-----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, DAqjsTXpwl5MHHMb9Xgk1vSd+i/DibAN1+YXhHE4PBMnt8RVUsVei6pqpjEd8IiM V3WUt0cmpxePK7C8nIUBQg== 0001047469-99-021217.txt : 19990518 0001047469-99-021217.hdr.sgml : 19990518 ACCESSION NUMBER: 0001047469-99-021217 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99628184 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 Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarter ended March 31, 1999. 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 . --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's class of common stock, as of the latest practical date.
Class Outstanding at May 10, 1999 ----- --------------------------- Common Stock, no par value 20,440,153
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PLC SYSTEMS INC. INDEX Part I. Financial Information: Item 1. Condensed Consolidated Balance Sheets...........................................................3 Condensed Consolidated Statements of Operations.................................................4 Condensed Consolidated Statements of Cash Flows.................................................5 Notes to Condensed Consolidated Financial Statements............................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................11-16 Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................16 Part II. Other Information: Item 1. Legal Proceedings..........................................................................17 Item 2. Changes in Securities......................................................................17 Item 3. Not Applicable.............................................................................17 Item 4. Not Applicable.............................................................................17 Item 5. Not Applicable.............................................................................17 Item 6. Exhibits and Reports on Form 8-K...........................................................17
-2- ITEM 1. FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- PLC SYSTEMS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
March 31, December 31, 1999 1998 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 4,765 $ 4,846 Accounts receivable, net 1,682 2,262 Inventories 3,025 2,953 Prepaid expenses and other current assets 457 547 -------- -------- Total current assets 9,929 10,608 Equipment, furniture and leasehold improvements, net 4,624 5,091 Lease Receivables, net 664 -- Other assets 534 558 -------- -------- Total assets $ 15,751 $ 16,257 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,283 $ 986 Accrued clinical costs 980 1,016 Accrued compensation 942 989 Accrued expenses 789 1,127 Deferred revenue 140 195 Convertible Debentures due 2003 -- 934 Other accrued liabilities 72 72 -------- -------- Total current liabilities 4,206 5,319 Capital lease obligations 19 37 Secured borrowings 1,201 240 Commitments and contingencies Stockholders' equity: Preferred stock, no par value, 5,000 shares authorized Common stock, no par value, 50,000 shares authorized, 20,230 and 19,740 shares issued and outstanding in 1999 and 1998, respectively 81,390 79,521 Accumulated deficit (70,334) (68,136) Accumulated other comprehensive loss (731) (724) -------- -------- 10,325 10,661 -------- -------- Total liabilities and stockholders' equity $ 15,751 $ 16,257 -------- -------- -------- --------
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, 1999 1998 -------- -------- Revenues: Product sales $ 2,159 $ 365 Placement and service fees 687 580 -------- -------- Total revenues 2,846 945 Cost of revenues: Product sales 991 152 Placement and service fees 371 536 -------- -------- Total cost of revenues 1,362 688 -------- -------- Gross profit 1,484 257 Operating expenses: Selling, general and administrative 2,642 3,053 Research and development 1,048 1,291 -------- -------- Total operating expenses 3,690 4,344 -------- -------- Loss from operations (2,206) (4,087) Other income, net 7 151 -------- -------- Net loss $ (2,199) $ (3,936) -------- -------- -------- -------- Basic and diluted loss per share $ (.11) $ (.21) Shares used to compute basic and diluted loss per share 19,934 18,759
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, 1999 1998 -------- -------- Operating activities: Net loss $ (2,199) $ (3,936) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 708 606 Change in assets and liabilities: Accounts receivable 353 752 Inventory (394) (502) Prepaid expenses and other assets 122 52 Accounts payable 260 464 Deferred revenue 77 (253) Accrued liabilities 421 344 -------- -------- Net cash used for operating activities (652) (2,473) Investing activities: Purchase of marketable securities -- (999) Maturities of marketable securities -- 10,839 Purchase of fixed assets (202) (872) -------- -------- Net cash provided by (used for) investing activities (202) 8,968 Financing activities: Net proceeds from sales of common shares 897 196 Secured borrowings 296 -- Principal payments on capital lease obligations (18) (16) -------- -------- Net cash provided by financing activities 1,175 180 Effect of exchange rate changes on cash and cash equivalents (402) (207) -------- -------- Net increase (decrease) in cash and cash equivalents (81) 6,468 Cash and cash equivalents at beginning of period 4,846 3,484 -------- -------- Cash and cash equivalents at end of period $ 4,765 $ 9,952 -------- -------- -------- -------- NON-CASH FINANCING ACTIVITIES: Conversion of Convertible Debentures and accrued Interest into Common Stock $ 972 $ 3,828
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, 1999 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, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1998. 2. NET LOSS PER SHARE In 1998, 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 exclude any dilutive effects of options, warrants and convertible securities. Diluted earnings per share are very similar to the previously reported fully diluted earnings per share. 3. COMPREHENSIVE LOSS As of January 1, 1998, the Company adopted Statement 130, Reporting Comprehensive Income ("Statement 130"). Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; 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. During the first quarter of 1999 and 1998, total comprehensive loss amounted to $2,206,000 and $4,013,000. 4. INVENTORIES Inventories consist of the following (in thousands):
March 31, December 31, 1999 1998 ------ ------ Raw Materials ...... $1,120 $1,035 Work in Progress ... 729 145 Finished Goods ..... 1,176 1,773 ------ ------ $3,025 $2,953 ------ ------ ------ ------
-6- PLC SYSTEMS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. ISSUANCE OF CONVERTIBLE DEBENTURES In April 1998, the Company obtained a $10 million financing commitment from three institutional investors. Pursuant to the terms of the financing, the Company received approximately $5 million in April 1998 from the issuance of non-interest bearing, five-year convertible debentures due April 23, 2003. As of December 31, 1998, $4,000,000 of the convertible debentures outstanding had been converted into 653,063 shares of the Company's Common Stock. In January 1999, the remaining $1,000,000 of the convertible debentures outstanding converted into 163,264 shares of the Company's Common Stock. The remaining $5 million of the commitment expired on December 31, 1998. 6. LEGAL PROCEEDINGS In September 1996, CardioGenesis Corporation ("CardioGenesis") filed a civil lawsuit in the United States District Court for the Northern District of California asking the court to declare the Company's synchronization patent (U.S. Patent No. 5,125,926) invalid and unenforceable, or, alternatively, to find that the TMR and PMR lasers of CardioGenesis do not infringe this patent. The Company filed a counterclaim alleging that all of the TMR and PMR lasers of CardioGenesis 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 the TMR and PMR lasers of CardioGenesis infringe the Company's German synchronization patent. The PLC patents at issue in these lawsuits cover the Company's synchronization technology, a critical factor in ensuring the safety of TMR and PMR procedures. In January 1999, the Company settled its outstanding patent infringement litigation with CardioGenesis. Under the settlement, CardioGenesis acknowledged that U.S. Patent No. 5,125,926 and related international patents of the Company are valid and enforceable. PLC granted CardioGenesis a non-exclusive worldwide license to the patents in exchange for payment of a license fee and ongoing royalties over the life of the patents (at least 10 years unless the patents are all held invalid in future lawsuits). As part of the settlement, CardioGenesis must pay the Company: o a minimum of $2.5 million over the next 42 months; and o 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 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 of damages in connection with alleged violations of the federal securities laws based on the Company's failure to obtain a favorable FDA panel recommendation in 1997. Nineteen of these complaints have been consolidated by the court into a single action for pretrial purposes. Two of these suits have -7- PLC SYSTEMS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) been dismissed. The Company moved to dismiss all of the remaining claims. On March 26, 1999, the court issued an order dismissing some, but not all, of the remaining claims. The Company has also been named as a defendant in a lawsuit filed in Massachusetts Superior Court in September 1998. This suit seeks over $2 million in damages for alleged negligent misrepresentations and fraud arising from the Company's failure to obtain a favorable FDA recommendation in 1997. The Company cannot make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of these lawsuits, but an unfavorable outcome could have a material adverse affect on our business, financial position and results of operations. The Company believes that it has valid defenses and continues to vigorously defend itself in these matters. In August 1997, the Company received from the United States Securities and Exchange Commission (the "Commission") an informal request for information relating to the decision by the FDA advisory panel not to recommend approval of The Heart Laser System in July 1997. The Company has responded and not received any further communication from the Commission regarding this matter since June 1998. In February 1996, PLC Medical Systems, Inc. filed suit against Eclipse Surgical Technologies, Inc. ("Eclipse") in the United States District Court for the District of Massachusetts alleging copyright infringement and unfair and deceptive trade practices based on Eclipse's misappropriation and copying of one of PLC's confidential clinical study protocols. The Company is seeking injunctive relief and damages, as well as any profits derived by Eclipse as a result of the misappropriation, attorney's fees, treble damages and other relief. In November 1998, a hospital in France, Centre Medico Chirurgical Foch ("Foch Hospital") sued the Company's Portuguese subsidiary, PLC Sistemas Medicos Internacionais Lda., and a third party, Johnson & Johnson Leasing GmbH in Paris, France alleging breach of contract. In October 1997, the French Ministry of Health suspended commercial use of TMR devices in France. Foch Hospital is seeking reimbursement of lease payments made for The Heart Laser System. The Company intends to vigorously defend itself in this matter. This matter is in the earliest stage of litigation and a meaningful estimate of the loss that could result from this matter has not been made. The Company is not involved in any other litigation of a material nature. 7. EQUITY FINANCING On March 4, 1999, the Company announced that it had obtained a provisional equity financing commitment of $8 million from a major institutional investor. The commitment contemplates the sale by the Company of up to $2 million in common stock during consecutive 20 day periods at prices based on the trailing volume weighted average price of the common stock on the American Stock Exchange on each day during such periods, less a seven percent discount. The Company is unable to use the commitment on any trading day to the extent that the volume weighted average price of the Company's common stock is less than $3.50 per share, unless the Company and the investor mutually agree to a reduction in such price. If the Company is unable to use the commitment on any given trading day, the commitment amount is automatically reduced by $100,000 on such day. -8- PLC SYSTEMS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) There can be no assurance that the Company will be able to use this commitment in the future. As of March 31, 1999, the Company had sold 323,231 shares of common stock under this commitment, resulting in proceeds to the Company (net of all issuance costs payable upon closing) of $880,000. In April 1999, the Company sold an additional 209,677 shares of common stock, resulting in net proceeds of $672,000. 8. LEASE RECEIVABLES In September 1998, the Company entered into an exclusive agreement with GE Capital Trans Leasing ("GE Capital") to provide a broad array of lease financing alternatives to U.S. hospitals interested in acquiring The Heart Laser System. The lease financing alternatives available through GE Capital are expected to complement the Company's traditional placement and sales strategies. Under the agreement, the Company receives payment from GE Capital equal to the present value of guaranteed minimum procedure 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 lease payments until such time as the Company can legally isolate the lease receivables. The payment received from GE Capital is recognized as a secured borrowing. Interest income and interest expense related to the lease receivables and secured borrowings, respectively, are recognized over time using the effective interest method. Equal amounts of interest income and interest expense are included as a component of other income, net, in the Statement of Operations. In transactions where a sale has not occurred the Company accounts for the transaction as an operating lease. Guaranteed minimum procedure payments are recorded as revenue as earned and included as a component of placement service revenue. The cash received from GE Capital is recognized as a secured borrowing. Interest expense related to the secured borrowings are recognized over time using the effective interest method and included in the Statement of Operations as a component of interest expense. -9- ITEM 2. - -------------------------------------------------------------------------------- PLC SYSTEMS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. 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 annual report on Form 10-K for the fiscal year ended December 31, 1998 and the Company's other filings with the Securities and Exchange Commission. 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. In placement transactions, an installation fee is paid when The Heart Laser System is shipped and the Company then receives a procedure fee per use. Typically, customers commit to pay for a minimum number of procedures during the term of a placement agreement. Sterile handpieces and other disposables are included in the procedure fee. Revenues from these contracts are classified as placement fees. The cost of The Heart Laser System, which is owned by the Company, is depreciated over the term of the placement agreement. The Heart Laser System is also sold to customers, and the related sterile handpieces and other disposables are sold separately for each procedure. The Company sells The Heart Laser System directly and through distributors. These sales are classified as product sales. In September 1998, the Company entered into an exclusive agreement with GE Capital Trans Leasing ("GE Capital") to provide a broad array of lease financing alternatives to U.S. hospitals interested in acquiring The Heart Laser System. The lease financing alternatives available through GE Capital are expected to complement the Company's traditional placement and sales strategies. Under the agreement, the Company obtains cash from GE Capital equal to the present value of guaranteed minimum procedure payments due from the customer after customer acceptance of The Heart Laser System. -10- RESULTS OF OPERATIONS Total revenues for the quarter ended March 31, 1999 were $2,846,000, an increase of 201% when compared to $945,000 for the quarter ended March 31, 1998. Product sales for the quarter ended March 31, 1999 were $2,159,000, an increase of 492% when compared to $365,000 for the quarter ended March 31, 1998. The major factor in these increases is an increase in the number of sales transactions. In the three months ended March 31, 1999, the Company recorded revenue on four sales transactions. In the 1998 period, there were no sales transactions. In addition, in January 1999, the Company settled its outstanding patent dispute with CardioGenesis and 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. Included in product sales for the three months ended March 31, 1999 is the license fee associated with the above settlement. During the first quarter of 1999, the Company recognized product sales revenue and placement revenue of $667,757 and $19,995, respectively, related to transactions under the GE Capital agreement. Placement and service fees for the three months ended March 31, 1999 were $687,000, an increase of 18% when compared with $580,000 for the same period in fiscal 1998. In May 1997, the Health Care Financing Administration ("HCFA") instituted a non-coverage policy for transmyocardial revascularization ("TMR") procedures performed on Medicare patients in the United States. The HCFA announcement, coupled with delays in the FDA Pre-Market Approval ("PMA") process, caused the Company to examine its contractual requirements during 1997 and amend substantially all of its placement contracts, temporarily replacing contractual minimal billings with actual usage billings. Following receipt of the PMA from the FDA on August 20, 1998, placement contracts that provide for minimum billings were reinstated, and the Company has been renegotiating those placement agreements that do not provide for minimum billings following FDA approval. The 1999 period reflects revenue from placement contracts with specified minimum billing reinstated following FDA approval. The 1998 period reflects revenue from placement contracts with actual usage billings. Total gross margin for the three-month period ended March 31, 1999 approximated 52% of revenues up from 27% for the comparable period in fiscal 1998. The increase in revenue offset a greater portion of unfavorable manufacturing variances, which are expected to continue until production increases to levels which will fully absorb manufacturing overhead. Selling, general and administrative expenditures of $2,642,000 for the three-month period ending March 31, 1999 decreased 13% when compared to fiscal 1998 expenditures of $3,053,000. The decrease in the quarter ended March 31, 1999 over the 1998 period primarily relates to the reduction in outside legal counsel expenditures associated with the CardioGenesis litigation, which was settled in January 1999. Research and development expenditures for the three months ended March 31, 1999 were $1,048,000, a decrease of 19% when compared to spending of $1,291,000 for the comparable period in fiscal 1998. The decrease in 1999 compared to 1998 reflects the reduced demands for clinical study compilation and data preparation following the FDA panel recommendation of approval for The Heart Laser(TM) System, offset in part by higher costs associated with the development of new products. Other income of $7,000 for the period ended March 31, 1999 decreased $144,000 when compared to $151,000 for the comparable period in fiscal 1998, primarily related to less interest income as a result of lower cash balances in the 1999 period when compared to the 1998 period. -11- The Company incurred a net loss of $2,199,000 for the quarter ended March 31, 1999 when compared to net loss of $3,936,000 for the comparable 1998 period. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1999, the Company had cash and cash equivalents of $4,765,000. Over the past two years, the Company has incurred significant operating losses and utilized significant amounts of cash to fund operations. The Company is reaching a critical stage in its growth as it transitions from a research and development company to a commercial company with complete sales, marketing and production capabilities. During this time the Company increased its overall operating expenses and overhead to be positioned to further increase its sale and production capabilities in anticipation of possible FDA approval. In order to be adequately positioned to meet these demands, the Company obtained equity financing. The Company continues to seek equity financing as its primary means of funding operations during this transition. On March 4, 1999, the Company announced that it had obtained a provisional equity financing commitment of $8 million from a major institutional investor. The commitment contemplates the sale by the Company of up to $2 million in common stock during consecutive 20 day periods at prices based on the trailing volume weighted average price of the common stock on the American Stock Exchange on each day during such periods, less a seven percent discount. The Company is unable to use the commitment on any trading day to the extent that the volume weighted average price of the Company's common stock is less than $3.50 per share, unless the Company and the investor mutually agree to a reduction in such price. If the Company is unable to use the commitment on any given trading day, the commitment amount is automatically reduced by $100,000 on such day. As of April 12, 1999, the Company had sold 532,908 shares of common stock under this commitment, resulting in net proceeds to the Company of $1,552,000. Since April 13, 1999, the Company has been unable to utilize this commitment due to its stock price. While the Company anticipates being able to utilize this commitment or obtain other sources of equity financing, there can be no assurance that the Company will be able to raise additional equity financing or that the Company will maintain its eligibility to use Form S-3. To the extent that the Company raises additional capital by issuing equity or convertible securities, ownership dilution to the stockholders will result. During the second half of 1998, the Company implemented a number of programs to reduce its consumption of cash, including operating expense reductions and the financing agreement with GE Capital, which enables the Company to obtain an upfront cash payment on certain domestic transactions with customers. While the Company is encouraged by the recent developments with respect to FDA approval and the HCFA announcement that Medicare will provide coverage, beginning July 1, 1999, for TMR procedures performed with devices approved by the FDA, the historical absence of widespread reimbursement for the TMR procedure by third party payers, principally Medicare, Medicaid, and private health insurance plans, has limited demand for and use of The Heart Laser System in the United States. Although Medicare reimbursement will begin in 1999 and some private insurance plans have begun reimbursing health care providers for TMR procedures, 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. -12- Management of the Company has begun to implement a plan of appropriate action steps to attempt to ensure that the Company has adequate sources of cash to meet its working capital needs for at least the next twelve months. In March 1999, management of the Company received approval from the Board of Directors to begin implementation of this action plan. The key elements of the plan are as follows: o Further operating expense reductions to eliminate certain expenditures which are not critically essential to achieving critical business objectives at this time (e.g., discretionary spending, further development efforts). o Strategic realignment of the Company's international sales organization. o Pursuit of strategic alternatives related to the Company's domestic sales efforts that can help it further penetrate existing markets. o Pursuit of strategic financing alternatives including the sale of debt or equity securities, strategic alliances, joint ventures or by other means. On April 29, 1999, the Company announced a restructuring of the Company to further reduce operating expenses and concentrate the Company's resources on its sales efforts. The restructuring will reduce operating expenses by eliminating 27 positions of the 91 positions within the Company as of April 23, 1999. As a result of implementing the above actions, management believes that its existing cash resources and cash from operations will meet working capital requirements over the next twelve months. However, unanticipated decreases in operating revenues, increases in expenses or further delays in the process of third party payers committing to provide reimbursement to healthcare providers may adversely impact the Company's cash position and require further cost reductions. No assurance can be given that the Company will be successful in achieving broad commercial acceptance of The Heart Laser System or that the Company will be able to operate profitably on a consistent basis. For the quarter ended March 31, 1999, the Company incurred a loss of $2,199,000, which resulted in the use of $652,000 to support operations. Cash used for investing activities was $202,000, primarily related to investment on fixed assets associated with the Company's placement contract activity. Cash provided by financing activities was $1,170,000, including $880,000 in net proceeds from the provisional equity financing commitment, $17,000 from the exercise of stock options, and $300,000 from secured borrowings. 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 6 in the accompanying condensed consolidated financial statements for further discussion. YEAR 2000 The Year 2000 problem is the result of computer programs that use two digits rather than four to define the applicable year. On January 1, 2000, computer equipment and programs that have time-sensitive software may not be able to distinguish whether "00" means 1900 or 2000. This could cause a major system failure or could create erroneous results. The Company could be unable to process transactions, send invoices, or engage in similar business activities. The Company may also be vulnerable to other companies' Year 2000 issues. -13- In 1998, the Company formed a task force to determine what if any Year 2000 compliance issues the Company faces. The task force has developed and implemented a Year 2000 readiness plan that defines compliance and sets critical milestones to identify any deficiencies and correct them. The task force identified three basic operational areas that have been and will continue to be examined: o Products - products the Company currently sells, products the Company sold previously, and products of the Company's most significant suppliers; o Business Systems - computer hardware and software used to operate the Company's business, including purchasing, manufacturing, sales and finance; and o Peripherals - the Company's telephone, e-mail, security and shipping systems. In 1998, The Heart Laser System was tested and is believed to be Year 2000 compliant in all material respects. In addition, the Company has purchased and implemented new enterprise resource planning system software that the vendor has represented is Year 2000 compliant. This new software system has replaced substantially all of the Company's previous financial software systems. Current estimates of the impact of the Year 2000 problem on the Company's operations and financial results do not include costs and time that may be incurred as a result of vendor or customer failures to become Year 2000 compliant, but no significant costs have been identified to date. Despite investigation and testing by the Company and its business partners, the Company's products and systems may contain errors or defects associated with Year 2000 date functions. The Company believes that its new enterprise resource planning software substantially addresses its material Year 2000 risks; however, the Company is continuing to test its secondary systems and investigate third party compliance efforts. In a worst case scenario, known and unknown errors and defects that could affect the operation of our products or systems could result in: o delay or loss of revenue; o cancellation of customer contracts; o increased service and/or warranty costs; o increased litigation costs; o diversion of product development and personnel resources; and o damage to our reputation. Furthermore, the Company has not developed a Year 2000 contingency plan to address any failure of our Year 2000 compliance review to identify and correct significant Year 2000 risks. Development of contingency plans is in progress and will continue during calendar year 1999. Such plans could include stockpiling inventory parts and raw materials, accelerating replacement of affected equipment or software, using back-up equipment and software, developing temporary manual procedures to compensate for system deficiencies, and identifying alternative Year 2000 capable suppliers. The Company cannot be sure that such contingency plans will adequately address the year 2000 problem. Any of these occurrences could have a material adverse effect on our business, financial condition and results of operations. Unanticipated decreases in operating revenues or increases in expenses 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 -14- availability of such financing and the reasonableness of any related terms in comparison to market conditions cannot be assured. The Company believes that operating losses are likely prior to such time, if ever, as third party payers agree to reimburse health care providers for use of The Heart Laser System. The Company must also convince health care professionals, third party payers 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. 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 in the United States and sells the products. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. The Company's operating results are exposed to changes in exchanges rates between the U.S. dollar and Swiss Franc and the German Mark. When the U.S. dollar strengthens against the Franc or Mark, the value of nonfunctional currency sales decreases. When the U.S. dollar weakens, the functional currency amount of sales increases. Overall, the Company is a net receiver of currencies other than the U.S. dollar and, as such, benefits from a weaker dollar, but is adversely affected by a stronger dollar relative to major currencies worldwide. The Company's exposures are not significant. The Company's interest income and expense are most sensitive to changes in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on the Company's cash equivalents as well as interest paid on its debt. -15- PLC SYSTEMS INC. Part II Other Information ITEM 1. LEGAL PROCEEDINGS. See Note 6 to Notes to Consolidated Financial Statements filed with this Form 10-Q. ITEM 2. CHANGES IN SECURITIES. See Note 5 and Note 7 to Notes to Consolidated Financial Statements filed with this Form 10-Q. 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 (I) The following exhibits are filed herewith: Exhibit No. Title --- ----- 27 Financial Data Schedule. b.) REPORTS ON FORM 8-K None -16- 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 17, 1999 By: /s/ Robert Svikhart -------------- ------------------------------------------- (Chief Financial Officer) -17- EX-27 2 EX. 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, 1999 and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-1998 MAR-31-1999 4,765,000 0 2,574,000 (228,000) 3,025,000 10,593,000 11,225,000 (6,601,000) 15,751,000 5,407,000 0 0 0 81,390,000 (68,866,000) 15,751,000 2,159,000 2,846,000 1,362,000 3,690,000 (7,000) 0 0 (2,199,000) 0 (2,199,000) 0 0 0 (2,199,000) (.11) (.11)
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