PLC SYSTEMS INC
For the years ended December 31,                 2005       2004       2003       2002       2001                 (All   amounts are in thousands except per share data)         Statement   of Operations Data:                                                 Revenues:                                                 Product sales       $   6,097       $   5,982       $   6,899       $   7,425       $   7,975         Service fees       1,539       1,591       1,435       1,413       1,805         Total revenues:       7,636       7,573       8,334       8,838       9,780         Cost of revenues       3,066       3,069       3,343       4,092       5,591         Gross profit       4,570       4,504       4,991       4,746       4,189         Operating   expenses:                                                 Selling, general   and administrative       3,336       3,329       3,297       3,626       7,438         Research and   development       2,750       2,130       980       889       904         Total operating   expenses       6,086       5,459       4,277       4,515       8,342         Income (loss)   from operations       (1,516   )   (955   )   714       231       (4,153   )     Other income, net       248       175       60       74       251         Liquidation of   subsidiary:                                                 Foreign currency loss       —       —       (257   )   —       —         Income (loss)   before income taxes       (1,268   )   (780   )   517       305       (3,902   )     Provision for   income taxes       —       53       —       —       —         Net income (loss)       $   (1,268   )   $   (833   )   $   517       $   305       $   (3,902   )     Basic and diluted   earnings (loss) per share       $   (0.04   )   $   (0.03   )   $   0.02       $   0.01       $   (0.13   )     Average shares   outstanding:                                                 Basic       30,074       30,025       29,826       29,696       29,248         Diluted       30,074       30,025       30,414       29,784       29,248                       As of December 31,                 2005       2004       2003       2002       2001                 (All   amounts are in thousands )         Balance   Sheet Data:                                                 Working capital       $   8,964       $   10,658       $   7,405       $   6,470       $   5,785         Total assets       12,467       13,327       9,849       10,328       12,298         Secured   borrowings, long-term       —       —       —       408       1,446         Stockholders’ equity       5,543       6,829       7,556       6,725       6,310                              Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview We are a medical device company specializing in innovative technologies for the cardiac and vascular markets. We currently manufacture two lasers that are used in the treatment of cardiovascular disease. Our Heart Laser Systems are used to treat patients with severe angina and the Optiwave 980 is used to ablate cardiac tissue as a means to treat certain heart arrhythmias. Edwards is our exclusive distributor for TMR products in the United States and our largest customer, accounting for approximately 89% and 88% of our total sales in 2005 and 2004, respectively. We expect this sales trend to continue for the near future. 23    Approximately 89% of our revenues in 2005 came from the sale and service of TMR lasers and related disposable kits. Although not a direct measure, we believe a leading indicator of the adoption rate of TMR as a treatment for severe angina is TMR kit shipments to U.S. hospitals. TMR kit shipments to U.S. hospitals through Edwards increased approximately 9% from 2004 to 2005. We remain largely dependent on the success of Edwards’ sales and marketing efforts to increase our installed base of TMR lasers and increase TMR procedure volumes and revenues. Our management reviews a number of key performance indicators to assist them in determining how to allocate resources and run our day to day operations. These indicators include (1) actual prior quarterly sales trends, (2) projected TMR laser and kit sales for the next four quarters, as provided by Edwards in a rolling twelve month sales forecast, (3) research and development progress as measured against internal project plan objectives, (4) budget to actual financial expenditure results, (5) inventory levels (both our own and Edwards’) and (6) short term and long term projected cash flows of the business. Critical Accounting Policies and Estimates Our financial statements are based on the application of significant accounting policies, many of which require us to make significant estimates and assumptions (see Note 2 to the Consolidated Financial Statements). We believe that the following are some of the more material judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations. Inventories Inventories are stated at the lower of cost (computed on a first-in, first-out method) or market value and include allocations of labor and overhead. A specific obsolescence allowance is provided for slow moving, excess and obsolete inventory based on our best estimate of the net realizable value of inventory on hand taking into consideration factors such as (1) actual trailing twelve month sales, (2) expected future product line demand, based in part on sales forecast input received from Edwards, and (3) service part stocking levels which, in management’s best judgment, are advisable to maintain in order to meet warranty, service contract and time and material spare part demands. Historically, we have found our reserves to be adequate. Allowance for Doubtful Accounts For our accounts receivable, we continuously monitor collections from customers, our principal customer being Edwards, and we maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that we have identified. Historically, we have not experienced significant losses related to our accounts receivable. Collateral is not generally required. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Warranty and Preventative Maintenance Costs We warranty our products against manufacturing defects under normal use and service during the warranty period. We obtain similar warranties from a majority of our suppliers, including those who supply critical Heart Laser System components. In addition, under the terms of our TMR distribution agreement with Edwards, we are able to bill Edwards for actual warranty costs, including preventative maintenance services, up to a specified amount during the warranty period. We evaluate the estimated future unrecoverable costs of warranty and preventative maintenance services for our installed base of lasers on a quarterly basis and adjust our warranty reserve accordingly.  24    We consider all available evidence, including historical experience and information obtained from supplier audits. Revenue Recognition We record revenue from the sale of TMR kits and the Optiwave 980 at the time of shipment to Edwards. TMR kit revenues include the amount invoiced to Edwards for kits shipped pursuant to purchase orders received, as well as an amortized portion of deferred revenue related to Edwards’ payment to us of $4,533,333 in February 2004. This payment was made by Edwards in exchange for a reduction in the prospective purchase price we receive from Edwards upon a sale of the kits. We are amortizing this payment from Edwards into our Consolidated Statement of Operations as revenue over a seven year period (culminating in 2010) under the units-of-revenue method as prescribed by Emerging Issues Task Force (EITF) 88-18, Sales of Future Revenue. We determined that a seven year timeframe was the most appropriate amortization period based on a valuation model we used to assess the economic fairness of the payment. Factors we considered in developing this valuation model included the estimated foregone revenues over a seven year period resulting from the reduction in the prospective purchase price payable to us by Edwards, a discount rate deemed appropriate to this transaction and an estimate of the remaining economic useful life of the current TMR kit design, without any benefit being given to potential future product improvements we may make. Management reviews annually, and adjusts if necessary, the prospective revenue amortization rate for kits based on its best estimate of the total number of kits likely remaining to be shipped to hospital customers by Edwards through 2010.  Based on this, and for the years ended December 31, 2005 and 2004, we recorded amortization of $356,000 and $183,000, respectively, which is included in revenues in our Consolidated Statements of Operations. TMR lasers are billed to Edwards in accordance with purchase orders that we receive. Invoiced TMR lasers are recorded as other current assets and deferred revenue on our Consolidated Balance Sheet until such time as the laser is shipped to a hospital, at which time we record revenue and cost of revenue. Under the terms of the Edwards TMR distribution agreement, once Edwards has recovered a prescribed amount of revenue from a hospital for the use or purchase of a TMR laser, any additional revenues earned by Edwards are shared with us pursuant to a formula established in the distribution agreement. We only record our share of such additional revenue, if any, at the time the revenue is earned. We record revenue from the sale of TMR kits and TMR lasers to international distributors or hospitals at the time of shipment. Revenues from service and maintenance contracts are recognized ratably over the life of the contract. Installation revenues related to a TMR laser transaction are recorded as a component of service fees when the laser is installed. 25    Results of Operations Results for the past three years and the related percent of revenues were as follows:             2005       2004       2003                 $       %       $       %       $       %                 (dollars in thousands)         Total revenues       $   7,636       100.0   %   $   7,573       100.0   %   $   8,334       100.0   %     Total cost of sales       3,066       40.2       3,069       40.5       3,343       40.1         Gross profit       4,570       59.8       4,504       59.5       4,991       59.9         Selling,   general & administrative       3,336       43.7       3,329       44.0       3,297       39.6         Research &   development       2,750       36.0       2,130       28.1       980       11.8         Income (loss) from   operations       (1,516   )   (19.9   )   (955   )   (12.6   )   714       8.6         Other income       248       3.2       175       2.3       60       0.7         Liquidation of   subsidiary:                                                         Foreign currency loss       —       —       —       —       (257   )   (3.1)         Income (loss) before   income taxes       (1,268   )   (16.6   )   (780   )   (10.3   )   517       6.2         Provision for income   taxes       —       —       53       0.7       —       —         Net income (loss)       $   (1,268   )   (16.6   )%   $   (833   )   (11.0   )%   $   517       6.2%                       2005       Increase   (decrease)   over   2004       2004       Increase   (decrease)   over   2003       2003                 $       $       %       $       $       %       $                 (dollars in thousands)         Product sales       $   6,097           $   115           2   %       $   5,982           $   (917   )   (13   )%   $   6,899         Service fees       1,539           (52   )       (3   )       1,591           156       11       1,435         Total revenues       7,636           63           1           7,573           (761   )   (9   )   8,334         Product cost of sales       2,316           (30   )       (1   )       2,346           (478   )   (17   )   2,824         Service fees cost of   sales       750           27           4           723           204       39       519         Total cost of revenues       3,066           (3   )       —           3,069           (274   )   (8   )   3,343         Gross profit       4,570           66           1           4,504           (487   )   (10   )   4,991         Selling,   general & administrative expenses        3,336           7           —           3,329           32       1       3,297         Research &   development expenses       2,750           620           29           2,130           1,150       117       980         Total operating expenses       6,086           627           11           5,459           1,182       28       4,277         Liquidation of   subsidiary:                                                                                 Foreign currency loss       —           —           —           —           257       (100   )   (257   )     Other income       248           73           42           175           115       192       60         Income (loss) before   income taxes       (1,268   )       (488   )       (63   )       (780   )       (1,297   )   (251   )   517         Provision for income   taxes       —           (53   )       (100   )       53           53       100       —         Net income (loss)       $   (1,268   )       $   (435   )       (52   )%       $   (833   )       $   (1,350   )   (261   )%   $   517           26     Product Sales TMR laser revenues, the largest component of product sales in 2005, decreased by $457,000, or 13%, as compared to 2004. This decrease is primarily attributable to a $449,000, or 13%, decrease in domestic TMR laser revenues generated through our Edwards sales channel. The $449,000 decline in domestic TMR laser revenues is primarily a result of (1) a decrease in the number of new TMR lasers sold by Edwards in 2005 compared to 2004 and (2) decreased revenue sharing earned under the TMR distribution agreement with Edwards. These decreases were offset in part by a higher average selling price in 2005 on domestic TMR laser sales. International TMR laser revenues decreased $8,000, or 10%, in 2005 as compared to 2004. Disposable TMR kit revenues, the second largest component of product sales, increased by $544,000, or 31%, in 2005 as compared to 2004. The increase is primarily related to a $534,000, or 32%, increase in domestic disposable revenue resulting from a higher volume of kit shipments to Edwards and a $173,000 increase in deferred revenue amortization related to the $4,533,333 payment by Edwards. International disposable TMR kit revenues increased $10,000, or 9%, in 2005 as compared to 2004. Optiwave 980 revenues to Edwards increased $96,000, or 39%, as compared to 2004 due to a higher number of Optiwave 980 units sold to Edwards in 2005. Under our new supply agreement with Edwards that we entered into in March 2006, Edwards has agreed to purchase any additional units of the current generation of Optiwave 980 exclusively from us. We believe that our future revenues from sales of this first generation laser will not exceed $1,000,000 and may be less, depending in part on demand for that product and when, if ever, Edwards chooses to introduce its next generation laser to the market. We have a right of first refusal to develop and manufacture the next generation laser for Edwards; however, at this time we have not had discussions with Edwards regarding any such successor product. Other product sales, relating to sales of new and refurbished surgical tubes, decreased $68,000, or 13%, as compared to 2004. TMR laser revenues, the largest component of product sales in 2004, decreased by $1,020,000, or 23%, as compared to 2003. This decrease is primarily attributable to a $950,000, or 22%, decrease in domestic TMR laser revenues generated through our Edwards sales channel. The $950,000 decline in domestic TMR laser revenues is primarily a result of both a decrease in the number of new TMR laser units sold by Edwards in 2004 compared to 2003 and a lower average domestic selling price on TMR laser sales (down 8% in 2004). International TMR laser revenues decreased by $70,000, or 46%, in 2004. Although we shipped a greater number of HL1 TMR lasers in 2004 compared to 2003, the lasers we did sell were at a lower average selling price. We believe the HL1 may continue to have some ability to be sold in price sensitive foreign countries; however, we expect the number to be in limited quantities, if any. Disposable TMR kit revenues, the second largest component of product sales, decreased by $236,000, or 12%, in 2004 as compared to 2003. The decrease is primarily related to a $143,000, or 8%, decrease in domestic disposable revenue. This $143,000 decrease resulted from a lower volume of kit shipments to Edwards coupled with a reduced share of revenue on TMR kits. The reduced share of revenue on TMR kits is a result of a modification to the TMR distribution agreement in February 2004, whereby our share of the revenue on TMR kits sold to hospitals was reduced from 45% to 36.5% in exchange for a payment by Edwards of $4,533,333. The impact of this reduction to 36.5% compared to what disposable revenue would have been at 45% was a reduction in revenue of $327,000 in 2004. This impact was offset in part by the recognition of $183,000 of deferred revenue amortization in 2004 related to the $4,533,333 payment by Edwards. International disposable revenue decreased by $93,000, or 46%, due to a decrease in the number of TMR kits shipped to international customers in 2004 compared to 2003 and a lower overall average selling  27    price in 2004 on those kits that were sold. The decline in average sale price is the result of a greater number of kits being sold outside the European Union in 2004 compared to 2003. A greater number of the kits sold in 2004 were to countries located in Latin America and the Middle East, where we believe pricing pressures are greater and where we sell through distributors at a discount off of list price. Optiwave 980 revenues to Edwards, a new component of product sales in 2004, increased $249,000 as compared to 2003 when we had no such sales. Other product sales, relating to sales of new and refurbished surgical tubes, increased $90,000, or 20%, in 2004. Service Fee Revenues Service fees decreased $52,000, or 3%, in 2005 as compared to 2004. The decrease is primarily a result of decreased international service fee revenues due to decreased service billings to international customers. Service fees increased $156,000, or 11%, in 2004 as compared to 2003. This increase is primarily a result of increased international revenues due to an increase in billings to international customers as compared to 2003. Gross Profit Total gross profit was $4,570,000, or 60%, of total revenues, for the year ended December 31, 2005 as compared with gross profit of $4,504,000, or 60%, of total revenues, for the year ended December 31, 2004. The increase in gross profit dollars in 2005 as compared to 2004 is due to (1) higher disposable TMR revenues and (2) a higher average domestic selling price on TMR laser sales. These increases were offset in part by (1) a decrease in additional revenue sharing earned under the TMR distribution agreement, (2) a decrease in service related revenues, (3) a decrease in the number of new TMR lasers sold and (4) higher unabsorbed period overhead expenses. Total gross profit was $4,504,000, or 60%, of total revenues, for the year ended December 31, 2004 as compared with gross profit of $4,991,000, or 60%, of total revenues, for the year ended December 31, 2003. The decrease in gross profit dollars in 2004 as compared to 2003 is due to (1) a decrease in the number of new TMR lasers sold, (2) lower disposable TMR revenues, (3) lower revenues on HL1 transactions and (4) a $40,000 decrease in benefit derived from a reduction of our warranty accrual in 2003. These decreases were offset in part by new 2004 product sales of Optiwave 980 and an increase in service related revenues. Selling, General and Administrative Expenses The overall level of expenditures remained relatively unchanged in 2005 as compared to 2004. Salary and related fringe benefits, insurance, depreciation and software expenditures increased while legal and other related corporate expenditures decreased by similar offsetting amounts. The overall increase in 2004 as compared to 2003 is primarily a result of increased expenditures related to legal fees of $167,000 offset in part by reduced international expenditures of $111,000 due to the closing of our Swiss subsidiary in late 2003 and other general corporate expenditures. 28    Research and Development Expenses Research and development expenditures increased 29% in 2005 as compared to 2004 primarily due to increased expenditures in connection with product development work on an additional internal research and development initiative. This increase was offset in part by a decrease in Optiwave 980 System expenditures in 2005. The transition of the Optiwave 980 from research and development to manufacturing in late 2004 contributed to a decrease of expenditures in this area in 2005. The increased expenditures in 2004 as compared to 2003 were incurred in connection with the development of the Optiwave 980 System due to increased salaries and associated fringe benefits, project materials and depreciation related to this program and additional product development work on longer term research and development projects. These increases were offset in part by a $56,000 reduction in an accrued liability related to a past clinical trial that we no longer deemed necessary. We expect to continue to incur significant new research and development expenditures in 2006 and future years in pursuit of our business strategy to broaden and diversify our product portfolio beyond our current TMR offerings. Other Income The largest component of other income is interest income earned on our cash, cash equivalents and short-term investments. Interest income increased $125,000 in 2005 as compared to 2004 primarily due to higher interest rates earned on our cash, cash equivalents and short-term investments. Other income was negatively impacted in comparison to the comparable period in 2004 as a result of a $52,000 insurance settlement received in 2004. Interest income increased $63,000 in 2004 as compared to 2003 due to higher average cash balances. Other income increased $52,000 in 2004 as a result of an insurance settlement received in 2004. Liquidation of Subsidiary—Foreign Currency Loss In 2003, we decided to close our Swiss subsidiary. In closing that subsidiary, we realized a non-recurring foreign currency translation loss of $257,000 in the year ended December 31, 2003. Provision for Income Taxes In 2005, there was no provision for income taxes due to our net loss. In 2004, we recorded a provision for income taxes due to limitations on the utilization of U.S. net operating loss carryforwards being available to reduce taxable income. In 2003, there was no provision for income tax despite a recorded net profit of $517,000 due to the utilization of U.S. net operating loss carryforwards being available to reduce taxable income. Net Income (Loss) The net loss increased in 2005 as compared to 2004 primarily due to increased research and development expenses. The change from net income in 2003 to a net loss in 2004 resulted primarily from lower gross margin dollars generated on lower overall sales coupled with higher research and development expenses. 29    Kit Shipments We view disposable kit shipments to end users as an important metric in evaluating our business. We believe that kit shipments (particularly kit shipments to U.S. hospitals), although not a direct measure, are a reasonable indicator for the adoption of TMR as a therapy in the marketplace. Disposable kit shipments to end users are as follows:             2005       %   Increase   (Decrease)   Over   2004       2004       %   Increase   (Decrease)   Over   2003       2003         Domestic (by   Edwards)       2,056           9   %       1,880           1   %       1,866         International       87           (30   )       125           (7   )       135         Total       2,143           7   %       2,005           0   %       2,001           We believe the 9% growth in domestic kit shipments in 2005 was primarily due to an increased base of installed TMR lasers available to perform TMR procedures and diminished concerns regarding the reimbursement around the TMR procedure that arose in 2004, as explained below. We believe the limited growth in domestic kit shipments in 2004 was in part a result of some uncertainty surrounding reimbursement for the TMR procedure that was created when the Centers for Medicare and Medicaid Services (CMS) convened an advisory panel meeting in July 2004 to review and discuss the evidence and clinical data regarding TMR, even though no changes to Medicare coverage resulted from this panel meeting. We believe this uncertainty, which has since diminished, adversely impacted Edwards’ sales of TMR kits in 2004. The overall limited growth in TMR kit shipments in recent years may also be partly attributable to what we believe may be an ongoing downward trend in the number of bypass surgeries being performed. We believe the proliferation in the number of interventional cardiac procedures being performed, particularly with the recent advent in the use of drug eluting stents, is causing a delay in the number of patients being referred to cardiac surgeons for treatment of their cardiovascular disease. Because a significant number of the total TMR procedures performed each year by cardiac surgeons are done in combination with bypass surgery, we believe the growth in the number of TMR procedures may be being adversely impacted by this reduction in the number of bypass surgeries being performed. Liquidity and Capital Resources Cash, cash equivalents and short-term investments totaled $9,460,000 as of December 31, 2005, a decrease of $218,000 from $9,678,000 as of December 31, 2004. In March 2006, we received $1,500,000 related to the sale of our Optiwave 980 System related disposable manufacturing and development rights to Edwards (See Note 11). Our short-term investments consist of monies invested in bank certificates of deposit. We have no debt obligations. We believe that our existing cash resources will meet our working capital requirements through at least the next 12 months. Cash used for operations in 2005 was $127,000 due to our net loss, which was partially offset by a reduction in our accounts receivable as a result of cash collections from our customers, as well as other favorable working capital changes and non-cash depreciation and amortization. Cash was also used to purchase $57,000 of capital equipment. Cash provided by financing activities consisted of $6,000 of net proceeds from the sales of common shares. The effect of foreign exchange rate changes during 2005 also negatively impacted cash by $40,000. We are largely dependent on the success of Edwards’ sales and marketing efforts in the U.S. to continue to increase the installed base of HL2 and Optiwave 980 lasers and to substantially increase TMR  30    procedural volumes and revenues. Should the installed base of HL2 lasers or TMR procedural volume not increase sufficiently, our liquidity and capital resources will be negatively impacted. Additionally, other unanticipated decreases in operating revenues or increases in expenses or changes or delays in third-party reimbursement to healthcare providers using our products may adversely impact our cash position and require further cost reductions or the need to obtain additional financing. It is not certain that we, working with Edwards and our international distributors, will be successful in achieving broad commercial acceptance of either the Heart Laser Systems or the Optiwave 980, or that we will be able to operate profitably in the future on a consistent basis, if at all. Some hospital customers prefer to acquire the Heart Laser Systems on a usage basis rather than as a capital equipment purchase. We believe this is the result of limitations many hospitals currently have on acquiring expensive capital equipment as well as competitive pressures in the marketplace. A usage business model will result in a longer recovery period for Edwards to recoup its investment in lasers it purchases from us. This results in (1) a delay in our ability to receive additional shared revenue, if any, that we otherwise are entitled to receive under the terms of our distribution agreement with Edwards (see “Critical Accounting Policies and Estimates—Revenue Recognition”) and (2) a delay in the purchase of new lasers by Edwards if its installed base of lasers placed under usage contracts are under-performing and it chooses to re-deploy these lasers to other hospital sites in lieu of purchasing a new laser from us. Our cash position and our need for additional financing to fund operations will be dependent in part upon the number of hospitals that acquire Heart Laser Systems from Edwards on a usage basis and the number and frequency of TMR procedures performed by these hospitals. Furthermore, we have undertaken a new business strategy that involves broadening and diversifying our product portfolio beyond our current TMR offerings, by developing or acquiring new and innovative medical devices to address cardiac and vascular related markets. We believe this strategy will result in our incurring losses for at least the next 12-24 months as we increase our spending in the area of research and development. We cannot be certain that we will be successful in implementing our business strategy or that future sales, if any, from these planned new products will recover the investments we plan to make. If we are unsuccessful in implementing our business strategy, or if the diversification of our product portfolio takes longer or costs more than anticipated, our liquidity and capital resources will be adversely affected and we may need to obtain additional financing. There can be no assurance that, should we require additional financing, such financing will be available on terms and conditions acceptable to us. Should additional financing not be available on terms and conditions acceptable to us, additional actions may be required that could adversely impact our ability to continue to realize assets and satisfy liabilities in the normal course of business. The consolidated financial statements set forth in this report do not include any adjustments to reflect the possible future effects of these uncertainties. 31    Contractual Obligations Our long-term contractual commitments as of December 31, 2005 consisted of operating leases for our facility in Franklin, Massachusetts, which expires in August 2009, and our former facility in Billerica, Massachusetts, which expired in February 2006, and purchase commitments to make payments to suppliers. Future annual minimum payments for these contractual obligations are as follows:             Payment due by period         Contractual Obligations               Total       Less than   1 year       1-3   years       3-5   years       More than   5 years                 (dollars in thousands)         Operating Lease   Obligations       $   953           $   261           $   692           —               —             Purchase Obligations       551           551           —           —               —             Total       $   1,504           $   812           $   692           —               —                                        Off-Balance Sheet Arrangements None. Item 7A. Quantitative and Qualitative Disclosures about Market Risk A portion of our operations consists of sales activities in foreign jurisdictions. We manufacture our products exclusively in the U.S. and sell our products in the U.S. and abroad. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we distribute our products. Our operating results are exposed to changes in exchange rates between the U.S. dollar and foreign currencies, especially the Euro. When the U.S. dollar strengthens against the Euro, the value of foreign sales decreases. When the U.S. dollar weakens, the functional currency amount of sales increases. No assurance can be given that foreign currency fluctuations in the future will not adversely affect our business, financial condition and results of operations, although at present we do not believe that our exposure is significant as international sales represented only 6% of our consolidated sales in 2005. We do not hedge any balance sheet exposures and intercompany balances against future movements in foreign exchange rates. Our interest income and expense are sensitive to changes in the general level of U.S. and foreign interest rates. In this regard, changes in U.S. and foreign interest rates affect the interest earned on our cash and cash equivalents. We do not believe that a 10% change to the applicable interest rates would have a material impact on our future results of operations or cash flows. Item 8. Financial Statements and Supplementary Data All financial statements and other information required to be filed hereunder are filed as Appendix A hereto, are listed under Item 15(a) and are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. 32
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is incorporated herein by reference to our Definitive Proxy Statement under the captions “Securities Authorized for Issuance Under Equity Compensation Plans” and “Security Ownership of Certain Beneficial Owners and Management”. Item 13. Certain Relationships and Related Transactions The information required by this item is incorporated herein by reference to our Definitive Proxy Statement under the caption “Certain Relationships and Related Transactions”. Item 14. Principal Accountant Fees and Services The information required by this item is incorporated herein by reference to our Definitive Proxy Statement under the caption “Principal Accountant Fees and Services”. 34     PART IV Item 15. Exhibits and Financial Statement Schedules (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.            Page         Report of Independent Registered Public Accounting   Firm       F-2         Report of Predecessor Independent Registered Public   Accounting Firm       F-3         Consolidated   Balance Sheets as of December 31, 2005 and 2004       F-4         Consolidated Statements of Operations for the years   ended December 31, 2005, 2004 and 2003       F-5         Consolidated Statements of Stockholders’ Equity for   the years ended December 31, 2005, 2004 and 2003       F-6         Consolidated   Statements of Cash Flows for the years ended December 31, 2005, 2004 and   2003       F-7         Notes to   Consolidated Financial Statements       F-8         Schedule II—Valuation   and Qualifying Accounts       S-1           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) Exhibits. The exhibits filed as part of this annual report on Form 10-K are set forth on the Exhibit Index immediately preceding such exhibits, and are incorporated herein by reference. (c) Financial Statement Schedules. See Item 15(a) above. 35     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 28, 2006   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 dates indicated.        Name               Capacity              Date              /s/ MARK   R. TAUSCHER       President and   Chief Executive        March 28, 2006         Mark   R. Tauscher       Officer (Principal   Executive Officer)                 /S/ JAMES G. THOMASCH       Chief Financial   Officer (Principal        March 28, 2006         James   G. Thomasch       Financial and Principal  Accounting Officer)                 /s/ EDWARD   H. PENDERGAST       Director       March 28, 2006         Edward   H. Pendergast                         /s/ DONALD   E. BOBO       Director       March 28, 2006         Donald   E. Bobo                         /s/ KEVIN   J. DUNN       Director       March 28, 2006         Kevin   J. Dunn                         /s/ BENJAMIN   HOLMES       Director       March 28, 2006         Benjamin   Holmes                         /s/ ALAN   H. MAGAZINE       Director       March 28, 2006         Alan   H. Magazine                         /s/ BRENT   NORTON, M.D.       Director       March 28, 2006         Brent   Norton, M.D.                         /s/ ROBERT   I. RUDKO, PH.D.       Director       March 28, 2006         Robert I. Rudko,   Ph.D.                             36     APPENDIX A PLC SYSTEMS INC. CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2005, 2004 and 2003       PLC SYSTEMS INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS            Page         Report of Independent Registered Public Accounting   Firm           F-2             Report of Predecessor Independent Registered Public   Accounting Firm           F-3             Consolidated Balance Sheets as of December 31,   2005 and 2004           F-4             Consolidated Statements of Operations for the years   ended December 31, 2005, 2004 and 2003           F-5             Consolidated Statements of Stockholders’ Equity for   the years ended December 31, 2005, 2004 and 2003           F-6             Consolidated Statements of Cash Flows for the years   ended December 31, 2005, 2004 and 2003           F-7             Notes to Consolidated Financial Statements           F-8             Financial   Statement Schedule:                         Schedule II—Valuation   and Qualifying Accounts           S-1               F-1     Report of Vitale, Caturano & Company Ltd., Independent Registered Public Accounting Firm The Board of Directors and Stockholders of PLC Systems Inc. We have audited the accompanying consolidated balance sheet of PLC Systems Inc. as of December 31, 2005, and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 15(a). These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States of America.) Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal controls over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also 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 our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PLC Systems Inc. as of December 31, 2005, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Our audit was performed for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The schedule listed in the Index at Item 15 is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. In our opinion, the schedule referred to above presents fairly, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole for the year ended December 31, 2005.        /s/ Vitale, Caturano & Company, Ltd.       Boston, Massachusetts February 10, 2006, except with respect to the matters discussed in Note 11, as to which the date is March 9, 2006 F-2     Report of Ernst & Young LLP, Independent Registered Public Accounting Firm 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, 2004, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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, 2004, and the consolidated results of its operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.        /s/ Ernst & Young LLP       Boston, Massachusetts February 10, 2005 F-3     PLC SYSTEMS INC. CONSOLIDATED BALANCE SHEETS December 31, 2005 and 2004 (In thousands)             2005       2004         ASSETS                         Current assets:                         Cash and cash equivalents       $   2,560       $   9,678         Short-term investments       6,900       —         Accounts receivable—Edwards       634       1,144         Accounts receivable—other, net of allowance of $96   and $104 in 2005 and 2004, respectively       153       261         Inventories, net       963       1,112         Prepaid expenses and other current assets       798       592         Total current assets       12,008       12,787         Equipment,   furniture and leasehold improvements, net       235       293         Other assets       224       247         Total assets       $ 12,467       $ 13,327         LIABILITIES AND STOCKHOLDERS’ EQUITY                         Current liabilities:                         Accounts payable       $      352       $      328         Accrued compensation       677       430         Accrued other       334       301         Deferred revenue—Edwards       1,621       999         Deferred revenue—other       60       71         Total current liabilities       3,044       2,129         Deferred revenue—Edwards       3,692       4,181         Deferred revenue—other       188       188         Total long-term liabilities       3,880       4,369         Commitments and   contingencies (note 8)                         Stockholders’   equity:                         Preferred stock, no par   value, unlimited shares authorized,   none issued and outstanding                         Common stock, no   par value, unlimited shares authorized, 30,080 and 30,068 shares issued and   outstanding at December 31, 2005 and 2004, respectively       93,737       93,731         Accumulated   deficit       (87,850   )   (86,582   )     Accumulated other   comprehensive loss       (344   )   (320   )     Total stockholders’ equity       5,543       6,829         Total liabilities   and stockholders’ equity       $ 12,467       $ 13,327           The accompanying notes are an integral part of the consolidated financial statements. F-4     PLC SYSTEMS INC. CONSOLIDATED STATEMENTS OF OPERATIONS For The Years Ended December 31, 2005, 2004 and 2003 (In thousands, except per share data)             2005       2004       2003         Revenues:                                 Product sales—Edwards       $   5,476       $   5,328       $   6,123         Product sales—other       621       654       776         Service fees—Edwards       1,311       1,322       1,328         Service fees—other       228       269       107         Total revenues       7,636       7,573       8,334         Cost of revenues:                                 Product sales—Edwards       2,064       1,987       2,551         Product sales—other       252       359       273         Service fees—Edwards       577       556       513         Service fees—other       173       167       6         Total cost of revenues       3,066       3,069       3,343         Gross profit       4,570       4,504       4,991         Operating   expenses:                                 Selling, general and administrative       3,336       3,329       3,297         Research and development       2,750       2,130       980         Total operating expenses       6,086       5,459       4,277         Income (loss)   from operations       (1,516   )   (955   )   714         Other income   (expense):                                 Other income, net       248       175       60         Liquidation of subsidiary: foreign currency loss       —       —       (257   )     Income (loss)   before income taxes       (1,268   )   (780   )   517         Provision for   income taxes       —       53       —         Net income (loss)       $   (1,268   )   $   (833   )   $   517         Basic and diluted   earnings (loss) per share       $   (0.04   )   $   (0.03   )   $   0.02         Average shares   outstanding:                                 Basic       30,074       30,025       29,826         Diluted       30,074       30,025       30,414           The accompanying notes are an integral part of the consolidated financial statements. F-5     PLC SYSTEMS INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For The Years Ended December 31, 2005, 2004 and 2003 (In thousands)                                     Accumulated                                                 Other                         Common Stock       Accumulated       Comprehensive                         Shares       Amount       Deficit       Loss       Total         Balance,   December 31, 2002       29,798       $   93,586           $   (86,266   )           $   (595   )       $   6,725         Exercise of stock   options       19       10           —               —           10         Issuance of   common stock       79       40           —               —           40         Comprehensive income:                                                                 Net income       —       —           517               —           517         Foreign currency translation, including $257 of   realized foreign currency   losses       —       —           —               264           264         Total comprehensive income                                                       781         Balance,   December 31, 2003       29,896       $   93,636           $   (85,749   )           $   (331   )       $   7,556         Exercise of stock   options       159       86           —               —           86         Issuance of   common stock       13       9           —               —           9         Comprehensive loss:                                                                 Net loss       —       —           (833   )           —           (833   )     Foreign currency translation       —       —           —               11           11         Total comprehensive loss                                                       (822   )     Balance,   December 31, 2004       30,068       $   93,731           $   (86,582   )           $   (320   )       $   6,829         Issuance of   common stock       12       6           —               —           6         Comprehensive loss:                                                                 Net loss       —       —           (1,268   )           —           (1,268   )     Foreign currency translation       —       —           —               (24   )       (24   )     Total comprehensive loss                                                       (1,292   )     Balance,   December 31, 2005       30,080       93,737           (87,850   )           (344   )       5,543           The accompanying notes are an integral part of the consolidated financial statements. F-6     PLC SYSTEMS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For The Years Ended December 31, 2005, 2004 and 2003 (In thousands)             2005       2004       2003         Operating activities:                                 Net income (loss)       $   (1,268   )   $   (833   )   $   517         Adjustments to reconcile   net income (loss) to net cash provided by (used for) operating activities:                                 Depreciation and amortization       140       122       122         Foreign currency loss on liquidation of subsidiary       —       —       257         Change in assets   and liabilities:                                 Accounts receivable—Edwards       510       (43   )   119         Accounts receivable—other       119       (134   )   (13   )     Inventory       148       (226   )   22         Prepaid expenses and other assets       (208   )   (102   )   (120   )     Accounts payable       24       30       (104   )     Deferred revenue—Edwards       134       4,514       258         Deferred revenue—other       (7   )   34       20         Accrued liabilities       281       (4   )   (471   )     Net cash provided   by (used for) operating activities       (127   )   3,358       607         Investing   activities:                                 Purchase of investments       (8,400   )   —       —         Maturity of investments       1,500       —       —         Purchase of equipment       (57   )   (180   )   (91   )     Net cash used for   investing activities       (6,957   )   (180   )   (91   )     Financing   activities:                                 Net proceeds from sales of common shares       6       95       50         Secured borrowings       —       —       (137   )     Net cash provided   by (used for) financing activities       6       95       (87   )     Effect of   exchange rate changes on cash and cash equivalents       (40   )   28       16         Net increase   (decrease) in cash and cash equivalents       (7,118   )   3,301       445         Cash and cash   equivalents at beginning of year       9,678       6,377       5,932         Cash and cash   equivalents at end of year       $   2,560       $   9,678       $   6,377           The accompanying notes are an integral part of the consolidated financial statements. F-7     PLC SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 1.   Business PLC Systems Inc. (“PLC” or the “Company”) is a medical device company specializing in innovative technologies for the cardiac and vascular markets. The Company currently manufactures two lasers that are used in the treatment of cardiovascular disease. PLC pioneered the CO2 Heart Laser System (“The Heart Laser System”) that cardiac surgeons use to perform carbon dioxide (CO2) transmyocardial revascularization (“TMR”) to alleviate symptoms of severe angina. In addition, the Company manufactures the Optiwave 980 laser (“Optiwave 980”) under a supply agreement with Edwards Lifesciences LLC (“Edwards”). The Optiwave 980 is expected to be utilized by surgeons to ablate cardiac tissue as a means to treat certain heart arrhythmias. Edwards is the Company’s exclusive distributor for TMR products in the United States. Edwards is also the Company’s largest shareholder, owning approximately 18% of its outstanding common stock as of December 31, 2005, and has a representative on the Board of Directors. 2.   Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of PLC and its two wholly owned subsidiaries, PLC Medical Systems, Inc. and PLC Sistemas Medicos Internacionais (Deutschland) GmbH. During 2003, PLC Medical Systems AG was substantially liquidated resulting in the recognition of $257,000 of foreign currency translation losses. All intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires the Company 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. Cash, Cash Equivalents and Short-Term Investments The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents at December 31, 2005 and 2004 consist of investments in money market funds. Short-term investments consist of monies invested in bank certificates of deposits with remaining maturities greater than three months and less than one year. These investments are carried at cost, which approximates fair value. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk include cash, cash equivalents and short-term investments and accounts receivable. The Company believes it minimizes its exposure to potential concentrations of credit risk by placing its cash equivalents and short- F-8    PLC SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 2.   Significant Accounting Policies (Continued) term investments in high-quality financial instruments with a high quality institution. At December 31, 2005 and 2004, the majority of the cash, cash equivalents and short-term investments balance was invested with a single financial institution. The Company has a concentration of credit risk due to its exclusive supply arrangements with Edwards. Edwards accounted for 81% of the Company’s accounts receivable at both December 31, 2005 and 2004. Edwards also accounted for 89%, 88% and 89% of the Company’s revenues for the years ended December 31, 2005, 2004 and 2003, respectively. Collateral is not required on sales to Edwards. Concentration of Revenues Approximately 89%, 90% and 95% of the Company’s revenues for the years ended December 31, 2005, 2004 and 2003, respectively, were derived from the sales and service of the Heart Laser System. Allowance for Doubtful Accounts For the Company’s accounts receivable, the Company continuously monitors collections from customers, its principal customer being Edwards, and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that the Company has identified. Historically, the Company has not experienced significant losses related to its accounts receivable. Collateral is generally not required. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventories Inventories are stated at the lower of cost (computed on a first-in, first-out method) or market value and include allocations of labor and overhead. A specific obsolescence allowance is provided for slow moving, excess and obsolete inventory based on management’s best estimate of the net realizable value of inventory on hand taking into consideration factors such as actual trailing twelve month sales, expected future product line sales and estimated required service part stocking levels needed to meet warranty, service contract and time and material spare part demands. Equipment, Furniture, Leasehold Improvements and Long-Lived Assets Equipment, furniture 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:     Equipment       3-5   years         Office furniture   and fixtures       5   years         Leasehold improvements       Shorter of life of lease   or useful life           F-9    PLC SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 2.   Significant Accounting Policies (Continued) The Company reviews and evaluates long-lived assets for impairment on a regular basis. In the Company’s opinion, long-lived assets are not impaired as of the balance sheet dates presented. Warranty and Preventative Maintenance Costs The Company warranties its products against manufacturing defects under normal use and service during the warranty period. The Company obtains similar warranties from a majority of its suppliers, including those who supply critical Heart Laser System components. In addition, under the terms of its TMR distribution agreement with Edwards, the Company is able to bill Edwards for actual warranty costs, including preventative maintenance services, up to a specified amount during the warranty period. The Company evaluates the estimated future unrecoverable costs of warranty and preventative maintenance services for its installed base of lasers on a quarterly basis and adjusts its warranty reserve accordingly. The Company considers all available evidence, including historical experience and information obtained from supplier audits. Changes in the warranty accrual were as follows (in thousands):             Year Ended   December 31,                 2005       2004         Balance,   beginning of period           $   60               $   60             Change in   liability for warranties issued during the period           (7   )           4             Change in   liability for pre-existing warranties           7               (4   )         Balance, end of period           $   60               $   60               Revenue Recognition The Company records revenue from the sale of TMR kits and the Optiwave 980 at the time of shipment to Edwards. TMR kit revenues include the amount invoiced to Edwards for kits shipped pursuant to purchase orders received, as well as an amortized portion of deferred revenue related to Edwards’ payment of $4,533,333 in February 2004. This payment was made by Edwards in exchange for a reduction in the prospective purchase price the Company receives from Edwards upon a sale of the kits (see Note 3). The Company is amortizing this payment from Edwards into its Consolidated Statement of Operations as revenue over a seven year period (culminating in 2010) under the units-of-revenue method as prescribed by Emerging Issues Task Force (EITF) 88-18, Sales of Future Revenue. Management determined that a seven year timeframe was the most appropriate amortization period based on a valuation model they used to assess the economic fairness of the payment. Factors management considered in developing this valuation model included the estimated foregone revenues over a seven year period resulting from the reduction in the prospective purchase price payable to the Company by Edwards, a discount rate deemed appropriate to this transaction and an estimate of the remaining economic useful life of the current TMR kit design, without any benefit being given to potential future product improvements the Company may make. Management reviews annually, and adjusts if necessary, the prospective revenue amortization rate for kits based on its best estimate of the total number of kits likely remaining to be shipped to hospital customers by Edwards through 2010.  Based on this, and for the years ended  F-10    PLC SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 2.   Significant Accounting Policies (Continued) December 31, 2005 and 2004, the Company recorded amortization of $356,000 and $183,000, respectively, which is included in revenues in the Consolidated Statements of Operations. TMR lasers are billed to Edwards in accordance with purchase orders that the Company receives. Invoiced TMR lasers are recorded as other current assets and deferred revenue on the Company’s Consolidated Balance Sheet until such time as the laser is shipped to a hospital, at which time the Company records revenue and cost of revenue. Under the terms of the Edwards TMR distribution agreement, once Edwards has recovered a prescribed amount of revenue from a hospital for the use or purchase of a TMR laser, any additional revenues earned by Edwards are shared with the Company pursuant to a formula established in the distribution agreement. The Company only records its share of such additional revenue, if any, at the time the revenue is earned. The Company records revenue from the sale of TMR kits and TMR lasers to international distributors or hospitals at the time of shipment. Revenues from service and maintenance contracts are recognized ratably over the life of the contract. Installation revenues related to a TMR laser transaction are recorded as a component of service fees when the laser is installed. Foreign Currency Translation Assets and liabilities are translated into U.S. dollars at end-of-period 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. During 2003, the liquidation of PLC Medical Systems AG was substantially complete, resulting in the recognition of $257,000 of foreign currency translation losses. Gains and losses from foreign currency transactions are recorded as other income, net, in the accompanying statements of operations and are not material. Earnings (Loss) per Share In 2005 and 2004, basic and diluted loss per share have been computed using only the weighted average number of common shares outstanding during the period without giving effect to any potential future issuances of common stock related to stock option programs and warrants, since their inclusion would be antidilutive. In 2003, basic earnings per share have been computed using only the weighted average number of common shares outstanding during the period, while diluted earnings per share was computed using the weighted average number of common shares outstanding during the period plus the effect of outstanding stock options and warrants using the treasury stock method. In calculating diluted earnings per share, the dilutive effect of stock options and warrants is computed using the average market price for the respective period. F-11    PLC SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 2.   Significant Accounting Policies (Continued) For the years ended December 31, 2005, 2004 and 2003, 5,788,000, 6,170,000 and 3,866,000 shares attributable to outstanding stock options and warrants were excluded from the calculation of diluted earnings per share because the effect was antidilutive. The following table sets forth the computation of basic and diluted earnings per share:             Years Ended December 31,                 2005       2004       2003                 (In thousands, except per share data)         Net income (loss)   available for common shareholders       $   (1,268   )   $   (833   )   $   517         Weighted average   outstanding shares of common stock       30,074       30,025       29,826         Dilutive effect of   employee stock options and warrants       —       —       588         Common stock and common   stock equivalents       30,074       30,025       30,414         Earnings (loss) per   share:                                 Basic       $   (0.04   )   $   (0.03   )   $   0.02         Diluted       $   (0.04   )   $   (0.03   )   $   0.02           Stock Based Compensation The Company has historically granted 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. Through December 31, 2005 the Company adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-based Compensation (“SFAS 123”), and accounted for its stock option plans in accordance with the provisions of Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees (“APB Opinion No. 25”). Under APB Opinion No. 25, compensation expense with respect to such awards is not recognized if on the date the awards were granted the exercise price was equal to or greater than the fair market value of the underlying common shares. The following table illustrates the effect on net income (loss) and basic earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation:             Years Ended December 31,                 2005       2004       2003                 (In thousands, except per share data)         Net income (loss)   attributable to common stockholders—As reported       $   (1,268   )   $   (833   )   $   517         Deduct total stock-based   compensation expense determined under fair value based method for all stock   option awards       (186   )   (470   )   (147   )     Net income (loss)   attributable to common stockholders—Pro forma       $   (1,454   )   $   (1,303   )   $   370         Earnings (loss) per   basic and diluted share attributable to common stockholders—As reported       $   (0.04   )   $   (0.03   )   $   0.02         Earnings (loss) per basic and diluted share   attributable to common stockholders—Pro forma       $   (0.05   )   $   (0.04   )   $   0.01           F-12    PLC SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 2.   Significant Accounting Policies (Continued) The fair value of options issued at the date of grant were estimated using the Black-Scholes model with following weighted average assumptions:             2005       2004       2003         Expected life   (years)       3       3       3         Interest rate       3.68%       1.47%-2.53%       1.59%-2.98%         Volatility       40.7%       73.4%-80.3%       58.5%-78.8%         Expected dividend   yield       None       None       None         Weighted average   fair value of options granted during the year       $   0.17       $   0.41       $   0.25                        Recent Accounting Pronouncements On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), Share-Based Payments (“SFAS 123R”), which is a revision of SFAS No. 123. SFAS 123R supersedes APB Opinion No. 25. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. The disclosure-only approach permitted by SFAS 123 and elected by the Company through December 31, 2005 is no longer an alternative. The Company is required to adopt the provisions of SFAS 123R effective January 1, 2006. The impact of adoption of SFAS 123R will depend in part on levels of share-based payments granted in the future and the above pro-forma disclosures are not necessarily representative of the effects on reported net income (loss) for future years. In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4 (“SFAS 151”). SFAS 151 amends the guidance in ARB No 43, Chapter 4, Inventory Pricing, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) should be recognized as current-period charges. In addition, SFAS 151 requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS 151 are effective for fiscal years beginning after June 15, 2005. The Company does not believe that the adoption of SFAS 151 will have a material impact on the Company’s financial condition, results of operations or liquidity. In May 2005, the FASB issued FASB Statement No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). Previously, APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements” required the inclusion of the cumulative effect of changes in accounting principle in net income of the period of the change. SFAS 154 requires companies to recognize a change in accounting principle, including a change required by a new accounting pronouncement when the pronouncement does not include specific transition provisions, retrospectively to prior periods’ financial statements. The Company will assess the impact of a retrospective application of a change in accounting principle in accordance with SFAS 154 when such a change arises after the effective date of January 1, 2006. F-13    PLC SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 3.   Edwards Transaction In February 2004, the Company signed an agreement with Edwards to assume development and manufacturing of the Optiwave 980 and related system disposables. Subsequent to December 31, 2005, the Company and Edwards terminated this agreement and entered into a new modified supply agreement whereby the Company will, commencing in March 2006, now only manufacture the Optiwave 980 for Edwards and Edwards will assume all development and manufacturing responsibilities for the Optiwave 980 system disposables (see Note 11, “Subsequent Event”). In conjunction with signing the February 2004 agreement, the terms of the Company’s TMR distribution agreement with Edwards were modified to (1) extend the term of the agreement until at least October 17, 2017 and (2) reduce the Company’s share of revenue on TMR kits sold to hospitals. The Company received as consideration from Edwards, a lump-sum payment of $4,533,333, which initially was recorded as deferred revenue in the Company’s Consolidated Balance Sheet. See Note 2, “Revenue Recognition”. 4.   Inventories Inventories consist of the following at December 31 (in thousands):             2005       2004         Raw materials       $   701       $   889         Work in process       67       130         Finished goods       195       93                 $   963       $   1,112           At December 31, 2005 and 2004, inventories are stated net of a reserve of $533,000 and $528,000, respectively, for potentially excess and obsolete inventory. 5.   Equipment, Furniture and Leasehold Improvements Equipment, furniture and leasehold improvements consist of the following at December 31 (in thousands):             2005       2004         Equipment       $   3,220       $3,613         Office furniture   and fixtures       582       582         Leasehold   improvements       346       346                 4,148       4,541         Less accumulated   depreciation and amortization       3,913       4,248                 $   235       $   293                     Depreciation expense was $114,000, $94,000 and $89,000 for the years ended December 31, 2005, 2004 and 2003, respectively. F-14    PLC SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 6.   Stockholders’ Equity In January 2001, the Company issued 5,333,333 shares of common stock to Edwards at $.75 per share resulting in net proceeds of approximately $3,898,000. Edwards has certain preemptive rights to maintain their ownership position relative to future stock offerings. The Company also issued 1,000,000 warrants to purchase shares of common stock at $1.50 per share, 1,000,000 warrants to purchase shares of common stock at $2.50 per share, and 1,000,000 warrants to purchase shares of common stock at $3.50 per share. These warrants all expired unexercised in January 2004, January 2005 and January 2006, respectively. In connection with this transaction, the Company issued to a financial advisor a warrant to purchase 100,000 shares at $1.00 per share. This warrant expired unexercised in January 2006. At December 31, 2005, there were 7,576,000 shares of authorized but unissued common stock reserved for issuance under all stock option plans, the employee stock purchase plan and stock warrants. The Company has unlimited authorized shares of preferred stock. The Board of Directors is authorized to fix designations, relative rights, preferences and limitations in the preferred stock at the 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. 7.   Stock Option and Stock Purchase Plans In May 2005, the Company adopted the 2005 Stock Incentive Plan (the “2005 Plan”). The 2005 Plan has replaced the 1997 Executive Stock Option Plan, 2000 Equity Incentive Plan, 2000 Non-Statutory Stock Option Plan and 2000 Non-Qualified Performance and Retention Equity Plan (the “Previous Plans”), under which no further awards can be granted from the Previous Plans after the adoption of the 2005 Plan. The number of Options that may be granted under the 2005 Plan is equal to 2,156,175 shares of common stock (subject to adjustment in the event of stock splits and other similar events), plus such number of shares as may become available under the Previous Plans after the date of the adoption of the 2005 Plan because any award previously granted under any such plan expires or is terminated, surrendered or cancelled without having been fully exercised or is forfeited in whole or in part or results in any common stock not being issued, provided that such number of additional shares may not exceed 2,535,492. 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 the Previous Plans and the 2005 Plan become exercisable either immediately, ratably over one to four years from the date of grant, or based on the attainment of specific performance criteria, and expire ten years from the date of grant. In May 2005 and 2004, the Company granted new options to purchase 690,000 and 895,000 shares of the Company’s common stock, respectively, to employees and non-employee directors which vested immediately upon granting. The Company grants stock options to its non-employee directors. Generally, new non-employee directors receive an initial grant of an option to purchase 30,000 shares of the Company’s common stock that vests in installments over three years. Once the initial grant has fully vested, non-employee directors other than the Chairman of the Board receive an annual grant of an option to purchase 15,000 shares of the Company’s common stock that generally vests either immediately or in four equal quarterly installments. The Chairman of the Board receives an annual grant of an option to purchase 30,000 shares  F-15    PLC SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 7.   Stock Option and Stock Purchase Plans (Continued) of the Company’s common stock that vests either immediately or in four equal quarterly installments in the same manner as the options granted annually to the other non-employee directors. All such options have an exercise price equal to the fair market value of the common stock on the date of grant. The grants of options to non-employee directors discussed above are not awarded to the Edwards representative who holds a Company board position. 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. In August 2002, the Company communicated to its domestic employees an offer to exchange certain employee stock options having an exercise price of $.75 or more per share previously granted to them in return for nonqualified stock options of the Company at an exchange ratio of one new option share for one eligible option share surrendered (the “Exchange Offer”). Each employee who accepted the Exchange Offer was required to exchange all option shares subject to each option grant that the employee surrendered for exchange and to forfeit certain stock options granted to him or her on or after February 26, 2002. Generally, the new options granted in this exchange vest on a cumulative basis with one-sixth of the new option vesting on the date the new option was granted and the remaining portion of the new option vesting in five equal installments at the end of each six-month period thereafter. The Company issued on or about March 26, 2003 new options to purchase 999,345 shares of the Company’s Common Stock in exchange for the options surrendered in this option exchange program. Because the new options were granted six months and a day from the cancellation, no compensation expense resulted from the grant of the new options. The following is a summary of option activity under all Plans (in thousands, except per option data):             2005       2004       2003                 Number of   Options       Weighted   Average   Exercise   Price       Number of   Options       Weighted   Average   Exercise   Price       Number of   Options       Weighted   Average   Exercise   Price         Outstanding,   beginning of year           4,070               $   1.38               3,346               $   1.51               2,149               $   2.25             Options granted           690               0.55               927               0.82               1,378               0.53             Options exercised           —               —               (158   )           0.54               (20   )           0.51             Options cancelled           (2   )           0.81               (23   )           1.15               (71   )           1.74             Options cancelled upon termination of expired stock   option plans           (70   )           5.94               (22   )           4.63               (90   )           4.00             Outstanding, end   of year           4,688               1.19               4,070               1.38               3,346               1.51             Exercisable, end of year           4,586               1.19               3,539               1.50               2,258               1.97               F-16     PLC SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 7.   Stock Option and Stock Purchase Plans (Continued) The following table summarizes stock options at December 31, 2005 (number of options in thousands):             Outstanding       Exercisable         Range of Exercise Prices               Number of   Options       Average   Remaining   Contractual   Life (Years)       Weighted   Average   Exercise   Price       Number of   Options       Weighted   Average   Exercise   Price         $0.45-$0.90           3,860               7.44               0.61               3,780               0.60             $1.25-$3.00           336               4.56               2.16               314               2.21             $3.88-$8.88           492               2.30               5.08               492               5.08                         4,688               6.69               1.19               4,586               1.19                                         The Company has a 2000 Employee Stock Purchase Plan (the “Purchase Plan”) for all eligible employees.  Prior to December 1, 2005, shares of the Company’s common stock could be purchased at six-month intervals at 85% of the lower of the fair market value on the first or the last day of each six-month period.  On November 30, 2005, the Company adopted an amendment to the Purchase Plan which provides that the purchase price for each share of the Company’s common stock purchased under the Plan will be 95% of the closing price of the Company’s common stock on the last business day of the relevant plan period.  The change in the purchase price was effective beginning with the plan period commencing on December 1, 2005.  Employees may purchase shares having a value not exceeding 10% of their gross compensation during an offering period, subject to certain additional limitations.  Under the Purchase Plan, employees of the Company purchased 12,044 shares of common stock in 2005, 13,390 shares of common stock in 2004 and 78,832 shares of common stock in 2003 at average prices of $0.50, $0.70 and $0.51 per share, respectively.  At December 31, 2005, 322,487 shares were reserved for future issuance under the Purchase Plan. 8.   Lease Commitments The Company leases its corporate office under an operating lease agreement which expires in August 2009. In addition to the minimum lease payments, the agreement requires payment of the Company’s pro-rata share of property taxes and building operating expenses. The Company also leased additional manufacturing space under an operating lease which expired in February 2006. As of December 31, 2005, future minimum lease payments are estimated to be as follows (in thousands):     Year               Future Minimum   Lease Payments         2006           $   261             2007           255             2008           261             2009           176                         $953               Total rent expense was $316,000 in 2005, $294,000 in 2004 and $296,000 in 2003. F-17    PLC SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 9.   Income Taxes The provision for income taxes in the year ended December 31, 2004 shown in the Consolidated Statement of Operations represents current federal income taxes payable. 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):             2005       2004         Net U.S.   operating loss carryforwards       $   20,827       $   20,138         Net foreign   operating loss carryforwards       341       377         Accrued expenses   and reserves       640       585         Tax credits       1,027       1,039         Other       2,440       2,403         Total deferred tax assets       25,275       24,542         Valuation allowance       (25,275   )   (24,542   )     Net deferred tax   assets       $   —       $   —           The valuation allowance increased by approximately $733,000 in 2005 primarily due to a net loss and an increase in temporary differences associated with deferred revenue and accrued expenses in 2005. The Company recorded the valuation allowance due to the uncertainty of the realizability of the related net deferred tax asset of $25,275,000. Income (loss) before taxes consisted of the following (in thousands):             2005       2004       2003         Domestic       $   (1,167   )   $   (4,496   )   $   1,098         Foreign       (101   )   3,663       (581   )             $   (1,268   )   $   (833   )   $   517           The amounts reported above for the 2004 domestic and foreign income (loss) before taxes include the effects of the write-off of all unsettled intercompany receivables and payables carried on the books of the Company’s U.S. and Swiss operating subsidiaries at the time the Swiss operating subsidiary was formally liquidated in 2004. As such, the U.S. operating subsidiary recorded an expense of approximately $3,800,000 and the Swiss operating subsidiary recorded income of the same amount in 2004. F-18    PLC SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 9.   Income Taxes (Continued) Income taxes (benefit) computed at the federal statutory rate differ from amounts provided as follows (in thousands):             2005       2004       2003         Statutory income tax   expense (benefit)       $   (431   )   $   (283   )   $   471         Utilization of loss   carryforwards       (30   )   (1,398   )   (471   )     Unbenefited U.S. losses       396       1,529       —         Unbenefited foreign   losses       65       152       —         Benefit for income taxes       $   —       $   —       $   —           At December 31, 2005, the Company had U.S. net operating loss carryforwards available to reduce future taxable income of approximately $52 million, which expire at various dates through 2025. In addition, the Company had foreign net operating loss carryforwards of approximately $900,000. 10.   Segment Information The Company operates in one industry segment - the development, manufacture and sale of medical lasers and related products. Net sales to unaffiliated customers (by origin) are summarized below (in thousands):             North   America       Europe       Total         2005                                                 Net sales           $   7,213               $   423           $   7,636         2004                                                 Net sales           $   7,111               $   462           $   7,573         2003                                                 Net sales           $   7,864               $   470           $   8,334           All of the Company’s long-lived assets are located in North America. 11.   Subsequent Event In March 2006, the Company entered into an agreement with Edwards whereby the Company received a cash payment of $1,500,000 in consideration for selling its Optiwave 980 system related disposable manufacturing and development rights to Edwards. The Company will continue to be the exclusive manufacturer of the current generation of Optiwave 980 for Edwards and will have certain rights of first refusal related to the development and manufacture of the next generation laser. Separately, Edwards will pay the Company a royalty on all future Optiwave 980 system related disposable sales until such time that cumulative royalty payments from Edwards reach $1,700,000. F-19    PLC SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 12.   Selected Quarterly Data (unaudited)             March 31       June 30       September 30       December 31       Total                 (In thousands, except per share data)         2005                                                                         Total revenue           $   1,943           $   1,982           $   1,900               $   1,811           $   7,636         Gross profit           1,215           1,192           1,085               1,078           4,570         Loss from   operations           (236   )       (354   )       (464   )           (462   )       (1,516   )     Net loss           (184   )       (290   )       (397   )           (397   )       (1,268   )     Loss per share,   basic and diluted           (0.01   )       (0.01   )       (0.01   )           (0.01   )       (0.04   )     2004                                                                         Total revenue           $   1,909           $   1,796           $   1,606               $   2,262           $   7,573         Gross profit           1,143           1,049           1,056               1,256           4,504         Income (loss)   from operations           (376   )       (333   )       (446   )           200           (955   )     Net income (loss)           (350   )       (251   )       (436   )           204           (833   )     Earnings (loss) per   share, basic and diluted           (0.01   )       (0.01   )       (0.01   )           0.01           (0.03   )         F-20     Schedule II PLC SYSTEMS INC. Valuation and Qualifying Accounts                     Additions                                 Balance at       Charged to               Balance at                 Beginning       Costs and               End of         Description               of Period       Expenses       Deductions       Period         For the Year Ended   December 31, 2005                                                         Allowance for Doubtful Accounts       $   104,000           $   (8,000   )           —           $   96,000         For the Year Ended   December 31, 2004                                                         Allowance for Doubtful Accounts       $   115,000           $   (2,000   )           $   9,000           $   104,000         For the Year Ended   December 31, 2003                                                         Allowance for   Doubtful Accounts       $   192,000           $   (14,000   )           $   63,000           $   115,000                                 S-1     EXHIBIT INDEX    Exhibit             Number       Description of Document     3.1       Articles of Continuance, pursuant to the Yukon   Business Corporations Act, as amended, incorporated by reference to the   Registrant’s annual report on Form 10-K for the year ended   December 31, 2004, as previously filed with the Securities and Exchange   Commission.     3.2       By-Law No. 1, a   By-Law relating generally to the transaction of the business and affairs of   PLC Systems Inc., incorporated by reference to the Registrant’s annual report   on Form 10-K for the year ended December 31, 1999, as   previously filed with the Securities and Exchange Commission.     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#       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.     10.2#       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.     10.3#       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.     10.4#       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, as   previously filed with the Securities and Exchange Commission.     10.5#       2000 Non-qualified   Performance and Retention Equity Plan, incorporated by reference to the   Registrant’s annual report on Form 10-K for the year ended   December 31, 2000, as previously filed with the Securities and Exchange   Commission.     10.6#       2000 Non-Statutory Stock   Option Plan, incorporated by reference to the Registrant’s annual report on   Form 10-K for the year ended December 31, 2001, as previously   filed with the Securities and Exchange Commission.     10.7#       2000 Equity Incentive   Plan, incorporated by reference to the Registrant’s annual report on   Form 10-K for the year ended December 31, 2001, as previously   filed with the Securities and Exchange Commission.     10.8#       Form of Stock   Option Grant Letter to Employees of the Registrant under the Registrant’s 1995   Stock Option Plan, 1997 Executive Stock Option Plan, 2000 Equity Incentive   Plan and 2000 Non-Qualified Performance and Retention Plan, incorporated by   reference to the Registrant’s quarterly report on Form 10-Q for   the quarter ended June 30, 2004, as previously filed with the Securities   and Exchange Commission.     10.9#       Form of Stock   Option Grant Letter to Non-Employee Directors of the Registrant under the   Registrant’s 1995 Stock Option Plan, 1997 Executive Stock Option Plan and   2000 Equity Incentive Plan., incorporated by reference to the Registrant’s   quarterly report on Form 10-Q for the quarter ended   September 30, 2004, as previously filed with the Securities and Exchange   Commission.     10.10#       2005 Stock Incentive   Plan, incorporated by reference to the Registrant’s current report on   Form 8-K filed with the Securities and Exchange Commission on   May 24, 2005.            10.11#       Form of Stock Option Grant Letter for Employees   of the Registrant under the Registrant’s 2005 Stock Incentive Plan,   incorporated by reference to the Registrant’s current report on Form 8-K   filed with the Securities and Exchange Commission on May 24, 2005.     10.12#       Form of Stock   Option Grant Letter for Non-Employee Directors of the Registrant under the   Registrant’s 2005 Stock Incentive Plan, incorporated by reference to the   Registrant’s current report on Form 8-K filed with the Securities   and Exchange Commission on May 24, 2005.     10.13#       Employment Agreement of   James G. Thomasch, dated November 4, 1999, incorporated by reference to   the Registrant’s annual report on Form 10-K for the year ended   December 31, 2000, as previously filed with the Securities and Exchange   Commission.     10.14#       Employment Agreement of   Mark R. Tauscher, dated December 22, 1999, incorporated by reference to   the Registrant’s annual report on Form 10-K for the year ended   December 31, 2000, as previously filed with the Securities and Exchange   Commission.     10.15#       Terms of Employment   dated October 28, 2003 between the Registrant and Dr. Robert I.   Rudko, incorporated by reference to the Registrant’s annual report on   Form 10-K for the year ended December 31, 2003, as previously   filed with the Securities and Exchange Commission.     10.16#       Amendment dated   March 15, 2005 to Terms of Employment between PLC Medical   Systems, Inc. and Dr. Robert I. Rudko, incorporated by reference to   the Registrant’s current report on Form 8-K filed with the   Securities and Exchange Commission on March 17, 2005.     10.17+*       Distribution Agreement,   dated January 9, 2001, by and among the Registrant, PLC Medical   Systems, Inc. and Edwards Lifesciences LLC.     10.18       Shareholders Agreement,   dated January 9, 2001, by and between the Registrant and Edwards   Lifesciences Corporation, incorporated by reference to the Registrant’s   quarterly report on Form 10-Q for the quarter ended March 31,   2001, as previously filed with the Securities and Exchange Commission.     10.19+       Distribution Agreement   by and among the Registrant, PLC Medical Systems, Inc. and Edwards   Lifesciences LLC dated February 24, 2004, incorporated by reference to   the Registrant’s quarterly report on Form 10-Q for the quarter   ended March 31, 2004, as previously filed with the Securities and   Exchange Commission.     10.20+       Contribution,   Development and Manufacturing Agreement by and among the Registrant, PLC Medical   Systems, Inc. and Edwards Lifesciences LLC dated as of February 24,   2004, incorporated by reference to the Registrant’s quarterly report on   Form 10-Q for the quarter ended March 31, 2004, as previously   filed with the Securities and Exchange Commission.     10.21       First Amendment to   Distribution Agreement entered into as of February 24, 2004 by and among   Edwards Lifesciences LLC, the Registrant and PLC Medical Systems, Inc.,   incorporated by reference to the Registrant’s quarterly report on   Form 10-Q for the quarter ended March 31, 2004, as previously   filed with the Securities and Exchange Commission.     10.22       First Amendment to   Shareholders Agreement entered into as of February 24, 2004 by and   between Edwards Lifesciences Corporation and the Registrant, incorporated by   reference to the Registrant’s quarterly report on Form 10-Q for   the quarter ended March 31, 2004, as previously filed with the   Securities and Exchange Commission.     10.23*#       Compensatory   Arrangements with Executive Officers.     10.24*#       Compensatory   Arrangements with Non-Employee Directors.     10.25*#       Severance Agreements   with Certain Executive Officers.     21.1*       Subsidiaries of the   Registrant.            23.1*       Consent of Vitale,   Caturano & Company Ltd.     23.2*       Consent of Ernst & Young LLP     31.1*       Certification of Chief   Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of   the Securities Exchange Act of 1934, as adopted pursuant to Section 302   of the Sarbanes-Oxley Act of 2002.     31.2*       Certification of Chief   Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of   the Securities Exchange Act of 1934, as adopted pursuant to Section 302   of the Sarbanes-Oxley Act of 2002.     32.1*       Certifications pursuant   to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of   the Sarbanes-Oxley Act of 2002.     *                    Filed with this annual report on Form 10-K for the year ended December 31, 2005. +                Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commission. #                 Management contract or compensatory plan or arrangement.        EX-10.17 2 a06-2062_1ex10d17.htm MATERIAL CONTRACTS         Exhibit 10.17   Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions.     DISTRIBUTION AGREEMENT   by and among   PLC SYSTEMS INC.,   PLC MEDICAL SYSTEMS, INC.   and   EDWARDS LIFESCIENCES LLC   dated   January 9, 2001          TABLE OF CONTENTS      ARTICLE I - Definitions   1                   ARTICLE II - Appointment   3                   Section 2.1   Appointment   3     Section 2.2   Competition   3                   ARTICLE III - Obligations of Distributor   3                   Section 3.1   General Obligations of Edwards   3     Section 3.2   Costs and Expenses   4     Section 3.3   Sales and Marketing Option   4                   ARTICLE IV - Obligations of PLC   4                   Section 4.1   Transition Services   4     Section 4.2   Approvals   4     Section 4.3   Labeling of Products   4     Section 4.4   Clinical or Marketing Studies   5     Section 4.5   Installation Services and Services Provided Under   Extended Service Agreements   5     Section 4.6   Warranty and Preventive Maintenance Services   5     Section 4.7   Recall of Products   5     Section 4.8   Product Liability Insurance   6     Section 4.9   Costs and Expenses   6                   ARTICLE V - Sales and Marketing   6                   Section 5.1   Marketing Plan   6     Section 5.2   Sales Plan   6     Section 5.3   Sales Material and Literature   6     Section 5.4   Training and Retention of Sales Personnel   6     Section 5.5   Performance Record of Sales Personnel   7                   ARTICLE VI - Purchase Arrangements   7                   Section 6.1   Purchase Forecasts for Products   7     Section 6.2   Purchaser Orders; No Minimum Product Quantities   7     Section 6.3   Placement of Orders   7                   ARTICLE VII - Pricing, Payment, Shipping   8                   Section 7.1   TMR Disposable Kit.   8     Section 7.2   HL-1 Laser Systems   8     Section 7.3   HL-2 Laser Systems   8     Section 7.4   Product Accessories   9     Section 7.5   Shipping   9     Section 7.6   Payment   9                   ARTICLE VIII - Term and Termination; Annual   Meeting   9                   Section 8.1   Term and Renewal   9      i           Section 8.2   Immediate Termination   10     Section 8.3   Annual Meeting   10                   ARTICLE IX - Warranties and Indemnification   10                   Section 9.1   Warranties   10     Section 9.2   Indemnification by PLC   10     Section 9.3   Indemnification by Edwards   11     Section 9.4   Indemnification Procedures   11                   ARTICLE X - Intellectual Property Rights and   Confidentiality   12                   Section 10.1   Trademarks   12     Section 10.2   Confidential Information   12                   ARTICLE XI - MISCELLANEOUS   13                   Section 11.1   Relationship   13     Section 11.2   No Conflict   13     Section 11.3   Governing Law   13     Section 11.4   Escalation   13     Section 11.5   Jurisdiction and Consent to Service   14     Section 11.6   Notices   14     Section 11.7   Interpretation   15     Section 11.8   Severability   15     Section 11.9   Counterparts   15     Section 11.10   Entire Agreement; No Third Party Beneficiaries   15     Section 11.11   Amendments and Modifications; Waivers and   Extensions.   16     Section 11.12   Assignment   16     Section 11.13   Exhibits   16     Section 11.14   Expenses   16     Section 11.15   No Consequential or Punitive Damages   16         Exhibits and Schedules                           Exhibit A       Description of Products         Schedule 2.1       Distributors         Schedule 3.3       Sales Personnel         Schedule 4.1       Transition Services         Schedule 4.5       Installation Services   and Services Relating to Extended Service Agreements         Schedule 4.6       Warranty and Preventive   Maintenance Services         Schedule 4.8       Product Liability   Insurance         Schedule 5.1       Marketing Plan         Schedule 5.2       Sales Plan         Schedule 7.3       HL-2 Laser System   Customers         Schedule 7.4       Product Accessories          ii        DISTRIBUTION AGREEMENT   DISTRIBUTION AGREEMENT, dated as of January 9, 2001 this “Agreement”), by and among Edwards Lifesciences LLC, a Delaware corporation (“Edwards”), PLC Systems Inc., a Yukon Territory corporation (“PLC Parent”), and PLC Medical Systems, Inc., a Delaware corporation (“PLC”), which is a wholly owned subsidiary of PLC Parent.   WHEREAS, PLC has developed a carbon dioxide laser system and related accessories described in Exhibit A hereto (as set forth in Exhibit A, the “Products”), and desires that the sale and use of the Products be actively promoted in the fifty states of the United States of America and the District of Columbia (the “Territory”);   WHEREAS, Edwards is a company in the medical devices field with experience and expertise in the commercialization and distribution of medical devices;   WHEREAS, PLC desires to engage Edwards to purchase, resell and distribute the Products in the Territory; and   WHEREAS, Edwards desires to obtain rights to purchase, resell and distribute the Products in the Territory;   NOW, THEREFORE, in consideration of the mutual agreements and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows:   ARTICLE I   Definitions   As used in this Agreement, the following terms shall have the following meanings:   “Agreement” shall have the meaning set forth in the Recitals.   “Automatic Renewal Threshold” shall have the meaning set forth in Section 8.1.   “Average End User Price” shall have the meaning set forth in Section 7.1.   “Damages” shall have the meaning set forth in Section 9.2.   “DBMR” shall have the meaning set forth in Section 2.2.   “Dispute” shall have the meaning set forth in Section 11.4.   “Edwards” shall have the meaning set forth in the Recitals.   “Edwards Facility” shall have the meaning set forth in Section 7.5.   “Effective Date” shall have the meaning set forth in Section 8.1.   1        “Escalation Notice” shall have the meaning set forth in Section 11.4.   “Estimated End User Price “ shall have the meaning set forth in Section 7.1.   “ETL” shall have the meaning set forth in Section 4.2.   “FDA” shall have the meaning set forth in Section 4.2.   “HL-1 Laser System” shall have the meaning set forth in Exhibit A.   “HL-2 Laser System” shall have the meaning set forth in Exhibit A.   “HL-2 Purchase Price” shall have the meaning set forth in Section 7.3.   “Indemnified Party” shall have the meaning set forth in Section 9.3.   “Indemnifying Party” shall have the meaning set forth in Section 9.3.   “Initial Term” shall have the meaning set forth in Section 8.1.   “PLC” shall have the meaning set forth in the Recitals.   “PLC Parent” shall have the meaning set forth in the Recitals.   “Products” shall have the meaning set forth in the Recitals.   “Sales and Marketing Option” shall have the meaning set forth in Section 3.3.   “Scheduled Employees” shall have the meaning set forth in Section 3.3   “Services” shall have the meaning set forth in Section 4.5.   “Territory” shall have the meaning set forth in the Recitals.   “TMR Disposable Kit” shall have the meaning set forth in Exhibit A.   “Transaction Agreements” shall have the meaning set forth in Section 11.10.   “Usage Premium” shall mean, with respect to each contract pursuant to which an HL-1 Laser System or HL-2 Laser System is sold, the dollar amount by which the per-usage charge set forth in such contract exceeds the TMR Disposable Kit price set forth in such contract or if the TMR Disposable Kit price is not explicitly stated in such contract, the list price of a TMR Disposable Kit at the time the contract was entered into. In addition, Usage Premium shall also include the amount of any additional payments related exclusively to the use of the applicable Laser System, including, but not limited to, rental or lease payments.   “Warehouse Retesting” shall mean retesting an HL-2 Laser System to its original factory specifications due to the fact that it has been warehoused by Edwards for longer than the Warehouse Life.   2        “Warehouse Life” shall mean [**], unless PLC reasonably determines, at any time during the term of this Agreement, that such period may be extended, but in no event shall such period be extended to more than [**]; provided, however that PLC shall provide Edwards with the data upon which it makes the determination to extend or maintain the Warehouse Life.   “Warranty Period” shall mean in the event (a) an HL-2 Laser System is shipped before the expiration of the Warehouse Life, the period from the date of installation until the [**] anniversary of such installation, but not to exceed [**] from the date of shipment to the end user; (b) an HL-2 Laser System is shipped after the expiration of the Warehouse Life and PLC has requested that such HL-2 Laser System be Warehouse Retested and Edwards ships without such Warehouse Retesting, the period from the date of sale to Edwards until the date which is [**] plus the Warehouse Life; (c) a proposed shipment of an HL-2 Laser System would occur after the expiration of the Warehouse Life, and Edwards and PLC agree to the Warehouse Retesting of such HL-2 Laser System, the period from the date of installation until the [**] anniversary of such installation, but not to exceed [**] from the date of shipment to the end user; and (d) a proposed shipment of an HL-2 Laser System would occur after the expiration of the Warehouse Life, and Edwards and PLC agree that Warehouse Retesting of such HL-2 Laser System is not necessary, the period from the date of installation until the [**] anniversary of such installation, but not to exceed [**] from the date of shipment to the end user.   ARTICLE II   Appointment   SECTION 2.1  Appointment. Subject to the terms and conditions contained in this Agreement, PLC hereby appoints Edwards as PLC’s exclusive independent distributor of the Products in the Territory. Edwards may not appoint a secondary or sub-distributor to sell the Products without PLC’s prior written consent, other than those set forth on Schedule 2.1. PLC shall not appoint any other agents, representatives, or distributors for the purpose of selling the Products in the Territory.   SECTION 2.2  Competition. Edwards shall not sell any devices in the Territory which directly compete with the Products in the field of myocardial revascularization either intraoperative or percutaneous that uses a device-based channeling means (“DBMR”) during the term of this Agreement. Edwards may market and sell medical devices, including, without limitation, products that may be used in connection with revascularization of the heart, as long as such medical devices are not within the field of DBMR and all other medical devices which it is selling as of the date hereof. Edwards does not currently sell any devices in the field of DBMR.   ARTICLE III   Obligations of Distributor   SECTION 3.1  General Obligations of Edwards. Edwards shall use commercially reasonable efforts to distribute and sell the Products in the Territory including, without limitation, the following:   3        (a)                                  Promote the sale and use of Products in the Territory;   (b)                                 Provide customer service, including responding to customer inquiries and requests for quotes on Product pricing; and   (c)                                  Provide invoices to customers and manage accounts receivable and collection responsibilities for sales by Edwards of the Products.   SECTION 3.2  Costs and Expenses. Edwards shall bear all the costs and expenses associated with its obligations set forth in this Agreement.   SECTION 3.3  Sales and Marketing Option. Edwards shall have the option (the “Sales and Marketing Option”) which must be exercised, if at all, upon 30 days prior written notice to PLC given during or before the three-month period following the first anniversary of the date hereof, to assume full sales and marketing responsibility for the Products in the Territory and to offer employment, subject to Edwards’ standard employment qualifications, with base compensation, commission and benefits substantially competitive to those provided by PLC immediately prior to such offer to each PLC employee set forth on Schedule 3.3 (the “Scheduled Employees”), provided they meet the performance criteria set forth on Schedule 3.3. Upon exercise of the Sales and Marketing Option, PLC shall release performance reviews of the Scheduled Employees to Edwards, subject to the waiver of each such employee. If such Scheduled Employee refuses to waive access to his or her performance reviews, such refusal shall constitute a rejection of an offer of employment from Edwards and Edwards shall have no further obligations with respect to such employee and PLC shall be responsible for any severance pay pursuant to the last sentence of this section. If Edwards chooses not to offer employment to any Scheduled Employee that meets the performance criteria set forth on Schedule 3.3 and Edwards’ standard employment qualifications, Edwards shall pay to PLC the amount on Schedule 3.3 per such employee. In the event a Scheduled Employee rejects the employment offer by Edwards, PLC shall be responsible for severance pay to such employee, if any, pursuant to PLC’s then existing severance policy, if any.   ARTICLE IV   Obligations of PLC   SECTION 4.1  Transition Services. PLC shall and PLC Parent shall cause PLC to provide to Edwards at no cost the transition services set forth on Schedule 4.1 for a period of up to two months from the Effective Date which services Edwards may terminate in whole or in part at any time prior to the expiration of such two-month period.   SECTION 4.2  Approvals. PLC shall and PLC Parent shall cause PLC to use commercially reasonable efforts to obtain and maintain all approvals and clearances required with respect to the sale of the Products in the Territory, including, without limitation, approvals from the Food and Drug Administration (the “FDA”) and the Electrical Testing Laboratory (“ETL”).   SECTION 4.3  Labeling of Products. PLC shall and PLC Parent shall cause PLC to provide and to assume regulatory responsibility for all finished Product and Product-related   4        labeling, including all sales and marketing literature, such that it complies with all applicable laws and regulations in the Territory during the term of this Agreement. All labeling for the Products shall include the statement “Distributed by Edwards Lifesciences LLC, Manufactured by PLC Medical Systems, Inc.”   SECTION 4.4  Clinical or Marketing Studies. PLC shall and PLC Parent shall cause PLC to use commercially reasonable efforts to conduct any clinical study with respect to the Products required by the FDA or other governmental agencies to sell or market the Products in the Territory. All other clinical or marketing studies with respect to the Products that are conducted within the Territory will be approved, funded, and conducted on terms and conditions mutually agreed to by PLC and Edwards.   SECTION 4.5  Installation Services and Services Provided Under Extended Service Agreements. PLC shall and PLC Parent shall cause PLC to provide the services and technical support relating to the Products as set forth on Schedule 4.5 (the “Schedule 4.5 Services”). PLC shall retain all service fees and revenues that it receives from end users for providing the Schedule 4.5 Services, provided that PLC shall pay to Edwards a commission of [**]% of all such fees and revenues. If and to the extent that PLC fails to perform its obligation in the first sentence of this Section 4.5, Edwards may provide those Schedule 4.5 Services or contract with a third party to provide those Schedule 4.5 Services. In such event, Edwards shall keep all service fees and revenues resulting therefrom and PLC shall train the personnel (at a rate of $[**] per day) performing such Schedule 4.5 Services (whether employed by Edwards or a third party) and provide factory support, including, without limitation, spare parts, technical troubleshooting, and processing product returns. PLC shall also provide Edwards with monthly reports with respect to Product returns and complaints. Edwards shall log in any Products returned by customers to Edwards and return such Products to PLC. If an HL-2 Laser System is installed and the price to be paid by the end user for such installation is less than $[**] per day, PLC shall install such HL-2 Laser System and Edwards shall pay PLC the difference between $[**] and the amount to be paid by the end user per day for such installation, but in no event shall Edwards’ payment exceed $[**] per installation.   SECTION 4.6  Warranty and Preventive Maintenance Services. PLC shall and PLC Parent shall cause PLC to provide all warranty and two scheduled preventive maintenance services on all HL-2 Laser Systems as set forth on Schedule 4.6 during the Warranty Period. Edwards shall reimburse PLC for the costs set forth on Schedule 4.6 incurred by PLC in the performance of its obligation in the prior sentence during the Warranty Period, but in no event shall such reimbursement exceed $[**] per HL-2 Laser System. In the event PLC is required to conduct Warehouse Retesting on an HL-2 Laser System, Edwards shall reimburse PLC $[**] per such HL-2 Laser System, upon completion of Warehouse Retesting.   SECTION 4.7  Recall of Products. In the event of a recall of any of the Products, PLC shall and PLC Parent shall cause PLC to bear all costs and expenses of such recall, including, without limitation, expenses or obligations to third parties, the cost of notifying customers and end users, and costs associated with the shipment of recalled Products from customers to PLC. Edwards shall cooperate with PLC in effecting any recall of the Products sold by Edwards by producing customer lists and assisting with the notification of customers and end users of the recalled Products.   5        SECTION 4.8  Product Liability Insurance. Set forth on Schedule 4.8 is a copy of PLC’s product liability insurance policy which is in full force and effect. PLC shall and PLC Parent shall cause PLC to obtain and keep in force during the term of this Agreement a product liability insurance policy in an amount not less than $10,000,000 in a form reasonably acceptable to Edwards. During the term of this Agreement and for a period of [**] following the expiration or termination of this Agreement, such insurance policy shall evidence Edwards and all of its affiliates as additional insured entities and shall provide for written notification to Edwards by the insurer not less than 30 days prior to cancellation, expiration or modification. PLC shall and PLC Parent shall cause PLC to provide a certificate of insurance evidencing compliance with this Section 4.8 to Edwards within 30 days of the date hereof.   SECTION 4.9  Costs and Expenses. PLC shall and PLC Parent shall cause PLC to bear all the costs and expenses associated with PLC’s obligations set forth in this Agreement.   ARTICLE V   Sales and Marketing   SECTION 5.1  Marketing Plan. PLC and Edwards shall jointly execute the marketing plan for the Products set forth in Schedule 5.1 and fund such plan based on the percentages set forth on such schedule during the first six months of the term of this Agreement. During such period, PLC and Edwards shall jointly develop a marketing plan for the Products for the next six months and PLC shall provide [**]% of the funding for such plan and Edwards shall provide the remaining [**]% of the funding. PLC and Edwards shall continue to jointly develop a marketing plan for the Products and provide funding for such plan according to mutually agreeable allocations until such time as Edwards exercises the Sales and Marketing Option.   SECTION 5.2  Sales Plan. Edwards and PLC agree to the sales plan set forth on Schedule 5.2. Edwards shall reimburse any out-of-pocket costs for travel incurred by PLC in connection with training Edwards’ sales personnel beyond the scope of the training requirements anticipated in Schedule 5.2.   SECTION 5.3  Sales Material and Literature. PLC shall initially provide all sales material and literature for the Products. PLC and Edwards shall jointly develop any new literature. The costs and expenses associated with developing and producing any new literature shall be paid jointly by PLC and Edwards according to the funding percentages set forth in Section 5.1 until such time as Edwards exercises the Sales and Marketing Option. If Edwards exercises such option, Edwards thereafter shall be solely responsible for paying the cost of such literature. Nothing in this Section 5.3 shall have any effects on PLC’s obligations set forth in Section 4.3.   SECTION 5.4  Training and Retention of Sales Personnel. PLC shall provide products and sales training to all PLC and Edwards sales personnel that are engaged in marketing and selling the Products in the Territory. PLC shall use commercially reasonable efforts to retain the sales personnel set forth on Schedule 3.3. During the term of this Agreement and for a period of [**] after the termination or expiration of this Agreement, neither PLC Parent nor PLC shall hire or solicit for employment any of Edwards’ personnel without the prior written consent of   6        Edwards. During the term of this Agreement and for a period of one year after the termination or expiration of this Agreement, Edwards shall not hire or solicit for employment any personnel of PLC Parent or PLC without the prior written consent of PLC; provided, however, that if Edwards exercises the Sales and Marketing Option, the foregoing limitations shall be inapplicable to personnel listed or otherwise referenced on Schedule 3.3.   SECTION 5.5  Performance Record of Sales Personnel. PLC shall keep an accurate and complete record of the performance of all Scheduled Employees, including the sales figures for each Scheduled Employee, and will provide quarterly updates to Edwards of the sales figures for each territory.   ARTICLE VI   Purchase Arrangements   SECTION 6.1  Purchase Forecasts for Products. PLC and Edwards shall confer monthly and jointly produce a rolling twelve-month forecast of the expected demand for the Products until such time as Edwards exercises the Sales and Marketing Option. After Edwards exercises such option, for the remaining term of the Agreement, Edwards shall provide quarterly to PLC a rolling four quarter forecast of the expected demand for the Products.   SECTION 6.2  Purchaser Orders; No Minimum Product Quantities. Edwards shall submit a non-cancelable purchase order to PLC for TMR Disposal Kits for the upcoming calendar quarter on the first day of the month preceding such quarter except that until June 30, 2001, Edwards shall submit non-cancelable purchase orders on a monthly basis for TMR Disposal Kits. Until such time as Edwards exercises the Sales and Marketing Option, Edwards shall submit non-cancelable purchase orders to PLC for HL-2 Laser Systems on an as needed basis. If Edwards exercises such option, thereafter, Edwards shall submit a non-cancelable purchase order to PLC for HL-2 Laser Systems for the upcoming calendar quarter on the first day of the month preceding such quarter. Notwithstanding its provision of demand forecasts for the Products and anything else set forth herein, Edwards shall determine in its sole discretion the quantity of Products it shall purchase and there shall be no minimum purchase requirements for any Products. To the extent that the terms of any purchase order and the terms of this Agreement conflict, the terms of this Agreement shall control.   SECTION 6.3  Placement of Orders. All orders for Products submitted by Edwards shall be initiated by written purchase orders sent to PLC which shall specify the desired delivery date, location and method of transportation for the Products included in such order. With respect to any Product for which Edwards may submit purchase orders to PLC on an as needed basis, Edwards agrees to promptly submit purchase orders to PLC after its receipt of orders from its customers, but, in any event, shall submit purchase orders to PLC within ten business days of its receipt of a customer order. Quarterly purchase orders submitted to PLC by Edwards will indicate the quantity of Products to be delivered for each month of the quarter, provided, however, the quantity for any individual month shall in no case be less than [**]% of the total to be delivered for the entire quarter. The quantity for the quarter shall not exceed [**]% of the most recent forecasted quantity for the quarter. PLC shall use commercially reasonable efforts to deliver the Products on the agreed upon delivery dates set forth in accepted   7        purchase orders, but, in any event, shall make all deliveries within [**] days of the agreed upon delivery dates set forth in accepted purchase orders.   ARTICLE VII   Pricing, Payment, Shipping   SECTION 7.1  TMR Disposable Kit. (a)  Edwards shall purchase the TMR Disposable Kits from PLC at 55% of the Average End User Price. If Edwards exercises the Sales and Marketing Option, thereafter Edwards shall purchase the TMR Disposable Kits from PLC at 45% of the Average End User Price. The “Average End User Price” shall mean the average of the actual sales price for each TMR Disposable Kit sold during a calendar quarter. Edwards shall calculate the Average End User Price and deliver such calculation to PLC within 15 days after the end of each quarter.   (b)                                 PLC shall bill TMR Disposable Kits to Edwards on a preliminary basis at 55% of the Estimated End User Price before Edwards exercises the Sales and Marketing Option and 45% of the Estimated End User Price after Edwards exercises such option. Through June 30, 2001, the “Estimated End User Price” shall be $2,000. During subsequent quarters of the Agreement, the “Estimated End User Price” shall be equal to the Average End User Price for the most recent quarter that such data is available and calculable.   (c)                                  The difference between the preliminary amount billed during a quarter using the Estimated End User Price and the actual amount owed using the Average End User Price shall be credited to Edwards by PLC or paid by Edwards to PLC, as the case may be, within [**] days of the date such Average End User Price is determined. With respect to TMR Disposable Kits that PLC has sold prior to the date of this Agreement to PLC customers using the HL-1 Laser System, but as to which delivery has not yet been requested by the applicable customer, upon such request for delivery PLC shall provide the requested TMR Disposable Kits to Edwards [**], and Edwards shall provide such TMR Disposable Kits to the applicable customer [**].   (d)                                 Within [**] days of the end of each calendar month, Edwards shall provide to PLC a written report showing, for the month immediately preceding the report, Edwards’ sales of the Products, including the name of the customer, the date of the shipment, the price of the Product and the allocation of the price between Edwards and PLC. Edwards shall maintain for at least two years its records, contracts and accounts relating to sales of the Products, and shall permit examination thereof by authorized representatives of PLC at all reasonable times.   SECTION 7.2  HL-1 Laser Systems. Edwards shall deliver to PLC 100% of all Usage Premiums received in connection with the sale of TMR Disposable Kits for use with, and service revenue related to, HL-1 Laser Systems. Edwards shall deliver any and all monies received in connection with the purchase of an HL-1 Laser System to PLC.   SECTION 7.3  HL-2 Laser Systems. Subject to any adjustment provided herein, Edwards shall purchase the HL-2 Laser Systems from PLC for $[**] per unit, which amount   8        includes warehousing fees at PLC’s facility (the “HL-2 Purchase Price”). In addition, Edwards shall pay PLC [**]% of the amount the HL-2 Laser System end user price exceeds the HL-2 Purchase Price for each such HL-2 Laser System sold. Edwards shall retain the Usage Premiums it receives from each HL-2 Laser System that is placed until the aggregate Usage Premiums received with respect to such HL-2 Laser System equals the [**]. Thereafter, Edwards shall pay PLC [**]% of such Usage Premiums. PLC and Edwards agree to periodically review in good faith the HL-2 Laser Purchase Price and to make adjustments, subject to their mutual agreement, to the HL-2 Purchase Price due to inflation, change in product cost and/or other market or competitive conditions. Edwards shall pay PLC within [**] days of the sale the amount set forth in the column titled “Protection” specified in Schedule 7.3 for each such HL-2 Laser System that is sold to a customer listed on Schedule 7.3 within three months of Effective Date of this Agreement.   SECTION 7.4  Product Accessories. Edwards shall purchase from PLC F.O.B PLC’s manufacturing facility any Product accessory set forth on Schedule 7.4 for the transfer price listed for such accessory on Schedule 7.4.   SECTION 7.5  Shipping. At Edwards’ request, PLC shall warehouse all HL-2 Laser Systems purchased by Edwards at Edwards’ segregated warehouse within PLC’s facility (“Edwards Facility”). Until the date 60 days after the date of the termination of the transition services provided in Section 4.1, PLC shall deliver TMR Disposable Kits directly to the end user. Thereafter, PLC shall deliver TMR Disposable Kits directly to Edwards. All prices for the Products shall be F.O.B. PLC’s manufacturing facility. The prices will not include any federal, state or local sales, use, excise or value added tax that may be applicable. If PLC has the legal obligation to collect such taxes, the appropriate amount shall be added to Edwards’ invoice and paid by Edwards unless Edwards provides PLC with a valid tax exemption certificate authorized by the appropriate taxing authority. PLC shall ship the Products using the method of transportation specified by Edwards in the purchase order. In all cases, title, risk of loss and all responsibility for transportation, insurance and storage shall pass from PLC to Edwards upon transfer of finished HL-2 Laser Systems from PLC to the Edwards Facility and after such transfer PLC shall promptly issue an invoice related thereto to Edwards.   SECTION 7.6  Payment. Full payment shall be made by Edwards to PLC within [**] days from the invoice date which shall be shipping date for the Products to Edwards.   ARTICLE VIII   Term and Termination; Annual Meeting   SECTION 8.1  Term and Renewal. This Agreement shall commence on the dale hereof (the “Effective Date”) and be valid for an initial term of five (5) years (“Initial Term”). Edwards shall have the option to extend the Agreement on the same terms and conditions for an additional term of five (5) years, provided that the TMR Disposable Kits sold by Edwards, measured for the twelvemonth period ending six months prior to the expiration of the Initial Term, are used in at least 35% of all intraoperative laser-based transmyocardial revascularization procedures in the Territory for such period as measured by a third-party study reasonably acceptable to PLC and Edwards (the “Automatic Renewal Threshold”). If the parties cannot   9        agree on any such study, then they shall jointly commission a study by McKinsey & Company and will be bound by such study. PLC and Edwards shall split the cost of the McKinsey & Company study equally. If the sale of Products by Edwards does not meet the Automatic Renewal Threshold, the parties may agree to extend the Agreement on mutually acceptable terms and conditions.   SECTION 8.2  Immediate Termination. This Agreement may be terminated by either Edwards or PLC immediately in the event that (a) any breach by PLC of Section 4.8; (b) any material breach by the other party remains uncured 60 days after written notice containing details of the breach has been delivered to the other party; or (c) the other party shall file for protection from its creditors under any applicable bankruptcy or insolvency laws, shall make an assignment for the benefit of creditors, or shall have a receiver appointed for its property. This Agreement may be terminated by Edwards upon one-year notice, in the event Edwards decides in its sole reasonable discretion that unfavorable market conditions exist for the Products in the Territory.   SECTION 8.3  Annual Meeting. The chief executive officer of PLC and the executive in charge of the DBMR business for Edwards shall agree to meet annually in order to discuss sales opportunities, current market trends and to keep each other informed of pertinent events and competing products having an impact upon the Products’ marketability, including, but not limited to, forecasts as to future demand.   ARTICLE IX   Warranties and Indemnification   SECTION 9.1  Warranties. PLC warrants that (a) it possesses good and marketable title to all Products sold to Edwards under this Agreement; (b) each Product conforms to its specifications and is fit for the purposes and indications described in its labeling; (c) when available for sale in the Territory the Products are or will be manufactured in conformity with all FDA and ETL rules and regulations and applicable laws of the Territory; (d) the Products have or will have obtained FDA approval to market and sell the Products when the Products are available for sale in the Territory; (e) it is the owner or licensor of the entire right, title and interest in the intellectual property relating to the Products and, to the knowledge of PLC and PLC Parent, the use by Edwards of any such intellectual property will not violate any right of any third party; and (f) it complies and will continue to comply with all applicable laws and regulations of the Territory with respect to the Products.   SECTION 9.2  Indemnification by PLC. PLC and PLC Parent shall indemnify and hold harmless Edwards, its officers, directors, shareholders, employees, parents, successors, affiliates, assigns, customers and users of Products, in each case, from and against any and all costs or expenses (including, without limitation, reasonable attorneys’ fees, and the reasonable out-of-pocket expenses of testifying and preparing for testimony and responding to document and other information requests, whether or not a party to such litigation), judgments, fines, losses, claims (whether or not meritorious) and damages (collectively, “Damages”), as incurred, to the extent they relate to, arise out of or are the result of (i) the manufacture by PLC or use of any Products; (ii) the design of any Products or component of the Products not developed   10        exclusively by Edwards; (iii) the failure of the Products to satisfy any warranty made by PLC; (iv) by reason of the sale or use of the Products any claim of infringement of patents, trademarks, trade names, or copyrights, any claim of misappropriation or misuse of trade secrets or information or any similar claim; (v) any claims with respect to any Scheduled Employee arising from actions taken by PLC prior to the date hereof, and (vi) any claims with respect to any Scheduled Employee arising from actions taken by PLC, unrelated to this Agreement, prior to the exercise of the Sales and Marketing Option, provided, however, that such indemnification shall in no event exceed $[**].   SECTION 9.3  Indemnification by Edwards. Edwards shall indemnify and hold harmless PLC, its successors, affiliates and assigns, in each case, from and against any and all Damages, as incurred, to the extent they relate to, arise out of or are the result of Edwards’ gross negligence or willful misconduct in the promotion and sale of the Products by Edwards.   SECTION 9.4  Indemnification Procedures. The party seeking indemnification (the “Indemnified Party”) pursuant to this Article EX shall promptly notify the indemnifying party (the “Indemnifying Party”), in writing, of such claim describing such claim in reasonable detail, provided that the failure to provide such notice shall not affect the obligations of the Indemnifying Party unless and only to the extent it is actually prejudiced thereby. In the event that such claim involves a claim by a third party against an Indemnified Party, the Indemnifying Party shall have 30 days after receipt of such notice to decide whether it will undertake, conduct and control, through counsel of its own choosing (but reasonably acceptable to the Indemnified Party) and at its own expense, the settlement or defense thereof unless (i) the Indemnifying Party is also a party to the proceeding and the Indemnified Party determines in good faith that joint representation would be inappropriate or (ii) the Indemnifying Party fails to provide reasonable assurance to the Indemnified Party of its financial capacity to defend such proceeding, and provide indemnification with respect thereto, and if it so decides, the Indemnified Party shall cooperate with it in connection therewith, provided that the Indemnified Party may participate in such settlement or defense through counsel chosen by it, and provided further that the fees and expenses of such counsel shall be borne by the Indemnified Party. The Indemnifying Party shall not, without the written consent of the Indemnified Party (which consent shall not be unreasonably withheld, conditioned or delayed), settle or compromise any action, unless such settlement or compromise includes an unconditional release of the Indemnified Party. If the Indemnifying Party does not notify the Indemnified Party within 30 days after the receipt of notice of a claim of indemnity hereunder that it elects to undertake the defense thereof, the Indemnified Party shall have the right to contest, settle or compromise the claim but shall not pay or settle any such claim without the consent of the Indemnifying Party (which consent shall not be unreasonably withheld, conditioned or delayed). The Indemnifying Party and the Indemnified Party shall cooperate fully in all aspects of any investigation, defense, pre-trial activities, trial, compromise, settlement or discharge of any claim in respect of which indemnity is sought pursuant to Article IX, including, but not limited to, providing the other party with reasonable access to employees and officers (including as witnesses) and other information. The remedies provided in this Article IX will not be exclusive of or limit any other remedies that may be available to the Indemnified Parties.   11        ARTICLE X   Intellectual Property Rights and Confidentiality   SECTION 10.1  Trademarks. Edwards shall have the right to indicate to the public that it is an authorized distributor of the Products and to market and sell the Products under the trademarks, service marks and trade names that PLC may adopt from time to time. Edwards shall not alter, obscure or remove any trademarks, service marks or trade names of PLC which are contained on or in or affixed to the Products at the time of shipment. Edwards shall not use any trademarks, service marks or trade names of PLC in connection with any business conducted by Edwards other than dealing with the Products in accordance with the terms of this Agreement. Edwards agrees that its use of the trademarks, service marks and trade names of PLC shall not create in its favor any right, title or interest therein and acknowledges PLC’s exclusive right, title and interest thereto. Edwards agrees that it will not use, without PLC’s prior written consent, any mark which is similar to or is likely to be confused with any trademarks, service marks or trade names of PLC. Edwards’ rights to use the trademarks, service marks and trade names of PLC as set forth in this Section 10.1 shall terminate upon termination or expiration of this Agreement.   SECTION 10.2  Confidential Information. In order to avoid disclosure of confidential and proprietary information to any other person, firm or corporation, the parties agree that during the term of this Agreement and for a period of three years from the termination of this Agreement each will treat any such information which is received from one another in writing and clearly marked as “Confidential” or if disclosed orally, which is confirmed in writing as “Confidential” within thirty (30) days of initial disclosure, with the same degree of care that each employs with respect to its own information which it does not desire to have published or disseminated. It is understood that each party shall be liable for any unauthorized disclosure should it fail to safeguard the disclosed information with such care. This obligation shall survive the termination or expiration of this Agreement. The parties shall not have any obligation with respect to such information which is:   (a)                                  independently developed by the receiving party without the benefit of the disclosure or is already known to the receiving party at the time of the disclosure, as evidenced by written documentation;   (b)                                 publicly known or becomes publicly known without the wrongful act or breach of this Agreement by the receiving party; or   (c)                                  rightfully received by the receiving party from a third-party who is not under any obligation of confidentiality or trade secret obligation to the originating party.   12        ARTICLE XI   MISCELLANEOUS   SECTION 11.1  Relationship. The relationship of Edwards and PLC established by this Agreement is of independent contractors and not agents (except as set forth in Section 2.1), and nothing in this Agreement shall be construed:   (a)                                  To give either party the power to direct or control the daily activities of the other party beyond the obligations imposed on Edwards and PLC, respectively, by this Agreement;   (b)                                 To constitute the parties as partners, joint ventures, co-owners or otherwise as participants in joint undertaking; or   (c)                                  To allow either party to create or assume any obligation on behalf of the other party for any purpose whatsoever. The purchase, promotion, and resale of, or any other legal transactions concerning the Products hereunder shall be carried out in the name of and for the account of Edwards as principal, and Edwards shall not enter into any agreement with third persons binding in any way on PLC.   SECTION 11.2  No Conflict. Each party represents and warrants to the other parties that it is not subject to any contractual obligation or restraint which will materially interfere with its right and ability to perform pursuant to the terms of this Agreement.   SECTION 11.3  Governing Law. This Agreement shall be governed by, interpreted under, and construed in accordance with the internal laws of the State of New York, including, without limitation, Sections 5-1401, 5-1402 of the New York General Obligations Law and New York Civil Practice Laws and Rules 327(b).   SECTION 11.4  Escalation. Edwards and PLC (and/or PLC Parent) will attempt in good faith to resolve expeditiously any dispute, claim or controversy arising out of or relating to this Agreement (the “Dispute”) promptly by negotiations between executives who have authority to settle the controversy and who are at a higher level of management than the persons with direct responsibility for the administration of this Agreement. Either party may give the other party written notice (the “Escalation Notice”) of any Dispute not resolved in the normal course of business. Within 15 days after delivery of the Escalation Notice, the receiving party shall submit to the other a written response. The Escalation Notice and the response thereto shall include (a) a statement of each party’s position and a summary of arguments supporting that position, and (b) the name and title of the executive who will represent that party and of any other person who will accompany the executive. Within 30 days after delivery of the Escalation Notice, the executives of both parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to attempt to resolve the Dispute. All reasonable requests for information made by one party to the other will be honored. All negotiations pursuant to this clause are confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence. The parties shall attempt to resolve any Dispute pursuant to the procedure set forth in this Section 11.4 for a period up to 60 days from the date of delivery of the Escalation Notice before resorting to other available remedies; provided, however, nothing contained in this Section 11.4 shall prevent any party from resorting to judicial process if injunctive or other equitable relief from a court is necessary to prevent serious and irreparable injury to it or to others. The use of the procedure set forth in this   13        Section 11.4 will not be construed under the doctrine of laches, waiver or estoppel to affect adversely any party’s right to assert any claim or defense.   SECTION 11.5  Jurisdiction and Consent to Service. In accordance with the laws of the State of New York, and without limiting the jurisdiction or venue of any other court, the parties (a) agree that any suit, action or proceeding arising out of or relating to this Agreement shall be brought solely in the state or federal courts of New York; (b) consent to the exclusive jurisdiction of each such court in any suit, action or proceeding relating to or arising out of this Agreement; (c) waive any objection which any of them may have to the laying of venue in any such suit, action or proceeding in any such court; and (d) agree that service of any court paper in any such suit, action or proceeding may be made in any manner as may be provided under the applicable laws or court rules governing service of process in such court.   SECTION 11.6  Notices. All notices, demands, requests, consents, approvals or other communications required or permitted to be given hereunder or which are given with respect to this Agreement shall be in writing and shall be delivered (charges prepaid, receipt confirmed or return receipt requested (if available)) by hand, by nationally recognized air courier service, by certified mail or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Notice shall be deemed given and effective (i) if delivered by hand or by nationally recognized courier service, when delivered at the address specified in this Section 11.6 (or in accordance with the latest unrevoked written direction from such party), (ii) if by certified mail, upon mailing or (iii) if given by facsimile when such facsimile is transmitted to the fax number specified in this Section 11.6 (or in accordance with the latest unrevoked written direction from such party), provided the appropriate confirmation is received.   To PLC:   PLC Systems Inc. 10 Forge Park Franklin, MA 02038 Attention:  Chief Executive Officer Fax:  (508) 541-7990   with a copy (which shall not constitute notice) to:   Wilmer Cutler Pickering Hale and Dorr LLP 60 State Street Boston, MA 02109 Attention:  Steven D. Singer, Esq. Fax:  (617) 526-5000   To Edwards:   Edwards Lifesciences LLC One Edwards Way Irvine, California 92614 Attention:  Associate General Counsel Fax:  (949) 250-6850   14        with a copy (which shall not constitute notice) to:   Skadden, Arps, Slate, Meagher & Flom LLP 300 South Grand Avenue, Suite 3400 Los Angeles, California 90071-3144 Attention:  Joseph J. Giunta, Esq. Fax:  (213) 687-5600   SECTION 11.7  Interpretation. When a reference is made in this Agreement to a Section, Schedule or Exhibit, such reference shall be to a Section, Schedule or Exhibit of this Agreement unless otherwise indicated. When a reference is made in this Agreement to a specific Schedule, such reference shall be deemed to include, to the extent applicable, all the other Schedules. The table of contents, table of definitions, titles and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. When the words “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation.” All accounting terms not defined in this Agreement shall have the meanings determined by generally accepted accounting principles as of the date hereof. All capitalized terms defined herein are equally applicable to both the singular and plural forms of such terms.   SECTION 11.8  Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the parties shall negotiate in good faith with a view to the substitution therefore of a suitable and equitable solution in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid provision; provided, however, that the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law.   SECTION 11.9  Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which shall, taken together, be considered one and the same agreement, it being understood that the parties need not sign the same counterpart.   SECTION 11.10  Entire Agreement; No Third Party Beneficiaries. This Agreement and the other Transaction Agreements (as such term is defined in the Securities Purchase Agreement, dated as of January 7, 2001, by and among Edwards Lifesciences Corporation, PLC and PLC Parent), including all exhibits hereto and thereto, by and among the parties hereto,   (a)                                  constitute the entire agreement of the parties with respect to the subject matter hereof and supersede all prior and contemporaneous agreements, representations, understandings, negotiations and discussions between the parties, whether oral or written, with respect to the subject matter hereof; and   15        (b)                                 and shall be binding upon and shall inure to the benefit of each of the parties hereto and thereto and their respective successors and permitted assigns and is not intended to confer any rights, remedies or benefits on any Persons other than as expressly set forth in this Section 11.10.   SECTION 11.11  Amendments and Modifications; Waivers and Extensions.   (a)                                  No amendment, modification or termination of this Agreement shall be binding upon any other party unless executed in writing by the parties hereto intending to be bound thereby.   (b)                                 Any party to this Agreement may waive any right, breach or default which such party has the right to waive; provided that such waiver will not be effective against the waiving party unless it is in writing, is signed by such party, and specifically refers to this Agreement. Waivers may be made in advance or after the right waived has arisen or the breach or default waived has occurred. Any waiver may be conditional. No waiver of any breach of any agreement or provision herein contained shall be deemed a waiver of any preceding or succeeding breach thereof nor of any other agreement or provision herein contained. No failure or delay in exercising any right, power or privilege hereunder shall be deemed a waiver or extension of the time for performance of any other obligations or acts nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege.   SECTION 11.12  Assignment. Neither this Agreement nor any of the rights, duties or obligations hereunder may be assigned or delegated by any of the parties hereto without the prior written consent of PLC or Edwards, as the case may be, which may be withheld in its sole discretion except that Edwards may assign all its rights and obligations to any subsidiary of Edwards Lifesciences Corporation. Any attempted assignment or delegation of rights, duties or obligations hereunder in contravention hereof shall be void and of no effect.   SECTION 11.13  Exhibits. Each of the exhibits referred to herein and attached hereto is an integral part of this Agreement and is incorporated herein by reference.   SECTION 11.14  Expenses. Except as otherwise provided in this Agreement, each party to this Agreement shall bear its respective expenses incurred in connection with the preparation, execution, and performance of this Agreement and the transactions contemplated hereby, including all fees and expenses of agents, representations, counsel and accountants.   SECTION 11.15  No Consequential or Punitive Damages. If any party claims any breach of this Agreement by the other party or otherwise becomes dissatisfied with any matter relating hereto or arising herefrom, it shall have no right to seek consequential or punitive damages and each party hereby waives any right it may have to seek such punitive or consequential damages.   16        IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.          PLC   SYSTEMS INC.                   By:   /s/ James   G. Thomasch                 Name:   James   G. Thomasch             Title:   Senior   Vice President and Chief Financial             Officer                   PLC   MEDICAL SYSTEMS, INC.                   By:   /s/ James   G. Thomasch                 Name:   James   G. Thomasch             Title:   Senior   Vice President and Chief Financial             Officer                   EDWARDS   LIFESCIENCES LLC                   By:   /s/ John   H. Kehl, Jr.                 Name:   John   H. Kehl, Jr.             Title:   Corporate   Vice President                    Exhibit A   Description of Products   1.                                      HL-2 Laser System including:   [**]   2.                                      TMR Disposable Kit including:   [**]   Products shall also include [**] and or [**] the products, [**] and [**] products [**] in the field [**].   Products do not include the HL-1 Laser System.          Schedule 2.1   Distributors   1.                                       Criticor (West Coast)   2.                                       Central Medical (Wisconsin, Minnesota)          Schedule 3.3   Sales Personnel   Capital Sales Representatives [**]   Manager of Clinical Training   [**]   Clinical Specialists   [**]   (i)                                     $[**]   (ii)                                  A ranking of no less than “satisfactory” (or PLC’s equivalent) on the most recent performance review immediately prior to Edwards’ exercise of the Sales and Marketing Option.          Schedule 4.1   Transition Services   1.                                       Customer service:  Provide seamless support to customers during transition to include order placement, returns, problem resolution, questions, etc. In addition, provide support and data to Edwards Customer Service relative to customers, products and the sales force.   2.                                       Invoicing:  Provide accounts receivable support to customers during transition to include invoicing, collections, problem resolution, questions, etc. In addition, provide support and data to Edwards Accounts Receivable relative to customers, aging and other information.          Schedule 4.5   Installation Services and Services Relating to Extended Service Agreements   Installation Support Service includes:   (i)                                     installation of HL-2 Laser System at hospital   (ii)                                  laser operator in-service training at hospital   Extended Service Agreements can include:   all or part of the services defined in Schedule 4.6. The exact services are detailed in extended service contract agreements with the customer and are tailored to the customer requirements.   PLC is not responsible for the re-installation or transportation of the Product among multiple facilities.          Schedule 4.6   Warranty and Preventive Maintenance Services   Preventive Maintenance are planned services which include:   (i)                                     Cleaning of optics (ii)                                  In-service for any new operating room personnel (iii)                               Calibration of energy readings (iv)                              Safety checks (v)                                 Replacement of air purge filter (vi)                              any adjustments to make the product meet performance specifications   Warranty Service is unplanned services which include:   (i)                                     any necessary travel, labor and material expense to repair or replace a defective product or product component that is not meeting published PLC performance specifications.   “costs” shall include all material costs at PLC’s fully absorbed standard manufacturing cost and labor and travel-related costs for PLC personnel calculated at the rate of $[**] per day, billed in whole day increments          Schedule 4.8   Product Liability Insurance   To be provided.          Schedule 5.1   Marketing Plan   To be provided.          Schedule 5.2   Sales Plan   PLC and Edwards have developed a joint sales strategy to drive utilization during the first year of the agreement. Edwards and PLC anticipate a transition of the sales and marketing functions from PLC to Edwards at the end of the first twelve months based on the success of the partnership in 2001. Specific objectives, actions and activities to accomplish the goals are highlighted below and the details are supported by the jointly developed master Sales Plan.      Objective:       Drive procedural growth   in assigned territory.                   Expectation:       Edwards sales   organization will develop skill sets that allow them to successfully manage   the process of increasing kit sales by gaining necessary knowledge &   devoting time needed to drive procedural increases in assigned territory.                   Action:       A training curriculum   will be established for the Edwards Sales Representatives that develops core   competencies in the key areas of clinical knowledge, concept selling and   capital acquisition.                   Activities:       The following   activities have been schedules to ensure core competencies are attained:         Activity       Location       Date       Attendees                                   A.   Implementation/Launch       Chicago       January 8-11       PLC/EW     B. Training-Patient Selection       STS       January 29       EW/PLC     C. Edwards National Meeting       Irvine,   CA       Feb. 7       EW/PLC   mgmt     D. Combine Training Event       not   determined       April 2       EW/PLC     E. Combine Training Event       not   determined       September 2       EW/PLC     F. PLC representative will spend approximately   20% of selling time supporting Edwards activity to assist in the attainment   of sales objectives.                               *Measurements will be established to monitor progress in key areas.          Schedule 7.3   HL-2 Laser System Customers      EST. COMMISSION   ACCOUNT       CITY       REP       DEAL       CLOSE       PROTECTION                                                   [**]       [**]       [**]       [**]       [**]       [**]                                                   [**]       [**]       [**]       [**]       [**]       [**]                                                   [**]       [**]       [**]       [**]       [**]       [**]                                                   [**]       [**]       [**]       [**]       [**]       [**]                                                   [**]       [**]       [**]       [**]       [**]       [**]                                                   [**]       [**]       [**]       [**]       [**]       [**]             Schedule 7.4   Product Accessories      Part   Number       Description       Model   used   on       Qty       Unit       Shelf   life       PLC   Sale   Price       Edwards   Transfer   Price       Shipping   Weight   (lbs)       Shipping   Dimensions   (inches)       Notes:                                                                                           P00100       Footswitch       both       1       ea       n/a       [**]       [**]       8       12x6.5x5.5                                                                                                   L00002       Safety Goggles       both       1       ea       n/a       [**]       [**]       1       7.5x6.5x5.5                                                                                                   B00056       Remote Enable Cable       both       1       ea       n/a       [**]       [**]       1       11x13x1.5       Fedex small box                                                                                           B00076       Lens Cell       both       1       ea       n/a       [**]       [**]       1       11x13x1.5       Fedex small box                                                                                           A00097        ECG Trunk Cable        HL-2        1        ea        n/a        [**]        [**]        1        11x13x1.5        Fedex small box                                                                                            A00098        ECG 5 Lead Set        HL-2        1        ea        n/a        [**]        [**]        1        11x13x1.5        Fedex small box                                                                                            L00004        Filter, Hepa, 0.3 micron        HL-2        1        ea        n/a        [**]        [**]        1        11x13x1.5        Fedex small box                                                                                            A00181        HL-2 Operators Manual        HL-2        1        ea        n/a        [**]        [**]        3        13.5x11.5x2.5        Fedex medium box                                                                                            A00202       Warning Sign HL-2       HL-2       1       ea       n/a       [**]       [**]       1       11x13x1.5       Fedex small box                EX-10.23 3 a06-2062_1ex10d23.htm MATERIAL CONTRACTS       EXHIBIT 10.23   Compensatory Arrangements with Executive Officers   Base Salary   The current annual base salaries of each of the executive officers of PLC Systems Inc. (the “Company”) are as follows:      Mark R.   Tauscher, President, Chief Executive Officer and Director       $   286,841                           James G.   Thomasch, Senior Vice President of Finance and Administration,   Chief Financial Officer and Treasurer       $   180,081                           Dr. Robert I.   Rudko, Chief Scientist       $   198,275                           Michael F.   Adams, Vice President of New Ventures       $   169,744                           Kenneth J.   Luppi, Vice President of Operations       $   147,583          Cash Bonus Compensation   On February 1, 2006, the Compensation Committee of the Board of Directors (the “Compensation Committee”) of the Company adopted bonus arrangements for its executive officers for 2006. Messrs. Tauscher, Thomasch, Adams,  Luppi  and Rudko will receive a bonus based 25% on the financial performance of the Company’s business and 75% on the attainment of defined program milestones during the fiscal year ending December 31, 2006. The target bonus payment for Mr. Tauscher is 50% of his base salary, for Mr. Thomasch 40% of his base salary, and for Messrs. Adams, Luppi and Rudko is 30% of each of their respective base salaries. The target bonus payments may be adjusted downwards if the financial performance of the Company’s business does not meet the targets or the Company does not attain the defined program milestones.   Other Compensation   Mr. Tauscher and Mr. Thomasch each currently receive an annual car allowance of $12,000. Mr. Adams, Mr. Luppi and Dr. Rudko each currently receive an annual car allowance of $6,000.   The Compensation Committee may also, from time to time, award each of the executive officers compensation in the form of stock options granted under the Company’s 2005 Stock Incentive Plan.           EX-10.24 4 a06-2062_1ex10d24.htm MATERIAL CONTRACTS       EXHIBIT 10.24   Compensatory Arrangements with Non-Employee Directors   Each non-employee director of PLC Systems Inc. (the “Company”) other than the Chairman of the Board receives $12,000 per year and the Chairman of the Board receives $24,000 per year, paid in quarterly installments. In addition, non-employee directors other than the Chairman of the Board who serve as chairman of a committee, or who serve on more than one committee, receive an additional $500 per quarter. The Company reimburses directors for reasonable out-of-pocket expenses incurred in attending meetings of the Board of Directors and committees of the Board of Directors.   The Company grants stock options to its non-employee directors. Generally, new non-employee directors receive an initial grant of an option to purchase 30,000 shares of the Company’s common stock that vests in installments over three years. Once the initial grant has fully vested, non-employee directors other than the Chairman of the Board receive an annual grant of an option to purchase 15,000 shares of the Company’s common stock that vests in four equal quarterly installments. The Chairman of the Board receives an annual grant of an option to purchase 30,000 shares of the Company’s common stock that vests in four equal quarterly installments. All such options have an exercise price equal to the fair market value of the common stock on the date of grant. The grants of options to non-employee directors discussed above do not apply to Donald E. Bobo, Jr. because he is a director as a result of the Company’s transaction with Edwards Lifesciences LLC.           EX-10.25 5 a06-2062_1ex10d25.htm MATERIAL CONTRACTS       EXHIBIT 10.25   Severance Arrangements with Certain Executive Officers   Pursuant to resolutions adopted by the Board of Directors of PLC Systems Inc. (the “Company”) on December 19, 2001, Michael F. Adams, the Company’s Vice President of New Ventures, and Kenneth J. Luppi, the Company’s Vice President of Operations, are entitled to receive payments equal to 26 weeks of base salary in the event that they are terminated within one year of the date of a change in control of the Company.   Mark R. Tauscher, the Company’s President and Chief Executive Officer, James G. Thomasch, the Company’s Senior Vice President of Finance and Administration, Chief Financial Officer and Treasurer, and Dr. Robert I. Rudko, the Company’s Chief Scientist, are separately entitled to receive severance payments pursuant to the terms of their respective employment agreements with the Company.           EX-21.1 6 a06-2062_1ex21d1.htm SUBSIDIARIES OF THE REGISTRANT       EXHIBIT 21.1   SUBSIDIARIES OF THE REGISTRANT   1)             PLC Medical Systems, Inc., a Delaware corporation   2)             PLC Sistemas Medicos Internacionais (Deutschland) GmbH, a German corporation           EX-23.1 7 a06-2062_1ex23d1.htm CONSENTS OF EXPERTS AND COUNSEL       EXHIBIT 23.1   Consent of Independent Registered Public Accounting Firm   As independent registered public accountants, we hereby consent to the incorporation of our report dated February 10, 2006, except with respect to the matters discussed in Note 11, as to which the date is March 9, 2006, relating to the consolidated financial statements and schedule of PLC Systems Inc.  for the year ended December 31, 2005 included in this Form 10-K, into the Company’s previously filed Registration Statements on Form S-3 (File Nos.  333-68923, 333-80045 and 333-43454) and Form S-8  (File Nos. 33-95168, 333-51547, 333-37814, 333-48706, 333-51136, 333-57752, 333-91430, 333-106100 and 333-127770).          /s/ Vitale, Caturano &   Company Ltd.                            Boston, Massachusetts     March 28, 2006               EX-23.2 8 a06-2062_1ex23d2.htm CONSENTS OF EXPERTS AND COUNSEL       EXHIBIT 23.2   Consent of Independent Registered Public Accounting Firm   We consent to the incorporation by reference in the Registration Statements (Form S-3 Nos. 333-68923, 333-80045 and 333-43454 and Form S-8 Nos. 33-95168, 333-51547, 333-37814, 333-48706, 333-51136, 333-57752, 333-91430, 333-106100 and 333-127770) of PLC Systems Inc. of our report dated February 10, 2005 with respect to the consolidated financial statements and financial statement schedule of PLC Systems Inc. as of December 31, 2004 and for each of the two years in the period ended December 31, 2004, included in this Annual Report (Form 10-K) for the year ended December 31, 2005.            /s/ Ernst & Young LLP                            Boston, Massachusetts     March 27, 2006               EX-31.1 9 a06-2062_1ex31d1.htm 302 CERTIFICATION       EXHIBIT 31.1   CERTIFICATION PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002   I, Mark R. Tauscher, certify that:   1. I have reviewed this annual report on Form 10-K of PLC Systems Inc.;   2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;   3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;   4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:   a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;   b) Not Applicable;   c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and   d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and   5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):   a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and   b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.      Date:       March 28, 2006   /s/ Mark R. Tauscher             Mark R. Tauscher             Chief Executive Officer              EX-31.2 10 a06-2062_1ex31d2.htm 302 CERTIFICATION       EXHIBIT 31.2   CERTIFICATION PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002   I, James G. Thomasch, certify that:   1. I have reviewed this annual report on Form 10-K of PLC Systems Inc.;   2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;   3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;   4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:   a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;   b) Not Applicable;   c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and   d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and   5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):   a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and   b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.      Date:       March 28, 2006   /s/ James G. Thomasch             James G. Thomasch             Chief Financial Officer              EX-32.1 11 a06-2062_1ex32d1.htm 906 CERTIFICATION       EXHIBIT 32.1   CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002   In connection with the annual report on Form 10-K of PLC Systems Inc. (the “Company”) for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Mark R. Tauscher, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:   (1)  the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and   (2)  the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.        Dated:   March 28, 2006   By:   /s/ Mark R. Tauscher                     Mark R. Tauscher                 Chief Executive Officer        In connection with the annual report on Form 10-K of PLC Systems Inc. (the “Company”) for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, James G. Thomasch, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:   (1)  the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and   (2)  the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.        Dated:   March 28, 2006   By:   /s/ James G. Thomasch                     James G. Thomasch                 Chief Financial Officer              -----END PRIVACY-ENHANCED MESSAGE-----