UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File Number: 0-26082
VIDAMED, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0314454
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(State of incorporation) (IRS Employer Identification No.)
1380 Willow Rd., Suite 101
Menlo Park, CA 94025
(Address of principal executive offices)
(415) 328-8781
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common Stock, $.001 par value
Preferred Shares Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendments to this
Form 10-K. [ ]
The aggregate market value of the Common Stock of the registrant held by
non-affiliates as of March 17, 1997 was $91,386,141.
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, was 11,247,525 as of March 17, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information is incorporated into Part III of this report by reference to
the Proxy Statement for the Registrant's 1997 annual meeting of stockholders to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this Form
10-K. Certain information is incorporated into Parts II and IV of this report by
reference to the Registrant's annual report to stockholders for the year ended
December 31, 1996.
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VIDAMED, INC.
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INDEX
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Page
PART I Number
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Item 1. Business 1
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholders
Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 14
PART III
Item 10. Directors and Executive Officers of the Registrant 14
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners and Management 15
Item 13. Certain Relationships and Related Transactions 15
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 16
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PART I
Item 1 - BUSINESS
VidaMed, Inc. (the "Company" or "VidaMed") designs, develops,
manufactures and markets technologically and clinically advanced, cost effective
systems for urological applications. The Company's initial focus is upon the
treatment of benign prostatic hyperplasia ("BPH"). The Company's first product,
the patented TUNA System, is designed to offer a cost effective, minimally
invasive alternative therapy with compelling clinical advantages for BPH
treatment. The Company commenced manufacturing production and international
product sales in 1993. The Company received clearance from the Food and Drug
Administration ("FDA") in October 1996 for the treatment of symptoms associated
with BPH. The Company sells its products primarily to urologists, surgery
centers and hospitals in the United States and internationally to distributors
who resell to physicians and hospitals.
VidaMed was founded as a California corporation in July 1992 and was
reincorporated in Delaware in June 1995. VidaMed's principal offices are located
at 1380 Willow Road, Suite 101, Menlo Park, California. The Company's telephone
number is (415) 328-8781.
Overview
This Report on Form 10-K contains certain forward looking statements
regarding future events with respect to the Company. Actual events and future
results of operations may differ materially from those contemplated by such
forward-looking statements as a result of certain factors discussed herein under
"Competition," "Marketing and Customers," "Third Party Reimbursement,"
"Government Regulation," "Clinical Status," "Manufacturing," "Patents and Trade
Secrets," "Product Liability and Insurance" and "Additional Risk Factors."
The prostate is a fibromuscular gland in the male which lies
immediately below the bladder. The normal prostate is approximately the size of
a walnut. Usually in the fourth decade of life, the prostate begins to enlarge
and causes a condition called benign prostatic hyperplasia (BPH). Benign nodules
grow around the tube-like urethra that empties the bladder and passes through
the center of the prostate. This growth obstructs the flow of urine through the
urethra.
As a result of this obstruction, men begin to experience problems with
urination such as frequency, the need to urinate more often, especially at
night; urgency, the sudden sensation that you need to find a toilet; incomplete
emptying of the bladder; and burning or pain during urination. A delay in
treatment can have serious consequences, including complete obstruction (acute
retention), loss of bladder functions, and in extreme cases, kidney failure. The
symptoms can be debilitating and can significantly alter a sufferer's quality of
life.
BPH or enlarged prostate is a very common condition among older men.
According to industry sources, the percentage of men suffering from symptoms of
BPH is approximately 30% for men in their fifties and increases to more than 75%
for men over eighty. It is estimated that approximately 30 million men in
Western Europe, Japan and the United States have urinary tract problems
associated with BPH, including approximately 14 million men in the United
States. Most patients experiencing BPH are regularly monitored and given
clinical tests by their physicians but, due in part to the side effects and
complications associated with current BPH therapies, elect not to receive active
intervention (a course of action known as "watchful waiting"). If symptoms
persist or worsen, drug therapy or surgical intervention is usually recommended.
The most common surgical procedure is Transurethral Resection of the Prostate
(known as "TURP"), an invasive procedure in which an electrosurgical loop is
used to cut away the prostatic urethra and the surrounding tissue in the
prostate thereby widening the urethral channel for urinary flow. Recently, new
less invasive surgical procedures have been developed.
Total BPH related expenditures in the United States are estimated to be
approximately $5 billion annually. Industry sources estimate that one million
men currently receive medical treatment for BPH in the United States. An
estimated 40% of patients in active therapy receive drug treatment for BPH.
Prior to the advent of drug therapy in the mid-1990s, a surgical procedure known
as transurethral resection of the prostate ("TURP") was the principal treatment
modality for BPH. Although the number of TURP procedures performed in the United
States has been declining progressively in recent years, TURP remains one of the
most common surgical procedures performed on men in the United States and
represents the second highest aggregate surgical expense reimbursed by Medicare.
The Company believes that the numerous complications associated with TURP are a
deterrent to many prospective patients, leading to a decline in the number of
TURPs performed in the United States, from a total of 380,000 in 1990 to 260,000
in 1993. The development of less invasive procedures for treatment of BPH could
result in a
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substantial increase in the number of BPH patients who elect to receive
interventional therapy. The general aging of the United States population, as
well as increasing life expectancies, is also expected to contribute to growth
in the BPH therapy market.
Total BPH related expenditures outside the United States are estimated
to be nearly $4 billion annually. Industry sources estimate that approximately
450,000 BPH patients outside the United States are currently receiving drug
therapy, and that approximately 550,000 TURP procedures are performed annually
outside the United States.
The BPH market is large and can be expected to continue to grow due to
the general aging of the world's population, as well as increasing life
expectancies. Improved education on healthcare issues may also encourage more
men to seek treatment of their BPH symptoms.
The rising cost of healthcare in the United States has influenced
public support for managed care in order to control spending. Hospitals and
doctors are now forced to compete for the managed care dollars. VidaMed believes
it is well positioned to provide both managed care and physicians an alternative
to drug therapy and costly and invasive surgery and intends to capitalize on
this position with the goal of capturing market share.
The TUNA System
VidaMed has developed the TUNA System to be the therapy of choice for
BPH over watchful waiting, drug therapy and current surgical therapies. The TUNA
System is designed to restore and improve urinary flow while resulting in fewer
complications and adverse effects, shorter recovery time and greater cost
effectiveness than other therapies for treating BPH. The Company believes that
the cost of treatment with TUNA will be less than the cost of many other
interventional BPH therapies because the procedure is designed to be performed
on an outpatient basis and to result in fewer complications.
The principal components of the TUNA system are (i) a single-use needle
ablation catheter that delivers RF energy to the prostate, (ii) a low power RF
energy generator, (iii) an optical device that allows direct viewing during the
procedure and (iiiv) a data recorder.
TUNA Catheter. The single-use TUNA catheter measures 22 French
(approximately seven millimeters) in diameter and contains laterally deployed
needles that extend at an approximately 90 degree angle. Each needle is encased
by a retractable shield which protects the urethra and is adjusted by the
urologist to selectively control the area of prostate tissue ablated during the
procedure. Controls on the catheter handle allow for independent advancement and
retraction of the needle and shields. Thermocouples located at the shield tip
and at the catheter tip record temperatures at the lesion site and in the
prostatic urethra. The catheter includes capabilities for irrigation and
aspiration, enhancing visualization for the physician and enabling drainage of
the bladder without removing and reinserting the catheter. In addition, these
capabilities allow the physician to more closely control urethral tissue
temperature during the procedure.
TUNA RF Generator. The TUNA RF energy generator is designed
specifically for use with the TUNA catheter. The RF generator has digital
displays indicating the temperature at each thermocouple, the RF power being
delivered to each needle, ablation time and electrical impedance. These
measurements are used by the physician to control tissue ablation. The generator
has both automatic and manual control features and has an automatic shut-off
activated by both temperature and impedance measurements to ensure controlled
tissue ablation.
TUNA Optics. The TUNA optical device allows precise positioning of the
catheter between the verumontanum and the bladder neck during the procedure
using direct vision control. The optical device is reusable after sterilization
and is equipped with a three-way exchange adapter, which allows the unit to be
used with endoscopic light sources manufactured by other companies.
TUNA Data Recorder. The TUNA data recorder provides a record of the
treatment regarding temperature settings and impedance levels. This proprietary
software is loaded onto a laptop computer and provides immediate feedback to the
urologist during the TUNA procedure. In addition, the data can be printed and
serve as documentation for the patient's record and reimbursement submission.
The TUNA procedure desiccates prostatic tissue, leading to improved
urinary flow, and can be performed in approximately 30 to 45 minutes with local
anesthesia, which may be supplemented by intravenous sedation. The TUNA catheter
is inserted into the patient's urethra, and the two shielded needle electrodes
are then advanced into
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one of the two lateral lobes of the prostate. Controlled RF energy delivered by
the needle electrodes heats targeted portions of the prostate lobe to
temperatures of 90 to 100 degrees centigrade, creating a localized area of
desiccated tissue measuring approximately one to two centimeters in diameter,
while the shields protect the urethra from thermal damage. Once a lesion of
sufficient size has been created, the urologist retracts the needles and places
the catheter at the next site to be ablated and repeats the process. Typically,
two treatments in each lateral prostate lobe are performed depending upon the
size of the prostate. If the patient is unable to urinate due to temporary
swelling or irritation of the urethra, a catheter will be inserted into the
patient's urethra. This catheter, if inserted, is typically left in place for
one to two days.
The Company believes that the design of the TUNA system offers
significant advantages over other BPH therapies. Because the TUNA system shields
the urethra and delivers controlled RF energy directly into the interior of the
prostate, the procedure protects the prostatic urethra and reduces the risk of
unintended thermal damage to surrounding structures. In other procedures where
this control does not exist, the prostatic urethra and other structures can be
damaged or destroyed, causing significant patient discomfort and complications.
Clinical trials of the TUNA system indicate that TUNA results in fewer of the
complications associated with TURP, including impotence, retrograde ejaculation
and incontinence. The Company believes that the cost of the TUNA procedure in
the United States, including physician charges, will be significantly less than
the cost of TURP. In the United States the TUNA RF generator has a list price of
$29,500 and internationally, based on information received from its
distributors, the Company believes that the TUNA RF generator is sold at prices
ranging from $20,000 to $35,000. This capital cost is less than the general
surgical lasers required to perform laser procedures and the ultrasound and
microwave devices required for other surgical procedures.
The Company believes TUNA will also provide patients, physicians and
health care payors with a clinically and economically superior alternative to
ongoing drug therapy and watchful waiting. To date, the symptomatic relief
experienced by patients in the Company's clinical trials suggests that TUNA may
provide greater relief than drug therapy or watchful waiting. The Company
believes that if the relief provided by TUNA proves to be sufficiently long
lasting, TUNA may prove to be economically superior to the noninvasive
approaches. To date, the Company's available two-year clinical follow-up data
for TUNA patients do not suggest the need for retreatment within this time
frame. However, there can be no assurance as to whether and how frequently TUNA
patients will require retreatment.
BPH Therapy
Watchful Waiting
The majority of BPH patients are initially managed through watchful
waiting, an approach entailing periodic visits to physicians and clinical
testing. The aim of watchful waiting is to monitor the patient's symptoms, treat
some of the attendant complications such as bladder infections, and determine
when more active intervention is required. For many BPH sufferers, watchful
waiting represents only a temporary option due to generally worsening symptoms
that eventually require therapeutic intervention. The Company estimates that the
annual cost of watchful waiting, consisting of several physician visits and
periodic testing, is between $750 and $1,000 per patient. The Company believes
that many health care payors have encouraged watchful waiting or drug therapy
over surgical intervention, due in large part to the higher costs of
interventional therapy, particularly TURP procedures.
Drug Therapy
Drug therapy for BPH has been available since FDA approval of three
orally administered pharmaceutical products, Proscar (sold by Merck) in 1992,
Hytrin (sold by Abbott Laboratories) in 1993 and Cardura (sold by Pfizer) in
1995. Several other pharmaceutical products are currently undergoing clinical
trials for BPH symptom relief.
Proscar blocks hormones that stimulate growth of the prostate. Hytrin,
an alpha blocker, disables alpha receptors on smooth muscle cells in the area of
the prostate, causing muscle relaxation that alleviates some of the symptoms of
BPH. Cardura, also an alpha blocker, acts in a manner similar to Hytrin. A
minimum of six months of Proscar treatment may be necessary to determine
efficacy and, after 12 months, many patients taking Proscar do not experience an
increase in urine flow or an improvement in other BPH symptoms. Side effects for
Proscar include impotence, decreased libido and other sexual dysfunction. Side
effects for alpha blockers include dizziness, headache and fatigue. According to
the United States Department of Health and Human Services, there is no evidence
that Proscar or alpha blockers reduce BPH complication rates or the need for
future surgery. The average
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annual cost of single drug therapy is $1,300 for Proscar and $1,400 for alpha
blockers. Drug therapy generally must be administered daily for the duration of
the patient's life.
Surgical Treatments for BPH
Transurethral Resection of the Prostate. TURP has been the primary
interventional treatment modality for BPH since the 1940s and remains the most
common BPH surgical procedure. TURP is an inpatient procedure requiring general
anesthesia or regional anesthesia administered into the spinal column. Patients
usually must remain in the hospital for an average of approximately six days and
typically miss work for seven to twenty-one days. The TURP procedure is
performed by a physician, who uses a visualization scope (known as a cystoscope)
inserted through the urethra to view the prostate and an electrically powered
metal loop to cut away the prostatic urethra and the surrounding prostatic
tissue. The procedure results in complete removal of the prostatic urethra and
removal of a substantial portion of the prostate. While TURP results in a
dramatic improvement in urine flow, it can also result in serious complications,
which may impact negatively on two other measures of BPH symptom relief known as
the symptom score and quality of life score. A significant degree of bleeding
can occur during the procedure. Due to the trauma to the urethra, patients
experience pain during urination and require a urinary catheter, which is
typically left in place for several days or longer. The current average Medicare
reimbursement for TURP is approximately $8,600. The initial cost to the hospital
of the equipment needed to perform TURP, including a power source, cystoscope
and electrosurgical loop, is approximately $16,000. This equipment is generally
reusable.
A large number of TURP patients experience complications. Virtually all
patients experience a burning sensation upon urination that lasts for up to
three weeks following the procedure. According to the United States Department
of Health and Human Services, other complications include impotence (14% of
patients), retrograde ejaculation (the reverse flow of semen, which often
results in sterility) (73%), infection (15%), urethral stricture resulting in a
complete inability to urinate (4%), excessive bleeding requiring transfusion
(12%) or immediate surgery to stop the bleeding (2%), TURP syndrome (caused by
absorption of the irrigation fluids used in TURP and resulting in mental
confusion, nausea, visual disturbance and cardiac arrhythmias) (2%) and total
urinary incontinence (1%). In addition, approximately 2% of TURP patients die as
a result of the procedure and related complications. At least 10% of TURP
patients develop BPH symptoms again and require retreatment within five years.
Recently, a device employing a roller ball instead of an
electrosurgical loop has been used to perform the TURP procedure. The roller
ball cauterizes as it removes tissue. Like a conventional TURP, this procedure
must be performed in a hospital under general or regional anesthesia, results in
destruction of the prostatic urethra and requires insertion of a urinary
catheter. An early study indicates that many of the same complications of TURP
are experienced and that patients are generally required to stay in the hospital
at least overnight.
Laser Assisted Prostatectomy. Laser assisted prostatectomy includes two
similar procedures-visual laser assisted prostatectomy ("V-LAP") and contact
laser assisted prostatectomy ("C-LAP"). Typically, the procedure is performed in
the hospital under either general or regional anesthesia, and an overnight
hospital stay is required. In V-LAP and C-LAP, a surgical laser catheter
inserted into the urethra burns the prostatic tissue and the prostatic urethra.
In V-LAP, the burnt prostatic tissue then necroses, or dies, and over four to
twelve weeks is sloughed off during urination. In C-LAP, the prostatic and
urethral tissue is burned on contact and vaporized. Complications associated
with V-LAP and C-LAP include retrograde ejaculation, infection, incontinence and
acute urinary retention. Because of the burning of the prostatic urethra and
resulting pain during urination, patients may require a urinary catheter for
several days or longer following the procedure. In addition, the sloughing off
of dead prostatic tissue following V-LAP can cause acute pain and psychological
distress for weeks or months following the procedure. The current average
Medicare reimbursement for laser procedures to treat BPH in the United States is
approximately $7,000. Approximately 50,000 laser assisted prostatectomy
procedures were performed in the United States in 1994, and V-LAP and C-LAP
procedures are also performed in major European and Asia Pacific markets. The
laser equipment used in these procedures typically costs in excess of $50,000,
although this cost can be eliminated by the use of a general surgical laser
already owned by the physician or hospital.
Transurethral Microwave Therapy. In transurethral microwave therapy
("TUMT") a catheter that is inserted into the urethra delivers microwave energy
to destroy prostatic tissue. TUMT is typically performed in an outpatient
setting under local anesthesia, which may be supplemented by intravenous
sedation. Although early experience with TUMT has demonstrated some success in
alleviating the symptoms of BPH, the Company believes the difficulty of
controlling the absorption of microwave energy in tissue may cause varying
treatment outcomes. A microwave system marketed by EDAP Techomed called the
Prostatron received FDA clearance in 1996 for treatment of
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symptoms associated with BPH. Microwave systems have been marketed in certain
European countries for several years. The Company believes microwave generators
used for performing TUMT are currently priced at approximately $395,000 in the
United States.
Other Surgical Procedures. Several new procedures for treating BPH have
recently been introduced, including high-intensity focused ultrasound ("HIFU")
and laser delivered interstitial thermal therapy ("LDIT").
In a HIFU procedure, a high intensity ultrasound beam is used to create
heat in a defined area, thereby necrosing prostatic tissue. Clinical trials for
HIFU systems are currently underway in the United States and Japan. The
procedure may be performed in an outpatient setting under local anesthesia, but
general anesthesia may be required if the patient is unable to remain still
during the procedure. Early studies show that treatment outcomes are variable,
and complications include tissue sloughing that may require catheterization and
blood in the urine and seminal fluid. The Company believes that ultrasound
systems used in HIFU are currently being marketed at a price of approximately
$100,000.
In an LDIT procedure, a laser fiber is inserted through the urethra
into the prostate, and energy is delivered directly into the cellular mass (or
interstitium) of the prostate. The interstitial laser procedure is designed to
be performed in an outpatient setting under local anesthesia, which may be
supplemented by intravenous sedation. Complications observed in early studies
include urinary tract infections and stricture.
In addition, various other procedures that attempt to create an opening
for urinary flow without removing prostatic tissue have been used for treatment
of BPH. These procedures include transurethral incision of prostate ("TUIP"),
balloon dilation and stenting. Open surgery, in which the entire prostate gland
is removed, is often used as a treatment for prostate cancer but is rarely used
for treatment of BPH.
The Company believes that none of these procedures offers patients,
physicians and payors collectively all of the advantages of the TUNA System and
procedure.
Competition
Competition in the market for treatment of BPH is intense and is expected to
increase. The Company believes its principal competition will come from invasive
therapies, such as TURP, and noninvasive courses of action, such as drug therapy
and watchful waiting. The Company may encounter competition from emerging
therapies in attracting clinical investigators as well as prospective clinical
trial patients. Most of the Company's competitors have significantly greater
financial, technical, research, marketing, sales, distribution and other
resources than the Company. There can be no assurance that the Company's
competitors will not succeed in developing or marketing technologies and
products that are more effective or commercially attractive than any which are
being developed by the Company. Such developments could have a material adverse
effect on the Company's business, financial condition and results of operations.
Any product developed by the Company that gains regulatory approval
will have to compete for market acceptance and market share. An important factor
in such competition may be the timing of market introduction of competitive
products. Accordingly, the relative speed with which the Company can develop
products, complete clinical testing and regulatory approval processes, gain
reimbursement acceptance and supply commercial quantities of the product to the
market are expected to be important competitive factors. The Company expects
that competition in the BPH field will also be based, among other things, on the
ability of the therapy to provide safe, effective and lasting treatment, cost
effectiveness of the therapy, physician, health care payor and patient
acceptance of the procedure, patent position, marketing and sales capability,
and third party reimbursement policies.
Marketing and Customers
VidaMed has positioned itself for worldwide distribution of the TUNA
System. VidaMed's sales and marketing staff are currently located in the United
States, United Kingdom, and Venezuela where direct distribution takes place. In
the United States, the Company markets the TUNA System through a network of five
VidaMed sales managers and approximately 35 independent dealers and
representatives. A network of distributors, supported by VidaMed staff, cover
other countries throughout Asia, Europe and South America. Century Medical has
paid the Company $1.0 million for exclusive distribution rights in Japan for a
period of five years commencing with the receipt, if any, of Japanese regulatory
approval for the TUNA System. At such time, Century Medical will be obligated to
pay the Company an additional $500,000.
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Key urologists around the world have adopted the TUNA procedure as a
new treatment for symptomatic BPH. The Company believes that the endorsements
made by these early adopters will assist in the United States marketing efforts
to create acceptance in the urological community. VidaMed will continue to be
represented at all major urology conferences in the United States and the rest
of the world. A number of educational workshops were presented in 1996 to over
400 urologists in order to educate doctors on how to perform the TUNA procedure.
The Company has prepared a number of patient awareness and education materials
for urologists to use to expand their medical practice. Reimbursement
specialists are working with the Company to develop billing programs for
physicians and insurance companies. VidaMed is committed to delivering a quality
product to its customers and to reinforce product delivery with excellent
customer service and field support.
The TUNA System represents a new therapy for BPH, and there can be no
assurance that the TUNA System will gain any significant degree of market
acceptance among physicians, patients and health care payors, even if necessary
international and United States regulatory and reimbursement approvals are
obtained. Physicians will not recommend the TUNA procedure unless they conclude,
based on clinical data and other factors, that it is an attractive alternative
to other methods of BPH treatment, including more established methods such as
TURP and drug therapy. In particular, physicians may elect not to recommend the
TUNA procedure until such time, if any, as the duration of the relief provided
by the procedure has been established. Broad use of the TUNA System will require
the training of numerous physicians, and the time required to complete such
training could result in a delay or dampening of market acceptance. Even if the
clinical efficiency of the TUNA procedure is established, physicians may elect
not to recommend the procedure unless acceptable reimbursement from health care
payors is available. Health care payor acceptance of the TUNA procedure will
require evidence of the cost effectiveness of TUNA as compared to other BPH
therapies, which will depend in large part on the duration of the relief
provided by the TUNA procedure. A thorough analysis of multi-year patient
follow-up data will be necessary to assess the durability of the relief provided
by TUNA therapy. Patient acceptance of the procedure will depend in part on
physician recommendations as well as other factors, including the degree of
invasiveness and rate and severity of complications associated with the
procedure as compared to other therapies.
Third Party Reimbursement
The Company believes that the acceptance of the TUNA procedure will
depend not only on its clinical efficacy and cost effectiveness, but also on the
receipt of third party reimbursement. To date, the Company has been focused on
obtaining reimbursement approvals in international markets and upon FDA
clearance of the TUNA System has begun the reimbursement process in the United
States. The main types of reimbursement systems in international markets are
government sponsored health care and private insurance. Countries with
government sponsored health care, such as the United Kingdom, Italy and Sweden,
have a centralized, nationalized health care system. New devices are brought
into the system through negotiations between departments at individual hospitals
at the time of budgeting. In most foreign countries, there are also private
insurance systems that may offer payments for alternative therapies. Although
not as prevalent as in the United States, health maintenance organizations are
beginning to appear in Europe, particularly in Spain. Regardless of the type of
reimbursement system, the Company believes that physician advocacy of the TUNA
System will be the key to obtaining reimbursement.
The Company seeks to obtain reimbursement approvals for the TUNA
procedure by addressing the reimbursement systems in individual countries and is
in the early stages of implementing this strategy. In the United States, most
medical procedures are reimbursed by a variety of third party payors, including
Medicare and private insurers. Health Care Financing Administration ("HCFA")
determines whether Medicare will reimburse for a particular procedure, based on
its assessment of the procedure's safety and efficacy. Private third party
payors base their reimbursement decisions partly on HCFA's policies and also on
their own independent analyses of the cost effectiveness of such procedures.
VidaMed's strategy for obtaining reimbursement authorization for the
TUNA procedure in the United States is to establish the safety, efficacy and
cost effectiveness of the TUNA procedure compared to other treatments for BPH.
The Company is working aggressively to receive third party reimbursement for the
TUNA procedure in the United States since FDA clearance was received, however,
there can be no assurance that reimbursement for TUNA procedures will be
available in the United States. The TUNA procedure has received reimbursement
from several third party payors and the Company is actively seeking approval
from major third party payors. Furthermore, the cost effectiveness of TUNA, and
therefore reimbursement, will also depend on the duration of the relief provided
by the TUNA procedure.
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Currently, the Company has received governmental approval in New
Zealand to submit reimbursement claims for TUNA procedures under an existing
treatment code. In Italy, TUNA procedures have been reimbursed under standard
codes for BPH treatment. In Germany, TUNA procedures have been reimbursed by
private insurers on a case-by-case basis. The Company has recently started
formal reimbursement clinical trials in Germany and France in order to obtain
reimbursement in those two countries. Market acceptance of the TUNA System will
depend on availability of reimbursement in international markets targeted by the
Company and will require reimbursement approvals in addition to those already
obtained. There can be no assurance that the TUNA System will receive the
necessary reimbursement approvals in all such markets, or that physicians will
support reimbursement for TUNA procedures.
Failure of the Company to receive reimbursement approvals from
governmental and private health care payors in the United States and in
international markets targeted by the Company, or changes in the reimbursement
policies of governmental or private health care payors that adversely affect
reimbursement for TUNA procedures, would have a material adverse effect on the
Company's business, financial condition and results of operations.
Government Regulation
United States
The Company's TUNA System is regulated in the United States as a
medical device by the FDA under the Federal Food, Drug, and Cosmetic Act ("FDC
Act") and requires approval by the FDA prior to commercialization. Pursuant to
the FDC Act, the FDA regulates the manufacture, distribution and production of
medical devices in the United States. Noncompliance with applicable requirements
can result in fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant approval for devices, and criminal prosecution. Medical devices are
classified into one of three classes, class I, II or III, on the basis of the
controls necessary to reasonably ensure their safety and effectiveness. The
safety and effectiveness can be assured for class I devices through general
controls (e.g., labeling, premarket notification and adherence to GMPs) and for
class II devices through the use of special controls (e.g., performance
standards, postmarket surveillance, patient registries, and FDA guidelines).
Generally, class III devices are those which must receive premarket approval by
the FDA to ensure their safety and effectiveness (e.g., life-sustaining,
life-supporting and implantable devices, or new devices which have not been
found substantially equivalent to legally marketed devices).
Before a new device can be introduced into the market, the manufacturer
must generally obtain FDA clearance through either a 510(k) notification or a
premarket approval ("PMA"). A 510(k) clearance will be granted if the submitted
data establishes that the proposed device is "substantially equivalent" to a
legally marketed class I or II medical device, or to a class III medical device
for which the FDA has not called for a PMA. The FDA has recently been requiring
a more rigorous demonstration of substantial equivalence than in the past. It
generally takes from three to nine months from submission to obtain a 510(k)
clearance, but it may take longer. The FDA may determine that the proposed
device is not substantially equivalent, or that additional data is needed before
a substantial equivalence determination can be made. A "not substantially
equivalent" determination, or a request for additional data, could delay the
market introduction of new products that fall into this category and could have
a materially adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will obtain
510(k) clearance within the above time frames, if at all, for any device for
which it files a future 510(k) notification. In June 1995, the Company received
510(k) clearance for its TransUniversal Needle Ablation System, a system based
on the Company's core RF technology. Such clearance is for general surgical use
for soft tissue ablation, and the Company is prohibited from marketing the
device for more specific indications without additional FDA clearances that may
require the submission of clinical data. The Company did not introduce this
device in the United States due to the 510(k) submission in March of the TUNA
System. The TUNA System was submitted for a BPH treatment indication which
provides a significant advantage in marketing the product. For any of the
Company's products that are cleared through the 510(k) process, modifications or
enhancements that could significantly affect safety or efficacy will require new
510(k) submissions. The Company is prohibited from marketing its general
electrosurgical device for treatment of BPH without receipt of additional FDA
clearance for such device.
In 1995, the FDA concurred with VidaMed's request to change the
regulatory requirement of the TUNA System from a PMA to a 510(k). This
regulatory change provides VidaMed the opportunity to commercialize the TUNA
System in the United States earlier than originally expected. The 510(k) was
filed in March of 1996 and FDA clearance was received in October 1996.
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If a manufacturer or distributor of medical devices cannot establish
that a proposed device is substantially equivalent to a legally marketed device,
the manufacturer or distributor must seek premarket approval of the proposed
device through submission of a PMA application. A PMA application must be
supported by extensive data, including, in many instances, preclinical and
clinical trial data, as well as extensive literature to prove the safety and
effectiveness of the device. Following receipt of a PMA application, if the FDA
determines that the application is sufficiently complete to permit a substantive
review, the FDA will "file" the application. Under the FDC Act, the FDA has 180
days to review a PMA application, although the review of such an application
more often occurs over a protracted time period, and generally takes
approximately two years or more from the date of filing to complete.
The PMA application approval process can be expensive, uncertain and
lengthy. A number of devices for which premarket approval has been sought have
never been approved for marketing. The review time is often significantly
extended by the FDA, which may require more information or clarification of
information already provided in the submission. During the review period, an
advisory committee likely will be convened to review and evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. In addition, the FDA will inspect the manufacturing facility
to ensure compliance with the FDA's GMP requirements prior to approval of an
application. If granted, the approval of the PMA application may include
significant limitations on the indicated uses for which a product may be
marketed.
If necessary, the Company will file a PMA application with the FDA for
approval to sell its potential products commercially in the United States when
it has developed such products. There can be no assurance that the Company will
be able to obtain necessary PMA application approvals to market such products on
a timely basis, if at all, and delays in receipt or failure to receive such
approvals, the loss of previously received approvals, or failure to comply with
existing or future regulatory requirements could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company is also required to register as a medical device
manufacturer with the FDA and state agencies, such as the California Department
of Health Services ("CDHS") and to list its products with the FDA. As such, the
Company is subject to inspections by both the FDA and the CDHS for compliance
with the FDA's GMP and other applicable regulations. These regulations require
that the Company maintain its documents in a prescribed manner with respect to
manufacturing, testing and control activities. Further, the Company and the
third party manufacturers of its products are required to comply with various
FDA requirements for design, safety, advertising and labeling. The Company has
not yet undergone an FDA GMP inspection. However, the Company has undergone two
annual CDHS GMP inspections in January 1995 and in February 1996, both of which
were satisfactory.
The Company is required to provide information to the FDA on death or
serious injuries alleged to have been associated with the use of its medical
devices, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunction were to recur. In addition, the
FDA prohibits a cleared or approved device from being marketed for uncleared or
unapproved applications. If the FDA believes that a company is not in compliance
with the law, it can institute proceedings to detain or seize products, issue a
recall, enjoin future violations and assess civil and criminal penalties against
the company, its officers and its employees. Failure to comply with the
regulatory requirements could have a material adverse effect on the Company's
business, financial condition and results of operations.
The advertising of most FDA-regulated products is subject to both FDA
and Federal Trade Commission jurisdiction. The Company also is subject to
regulation by the Occupational Safety and Health Administration and by other
governmental entities.
Regulations regarding the manufacture and sale of the Company's
products are subject to change. The Company cannot predict the effect, if any,
that such changes might have on its business, financial condition or results of
operations.
International
Sales of medical devices outside the United States are subject to
regulatory requirements that vary widely from country to country. The time
required to obtain approval for sale in a foreign country may be longer or
shorter than that required for FDA approval, and the requirements may differ.
VidaMed has received regulatory approvals where required for commercial
sale of the TUNA System in all major international markets, except Japan. In May
1994 the Company's United Kingdom facility passed inspection
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by the United Kingdom Department of Health and received GMP certification. In
June 1994, the Company received a report of compliance for the TUNA system from
the British Standards Institute ("BSI") and in August 1994 the Company received
a certificate of compliance with IEC 601-1 and IEC 601-2 regulations from TUV
Product Services. TUV and BSI certifications, which are issued by organizations
analogous to Underwriters Laboratories in the United States, are focused on
device safety and adherence of the device to published electronic or mechanical
specifications. In February 1995, the Company received ISO 9002 certification
for its manufacturing facility in the United Kingdom. ISO 9002 certification is
based on adherence to established standards in the areas of quality assurance
and manufacturing process control. These certifications allow the Company to
affix the CE mark to the TUNA system, permitting the Company to commercially
market and sell the TUNA system in all countries of the European Economic Area.
In order to maintain these approvals, the Company is subject to periodic
inspections. Additional product approvals from foreign regulatory authorities
may be required for international sale of the Company's general electrosurgical
device for which an FDA 510(k) notification has been filed. Failure to comply
with applicable regulatory requirements can result in loss of previously
received approvals and other sanctions and could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company's distributor in Japan, Century Medical, will be
responsible for management of clinical trials and obtaining regulatory approval
for the TUNA System, and such approval will therefore be outside the Company's
control. Century Medical submitted an application to Japanese regulatory
authorities in October 1996, and approval is expected by the end of 1997,
however, there can be no assurance as to when or whether such approval will be
received.
Clinical Status
The Company is performing clinical trials of the TUNA System to obtain
clinical data to obtain long-term data, to obtain regulatory approval in Japan
and to obtain data to support reimbursement approvals in various markets. The
Company began international clinical evaluation of the TUNA system in March
1993. As of December 31, 1996, over 500 patients had undergone TUNA procedures
in clinical trials worldwide, including more than 150 patients in the United
States.
In July 1994, the Company completed a pilot safety study in the United
States. In September 1994, the Company received FDA approval for, and in late
1994 commenced, a controlled, randomized, multicenter clinical trial in the
United States involving at least 200 patients with 12-month follow-up data. This
clinical study was designed to measure the safety and efficacy of the TUNA
System compared to TURP in two groups of at least 100 patients each. In
September 1995 the FDA issued a new guidance document for adding BPH label
claims to surgical lasers and certain other previously cleared devices. This
guidance document changed the regulatory filing document from a PMA to a 510(k).
In October 1995, the FDA concurred with VidaMed's request that the TUNA System
be covered under this policy. This change reduced the number the clinical study
patient requirements from two groups of at least 100 patients each to 50
patients in each group, and only require 6-month follow-up data. This
significantly shortened the time needed to complete the clinical study and
resulted in a 510(k) filing to the FDA in March of 1996. The Company has agreed
with the FDA to monitor the patients in the multicenter study for long-term data
of at least 5 years.
The Company is currently conducting clinical trials in Germany, the
United Kingdom, France, and Australia for reimbursement approval or acceptance
within the medical community. In addition, Japan requires clinical trials and
regulatory approval prior to commercial sale of the TUNA System, and such
clinical trials were completed in 1996. The Company's distributor in Japan,
Century Medical, is responsible for the management of Japanese clinical trials
and initiated such trials under a protocol agreed upon with the Japanese
Ministry of Health and Welfare requiring six-month follow-up data. Upon
completion of these trials, Century Medical prepared and submitted the
regulatory submissions to the Ministry of Health and Welfare.
In the clinical trials conducted both in the United States and
internationally, significant relief from BPH symptoms has been observed in the
majority of patients for whom follow-up data are available. Follow-up data being
collected include urine flow rates and two standard measures of BPH symptom
relief, known as symptom score and quality of life score. The Company believes
the results provide preliminary indication that treatment with the TUNA System
provides clinically significant relief from the symptoms associated with BPH.
There can be no assurance that equivalent results will be achieved over a longer
follow-up period or in a larger patient population, or that the results of
clinical trials will be sufficient to obtain required foreign regulatory and
reimbursement approvals or physician acceptance.
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Manufacturing
The Company's strategy is to manufacture products for commercial sales
at its facility in Plymouth, England and Menlo Park, California. The Company has
received ISO 9002 certification and United Kingdom GMP approval for the
manufacture of the TUNA System at the United Kingdom facility. The Company
manufactures the TUNA catheter at its Plymouth facility and the RF generator at
its Menlo Park facility. Beginning in 1997 the Company has contracted with a
third party manufacturer for the production of the RF generator.
VidaMed purchases components used in the TUNA System from various
suppliers and relies on single sources for several components. Delays associated
with any future component shortages, particularly as the Company scales up its
manufacturing activities in support of commercial sales, would have a material
adverse effect on the Company's business, financial condition and results of
operations.
At various assembly stages, each production lot undergoes thorough
testing by trained personnel to ensure compliance with the Company's stringent
specifications, which are based on international quality assurance standards.
The Company's quality assurance group independently verifies, at various steps
in the manufacturing cycle, that product fabrication and inspection processes
meet the Company's specifications and applicable regulatory requirements.
The Company currently manufactures the TUNA System in limited
quantities at its United Kingdom facility. However, the Company does not have
experience in manufacturing its products in commercial quantities. Manufacturers
often encounter difficulties in scaling up production of new products, including
problems involving production yields, quality control and assurance, component
supply and lack of qualified personnel. Difficulties encountered by VidaMed in
manufacturing scale-up could have a material adverse effect on its business,
financial condition and results of operations. In mid-1994, the Company
experienced problems at its United Kingdom facility with respect to mechanical
aspects of the TUNA catheter's needle assembly. As a result, a substantial
portion of catheters in the field were returned for rework. The Company has
modified its manufacturing process to rectify these problems and has completed
product rework. However, there can be no assurance that future manufacturing
difficulties or product recalls, either of which could have a material adverse
effect on the Company's business, financial condition and results of operations,
will not occur.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
FDA including recordkeeping requirements and reporting of adverse experience
with the use of the device. The Company's manufacturing facilities are subject
to periodic inspection by FDA, certain state agencies and foreign regulatory
agencies. Failure to comply with regulatory requirements could have a material
adverse effect on the Company's business. There can be no assurance that the
Company will not be required to incur significant costs to comply with laws and
regulations in the future or that laws or regulations will not have a material
adverse effect upon the Company's business.
Research and Development
The Company's research and development efforts are currently focused on
improving the features and reducing the cost of the TUNA System. These efforts
have resulted in improvements to the TUNA System, including: (i) improved optics
for enhanced visualization during the TUNA procedure, (ii) the addition of
irrigation and aspiration ports, (iii) automation of certain functions of the
TUNA RF generator, (iv) reductions in the cost of the TUNA catheter by reducing
the number of components comprising the catheter device, and (v) the development
of the data recorder which provides a record of temperature and impedance levels
during the TUNA procedure.
The Company has also developed a general electrosurgical device for
tissue ablation that is based on its core RF and catheter technology. In June
1995, the Company received FDA 510(k) marketing clearance for such device. The
510(k) clearance for this device is for general surgical use, and the Company is
prohibited from marketing the device for more specific indications without
additional FDA clearances that may require the submission of clinical data.
Ongoing research and development efforts include increasing the range
of energy output of the RF generator, providing support for clinical trials,
interfacing with physicians to develop product enhancements and developing
devices for urological applications in addition to BPH. The Company's in-house
research and development program uses a network linking CAD/CAM capability and
advanced graphic design workstations with a
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computerized machine shop. These capabilities allow the Company to produce
molds, custom parts and tooling, enabling rapid prototyping and pre-production
evaluation of devices.
Patents and Trade Secrets
The Company files patent applications to protect technology, inventions
and improvements that are significant to the development of its business. The
Company has been issued 25 United States patents covering a method of prostate
ablation using the TUNA System and the design of the TUNA System. The Company
currently has approximately 25 patent applications on file in the United States
and over 50 corresponding patent applications on file in various foreign
countries. In addition, the Company holds licenses to certain technology used in
the TUNA System. There can be no assurance that the Company's 25 issued United
States patents, or any patents which may be issued as a result of the Company's
applications, will offer any degree of protection. There can be no assurance
that any of the Company's patents or patent applications will not be challenged,
invalidated or circumvented in the future. In addition, there can be no
assurance that competitors, many of which have substantial resources and have
made substantial investments in competing technologies, will not seek to apply
for and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or in
international markets.
Interference proceedings maybe declared by the United States Patent
and Trademark Office ("USPTP") for the purpose of determining which of the
parties in the interference was the first to invent the subject matter of the
interference. In 1995, EP Technologies, Inc. ("EPT") and the University of
California, which have filed patent applications relating to ablation of body
tissue, requested that the USPTO declare an interference with a third party's
issued patent and two then-pending VidaMed patent applications. To date, the
Company has not received notice to the effect that the USPTO has declared such
an interference. There can be no assurance that the USPTO will not declare an
interference involving VidaMed or that, if declared, such interference will not
be determined adversely to the Company. If an interference proceeding were
determined adversely to the Company, the Company's patent claims that are the
subject of the interference would not be issued and the patent claims issued to
the prevailing party could cover aspects of the Company's products and
activities. In addition, there can be no assurance that the USPTO will not use
the prevailing party's application to reject the allowed claims of the Company.
The enforcement of any such patent claims against VidaMed could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights, and
companies in the medical device industry have employed intellectual property
litigation to gain a competitive advantage. The Company is aware of patents held
by other participants in the BPH market, and there can be no assurance that the
Company will not in the future become subject to patent infringement claims and
litigation or USPTO interference proceedings. The defense and prosecution of
intellectual property suits, USPTO interference proceedings and related legal
and administrative proceedings are both costly and time consuming. Litigation
may be necessary to enforce patents issued to the Company, to protect trade
secrets or know-how owned by the Company or to determine the enforceability,
scope and validity of the proprietary rights of others. The Company, Mr.
Edwards, who was a founder and the Company's former Chief Executive Officer, and
a co-founder and former director of VidaMed settled a dispute in 1995 with EPT
relating to, among other things, certain inventions of Mr. Edwards. Pursuant to
the settlement, mutual releases were granted.
Any litigation or interference proceedings could result in substantial
expense to the Company and significant diversion of effort by the Company's
technical and management personnel. An adverse determination in litigation or
interference proceedings to which the Company may become a party could subject
the Company to significant liabilities to third parties or require the Company
to seek licenses from third parties. Although patent and intellectual property
disputes in the medical device area have often been settled through licensing or
similar arrangements, costs associated with such arrangements may be substantial
and could include ongoing royalties. Furthermore, there can be no assurance that
necessary licenses would be available to the Company on satisfactory terms or at
all. Accordingly, an adverse determination in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent the Company
from manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
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In addition to patents, the Company relies on trade secrets and
proprietary know-how, which it seeks to protect, in part, through proprietary
information agreements with employees, consultants and other parties. The
Company's proprietary information agreements with its employees and consultants
contain industry standard provisions requiring such individuals to assign to the
Company without additional consideration any inventions conceived or reduced to
practice by them while employed or retained by the Company, subject to customary
exceptions. There can be no assurance that proprietary information agreements
with employees, consultants and others will not be breached, that the Company
would have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known to or independently developed by competitors.
The proprietary information agreement between the Company and Mr.
Edwards obligates Mr. Edwards to assign to the Company his inventions and
related intellectual property only in the field of urology. Mr. Edwards has
assigned to RITA Medical Systems, Inc. ("RITA"), formerly known as ZoMed
International, Inc. his inventions in the cancer field. Mr. Edwards has
conceived of, and may continue to conceive of, various medical device product
concepts for other fields outside of urology, including certain concepts in the
gynecology field that have been licensed to an unrelated party. Such party also
has an option to purchase all future technology developed by Mr. Edwards in the
gynecology field. Product concepts outside of urology developed by Mr. Edwards
will not be owned by or commercialized through VidaMed.
The Company has entered into a cross license agreement with RITA. Under
the cross license, RITA has the right to use VidaMed technology in the cancer
field and VidaMed has the right to use RITA technology in the treatment of
urological diseases and disorders. The cross license between VidaMed and RITA
allows both companies to develop products for treatment of prostate cancer and
cancers of the lower urinary tract, and VidaMed and RITA may therefore become
competitors in this field.
Product Liability and Insurance
The business of the Company entails the risk of product liability
claims. Although the Company has not experienced any product liability claims to
date, any such claims could have an adverse impact on the Company. The Company
maintains product liability insurance and evaluates its insurance requirements
on an ongoing basis. There can be no assurance that product liability claims
will not exceed such insurance coverage limits or that such insurance will be
available on commercially reasonable terms or at all.
Employees
As of December 31, 1996, the Company employed 93 individuals on a
full-time basis. Of these, 57 are located in the United States, 34 in the United
Kingdom and 2 in Australia. The Company also has several part-time employees and
consultants. The Company's employees in the United Kingdom are covered under
standard United Kingdom services agreements providing severance pay of one to
three months in the event of termination of employment without cause. None of
the Company's employees is covered under collective bargaining agreements. The
Company considers relations with its employees to be good.
Additional Risk Factors
Limited Operating History; History of Losses and Expectation of Future
Losses; Fluctuations in Operating Results. The Company has a limited history of
operations. Since its inception in July 1992, the Company has been primarily
engaged in research and development of the TUNA System. The Company has
experienced significant operating losses since inception and, as of December 31,
1996, had an accumulated deficit of $51.9 million. The development and
commercialization by the Company of the TUNA System and other new products, if
any, will require substantial product development, clinical, regulatory and
other expenditures. The Company expects its operating losses to continue for at
least the next 12 to 24 months as it continues to expend substantial resources
in the expansion of marketing and sales activities, funding clinical trials in
support of regulatory and reimbursement approvals and research and development.
There can be no assurance that the TUNA System will be successfully
commercialized or that the Company will achieve significant revenues from either
international or domestic sales. In addition, there can be no assurance that the
Company will achieve or sustain profitability in the future. Results of
operations may fluctuate significantly from quarter to quarter and will depend
upon numerous factors, including actions relating to regulatory and
reimbursement matters, progress of clinical trials, the extent to which the TUNA
System gains market acceptance, varying pricing promotions and volume discounts
to distributors, introduction of alternative therapies for BPH and competition.
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Uncertainty Relating to Third Party Reimbursement. The Company's
success will be dependent upon, among other things, its ability to obtain
satisfactory reimbursement from health care payors for the TUNA procedure. In
the United States and in international markets, third party reimbursement is
generally available for existing therapies used for treatment of BPH. After FDA
approval is received, third party reimbursement for the TUNA procedure is
dependent upon decisions by the Health Care Financing Administration ("HCFA")
for Medicare, as well as by individual health maintenance organizations, private
insurers and other payors.
Reimbursement systems in international markets vary significantly by
country. Many international markets have governmentally managed health care
systems that govern reimbursement for new devices and procedures. In most
markets, there are private insurance systems as well as governmentally managed
systems.
Regardless of the type of reimbursement system, the Company believes
that physician advocacy of the TUNA System will be required to obtain
reimbursement. Availability of reimbursement will depend not only on the
clinical efficacy and direct cost of the TUNA procedure, but also on the
duration of the relief provided by the procedure. There can be no assurance that
reimbursement for the Company's products will be available in the United States
or in international markets under either governmental or private reimbursement
systems, or that physicians will support reimbursement for TUNA procedures.
Furthermore, the Company could be adversely affected by changes in reimbursement
policies of governmental or private health care payors. Failure by physicians,
hospitals and other users of the Company's products to obtain sufficient
reimbursement from health care payors or adverse changes in governmental and
private third party payors' policies toward reimbursement for procedures
employing the Company's products would have a material adverse effect on the
Company's business, financial condition and results of operations.
Risk of Inadequate Funding. The Company plans to continue to expend
substantial funds for the expansion of sales and marketing activities, clinical
trials in support of regulatory and reimbursement approvals, research and
development and establishment of commercial scale manufacturing capability. The
Company may be required to expend greater than anticipated funds if unforeseen
difficulties arise in the marketing and sales of the TUNA System, the completion
of clinical trials of the TUNA System, in connection with obtaining necessary
regulatory and reimbursement approvals or in other aspects of the Company's
business. Although the Company believes that existing cash, cash equivalents and
short-term investments and equity line of credit together with cash generated
from the future sale of products will be sufficient to meet the Company's
operating and capital requirements during the next 12 to 24 months, there can be
no assurance that the Company will not require additional financing within this
time frame. The Company's future liquidity and capital requirements will depend
upon numerous factors, including progress of clinical trials, actions relating
to regulatory and reimbursement matters, and the extent to which the TUNA System
gains market acceptance. Any additional financing, if required, may not be
available on satisfactory terms or at all. Future equity financings may result
in dilution to the holders of the Company's Common Stock.
Possible Volatility of Stock Price. The stock market has from time to
time experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. In addition, the market price of the shares of Common Stock is likely to
be highly volatile. Factors such as fluctuations in the Company's operating
results, announcements of technological innovations or new products by the
Company or its competitors, FDA and international regulatory actions, actions
with respect to reimbursement matters, developments with respect to patents or
proprietary rights, public concern as to the safety of products developed by the
Company or others, changes in health care policy in the United States and
internationally, changes in stock market analyst recommendations regarding the
Company, other medical device companies or the medical device industry generally
and general market conditions may have a significant effect on the market price
of the Common Stock.
Item 2 - PROPERTIES
The Company's principal facilities are located in Menlo Park,
California and Plymouth, England. The Menlo Park facility, a 17,000 square foot
facility, serves as Corporate headquarters and is the primary location for
research & development activities. The facility is leased through August 1997
with an option to extend through August 1999. The Plymouth facility, which is
primarily a manufacturing facility, is approximately 14,800 square feet and was
purchased by VidaMed in December 1993 for $750,000. The Company has also leased
a 14,800 square foot facility in Sydney, Australia through 1999 which the
Company intended to use as a sales office and warehouse. The Company subleased
substantially all of the Australian facility in December 1995 for a one year
period on
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essentially the same terms. The sublease terminated and in December 1995
subleased the facility to a new tenant through the end of the lease period on
essentially the same terms.
The Company believes its facilities are in good operating condition but
will not be sufficient in the United States to meet the Company's future
requirements. The Company has begun to search for additional space in California
in order to meet expected manpower and space requirements. The Company has
identified facilities that would be adequate for future requirements and
believes it will be able to secure such facilities.
Item 3 - LEGAL PROCEEDINGS
Not applicable.
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of the year ended December 31, 1996.
PART II
Item 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
The section labeled "Market for Registrant's Common Equity and Related
Stockholders matters" appearing on the inside front cover of the Company's 1996
Annual Report to Stockholders is incorporated herein by reference.
Item 6 - SELECTED FINANCIAL DATA
The section labeled "Selected Financial Data" appearing on page 15 of the
Company's 1996 Annual Report to Stockholders is incorporated herein by
reference.
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The section labeled "Management's Discussion & Analysis of Financial
Condition and Results of Operations" appearing on pages 13 through 15 of the
Company's 1996 Annual Report to Stockholders is incorporated herein by
reference.
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Notes to Consolidated Financial
Statements appearing on pages 16 through 30, and the Report of Ernst & Young
LLP, Independent Auditors, appearing on page 30 of the Company's 1996 Annual
Report to Stockholders are incorporated herein by reference.
Item 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file a definitive proxy statement within
120 days after the end of its fiscal year pursuant to Regulation 14A with
respect to the 1997 Annual Meeting of Stockholders (the "Proxy Statement") to be
held May 7, 1997 and certain information included therein is incorporated herein
by reference.
Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item relating to directors is
incorporated by reference to the information under the caption "Proposal No. 1 -
Election of Directors" in the Proxy Statement.
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The executive officers of the Registrant, who are elected by the board
of directors, are as follows:
Name Age Position
---- --- --------
James A. Heisch 53 President, Chief Executive Officer
and Chief Financial Officer
Carol A. Chludzinski 42 Senior Vice President, North American
Sales and Marketing
John N. Hendrick 45 Vice President and Chief Operating Officer
Patricia S. Garfield 47 Vice President of Marketing
James A. Heisch has served as President and Chief Executive Officer
since March 1996 and has served as Chief Financial Officer since October 1994.
He served as Vice President from October 1994 to May 1995 and was appointed
Executive Vice President in May 1995. From December 1990 until October 1994, Mr.
Heisch was Chief Financial Officer, Vice President, Finance and Secretary of
SuperMac Technology, Inc., a supplier of color graphics systems. From July 1983
until June 1990, Mr. Heisch held various senior management positions, including
Senior Vice President and Chief Financial Officer, with Businessland, Inc., a
distributor of computer products. Mr. Heisch holds a B.S. in Accounting from San
Jose State University and an M.B.A. from the University of Santa Clara. He is a
Certified Public Accountant.
Carol A. Chludzinski has served a Senior Vice President of North
American Sales and Marketing since February 1997. From March 1996 to February
1997, Ms. Chludzinski served as Vice President, North American Sales and
Marketing. Prior to joining the Company, from 1994 to 1995, Ms. Chludzinksi was
Director of Sales for Cybex, Inc., a medical rehabilitation and equipment
manufacturer and distributor. From 1990 to 1994, Ms. Chludzinski served as
Director of Domestic Sales for Heraeus Surgical, Inc., a surgical laser and
other medical equipment manufacturer and distributor. Ms. Chludzinski holds a
B.A. in Liberal Arts from Chestnut Hill College.
John N. Hendrick joined the Company in September 1994 as Vice President
and Chief Operating Officer. From 1988 until joining VidaMed, Mr. Hendrick was
Vice President of Operations for Allergan Medical Optics, a division of
Allergan, Inc. that manufactures ophthalmic and refractive surgical products.
From 1986 to 1988, Mr. Hendrick served as Vice President of Manufacturing of the
Bentley Division of Baxter Healthcare Corporation. Mr. Hendrick previously
served as Vice President of Manufacturing of the Edwards Cardiovascular Division
of American Hospital Supply Corporation. Mr. Hendrick holds a B.A. in Business
Administration from the University of San Bernadino.
Patricia S. Garfield joined the Company as Vice President of Marketing
in February 1997. From 1994 to 1997 Ms. Garfield was the President and Owner of
Health Care Recruiters, an executive search firm specializing in biotech. From
1991 to 1994 Ms. Garfield was Vice President of Marketing for Heraeus Surgical,
Inc., a surgical laser and other medical equipment manufacturer and distributor.
Ms. Garfield holds a B.A. in Liberal Arts from the University of California at
Fullerton.
Item 11 - EXECUTIVE COMPENSATION
Executive Compensation information contained in the Company's Proxy
Statement is incorporated herein by reference.
Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management
information contained in the Company's Proxy Statement is incorporated herein by
reference.
Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Relationships and Related Transactions information contained in
the Company's Proxy Statement is incorporated herein by reference.
PART IV
Item 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
15
<PAGE>
a) 1. Financial Statements
<TABLE>
Incorporated by reference into Part II, Item 8 of this Report:
<CAPTION>
Pages in 1996 Annual
Report to Stockholders
----------------------
<S> <C>
Consolidated Balance Sheets as of December 31, 1996 and 1995 16
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 17
Consolidated Statement of Stockholders' Equity (Net Capital
Deficiency) for the years ended December 31, 1996, 1995 and 1994 18
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 19
Notes to Consolidated Financial Statements 20-30
Independent Auditors' Report 30
</TABLE>
2. Financial Statement Schedules
All schedules are omitted because they are not applicable, or
not required, or because the required information is included in the
consolidated financial statements or notes thereto.
3. Exhibits
Exhibit No. Description
------------- -----------------------------------------------------
3.1 Certificate of Incorporation of the Company as filed
with the Delaware Secretary of State on March 31,
1995, and an amendment thereto as filed on June 19,
1995. (1)
3.2 By-laws of the Company. (1)
4.1 Warrant to Purchase Shares of Series B Preferred
Stock, dated April 13, 1993, issued to Dominion
Ventures, Inc. (1)
4.2 Warrant Purchase Agreement, dated November 8, 1993,
between the Company and Dominion Ventures, Inc. and
Warrant to Purchase Shares of Series C Preferred
Stock, issued to Dominion Ventures, Inc. (1)
4.3 Warrant Purchase Agreement, dated June 30, 1994,
between the Company and LINC Capital Management
Services, Ltd. and Warrant to Purchase Shares of
Series D Preferred Stock, dated June 30, 1994, issued
to LINC Capital Management Services, Ltd. (1)
4.4 Representative Form of Note Subscription Agreement
and Convertible Subordinated Promissory Note. (1)
10.1 Form of Indemnification Agreement between the Company
and each of its directors and officers. (1)
10.2 1992 Stock Plan, as amended. (2)
10.3 1995 Director Option Plan, as amended. (2)
10.4 1995 Employee Stock Purchase Plan. (1)
10.5 Consulting Agreement, dated August 1, 1992, between
the Company and Ronald G. Lax. (1)
10.6 Dominion Ventures Master Lease Agreement, dated April
13, 1993, between the Company and Dominion Ventures,
Inc., and First Amendment thereto. (1)
10.7 Deed of Transfer and Mortgage, dated December 24,
1993, between VidaMed International Ltd. and The
Council of the City of Plymouth, England. (1)
10.8 Master Lease Agreement, dated June 24, 1994, between
the Company and LINC Capital Management Services,
Inc. (1)
10.9 Representative Form of International Distribution
Agreement. (1)
10.10 Settlement Agreement and Mutual Release, dated as of
September 7, 1994, between the Company, certain
individuals, EP Technologies, Inc. and Charter
Venture Capital and Stock Purchase Warrant to
Purchase Shares of Common Stock, dated October 13,
1994, issued to EP Technologies, Inc. (1)
10.11 Cross License Agreement, dated August 2, 1994,
between the Company and ZoMed International, Inc. (1)
16
<PAGE>
10.12 International Distribution Agreement, dated May 9,
1994, between the Company and Century Medical, Inc.
(1)
10.13 Grant Agreement, dated July 19, 1993, between the
Company and the United Kingdom Department of Trade
and Industry. (1)
10.14 Letter employment agreement, dated March 23, 1994,
between the Company and David E. Silverman, M.D. (1)
10.15 Letter employment agreement, dated August 26, 1994,
between the Company and John N. Hendrick. (1)
10.16 Letter employment agreement, dated August 31, 1994,
between the Company and James A. Heisch. (1)
10.17 Restated Shareholder Rights Agreement, dated November
23, 1994, among the Company and holders of the
Company's Registerable Securities. (1)
11.1 Statement of Computation of Loss per Share.
13.1 Annual Report to Stockholders.
21.1 Subsidiaries of the Registrant. (1)
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see signature page of this
Report).
27.1 Financial Data Schedule.
- --------------------
(1) Filed as an Exhibit to the Company's Registration Statement on Form
S-1 (File No. 33-90746) and incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Registration Statement on Form
S-8 (File No. 33-80619) and incorporated herein by reference.
b) Report on Form 8-K
The Company was not required to and did not file any reports on Form
8-K during the three months ended December 31, 1996.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Menlo
Park, State of California, on the 24st day of March, 1997.
VIDAMED, INC.
By /s/ James A. Heisch
----------------------------------
James A. Heisch, President,
Chief Executive Officer and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below hereby constitutes and appoints James A. Heisch, as his
attorney-in-fact, with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Report on Form 10-K, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorney to any and
all amendments to said Report.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed by the following persons in the capacities and
on the dates indicated:
Signatures Title Date
---------- ----- ----
/s/ James A. Heisch President, Chief March 24, 1997
- -------------------------------- Executive Officer
(James A. Heisch) and Chief Financial
Officer (Principal
Executive, Financial
Officer)
/s/ Thomas M. Fahey Chief Accounting March 24, 1997
- -------------------------------- Officer
(Thomas M. Fahey)
/s/ David L. Douglass Director
- -------------------------------- March 24, 1997
(David L. Douglass)
/s/ Stuart D. Edwards Director March 24, 1997
- --------------------------------
(Stuart D. Edwards)
/s/ Lawrence G. Mohr, Jr. Director March 24, 1997
- --------------------------------
(Lawrence G. Mohr, Jr.)
/s/ Michael H. Spindler Director March 24, 1997
- --------------------------------
(Michael H. Spindler)
18
<PAGE>
1996 Annual Report | VIDAMED, Inc
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 3,878,700 $ 5,686,497
SHORT-TERM INVESTMENTS 1,976,300 8,003,379
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE (1996--$168,000, 1995--$43,000) 2,413,320 128,181
OTHER RECEIVABLES 283,415 235,746
INVENTORIES 1,447,065 1,345,277
OTHER CURRENT ASSETS 381,125 272,878
- ----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 10,379,925 15,671,958
PROPERTY AND EQUIPMENT, NET 2,259,100 2,908,837
OTHER ASSETS 207,882 235,331
$ 12,846,907 $ 18,816,126
- ----------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
CURRENT LIABILITIES:
NOTES PAYABLE $ 1,063,565 $ 3,650,049
ACCOUNTS PAYABLE 1,246,085 486,888
ACCRUED COMPENSATION 226,931 174,623
ACCRUED PROFESSIONAL FEES 498,497 337,817
ACCRUED CLINICAL TRIAL COSTS 981,610 977,705
OTHER ACCRUED LIABILITIES 2,830,735 2,181,229
DEFERRED REVENUE 466,667 779,167
CURRENT PORTION OF OBLIGATIONS UNDER CAPITAL LEASES 469,659 696,086
CURRENT PORTION OF LONG-TERM DEBT 57,521 20,958
- ----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 7,841,270 9,304,522
OBLIGATIONS UNDER CAPITAL LEASES, NONCURRENT PORTION 86,456 555,021
LONG-TERM DEBT 738,816 658,804
NOTES PAYABLE, NONCURRENT 479,518 1,543,084
COMMITMENTS -- --
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $.001 PAR VALUE; ISSUABLE IN SERIES, 5,000,000 SHARES
AUTHORIZED; NONE OUTSTANDING AT DECEMBER 31, 1996 AND 1995.
COMMON STOCK, $.001 PAR VALUE, 30,000,000 SHARES AUTHORIZED; 10,928,442 AND
9,257,037 SHARES ISSUED AND OUTSTANDING AT DECEMBER 31,
1996 AND 1995, RESPECTIVELY. 10,928 9,257
ADDITIONAL PAID-IN-CAPITAL 55,895,458 45,373,088
NOTES RECEIVABLE FROM STOCKHOLDERS (205,368) (85,240)
UNREALIZED GAIN (LOSS) ON INVESTMENTS (1,593) 9,111
DEFERRED COMPENSATION (122,733) (218,733)
ACCUMULATED DEFICIT (51,875,845) (38,332,788)
- ----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 3,700,847 6,754,695
- ----------------------------------------------------------------------------------------------------------------
$ 12,846,907 $ 18,816,126
- ----------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
1996 Annual Report | VIDAMED, Inc
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
PRODUCT SALES, NET $ 3,510,143 $ 2,184,374 $ 1,023,802
LICENSE FEES AND GRANT REVENUE 314,383 436,266 363,052
- ---------------------------------------------------------------------------------------------------------------
NET REVENUES 3,824,526 2,620,640 1,386,854
COST OF GOODS SOLD 3,678,903 3,544,961 3,369,706
- ---------------------------------------------------------------------------------------------------------------
GROSS PROFIT (LOSS) 145,623 (924,321) (1,982,852)
Operating Expenses:
RESEARCH AND DEVELOPMENT, INCLUDING
PROTOTYPE DEVELOPMENT COSTS 5,742,469 6,542,381 5,328,053
CHARGE FOR THE PURCHASE OF IN-PROCESS
RESEARCH AND DEVELOPMENT -- -- 739,046
SELLING, GENERAL AND ADMINISTRATIVE 7,890,041 7,084,796 6,138,715
- ---------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 13,632,510 13,627,177 12,205,814
- ---------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (13,486,887) (14,551,498) (14,188,666)
INTEREST AND OTHER INCOME 659,100 543,094 182,631
INTEREST AND OTHER EXPENSE (715,270) (849,310) (298,588)
SETTLEMENT OF LITIGATION -- -- (1,590,594)
- ---------------------------------------------------------------------------------------------------------------
NET LOSS $(13,543,057) $(14,857,714) $(15,895,217)
- ---------------------------------------------------------------------------------------------------------------
NET LOSS PER SHARE $ (1.30) $ (2.59) $ (6.99)
- ---------------------------------------------------------------------------------------------------------------
SHARES USED IN COMPUTING NET LOSS PER SHARE 10,381,700 5,744,600 2,272,886
- ---------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
1996 Annual Report | VIDAMED, Inc
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<CAPTION>
PREFERRED STOCK ADDITIONAL COMMON
----------------------------------------- COMMON PAID-IN STOCK
SERIES A SERIES B SERIES C SERIES D STOCK CAPITAL WARRANT
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1993 $ 233 $ 1,434 $ 877 $ 0 $ 1,167 $ 10,020,092 $ 0
ISSUANCE OF 835,767 SHARES OF
SERIES D PREFERRED STOCK,
NET OF ISSUANCE COSTS OF $272,244 -- -- -- 836 -- 10,445,357 --
ISSUANCE OF 44,445 SHARES OF SERIES D
PREFERRED STOCK TO ACQUIRE SCIONEX
CORPORATION IN JUNE 1994 (NOTE 3) -- -- -- 44 -- 569,956 --
EXERCISE OF OPTIONS TO PURCHASE 96,662
SHARES OF COMMON STOCK -- -- -- -- 97 49,609 --
ISSUANCE OF 445 SHARES OF COMMON STOCK
IN EXCHANGE FOR A PRODUCT LICENSE -- -- -- -- 1 1,999 --
PAYMENTS ON NOTES RECEIVABLE -- -- -- -- -- -- --
COMMON STOCK AND WARRANT ISSUED PURSUANT
TO SETTLEMENT OF LITIGATION (NOTE 11) -- -- -- -- 28 127,472 1,138,094
DEFERRED COMPENSATION RELATED
TO GRANT OF STOCK OPTIONS -- -- -- -- -- 436,052 --
AMORTIZATION OF DEFERRED COMPENSATION -- -- -- -- -- -- --
NET LOSS -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1994 233 1,434 877 880 1,293 21,650,537 1,138,094
EXERCISE OF OPTIONS TO PURCHASE 181,677
SHARES OF COMMON STOCK -- -- -- -- 182 292,681 --
EXERCISE OF COMMON STOCK WARRANT -- -- -- -- 255 1,149,718 (1,138,094)
ISSUANCE OF 10,222 SHARES OF COMMON
STOCK IN EXCHANGE FOR CONSULTING
SERVICES -- -- -- -- 10 3,512 --
ISSUANCE OF 193,622 SHARES OF SERIES D
PREFERRED STOCK PURSUANT
TO ANTIDILUTION PROVISIONS -- -- -- 194 ) -- (194) --
CONVERSION OF PREFERRED STOCK
INTO COMMON STOCK (NOTE 8) (233) (1,434) (877) (1,074) 3,618 -- --
CONVERSION OF CONVERTIBLE NOTES
INTO COMMON STOCK (NOTE 8) -- -- -- -- 334 1,518,471 --
ISSUANCE OF 3,565,000 SHARES OF COMMON
STOCK, NET OF ISSUANCE COSTS
OF $2,410,572 -- -- -- -- 3,565 20,758,363 --
PAYMENTS ON NOTES RECEIVABLE -- -- -- -- -- -- --
AMORTIZATION OF DEFERRED COMPENSATION -- -- -- -- -- -- --
NET LOSS -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1995 0 0 0 0 9,257 45,373,088 0
EXERCISE OF OPTIONS TO PURCHASE 236,013
SHARES OF COMMON STOCK -- -- -- -- 236 491,022 --
ISSUANCE OF 59,716 SHARES OF COMMON
STOCK UNDER THE EMPLOYEE STOCK
PURCHASE PLAN -- -- -- -- 60 354,639 --
CONVERSION OF CONVERTIBLE NOTES
INTO COMMON STOCK (NOTE 7) -- -- -- -- 1,375 9,676,709 --
AMORTIZATION OF DEFERRED COMPENSATION -- -- -- -- -- -- --
NET LOSS -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 $ 0 $ 0 $ 0 $ 0 $10,928 $ 55,895,458 $ 0
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TOTAL
NOTES STOCKHOLDERS'
RECEIVABLE UNREALIZED EQUITY (NET
FROM DEFERRED INVESTMENTS ACCUMULATED CAPITAL
STOCKHOLDERS COMPENSATION GAIN/(LOSS) DEFICIT DEFICIENCY)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1993 $ (52,024) $ 0 $ 0 $(7,579,857) $ 2,391,922
ISSUANCE OF 835,767 SHARES OF
SERIES D PREFERRED STOCK,
NET OF ISSUANCE COSTS OF $272,244 -- -- -- -- 10,446,193
ISSUANCE OF 44,445 SHARES OF SERIES D
PREFERRED STOCK TO ACQUIRE SCIONEX
CORPORATION IN JUNE 1994 (NOTE 3) -- -- -- -- 570,000
EXERCISE OF OPTIONS TO PURCHASE 96,662
SHARES OF COMMON STOCK -- -- -- -- 49,706
ISSUANCE OF 445 SHARES OF COMMON STOCK
IN EXCHANGE FOR A PRODUCT LICENSE -- -- -- -- 2,000
PAYMENTS ON NOTES RECEIVABLE 13,344 -- -- -- 13,344
COMMON STOCK AND WARRANT ISSUED PURSUANT
TO SETTLEMENT OF LITIGATION (NOTE 11) -- -- -- -- 1,265,594
DEFERRED COMPENSATION RELATED
TO GRANT OF STOCK OPTIONS -- (436,052) -- -- --
AMORTIZATION OF DEFERRED COMPENSATION -- 108,333 -- -- 108,333
NET LOSS -- -- -- (15,895,217) (15,895,217)
- -------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1994 (38,680) (327,719) 0 (23,475,074) (1,048,125)
EXERCISE OF OPTIONS TO PURCHASE 181,677
SHARES OF COMMON STOCK (72,000) -- -- -- 220,863
EXERCISE OF COMMON STOCK WARRANT -- -- -- -- 11,879
ISSUANCE OF 10,222 SHARES OF COMMON
STOCK IN EXCHANGE FOR CONSULTING
SERVICES -- -- -- -- 3,522
ISSUANCE OF 193,622 SHARES OF SERIES D
PREFERRED STOCK PURSUANT
TO ANTIDILUTION PROVISIONS -- -- -- -- --
CONVERSION OF PREFERRED STOCK
INTO COMMON STOCK (NOTE 8) -- -- -- -- --
CONVERSION OF CONVERTIBLE NOTES
INTO COMMON STOCK (NOTE 8) -- -- -- -- 1,518,805
ISSUANCE OF 3,565,000 SHARES OF COMMON
STOCK, NET OF ISSUANCE COSTS
OF $2,410,572 -- -- -- -- 20,761,928
PAYMENTS ON NOTES RECEIVABLE 25,440 -- -- -- 25,440
AMORTIZATION OF DEFERRED COMPENSATION -- 108,986 -- -- 108,986
NET LOSS -- -- 9,111 (14,857,714) (14,848,603)
- -------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1995 (85,240) (218,733) 9,111 (38,332,788) 6,754,696
EXERCISE OF OPTIONS TO PURCHASE 236,013
SHARES OF COMMON STOCK (120,128) -- -- -- 371,130
ISSUANCE OF 59,716 SHARES OF COMMON STOCK
UNDER THE EMPLOYEE STOCK PURCHASE PLAN -- -- -- -- 354,699
CONVERSION OF CONVERTIBLE NOTES
INTO COMMON STOCK (NOTE 7) -- -- -- -- 9,678,084
AMORTIZATION OF DEFERRED COMPENSATION -- 96,000 -- -- 96,000
NET LOSS -- -- (10,704) (13,543,057) (13,553,761)
- -------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 $ (205,368) $ (122,733) $ (1,593) $(51,875,845) $ 3,700,847
- -------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
1996 Annual Report | VIDAMED, Inc
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOW
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<CAPTION>
YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
NET LOSS $(13,543,057) $(14,857,714) $(15,895,217)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED BY OPERATING ACTIVITIES:
DEPRECIATION & AMORTIZATION 1,443,698 1,208,856 687,223
FOREIGN EXCHANGE LOSS/(GAIN) 36,405 (7,566) 31,780
UNREALIZED INVESTMENT LOSS (10,704) -- --
ISSUANCE OF A COMMON STOCK WARRANT AND
ISSUABLE COMMON STOCK IN CONNECTION
WITH A LEGAL SETTLEMENT -- -- 1,265,594
ISSUANCE OF COMMON STOCK FOR PRODUCT LICENSE -- -- 2,000
ISSUANCE OF PREFERRED STOCK AS PARTIAL
CONSIDERATION FOR IN-PROCESS RESEARCH
AND DEVELOPMENT -- -- 570,000
CHANGES IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE (2,285,139) 83,951 (141,153)
OTHER RECEIVABLES (47,669) 172,780 (85,850)
INVENTORIES (101,788) (58,218) (842,822)
OTHER CURRENT ASSETS (108,247) 27,970 (188,973)
OTHER ASSETS 27,449 (10,266) (170,345)
ACCOUNTS PAYABLE 759,197 (638,348) 102,321
ACCRUED COMPENSATION 52,308 (27,725) 117,196
ACCRUED PROFESSIONAL FEES 160,680 (579,619) 604,702
ACCRUED CLINICAL TRIAL COSTS 3,905 596,340 381,365
OTHER ACCRUED LIABILITIES 649,506 1,469,775 625,188
DEFERRED REVENUE (312,500) (424,999) 1,204,166
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (13,275,956) (13,044,783) (11,732,825)
- ---------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
PURCHASES OF AVAILABLE-FOR-SALE SECURITIES (11,787,849) (7,994,268) (9,936,812)
PROCEEDS FROM SALES OF SHORT-TERM INVESTMENTS -- -- 3,738,138
PROCEEDS FROM MATURITIES OF SHORT-TERM INVESTMENTS 17,810,104 -- 7,191,657
PROCEEDS FROM SALE/LEASEBACK OF PROPERTY & EQUIPMENT -- -- 892,943
EXPENDITURES FOR PROPERTY AND EQUIPMENT, NET (693,137) (720,940) (838,798)
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES 5,329,118 (8,715,208) 1,047,128
- ---------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
NET CASH PROCEEDS FROM ISSUANCE OF PREFERRED STOCK -- -- 10,446,193
NET CASH PROCEEDS FROM ISSUANCE OF COMMON STOCK 725,828 20,998,192 49,706
PROCEEDS FROM PAYMENTS ON
NOTES RECEIVABLE FROM STOCKHOLDERS -- 25,440 13,344
PRINCIPAL PAYMENTS UNDER CAPITAL LEASES (692,629) (648,432) (354,488)
REPAYMENT OF SHORT-TERM BANK LOAN -- -- (400,000)
NET PROCEEDS FROM ISSUANCE OF NOTES PAYABLE
AND CONVERTIBLE NOTES 9,678,085 7,218,805 --
PRINCIPAL PAYMENTS ON NOTES PAYABLE (3,650,050) (506,867) --
NET PROCEEDS FROM ISSUANCE OF LONG-TERM DEBT 100,000 -- --
PRINCIPAL PAYMENTS ON LONG-TERM DEBT (22,193) (12,288) (7,097)
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY/USED IN FINANCING ACTIVITIES 6,139,041 27,074,850 9,747,658
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,807,797) 5,314,859 (938,039)
CASH AND CASH EQUIVALENTS AT THE BEGINNING
OF THE PERIOD 5,686,497 371,638 1,309,677
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 3,878,700 $ 5,686,497 $ 371,638
- ---------------------------------------------------------------------------------------------------------------
Supplemental Schedule of Noncash Investing
and Financing Activities:
EQUIPMENT PURCHASED UNDER CAPITAL LEASES $ -- $ 167,275 $ 1,821,509
- ---------------------------------------------------------------------------------------------------------------
ISSUANCE OF COMMON STOCK FOR NOTES RECEIVABLE $ 120,128 $ 72,000 $ --
- ---------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flows Information:
CASH PAID FOR INTEREST $ 710,628 $ 431,058 $ 217,553
- ---------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
1996 Annual Report | VIDAMED, Inc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
VIDAMED, Inc. (the Company or VIDAMED) was founded on July 9, 1992, and
reincorporated in the State of Delaware in June 1995. The Company designs,
develops, manufactures and markets technologically and clinically advanced,
cost effective devices for urological applications. The Company's initial focus
is upon the treatment of benign prostatic hyperplasia. The Company commenced
manufacturing production and product sales in 1993. In the United States, the
Company sells its products to urologists, surgery centers and hospitals.
Outside of the United States, the Company sells its products primarily to
international distributors who resell to physicians and hospitals.
Liquidity
In the course of its operations, the Company has sustained continuing operating
losses and expects such losses to continue over at least the next year. The
Company plans to continue to finance its working capital needs through a
combination of stock sales, issuance of convertible notes, short-term loans,
factoring of accounts receivable and financing of equipment the Company
currently owns. Should the plans contemplated by management not be consummated,
the Company may have to seek alternative sources of capital or reevaluate its
operating plans.
Fiscal Year
During 1994, the Company changed its fiscal year from June 30 to December 31.
The Company has restated its 1994 financial statements to a calendar year
basis.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of
VIDAMED and its wholly-owned subsidiaries after elimination of intercompany
balances and transactions.
Revenue Recognition and Concentration of Credit Risk
Generally, revenue from product sales is recognized at the time of shipment,
net of allowances for discounts and estimated returns which are also provided
for at the time of shipment. Certain initial shipments to international
distributors have not been recorded in the accompanying financial statements
due to extended payment terms or limited sell through experience.
Revenue derived from the granting of distribution rights is recognized on a
straight-line basis over the term of the distribution agreements. At December
31, 1996 and 1995, the Company had deferred a total of $466,667 and $666,667,
respectively, of revenue from the granting of such distribution rights.
The Company currently sells its products to urologists, surgery centers and
hospital in the United States and to distributors in Canada, Europe and the
Pacific Rim. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. Actual losses have been immaterial
in all periods to date.
For the year ended December 31, 1996, no customer represented more than 10% of
the Company's net revenues. For the year ended December 31, 1995, one customer
represented 17% of the Company's net revenues. For the year ended December 31,
1994, one customer represented 17% of the Company's net revenues.
<PAGE>
1996 Annual Report | VIDAMED, Inc
Grant Revenue
In July 1993, the Company entered into an agreement with the Department of
Trade and Industry of the United Kingdom, pursuant to which the Company's
United Kingdom subsidiary will be entitled to a grant not exceeding
(pound)750,000 for the establishment of a facility to develop and manufacture
medical devices in Plymouth, England. The grant expires in December 1998 and
the Company is required to achieve certain investment, financing and job
creation targets under the grant. In 1994, the Company received the first
(pound)450,000 under the grant upon achievement of the first payment
conditions. This amount was deferred and is being amortized ratably over the
term of the grant (estimated at three years). Payments under this grant may be
withheld or repaid under certain defined conditions. The Company recognized
revenue of (pound)75,000 ($114,000), (pound)150,000 ($236,000), and
(pound)150,000 ($230,000) for the years ended December 31, 1996, 1995 and 1994,
respectively.
Warranty Costs
The Company provides at the time of sale for the estimated cost of replacing
and repairing products under warranty. The warranty period ranges from 90 days
to one year depending upon the component. Because of the length of the warranty
period, adjustments to the originally recorded provisions may be necessary from
time to time.
Inventories
Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market value. Inventories consist of the following:
DECEMBER 31,
- ---------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------
RAW MATERIALS $ 599,577 $ 507,643
WORK IN PROCESS 174,567 153,916
FINISHED GOODS 672,921 683,718
- ---------------------------------------------------------------------------
$ 1,447,065 $ 1,345,277
- ---------------------------------------------------------------------------
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the respective assets
which range from three to five years, except for buildings which are
depreciated over 20 years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the estimated useful life or the
remaining life of the lease.
Property and equipment consists of the following:
DECEMBER 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
LAND AND BUILDING $ 924,132 $ 922,170
FURNITURE AND FIXTURES 641,642 613,564
MACHINERY AND EQUIPMENT 2,108,404 1,767,578
COMPUTER EQUIPMENT AND SOFTWARE 1,258,397 1,116,505
LEASEHOLD IMPROVEMENTS 112,347 112,347
- --------------------------------------------------------------------------------
5,044,922 4,532,164
- --------------------------------------------------------------------------------
LESS ACCUMULATED DEPRECIATION AND AMORTIZATION (2,785,822) (1,623,327)
- --------------------------------------------------------------------------------
$ 2,259,100 $ 2,908,837
- --------------------------------------------------------------------------------
Property and equipment includes approximately $2,268,000 and $2,296,000
recorded under capital leases at December 31, 1996 and 1995, respectively.
Accumulated amortization relating to leased assets totaled approximately
$1,799,000 and $1,134,000 at December 31, 1996, and 1995, respectively.
<PAGE>
1996 Annual Report | VIDAMED, Inc
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement No.
123, "Accounting for Stock-Based Compensation" (Statement 123). Statement 123
is effective for fiscal years beginning after December 15, 1995. Under
Statement 123, stocked-based compensation expense to employees is measured
using either the intrinsic-value method as prescribed by Accounting Principles
Board Opinion No. 25 or the fair-value method described in Statement 123.
Companies choosing the intrinsic-value method will be required to disclose the
pro forma impact of the fair-value method on net income and earnings per share.
VIDAMED has chosen to comply with the standard in 1996 by continuing to use the
intrinsic-value method for stock awards to employees. See Note 8 for additional
information on stock-based compensation. There is no effect of adopting the
standard on VIDAMED's financial position or results of operations.
Foreign Currency Translation
The functional currency for foreign subsidiaries is the United States dollar.
Monetary assets and liabilities denominated in foreign currencies are
translated at the year-end exchange rate. Inventory, property and equipment and
non-monetary assets and liabilities denominated in foreign currencies are
translated at historical rates. Adjustments resulting from these translations
are included in the results of operations and have been immaterial.
The Company does not enter into foreign currency forward exchange contracts.
Net Loss per Share
Except as noted below, net loss per share is computed using the weighted
average number of common shares outstanding. Common equivalent shares are
excluded from the computation as their effect is antidilutive, except that,
pursuant to the Securities and Exchange Commission (SEC) Staff Accounting
Bulletins, common and common equivalent shares (stock options, warrants,
convertible notes and preferred stock) issued during the 12 month period prior
to an initial public offering at prices below the public offering price have
been included in the calculation as if they were outstanding for all periods
presented (using the treasury stock method for stock options and warrants and
the if-converted method for convertible notes and preferred stock).
The pro forma calculation of net loss per share presented below has been
computed as described above but also gives retroactive effect from the date of
issuance to the conversion of the convertible preferred stock which
automatically converted to common shares upon the closing of the Company's
initial public offering.
YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------
PRO FORMA NET LOSS PER SHARE $ (1.99) $ (2.87)
- -------------------------------------------------------------------------
SHARES USED IN CALCULATING
PRO FORMA NET LOSS PER SHARE 7,477,000 5,532,000
- -------------------------------------------------------------------------
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
2. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The Company considers all highly liquid investments with a maturity of 90 days
or less at the time of purchase to be cash equivalents. The Company invests its
excess cash in deposits with major banks. Short-term investments consist of
corporate paper and government securities with remaining maturities at the date
of purchase of greater than 90 days and less than one year.
The Company accounts for marketable investments under Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," (Statement 115). Under Statement 115, management determines
the appropriate classification of debt securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. To date, all
marketable securities have been classified as available-for-sale and are
carried at fair value at quoted market prices. Unrealized gains and losses are
reported as a separate component of stockholders' equity. The amortized cost of
debt securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in interest
income. The cost of securities sold is based on the specific identification
method. Interest earned on securities classified as available-for-sale is
included in interest income.
<PAGE>
1996 Annual Report | VIDAMED, Inc
<TABLE>
The following is a summary of available-for-sale securities at December 31,
1996:
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. CORPORATE SECURITIES $ 3,971,993 $ -- $ (1,593) $ 3,970,400
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
The following is a summary of available-for-sale securities at December 31,
1995:
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY SECURITIES AND OBLIGATIONS
OF U.S. GOVERNMENT AGENCIES $ 4007,480 $ 7,000 $ -- $ 4,014,480
- --------------------------------------------------------------------------------------------------------------
U.S. CORPORATE SECURITIES 5,984,249 2,111 5,986,360
- --------------------------------------------------------------------------------------------------------------
$ 9,991,729 $ 9,111 $ -- $ 10,000,840
- --------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1996 and 1995 there were $1,994,100 and $1,997,461,
respectively, of U.S. Corporate securities recorded as cash equivalents due to
the maturity date at purchase being less than 90 days. All available-for-sale
securities are recorded as short-term investment or cash equivalents as the
maturities of the investments do not exceed one year.
The fair market value of the long term debt approximates its carrying value
based on an assessment of maturity, the variable interest rates and the
incremental borrowing rate for similar debt.
3. BUSINESS ACQUISITION
In June 1994, the Company acquired 100% of the issued and outstanding capital
stock of Scionex Corporation (Scionex), a company owned by a stockholder of the
Company. Scionex is engaged in the design and development of RF generators and
other products pursuant to contract engineering projects. Scionex's primary
source of revenue was for research conducted on behalf of the Company.
Consideration for the acquisition consisted of $154,000 in cash and 44,445
shares of Series D Preferred Stock valued at $12.83 per share. As of the date
of the acquisition, the Company concluded that as Scionex was involved
primarily in research and development and as the in-process technology had no
alternative future use, the entire purchase price was expensed to operations as
a charge for the purchase of in-process research and development.
The business combination has been accounted for under the purchase method.
Accordingly, the consolidated results of operations include the operations of
Scionex from the date of its acquisition on June 2, 1994. The Company has not
presented pro forms combined financial statements as the operations of Scionex
prior to the acquisition date were not significant in relation to the Company's
consolidated results of operations. Scionex discontinued sales to third party
customers at the end of 1995.
4. RELATED PARTY TRANSACTIONS
In August 1992, two different stockholders entered into agreements to provide
the Company engineering and design services used in the development and
production of the Company's disposable medical devices. In February 1993, the
Company entered into an agreement with Scionex, which was owned by a third
stockholder, to develop and produce certain of the Company's medical capital
equipment. The Company subsequently acquired Scionex as discussed in Note 3.
The Company recognized cost of sales of $462,038 for the year ended December
31, 1994. The Company recognized research and development expenses of $17,500,
$155,018 and $321,498 under these arrangements for the years ended December 31,
1996, 1995, and 1994, respectively.
<PAGE>
1996 Annual Report | VIDAMED, Inc
The Company has cross licensed technology with RITA Medical Systems (RITA),
formerly known as ZoMed International, Inc., a privately-held development stage
company founded by certain of the Company's founders and initially financed by
certain of the Company's current investors. The cross license grants RITA the
exclusive right to use VIDAMED technology in the cancer field and grants the
Company the right to use RITA technology in the treatments of urological
disorders other than cancer, and allows both companies to participate in the
field of prostate and lower urinary tract cancer treatment. As consideration
for the cross license, RITA issued the Company 1.8 million shares of RITA
common stock which represented a 10% ownership in RITA immediately following
its private placement. This investment is carried at the historical cost basis
of the technology of $0. RITA will also pay royalties to the Company based on a
percentage of net sales of products incorporating VIDAMED technology, subject
to an aggregate maximum of $500,000.
The Company has advanced to RITA and other affiliated entities amounts for
certain operating expenses. These advances are due on demand and repayment has
been made on a regular basis. Related amounts outstanding at period end are
included in other receivables.
5. LONG-TERM DEBT AND NOTES PAYABLE
In April 1993, the Company entered into a loan agreement borrowing
(pound)450,000 (approximately $755,000 at the December 31, 1996, closing
exchange rate) for the purchase of land and a building in the United Kingdom.
The term of the loan is 20 years at an interest rate of 8.5% per annum and the
loan is secured by the land and building. At December 31, 1996, the net book
value of the land and building was approximately $733,000.
In January 1995, the Company entered into an agreement with a corporate
investor to issue notes payable in the amount of $2.7 million. These notes were
unsecured, carry interest at the prime rate publicly announced by Chase
Manhattan Bank in New York (8.5% at December 31, 1995). These notes and
interest were paid in full in two installments in January and February 1996.
In April 1995, the Company obtained a $3.0 million secured credit facility. As
of December 31, 1995 the Company had borrowed $3.0 million under this facility.
Borrowings under this facility bear interest at the prime rate plus 3% per
annum (Periodic Interest) plus additional lump-sum interest of 15% of each
borrowing, payable at maturity. Borrowings are required to be repaid in 36
equal monthly installments of principal and Periodic Interest, with lump-sum
interest payable with the last installment, and are secured by a pledge of
specific Company assets. In connection with this agreement, the Company issued
the lender a warrant to purchase 71,490 shares of Common Stock at $4.55 per
share.
Aggregate future principal payments for long-term debt and notes payable at
December 31, 1996, are as follows:
YEAR
- -------------------------------------------------------------------------------
1997 $ 1,121,086
1998 534,699
1999 45,618
2000 25,404
2001 27,583
THEREAFTER 585,060
- -------------------------------------------------------------------------------
$ 2,339,420
- -------------------------------------------------------------------------------
<PAGE>
1996 Annual Report | VIDAMED, Inc
6. CAPITAL AND OPERATING LEASES
In April 1993 and as amended in November 1993, the Company entered into a
master lease line of credit to finance up to $1,100,000 of equipment purchases.
The availability of the lease line expired on December 15, 1994, at which time
the Company had fully borrowed this line of credit. Pursuant to this agreement,
the Company issued the lessor a warrant to purchase 17,286 shares of its Common
Stock at an exercise price of $3.00 per share. In connection with the November
1993 amendment to the lease line, the Company issued the lessor a warrant to
purchase 8,334 shares of its Common Stock at an exercise price of $6.00 per
share. The warrants expire in 2002. As of December 31, 1996, no shares had been
purchased under the terms of these warrants.
In June 1994, the Company entered into an additional master lease line of
credit to finance up to $1,900,000 of equipment purchases. The availability of
this lease line expired July 1, 1995, at which time the Company had utilized
$1,064,624 under this lease line of credit. Pursuant to this agreement, the
Company issued the lessor a warrant to purchase 21,689 shares of Common Stock
at an exercise price of $12.83 per share. The warrant expires in 2004. As of
December 31, 1996, no shares had been purchased under the terms of the warrant.
The Company leases its office and research facilities under operating lease
agreements. Future minimum lease payments at December 31, 1996, under capital
leases and future obligations under noncancelable operating leases are as
follows:
OPERATING CAPITAL
LEASES LEASES
- --------------------------------------------------------------------------------
1997 $ 191,399 $ 497,279
1998 43,613 89,595
1999 9,096 --
- --------------------------------------------------------------------------------
TOTAL MINIMUM PAYMENTS REQUIRED $ 244,108 586,874
- --------------------------------------------------------------------------------
LESS AMOUNT REPRESENTING INTEREST (30,759)
- --------------------------------------------------------------------------------
PRESENT VALUE OF MINIMUM LEASE PAYMENTS 556,115
LESS AMOUNT DUE WITHIN ONE YEAR (469,659)
- --------------------------------------------------------------------------------
AMOUNT DUE AFTER ONE YEAR $ 86,456
- --------------------------------------------------------------------------------
Rent expense for the years ended December 31, 1996, 1995 and 1994 was $346,000,
$395,000 and $414,000, respectively.
7. CONVERTIBLE SUBORDINATED NOTES PAYABLE
In March 1996, the Company completed the sale of $10.1 million in 5%
convertible subordinated notes (the Notes). The Notes were convertible into
Common Stock of VIDAMED based upon a percentage (ranging from 80% to 85%) of
the average closing bid price over a period of five trading days prior to
conversion. As of December 31, 1996, all of the $10.1 million in principal and
accrued interest on the Notes had been converted into an aggregate of 1,375,676
shares of Common Stock.
8. STOCKHOLDERS' EQUITY
Common Stock
During July, October and November 1992 and January 1993, 965,817 shares of
Common Stock were issued to the Company's founders, consultants and employees
at prices ranging from $.00135 to $.3002 per share. These shares are subject to
certain transfer restrictions. Certain of these shares, until vested, are
subject to repurchase at their respective original issue prices in the event of
termination of employment or services. The Company's right of repurchase
expires ratably, subject to continued employment over 48 months. At December
31, 1996, 5,057 shares remain subject to the repurchase option.
<PAGE>
1996 Annual Report | VIDAMED, Inc
On June 21, 1995, the Company issued 3,100,000 of Common Stock at $6.50 per
share in an initial public offering. At the offering date all outstanding
Preferred Stock converted into 3,618,103 shares of Common Stock on the
following basis:
PREFERRED COMMON
STOCK STOCK
OUTSTANDING ISSUED
- ------------------------------------------------------------------------------
SERIES A 233,497 233,497
SERIES B 1,433,543 1,433,543
SERIES C 877,229 877,229
SERIES D 880,212 1,073,834
- ------------------------------------------------------------------------------
3,424,481 3,618,103
- ------------------------------------------------------------------------------
Additionally, Convertible Notes of $1,518,805 were converted into 333,800
shares of Common Stock based on a conversion price of $4.55 per share of Common
Stock.
As of December 31, 1996, the Company has reserved a total of 118,799 shares of
Common Stock for issuance upon the conversion of outstanding warrants.
Notes Receivable from Stockholders
Interest on notes receivable from stockholders accrues at a rate of 6.73% per
annum. Principal and interest payments are due at various times after December
2000.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options and employee stock purchase plan
because, as discussed below, the alternative fair value accounting provided for
under FASB Statement No. 123, "Accounting for Stock-Based Compensation",
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
In July 1992, the board of directors adopted the 1992 Stock Plan (the Plan). As
amended, the Company has reserved 1,733,334 shares of Common Stock for issuance
upon exercise of options granted under the Plan.
The Plan provides for both incentive and nonqualified stock options to be
granted to employees and consultants. The Plan provides that incentive stock
options will be granted at no less than the fair value of the company's Common
Stock (no less than 85% of the fair value for nonqualified stock options) as
determined by the board of directors at the date of the grant. If, at the time
the Company grants an option, the optionee owns more than 10% of the total
combined voting power of all the classes of stock of the Company, the option
price shall be at least 110% of the fair value and the option shall not be
exercisable for more than five years after the date of grant. The options
become exercisable over periods determined by the board of directors which is
currently four years. Except as noted above, options expire no more than ten
years after the date of grant, or earlier if employment terminates.
In April 1995, the stockholders approved the 1995 Director Option Plan
(Director Plan). A total of 100,000 shares of Common Stock have been authorized
for issuance. Each nonemployee director automatically is granted a nonstatutory
option to purchase 13,334 shares of Common Stock upon election to the board,
and annual nonstatutory option for 3,334 shares of Common Stock.
<PAGE>
1996 Annual Report | VIDAMED, Inc
<TABLE>
Activity under the option plans is summarized below:
<CAPTION>
SHARES OPTIONS OUTSTANDING WEIGHTED AVG.
AVAILABLE ------------------------------ FAIR VALUE OF NUMBER OF
FOR GRANT NUMBER WEIGHTED AVG. OPTIONS GRANTED OPTIONS
OF OPTIONS OF SHARES EXERCISE PRICE DURING YEAR EXERCISABLE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 76,750 390,630 $ -- -- 97,647
ADDITIONAL SHARES AUTHORIZED 488,889 -- $ -- -- --
OPTIONS GRANTED (668,606) 668,606 $ -- $ -- --
OPTIONS EXERCISED -- (96,662) $ -- -- --
OPTIONS CANCELED 115,110 (115,110) $ -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 12,143 847,464 $ 1.76 -- 194,648
ADDITIONAL SHARES AUTHORIZED 722,222 -- $ -- -- --
OPTIONS GRANTED (483,446) 483,446 $ 6.19 $ 4.52 --
OPTIONS EXERCISED -- (181,677) $ 1.63 -- --
OPTIONS CANCELED 84,005 (84,005) $ 2.50 -- --
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 334,924 1,065,228 $ 3.54 -- 299,651
ADDITIONAL SHARES AUTHORIZED 1,000,000 -- $ -- -- --
OPTIONS GRANTED (855,281) 855,281 $ 9.71 $ 7.14 --
OPTIONS EXERCISED -- (236,013) $ 1.91 -- --
OPTIONS CANCELED 217,949 (217,949) $ 6.66 -- --
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 697,592 1,466,547 $ 7.02 -- 376,570
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exercise prices for options outstanding as of December 31, 1996, ranged from
$0.188 to $13.00 based on the following price ranges. The weighted-average
remaining contractual life of those options is 8.75 years.
RANGE OF WEIGHTED AVERAGE
EXERCISE PRICES EXERCISE PRICE
- -----------------------------------------------------------------------
$0.188 - $ 2.70 $ 2.06
$ 4.00 - $ 4.00 $ 6.19
$ 7.50 - $10.25 $ 8.76
$10.875 - $13.00 $11.15
- -----------------------------------------------------------------------
In April 1995, the stockholders approved the 1995 Employee Stock Purchase Plan
(Purchase Plan). A total of 100,000 shares of Common Stock have been authorized
for issuance. 59,716 shares have been issued under the Purchase Plan at
December 31, 1996. Under the Purchase Plan participating employees may
contribute up to 15% of their salary to purchase shares of the Company's Common
Stock. The purchase price is equal to 85% of the fair market value of the
Common Stock based on the lower of the first day of the offering period or last
day of the purchase period.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options granted subsequent to December 31, 1994, under the fair
value method of that Statement. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1995 and 1996, respectively:
risk-free interest rates of 6.26% and5.88%; dividend yields of 0.0%; volatility
factors of the expected market price of the Company's common stock of .9236,
and a weighted-average expected life of the option of 4.85 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
<PAGE>
1996 Annual Report | VIDAMED, Inc
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for loss per share information):
1996 1995
- -------------------------------------------------------------------------
PRO FORMA NET LOSS $(14,785) $(15,149)
- -------------------------------------------------------------------------
PRO FORMA LOSS PER SHARE $ (1.42) $ (2.64)
- -------------------------------------------------------------------------
Statement 123 is applicable only to options granted subsequent to December 31,
1994, and its pro forma effect will not be fully reflected until 1998.
The Company recorded deferred compensation for the difference between the grant
price and the deemed fair value of the Company's Common Stock, as determined by
the board of directors, for certain options granted in the twelve-month period
prior to the Company's initial public offering. This deferred compensation
totaled $436,052 and is being amortized over the vesting period of the options.
Amortization of deferred compensation of $96,000, $108,986 and $108,333 was
recorded in the years ended December 31, 1996, 1995 and 1994, respectively.
9. INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
As of December 31, 1996, the Company had federal and California net operation
loss carryforwards of approximately $31,300,000 and $8,400,000, respectively.
Additionally, the Company had foreign net operating loss carryforwards of
approximately $15,500,000. The federal net operating loss carryforwards will
expire at various dates beginning in 2007 through 2011 if not utilized. The
California net operating losses will expire at various dates beginning in 1998
through 2001 if not utilized.
Utilization of the net operating losses may be subject to an annual limitation
due to the ownership change rules provided by the Internal Revenue Code of 1986
and similar state provisions. The annual limitation may result in the
expiration of the net operating losses before utilization.
<TABLE>
Significant components of the Company's deferred tax assets:
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
NET OPERATING LOSS CARRYFORWARDS $ 16,200,000 $ 11,000,000
RESEARCH CREDIT (EXPIRES IN 2008 THROUGH 2010) 700,000 500,000
DEFERRED REVENUE 500,000 800,000
LEGAL SETTLEMENT -- 400,000
CAPITALIZED R&D FOR CALIFORNIA 900,000 600,000
OTHER 200,000 200,000
- ----------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS 18,500,000 13,500,000
VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS (18,500,000) (13,500,000)
- ----------------------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS $ -- $ --
- ----------------------------------------------------------------------------------------------
</TABLE>
The Company's tax year-end was previously June 30 and was changed to December
31 effective December 31, 1995. The Company had a six-month tax period for the
period ending December 31, 1995.
During the years ended December 31, 1996 and 1995, and the six months ended
December 31, 1994, the valuation allowance for deferred tax assets increased by
approximately $5,000,000, $4,800,000, and $2,700,000 respectively, due to the
Company's continuing operating losses.
<PAGE>
1996 Annual Report | VIDAMED, Inc
10. GEOGRAPHIC SEGMENT DATA
The Company's domestic operations primarily consist of product development,
sales and marketing. The Company's foreign operations consist of subsidiaries
in the United Kingdom and Australia. The Company's subsidiary in the United
Kingdom is engaged in product development, manufacturing, sales and marketing
and product distribution worldwide and was established in 1993.
<TABLE>
Information regarding geographic areas is as follows:
<CAPTION>
GEOGRAPHIC AREA
- --------------------------------------------------------------------------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS TOTAL
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994:
REVENUE FROM UNAFFILIATED CUSTOMERS $ 447,171 $ 939,683 $ -- $ 1,386,854
INTERGEOGRAPHIC TRANSFERS 1,177,786 20,263 (1,198,049) --
- --------------------------------------------------------------------------------------------------------------
NET REVENUES $ 1,624,957 $ 959,946 $ (1,198,049) $ 1,386,854
- --------------------------------------------------------------------------------------------------------------
NET LOSS $ (9,930,768) $ (5,878,496) $ (85,953) $(15,895,217)
- --------------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS $ 12,290,150 $ 3,006,307 $ (9,370,697) $ 5,925,760
- --------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995:
REVENUE FROM UNAFFILIATED CUSTOMERS $ 946,585 $ 1,674,055 $ -- $ 2,620,640
INTERGEOGRAPHIC TRANSFERS 796,198 152,374 (948,572) --
- --------------------------------------------------------------------------------------------------------------
NET REVENUES $ 1,742,783 $ 1,826,429 $ (948,572) $ 2,620,640
- --------------------------------------------------------------------------------------------------------------
NET LOSS $ (9,546,631) $ (5,300,099) $ (10,984) $(14,857,714)
- --------------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS $ 30,877,958 $ 3,194,645 $(15,256,477) $ 18,816,126
- --------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996:
REVENUE FROM UNAFFILIATED CUSTOMERS $ 3,053,562 $ 770,964 $ -- $ 3,824,526
INTERGEOGRAPHIC TRANSFERS 81,451 735,035 (816,486) --
- --------------------------------------------------------------------------------------------------------------
NET REVENUES $ 3,135,013 $ 1,505,999 $ (816,486) $ 3,824,526
- --------------------------------------------------------------------------------------------------------------
NET LOSS $ (9,169,419) $ (5,552,226) $ 1,178,588 $(13,543,057)
- --------------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS $ 29,142,639 $ 2,131,463 $(18,427,195) $ 12,846,907
- --------------------------------------------------------------------------------------------------------------
</TABLE>
11. SETTLEMENT OF LITIGATION
In 1993 several lawsuits were filed between the former Company's then President
and Chief Executive Officer (CEO), a co-founder and former member of VIDAMED's
board of directors, EP Technologies, Inc. (EPT) and certain principals of EPT.
On September 7, 1994, the Company and EPT entered into a Settlement Agreement
and Mutual Release (the Agreement). Under the terms of the Agreement, the
Company, CEO and board member received a discharge from all claims and actions
that had been alleged under the EPT suit, and the Company delivered to EPT a
warrant to purchase 255,465 shares of Common Stock at $.45 per share. This
warrant has been valued at $1,138,094 and has been recorded as an expense in
the year ended December 31, 1994. In addition, the CEO and the board member
transferred a total of 28,334 shares of Common Stock, to an attorney who
defended the Company, CEO and board member under the suit. The Company has
reissued the same number of shares to the CEO and board member and recorded the
compensation expense of $127,500 in 1994. The value of the warrant and the
transferred shares have been recorded as Common Stock and warrant issuable
pursuant to the settlement of litigation at December 31, 1994. The warrant was
exercised in January 1995.
In addition to that described above, the Company issued a warrant to purchase
22,223 shares of Common Stock at $12.83 per share to the attorney who defended
the Company in the above matter. The warrant expired in September 1996 and was
not exercised.
<PAGE>
1996 Annual Report | VIDAMED, Inc
12. SUBSEQUENT EVENTS (UNAUDITED)
In February 1997, the Company entered into an equity financing arrangement with
a European institutional investor under which the Company may, at its option,
sell to such investment bank up to $10.0 million of VIDAMED common stock in
increments of up to $2.5 million. The common stock will be priced at a 10%
discount to the current market price at the time of sale, subject to adjustment
based on a formula linked to the market price of the Company's common stock
during the 21 trading days following each sale. In connection with this
arrangement, the Company paid a commitment fee of $100,000.
REPORT OF ERNST & YOUNG LLP
Independent Auditors
THE BOARD OF DIRECTORS AND STOCKHOLDERS
VIDAMED, INC.
We have audited the accompanying consolidated balance sheets of VIDAMED, Inc.
as of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity (net capital deficiency) and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly and
in all material respects, the consolidated financial position of VIDAMED, Inc.
at December 31, 1996 and 1995, and the consolidated result of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
January 17, 1997
<PAGE>
<TABLE>
<S> <C>
BOARD OF DIRECTORS
DAVID L. DOUGLASS--CHAIRMAN OF THE BOARD
STUART D. EDWARDS--DIRECTOR
JAMES A. HEISCH--PRESIDENT AND CHIEF EXECUTIVE OFFICER
LAWRENCE G. MOHR, JR.--DIRECTOR
MICHAEL H. SPINDLER--DIRECTOR
CORPORATE OFFICERS
JAMES A. HEISCH--PRESIDENT AND CHIEF EXECUTIVE OFFICER
CAROL A. CHLUDZINSKI--SENIOR VICE PRESIDENT, NORTH AMERICA SALES AND MARKETING
JOHN N. HENDRICK--VICE PRESIDENT AND CHIEF OPERATING OFFICER
NOEL D. MESSENGER--VICE PRESIDENT , REGULATORY AFFAIRS, CLINICAL AFFAIRS AND QUALITY ASSURANCE
PATRICIA S. GARFIELD--VICE PRESIDENT, MARKETING
CORPORATE HEADQUARTERS
VIDAMED, INC.
1380 WILLOW ROAD
MENLO PARK, CA 94025
TRANSFER AGENT AND REGISTRAR
CORPORATE INFORMATION AMERICAN SECURITIES TRANSFER INCORPORATED
1825 LAWRENCE STREET, SUITE 444
DENVER, CO 80202
CORPORATE COUNSEL
WILSON, SONSINI, GOODRICH AND ROSATI, PC
PALO ALTO, CALIFORNIA
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
PALO ALTO, CALIFORNIA
SEC FORM 10-K
A COPY OF THE COMPANY'S FORM 10-K IS AVAILABLE WITHOUT CHARGE. PLEASE CONTACT:
INVESTOR RELATIONS
VIDAMED, INC.
1380 WILLOW ROAD
MENLO PARK, CA 94025
415 328-8781
ANNUAL MEETING
THE ANNUAL MEETING OF THE STOCKHOLDERS
WILL BE HELD ON MAY 7, 1997, AT 10:00AM AT
THE HOTEL SOFITEL, REDWOOD CITY, CALIFORNIA.
</TABLE>
Exhibit 11.1
<TABLE>
STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
<CAPTION>
December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Calculation of shares outstanding for computing
net loss per share:
Weighted average shares of
common stock outstanding 10,381,700 5,744,600 1,202,064
SEC Staff Accounting Bulletin
Nos. 55, 64, and 83 "cheap stock" -- -- 1,070,822
Total shares used in calculation
of net loss per share 10,381,700 5,744,600 2,272,886
============ ============
Net loss ($13,543,057) ($14,857,714) ($15,895,217)
============ ============ ============
Net loss per share ($ 1.30) ($ 259) ($ 6.99)
============ ============ ============
Calculation of shares outstanding for computing
pro forma net loss per share:
Shares used in computing net
loss per share -- 5,744,600 2,272,886
Adjusted to reflect the effect of the
assumed conversion of Preferred
Stock from the date of issuance (1) -- 1,732,331 3,259,130
------------ ------------ ------------
Shares used in computing pro forma net
loss per share -- 7,476,931 5,532,016
============ ============ ============
Net loss -- ($14,857,714) ($15,895,217)
Pro forma net loss per share -- ($ 1.99) ($ 2.87)
============ ============ ============
<FN>
(1) Series A, B, C and D shares
</FN>
</TABLE>
19
Exhibit 13.1
Annual Report to Stockholders
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8, No. 33-80619) pertaining to the 1992 Stock Plan, the 1992 Consultant Stock
Plan, the 1995 Director Option Plan and the 1995 Employee Stock Purchase Plan of
VidaMed, Inc. and in the Registration Statement (Form S-3 No. 333-20171) and in
the related Prospectus of VidaMed, Inc. of our report dated January 17, 1997,
with respect to the consolidated financial statements of VidaMed, Inc.
incorporated by reference in the Annual Report (Form 10-K) for the year ended
December 31, 1996.
ERNST & YOUNG LLP
Palo Alto, California
March 27, 1997
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
IN REFERENCE TO INTEREST-EXPENSE:
(F1) Interest expense is net of interest income. The net amount is interest
income.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,879
<SECURITIES> 1,976
<RECEIVABLES> 2,581
<ALLOWANCES> 168
<INVENTORY> 1,447
<CURRENT-ASSETS> 13,380
<PP&E> 5,045
<DEPRECIATION> 2,786
<TOTAL-ASSETS> 12,847
<CURRENT-LIABILITIES> 7,841
<BONDS> 1,218
<COMMON> 11
0
0
<OTHER-SE> 3,698
<TOTAL-LIABILITY-AND-EQUITY> 12,847
<SALES> 3,510
<TOTAL-REVENUES> 3,825
<CGS> 3,679
<TOTAL-COSTS> 13,633
<OTHER-EXPENSES> 35
<LOSS-PROVISION> 133
<INTEREST-EXPENSE> (32)
<INCOME-PRETAX> (13,494)
<INCOME-TAX> 49
<INCOME-CONTINUING> (13,543)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (13,543)
<NET-INCOME> 0
<EPS-PRIMARY> 0.00
<EPS-DILUTED> (1.30)
</TABLE>
