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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 BY PERIOD ENDED SEPTEMBER 30, 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 / /.
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 NOVEMBER 10, 1999
----- --------------------------------
Common Stock, no par value 21,223,385
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PLC SYSTEMS INC.
INDEX
<TABLE>
<S> <C> <C>
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............................................ 10-15
Item 3.
Quantitative and Qualitative Disclosures About Market Risk................................... 15
Part II. Other Information:
Item 1. Legal Proceedings........................................................................ 16
Item 2. Changes in Securities.................................................................... 16
Item 3. Defaults Upon Senior Securities.......................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders...................................... 16
Item 5. Other Information........................................................................ 16
Item 6. Exhibits and Reports on Form 8-K......................................................... 16
</TABLE>
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ITEM 1. FINANCIAL STATEMENTS
PLC SYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................................. $ 5,611 $ 4,846
Accounts receivable, net .............................................................. 2,343 2,262
Inventories ........................................................................... 1,610 2,953
Prepaid expenses and other current assets ............................................. 384 547
-------- --------
Total current assets ............................................................ 9,948 10,608
Equipment, furniture and leasehold improvements, net ........................................ 4,092 5,091
Lease receivables, net ...................................................................... 1,271 --
Other assets ................................................................................ 569 558
-------- --------
Total assets .................................................................... $ 15,880 $ 16,257
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................................... $ 793 $ 986
Accrued clinical costs ................................................................ 960 1,016
Accrued compensation .................................................................. 866 989
Accrued expenses ...................................................................... 1,429 1,127
Deferred revenue ...................................................................... 87 195
Convertible debentures ................................................................ -- 934
Other accrued liabilities ............................................................. 60 72
-------- --------
Total current liabilities ....................................................... 4,195 5,319
Capital lease obligations ................................................................... -- 37
Secured borrowings .......................................................................... 1,616 240
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value, 5,000 shares authorized
Common stock, no par value, 50,000 shares authorized,
21,223 and 19,740 shares issued and outstanding
in 1999 and 1998, respectively ........................................................ 84,271 79,521
Accumulated deficit ......................................................................... (73,435) (68,136)
Accumulated other comprehensive loss ........................................................ (767) (724)
-------- --------
10,069 10,661
-------- --------
Total liabilities and stockholders' equity .................................................. $ 15,880 $ 16,257
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
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PLC SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product sales ..................... $ 1,623 $ 1,036 $ 6,467 $ 1,561
Placement and service fees ........ 919 579 2,413 1,679
-------- -------- -------- --------
Total revenues .............. 2,542 1,615 8,880 3,240
Cost of revenues:
Product sales ..................... 637 519 2,758 1,035
Placement and service fees ........ 673 776 1,686 1,979
-------- -------- -------- --------
Total cost of revenues ...... 1,310 1,295 4,444 3,014
-------- -------- -------- --------
Gross profit ............................ 1,232 320 4,436 226
Operating expenses:
Selling, general and administrative 2,182 3,324 7,801 10,321
Research and development .......... 493 1,028 2,114 3,593
-------- -------- -------- --------
Total operating expenses .... 2,675 4,352 9,915 13,914
-------- -------- -------- --------
Loss from operations .................... (1,443) (4,032) (5,479) (13,688)
Other income, net ....................... 48 26 180 344
-------- -------- -------- --------
Net loss ................................ $ (1,395) $ (4,006) $ (5,299) $(13,344)
======== ======== ======== ========
Basic and diluted loss per share ........ $ (0.07) $ (0.21) $ (0.26) $ (0.70)
Shares used to compute basic and diluted
loss per share .................... 21,127 19,074 20,696 19,019
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
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PLC SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net loss ....................................................... $ (5,299) $(13,344)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization ............................ 1,285 1,787
Change in assets and liabilities:
Accounts receivable ................................... 205 166
Inventory ............................................. 1,015 (1,381)
Prepaid expenses and other assets ..................... 164 114
Accounts payable ...................................... (186) 178
Deferred revenue ...................................... 23 (35)
Accrued liabilities ................................... (504) 746
-------- --------
Net cash used for operating activities ............................... (3,297) (11,769)
Investing activities:
Purchase of marketable securities .............................. -- (1,986)
Maturities of marketable securities ............................ -- 14,831
Purchase of fixed assets ....................................... (247) (1,529)
-------- --------
Net cash provided by (used for) investing activities ................. (247) 11,316
Financing activities:
Net proceeds from sales of common shares ....................... 3,777 4,659
Secured borrowings ............................................. 288 586
Principal payments on capital lease obligations ................ (37) (49)
-------- --------
Net cash provided by financing activities ............................ 4,028 5,196
Effect of exchange rate changes on cash and cash equivalents ......... 281 38
-------- --------
Net increase in cash and cash equivalents ............................ 765 4,781
Cash and cash equivalents at beginning of period ..................... 4,846 3,484
-------- --------
Cash and cash equivalents at end of period ........................... $ 5,611 $ 8,265
======== ========
NON-CASH FINANCING ACTIVITIES:
Conversion of convertible debentures and accrued
interest into common stock .................................. $ 972 $ 4,872
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
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PLC SYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 and nine month periods ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. 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, 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 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.
Total comprehensive loss for the three and nine months ended September 30,
1999 amounted to $1,410,000 and $5,342,000, as compared to $3,907,000 and
$13,362,000 for the three and nine months ended September 30, 1998.
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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):
September 30, December 31,
1999 1998
------------- ------------
Raw materials.............................. $1,082 $1,035
Work in progress........................... 46 145
Finished goods............................. 482 1,773
------ ------
$1,610 $2,953
====== ======
5. LEGAL PROCEEDINGS
In September 1996, CardioGenesis Corporation ("CardioGenesis") filed a
civil lawsuit in the United States District Court for the Northern District of
California asking the court to declare the Company's synchronization patent
(U.S. Patent No. 5,125,926) invalid and unenforceable, or, alternatively, to
find that 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:
- 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 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
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PLC SYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 were consolidated by the court into a single
action for pretrial purposes (hereafter referred to as the "federal suit"). Two
other of these suits were voluntarily dismissed. The Company moved to dismiss
the claims in the federal suit. On March 26, 1999, the court issued an order
dismissing some, but not all, of the claims. The parties filed cross motions for
reconsider and on October 12, 1999 the court dismissed additional but not all
remaining claims. The Company also has been named as a defendant in a lawsuit
filed in Massachusetts Superior Court in September 1998 (hereafter referred to
as the "state suit"). The state 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 meritorious 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 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 November 1998, a hospital in France, Centre Medico Chirurgical Foch
("Foch Hospital") sued the Company's Portuguese subsidiary, PLC Sistemas Medicos
Internacionais Lda., and a third party, Johnson & Johnson Leasing GmbH in Paris,
France alleging breach of contract. In October 1997, the French Ministry of
Health suspended commercial use of TMR devices in France. Foch Hospital is
seeking reimbursement of lease payments made for The Heart Laser System. The
Company intends to vigorously defend itself in this matter. This matter is in
the earliest stage of litigation and a meaningful estimate of the loss that
could result from this matter has not been made.
The Company is not involved in any other litigation of a material nature.
6. 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.
As of September 30, 1999, the Company had sold 649,474 shares of common stock
under this commitment, resulting
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PLC SYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
in proceeds to the Company (net of all issuance costs payable upon closing) of
approximately $1,900,000. This financing commitment expired on July 16, 1999.
In July 1999, the Company sold 666,666 shares of common stock to another
institutional investor resulting in net proceeds to the Company of approximately
$1,900,000.
7. LEASE RECEIVABLES
The Company has entered into third-party financing alliances to provide a
broad array of lease financing alternatives to hospitals interested in acquiring
The Heart Laser System. The lease financing alternatives available are expected
to complement the Company's traditional placement and sales strategies.
Under these agreements, the Company receives payment from the leasing
company equal to the present value of guaranteed minimum procedure payments due
from the customer after customer acceptance of The 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. For the nine months ended September
30, 1999, the Company recognized product sales revenue and placement revenue of
$1,955,000 and $211,000, respectively, related to transactions under the
third-party financing alliances. 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 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 Condensed Consolidated 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
and service fees. The cash received from the leasing company 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
Condensed Consolidated Statement of Operations as a component of interest
expense.
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ITEM 2.
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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.
The Company entered into third-party financing alliances in order to
provide a broad array of lease financing alternatives to hospitals interested in
acquiring The Heart Laser System. The lease financing alternatives available
through these alliances complement the Company's traditional placement and sales
strategies. Under these agreements, the Company obtains cash from the leasing
company equal to the present value of guaranteed minimum procedure payments due
from the customer after customer acceptance of The Heart Laser System.
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<PAGE>
RESULTS OF OPERATIONS
Total revenues for the quarter ended September 30, 1999 were $2,542,000,
an increase of $927,000 when compared with total revenues of $1,615,000 for
the quarter ended September 30, 1998. Product sales for the quarter ended
September 30, 1999 were $1,623,000, an increase of $587,000 when compared
with product sales of $1,036,000 for the quarter ended September 30, 1998.
The major factor in both increases is primarily due to the 1999 periods
reflecting higher Heart Laser System sales and related disposables due to the
Company's receipt of FDA approval in August 1998. In addition, in January
1999, the Company settled its outstanding patent dispute with CardioGenesis
and granted CardioGenesis a non-exclusive world-wide license to certain
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
September 30, 1999 is a royalty payment associated with the CardioGenesis
patent dispute.
Total revenues for the nine months ended September 30, 1999 were
$8,880,000, an increase of $5,640,000 when compared with total revenues of
$3,240,000 for the nine months ended September 30, 1998. Product sales for the
nine months ended September 30, 1999 were $6,467,000, an increase of $4,906,000
when compared with product sales of $1,561,000 for the nine months ended
September 30, 1998. The major factor in both increases is primarily due to the
1999 periods reflecting higher Heart Laser System sales and related disposables
due to the Company's receipt of FDA approval in August 1998. Included in product
sales for the nine months ended September 30, 1999 is the license fee and
royalties associated with the CardioGenesis settlement. During the first nine
months of 1999, the Company recognized product sales revenue and placement
revenue of $1,955,000 and $211,000, respectively, related to transactions under
the third-party financing alliances.
Placement and service fees for the three and nine months ended September
30, 1999 were $919,000 and $2,413,000, respectively, increases of $340,000
and $734,000, respectively, when compared with placement and service fees of
$579,000 and $1,679,000 for the same periods 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 approval of the PMA by 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. During the third
quarter of 1999, the Company recognized placement revenue of $171,000 related
to transactions under the third-party financing alliances.
Total gross margin for the three and nine month periods ended September 30,
1999 approximated 48% and 50% of revenues, respectively, up from 20% and 7%,
respectively, for the comparable periods in fiscal 1998. In the 1998 periods,
the Company did not generate sufficient gross margin dollars to offset
manufacturing variances, resulting in lower gross margins. Gross margins
improved as a result of an increase in sales volumes which more than offset
fixed manufacturing costs.
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Selling, general and administrative expenditures were $2,182,000 and
$7,801,000 for the three and nine month periods ending September 30, 1999,
respectively, a decrease of 34% and 24%, respectively, when compared to
expenditures of $3,324,000 and $10,321,000 in the comparable periods in fiscal
1998. In April 1999, the Company restructured its workforce by eliminating 27
positions of the 91 positions within the Company as of April 23, 1999. The 1999
periods reflect reduced headcount and compensation and related benefits related
to the reduced workforce.
Research and development expenditures for the three and nine months ended
September 30, 1999 were $493,000 and $2,114,000, respectively, a decrease of 52%
and 41% when compared to spending of $1,028,000 and $3,593,000, respectively,
for the comparable periods in fiscal 1998. The decreases in 1999 compared to
1998 reflect the reduced demands for clinical study compilation and data
preparation following the FDA approval for The Heart Laser(TM) System. In
addition, in April 1999, the Company reduced in its workforce and the 1999
periods reflect reduced headcount and compensation and related benefits related
to the reduced workforce.
Other income for the three months ended September 30, 1999 was $48,000, an
increase of $22,000 when compared with other income of $26,000 for the three
months ended September 30, 1998 due to foreign currency translation losses in
the 1998 period. Other income for the nine month period ended September 30, 1999
was $180,000, a decrease of $164,000 when compared with other income of $344,000
for the nine months ended September 30, 1998 due to lower interest income in
1999 as a result of lower cash balances in 1999 as compared to 1998.
The Company incurred a net loss of $1,395,000 and $5,299,000 for the three
and nine months ended September 30, 1999, respectively, when compared to net
losses of $4,006,000 and $13,344,000, respectively, for the comparable 1998
periods.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash and cash equivalents of
$5,611,000.
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
additional equity financing. The Company expects to seek additional 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 contemplated 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.
As of July 16, 1999, the Company had sold 649,474 shares of common stock
under this commitment, resulting in net proceeds to the Company of approximately
$1,900,000. The
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commitment expired on July 16, 1999. In July 1999, the Company also sold 666,666
shares of common stock to another investor resulting in net proceeds of
approximately $1,900,000. 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
Company's existing 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 a 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 began to
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 commenced in July 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.
Management of the Company has commenced implementation of a plan intended
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 plan. The key elements of the plan are as follows:
- Further operating expense reductions to eliminate certain expenditures
which are not critically essential to achieving critical business
objectives at this time (e.g., discretionary spending, further
development efforts).
- Strategic realignment of the Company's international sales
organization.
- Pursuit of strategic alternatives related to the Company's domestic
sales efforts that can help it further penetrate existing markets.
- Pursuit of strategic financing alternatives including the sale of debt
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 eliminated 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.
-13-
<PAGE>
For the nine months ended September 30, 1999, the Company incurred a loss
of $5,299,000, which resulted in the use of $3,297,000 to support operations.
Cash used for investing activities was $247,000, primarily related to investment
on fixed assets associated with the Company's placement contract activity. Cash
provided by financing activities was $4,028,000, including $3,777,000 in net
proceeds from the sale of common stock and $288,000 from secured borrowings.
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 availability of such financing
and the reasonableness of any related terms in comparison to market conditions
cannot be assured. To the extent the Company issues equity securities or
securities convertible into equity securities, dilution to the Company's
existing stockholders may result.
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.
YEAR 2000
The Year 2000 problem is the result of computer programs that use two
digits rather than four to define the applicable year. On January 1, 2000,
computer equipment and programs that have time-sensitive software may not be
able to distinguish whether "00" means 1900 or 2000. This could cause a major
system failure or could create erroneous results. The Company could be unable to
process transactions, send invoices, or engage in similar business activities.
The Company may also be vulnerable to other companies' Year 2000 issues.
In 1998, the Company formed a task force to determine what if any Year 2000
compliance issues the Company faces. The task force has developed and
implemented a Year 2000 readiness plan that defines compliance and sets critical
milestones to identify any deficiencies and correct them. The task force
identified three basic operational areas that have been and will continue to be
examined:
- Products - products the Company currently sells, products the Company
sold previously, and products of the Company's most significant
suppliers;
- Business Systems - computer hardware and software used to operate the
Company's business, including purchasing, manufacturing, sales and
finance; and
- Peripherals - the Company's telephone, e-mail, security and shipping
systems.
In 1998, The Heart Laser System was tested and is believed to be Year 2000
compliant in all material respects. In addition, the Company has purchased and
implemented new enterprise resource planning system software that the vendor has
represented is Year 2000 compliant. This new software system has replaced
substantially all of the Company's previous financial software systems. Current
estimates of the impact of the Year 2000 problem on the Company's operations and
financial results do not include costs and time that may be incurred as a result
of vendor or customer failures to become Year 2000 compliant, but no significant
costs have been identified to
-14-
<PAGE>
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:
- delay or loss of revenue;
- cancellation of customer contracts;
- increased service and/or warranty costs;
- increased litigation costs;
- diversion of product development and personnel resources; and
- damage to our reputation.
Furthermore, the Company has not developed a Year 2000 contingency plan to
address any failure of our Year 2000 compliance review to identify and correct
significant Year 2000 risks. Development of contingency plans is in progress and
will continue during calendar year 1999. Such plans could include stockpiling
inventory parts and raw materials, accelerating replacement of affected
equipment or software, using back-up equipment and software, developing
temporary manual procedures to compensate for system deficiencies, and
identifying alternative Year 2000 capable suppliers. The Company cannot be sure
that such contingency plans will adequately address the year 2000 problem. Any
of these occurrences could have a material adverse effect on our business,
financial condition and results of operations.
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.
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 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 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-
<PAGE>
PLC SYSTEMS INC.
Part II Other Information
ITEM 1. LEGAL PROCEEDINGS.
See Note 5 to Notes to Consolidated Financial Statements filed with this
Form 10-Q, which is incorporated herein by this reference.
ITEM 2. CHANGES IN SECURITIES.
None.
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.
In connection with the Company's annual meeting for fiscal 2000, any
shareholders proposal for inclusion in the Proxy Statement must be received on
or before December 17, 1999 to the attention of Steven Singer, Secretary of the
Company, at Hale & Dorr LLP, 60 State Street, Boston, Massachusetts 02109.
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-
<PAGE>
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: NOVEMBER 15, 1999 By: /s/ EDWARD H. PENDERGAST
------------------- -----------------------------------------
(President, Chief Executive Officer
and Chairman)
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of the Company as of and for the three month period ended
September 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 5,611,000
<SECURITIES> 0
<RECEIVABLES> 2,571,000
<ALLOWANCES> (228,000)
<INVENTORY> 1,610,000
<CURRENT-ASSETS> 9,948,000
<PP&E> 11,270,000
<DEPRECIATION> (7,178,000)
<TOTAL-ASSETS> 15,880,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 84,271,000
<OTHER-SE> (74,202,000)
<TOTAL-LIABILITY-AND-EQUITY> 15,880,000
<SALES> 1,623,000
<TOTAL-REVENUES> 2,542,000
<CGS> 1,310,000
<TOTAL-COSTS> 2,675,000
<OTHER-EXPENSES> (48,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,395,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,395,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,395,000)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
