10-Q 1 d10q.txt PERIOD ENDING JUNE 30, 2001 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, 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 35,934,858 as of June 30, 2001. Page 1 of 15 VIDAMED, INC. INDEX PART I. FINANCIAL INFORMATION
Page Item 1. Condensed Consolidated Financial Statements - unaudited Condensed consolidated balance sheets - June 30, 2001 and December 31, 2000 3 Condensed consolidated statements of operations - three months ended June 30, 2001 and 2000 and six months ended June 30, 2001 and 2000. 4 Condensed consolidated statements of cash flows - six months ended June 30, 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 8 Item 3 Quantitative and Qualitative Disclosure About Market Risk 14 PART II. OTHER INFORMATION 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)
June 30, December 31, 2001 2000 -------------- ------------- (Unaudited) (*) Assets Current Assets: Cash and cash equivalents $ 6,553 $ 6,491 Short-term investments 3,295 9,060 Accounts receivable, net 1,669 800 Inventories 1,725 649 Other current assets 277 389 ------------ ----------- Total current assets $ 13,519 $ 17,389 Property and equipment, net 1,867 1,898 Other assets, net 97 99 ------------ ----------- Total assets $ 15,483 $ 19,386 ============ =========== Liabilities and stockholders' equity Current liabilities: Notes payable, current $ 1,476 $ 1,776 Accounts payable 876 283 Accrued liabilities 2,500 2,821 ------------ ----------- Total current liabilities $ 4,852 $ 4,880 Stockholders' equity: Capital stock 126,274 124,063 Accumulated deficit (115,643) (109,557) ------------ ----------- Total stockholders' equity 10,631 14,506 ------------ ----------- Total liabilities and stockholder's equity $ 15,483 $ 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 Six Months Ended June 30, June 30, ---------------------------- --------------------------- 2001 2000 2001 2000 -------------- ------------ ------------- ------------ Revenues $ 2,977 $ 2,418 $ 5,245 $ 4,944 Cost of Products Sold 1,239 891 2,278 1,659 -------------- ------------ ------------- ------------ Gross Profit 1,738 1,527 2,967 3,285 Operating Expenses: Research and development 827 822 1,669 1,604 Selling, general and administrative 3,511 2,980 6,927 6,247 -------------- ------------ ------------- ------------ Total operating expenses 4,338 3,802 8,596 7,851 -------------- ------------ ------------- ------------ Loss from operations (2,600) (2,275) (5,629) (4,566) Other income, net 111 48 467 201 -------------- ------------ ------------- ------------ Net loss $ (2,489) $ (2,227) $ (5,162) $ (4,365) ============== ============ ============= ============ Basic and diluted net loss per share $ (0.07) $ (0.07) $ (0.15) $ (0.15) ============== ============ ============= ============ Shares used in computing basic and diluted net loss per share 35,534 30,198 35,278 29,567 ============== ============ ============= ============
See accompanying notes. -------------------------------------------------------------------------------- Page 4 of 15 VidaMed, Inc. Condensed Consolidated Statement of Cash Flows (In thousands) (Unaudited)
Six Months Ended June 30, --------------------------------------- 2001 2000 ------------------ ------------------ Cash flows from operating activities: Net loss $ (5,162) $ (4,365) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 567 882 Amortization of deferred compensation 60 - Gain realized on sales of short-term investments (413) Issuance of warrants for renewal of loan - 58 Changes in current assets and liabilities: Accounts receivable (869) 176 Inventory (1,076) 10 Other current assets 112 (34) Other assets 2 65 Accounts payable 593 562 Accrued liabilities (322) (83) Deferred revenue - (154) ------------------ ----------------- Net cash used in operating activities (6,508) (2,883) ------------------ ----------------- Cash flows from investing activities: Expenditures for property and equipment (536) (1,345) Proceeds from the sale of short-term investments 5,255 - ------------------ ----------------- Net cash provided by (used in) investing activities 4,719 (1,345) ------------------ ----------------- Cash flows from financing activities: Principal payments of notes payable (300) (482) Net cash proceeds from issuance of common stock 2,151 12,832 ------------------ ----------------- Net cash provided by financing activities 1,851 12,350 ------------------ ----------------- Net increase in cash and cash equivalents 62 8,122 Cash and equivalents at the beginning of the period 6,491 2,748 ------------------ ----------------- Cash and equivalents at the end of the period $ 6,553 $ 10,870 ================== ================= Supplemental disclosure of cash flows information: Cash paid for interest $ 174 $ 227 ================== ================= Supplemental disclosure of non-cash information: Unrealized gain on investments $ 923 $ - ================== =================
See accompanying notes. Page 5 of 15 VIDAMED, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 (Unaudited) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of VidaMed, Inc. (the "Company", "VidaMed", "we" or "our") 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 June 30, 2001, the statements of operations for three months and six months ended June 30, 2001 and 2000 and the statements of cash flows for the six months ended June 30, 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 six months ended June 30, 2000 to conform to the current period'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 our 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 June 30, 2001, we had 4,929,496 options outstanding under our equity compensation plans and 1,938,000 outstanding warrants. The options and warrants 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 June 30, 2001 and December 31, 2000 consist of the following (in thousands): June 30, December 31, 2001 2000 ----------------- ---------------- Raw materials $ 749 $ 120 Work in process - 5 Finished goods 976 524 ----------------- ---------------- $ 1,725 $ 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 June 30, 2001, approximately $497,000 was outstanding on our term loan and we borrowed approximately $979,000 against the revolving accounts receivable-based line at a rate of 10.5% per year. 5. Comprehensive Income (Loss) We follow Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (Statement 130). Statement 130 establishes 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 and six months ended June 30, 2000, the total comprehensive loss was not materially different from the net loss. Total comprehensive loss for the quarter ended June 30, 2001 was $2,474,000, compared to a net loss of $2,489,000. For the six months ended June 30, 2001, total comprehensive loss was $5,673,000 compared to a net loss of $5,162,000 the differences are the result of an increase of $15,000 in the fair market value of the short-term investments for the three months ended June 30, 2001 and a decrease in their fair market value of $511,000 for the six months ended June 30, 2001. 6. Common Stock During the six months ended June 30, 2001, we issued 891,302 shares of common stock upon the exercise of outstanding warrants, 134,211 shares under our equity compensation plans and 76,308 shares under our employee stock purchase plan. 7. Recently Issued Accounting Standards In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which we adopted on January 1, 2001. This statement establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. The adoption of SFAS 133 did not have a material effect on our operating results or financial position since we currently do not invest in derivative instruments or engage in hedging activities. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"). SFAS 141 establishes new standards for accounting and reporting for business combinations and will require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method will be prohibited. We will adopt this statement during the first quarter of fiscal 2002 and we do not believe that SFAS 141 will have a material effect on our operating results or financial position. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which supersedes APB Opinion No. 17, Intangible Assets. SFAS 142 establishes new Page 7 of 15 standards for goodwill, including the elimination of goodwill amortization to be replaced with methods of periodically evaluating goodwill for impairment. We will adopt this statement during the first quarter of fiscal 2002, and we do not believe that SFAS 142 will have a material effect on our operating results or financial position. 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, 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 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, 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 June 30, 2001, all 50 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 physician that performs the TUNA procedure was reimbursed by Medicare approximately $600 per procedure. In August 2000, the U.S. Health Care Financing Administration, recently renamed Centers for Medicare and Medicaid Services, or CMS, 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, although this rate can be higher or lower Page 8 of 15 depending upon a wage index factor for each hospital. The physician 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, CMS published new Medicare payment rates and a schedule for implementing minimally invasive heat therapies for the treatment of BPH in the physician'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 BPH 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. Results of Operations Net revenue for the three months ended June 30, 2001 was $2,977,000. This represents an increase of $559,000, or 23%, from $2,418,000 in the three months ended June 30, 2000. Net revenues for the six months ended June 30, 2001, increased 6% to $5,245,000, from $4,944,000 in the same period of 2000. These increases were primarily due to a 99% increase in U.S. procedure volume for the three months ended June 30, 2001 compared to the three months ended June 30, 2000 and a 74% increase in U.S. procedure volume compared to the six months ended June 30, 2000. These increases, however, were offset by the reduction of our average selling price resulting from the implementation of the CMS prospective payment system, which became effective August, 1 2000. For the three months ended June 30, 2001, revenues increased sequentially by 31%, or $716,000, from $2,261,000 for the three months ended March 31, 2001. This sequential quarter growth is primarily attributed to the growth in the physician's office market and a related 25% sequential quarter increase in U. S. procedure volume. Cost of product sold for the three months ended June 30, 2001 was $1,239,000, an increase of 39%, or $348,000, from $891,000 for the three months ended June 30, 2000. For the six months ended June 30, 2001 cost of product sold was $2,278,000, an increase of 39%, or $619,000, from $1,659,000 for the six months ended June 30, 2000. These increases were due to higher product sales in the respective periods. Gross profit for the three months ended June 30, 2001, was $1,738,000, an increase of 14%, or $211, 000, from $1,527,000 for the three months ended June 30, 2000. The increase is attributed to product volume increases exceeding the effects of reduced average selling prices resulting from the introduction of hospital fixed rates. Gross profit for the six months ended June 30, 2001 was $2,967,000, a decrease of 10%, or $318,000, from $3,285,000 for the six months ended June 30, 2000. This is a result of product volume increases not off-setting the impact of reduced average selling price. Gross margin expressed as a percentage of sales in the three months ended June 30, 2001 was 58%, down from 63% for the three months ended June 30, 2000. Gross margin expressed as a percentage of sales for the six months ended June 30, 2001 was 57%, down from 66% for the six months ended June 30, 2000. These decreases in gross margin are primarily attributed to the reduction of our average selling price, resulting from the implementation of the prospective payment system. Gross margin for the three months ended June 30, 2001 improved sequentially to 58% from 54% for the three months ended March 31, 2001. This increase is primarily attributed to increased manufacturing expense absorption at higher procedure volumes and margin improvements resulting from the increased proportion of procedures performed in the physician's office, where margins are higher than those realized from procedures performed in the hospital. Page 9 of 15 Research and development (R&D) expenses for the three months ended June 30, 2001 and 2000 included expenditures for regulatory compliance and clinical trials. Clinical trial costs consisted largely of payments to clinical investigators, product for clinical trials, and costs associated with initiating and monitoring clinical trials. R&D expenses of $827,000 in the three months ended June 30, 2001 remained relatively unchanged from $822,000 in the three months ended June 30, 2000. R&D expenses for the six months ended June 30, 2001 of $1,669,000 was slightly higher than R&D expenses of $1,604,000 for the six months ended June 30, 2000, as the Company maintained its product improvement and incremental cost reduction efforts. Selling, general and administrative (SG&A) expenses for the three months ended June 30, 2001 was $3,511,000, an increase of 18%, or $531,000, compared to expenditures of $2,980,000 in the three months ended June 30, 2000. SG&A expenses for the six months ended June 30, 2001 was $6,927,000, an increase of 11%, or $680,000, from SG&A expenses $6,247,000 for the six months ended June 30, 2000. These increases are due to increases in sales staff, training and tools necessary to aggressively market and service the in-office market, which was approved for Medicare reimbursement by CMS effective January 1, 2001. SG&A expenses for the three months ended June 30, 2001 was only slightly higher than the $3,416,000 for the three months ended March 31, 2001 as the company closely manages expenses. Other income, net 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 June 30, 2001 increased 131% to $111,000 compared to net other income of $48,000 for the comparable period in 2000. The increase is primarily attributed to increased interest income resulting from a higher average invested balance of cash and investments. For the six months ended June 30, 2001, other income was $467,000, an increase of 132% from other income of $201,000, for the six months ended June 30, 2000. This change was primarily a result of $413,000 realized on sales of short-term investments during the six months ended June 30, 2001. History of Operating Losses As of June 30, 2001, we had incurred operating losses of approximately $115.6 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 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 physicians' 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 June 30, 2001, our cash and cash equivalents and short-term investments were $9.8 million. For the quarter ended June 30, 2001, our cash and cash equivalents decreased by $.05 million to $6.6 million. The decrease is due to $3.4 million used in operating activities, $0.1 million used for purchases of property and equipment, $1.8 million realized from the sale of short-term investments and $1.65 million realized from the issuance of common stock. For the six months ended June 30, 2001, cash and cash equivalents increased $0.1 million compared to $6.5 million at December Page 10 of 15 31, 2000. The increase is due to $5.3 million in proceeds from the sale of short-term investments, $2.1 million realized from the issuance of common stock, less $6.5 million expended in operating activities, $0.5 million expended for the purchase of property and equipment and a $0.3 million reduction in notes payable. Short-term investments at June 30, 2001 consisted of corporate commercial paper and bonds with a fair market value of $3.0 million and investments in equities of $0.3 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 June 30, 2001, we owed $497,000 on this equipment term loan. As of June 30, 2001, we borrowed approximately $979,000 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. 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 June 2002. 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 through public or private transactions, strategic relationships or other arrangements. We cannot assure you that such financing, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to our stackholders, and debt financing, if available, may involve restrictive covenants that could limit the operations of our business. Recent Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which we adopted on January 1, 2001. This statement establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. The adoption of SFAS 133 did not have a material effect on our operating results or financial position since we currently do not invest in derivative instruments or engage in hedging activities. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"). SFAS 141 establishes new standards for accounting and reporting for business combinations and will require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method will be prohibited. We will adopt this statement during the first quarter of fiscal 2002 and we do not believe that SFAS 141 will have a material effect on our operating results or financial position. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which supersedes APB Opinion No. 17, Intangible Assets. SFAS 142 establishes new standards for goodwill, including the elimination of goodwill amortization to be replaced with methods of periodically evaluating goodwill for impairment. We will adopt this statement during the first quarter of fiscal 2002, and we do not believe that SFAS 142 will have a material effect on our operating results or financial position. 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: Page 11 of 15 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 $2.6 million for the three months ended June 30, 2001, and have incurred substantial losses since our inception from costs relating to the development and commercialization of our TUNA system. As of June 30, 2001, we had an accumulated deficit of approximately $115.6 million. We expect to continue to incur operating losses in the near future as we expend funds on sales and marketing activities, clinical trials 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 physicians' 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. 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 Page 12 of 15 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. Our future revenues depend upon our customers receiving third party reimbursement. The continuing efforts of governments and insurance companies, health maintenance organizations and other payors of healthcare costs to contain or reduce health care costs may affect our future revenues and profitability. 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. 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. The TUNA procedure is a new therapy and may not be accepted by physicians and patients, 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. Clinical data for assessing the durability of relief provided by the TUNA therapy extends beyond five years, but some physicians may not consider this to be sufficient evidence of durability. 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. Patient acceptance of the procedure will depend in part upon physician recommendations and 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. 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. Page 13 of 15 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. 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. 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. 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. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS VidaMed, Inc. held its annual meeting of stockholders on May 10, 2001. Our stockholders voted on the following: 1. Election of Directors. The election of directors was conducted and the following nominees were elected, with the following vote count:
Votes Votes Name For Withheld -------------------- ------------------- -------------------- Randy D. Lindholm 21,062,355 590,383 Robert J. Erra 21,622,706 30,032 Elizabeth H. Davila 21,624,076 28,662 Paulita M. LaPlante 21,624,076 28,662 Kurt C. Wheeler 16,291,662 5,361,076 Michael D. Ellwein 21,622,626 30,112
2. Ratification of Independent Auditors. The stockholders ratified Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2001. There were 21,580,225 votes for and 7,275 against ratification, with 65,238 abstentions. Item 6. Exhibits and Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 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: August 9, 2001 By: /s/ Randy D. Lindholm ---------------------- --------------------------- Randy D. Lindholm Chairman, President and Chief Executive Officer (Principal Executive Officer) Date: August 9, 2001 By: /s/ John F. Howe ---------------------- --------------------------- John F. Howe VP Finance and Chief Financial Officer (Principal Financial Officer) Date: August 9, 2001 By: /s/ L. Phillip Brooks ---------------------- --------------------------- Controller (Principal Accounting Officer) Page 15 of 15