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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 4
[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 August 13, 1999 was $37,439,543.
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, was 20,650,603 as of August 13, 1999.
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/A.
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PART I
Item 1 - BUSINESS
Cautionary Statement Regarding Forward-Looking Statements
This report contains, in addition to historical information, forward-looking
statements that are based on current expectations and beliefs. Forward-looking
statements involve a number of risks and uncertainties that could cause actual
results to differ materially from those suggested in the forward looking
statements. Some of the factors that could cause actual results to differ
materially include, among others, market acceptance of the VidaMed Tuna
Procedure, availability of cash resources sufficient to fund operations,
availability and timing of third-party reimbursement for procedures performed
with the VidaMed Tuna System, the possible volatility of VidaMed's Stock Price,
and the risk factors discussed herein under "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and in the other
documents we file from time to time with the Securities Exchange Commission.
VidaMed undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
General information
VidaMed, Inc. (the "Company" or "VidaMed") designs, develops, manufactures
and markets technologically and clinically advanced, cost effective systems for
urological conditions. Our focus is the treatment of the enlarged prostate or
benign prostatic hyperplasia (BPH). Our first product, the patented TUNA System,
is designed to offer a cost effective, minimally invasive alternative therapy
with compelling clinical advantages for BPH treatment. We commenced
manufacturing, production and international product sales in 1993. We received
clearance from the Food and Drug Administration (FDA) in October 1996, and
received Medicare CPT code # 53852, effective January 1, 1998, for the treatment
of symptoms associated with BPH. We sell our products primarily to urologists
and hospitals in the United States, and internationally to distributors who
resell to physicians and hospitals. Information about our revenues, operating
losses and assets is provided in the financial statements included in this
report - See Part II, Item 6, "Selected Financial Data" and Item 8, "Financial
Statements and Supplementary Data."
We were organized as a California corporation in July 1992 and were
reincorporated in Delaware in June 1995. Our principal offices are located at
46107 Landing Parkway, Fremont, California. Our 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 over a man's lifetime, a
condition known as begin prostatic hyperplasia ("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 14 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
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recommended. The most common surgical procedure is Transurethral Resection of
the Prostate (known as TURP), an invasive procedure in which portions of the
prostatic urethra and surrounding tissue are removed thereby widening the
urethral channel for urinary flow.
Prior to the advent of drug therapy in the mid-1990s TURP was the principal
method of treatment 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. We
believe that the numerous complications associated with TURP and the acceptance
of drug therapy have lead to a decline in the number of TURP procedures
performed in the United States, from a total of 450,000 in 1992 to 150,000 in
1998.
Less invasive surgical procedures to treat the symptoms of BPH have been
developed. We feel 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, approximately
$5 billion of which was spent 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. 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. According to U.S. Census Bureau reports, 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. We believe that we are well positioned to provide both
payors and physicians a cost-effective alternative to drug therapy, invasive
surgery, and other less invasive surgical procedures.
The TUNA System and Procedure
We have developed the TUNA System to provide the therapy of choice for BPH
over watchful waiting, drug therapy and current surgical therapies. Our 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 BPH therapies. We believe that the overall 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 prostate tissue to relieve the symptoms
associated with BPH. The principal components of the VTS PROVu TUNA System are:
VTS RF Generator, a low power radio frequency energy generator (Model
7600). 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 radio frequency 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 monitors the
procedure to reach the ideal treatment levels in each lobe of the prostrate.
The VTS Generator has an automatic shut-off activated by both temperature and
impedance measurements to ensure controlled tissue shrinkage. The integrated
computer records patient lesion information for medical records and
reimbursement.
VTS PROVu(TM) Cartridge, a single-use cartridge containing two needles
that extend at an approximate 90 degree angle from the cartridge's clear tip.
Each needle, which delivers radio frequency energy into the prostatic
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tissue, is equipped with a patented insulation shield to thermally protect the
urethra during the procedure. Within each shield is an apparatus that monitors
internal temperatures during the procedure.
VTS PROVu Reusable Handle, a device that attaches to the cartridge to
provide simultaneous needle deployment; and
VTS PROVu Telescope, an optical device designed to allow direct tissue
viewing and precise positioning of the cartridge during the procedure. A
unique feature of the PROVu Telescope and Handle is the ability to adjust the
scope forward or back during a procedure to view 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 major medical grade video camera
systems and light sources.
The TUNA Procedure shrinks targeted tissue in and surrounding the
prostrate, leading to improved urinary flow. It 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 intravenous
sedation. The VTS PROVu 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 radio frequency 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 treated 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 apparatus at the next site to
be treated and repeats the process. Typically, two or more treatments in each
lateral lobe of the prostrate 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. Based on our randomized FDA audited trials as published in the May 1998,
Journal of Urology, there was an 8% incidence of post-procedure urinary tract
infection symptoms/urethral stricture resulting in a complete inability to
urinate, and a 32% incidence of post-procedure bleeding. There was no reported
incidence of impotence, retrograde ejaculation (the reverse flow of semen which
can result in sterility), or incontinence.
We believe that the TUNA System design offers significant advantages over
other BPH therapies. Because the components of the TUNA System shield the
urethra and deliver radio frequency 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.
We believe that the cost of the TUNA procedure in the United States,
including physician charges, will be significantly less than the overall cost of
TURP due in large part to overnight hospital stays. The capital cost for our
TUNA System is less than the cost for microwave devices used for other minimally
invasive BPH procedures. A complete TUNA System has a list price of $80,000,
with a per procedure disposable cost of approximately $795. During the fourth
quarter of 1998, we introduced a fee per use program whereby we provide access
to TUNA Systems without requiring the purchase of the TUNA System, but charge a
fee of $2,639 for each TUNA Procedure performed.
In addition to providing procedural alternatives, we believe the VidaMed
TUNA Procedure also provides patients, physicians and health care payors with a
clinically and economically superior alternative to ongoing drug therapy. To
date, the symptomatic relief experienced by patients in our clinical trials
suggest that the TUNA procedure provides greater relief than the results
reported for drug therapy or watchful waiting. Additionally, our 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.
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Alternative 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. We believe
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 four primary orally administered pharmaceutical products: Proscar (sold by
Merck KGaA) in 1992, Hytrin (sold by Abbott Laboratories) in 1993, Cardura (sold
by Pfizer Inc.) in 1995 and Flomax (sold by Boehringer Ingelheim
Pharmaceuticals, Inc.) in 1997. 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 and Flomax, also alpha-blockers, act 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"). TURP has been the
primary interventional treatment method 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 remove 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 the insertion of a
tube into the urethra to keep the urinary canal open, which tube 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. The TURP procedure costs several thousands of dollars exclusive of
post-operative hospitalization.
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% of patients;
. Post- Procedure Bleeding - 100%
. Urinary tract infection symptoms/urethral stricture resulting in a complete
inability to urinate - 20% of patients; and
. Incontinence - 4% of patients;
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According to the United States Department of Health and Human Services,
approximately 2% of TURP patients die as a result of the procedure and related
complications. At least 10% of TURP patients develop BPH symptoms again and
require retreatment within five years.
Transurethral Microwave Therapy (TUMT). The TUMT procedure is performed by
inserting an apparatus into the urethra to deliver 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, we believe the difficulty of controlling the absorption of
microwave energy in tissue may cause varying treatment outcomes. The primary
microwave treatments are discussed below:
. In 1996, a microwave system marketed by EDAP Techomed, Prostatron, received
FDA clearance for treatment of symptoms associated with BPH. Microwave
systems have been marketed in certain European countries for several years.
We believe the Prostatron generator is costs approximately $295,000, and per-
procedure disposable costs are estimated to be $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 cost of about $1,200.
Both the EDAP Techomed and Targis systems are also sold as a mobile work
station on a turnkey, fee-per-use basis, generally costing $3,000 and higher.
Due to the design configurations of the microwave based systems, we believe
these systems limit the number of patients with BPH that can be treated. We
believe that the cost of the capital equipment and single-use disposable items
combined with the postoperative complications will limit the use of this
treatment method.
Interstitial Laser Coagulation. FDA cleared Johnson & Johnson's Indigo
LaserOptic(TM) Treatment System for U.S. marketing in December 1997. This
treatment uses a diode laser to directly view targeted tissue. Preliminary
studies indicate that treatment outcomes compare favorably to TURP in terms of
safety. Complications 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.
Other Treatment Methods
Transurethral Vaporization of the Prostate (TVP). TVP is a variation of
TURP. It was introduced in January 1995 by Circon Corporation. TVP is
performed in a manner similar to using a paint roller and delivers electrical
energy to vaporize the urethra and prostate. It utilizes the same radio
frequency generator as does TURP, thus requiring no additional capital expense.
The TVP has similar efficacy as TURP with less bleeding and shorter post-
operative catheterization, but other complications are similar to those of TURP.
Transurethral Evaporization of the Prostate (TUEP). TUEP utilizes high
wattage laser energy at high power levels 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.
High Intensity Focused Ultrasound (HIFU). High intensity focused
ultrasound (HIFU) uses a customized ultrasound probe to deliver precise high-
energy ultrasound (acoustic energy) to small-localized areas. This produces
high tissue temperatures and destroys 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
is not recommended in the median lobe and for patients with multiple calcium
deposits. Early studies show that treatment outcomes are variable, and
complications include tissue sloughing that may require catheterization, and
blood in urine and seminal fluid. We believe that ultrasound systems used in
HIFU are currently being marketed at a price of approximately $100,000.
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Other procedures attempt to create an opening for urinary flow without
removing prostatic tissue. 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.
Marketing and Customers
We have positioned ourself for worldwide distribution of the TUNA System.
Our sales and marketing staff is located in the United States, United Kingdom
and Germany where direct distribution takes place. In the United States, we
market the TUNA System through a network of four regional sales managers
supported by both independent dealers and sales representatives.
Internationally, we primarily sell to distributors who resell to physicians and
hospitals.
Century Medical, Inc. paid 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. We commenced shipments
to Century Medical at that time, and received an additional one-time $500,000
royalty. Based on information we have received from Century Medical, we believe
that exclusive of the cost of drug therapy and hospitalization fees, the annual
cost of treating BPH in Japan is approximately $80 million and that there are
approximately 90,000 TURP procedures are being performed each year in Japan.
Urologists around the world have adopted VidaMed's TUNA Procedure as a new
treatment for symptomatic BPH. Many of those urologists teach at prestigious
universities or are affiliated with leading hospitals. We believe that the
endorsements made by these early adopters will assist U.S. and worldwide
marketing efforts to create acceptance in the urological community. We will
continue to be represented at all major urology conferences in the United States
and the rest of the world. We have 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.
We are committed to delivering a quality product to our customers and to
reinforce product delivery with excellent customer service and field support.
Clinical Status
We are performing clinical trials of the 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. We began international
clinical evaluation of the TUNA Procedure in March 1993 and U.S. trials in
November 1994. We are 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 clinical trials conducted both in the United States and internationally,
the majority of TUNA patients for whom follow-up data is available show
significant relief from BPH symptoms. Follow-up data collected includes urine
flow rates and two standard measures of BPH symptom relief: (i) symptom score
and (ii) quality of life score. We believe the results to date indicate that the
TUNA System provides clinically significant relief from the symptoms associated
with BPH. 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.
In early 1999, the Blue Cross Blue Shield technical evaluation committee
reviewed the TUNA Procedure in multiple settings beyond clinical trials. Those
settings included TUNA Procedures performed in medical centers
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in the United States, Canada, Australia South Africa, Israel and Europe. The
committee evaluated the TUNA Procedure in light of the following five factors:
. The technology must have approval from the appropriate government regulatory
bodies;
. The scientific evidence must permit conclusions concerning the effect of the
technology on health outcomes;
. The technology must improve the net health outcome;
. The technology must be as beneficial as any established alternatives; and
. The improvement must be attainable outside the investigating settings.
The committee determined that the TUNA Procedure satisfied each of those
factors. We believe that the Blue Cross Blue Shield report provides further
support for the TUNA Procedure as a viable alternative to the TURP procedure.
Manufacturing
During 1998, we manufactured the new VTS PROVu reusable handle for
commercial sale at our facility in Fremont, California. At various assembly
stages, each production lot was thoroughly tested by trained personnel to ensure
compliance with our stringent specifications. Our quality assurance group
independently verified, at various steps in the manufacturing cycle, that
product fabrication and inspection processes met our specifications and
applicable regulatory requirements.
In 1998, we completed ISO 9001 certification at the Fremont facility and
obtained the necessary CE Mark (European authorization) for the ongoing sale of
our products in Europe.
Also during the year, we successfully completed a U.S. FDA/State of
California regulatory audit, which resulted in us obtaining a license to
manufacture our product in Fremont.
We contract with Telo Electronics aka Sanmina MPD to manufacture the VTS
Generator, and with Karl Storz in Germany to manufacture our VTS PROVu
Telescope. In January 1999, we began transitioning the manufacturing of our
disposable cartridge to Zeiss Humphrey Systems. Both Telo Electronics and Zeiss
Humphrey Systems are located in the Silicon Valley area.
Research and Development
Our 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 radio frequency generator,
providing support for clinical trials, working with physicians to develop
product enhancements and developing devices for urological applications in
addition to BPH. Our in-house research and development program uses a network
linking computer assisted design and manufacturing capability and advanced
graphic design workstations with a computerized machine shop. These
capabilities allow us to produce molds, custom parts and tooling, enabling rapid
prototyping and pre-production evaluation of devices. We have fully funded all
research and development. The amounts expensed, in thousands, for 1996, 1997
and 1998 respectively are $5,742, $6,003 and $4,241.
Backlog
We do not have a backlog of orders for our products in countries where the
TUNA System is sold and anticipate that we will continue to ship orders after
their receipt. Accordingly, we do not anticipate that we will develop a
significant backlog in the future.
Patents, Trademarks and Licenses
We have been issued 42 United States patents and 40 foreign patents
covering a method of prostate ablation using the TUNA System and the design of
the TUNA System. The earliest termination date of any of our United States
patents is in 2009, with the majority of patents scheduled to continue in effect
through the year 2013.
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At the end of fiscal 1998, we had 16 patent applications pending in the United
States and 49 corresponding patent applications pending in various foreign
countries. Our patents focus on methods for delivery of low power radio
frequency energy to the prostrate for the treatment of BPH. We also have rights
to technology with allows our products to deliver radio frequency energy to
other organs of the human body while protecting surrounding tissue Our patents
materially support our place in the market by preventing others from making,
using, or selling devices which copy our treatment methods and equipment. It is
our policy to pursue aggressively protection of our patents.
We also enter into patent and technology licensing agreements with others
when management determines it in the Company's best interest to do so. We pay
royalties under existing patent license agreements for the use of patents in
certain of our products, which patents are licensed for the life of the patents.
We own various trademarks that we use in our business. These assets are
valuable to us, the most important of which are "TUNA", and our "V device"
corporate logo.
There can be no assurance that our issued United States patents, or any
patents which may be issued as a result of our applications, will offer any
degree of protection. There can be no assurance that any of our patents or
patent applications will not 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 our ability to make, use or sell our products either in
the United States or in international markets.
We have been and may in the future be notified that the Company may be
infringing the patents or other proprietary rights of others. If infringement
is established, we could be required to pay damages and be enjoined from selling
the infringing products or practicing processes. Moreover, if we were unable to
alter our products or processes to avoid the infringement claim, we 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" - "Uncertainty Regarding Patents and
Protection of Proprietary Technology."
Employees
As of December 31, 1998, we employed 88 individuals on a full-time basis.
Of these, 84 were located in the United States, 3 in the United Kingdom and 1 in
Germany. We also have several part-time employees and consultants. Our
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 our employees is covered under collective
bargaining agreements. We consider relations with our employees to be good.
With the outsourcing of manufacturing, the headcount has been reduced to 68 as
of February 1, 1999.
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PART II
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of VidaMed's financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements, the related Notes included in this report on Form 10-K/A, and the
Cautionary Statements Regarding Forward-Looking Statements presented at the
beginning of Part I of this Form 10-K/A.
Overview
Since our inception in July 1992, we have been engaged in the design,
development, clinical testing and manufacture of the VidaMed TUNA System for the
treatment of symptoms associated with BPH. We commenced international sales of
the 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. For the fiscal year ended December 31, 1998, we
marketed the TUNA System in the United States through a network of four sales
managers, supported by both sales representatives and independent dealers. In
Europe, Asia and South America, we marketed our products primarily through a
network of distributors who were supported by our staff.
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At the end of fiscal 1998, we began restructuring our sales and marketing
model to shift the emphasis from the sale of the TUNA System itself to a model
based on generating revenues through a fee-per-use program. Under the prior
model, we focused on selling the TUNA System generator and related equipment.
Under the new sales model, an entire TUNA System is placed with a hospital at no
capital charge and a fee is charged for each procedure performed.
We received FDA clearance to market the TUNA System in 1996, and in 1998,
Medicare reimbursement coverage became available for procedures using our
equipment that are performed in hospitals. As of August 15, 1999, 38 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. 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 coverage 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 continue to advance Medicare reimbursement coverage for
the TUNA Procedure, but, as discussed below in "Liquidity and Capital
Resources," we will not be able to do so without additional debt or equity
financing.
We do not anticipate reaching profitability in the near future. We expect
our operating losses to continue as we continue 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. Our
future profitability will be dependent upon, among other factors, market
acceptance of the VidaMed TUNA Procedure, availability and timing of third-party
reimbursement for procedures performed with the TUNA System, adoption of our
fee-per-use program and our ability to fund operations absent sufficient sales
of our products.
There can be no assurance that the TUNA System will be deemed clinically or
cost effective by health care providers and payors, superior to other current
and emerging methods for treating BPH, or that the TUNA System will achieve
significant market acceptance in the United States. Furthermore, determinations
of reimbursement of the TUNA Procedure by private and governmental health payors
are made by such payors and their medical directors independent of the FDA
approval. Accordingly, there can be no assurance that the TUNA Procedure will
be reimbursed at adequate levels 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, lack of adequate funding, the impact of competitive products
and pricing and other risks could have a material adverse effect on our
business, financial condition and results of operations.
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Results of Operations
Net revenues for 1998 were $1.0 million, which is a decrease of $8.8
million or 90% from $9.8 million in 1997. Revenues decreased in 1998 for the
following reasons:
. We recorded a $2.7 million sales reserve in the third quarter of 1998. The
sales reserve is a direct result of first and second quarter 1998 sales
efforts in office-based and ambulatory surgery center (ASC) markets, where
Medicare reimbursement was assumed to be imminent. In mid-1998, Medicare
coverage for supplies and devices in the office-based and ASC markets was
delayed due to Medicare announced Y2K compliance issues. We estimated that
Medicare reimbursement approvals and coverage for procedures performed in
these markets would be delayed at least until July 2000. As a result of the
delay, we established the $2.7 million sales reserve in third quarter of
1998.
. Revenues of $1.5 million in 1997 were attributable to nonrecurring license
fees and an initial stocking order received in 1997 from our Japanese
distributor following Japanese approval of the TUNA System.
. Revenues of $.9 million in 1997 were attributable to a sale of 39 systems
to Tenet HealthCare Systems in the first quarter of 1997. Tenet did not buy
any additional systems in 1998.
. The remaining $3.7 million net reduction in U.S. product revenues between
1997 and 1998 was due to a strong launch of the TUNA System in 1997, and
the inability to obtain reimbursement for domestic office-based procedures
in 1998. After receiving FDA approval in late 1996 to market the TUNA
System, we sold TUNA Systems in record numbers into the domestic office
market in 1997. It was assumed that third-party reimbursement, including
Medicare coverage, would soon become available for performing the TUNA
procedure in physicians' offices and the ASC setting. When Medicare
announced in the summer of 1998 that office-based and ASC reimbursement
would be delayed, domestic office sales dropped sharply, and we recorded a
$2.7 million sales reserve for all office-based and ASC sales, as described
above.
Current Medicare reimbursement coverage for the TUNA hand piece, related
equipment and supplies 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. The failure to
receive Medicare reimbursement coverage at the ASC level in the year 2000 could
have a material adverse effect on our future revenues.
We began 1998 with Medicare reimbursement coverage 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 fourth quarter of
1998, this expanded to 14 states, covering 17% of men over 50. Although coverage
has increased to 29 states and 51% of the over 50 male population in January
1999, including California and Florida, to achieve significant increases in
sales volume, it may be necessary to obtain Medicare reimbursement coverage 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. We have several initiatives underway to
facilitate the Medicare reimbursement approval process. We are working in
cooperation with state Medicare Medical Directors and important technical
bodies, such as the Blue Shield Technical Evaluation Committee, and we regularly
publish our long-term clinical studies. There can be no assurance that we will
receive additional Medicare reimbursement coverage in major states in a timely
manner, and the failure to receive such coverage would have a material adverse
effect on our business, financial condition and results of operations.
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 our manufacturing facility in the United
Kingdom. The increase in 1997 is due primarily to an increase in product sales.
Due to the lower 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
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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:
. Investment in 1997 in development efforts on the TUNA System radio frequency
generator;
. Cost savings from the closure of the facility in the United Kingdom in 1997;
and
. Reduction of clinical trial costs.
The increase in 1997 when compared to 1996, is primarily due to the completion
of the 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 our 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 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
of our common stock in 1998 and 1997. The decrease in 1997 is due to lower
investment balances as we used the capital raised during our 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.
Our 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; and
. 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; and
. R&D and SG&A expenses associated with the potential growth of our
organization.
Fluctuations in operating results could have a material adverse affect on our
business by, among other things, disrupting our cash flow, limiting our ability
to attract investors, and impairing our ability to implement long range plans.
As a result, there can be no assurance as to when or whether we will achieve
profitability. If profitability is achieved, there can be no assurance such
profitability will continue in the future.
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Liquidity and Capital Resources
As we began fiscal 1999, we believed that our current cash balances, projected
cash flows from operations including a U.S. procedure based sales program (the
"fee-per-use program") and cash available under the Transamerica financing
facility would be sufficient to meet our current operating and capital
requirements through the end of the fiscal year. We now believe that the fee-
per-use program will take longer to implement than originally planned. In an
effort to increase revenues, we believe that it is necessary to:
. Increase consumer awareness of the treatment options
available to BPH patients with the view that an informed
patient and his doctor are more likely to choose the TUNA
procedure;
. Provide opportunities for our field organization to
increase the number of physicians who perform TUNA
Procedures; and
. Implement marketing initiatives to assist physicians build
their practices by increasing the number of TUNA
Procedures performed.
The increased costs associated with this three-pronged approach together with
lower than anticipated revenues from the fee-per-use program will require us to
obtain additional financing to meet our current operating and capital
requirements through the end of the fiscal year. Management is pursuing, and
believes it can obtain, financing to fund operations through the end of this
fiscal year and into fiscal year 2000. Additional financing will likely be
required in order to fund operations throughout fiscal 2000.
We cannot give any assurance that we will be successful in securing any debt or
equity financing, or that such financing, if available, will be on favorable
terms. Any future equity financing would result in dilution to our
stockholders. If we are unable to secure additional financing this year, we
would not be able to continue as a going concern. We would be forced to explore
strategic relationships, reduce staff and discontinue clinical trials, research
and development and marketing and sales activities.
In October 1998, we finalized a commitment for $5.5 million in new debt
financing with Transamerica Technology Finance, a division of Transamerica
Corporation. The facility is secured by our assets and consists of a revolving
accounts receivable-based credit line of up to $3 million and a $2.5 million
equipment term loan. The term loan was funded in full as of December 31, 1998,
at an interest rate of 12% per year. Repayment of that loan is amortized over a
three-year period, with the first monthly payment having been made in December
1998 and continuing monthly thereafter.
As of December 31, 1998, we borrowed approximately $132,000 against the
revolving accounts receivable-based line at a rate of 9.75% per year. We were
eligible to borrow approximately $166,000 against this line on December 31,
1998, and borrowed the remaining available balance of approximately $34,000 in
January 1999.
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 our common stock at a price of $0.89 per share.
Restructuring Accrual
In September 1997, we announced a restructuring program designed to reduce
costs and improve operating efficiencies by closing our U.K. manufacturing
facility and relocating the manufacturing to our headquarters in Fremont,
California. 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.
Risk Factors
In additions to the risks outlined above, our business, results of
operations and financial condition are subject to a number of risk factors,
including the following:
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Risk of Inadequate Funding. We expect our operating losses to continue as we
continue 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. We may be required to
expend greater than anticipated funds if unforeseen difficulties arise in the
marketing and sales of the TUNA System, and in obtaining necessary regulatory
and reimbursement approvals or in other aspects of our 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, we will likely
require additional debt and/or equity financing. Our future liquidity and
capital requirements will depend upon numerous factors, including actions
relating to regulatory and reimbursement matters and the extent to which the
TUNA System gains market acceptance. Any additional financing, if required, may
not be available on satisfactory terms or at all. Debt financing may require us
to pledge assets and to comply with financial and operational covenants. Future
equity financing would result in dilution to the holders of our common stock.
Limited Operating History. We have a limited history of operations. Since our
inception in July 1992, we have been primarily engaged in research and
development of the TUNA System. We have experienced significant operating
losses since inception and, as of December 31, 1998, had an accumulated deficit
of $88.2 million. Unlike companies that have been operating profitably for
years and have a well accepted product, given our limited operating history and
the relative newness of our products, there can be no assurance that we will
ever be successful.
History of Losses and Expectation of Future Losses. Our development and
commercialization of the TUNA System and other new products, if any, will
require substantial product development, clinical, regulatory, marketing and
other expenditures. We expect our operating losses to continue as we continue 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:
. We will have sufficient funds available to develop our products as we believe
is necessary;
. The TUNA System will be successfully commercialized, or
. We will produce significant revenues from either international or domestic
sales.
As a result, there can be no assurance that we will achieve or sustain
profitability in the future.
Uncertainty of Market Acceptance. The 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. If the TUNA System does not achieve sufficient market
acceptance, we will not be able to generate revenues necessary to operate our
business, and absent funds available from another source, our business and
operations would be materially and adversely affected. See, "Liquidity and
Capital Resources" and "Risk of Inadequate Funding".
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 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. Our success will be
dependent upon, among other things, our 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
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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, we believe that physician
advocacy of the 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 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 ambulatory service centers ("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 us in the United States. 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 TUNA Procedure. Furthermore, we
could be adversely affected by changes in reimbursement policies of governmental
or private health care payors. Failure by physicians, hospitals and other users
of our 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 our products would have a
material adverse effect on our 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 than ours which allows them to have
larger technical, research, marketing, sales and distribution programs. There
can be no assurance that our competitors will not succeed in developing or
marketing technologies and products that are more effective or commercially
attractive than any we develop. Such developments could have a material adverse
effect on our business, financial condition and results of operations.
Any product we develop 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 we 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. We expect 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.
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. The market price of the shares of
our common stock is also likely to be highly volatile. The broad market
fluctuations and the volatility or our stock may adversely affect the market
price of our common stock, and impair our ability to obtain future funding from
the sale of our common or preferred stock.
The following conditions may have a significant effect on the market price of
our common stock:
. Fluctuations in our operating results;
. Announcements of technological innovations or new products;
. FDA and international regulatory actions;
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. Actions with respect to reimbursement matters;
. Developments with respect to patents or proprietary rights;
. Public concern as to the safety of products;
. Changes in health care policy in the United States and internationally;
. Changes in stock market analyst recommendations regarding us, other medical
device companies or the medical device industry generally; and
. General market conditions
U.S. Government Regulation. The FDA under the Federal Food, Drug, and Cosmetic
Act ("FDC Act") regulates our 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 Our business, financial condition and
results of operations. There can be no assurance that:
. We will obtain 510(k) clearance within the above time frames, if at all, for
any device for which we file a future 510(k) notification; or
. We will not be required to submit a premarket approval application for any
device which we may develop in the future.
. The Fremont facility is currently qualified under FDA good manufacturing
practice regulations and under ISO 9000 standards. In order to maintain these
approvals, we are subject to periodic inspections.
Foreign Government Regulation. 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. Although we have received regulatory approvals where required for
commercial sale of the TUNA System in all major international markets, the
requirements to receive such approvals could change, or new approvals could be
necessary as we develop new products or modify existing products.
We have received certifications that allow us to affix the CE mark to the TUNA
System, permitting us to commercially market and sell the TUNA System in all
countries of the European Economic Area. Additional product approvals from
foreign regulatory authorities may be required for international sale of our
general electrosurgical device for which a FDA 510(k) notification has been
filed. Failure to comply with applicable
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regulatory requirements can result in loss of previously received approvals and
other sanctions and could have a material adverse effect on our business,
financial condition and results of operations.
Our 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 at the end of fiscal 1998, the new generator and PROVu system
were 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 our products in Japan and could have a
material adverse effect on our business, financial condition and results of
operations.
Limited Manufacturing Experience; Scale-Up Risk. We purchase components used in
the TUNA System from various suppliers and rely on single sources for several
components. We have limited experience in manufacturing our products in
commercial quantities in the United States. Delays associated with any future
component shortages, particularly as we scale up our manufacturing activities in
support of commercial sales, could have a material adverse effect on our
business, financial condition and results of operations because we would not
have products available to sell.
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 we have begun to outsource the manufacture of the disposable cartridge and
other components of the TUNA System, such difficulties could arise, resulting in
a material adverse effect on our business, financial condition and results of
operations.
Product Recall Risk. Any products we manufacture or distribute 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. Our manufacturing facilities are subject to
periodic inspection by FDA, certain state agencies and foreign regulatory
agencies. We require that our key suppliers comply with international standards
for production of medical devices, and assure through detailed, in-depth audits,
that our suppliers meet both recognized standards and our own stringent quality
standards. Our three key manufacturing subcontractors are ISO9001/EN46001
certified. However, our failure or the failure of our suppliers to comply with
regulatory requirements could have a material adverse effect on our business.
There can be no assurance that we 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 our business.
Uncertainty Regarding Patents and Protection of Proprietary Technology. Our
success depends in part on the establishment and maintenance of proprietary
technologies. We rely on a combination of patent, copyright and trade secret law
to protect the technology in our products. We hold numerous U.S. and foreign
patents and patent applications relating to our products. The earliest
termination date of any of our United States patents is in 2009, with the
majority of patents scheduled to continue in effect through the year 2013.
There can be no assurance that the steps we take to protect our technology will
be adequate to prevent third parties from misappropriating our technology, or
independently developing similar technology.
In addition to patents, we rely on trade secrets and proprietary know-how,
which we seek to protect, in part, through proprietary information agreements
with employees, consultants and other parties. Our proprietary information
agreements with our employees and consultants contain industry standard
provisions requiring such individuals to assign to us without additional
consideration any inventions conceived or reduced to practice by them while
employed or retained, subject to customary exceptions. There can be no
assurance that proprietary information agreements with employees, consultants
and others will not be breached, that we would have adequate remedies for any
breach, or that our trade secrets will not otherwise become known to or
independently developed by competitors.
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. We are aware
of patents held by other participants in the BPH market, and there can be no
assurance that we 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
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enforce our patents, to protect our trade secrets or know-how, or to determine
the enforceability, scope and validity of other's proprietary rights.
Any litigation or interference proceedings could result in substantial
expense and significant diversion of our technical and management personnel. An
adverse determination in litigation or interference proceedings could subject us
to significant liabilities to third parties or require us 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 arrangements may be substantial and could include
ongoing royalties. Furthermore, there can be no assurance that necessary
licenses would be available on satisfactory terms or at all. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent us from manufacturing and selling our
products, which would have a material adverse effect on our business, financial
condition and results of operations.
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 21/st/ century dates from
20/th/ century dates. The Y2K issue is a result of these programs being written
with two digits instead of four. As a result, computer systems and software used
by companies, including us and our vendors and customers, will need to comply
with the Y2K requirements. We presently believe that as a byproduct of normal
business system modifications and upgrades and the short length of time we have
been in operation, the Y2K issue should not have a material effect on our
current financial position, liquidity or results of operations. However, this
does not completely prevent the possibility of problems arising related to the
Y2K issue that could have a material impact on our operations.
We have been proactive in addressing the Y2K issue internally and
externally. Our primary software system is currently Y2K compliant. We do not
depend on in-house custom systems and generally purchase off-the-shelf software
from reputable vendors who have tested their software for Y2K compliance. The
Y2K issue is being considered for all future software purchases. Although we
believe the Y2K issue will not pose material operational problems for our
computer systems, there can be no assurance that problems arising from the Y2K
issue will be completely eliminated.
We have initiated communication with our significant suppliers and
customers to determine the extent to which our operations are vulnerable to a
failure of any of those third parties to remediate their own Y2K issues. The
Company determined that Medicare coverage for supplies and devices in the
office-based and ASC markets was delayed in mid-1998 due to Medicare announced
Y2K problems. The ASC reimbursement program, which was expected to be effective
January 1, 1999 is not likely to be effective before June 30, 2000. As a result
of the Medicare coverage delays, the Company established a $2.7 million reserve
in the third quarter of 1998 for all office-based and ASC sales. Other than
issues related to Medicare, none of our significant suppliers or large customers
has notified us that they have significant Y2K problems. Even where assurances
are received from third parties, however, there remains a risk that failure of
systems and products of other companies on which we rely could have a material
adverse effect on our business.
Our products are Y2K compliant and are able to operate in the Year 2000 and
beyond. There are two processors used in the TUNA System generator. One
processor does not have date sensitivity while the other does. We have tested
the date sensitive processor and have concluded that it has no significant Y2K
problems.
We believe we have an effective program in place to resolve Y2K issues in a
timely manner. We also have contingency plans for certain critical applications
and are working on such plans for others. These contingency plans involve,
among other actions:
. Manual workarounds (e.g. manual preparation of invoices, paychecks)
---
. Adjusting staffing strategies.
In the event that we do not completely resolve all of the Y2K issues, our
business operations could be adversely affected. Although the resulting costs
and loss of business cannot be reasonably estimated at this time, we have not
and do not expect to have material costs associated with the Y2K issues.
The most reasonably likely worst case scenario relates to our ability to
use our computerized manufacturing and accounting system. Although the software
product is Y2K compliant, other unforeseen factors could render it inoperative,
such as the inability of public utilities to provide service. This occurrence
could
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materially adversely effect our business. We could also be required to manually
prepare documents, such as shipping documents, invoices and checks and the like.
Such tasks would be more time consuming and would likely require additional
human resources to complete.
Rights to Founder's Inventions Limited to Urology. The proprietary information
agreement between us and Stuart D. Edwards, one of our founders, obligates Mr.
Edwards to assign to us 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. That 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 us, and we will have no rights or ownership interests
with respect thereto.
Risks Relating to RITA. We have entered into a cross license agreement with
RITA, formerly ZoMed International, Inc. Under the cross license, RITA has the
right to use our technology in the cancer field and we have the right to use
RITA technology in the treatment of Urological diseases and disorders. The
cross license between us and RITA allows both companies to develop products for
treatment of prostate cancer and cancers of the lower urinary tract, and we may
therefore become competitors of RITA in this field.
Product Liability Risk; Limited Insurance Coverage. Our business entails the
risk of product liability claims. Although we have not experienced any product
liability claims to date, any such claims could adversely impact our business.
We maintain product liability insurance and evaluate our 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.
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SIGNATURES
As set forth by 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 24th day of January, 2000.
VIDAMED, INC.
By /s/ John F. Howe
------------------------
John F. Howe,
Chief Financial
Officer
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