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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD OF__________TO__________
COMMISSION FILE NUMBER 1-11388
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PLC SYSTEMS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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YUKON TERRITORY, CANADA 04-3153858
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10 FORGE PARK, FRANKLIN, MASSACHUSETTS
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
02038
(ZIP CODE)
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(508) 541-8800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, NO PAR VALUE AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based on the last sale price for such stock on March 8, 2000,
was $82,192,815. As of March 8, 2000, 21,223,385 shares of Common Stock, no par
value per share, were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement, which will be
issued in connection with the 2000 Annual Meeting of Shareholders, are
incorporated by reference in Part III of its Annual Report in Form 10-K.
FORWARD-LOOKING STATEMENTS
This report (including certain information incorporated herein by
reference) contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements include
statements in Item 1. "Business"; Item 3. "Legal Proceedings"; Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"; and Item 7A. "Quantitative and Qualitative Disclosures about Market
Risk". Statements containing terms such as "believes", "plans", "expects",
"anticipates", "intends", "estimates" and similar expressions contain
uncertainty and are forward-looking statements. Forward-looking statements are
based on current plans and expectations and involve known and unknown risks and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. Such factors and uncertainties
include, but are not limited to: the successful ability to secure any required
financing; the ability to convince health care professionals and third party
payers of the medical and economic benefits of the Company's products; the
absence of reimbursement for health care providers who use the Company's
products, or the risk that reimbursement, if provided, will be inadequate;
restrictions imposed by regulatory agencies such as the U.S. Food and Drug
Administration; competitive developments; business conditions, growth in certain
market segments, and the general economy; uncertainty that any patent protection
will exclude competitors or that the Company's products do not infringe any
intellectual property rights of others; and the risk factors set forth in Item
7, Item 7A, the Company's other SEC reports and the Company's press releases.
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PART I
ITEM 1. BUSINESS.
General
PLC Systems Inc. ("PLC" or the "Company") has developed a patented
high-powered carbon dioxide ("CO(2)") laser system known as The Heart Laser-TM-
System for use in the treatment of coronary artery disease in a surgical laser
procedure, pioneered by the Company and its clinical investigators, known as
transmyocardial revascularization ("TMR").
TMR is a new laser based treatment for relieving debilitating pain
in patients suffering from severe coronary artery disease ("CAD"). Each TMR
procedure requires a sterile, single use, TMR kit containing assorted TMR
handpieces, drapes and other disposable items. The Company's CO(2) laser is
used by a cardiovascular surgeon to create between 20 and 40 tiny channels in
the heart wall of a patient suffering from severe CAD. The Company's Heart
Laser System was developed specifically for TMR and it is believed to be the
only TMR system that can create a channel completely through the heart wall
with a single laser pulse. In addition, the Company's Heart Laser System uses
patented technology to fire this single laser pulse in the fraction of a
second between a patient's heartbeats. This patented "synchronization"
technology ensures that The Heart Laser System will only fire at a relatively
safe point in a patient's heartbeat cycle when the heart is relatively still
and unresponsive to stimuli. The procedure does not require a heart-lung
bypass machine and is performed through a small incision between the
patient's ribs while the patient's heart is beating.
The Company estimates that each year approximately 120,000 patients
worldwide are diagnosed with severe CAD which is not treatable by conventional
revascularization techniques. CAD is a form of heart disease caused by the
blockage of blood flow into the coronary arteries which supply oxygen-rich blood
to the heart. Typically, severe CAD patients experience excruciating spasmodic
attacks of chest pain, or "angina", and often shortness of breath and fatigue.
No longer candidates for traditional surgery, these patients are generally on
maximum drug therapy. U.S. clinical studies have demonstrated The Heart Laser
System to be safe and effective in decreasing angina by two or more classes
(angina is measured in classes from one to four, one being the least painful and
four being the most) in nearly 75% of the patients studied; in fact, TMR using
The Heart Laser System eliminated all angina in one-third of the patients
studied.
Over 5,500 patients have been treated with the Company's Heart Laser
System in the United States and abroad. As of December 31, 1999, the Company had
shipped 135 Heart Laser Systems worldwide.
RECENT DEVELOPMENTS
Since the Company's last annual report on Form 10-K, the following
significant events and accomplishments have occurred:
MEDICARE REIMBURSEMENT BEGINS. On July 1, 1999, the Health Care
Financing Administration ("HCFA") implemented nationwide coverage for Medicare
patients receiving TMR with devices approved by the U.S. Food and Drug
Administration (the "FDA"). The decision allows health care providers who use
the PLC Heart Laser System to receive payment for TMR procedures performed on
patients insured by Medicare. During the previous two years, HCFA had denied all
coverage for Medicare patients receiving TMR. In October 1999, HCFA further
announced that its TMR coverage policy included cases where TMR is used as an
adjunct to coronary artery bypass grafting ("CABG").
MANAGEMENT CHANGES AT PLC. During 1999, PLC's chief executive officer
and chief financial officer resigned. A new chief financial officer was
appointed in November 1999 and a new chief executive officer was appointed in
December 1999. Mark R. Tauscher was appointed president, chief executive officer
and a director of PLC on December 22, 1999. Mr. Tauscher has over 20 years of
experience in medical product sales, marketing and management at companies
including Quinton Instrument Company, Marquette Medical Systems and Hewlett
Packard.
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James G. Thomasch was appointed senior vice president of finance and
administration, chief financial officer and treasurer on November 8, 1999. Mr.
Thomasch is a certified public accountant with over 18 years of experience. Mr.
Thomasch has served as chief financial officer for XRE Corporation and
Angiographic Devices Corporation and as an audit manager for Arthur Andersen
LLP. Most recently, Mr. Thomasch was the XRE division president and chief
operating officer for Trex Medical Corporation.
NEW DIRECTORS JOIN PLC'S BOARD. In September 1999, two new directors
were appointed to PLC's Board of Directors, Alan H. Magazine and Kevin J. Dunn.
For the past 10 years, Mr. Magazine served as president and chief executive
officer of the Health Industry Manufacturer's Association , the largest
worldwide association for medical technology companies. Prior to this, Mr.
Magazine was the president and chief executive officer of the Foundation for
American Economic Competitiveness and its operating arm, the Council on
Competitiveness. Mr. Dunn is the senior managing director for the Boston office
of The Robinson Humphrey Company, an investment banking firm. Previously, Mr.
Dunn worked for Tucker Anthony Incorporated for over 15 years, most recently as
senior managing director for the investment banking group and a director of the
firm. In May 1999, Harold Capozzi, a PLC director since 1991, retired from the
Board.
PLC RECEIVES PMR PATENT. In 1999 PLC received U.S. Patent No. 5,893,848
covering a gauging system for monitoring the depth of channels created in
percutaneous myocardial revascularization, known as "PMR" or "PTMR". Knowing the
depth of channels created during PMR is believed to be important to performing
PMR procedures safely and effectively.
PLC RECEIVES ISO 9001 CERTIFICATION. In March 1999, PLC received ISO
9001 certification, allowing the Company to place the CE Mark on its products.
PLC HEART LASER SYSTEM APPROVED FOR SALE IN SOUTH KOREA. In July 1999,
the Korean Food and Drug Administration approved the PLC Heart Laser System for
commercial distribution throughout South Korea.
BACKGROUND
In 1981, the Company's former Chairman, Dr. Robert I. Rudko, formed
Laser Engineering, Inc. ("LEI"), now PLC Medical Systems, Inc., to develop and
commercialize sealed-off carbon dioxide ("CO(2)") lasers. Dr. Rudko, who holds a
Ph.D. in electrical engineering from Cornell University, had spent over
twenty-five years designing and developing CO(2) laser systems for Raytheon
Company. In the late 1980s, a heart surgeon at the San Francisco Heart
Institute, Dr. John Crew, was performing early studies of TMR on hearts that had
been stopped and placed on a heart-lung machine. Although these early studies
appeared promising, the efficacy of the TMR treatment could not be proven unless
the procedure could be performed on a beating heart. Since no laser existed at
that time which could perform such a medical procedure, the San Francisco Heart
Institute turned to Dr. Rudko and LEI to design and develop such a laser. The
result of that effort was The Heart Laser System, a high-powered laser system
capable of creating a channel completely through a human heart wall with a
single laser pulse delivered in the fraction of a second between heartbeats.
In November 1990, the Company received a Phase I Investigational Device
Exemption ("IDE") for its Heart Laser System from the FDA. In approving the
Phase I study, the FDA permitted the use of The Heart Laser System for patients
considered not suitable for any other intervention. Phase I trials were
performed by Dr. John Crew and completed in October 1991. In April 1992, the
Company received Phase II clearance from the FDA to perform TMR on 50 patients
at four clinical sites. This clearance was expanded to eventually include 201
patients at eight clinical sites. In 1995, the FDA approved three new IDEs for
studies of TMR using The Heart Laser System. The first was a 100 patient
randomized study (Phase III) comparing TMR patients to patients receiving
medical management. The study was later expanded to 200 patients. The second
study was a 400 patient randomized trial comparing TMR patients to patients
receiving a second bypass surgery. The third study compared patients receiving
TMR in conjunction with bypass surgery to patients receiving only bypass
surgery.
The Company recently undertook an effort to gather long-term (more than
12 months) data on its clinical study
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patients. The long-term TMR analysis included 70 patients at eight hospitals.
Each patient had been suffering from severe coronary artery disease, including
chronic angina, before receiving treatment with The Heart Laser System. The
average age of the patients at enrollment was 63. The average preoperative
angina class for the group was 3.8. Angina is measured in classes ranging from
one to four, with one being the least painful and four being the most painful.
After an average of 34 months following the TMR procedure, the group's average
angina class was improved from 3.8 to 1.5. This was virtually unchanged from the
1.4 average angina class reported at 12 months postoperatively. In fact, three
years after TMR with The Heart Laser System, 23% of the patients reported having
no angina and 58% were in class 1 or 2.
Since April 1992, the Company has received 21 U.S. patents relating to
the underlying laser technology, the use of a laser on a beating heart, The
Heart Laser System handpiece and other laser accessories. The Company also has
11 U.S. patent applications pending that cover various aspects of the technology
for The Heart Laser System and the process by which a laser is used to
revascularize the myocardium, as well as other laser technologies. The Company
also holds a number of foreign patents and patent applications.
On August 20, 1998, the Company received approval from the FDA to
market The Heart Laser System throughout the U.S. to treat the estimated 80,000
domestic patients each year who suffer from severe coronary artery disease but
cannot be treated with conventional coronary revascularization techniques such
as bypass surgery or angioplasty. PLC was the first company to receive FDA
approval to commercialize a product to perform TMR.
The Company was incorporated pursuant to the COMPANY ACT of British
Columbia, Canada on March 3, 1987. The Company transferred its jurisdiction of
incorporation to the Yukon Territory of Canada in March 1999. The Company's
principal offices and manufacturing facilities are located at 10 Forge Park,
Franklin, Massachusetts 02038. The Company's telephone number is (508) 541-8800.
As used herein, the term "Company" means, unless the context requires otherwise,
PLC and its subsidiaries, PLC Medical Systems, Inc., PLC Sistemas Medicos
Internacionais GmbH, PLC Medical Systems AG, PLC Medical Systems Asia/Pacific
Pte Ltd and PLC Medical Systems Australia Pty Ltd.
CARDIOVASCULAR DISEASE AND CURRENT THERAPIES
Today 60 million Americans are suffering from cardiovascular disease
with over 12.2 million Americans suffering from coronary heart disease.
Cardiovascular disease is the leading cause of death in the U.S., resulting in
over 41% (or 950,000) of all deaths in the U.S. annually. Arteriosclerosis, the
principal form of cardiovascular disease and primary cause of heart attacks, is
characterized by a progressive accumulation of fatty deposits known as "plaque"
in the walls of arteries and the resulting narrowing of the interior of the
arteries. Arteriosclerosis reduces blood flow to the muscle wall ("myocardium")
of the heart, causing ischemia and resulting angina and can further lead to a
complete occlusion of the artery causing a heart attack. According to the 2000
Heart and Stroke Facts Statistics published by the American Heart Association
(the "AHA"), approximately 607,000 coronary bypass operations and 447,000
balloon angioplasty procedures were performed in the U.S. in 1997. The AHA
estimates the cost of cardiovascular disease in the year 2000 at $326.6 billion,
including physician and nursing services, hospital and nursing home services,
the cost of medications and lost productivity resulting from disability.
Traditional treatment of atherosclerosis includes drug therapy, surgery
and angioplasty. Drug therapy alleviates some of the symptoms of atherosclerosis
but is often ineffective in serious cases. Conventional bypass surgery involves
cutting open the patient's chest, cutting through the sternum, connecting the
patient to a heart-lung machine, stopping the heart, attaching a vein or artery
removed from another part of the patient's body to create a bypass around the
diseased blood vessel and restarting the heart. Certain patients are not
suitable for bypass procedures, including some who have previously undergone
bypass surgery, patients with extremely diffuse diseases, patients with vessels
that are too small to graft, patients with chronic obstructive pulmonary
disease, some diabetics, and others who are too ill to survive the use of a
heart lung machine.
A less invasive alternative to bypass surgery is balloon angioplasty.
The most common form of angioplasty involves inserting a catheter with a balloon
at the tip into a diseased artery. By inflating the balloon at the site of
blockage, the arterial plaque can be pressed against the arterial walls and
reshaped, resulting in increased blood flow.
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Metallic stents were developed to help prevent the sudden closures that
sometimes occur after angioplasty and to help reduce restenosis. These stents
are inserted into the artery after balloon angioplasty to hold the expanded
plaque in place. Because it is less traumatic and less costly, balloon
angioplasty is preferred over bypass surgery when the blockages are not
complicated and involve few coronary arteries. While offering certain benefits
compared to bypass surgery, certain studies including the 1991 Coronary Artery
Descriptors and Restenosis Study ("CADRE") and the 1993 Emory Angioplasty vs.
Surgery Trial ("EAST") suggest restenosis or reocclusion is a serious problem
with traditional angioplasty treatment. While stents have been shown to help
reduce restenosis, and are used extensively, restenosis continues to occur at a
significant rate. Atherectomy, another angioplasty-type treatment, involves the
use of a catheter that contains a rotating mechanical device to cut, grind away
and remove the plaque.
Management believes that TMR using The Heart Laser System is useful as
a treatment for patients who have severe, stable angina and who are no longer
candidates for either angioplasty or bypass because of either extensive disease
or small coronary arteries. The FDA has approved The Heart Laser System for such
patients. TMR is designed to be less invasive and less expensive than
traditional bypass surgery, and may avoid the restenosis problem common with
bypass surgery and balloon angioplasty by not targeting the coronary arteries
for treatment. Also, with additional clinical research, TMR may be proven useful
in conjunction with angioplasty or bypass surgery to obtain more complete
revascularization.
In addition to the more conventional treatments described above, there
are a number of newer treatments and therapies including minimally invasive
direct coronary artery bypass ("MIDCAB"), "off-pump" coronary artery bypass
("OPCAB") and the use of angiogenic growth factors. Some of these techniques and
therapies may offer certain improvements in relation to conventional treatments.
Management believes that with further clinical research, TMR may be found useful
in conjunction with these less invasive procedures to more effectively
revascularize the heart.
TMR USING THE HEART LASER SYSTEM
The main challenge in treating atherosclerosis is to allow adequate
blood to flow to the heart muscle without significantly damaging the heart. The
conventional and newer techniques described above are used to bypass, reopen or
widen blocked or narrowed arteries and could eventually fail due to restenosis
or natural disease progression. TMR using The Heart Laser System involves a
different technique where channels are created into the myocardium as a means of
supplying oxygen-rich blood from the left ventricular chamber into the ischemic
myocardium. TMR does not target the coronary arteries for treatment.
Heart muscle, like all tissues of the body, must be constantly supplied
with oxygen in order to function effectively. Oxygen is delivered to the
myocardium by the blood, which is distributed to the myocardium through the
right and left coronary arteries. If these arteries are narrowed or blocked as a
result of atherosclerosis, sufficient oxygen-rich blood may be unable to reach
the heart to satisfy the metabolic demands of the myocardium. Cardiovascular
disease eventually may cause myocardial ischemia, often evidenced by severe and
debilitating angina caused by lack of oxygen to the heart muscle, which can
progress to myocardial infarction (the death of an area of the heart muscle).
Advanced multi-vessel ischemic heart disease is typically treated with bypass
surgery.
During the TMR procedure, the patient is given general anesthesia. An
incision is made in the patient's side between the ribs, exposing the heart. The
Heart Laser System is computer synchronized with the patient's heartbeat, firing
only when the left ventricle is filled with blood and is electrically
insensitive. The Company believes that synchronization may reduce the risk of
arrhythmias (irregular heartbeats) and their associated morbidity and mortality.
Research studies conducted by the Texas Heart Institute in animal models
indicated that performing TMR without synchronization may be associated with an
increase in life threatening arrhythmias. The synchronization technology is
covered under a patent owned by the Company. The Heart Laser System is capable
of drilling a transmural channel in less than 0.05 seconds with a single laser
pulse in a patient whose heart has not been stopped and who has not been placed
on a heart-lung bypass machine. The surgeon can vary the pulse width of the
laser using a touch key control panel to accommodate for the thickness of the
patient's heart wall. Transesophageal Echocardiography (TEE) is used to confirm
that complete channels are made by the laser. Generally, 20 to 40 new channels
are created during the procedure. Each TMR procedure requires a sterile, single
use, TMR kit containing assorted TMR hand pieces, drapes
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and other disposable items.
POTENTIAL BENEFITS OF TMR
Based on clinical results to date, the Company believes that TMR using
The Heart Laser System provides a number of benefits, although no assurance can
be given that any of the mentioned benefits will be received by patients and no
assurance can be given that the FDA will approve additional indications for use
of The Heart Laser System.
These current anticipated benefits include:
THERAPY FOR PATIENTS NOT SUITABLE FOR CORONARY BYPASS. The FDA has
approved the use of The Heart Laser System for patients who have severe, stable
angina and would otherwise not be suitable for coronary bypass surgery, and for
whom other surgical or interventional techniques may not be available or
advisable to alleviate the effects of atherosclerotic illness.
POTENTIAL USE IN CONJUNCTION WITH BOTH CONVENTIONAL AND MINIMALLY
INVASIVE CORONARY BYPASS. TMR may allow the surgeon to provide oxygenated blood
to areas of the heart muscle that are not accessible by coronary bypass grafts.
With the advent of the MIDCAB and OPCAB procedures, in which coronary artery
bypass graft surgery is performed on a beating heart, Management believes that
with additional clinical research, TMR may be found to be an effective
complement to these procedures. TMR can be performed on the anterior, posterior
and lateral walls of the heart while the MIDCAB procedure usually is only
performed on the anterior wall of the heart. Further, although the OPCAB
procedure can be performed on posterior and lateral walls of the heart, it
generally entails great technical difficulty.
POTENTIALLY A THIRD REVASCULARIZATION OPTION. In the future, with
additional clinical research, TMR may be found to be useful as an alternative to
bypass or angioplasty procedures.
POTENTIAL THERAPY FOR HEART TRANSPLANT PATIENTS. With additional
clinical research, TMR could potentially be found useful for post-transplant
patients suffering from chronic rejection atherosclerosis. Presently, the only
treatment for this condition is re-transplantation.
POTENTIALLY LOWER MEDICAL COSTS. Management believes the medical costs
associated with TMR using The Heart Laser System will be less than the costs of
traditional bypass surgery which requires a larger surgical team, more
supporting equipment and a longer hospital stay. The cost of TMR in some
situations may also be less than angioplasty when combinations of additional
devices such as atherectomy catheters, stents or intravascular ultrasound are
required.
POTENTIALLY QUICKER RECOVERY. Because TMR using The Heart Laser System
is less invasive and does not involve stopping and starting the heart, the
patient may recover more quickly than if conventional bypass techniques were
used, with potentially reduced risks of complications.
NOT DEPENDENT ON PLAQUE TYPE OR LOCATION AND POTENTIALLY LESS RISK OF
RESTENOSIS. Unlike angioplasty, atherectomy devices and stents, which may be
more or less effective, depending on the composition, extent or location of the
plaque occluding the artery and which have evidenced high restenosis rates, TMR
is not dependent upon plaque type or location.
DEVELOPMENT OF MARKETING STRATEGY
The Company's strategy is to establish TMR using The Heart Laser System
as a standard of care for treating patients suffering from coronary artery
disease. Currently, The Heart Laser System is commercially available in the
U.S., the European Community (except France), China, South Korea, Taiwan and
certain countries that do not require governmental approval for
commercialization. The Company has submitted applications for government
approval to sell The Heart Laser System in other countries including Japan.
The Company has also developed a procedural kit, which includes single
use surgical products to be used with
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The Heart Laser System in performing TMR. The TMR procedure kit contains a set
of handpieces, drapes and other TMR surgical accessories.
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 structure of a particular 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.
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 financing arrangements with leasing vendors enables the
Company to monetize future payment streams associated with certain placements.
If utilization becomes more predictable, the Company expects a significant
number of new accounts to opt for conventional leasing or direct purchase.
The Heart Laser System is also sold to customers, and the related
sterile handpieces and other disposables are sold separately for each procedure.
These sales are classified as product sales.
The Company has several different marketing strategies to sell or place
The Heart Laser System and accessories depending upon the particular
circumstances, including direct sales, sales through distributors, minimum
procedure sales contracts, retained placements, rental, and leasing. Pricing
varies depending upon the particular marketing strategy used and the country in
which The Heart Laser System is sold.
UNITED STATES. The Company is primarily using a direct sales force in
the United States to market The Heart Laser System. The sales force is comprised
of personnel with a high degree of professionalism and experience in the
cardiovascular device business. The Company invested considerable resources in
recruiting and training of the sales force in 1998 and 1999. Initial marketing
efforts following FDA approval were directed at The Heart Laser System user, the
cardiothoracic surgeon, whose influence is believed to be critical in a
hospitals decision to purchase The Heart Laser System. Subsequent marketing
efforts are expected to shift to hospital administration and referring
physicians, with a focus on promoting the economics and viability of TMR as a
new hospital technology and driving the growth of TMR procedures. No assurance
can be given that such programs will be implemented successfully, or at all.
Supporting the direct sales force is a promotional program that
consists of electronic media advertising, public relations, direct mail, trade
shows and educational symposia, all focused on disseminating critical
information to decision makers and key purchase influencers.
In 1999, PLC expanded its Center of Excellence training program to
Texas Heart Institute in Houston. Since 1998, PLC and Rush Presbyterian Medical
Center in Chicago have hosted a training program focused on educating
prospective surgeons as well as surgeons from new and existing customer sites in
the use of The Heart Laser System. These comprehensive programs facilitate
interaction among experienced users enabling them to discuss best practices and
focus on ensuring the best possible patient outcomes, including intensive
discussions on patient selection and management. Course participants view live,
narrated procedures via closed circuit television. Actual hands on training is
also provided during the laboratory session.
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INTERNATIONAL. The Company currently markets The Heart Laser System
overseas both directly and through distributors. International Sales (by origin)
accounted for 12%, 30% and 54% of the Company's total revenues in 1999, 1998 and
1997 respectively. The Company had no sales by origin in Canada, its principle
business location.
PLC received the CE Mark for The Heart Laser System in the third
quarter of 1995. The CE Mark allows the Company to sell The Heart Laser System
commercially in European Community countries. Despite receiving the CE Mark, the
French Ministry of Health instituted a commercial moratorium on TMR procedures
in France in October 1997 (See "Government Regulation").
In March 1999, PLC received ISO 9001 certification, allowing the
Company to self certify and place the CE Mark on its products.
In early 1999, the Company renewed its distribution agreement in Japan
with Imatron Japan, Inc. ("Imatron") to distribute The Heart Laser System in
Japan and complete the Japanese regulatory approval process. Along with the
United States and Germany, Japan is believed to be one of the three largest
markets in the world for products used in the treatment of cardiovascular
disease. Imatron also distributes medical equipment in Japan for its parent,
Imatron, Inc. a U.S. based manufacturer of diagnostic imaging equipment. Between
1995 and 1997, Imatron purchased 12 Heart Laser Systems from PLC to conduct
clinical studies in Japan. PLC and Imatron submitted data from these studies to
the Japanese Government in December 1998 in support of their application to
market The Heart Laser System in Japan. The joint application is believed to be
the first submitted by a laser revascularization company seeking to market its
product in Japan. No assurance can be given that Japanese regulatory approval
will be granted to The Heart Laser System.
As of December 31, 1999, the Company had shipped 78 Heart Laser Systems
to international markets. Foreign sales may be subject to certain risks,
including foreign medical, electrical and safety regulations, export and import
restrictions, tariffs and currency fluctuations.
PRODUCTS AND CUSTOMERS
The Company develops and markets one principal product: The Heart Laser
System. Approximately 89% of the Company's revenue in the fiscal year ended
December 31, 1999, 90% in the fiscal year ended December 31, 1998 and 93% in the
fiscal year ended December 31, 1997 was derived from The Heart Laser System. No
single customer accounted for more than 10% of the Company's revenues in fiscal
1999 or 1998. In 1997, Imatron, the Company's exclusive distributor in Japan,
accounted for approximately 20% of the Company's revenues.
MANUFACTURING
The Company manufactures and tests its products at its 37,000 square
foot facility in Franklin, Massachusetts, approximately 40 miles west of Boston.
The Company moved to this facility in September 1996 and believes that its
manufacturing capacity will be sufficient to meet market demands anticipated in
the coming year.
The Company purchases components for its laser systems and its related
disposables from a number of sources, and management believes that most
components are available from multiple sources. The Company's manufacturing
facilities are subject to periodic inspection by regulatory authorities to
ensure compliance with FDA and European Community quality regulations. The
Company's business is not subject to seasonal fluctuations.
GOVERNMENT REGULATION
The Heart Laser System, as well as other medical devices that have
been and are being developed by the Company, are subject to extensive
regulation by the FDA. Pursuant to the Federal Food, Drug and Cosmetic Act,
as amended, (the "FDC Act"), the FDA regulates the design, development,
manufacturing and clinical testing, installation, servicing, labeling,
distribution and promotion of medical devices in the U.S. The Company's laser
products are subject to
7
<PAGE>
additional FDA regulation under the radiation health and safety provisions of
the FDC Act, which imposes labeling and other safety requirements related to
radiation hazards. In addition, various foreign countries in which the
Company's products are or may be sold impose additional regulatory
requirements.
On August 20, 1998, the Company received approval from the FDA to
market The Heart Laser System throughout the U.S. to treat the estimated 80,000
domestic patients each year who suffer from severe coronary artery disease but
cannot be treated with conventional coronary revascularization techniques such
as bypass surgery or angioplasty. PLC was the first company to receive FDA
approval to commercialize a product to perform TMR. FDA imposed certain
post-approval requirements as conditions of its August clearance. These
requirements include a 600 patient post-market study to further assess
mortality, a specific "TMR" surgical informed consent and certain disclaimers
placed on all promotion and advertising materials.
Once a product obtains market approval, any material modifications to
the existing design or manufacturing process as well as any desire to change its
labeling (i.e., intended use) must be approved by the FDA. The Company intends
to continuously improve The Heart Laser System after market introduction and may
therefore submit future Investigational Device Exemption ("IDE"), Pre-Market
Approval ("PMA") and PMA supplement applications to the FDA. No assurance can be
given that approval of such new IDEs, PMAs or PMA supplements will be received
from the FDA on a timely basis, or at all.
The international regulatory approval process varies from country to
country and is subject to change in a given country as regulatory requirements
change. There is no assurance that foreign regulatory authorities will allow (or
will continue to allow) the use or sale of The Heart Laser System in a
particular country on a timely basis, or at all.
In addition, regulatory authorities can suspend or modify approvals
previously granted in certain circumstances. For example, the French Ministry of
Health instituted a commercial moratorium on TMR procedures in France in October
1997. The French Ministry of Health deemed the procedure to be "experimental",
although The Heart Laser System had been approved for commercial distribution in
the European Community since 1995. As a result, TMR can only be performed within
the context of a clinical study in France. An evaluation of the safety of The
Heart Laser System is currently under review by a panel of French experts. There
can be no assurance that the Company will be successful in having the moratorium
lifted or that other countries will not impose restrictions on the use or sale
of the Company's products.
As a device manufacturer, the Company is also required to register
with the FDA. As such, the Company is subject to inspection on a routine
basis for compliance with the FDA's Quality Systems regulations. These
regulations require that the Company manufacture its products and maintain
its documents in a prescribed manner with respect to manufacturing, testing
and control activities. Further, the Company is required to comply with
various FDA requirements for reporting. The FDC Act and medical device
reporting regulations require that the Company provide information to the FDA
on death or serious injuries alleged to have been caused or contributed to by
the use of its products, as well as product malfunctions that would likely
cause or contribute to death or serious injury if the malfunction were to
recur. The FDA also prohibits an approved device from being marketed for
unapproved uses. The Company's laser products are subject to periodic
inspection under the radiation health and safety provisions of the FDC Act
for compliance with labeling and other safety regulations. If the FDA
believes that a company is not in compliance with the law, proceedings can be
instituted to detain or seize products or force notification and correction
of hazards or defects (including a recall), enjoin future violations and
assess civil and criminal penalties against the Company, its officers,
directors or employees. Failure to comply with regulatory requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations.
THIRD PARTY REIMBURSEMENT
Heath care providers, such as hospitals and physicians, that purchase
medical devices such as The Heart Laser System for use on their patients
generally rely on third party payers, principally Medicare, Medicaid and private
health insurance plans, to reimburse all or part of the costs associated with
the procedures performed with these devices.
8
<PAGE>
In February 1997, the Health Care Financing Administration ("HCFA")
published a national non-coverage instruction for TMR. It is not unusual for
HCFA to deny reimbursement for procedures performed using devices that have not
yet received FDA approval. The non-coverage instruction applied to procedures
performed on or after May 19, 1997 on Medicare beneficiaries.
On August 20, 1998, the Company received approval from the FDA to
market The Heart Laser System throughout the U.S. to treat the estimated 80,000
domestic patients each year who suffer from severe coronary artery disease but
cannot be treated with conventional coronary revascularization techniques such
as bypass surgery or angioplasty. PLC was the first company to receive FDA
approval to commercialize a product to perform TMR.
In January 1999, the Blue Cross and Blue Shield Association Technology
Evaluation Center ("TEC") completed a favorable assessment of TMR. The TEC
concluded that TMR meets all five criteria used to evaluate new medical
technologies: (1) final approval from the FDA; (2) scientific evidence of
improvement in health outcomes; (3) net benefit in health outcomes; (4) health
outcomes at least as beneficial with any established alternative; and (5)
improvements achievable outside investigational settings. The TEC's
determination that TMR meets its criteria is a significant step in obtaining
reimbursement for TMR by major payers. The TEC's conclusion was based upon a
review of data showing the safety and effectiveness of TMR by the TEC program
staff, and the TEC's assessment was approved by its panel of independent medical
advisors. The TEC program is sponsored by the national Blue Cross and Blue
Shield Association, whose members include local Blue Cross and Blue Shield plans
nationwide, as well as other major managed care organizations. TEC assessments
are released as reports to TEC program subscribers. Nearly all major payers in
the US, including governmental payers, private third party payers and managed
care organizations, subscribe to the TEC program and receive TEC assessment
reports for use in their own coverage and payment policy making.
In February 1999, HCFA rescinded the national non-coverage instruction
for TMR implemented in May 1997 and announced that Medicare will provide
coverage for TMR procedures performed with devices approved by the FDA. The
decision set a new coverage policy to allow payment for TMR consistent with
FDA-approved uses of TMR devices effective July 1, 1999.
In October 1999, HCFA issued an addendum clarifying Medicare coverage
for TMR procedures. In response to questions from practicing physicians, HCFA
announced that Medicare coverage would be provided in cases where TMR is used as
an adjunct to coronary artery bypass grafting (CABG).
Economic data derived from the Company's clinical studies indicates
that TMR using The Heart Laser System may result in a significant reduction in
the cost of treating patients with severe CAD. Potentially, this could mean that
TMR performed with The Heart Laser System is a procedure that offers real
economic advantages to the managed care market, in particular, in which over 70%
of all privately insured Americans are covered at least in part. No assurance
can be given that such economic benefits will be realized by customers.
Certain private insurance companies and health maintenance
organizations currently provide reimbursement for TMR procedures performed with
the Company's products. No assurance can be given, however, that these payers
will continue to reimburse health care providers who perform TMR procedures
using the Company's products. Further, no assurance can be given that additional
payers will reimburse health care providers who perform TMR procedures using the
Company's products or that reimbursement, if provided, will be timely or
adequate. In addition, the market for the Company's products could be adversely
affected by future legislation to reform the nation's health care system or by
changes in industry practices regarding reimbursement policies and procedures.
PRODUCT LIABILITY AND INSURANCE
The Company's business involves the risk of product liability claims.
No claims have been made against The Heart Laser System to date. The Company
maintains product liability insurance with per claim and aggregate coverage
limits of $10 million, subject to a $50,000 per occurrence and $250,000
aggregate self-insured deductible. No
9
<PAGE>
assurance can be given that product liability claims, if brought, will not
exceed such insurance coverage limits, that such claims will not have a material
adverse effect on the Company or that such insurance will be available on
commercially reasonable terms or at all.
PROPRIETARY PROCESSES, PATENTS, LICENSES AND OTHER RIGHTS
The Company's policy is to file patent applications to protect its
technology, inventions and product improvements. The Company also relies on
trade secret protection for certain confidential and proprietary information.
Since April 1992, the Company has received 21 U.S. patents, of which 16
involve The Heart Laser System and its related technologies. These patents have
terms which expire from 2009 through 2017 and cover the underlying laser
technology needed to create a pulsed, fast flow laser system,the use of a laser
on a beating heart to revascularize the heart using TMR, and the system used to
time the heart's contractions to synchronize the laser firing at the correct
time. The Company also has eleven U.S. patent applications pending relating to
The Heart Laser System handpiece, other technology used in The Heart Laser
System, technology associated with minimally invasive surgical techniques and
technologies associated with percutaneous myocardial revascularization.
In April 1996, the Company received patents from the European Patent
Office and the Japanese Patent Office providing patent protection on its heart
synchronization technology. A patent covering this technology was also issued in
April 1997 in Canada. Additional Japanese-issued patents cover a TMR handpiece,
a self-aligning coupler for a laser endoscope, laser beam manipulation and a
laser beam status indicator. In December 1996, a patent was issued in Canada
covering a self-aligning coupler for a laser endoscope. The Company has numerous
patents pending related to The Heart Laser System and its components in various
international patent offices. The Company expects to file additional patent
applications in the next year, although there can be no assurance that any
additional applications will be filed or that any additional patents will be
issued.
In January 1999, CardioGenesis Corporation ("CardioGenesis"), a
competitor of the Company that subsequently merged with Eclipse Surgical
Technologies, Inc., agreed to the validity and enforceability of certain of the
Company's patents in connection with a settlement of certain litigation between
the companies. The patents, U.S. Patent No. 5,125,926 and related international
patents, cover the Company's proprietary synchronization technology, which the
Company believes is a critical factor in increasing the safety of TMR and PMR
procedures. PLC granted CardioGenesis a non-exclusive worldwide license to the
patents in exchange for payment of a license fee and ongoing royalties over of
the life of the patents. A minimum of $2.5 million will be paid to the Company
in connection with this license agreement. (See Item 3. "Legal Proceedings").
Although the Company believes its patents to be strong, successful
litigation against these patents by a competitor could have a material adverse
effect on the Company's business, financial condition and results of operations.
No assurance can be given that the existing patents will be held valid if
challenged, that any additional patents will be issued or that the scope of any
patent protection will exclude competitors. The breadth of claims in medical
technology patents involve complex legal and factual issues and therefore can be
highly uncertain.
The Company also relies upon unpatented proprietary technology and
trade secrets that it seeks to protect, in part, through confidentiality
agreements with employees and other parties. No assurance can be given that
these agreements will not be breached, that the Company will have adequate
remedies for any breach, that others will not independently develop or otherwise
acquire substantially equivalent proprietary technology and trade secrets or
disclose such technology or that the Company can meaningfully protect its rights
in such unpatented technology. In addition, others may hold or receive patents,
which contain claims that may cover products developed by the Company.
The Company believes its patents to be valid and enforceable. However,
there has been substantial litigation regarding patent and other intellectual
property rights in the medical device industry. Litigation, which could result
in substantial cost to and diversion of effort by the Company, may be necessary
to enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company, to defend the Company against claimed infringement of the
rights of others and to determine the scope and validity of the proprietary
rights of others. Adverse determinations in
10
<PAGE>
litigation could subject the Company to significant liabilities to third
parties, require the Company to seek licenses from third parties and prevent the
Company from manufacturing, selling or using its products, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
COMPETITION
The Company believes that the majority of TMR procedures completed
worldwide to date have been performed using The Heart Laser System. As of
December 31, 1999, over 5,500 TMR procedures had been performed using The Heart
Laser System. In addition, the Company believes that the majority of peer
reviewed medical journal articles on TMR report results of TMR procedures
performed with The Heart Laser System.
A number of other companies have entered or are attempting to enter
the TMR market. These companies are believed to be using other types of
lasers such as holmium and excimer lasers. Holmium and excimer lasers have
different physical properties and interact differently with human tissue than
the Company's CO(2) laser. The Company believes that The Heart Laser System
is the only TMR product that can create a channel completely through the
heart wall with a single laser pulse. Research conducted at the Texas Heart
Institute in animal models has indicated that the Company's synchronized,
single pulse CO(2) laser may cause significantly less damage to the heart
than a holmium laser used to perform TMR. Holmium lasers currently used for
TMR are not capable of creating a patent channel in one pulse, and must
therefore use a fiber-optic probe that "drills" its way from the outside of
the heart to the blood-filled left ventricle. The presence of the probe
within the heart muscle may contribute to an increased risk of arrhythmias.
Moreover, since four to seven firings are required to create a channel,
channels formed in the heart wall by such holmium systems have been observed
to be jagged and segmented. The Company believes that there is an opportunity
to successfully differentiate its CO(2) laser and plans to implement an
appropriate marketing effort accordingly. No assurance can be given that such
a marketing effort will be implemented successfully, or at all.
The Company believes several companies are developing "percutaneous"
methods of performing TMR, known as "PMR". PMR procedures are performed via a
catheter inserted through an incision in a patient's leg. The Company has a
proprietary PMR development program underway. PMR may provide a less invasive
method of creating channels in a human heart if it can be proven safe and
effective. No assurance can be given that the Company's PMR development program
will be successful.
The Company's two principal competitors, Eclipse Surgical Technologies,
Inc. ("Eclipse") and CardioGenesis Corporation ("CardioGenesis"), merged on
March 17, 1999. Both companies have holmium laser systems. In February 1999,
Eclipse received FDA approval to market its holmium laser in the U.S. to perform
TMR. According to public information, the laser revascularization systems
developed by Eclipse and CardioGenesis may be adaptable to be used to perform
both TMR and PMR procedures.
Many treatments are available for coronary artery disease. The Company
believes that the primary competitive factors in the medical treatment of
coronary artery disease are clinical safety and efficacy, product safety and
reliability, regulatory approval, availability of reimbursement from insurance
companies and other payers, product quality, price, reputation for quality,
customer service and ease of use. The Company believes that its competitive
success will be based on its ability to create and maintain scientifically
effective and safe technology, obtain required regulatory approvals, obtain
third party reimbursement for use of its products, attract and retain key
personnel, obtain patent or other protection for its products and successfully
differentiate, price, manufacture and market its products either directly or
through outside parties.
The Company believes that the primary competitive factors within the
interventional cardiovascular market are the ability to treat safely and
effectively various types of coronary disease, physician familiarity with and
acceptance of the procedure, third party reimbursement policies, and to a lesser
extent, ease of product use, product reliability and price.
The medical care products industry is characterized by extensive
research efforts and rapid technological
11
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progress. New technologies and developments are expected to continue at a rapid
pace in both industry and academia. Competition in the market for surgical
lasers and for the treatment of cardiovascular disease is intense and is
expected to increase. Management believes that The Heart Laser System must
compete not only with TMR and PMR systems, but also with medical management
(drugs) and other coronary procedures (e.g. coronary bypass, balloon
angioplasty, atherectomy, laser angioplasty and stents). Many of the companies
manufacturing these products have substantially greater resources and experience
than the Company and represent significant competition for the Company. Such
companies may succeed in developing products that are more effective or less
costly in treating coronary disease than The Heart Laser System and may be more
successful than the Company in manufacturing and marketing their products. No
assurance can be given that the Company's competitors or others will not succeed
in developing technologies, products or procedures that are more effective than
any being developed by the Company or that would render the Company's technology
and products obsolete or noncompetitive. Although the Company will continue to
work to develop new and improved products, the advent of either new devices or
new pharmaceutical agents could hinder the Company's ability to compete
effectively and have a material adverse effect on its business, financial
condition and results of operations.
RESEARCH AND DEVELOPMENT
Research and development expenses were $2,672,000, $4,468,000 and
$5,158,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Since The Heart Laser System received final approval from the FDA in late August
1998, there has been a significant reduction in research and development
expenses related to clinical trials. The Company continues to refine The Heart
Laser System and is currently designing and developing next generation products
and technologies, including less invasive methods of performing myocardial
revascularization including catheters and other percutaneous delivery devices.
Several other companies are developing "percutaneous" methods of performing TMR,
known as "PMR". PMR procedures are performed via a catheter inserted through an
incision in a patient's leg. The Company has a proprietary PMR development
program underway. PMR may provide a less invasive method of creating channels in
a human heart if it can be proven safe and effective. No assurance can be given
that the Company's PMR development program will be successful.
The Company continues to monitor all technologies that may be
applicable to TMR to keep it at the forefront of this field. No assurance can be
given that the Company's research and development goals will be implemented
successfully or that the Company will maintain its position in this market.
EMPLOYEES
As of March 13, 2000, the Company had 48 full-time domestic employees,
including its executive officers. Of these, 16 are employed in general and
administrative activities, 19 are involved in sales and marketing, 7 are
involved in research and development and 6 are involved in manufacturing. The
Company also employs one part-time employee. None of the Company's employees are
represented by a union. In addition, the Company has 9 full time
employees/consultants for its international operations. Management considers its
relations with employees to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
Since September 1996, the Company has leased its current 37,000 square
foot facility in Franklin, Massachusetts where it maintains its principal
executive offices and manufacturing operations. The lease expires in August
2001. The lease provides for two renewal periods of three years each. The total
base rental payments for the term of the lease are approximately $296,400 per
year plus operating and maintenance costs and real estate taxes.
ITEM 3. LEGAL PROCEEDINGS.
In September 1996, CardioGenesis filed a civil lawsuit in the United
States District Court for the Northern District of California asking the court
to declare the Company's synchronization patent (U.S. Patent No. 5,125,926)
invalid and unenforceable, or, alternatively, to find that CardioGenesis' TMR
and PMR lasers do not infringe this
12
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patent. The Company filed a counterclaim alleging that all of CardioGenesis' TMR
and PMR lasers infringe U.S. Patent No. 5,125,926. In January 1997,
CardioGenesis filed an opposition in the European Patent Office to have the
Company's German synchronization patent declared invalid. In April 1997, the
Company filed an infringement lawsuit against CardioGenesis and one of its
distributors in the Munich District Court alleging that CardioGenesis' TMR and
PMR lasers infringe the Company's German synchronization patent. The PLC patents
at issue in these lawsuits cover the Company's synchronization technology, which
the Company believes is a critical factor in increasing the safety of TMR and
PMR procedures.
In January 1999, the Company settled its outstanding patent
infringement litigation with CardioGenesis who subsequently merged with Eclipse
Surgical Technologies, Inc. Under the settlement, CardioGenesis agreed that U.S.
Patent No. 5,125,926 and related international patents of the Company are valid
and enforceable. PLC granted CardioGenesis a non-exclusive worldwide license to
these patents in exchange for the 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, an 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 has
also been named as a defendant in a lawsuit filed in Massachusetts Superior
Court in September 1998 (hereafter referred to as the "state suit") seeking
over $2 million in damages for alleged negligent misrepresentations and fraud
arising from the Company's failure to obtain a favorable FDA recommendation
in 1997. The 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 effect on the Company's
business, financial position and results of operations. The Company believes
that it has meritorious defenses to these litigation matters 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 has 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
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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. A hearing on the
merits of the case has been held, however no decision has been rendered and a
meaningful estimate of the loss that could result from this matter has not been
made. However, the Company does not believe that the loss, if any, would have
a material adverse impact on the Company's financial condition.
The Company is not involved in any other litigation of a material
nature.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since September 17, 1992, the Company's Common Stock has traded on the
American Stock Exchange ("AMEX") under the symbol "PLC". From March 3, 1992
through September 16, 1992, the Company's Common Stock was traded on the
over-the-counter market through the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"). On March 13, 2000 the closing sale price
of the Company's Common Stock was $3.75 per share.
For the periods indicated, the following table sets forth the range of
high and low sales prices for the Common Stock from January 1, 1998.
<TABLE>
<CAPTION>
SALES
-----
HIGH LOW
---- ---
1998
- ----
<S> <C> <C>
First Quarter.......................................................... $19.50 $7.75
Second Quarter......................................................... $22.00 $9.13
Third Quarter.......................................................... $12.88 $3.25
Fourth Quarter......................................................... $7.13 $2.75
1999
- ----
First Quarter.......................................................... $7.44 $2.38
Second Quarter......................................................... $4.88 $2.31
Third Quarter.......................................................... $4.88 $2.63
Fourth Quarter......................................................... $3.19 $1.81
2000
- ----
First Quarter (through March 13, 2000)................................. $4.63 $2.06
</TABLE>
As of March 13, 2000, there were approximately 728 record holders of
the Company's Common Stock. Management believes that there are approximately
16,000 beneficial owners of the Company's Common Stock.
DIVIDENDS
The Company has never paid cash dividends. The Company currently
intends to retain all future earnings, if any, for use in its business and does
not anticipate paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data with respect to the Company for
the five years ended December 31, 1999, are derived from the audited financial
statements of the Company. The data should be read in conjunction with the
financial statements, related notes and other financial information included
elsewhere herein.
15
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------- ---------------- --------------- --------------- ----------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(ALL AMOUNTS ARE IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product sales................. $ 8,400 $ 3,088 $ 5,687 $9,082 $11,938
Placement and service fees.... 3,236 2,605 3,254 2,790 1,407
Costs and expenses:
Cost of product sales......... 3,615 1,945 2,721 2,911 4,177
Cost of placement and service fees 2,061 2,622 2,595 1,155 386
Selling, general and administrative 10,054 13,718 13,049 7,023 5,035
Research and development ..... 2,672 4,468 5,158 2,835 2,246
------ ------ ------ ------ -----
Income (loss) from operations. (6,766) (17,060) (14,582) (2,052) 1,501
Other income.................. 211 457 178 512 588
------ ------ ------ ------ -----
Income (loss) before income taxes (6,555) (16,603) (14,404) (1,540) 2,089
Provision for income taxes.... -- -- -- -- 85
------ ------ ------ ------ -----
Net income (loss)............. $(6,555) $(16,603) $(14,404) $(1,540) $2,004
======= ======== ======== ======== ======
Net income (loss) per share - Basic $ (.32) $ (.86) $ (.84) $ (.09) $ .13
======= ======= ======= ======= ======
Net income (loss) per share - Diluted $ (.32) $ (.86) $ (.84) $ (.09) $ .12
======= ======= ======= ======= ======
Shares used to compute net
income (loss) per share - Basic 20,675 19,218 17,050 16,376 15,868
Shares used to compute net
income (loss) per share - Diluted 20,675 19,218 17,050 16,376 16,590
</TABLE>
<TABLE>
<CAPTION>
As of December 31
-------------- --------------- ---------------- --------------- ----------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital .............. $5,459 $5,050 $12,793 $11,245 $13,541
Total assets.................. 15,319 16,257 27,017 19,417 18,290
Long term obligations......... -- 37 121 27 32
Secured borrowings ........... 2,082 -- -- -- --
Stockholders' equity ......... 8,885 10,662 19,009 16,467 15,508
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 financing arrangements with
leasing vendors enables the Company to monetize future payment streams
associated with certain agreements. If utilization becomes more predictable, the
Company expects a significant number of new accounts to opt for conventional
leasing, or direct purchase.
The Heart Laser System is also sold to customers, and the related
sterile handpieces and other disposables are sold separately for each procedure.
These sales are classified as product sales.
Customers are given the option to purchase service contracts to cover
the cost of maintaining The Heart Laser System beyond the applicable warranty
period. These service revenues are recorded ratably over the service contract
and are classified as a component of placement and service fees.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Total revenues of $11,636,000 for the year ended December 31, 1999
increased $5,943,000 or 104% when compared to total revenues of $5,693,000 for
the year ended December 31, 1998. For the year ended December 31, 1999, product
sales of $8,400,000 increased $5,312,000 or 172% when compared to product sales
of $3,088,000 for the year ended December 31, 1998. The major factors in both
increases are primarily due to the 1999 periods reflecting increased sales of
The Heart Laser System and related disposables due to the Company's receipt of
FDA approval to market the Heart Laser System in August 1998, as well as license
and royalty fees associated with the CardioGenesis settlement.
Placement and service fees of $3,236,000 for the year ended December
31, 1999 increased 24% from placement and service fees of $2,605,000 for the
year ended December 31, 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
retained placement contracts, temporarily replacing contractual minimum
billings with actual usage billings. Following approval of the PMA by the FDA
on August 20, 1998, the Company renegotiated usage agreements with its
customers on a case-by-case basis. The 1999 period reflects revenue from
these retained placement contracts with the renegotiated usage agreements
following FDA approval. The 1998 period reflects revenue primarily from
retained placement contracts with actual usage billings.
Total gross profit increased to $5,960,000 or 51% of total revenues for
the year ended December 31, 1999
17
<PAGE>
as compared with the gross profit of $1,126,000 or 20% of total revenues for
the year ended December 31, 1998. In the 1998 period, the Company did not
generate sufficient sales volume to efficiently cover manufacturing costs,
resulting in lower gross margins. In 1999, gross margins improved as a result
of an increase in sales volumes and manufacturing cost reductions implemented
by the Company.
Selling, general and administrative expenses of $10,054,000 for the
year ended December 31, 1999 decreased $3,664,000 or 27% when compared with
expenses of $13,718,000 for the year ended December 31, 1998. This reduction is
primarily due to a restructuring of the Company's workforce in April 1999. The
1999 periods reflect reduced headcount and compensation and related benefits
related to the reduced workforce.
Research and development expenditures of $2,672,000 decreased
$1,796,000 or 40% for the year ended December 31, 1999 when compared with
expenditures of $4,468,000 for the year ended December 31, 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
System in August 1999. In addition, in April 1999, the Company reduced its
workforce, and the 1999 periods reflect reduced headcount and compensation and
related benefits related to the reduced workforce.
Other income of $211,000 for the year ended December 31, 1999 decreased
$246,000 or 54% when compared to other income of $457,000 for the year ended
December 31, 1998, primarily due to lower interest income as a result of lower
average cash balances in 1999 as compared to 1998.
There was no provision for income tax for the years ended December 31,
1999 or 1998 due to the net losses of $6,555,000 and $16,603,000, respectively.
The Company incurred a net loss for the year ended December 31, 1999 of
$6,555,000 compared with a net loss of $16,603,000 for the year ended December
31, 1998. The smaller net loss resulted from higher total revenues and higher
gross margin dollars coupled with lower overall operating expenses in 1999 when
compared with 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total revenues of $5,693,000 for the year ended December 31, 1998
decreased $3,248,000 or 36% when compared to total revenues of $8,941,000 for
the year ended December 31, 1997. For the year ended December 31, 1998, product
sales of $3,088,000 decreased $2,599,000 or 46% when compared to product sales
of $5,687,000 for the year ended December 31, 1997. The major factor in these
decreases is the decline in the number of sales transactions in 1998. In 1998,
the Company recorded revenue on six sales compared with revenue recognition on
ten sales in 1997.
Placement and service fees of $2,605,000 for the year ended
December 31, 1998 decreased 20% from placement and service fees of $3,254,000
for the year ended December 31, 1997. Although the Company increased the
number of its retained placement contracts in 1998, revenue from these
contracts decreased. In May 1997, HCFA instituted a non-coverage policy for
TMR procedures performed on Medicare patients in the United States. The HCFA
announcement, coupled with delays in the FDA PMA process, caused the Company
to examine its contractual requirements during 1997 and amend substantially
all of its retained placement contracts, temporarily replacing contractual
minimal billings with actual usage billings. Following receipt of the PMA
from the FDA on August 20, 1998, the Company renegotiated usage agreements
with the customer based on a case-by-case basis.
Total gross profit decreased to $1,126,000 or 20% of total revenues for
the year ended December 31, 1998
18
<PAGE>
as compared with total gross profit of $3,625,000 or 41% of total revenues
for the year ended December 31, 1997. This decrease resulted from three
factors. First, the decrease in revenue in 1998 generated fewer gross margin
dollars as compared to 1997. Second, the Company produced fewer of The Heart
Laser Systems than planned in 1998, resulting in unfavorable manufacturing
variances. These unfavorable manufacturing variances would continue until
production increases to levels which will fully absorb manufacturing
overhead. Third, depreciation on The Heart Laser Systems shipped pursuant to
placement contracts increased at a greater rate than the corresponding
revenue generated from placement contracts.
Selling, general and administrative expenses of $13,718,000 for the
year ended December 31, 1998 increased $669,000 or 5% when compared with
expenses of $13,049,000 for the year ended December 31, 1997. The increase in
1998 reflects sales and marketing expenses incurred to initiate rapid
commercialization of The Heart Laser System upon receipt of the PMA.
Research and development expenditures of $4,468,000 decreased $690,000
or 13% for the year ended December 31, 1998 when compared with expenditures of
$5,158,000 for the year ended December 31, 1997. The decrease in 1998 compared
to 1997 reflects the reduced demands for clinical study compilation and data
preparation following the FDA panel recommendation of approval for The Heart
Laser System, offset in part by higher costs associated with the development of
new products.
Other income of $457,000 for the year ended December 31, 1998 increased
$279,000 or 157% when compared to other income of $178,000 for the year ended
December 31, 1997, primarily because of gains recorded in connection with
foreign currency transactions.
There was no provision for income tax for the years ended December 31,
1998 or 1997 due to the net losses of $16,603,000 and $14,404,000, respectively.
The Company incurred a net loss for the year ended December 31, 1998 of
$16,603,000 compared with a net loss of $14,404,000 for the year ended December
31, 1997. The larger net loss resulted from lower total revenues and lower gross
margin dollars in 1998 when compared with 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and cash equivalents of
$4,467,000
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.
During 1999, the Company implemented a number of programs to reduce
its consumption of cash, including operating expense reductions and
establishment of third party financing alliances to enable the Company to
obtain an upfront cash payment on certain of its minimum procedure sales
contracts. In April 1999, the Company announced a workforce restructuring to
further reduce operating expenses and concentrate the Company's resources on
its sales efforts. The restructuring eliminated 27 of the 91 positions
within the Company as of April 23, 1999. During 1999, the Company also sold
1,316,140 shares of common stock resulting in proceeds to the Company (net of
all issuance costs) of approximately $3,800,000 to fund working capital
requirements.
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Most recently, on March 28, 2000, the Company closed an equity
financing with two institutional investors at $2.00 per share. In conjunction
with this offer, the Company sold 2,683,000 shares of common stock, resulting
in proceeds to the Company (net of all issuance costs) of approximately
$5,000,000 and issued the placement agent a three year warrant for 61,326
shares of common stock at $3.15 per share. The Company may seek additional
financing through the issuance and sale of debt or equity securities, bank
financing, joint ventures or by other means. The availability of such
financing and the reasonableness of any related terms in comparison to market
conditions cannot be assured.
While the Company is encouraged by recent developments with respect
to FDA approval and Medicare coverage for TMR procedures, the historical
absence of widespread reimbursement for the TMR procedure by third party
payers has limited demand for and use of The Heart Laser System. Although
Medicare reimbursement began in July 1999, and some private insurance plans
have begun reimbursing health care providers for TMR procedures using The
Heart Laser System, the Company believes that operating losses are likely to
continue until such time as third party payers begin to provide widespread
reimbursement to healthcare providers for use of The Heart Laser System.
Management believes that its existing cash resources and cash from operations
will meet working capital requirements over the next twelve months. However,
unanticipated decreases in operating revenues, increases in expenses 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 financial statements do not include any adjustments
to reflect the possible future effects of these uncertainties.
During the year ended December 31, 1999, the Company incurred a net
loss of $6,555,000, which resulted in the use of approximately $3,793,000 to
support operations. Cash used by investing activities was approximately $585,000
and primarily related to PLC's retained placement contract activity. Cash
provided by financing activities was approximately $3,979,000 and primarily
related to the net proceeds of $3,803,000 obtained from the sale of the
Company's common stock, $242,000 in secured borrowings, offset by principal
payments on capital lease obligations of $66,000.
At December 31, 1999, the Company had U.S. net operating loss
carryforwards of approximately $40.8 million available to reduce future taxable
income, which expire at various dates through 2013, and the Company had foreign
net operating loss carryforwards of approximately $4.4 million. In addition,
various other deferred tax assets have been generated related primarily to
intercompany profit, accruals, and research and development tax credits. Because
the Company believes that, as of December 31, 1999, it is more likely than not,
that all of the deferred tax assets will not be realized, no tax benefit for
prior year losses and other deferred items has been provided. These amounts
could provide a benefit to the Company in the future in profitable years,
subject to the expirations noted.
The 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 consolidated financial statements for
further discussion.
YEAR 2000
In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date change.
The Company did not incur material expenses in 1999 in connection with
remediating its systems to become Year 2000 ready. The Company is not aware of
any material problems resulting from Year 2000 issues, either with its products,
its internal systems, or the products and services of third parties. The Company
will continue to monitor its mission critical computer applications and those of
its suppliers and vendors through the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed completely.
20
<PAGE>
RISK FACTORS
OUR COMPANY HAS A HISTORY OF OPERATING LOSSES
PLC Systems Inc. was founded in 1987. We have incurred operating losses
in every year of our existence except 1995. We have incurred net losses of
$6,555,000 for the year ended December 31, 1999, $16,603,000 for the year ended
December 31, 1998 and $14,404,000 for the year ended December 31, 1997. As of
December 31, 1999, we had an accumulated deficit of $74,691,000. We have not
achieved profitability and expect to continue to incur net losses for at least
the next fiscal year. Moreover, although our business is not seasonal in nature,
our revenues tend to vary significantly from fiscal quarter to fiscal quarter.
OUR COMPANY IS DEPENDENT ON ONE PRINCIPAL PRODUCT
We develop and market one principal product: a patented high-powered
carbon dioxide laser system known as The Heart Laser System and related
disposables. Approximately 89% of our revenue in the fiscal year ended
December 31, 1999 and 90% in the fiscal year ended December 31, 1998 was
derived from The Heart Laser System.
OUR COMPANY MAY BE UNABLE TO RAISE NEEDED FUNDS
As of December 31, 1999, we had cash and cash equivalents totaling
$4,467,000, a decrease of $379,000 from the balance of $4,846,000 we had as of
December 31, 1998. Based on our current operating plan, we anticipate that our
existing capital resources, together with cash from operations, should be
sufficient to meet our working capital requirements over the next twelve months.
If our business does not progress in accordance with our current business plan,
we may need to raise additional funds. We are currently exploring a number of
alternatives to raise additional capital. We may not be able to raise additional
capital upon satisfactory terms or at all, and our business, financial condition
and results of operations could be materially and adversely affected. To the
extent that we raise additional capital by issuing equity or convertible
securities, ownership dilution to our stockholders will result.
IN ORDER TO COMPETE EFFECTIVELY, THE HEART LASER SYSTEM NEEDS TO GAIN COMMERCIAL
ACCEPTANCE
The Heart Laser System is designed for use in the treatment of coronary
artery disease in a surgical laser procedure we pioneered known as
transmyocardial revascularization. Transmyocardial revascularization is commonly
referred to in our industry as "TMR." TMR is a new technology that is only
recently becoming known. We may never achieve widespread commercial acceptance.
To be successful, we need to:
- demonstrate to the medical community in general, and to heart
surgeons and cardiologists in particular, that TMR procedures
and The Heart Laser System are effective, relatively safe and
cost effective;
- train heart surgeons to perform TMR procedures using The Heart
Laser System; and
- obtain widespread insurance reimbursement for the TMR
procedure.
To date, we have trained only a limited number of heart surgeons and will need
to expand our marketing and training capabilities.
Although The Heart Laser System has received FDA approval and the CE
Mark, it has not yet received widespread commercial acceptance. If we are unable
to maintain regulatory approvals or to achieve widespread commercial acceptance
of The Heart Laser System, our business, financial condition and results of
operations will be materially and adversely affected.
RESULTS OF LONG-TERM CLINICAL STUDIES MAY ADVERSELY AFFECT OUR BUSINESS
Patients have only been treated with The Heart Laser System since
January 1990, and, as a result, there have been few long-term follow-up studies.
If patients suffer harmful, long-term consequences from The Heart Laser System,
21
<PAGE>
our business, financial condition and results of operations will be materially
and adversely affected.
RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY COULD MAKE THE HEART LASER SYSTEM
OBSOLETE
Our industry is characterized by rapid technological change and intense
competition. New technologies and products and new industry standards will
develop at a rapid pace. They could make The Heart Laser System obsolete. The
advent of new devices and procedures and advances in new drugs and genetic
engineering are especially threatening. Our future success will depend upon our
ability to develop and introduce product enhancements to address the needs of
our customers. Material delays in introducing product enhancements may cause
customers to forego purchases of our product and purchase those of our
competitors.
Many of our competitors have substantially greater financial resources
and are in a better financial position to exploit marketing and research and
development opportunities. Our competitors' products use different types of
lasers than we use in The Heart Laser System, including holmium and excimer
lasers that may gain more widespread market acceptance than The Heart Laser
System. In addition, we believe that several companies are attempting to develop
less invasive methods of performing TMR procedures. These new methods may
eliminate the need to make an incision in the patient's chest, reducing costs
and speeding recovery. These new technologies and methods may erode the
potential TMR market, which could have a material adverse effect on our
business, financial condition and results of operations.
WE MUST RECEIVE AND MAINTAIN GOVERNMENT APPROVAL IN ORDER TO MARKET OUR PRODUCT
GENERAL
The Heart Laser System and our manufacturing activities are subject
to extensive, rigorous and changing federal and state regulation in the
United States and to similar regulatory requirements in other major markets,
including the European Community and Japan. To date, we have received
regulatory approval in the United States and have the ability to market The
Heart Laser System in the European Community (excluding France). We have not
received regulatory approval in Japan. Without regulatory approval, we cannot
market The Heart Laser System in Japan. Even if granted, regulations may
significantly restrict the use of The Heart Laser System. The process of
obtaining and maintaining required regulatory approval is lengthy, expensive
and uncertain.
UNITED STATES -- ALTHOUGH WE HAVE RECEIVED FDA APPROVAL, THE FDA HAS
RESTRICTED THE USE OF THE HEART LASER SYSTEM AND COULD REVERSE ITS
APPROVAL AT ANY TIME
In August 1998, we received FDA approval to market a laser system for
TMR procedures. However, the FDA:
- has not allowed us to market The Heart Laser System to treat
patients whose condition is amenable to conventional
treatments, such as heart bypass surgery and angioplasty; and
- could reverse its ruling and prohibit use of The Heart Laser
System at any time.
EUROPE -- ALTHOUGH WE HAVE THE ABILITY TO MARKET OUR PRODUCT IN THE
EUROPEAN COMMUNITY, THE MEMBERS OF THe EUROPEAN COMMUNITY COULD, AND
FRANCE HAS, PROHIBITED COMMERCIAL USE OF THE HEART LASER SYSTEM
The Heart Laser System received the CE Mark from the European Community
in 1995. However:
- the European Community could reverse its ruling and prohibit
use of The Heart Laser System at any time;
- we cannot market The Heart Laser System in France; and
- other European Community countries could prohibit or restrict
use of The Heart Laser System.
Despite receiving the CE Mark, The French Ministry of Health instituted a
commercial moratorium on TMR procedures in October 1997. In its opinion, the
procedure is considered to be experimental and should only be
22
<PAGE>
performed within the context of a clinical study. An evaluation of the safety of
The Heart Laser System is currently under review by a panel of French experts.
There can be no assurance that this moratorium will be lifted on a timely basis
or at all.
ASIA -- WE CANNOT MARKET OUR PRODUCT IN MAJOR ASIAN MARKETS UNTIL WE
RECEIVE GOVERNMENT APPROVAL
We believe that Japan represents the largest potential market for The
Heart Laser System in Asia. Prior to marketing The Heart Laser System in Japan,
we must receive approval from the Japanese Government. This approval requires a
clinical study in Japan with at least 60 patients. This study was completed in
1998. Although the results of this study have been submitted to the Japanese
Government, we do not know whether the clinical study will be sufficient or
when, if ever, we will receive approval to sell The Heart Laser System in Japan.
Additional regulatory applications are pending in Taiwan. We cannot be
sure when, if at all, we will obtain regulatory approval in any particular
country.
ASSERTING AND DEFENDING INTELLECTUAL PROPERTY RIGHTS MAY IMPACT OUR RESULTS OF
OPERATIONS
In our industry, competitors often assert intellectual property
infringement claims against one another. The success of our business depends on
our ability to successfully defend our intellectual property. Future litigation
may have a material impact on our financial condition even if we are successful
in marketing The Heart Laser System. We may not be successful in defending or
asserting our intellectual property rights.
An adverse outcome in any litigation or interference proceeding could
subject us to significant liabilities to third parties and require us to cease
using the technology that is at issue or to license the technology from third
parties. In addition, a finding that any of our intellectual property is invalid
could allow our competitors to more easily and cost-effectively compete with us.
Thus, an unfavorable outcome in any patent litigation or interference proceeding
could have a material adverse effect on our business, financial condition or
results of operations.
The cost to us of any patent litigation or interference proceeding
could be substantial. Uncertainties resulting from the initiation and
continuation of patent litigation or interference proceedings could have a
material adverse effect on our ability to compete in the marketplace. Patent
litigation and interference proceedings may also absorb significant management
time.
WE MAY BE SUBJECT TO PRODUCT LIABILITY LAWSUITS; OUR INSURANCE MAY NOT BE
SUFFICIENT TO COVER DAMAGES
We may be subject to product liability claims. The United States
Supreme Court has stated that compliance with FDA regulations will not shield a
company from common-law negligent design claims or manufacturing and labeling
claims based on state rules. Such claims may absorb significant management time
and could degrade the reputation of PLC and the marketability of The Heart Laser
System. If product liability claims are made with respect to our products, we
may need to recall the implicated product which could have a material adverse
effect on our business, financial condition and results of operations. In
addition, although we maintain product liability insurance with a per claim and
yearly aggregate maximum of $10 million, subject to a $50,000 per occurrence and
$250,000 aggregate self-insured deductible, we cannot be sure that our insurance
will be adequate to cover potential product liability lawsuits. Our insurance is
expensive and in the future may not be available on acceptable terms, if at all.
If a successful product liability claim or series of claims exceeded our
insurance coverage, it could have a material adverse effect on our business,
financial condition and results of operations.
WE ARE DEPENDENT ON CERTAIN SUPPLIERS
We believe that some of the components for our laser systems, most
notably the laser head, may only be available from one or a limited number of
suppliers. Any interruption in supply from these suppliers could prevent us from
meeting commercial demands for The Heart Laser System, which could have a
material adverse effect on our business, financial condition and results of
operations.
23
<PAGE>
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
A portion of our product sales are generated from operations outside of
the United States. Establishing and expanding international sales can be
expensive. Managing and overseeing foreign operations may be difficult and
products may not receive market acceptance. Risks of doing business outside the
U.S. include the following: agreements may be difficult to enforce and
receivables difficult to collect through a foreign country's legal system;
foreign customers may have longer payment cycles; foreign countries may impose
additional withholding taxes or otherwise tax PLC's foreign income, impose
tariffs or adopt other restrictions on foreign trade; U.S. export licenses may
be difficult to obtain; and the protection of intellectual property in foreign
countries may be more difficult to enforce. There can be no assurance that our
international business will grow or that any of the foregoing risks will not
result in a material adverse effect on PLC.
WE HAVE BEEN SUED FOR ALLEGED VIOLATIONS OF SECURITIES LAW
In July 1997, an FDA advisory panel recommended against approval of our
application to market The Heart Laser System. Following this recommendation, we
were named as defendant in 21 purported class action lawsuits filed between
August 1997 and November 1997 in the United States District Court for the
District of Massachusetts. The lawsuits seek an unspecified amount of damages in
connection with alleged violations of the federal securities laws based on our
failure to obtain a favorable FDA panel recommendation in 1997. Nineteen of
these complaints have been consolidated by the court into a single action for
pretrial purposes and two suits were voluntarily dismissed. The Company moved to
dismiss all of the remaining claims. On March 26, 1999, the court issued an
order dismissing some, but not all of the remaining claims. The parties both
filed motions for reconsideration and on October 12, 1999, the court dismissed
additional, but not all remaining claims. We cannot make a meaningful estimate
of the amount or range of loss that could result from an unfavorable outcome of
these lawsuits. We may not be able to pay the amount of any judgment against us.
An unfavorable outcome in this litigation could have a material adverse effect
on our business, financial position and results of operations.
BECAUSE WE ARE INCORPORATED IN CANADA, YOU MAY NOT BE ABLE TO ENFORCE JUDGMENTS
AGAINST US AND OUR CANADIAN DIRECTORS
Under Canadian law, you may not be able to enforce a judgment issued by
courts in the United States against us or our Canadian directors. The status of
the law in Canada is unclear as to whether a U.S. citizen can enforce a judgment
from a U.S. court in Canada for violations of U.S. securities laws. A separate
suit may need to be brought directly in Canada.
ANTITAKEOVER PROVISIONS MAY PREVENT YOU FROM REALIZING A PREMIUM RETURN
Provisions of Canadian law could make it more difficult for a third
party to acquire us, even if the acquisition would be beneficial to you.
Specifically, Canadian law requires any person who makes a tender offer that
would increase the person's stock ownership to more than 20% of our outstanding
common stock to make a tender offer for all of our common stock. These
provisions could prevent you from realizing the premium return that stockholders
may realize in conjunction with corporate takeovers.
In addition, the Company has three classes of directors, with
approximately one-third elected each year for a three-year term. These
provisions may have the effect of delaying or preventing a corporate takeover or
a change in our management. This could adversely affect the market price of your
common stock.
THE MARKET PRICE OF OUR STOCK MAY FALL IF OTHER STOCKHOLDERS SELL THEIR STOCK
If our stockholders sell substantial amounts of our common stock in the
public market, the market price of our common stock could fall. Such sales also
might make it more difficult for us to sell equity or equity-related securities
in the future at a price we deem appropriate.
24
<PAGE>
THE VALUE OF YOUR COMMON STOCK MAY DECREASE IF OTHER SECURITY HOLDERS EXERCISE
THEIR OPTIONS AND WARRANTS
As shown in the table below, we have reserved an additional 3,023,026
shares of common stock for future issuance upon exercise or conversion of
outstanding options and redeemable warrants.
<TABLE>
<CAPTION>
Range of Weighted Shares Reserved
Exercise/ Average Exercise/ for Future
Conversion Prices Conversion Price Issuance
----------------- ---------------- --------
<S> <C> <C> <C>
Options $2.00 - $8.88 $3.84 2,868,162
Redeemable Warrants $15.78 - $27.81 $21.33 154,864
-------
Total 3,023,026
=========
</TABLE>
We may issue additional options and warrants in the future. If any of these
securities are exercised, you may experience significant dilution in the market
value and earnings per share of your common stock.
WE HAVE NO INTENTION TO PAY DIVIDENDS
We have never paid any cash dividends on our common stock. We currently
intend to retain all future earnings, if any, for use in our business and do not
expect to pay any dividends in the foreseeable future.
OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
FORWARD-LOOKING STATEMENTS
This annual report and information incorporated by reference contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements deal with our current plans and expectations and
involve known and unknown risks and uncertainties. Statements containing terms
such as:
- believes,
- does not believe,
- plans,
- expects,
- intends,
- estimates,
- anticipates,
and other phrases of similar meaning are considered to contain uncertainty and
are forward-looking statements.
No forward-looking statement is a guarantee of future performance. Our
actual results could differ materially from those anticipated in these
forward-looking statements. We make cautionary statements in certain sections of
this annual report, including in the risk factors identified above, and in
materials incorporated herein by reference. You should read these cautionary
statements as being applicable to all related forward-looking statements,
wherever they appear in this annual report, in the materials referred to in this
annual report, in the materials incorporated by reference into this annual
report or in our press releases. You should not place undue reliance on any
forward-looking statement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
All financial statements required to be filed hereunder are filed as
Appendix A hereto, are listed under Item 14(a) and are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information required by this item is incorporated herein by
reference from the Company's Definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the Company's 2000 Annual
Meeting of Stockholders (the "Definitive Proxy Statement") under the caption
"Item No. 1 - Election of Directors".
ITEM 11. EXECUTIVE COMPENSATION
This information required by this item is incorporated herein by
reference from the Company's Definitive Proxy Statement under the caption "Item
No. 1 - Election of Directors".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information required by this item is incorporated herein by
reference from the Company's Definitive Proxy Statement under the caption "Item
No. 1 - Election of Directors - Beneficial Ownership of Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information required by this item is incorporated herein by
reference from the Company's Definitive Proxy Statement under the caption
"Certain Relationships and Related Transactions".
27
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS. The following documents are filed as Appendix
A hereto and are included as part of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
PLC SYSTEMS INC. PAGE
----
<S> <C>
Report of Independent Auditors..................................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 ...................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997................................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997................................................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997................................................. F-6
Notes to Consolidated Financial Statements......................................... F-7
Schedule II Valuation and Qualifying Accounts...................... S-1
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(b) REPORTS ON FORM 8-K
(1) On December 30, 1999, PLC filed a Current Report on Form
8-K with the Securities and Exchange Commission announcing that Mark R.
Tauscher had been appointed president, chief executive officer and a
director of PLC.
(c) EXHIBITS. The list of Exhibits filed as part of this Annual Report
on Form 10-K are set forth on the Exhibit Index immediately preceding such
exhibits, and is incorporated herein by this reference.
(d) FINANCIAL STATEMENT SCHEDULES. See Item 14(a) above.
28
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PLC SYSTEMS INC.
Date: March 30, 2000 By: /s/ Mark R. Tauscher
---------------------------------------
Mark R. Tauscher
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT
AND IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
Name Capacity Date
---- -------- ----
<S> <C> <C>
/s/ Mark R. Tauscher President and Chief Executive Officer March 30, 2000
- --------------------------------------- (Principal Executive Officer)
Mark R. Tauscher
/s/ James G. Thomasch Chief Financial Officer March 30, 2000
- --------------------------------------- (Principal Financial and Accounting Officer)
James G. Thomasch
/s/ Edward H. Pendergast Chairman of the Board of Directors March 30, 2000
- ---------------------------------------
Edward H. Pendergast
/s/ William C. Dow Director March 30, 2000
- ---------------------------------------
William C. Dow
/s/ Kevin J. Dunn Director March 30, 2000
- ---------------------------------------
Kevin J. Dunn
/s/ Alan H. Magazine Director March 30, 2000
- ---------------------------------------
Alan Magazine
/s/ H.B. Brent Norton, M.D. Director March 30, 2000
- ---------------------------------------
H.B. Brent Norton, M.D.
/s/ Kenneth J. Pulkonik Director March 30, 2000
- ---------------------------------------
Kenneth J. Pulkonik
/s/ Robert I. Rudko, PH.D. Director March 30, 2000
- ---------------------------------------
Robert I. Rudko, Ph.D.
/s/ Roberts A. Smith, PH.D. Director March 30, 2000
- ---------------------------------------
Roberts A. Smith, Ph.D.
</TABLE>
29
<PAGE>
APPENDIX A
PLC SYSTEMS INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 1999, 1998, 1997
<PAGE>
PLC SYSTEMS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors.........................................................................F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998...........................................F-3
Consolidated Statements of Operations for the years ended December 31, 1999, 1998
and 1997 ...........................................................................................F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999,
1998 and 1997.......................................................................................F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998
and 1997............................................................................................F-6
Notes to Consolidated Financial Statements.............................................................F-7
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts......................................................S-1
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To The Board of Directors and Stockholders of
PLC Systems Inc.
We have audited the accompanying consolidated balance sheets of PLC Systems Inc.
as of December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PLC
Systems Inc. at December 31, 1999 and 1998, and the consolidated results of its
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Ernst & Young LLP
Boston, Massachusetts
February 18, 2000,
except for Note 12,
as to which date is March 28, 2000
F - 2
<PAGE>
PLC SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
(In thousands)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,467 $ 4,846
Accounts receivable, net 1,894 2,262
Lease receivables, net 642 -
Inventories, net 2,348 2,953
Prepaid expenses and other current assets 460 547
------- -------
Total current assets 9,811 10,608
Equipment, furniture and leasehold improvements, net 3,336 5,091
Lease receivables, net 1,782 -
Other assets 390 558
------- -------
Total assets $15,319 $16,257
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,338 $ 986
Accrued clinical costs 769 1,016
Accrued compensation 653 989
Accrued expenses 630 1,199
Deferred revenue 138 195
Secured borrowings 824 240
Convertible debentures - 934
------- -------
Total current liabilities 4,352 5,559
Capital lease obligations - 37
Secured borrowings 2,082 -
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value, 5,000 shares authorized,
none issued and outstanding
Common stock, no par value, unlimited shares authorized,
21,223 shares issued and outstanding in 1999,
50,000 shares authorized, and
19,740 shares issued and outstanding in 1998 84,380 79,521
Accumulated deficit (74,691) (68,136)
Accumulated other comprehensive loss (804) (724)
------- -------
8,885 10,661
------- -------
Total liabilities and stockholders' equity $15,319 $16,257
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 3
<PAGE>
PLC SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C>
Revenue:
Product sales $ 8,400 $ 3,088 $ 5,687
Placement and service fees 3,236 2,605 3,254
------- -------- --------
Total revenues 11,636 5,693 8,941
Cost of revenues:
Product sales 3,615 1,945 2,721
Placement and service fees 2,061 2,622 2,595
------- -------- --------
Total cost of revenues 5,676 4,567 5,316
------- -------- --------
Gross Profit 5,960 1,126 3,625
Operating expenses:
Selling, general and administrative 10,054 13,718 13,049
Research and development 2,672 4,468 5,158
------- -------- --------
Total operating expenses 12,726 18,186 18,207
------- -------- --------
Loss from operations (6,766) (17,060) (14,582)
Other income, net 211 457 178
------- -------- --------
Net loss $(6,555) $(16,603) $(14,404)
======= ======== ========
Net loss per share - Basic and Diluted $ (.32) $ (.86) $ (.84)
Shares used to compute net loss per share
- Basic and Diluted 20,675 19,218 17,050
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 4
<PAGE>
PLC SYSTEMS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
------------ Accumulated Comprehensive
Shares Amount Deficit Loss Total
------ ------ ------- ---- ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 16,513 $ 54,030 $(37,129) $ (434) $ 16,467
Exercise of stock options 435 1,909 - - 1,909
Exercise of warrants 17 94 - - 94
Conversion of debentures 1,403 14,465 - - 14,465
Issuance of warrants - 617 - - 617
Comprehensive loss:
Net loss - - (14,404) - (14,404)
Foreign currency translation - - - (139) (139)
--------
Total comprehensive loss (14,543)
-------- -------- -------- -------- --------
Balance, December 31, 1997 18,368 71,115 (51,533) (573) 19,009
Exercise of stock options 142 623 - - 623
Conversion of 5% debentures due 2002 577 3,923 - - 3,923
Conversion of debentures due 2003 653 3,810 - - 3,810
Issuance of warrants - 50 - - 50
Comprehensive loss:
Net loss - - (16,603) - (16,603)
Foreign currency translation - - - (151) (151)
--------
Total comprehensive loss (16,754)
-------- -------- -------- -------- --------
Balance, December 31, 1998 19,740 $ 79,521 $(68,136) $ (724) $ 10,661
Exercise of stock options 4 17 - - 17
Conversion of debentures due 2003 163 972 - - 972
Issuance of common stock 1,316 3,786 3,786
Compensation expense - 84 - - 84
Comprehensive loss:
Net loss - - (6,555) - (6,555)
Foreign currency translation (80) (80)
--------
Total comprehensive loss (6,635)
-------- -------- -------- -------- --------
Balance, December 31, 1999 21,223 $ 84,380 $(74,691) $ (804) $ 8,885
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F - 5
<PAGE>
PLC SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Operating activities:
Net loss $(6,555) $(16,603) $(14,404)
Adjustments to reconcile net loss to
net cash used for operating activities:
Depreciation and amortization 2,378 3,170 2,007
Compensation on stock options 84 - -
Change in assets and liabilities:
Accounts receivable 313 (973) 1,389
Inventories 607 (475) (136)
Prepaid expenses and other assets 234 89 (20)
Accounts payable 342 82 24
Deferred revenue (57) 142 (77)
Accrued liabilities (1,139) 304 1,163
------- ------- --------
Net cash used for operating activities (3,793) (14,264) (10,054)
Investing activities:
Purchase of fixed assets (1,166) (2,574) (2,642)
Retirement of fixed assets at net book value 581 - -
Purchase of marketable securities - (1,986) (17,827)
Maturities of marketable securities - 14,831 10,452
------- ------- --------
Net cash provided by (used for) investing activities (585) 10,271 (10,017)
Financing activities:
Net proceeds from sale of common stock 3,803 623 2,003
Secured borrowing 242 240 -
Principal payments on capital lease obligations (66) (79) (25)
Issuance of 5% Convertible Debentures, net of
issuance costs - - 18,779
Issuance of Convertible Debentures, net of issuance costs - 4,659 -
------- ------- --------
Net cash provided by financing activities 3,979 5,443 20,757
Effect of exchange rate changes on cash and cash equivalents 20 (88) (241)
------- ------- --------
Net increase (decrease) in cash and cash equivalents (379) 1,362 445
Cash and cash equivalents at beginning of year 4,846 3,484 3,039
------- ------- --------
Cash and cash equivalents at end of year $ 4,467 $ 4,846 $ 3,484
======= ======= =======
Non-Cash Financing Activities:
Conversion of Convertible Debentures and accrued
interest into Common Stock $ 972 $ 7,733 $ 14,465
Ascribed warrant value - 50 617
Capital leases - - 150
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 6
<PAGE>
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. NATURE OF BUSINESS
PLC Systems Inc. ("PLC" or the "Company") has developed a patented
high-powered carbon dioxide laser system known as The Heart Laser System for
use in the treatment of coronary artery disease in a surgical laser
procedure, pioneered by the Company and its clinical investigators, known as
transmyocardial revascularization ("TMR"). TMR is a new laser based treatment
for relieving debilitating pain in patients suffering from severe coronary
artery disease ("CAD"). The Company's CO2 laser is used by a cardiovascular
surgeon to create between 20 and 40 tiny channels in the heart wall of a
patient suffering from severe CAD. Each TMR procedure requires a sterile,
single use, TMR kit containing assorted TMR handpieces, drapes and other
disposable items.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of PLC
Systems Inc. (PLC or the "Company") and its five wholly owned subsidiaries, PLC
Medical Systems, Inc., PLC Sistemas Medicos GmbH, PLC Medical Systems AG, PLC
Medical Systems Asia/Pacific Pte Ltd, and PLC Medical Systems Australia Pty Ltd.
All intercompany accounts and transactions have been eliminated. Certain prior
year amounts may have been reclassified to conform to the current year's
presentation.
These consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP). Had the
statements been prepared in accordance with Canadian GAAP, certain transactions
in 1998 would have been accounted for differently. Under Canadian GAAP, the
Convertible Debentures, net of issuance costs, would be classified as equity
since the Company has the right to settle the principal and interest amounts due
on the debentures by issuing common stock.
F - 7
<PAGE>
Accordingly, if the accompanying financial statements had been prepared
under Canadian GAAP at December 31, 1998, common stock would be $934,000 greater
due to the inclusion of the Convertible Debentures and accrued expenses would be
reduced by $33,000 in 1998 due to the elimination of accrued interest on the
debt. In addition, the accumulated deficit would be reduced by $252,000 in 1998
as a result of the elimination of interest and other debt issuance expenses
included in the accompanying statement of operations for the year ended December
31, 1998 as required under U.S. GAAP. In 1999, the financial statements
presented are in accordance with both U.S. GAAP and Canadian GAAP.
CASH AND MARKETABLE SECURITIES
Investments with a maturity of three months or less at the date of
purchase are considered to be cash equivalents and those with maturities greater
than three months are considered to be marketable securities. Marketable
securities are stated at cost, which approximates fair value. Cash equivalents
and marketable securities, which are classified as available-for-sale
securities, consist primarily of time deposits, bankers acceptances and
obligations of U.S. government and agencies.
INVENTORIES
Inventory is stated at the lower of cost or market value.
EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, fixtures and leasehold improvements are stated on the basis
of cost. Depreciation is computed principally on the straight-line method for
financial reporting purposes and on accelerated methods for income tax purposes.
Depreciation and amortization are based on the following useful lives:
<TABLE>
<CAPTION>
<S> <C>
Equipment 3-5 years
Equipment under placement contracts Life of contract
Office furniture and fixtures 5 years
Equipment under capital lease 5 years
Leasehold improvements Life of lease
</TABLE>
The Company reviews and evaluates long-lived assets for impairment on a
regular basis. In management's opinion, long-lived assets are not impaired as of
the balance sheet dates presented. The amounts capitalized have future value to
the Company.
REVENUE RECOGNITION
The Company sells it principal product, The Heart Laser System, and
related disposable surgical kits to hospital customers both directly and through
distributors. Revenues from the sale of disposable kits are recorded as product
sales at the time of shipment. Revenues from the sale or lease of The Heart
Laser System, which result in substantially all the risks and benefits of
ownership of The Heart Laser System being transferred to the customer, are
recorded as product at the time of ownership transfer. In sales transactions
this typically occurs at time of shipment. In lease transactions this typically
occurs upon lease commencement, at which time the Company records revenue equal
to the present value of the guaranteed minimum lease payments.
The Company also installs The Heart Laser System at hospitals under
placement agreements which do not transfer substantial ownership of the
equipment to the customer. Revenues from these transactions are recognized over
the life of the placement agreement in accordance with the specific terms of the
contract.
Revenues from service and maintenance contracts are recognized ratably
over the life of the contract.
F - 8
<PAGE>
FOREIGN CURRENCY TRANSLATION
Assets and liabilities are translated into U.S. dollars at current
exchange rates, while income and expense items are translated at average rates
of exchange prevailing during the year. Exchange gains and losses arising from
translation are accumulated as a separate component of stockholders' equity.
Gains and losses from foreign currency transactions are recorded in the
accompanying statements of operations and are not material.
NET LOSS PER SHARE
Basic earnings per share is computed based only on the weighted average
number of common shares outstanding during the period. 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 stock option programs and convertible debt financing. In calculating
diluted earnings per share, the dilutive effect of stock options is computed
using the average market price for the period unless their inclusion would be
antidilutive.
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to
employees and certain other individuals with exercise prices equal to the fair
value of the shares at the dates of grant. The Company has adopted the
disclosure only provisions of Statement of Financial Accounting Standards No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("FAS 123") and will continue to
account for its stock option plans in accordance with the provisions of APB 25
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The Company
has provided a valuation allowance for all deferred tax assets due to the
inability to assume the realization of such tax benefits in the foreseeable
future.
1. INVENTORIES
Inventories consist of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Raw materials $1,044 $1,035
Work in process 439 145
Finished goods 865 1,773
------ ------
$2,348 $2,953
====== ======
</TABLE>
2. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements consist of the
following at December 31 (in thousands):
F - 9
<PAGE>
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Equipment $ 2,614 $ 2,461
Equipment under placement contracts 6,354 6,617
Office furniture and fixtures 881 929
Equipment under capital lease 429 429
Leasehold improvements 591 587
------- -------
10,869 11,023
Less accumulated depreciation
and amortization 7,533 5,932
------- -------
$ 3,336 $ 5,091
======= =======
</TABLE>
Depreciation expense was $2,340,000, $3,116,000 and $1,894,000,
respectively, for the years ended December 31, 1999, 1998 and 1997.
5. LEGAL PROCEEDINGS
In September 1996, CardioGenesis filed a civil lawsuit in the United
States District Court for the Northern District of California asking the court
to declare the Company's synchronization patent (U.S. Patent No. 5,125,926)
invalid and unenforceable, or, alternatively, to find that CardioGenesis' TMR
and PMR lasers do not infringe this patent. The Company filed a counterclaim
alleging that all of CardioGenesis' TMR and PMR lasers infringe U.S. Patent No.
5,125,926. In January 1997, CardioGenesis filed an opposition in the European
Patent Office to have the Company's German synchronization patent declared
invalid. In April 1997, the Company filed an infringement lawsuit against
CardioGenesis and one of its distributors in the Munich District Court alleging
that CardioGenesis' TMR and PMR lasers infringe the Company's German
synchronization patent. The PLC patents at issue in these lawsuits cover the
Company's synchronization technology, which the Company believes is a critical
factor in increasing the safety of TMR and PMR procedures.
In January 1999, the Company settled its outstanding patent
infringement litigation with CardioGenesis, who subsequently merged with Eclipse
Surgical Technologies, Inc. Under the settlement, CardioGenesis agreed that U.S.
Patent No. 5,125,926 and related international patents of the Company are valid
and enforceable. PLC granted CardioGenesis a non-exclusive worldwide license to
the patents in exchange for payment of a license fee and ongoing royalties over
the life of the patents (at least 10 years unless the patents are all held
invalid in future lawsuits).
As part of the settlement, CardioGenesis agreed to pay the Company:
- a minimum of $2.5 million over the next 42 months; and
- license fees and ongoing royalties on sales of all covered
products for at least 10 years (unless the patents are all
held invalid in future lawsuits).
In July 1997, a U.S. Food and Drug Administration ("FDA") advisory
panel recommended against approval of the Company's application to market The
Heart Laser System in the United States. Following this recommendation, the
Company was named as defendant in 21 purported class action lawsuits filed
between August 1997 and November 1997 in the United States District Court for
the District of Massachusetts. The lawsuits seek an unspecified amount 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 has also been named as a defendant in a lawsuit
filed in Massachusetts Superior Court in September 1998 (hereafter referred
to as the "state suit") seeking over $2 million in damages for alleged
negligent misrepresentations and fraud arising from the Company's failure to
obtain a favorable FDA recommendation in 1997. The Company cannot make a
meaningful estimate of the amount or range of loss that could result from an
unfavorable outcome of these
F - 10
<PAGE>
lawsuits, 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 these litigation matters 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 has 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. A
hearing on the merits of the case has been held, however no decision has been
rendered and a meaningful estimate of the loss that could result from this
matter can not be made. However, the Company does not believe that the loss,
if any, would have a material adverse impact on the Company's financial
condition.
6. 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. In 1998, $4,000,000 of
the convertible debentures outstanding 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.
In connection with the April 1998 financing, the Company issued
redeemable warrants to purchase 4,864 shares of its Common Stock at $19.53 per
share. If the average closing sale price of its Common Stock for any consecutive
thirty trading day period commencing April 23, 1999 exceeds the exercise price
by more than 50%, the Company has the right, exercisable at any time upon 30
days notice to the holder, to redeem the warrants at a price of $.10 per
warrant. The warrants expire on April 23, 2003. The detachable warrants were
valued at $50,000 (using the Black-Scholes formula), classified as a component
of equity, and disclosed separately in the Consolidated Statement of
Stockholders' Equity.
7. STOCKHOLDERS' EQUITY
The Company's 1992 Stock Option Plan ("1992 Plan"), the 1993 Stock
Option Plan ("1993 Plan") and the 1995 Stock Option Plan ("1995 Plan") allow for
the granting of options aggregating 2,505,000 shares of common stock. All of the
Plans consist of both incentive stock options and non-qualified options.
Incentive stock options are issuable only to employees of the Company, while
non-qualified options may be issued to non-employee directors, consultants, and
others, as well as to employees. The options granted under all the Plans
generally become
F - 11
<PAGE>
exercisable ratably over one to three years from the date of grant, or based on
the attainment of specific performance criteria, and expire ten years from the
date of grant.
The Company's 1993 Formula Stock Option Plan (the "Formula Plan")
provides for the grant of non-qualified options to non-employee directors to
purchase up to 250,000 shares of common stock. The Plan is administered by the
Board of Directors. Annually, the Company grants 10,000 options to each of its
non-employee directors. A director must attend at least 60% of all Board
meetings, as well as committee meetings, to receive the grant. The options vest
over one year on a quarterly basis and expire ten years from the date of grant.
The exercise price is the fair market value of the Company's common stock on the
last business day preceding the date of grant. As of December 31, 1999, the
options are fully exercisable and expire ten years from the date of grant.
The Company's 1997 Executive Stock Option Plan ("1997 Executive Plan")
provides for the grant of non-qualified options to officers and directors of the
Company to purchase up to 1,000,000 shares of common stock. The
options vest over time and/or the attainment of specific performance criteria.
The per share exercise price of the common stock subject to an
incentive stock option may not be less than the fair market value of the common
stock on the date the option is granted. The Company must grant non-qualified
options at an exercise price of at least 85% of the fair market value of the
common stock on the date the option is granted.
During 1998, the Board of Directors (together with its Compensation and
Executive Committees) adopted the following incentive compensation programs:
a.) In January 1998, the outstanding options of all employees
(except executive officers and directors) having a higher exercise price were
repriced to $8.88 per share. As a result, the exercise price of options to
purchase 526,784 shares of Common Stock was reduced to $8.88 per share.
b.) In August, 1998, the outstanding options of all directors and
executive employees having a higher exercise price were repriced to $7.75 per
share. As a result, the exercise price of options to purchase 1,373,500 shares
of Common Stock was reduced to $7.75 per share.
c.) In September 1998, a new Senior Management Investment Program
("SMIP") was adopted to promote investment in the Company's stock by directors
and members of the Company's senior management team. Under the SMIP, individuals
who purchased additional shares of the Company's stock between September 15,
1998 and December 15, 1998 (the "Participants") received options to purchase an
additional 1.5 shares of Common Stock at an exercise price equal to the
Participant's share purchase price (the "Share Purchase Price"). In addition,
Participants received ten "option credits" for each share of Common Stock
purchased between September 15, 1998 and December 15, 1998. Participants could
use each "option credit" to: (i) reduce the exercise price of an outstanding
option (vested or unvested) to purchase one share of Common Stock to the
Participant's Share Purchase Price; or (ii) extend the expiration date of any
outstanding option (vested or unvested) for an additional three years; or (iii)
acquire new vested options with an exercise price equal to the Participant's
Share Purchase Price (at a rate of 6.67 option credits for each new option to
purchase one share of Common Stock). Under this program, the Company granted
options to purchase an additional 331,575 shares of Common Stock at exercise
prices ranging from $3.875 to $6.625 per share . Furthermore, the Company has
reduced the exercise prices of options to purchase 1,243,500 shares of Common
Stock to new exercise prices ranging from $4.6875 to $5.5625.
d.) In December 1998, the outstanding options held by employees not
eligible to participate in the SMIP having a higher exercise price were repriced
to $4.875 per share. As a result, the exercise price of options to purchase
332,316 shares of Common Stock were repriced to $4.875 per share.
The following is a summary of option activity under all Plans (in
thousands, except per option data):
F - 12
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year 2,788 2,187 1,914
Granted 1,204 823 938
Exercised (4) (142) (435)
Canceled (1,282) (80) (230)
------ ----- ------
Outstanding at end of year 2,706 2,788 2,187
===== ===== =====
Exercisable at end of year 1,681 1,711 878
Available for grant at end of year 152 71 463
1999 1998 1997
---- ---- ----
Weighted - average exercise price:
Outstanding at beginning of year $4.88 $8.75 $8.18
Granted $2.53 $5.39 $13.56
Canceled $5.46 $9.09 $11.50
Exercised $3.91 $4.39 $4.39
Outstanding at end of year $3.84 $5.16 $10.84
Exercisable at end of year $4.47 $4.88 $8.75
Weighted - average fair value of
Options granted during the year $1.44 $3.33 $8.20
</TABLE>
<TABLE>
<CAPTION>
Range of Exercise Prices
------------------------
$2.00 - $5.00 $5.01 - $8.88 $2.00 - $8.88
------------- ------------- -------------
Options Outstanding:
--------------------
<S> <C> <C> <C>
Number (in thousands) 2,184 522 2,706
Weighted-Average Remaining
Contractual Life 7.71 7.43 7.66
Weighted-Average
Exercise Price $3.32 $6.03 $3.84
Options Exercisable:
--------------------
Number (in thousands) 1,210 471 1,681
Weighted-Average
Exercise Price $3.91 $5.89 $4.47
</TABLE>
Pursuant to the requirements of FAS 123, the following are the pro
forma net loss and net loss per share for 1999, 1998 and 1997, as if the
compensation cost for the option plans had been determined based on the fair
value at the grant date for grants in 1999, 1998 and 1997, consistent with the
provisions of FAS 123.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ---
<S> <C> <C> <C>
Proforma net loss (in thousands) $(5,163) $(22,438) $(16,523)
Proforma net loss per share $ (.25) $ (1.17) $ (.97)
</TABLE>
F - 13
<PAGE>
The fair value of options issued at the date of grant were estimated
using the Black-Scholes model with following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- -------
<S> <C> <C> <C>
Expected life (years) 2 2 2
Interest rate 5.87% 5.53% 6.01%
Volatility 1.052 .761 1.141
</TABLE>
The effects on pro forma disclosures of applying FAS 123 are not likely
to be representative of the effects on pro forma disclosures of future years.
As of December 31, 1999, the Company had the following outstanding
warrants to purchase common stock: 69,875 shares at $27.81 per share expiring
July 22, 2002; 80,125 shares at $15.78 per share expiring August 14, 2002; and
4,864 shares at $19.53 per share expiring April 23, 2003.
At December 31, 1999, there were 3,023,026 shares of authorized but
unissued common stock reserved for issuance under all stock option plans and
stock warrants.
In March 1999, the Company obtained a provisional equity financing
commitment of up to $8 million from a major institutional investor. In 1999, the
Company had sold 649,474 shares of common stock under this commitment, resulting
in proceeds to the Company (net of all issuance costs payable upon closing) of
approximately $1,900,000. This 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 to the Company of approximately $1,900,000.
The Company has 5,000,000 authorized shares of preferred stock. The
Board of Directors is authorized to fix designations, relative rights,
preferences and limitations in the preferred stock at time of issuance.
The Company has never declared nor paid dividends on any of its capital
stock and does not expect to do so in the foreseeable future.
8. LEASE RECEIVABLES
The Company has entered into 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
complement 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 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 the leasing
company is recognized as a secured borrowing. Interest income and interest
expense related to the lease receivables and secured borrowing, respectively, is
recognized over time using the effective interest method. Equal amounts of
interest income and interest expense are included as a component of other
income, net, in the Consolidated Statement of Operations.
9. LEASE COMMITMENTS
The Company occupies its worldwide facilities under operating lease
agreements, which expire through March 2002. The Company has the option to renew
the U.S. facilities lease for up to six years. In addition to the
F - 14
<PAGE>
minimum lease payments, the agreement requires payment of the Company's pro-rata
share of property taxes and building operating expenses. The Company also leases
certain equipment.
As of December 31, 1999, future minimum lease payments are as follows
(in thousands):
<TABLE>
<CAPTION>
Future Minimum
Year Lease Payments
---- --------------
<S> <C>
2000 $327
2001 213
2002 12
----
$552
====
</TABLE>
Total rent expense was $424,000 in 1999, $375,000 in 1998 and $458,000
in 1997.
10. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets as of December 31 are as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net U.S. operating loss carryforwards $16,279 $13,791
Net foreign operating loss carryforwards 1,775 2,263
Intercompany profit 189 313
Accrued clinical costs 307 406
Research & development credits 761 679
Inventory and warranty reserves 484 497
Alternative minimum tax credit 63 63
Accrued salaries 200 195
Deferred revenue 55 173
Other (62) 4
-------- -------
Total deferred tax assets 20,051 18,384
Valuation allowance (20,051) (18,384)
-------- -------
Net deferred tax assets $ - $ -
======== =======
</TABLE>
The valuation allowance increased by approximately $1,700,000 primarily
due to additional net operating loss carryforwards. The Company recorded the
valuation allowance due to the uncertainty of the realizability of the related
net deferred tax asset of $20,051,000.
Loss before taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Domestic $(5,027) $(14,137) $(11,340)
Foreign (1,528) (2,472) (3,064)
------- -------- --------
$(6,555) $(16,603) $(14,404)
======= ======== ========
</TABLE>
Income taxes (benefit) computed at the federal statutory rate differ
from amounts provided as follows (in thousands):
F - 15
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory income tax benefit $(2,229) $(5,645) $(4,898)
Utilization of loss carryforwards (290) (85) -
Unbenefited U.S. losses 1,709 4,807 3,856
Unbenefited foreign losses 810 923 1,042
-------- -------- --------
Benefit for income taxes $ - $ - $ -
======== ======== ========
</TABLE>
At December 31, 1999 the Company had U.S. net operating loss
carryforwards available to reduce future taxable income of approximately $40.8
million, which expire at various dates through 2013. In addition, the Company
had foreign net operating loss carryforwards of approximately $4.4 million.
In 1999, certain subsidiaries were liquidated. The foreign net
operating loss carryforwards were reduced for amounts that will not be utilized
as a result of the liquidations.
11. SEGMENT INFORMATION
The Company operates in one industry segment - the development,
manufacture and sales of medical lasers and related products. Net sales to
unaffiliated customers (by origin) are summarized below (in thousands).
<TABLE>
<CAPTION>
North
America Europe Other Eliminations Total
----------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1999
Net sales to unaffiliated $10,196 $1,440 $ - $ - $ 11,636
customers
Long-lived assets $ 391 $ - $ - $ - $ 391
1998
Net sales to unaffiliated
Customers
$ 3,992 $1,615 $ 86 $ - $ 5,693
Long-lived assets $ 558 $ - $ - $ - $ 558
1997
Net sales to unaffiliated
Customers $ 4,092 $4,683 $166 $ - $ 8,941
Long-lived assets $ 701 $ - $ - $ - $ 701
</TABLE>
No one customer accounted for more than 10% of the Company's revenues
for the year ended December 31, 1999 or 1998. Approximately 20% of the Company's
revenues for the year ended December 31, 1997 came from one customer, Imatron
Japan. The Company believes that its exposure to concentrations of credit risk
is not significant based on experiences with these customers. In addition,
letters of credit or payment in advance are required in credit risk situations.
The Company does not believe its future revenues to be dependent on those
generated from any single customer.
12. SUBSEQUENT EVENT
On March 28, 2000, the Company closed an equity financing with two
institutional investors at $2.00 per share. In conjunction with this offer,
the Company sold 2,683,000 shares of common stock, resulting in proceeds to
the Company (net of all issuance costs) of approximately $5,000,000 and
issued the placement agent a three year warrant for 61,326 shares of common
stock at $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.
F - 16
<PAGE>
Schedule II
PLC SYSTEMS INC.
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions Deductions
--------- ----------
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Period
- ----------- --------- -------- ------
<S> <C> <C> <C> <C>
For the Year Ended December 31, 1999
Allowance for Doubtful Accounts $228,000 $190,000 $ 0 $418,000
For the Year Ended December 31, 1998
Allowance for Doubtful Accounts $140,000 $100,000 $12,000 $228,000
For the Year Ended December 31, 1997
Allowance for Doubtful Accounts $ 28,000 $112,000 $ 0 $140,000
</TABLE>
PLC SYSTEMS INC.
QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31 Total
<S> <C> <C> <C> <C> <C>
1999
Total revenue $ 2,846 $ 3,492 $ 2,542 $2,756 $11,636
Gross profit 1,484 1,720 1,232 1,524 5,960
Loss from operations (2,206) (1,830) (1,443) (1,287) (6,766)
Net loss (2,199) (1,705) (1,395) (1,256) (6,555)
Net loss per share, basic and diluted (.11) (.08) (.07) (.06) (.32)
1998
Total revenue $ 945 $ 680 $ 1,615 $2,453 $5,693
Gross profit (loss) 257 (351) 320 900 1,126
Loss from operations (4,087) (5,569) (4,032) (3,372) (17,060)
Net loss (3,936) (5,402) (4,006) (3,259) (16,603)
Net loss per share, basic and diluted (.21) (.28) (.21) (.17) (.86)
</TABLE>
S - 1
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Document
------ -----------------------
3.1 Certificate of Incorporation, incorporated by reference to the
Registrant's registration statement on Form S-1 (SEC File No.
33-48340) and amendments thereto, as previously filed with the
Securities and Exchange Commission.
3.2* Articles of Continuance, pursuant to the Yukon Business
Corporations Act.
3.3* By-Law No. 1, a By-Law relating generally to the transaction of the
business and affairs of PLC Systems, Inc.
4.1 Form of Common Stock Certificate, incorporated by reference to the
Registrant's registration statement on Form S-1 (SEC File No.
33-48340) and amendments thereto, as previously filed with the
Securities and Exchange Commission.
10.1 1992 Stock Option Plan, incorporated by reference to the
Registrant's registration statement on Form S-1 (SEC File No.
33-48340) and amendments thereto, as previously filed with the
Securities and Exchange Commission.
10.2 1993 Stock Option Plan, incorporated by reference to the
Registrant's registration statement on Form S-1 (SEC File No.
33-58258) and amendments thereto, as previously filed with the
Securities and Exchange Commission.
10.3 1993 Formula Stock Option Plan, incorporated by reference to the
Registrant's registration statement on Form S-1 (SEC File No.
33-58258) and amendments thereto, as previously filed with the
Securities and Exchange Commission.
10.4 Revised Form of Key Employee Agreement for Dr. Robert I. Rudko,
incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994 (SEC File No. 1-11388),
as previously filed with the Securities and Exchange Commission.
10.5 1995 Stock Option Plan, incorporated by reference to the
Registrant's Registration Statement on Form S-8 (SEC File No.
33-95168), as previously filed with the Securities and Exchange
Commission.
10.6 Convertible Debenture Agreement, incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 (SEC File No. 1-11388), as previously filed with the
Securities and Exchange Commission.
10.7 First Amendment to Convertible Debenture Agreement, incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 (SEC File No. 1-11388), as previously
filed with the Securities and Exchange Commission.
10.8 Second Amendment to Convertible Debenture Agreement, incorporated
by reference to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997 (SEC File No. 1-11388), as
previously filed with the Securities and Exchange Commission.
10.9 Form of Convertible Debenture, incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 (SEC File No. 1-11388), as previously filed with the
Securities and Exchange Commission.
10.10 Form of Redeemable Warrant, incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 (SEC File No. 1-11388), as previously filed with the
Securities and Exchange Commission.
10.11 Registration Rights Agreement, incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 (SEC File No. 1-11388), as previously filed with the
Securities and Exchange Commission.
10.12 Form of Key Employment Agreement for William C. Dow, incorporated
by reference to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 (SEC File No. 1-11388), as
previously filed with the Securities and Exchange Commission.
10.13 1997 Executive Stock Option Plan, incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 (SEC File No. 1-11388), as previously filed with
the Securities and Exchange Commission.
10.14 Convertible Debenture Purchase Agreement dated as of April 23, 1998
between Southbrook International Investment, Ltd., Brown Simpson
Strategic Growth Fund, L.P. and Brown
<PAGE>
Simpson Strategic Growth Fund, Ltd. and the Registrant,
incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the Quarter ended March 31, 1998 (File No. 1-11388),
as previously filed with the Securities and Exchange Commission.
10.15 Form of Convertible Debenture, incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the Quarter ended
March 31, 1998 (File No. 1-11388), as previously filed with the
Securities and Exchange Commission.
10.16 Form of Redeemable Warrant, incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the Quarter ended
March 31, 1998 (File No. 1-11388), as previously filed with the
Securities and Exchange Commission.
10.17 Registration Rights Agreement dated as of April 23, 1998 between
Southbrook International Investment, Ltd., Brown Simpson Strategic
Growth Fund, L.P. and Brown Simpson Strategic Growth Fund, Ltd. and
the Registrant, incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the Quarter ended March 31, 1998
(File No. 1-11388), as previously filed with the Securities and
Exchange Commission.
10.18 Key Employee Agreement of Robert Svikhart, incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the
Quarter ended June 30, 1998 (File No. 1-11388), as previously filed
with the Securities and Exchange Commission.
10.19 Form of Common Stock Purchase Agreement, incorporated by reference
to the Registrant's Current Report on Form 8-K dated March 12, 1999
(File No. 1-11388), as previously filed with the Securities and
Exchange Commission.
21.1 * Subsidiaries of the Registrant.
23.1 * Consent of Ernst & Young LLP.
27.1 * Financial Data Schedule.
* Filed with this Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.
<PAGE>
Exhibit 3.2
YUKON BUSINESS CORPORATIONS ACT
(SECTION 190)
FORM 3-01
ARTICLES OF CONTINUANCE
- --------------------------------------------------------------------------------
1. NAME OF CORPORATION:
PLC SYSTEMS INC.
- --------------------------------------------------------------------------------
2. THE CLASSES AND ANY MAXIMUM NUMBER OF SHARES THAT THE CORPORATION IS
AUTHORIZED TO ISSUE:
The Corporation is authorized to issue an unlimited number of common shares
and an unlimited number of preferred shares, issuable in series, having the
special rights and restrictions set forth in Appendix "1" hereto.
-------------------------------------------------------------------------------
3. RESTRICTIONS, IF ANY, ON SHARE TRANSFERS:
None.
- --------------------------------------------------------------------------------
4. NUMBER (OR MINIMUM OR MAXIMUM NUMBER) OF DIRECTORS:
Minimum of 3 Maximum of 20
- --------------------------------------------------------------------------------
5. RESTRICTIONS, IF ANY, ON BUSINESS THE CORPORATION MAY CARRY ON:
The Corporation is restricted from carrying on the business of a railway,
steamship, air transport, canal, telegraph or irrigation company.
-------------------------------------------------------------------------------
6. IF CHANGE OF NAME EFFECTED, PREVIOUS NAME:
Not application.
- --------------------------------------------------------------------------------
7. DETAILS OF INCORPORATION:
The Corporation was incorporated on March 3, 1987 under the name "Videx
Communication Systems Inc." by registration of memorandum pursuant to the
Company Act (British Columbia) under Certificate of Incorporation No. 322734.
The Corporation changed its name on May 20, 1987 to PLC Systems Inc.
- --------------------------------------------------------------------------------
8. OTHER PROVISIONS, IF ANY:
See attached Appendix "2" hereto.
- --------------------------------------------------------------------------------
9. DATE March 4, 1999 SIGNATURE /s/ Jennifer T. Miller TITLE Secretary
- --------------------------------------------------------------------------------
<PAGE>
ARTICLES OF CONTINUANCE OF
PLC SYSTEMS INC.
(THE "CORPORATION")
The following special rights and restrictions shall be attached to the preferred
shares ("preferred shares"):
(i) The preferred shares as a class shall have attached thereto the
special rights and restrictions specified in this Appendix "1";
(ii) Preferred shares my at any firm and from time, to time be issued in one
or more series. The directors may from time to time by resolution
passed before the issue of any preferred shares of any particular
series, alter the Articles of the Company to fix the number of
preferred shares of any particular series, alter the Articles of the
Company to fix the number of preferred shares in, and to determine the
designation of the preferred shares of, that series and alter the
Articles to create, define and attach special rights and restrictions
to the preferred shares of that series including, but without in any
way limiting or restricting the generality of the foregoing: the rate
or amount of dividends, whether cumulative, non-cumulative or partially
cumulative; the dates, places and currencies of payment thereof, the
consideration for, and the terms and conditions of, any purchase for
cancellation or redemption thereof, including redemption after a fixed
term or at a premium; conversion or exchange rights or rights of
retraction (provided that any such conversion or exchange rights or
rights of retraction shall be in accordance with the provisions
existing at the time of creation of such series relating to conversion,
exchange, or retraction as prescribed by the policies of the American
Stock Exchange or any other stock exchange on which the shares of the
Company are then listed); the terms and conditions of any share
purchase plan or sinking fund; and voting rights and restrictions, but
no special right or restriction so created, defined or attached shall
contravene the provisions of subclauses (iii) and (iv) of this Appendix
"1";
(iii) Holders of preferred shares shall be entitled, on the distribution of
assets of the Company or on the liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary, or on any other
distribution of assets of the Company among its shareholders for the
purpose of winding-up its affairs, to receive before any distribution
to be made to holders of common shares or any other shares of the
Company ranking junior to the preferred shares with respect to
repayment of capital, the amount due to such holders of preferred
shares in accordance with the Articles with respect to each preferred
share held by them, together with all accrued and unpaid cumulative
dividends, (if any and if preferential) thereon, and all declared and
unpaid non-cumulative dividends (if any and if preferential) thereon.
After payment to holders of preferred shares of the amounts so payable
to them, such holders shall not be entitled to share in any further
distribution of the property or assets of the Company except as
specifically provided in the special rights and restrictions attached
to any particular series of the preferred shares; and
(iv) Except for such voting rights as may be attached to any series of the
preferred shares by the directors, holders of preferred shares shall
not be entitled as such to vote at, any general meeting of shareholders
of the Company. Holders of preferred shares shall be given notice of
and be invited to attend meetings of voting shareholders of the
Company.
<PAGE>
APPENDIX "2"
ATTACHED TO AND FORMING PART OF FORM 3-01
ARTICLES OF CONTINUANCE OF
PLC SYSTEMS INC.
(THE "CORPORATION")
(1) The Directors of the Corporation may, between annual general meetings
of the Corporation, appoint one or more additional directors to serve
until the next annual general meeting but the number of additional
directors shall not at any time exceed one third of the number of
directors who held office at the expiration of the last annual general
meeting, and in no event shall the total number of directors exceed the
maximum number of directors fixed pursuant to paragraph 4 of the
Articles of Continuance.
(2) Meetings of Shareholders shall be held in the Cities of Boston, in the
State of Massachusetts, New York, in the State of New York, Vancouver
in the Province of British Columbia or such other place or places as
the directors in their absolute discretion may determine from time to
time.
(3) At each annual general meeting of the Company, the Company shall elect
directors to the Board of Directors as may be required to fill any
positions vacated by reason of the expiration of the term of office of
one or more of the directors. A director may be elected for a term of
office of one or more years of office as may be specified in the
resolution by which he is elected. In this part, "year or office" means
the period of time commencing on the date of an annual general meeting
of the Company and ending on the date of the annual general meeting
held in the next subsequent calendar year. If in any calendar year the
Company does not hold an annual general meeting, the directors whose
terms of office would have expired in such calendar year shall be
deemed to have been elected as directors on the last date on which the
annual general meeting could have been held in such calendar year
pursuant to the Yukon Business Corporations Act and each director so
deemed elected may hold office until the next annual general meeting is
held and other directors are elected. The shareholders may, by special
resolution, vary the term of office of any director.
<PAGE>
Exhibit 3.3
BY-LAW NO. 1
A BY-LAW RELATING GENERALLY TO THE TRANSACTION OF
THE BUSINESS AND AFFAIRS OF
PLC SYSTEMS INC.
(THE "CORPORATION")
CONTENTS:
1. Interpretation
2. Business of the Corporation
3. Borrowing and Securities
4. Directors
5. Committees
6. Officers
7. Protection of Directors, Officers and Others
8. Shares
9. Dividends and Rights
10. Meetings of Shareholders
11. Division and Departments
12. Notices
BE IT ENACTED as a By-Law of the Corporation as follows:
<PAGE>
SECTION ONE
INTERPRETATION
1.01 DEFINITIONS - in the By- Laws of the Corporation, unless the context
otherwise requires:
"ACT" means the BUSINESS CORPORATIONS ACT, and any statute that may be
substituted therefore, as from time to time amended; marginal references to
sections of the Act herein are not made for the purpose of modifying or
affecting the meaning of any provision of this By-Law in any way but are
inserted only for the purpose of directing attention to provisions of the Act
which may be regarded as relevant;
"APPOINT" includes "ELECT" and vice versa;
"ARTICLES" means the Articles attached to the Certificate of Continuance dated
the 12th day of March, 1999 of the Corporation as from time to time amended or
restated;
"BOARD" means the Board of Directors of the Corporation;
"BY-LAWS" means this By-Law and all other By-Laws of the Corporation from time
to time in force and effect relating to transaction of business and affairs of
the Corporation in addition hereto, or in amendment hereof or in substitution
for all or any part of this ByLaw;
"CORPORATION" means the Corporation incorporated by Certificate of Continuance
under the Act and named: PLC SYSTEMS INC.
"MEETING OF SHAREHOLDERS" includes an annual meeting of Shareholders and a
Special Meeting of Shareholders; "Special Meeting of Shareholders" includes both
a meeting of any class or classes acting separately from any other class or
classes and also a meeting, other than an annual meeting, of all Shareholders
entitled to vote at any annual meeting of Shareholders;
"NON-BUSINESS DAY" means Saturday, Sunday and any other day that is a holiday as
defined in the INTERPRETATION ACT (CANADA) or the INTERPRETATION ACT (YUKON);
"PROHIBITED CORPORATE SHAREHOLDER" means a corporation prohibited from holding
shares in itself or its holding body corporate or a subsidiary corporation
prohibited from holding shares in its parent corporation pursuant to the Act and
not exempted from such prohibited shareholdings by Virtue of the Act;
"RECORDED ADDRESS" means in the case of a Shareholder his address as recorded in
the securities register, and in the case of joint Shareholders the address
appearing in the securities register in respect of such joint holdings
determined under Section 8.09; and in the case of a Director, Officer, auditor
or member of a Committee of Directors, his latest address as recorded in the
records of the Corporation; save as aforesaid, words and expressions defined in
the Act have the
<PAGE>
Same meaning when used herein; and words importing the singular number include
the plural and vice versa; words importing gender include the masculine,
feminine and neuter genders; and words importing persons include individuals,
bodies corporate, partnerships, trusts and unincorporated organizations.
SECTION TWO
BUSINESS OF THE CORPORATION
2.01 REGISTERED OFFICE - Until changed in accordance with the Act, the
registered office of the Corporation shall be at the City of Whitehorse, in the
Yukon Territory, and at such location therein as the Board may from time to time
determine.
2.02 CORPORATE SEAL - Until changed by the Board, the corporate seal of the
Corporation and any facsimiles thereof adopted by the Board for use in
jurisdictions outside the Yukon Territory shall be in the form approved by the
Directors.
2.03 FINANCIAL YEAR - The financial year of the Corporation shall end on the day
in each year that is established by the Board.
2.04 EXECUTION OF INSTRUMENTS - Deeds, transfers, assignments, contracts,
obligations, certificates and other instruments required by law or otherwise by
these By-Laws or any resolution of the Board or Shareholders of the Corporation
to be executed under corporate seal may be signed on behalf of the Corporation
by any one or more persons each of which is either a Director of the Corporation
or a person who holds the office of Chief Executive Officer, Chairman of the
Board, President, Managing Director, Vice-President, Secretary, Treasurer,
Assistant Secretary, Assistant Treasurer or any other office created by by-law
or by resolution of the Board. Notwithstanding the foregoing, the Board may from
time to time direct the manner in which and the person or persons by whom any
particular instrument or class of instruments may or shall be signed or sealed.
Any one Officer may affix the corporate seal to any instrument requiring the
same.
2.05 BANKING ARRANGEMENTS - The banking business of the Corporation including,
without limitation, the borrowing of money and the giving of security therefore,
shall be transacted with such banks, trust companies or other bodies corporate
or organizations as may from time to time be designated by or under the
authority of the Board. Such banking business or any part thereof shall be
transacted under such agreements, instructions and delegations of powers as the
Board may from time to time by resolution prescribe or authorize.
2.06 VOTING RIGHTS IN OTHER BODIES CORPORATE - Any one of the Officers of the
Corporation may execute and deliver proxies and arrange for the issuance of
voting certificates or other evidence of the right to exercise the voting rights
attaching to any securities held by the Corporation. Such instruments,
certificates or other evidence shall be in favor of such person or persons as
may be determined by the Officers executing such proxies or arranging for the
issuance of voting certificates or such other evidence of the right to exercise
such voting rights.
<PAGE>
In addition the Board may from time to time direct the manner in which and the
person or persons by whom any particular voting rights or class of voting rights
may or shall be exercised.
2.07 WITHHOLDING INFORMATION FROM SHAREHOLDERS - Subject to the provisions of
the Act, no Shareholder shall be entitled to discovery of any information
respecting any details or conduct of the Corporation's business which, in the
opinion of the Board, would not be in the best interests of the Shareholders or
the Corporation to communicate to the public. The Board may from time to time
determine whether and to what extent and at what time and place and under what
conditions or regulations the accounts, records and documents of the Corporation
or any of them shall be open to the inspection of Shareholders and no
Shareholder shall have any right of inspecting any account, record or document
of the Corporation except as conferred by the Act or authorized by the Board or
by resolution passed at a general meeting of Shareholders,
2.08 MECHANICAL REPRODUCTION OF SIGNATURES - The signature of any officer of the
Corporation may, if authorized by the Board, be printed, lithographed, engraved
or otherwise mechanically reproduced upon all instruments executed or issued by
the Corporation or any officer thereof; and any instrument on which the
signature of any such person is so reproduced, shall subject to Section 2.04
hereof be deemed to have been manually signed by such person whose signature is
so reproduced and shall be as valid to all intents and purposes as if such
instrument had been signed manually, and notwithstanding that the person whose
signature is so reproduced may have ceased to hold office at the date of the
delivery or issue of such instrument. The term "instrument" as used in this
Section shall include deeds, mortgages, hypothecs, charges, conveyances,
transfers and assignments of property, real or personal, agreements, releases,
receipts and discharges for the payment of money or other obligations,
certificates of the Corporation's shares, share warrants of the Corporation,
bonds, debentures and other debt obligations of the Corporation, and all paper
writings.
SECTION THREE
BORROWING AND SECURITIES
3.01 BORROWING POWER - Without limiting the borrowing powers of the Corporation
as set forth in the Act, the Board is authorized from time to time:
(a) to borrow money upon the credit of the Corporation in such amounts and
on such terms as may be deemed expedient by obtaining loans or advances
or by way of overdraft or otherwise;
(b) to issue, re-issue, sell or pledge bonds, debentures, notes or other
evidence of indebtedness or guarantees of the Corporation, whether
secured or unsecured for such sums and at such prices as may be deemed
expedient;
(c) subject to the Act, to issue guarantees on behalf of the Corporation to
secure the performance of the obligations of any person; and
<PAGE>
(d) to charge, mortgage, hypothecate, pledge or otherwise create a security
interest in all or any currently owned or subsequently acquired real or
personal, movable or immovable, property and undertaking of the
Corporation, including book debts, rights, powers and franchises for
the purpose of securing any such bonds, debentures, notes or other
evidences of indebtedness or guarantee or any other present or future
indebtedness or liability of the Corporation.
Nothing in this section limits or restricts the borrowing of money by the
Corporation on bills of exchange or promissory notes made, drawn, accepted or
endorsed by or on behalf of the Corporation.
3.02 DELEGATION OF BORROWING POWER - The Board may from time to time delegate to
such one or more of the Directors and Officers of the Corporation as may be
designated by the Board all or any of the powers conferred on the Board by
Section 3.01 to such extent and in such manner as the Board shall determine at
the time of each such delegation.
3.03 EXECUTION OF DEBT OBLIGATION DOCUMENTS - If the Board so authorizes, or if
any instrument under which any bonds, debentures or other debt obligations of
the Corporation are issued so provides, any bonds, debentures and other debt
obligations of the Corporation, instead of being manually signed by the
Directors or Officers authorized in that behalf, may have the facsimile
signatures of such Directors or Officers printed or otherwise mechanically
reproduced thereon and in either case, shall be as valid as if signed manually,
but no such bond, debenture or other debt obligation, shall be issued unless it
is manually signed, countersigned or certified by or on behalf of a trust
company or other transfer agent or registrar duly authorized by the Board or the
instrument under which such bonds, debentures or other debt obligations are
issued so to do. Notwithstanding that any persons whose facsimile signature is
so used shall have ceased to hold the office that he is stated on such bond,
debenture or other debt obligation to hold at the date of the actual issue
thereof, the bond debenture or other debt obligation shall be valid and binding
on the Corporation.
SECTION FOUR
DIRECTORS
4.01 NUMBER OF DIRECTORS AND QUORUM - Until changed in accordance with the Act,
the Board shall consist of not fewer than three (3) and not more than twenty
(20) Directors. Subject to Section 4.07 and subject also to the Articles and the
Act, the quorum for the transaction of business at any meeting of the Board
shall consist of a majority of the Directors or such lesser number of Directors
as the Board may from time to time determine. A Director interested is to be
counted in a quorum notwithstanding his interest.
4.02 QUALIFICATION - No person shall be qualified for election as a Director if
he is less than Nineteen (19) years of age; H he is of unsound mind and has been
so found by a Court in Canada or elsewhere; if he is not an individual; or if he
has the status of a bankrupt. A Director need not be a Shareholder.
<PAGE>
4.03 ELECTION AND TERM - Each Director named in the Notice of Directors filed at
the time of continuance shall hold office from the date of the Certificate of
Continuance until the expiration of the term of office applicable to that
Director at the date of the Certificate of Continuance. At each annual general
meeting of the Corporation, the Corporation shall elect directors to the Board
as may be required to fill any positions vacated by reason of the expiration of
the term of office of one or more of the Directors. A Director may be elected
for a term of office of one or more years of office as may be specified in the
resolution by which he is elected. In this part, "year or office" means the
period of time commencing on the date of an annual general meeting of the
Corporation and ending on the date of the annual general meeting held in the
next subsequent calendar year. If in any calendar year the Corporation does not
hold an annual general meeting, the Directors whose terms of office would have
expired in such calendar year shall be deemed to have been elected as Directors
on the last date on which the annual general meeting could have been held in
such calendar year pursuant to the Act and each Director so deemed elected may
hold office until the next annual general meeting is held and other Directors
are elected. The shareholders may, by special resolution, vary the term of
office of any Director. The number of Directors to be elected at any such
meeting shall be the number of Directors in office prior to the meeting unless
the Directors or the Shareholders otherwise determine. The election shall be by
ordinary resolution of the Shareholders. If an election of Directors is not held
at the proper time, the incumbent Directors shall continue in office until their
successors are elected.
4.04 REMOVAL OF DIRECTORS - Subject to the provisions of the Act, the
Shareholders may by ordinary resolution passed at a special meeting remove any
Director from office and the vacancy created by such removal may be filled at
the same meeting failing which it may be filled by the Directors.
4.05 VACATION OF OFFICE - A Director ceases to hold office when: he dies; he is
removed from office by the Shareholders; he ceases to be qualified for election
as a Director, or his written resignation is sent or delivered to the
Corporation, or if a time is specified in such resignation, at the time so
specified, whichever is later.
4.06 VACANCIES
(a) Subject to the Act and the Articles, a quorum of the Board may fill a
vacancy in the Board, except a vacancy resulting from an increase in
the minimum number of Directors or from a failure of the Shareholders
to elect the minimum number of Directors. In the absence of a quorum of
the Board, or if the vacancy has arisen from a failure of the
Shareholders to elect the minimum number of Directors, the Board shall
forthwith call a special meeting of the Shareholders to fill the
vacancy. If the Board fails to call such meeting or if there are no
such Directors then in office, any Shareholder may call the meeting;
and
(b) The Directors of the Corporation may, between annual general meetings
of the Corporation, appoint one or more additional Directors to serve
until the next annual general meeting but the number of additional
Directors shall not at any time exceed one
<PAGE>
third of the number of Directors who held office at the expiration of
the last annual general meeting, and in no event shall the total number
of Directors exceed the maximum number of Directors fixed pursuant to
paragraph 4 of the Articles of Continuance. Any Director so appointed
shall hold office only until the next following annual general meeting
of the Corporation but shall be eligible for election at such meeting
and, so long as he is an additional Director prior to such meeting, the
number of Directors for election at such meeting shall be increased
accordingly.
4.07 ACTION BY THE BOARD - The Board shall manage the business and affairs of
the Corporation. The powers of the Board may be exercised by resolution
passed at a meeting at which a quorum is present or by resolution in writing,
whether by document, telegram, telecopy or any method of transmitting legibly
recorded messages or other means, signed by all the Directors entitled to
vote on that resolution at a meeting of the Board and any resolution in
writing so signed shall be as valid as if it had been passed at a meeting of
Directors or a Committee of Directors and shall be held to relate to any date
therein stated to be the effective date thereof, and a copy of every such
resolution in writing shall be kept with the minutes of the proceedings of
Directors or Committee of Directors. Where there is a vacancy in the Board,
the remaining Directors may exercise all the powers of the Board so long as a
quorum remains in office. Where the Corporation has only one Director, that
Director may constitute a meeting. An act of a Director is valid
notwithstanding any irregularity in his election or appointment or a defect
in his qualifications.
4.08 MEETINGS BY TELEPHONE -If all of the Directors consent, a Director may
participate in a meeting of the Board or of a Committee of Directors by means of
telephone or such other communications facilities as permit all persons
participating in the meeting to hear each other, and a Director participating in
such a meeting by such means is deemed to be present at the meeting. Any such
consent shall be effective whether given before or after the meeting to which it
relates and may be given with respect to all meetings of the Board and of
Committees of Directors held while a Director holds office.
4.09 PLACE OF MEETING -Meetings of the Board may be held at any place in or
outside Canada.
4.10 CALLING OF MEETINGS -Meetings of the Board shall be held from time to time
and at such place as the Board may determine. In addition, each of the Chairman
of the Board, the Managing Directors, the President or any two Directors may
convene or direct the convening of a meeting of the Board.
4.11 NOTICE OF MEETING -Except as otherwise provided in Section 4.12, notice of
the time and place of each meeting of the Board shall be given in the manner
provided in Section 12.01 to each Director not less than forty-eight (48) hours
before the time when he meeting is to be held. A notice of a meeting of
Directors need not specify the purpose of or the business to be transacted at
the meeting except where Section 115(3) of the Act requires such purpose or
business to be specified, including any proposal to:
(a) submit to the Shareholders any question or matter requiring approval of
the Shareholders;
<PAGE>
(b) fill a vacancy among the Directors or in the office of auditor,
(c) issue securities;
(d) declare dividends;
(e) purchase, redeem, or otherwise acquire shares of the Corporation;
(f) pay a commission for the sale of shares;
(g) approve a management proxy circular;
(h) approve any annual financial statements; or
(i) adopt, amend or repeal By-Laws.
A Director may in any manner waive notice of or otherwise consent to a meeting
of the Board either before or after the convening of the meeting.
4.12 REGULAR MEETINGS - The Board may by resolution appoint a day or days in any
month or months for regular meetings of the Board at a place and hour to be
named in the resolution. No notice shall be required for any such regular
meeting.
4.13 FIRST MEETING OF NEW BOARD - Provided a quorum of Directors is present,
each newly elected Board may without notice hold its first meeting immediately
following the meeting of Shareholders at which such Board or portion thereof is
elected.
4.14 ADJOURNED MEETING - Notice of an adjourned meeting of the Board is not
required if the time and place of the adjourned meeting is announced at the
original meeting.
4.15 CHAIRMAN - The Chairman of any meeting of the Board shall be the first
mentioned of such of the following Officers as have been appointed and who is a
Director and is present at the meeting: Chairman of the Board, Managing
Director, President, or a Vice-President who is a Director. If no such Officer
is present, the Directors present shall choose one of their number to be
Chairman.
4.16 VOTES TO GOVERN - At all meetings of the Board every question shall be
decided by a majority of the votes cast on the question. In cases of an equality
of votes the Chairman of the meeting shall not be entitled to a second or
casting vote.
4.17 CONFLICT OF INTEREST - A Director or Officer who is a party to, or who is a
Director or Officer of or has a material interest in any person who is a party
to, a material contract or proposed material contract with the Corporation shall
disclose the nature and extent of his interest at the time and in the manner
provided by the Act. Any such contract or proposed
<PAGE>
contract shall be referred to the Board or Shareholders for approval even if
such contract is one that in the ordinary course of the Corporation's business
would not require approval by the Board or Shareholders, and a Director
interested in a contract so referred to the Board shall not vote on any
resolution to approve the same except as provided by the Act.
4.18 REMUNERATION AND EXPENSES - The Directors shall be paid such remuneration
for their services as the Board may from time to time determine. The Directors
shall also be entitled to be reimbursed for travelling and other expenses
properly incurred by them in attending meetings of the Board or any committee
thereof. Nothing herein contained shall preclude any Director from serving the
Corporation in any other capacity and receiving remuneration therefore.
4.19 ALTERNATE DIRECTOR - Any director (herein called the "Appointor") may from
time to time by written notice to the Corporation appoint any person (herein
called the "Appointee") to be his alternate director provided that the directors
approve of such appointment by resolution. Such approval shall not be required
If a director is appointed alternate director for another director. A person
(including a director) may be appointed as an alternate director by more than
one director.
(a) The Appointee while he holds office as an alternate director shall be
entitled and authorized:
(i) if expressly so specified by the Appointor in the instrument
appointing the Appointee, to receive notice of meetings of the
directors, and notice of meetings of all committees of which
the Appointor is a member;
(ii) to attend and vote as a director at meetings of the directors
in the absence of the Appointor;
(iii) to attend and vote at meetings of all committees of which the
Appointor is a member, in the absence of the Appointor,
(iv) execute consents to resolutions in writing of the directors
and such committees, in substitution for the Appointor; and
(v) if expressly so authorized by the Appointor in the instrument
appointing the Appointee, to execute all documents,
instruments and writings under the sea[ of the Corporation or
otherwise which the Appointor is authorized to execute on
behalf of the Corporation, in substitution for the Appointor,
and for the purposes thereof the Appointee shall be deemed to be a director. He
shall not be deemed to be the agent of the Appointor.
(b) The Appointee shall have a separate vote on behalf of each director for
whom he is an alternate director. If the Appointee is also a director,
the Appointee shall be counted separately in determining the quorum of
a meeting and shall have a separate vote on behalf of each director for
whom he is an alternate director in addition to being so
<PAGE>
counted and voting in his own right as a director.
(c) The Appointee shall not be entitled to be remunerated as an alternate
director otherwise than out of the remuneration of the Appointor.
(d) No person shall act as an alternate director unless he qualifies under
the Act to act as a director of the Corporation and has consented in
writing to his appointment.
(e) An Appointee's appointment as an alternate director shall terminate if:
(i) the Appointor gives written notice revoking the Appointee's
appointment; or
(ii) the Appointee resigns; or
(iii) The Appointor ceases for any reason to be a director, or
(iv) the Appointee ceases to be qualified under the Act to act as a
director, or
(v) the term of the Appointee's appointment, if any, expires.
(f) Any Appointor may make or revoke an appointment of an Appointee by
notice in writing delivered to, mailed to or transmitted by telegram,
cable or telecopier to the registered office of the Corporation,
delivery, postage or transmission charges prepaid.
SECTION FIVE
COMMITTEES
5.01 COMMITTEE OF DIRECTORS
(a) The Board may appoint one or more Committees of Directors, however
designated, and delegate to such committee any of the powers of the
Board except those which, under the Act, a Committee of Directors has
no authority to exercise.
(b) The Directors may by resolution appoint an Executive Committee to
consist of such member or members of their body as they think fit,
which Committee shall have, and may exercise during the intervals
between the meetings of the Board, all the powers vested in the Board
except the power to fill vacancies in the Board, the power to change
the membership of, or fill vacancies in, said Committee or any other
committee of the Board and such other powers, if any, as may be
specified in the resolution. The said Committee shall keep regular
minutes of its transactions and shall cause them to be recorded in
books kept for that purpose, and shall report the same to the Board of
Directors at such times as the Board of Directors may from time to time
require. The Board shall have the power at any time to revoke or
override the authority given to or acts done by the Executive Committee
except as to acts done before such revocation or overriding and to
terminate
<PAGE>
the appointment or change the membership of such Committee and to fill
vacancies in it. The Executive Committee may make rules for the conduct
of its business and may appoint such assistants as it may deem
necessary. A majority of the members of said Committee shall constitute
a quorum thereof.
(c) The Directors may from time to time by resolution constitute, dissolve
or reconstitute standing committees and other committees consisting of
such persons as the Board may determine. Every committee constituted by
the Board shall have the powers, authorities and discretions delegated
to it by the Board (which shall not include the power to fill vacancies
in the Board and the power to change the membership of or fill
vacancies in any committee constituted by the Board or the power to
appoint or remove officers appointed by the Board) and shall conform to
the regulations which may from time to time be imposed upon it by the
Board.
(d) The Executive Committee and any other committee may meet and adjourn as
it thinks proper. Questions arising at any meeting shall be determined
by a majority of votes of the members of the committee present, and in
case of an equality of votes the chairman shall not have a second or
casting vote. A resolution approved in writing by all the members of
the Executive Committee or any other committee shall be as valid and
effective as if it had been passed at a meeting of such Committee duly
called and constituted. Such resolution may be in two or more
counterparts which together shall be deemed to constitute one
resolution in writing. Such resolution shall be filed with the minutes
of the proceedings of the committee and shall be effective on the date
stated thereon or on the latest date stated in any counterpart.
5.02 TRANSACTION OF BUSINESS - Subject to the provisions of Section 5.01, the
powers of a Committee of Directors may be exercised by a meeting at which a
quorum is present or by resolution in writing signed by all the members of such
committee who would have been entitled to vote on that resolution at a meeting
of the committee. Meetings of such committee may be held at any place in or
outside Canada.
5.03 AUDIT COMMITTEE - When required by the Act the Board shall, and at any
other time the Board may, elect annually from among its number an audit
committee to be composed of not fewer than three (3) directors of whom a
majority shall not be Officers or employees of the Corporation or its
affiliates. The audit committee shall have the powers and duties provided in the
Act.
5.04 PROCEDURE - Unless otherwise determined by the Board, each Committee of
Directors shall have the power to fix its quorum at not less than a majority of
its members, to elect its Chairman and to regulate its procedure.
SECTION SIX
OFFICERS
<PAGE>
6.01 APPOINTMENT - The Board may from time to time appoint a President, one or
more Vice-Presidents (to which title may be added words indicating seniority or
function), a Secretary; a Treasurer and such other Officers as the Board may
determine, including one or more assistants to any of the Officers so appointed
(herein referred to as "Officers"). The Board may specify the duties of and, in
accordance with this By-Law and subject to the provisions of the Act, delegate
to such Officers powers to manage the business and affairs of the Corporation.
Subject to Sections 6.02 and 6.03, an Officer may but need not be a Director and
one person may hold more than one office.
6.02 CHAIRMAN OF THE BOARD - The Board may from time to time also appoint a
Chairman of the Board who shall be a Director. The Chairman of the Board shall,
when present, preside at all meetings of the Board, Committees of Directors and
at all meetings of Shareholders. In addition, the Board may assign to him any of
the powers and duties that may by the provisions of this by-law be assigned to
the Managing Director or to the President; and he shall have such other powers
and duties as the board may specify.
6.03 MANAGING DIRECTOR - The Board may from time to time appoint a Managing
Director who shall be a Director. If appointed, he shall be the Chief Executive
Officer and, subject to the authority of the Board, shall have general
supervision of the business and affairs of the Corporation; and he shall,
subject to the provisions of the Act, have such other powers and duties as the
Board may specify. During the absence or disability of the President, or if no
President has been appointed, the Managing Director shall also have the powers
and duties of the President's office.
6.04 PRESIDENT - The Board, from time to time, may elect from among its number,
a President. The President, in the absence or non-appointment of the Chairman of
the Board, shall preside at meetings of the Board and at all meetings of the
Shareholders. He shall have general and active management of the business and
affairs of the Corporation, and without limitation to the foregoing:
(i) he shall have general supervision and direction of all the
other officers of the Corporation;
(ii) he shall submit the annual report of the Board, if any, and
the annual balance sheets and financial statements of the
business and affairs and reports on the financial position of
the Corporation as required by the statutes to the annual
general meeting and from time to time shall report to the
Board on all matters within his knowledge which the interest
of the Corporation requires to be brought to their attention.
(iii) he shall be ex-officio a member of all standing committees.
6.05 VICE-PRESIDENT - A Vice-President shall have such powers and duties as the
Board may specify.
<PAGE>
6.06 SECRETARY - The Secretary shall attend and be the Secretary of all meetings
of the Board, Shareholders and Committees of the Board and shall enter or cause
to be entered in records kept for that purpose minutes of all proceedings
thereat; he shall give or cause to be given, as and when instructed, all notices
to Shareholders, Directors, Officers, the auditor and members of the Committees
of Directors; he shall be the custodian of the stamp or mechanical device
generally used for affixing the corporate seal of the Corporation and of all
books, papers, records, documents and instruments belonging to the Corporation,
except when some other Officer or agent has been appointed for that purpose; and
he shall have such other powers and duties as the Board may specify.
6.07 TREASURER - The Treasurer shall keep proper accounting records in
compliance with the Act and shall be responsible for the deposit of money, the
safekeeping of securities and the disbursement of the funds of the Corporation;
he shall render to the Board whenever required an account of all his
transactions as Treasurer and of the financial position of the Corporation; and
he shall have such other powers and duties as the Board may specify.
6.08 POWERS AND DUTIES OF OTHER OFFICERS - The powers and duties of all other
Officers shall be such as the terms of their engagement call for or as the Board
or the Chief Executive Officer may specify. Any of the powers and duties of an
Officer to whom an assistant has been appointed may be exercised and performed
by such assistant, unless the Board otherwise directs.
6.09 VARIATION OF POWERS AND DUTIES - The Board may from time to time and
subject to the provisions of the Act, vary, add to or limit the powers and
duties of any Officer.
6.10 TERM OF OFFICE - The Board, in its discretion, may remove any Officer of
the Corporation, without prejudice to such Officer's rights under any employment
contract, otherwise each Officer appointed by the Board shall hold office until
the earlier of the date his resignation becomes effective, the date his
successor is appointed or he shad cease to be qualified for that office.
6.11 TERMS OF EMPLOYMENT AND REMUNERATION - The terms of employment and the
remuneration of Officers appointed by the Board shall be settled by it from time
to time.
6.12 CONFLICT OF INTEREST - An Officer shall disclose his interest in any
material contract or proposed material contract with the Corporation in
accordance with Section 4.17.
6.13 AGENTS AND ATTORNEYS - The Board shall have power from time to time to
appoint agents or attorneys for the Corporation in or outside of Canada with
such powers of management or otherwise (including the power to sub-delegate) as
may be thought fit.
6.14 FIDELITY BONDS - The Board may require such Officers, employees and agents
of the Corporation as the Board deems advisable to furnish bonds for the
faithful discharge of their powers and duties, in such form and with such surety
as the Board may from time to time determine.
<PAGE>
SECTION SEVEN
PROTECTION OF DIRECTORS, OFFICERS AND OTHERS
7.01 LIMITATION OF LIABILITY - No Director shall be liable for the acts,
receipts, neglects or defaults of any other Director or Officer or employee, or
for joining in any receipt or other act for conformity, or for any loss, damage
or expense happening to the Corporation through the insufficiency or deficiency
of title to any property acquired for or on behalf of the Corporation, or for
the insufficiency or deficiency of any security in or upon which any of the
moneys of the Corporation shall be invested, or for any loss or damage arising
from the bankruptcy, insolvency or tortious acts of any person with whom any of
the moneys, securities or effects of the Corporation shall be deposited, or for
any loss occasioned by any error of judgement or oversight on his part, or for
any other loss, damage or misfortune whatever which shall happen in the
execution of the duties of his office or in relation thereto, unless the same
are occasioned by his own wilful neglect or default; provided that nothing
herein shall relieve any Director or Officer from the duty to act in accordance
with the Act and the regulations thereunder or from liability for any breach
thereof.
7.02 INDEMNITY - Subject to the limitations contained in the Act, and to the
extent he is otherwise fairly and reasonably entitled thereto, the Corporation
shall indemnify a Director or Officer, a former Director or Officer, or a person
who acts or acted at the Corporation's request as a Director or Officer of a
body corporate of which the Corporation is or was a Shareholder or creditor (or
a person who undertakes or has undertaken any liability on behalf of the
Corporation or any such body corporate) and his heirs and legal representatives,
against all costs, charges and expenses, including an amount paid to settle an
action or satisfy a judgement, reasonably incurred by him in respect of any
civil, criminal or administrative action or proceeding to which he is made a
party by reason of being or having been a Director or Officer of the Corporation
or such body corporate, if
(a) he acted honestly and in good faith with a view to the best interests
of the Corporation; and
(b) in the case of a criminal or administrative action or proceeding that
is enforced by a monetary penalty, he had reasonable grounds for
believing that his conduct was lawful.
7.03 INSURANCE - Subject to the limitations contained in the Act, the
Corporation may purchase and maintain such insurance for the benefit of its
Directors and Officers as the Board may from time to time determine.
7.04 DIRECTORS MAY RELY - Directors may rely upon the accuracy of any statement
of fact represented by an Officer of the Corporation to be correct or upon
statements in a written report of the auditor of the Corporation and shall not
be responsible or held liable for any loss or damage resulting from the paying
of any dividends or otherwise acting in good faith upon any such statement.
<PAGE>
SECTION EIGHT
SHARES
8.01 ALLOTMENT AND ISSUE - The Board may from time to time allot, or grant
options to purchase the whole or any part of the authorized and unissued shares
of the Corporation at such times and to such persons and for such consideration
as the Board shall determine, provided that no share shall be issued until it is
fully paid as prescribed by the Act. Subject to the Articles, no holder of any
class of share of the capital of the Corporation shall be entitled as of right
to subscribe for, purchase or receive any part of any new or additional issue of
shares of any class, whether now or hereafter authorized or any bonds,
debentures or other securities convertible into shares of any class.
8.02 COMMISSIONS - The Board may from time to time authorize the Corporation to
pay a reasonable commission to any person in consideration of his purchasing or
agreeing to purchase shares of the Corporation, whether from the Corporation or
from any other person, or procuring or agreeing to procure purchasers for any
such shares.
8.03 REGISTRATION OF TRANSFER
(a) Subject to the provisions of the Act, no transfer of shares shall be
registered in a securities register except upon presentation of the
Certificate representing such shares with a transfer endorsed thereon
or delivered therewith duly executed by the registered holder or by his
attorney or successor duly appointed, together with such reasonable
assurance or evidence of signature, identification and authority to
transfer as the Board may from time to time prescribe, upon payment of
all applicable taxes and any fees prescribed by the Board, upon
compliance with such restrictions on transfer, if any, as are
authorized by the Articles, and upon satisfaction of any lien referred
to in Section 8.05.
(b) The signature of the registered owner of any shares, or of his duly
authorized attorney, upon an authorized instrument of transfer shall
constitute a complete and sufficient authority to the Corporation, its
Directors, Officers and agents to register, in the name of the
transferee as named in the instrument of transfer, the number of shares
specified therein or, if no number is specified, all the shares of the
registered owner represented by share certificates deposited with the
instrument of transfer. If no transferee is named in the instrument of
transfer, the instrument of transfer shall constitute a complete and
sufficient authority to the corporation, its Directors, Officers and
agents to register, in the name of the person in whose behalf any
certificate for the shares to be transferred is deposited with the
Corporation for the purpose of having the transfer registered, the
number of shares specified in the instrument of transfer or, if no
number is specified, all the shares represented by all share
certificates deposited with the instrument of transfer.
(c) Neither the Corporation nor any Director, Officer or agent thereof
shall be bound to inquire into the title of the person named in the
form of transfer as transferee, or, if no person is named therein as
transferee, of the person on whose behalf the certificate is
<PAGE>
deposited with the Corporation for the purpose of having the transfer
registered or be liable to any claim by such registered owner or by any
intermediate owner or holder of the certificate or of any of the shares
represented thereby or any interest therein for registering the
transfer, and the transfer, when registered, shall confer upon the
person in whose name the shares have been registered a valid title to
such shares.
(d) Every instrument of transfer shall be executed by the transferor and
left at the registered office of the Corporation or at the office of
its transfer agent or branch transfer agent or registrar for
registration together with the share certificate for the shares to be
transferred and such other evidence if any, as the Directors or the
transfer agent or branch transfer agent or registrar or branch
registrar may require to prove the title of the transferor or his right
to transfer the shares and the right of the transferee to have the
transfer registered. All instruments of transfer where the transfer is
registered shall be retained by the Corporation or its transfer agent
or branch transfer agent or registrar or branch registrar and any
instrument of transfer, where the transfer is not registered, shall be
returned to the person depositing the same together with the share
certificate which accompanied the same when tendered for registration.
(e) There shall be paid to the Corporation in respect of the registration
of any transfer such sum, if any, as the Directors may from time to
time determine.
8.04 TRANSFER AGENTS AND REGISTRARS - The Board may from time to time appoint a
registrar to maintain the securities register and a transfer agent to maintain
the register of transfers and may also appoint one or more branch registrars to
maintain branch securities registers and one or more branch transfer agents to
maintain branch registers of transfer, but one person may be appointed both
registrar and transfer agent. The Board may at any time terminate any such
appointment.
8.05 PURCHASE AND REDEMPTION OF SHARES - Subject to the provisions of the Act
and the Articles, a Corporation may purchase or otherwise acquire shares issued
by it and may purchase or redeem any redeemable shares issued by it at prices
not exceeding the redemption of those shares stated in the Articles or
calculated according to a formula stated in the Articles.
8.06 NON-RECOGNITION OF TRUSTS - Subject to the provisions of the Act, the
Corporation shall treat as absolute owner of the share the person in whose name
the share is registered in the securities register as if that person had full
legal capacity and authority to exercise all rights of ownership, irrespective
of any indication to the contrary through knowledge or notice or description in
the Corporation's records or on the share certificate.
8.07 SHARE CERTIFICATES - Every holder of one or more shares of the Corporation
shall be entitled, at his option, to a share certificate, or to a
non-transferable written acknowledgement of his right to obtain a share
certificate, stating the number and list or series of shares held by him as
shown on the securities register. Share Certificates and acknowledgements of a
Shareholder's right to a share certificate, respectively, shall be in such form
as the Board shall from time to time approve. Any share certificate shall be
signed in accordance with Section 2.04 and need not
<PAGE>
be under the corporate seal; provided that, unless the Board otherwise
determines, certificates representing shares in respect of which a transfer
agent and/or registrar has been appointed shall not be valid unless
countersigned by or on behalf of such transfer agent and/or registrar. The
signature of one of the signing Officers or, in the case of share certificates
which are not valid unless countersigned by or on behalf of a transfer agent
and/or registrar, the signature of one of the Officers, may be printed or
mechanically reproduced in facsimile upon share certificates and every such
facsimile signature shall for all purposes be deemed to be the signature of the
Officer whose signature it reproduces and shall be binding upon the Corporation.
A share certificate executed as aforesaid shall be valid notwithstanding that
one or both of the Officers whose facsimile signature appears thereon no longer
holds office at the date of issue of the Certificate.
8.08 REPLACEMENT OF SHARE CERTIFICATES - The Board or any Officer or agent
designated by the Board may in its or his discretion direct the issue of a new
share certificate in lieu of and upon cancellation of a share certificate that
has been mutilated or in substitution for a share certificate claimed to have
been lost, destroyed or wrongfully taken or which does not comply as to form
with the requirements from time to time of the Act in this regard, on payment of
such fee as the Board may direct and on such terms as to indemnity;
reimbursement of expenses and evidence of loss and of title as the Board may
from time to time prescribe, whether generally or in any particular case.
8.09 JOINT SHAREHOLDERS - If two or more persons are registered as joint holders
of any share, the Corporation shall not be bound to issue more than one
certificate in respect thereof, and delivery of such certificate to one of such
persons shall be sufficient delivery to all of them. Any one of such persons may
give effectual receipts for the certificate issued in respect thereof or for any
dividend, bonus, return of capital or other money payable or warrant issuable in
respect of such share. Joint Shareholders may collectively designate in writing
an address as their recorded address for service of notice and payment of
dividends but in default of such designation the address of the first named
joint Shareholder shall be deemed to be the recorded address aforesaid.
8.10 DECEASED SHAREHOLDERS - In the event of the death of a holder, or of one of
the joint holders, of any share, the Corporation shall not be required to make
any entry in the securities register in respect thereof or to make payment of
any dividends thereon except upon production of all such documents as may be
required by law and upon compliance with the reasonable requirements of the
Corporation and its transfer agents.
SECTION NINE
DIVIDENDS AND RIGHTS
9.01 DIVIDENDS - Subject to the provisions of the Act, the Board may from time
to time declare dividends payable to the Shareholders according to their
respective rights and interest in the Corporation. Dividends may be paid in
money or property or by issuing fully paid shares of the Corporation.
9.02 DIVIDEND CHEQUES - A dividend payable in cash shall be paid by cheque drawn
on the
<PAGE>
Corporation's bankers or one of them to the order of each registered holder of
shares of the class or series in respect of which it has been declared and
mailed by prepaid ordinary mail to such registered holder at his recorded
address, unless such holder otherwise directs. In the case of joint holders the
cheque shall, unless such joint holders otherwise direct, be made payable to the
order of all of such joint holders and mailed to them at their recorded address.
The mailing of such cheque as aforesaid, unless the same is not paid on due
presentation, shall satisfy and discharge the liability for the dividend to the
extent of the sum represented thereby plus the amount of any tax which the
Corporation is required to and does withhold.
9.03 NON-RECEIPT OF CHEQUES - In the event of non-receipt of any dividend cheque
by the person to whom it is sent as aforesaid, the Corporation shall issue to
such person a replacement cheque for a like amount on such terms as to
indemnity, reimbursement of expenses and evidence of non-receipt and of title as
the Board may from time to time prescribe, whether generally or in any
particular case.
9.04 RECORD DATE FOR DIVIDENDS AND RIGHTS - The Board may fix in advance a date,
preceding by not more than Fifty (50) days the date for the payment of any
dividend or the date for the issue of any warrant or other evidence of right to
subscribe for securities of the Corporation, as a record date for the
determination of the persons entitled to receive payment of such dividend or to
exercise the right to subscribe for such securities, provided that, where the
Corporation is a distributing Corporation for purposes of the Act, notice of any
such record date is given not less than seven (7) days before such record date
by newspaper advertisement and otherwise in the manner provided in the Act.
Where no record date is fixed in advance as aforesaid, the record date for the
determination of the persons entitled to receive payment of any dividend or to
exercise the right to subscribe for securities of the Corporation shall be at
the close of business on the day on which the resolution relating to such
dividend or right to subscribe is passed by the Board.
9.05 UNCLAIMED DIVIDENDS - Any dividend unclaimed after a period of six (6)
years from the date on which the same has been declared to be payable shall be
forfeited and shall revert to the Corporation.
SECTION TEN
MEETINGS OF SHAREHOLDERS
10.01 ANNUAL MEETINGS - The annual meeting of Shareholders shall be held at such
time in each year and, subject to the Act, the Articles and to Section 10.04, at
such place as the Board may from time to time determine, for the purpose of
considering the financial statements and reports required by the Act to be
placed before the annual meeting, electing Directors, appointing auditors and
for the transaction of such other business as may properly be brought before the
meeting.
10.02 SPECIAL MEETINGS - The Board shall have power to call a special meeting of
Shareholders at any time.
<PAGE>
10.03 SPECIAL BUSINESS - All business transacted at a special meeting of
Shareholders and all business transacted at an annual meeting of Shareholders,
except consideration of the financial statements, auditors reports, election of
directors and reappointment of the incumbent auditors, is deemed to be special
business.
10.04 PLACE OF MEETING - Subject to the Articles, meetings of Shareholders may
be held in the Cities of Boston, in the State of Massachusetts, New York, in the
State of New York, Vancouver in the Province of British Columbia or such other
place or places as the Directors in their absolute discretion may determine from
time to time.
10.05 NOTICE OF MEETING - Notice of the time and place of each meeting of
Shareholders shall be given in the manner provided in Section 12.01 not less
than twenty-one (21) nor more than fifty (50) days before the date of the
meeting to each Director, to the auditor and to each Shareholder who at the
close of business on the record date, if any, for notice is entered in the
securities register as the holder of one or more shares carrying the right to
vote at the meeting. Notice of a meeting of Shareholders called for any purpose
other than consideration of the financial statements and auditor's report,
election of Directors and re-appointment of the incumbent auditor shall state
the nature of such business in sufficient detail to permit the Shareholder to
form a reasoned judgement thereon and shall state the text of any special
resolution to be submitted to the meeting. A Shareholder and any other person
entitled to attend a meeting of Shareholders may in any manner waive notice of
or otherwise consent to a meeting of Shareholders.
10.06 LIST OF SHAREHOLDERS ENTITLED TO NOTICE - For every meeting of
Shareholders, at any time that the Corporation has more than fifteen (15)
Shareholders entitled to vote at a meeting of Shareholders, the Corporation
shall prepare a list of Shareholders entitled to receive notice of the meeting,
arranged in alphabetical order and showing the number of shares entitled to vote
at the meeting held by each Shareholder. If a record date for the meeting is
fixed pursuant to Section 10.07, the Shareholders listed shall be those
registered or constructively registered pursuant to the Act at the close of
business of the record date, such list to be prepared on a day not later than
ten (10) days after such record date. If no record date is fixed, the list of
Shareholders shall be prepared no later than at the close of business on the day
immediately preceding the day on which notice of the meeting is given, or where
no such notice is given, the day on which the meeting is held. The list shall be
available for examination by any Shareholder during usual business hours at the
records office of the Corporation or at the place where the central securities
register is kept and at the place where the meeting is held.
10.07 RECORD DATE FOR NOTICE - The Board may fix in advance a record date,
preceding the date of any meeting of Shareholders by not more than fifty (50)
days and not less than twenty-one (21) days for the determination of the
Shareholders entitled to notice of the meeting, provided that notice of any such
record date is given, not less than seven (7) days before such record date, by
newspaper advertisement in the manner provided in the Act. If no record date is
so fixed, the record date for the determination of the Shareholders entitled to
notice of the meeting shall be the close of business on the day immediately
preceding the day on which the notice is given, or if no
<PAGE>
notice is given, the day on which the meeting is held.
10.08 MEETINGS WITHOUT NOTICE - A meeting of Shareholders may be held without
notice at any time and place permitted by the Act:
(a) if all the Shareholders entitled to vote thereat are present in person
or represented by proxy or if those not present or represented by proxy
waive notice of or otherwise consented to such meeting being held, and
(b) if the auditor and the Directors are present or waived notice of or
otherwise consent to such meeting being held.
At such meeting any business may be transacted which the Corporation at a
meeting of Shareholders may transact. If the meeting is held at a place outside
the Yukon Territory, Shareholders not present or represented by proxy, but who
have waived notice of or otherwise consented to such meeting, shall also be
deemed to have consented to the meeting being held at such place.
10.09 MEETINGS BY TELEPHONE - If all the Shareholders consent, a Shareholder may
participate in a meeting of Shareholders by means of telephone or such other
communications facilities as permit all persons participating in the meeting to
hear each other, and a Shareholder participating in such a meeting by such
consent shall be effective whether given before or after the meeting to which it
relates.
10.10 CHAIRMAN, SECRETARY AND SCRUTINEERS - The Chairman of any meeting of
Shareholders shall be the first mentioned of such of the following Officers as
having been appointed and who is present at the meeting: Chairman of the Board,
President, Managing Director, or a Vice-President. If no such Officer is present
within fifteen (15) minutes from the time fixed for holding the meeting, the
persons present and entitled to vote shall choose one of their number to be
Chairman. If the Secretary of the Corporation is absent, the Chairman shall
appoint some person, who need not be a Shareholder, to act as Secretary of the
meeting. If desired, one or more scrutineers, who need not be Shareholders, may
be appointed by a resolution or by the Chairman with the consent of the meeting.
10.11 PERSONS ENTITLED TO BE PRESENT - The only persons entitled to be present
at a meeting of Shareholders shall be those entitled to vote thereat, the
Directors and auditor of the Corporation and others who, although not entitled
to vote, are entitled or required under any provision of the Act or the Articles
or By-Laws to be present at the meeting. Any other person may be admitted only
on the invitation of the Chairman of the meeting or with the consent of the
meeting.
10.12 QUORUM - Save as herein otherwise provided, a quorum shall be two
shareholders or proxyholders present, holding not less than ten percent (10%) of
the outstanding shares of the Corporation entitled to vote at the meeting. If
there is only one shareholder, the quorum is one person present and being, or
representing by proxy, such shareholder. The Directors, the Secretary or, in his
absence, an assistant Secretary, and the solicitor of the Corporation shall be
<PAGE>
entitled to attend at any general meeting but no such person shall be counted in
the quorum or be entitled to vote at any general meeting unless he is a
shareholder or proxyholder entitled to vote thereat. If a quorum is present at
the opening of any meeting of Shareholders, the Shareholders present or
represented by proxy may proceed with the business of the meeting
notwithstanding that a quorum is not present throughout the meeting. No
business, other than the election of a Chairman of the meeting and the
adjournment of the meeting shall be transacted at any general meeting unless the
quorum requisite was present at the commencement of the meeting. If within
one-half hour from the time appointed for a meeting a quorum in not present, the
meeting if convened by requisition of the Shareholders, shall be dissolved; but
in any other case it shall stand adjourned to the same day in the next week at
the same time and place. If at such adjourned meeting a quorum is not present
within one-half hour from the time appointed, the Shareholders present in person
or by proxy shall be a quorum.
10.13 RIGHT TO VOTE - RECORD DATE FOR VOTING - Subject to the provisions of the
Act as to authorized representative of any other body corporate, at any meeting
of Shareholders in respect of which the Corporation has prepared the list
referred to in Section 10.06, every person who is named in such list shall be
entitled to vote the shares shown thereon opposite his name except, where the
Corporation has fixed a record date in respect of such meeting pursuant to
Section 10.07, to the extent that such person has transferred any of his shares
after such record date and the transferee, upon producing properly endorsed
Certificates evidencing such shares or otherwise establishing that he owns such
shares, demands not later than ten (10) days before the meeting that his name be
included in such list, in which event the transferee alone shall be entitled to
vote the transferred shares at the meeting. Where no record date for notice has
been fixed and no notice of meeting given, or in the absence of a list prepared
as aforesaid in respect of a meeting of Shareholders, every person shall be
entitled to vote at the meeting who at the time is entered in the securities
register as the holder of one or more shares carrying the right to vote at such
meeting.
10.14 PROXIES
(a) Every Shareholder entitled to vote at a meeting of Shareholders, may
appoint a proxyholder, or one or more alternate proxyholders, who need
not be Shareholders, to attend and act at the meeting in the manner and
to the extent authorized and With the authority conferred by the proxy.
A proxy shall be in writing executed by the Shareholder or his attorney
and shall conform with the requirements of the Act. An instrument of
proxy shall be valid only at the meeting in respect of which it is
given or any adjournment thereof.
(b) Any corporation, other than a Prohibited Corporate Shareholder, which
is a Shareholder of the Corporation may by resolution of its Directors
or other governing body authorize such person as it thinks fit to act
as its representative at any meeting. The person so authorized shall be
entitled to exercise in respect of and at such meeting the same powers
on behalf of the corporation which he represents as that corporation
could exercise if it were an individual member of the Corporation
personally present, including, without limitation, the right, unless
restricted by such resolution, to appoint a proxyholder to
<PAGE>
represent such corporation, and shall, If present at the meeting, be
counted for the purpose of forming a quorum and be deemed to be a
member present at the meeting. Evidence of the appointment of any such
representative may be sent to the Corporation by written instrument,
telegram, telex, facsimile or any method of transmitting legibly
recorded messages.
(c) Every ballot case upon a poll and every proxy appointing a proxyholder
who cast a ballot upon a poll shall be retained by the Secretary for
the period and be subject to the inspection as the Act may provide.
10.15 TIME FOR DEPOSIT OF PROXIES - The Board may specify in a notice calling a
meeting of Shareholders a time, preceding the time of such meeting by not more
than forty-eight (48) hours exclusive of non-business days, before which time
proxies to be used at such meeting must be deposited. A proxy shall be acted
upon only if, prior to -the time so specified, it shall have been deposited by
written instrument, telegram, telex, facsimile or any method of transmitting
legibly recorded messages with the Corporation or an agent thereof specified in
such notice or, if no such time is specified in such notice, unless it has been
received by the Secretary of the Corporation or by the Chairman of the meeting
or any adjournment thereof prior to the time of voting.
10.16 JOINT SHAREHOLDERS - If two or more persons hold shares jointly, any one
of them present in person or represented by proxy at a meeting of Shareholders
may, in the absence of the other or others, vote the shares but if two or more
of those persons are present in person or represented by proxy and vote, they
shall vote as one on the shares jointly held by them and in the absence of
agreement between those so voting the person named first in the Register shall
vote the shares.
10.17 VOTES TO GOVERN - At any meeting of Shareholders every question shall,
unless otherwise required by the Articles or By-Laws or by law, be determined by
the majority of the votes cast on the question. In case of an equality of votes
either upon a show of hands or upon a poll, the Chairman of the meeting shall be
entitled to a second or casting vote in addition to vote or votes to which he
may be entitled as a shareholder.
10.18 MOTION - No resolution proposed at a meeting need be seconded. The
Chairman may propose or second a motion.
10.19 SHOW OF HANDS - Subject to the provisions of the Act any question at a
meeting of Shareholders shall be decided by a show of hands unless a ballot
thereon is required or demanded as hereinafter provided. Upon a show of hands,
every person who is present and entitled to vote shall have one vote. Whenever a
vote by show of hands shall have been taken upon a question, unless a ballot
thereon is so required or demanded, a declaration by the Chairman of the meeting
that the vote upon the question has been carded or carried by a particular
majority or not carried, an entry to that effect in the minutes of the meeting
shall be conclusive evidence of the fact without proof of the number or
proportion of the votes recorded in favor of or against any resolution or other
proceeding in respect of the said question, and the result of the vote so taken
shall be the decision of the Shareholders upon the said question.
<PAGE>
10.20 BALLOTS
(a) On any question proposed for consideration at a meeting of
Shareholders, and whether or not a show of hands has been taken
thereof, any Shareholder or proxyholder entitled to vote at the meeting
may require or demand a ballot. A ballot so required or demanded shall
be taken in such manner as the Chairman shall direct. A requirement or
demand for a ballot may be withdrawn at any time prior to the taking of
the ballot. If a ballot is taken each person present shall be entitled
in respect of the shares which he is entitled to vote at the meeting
upon the question, to that number of votes provided by the Act or the
Articles, and the result of the ballot so taken shall be the decision
of the Shareholders upon the said question.
(b) No ballot may be demanded on the election of a Chairman. A ballot
demanded on a question of adjournment shall be taken forthwith. A
ballot demanded on any other question shall be taken as soon as, in the
opinion of the chairman, is reasonably convenient, but in no event
later than seven (7) days after the meeting and at such time and place
and in such manner as the chairman of the meeting directs. The result
of the ballot shall be deemed to be the resolution of and passed at the
meeting at which the ballot was demanded. Any business other than that
upon which the ballot has been demanded may be proceeded with pending
the taking of the ballot. In any dispute as to the admission or
rejection of a vote the decision of the chairman made in good faith
shall be final and conclusive.
10.21 ADJOURNMENT - If a meeting of Shareholders is adjourned for less than
thirty (30) days, it shall not be necessary to give notice of the adjourned
meeting, other than by announcement at the earliest meeting that it is
adjourned. If a meeting of Shareholders is adjourned by one or more adjournments
for an aggregate of thirty (30) days or more, notice of the adjourned meeting
shall be given as for an original meeting. At any such adjourned meeting no
business shall be transacted other than business left unfinished at the meeting
from which the adjournment took place.
10.22 RESOLUTION IN WRITING - A resolution in writing signed by all the
Shareholders entitled to vote on that resolution at a meeting of Shareholders is
as valid as if it had been passed at a meeting of the Shareholders, and shall be
held to relate to any date therein stated to be the effective date thereof.
10.23 ONLY ONE SHAREHOLDER - Where the Corporation has only one Shareholder or
only one holder of any class or series of shares, the Shareholder present in
person or by proxy constitutes a meeting.
10.24 ONLY TWO SHAREHOLDERS - Where the Corporation has only two Shareholders a
quorum for transaction of business at any meeting of Shareholders shall be one
(1) person present in person, being a Shareholder entitled to vote thereat, or a
duly appointed proxy of said Shareholder, holding not less than ten percent
(10%) of the outstanding shares of the Corporation entitled to vote at the
meeting.
<PAGE>
SECTION ELEVEN
DIVISIONS AND DEPARTMENTS
11.01 CREATION AND CONSOLIDATION OF DIVISIONS - The Board may cause the business
and operations of the Corporation or any part thereof to be divided or to be
segregated into one or more divisions upon such basis, including without
limitation, character or type of operation, geographical territory, product
manufactured or service rendered, as the Board may consider appropriate in each
case. The Board may also cause the business and operations of any such division
to be further divided into sub-units and the business and operations of any such
divisions or sub-units to be consolidated upon such basis as the Board may
consider appropriate in each case.
11.02 NAME OF DIVISION - Subject to the Act any division or its sub-units may be
designated by such name as the Board may from time to time determine and may
transact business, enter into contracts, sign cheques and other documents of any
kind and do all acts and things under such name, provided that the Corporation
shall set out its name in legible characters in all contracts, invoices,
negotiable instruments and orders for goods or services issued or made by or on
behalf of the Corporation. Any such contract, cheque or documents shall be
binding upon the Corporation as if it had been entered into or signed in the
name of the Corporation.
11.03 OFFICERS OF DIVISION - From time to time the Board or if authorized by the
Board, the Chief Executive Officer, may appoint one or more Officers for any
division, prescribe their powers and duties and settle their terms of employment
and remuneration. The Board or, if authorized by the Board, the Chief Executive
Officer, may remove at its or his pleasure any Officers so appointed, without
prejudice to such Officer's right under any employment contract. Officers of
divisions or their sub-units shall not, as such, be Officers of the Corporation.
SECTION TWELVE
NOTICES
12.01 METHOD OF GIVING NOTICES - Any notice (which term includes any
communication or document) to be given (which term includes sent, delivered or
served) pursuant to the Act, the regulations thereunder, the Articles, the
By-Laws or otherwise to a Shareholder, Director, Officer, auditor or member of a
Committee of Directors shall be sufficiently given if delivered personally to
the person to whom it is to be given or if delivered to his recorded address by
any means of prepaid transmitted or recorded communication. A notice so
delivered shall be deemed to have been given when it is delivered personally or
to the recorded address as aforesaid; a notice so mailed shall be deemed to have
been received by him on the business day following the day the notice is posted;
and a notice so sent by any means of transmitted or recorded communication shall
be deemed to have been given when dispatched or delivered to the appropriate
communication corporation or agency or its representative for dispatch. Subject
to the Act, a notice of meeting of Shareholders shall be deemed to have been
sent to the
<PAGE>
Shareholder on the business day following the day on which it is deposited in
the mail. The Secretary may change or cause to be changed the recorded address
of any Shareholder, Director, Officer, auditor or member of a Committee of
Directors in accordance with any information believed by him to be reliable.
12.02 NOTICE TO JOINT SHAREHOLDERS - if two or more persons are registered as
joint holders of any share, any notice shall be addressed to all of such joint
holders but notice given to any one or more of such persons at the recorded
address for such joint shareholders shall be sufficient notice to all of them.
12.03 COMPUTATION OF TIME - In computing the date when notice must be given
under any provision requiring a specified number of days notice of any meeting
or other event, the date of giving the notice shall be excluded and the date of
the meeting or other event in respect of which the notice is being given shall
be included.
12.04 UNDELIVERED NOTICES - any notice given to a Shareholder pursuant to
Section 12.01 is returned on three (3) consecutive occasions because he cannot
be found or served or is unknown at his recorded address, the Corporation shall
not be required to give any further notices to such Shareholder until he informs
the Corporation in writing of his new recorded address.
12.05 PROOF OF SERVICE - A certificate of the Secretary or other duly authorized
Officer of the Corporation in office at the time of the making of the
certificate, or of any agent of the Corporation as to the facts in relation to
the mailing or delivery or sending of any notice to any Shareholder, Director,
the auditors, or conclusive evidence thereof and shall be binding on every
Shareholder, Director, the auditors or any Officer of the Corporation as the
case may be.
12.06 OMISSIONS AND ERRORS - The accidental omission to give any notice to any
Shareholder, Director, Officer, auditor or member of a Committee of Directors or
the non-receipt of any notice by any such person or any error in any notice not
affecting the substance thereof shall not invalidate any action taken at any
meeting held pursuant to such notice or otherwise founded thereon.
12.07 PERSONS ENTITLED BY DEATH OR OPERATION OF LAW - Every person who by
operation of law, transfer, death of a Shareholder or any other means
whatsoever, shall become entitled to any share, shall be bound by every notice
in respect of such share which shall have been duly given to the Shareholder
from whom he derives his title prior to such person's name and address being
entered on the securities register (whether such notice was given before or
after the happening of the event upon which he became so entitled) and prior to
his furnishing to the Corporation the proof of authority or evidence of his
entitlement prescribed by the Act.
12.08 WAIVER OF NOTICE -Any Shareholder (or his duly appointed proxyholder),
Director, Officer, auditor or member of a Committee of Directors may at any time
waive the sending of any notice, or waive or abridge the time for any notice,
required to be given to him under any provision of the Act, the regulations
thereunder, the Articles, the By-Laws or otherwise and such waiver or
abridgement shall cure any default in the giving or the time of such notice, as
the case
<PAGE>
may be. Any such waiver or abridgement shall be in writing except a waiver of
notice of a meeting of Shareholders or of the Board which may be given in any
manner.
<PAGE>
EXHIBIT 21
PLC SYSTEMS INC.
SUBSIDIARIES OF REGISTRANT
1.) PLC Medical Systems, Inc., a Delaware Corporation
2.) PLC Sistemas Medicos Internacionais GmbH, a German Corporation
3.) PLC Medical Systems AG, a Swiss Corporation
4.) PLC Medical Systems Asia/Pacific Pte Ltd, a Singapore Corporation
5.) PLC Medical Systems Australia Pty Ltd, an Australian Corporation
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of PLC Systems Inc. of our report dated February 18, 2000, except for
Note 12, as to which date is March 28, 2000, included in the 1999 Annual
Report to Shareholders of PLC Systems Inc.
Our audits also included the financial statement schedule of PLC Systems Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this schedule based
on our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
We consent to the incorporation by reference in the Registration Statements
(Form S-3 Nos. 33-98744, 333-34315, 333-53649, 333-68923 and 333-80045 and
Form S-8 Nos. 33-95168 and 333-51547) of PLC Systems Inc. of our report dated
February 18, 2000, except for Note 12, as to which date is March 28, 2000
with respect to the consolidated financial statements and schedule of PLC
Systems Inc. included in this Annual Report (Form 10-K) for the year ended
December 31, 1999.
/s/ Ernst & Young LLP
Ernst & Young LLP
Boston, Massachusetts
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANICAL INFORMATION EXTRACTED FROM CONDENSED
BALANCED SHEET AND CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,467
<SECURITIES> 0
<RECEIVABLES> 2,954
<ALLOWANCES> (418)
<INVENTORY> 2,348
<CURRENT-ASSETS> 9,811
<PP&E> 10,869
<DEPRECIATION> (7,533)
<TOTAL-ASSETS> 15,319
<CURRENT-LIABILITIES> 4,352
<BONDS> 0
0
0
<COMMON> 84,380
<OTHER-SE> (75,495)
<TOTAL-LIABILITY-AND-EQUITY> 15,319
<SALES> 8,400
<TOTAL-REVENUES> 11,636
<CGS> 5,676
<TOTAL-COSTS> 12,726
<OTHER-EXPENSES> 21
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (232)
<INCOME-PRETAX> (6,555)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,555)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,555)
<EPS-BASIC> (.32)
<EPS-DILUTED> (.32)
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