UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMEMDMENT NO. 1
[ 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
incorporation or organization) Identification No.)
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.
<PAGE>
VIDAMED, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Condensed Consolidated Financial Statements - unaudited
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 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Page 2 of 16
<PAGE>
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 3 of 16
<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>
</TABLE>
Page 4 of 16
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VidaMed, Inc.
Condensed Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
June 30,
--------------------
1999 1998
-------- --------
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
======== ========
See accompanying notes.
Page 5 of 16
<PAGE>
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. 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 shown in this report are not necessarily
indicative of results to be expected 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 earnings (loss) per share and diluted
earnings (loss) per share, if more dilutive, for all periods presented. Basic
and diluted net loss per share are computed using the weighted-average number of
shares of common stock outstanding during the periods presented. Securities that
could share in the earnings of the Company, such as options, warrants and
convertible securities, are excluded from the computation, as their effect is
anti-dilutive. 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.
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
Page 6 of 16
<PAGE>
loan. The term loan was funded in full as of December 31, 1998, at an interest
rate of 12% per year. Repayment of that loan is amortized over a three-year
period, with the first monthly payment having been made in December 1998 and
continuing monthly thereafter.
As of June 30, 1999, the Company borrowed approximately $200,0000 against the
revolving accounts receivable-based line at a rate of 9.75% per year. It was
eligible to borrow approximately $330,000 against this line on June 30, 1999,
and borrowed the remaining available balance of approximately $130,000 in July
1999.
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 repayment 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, 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, 1999, is
primarily due to the sale of common stock to the principals of Telo Electronics,
one of our manufacturers. On December 17, 1998, the Company entered into an
agreement to sell 368,596 shares of its common stock to the principals of Telo
Electronics, one of our manufacturers. The purchase price of the common stock
was $2.713, the average closing price of the common stock for the five trading
days preceding December 17, 1998. The common stock was paid for with promissory
notes delivered on December 17, 1998. The transaction closed in February 1999
when the promissory notes plus interest were paid. The Company received net
proceeds of $1,000,000 from that transaction.
8. Retention Agreements
In October 1998, the Company entered into retention agreements with certain
executive officers. Under those agreements, the Company was obligated to pay up
to $810,000 on April 1,1999, if those officers remained with the Company through
April 1, 1999. All officers covered by the retention agreements remained with
the Company through April 1, 1999, and the Company paid $810,000 according to
the terms of the agreements.
Page 7 of 16
<PAGE>
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 coverage
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
update any 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 other factors
described 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. Our products 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.
At the beginning of fiscal 1999, we began restructuring our United States sales
and marketing model to align with current hospital-based reimbursement coverage.
Under the prior model, we focused on selling the TUNA System generator and
related equipment to hospitals, physician groups and ambulatory service centers.
Under the new sales model, an entire TUNA System is placed with a hospital at no
initial capital charge, and a per use fee is charged for each procedure
performed.
We received FDA clearance to market the TUNA System in 1996. In 1998, Medicare
reimbursement coverage became available for procedures using our equipment that
are performed in hospitals. As of June 30, 1999, 36 states provide such
reimbursement coverage. To achieve significant increases in sales, we must
actively promote the fee-per-use program and secure Medicare reimbursement
coverage at least in all states with large populations of men over 50 years of
age, which is our target patient population. The Company has several initiatives
underway to facilitate the Medicare reimbursement coverage process, including
working in cooperation with state Medicare Medical Directors. Notwithstanding
the foregoing, there can be no assurance that the Company will receive
additional Medicare reimbursement coverage in major states in a timely manner,
and the failure to receive such coverage would have a material adverse effect on
the business, financial condition and results of operations of the Company.
Medicare coverage for supplies and devices in the office-based and 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
Page 8 of 16
<PAGE>
for our fee-per-use program while at the same time continue to advance Medicare
reimbursement for the TUNA Procedure, but, as discussed below in "Liquidity and
Capital Resources," we will not be able to do so without additional debt or
equity financing.
Although initial results from our fee-per-use sales model are favorable, we do
not anticipate reaching profitability in the near future. We expect our
operating losses to continue as we commit substantial resources to expand
marketing and sales activities, fund clinical trials in support of regulatory
and reimbursement approvals, and fund research and development. Our future
profitability will be dependent upon, among other factors, market acceptance of
the VidaMed TUNA Procedure, availability and timing of third-party reimbursement
for procedures performed with the TUNA System, adoption of our fee-per-use
program and our ability to fund operations absent sufficient sales of our
products.
There can be no assurance that the TUNA System will continue to 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 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 or continue to be
reimbursed at adequate levels in the United States under either private or
governmental healthcare payment systems. Both lack of coverage and inadequate
reimbursement for the TUNA Procedure could adversely affect market acceptance of
the TUNA System. Failure of the TUNA Procedure to achieve market acceptance in
the United States, lack of adequate funding, the impact of competitive products
and pricing and other risks could have a material adverse effect on our
business, financial condition and results of operations.
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. The decrease is primarily due to
non-recurring grant revenue that was recognized in 1998. Though the net product
revenues did not change materially from the first six months of 1998 to the
first six months of 1999, the source of revenues changed. Product revenues for
the prior period were generated from the sales of entire TUNA Systems while
product revenues for the first six months of 1999 included revenues from our
fee-per-use program, as discussed above in the section entitled "Overview."
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 increase was a function of higher product sales. For the six months
ended June 30, 1999 cost of product sold was $1,480,000, down 12% from
$1,680,000 in the first six months of 1998. The decrease is a function of (i) a
transition from a sales and marketing model based on the sales of the TUNA
System to a fee-per-use sales model, and (ii) outsourcing the manufacture of our
disposable product resulting in lower materials cost.
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 due to reduced clinical activity in 1999, resulting from
the completion of FDA clinical trial studies, and the completion of R&D
expenditures for our current ProVu generation of products in 1998.
Page 9 of 16
<PAGE>
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. The increase is primarily attributed to costs associated
with executive retention and reorganizing our U.S. sales force, including
recruiting costs, offset by legal expenses.
For the first six months ended June 30, 1999 SG&A expenses decreased $1,991,000
or 25% from $7,904,000 in 1998 to $5,913,000 in 1999. The decrease is a function
of higher expenditures in the first quarter of 1998, including a charge to the
allowance for doubtful accounts necessitated by the length of time involved in
obtaining state Medicare coverage, a charge incurred in the transition to a new
chief executive officer and a charge for legal expenses.
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 expects operating losses to continue at least through fiscal year 2000.
Liquidity and Capital Resources
As of 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, offset in part
by the issuance of equity as discussed in footnote 7.
As we began fiscal 1999, we believed that our current cash balances, projected
cash flows from operations including a U.S. procedure based sales program (the
"fee-per-use program") and cash available under the Transamerica financing
facility would be sufficient to meet our current operating and capital
requirements through the end of the fiscal year. We now believe that the
fee-per-use program will take longer to implement than originally planned. In an
effort to increase revenues, we believe that it is necessary to:
o Increase consumer awareness of the treatment options available to BPH
patients with the view that an informed patient and his doctor are
more likely to choose the TUNA procedure;
o Provide opportunities for our field organization to increase the
number of physicians who perform TUNA Procedures; and
Page 10 of 16
<PAGE>
o Implement marketing initiatives to assist physicians build their
practices by increasing the number of TUNA Procedures performed.
The increased costs associated with this three-pronged approach together with
lower than anticipated revenues from the fee-per-use program will require us to
obtain additional financing to meet our current operating and capital
requirements through the end of the fiscal year. Management is pursuing, and
believes it can obtain, financing to fund operations through the end of this
fiscal year and into fiscal year 2000. Additional financing will likely be
required in order to fund operations throughout fiscal 2000.
We cannot give any assurance that we will be successful in securing any debt or
equity financing, or that such financing, if available, will be on favorable
terms. Any future equity financing would result in dilution to our stockholders.
If we are unable to secure additional financing this year, we would not be able
to continue as a going concern. We would be forced to explore strategic
relationships, reduce staff and discontinue clinical trials, research and
development and marketing and sales activities.
During 1998, we 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 our assets and consists of a revolving accounts
receivable-based credit line of up to $3 million and a $2.5 million equipment
term loan. The term loan was funded in full as of December 31, 1998, at an
interest rate of 12% per year. Repayment of that loan is amortized over a
three-year period, with the first monthly payment having been made in December
1998 and continuing monthly thereafter.
As of June 30, 1999, we borrowed approximately $200,0000 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 of approximately $130,000 in July 1999.
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" and in our annual report on
Form 10-K for the year ended December 31, 1998, as amended.
Page 11 of 16
<PAGE>
Potential Loss of Nasdaq Listing
The continuing listing requirements for inclusion of our stock 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-Amex
Market Group of the NASD ("Nasdaq-Amex") 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. For example, our common stock cannot close below $1.00 for
30 consecutive trading days. The failure to satisfy any minimum listing
requirement could result in the initiation of delisting proceedings.
In August 1999, Nasdaq-Amex notified us that we were out of compliance with the
net tangible assets requirement for continued listing on the Nasdaq National
Market. The Company has been asked to submit a plan for achieving compliance to
Nasdaq-Amex. No delisting action will be taken against VidaMed until we have an
adequate opportunity to respond.
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 a similar quotation 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 Electronics manufactures the VTS Generator
(Model 7600) at its facility in San Jose, California. Ziess Humphrey 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 Zeiss Humphrey Systems was completed during the quarter ended June
30, 1999.
By outsourcing our manufacturing, we are at risk that our manufacturers will not
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 issue
that could have a material impact on our operations.
We have been proactive in addressing the Y2K issue internally and externally.
Our primary software system is currently Y2K compliant. We do not depend on
in-house custom systems and generally purchase off-the-shelf software from
reputable vendors who have tested their software for Y2K compliance. The Y2K
issue is being
Page 12 of 16
<PAGE>
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.
We have initiated communication with our significant suppliers and customers to
determine the extent to which our operations are vulnerable to a failure of any
of those third parties to remediate their own Y2K issues. 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 not
likely to be effective before June 30, 2000. As a result of the 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, however, 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.
Our products are Y2K compliant and are able to operate in the Year 2000 and
beyond. There are two processors used in the TUNA System generator. One
processor does not have date sensitivity while the other does. We have tested
the date sensitive processor and have concluded that it has no significant Y2K
problems.
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 (e.g. manual preparation of invoices, paychecks)
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, we have not
and do not expect to have material costs associated with the Y2K issues.
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, such as
the inability of public utilities to provide service. This occurrence could
materially adversely effect our business. We could also be required to manually
prepare documents, such as shipping documents, invoices and checks and the like.
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 are exposed to interest rate risk on the investments of our excess
cash. The primary objective of our investment activities is to preserve
principal while at the same time maximize yields without significantly
increasing risk. To achieve this objective, we invest in highly liquid and high
quality debt securities. To minimize the exposure due to adverse shifts in
interest rates, we invest in short-term securities with maturities of less than
one year. Due to the nature of our short-term investments, we have concluded
that we doe not have a material market risk exposure.
PART II: OTHER INFORMATION
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 proposals.
Page 13 of 16
<PAGE>
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 votes 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 not voting.
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 votes against the amendment, with 148,901 abstentions and 7,809,560
shares not voting.
The stockholders approved an amendment to the 1995 Director Option Plan to
eliminate the vesting provisions and to vest immediately any future options
granted under the plan. 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 votes 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 an exhibit 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 an exhibit 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.
Page 14 of 16
<PAGE>
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.
On August 23, 1999, John F. Howe replaced Richard D. Brounstein as Vice
President Finance, Chief Financial Officer. Mr. Brounstein will remain with
VidaMed to effectuate a smooth transition.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.19(1) Transition Agreement between VidaMed, Inc. and David
Illingworth, dated June 26, 1999.
10.20(1) 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.
(1) Filed as an Exhibit to the Company's original Report on Form 10-Q for the
Quarter ended June 30, 1999 and incorporated herein by reference.
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: August 26, 1999 By: /s/ Randy D. Lindholm
------------------- ------------------------------------
Randy D. Lindholm
President, Chief Executive Officer
Date: August 26, 1999 By: /s/ John F. Howe
------------------- -------------------------------
John F. Howe
VP Finance, Chief Financial Officer
(Principal Financial and Accounting Officer)
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