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 March 31, 1998
or
[ ] TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
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 15,547,858 as of May 13, 1998.
Page 1 of 13
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VIDAMED, INC.
INDEX
PART I: FINANCIAL INFORMATION
Page
----
Item 1. Condensed consolidated financial statements - unaudited
Condensed consolidated balance sheets - March 31, 1998
and December 31, 1997 3
Condensed consolidated statements of operations -
three months ended March 31, 1998 and 1997 4
Condensed consolidated statements of cash flows -
three months ended March 31, 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 8
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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<TABLE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VidaMed, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<CAPTION>
March 31, December 31,
1998 1997
-------- --------
(Unaudited) (*)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 3,338 8,026
Accounts receivable 3,192 3,644
Inventory 1,519 1,512
Other current assets 1,692 930
-------- --------
Total current assets 9,741 14,112
Property and equipment, net 2,826 2,647
Other assets, net 208 206
-------- --------
Total assets $ 12,775 $ 16,965
======== ========
Liabilities and stockholders' equity Current liabilities:
Notes payable, current portion $ 1,686 $ 480
Accounts payable 1,189 1,536
Accrued professional fees 396 559
Accrued clinical trial costs 343 372
Accrued and other liabilities 3,738 2,620
Accrued interest payable 460 422
Restructuring Accrual 432 1,000
Current portion of long-term debt 33 34
Current portion of obligations under capital leases 44 82
Deferred revenue, current portion 376 611
-------- --------
Total current liabilities 8,697 7,716
Other long-term liabilities 14 22
Stockholders' equity:
Capital stock 77,648 77,573
Accumulated deficit (73,584) (68,346)
-------- --------
Total stockholders' equity 4,064 9,227
-------- --------
Total liabilities and stockholders' equity $ 12,775 $ 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>
<PAGE>
VidaMed, Inc.
Condensed Consolidated Statements of Operations
(In thousands except per share amounts)
(Unaudited)
Three Months Ended
March 31,
----------------------
1998 1997
-------- --------
Revenues:
Product sales, net $ 1,375 $ 3,252
License fees and grant revenue 289 50
-------- --------
Net revenues 1,664 3,302
Cost of Products Sold 1,072 1,783
-------- --------
Gross Profit (Loss) 592 1,519
Operating Expenses:
Research and development 1,132 1,898
Selling, general and administrative 4,607 3,358
-------- --------
Total operating expenses 5,739 5,256
Loss from operations (5,147) (3,737)
Other income(expense), net (91) (7)
-------- --------
Net loss $ (5,238) $ (3,744)
======== ========
Basic and diluted net loss per share $ (.34) $ (.34)
======== ========
Shares used in computing basic and diluted
net loss per share 15,238 11,128
======== ========
See accompanying notes.
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<TABLE>
VidaMed, Inc.
Condensed Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
----------------------------
1998 1997
------- -------
Cash flows from operating activities:
<S> <C> <C>
Net loss $(5,238) $(3,744)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 348 326
Other (24)
Changes in assets and liabilities:
Accounts receivable 452 (1,692)
Inventory (7) 457
Other current assets (762) (681)
Other assets (2) 4
Accounts payable (347) 135
Accrued professional fees (163) 20
Accrued clinical trial costs (29) (139)
Accrued interest payable 38 37
Accrued restructuring cost (568) --
Accrued and other liabilities 1,118 457
Deferred revenue (235) (21)
------- -------
Net cash used in operating activities (5,395) (4,865)
------- -------
Cash flows from investing activities:
Expenditures for property and equipment (504) (257)
Proceeds from maturities of short-term investments -- 1,976
------- -------
Net cash provided by (used in) investing activities (504) 1,719
------- -------
Cash flows from financing activities:
Principal payments under capital leases (38) (164)
Principal payments of long-term debt (9) (34)
Principal payments of notes payable (294) (255)
Net proceeds from issuance of notes payable 1,500 --
Net cash proceeds from issuance of common stock 52 4,021
------- -------
Net cash provided by financing activities 1,211 3,568
------- -------
Net increase (decrease) in cash and cash equivalents (4,688) 422
Cash and cash equivalents at the beginning of the period 8,026 3,879
------- -------
Cash and cash equivalents at the end of the period $ 3,338 $ 4,301
======= =======
Supplemental disclosure of cash flows information:
Cash paid for interest $ 98 $ 654
======= =======
<FN>
See accompanying notes.
</FN>
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</TABLE>
<PAGE>
VIDAMED, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 March 31, 1998 and the statements of operations for the
three months ended March 31, 1998 and 1997, and the statements of cash flows for
the three months ended March 31, 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
Net loss per share is computed using the weighted average number of shares of
common stock outstanding during the periods presented. Common equivalent shares
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 per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share exclude any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share are very similar to the previously named fully diluted
earnings 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 incurred loses from operations in each of the
periods presented, there is no difference between basic and diluted net loss per
share amounts.
3. Inventories
Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market value. Inventories at March 31, 1998 and December
31, 1997 consist of the following (in thousands):
Page 6 of 13
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March 31, December 31,
1998 1997
------ ------
Raw materials $ 181 $ 261
Work in process 86 90
Finished goods 1,252 1,161
------ ------
$1,519 $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 March 31, 1998, no funds
remained available for borrowing under this loan. Concurrently, the Company
established a $3,000,000 working capital line with this bank.
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. Following the transition period, ended March 31, 1998,
manufacturing of the VidaMed Trans Urethral Needle Ablation (TUNA(R)) System
hand pieces will occur in the U.S. The charge in the third quarter of 1997 was
$2.1 million.
The elements of the total charge as of March 31, 1998 are as follows (in
thousands):
Representing
----------------------------
Cash Outlays
----------------
Total Asset
Charges Write-down Completed Future
------- ----------- -------- ------
Fixed assets $ 390 $ 390 $ -- $ --
Facility shut down 1,305 -- 1,278 27
Grant 405 -- -- 405
------ ------ ------ ------
Total Special Charges $2,100 $ 390 $1,278 $ 432
------ ------ ------ ------
6. Reporting Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. 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).
Prior year financial statements have been reclassified to conform to the
requirements of Statement 130.
During the first quarter of 1998 and 1997, the total comprehensive loss was not
materially different from the net loss.
Page 7 of 13
<PAGE>
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 months ended March 31, 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 forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from those
anticipated by the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed below and in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Overview
Since its inception in July 1992, VidaMed has been engaged in the design,
development, clinical testing and manufacture of the VidaMed TUNA System for the
treatment of symptoms associated with benign prostatic hyperplasia (BPH). The
Company commenced international sales of the VidaMed TUNA System in late 1993
and United States sales in October 1996. As of March 31, 1998 there have been
over 350 RF generators sold and over 10,000 TUNA procedures performed worldwide.
Revenues for the quarters ended March 31, 1998 and 1997 include license fees for
distribution rights in Japan.
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 a network of five VidaMed sales managers, supported by both sales
representatives and independent dealers in the U.S. Primarily 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 through at least the next four
quarters as it continues to expend substantial resources in expansion of
marketing and sales activities, funding clinical trials in support of regulatory
and reimbursement approvals, and 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.
Although the Company has received FDA clearance of its 510(k) notification for
the TUNA System for treatment of symptoms associated with BPH and has commenced
marketing of the TUNA System in the United States, there can be no assurance
that the TUNA System will be deemed clinically or cost effective by many health
care providers and payors, will be deemed superior to other current and emerging
methods for treating BPH or 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
Page 8 of 13
<PAGE>
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 TUNA procedures could
have an adverse effect on the ability of the TUNA System to achieve market
acceptance. Failure of the TUNA Procedure to achieve market acceptance in the
United States would 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
Net revenues for the three months ended March 31, 1998 were $1.7 million, down
$1.6 million or 50% from $3.3 million in the three months ended March 31, 1997.
Product sales in the first quarter of 1998 decreased 58% to $1.4 million from
$3.3 in the same period in 1997. The decrease in net revenues and product sales
between the 1998 and 1997 periods is the result of slowing sales while the
Company awaits Medicare reimbursement approval at the state levels. VidaMed has
now gained approval in 10 states, including Massachusetts, Ohio and Colorado.
Another factor contributing to the decrease from 1997 to 1998 was that sales for
the first quarter of 1997 included a significant amount of accumulated demand
resulting from the late-1996 receipt of Food and Drug Administration 510(k)
clearance for the VidaMed TUNA System, including a sale of 40 TUNA Systems to
Tenet HealthSystem.
Cost of product sold for the three months ended March 31, 1998 was $1.1 million,
a decrease of 40% or $0.7 million from $1.8 million for the three months ended
March 31, 1997. The decrease is due to lower product sales in the first three
months of 1998. Decreased gross margin percentage in the first three months of
1998 when compared to the three months ended March 31, 1997 was a result of
reduced absorption of manufacturing overhead.
Research and development (R & D) expenses decreased 40% to $1.1 in the three
months ended March 31, 1998 from $1.9 in the three months ended March 31, 1997.
The difference is primarily due to the investment in the first quarter ended
March 31, 1997, in development efforts on the VidaMed TUNA System (VTS) RF
generator and VTS hand piece. Additionally, R & D includes the United States
patient enrollment to support the clinical trials completed in 1995. The costs
associated with follow-up visits for these clinical trials will continue through
1998 and beyond.
Selling, general and administrative (SG&A) expenses increased 37% to $4.6
million in the three months ended March 31, 1998 from $3.4 in the three months
ended March 31, 1997. Spending in SG&A in both quarters included start-up and
launch costs for new products and as well as costs associated with the continued
efforts to support domestic and international sales and secure global
reimbursement for TUNA. In particular, the period ended March 31, 1998 included
an investment in additional headcount to enhance the existing sales and field
reimbursement force and the period ended March 31, 1997 included a coop
advertising agreement with Tenet HealthSystem. The increase in 1998 from 1997 is
primarily due to an increase to the allowance for doubtful accounts of $655,000
as a result of the length of time involved in obtaining Medicare reimbursement
levels for each state and the transition to a new CEO.
Page 9 of 13
<PAGE>
Total operating expenses in the three months ended March 31, 1998 increased 9%
to $5.7 million from $5.3 in the three months ended March 31, 1997. The
difference in operating expenses was due primarily to the increase in selling,
general and administrative expenses and offset in part by the decreased spending
in research and development.
Other expense for the three months ended March 31, 1998 was $91,000 compared to
other expense of $7,000 for the comparable period in 1997. This change is
primarily due to lower interest income attributable to lower investment balances
as well as increased interest expense attributable to increased debt balances.
The net loss for the three months ended March 31, 1998 and 1997 was $5.2 and
$3.7, respectively.
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, government grants and
other product sales.
At March 31, 1998 the Company's cash and cash equivalents were $3.3 million
compared to $8.0 at December 31, 1997. The cash used in operations was used
primarily on expenses associated with 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 due in part to
delays in receivable collections due to Medicare reimbursement and payments
related to the U.K. transition.
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. In addition, the Company established a $3,000,000 working
capital line with this bank. The Company is currently in default of certain
covenants pursuant to this financing agreement. The Company has obtained an
agreement from the bank to refrain from exercising remedies, including demanding
immediate repayment of the note, through May 25, 1998. The Company is currently
in discussions with several prospective investors, and expects to obtain
additional financing from such investors by such date. However, there can be no
assurance that such financing will be obtained by such a date or at all, and the
failure to obtain such financing would have a material adverse effect on the
Company's business and financial condition. Such financing would bring the
Company back into compliance with its loan covenants. Until such financing is
obtained and the Company is able to return to compliance with its covenants, the
Company may not borrow additional amounts from the bank. In addition, the note
payable to the bank is reflected on the Company's balance sheet as a current
liabilty as a result of these circumstances.
In April 1995, the Company obtained a $3,000,000 secured credit facility. To
date, the Company has borrowed $3,000,000 under this facility. Borrowings bear
interest at the prime rate plus 3% per annum plus additional lump-sum interest
of 15% of each borrowing, payable at maturity. Repayment of principal and
interest is based on a three year amortization schedule.
The Company is currently in discussions with several prospective investors, and,
as indicated above, expects to obtain additional financing during May 1998.
VidaMed believes that this equity financing, combined with its current capital
resources and cash generated from the sale of products will be enough to meet
the Company's operating and capital requirements for the next twelve months.
There can be no assurance that additional financing, if required, 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.
Page 10 of 13
<PAGE>
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 $432,000 in
cash outlays over the next twenty-four months. See also Footnote 5.
Impact of Year 2000
The Company is currently in the process of assessing and modifying internal
software systems in order to function properly in the Year 2000 and thereafter.
The Company believes that with limited modifications to existing software, the
Year 2000 issue will not pose significant operational problems for its computer
systems. There can be no assurance that these modifications will completely
eliminate problems resulting from the Year 2000 issue. 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. The Year 2000 issue is being considered for all future software
purchases.
Page 11 of 13
<PAGE>
VIDAMED, INC.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On May 20, 1997 VidaMed, Inc. filed a complaint against Prosurg, Inc.,
in the United States District Court for the Northern District of California. The
complaint alleges that Prosurg Inc. is infringing and inducing others to
infringe U. S. Patent Nos. 5,536,240, 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 claims remaining in the litigation are those related to U.S Patent No.
5,536,240. VidaMed seeks both damages and injunctive relief from the Court. A
factual discovery cut-off was set for June 1, 1998, however that date has been
extended to July 1, 1998 to allow the parties to obtain discovery from several
third parties and to accommodate certain other scheduling constraints. The Court
tentatively has set October 19, 1998 as a trial date, and the Court has ordered
the parties to attempt to reach a settlement through mediation. The court
ordered mediation is expected to be completed by June 1, 1998.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(10.17) Employment Offer Letter Agreement
between Registrant and David J.
Illingworth
(27.1) Financial Data Schedule
b) Reports on Form 8-K. No reports on Form 8-K
were filed during the quarter ended March
31, 1998.
Page 12 of 13
<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.
VIDAMED, INC.
Date: May 13, 1998 By: /s/ David J. Illingworth
-------------------------- -----------------------------
David J. Ilingworth
Chairman, President, Chief
Executive Officer
Date: May 13, 1998 By: /s/ Richard D. Brounstein
-------------------------- ------------------------------
Richard D. Brounstein
VP Finance, Chief Financial
Officer
(Principal Financial and
Accounting Officer)
Page 13 of 13
Vidamed, Inc.
46107 Landing Parkway
Fremont, California 94538
February 20, 1998
Mr. David Illingworth
c/o Contemporary Resort Hotel, Room 8125
Walt Disney World
via facsimile: (407) 824-3539
Re: Terms of Employment Offer
Dear Mr. Illingworth:
This letter will confirm the terms of your offer of employment with
Vidamed, Inc. Such terms are as follows:
1. Position and Responsibilities. You will serve in the position of
Chairman, President and Chief Executive Officer, reporting to the Board of
Directors of the Company. You will assume and discharge such responsibilities as
are commensurate with such position. During the term of your employment, you
shall devote your full time, skill and attention to your duties and
responsibilities and shall perform them faithfully, diligently and competently.
In addition, you shall comply with and be bound by the operating policies,
procedures and practices of Vidamed in effect from time to time during your
employment.
2. Compensation.
(a) In consideration of your services, effective as of your
employment start date of April 6, 1998, you will be paid a base salary of
$270,000 per annum, payable twice monthly in accordance with Vidamed's standard
payroll practices. Your base salary is normally reviewed annually by the
compensation committee of the Board of Directors of Vidamed.
(b) In addition to your base salary, you will receive a
one-time signing bonus of $30,000 upon commencement of your employment with
Vidamed.
(c) In addition to your base salary, you will be entitled to
participate in such incentive compensation or bonus plan which may be adopted
for senior management of Vidamed. You understand that the adoption of any such
plan, the eligibility and measurement criteria and all other terms shall be at
the sole discretion of the compensation committee and board of directors of
Vidamed.
(d) In connection with your employment by Vidamed, Vidamed
will retire the existing loan with Nellcor Puritan Bennett on March 16, 1998.
You will execute a promissory note in favor of Vidamed in the amount of $250,000
at the time of retirement of such loan. Your loan from Vidamed will be forgiven
on the following schedule (which shall be set forth in the note): 50% of the
<PAGE>
loan balance will be forgiven on the date of commencement of your employment,
25%of the loan balance will be forgiven on the first anniversary of the date of
commencement of your employment (provided that you have not voluntarily
terminated your employment with Vidamed on or prior to such date) and 25% of the
loan balance will be forgiven on the second anniversary of the date of
commencement of your employment (provided that you have not voluntarily
terminated your employment with Vidamed on or prior to such date). This loan
will be pursuant to a promissory note incorporating the foregoing terms, which
will be sent to you separately.
3. Other Benefits. You will be entitled to receive the standard
employee benefits made available by Vidamed to its employees to the full extent
of your eligibility therefor. You shall be entitled to _______ weeks of paid
vacation per year (which shall be consistent with Vidamed's vacation policy and
which shall not accrue in excess of _______ weeks per year). During your
employment, you shall be permitted, to the extent eligible, to participate in
any group medical, dental, life insurance and disability insurance plans, or
similar benefit plan of Vidamed that is available to executive officers
generally. Participation in any such plan shall be consistent with your rate of
compensation to the extent that compensation is a determinative factor with
respect to coverage under any such plan.
Vidamed shall reimburse you for all reasonable expenses
actually incurred or paid by you in the performance of your services on behalf
of the company, upon prior authorization and approval in accordance with
Vidamed's expense reimbursement policy as from time to time in effect.
4. Stock Option. Pursuant to Board approval, and under the terms and
conditions of the Vidamed Stock Option Plan and Stock Option Agreement,
including the stock vesting provisions contained therein, you will be granted an
option to purchase 750,000 shares of common stock of Vidamed. Your stock option
will be granted in two separate tranches as follows: (i) tranche 1 for 500,000
shares will be granted to you upon commencement of your employment and (ii)
tranche 2 will be granted to you on the date of Vidamed's 1998 annual meeting
stockholders, subject to stockholder approval at such meeting of an increase in
the shares reserved for issuance under Vidamed's Stock Option Plan. The exercise
price for each tranche will equal the fair market value of Vidamed Common Stock
on the respective grant dates. Both tranches will vest over a four year period
beginning on the date of commencement of your employment, with one-quarter of
the shares vesting on the first anniversary of the commencement of your
employment and the remaining shares vesting on a cumulative monthly basis. In
the event of a merger or acquisition involving Vidamed, or the sale of
substantially all of Vidamed's assets, which results in a change of control of
Vidamed (a "Change of Control Transaction"), 50% of your unvested stock options
shall become vested upon the occurence of the Change of Control. In the event
that within 12 months following the Change of Control Transaction, your
employment duties are substantially changed by the acquiring party or you are
required to relocate to a new place of employment outside the San Francisco Bay
Area, all remaining unvested stock options shall vest. The Vidamed Stock Option
Plan, including the Stock Option Agreement, will be sent to you separately.
5. Confidential Information. You agree that your employment is
contingent upon your execution of, and delivery to, Vidamed of an Employment,
Confidential Information and Invention Assignment Agreement in the standard form
utilized by Vidamed.
6. Conflicting Employment. You agree that, during the term of your
employment with Vidamed, you will not engage in any other employment,
occupation, consulting or other business
2
<PAGE>
activity directly related to the business in which Vidamed is now involved or
becomes involved during the term of your employment, nor will you engage in any
other activities that conflict with your obligations to Vidamed.
7. General Provisions.
(a) This offer letter will be governed by the laws of the
State of California, applicable to agreements made and to be performed entirely
within such state.
(b) This offer letters sets forth the entire agreement and
understanding between Vidamed and you relating your employment and supersedes
all prior verbal discussion between us. Any subsequent change or changes in your
duties, salary or other compensation will not affect the validity or scope of
this agreement.
(c) This agreement will be binding upon your heirs, executors,
administrators and other legal representatives and will be for the benefit of
Vidamed and its respective successors and assigns.
Please acknowledge and confirm your acceptance of this letter by
signing and returning the enclosed copy of this offer letter as soon as
possible. If you have any questions about this offer letter, please call me
directly. I can be reached today at (530) 426-0316.
VIDAMED, INC.
By __________________________________
David Douglass, Chairman of the Board
ACCEPTANCE:
I accept the terms of my employment with Vidamed, Inc. as set forth
herein. I understand that this offer letter does not constitute a contract of
employment for any specified period of time, and that my employment relationship
may be terminated by either party, with or without cause and with or without
notice.
February __, 1998
- ----------------------------------------- -----------------
David Illingworth Date
3
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