-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fzp4ikEg6ogbBFN6KmOzekABQxe1SyQ3bAib9MmqhyBMu845I4w1HXgSRkAYlBFu adygBbZrwYqVued6t8PC6Q== 0000929624-01-500285.txt : 20010516 0000929624-01-500285.hdr.sgml : 20010516 ACCESSION NUMBER: 0000929624-01-500285 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIDAMED INC CENTRAL INDEX KEY: 0000929900 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 770314454 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26082 FILM NUMBER: 1634720 BUSINESS ADDRESS: STREET 1: 46107 LANDING PARKWAY STREET 2: SUITE 101 CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5104924900 MAIL ADDRESS: STREET 1: 46107 LANDING PARKWAY STREET 2: STE 101 CITY: FREMONT STATE: CA ZIP: 94538 10-Q 1 d10q.txt FORM 10-Q 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 March 31, 2001 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 35,098,112 as of March 31, 2001. Page 1 of 15 VIDAMED, INC. INDEX
PART I. FINANCIAL INFORMATION Page Item 1. Condensed Consolidated Financial Statements - unaudited Condensed consolidated balance sheets - March 31, 2001 and December 31, 2000 3 Condensed consolidated statements of operations - three months ended March 31, 2001 and 2000 4 Condensed consolidated statements of cash flows - three months ended March 31, 2001 and 2000 5 Notes to condensed consolidated financial statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 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
Page 2 of 15 ITEM 1: FINANCIAL STATEMENTS VidaMed, Inc. Condensed Consolidated Balance Sheets (In thousands) March 31, 2001 December 31, 2000 -------------------- ------------------- (Unaudited) (*) Assets Current assets: Cash and cash equivalents $ 6,601 $ 6,491 Short-term investments 5,120 9,060 Accounts receivable, net 1,141 800 Inventories 1,174 649 Other current assets 361 389 -------------------- ------------------- Total current assets 14,397 17,389 Property and equipment, net 2,035 1,898 Other assets, net 97 99 -------------------- ------------------- Total assets $ 16,529 $ 19,386 ==================== =================== Liabilities and stockholders' equity Current liabilities: Notes payable, current $ 1,447 $ 1,776 Accounts payable 1,375 283 Accrued liabilities 2,276 2,821 -------------------- ------------------- Total current liabilities 5,098 4,880 Notes payable, long-term - - Stockholders' equity: Capital stock 124,864 124,347 Accumulated deficit (113,433) (109,841) -------------------- ------------------- Total stockholders' equity 11,431 14,506 -------------------- ------------------- Total liabilities and stockholder's equity $ 16,529 $ 19,386 ==================== ===================
* The Balance Sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. Page 3 of 15 VidaMed, Inc. Condensed Consolidated Statement of Operations (In thousands except per share amounts) (Unaudited)
Three Months Ended March 31, --------------------------------------------- 2001 2000 -------------------- ------------------- Revenues $ 2,269 $ 2,524 Cost of products sold 1,039 767 -------------------- ------------------- Gross profit 1,230 1,757 Operating expenses: Research and development 842 783 Selling, general and administrative 3,416 3,265 -------------------- ------------------- Total operating expenses 4,258 4,048 -------------------- ------------------- Loss from operations (3,028) (2,291) Other income, net 356 153 -------------------- ------------------- Net loss $(2,672) $(2,138) ==================== =================== Basic and diluted net loss per share $(0.08) $(0.07) ==================== =================== Shares used in computing basic and diluted net loss per share 35,021 28,936 ==================== ====================
See accompanying notes. Page 4 of 15 VidaMed, Inc. Condensed Consolidated Statement of Cash Flows (In thousands) (Unaudited)
Three Months Ended March 31, ----------------------------------------------- 2001 2000 ---------------------- -------------------- Cash flows from operating activities: Net loss $(2,672) $(2,138) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 287 380 Amortization of deferred compensation 20 - Realized gain on sales of short-term investments (413) - Changes in current assets and liabilities: Accounts receivable (341) (310) Inventory (525) 66 Other current assets 28 141 Other assets 2 65 Accounts payable 1,092 107 Accrued liabilities (545) (379) Deferred revenue - 67 ---------------------- -------------------- Net cash used in operating activities (3,067) (2,001) ---------------------- -------------------- Cash flows from investing activities: Expenditures for property and equipment (424) (789) Proceeds from the sale of short-term investments 3,413 - Purchases of short-term investments - (8,777) ---------------------- -------------------- Net cash provided by (used in) investing activities 2,989 (9,566) ---------------------- -------------------- Cash flows from financing activities: Principal payments of notes payable (329) (205) Net cash proceeds from issuance of common stock 517 12,420 ---------------------- -------------------- Net cash provided by financing activities 188 12,215 ---------------------- -------------------- Net increase (decrease) in cash and cash equivalents 110 648 Cash and equivalents at the beginning of the period 6,491 2,748 ---------------------- -------------------- Cash and equivalents at the end of the period $ 6,601 $ 3,396 ====================== ==================== Supplemental disclosure of cash flows information: Cash paid for interest $ 50 $ 153 ====================== ==================== - -----------------------------------------------------------------------------------------------------------------------
See accompanying notes. Page 5 of 15 VIDAMED, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 (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 Rule 10 of Regulation S-X. The balance sheet as of March 31, 2001 and the statements of operations for the three months ended March 31, 2001 and 2000, and the statements of cash flows for the three months ended March 31, 2001 and 2000, are unaudited but include all adjustments (consisting of normal recurring adjustments) which the Company considers necessary for a fair presentation of the financial position at such date and the operating results and cash flows for those periods. Certain information normally included in financial statements and related footnotes prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying financial statements should be read in conjunction with the financial statements and notes included in the Company's annual report on Form 10-K for the year ended December 31, 2000, filed with the Securities and Exchange Commission. Certain amounts have been reclassified for the three months ended March 31, 2000 to conform to the current quarter's presentation. These reclassifications did not impact the Company's net loss from operations. 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 and diluted net loss per share is computed using the weighted-average number of shares of common stock 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. As the Company has incurred losses from operations in each of the periods presented, there is no difference between basic and diluted net loss per share amounts. As of March 31, 2001, we had 4,868,862 options outstanding under employee and director plans. The options will be included in the calculation at such time as the 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 at March 31, 2001 and December 31, 2000 consist of the following (in thousands):
March 31, December 31, 2001 2000 --------- ------------ Raw materials $ 378 $ 120 Work in process 128 5 Finished goods 668 524 --------- ------------ $ 1,174 $ 649 ========= ============
Page 6 of 15 4. Notes Payable In October 1998, we finalized a $5.5 million debt facility with Transamerica Technology Finance, a division of Transamerica Corporation. The facility is secured by the Company's assets and consists of a revolving accounts receivable- based credit line of up to $3 million and a $2.5 million equipment term loan. 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 March 31, 2001, we borrowed approximately $741,000 against the revolving accounts receivable-based line at a rate of 10.5% per year. In January 2001, our debt financing with Transamerica automatically renewed. 5. Comprehensive Income (Loss) We follow Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (Statement 130). Statement 130 establishes new rules for the reporting and display of comprehensive income and its components. Statement 130 requires unrealized gains or losses on our available-for-sale securities and foreign currency translation adjustments, to be included in other comprehensive income (loss). During the three months ended March 31, 2000, the total comprehensive loss was not materially different from the net loss. During the three months ended March 31, 2001, the Company's total comprehensive loss was $3,198,000 compared to its net loss of $2,672,000. As a result of equity investments acquired through a 1994 cross licensing agreement, the Company had an unrealized gain of $1,148,000 at December 31, 2000. During the quarter ended March 31, 2001, we sold a portion of the investment, realizing a gain of $413,000 and the fair market value of the unsold portion decreased by $526,000. 6. Common Stock During the three months ended March 31, 2001, we issued 141,615 shares of common stock upon the exercise of outstanding warrants, an additional 47,152 shares under our stock option plans and 76,308 shares under our employee stock purchase plan. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion and analysis of VidaMed's consolidated financial condition and results of operations for the three months ended March 31, 2001 and 2000. We also discuss certain factors that may affect our prospective financial condition and results of operations. This section should be read in conjunction with the Condensed Consolidated Financial Statements and related Notes in Item 1 of this report and the Company's Annual Report on Form 10-K for the year ended December 31, 2000, which has been filed with the Securities and Exchange Commission and is available from the Company at no charge. Cautionary Statement Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements. For this purpose, any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as "may," "will," "should," "expects," "anticipates," "contemplates," "estimates," "believes," "plans," "projected," "predicts," "potential" or "continue" or the negative of these or similar Page 7 of 15 terms. In evaluating these forward-looking statements, you should consider various factors, including the risk factors listed under the heading "Certain Important Factors" and in VidaMed's other filings with the Securities and Exchange Commission and in material incorporated by reference into those filings. These factors may cause our actual results to differ materially from any forward-looking statement. Overview Since its founding in 1992, VidaMed has been engaged in the design, development and marketing of urological systems 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 receiving FDA clearance. In 1997, the TUNA system was sold to office-based urology practices in the U.S., assuming that after receiving FDA clearance, that 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 procedure, would be delayed until at least mid-2000, due to year 2000 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 through 2000, 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. As of March 31, 2001, 49 states had approved hospital-based Medicare reimbursement coverage for the TUNA procedure. 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. In August 2000, the U.S. Health Care Financing Administration, or HCFA, which administers Medicare reimbursement, replaced the reasonable cost basis 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, 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 fee-per-use pricing has been reduced. In July 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 of the TUNA procedure was included in the ruling, which became effective in January 2001. The approximate reimbursement rate (inclusive of physician's fee) for the TUNA procedure in the urologist's office is $2,455 in 2001 and $3,043 in 2002. In February 2001, we received FDA clearance for our new TUNA "Precision" office system, which was specifically designed to treat PBH patients in the physicians' office. We anticipate that the demand for the TUNA procedure will increase as we expand the TUNA treatment from the outpatient hospital setting to the convenience and control of physicians' offices. Our goal is to establish the TUNA system as a global standard of care for the treatment of BPH. Our business strategy to achieve this goal is to continue to support our existing hospital- based customers, aggressively promote our product to the physician office-based market and focus our marketing and sales efforts on patient education and physician support. Page 8 of 15 Results of Operations Net revenue for the three months ended March 31, 2001 was $2,269,000. A decrease of $255,000 or 10% from $2,524,000 for the same period in 2000. While procedure volume increased, the decrease in revenue is primarily due to the reduction of our average selling price resulting from the implementation of the HCFA prospective payment system and the introduction of in-office reimbursement, which became effective January 1, 2001, at rates less than the "cost plus" hospital reimbursement rates. Net revenue in the first quarter of 2001 increased 40% from $1,622,000 in the three months ended December 31, 2000. The difference is primarily due to a 47% increase in U.S. procedure volume. Cost of product sold for the three months ended March 31, 2001 was $1,039,000, an increase of 35% or $272,000 from $767,000 the three months ended March 31, 2000. The increase is a result of increased unit sales due to higher procedure volume. Gross margin expressed as a percentage of sales in the three months ended March 31, 2001 was 54%, down from 70% for the three months ended March 31, 2000. This decrease in gross margin is primarily attributed to the reduction of our average selling price resulting from the implementation of the prospective payment system. Gross profit for the for the three months ended March 31, 2001 was $1,230,000 compared to $1,757,000 for the comparable period in 2000. Gross profit for the three months ended December 31, 2000 was $751,000. This increase of $479,000 for the quarter ended March 31, 2001, is primarily attributed to increased volume. Research and development (R&D) expenses 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 8% to $842,000 in the three months ended March 31, 2001, from $783,000 in the three months ended March 31, 2000. R&D expenses for the first quarter of 2001 increased $60,000 from $782,000 in the three months ended December 31, 2000. The increase was primarily due to increased level of spending associated with the introduction of our new "Precision" product. Selling, general and administrative (SG&A) expenses for the three months ended March 31, 2001 was $3,416,000, an increase of less than 5%, compared to 2000 expenditures to $3,265,000 in the three months ended March 31, 2000. SG&A expenses for the first quarter of 2001 increased $70,000 from $3,346,000 in the three months ended December 31, 2000. These increases were due to increases in sales training and tools necessary to successfully market and service the in- office market, which was approved by HCFA effective January 1, 2001. Other income is primarily composed of gains on the sale of short term investments and interest income and expense. Other income/expense for the three months ended March 31, 2001 increased to net other income of $356,000 compared to net other income of $153,000 for the comparable period in 2000. Other income/expense in the three months ended December 31, 2000 was a net expense of $16,000. These changes were primarily a result of $413,000 gain realized on sales of short term investments during the three months ended March 31, 2001. Total comprehensive loss for the quarter ended March 31, 2001 was $3,198,000 compared to net loss of $2,672,000. The difference is the result of the decrease in the fair market value of short-term investments. Total comprehensive loss and net loss for the three months ended March 31, 2000, was $2,138,000. History of Operating Losses As of March 31, 2001, we had incurred operating losses of approximately $113.4 million since 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 upon our ability to sell sufficient quantities of our TUNA system and the related disposables to generate revenue in excess of our planned expenditures. Our ability to sell sufficient quantities of our TUNA system and the related disposables depends upon numerous factors, including: Page 9 of 15 . our success in achieving market acceptance of the TUNA system; . our success in expanding our sales and marketing efforts to sell the TUNA system into urologists' offices; . our success in obtaining and maintaining necessary regulatory clearances and approvals; and . the extent to which Medicare and other healthcare payors continue to reimburse the costs of TUNA procedures and the amounts of reimbursement provided. Liquidity and Capital Resources At March 31, 2001, our cash and cash equivalents and short-term investments were $11.7 million. For the quarter ended March 31, 2001, our cash and cash equivalents increased by $0.1 million to $6.6 million, compared to $6.5 million at December 31, 2000. The increase is due to $3.4 million sale of available- for-sale securities plus $0.4 million realized gain from the sale of short-term investments, offset by operating expenses incurred in the normal course of business. In addition to the sale of available-for-sale securities, our operating activities during the period were financed by the sales of $0.5 million of common stock, less $0.3 million to reduce debt. We used $3.0 million in operating activities, primarily as a result of our net loss, and purchased $0.4 million in property and equipment. Short-term investments at March 31, 2001, consisted of corporate commercial paper and bonds with a fair market value of $4.9 million and investments in equities of $0.2 million. We have debt financing with Transamerica Technology Finance, a division of Transamerica Corporation. This 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. As of March 31, 2001, we owed $706,000 on this equipment term loan. As of March 31, 2001, we borrowed approximately $741,000 against the revolving accounts receivable-based line at a rate of 10.50% per year. The revolving credit line has a minimum interest payment of $96,000 per year. In January 2001, our debt financing with Transamerica automatically renewed. Management believes that our current cash balances, short term investments and projected cash flows from operations will be sufficient to meet our current operating and capital requirements through the end of 2001. We have based this estimate, however, on assumptions that may prove to be wrong. As a result, we may need to obtain additional financing prior to that time. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," or SFAS 133, which was adopted buy us on January 1, 2001. The adoption of SFAS 133 did not a significant effect on our operating results or financial position. Page 10 of 15 Certain Important Factors In addition to the factors identified above, there are several important factors that could cause our actual results to differ materially from those anticipated by us or which are reflected in any of our forward-looking statements. These factors, and their impact on the success of our operations and our ability to achieve our goals, include the following: We have incurred substantial losses since our inception, and if physicians do not purchase and use our TUNA system and the related disposables in sufficient quantities, we may be unable to achieve and maintain profitability. We incurred a net loss of approximately $2.7 million for the three months ended March 31, 2001, and have incurred substantial losses since our inception from costs relating to the development and commercialization of our TUNA system. As of March 31, 2001, we had an accumulated deficit of approximately $113.4 million. 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 upon our ability to sell sufficient quantities of our TUNA system and the related disposables to generate revenue in excess of our planned expenditures. Our ability to sell sufficient quantities of our TUNA system and the related disposables depends upon numerous factors, including: . our success in achieving market acceptance of the TUNA system; . our success in expanding our sales and marketing efforts to sell the TUNA system into urologists' offices; . our success in obtaining and maintaining necessary regulatory clearances and approvals; and . the extent to which Medicare and other healthcare payors continue to reimburse the costs of TUNA procedures and the amounts of reimbursement provided. We depend upon our TUNA system, which is our only product, for all of our revenues. All of our revenues are derived from sales of our TUNA system. As a result, our success is solely dependent upon the success of our TUNA system. We began selling the TUNA system in late 1993. To date, our TUNA system has not received widespread market acceptance. 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. Our 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. Possible problems that we may experience with our TUNA system include: . malfunctions; . failure to comply with or changes in governmental regulations; . product recalls; . product obsolescence; . patent infringement claims; . inability to protect our intellectual property; and . shortages of one or more of the components of the system. Page 11 of 15 We outsource almost all of our manufacturing and rely upon several single source suppliers to manufacture two of the four major components to our TUNA system. The termination of these relationships or the failure of these manufacturers to supply us components on a timely basis or in significant quantities would likely cause us to be unable to meet customer orders for our TUNA system and harm our business. We outsource all of our manufacturing, except for the assembly of the reusable handle. We obtain components to the reusable handle from a number of different suppliers, including a few single source suppliers. We are aware of a few other qualified suppliers for many of these components. We contract with Humphrey Systems, a division of Carl Zeiss, Inc., and Circon Corporation to manufacture the disposable cartridge, Telo Electronics, a subsidiary of Sanmina MPD, to manufacture the radio frequency generator, and Karl Storz in Germany to manufacture the telescope. We have not qualified any alternative sources of supply for our radio frequency generator or telescope. We have written agreements with Humphrey Systems and Circon Corporation to manufacture the disposable cartridge. Either party may terminate these agreements for any reason upon at least 180 days prior written notice. We do not have any other supply agreements with these suppliers or any of our other suppliers that require them to supply us with components to our TUNA system. 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. Identifying and qualifying alternative suppliers of components takes time and involves significant additional costs and may delay the production of the TUNA system. The FDA requires us to identify any supplier we use. The FDA may require additional testing of any component from new suppliers prior to our use of these components. The termination of our relationships with these single source suppliers or the failure of these parties to supply us with the components to the TUNA system on a timely basis and in sufficient quantities would likely cause us to be unable to meet customer orders for our products in a timely manner or within our budget and harm our business. The TUNA procedure is a new therapy and may not be accepted by physicians, patients and healthcare payors, which would significantly 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 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. 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 upon the duration of the relief provided by the TUNA procedure. Patient acceptance of the procedure will depend in part upon physician recommendations and on other factors, including the degree of invasiveness and the rate and severity of complications associated with the TUNA procedure compared with other therapies. Patient acceptance of the TUNA procedure will also depend upon the ability of physicians to educate these patients on their treatment choices. Our marketing strategy must overcome the difficulties inherent in the introduction of new technology to the medical community. Page 12 of 15 We depend upon several of our executive officers and key employees, and if we are unable to retain these individuals, our business could suffer. Our ability to grow and our future success will depend to a significant extent upon the continued contributions of our senior management and key employees, many of whom would be difficult to replace. Our Chairman of the Board, President and Chief Executive Officer, Randy D. Lindholm, joined VidaMed in 1998. Many other members of our management and key employees have been with VidaMed for a number of years and have extensive experience with other medical technology companies. The success of our business is dependent upon the ability, experience and performance of these individuals and our ability to retain these individuals. We do not have key person life insurance on any of our personnel. If we are unable to attract and retain qualified personnel, our business could suffer. Our future success depends in large part upon our ability to identify, attract and retain highly qualified managerial, technical and sales and marketing personnel. Competition for these individuals is intense, especially in the Silicon Valley area where our principal executive office is located. We may not succeed in identifying, attracting and retaining these personnel. Our inability to identify, attract or retain qualified personnel in the future or delays in hiring qualified personnel, particularly managerial, technical and sales and marketing personnel, could make it difficult for us to manage our business and meet key objectives, which would harm our business. There is intense competition for skilled sales and marketing employees, especially for individuals who have experience selling medical devices. We may be unable to hire skilled individuals to sell our TUNA system, which could harm our business. If we fail to compete successfully in our market, our revenues and operating results may be adversely affected and we may not achieve future growth. Although there is a large market for the treatment of men suffering from enlarged prostate, there are a number of therapies competing for market share. Competition in the market for minimally invasive devices to treat this condition is primarily two competitors, Urologix, Inc. and Johnson & Johnson. Both of these competitors have: . better name recognition; . more widely accepted products and broader product lines; . greater sales, marketing and distribution capabilities; and . more established relationships with some of our existing and potential customers. Johnson & Johnson also has significantly greater financial resources and larger research and development staffs and facilities than us. Our competitors will likely continue to improve their products and develop new competing products. Other competitors will likely also emerge. We may be unable to compete effectively with our competitors if we cannot keep up with existing or new alternative products, techniques, therapies and technology in the treatment of BPH market. Our competitors may commercially introduce new technologies and products that are more effective than our products or render our products obsolete. Competition in our market may also result in pricing pressures that may decrease the sales prices for our products. Page 13 of 15 If our patents and other intellectual property rights do not adequately protect our products or if we are sued for violating the intellectual property rights of others, we may be unable to gain market share or operate our business profitably. We rely on patents, trade secrets, trademarks, copyrights, know-how, license agreements and contractual provisions to establish and protect our intellectual property rights. These legal means, however, afford us only limited protection and may not adequately protect our rights or remedies to gain or keep any advantages we may have over our competitors. In addition, litigation may be necessary to enforce our intellectual property rights, to protect our patents and trade secrets and to determine the validity and scope of our proprietary rights. Any litigation would likely result in substantial expense and divert our attention from implementing our business strategy. Furthermore, we cannot assure you that others have not developed or will not develop similar products or manufacturing processes, duplicate any of our products or manufacturing processes, or design around any of our patents. 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 our market, and we cannot assure you that we will not in the future become subject to patent infringement claims and litigation or United States Patent and Trademark Office interference proceedings. Intellectual property litigation would likely result in substantial cost to and diversion of effort by us. If we lose one of these proceedings, a court, or a similar foreign governing body, could require us to pay significant damages to third parties, require us to seek licenses from third parties and pay ongoing royalties, require us to redesign our products, or prevent us from manufacturing, using or selling our products. In addition to being costly, protracted litigation regarding our ability to incorporate intellectual property into our products could result in our customers or potential customers deferring or limiting their purchase or use of the affected products until resolution of the litigation. Our future revenues depend upon our customers receiving third party reimbursement. 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 system successfully will depend in part upon the extent to which the users of our product obtain appropriate reimbursement for the cost of the TUNA procedure. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to interest rate risk on the investments of our excess cash. The primary objective of our investment activities is to preserve principal while at the same time maximize yields without significantly increasing risk. To achieve this objective, we invest in highly liquid and high quality debt securities. To minimize the exposure due to adverse shifts in interest rates, we invest in short-term securities with maturities of less than one year. Due to the nature of our short-term investments, we have concluded that we do not have a material market risk exposure. Page 14 of 15 PART II: OTHER INFORMATION ITEM 5. OTHER INFORMATION Management Changes In February 2001, Lewis P. Chapman, who served as an independent contractor working as Vice President of Business Development for Arthrosome, Inc., became our Vice President of Global Marketing and Sales, Chief Business Officer. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended March 31, 2001. 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: May 14, 2001 By: /s/ Randy D. Lindholm ---------------------- -------------------------------------- Randy D. Lindholm President, Chief Executive Officer (Principal Executive Officer) Date: May 14, 2001 By: /s/ John F. Howe ---------------------- -------------------------------------- John F. Howe VP Finance, Chief Financial Officer (Principal Financial Officer) Date: May 14, 2001 By: /s/ L. Phillip Brooks --------------------- -------------------------------------- Controller (Principal Accounting Officer) Page 15 of 15 -----END PRIVACY-ENHANCED MESSAGE-----