-----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, KsJD3AH279tMTJL6OFirmhDDL/TMrCZqyOTNV5D1G9qPkgTZjx9hyoysaA0d8Sw1 YStaQ0XvHJK7fVyGaJbzbA== 0000950005-99-000775.txt : 19990817 0000950005-99-000775.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950005-99-000775 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99693980 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 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 June 30, 1999 or [ ] TRANSITION REPORTS 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 20,650,603 as of August 13, 1999. Page 1 of 17 VIDAMED, INC. INDEX
PART I: FINANCIAL INFORMATION Page Item 1. Financial Statements Condensed consolidated balance sheets - June 30, 1999 and December 31, 1998 3 Condensed consolidated statements of operations - three months ended June 30, 1999 and 1998 and six months ended June 30, 1999 and 1998. 4 Condensed consolidated statements of cash flows - six months ended June 30, 1999 and 1998 5 Notes to condensed consolidated financial statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3 Quantitative and Qualitative Disclosure About Market Risk 13 PART II: OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16
Page 2 of 17 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VidaMed, Inc. Condensed Consolidated Balance Sheets (In thousands) June 30, December 31, 1999 1998 -------- -------- (Unaudited) (*) Assets Current Assets: Cash and cash equivalents $ 4,411 $ 9,384 Accounts receivable 736 228 Inventories 891 1,228 Other current assets 795 1,179 -------- -------- Total current assets 6,833 12,019 Property and equipment, net 1,316 1,797 Other assets, net 287 316 -------- -------- Total assets $ 8,436 $ 14,132 ======== ======== Liabilities and stockholders' equity Current liabilities: Notes payable, current portion $ 1,070 $ 764 Accounts payable 321 338 Accrued professional fees 181 317 Accrued clinical trial costs 271 431 Accrued and other liabilities 2,157 2,362 Accrued advertising costs 309 309 Restructuring accrual 198 252 Current portion of obligations under capital leases -- 22 Deferred revenue 130 229 -------- -------- Total current liabilities 4,637 5,024 Notes payable, long-term portion 1,424 1,785 Stockholders' equity: Capital stock 97,235 95,542 Accumulated deficit (94,860) (88,219) -------- -------- Total stockholders' equity 2,375 7,323 -------- -------- Total liabilities and stockholders' equity $ 8,436 $ 14,132 ======== ======== * The Balance Sheet at December 31, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. VidaMed, Inc. Condensed Consolidated Statements of Operations (In thousands except per share amounts) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, -------------------------- --------------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Revenues: Product sales, net $ 1,208 $ 861 $ 2,196 $ 2,236 License fees and grant revenue 17 50 67 339 -------- -------- -------- -------- Net revenues 1,225 911 2,263 2,575 Cost of Products Sold 646 608 1,480 1,680 -------- -------- -------- -------- Gross Profit 579 303 783 895 Operating Expenses: Research and development 742 1,200 1,555 2,334 Selling, general and administrative 3,409 3,297 5,913 7,904 -------- -------- -------- -------- Total operating expenses 4,151 4,497 7,468 10,238 -------- -------- -------- -------- Loss from operations (3,572) (4,194) (6,685) (9,343) Other income(expense), net 87 (46) 44 (135) -------- -------- -------- -------- Net loss $ (3,485) $ (4,240) $ (6,641) $ (9,478) ======== ======== ======== ======== Basic and diluted net loss per share $ (0.17) $ (0.24) $ (0.33) $ (0.58) ======== ======== ======== ======== Shares used in computing basic and diluted net loss per share 20,546 17,443 20,430 16,341 -------- -------- -------- -------- See accompanying notes. Page 4 of 17
VidaMed, Inc. Condensed Consolidated Statement of Cash Flows (In thousands) (Unaudited)
Six Months Ended June 30, -------------------------- 1999 1998 -------- -------- Cash flows from operating activities: Net loss $ (6,641) $ (9,478) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 626 635 Changes in assets and liabilities: Accounts receivable (508) 693 Inventory 337 (251) Other current assets 384 (567) Other assets 29 5 Accounts payable (17) (822) Accrued professional fees (136) (178) Accrued clinical trial costs (160) 6 Accrued interest payable -- (225) Accrued restructuring cost (54) (569) Accrued and other liabilities (205) 348 Deferred revenue (99) (272) -------- -------- Net cash used in operating activities (6,444) (10,675) -------- -------- Cash flows from investing activities: Expenditures for property and equipment (145) (611) -------- -------- Net cash used in investing activities (145) (611) -------- -------- Cash flows from financing activities: Principal payments under capital leases (22) (58) Principal payments of notes payable (55) (716) Net proceeds from issuance of notes payable -- 1,500 Net proceeds from issuance of common stock 1,693 17,865 -------- -------- Net cash provided by financing activities 1,616 18,591 -------- -------- Net (decrease) increase in cash and cash equivalents (4,973) 7,305 Cash and cash equivalents at the beginning of the period 9,384 8,026 -------- -------- Cash and cash equivalents at the end of the period $ 4,411 $ 15,331 ======== ======== Supplemental disclosure of cash flows information: Cash paid for interest $ 124 $ 458 ======== ======== See accompanying notes. Page 5 of 17
VIDAMED, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 (Unaudited) 1. Basis of presentation The accompanying unaudited condensed consolidated financial statements of VidaMed, Inc. (the "Company" or "VidaMed") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. The balance sheet as of June 30, 1999 and the statements of operations for the three and six months ended June 30, 1999 and 1998, and the statements of cash flows for the three and six months ended June 30, 1999 and 1998, are unaudited but include all adjustments (consisting of normal recurring adjustments) which the Company considers necessary for a fair presentation of the financial position at such date and the operating results and cash flows for those periods. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information normally included in financial statements and related footnotes prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying financial statements should be read in conjunction with the financial statements and notes included in the Company's annual report on Form 10-K, as amended, for the year ended December 31, 1998 filed with the Securities and Exchange Commission. Results for any interim period are not necessarily indicative of results for any other interim period or for the entire year. 2. Net loss per share The Company calculates net loss per share in accordance with statement of Financial Accounting Standards No. 128 "Earnings per Share". Statement 128 requires the presentation of basic earning (loss) per share and diluted earnings per share, if more dilutive, for all periods presented. Basic and diluted net loss per share is computed using the weighted average number of shares of common stock outstanding during the periods presented.. 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. 3. Inventories Inventories are stated at the lower of cost (determined using the first-in, first-out method) or market value. Inventories at June 30, 1999 and December 31, 1998 consist of the following (in thousands): June 30, December 31, 1999 1998 ------ ------ Raw materials $ 93 $ 404 Work in process 0 261 Finished goods 798 563 ------ ------ $ 891 $1,228 ====== ====== Reductions in Raw materials and Work in Process levels are due to the outsourcing of manufacturing. Page 6 of 17 4. Notes Payable During 1998, the Company finalized a commitment for $5.5 million in new debt financing with Transamerica Technology Finance, a division of Transamerica Corporation. The facility is secured by the Company's assets and consists of a revolving accounts receivable based credit line of up to $3 million and a $2.5 million equipment term loan. As of June 30, 1999, the term loan had funded in full at a rate of 12%. As of June 30, 1999, we have borrowed approximately $200,000 against the revolving accounts receivable-based line at a rate of 9.75% per year. We were eligible to borrow approximately $330,000 against this line on June 30, 1999 and borrowed the remaining available balance in July. 5. Restructuring Accrual In September 1997, VidaMed announced a restructuring program designed to reduce costs and improve operating efficiencies by closing the company's U.K. manufacturing facility. The charge in the third quarter of 1997 was $2.1 million recorded in Cost of products sold. The elements of the total charge as of June 30, 1999 are as follows (in thousands): Representing -------------------------------- Cash Outlays Total Asset -------------------- Charges Write-down Completed Future ------ ------ ------ ------ Fixed assets $ 390 $ 390 $ -- $ -- Facility shut down 1,305 -- 1,305 -- Grant 405 -- 207 198 ------ ------ ------ ------ Total Special Charges $2,100 $ 390 $1,512 $ 198 ------ ------ ------ ------ 6. Reporting Comprehensive Income (Loss) As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No.130, "Reporting Comprehensive Income" (Statement 130). Statement 130 establishes new rules for the reporting and display of comprehensive income and its components. Statement 130 requires unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments, which prior to adoption were reported in shareholders' equity, to be included in other comprehensive income (loss). During the three and six months ended June 30, 1999 and 1998, the total comprehensive loss was not materially different from the net loss. 7. Common Stock The increase in Capital stock, for the six months ended June 30, is due to the Company selling common stock, to the principals of Telo Electronics, one of our manufacturers. In this transaction, the Company issued 368,596 shares of common stock at a purchase price of $2.713 per share. Page 7 of 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion and analysis of Vidamed's consolidated financial condition and results of operations for the three months and six months ended June 30, 1999 and 1998. We also discuss certain factors that may affect our prospective financial condition and results of operations. This section should be read in conjunction with the Condensed Consolidated Financial Statements and related Notes in Item 1 of this report and the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 1998, which has been filed with the Securities and Exchange Commission and is available from the Company at no charge. Cautionary Statement Regarding Forward-Looking Statements This Management's Discussion and Analysis of Financial Condition and Results of Operations contains, in addition to historical information, forward-looking statements that are based on VidaMed's current expectations, beliefs, intentions or future strategies. The forward-looking statements concern, among other things, the availability of cash resources to fund continued operations and market acceptance of and the likelihood of additional Medicare reimbursement approvals for the TUNA Procedure. We base all forward-looking statements on information available to us on the date of this report. We do not undertake to such forward-looking statements to reflect events that arise after the date of this report. Actual results could differ materially from those in the forward-looking statements because of the factors described under "Liquidity and Capital Resources" and "Risk Factors" in this report and in our annual report on Form 10-K, as amended, for the year ended December 31, 1998. Overview We design, develop, and market urological systems that are used for urinary tract disorders. We primarily treat the enlarged prostate or Benign Prostatic Hyperplasia ("BPH"), a noncancerous condition of the prostrate gland affecting urination. VidaMed's primary product, the patented VidaMed TUNA System, is a reasonably priced alternative therapy that minimizes surgical invasion, side effects and complications for this condition. In the United States, we sell our products primarily through direct sales personnel. Internationally, we primarily sell to distributors who resell to physicians and hospitals. VidaMed received FDA clearance to market the TUNA System in 1996, and in 1998, Medicare reimbursement became available for procedures using our equipment that are performed in hospitals. Currently, 38 states provide such reimbursement coverage. To achieve significant increases in sales, we must secure Medicare reimbursement approvals 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 Ambulatory Service Center ("ASC") markets was delayed in mid-1998 due to Medicare's review of its "Year 2000" compliance. We believe that Medicare reimbursement in doctors' offices and ASCs, as well as patient awareness and physician advocacy of the TUNA System and procedure, are our greatest challenges. Our business strategy is to focus marketing and sales efforts on patient education and physician support for our products and procedures until Medicare coverage issues are resolved, but, as discussed in "Liquidity and Capital Resources" below, we will not be able to do so without additional debt or equity financing. Page 8 of 17 Results of Operations Net revenue for the three months ended June 30, 1999 was $1,225,000. This was an increase of $314,000 or 34% from $911,000 in the three months ended June 30, 1998. Product sales in the second quarter of 1999 increased 40% to $1,208,000 from $861,000 in the same period in 1998. The difference is due primarily to increased European sales. For the first six months of 1999, net revenue decreased 12% to $2,263,000 from $2,575,000 during the same period of 1998. Product sales decreased by less than 2% from $2,236,000 for the first six months of 1998, to $2,196,000 for the first six months of 1999. The decrease is primarily due to a one time grant revenue, that was recognized in 1998. Cost of product sold for the three months ended June 30, 1999 was $646,000, an increase of 6% or $38,000 from $608,000 for the three months ended June 30, 1998. This was due to higher product sales. For the six months ended June, 30, 1999 cost of product sold ws $1,480,000 down 12% from $1,680,000 in the first six months of 1998. The decrease is due to a change in our sales and marketing efforts and outsourcing the manufacture of our hand pieces. Research and development (R & D) expenses included expenditures for regulatory compliance and clinical trials. Clinical trial costs consist largely of payments to clinical investigators, product for clinical trials, and costs associated with initiating and monitoring clinical trials. R&D expenses decreased 38% to $742,000 in the three months ended June 30, 1999 from $1,200,000 in the three months ended June 30, 1998. For the six months ended June 30, 1999 expenses decreased 33% to $1,555,000 from $2,334,000 in the first six months of 1998. The decrease was primarily reduced clinical activity in 1999 and the launch of our current ProVu generation of product in 1998. The decrease was primarily due to reduced clinical activity in 1999, and resulting from the completion of the FDA clinical trial studies, and the completion of R&D expenditures for our current ProVu generation of product in 1998. Selling, general and administrative (SG&A) expenses increased 3% to $3,409,000 in the three months ended June 30, 1999 from $3,297,000 in the three months ended June 30, 1998. For the first six months ended June 30, 1999 expenses decreased $1,991,000 or 25% from $7,904,000 in 1998 to $5,913,000 in 1999. The expenditures in 1998 included a charge to the allowance for doubtful accounts, as a result of the length of time involved in obtaining state Medicare coverage and transition to a new Chief Financial Officer. Expenses in 1999 included costs associated with reorganizing our U.S. sales force organization, including recruiting costs. Page 9 of 17 Other income/expense for the three months ended June 30, 1999 included income of $87,000 compared to an expense of $46,000 for the comparable period in 1998. For the six months ended June 30, 1999 other income was $44,000 compared to an expense of $135,000 for the six months ended June 30, 1998. Other income is primarily composed of interest income and expense. VidaMed's results of operations have fluctuated in the past and may fluctuate in the future from year to year as well as from quarter to quarter. Revenues fluctuate as a result of several factors, including: o Regulatory and reimbursement approvals o Results of clinical trials o The extent to which the TUNA System gains market acceptance o Varying pricing promotions o Volume discounts to customers and distributors o Introduction of new products, and o Introduction of competing alternative therapies for BPH. Operating expenses fluctuate as a result of several factors, including: o The timing of expansion of sales and marketing activities o Costs and frequency of clinical activities, and o R&D and SG&A expenses associated with the potential growth of VidaMed's organization. VidaMed does not anticipate reaching profitability in the near future. As discussed below under "Liquidity and Capital Resources," our cash on hand, cash flows from sales and credit agreements are not sufficient to fund the operations through profitability without additional equity or debt financing. If we are unable to secure such additional financing, management will substantially reduce staffing, clinical trials that support regulatory and reimbursement approvals, research and development and marketing and sales activities. Liquidity and Capital Resources At June 30, 1999, our cash and cash equivalents decreased by $5.0 million to $4.4 million, compared to $9.4 million at December 31, 1998. The decrease is due to operating expenses incurred in the normal course of business. If we are unable to secure additional debt or equity financing this year, management will reevaluate and revise current operating plans, reduce spending and explore possible strategic relationships. We would be forced to reduce staff and discontinue or substantially reduce clinical trials, research and development and marketing and sales activities, and may not be able to continue as a going concern. Page 10 of 17 Our current cash balances and projected cash flows from the sale of products together with cash available under the Transamerica financing facility will not be sufficient to meet our current operating and capital requirements beyond approximately December 1999 without additional equity or debt financing. Management is pursuing and believes it can obtain additional financing, cannot give any assurance that we will be successful in securing such financing. Debt financing may require VidaMed to pledge assets and to comply with financial and operational covenants, or may not be available at all. Any future equity financing would result in dilution to our stockholders. In October 1998, the Company finalized a debt financing with Transamerica Technology Finance, a division of Transamerica Corporation. The facility is secured by the Company's assets and consists of a revolving accounts receivable-based credit line of up to $3 million and a $2.5 million equipment term loan. As of June 30, 1999, the term loan had funded in full. As of June 30, 1999, we have borrowed approximately $200,000 against the revolving accounts receivable-basd line at a rate of 9.75% per year. We were eligible to borrow approximately $330,000 against this line on June, 30 1999 and borrowed the remaining available balance in July. Restructuring Accrual In September 1997, VidaMed announced a restructuring program designed to reduce costs and improve operating efficiencies by closing our U.K. manufacturing facility. In 1997, we incurred a $2,100,000 charge in cost of goods sold due to the closure of the plant. The charge reflects $390,000 for the estimated loss on the abandonment of fixed assets, a $1,305,000 charge for our short-term obligation related to the closure of our British manufacturing facility and a $405,000 obligation to repay a grant received when we opened the facility. As of June 30, 1999, the remaining accrual balance is $198,000 and consists mainly of a grant repayment due by the end of 1999. See Note 5 of Notes to Condensed Consolidated Financial Statements. RISK FACTORS Our business, results of operations and financial condition are subject to a number of risk factors, in addition to those described above under "Results of Operations" and "Liquidity and Capital Resources." Potential Loss of Nasdaq Listing The continuing listing requirements for inclusion on the Nasdaq National Market require that we maintain minimum net tangible assets of $4.0 million. As of June 30, 1999, our net tangible assets decreased to $2.375 million. Although we are attempting to increase our net tangible assets through the sale of securities and increased sales of our products, the Nasdaq Stock Market, Inc. could initiate de-listing proceedings. There is no assurance that we will be able to raise sufficient capital or increase sales to meet the minimum net tangible asset listing requirements. In addition, there are other minimum listing requirements that VidaMed must continually satisfy, such as the requirement that our common stock cannot close below $1.00 for 30 consecutive trading days. The failure to satisfy any minimum listing requirement could cause the Nasdaq Stock Market, Inc. to initiate delisting proceedings. Delisting from the Nasdaq National Market could adversely affect the liquidity and price of the Company's common stock. Moreover, investors may find it more difficult to dispose of or obtain accurate quotations for our common stock because the bid and asked quotations would be reported on an electronic bulletin board such as the OTC Bulletin Board or similar quotations medium. Manufacturing Three of the four major components of the TUNA System are manufactured by third parties. We manufacture the VTS PROVu Reuseable Handle at our headquarters facility in Fremont, California. Telo Page 11 of 17 Electronics manufactures the VTS Generator (Model 7600) at its facility in San Jose, California. Humphreys Systems manufactures the VTS Disposable Cartridge at its facility in Dublin, California. Karl Storz manufactures the VTS PROVu Telescope at its facility in Germany. The transition to Humphreys was completed during the quarter ended June 30, 1999. By outsourcing our manufacturing, we are at risk that our manufacturers will be able to supply us with our products as ordered. Our products are continuously subject to Food and Drug Administration regulation, including recordkeeping and reporting requirements regarding use of the device. Manufacturing facilities where we outsource products are also subject to periodic inspection by federal, state and foreign regulatory agencies. Failure of our manufacturers to comply with regulatory requirements could adversely effect our business. Impact of Year 2000 Many currently installed computer systems and software products are coded to accept, store, or report only two digit year entries in date code fields. Beginning in the Year 2000 (Y2K), these date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. The Y2K issue is a result of these programs being written with two digits instead of four. As a result, computer systems and software used by companies, including us and our vendors and customers, will need to comply with the Y2K requirements. We presently believe that as a byproduct of normal business system modifications and upgrades and the short length of time we have been in operation, the Y2K issue should not have a material effect on our current financial position, liquidity or results of operations. However, this does not completely prevent the possibility of problems arising related to the Y2K that could have a material impact on our operations. We are aware of the Y2K issue and have been proactive in addressing the issue internally and externally. Our primary software system is currently Y2K compliant. We do not depend on in-house custom systems and generally purchases off the shelf software from reputable vendors who have tested their software for Y2K compliance. The Y2K issue is being considered for all future software purchases. Although 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. In early 1999, the Company completed its evaluation of its significant suppliers and large customers systems to determine the extent to which the Company's interface with these systems is vulnerable to the Y2K issue. 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 now likely to go into effect before mid-2000, at which time, office-based payments will begin their three year phase-in: 50% in 2000, 75% in 2001 and full payment in 2002. As a result of Medicare coverage delays, the Company established a $2.7 million reserve in the third quarter of 1998 for all office-based and ASC sales. 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 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. We are aware of the Y2K issue and have been proactive in addressing the issue internally and externally. Page 12 of 17 o Our primary software system is currently Y2K compliant. o We do not depend on in-house custom systems o We purchase off the shelf software from reputable vendors who have tested their software for Y2K compliance. o 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. Our products are Y2K compliant and are able to operate in the Year 2000 and beyond. The Y2K issue is relevant to the hardware and software used in the TUNA System generator. There are two processors used in the generator. One processor does not have date sensitivity and the other is a motherboard assembly running Microsoft's Windows 95 Operating system. With regard to Windows 95 Operating system being Y2K compliant, Microsoft wrote in a letter dated September 10, 1996, to the U.S. House of Representatives stating that, "All Microsoft's operating systems (MS-DOS, Windows 3.x, Windows 95, and Windows NT) can handle files created up to the year 2108." We have not, however, independently verified Microsoft's claim. We have not and do not expect to have material costs associated with the Y2K issues. We believe we have an effective program in place to resolve Y2K issues in a timely manner. We also have contingency plans for certain critical applications and are working on such plans for others. These contingency plans involve, among other actions: o Manual workarounds, o Increasing inventories o 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. 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. This occurrence would require us to manually prepare documents, such as shipping documents, invoices and checks, to keep the business running. Such tasks would be more time consuming and would likely require additional human resources to complete. Item 3 Quantitative and Qualitative Disclosures About Market Risk We have assessed our exposure to market risk based on our current market risk sensitive instruments and determined that amounts are not material. Page 13 of 17 PART II: OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders VidaMed held its annual meeting on June 3, 1999. Our stockholders voted on the following: The stockholders approved an amendment to the Company's Restated Certificate of Incorporation increasing the number of authorized common shares from 30,000,000 to 60,000,000. There were 14,940,299 votes for, and 1,815,378 against the proposal, with 1,852,359 abstentions. The election of directors was conducted and the following nominees were elected, with the following vote count: Votes Votes Name For Withheld ---- --- -------- Franklin D. Brown 18,380,044 227,992 Robert Erra 18,381,589 226,447 David J. Illingworth 18,386,371 221,665 Wayne I. Roe 15,579,406 3,028,630 Michael H. Spindler 18,380,289 227,747 The stockholders approved an amendment to our 1995 Employee Stock Purchase Plan to increase the number of shares of common stock reserved for future issuance under the plan by 200,000 shares to a new total of 600,000 shares. There were 10,312,832 votes for, and 589,954 votes against the amendment, with 122,591 abstentions and 7,582,659 shares were not voted. The stockholders did not approve an amendment to the 1992 Stock Plan to increase the number of shares of common stock reserved for future issuance by 1,200,000 shares to a new total of 5,500,000 shares. There were 4,058,264 votes for, and 6,591,311 against the amendment, with 148,901 abstentions. 7,809,560 shares were not voted. Page 14 of 17 The stockholders approved an amendment to the 1995 Director Option Plan to eliminate the vesting provisions and to vest immediately any future options granted. There were 14,761,446 votes for, and 3,649,417 votes against the amendment, with 197,173 abstentions. The stockholders ratified Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 1999. There were 18,336,879 votes for, and 189,177 against ratification, with 81,980 abstentions. Item 5. Other Information Management Changes In June 1999, several changes occurred in our management and on our Board of Directors. David Illingworth resigned as President and Chief Executive Officer to become Executive Chairman of the Board, effective August 1, 1999. Mr. Illingworth will devote up to 50 percent of his working time to strategic relationships and strategic planning. He continues to serve as Chairman of the Board of Directors. Mr. Illingworth's contract with VidaMed for his services as Executive Chairman is attached as exhibit 10.19 to this report. Randy Lindholm, who had been our Executive Vice President of Sales and Marketing, was promoted to President and Chief Executive Officer, effective August 1, 1999. Mr. Lindholm also joined the Board of Directors. Mr. Lindholm's contract with VidaMed for his services as President and Chief Executive Officer is attached as exhibit 10.20 to this report. Two members of the Board of Directors of VidaMed resigned in June 1999. Wayne Roe resigned due to potential conflicts in his relationship with a major health care industry consulting firm. Mr. Roe's resignation was effective August 1, 1999. Frank Brown resigned due to personal health reasons. Mr. Brown's resignation was effective July 1, 1999. VidaMed now has 4 members on its Board of Directors. A nominating committee of the Board, consisting of Robert Erra and Mr. Illingworth, has been formed to conduct a search for a new Board member. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.19 Transition Agreement between VidaMed, Inc. and David Illingworth, dated June 26, 1999. 10.20 Employment Agreement between VidaMed, Inc. and Randy Lindholm, dated June 22, 1999. 27.1 Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended June 30, 1999. Page 15 of 17 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: August 13, 1999 By: /s/ Randy D. Lindholm ------------------------- ------------------------------------ Randy D. Lindholm President, Chief Executive Officer Date: August 13, 1999 By: /s/ Richard D. Brounstein -------------------------- ---------------------------------------- Richard D. Brounstein VP Finance, Chief Financial Officer (Principal Financial and Accounting Officer)
Page 16 of 17 EX-10.19 2 TRANSITION AGREEMENT VidaMed, Inc. 46107 Landing parkway Fremont, California 94538 June 26, 1999 Mr. David Illingworth President and Chief Executive Officer VidaMed, Inc, 46107 Landing Parkway Fremont, California 94538 Re: Transition to Employment as Executive Chairman Dear Mr. Illingworth: This letter will confirm the terms of your transition to the role of Executive Chairman, such transition to be effective August 1, 1999 or earlier if mutually agreed upon by you and the new President and Chief Executive Officer (the "Transition Date"). The terms under which such employment is offered are as follows: 1. Position and Responsibilities. By the authority vested in the Board of Directors under Section 5.3 of the "Bylaws of VidaMed, Inc. (a Delaware corporation)" you are herewith appointed to the position of Executive Chairman, reporting to the President and Chief Executive of the Company. During the term of your service you shall devote up to 50% of your working time to your duties and responsibilities of your employment and shall perform them faithfully, diligently and competently. In addition, you shall comply with and be bound by the operating policies, procedures and practices of VidaMed in effect or as may be promulgated by the Company from time to time during your employment. In particular, your responsibilities as Executive Chairman shall include the following: (i) assisting with smooth transition of Mr. Randy Lindholm to his position as President and Chief Executive Officer of the Company, (ii) making personal visits with distribution partners during the third quarter of 1999, (iii) participating in fundraising activities, (iv) participating in efforts to explore strategic relationships and partnerships, and (v) such other duties as may be assigned to you by the President and CEO of the Company. The term of your service as Executive Chairman will continue through February 1, 2000 ("Termination Date"), unless modified by mutual agreement in writing. It is noted that you shall continue to serve as Chairman of the VidaMed Board of Directors and participate on the nominating committee of Board of Directors during the present term of that office. Your authority and responsibility as Chairman and member of the VidaMed Board of Directors is herewith recognized as distinct from the duties and authority of the Executive Chairman hereunder. 2. Compensation and Benefits. (a) In consideration of your services, effective as of your transition date of August 1, 1999, you will be paid a base salary of 50% of your current base salary of $270.000.00 per annum payable twice monthly in accordance with VidaMed's standard payroll practices. If during any payroll period, you devote greater than 50% of your working time to VidaMed matters as Executive Chairman, your salary for such period will be prorated accordingly. (b) You will also be entitled to participate in the VidaMed Performance Improvement Plan ("PIP") under such term accorded the President and Chief Executive Officer of the Company, prorated through August 1, 1999. You will not be eligible to participate in the PIP after August 1, 1999, except to the extent of the proration for the 1999 fiscal year. For purposes of calculating 1 benefits under the PIP, the Operating Plan shall be the "Steady Growth Plan" stated in the Minutes of the Board of Directors dated June 22, 1999. (c) Upon faithful completion of your service as Executive Chairman, the remaining balance of $62,500 loan made to you by the Company shall be deemed earned and the note forgiven. (d) You will also be entitled to receive the standard employee benefits made available by VidaMed to its employees to the full extent of your eligibility therefor. VidaMed will reimburse you for all reasonable expenses actually incurred or paid by you in the performance of your services on behalf of the company, upon prior authorization and approval in accordance with VidaMed's expense reimbursement policy then in effect and as may be amended from time to time. 3. Stock Options. Your stock option for an aggregate of 250,000 shares which was granted to you on October 9, 1998 (the "10/98 Option") will continue to vest on terms set forth in such option until termination of your services as Executive Chairman. Thereafter you will have thirty (30) days from termination of such service to exercise the shares vested under the 10/98 Option. The unvested portion of all your other unexercised VidaMed options will be cancelled and returned to the VidaMed stock option plan on the Transition Date. 4. Other Agreements. Your change of control agreement with VidaMed will remain in effect for so long as you are serving as Executive Chairman in accordance with this Agreement. Your indemnification agreement with VidaMed will remain in effect for so long as you are serving as Executive Chairman of VidaMed or as a member of VidaMed's Board of Directors. Your employee confidentiality agreement with VidaMed will remain in effect in accordance with its terms. 5. Conflicting Employment. You agree that, during the term of your service as Executive Chairman, you will not engage in any other employment, occupation, consulting or other business activity directly related to the business in which VidaMed is now involved or becomes involved during the term of your employment, nor will you engage in any other activities that conflict with your obligation to VidaMed. 6. General Provisions. (a) This letter will be governed by the laws of the State of California, applicable to agreements made and to be performed entirely within such state. (b) This letter agreement sets the entire agreement and understanding between VidaMed and you relating to your service as Executive Chairman and supersedes all prior verbal discussions between us. (c) This agreement will be binding upon your heirs, executors, administrators and other legal representatives and will be for the benefit of VidaMed and its respective successors and assigns. Please acknowledge and confirm your acceptance of this letter by signing and returning the enclosed copy of this letter as soon as possible.
VIDAMED, INC. By _________________________________________ Robert Erra, Member of Board of Directors Agreed to and accepted this 26th day of June 1999. By______________________________________ David J. Illingworth
2 EX-10.20 3 EMPLOYMENT AGREEMENT VidaMed, Inc. 46107 Landing Parkway Fremont, California 94538 June 22, 1999 Mr. Randy Lindholm VidaMed, Inc. 46107 Landing Parkway Fremont, CA 94538 Re: Terms of Employment Offer Dear Mr. Lindholm: This letter will confirm the terms of your offer of employment with VidaMed, Inc. Such terms are as follows: 1. Position and Responsibilities. You will serve in the position of President and Chief Executive Officer, reporting to the Board of Directors of the Company. You will assume and discharge such responsibilities as are commensurate with such position. During the term of your employment, you shall devote your full time, skill and attention to your duties and responsibilities and shall perform them faithfully, diligently and competently. In addition, you shall comply with and be bound by the operating policies, procedures and practices of VidaMed in effect from time to time during your employment. Your service as President and Chief Executive Officer will commence on August 1, 1999 (the "Start Date"). 2. Compensation. (a) In consideration of your services, effective as of the Start Date, you will be paid a base salary of $235,000 per annum, payable twice monthly in accordance with VidaMed's standard payroll practices. Upon the termination of service of David Illingworth as Executive Chairman of the Company, which is expected to occur no later than six months following the Start Date (the "Phase II Date") your base salary will be increased to $260,000. Thereafter, your base salary will normally be reviewed annually by the compensation committee of the Board of Directors of VidaMed. (b) On the Start Date, 25% of the original principal amount (plus accrued interest thereon) of your loan from VidaMed (the "Loan") will be forgiven. On each of the Phase II Date, the date which is six months after the Phase II Date and the date which is 18 months after the Phase II Date, 25% of the original principal amount (plus accrued interest thereon) of the Loan will be forgiven, provided you remain employed by the Company as President and Chief Executive Officer on each such Loan forgiveness date. (c) You will be entitled to participate in the VidaMed Performance Incentive Plan. For purposes of calculating benefits under the PIP, the Operating Plan shall be the "Steady Growth Plan" stated in the Minutes of the Board of Directors dated June 22, 1999. Your participation in the 1 PIP for fiscal year 1999 shall be at seven-twelfths in your capacity as a corporate officer and five-twelfths as President and CEO. 3. Other Benefits. You will be entitled to receive the standard employee benefits made available by VidaMed to its employees to the full extent of your eligibility therefor. You shall be entitled to paid vacation in accordance with VidaMed's vacation policy. During your employment, you shall be permitted, to the extent eligible, to participate in any group medical, dental, life insurance and disability insurance plans, or similar benefit plan of VidaMed that is available to executive officers generally. Participation in any such plan shall be consistent with your rate of compensation to the extent that compensation is a determinative factor with respect to coverage under any such plan. VidaMed shall reimburse you for all reasonable expenses actually incurred or paid by you in the performance of your services on behalf of the company, upon prior authorization and approval in accordance with VidaMed's expense reimbursement policy as from time to time in effect. 4. Stock Option. Pursuant to Board approval, and under the terms and conditions of the VidaMed Stock Option Plan and Stock Option Agreement, including the stock vesting provisions contained therein, you will be granted an option to purchase 400,000 shares of common stock of VidaMed. Your stock option will be granted in two separate tranches as follows: (i) tranche 1 for 200,000 shares will be granted to you on the second business day after your acceptance of this offer letter and (ii) tranche 2 will be granted to you on the Phase II Date, provided you remain employed by the Company as President and Chief Executive Officer on the Phase II Date. The exercise price for each tranche will equal the fair market value of VidaMed Common Stock on the respective grant dates. Both tranches will vest over a four-year period beginning on the date of commencement of your service as President and Chief Executive Officer (in the case of the tranche 1 options) and on the Phase II Date (in the case of the tranche 2 options). The VidaMed Stock Option Plan, including the Stock Option Agreement, will be sent to you separately. 5. Confidential Information. You agree that your employment is contingent upon your execution of, and delivery to, VidaMed of an Employment, Confidential Information and Invention Assignment Agreement in the standard form utilized by VidaMed. 6. Conflicting Employment. You agree that, during the term of your employment with VidaMed, you will not engage in any other employment, occupation, consulting or other business activity directly related to the business in which VidaMed is now involved or becomes involved during the term of your employment, nor will you engage in any other activities that conflict with your obligations to VidaMed. 7. General Provisions. (a) This offer letter will be governed by the laws of the State of California, applicable to agreements made and to be performed entirely within such state. (b) This offer letters sets forth the entire agreement and understanding between VidaMed and you relating your employment and supersedes all prior verbal discussion between us. Any subsequent change or changes in your duties, salary or other compensation will not affect the validity or scope of this agreement. 2 (c) This agreement will be binding upon your heirs, executors, administrators and other legal representatives and will be for the benefit of VidaMed and its respective successors and assigns. Please acknowledge and confirm your acceptance of this letter by signing and returning the enclosed copy of this offer letter as soon as possible. VIDAMED, INC. By ___________________________________ Robert Erra, Director ACCEPTANCE: I accept the terms of my employment with VidaMed, Inc. as set forth herein. I understand that this offer letter does not constitute a contract of employment for any specified period of time, and that either party, with or without cause and with or without notice may terminate my employment relationship. Date:___________, 1999 ----------------------- Randy Lindholm EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 4,411 0 3,536 2,800 891 6,833 6,107 4,791 8,436 4,637 0 0 0 21 2,354 8,436 2,196 2,263 1,480 1,480 0 573 192 (6,641) 0 (6,641) 0 0 0 (6,641) (.33) (.33)
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