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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 1-11388
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PLC SYSTEMS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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BRITISH COLUMBIA, CANADA 04-3153858
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10 FORGE PARK, FRANKLIN, MASSACHUSETTS
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
02038
(ZIP CODE)
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(508) 541-8800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, NO PAR VALUE AMERICAN STOCK EXCHANGE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the last sale price for such stock on March 23, 1998,
was $262,345,727. As of March 23, 1998, 18,973,114 shares of Common Stock, no
par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORM 10-K
IN WHICH
DOCUMENT DOCUMENT IS INCORPORATED
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Registration Statement on Form S-1 Part IV
(File No. 33-58258).
Registration Statement on Form S-1 Part IV
(File No. 33-48340).
COMPLIANCE WITH COMPANY ACT REGULATIONS (BRITISH COLUMBIA)
This Annual Report on Form 10-K is intended to comply with the requirements
of Section 6 of the Company Act Regulations (British Columbia).
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PART I
ITEM 1. BUSINESS.
This report contains forward-looking statements regarding the U.S. Food and
Drug Administration ("FDA") approval, anticipated increases in revenues,
marketing of products and proposed products, product performance, adequacy of
the Company's facilities, patents and patent applications, competition and other
matters. These statements, in addition to statements made in conjunction with
the words "anticipate," "expect," "intend," "believe," "seek," "estimate" and
similar expressions are forward-looking statements that involve a number of
risks and uncertainties. Such statements are based on management's current
expectations and are subject to a number of factors and uncertainties that could
cause actual results to differ materially from those described in the
forward-looking statements. Such factors and uncertainties include, but are not
limited to: approval by the U.S. Food and Drug Administration, ability to secure
any required additional financing, business conditions and growth in certain
market segments and economic conditions, competition, market acceptance of the
Company's products and proposed products, reimbursement policies of government
and insurance carriers, the uncertainty that existing patents will be held
valid, that any additional patents will be issued or that the scope of any
patent protection will exclude competitors and other risks and uncertainties
indicated from time to time in the Company's filings with the Securities and
Exchange Commission.
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
System(TM)(1) for broad application in the treatment of coronary artery disease
in a surgical laser procedure pioneered by the Company and its clinical
investigators known as transmyocardial revascularization ("TMR"). The Company
believes that TMR using the Heart Laser System may provide an alternative or
adjunct therapy to conventional revascularization treatments, such as coronary
bypass surgery and balloon angioplasty or may be used to treat patients who
cannot be helped by these treatments.
TMR, using the Heart Laser System creates new channels in the heart that
permit oxygenated blood present in the left ventricle of the heart to flow
outwardly to the ischemic (oxygen starved) areas of the heart muscle affected by
atherosclerosis. Through a small incision made between the patient's ribs, the
Heart Laser System is used to drill approximately 20-40 tiny channels from the
exterior of the heart muscle into the interior of the left ventricle. This
procedure is performed on a beating heart and does not require the use of a
heart-lung machine. Clinical test results have indicated that through the body's
normal healing process, the end of each hole on the exterior of the heart muscle
closes, but the channels created into the interior remain open resulting in
oxygenated blood flowing outwardly from the left ventricle to the ischemic areas
of the heart muscle. Studies conducted at the Max Planck Institut in Germany
using myocardial contrast echocardiography (MCE) demonstrated patent (open)
channels in the heart muscles of TMR patients which was further confirmed by a
study conducted at University Hospital in Hamburg, Germany using a revolutionary
ultrasound system.
Under the Company's first indication for the Heart Laser System, for which
PLC has submitted a PreMarket Approval application ("PMA"), the U.S. Food and
Drug Administration ("FDA") has authorized the Company to utilize the Heart
Laser System to treat patients who were not suitable for conventional bypass
surgery or other revascularization procedures. Management believes that clinical
testing to date has been positive, with benefits including reduced length of
hospital stays by patients, more efficient all-inclusive treatment costs,
reduction of angina pain, increased activity level, improved quality of life and
reduced incidents of adverse side effects and restenosis compared to alternative
treatments. Management notes, however, that TMR using the Heart Laser System is
still in the testing stage and that at this time no assurance can be given
regarding the ultimate safety or efficacy of the device as treatment for
cardiovascular disease.
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1The Heart Laser is a trademark of PLC Medical Systems, Inc.
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Well over 3,500 patients have been treated with TMR using the Heart Laser
System in the United States and overseas. The Heart Laser System has been
shipped to 30 sites in the United States, and the Company had sold or placed
(through December 31, 1997) 69 Heart Laser Systems overseas. At the same time, a
number of studies and scientific conferences have been held favorably reporting
on the use of TMR using the Heart Laser System as an adjunct or alternative to
bypass and angioplasty procedures on patients that were not eligible for these
procedures.
Since the Company's last annual report on Form 10-K, the following
significant events and accomplishments have taken place:
Review of PMA by FDA Circulatory System Devices Advisory Panel. In July
1997, the circulatory systems devices panel of the FDA convened to review the
Company's PMA application for TMR using the Heart Laser System. In a nine to two
vote, the panel recommended that the PMA application not be recommended for
approval pending further patient data. In September 1997, the Company received a
letter from the FDA, which agreed with the panel's recommendation of
non-approval and completion of the follow-up data. Included in this letter were
12 requests for further information relating to follow-up data, which when
answered, would place the PMA application in "approvable form."
PLC Systems Completes Data Submission to the FDA for The Heart Laser
System. In December 1997, the Company submitted all of the requested data on
TMR using The Heart Laser System to the FDA. The submission was in response to
the list of 12 requests received from the FDA following the July 1997 panel
meeting. The 12 month data from the controlled randomized study of TMR versus
medical management suggests that patients with end-stage or chronic coronary
artery disease who undergo TMR using the CO(2) Heart Laser System fare
significantly better than patients on medical management. In addition to the 12
month data on the controlled randomized study, the Company also submitted
favorable long-term, three year angina data on more than 60 TMR patients from
its earlier studies.
New FDA Advisory Panel Scheduled to Review TMR using The Heart Laser
System. In March 1998, the Company was advised that an FDA Advisory Panel would
review the PMA application for TMR using the Heart Laser System on April 24,
1998. Written notification of the advisory panel meeting is expected to be
posted in the Federal Register approximately 15 days prior to the meeting. All
FDA advisory panel schedules are subject to change. No assurance can be given
that the advisory panel will recommend approval for the Company's Heart Laser
System at the April panel meeting, or at any future meeting.
PLC Systems Completes $20 Million Convertible Debenture Financing. In
August 1997, the Company completed, through Smith Barney, a $20 million
financing from funds advised by Brown Simpson Asset Management, LLC. Under the
terms of the financing, the Company received $20 million from the issuance of
convertible debentures due July 17, 2002. All debentures were converted into
Common Stock beginning September 10, 1997 and ending February 9, 1998. The money
raised provides the Company with a solid cash position to continue its clinical
studies of TMR in the U.S. and prepare the Company for the potential worldwide
launch of The Heart Laser System.
William C. Dow Appointed President and CEO of PLC Systems. In August 1997,
William C. Dow, joined the Company as President and CEO. Mr. Dow joined the
Company after serving as President and CEO of Deknatel Snowden Pencer Worldwide,
Inc., a $100 million medical device manufacturer and marketing subsidiary of
Genzyme Corporation. Mr Dow has more than 25 years of broad-based experience in
the medical device and services industry. Mr. Dow holds a Bachelor of Science in
Engineering from the United States Naval Academy and served as a Lieutenant in
the U.S. Navy where he was a pilot and a supply officer.
TMR Studies Underway in Japan Using PLC Systems CO2 Heart Laser System. In
March 1997, The Heart Institute of Japan located at Tokyo Women's Medical Center
performed the country's first TMR procedure as part of the Ministry of Health
and Welfare (MHW) approval process in that country. In compliance with the MHW
approved protocol, a total of 60 patients will be enrolled in the Japanese
study. To date, 54 patients have been enrolled in this study. The Company is
working closely with its distributor IMATRON Japan to provide technical support
and training in Japan during the clinical studies. The Company believes MHW
approval for TMR using The Heart Laser System could be granted sometime in the
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period beginning late 1998 through early 1999. No assurance can be given that an
MHW approval will be granted in this timeframe, if at all.
HCFA/Medicare Institutes a Non-Coverage Policy for TMR Patients in the
United States. Effective May 1997, the Health Care Financing Administration
(HCFA) instituted a non-coverage instruction for Medicare patients in the U. S.
receiving TMR. The Company has been in regular contact with HCFA and continues
to advise the agency of the Company's progress through the FDA regulatory
approval process. The Company is hopeful that upon PMA approval, Medicare
reimbursement for TMR using the Heart Laser System will be implemented as
reimbursement policies will continue to impact the Company's business and
revenues. No assurance can be given that Medicare reimbursement will be
implemented after PMA approval and no assurance can be given that the FDA will
grant a PMA approval for the Heart Laser System.
PLC Systems Strengthens Team with Addition of New Executive Managers. In
January 1998, the Company announced the addition of several new senior
management positions. New senior managers include: Vincent Puglisi, Corporate
Sales; Paul Levesque, Marketing and New Business Development; Cindy Crosby,
Regulatory and Quality Assurance and Jennifer Miller, General Counsel. The
Company has expanded its management team with executives with experience in
transitioning businesses from research and development to commercialization.
BACKGROUND
In 1981, the Company's Chairman, Dr. Robert I. Rudko, formed Laser
Engineering, Inc. ("LEI"), now PLC Medical Systems, Inc., to commercialize the
development of sealed-off carbon dioxide ("CO(2)") lasers. In 1988, the San
Francisco Heart Institute advanced $250,000 to assist the Company in the
development of a high-powered CO(2) laser which could be used for TMR on a
beating heart.
In November 1990, the Company received a Phase I Investigational Device
Exemption ("IDE") for its Heart Laser System from the FDA. In granting the Phase
I study, the FDA permitted the use of the Heart Laser System for patients
considered not suitable for any other intervention. Phase I trials were
performed by Dr. John Crew at Seton Medical Center in Daly City, California and
were completed in October 1991. In April 1992, the Company received Phase II
clearance from the FDA to perform TMR on 50 patients at four clinical sites.
This clearance was periodically expanded to include 201 patients at eight
clinical sites. In 1995, the FDA granted three new IDE's for studies of TMR
using the Heart Laser System. The first was a 100 patient randomized study
(Phase III) comparing TMR patients to patients receiving medical management. The
study was later expanded to 200 patients. The second study is a 400 patient
randomized trial comparing TMR patients to patients receiving a second bypass
surgery. The third is a study comparing patients receiving TMR in conjunction
with bypass surgery to patients receiving only bypass surgery. The Phase I, II
and III studies have been completed and a PMA application was filed in February
1997. The PMA application was reviewed by the circulatory systems device panel
in July 1997 which resulted in a recommendation for non-approval pending further
patient data.
Since April 1992, the Company has received 11 U.S. patents relating to the
underlying laser technology, the use of a laser on a beating heart, the Heart
Laser System handpiece, and other laser accessories. The Company also has 12
U.S. patent applications pending that cover various aspects of the technology
for the Heart Laser System and the process by which a laser is used to
revascularize the myocardium, as well as other laser technologies. The Company
also holds a number of foreign patents and patent applications.
The Company was incorporated pursuant to the Company Act of British
Columbia, Canada on March 3, 1987 and has its principal offices and
manufacturing facilities at 10 Forge Park, Franklin, Massachusetts 02038. The
Company's telephone number is (508) 541-8800. As used herein, the term "Company"
means, unless the context requires otherwise, PLC and its subsidiaries, PLC
Medical Systems, Inc., PLC Sistemas Medicos Internacionais Lda, PLC Sistemas
Medicos Internacionais GmbH, PLC Medical Systems AG, PLC Medical Systems France,
PLC Medical Systems Asia/Pacific Pte Ltd and PLC Medical Systems Australia Pty
Ltd.
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CARDIOVASCULAR DISEASE AND CURRENT THERAPIES
Cardiovascular disease is the leading cause of death in the U.S. with more
than 954,000 deaths annually. This represents over 40% of all U.S. deaths. Over
13 million Americans suffer from coronary heart disease with 350,000 new cases
every year. Atherosclerosis, the principal form of cardiovascular disease and
primary cause of heart attacks, is characterized by a progressive accumulation
of fatty deposits known as "plaque" in the walls of arteries and the resulting
narrowing of the interior of the arteries. Atherosclerosis reduces blood flow to
the muscle wall ("myocardium") of the heart, causing ischemia and resulting
angina pain and can further lead to a complete occlusion of the artery causing a
heart attack. According to the 1998 Heart and Stroke Facts Statistics published
by the American Heart Association (the "AHA"), approximately 573,000 coronary
bypass operations were performed on 360,000 patients and 434,000 balloon
angioplasty procedures were performed in the U.S. on 408,000 patients in 1995.
The AHA estimates the cost of cardiovascular disease in 1997 at $259.1 billion,
including physician and nursing services, hospital and nursing home services,
the cost of medications and lost productivity resulting from disability.
Traditional treatment of atherosclerosis includes drug therapy, coronary
bypass surgery and angioplasty. Drug therapy alleviates some of the symptoms of
atherosclerosis but is often ineffective in serious cases. Conventional bypass
surgery involves cutting open the patient's chest, cutting through the sternum,
connecting the patient to a heart-lung machine and stopping the heart, attaching
a vein or artery removed from another part of the patient's body to create a
bypass around the diseased blood vessel and restarting the heart. Hospital
charges for bypass surgery are typically between $25,000 to $45,000 and bypass
requires prolonged hospitalization and extensive recuperation periods. In
addition bypass grafts eventually fail. Certain patients are not suitable for
bypass procedures, including those who have previously undergone bypass
surgeries, patients with extremely diffuse diseases, patients with vessels that
are too small to graft, patients with chronic obstructive pulmonary disease,
some diabetics, and others who are too ill to survive the use of a heart lung
machine.
A less invasive alternative to bypass surgery is balloon angioplasty. The
most common form of angioplasty involves the use of balloon-tipped catheters
inserted into a diseased artery. By inflating the balloon at the site of
blockage ("lesion"), the arterial plaque can be pressed against the arterial
walls and reshaped, resulting in increased blood flow. Metallic stents were
developed to help prevent the sudden closures that sometime 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.
Management believes that TMR utilizing the Heart Laser System may be useful
as a treatment for patients who are no longer candidates for either angioplasty
or bypass because of either extensive disease or small coronary arteries. TMR is
designed to be less invasive and less expensive than bypass surgery, and may
avoid the restenosis problem inherent with bypass surgery and balloon
angioplasty by not targeting the coronary arteries for treatment. Also, TMR may
be useful in conjunction with angioplasty or bypass to obtain more complete
revascularization.
In addition to the more conventional treatment described above, there are a
number of newer treatments and therapies including minimally invasive direct
coronary artery bypass ("MIDCAB"), "trap door" coronary bypass and the use of
angiogenic growth factors. Some of these techniques and therapies may offer
certain improvements in relation to conventional treatments. Management believes
that TMR can be used in conjunction with these less invasive procedures to more
effectively revascularize the heart muscle.
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TMR UTILIZING THE HEART LASER SYSTEM
The main challenge in treating atherosclerosis is to allow adequate blood
to flow to the heart muscle without significantly damaging the heart.
Conventional and newer techniques described above are used to bypass, reopen or
widen blocked or narrowed arteries and could eventually fail due to restenosis
or natural disease progression. TMR using the Heart Laser System involves a
different technique where channels are created into the myocardium as a means of
supplying oxygen-rich blood from the left ventricular chamber into the ischemic
myocardium. TMR does not target the coronary arteries for treatment.
Heart muscle, like all tissues of the body, must be constantly supplied
with oxygen in order to function effectively. Oxygen is delivered to the
myocardium by the blood, which is distributed to the myocardium through the
right and left coronary arteries. If these arteries are narrowed or blocked as a
result of atherosclerosis, oxygen-rich blood cannot supply the metabolic demand
of the myocardium. Cardiovascular disease eventually may cause myocardial
ischemia, often evidenced by severe and debilitating angina or chest pains
caused by lack of oxygen to the heart muscle, which can progress to myocardial
infarction (the death of an area of the heart muscle). Advanced multi vessel
ischemic heart disease is typically treated with bypass surgery.
During the TMR procedure, the patient is given general anaesthesia. An
incision is made in the patient's side between the ribs, exposing the heart. The
laser's output is computer synchronized with the patient's heartbeat, firing
when the left ventricle is filled with blood and is electrically insensitive.
The Company believes that synchronization minimizes arrhythmia (irregular heart
beat) and associated morbidity and mortality. In fact, research studies
conducted by the Texas Heart Institute have indicated that failure to
synchronize may lead to a significant increase in life threatening arrhythmias.
The synchronization process is covered under a patent owned by the Company and
is accomplished using an EKG monitor located on the laser and a computer used to
control the laser system. The Heart Laser System is capable of drilling a
transmural channel in less than 0.05 seconds in a patient whose heart has not
been stopped and who has not been placed on a heart lung machine. The surgeon
can vary the pulse width of the laser using a touch key control panel to
accommodate for the thickness of the patient's heart muscle. Transesophageal
(TEE) ultrasound is used to determine that complete channels are made by the
laser. Generally, 20-40 new channels are drilled during the procedure to create
new alternative channels for blood flow to the ischemic heart muscle. Each TMR
procedure requires a sterile, single use, TMR kit containing a lens cell,
assorted TMR hand pieces, EKG electrodes, drapes and other disposable items.
In accordance with the FDA protocol governing the multi-center
non-randomized, Phase II clinical trial, all of the 201 study patients treated
with the TMR procedure were critically ill with extensive coronary artery
disease and were not suitable candidates for coronary bypass or angioplasty
revascularization due to the severity of their coronary artery disease. Of the
201 study patients, 15 patients died within 30 days of the surgery and 17 died
during the 12 months follow-up period. An additional seven patients died from
other non-cardiac reasons. This mortality rate is well within the mortality rate
for second bypass surgery despite the fact that the TMR patients tended to be
much sicker than those who are typically eligible for a second bypass surgery.
Physician reports indicate that none of these deaths were directly related to
the TMR procedure.
In July of 1995, the Company began a multi-center randomized control study
comparing TMR using the Heart Laser System to continued medical therapy for the
treatment of end stage coronary artery disease in patients who were not suitable
candidates for coronary bypass or angioplasty revascularization. Following
submission by the Company of preliminary study results, the FDA ended the
randomization process of the study in September 1996, allowing all subsequent
patients enrolled in the study to receive TMR treatment. Of the 192 patients
randomized into the study, 91 patients have received TMR treatment and 101 were
placed in the control arm of the study. Three of the 91 TMR patients died within
30 days of the surgery. Ten TMR patients died during the 12 month follow-up
period. Twenty two of the 101 patients randomized to the medical management
group died.
The PMA application for the Heart Laser System was filed by the FDA in
February 1997. In July 1997, the PMA application was reviewed by the circulatory
systems device panel of the FDA. The panel voted 9 to 2 that the PMA application
not be recommended for approval pending further patient data. In September 1997,
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the Company received a letter from the FDA which agreed with the panel's
recommendation and outlined 12 items which when completed, would place the PMA
in "approvable form". In December 1997, the Company completed the submission of
the data related to the 12 requested items. The information included all the
follow-up data on the 192 patients enrolled in the randomized study. The Company
is currently waiting for a subsequent advisory panel review which is tentatively
scheduled for April 24, 1998.
After the one year follow-up, the Company was no longer required by the FDA
to ask patients to come in for regular testing, however, the Company recently
undertook an effort to gather long-term (more than 12 months) data on the Phase
I, II, and III patients. The Company was able to collect three year follow-up on
62 patients. The average angina class of these patients, which was 3.8
preoperatively, was down to 1.5 three years postoperatively. The three year
survival rate for these patients was 73%. Based on these results, management
believes that the possibility of a "placebo effect" being responsible for angina
improvements, is unlikely as "placebo effects" typically do not last longer than
six months.
Recent technical advances in echocardiography technology have made it
possible to visualize blood flow in TMR channels at follow-up. These clinical
findings confirm previous postmortem examination on two TMR patients treated
with the Heart Laser System which indicated that the TMR channels were still
open after 3 and 12 months. These channels were active and collateral growth
(growth of new blood vessels) had occurred. It also appears that additional
mechanisms of action such as angiogenesis may be occurring. The exact mechanism
of action has yet to be proven and it should be noted that defining the
mechanism is not a requirement for FDA approval.
In addition to the work on patients with no other alternative, the Company
continues to enroll patients in its two other clinical trials; patients eligible
for redo bypass and patients who are having a combination bypass-TMR procedure.
The results of these studies indicate that TMR could potentially have expanded
applications in the treatment of coronary artery disease.
POTENTIAL BENEFITS OF TMR
Based on clinical results to date, the Company believes that TMR using the
Heart Laser System 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 the Heart Laser System. These
anticipated benefits include:
Potentially a Third Revascularization Option. In the future, TMR may be
used on patients as an alternative to bypass or angioplasty procedures.
Therapy for Patients Not Suitable for Coronary Bypass. TMR may allow
patients who would otherwise not be suitable for coronary bypass surgery, and
for whom other surgical or interventional techniques may not be available or
advisable to alleviate the effects of atherosclerotic illness.
Potential Use in Conjunction with Both Conventional and Minimally Invasive
Coronary Bypass. TMR may allow the surgeon to provide oxygenated blood to areas
of the heart muscle that are not accessible by coronary bypass grafts. With the
advent of the "trap-door" procedure where coronary artery bypass graft surgery
is performed on a beating heart, management believes that TMR will be an
effective complement to this procedure. TMR can be performed on the anterior,
posterior and lateral walls of the heart while the "trap-door" procedure usually
is only performed on the anterior wall of the heart.
Potentially Lower Medical Costs. Management believes the medical costs
associated with TMR using the Heart Laser System will be less than the costs of
traditional bypass surgery which requires a larger surgical team, more
supporting equipment and a longer hospital stay. The cost of TMR in some
situations may also be less than angioplasty when combinations of additional
devices such as atherectomy catheters, stents or intravascular ultrasound are
required.
Potentially Quicker Recovery. Since TMR using the Heart Laser System is
less invasive and does not involve stopping and starting the heart, the patient
may recover more quickly than if conventional bypass
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techniques were used, with a potentially reduced risk of complications compared
with the risks associated with bypass surgery.
Potentially Minimally Invasive Surgery. Management believes that
development of a thoracoscopic delivery device, would allow TMR to be performed
less invasively. Testing to date has been very encouraging. Management believes
that a thoracoscopic delivery device could potentially reduce complication risks
and the length of hospital stay as well as provide a further reduction in
hospital and post operative costs.
Not Dependent on Plaque Type or Location and Potentially Less Risk of
Restenosis. Unlike angioplasty, atherectomy devices and stents, which may be
more or less effective, depending on the composition, extent or location of the
plaque occluding the artery and which have evidenced high restenosis rates, TMR
is not dependent upon plaque type or location. Preliminary results from patients
treated with TMR suggest less risk that the new channels created by the laser
will become narrowed or blocked due to restenosis.
Potential Therapy for Heart Transplant Patients. TMR could potentially be
used on post transplant patients suffering from chronic rejection
atherosclerosis. Presently, the only treatment for this condition is re-
transplantation.
DEVELOPMENT OF MARKETING STRATEGY
The Company's strategy is to establish TMR using the Heart Laser System as
an appropriate means of treating patients suffering from coronary artery
disease. Currently, the Heart Laser System is an investigational device in the
U.S. and cannot be marketed as a commercial product. The Heart Laser System is
commercially available outside the U.S. with the exception of Japan, Australia
and certain countries in Southeast Asia, where governmental approval for
commercialization is also required. In October 1997, the Company was notified
that the French Ministry of Health was instituting a commercial moratorium on
lasers used for TMR pending further evaluation. This moratorium was placed on
lasers whether or not they had received CE approval. (See "Government
Regulation").
The Company has also developed a number of single use surgical products to
be used with the Heart Laser System in performing TMR to address concerns
regarding the spread of infections. The Company sells sterile, single use, TMR
procedure kits containing components such as a lens holder, a set of handpieces,
drapes and other TMR single use items. The Company also intends to sell
individual handpieces. The Heart Laser System handpieces have been incorporated
under the IDE with the Heart Laser System. In addition, the Company is seeking
patent protection on these handpieces.
The Company has developed a marketing strategy to address the challenges of
marketing high dollar capital equipment. In markets with minimal credit risk,
economic stability, where health care is reimbursed, and where government
regulations permit, the Company intends to market TMR on a usage basis whereby
the hospital receives a Heart Laser System for an installation charge and pays
the Company for the use of the machine each time a TMR procedure is performed.
The use of the machine is subject to contractual yearly minimums for a defined
period of time with renewal options. The Heart Laser System remains the property
of the Company and is depreciated. Repairs, maintenance, upgrades and
disposables are the responsibility of the Company. The Company refers to this
approach as a placement contract. Such placement contracts are appealing to
hospitals when capital equipment funds are scarce or unavailable or when it is
difficult to predict early usage as is the case with new technology such as TMR.
In unstable economic markets where credit risks are high, the Company's
plan would be to sell the Heart Laser System outright as capital equipment. The
disposable sterile kits would be sold for each procedure, along with yearly
maintenance contracts after expiration of the applicable warranty period. There
is no single retail price for the Company's Heart Laser System. The Company has
several different marketing strategies to sell this product line depending upon
the particular circumstances, including direct sales, sales through distributors
and placement (leasing) type sale. Pricing varies depending upon the particular
marketing strategy used and the country in which the Heart Laser System is sold.
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United States. It is critical to the Company's success to obtain PMA
approval from the FDA for the Heart Laser System initially for patients who are
not suitable for bypass surgery or other interventions. The Company submitted
its PMA application for this indication in April 1995 which subsequently
received expedited review status in May 1995. This application was filed by the
FDA in February 1997. In July 1997, the circulatory systems devices panel of the
FDA reviewed the Company's PMA application and recommended non-approval of the
PMA pending further patient data. The Company submitted the patient data
requested by the FDA in November and December of 1997 and has been advised of an
April 1998 panel meeting date. Given the current uncertainties on the time
required by the FDA to approve a PMA application, the Company cannot project
when, if at all, such approval would occur.
In addition to PMA approval, reimbursement for the TMR procedure by
government and private insurers will be required for rapid product
commercialization. At present there is a significant pent-up demand for TMR that
will only be satisfied when reimbursement is allowed. (See "Third Party
Reimbursements").
While it is not possible to predict when or if PMA approval is forthcoming,
the Company has developed a comprehensive product launch plan with built-in
contingencies to reflect PMA approval. Such a launch plan has been developed in
close association with a leading medical product marketing agency experienced in
product introductions similar to the Company's Heart Laser System.
In February 1998, the Company hired a Vice President of Marketing and
Business Development to lead the Company launch and develop the necessary
organization needed to support and promote the Company's products
internationally and in the U.S. after PMA approval has been received. The
Company presently intends to utilize a direct sales force in the United States
to market the Heart Laser System to hospitals. A sales management team was hired
in the fourth quarter of 1996. The Company has hired 11 new direct territory
representatives and a launch campaign is currently being established in
anticipation of an FDA approval of the Heart Laser System.
International. The Company currently markets its Heart Laser System
overseas both directly and through distributors. In the fourth quarter of 1994,
the Company incorporated an EC subsidiary, PLC Sistemas Medicos Internacionais
Lda, in Madeira, Portugal and in the first quarter of 1996 a subsidiary was
incorporated in Hamburg, Germany as a sales office to market the Heart Laser
System throughout Germany. In the fourth quarter of 1996, the Company
incorporated two additional subsidiaries in Switzerland and France. Sales,
service and clinical support personnel are located throughout the European
subsidiaries.
PLC received the CE Mark for the Heart Laser System in the third quarter of
1995. The CE Mark approval indicates that a product conforms to mandatory
European safety and efficacy requirements. The approval allows the Company to
sell the Heart Laser System commercially in all European Community countries. In
October 1997, the Company was notified that the French Ministry of Health was
instituting a commercial moratorium on lasers used for TMR pending further
evaluation. (See "Government Regulation"). In the spring of 1996, the Company
began to pursue ISO 9001 as set out by the International Standards Organization
which will be required by the European Community in 1998.
The Company hired a Managing Director for the Far East and Australia in
February 1995 to increase sales and marketing efforts of the Heart Laser System
in this part of the world through both direct sales and the use of distributors.
The Company incorporated a subsidiary in Singapore in the fourth quarter of 1996
and a second subsidiary in Australia was incorporated in the second quarter of
1997 to handle sales and service for these areas of the world.
In the third quarter of 1995, the Company signed a distributor agreement
with IMATRON Japan to manage, fund and distribute the Heart Laser System in
accordance with Ministry of Health and Welfare ("MHW") clinical trials to be
conducted in Japan. The first TMR procedure in Japan was performed in March
1997, which began the 60 patient clinical study required by the MHW approval
process. The Company is working closely with IMATRON to provide technical
support and training during these clinical trials. To date, 12 Heart Laser
Systems have been sold to IMATRON and 54 patients have received TMR in Japan.
The Company believes that MHW approval for TMR could be granted sometime in the
later part of 1998 or
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early in 1999. No assurance can be given that an MHW approval will be granted in
this timeframe, if at all. IMATRON Japan is just one among several distributors
working with PLC in the Asia/Pacific territory.
As of December 31, 1997, the Company had shipped 69 Heart Laser Systems to
the international markets which include 35 to Europe and Middle East, 27 to the
Asia/Pacific area and seven to South America. Foreign sales may be subject to
certain risks, including foreign medical, electrical and safety regulations,
export and import restrictions, tariffs and currency fluctuations.
CUSTOMERS
The Company operates in one industry segment: the development, manufacture
and sales of medical lasers and related products. Approximately 20% of the
Company's revenues in Fiscal 1997 came from one customer, while no one customer
accounted for more than 10% of revenues in Fiscal 1996, and one customer
accounted for more than 43% of revenues in Fiscal 1995. In 1997 and 1995, the
customer was the Company's exclusive distributor in Japan. Management does not
believe that the possible lack of future relationships with any of these
customers will have a material adverse effect on future revenues.
MANUFACTURING
The Company manufactures and tests its products at its 37,000 square foot
facility in Franklin, Massachusetts, approximately 40 miles west of Boston. The
Company moved to this facility in September 1996 and believes that its
manufacturing capacity will be sufficient to meet the market demands anticipated
upon PMA approval.
The Company purchases components for its laser systems and its related
disposables from a number of sources, and management believes that most
components are available from multiple sources. For those components that are
single sourced, management has entered into exclusive supplier agreements which
provide access to technologies, processes and bills of material to enable the
Company to manufacture the components or to have the components manufactured
elsewhere. The Company's business is not subject to seasonal fluctuations.
GOVERNMENT REGULATION
The Heart Laser System, as well as other medical devices that have been and
are being developed by the Company, are subject to extensive regulation by the
FDA. Pursuant to the Federal Food, Drug, and Cosmetic Act, as amended, the FDA
regulates the clinical testing, manufacture, labeling, distribution and
promotion of medical devices in the U.S. The Company's laser products are
subject to additional FDA regulation under the Radiation Control for Health and
Safety Act of 1968, 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.
The Heart Laser System requires a PMA. The first step in the PMA
application process is the submission to the FDA of the results of product
tests, laboratory and animal studies and a request for permission to clinically
evaluate the device in humans under an IDE. Initiation of the study requires the
approval of the Institutional Review Board of the hospitals participating in the
clinical trials and written, informed consent from all participating patients.
In March 1990, the Company submitted to the FDA its first Heart Laser
System IDE application consisting of product information and bench and animal
test results and requested permission to evaluate the device in humans. The
Company received agency permission to conduct a Phase I clinical evaluation of
the Heart Laser System in November 1990. Authorization was limited to one
clinical site and 15 patients. Dr. John Crew, a member of the Company's Medical
Advisory Board, performed all of the Phase I tests of TMR using the Heart Laser
System at Seton Medical Center in Daly City, California. In December 1991, the
Company requested permission from the FDA to initiate Phase II of the clinical
study and obtained authority to proceed in April 1992. Under Phase II, up to 16
sites were permitted to use the Heart Laser System which led to the treatment of
201 patients with TMR, rather than the one site used for Phase I on 15 patients.
The
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Phase II study protocol involved patients who suffer from severe coronary artery
disease and who were not candidates for conventional CABG or angioplasty
procedures. The sites for Phase II testing are sites which perform a large
number of open heart procedures and are experienced in taking part in clinical
trials.
The second step in the approval process requires submission to the FDA of a
comprehensive PMA application which includes results of all the human clinical
testing performed as well as detailed product manufacturing, quality controls
and facility descriptions. In May 1995, the Company submitted its PMA
application and was assigned expedited review status. The FDA grants expedited
review status for medical devices intended for use in the following
circumstances; life threatening or irreversible debilitating condition with no
alternative modalities, or for which the device provides an earlier diagnosis, a
revolutionary breakthrough device, or a device whose availability is in the best
interest of public health.
In December 1994, the Company requested permission from the FDA to initiate
Phase III of its existing clinical study and obtained authority to proceed in
June 1995. The Phase III study was a randomized study designed to specifically
compare the use of the Heart Laser System to a control treatment, medical
management, on end stage cardiac patients. Authorization was granted to permit
up to 20 clinical sites and 350 patients. Based on early results of this study
submitted by the Company to the FDA in August 1996, the FDA granted permission
to no longer require the control treatment. Therefore, all future patients
enrolled in the study could receive TMR with the Heart Laser System.
Efforts towards finalizing the market approval of the Heart Laser System
continue. In December 1996, the Company submitted an amendment to its PMA
application to provide the most current clinical test results from the Phase II
and Phase III studies. In February 1997, the FDA, under its administrative
policies, agreed to file the Company's PMA and to undergo a substantive review
of the application. Since that time, the Company has received multiple requests
from the FDA for additional information, indicating the continuation of this
substantive review process. In July 1997, a public meeting with the FDA
circulatory systems device advisory panel resulted in a decision to not
recommend approval of the Heart Laser System at that time, pending further
patient data. The Company submitted the patient data requested by the FDA in
November and December of 1997 and has been advised of an April 1998 panel
meeting date. Pre-approval inspections of the Company and its clinical sites
have taken place in 1997 and 1998 with one more waiting to be scheduled by the
Company.
Once a product obtains market approval, any modifications to the existing
design or manufacturing process as well as any desire to change its labeling
(i.e., intended use) must proceed through the FDA approval process once again.
The Company intends to continuously improve the Heart Laser System after market
introduction and therefore intends to submit future IDE, PMA and PMA supplement
applications to the FDA. No assurance can be given that approval of these new
IDE's, PMA's or PMA supplements will be received from the FDA on a timely basis,
if at all.
International shipments of investigational medical devices are subject to
FDA export requirements. Investigational devices may be freely exported to any
Tier 1 country (European Economic Area member states, South Africa, Australia,
Canada, Israel, Japan, New Zealand and Switzerland), without receiving FDA
export approval provided a valid market authorization from one of these
countries is obtained. FDA requires notification only at the time of the first
shipment. In September 1995, the Heart Laser System was afforded an EC Type
examination certificate, which allows the Company to place the CE Mark on each
Heart Laser System and list its devices after inspection by a notified body. The
CE Mark permits market distribution of the Heart Laser System throughout member
states of the European Union. For all other countries outside of this list, FDA
export approval must be obtained and is contingent upon obtaining an approval
letter or a letter of no objection from a regulatory authority of the importing
country. The regulatory approval process varies from country to country and
there is no assurance that this information can be obtained in a timely manner,
in a manner that will satisfy the FDA or that a foreign agency will authorize
the use of the Heart Laser System in such country.
In October 1997, the Company was notified that the French Ministry of
Health was instituting a commercial moratorium on lasers used for TMR, as in
their opinion, the procedure was considered to be experimental and should only
be performed within the context of a clinical study. An evaluation of the safety
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of TMR is currently under review by a panel of French experts and the results of
this review will determine the status of TMR. The Company has provided a dossier
of its clinical results to the panel and is actively working with the Ministry
to have this moratorium lifted. No assurance can be given as to whether the
Company will be successful in its efforts to have this situation modified.
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 documents in a
prescribed manner with respect to manufacturing, testing and control activities.
Further, the Company is required to comply with various FDA requirements for
reporting. The Medical Device Reporting Act regulations require that the Company
provide information to the FDA on death or serious injuries alleged to have been
associated with the use of its laser systems, as well as product malfunctions
that would likely cause or contribute to death or serious injury if the
malfunction were to recur. The FDA also prohibits an approved device from being
marketed for unapproved applications. In addition to the requirements generally
applicable to devices, there are additional regulatory requirements specifically
applicable to lasers under the Radiation Control for Health and Safety Act of
1968 ("Radiation Act") and FDA regulations thereunder. The Company's laser
products are subject to periodic inspection under the Radiation Act for
compliance with labeling and other safety regulations. If the FDA believes that
a company is not in compliance with the law, proceedings can be instituted to
detain or seize products or force notification and correction of hazards or
defects (including a recall), enjoin future violations and assess civil and
criminal penalties against the Company, its officers or its employees. Failure
to comply with regulatory requirements could have a material adverse effect on
the Company's business, financial conditions and results of operations.
THIRD PARTY REIMBURSEMENTS
Heath care providers, such as hospitals and physicians, that purchase
medical devices such as the Heart Laser System for use on their patients
generally rely on third party payors, principally Medicare, Medicaid and private
health insurance plans, to reimburse all or part of the costs and fees
associated with the procedures performed with these devices.
In November 1995, the FDA designated the Company's IDE for TMR with the
Heart Laser System as Category B for the Health Care Financing Administration
("HCFA"), the agency responsible for administering the Medicare program. This
classification meant that procedures performed with the Heart Laser System were
eligible for Medicare reimbursement during the clinical trials. The Rule
allowing coverage for Category B devices left the coverage determination for
procedures involving those devices to the discretion of local Medicare
contractors in the absence of a national coverage instruction.
In February 1997, HCFA published a national non-coverage instruction for
TMR based on its belief that scientific evidence substantiating the safety and
effectiveness of TMR was not currently available. It is not unusual for HCFA to
deny reimbursement for procedures performed using devices that have not yet
received FDA approval. The non-coverage instruction applied to procedures
performed on or after May 19, 1997, on Medicare beneficiaries. The Company has
been working with HCFA staff to seek withdrawal of the non-coverage instruction.
HCFA has agreed to look at the Company's safety and effectiveness data at the
time of the FDA panel review in April 1998, possibly leading to a withdrawal of
the national non-coverage instruction. The Company is in the process of
notifying HCFA of the scheduled FDA Panel date in April and will request a
meeting to further discuss the modification or withdrawal of the non-coverage
instruction.
The Company believes, although no assurance can be given, that FDA approval
may be granted in 1998, and that the data submitted to support an FDA approval
may warrant a withdrawal of the non-coverage instruction made by HCFA. The
Company is not sure if any reversal in the coverage instruction will be product
specific to the Heart Laser System or will apply to the TMR procedure in
general. The Company has also discussed the benefits of TMR and the potential
adverse effects of HCFA's non-coverage instruction on the Medicare population
with some members of Congress. No assurance can be given that the non-coverage
instruction will be withdrawn and no assurance can be given that the FDA will
grant a PMA approval for the Heart Laser System in 1998, if at all.
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Even if a device has FDA clearance, Medicare and other third party payors
may deny coverage if they conclude that TMR is not a reasonable and necessary
procedure. No assurance can be given that, even if coverage is granted, the
payors' reimbursement levels will not adversely affect the Company's ability to
sell its products. Private insurance companies and HMO's have already made
reimbursement for TMR procedures performed in some cases during clinical trials.
Economic data derived from the IDE studies indicates that there may be a
significant reduction in the cost of treating the patient population of the
studies. Potentially, this could mean that TMR performed with the Heart Laser
System is a procedure that offers economic advantage to the managed care market,
in particular, in which over 70% of all privately insured Americans are covered
at least in part.
The Company has begun an effort to educate the different segments of the
market concerning TMR reimbursement. It is important that the hospital and
physician providers, the insurance industry, the health plan underwriters,
employers and patients understand the clinical and economic benefits of TMR as
indicated by the IDE studies. Study results are concurrent with the quality of
care and economic issues currently driving the health care market. It should be
noted that the market for the Company's products also could be adversely
affected by future legislation to reform the nation's health care system or by
changes in industry practices regarding reimbursement policies and procedures.
PRODUCT LIABILITY AND INSURANCE
The Company's business involves the risk of product liability claims. No
claims have been made against the Heart Laser System to date. The Company
maintains product liability insurance with aggregate coverage limits of $4
million. No assurance can be given that product liability claims will not exceed
such insurance coverage limits, which could have a material adverse effect on
the Company, or that such insurance will be available at commercially reasonable
terms or at all.
PROPRIETARY PROCESSES, PATENTS, LICENSES AND OTHER RIGHTS
The Company's policy is to file patent applications to protect technology,
inventions and product improvements. The Company also relies on trade secret
protection for certain confidential and proprietary information.
Since April 1992, the Company has received 14 U.S. patents, of which 11
involve the Heart Laser System and its related technologies. The first patent,
which was issued in April 1992, provides patent protection until 2009 and
relates to the underlying laser technology needed to create a pulsed, fast flow
laser system (allowing the laser gas to flow through the laser to the vacuum at
high speed). The second patent, which was issued in June 1992, provides patent
protection until 2009 and relates to the use of a laser on a beating heart to
revascularize the heart using TMR. The third patent, which was also issued in
June 1992, provides patent protection until 2009 and relates to the system used
to time the heart's contractions to synchronize the laser firing at the correct
time. The fourth patent, which was issued in April 1993, provides patent
protection until 2010 and relates to the Heart Laser System handpiece, which is
used to deliver the laser energy to the heart. The fifth patent, which was
issued in June 1993, provides patent protection until 2010 and relates to a
specialized laser beam manipulator used for conventional laser surgery. The
sixth patent, which was issued in October 1993, provides patent protection until
2010 and relates to a self-aligning coupler for a laser endoscope. The seventh
patent, which was issued in August 1994, provides patent protection until 2011
and relates to the synchronization of a surgical smoke evacuator to a laser
system or other medical device. The eighth patent, which was issued in April
1996, provides patent protection until 2013 and relates to the use of an ECG
monitor. The ninth patent, which was issued in September 1996, provides patent
protection until 2013 and relates to medical laser technology. The tenth patent,
which was issued in January 1997, provides patent protection until 2014 and
relates to the Heart Laser System handpiece. The eleventh patent, which was
issued in April 1997, provides patent protection until 2014 and relates to the
lens cell for the Heart Laser System. The twelfth patent, which was issued in
November 1997, provides patent protection until 2014 and relates to a
thoracoscopic cannula system. The thirteenth patent which was issued in December
1997, provides patent protection until 2014 and relates to a thoracoscopic TMR
handpiece. The fourteenth patent, which was issued in March 1998, provides
patent protection until 2015 and relates to ultrasound detection of
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revascularization. The Company also has ten U.S. patent applications pending
relating to the Heart Laser System handpiece, other technology used in the Heart
Laser System, technology associated with minimally invasive surgical techniques
and technologies associated with percutaneous TMR.
In April 1996, the Company received patents from the European Patent Office
and the Japanese Patent Office providing patent protection on its heart
synchronization technology. A patent covering this technology was issued in
April 1997 in Canada. Additional Japanese issued patents cover a TMR handpiece,
a self-aligning coupler for a laser endoscope, laser beam manipulation and a
laser beam status indicator. In December 1996, a patent was issued in Canada
covering a self aligning coupler for a laser endoscope. The Company has over 30
patents pending related to the Heart Laser System and its components in various
international patent offices. The Company intends to file additional patent
applications overseas in the next year. The Company expects to continue to file
domestic and foreign patent applications on various features of the Heart Laser
System, although there can be no assurance that any additional patents will be
issued.
In September 1996, CardioGenesis Corporation, ("CardioGenesis") filed a
civil lawsuit in the United States District Court for the Northern District of
California seeking to have the Company's synchronization patent declared
invalid, or, alternatively, asking the court to determine whether CardioGenesis
infringes on this patent. In October 1996, the Company filed an answer and
counterclaim alleging that CardioGenesis infringes on this patent. The
counterclaim seeks both injunctive relief and monetary damages against
CardioGenesis. In October 1997, CardioGenesis filed an amended complaint seeking
to have the Company's synchronization patent declared unenforceable.
CardioGenesis is not seeking monetary damages from the Company. (See "Item 3.
Legal Proceedings")
In February 1998, the Company filed an application with the United States
Patent Office to reissue the Company's synchronization patent with 32 additional
claims directed to various features of its synchronized laser system technology
including the use of a fiber optic laser delivery device.
In January 1997, CardioGenesis Corporation, filed a challenge to the
Company's European synchronization patent in the European Patent Office and in
March 1997 the Company filed its response. In addition, in April 1997, the
Company filed an infringement lawsuit against CardioGenesis in the Munich
District Court alleging infringement of its synchronization patent. An oral
hearing has been scheduled in the Munich District Court on October 1, 1998. (See
"Item 3. Legal Proceedings")
Although the Company believes its patents to be strong, successful
litigation against these patents by a competitor could have a material adverse
effect on the Company's business, financial condition and results of operations.
No assurance can be given that the existing patents will be held valid if
challenged, that any additional patents will be issued or that the scope of any
patent protection will exclude competitors. The breadth of claims in medical
technology patents involve complex legal and factual issues and therefore can be
highly uncertain. Further, no assurance can be given that the scope of the
claims of the Company's synchronization patent will remain unchanged during the
patent office review of the Company's reissue application, or that any claims
will be approved.
The Company also relies upon unpatented proprietary technology and trade
secrets that it seeks to protect, in part, through confidentiality agreements
with employees and other parties. No assurance can be given that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, that others will not independently develop or otherwise acquire
substantially equivalent proprietary technology and trade secrets or disclose
such technology or that the Company can meaningfully protect its rights in such
unpatented technology. In addition, others may hold or receive patents which
contain claims that may cover products developed by the Company.
The Company believes its patents to be valid and enforceable. However,
there has been substantial litigation regarding patent and other intellectual
property rights in the medical device industry. Litigation, which could result
in substantial cost to and diversion of effort by the Company, may be necessary
to enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company, to defend the Company against claimed infringement of the
rights of others and to determine the scope and validity of the proprietary
rights of others. Adverse determinations in litigation could subject the Company
to significant
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liabilities to third parties, could require the Company to seek licenses from
third parties and could prevent the Company from manufacturing, selling or using
its products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
In February 1996, PLC Medical Systems, Inc. filed suit against Eclipse
Surgical Technologies, Inc. ("Eclipse") in the United States District Court for
the District of Massachusetts alleging copyright infringement of certain
copyrighted works and unfair and deceptive trade practices. The Company is
seeking injunctive relief and damages for, among other things, any profits
derived by Eclipse, attorney's fees, treble damages and other relief.
The Company believes that trademarks may be important to its business. The
Company has a U.S. registered trademark for "THE HEART LASER AND DESIGN" which
was issued on December 19, 1995 and three foreign registered trademarks for "THE
HEART LASER," which were issued on September 9, 1991 in France, on March 29,
1993 in Switzerland and on March 31, 1994 in Japan. Additionally, the Company
has three pending U.S. trademark applications for "TMR and DESIGN," "HEART
DESIGN," "TMR TRANSMYOCARDIAL REVASCULARIZATION and Design" which were filed on
July 13, 1995, July 20, 1995 and July 24, 1995, respectively. In 1996, Eclipse
filed oppositions to each of these trademark applications in the United States
Trademark Office. There is one pending foreign trademark application for "THE
HEART LASER AND DESIGN" in Germany. No assurance can be given that the Company's
trademarks will be registered or that others do not have prior rights to such
marks.
COMPETITION
Many treatments are available for coronary artery disease. The Company
believes that if the Heart Laser System receives approval for expanded
indications, the Heart Laser System should be able to successfully compete with
some of these technologies.
The Company is aware of number of other companies who have entered the TMR
market or have announced their intention to enter the TMR market. The majority
of these companies are using holmium lasers, two are using excimer lasers and
one company is developing a short pulsed CO(2) laser for TMR. Most of these
companies are in the early stages of clinical tests or in the development of
clinical testing. Based on public information and published results, the Company
has performed the highest number of TMR procedures and has the most published
data and peer reviewed articles. To date, only two of the Companies using a
holmium laser have presented data on their results, which show reduction in
angina and improvement in quality of life.
The Company is investigating whether these competitors violate in any way,
existing patents issued to the Company and has brought claims against
CardioGenesis in both the U.S. and in Europe. (See "Proprietary Processes,
Patents, Licenses and Other Rights" and "Legal Proceedings")
Several of the companies who have entered the TMR market are developing
percutaneous methods of performing TMR. To date there has been very little
information presented on patient outcomes other than claims that benefits
derived may be equivalent to surgical treatment. The Company is currently
developing a proprietary percutaneous program.
The Company believes that the primary competitive factors in the medical
treatment of coronary artery disease are clinical efficacy, product safety and
reliability, product quality, innovation, price, reputation for quality,
customer service and ease of use. The Company believes that its competitive
success will be based on its ability to create and maintain scientifically
advanced technology, attract and retain scientific personnel, obtain patent or
other protection for its products, obtain required regulatory approvals and
manufacture and successfully market its products either directly or through
outside parties. If a PMA is granted under expedited review in the current year,
management expects that the Heart Laser System would be the first FDA approved
TMR device and should enjoy a market lead time over its competitors. No
assurance can be given however that a PMA will be granted in the current year,
if at all, and if granted, that it would necessarily be in advance of any
competitors or provide the Company with a sustainable competitive advantage.
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If the FDA grants a PMA for TMR using the Heart Laser System, the Company
believes that the primary competitive factors within the interventional
cardiovascular market are the ability to treat safely and effectively various
types of coronary disease, physician familiarity with and acceptance of the
procedure, third party reimbursement policies and to a lesser extent, ease of
product use, product reliability, and price.
The medical care products industry is characterized by extensive research
efforts and rapid technological progress. New technologies and developments are
expected to continue at a rapid pace in both industry and academia. Competition
in the market for surgical lasers and for the treatment of cardiovascular
disease is intense and is expected to increase. Management believes that the
Heart Laser System, if approved for general sale by the FDA, will compete
primarily with current medical management (drugs) as well as conventional
coronary bypass, balloon angioplasty and new coronary procedures (including
atherectomy, laser angioplasty and metallic stents). Many of the companies
manufacturing these devices have substantially greater capital, as well as
greater research and development, regulatory, manufacturing and marketing
resources and experience than the Company and represent significant competition
for the Company. Such companies may succeed in developing products that are more
effective or less costly in treating coronary disease than the Heart Laser
System, 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
products and advance existing 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 $5,158,000, $2,835,000 and
$2,246,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Although the initial design of the Heart Laser System is now completed,
management expects to continue to refine the Heart Laser System design, to
develop new less invasive methods for use of the Heart Laser System in TMR
procedures, including endoscopic and percutaneous delivery systems and to fund
clinical trials. The Company intends to continue to monitor all technologies
that may be applicable to TMR to maintain its position as a technology leader in
this marketplace.
EMPLOYEES
As of March 23, 1998, the Company had 81 full-time domestic employees,
including its executive officers. Of these, 15 are employed in general and
administrative activities, 22 are involved in sales and marketing, 19 are
involved in research and development and 25 are involved in manufacturing. The
Company also employs one part-time employee. None of the Company's employees are
represented by a union. In addition, the Company has 14 full time
employees/consultants for its international operations. Management considers its
relations with employees to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
In September 1996, the Company moved into its current 37,000 square foot
facility in Franklin, Massachusetts where it maintains its principal executive
offices and manufacturing operations. The premises are leased from an
independent third party under a lease which expires in August 2001. The lease
provides for two renewal periods of three years each. The total base rental
payments for the term of the lease are approximately $296,400 per year plus
operating and maintenance costs and real estate taxes.
ITEM 3. LEGAL PROCEEDINGS.
In February 1996, PLC Medical Systems, Inc. filed suit against Eclipse
Surgical Technologies, Inc. ("Eclipse") in the United States District Court for
the District of Massachusetts alleging copyright infringement of certain
copyrighted works and unfair and deceptive trade practices. The Company is
seeking
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injunctive relief and damages for, among other things, any profits derived by
Eclipse, attorney's fees, treble damages and other relief. (See "Proprietary
Processes, Patents, Licenses and Other Rights")
In September 1996, CardioGenesis Corporation, ("CardioGenesis") filed a
civil lawsuit in the United States District Court for the Northern District of
California seeking to have the Company's synchronization patent declared
invalid, or, alternatively, asking the court to determine whether CardioGenesis
infringes on this patent. In October 1996, the Company filed an answer and
counterclaim alleging that CardioGenesis infringes on this patent. The
counterclaim seeks both injunctive relief and monetary damages against
CardioGenesis. In October 1997, CardioGenesis filed an amended complaint seeking
to have the Company's synchronization patent declared unenforceable.
CardioGenesis is not seeking monetary damages from the Company but will seek
reimbursement of its legal expenses if successful in the lawsuit. Trial has been
scheduled to begin in January 1999. (See "Proprietary Processes, Patents,
Licenses and Other Rights")
In January 1997, CardioGenesis Corporation, filed a challenge to the
Company's European synchronization patent in the European Patent Office and in
March 1997 the Company filed its response. In addition, in April 1997, the
Company filed an infringement lawsuit against CardioGenesis in the Munich
District Court alleging infringement of its synchronization patent. An oral
hearing has been scheduled in the Munich District Court on October 1, 1998. (See
"Proprietary Processes, Patents, Licenses and Other Rights")
The Company and certain of its officers have been named as defendants in 21
purported class action lawsuits filed between August 1997 and November 1997 in
the United States District Court for the District of Massachusetts. The suits
allege violations of the federal securities laws. The plaintiffs are seeking
damages in connection with such alleged violations. Nineteen of these complaints
have been consolidated by the court into a single action for pretrial purposes.
A motion has been filed to consolidate the other two suits with each other.
These matters are in the earliest stages of litigation and the Company intends
to seek motions to dismiss all of these claims. There can be no assurance that
the motions to dismiss these claims will be successful. Management is unable to
make a meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome of these pending litigation matters. It is possible that
the Company's result of operations or cash flows in a particular quarter or
annual period or its financial position could be materially affected by an
ultimate unfavorable outcome of this pending litigation. The Company believes
that it has valid defenses to these class action litigation matters and intends
to vigorously defend itself in these matters.
In August 1997, the Company received from the Securities and Exchange
Commission an informal request for information relating to the decision by the
FDA Advisory Panel to not recommend approval of the Heart Laser System. The
Company has responded and to date has not received any further communication
with the Commission regarding this matter.
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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since September 17, 1992, the Company's Common Stock has traded on the
American Stock Exchange ("AMEX") under the symbol "PLC". From March 3, 1992
through September 16, 1992, the Company's Common Stock was traded on the
over-the-counter market through the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"). On March 23, 1998 the closing sale price
of the Company's Common Stock as reported by the AMEX was $14.75 per share.
For the periods indicated, the following table sets for the range of high
and low sale prices for the Common Stock as reported by AMEX from January 1,
1996.
SALES
----------------
HIGH LOW
------ ------
1996
First Quarter............................................... $34.88 $16.63
Second Quarter.............................................. $33.88 $20.38
Third Quarter............................................... $28.63 $13.25
Fourth Quarter.............................................. $27.25 $19.63
1997
First Quarter............................................... $27.63 $16.63
Second Quarter.............................................. $22.88 $12.38
Third Quarter............................................... $26.81 $10.25
Fourth Quarter.............................................. $14.38 $ 6.88
1998
First Quarter (through March 23, 1998)...................... $14.75 $ 7.88
As of March 23, 1998, there were approximately 647 record holders of the
Company's Common Stock. Management believes that there are approximately 16,000
beneficial owners of the Company's Common Stock.
DIVIDENDS
The Company has never paid cash dividends. The Company currently intends to
retain all future earnings, if any, for use in its business and does not
anticipate paying any cash dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data with respect to the Company for the
five years ended December 31, 1997, are derived from the audited financial
statements of the Company. The data should be read in conjunction with the
financial statements, related notes and other financial information included
herein.
SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31
----------------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
(ALL AMOUNTS ARE IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Product sales......................... $ 5,687 $ 9,082 $11,938 $ 5,068 $ 3,322
Placement and service fees............ 3,254 2,790 1,407 111 --
Costs and expenses:
Cost of product sales................. 2,721 2,911 4,177 2,851 2,982
Cost of placement and service fees.... 2,595 1,155 386 17 --
Selling, general and administrative... 13,049 7,023 5,035 3,030 2,637
Research and development.............. 5,158 2,835 2,246 2,211 1,930
-------- ------- ------- ------- -------
Income (loss) from operations........... (14,582) (2,052) 1,501 (2,930) (4,227)
Other income............................ 178 512 588 366 254
-------- ------- ------- ------- -------
Income (loss) before income taxes....... (14,404) (1,540) 2,089 (2,564) (3,973)
Provision for income taxes.............. -- -- 85 -- --
-------- ------- ------- ------- -------
Net income (loss)....................... $(14,404) $(1,540) $ 2,004 $(2,564) $(3,973)
======== ======= ======= ======= =======
Net income (loss) per share -- Basic.... $ (.84) $ (.09) $ .13 $ (.18) $ (.31)
======== ======= ======= ======= =======
Net income (loss) per share --Diluted... $ (.84) $ (.09) $ .12 $ (.18) $ (.31)
======== ======= ======= ======= =======
Shares used to compute net income (loss)
per share -- Basic.................... 17,050 16,376 15,868 14,372 12,868
Shares used to compute net income (loss)
per share -- Diluted.................. 17,050 16,376 16,590 14,372 12,868
AS OF DECEMBER 31
----------------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
BALANCE SHEET DATA:
Working capital......................... $ 12,793 $11,245 $13,541 $12,431 $ 5,873
Total assets............................ 27,017 19,417 18,290 14,337 7,595
Long term obligations................... 121 27 32 7 14
Stockholders' equity.................... 19,009 16,467 15,508 13,059 6,658
The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128 "Earnings Per
Share". For further discussion regarding the calculation of earnings per share,
see Note 1 to the Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Prior to Fiscal 1994, a significant portion of the Company's product sales,
gross profit and operating expenses was related to its general purpose CO(2)
surgical lasers, laser components and related accessories. The Company exited
this part of its surgical laser business by the end of 1995 to focus its full
resources on the Heart Laser System. The exit strategy included fulfilling
existing contracts and orders, and a sale of technologies associated with a part
of this business.
The Company has both a placement strategy and a direct/distributor sales
strategy for Heart Laser System purchases. The placement program allows the
Company to receive recurring revenues based on the usage of the Heart Laser
System rather than one-time revenues for the sale of each Heart Laser System.
Under the placement model, an installation fee is paid when the Heart Laser
System is installed and the Company then receives a fee per use. Sterile
handpieces and other disposables are included in the per procedure fee. Revenues
from these contracts are classified as placement fees. The cost of the Heart
Laser System is depreciated over the term of the contract. In the near term, it
is expected that placement revenues will continue to be impacted by
reimbursement policies until the U.S. Food and Drug Administration ("FDA")
approval is granted.
In foreign countries where credit risk is high or where health care is not
reimbursed by the government or insurance, the Heart Laser System is sold as
capital equipment and the related sterile handpieces and other disposables are
sold separately for each procedure. The Company sells Heart Laser Systems
directly and through distributors. These sales are classified as product sales.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Total revenues of $8,941,000 for the year ended December 31, 1997 decreased
$2,931,000 or 25% when compared to total revenues of $11,872,000 for the year
ended December 31, 1996. For the year ended December 31, 1997, product sales of
$5,687,000 decreased $3,395,000 or 37% when compared to product sales of
$9,082,000 for the year ended December 31, 1996. The major factors in both of
these year to date decreases are the number of Heart Laser Systems sold and the
customer mix. In 1997, the Company recorded revenue on ten Heart Laser Systems
under the sales strategy of which two were sold directly and eight were sold to
distributors as compared to revenue recorded on 13 Heart Laser Systems under the
sales strategy in 1996 of which six were sold directly and seven were sold to
distributors. Heart Laser Systems sold directly to customers typically generate
higher revenues than those sold to distributors.
Placement and service fees of $3,254,000 for the year ended December 31,
1997 increased 17% over placement and service fees of $2,790,000 for the year
ended December 31, 1996. Although the Company has increased its placement
contract base, revenue dollars have not proportionately increased. The Company
generates a revenue stream over the life of the placement contract. Typically,
the revenue generated in the initial periods of the contract are less than in
later periods when PreMarket Approval ("PMA") approval is anticipated and
minimum contractual billings are increased. In May 1997, the Health Care
Financing Administration (HCFA) instituted a non-coverage policy for TMR
procedures performed on Medicare patients in the United States. The HCFA
announcement coupled with the July 28, 1997 FDA Advisory Panel recommendation of
non-approval caused the Company to reexamine its requirement of contractual
minimum billings prior to FDA approval. As a result, the Company permitted a
slowdown in the contractual minimum billings to an actual usage billing. Until
PMA approval, of which no assurance can be given, the Company expects that
future billings under placement contracts will be impacted similarly and the
effect on future revenue on existing contracts cannot be predicted.
Total gross profit decreased to $3,625,000 or 41% of total revenues for the
year ended December 31, 1997 as compared with $7,806,000 or 66% of total
revenues for the year ended December 31, 1996. Gross profit on product sales
decreased to $2,966,000 or 52% of product sales for the year ended December 31,
1997 from $6,171,000 or 68% of product sales for the year ended December 31,
1996. This overall decrease has resulted primarily from three factors. First, in
September 1996, the Company moved into a new facility to
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accommodate higher levels of manufacturing in anticipation of FDA approval. In
1997, the Company continued to increase overall staffing and other related fixed
manufacturing costs, which in turn caused overall manufacturing spending to be
higher in 1997 than in 1996 coupled with lower levels of production in 1997 than
in 1996. The combination of these factors resulted in unfavorable capacity and
manufacturing variances in 1997, which caused a deterioration in the gross
margin. The Company anticipates that after PMA approval, of which no assurance
can be given, production levels will increase to levels that will absorb
manufacturing overhead and mitigate these variances. Secondly, as previously
discussed, the Company shipped fewer units under its sales strategy in 1997 than
in 1996 and the mix was primarily to distributors in 1997 as compared to direct
sales in 1996. Heart Laser Systems sold directly to customers typically carry a
higher gross profit than those sold to distributors. Thirdly, the Company
generated less gross margin dollars from placement contracts in 1997 than in
1996 as discussed below.
Gross profit on placement and service fees of $659,000 or 20% of total
revenues for the year ended December 31, 1997 decreased $976,000 when compared
to $1,635,000 or 59% of total revenues for the year ended December 31, 1996. The
Company's existing placement contracts are in the pre-PMA contractual minimum
billings period, which are typically lower than minimums required after PMA
approval, of which no assurance can be given, at which time annual minimums
increase. The cost of the laser is charged on a straight-line basis over the
life of the placement contract. The overall depreciation on Heart Laser Systems
under existing placement contracts is increasing at a faster rate than the
corresponding revenue generated due to the lower pre-PMA minimum billings. This
has resulted in a lower gross margin in 1997 as compared to 1996. Until such
time that the Company sees an increase to its minimum billings on existing and
future placement contracts, the gross margin is expected to be negatively
impacted.
Selling, general and administrative expenses of $13,049,000 for the year
ended December 31, 1997 increased $6,026,000 or 86% when compared with
$7,023,000 for the year ended December 31, 1996. The Company continues to
prepare for an FDA panel review of the PMA application for the Heart Laser
System. In 1997, the Company expanded its management team, and as well as its
sales force. The Company feels these additional expenditures are necessary and
should enable the Company to be well positioned for the U.S. launch of the Heart
Laser System upon approval from the FDA, of which no assurance can be given.
Research and development expenditures of $5,158,000 increased $2,323,000 or
82% for the year ended December 31, 1997 when compared with $2,835,000 for the
year ended December 31, 1996. The Company continues to make expenditures with
its clinical study compilation and data preparation for FDA submissions. These
activities have required additional staffing and consultants in 1997 for these
growing demands. In addition, the Company continues its investments in the
research and development of new products.
Other income of $178,000 for the year ended December 31, 1997 decreased
$334,000 or 65% when compared to $512,000 for the year ended December 31, 1996.
Included in other income is interest income, interest expense and other expense.
Interest income was $553,000 in 1997 and $594,000 in 1996. The slight decrease
in interest income is a result of a lower average cash and marketable securities
balances in 1997 than in 1996. Interest expense was $207,000 in 1997 and $13,000
in 1996. In July and August 1997, the Company received $18.8 million in net
proceeds from the issuance of 5% Convertible Debentures. See Note 6 to the
Consolidated Financial Statements. The Company recorded interest expense on the
outstanding debentures throughout the year. Other expense was $168,000 in 1997
and $69,000 in 1996. Included in other expense are gains and losses from foreign
currency transactions.
There was no provision for income tax for the year ended December 31, 1997
or 1996 due to the net loss of $14,404,000 and $1,540,000, respectfully.
The Company incurred a net loss for the year ended December 31, 1997 of
$14,404,000 when compared to a net loss of $1,540,000 for the year ended
December 31, 1996. This is a result of lower total revenues in 1997 when
compared with 1996, coupled with higher overall expenses in 1997 related to
preparation for the PMA approval process.
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22
The $.84 and $.09 loss per share for the years ended December 31, 1997 and
1996, respectively, was calculated using only the weighted average number of
shares outstanding during the year.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total revenues of $11,872,000 for the year ended December 31, 1996
decreased $1,473,000 or 11% when compared to total revenues of $13,345,000 for
the year ended December 31, 1995. For the year ended December 31, 1996, product
sales of $9,082,000 decreased $2,856,000 or 24% when compared to product sales
of $11,938,000 for the year ended December 31, 1995. The major factors in both
of these year to date decreases are the number of Heart Lasers shipped and the
method of sale. In 1996, there were 30 units shipped, 13 of which were sales, as
compared with 23 shipped in 1995, 15 of which were sales. In addition, in 1995,
the Company had a significant sale to a distributor IMATRON Japan ("IMATRON") of
six Heart Lasers at approximately $5.7 million. In 1996, the Company did not
have a comparable contract with IMATRON or any other distributor.
Placement and service fees of $2,790,000 for the year ended December 31,
1996 increased 98% over placement and service fees of $1,407,000 for the year
ended December 31, 1995 which reflects an increase in the number of Heart Lasers
under placement contracts. In 1996 the Company had a total of 27 Heart Lasers
under placement contracts as compared with a total of 11 in 1995.
Total gross profit decreased to $7,806,000 or 66% of total revenues for the
year ended December 31, 1996 as compared with $8,782,000 or 66% of total
revenues for the year ended December 31, 1995. Gross profit on product sales
decreased to $6,171,000 or 68% of product sales for the year ended December 31,
1996 from $7,761,000 or 65% of product sales for the year ended December 31,
1995. The decrease in gross margin dollars is a function of lower product sales
discussed previously. The gross margin percentage on product sales increased
slightly in 1996 as compared with 1995. During the year ended December 31, 1995,
the Company expensed certain inventory related with the exit strategy of its
general purpose CO(2) surgical laser product line, which had an unfavorable
impact on the gross margin percentage in 1995.
Gross profit on placement and service fees of $1,635,000 or 59% for the
year ended December 31, 1996 increased $614,000 when compared to $1,021,000 or
73% for the year ended December 31, 1995. In 1996, the Company had a majority of
its placement contracts in their first contract year. The first year of a
placement contract generally produces lower annual minimum contractual revenues
than in subsequent years. In addition, the Company records installation revenue
at the commencement of the placement contract. In 1996, the timing of both of
these factors reflected a lower gross margin percentage when compared to 1995.
Selling, general and administrative expenses of $7,023,000 for the year
ended December 31, 1996 increased $1,988,000 or 39% when compared with
$5,035,000 for the year ended December 31, 1995. In 1996, the Company expanded
its international sales and marketing efforts with the establishment of four
international subsidiaries in Europe and Asia, which accounted for more than
one-third of the overall increase. In addition to the expansion internationally,
the Company has also strengthened its domestic marketing efforts, increased
overall staffing, and moved its operations to a new 37,000 square foot facility.
Research and development expenditures of $2,835,000 increased $589,000 or
26% for the year ended December 31, 1996 when compared with $2,246,000 for the
year ended December 31, 1995. The increase is primarily related to increased
staffing requirements associated with growing demands for clinical study
compilation and the development of a second generation Heart Laser System.
Other income of $512,000 for the year ended December 31, 1996 decreased
$76,000 or 13% when compared to $588,000 for the year ended December 31, 1995.
This decrease is the result of lower interest income due to lower interest rates
throughout 1996 as compared to 1995. In addition, with the establishment of the
Company's new subsidiaries in 1996, foreign currency transactions resulted in a
$51,000 loss for the year ended December 31, 1996.
There was no provision for income tax for the year ended December 31, 1996
due to the net loss of $1,540,000. Although the Company had sufficient net
operating loss carryforwards to offset income taxes for
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23
the year ended December 31, 1995, the provision for income taxes represents the
tax liability under the alternative minimum tax regulations which cannot be
offset by net operating loss carryforwards.
The Company incurred a net loss for the year ended December 31, 1996 of
$1,540,000 when compared to net income of $2,004,000 for the year ended December
31, 1995. This is a result of lower total revenues in 1996 when compared with
1995, coupled with higher overall expenses in 1996 related to both international
and domestic expansion.
The $.09 loss per share for the year ended December 31, 1996 was calculated
using only the weighted average number of shares outstanding during the year.
Earnings per share of $.13 for the year ended December 31,1995 was calculated
using the weighted average number of shares outstanding during the year.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash and cash equivalents of
$3,484,000 and short-term investments of $12,845,000. In July and August 1997,
the Company received $18,800,000 in net proceeds through the issuance of 5%
Convertible Debentures due July 2002 and August 2002. In September 1997
$15,900,000 of these debentures were converted into the Company's Common Stock.
In January and February 1998, the remaining $4,250,000 of these debentures
converted into the Company's Common Stock. See Note 6 to the Consolidated
Financial Statements.
During the year ended December 31, 1997, the Company incurred a loss of
$14,404,000 which resulted in the use of approximately $10,050,000 to support
operations. Cash used in investing activities was approximately $10,000,000
primarily related to the net purchase of $7,300,000 of marketable securities
from the proceeds of the convertible debentures discussed previously. In
addition, the Company invested $2,600,000 in fixed assets, primarily related to
its placement contract activity. Cash provided by financing activities was
approximately $20,800,000, primarily related to the net proceeds of $18,800,000
through the issuance of convertible debentures and $2,000,000 from proceeds of
the sale of the Company's common stock.
During the year ended December 31, 1996, the Company received approximately
$2,499,000 in proceeds from the exercise of stock options and warrants, and
$119,000 from the repayment of shareholder loans. An additional $1,030,000 of
cash was generated from the maturities of short-term investments which were not
reinvested. Cash provided from operating activities approximated $3,100,000,
principally related to its collection in January 1996 of its $5,700,000
outstanding receivable from IMATRON, offset by investments in inventories, and
increases in prepaid expenses and other assets. Approximately $4,200,000 was
used to acquire capital equipment, principally Heart Lasers used for placement
contracts coupled with leasehold improvements related to the Company's new
facility. On September 3, 1996, the Company moved into its new facility in
Franklin, Massachusetts under a five-year operating lease.
In February 1997, the Company's PMA was filed by the FDA. In anticipation
of a possible FDA approval, the Company had been increasing its overall
operating expenses and overhead to be positioned to further increase its
production capacities. In order to be adequately positioned to meet these
demands, the Company secured financing in July 1997. On July 28, 1997, an FDA
Advisory Panel recommended a non-approval at that meeting with the requirement
of additional data to complete the randomized study. In December 1997, the
Company submitted all of the data on the Heart Laser System to the FDA and its
Advisory Panel from the request of the July 28, 1997 FDA Advisory Panel meeting.
The Company has been notified of a scheduled FDA Advisory Panel date on April
24, 1998. Given this delay, the Company has monitored its operating expenses
closely and minimized increases to expenses and overhead during this period.
With the $16.3 million in cash and marketable securities at December 31, 1997,
the Company believes that it has sufficient resources to meet its working
capital demands for at least the next twelve months.
The Company and certain of its officers have been named as defendants in 21
purported class action lawsuits filed between August 1997 and November 1997. See
Note 5 to the Consolidated Financial Statement and Item 3 Legal Proceedings for
further discussion. The Company has an insurance policy of which the maximum
deductible has been recorded in the results of operations for the year ended
1997.
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Unanticipated decreases in operating revenues, increases in expenses, or a
further delay in the expected FDA approval, may adversely impact the Company's
cash position. The Company may seek additional financing through the issuance
and sale of debt or equity securities, bank financing, joint ventures or by
other means. The availability of such financing and the reasonableness of any
related terms in comparison to market conditions cannot be assured.
For the reasons discussed above, the Company believes that operating losses
are likely until after such time as the Company receives its PMA from the FDA
for the Heart Laser System. Although the Heart Laser System has been granted
"expedited review" status by the FDA, the Company cannot project when, if at
all, such approval will be granted or that any approval will include desirable
claims. Any failure or delay in receiving any such approval would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company must also convince health care
professionals, third party payors and the general public of the medical and
economic benefits of the Heart Laser System. No assurance can be given that the
Company will be successful in marketing the Heart Laser System or that the
Company will be able to operate profitably on a consistent basis.
This report contains forward-looking statements regarding anticipated
increases in revenues, marketing of products and proposed products and other
matters. These statements, in addition to statements made in conjunction with
the words "anticipate," "expect," "intend," "believe," "seek," "estimate" and
similar expressions are forward-looking statements that involve a number of
risks and uncertainties. The following is a list of factors, among others, that
would cause actual results to differ materially from the forward-looking
statements: approval by the FDA, successful ability to secure any required
additional financing, business conditions and growth in certain market segments
and general economy, an increase in competition, increased or continued market
acceptance of the Company's products and proposed products, and other risks and
uncertainties indicated from time to time in the Company's filings with the
Securities and Exchange Commission.
At December 31, 1997, the Company had U.S. net operating loss carryforwards
of approximately $19.2 million available to reduce future taxable income which
expire at various dates through 2011, and the Company had foreign net operating
loss carryforwards of approximately $3.7 million. In addition, various other
deferred tax assets have been generated related primarily to intercompany
profit, accruals, and research and development tax credits.
Since the Company believes that as of December 31, 1997 it is more likely
than not, that all of the deferred tax assets will not be realized, no tax
benefit for prior year losses and other deferred items has been provided. These
amounts could provide a benefit to the Company in the future in profitable
years, subject to the expirations noted.
The Year 2000 Issue refers to potential problems with computer systems or
any equipment with computer chips or software that uses dates where the date has
been stored as just two digits (e.g., 97 for 1997). On January 1, 2000, any
clock or date recording mechanism incorporating date sensitive software which
uses only two digits to represent the year may recognize a date using 00 as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar business activities. The Company is presently evaluating the impact of
the Year 2000 Issue as it affects business operations, interfaces with customers
and vendors, and contingencies related to products that have been sold that may
need to be modified. To date, the Company is unaware of any situations of
noncompliance that would materially adversely effect its operations or financial
condition. There can be no assurance, however, that instances of noncompliance
which could have a material adverse effect on the Company's operations or
financial condition will not be identified, that the systems of other companies
with which the Company transacts business will be corrected on a timely basis;
or that failure by such entities to correct a Year 2000 problem or a correction
which is incompatible with the Company's information systems would not have a
material adverse effect on the Company's operations and financial condition.
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NEW ACCOUNTING PRONOUNCEMENT
Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income" ("Statement 130").
Financial Accounting Standards Board Statement No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("Statement 131").
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 below and the Index therein for a listing of the financial
statements and supplementary data filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the ages of and positions and offices
presently held by each director and each executive officer of the Company as of
March 23, 1998.
CLASS TO
WHICH THE
DIRECTOR
NAME AGE POSITION BELONGS
- ---- --- -------- ---------
Robert I. Rudko, Ph.D..... 55 Chairman of the Board of Directors and Chief I
Scientist
William C. Dow............ 51 President, Chief Executive Officer and Director II
Edward H. Pendergast...... 64 Lead Outside Director I
Harold P. Capozzi......... 73 Director III
H.B. Brent Norton,
M.D. ................... 37 Director III
Kenneth J. Pulkonik....... 57 Director II
Roberts A. Smith,
Ph.D. .................. 69 Director III
Patricia L. Murphy........ 47 Chief Financial Officer and Treasurer N/A
The Company's Articles, as amended, provide that the members of the Board
of Directors shall be classified and elected as nearby as possible into three
classes, each with approximately one-third of the members of the Board of
Directors. The classified board is designed to assure continuity and stability
in the Board of Directors' leadership and policies. Dr. Rudko and Mr. Pendergast
are classified as Class I directors and serve a three year term, expiring at the
1998 Annual Meeting, Messrs. Dow and Pulkonik are classified as Class II
directors and serve until the 2000 Annual Meeting, and Drs. Norton and Smith and
Mr. Capozzi are classified as Class III directors and serve until the 1999
Annual Meeting. The successors to the class of directors whose terms expire at
that meeting would be elected for a term of office to expire at the third
succeeding annual meeting after their election and until their successors have
been duly elected by the stockholders. Directors chosen to fill vacancies on a
classified board shall hold office until the next election of the class for
which directors shall have been chosen, and until their successors are duly
elected by the stockholders. Officers are elected by and serve at the discretion
of the Board of Directors, subject to their employment contracts.
The Company Act (British Columbia) requires that the Corporation's
President serve on the Board of Directors. With the resignation of Mr. M. Lee
Hibbs as President and Director of the Corporation effective June 30, 1997, Dr.
Rudko agreed to become the Interim Acting President of the Corporation until a
successor was hired which satisfied this requirement. However, there was a
vacancy on the Board. Ms. Patricia L. Murphy was nominated and elected to serve
as a member of the Board of Directors to fill this vacancy. In order to continue
to satisfy the Company Act requirement, Ms. Murphy agreed with the Corporation
to resign as a director effective immediately upon the Corporation hiring a new
President and Chief Executive Officer. On August 15, 1997, Mr. Dow was elected
as President, Chief Executive Officer and Director of the Corporation, at which
point Ms. Murphy and Dr. Rudko resigned from their respective interim positions.
Under British Columbia corporate law, a majority of the Company's directors
must be residents of Canada and one director must be a resident of British
Columbia. As a result, stockholders may be limited in the persons they can
nominate and elect as directors.
No director or executive officer is related to any other director or
executive officer by blood or marriage.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
executive officers and directors, and persons who beneficially own more than ten
percent (10%) of the Company's stock to file initial reports of ownership on
Form 3, reports of changes in ownership on Form 4 and annual statements of
changes
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in beneficial ownership on Form 5 with the Securities and Exchange Commission
("SEC") and any national securities exchange on which the Company's securities
are registered. Executive officers, directors and greater than ten percent (10%)
beneficial owners are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to the
Company and written representations from the executive officers and directors,
the Company believes that all Section 16(a) filing requirements applicable to
its executive officers, directors and greater than ten percent (10%) beneficial
owners were complied with for Fiscal 1997, except for the following filed by
Harold P. Capozzi: (i) one late Form 4 reporting one sale transaction, which
Form 4 inadvertently under reported the number of shares beneficially owned; and
(ii) Mr. Capozzi inadvertently over reported the number of options he
beneficially owned in a timely filed Form 4.
BACKGROUND
The following is a brief account of the business experience of each
director and executive officer:
ROBERT I. RUDKO, PH.D. Dr. Rudko has served as Chairman of the Company
since April 1992, President of the Company from April 1992 until October 1993,
Chief Scientist of the Company since October 1993 and President of Laser
Engineering, Inc. (now known as PLC Medical Systems, Inc. "PLC Medical"), a
wholly owned subsidiary of the Company, since 1981. Dr. Rudko has 26 years of
experience in the analysis, design, development, and manufacture of lasers and
surgical laser systems. Prior to founding PLC Medical in 1981, Dr. Rudko was
employed by the Research Division of Raytheon Company, a publicly traded defense
contractor, from 1967 to 1981, first as a Senior Research Scientist and then as
Principal Research Scientist. Dr. Rudko received his Ph.D. degree in electrical
engineering from Cornell University.
WILLIAM C. DOW. Mr. Dow has served as the President, Chief Executive
Officer and director of the Company since August 1997. Prior to joining the
Company, from 1993 to 1997, Mr. Dow served as President and Chief Executive
Officer of Deknatel Snowden Pencer Worldwide, Inc., a $100 million medical
device manufacturer. Deknatel Snowden Pencer Worldwide, Inc., became a
manufacturing and marketing subsidiary of Genzyme Corporation in 1996. Mr. Dow
has over 25 years of broad based experience in the medical device and service
industry having held various positions in sales, marketing, distribution and
general management with Griffith Micro Science, Kendall, Terumo and American
Hospital Supply. Mr. Dow is a graduate of the United States Navel Academy with a
Bachelor of Science in Engineering and served as both a pilot and a Supply Corps
officer in the U.S. Navy.
EDWARD H. PENDERGAST. Mr. Pendergast was a director of PLC Medical from
its incorporation in 1981 until 1992. Mr. Pendergast has served as a director of
PLC Systems Inc. since September 1992 and as its Lead Outside Director since
March 1995. Mr. Pendergast is the President of Pendergast & Company, a privately
held management consulting firm. Mr. Pendergast also serves as Chairman of the
Board of Formware Corporation, a privately held software company. From 1984 to
1989, Mr. Pendergast served as the Chairman of Kennedy & Lehan, a public
accounting firm. Mr. Pendergast also serves as a member of the Board of
Directors of several other private companies. Mr. Pendergast is a Certified
Public Accountant and the former President of the Massachusetts Society of
Certified Public Accountants.
HAROLD P. CAPOZZI. Mr. Capozzi has served as a director of the Company
since 1991. For approximately the last 25 years through the present, Mr. Capozzi
has acted in various managerial and operational capacities for several
family-owned businesses. These businesses, Capozzi Enterprises, Ltd., Pasadena
Investments, Ltd. and Catalina Properties Ltd., operate primarily in the real
estate and real estate leasing markets and are privately held. He served seven
years as a member of the Legislative Assembly for the Province of British
Columbia and was a founding director of McDonald's Canada Ltd. and Expo '86.
From 1987 to 1991, Mr. Capozzi was a director for Pineridge Capital Group Inc.,
a publicly traded venture capital company. Mr. Capozzi is currently a director
of Richland Mines Inc. and Knightsbridge Corporation, both publicly traded
companies.
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Resources Ltd., a publicly traded mining company. He has also served as a
director for Comac Food Group Inc., from 1991 to 1993. He has been a director of
Richland Mines Inc., a publicly traded company, since 1993.
KENNETH J. PULKONIK. Mr. Pulkonik has served as a director of the Company
since 1992. Mr. Pulkonik has served as President and Chairman of the Board of
Rush Electronics Ltd. of Ontario, Canada, a privately held business, since 1983.
Mr. Pulkonik has also served as the Chairman of the Board for Rush Corporation,
the United States subsidiary of Rush Electronics Ltd., a privately held company,
since 1987. In 1971, Mr. Pulkonik co-founded Rush Industries, Inc., a privately
held industrial distributor to the electronics industry in the New England area.
ROBERTS A. SMITH, PH.D. Dr. Smith has served as a director of the Company
since January 1993. From 1980 to 1986 and from 1988 to 1994, Dr. Smith has been
the President of Viratek, Inc., a pharmaceutical development company. He was the
Vice President of SPI Pharmaceuticals, a pharmaceutical marketing company from
1990 to 1992, and from 1985 to 1988, Dr. Smith was the Vice President and a
director of the Nucleic Acid Research Institute. Dr. Smith has been the Vice
Chairman since 1992 and a founding director since 1959 of ICN Pharmaceuticals,
Inc. From 1958 to 1987, Dr. Smith was a full Professor and from 1987 to the
present, Dr. Smith has been a Professor Emeritus, at the University of
California, Los Angeles where he instructs in biochemistry.
H. B. BRENT NORTON, M.D. Dr. Norton has served as a director of the
Company since June 1994. He has served since 1991 as the President of IMI
International Medical Innovations Inc. formerly IMI Diagnatech Inc., a publicly
held biotechnology commercialization company. Additionally, since 1990, he has
owned and been the President of the Ontario Workers Health Clinic, a privately
held health assessment company. From 1990 to 1993, Dr. Norton was an associate
at the Institute for Sport Medicine and Human Performance, a privately held
provider of medical care to athletes. From 1989 to 1990, Dr. Norton served as
the consultant Medical Director of Mueller Medical International Inc., a
publicly traded medical technology company. Dr. Norton received his degree as a
Doctor of Medicine from McGill University and a Master of Business
Administration degree from the University of Western Ontario.
PATRICIA L. MURPHY. Ms. Murphy has served as the Company's Chief Financial
Officer and Treasurer since May 1992 and as PLC Medical's Corporate Controller
since December 1991. Prior to joining the Company, she was Assistant Corporate
Controller of Town & Country Corporation from 1989 to December 1991, a publicly
traded jewelry manufacturer, and Corporate Controller at Bytex Corporation, a
publicly traded manufacturer of computer network switching devices, from 1983 to
1989. Ms. Murphy has also worked in public accounting at Coopers & Lybrand LLP
and is a Certified Public Accountant.
KEY EMPLOYEES
The significant employees of the Company, their ages and positions in the
Company are as follows as of March 23, 1998:
NAME AGE POSITION
- ---- --- --------
Stephen J. Linhares................ 41 Vice President of Research and Development and
Clinical Trials -- PLC Medical
John R. Serino..................... 50 Vice President of Sales and Marketing -- PLC Medical
Jennifer T. Miller................. 31 General Counsel
Vincent C. Puglisi................. 49 Vice President of Corporate Sales -- PLC Medical
Paul A. Levesque................... 50 Vice President of Marketing and New Business
Development -- PLC Medical
The following is a brief account of the business experience of each officer
and key employee of the Company:
STEPHEN J. LINHARES. Mr. Linhares has served as PLC Medical's Vice
President of Research and Development and Clinical Trials since January 1996.
Mr. Linhares was PLC Medical's Director of Engineering from 1987 to 1995. He
joined PLC Medical in 1983 as an engineer and was subsequently
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29
appointed Operations Manager in 1985 and Director of Engineering in 1987. His
responsibilities currently include managing all aspects of PLC Medical's product
research and development as well as clinical affairs. Prior to joining PLC
Medical, he was employed in the Research Division of Raytheon Company, a
publicly traded defense contractor, as an Associate Scientist from 1979 to 1983.
JOHN R. SERINO. Mr. Serino has served as PLC Medical's Vice President of
Global Sales since December 1997 and as PLC Medical's Vice President of Sales
and Marketing since December 1995. From 1994 to 1995, Mr. Serino was the
President of Paradigm Medical, Inc., a medical consulting company. From 1989 to
1994, Mr. Serino served as Vice President of Marketing at Medtronic
Cardiopulmonary, a manufacturer of instruments used in open heart surgery. From
1976 to 1989, Mr. Serino held various positions at Shiley, Inc., a division of
Pfizer Hospital, which manufactured and marketed specialty medical products for
use in cardiovascular and respiratory care.
JENNIFER T. MILLER. Ms. Miller has served as General Counsel since
September 1997. From 1991 to 1997, Ms. Miller was an attorney with the firm of
Fish & Richardson P.C. Ms. Miller is a magna cum laude graduate of Tufts
University, where she was awarded a Fulbright Scholarship. Ms. Miller received
her law degree from Harvard Law School.
VINCENT C. PUGLISI. Mr. Puglisi has served as PLC Medical's Vice President
of Corporate Sales since December 1997. His responsibilities include managing
PLC Medical's reimbursement, national account and managed care initiatives. From
1984 to 1997, he was President of Medrep, an independent manufacturers'
representative for several medical supply and equipment companies. Prior to
founding Medrep in 1984, Mr. Puglisi served as Vice President, Marketing and
Sales for Professional Disposables, Inc. beginning in 1980. He began his career
in healthcare with American Hospital Supply in 1975 and held several positions
there until 1980. Mr. Puglisi attended the U.S. Air Force Academy and served as
a Captain in the USAF until 1975.
PAUL A. LEVESQUE. Mr. Levesque has served as PLC Medical's Vice President
of Marketing and Business Development since February 1998. Prior to joining PLC
Medical, Mr. Levesque was Vice President of Marketing and Sales for Corometrics
Medical System, a division of American Home Products. From 1984 to 1991, Mr.
Levesque held senior marketing positions at General Electric Medical Systems and
Zoll Medical. In addition, Mr. Levesque has over 11 years experience at Hewlett
Packard, medical products group, where he served in various professional sales
and marketing positions.
ITEM 11. EXECUTIVE COMPENSATION
During Fiscal 1997, the aggregate cash compensation paid or payable to the
Company's executive officers was approximately $1,285,442 which includes
severance payments to Mr. Hibbs of $161,404.
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The following table sets forth the compensation paid to the Company's
President and Chief Executive Officer and each of the four other most highly
compensated persons who were serving as executive officers of the Company as of
December 31, 1997 (collectively the "named executive officers") with respect to
services rendered to the Company during Fiscal 1997, Fiscal 1996 and Fiscal
1995.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------------- ------------
(A) (B) (C) (D) (E) (G) (I)
SECURITIES
UNDERLYING
OTHER ANNUAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(3) (#) COMPENSATION
- --------------------------- ---- -------- ------- --------------- ------------ ------------
Robert I. Rudko, Ph.D.... 1997 $192,500(1) $48,000(1) $28,875 0 $ 0
Chairman of the 1996 $192,500(1) $38,500(1) $28,875 0 $ 0
Board and 1995 $175,000(1) $84,000(1) $26,250 100,000 $ 0
Chief Scientist
William C. Dow........... 1997(5) $116,538(2) $50,000(2) $17,481 660,000 $ 0
President, Chief
Executive Officer and
Director
M. Lee Hibbs............. 1997 $215,000(4) $ 0 $35,794(4) 0 $161,404(4)
Former President, 1996 $215,000 $43,000 $32,250 25,000 $ 23,540
Chief Executive........ 1995 $195,000 $113,600 $29,250 100,000 $ 13,170
Officer and Director
Patricia L. Murphy....... 1997 $127,000 $12,700 $19,050 0 $ 0
Chief Financial 1996 $115,000 $23,000 $17,250 10,000 $ 0
Officer and Treasurer 1995 $100,000 $15,000 $15,000 55,000 $ 0
Stephen J. Linhares...... 1997 $100,000 $ 6,000 $ 6,000 0 $ 0
PLC Medical's 1996(5) $ 77,012 $11,500 $ 6,000 5,000 $ 0
Vice President of R&D and
Clinical Affairs
John R. Serino........... 1997 $135,000 $ 8,100 $ 6,000 0 $ 0
PLC Medical's 1996 $125,000 $31,250 $ 6,000 50,000 $ 10,390
Vice President of 1995(5) $ 4,800 $ 0 $ 0 0 $ 0
Global Sales
- ---------------
(1) Amounts shown indicate annual cash compensation earned and received by Dr.
Rudko, Mr. Dow, Mr. Hibbs, Ms. Murphy, Mr. Linhares and Mr. Serino.
Executive officers, including Dr. Rudko, Mr. Dow, Ms. Murphy, Mr. Linhares
and Mr. Serino participate in the Company's group life, health and long-term
disability insurance, at generally the same benefit levels as are available
to all of the Company's full time employees. Effective in September 1994,
the Compensation Committee recommended and the Board of Directors approved
an employment agreement which provided for a base salary of $175,000 for Dr.
Rudko and benefits, to be selected by him equal to 15% of his base salary.
This agreement was automatically renewed for one year on January 1, 1998,
provides for annual reviews of salary increases and bonus plans by the Board
of Directors for each fiscal year beginning January 1, 1996. Effective
January 1, 1996, the base salary of Dr. Rudko increased from $175,000 to
$192,500. No salary increase was provided for Dr. Rudko for fiscal 1997.
This agreement also provides that Dr. Rudko may receive a bonus, commencing
with Fiscal 1995, of a sliding scale based upon the Company achieving a
certain percentage of its annual plan for sales and placements of the Heart
Laser, provided that the Company must achieve at least 70% of plan for the
bonus to be paid. If the Company achieves at least 70% of its plan, the
executive will receive 28% of his base salary as a bonus. If the Company
achieves 100% of its plan the officer will receive 40% of his base salary.
The bonus available provides for linear increases such that the maximum
bonus the officer may receive is 120% of base salary if the Company achieves
190% of
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its plan. Pursuant to the terms of this agreement bonuses in the amounts of
$38,500 and $84,000 were paid to Dr. Rudko for Fiscal 1996 and 1995,
respectively. In Fiscal 1997, the Compensation Committee approved a $23,000
bonus for Dr. Rudko for acting as Interim President of the Company as well
as a $25,000 annual bonus.
(2) Effective August 15, 1997, the Compensation Committee recommended and the
Board of Directors approved an employment agreement through August 31, 2000,
for Mr. Dow which provided for a base salary of $300,000 per annum through
December 31, 1998. Increases for future years shall be established by the
Board of Directors. This agreement also provided that Mr. Dow may receive a
yearly incentive bonus, commencing with a guaranteed bonus of $50,000 for
Fiscal 1997, followed by an incentive bonus commencing in Fiscal 1998, of a
sliding scale based upon the Company achieving a certain percentage of its
annual plan for sales and placements of the Heart Laser, revenue, operating
results and other strategic goals equal to or at least 70% of the
performance plan as approved by the Board of Directors. The incentive bonus
will range from 70% to 120% of 50% of Mr. Dow's then base salary for the
fiscal year. Pursuant to this agreement, a bonus of $50,000 was paid for
Fiscal 1997.
(3) In Fiscal 1995, the Compensation Committee approved a benefit allowance of
up to 15% of base salary for Dr. Rudko and Mr. Hibbs. Ms. Murphy was also
given the same benefit allowance starting in Fiscal 1995. In August 1997, a
15% benefit allowance was approved as part of Mr. Dow's employment
agreement. The determination of such benefits is up to the individual. In
Fiscal 1997 and 1996 Mr. Serino received a $500 per month compensatory car
allowance. Mr. Linhares received the same allowance in 1997.
(4) On April 18, 1997, Mr. Hibbs and the Company entered into a severance
agreement and release (the "Agreement"). Pursuant to the terms of the
Agreement, Mr. Hibbs agreed to resign as Chief Executive Officer of the
Corporation on July 31, 1997. Mr. Hibbs continued to receive his annual base
salary of $215,000 through December 31, 1997 as an employee of the
Corporation. Mr. Hibbs received his accrued and unpaid 15% benefit allowance
of $11,151 and accrued and unpaid vacation of $24,643 which is reflected in
the "Other Annual Compensation" column. He also received an additional 15%
annual benefit allowance of $32,250 and $20,000 in professional expenses as
part of his severance. From January 1, 1998 through April 18, 1998, he will
receive severance pay at the rate of $215,000 per annum which will total
$66,154. In addition, pursuant to the terms of his employment agreement, he
is entitled to receive $43,000 payable in twelve (12) equal monthly
installments which commenced on August 1, 1997.
(5) Mr. Dow joined the Company in August 1997 and Mr. Serino joined PLC Medical
in December 1995. Mr. Linhares became PLC Medical's Vice President of
Research and Development and Clinical Trials in January 1996.
Except for the Agreement with Mr. Hibbs, the Company has no plans other
than as set out herein pursuant to which cash or non-cash compensation was paid
or distributed to the executive officers during Fiscal 1997 or is proposed to be
paid or distributed in a subsequent year. No other compensation was paid by the
Company to the executive officers during Fiscal 1997, including personal
benefits and securities or property paid or distributed other than pursuant to a
formal plan which compensation is not offered on the same terms to all full time
employees, except as noted above.
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The following table sets forth the options granted to the named executive
officers in Fiscal 1997.
OPTION GRANTS IN FISCAL YEAR 1997
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(5)
-------------------------------------------------------- -------------------------
(A) (B) (D) (E) (F) (G)
NUMBER OF (C)
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR(3) ($/SH) DATE(4) 5% 10%
---- ----------- --------------- ----------- ---------- ---------- -----------
William C. Dow....... 644,466(1) 74% $12.88 08/15/2007 $5,218,253 $13,224,078
William C. Dow....... 15,534(2) 2% $12.88 08/15/2007 $ 125,828 $ 318,873
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(1) These non-qualified options were granted on August 15, 1997 with 99,466 of
the options vesting over time as follows: 20,983 on August 15, 1997, 20,983
on December 1, 1997, 28,750 on March 1, 1998 and 28,750 on June 1, 1998. The
remaining 545,000 vest on performance criteria as follows: (i) 115,000 vest
on the earlier of August 15, 2000 or receipt of PMA from the FDA,
(ii)115,000 vest on the earlier of August 15, 2000 or release of audited
financial statements reporting positive earnings after taxes, (iii) 115,000
vest on the earlier of August 15, 2000 or the 30th consecutive day when the
Company's closing price for its Common Stock exceeds $15.00 per share, (iv)
50,000 vest on the earlier of August 15, 2002 or the 30th consecutive day
when the Company's closing price for its Common Stock exceeds $18.00 per
share, (v) 50,000 vest on the earlier of August 15, 2002 or the 30th
consecutive day when the Company's closing price for its Common Stock
exceeds $21.50 per share, (vi) 50,000 vest on the earlier of August 15, 2002
or the 30th consecutive day when the Company's closing price for its Common
Stock exceeds $35.00 per share, and (vii) 50,000 vest on the earlier of
August 15, 2002 or the 30th consecutive day when the Company's closing price
for its Common Stock exceeds $40.00 per share. All options vest upon a sale
or acquisition of substantially all of the stock or assets of the Company.
(2) These incentive stock options were granted on August 15, 1997 and vest as
follows; 7,767 vested on August 15, 1997 and 7,767 vest on January 1, 1998.
(3) In Fiscal 1997, options to purchase 872,500 shares of Common Stock were
granted to Company employees, including executive officers.
(4) The options are subject to earlier termination upon certain events related
to termination of employment.
(5) Amounts for the named executives shown in these columns have been derived by
multiplying (i) the difference between (a) the product of the per share
market price at the time of the grant and the sum of 1 plus the adjusted
stock price appreciation rate (the assumed rate of appreciation compounded
annually over the term of the option) and (b) the per share exercise price
of the option; and (ii) the number of securities underlying the option. The
dollar gains under these columns result from calculations assuming
hypothetical growth rates as set by the Securities and Exchange Commission
and are not intended to forecast possible future price appreciation, if any,
of the Company's Common Stock.
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The following table indicates the options that were exercised in Fiscal
1997 and sets forth the value of outstanding options held by the named executive
officers of the Company during the year ended December 31, 1997.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997
AND FY-END OPTION VALUES
(A) (B) (C) (D) (E)
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FY-END OPTIONS AT FY-END
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)(2)
- -------------------------------- ------- ---------- --------------- ----------------
Robert I. Rudko, Ph.D. ......... 0 0 172,900/200,000 $643,960/$718,750
William C. Dow.................. 0 0 49,733/610,267 $0/$0
M. Lee Hibbs.................... 375,000 $3,130,461(3) 0/0 $0/$0
Patricia L. Murphy.............. 0 0 83,755/6,666 $306,410/$0
John R. Serino.................. 0 0 16,667/33,333 $0/$0
Stephen J. Linhares............. 0 0 14,960/7,500 $8,910/$0
- ---------------
(1) In-the-Money options are those options for which the fair market value of
the underlying Common Stock is greater than the exercise prices of the
option.
(2) The value of unexercised options is determined by multiplying the number of
options held by the difference between the fair market value of the Common
Stock underlying the options at the end of Fiscal 1997 ($7.59 per share as
determined by the average of the high and low sale prices of the Common
Stock as reported by the American Stock Exchange on December 31, 1997) and
the exercise price of the options granted. Since the fair market value at
the end of Fiscal 1997 was less than the exercise price of certain options
held, the following options were not included in the In the Money table; Mr.
Dow: 660,000 options, Ms. Murphy: 10,000 options (3,334 exercisable and
6,666 unexercisable), Mr. Serino: 50,000 options and Mr. Linhares: 20,000
options (12,500 exercisable and 7,500 unexercisable).
(3) The value realized is calculated by determining the difference between the
fair market value of the Common Stock acquired at exercise and the exercise
price.
COMPENSATION OF DIRECTORS
Each of the non-employee directors receives a fee of $650 for each meeting
of the Board of Directors plus reimbursement for related travel expenses. Each
of the non-employee directors receives an additional $2,000 per quarter.
Eligible directors also received an aggregate of 240,000 stock options through
1996 pursuant to the Company's 1993 Formula Stock Option Plan. In June 1997, an
aggregate of 70,000 stock options were granted to the non-employee directors
pursuant to the 1995 Stock Option Plan, except Mr. Capozzi. Mr. Capozzi's option
to purchase 10,000 shares was granted pursuant to the 1993 Formula Plan which
plan was extinguished with the grant of this option. See "Beneficial Ownership
of Common Stock." In March 1995, Mr. Pendergast agreed to serve as the Lead
Outside Director of the Company and effective January 17, 1997, he receives an
additional $4,000 per quarter for his services as lead outside director in
addition to the fees and expenses referenced above. Mr. Pendergast may also
receive $200 per hour for other consulting activities provided to the Company in
excess of eight hours each month on a pre-approved basis by the Board of
Directors. Mr. Pendergast was also granted an option on August 4, 1995 to
purchase up to 10,000 shares of Common Stock at an exercise price of $12.56 per
share through August 3, 2005, subject to certain requirements and his continued
service as Lead Outside Director for the Company. See "Beneficial Ownership of
Common Stock." The Company has no arrangements, pursuant to which directors were
compensated for their services in their capacity as directors during Fiscal 1997
or thereafter, except as described above.
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EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company has arrangements with respect to compensation received or that
may be received by the named executive officers to compensate such officers in
the event of termination of employment (resignation, retirement, change in
control) or in the event of a change in responsibilities following a change in
control.
An employment agreement was entered into in May 1992 between Dr. Rudko and
the Company providing for payment of 24 months' base salary and prior bonus to
Dr. Rudko. The agreement was amended in September 1994 to provide that in
addition to the severance benefits discussed above, in the event of a sale or
change of control in the Company, and if Dr. Rudko's employment is terminated
without cause, or if Dr. Rudko is transferred outside of Eastern Massachusetts
or if he has a significant reduction in responsibility with the Company, then he
shall be entitled to receive 299% of his prior year's compensation (as
determined by Section 280G of the Internal Revenue Code of 1986, as amended). In
addition, this employment agreement, as modified, provides that if Dr. Rudko
remains with the Company for one year after a sale or change of control in the
Company, then he shall receive as a bonus an amount equal to 18 months of his
then current base salary.
An employment agreement was entered into in August 1997 between Mr. Dow and
the Company providing for payment of Severance Benefits of 150% of his then
current base salary, 150% of his incentive bonus earned in the Company's most
recent fiscal year and any other benefits allowed under his benefit allowance.
The agreement further provides, in the event of a sale or change of control in
the Company, and if Mr. Dow's employment is terminated without cause, then he
shall be entitled to receive 299% of his Severance Benefits. In addition, this
employment agreement provides that if Mr. Dow remains with the Company for one
year after a sale or change of control in the Company, then he shall receive as
a bonus an amount equal to 100% of his then current base salary and incentive
bonus paid during the preceding fiscal year and the fair market value of all
other benefits then payable, irrespective of whether he thereafter actually
terminates employment with the Company.
In addition, the Company entered into an agreement with each of Ms. Murphy
and Mr. Linhares in April 1996 that provide for a severance payment equal to 12
months' base salary if either Ms. Murphy or Mr. Linhares is terminated without
cause. These agreements also provide that in the event of a sale or change of
control in the Company, and if Ms. Murphy's or Mr. Linhares' employment is
terminated without cause, or their base salary or Company-paid benefits are
reduced, or if they are transferred outside of Eastern Massachusetts or if they
have a significant reduction in responsibility with the Company, then they shall
be entitled to receive 100% of their prior year's compensation.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 23, 1998, certain information
concerning stock ownership of the Company by (i) each person who is known by the
Company to own of record or beneficially more than five percent (5%) of the
Company's Common Stock, (ii) each of the Company's directors and named executive
officers and (iii) all current directors and executive officers as a group.
Except as otherwise indicated, the stockholders listed in the table have sole
voting and investment powers with respect to the shares indicated.
NUMBER OF SHARES PERCENTAGE
NAME OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) OF CLASS
--------------------------- --------------------- ----------
Robert I. Rudko, Ph.D.(3)................................... 1,294,762 6.8%
William C. Dow(4)........................................... 115,000 *
M. Lee Hibbs................................................ 339,000 *
Edward H. Pendergast(5)(6)(7)(8)(9)......................... 123,092 *
Harold P. Capozzi(6)(8)(10)(11)............................. 53,000 *
Kenneth J. Pulkonik(5)(6)(8)(11)............................ 75,000 *
Roberts A. Smith, Ph.D.(6)(8)(11)(12)....................... 55,000 *
Brent H. B. Norton, M.D.(8)(11)(13)......................... 47,000 *
Patricia L. Murphy(14)...................................... 122,381 *
Stephen J. Linhares(15)..................................... 80,667 *
John R. Serino(16).......................................... 21,667 *
Scudder Kemper Investments, Inc.(17)........................ 961,000 5.1%
All current directors and executive officers as a group (8
persons) (3)(4)(5)(6)(7)(8)(9)(10)(11)(12)(13)(14)........ 1,885,235 9.6%
- ---------------
* Less than 1%.
(1) Each of such persons, with the exception of Scudder Kemper Investments,
Inc., may be reached through the Company at 10 Forge Park, Franklin,
Massachusetts 02038. The address for Scudder Kemper Investments, Inc. is
Two International Place, Boston, Massachusetts 02110.
(2) Pursuant to the rules of the Securities and Exchange Commission, shares of
Common Stock which an individual or group has a right to acquire within 60
days pursuant to the exercise of options or warrants are deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the purpose
of computing the percentage ownership of any other person shown in the
table.
(3) The figures presented in the table include 100,000 shares of an option to
purchase up to 300,000 shares of Common Stock through December 31, 1999 at
a price of $4.00 per share, which option fully vests at December 31, 1999
or earlier upon receipt of PMA of the Heart Laser System from the FDA,
except that all such options shall vest immediately in the event of a sale
or acquisition of all or substantially all of the assets of the Company or
the sale of all or substantially all of the Company's stock to an acquiring
party. The figures in this table also include an option granted on March 3,
1995 to purchase up to 72,900 shares of Common Stock at an exercise price
of $3.69 per share which vested on December 2, 1997 and terminates on March
2, 2005. Also includes 94,762 shares of Common Stock held by Dr. Rudko's
wife, but as to which Dr. Rudko disclaims any beneficial interest. Excludes
13,750 shares of Common Stock held by Dr. Rudko's adult children, as to
which he disclaims any beneficial interest.
(4) Includes (i) 15,534 shares of an option granted on August 15, 1997 at an
exercise price of $12.88 per share which is fully vested and terminates on
August 15, 2007 and (ii) 99,466 shares of an option to purchase up to
644,466 shares of Common Stock granted on August 15, 1997 at an exercise
price of $12.88 per share which terminates on August 15, 2007. See "Option
Grants in Fiscal Year 1997" for vesting details.
(5) Includes an option granted on September 16, 1993 to purchase up to 30,000
shares of Common Stock at an exercise price of $4.00 per share through
September 15, 2003 which is fully vested.
34
36
(6) Includes an option granted on June 19, 1995 to purchase up to 10,000 shares
of Common Stock at an exercise price of $10.44 per share through June 18,
2005, which is fully vested.
(7) Includes an option granted on August 4, 1995 to purchase up to 10,000
shares of Common Stock at an exercise price of $12.56 per share through
August 3, 2005, which is fully vested. Excludes 1,000 shares of Common
Stock owned by a trust established for the benefit of a child of Mr.
Pendergast over which Mr. Pendergast has no control, and of which he
disclaims any beneficial ownership.
(8) Includes an option granted on June 17, 1996 to purchase up to 10,000 shares
of Common Stock at an exercise price of $24.50 per share through June 16,
2006, which is fully vested.
(9) Includes an option granted on June 30, 1997 to purchase up to 30,000 shares
of Common Stock at an exercise price of $20.75 per share through June 30,
2007, which fully vests on April 1, 1998.
(10) Includes 17,438 shares of Common Stock owned by Mr. Capozzi as well as an
option granted on September 16, 1993 to purchase up to 5,562 shares of
Common Stock at an exercise price of $4.00 per share through September 15,
2003, which is fully vested.
(11) Includes an option granted on June 30, 1997 to purchase up to 10,000 shares
of Common Stock at an exercise price of $20.75 per share through June 30,
2007, which fully vests on April 1, 1998.
(12) Includes an option granted on September 16, 1993 to purchase up to 25,000
shares of Common Stock at an exercise price of $4.00 per share through
September 15, 2003, which is fully vested.
(13) Includes an option granted on June 9, 1994 to purchase up to 27,000 shares
of Common Stock at an exercise price of $4.63 per share through June 9,
2004, which is fully vested.
(14) Includes (i) 35,293 shares of Common Stock; (ii) 13,571 shares of an option
granted on July 28, 1994 at an exercise price of $3.97, which is fully
vested and terminates on January 5, 2004; (iii) 13,333 shares of an option
granted on July 28, 1994 at an exercise price of $3.97 per share, which is
fully vested and terminates on July 27, 2004; (iv) 53,517 shares of an
option granted on March 3, 1995 at an exercise price of $3.69 per share,
which is fully vested and terminates on March 2, 2005 and (v) 6,667 shares
of an option to purchase up to 10,000 shares of Common Stock granted on
January 2, 1996 at an exercise price of $16.31 per share, which vests on
January 2, 1999 and terminates on January 1, 2006.
(15) Includes (i) 59,040 shares of Common Stock, (ii) 2,460 shares of an option
granted on July 28, 1994 at an exercise of $3.97 per share, which is fully
vested and terminates on December 31, 2003; (iii) 10,000 shares of an
option to purchase up to 15,000 shares of Common Stock granted on August 4,
1995 at an exercise price of $12.56 per share, which vests on August 4,
1998 and terminates on August 3, 2005; (iv) 2,500 shares of an option to
purchase up to 5,000 shares of Common Stock granted on July 17, 1996 at an
exercise price of $14.88, which vests on the earlier of August 1, 2001 or
upon receipt of the PMA from the FDA and terminates on July 16, 2006 and
(v) 6,667 shares of an option to purchase up to 20,000 shares of Common
Stock granted on January 16, 1998 at an exercise price of $8.88 per share,
such option vests in equal installments over three years beginning April
23, 1998 and terminates on April 22, 2008.
(16) Includes (i) 16,667 shares of an option to purchase up to 50,000 shares of
Common Stock granted on January 2, 1996 at an exercise price of $16.31 per
share, such option vests in equal installments over three years beginning
on January 2, 1997 and terminates on January 1, 2006; and (ii) 5,000 shares
of an option to purchase up to 25,000 shares of Common Stock granted on
January 16, 1998 at an exercise price of $8.88 per share, such option vests
15,000 shares in equal installments over three years beginning April 23,
1998 with the remaining 10,000 vesting on the earlier of April 23, 2000 or
on the following performance criteria: 1,000 shares for each Heart Laser
sold in Fiscal 1998. Such option terminates on April 22, 2008.
(17) Based solely on a Schedule 13G filed in February 1998 by Scudder Kemper
Investments, Inc. ("Scudder"). Scudder has sole voting power as to 358,700
shares and shared voting power as to 374,600 shares. Scudder has sole
dispositive power as to all 961,000 shares.
35
37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During Fiscal 1991, the Corporation loaned Corhart Management Group, Inc.
("Corhart") the sum of $126,061 on a demand basis. Corhart provided office and
administrative services for the Corporation's Vancouver office. Corhart then
loaned a portion of the $126,061 to Dr. Rudko, the Corporation's Chairman of the
Board and Chief Scientist. The balance of the loan to Dr. Rudko plus accrued
interest is approximately $85,000. The loan currently bears interest at 8.65%.
No insider of the Company and no associate or affiliate of the foregoing
persons has or has had any material interest, direct or indirect, in any
transaction since the commencement of Fiscal 1997 or in any proposed transaction
which in either such case has materially affected or will materially affect the
Company, except as described above.
The Company believes that the aforementioned transactions were on terms as
favorable as could have been obtained from independent third parties, and that
any future transaction by the Company with its officers, directors or principal
stockholders will be on terms no less favorable than could be obtained from
independent third parties and will be subject to approval by a majority of the
independent directors.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements. The financial statements required to be filed
by Item 8 herewith are as follows:
PLC SYSTEMS INC. PAGE
---------------- ----
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
(a)(2) Financial Statement Schedules. The following financial statement
schedules are filed herewith:
Schedule II Valuation and Qualifying Accounts.............. S-1
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(a)(3) Exhibits.
36
38
(i) The following exhibits, required by Item 601 of Regulation S-K, are
filed herewith:
EXHIBIT
NO. TITLE
------- ------------------------------------------------------------
21 Subsidiaries of the Registrant, as amended.
23 Consent of Ernst & Young LLP.
27a Financial Data Schedule for fiscal year ended December 31,
1997.
27b Restated Financial Data Schedule for the quarter ended
September 30, 1997.
27c Restated Financial Data Schedule for the quarter ended June
30, 1997.
27d Restated Financial Data Schedule for the quarter ended March
31, 1997.
27e Restated Financial Data Schedule for the quarter ended
December 31, 1996.
27f Restated Financial Data Schedule for the quarter ended
September 30, 1996.
27g Restated Financial Data Schedule for the quarter ended June
30, 1996.
27h Restated Financial Data Schedule for the quarter ended March
31, 1996.
(ii) The following exhibits were filed as part of the Company's Report on
Form 10-Q for the quarter ended September 30, 1997, filed with the Commission on
November 14, 1997 and are herein incorporated by reference:
EXHIBIT
NO. TITLE
------- ------------------------------------------------------------
10a** Form of Key Employment Agreement of William C. Dow.
10b** 1997 Executive Stock Option Plan.
(iii) The following exhibits were filed as part of the Company's Report on
Form 10-Q for the quarter ended June 30, 1997, filed with the Commission on
August 14, 1997 and are herein incorporated by reference:
EXHIBIT
NO. TITLE
------- ------------------------------------------------------------
10a Convertible Debenture Agreement.
10b First Amendment to Convertible Debenture Agreement.
10c Second Amendment to Convertible Debenture Agreement.
10d Form of Convertible Denbenture.
10e Form of Redeemable Warrant.
10f Registration Rights Agreement.
(iv) The following exhibits were filed as part of the Company's Annual
Report on Form 10-K for the year ended December 31, 1994 as filed with the
Commission on March 31, 1995 and are herein incorporated by reference:
EXHIBIT
NO. TITLE
------- ------------------------------------------------------------
10a** Revised Form of Key Employee Agreement for Dr. Robert I.
Rudko.
10b** 1995 Stock Option Plan.
37
39
(v) The following exhibits were filed as part of the Company's Form S-1
Registration Statement (33-58258) declared effective by the Commission on
November 5, 1993 and are herein incorporated by reference:
EXHIBIT
NO. TITLE
------- ------------------------------------------------------------
10a** 1993 Stock Option Plan.
10b 1993 Formula Stock Option Plan.
(vi) The following exhibits were filed as part of the Company's Form S-1
Registration Statement (33-48340) declared effective by the Commission on
September 17, 1992 and are incorporated herein by reference:
EXHIBIT
NO. TITLE
------- ------------------------------------------------------------
3a Certificate of Incorporation.
3b Articles.
4a Rights of security holders (included in Exhibits 3a and 3b).
4c Specimen Stock Certificate.
10g** 1992 Stock Option Plan.
- ---------------
** Management contracts or compensatory plan or arrangements required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of the period covered by this report.
(c) Exhibits. The Company hereby files as part of this Form 10-K the
exhibits listed in Item 14(a)(3) as set forth above.
(d) Financial Statement Schedules. See Item 14(a)(2) above.
38
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PLC SYSTEMS INC.
Date: March 31, 1998 By: /s/ WILLIAM C. DOW
------------------------------------
William C. Dow
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
NAME CAPACITY DATE
---- -------- ----
/s/ WILLIAM C. DOW President and Chief Executive March 31, 1998
- --------------------------------------------------- Officer (Principal Executive
William C. Dow Officer)
/s/ PATRICIA L. MURPHY Chief Financial Officer March 31, 1998
- --------------------------------------------------- (Principal Financial and
Patricia L. Murphy Accounting Officer)
/s/ ROBERT I. RUDKO, PH.D. Chairman of the Board of March 31, 1998
- --------------------------------------------------- Directors
Robert I. Rudko, Ph.D.
/s/ HAROLD P. CAPOZZI Director March 31, 1998
- ---------------------------------------------------
Harold P. Capozzi
/s/ H.B. BRENT NORTON, M.D. Director March 31, 1998
- ---------------------------------------------------
H.B. Brent Norton, M.D.
/s/ EDWARD H. PENDERGAST Director March 31, 1998
- ---------------------------------------------------
Edward H. Pendergast
/s/ KENNETH J. PULKONIK Director March 31, 1998
- ---------------------------------------------------
Kenneth J. Pulkonik
/s/ ROBERTS A. SMITH, PH.D. Director March 31, 1998
- ---------------------------------------------------
Roberts A. Smith, Ph.D.
39
41
PLC SYSTEMS INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 1997, 1996, 1995
40
42
PLC SYSTEMS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts.......... S-1
F-1
43
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
PLC Systems Inc.
We have audited the accompanying consolidated balance sheets of PLC Systems
Inc. as of December 31, 1997 and 1996, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1997. Our audits also included the financial
statement schedule listed in the index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
PLC Systems Inc. at December 31, 1997 and 1996, and the consolidated results of
its operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
Boston, Massachusetts
February 20, 1998
F-2
44
PLC SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
-------- --------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,484 $ 3,039
Marketable securities..................................... 12,845 5,470
Accounts receivable, net.................................. 1,337 2,635
Inventories, net.......................................... 2,512 2,345
Prepaid expenses and other current assets................. 502 679
-------- --------
Total current assets.............................. 20,680 14,168
Equipment, furniture and leasehold improvements, net........ 5,636 4,712
Other assets................................................ 701 537
-------- --------
Total assets...................................... $ 27,017 $ 19,417
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 917 $ 867
Accrued clinical costs.................................... 1,292 935
Accrued compensation...................................... 570 467
Accrued expenses.......................................... 923 304
Deferred revenue.......................................... 70 339
5% Convertible Debentures................................. 3,819 --
Other accrued liabilities................................. 296 11
-------- --------
Total current liabilities......................... 7,887 2,923
Capital lease obligations................................... 121 27
Commitments and contingencies
Stockholders' equity:
Common stock, no par value, 25,000 shares authorized,
18,368 and 16,513 shares issued and outstanding in 1997
and 1996, respectively................................. 71,115 54,030
Accumulated deficit......................................... (51,533) (37,129)
Foreign currency translation................................ (573) (434)
-------- --------
19,009 16,467
-------- --------
Total liabilities and stockholders' equity........ $ 27,017 $ 19,417
======== ========
The accompanying notes are an intergal part of the consolidated financial
statements.
F-3
45
PLC SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
Revenue:
Product sales............................................. $ 5,687 $ 9,082 $11,938
Placement and service fees................................ 3,254 2,790 1,407
-------- ------- -------
Total revenues.................................... 8,941 11,872 13,345
Cost of revenues:
Product sales............................................. 2,721 2,911 4,177
Placement and service fees................................ 2,595 1,155 386
-------- ------- -------
Total cost of revenues............................ 5,316 4,066 4,563
-------- ------- -------
Gross Profit................................................ 3,625 7,806 8,782
Operating expenses:
Selling, general and administrative....................... 13,049 7,023 5,035
Research and development.................................. 5,158 2,835 2,246
-------- ------- -------
Total operating expenses.......................... 18,207 9,858 7,281
-------- ------- -------
Income (loss) from operations............................... (14,582) (2,052) 1,501
Other income (expense), net................................. 178 512 588
-------- ------- -------
Income (loss) before provision for income taxes............. (14,404) (1,540) 2,089
Provision for income taxes.................................. -- -- 85
-------- ------- -------
Net income (loss)........................................... $(14,404) $(1,540) $ 2,004
Net income (loss) per share -- Basic........................ $ (.84) $ (.09) $ .13
Net income (loss) per share -- Diluted...................... $ (.84) $ (.09) $ .12
Shares used to compute net income (loss) per share
-- Basic.................................................. 17,050 16,376 15,868
-- Diluted................................................ 17,050 16,376 16,590
The accompanying notes are an intergal part of the consolidated financial
statements.
F-4
46
PLC SYSTEMS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
COMMON STOCK FOREIGN
----------------- ACCUMULATED CURRENCY
SHARES AMOUNT DEFICIT TRANSLATION TOTAL
------ ------- ----------- ----------- --------
(IN THOUSANDS)
Balance, December 31, 1994........... 15,845 $50,943 $(37,593) $(291) $ 13,059
Exercise of stock options............ 99 399 399
Repayment of stockholder notes....... -- 69 69
Net income........................... 2,004 2,004
Currency translation adjustment...... (23) (23)
------ ------- -------- ----- --------
Balance, December 31, 1995........... 15,944 51,411 (35,589) (314) 15,508
Exercise of stockholder warrants..... 351 1,680 1,680
Exercise of stock options............ 218 820 820
Repayment of stockholder notes....... -- 119 119
Net loss............................. (1,540) (1,540)
Currency translation adjustment...... (120) (120)
------ ------- -------- ----- --------
Balance, December 31, 1996........... 16,513 54,030 (37,129) (434) 16,467
Exercise of stock options............ 435 1,909 1,909
Exercise of warrants................. 17 94 94
Conversion of debentures............. 1,403 14,465 14,465
Issuance of warrants................. -- 617 617
Net loss............................. (14,404) (14,404)
Currency translation adjustment...... (139) (139)
------ ------- -------- ----- --------
Balance, December 31, 1997........... 18,368 $71,115 $(51,533) $(573) $ 19,009
====== ======= ======== ===== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
47
PLC SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
Operating activities:
Net income (loss)......................................... $(14,404) $ (1,540) $ 2,004
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization............................. 2,007 1,228 565
Change in assets and liabilities:
Accounts receivable.................................... 1,389 4,149 (6,387)
Inventory.............................................. (136) (556) (435)
Prepaid expenses and other assets...................... (20) (359) (399)
Account payable........................................ 24 303 220
Deferred revenue....................................... (77) 107 33
Accrued liabilities.................................... 1,163 (252) 1,225
-------- -------- -------
Net cash provided by (used for) operating activities........ (10,054) 3,080 (3,174)
Investing activities:
Purchase of marketable securities......................... (17,827) (19,419) (8,500)
Maturities of marketable securities....................... 10,452 20,449 9,858
Purchase of fixed assets.................................. (2,642) (4,216) (1,584)
-------- -------- -------
Net cash used for investing activities...................... (10,017) (3,186) (226)
Financing activities:
Issuance of 5% Convertible Debentures, net of issuance
costs.................................................. 18,779 -- --
Net proceeds from sale of common stock.................... 2,003 2,499 388
Tax benefit relating to stock option plans................ -- -- 11
Repayment of stockholder notes............................ -- 119 69
Principal payments on capital lease obligations........... (25) (13) (17)
-------- -------- -------
Net cash provided by financing activities................... 20,757 2,605 451
Effect of exchange rate changes on cash and cash
equivalents............................................... (241) (164) (46)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents........ 445 2,335 (2,995)
Cash and cash equivalents at beginning of year.............. 3,039 704 3,699
-------- -------- -------
Cash and cash equivalents at end of year.................... $ 3,484 $ 3,039 $ 704
======== ======== =======
Non-Cash Financing Activities:
Conversion of Convertible Debentures and accrued interest
into Common Stock...................................... 14,464 -- --
Warrant value............................................. 617 -- --
Capital leases............................................ 150 -- --
Supplemental disclosure:
Interest paid............................................. $ 2 $ 1 $ 6
Income taxes paid (refunded).............................. $ (29) $ 91 $ --
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
48
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. NATURE OF BUSINESS
The Company is a multinational manufacturer of medical lasers and related
products operating primarily in the United States with sales offices in Europe
and the Pacific Rim. The Company's primary product is The Heart Laser(TM)(1) TMR
System ("Heart Laser System") which is a patented CO(2) laser used for a
surgical technique known as Transmyocardial Revascularization. The Company is
currently conducting clinical tests of the Heart Laser System in the United
States under the regulation of the Food and Drug Administration. The Heart Laser
System is being marketed internationally in countries where it has received
regulatory approvals and in other countries where no approval is required.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of PLC Systems
Inc. (PLC or the "Company") and its seven wholly-owned subsidiaries, PLC Medical
Systems, Inc., PLC Sistemas Medicos Internacionais, Lda, PLC Sistemas Medicos
GmbH, PLC Medical Systems AG, PLC Medical Systems Asia/Pacific Pte Ltd, PLC
Medical Systems France and PLC Medical Systems Australia Pty Ltd. All
intercompany accounts and transactions have been eliminated.
These consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles (GAAP). Had the statements
been prepared in accordance with Canadian GAAP, certain transactions would have
been accounted for differently. Under Canadian GAAP, the 5% Convertible
Debentures, net of issuance costs, would be classified as equity since the
Company has the right to settle the principal and interest amounts due on the
debentures by issuing common stock.
Accordingly, if the accompanying financial statements had been prepared
under Canadian GAAP at December 31, 1997, common stock would be $3,697,000
greater due to the inclusion of the 5% Convertible Debentures and accrued
expenses would be reduced by $75,000 due to the elimination of accrued interest
on the debt. In addition, the accumulated deficit would be reduced by $197,000
as a result of the elimination of interest and other debt issuance expenses
included in the accompanying statement of operations for the year ended December
31, 1997, as required under U.S. GAAP.
Cash and Marketable Securities
Investments with a maturity of three months or less at the date of purchase
are considered to be cash equivalents and those with maturities greater than
three months are considered to be marketable securities. Marketable securities
are stated at cost, which approximates fair value. Cash equivalents and
marketable securities, which are classified as available-for-sale securities,
consist primarily of time deposits, bankers acceptances and obligations of U.S.
government and agencies. There were no unrealized gains or losses at December
31, 1997, 1996 or 1995.
Inventory
Inventory is stated at the lower of average cost or market value.
Equipment, Furniture and Leasehold Improvements
Equipment, fixtures and leasehold improvements are stated on the basis of
cost. Depreciation is computed principally on the straight-line method for
financial reporting purposes and on accelerated methods for income tax purposes.
- ---------------
1. The Heart Laser is a trademark of PLC Medical Systems, Inc.
F-7
49
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Revenues from product sales, except sales to certain distributors, are
recognized at the time of shipment. Shipments made to distributors, where
payment is dependent on the resale of the product, are recognized at the time of
payment from the distributor. Revenues from placement contracts are recognized
as earned based on the terms of each placement contract. Revenues from service
contracts are recognized ratably over the life of the contract.
Foreign Currency Translation
Assets and liabilities are translated into U.S. dollars at current exchange
rates, while income and expense items are translated at average rates of
exchange prevailing during the year. Exchange gains and losses arising from
translation are accumulated as a separate component of stockholders' equity.
Gains and losses from foreign currency transactions are recorded in the
accompanying statements of operations and are not material.
Net Income (Loss) per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" ("Statement 128") which replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and have been restated, to conform to Statement 128. At December 31,
1995, the difference between basic and diluted shares used in the computation of
earnings per share is approximately 722,000 weighted average common equivalent
shares resulting from outstanding common stock options.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
and certain other individuals with exercise prices equal to the fair value of
the shares at the dates of grant. The Company has adopted the disclosure only
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-based Compensation ("FAS 123") and will continue to account for its
stock option plans in accordance with the provisions of APB 25 Accounting for
Stock Issued to Employees. Accordingly, no compensation cost has been recognized
for the stock option plans.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The Company
has provided a valuation allowance for all deferred tax assets due to the
inability to assume the realization of such tax benefits in the foreseeable
future.
Impact of Recently Issued Accounting Standards
During 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("Statement 130"). The Company will adopt
the provisions of Statement 130 during fiscal 1998. At that time, the Company
will be required to disclose comprehensive income and comprehensive income per
share. Comprehensive income is generally defined as all changes in stockholders'
equity exclusive of transactions with owners such as capital investments and
dividends.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information"
("Statement 131") which is required to be adopted for
F-8
50
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
years beginning after December 15, 1997. Management of the Company does not
expect the adoption of Statement 131 to have a material impact on the Company's
financial statement disclosures.
3. INVENTORIES
Inventories consist of the following at December 31 (in thousands):
1997 1996
------ ------
Raw materials.............................................. $1,141 $1,043
Work in process............................................ 10 306
Finished goods............................................. 1,361 996
------ ------
$2,512 $2,345
====== ======
4. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements consist of the following at
December 31 (in thousands):
1997 1996
------ ------
Equipment.................................................. $2,010 $1,995
Equipment under placement contracts........................ 5,760 3,387
Office furniture and fixtures.............................. 1,082 834
Equipment under capital lease.............................. 455 284
Leasehold improvements..................................... 587 576
------ ------
9,894 7,076
Less accumulated depreciation and amortization............. 4,258 2,364
------ ------
$5,636 $4,712
====== ======
Equipment under placement contracts represents Heart Lasers that the
Company has provided to customers under contracts which require the customers to
pay a fee for each use of the equipment, subject to guaranteed annual minimum
fees. The Company maintains title to the equipment, which is depreciated over
the term of the contract, and is responsible for maintenance.
5. LEGAL PROCEEDINGS
In September 1996, CardioGenesis Corporation, ("CardioGenesis") filed a
civil lawsuit in the United States District Court for the Northern District of
California seeking to have the Company's synchronization patent declared
invalid, or, alternatively, asking the court to determine whether CardioGenesis
infringes on this patent. In October 1996, the Company filed an answer and
counterclaim alleging that CardioGenesis infringes on this patent. The
counterclaim seeks both injunctive relief and monetary damages against
CardioGenesis. In October 1997, CardioGenesis filed an amended complaint seeking
to have the Company's synchronization patent declared unenforceable.
CardioGenesis is not seeking monetary damages from the Company.
In January 1997, CardioGenesis Corporation, filed a challenge to the
Company's European synchronization patent in the European Patent Office and in
March 1997 the Company filed its response. In addition, in April 1997, the
Company filed an infringement lawsuit against CardioGenesis in the Munich
District Courts alleging infringement of its synchronization patent. An oral
hearing has been scheduled in the Munich District Court on October 1, 1998.
F-9
51
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company and certain of its officers have been named as defendants in 21
purported class action lawsuits filed between August 1997 and November 1997 in
the United States District Court for the District of Massachusetts. The suits
allege violations of the federal securities laws. The plaintiffs are seeking
damages in connection with such alleged violations. Nineteen of these complaints
have been consolidated by the court into a single action for pretrial purposes.
A motion has been filed to consolidate the other two suits with each other.
These matters are in the earliest stages of litigation and the Company intends
to seek motions to dismiss all of these claims. There can be no assurance that
the motions to dismiss these claims will be successful. Management is unable to
make a meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome of these pending litigation matters. It is possible that
the Company's result of operations or cash flows in a particular quarter or
annual period or its financial position could be materially affected by an
ultimate unfavorable outcome of this pending litigation. The Company believes
that it has valid defenses to these class action litigation matters and intends
to vigorously defend itself in these matters.
6. ISSUANCE OF CONVERTIBLE DEBENTURES
In July 1997, the Company entered into a $20 million financing commitment.
Under the terms of the financing, the Company received $10,075,000 in July 1997
and $10,075,000 in August 1997 from the issuance of five-year convertible
debentures to accredited investors through Smith Barney Inc. as placement agent.
The convertible debentures accrue interest at 5% per annum, payable in cash or
common stock at the Company's option, at the time of conversion. The debentures
are convertible into common shares under a predetermined formula. The first
tranche of the debentures are convertible into common shares at the lesser of
(a) $25.98, or (b) the market price of the Company's Common Stock at the time of
conversion, with no more than 1,007,500 shares of Common Stock issuable in full
payment of all accrued interest and principal. In September 1997, the entire
first tranche of convertible debentures of $10,075,000 and related accrued
interest converted into 890,394 shares of common stock. The second tranche of
the debentures are convertible into common shares at the lesser of (a) $14.60,
or (b) the market price of the Company's Common Stock at the time of conversion,
with no more than 1,507,500 shares of Common Stock issuable in full payment of
all accrued interest and principal. In September 1997, $5,825,000 of the second
tranche of convertible debentures and related accrued interest converted into
512,572 shares of common stock. In January and February 1998, the remaining
$4,250,000 of the second tranche of convertible debt and related accrued
interest converted into 576,606 shares of common stock.
In connection with the issuance of the first tranche of convertible
debentures, the Company issued 69,875 redeemable warrants to purchase shares of
its Common Stock at $27.81 per share. In connection with the issuance of the
second tranche of convertible debentures, the Company issued 80,125 redeemable
warrants to purchase shares of its Common Stock at $15.78 per share. If the
average closing sale price of its Common Stock for any consecutive 30 trading
day period commencing January 17, 1999 exceeds the exercise price by more than
50%, the Company has the right, exercisable at any time upon 30 days notice to
the holder to redeem the warrant at a price of $.10 per warrant share. The
warrants issued in connection with the first tranche expire on July 17, 2002.
The warrants issued in connection with the second tranche expire on August 14,
2002.
7. STOCKHOLDERS' EQUITY
The Company has three stock option plans, the 1992 Stock Option Plan ("1992
Plan"), the 1993 Stock Option Plan ("1993 Plan") and the 1995 Stock Option Plan
("1995 Plan"), which provide for option grants to primarily employees, officers
and consultants. The Plans allow for the granting of options aggregating
2,505,000 shares of common stock. All of the Plans consist of both incentive
stock options and nonqualified options. Incentive stock options are issuable
only to employees of the Company, while nonqualified options may be issued to
nonemployee directors, consultants, and others, as well as to employees. The
options granted
F-10
52
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
under all the Plans generally become exercisable ratably over one to three years
from the date of grant, or based on the attainment of specific performance
criteria, and expire ten years from the date of grant.
The per share exercise price of the common stock subject to an incentive
stock option may not be less than the fair market value of the common stock on
the date the option is granted. The Company must grant nonqualified options at
an exercise price of at least 85% of the fair market value of the common stock
on the date the option is granted.
The Company also has the 1993 Formula Stock Option Plan (the "Formula
Plan") that provides for the grant of nonqualified options to nonemployee
directors to purchase up to 250,000 shares of common stock. The Plan is
administered by the Board of Directors. Annually, the Company grants 10,000
options to each of its nonemployee directors. A director must attend at least
60% of all Board meetings, as well as committee meetings, to receive the grant.
The options vest over one year on a quarterly basis and expire ten years from
the date of grant. The exercise price is the fair market value of the Company's
common stock on the last business day preceding the date of grant. In addition,
in 1995, the Company granted 10,000 nonqualified options at $12.88 per share to
the Company's Lead Outside Director. As of December 31, 1997, the options are
fully exercisable and expire ten years from the date of grant.
The Company has a 1997 Executive Stock Option Plan ("1997 Executive Plan")
that provides for the grant of nonqualified options to an executive of the
Company to purchase up to 650,000 shares of common stock. The options vest over
a combination of time and the attainment of specific performance criteria.
The following is a summary of option activity under all Plans (in
thousands, except per option data):
1997 1996 1995
---- ---- ----
Outstanding at beginning of year.... 1,914 1,635 1,153
Granted........................... 938 500 615
Exercised......................... (435) (220) (99)
Canceled.......................... (230) (1) (34)
----- ----- -----
Outstanding at end of year.......... 2,187 1,914 1,635
===== ===== =====
Exercisable at end of year.......... 878 874 693
Available for grant at end of
year.............................. 463 521 321
1997 1996 1995
---- ---- ----
Weighted-average exercise price:
Outstanding at beginning of
year........................... $ 8.18 $ 4.67 $4.15
Granted........................... $13.56 $17.83 $5.49
Canceled.......................... $11.50 $ 3.97 $3.69
Exercised......................... $ 4.39 $ 3.73 $4.09
Outstanding at end of year........ $10.84 $ 8.18 $4.67
Exercisable at end of year........ $ 8.75 $ 5.34 $4.22
Weighted-average fair value of
options granted during the year... $ 8.20 $ 5.56 --
Price range per share of outstanding
options........................... $ 3.69 - $24.50 $ 3.69 - $24.50 $3.69 - $16.25
Price range per share of options
granted........................... $10.03 - $22.19 $14.88 - $24.50 $3.69 - $16.25
Price range per share of options
exercised......................... $ 3.69 - $21.25 $3.69 - $16.25 $3.69 - $ 7.25
F-11
53
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Exercise prices for options outstanding as of December 31, 1997 ranged from
$3.69 to $24.50. The weighted-average contractual life of those options is 7.6
years.
RANGE OF EXERCISE PRICES
------------------------------------------------------------
$3.69 - $5.38 $8.06 - $12.88 $14.13 - $22.19 $24.50
------------- -------------- --------------- ------
OPTIONS OUTSTANDING:
Number (in thousands)............... 761 859 517 50
Weighted-Average Remaining
Contractual Life.................. 4.6 9.4 8.8 8.5
Weighted-Average Exercise Price..... $3.97 $12.39 $17.06 $24.50
OPTIONS EXERCISABLE:
Number (in thousands)............... 542 123 163 50
Weighted-Average Exercise Price..... $3.96 $11.70 $17.61 $24.50
In January 1998, the Board of Directors approved the repricing of all
options priced greater than $8.88 other than to executive officers and Board
Members.
Pursuant to the requirements of FAS 123, the following are the pro forma
net income (loss) and net income (loss) per share for 1997, 1996 and 1995, as if
the compensation cost for the option plans had been determined based on the fair
value at the grant date for grants in 1997, 1996 and 1995, consistent with the
provisions of FAS 123.
1997 1996 1995
-------- ------- ------
Proforma net income (loss)(in thousands).............. $(16,523) $(2,404) $1,868
Proforma net income (loss) per share.................. $ (.97) $ (.15) $ .12
The fair value of options issued at the date of grant were estimated using
the Black-Scholes model with following weighted average assumptions:
1997 1996 1995
---- ---- -----
Expected life (years)................................. 2 2 2
Interest rate......................................... 6.01% 5.65% 6.55%
Volatility............................................ 1.141 .576 .422
The Company has never declared nor paid dividends on any of its capital
stock and does not expect to do so in the foreseeable future.
The effects on 1997, 1996 and 1995 pro forma net income (loss) and net
income (loss) per share of expensing the estimated fair value of stock options
are not necessarily representative of the effects on reporting the results of
operations for future years as the periods presented include only one and two
years, respectively, of option grants under the Company's plans.
At December 31, 1995, the Company had two outstanding warrants to purchase
common stock. The first warrant provided for the purchase of 145,000 shares at
$6.00 per share and 72,500 shares at $4.80 per share. In March 1996, the
majority of these warrants were exercised and the remaining 11,180 of the $6.00
warrants and 5,590 of the $4.80 warrants were exercised in 1997. The second
warrant provided for the purchase of 150,000 shares at $3.94 per share and was
exercised in full in March 1996.
At December 31, 1997, there were 2,810,000 shares of authorized but
unissued common stock reserved for issuance under all stock option plans and
stock warrants. In conjunction with the conversion of the debentures and related
accrued interest in January and February 1998 and the FDA approval contingency
shares, the Company has reserved an additional 1,076,606 shares. See Note 6 for
a further discussion.
F-12
54
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
The Company occupies its worldwide facilities under operating leases
agreements which expire through March 2002. The Company has the option to renew
the U.S. facilities lease for up to six years. In addition to the minimum lease
payments, the agreement requires payment of the Company's pro-rata share of
property taxes and building operating expenses. The Company also leases certain
equipment.
As of December 31, 1997, future minimum lease payments are as follows (in
thousands):
YEAR
----
1998........................................................ $ 372
1999........................................................ 372
2000........................................................ 337
2001........................................................ 223
2002........................................................ 6
------
$1,310
======
Total rent expense was $458,000 in 1997, $370,000 in 1996 and $227,000 in
1995.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of December 31 are as follows (in
thousands):
1997 1996
-------- -------
U.S. net operating loss carryforwards................... $ 7,682 $ 3,064
Foreign net operating loss carryforwards................ 1,482 484
Intercompany profit..................................... 637 781
Accrued clinical costs.................................. 516 373
Research & development credits.......................... 561 350
Inventory and warranty reserves......................... 331 162
Alternative minimum tax credit.......................... 63 63
Other................................................... 56 22
-------- -------
Total deferred tax assets.......................... 11,328 5,299
Valuation allowance................................ (11,328) (5,299)
-------- -------
Net deferred tax assets....................... $ -- $ --
======== =======
The valuation allowance increased by approximately $6,000,000 primarily due
to additional net operating loss carryforwards. The Company recorded the
valuation allowance due to the uncertainty of the realizability of the related
deferred tax asset of $11,328,000.
Income (loss) before taxes consisted of the following (in thousands):
1997 1996 1995
-------- ------- ------
Domestic...................................... $(11,340) $(1,244) $2,094
Foreign....................................... (3,064) (296) (5)
-------- ------- ------
$(14,404) $(1,540) $2,089
======== ======= ======
F-13
55
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income taxes (benefit) computed at the federal statutory rate differ from
amounts provided as follows (in thousands):
1997 1996 1995
------- ----- -----
Statutory income tax provision................... $(4,898) $(524) $ 710
Utilization of loss carryforwards................ -- -- (641)
Unbenefited U.S. losses.......................... 3,856 423 --
Unbenefited foreign losses....................... 1,042 100 --
Other............................................ -- 1 16
------- ----- -----
Provision for income taxes....................... $ -- $ -- $ 85
======= ===== =====
The 1995 income tax provision of $85,000 represented the current liability
due under the alternative minimum tax regulations.
At December 31, 1997 the Company had U.S. net operating loss carryforwards
available to reduce future taxable income of approximately $19.2 million which
expire at various dates through 2011. In addition, the Company had foreign net
operating loss carryforwards of approximately $3.7 million.
10. SEGMENT INFORMATION
The Company operates in one industry segment -- the development,
manufacture and sales of medical lasers and related products. Net revenue,
operating income and assets by geographic area are summarized below (in
thousands). Transfers to foreign subsidiaries are at prices comparable to those
charged to third party distributors.
NORTH
AMERICA EUROPE OTHER ELIMINATIONS TOTAL
------- ------ ----- ------------ --------
1997
Net sales to unaffiliated
customers...................... $ 4,092 $4,683 $166 $ -- $ 8,941
Transfers between areas.......... 2,800 -- -- (2,800) --
------- ------ ---- ------- --------
6,892 4,683 166 (2,800) 8,941
Operating income (loss).......... (12,318) (1,650) (806) 370 (14,404)
Identifiable assets.............. 22,652 5,363 597 (1,595) 27,017
1996
Net sales to unaffiliated
customers...................... $ 5,657 $6,215 $ -- $ -- $ 11,872
Transfers between areas.......... 4,700 2,900 -- (7,600) --
------- ------ ---- ------- --------
10,357 9,115 -- (7,600) 11,872
Operating income (loss).......... (1,954) 272 (106) (264) (2,052)
Identifiable assets.............. 15,430 5,517 425 (1,955) 19,417
1995
Net sales to unaffiliated
customers...................... $10,231 $3,114 -- -- $ 13,345
Transfers between areas.......... 4,050 -- -- (4,050) --
------- ------ ---- ------- --------
14,281 3,114 -- (4,050) 13,345
Operating income................. 3,149 43 -- (1,691) 1,501
Identifiable assets.............. 16,714 3,267 -- (1,691) 18,290
Included in North America net sales for 1997 are export sales of $2,026,000
of which $1,023,000 related to the Far East and $563,000 to South America.
Included in North American net sales for 1996 are export
F-14
56
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sales of $3,980,000 of which $2,547,000 related to Asia. Included in North
American net sales for 1995 are export sales of $9,199,000 of which $8,002,000
related to Asia.
Approximately 20% of the Company's revenues for the year ended December 31,
1997 came from one customer. No one customer accounted for more than 10% of the
Company's revenues for the year ended December 31, 1996. Approximately 43% of
the Company's revenues for the year ended December 31, 1995 came from one
customer. The Company believes that its exposure to concentrations of credit
risk is not significant based on experiences with these customers. In addition,
letters of credit or payment in advance are required in credit risk situations.
The Company does not believe its future revenues to be dependent on those
generated from any single customer.
F-15
57
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, 1997
Allowance for Doubtful Accounts............... $28,000 $112,000 $ 0 $140,000
------- -------- ------ --------
For the Year Ended December 31, 1996
Allowance for Doubtful Accounts............... $29,000 $ 0 $1,000 $ 28,000
------- -------- ------ --------
For the Year Ended December 31, 1995
Allowance for Doubtful Accounts............... $10,000 $ 19,000 $ 0 $ 29,000
------- -------- ------ --------
S-1
58
PLC SYSTEMS INC.
QUARTERLY DATA (UNAUDITED)
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- ------- ------------ ----------- --------
1997
Total revenue...................... $ 1,588 $ 3,422 $ 1,885 $ 2,046 $ 8,941
Gross profit....................... 758 1,952 666 249 3,625
Loss from operations............... (3,130) (2,712) (3,590) (5,150) (14,582)
Net loss........................... (3,022) (2,697) (3,562) (5,123) (14,404)
Loss per share..................... (.18) (.16) (.21) (.28) (.84)
1996
Total revenue...................... 4,829 1,431 2,493 3,119 11,872
Gross profit....................... 3,439 1,055 1,584 1,728 7,806
Income (loss) from operations...... 1,229 (1,095) (696) (1,490) (2,052)
Net income (loss).................. 1,277 (903) (562) (1,352) (1,540)
Income (loss) per share............ .08 (.05) (.03) (.08) (.09)
The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128 "Earnings Per
Share". For further discussion regarding the calculation of earnings per share,
see Note 1 to the Consolidated Financial Statements.
59
EXHIBIT INDEX
EXHIBIT
NO. TITLE
- ------- -----
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27a Financial Data Schedule for fiscal year ended December 31,
1997.
27b Restated Financial Data Schedule for the quarter ended
September 30, 1997.
27c Restated Financial Data Schedule for the quarter ended June
30, 1997.
27d Restated Financial Data Schedule for the quarter ended March
31, 1997.
27e Restated Financial Data Schedule for fiscal year ended
December 31, 1996.
27f Restated Financial Data Schedule for the quarter ended
September 30, 1996.
27g Restated Financial Data Schedule for the quarter ended June
30, 1996.
27h Restated Financial Data Schedule for the quarter ended March
31, 1996.