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 June 30, 1999
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
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, was 20,650,603 as of August 13, 1999.
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VIDAMED, INC.
INDEX
<CAPTION>
PART I: FINANCIAL INFORMATION
Page
<CAPTION>
<S> <C>
Item 1. Financial Statements
Condensed consolidated balance sheets - June 30, 1999
and December 31, 1998 3
Condensed consolidated statements of operations - three months
ended June 30, 1999 and 1998 and six months ended June 30,
1999 and 1998. 4
Condensed consolidated statements of cash flows - six months
ended June 30, 1999 and 1998 5
Notes to condensed consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosure About Market Risk 13
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VidaMed, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
June 30, December 31,
1999 1998
-------- --------
(Unaudited) (*)
Assets
Current Assets:
Cash and cash equivalents $ 4,411 $ 9,384
Accounts receivable 736 228
Inventories 891 1,228
Other current assets 795 1,179
-------- --------
Total current assets 6,833 12,019
Property and equipment, net 1,316 1,797
Other assets, net 287 316
-------- --------
Total assets $ 8,436 $ 14,132
======== ========
Liabilities and stockholders' equity
Current liabilities:
Notes payable, current portion $ 1,070 $ 764
Accounts payable 321 338
Accrued professional fees 181 317
Accrued clinical trial costs 271 431
Accrued and other liabilities 2,157 2,362
Accrued advertising costs 309 309
Restructuring accrual 198 252
Current portion of obligations under capital leases -- 22
Deferred revenue 130 229
-------- --------
Total current liabilities 4,637 5,024
Notes payable, long-term portion 1,424 1,785
Stockholders' equity:
Capital stock 97,235 95,542
Accumulated deficit (94,860) (88,219)
-------- --------
Total stockholders' equity 2,375 7,323
-------- --------
Total liabilities and stockholders' equity $ 8,436 $ 14,132
======== ========
* The Balance Sheet at December 31, 1998 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.
<PAGE>
<TABLE>
VidaMed, Inc.
Condensed Consolidated Statements of Operations
(In thousands except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product sales, net $ 1,208 $ 861 $ 2,196 $ 2,236
License fees and grant revenue 17 50 67 339
-------- -------- -------- --------
Net revenues 1,225 911 2,263 2,575
Cost of Products Sold 646 608 1,480 1,680
-------- -------- -------- --------
Gross Profit 579 303 783 895
Operating Expenses:
Research and development 742 1,200 1,555 2,334
Selling, general and administrative 3,409 3,297 5,913 7,904
-------- -------- -------- --------
Total operating expenses 4,151 4,497 7,468 10,238
-------- -------- -------- --------
Loss from operations (3,572) (4,194) (6,685) (9,343)
Other income(expense), net 87 (46) 44 (135)
-------- -------- -------- --------
Net loss $ (3,485) $ (4,240) $ (6,641) $ (9,478)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.17) $ (0.24) $ (0.33) $ (0.58)
======== ======== ======== ========
Shares used in computing basic and diluted
net loss per share 20,546 17,443 20,430 16,341
-------- -------- -------- --------
<FN>
See accompanying notes.
</FN>
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<TABLE>
VidaMed, Inc.
Condensed Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,641) $ (9,478)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 626 635
Changes in assets and liabilities:
Accounts receivable (508) 693
Inventory 337 (251)
Other current assets 384 (567)
Other assets 29 5
Accounts payable (17) (822)
Accrued professional fees (136) (178)
Accrued clinical trial costs (160) 6
Accrued interest payable -- (225)
Accrued restructuring cost (54) (569)
Accrued and other liabilities (205) 348
Deferred revenue (99) (272)
-------- --------
Net cash used in operating activities (6,444) (10,675)
-------- --------
Cash flows from investing activities:
Expenditures for property and equipment (145) (611)
-------- --------
Net cash used in investing activities (145) (611)
-------- --------
Cash flows from financing activities:
Principal payments under capital leases (22) (58)
Principal payments of notes payable (55) (716)
Net proceeds from issuance of notes payable -- 1,500
Net proceeds from issuance of common stock 1,693 17,865
-------- --------
Net cash provided by financing activities 1,616 18,591
-------- --------
Net (decrease) increase in cash and cash equivalents (4,973) 7,305
Cash and cash equivalents at the beginning
of the period 9,384 8,026
-------- --------
Cash and cash equivalents at the end of the period $ 4,411 $ 15,331
======== ========
Supplemental disclosure of cash flows information:
Cash paid for interest $ 124 $ 458
======== ========
<FN>
See accompanying notes.
</FN>
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VIDAMED, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(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 June 30, 1999 and the statements of operations for the three
and six months ended June 30, 1999 and 1998, and the statements of cash flows
for the three and six months ended June 30, 1999 and 1998, 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 included in the Company's annual report
on Form 10-K, as amended, for the year ended December 31, 1998 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
The Company calculates net loss per share in accordance with statement of
Financial Accounting Standards No. 128 "Earnings per Share". Statement 128
requires the presentation of basic earning (loss) per share and diluted earnings
per share, if more dilutive, for all periods presented. Basic and diluted net
loss per share is computed using the weighted average number of shares of common
stock outstanding during the periods presented.. 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.
3. Inventories
Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market value. Inventories at June 30, 1999 and December 31,
1998 consist of the following (in thousands):
June 30, December 31,
1999 1998
------ ------
Raw materials $ 93 $ 404
Work in process 0 261
Finished goods 798 563
------ ------
$ 891 $1,228
====== ======
Reductions in Raw materials and Work in Process levels are due to the
outsourcing of manufacturing.
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4. Notes Payable
During 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 June 30, 1999, the term loan had funded in
full at a rate of 12%.
As of June 30, 1999, we have borrowed approximately $200,000 against the
revolving accounts receivable-based line at a rate of 9.75% per year. We were
eligible to borrow approximately $330,000 against this line on June 30, 1999 and
borrowed the remaining available balance in July.
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
recorded in Cost of products sold.
The elements of the total charge as of June 30, 1999 are as follows (in
thousands):
Representing
--------------------------------
Cash Outlays
Total Asset --------------------
Charges Write-down Completed Future
------ ------ ------ ------
Fixed assets $ 390 $ 390 $ -- $ --
Facility shut down 1,305 -- 1,305 --
Grant 405 -- 207 198
------ ------ ------ ------
Total Special Charges $2,100 $ 390 $1,512 $ 198
------ ------ ------ ------
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 six
months ended June 30, 1999 and 1998, the total comprehensive loss was not
materially different from the net loss.
7. Common Stock
The increase in Capital stock, for the six months ended June 30, is due to the
Company selling common stock, to the principals of Telo Electronics, one of our
manufacturers. In this transaction, the Company issued 368,596 shares of common
stock at a purchase price of $2.713 per share.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of Vidamed's consolidated financial
condition and results of operations for the three months and six months ended
June 30, 1999 and 1998. We also discuss certain factors that may affect our
prospective financial condition and results of operations. This section should
be read in conjunction with the Condensed Consolidated Financial Statements and
related Notes in Item 1 of this report and the Company's Annual Report on Form
10-K, as amended, for the year ended December 31, 1998, which has been filed
with the Securities and Exchange Commission and is available from the Company at
no charge.
Cautionary Statement Regarding Forward-Looking Statements
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 VidaMed's current expectations, beliefs, intentions
or future strategies. The forward-looking statements concern, among other
things, the availability of cash resources to fund continued operations and
market acceptance of and the likelihood of additional Medicare reimbursement
approvals for the TUNA Procedure. We base all forward-looking statements on
information available to us on the date of this report. We do not undertake to
such forward-looking statements to reflect events that arise after the date of
this report. Actual results could differ materially from those in the
forward-looking statements because of the factors described under "Liquidity and
Capital Resources" and "Risk Factors" in this report and in our annual report on
Form 10-K, as amended, for the year ended December 31, 1998.
Overview
We design, develop, and market urological systems that are used for urinary
tract disorders. We primarily treat the enlarged prostate or Benign Prostatic
Hyperplasia ("BPH"), a noncancerous condition of the prostrate gland affecting
urination. VidaMed's primary product, the patented VidaMed TUNA System, is a
reasonably priced alternative therapy that minimizes surgical invasion, side
effects and complications for this condition. In the United States, we sell our
products primarily through direct sales personnel. Internationally, we primarily
sell to distributors who resell to physicians and hospitals.
VidaMed received FDA clearance to market the TUNA System in 1996, and in 1998,
Medicare reimbursement became available for procedures using our equipment that
are performed in hospitals. Currently, 38 states provide such reimbursement
coverage. To achieve significant increases in sales, we must secure Medicare
reimbursement approvals at least in all states with large populations of men
over 50 years of age, which is our target patient population. Medicare coverage
for supplies and devices in the office-based and Ambulatory Service Center
("ASC") markets was delayed in mid-1998 due to Medicare's review of its "Year
2000" compliance. We believe that Medicare reimbursement in doctors' offices and
ASCs, as well as patient awareness and physician advocacy of the TUNA System and
procedure, are our greatest challenges. Our business strategy is to focus
marketing and sales efforts on patient education and physician support for our
products and procedures until Medicare coverage issues are resolved, but, as
discussed in "Liquidity and Capital Resources" below, we will not be able to do
so without additional debt or equity financing.
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Results of Operations
Net revenue for the three months ended June 30, 1999 was $1,225,000. This was an
increase of $314,000 or 34% from $911,000 in the three months ended June 30,
1998. Product sales in the second quarter of 1999 increased 40% to $1,208,000
from $861,000 in the same period in 1998. The difference is due primarily to
increased European sales.
For the first six months of 1999, net revenue decreased 12% to $2,263,000 from
$2,575,000 during the same period of 1998. Product sales decreased by less than
2% from $2,236,000 for the first six months of 1998, to $2,196,000 for the first
six months of 1999. The decrease is primarily due to a one time grant revenue,
that was recognized in 1998.
Cost of product sold for the three months ended June 30, 1999 was $646,000, an
increase of 6% or $38,000 from $608,000 for the three months ended June 30,
1998. This was due to higher product sales.
For the six months ended June, 30, 1999 cost of product sold ws $1,480,000 down
12% from $1,680,000 in the first six months of 1998. The decrease is due to a
change in our sales and marketing efforts and outsourcing the manufacture of our
hand pieces.
Research and development (R & D) expenses included expenditures for regulatory
compliance and clinical trials. Clinical trial costs consist largely of payments
to clinical investigators, product for clinical trials, and costs associated
with initiating and monitoring clinical trials. R&D expenses decreased 38% to
$742,000 in the three months ended June 30, 1999 from $1,200,000 in the three
months ended June 30, 1998. For the six months ended June 30, 1999 expenses
decreased 33% to $1,555,000 from $2,334,000 in the first six months of 1998. The
decrease was primarily reduced clinical activity in 1999 and the launch of our
current ProVu generation of product in 1998. The decrease was primarily due to
reduced clinical activity in 1999, and resulting from the completion of the FDA
clinical trial studies, and the completion of R&D expenditures for our current
ProVu generation of product in 1998.
Selling, general and administrative (SG&A) expenses increased 3% to $3,409,000
in the three months ended June 30, 1999 from $3,297,000 in the three months
ended June 30, 1998. For the first six months ended June 30, 1999 expenses
decreased $1,991,000 or 25% from $7,904,000 in 1998 to $5,913,000 in 1999. The
expenditures in 1998 included a charge to the allowance for doubtful accounts,
as a result of the length of time involved in obtaining state Medicare coverage
and transition to a new Chief Financial Officer. Expenses in 1999 included costs
associated with reorganizing our U.S. sales force organization, including
recruiting costs.
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Other income/expense for the three months ended June 30, 1999 included income of
$87,000 compared to an expense of $46,000 for the comparable period in 1998. For
the six months ended June 30, 1999 other income was $44,000 compared to an
expense of $135,000 for the six months ended June 30, 1998. Other income is
primarily composed of interest income and expense.
VidaMed's results of operations have fluctuated in the past and may fluctuate in
the future from year to year as well as from quarter to quarter. Revenues
fluctuate as a result of several factors, including:
o Regulatory and reimbursement approvals
o Results of clinical trials
o The extent to which the TUNA System gains market acceptance
o Varying pricing promotions
o Volume discounts to customers and distributors
o Introduction of new products, and
o Introduction of competing alternative therapies for BPH.
Operating expenses fluctuate as a result of several factors, including:
o The timing of expansion of sales and marketing activities
o Costs and frequency of clinical activities, and
o R&D and SG&A expenses associated with the potential growth of
VidaMed's organization.
VidaMed does not anticipate reaching profitability in the near future. As
discussed below under "Liquidity and Capital Resources," our cash on hand, cash
flows from sales and credit agreements are not sufficient to fund the operations
through profitability without additional equity or debt financing. If we are
unable to secure such additional financing, management will substantially reduce
staffing, clinical trials that support regulatory and reimbursement approvals,
research and development and marketing and sales activities.
Liquidity and Capital Resources
At June 30, 1999, our cash and cash equivalents decreased by $5.0 million to
$4.4 million, compared to $9.4 million at December 31, 1998. The decrease is due
to operating expenses incurred in the normal course of business.
If we are unable to secure additional debt or equity financing this year,
management will reevaluate and revise current operating plans, reduce spending
and explore possible strategic relationships. We would be forced to reduce staff
and discontinue or substantially reduce clinical trials, research and
development and marketing and sales activities, and may not be able to continue
as a going concern.
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Our current cash balances and projected cash flows from the sale of products
together with cash available under the Transamerica financing facility will not
be sufficient to meet our current operating and capital requirements beyond
approximately December 1999 without additional equity or debt financing.
Management is pursuing and believes it can obtain additional financing, cannot
give any assurance that we will be successful in securing such financing. Debt
financing may require VidaMed to pledge assets and to comply with financial and
operational covenants, or may not be available at all. Any future equity
financing would result in dilution to our stockholders.
In October 1998, the Company finalized a 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 June 30, 1999, the term loan had funded in full. As of June 30,
1999, we have borrowed approximately $200,000 against the revolving accounts
receivable-basd line at a rate of 9.75% per year. We were eligible to borrow
approximately $330,000 against this line on June, 30 1999 and borrowed the
remaining available balance in July.
Restructuring Accrual
In September 1997, VidaMed announced a restructuring program designed to reduce
costs and improve operating efficiencies by closing our U.K. manufacturing
facility. In 1997, we incurred a $2,100,000 charge in cost of goods sold due to
the closure of the plant. The charge reflects $390,000 for the estimated loss on
the abandonment of fixed assets, a $1,305,000 charge for our short-term
obligation related to the closure of our British manufacturing facility and a
$405,000 obligation to repay a grant received when we opened the facility. As of
June 30, 1999, the remaining accrual balance is $198,000 and consists mainly of
a grant repayment due by the end of 1999. See Note 5 of Notes to Condensed
Consolidated Financial Statements.
RISK FACTORS
Our business, results of operations and financial condition are subject to a
number of risk factors, in addition to those described above under "Results of
Operations" and "Liquidity and Capital Resources."
Potential Loss of Nasdaq Listing
The continuing listing requirements for inclusion on the Nasdaq National Market
require that we maintain minimum net tangible assets of $4.0 million. As of June
30, 1999, our net tangible assets decreased to $2.375 million. Although we are
attempting to increase our net tangible assets through the sale of securities
and increased sales of our products, the Nasdaq Stock Market, Inc. could
initiate de-listing proceedings. There is no assurance that we will be able to
raise sufficient capital or increase sales to meet the minimum net tangible
asset listing requirements. In addition, there are other minimum listing
requirements that VidaMed must continually satisfy, such as the requirement that
our common stock cannot close below $1.00 for 30 consecutive trading days. The
failure to satisfy any minimum listing requirement could cause the Nasdaq Stock
Market, Inc. to initiate delisting proceedings.
Delisting from the Nasdaq National Market could adversely affect the liquidity
and price of the Company's common stock. Moreover, investors may find it more
difficult to dispose of or obtain accurate quotations for our common stock
because the bid and asked quotations would be reported on an electronic bulletin
board such as the OTC Bulletin Board or similar quotations medium.
Manufacturing
Three of the four major components of the TUNA System are manufactured by third
parties. We manufacture the VTS PROVu Reuseable Handle at our headquarters
facility in Fremont, California. Telo
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Electronics manufactures the VTS Generator (Model 7600) at its facility in San
Jose, California. Humphreys Systems manufactures the VTS Disposable Cartridge at
its facility in Dublin, California. Karl Storz manufactures the VTS PROVu
Telescope at its facility in Germany. The transition to Humphreys was completed
during the quarter ended June 30, 1999.
By outsourcing our manufacturing, we are at risk that our manufacturers will be
able to supply us with our products as ordered. Our products are continuously
subject to Food and Drug Administration regulation, including recordkeeping and
reporting requirements regarding use of the device. Manufacturing facilities
where we outsource products are also subject to periodic inspection by federal,
state and foreign regulatory agencies. Failure of our manufacturers to comply
with regulatory requirements could adversely effect our business.
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 (Y2K), these date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates.
The Y2K 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 us and our vendors and customers, will need to comply with the Y2K
requirements. We presently believe that as a byproduct of normal business system
modifications and upgrades and the short length of time we have been in
operation, the Y2K issue should not have a material effect on our current
financial position, liquidity or results of operations. However, this does not
completely prevent the possibility of problems arising related to the Y2K that
could have a material impact on our operations.
We are aware of the Y2K issue and have been proactive in addressing the issue
internally and externally. Our primary software system is currently Y2K
compliant. We do not depend on in-house custom systems and generally purchases
off the shelf software from reputable vendors who have tested their software for
Y2K compliance. The Y2K issue is being considered for all future software
purchases. Although we believe the Y2K issue will not pose material operational
problems for our computer systems, there can be no assurance that problems
arising from the Y2K issue will be completely eliminated.
In early 1999, the Company completed its evaluation of its significant
suppliers and large customers systems to determine the extent to which the
Company's interface with these systems is vulnerable to the Y2K issue. The
Company determined that Medicare coverage for supplies and devices in the
office-based and ASC markets was delayed in mid-1998 due to Medicare announced
Y2K problems. The ASC reimbursement program, which was expected to be effective
January 1, 1999 is now likely to go into effect before mid-2000, at which time,
office-based payments will begin their three year phase-in: 50% in 2000, 75% in
2001 and full payment in 2002. As a result of Medicare coverage delays, the
Company established a $2.7 million reserve in the third quarter of 1998 for all
office-based and ASC sales. Other than issues related to Medicare, none of our
significant suppliers or large customers has notified us that they have
significant Y2K problems. Even where assurances are received from third parties
there remains a risk that failure of systems and products of other companies on
which we rely could have a material adverse effect on our business.
We are aware of the Y2K issue and have been proactive in addressing the issue
internally and externally.
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<PAGE>
o Our primary software system is currently Y2K compliant.
o We do not depend on in-house custom systems
o We purchase off the shelf software from reputable vendors who have
tested their software for Y2K compliance.
o The Y2K issue is being considered for all future software purchases.
Although we believe the Y2K issue will not pose material operational problems
for our computer systems, there can be no assurance that problems arising from
the Y2K issue will be completely eliminated.
Our products are Y2K compliant and are able to operate in the Year 2000
and beyond. The Y2K 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 Y2K 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." We have not, however,
independently verified Microsoft's claim.
We have not and do not expect to have material costs associated with
the Y2K issues.
We believe we have an effective program in place to resolve Y2K issues in a
timely manner. We also have contingency plans for certain critical applications
and are working on such plans for others. These contingency plans involve, among
other actions:
o Manual workarounds,
o Increasing inventories
o Adjusting staffing strategies.
In the event that we do not completely resolve all of the Y2K issues, our
business operations could be adversely affected, although the resulting costs
and loss of business cannot be reasonably estimated at this time.
The most reasonably likely worst case scenario relates to our ability
to use our computerized manufacturing and accounting system. Although the
software product is Y2K compliant, other unforeseen factors could render it
inoperative. This occurrence would require us to manually prepare documents,
such as shipping documents, invoices and checks, to keep the business running.
Such tasks would be more time consuming and would likely require additional
human resources to complete.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
We have assessed our exposure to market risk based on our current market risk
sensitive instruments and determined that amounts are not material.
Page 13 of 17
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
VidaMed held its annual meeting on June 3, 1999. Our stockholders voted on the
following:
The stockholders approved an amendment to the Company's Restated Certificate of
Incorporation increasing the number of authorized common shares from 30,000,000
to 60,000,000. There were 14,940,299 votes for, and 1,815,378 against the
proposal, with 1,852,359 abstentions.
The election of directors was conducted and the following nominees were elected,
with the following vote count:
Votes Votes
Name For Withheld
---- --- --------
Franklin D. Brown 18,380,044 227,992
Robert Erra 18,381,589 226,447
David J. Illingworth 18,386,371 221,665
Wayne I. Roe 15,579,406 3,028,630
Michael H. Spindler 18,380,289 227,747
The stockholders approved an amendment to our 1995 Employee Stock Purchase Plan
to increase the number of shares of common stock reserved for future issuance
under the plan by 200,000 shares to a new total of 600,000 shares. There were
10,312,832 votes for, and 589,954 votes against the amendment, with 122,591
abstentions and 7,582,659 shares were not voted.
The stockholders did not approve an amendment to the 1992 Stock Plan to increase
the number of shares of common stock reserved for future issuance by 1,200,000
shares to a new total of 5,500,000 shares. There were 4,058,264 votes for, and
6,591,311 against the amendment, with 148,901 abstentions. 7,809,560 shares were
not voted.
Page 14 of 17
<PAGE>
The stockholders approved an amendment to the 1995 Director Option Plan to
eliminate the vesting provisions and to vest immediately any future options
granted. There were 14,761,446 votes for, and 3,649,417 votes against the
amendment, with 197,173 abstentions.
The stockholders ratified Ernst & Young LLP as our independent auditors for the
fiscal year ending December 31, 1999. There were 18,336,879 votes for, and
189,177 against ratification, with 81,980 abstentions.
Item 5. Other Information
Management Changes
In June 1999, several changes occurred in our management and on our Board of
Directors. David Illingworth resigned as President and Chief Executive Officer
to become Executive Chairman of the Board, effective August 1, 1999. Mr.
Illingworth will devote up to 50 percent of his working time to strategic
relationships and strategic planning. He continues to serve as Chairman of the
Board of Directors. Mr. Illingworth's contract with VidaMed for his services as
Executive Chairman is attached as exhibit 10.19 to this report.
Randy Lindholm, who had been our Executive Vice President of Sales and
Marketing, was promoted to President and Chief Executive Officer, effective
August 1, 1999. Mr. Lindholm also joined the Board of Directors. Mr. Lindholm's
contract with VidaMed for his services as President and Chief Executive Officer
is attached as exhibit 10.20 to this report.
Two members of the Board of Directors of VidaMed resigned in June 1999. Wayne
Roe resigned due to potential conflicts in his relationship with a major health
care industry consulting firm. Mr. Roe's resignation was effective August 1,
1999. Frank Brown resigned due to personal health reasons. Mr. Brown's
resignation was effective July 1, 1999.
VidaMed now has 4 members on its Board of Directors. A nominating committee of
the Board, consisting of Robert Erra and Mr. Illingworth, has been formed to
conduct a search for a new Board member.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.19 Transition Agreement between VidaMed, Inc.
and David Illingworth, dated June 26, 1999.
10.20 Employment Agreement between VidaMed, Inc.
and Randy Lindholm, dated June 22, 1999.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter
ended June 30, 1999.
Page 15 of 17
<PAGE>
<TABLE>
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.
<CAPTION>
<S> <C>
VIDAMED, INC.
Date: August 13, 1999 By: /s/ Randy D. Lindholm
------------------------- ------------------------------------
Randy D. Lindholm
President, Chief Executive Officer
Date: August 13, 1999 By: /s/ Richard D. Brounstein
-------------------------- ----------------------------------------
Richard D. Brounstein
VP Finance, Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
Page 16 of 17
VidaMed, Inc.
46107 Landing parkway
Fremont, California 94538
June 26, 1999
Mr. David Illingworth
President and Chief Executive Officer
VidaMed, Inc,
46107 Landing Parkway
Fremont, California 94538
Re: Transition to Employment as Executive Chairman
Dear Mr. Illingworth:
This letter will confirm the terms of your transition to the role of
Executive Chairman, such transition to be effective August 1, 1999 or earlier if
mutually agreed upon by you and the new President and Chief Executive Officer
(the "Transition Date"). The terms under which such employment is offered are as
follows:
1. Position and Responsibilities. By the authority vested in the Board
of Directors under Section 5.3 of the "Bylaws of VidaMed, Inc. (a Delaware
corporation)" you are herewith appointed to the position of Executive Chairman,
reporting to the President and Chief Executive of the Company. During the term
of your service you shall devote up to 50% of your working time to your duties
and responsibilities of your employment 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 or as may
be promulgated by the Company from time to time during your employment.
In particular, your responsibilities as Executive Chairman shall
include the following: (i) assisting with smooth transition of Mr. Randy
Lindholm to his position as President and Chief Executive Officer of the
Company, (ii) making personal visits with distribution partners during the third
quarter of 1999, (iii) participating in fundraising activities, (iv)
participating in efforts to explore strategic relationships and partnerships,
and (v) such other duties as may be assigned to you by the President and CEO of
the Company. The term of your service as Executive Chairman will continue
through February 1, 2000 ("Termination Date"), unless modified by mutual
agreement in writing.
It is noted that you shall continue to serve as Chairman of the VidaMed
Board of Directors and participate on the nominating committee of Board of
Directors during the present term of that office. Your authority and
responsibility as Chairman and member of the VidaMed Board of Directors is
herewith recognized as distinct from the duties and authority of the Executive
Chairman hereunder.
2. Compensation and Benefits.
(a) In consideration of your services, effective as of your
transition date of August 1, 1999, you will be paid a base salary of 50% of your
current base salary of $270.000.00 per annum payable twice monthly in accordance
with VidaMed's standard payroll practices. If during any payroll period, you
devote greater than 50% of your working time to VidaMed matters as Executive
Chairman, your salary for such period will be prorated accordingly.
(b) You will also be entitled to participate in the VidaMed
Performance Improvement Plan ("PIP") under such term accorded the President and
Chief Executive Officer of the Company, prorated through August 1, 1999. You
will not be eligible to participate in the PIP after August 1, 1999, except to
the extent of the proration for the 1999 fiscal year. For purposes of
calculating
1
<PAGE>
benefits under the PIP, the Operating Plan shall be the "Steady Growth Plan"
stated in the Minutes of the Board of Directors dated June 22, 1999.
(c) Upon faithful completion of your service as Executive
Chairman, the remaining balance of $62,500 loan made to you by the Company shall
be deemed earned and the note forgiven.
(d) You will also be entitled to receive the standard
employee benefits made available by VidaMed to its employees to the full extent
of your eligibility therefor. VidaMed will 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 then in effect and as may be amended from
time to time.
3. Stock Options. Your stock option for an aggregate of 250,000 shares
which was granted to you on October 9, 1998 (the "10/98 Option") will continue
to vest on terms set forth in such option until termination of your services as
Executive Chairman. Thereafter you will have thirty (30) days from termination
of such service to exercise the shares vested under the 10/98 Option. The
unvested portion of all your other unexercised VidaMed options will be cancelled
and returned to the VidaMed stock option plan on the Transition Date.
4. Other Agreements. Your change of control agreement with VidaMed will
remain in effect for so long as you are serving as Executive Chairman in
accordance with this Agreement. Your indemnification agreement with VidaMed will
remain in effect for so long as you are serving as Executive Chairman of VidaMed
or as a member of VidaMed's Board of Directors. Your employee confidentiality
agreement with VidaMed will remain in effect in accordance with its terms.
5. Conflicting Employment. You agree that, during the term of your
service as Executive Chairman, you will not engage in any other employment,
occupation, consulting or other business 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 obligation to VidaMed.
6. General Provisions.
(a) This 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 letter agreement sets the entire agreement and
understanding between VidaMed and you relating to your service as Executive
Chairman and supersedes all prior verbal discussions between us.
(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 letter as soon as possible.
<TABLE>
<CAPTION>
<S> <C>
VIDAMED, INC.
By _________________________________________
Robert Erra, Member of Board of Directors
Agreed to and accepted this 26th day of June 1999.
By______________________________________
David J. Illingworth
</TABLE>
2
VidaMed, Inc.
46107 Landing Parkway
Fremont, California 94538
June 22, 1999
Mr. Randy Lindholm
VidaMed, Inc.
46107 Landing Parkway
Fremont, CA 94538
Re: Terms of Employment Offer
Dear Mr. Lindholm:
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
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. Your
service as President and Chief Executive Officer will commence on August 1, 1999
(the "Start Date").
2. Compensation.
(a) In consideration of your services, effective as of the
Start Date, you will be paid a base salary of $235,000 per annum, payable twice
monthly in accordance with VidaMed's standard payroll practices. Upon the
termination of service of David Illingworth as Executive Chairman of the
Company, which is expected to occur no later than six months following the Start
Date (the "Phase II Date") your base salary will be increased to $260,000.
Thereafter, your base salary will normally be reviewed annually by the
compensation committee of the Board of Directors of VidaMed.
(b) On the Start Date, 25% of the original principal amount
(plus accrued interest thereon) of your loan from VidaMed (the "Loan") will be
forgiven. On each of the Phase II Date, the date which is six months after the
Phase II Date and the date which is 18 months after the Phase II Date, 25% of
the original principal amount (plus accrued interest thereon) of the Loan will
be forgiven, provided you remain employed by the Company as President and Chief
Executive Officer on each such Loan forgiveness date.
(c) You will be entitled to participate in the VidaMed
Performance Incentive Plan. For purposes of calculating benefits under the PIP,
the Operating Plan shall be the "Steady Growth Plan" stated in the Minutes of
the Board of Directors dated June 22, 1999. Your participation in the
1
<PAGE>
PIP for fiscal year 1999 shall be at seven-twelfths in your capacity as a
corporate officer and five-twelfths as President and CEO.
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 paid vacation in
accordance with VidaMed's vacation policy. 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 400,000 shares of common stock of VidaMed. Your stock option
will be granted in two separate tranches as follows: (i) tranche 1 for 200,000
shares will be granted to you on the second business day after your acceptance
of this offer letter and (ii) tranche 2 will be granted to you on the Phase II
Date, provided you remain employed by the Company as President and Chief
Executive Officer on the Phase II Date. 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 service as President and Chief Executive Officer (in the
case of the tranche 1 options) and on the Phase II Date (in the case of the
tranche 2 options). 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 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.
2
<PAGE>
(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.
VIDAMED, INC.
By ___________________________________
Robert Erra, Director
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 either party, with or
without cause and with or without notice may terminate my employment
relationship.
Date:___________, 1999
-----------------------
Randy Lindholm
<TABLE> <S> <C>
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<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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<RECEIVABLES> 3,536
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