-----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, VolPpE1S+lyy/asbm8SzXMESf3awIdK6APj6iu2zAgntPHXJfqknS8ENEbzQazz6 BJfbBzCismZjnd03ToP9Xg== 0001021408-01-509789.txt : 20020410 0001021408-01-509789.hdr.sgml : 20020410 ACCESSION NUMBER: 0001021408-01-509789 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 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: 1934 Act SEC FILE NUMBER: 000-26082 FILM NUMBER: 1781421 BUSINESS ADDRESS: STREET 1: 46107 LANDING PARKWAY STREET 2: SUITE 101 CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5104924900 MAIL ADDRESS: STREET 1: 46107 LANDING PARKWAY STREET 2: STE 101 CITY: FREMONT STATE: CA ZIP: 94538 10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 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, including zip code) (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 36,049,926 as of September 30, 2001. Page 1 of 14 VIDAMED, INC. INDEX
PART I. FINANCIAL INFORMATION Page Item 1. Condensed Consolidated Financial Statements - unaudited Condensed consolidated balance sheets - September 30, 2001 and December 31, 2000 3 Condensed consolidated statements of operations - three months ended September 30, 2001 and 2000 and nine months ended September 30, 2001 and 2000 4 Condensed consolidated statements of cash flows - nine months ended September 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 14 Signatures 14
Page 2 of 14 ITEM 1: FINANCIAL STATEMENTS VidaMed, Inc. Condensed Consolidated Balance Sheets (In thousands)
September 30, 2001 December 31, 2000 -------------------- ------------------- (Unaudited) (*) Assets Current Assets: Cash and cash equivalents $ 6,094 $ 6,491 Short-term investments 1,173 9,060 Accounts receivable, net 2,639 800 Inventories 2,157 649 Other current assets 583 389 -------------------- ------------------- Total current assets 12,646 17,389 Property and equipment, net 1,553 1,898 Other assets, net 97 99 -------------------- ------------------- Total assets $ 14,296 $ 19,386 ==================== =================== Liabilities and stockholders' equity Current liabilities: Notes payable, current $ 1,572 $ 1,776 Accounts payable 1,009 283 Accrued liabilities 2,972 2,821 -------------------- ------------------- Total current liabilities 5,553 4,880 Stockholders' equity: Capital stock 126,504 124,063 Accumulated deficit (117,761) (109,557) -------------------- ------------------- Total stockholders' equity 8,743 14,506 -------------------- ------------------- Total liabilities and stockholders' equity $ 14,296 $ 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 14 VidaMed, Inc. Condensed Consolidated Statements of Operations (In thousands except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 -------- -------- -------- -------- Revenues $ 3,779 $ 1,681 $ 9,024 $ 6,625 Cost of Products Sold 1,454 785 3,732 2,445 -------- -------- -------- -------- Gross Profit 2,325 896 5,292 4,180 Operating Expenses: Research and development 799 875 2,469 2,481 Selling, general and administrative 3,525 2,903 10,451 9,147 -------- -------- -------- -------- Total operating expenses 4,324 3,778 12,920 11,628 -------- -------- -------- -------- Loss from operations (1,999) (2,882) (7,628) (7,448) Other income (expense), net 2 (16) 469 185 -------- -------- -------- -------- Net loss $ (1,997) $ (2,898) $ (7,159) $ (7,263) ======== ======== ======== ======== Basic and diluted net loss per share $ (0.06) $ (0.10) $ (0.20) $ (0.24) ======== ======== ======== ======== Shares used in computing basic and diluted net loss per share 36,037 30,213 35,532 29,782 ======== ======== ======== ========
See accompanying notes. - -------------------------------------------------------------------------------- Page 4 of 14 VidaMed, Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Nine Months Ended September 30, 2001 2000 --------------------- -------------------- Cash flows from operating activities: Net loss $ (7,159) $ (7,263) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 845 1,351 Amortization of deferred compensation 95 129 Issuance of warrants for renewal of loan -- 87 Gain realized on sales of short-term investments (413) -- Changes in current assets and liabilities: Accounts receivable (1,839) 277 Inventory (1,359) (45) Other current assets (194) 67 Other assets 2 64 Accounts payable 726 297 Accrued liabilities 151 (234) Deferred revenue -- (164) --------------------- -------------------- Net cash used in operating activities (9,145) (5,434) --------------------- -------------------- Cash flows from investing activities: Expenditures for property and equipment (649) (1,536) Proceeds from the sale of short-term investments 7,255 -- --------------------- -------------------- Net cash provided by (used in) investing activities 6,606 (1,536) --------------------- -------------------- Cash flows from financing activities: Principal payments of notes payable (204) (521) Net cash proceeds from issuance of common stock 2,346 12,947 --------------------- -------------------- Net cash provided by financing activities 2,142 12,426 --------------------- -------------------- Net increase (decrease) in cash and cash equivalents (397) 5,456 Cash and equivalents at the beginning of the period 6,491 2,748 --------------------- -------------------- Cash and equivalents at the end of the period $ 6,094 $ 8,204 ===================== ==================== Supplemental disclosure of cash flows information: Cash paid for interest $ 214 $ 394 ===================== ==================== Supplemental disclosure of non-cash information: Unrealized loss on investments $ (633) $ -- ===================== ====================
See accompanying notes. Page 5 of 14 VIDAMED, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 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 September 30, 2001, the statements of operations for three months and nine months ended September 30, 2001 and 2000 and the statements of cash flows for the nine months ended September 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 nine months ended September 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 September 30, 2001, we had 4,961,576 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 September 30, 2001 and December 31, 2000 consist of the following (in thousands): September 30, December 31, 2001 2000 ----------------- ------------- Raw materials $ 1,155 $ 120 Work in process - 5 Finished goods 1,002 524 ----------------- ------------- $ 2,157 $ 649 ================= ============= Page 6 of 14 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 September 30, 2001, approximately $283,000 was outstanding on our term loan and we had borrowed approximately $1,289,000 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 nine months ended September 30, 2000, the total comprehensive loss was not materially different from the net loss. Total comprehensive loss for the quarter ended September 30, 2001 was $2,119,000, compared to a net loss of $1,997,000. For the nine months ended September 30, 2001, total comprehensive loss was $7,791,000 compared to a net loss of $7,159,000. These differences were the result of a decrease of $122,000 in the fair market value of the short-term investments for the three months ended September 30, 2001 and a decrease in their fair market value of $633,000 for the nine months ended September 30, 2001. 6. Common Stock During the nine months ended September 30, 2001, we issued 891,302 shares of common stock upon the exercise of outstanding warrants, 151,441 shares under our equity compensation plans and 174,146 shares under our employee stock purchase plan. 7. Recently Issued Accounting Standards In September 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 September 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 14 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. In October 2001, the FASB issued Statement of Financial Accounting Standard No.144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), which is effective for fiscal periods beginning after December 15, 2001 and supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. SFAS 144 provides a single model for accounting and reporting the impairment and disposal of long-lived assets. The statement also sets new criteria for the classification of assets held-for-sale and changes the reporting of discontinued operations. We do not believe that the adoption of SFAS 144 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 nine months ended September 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 VidaMed's Condensed Consolidated Financial Statements and Related Notes in Item 1 of this Quarterly Report on Form 10-Q and VidaMed's Annual Report on Form 10-K for the year ended December 31, 2000, which VidaMed has filed with the Securities and Exchange Commission. You may obtain a copy of VidaMed's Form 10-K from VidaMed 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 We design, develop, and market a minimally invasive treatment for the urological condition, benign prostatic hyperplasia, which is commonly referred to as BPH or enlarged prostate. Over one-half of the 37 million men age 50 and older in the United States suffer from symptomatic BPH, which if left untreated, can lead to other adverse medical conditions, including incontinence. Our patented transurethral needle ablation (TUNA) procedure is designed to provide a safe, cost effective and minimally invasive treatment for BPH and an alternative to drug therapy and major surgery. Our TUNA procedure delivers low-level radio frequency energy directly into the prostate, resulting in tissue shrinkage and subsequent alleviation of symptoms associated with BPH, with minimal patient discomfort or sensation of heat and allowing a patient to return quickly to a normal life style. Our latest generation TUNA system, the Precision system, which was designed specifically for the physician office environment, was cleared for marketing by the FDA in February 2001. Our Precision system offers a significantly faster average treatment time of only 20 minutes for a typical-sized prostate, compared with approximately 30 to 60 minutes for most other minimally invasive therapies. In addition, our Precision system has an intuitive user interface Page 8 of 14 that monitors intra-prostatic temperature 50 times each second, and provides essential real-time feedback to the physician ensuring a safe and successful treatment. The principal components of our TUNA system are the radio frequency generator, a reusable hand piece and telescope, and a single-use disposable catheter needed for each procedure. We outsource all of our manufacturing, except for the assembly of the reusable handle. We distribute the TUNA system in the United States through a network of direct sales and marketing representatives and account specialists, and internationally directly to customers and through a number of strategic distributors. We offer customers the option either to purchase the radio frequency generators and related accessories outright or to acquire them pursuant to a fee per use agreement whereby the customer contractually commits to purchase a minimum number of disposable catheters per year or other time period. All of our revenue is derived from the sale of our disposable catheters and radio frequency (RF) generators, hand pieces and telescopes. Revenue from product sales is recognized at the time of shipment, net of allowances for discounts and estimated returns which are also provided for at the time of shipment. Placement of RF generators in hospitals and physicians' offices is necessary for customers to use our disposable catheters. We continue to focus our sales and marketing efforts on expanding the base of our customer accounts and increasing the usage of our disposable products at our current accounts. We expect that revenue from the sale of our disposable cartridges will increase as a percentage of our revenue as the installed base of our RF generators continues to grow. Our ability to successfully commercialize our TUNA system depends in part on the extent to which the users of our products obtain appropriate reimbursement for the cost of the TUNA procedure. The majority of patients who receive treatment for BPH in the United States are eligible for Medicare coverage. Before August 1, 2000, the U.S. Health Care Financing Administration, recently renamed Centers for Medicare and Medicaid Services, or CMS, which administers Medicare reimbursement, only made reimbursement available for TUNA procedures performed in hospital-based settings, on a reasonable cost or cost plus basis. On August 1, 2000, the reimbursement was changed to a fixed rate or "prospective payments system" for procedures performed in hospitals. On January 1, 2001, Medicare reimbursement became available under the prospective payment system for TUNA procedures performed in physicians' offices. Results of Operations Net revenues for the three months ended September 30, 2001 was $3,779,000. This represents an increase of $2,098,000, or 125%, from $1,681,000 in the three months ended September 30, 2000. Net revenues for the nine months ended September 30, 2001 increased 36% to $9,024,000, from $6,625,000 in the same period of 2000. These increases were primarily due to a 176% increase in U.S. procedure volume for the three months ended September 30, 2001 compared to the three months ended September 30, 2000, and a 105% increase in U.S. procedure volume for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. These increases, however, were offset by the reduction of our average selling prices for each procedure resulting from the implementation of the CMS prospective payment system, which became effective for procedures performed in hospitals on August 1, 2000. For the three months ended September 30, 2001, net revenues increased sequentially by 27%, or $802,000, from $2,977,000 for the three months ended June 30, 2001. This sequential quarter growth was primarily attributable to the growth in the physician's office market and a related 24% sequential quarter increase in U.S. procedure volume and a sequential increase of 233% increase in U.S. RF generator system sales to 30 systems. Cost of goods sold increased $669,000 and $1,287,000 for the three and nine-month periods ended September 30, 2001, respectively from $785,000 and $2,445,000 during the same periods in the prior year. The increases are attributed to higher product sales. Gross margin expressed as a percentage of sales in the three months ended September 30, 2001 was 62%, up from 53% for the three months ended September 30, 2000. Gross margin expressed as a percentage of sales for the nine months ended September 30, 2001 was 59%, down from 63% for the nine months ended September 30, 2000. The increase in gross margin as a percentage of sales for the three months ended Page 9 of 14 September 30, 2001 is primarily due to increased manufacturing expense absorption at higher procedure volumes. The decrease in gross margin as a percentage of sales for the nine months ended September 30, 2001 is primarily attributed to the reduction of our average selling price, resulting from the implementation of the prospective payment system for the hospital out patient. Research and development expenses, which include expenditures for regulatory compliance and clinical trials, were $799,000 for the three months ended September 30, 2001 which was slightly declined from $875,000 for the same period in 2000. Research and development expenses for the nine months ended September 30, 2001 of $2,469,000 remained relatively unchanged from $2,481,000 for nine months ended September 30, 2000, as we sustained the level of our product improvement and cost reduction efforts. Selling, general and administrative expenses increased to $3,525,000 and $10,451,000 from $2,903,000 and $9,147,000 for the three and nine-months periods ended September 30, 2001 and 2000, respectively. 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. Other income (expense) 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 September 30, 2001 increased to $2,000 compared to other income (expense) of $(16,000) for the comparable period in 2000. The increase was primarily attributable to increased interest income resulting from a higher average invested balance of cash and investments. For the nine months ended September 30, 2001, other income/expense, net was $469,000, an increase of 154% from other income/expense, net of $185,000, for the nine months ended September 30, 2000. This change was primarily a result of a gain of $413,000 realized on sales of short-term investments during the nine months ended September 30, 2001. Our net loss for the three months ended September 30, 2001 was $2.0 million compared to $2.9 million for the three months ended September 30, 2000. Our net loss for the nine months ended September 30, 2001 was $7.2 million compared to $7.3 million for the nine months ended September 30, 2000. Liquidity and Capital Resources Since our inception, we have financed our operations principally through the sale of equity securities and to a lesser extent, through debt financing and loans. At September 30, 2001, our cash and cash equivalents and short-term investments were $7.3 million. For the quarter ended September 30, 2001, our cash and cash equivalents decreased by $0.5 million to $6.1 million. This decrease was due to $2.5 million used in operating activities, $0.1 million used for purchases of property and equipment, $1.9 million realized from the sale of short-term investments and $0.2 million realized from the issuance of common stock. For the nine months ended September 30, 2001, our cash and cash equivalents decreased $0.4 million compared to $6.5 million at December 31, 2000. This decrease was due to $7.2 million in proceeds from the sale of short-term investments, $2.3 million realized from the issuance of common stock, less $9.1 million used in operating activities, $0.6 million used for the purchase of property and equipment and a $0.2 million reduction in notes payable. Short-term investments at September 30, 2001 consisted of corporate commercial paper and bonds with a fair market value of $1.0 million and investments in equity securities of $0.2 million. We have debt financing with Transamerica Technology Finance, a division of Transamerica Corporation. This facility is secured by our assets and consists of a revolving accounts receivable-based credit line of up to $3 million and a $2.5 million equipment term loan. The term loan was funded in full as of December 31, 1998, at an interest rate of 12% per year. Repayment of that loan is amortized over a three-year period, with the first monthly payment having been made in December 1998 and the last monthly payment required to be made in December 2001. As of September 30, 2001, we owed $283,000 on this equipment term loan. As of September 30, 2001, we had borrowed approximately $1,289,000 against the revolving accounts receivable-based line at a rate of 10.50% per year, which will be required to be repaid in December 2001 if this credit line is not renewed. The revolving credit line has a Page 10 of 14 minimum interest payment of $96,000 per year. We are in the process of negotiating with banks the terms of a new credit facility to replace our Transamerica facility. Management believes that our current cash balances, short term investments, available debt financing and projected cash flows from operations will be sufficient to meet our current operating and capital requirements through the end of September 2002. We have based this estimate, however, on assumptions that may prove to be wrong. As a result, we may need or elect 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 will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to our stockholders, and debt financing, if available, may involve restrictive covenants that could limit the operations of our business. Certain Important Factors In addition to the factors identified above, there are several important factors that could cause our actual results to differ materially from those anticipated by us or which are reflected in any of our forward-looking statements. These factors, and their impact on the success of our operations and our ability to achieve our goals, include the following: We have incurred substantial losses since our inception, and if physicians do not purchase and use our TUNA system and the related disposables in sufficient quantities, we may be unable to achieve and maintain profitability. We incurred a net loss of approximately $2.0 million for the three months ended September 30, 2001, and have incurred substantial losses since our inception from costs relating to the development and commercialization of our TUNA system. As of September 30, 2001, we had an accumulated deficit of approximately $117.8 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; Page 11 of 14 . 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 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 Page 12 of 14 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. 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 Page 13 of 14 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. PART II: OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K On August 23, 2001, VidaMed filed a Current Report on Form 8-K reporting in Item 5, Other Events, the adoption by Randy D. Lindholm, VidaMed's Chairman, President and Chief Executive Officer, of a written trading plan pursuant to Rule 10b5-1 that allows him to systematically sell VidaMed common stock. SIGNATURE 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: November 12, 2001 By: /s/ Randy D. Lindholm ------------------- -------------------------------------- Randy D. Lindholm Chairman, President and Chief Executive Officer (Principal Executive Officer) Date: November 12, 2001 By: /s/ John F. Howe -------------------- -------------------------------------- John F. Howe VP Finance and Chief Financial Officer (Principal Financial Officer) Date: November 12, 2001 By: /s/ L. Phillip Brooks -------------------- -------------------------------------- L. Phillip Brooks Controller (Principal Accounting Officer) Page 14 of 14 -----END PRIVACY-ENHANCED MESSAGE-----