-----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, RR6Rvie55EWgmIAgYE/G9OAiu8MJtgTs7+1X7p2bi43xuNXWUE9tifUHh7LranW1 RNTSjCNPijdzPorIH0KQQQ== 0000950005-99-000808.txt : 19990901 0000950005-99-000808.hdr.sgml : 19990901 ACCESSION NUMBER: 0000950005-99-000808 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990831 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/A SEC ACT: SEC FILE NUMBER: 000-26082 FILM NUMBER: 99703125 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/A 1 FORM 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A AMEMDMENT NO. 1 [ 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 incorporation or organization) Identification No.) 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. VIDAMED, INC. INDEX PART I. FINANCIAL INFORMATION Page Item 1. Condensed Consolidated Financial Statements - unaudited 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 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 Page 2 of 16 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. Page 3 of 16 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 16 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 16 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. Certain information normally included in financial statements and related footnotes prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying financial statements should be read in conjunction with the financial statements and notes included in the Company's annual report on Form 10-K, as amended, for the year ended December 31, 1998 filed with the Securities and Exchange Commission. Results for any interim period shown in this report are not necessarily indicative of results to be expected for any other interim period or for the entire year. 2. Net Loss Per Share The Company calculates net loss per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share." Statement 128 requires the presentation of basic earnings (loss) per share and diluted earnings (loss) per share, if more dilutive, for all periods presented. Basic and diluted net loss per share are computed using the weighted-average number of shares of common stock outstanding during the periods presented. Securities that could share in the earnings of the Company, such as options, warrants and convertible securities, are excluded from the computation, as their effect is anti-dilutive. As the Company has incurred losses from operations in each of the periods presented, there is no difference between basic and diluted net loss per share amounts. 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. 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 Page 6 of 16 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 June 30, 1999, the Company borrowed approximately $200,0000 against the revolving accounts receivable-based line at a rate of 9.75% per year. It was eligible to borrow approximately $330,000 against this line on June 30, 1999, and borrowed the remaining available balance of approximately $130,000 in July 1999. 5. Restructuring Accrual In September 1997, VidaMed announced a restructuring program designed to reduce costs and improve operating efficiencies by closing the Company's U.K. manufacturing facility. The charge in the third quarter of 1997 was $2.1 million recorded in cost of products sold. The elements of the total charge as of 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 repayment 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, 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, 1999, is primarily due to the sale of common stock to the principals of Telo Electronics, one of our manufacturers. On December 17, 1998, the Company entered into an agreement to sell 368,596 shares of its common stock to the principals of Telo Electronics, one of our manufacturers. The purchase price of the common stock was $2.713, the average closing price of the common stock for the five trading days preceding December 17, 1998. The common stock was paid for with promissory notes delivered on December 17, 1998. The transaction closed in February 1999 when the promissory notes plus interest were paid. The Company received net proceeds of $1,000,000 from that transaction. 8. Retention Agreements In October 1998, the Company entered into retention agreements with certain executive officers. Under those agreements, the Company was obligated to pay up to $810,000 on April 1,1999, if those officers remained with the Company through April 1, 1999. All officers covered by the retention agreements remained with the Company through April 1, 1999, and the Company paid $810,000 according to the terms of the agreements. Page 7 of 16 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 coverage approvals for the TUNA Procedure. We base all forward-looking statements on information available to us on the date of this report. We do not undertake to update any such forward-looking statements to reflect events that arise after the date of this report. Actual results could differ materially from those in the forward-looking statements because of the factors described under "Liquidity and Capital Resources" and "Risk Factors" in this report and other factors described in our annual report on Form 10-K, as amended, for the year ended December 31, 1998. Overview We design, develop, and market urological systems that are used for urinary tract disorders. Our products primarily treat the enlarged prostate or Benign Prostatic Hyperplasia ("BPH"), a noncancerous condition of the prostrate gland affecting urination. VidaMed's primary product, the patented VidaMed TUNA System, is a reasonably priced alternative therapy that minimizes surgical invasion, side effects and complications for this condition. In the United States, we sell our products primarily through direct sales personnel. Internationally, we primarily sell to distributors who resell to physicians and hospitals. At the beginning of fiscal 1999, we began restructuring our United States sales and marketing model to align with current hospital-based reimbursement coverage. Under the prior model, we focused on selling the TUNA System generator and related equipment to hospitals, physician groups and ambulatory service centers. Under the new sales model, an entire TUNA System is placed with a hospital at no initial capital charge, and a per use fee is charged for each procedure performed. We received FDA clearance to market the TUNA System in 1996. In 1998, Medicare reimbursement coverage became available for procedures using our equipment that are performed in hospitals. As of June 30, 1999, 36 states provide such reimbursement coverage. To achieve significant increases in sales, we must actively promote the fee-per-use program and secure Medicare reimbursement coverage at least in all states with large populations of men over 50 years of age, which is our target patient population. The Company has several initiatives underway to facilitate the Medicare reimbursement coverage process, including working in cooperation with state Medicare Medical Directors. Notwithstanding the foregoing, there can be no assurance that the Company will receive additional Medicare reimbursement coverage in major states in a timely manner, and the failure to receive such coverage would have a material adverse effect on the business, financial condition and results of operations of the Company. Medicare coverage for supplies and devices in the office-based and ASC markets was delayed in mid-1998 due to Medicare's review of its "Year 2000" compliance. We believe that Medicare reimbursement in doctors' offices and ASCs, as well as patient awareness and physician advocacy of the TUNA System and procedure, are our greatest challenges. Our business strategy is to focus marketing and sales efforts on patient education and physician support Page 8 of 16 for our fee-per-use program while at the same time continue to advance Medicare reimbursement for the TUNA Procedure, but, as discussed below in "Liquidity and Capital Resources," we will not be able to do so without additional debt or equity financing. Although initial results from our fee-per-use sales model are favorable, we do not anticipate reaching profitability in the near future. We expect our operating losses to continue as we commit substantial resources to expand marketing and sales activities, fund clinical trials in support of regulatory and reimbursement approvals, and fund research and development. Our future profitability will be dependent upon, among other factors, market acceptance of the VidaMed TUNA Procedure, availability and timing of third-party reimbursement for procedures performed with the TUNA System, adoption of our fee-per-use program and our ability to fund operations absent sufficient sales of our products. There can be no assurance that the TUNA System will continue to be deemed clinically or cost effective by health care providers and payors, superior to other current and emerging methods for treating BPH, or that the TUNA System will achieve significant market acceptance in the United States. Furthermore, determinations of reimbursement of the TUNA Procedure by private and governmental health payors are made by such payors and their medical directors independent of the FDA approval. Accordingly, there can be no assurance that the TUNA Procedure will be reimbursed at adequate levels or continue to be reimbursed at adequate levels in the United States under either private or governmental healthcare payment systems. Both lack of coverage and inadequate reimbursement for the TUNA Procedure could adversely affect market acceptance of the TUNA System. Failure of the TUNA Procedure to achieve market acceptance in the United States, lack of adequate funding, the impact of competitive products and pricing and other risks could have a material adverse effect on our business, financial condition and results of operations. 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. The decrease is primarily due to non-recurring grant revenue that was recognized in 1998. Though the net product revenues did not change materially from the first six months of 1998 to the first six months of 1999, the source of revenues changed. Product revenues for the prior period were generated from the sales of entire TUNA Systems while product revenues for the first six months of 1999 included revenues from our fee-per-use program, as discussed above in the section entitled "Overview." 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 increase was a function of higher product sales. For the six months ended June 30, 1999 cost of product sold was $1,480,000, down 12% from $1,680,000 in the first six months of 1998. The decrease is a function of (i) a transition from a sales and marketing model based on the sales of the TUNA System to a fee-per-use sales model, and (ii) outsourcing the manufacture of our disposable product resulting in lower materials cost. 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 due to reduced clinical activity in 1999, resulting from the completion of FDA clinical trial studies, and the completion of R&D expenditures for our current ProVu generation of products in 1998. Page 9 of 16 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. The increase is primarily attributed to costs associated with executive retention and reorganizing our U.S. sales force, including recruiting costs, offset by legal expenses. For the first six months ended June 30, 1999 SG&A expenses decreased $1,991,000 or 25% from $7,904,000 in 1998 to $5,913,000 in 1999. The decrease is a function of higher expenditures in the first quarter of 1998, including a charge to the allowance for doubtful accounts necessitated by the length of time involved in obtaining state Medicare coverage, a charge incurred in the transition to a new chief executive officer and a charge for legal expenses. 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 expects operating losses to continue at least through fiscal year 2000. Liquidity and Capital Resources As of 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, offset in part by the issuance of equity as discussed in footnote 7. As we began fiscal 1999, we believed that our current cash balances, projected cash flows from operations including a U.S. procedure based sales program (the "fee-per-use program") and cash available under the Transamerica financing facility would be sufficient to meet our current operating and capital requirements through the end of the fiscal year. We now believe that the fee-per-use program will take longer to implement than originally planned. In an effort to increase revenues, we believe that it is necessary to: o Increase consumer awareness of the treatment options available to BPH patients with the view that an informed patient and his doctor are more likely to choose the TUNA procedure; o Provide opportunities for our field organization to increase the number of physicians who perform TUNA Procedures; and Page 10 of 16 o Implement marketing initiatives to assist physicians build their practices by increasing the number of TUNA Procedures performed. The increased costs associated with this three-pronged approach together with lower than anticipated revenues from the fee-per-use program will require us to obtain additional financing to meet our current operating and capital requirements through the end of the fiscal year. Management is pursuing, and believes it can obtain, financing to fund operations through the end of this fiscal year and into fiscal year 2000. Additional financing will likely be required in order to fund operations throughout fiscal 2000. We cannot give any assurance that we will be successful in securing any debt or equity financing, or that such financing, if available, will be on favorable terms. Any future equity financing would result in dilution to our stockholders. If we are unable to secure additional financing this year, we would not be able to continue as a going concern. We would be forced to explore strategic relationships, reduce staff and discontinue clinical trials, research and development and marketing and sales activities. During 1998, we finalized a commitment for $5.5 million in new debt financing with Transamerica Technology Finance, a division of Transamerica Corporation. The facility is secured by our assets and consists of a revolving accounts receivable-based credit line of up to $3 million and a $2.5 million equipment term loan. The term loan was funded in full as of December 31, 1998, at an interest rate of 12% per year. Repayment of that loan is amortized over a three-year period, with the first monthly payment having been made in December 1998 and continuing monthly thereafter. As of June 30, 1999, we borrowed approximately $200,0000 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 of approximately $130,000 in July 1999. 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" and in our annual report on Form 10-K for the year ended December 31, 1998, as amended. Page 11 of 16 Potential Loss of Nasdaq Listing The continuing listing requirements for inclusion of our stock on the Nasdaq National Market require that we maintain minimum net tangible assets of $4.0 million. As of 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-Amex Market Group of the NASD ("Nasdaq-Amex") 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. For example, our common stock cannot close below $1.00 for 30 consecutive trading days. The failure to satisfy any minimum listing requirement could result in the initiation of delisting proceedings. In August 1999, Nasdaq-Amex notified us that we were out of compliance with the net tangible assets requirement for continued listing on the Nasdaq National Market. The Company has been asked to submit a plan for achieving compliance to Nasdaq-Amex. No delisting action will be taken against VidaMed until we have an adequate opportunity to respond. 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 a similar quotation 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 Electronics manufactures the VTS Generator (Model 7600) at its facility in San Jose, California. Ziess Humphrey Systems manufactures the VTS Disposable Cartridge at its facility in Dublin, California. Karl Storz manufactures the VTS PROVu Telescope at its facility in Germany. The transition to Zeiss Humphrey Systems was completed during the quarter ended June 30, 1999. By outsourcing our manufacturing, we are at risk that our manufacturers will not be able to supply us with our products as ordered. Our products are continuously subject to Food and Drug Administration regulation, including recordkeeping and reporting requirements regarding use of the device. Manufacturing facilities where we outsource products are also subject to periodic inspection by federal, state and foreign regulatory agencies. Failure of our manufacturers to comply with regulatory requirements could adversely effect our business. Impact of Year 2000 Many currently installed computer systems and software products are coded to accept, store, or report only two digit year entries in date code fields. Beginning in the Year 2000 (Y2K), these date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. The Y2K issue is a result of these programs being written with two digits instead of four. As a result, computer systems and software used by companies, including us and our vendors and customers, will need to comply with the Y2K requirements. We presently believe that as a byproduct of normal business system modifications and upgrades and the short length of time we have been in operation, the Y2K issue should not have a material effect on our current financial position, liquidity or results of operations. However, this does not completely prevent the possibility of problems arising related to the Y2K issue that could have a material impact on our operations. We have been proactive in addressing the Y2K issue internally and externally. Our primary software system is currently Y2K compliant. We do not depend on in-house custom systems and generally purchase off-the-shelf software from reputable vendors who have tested their software for Y2K compliance. The Y2K issue is being Page 12 of 16 considered for all future software purchases. Although we believe the Y2K issue will not pose material operational problems for our computer systems, there can be no assurance that problems arising from the Y2K issue will be completely eliminated. We have initiated communication with our significant suppliers and customers to determine the extent to which our operations are vulnerable to a failure of any of those third parties to remediate their own Y2K issues. The Company determined that Medicare coverage for supplies and devices in the office-based and ASC markets was delayed in mid-1998 due to Medicare announced Y2K problems. The ASC reimbursement program, which was expected to be effective January 1, 1999 is not likely to be effective before June 30, 2000. As a result of the Medicare coverage delays, the Company established a $2.7 million reserve in the third quarter of 1998 for all office-based and ASC sales. Other than issues related to Medicare, none of our significant suppliers or large customers has notified us that they have significant Y2K problems. Even where assurances are received from third parties, however, there remains a risk that failure of systems and products of other companies on which we rely could have a material adverse effect on our business. Our products are Y2K compliant and are able to operate in the Year 2000 and beyond. There are two processors used in the TUNA System generator. One processor does not have date sensitivity while the other does. We have tested the date sensitive processor and have concluded that it has no significant Y2K problems. We believe we have an effective program in place to resolve Y2K issues in a timely manner. We also have contingency plans for certain critical applications and are working on such plans for others. These contingency plans involve, among other actions: o Manual workarounds (e.g. manual preparation of invoices, paychecks) 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, we have not and do not expect to have material costs associated with the Y2K issues. The most reasonably likely worst case scenario relates to our ability to use our computerized manufacturing and accounting system. Although the software product is Y2K compliant, other unforeseen factors could render it inoperative, such as the inability of public utilities to provide service. This occurrence could materially adversely effect our business. We could also be required to manually prepare documents, such as shipping documents, invoices and checks and the like. Such tasks would be more time consuming and would likely require additional human resources to complete. 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 doe not have a material market risk exposure. PART II: OTHER INFORMATION 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 proposals. Page 13 of 16 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 votes 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 not voting. 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 votes against the amendment, with 148,901 abstentions and 7,809,560 shares not voting. The stockholders approved an amendment to the 1995 Director Option Plan to eliminate the vesting provisions and to vest immediately any future options granted under the plan. 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 votes 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 an exhibit 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 an exhibit 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. Page 14 of 16 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. On August 23, 1999, John F. Howe replaced Richard D. Brounstein as Vice President Finance, Chief Financial Officer. Mr. Brounstein will remain with VidaMed to effectuate a smooth transition. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.19(1) Transition Agreement between VidaMed, Inc. and David Illingworth, dated June 26, 1999. 10.20(1) 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. (1) Filed as an Exhibit to the Company's original Report on Form 10-Q for the Quarter ended June 30, 1999 and incorporated herein by reference. 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 26, 1999 By: /s/ Randy D. Lindholm ------------------- ------------------------------------ Randy D. Lindholm President, Chief Executive Officer Date: August 26, 1999 By: /s/ John F. Howe ------------------- ------------------------------- John F. Howe VP Finance, Chief Financial Officer (Principal Financial and Accounting Officer) EX-27 2 FINANCIAL DATA SCHEDULE
5 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 0 (44) (6,641) 0 (6,641) 0 0 0 (6,641) (.33) (.33)
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