-----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, BSWsErqL30l12v/MVJQ/oyUWCXeQCxn3dgFZFR0jp/7aq0hf+4ZaOOmPHn2W4s69 MSl/+SQlmQ1wXIGdoHoPJA== /in/edgar/work/0001032210-00-002102/0001032210-00-002102.txt : 20001102 0001032210-00-002102.hdr.sgml : 20001102 ACCESSION NUMBER: 0001032210-00-002102 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001031 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIDAMED INC CENTRAL INDEX KEY: 0000929900 STANDARD INDUSTRIAL CLASSIFICATION: [3841 ] IRS NUMBER: 770314454 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26082 FILM NUMBER: 750082 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 0001.txt THIRD QUARTER REPORT 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, 2000 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 30,386,062 as of September 30, 2000. VIDAMED, INC. INDEX PART I. FINANCIAL INFORMATION
Page Item 1. Condensed Consolidated Financial Statements - unaudited Condensed consolidated balance sheets - September 30, 2000 and December 31, 1999 3 Condensed consolidated statements of operations - three months ended September 30, 2000 and 1999 and nine months ended September 30, 2000 and 1999. 4 Condensed consolidated statements of cash flows - nine months ended September, 2000 and 1999 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 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 15 Financial Data Schedule 17
2 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VidaMed, Inc. Condensed Consolidated Balance Sheets (In thousands)
September 30, 2000 December 31, 1999 -------------------- --------------------- (Unaudited) (*) Assets Current assets: Cash and cash equivalents $ 8,204 $ 2,748 Short term investments 1,507 - Accounts receivable, net 1,166 1,443 Inventories 460 415 Other current assets 493 531 -------------------- --------------------- Total current assets $ 11,830 $ 5,137 Property and equipment, net 2,202 2,017 Other assets, net 102 166 -------------------- --------------------- Total assets $ 14,134 $ 7,320 ==================== ===================== Liabilities and stockholders' equity Current liabilities: Accounts payable $ 758 $ 461 Accrued liabilities 2,118 2,558 Deferred revenue 108 272 Notes payable, current portion 1,656 1,394 -------------------- --------------------- Total current liabilities $ 4,640 $ 4,685 Notes payable, long-term portion 247 1,030 Stockholders' equity: Capital stock 115,123 101,725 Accumulated other comprehensive income 1,507 - Accumulated deficit (107,383) (100,120) -------------------- --------------------- Total stockholders' equity 9,247 1,605 -------------------- --------------------- Total liabilities and stockholder's equity $ 14,134 $ 7,320 ==================== =====================
* The Balance Sheet at December 31, 1999 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. 3 VidaMed, Inc. Condensed Consolidated Statements of Operations (In thousands, except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ------------- ------------- ------------- ------------- Revenues $ 1,681 $ 1,487 $ 6,625 $ 3,749 Cost of products sold 785 579 2,445 2,059 ------------- ------------- ------------- ------------- Gross profit 896 908 4,180 1,690 Operating expenses: Research and development 875 683 2,481 2,238 Selling, general and administrative 2,903 2,934 9,147 8,847 ------------- ------------- ------------- ------------- Total operating expenses 3,778 3,617 11,628 11,085 ------------- ------------- ------------- ------------- Loss from operations (2,882) (2,709) (7,448) (9,395) Other income (expense), net (16) (60) 185 (16) ------------- ------------- ------------- ------------- Net loss $ (2,898) $ (2,769) $ (7,263) $(9,411) ============= ============= ============= ============= Basic and diluted net loss per share $ (0.10) $ (0.13) $ (0.24) $(0.46) ============= ============= ============= ============= Shares used in computing basic and diluted net loss per share 30,213 20,653 29,782 20,505 ============= ============= ============= =============
See accompanying notes. 4 VidaMed, Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Nine Months Ended September 30, 2000 1999 ------------- ------------- Cash flows from operating activities: Net loss $ (7,263) $ (9,411) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,351 939 Issuance of warrants for renewal of loan 87 - Amortization of deferred compensation 129 - Changes in current assets and liabilities: Accounts receivable 277 (580) Inventories (45) 167 Other current assets 67 282 Other assets 64 114 Accounts payable 297 (114) Accrued liabilities (234) (647) Deferred revenue (164) (132) ------------ ------------ Net cash used in operating activities (5,434) (9,382) ------------ ------------ Cash flows from investing activities: Expenditures for property and equipment (1,536) (323) Net cash used in investing activities (1,536) (323) Cash flows from financing activities: Principal payments under capital leases - (22) Principal payments of notes payable (521) (135) Net cash proceeds from issuance of common stock 12,947 1,848 ------------ ------------ Net cash provided by financing activities 12,426 1,691 ------------ ------------ Net increase (decrease) in cash and cash equivalents 5,456 (8,014 Cash and equivalents at the beginning of the period 2,748 9,384 ------------ ------------ Cash and equivalents at the end of the period $ 8,204 $ 1,370 ============ ============ Supplemental disclosure of cash flows information: Cash paid for interest $ 394 $ 226 ============ ============
See accompanying notes. 5 VIDAMED, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 (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 September 30, 2000, the statements of operations for the three months and nine months ended September 30, 2000 and 1999, and the statements of cash flows for the nine months ended September 30, 2000 and 1999, are unaudited but include all adjustments (consisting of normal recurring adjustments) that we consider necessary for a fair presentation of the financial position at such dates 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 our annual report on Form 10-K for the year ended December 31, 1999, 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 Basic net loss per share is computed using the weighted-average number of shares of common stock issued and 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. Because we have 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, 2000, we had 30,386,062 issued and outstanding shares of common stock, with options to purchase 4,118,351 shares of common stock outstanding under employee and director stock option plans, and warrants to purchase 3,001,571 shares of common stock outstanding. The options and warrants will be included in the calculation of net loss per share at such time as their 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 consist of the following (in thousands):
September 30, December 31, 2000 1999 ------------- ------------ Raw materials $ 126 $ 147 Work in process 12 39 Finished goods 322 229 ------------- ------------ $ 460 $ 415 ============= ============
6 4. Notes Payable In January 2000, we renewed our debt facility arrangement with Transamerica and in consideration of this renewal we issued a warrant to Transamerica to acquire an additional 77,320 shares of common stock for a purchase price of $1.94 per share. The warrant has a term of five years. Using the Black Scholes model, the fair value of the warrant was estimated to be $115,980 and is being amortized to interest expense over the life of the debt facility. 5. Reporting Comprehensive Income (Loss) We follow the Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (Statement 130). Statement 130 establishes new rules for reporting and displaying 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 nine months ended September 30, 1999, the total comprehensive loss was not materially different from the net loss. In August 1994, we received common stock in a private company pursuant to a cross licensing agreement. At the time of the agreement, the value of the common stock was assigned a value equal to our basis in the licensed technology, essentially zero. In July 2000, the private company successfully completed an initial public offering of its common stock. As a result, we are now accounting for the investment as an available-for-sale security and have recorded the security at its fair market value of $1,506,600 as of September 30, 2000. Unrealized gains and losses on this investment are recorded as a component of accumulated other comprehensive income (loss). Our ability to sell the common stock investment is restricted by a lockup period which expires in January 2001. During the nine months ended September 30, 2000,our total comprehensive loss was $5,756,400 compared to our net loss of $7,263,000. 6. Common Stock In January 2000, we sold 5,300,000 shares of common stock to Medtronic Asset Management, Inc. and 1,160,000 to existing shareholders at an issuance price of $1.73 per share, which represented a premium to the average closing price for the five days preceding the sale. The investors, including Medtronic, received warrants to purchase 1,938,000 shares of common stock at an exercise price of $1.80 per share. The warrants have a term of five years. In February 2000, we sold 106,648 shares of common stock to MC Medical, Inc. at a per share price of $2.81, which was the average purchase price five days preceding the sale. During the nine months ended September 30, 2000, we issued 78,272 shares of common stock on the exercise of outstanding warrants, an additional 33,713 shares of common stock to existing shareholders, 42,334 shares of common stock in employment-related settlements and 703,484 shares of common stock under employee stock option and purchase plans. During this period, 629,413 warrants which were issued in connection with our September 1997 private placement expired. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 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, 2000 and 1999. We also discuss certain factors that may affect our prospective financial condition and results of operations. This section should be read in conjunction with our condensed consolidated financial statements and related notes in Item 1 of this report and our annual report on Form 10-K for the year ended December 31, 1999, which has been filed with the Securities and Exchange Commission and is available from VidaMed at no charge. "Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995 This report contains, in addition to historical information, forward-looking statements that are based on current expectations and beliefs, but involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Some of the factors that could cause actual results to differ are discussed below in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the "Risk Factors" discussion that follows. You should also refer to the risk factors described in our annual report on Form 10-K for the year ended December 31, 1999, which has been filed with the Securities and Exchange Commission and is available from VidaMed at no charge. The forward- looking statements included in this report are made only as of the date hereof, and we undertake no obligation to publicly revise or update them to reflect subsequent events or circumstances. Overview Since its founding in 1992, VidaMed has been engaged in the design, development and marketing of urological systems, which are 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 we received FDA clearance. In 1997, we began marketing and selling the TUNA system 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 procedures would be delayed until at least mid-2000 due to Y2K 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 throughout 1999, 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. Under this model, an entire TUNA system is placed in a hospital at no charge to the hospital. Revenue is generated by selling a single- use component needed for each TUNA procedure performed. Once the procedure is performed the single-use component is discarded and a new component must be purchased for the next procedure. As of September 30, 2000, 49 states have approved hospital-based Medicare reimbursement coverage for the TUNA procedure. Until August 1, 2000, Medicare had reimbursed hospitals on a 8 reasonable cost basis for each TUNA procedure performed. Under the reasonable cost basis method of reimbursement, we charged the hospital a fee-per-use charge of approximately $2,600 for each TUNA procedure performed, and combined with other direct and indirect overhead costs the hospital incurs in conducting the TUNA procedure, the hospital was reimbursed by Medicare for these reasonable costs. In addition to the hospital, the urologist that performs the TUNA procedure was reimbursed by Medicare approximately $600 per procedure. Effective August 1, 2000, the United States Health Care Finance Administration (commonly referred to as HCFA), which administers Medicare, replaced the reasonable cost basis of 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 depending on a wage index factor for each hospital. The urologist performing the TUNA procedure continues to be reimbursed approximately $600 per procedure. With this change in reimbursement, we continue to market and sell the TUNA procedure to hospitals on a fee-per-use basis, but our current fee-per-use pricing has been reduced. On July 17, 2000, HCFA published new Medicare payment rates and a schedule for implementing minimally invasive heat therapies for the treatment of BPH in the urologist's office. Coverage for the TUNA procedure is included in the ruling, which was published in the Federal Register and proposed to become effective January 1, 2001. The proposed reimbursement rate (inclusive of the physician's fee) for the TUNA procedure in the urologist's office is estimated to be $2,315 in 2001 and $2,866 beginning January 1, 2002. With the recent changes and proposed changes in the rate and site of care for which Medicare will reimburse the TUNA procedure, our business is in a period of transition. Our business strategy will be to continue to support our hospital- based business while making the preparations necessary to service and accelerate our volume of business in urologists' offices. In both settings, we will continue to focus our marketing and sales efforts on clinical leadership, patient awareness and physician advocacy of the TUNA procedure. Results of Operations Net revenue for the three months ended September 30, 2000 was $1,681,000. This represents an increase of $194,000, or 13%, from $1,487,000, in the three months ended September 30, 1999. The increase was due primarily to increased procedure volume as a result of our fee-per-use program offset by the per procedure price reduction which became effective on August 1, 2000, attributable to the implementation of HCFA's new prospective payment system. Net revenue for the nine months ended September 30, 2000 increased 77% to $6,625,000, from $3,749,000 in the same period of 1999. The increase in revenues during the nine months ended September 30, 2000 compared to the same period of 1999 was due to the expansion of our sales and marketing organization and the continued acceptance of our fee-per-use program. Cost of product sold for the three months ended September 30, 2000 was $785,000, an increase of 36% or $206,000 from $579,000 for the three months ended September 30, 1999. The increase was due to higher product sales and increased TUNA generator amortization costs resulting from the placement of more fee-per- use generators in hospitals. For the nine months ended September 30, 2000, cost of product sold was $2,445,000, an increase of 19% from $2,058,000 in the nine months of 1999. This increase was generally due to higher product sales. 9 Gross margin expressed as a percentage of sales for the three months ended September 30, 2000 was 53%, down from 61% for the three months ended September 30, 1999. This decrease was caused by reduced prices resulting from the prospective payment system established by HCFA. Gross margin expressed as a percentage of sales for the nine months ended September 30, 2000 was 63%, up from 45% for the same period in 1999. Gross margin improvement for the nine months ended September 30, 2000, were due primarily to the increased volume of our fee-per-use program. Research and development (R&D) expenses during the three and nine months ended September 30, 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 increased 28% to $875,000 in the three months ended September 30, 2000 from $683,000 in the three months ended September 30, 1999. For the nine months ended September 30, 2000, R&D expenses increased 11% to $2,481,000 from $2,238,000 in the first nine months of 1999. The increases for the three months and nine months ending September 30, 2000, over the same periods in 1999, are primarily due to accelerated R&D and clinical trial expenditures in the development of faster and easier to use office products. Selling, general and administrative (SG&A) expenses decreased 1% to $2,903,000 in the three months ended September 30, 2000 from $2,934,000 in the three months ended September 30, 1999. For the nine months ended September 30, 2000, SG&A expenses increased $300,000, or 3%, from $8,847,000 in 1999 to $9,147,000 in 2000. This increase was primarily due to an increase in sales and marketing personnel and related payroll and other expenses over the comparable nine months. Other income (expense), net for the three months ended September 30, 2000 decreased to ($16,000) compared to ($60,000) for the same period in the prior year. This decrease was due to increased interest income as a result of a higher average outstanding balance of cash and investments. For the nine months ended September 30, 2000, other income (expense),net was $185,000 compared to a net expense of ($16,000) for the nine months ended September 30, 1999. This decrease was due to increased interest income as a result of a higher average outstanding balance of cash and investments. Other income (expense), net is primarily composed of interest income and expense. The increase in interest income was primarily attributable to a higher average outstanding balance of cash and investments resulting from the sale of our common stock to investors in January and February 2000. Total comprehensive loss during the three months ended September 30, 2000, was $1,391,400 compared to a net loss of $2,898,000. Total comprehensive loss during the nine months ended September 30,2000, was $5,756,400 compared to a net loss of $7,263,000. In August 1994, we received common stock in Rita Medical Systems, Inc. ("Rita"), a private company, pursuant to a cross licensing agreement. At the time of the agreement the value of the common stock was assigned a value equal to our basis in the licensed technology, essentially zero. In July 2000, Rita successfully completed an initial public offering of common stock. As a result, we are now accounting for the investment as an available-for-sale security of 135,000 common shares of Rita stock and have recorded the security at its fair market value of $1,506,600 as of September 30, 2000. Unrealized gains and losses on this investment are recorded as a component of accumulated other comprehensive income (loss). Our ability to sell the common stock investment is restricted by a lockup period which expires in January 2001. 10 Liquidity and Capital Resources For the nine months ended September 30, 2000, our cash and cash equivalents, and available-for-sale investments increased by $7.0 million to $9.7 million, compared to $2.7 million at December 31, 1999. Our operating and investing activities during this period were primarily financed from $12.9 million received from the sale and issuance of common stock and warrants, less $0.5 million used to reduce debt. We used $5.4 million in operating activities, primarily as a result of our net loss, and purchased $1.5 million of property and equipment. Available-for-sale investments increased by $1.5 million related to Rita common stock acquired pursuant to a 1994 cross licensing agreement. We have a line of credit 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. We may be able to obtain additional debt financing from Transamerica, but we cannot give any assurance that we will be able to do so or that the terms of the financing would be favorable. Collaborative arrangements, if necessary to raise additional funds, may require us to relinquish rights to certain of our technologies or products. Our failure to raise capital when needed could have a material adverse effect on our business, financial condition and results of operations. As of September 30, 2000, we had borrowed approximately $798,000 against the Transamerica revolving accounts receivable-based line at a rate of 10.5% per year. $1,171,000 remained outstanding on the equipment term loan, as of September 30, 2000. While management believes that the cash balances, plus revenues from the fee- per-use program will be sufficient to fund operations at current levels through the end of fiscal 2000, additional financing may be required to fund operations at current levels through the end of fiscal 2001. If required, management will pursue, and believes it can obtain, financing to fund operations at current levels in 2001. Additional financing, however, may not be available, or if available, may not be available on favorable terms. If additional financing is unavailable, management believes that it may be able to fund operations through fiscal 2001 by scaling back research and development, clinical trials, expansion into the office-based market and other areas of discretionary spending. Reductions in those areas could have a material adverse effect on our long-term opportunities to develop new and competitive products, obtain necessary governmental approvals of those products and develop additional markets for our products. 11 Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement 133), which is required to be adopted in the first quarter of the year ending December 31, 2001. Management does not anticipate that the adoption of Statement 133 will have a significant effect on our results of operations or our financial position. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No.101 (SAB 101). SAB 101 summarizes certain areas of the views of the SEC staff in applying generally accepted accounting principles to revenue recognition in financial statements. We believe that our current revenue recognition principles comply with SAB 101. In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting For Certain Transactions involving Stock Compensation" (FIN 44), which contains rules designed to clarify the application of APB 25. FIN 44 was effective on July 1, 2000, and we have adopted it. We believe the impact of adopting FIN 44 was not material to the operating results and financial position of the Company. Risk Factors We Have Experienced a History of Losses As of September 30, 2000, we had incurred operating losses of approximately $107.4 million since our inception in 1992. We expect to continue to incur operating losses in the near future as we expend funds on sales and marketing activities, clinical trials in support of reimbursement approvals and research and development. Our future profitability depends on numerous factors, including: . our success in achieving market acceptance of the TUNA procedure; . our success in obtaining and maintaining necessary regulatory clearances; . the extent to which Medicare and other healthcare payors approve reimbursement of the costs of TUNA procedures performed in hospitals, urologists' offices and ambulatory surgery centers; . our success in expanding our sales and marketing efforts to sell the TUNA procedure into the urologist office; and . the amount of reimbursement provided and the effects of the proposed in- office reimbursement rates and prospective payment system on our future revenues. Our business, results of operations and financial condition are subject to the following 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, 1999. 12 Our Future Revenues Are Subject to Uncertainties Regarding Healthcare Reimbursement and Reform The continuing efforts of government and insurance companies, health maintenance organizations and other payors of healthcare costs to contain or reduce costs of health care may affect our future revenues and profitability. In the United States, given recent federal and state government initiatives directed at lowering the total cost of health care, the U.S. Congress and state legislatures will likely continue to focus on healthcare reform including the reform of Medicare and Medicaid systems, and on the cost of medical products and services. Our ability to commercialize the TUNA procedure successfully will depend in part on the extent to which the users of our products obtain appropriate reimbursement for the cost of the TUNA procedure. Third-party payors are increasingly challenging the prices charged for medical products and services. Also, legislative proposals to reform health care or reduce government insurance programs, coupled with the trend toward managed health care in the United States and the concurrent growth of organizations such as HMOs, which organizations could control or significantly influence the purchase of healthcare services and products, may all result in lower prices for or rejection of our products. For example, effective August 1, 2000, the United States Health Care Finance Administration (commonly referred to as HCFA), which administers Medicare, replaced the reasonable cost basis of reimbursement for outpatient hospital- based procedures, like the TUNA, with a new fixed rate or "prospective payment system". Under this new method of reimbursement, a hospital will receive a fixed reimbursement of approximately $1,875 for each TUNA procedure performed in its facility, although this rate can be higher or lower depending on a wage index factor for each hospital. The urologist performing the TUNA procedure will continue to be reimbursed approximately $600 per procedure. In addition, on July 17, 2000, HCFA published new Medicare payment rates and a schedule for implementing minimally invasive heat therapies for the treatment of BPH in the urologist's office. Coverage for the TUNA procedure is included in the ruling, which was published in the Federal Register and proposed to become effective January 1, 2001. The proposed reimbursement rate (inclusive of the physician's fee) for the TUNA procedure in the urologist's office is estimated to be $2,315 in 2001 and $2,866 beginning January 1, 2002. These cost containment measures that healthcare payors and providers are instituting and the effect of future health care reform could cause reductions in the amount of reimbursement available to users of our products and could materially adversely affect our ability to operate profitably. The TUNA Procedure is a New Therapy and May Not Be Accepted by Physicians, Patients and Healthcare Payors Which Would Severely Harm our Business Physicians will not recommend the TUNA procedure unless they conclude, based on clinical data and other factors, that it is an effective alternative to other methods of enlarged prostate treatment, including more established methods. In particular, physicians may elect not to recommend the TUNA procedure until the long term duration of the relief provided by the procedure has been established. Clinical data for assessing the durability of relief provided by the TUNA therapy in the United States does not extend beyond five years Some physicians may consider five years of clinical data to be sufficient evidence of durability and others may not. As time passes since the first TUNA procedures were performed, and as more procedures are performed, the clinical data will continue to be developed. We are in the process of conducting multi-year patient follow- up studies to assess the durability of the relief provided by the TUNA procedure. We cannot assure you that these studies will support the durability of the relief provided by the TUNA procedure. 13 Even if the clinical efficacy of the TUNA procedure is established, physicians may elect not to recommend the procedure unless acceptable reimbursement from healthcare payors is available. Healthcare payor acceptance of the TUNA procedure will require evidence of its cost effectiveness compared with other therapies for an enlarged prostate, which will depend in large part on the duration of the relief provided by the TUNA procedure. Patient acceptance of the procedure will depend in part on physician recommendations and on other factors, including the degree of invasiveness and the rate and severity of complications associated with the procedure compared with other therapies. Patient acceptance of the TUNA procedure will also depend on the ability of physicians to educate these patients on their treatment choices. Our Success is Dependent on the Sale of Our Only Product, the TUNA System All of our revenues are derived from sales of our TUNA system. The VidaMed 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 because we rely on our TUNA system for all of our revenue and have no other products. Possible problems include, but are not necessarily limited to, malfunctions, failure to comply with or changes in governmental regulations, product recalls, product obsolescence, injunctions resulting from litigation, inability to protect our intellectual property, invalidity of our patents or shortages of one or more of the components of the system. Additionally, 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. We Rely on Contract Manufacturers for the Majority of Our Manufacturing Needs We outsource the manufacture of the disposable cartridge and most of the other components of the TUNA system, and we rely on contract manufacturers to supply our components in sufficient quantities, in compliance with regulatory requirements and at an acceptable cost. We purchase components through purchase orders rather than long-term supply agreements. 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. The disruption or termination of the supply of components for our TUNA system could cause a significant increase in the costs of these components or an inability to meet demand for our products. Furthermore, if we are required to change the manufacturer of a key component of our TUNA system, we may be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and other applicable regulations and guidelines. The delays associated with verification and other delays in production could adversely affect the success of our fee- per-use program and our future revenues. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE 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. 14 PART II: OTHER INFORMATION ITEM 5. OTHER INFORMATION Management Changes As of October 13, 2000, Diane M. Anderson resigned as Vice President of Sales and Marketing. Amendment to Rights Agreement Effective as of January 4, 2000, we amended the definition of "acquiring person" in our rights agreement to increase the beneficial ownership percentage trigger from 20% to 25% with respect to Medtronic Asset Management, Inc. or any of its affiliates or associates. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Amendment to Rights Agreement 27.1 Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended September 30, 2000. SIGNATURES 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: October 30, 2000 By: /s/ Randy D. Lindholm ------------------ ------------------------------------ Randy D. Lindholm President, Chief Executive Officer Date: October 30, 2000 By: /s/ John F. Howe ------------------ ------------------------------------ John F. Howe VP Finance, Chief Financial Officer (Principal Financial and Accounting Officer) 15 EXHIBIT INDEX Exhibit Number Description - -------------- ----------- 10.1 Amendment No. 1 to Preferred Shares Rights Agreement, effective January 3, 2000 27.1 Financial Data Schedule 16 EX-10.1 2 0002.txt AMENDMENT TO PREFERRED SHARED RIGHTS AGREEMENT EXHIBIT 10.1 AMENDMENT NO. 1 TO PREFERRED SHARES RIGHTS AGREEMENT This Amendment No. 1 to Preferred Shares Rights Agreement (this "Amendment") is between VidaMed, Inc., a Delaware corporation (the "Company"), and American Securities Transfer & Trust, Inc. (the "Rights Agent"), effective as of January 3, 2000. A. The Company and the Rights Agent have entered into a Preferred Shares Rights Agreement, dated as of January 27, 1997 (the "Rights Agreement"). Capitalized terms used and not otherwise defined herein will have the meaning given in the Rights Agreement. B. Section 27 of the Rights Agreement provides that, prior to the Distribution Date, the Company may amend the Rights Agreement, including the definition of an Acquiring Person as set forth in Section 1(a) thereof, and that, upon any such amendment, the Rights Agent shall amend the Rights Agreement as the Company directs. C. The Company desires, and hereby directs the Rights Agent, to amend the definition of an Acquiring Person, and the Rights Agent agrees to such amendment, on the terms and conditions hereof. NOW, THEREFORE, the Company and the Rights Agent agree as follows: 1. Representations and Warranties. The Company represents and warrants to the ------------------------------ Rights Agent that: (a) to the best knowledge of the Company, the Distribution Date has not occurred prior to the effective date hereof; and (b) this Amendment is authorized pursuant to the requirements of Section 27 of the Rights Agreement. 2. Amendment of Section 1(a). Section 1(a) of the Rights Agreement is hereby ------------------------- amended by deleting Section 1(a) in its entirety and substituting the following therefor: (a) "Acquiring Person" shall mean any Person who or which, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of 20% or more of the Common Shares then outstanding (the "Acquiring Person Triggering Amount"), but shall not include the Company, any Subsidiary of the Company or any employee benefit plan of the Company or of any Subsidiary of the Company, or any entity holding Common Shares for or pursuant to the terms of any such plan. Notwithstanding the foregoing, no Person shall be deemed to be an Acquiring Person as the result of an acquisition of Common Shares by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to the Acquiring Person Triggering Amount; provided, however, that if a Person shall become the Beneficial Owner of the Acquiring Person Triggering Amount by reason of share purchases by the Company and shall, after such share purchases by the Company, become the Beneficial Owner of any additional Common Shares of the Company (other than pursuant to a dividend or distribution paid or made by the Company on the outstanding Common Shares in Common Shares or pursuant to a split or subdivision of the outstanding Common Shares), then such Person shall be deemed to be an Acquiring Person unless upon becoming the Beneficial Owner of such additional Common Shares of the Company such Person does not beneficially own the Acquiring Person Triggering Amount. Notwithstanding the foregoing, (i) if a majority of the Continuing Directors then in office determines in good faith that a Person who would otherwise be an "Acquiring Person," as defined pursuant to the provisions of this paragraph (a), has become such inadvertently (including, without limitation, because (A) such Person was unaware that it beneficially owned a percentage of the Common Shares that would otherwise cause such Person to be an "Acquiring Person," as defined pursuant to the provisions of this paragraph (a), or (B) such Person was aware of the extent of the Common Shares it beneficially owned but had no actual knowledge of the consequences of such beneficial ownership under this Agreement) and without any intention of changing or influencing control of the Company, and if such Person divested or divests as promptly as practicable a sufficient number of Common Shares so that such Person would no longer be an "Acquiring Person," as defined pursuant to the provisions of this paragraph (a), then such Person shall not be deemed to be or to have become an "Acquiring Person" for any purposes of this Agreement; and (ii) if, as of the date hereof, any Person is the Beneficial Owner of 20% or more of the Common Shares outstanding, such Person shall not be or become an "Acquiring Person," as defined pursuant to the provisions of this paragraph (a), unless and until such time as such Person shall become the Beneficial Owner of additional Common Shares (other than pursuant to a dividend or distribution paid or made by the Company on the outstanding Common Shares in Common Shares or pursuant to a split or subdivision of the outstanding Common Shares), unless, upon becoming the Beneficial Owner of such additional Common Shares, such Person is not then the Beneficial Owner of the Acquiring Person Trigger Amount. For purposes of this definition of "Acquiring Person", the Acquiring Person Trigger Amount for Medtronic Asset Management, Inc. or any of its Affiliates or Associates (collectively, the "Medtronic Group") shall be 25.0% or more of the Common Shares then outstanding (the "Medtronic Trigger Amount") which shall be applicable if any member of the Medtronic Group has, or, together with any Affiliates and Associates of Medtronic, shall be the Beneficial Owner of, such Medtronic Trigger Amount. 3. No Other Changes. Except as specifically amended by this Amendment, all ---------------- other provisions of the Rights Agreement shall remain in full force and effect. This Amendment shall not constitute or operate as a waiver of, or estoppel with respect to, any provisions of the Rights Agreement by any party hereto. 4. Counterparts. This Amendment may be executed in one or more counterparts, ------------ each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. The Company and the Rights Agent have caused this Amendment to be duly executed on their behalf by their respective duly authorized representatives as of the date first written above. 19 VIDAMED, INC. AMERICAN SECURITIES TRANSFER & TRUST, INC. By: /s/ Randy D. Lindholm By: /s/ Laura Sasneros ----------------------------------- ------------------------------- Its: President, Chief Executive Officer Its: Vice President, Trust Officer ----------------------------------- ------------------------------- AMERICAN SECURITIES TRANSFER & TRUST, INC. By: Kellie Guinn ------------------------------- 20 EX-27.1 3 0003.txt FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 8,204 1,507 1,458 292 460 11,830 9,729 7,527 14,134 4,640 1,903 0 0 30 9,217 14,134 6,625 6,625 2,445 2,445 185 16 367 (7,263) 0 (7,263) 0 0 0 (7,263) (0.24) (0.24)
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