UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number: 0-26082
VIDAMED, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0314454
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(State of incorporation) (IRS Employer Identification No.)
46107 Landing Parkway
Fremont, CA 94538
(Address of principal executive offices)
(510) 492-4900
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common Stock, $.001 par value
Preferred Share Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendments to this
Form 10-K. [ ]
The aggregate market value of the Common Stock of the registrant held by
non-affiliates as of March 19, 1999 was $56,318,565.
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, was 20,479,478 as of March 19, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain information is incorporated into Part III of this report by reference to
the Proxy Statement for the Registrant's 1999 annual meeting of stockholders to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this Form
10-K.
FORWARD LOOKING STATEMENTS
THIS REPORT ON FORM 10-K CONTAINS, IN ADDITION TO HISTORICAL INFROMATION,
FORWARD-LOOKING STATEMENTS THAT ARE BASED ON CURRENT EXPECTATIONS AND BELIEFS.
SUCH FORWARD-LOOKING STATEMENTS INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. SOME OF THE FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, AMONG OTHERS, MARKET
ACCEPTANCE OF THE VIDAMED TUNA PROCEDURE, AVAILABILITY AND TIMING OF THIRD-PARTY
REIMBURSEMENT FOR PROCEDURES PERFORMED WITH THE VIDAMED TUNA SYSTEM,
AVAILABILITY OF CASH RESOURCES SUFFICIENT TO FUND OPERATIONS, THE POSSIBLE
VOLATILITY OF THE COMPANY'S STOCK PRICE, THE FACTORS DISCUSSED HEREIN UNDER
"MARKETING AND CUSTOMERS," "CLINICAL STATUS," "MANUFACTURING," "RESEARCH AND
DEVELOPMENT," "ADDITIONAL RISK FACTORS," AND "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, FACTORS AFFECTING
RESULTS OF OPERATIONS." VIDAMED UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE
THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT ARISE
AFTER THE DATE HEREOF. READERS SHOULD CAREFULLY REVIEW THE RISK FACTORS
DESCRIBED IN OTHER DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE
SECURITIES EXCHANGE COMMISSION, INCLUDING THE QUARTERLY REPORTS ON FORM 10-Q TO
BE FILED BY THE COMAPANY IN 1999 AND ANY CURRENT REPORTS ON FORM 8-K FILED BY
THE COMPANY.
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VIDAMED, INC.
INDEX
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Page
Number
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PART I
Item 1. Business 1
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation 12
Item 7A Quantitative and Qualitative Disclosures About Market Risk 21
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 35
PART III
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial Owners and Management 37
Item 13. Certain Relationships and Related Transactions 37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 38
</TABLE>
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PART I
Item 1 - BUSINESS
VidaMed, Inc. (the "Company" or "VidaMed") designs, develops,
manufactures and markets technologically and clinically advanced, cost effective
systems for urological conditions. The Company's initial focus is upon the
treatment of the enlarged prostate or benign prostatic hyperplasia (BPH). The
Company's first product, the patented TUNA System, is designed to offer a cost
effective, minimally invasive alternative therapy with compelling clinical
advantages for BPH treatment. The Company commenced manufacturing production and
international product sales in 1993. The Company received clearance from the
Food and Drug Administration (FDA) in October 1996 and Medicare CPT code #
53852, effective January 1, 1998, for the treatment of symptoms associated with
BPH. The Company sells its products primarily to urologists and hospitals in the
United States and internationally to distributors who resell to physicians and
hospitals. Information regarding the amounts of revenue, operating profit or
loss and assets are provided in the financial statements included in this Report
on Form 10-K - See Part II, Item 6 "Selected Financial Data" and Item 8
"Financial Statements and Supplementary Data."
VidaMed was founded as a California corporation in July 1992 and was
reincorporated in Delaware in June 1995. VidaMed's principal offices are located
at 46107 Landing Parkway, Fremont, California. The Company's telephone number is
(510) 492-4900.
Overview
The prostate is a fibromuscular gland that surrounds the urethra and
lies immediately below the bladder in the male. The normal prostate is
approximately the size of a walnut. The prostate gradually enlarges one's
lifetime. The condition responsible for this is BPH. As the benign nodules grow
around the tube-like urethra, this growth obstructs the flow of urine released
from the bladder.
As a result of BPH, men begin to experience problems with urination
which include decreased force of urinary stream; frequency, the need to urinate
more often, especially at night; urgency, the sudden sensation that you need to
find a toilet and incomplete emptying of the bladder. A delay in treatment can
have serious consequences, including complete obstruction (acute retention of
body waste or urine), urinary tract infections, loss of bladder functions, and
in extreme cases, kidney failure. The symptoms can be debilitating and can
significantly alter a sufferer's quality of life.
BPH is a very common condition among older men. According to industry
sources, the percentage of men suffering from symptoms of BPH is approximately
50% for men in their fifties and increases to more than 75% for men over eighty.
It is estimated that approximately 23 million men worldwide have urinary tract
problems associated with BPH, including approximately 13 million men in the
United States. Many patients experiencing BPH are regularly monitored and given
clinical tests by their physicians but, due in part to the side effects and
complications associated with current BPH therapies, elect not to receive active
intervention (a course of inaction known as watchful waiting). If symptoms
persist or worsen, drug therapy or surgical intervention is usually recommended.
The most common surgical procedure is Transurethral Resection of the Prostate
(known as TURP), an invasive procedure in which an electrosurgical loop is used
to cut away the prostatic urethra and the surrounding tissue in the prostate
thereby widening the urethral channel for urinary flow.
Prior to the advent of drug therapy in the mid-1990s TURP was the
principal treatment modality for BPH. Although the number of TURP procedures
performed in the United States has been declining progressively in recent years,
TURP remains one of the most common surgical procedures performed on men in the
United States and represents a major surgical expense reimbursed by Medicare.
The Company believes that the numerous complications associated with TURP such
as, incontinence, impotence, retrograde ejaculation, bleeding, longer hospital
stays, and the potentially lethal TURP syndrome, are a deterrent to many
prospective patients, and coupled with the acceptance of drug therapy, has lead
to a decline in the number of TURP procedures performed in the United States,
from a total of 450,000
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in 1992 to 150,000 in 1998. Recently, less invasive surgical procedures to treat
the symptoms of BPH have been developed. The Company feels that the development
of less invasive procedures for the treatment of BPH has developed from patients
who fail drug therapy or otherwise are looking for less radical alternatives
than TURP or a lifetime on drug therapy.
Total BPH related expenditures exceed $10 billion worldwide, of which
approximately $3.5 billion annually occurred in the United States. Industry
sources estimate that in excess of 1.5 million men currently receive medical
treatment for BPH in the United States. Total BPH related expenditures outside
the United States are estimated to be nearly $6.5 billion annually. Industry
sources estimate that approximately 450,000 BPH patients outside the United
States are currently receiving drug therapy, and that approximately 550,000 TURP
procedures are performed annually outside the United States.
The BPH market is large and can be expected to continue to grow due to
the general aging of the world's population, as well as increasing life
expectancies. For example, the population of men 50 years of age and older in
the United States is growing approximately 25% annually and is expected to reach
approximately 39 million in 2005. Improved education on healthcare issues may
also encourage more men to seek treatment of their BPH symptoms.
Medicare, which covers approximately 80% of BPH patients in the U.S. is
under ever increasing budget pressures. The rising cost of healthcare in the
United States has also influenced public support for managed care in order to
control spending. Hospitals and doctors are now forced to compete for the
managed care dollars. VidaMed believes it is well positioned to provide both
payors and physicians a cost-effective alternative to drug therapy, invasive
surgery, and other less invasive surgical procedures and intends to capitalize
on this position with the goal of capturing market share.
The TUNA System and Procedure
VidaMed has developed the TUNA System to provide the therapy of choice
for BPH over watchful waiting, drug therapy and current surgical therapies.
VidaMed's TUNA Procedure is designed to restore and improve urinary flow while
resulting in fewer complications and adverse effects, shorter recovery time and
greater cost effectiveness than other therapies for treating BPH. The Company
believes that the cost of treatment with the TUNA Procedure will be less than
the cost of most other interventional BPH therapies because the procedure is
designed to be performed in an office or outpatient setting and to result in
fewer complications.
The VidaMed TUNA System (VTS) is designed to deliver low levels of
radio frequency energy directly into hyperplastic tissue to shrink the symptoms
associated with BPH. The principal components of the VTS PROVu TUNA System are
(I) VTS RF Generator, a low power radio frequency (RF) energy generator (Model
7600), (ii) VTS PROVu(TM) Cartridge, a single-use cartridge that delivers RF
energy via two insulated needles to the prostate, (iii) VTS PROVu Reusable
Handle, attaches to the cartridge to provide simultaneous needle deployment to a
predetermined tissue depth between 12mm and 22mm, and (iv) the VTS PROVu
Telescope, the highest quality optical device that allows direct tissue viewing
during the procedure and is compatible with all medical grade video camera
systems.
VTS RF Generator. The 7600 Model VTS Generator is designed specifically
for use with the PROVu cartridge, but is compatible with all previous models as
well. This computerized generator system is the control center for the TUNA
Procedure. It interprets and regulates the RF energy delivered into each
prostatic lobe. In the automatic mode, the VTS Generator provides simultaneous
monitoring of urethral, prostatic and rectal temperatures to prevent damage to
the urethra, charring of prostate tissue and damage to the rectum. The manual
mode allows physicians to customize the lesion for optimal results in atypical
prostates. The VTS RF Generator continuously and automatically calculates
impedance and energy output to reach the ideal treatment levels in each lobe.
The VTS Generator has an automatic shut-off activated by both temperature and
impedance measurements to ensure controlled tissue ablation. The integrated
computer records patient lesion information for medical records and
reimbursement.
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VTS PROVu. The VTS PROVu is unique and ergonomically designed with
three components: Disposable Cartridge, Reusable Handle and Rigid Telescope.
Disposable Cartridge. The single-use cartridge measures 18.5 French
(approximately 6 millimeters) in diameter and contains two laterally deployed
needles that extend at an approximate 90 degree angle from the cartridges clear
tip. Each needle, which delivers RF energy into the prostatic tissue, is
equipped with a patented insulation shield to thermally protect the urethra
during the procedure. Within the shields are thermocouples that offer real-time
monitoring of interstitial and urethral temperatures during the procedure.
Reusable Handle. When the cartridge is attached to the PROVu Handle the
operator can select from 6 preset needle lengths, between 12mm and 22mm. The
single-handed deployment advances the needles and shields simultaneously. The
shields deploy to a preset 6mm length.
PROVu Telescope. The rigid PROVu Telescope allows precise positioning
of the cartridge within the prostatic urethra under direct visualization. A
unique feature of the PROVu Telescope and Handle is the ability to adjust the
scope forward or back during a procedure to visualize the placement of the
needles into the tissue. The PROVu Telescope meets the highest optical standards
found in the industry and is compatible with all medical grade video camera
systems and light sources.
The VidaMed TUNA Procedure desiccates prostatic tissue, leading to
improved urinary flow, and can generally be performed in under an hour with
local anesthesia such as lidocaine jelly and an oral sedative. Some physicians
also prefer to use a prostate block or IV sedation. The VTS PROVu catheter is
inserted into the patient's urethra, and the two-shielded needle electrodes are
then advanced into one of the two lateral lobes of the prostate. Controlled RF
energy delivered by the needle electrodes heats targeted portions of the
prostate lobe to temperatures of 90 to 100 degrees centigrade, creating a
localized area of desiccated tissue measuring approximately one to two
centimeters in diameter, while the shields protect the urethra from thermal
damage. Once a lesion of sufficient size has been created, the urologist
retracts the needles and places the catheter at the next site to be ablated and
repeats the process. Typically, two or more treatments in each lateral prostatic
lobe are performed depending upon the size of the prostate. If the patient is
unable to urinate due to temporary swelling or irritation of the urethra, a
catheter may be inserted into the patient's urethra. This catheter, if inserted,
is typically left in place for one to three days.
The Company believes that the VTS design offers significant advantages
over other BPH therapies. Because the components of the VidaMed TUNA System
shield the urethra and deliver controlled RF energy directly into the interior
of the prostate, the procedure protects the prostatic urethra and reduces the
risk of unintended thermal damage to surrounding structures. In other procedures
where this control does not exist, the urethra and other structures can be
damaged or destroyed, causing significant patient discomfort and complications.
Clinical trials of the TUNA procedure as reported by Claus Roehrborn, M.D. in
the peer-reviewed published study, titled "Transurethral Needle Ablation of
Benign Prostatic Hyperplasia: 12-Month Results of a Prospective, Multicenter
U.S. Study," indicate that TUNA results in fewer of the complications associated
with TURP, including sexual dysfunction and incontinence. This study, conducted
at several major university medical centers includes 130 patients who were
treated with TUNA, with 90% being performed under local anesthesia supplemented
with oral and/or IV sedation. Compared to clinical results published for other
less invasive procedures including Transurethral Microwave Therapy (TUMT) and
Interstital Laser Coagulation (ILC), Roehrborn's study supports the VidaMed TUNA
Procedure as a minimally invasive therapy with the least post-procedure
complications of any treatment for BPH.
The Company believes that the cost of the TUNA procedure in the United
States, including physician charges, will be significantly less than the cost of
TURP. The capital cost for VidaMed's TUNA System is less than the cost for
general surgical lasers required to perform laser procedures, and the ultrasound
and microwave devices required for other minimally invasive surgical procedures.
In addition to providing procedural alternatives, the Company believes
the VidaMed TUNA Procedure also provides patients, physicians and health care
payors with a clinically and economically superior alternative to ongoing
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drug therapy. To date, the symptomatic relief experienced by patients in the
Company's clinical trials suggest that the TUNA procedure provides greater
relief than the results reported for drug therapy or watchful waiting.
Additionally, the Company's available three-year U.S. clinical follow-up data
and four-year international follow-up data for TUNA patients do not suggest the
need for a significant number of re-treatments within these time frames.
However, there can be no assurance as to whether and how frequently TUNA
patients will require retreatment.
BPH Therapies
Watchful Waiting
The majority of BPH patients are initially managed through watchful
waiting, an approach entailing periodic visits to physicians and clinical
testing. The aim of watchful waiting is to monitor the patient's symptoms, treat
some of the attendant complications such as bladder infections, and determine
whether and when more active intervention is required. For many BPH sufferers,
watchful waiting represents only a temporary option due to generally worsening
symptoms that eventually require therapeutic intervention. The Company believes
that many health care payors have encouraged watchful waiting or drug therapy
over surgical intervention, due in large part to the higher costs of
interventional therapy, particularly TURP procedures.
Drug Therapy
Drug therapy for BPH has been available since the commercial
availability of three orally administered pharmaceutical products: Proscar (sold
by Merck KGaA) in 1992, Hytrin (sold by Abbott Laboratories) in 1993 and Cardura
(sold by Pfizer Inc.) in 1995. These remain the primary drug therapies currently
available although several other pharmaceutical products are currently available
or undergoing clinical trials for BPH symptom relief.
Proscar blocks hormones that stimulate growth of the prostate. Hytrin,
an alpha-blocker, disables alpha-receptors on smooth muscle cells in the area of
the prostate, causing muscle relaxation that alleviates some of the symptoms of
BPH. Cardura, also an alpha-blocker, acts in a manner similar to Hytrin. Side
effects of alpha-blockers include dizziness, headache and fatigue. Side effects
of Proscar include impotence, decreased libido and other sexual dysfunction Drug
therapy generally must be administered daily for the duration of the patient's
life at an average annual cost of approximately $600 per year.
Surgical Treatments for BPH
Transurethral Resection of the Prostate. TURP has been the primary
interventional treatment modality for BPH since the 1940s and remains the most
common BPH surgical procedure. TURP is an inpatient procedure requiring general
anesthesia or regional anesthesia administered into the spinal column. Patients
usually remain in the hospital for 2-5 days and experience a 6-week recovery
period. The TURP procedure is performed by a physician, who uses a visualization
scope (known as a cystoscope) inserted through the urethra to view the prostate
and an electrically powered metal loop to cut away the prostatic urethra and the
surrounding prostatic tissue. The procedure results in removal of a substantial
portion of the prostate. While TURP results in a dramatic improvement in urine
flow, it can also result in serious complications. A significant amount of
bleeding occurs during the procedure, and due to the trauma to the urethra,
patients may experience pain during urination and require a urinary catheter,
which is typically left in place for several days or longer. The initial cost to
the hospital of the equipment needed to perform TURP, including a power source,
cystoscope and electrosurgical loop, is approximately $20,000, and this
equipment is generally reusable.
A large number of TURP patients experience complications. Virtually all
patients experience a burning sensation upon urination that lasts for up to
three weeks following the procedure. Based on our randomized FDA audited trials
as published in the May 1998, Journal of Urology, other complications include
impotence (13% of patients), retrograde ejaculation (the reverse flow of semen,
which often results in sterility) (38%), urinary tract infection
symptoms/urethral stricture resulting in a complete inability to urinate (20%),
incontinence (4%). According to the United States Department of Health and Human
Services, approximately 2% of TURP patients die as a result of the
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procedure and related complications. At least 10% of TURP patients develop BPH
symptoms again and require retreatment within five years.
A variation on the TURP is the Transurethral Vaporization of the
Prostate (TVP), or roller-ball, which was successfully introduced in January
1995 by Circon Corporation. TVP, which is performed in a manner similar to using
a paint roller, delivers electrical energy to vaporize the urethra and prostate,
but utilizes the same RF generator as does TURP, thus requiring no additional
capital expense. The TVP has similar efficacy as TURP with less bleeding and
shorter post-op catheterization, but other complications are similar to those of
TURP.
Transurethral Microwave Therapy. In transurethral microwave therapy
(TUMT) a catheter that is inserted into the urethra delivers microwave energy to
destroy prostatic tissue. TUMT is typically performed in an outpatient setting
under local anesthesia, which may be supplemented by intravenous sedation.
Although early experience with TUMT has demonstrated some success in alleviating
the symptoms of BPH, the Company believes the difficulty of controlling the
absorption of microwave energy in tissue may cause varying treatment outcomes.
A microwave system marketed by EDAP Techomed, Prostatron, received FDA
clearance in 1996 for treatment of symptoms associated with BPH. Microwave
systems have been marketed in certain European countries for several years. The
Company believes the Prostatron generator is currently priced at approximately
$295,000 in the United States and disposable per-procedure disposable costs are
estimated of around $600. In 1997, a U.S. based company, Urologix, received FDA
clearance to market the Targis System for the treatment of the symptoms
associated with BPH. This system has a capital equipment list price of $150,000
with a per procedure disposable charge of about $1,200. These systems are also
sold in a mobile environment on a turnkey, per use basis, generally costing
$3,000 and higher.
Dornier Medical Systems received FDA clearance to market its Urowave
microwave thermotherapy device in May 1998. Clinical results have not been
published. This unit sells at approximately $100,000 with disposable component
charges of approximately $1,000 per procedure.
Due to the design configurations of these systems, the Company believes
these systems limit the number of patients with BPH that can be treated. The
Company believes that the cost of the capital equipment and single-use
disposable items combined with the postoperative morbidity will limit the use of
this treatment modality.
Interstitial Laser Coagulation. FDA cleared Johnson & Johnson's Indigo
LaserOptic(TM) Treatment System for U.S. marketing in December 1997. ILC uses a
diode laser under direct visualization to selectively ablate prostatic tissue
Preliminary studies indicate that treatment outcomes compare favorably to TURP
in terms of safety. Morbidity remains a concern with extended post-procedure
catheterization approaching 2 weeks and increased urinary tract infections, in
some patients. Capital equipment costs approximately $50,000, and per procedure
disposable laser fibers are approximately $600.
Transurethral Evaporization of the Prostate. TUEP utilizes high wattage
laser energy at high power densities to cause evaporization of the prostate.
This procedure results in many of the same complications as TURP but usually
results in reduced blood loss. While clinical studies have indicated that when
properly performed, TUEP results in statistically significant improvements for
patients, the use of TUEP is generally limited due to its prolonged operative
time, requirement of general anesthesia, specialized equipment, and cost. TUEP
takes 25%-50% longer than a standard TURP and can be expensive due to the use of
multiple single-use fibers at a cost of approximately $500 each.
High Intensity Focused Ultrasound. High intensity focused ultrasound
(HIFU) uses a customized transrectal ultrasound probe to deliver precise
high-energy ultrasound (acoustic energy) to small-localized areas. This produces
high tissue temperatures and causes instantaneous coagulative necrosis in the
target tissue. Clinical trials for HIFU systems are currently underway in the
United States and Japan. The procedure may be performed in an outpatient setting
under local anesthesia, but general anesthesia may be required if the patient is
unable to remain still during the procedure. Additionally, HIFU is sub-optimal
in-patients with large glands and contraindicated in the median lobe and for
patients with multiple prostatic calculi (calcium deposits). Early studies show
that treatment outcomes are variable,
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and complications include tissue sloughing that may require catheterization and
blood in the urine and seminal fluid. The Company believes that ultrasound
systems used in HIFU are currently being marketed at a price of approximately
$100,000.
In addition, various other procedures that attempt to create an opening
for urinary flow without removing prostatic tissue have been used for treatment
of BPH. These procedures include transurethral incision of prostate (TUIP),
balloon dilation and stenting. Open surgery, in which the entire prostate gland
is removed, is often used as a treatment for prostate cancer but is rarely used
for treatment of BPH.
The Company believes that none of these procedures offers patients,
physicians and payors collectively all of the advantages of the VidaMed TUNA
System and Procedure.
Marketing and Customers
The Company has positioned itself for worldwide distribution of the
VidaMed TUNA System. VidaMed's sales and marketing staff is currently located in
the United States, United Kingdom and Germany where direct distribution takes
place. In the United States, the Company markets the TUNA System through a
network of four VidaMed regional sales managers supported by both independent
dealers and sales representatives. Primarily a network of distributors,
supported by VidaMed staff, cover other countries throughout Asia, Europe and
South America.
Century Medical, Inc. (CMI) paid the Company a total of $1.0 million in
1995 and 1996, for exclusive distribution rights in Japan for a period of five
years commencing with the receipt of Japanese regulatory approval for the TUNA
System. In July 1997, the Japanese Ministry of Health and Welfare approved the
VTS for sale and a reimbursement level of 250,000 Yen for the procedure in
Japan. VidaMed commenced shipments to CMI at that time. The Company also
received an additional one-time, $500,000 royalty. It is estimated that
exclusive of the cost of drug therapy and hospitalization fees, the cost of
treating BPH in Japan is approximately $80 million annually and that there are
approximately 90,000 TURP procedures are being performed each year in Japan.
Key urologists around the world have adopted VidaMed's TUNA Procedure
as a new treatment for symptomatic BPH. The Company believes that the
endorsements made by these early adopters will assist in the U.S. and worldwide
marketing efforts to create acceptance in the urological community. VidaMed will
continue to be represented at all major urology conferences in the United States
and the rest of the world. The Company has prepared a Physician Practice
Building Kit that contains a number of patient awareness and education materials
for urologists to use to expand their medical practice once their state Medical
Director activates the TUNA CPT payment code in their state.
VidaMed is committed to delivering a quality product to its customers
and to reinforce product delivery with excellent customer service and field
support.
Clinical Status
The Company is performing clinical trials of the VidaMed TUNA Procedure
to obtain clinical data to support new indications, to obtain long-term data,
and to gather data in supporting reimbursement approvals in various markets. The
Company began international clinical evaluation of the TUNA Procedure in March
1993 and U.S. trials in November 1994. The Company is currently involved in
clinical trials in Germany, France, and Spain for reimbursement approval and
acceptance within the medical community. Multi-center studies in the U.S. are in
progress to evaluate the ProVu system in the treatment of the median lobe; an
anesthesia study is ongoing to scientifically document the treatment of TUNA in
the office. Several independent studies are ongoing to evaluate the TUNA
procedure to support the expansion of labeling claims, as to how the procedure
is used.
In the clinical trials conducted both in the United States and
internationally, significant relief from BPH symptoms has been observed in the
majority of TUNA patients for whom follow-up data are available. Follow-up data
being collected include urine flow rates and two standard measures of BPH
symptom relief, known as symptom score
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and quality of life score. The Company believes the results to date indicate
that the TUNA System provides clinically significant relief from the symptoms
associated with BPH. To date, these results are based on data published in
peer-reviewed articles and publications in top Urology journals on one-year
follow-ups in the United States. Scientific papers are currently being presented
on U.S. two and three-year data from these initial FDA trials. Three to
four-year follow-up has been published internationally. There can be no
assurance that equivalent results will be achieved over a longer follow-up
period or in a larger patient population, or that the results of clinical trials
will be sufficient to obtain required foreign regulatory and reimbursement
approvals, U.S. state Medicare and local approvals in all states or physician
acceptance.
The Blue Cross Blue Shield TEC committee's positive evaluation of the
TUNA in early 1999 did consider the treatment of the TUNA Procedure in multiple
settings beyond clinical trials. The decision by the committee was based on five
criteria as follows; (i) the technology must have approval from the appropriate
government regulatory bodies, (ii) the scientific evidence must permit
conclusions concerning the effect of the technology on health outcomes, (iii)
the technology must improve the net health outcome, (iv) the technology must be
as beneficial as any established alternatives and (v) the improvement must be
attainable outside the investigating settings.
Manufacturing
During 1998, the Company manufactured the new VTS PROVu for commercial
sale at its facility in Fremont, California. At various assembly stages, each
production lot undergoes thorough testing by trained personnel to ensure
compliance with the Company's stringent specifications. The Company's quality
assurance group independently verifies, at various steps in the manufacturing
cycle, that product fabrication and inspection processes meet the Company's
specifications and applicable regulatory requirements.
In 1998, the Company completed ISO 9001 certification at the Fremont
facility and obtained the necessary CE Mark (European authorization) for the
ongoing sale of VidaMed's products in Europe. Prior to 1998, the Company
manufactured the disposable hand piece at its ISO 9002 registered facility in
the U.K.
Also during the year, the company successfully completed a U.S.
FDA/State of California regulatory audit, which resulted in the Company
obtaining a license to manufacture their product in Fremont.
The Company contracts with a third party manufacturer for the
production of the Generator. In January 1999, the Company began transitioning
the manufacturing of the disposable hand piece to a medical device manufacturer
in the Silicon Valley area.
Research and Development
The Company's research and development efforts are currently focused on
improving the features and reducing both the cost of the TUNA System and the
time it takes to perform a TUNA Procedure. Ongoing research and development
efforts include increasing the range of energy output of the RF generator,
providing of support for clinical trials, interfacing with physicians to develop
product enhancements and developing devices for urological applications in
addition to BPH. The Company's in-house research and development program uses a
network linking CAD/CAM capability and advanced graphic design workstations with
a computerized machine shop. These capabilities allow the Company to produce
molds, custom parts and tooling, enabling rapid prototyping and pre-production
evaluation of devices. All research and development has been fully funded by the
Company. The amounts expensed, in thousands, for 1996, 1997 and 1998
respectively are $5,742, $6,003 an $4,241.
Backlog
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 ship orders after their receipt. Accordingly, the Company does not
anticipate that it will develop a significant backlog in the future.
7
<PAGE>
Patents and Licenses
The Company has been issued 42 United States patents and 40 foreign
patents covering a method of prostate ablation using the VidaMed TUNA System and
the design of the TUNA System. The Company currently has 16 patent applications
pending in the United States and 49 corresponding patent applications pending in
various foreign countries. In addition, the Company holds licenses to certain
technology used in the TUNA System. There can be no assurance that the Company's
issued United States patents, or any patents which may be issued as a result of
the Company's applications, will offer any degree of protection. There can be no
assurance that any of the Company's patents or patent applications will be
challenged, invalidated or circumvented in the future. In addition, there can be
no assurance that competitors, many of which have substantial resources and have
made substantial investments in competing technologies, will not seek to apply
for and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or in
international markets.
The Company has been and may in the future be notified that it may be
infringing patent or other proprietary rights. If infringement is established,
the Company could be required to pay damages and be enjoined from selling the
infringing products or practicing processes. Moreover, if the Company were
unable to alter its products or processes to avoid the infringement claim, it
might be required to obtain licenses and there can be no assurance that
necessary licenses could be obtained on satisfactory terms, if at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors Affecting Results of Operations" - "Dependence of
Proprietary Technology" and "Intellectual Property Litigation Risks."
Employees
As of December 31, 1998, the Company employed 88 individuals on a
full-time basis. Of these, 84 were located in the United States and 4 in Europe.
The Company also has several part-time employees and consultants. The Company's
employees in Europe are covered under standard country services agreements
providing severance pay of one to three months in the event of termination of
employment without cause. None of the Company's employees is covered under
collective bargaining agreements. The Company considers relations with its
employees to be good. With the outsourcing of manufacturing, the headcount has
been reduced to 68 as of February 1, 1999.
Additional Risk Factors
Risk of Inadequate Funding. The Company expects its operating losses to
continue as it continues to expend substantial funds for the expansion of sales
and marketing activities, as well as ongoing clinical trials in support of
regulatory and reimbursement approvals and research and development. The Company
may be required to expend greater than anticipated funds if unforeseen
difficulties arise in the marketing and sales of the VidaMed TUNA System, and in
obtaining necessary regulatory and reimbursement approvals or in other aspects
of the Company's business. Along with existing cash, cash equivalents,
short-term investments and a line of credit together with cash generated from
the future sale of products, the Company will likely require additional debt
and/or equity financing. The Company's future liquidity and capital requirements
will depend upon numerous factors, including actions relating to regulatory and
reimbursement matters and the extent to which the VidaMed TUNA System gains
market acceptance. Any additional financing, if required, may not be available
on satisfactory terms or at all. Future equity financing would result in
dilution to the holders of the Company's Common Stock.
Possible Volatility of Stock Price. The stock market has from time to
time experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. In addition, the market price of the shares of Common Stock is likely to
be highly volatile. Factors such as fluctuations in the Company's operating
results, announcements of technological innovations or new products by the
Company or its competitors, FDA and international regulatory actions, actions
with respect to reimbursement matters, developments with respect to patents or
proprietary rights, public concern as to the safety of products developed by the
Company or others, changes in health care policy in the United States and
internationally, changes in stock market analyst recommendations regarding the
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<PAGE>
Company, other medical device companies or the medical device industry generally
and general market conditions may have a significant effect on the market price
of the Common Stock.
Item 2 - PROPERTIES
The Company's principal facility is located in Fremont, California. The
Fremont facility, a 35,000 square foot facility, serves as corporate
headquarters and is the primary location for research & development activities.
The Fremont facility also has manufacturing space with clean-room capabilities
that were used in 1998 and prior to the outsourcing of the disposable hand-piece
manufacturing in early 1999 (see also Note 12 Subsequent Events included in
Notes to Consolidated Financial Statements). The facility is leased through May
2002. The Company leases two other sales offices, located in Heathfield, England
and Sydney, Australia.
The company believes that its Fremont facility or similar space readily
available in the Silicon Valley area will be sufficient to meet its future
additional space requirements in the United States.
Item 3 - LEGAL PROCEEDINGS
On May 20, 1997, VidaMed filed a complaint against Prosurg, Inc., in
the United States District Court for the Northern District of California
alleging that Prosurg Inc. infringed and induced others to infringe three
VidaMed Patents, U.S. Patent Nos. 5,526,240, 5,531,676, and 5,531,677. On March
20, 1998, at the request of the parties, the Court dismissed without prejudice
all claims relating to U.S. patent Nos. 5,531,676 and 5,531,677.
On September 10, 1998, the Company entered into a settlement agreement
with Prosurg Inc. in which Prosurg Inc. acknowledged that it had infringed and
induced infringement of claim 1 of VidaMed's U.S. Patent 5,526,240 and
acknowledged the validity of claim 1. In the settlement, Prosurg agreed not to
use, sell or distribute Opal, Opal Flex, BEAP, or any other radio frequency
interstitial therapy devices in the U.S. for the treatment of BPH. The
settlement agreement also prevents Prosurg from asking, encouraging, aiding,
abetting, or otherwise soliciting others to use its radio frequency therapy
devices in the treatment of BPH in the U.S. As part of the settlement, Prosurg,
with certain restrictions, will continue to sell radio frequency therapy devices
in the international market place.
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of the year ended December 31, 1998.
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PART II
Item 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the NASDAQ national
market (ticker symbol VIDA) since June 1995. The number of stockholders of
record of the Company's common stock at December 31, 1998 was approximately 288.
The Company has not paid any dividends since its inception and does not intend
to pay any dividends in the foreseeable future. In addition, the Company is
restricted by the terms of its loan agreement with Transamerica Business Credit
Corporation from paying cash dividends without Transamerica's consent.
The following table sets forth the high and low sales prices per share
for the periods indicated, as reported by the NASDAQ national market. The
quotations shown represent inter-dealer prices without adjustment for retail
markups, markdowns, or commissions, and may not necessarily reflect actual
transactions.
1998 1997
Quarter ended High Low High Low
March 31 4 5/8 3 14 6 3/4
June 30 5 3/8 3 9 1/2 4 3/4
September 30 4 15/16 1 7 1/4 2 15/16
December 31 3 3/16 11/16 7 11/16 3 13/16
10
<PAGE>
<TABLE>
Item 6 - SELECTED FINANCIAL DATA
Selected Financial Data
<CAPTION>
Years Ended December 31,
In thousands, except per share data 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net revenues $ 1,028 $ 9,828 $ 3,824 $ 2,621 $ 1,387
Net loss (19,873) (16,470) (13,543) (14,858) (15,895)
Basic and diluted net loss per share (1.10) (1.29) (1.30) (2.68) (13.13)
Shares used in computing basic
and diluted net loss per share 18,133 12,786 10,382 5,545 1,211
Total assets 14,132 16,965 12,847 18,816 5,926
Long-term debt and
capital lease obligations,
less current portion 1,785 22 1,305 2,757 1,820
Accumulated deficit (88,219) (68,346) (51,876) (38,333) (23,475)
Stockholders' equity
(Net capital deficiency) 7,323 9,227 3,701 6,755 (1,048)
</TABLE>
11
<PAGE>
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
VidaMed, Inc. ("VidaMed" or the "Company") should be read in conjunction with
the Consolidated Financial Statements and the related Notes thereto included
herein.
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 BPH. The Company commenced international
sales of the VidaMed TUNA System in late 1993 and United States sales in October
1996. Revenues for the years ended December 31, 1998, 1997 and 1996 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 is published in the Federal Register and is
part of the Medicare Physician Fee Schedule as of calendar year 1998. VidaMed
sells its products in the U.S. to individual and group urology practices and
hospitals. The Company markets the VidaMed TUNA System through a network of four
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 as it continues to commit
substantial resources to expand marketing and sales activities, fund clinical
trials in support of regulatory and reimbursement approvals, and fund research
and development. The Company's future profitability will be dependent upon,
among other factors, market acceptance of the VidaMed TUNA Procedure and
availability of third-party reimbursement for procedures performed with the TUNA
System.
Although the Company has received FDA clearance to market the TUNA System for
treatment of symptoms associated with BPH and has commenced marketing in the
United States, there can be no assurance that the TUNA System will be deemed
clinically or cost effective by health care providers and payors, superior to
other current and emerging methods for treating BPH, or that the TUNA System
will achieve significant market acceptance in the United States. Furthermore,
determinations of reimbursement of the VidaMed TUNA Procedure by private and
governmental health payors are made by such payors and their medical directors
independent of the FDA approval. Accordingly, there can be no assurance that the
TUNA Procedure will be reimbursed at adequate levels in the United States under
either private or governmental healthcare payment systems. Availability of
Medicare reimbursement for the TUNA Procedure may be dependent on the
publication of clinical data relating to the cost-effectiveness and duration of
the TUNA therapy. Inadequate reimbursement for the TUNA Procedure could
adversely effect market acceptance of the TUNA System. Failure of the TUNA
Procedure to achieve market acceptance in the United States as well as the
impact of competitive products and pricing and other risks could have a material
adverse effect on business, financial condition and results of operations of the
Company.
Results of Operations
Net revenues for 1998 of $1.0 million decreased $8.8 million or 90% from $9.8
million in 1997. Revenues in 1997 increased 157% from $3.8 million in 1996.
Adjusting for the impact of the delay in office-based Medicare reimbursement,
the Company increased sales reserves by $2.7 million in the third quarter of
1998 so that net revenues for the year were $1.0 million. Excluding the sales
reserve, revenues were $3.7 million in 1998, a decrease of $6.1 million or 62%
from $9.8 million in 1997. The decrease in revenue for the year 1998 compared to
1997, is due to (i) license fees and an initial stocking order received in 1997
from our Japanese distributor following Japanese approval of
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<PAGE>
the TUNA System, (ii) domestic office sales (as opposed to hospital sales) of
the TUNA System in 1997 in anticipation of the purchase of TUNA Systems being
Medicare reimbursable as a result of the Company's CPT Code becoming effective
on January 1, 1998, (iii) an overall high sales volume in early 1997 to satisfy
pent-up demand following the 1996 FDA approval of the VidaMed TUNA System,
including a sale of 39 systems to Tenet HealthCare Systems in the first quarter
of 1997, (iv) the difficulties experienced in 1998 obtaining Medicare
reimbursement for TUNA Systems sold and TUNA Procedures performed in states
which have not yet either approved Medicare coverage for the TUNA System, or
have only approved coverage for hospital use of the TUNA System and (v) the $2.7
million sales reserve. The sales reserve is a direct result of sales efforts in
the office-based and Ambulatory Surgery Center (ASC) markets, where VidaMed's
TUNA System is uniquely suited, not providing the anticipated return due to the
difficulties of Medicare reimbursement discussed above. Medicare coverage for
supplies and devices in the office-based and ASC markets was 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 unlikely to go into effect
before mid-2000. As a result of Medicare coverage delays, the Company
established the third quarter 1998 reserve for all office-based and ASC sales.
Current Medicare reimbursement for the TUNA hand piece and related equipment and
supply costs extends only to procedures performed in a hospital. Reimbursement
follows the "reasonable cost basis" method, whereby the hospital is reimbursed
for its fully burdened costs for treating Medicare patients. As stated above,
Medicare coverage for supplies and devices in the office-based and ASC markets
is not expected to be effective in the near future. If the approval for Medicare
reimbursement at the ASC level is not approved in the year 2000, this could
result negatively towards the Company's future revenues.
VidaMed began 1998 with Medicare reimbursement available for hospital based
procedures under CPT code 53852 in 4 states comprising 2% of the men over 50
years of age (TUNA's target patient population). By the 4th quarter of 1998,
this expanded to 14 states, covering 17% of men over 50. While this has
increased to 29 states and 51% of the over 50 male population in January 1999,
including California and Florida, for the Company to achieve significant
increases in sales volume, it may be necessary to obtain Medicare reimbursement
approvals in all 50 states, or at least in all states with significant
population centers, particularly since sales agreements with major healthcare
providers are often on a national, or system-wide, basis. The Company has
several initiatives underway to facilitate the Medicare reimbursement approval
process, including working in cooperation with state Medicare Medical Directors
and important technical bodies, such as the Blue Shield Technical Evaluation
Committee, as well as ongoing publication of its long term clinical studies.
There can be no assurance that the Company will receive additional Medicare
reimbursement approvals in major states in a timely manner, and the failure to
receive such approvals would have a material adverse effect on the business,
financial condition and results of operations of the Company.
The increase in net revenues and product sales between 1997 and 1996 was the
result of United States sales of the VidaMed TUNA System (VTS) Generator and
Hand Piece. Of the $9.8 million in 1997 revenues, $8.0 million was attributable
to U.S. product sales. Of the $3.8 million in 1996 revenues, $2.7 million was
attributed to U. S. product sales, primarily in the fourth quarter following FDA
clearance.
Cost of product sold in 1998 decreased to $3.1 million from $7.3 million in
1997. Cost of product sold in 1997 increased to $7.3 million from $3.7 million
in 1996. Cost of product sold for 1997 includes a one-time charge of $2.1
million related to the closure of VidaMed's manufacturing facility in the United
Kingdom. The increase in 1997 is due primarily to an increase in product sales.
Due to the low sales in 1998, gross margin was negative $2.1 in 1998. Gross
margin was positive $2.6 million in 1997 as a result of higher product sales. In
1996, the gross margin was relatively flat at a positive $145,000 due in part to
high start-up costs and low sales with FDA approval late in the year.
Research and development expenses (R&D) include 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 29% to
$4.2 million in 1998 from $6.0 million in 1997, and increased 5% in 1997 from
$5.7 million in 1996. The difference from the year ended 1998 to 1997, is
primarily due to the investment in 1997 in development efforts on the VidaMed
TUNA System RF generator, cost savings from the closure of the facility in the
United Kingdom and with publication of clinical results, associated clinical
13
<PAGE>
trial costs were significantly reduced. The increase in 1997 when compared to
1996, is primarily due to the completion of the VidaMed TUNA System disposable
product development in 1997.
Selling, general and administrative (SG&A) expenses increased 3% to $13.5
million in 1998 from $13.0 million in 1997, and 65% from $7.9 million in 1996.
The increase in 1998 from 1997 was due primarily to the transition to a new
chief executive officer and a realignment of the Company's critical sales
positions with the addition of a new executive vice president of worldwide sales
and marketing. Spending in SG&A in both periods included start-up and launch
costs for the latest product releases and costs associated with the continued
efforts to support domestic and international sales and costs to secure global
reimbursement for the TUNA Procedure. During 1998, costs were incurred to
enhance the existing sales and field reimbursement force. Costs incurred in
1997, including a co-op advertising agreement with Tenet Health System remain
accrued (approximately $309,000) and available for programs at the individual
Tenet hospitals as Medicare reimbursement is approved in the state where the
Tenet hospitals are located. The increase in 1997 over 1996 is primarily due to
increased sales and marketing expense incurred in the continuing product
introduction of the VidaMed TUNA System in the U.S. Significant sales and
marketing expenses included commissions, advertising expenses, trade shows and
physician workshops.
Interest and other income increased to $523,000 in 1998 from $345,000 in 1997,
and decreased from $659,000 when compared to 1996. The increase in 1998 is a
result of increased investment balances from proceeds from private placements in
1998 and 1997. The decrease in 1997 is due to lower investment balances as the
Company used the capital raised during VidaMed's initial public offering in
1995. Interest and other expense increased in 1998 to $587,000 from $359,000 in
1997, due to the addition of the bank line, the revolving credit line and the
equipment term loan. The decrease in 1997, from $715,000 in 1996, was due to
lower interest expense as a result of lower notes payable and capital lease
balances.
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 may
fluctuate as a result of several factors, including actions relating to
regulatory and reimbursement matters, results of clinical trials, the extent to
which the TUNA System gains market acceptance, varying pricing promotions,
volume discounts to customers, introduction of new products and the competitive
introduction of alternative therapies for BPH. Operating expenses may fluctuate
as a result of several factors, including the timing of expansion of sales and
marketing activities, costs of clinical activities, R&D and SG&A expenses
associated with the potential growth of VidaMed's organization. As a result of
these factors there can be no assurance as to when or whether the Company will
achieve profitability. If profitability is achieved, there can be no assurance
such profitability will continue in the future.
Liquidity and Capital Resources
VidaMed has financed its operations primarily through the public and private
sale of equity securities and, to a lesser extent, through borrowings, equipment
lease financing, product sales, distribution rights fees and government grants.
During each of the years ended December 31, 1998, 1997 and 1996, VidaMed
consumed cash in operations of $17.9 million, $15.7 million and $13.3 million,
respectively. The cash used in operations was due primarily to the expenses
associated with the marketing and sale of the VidaMed TUNA System, R&D
activities including clinical trials and increased SG&A expenses to support
increased operations.
In January 1998, the Company entered into a financing agreement with Silicon
Valley Bank, including a $1.5 million 42-month term loan to cover the cost of
establishing the manufacturing facility in California and a $3.0 million working
capital bank line.
In October 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 essentially all of 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 December 31, 1998, the
term loan had funded in full at a rate of 12% per year and replaced the open
balance of the $1.5 million 42-month term loan with Silicon Valley Bank. Based
on the accounts receivable balance as
14
<PAGE>
of December 31, 1998, the Company was eligible to borrow, and has borrowed,
$115,000 against the revolving accounts receivable-based credit line at a rate
of 9.75% per year. The revolving credit line has a minimum interest payment of
$96,000 per year. In conjunction with the financing, Transamerica received a
5-year warrant to purchase 55,000 shares of VidaMed common stock at a price of
$0.89 per share.
At December 31, 1998 the Company's cash and cash equivalents increased $1.4
million to $9.4 million, compared to $8.0 million at December 31, 1997. The
increase is due primarily to a private sale of the Company's securities in 1998
totaling approximately $16.7 million offset by operating expenses.
VidaMed believes that the Transamerica financing, combined with its current
capital resources and cash generated from the sale of products, will be
sufficient to enable the Company to meet its operating and capital requirements
during the fiscal year ending December 31, 1999. Its ability to fund operating
and capital requirements assumes revenues to double over 1998 levels based on
new sales and marketing programs focussing on usage rather than capital
equipment sales. (As of February 1999, the Company is achieving its U.S. usage
plan and world-wide revenue plan. However, there can be no assurance that the
goals established under such plans will continue to be achieved.) The Company's
existing inventory of generators is sufficient to support this program without
an immediate need to incur costs associated with manufacturing additional
generators. Funds currently available for operations and capital requirements
could become insufficient, however, if the product is not accepted in the
marketplace and the Company is not able to achieve its usage and revenue plan.
Further, the Company's plans assume reimbursement by additional key states
during 1999. Delays of Medicare coverage in these key states or other reasons
could also cause the Company's sales to fall below projections, and if expenses
exceed budgeted amounts, the Company would require additional funding. In
summary, the Company may be required to expend greater than anticipated funds if
unforeseen difficulties arise in the marketing and sales of the VidaMed TUNA
System, in obtaining necessary regulatory and reimbursement approvals or in
other aspects of the Company's business. In such case, the Company will likely
require additional debt and/or equity financing. There can be no assurance that
additional financing, if required, will be available on satisfactory terms or at
all. Future equity financing would result in dilution to the holders of the
Company's Common Stock. If financing were not available, management would need
to reevaluate and revise current operating plans as well as reduce spending in
general. Should such a situation arise, management has formulated a contingent
operating plan, which management believes is achievable, to sustain the
Company's operations at least through the end of 1999.
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 VidaMed, Inc. and its vendors and customers, will need to comply with
the Y2K requirements. The Company presently believes that as a byproduct of
normal business system modifications and upgrades and the short length of time
the Company has been in operation, the Y2K issue should not have a material
effect on the Company's current financial position, liquidity or results of
operations. However, this does not completely prevent the possibility of
problems arising related to the Y2K that could have a material impact on
operations of the Company.
The Company is aware of the Y2K issue and has been proactive in addressing the
issue internally and externally. The Company's primary software system is
currently Y2K compliant. The Company does not depend on in-house custom systems
and generally purchases off the shelf software from reputable vendors who have
tested their software for Y2K compliance. The Y2K issue is being considered for
all future software purchases. Although the Company believes the Y2K issue will
not pose material operational problems for its computer systems, there can be no
assurance that problems arising from the Y2K issue will be completely
eliminated.
The Company is evaluating significant suppliers and large customers systems to
determine the extent to which the Company's interface with these systems is
vulnerable to the Y2K issue. This process is in progress and should be completed
by early 1999. Preliminarily, the Company has 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-
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<PAGE>
2000, at which time, office-based payments will begin their three year phase-in.
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
VidaMed's 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."
The Company has not and does not expect to have material costs associated with
the Y2K issues.
The Company believes it has an effective program in place to resolve Y2K issues
in a timely manner. The Company also has contingency plans for certain critical
applications and is working on such plans for others. These contingency plans
involve, among other actions, manual workarounds, increasing inventories, and
adjusting staffing strategies. In the event that the Company does not completely
resolve all of the Y2K issues, the Company's business operations could be
adversely affected, although the resulting costs and loss of business cannot be
reasonably estimated at this time.
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 1997 was $2.1 million recorded in Cost of
Products Sold. The remaining accrual balance as of December 31, 1998 is $252,000
and consists mainly of a grant repayment due over the next twelve months. See
also Footnote 10 to the financial statements.
Factors Affecting Results of Operations
Limited Operating History; History of Losses and Expectation of Future Losses;
Fluctuations in Operating Results. The Company has a limited history of
operations. Since its inception in July 1992, the Company has been primarily
engaged in research and development of the VidaMed TUNA System. The Company has
experienced significant operating losses since inception and, as of December 31,
1998, had an accumulated deficit of $88.2 million.
The development and commercialization by the Company of the TUNA System and
other new products, if any, will require substantial product development,
clinical, regulatory, marketing and other expenditures. The Company expects its
operating losses to continue as it continues to expend substantial resources in
expanding marketing and sales activities, funding clinical trials in support of
regulatory and reimbursement approvals and research and development. There can
be no assurance that the TUNA System will be successfully commercialized or that
the Company will achieve significant revenues from either international or
domestic sales. As a result, there can be no assurance that the Company will
achieve or sustain profitability in the future. Results of operations may
fluctuate significantly from quarter to quarter and will depend upon numerous
factors, including actions relating to regulatory and reimbursement matters,
progress of clinical trials, the extent to which the TUNA System gains market
acceptance, varying pricing promotions and volume discounts to distributors,
introduction of alternative therapies for BPH and competition.
Uncertainty of Market Acceptance. VidaMed's TUNA Procedure represents a new
therapy for BPH, and there can be no assurance that the TUNA System will gain
any significant degree of market acceptance among physicians, patients and
health care payors, even if necessary international and United States
reimbursement approvals are obtained. Physicians will not recommend the TUNA
Procedure unless they conclude, based on clinical data and other factors, that
it is an attractive alternative to other methods of BPH treatment, including
more established methods such as TURP and drug therapy. In particular,
physicians may elect not to recommend the TUNA Procedure until such time, if
any, as the duration of the relief provided by the procedure has been
established. Broad use of the TUNA System will require the training of numerous
physicians, and the time required to complete such training could result in a
delay or dampening of
16
<PAGE>
market acceptance. Even with the clinical efficacy of the TUNA Procedure
established, physicians may elect not to recommend the procedure unless
acceptable reimbursement from health care payors is available. Health care payor
acceptance of the TUNA Procedure will require evidence of the cost effectiveness
of TUNA as compared to other BPH therapies, which will depend in large part on
the duration of the relief provided by the TUNA Procedure. A thorough analysis
of multi-year patient follow-up data will be necessary to assess the durability
of the relief provided by TUNA therapy. Patient acceptance of the procedure will
depend in part on physician recommendations as well as other factors, including
the degree of invasiveness and rate and severity of complications associated
with the procedure as compared to other therapies.
Uncertainty Relating to Third Party Reimbursement. The Company's success will be
dependent upon, among other things, its ability to obtain satisfactory
reimbursement from health care payors for the TUNA Procedure. In the United
States and in international markets, third party reimbursement is generally
available for existing therapies used for treatment of BPH. In the United
States, third party reimbursement for the TUNA Procedure will be dependent upon
decisions by the local Medicare Medical Directors to provide coverage for the
TUNA Procedure based on the CPT codes, as well as by individual health
maintenance organizations, private insurers and other payors.
Reimbursement systems in international markets vary significantly by country.
Many international markets have governmentally managed health care systems that
govern reimbursement for new devices and procedures. In most markets, there are
private insurance systems as well as governmentally managed systems.
Regardless of the type of reimbursement system, the Company believes that
physician advocacy of the VidaMed TUNA System will be required to obtain
reimbursement. Availability of reimbursement will depend not only on the
clinical efficacy and direct cost of the TUNA Procedure, but also on the
duration of the relief provided by the procedure. In the United States, TUNA
Procedures are currently being reimbursed by certain private payors. However,
due to the age of the typical BPH patient, Medicare reimbursement is
particularly critical for widespread market acceptance of the TUNA Procedure in
the United States. CPT code number 53852, covering the physician fee component
of the TUNA Procedure, was included in the 1998 edition of CPT codes, which
became effective January 1, 1998. If adopted by local Medicare Medical
Directors, this code should enhance the reimbursement process for physicians
performing the VidaMed TUNA Procedure in an outpatient hospital environment.
During 1998, the CPT code was active in less than half the states. Further,
national Medicare reimbursement of TUNA Procedure costs in an office setting at
an adequate level will require completion by the Health Care Financing
Administration ("HCFA") of a review of the cost and efficacy of the TUNA
Procedure. Reimbursement in both the office-based and ASC systems are currently
delayed while Medicare reviews its Y2K compliance issues. Due to this situation,
there can be no assurance that office-based and ASC systems will generate
significant revenue for the Company in the United States until this issue is
resolved. In addition, there can be no assurance that reimbursement will be
available in international markets, under either governmental or private
reimbursement systems at adequate levels, or that physicians will support
reimbursement for the VidaMed TUNA Procedure. Furthermore, the Company could be
adversely affected by changes in reimbursement policies of governmental or
private health care payors. Failure by physicians, hospitals and other users of
the Company's products to obtain sufficient reimbursement from health care
payors, including in particular outpatient hospital Medicare reimbursement in
the United States, or adverse changes in governmental and private third party
payors' policies toward reimbursement for procedures employing the Company's
products would have a material adverse effect on the Company's business,
financial condition and results of operations.
Competition and Technological Advances. Competition in the market for treatment
of BPH comes from invasive therapies, such as TURP, and noninvasive courses of
action, such as drug therapy and watchful waiting. Competition in the market for
minimally invasive devices to treat BPH has increased significantly and is
expected to continue to be intense. Johnson and Johnson's Indigo System received
FDA clearance for United States commercial sales of an interstitial laser system
for BPH treatment in 1997 and Boston Scientific Corporation holds U.S. and
European distribution rights for a microwave system for BPH treatment
manufactured by Urologix. The above mentioned Company's competitors have
significantly greater financial resources which allows them to have greater
technical, research, marketing, sales, distribution and other resources than the
Company. There can be no assurance that the Company's competitors will not
succeed in developing or marketing technologies and products that are more
effective or
17
<PAGE>
commercially attractive than any which are being developed by the Company. Such
developments could have a material adverse effect on the Company's business,
financial condition and results of operations.
Any product developed by the Company that gains regulatory approval would have
to compete for market acceptance and market share. An important factor in such
competition may be the timing of market introduction of competitive products.
Accordingly, the relative speed with which the Company can develop products,
complete clinical testing and regulatory approval processes, gain reimbursement
acceptance and supply commercial quantities of the product to the market are
expected to be important competitive factors. The Company expects that
competition in the BPH field will also be based, among other things, on the
ability of the therapy to provide safe, effective and lasting treatment, cost
effectiveness of the therapy, physician, health care payor and patient
acceptance of the procedure, patent position, marketing and sales capability,
and third party reimbursement policies.
Government Regulation. The FDA under the Federal Food, Drug, and Cosmetic Act
("FDC Act") regulates the Company's TUNA System in the United States as a
medical device. Pursuant to the FDC Act, the FDA regulates the manufacture,
distribution and production of medical devices in the United States.
Noncompliance with applicable requirements can result in fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant approval for devices, and
criminal prosecution. Medical devices are classified into one of three classes,
class I, II or III, on the basis of the controls necessary to reasonably ensure
their safety and effectiveness. The safety and effectiveness can be assured for
class I devices through general controls (e.g., labeling, pre-market
notification and adherence to GMPs) and for class II devices through the use of
special controls (e.g., performance standards, post-market surveillance, patient
registries, and FDA guidelines). Generally, class III devices are those which
must receive pre-market approval by the FDA to ensure their safety and
effectiveness (e.g., life-sustaining, life-supporting and implantable devices,
or new devices which have not been found substantially equivalent to legally
marketed devices).
Before a new device can be introduced into the market, the manufacturer must
generally obtain FDA clearance through either a 510(k) notification or a
pre-market approval ("PMA"). A 510(k) clearance will be granted if the submitted
data establishes that the proposed device is "substantially equivalent" to a
legally marketed class I or II medical device, or to a class III medical device
for which the FDA has not called for a PMA. The FDA may determine that the
proposed device is not substantially equivalent, or that additional data is
needed before a substantial equivalence determination can be made. A "not
substantially equivalent" determination, or a request for additional data, could
delay the market introduction of new products that fall into this category and
could have a materially adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will obtain 510(k) clearance for any device for which it files a future 510(k)
notification. Furthermore, there can be no assurance that the Company will not
be required to submit a PMA application for any device, which it may develop in
the future. For any of the Company's products that are cleared through the
510(k) process, including the Company's TUNA System, modifications or
enhancements that could significantly affect safety or efficacy will require new
510(k) submissions.
Sales of medical devices outside the United States are subject to regulatory
requirements that vary widely from country to country. The time required to
obtain approval for sale in a foreign country may be longer or shorter than that
required for FDA approval and the requirements may differ. VidaMed has received
regulatory approvals where required for commercial sale of the TUNA System in
all major international markets. The Company has received certifications that
allow the Company to affix the CE mark to the VidaMed TUNA System, permitting
the Company to commercially market and sell the TUNA System in all countries of
the European Economic Area. The Fremont facility is currently qualified under
FDA good manufacturing practice regulations and under ISO 9000 standards. In
order to maintain these approvals, the Company is subject to periodic
inspections. Additional product approvals from foreign regulatory authorities
may be required for international sale of the Company's general electrosurgical
device for which a FDA 510(k) notification has been filed. Failure to comply
with applicable regulatory requirements can result in loss of previously
received approvals and other sanctions and could have a material adverse effect
on the Company's business, financial condition and results of operations.
18
<PAGE>
The Company's distributor in Japan, Century Medical, Inc., is responsible for
management of clinical trials and obtaining regulatory and reimbursement
approval for the TUNA System. Such regulatory approval was received from the
Japanese Ministry of Health and Welfare in July 1997 for the previous generation
product, while the new generator and PROVu system are currently in the approval
process. Failure to obtain timely approval of PROVu and the new generator or
obtain market acceptance for the TUNA Procedure in Japan could preclude the
commercial viability of the Company's products in Japan and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Limited Manufacturing Experience; Scale-Up Risk; Product Recall Risk. VidaMed
purchases components used in the TUNA System from various suppliers and relies
on single sources for several components. The Company has limited experience in
manufacturing its products in commercial quantities in the U.S.A. Delays
associated with any future component shortages, particularly as the Company
scales up its manufacturing activities in support of commercial sales, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Manufacturers often encounter difficulties in scaling up production of new
products, including problems involving production yields, product recalls,
quality control and assurance, component supply and lack of qualified personnel.
As the Company has begun outsourcing the manufacture of the disposable
cartridge, such difficulties could arise, resulting in a material adverse effect
on its business, financial condition and results of operations.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
FDA including record keeping requirements and reporting of adverse experience
with the use of the device. The Company's manufacturing facilities are subject
to periodic inspection by FDA, certain state agencies and foreign regulatory
agencies. VidaMed requires that its key suppliers comply with International
Standards for production of medical devices, and assures through detailed,
in-depth audits, that the Company's suppliers meet both recognized standards and
the Company's own stringent quality standards. The Company's two key
manufacturing subcontractors are ISO9001/EN46001 certified. However, failure of
VidaMed or its suppliers to comply with regulatory requirements could have a
material adverse effect on the Company's business. There can be no assurance
that the Company will not be required to incur significant costs to comply with
laws and regulations in the future or that laws or regulations will not have a
material adverse effect upon the Company's business.
Uncertainty Regarding Patents and Protection of Proprietary Technology. The
Company's success depends in part on the establishment and maintenance of
proprietary technologies. The Company relies on a combination of patent,
copyright and trade secret law to protect the technology in its products. The
Company holds numerous U.S. and foreign patents and patent applications relating
to its products. There can be no assurance that the steps taken by the Company
to protect its technology will be adequate to prevent misappropriation of its
technology by third parties, or that third parties will not be able
independently to develop similar technology.
Intellectual Property Litigation Risks. The medical device industry has been
characterized by extensive litigation regarding patents and other intellectual
property rights, and companies in the medical device industry have employed
intellectual property litigation to gain a competitive advantage. The Company is
aware of patents held by other participants in the BPH market, and there can be
no assurance that the Company will not in the future become subject to patent
infringement claims and litigation or United States Patent and Trademark Office
("USPTO") interference proceedings. The defense and prosecution of intellectual
property suits, USPTO interference proceedings and related legal and
administrative proceedings are both costly and time consuming. Litigation may be
necessary to enforce patents issued to the Company, to protect trade secrets or
know-how owned by the Company or to determine the enforceability, scope and
validity of the proprietary rights of others.
Any litigation or interference proceedings could result in substantial expense
to the Company and significant diversion of effort by the Company's technical
and management personnel. An adverse determination in litigation or interference
proceedings to which the Company may become a party could subject the Company to
significant liabilities to third parties or require the Company to seek licenses
from third parties. Although patent and intellectual property disputes in the
medical device area have often been settled through licensing or similar
arrangements, costs associated with such
19
<PAGE>
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms or at all. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent the Company from manufacturing and
selling its products, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
In addition to patents, the Company relies on trade secrets and proprietary
know-how, which it seeks to protect, in part, through proprietary information
agreements with employees, consultants and other parties. The Company's
proprietary information agreements with its employees and consultants contain
industry standard provisions requiring such individuals to assign to the Company
without additional consideration any inventions conceived or reduced to practice
by them while employed or retained by the Company, subject to customary
exceptions. There can be no assurance that proprietary information agreements
with employees, consultants and others will not be breached, that the Company
would have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known to or independently developed by competitors.
Rights to Founder's Inventions Limited to Urology. The proprietary information
agreement between the Company and Stuart D. Edwards, one of the Company's
founders, obligates Mr. Edwards to assign to the Company his inventions and
related intellectual property only in the field of urology. Mr. Edwards has
assigned to Rita Medical Systems, Inc. ("RITA") his inventions in the cancer
field. Mr. Edwards has conceived of, and may continue to conceive of, various
medical device product concepts for other fields outside of urology, including
certain product concepts for the treatment of snoring and sleep apnea that have
been assigned to an unrelated third party and certain product concepts in the
gynecology field that have been licensed to another unrelated third party. Such
party also has an option to purchase all future technology developed by Mr.
Edwards in the gynecology field. Product concepts outside of urology developed
by Mr. Edwards will not be owned by or commercialized through VidaMed, and
VidaMed will have no rights or ownership interests with respect thereto.
20
<PAGE>
Risks Relating to RITA. The Company has entered into a cross license agreement
with RITA, formerly ZoMed International, Inc. Under the cross license, RITA has
the right to use VidaMed technology in the cancer field and VidaMed has the
right to use RITA technology in the treatment of Urological diseases and
disorders. The cross license between VidaMed and RITA allows both companies to
develop products for treatment of prostate cancer and cancers of the lower
urinary tract, and VidaMed and RITA may therefore become competitors in this
field.
Product Liability Risk; Limited Insurance Coverage. The business of the Company
entails the risk of product liability claims. Although the Company has not
experienced any product liability claims to date, any such claims could have an
adverse impact on the Company. The Company maintains product liability insurance
and evaluates its insurance requirements on an ongoing basis. There can be no
assurance that product liability claims will not exceed such insurance coverage
limits or that such insurance will be available on commercially reasonable terms
or at all.
ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
21
<PAGE>
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
VidaMed, Inc.
Consolidated Balance Sheets
(In thousands except share and per share amounts)
<CAPTION>
December 31,
1998 1997
-------- --------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 9,384 $ 8,026
Accounts receivable, net of allowance (1998-$3,540, 1997-$1,059) 228 3,644
Inventory 1,228 1,512
Amount prepaid to contract manufacturer 724 250
Other current assets 455 680
-------- --------
Total current assets 12,019 14,112
Property and equipment, net 1,797 2,647
Other assets, net 316 206
-------- --------
Total assets $ 14,132 $ 16,965
======== ========
Liabilities and stockholders' equity
Current liabilities:
Notes payable, current portion $ 764 $ 480
Accounts payable 338 1,536
Accrued professional fees 317 559
Accrued clinical trial costs 431 372
Accrued and other liabilities 2,362 2,311
Accrued advertising costs 309 309
Accrued interest payable -- 422
Restructuring accrual 252 1,000
Current portion of long-term debt and obligations
under capital leases 22 116
Deferred revenue 229 611
-------- --------
Total current liabilities 5,024 7,716
Notes payable and capital leases, long-term portion 1,785 22
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; issuable
in series, 5,000,000 shares
authorized; none outstanding at December
31, 1998 and 1997
Common stock, $.001 par value, 30,000,000 shares authorized;
19,926,656 and 15,203,401 shares issued and
outstanding at December 31, 1998
and 1997, respectively 20 15
Additional paid-in-capital 95,727 77,789
Notes receivable from stockholders (205) (205)
Deferred compensation -- (26)
Accumulated deficit (88,219) (68,346)
-------- --------
Total stockholders' equity 7,323 9,227
-------- --------
Total liabilities and stockholders' equity $ 14,132 $ 16,965
======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
22
<PAGE>
<TABLE>
VidaMed, Inc.
Consolidated Statements of Operations
(In thousands except share and per share amounts)
<CAPTION>
Years Ended December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Product sales, net $ 589 $ 9,065 $ 3,510
License fees, grant and other revenue 439 763 314
------------ ------------ ------------
Net revenues 1,028 9,828 3,824
------------
Cost of Products Sold 3,130 7,261 3,679
------------ ------------ ------------
Gross Profit (loss) (2,102) 2,567 145
------------
Operating Expenses:
Research and development 4,241 6,003 5,742
Selling, general and administrative 13,466 13,020 7,890
------------ ------------ ------------
Total operating expenses 17,707 19,023 13,632
------------ ------------ ------------
Loss from operations (19,809) (16,456) (13,487)
Interest and other income 523 345 659
Interest and other expense (587) (359) (715)
------------ ------------ ------------
Net loss $ (19,873) $ (16,470) $ (13,543)
============ ============ ============
Basic and diluted net loss per share $ (1.10) $ (1.29) $ (1.30)
============ ============ ============
Shares used in computing basic and diluted
net loss per share 18,133,000 12,786,000 10,382,000
============ ============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
23
<PAGE>
<TABLE>
VidaMed, Inc.
Statements of Stockholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996
<CAPTION>
Notes Accumulated
Additional Common Receivable Other Total
Common Paid-In Stock From Deferred Accumulated Comprehensive Stockholders'
Stock Capital Warrant Stockholders Compensation Deficit Income Equity
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 9 45,373 -- (85) (219) (38,333) 10 6,755
Exercise of options to purchase 236,013 -- -- -- -- -- -- -- --
shares of common stock -- 491 -- (120) -- -- -- 371
Issuance of 59,716 shares of common -- -- -- -- -- -- -- --
stock under the employee stock
purchase plan -- 355 -- -- -- -- -- 355
Conversion of convertible notes into
common stock -- -- -- -- -- -- -- --
Common Stock 2 9,676 -- -- -- -- -- 9,678
Amortization of deferred compensation -- -- -- -- 96 -- -- 96
Net loss -- -- -- -- -- (13,543) -- (13,543)
Unrealized investment loss -- -- -- -- -- -- (11) (11)
-------
Total comprehensive loss -- -- -- -- -- -- -- (13,554)
-------------------------------------------------------------------------------------------
Balances at December 31, 1996 11 55,895 0 (205) (123) (51,876) (1) 3,701
Exercise of options to purchase 96,106 -- -- -- -- -- -- -- --
shares of common stock -- 251 -- -- -- -- -- 251
Issuance of 4,157,814 shares of common --
stock, net of offering costs
of $774,000 4 21,552 -- -- -- -- -- 21,556
Issuance of 21,039 shares of common -- -- -- -- -- -- -- --
stock under the employee stock
purchase plan -- 91 -- -- -- -- -- 91
Amortization of deferred compensation -- -- -- -- 97 -- -- 97
Net loss -- -- -- -- -- (16,470) -- (16,470)
Unrealized investment gain -- -- -- -- -- -- 1 1
-------
Total comprehensive loss -- -- -- -- -- -- -- (16,469)
-------------------------------------------------------------------------------------------
Balances at December 31, 1997 15 77,789 0 (205) (26) (68,346) 0 9,227
Exercise of options to purchase 36,386 -- -- -- -- -- -- -- --
shares of common stock -- 83 -- -- -- -- -- 83
Issuance of 53,970 shares of common -- -- -- -- -- -- -- --
stock under the employee stock
purchase plan -- 195 -- -- -- -- -- 195
Issuance of 4,340,004 shares of common -- -- -- -- -- -- -- --
stock, net of offering costs
of $639,000 5 16,712 -- -- -- -- -- 16,717
Issuance of 292,895 shares of new
common stock -- 948 -- -- -- -- -- 948
Amortization of deferred compensation -- -- -- -- 26 -- -- 26
Net loss -- -- -- -- -- (19,873) -- (19,873)
-------
Total comprehensive loss -- -- -- -- -- -- -- (19,873)
-------------------------------------------------------------------------------------------
Balances at December 31, 1998 20 95,727 0 (205) 0 (88,219) 0 7,323
============================================================================================
<FN>
See accompanying notes
</FN>
</TABLE>
24
<PAGE>
<TABLE>
VidaMed, Inc.
Consolidated Statements of Cash Flows
(In thousands)
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(19,873) $(16,470) $(13,543)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,489 1,369 1,444
Other -- -- 26
Changes in assets and liabilities:
Accounts receivable 3,416 (1,231) (2,285)
Inventory 284 (65) (102)
Other current assets 225 (15) (156)
Prepaid contract manufacturer (474) (250) --
Other assets (110) 2 27
Accounts payable (1,198) 290 759
Accrued professional fees (242) 61 161
Accrued clinical trial costs 59 (610) 4
Accrued interest payable (422) 143 150
Accrued advertising costs -- (309) --
Accrued restructuring cost (748) 1,000 --
Accrued and other liabilities 51 152 551
Deferred revenue (382) 241 (312)
-------- -------- --------
Net cash used in operating activities (17,925) (15,692) (13,276)
-------- -------- --------
Cash flows from investing activities:
Expenditures for property and equipment (639) (1,757) (693)
Purchases of short-term investments -- -- (11,788)
Proceeds from maturities of short-term investments -- 1,977 17,810
-------- -------- --------
Net cash provided by (used in) investing activities (639) 220 5,329
-------- -------- --------
Cash flows from financing activities:
Principal payments under capital leases (104) (474) (693)
Principal payments of long-term debt (12) (741) (22)
Principal payments of notes payable (2,046) (1,064) (3,650)
Net proceeds from issuance of long-term debt -- -- 100
Net proceeds from issuance of notes payable
and convertible notes 4,115 -- 9,678
Net cash proceeds from issuance of common stock 17,969 21,898 726
-------- -------- --------
Net cash provided by financing activities 19,922 19,619 6,139
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,358 4,147 (1,808)
Cash and cash equivalents at the beginning
of the period 8,026 3,879 5,687
-------- -------- --------
Cash and cash equivalents at the end of the period $ 9,384 $ 8,026 $ 3,879
======== ======== ========
Supplemental schedule of noncash investing and financing activities:
Issuance of common stock for notes receivable $ -- $ -- $ 120
-------- -------- --------
Supplemental disclosure of cash flows information:
Cash paid for interest $ 309 $ 654 $ 711
-------- -------- --------
<FN>
See accompanying notes.
</FN>
</TABLE>
25
<PAGE>
VIDAMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. Organization and Summary of Significant Accounting Policies
Organization and Business
VidaMed, Inc. (the "Company" or "VidaMed") was founded as a California
corporation on July 9, 1992 and reincorporated in Delaware in June 1995. The
Company designs, develops, manufactures and markets technologically and
clinically advanced, cost effective devices for urology applications. The
Company's initial focus is the treatment of BPH. The Company commenced
manufacturing production and product sales in 1993. In the United States, the
Company sells its products to urologists, surgery centers and hospitals. Outside
of the United States, the Company sells its products primarily to international
distributors who resell to physicians and hospitals.
Liquidity
In the course of its operations, the Company has sustained losses and expects
such losses to continue as it proceeds to expend substantial funds primarily for
the expansion of sales and marketing activities. VidaMed believes that its
current capital resources and cash generated from the sale of products combined
with, the recent Transamerica financing, (see Note 4) will be sufficient to
enable the Company to meet its operating and capital requirements during the
fiscal year ending December 31, 1999. Its ability to fund operating and capital
requirements assumes revenues to double over 1998 levels based on new sales and
marketing programs focusing on usage rather than capital equipment sales. The
Company's existing inventory of generators is sufficient to support this program
without an immediate need to incur costs associated with manufacturing
additional generators. Funds currently available for operations and capital
requirements could become insufficient, however, if the product is not accepted
in the marketplace and the Company is not able to achieve its usage and revenue
plan. Further, the Company's plans assume reimbursement by additional key states
during 1999. Delays of Medicare coverage in these key states or other reasons
could also cause the Company's sales to fall below projections, and if expenses
exceed budgeted amounts, the Company would require additional funding. In
summary, the Company may be required to expend greater than anticipated funds if
unforeseen difficulties arise in the marketing and sales of the VidaMed TUNA
System, in obtaining necessary regulatory and reimbursement approvals or in
other aspects of the Company's business. In such a case, the Company will likely
require additional debt and/or equity financing. There can be no assurance that
additional financing, if required, will be available on satisfactory terms or at
all. Future equity financing would result in dilution to the holders of the
Company's Common Stock. If financing were not available, management would need
to reevaluate and revise current operating plans as well as reduce spending in
general. Should such a situation arise, management has formulated a contingent
operating plan, which management believes is achievable, to sustain the
Company's operations at least through the end of 1999.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of
VidaMed and its wholly owned subsidiaries after elimination of inter-company
balances and transactions.
Revenue Recognition and Concentration of Credit Risk
Generally, revenue from product sales is recognized at the time of shipment, net
of allowances for discounts and estimated returns which is also provided for at
the time of shipment. Deferred revenue for warranty contracts are recognized
over the contract period.
Revenue derived from the granting of distribution rights is recognized on a
straight-line basis over the term of the distribution agreements. At December
31, 1998, 1997 and 1996, the Company had deferred a total of $229,000, $267,000
and $467,000, respectively, of revenue from the granting of such distribution
rights.
By policy, the Company limits similar types of investments and diversifies
investing activities utilizing several investment agencies.
The Company currently sells its products to urologists and hospitals in the
United States and to distributors elsewhere in the Americas, Europe and the
Pacific Rim. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. During the third quarter of 1998, the
Company recorded a sales reserve of $2.7 million due to the delays in Medicare
reimbursement related to its sales efforts in the office-based and ASC markets,
where VidaMed's TUNA System is uniquely suited, not providing the anticipated
return.
For the year ended December 31, 1998, one customer represented 50% of the
Company's net revenues. For the years ended December 31, 1997 and 1996, no
customer represented more than 10% of the Company's net revenues.
As of December 1998, the Company had a prepaid materials balance of $724,000
with Telo Electronics, Inc., who is responsible for the manufacturing of the
VidaMed Generator. The Company had $762,000 and $3,557,000 in purchases from
Telo Electronics, Inc. in the years ended December 31, 1998 and 1997,
respectively.
26
<PAGE>
Grant Revenue
In July 1993, the Company entered into an agreement with the Department of Trade
and Industry of the United Kingdom, pursuant to which the Company's U.K.
subsidiary was entitled to a grant not exceeding (pound)750,000 for the
establishment of a facility to develop and manufacture medical devices in
Plymouth, England. As part of the U.K. facility shutdown, the grant is being
repaid at a value of (pound)225,000 or approximately $340,000. See also Note 10.
Warranty Costs
The Company provides at the time of sale for the estimated cost of replacing and
repairing products under warranty. The warranty period ranges from 90 days to
one year depending upon the component. Because of the length of the warranty
period, adjustments to the originally recorded provisions may be necessary from
time to time.
Inventories
Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market value. Inventories consist of the following (in
thousands):
December 31,
-------------------------
1998 1997
---- ----
Raw materials ............................ $ 404 $ 261
Work in process .......................... 261 90
Finished goods ........................... 563 1,161
------ ------
$1,228 $1,512
====== ======
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the respective assets,
which range from three to five years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the estimated useful life or the
remaining life of the lease.
Property and equipment consists of the following (in thousands):
December 31,
------------------------
1998 1997
------- -------
Furniture and fixtures ........................ $ 464 $ 457
Machinery and equipment ....................... 3,624 3,445
Computer equipment and software ............... 1,250 901
Leasehold improvements ........................ 1,044 972
6,382 5,775
Less accumulated depreciation and
amortization ................................ (4,585) (3,128)
------- -------
$ 1,797 $ 2,647
======= =======
Property and equipment includes approximately $22,000 and $1,895,000 recorded
under capital leases at December 31, 1998 and 1997, respectively. Accumulated
amortization relating to leased assets totaled approximately $77,000 and
$1,813,000 at December 31, 1998, and 1997, respectively.
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued "Accounting for
Stock-Based Compensation" (Statement 123). Statement 123 is effective for fiscal
years beginning after December 15, 1995. Under Statement 123, stock-based
compensation expense to employees is measured using either the intrinsic-value
method as prescribed by Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees," or the fair-value method described
in Statement 123. As allowed by Statement 123, the Company has chosen the
intrinsic-value method as prescribed by APB 25 and will disclose the pro forma
impact of the fair-value method on net income and earnings per share. See Note 7
for additional information on stock based compensation. There is no effect of
adopting the standard on VidaMed's financial position or results of operations.
27
<PAGE>
Foreign Currency Translation
The functional currency for foreign subsidiaries is the United States dollar.
Monetary assets and liabilities denominated in foreign currencies are translated
at the year-end exchange rate. Inventory, property and equipment and
non-monetary assets and liabilities denominated in foreign currencies are
translated at historical rates. Adjustments resulting from these translations
are included in the results of operations and have been immaterial. The Company
does not enter into foreign currency forward exchange contracts.
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). Prior year financial
statements have been reclassified to conform to the requirements of the
Statement 130. There was no impact from the adoption on the Company's financial
position or results of operations.
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 have been presented and, where
appropriate, restated to conform to the Statement 128 requirement. As the
Company incurred loses from operations in each of the three years in the period
ended December 31, 1998, there is no difference between basic and diluted loss
per share amounts for these years.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Segment Information
Effective January 1, 1998, the Company adopted Statement No. 131, "Disclosure
about Segments of an Enterprise and Related Information" (Statement 131).
Statement 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. Statement 131 also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. Theadoption of Statement 131 had no significant effect on results of
operations or the financial position of the Company.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (Statement 133),
which is required to be adopted for the year ending December 31, 2000.
Management does not anticipate that the adoption of Statement 133 will have a
significant effect on results of operations or the financial position of the
Company.
28
<PAGE>
2. Fair Market Value of Financial Instruments
The Company considers all highly liquid investments with maturities of 90 days
or less from the date of purchase to be cash equivalents. The Company invests
its excess cash in deposits with banks. Short-term investments consist of
commercial paper and government securities with remaining maturities at the date
of purchase of greater than 90 days and less than one year.
The Company accounts for marketable investments under Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," (Statement 115). Under Statement 115, management determines
the appropriate classification of debt securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. To date, all
marketable securities have been classified as available-for-sale and are carried
at fair value at quoted market prices. Unrealized gains and losses are reported
as a separate component of accumulated comprehensive income. The amortized cost
of debt securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization or accretion is included
in interest income or interest expense respectively. The cost of securities sold
is based on the specific identification method. Interest earned on securities
classified as available-for-sale is included in interest income.
As of December 31, 1998 and 1997, the Company had U. S. government securities
and commercial paper available for sale at a fair market value of approximately
$8,383,000 and $7,273,000, respectively, with no gross unrealized gains or
losses. As of December 31, 1998 and 1997, all available-for-sale securities are
recorded as cash equivalents as the maturities of the investments at the date of
purchase are less than 90 days. For the years ended December 31, 1998, 1997 and
1996, gross realized gains and losses on sales were immaterial.
The fair market value of the long-term debt approximates its carrying value
based on an assessment of maturity, the variable interest rates and the
incremental borrowing rate for similar debt.
3. Related Party Transactions
The Company has cross licensed technology with RITA Medical Systems (RITA),
formerly known as ZoMed International, Inc., a privately-held development stage
company founded by certain of the Company's founders and initially financed by
certain of the Company's current investors. The cross license grants RITA the
exclusive right to use VidaMed technology in the cancer field and grants the
Company the right to use RITA technology in the treatments of Urological
disorders other than cancer, and allows both companies to participate in the
field of prostate and lower urinary tract cancer treatment. As consideration for
the cross license, RITA issued the Company 1.8 million shares of RITA common
stock which represented a 10% ownership in RITA immediately following its
private placement. The current percentage of ownership has dropped well below
the original 10%. This investment is carried at the historical cost basis of the
technology of $0. RITA will also pay royalties to the Company based on a
percentage of net sales of products incorporating VidaMed technology, subject to
an aggregate maximum of $500,000.
4. Long Term Debt and Notes Payable
In April 1995, the Company obtained a $3,000,000 secured credit facility and
subsequently borrowed and paid-off the full amount. In connection with this
agreement, the Company issued the lender a warrant to purchase 72,000 shares of
common stock at $4.55 per share.
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 December 31, 1998, this
loan has been paid in full.
Also 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 December 31, 1998, the term loan had funded
in full at a rate of 12% and replaced the open balance of the $1.5 million
42-month term loan with Silicon Valley Bank. Based on the accounts receivable
balance as of December 31, 1998, the revolving accounts receivable-based credit
line had $115,000 available for borrowing at a rate of 9.75% and was fully
utilized. The revolving credit line has a minimum interest payment of $96,000
per year. In conjunction with the financing, Transamerica received a 5-year
warrant to purchase 55,000 shares of VidaMed common stock at a price of $0.89
per share.
29
<PAGE>
All future principal payments for long-term debt and notes payable at December
31, 1998 is a combination of $660,000, $744,000 and $1,041,000 due in the years
ended December 31, 1999, 2000 and 2001, respectively.
5. Capital and Operating Leases
In 1993 and 1994, the Company entered into master lease lines of credit to
finance up to $3,000,000 of equipment purchases. The Company had borrowed
$2,165,000 from these lines and as of December 31, 1998, $22,000 remains unpaid
from these lines.
In June 1994, the Company entered into an additional master lease line of credit
to finance up to $1,900,000 of equipment purchases. The availability of this
lease line expired July 1, 1995 at which time the Company had utilized
$1,065,000 under this lease line of credit. Pursuant to the lease line of credit
agreements, the Company issued warrants to purchase an aggregate of 47,000
shares of common stock at exercise prices ranging from $3.00 to $12.83 per
share. The warrants expire in 2002 and 2004. As of December 31, 1998, no shares
had been purchased under the terms of the warrants.
The Company moved in July 1997 to a 35,000 square foot facility in Fremont,
California. The Company leases its office and research facilities under
operating lease agreements. Future minimum lease payments at December 31, 1998
under capital leases and future obligations under noncancellable operating
leases are as follows (in thousands):
Operating Capital
Leases Leases
------ ------
1999.......................................................... $ 408 $ 23
2000 ......................................................... 421 --
2001 ......................................................... 433 --
2002 ......................................................... 183 --
------- -------
Total minimum payments required .............................. $1,445 23
======
Less amount representing interest ............................ (1)
-------
Present value of minimum lease payment ....................... 22
Less amount due within one year .............................. (22)
-------
Amount due after one year .................................... $ --
=======
Rent expense for the years ended December 31, 1998, 1997 and 1996 was $537,000,
$433,000 and $346,000, respectively.
6. Convertible Subordinated Notes Payable
In March 1996, the Company completed the sale of $10.1 million in 5% convertible
subordinated notes (the Notes). The Notes were convertible into common stock of
VidaMed based upon a percentage (ranging from 80% to 85%) of the average closing
bid price over a period of five trading days prior to conversion. As of December
31, 1996 all of the $10.1 million in principal and accrued interest on the Notes
had been converted into an aggregate of 1,375,676 shares of common stock.
7. Stockholder's Equity
Common Stock
In February 1997, the Company entered into an equity financing agreement with a
European investment bank which provided the Company with the option to sell to
such investment bank up to $10,000,000 of VidaMed common stock in increments of
up to $2,500,000. Under this arrangement, the common stock was priced at a 10%
discount to the current market price at the time of sale, subject to adjustment.
As of December 31, 1997 the Company had issued 1,570,000 shares of common stock
under the arrangement, resulting in approximately $10,000,000 of proceeds. Under
this arrangement, the Company issued to the investment bank warrants to purchase
common stock, which after being adjusted according to their terms as a result of
subsequent financing transactions, resulted in the issuance of a total of
186,000 warrants. These warrants range in exercise price from $5.95 to $9.30.
Each warrant has a term of three years from the original dates of issuance in
1997.
30
<PAGE>
In September 1997, the Company completed a private placement with certain
investors. In this transaction, the Company issued 2,600,000 shares of common
stock at a purchase price of $4.75 per share resulting in net proceeds of
$11,700,000 to the Company. In connection with this financing, the Company
issued warrants to purchase an aggregate of 629,000 shares of common stock at an
exercise price of $4.00 per share.
In May 1998, the Company completed a sale of publicly registered common stock
with certain investors, officers and directors. In this transaction, the Company
issued 4,340,004 shares of common stock at a purchase price of $4.00 per share
resulting in net proceeds of $16,717,000 to the Company. In connection with this
financing, the Company issued to the investors 3-year warrants to purchase an
aggregate of 1,085,000 shares of common stock at an exercise price of $5.00 per
share for no additional consideration.
As of December 31, 1998, the Company has reserved a total of 2,074,000 shares of
common stock for issuance upon the conversion of outstanding warrants.
Notes Receivable from Stockholders
Interest on notes receivable from stockholders accrues at a rate of 6.73% per
annum. Principal and interest payments are due at various times after December
2000.
Stock Options
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options and employee stock purchase plan
because, as discussed below, the alternative fair value accounting provided for
under Statement No. 123 requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
In July 1992, the board of directors adopted the 1992 Stock Plan (the "Plan").
As amended during 1998, the Company has reserved 4,300,000 shares of common
stock for issuance upon exercise of options granted under the Plan.
In the year ended December 31, 1997 the Board of Directors voted on and approved
two stock option repricings. The Company repriced options as an incentive plan
in order to retain key employees. All employees were offered the repriced value
for options in exchange for a six to twelve month lock up of option exercising
rights. The first repricing occurred in May 1997 and revalued the option price
at $6.875 for all current employees excluding outside board members. The second
repricing occurred in September 1997 and revalued the option price at $4.813 for
all current employees excluding outside board members.
The Plan provides for both incentive and nonqualified stock options to be
granted to employees and consultants. The Plan provides that incentive stock
options will be granted at no less than the fair value of the Company's common
stock (no less than 85% of the fair value for nonqualified stock options) as
determined by the board of directors at the date of the grant. If, at the time
the Company grants an option, the optionee owns more than 10% of the total
combined voting power of all the classes of stock of the Company, the option
price shall be at least 110% of the fair value and the option shall not be
exercisable for more than five years after the date of grant. The options become
exercisable over periods determined by the board of directors, which is
currently four years. Except as noted above, options expire no more than ten
years after the date of grant, or earlier if employment terminates.
In April 1995, the stockholders approved the 1995 Director Option Plan (Director
Plan). A total of 200,000 shares of common stock have been authorized for
issuance. Each non-employee director automatically is granted a non-statutory
option to purchase 13,334 shares of common stock upon election to the board, and
annual non-statutory option for 3,334 shares of common stock.
31
<PAGE>
<TABLE>
Activity under the Plans is summarized below:
<CAPTION>
Shares Options Outstanding Weighted Avg.
Available ----------------------------- Fair Value Number of
for Grant Number of Weighted-Avg. Grant Options
of Options Shares Exercise Price Date Exercisable
---------- ------ -------------- ---- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 334,924 1,065,228 $ 3.54 299,651
Shares authorized 1,000,000 -- --
Options granted (855,281) 855,281 $ 9.71 $ 7.14
Options exercised -- (236,013) $ 1.91
Options canceled 217,949 (217,949) $ 6.66
---------- ---------
Balance at December 31, 1996 697,592 1,466,547 $ 7.02 376,570
Shares authorized 366,666 -- --
Options granted (1,674,883) 1,674,883 $ 5.08 $ 3.93
Options exercised -- (94,994) $ 2.61
Options canceled 1,165,276 (1,165,276) $ 8.78
---------- ---------
Balance at December 31, 1997 554,651 1,881,160 $ 4.42 328,535
Shares authorized 1,200,000
Options granted (1,957,830) 1,957,830 $ 2.69 $ 4.17
Options exercised -- (36,386) $ 2.29
Options canceled 277,723 (277,723) $ 4.57
---------- ---------
Balance at December 31, 1998 74,544 3,524,881 $ 3.50 944,785
========== =========
</TABLE>
<TABLE>
Exercise prices for options outstanding as of December 31, 1998 ranged from
$0.188 to $13.125 based on the following price ranges. The weighted-average
remaining contractual life of those options is 8.53 years.
<CAPTION>
Number Weighted Average Number
Range of Outstanding Weighted Average Contractual Exercisable Weighted Average
Exercise Prices as of 12/31/98 Exercise Price Life as of 12/31/98 Exercise Price
--------------- -------------- -------------- ---- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.188 - $ 0.60 30,751 $ 0.44 4.24 30,751 $ 0.44
$ 0.781 - $ 0.781 734,370 $ 0.78 9.77 9,581 $ 0.78
$ 1.283 - $ 3.69 1,032,582 $ 3.37 8.41 250,943 $ 2.64
$ 3.75 - $ 4.63 818,089 $ 4.45 8.79 73,263 $ 4.09
$ 4.81 - $13.125 909,089 $ 5.10 7.51 580,247 $ 5.10
</TABLE>
In April 1995, the stockholders approved the 1995 Employee Stock Purchase Plan
(Purchase Plan). As amended 1998, a total of 400,000 shares of common stock have
been authorized for issuance. 140,795 shares have been issued under the Purchase
Plan as of December 31, 1998. Under the Purchase Plan participating employees
may contribute up to 15% of their salary to purchase shares of the Company's
common stock. The purchase price is equal to 85% of the fair market value of the
common stock based on the lower of the first day of the offering period or last
day of the purchase period.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options granted subsequent to December 31, 1994 under the fair
value method of that Statement. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1998, 1997 and 1996, respectively:
risk-free interest rates of 4.74%, 6.00% and 5.88%; dividend yields of 0.0%;
volatility factors of the expected market price of the Company's common stock of
1.0, 0.897 and 0.924; and a weighted-average expected life of the option of 3.0
years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
32
<PAGE>
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for loss per share amounts):
1998 1997 1996
-------- -------- ----------
Pro forma net loss ($22,223) ($19,950) ($ 14,785)
======== ======== ==========
Pro forma loss per share ($ 1.23) ($ 1.56) ($ 1.42)
======== ======== ==========
Statement 123 is applicable only to options granted subsequent to December 31,
1994 and its proforma effect will not be fully reflected until 1999.
The Company recorded deferred compensation for the difference between the grant
price and the deemed fair value of the Company's common stock, as determined by
the board of directors, for certain options granted in the twelve-month period
prior to the Company's initial public offering. This deferred compensation
totaled $436,000, and was amortized over the vesting period of the options
through 1998. Amortization of deferred compensation of $26,000, $97,000 and
$96,000 was recorded in the years ended December 31, 1998, 1997 and 1996,
respectively.
8. Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
As of December 31, 1998, the Company had Federal and California net operating
loss carry forwards of approximately $52,300,000 and $18,100,000, respectively.
Additionally, the Company had foreign net operating loss carry forwards of
approximately $19,300,000. The Federal net operating loss carry forwards will
expire at various dates beginning in 2007 through 2012 if not utilized. The
California net operating losses will expire at various dates beginning in 1999
through 2002 if not utilized.
Utilization of the net operating losses may be subject to an annual limitation
due to the ownership change rules provided by the Internal Revenue Code of 1986
and similar state provisions. The annual limitation may result in the expiration
of the net operating losses before utilization.
<TABLE>
Significant components of the Company's deferred tax assets (in thousands):
<CAPTION>
December 31,
-----------------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
U.S. Net operating loss carry forwards $ 20,100 $ 16,700
Foreign net operating losses 6,400 5,300
Research credit (expires in 2007 through 2012) 1,000 900
Deferred revenue -- 200
Capitalized research and development for California purposes 1,300 1,200
Other 2,300 400
-------- --------
Total deferred tax assets 31,100 24,700
Valuation allowance for deferred tax assets (31,100) (24,700)
-------- --------
Net deferred tax assets $ -- $ --
-------- --------
</TABLE>
During the years ended December 31, 1997 and 1996, the valuation allowance for
deferred tax assets increased by $6,200,000 and $5,000,000, respectively, due to
the Company's continuing operating losses.
9. Geographic Segment Data
The Company's domestic operations primarily consist of product development,
sales and marketing. The Company's foreign operations consist of subsidiaries in
the United Kingdom and Australia. The Company's subsidiary in the U.K. was
established in 1993 and was engaged in product development, manufacturing, sales
and marketing and product distribution worldwide. The shutdown of the U. K.
facility in November 1997 has left the
33
<PAGE>
<TABLE>
U.K. with operations related only to sales and clinical studies. The Australian
subsidiary was established in 1994 and operates as a sales and marketing office
for the Asia Pacific region. Information regarding geographic areas is as
follows (in thousands):
<CAPTION>
1998 1997 1996
Revenue Long lived Revenue Long lived Revenue Long lived
assets assets assets
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. $ (119) $13,312 $ 7,889 $15,348 $ 2,740 $10,716
Europe $ 304 $ 654 $ 1,033 $ 1,400 $ 853 $ 1,941
Asia $ 843 $ 166 $ 906 $ 217 $ 232 $ 190
------- ------- ------- ------- ------- -------
Total $ 1,028 $14,132 $ 9,828 $16,965 $ 3,825 $12,847
------- ------- ------- ------- ------- -------
</TABLE>
10. 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 1997 was $2.1 million recorded in Cost of
Products Sold.
<TABLE>
The elements of the total charge as of December 31, 1998 are as follows (in
thousands):
<CAPTION>
Representing
--------------------------------------------------
Cash Outlays
----------------------------
Total Asset
Charges Write-down Completed Future
------ ------ ------ ------
<S> <C> <C> <C> <C>
Fixed assets $ 390 $ 390 $ -- $ --
Facility shut down 1,305 -- 1,305 --
Grant 405 -- 153 252
------ ------ ------ ------
Total Special Charges $2,100 $ 390 $1,458 $ 252
------ ------ ------ ------
</TABLE>
11. Commitments
In January 1999, the Company signed a manufacturing agreement with a local
medical device manufacturer to produce the VidaMed PROVu disposable cartridge.
The three-year contract runs through the year 2001 and calls for the Company to
purchase a minimum of 10,000 units over the three-year period. If VidaMed
terminates this agreement prior to expiration or fails to make the minimum
purchases thereunder, the Company would have to pay at least $200,000, but no
more than $750,000 to the manufacturer.
In October 1998, the Company entered into retention agreements with certain
executive officers in which the Company will pay up to $810,000 on April 1,1999.
12. Subsequent Events
In February 1999, VidaMed announced a plan to outsource the manufacturing of the
PROVu hand piece to a Silicon Valley manufacturer. Due to the elimination of the
manufacturing function, the Company terminated employment with 18 people or 21%
of its workforce from the operations and administration departments.
34
<PAGE>
Item 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
35
<PAGE>
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file a definitive proxy statement within
120 days after the end of the fiscal year pursuant to Regulation 14A with
respect to the 1999 Annual Meeting of Stockholders (the "Proxy Statement"
covered by this Form 10-K) and certain information that will be included therein
is incorporated herein by reference.
Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item relating to directors is
incorporated by reference to the information under the caption "Proposal No. 1 -
Election of Directors" in the Proxy Statement.
<TABLE>
The executive officers of the Registrant, who are appointed by the
board of directors, and their ages and positions with the Company as of March
15, 1999 are as follows:
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
David J. Illingworth 45 Chairman, President and Chief Executive Officer
Richard D. Brounstein 49 Vice President, Finance and Chief Financial Officer
Randy D. Lindholm 43 Executive Vice President, Worldwide Sales and Marketing
Robin L. Bush 41 Vice President, Regulatory Affairs and Clinical Affairs
John N. Hendrick 47 Vice President and Chief Operating Officer
</TABLE>
David J. Illingworth became Chairman of the Board, President and Chief
Executive Officer on April 6, 1998. He has served as a director of the Company
since February 1998. From January 1993 through March 1998, Mr. Illingworth held
various positions with Nellcor Puritan Bennett, Inc., a wholly owned subsidiary
of Mallinckrodt Inc., most recently serving as Executive Vice President and
President, Alternative Care Business. Prior to joining Nellcor, Mr. Illingworth
spent 15 years with General Electric in their medical systems business. Mr.
Illingworth serves as a Director of Somnus Medical Technologies, Inc. He holds a
B.S. in Engineering from Texas A & M University.
Richard D. Brounstein has served as Vice President of Finance and Chief
Financial Officer since May 1997. From 1989 to 1997 he served as Vice President
Finance and Administration and Chief Financial Officer for MedaSonics, Inc., a
manufacturer of ultrasound medical equipment. Mr. Brounstein holds a B.S. in
Accounting and a MBA in Finance from Michigan State University. He is a
Certified Public Accountant.
Randy D. Lindholm has served as Executive Vice President of World Sales
and Marketing since July 1998. From 1993 to 1998 he served as Vice President of
Americas Field Operations of Nellcor Puritan Bennett, a wholly owned subsidiary
of Mallinckrodt Inc., a manufacturer of medical devices. Prior to joining
Nellcor, Mr. Lindholm spent 16 years with General Electric in their medical
systems business. Mr. Lindholm holds a B.S. in Electrical Engineering from
Michigan Tech University.
Robin L. Bush has served as Vice President of Regulatory Affairs and
Clinical Affairs since July 1997. From 1988 to 1997 Ms. Bush was Director of
Regulatory Affairs and Quality Assurance for Aesculap, Inc., a manufacturer of
surgical instruments. Ms. Bush has 20 years experience with medical device
companies, managing regulatory affairs, quality assurance, clinical trials and
compliance functions. Ms. Bush is a certified Regulatory Affairs Professional
(RAC). Ms. Bush holds a B.A. in Human Biology and Psychology from Stanford
University and an MBA from Golden Gate University.
John N. Hendrick joined the Company in September 1994 as Vice President
and Chief Operating Officer. From 1988 until joining VidaMed, Mr. Hendrick was
Vice President of Operations for Allergan Medical Optics, a division of
Allergan, Inc. which manufactures ophthalmic and refractive surgical products.
Mr. Hendrick holds a B.A. in Business Administration from the University of San
Bernadino.
36
<PAGE>
Item 11 - EXECUTIVE COMPENSATION
Executive Compensation information contained in the Company's Proxy
Statement is incorporated herein by reference.
Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management
information contained in the Company's Proxy Statement is incorporated herein by
reference.
Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Relationships and Related Transactions information contained in
the Company's Proxy Statement is incorporated herein by reference.
37
<PAGE>
PART IV
Item 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
1. Financial Statements
<CAPTION>
Included in Part II, Item 8 of this Report:
<S> <C>
Consolidated Balance Sheets as of December 31, 1998 and 1997 22
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 23
Consolidated Statement of Stockholders' Equity (Net Capital
Deficiency) for the years ended December 31, 1998, 1997 and 1996 24
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 25
Notes to Consolidated Financial Statements 26
Independent Auditors' Report 42
</TABLE>
2. Financial Statement Schedules
Schedule II is included, on page 10. All other schedules are omitted because
they are not applicable, or not required, or because the required information is
included in the consolidated financial statements or notes thereto.
<TABLE>
3. Exhibits
<CAPTION>
Exhibit No. Description
------------ --------------------------------------------------------------------------------------
<S> <C>
3.1 (1) Restated Certificate of Incorporation of the Company filed with the Delaware Secretary
of State on June 28, 1995.
3.2 (2) Certificate of Designation of Rights, preferences and Privileges of Series A
Participating Preferred Stock of the Company filed with the Delaware Secretary of
State on January 13, 1997.
3.3 (1) Restated Bylaws of the Company
4.1 (1) Form of common Stock Certificate of the Company.
4.2 (1) Warrant to Purchase Shares of Series B Preferred Stock, dated April 13, 1993,
issued to Dominion Ventures, Inc.
4.3 (1) Warrant Purchase Agreement, dated November 8, 1993, between the Company
and Dominion Ventures, Inc. and Warrant to Purchase Shares of
Series C Preferred Stock, issued to Dominion Ventures, Inc.
4.4 (1) Warrant Purchase Agreement, dated June 30, 1994, between the Company and
LINC Capital Management Services, Ltd. and Warrant to Purchase Shares of
Series D Preferred Stock, dated June 30, 1994,
issued to LINC Capital Management Services, Ltd.
4.5 (1) Representative Form of Note Subscription Agreement and Convertible
Subordinated Promissory Note.
4.6 (2) Preferred Shares Rights Agreement dated as of January 27, 1997, between the Company
and American Securities Transfer & Trust, Inc. including the Certificate of
Designations,
38
<PAGE>
the Form of Rights Certificate and the Summary of Rights attached
thereto as Exhibit A, Exhibit B and Exhibit C, respectively.
4.7 (3) Investment agreement, dated as of February 4, 1997, between the Company and
MeesPierson Clearing Services B.V., including Form of Pricing Period Confirmation,
Form of Warrant and Form of Opinion attached thereto as Exhibit A, Exhibit B and
Exhibit C, respectively.
4.8 (4) Purchase Agreement, dated as of September 22, 1997, among the Company and certain
purchasers named therein, including Schedule of Investors, Form of Common Stock
Purchase Warrant and Form of Opinion attached thereto as Exhibit A, Exhibit B and
Exhibit C, respectively.
10.1 (1) Form of Indemnification Agreement between the Company and each of its
directors and officers.
10.2 (2) 1992 Stock Plan, as amended.
10.3 (5) 1995 Director Option Plan, as amended.
10.4 (1) 1995 Employee Stock Purchase Plan.
10.5 (1) Dominion Ventures Master Lease Agreement, dated April 13, 1993, between
the Company and Dominion Ventures, Inc., and First Amendment thereto.
10.6 (1) Master Lease Agreement, dated June 24, 1994, between the Company and
LINC Capital Management Services, Inc.
10.7 (1) Representative Form of International Distribution Agreement.
10.8 (1) Cross License Agreement, dated August 2, 1994, between the Company and RITA, formerly
ZoMed International, Inc.
10.9 (1) International Distribution Agreement, dated May 9, 1994, between the
Company and Century Medical, Inc.
10.10 (1) Grant Agreement, dated July 19, 1993, between the Company and the United
Kingdom Department of Trade and Industry.
10.11 (1) Letter employment agreement, dated August 26, 1994, between the Company
and John N. Hendrick.
10.12 (1) Letter employment agreement, dated August 31, 1994, between the Company
and James A. Heisch.
10.13 (1) Restated Shareholder Rights Agreement, dated November 23, 1994,
among the Company and holders of the Company's Registerable Securities
10.14 (1) Loan and Security Agreement dated April 20, 1995 between the
Company and Venture Lending and Leasing, Inc. and related letter agreement.
10.15 (6) Operating Lease dated April 3, 1997, between the Company and Hopkins Brothers.
10.16 (6) Loan and Security Agreement, dated January 13, 1998, between the Company and Silicon Valley Bank.
10.17 Loan and Security Agreement and Streamlined Facility Agreement and Amended Agreement, dated October 20,
1998, between the Company and Transamerica Business Credit Corporation.
39
<PAGE>
10.18 Manufacturing Agreement, dated January 5, 1999, between the Company and Humphrey Systems
21.1 (1) Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 42 of this report).
24.1 Power of Attorney (see signature page of this Report).
27.1 Financial Data Schedule.
<FN>
- -----------
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-90746) and incorporated herein by
reference.
(2) Filed as an Exhibit to the Company's Registration Statement on Form 8-A filed with the Securities and Exchange Commission
on January 31, 1997 and incorporated herein by reference thereto.
(3) Filed as an Exhibit to the Company's Current Report on form 8-K filed with the Securities and Exchange Commission on March
14, 1997 and incorporated herein by reference thereto.
(4) Filed as an Exhibit to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on
September 24, 1997 and incorporated herein by reference thereto.
(5) Filed as an Exhibit to the Company's Registration Statement on Form S-8 (File No. 33-80619) and incorporated herein by
reference.
(6) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated
herein by reference.
</FN>
</TABLE>
b) Reports on Form 8-K
The Company was not required to and did not file any reports
on Form 8-K during the three months ended December 31, 1998.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Fremont, State of California, on the 25th day of March, 1999.
VIDAMED, INC.
By /s/ David J. Illingworth
--------------------------------------------
David J. Illingworth, Chairman,
President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below hereby constitutes and appoints David J. Illingworth and
Richard D. Brounstein as his attorneys-in-fact, with full power of substitution,
for him in any and all capacities, to sign any and all amendments to this Report
on Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys to any and all amendments to said Report.
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed by the following persons in the capacities and
on the dates indicated:
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ David J. Illingworth Chairman, President and Chief March 25, 1999
----------------------------------- Executive Officer
(David J. Illingworth) (Principal Executive Officer)
/s/ Richard D. Brounstein Vice President, Finance and Chief March 25, 1999
----------------------------------- Financial Officer
(Richard D. Brounstein) (Principal Financial Officer)
/s/ Franklin D. Brown Director March 25, 1999
-----------------------------------
(Franklin D. Brown)
/s/ Robert J. Erra Director March 25, 1999
-----------------------------------
(Robert J. Erra)
/s/ Wayne I. Roe Director March 25, 1999
-----------------------------------
(Wayne I. Roe)
/s/ Michael H. Spindler Director March 25, 1999
---------------------------------------
(Michael H. Spindler)
</TABLE>
41
<PAGE>
<TABLE>
Schedule II - Valuation and Qualifying Accounts
Allowance for Doubtful Accounts (in thousands)
<CAPTION>
Description Balance at Beginning Charged to costs Charged to Deductions Balance at
of Period and Expenses Other Accounts End of Period
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance 12/31/96 43 125 0 0 168
Balance 12/31/97 168 891 0 0 1,059
Balance 12/31/98 1,059 3,796 0 (1,436) 3,540
</TABLE>
42
- --------------------------------------------------------------------------------
TBCC
Loan and Security Agreement
Borrower: VidaMed, Inc.,
a Delaware Corporation
Address: 46107 Landing Parkway
Fremont, California 94538-6407
Date: October 20, 1998
THIS LOAN AND SECURITY AGREEMENT is entered into as of the above date, between
the above borrower (the "Borrower"), having its chief executive office and
principal place of business at the address shown above, and TRANSAMERICA
BUSINESS CREDIT CORPORATION, a Delaware corporation ("TBCC"), having its
principal office at 9399 West Higgins Road, Suite 600, Rosemont, Illinois 60018
and having an office at 15260 Ventura Blvd., Suite 1240, Sherman Oaks,
California 91403. The Schedule to this Agreement (the "Schedule") being signed
concurrently is an integral part of this Agreement. (Definitions of certain
terms used in this Agreement are set forth in Section 9 below.) The parties
agree as follows:
1. LOANS.
1.1 Loans. TBCC, subject to the terms and conditions of this Agreement,
agrees to make loans (the "Loans") to Borrower, from time to time during the
period from the date of this Agreement to the Maturity Date set forth in the
Schedule, at Borrower's request, in an aggregate principal amount at any one
time outstanding not to exceed the Credit Limit shown on the Schedule. If at any
time the total outstanding Loans and other monetary Obligations exceed said
limit, Borrower shall repay the excess immediately without demand. Borrower
shall use the proceeds of all Loans solely for lawful general business purposes.
1.2 Due Date. The Loans, all accrued interest and all other monetary
Obligations shall be payable in full on the Maturity Date. Borrower may borrow,
repay and reborrow Loans (other than any Term Loans), in whole or in part, in
accordance with the terms of this Agreement.
1.3 Loan Account. TBCC shall maintain an account on its books in the
name of Borrower (the "Loan Account"). All Loans and advances made by TBCC to
Borrower or for Borrower's account and all other monetary Obligations will be
charged to the Loan Account. All amounts received by TBCC from Borrower or for
Borrower's account will be credited to the Loan Account. TBCC will send Borrower
a monthly statement reflecting the activity in the Loan Account, and each such
monthly statement shall be an account stated between Borrower and TBCC and shall
be final conclusive and binding absent manifest error.
1.4 Collection of Receivables. Borrower shall remit to TBCC all
Collections including all checks, drafts and other documents and instruments
evidencing remittances in payment (collectively referred to as "Items of
Payment") within one Business Day after receipt, in the same form as received,
with any necessary indorsements. For purposes of calculating interest due to
TBCC, credit will be given for Collections and all other proceeds of Collateral
and other payments to TBCC three Business Days after receipt of cleared funds.
For all purposes of this Agreement any cleared funds received by TBCC later than
10:00 a.m. (California time) on any Business Day shall be deemed to have been
received on the following Business Day and any applicable interest or fee shall
continue to accrue. Borrower's Loan Account will be credited only with the net
amounts actually received in payment of Receivables, and such payments shall be
credited to the Obligations in such order as TBCC shall determine in its
discretion. Pending delivery to TBCC, Borrower will not commingle any Items of
Payment with any of its other funds or property, but will segregate them from
the other assets of Borrower and will hold them in trust and for the account and
as the property of TBCC. Borrower hereby agrees to endorse any Items of Payment
upon the request of TBCC.
1.5 Reserves. TBCC may, from time to time, in its Good Faith business
judgment: (i) establish and modify reserves against Eligible Receivables and
Eligible Inventory, (ii) modify advance rates with respect to Eligible
Receivables and Eligible Inventory, (iii) modify the standards of eligibility
set forth in the definitions of Eligible Receivables and Eligible Inventory, and
(iv) establish reserves against available Loans.
1.6 Term.
(a) The term of this Agreement shall be from the date of this
Agreement to the Maturity Date set forth in the Schedule, unless sooner
terminated in accordance with the terms of this Agreement, provided that the
Maturity Date shall automatically be extended, and this Agreement shall
automatically and continuously renew, for successive additional terms of one
year each, unless one party gives written notice to the other, not less than
sixty days prior to the next Maturity Date, that such party elects to terminate
this Agreement effective on the next Maturity Date. On the Maturity Date or on
any earlier termination of this
-1-
<PAGE>
TBCC Loan and Security Agreement
- --------------------------------------------------------------------------------
Agreement Borrower shall pay in full all Obligations, and notwithstanding any
termination of this Agreement all of TBCC's security interests and all of TBCC's
other rights and remedies shall continue in full force and effect until payment
and performance in full of all Obligations.
(b) This Agreement may be terminated prior to the Maturity
Date as follows: (i) by Borrower, effective three business days after written
notice of termination is given to TBCC; or (ii) by TBCC at any time after the
occurrence of an Event of Default, without notice, effective immediately. If
this Agreement is terminated by Borrower or by TBCC under this Section 1.6(b),
Borrower shall pay to TBCC a termination fee (the "Termination Fee") in the
amount shown on the Schedule. The Termination Fee shall be due and payable on
the effective date of termination. Notwithstanding the foregoing, Borrower shall
have no right to terminate this Agreement at any time that any principal of, or
interest on any of the Loans or any other monetary Obligations are outstanding,
except upon prepayment of all Obligations and the satisfaction of all other
conditions set forth in the Loan Documents.
1.7 Payment Procedures. Borrower hereby authorizes TBCC to charge the
Loan Account with the amount of all interest, fees, expenses and other payments
to be made hereunder and under the other Loan Documents. TBCC may, but shall not
be obligated to, discharge Borrower's payment obligations hereunder by so
charging the Loan Account. Whenever any payment to be made hereunder is due on a
day that is not a Business Day, the payment may be made on the next succeeding
Business Day and such extension of time shall be included in the computation of
the amount of interest due.
1.8 Conditions to Initial Loan. The obligation of TBCC to make the
initial Loan is subject to the satisfaction of the following conditions prior to
or concurrent with such initial Loan, and Borrower shall cause all such
conditions to be satisfied by the Closing Deadline set forth in the Schedule:
(a) Except for the filing of termination statements under the
Code by the existing lender to Borrower whose loans are being repaid with the
Loan proceeds and the documents and actions relating to the Liens of TBCC
created hereunder, as provided for in Section 1.8(c) below, no consent or
authorization of, filing with or other act by or in respect of any Governmental
Authority or any other Person is required in connection, with the execution,
delivery, performance, validity or enforceability of this Agreement, or the
other Loan Documents or the consummation of the transactions contemplated hereby
or thereby or the continuing operations of the Borrower following the
consummation of such transactions.
(b) TBCC and its counsel shall have performed (i) a review
satisfactory to TBCC of all of the Material Contracts and other assets of the
Borrower, the financial condition of the Borrower, including all of its tax,
litigation, environmental and other potential contingent liabilities, and the
corporate and capital structure of the Borrower and (ii) a pre-closing audit and
collateral review, in each case with results satisfactory to TBCC.
(c) TBCC shall have received the following, each dated the
date of the initial Loan or as of an earlier date acceptable to TBCC, in form
and substance satisfactory to TBCC and its counsel: (i) a Blocked Account
Agreement , duly executed by the Borrower and its bank on TBCC's standard form;
(ii) acknowledgment copies of Uniform Commercial Code financing statements
(naming TBCC as secured party and the Borrower as debtor), duly filed in all
jurisdictions that TBCC deems necessary or desirable to perfect and protect the
Liens created hereunder, and evidence that all other filings, registrations and
recordings have been made in the appropriate governmental offices, and all other
action has been taken, which shall be necessary to create, in favor of TBCC, a
perfected first priority Lien on the Collateral; (iii) the opinion of counsel
for the Borrower covering such matters incident to the transactions contemplated
by this Agreement as TBCC may specify in its discretion; (iv) certified copies
of all policies of insurance required by this Agreement and the other Loan
Documents, together with loss payee endorsements for all such policies naming
TBCC as lender loss payee and an additional insured; (v) copies of the
Borrower's articles or certificate of incorporation, certified as true, correct
and complete by the secretary of state of Borrower's state of incorporation
within 45 days of the date hereof; (vi) copies of the bylaws of the Borrower and
a copy of the resolutions of the Board of Directors of the Borrower authorizing
the execution, delivery and performance of this Agreement, the other Loan
Documents, and the transactions contemplated hereby and thereby, attached to
which is a certificate of the Secretary or an Assistant Secretary of the
Borrower certifying (A) that such copies of the bylaws and resolutions are true,
complete and accurate copies thereof, have not been amended or modified since
the date of such certificate and are in full force and effect and (B) the
incumbency, names and true signatures of the officers of the Borrower; (vii) a
good standing certificate from the Secretary of State of Borrower's state of
incorporation and each state in which the Borrower is qualified as a foreign
corporation, each dated within ten days of the date hereof; (viii) the
additional documents and agreements, if any, listed in the Schedule; and (ix)
such other agreements and instruments as TBCC deems necessary in its sole and
absolute discretion in connection with the transactions contemplated hereby.
1.9 Conditions to Lending. The obligation of TBCC to make any Loan is
subject to the satisfaction of the following conditions precedent:
(a) There shall be no pending or, to the knowledge of Borrower
after due inquiry, threatened litigation, proceeding, inquiry or other action
relating to this Agreement, or any other Loan Document, or which could be
expected to have a Material Adverse Effect in the judgment of TBCC;
(b) Borrower shall be in compliance with all Requirements of
Law and Material Contracts, other than such noncompliance that could not have a
Material Adverse Effect;
(c) The Liens in favor of TBCC shall have been duly perfected
and shall constitute first priority Liens, except for Permitted Liens;
(d) All representations and warranties contained in this
Agreement and the other Loan Documents shall be true and correct on and as of
the date of such Loan as if
-2-
<PAGE>
TBCC Loan and Security Agreement
- --------------------------------------------------------------------------------
then made, other than representations and warranties that expressly relate
solely to an earlier date, in which case they shall have been true and correct
as of such earlier date;
(e) No Default or Event of Default shall have occurred and be
continuing or would result from the making of the requested Loan as of the date
of such request; and
(f) No Material Adverse Effect shall have occurred.
2. INTEREST AND FEES.
2.1 Interest. Borrower shall pay TBCC interest on all outstanding Loans
and other monetary Obligations, at the interest rate set forth in the Schedule.
Interest shall be payable monthly in arrears on the first Business Day of each
month, and on the Maturity Date. Following the occurrence and during the
continuance of any Event of Default, the interest rate applicable to all
Obligations shall be increased by two percent per annum.
2.2 Fees. Borrower shall pay TBCC the fees set forth in the Schedule.
2.3 Calculations. All interest and fees under this Agreement shall be
calculated on the basis of a year of 360 days for the actual number of days
elapsed in the period for which such interest or fees are payable.
2.4 Taxes. Any and all payments by Borrower under this Agreement or any
other Loan Document shall be made free and clear of and without deduction for
any and all present or future taxes, levies, imposts, deductions, charges or
withholdings and penalties, interest and all other liabilities with respect
thereto, excluding in the case of TBCC, taxes imposed on its net income and
franchise taxes imposed on it by the jurisdiction under the laws of which TBCC
is organized or any political subdivision thereof.
3. SECURITY.
3.1 Grant of Security Interest. To secure the payment and performance
when due of all of the Obligations, Borrower hereby grants to TBCC a security
interest in all of its present and future Receivables, Investment Property,
Inventory, Equipment, Other Property, and other Collateral, wherever located.
3.2 Other Liens; Location of Collateral. Borrower represents, warrants
and covenants that all of the Collateral is, and will at all times continue to
be, free and clear of all Liens, other than Permitted Liens and Liens in favor
of TBCC. All Collateral is and will continue to be maintained at the locations
shown on the Schedule.
3.3 Receivables.
(a) Schedules and Other Actions. As often as requested by
TBCC, Borrower shall execute and deliver to TBCC written schedules of
Receivables and Eligible Receivables (but the failure to execute or deliver any
schedule shall not affect or limit TBCC's security interest in all Receivables).
On TBCC's request, Borrower shall also furnish to TBCC copies of invoices to
customers and shipping and delivery receipts. Borrower shall deliver to TBCC the
originals of all letters of credit, notes, and instruments in its favor and such
endorsements or assignments as TBCC may reasonably request and, upon the request
of TBCC, Borrower shall deliver to TBCC all certificated securities with respect
to any Investment Property, with all necessary indorsements, and obtain such
account control agreements with securities intermediaries and take such other
action with respect to any Investment Property, as TBCC shall request, in form
and substance satisfactory to TBCC. Upon request of TBCC Borrower additionally
shall obtain consents from any letter of credit issuers with respect to the
assignment to TBCC of any letter of credit proceeds.
(b) Records, Collections. Borrower shall report all customer
credits to TBCC, on the regular reports to TBCC in the form from time to time
specified by TBCC. Borrower shall notify TBCC of all returns and recoveries of
merchandise and of all claims asserted with respect to merchandise, on its
regular reports to TBCC. Borrower shall not settle or adjust any dispute or
claim, or grant any discount, credit or allowance or accept any return of
merchandise, except in the ordinary course of its business, without TBCC's prior
written consent.
(c) Representations. Borrower represents and warrants to TBCC
that each Receivable with respect to which Loans are requested by Borrower
shall, on the date each Loan is requested and made, represent an undisputed,
bona fide, existing, unconditional obligation of the account debtor created by
the sale, delivery, and acceptance of goods, the licensing of software or the
rendition of services, in the ordinary course of Borrower's business, and meet
the Minimum Eligibility Requirements set forth in Section 9.1(n) below.
3.4 Inventory. Borrower shall maintain full, accurate and complete
records respecting the Inventory describing the kind, type and quantity of the
Inventory and Borrower's cost therefor, withdrawals therefrom and additions
thereto, including a perpetual inventory for work in process and finished goods.
3.5 Equipment. Borrower shall at all times keep correct and accurate
records itemizing and describing the location, kind, type, age and condition of
the Equipment, Borrower's cost therefor and accumulated depreciation thereof and
retirements, sales, or other dispositions thereof. Borrower shall keep all of
its Equipment in a satisfactory state of repair and satisfactory operating
condition in accordance with industry standards, ordinary wear and tear
excepted. No Equipment shall be annexed or affixed to or become part of any
realty, unless the owner of the realty has executed and delivered a Landlord
Waiver in such form as* TBCC. Where Borrower is permitted to dispose of any
Equipment under this Agreement or by any consent thereto hereafter given by
TBCC, Borrower shall do so at arm's length, in good faith and by obtaining the
maximum amount of recovery practicable therefor and without impairing the
operating integrity or value of the remaining Equipment.
*shall be reasonably acceptable to
3.6 Investment Property. Borrower shall have the right to retain all
Investment Property payments and distributions, unless and until a Default or an
Event of Default has occurred. If a Default or an Event of Default
-3-
<PAGE>
TBCC Loan and Security Agreement
- --------------------------------------------------------------------------------
exists, Borrower shall hold all payments on, and proceeds of, and distributions
with respect to, Investment Property in trust for TBCC, and Borrower shall
deliver all such payments, proceeds and distributions to TBCC, immediately upon
receipt, in their original form, duly endorsed, to be applied to the Obligations
in such order as TBCC shall determine. Upon the request of TBCC, any such
distributions and payments with respect to any Investment Property held in any
securities account shall be held and retained in such securities account as part
of the Collateral.
3.7 Further Assurances. Borrower will perform any and all steps that
TBCC may reasonably request to perfect TBCC's security interests in the
Collateral, including, without limitation, executing and filing financing and
continuation statements in form and substance satisfactory to TBCC. TBCC is
hereby authorized by Borrower to sign Borrower's name or file any financing
statements or similar documents or instruments covering the Collateral whether
or not Borrower's signature appears thereon. Borrower agrees, from time to time,
at TBCC's request, to file notices of Liens, financing statements, similar
documents or instruments, and amendments, renewals and continuations thereof,
and cooperate with TBCC, in connection with the continued perfection and
protection of the Collateral. If any Collateral is in the possession or control
of any Person other than a public warehouseman where the warehouse receipt is in
the name of or held by TBCC, Borrower shall notify such Person of TBCC's
security interest therein and, upon request, instruct such Person or Persons to
hold all such Collateral for the account of TBCC and subject to TBCC's
instructions. If so requested by TBCC, Borrower will deliver to TBCC warehouse
receipts covering any Collateral located in warehouses showing TBCC as the
beneficiary thereof and will also cause the warehouseman to execute and deliver
such agreements as TBCC may request relating to waivers of liens by such
warehouseman and the release of the Inventory to TBCC on its demand. Borrower
shall defend the Collateral against all claims and demands of all Persons.
3.8 Power of Attorney. Borrower hereby appoints and constitutes TBCC as
Borrower's attorney-in-fact (i) to request at any time from account debtors
verification of information concerning Receivables and the amount owing thereon,
(ii) upon the occurrence and during the continuance of an Event of Default, to
convey any item of Collateral to any purchaser thereof, (iii) to give or sign
Borrower's name to any notices or statements necessary or desirable to create or
continue the Lien on any Collateral granted hereunder, (iv) to execute and
deliver to any securities intermediary or other Person any entitlement order,
account control agreement or other notice, document or instrument with respect
to any Investment Property, and (v) to make any payment or take any act
necessary or desirable to protect or preserve any Collateral. TBCC's authority
hereunder shall include, without limitation, the authority to execute and give
receipt for any certificate of ownership or any document, transfer title to any
item of Collateral and take any other actions arising from or incident to the
powers granted to TBCC under this Agreement. This power of attorney is coupled
with an interest and is irrevocable.
4. Representations and Warranties of Borrower. Borrower represents and warrants
as follows:
4.1 Organization, Good Standing and Qualification. Borrower (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the State set forth above, (ii) has the corporate power and authority to own
its properties and assets and to transact the businesses in which it is engaged
and (iii) is duly qualified, authorized to do business and in good standing in
each jurisdiction where it is engaged in business, except to the extent that the
failure to so qualify or be in good standing would not have a Material Adverse
Effect.
4.2 Locations of Offices, Records and Collateral. The address of the
principal place of business and chief executive office of Borrower is, and the
books and records of Borrower and all of its chattel paper and records relating
to Collateral are maintained exclusively in the possession of Borrower at, the
address of Borrower specified in the heading of this Agreement. Borrower has
places of business, and Collateral is located, only at such address and at the
addresses set forth in the Schedule and at any additional locations reported to
TBCC as provided in Section 5.8(c) as to which TBCC has taken all necessary
action to perfect and protect its security interests in the Collateral at any
such locations.
4.3 Authority. Borrower has the requisite corporate power and authority
to execute, deliver and perform its obligations under each of the Loan
Documents. All corporate action necessary for the execution, delivery and
performance by Borrower of the Loan Documents has been taken.
4.4 Enforceability. This Agreement is, and, when executed and
delivered, each other Loan Document will be, the legal, valid and binding
obligation of Borrower enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency or similar laws
affecting creditors' rights generally and general principles of equity.
4.5 No Conflict. The execution, delivery and performance of each Loan
Document by Borrower does not and will not contravene (i) any of the Governing
Documents, (ii) any Requirement of Law or (iii) any Material Contract and will
not result in the imposition of any Liens other than in favor of TBCC.
4.6 Consents and Filings. No consent, authorization or approval of, or
filing with or other act by, any shareholders of Borrower or any Governmental
Authority or other Person is required in connection with the execution,
delivery, performance, validity or enforceability of this Agreement or any other
Loan Document, the consummation of the transactions contemplated hereby or
thereby or the continuing operations of Borrower following such consummation,
except (i) those that have been obtained or made, (ii) the filing of financing
statements under the Uniform Commercial Code and (iii) any necessary filings
with U.S. Copyright Office and the U.S. Patent and Trademark Office.
4.7 Solvency. Borrower is Solvent and will be Solvent upon the
completion of all transactions contemplated to occur on or before the date of
this Agree-
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ment (including, without limitation, the Loans to be made on the date of this
Agreement).
4.8 Financial Data. Borrower has provided to TBCC complete and accurate
Financial Statements, which have been prepared in accordance with GAAP
consistently applied throughout the periods involved and fairly present the
financial position and results of operations of Borrower for each of the periods
covered, subject, in the case of any quarterly financial statements, to normal
year-end adjustments and the absence of notes. Borrower has no Contingent
Obligation or liability for taxes, unrealized losses, unusual forward or
long-term commitments or long-term leases, which is not reflected in such
Financial Statements or the footnotes thereto. Since the last date covered by
such Financial Statements, there has been no sale, transfer or other disposition
by Borrower of any material part of its business or property and no purchase or
other acquisition of any business or property (including any capital stock of
any other Person) material in relation to the financial condition of Borrower at
said date. Since said date, (i) there has been no change, occurrence,
development or event which has had or could reasonably be expected to have a
Material Adverse Effect and (ii) none of the capital stock of Borrower has been
redeemed, retired, purchased or otherwise acquired for value by Borrower.
4.9 Accuracy and Completeness of Information. All data, reports and
information previously, now or hereafter furnished by or on behalf of Borrower
to TBCC or the Auditors are or will be true and accurate in all material
respects on the date as of which such data, reports and information are dated or
certified, and not incomplete by omitting to state any material fact necessary
to make such data, reports and information not materially misleading at such
time. There are no facts now known to Borrower which individually or in the
aggregate would reasonably be expected to have a Material Adverse Effect and
which have not been disclosed in writing to TBCC*.
*or otherwise disclosed in Borrower's public filings with the
Securities and Exchange Commission
4.10 No Joint Ventures, Partnerships or Subsidiaries. Borrower is not
engaged in any joint venture or partnership with any other Person. Borrower has
no Subsidiaries.
4.11 Corporate and Trade Name. During the past five years, Borrower has
not been known by or used any other corporate, trade or fictitious name except
for its name as set forth on the signature page of this Agreement and the other
names specified in the Schedule.
4.12 No Actual or Pending Material Modification of Business. There
exists no actual or, to the best of Borrower's knowledge after due inquiry,
threatened termination, cancellation or limitation of, or any modification or
change in the business relationship of Borrower with any customer or group of
customers whose purchases individually or in the aggregate are material to the
operation of Borrower's business or with any material supplier.
4.13 No Broker's or Finder's Fees. No broker or finder brought about
this Agreement or the Loans. No broker's or finder's fees or commissions will be
payable by Borrower to any Person in connection with the transactions
contemplated by this Agreement.
4.14 Taxes and Tax Returns. Borrower has properly completed and timely
filed all income tax returns it is required to file. The information filed is
complete and accurate in all material respects. All deductions taken in such
income tax returns are appropriate and in accordance with applicable laws and
regulations, except deductions that may have been disallowed but are being
challenged in good faith and for which adequate reserves have been made in
accordance with GAAP. All taxes, assessments, fees and other governmental
charges for periods beginning prior to the date of this Agreement have been
timely paid (or, if not yet due, adequate reserves therefor have been
established in accordance with GAAP) and Borrower has no liability for taxes in
excess of the amounts so paid or reserves so established. No deficiencies for
taxes have been claimed, proposed or assessed by any taxing or other
Governmental Authority against Borrower and no notice of any tax Lien has been
filed. There are no pending or threatened audits, investigations or claims for
or relating to any liability for taxes and there are no matters under discussion
with any Governmental Authority which could result in an additional liability
for taxes. No extension of a statute of limitations relating to taxes,
assessments, fees or other governmental charges is in effect with respect to
Borrower. Borrower is not a party to and does not have any obligations under any
written tax sharing agreement or agreement regarding payments in lieu of taxes.
4.15 No Judgments or Litigation. Except as set forth in the Schedule,
no judgments, orders, writs or decrees are outstanding against Borrower, nor is
there now pending or, to the knowledge of Borrower after due inquiry, threatened
litigation, contested claim, investigation, arbitration, or governmental
proceeding by or against Borrower that (i) could individually or in the
aggregate be likely in the reasonable business judgment of TBCC to have a
Material Adverse Effect or (ii) purports to affect the legality, validity or
enforceability of this Agreement, any other Loan Document or the consummation of
the transactions contemplated hereby or thereby.
4.16 Investments; Contracts. Borrower (i) has not committed to make any
Investment; (ii) is not a party to any indenture, agreement, contract,
instrument or lease or subject to any charter, by-law or other corporate
restriction or any injunction, order, restriction or decree, which would
materially and adversely affect its business, operations, assets or financial
condition; (iii) is not a party to any "take or pay" contract as to which it is
the purchaser; or (iv) has no material contingent or long-term liability,
including management contracts (excluding employment contracts of full-time
individual officers or employees), which could have a Material Adverse Effect.
4.17 No Defaults; Legal Compliance. Borrower is not in default under
any term of any Material Contract or in violation of any Requirement of Law, nor
is Borrower subject to any investigation with respect to a claimed violation of
any Requirement of Law.
4.18 Rights in Collateral; Priority of Liens. All Collateral is owned
or leased by Borrower, free and clear of any and all Liens in favor of third
parties, other than Permitted Liens. The Liens granted to TBCC pursuant to
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the Loan Documents constitute valid, enforceable and perfected first-priority
Liens on the Collateral, except for Permitted Liens.*
*Notwithstanding the foregoing, on the date of the initial funding of
the Loans hereunder, certain proceeds of such initial Loans will be used to
discharge Liens held by a financial institution that has made secured loans to
Borrower, and such Liens shall be discharged in full upon such repayment to such
financial institution.
4.19 Intellectual Property. Set forth in the written Representations
and Warranties of Borrower previously delivered to TBCC is a complete and
accurate list of all patents, trademarks, trade names, service marks and
copyrights (registered and unregistered), and all applications therefor and
licenses thereof, of Borrower. Borrower owns or licenses all material patents,
trademarks, service-marks, logos, tradenames, trade secrets, know-how,
copyrights, or licenses and other rights with respect to any of the foregoing,
which are necessary or advisable for the operation of its business as presently
conducted or proposed to be conducted. To the best of its knowledge Borrower has
not infringed any patent, trademark, service-mark, tradename, copyright, license
or other right owned by any other Person by the sale or use of any product,
process, method, substance, part or other material presently contemplated to be
sold or used, where such sale or use would reasonably be expected to have a
Material Adverse Effect and no claim or litigation is pending, or to the best of
Borrower's knowledge, threatened against or affecting Borrower that contests its
right to sell or use any such product, process, method, substance, part or other
material.
4.20 Labor Matters. There are no existing or threatened strikes,
lockouts or other disputes relating to any collective bargaining or similar
agreement to which Borrower is a party which would, individually or in the
aggregate, be reasonably likely to have a Material Adverse Effect.
4.21 Licenses and Permits. Borrower has obtained and holds in full
force and effect, all franchises, licenses, leases, permits, certificates,
authorizations, qualifications, easements, rights of way and other rights and
approvals which are necessary or advisable for the operation of its business as
presently conducted and as proposed to be conducted, except where the failure to
possess any of the foregoing (individually or in the aggregate) would not have a
Material Adverse Effect.
4.22 Government Regulation. Borrower is not subject to regulation under
the Public Utility Holding Company Act of 1935, the Federal Power Act, the
Interstate Commerce Act, the Investment Company Act of 1940, or any other
Requirement of Law that limits its ability to incur indebtedness or its ability
to consummate the transactions contemplated by this Agreement and the other Loan
Documents.
4.23 Business and Properties. The business of Borrower is not affected
by any fire, explosion, accident, strike, lockout or other labor dispute,
drought, storm, hail, earthquake, embargo, act of God or of the public enemy or
other casualty (whether or not covered by insurance) that could reasonably be
expected to have a Material Adverse Effect.
4.24 Affiliate Transactions. Borrower is not a party to or bound by any
agreement or arrangement (whether oral or written) to which any Affiliate of
Borrower is a party except (i) in the ordinary course of and pursuant to the
reasonable requirements of the business of Borrower and (ii) upon fair and
reasonable terms no less favorable to Borrower than it could obtain in a
comparable arm's-length transaction with an unaffiliated Person.
4.25 Survival of Representations. All representations made by Borrower
in this Agreement and in any other Loan Document executed and delivered by it in
connection herewith shall survive the execution and delivery hereof and thereof
and the closing of the transactions contemplated hereby and thereby.
5. AFFIRMATIVE COVENANTS OF THE BORROWER. Until termination of this Agreement
and payment and satisfaction of all Obligations:
5.1 Corporate Existence. Borrower shall (i) maintain its corporate
existence, (ii) maintain in full force and effect all material licenses, bonds,
franchises, leases, trademarks, qualifications and authorizations to do
business, and all material patents, contracts and other rights necessary or
advisable to the profitable conduct of its business, and (iii) continue in, and
limit its operations to, the same lines of business as presently conducted by
it.
5.2 Maintenance of Property. Borrower shall keep all property useful
and necessary to its business in good working order and condition (ordinary wear
and tear excepted) in accordance with its past operating practices.
5.3 Affiliate Transactions. Borrower shall conduct transactions with
any of its Affiliates on an arm's-length basis or other basis no less favorable
to Borrower and which are approved by the board of directors of Borrower.
5.4 Taxes. Borrower shall pay when due (i) all tax assessments, and
other governmental charges and levies imposed against it or any of its property
and (ii) all lawful claims that, if unpaid, might by law become a Lien upon its
property; provided, however, that, unless such tax assessment, charge, levy or
claim has become a Lien on any of the property of Borrower, it need not be paid
if it is being contested in good faith, by appropriate proceedings diligently
conducted and an adequate reserve or other appropriate provision shall have been
made therefor as required in accordance with GAAP.
5.5 Requirements of Law. Borrower shall comply with all Requirements of
Law applicable to it, including, without limitation, all applicable Federal,
State, local or foreign laws and regulations, including, without limitation,
those relating to environmental matters, employee matters, the Employee
Retirement Income Security Act of 1974, and the collection, payment and deposit
of employees' income, unemployment and social security taxes, provided that
Borrower shall not be deemed in violation hereof if Borrower's failure to comply
with any of the foregoing would not require more than * to cure the same.
*$75,000
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5.6 Insurance. Borrower shall maintain public liability insurance,
business interruption insurance, third party property damage insurance and
replacement value insurance on its assets (including the Collateral) under such
policies of insurance, with such insurance companies, in such amounts and
covering such risks as are at all times satisfactory to TBCC in its commercially
reasonable judgment, all of which policies covering the Collateral shall name
TBCC as an additional insured and lender loss payee in case of loss, and contain
other provisions as TBCC may reasonably require to protect fully TBCC's interest
in the Collateral and any payments to be made under such policies.
5.7 Books and Records; Inspections. Borrower shall (i) maintain books
and records (including computer records) pertaining to the Collateral in such
detail, form and scope as is consistent with good business practice and (ii)
provide TBCC and its agents access to the premises of Borrower at any time and
from time to time, during normal business hours and upon reasonable notice under
the circumstances, and at any time on and after the occurrence of a Default or
Event of Default, for the purposes of (A) inspecting and verifying the
Collateral, (B) inspecting and copying (at Borrower's expense) any and all
records pertaining thereto, and (C) discussing the affairs, finances and
business of Borrower with any officer, employee or director of Borrower or with
the Auditors. Borrower shall reimburse TBCC for the reasonable travel and
related expenses of TBCC's employees or, at TBCC's option, of such outside
accountants or examiners as may be retained by TBCC to verify or inspect
Collateral, records or documents of Borrower on a regular basis or for a special
inspection if TBCC deems the same appropriate. If TBCC's own employees are used,
Borrower shall also pay therefor $600 per person per day (or such other amount
as shall represent TBCC's then current standard charge for the same), or, if
outside examiners or accountants are used, Borrower shall also pay TBCC such sum
as TBCC may be obligated to pay as fees therefor.
5.8 Notification Requirements. Borrower shall give TBCC the following
notices and other documents:
(a) Notice of Defaults. Borrower shall give TBCC written
notice of any Default or Event of Default within two Business Days after
becoming aware of the same.
(b) Proceedings or Adverse Changes. Borrower shall give TBCC
written notice of any of the following, promptly, and in any event within five
Business Days after Borrower becomes aware of any of the following: (i) any
proceeding being instituted or threatened by or against it in any federal,
state, local or foreign court or before any commission or other regulatory body
involving a sum, together with the sum involved in all other similar
proceedings, in excess of * in the aggregate, (ii) any order, judgment or decree
being entered against Borrower or any of its properties or assets involving a
sum, together with the sum of all other orders, judgments or decrees, in excess
of * in the aggregate, and (iii) any actual or prospective change, development
or event which has had or could reasonably be expected to have a Material
Adverse Effect.
*$75,000
(c) Change of Name or Chief Executive Office; Opening
Additional Places of Business. Borrower shall give TBCC at least 30 days prior
written notice of any change of Borrower's corporate name or its chief executive
office or of the opening of any additional place of business.
(d) Casualty Loss. Borrower shall (i) provide written notice
to TBCC, within ten Business Days, of any material damage to, the destruction of
or any other material loss to any asset or property owned or used by Borrower
other than any such asset or property with a net book value (individually or in
the aggregate) less than * or any condemnation, confiscation or other taking, in
whole or in part, or any event that otherwise diminishes so as to render
impracticable or unreasonable the use of such asset or property owned or used by
Borrower together with the amount of the damage, destruction, loss or diminution
in value and (ii) diligently file and prosecute its claim or claims for any
award or payment in connection with any of the foregoing.
*$25,000
(e) Intellectual Property. Borrower shall promptly give TBCC
written notice of any copyright registration made by it, any rights Borrower may
obtain to any copyrightable works, new trademarks or any new patentable
inventions, and of any renewal or extension of any trademark registration, or if
it shall otherwise become entitled to the benefit of any patent or patent
application or trademark or trademark application.
(f) Deposit Accounts and Security Accounts. Borrower shall
promptly give TBCC written notice of the opening of any new bank account or
other deposit account, and any new securities account.
5.9 Qualify to Transact Business. Borrower shall qualify to transact
business as a foreign corporation in each jurisdiction where the nature or
extent of its business or the ownership of its property requires it to be so
qualified or authorized and where failure to qualify or be authorized would have
a Material Adverse Effect.
5.10 Financial Reporting. Borrower shall timely deliver to TBCC the
following financial information: the information set forth in the Schedule, and,
when requested by TBCC in its good-faith judgment, any further information
respecting Borrower or any Collateral. Borrower authorizes TBCC to communicate
directly with its officers, employees and Auditors and to examine and make
abstracts from its books and records. Borrower authorizes its Auditors to
disclose to TBCC any and all financial statements, work papers and other
information of any kind that they may have with respect to Borrower and its
business and financial and other affairs. Borrower shall deliver a letter
addressed to the Auditors requesting them to comply with the provisions of this
paragraph when requested by TBCC.
5.11 Payment of Liabilities. Borrower shall pay and discharge, in the
ordinary course of business, all Indebtedness, except where the same may be
contested in good faith by appropriate proceedings and adequate reserves with
respect thereto have been provided on the books and records of Borrower in
accordance with GAAP.
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5.12 Patents, Trademarks, Etc. Borrower shall do and cause to be done
all things necessary to preserve, maintain and keep in full force and effect all
of its registrations of trademarks, service marks and other marks, trade names
and other trade rights, patents, copyrights and other intellectual property in
accordance with *prudent business practices.
*commercially reasonable
5.13 Proceeds of Collateral. Without limiting any of the other terms of
this Agreement, and without implying any consent to any sale or other transfer
of Collateral in violation of any provision of this Agreement, Borrower shall
deliver to TBCC all proceeds of any sale or other transfer or disposition of any
Collateral, immediately upon receipt of the same and in the same form as
received, with any necessary endorsements, and Borrower will not commingle any
such proceeds with any of its other funds or property, but will segregate them
from the other assets of Borrower and will hold them in trust and for the
account and as the property of TBCC.
5.14 Solvency. Borrower shall be Solvent at all times.
6. Negative Covenants. Until termination of this Agreement and payment and
satisfaction of all Obligations:
6.1 Contingent Obligations. Borrower will not, directly or indirectly,
incur, assume, or suffer to exist any Contingent Obligation, excluding
indemnities given in connection with this Agreement or the other Loan Documents
in favor of TBCC or in connection with the sale of Inventory or other asset
dispositions permitted hereunder.
6.2 Corporate Changes. Borrower will not, directly or indirectly, merge
or consolidate with any Person, or liquidate or dissolve (or suffer any
liquidation or dissolution)*.
*, except that Borrower may merge or consolidate if the surviving
entity shall be Borrower and shall have a net worth immediately after giving
effect to such merger or consolidation of at least as great as the net worth of
Borrower prior to such merger or consolidation and such merger or consolidation
shall not result in any Event of Default, provided that TBCC has taken all
necessary steps to protect and continue perfected its first priority security
interest in the Collateral (subject only to Permitted Liens)
6.3 Change in Nature of Business. Borrower will not at any time make
any material change in the lines of its business as carried on at the date of
this Agreement or enter into any new line of business.
6.4 Sales of Assets. Borrower will not, directly or indirectly, in any
fiscal year, sell, transfer or otherwise dispose of any assets, or grant any
option or other right to purchase or otherwise acquire any assets other than (i)
Equipment with an aggregate value of less than $25,000 the proceeds of which
shall be paid to TBCC and applied to the Obligations, (ii) sales of Inventory in
the ordinary course of business and (iii) licenses or sublicenses on a
non-exclusive basis of intellectual property in the ordinary course of
Borrower's business.
6.5 Cancellation of Debt. Borrower will not cancel any claim or debt
owed to it, except in the ordinary course of business.*
*The foregoing provision shall not prohibit Borrower from forgiving any
indebtedness existing on the date hereof of employees of Borrower owing to
Borrower, provided that all such forgiven indebtedness does not exceed $350,000
in the aggregate.
6.6 Loans to Other Persons. Borrower will not at any time make loans or
advance any credit (except to trade debtors in the ordinary course of business)
to any Person in excess of $25,000 in the aggregate at any time for all such
loans.
6.7 Liens. Borrower will not, directly or indirectly, at any time
create, incur, assume or suffer to exist any Lien on or with respect to any of
the Collateral, other than: Liens created hereunder and by any other Loan
Document; and Permitted Liens.
6.8 Dividends, Stock Redemptions. Borrower will not, directly or
indirectly, pay any dividends or distributions on, purchase, redeem or retire
any shares of any class of its capital stock or any warrants, options or rights
to purchase any such capital stock, whether now or hereafter outstanding
("Stock"), or make any payment on account of or set apart assets for a sinking
or other analogous fund for, the purchase, redemption, defeasance, retirement or
other acquisition of its Stock, or make any other distribution in respect
thereof, either directly or indirectly, whether in cash or property or in
obligations of Borrower, except for dividends paid solely in stock of the
Borrower.
6.9 Investments in Other Persons. Borrower will not, directly or
indirectly, at any time make or hold any Investment in any Person (whether in
cash, securities or other property of any kind) other than Investments in Cash
Equivalents.
6.10 Partnerships; Subsidiaries; Joint Ventures; Management Contracts.
Borrower will not at any time create any direct or indirect Subsidiary, enter
into any joint venture or similar arrangement or become a partner in any general
or limited partnership or enter into any management contract (other than an
employment contract for the employment of an officer or employee entered into in
the regular course of Borrower's business) permitting third party management
rights with respect to Borrower's business.
6.11 Fiscal Year. Borrower will not change its fiscal year.
6.12 Accounting Changes. Borrower will not at any time make or permit
any change in accounting policies or reporting practices, except as required *by
GAAP.
*or permitted
6.13 Broker's or Finder's Fees. Borrower will not pay or incur any
broker's or finder's fees in connection with this Agreement or the transactions
contemplated hereby.
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6.14 Unusual Terms of Sale. Borrower will not sell goods or products on
extended terms, consignment terms, on a progress billing or bill and hold basis,
or on any other unusual terms*.
* or which would not otherwise be in accordance with Borrower's
customary business practices
6.15 Amendments of Material Contracts. Borrower will not amend, modify,
cancel or terminate, or permit the amendment, modification, cancellation or
termination of, any Material Contract, if such amendment, modification,
cancellation or termination could have a Material Adverse Effect.
6.16 Sale and Leaseback Obligations. Borrower will not at any time
create, incur or assume any obligations as lessee for the rental of real or
personal property in connection with any sale and leaseback transaction.
6.17 Acquisition of Stock or Assets. Borrower will not acquire or
commit or agree to acquire all or any stock, securities or assets of any other
Person other than Inventory and Equipment acquired in the ordinary course of
business.
7. EVENTS OF DEFAULT.
7.1 Events of Default. The occurrence of any of the following events
shall constitute an "Event of Default":
(a) Borrower shall fail to pay any principal, interest, fees,
expenses or other Obligations when payable, whether at stated maturity, by
acceleration, or otherwise; or
(b) Borrower shall default in the performance or observance of
any agreement, covenant, condition, provision or term contained in Section 1.1,
1.2, 1.4, 3.3, 5.7, 5.13, 6 (and its Sections and subsections), or 8.1 of this
Agreement, or Borrower shall fail to perform any non-monetary Obligation which
by its nature cannot be cured; or
(c) Borrower shall default in the performance or observance of
any other agreement, covenant, condition, provision or term of this Agreement
(other than those referred to in Section 7.1(a) above or Section 7.1(b) above)
or any other Loan Document, and such failure continues uncured for a period of
five Business Days after the date it occurs; or
(d) Borrower or any Guarantor shall dissolve, wind up or
otherwise cease to conduct its business; or
(e) Borrower or any Guarantor shall become the subject of (i)
an Insolvency Event except as set forth in clause (e) of the definition of
Insolvency Event or (ii) an Insolvency Event as set forth in clause (e) of the
definition of Insolvency Event that is not dismissed within sixty days; or
(f) any representation or warranty made by or on behalf of
Borrower or any Guarantor to TBCC, under this Agreement or otherwise, shall be
incorrect or misleading in any material respect when made or deemed made; or
(g) A change in the ownership or control* of more than ** of
the voting stock of the Borrower compared to such ownership on the date of this
Agreement;
*of the Borrower as a result of the acquisition of beneficial ownership
by any Person or group of Persons acting in concert
**50%
(h) any judgment or order for the payment of money shall be
rendered against Borrower and shall not be stayed, vacated, bonded or discharged
within thirty days; or
(i) any defined "Event of Default" shall occur under any other
Loan Document; or Borrower or any Guarantor shall deny or disaffirm its
obligations under any of the Loan Documents or any Liens granted in connection
therewith or shall otherwise challenge any of its obligations under any of the
Loan Documents; or any Liens granted in any of the Collateral shall be
determined to be void, voidable or invalid, are subordinated or are not given
the priority contemplated by this Agreement; or
(j) any Loan Document shall for any reason cease to create a
valid and perfected Lien on the Collateral purported to be covered thereby, of
first priority (except for Permitted Liens); or
(k) the Auditors for Borrower shall deliver a Qualified
opinion on any Financial Statement; or
(l) Borrower or any Guarantor (i) shall fail to pay any
Indebtedness owing to TBCC under any other agreement with TBCC or note or
instrument in favor of TBCC, when due (whether at scheduled maturity or by
required prepayment, acceleration, demand or otherwise), or (ii) shall otherwise
be in breach of or default in any of its obligations under any such agreement,
note or instrument with respect to any such Indebtedness; or
(m) Borrower or any Guarantor (i) shall fail to pay any
Indebtedness in excess of $50,000 owing to any Person other than TBCC or any
interest or premium thereon, when due (whether at scheduled maturity or by
required prepayment, acceleration, demand or otherwise), or (ii) shall otherwise
be in breach or default in any of its obligations under any agreement with
respect to any such Indebtedness, if the effect of such breach, default or
failure to pay is to cause such Indebtedness to become due or redeemed or permit
the holder or holders of such Indebtedness (or a trustee or agent on behalf of
such holder or holders) to declare such Indebtedness due or require such
Indebtedness to be redeemed prior to its stated maturity; or
(n) the occurrence of any event or condition that, in TBCC's
*judgment, could reasonably be expected to have a Material Adverse Effect.
*good faith business
TBCC may cease making any Loans hereunder during any of the above cure periods,
and thereafter if any Event of Default has occurred and is continuing.
7.2 Remedies. Upon the occurrence and during the continuance of an
Event of Default, TBCC shall have all rights and remedies under applicable law
and the Loan Documents, and TBCC may do any or all of the following: Declare all
Obligations to be immediately due and payable (except with respect to any Event
of Default with respect to Borrower set forth in Section 7.1(e), in which case
all
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Obligations shall automatically become immediately due and payable) without
presentment, demand, protest or any other action or obligation of TBCC;
(a) Cease making any Loans or other extensions of credit to
Borrower of any kind;
(b) Take possession of all documents, instruments, files and
records (including the copying of any computer records) relating to the
Receivables or other Collateral and use (at the expense of Borrower) such
supplies or space of Borrower at Borrower's places of business necessary to
administer and collect the Receivables and other Collateral;
(c) Accelerate or extend the time of payment, compromise,
issue credits, or bring suit on the Receivables and other Collateral (in the
name of Borrower or TBCC) and otherwise administer and collect the Receivables
and other Collateral;
(d) Collect, receive, dispose of and realize upon any
Investment Property, including withdrawal of any and all funds from any
securities accounts;
(e) Sell, assign and deliver the Receivables and other
Collateral, with or without advertisement, at public or private sale, for cash,
on credit or otherwise, subject to applicable law; and
(f) Foreclose on the security interests created pursuant to
the Loan Documents by any available procedure, take possession of any or all of
the Collateral, with or without judicial process and enter any premises where
any Collateral may be located for the purpose of taking possession of or
removing the same.
(g) TBCC may bid or become a purchaser at any sale, free from
any right of redemption, which right is expressly waived by Borrower, if
permitted under applicable law. If notice of intended disposition of any
Collateral is required by law, it is agreed that ten days' notice shall
constitute reasonable notification. Borrower will assemble the Collateral and
make it available at such locations as TBCC may specify, whether at the premises
of Borrower or elsewhere, and will make available to TBCC the premises and
facilities of Borrower for the purpose of TBCC's taking possession of or
removing the Collateral or putting the Collateral in salable form.
(h) Borrower recognizes that TBCC may be unable to make a
public sale of any or all of the Investment Property, by reason of prohibitions
contained in applicable securities laws or otherwise, and expressly agrees that
a private sale to a restricted group of purchasers for investment and not with a
view to any distribution thereof shall be considered a commercially reasonable
sale.
7.3 Receivables. Upon the occurrence and during the continuance of an
Event of Default, or at any time that TBCC believes in good faith that fraud has
occurred or that Borrower has failed to deliver the proceeds of Receivables or
other Collateral to TBCC as required by this Agreement or any other Loan
Document, TBCC may (i) settle or adjust disputes or claims directly with account
debtors for amounts and upon terms which it considers advisable, and (ii) notify
account debtors on the Receivables and other Collateral that the Receivables and
Collateral have been assigned to TBCC, and that payments in respect thereof
shall be made directly to TBCC. If an Event of Default has occurred and is
continuing or TBCC reasonably believes in good faith that fraud has occurred, or
that Borrower has failed to deliver the proceeds of Receivables or other
Collateral to TBCC as required by this Agreement or any other Loan Document,
Borrower hereby irrevocably authorizes and appoints TBCC, or any Person TBCC may
designate, as its attorney-in-fact, at Borrower's sole cost and expense, to
exercise, all of the following powers, which are coupled with an interest and
are irrevocable, until all of the Obligations have been indefeasibly paid and
satisfied in full in cash: (A) to receive, take, endorse, sign, assign and
deliver, all in the name of TBCC or Borrower, any and all checks, notes, drafts,
and other documents or instruments relating to the Collateral; (B) to receive,
open and dispose of all mail addressed to Borrower and to notify postal
authorities to change the address for delivery thereof to such address as TBCC
may designate; and (C) to take or bring, in the name of TBCC or Borrower, all
steps, actions, suits or proceedings deemed by TBCC necessary or desirable to
enforce or effect collection of Receivables and other Collateral or file and
sign Borrower's name on a proof of claim in bankruptcy or similar document
against any obligor of Borrower.
7.4 Right of Setoff. In addition to all rights of offset that TBCC may
have under applicable law, upon the occurrence and during the continuance of any
Event of Default, and whether or not TBCC has made any demand or the Obligations
of Borrower have matured, TBCC shall have the right to appropriate and apply to
the payment of the Obligations of Borrower all deposits and other obligations
then or thereafter owing by TBCC to or for the credit or the account of
Borrower. In the event that TBCC exercises any of its rights under this Section,
TBCC shall provide notice to Borrower of such exercise, provided that the
failure to give such notice shall not affect the validity of the exercise of
such rights.
7.5 License for Use of Software and Other Intellectual Property. After
the occurrence and during the continuance of an Event of Default, unless
expressly prohibited by any licensor thereof, TBCC is hereby granted a license
to use all computer software programs, data bases, processes, trademarks,
tradenames and materials used by Borrower in connection with its businesses or
in connection with the Collateral.
7.6 No Marshalling; Deficiencies; Remedies Cumulative. The net cash
proceeds resulting from TBCC's exercise of any of its rights with respect to
Collateral, including any and all Collections (after deducting all of TBCC's
reasonable expenses related thereto), shall be applied by TBCC to such of the
Obligations in such order as TBCC shall elect in its sole and absolute
discretion, whether due or to become due. Borrower shall remain liable to TBCC
for any deficiencies and TBCC shall remit to Borrower or its successor or
assign, any surplus resulting therefrom. The remedies specified in this
Agreement are cumulative, may be exercised in such order and with respect to
such Collateral as TBCC may deem desirable and are not intended to be exclusive,
and the full or partial exercise of any of them shall not preclude the full or
partial exercise of any other available remedy under this
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Agreement, under any other Loan Document, at equity or at law.
7.7 Waivers. Borrower hereby waives any bonds, security or sureties
required by any statute, rule or any other law as an incident to any taking of
possession by TBCC of any Collateral. Borrower also waives any damages (direct,
consequential or otherwise) occasioned by the enforcement of TBCC's rights under
this Agreement or any other Loan Document including the taking of possession of
any Collateral or the giving of notice to any account debtor or the collection
of any Receivable or other Collateral (other than damages that are the result of
acts or omissions constituting gross negligence or willful misconduct of TBCC).
These waivers and all other waivers provided for in this Agreement and the other
Loan Documents have been negotiated by the parties and Borrower acknowledges
that it has been represented by counsel of its own choice and has consulted such
counsel with respect to its rights hereunder.
7.8 Right to Make Payments. In the event that Borrower shall fail to
purchase or maintain insurance required hereunder, or to pay any tax,
assessment, government charge or levy, except as the same may be otherwise
permitted hereunder, or in the event that any Lien prohibited hereby shall not
be paid in full or discharged, or in the event that Borrower shall fail to
perform or comply with any other covenant, promise or obligation to TBCC
hereunder or under any other Loan Document, TBCC may (but shall not be required
to) perform, pay, satisfy, discharge or bond the same for the account of
Borrower, and all amounts so paid by TBCC shall be treated as a Loan hereunder
to Borrower and shall constitute part of the Obligations.
8. ASSIGNMENTS AND PARTICIPATIONS.
8.1 Assignments. Borrower shall not assign this Agreement or any right
or obligation hereunder without the prior written consent of TBCC. TBCC may
assign (without the consent of Borrower) to one or more Persons all or a portion
of its rights and obligations under this Agreement and the other Loan Documents.
8.2 Participations. TBCC may sell participations in or to all or a
portion of its rights and obligations under this Agreement (including, without
limitation, all or a portion of the Loans); provided, however, that TBCC's
obligations under this Agreement shall remain unchanged.
8.3 Disclosure. TBCC may, in connection with any permitted assignment
or participation or proposed assignment or participation pursuant to this
Agreement, disclose to the assignee or participant or proposed assignee or
participant any information relating to Borrower furnished to TBCC by or on
behalf of Borrower.
9. DEFINITIONS.
9.1 General Definitions. As used herein, the following terms shall have
the meanings herein specified (to be equally applicable to both the singular and
plural forms of the terms defined):
(a) "Affiliate" means as to any Person, any other Person who
directly or indirectly controls, is under common control with, is controlled by
or is a director or officer of such Person. As used in this definition,
"control" (including its correlative meanings, "controlled by" and "under common
control with") means possession, directly or indirectly, of the power to direct
or cause the direction of management or policies (whether through ownership of
voting securities or partnership or other ownership interests, by contract or
otherwise), provided that, in any event, any Person who owns directly or
indirectly twenty percent (20%) or more of the securities having ordinary voting
power for the election of the members of the board of directors or other
governing body of a corporation or twenty percent (20%) or more of the
partnership or other ownership interests of any other Person (other than as a
limited partner of such other Person) will be deemed to control such
corporation, partnership or other Person.
(b) "Agreement" means this Loan and Security Agreement, as
amended, supplemented or otherwise modified from time to time.
(c) "Auditors" means a nationally recognized firm of
independent public accountants selected by Borrower and reasonably satisfactory
to TBCC.
(d) "Bankruptcy Code" means Title 11 of the United States Code
entitled "Bankruptcy," as that title may be amended from time to time, or any
successor statute.
(e) "Borrowing" means a borrowing of Loans.
(f) "Business Day" means any day other than a Saturday, Sunday
or any other day on which commercial banks in Chicago, Illinois are required or
permitted by law to close.
(g) "Cash Equivalents" means (i) securities issued, guaranteed
or insured by the United States or any of its agencies with maturities of not
more than one year from the date acquired; (ii) certificates of deposit with
maturities of not more than one year from the date acquired, issued by any U.S.
federal or state chartered commercial bank of recognized standing which has
capital and unimpaired surplus in excess of $100,000,000; (iii) investments in
money market funds registered under the Investment Company Act of 1940; and (iv)
other instruments, commercial paper or investments acceptable to TBCC in its
sole discretion.
(h) "Collateral" means Receivables, Investment Property,
Inventory, Equipment, and Other Property, and all additions and accessions
thereto and substitutions and replacements therefor and improvements thereon,
and all proceeds (whether cash or other property) and products thereof,
including, without limitation, all proceeds of insurance covering the same and
all tort claims in connection therewith, and all records, files, computer
programs and files, data and writings relating to the foregoing, and all
equipment containing the foregoing.
(i) "Collections" means all cash, funds, checks, notes,
instruments, any other form of remittance tendered by account debtors in respect
of payment of Receivables and any other payments received by Borrower with
respect to any other Collateral.
(j) "Compliance Certificate" means a certificate as to
compliance with the Obligations, on TBCC's standard form (in effect from time to
time).
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(k) "Contingent Obligation" means any direct, indirect,
contingent or non-contingent guaranty or obligation for the Indebtedness of
another Person, except endorsements in the ordinary course of business.
(l) "Default" means any of the events specified in Section
7.1, whether or not any of the requirements for the giving of notice, the lapse
of time, or both, or any other condition, has been satisfied.
(m) "Eligible Receivables" means and includes only those
Receivables which TBCC in its sole discretion deems eligible for borrowing,
based on such considerations as TBCC in its sole discretion may deem appropriate
from time to time and less any such reserves as TBCC, in its sole discretion,
may require. Without limiting the fact that the determination of which
Receivables are eligible for borrowing is a matter of TBCC's sole discretion,
the following (the "Minimum Eligibility Requirements") are the minimum
requirements for a Receivable to be an Eligible Receivable: (i) the Receivable
must not be outstanding for more than 90 days from its invoice date, (ii) the
Receivable must not represent progress billings, or be due under a fulfillment
or requirements contract with the account debtor, (iii) the Receivable must not
be subject to any contingencies (including Receivables arising from sales on
consignment, guaranteed sale or other terms pursuant to which payment by the
account debtor may be conditional), (iv) the Receivable must not be owing from
an account debtor with whom the Borrower has any dispute (whether or not
relating to the particular Receivable), (v) the Receivable must not be owing
from an Affiliate of Borrower, (vi) the Receivable must not be owing from an
account debtor which is subject to any insolvency or bankruptcy proceeding, or
whose financial condition is not acceptable to TBCC, or which, fails or goes out
of a material portion of its business, (vii) the Receivable must not be owing
from the United States or any department, agency or instrumentality thereof
(unless there has been compliance, to TBCC's satisfaction, with the United
States Assignment of Claims Act), (viii) the Receivable must not be owing from
an account debtor located outside the United States or Canada (unless
pre-approved by TBCC in its discretion in writing, or backed by a letter of
credit satisfactory to TBCC, or FCIA insured satisfactory to TBCC), (ix) the
Receivable must not be owing from an account debtor to whom Borrower is or may
be liable for goods purchased from such account debtor or otherwise, (x) the
Receivable must not violate any representation or warranty set forth in this
Agreement, and (xi) the Receivable must not be one in which TBCC does not have a
first-priority, valid, perfected Lien. Without limiting the generality of the
foregoing, Borrower must be in compliance with all requirements of the Loan
Documents regarding registration with the U.S. Copyright Office of any
copyrightable software in order for any Receivable arising from any licensing of
such software to constitute an Eligible Receivable hereunder. Receivables owing
from one account debtor will not be deemed Eligible Receivables to the extent
they exceed 25% of the total eligible Receivables outstanding. In addition, if
more than 50% of the Receivables owing from an account debtor are outstanding
more than 90 days from their invoice date (without regard to unapplied credits)
or are otherwise not eligible Receivables, then all Receivables owing from that
account debtor will be deemed ineligible for borrowing. TBCC may, from time to
time, in its sole discretion, revise the Minimum Eligibility Requirements, upon
written notice to the Borrower.
(n) "Equipment" means all machinery, equipment, furniture,
fixtures, conveyors, tools, materials, storage and handling equipment, hydraulic
presses, cutting equipment, computer equipment and hardware, including central
processing units, terminals, drives, memory units, printers, keyboards, screens,
peripherals and input or output devices, molds, dies, stamps, vehicles, and
other equipment of every kind and nature and wherever situated now or hereafter
owned by Borrower or in which Borrower may have any interest as lessee or
otherwise (to the extent of such interest), together with all additions and
accessions thereto, all replacements and all accessories and parts therefor, all
manuals, blueprints, know-how, warranties and records in connection therewith,
all rights against suppliers, warrantors, manufacturers, sellers or others in
connection therewith, and together with all substitutes for any of the
foregoing.
(o) "Event of Default" means the occurrence of any of the
events specified in Section 7.1.
(p) "Financial Statements" means the balance sheets, profit
and loss statements, statements of cash flow, and statements of changes in
intercompany accounts, if any, for the period specified, prepared in accordance
with GAAP and consistent with prior practices.
(q) "GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board that are applicable
to the circumstances as of the date of determination. Whenever any accounting
term is used herein which is not otherwise defined, it shall be interpreted in
accordance with GAAP.
(r) "Good Faith" means "good faith" as defined in the Uniform
Commercial Code, from time to time in effect in the State of Illinois.
(s) "Governing Documents" means the articles or certificate of
incorporation and by-laws of Borrower.
(t) "Governmental Authority" means any nation or government,
any state or other political subdivision thereof or any entity exercising
executive, legislative, judicial, regulatory or administrative functions thereof
or pertaining thereto.
(u) "Guarantor" means any present or future guarantor of any
or all of the Obligations.
(v) "Indebtedness" means, with respect to any Person, as of
the date of determination any indebtedness, liability or obligation of such
Person (including without limitation obligations under capital leases and
Contingent Obligations).
(w) "Insolvency Event" means, with respect to any Person, the
occurrence of any of the following: (a) such Person shall be adjudicated
insolvent or bankrupt, or shall generally fail to pay or admit in writing its
inability to pay its debts as they become due, (b) such Person shall seek
dissolution or reorganization or the appointment of a
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receiver, trustee, custodian or liquidator for it or a substantial portion of
its property, assets or business or to effect a plan or other arrangement with
its creditors, (c) such Person shall make a general assignment for the benefit
of its creditors, or consent to or acquiesce in the appointment of a receiver,
trustee, custodian or liquidator for a substantial portion of its property,
assets or business, (d) such Person shall file a voluntary petition under any
bankruptcy, insolvency or similar law or take any corporate or similar act in
furtherance thereof, or (e) such Person, or a substantial portion of its
property, assets or business shall become the subject of an involuntary
proceeding or petition for its dissolution, reorganization, and such proceeding
is not dismissed or stayed within sixty days, or the appointment of a receiver,
trustee, custodian or liquidator, and such receiver is not dismissed within
sixty days.
(x) "Inventory" means all present and future goods intended
for sale, lease or other disposition by Borrower including, without limitation,
all raw materials, work in process, finished goods and other retail inventory,
goods in the possession of outside processors or other third parties, goods
consigned to Borrower to the extent of its interest therein as consignee,
materials and supplies of any kind, nature or description which are or might be
used in connection with the manufacture, packing, shipping, advertising, selling
or finishing of any such goods, and all documents of title or documents
representing the same.
(y) "Investment" in any Person means, as of the date of
determination thereof, any payment or contribution, or commitment to make a
payment or contribution, by any Person including, without limitation, property
contributed or committed to be contributed by any Person, on its account for or
in connection with its acquisition of any stock, bonds, notes, debentures,
partnership or other ownership interest or any other security of the Person in
whom such Investment is made or any evidence of indebtedness by reason of a
loan, advance, extension of credit, guaranty or other similar obligation for any
debt, liability or indebtedness of such Person in whom the Investment is made.
(z) "Investment Property" means any and all investment
property of Borrower, including all securities, whether certificated or
uncertificated, security entitlements, securities accounts, commodity contracts
and commodity accounts, and all financial assets held in any securities account
or otherwise, wherever located, and whether now existing or hereafter acquired
or arising.
(aa) "Lien" means any lien, claim, charge, pledge, security
interest, assignment, hypothecation, deed of trust, mortgage, lease, conditional
sale, retention of title or other preferential arrangement having substantially
the same economic effect as any of the foregoing, whether voluntary or imposed
by law.
(bb) "Loan Account" has the meaning specified in Section 1.3.
(cc) "Loan Documents" means this Agreement and all present and
future documents and instruments delivered or to be delivered by Borrower or any
of its Affiliates or any Guarantor under, in connection with or relating to this
Agreement, as each of the same may be amended, supplemented or otherwise
modified from time to time.
(dd) "Loans" means the loans and financial accommodations made
by TBCC hereunder.
(ee) "Material Adverse Effect" means (i) a material adverse
effect on the business, prospects, operations, results of operations, assets,
liabilities or condition (financial or otherwise) of Borrower, (ii) the
impairment of Borrower's ability to perform its obligations under the Loan
Documents to which it is a party or of TBCC to enforce the Obligations or
realize upon the Collateral or (iii) a material adverse effect on the value of
the Collateral or the amount which TBCC would be likely to receive (after giving
consideration to delays in payment and costs of enforcement) in the liquidation
of the Collateral.
(ff) "Material Contract" means any contract or other
arrangement to which Borrower is a party (other than the Loan Documents) for
which breach, nonperformance, cancellation or failure to renew could have a
Material Adverse Effect.
(gg) "Obligations" means and includes all loans (including the
Loans), advances, debts, liabilities, obligations, covenants and duties owing by
Borrower to TBCC of any kind or nature, present or future, whether or not
evidenced by any note, guaranty or other instrument, which may arise under, out
of, or in connection with, this Agreement, any other Loan Document or any other
agreement executed in connection herewith or therewith or otherwise, whether or
not for the payment of money, whether arising by reason of an extension of
credit, opening, guaranteeing or confirming of a letter of credit, loan,
guaranty, indemnification or in any other manner, whether direct or indirect
(including those acquired by assignment, purchase, discount or otherwise),
whether absolute or contingent, due or to become due, now due or hereafter
arising and however acquired. The term includes, without limitation, all
interest (including interest accruing on or after an Insolvency Event, whether
or not an allowed claim), charges, expenses, commitment, facility, closing and
collateral management fees, letter of credit fees, reasonable attorneys' fees,
and any other sum properly chargeable to Borrower under this Agreement, the
other Loan Documents or any other agreement executed in connection herewith or
therewith or otherwise.
(hh) "Other Property" means all present and future:
instruments, documents, documents of title, securities, bonds, notes, promissory
notes, drafts, acceptances, letters of credit and rights to receive proceeds of
letters of credit, deposit accounts, chattel paper, certificates, insurance
policies, insurance proceeds, leases, computer tapes, causes of action,
judgments, claims against third parties, leasehold rights in any personal
property, books, ledgers, files and records, general intangibles (including
without limitation, all contract rights, tax refunds, rights to receive tax
refunds, patents, patent applications, copyrights (registered and unregistered),
royalties, licenses, permits, franchise rights, authorizations, customer lists,
rights of indemnification, contribution and subrogation, computer programs,
discs and software, trade secrets, computer service contracts, trademarks, trade
names, service marks and names, logos, goodwill, deposits,
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choses in action, designs, blueprints, plans, know-how, telephone numbers and
rights thereto, credits, reserves, and all forms of obligations whatsoever now
or hereafter owing to Borrower), all property at any time in the possession or
under the control of TBCC, and all security given by Borrower to TBCC pursuant
to any other Loan Document or agreement.
(ii) "Permitted Liens" means such of the following as to which
no enforcement, collection, execution, levy or foreclosure proceeding shall have
been commenced and be continuing: (i) Liens for taxes, assessments and other
governmental charges or levies or the claims or demands of landlords, carriers,
warehousemen, mechanics, laborers, materialmen and other like Persons arising by
operation of law in the ordinary course of business for sums which are not yet
due and payable,* (ii) deposits or pledges to secure the payment of workmen's
compensation, unemployment insurance or other social security benefits or
obligations, public or statutory obligations, surety or appeal bonds, bid or
performance bonds, or other obligations of a like nature incurred in the
ordinary course of business (but nothing in this clause (ii) shall permit the
creation of Liens on Receivables, Investment Property, Inventory or Other
Property), (iii) zoning restrictions, easements, encroachments, licenses,
restrictions or covenants on the use of the Property which do not materially
impair either the use of the Property in the operation of the business of
Borrower or the value of the Property, (iv) rights of general application
reserved to or vested in any municipality or other governmental, statutory or
public authority to control or regulate property, or to use property in a manner
which does not materially impair the use of the property for the purposes for
which it is held by Borrower, (v) state and municipal Liens for personal
property taxes which are not yet due and payable, and (vi) Purchase Money Liens.
* including, in the case of Liens securing tax obligations of Borrower,
Liens securing taxes that are due and payable by Borrower but are being
contested in good faith by Borrower in appropriate proceedings, so long as such
tax liabilities are adequately reserved against in accordance with GAAP,
(jj) "Person" means any individual, sole proprietorship,
partnership, joint venture, limited liability company, trust, unincorporated
organization, joint stock company, association, corporation, institution,
entity, party or government (including any division, agency or department
thereof) or any other legal entity, whether acting in an individual, fiduciary
or other capacity, and, as applicable, the successors, heirs and assigns of
each.
(kk) "Plan" means any employee benefit plan, program or
arrangement maintained or contributed to by Borrower or with respect to which it
may incur liability.
(ll) "Purchase Money Lien" means a Lien on any item of
Equipment created substantially simultaneously with the acquisition of such
Equipment for the purpose of financing such acquisition, provided that such Lien
shall attach only to the Equipment acquired.
(mm) "Qualification" or "Qualified" means, with respect to any
report of Auditors covering Financial Statements, a material qualification to
such report (i) resulting from a limitation on the scope of examination of such
Financial Statements or the underlying data, (ii) as to the capability of
Borrower to continue operations as a going concern or (iii) which could be
eliminated by changes in Financial Statements or notes thereto covered by such
report (such as by the creation of or increase in a reserve or a decrease in the
carrying value of assets) and which if so eliminated by the making of any such
change and after giving effect thereto would result in a Default or an Event of
Default.
(nn) "Receivables" means all present and future accounts and
accounts receivable, together with all security therefor and guaranties thereof
and all rights and remedies relating thereto, including any right of stoppage in
transit.
(oo) "Requirement of Law" means (a) the Governing Documents,
(b) any law, treaty, rule, regulation, order or determination of an arbitrator,
court or other Governmental Authority or (c) any franchise, license, lease,
permit, certificate, authorization, qualification, easement, right of way, right
or approval binding on Borrower or any of its property.
(pp) "Schedule" means the Schedule to this Agreement being
signed concurrently by Borrower and TBCC, as amended from time to time.
(qq) "Solvent" means when used with respect to any Person that
as of the date as to which such Person's solvency is to be measured: (a) the
fair salable value of its assets is in excess of the total amount of its
liabilities (including contingent liabilities as valued in accordance with
applicable law) as they become absolute and matured; (b) it has sufficient
capital to conduct its business; and (c) it is able to meet its debts as they
mature.
(rr) "Subsidiary" means, as to any Person, a corporation or
other entity in which that Person directly or indirectly owns or controls shares
of stock or other ownership interests having ordinary voting power to elect a
majority of the board of directors or appoint other managers of such corporation
or other entity.
9.2 Accounting Terms and Determinations. Unless otherwise defined or
specified herein, all accounting terms used in this Agreement shall be construed
in accordance with GAAP, applied on a basis consistent in all material respects
with the Financial Statements delivered to TBCC on or before the date of this
Agreement. All accounting determinations for purposes of determining compliance
with this Agreement shall be made in accordance with GAAP as in effect on the
date of this Agreement and applied on a basis consistent in all material
respects with the audited Financial Statements delivered to TBCC on or before
the date of this Agreement. The Financial Statements required to be delivered
hereunder, and all financial records, shall be maintained in accordance with
GAAP. If GAAP shall change from the basis used in preparing the audited
Financial Statements delivered to TBCC on or before the date of this Agreement,
the Compliance Certificates required to be delivered pursuant to this Agreement
shall include calculations setting forth the adjustments necessary to
demonstrate how Borrower is in compliance with the Financial Covenants (if any)
based upon GAAP as in effect on the date of this Agreement.
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9.3 Other Terms; Headings; Construction. Unless otherwise defined
herein, terms used herein that are defined in the Uniform Commercial Code, from
time to time in effect in the State of Illinois, shall have the meanings set
forth therein. Each of the words "hereof," "herein," and "hereunder" refer to
this Agreement as a whole. The term "including", whenever used in this
Agreement, shall mean "including (but not limited to)". An Event of Default
shall "continue" or be "continuing" unless and until such Event of Default has
been waived or cured within the grace period specified therefor under Section
7.1. References to Articles, Sections, Annexes, Schedules, and Exhibits are
internal references to this Agreement, and to its attachments, unless otherwise
specified. The headings and any Table of Contents are for convenience only and
shall not affect the meaning or construction of any provision of this Agreement.
This Agreement has been fully reviewed and negotiated between the parties and no
uncertainty or ambiguity in any term or provision of this Agreement shall be
construed strictly against TBCC or Borrower under any rule of construction or
otherwise.
10. GENERAL PROVISIONS.
10.1 GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF
THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND ANY DISPUTE ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, WHETHER
SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE GOVERNED BY THE
INTERNAL LAWS AND DECISIONS OF THE STATE OF ILLINOIS.
10.2 SUBMISSION TO JURISDICTION. ALL DISPUTES BETWEEN THE BORROWER AND
TBCC, WHETHER SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVED
ONLY BY STATE AND FEDERAL COURTS LOCATED IN CHICAGO, ILLINOIS, AND THE COURTS TO
WHICH AN APPEAL THEREFROM MAY BE TAKEN; PROVIDED, HOWEVER, THAT TBCC SHALL HAVE
THE RIGHT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST THE
BORROWER OR ITS PROPERTY IN ANY LOCATION REASONABLY SELECTED BY TBCC IN GOOD
FAITH TO ENABLE TBCC TO REALIZE ON SUCH PROPERTY, OR TO ENFORCE A JUDGMENT OR
OTHER COURT ORDER IN FAVOR OF TBCC. THE BORROWER AGREES THAT IT WILL NOT ASSERT
ANY PERMISSIVE COUNTERCLAIMS, SETOFFS OR CROSS-CLAIMS IN ANY PROCEEDING BROUGHT
BY TBCC. THE BORROWER WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF
THE COURT IN WHICH TBCC HAS COMMENCED A PROCEEDING, INCLUDING, WITHOUT
LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON FORUM NON
CONVENIENS.
10.3 SERVICE OF PROCESS. THE BORROWER HEREBY IRREVOCABLY DESIGNATES CT
CORPORATION SYSTEM, 1209 ORANGE STREET, WILMINGTON, DELAWARE 19801, AS THE
DESIGNEE AND AGENT OF THE BORROWER TO RECEIVE, FOR AND ON BEHALF OF THE
BORROWER, SERVICE OF PROCESS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO
THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. IT IS UNDERSTOOD THAT A COPY OF SUCH
PROCESS SERVED ON SUCH AGENT AT ITS ADDRESS WILL BE PROMPTLY FORWARDED BY MAIL
TO THE BORROWER, BUT THE FAILURE OF THE BORROWER TO RECEIVE SUCH COPY SHALL NOT
AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. NOTHING HEREIN SHALL AFFECT THE
RIGHT OF THE LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.
10.4 LIMITATION OF LIABILITY. TBCC SHALL HAVE NO LIABILITY TO THE
BORROWER (WHETHER SOUNDING IN TORT, CONTRACT, OR OTHERWISE) FOR LOSSES SUFFERED
BY THE BORROWER IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO THE
TRANSACTIONS OR RELATIONSHIPS CONTEMPLATED BY THIS AGREEMENT, OR ANY ACT,
OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH, UNLESS IT IS DETERMINED BY
A FINAL AND NONAPPEALABLE JUDGMENT OR COURT ORDER BINDING ON TBCC THAT THE
LOSSES WERE THE RESULT OF ACTS OR OMISSIONS CONSTITUTING GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT OF TBCC. THE BORROWER HEREBY WAIVES ALL FUTURE CLAIMS AGAINST
TBCC FOR SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES.
10.5 Delays; Partial Exercise of Remedies. No delay or omission of TBCC
to exercise any right or remedy hereunder shall impair any such right or operate
as a waiver thereof. No single or partial exercise by TBCC of any right or
remedy shall preclude any other or further exercise thereof, or preclude any
other right or remedy.
10.6 Notices. Except as otherwise provided herein, all notices and
correspondence hereunder shall be in writing and sent by certified or registered
mail, return receipt requested, by overnight delivery service, with all charges
prepaid, or by telecopier followed by a hard copy sent by regular mail, to the
parties at their addresses set forth in the heading to this Agreement. All such
notices and correspondence shall be deemed given (i) if sent by certified or
registered mail, three Business Days after being postmarked, (ii) if sent by
overnight delivery service, when received at the above stated addresses or when
delivery is refused and (iii) if sent by telecopier transmission, when receipt
of such transmission is acknowledged. Borrower's and TBCC's telecopier numbers
for purpose of notice hereunder are set forth in the Schedule; each party's
number may be changed by written notice to the other party.
10.7 Indemnification; Reimbursement of Expenses of Collection. Borrower
hereby indemnifies and agrees, whether or not any of the transactions
contemplated by this Agreement or the other Loan Documents are consummated, to
defend and hold harmless (on an after-tax basis) TBCC, its successors and
assigns and their respective directors, officers, agents, employees, advisors,
shareholders, attorneys and Affiliates (each, an "Indemnified Party")
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TBCC Loan and Security Agreement
- --------------------------------------------------------------------------------
from and against any and all losses, claims, damages, liabilities, deficiencies,
obligations, fines, penalties, actions (whether threatened or existing),
judgments, suits (whether threatened or existing) or expenses (including,
without limitation, reasonable fees and disbursements of counsel, experts,
consultants and other professionals) incurred by any of them (collectively,
"Claims") (except, in the case of each Indemnified Party, to the extent that any
Claim is determined in a final and non-appealable judgment by a court of
competent jurisdiction to have directly resulted from such Indemnified Party's
gross negligence or willful misconduct) arising out of or by reason of (i) any
litigation, investigation, claim or proceeding which arises out of or is related
to (A) Borrower, or this Agreement, any other Loan Document or the transactions
contemplated hereby or thereby, (B) any actual or proposed use by Borrower of
the proceeds of the Loans, or (C) TBCC's entering into this Agreement or any
other Loan Document or any other agreements and documents relating hereto,
including, without limitation, amounts paid in settlement, court costs and the
reasonable fees and disbursements of counsel incurred in connection with any
such litigation, investigation, claim or proceeding, (ii) any remedial or other
action taken by Borrower in connection with compliance by Borrower, or any of
its properties, with any federal, state or local environmental laws, rules or
regulations, and (iii) any pending, threatened or actual action, claim,
proceeding or suit by any shareholder or director of Borrower or any actual or
purported violation of Borrower's charter, by-laws or any other agreement or
instrument to which Borrower is a party or by which any of its properties is
bound. In addition and without limiting the generality of the foregoing,
Borrower shall, upon demand, pay to TBCC all reasonable costs and expenses
incurred by TBCC (including the reasonable fees and disbursements of counsel and
other professionals) in connection with the preparation, execution, delivery,
administration, modification and amendment of the Loan Documents, and pay to
TBCC all reasonable costs and expenses (including the reasonable fees and
disbursements of counsel and other professionals) paid or incurred by TBCC in
order to enforce or defend any of its rights under or in respect of this
Agreement, any other Loan Document or any other document or instrument now or
hereafter executed and delivered in connection herewith, collect the Obligations
or otherwise administer this Agreement, foreclose or otherwise realize upon the
Collateral or any part thereof, prosecute actions against, or defend actions by,
account debtors; commence, intervene in, or defend any action or proceeding;
initiate any complaint to be relieved of the automatic stay in bankruptcy; file
or prosecute any probate claim, bankruptcy claim, third-party claim, or other
claim; examine, audit, copy, and inspect any of the Collateral or any of
Borrower's books and records; protect, obtain possession of, lease, dispose of,
or otherwise enforce TBCC's security interest in, the Collateral; and otherwise
represent TBCC in any litigation relating to Borrower. Without limiting the
generality of the foregoing, Borrower shall pay TBCC a fee with respect to each
wire transfer in the amount of $15 plus all bank charges and a fee of $15 for
all returned checks plus all bank charges. If either TBCC or Borrower files any
lawsuit against the other predicated on a breach of this Agreement, the
prevailing party in such action shall be entitled to recover its reasonable
costs and attorneys' fees, including (but not limited to) reasonable attorneys'
fees and costs incurred in the enforcement of, execution upon or defense of any
order, decree, award or judgment. If and to the extent that the Obligations of
Borrower hereunder are unenforceable for any reason, Borrower hereby agrees to
make the maximum contribution to the payment and satisfaction of the Obligations
which is permissible under applicable law. Borrower's obligations under Section
2.4 and this Section shall survive any termination of this Agreement and the
other Loan Documents and the payment in full of the Obligations, and are in
addition to, and not in substitution of, any of the other Obligations.
10.8 Amendments and Waivers. Any provision of this Agreement or any
other Loan Document may be amended or waived if, but only if, such amendment or
waiver is in writing and signed by Borrower and TBCC and then any such amendment
or waiver shall be effective only to the extent set forth therein. The failure
of TBCC at any time or times to require Borrower to strictly comply with any of
the provisions of this Agreement or any other present or future agreement
between Borrower and TBCC shall not waive or diminish any right of TBCC later to
demand and receive strict compliance therewith. Any waiver of any default shall
not waive or affect any other default, whether prior or subsequent, and whether
or not similar. None of the provisions of this Agreement or any other agreement
now or in the future executed by Borrower and delivered to TBCC shall be deemed
to have been waived by any act or knowledge of TBCC or its agents or employees,
but only by a specific written waiver signed by an authorized officer of TBCC
and delivered to Borrower.
10.9 Counterparts; Telecopied Signatures. This Agreement and any waiver
or amendment hereto may be executed in counterparts and by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but both of which shall together constitute one and the same
instrument. This Agreement and each of the other Loan Documents and any notices
given in connection herewith or therewith may be executed and delivered by
telecopier or other facsimile transmission all with the same force and effect as
if the same was a fully executed and delivered original manual counterpart.
10.10 Severability. In case any provision in or obligation under this
Agreement or any other Loan Document shall be invalid, illegal or unenforceable
in any jurisdiction, the validity, legality and enforceability of the remaining
provisions or obligations, or of such provision or obligation in any other
jurisdiction, shall not in any way be affected or impaired thereby.
10.11 Joint and Several Liability. If Borrower consists of more than
one Person, their liability shall be joint and several, and the compromise of
any claim with, or the release of, any Borrower shall not constitute a
compromise with, or a release of, any other Borrower.
10.12 Maximum Rate. Notwithstanding anything to the contrary contained
elsewhere in this Agreement or in any other Loan Document, the parties hereto
hereby agree that all agreements between them under this Agreement and the other
Loan Documents, whether now existing or hereafter arising and whether written or
oral, are expressly limited so that in no contingency or event whatsoever shall
the amount paid, or agreed to be paid, to TBCC for the use,
-16-
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TBCC Loan and Security Agreement
- --------------------------------------------------------------------------------
forbearance, or detention of the money loaned to Borrower and evidenced hereby
or thereby or for the performance or payment of any covenant or obligation
contained herein or therein, exceed the maximum non-usurious interest rate, if
any, that at any time or from time to time may be contracted for, taken,
reserved, charged or received on the Obligations, under the laws of the State of
Illinois (or the laws of any other jurisdiction whose laws may be mandatorily
applicable notwithstanding other provisions of this Agreement and the other Loan
Documents), or under applicable federal laws which may presently or hereafter be
in effect and which allow a higher maximum non-usurious interest rate than under
the laws of the State of Illinois (or such other jurisdiction), in any case
after taking into account, to the extent permitted by applicable law, any and
all relevant payments or charges under this Agreement and the other Loan
Documents executed in connection herewith, and any available exemptions,
exceptions and exclusions (the "Highest Lawful Rate"). If due to any
circumstance whatsoever, fulfillment of any provisions of this Agreement or any
of the other Loan Documents at the time performance of such provision shall be
due shall exceed the Highest Lawful Rate, then, automatically, the obligation to
be fulfilled shall be modified or reduced to the extent necessary to limit such
interest to the Highest Lawful Rate, and if from any such circumstance TBCC
should ever receive anything of value deemed interest by applicable law which
would exceed the Highest Lawful Rate, such excessive interest shall be applied
to the reduction of the principal amount then outstanding hereunder or on
account of any other then outstanding Obligations and not to the payment of
interest, or if such excessive interest exceeds the principal unpaid balance
then outstanding hereunder and such other then outstanding Obligations, such
excess shall be refunded to Borrower. All sums paid or agreed to be paid to TBCC
for the use, forbearance, or detention of the Obligations and other indebtedness
of Borrower to TBCC shall, to the extent permitted by applicable law, be
amortized, prorated, allocated and spread throughout the full term of such
indebtedness, until payment in full thereof, so that the actual rate of interest
on account of all such indebtedness does not exceed the Highest Lawful Rate
throughout the entire term of such indebtedness. The terms and provisions of
this Section shall control every other provision of this Agreement, the other
Loan Documents and all other agreements between the parties hereto.
10.13 Entire Agreement; Successors and Assigns. This Agreement and the
other Loan Documents constitute the entire agreement between the parties,
supersede any prior written and verbal agreements between them, and shall bind
and benefit the parties and their respective successors and permitted assigns.
There are no oral understandings, oral representations or oral agreements
between the parties which are not set forth in this Agreement or in other
written agreements signed by the parties in connection herewith.
10.14 MUTUAL WAIVER OF JURY TRIAL. TBCC AND BORROWER EACH HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT
OF, OR IN ANY WAY RELATING TO: (I) THIS AGREEMENT; OR (II) ANY OTHER PRESENT OR
FUTURE INSTRUMENT OR AGREEMENT BETWEEN TBCC AND BORROWER; OR (III) ANY CONDUCT,
ACTS OR OMISSIONS OF TBCC OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH TBCC OR
BORROWER; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT
OR OTHERWISE.
Borrower:
VIDAMED, INC.
By: ______________________
Title: ____________________
TBCC:
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By: ______________________
Title: ____________________
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<PAGE>
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TBCC
Schedule to
Loan and Security Agreement
Borrower: VidaMed, Inc.,
a Delaware Corporation
Address: 46107 Landing Parkway
Fremont, California 94538-6407
Date: October 20, 1998
This Schedule is an integral part of the Loan and Security Agreement between
TRANSAMERICA BUSINESS CREDIT CORPORATION ("TBCC") and the above borrower
("Borrower") of even date.
1. Credit Limit (Section 1.1): In respect of the Loans constituting the
revolving credit facility (the "Revolving
Loans"), an amount not to exceed the lesser
of (1) or (2) below:
(1) $3,000,000 at any one time outstanding;
or
(2) an amount equal to 80% of the amount of
Borrower's Eligible Receivables (as defined
in Section 9.1(n) above).
In respect of the term loans (each a "Term
Loan") to be made hereunder as contemplated
by the Equipment Loan Rider hereto, an amount
not to exceed a principal amount of
$2,500,000 in the aggregate. As used herein,
the term "Loans" shall include the Revolving
Loans and the Term Loans.
2. Interest (Section 2.1): 1. The following shall apply to the Revolving
Loans:
The interest rate in effect throughout each
calendar month during the term of this
Agreement shall be the highest "Base Rate" in
effect during such month, plus 2% per annum,
provided that the interest rate in effect in
each month shall not be less than 9% per
annum, and provided that the interest charged
for each month in respect of the revolving
credit facility shall be a minimum of $4,000
through December 31, 1998, and $96,000 per
annum thereafter, regardless of the amount of
the Obligations outstanding. Interest shall
be calculated on the basis of a 360-day year
for the actual number of days elapsed. "Base
Rate" shall mean the higher of (a) the
highest prime, base or equivalent rate of
interest announced from time to time by
Citibank, N.A., First National Bank of
Chicago and Bank of America National Trust
and Savings Association (which may not be the
lowest rate of interest charged by such bank)
and (b) the published annualized rate for
90-day dealer commercial paper which appears
in the "Money Rates" section of The Wall
Street Journal.
2. Interest on the Term Loans shall accrue at
the interest rate set forth in the promissory
note applicable thereto (each a "Term Note").
3. Fees (Section 2.2): Loan Fee (Revolving Loans): $37,500, payable
concurrently herewith and to be allocated as
follows: $30,000 shall be for the account of
TBCC and $7,500 shall be for the account of
Sand Hill Capital.
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<PAGE>
TBCC Schedule to Loan and Security Agreement
- --------------------------------------------------------------------------------
Loan Fee (Term Loan): $25,000, payable
concurrently herewith and to be allocated as
follows: $12,500 shall be for the account of
TBCC and $12,500 shall be for the account of
Sand Hill Capital.
Termination Fee: (1) Revolving Loan facility:
an amount equal to $8,000 multiplied by each
month (or portion thereof) from the effective
date of termination to the Maturity Date,
which Termination Fee shall be payable on the
date of termination; (2) Term Loan facility:
none.
4. Maturity Date (Section 1.6): In respect of the Revolving Loans, December
31, 1999 (the "Maturity Date"), subject to
automatic renewal and early termination as
provided in Section 1.6 above. The Term Loans
shall mature on the dates set forth in the
Term Notes.
5. Reporting (Section 5.10): Borrower shall provide TBCC with the
following reports:
(a) Monthly Financial Statements.
Monthly unaudited financial
statements, as soon as available,
and in any event within 30 days
after the end of each month.
(b) Monthly Receivable Agings. Monthly
Receivable agings, aged by invoice
date, within 10 days after the end
of each month.
(c) Monthly Payable Agings. Monthly
accounts payable agings, aged by
invoice date, and outstanding or
held check registers within 10 days
after the end of each month.
(d) Monthly Inventory Reports. Monthly
perpetual inventory reports for the
Inventory valued on a first-in,
first-out basis at the lower of
cost or market (in accordance with
generally accepted accounting
principles) or such other inventory
reports as are reasonably requested
by TBCC, all within 30 days after
the end of each month.
(e) Monthly Compliance Certificates. As
soon as available, but not later
than thirty days after the end of
each month, a Compliance
Certificate, with an attached
schedule of calculations
demonstrating compliance or
indicating non-compliance with any
Financial Covenants.
(f) Quarterly Financial Statements.
Quarterly unaudited financial
statements, as soon as available,
and in any event within 30 days
after the end of each fiscal
quarter of Borrower.
(g) Annual Financial Statements. As
soon as available, but not later
than 90 days after the end of the
Borrower's fiscal year, (A)
Borrower's annual audited Financial
Statements; (B) a comparison in
reasonable detail to the prior
year's audited Financial
Statements; (C) the Auditors'
opinion without Qualification, a
"Management Letter" and a statement
indicating that the Auditors have
not obtained knowledge of the
existence of any Default or Event
of Default during their audit; (D)
a narrative discussion of
Borrower's financial condition and
results of operations and the
liquidity and capital resources for
such fiscal year (such discussion
may consist of the "Management's
Discussion and Analysis" Section of
Borrower's reports to the
Securities and Exchange
Commission).
6. Borrower Information: (a) Prior Names of Borrower (Section
4.11): None.
(b) Prior Trade Names of Borrower
(Section 4.11): None.
(c) Existing Trade Names of Borrower
(Section 4.11): None.
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<PAGE>
TBCC Schedule to Loan and Security Agreement
- --------------------------------------------------------------------------------
(d) Other Places of Business and
Locations of Collateral (Section
4.2).
Telo Electronics, Inc.
90 Headquarters Dr.
San Jose, CA 95134
(Manufactures Borrower's generators, holds
materials and finished product)
(e) Litigation, etc. (Section 4.15):
None.
7. FACSIMILE NUMBERS: Borrower: 510-492-4999
TBCC: 818-995-3214
8. CLOSING DEADLINE (Section 1.8): October 20, 1998
9. ADDITIONAL CLOSING The following additional agreements, in form
CONDITIONS (Section 1.8): and substance satisfactory to TBCC and its
counsel, shall be executed and delivered by
Borrower as conditions pursuant to closing:
(a) Streamlined Facility Agreement;
(b) Patent and Trademark Security
Agreement;
(c) Security Agreement in Copyrighted
Works;
(d) a Landlord Agreement in respect of
the Borrower's location at 46107
Landing Parkway, Fremont,
California; and
(e) Equipment Loan Rider.
10. ADDITIONAL PROVISIONS: 1. Warrant. On or before the Closing
Deadline, the Borrower shall provide TBCC
with five-year warrants to purchase 55,000
shares of Common Stock of the Borrower, on
the terms to be set forth in a Stock
Subscription Warrant (the "Warrant"), in
form and substance satisfactory to TBCC, at
an exercise price equal to the 10-day
trading average price of Borrower's Common
Stock for the 10-day period immediately
preceding the Closing Date. Said warrants
shall be deemed fully earned on the date of
issuance thereof, shall be in addition to
all interest and other fees, and shall be
non-refundable.
2. Copyright Registration. Borrower agrees
promptly, and in any event not later than 60
days after the date hereof (the "Registration
Completion Date"), to have any of its
currently unregistered material copyrightable
software, computer programs and other
materials registered with the U.S. Copyright
Office in Washington, D.C. (the "Copyright
Office") and to promptly provide TBCC with
evidence of such registration. Borrower will,
on an ongoing basis, promptly register any
future unregistered material copyrightable
software, computer programs and other
materials with the Copyright Office. Until
the Registration Completion Date Borrower may
request Loans notwithstanding any
noncompliance with Section 2(g) of the
Security Agreement in Copyrighted Works (the
"Security Agreement in Copyrighted Works")
between Borrower and TBCC (which Section 2(g)
requires registration with the Copyright
Office of any copyright the sale, licensing
or other disposition of which results in any
Receivable (a "Copyright Receivable") with
respect to which any Loan is requested).
Effective the Registration Completion Date,
no Loan request under the Revolving Credit
may be made with respect to any Copyright
Receivables if TBCC has not made its filing
with the Copyright Office with respect to the
copyright giving rise to such Copyright
Receivables.
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TBCC Schedule to Loan and Security Agreement
- --------------------------------------------------------------------------------
Borrower: TBCC:
TRANSAMERICA BUSINESS CREDIT
VIDAMED, INC. CORPORATION
By: ______________________ By: ______________________
Title: ____________________ Title: ____________________
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<PAGE>
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TBCC
STREAMLINED FACILITY AGREEMENT
October 20, 1998
Ladies and Gentlemen:
This Streamlined Facility Agreement (this "Agreement") is entered into
between Transamerica Business Credit Corporation ("TBCC") , and VidaMed, Inc.
("Borrower"), in connection with the Loan and Security between TBCC and Borrower
dated October 20, 1998 (the "Loan Agreement"). (This Agreement, the Loan
Agreement, and all other written documents and agreements between TBCC and
Borrower are referred to herein collectively as the "Loan Documents".
Capitalized terms used but not defined in this Agreement, shall have the
meanings set forth in the Loan Agreement.)
This will confirm our agreement that the following provisions (the
"Streamlined Provisions") shall apply, effective on the date hereof, until
terminated as provided below:
1. Borrower will provide TBCC with a monthly Borrowing Base Certificate,
in such form as TBCC shall from time to time specify, within 10 days
after the end of each month, and TBCC shall not require more frequent
schedules of Receivables or other Collateral reporting with respect to
the Receivables, except for the information required in connection with
an advance request. In the event, as of the end of any month, the total
of all Loans and all other Obligations exceeds the Credit Limit,
Borrower shall immediately pay the amount of the excess to TBCC.
2. Delivery of the proceeds of Receivables and other Collateral within one
Business Day after receipt, as called for by Section 1.4 of the Loan
Agreement, will not be required.
3. TBCC will also not require any Blocked Account Agreement, as called for
by Section 1.8 of the Loan Agreement. In addition, Borrower will not be
required to provide TBCC with copies of invoices to customers or
shipping and delivery receipts, as called for by Section 3.3(a) of the
Loan Agreement, or to report customer credits, returns and recoveries
of merchandise as called for by Section 3.3(b) of the Loan Agreement.
TBCC shall have the right to terminate the Streamlined Provisions (i)
at any time upon 15 days' prior written notice to Borrower and (ii) at any time
effective immediately upon written notice to Borrower if any Default or Event of
Default occurs and is continuing.
Upon any termination of the Streamlined Provisions, Borrower shall,
then and thereafter, provide TBCC with such other or additional reporting of
Receivables as TBCC shall request under Section 3.3(a) of the Loan Agreement,
comply in all respects with Section 3.3(b) of the Loan Agreement, and deliver
all proceeds of Receivables and other Collateral to TBCC, within one Business
Day after receipt, as called for by Section 1.4 of the Loan Agreement.
Additionally, Borrower and its
<PAGE>
TBCC Streamlined Facility Agreement
- --------------------------------------------------------------------------------
bank shall execute and deliver a Blocked Account Agreement, in form and
substance satisfactory to TBCC.
Please confirm your agreement to the foregoing by signing the enclosed
copy of this Agreement and returning it to us.
Sincerely yours,
Transamerica Business Credit Corporation
By: ________________________________
Title: _____________________________
Acknowledged and Agreed:
VidaMed, Inc.
By: ________________________________
Title: _____________________________
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<PAGE>
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REVOLVING CREDIT NOTE
$3,000,000 Chicago, Illinois October 20, 1998
FOR VALUE RECEIVED, VidaMed, Inc., a Delaware corporation having its
chief executive office and principal place of business at 46107 Landing Parkway,
Fremont, California 94538-6407 (the "Borrower"), hereby unconditionally and
absolutely promises to pay to the order of TRANSAMERICA BUSINESS CREDIT
CORPORATION, a Delaware corporation ("TBCC"), on the Maturity Date, at TBCC's
office at 9399 West Higgins Road, Suite 600, Rosemont, Illinois 60018, or at
such other location as TBCC may from time to time designate, in lawful money of
the United States of America and in immediately available funds, the principal
amount equal to $3,000,000 or such greater or lesser amount as represents the
aggregate unpaid principal amount of all Loans made by TBCC to the Borrower
under the revolving credit facility made available pursuant to the Loan and
Security Agreement between TBCC and Borrower dated October 20, 1998 (the "Loan
Agreement"). The Borrower further promises to pay interest in like money and
funds at TBCC's office specified above (or at such other location as TBCC may
from time to time designate) on the unpaid principal amount hereof from time to
time outstanding from and including the date hereof until paid in full (both
before and after judgment) at the rates and on the dates set forth in the Loan
Agreement. All capitalized terms used herein which are not defined herein shall
have the meanings ascribed to such terms in the Loan Agreement.
Whenever any payment to be made hereunder shall be stated to be due on
a day that is not a Business Day, the payment may be made on the next succeeding
Business Day and such extension of time shall be included in the computation of
the amount of interest due hereunder.
This Note is entitled to the benefit of all terms and conditions of,
and the security of all security interests, liens, mortgages, deeds of trust and
rights granted pursuant to, the Loan Agreement and the other Loan Documents, and
is subject to optional and mandatory prepayment as provided therein.
Upon the occurrence of any one or more Events of Default, all amounts
then remaining unpaid on this Note may be declared to be or may automatically
become immediately due and payable as provided in the Loan Agreement.
The Borrower acknowledges that the holder of this Note may assign,
transfer or sell all or a portion of its rights and interests to and under this
Note to one or more Persons as provided in the Loan Agreement and that such
Persons shall thereupon become vested with all of the rights and benefits of
TBCC in respect hereof as to all or that portion of this Note which is so
assigned, transferred or sold.
In the event of any conflict between the terms hereof and the terms and
provisions of the Loan Agreement, the terms and provisions of the Loan Agreement
shall control.
The Borrower and all other parties that at any time may be liable
hereupon in any capacity, jointly or severally, waive presentment, demand for
payment, protest and notice of dishonor of this Note and authorize the holder
hereof, without notice, to increase or decrease the rate of interest on any
amount owing under this Note in accordance with the Loan Agreement. The Borrower
further waives promptness, diligence, notice of acceptance and any other notice
with respect to any of the Obligations and any requirement that TBCC exhaust any
rights or take any action against any other Person or any Collateral. The
Borrower further hereby waives notice of or proof of reliance by TBCC upon this
Note, and the Obligations shall conclusively be deemed to have been created,
contracted, incurred, renewed, extended, amended or waived in reliance upon this
Note. The Borrower shall make all payments hereunder and under the Loan
Agreement without defense, offset or counterclaim. No failure to exercise and no
delay in exercising any rights hereunder on the part of the holder hereof shall
operate as a waiver of such rights. This Note may not be changed orally, but
only by an agreement in writing, which is signed by the party or parties against
whom enforcement of any waiver, change, modification or discharge is sought.
THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS NOTE AND THE OTHER
LOAN DOCUMENTS AND ANY DISPUTE ARISING OUT OF OR IN CONNECTION WITH THIS NOTE,
WHETHER SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE GOVERNED BY
THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS) AND DECISIONS
OF THE STATE OF ILLINOIS.
ALL DISPUTES ARISING UNDER OR IN CONNECTION WITH THIS NOTE AND ANY
OTHER LOAN DOCUMENT BETWEEN THE BORROWER AND TBCC, WHETHER SOUNDING IN CONTRACT,
TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVED ONLY BY STATE AND FEDERAL COURTS
LOCATED IN CHICAGO, ILLINOIS, AND THE COURTS TO WHICH AN APPEAL THEREFROM MAY BE
TAKEN; PROVIDED, HOWEVER, THAT TBCC SHALL HAVE THE RIGHT, TO THE EXTENT
PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST THE BORROWER OR ITS PROPERTY IN
ANY LOCATION REASONABLY SELECTED BY TBCC IN GOOD FAITH TO ENABLE TBCC TO REALIZE
ON SUCH PROPERTY, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF
TBCC. THE BORROWER AGREES THAT IT WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS,
SETOFFS OR CROSS-CLAIMS IN ANY PROCEEDING BROUGHT BY TBCC. THE BORROWER WAIVES
ANY OBJECTION THAT THE BORROWER MAY HAVE TO THE LOCATION OF THE
-1-
<PAGE>
TBCC Streamlined Facility Agreement
- --------------------------------------------------------------------------------
COURT IN WHICH TBCC HAS COMMENCED A PROCEEDING, INCLUDING, WITHOUT LIMITATION,
ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON FORUM NON CONVENIENS.
THE BORROWER HEREBY IRREVOCABLY DESIGNATES CT CORPORATION SYSTEM, 1209
ORANGE STREET, WILMINGTON, DELAWARE 19801 AS THE DESIGNEE AND AGENT OF THE
BORROWER TO RECEIVE, FOR AND ON BEHALF OF THE BORROWER SERVICE OF PROCESS IN ANY
LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS NOTE OR ANY OTHER LOAN DOCUMENT.
IT IS UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED ON SUCH AGENT AT ITS ADDRESS
WILL BE PROMPTLY FORWARDED BY MAIL TO THE BORROWER, BUT THE FAILURE OF THE
BORROWER TO RECEIVE SUCH COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH
PROCESS. NOTHING HEREIN SHALL AFFECT THE RIGHT OF TBCC TO SERVE LEGAL PROCESS IN
ANY OTHER MANNER PERMITTED BY LAW.
THE BORROWER AND, BY ITS ACCEPTANCE HEREOF, TBCC EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO: (I) THIS NOTE; OR (II) ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN TBCC AND BORROWER; OR (III) ANY CONDUCT, ACTS OR
OMISSIONS OF TBCC OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH TBCC OR BORROWER; IN EACH
OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
VidaMed, Inc.
By: ________________________________
Title: _____________________________
-2-
<PAGE>
<TABLE>
TBCC Streamlined Facility Agreement
- --------------------------------------------------------------------------------------------------
SCHEDULE
TO REVOLVING CREDIT NOTE
DATED OCTOBER 20, 1998
OF VIDAMED, INC. TO
TRANSAMERICA BUSINESS CREDIT CORPORATION
<CAPTION>
Amount of Unpaid Principal Notation
Date Amount of Loan Interest Rate Principal Paid Balance Made by
---- -------------- ------------- -------------- ------- -------
<S> <C> <C> <C> <C> <C>
</TABLE>
-3-
<PAGE>
- ------------------------------------------------------------------------------
TBCC
Amendment Agreement
Borrower: VidaMed, Inc.,
a Delaware corporation
Address: 46107 Landing Parkway
Fremont, California 94538-6407
Date: January 12, 1999
THIS AMENDMENT AGREEMENT (this "Amendment") is entered into as of the above
date, between the above borrower (the "Borrower"), having its chief executive
office and principal place of business at the address shown above, and
TRANSAMERICA BUSINESS CREDIT CORPORATION, a Delaware corporation ("TBCC"),
having its principal office at 9399 West Higgins Road, Suite 600, Rosemont,
Illinois 60018 and having an office at 15260 Ventura Blvd., Suite 1240, Sherman
Oaks, California 91403.
TBCC and Borrower agree to amend and supplement the Loan and Security Agreement
between them, dated October 20, 1998, as follows. (This Amendment, the Loan
Agreement, any prior written amendments to the Loan Agreement signed by TBCC and
Borrower, and all other written documents and agreements between TBCC and
Borrower, are referred to herein collectively as the "Loan Documents."
Capitalized terms used but not defined in this Amendment shall have the meanings
set forth in the Loan Agreement.)
1. Amendments. The Loan Documents shall be amended as set forth
below.
(a) Section 4.10 of the Loan Agreement captioned "No Joint
Ventures, Partnerships or Subsidiaries" is hereby amended and
restated in its entirety as follows:
No Joint Ventures, Partnerships or Subsidiaries. Borrower is
not engaged in any joint venture or partnership with any other
Person. Borrower has no subsidiaries, except as set forth in
the Schedule.
(b) The Schedule to the Loan Agreement is hereby amended to
add the following subparagraph (f) to paragraph 6 captioned "Borrower
Information":
(f) Subsidiaries (Section 4.10):
(i) VidaMed Australia PTY LTD.
(ii) VidaMed International LTD. [UK]
2. Representations True. To induce TBCC to enter into this
Amendment, Borrower hereby confirms and restates, as of the date hereof, the
representations and warranties made by it in Section 4 of the Loan Agreement.
For the purposes of this Section 2 each reference in Section 4 of the Loan
Agreement to "this Agreement," and the words "hereof," "herein," "hereunder," or
words of like import in such Section, shall mean and be a reference to the Loan
Agreement as amended by this Amendment.
3. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF
THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND ANY DISPUTE ARISING OUT OF OR IN
<PAGE>
TBCC Amendment Agreement
- --------------------------------------------------------------------------------
CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, WHETHER
SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE GOVERNED BY THE
INTERNAL LAWS AND DECISIONS OF THE STATE OF ILLINOIS.
4. General Provisions. TBCC's execution and delivery of, or
acceptance of, this Amendment and any other documents and instruments in
connection herewith shall not be deemed to create a course of dealing or
otherwise create any express or implied duty by it to provide any other or
further amendments, consents or waivers in the future. This Amendment, the Loan
Agreement, and the other Loan Documents set forth in full all of the
representations and agreements of the parties with respect to the subject matter
hereof and supersede all prior discussions, representations, agreements and
understandings between the parties with respect to the subject hereof. Except as
herein expressly amended and supplemented, all of the terms and provisions of
the Loan Agreement and the other Loan Documents shall continue in full force and
effect and the same are hereby ratified and confirmed. This Amendment forms part
of the Loan Agreement and the terms of the Loan Agreement are incorporated
herein by reference.
Borrower: TBCC:
TRANSAMERICA BUSINESS CREDIT
VIDAMED, INC. CORPORATION
By: ______________________ By: ______________________
Title: ____________________ Title: ____________________
2
MANUFACTURING AGREEMENT
Humphrey Systems - VidaMed, Inc.
Page 1 of 14
MANUFACTURING AGREEMENT
This Agreement, is made this 5th day of January 1999 ("Effective Date") by and
between VidaMed, Inc., a Delaware Corporation, having principal offices at 46107
Landing Parkway, Fremont, California, 94538 (hereinafter called "VidaMed") and
Humphrey Systems, a Division of Carl Zeiss, Inc., with offices at 5160 Hacienda
Dr., Dublin, CA 94568 (hereinafter called "Humphrey").
Whereas VidaMed manufactures, markets and sells products for the symptomatic
treatment of benign Prostatic Hyperplasia under the TUNA(R) (Trans Urethral
Needle Ablation) and other trademarks; and
WHEREAS VidaMed desires to have specific services performed relative to the
production of components for the VidaMed TUNA system, including the manufacture
of PROVu(TM) disposable cartridges and other related components; and
WHEREAS Humphrey has the technical ability and desire to perform said contract
services; and
WHEREAS Humphrey and VidaMed desire to enter into an Agreement for the
manufacture of disposable cartridges for the VidaMed TUNA (Trans Urethral Needle
Ablation) system, whereby Humphrey shall manufacture said components to the
designs and specifications developed by
VidaMed;
NOW THEREFORE, in consideration of the mutual promises contained herein,
Humphrey and VidaMed agree as follows:
1. Humphrey SERVICES and DUTIES
A. Services
i. Manufacture
Humphrey shall manufacture VidaMed PROVu disposable cartridges and such other
TUNA system components as may be agreed between the parties ("Products") in
accordance with the prices, plans and specifications provided by VidaMed and
attached hereto in Schedule A. Said prices, plans and specifications shall be
supplied by VidaMed and accepted by Humphrey. The activities performed by
Humphrey shall be referred to herein as the "Services".
ii. Lead Time Reduction
It is anticipated that as product knowledge and processes are improved, Humphrey
and VidaMed shall work together toward reducing the lead-time from ninety (90)
days to thirty (30) days.
iii. Storage
Humphrey agrees to work with VidaMed to determine a fair and reasonable price in
the event that VidaMed would require storage and shipping services from
Humphrey.
<PAGE>
MANUFACTURING AGREEMENT
Humphrey Systems - VidaMed, Inc.
Page 2 of 14
iv. Drop Shipment
Humphrey shall also work with VidaMed to create a system for drop shipment of
Products to VidaMed's customers.
B. Duties
i. Clean Room
Humphrey shall cause to be built at its facility in Dublin, California, a Clean
Room, capable of supporting a "Class 100,000" certification.
ii. Engineering Changes
VidaMed must approve any changes that affect form, fit, or function of the
product. Humphrey may suggest changes to the manufacturing specifications of the
Products. Any such suggested changes shall be made in writing and shall clearly
set forth the nature of the change, the necessity for the change, and any
projected cost or manufacturing schedule impact. VidaMed may approve or reject
the suggested changes in its sole discretion.
Humphrey agrees to assist VidaMed in implementation of changes to the Products
by providing reasonable support including, but not limited to, quality control,
documentation, and sustaining engineering. All such changes and improvement
shall be submitted to Humphrey in writing and Humphrey shall respond to the
proposed change with cost and schedule impact within thirty (30) days after
receipt, or such other date when it might reasonably respond to VidaMed.
iii. Subcontractors
VidaMed reserves the right to approve Humphrey's use of any subcontractor to
perform any test, manufacture, or rework of the Products.
iv. Certificate of Compliance
A certificate of compliance will be created and maintained by Humphrey for the
life of any product manufactured by Humphrey. Said certificate shall be supplied
with each lot of product shipped to VidaMed and shall be maintained through the
end of the Agreement, then transferred to VidaMed or VidaMed's successor in
interest.
v. Return Material Authorization
Humphrey shall create and maintain a "Return Material Authorization" ("RMA")
tracking system for all returned product. Said RMA system shall include
information regarding the date the returned product was received, the date
quoted for return, and the date the reworked / repaired product was shipped to
VidaMed or VidaMed's customer.
vi. Assignment of Purchase Contracts
Humphrey agrees to assume the purchase agreements currently held by VidaMed with
its suppliers. Said Purchase Agreements are attached hereto as Schedule C. All
components required to build the current product will be purchased by Humphrey
from VidaMed's existing suppliers. Humphrey shall not be obliged to continue
purchasing product through current VidaMed suppliers after the termination of
the current term of the Purchase Contracts.
<PAGE>
MANUFACTURING AGREEMENT
Humphrey Systems - VidaMed, Inc.
Page 3 of 14
vii. Raw Materials
Humphrey agrees to purchase raw material necessary to perform the Services from
VidaMed and other suppliers holding such material, where in the latter case,
such suppliers will not continue to supply raw material to VidaMed. Humphrey
will purchase all existing raw material inventories located at VidaMed at
standard cost. A credit for the cost of the materials will be applied toward the
Products sold to VidaMed and produced using said raw materials, until said raw
materials are exhausted.
viii. Warranty
Humphrey warrants that the Products shall conform to the manufacturing, quality,
and regulatory specifications provided by VidaMed to Humphrey and shall be
substantially free of errors in workmanship.
2. VIDAMED DUTIES
A. Forecast of for Volume of Finished Products
i. Lead Time
VidaMed shall provide Humphrey with at least a ninety (90) day lead-time for
product, as defined in the forecast requirements. It is anticipated that as
product knowledge and processes are improved, Humphrey and VidaMed shall work
together toward reducing the lead-time from ninety (90) days to thirty (30)
days.
ii. Rolling Forecast
VidaMed agrees to provide to Humphrey a twelve (12) month rolling forecast for
product production volume on a monthly basis. The forecasted quantity will
become the order quantity for the first (30) days after the forecast; the
quantity forecasted for the next thirty (30) days can be changed by plus or
minus fifteen percent (+/-15%) from the previous forecast; and the quantity for
the subsequent thirty (30) days can be changed by plus or minus twenty-five
percent (+/-25%) from the original forecast. Any reasonable changes in quantity
beyond ninety (90) days will be accepted or negotiated between the parties.
B. Regulatory Requirements
VidaMed shall be solely responsible for fulfilling all filings, registrations
and attendant requirements of both federal and local governments relative to the
Products.
<PAGE>
MANUFACTURING AGREEMENT
Humphrey Systems - VidaMed, Inc.
Page 4 of 14
3. QUANTITY AND COST
A. Minimum Purchase Quantity
VidaMed agrees to purchase a minimum of Ten Thousand (10,000) units of the
Products ("Minimum Purchase Commitment") during the first term of this
Agreement.
B. Cost
The cost for each unit of Products manufactured shall be derived from the table
attached hereto under Schedule B. The cost per unit of Products shall
hereinafter be referred to as the "Standard Charge".
4. CONFORMITY TO ALL LAWS
A. Duties of Humphrey
Humphrey will manufacture all products in a good and workmanlike manner and will
comply with and maintain all applicable federal, state, local, and environmental
laws, ordinances and regulations, including but not limited to ISO 9001 and EN
46001 standards, as amended, and the Food, Drug and Cosmetic Act as amended,
including regulations relating thereto, pertinent to the Services it performs
relative to the manufacture of the Products.
B. Duties of VidaMed
VidaMed shall be solely responsible for all registrations, filings and other
regulatory requirements of both the federal, state and local laws, including but
not limited to the requirements of the Federal Food, Drug and Cosmetic Act as
amended and its attendant regulations.
5. PRODUCT RECALL
All product recalls shall be the sole responsibility of VidaMed. However,
Humphrey shall bear the expense of reprocessing the recalled Products, as well
as shipping to and from the reprocessing site and reasonable associated expenses
for the coordination of the recall, if the adulteration of the Products arose
from the workmanship by Humphrey in providing the Services, or due to Humphrey's
failure to maintain VidaMed's specifications, pursuant to Schedule A hereto,
during the manufacturing process. VidaMed shall bear the expense of the recall
in all other events, including but not limited to a recall arising from a defect
or inadequacy in VidaMed's design, or if it determined that VidaMed has failed
to provide Humphrey inadequate specifications and or support.
6. COMPENSATION
Unless otherwise stipulated, Humphrey shall provide and initially pay for all
costs of work performed. VidaMed shall compensate Humphrey as provided in
Schedule B hereto. Schedule B shall contain the amounts and terms of
compensation and reference to any applicable federal, state, local,
governmental, or private tax, tariff, fee, surcharge or other charge for the
Services. Terms of payment shall be net 30 from receipt of product at VidaMed or
VidaMed's customer's site.
<PAGE>
MANUFACTURING AGREEMENT
Humphrey Systems - VidaMed, Inc.
Page 5 of 14
7. DELIVERY
All Products supplied to VidaMed FOB Humphrey's location. VidaMed shall
designate a carrier and the cost of subsequent transportation shall be borne and
paid by VidaMed.
8. Inspection and Audit Rights
A. Product Inspection
VidaMed reserves the right to inspect and reject any product that does not meet
the specifications provided by VidaMed to Humphrey. In the event of rejected
product, VidaMed shall notify Humphrey of the rejections in writing within sixty
(60) days of receipt of the product and shall provide Humphrey with the
opportunity to rework or replace the product. In the event, the product was
rejected for design issues arising out of VidaMed's specifications, VidaMed
shall be responsible for all costs of rework, replacement or scrap of the
product.
B. Records and Premises
Humphrey shall maintain books and records in accordance with Generally Accepted
Accounting Principles (GAAP). VidaMed, and regulators reviewing the Products,
shall have the right at VidaMed's expense to audit Humphrey's books and records
with regard to the Services and Products related thereto. Further, VidaMed shall
have the right during normal business hours and providing Humphrey with at least
twenty-four (24) hours notice, to enter Humphrey's facilities and inspect the
manufacturing processes of any Products. Should VidaMed find defects in
accounting or in manufacturing, VidaMed shall notify Humphrey in writing and
Humphrey shall take action to correct such defects within ten (10) days of such
notice. Failure to take actions to cure such defects within ten (10) days shall
give VidaMed the right to terminate this Agreement without further obligation to
Humphrey, except as provided herein, after thirty (30) days of the VidaMed's
original notice to Humphrey.
C. Regulatory Inspections
Humphrey further agrees to fully cooperate with all regulatory investigations
and notify VidaMed in advance of such inspections. VidaMed reserves the right to
be present and assist with any regulatory inspections which pertain in any way
to the Products. Humphrey shall provide within ten (10) days of receipt a
response to any regulatory inquires. Humphrey shall provide VidaMed copies of
all form 483, form 486, or other regulatory notifications when such
notifications pertains to the Services and or the Products.
9. Transfer of Employees
VidaMed shall transfer some or all of its manufacturing employees to Humphrey
and Humphrey agrees to hire such individual on terms at least equivalent to the
salary and benefits such individuals received while employees of VidaMed.
However, benefits shall be commensurate with standard Humphrey benefits.
<PAGE>
MANUFACTURING AGREEMENT
Humphrey Systems - VidaMed, Inc.
Page 6 of 14
Humphrey reserves the right to interview all employees prior to hire, and to
refuse the hire of those employees which it deems to be unacceptable. A list of
proposed employees to be transferred is attached hereto as Schedule D.
Humphrey shall be informed, in writing, of the immigration status of all
proposed employees. Humphrey may, at its discretion, agree to provide legal
assistance to any transferred VidaMed employees with regard to immigration
issues.
Humphrey shall hire Mr. Dennis Payne on a contract basis at his current VidaMed
salary and with standard Humphrey benefits. Once the required visa transfer is
complete, Humphrey agrees to hire Mr. Payne as a full-time, regular employee of
Humphrey.
10. INDEMNITY
Humphrey and VidaMed shall indemnify and hold each other harmless from and
against any and all claims, liabilities, costs and expenses (including legal
fees and disbursements) of the party seeking indemnity, arising out of the acts
of the other party, providing that the party seeking indemnity shall timely
notify the other party, and provided the party from whom indemnity is sought
shall have control of any litigation, at its sole cost and expense, and
provided, further, that no compromise thereof shall be entered into without the
express written consent of the party from whom indemnity is sought.
11. INSURANCE
A. Obligation of Humphrey
Humphrey shall at all times carry "Adequate Insurance" that shall include
coverage on all of Humphrey's activities under this Agreement, as well as any
insurance required by law. For purposes of this Agreement, "Adequate Insurance"
shall mean liability, casualty and fire insurance of no less than Five Million
Dollars ($5,000,000). Humphrey shall provide a certificate of insurance to
VidaMed naming VidaMed, Inc. as an additional insured under such policies of
insurance. Humphrey shall also carry sufficient product liability insurance and
name VidaMed as an additional insured on its policy.
B. VidaMed
VidaMed shall at all times carry adequate insurance that shall include coverage
on all of VidaMed's activities under this Agreement, as well as any insurance
required by law. VidaMed shall provide a certificate of insurance to Humphrey
naming Humphrey Instruments as an additional insured under such policies of
insurance. VidaMed shall also carry sufficient product liability insurance and
name Humphrey as an additional insured on its policy.
12. BASELINE PROCESSES AND INCORPORATION OF ENGINEERING DOCUMENTS
Prior to the start of production, both parties shall agree to acceptable
baseline manufacturing processes. Said baseline manufacturing processes shall be
incorporated herein.
The following sets of engineering documents, collectively forming the
Specifications for the manufacture of VidaMed product, are incorporated herein:
<PAGE>
MANUFACTURING AGREEMENT
Humphrey Systems - VidaMed, Inc.
Page 7 of 14
a) Released Prints;
b) Bill of Materials;
c) Routers;
d) Manufacturing Instructions;
e) Quality Control Instructions; and
f) Labeling Instructions.
13. NO ASSIGNMENT
Neither party may assign any rights or obligations under this Agreement without
the express written consent of the other party. Such consent, however, shall not
be unreasonably withheld.
14. CONFIDENTIALITY
Both parties understand that all correspondence, patents, license and conditions
pertinent to this Agreement are to be held strictly confidential, and that
breach of this confidentiality may result in termination of this Agreement. This
confidentiality obligation shall survive the termination or expiration of this
Agreement for a period of no less than four (4) years.
15. TERM AND TERMINATION
A. Term and Termination
This Agreement shall begin on the Effective Date and, unless terminated earlier
pursuant to this paragraph, continue for three (3) years, at which time this
agreement shall terminate. It is contemplated by the parties that they will
review their relationship during the ninety (90) days immediately preceding its
termination to determine whether and on what terms the relationship may be
continued upon mutual agreement. Nothing in this agreement will be construed to
require either party to agree to any such extension. Upon termination of the
Agreement, VidaMed or its successor in interest agree to purchase up to ninety
(90) days of raw material and finished goods held by Humphrey. The quantity of
such raw material and finished goods shall be determined based upon the last
forecast agreed by the parties.
B. Pre-Shipment Termination
Prior to the first shipment of product to VidaMed, VidaMed shall have the right
to cancel this Agreement for a one-time payment to Humphrey of
one-hundred-thousand Dollars ($100,000). In such case VidaMed shall, at its
option, offer all employees transferred to Humphrey employment. In the event
VidaMed fails to offer employment to any employee, VidaMed shall be solely
responsible for reasonable expenses associated with the termination of said
employee.
C. Termination upon Notice
The Parties agree that the entering into and the risks and costs associated with
such a venture are understood and accepted by the Parties. Therefore, either
Party may cancel this Agreement at the end of any calendar month without cause,
provided one-hundred-eighty (180) days written notice, return receipt requested,
is given. Each party shall be entitled to its verifiable costs for the venture.
These costs shall be reviewed from the perspective of those costs incurred by a
reasonably prudent business person when entering into such an Agreement. In the
event
<PAGE>
MANUFACTURING AGREEMENT
Humphrey Systems - VidaMed, Inc.
Page 8 of 14
Humphrey terminates this Agreement upon notice, VidaMed shall not be required to
meet the Buyout Provision as set forth in Paragraph 15(E) or the minimum
purchase provision in 3(A) of this agreement. In the event VidaMed terminates
this Agreement upon notice, VidaMed shall be required to meet the
responsibilities of the Buyout Provision as set forth in Paragraph 15(E).
D. Immediate Termination
This Agreement may be terminated by either party with immediate effect upon the
material breach of this Agreement by the other party if a reasonable response to
correct such breach is not provided within thirty (30) days of notice thereof;
or by Humphrey with immediate effect in the event of (i) the substantial
deterioration in VidaMed's financial position which materially impairs VidaMed's
ability to perform under this agreement; (ii) VidaMed ceases to do business,
terminates its existence, dissolved or liquidates; (iii) VidaMed becomes
insolvent or fails to pay its obligations (including its obligations to
Humphrey) when they become due; (iv) a receiver is appointed to hold, manage or
operate VidaMed's property or business; (v) there is a general assignment of
VidaMed's property or business for the benefit of its creditors; or (vi)
proceedings are instituted by or against VidaMed under any bankruptcy or
insolvency law; (vii) VidaMed changes ownership in any manner without the
express written notice and consent of Humphrey. In the event this agreement is
terminated by VidaMed breach, VidaMed shall be required to meet the
responsibilities of the Buyout Provision as set forth in Paragraph 15(E).
E. Change in Control; Buyout Provision
In the event that a "Change in Control" occurs at VidaMed or at VidaMed's
request the surviving entity or controlling party may terminate this Agreement
upon notice by a "Buyout" in the amount greater of either:
a. Providing payment in the amount of Seventy-five Dollars ($75.00) per unit for
the number of units necessary to complete the Minimum Purchase Commitment. Under
this option, it is understood that Humphrey shall not manufacture the number of
units necessary to complete the Minimum Purchase Commitment, but shall receive
payment therefore; or
b. Paying Two Hundred Thousand Dollars ($200,000) to Humphrey;
c. The rehire or indemnification of Humphrey for payment of all termination
costs and unemployment and severance benefits to former VidaMed employees under
Humphrey employ by this Agreement.
No surcharge or credit with regard to the Clean Room shall be applicable in
connection with the exercise of "Buy-Out" rights under this Agreement.
Alternatively, the surviving entity or controlling party would have the right to
a novation of this Agreement in its favor.
For purposes of this Agreement, "Change in Control" shall mean, and shall be
deemed to have occurred if, on or after the date of this Agreement:
<PAGE>
MANUFACTURING AGREEMENT
Humphrey Systems - VidaMed, Inc.
Page 9 of 14
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company
acting in such capacity or a corporation owned directly or indirectly by the
stockholders of the Company in substantially the outstanding Voting securities,
(ii) The stockholders of the Company approve a merger or consolidation of the
Company with any other corporation other than a merger or consolidation which
would result in the Voting Securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into Voting Securities of the surviving entity) at least 80% of
the total voting power represented by the Voting Securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation, or
(iii) The stockholders of the Company approve a plan of complete liquidation of
the Company or an agreement for the sale or disposition by the Company (in one
transaction or a series of related transactions) of all or substantially all of
the Company's assets.
16. FORCE MAJEURE
If, by any reason of impediment, such as war, rebellion, tumult, riot, civil
commotion, insurrection, political disturbance, strike, lock-out, fire, flood,
stoppage of work of any kind, instruction of the authorities or any other cause
or event of a similar nature affecting either party over which such party has no
control, such party cannot perform its fundamental obligations hereunder, it,
except for the obligation of Humphrey to apply timely for product already
ordered, manufactured and shipped, shall have the right to postpone for the
duration of such impediment the performance of such obligation.
17. NO AGENCY
Humphrey is an independent contractor and has and shall have no power nor shall
it represent that it has any power to bind VidaMed or to assume or create any
obligation or responsibility, express or implied, on behalf of VidaMed or in its
name. This Agreement shall not be construed as constituting the parties a
partnership, joint venture or any other form of association which would impose
on any party liability for the act or failure to act of any other party.
18. AMENDMENT AND WAIVER
This Agreement supersedes and cancels any and all previous agreements made
between the parties and may not be changed in any way except by an instrument in
writing signed by both parties. The failure of either party to enforce any of
the provisions herein shall not be a waiver of such provisions or the right of
such party thereafter to enforce any such provision.
19. NOTICES
All notices, demands and other communications required or permitted to be given
hereunder shall be in writing and shall be deemed to have been properly given if
delivered personally or sent by registered or certified mail, return receipt
requested, postage pre-paid, or by Federal Express or like courier service.
If to Humphrey:
<PAGE>
MANUFACTURING AGREEMENT
Humphrey Systems - VidaMed, Inc.
Page 10 of 14
Humphrey Systems
5160 Hacienda Drive
Dublin, California 94568
Attention: Vice President of Operations.
With a copy to:
Carl Zeiss, Inc.
One Zeiss Drive
Thornwood, New York, 10594
Attention: General Counsel.
<PAGE>
MANUFACTURING AGREEMENT
Humphrey Systems - VidaMed, Inc.
Page 11 of 14
If to VidaMed:
VidaMed, Inc.
46107 Landing Parkway
Fremont, CA 94538
Attention: Vice President and COO.
With a copy to:
VidaMed, Inc.
46107 Landing Parkway
Fremont, CA 94538
Attention: General Counsel.
or to such other addresses as the parties may designate by notice given in the
manner specified in this Paragraph 19. All such notices, demands and
communications shall be deemed effective on the date personally delivered, or
three (3) days after deposited in the United States mail as registered or
certified mail, or one (1) day after deposited with Federal Express or a like
courier service, as the case may be.
20. HEADINGS
The headings of this Agreement are for convenience of reference only and shall
not limit or are used as an aid in construing any provisions of this Agreement.
21. CHOICE OF LAW
This Agreement shall be construed under the laws of the State of California.
22. DISPUTES
(a) Any dispute, controversy or claim (whether such claim sounds in contract,
tort or otherwise) arising out of or relating to this Agreement (or the breach,
termination or validity thereof), or arising in any way out of the relationship
of the parties shall, at the request of either party, be settled by arbitration
in accordance with the Commercial Arbitration Rules of the American Arbitration
Association ("AAA") in effect at the time of the arbitration (the "Rules"),
except as such Rules may be modified herein. If there is any inconsistency
between the Rules and this Article, the provisions of this Article shall govern.
In the alternative, if it is mutually agreed to by the parties, mediation may be
used to settle any disputes, controversy or claim arising herefrom.
(b) An award rendered in connection with an arbitration pursuant to this Article
shall be final and binding on the parties and judgment upon such an award may be
entered and enforced in any court of competent jurisdiction.
(c) All arbitration proceedings under this Article shall be held at a mutually
convenient location for both parties.
<PAGE>
MANUFACTURING AGREEMENT
Humphrey Systems - VidaMed, Inc.
Page 12 of 14
(d) The arbitrator shall determine the rights, remedies and obligations of the
parties according to the law of the California (excluding conflict of laws
principles), and may not award punitive or exemplary damages to either party.
(e) Each party shall be given not less than 15 days advance notice of the time
and place of any arbitration hearing. The arbitration hearing shall be held not
later than 120 days after the appointment of the arbitrator and the arbitrator
shall render his award not later than 30 days after the closing of the
arbitration hearing.
(f) The final award:
(i) At the request of either party, shall set forth the grounds, factual
and legal, upon which it is based; (ii) may allocate between the parties, in
such proportion as the arbitrator deems proper, the costs of the proceeding,
including the AAA administrative fee, arbitrator's compensation and the cost of
stenographic transcripts and of expert witness, or may direct that all or part
of such costs be borne directly by one party; (iii) may award to either party
all or part of the legal costs, including reasonable attorney fees, incurred by
such party because of the other party's unreasonable, frivolous, bad faith, or
dilatory conduct in the course of the arbitration; (iv) may award to the party
which has prevailed, in whole or in balance on the merits, all or part of such
party's legal costs incurred in connection with the arbitration, including
reasonable attorneys fees.
23. ENTIRE AGREEMENT; SEVERABILITY
This Agreement sets forth the entire understanding and agreement of the parties,
and shall not be modified except by mutual agreement of the parties, in writing.
The unenforceability or invalidity of any provision or provisions of this
agreement shall not render any other provision or provisions herein contained
unenforceable or invalid. In the event that any of the provisions, or portions
thereof, or interpretations by the parties or by either party of any provisions,
or portions thereof, of the Agreement are held unenforceable invalid by any
court of competent jurisdiction, the parties shall negotiate an equitable
adjustment in the provisions of the Agreement with a view toward effecting the
purpose of the Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by there duly authorized respective officer or employees as of the day and year
written below:
Humphrey Systems VidaMed, Inc.,
By: __________________________ By: __________________________
Name: ________________________ Name: ________________________
Title: _______________________ Title: _______________________
Date: ________________________ Date: ________________________
<PAGE>
MANUFACTURING AGREEMENT
Humphrey Systems - VidaMed, Inc.
Page 13 of 14
Schedule A
PRODUCTS, SPECIFICATIONS
<PAGE>
MANUFACTURING AGREEMENT
Humphrey Systems - VidaMed, Inc.
Page 14 of 14
Schedule B
Units Cost and Terms of Payment
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-80619, 333-59869 and 333-70201) pertaining to the 1992 Stock
Plan, the 1992 Consultant Stock Plan, the 1995 Director Option Plan, the 1995
Employee Stock Purchase Plan and the 1999 Nonstatutory Stock Option Plan and in
the Registration Statement (Form S-3 No. 333-45895) of VidaMed, Inc. of our
report dated January 15, 1999, with respect to the consolidated financial
statements of VidaMed, Inc. included in this Annual Report (Form 10-K) for the
year ended December 31, 1998, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Palo Alto, California
March 25, 1999
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<INCOME-PRETAX> (19,872) (16,456) (13,494)
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