UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
Commission File Number: 0-26082
VIDAMED, INC.
(exact name of registrant as specified in its charter)
Delaware 77-0314454
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
46107 Landing Parkway
Fremont, CA 94538
(Address of principal executive offices)
(510) 492-4900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, was 22,873,211 as of November 11, 1999.
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VIDAMED, INC.
INDEX
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements - unaudited
Condensed consolidated balance sheets - September 30, 1999
and December 31, 1998 3
Condensed consolidated statements of operations - three months
ended September 30, 1999 and 1998 and nine months ended September 30, 1999
and 1998. 4
Condensed consolidated statements of cash flows - nine months
ended September 30, 1999 and 1998 5
Notes to condensed consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosure About Market Risk 13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
VidaMed, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<CAPTION>
September 30, December 31,
1999 1998
-------- --------
(Unaudited) (*)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 1,370 $ 9,384
Accounts receivable 808 228
Inventories 1,061 1,228
Other current assets 897 1,179
-------- --------
Total current assets $ 4,136 $ 12,019
Property and equipment, net 1,181 1,797
Other assets, net 202 316
-------- --------
Total assets $ 5,519 $ 14,132
======== ========
Liabilities and stockholders' equity Current liabilities:
Notes payable, current portion $ 1,179 $ 764
Accounts payable 224 338
Accrued professional fees 167 317
Accrued clinical trial fees 233 431
Accrued and other liabilities 2,624 2,923
Current portion of obligations under capital leases -- 22
Deferred revenue $ 97 $ 229
-------- --------
Total current liabilities $ 4,524 $ 5,024
Notes payable, long-term portion 1,235 1,785
Stockholders' equity (deficit):
Capital stock 97,390 95,542
Accumulated deficit (97,630) (88,219)
-------- --------
Total stockholders' equity (deficit) (240) 7,323
-------- --------
Total liabilities and stockholder's equity (deficit) $ 5,519 $ 14,132
======== ========
<FN>
* The Balance sheet at December 31, 1998 has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes.
</FN>
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VidaMed, Inc.
Condensed Consolidated Statements of Operations
(In thousands except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 1,487 $ (2,088) $ 3,749 $ 487
Cost of products sold 579 954 2,059 2,634
-------- -------- -------- --------
Gross profit 908 (3,042) 1,690 (2,147)
Operating expenses:
Research and development 683 1,136 2,238 3,471
Selling, general and administrative 2,934 2,802 8,847 10,705
-------- -------- -------- --------
Total operating expenses 3,617 3,938 11,085 14,176
-------- -------- -------- --------
Operating loss (2,709) (6,980) (9,395) (16,323)
Other income (expense) (60) 80 (16) (55)
-------- -------- -------- --------
Net loss $ (2,769) $ (6,900) $ (9,411) $(16,378)
======== ======== ======== ========
Basic and Diluted Net loss per share $ (0.13) $ (0.35) $ (0.46) $ (0.93)
======== ======== ======== ========
Shares used in computing Basic and Diluted net loss per share 20,653 19,925 20,505 17,536
======== ======== ======== ========
<FN>
See accompanying notes.
</FN>
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VidaMed, Inc.
Condensed Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,411) $(16,378)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 939 976
Changes in assets and liabilities:
Accounts receivable (580) 3,183
Inventory 167 164
Other current assets 282 (955)
Other assets 114 92
Accounts payable (114) (784)
Accrued professional fees (150) (198)
Accrued clinical trial costs (198) 231
Accrued and other liabilities (299) (966)
Deferred revenue (132) (329)
-------- --------
Net cash used in operating activities (9,382) (14,964)
-------- --------
Cash flows from investing activities:
Expenditures for property and equipment (323) (679)
-------- --------
Net cash used in investing activities (323) (679)
-------- --------
Cash flows from financing activities
Principle payments under capital leases
(22) (101)
Principle payments of notes payable (135) (770)
Net proceeds from issuance of notes payable -- 1,500
Net proceeds from issuance of common stock 1,848 17,970
-------- --------
Net cash from financing activities 1,691 18,599
-------- --------
Net (decrease) increase in cash and cash equivalents (8,014) 2,956
Cash and cash equivalents at the beginning of the period 9,384 8,026
-------- --------
Cash and cash equivalents at the end of the period $ 1,370 $ 10,982
-------- --------
Supplemental disclosure of cash flows information:
Cash paid for interest $ 226 $ 739
-------- --------
<FN>
See accompanying notes
</FN>
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VIDAMED, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
1. Basis of presentation
The accompanying unaudited condensed consolidated financial statements of
VidaMed, Inc. (the "Company" or "VidaMed") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X. The
balance sheet as of September 30, 1999 and the statements of operations for the
three and nine months ended September 30, 1999 and 1998, and the statements of
cash flows for the nine months ended September 30, 1999 and 1998, are unaudited
but include all adjustments (consisting of normal recurring adjustments) which
the Company considers necessary for a fair presentation of the financial
position at such date and the operating results and cash flows for those
periods. Certain information normally included in financial statements and
related footnotes prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. The accompanying financial statements
should be read in conjunction with the financial statements and notes included
in the Company's annual report on Form 10-K, as amended, for the year ended
December 31, 1998 filed with the Securities and Exchange Commission.
Results for any interim period shown in this report are not necessarily
indicative of results to be expected for any other interim period or for the
entire year.
2. Net Loss Per Share
The Company calculates net loss per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share." Statement 128
requires the presentation of basic earnings (loss) per share and diluted
earnings (loss) per share, if more dilutive, for all periods presented. Basic
and diluted net loss per share is computed using the weighted-average number of
shares of common stock outstanding during the periods presented. Securities that
could share in the earnings of the Company, such as options, warrants and
convertible securities, are excluded from the computation, as their effect is
anti-dilutive. As the Company has incurred losses from operations in each of the
periods presented, there is no difference between basic and diluted net loss per
share amounts. Currently we have 3,435,762 options outstanding under employee
and director plans. The options will be included in the calculation at such time
as the affect is no longer anti-dilutive, as calculated using the treasury stock
method.
3. Inventories
Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market value. Inventories at September 30, 1999 and
December 31, 1998 consist of the following (in thousands):
September 30, December 31,
1999 1998
------ ------
Raw materials $ 102 $ 404
Work in process -- 261
Finished goods 959 563
------ ------
$1,061 $1,228
====== ======
The reduction in raw materials and work in process since December 31, 1998 is
due the transition to our manufacturing outsource partner, Zeis Humphery, being
completed.
Page 6 of 16
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4. Notes Payable
During 1998, the Company finalized a commitment for $5.5 million in new debt
financing with Transamerica Business Credit 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. The term
loan was funded in full as of December 31, 1998, at an interest rate of 12% per
year. Repayment of that loan is amortized over a three-year period, with the
first monthly payment having been made in December 1998 and continuing monthly
thereafter.
On August 30, 1999, we filed a form 10K/A, which included an updated opinion
from our Independent Auditors, Ernst & Young LLP, regarding a going concern
uncertainty. Due to the going concern uncertainty, our loan with Transamerica
was considered in default. On October 26, 1999, we received a waiver from
Transamerica, and are no longer considered in default. Transamerica received a
$10,000 fee and was issued a warrant to acquire up to 20,000 shares of our
common stock for a purchase price of $0.89 per share. The warrant has a term of
five years and carries piggy-back registration rights.
As of September 30, 1999, the Company borrowed approximately $330,0000 against
the revolving accounts receivable-based line at a rate of 9.75% per year. It was
eligible to borrow approximately $511,000 against this line on September 30,
1999, and borrowed the remaining available balance of approximately $181,000 in
October 1999.
5. Restructuring Accrual
In September 1997, VidaMed announced a restructuring program designed to reduce
costs and improve operating efficiencies by closing the Company's U.K.
manufacturing facility. The charge in the third quarter of 1997 was $2.1 million
recorded in cost of products sold.
The elements of the total charge as of September 30, 1999 are as follows (in
thousands):
Representing
------------------------------------------
Cash Outlays
------------------
Total Asset
Charges Write-down Completed Future
------ ------ ------ ------
Fixed assets $ 390 $ 390 $ -- $ --
Facility shut down 1,305 -- 1,305 --
Grant repayment 405 -- 222 183
------ ------ ------ ------
Total Special Charges $2,100 $ 390 $1,527 $ 183
------ ------ ------ ------
The grant repayment is due to be paid by December 31, 1999.
6. Reporting Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (Statement 130). Statement
130 establishes new rules for the reporting and display of comprehensive income
and its components. Statement 130 requires unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments, to be included in other comprehensive income (loss). During the
three and nine months ended September 30, 1999 and 1998, the total comprehensive
loss was not materially different from the net loss.
7. Common Stock
The increase in capital stock for the nine months ended September 30, 1999, is
due to the issuance of 734,047 additional shares. We sold 368,596 shares of
common stock to the principals of Telo Electronics, a vendor of the company. On
December 17, 1998, the Company entered into an agreement to sell 368,596 shares
of its common stock to the principals of Telo Electronics. The purchase price
per share of the common stock was $2.713, the
Page 7 of 16
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average closing price of the common stock for the five trading days preceding
December 17, 1998. The common stock was paid for with promissory notes delivered
on December 17, 1998. The transaction closed in February 1999 when the
promissory notes plus interest were paid. The Company received net proceeds of
$1,000,000 from that transaction. Additionally, we have issued 270,548 shares in
employment-related settlements and 94,903 under employee stock option and
purchase plans.
8. Retention Agreements
In October 1998, the Company entered into retention agreements with certain
executive officers. Under those agreements, the Company was obligated to pay up
to $810,000 on April 1, 1999, if those officers remained with the Company
through April 1, 1999. All officers covered by the retention agreements remained
with the Company through April 1, 1999, and the Company paid $810,000 according
to the terms of the agreements.
9. Subsequent Events
On October 27, 1999, the Company received $4.3 million net proceeds from the
private sale of 2.2 million shares of common stock at $2.00 per share. In
connection with the sale of those shares, the purchasers were granted
registration rights requiring the Company to register those shares for resale
within 90 days of October 27, 1999. If the shares are not registered for resale
by then, the Company will be obligated to issue to the purchasers warrants to
acquire up to 550,000 shares of common stock at an exercise price of $2.4068 per
share. The warrants, if issued, will be for a term of three years.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is a discussion and analysis of VidaMed's consolidated financial
condition and results of operations for the three months and nine months ended
September 30, 1999 and 1998. We also discuss certain factors that may affect our
prospective financial condition and results of operations. This section should
be read in conjunction with the Condensed Consolidated Financial Statements and
related Notes in Item 1 of this report and the Company's Annual Report on Form
10-K, as amended, for the year ended December 31, 1998, which has been filed
with the Securities and Exchange Commission and is available from the Company at
no charge.
Cautionary Statement Regarding Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains, in addition to historical information, forward-looking
statements that are based on VidaMed's current expectations, beliefs, intentions
or future strategies. The forward-looking statements concern, among other
things, the availability of cash resources to fund continued operations and
market acceptance of and the likelihood of additional Medicare coverage
approvals for the TUNA Procedure. We base all forward-looking statements on
information available to us on the date of this report. We do not undertake to
update any such forward-looking statements to reflect events that arise after
the date of this report. Actual results could differ materially from those
suggested in the forward-looking statements because of the factors described
under "Liquidity and Capital Resources" and "Risk Factors" in this report and
other factors described in our Annual Report on Form 10-K, as amended, for the
year ended December 31, 1998.
Overview
We design, develop, and market urological systems that are used for urinary
tract disorders. Our products primarily treat the enlarged prostate or Benign
Prostatic Hyperplasia ("BPH"), a noncancerous condition of the prostrate gland
affecting urination. VidaMed's primary product, the patented VidaMed TUNA
System, is a reasonably priced alternative therapy that minimizes surgical
invasion, side effects and complications for this condition. In the United
States, we sell our products primarily through direct sales personnel.
Internationally, we primarily sell to distributors who resell to physicians and
hospitals.
Page 8 of 16
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At the beginning of fiscal 1999, we began restructuring our United States sales
and marketing model to align with current hospital-based Medicare reimbursement
coverage. Under the prior model, we focused on selling the TUNA system generator
and related equipment to hospitals, physician groups and ambulatory surgical
centers (ASC). Under the new sales model, an entire TUNA System is placed with a
hospital at no charge, and a per use fee is charged for each procedure
performed.
We received FDA clearance to market the TUNA System in 1996. In 1998, Medicare
reimbursement coverage became available for procedures using our equipment that
are performed in hospitals. As of October 1, 1999, 41 states provide such
reimbursement coverage. To achieve significant increases in sales, we must
actively promote the fee-per-use program and secure Medicare reimbursement
coverage at least in all states with large populations of men over 50 years of
age, which is our target patient population. The Company has several initiatives
underway to facilitate the Medicare reimbursement coverage process, including
working in cooperation with state Medicare Medical Directors. We can give no
assurance however that the Company will receive additional Medicare
reimbursement coverage in major states in a timely manner or at all, and the
failure to receive such coverage would have a material adverse effect on our
business, financial condition and results of operations.
Medicare coverage for supplies and devices in the office-based and ASC markets
was delayed in mid-1998 due to Medicare's review of its "Year 2000" compliance.
We believe that Medicare reimbursement in doctors' offices and ASCs, as well as
patient awareness and physician advocacy of the TUNA System and procedure, are
our greatest challenges. Our business strategy is to focus marketing and sales
efforts on patient education and physician support for our fee-per-use program
while at the same time continuing to advance Medicare reimbursement for the TUNA
Procedure. As discussed below in "Liquidity and Capital Resources," we may not
be able to continue to execute the business plan without additional debt or
equity financing.
There can be no assurance that the TUNA System will be deemed clinically or cost
effective by health care providers and payors, or superior to other current and
emerging methods for treating BPH, or that the TUNA System will achieve
significant market acceptance in the United States. Furthermore, determinations
of reimbursement of the TUNA Procedure by private and governmental health payors
are made by such payors and their medical directors independent of the FDA
approval. Accordingly, we can give no assurance that the TUNA Procedure will be
reimbursed at adequate levels or continue to be reimbursed at adequate levels in
the United States under either private or governmental healthcare payment
systems. Both lack of coverage and inadequate reimbursement for the TUNA
Procedure could adversely affect market acceptance of the TUNA System
Results of Operations
Net revenue for the three months ended September 30, 1999 was $1,487,000. This
was an increase of $262,000 or 21% from $1,225,000 in the three months ended
June 30, 1999. Product sales in the third quarter of 1999 increased 129 % to
$1,487,000 from $650,000 in the same period in 1998. The difference is due
primarily to acceptance of our fee-per-use program. The 1998 sales of $650,000
are before a $2,718,000 sales reserve, recorded in the third quarter of 1998,
related primarily to sales in the first two quarters. This reserve was taken due
to the announced delay in office based Medicare reimbursement.
For the first nine months of 1999, net revenue increased to $3,749,000 from
$487,000 during the same period of 1998. The increase is attributable to the
$2,718,000 charge to sales reserves taken in 1998 and increased sales under the
fee-per-use program.
Cost of product sold for the three months ended September 30, 1999 was $579,000,
a decrease of 39% or $375,000 from $954,000 for the three months ended September
30, 1998. For the nine months ended September 30, 1999 cost of product sold was
$2,059,000, down 22% from $2,634,000 in the first nine months of 1998. The
decrease is a function of (i) a transition from a sales and marketing model
based on the sales of the TUNA System to a fee-per-use sales model, and (ii)
outsourcing the manufacture of the disposable component of our product resulting
in lower materials cost.
Page 9 of 16
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Gross margin expressed as a percentage of sales in the three months ended
September 30, 1999 was 61%, up from 47% for the three months ended June 30,
1999. This significant improvement in gross margin is primarily attributed to
the increased volume in our U.S. based fee-per-use program.
Research and development (R & D) expenses included expenditures for regulatory
compliance and clinical trials. Clinical trial costs consist largely of payments
to clinical investigators, product for clinical trials, and costs associated
with initiating and monitoring clinical trials. R&D expenses decreased 40% to
$683,000 in the three months ended September 30, 1999 from $1,136,000 in the
three months ended September 30, 1998. For the nine months ended September 30,
1999 expenses decreased 36% to $2,238,000 from $3,471,000 in the first nine
months of 1998. The decrease was primarily due to reduced clinical activity in
1999, resulting from the completion of FDA clinical trial studies, and the
completion of R&D expenditures for our current ProVu generation of products in
1998.
Selling, general and administrative (SG&A) expenses increased 5%, when compared
to 1998 expenditures after the reclassification of bad debt, to $2,934,000 in
the three months ended September 30, 1999 from $2,802,000 in the three months
ended September 30, 1998. The third quarter of 1998 included a reclassification
of bad debt expense to sales reserves recorded in connection with the $2,718,000
sales reserve discussed above. The impact on the third quarter of 1998 from
items in the first two quarters was approximately $337,000 Adjusting for the
impact of this reclassification, SG&A decreased $235,000 or 8% from the
comparable quarter last year. The difference is due to added legal expense for
patent litigation in 1998.
For the nine months ended September 30, 1999 SG&A expenses decreased $1,858,000
or 17% from $10,705,000 in 1998 to $8,847,000 in 1999. The decrease is a
function of higher expenditures in the first quarter of 1998, including a charge
to the allowance for doubtful accounts necessitated by the length of time
involved in obtaining state Medicare coverage, a charge incurred in the
transition to a new chief executive officer and for legal expenses related to
patent defense.
Other income/expense for the three months ended September 30, 1999 included
expense of $60,000 compared to an income of $80,000 for the comparable period in
1998. For the nine months ended September 30, 1999 other income was $44,000
compared to an expense of $135,000 for the nine months ended September 30, 1998.
Other income is primarily composed of interest income and expense.
Liquidity and Capital Resources
For the quarter ending September 30, 1999, our cash and cash
equivalents decreased by $3.0 million to $1.4 million, compared to $4.4 million
at June 30, 1999. The decrease is due to operating expenses incurred in the
normal course of business. For the nine months ending September 30, 1999 cash
decreased by $8.0 million from $9.4 million at December 31, 1998. The decrease
is due to normal operating expenses offset in part by financing activities.
In October 1999, we received $4,300,000 in net proceeds from the sale
of 2.2 million shares of our common stock in a private sale. The financing was
necessitated because of increased costs associated with developing the newly
introduced fee-per-use program and a longer than anticipated ramp-up time to
generate revenues from that program. While management believes that the proceeds
of that equity financing plus revenues from the fee-per-use program will be
sufficient to fund operations at current levels through the end of fiscal 1999,
additional financing may be required to fund operations at current levels
through the end of fiscal 2000. Management is pursuing, and believes it can
obtain, financing to fund operations at current levels through the end of fiscal
2000. Additional financing may not be available, or if available, may not be on
favorable terms. Any future equity financing would result in dilution to our
stockholders.
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If additional financing is unavailable, management nevertheless
believes that it would be able to fund operations through the end of fiscal 2000
by scaling back research and development, clinical trials, expansion into the
office-based market and other areas of discretionary spending. Reductions in
those areas could have a material adverse affect on our long-term opportunities
to develop new and competitive products, obtain necessary governmental approvals
of those products and develop additional markets for our products.
During 1998, we finalized a commitment for $5.5 million in new debt
financing with Transamerica Business Credit Corporation. The facility is secured
by our assets and consists of a revolving accounts receivable-based credit line
of up to $3 million and a $2.5 million equipment term loan. The term loan was
funded in full as of December 31, 1998, at an interest rate of 12% per year.
Repayment of that loan is amortized over a three-year period, with the first
monthly payment having been made in December 1998 and continuing monthly
thereafter.
As of September 30, 1999, we borrowed approximately $330,0000 against
the Transamerica revolving accounts receivable-based line at a rate of 9.75% per
year. We were eligible to borrow approximately $511,000 against this line on
September 30, 1999, and borrowed the remaining available balance of
approximately $181,000 in October 1999.
On October 26, 1999, we entered into an Amendment and Waiver Agreement
with Transamerica. Under that agreement, Transamerica waived an event of default
under our Loan and Security Agreement. The event of default resulted from the
inclusion of a going concern uncertainty in an updated opinion from our
independent auditors. In consideration for the waiver, we paid Transamerica a
$10,000 fee and issued it a warrant to acquire up to 20,000 shares of our common
stock for a purchase price of $0.89 per share. The warrant has a term of five
years and carries piggy-back registration rights.
Restructuring Accrual
In September 1997, VidaMed announced a restructuring program designed to reduce
costs and improve operating efficiencies by closing our U.K. manufacturing
facility. In 1997, we incurred a $2,100,000 charge in cost of goods sold due to
the closure of the plant. The charge reflects $390,000 for the estimated loss on
the abandonment of fixed assets, a $1,305,000 charge for our short-term
obligation related to the closure of our British manufacturing facility and a
$405,000 obligation to repay a grant received when we opened the facility. As of
September 30, 1999, the remaining accrual balance is $183,000 and consists
mainly of a grant repayment due by the end of 1999. See Note 5 of Notes to
Condensed Consolidated Financial Statements.
RISK FACTORS
Our business, results of operations and financial condition are subject to a
number of risk factors, in addition to those described above under "Results of
Operations" and "Liquidity and Capital Resources" and in our annual report on
Form 10-K for the year ended December 31, 1998, as amended.
Page 11 of 16
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The Fee-Per-Use Sales Program is New and Subject to Medicare Reimbursement
Policies.
At the beginning of fiscal 1999, we introduced our fee-per-use program
in the United States. Under this program, an entire TUNA System is placed with a
hospital at no charge and a fee is charged for each procedure performed. This
program replaced our previous sales model, which focused on sales of the TUNA
System generator and related equipment to hospitals. Given the relatively short
time that the fee-per-use program has been in place, the success of the program
and the amount of revenues it will generate are uncertain. Also a change in
Medicare reimbursement policy, allowing for payment for procedures in an office
setting but at a reduced rate, would directly impact the revenue and associated
margins of the fee-per-use program. If revenues do not meet expectations, we
will have to obtain additional debt or equity financing to cover the shortfall,
and may consider developing another sales model to replace or supplement the
fee-per-use program. We currently do not have any plans to replace the
fee-per-use program, and are continually working to develop and enhance the
program.
Potential Loss of or Change in Nasdaq Listing
The continuing listing requirements for inclusion of our stock on the
Nasdaq National Market require that we maintain minimum net tangible assets of
$4.0 million. As of September 30, 1999, our net tangible assets decreased to
($240) thousand. Our net tangible assets increased with the receipt of $4.3
million in proceeds from the private sale of common stock in October 1999, but
not in an amount sufficient to satisfy the $4.0 minimum listing requirement.
There is no assurance that we will be able to raise sufficient capital or
increase sales to meet the minimum net tangible asset listing requirement. In
addition, there are other minimum listing requirements that VidaMed must
continually satisfy. For example, our common stock cannot close below $1.00 for
30 consecutive trading days.
In August 1999, the Nasdaq-Amex Market Group of the NASD
("Nasdaq-Amex") notified us of our non-compliance with the listing requirements.
On November 4, 1999, a hearing was conducted to determine whether we satisfied
the minimum listing requirements, and if not, whether we would be granted an
extension of time to achieve compliance. At the time of the hearing, we were not
in compliance with the minimum listing requirements of the Nasdaq National
Market, but we did satisfy the continued listing requirements of the Nasdaq
SmallCap Market. We are awaiting Nasdaq-Amex's decision on whether our request
for an extension of time to achieve compliance with the Nasdaq National Market
requirements will be granted, or whether the listing of our common stock will be
transferred to the Nasdaq SmallCap Market or other action will be taken.
If our common stock is removed from the Nasdaq National Market and not
transferred to the Nasdaq SmallCap Market, the liquidity and price of the stock
could be adversely affected. Moreover, we may find it more difficult to raise
equity financing, and investors may find it more difficult to dispose of or
obtain accurate quotations for our common stock because the bid and asked
quotations would be reported on an electronic bulletin board such as the OTC
Bulletin Board or a similar quotation medium.
VidaMed Relies on One Product Line
The VidaMed TUNA System consists of a radio frequency generator, a
reusable handle, a disposable cartridge and an optical telescope. If a material
problem develops with any one or more of those components, our revenues would
likely suffer because we do not have other products to rely on. Possible
problems include, but are not necessarily limited to, malfunctions, failures to
comply with or changes in governmental regulations, product recalls, product
obsolescence, injunctions resulting from litigation, inability to protect our
intellectual property, invalidity of our patents or shortages of product.
Manufacturing
Three of the four major components of the TUNA System are manufactured by third
parties. We manufacture the VTS PROVu Reusable Handle at our headquarters
facility in Fremont, California. Telo Electronics manufactures the VTS Generator
(Model 7600) at its facility in San Jose, California. Ziess Humphrey Systems
manufactures the VTS Disposable Cartridge at its facility in Dublin, California.
Karl Storz manufactures the VTS PROVu Telescope at its facility in Germany.
By outsourcing our manufacturing, we are at risk that our manufacturers will not
be able to supply us with our products as ordered. Our products are continuously
subject to Food and Drug Administration regulation, including recordkeeping and
reporting requirements regarding use of the device. Manufacturing facilities
where we outsource
Page 12 of 16
<PAGE>
products are also subject to periodic inspection by federal, state and foreign
regulatory agencies. Failure of our manufacturers to comply with regulatory
requirements could adversely effect our business.
Impact of Year 2000
Many currently installed computer systems and software products are coded to
accept, store, or report only two digit year entries in date code fields.
Beginning in the Year 2000 (Y2K), these date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates.
The Y2K issue is a result of these programs being written with two digits
instead of four. As a result, computer systems and software used by companies,
including us and our vendors and customers, will need to comply with the Y2K
requirements. We presently believe that as a byproduct of normal business system
modifications and upgrades and the short length of time we have been in
operation, the Y2K issue should not have a material effect on our current
financial position, liquidity or results of operations. However, this does not
completely prevent the possibility of problems arising related to the Y2K issue
that could have a material impact on our operations.
We have been proactive in addressing the Y2K issue internally and externally.
Our primary software system is Y2K compliant. We do not depend on in-house
custom systems and generally purchase off-the-shelf software from reputable
vendors who have tested their software for Y2K compliance. The Y2K issue is
being considered for all future software purchases. Although we believe the Y2K
issue will not pose material operational problems for our computer systems,
there can be no assurance that problems arising from the Y2K issue will be
completely eliminated.
We have communicated with our significant suppliers and customers to determine
the extent to which our operations are vulnerable to a failure of any of those
third parties to remediate their own Y2K issues. Medicare coverage for supplies
and devices in the office-based and ASC markets was delayed in mid-1998 due to
Medicare announced Y2K problems. The ASC reimbursement program, which was
expected to be effective January 1, 1999, is not likely to be effective before
September 30, 2000. As a result of the Medicare coverage delays, the Company
established a $2.7 million reserve in the third quarter of 1998 for all
office-based and ASC sales, which occurred principally in the first and second
quarter of 1998. Other than issues related to Medicare, none of our significant
suppliers or large customers has notified us that they have significant Y2K
problems. Even where assurances are received from third parties, however, there
remains a risk that failure of systems and products of other companies on which
we rely could have a material adverse effect on our business.
Our products are Y2K compliant and are able to operate in the Year 2000 and
beyond. There are two processors used in the TUNA System generator. One
processor does not have date sensitivity while the other does. We have tested
the date sensitive processor and have concluded that it has no significant Y2K
problems.
We believe we have an effective program in place to resolve Y2K issues in a
timely manner. We also have contingency plans for certain critical applications
and are working on such plans for others. These contingency plans involve, among
other actions:
o Manual workarounds (e.g. manual preparation of invoices, paychecks)
o Adjusting staffing strategies, to meet additional and changing demands.
In the event that we do not completely resolve all of the Y2K issues, our
business operations could be adversely affected. Although the resulting costs
and loss of business cannot be reasonably estimated at this time, we have not
and do not expect to have material costs associated with the Y2K issues.
The most reasonably likely worst case scenario relates to our inability to use
our computerized manufacturing and accounting system. Although the software
product is Y2K compliant, other unforeseen factors could render it inoperative,
such as the inability of public utilities to provide service. This occurrence
could materially adversely effect our business. We could also be required to
manually prepare documents, such as shipping documents, invoices and checks.
Such tasks would be more time consuming and would likely require additional
human resources to complete.
Page 13 of 16
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate risk on the investments of our excess
cash. The primary objective of our investment activities is to preserve
principal while at the same time maximize yields without significantly
increasing risk. To achieve this objective, we invest in highly liquid and high
quality debt securities. To minimize the exposure due to adverse shifts in
interest rates, we invest in short-term securities with maturities of less than
one year. Due to the nature of our short-term investments, we have concluded
that we do not have a material market risk exposure.
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our stockholders during the quarter ended
September 30, 1999.
Item 5. Other Information
Management Changes
In August 1999, several changes occurred in our management and on our Board of
Directors. David Illingworth resigned as President and Chief Executive Officer,
effective August 1, 1999. He remains a member of the Board.
Randy Lindholm, who had been our Executive Vice President of Sales and
Marketing, was promoted to President and Chief Executive Officer, effective
August 1, 1999. Mr. Lindholm also was named Chairman of the Board, effective
November 12, 1999.
Effective September 27, 1999 Elizabeth H. Davila was named to the Board of
Directors. Effective November 4, 1999 Paulita Laplante and Kurt C. Wheeler were
named to the Board of Directors.
On August 23, 1999, John F. Howe replaced Richard D. Brounstein as Vice
President Finance, Chief Financial Officer. Mr. Howe was most recently Vice
President, Finance and Hospital Division Controller for Nellcor Puritan Bennett
of Pleasanton, Calif., a $800 million international medical device company
specializing in respiratory products and services, which was acquired by
Mallinckrodt Inc. (NYSE: MKG) in 1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter
ended September 30, 1999.
<TABLE>
<CAPTION>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<S> <C>
VIDAMED, INC.
Date: November 12, 1999 By: /s/ Randy D. Lindholm
--------------------------- ------------------------------------
Randy D. Lindholm
President, Chief Executive Officer
Page 14 of 16
<PAGE>
Date: November 12, 1999 By: /s/ John F. Howe
---------------------------- -------------------------------
John F. Howe
VP Finance, Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 15 of 16
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