UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
Commission File Number: 0-26082
VIDAMED, INC.
(exact name of registrant as specified in its charter)
Delaware 77-0314454
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
46107 Landing Parkway
Fremont, CA 94538
(Address of principal executive offices)
(510) 492-4900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [ X ] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, was 19,926,656 as of November 10, 1998.
<PAGE>
VIDAMED, INC.
INDEX
PART I: FINANCIAL INFORMATION
Page
Item 1. Condensed consolidated financial statements - unaudited
Condensed consolidated balance sheets - September 30, 1998
and December 31, 1997 3
Condensed consolidated statements of operations - three months
ended September 30, 1998 and 1997 and nine months ended
September 30, 1998 and 1997 4
Condensed consolidated statements of cash flows - nine months
ended September 30, 1998 and 1997 5
Notes to condensed consolidated financial statements 6
Item 2. Management's discussion and analysis of financial condition
and results of operations 9
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Exhibits and Reports on Form 8-K 15
Signatures 16
Page 2 of 17
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<TABLE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VidaMed, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<CAPTION>
September 30, December 31,
1998 1997
-------- --------
(Unaudited) (*)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 10,982 $ 8,026
Accounts receivable 461 3,644
Inventories 1,348 1,512
Other current assets 1,885 930
-------- --------
Total current assets 14,676 14,112
Property and equipment, net 2,350 2,647
Other assets, net 114 206
-------- --------
Total assets $ 17,140 $ 16,965
======== ========
Liabilities and stockholders' equity
Current liabilities:
Notes payable, current portion $ 267 $ 480
Accounts payable 752 1,536
Accrued professional fees 361 559
Accrued clinical trial costs 603 372
Accrued and other liabilities 2,799 3,042
Restructuring Accrual 277 1,000
Current portion of long-term debt and obligations
under capital leases 37 116
Deferred revenue, current portion 282 611
-------- --------
Total current liabilities 5,378 7,716
Notes payable and capital leases, long-term portion 943 22
Stockholders' equity:
Capital stock 95,543 77,573
Accumulated deficit (84,724) (68,346)
-------- --------
Total stockholders' equity 10,819 9,227
-------- --------
Total liabilities and stockholders' equity $ 17,140 $ 16,965
======== ========
<FN>
* The Balance Sheet at December 31, 1997 has been derived from the audited financial statements at that date but does not include
all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
See accompanying notes.
</FN>
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<TABLE>
VidaMed, Inc.
Condensed Consolidated Statements of Operations
(In thousands except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product sales, net $ (2,138) $ 1,809 $ 98 $ 7,164
License fees and grant revenue 50 550 389 650
-------- -------- -------- --------
Net revenues (2,088) 2,359 487 7,814
Cost of Products Sold 954 3,306 2,634 6,354
-------- -------- -------- --------
Gross Profit (3,042) (947) (2,147) 1,460
Operating Expenses:
Research and development 1,136 1,218 3,471 4,571
Selling, general and administrative 2,802 2,935 10,705 10,159
-------- -------- -------- --------
Total operating expenses 3,938 4,153 14,176 14,730
-------- -------- -------- --------
Loss from operations (6,980) (5,100) (16,323) (13,270)
Other income (expense), net 80 23 (55) (86)
-------- -------- -------- --------
Net loss $ (6,900) $ (5,077) $(16,378) $(13,356)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.35) $ (0.39) $ (0.93) $ (1.11)
======== ======== ======== ========
Shares used in computing basic and diluted
net loss per share 19,925 12,901 17,536 11,981
======== ======== ======== ========
<FN>
See accompanying notes.
</FN>
Page 4 of 17
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<TABLE>
VidaMed, Inc.
Condensed Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(16,378) $(13,356)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 976 907
Changes in assets and liabilities:
Accounts receivable 3,183 (944)
Inventory 164 (157)
Other current assets (955) (356)
Other assets 92 (23)
Accounts payable (784) 941
Accrued professional fees (198) 203
Accrued clinical trial costs 231 (353)
Accrued restructuring cost (723) 2,100
Accrued and other liabilities (243) 138
Deferred revenue (329) (52)
-------- --------
Net cash used in operating activities (14,964) (10,952)
-------- --------
Cash flows from investing activities:
Expenditures for property and equipment (679) (2,045)
Proceeds from maturities of short-term investments -- 1,977
-------- --------
Net cash used in investing activities (679) (68)
Cash flows from financing activities:
Principal payments of long-term debt and capital
leases (101) (383)
Principal payments of notes payable (770) (787)
Net proceeds from issuance of notes payable 1,500 --
Net cash proceeds from issuance of common stock 17,970 21,828
-------- --------
Net cash provided by financing activities 18,599 20,658
-------- --------
Net increase (decrease) in cash and cash equivalents 2,956 9,638
Cash and cash equivalents at the beginning
of the period 8,026 3,879
-------- --------
Cash and cash equivalents at the end of the period $ 10,982 $ 13,517
======== ========
Supplemental disclosure of cash flows information:
Cash paid for interest $ 739 $ 378
======== ========
<FN>
See accompanying notes.
</FN>
Page 5 of 17
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VIDAMED, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
1. Basis of presentation
The accompanying unaudited condensed consolidated financial statements of
VidaMed, Inc. (the "Company" or "VidaMed") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X. The
balance sheet as of September 30, 1998 and the statements of operations for the
three and nine months ended September 30, 1998 and 1997, and the statements of
cash flows for the nine months ended September 30, 1998 and 1997, are unaudited
but include all adjustments (consisting of normal recurring adjustments) which
the Company considers necessary for a fair presentation of the financial
position at such date and the operating results and cash flows for those
periods. Although the Company believes that the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information normally included in financial statements and related
footnotes prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The accompanying financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's annual report on Form 10-K for the year ended December 31, 1997
filed with the Securities and Exchange Commission.
Results for any interim period are not necessarily indicative of results for any
other interim period or for the entire year.
2. Net loss per share
Basic and diluted net loss per share is computed using the weighted average
number of shares of common stock outstanding during the periods presented.
Common equivalent shares from options and warrants are excluded from the
computation, as their effect is anti-dilutive. In February 1997, the Financial
Accounting Standards Board issued Statement No. 128, "Earnings per Share"
(Statement 128). Statement 128 replaced the calculation of primary and fully
diluted earnings (loss) per share with basic and diluted earnings (loss) per
share. Unlike primary earnings (loss) per share, basic earnings (loss) per share
exclude any dilutive effects of options, warrants and convertible securities.
Diluted earnings (loss) per share are very similar to the previously named fully
diluted earnings (loss) per share. All loss per share amounts for all periods
have been presented, and where appropriate, restated to conform to the Statement
128 requirements. As the Company has incurred losses from operations in each of
the periods presented, there is no difference between basic and diluted net loss
per share amounts.
Page 6 of 17
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3. Inventories
Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market value. Inventories at September 30, 1998 and
December 31, 1997 consist of the following (in thousands):
September 30, December 31,
1998 1997
------ ------
Raw materials $ 688 $ 261
Work in process 221 90
Finished goods 439 1,161
------ ------
$1,348 $1,512
====== ======
4. Notes Payable
In January 1998, the Company entered into a financing agreement with Silicon
Valley Bank, for a $1,500,000 42-month term loan. As of September 30, 1998, no
funds remained available for borrowing under this loan.
5. Restructuring Accrual
In September 1997, VidaMed announced a restructuring program designed to reduce
costs and improve operating efficiencies by closing the company's U.K.
manufacturing facility. The charge in the third quarter of 1997 was $2.1
million. The remaining accrual balance as of September 30, 1998 is $277,000 and
consists mainly of a grant repayment due over the next twenty-four months.
6. Reporting Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No.130, Reporting Comprehensive Income (Statement 130). Statement 130
establishes new rules for the reporting and display of comprehensive income and
its components. Statement 130 requires unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported in shareholders' equity, to
be included in other comprehensive income (loss). During the three and nine
months ended September 30, 1998 and 1997, the total comprehensive loss was not
materially different from the net loss.
7. Common Stock
In May 1998, the Company completed a private sale of common stock with certain
investors. In this transaction, the Company issued 4,340,000 shares of common
stock at a purchase price of $4.00 per share resulting in net proceeds of
$16,743,000 to the Company. In connection with this financing, the Company
Page 7 of 17
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issued to the investors 3-year warrants to purchase an aggregate of 1,085,000
shares of common stock at an exercise price of $5.00 per share for no additional
consideration.
8. Subsequent Events
Subsequent to the quarter ended September 30, 1998, the Company finalized a
commitment for $5.5 million in new debt financing with Transamerica Technology
Finance, a division of Transamerica Corporation. The facility is secured by the
Company's assets and consists of a revolving accounts receivable-based credit
line of up to $3 million and a $2.5 million equipment term loan. As of the
filing of this 10-Q, the term loan has funded in full and replaced the open
balance of the $1.5 million 42-month term loan with Silicon Valley Bank (see
Note 4, Notes Payable). The revolving accounts receivable-based credit line has
an available balance of up to $2.7 million as of the filing of this 10-Q. In
conjunction with the financing, Transamerica received a 5-year warrant to
purchase 55,000 shares of VidaMed common stock at a price of $0.89 per share.
Page 8 of 17
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three and nine months ended September 30, 1998 and 1997,
should be read in conjunction with the Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains, in addition to historical information, forward-looking
statements that are based on current expectations and beliefs. Such
forward-looking statements involve a number of risks and uncertainties that
could cause actual results to differ materially. Some of the factors that could
cause actual results to differ materially include, among other factors, market
acceptance of the VidaMed TUNA Procedure, availability and timing of third-party
reimbursement for procedures performed with the VidaMed TUNA System,
availability of cash resources sufficient to fund operations, the possible
volatility of the Company's stock price and other factors discussed below and
described in the Company's Securities and Exchange Commission reports and
filings.
Overview
Since its inception in July 1992, VidaMed has been engaged in the design,
development, clinical testing and manufacture of the VidaMed TransUrethral
Needle Ablation (TUNA(R)) System for the treatment of symptoms associated with
an enlarged prostate or benign prostatic hyperplasia (BPH). The Company
commenced international sales of the VidaMed TUNA System in late 1993 and United
States sales in October 1996.
VidaMed anticipates that a substantial amount of its revenues from product sales
in the future will be from sales in the United States. The Company received FDA
clearance to market this system for the treatment of symptoms associated with
BPH in the United States on October 8, 1996. The Company applied to the American
Medical Association for a CPT code covering the TUNA Procedure. CPT code number
53852 relating to the TUNA Procedure has been published in the Federal Register
and is part of the Medicare Physician Fee Schedule for calendar 1998. VidaMed
sells its products in the U.S. to individual and group urology practices,
surgery centers and hospitals. The Company markets the VidaMed TUNA System
through four VidaMed sales managers, supported by both sales representatives and
independent dealers in the U.S. A network of distributors, supported by VidaMed
staff, cover other countries in Europe, Asia and South America.
VidaMed does not anticipate reaching profitability in the near future. The
Company expects its operating losses to continue as it continues to commit
substantial resources to expand marketing and sales activities, fund clinical
trials in support of regulatory and reimbursement approvals, and fund research
and development. The Company's future profitability will be dependent upon,
among other factors, market acceptance of the VidaMed TUNA Procedure and
availability of third-party reimbursement for procedures performed with the TUNA
System.
Page 9 of 17
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Although the Company has received FDA clearance to market the TUNA System for
treatment of symptoms associated with BPH and has commenced marketing in the
United States, there can be no assurance that the TUNA System will be deemed
clinically or cost effective by health care providers and payors, superior to
other current and emerging methods for treating BPH, or that the TUNA System
will achieve significant market acceptance in the United States. Furthermore,
determinations of reimbursement of the VidaMed TUNA Procedure by private and
governmental health payors are made by such payors and their medical directors
independent of the FDA approval. Accordingly, there can be no assurance that the
TUNA Procedure will be reimbursed at adequate levels in the United States under
either private or governmental healthcare payment systems. Availability of
Medicare reimbursement for the TUNA Procedure may be dependent on the
publication of clinical data relating to the cost-effectiveness and duration of
the TUNA therapy. Inadequate reimbursement for the TUNA Procedure could
adversely effect market acceptance of the TUNA System. Failure of the TUNA
Procedure to achieve market acceptance in the United States as well as the
impact of competitive products and pricing and other risks could have a material
adverse effect on business, financial condition and results of operations of the
Company.
The Company does not have a backlog of orders for its products in countries
where the VidaMed TUNA System is sold and anticipates that it will continue to
manufacture and ship orders after their receipt. Accordingly, the Company does
not anticipate that it will develop a significant backlog in the future.
Results of Operations
As a result of a one-time sales reserve of $2.7 million established as a result
of delays in Medicare reimbursement in certain key markets, net revenues for the
three months ended September 30, 1998 were negative $2.1 million, down $4.4
million, or 189% from $2.4 million in the three months ended September 30, 1997.
Excluding the sales reserve, net revenues for the three months ended September
30, 1998 were $0.6 million, down $1.8 million or 73% from $2.4 million in the
three months ended September 30, 1997. After the effect of the $2.7 million
sales reserve is considered, the decrease in revenue for the three months ended
September 30, 1998 compared to the same period in 1997, is due to (i) license
fees and an initial stocking order received in 1997 from our Japanese
distributor following Japanese approval of the TUNA System, (ii) domestic office
sales (as opposed to hospital sales) of the TUNA System in 1997 in anticipation
of the purchase of TUNA Systems being Medicare reimbursable as a result of the
Company's CPT Code becoming effective on January 1, 1998, and (iii) the
difficulties experienced in 1998 collecting Medicare reimbursement for TUNA
Systems sold and TUNA Procedures performed in states which have not yet either
approved Medicare coverage for the TUNA System, or have only approved coverage
for hospital use of the TUNA System. The sales reserve is a direct result of
sales and marketing efforts in the office-based and Ambulatory Surgery Center
(ASC) markets, where VidaMed's TUNA System is uniquely suited, not providing the
anticipated return due to the difficulties of Medicare reimbursement discussed
above. Medicare coverage for supplies and devices in the office based and ASC
markets was expected to be effective January 1, 1999, providing an opportunity
to shift office based systems into this venue. Recently available information
indicates Medicare coverage is now likely to be delayed, and accordingly the
Company established a reserve for all office-based and ASC receivables.
For the nine months ended September 30, 1998 net revenue decreased 94% to $0.5
million from $7.8 million during the same period in 1997. Excluding the sales
reserve, net revenue for the nine months ended September 30, 1998 was $3.2
million, down 59% from $7.8 million in the same period for 1997. In addition to
the reasons discussed above, the decrease in revenue for the nine months ended
September 30, 1998 compared to the same period in 1997, is due to the reasons
explained above and an overall high sales volume in 1997 to satisfy pent-up
demand following the late 1996 FDA approval of the VidaMed TUNA System,
including a sale of 39 systems to Tenet HealthCare Systems in the first quarter
of 1997. The VidaMed TUNA Procedure has now gained Medicare reimbursement
approval in 21 states, including Georgia, Colorado, Massachusetts and Ohio.
Page 10 of 17
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Other states with significant Medicare populations are moving forward with
regard to Medicare reimbursement. For the Company to achieve significant
increases in sales volume, it will be necessary to obtain Medicare reimbursement
approvals in all 50 states, or at least in all states with significant
population centers, particularly since sales agreements with major healthcare
providers are often on a national, or system-wide, basis. The Company has
several initiatives underway to facilitate the Medicare reimbursement approval
process, including working in cooperation with state Medicare Medical Directors.
Current Medicare reimbursement for the TUNA handpiece extends only to procedures
performed in a hospital outpatient setting. As stated above, Medicare coverage
for supplies and devices in the office-based and ASC markets is not expected to
be effective in the near future, which resulted in the Company's increased sales
reserve balances. There can be no assurance that the Company will receive
additional Medicare reimbursement approvals in major states in a timely manner,
and the failure to receive such approvals would have a material adverse effect
on the business, financial condition and results of operations of the Company.
Cost of product sold for the three months ended September 30, 1998 was $0.9
million, a decrease of 71% or $2.4 million from $3.3 million for the three
months ended September 30, 1997. The period ended September 30, 1997 included a
one-time charge of $2.1 million for the shutdown of the U.K. facility (see Note
# 5 of Notes to Condensed Consolidated Financial Statements - Restructuring
Accrual). For the nine months ended September 30, 1998 cost of product sales
decreased 59% to $2.6 million from $6.4 million in the same period in 1997 and
40% from $4.3 million in 1997 exclusive of the restructuring accrual. The
decrease is due to lower product sales, partially offset by production of fewer
VidaMed TUNA Systems.
Research and development (R & D) expenses decreased 7% to $1.1 million in the
three months ended September 30, 1998, from $1.2 million in the three months
ended September 30, 1997. For the nine months ended September 30, 1998, R & D
expenses decreased 24% to $3.5 million from $4.6 million in the same period for
1997. The difference is primarily due to the investment in the first nine months
of 1997 in development efforts on the VidaMed TUNA System RF generator and VTS
hand piece. Additionally, R & D includes the United States patient enrollment to
support the clinical trials in both 1997 and 1998 as well as two new clinical
trials started in 1998. The costs associated with follow-up visits for these
clinical trials will continue through 1998 and beyond.
Selling, general and administrative (SG&A) expenses decreased 5% to $2.8 million
in the three months ended September 30, 1998, from $2.9 in the three months
ended September 30, 1997. For the nine months ended September 30, 1998, SG&A
expenses increased 5% to $10.7 million from $10.2 million in the same period in
1997. The increase in 1998 from 1997 was due primarily to the transition to a
new chief executive officer and a realignment of the Company's critical sales
positions with the addition of a new executive vice president of worldwide sales
and marketing. Spending in SG&A in both periods included start-up and launch
costs for the latest product releases and costs associated with the continued
efforts to support domestic and international sales and costs to secure global
reimbursement for the TUNA Procedure. During the nine-month period ended
September 30, 1998, costs were incurred to enhance the existing sales and field
reimbursement force. Costs incurred during the nine-month period ended September
30, 1997 for a co-op advertising agreement with
Page 11 of 17
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Tenet Health System remain accrued (approximately $300,000) and available for
programs at the individual Tenet hospitals as Medicare reimbursement is approved
in the state where the Tenet hospitals are located.
Operating expenses for the three and nine months ended September 30, 1998
include a one-time charge for a reduction in work force, taken to help curb
operating spending. The total spending related to the reduction was $232,000 and
consisted of SG&A expenses.
Other income for the three months ended September 30, 1998 was $80,000 compared
to other income of $23,000 for the comparable period in 1997. For the nine
months ended September 30, 1998, other expense was $55,000 compared to $86,000
for the same period in 1997. These changes were primarily a function of the
balance of cash, cash equivalents and debt, interest earned or incurred,
changing foreign exchange rates and fluctuations in the relative balances of
these accounts.
Liquidity and Capital Resources
VidaMed has financed its operations primarily through the public and private
sale of equity securities and, to a lesser extent, through borrowings, equipment
lease financing, product sales, distribution rights fees and government grants.
At September 30, 1998, the Company's cash and cash equivalents were $11.0
million compared to $8.0 million at December 31, 1997. The increase is due
primarily to a private sale of 4.3 million shares of common stock in May 1998
(the net proceeds from which were approximately $16.7 million) offset by
operating expenses. The cash expenditures were used primarily for the marketing
and sale of the VidaMed TUNA System, research and development activities
including clinical trials, increased SG&A expenses to support increased
operations, working capital and payments related to the U.K. transition (See,
Restructuring Accrual, below).
In January 1998, the Company entered into a financing agreement with Silicon
Valley Bank for a $1,500,000, 42-month term loan with principal and interest
payable monthly. The Company also established a $3,000,000 working capital line
with Silicon Valley Bank. The Company currently has no available funds under the
working line of credit.
Subsequent to the quarter ended September 30, 1998, the Company finalized a
commitment for $5.5 million in new debt financing with Transamerica Technology
Finance, a division of Transamerica Corporation. The facility is secured by the
Company's assets and consists of a revolving accounts receivable-based credit
line of up to $3 million and a $2.5 million equipment term loan. As of the
filing of this 10-Q, the term loan has funded in full and replaced the open
balance of the $1.5 million 42-month term loan with Silicon Valley Bank. The
revolving accounts receivable-based credit line has an available balance of up
to $2.7 million as of the filing of this 10-Q. In conjunction with the
financing, Transamerica received a 5-year warrant to purchase 55,000 shares of
VidaMed common stock at a price of $0.89 per share.
Page 12 of 17
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VidaMed believes that the Transamerica financing, combined with its current
capital resources and cash generated from the sale of products, will be
sufficient to enable the Company to meet its operating and capital requirements
during the next twelve months. Funds currently available for operations could
become insufficient, however, if the product is not accepted in the marketplace
due to competitive products gaining market share or continued delays of Medicare
coverage or for other reasons which cause the Company's sales to fall below
projections, or if expenses exceed budgeted amounts. If this situation should
arise, there can be no assurance that additional financing will be available on
satisfactory terms or at all. If financing were not available, management would
need to reevaluate and revise current operating plans as well as reduce capital
spending in general. VidaMed's future liquidity and capital requirements will
depend on numerous other factors, including progress of clinical trials, actions
related to regulatory and reimbursement matters and the extent to which the TUNA
System gains market acceptance.
Restructuring Accrual
In September 1997, VidaMed announced a restructuring program designed to reduce
costs and improve operating efficiencies by closing the Company's U.K.
manufacturing facility. The Company expects to incur approximately $277,000 in
cash outlays relating to the restructuring over the next twenty-four months. See
also Note 5 of Notes to Condensed Consolidated Financial Statements.
Impact of Year 2000
Many currently installed computer systems and software products are coded to
accept, store, or report only two digit year entries in date code fields.
Beginning in the Year 2000, these date code fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. The
Year 2000 issue is a result of these programs being written with two digits
instead of four. As a result, computer systems and software used by companies,
including VidaMed, Inc. and its vendors and customers, will need to comply with
the Year 2000 requirements. The Company presently believes that as a byproduct
of normal business system modifications and upgrades and the short length of
time the Company has been in operation, the Year 2000 issue should not have a
material effect on the Company's current financial position, liquidity or
results of operations. However, this does not completely prevent the possibility
of problems arising related to the Year 2000 that could have a material impact
on operations of the Company.
The Company is aware of the Year 2000 issue and has been proactive in addressing
the issue internally and externally. The Company's primary software system is
currently Year 2000 compliant. The Company does not depend on in-house custom
systems and generally purchases off the shelf software from reputable vendors
who have tested their software for Year 2000 compliance. The Year 2000 issue is
being considered for all future software purchases. Although the Company
believes the Year 2000 issue will not pose material operational problems for its
computer systems, there can be no assurance that problems arising from the Year
2000 issue will be completely eliminated.
The Company is evaluating significant suppliers and large customers systems to
determine the extent to which the Company's interface with these systems is
vulnerable to the Year 2000 issue. This process is in progress and should be
completed by early 1999.
Page 13 of 17
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VidaMed's products are Year 2000 compliant and are able to operate in the Year
2000 and beyond. The Year 2000 issue is relevant to the hardware and software
used in the TUNA System generator. There are two processors used in the
generator. One processor does not have date sensitivity and the other is a
motherboard assembly running Microsoft's Windows 95 Operating system. With
regard to Windows 95 Operating system being Year 2000 compliant, Microsoft wrote
in a letter dated September 10, 1996, to the U.S. House of Representatives
stating that, "All Microsoft's operating systems (MS-DOS, Windows 3.x, Windows
95, and Windows NT) can handle files created up to the year 2108."
The Company has not and does not expect to have material costs associated with
the Year 2000.
The Company believes it has an effective program in place to resolve the Year
2000 issue in a timely manner. The Company also has contingency plans for
certain critical applications and is working on such plans for others. These
contingency plans involve, among other actions, manual workarounds, increasing
inventories, and adjusting staffing strategies. In the event that the Company
does not completely resolve all of the Year 2000 issues, the Company's business
operations could be adversely affected, although the resulting costs and loss of
business cannot be reasonably estimated at this time.
Page 14 of 17
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On May 20, 1997, VidaMed filed a complaint against Prosurg, Inc., in the United
States District Court for the Northern District of California alleging that
Prosurg Inc. is infringing and inducing others to infringe three VidaMed
Patents, U.S. Patent Nos. 5,526,240, 5,531,676, and 5,531,677. On March 20,
1998, at the request of the parties, the Court dismissed without prejudice all
claims relating to U.S. patent Nos. 5,531,676 and 5,531,677. Accordingly, the
only remaining claim is related to U.S Patent No. 5,526,240.
On September 10, 1998, the Company entered into a settlement agreement with
Prosurg Inc. in which Prosurg Inc. acknowledged that it had infringed and
induced infringement of claim 1 of VidaMed's U.S. Patent 5,526,240 and
acknowledged the validity of claim 1. In the settlement, Prosurg agreed not to
use, sell or distribute Opal, Opal Flex, BEAP, or any other R.F. interstitial
therapy devices in the U.S. for the treatment of BPH. The settlement agreement
also prevents Prosurg from asking, encouraging, aiding, abetting, or otherwise
soliciting others to use its R.F. therapy devices in the treatment of BPH in the
U.S. As part of the settlement, Prosurg, with certain restrictions, will
continue to sell R.F. therapy devices in the international market place.
Item 2. Exhibits and Reports on Form 8-K
a) Exhibits
(27.1) Financial Data Schedule
b) Reports on Form 8-K.
No reports on Form 8-K were filed during the
quarter ended September 30, 1998.
Page 15 of 17
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIDAMED, INC.
Date: November 13, 1998 By: /s/ David J. Illingworth
---------------------------- --------------------------------
David J. Ilingworth
Chairman, President, Chief
Executive Officer
Date: November 13, 1998 By: /s/ Richard D. Brounstein
---------------------------- --------------------------------
Richard D. Brounstein
VP Finance, Chief Financial
Officer (Principal Financial and
Accounting Officer)
Page 16 of 17
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