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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, 2000
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 30,386,062 as of September 30, 2000.
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VIDAMED, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C>
Item 1. Condensed Consolidated Financial Statements - unaudited
Condensed consolidated balance sheets - September 30, 2000
and December 31, 1999 3
Condensed consolidated statements of operations - three months
ended September 30, 2000 and 1999 and nine months ended
September 30, 2000 and 1999. 4
Condensed consolidated statements of cash flows - nine months
ended September, 2000 and 1999 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 14
PART II. OTHER INFORMATION
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
Financial Data Schedule 17
</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VidaMed, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
-------------------- ---------------------
(Unaudited) (*)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 8,204 $ 2,748
Short term investments 1,507 -
Accounts receivable, net 1,166 1,443
Inventories 460 415
Other current assets 493 531
-------------------- ---------------------
Total current assets $ 11,830 $ 5,137
Property and equipment, net 2,202 2,017
Other assets, net 102 166
-------------------- ---------------------
Total assets $ 14,134 $ 7,320
==================== =====================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 758 $ 461
Accrued liabilities 2,118 2,558
Deferred revenue 108 272
Notes payable, current portion 1,656 1,394
-------------------- ---------------------
Total current liabilities $ 4,640 $ 4,685
Notes payable, long-term portion 247 1,030
Stockholders' equity:
Capital stock 115,123 101,725
Accumulated other comprehensive income 1,507 -
Accumulated deficit (107,383) (100,120)
-------------------- ---------------------
Total stockholders' equity 9,247 1,605
-------------------- ---------------------
Total liabilities and stockholder's equity $ 14,134 $ 7,320
==================== =====================
</TABLE>
* The Balance Sheet at December 31, 1999 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.
3
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VidaMed, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 1,681 $ 1,487 $ 6,625 $ 3,749
Cost of products sold 785 579 2,445 2,059
------------- ------------- ------------- -------------
Gross profit 896 908 4,180 1,690
Operating expenses:
Research and development 875 683 2,481 2,238
Selling, general and administrative 2,903 2,934 9,147 8,847
------------- ------------- ------------- -------------
Total operating expenses 3,778 3,617 11,628 11,085
------------- ------------- ------------- -------------
Loss from operations (2,882) (2,709) (7,448) (9,395)
Other income (expense), net (16) (60) 185 (16)
------------- ------------- ------------- -------------
Net loss $ (2,898) $ (2,769) $ (7,263) $(9,411)
============= ============= ============= =============
Basic and diluted net loss per share $ (0.10) $ (0.13) $ (0.24) $(0.46)
============= ============= ============= =============
Shares used in computing basic and diluted net loss per share 30,213 20,653 29,782 20,505
============= ============= ============= =============
</TABLE>
See accompanying notes.
4
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VidaMed, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,263) $ (9,411)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,351 939
Issuance of warrants for renewal of loan 87 -
Amortization of deferred compensation 129 -
Changes in current assets and liabilities:
Accounts receivable 277 (580)
Inventories (45) 167
Other current assets 67 282
Other assets 64 114
Accounts payable 297 (114)
Accrued liabilities (234) (647)
Deferred revenue (164) (132)
------------ ------------
Net cash used in operating activities (5,434) (9,382)
------------ ------------
Cash flows from investing activities:
Expenditures for property and equipment (1,536) (323)
Net cash used in investing activities (1,536) (323)
Cash flows from financing activities:
Principal payments under capital leases - (22)
Principal payments of notes payable (521) (135)
Net cash proceeds from issuance of common stock 12,947 1,848
------------ ------------
Net cash provided by financing activities 12,426 1,691
------------ ------------
Net increase (decrease) in cash and cash equivalents 5,456 (8,014
Cash and equivalents at the beginning of the period 2,748 9,384
------------ ------------
Cash and equivalents at the end of the period $ 8,204 $ 1,370
============ ============
Supplemental disclosure of cash flows information:
Cash paid for interest $ 394 $ 226
============ ============
</TABLE>
See accompanying notes.
5
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VIDAMED, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(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, 2000, the statements of operations for the
three months and nine months ended September 30, 2000 and 1999, and the
statements of cash flows for the nine months ended September 30, 2000 and 1999,
are unaudited but include all adjustments (consisting of normal recurring
adjustments) that we consider necessary for a fair presentation of the financial
position at such dates 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 our annual report on Form 10-K for the year ended December 31, 1999,
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
Basic net loss per share is computed using the weighted-average number of shares
of common stock issued and outstanding during the periods presented. Diluted net
loss per share is computed based on the weighted average number of shares of our
common stock and common equivalent shares (stock options and warrants to
purchase common stock), if dilutive. Because we have incurred losses from
operations in each of the periods presented, there is no difference between
basic and diluted net loss per share amounts. As of September 30, 2000, we had
30,386,062 issued and outstanding shares of common stock, with options to
purchase 4,118,351 shares of common stock outstanding under employee and
director stock option plans, and warrants to purchase 3,001,571 shares of common
stock outstanding. The options and warrants will be included in the calculation
of net loss per share at such time as their effect 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 consist of the following (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Raw materials $ 126 $ 147
Work in process 12 39
Finished goods 322 229
------------- ------------
$ 460 $ 415
============= ============
</TABLE>
6
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4. Notes Payable
In January 2000, we renewed our debt facility arrangement with Transamerica and
in consideration of this renewal we issued a warrant to Transamerica to acquire
an additional 77,320 shares of common stock for a purchase price of $1.94 per
share. The warrant has a term of five years. Using the Black Scholes model,
the fair value of the warrant was estimated to be $115,980 and is being
amortized to interest expense over the life of the debt facility.
5. Reporting Comprehensive Income (Loss)
We follow the Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (Statement 130). Statement 130 establishes new rules for
reporting and displaying comprehensive income and its components. Statement 130
requires unrealized gains or losses on our available-for-sale securities and
foreign currency translation adjustments, to be included in other comprehensive
income (loss). During the nine months ended September 30, 1999, the total
comprehensive loss was not materially different from the net loss.
In August 1994, we received common stock in a private company pursuant to a
cross licensing agreement. At the time of the agreement, the value of the
common stock was assigned a value equal to our basis in the licensed technology,
essentially zero. In July 2000, the private company successfully completed an
initial public offering of its common stock. As a result, we are now accounting
for the investment as an available-for-sale security and have recorded the
security at its fair market value of $1,506,600 as of September 30, 2000.
Unrealized gains and losses on this investment are recorded as a component of
accumulated other comprehensive income (loss). Our ability to sell the common
stock investment is restricted by a lockup period which expires in January 2001.
During the nine months ended September 30, 2000,our total comprehensive loss was
$5,756,400 compared to our net loss of $7,263,000.
6. Common Stock
In January 2000, we sold 5,300,000 shares of common stock to Medtronic Asset
Management, Inc. and 1,160,000 to existing shareholders at an issuance price of
$1.73 per share, which represented a premium to the average closing price for
the five days preceding the sale. The investors, including Medtronic, received
warrants to purchase 1,938,000 shares of common stock at an exercise price of
$1.80 per share. The warrants have a term of five years. In February 2000, we
sold 106,648 shares of common stock to MC Medical, Inc. at a per share price of
$2.81, which was the average purchase price five days preceding the sale.
During the nine months ended September 30, 2000, we issued 78,272 shares of
common stock on the exercise of outstanding warrants, an additional 33,713
shares of common stock to existing shareholders, 42,334 shares of common stock
in employment-related settlements and 703,484 shares of common stock under
employee stock option and purchase plans. During this period, 629,413 warrants
which were issued in connection with our September 1997 private placement
expired.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
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, 2000 and 1999. We also discuss certain factors that may affect
our prospective financial condition and results of operations. This section
should be read in conjunction with our condensed consolidated financial
statements and related notes in Item 1 of this report and our annual report on
Form 10-K for the year ended December 31, 1999, which has been filed with the
Securities and Exchange Commission and is available from VidaMed at no charge.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995
This report contains, in addition to historical information, forward-looking
statements that are based on current expectations and beliefs, but involve a
number of risks and uncertainties that could cause actual results to differ
materially from those anticipated in the forward-looking statements. Some of
the factors that could cause actual results to differ are discussed below in
this "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in the "Risk Factors" discussion that follows. You should also
refer to the risk factors described in our annual report on Form 10-K for the
year ended December 31, 1999, which has been filed with the Securities and
Exchange Commission and is available from VidaMed at no charge. The forward-
looking statements included in this report are made only as of the date hereof,
and we undertake no obligation to publicly revise or update them to reflect
subsequent events or circumstances.
Overview
Since its founding in 1992, VidaMed has been engaged in the design, development
and marketing of urological systems, which are primarily focused on the
treatment of the enlarged prostate or benign prostatic hyperplasia, commonly
known as BPH. International sales of the patented TUNA system commenced in late
1993, and commercial sales began in the United States in late 1996, after we
received FDA clearance. In 1997, we began marketing and selling the TUNA system
to office-based urology practices in the U.S., assuming that after receiving FDA
clearance, third-party reimbursement, including Medicare, would be approved for
those locations.
In mid-1998, Medicare announced that approval of any new office-based or
ambulatory surgery center procedures would be delayed until at least mid-2000
due to Y2K compliance issues. As a result, Medicare reimbursement for the TUNA
procedure was made available only for procedures performed in hospital-based
settings, on a reasonable cost basis, and required individual state-by-state
approval.
Starting in late 1998 and throughout 1999, we focused our sales and marketing
efforts on obtaining the required individual state Medicare reimbursement
approvals and implementing a new U.S. hospital-based "fee-per-use" sales and
marketing model. Under this model, an entire TUNA system is placed in a
hospital at no charge to the hospital. Revenue is generated by selling a single-
use component needed for each TUNA procedure performed. Once the procedure is
performed the single-use component is discarded and a new component must be
purchased for the next procedure.
As of September 30, 2000, 49 states have approved hospital-based Medicare
reimbursement coverage for the TUNA procedure. Until August 1, 2000, Medicare
had reimbursed hospitals on a
8
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reasonable cost basis for each TUNA procedure performed. Under the reasonable
cost basis method of reimbursement, we charged the hospital a fee-per-use charge
of approximately $2,600 for each TUNA procedure performed, and combined with
other direct and indirect overhead costs the hospital incurs in conducting the
TUNA procedure, the hospital was reimbursed by Medicare for these reasonable
costs. In addition to the hospital, the urologist that performs the TUNA
procedure was reimbursed by Medicare approximately $600 per procedure.
Effective August 1, 2000, the United States Health Care Finance Administration
(commonly referred to as HCFA), which administers Medicare, replaced the
reasonable cost basis of reimbursement for outpatient hospital-based procedures,
like the TUNA procedure, with a new fixed rate or "prospective payment system".
Under this new method of reimbursement, a hospital receives a fixed
reimbursement of approximately $1,875 for each TUNA procedure performed in its
facility, although this rate can be higher or lower depending on a wage index
factor for each hospital. The urologist performing the TUNA procedure continues
to be reimbursed approximately $600 per procedure. With this change in
reimbursement, we continue to market and sell the TUNA procedure to hospitals on
a fee-per-use basis, but our current fee-per-use pricing has been reduced.
On July 17, 2000, HCFA published new Medicare payment rates and a schedule for
implementing minimally invasive heat therapies for the treatment of BPH in the
urologist's office. Coverage for the TUNA procedure is included in the ruling,
which was published in the Federal Register and proposed to become effective
January 1, 2001. The proposed reimbursement rate (inclusive of the physician's
fee) for the TUNA procedure in the urologist's office is estimated to be $2,315
in 2001 and $2,866 beginning January 1, 2002.
With the recent changes and proposed changes in the rate and site of care for
which Medicare will reimburse the TUNA procedure, our business is in a period of
transition. Our business strategy will be to continue to support our hospital-
based business while making the preparations necessary to service and accelerate
our volume of business in urologists' offices. In both settings, we will
continue to focus our marketing and sales efforts on clinical leadership,
patient awareness and physician advocacy of the TUNA procedure.
Results of Operations
Net revenue for the three months ended September 30, 2000 was $1,681,000. This
represents an increase of $194,000, or 13%, from $1,487,000, in the three months
ended September 30, 1999. The increase was due primarily to increased procedure
volume as a result of our fee-per-use program offset by the per procedure price
reduction which became effective on August 1, 2000, attributable to the
implementation of HCFA's new prospective payment system. Net revenue for the
nine months ended September 30, 2000 increased 77% to $6,625,000, from
$3,749,000 in the same period of 1999. The increase in revenues during the nine
months ended September 30, 2000 compared to the same period of 1999 was due to
the expansion of our sales and marketing organization and the continued
acceptance of our fee-per-use program.
Cost of product sold for the three months ended September 30, 2000 was $785,000,
an increase of 36% or $206,000 from $579,000 for the three months ended
September 30, 1999. The increase was due to higher product sales and increased
TUNA generator amortization costs resulting from the placement of more fee-per-
use generators in hospitals. For the nine months ended September 30, 2000, cost
of product sold was $2,445,000, an increase of 19% from $2,058,000 in the nine
months of 1999. This increase was generally due to higher product sales.
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Gross margin expressed as a percentage of sales for the three months ended
September 30, 2000 was 53%, down from 61% for the three months ended September
30, 1999. This decrease was caused by reduced prices resulting from the
prospective payment system established by HCFA. Gross margin expressed as a
percentage of sales for the nine months ended September 30, 2000 was 63%, up
from 45% for the same period in 1999. Gross margin improvement for the nine
months ended September 30, 2000, were due primarily to the increased volume of
our fee-per-use program.
Research and development (R&D) expenses during the three and nine months ended
September 30, 2000 included expenditures for regulatory compliance and clinical
trials. Clinical trial costs consisted largely of payments to clinical
investigators, product for clinical trials, and costs associated with initiating
and monitoring clinical trials. R&D expenses increased 28% to $875,000 in the
three months ended September 30, 2000 from $683,000 in the three months ended
September 30, 1999. For the nine months ended September 30, 2000, R&D expenses
increased 11% to $2,481,000 from $2,238,000 in the first nine months of 1999.
The increases for the three months and nine months ending September 30, 2000,
over the same periods in 1999, are primarily due to accelerated R&D and clinical
trial expenditures in the development of faster and easier to use office
products.
Selling, general and administrative (SG&A) expenses decreased 1% to $2,903,000
in the three months ended September 30, 2000 from $2,934,000 in the three months
ended September 30, 1999. For the nine months ended September 30, 2000, SG&A
expenses increased $300,000, or 3%, from $8,847,000 in 1999 to $9,147,000 in
2000. This increase was primarily due to an increase in sales and marketing
personnel and related payroll and other expenses over the comparable nine
months.
Other income (expense), net for the three months ended September 30, 2000
decreased to ($16,000) compared to ($60,000) for the same period in the prior
year. This decrease was due to increased interest income as a result of a
higher average outstanding balance of cash and investments. For the nine months
ended September 30, 2000, other income (expense),net was $185,000 compared to a
net expense of ($16,000) for the nine months ended September 30, 1999. This
decrease was due to increased interest income as a result of a higher average
outstanding balance of cash and investments. Other income (expense), net is
primarily composed of interest income and expense. The increase in interest
income was primarily attributable to a higher average outstanding balance of
cash and investments resulting from the sale of our common stock to investors in
January and February 2000.
Total comprehensive loss during the three months ended September 30, 2000, was
$1,391,400 compared to a net loss of $2,898,000. Total comprehensive loss
during the nine months ended September 30,2000, was $5,756,400 compared to a net
loss of $7,263,000.
In August 1994, we received common stock in Rita Medical Systems, Inc. ("Rita"),
a private company, pursuant to a cross licensing agreement. At the time of the
agreement the value of the common stock was assigned a value equal to our basis
in the licensed technology, essentially zero. In July 2000, Rita successfully
completed an initial public offering of common stock. As a result, we are now
accounting for the investment as an available-for-sale security of 135,000
common shares of Rita stock and have recorded the security at its fair market
value of $1,506,600 as of September 30, 2000. Unrealized gains and losses on
this investment are recorded as a component of accumulated other comprehensive
income (loss). Our ability to sell the common stock investment is restricted by
a lockup period which expires in January 2001.
10
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Liquidity and Capital Resources
For the nine months ended September 30, 2000, our cash and cash equivalents, and
available-for-sale investments increased by $7.0 million to $9.7 million,
compared to $2.7 million at December 31, 1999. Our operating and investing
activities during this period were primarily financed from $12.9 million
received from the sale and issuance of common stock and warrants, less $0.5
million used to reduce debt. We used $5.4 million in operating activities,
primarily as a result of our net loss, and purchased $1.5 million of property
and equipment. Available-for-sale investments increased by $1.5 million related
to Rita common stock acquired pursuant to a 1994 cross licensing agreement.
We have a line of credit 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. We may be able to
obtain additional debt financing from Transamerica, but we cannot give any
assurance that we will be able to do so or that the terms of the financing would
be favorable. Collaborative arrangements, if necessary to raise additional
funds, may require us to relinquish rights to certain of our technologies or
products. Our failure to raise capital when needed could have a material adverse
effect on our business, financial condition and results of operations.
As of September 30, 2000, we had borrowed approximately $798,000 against the
Transamerica revolving accounts receivable-based line at a rate of 10.5% per
year. $1,171,000 remained outstanding on the equipment term loan, as of
September 30, 2000.
While management believes that the cash balances, plus revenues from the fee-
per-use program will be sufficient to fund operations at current levels through
the end of fiscal 2000, additional financing may be required to fund operations
at current levels through the end of fiscal 2001. If required, management will
pursue, and believes it can obtain, financing to fund operations at current
levels in 2001. Additional financing, however, may not be available, or if
available, may not be available on favorable terms.
If additional financing is unavailable, management believes that it may be able
to fund operations through fiscal 2001 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
effect 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.
11
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Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (Statement 133),
which is required to be adopted in the first quarter of the year ending December
31, 2001. Management does not anticipate that the adoption of Statement 133 will
have a significant effect on our results of operations or our financial
position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No.101 (SAB 101). SAB 101 summarizes certain areas of the views of the
SEC staff in applying generally accepted accounting principles to revenue
recognition in financial statements. We believe that our current revenue
recognition principles comply with SAB 101.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting For
Certain Transactions involving Stock Compensation" (FIN 44), which contains
rules designed to clarify the application of APB 25. FIN 44 was effective on
July 1, 2000, and we have adopted it. We believe the impact of adopting FIN 44
was not material to the operating results and financial position of the Company.
Risk Factors
We Have Experienced a History of Losses
As of September 30, 2000, we had incurred operating losses of approximately
$107.4 million since our inception in 1992. We expect to continue to incur
operating losses in the near future as we expend funds on sales and marketing
activities, clinical trials in support of reimbursement approvals and research
and development. Our future profitability depends on numerous factors,
including:
. our success in achieving market acceptance of the TUNA procedure;
. our success in obtaining and maintaining necessary regulatory
clearances;
. the extent to which Medicare and other healthcare payors approve
reimbursement of the costs of TUNA procedures performed in hospitals,
urologists' offices and ambulatory surgery centers;
. our success in expanding our sales and marketing efforts to sell the
TUNA procedure into the urologist office; and
. the amount of reimbursement provided and the effects of the proposed in-
office reimbursement rates and prospective payment system on our future
revenues.
Our business, results of operations and financial condition are subject to the
following 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, 1999.
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Our Future Revenues Are Subject to Uncertainties Regarding Healthcare
Reimbursement and Reform
The continuing efforts of government and insurance companies, health maintenance
organizations and other payors of healthcare costs to contain or reduce costs of
health care may affect our future revenues and profitability. In the United
States, given recent federal and state government initiatives directed at
lowering the total cost of health care, the U.S. Congress and state legislatures
will likely continue to focus on healthcare reform including the reform of
Medicare and Medicaid systems, and on the cost of medical products and services.
Our ability to commercialize the TUNA procedure successfully will depend in part
on the extent to which the users of our products obtain appropriate
reimbursement for the cost of the TUNA procedure. Third-party payors are
increasingly challenging the prices charged for medical products and services.
Also, legislative proposals to reform health care or reduce government insurance
programs, coupled with the trend toward managed health care in the United States
and the concurrent growth of organizations such as HMOs, which organizations
could control or significantly influence the purchase of healthcare services and
products, may all result in lower prices for or rejection of our products.
For example, effective August 1, 2000, the United States Health Care Finance
Administration (commonly referred to as HCFA), which administers Medicare,
replaced the reasonable cost basis of reimbursement for outpatient hospital-
based procedures, like the TUNA, with a new fixed rate or "prospective payment
system". Under this new method of reimbursement, a hospital will receive a
fixed reimbursement of approximately $1,875 for each TUNA procedure performed in
its facility, although this rate can be higher or lower depending on a wage
index factor for each hospital. The urologist performing the TUNA procedure
will continue to be reimbursed approximately $600 per procedure. In addition,
on July 17, 2000, HCFA published new Medicare payment rates and a schedule for
implementing minimally invasive heat therapies for the treatment of BPH in the
urologist's office. Coverage for the TUNA procedure is included in the ruling,
which was published in the Federal Register and proposed to become effective
January 1, 2001. The proposed reimbursement rate (inclusive of the physician's
fee) for the TUNA procedure in the urologist's office is estimated to be $2,315
in 2001 and $2,866 beginning January 1, 2002. These cost containment measures
that healthcare payors and providers are instituting and the effect of future
health care reform could cause reductions in the amount of reimbursement
available to users of our products and could materially adversely affect our
ability to operate profitably.
The TUNA Procedure is a New Therapy and May Not Be Accepted by Physicians,
Patients and Healthcare Payors Which Would Severely Harm our Business
Physicians will not recommend the TUNA procedure unless they conclude, based on
clinical data and other factors, that it is an effective alternative to other
methods of enlarged prostate treatment, including more established methods. In
particular, physicians may elect not to recommend the TUNA procedure until the
long term duration of the relief provided by the procedure has been established.
Clinical data for assessing the durability of relief provided by the TUNA
therapy in the United States does not extend beyond five years Some physicians
may consider five years of clinical data to be sufficient evidence of durability
and others may not. As time passes since the first TUNA procedures were
performed, and as more procedures are performed, the clinical data will continue
to be developed. We are in the process of conducting multi-year patient follow-
up studies to assess the durability of the relief provided by the TUNA
procedure. We cannot assure you that these studies will support the durability
of the relief provided by the TUNA procedure.
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Even if the clinical efficacy of the TUNA procedure is established, physicians
may elect not to recommend the procedure unless acceptable reimbursement from
healthcare payors is available. Healthcare payor acceptance of the TUNA
procedure will require evidence of its cost effectiveness compared with other
therapies for an enlarged prostate, which will depend in large part on the
duration of the relief provided by the TUNA procedure.
Patient acceptance of the procedure will depend in part on physician
recommendations and on other factors, including the degree of invasiveness and
the rate and severity of complications associated with the procedure compared
with other therapies. Patient acceptance of the TUNA procedure will also depend
on the ability of physicians to educate these patients on their treatment
choices.
Our Success is Dependent on the Sale of Our Only Product, the TUNA System
All of our revenues are derived from sales of our TUNA system. 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 suffer because we rely on our
TUNA system for all of our revenue and have no other products. Possible
problems include, but are not necessarily limited to, malfunctions, failure 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 one or more of
the components of the system. Additionally, any factors adversely affecting the
pricing of, demand for or market acceptance of our TUNA system, such as
competition or technological change, would significantly harm our business.
We Rely on Contract Manufacturers for the Majority of Our Manufacturing Needs
We outsource the manufacture of the disposable cartridge and most of the other
components of the TUNA system, and we rely on contract manufacturers to supply
our components in sufficient quantities, in compliance with regulatory
requirements and at an acceptable cost. We purchase components through purchase
orders rather than long-term supply agreements. 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. If any of our manufacturers
experience production problems, we may not be able to locate an alternate
manufacturer promptly. The disruption or termination of the supply of
components for our TUNA system could cause a significant increase in the costs
of these components or an inability to meet demand for our products.
Furthermore, if we are required to change the manufacturer of a key component of
our TUNA system, we may be required to verify that the new manufacturer
maintains facilities and procedures that comply with quality standards and other
applicable regulations and guidelines. The delays associated with verification
and other delays in production could adversely affect the success of our fee-
per-use program and our future revenues.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE 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.
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PART II: OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Management Changes
As of October 13, 2000, Diane M. Anderson resigned as Vice President of Sales
and Marketing.
Amendment to Rights Agreement
Effective as of January 4, 2000, we amended the definition of "acquiring person"
in our rights agreement to increase the beneficial ownership percentage trigger
from 20% to 25% with respect to Medtronic Asset Management, Inc. or any of its
affiliates or associates.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment to Rights Agreement
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, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIDAMED, INC.
Date: October 30, 2000 By: /s/ Randy D. Lindholm
------------------ ------------------------------------
Randy D. Lindholm
President, Chief Executive Officer
Date: October 30, 2000 By: /s/ John F. Howe
------------------ ------------------------------------
John F. Howe
VP Finance, Chief Financial Officer
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
10.1 Amendment No. 1 to Preferred Shares Rights
Agreement, effective January 3, 2000
27.1 Financial Data Schedule
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