-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JX0E8cWsHb7N6gynhJT8nBUkTVD/JHHi/hf8Gd+38UymmhHur1pYEuKYf0Z0/OHw gqfx17s2PZC1r1ZN1RYtrg== 0000912057-00-023738.txt : 20000515 0000912057-00-023738.hdr.sgml : 20000515 ACCESSION NUMBER: 0000912057-00-023738 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLC SYSTEMS INC CENTRAL INDEX KEY: 0000879682 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 043153858 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11388 FILM NUMBER: 627990 BUSINESS ADDRESS: STREET 1: 10 FORGE PK CITY: FRANKLIN STATE: MA ZIP: 02038 BUSINESS PHONE: 5085418800 MAIL ADDRESS: STREET 1: 10 FORGE PARK CITY: FRANKLIN STATE: MA ZIP: 02038 10-Q 1 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000. COMMISSION FILE NUMBER 1-11388 PLC SYSTEMS INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) YUKON TERRITORY, CANADA 04-3153858 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 10 FORGE PARK, FRANKLIN, MASSACHUSETTS 02038 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (508) 541-8800 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at May 8, 2000 ----- -------------------------- Common Stock, no par value 23,906,385 ================================================================================ ================================================================================ PLC SYSTEMS INC. INDEX Part I. Financial Information: Item 1. Condensed Consolidated Balance Sheets (unaudited)...................................3 Condensed Consolidated Statements of Operations (unaudited).........................4 Condensed Consolidated Statements of Cash Flows (unaudited).........................5 Notes to Condensed Consolidated Financial Statements (unaudited)....................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................10-13 Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................13 Part II. Other Information: Item 1. Legal Proceedings..............................................................14 Item 2. Changes in Securities..........................................................14 Item 3. Defaults Upon Senior Securities................................................14 Item 4. Submission of Matters to a Vote of Security Holders............................14 Item 5. Other Information..............................................................14 Item 6. Exhibits and Reports on Form 8-K...............................................14
- 2 - ITEM 1. FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- PLC SYSTEMS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited)
March 31, December 31, 1999 2000 ---------- ------------ ASSETS Current assets: Cash and cash equivalents...................................... $ 8,085 $ 4,467 Accounts receivable, net....................................... 1,223 1,894 Lease receivables, net......................................... 842 642 Inventories.................................................... 2,122 2,348 Prepaid expenses and other current assets...................... 464 460 ------- ------- Total current assets....................................... 12,736 9,811 Equipment, furniture and leasehold improvements, net................ 3,488 3,336 Lease receivables, net.............................................. 1,858 1,782 Other assets........................................................ 560 390 ------- ------- Total assets............................................... $18,642 $15,319 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................................... $1,893 $1,338 Accrued clinical costs......................................... 753 769 Accrued compensation........................................... 278 653 Accrued expenses............................................... 674 630 Deferred revenue............................................... 107 138 Secured borrowings............................................. 1,039 824 ------- ------- Total current liabilities.................................. 4,744 4,352 Secured borrowings.................................................. 2,097 2,082 Commitments and contingencies Stockholders' equity: Preferred stock, no par value, 5,000 shares authorized, no shares issued and outstanding.................................. Common stock, no par value, unlimited shares authorized, 23,906 and 21,223 shares issued and outstanding at March 31, 2000 and December 31, 1999, respectively............. 89,455 84,380 Accumulated deficit................................................. (76,874) (74,691) Accumulated other comprehensive loss................................ (780) (804) ------- ------- 11,801 8,885 ------- ------- Total liabilities and stockholders' equity.......................... $18,642 $15,319 ======= =======
The accompanying notes are an integral part of the condensed consolidated financial statements. - 3 - PLC SYSTEMS INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Three Months Ended March 31, ------------------ 2000 1999 ---- ---- Revenues: Product sales...................................... $ 894 $ 2,159 Placement and service fees......................... 848 687 ------ ------- Total revenues................................. 1,742 2,846 Cost of revenues: Product sales...................................... 300 991 Placement and service fees......................... 686 371 ------ ------- Total cost of revenues......................... 986 1,362 ------ ------- Gross profit............................................ 756 1,484 Operating expenses: Selling, general and administrative................ 2,580 2,642 Research and development........................... 456 1,048 ------ ------- Total operating expenses....................... 3,036 3,690 ------ ------- Loss from operations.................................... (2,280) (2,206) Other income, net....................................... 97 7 ------ ------- Net loss $(2,183) $(2,199) ======= ======= Basic and diluted loss per share........................ $ (.10) $ (.11) Shares used to compute basic and diluted loss per share..................................... 21,341 19,934
The accompanying notes are an integral part of the condensed consolidated financial statements. - 4 - PLC SYSTEMS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three Months Ended March 31, ------------------ 2000 1999 ---- ---- Operating activities: Net loss..................................................... $(2,183) $(2,199) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization............................ 627 708 Change in assets and liabilities: Accounts receivable.................................... 689 353 Inventory.............................................. 226 (394) Prepaid expenses and other assets...................... (173) 122 Accounts payable....................................... 556 260 Deferred revenue....................................... (31) 77 Accrued liabilities.................................... (347) 403 ------- ------- Net cash used for operating activities............................ (636) (670) Investing activities: Purchase of fixed assets..................................... (780) (202) ------- ------- Net cash used by investing activities............................. (780) (202) Financing activities: Net proceeds from sales of common shares..................... 5,075 897 Secured borrowings........................................... (46) 296 ------- ------- Net cash provided by financing activities......................... 5,029 1,193 Effect of exchange rate changes on cash and cash equivalents...... 5 (402) ------- ------- Net increase (decrease) in cash and cash equivalents.............. 3,618 (81) Cash and cash equivalents at beginning of period.................. 4,467 4,846 ------- ------- Cash and cash equivalents at end of period........................ $8,085 $ 4,765 ======= ======= Non-cash financing activities: Conversion of convertible debentures and accrued interest into common stock................................. $ - $ 972
The accompanying notes are an integral part of the condensed consolidated financial statements. - 5 - PLC SYSTEMS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. Certain prior period items have been reclassified to conform with current period presentations. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1999. 2. NET LOSS PER SHARE Basic earnings per share is computed based only on the weighted average number of common shares outstanding during the period and exclude any dilutive effect of options, warrants and convertible securities. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of future issues of common stock relating to options, warrants and convertible securities. In calculating diluted earnings per share, the dilutive effect of options, warrants and convertible securities is computed using the average market price for the period unless their inclusion would be antidilutive. 3. COMPREHENSIVE LOSS The Company has adopted Statement 130, Reporting Comprehensive Income ("Statement 130"). Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of Statement 130 had no impact on the Company's net loss or shareholders' equity. Statement 130 requires unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Total comprehensive loss for the three-month period ended March 31, 2000 amounted to $2,207,000, as compared to $2,206,000 for the three-month period ended March 31, 1999. - 6 - PLC SYSTEMS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. INVENTORIES Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method and consist of the following (in thousands):
March 31, December 31, 2000 1999 --------- ------------ Raw materials.................. $ 997 $1,044 Work in progress............... 374 439 Finished goods................. 751 865 ------ ------ $2,122 $2,348 ====== ======
5. LEGAL PROCEEDINGS In September 1996, CardioGenesis filed a civil lawsuit in the United States District Court for the Northern District of California asking the court to declare the Company's synchronization patent (U.S. Patent No. 5,125,926) invalid and unenforceable, or, alternatively, to find that CardioGenesis' TMR and PMR lasers do not infringe this patent. The Company filed a counterclaim alleging that all of CardioGenesis' TMR and PMR lasers infringe U.S. Patent No. 5,125,926. In January 1997, CardioGenesis filed an opposition in the European Patent Office to have the Company's German synchronization patent declared invalid. In April 1997, the Company filed an infringement lawsuit against CardioGenesis and one of its distributors in the Munich District Court alleging that CardioGenesis' TMR and PMR lasers infringe the Company's German synchronization patent. The PLC patents at issue in these lawsuits cover the Company's synchronization technology, which the Company believes is a critical factor in increasing the safety of TMR and PMR procedures. In January 1999, the Company settled its outstanding patent infringement litigation with CardioGenesis, who subsequently merged with Eclipse Surgical Technologies, Inc. Under the settlement, CardioGenesis agreed that U.S. Patent No. 5,125,926 and related international patents of the Company are valid and enforceable. PLC granted CardioGenesis a non-exclusive worldwide license to the patents in exchange for payment of a license fee and ongoing royalties over the life of the patents (at least 10 years unless the patents are all held invalid in future lawsuits). As part of the settlement, CardioGenesis agreed to pay the Company: - a minimum of $2.5 million over the next 42 months; and - license fees and ongoing royalties on sales of all covered products for at least 10 years (unless the patents are all held invalid in future lawsuits). In July 1997, a U.S. Food and Drug Administration ("FDA") advisory panel recommended against approval of the Company's application to market The Heart Laser System in the United States. Following this recommendation, the Company was named as defendant in 21 purported class action lawsuits filed between August 1997 and November 1997 in the United States District Court for the District of Massachusetts. The lawsuits seek an unspecified amount - 7 - PLC SYSTEMS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) of damages in connection with alleged violations of the federal securities laws based on the Company's failure to obtain a favorable FDA panel recommendation in 1997. Nineteen of these complaints have been consolidated by the court into a single action for pretrial purposes (hereafter referred to as the "federal suit"). Two of these suits were voluntarily dismissed. The Company moved to dismiss all claims in the federal suit. On March 26, 1999, the court issued an order dismissing some, but not all, of the claims in the federal suit. The parties filed cross motions for reconsideration and on October 12, 1999, the court dismissed additional, but not all remaining claims in the federal suit. The Company cannot make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of this lawsuit, but an unfavorable outcome could have a material adverse effect on the Company's business, financial position and results of operations. The Company believes that it has meritorious defenses to this litigation matter and continues to vigorously defend itself. The Company also was named as a defendant in a lawsuit filed in Massachusetts Superior Court in September 1998 (hereafter referred to as the "state suit") seeking over $2 million in damages for alleged negligent misrepresentations and fraud arising from the Company's failure to obtain a favorable FDA recommendation in 1997. The state suit settled on confidential terms, and a Stipulation of Dismissal was filed on April 13, 2000. The settlement of the lawsuit did not have a material impact on the Company's financial statements. In February 1996, PLC Medical Systems, Inc. filed suit against Eclipse Surgical Technologies, Inc. ("Eclipse") in the United States District Court for the District of Massachusetts alleging copyright infringement and unfair and deceptive trade practices based on Eclipse's misappropriation and copying of one of PLC's confidential clinical study protocols. The Company settled this suit in April 1999 on confidential terms. The settlement of the lawsuit did not have a material impact on the Company's financial statements. In October 1997, the French Ministry of Health suspended commercial use of TMR devices in France. In November 1998, a hospital in France, Centre Medico Chirurgical Foch ("Foch Hospital"), sued the Company's Portuguese subsidiary, PLC Sistemas Medicos Internacionais Lda., and a third party, Johnson & Johnson Leasing GmbH, in Paris, France alleging breach of contract and seeking reimbursement of lease payments made for The Heart Laser System. On April 18, 2000, the Tribunal de Grande Instance de Paris dismissed this suit for lack of jurisdiction. The Company can make no assurance as to whether Foch Hospital will appeal this decision or bring suit in another jurisdiction. 6. EQUITY FINANCING On March 28, 2000, the Company issued and sold 2,683,000 shares of common stock to two institutional investors at a price of $2.00 per share, resulting in proceeds to the Company (net of all issuance costs) of approximately $5,075,000. In connection with this financing the Company issued a placement agent a three-year warrant exercisable for 61,326 shares of common stock at a price of $3.15 per share. 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. - 8 - PLC SYSTEMS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. LEASE RECEIVABLES The Company utilizes third-party financing arrangements to provide an array of lease financing alternatives to hospitals interested in acquiring The Heart Laser System. The lease financing alternatives available compliment the Company's traditional placement and sales strategies. Under these arrangements, the Company receives payment from the leasing company equal to the present value of guaranteed minimum payments due from the customer after customer acceptance of The Heart Laser System. In transactions where the Company has transferred substantially all of the risks and rewards of ownership to the customer and the customer has accepted The Heart Laser System, the Company recognizes revenue, which is reported as a component of product sales. The Company recognizes a lease receivable equal to the present value of the guaranteed minimum payments until such time as the Company can legally isolate the lease receivables. The payment received from the leasing company is recognized as a secured borrowing. Interest income and interest expense related to the lease receivables and secured borrowing, respectively, is recognized over time using the effective interest method. Equal amounts of interest income and interest expense are included as a component of other income, net, in the Consolidated Statement of Operations. - 9 - PLC SYSTEMS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This quarterly 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. Such statements are based on management's current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Such factors and uncertainties include, but are not limited to, business conditions and growth in certain market segments and the general economy, the ability of the Company to secure any required additional financing, an increase in competition or other competitive developments, the lack of market acceptance of the Company's products and proposed products by healthcare professionals and third party payers, the lack of reimbursement by third party payers, the development of alternative treatments or procedures for the treatment of heart disease and other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission, including without limitation in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, which are expressly incorporated by reference herein. The Company undertakes no obligation to revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report. OVERVIEW The Company offers placement, purchase and leasing alternatives to customers interested in acquiring The Heart Laser System. The Company has developed a strategy to address the challenges of marketing high cost capital equipment by offering The Heart Laser System on a usage basis to hospitals. The particular structure of a usage based contract, including the length of contract, price billed per procedure and end of term options for purchase, depends primarily on whether the hospital is willing and able to commit to a certain minimum volume of procedures over a defined period of time. If the hospital cannot commit to a sufficient number of procedures, The Heart Laser System may be installed with usage fees billed as agreed upon with the hospital. The Company refers to this type of usage arrangement as a retained placement contract. Under a retained placement contract, placement and service fee revenue is recorded over the term of the usage agreement and The Heart Laser System remains the property of the Company and is depreciated over the term of the usage agreement. If the hospital is willing and able to commit to a sufficient number of procedures such that the substantial risks and benefits of ownership of The Heart Laser System have transferred to the hospital, then the Company classifies the usage agreement as a minimum procedure sales contract. Under a minimum procedure sales contract, the Company records product revenue, at a discounted present value of the guaranteed minimum procedure payments, and records product cost of sale at the time of acceptance of The Heart Laser System. The Company believes that retained placement and minimum procedure sales contracts are appealing to hospitals when capital equipment funds are scarce or unavailable or when it is - 10 - difficult to predict early usage as is the case with new technology such as TMR. The Company's lease financing arrangements enables the Company to monetize future payment streams associated with certain agreements. If utilization becomes more predictable, the Company expects a significant number of new accounts to opt for conventional leasing, or direct purchase. The Heart Laser System is also sold to customers, and the related sterile handpieces and other disposables are sold separately for each procedure. These sales are classified as product sales. Customers are given the option to purchase service contracts to cover the cost of maintaining The Heart Laser System beyond the applicable warranty period. These service revenues are recorded ratably over the service contract and are classified as a component of placement and service fees. RESULTS OF OPERATIONS Total revenues for the three-month period ended March 31, 2000 were $1,742,000, a decrease of $1,104,000 when compared with total revenues of $2,846,000 for the three-month period ended March 31, 1999. Product sales for the three-month period ended March 31, 2000 were $894,000, a decrease of $1,265,000 when compared with product sales of $2,159,000 for the three-month period ended March 31, 1999. The major factors in these decreases are the decline in the number of Heart Laser System sales transactions recognized during the three month period ended March 31, 2000, as well as a lower average selling price for The Heart Laser System in 2000 as compared to 1999. In the three months ended March 31, 2000, the Company recorded only one Heart Laser System sales transaction, while in the 1999 comparable period the Company recorded four Heart Laser System sales transactions. Included in product sales for the three months ended March 31, 2000 and 1999 are royalty and license payments associated with the CardioGenesis patent dispute. Placement and service fees for the three-month period ended March 31, 2000 were $848,000, an increase of $161,000, when compared with placement and service fees of $687,000 for the same period in fiscal 1999. This increase is due to both increased utilization of installed Heart Laser Systems and a redeployment strategy that moves under-performing Heart Laser Systems to more productive sites. Total gross margin for the three-month period ended March 31, 2000 approximated 43% of revenues, down from 52% for the comparable period in fiscal 1999. In the 2000 period, the Company did not generate sufficient sales volume to efficiently cover manufacturing costs, resulting in lower gross margins. Selling, general and administrative expenditures were $2,580,000 for the three-month period ended March 31, 2000, a decrease of $62,000 when compared to expenditures of $2,642,000 in the comparable period in fiscal 1999. As a result of the Company's restructuring of its workforce in April 1999, the Company reduced compensation expense in the three-month period ended March 31, 2000 as compared to the three-month period ended March 31, 1999. The Company used the savings from the headcount reduction to increase its sales and marketing expenditures in the three-month period ended March 31, 2000, as compared to the three-month period ended March 31, 1999, particularly in the areas of internet/web expansion, tradeshows, advertising and marketing literature. - 11 - Research and development expenditures for the three-month period ended March 31, 2000 were $456,000, a decrease of $592,000 when compared with expenditures of $1,048,000 for the three-month period ended March 31, 1999. The reduction in research and development expenses primarily reflects reduced compensation expense resulting from the Company's reduction in its workforce in April 1999. Other income for the three-month period ended March 31, 2000 was $97,000, an increase of $90,000 when compared with other income of $7,000 for the three-month period ended March 31, 1999. The three-month period ended March 31, 2000 included income from an insurance settlement while the comparable 1999 period included foreign currency translation losses. The Company incurred a net loss of $2,183,000 for the three-month period ended March 31, 2000, compared to a net loss of $2,199,000, for the comparable 1999 period. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2000, the Company had cash and cash equivalents of $8,085,000. Over the past three years, the Company incurred significant operating losses and utilized significant amounts of cash to fund operations. The Company is in a critical stage in its growth as it continues to transition from a research and development company to a commercial company with complete sales, marketing and production capabilities. On March 28, 2000, the Company issued and sold 2,683,000 shares of Common Stock to two institutional investors at a price of $2.00 per share, resulting in proceeds to the Company (net of all issuance costs) of approximately $5,075,000. In connection with this financing, the Company issued a placement agent a three-year warrant for 61,326 shares of common stock at a price of $3.15 per share. 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. While the Company is encouraged by recent developments with respect to FDA approval and Medicare coverage for TMR procedures, the historical absence of widespread reimbursement for the TMR procedure by third party payers has limited demand for and use of The Heart Laser System. Although Medicare reimbursement began in July 1999, and some private insurance plans have begun reimbursing health care providers for TMR procedures using The Heart Laser System, the Company believes that operating losses are likely to continue until such time as third party payers begin to provide widespread reimbursement to healthcare providers for use of The Heart Laser System. Management believes that its existing cash resources and cash from operations will meet working capital requirements through 2000. However, unanticipated decreases in operating revenues or increases in expenses, inability to monetize usage agreements or further delays in the process of third party payers providing reimbursement to healthcare providers may adversely impact the Company's cash position and require further cost reductions or the need to obtain additional financing. No assurance can be given that the Company will be successful in achieving broad commercial acceptance of The Heart Laser System or that the Company will be able to operate profitably on a consistent basis. Should additional financing not be available on terms and conditions acceptable to the Company, - 12 - additional actions may be required that could adversely impact the Company's ability to continue to realize assets and satisfy liabilities in the normal course of business. The consolidated financial statements set forth in this quarterly report do not include any adjustments to reflect the possible future effects of these uncertainties. During the three-months ended March 31, 2000, the Company incurred a net loss of $2,183,000, which resulted in the use of approximately $636,000 of its cash resources to support operations. Cash used by investing activities was approximately $780,000 and primarily related to PLC's retained placement contract activity. Cash provided by financing activities was approximately $5,029,000 and primarily related to the net proceeds of $5,075,000 obtained from the sale of the Company's common stock on March 28, 2000, offset by a decrease in secured borrowings of $46,000. The Company and certain of its officers have been named as defendants in 21 purported class action lawsuits filed between August 1997 and November 1997. See Note 5 in the accompanying condensed consolidated financial statements for further discussion. YEAR 2000 In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company did not incur material expenses in the first quarter of 2000 in connection with remediating its systems to become Year 2000 ready. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors through the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed completely. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. A portion of the Company's operations consists of sales activities in foreign jurisdictions. The Company manufactures its products exclusively in the United States and sells the products in the United States and abroad. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. The Company's operating results are exposed to changes in exchange rates between the U.S. dollar and foreign currencies, especially the Swiss Franc and the German Mark. When the U.S. dollar strengthens against the Franc or Mark, the value of nonfunctional currency sales decreases. When the U.S. dollar weakens, the functional currency amount of sales increases. Overall, the Company's support of its foreign operations results in a benefit of a stronger U.S. dollar, but is adversely affected by a weaker U.S. dollar relative to major currencies worldwide. The Company does not believe that its exposure is significant. The Company's interest income and expense are most sensitive to changes in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on the Company's cash equivalents as well as interest paid on its debt. - 13 - PLC SYSTEMS INC. Part II Other Information ITEM 1. LEGAL PROCEEDINGS See Note 5 to Notes to Condensed Consolidated Financial Statements filed with this Form 10-Q, which is incorporated herein by this reference. ITEM 2. CHANGES IN SECURITIES c) In connection with an equity financing on March 28, 2000, the Company issued a placement agent a three-year warrant exercisable for 61,326 shares of common stock at a price of $3.15 per share. This issuance was conducted pursuant to Section 4(2) of the Securities Act of 1933, as amended. ITEM 3. DEFAULTS BY THE COMPANY UPON ITS SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) EXHIBITS See the Exhibit Index on Page 16 for a list of exhibits filed as part of this Quarterly Report on Form 10-Q, which Exhibit Index is incorporated herein by reference. b) REPORTS ON FORM 8-K (1) On March 27, 2000, the Company filed a Current Report on Form 8-K with the Securities and Exchange Commission setting forth certain risk factors relating to the Company's business. - 14 - PLC SYSTEMS INC. Part II. Other Information (Continued) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PLC SYSTEMS INC. Registrant Date: May 12, 2000 By: /s/ James G. Thomasch, Chief Financial Officer ----------------- ----------------------------------------------- (Principal Financial and Accounting Officer) - 15 - EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- 27.1 Financial Data Schedule 99.1 Risk Factors set forth on pages 21 through 25 of the Company's Annual Report on Form 10-K for the year ended December 31, 1999 as filed with the Securities and Exchange Commission (which is not deemed filed except to the extent that portions thereof are expressly incorporated by reference herein).
- 16 - EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF THE COMPANY AS OF AND FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1999 MAR-31-2000 8,085,000 0 1,636,000 (413,000) 2,122,000 464,000 11,392,000 (7,904,000) 18,642,000 4,744,000 0 0 0 89,455,000 (77,654,000) 18,642,000 894,000 1,742,000 986,000 3,036,000 97,000 0 0 (2,183,000) 0 (2,183,000) 0 0 0 (2,183,000) (.10) (.10)
EX-99.1 3 EXHIBIT 99.1 RISK FACTORS OUR COMPANY HAS A HISTORY OF OPERATING LOSSES PLC Systems Inc. was founded in 1987. We have incurred operating losses in every year of our existence except 1995. We have incurred net losses of $6,555,000 for the year ended December 31, 1999, $16,603,000 for the year ended December 31, 1998 and $14,404,000 for the year ended December 31, 1997. As of December 31, 1999, we had an accumulated deficit of $74,691,000. We have not achieved profitability and expect to continue to incur net losses for at least the next fiscal year. Moreover, although our business is not seasonal in nature, our revenues tend to vary significantly from fiscal quarter to fiscal quarter. OUR COMPANY IS DEPENDENT ON ONE PRINCIPAL PRODUCT We develop and market one principal product: a patented high-powered carbon dioxide laser system known as The Heart Laser System and related disposables. Approximately 89% of our revenue in the fiscal year ended December 31, 1999 and 90% in the fiscal year ended December 31, 1998 was derived from The Heart Laser System. OUR COMPANY MAY BE UNABLE TO RAISE NEEDED FUNDS As of December 31, 1999, we had cash and cash equivalents totaling $4,467,000, a decrease of $379,000 from the balance of $4,846,000 we had as of December 31, 1998. Based on our current operating plan, we anticipate that our existing capital resources, together with cash from operations, should be sufficient to meet our working capital requirements over the next twelve months. If our business does not progress in accordance with our current business plan, we may need to raise additional funds. We are currently exploring a number of alternatives to raise additional capital. We may not be able to raise additional capital upon satisfactory terms or at all, and our business, financial condition and results of operations could be materially and adversely affected. To the extent that we raise additional capital by issuing equity or convertible securities, ownership dilution to our stockholders will result. IN ORDER TO COMPETE EFFECTIVELY, THE HEART LASER SYSTEM NEEDS TO GAIN COMMERCIAL ACCEPTANCE The Heart Laser System is designed for use in the treatment of coronary artery disease in a surgical laser procedure we pioneered known as transmyocardial revascularization. Transmyocardial revascularization is commonly referred to in our industry as "TMR." TMR is a new technology that is only recently becoming known. We may never achieve widespread commercial acceptance. To be successful, we need to: - demonstrate to the medical community in general, and to heart surgeons and cardiologists in particular, that TMR procedures and The Heart Laser System are effective, relatively safe and cost effective; - train heart surgeons to perform TMR procedures using The Heart Laser System; and - obtain widespread insurance reimbursement for the TMR procedure. To date, we have trained only a limited number of heart surgeons and will need to expand our marketing and training capabilities. Although The Heart Laser System has received FDA approval and the CE Mark, it has not yet received widespread commercial acceptance. If we are unable to maintain regulatory approvals or to achieve widespread commercial acceptance of The Heart Laser System, our business, financial condition and results of operations will be materially and adversely affected. RESULTS OF LONG-TERM CLINICAL STUDIES MAY ADVERSELY AFFECT OUR BUSINESS Patients have only been treated with The Heart Laser System since January 1990, and, as a result, there have been few long-term follow-up studies. If patients suffer harmful, long-term consequences from The Heart Laser System, 1 our business, financial condition and results of operations will be materially and adversely affected. RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY COULD MAKE THE HEART LASER SYSTEM OBSOLETE Our industry is characterized by rapid technological change and intense competition. New technologies and products and new industry standards will develop at a rapid pace. They could make The Heart Laser System obsolete. The advent of new devices and procedures and advances in new drugs and genetic engineering are especially threatening. Our future success will depend upon our ability to develop and introduce product enhancements to address the needs of our customers. Material delays in introducing product enhancements may cause customers to forego purchases of our product and purchase those of our competitors. Many of our competitors have substantially greater financial resources and are in a better financial position to exploit marketing and research and development opportunities. Our competitors' products use different types of lasers than we use in The Heart Laser System, including holmium and excimer lasers that may gain more widespread market acceptance than The Heart Laser System. In addition, we believe that several companies are attempting to develop less invasive methods of performing TMR procedures. These new methods may eliminate the need to make an incision in the patient's chest, reducing costs and speeding recovery. These new technologies and methods may erode the potential TMR market, which could have a material adverse effect on our business, financial condition and results of operations. WE MUST RECEIVE AND MAINTAIN GOVERNMENT APPROVAL IN ORDER TO MARKET OUR PRODUCT GENERAL The Heart Laser System and our manufacturing activities are subject to extensive, rigorous and changing federal and state regulation in the United States and to similar regulatory requirements in other major markets, including the European Community and Japan. To date, we have received regulatory approval in the United States and have the ability to market The Heart Laser System in the European Community (excluding France). We have not received regulatory approval in Japan. Without regulatory approval, we cannot market The Heart Laser System in Japan. Even if granted, regulations may significantly restrict the use of The Heart Laser System. The process of obtaining and maintaining required regulatory approval is lengthy, expensive and uncertain. UNITED STATES -- ALTHOUGH WE HAVE RECEIVED FDA APPROVAL, THE FDA HAS RESTRICTED THE USE OF THE HEART LASER SYSTEM AND COULD REVERSE ITS APPROVAL AT ANY TIME In August 1998, we received FDA approval to market a laser system for TMR procedures. However, the FDA: - has not allowed us to market The Heart Laser System to treat patients whose condition is amenable to conventional treatments, such as heart bypass surgery and angioplasty; and - could reverse its ruling and prohibit use of The Heart Laser System at any time. EUROPE -- ALTHOUGH WE HAVE THE ABILITY TO MARKET OUR PRODUCT IN THE EUROPEAN COMMUNITY, THE MEMBERS OF THe EUROPEAN COMMUNITY COULD, AND FRANCE HAS, PROHIBITED COMMERCIAL USE OF THE HEART LASER SYSTEM The Heart Laser System received the CE Mark from the European Community in 1995. However: - the European Community could reverse its ruling and prohibit use of The Heart Laser System at any time; - we cannot market The Heart Laser System in France; and - other European Community countries could prohibit or restrict use of The Heart Laser System. Despite receiving the CE Mark, The French Ministry of Health instituted a commercial moratorium on TMR procedures in October 1997. In its opinion, the procedure is considered to be experimental and should only be 2 performed within the context of a clinical study. An evaluation of the safety of The Heart Laser System is currently under review by a panel of French experts. There can be no assurance that this moratorium will be lifted on a timely basis or at all. ASIA -- WE CANNOT MARKET OUR PRODUCT IN MAJOR ASIAN MARKETS UNTIL WE RECEIVE GOVERNMENT APPROVAL We believe that Japan represents the largest potential market for The Heart Laser System in Asia. Prior to marketing The Heart Laser System in Japan, we must receive approval from the Japanese Government. This approval requires a clinical study in Japan with at least 60 patients. This study was completed in 1998. Although the results of this study have been submitted to the Japanese Government, we do not know whether the clinical study will be sufficient or when, if ever, we will receive approval to sell The Heart Laser System in Japan. Additional regulatory applications are pending in Taiwan. We cannot be sure when, if at all, we will obtain regulatory approval in any particular country. ASSERTING AND DEFENDING INTELLECTUAL PROPERTY RIGHTS MAY IMPACT OUR RESULTS OF OPERATIONS In our industry, competitors often assert intellectual property infringement claims against one another. The success of our business depends on our ability to successfully defend our intellectual property. Future litigation may have a material impact on our financial condition even if we are successful in marketing The Heart Laser System. We may not be successful in defending or asserting our intellectual property rights. An adverse outcome in any litigation or interference proceeding could subject us to significant liabilities to third parties and require us to cease using the technology that is at issue or to license the technology from third parties. In addition, a finding that any of our intellectual property is invalid could allow our competitors to more easily and cost-effectively compete with us. Thus, an unfavorable outcome in any patent litigation or interference proceeding could have a material adverse effect on our business, financial condition or results of operations. The cost to us of any patent litigation or interference proceeding could be substantial. Uncertainties resulting from the initiation and continuation of patent litigation or interference proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and interference proceedings may also absorb significant management time. WE MAY BE SUBJECT TO PRODUCT LIABILITY LAWSUITS; OUR INSURANCE MAY NOT BE SUFFICIENT TO COVER DAMAGES We may be subject to product liability claims. The United States Supreme Court has stated that compliance with FDA regulations will not shield a company from common-law negligent design claims or manufacturing and labeling claims based on state rules. Such claims may absorb significant management time and could degrade the reputation of PLC and the marketability of The Heart Laser System. If product liability claims are made with respect to our products, we may need to recall the implicated product which could have a material adverse effect on our business, financial condition and results of operations. In addition, although we maintain product liability insurance with a per claim and yearly aggregate maximum of $10 million, subject to a $50,000 per occurrence and $250,000 aggregate self-insured deductible, we cannot be sure that our insurance will be adequate to cover potential product liability lawsuits. Our insurance is expensive and in the future may not be available on acceptable terms, if at all. If a successful product liability claim or series of claims exceeded our insurance coverage, it could have a material adverse effect on our business, financial condition and results of operations. WE ARE DEPENDENT ON CERTAIN SUPPLIERS We believe that some of the components for our laser systems, most notably the laser head, may only be available from one or a limited number of suppliers. Any interruption in supply from these suppliers could prevent us from meeting commercial demands for The Heart Laser System, which could have a material adverse effect on our business, financial condition and results of operations. 3 RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS A portion of our product sales are generated from operations outside of the United States. Establishing and expanding international sales can be expensive. Managing and overseeing foreign operations may be difficult and products may not receive market acceptance. Risks of doing business outside the U.S. include the following: agreements may be difficult to enforce and receivables difficult to collect through a foreign country's legal system; foreign customers may have longer payment cycles; foreign countries may impose additional withholding taxes or otherwise tax PLC's foreign income, impose tariffs or adopt other restrictions on foreign trade; U.S. export licenses may be difficult to obtain; and the protection of intellectual property in foreign countries may be more difficult to enforce. There can be no assurance that our international business will grow or that any of the foregoing risks will not result in a material adverse effect on PLC. WE HAVE BEEN SUED FOR ALLEGED VIOLATIONS OF SECURITIES LAW In July 1997, an FDA advisory panel recommended against approval of our application to market The Heart Laser System. Following this recommendation, we were named as defendant in 21 purported class action lawsuits filed between August 1997 and November 1997 in the United States District Court for the District of Massachusetts. The lawsuits seek an unspecified amount of damages in connection with alleged violations of the federal securities laws based on our failure to obtain a favorable FDA panel recommendation in 1997. Nineteen of these complaints have been consolidated by the court into a single action for pretrial purposes and two suits were voluntarily dismissed. The Company moved to dismiss all of the remaining claims. On March 26, 1999, the court issued an order dismissing some, but not all of the remaining claims. The parties both filed motions for reconsideration and on October 12, 1999, the court dismissed additional, but not all remaining claims. We cannot make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of these lawsuits. We may not be able to pay the amount of any judgment against us. An unfavorable outcome in this litigation could have a material adverse effect on our business, financial position and results of operations. BECAUSE WE ARE INCORPORATED IN CANADA, YOU MAY NOT BE ABLE TO ENFORCE JUDGMENTS AGAINST US AND OUR CANADIAN DIRECTORS Under Canadian law, you may not be able to enforce a judgment issued by courts in the United States against us or our Canadian directors. The status of the law in Canada is unclear as to whether a U.S. citizen can enforce a judgment from a U.S. court in Canada for violations of U.S. securities laws. A separate suit may need to be brought directly in Canada. ANTITAKEOVER PROVISIONS MAY PREVENT YOU FROM REALIZING A PREMIUM RETURN Provisions of Canadian law could make it more difficult for a third party to acquire us, even if the acquisition would be beneficial to you. Specifically, Canadian law requires any person who makes a tender offer that would increase the person's stock ownership to more than 20% of our outstanding common stock to make a tender offer for all of our common stock. These provisions could prevent you from realizing the premium return that stockholders may realize in conjunction with corporate takeovers. In addition, the Company has three classes of directors, with approximately one-third elected each year for a three-year term. These provisions may have the effect of delaying or preventing a corporate takeover or a change in our management. This could adversely affect the market price of your common stock. THE MARKET PRICE OF OUR STOCK MAY FALL IF OTHER STOCKHOLDERS SELL THEIR STOCK If our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could fall. Such sales also might make it more difficult for us to sell equity or equity-related securities in the future at a price we deem appropriate. 4 THE VALUE OF YOUR COMMON STOCK MAY DECREASE IF OTHER SECURITY HOLDERS EXERCISE THEIR OPTIONS AND WARRANTS As shown in the table below, we have reserved an additional 3,023,026 shares of common stock for future issuance upon exercise or conversion of outstanding options and redeemable warrants.
Range of Weighted Shares Reserved Exercise/ Average Exercise/ for Future Conversion Prices Conversion Price Issuance ----------------- ---------------- -------- Options $2.00 - $8.88 $3.84 2,868,162 Redeemable Warrants $15.78 - $27.81 $21.33 154,864 ------- Total 3,023,026 =========
We may issue additional options and warrants in the future. If any of these securities are exercised, you may experience significant dilution in the market value and earnings per share of your common stock. WE HAVE NO INTENTION TO PAY DIVIDENDS We have never paid any cash dividends on our common stock. We currently intend to retain all future earnings, if any, for use in our business and do not expect to pay any dividends in the foreseeable future. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN FORWARD-LOOKING STATEMENTS This annual report and information incorporated by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements deal with our current plans and expectations and involve known and unknown risks and uncertainties. Statements containing terms such as: - believes, - does not believe, - plans, - expects, - intends, - estimates, - anticipates, and other phrases of similar meaning are considered to contain uncertainty and are forward-looking statements. No forward-looking statement is a guarantee of future performance. Our actual results could differ materially from those anticipated in these forward-looking statements. We make cautionary statements in certain sections of this annual report, including in the risk factors identified above, and in materials incorporated herein by reference. You should read these cautionary statements as being applicable to all related forward-looking statements, wherever they appear in this annual report, in the materials referred to in this annual report, in the materials incorporated by reference into this annual report or in our press releases. You should not place undue reliance on any forward-looking statement. 5 -----END PRIVACY-ENHANCED MESSAGE-----