<PAGE>
================================================================================
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 JUNE 30, 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 AUGUST 1, 2000
----- -----------------------------
Common Stock, no par value 23,906,385
================================================================================
<PAGE>
================================================================================
PLC SYSTEMS INC.
INDEX
Part I. Financial Information:
Item 1. Unaudited Condensed Consolidated Financial Statements
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.........14
Part II. Other Information:
Item 1. Legal Proceedings..................................................15
Item 2. Changes in Securities..............................................15
Item 3. Defaults Upon Senior Securities....................................15
Item 4. Submission of Matters to a Vote of Security Holders................15
Item 5. Other Information..................................................16
Item 6. Exhibits and Reports on Form 8-K...................................16
-2-
<PAGE>
PLC SYSTEMS INC.
Part I. Financial Information
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PLC SYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 7,429 $ 4,467
Accounts receivable, net................................... 1,357 1,894
Lease receivables, net..................................... 1,235 642
Inventories................................................ 1,823 2,348
Prepaid expenses and other current assets.................. 334 460
-------- --------
Total current assets................................... 12,178 9,811
Equipment, furniture and leasehold improvements, net......... 2,915 3,336
Lease receivables, net....................................... 2,830 1,782
Other assets................................................. 538 390
-------- --------
Total assets........................................... $ 18,461 $ 15,319
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 711 $ 1,338
Accrued clinical costs..................................... 753 769
Accrued compensation....................................... 500 653
Accrued expenses........................................... 1,048 630
Deferred revenue........................................... 104 138
Secured borrowings......................................... 1,417 824
-------- --------
Total current liabilities.............................. 4,533 4,352
Secured borrowings........................................... 3,040 2,082
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value, unlimited 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
June 30, 2000 and December 31, 1999, respectively.......... 89,459 84,380
Accumulated deficit.......................................... (77,756) (74,691)
Accumulated other comprehensive loss......................... (815) (804)
-------- --------
10,888 8,885
-------- --------
Total liabilities and stockholders' equity................... $ 18,461 $ 15,319
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
<PAGE>
PLC SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product sales........................... $ 2,746 $ 2,685 $ 3,640 $ 4,844
Placement and service fees.............. 834 807 1,682 1,494
------ ------- ------- -------
Total revenues...................... 3,580 3,492 5,322 6,338
Cost of revenues:
Product sales........................... 1,127 1,130 1,427 2,121
Placement and service fees.............. 397 642 1,083 1,013
------ ------- ------- -------
Total cost of revenues.............. 1,524 1,772 2,510 3,134
------ ------- ------- -------
Gross profit.............................. 2,056 1,720 2,812 3,204
Operating expenses:
Selling, general and administrative..... 2,520 2,977 5,101 5,619
Research and development................ 533 573 988 1,621
------ ------- ------- -------
Total operating expenses............ 3,053 3,550 6,089 7,240
------ ------- ------- -------
Loss from operations...................... (997) (1,830) (3,277) (4,036)
Other income, net......................... 115 125 212 132
------ ------- ------- -------
Net loss $ (882) $(1,705) $(3,065) $(3,904)
====== ======= ======= =======
Basic and diluted loss per share.......... $ (0.04) $ (0.08) $ (0.14) $ (0.19)
Shares used to compute basic and diluted
loss per share.......................... 23,906 20,406 22,609 20,171
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
<PAGE>
PLC SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
---- ----
<S> <C> <C>
Operating activities:
Net loss $(3,065) $(3,904)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization............................. 1,066 1,079
Change in assets and liabilities:
Accounts receivable..................................... 534 211
Inventory............................................... 520 475
Prepaid expenses and other assets....................... (21) 123
Accounts payable........................................ (627) 25
Deferred revenue........................................ (33) 76
Accrued liabilities..................................... 242 (742)
-------- ---------
Net cash used for operating activities.......................... (1,384) (2,657)
Investing activities:
Purchase of fixed assets...................................... (1,209) (215)
Sale of fixed assets at net book value........................ 564 -
-------- ---------
Net cash used by investing activities........................... (645) (215)
Financing activities:
Net proceeds from sales of common shares...................... 5,080 1,525
Secured borrowings............................................ (91) 334
-------- ---------
Net cash provided by financing activities....................... 4,989 1,859
Effect of exchange rate changes on cash and cash equivalents.... 2 149
-------- ---------
Net increase (decrease) in cash and cash equivalents............ 2,962 (864)
Cash and cash equivalents at beginning of period................ 4,467 4,846
-------- ---------
Cash and cash equivalents at end of period...................... $ 7,429 $ 3,982
======== =========
Non-cash financing activities:
Conversion of convertible debentures and accrued
interest into common stock.................................. $ - $ 972
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-5-
<PAGE>
PLC SYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
PLC Systems Inc. ("PLC" or the "Company") 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 six-month periods ended June 30, 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
Total comprehensive loss for the three and six-month periods ended June 30,
2000 amounted to $917,000 and $3,076,000, as compared to $1,726,000 and
$3,932,000, for the three and six-month periods ended June 30, 1999.
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):
June 30, December 31,
2000 1999
-------- ------------
Raw materials.................. $ 930 $1,044
Work in progress............... 420 439
Finished goods................. 473 865
-------- ------------
$1,823 $2,348
======== ============
-6-
<PAGE>
PLC SYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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's 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's 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 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.
-7-
<PAGE>
PLC SYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company also was named as a defendant in a lawsuit filed in
Massachusetts Superior Court in September 1998 (hereafter referred to as the
"state suit") seeking over $2.0 million in damages for alleged negligent
misrepresentations and fraud arising from the Company's failure to obtain a
favorable FDA 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., a wholly-owned subsidiary of
the Company, 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 $5,080,000.
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.
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
-8-
<PAGE>
PLC SYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 unaudited Condensed Consolidated
Statements of Operations.
-9-
<PAGE>
ITEM 2. 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," "will" 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 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
-10-
<PAGE>
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. Until such time that utilization becomes more
predictable, the Company believes that the retained placement model may be the
most viable option for certain hospitals.
The Heart Laser System is also sold to hospitals, and the related sterile
handpieces and other disposables are sold separately for each procedure. These
sales are classified as product sales.
Hospitals 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 June 30, 2000 were
$3,580,000, an increase of $88,000 when compared with total revenues of
$3,492,000 for the three-month period ended June 30, 1999. Product sales for the
three-month period ended June 30, 2000 were $2,746,000, an increase of $61,000
when compared with product sales of $2,685,000 for the three-month period ended
June 30, 1999. The 2000 period reflects higher disposable revenue and royalties
in comparison to the 1999 period, offset by a decline in the number of sales
transactions recognized during the 2000 period, as well as a lower average
selling price. In the three months ended June 30, 2000, the Company recorded
eight sales transactions, while in the 1999 comparable period, the Company
recorded nine sales transactions.
Total revenues for the six-month period ended June 30, 2000 were
$5,322,000, a decrease of $1,016,000 when compared with total revenues of
$6,338,000 for the six-month period ended June 30, 1999. Product sales for the
six-month period ended June 30, 2000 were $3,640,000, a decrease of $1,204,000
when compared with product sales of $4,844,000 for the six-month period ended
June 30, 1999. The major factors in these decreases are the decline in the
number of Heart Laser System sales transactions recognized during the six-months
ended June 30, 2000, as well as a lower average selling price for The Heart
Laser System in 2000 as compared to 1999. In the six-months ended June 30, 2000,
the Company recorded nine sales transactions, while in the 1999 comparable
period, the Company recorded thirteen sales transactions.
Placement and service fees for the three and six-months ended June 30, 2000
were $834,000 and $1,682,000, increases of $27,000 and $188,000, when compared
with placement and service fees of $807,000 and $1,494,000 for the same periods
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 and six-month periods ended June 30, 2000
were $2,056,000, or 57% of revenues, and $2,812,000, or 53% of revenues, as
compared to $1,720,000, or 49% of revenues, and $3,204,000, or 51% of revenues,
for the comparable periods in fiscal 1999. In the three months ended June 30,
2000, the overall gross margin dollars increased as a result of an increase in
sales volume and the implementation of manufacturing cost reductions by the
Company. In the six-months ended June 30, 2000, the overall gross margin dollars
decreased as a result of a decrease in sales volume, which was partially offset
by manufacturing cost reductions implemented
-11-
<PAGE>
by the Company.
Selling, general and administrative expenditures were $2,520,000 and
$5,101,000 for the three and six-month periods ended June 30, 2000, decreases of
$457,000 and $518,000 when compared to expenditures of $2,977,000 and $5,619,000
in the comparable periods 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 and six-month periods ended June 30, 2000 as compared to
the three and six-month periods ended June 30, 1999. The Company also reduced
travel, entertainment and consulting expenditures in the three months ended June
30, 2000 as compared to the comparable 1999 period. The Company used a portion
of the savings from the headcount reduction to increase its sales and marketing
expenditures in the six-month period ended June 30, 2000, as compared to the
six-month period ended June 30, 1999, particularly in the areas of Internet/web
expansion, tradeshows, advertising and marketing literature.
Research and development expenditures for the three and six-month periods
ended June 30, 2000 were $533,000 and $988,000, decreases of $40,000 and
$633,000 when compared with expenditures of $573,000 and $1,621,000 in the
comparable periods 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 and six-month periods ended June 30, 2000 as compared to the three and
six-month periods ended June 30, 1999. During the three months ended June 30,
2000, the Company used a portion of the savings from the headcount reduction to
increase investment in project materials as compared to the same period in 1999.
Other income for the three and six-month periods ended June 30, 2000 were
$115,000 and $212,000, a decrease of $10,000 when compared with other income of
$125,000 in the three month period ended June 30, 1999 and an increase of
$80,000 when compared with other income of $132,000 in the six month period
ended June 30, 1999. The six-month period ended June 30, 2000 included income
from an insurance settlement while the comparable 1999 period included foreign
currency translation losses.
The Company incurred a net loss of $882,000 and $3,065,000 for the three
and six-month periods ended June 30, 2000, compared to net losses of $1,705,000
and $3,904,000 for the comparable 1999 periods.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had cash and cash equivalents of $7,429,000.
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 $5,080,000.
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
-12-
<PAGE>
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 as
well as concerns over the lack of a consensus view on the reason or reasons
why a TMR procedure relieves angina in patients who undergo the procedure
(hereafter referred to as "mechanism of action"), 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. In addition, the Company
believes that hospitals may delay the implementation of a TMR program until
such time that concerns about the lack of a known mechanism of action are
satisfied, if ever. Management believes that its existing cash resources and
cash from operations will meet working capital requirements through December
31, 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, 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.
The Company has seen an increasing trend on the part of its hospital
customers to acquire The Heart Laser System on a fee per use basis rather than
as a capital equipment purchase. The Company believes that this trend is the
result of limitations many hospitals currently have on acquiring expensive
capital equipment through an outright purchase as well as competitive pressures
in the marketplace. This shift to a procedural fee for use business model will
result in the deferral of both revenue and cash over a more extended timeframe
than would be the case with an outright sale of the equipment. The Company's
cash position and its need for additional financing to fund operations will be
dependent in part upon the number of hospitals that acquire The Heart Laser
System on a fee per use basis and the number and frequency of TMR procedures
performed by these hospitals. No assurance can be given that the Company's
procedural-based sales model will be successful. There can be no assurance that,
should the Company require additional financing, such financing will be
available on terms and conditions acceptable to the Company.
During the six-months ended June 30, 2000, the Company incurred a net loss
of $3,065,000, which resulted in the use of approximately $1,384,000 of its cash
resources to support operations. Cash used by investing activities was
approximately $645,000 and primarily related to PLC's retained placement
contract activity. Cash provided by financing activities was approximately
$4,989,000 and primarily related to the net proceeds of $5,080,000 obtained from
the sale of the Company's common stock on March 28, 2000, offset by a decrease
in secured borrowings of $91,000.
-13-
<PAGE>
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 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 as well as proceeds received on sales
financings through third party leasing arrangements.
-14-
<PAGE>
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
None.
ITEM 3. DEFAULTS BY THE COMPANY UPON ITS SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On May 24, 2000, the Company held its Annual General Meeting of
Stockholders to vote on the following proposals:
1. To elect three members of the Board of Directors for a three-year
term ("Proposal No. 1"). Nominees for Director were Benjamin Holmes,
Alan H. Magazine and Kenneth J. Pulkonik.
2. To approve the 2000 Employee Stock Purchase Plan of the Company
("Proposal No. 2").
3. To approve the 2000 Equity Incentive Plan of the Company ("Proposal
No. 3").
4. To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for Fiscal Year 2000 ("Proposal No. 4").
Of the 23,906,385 shares of the Company's common stock of record as
of April 7, 2000 able to be voted at the meeting, a total of
approximately 21,495,163 shares, or approximately 89.9% of the
Company's issued and outstanding shares of common stock entitled to
vote on these matters, were present at the meeting in person or by
proxy. Each of the proposals was adopted, with the vote total as
follows:
<TABLE>
<CAPTION>
SHARES SHARES SHARES SHARES
PROPOSAL VOTING FOR VOTING AGAINST ABSTAINING WITHHELD
NO. 1 ---------- -------------- ---------- --------
<S> <C> <C> <C> <C>
- Benjamin Holmes 21,103,568 0 391,595 0
- Alan H. Magazine 21,103,618 0 391,545 0
- Kenneth J. Pulkonik 21,103,418 0 391,745 0
NO. 2 20,711,736 707,820 75,607 0
NO. 3 20,483,467 941,312 70,384 0
NO. 4 21,322,696 107,110 65,357 0
</TABLE>
-15-
<PAGE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
27.1 Financial Data Schedule
99.1(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).
b) REPORTS ON FORM 8-K
None.
------------------------------
(1) Incorporated herein by reference to exhibit 99.1 to
the registrant's Quarterly Report on Form 10-Q for the fiscal period ended
March 31, 2000.
-16-
<PAGE>
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: AUGUST 4, 2000 By: /S/ JAMES G. THOMASCH
---------------- ------------------------
Chief Financial Officer
(Principal Financial and Accounting Officer)
-17-
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule
99.1(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).
------------------------------
(1) Incorporated herein by reference to exhibit 99.1 to the registrant's
Quarterly Report on Form 10-Q for the fiscal period ended March 31, 2000.
-18-
