<PAGE>
As filed with the Securities and Exchange Commission on July 19, 2000
Registration No. 333-36160
-------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
AMENDMENT NO. 4
TO
Form S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------------
RITA MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 3845 94-3199149
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
967 N. Shoreline Blvd.
Mountain View, CA 94043
(650) 390-8500
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------
Barry N. Cheskin
Chief Executive Officer
RITA Medical Systems, Inc.
967 N. Shoreline Blvd.
Mountain View, CA 94043
(650) 390-8500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------
Copies to:
<TABLE>
<S> <C>
Mark B. Weeks John W. White
Brooke Campbell CRAVATH, SWAINE & MOORE
Ughetta Manzone Worldwide Plaza
VENTURE LAW GROUP 825 Eighth Avenue
A Professional Corporation New York, New York 10019
2800 Sand Hill Road
Menlo Park, California 94025
</TABLE>
------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell these securities and is not +
+soliciting an offer to buy these securities in any state where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 19, 2000
PROSPECTUS
3,400,000 Shares
[LOGO OF RITA MEDICAL SYSTEMS, INC.]
Common Stock
--------
We are selling 3,400,000 shares of our common stock. We have granted the
underwriters a 30-day option to purchase up to an additional 510,000 shares of
common stock to cover over-allotments.
This is the initial public offering of our common stock. We currently expect
that the initial public offering price will be between $11.00 and $13.00 per
share. We have applied to have our common stock included for quotation on the
Nasdaq National Market under the symbol "RITA."
--------
Investing in our common stock involves certain risks. See "Risk Factors"
beginning on page 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
--------
<TABLE>
<CAPTION>
Per Share Total
--------- ---------
<S> <C> <C>
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to RITA Medical Systems, Inc. (before expenses) $ $
</TABLE>
The underwriters expect to deliver the shares to purchasers on or about
, 2000.
--------
Salomon Smith Barney Robertson Stephens
, 2000.
<PAGE>
[INSIDE FRONT COVER]
Graphic 1: Pre-procedure CAT scan showing a liver tumor
Graphic 2: Post-procedure CAT scan showing destruction of the liver tumor
with our new StarBurst XL disposable device
Graphic 3: StarBurst XL disposable device entering tissue (undeployed)
Graphic 4: StarBurst XL disposable device deployed to 5 centimeters
Graphic 5: 5 centimeter diameter area of treated tissue.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 8
Information Regarding Forward-Looking Statements......................... 16
Use of Proceeds.......................................................... 17
Our Policy Regarding Dividends........................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 29
Management............................................................... 41
Relationships and Related Party Transactions............................. 50
Principal Stockholders................................................... 54
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 60
United States Tax Consequences to Non-United States Holders.............. 62
Underwriting............................................................. 64
Legal Matters............................................................ 66
Experts.................................................................. 66
Where You Can Find Additional Information................................ 67
Index to Financial Statements............................................ F-1
</TABLE>
Until , 2000, all dealers that buy, sell or trade our common
stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information you should consider before
buying shares in this offering. Therefore, you should read this entire
prospectus carefully, including the risks of purchasing our common stock
discussed under the "Risk Factors" section and our financial statements and the
related notes.
Our Company
We are a medical device company that develops, manufactures and markets
innovative products to treat patients with solid cancerous or benign tumors.
Our proprietary system uses radiofrequency energy to heat tissue to a high
enough temperature to ablate it, or cause cell death. The RITA system includes
radiofrequency generators and a family of disposable needle electrode devices
which deliver controlled thermal energy to the targeted tissue. We have
received regulatory clearance for sale in major markets worldwide for the
ablation of soft tissue. In addition to soft tissue, our system is specifically
cleared by the FDA for unresectable liver lesions, which are lesions which
cannot be treated surgically.
We currently sell the RITA system for the ablation of unresectable liver
tumors or lesions. We believe our system offers a viable option to patients
with this condition who previously had few effective alternatives. Since the
launch of our system, we have sold more than 10,000 disposable devices.
We are currently focused on addressing the liver cancer market. We estimate
that the worldwide market opportunity for the radiofrequency ablation of
unresectable liver cancer is approximately $500 million annually. In addition
to liver cancer, we believe that our minimally invasive technology may in the
future be applied to the treatment of other types of cancerous or benign
tumors, including tumors of the lung, bone, breast, prostate and kidney. We
believe the market opportunity for these additional applications may exceed $1
billion annually.
The RITA system offers physicians and patients an effective minimally
invasive treatment option with few side effects or complications. Our products
can be used in an outpatient procedure that requires only local anesthesia, and
patients are typically sent home the same day with a small bandage over the
entry site. Patients can also be treated in a laparoscopic procedure, which is
a procedure in which surgical instruments are inserted into the body through a
small incision in the abdomen, and are generally sent home the next day.
We offer the only radiofrequency ablation products to our target market that
provide tissue temperature feedback throughout the targeted tissue. We believe
our system has the potential to provide a more effective ablation than
competing technologies by providing this thermal feedback during the procedure.
The Opportunity
Every year cancer afflicts millions of people worldwide. While our current
focus is on patients with liver cancer, we believe that in the future, our
technology will be applied to other patients with cancer. Liver cancer is one
of the most prevalent and lethal forms of cancer in the world. It is estimated
to afflict more than one million new patients worldwide each year.
Because of the lack of effective treatment options currently available for
these patients, 90 percent of them will die within five years. We believe our
system offers patients whose cancer originated in the liver and patients whose
cancer has spread from other organs and is now confined to the liver, an
effective treatment alternative because it destroys their liver tumors.
Surgery is generally considered the "gold standard" treatment option to
address liver tumors; however, it is estimated that 70 percent of liver cancer
patients are not candidates for surgery. Alternative treatment options include
chemotherapy, cryosurgery, which involves freezing tumors, percutaneous ethanol
injection, which involves injecting tumors with alcohol, and radiation therapy.
Unfortunately, many of these alternative therapies are ineffective and are
generally associated with significant side effects, and some of them can cause
death.
4
<PAGE>
Benefits of Our Approach
The benefits of our system include:
. Effective Treatment Option. Our system offers liver cancer patients who
previously had few treatment options an effective alternative. Our
system may in the future offer patients with other types of tumors a
better treatment option.
. Minimally Invasive Procedure. Compared to existing alternatives, our
procedure is minimally invasive, may be cost effective and can result in
reduced hospital stays.
. Array Design Provides Predictable Results. Our array design which is a
curved set of electrodes in the shape of a fountain at the end of our
disposable device enables the physician to predictably ablate large
volumes of targeted tissue.
. Temperature Feedback Provides Procedural Control. Our dynamic, real-time
temperature feedback allows physicians to know they have achieved target
temperatures. Additionally, temperature feedback provides post-ablation
confirmation that the necessary temperature has been reached for the
destruction of tissue.
. Repeat Treatments Possible. Because of the minimally invasive nature of
our procedure, patients treated with our system often can be retreated.
Retreatment is frequently necessary because of the recurrent nature of
cancer.
. Broadly Applicable Technology. Clinical experience in the treatment of
liver tumors and feasibility studies in other organs indicate that our
technology may in the future be applied to the ablative treatment of
solid tumors in the lung, bone, breast, prostate and kidney.
------------
We were incorporated in California in January 1994 under the name ZoMed
Incorporated. We changed our name to RITA Medical Systems, Inc. in October
1996. Prior to the effectiveness of this registration statement, we will
reincorporate in Delaware. Our principal offices are located at 967 North
Shoreline Boulevard, Mountain View, California 94043, and our telephone number
is (650) 390-8500.
5
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered.......................... 3,400,000 shares
Common stock outstanding after this offering.. 13,538,948 shares
Use of proceeds............................... To fund business development,
such as research and
development, clinical research
and sales and marketing, to
provide working capital and for
general corporate purposes.
Proposed Nasdaq National Market symbol........ "RITA"
</TABLE>
Unless otherwise indicated, all information in this prospectus:
. assumes no exercise of the underwriters' option to purchase up to 510,000
additional shares of common stock to cover over-allotments;
. reflects a three-for-five reverse split of our stock that will be
effected prior to completion of the offering;
. reflects the conversion of each outstanding share of convertible
preferred stock into 8,934,628 shares of common stock concurrently with
the completion of this offering;
. assumes our reincorporation into Delaware prior to completion of this
offering; and
. assumes the filing of our amended and restated certificate of
incorporation concurrently with the completion of this offering.
The number of shares of common stock to be outstanding immediately after the
offering:
. is based upon 10,138,948 shares of common stock outstanding as of March
31, 2000 assuming conversion of all convertible preferred stock;
. does not take into account 1,855,616 shares of common stock issuable upon
the exercise of options outstanding as of March 31, 2000, at a weighted
average exercise price of $1.01 per share;
. does not take into account 253,042 shares of common stock issuable upon
the exercise of warrants outstanding as of March 31, 2000, at a weighted
average exercise price of $4.66 per share; and
. does not take into account 293,900 shares available for future issuance
under our 1994 equity incentive plan, as of March 31, 2000.
RITA(R) and StarBurst(TM) are our trademarks.
6
<PAGE>
SUMMARY FINANCIAL DATA
The following table sets forth our summary financial data. You should read
this information together with the financial statements and notes thereto
appearing elsewhere in this prospectus and the information under "Selected
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
Three Months ended
Years Ended December 31, March 31,
---------------------------- --------------------
1997 1998 1999 1999 2000
-------- -------- -------- --------- ---------
(in thousands, except (unaudited)
per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Sales...................... $ 220 $ 1,137 $ 4,629 $ 837 $ 1,841
Cost of goods sold......... 589 1,523 2,994 690 1,182
-------- -------- -------- --------- ---------
Gross profit (loss)....... (369) (386) 1,635 147 659
-------- -------- -------- --------- ---------
Operating expenses:
Research and development.. 2,486 2,729 3,931 737 1,631
Selling, general and
administrative........... 2,829 3,606 5,452 1,338 2,641
-------- -------- -------- --------- ---------
Total operating
expenses................ 5,315 6,335 9,383 2,075 4,272
-------- -------- -------- --------- ---------
Loss from operations....... (5,684) (6,721) (7,748) (1,928) (3,613)
Interest and other income
(expense), net............ (176) (28) 238 70 35
-------- -------- -------- --------- ---------
Net loss................... $ (5,860) $ (6,749) $ (7,510) $(1,858) $(3,578)
======== ======== ======== ========= =========
Net loss per share, basic
and diluted............... $ (11.02) $ (10.10) $ (9.33) $ (2.39) $ (3.52)
======== ======== ======== ========= =========
Shares used in computing
net loss per share,
basic and diluted......... 532 668 805 779 1,017
Pro forma net loss per
share, basic and diluted.. $ (0.90) $ (0.36)
======== =========
Shares used in computing
pro forma net loss per
share, basic and diluted.. 8,355 9,951
</TABLE>
Pro forma basic and diluted net loss per share have been calculated assuming
the conversion of all outstanding shares of convertible preferred stock as of
March 31, 2000 into 8,934,628 shares of common stock as if the stock had been
converted immediately upon its issuance.
<TABLE>
<CAPTION>
As of March 31, 2000
-----------------------------
Pro Pro Forma
Actual Forma As Adjusted
-------- ------- -----------
Balance Sheet Data: (in thousands)
<S> <C> <C> <C>
Cash, cash equivalents and marketable
securities..................................... $ 12,009 $12,009 $48,753
Working capital................................. 11,999 11,999 48,743
Total assets.................................... 15,930 15,930 52,674
Long-term obligations, net of current portion... 3,325 3,325 3,325
Convertible preferred stock and preferred stock
warrants....................................... 38,515 -- --
Total stockholders' equity (deficit)............ (28,837) 9,678 46,422
</TABLE>
The pro forma balance sheet reflects the automatic conversion of outstanding
shares of convertible preferred stock as of March 31, 2000 into 8,934,628
shares of common stock. The pro forma as adjusted balance sheet reflects the
sale of 3,400,000 shares of common stock offered hereby at an assumed initial
public offering price of $12.00 after deducting estimated underwriting
discounts, commissions and offering expenses.
7
<PAGE>
RISK FACTORS
An investment in our common stock involves significant risks. You should
carefully consider the following risks described below and the other
information in this prospectus including our financial statements and related
notes before you decide to buy our common stock. The trading price of our
common stock could decline due to any of these risks, and you could lose all or
part of your investment.
Due to our dependence on the RITA system, failure to achieve market acceptance
in a timely manner could harm our business
Because all of our revenue comes from the sale of the RITA system, our
financial performance will depend upon physician adoption and patient awareness
of this system. If we are unable to convince physicians to use the RITA system,
we may not be able to generate revenues because we do not have alternative
products.
We have a history of losses, anticipate significant increases in our operating
expenses over the next several years and may never achieve profitability
We anticipate that our operating expenses will increase substantially in
absolute dollars for the foreseeable future as we expand our sales and
marketing, manufacturing, clinical research and product development efforts. To
become profitable, we must continue to increase our sales. If sales do not
continue to grow, we may not be able to achieve or maintain profitability in
the future. In particular, we incurred net losses of $6.7 million in 1998 and
$7.5 million in 1999. As of March 31, 2000, we had an accumulated deficit of
approximately $32.2 million.
We currently lack long-term data regarding the safety and efficacy of our
products and may find that long-term data does not support our short-term
clinical results
Our products are supported by an average clinical follow-up of between five
and 14 months in published clinical reports. If longer-term studies fail to
confirm the effectiveness of our products, our sales could decline. If longer-
term patient follow-up or clinical studies indicate that our procedures cause
unexpected, serious complications or other unforeseen negative effects, we
could be subject to significant liability. Further, because some of our data
has been produced in studies that were not randomized and/or included small
patient populations, our clinical data may not be reproduced in wider patient
populations. We are involved in two clinical studies using our system which are
expected to produce twelve month or longer follow-up data. Both studies are at
an early stage. We do not know when these studies will be completed or
published and we do not have preliminary data from either of these studies. If
the data produced is not favorable, our business could be harmed.
Because we face significant competition from companies with greater resources
than we have, we may be unable to compete effectively
The market for our products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants.
We compete directly with two companies: RadioTherapeutics Corporation, a
privately held company, and Radionics, Inc., a division of Tyco International,
a publicly traded company with substantial resources. Both RadioTherapeutics
and Radionics sell products that use radiofrequency energy to ablate soft
tissue. RadioTherapeutics has entered into a distribution arrangement with
Boston Scientific Corporation, a publicly traded company with substantially
greater resources than we have.
Alternative therapies could prove to be superior to the RITA system, and
physician adoption could be negatively affected
In addition to competing against other companies offering products which use
radiofrequency energy to ablate soft tissue, we also compete against companies
developing, manufacturing and marketing alternative
8
<PAGE>
therapies that address both cancerous and benign tumors. If these alternative
therapies prove to offer treatment options that are superior to our system,
physician adoption of our products could be negatively affected and our
revenues could decline.
We are currently involved in a patent interference action and a patent
opposition action involving RadioTherapeutics Corporation and if we do not
prevail in these actions, we may be unable to sell the RITA system
In July 1999, the United States Patent and Trademark Office declared an
interference involving us which was provoked by RadioTherapeutics Corporation,
a competitor of ours, in which the validity of a patent claim previously issued
to us is being called into question. The claim being questioned is one of a
number of issued patent claims that covers the curvature of the array at the
tip of our disposable devices. We believe that the inventor named in our patent
was the first to invent this subject matter. RadioTherapeutics believes they
invented this curvature first. In March 2000, RadioTherapeutics Corporation
filed an opposition to our European Patent No. 0777445. This patent also covers
the curvature of the array at the tip of our disposable devices. In this
opposition, the validity of our issued patent is being questioned. Final
resolution of these matters is not expected for several years.
Patent issues involve complex legal and factual issues. In the event we do
not prevail in the interference action, we could be prevented from selling the
RITA system unless we could, either obtain a license from RadioTherapeutics to
use the relevant patent or were able to modify our product. We may not be able
to modify the RITA system successfully, and we cannot be certain that any
modified system would achieve market acceptance or regulatory approval. If we
were unable to sell our system and unable to develop a commercially successful
alternative or obtain a license, to the relevant patent or patents on
commercially reasonable terms, our business could be materially harmed. If we
do not prevail in the opposition proceeding, we could lose our only currently
issued patent in Europe.
Patents and other proprietary rights provide uncertain protections, and we may
be unable to protect our intellectual property
Our success depends significantly on our ability to protect our proprietary
rights to the technologies used in our products, and yet we may be unable to do
so. A number of companies in our market, as well as universities and research
institutions, have issued patents and have filed patent applications which
relate to the use of radiofrequency energy to ablate soft tissue. Our pending
United States and foreign patent applications may not issue or may issue and be
subsequently successfully challenged by others and invalidated. In addition,
our pending patent applications include claims to material aspects of our
products that are not currently protected by issued patents. Both the patent
application process and the process of managing patent disputes can be time-
consuming and expensive.
Competitors may be able to design around our patents or develop products
which provide outcomes which are comparable to ours. In addition, the laws of
some foreign countries may not protect our intellectual property rights to the
same extent as do the laws of the United States. In the event a competitor
infringes upon our patent or other intellectual property rights, enforcing
those rights may be difficult and time consuming. Even if successful,
litigation to enforce our intellectual property rights or to defend our patents
against challenge could be extensive and time consuming and could divert our
management's attention. We may not have sufficient resources to enforce our
intellectual property rights or to defend our patents against a challenge.
In addition, confidentiality agreements executed by our employees,
consultants and advisors may not be enforceable or may not provide meaningful
protection for our trade secrets or other proprietary information in the event
of unauthorized use or disclosure.
9
<PAGE>
Because the medical device industry is characterized by competing intellectual
property, we may be sued for violating the intellectual property rights of
others
The medical device industry is characterized by a substantial amount of
litigation over patent and other intellectual property rights. Determining
whether a product infringes a patent involves complex legal and factual
issues, and the outcome of patent litigation actions is often uncertain. Our
competitors may assert that our products and the methods we employ in the use
of our products are covered by United States or foreign patents held by them.
However, we do not believe that we infringe any valid patent rights held by
others. In addition, because patent applications can take many years to issue,
there may be applications now pending of which we are unaware, which may later
result in issued patents which our products may infringe. There could also be
existing patents that one or more of our products may inadvertently be
infringing of which we are unaware. As the number of competitors in the market
for less invasive cancer treatment alternatives grows, and as the number of
patents issued in this area grows, the possibility of a patent infringement
claim against us increases.
To address patent infringement or other intellectual property claims, we
may have to enter into licensing agreements or agree to pay royalties at a
substantial cost to our business. We may be unable to obtain necessary
licenses. A valid claim against us, and our failure to license the technology
at issue, could prevent us from selling our products.
If we are sued for patent infringement, we could be prevented from selling our
products and our business could suffer
We are aware of the existence of patents held by competitors in our market
which could result in a patent lawsuit against us. In the event that we are
subject to a patent infringement lawsuit and if the relevant patents were
upheld as valid and enforceable and we were found to infringe, we could be
prevented from selling our products unless we could obtain a license or were
able to redesign the product to avoid infringement. If we were unable to
obtain a license or successfully redesign our system, we may be prevented from
selling our system and our business could suffer.
You may have a difficult time evaluating our company as an investment because
we have a limited operating history
You can only evaluate our business based on a limited operating history
because we began selling the RITA system in 1997. This short history may not
be adequate to enable you to fully assess our ability to achieve market
acceptance of our products and respond to competition.
Our dependence on international revenues, which accounted for a significant
portion of our 1999 revenues, could harm our business
Because our future profitability will depend in part on our ability to grow
product sales in international markets, we are exposed to risks specific to
business operations outside the United States. These risks include:
. obtaining reimbursement for procedures using our devices in some foreign
markets;
. the burden of complying with complex and changing foreign regulatory
requirements;
. longer accounts receivable collection time;
. significant currency fluctuations which could cause our distributors to
reduce the number of products they purchase from us because the cost of
our products to them could increase relative to the price they could
charge their customers;
. reduced protection of intellectual property rights in some foreign
countries; and
. contractual provisions governed by foreign laws.
10
<PAGE>
We are substantially dependent on two distributors in our international
markets, and if we lose either distributor or are unable to attract additional
distributors, our international and total revenues could decline
We are substantially dependent on a limited number of significant
distributors in our international markets, and if we lose these distributors
and fail to attract additional distributors, our international revenues could
decline. Nissho Iwai Corporation, which is our primary distributor in Asia,
accounted for 41 percent of our international revenues in fiscal 1999.
M.D.H.s.r.l. Forniture Ospedaliere, which is our distributor in Italy,
accounted for 41 percent of our revenues in fiscal 1998 and 14 percent of our
revenues for fiscal 1999. Because international revenues accounted for 64
percent of our total revenues for fiscal 1999 and these two distributors
represented 85 percent of that total, the loss of either distributor could
cause revenues to decline substantially. If we are unable to attract additional
international distributors, our international revenues may not grow.
Our relationships with third-party distributors could negatively affect our
sales
We sell our products in international markets through third-party
distributors over whom we have limited control, and, if they fail to adequately
support our products, our sales could decline. If we or our distributors
terminate our existing agreements, finding companies to replace them could be
an expensive and time-consuming process and sales could decrease during any
transition period.
Any failure to build and manage our direct sales organization may negatively
affect our revenues
We are currently building a direct sales force in the United States and if
we do not expand our sales force substantially over the next twelve months, we
may not achieve our revenue growth goals. There is intense competition for
skilled sales and marketing employees, especially for people who have
experience selling disposable devices and generators to the physicians in our
target market, and we may be unable to hire skilled individuals to sell our
products. Any inability to build our direct sales force could negatively impact
our growth.
We depend on key employees in a competitive market for skilled personnel and
without additional employees, we cannot grow or achieve profitability
We are highly dependent on the principal members of our management,
operations and research and development staff. Our future success will depend
in part on the continued service of these individuals and our ability to
identify, hire and retain additional personnel, including sales and marketing
staff. The market for qualified management personnel in Northern California,
where our offices are located, is extremely competitive and is expected to
continue to be highly competitive. Because the environment for good personnel
is so competitive, costs related to compensation may increase significantly. If
we are unable to attract and retain the personnel we need to support and grow
our business, our business will suffer.
If third-party payors do not reimburse health care providers for use of the
RITA system, purchases could be delayed and our revenues could decline
Physicians, hospitals and other health care providers may be reluctant to
purchase our products if they do not receive substantial reimbursement for the
cost of the procedures using our products from third-party payors, such as
Medicare, Medicaid and private health insurance plans. Procedures using our
products are currently reimbursed based on established general reimbursement
codes. Because there is no specific reimbursement code for procedures using the
RITA system, physicians need to submit a patient case history and data
supporting the applicability of our system to the patient's condition in order
to obtain reimbursement. Each payor then determines whether and to what extent
to reimburse for a medical procedure or product. Payors may refuse to provide
reimbursement for procedures covered by general codes because the applicability
of the code must be determined on a case-by-case basis. If a payor refuses to
reimburse the cost of our procedure under existing reimbursement codes, we
could be required to establish new specific codes. This process is time
consuming and
11
<PAGE>
costly and requires us to provide extensive supporting scientific, clinical and
cost-effectiveness data for our products to the American Medical Association.
Even if we were successful in establishing a new code, a payor still may not
reimburse adequately for the procedure or product. In addition, we believe the
advent of fixed payment schedules has made it difficult to receive
reimbursement for disposable products, even if the use of these products
improves clinical outcomes. Fixed payment schedules typically permit
reimbursement for a procedure rather than a device. If physicians believe that
our system will add cost to a procedure but will not add sufficient offsetting
economic or clinical benefits, physician adoption could be slowed.
We may be subject to costly and time-consuming product liability actions
We manufacture medical devices that are used on patients in both minimally
invasive and open surgical procedures and as a result, we may be subject to
product liability lawsuits. To date, we have not been subject to a product
liability claim; however, any product liability claim brought against us, with
or without merit, could result in the increase of our product liability
insurance rates or the inability to secure coverage in the future. In addition,
we could have to pay any amount awarded by a court in excess of policy limits.
Finally, even a meritless or unsuccessful product liability claim could be time
consuming and expensive to defend and could result in the diversion of
management's attention from managing our core business.
Any failure in our physician training efforts could result in lower than
expected product sales
It is critical to our sales effort to train a sufficient number of
physicians and to instruct them properly in the procedures which utilize our
products. We plan to establish formal physician training programs and will rely
on physicians to devote adequate time to understanding how our products should
be used. If physicians are not properly trained, they may misuse or
ineffectively use our products. This may result in unsatisfactory patient
outcomes, patient injury and related liability or negative publicity which
could have an adverse effect on our product sales.
If we fail to support our anticipated growth in operations, our business could
suffer
If we fail to execute our sales strategy and develop further our products,
our business could suffer. To manage anticipated growth in operations, we must
increase our quality assurance staff for both our generators and our disposable
devices and expand our manufacturing staff and facility for our disposable
devices. Our systems, procedures and controls may not be adequate to support
our expected growth in operations.
We have limited experience manufacturing our disposable devices in substantial
quantities, and if we are unable to hire sufficient additional personnel,
purchase additional equipment or are otherwise unable to meet customer demand
our business could suffer
To be successful, we must manufacture our products in substantial quantities
in compliance with regulatory requirements at acceptable costs. If we do not
succeed in manufacturing quantities of our disposable devices which meet
customer demand, we could lose customers and our business could suffer. At the
present time, we have limited manufacturing experience. Our manufacturing
operations are currently focused on the in-house assembly of our disposable
devices. As we increase our manufacturing volume and the number of product
designs for our disposable devices, the complexity of our manufacturing
processes will increase. Because our manufacturing operations are primarily
dependent upon manual assembly, if demand for our system increases we will need
to hire additional personnel may need to purchase additional equipment. If we
are unable to sufficiently staff our manufacturing operations or are otherwise
unable to meet customer demand for our products, our business could suffer.
We are dependent on one supplier which is the only source of a component that
we use in our disposable devices, and any disruption in the supply of this
component could negatively affect our revenues
Because there is only one supplier that provides us with a component that we
include in our disposable devices, a disruption in the supply of this component
could negatively affect revenues. This supplier is the only
12
<PAGE>
source of this component. If we were unable to remedy a disruption in supply of
this component within twelve months, we could be required to redesign the
handle of our disposable devices which could significantly impair our ability
to sell our products. In addition, a new or supplemental filing with applicable
regulatory authorities may require clearance prior to our marketing a product
containing new materials. This clearance process may take a substantial period
of time, and we may be unable to obtain necessary regulatory approvals for any
new material to be used in our products on a timely basis, if at all. This
could also create supply disruptions that could negatively affect our business.
We are dependent on third-party contractors for the supply of our generators,
and any failure to deliver generators to us could result in lower than expected
revenues
One of the generators we sell is currently manufactured according to our
specifications by one third-party supplier. There is only one other third-party
contractor who we have used who could readily assume this manufacturing
function. Our second-generation generator is produced by two third-party
suppliers. We have agreements with both of these suppliers. Any delay in
shipments of generators to us could result in our failure to ship generators to
customers and could negatively affect revenues.
Complying with the FDA and other domestic and international regulatory
authorities is an expensive and time-consuming process, and any failure to
comply could result in substantial penalties
We are subject to a host of federal, state, local and international
regulations regarding the manufacture and marketing of our products. In
particular, our failure to comply with FDA regulations could result in, among
other things, seizures or recalls of our products, an injunction, substantial
fines and/or criminal charges against us and our employees. The FDA's medical
device reporting regulations require us to report any incident in which our
products may have caused or contributed to a death or serious injury, or in
which our products malfunctioned in a way that would be likely to cause or
contribute to a death or serious injury if the malfunction recurred. As of
March 31, 2000, we had filed eight medical device reports with the FDA related
to skin burns caused by a ground pad primarily due to placement, one report
related to an arterial bleed caused by improper needle placement and one report
related to an abscess which resulted from the large volume of ablated tissue.
We believe that none of these incidents were attributed to a device
malfunction. None of these incidents resulted in permanent injury or death.
Sales of our products outside the United States are subject to foreign
regulatory requirements that vary from country to country. The time required to
obtain approvals from foreign countries may be longer than that required for
FDA approval or clearance, and requirements for foreign licensing may differ
from FDA requirements.
Product introductions or modifications may be delayed or canceled as a result
of the FDA regulatory process which could cause our revenues to be below
expectations
Unless we are exempt, before we can sell a new medical device in the United
States, we must obtain the appropriate FDA approval or clearance which can be a
lengthy and time-consuming process. To date, all of our products have received
clearances from the FDA through premarket notification under Section 510(k) of
the Federal Food, Drug and Cosmetic Act. However, if the FDA requires us to
submit a new premarket notification under Section 510(k) for modifications to
our existing products, or if the FDA requires us to go through a lengthier,
more rigorous examination than we had expected, our product introductions or
modifications could be delayed or canceled which could cause our revenues to be
below expectations. The FDA may determine that future products will require the
more costly, lengthy and uncertain premarket approval process. In addition,
modifications to medical device products cleared via the 510(k) process may
require a new 510(k) submission. We have made minor modifications to our
system. Using the guidelines established by the FDA, we have determined that
these modifications do not require us to file new 510(k) submissions. If the
FDA disagrees with our determinations, we may not be able to sell the RITA
system until the FDA has cleared new 510(k) submissions for these
modifications.
13
<PAGE>
In addition, we intend to request additional label indications, such as
approvals or clearances for the ablation of tumors in additional organs,
including lung, bone and breast, for our current products. The FDA may either
deny these requests outright, require additional extensive clinical data to
support any additional indications or impose limitations on the intended use of
any cleared product as a condition of approval or clearance. Therefore,
obtaining necessary approvals or clearances for these additional applications
could be an expensive and lengthy process.
If the public market fails to support our valuation, your investment in our
common stock could decline in value
After this offering, an active trading market in our stock might not develop
or continue. If you purchase shares of our common stock in this offering, you
will pay a price that was not established in a competitive market. Instead, you
will pay a price that we negotiated with our underwriters based upon an
assessment of the valuation of our stock. The public market may not agree with
or accept this valuation, in which case you may not be able to sell your shares
at or above the initial public offering price. The market price of our stock
may fluctuate for a number of reasons which are beyond our control. In
addition, the stock market in general has experienced extreme price and volume
fluctuations. The market prices of the common stock of companies in our sector
has been particularly volatile. These extreme fluctuations in the broader
public market for common stock could negatively affect our stock price.
We may incur significant costs related to a class action lawsuit due to the
likely volatility of our stock
Our stock price may fluctuate for a number of reasons including:
. our ability to successfully commercialize our products;
. announcements of technological or competitive developments;
. announcements regarding patent litigation or the issuance of patents to
us or our competitors;
. regulatory developments regarding us or our competitors;
. acquisitions or strategic alliances by us or our competitors;
. quarterly fluctuations in our results of operations;
. changes in estimates of our financial performance or changes in
recommendations by securities analysts; and
. general market conditions, particularly for companies with small market
capitalizations.
Securities class action litigation is often brought against a company after
a period of volatility in the market price of its stock. If our future
quarterly operating results are below the expectations of securities analysts
or investors, the price of our common stock would likely decline. Stock price
fluctuations may be exaggerated if the trading volume of our common stock is
low. Any securities litigation claims brought against us could result in
substantial expense and divert management's attention from our core business.
We may need to raise additional capital in the future which could result in
dilution to our stockholders
While we believe the proceeds from this offering will provide us with
adequate capital to fund operations for the next eighteen months, we may need
to raise additional funds prior to that time. We may seek to sell additional
equity or debt securities or to obtain an additional credit facility. The sale
of additional equity or convertible debt securities could result in additional
dilution to our stockholders. If additional funds are raised through the
issuance of debt securities, these securities could have rights that are senior
to holders of common stock and could contain covenants that would restrict our
operations. Any additional financing may not be available in amounts or on
terms acceptable to us, if at all.
14
<PAGE>
Our executive officers and directors own a large percentage of our voting stock
and could exert significant influence over matters requiring stockholder
approval after this offering
Immediately after this offering, our executive officers and directors, and
their respective affiliates, will own approximately 33 percent of our
outstanding common stock. Accordingly, these stockholders may, as a practical
matter, be able to exert significant influence over matters requiring approval
by our stockholders, including the election of directors and the approval of
mergers or other business combinations. This concentration of voting stock
could have the effect of delaying or preventing a change in control.
Our certificate of incorporation and Delaware law contain provisions that could
discourage a takeover which could prevent or delay a merger that stockholders
believe is favorable for the company
Our amended and restated certificate of incorporation and bylaws will
contain provisions that could delay or prevent a change in control of our
company. Some of these provisions:
. authorize the issuance of preferred stock which can be created and issued
by the board of directors without prior stockholder approval, commonly
referred to as "blank check" preferred stock, with rights senior to those
of common stock;
. provide for a classified board of directors; and
. prohibit stockholder action by written consent.
In addition, we are governed by the provisions of Section 203 of Delaware
General Corporate Law. These provisions may prohibit large stockholders, in
particular those owning fifteen percent or more of our outstanding voting
stock, from merging or combining with us. These and other provisions in our
amended and restated certificate of incorporation and bylaws and under Delaware
law could reduce the price that investors might be willing to pay for shares of
our common stock in the future and result in the market price being lower than
it would be without these provisions.
15
<PAGE>
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. The forward-looking
statements are contained principally in the sections entitled "Prospectus
Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." These statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performances or achievements expressed or implied by the forward-
looking statements. Forward-looking statements include, but are not limited to,
statements about:
. our estimates for future revenue and profitability;
. the progress of our research and development programs, including our
clinical research programs;
. the receipt of regulatory clearances and approvals;
. the mix of revenues between domestic and international sales;
. the mix of revenues between sales of our disposable products and
generators;
. our estimates regarding our capital requirements and our need for
additional financing; and
. the benefits to be derived from relationships with other companies,
including distributors.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements. These statements
reflect our current views with respect to future events and are based on
assumptions and subject to risks and uncertainties. Given these uncertainties,
you should not place undue reliance on these forward-looking statements. We
discuss many of these risks in this prospectus in greater detail under the
heading "Risk Factors." Also, these forward-looking statements represent our
estimates and assumptions only as of the date of this prospectus.
You should read this prospectus and the documents that we reference in this
prospectus completely and with the understanding that our actual future results
may be materially different from what we expect. We qualify all of our forward-
looking statements by these cautionary statements.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are
not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information provided by this
prospectus is accurate as of any date other than the date on the front of this
prospectus.
16
<PAGE>
USE OF PROCEEDS
We expect that we will receive net proceeds of approximately $36,744,000
from the sale of the 3,400,000 shares of common stock we are offering, based
on an assumed initial public offering price of $12.00 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses payable by us. If the underwriters exercise their over-allotment
option in full, we will receive net proceeds of approximately $42,435,600. We
currently intend to use the net proceeds of this offering as follows:
. approximately $25 million to fund business development, including our
research and development, clinical research and sales and marketing
efforts;
. approximately $5 million to provide working capital; and
. approximately $5 million for general corporate purposes.
In addition, we also may use a portion of the net proceeds of this offering
for the acquisition of complementary businesses, products or technologies.
While we evaluate these types of opportunities from time to time, there are
currently no agreements or negotiations with respect to any specific
transaction.
We have not yet determined all of our expected expenditures, and we cannot
estimate the amounts to be used for each purpose set forth above. Accordingly,
our management will have significant flexibility in applying the net proceeds
of this offering. Pending use of the net proceeds as described above, we
intend to invest the net proceeds of this offering in short-term, interest-
bearing, investment-grade securities.
OUR POLICY REGARDING DIVIDENDS
We have never declared or paid any cash dividends on our capital stock, and
we do not currently intend to pay any cash dividends on our common stock in
the foreseeable future. We expect to retain future earnings, if any, to fund
the development and growth of our business. Our board of directors will
determine future dividends, if any.
17
<PAGE>
CAPITALIZATION
The following table describes our capitalization as of March 31, 2000:
. on an actual basis;
. on a pro forma basis after giving effect to the automatic conversion of
all outstanding shares of convertible preferred stock into 8,934,628
shares of common stock; and
. on a pro forma as adjusted basis to reflect the sale of 3,400,000 shares
of common stock offered by us at an assumed initial public offering price
of $12.00 per share, after deducting the estimated underwriting
discounts, commissions and offering expenses.
You should read this table together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and the related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
and per share data)
<S> <C> <C> <C>
Long-term obligations, net of current portion.. $ 3,325 $ 3,325 $ 3,325
-------- -------- --------
Convertible preferred stock and warrants,
$0.001 par value: 15,165,774 shares
authorized, actual and pro forma; none
authorized, pro forma as adjusted; 8,579,581
shares issued and outstanding, actual; none
issued and outstanding, pro forma and pro
forma as adjusted............................. 38,515 -- --
-------- -------- --------
Stockholders' equity (deficit):
Preferred stock, $0.001 par value: no shares
authorized, actual or pro forma; 2,000,000
authorized, pro forma as adjusted; none
issued and outstanding, actual, pro forma and
pro forma as adjusted........................ -- -- --
Common stock, $0.001 par value: 30,000,000
shares authorized, actual and pro forma;
100,000,000 shares authorized, pro forma as
adjusted; 1,204,420 shares issued and
outstanding, actual; 10,138,948 shares issued
and outstanding, pro forma; 13,538,948 shares
issued and outstanding, pro forma as
adjusted..................................... 1 10 14
Additional paid-in capital.................... 10,034 48,540 85,280
Deferred stock-based compensation............. (6,421) (6,421) (6,421)
Stockholder note receivable................... (238) (238) (238)
Accumulated other comprehensive loss.......... (7) (7) (7)
Accumulated deficit........................... (32,206) (32,206) (32,206)
-------- -------- --------
Total stockholders' equity (deficit)....... (28,837) 9,678 46,422
-------- -------- --------
Total capitalization....................... $ 13,003 $ 13,003 $ 49,747
======== ======== ========
</TABLE>
The actual, pro forma and pro forma as adjusted information set forth in the
table excludes:
. 510,000 shares of common stock issuable upon the exercise of the
underwriters' over-allotment option;
. 1,855,616 shares of common stock issuable upon the exercise of stock
options outstanding, as of March 31, 2000, at a weighted average exercise
price of $1.01 per share;
. 253,042 shares of common stock issuable upon the exercise of warrants
outstanding, as of March 31, 2000, at a weighted average exercise price
of $4.66 per share; and
. 293,900 shares of common stock reserved for issuance under our 1994
equity incentive plan, as of March 31, 2000.
18
<PAGE>
DILUTION
Our net tangible book value as of March 31, 2000 was approximately $9.7
million, or $0.95 per share of common stock. Net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding assuming the
conversion of all shares of convertible preferred stock outstanding as of
March 31, 2000 into 8,934,628 shares of common stock. Net tangible book value
dilution per share represents the difference between the amount per share paid
by purchasers of shares of common stock in this offering and the net tangible
book value per share of common stock immediately after completion of this
offering on a pro forma as adjusted basis. After giving effect to the sale of
the 3,400,000 shares of common stock by us at an assumed initial public
offering price of $12.00 per share, and after deducting the underwriting
discounts and commissions and estimated offering expenses payable by us, our
pro forma net tangible book value as of March 31, 2000 would have been $46.4
million, or $3.43 per share of common stock. This represents an immediate
increase in net tangible book value of $2.48 per share of common stock to
existing common stockholders and an immediate dilution in pro forma net
tangible book value of $8.57 per share to new investors purchasing shares of
common stock in this offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $12.00
Net tangible book value per share before this offering...... $0.95
Increase in net tangible book value per share attributable
to this offering........................................... 2.48
-----
Pro forma net tangible book value per share after this
offering..................................................... 3.43
------
Dilution per share to new investors........................... $ 8.57
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 2000,
the number of shares of common stock purchased from us, the total consideration
paid and the average price per share paid by existing and new investors
purchasing shares of common stock in this offering, before deducting
underwriting discounts and commissions and offering expenses payable by us.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 10,138,948 75% $39,007,000 49% $ 3.85
New investors.......... 3,400,000 25 40,800,000 51 $12.00
---------- ----- ----------- -----
Total................ 13,538,948 100.0% $79,807,000 100.0%
========== ===== =========== =====
</TABLE>
The tables and calculations above assume no exercise of the underwriters'
over-allotment option to purchase up to an additional 510,000 shares of common
stock. If the underwriters' overallotment option is exercised in full, the
number of shares of common stock held by existing stockholders will be reduced
to 72% of the total number of shares of common stock outstanding after this
offering and the number of shares of common stock held by new investors will be
increased to 3,910,000, or 28% of the total number of shares of common stock
outstanding after this offering.
The information also assumes no exercise of any outstanding stock options or
warrants. As of March 31, 2000, there were 1,855,616 shares of common stock
issuable upon the exercise of outstanding options at a weighted average
exercise price of $1.01 per share and 253,042 shares of common stock reserved
for issuance upon the exercise of outstanding warrants at a weighted average
price of $4.66 per share. To the extent that any of these options or warrants
are exercised, there will be further dilution to new investors.
19
<PAGE>
SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
our financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this prospectus. We have derived our statement of operations for the years
ended December 31, 1997, 1998 and 1999, and our balance sheet data at December
31, 1998 and 1999 from our audited financial statements which we include
elsewhere in this prospectus. We have derived our statement of operations data
for the years ended December 31, 1996 and the balance sheet data at December
31, 1996 and 1997 from our audited financial statements which we do not include
in this prospectus. The statement of operations data and balance sheet data as
of and for the year ended December 31, 1995 are derived from our unaudited
financial statements which are not included in this prospectus. The statement
of operations data for the three months ended March 31, 1999 and 2000 and the
balance sheet data as of March 31, 2000 are derived from our unaudited
financial statements included elsewhere in this prospectus. In the opinion of
management, the unaudited consolidated financial statements include all
adjustments, consisting principally of normal recurring adjustments, necessary
for a fair presentation of the results of operations for the period. Historical
results are not necessarily indicative of the results of operations to be
expected for future periods and the results of interim periods are not
necessarily indicative of the results for a full year. We have presented pro
forma net income per share information to give effect to the assumed conversion
of all outstanding shares of our convertible preferred stock into a total of
8,934,628 shares of common stock as of their original dates of issuance. See
the notes to our financial statements for a detailed explanation of this
determination of the shares used to compute actual and pro forma basic and
diluted net loss per share.
<TABLE>
<CAPTION>
Three
Months Ended
Years Ended December 31, March 31,
------------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
(in thousands, except per share data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Sales................... $ $ -- $ 220 $ 1,137 $ 4,629 $ 837 $ 1,841
Cost of goods sold...... -- 589 1,523 2,994 690 1,182
------- ------- ------- ------- ------- ------- -------
Gross profit (loss).... -- (369) (386) 1,635 147 659
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development........... 2,254 2,214 2,486 2,729 3,931 737 1,631
Selling, general and
administrative........ 884 1,732 2,829 3,606 5,452 1,338 2,641
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 3,138 3,946 5,315 6,335 9,383 2,075 4,272
------- ------- ------- ------- ------- ------- -------
Loss from operations.... (3,138) (3,946) (5,684) (6,721) (7,748) (1,928) (3,613)
Interest and other
income (expense), net.. 76 (24) (176) (28) 238 70 35
------- ------- ------- ------- ------- ------- -------
Net loss................ $(3,062) $(3,970) $(5,860) $(6,749) $(7,510) $(1,858) $(3,578)
======= ======= ======= ======= ======= ======= =======
Net loss per share,
basic and diluted...... $ (5.98) $ (7.74) $(11.02) $(10.10) $ (9.33) $ (2.39) $ (3.52)
======= ======= ======= ======= ======= ======= =======
Shares used in computing
net loss per share,
basic and diluted...... 512 513 532 668 805 779 1,017
Pro forma net loss per
share, basic and
diluted................ $ (0.90) $ (0.36)
======= =======
Shares used in computing
pro forma net loss per
share, basic and
diluted................ 8,355 9,951
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------- March 31,
1995 1996 1997 1998 1999 2000
------ ------ -------- -------- -------- -----------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
and marketable
securities............. $1,307 $3,791 $ 147 $ 7,644 $ 12,153 $ 12,009
Working capital......... 683 3,329 (2,276) 7,560 12,437 11,999
Total assets............ 1,989 4,592 1,082 9,009 15,705 15,930
Long-term obligations,
net of current
portion................ 61 40 17 -- 1,854 3,325
Convertible preferred
stock and preferred
stock warrants ........ 5,783 12,331 12,492 28,337 38,516 38,515
Total stockholders'
deficit................ (4,530) (8,501) (14,275) (20,510) (26,991) (28,837)
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
"Selected Financial Data" and our financial statements and the related notes
included elsewhere in this prospectus.
Overview
We develop, manufacture and market innovative products that use
radiofrequency energy to treat patients with solid cancerous or benign tumors.
From inception in 1994 through 1996, our operations consisted primarily of
various start-up activities, including development of technologies central to
our business, recruiting personnel and raising capital. In 1997, we began
commercial shipment of our products.
All of our sales are generated from the sale of our disposable devices and
radiofrequency generators. For the year ended December 31, 1999, 36% of our
total sales were sold through our direct sales force in the United States and
64% were sold internationally through distributors. We intend to continue
building our direct sales force in the United States and selling through third-
party distribution partners internationally. We expect that a significant
portion of our revenue will continue to come from international operations
because of the high incidence of primary liver cancer in Asian and European
markets.
In the year ended December 31, 1999, 64% of our sales were derived from our
disposable devices and 36% were derived from the sale of our generators. We
plan to focus on expanding our base of customer accounts and increasing usage
of our disposable products. Placement of generators at hospitals is necessary
for customers to use our disposable devices, and we have adopted flexible
customer programs such as loans, leasing referrals and deferred purchase plans
to facilitate generator placements. We plan to offer current customers our new
higher-power generator at a discount to our list price in order to encourage
rapid adoption of our second-generation technology. We expect that an
increasing proportion of our sales will be derived from the sale of our higher
margin disposable devices.
We recognize revenue upon receipt of a purchase order and shipment of
products to customers. Our return policy allows customers to return products
received in damaged or non-working condition up to 60 days after receipt of the
product. To date, returns have been insignificant.
Our manufacturing costs consist of raw materials, including generators
produced for us by third-party suppliers, labor to produce our disposable
devices and to inspect incoming, in-process and finished goods, sterilization
performed by an outside service provider and general overhead expenses. Gross
profit margins are affected by production volumes and average selling prices.
In the year ended December 31, 1999, 42% of our operating expenses were
related to research and development activities, while 58% of our operating
expenses were related to selling, general and administrative activities. We
expect to continue to devote a large portion of our resources to product
development and clinical research programs. However, we expect to devote a
growing proportion of our operating expenses to selling, general and
administrative activities, particularly to our sales and marketing efforts.
These efforts include increasing the size of our domestic sales force and our
international distribution support activities as well as establishing formal
physician and patient awareness and education programs.
In connection with the grant of stock options to employees and non-
employees, we record deferred stock-based compensation as a component of
stockholders' equity. This stock-based compensation is amortized as charges to
operations over the vesting periods of the options. We recorded amortization of
deferred compensation of $403,000 for the year ended December 31, 1998,
$991,000 for the year ended December 31, 1999 and $1.6 million for the quarter
ended March 31, 2000. For options granted through May 1, 2000, we expect to
record a minimum of additional amortization expense for deferred compensation
as follows: $3.1 million in 2000, $2.2 million in 2001, $1.1 million in 2002
and $427,000 in 2003.
22
<PAGE>
We incurred net losses of approximately $7.5 million in 1999. As of March
31, 2000 we had an accumulated deficit of $32.2 million. Due to the high costs
associated with continued research and development programs, expanded clinical
research programs and increased sales and marketing efforts, we expect to
continue to incur net losses for the next few years.
Our product sales have mainly been to a group of early adopting physicians
who treat patients with cancerous tumors of the liver. Our opportunity for
further market penetration and increased revenues will depend on additional
sales efforts, longer-term supporting clinical data and physician awareness and
education programs.
Our future growth depends on expanding product usage in our current market
and finding new large markets in which we can leverage our core technologies of
applying radiofrequency energy to treat cancerous and benign tumors. To the
extent our current or any additional markets do not materialize in accordance
with our expectations, our sales could be lower than expected.
We are currently involved in patent proceedings and may become a party to
additional patent or product liability proceedings. The costs of such lawsuits
or proceedings may be material and could affect our earnings and financial
position. An adverse outcome in a patent lawsuit could require us to cease
sales of affected products or to pay royalties and/or license fees, which could
harm our results of operations.
Results of Operations
Three Months Ended March 31, 2000 and 1999
Sales for the quarter ended March 31, 2000 were $1.8 million as compared to
$837,000 in the corresponding period in 1999. Our disposable devices
represented 63% of the total sales for the quarter ended March 31, 2000 and 53%
of total sales for the corresponding period in 1999. Our generators represented
37% of total sales for the quarter ended March 31, 2000 and 47% for the
corresponding period in 1999. Higher unit shipments of generators and
disposables resulted from increased physician awareness of our technology,
expansion of our domestic sales force and increased geographical representation
through the appointment of new international distributors during the fourth
quarter of 1999 and the first quarter of 2000. We expect sales of our
disposable devices to represent a significant proportion of our sales once we
have established our customer base. During the first quarter of 2000, we
initiated a limited launch of our second-generation disposable devices and
generators to select United States and international customers.
Cost of goods sold for the quarter ended March 31, 2000 was $1.2 million as
compared to $690,000 for the corresponding period in 1999. The growth in cost
of goods sold was attributable primarily to higher material, labor, and
overhead costs associated with increased unit shipments, including increases in
amortization of deferred stock-based compensation of $105,000 in the first
quarter of 2000 as compared to $25,000 in the corresponding period in 1999.
Research and development expenses for the three months ended March 31, 2000
were $1.6 million as compared to $737,000 for the corresponding period in 1999.
The expense increase was attributable primarily to additional personnel,
expenses associated with the development of our second-generation disposable
devices and generators, increased clinical program spending as well as
increased patent expenses. Amortization of deferred stock-based compensation
was $308,000 in the quarter ended March 31, 2000 as compared to $80,000 in the
corresponding period of 1999.
Sales, general and administrative expenses for the three months ended March
31, 2000 were $2.6 million as compared to $1.3 million in the corresponding
period in 1999. The increase resulted from the addition of sales and clinical
support personnel as well as spending associated with the launch of our second-
generation disposable devices and generators. General and administrative
expenses increased due to added personnel to support our growth in operations.
For the quarter ended March 31, 2000, we recorded amortization of deferred
stock-based compensation of $1.1 million as compared to $115,000 in the
corresponding period of 1999.
23
<PAGE>
Interest income for the three months ended March 31, 2000 was $170,000 as
compared to $84,000 in the corresponding period of 1999. The increase was
primarily attributed to an increase in interest income due to a higher average
outstanding balance of cash and investments resulting from the timing of
private equity and debt financings. Interest expense for the three months ended
March 31, 2000 was $133,000 as compared to $12,000 for the corresponding period
in 1999. The increase was primarily attributable to the loan and security
agreement transacted in June 1999 with increases to the revolving credit note
and funding of the second term loan in the first quarter of 2000.
Years Ended December 31, 1999 and 1998
Sales for the year ended December 31, 1999 were $4.6 million as compared to
$1.1 million in 1998. Our disposable devices represented 64% of total sales for
the year ended December 31, 1999 and 52% of total sales for the corresponding
period in 1998. Our generators represented 36% of total sales for the year
ended December 31, 1999 and 48% of total sales for the corresponding period in
1998. The increase in sales was due to higher unit shipments of generators and
disposables to United States hospitals and international distributors. Higher
unit shipments resulted from increased physician awareness of our technology,
product improvements, expansion of our domestic sales force and increased
geographical coverage in international markets including Japan. A substantial
portion of our international sales are attributable to two of our distributors.
In the year ended December 31, 1999, one distributor accounted for 41% of our
sales and a second distributor accounted for 14% of our sales.
Cost of goods sold for the year ended December 31, 1999 was $3.0 million as
compared to $1.5 million for the corresponding period in 1998. The growth in
cost of goods sold was attributable primarily to the expansion of our
manufacturing operations, increased quality assurance programs and higher
material, labor and overhead costs associated with increased unit shipments.
Included in cost of goods sold was amortization of deferred stock-based
compensation of $107,000 in 1999 as compared to $25,000 in 1998.
Research and development expenses for the year ended December 31, 1999 were
$3.9 million as compared to $2.7 million for the corresponding period in 1998.
The expense increase was attributable primarily to the hiring of additional
personnel, expenses associated with the development of our second-generation
disposable devices and generators and increased patent expenses. In addition,
we had increases in the amortization of deferred stock-based compensation to
$354,000 in 1999 from $186,000 in 1998. We include expenses related to
prosecution or defense of our patent portfolio in our research and development
expenses. We expect to continue to make substantial investments in research and
development and clinical studies as well as to expand and protect our patent
portfolio, and we anticipate that these expenses will continue to grow in the
future.
Selling, general and administrative expenses for the year ended December 31,
1999 were $5.5 million as compared to $3.6 million in the corresponding period
in 1998. The increase in selling expenses resulted primarily from the addition
of domestic field sales and clinical support personnel as well as sales
management personnel to support international distribution efforts. In
addition, in 1999 we loaned generators to a group of prestigious medical
centers that agreed to provide references on our system to other hospitals, and
selling expenses for 1999 included depreciation charges related to the
generators placed at these medical centers. General and administrative expenses
increased due to the addition of personnel to support our growth in operations.
For the year ended December 31, 1999 we recorded amortization of deferred
stock-based compensation of $530,000 as compared to $192,000 in the
corresponding period in 1998. We expect selling and marketing expenses to grow
as we continue to increase the size of our direct sales force, expand our
international distribution network and engage in activities to further promote
product sales. We expect general and administrative expenses to increase as we
add personnel and incur reporting and investor-related expenses as a public
company.
Interest income for the year ended December 31, 1999 was $446,000 as
compared to $342,000 for the corresponding period in 1998. The increase was due
to an increase in interest earned on higher average cash balances due to the
timing of our private placement financings. Interest expense for the year ended
24
<PAGE>
December 31, 1999 was $212,000 as compared to $359,000 for the corresponding
period in 1998. Interest expense for 1998 included interest and warrant
amortization associated with the bridge loans obtained in 1997 and 1998.
Interest expense for 1999 included interest and warrant amortization associated
with the loan and security agreement entered into in June 1999.
Years Ended December 31, 1998 and 1997
Sales for the year ended December 31, 1998 were $1.1 million as compared to
$220,000 for the corresponding period in 1997. Our disposable devices
represented 52% of total sales for the year ended December 31, 1998 and 39% of
total sales for the corresponding period in 1997. Our generators represented
48% of total sales for the year ended December 31, 1998 and 61% of total sales
for the corresponding period in 1997. Sales in 1997 consisted mainly of product
sales to our distributor in Italy and the sale of evaluation units to a few
United States hospitals. During 1998, sales to our distributor in Italy
increased, and we began shipping commercial quantities of product to select
United States hospitals.
Cost of goods sold for the year ended December 31, 1998 was $1.5 million as
compared to $589,000 for the corresponding period in 1997. The growth in cost
of sales was attributable primarily to the significant expansion of our
manufacturing operations and higher material, labor and overhead costs
associated with increased unit shipments.
Research and development expenses for the year ended December 31, 1998 were
$2.7 million as compared to $2.5 million for the corresponding period in 1997.
Included in research and development expenses is amortization of deferred
stock-based compensation of $186,000 in 1998 as compared to $14,000 in 1997.
Research and development activities in 1997 were focused on pre-production
pilot runs, clinical studies and product development. Research and development
activities in 1998 were focused on continued product development and clinical
studies as well as regulatory affairs.
Selling, general and administrative expenses for the year ended December 31,
1998 were $3.6 million as compared to $2.8 million for the corresponding period
in 1997. The increase was due to the building of a small direct sales force in
the United States as well as additional general and administrative personnel to
support our growth in operations. Included in selling, general and
administrative expenses is amortization of deferred stock-based compensation of
$192,000 in 1998 as compared to $25,000 in 1997.
Interest income for the year ended December 31, 1998 was $342,000 as
compared to $40,000 for the corresponding period in 1997. The increase was due
to an increase in interest earned on higher average cash balances due to the
timing of our private placement financings. Interest expense for the year ended
December 31, 1998 was $359,000 as compared to $138,000 for the corresponding
period in 1997. Interest expense for 1998 included interest and warrant
amortization associated with the bridge loans obtained in 1997 and 1998.
25
<PAGE>
Quarterly Results of Operations
The following tables set forth our statement of operations data for each of
the four quarters ended December 31, 1999 and for the quarter ended March 31,
2000. This data has been derived from unaudited financial statements that, in
the opinion of our management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of such
information when read in conjunction with our annual audited financial
statements and notes thereto appearing elsewhere in this prospectus. The
operating results for any quarter are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1999 1999 1999 1999 2000
-------- -------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Sales........................ $ 837 $ 1,062 $ 1,197 $ 1,533 $ 1,841
Cost of goods sold........... 690 618 797 889 1,182
------- ------- ------- ------- -------
Gross profit................ 147 444 400 644 659
Operating expenses:
Research and development.... 737 813 928 1,453 1,631
Selling, general and
administrative............. 1,338 1,334 1,188 1,592 2,641
------- ------- ------- ------- -------
Total operating expenses... 2,075 2,147 2,116 3,045 4,272
------- ------- ------- ------- -------
Loss from operations......... (1,928) (1,703) (1,716) (2,401) (3,613)
Interest and other income
(expense), net.............. 70 40 38 90 35
------- ------- ------- ------- -------
Net loss..................... $(1,858) $(1,663) $(1,678) $(2,311) $(3,578)
======= ======= ======= ======= =======
Net loss per common share,
basic and diluted........... $ (2.39) $ (2.11) $ (2.09) $ (2.73) $ (3.52)
======= ======= ======= ======= =======
Shares used in computing net
loss per share, basic and
diluted..................... 779 789 803 848 1,017
</TABLE>
We believe that period-to-period comparisons of our operating results are
not necessarily meaningful, and you should not rely on them to predict future
performance. Small dollar increases had large percentage effects that were not
attributable to any meaningful events or transactions. The amount and timing of
our sales and operating expenses may fluctuate significantly in the future as a
result of a variety of factors. We face a number of risks and uncertainties
encountered by early stage companies, particularly those in rapidly evolving
markets such as the medical device industry. In addition, although we have
experienced revenue growth recently, such revenue growth may not continue, and
we may not achieve or maintain profitability in the future.
Recent Operating Results
The following table shows certain unaudited financial data for the quarter
ended June 30, 2000. We believe that this information reflects all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of the information for the period presented. The operating results
for the quarter are not necessarily indicative of results for any future
period. See Note 2 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share amounts.
<TABLE>
<CAPTION>
Quarter Ended
June 30, 2000
---------------------
(in thousands, except
per share data)
(unaudited)
<S> <C>
Sales................................................... $ 2,427
=======
Net loss................................................ $(3,207)
=======
Net loss per common share, basic and diluted............ $ (2.79)
=======
Shares used in computing net loss per share, basic and
diluted................................................ 1,150
=======
</TABLE>
26
<PAGE>
Liquidity and Capital Resources
We have financed our operations since inception principally through private
placements of equity securities, net of expenses, of $37.9 million of
convertible preferred stock. To a lesser extent, we also financed our
operations through equipment financing and other loans, which totaled $4.4
million in principal outstanding at March 31, 2000. As of March 31, 2000, we
had $9.8 million of cash and cash equivalents, $2.2 million of marketable
securities and $12.0 million of working capital.
For the year ended December 31, 1999, net cash used in operating activities
was $6.9 million principally due to our net loss and increases in accounts
receivable and inventory resulting from higher revenues and increased unit
shipments. This increase in use of cash for operating activities was partially
offset by an increase in accounts payable and accrued liabilities resulting
from the upward trend in business activities. Our investing activities for the
year ended December 31, 1999 were limited to the purchase of property and
equipment in the amount of $441,000 and net purchases or sales of short-term
investments. For the year ended December 31, 1999, net cash provided by
financing activities was $11.9 million attributable to proceeds from the
issuance of stock and debt obligations.
In June 1999, we entered into a loan and security agreement for a loan
facility of up to $5.0 million. The facility consists of two term loans of $1.5
million each and a revolving credit note of up to $2.0 million. As of December
31, 1999, we had drawn down the initial term loan of $1.5 million and $532,000
of the revolving credit note. As of March 31, 2000, we had drawn down two term
loans of $1.5 million each and $1.0 million of the revolving credit note.
Our capital requirements depend on numerous factors including our research
and development expenditures, expenses related to selling and marketing and
working capital to support business growth. Although it is difficult for us to
predict future liquidity requirements with certainty, we believe that the net
proceeds from this offering, together with our existing liquidity sources and
anticipated funds from operations, will satisfy our cash requirements for at
least the next 18 months. During or after this period, if cash generated by
operations is insufficient to satisfy our liquidity requirements, we may need
to sell additional equity or debt securities. There can be no assurance that
additional financing will be available to us or that, if available, such
financing will be available on terms favorable to the company and our
stockholders.
Income Taxes
As of December 31, 1999, we had federal net operating loss carryforwards of
approximately $24.6 million and state net operating loss carryforwards of
approximately $16.0 million, available to offset future regular taxable income.
The federal net operating loss carryforwards will expire between 2010 and 2019
and the state net operating loss carryforwards will expire between 2001 and
2004, if not utilized. The Tax Reform Act of 1986 limits the use of net
operating loss and tax credit carryforwards in certain situations where changes
occur in the stock ownership of the company, and our utilization of our
carryforwards could be restricted.
Quantitative and Qualitative Disclosures About Market Risk
Our exposure to interest rate risk at March 31, 2000 is related to our
investment portfolio and our borrowings. Fixed rate investments and borrowings
may have their fair market value adversely impacted from changes in interest
rates. Floating rate investments may produce less income than expected if
interest rates fall, and floating rate borrowings will lead to additional
interest expense if interest rates increase. Due in part to these factors, our
future investment income may fall short of expectations, and our interest
expense may be above our expectations. Further, we may suffer losses in
investment principal if we are forced to sell securities that have declined in
market value due to changes in interest rates.
We invest our excess cash in debt instruments of the United States
government and its agencies and in high quality corporate issuers. The average
contractual duration of our investments in 1999 was less than one
27
<PAGE>
year. Due to the short-term nature of these investments, we believe that there
is no material exposure to interest rate risk arising from our investments.
At March 31, 2000, we had two term loans of $1.5 million each outstanding
which bear interest at 13.36% and 14.33% and a revolving credit facility of
$1.0 million outstanding which bears interest at 2% above the prime rate.
All of our sales and purchases are denominated in United States dollars.
Therefore, we do not believe that we currently have any significant direct
foreign currency exchange rate risk.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
new standards of accounting and reporting for derivative instruments and
hedging activities. SFAS No. 133 requires that all derivatives be recognized at
fair value in the statement of financial position, and that the corresponding
gains or losses be reported either in the statement of operations or as a
component of comprehensive income, depending on the type of relationship that
exists. SFAS No. 133 will be effective for fiscal years beginning after June
15, 2000. We do not believe that the implementation of SFAS No. 133 will have
any significant impact on our financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, or FIN 44, "Accounting
for Certain Transactions Involving Stock Compensation," which is an
interpretation of Accounting Principal Board No. 25. This interpretation
clarifies:
. the definition of employee for purposes of applying Opinion 25, which
deals with stock compensation issues;
. the criteria for determining whether a plan qualifies as a
noncompensatory plan;
. the accounting consequence of various modifications to the terms of a
previously fixed stock option or award; and
. the accounting for an exchange of stock compensation awards in a
business combination.
This interpretation is effective July 1, 2000, but there are conclusions in
this interpretation that cover specific events that occur after either December
15, 1998, or January 12, 2000. To the extent that this interpretation covers
events occurring during the period after December 15, 1998, or January 12,
2000, but before the effective date of July 1, 2000, the effects of applying
this interpretation are recognized on a prospective basis from July 1, 2000.
The adoption of FIN 44 does not have a material impact on our financial
statements.
28
<PAGE>
BUSINESS
Overview
Our products use radiofrequency energy to address solid cancerous or benign
tumors. Our proprietary system includes radiofrequency generators and a family
of disposable needle electrode devices which deliver controlled thermal energy
to targeted tissue. The tissue is heated to a high enough level to cause cell
death. Our initial focus is on the treatment of liver cancer.
Prior to the introduction of the RITA system, patients with unresectable
liver tumors had few treatment alternatives. We believe our system offers them
an effective alternative. Our products are cleared for sale in major markets
worldwide. Our system is distributed in the United States through our direct
sales force and internationally through distribution companies.
Since our initial product launch, we have sold over 10,000 disposable
devices. Our total sales were $4.6 million in 1999, $1.1 million in 1998 and
$220,000 in 1997. Our disposable devices represented 64% of total sales in
1999, 52% of total sales in 1998 and 39% of total sales in 1997. Our generators
represented 36% of total sales in 1999, 48% of total sales in 1998 and 61% of
total sales in 1997.
As of March 31, 2000, we had 28 issued patents, four notices of allowance
and 45 United States and foreign patent applications pending. The issued and
allowed patents cover, among other things, deployable multi-array electrode
technology and temperature feedback technology.
Our Business Strategy
Our goal is to be the leading provider of minimally invasive devices for the
treatment of solid cancerous or benign tumors. To achieve this goal, we plan to
do the following:
. Increase Our Penetration of the Liver Cancer Market. We believe we can
capitalize on the opportunity to increase our penetration of the market
for the radiofrequency ablation of unresectable liver tumors or lesions,
which is currently estimated to be $500 million annually. We intend to
execute this strategy by doing the following:
- increase awareness among key referring oncologists through sales and
marketing programs;
- publish additional clinical research to provide data supporting the
expanded use of our products;
- drive patient awareness with marketing efforts focused on educating
patients on the benefits of the RITA system; and
- broaden our market coverage by expanding our domestic direct sales
force and international distribution channels.
. Expand the Application of Our Proprietary Technology to Markets Beyond
Liver Cancer. We believe our minimally invasive proprietary technology
can be broadly applied to the treatment of other types of cancerous and
benign tumors, including tumors in the lung, bone, breast, prostate and
kidney. We plan to build on our extensive clinical experience in liver
tumors as well as feasibility studies in additional organs to support the
extension of our technology to additional applications in the future. We
estimate that the market for these additional applications may exceed $1
billion annually.
. Continue to Advance Technology. We intend to aggressively pursue ongoing
research and development of additional products and technologies. We plan
to continue to expand and improve our product offerings to better serve
patients with solid cancerous or benign tumors whose needs are not met by
existing treatments. Examples of these efforts include:
- further enhancements of ablation technologies; and
- technologies for the improved visualization of tissue during the
ablation process.
29
<PAGE>
. Capitalize on the Significant Opportunity in International Markets. Liver
cancer is one of the leading causes of death in a number of international
markets. We plan to devote substantial attention to providing clinical
and marketing support to existing international distributors while
continuing to identify new distributors in additional markets.
Market Opportunity
Cancer Market
Every year, millions of people throughout the world are afflicted with
cancer. Only heart disease kills more people in the United States every year.
Cancer can be categorized into two broad groups: solid tumor cancers, such
as liver, lung, bone, breast, prostate and kidney cancers as well as
hematologic or blood-borne cancers, such as lymphomas and leukemias.
Approximately 90 percent of all cancers are solid tumor cancers.
Liver Cancer Market
There are two forms of liver cancer: primary and metastatic. Primary liver
cancer originates in the liver. Secondary, or metastatic, liver cancer results
from the spread of cancer from other places in the body to the liver. A
significant number of patients treated for primary and metastatic liver cancer
will experience a recurrence of their disease.
The worldwide incidence of primary liver cancer is estimated to be one
million new patients each year. The vast majority of primary liver cancer
patients are located outside the United States, particularly in Asia and
Southern Europe. Approximately 90 percent of patients diagnosed with primary
liver cancer will die within five years. Due to a rise in the number of
worldwide cases of Hepatitis B and C, both of which are correlated to the
development of primary liver cancer, we believe that the incidence of primary
liver cancer may increase in the future.
It is estimated that there are almost as many cases of metastatic liver
cancer worldwide as there are cases of primary liver cancer and approximately
300,000 annual cases in the United States alone. The liver is one of the three
most common sites for the spread of cancer. For example, one of the most common
forms of primary cancer is colorectal cancer, and 60 percent of these patients
will develop metastatic liver tumors. Due to numerous factors, including the
absence of viable treatment options, metastatic liver cancer often causes
death.
Treatment Options for Liver Cancer
The prognosis for primary and secondary liver cancer is poor. Although
limited treatment options are currently available for liver cancer, they are
typically ineffective, are generally associated with significant side effects
and can even cause death. Traditional treatment options include surgery,
chemotherapy, cryosurgery, percutaneous ethanol injection and radiation
therapy.
Surgery
While surgery is considered the "gold standard" treatment option to address
liver tumors, approximately 70 to 90 percent of liver cancer patients are
unresectable, which means they do not qualify for surgery. This is most often
due to the following:
. Operative risk: limited liver function or poor patient health threatens
survival as a result of the surgery; or
. Technical feasibility: the proximity of a cancerous tumor to a critical
organ or artery, or the size, location on the liver or number of tumors
makes surgery infeasible.
For the few patients who qualify for surgery, there are significant
complications related to the procedure and the operative mortality rate is two
percent. Further, one-year recurrence rates following surgery have been
reported to be as low as 12 percent, however, when tumors recur, surgery
typically cannot be repeated.
30
<PAGE>
Chemotherapy
Chemotherapy uses drugs to kill cancer cells. Chemotherapy can be used
systemically or regionally. In systemic chemotherapy, drugs are delivered
throughout the body. In local chemotherapy, drugs are delivered directly to the
liver tumor. Systemic chemotherapy is not considered an effective means of
treating liver cancer. In some cases, treatment regimens using localized
chemotherapy in addition to systemic treatment have been reported to increase
the efficacy of these alternatives to a limited extent.
Chemotherapy causes significant side effects in the majority of patients,
including loss of appetite, nausea and vomiting, hair loss and ulcerations of
the mouth. In addition, chemotherapy can damage the blood-producing cells of
the bone marrow, leading to a low blood cell count. As a result, chemotherapy
patients have an increased chance of infection, bleeding or bruising after
minor cuts or injuries, and fatigue or shortness of breath.
Cryosurgery
Cryosurgery is the destruction of cancer cells using sub-zero temperatures
in an open surgical procedure. During cryosurgery, multiple stainless steel
probes are placed into the center of the tumor and liquid nitrogen is
circulated through the end of the device, creating an iceball. Cryosurgery
involves a cycle of treatments in which the tumor is frozen, allowed to thaw
and then refrozen.
While cryosurgery is considered to be relatively effective, with one-year
local recurrence rates of approximately 10 percent, we believe adoption of this
procedure has been limited by the following factors:
. it is not an option for patients who cannot tolerate an open surgical
procedure;
. it involves significant complications which are similar to other open
surgical procedures, as well as liver fracture and hemorrhaging caused by
the cycle of freezing and thawing;
. it is associated with mortality rates estimated to be between one and
five percent; and
. it is expensive compared to other alternatives.
Percutaneous Ethanol Injection
Percutaneous ethanol injection, or PEI, involves the injection of alcohol
into the center of the tumor. The alcohol causes cells to dry out and cellular
proteins to disintegrate, ultimately leading to tumor cell death.
While PEI can be successful in treating some patients with primary liver
cancer and has a reported one-year local recurrence rate of approximately 13
percent, it is generally considered ineffective on large tumors as well as
metastatic tumors. Patients are required to receive multiple treatments making
this option unattractive for many patients. Complications include pain and
alcohol introduction to bile ducts and major blood vessels. In addition, this
procedure can cause cancer cells to be deposited along the needle tract when
the needle is withdrawn.
Radiation Therapy
Radiation therapy uses high dose x-rays to kill cancer cells. Radiation
therapy is not considered an effective means of treating liver cancer and is
rarely used for this purpose.
The RITA Solution
Our Procedure
Our proprietary system is designed to use radiofrequency energy to provide a
minimally invasive approach to ablating solid cancerous or benign tumors. Our
system delivers radiofrequency energy to raise the temperature of cells above
45 to 50(degrees)C, causing cellular death.
31
<PAGE>
The physician inserts the RITA disposable needle electrode device into the
target body tissue, typically under ultrasound guidance. Once the device is
inserted, pushing on the handle of the device causes a group of curved wires to
be deployed from the tip of the electrode. When the power is turned on, these
wires act to spread the delivery of radiofrequency energy throughout the tumor.
In addition, temperature sensors on the tips of the wires measure tissue
temperature throughout the procedure. During the procedure, our system
automatically adjusts the amount of energy delivered in order to maintain the
temperature necessary to ablate the targeted tissue. For a typical three
centimeter ablation, the ablation process takes approximately ten minutes. When
the ablation is complete, pulling back on the handle of the device causes the
curved wire array to be retracted into the device so it can be removed from the
body. Our disposable device cauterizes the tissue along the needle tract, which
we believe kills any residual cancer cells that might be removed from the
tumor.
Benefits of the RITA System
The benefits of our system include:
. Effective Treatment Option. We believe that our system provides an
effective treatment option to liver cancer patients who previously had
few options available to effectively address their unresectable liver
tumors. In the future, our system may offer patients with other types of
tumors a better treatment option.
. Minimally Invasive Procedure. The RITA system offers physicians an
effective minimally invasive treatment option with few side effects or
complications. Our products can be used in an outpatient procedure which
requires only local anesthesia, and patients are typically sent home the
same day with a small bandage over the entry site. Alternatively,
patients can be treated laparoscopically and are generally sent home the
next day. Compared to existing alternatives, we believe our minimally
invasive procedure can be cost effective and can result in reduced
hospital stays.
. Proprietary Array Design and Temperature Feedback Provide Procedural
Control. Our array design enables the physician to predictably ablate
large volumes of targeted tissue. In addition, our temperature feedback
feature allows physicians to ensure that the temperature is high enough
throughout the tissue to achieve cell death.
. Repeat Treatments Possible. Liver cancer is a recurrent disease. Due to
the invasive nature of existing treatment options, the majority of
patients who undergo traditional therapies cannot be retreated in the
event that new tumors appear on their livers. Because of the minimally
invasive nature of our procedure, patients treated with our system can
often be retreated.
. Broadly Applicable Technology. Our extensive clinical experience with
liver tumors and feasibility studies in other organs indicates that our
technology may in the future be broadly applied to the ablative treatment
of solid tumors in the lung, bone, breast, prostate and kidney. We
believe clinical studies will support the applicability of our technology
to a number of types of cancerous or benign tumors.
While there are numerous benefits of our system, there are some side effects
of treatment as well. These include bleeding, ground-pad burns, which are burns
which can occur when there is a concentration of heat at the ground-pad site,
causing a burn on the skin, and abcesses. However, these side effects have
occurred in only a small number of patients treated with our system and have
not resulted in any permanent injury. Physicians have also reported some
recurrence of tumors that have been treated using our system. However, in the
event that tumors recur, our procedure can be repeated.
Our Technology and Products
Technology
All of our products are based on our proprietary radiofrequency ablation
technology which is used to ablate tissue in a controlled manner. A
radiofrequency generator supplies energy through our disposable devices
32
<PAGE>
placed within the targeted tissue. These devices contain curved, space-filling
arrays of wires which are deployed from the tip to allow the radiofrequency
energy to be dispersed throughout the tumor.
Radiofrequency energy supplied by the generator produces ionic agitation, or
cellular friction, in the tissue closely surrounding the electrode. This
friction produces heat which can be used to predictably ablate volumes of
tissue. To effectively ablate tissue, it must be heated to an approximate
temperature of 45 to 50(degrees)C, or 113 to 122(degrees)F.
Our system is designed to permit the physician to set the desired treatment
time and temperature at the beginning of the procedure. Once that temperature
is reached, our proprietary temperature control technology automatically
adjusts the energy supplied from the generator to maintain the optimal
temperature within the tissue during the course of the procedure. We believe
our system has the potential to provide a more effective ablation than
competing technologies by providing critical tissue temperature feedback during
the procedure.
Products
The RITA system consists of a generator that supplies radiofrequency energy
as well as a family of disposable devices. The following chart summarizes our
product offerings.
<TABLE>
<CAPTION>
Product Name Description Status
-------------------------------------------------------------------------------
<C> <C> <S> <C>
Disposable Model 30 Designed to create a Commercially available
Devices: three centimeter since 1997
ablation. Compatible with
the Model 500 generator.
--------------------------------------------------------------------
Model 70 Designed to create a Commercially available
scalable two to three since mid-1999
centimeter ablation.
Compatible with the Model
500 generator.
--------------------------------------------------------------------
StarBurst Designed to create a Commercially available
scalable two to three since June 2000
centimeter ablation.
Compatible with the Model
1500 generator.
--------------------------------------------------------------------
StarBurst XL Designed to create a Commercially available
scalable three to five since June 2000
centimeter ablation.
Compatible with the Model
1500 generator.
-------------------------------------------------------------------------------
Generators: Model 500 50 Watt generator. Commercially available
since 1997
--------------------------------------------------------------------
Model 1500 150 Watt generator. Commercially available
since June 2000
</TABLE>
Disposable Devices
Our disposable devices all consist of needle shaped electrodes containing
curved wire arrays which can be deployed into the target body tissue once the
device has been inserted into the body. Each device contains several
thermocouples, or temperature sensors, which provide feedback to the physician
of the tissue temperature during the ablation and which allow the generator to
automatically adjust the amount of radiofrequency energy so that the desired
tissue temperature can be achieved.
Our disposable devices are available in different array sizes to allow the
physician to create a spherical ablation volume of anywhere from two to three
or from three to five centimeters. Three centimeters is slightly smaller than a
ping pong ball. Five centimeters is approximately the size of a billiard ball.
In addition, each of the devices is available in 15 or 25 centimeter lengths to
allow physicians to access tumors which are located more or less deeply within
the body. Each disposable device is supplied with one or more ground pads to
allow a return path for the flow of radiofrequency energy from the patient back
to the generator.
33
<PAGE>
Model 30. This device creates an ablation which is approximately three
centimeters in diameter. It uses our first generation umbrella-shaped array
consisting of four curved wires. It is compatible with the Model 500 generator.
In the United States, the device has a list price of $1,100.
Model 70. This device has the ability to create a variable size ablation
which can be chosen to be anywhere between two to three centimeters in
diameter. It uses our second-generation, space-filling, starburst-shaped curved
seven wire array, which has the potential to provide energy dispersion more
evenly throughout the tissue to be ablated. It is compatible with the Model 500
generator. In the United States, this device has a list price of $1,100.
StarBurst. This device is the same in all key respects as the Model 70,
except that it is designed to be marketed with the Model 1500 generator only.
In the United States, the device is expected to have a list price of $1,100.
StarBurst XL. This electrode device has the ability to create a variable
size ablation which can be chosen to be anywhere between three to five
centimeters in diameter. We believe the ability to create a five centimeter
ablation is considered by many physicians to be a major advance in the
radiofrequency ablation field. This electrode device uses our second-
generation, space-filling, starburst-shaped curved nine wire array. It is
compatible with the Model 1500 generator only. In the United States, the device
has a list price of $1,440.
Generators
All of our generators employ an internal computer to assist the physician to
safely and effectively control the delivery of radiofrequency during the
ablation. In addition, each generator has a display to convey information to
the physician while using the system.
Model 500. This generator is based on our first-generation technology and is
capable of delivering up to 50 Watts of power. It provides the user with a
display of temperature, impedance and energy as well as automatic control of
power based on temperature. In the United States, the device has a list price
of $30,000.
Model 1500. This generator is our newest-generation technology and is
capable of delivering up to 150 Watts of power. It provides the same
capabilities as the Model 500, but with greatly increased energy capability,
more temperature displays and an improved user interface. In addition, it has
the ability, using optional software running on a laptop computer, to display
real-time, color-coded graphs of power, temperature and impedance to aid the
user in controlling the system and to collect procedural information for the
patient's record. In the United States, the device has a list price of $37,500.
Clinical Research
To date, clinical studies using our products conducted both by physicians
affiliated with us as advisors as well as by unaffiliated physicians have been
reported on in 19 published reports in peer-reviewed journals. In addition,
over 35 abstracts have been presented at medical conferences. Some studies
using our products have been reported in multiple publications or
presentations. These published and presented reports include approximately 409
patients. The majority of the clinical studies which have been conducted using
the RITA system were on patients with unresectable liver cancer. However,
clinicians have investigated or are currently investigating the feasibility of
using the RITA system to address other types of cancer, including breast,
prostate and kidney cancer. These studies demonstrated that liver and
potentially other cancerous tumors can be ablated safely and effectively using
the RITA system.
In the area of unresectable liver cancer, there have been 15 published
reports on the use of the RITA system of which seven included follow-up data on
local tumor recurrence rates which ranged from 0 percent to 55 percent with an
average of 14 percent local recurrence. Serious complications were rare, with
overall complication rates of less than one percent.
34
<PAGE>
Several studies are underway or are being planned in the use of our products
for unresectable liver patients in conjunction with local or systemic
chemotherapy. We hope to show that the combination of the use of the RITA
system plus these more conventional therapies will produce clinical results
which are even better than the use of either chemotherapy or the RITA system
alone.
Clinicians have used the RITA system to evaluate the feasibility of ablating
tumors or lesions of the breast, kidney and prostate. Feasibility studies and
additional clinical research programs are underway or are being planned in the
use of our products in these areas as well as in the lung and bone. For those
studies already underway, the early results appear to be promising.
Product Development
We believe that we have a strong base of proprietary design, development and
manufacturing capabilities. We have particular expertise in the core research
and development areas relevant to the production of new disposable electrode
devices for use in conjunction with our current radiofrequency generators. We
are working on a number of enhancements to our existing products including
improved visualization technologies to further assist the physician in the
process of ablating tumors. In addition, we are working on technology
improvements which we believe will allow physicians to create larger volumes of
ablated tissue in shorter times.
Sales and Marketing
Our customer base is fairly evenly divided between the United States,
European and Asian markets. In the United States, we market our products
through our direct sales force to leading cancer institutes and prominent
medical centers. In international markets, we sell our products through
distribution companies. Our customers include surgical oncologists,
hepatobiliary surgeons, liver transplant surgeons, laparoscopists and
interventional radiologists. We also target referral sources, including
colorectal surgeons and medical oncologists.
Our products are marketed domestically by eight direct sales employees and
three clinical specialists who provide support to our direct sales force in the
training of physicians. We have entered into agreements with distributors in 15
countries including major countries in Europe and Asia. Three RITA employees,
who are responsible for sales in our European, Asian and other international
markets, monitor and direct our international distributors' activities. We have
plans in place to expand our United States direct sales force and our network
of international distributors by the end of 2000.
Our marketing and sales efforts are directed at placing generators at key
cancer centers and other leading medical centers worldwide and then working
with those centers' physicians to increase their usage of our disposable
devices. We recognize that our predominant source of recurring revenue will be
from our disposable devices, which can only be used once a generator is placed.
To facilitate generator placement at medical centers, we have established a
variety of programs, including deferred purchase, long- or short-term loan,
preferred customer discount, upgrade and leasing referral programs.
We plan to drive physician adoption by increasing awareness of the RITA
system among potential users. We have established relationships with leading
physicians at prominent cancer and other leading medical institutions, many of
whom we believe are now strong advocates of our products. To increase adoption
of our system, we plan to involve both these institutions and physicians in
formal courses as well as informal hands-on training programs which we will
sponsor. We also plan to target referring clinical oncologists and colorectal
surgeons with information regarding the benefits of the RITA system. In
addition, since cancer treatment options are often affected by patient choice,
we plan to expand public awareness of our products using both marketing
materials and our website.
Competition
The medical device industry is subject to intense competition. Accordingly,
our future success will depend on our ability to meet the clinical needs of
physicians, improve patient outcomes and remain cost-effective for payors.
35
<PAGE>
There are a limited number of alternatives available to patients with liver
cancer to address their lesions. The traditional treatment options include
surgery, chemotherapy, cryosurgery, percutaneous ethanol injections and
radiation therapy. We do not believe any of these treatments are directly
competitive with our products, as none are intended to use heat to ablate liver
lesions. Further, these treatments generally have limited efficacy and/or
applicability.
RadioTherapeutics Corporation, a privately held company, and Radionics, a
division of Tyco International, are the two companies in our market whose
products compete directly with ours. Both companies offer systems which include
a generator and disposable electrodes and use radiofrequency energy to ablate
soft tissue. However, neither system is designed to provide physicians with the
temperature feedback throughout the tissue that we believe is important to help
ensure successful tissue ablation.
We believe that the principal competitive factors in our markets are:
. improved patient outcomes;
. the publication of favorable peer-reviewed clinical studies;
. acceptance by leading physicians;
. ease of use of our generators and electrode devices;
. sales and marketing capability;
. regulatory approvals;
. timing and acceptance of product innovation;
. patent protection;
. product quality and reliability; and
. cost effectiveness.
Other than RadioTherapeutics and Radionics, we are not aware of any
companies using radiofrequency technology like ours to treat cancer. If
companies that currently sell products which utilize radiofrequency energy
enter our market, competition could increase.
Patents and Proprietary Technology
We believe that a key element of our competitive advantage depends on our
ability to develop and maintain the proprietary aspects of our technology. We
rely on patent protection, as well as a combination of copyright, trade secret
and trademark laws to protect our proprietary technology. We file patent
applications to protect the technology, inventions and improvements that we
believe are significant to the growth of our business. As of March 31, 2000, we
had 28 issued patents, four notices of allowance and 45 United States and
foreign patent applications pending. The issued and allowed patents cover,
among other things, deployable multi-array electrode technology and temperature
feedback technology. Our U.S. patents expire between 2012 and 2018. Our
European-wide patents expire in 2015 and our Japanese patents expire in 2015.
We require our employees, consultants and advisors to execute
confidentiality agreements in connection with their employment, consulting or
advisory relationships with us. We also require our employees, consultants and
advisors who are privy to confidential information to agree to disclose and
assign to us all inventions conceived during the RITA work day, using RITA
property or which relate to our business. Despite any measures taken to protect
our intellectual property, unauthorized parties may attempt to copy aspects of
our products or to obtain and use information that we regard as proprietary. In
addition, the laws of some foreign countries may not protect our proprietary
rights as fully as do the laws of the United States. Thus, the measures we are
taking to protect our proprietary rights in the United States and abroad may
not be adequate. Finally, our competitors may independently develop similar
technologies.
36
<PAGE>
The medical device industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. We are currently involved in a patent interference action
declared by the United States Patent and Trademark Office which involves us and
RadioTherapeutics Corporation, a competitor of ours. In this proceeding the
validity of a single patent claim previously issued to us is being called into
question. This patent claim covers the curved array technology at the tip of
our disposable devices. We are also involved in an opposition proceeding in
Europe with RadioTherapeutics. In this proceeding, RadioTherapeutics is
opposing our issued European patent on grounds that it is not valid as
currently issued. This European patent also covers the array technology of the
tip of our disposable devices.
As the number of entrants into our market increases, the possibility of an
infringement claim against us grows. For example, we may be inadvertently
infringing a valid patent claim of which we are unaware. In addition, because
patent applications can take many years to issue, there may be a patent
application now pending of which we are unaware that will cause us to be
infringing when it issues in the future. To address such patent infringement
claims, we may have to enter into royalty or licensing agreements on
disadvantageous commercial terms. A successful claim of product infringement
against us, and our failure to license the infringed or similar technology, if
necessary, would harm our business. In addition, any infringement claims, with
or without merit, would be time consuming and expensive to litigate or settle
and would divert management attention from our core business.
Third-Party Reimbursement
Establishing reimbursement for any new technology is a challenge in the
current environment of cost containment and managed care. Currently procedures
using our products are reimbursed based on established general reimbursement
codes. Physicians submit a patient case history and data supporting the
applicability of our system to the patient's condition in order to obtain
reimbursement. Establishment of specific codes could facilitate reimbursement
because payors are automatically required to provide reimbursement as long as
specific diagnostic criteria are met. To date, we believe most of our physician
and hospital customers in the United States have been successful in obtaining
substantial reimbursement from third-party payors of the costs related to our
procedure. Outside the United States, reimbursement procedures and policies are
country-specific. We believe physicians in our international markets have
generally been successful in obtaining reimbursement for procedures using our
products. However, in countries where specific reimbursement codes are strictly
required, reimbursement has been denied on that basis. We and our distributors
are pursuing strategies to address reimbursement issues in international
markets. In order to ensure continued success in this area, we intend to employ
dedicated resources to monitor and direct reimbursement strategy. We may also
provide administrative support to physicians seeking reimbursement for the use
of our products.
Manufacturing
Our manufacturing operations are focused on the manufacture of disposable
electrodes and radiofrequency generators. The manufacturing process for
electrodes includes the inspection, assembly, testing, packaging and external
sterilization of finished products. Our generators are manufactured to our
specifications by outside contractors. We inspect each lot of electrodes and
generators prior to distribution to ensure they comply with our specifications.
We devote significant attention to quality control while manufacturing our
products. We have established quality systems in conformance with the Quality
System Regulation as mandated by the FDA. Our Mountain View, California
facility received ISO 9001/EN 46001 re-certification in January 2000 and is in
conformance with the European Medical Device Directive for sale of products in
Europe. We inspect incoming components prior to assembly, and we inspect and
test internally manufactured products both during and after the manufacturing
process. We also inspect packaged products and validate the external
sterilization process to ensure compliance with our specifications.
Most purchased components and services are available from more than one
supplier. Our generators are supplied from two third-party contractors. One of
the third-party suppliers is the single source of our 50 Watt generator. Both
contractors supply our 150 Watt generator.
37
<PAGE>
Government Regulation
Our products are regulated in the United States as medical devices by the
FDA under the Federal Food, Drug, and Cosmetic Act, or FDC Act, and require
clearance of a premarket notification under Section 510(k) of the FDC Act or
approval of a premarket approval application under Section 515 of the FDC Act
by the FDA prior to commercialization. Material changes or modifications to
medical devices, including changes to product labeling, are also subject to FDA
review and clearance or approval. Under the FDC Act, the FDA regulates, among
other things, the research, clinical testing, manufacturing, safety,
effectiveness, labeling, storage, record keeping, advertising, distribution,
sale and promotion of medical devices in the United States. Non-compliance with
applicable requirements can result in, among other actions, warning letters,
fines, injunctions, civil and criminal penalties against us, our officers, and
our employees, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket approval or clearance
for devices, withdrawal of marketing approvals and recommendation that we not
be permitted to enter into government contracts.
Before a new device can be introduced into the market in the United States,
the manufacturer or distributor must obtain FDA clearance of a 510(k) premarket
notification submission or FDA approval of a premarket approval application. It
generally takes three to twelve months from the date of the submission to
obtain clearance of a 510(k) submission, but it may take longer. The FDA is
increasingly requiring a more rigorous demonstration of substantial
equivalence, including clinical trials for some devices.
To date, all of our products have received 510(k) clearances or are exempt
from the 510(k) clearance process. Our initial clearances in the United States
were general in nature and allow our products to be marketed for the ablation
of soft tissue. In March 2000, we received a specific 510(k) clearance from the
FDA for the partial or complete ablation of nonresectable liver lesions. While
we have been successful to date in obtaining regulatory clearance of our
products through the 510(k) notification process, if the FDA concludes that any
product does not meet the requirements for 510(k) clearance, then a premarket
approval would be required and the time required for obtaining regulatory
approval would be significantly lengthened.
Once 510(k) clearance has been received, any products that we manufacture or
distribute are subject to extensive and continuing regulation by the FDA.
Modifications to devices, including changes to product labeling, cleared via
the 510(k) process may require a new 510(k) submission. We have made
modifications to some of our devices which we believe do not require the filing
of new 510(k) submissions. If the FDA requires us to file a new 510(k)
submission for any device modification, we may be prohibited from marketing the
modified device until the 510(k) is cleared by the FDA.
We are required to register as a medical device manufacturer with the FDA
and with the California Department of Health Services and to list our products
with the FDA. As such, we will be inspected by both the FDA and California
Department of Heath and Safety for compliance with good manufacturing
practices, quality systems regulations, and other applicable regulations,
including labeling and the adulteration and misbranding provisions of the FDC
Act. In addition, our manufacturing processes are required to comply with good
manufacturing practices and quality system regulations which cover the methods
and documentation of the design, testing, production, control, quality
assurance, labeling, packaging and shipping of our products.
We are also required to comply with medical device reporting regulations
that require us to report to the FDA any incident in which our product may have
caused or contributed to a death or serious injury, or in which our product
malfunctioned and, if the malfunction were to recur, it would be likely to
cause or contribute to a death or serious injury. If the FDA believes that a
company is not in compliance with the law or regulations, it can institute
proceedings to, among other things, detain or seize products, order a recall,
enjoin future violations or distributions and assess civil and criminal
penalties against a company, its officers, and employees. As of March 31, 2000,
we had filed eight medical device reports with the FDA related to skin burns
primarily caused by a ground pad, one report related to an arterial bleed
caused by improper needle placement and one report related to an abscess which
resulted from the large volume of ablated tissue. We believe that none of these
incidents were attributed to a device malfunction. None of these incidents
resulted in permanent injury or death.
38
<PAGE>
We are also subject to regulations and product registration requirements in
many of the foreign countries in which we sell our products in the areas of
product standards, packaging requirements, labeling requirements, import
restrictions, tariff regulations, duties and tax requirements. The time
required to obtain marketing approval or clearance required by foreign
countries may be longer or shorter than that required for FDA approval or
clearance, and requirements for licensing a product in a foreign country may
differ significantly from FDA requirements. Either we or our distributors have
received registrations and approvals to market our products in our
international markets which include the European Economic Area, Japan, Korea,
Canada, Australia and New Zealand. We are seeking or intend to seek, regulatory
registrations or approvals in other international markets.
The European Union has promulgated rules, under the Medical Devices
Directive, or MDD, which require medical devices to bear the "CE mark". The CE
mark is an international symbol of adherence to quality assurance standards. We
obtained MDD certification in December 1996. We received our ISO9001/EN46001
recertification in January 2000 and have instituted all the systems necessary
to meet the Medical Device Directive, thus acquiring the ability to affix the
CE mark to our devices and export our devices to any EC-member country.
Scientific Advisory Board
We have established a scientific advisory board for the purpose of obtaining
clinical feedback on our products as well as market data and new product
development feedback. Our scientific advisory board is chaired by Dr. Steven
Rosenberg, Chief of Surgery, National Cancer Institute, National Institute of
Health.
Employees
As of March 31, 2000, we had 57 full-time employees, including 20 in sales
and marketing, 15 in manufacturing, 12 in research and development and 10 in
general and administrative functions. Our research and development group
includes two in research, seven in product development, two in clinical
research and one in regulatory affairs. From time to time, we also employ
independent contractors to support our engineering, marketing, sales and
administrative organizations.
Facilities
We are headquartered in Mountain View, California, where we lease one
building with approximately 18,000 square feet of office, research and
development and manufacturing space under a lease expiring in August 2004. We
currently sublease to a third party 6,000 square feet of our existing space
under a sublease that expires in August 2000. Our subtenant has the option to
renew the sublease for two additional six-month periods. We believe that our
existing facilities are adequate to meet our current and foreseeable
requirements for the next 12 months or that suitable additional or substitute
space will be available as needed.
Insurance
We have general and product liability insurance which we believe is
consistent with the level of coverage held by other companies in the medical
device industry. We believe our level of liability insurance coverage provides
us with adequate protection against the risks associated with general and
product liability claims.
Legal Proceedings
We are not currently subject to any material legal proceedings, other than
the patent disputes described in "Risk Factors--We are currently involved in a
patent interference action and a patent opposition action and if we do not
prevail in these actions, our business could suffer." The patent interference
proceeding is pending before the Board of Patent Appeals and Interferences of
the United States Patent and Trademark Office. On July 16, 1999 the United
States Patent and Trademark Office declared an interference between a claim of
one of our issued patents and claims of a patent application controlled by
RadioTherapeutics Corporation. The principal parties in the proceeding are
RadioTherapeutics and RITA. The factual basis underlying the claim is the
determination by the
39
<PAGE>
commissioner of the United States Patent and Trademark Office that our patent
and the RadioTherapeutics patent application interfere. In the interference
proceeding, RadioTherapeutics seeks to invalidate our patent claim and to
establish the patentability of the claims in their patent application. We seek
to maintain the priority of our patent claim. The European opposition is
pending before the European Patent Office and was instituted on March 2, 2000.
The principal parties are RadioTherapeutics and RITA. The factual basis
underlying the claim is the allegation by RadioTherapeutics that our European
patent is not valid. In the opposition, RadioTherapeutics seeks to have our
patent declared invalid and to have our patent cancelled. We are defending our
patent and seek to defend it as issued. In addition to these patent
proceedings, we may from time to time become a party to various legal
proceedings arising in the ordinary course of our business.
40
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table shows specific information about our executive officers
and directors as of March 31, 2000.
<TABLE>
<CAPTION>
Name Age Position(s)
--------------------------------- --- --------------------------------------
<C> <C> <S>
Barry Cheskin.................... 39 Chief Executive Officer, President and
Director
Marilynne Solloway............... 52 Chief Financial Officer and Vice
President, Finance and Administration
Daniel Balbierz.................. 38 Vice President, Research and
Development
Vicki Hacker..................... 43 Vice President, Clinical Affairs
Russell Johnson.................. 46 Vice President, Marketing
David Martin..................... 35 Vice President, Global Sales
Ronald Steckel................... 46 Vice President, Operations
Vincent Bucci.................... 46 Director
Janet Effland.................... 51 Director
John Gilbert..................... 63 Director
Scott Halsted.................... 40 Director
Gordon Russell................... 67 Director
</TABLE>
Messrs. Halsted, Bucci and Russell are members of our compensation
committee. Ms. Effland and Mr. Halsted are members of our audit committee.
Barry Cheskin has served as our President and Chief Executive Officer since
May 1997. Prior to joining us, he held various positions at Datascope Corp, a
medical device company. He was President, Collagen Products Division and
Corporate Vice President from May 1994 to April 1997, General Manager,
Vasoseal/Bioplex Division from November 1992 to May 1994, and Director,
Corporate Business Development from April 1992 to November 1992. Mr. Cheskin
holds a B.S. in Mechanical Engineering from Massachusetts Institute of
Technology, an M.S. in Mechanical Engineering from Stanford University, and an
M.B.A. from Columbia University.
Marilynne Solloway has served as our Vice President, Finance &
Administration and Chief Financial Officer since April 1998. Prior to joining
us, from July 1995 to April 1998, Ms. Solloway was self-employed as a
consultant and worked with several non-profit organizations. In 1985, she co-
founded Menlo Care, Inc., a medical device company. Ms. Solloway held the
position of Chief Financial Officer and Director of Menlo Care, Inc. from May
1985 to June 1995. Ms. Solloway holds a B.A. from University of California,
Berkeley and an M.B.A. from University of Santa Clara.
Daniel Balbierz has served as our Vice President, Research and Development
since April 1998. Prior to joining us, he held the position of Worldwide
Director, Research and Development for the Vascular Access Division of Johnson
& Johnson Medical, Inc., a medical device company, from March 1996 to March
1998. Previously, Mr. Balbierz held the position of Director, Research and
Development at Menlo Care, a medical device company, from June 1987 to March
1996. Mr. Balbierz holds a B.S. in Mechanical Engineering from California
Polytechnic State University.
Vicki Hacker has served as our Vice President, Clinical Affairs since
February 2000. Prior to joining us, she held various positions at Cardima
Corporation, an electro-physiology company, including Director of Clinical
Research from March 1999 to January 2000 and Manager of Clinical Programs from
June 1997 to February 1999. Previously, Ms. Hacker held the position of Senior
Clinical Education/Research Specialist at Heartport, a minimally invasive
cardiac surgery company, from June 1996 to May 1997. From July 1993 to May
1996, she held the position of Associate Director of Clinical Research at
Advanced Bioresearch Associates, a contract research association. Ms. Hacker
holds a B.S. in Nursing from Rush University and an M.S. in Nursing and
Administration from San Jose State University.
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<PAGE>
Russell Johnson has served as our Vice President, Marketing since July 1998.
From March 1999 to March 2000, he also served as our Vice President, Global
Sales. Prior to joining us, he founded The Pathfinder Group, a marketing
consulting firm servicing emerging medical device companies, and served as
President from June 1997 to June 1998. Previously, Mr. Johnson held the
position of Director, International Sales of Vista Medical Technologies, Inc.,
a medical device company, from January 1997 to May 1997 and before that he was
the Director, Worldwide Marketing for the Cardiothoracic Surgery Division of
Vista Medical Technologies, Inc., from July 1996 to December 1996. He also held
the position of Director of International Marketing for Boston Scientific, a
medical device company, from July 1993 to July 1996. Mr. Johnson holds a B.A.
from Brown University and an M.B.A. from University of Michigan.
David Martin has served as our Vice President, Global Sales since March
2000. Prior to joining us, he held the position of Director of United States
Sales for the Cardiac Surgery division of Guidant Corporation, a medical device
company, from November 1999 to March 2000. Previously, Mr. Martin held various
positions at CardioThoracic Systems, Inc., a minimally invasive cardiac surgery
company, including Director of Sales for the United States from January 1998 to
November 1999 and Regional Sales Manager and District Sales Manager Western
United States from July 1996 to December 1997. He also held the position of
District Manager for Carbomedics, a medical device company, from March 1994 to
June 1996. Mr. Martin holds a B.A. from University of California, Santa Barbara
and an M.B.A. from University of San Diego.
Ronald Steckel has served as our Vice President, Operations since June 1998.
Prior to joining us, Mr. Steckel held various positions at Metra Biosystems,
Inc., a medical diagnostics company, including Senior Vice President from July
1996 to June 1998, Vice President, Operations from February 1992 to June 1996
and a consultant from July 1991 to February 1992. Mr. Steckel holds a B.S. in
Biology from Blackburn University and an M.B.A. from Lake Forest College.
Vincent Bucci has served as a member of our board of directors since March
1999. Mr. Bucci holds the position of President of Health Policy Associates,
Inc., a consulting company, since 1992. Mr. Bucci holds a B.A. from Bates
College and a J.D. in Public Law and an M.A. in Government, both from
Georgetown University.
Janet Effland has served as a member of our board of directors since October
1999. She holds the position of Managing Director of Patricof & Co. Ventures,
Inc., a venture capital firm, since April 1988. Ms. Effland is also a director
of Focal, Inc. and various private companies. Ms. Effland holds a B.S. and a
J.D. from Arizona State University, and she attended Harvard Business School's
Program for Management Development.
John Gilbert has served as a member of our board of directors since May
2000. From 1992 to July 1999 he served as Vice Chairman of Keravision, Inc., a
medical device company. Prior to that, Mr. Gilbert retired from Johnson &
Johnson in 1992 after 30 years where he served as Vice President of Sales at
Ethicon, Inc., Vice President of Johnson & Johnson International and Vice
Chairman of Iolab Corporation. Mr. Gilbert holds a B.S. from Texas A&M
University.
Scott Halsted has served as a member of our board of directors since May
1998. He holds the positions of General Partner and Principal of Morgan Stanley
Dean Witter Venture Partners, a venture capital firm, since February 1997 and
prior to that he was Vice President from January 1992 to January 1997. Mr.
Halsted is also a director of Intuitive Surgical, Inc. and various other
private companies. Mr. Halsted holds an A.B. and a B.S. in Biomechanical
Engineering from Dartmouth College and an M.M. from the Kellogg Graduate School
of Management at Northwestern University.
Gordon Russell has served as a member of our board of directors since August
1994. From 1979 to January 2000, he held the position of General Partner at
Sequoia Capital, a venture capital firm, specializing in high technology and
healthcare. Mr. Russell is also a director of Fusion Medical, Inc. and various
private companies. He holds an A.B. from Dartmouth College.
Our bylaws currently provide for a board of directors consisting of seven
members. Following the offering the board of directors will be divided into
three classes, each serving staggered three year terms: Class I, which is
anticipated to consist of directors Janet Effland and Scott Halsted, whose term
will expire at the annual
42
<PAGE>
meeting of stockholders to be held in 2001; Class II, which is anticipated to
consist of directors Gordon Russell and John Gilbert, whose term will expire at
the annual meeting of stockholders to be held in 2002; and Class III, which is
anticipated to consist of directors Vincent Bucci, Barry Cheskin, and a vacancy
which will be filled at a later date whose term will expire at the annual
meeting of stockholders to be held in 2003. As a result, only one class of
directors will be elected at each annual meeting of our stockholders, with the
other classes continuing for the remainder of their terms.
Mr. Halsted and Ms. Effland were elected to the board of directors pursuant
to voting agreements between us and our Series E preferred stock investors.
That voting agreement will terminate upon completion of this offering. Our
officers are appointed by the board of directors and serve at the discretion of
the board of directors. There are no family relationships among our directors
and officers.
Director Compensation
Our directors do not currently receive compensation for their services as
members of the board of directors although they are reimbursed for expenses.
Employee directors are eligible to participate in our 1994 incentive stock plan
and our 2000 stock plan and will be eligible to participate in our 2000
employee stock purchase plan. In March 2000, we sold to Mr. Bucci 9,000 shares
of restricted common stock at $1.67 per share in exchange for regulatory
consulting services he provided to us. In addition, in March 1999, Mr. Bucci
was granted an option to purchase 30,000 shares of common stock under the 1994
incentive stock plan at an exercise price of $1.00 per share, and 1/48th of
such shares will vest each month beginning on March 16, 1999, the vesting start
date. Mr. Russell was granted options to purchase common stock under the 1994
incentive stock plan on two occasions. In October 1994 Mr. Russell was granted
7,500 shares at an exercise price of $.80 and 1/48th of such shares will vest
each month after July 1, 1994, the vesting start date. In January 1997,
Mr. Russell was granted 7,656 shares at an exercise price of $.50 and 1/48th of
such shares will vest each month after October 10, 1994, the vesting start
date. On May 17, 2000, Mr. Gilbert was granted options to purchase 25,000
shares of common stock under the 1994 incentive stock plan at an exercise price
of $3.33 and 1/48th of such shares will vest each month beginning on May 17,
2000.
Board of Directors Committees and Other Information
The compensation committee currently consists of Scott Halsted, Vincent
Bucci and Gordon Russell. The compensation committee:
. reviews and approves the compensation and benefits for our executive
officers; and
. makes recommendations to the board of directors regarding such matters.
The audit committee consists of Janet Effland and Scott Halsted. The audit
committee:
. makes recommendations to the board of directors regarding the selection
of independent auditors;
. reviews the results and scope of the audit and other services provided by
our independent auditors; and
. reviews and evaluates our audit and control functions.
Compensation Committee Interlocks and Insider Participation
The members of the compensation committee of the board of directors are
currently Scott Halsted, Vincent Bucci and Gordon Russell, none of whom has
ever been an officer or employee of RITA. Mr. Halsted is a General Partner at
Morgan Stanley Dean Witter Venture Partners and, until January 2000, Mr.
Russell was a General Partner at Sequoia Capital, both of which are principal
stockholders.
Executive Compensation
The following table sets all compensation earned, including salary, bonuses,
stock options and other compensation during the fiscal year ended December 31,
1999 by Barry Cheskin, our Chief Executive Officer and our four other most
highly compensated executive officers, each of whose total annual compensation
exceeded $100,000 in 1999.
43
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------- ------------
Securities
Other Annual Underlying All Other
Name and Position(s) Salary Bonus Compensation Options Compensation
--------------------------------- -------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Barry Cheskin.................... $217,000 -- $51,000(1) 63,079 $26,075(1)
President, Chief Executive
Officer and Director
Daniel Balbierz.................. 161,250 -- -- -- --
Vice President, Research and
Development
Marilynne Solloway............... 157,031 -- -- -- --
Chief Financial Officer and Vice
President, Finance and
Administration
Ronald Steckel................... 155,625 10,000(2) -- -- --
Vice President, Operations
Russell Johnson.................. 153,750 15,000(3) 54,674(4) -- 55,373(4)
Vice President, Marketing
</TABLE>
-------------------------
(1) Mr. Cheskin received a $42,000 housing allowance, a $9,000 auto allowance,
and a $26,075 relocation reimbursement. In lieu of his 1999 cash bonus, the
board of directors allowed Mr. Cheskin to continue to receive his housing
allowance through December 31, 2000.
(2) Mr. Steckel received a $30,000 signing bonus of which $10,000 was earned in
1999.
(3) Mr. Johnson received a $15,000 signing bonus which was earned in 1999.
(4) Mr. Johnson received a $15,000 housing allowance, $39,674 in sales
commissions, and a $55,373 relocation reimbursement. The housing allowance
terminates July 31, 2000.
44
<PAGE>
Option Grants in Last Fiscal Year
The following table summarizes the stock options granted to each named
executive officer during the fiscal year ended December 31, 1999. No stock
appreciation rights were granted to this individual during the year.
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------
Potential Realizable
Value at Assumed
Number of Percent of Annual Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted to for Option Term(2)
Options Employees in Exercise Expiration ---------------------
Name Granted(1) Fiscal Year 1999 Price Date 5% 10%
------------------------ ---------- ---------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Barry Cheskin........... 63,079 17.95% $1.00 10/7/09 $1,130,239 $1,799,717
</TABLE>
-------------------------
(1) This stock option, which was granted under our 1994 plan vests in
accordance with the following schedule: 50% of the total number of shares
of common stock vested on May 5, 1997 and 1/48 began vesting on May 5,
1999, and shall continue to vest as long as Mr. Cheskin remains an employee
with, consultant to, or director of RITA.
(2) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the Securities and Exchange Commission and are based on the
assumption that the assumed initial public offering price of $12.00 was the
fair market value of the common stock on the date of grant. There is no
assurance provided to any executive officer or any other holder of our
securities that the actual stock price appreciation over the 10-year option
term will be at the assumed 5% and 10% levels or at any other defined
level. Unless the market price of the common stock appreciates over the
option term, no value will be realized from the option grants made to the
executive officers.
Aggregate Corresponding Option Exercises in Last Fiscal Year and
Option Values at December 31, 1999
The following table provides information concerning exercises of options by
the named executive officers in 1999 and the number and value of unexercised
options held by the named executive officers at December 31, 1999.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares December 31, 1999 December 31, 1999 (2)
Acquired on Value ------------------------- -------------------------
Name Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
------------------------ ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Barry Cheskin........... 120,000 1,367,119 120,425 197,651 $1,324,675 $2,232,904
Marilynne Solloway...... -- -- 44,693 62,571 491,623 688,182
Daniel Balbierz......... -- -- 44,687 62,562 491,623 688,281
Ronald Steckel.......... -- -- 34,965 58,275 384,615 641,025
Russell Johnson......... -- -- 31,875 58,125 350,625 639,375
</TABLE>
-------------------------
(1) Assumes that the fair market value at the time of exercise was equal to the
assumed initial public offering price of $12.00 per share.
(2) The value of unexercised in-the-money options held at December 31, 1999
represents the total gain which an option holder would realize if he or she
exercised all of the in-the-money options held at December 31, 1999, and is
determined by multiplying the number of shares of common stock underlying
the options by the difference between an assumed initial public offering
price of $12.00 per share and the per share option exercise price. An
option is in-the-money if the fair market value of the underlying shares
exceeds the exercise of the option.
45
<PAGE>
Employment Agreements
We have entered into employment agreements with the executive officers set
forth below, which provide for the payment of severance or the acceleration of
unvested stock, options and warrants in some circumstances.
Mr. Cheskin's agreement provides that his initial percentage ownership of
our common stock shall be protected against dilution below five percent (5%) of
the company's outstanding capital stock. This antidilution protection applies
to all of our issuances of securities, other than shares issued in connection
with an initial public offering, and terminates upon completion of this
offering. In the event Mr. Cheskin's employment with us is involuntarily
terminated without cause, which would include constructive termination, all
unvested shares held by Mr. Cheskin will immediately vest and Mr. Cheskin will
receive monthly severance payments, equal to 1/12 of his annual base salary
until the earlier of (i) twelve months after his termination date or (ii) such
time as he commences full-time employment at another company. In addition, in
the event of a change in control of the company, immediately upon consummation
of the transaction, seventy five percent (75%) of any unvested shares held by
Mr. Cheskin will immediately vest.
Mr. Steckel's agreement provides that if we terminate his employment without
cause, he will receive continued payment of his base salary for the earlier of
(i) six months after his termination date or (ii) such time as he commences
full-time employment with another company.
Mr. Martin's agreement provides that if, after the six-month anniversary of
his employment with us, we terminate his employment without cause, he will
receive continued payment of his base salary for the earlier of (i) twelve
months after his termination date or (ii) such time as he commences full-time
employment with another company.
In addition, we have entered into change of control agreements with our
officers that provide the following benefits upon the sale or merger of RITA.
These benefits will not apply if we commence substantive discussions with a
potential acquiror prior to November 26, 2000. In the event that we consummate
a change of control transaction, 50 percent of any unvested options held by our
officers shall become fully vested and immediately exercisable and repurchase
rights retained by us with respect to 50 percent of the restricted stock held
by our officers shall immediately lapse. In addition, on each one month
anniversary following the effective date of a change of control transaction,
1/12th of the remaining unvested options held by our officers shall become
fully vested and immediately exercisable and repurchase rights retained by us
with respect to 1/12th of any remaining restricted stock held by our officers
shall immediately lapse.
If the officer is involuntarily terminated within twelve (12) months of the
change of control transaction, all unvested options held by our officers shall
become fully vested and immediately exercisable and all repurchase rights
retained by us with respect to the restricted stock held by our officers shall
immediately lapse. If the officer voluntarily resigns or is terminated for
cause after the change of control, then the officer is not entitled to any
acceleration of the vesting of options or lapse of repurchase rights with
respect to restricted stock.
Stock Plans
2000 Stock Plan
Our 2000 plan provides for the grant of incentive stock options to
employees, including employee directors, and of nonstatutory stock options and
stock purchase rights to employees and consultants, including non-employee
directors. The purposes of the 2000 plan are to attract and retain the best
available personnel, to provide additional incentives to our employees and
consultants and to promote the success of our business. The 2000 plan was
adopted by our board of directors in May 2000 and will be submitted for
approval by our stockholders prior to the completion of this offering. A total
of 2,000,000 shares of common stock has been reserved for issuance under the
2000 plan. The number of shares reserved for issuance under the 2000 plan will
be subject to an automatic annual increase on the first day of each of our
fiscal years beginning in 2001 and
46
<PAGE>
ending in 2010 equal to the lesser of 1,000,000 shares, 7% of our outstanding
common stock on the last day of the immediately preceding fiscal year, or such
lesser number of shares as the board of directors determines. Unless terminated
earlier by the board of directors, the 2000 plan will terminate in 2010.
The 2000 plan may be administered by the board of directors or a committee
of the board, each known as the administrator. The administrator determines the
terms of options and stock purchase rights granted under the 2000 plan,
including the number of shares subject to the award, the exercise or purchase
price, and the vesting and/or exercisability of the award and any other
conditions to which the award is subject. In no event, however, may an employee
receive awards for more than 1,000,000 shares under the 2000 plan in any fiscal
year. Incentive stock options granted under the 2000 plan must have an exercise
price of at least 100% of the fair market value of the common stock on the date
of grant, and not less than 110% of the fair market value in the case of
incentive stock options granted to an employee who holds more than 10% of the
total voting power of all classes of our stock or any parent or subsidiary's
stock. After the date of this offering, the exercise price of nonstatutory
stock options and the purchase price of stock purchase rights will be the price
determined by the administrator, although nonstatutory stock options and stock
purchase rights granted to our Chief Executive Officer and our four other most
highly compensated officers will generally equal at least 100% of the grant
date fair market value if we intend that awards to those individuals will
qualify as performance-based compensation under applicable tax law. Payment of
the exercise or purchase price may be made in cash or such other consideration
as determined by the administrator.
With respect to options granted under the 2000 plan, the administrator
determines the term of options, which may not exceed 10 years (or 5 years in
the case of an incentive stock option granted to an employee who holds more
than 10% of the total voting power of all classes of our stock or a parent or
subsidiary's stock). Generally, an option granted under the 2000 plan is
nontransferable other than by will or the laws of descent and distribution, and
may be exercised during the lifetime of the optionee only by such optionee.
However, the administrator may in its discretion provide for the limited
transferability of nonstatutory stock options granted under the 2000 plan.
Stock issued pursuant to stock purchase rights granted under the 2000 plan is
generally subject to a repurchase right at the purchaser's original purchase
price exercisable by us upon the termination of the holder's employment or
consulting relationship with us for any reason (including death or disability).
This repurchase right will lapse at such rate as the administrator may
determine.
If we sell all or substantially all of our assets or if we are acquired by
another corporation, each outstanding option and stock purchase right may be
assumed or an equivalent award substituted by the acquiror or purchaser.
However, if the acquiror does not agree to such assumption or substitution,
then outstanding options will terminate. Upon the closing of the transaction,
outstanding repurchase rights will terminate unless assigned to the acquiror or
purchaser. Outstanding options will adjust in the event of a stock split, stock
dividend or other similar change in our capital structure. The administrator
has the authority to amend or terminate the 2000 plan, but no action may be
taken that impairs the rights of any holder of an outstanding option or stock
purchase right without the holder's consent. In addition, we must obtain
stockholder approval of amendments to the plan as required by applicable law.
2000 Employee Stock Purchase Plan
Our 2000 employee stock purchase plan was adopted by the board of directors
in May 2000 and will be submitted for approval by our stockholders prior to
completion of this offering. A total of 650,000 shares of common stock has been
reserved for issuance under the 2000 purchase plan, none of which have been
issued as of the date of this offering. The number of shares reserved for
issuance under the 2000 purchase plan will be subject to an automatic annual
increase on the first day of each of our fiscal years beginning in 2002, 2003
and 2004 and equal to the lesser of 650,000 shares, 4% of our outstanding
common stock on the last day of the immediately preceding fiscal year, or such
lesser number of shares as the board of directors determines. The 2000 purchase
plan becomes effective upon the date of this offering. Unless terminated
earlier by the board of directors, the 2000 purchase plan shall terminate in
2010.
47
<PAGE>
The 2000 purchase plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, will be implemented by a series of offering periods
of approximately 24 months' duration, with new offering periods (other than the
first offering period) commencing generally on February 1 and August 1 of each
year. Each offering period will consist of consecutive purchase periods of
approximately six months' duration. At the end of each purchase period an
automatic purchase will be made for participants. The initial offering period
is expected to commence on the date of this offering and end on July 31, 2002.
The 2000 purchase plan will be administered by the board of directors or by a
committee appointed by the board. Our employees (including officers and
employee directors), or employees of any majority-owned subsidiary designated
by the board, are eligible to participate in the 2000 purchase plan if they are
employed by us or any such subsidiary for at least 20 hours per week and more
than five months per year. The 2000 purchase plan permits eligible employees to
purchase common stock through payroll deductions, which in any event may not
exceed 15% of an employee's eligible cash compensation. The purchase price is
equal to the lower of 85% of the fair market value of the common stock at the
beginning of each offering period or at the end of each purchase period.
Employees may end their participation in the 2000 purchase plan at any time
during an offering period, and participation ends automatically on termination
of employment.
An employee cannot be granted an option under the 2000 purchase plan if
immediately after the grant such employee would own stock and/or hold
outstanding options to purchase stock equaling 5% or more of the total voting
power or value of all classes of our stock or stock of our subsidiaries, or if
such option would permit an employee's rights to purchase stock under the 2000
purchase plan at a rate that exceeds $25,000 of fair market value of such stock
for each calendar year in which the option is outstanding. In addition, no
employee may purchase more than 1,500 shares of common stock under the 2000
purchase plan in any one purchase period.
If we merge or consolidate with or into another corporation or sell all or
substantially all of our assets, each right to purchase stock under the 2000
purchase plan will be assumed or an equivalent right substituted by the
successor corporation. However, the board of directors will shorten any ongoing
offering period so that employees' rights to purchase stock under the 2000
purchase plan are exercised prior to the transaction in the event that the
successor corporation refuses to assume each purchase right or to substitute an
equivalent right. Outstanding options will be adjusted if we effect a stock
split, stock dividend or similar change in our capital structure. The board of
directors has the power to amend or terminate the 2000 purchase plan and to
change or terminate an offering period as long as such action does not
adversely affect any outstanding rights to purchase stock thereunder. However,
the board of directors may amend or terminate the 2000 purchase plan or an
offering period even if it would adversely affect outstanding options in order
to avoid our incurring adverse accounting charges.
2000 Directors' Stock Option Plan
The 2000 directors' stock option plan was adopted by the board of directors
in May 2000 and will be submitted for approval by our stockholders prior to
completion of this offering. It will become effective upon the date of this
offering. A total of 500,000 shares of common stock have been reserved for
issuance under the 2000 directors' plan, all of which remain available for
future grants. The directors' plan provides for the grant of nonstatutory stock
options to our nonemployee directors. The directors' plan is designed to work
automatically without administration; however, to the extent administration is
necessary, it will be performed by the board of directors. To the extent they
arise, it is expected that conflicts of interest will be addressed by
abstention of any interested director from both deliberations and voting
regarding matters in which such director has a personal interest. Unless
terminated earlier by the board of directors, the directors' plan will
terminate in 2010.
The directors' plan provides that each person who becomes a non-employee
director after the completion of this offering will be granted a nonstatutory
stock option to purchase 25,000 shares of common stock on the date on which
such individual first becomes a member of our board of directors. This option
shall vest at the rate of 1/48 of the total number of shares subject to such
option per month. Thereafter, on the dates of our
48
<PAGE>
annual stockholder meetings, each non-employee director who has been a member
of the board of directors for at least six months will be granted a
nonstatutory stock option to purchase 5,000 shares of common stock. Members of
the board who were non-employee directors on the date of this offering shall
receive a nonstatutory stock option to purchase an additional 2,000 shares of
common stock. Each annual option shall vest at the rate of 100% of the total
number of shares subject to such option on the one-year anniversary of the
grant date.
All options granted under the directors' plan will have a term of 10 years
and an exercise price equal to the fair market value on the date of grant and
will generally be nontransferable. If a non-employee director ceases to serve
as a director for any reason other than death or disability, he or she may, but
only within 90 days after the date he or she ceases to be a director, exercise
options granted under the directors' plan. If he or she does not exercise the
option within such 90-day period, the option shall terminate. If a director's
service terminates as a result of his or her disability or death, or if a
director dies within three months following termination for any reason, the
director or his or her estate will have six months after the date of
termination or death, as applicable, to exercise options that were vested as of
the date of termination. Options granted under the directors' plan are
generally nontransferable by the option holder other than by will or the laws
of descent or distribution and each option is exercisable, during the lifetime
of the option holder, only by that option holder.
If we are acquired by another corporation, each option outstanding under the
directors' plan will be assumed or equivalent options substituted by our
acquiror, unless our acquiror does not agree to such assumption or
substitution, in which case the options will terminate upon consummation of the
transaction to the extent not previously exercised. In connection with any
acquisition, each director holding options under the directors' plan will have
the right to exercise his or her options immediately before the consummation of
the merger as to all shares underlying the options. Outstanding options will be
adjusted if we effect a stock split, stock dividend, or other similar change in
our capital structure. Our board of directors may amend or terminate the
directors' plan as long as such action does not adversely affect any
outstanding option and we obtain stockholder approval for any amendment to the
extent required by applicable law.
1994 Incentive Stock Plan
Our 1994 plan was originally adopted by our board of directors and approved
by our stockholders in July 1994. It provides for the grant of incentive stock
options to employees and nonstatutory stock options and stock purchase rights
to employees and consultants, including non-employee directors. As of March 31,
2000, options to purchase 1,855,616 shares of common stock were outstanding
under the 1994 plan at a weighted average exercise price of $1.01 per share,
708,932 shares had been issued upon exercise of outstanding options or pursuant
to restricted stock purchase agreements, and 293,900 shares remained available
for future grant. Our board of directors has determined that no future grants
will be made under the 1994 plan after the date of this offering.
The terms of the stock awards under the 1994 plan are generally the same as
those that may be issued under the 2000 plan, except for the following
features. Nonstatutory stock options and restricted stock purchase rights
granted under the 1994 plan are nontransferable in all cases and must generally
be granted with an exercise price equal to at least 85% of the fair market
value of our common stock on the date of grant. In addition, there is no
limitation on the number of shares that can be awarded to an employee in a
fiscal year.
If we sell all or substantially all of our assets or if we are acquired by
another corporation, each outstanding option and stock purchase right may be
assumed or an equivalent award substituted by the acquiror or purchaser.
However, if the acquiror does not agree to such assumption or substitution,
then outstanding options will terminate. Upon the closing of the transaction,
outstanding repurchase rights will terminate unless assigned to the acquiror or
purchaser. Outstanding options will adjust in the event of a stock split, stock
dividend or other similar change in our capital structure. The administrator
has the authority to amend or terminate the 1994 plan, but no action may be
taken that impairs the rights of any holder of an outstanding option or stock
purchase right without the holder's consent. In addition, we must obtain
stockholder approval of amendments to the plan as required by applicable law.
49
<PAGE>
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We believe that we have executed all of the transactions set forth below on
terms no less favorable to us than we could have obtained from unaffiliated
third parties. It is our intention to ensure that all future transactions,
including loans, between us and our officers, directors and principal
stockholders and their affiliates, are approved by a majority of the board of
directors, including a majority of the independent and disinterested members of
the board of directors, and are on terms no less favorable to us than those
that we could obtain from unaffiliated third parties.
Each share of Series B preferred stock, Series C preferred stock, Series D
preferred stock and Series E preferred stock outstanding immediately prior to
the offering is convertible into 1.000 share, 1.047 shares, 1.411 shares and
1.000 share, respectively, of common stock. Upon the closing of this offering,
all outstanding shares of preferred stock will be automatically converted into
common stock. All share and per share amounts below have been adjusted to
reflect such conversion and have been adjusted to reflect the three-for-five
reverse split to be effected upon completion of this offering.
From January 1, 1996 through March 31, 2000, we have issued shares of
preferred stock in private placement transactions as follows:
. an aggregate of 1,160,526 shares of Series B preferred stock at $1.05 per
share in May 1996(1);
. an aggregate of 259,179 shares of Series B preferred stock at $1.05 per
share in June 1996;
. an aggregate of 1,113,591 shares of Series C preferred stock at $4.78 per
share in December 1996;
. an aggregate of 317,475 shares of Series D preferred stock at $7.09 per
share in January 1998;
. an aggregate of 2,076,043 shares of Series E preferred stock at $4.58 per
share in April 1998;
. an aggregate of 872,727 shares of Series E preferred stock at $4.58 per
share in June 1998;
. an aggregate of 218,182 shares of Series E preferred stock at $4.58 per
share in July 1999;
. an aggregate of 1,527,273 shares of Series E preferred stock at $4.58 per
share in August 1999; and
. an aggregate of 436,363 shares of Series E preferred stock at $4.58 per
share in October 1999.
--------
(1) Includes cancellation of indebtedness in the following amounts: Delphi
BioVentures II for $81,304, Delphi BioInvestments II for $416, Sequoia
Capital VI for $74,400, Sequoia Technology Partners VI for $4,050, Sequoia
XXIV for $3,270, Mohr, Davidow Ventures III for $81,720 and Stuart Edwards
for $54,840.
50
<PAGE>
The purchasers of the preferred stock include the following holders of more
than 5% of our securities and their affiliated entities:
<TABLE>
<CAPTION>
Shares of Preferred Stock
------------------------------------
Investor Series B Series C Series D Series E
----------------------------------------- -------- -------- -------- ---------
<S> <C> <C> <C> <C>
Entities Affiliated with Patricof & Co.
Ventures, Inc.
APA Excelsior V, L.P..................... -- -- -- 964,493
The P/A Fund III, L.P.................... -- -- -- 201,974
Patricof Private Investment Club II,
L.P..................................... -- -- -- 11,714
Entities Affiliated with Morgan Stanley
Venture Partners
Morgan Stanley Venture Partners III,
L.P..................................... -- -- -- 1,573,862
The Morgan Stanley Venture Partners
Entrepreneur Fund, L.P. ................ -- -- -- 62,500
Entities Affiliated with Bank of America
Ventures
Bank of America Ventures................. -- -- -- 741,818
BA Venture Partners IV................... -- -- 130,909
Entities Affiliated with Sequoia Capital
Sequoia Capital VI....................... 243,698 152,433 -- 127,537
Sequoia Technology Partners VI........... 13,389 8,375 -- 7,007
Sequoia 1995, L.L.C...................... 10,710 6,700 -- 5,605
Entities Affiliated with Delphi Ventures
Delphi BioInvestments II, L.P. .......... 1,362 326 -- --
Delphi Ventures II....................... 266,436 63,650 -- 117,208
Mohr, Davidow Ventures III............... 267,800 63,975 -- 117,808
Entities Affiliated with Nissho Iwai
Corporation
Nissho Iwai Corporation.................. -- -- 317,514 --
Nissho Iwai American Corporation......... -- -- -- 218,182
</TABLE>
--------
Since January 1, 1996, we have issued the following warrants to executive
officers, directors, holders of more than 5% of our outstanding stock and their
affiliates
. a warrant for 4,551 shares of Series E preferred stock at an exercise
price of $4.58 per share issued to Sequoia Capital VI in October 1997;
. a warrant for 200 shares of Series E preferred stock at an exercise price
of $4.58 per share issued to Sequoia 1995, L.L.C. in October 1997;
. a warrant for 250 shares of Series E preferred stock at an exercise price
of $4.58 per share issued to Sequoia Technology Partners in October 1997;
. a warrant for 21 shares of Series E preferred stock at an exercise price
of $4.58 per share issued to Delphi BioInvestments II, L.P. in October
1997;
. a warrant for 4,183 shares of Series E preferred stock at an exercise
price of $4.58 per share issued to Delphi Ventures II, L.P. in October
1997; and
. a warrant for 4,205 shares of Series E preferred stock at an exercise
price of $4.58 per share issued to Mohr, Davidow Ventures III in October
1997.
For additional details on the shares held by each of these purchasers,
please refer to the information in this prospectus under the heading "Principal
Stockholders."
On August 2, 1994, we entered into a cross-license agreement with VIDAMed,
whose founder Stuart Edwards was also one of our founders. Under this
agreement, we granted VIDAMed a royalty-free license to
51
<PAGE>
use our radiofrequency technology to treat disorders of the lower urinary tract
and prostate gland. VIDAMed granted us the right to use their radiofrequency
technology to treat cancer. Until August 2, 2004 or until our payments total
$500,000, we are required to pay VIDAMed a royalty of 2.5% of net sales on
products developed or incorporating the VIDAMed technology. To date we have not
made any payments under the agreement.
In December 1999 we entered into a loan agreement with Barry Cheskin in the
amount of $72,881 in connection with Mr. Cheskin's exercise of stock options.
This promissory note is to be repaid over 4 years at a 6.11% interest rate.
On January 25, 2000, we granted the following officers stock options to
purchase common stock at an exercise price of $1.00 per share:
. Barry Cheskin was granted 68,983 shares;
. Daniel Balbierz was granted 33,000 shares;
. Russell Johnson was granted 21,000 shares;
. Marilynne Solloway was granted 33,000 shares; and
. Ronald Steckel was granted 18,000 shares.
In 1999 the board approved stock bonus programs for employees and officers
of the company. These programs were created to provide employees and officers
of the company a performance-based bonus determined in accordance with
achievement of 1999 company and individual objectives in the form of grants of
options or restricted stock out of the 1994 incentive stock plan. Following
retirement of the 1994 incentive stock plan in connection with this offering,
any future grants made from a similar bonus program, if any shall be made out
of the 2000 plan. The 1999 bonus program was administered by our Chief
Financial Officer. Eligibility to participate was based on the requirement that
the employee be employed by us for no less than three months prior to December
31, 1999, and continued to be employed on the date of grant. Employees and
officers were eligible to earn up to 10% of the number of options or restricted
common stock, as the case may be, that they held as of December 31, 1999. Each
officer who was granted restricted stock under this program was permitted to
purchase the stock immediately upon grant, subject to the company's right of
repurchase. This repurchase right lapses as to 25% of the stock each year on
the anniversary dates following January 1, 2000, the vesting start date. In
addition, each officer granted stock under this program has executed a full
recourse promissory note to purchase their stock. These notes shall be forgiven
as follows: 25% of the principal and accrued interest on the note shall be
forgiven on each one year anniversary of January 1, 2000, the vesting start
date.
The awards granted under the stock bonus programs, up to an additional 10%
of the number of options the individual employee or officer held at the end of
the year, were based on the following criteria for both employees and officers:
one half was based on our performance to objectives, the achievement of which,
and the corresponding percentage allocation, was determined by our compensation
committee in consultation with our Chief Executive Officer. In addition, for
employee stock bonuses, the other half of the bonus was based on each
employee's performance, as determined by his or her immediate supervisor and
our Chief Executive Officer. For our officers the other half of the bonus was
based on each officer's performance, as determined by our Chief Executive
Officer and our compensation committee.
On March 24, 2000, all employees as of October 1, 1999 were granted stock
options at an exercise price of $1.67 per share under the employee stock bonus
plan and the following officers were sold restricted stock under the officer
bonus plan at a price of $1.67 per share:
. Daniel Balbierz purchased 12,624 shares;
. Barry Cheskin purchased 49,500 shares;
. Russell Johnson purchased 11,100 shares;
. Marilynne Solloway purchased 14,028 shares; and
. Ronald Steckel purchased 11,124 shares.
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<PAGE>
This restricted stock was paid through the issuance of full recourse
promissory notes, which bear interest at the rate of 8% per annum, compounded
semiannually, on the unpaid balance of such principal sum. The principal and
interest under these notes become due and payable on the earlier of March 31,
2005, unless such amounts are forgiven in accordance with the following
schedule: 25% of the loaned amount shall be forgiven on each twelve-month
anniversary of the date when vesting begins, or the date of termination of the
employment of the officer or services of the director. These shares are subject
to repurchase by us at the original issuance price in the event of the
termination of employment or consulting relationship with us. This right of
repurchase lapses in regards to 1/4th of the shares each annual anniversary
beginning on January 1, 2001.
On March 24, 2000, in connection with their initial hire we granted the
following officers options to purchase common stock at an exercise price of
$1.67 per share:
. Vicki Hacker was granted 96,000 shares; and
. David Martin was granted 180,000 shares.
On May 1, 2000, we granted the following officers options to purchase common
stock at an exercise price of $3.33 per share:
. Ronald Steckel was granted 15,000 shares; and
. Russell Johnson was granted 15,000 shares.
On May 17, 2000, we granted John Gilbert options to purchase 25,000 shares
of common stock at an exercise price of $3.33 per share.
Nissho Iwai Corporation is both a 5% stockholder of ours and our
distribution partner in Japan, Korea and Taiwan. Nissho Iwai Corporation
purchased 317,514 shares of our Series D preferred stock for $2,250,000 and
Nissho Iwai American Corporation, which is affiliated with Nissho Iwai
Corporation, purchased 218,182 shares of Series E preferred stock for
$1,000,002.
See "Management--Executive Compensation" for description of employment
agreements with some of our executive officers which provide for the payment of
severance or the acceleration of unvested stock and options in some
circumstances.
Indemnification of Directors and Executive Officers
We have entered into indemnification agreements with our officers and
directors containing provisions which may require us, among other things, to
indemnify our officers and directors against a number of liabilities that may
arise by reason of their status or service as officers or directors (other than
liabilities arising from willful misconduct of a culpable nature) and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to directors,
officers or persons controlling us pursuant to the foregoing provisions, we
have been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is therefore unenforceable.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following tables set forth information about the beneficial ownership of
our common stock on March 31, 2000, and as adjusted to reflect the sale of the
shares of common stock in this offering, by:
. each named executive officer;
. each of our directors;
. each person known to us to be the beneficial owner of more than 5% of our
common stock; and
. all of our executive officers and directors as a group.
Unless otherwise noted below, the address of each beneficial owner noted on
the table is c/o RITA Medical Systems, Inc., 967 North Shoreline Blvd.,
Mountain View, California 94043.
We have determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission. Except as indicated by the footnotes below,
we believe, based on the information furnished to us, that the persons and
entities named in the tables below have sole voting and investment power with
respect to all shares of common stock that they beneficially own, subject to
applicable community property laws. We have based our calculation of the
percentage of beneficial ownership on 10,138,948 shares of common stock
outstanding on March 31, 2000 and 13,538,948 shares of common stock outstanding
upon completion of this offering.
In computing the number of shares of common stock beneficially owned by a
person and the percentage ownership of that person, we deemed outstanding
shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of March 31, 2000. We did
not deem these shares outstanding, however, for the purpose of computing the
percentage ownership of any other person. Asterisks represent beneficial
ownership of less than one percent.
54
<PAGE>
Executive Officers and Directors
<TABLE>
<CAPTION>
Options
Percent of Common Stock Number of Exercisable
Beneficially Owned Shares Within 60
Number of Shares ------------------------------ Subject to Days of
Name and Address of of Common Stock Repurchase March 31,
Beneficial Owner Beneficially Owned Before Offering After Offering by us(1) 2000
------------------------ ------------------ --------------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Janet Effland(2)........ 1,963,635 19.4% 14.5% -- --
Scott Halsted(3)........ 1,636,362 16.1 12.1 -- --
Barry Cheskin........... 519,794 5.0 3.8 49,500 170,297
Gordon Russell(4)....... 97,375 1.0 * -- 15,156
Daniel Balbierz......... 75,608 * * 12,624 62,984
Marilynne Solloway...... 74,019 * * 14,028 10,829
Ronald Steckel.......... 73,051 * * 11,124 46,927
Russell Johnson......... 69,975 * * 11,100 25,875
Vincent Bucci........... 17,750 * * -- 8,750
All directors and
executive officers as a
group (10 persons)..... 4,497,569 44.4 33.2 -- 340,818
</TABLE>
--------
* Less than 1% of the outstanding shares of common stock.
(1) Our right to repurchase these shares shall lapse as to 1/4th of these
shares on each annual anniversary beginning January 1, 2001.
(2) Includes 1,607,489 shares, 336,623 shares and 19,523 shares held by APA
Excelsior V, L.P., The P/A Fund III, L.P. and Patricof Private Investment
Club II, L.P., respectively. Janet Effland, a director of RITA, is a
Managing Director of Patricof & Co. Ventures, Inc. Ms. Effland disclaims
beneficial ownership of the shares held by these entities except to the
extent of her proportional interest in the entities.
(3) Includes 1,435,988 shares, 62,500 shares and 137,874 shares held by Morgan
Stanley Venture Partners III, L.P., Morgan Stanley Venture Investors III,
L.P. and The Morgan Stanley Venture Partners Entrepreneur Fund, L.P.,
respectively. Scott Halsted, a director of RITA, is a General Partner of
Morgan Stanley Dean Witter Venture Partners. Mr. Halsted disclaims
beneficial ownership of the shares held by these entities except to the
extent of his proportional interest in the entities.
(4) Includes 82,219 shares held by The Gordon Russell Trust, of which Mr.
Russell is trustee. Mr. Russell disclaims beneficial ownership of the
shares held by this entity except to the extent of his proportional
interest in the entity. Excludes shares held by entities affiliated with
Sequoia Capital, of which Mr. Russell is a former general partner. Mr.
Russell disclaims beneficial ownership of such shares except to the extent
of his proportional interest in these entities.
55
<PAGE>
5% Stockholders
<TABLE>
<CAPTION>
Percent of Common Stock
Beneficially Owned
Number of Shares ------------------------------
Name and Address of of Common Stock
Beneficial Owner Beneficially Owned Before Offering After Offering
---------------------------- ------------------ --------------- --------------
<S> <C> <C> <C>
Entities affiliated with
Patricof & Co. Ventures,
Inc.(1).................... 1,963,635 19.4% 14.5%
2100 Geng Road, Suite 150
Palo Alto, California 94303
Entities affiliated with
Morgan Stanley
Dean Witter Venture
Partners(2)............... 1,636,362 16.1 12.1
3000 Sand Hill Road
Building 4, Suite 250
Menlo Park, CA 94025
Entities affiliated with
BankAmerica Ventures(3).... 872,727 8.6 6.4
950 Tower Lane, Suite 700
Foster City CA 94404
Entities affiliated with
Sequoia Capital(4)......... 827,718 8.2 6.1
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Entities affiliated with
Delphi Ventures(5)......... 701,048 6.9 5.2
3000 Sand Hill Road
Building 1, Suite 135
Menlo Park, CA 94025
Mohr, Davidow Ventures III,
L.P.(6).................... 701,053 6.9 5.2
2775 Sand Hill Road, Suite
240
Menlo Park, CA 94025
Entities affiliated with
Nissho Iwai
Corporation(7)............. 535,696 5.3 4.0
c/o Nissho Iwai American
Corporation
44 Montgomery Street, Suite
2150
San Francisco, CA 94104
Barry Cheskin(8)............ 519,794 5.0 3.8
</TABLE>
--------
(1) Includes 1,607,489 shares, 336,623 shares and 19,523 shares held by APA
Excelsior V, L.P., The P/A Fund III, L.P. and Patricof Private Investment
Club II, L.P., respectively. Janet Effland, a director of RITA, is a
Managing director of Patricof & Co. Ventures, Inc. The other general
partners of APA Excelsior V, L.P., the P/A Fund III, L.P. and Patricof
Private Investment Club II, L.P are Gregory M. Case, Robert M. Chefitz,
Thomas P. Hirschfeld, George M. Jenkins, David A. Landau, Alan J. Patricof,
George D. Phipps, Lori F. Rafield, Ph.D, Salem D. Shuchman and Paul A.
Vais. In addition, the P/A Fund III, L.P. is co-managed by Adams Capital
Management whose general partners are Joel Adams and William Hulley. Ms.
Effland disclaims beneficial ownership of the shares held by these entities
except to the extent of her proportional interest in the entities.
(2) Includes 1,435,988 shares, 137,874 shares and 62,500 shares held by Morgan
Stanley Venture Partners III, L.P., Morgan Stanley Venture Investors III,
L.P. and The Morgan Stanley Venture Partners Entrepreneur Fund, L.P.,
respectively. Scott Halsted, a director of RITA, is a general partner of
Morgan Stanley Dean Witter Venture Partners and is the only general partner
who controls these funds. Mr. Halsted disclaims beneficial ownership of the
shares held by these entities except to the extent of his proportional
interest in the entities.
(3) Includes 130,909 shares and 741,818 shares held by Bank of America Ventures
and BA Venture Partners IV, respectively. The general partners of both Bank
of America Ventures and BA Venture Partners IV are Kate Mitchell, Robert
Obuch, Rory O'Driscoll, Louis Bock, Mark Brooks and John Dougery.
(4) Includes 753,229 shares, 41,384 shares, 23,215 shares and 9,890 shares held
by Sequoia Capital VI, Sequoia Technology Partners VI, Sequoia 1995, L.L.C.
and Sequoia XXIV, respectively. The general partners of Sequoia Capital VI
are Pierre Lamond, Douglas Leone, J. Thomas McMurray, Michael Moritz, Mark
Stevens, Thomas F. Stephenson and Donald T. Valentine. The general partners
of Sequoia Technology Partners VI are Douglas Leone, J. Thomas McMurray,
Michael Moritz, Mark Stevens and Thomas F. Stephenson.
(5) Includes 3,545 shares and 693,299 shares held by Delphi BioInvestments II,
L.P. and Delphi Ventures II, L.P., respectively. The general partners of
Delphi BioInvestments II, L.P. and Delphi Ventures II, L.P. are James J.
Bochnowski, David L. Douglass and Donald J. Lothrop.
(6) Mohr, Davidow Ventures III, L.P. is managed by WLPJ Partners whose general
partners are William H. Davidow, Lawrence G. Mohr, Jr., Nancy J. Schoendorf
and Jonathan D. Feiber.
(7) Includes 317,514 shares and 218,182 shares hold by Nissho Iwai Corporation
and Nissho Iwai American Corporation, respectively.
(8) Includes 49,500 shares subject to repurchase by us at the original issuance
price in the event of termination of employment or consulting relationship
with us. The right of repurchase lapses as to 1/4th of these shares on each
annual anniversary beginning January 1, 2001. Also includes 170,297 shares
issuable upon exercise of options exercisable within 60 days of March 31,
2000.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
100,000,000 shares of common stock, $0.001 par value, and 2,000,000 shares of
undesignated preferred stock, $0.001 par value. The following description of
our capital stock does not purport to be complete and is qualified in its
entirety by our certificate of incorporation and bylaws, which are included as
exhibits to the registration statement of which this prospectus forms a part.
Common Stock
As of March 31, 2000, there were 10,138,948 shares of common stock
outstanding and held by 123 stockholders of record, assuming the automatic
conversion of each outstanding share of preferred stock upon the closing of
this offering. In addition, as of March 31, 2000, there were 1,855,616 shares
of common stock subject to outstanding options and 253,042 shares of common
stock subject to outstanding warrants. After this offering, there will be
13,538,948 shares of our common stock outstanding and 14,048,948 shares if the
underwriters exercise their over-allotment option in full.
The holders of our common stock are entitled to one vote for each share held
of record on all matters submitted to a vote of the stockholders, including the
election of directors. There are no cumulative voting rights and therefore, the
holders of a plurality of the shares of common stock voting for the election of
directors may elect all of our directors standing for election. Subject to
preferences that may be applicable to any then outstanding preferred stock,
holders of common stock are entitled to receive ratably such dividends, if any,
as may be declared by the board of directors out of funds legally available for
that purpose. See "Dividend Policy." In the event of our liquidation,
dissolution or winding up, the holders of common stock are entitled to share
ratably in all assets legally available for distribution to stockholders after
the payment of all of our debts and other liabilities subject to the prior
rights of the preferred stock then outstanding. Holders of common stock have no
preemptive or conversion rights or other subscription rights and there are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and non-assessable, and the
shares of common stock to be issued upon completion of this offering will be
fully paid and non-assessable.
Preferred Stock
Upon the closing of the offering, all outstanding shares of preferred stock
will be converted into an aggregate of 8,934,628 shares of common stock and
automatically retired. Thereafter, the board of directors will have the
authority, without further action by the stockholders, to issue up to 2,000,000
shares of preferred stock in one or more series and to designate the rights,
preferences, privileges and restrictions of each such series. The issuance of
preferred stock could have the effect of restricting dividends on the common
stock, diluting the voting power of the common stock, impairing the liquidation
rights of the common stock or delaying or preventing our change in control
without further action by the stockholders. We have no present plans to issue
any additional shares of preferred stock.
Warrants
As of March 31, 2000, we had 17 warrants outstanding entitling the holders
to purchase an aggregate of 253,042 shares of common stock at a weighted
average exercise price of $4.66 per share, as adjusted to reflect the automatic
conversion of preferred stock into common stock upon the closing of the
offering. Of these warrants, warrants to purchase a total of 157,042 shares of
common stock at a weighted average exercise price of $4.70 per share will
terminate upon the completion of this offering, if not exercised prior to that
time.
Registration Rights
After the offering, the holders of 8,934,628 shares of common stock and
warrants to purchase 253,042 shares of common stock (the "registrable
securities") are entitled to have their shares registered by
57
<PAGE>
us under the Securities Act under the terms of an agreement between us and the
holders of the registrable securities. Subject to limitations specified in the
agreement, these registration rights include the following:
. The holders of at least 40% of the registrable securities may require, on
two occasions beginning on the earlier of (i) June 30, 2000, or (ii) six
months after the date of this prospectus, that we use our best efforts to
register the registrable securities for public resale, provided that the
aggregate offering price for such registrable securities is more than
$7,500,000. This right is subject to the ability of the underwriters to
limit the number of shares included in the offering in view of market
conditions.
. If we register any common stock, either for our own account or for the
account of other security holders, the holders of registrable securities
are entitled to include their shares of common stock in such
registration. This right is subject to the ability of the underwriters to
limit the number of shares included in the offering in view of market
conditions.
. Once we become eligible to file a registration statement on From S-3, the
holders of at least 25% of the then outstanding registrable securities
may require us to register all or a portion of their registrable
securities on a registration statement on Form S-3, provided that the
proposed aggregate offering price is more than $1,000,000. The holders of
registrable securities may only exercise these Form S-3 registration
rights three times.
All registration rights terminate on the date five years after the
completion of this offering, or, with respect to any holder, at such time as
the holder can sell all of the holder's shares in any three month period under
Rule 144 of the Securities Act.
Delaware Anti-Takeover Law and Provisions of our Certificate of Incorporation
and Bylaws
Provisions of Delaware law and our certificate of incorporation and bylaws
could make more difficult our acquisition by a third party and the removal of
our incumbent officers and directors. These provisions, summarized below, are
expected to discourage coercive takeover practices and inadequate takeover bids
and to encourage persons seeking to acquire control of RITA to first negotiate
with us. We believe that the benefits of increased protection of our ability to
negotiate with the proponent of an unfriendly or unsolicited acquisition
proposal outweigh the disadvantages of discouraging such proposals because,
among other things, negotiation could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a business combination with an
interested stockholder for a period of three years following the date the
person became an interested stockholder, unless:
. the board of directors approved the transaction in which such stockholder
became an interested stockholder prior to the date the interested
stockholder attained such status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
. on or subsequent to such date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders.
A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an interested stockholder is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
Our certificate of incorporation and bylaws do not provide for the right of
stockholders to act by written consent without a meeting or for cumulative
voting in the election of directors. In addition, our certificate of
incorporation permits the board of directors to issue preferred stock with
voting or other rights without any
58
<PAGE>
stockholder action. Our certificate of incorporation and bylaws also provide
that our board of directors will be divided into three classes, with each class
serving staggered three year terms. These provisions, some of which require the
vote of stockholders holding at least 66 2/3% of the outstanding common stock
to amend, may have the effect of deterring hostile takeovers or delaying
changes in our management. Our bylaws establish procedures, including advance
notice procedures with regard to stockholder proposals at stockholder meetings,
and with regard to the nomination, other than by or at the direction of the
board of directors, of candidates for election as directors.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to us or our stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided by Section 174 of the Delaware Law; or
. any transaction from which the director derived an improper personal
benefit.
Such limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission. Our certificate of
incorporation and bylaws provide that we shall indemnify our directors and
executive officers and may indemnify our other officers and employees and other
agents to the fullest extent permitted by the Delaware law. Our bylaws also
permit us to secure insurance on behalf of any officer, director, employee or
other agent for any liability arising out of his or her actions in such
capacity, regardless of whether the bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors
and executive officers for expenses specified in the agreements, including
attorneys' fees, judgments, fines and settlement amounts incurred by any such
person in any action or proceeding arising out of such person's services as our
director or executive officer, any subsidiary of ours or any other entity to
which the person provides services at our request. In addition, we maintain
directors' and officers' insurance. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent in which
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is U.S. Stock Transfer
Corporation.
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no public market for our common stock,
and no predictions can be made regarding the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
prevailing from time to time. As described below, only a limited number of
shares will be available for sale shortly after this offering due to
contractual and legal restrictions that apply to resale. Nevertheless, sales of
our common stock in the public market after the restrictions lapse, or the
perception that such sales may occur, could adversely affect the prevailing
market price.
Sale of Restricted Shares and Lock-Up Agreements
Upon completion of this offering, we will have an aggregate of 13,538,948
outstanding shares of common stock or 14,048,948 shares if the underwriters
exercise the over-allotment option in full. Of these shares, the 3,400,000
shares sold in the offering, plus any shares issued upon exercise of the
underwriters' overallotment option, will be freely tradable without restriction
under the Securities Act, unless purchased by our "affiliates" as that term is
defined in Rule 144 under the Securities Act. In general, affiliates include
officers, directors or 10% stockholders.
The remaining 10,138,948 shares outstanding are "restricted securities"
within the meaning of Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. Sales of the restricted securities in the public market, or
the availability of such shares for sale, could adversely affect the market
price of the common stock.
Our directors, officers and substantially all of our stockholders have
entered into lock-up agreements in connection with this offering generally
providing that they will not offer, sell, contract to sell or grant any option
to purchase or otherwise dispose of our common stock or any securities
exercisable for or convertible into our common stock owned by them for a period
of 180 days after the date of this prospectus without the prior written consent
of Salomon Smith Barney. Notwithstanding possible earlier eligibility for sale
under the provisions of Rules 144, 144(k) and 701, shares subject to lock-up
agreements will not be salable until such agreements expire or are waived by
Salomon Smith Barney. Taking into account the lock-up agreements, and assuming
Salomon Smith Barney does not release stockholders from these agreements, the
following shares will be eligible for sale in the public market at the
following times:
. Beginning on the effective date of this prospectus, the 3,400,000 shares
sold in the offering will be immediately available for sale in the public
market.
. Beginning 90 days after the effective date, approximately 129,550 shares
will be eligible for sale.
. Beginning 180 days after the effective date, approximately all of the
remaining 10,138,948 shares will be eligible for sale.
Rule 144
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:
. one percent of the number of shares of common stock then outstanding; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to manner
of sale, notice, and the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have
60
<PAGE>
been our affiliate at anytime during the three months preceding a sale, and who
has beneficially owned the shares proposed to be sold for at least two years,
is entitled to sell such shares without complying with the manner of sale,
public information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits our employees, officers, directors
or consultants who purchased shares pursuant to a written compensatory plan or
contract to resell such shares in reliance upon Rule 144 but without compliance
with specific restrictions. Rule 701 provides that affiliates may sell their
Rule 701 shares under Rule 144 without complying with the holding period
requirement and that non-affiliates may sell such shares in reliance on Rule
144 without complying with the holding period, public information, volume
limitation or notice provisions of Rule 144.
In addition, we intend to file registration statements under the Securities
Act as promptly as possible after the effective date to register shares to be
issued pursuant to our employee benefit plans. As a result, any options or
rights exercised under the 2000 stock plan, the 1994 incentive stock plan, the
2000 employee stock purchase plan, the 2000 directors' stock option plan or any
other benefit plan after the effectiveness of the registration statements will
also be freely tradable in the public market. However, such shares held by
affiliates will still be subject to the volume limitation, manner of sale,
notice and public information requirements of Rule 144 unless otherwise
resalable under Rule 701.
61
<PAGE>
UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a general discussion of the material United States federal
income tax consequences of the ownership and disposition of our common stock to
a non-United States holder. As used in this prospectus, the term non-United
States holder is a person other than:
. a citizen or individual resident of the United States for United States
federal income tax purposes;
. a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or any political
subdivision of the United States;
. an estate whose income is included in gross income for United States
federal income tax purposes regardless of its source; or
. a trust, in general, if it is subject to the primary supervision of a
court within the United States and which has one or more United States
persons who have the authority to control all substantial decisions of
the trust.
This discussion does not address all aspects of United States federal income
taxation that may be relevant in light of a non-United States holder's
particular facts and circumstances, such as being a United States expatriate,
and does not address any tax consequences arising under the laws of any state,
local or non-United States taxing jurisdiction. Furthermore, the following
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended, and administrative and judicial interpretations thereof, all as in
effect on the date hereof, and all of which are subject to change, possibly
with retroactive effect. Accordingly, each non-United States holder should
consult a tax advisor regarding the United States federal, state, local and
non-United States income and other tax consequences of acquiring, holding and
disposing of shares of our common stock.
Dividends
We have never paid dividends on our capital stock and do not anticipate
paying any cash dividends in the foreseeable future. In the event, however,
that we do pay dividends on our common stock, any dividend paid to a non-United
States holder of common stock generally will be subject to United States
withholding tax either at a rate of 30% of the gross amount of the dividend or
such lower rate as may be specified by an applicable tax treaty. Dividends
received by a non-United States holder that are effectively connected with a
United States trade or business conducted by the non-United States holder are
exempt from such withholding tax. However, those effectively connected
dividends, net of certain deductions and credits, are taxed at the same
graduated rates applicable to United States persons.
In addition to the graduated tax described above, dividends received by a
corporate non-United States holder that are effectively connected with a United
States trade or business of the corporate non-United States holder may also be
subject to a branch profits tax at a rate of 30% or such lower rate as may be
specified by an applicable tax treaty.
A non-United States holder of common stock that is eligible for a reduced
rate of withholding tax pursuant to a tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund
with the Internal Revenue Service.
Gain on Disposition of Common Stock
A non-United States holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
our common stock unless:
. the gain is effectively connected with a United States trade or business
of the non-United States holder (which gain, in the case of a corporate
non-United States holder, must also be taken into account for branch
profits tax purposes);
. the non-United States holder is an individual who holds his or her common
stock as a capital asset (generally, an asset held for investment
purposes) and who is present in the United States for a period or
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<PAGE>
periods aggregating 183 days or more during the calendar year in which the
sale or disposition occurs and certain other conditions are met; or
. we are or have been a "United States real property holding corporation"
for United States federal income tax purposes at any time within the
shorter of the five-year period preceding the disposition or the holder's
holding period for our common stock. We have determined that we are not
and do not believe that we will become a "United States real property
holding corporation" for United States federal income tax purposes.
Backup Withholding and Information Reporting
Generally, we must report annually to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax withheld.
A similar report is sent to the holder. Pursuant to tax treaties or other
agreements, the IRS may make its reports available to tax authorities in the
recipient's country of residence.
Dividends paid to a non-United States holder at an address within the United
States may be subject to backup withholding at a rate of 31% if the non-United
States holder fails to establish that it is entitled to an exemption or to
provide a correct taxpayer identification number and other information to the
payer. Backup withholding generally will not apply to dividends paid to non-
United States holders at an address outside the United States on or prior to
December 31, 2000 unless the payer has knowledge that the payee is a United
States person. Under recently finalized Treasury Regulations regarding
withholding and information reporting, payment of dividends to non-United
States holders at an address outside the United States after December 31, 2000
may be subject to backup withholding at a rate of 31% unless such non-United
States holder satisfies various certification requirements.
Under current Treasury Regulations, the payment of the proceeds of the
disposition of common stock to or through the United States office of a broker
is subject to information reporting and backup withholding at a rate of 31%
unless the holder certifies its non-United States status under penalties of
perjury or otherwise establishes an exemption. Generally, the payment of the
proceeds of the disposition by a non-United States holder of common stock
outside the United States to or through a foreign office of a broker will not
be subject to backup withholding but will be subject to information reporting
requirements if the broker is:
. a United States person;
. a "controlled foreign corporation" for United States federal income tax
purposes; or
. a foreign person 50% or more of whose gross income for certain periods is
from the conduct of a United States trade or business
unless the broker has documentary evidence in its files of the holder's non-
United States status and certain other conditions are met, or the holder
otherwise establishes an exemption. Neither backup withholding nor information
reporting generally will apply to a payment of the proceeds of a disposition of
common stock by or through a foreign office of a foreign broker not subject to
the preceding sentence.
In general, the recently promulgated final Treasury Regulations, described
above, do not significantly alter the substantive withholding and information
reporting requirements but would alter the procedures for claiming benefits of
an income tax treaty and change the certifications procedures relating to the
receipt by intermediaries of payments on behalf of the beneficial owner of
shares of common stock. Non-United States holders should consult their tax
advisors regarding the effect, if any, of those final Treasury Regulations on
an investment in our common stock. Those final Treasury Regulations generally
are effective for payments made after December 31, 2000.
Backup withholding is not an additional tax. Rather, the United States
income tax liability of persons subject to backup withholding will be reduced
by the amount of tax withheld. If withholding results in an overpayment of
taxes, a refund may be obtained, provided that the required information is
furnished to the IRS.
63
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, each
underwriter named below has agreed to purchase, and we have agreed to sell to
each underwriter, the number of shares set forth opposite the name of that
underwriter.
<TABLE>
<CAPTION>
Number
Name of shares
---- ---------
<S> <C>
Salomon Smith Barney Inc. .........................................
FleetBoston Robertson Stephens Inc. ...............................
----
Total ...........................................................
----
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
to purchase the shares included in this offering are subject to approval of
legal matters by counsel and to other conditions. The underwriters are
obligated to purchase all the shares of common stock, other than those covered
by the over-allotment option described below, if they purchase any of the
shares.
The underwriters, for whom Salomon Smith Barney Inc. and FleetBoston
Robertson Stephens Inc. are acting as representatives, propose to offer some of
the shares directly to the public at the public offering price set forth on the
cover page of this prospectus and some of the shares to dealers at the public
offering price less a concession not in excess of $ per share. The
underwriters may allow, and the dealers may reallow, a concession not in excess
of $ per share on sales to other dealers. If all of the shares are not
sold at the initial offering price, the representatives may change the public
offering price and the other selling terms. The representatives have advised us
that the underwriters do not intend to confirm any sales to any accounts over
which they exercise discretionary authority.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 510,000 additional shares of
common stock at the public offering price less the underwriting discount. The
underwriters may exercise this option solely for the purpose of covering over-
allotments, if any, in connection with this offering. To the extent the option
is exercised, each underwriter must, subject to specified conditions, purchase
a number of additional shares approximately proportionate to that underwriter's
initial purchase commitment.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to seven percent of the common shares to be sold in
this offering to our directors, officers and employees, as well as to clients,
vendors and individuals associated with us. The number of shares available for
sale to the general public will be reduced to the extent that any reserve
shares are purchased. Any reserved shares not purchased will be offered by the
underwriters on the same terms as the other shares offered by this prospectus.
We have agreed to indemnify the underwriters against some liabilities and
expenses, including liabilities under the Securities Act of 1933, in connection
with sales of the directed shares.
We, our officers and directors and holders of substantially all of our
existing outstanding stock have agreed that, for a period of 180 days from the
date of this prospectus, we will not, without the prior written consent of
Salomon Smith Barney Inc., dispose of or hedge, any shares of our common stock
or any securities convertible into or exchangeable for common stock. Salomon
Smith Barney Inc. in its sole discretion may release any of the securities
subject to these lock-up agreements at any time without notice.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial offering price for our shares will be
determined by negotiation among us and the representatives. Among the factors
considered in determining the initial public offering price will be our record
of operations, our current financial condition, our future prospects, our
markets, the economic conditions in and future prospects for the industry in
which we compete, our management, and currently prevailing general conditions
in the equity securities markets, including current market valuations of
publicly traded companies considered comparable to
64
<PAGE>
us. There can be no assurance, however, that the prices at which our shares
will sell in the public market after this offering will not be lower than the
price at which they are sold by the underwriters or that an active trading
market in our common stock will develop and continue after this offering.
We have applied to have our common stock included for quotation on the
Nasdaq National Market under the symbol "RITA."
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
Paid by RITA
----------------------
No
Exercise Full Exercise
-------- -------------
<S> <C> <C>
Per share............................................. $ $
Total................................................. $ $
</TABLE>
In connection with this offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of common stock in the open
market. These transactions may include short sales, syndicate covering
transactions and stabilizing transactions. Short sales involve syndicate sales
of common stock in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
"Covered" short sales are sales of shares made in an amount up to the number of
shares represented by the underwriters' over-allotment option. In determining
the source of shares to close out the covered short position, the underwriters
will consider, among other things, the price of the shares available for
purchase in the open market as compared to the price at which they may purchase
shares through the over-allotment option. Transactions to close out the covered
syndicate short involve either purchases of the common stock in the open market
after the distribution has been completed or the exercise of the over-allotment
option. The underwriters may also make "naked" short sales of shares in excess
of the over-allotment option. The underwriters must close out any naked short
position by purchasing shares of common stock in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the shares in the open market
after pricing that could adversely affect investors who purchase in the
offering. Stabilizing transactions consist of bids for or purchases of shares
in the open market while the offering is in progress.
The underwriters may also impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from an underwriter when Salomon
Smith Barney Inc., in covering syndicate short positions or making stabilizing
purchases, repurchases shares originally sold by that underwriter.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of the common stock. They may also cause the price
of the common stock to be higher than the price that would otherwise exist in
the open market in the absence of these transactions. The underwriters may
conduct these transactions on the Nasdaq National Market or in the over-the-
counter market, or otherwise. If the underwriters commence any of these
transactions, they may discontinue them at any time.
We estimate that the total expenses, excluding underwriting discounts and
commissions, of this offering will be approximately $1,200,000. The offering
expenses include the SEC registration fee Nasdaq filing fee, printing and
engraving expenses, legal fees and expenses, accounting fees and expenses,
transfer agent and registration fees and miscellaneous fees and expenses.
The representatives or their respective affiliates may, in the future,
perform various investment banking and advisory services for us from time to
time, for which they will receive customary fees. The representatives may, from
time to time, engage in transactions with and perform services for us in the
ordinary course of business.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
65
<PAGE>
LEGAL MATTERS
Various legal matters with respect to the validity of our common stock
offered by this prospectus will be passed upon for us by Venture Law Group, A
Professional Corporation, 2800 Sand Hill Road, Menlo Park, California 94025.
Mark Weeks, a Director of Venture Law Group, is our Secretary. Legal matters
with respect to information contained in this prospectus under the captions
"Risk Factors--We are currently involved in a patent interference action, and
if we do not prevail in this action, our business could suffer," "--Patents and
other proprietary rights provide uncertain protections, and we may be unable to
protect our intellectual property," and "--Because the medical device industry
is characterized by competing intellectual property, we may be sued for
violating the intellectual property rights of others," and "Business--Patents
and Proprietary Technology" will be passed upon for us by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto,
California 94304, patent counsel to us. Legal matters with respect to
information contained in the prospectus under the captions "Risk Factors --
Complying with the FDA and other domestic and international regulatory
authorities is an expensive and time-consuming process, and any failure to
comply could result in substantial penalties, "Product introductions may be
delayed or canceled as a result of the FDA regulatory process which could cause
our sales to be below expectations," and "Business--Government Regulation" will
be passed upon for us by Olsson, Frank and Weeda, P.C., 1400 Sixteenth Street,
N.W., Suite 6400, Washington, D.C. 20036. Certain legal matters in connection
with this offering will be passed upon for the underwriters by Cravath, Swaine
& Moore, Worldwide Plaza, 825 Eighth Avenue, New York, New York 10019-7475.
Mark Weeks, employees of Venture Law Group and an investment partnership
affiliated with Venture Law Group collectively own a total of 20,046 shares of
our common stock. Two partners of Wilson Sonsini Goodrich & Rosati and two
investment partnerships affiliated with Wilson Sonsini Goodrich & Rosati
collectively own a total of 21,765 shares of our common stock, including an
option to purchase 6,000 shares at an exercise price of $1.00 per share.
EXPERTS
The financial statements as of December 31, 1998 and 1999 and for each of
the three years in the period ended December 31, 1999, included in this
prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
the firm as experts in auditing and accounting.
The statements set forth in the prospectus under the captions "Risk
Factors--We are currently involved in a patent interference action, and if we
do not prevail in this action, our business could suffer," "--Patents and other
proprietary rights provide uncertain protections, and we may be unable to
protect our intellectual property" and"--Because the medical device industry is
characterized by competing intellectual property, we may be sued for violating
the intellectual property rights of others," and "Business--Patents and
Proprietary Technology" have been reviewed and approved by Wilson Sonsini
Goodrich & Rosati, a Professional Corporation, patent counsel to RITA, as
experts in such matters, and are included herein in reliance upon its review
and approval.
66
<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission under the Securities Act with respect to the shares of
common stock offered in this offering. This prospectus, which is a part of the
registration statement, does not contain all of the information set forth in
the registration statement, or the exhibits which are part of the registration
statement, parts of which are omitted as permitted by the rules and regulations
of the Securities and Exchange Commission. For further information about us and
the shares of our common stock to be sold in this offering, please refer to the
registration statement and the exhibits which are part of the registration
statement. Statements contained in this prospectus as to the contents of any
contract or any other document are not necessarily complete. Each statement in
this prospectus regarding the contents of the referenced contract or other
document is qualified in all respects by our reference to the copy filed with
the registration statement.
For further information about us and our common stock, we refer you to our
registration statement and its attached exhibits, copies of which may be
inspected without charge at the Securities and Exchange Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. You can request copies of these documents
by writing to the Securities and Exchange Commission and paying a duplicating
fee. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information about the public reference rooms. The Commission maintains
a World Wide Web site on the Internet at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Exchange Act and, in accordance
therewith, will file periodic reports, proxy and information statements and
other information with the Commission. Our periodic reports, proxy and
information statements and other information will be available for inspection
and copying at the regional offices, public references facilities and Web site
of the Commission referred to above.
We intend to furnish our stockholders with annual reports containing audited
financial statements and an opinion thereon expressed by independent certified
public accountants. We also intend to furnish other reports as we may determine
or as required by law.
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<PAGE>
RITA MEDICAL SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations and Comprehensive Loss............................ F-4
Statements of Stockholders' Deficit........................................ F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
RITA Medical Systems, Inc.
The reincorporation described in Note 11 to the financial statements has not
been consummated at the date of our opinion. When it has been consummated, we
will be in a position to furnish the following report:
"In our opinion, the accompanying balance sheets and the related statements
of operations and comprehensive loss, of stockholders' deficit and of cash
flows present fairly, in all material respects, the financial position of RITA
Medical Systems, Inc. at December 31, 1998 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above."
San Jose, California
April 10, 2000, except for
Note 11, for which the
date is , 2000
F-2
<PAGE>
RITA Medical Systems, Inc.
Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity at
------------------ March 31, March 31,
1998 1999 2000 2000
-------- -------- --------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents........ $ 5,322 $ 7,067 $ 9,772
Marketable securities............ 2,322 5,086 2,237
Accounts receivable, net of
allowance for doubtful accounts
of $29, $54 and $63 at December
31, in 1998 and 1999 and March
31, 2000, respectively.......... 288 1,149 1,434
Inventories, net................. 252 845 883
Prepaid assets and other current
assets.......................... 558 616 600
-------- -------- --------
Total current assets........... 8,742 14,763 14,926
Property, plant and equipment,
net.............................. 248 875 939
Other assets...................... 19 67 65
-------- -------- --------
Total assets................... $ 9,009 $ 15,705 $ 15,930
======== ======== ========
Liabilities, Convertible Preferred
Stock and Stockholders' Equity
(Deficit)
Current Liabilities:
Accounts payable................. $ 210 $ 892 $ 779
Accrued liabilities.............. 964 956 1,067
Current portion of term loan..... -- 312 818
Current portion of capital lease
obligations..................... 8 166 263
-------- -------- --------
Total current liabilities...... 1,182 2,326 2,927
Long-term notes payable........... -- 1,091 1,987
Revolving term loan............... -- 532 1,002
Capital lease obligations, net of
current portion.................. -- 231 336
-------- -------- --------
Total liabilities.............. 1,182 4,180 6,252
-------- -------- --------
Commitments and contingency (Note
5)
Convertible preferred stock,
$0.001 par value;
Authorized: 13,725 shares at
December 31, 1998 and 15,166
shares at December 31, 1999 and
March 31, 2000
Issued and outstanding: 6,398
shares at December 31, 1998,
8,580 shares at December 31,
1999 and March 31, 2000
(unaudited) and none pro forma
(Liquidation value: $38,383).... 27,964 37,911 37,910 $ --
Preferred stock warrants (Note
6).............................. 373 605 605 --
-------- -------- -------- --------
Stockholders' equity (deficit):
Common stock, $0.001 par value
Authorized: 30,000 shares
Issued and outstanding: 778
shares at December 31, 1998,
927 shares at December 31,
1999, 1,204 shares at March
31, 2000 (unaudited) and
10,139 shares pro forma
(unaudited).................... 1 1 1 10
Additional paid-in capital....... 1,538 3,651 10,034 48,540
Deferred stock-based
compensation.................... (933) (1,935) (6,421) (6,421)
Stockholder note receivable...... -- (73) (238) (238)
Accumulated other comprehensive
income (loss)................... 2 (7) (7) (7)
Accumulated deficit.............. (21,118) (28,628) (32,206) (32,206)
-------- -------- -------- --------
Total stockholders' equity
(deficit)..................... (20,510) (26,991) (28,837) $ 9,678
-------- -------- -------- ========
Total liabilities, convertible
preferred stock and warrants
and stockholders' equity
(deficit)..................... $ 9,009 $ 15,705 $ 15,930
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
RITA Medical Systems, Inc.
Statements of Operations and Comprehensive Loss
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Years Ended December 31, Ended March 31,
---------------------------- ----------------
1997 1998 1999 1999 2000
-------- -------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Sales......................... $ 220 $ 1,137 $ 4,629 $ 837 $ 1,841
Cost of goods sold (inclusive
of stock-based compensation
of $0, $25 and $107 in 1997,
1998 and 1999, respectively,
and $25 and $105 for the
three months ended March 31,
1999 and 2000 respectively... 589 1,523 2,994 690 1,182
-------- -------- -------- ------- -------
Gross profit (loss)......... (369) (386) 1,635 147 659
-------- -------- -------- ------- -------
Operating expenses:
Research and development
(inclusive of stock-based
compensation of $14, $186 and
$354 in 1997, 1998 and 1999,
respectively, and $80 and
$308 for the three months
ended March 31, 1999 and
2000, respectively).......... 2,486 2,729 3,931 737 1,631
Selling, general and
administrative (inclusive of
stock-based compensation of
$25, $192 and $530 in 1997,
1998 and 1999, respectively,
and $115 and $1,144 for the
three months ended March 31,
1999 and 2000,
respectively)................ 2,829 3,606 5,452 1,338 2,641
-------- -------- -------- ------- -------
Total operating expenses.... 5,315 6,335 9,383 2,075 4,272
-------- -------- -------- ------- -------
Loss from operations.......... (5,684) (6,721) (7,748) (1,928) (3,613)
Interest income............... 40 342 446 84 170
Interest expense.............. (138) (359) (212) (12) (133)
Other income (expense), net... (78) (11) 4 (2) (2)
-------- -------- -------- ------- -------
Net loss...................... (5,860) (6,749) (7,510) (1,858) (3,578)
Other comprehensive income
(expense):
Change in unrealized gain
(loss) on marketable
securities................. -- 2 (9) -- --
-------- -------- -------- ------- -------
Comprehensive loss............ $ (5,860) $ (6,747) $ (7,519) $(1,858) $(3,578)
======== ======== ======== ======= =======
Net loss per common share,
basic and diluted............ $ (11.02) $ (10.10) $ (9.33) $ (2.39) $ (3.52)
======== ======== ======== ======= =======
Shares used in computing net
loss per share, basic and
diluted...................... 532 668 805 779 1,017
Pro forma net loss per share,
basic and diluted
(unaudited).................. $ (0.90) $ (0.36)
======== =======
Shares used in computing pro
forma net loss per share,
basic and diluted
(unaudited).................. 8,355 9,951
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
RITA Medical Systems, Inc.
Statements of Stockholders' Deficit
For the years ended December 31, 1997, 1998 and 1999 and the three months ended
March 31, 2000
(in thousands)
<TABLE>
<CAPTION>
Common Stock Accumulated
------------- Additional Deferred Stockholder Other
Shares Paid-in Stock-based Note Comprehensive Accumulated
Issued Amount Capital Compensation Receivable Income (Loss) Deficit Total
------ ------ ---------- ------------ ----------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1,
1997................... 513 $ 1 $ 18 $ -- $ -- $-- $ (8,509) $ (8,490)
Conversion of Series A
preferred stock in
August 1997............ 1 -- -- -- -- -- -- --
Stock options
exercised.............. 64 -- 37 -- -- -- -- 37
Deferred stock-based
compensation........... -- -- 57 (57) -- -- -- --
Amortization of deferred
stock-based
compensation........... -- -- -- 39 -- -- -- 39
Net loss................ -- -- -- -- -- -- (5,860) (5,860)
----- --- ------- ------- ----- ---- -------- --------
Balances, December 31,
1997................... 578 1 112 (18) -- -- (14,369) (14,274)
Issuance of common
stock.................. 4 -- 2 -- -- -- -- 2
Stock options
exercised.............. 196 -- 106 -- -- -- -- 106
Deferred stock-based
compensation........... -- -- 1,318 (1,318) -- -- -- --
Amortization of deferred
stock-based
compensation........... -- -- -- 403 -- -- -- 403
Change in unrealized
gain on marketable
securities............. -- -- -- -- -- 2 -- 2
Net loss................ -- -- -- -- -- -- (6,749) (6,749)
----- --- ------- ------- ----- ---- -------- --------
Balances, December 31,
1998................... 778 1 1,538 (933) -- 2 (21,118) (20,510)
Stock options
exercised.............. 149 -- 92 -- (73) -- -- 19
Stock compensation...... -- -- 28 -- -- -- -- 28
Deferred stock-based
compensation........... -- -- 1,993 (1,993) -- -- -- --
Amortization of deferred
stock-based
compensation........... -- -- -- 991 -- -- -- 991
Change in unrealized
gain on marketable
securities............. -- -- -- -- -- (9) -- (9)
Net loss................ -- -- -- -- -- -- (7,510) (7,510)
----- --- ------- ------- ----- ---- -------- --------
Balances, December 31,
1999................... 927 1 3,651 (1,935) (73) (7) (28,628) (26,991)
Stock options
exercised.............. 277 -- 340 (165) 175
Deferred stock-based
compensation........... 6,043 (6,043) --
Amortization of deferred
stock-based
compensation........... 1,557 1,557
Net loss................ (3,578) (3,578)
----- --- ------- ------- ----- ---- -------- --------
Balances, March 31, 2000
(unaudited)............ 1,204 $1 $10,034 $(6,421) $(238) $(7) $(32,206) $(28,837)
===== === ======= ======= ===== ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
RITA Medical Systems, Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------- --------------------
1997 1998 1999 1999 2000
------- ------- ------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................... $(5,860) $(6,749) $(7,510) $ (1,858) $ (3,578)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization.............. 251 621 399 61 172
Preferred stock issued for
interest payable.......... -- 15 -- -- --
Issuance of common stock
for services received..... -- -- 2 -- --
Allowance for doubtful
accounts.................. -- 29 25 7 9
Provision for obsolete
inventory................. -- 52 105 132 8
Amortization of stock-
based compensation........ 39 403 991 220 1,557
Changes in operating
assets and liabilities:
Accounts receivable...... (110) (207) (886) (389) (294)
Inventory................ (130) (174) (698) (250) (46)
Prepaid and other
current assets.......... 110 (525) 26 328 (99)
Accounts payable and
accrued liabilities..... (37) 524 674 (37) (2)
------- ------- ------- --------- ---------
Net cash used in
operating activities.. (5,737) (6,011) (6,872) (1,786) (2,273)
------- ------- ------- --------- ---------
Cash flows from investing
activities:
Purchase of property and
equipment.................. (225) (120) (441) (55) --
Purchase of short-term
investments................ -- (3,853) (7,061) (877) (707)
Maturities of short-term
investments................ -- 1,532 4,290 676 3,556
Notes receivable and other
assets..................... (30) 152 (48) -- 2
------- ------- ------- --------- ---------
Net cash provided by (used
in) investing
activities................ (255) (2,289) (3,260) (256) 2,851
------- ------- ------- --------- ---------
Cash flows from financing
activities:
Proceeds from issuance of
common stock............... 37 108 45 2 175
Proceeds from issuance of
preferred stock............ -- 15,128 9,947 -- (1)
Proceeds from borrowings of
long-term debt............. 2,333 500 1,500 -- 1,500
Proceeds from revolving term
loan....................... -- -- 532 -- 470
Payments on capital lease
obligations................ (22) (31) (147) (33) (17)
Payments on long-term debt.. -- (2,230) -- -- --
------- ------- ------- --------- ---------
Net cash provided by
financing activities...... 2,348 13,475 11,877 (31) 2,127
------- ------- ------- --------- ---------
Net increase (decrease) in
cash and cash equivalents.... (3,644) 5,175 1,745 (2,073) 2,705
Cash and cash equivalents at
beginning of year............ 3,791 147 5,322 5,322 7,067
------- ------- ------- --------- ---------
Cash and cash equivalents at
end of year.................. $ 147 $ 5,322 $ 7,067 $ 3,249 $ 9,772
======= ======= ======= ========= =========
Supplemental disclosures of
cash flow information:
Cash paid for taxes......... $ 1 $ 1 $ 2 $ 1 $ 3
Cash paid for interest...... 138 103 183 12 113
Supplemental disclosures of
noncash financing activities:
Preferred stock issued upon
conversion of notes
payable.................... $ -- $ 500 $ -- $ -- $ --
Issuance of preferred stock
warrants in connection with
long-term debt............. 171 202 232 -- --
Equipment purchased under
capital leases............. -- -- 557 395 259
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
RITA Medical Systems, Inc.
Notes to Financial Statements
NOTE 1--FORMATION AND BUSINESS OF THE COMPANY:
RITA Medical Systems, Inc. (formerly ZoMed International, Inc.) (the
"Company") was incorporated in January 1994. The Company is engaged in
developing, manufacturing and marketing innovative products that use
radiofrequency energy to treat patients with solid cancerous or benign tumors.
Products include radiofrequency generators and a family of disposable needle
electrode devices which deliver controlled thermal energy to the targeted
tissue.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited interim results
The accompanying interim financial statements and the related notes as of
March 31, 2000 and for the three months ended March 31, 1999 and 2000 are
unaudited. The unaudited interim financial statements have been prepared on the
same basis as the annual financial statements and, in the opinion of
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the Company's financial position,
results of operations and cash flows as of March 31, 2000 and for the three
months ended March 31, 1999 and 2000. The financial data and other information
disclosed in these notes to financial statements related to these periods are
unaudited. The results for the three months ended March 31, 2000 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000.
Unaudited pro forma stockholders' equity
If the offering contemplated by this prospectus is consummated, all of the
convertible preferred stock outstanding will automatically convert into
8,934,628 shares of common stock. Unaudited pro forma stockholders' equity, as
adjusted for the assumed conversion of the preferred stock, is set forth on the
balance sheet.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of credit risk and other risks and uncertainties
The Company's products include components subject to rapid technological
change. Certain components used in manufacturing the product have relatively
few alternative sources of supply and establishing additional or replacement
suppliers for such components cannot be accomplished quickly. While the Company
has ongoing programs to minimize the adverse effect of such changes and
considers technological change in estimating its allowances, such estimates
could change in the future.
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, marketable
securities and accounts receivable. Cash and cash equivalents are deposited in
demand and money market accounts in three financial institutions in the United
States. Deposits held with financial institutions may exceed the amount of
insurance provided on such deposits. The Company has not experienced any losses
on its deposits of cash, cash equivalents or marketable securities.
The Company extends credit to its customers, which are primarily comprised
of accounts of private companies in the United States, Europe and Asia. The
Company performs ongoing credit evaluations of its customers' financial
conditions and generally requires no collateral. The Company maintains an
allowance for doubtful accounts receivable based on the expected collectibility
of individual accounts.
F-7
<PAGE>
RITA Medical Systems, Inc.
Notes to Financial Statements--(Continued)
Cash and cash equivalents
All highly liquid investments with original or remaining maturities of
ninety days or less from the date of purchase are considered to be cash
equivalents.
Marketable securities
The Company's marketable securities are categorized as available-for-sale,
as defined by Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Unrealized holding
gains and losses are reflected as a net amount in a separate component of
stockholders equity (deficit) until realized. For the purposes of computing
realized gains and losses, cost is identified on a specific identification
basis. As of December 31, 1998 and 1999, all available-for-sale securities
mature within one year.
The cost and fair value of available-for-sale securities at December 31,
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Cost Unrealized Fair
Value Gain/Loss Value
------ ---------- ------
<S> <C> <C> <C>
Corporate commercial paper......................... $ 683 $-- $ 683
Corporate notes.................................... 1,637 2 1,639
------ --- ------
$2,320 $ 2 $2,322
====== === ======
</TABLE>
The cost and fair value of available-for-sale securities at December 31,
1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Cost Unrealized Fair
Value Gain/Loss Value
------ ---------- ------
<S> <C> <C> <C>
Corporate commercial paper......................... $3,242 $ 1 $3,243
Corporate notes.................................... 849 (4) 845
Foreign debt securities............................ 1,002 (4) 998
------ --- ------
$5,093 $(7) $5,086
====== === ======
</TABLE>
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization of property and equipment is
computed using the straight-line method over the estimated useful lives of the
respective assets as follows:
<TABLE>
<S> <C>
Machinery and equipment......................................... 1 to 5 years
Computers and software.......................................... 3 to 5 years
Furniture and fixtures.......................................... 5 years
</TABLE>
Leasehold improvements are amortized over their estimated useful lives, or
the remaining lease term, whichever is shorter, using the straight-line
method. Upon sale or retirement, the asset's cost and related accumulated
depreciation are removed from the accounts and any related gain or loss is
reflected in operations.
F-8
<PAGE>
RITA Medical Systems, Inc.
Notes to Financial Statements--(Continued)
Long-lived assets
Long-lived assets and certain intangible assets are reviewed for impairment
when events or changes in circumstances indicate the carrying amount of an
asset may not be recoverable. Recoverability is measured by comparison of the
asset's carrying amount to future net undiscounted cash flows that the assets
are expected to generate. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the projected discounted future net cash flows
arising from the asset.
Fair value of financial instruments
The carrying amounts of some of the Company's financial instruments
including cash and cash equivalents, accounts receivable and accounts payable
approximate fair value due to their short maturities. Based on borrowing rates
currently available to the Company for loans with similar terms, the carrying
value of its debt obligations approximates fair value.
Revenue recognition
Revenue from product sales and sales to distributors are recognized upon
receipt of a purchase order and product shipments provided no significant
obligations remain and collection of the receivables is deemed probable.
Distributors have no price protection arrangements or rights of return on
products purchased.
Research and development
Research and development costs are expensed as incurred. Research and
development costs consist of direct and indirect internal costs related to
specific projects as well as fees paid to other entities which conduct certain
research activities on behalf of the Company.
Income taxes
Income taxes are accounted for using the liability method under which
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized.
Accounting for stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), Financial Accounting
Standards Board Interpretation ("FIN") No. 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans" and
complies with the disclosure provisions of Statements of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
Under APB No. 25, compensation expense is based on the difference, if any,
on the date of the grant, between the fair value of the Company's stock and the
exercise price. SFAS No. 123 defines a "fair value" based method of accounting
for an employee stock option or similar equity instruments. The pro forma
disclosures of the difference between compensation expense included in net loss
and the related cost measured by the fair value method are presented in Note 7.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123 and Emerging Task Force Issue No.
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services."
F-9
<PAGE>
RITA Medical Systems, Inc.
Notes to Financial Statements--(Continued)
Net loss per share
Basic earnings per share is calculated based on the weighted-average number
of common shares outstanding during the period. Diluted earnings per share
would give effect to the dilutive effect of common stock equivalents consisting
of stock options, shares issuable upon conversion of the preferred stock and
warrants. Potentially dilutive securities have been excluded from the dilutive
earnings per share computations as they have an antidilutive effect due to the
Company's net losses.
The computation of pro forma net loss per share includes shares issuable
upon the conversion of outstanding shares of convertible preferred stock (using
the as-if-converted method) from the original date of issuance.
A reconciliation of shares used in the calculations is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended December
31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net loss......................................... $(5,860) $(6,749) $(7,510)
======= ======= =======
Shares used to compute net loss per share, basic
and diluted..................................... 532 668 805
Basic and diluted net loss per share............. $(11.02) $(10.10) $ (9.33)
======= ======= =======
Shares used to compute net loss per share........ 805
Adjustment to reflect weighted-average effect of
assumed conversion of preferred stock
(unaudited)..................................... 7,550
-------
Shares used to compute pro forma basic and
diluted net loss per share (unaudited).......... 8,355
=======
Pro forma basic and diluted net loss per share... $ (0.90)
=======
</TABLE>
The following weighted outstanding options and warrants (prior to the
application of the treasury stock method), and convertible preferred stock (on
an as-if-converted basis) were excluded from the computation of diluted net
loss per share as they had an antidilutive effect (in thousands):
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Options and warrants....................................... 806 1,260 1,700
Convertible preferred stock................................ 3,310 5,927 7,550
----- ----- -----
4,116 7,187 9,250
===== ===== =====
</TABLE>
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities.
SFAS No. 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of relationship that exists. The
Company, to date, has not engaged in derivative or hedging activities. The
Company will adopt SFAS No. 133, as required, in fiscal year 2001.
F-10
<PAGE>
RITA Medical Systems, Inc.
Notes to Financial Statements--(Continued)
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
"Accounting for Certain Transactions Involving Stock compensation-an
Interpretation of APB 25." This Interpretation clarifies (a) the definition of
employee for purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. This Interpretation is effective July 1,
2000, but certain conclusions in this Interpretation cover specific events that
occur after either December 15, 1998, or January 12, 2000. To the extent that
this Interpretation covers events occurring during the period after December
15, 1998, or January 12, 2000, but before the effective date of July 1, 2000,
the effects of applying this Interpretation are recognized on a prospective
basis from July 1, 2000. The adoption of FIN 44 does not have a material impact
on the Company's financial statements.
NOTE 3--BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Inventories (in thousands):
Raw materials.............................................. $ -- $ 250
Work in progress........................................... -- 28
Finished goods............................................. 252 567
------- -------
$ 252 $ 845
======= =======
Property and equipment (in thousands):
Computer equipment and software............................ $ 371 $ 459
Furniture and fixtures..................................... 63 68
Leasehold improvements..................................... 164 195
Machinery and equipment.................................... 651 1,524
------- -------
1,249 2,246
Less: accumulated depreciation and amortization............ (1,001) (1,371)
------- -------
$ 248 $ 875
======= =======
</TABLE>
Property and equipment includes $62,174 and $574,518 of machinery under
capital leases at December 31, 1998 and 1999, respectively. Accumulated
amortization of assets under capital leases totaled $53,884 and $184,324 at
December 31, 1998 and 1999, respectively.
<TABLE>
<S> <C> <C>
Accrued liabilities (in thousands):
Payroll and related expenses...................................... $ 78 $177
Deferred revenue.................................................. -- 64
Other accrued liabilities......................................... 886 715
---- ----
$964 $956
==== ====
</TABLE>
NOTE 4--DEBT
Bridge loan
In July 1997, the Company obtained a $3 million bridge loan from a financial
institution. Under the terms of the agreement, the Company's aggregate
outstanding advances could not exceed $1.25 million until certain contractual
obligations were met. These obligations were met during 1998. Additionally,
certain investors of the
F-11
<PAGE>
RITA Medical Systems, Inc.
Notes to Financial Statements--(Continued)
Company were required to deposit an aggregate of $500,000 into an escrow
account under which the Company could draw funds at their discretion. The
Company drew down $500,000 during 1998. The bridge loan bore interest at prime
plus 2% and was collateralized by substantially all of the assets of the
Company. In connection with the bridge loan, the Company issued warrants to
purchase 111,818 shares of Series E Preferred Stock and warrants to purchase
25,000 shares of Series C Preferred Stock (Note 6). In May 1998, the Company
paid all amounts outstanding under the bridge loan. In June 1998, all amounts
owed under the additional financing from certain investors of $500,000 were
converted to Series E preferred stock at $4.5833 per share.
Notes payable
In June 1999, the Company entered into a loan and security agreement for a
loan facility of up to $5,000,000. The facility consists of two term loans of
$1,500,000 each and a revolving credit note of up to $2,000,000. The facility
is covered by a security interest in receivables, marketable securities,
inventory, equipment and other property including intellectual property. In
connection with the loan and security agreement, the Company issued warrants to
purchase 85,091 shares of Series E Preferred Stock (Note 6).
As of December 31, 1999, the Company had drawn down the initial term loan of
$1,500,000 with a term of three years and bearing interest at 13.36% per annum.
Subsequent to the year end, the Company satisfied the terms of the additional
draw down and entered into the second term loan of $1,500,000 in February 2000.
Principal payments on the initial term loan at December 31, 1999 are as
follows (in thousands):
<TABLE>
<S> <C>
2000................................................................. $ 312
2001................................................................. 750
2002................................................................. 438
------
1,500
Less: Warrants issued................................................ (97)
------
$1,403
======
</TABLE>
Revolving loans will be made under the revolving loan facility, bearing
interest at prime plus 2% (10.5% at December 31, 1999), through the later of
the maturity date or June 30, 2001. The maturity date will automatically be
extended to successive additional terms of one year each unless either the
lender or the Company provides written notice to terminate the loan period
effective on the next maturity date. On the loan maturity date, the Company is
required to pay in full all outstanding revolving loans. As of December 31,
1999, the Company had drawn down $532,685 of the revolving credit note.
NOTE 5--COMMITMENTS AND CONTINGENCY
Capital lease
In September 1998, the Company entered into a three year capital lease
agreement and may borrow up to $1,000,000 for equipment to be delivered no
later than December 31, 1999 and extended to March 31, 2000. In conjunction
with the capital lease, the Company issued warrants to purchase 10,909 shares
of Series E preferred stock at $4.5833 per share (Note 6).
F-12
<PAGE>
RITA Medical Systems, Inc.
Notes to Financial Statements--(Continued)
As of December 31, 1999, future minimum payments under the capital lease
are as follows (in thousands):
<TABLE>
<S> <C>
2000.................................................................. $ 211
2001.................................................................. 211
2002.................................................................. 64
-----
Total............................................................... 486
Less imputed interest (including warrants)............................ (89)
-----
Present value of future minimum lease payments........................ 397
Less current portion.................................................. (166)
-----
Noncurrent portion.................................................. $ 231
=====
</TABLE>
Operating leases
The Company leases manufacturing and office space under a 60 month
noncancelable operating lease terminating in August 2004. The base rent will
increase according to the CPI formula as stipulated in the lease agreement.
Under the terms of the lease, the Company is responsible for property taxes,
insurance and maintenance costs. The Company subleases a portion of its
facilities terminating in August 2000. Subject to certain provisions, the
sublessee has the right to extend the sublease for two additional six month
periods.
Minimum annual rental payments are as follows (in thousands):
<TABLE>
<S> <C>
2000.................................................................. $ 489
2001.................................................................. 489
2002.................................................................. 489
2003.................................................................. 489
2004.................................................................. 347
------
$2,303
======
</TABLE>
Rent expense was $169,340, $185,168 and $296,094, net of sublease income of
$126,062, $142,381 and $128,184 for the years ended December 31, 1997, 1998
and 1999, respectively.
Contingency
The Company is involved in a patent interference proceeding with
RadioTherapeutics Corporation in which the validity of a patent issued to the
Company has been called into question. Although the Company believes it has
meritorious defenses, if it does not prevail in this interference, it could be
prevented from selling the RITA System or be required to pay license fees and
or royalties on past and future product sales.
F-13
<PAGE>
RITA Medical Systems, Inc.
Notes to Financial Statements--(Continued)
NOTE 6--STOCKHOLDERS' EQUITY
Convertible preferred stock
The designated series and shares issued of convertible preferred stock are
as follows (in thousands):
<TABLE>
<CAPTION>
Shares Issued
and
Outstanding
Number of -------------- Minimum
Shares Book Liquidation
1998 Authorized Shares Value Value
---- ---------- ------ ------- -----------
<S> <C> <C> <C> <C>
Series A............................... 1,500 745 $ 5,773 $ 5,811
Series B............................... 2,500 1,415 1,416 1,489
Series C............................... 2,500 1,064 5,132 5,318
Series D............................... 425 225 2,205 2,250
Series E............................... 6,800 2,949 13,438 13,515
------ ----- ------- -------
13,725 6,398 $27,964 $28,383
====== ===== ======= =======
<CAPTION>
Shares Issued
and
Outstanding
Number of -------------- Minimum
Shares Book Liquidation
1999 Authorized Shares Value Value
---- ---------- ------ ------- -----------
<S> <C> <C> <C> <C>
Series A............................... 1,242 745 $ 5,773 $ 5,811
Series B............................... 2,359 1,415 1,416 1,489
Series C............................... 1,845 1,064 5,132 5,318
Series D............................... 375 225 2,205 2,250
Series E............................... 9,345 5,131 23,385 23,515
------ ----- ------- -------
15,166 8,580 $37,911 $38,383
====== ===== ======= =======
</TABLE>
The rights, privileges and preferences of Series A, Series B, Series C,
Series D and Series E preferred stock are as follows:
Voting rights
Holders of shares of all series of preferred stock are entitled to one vote
for each share of common stock into which each share of preferred stock could
be converted. The holders of the outstanding shares of all series of preferred
stock shall vote with the holders of the common stock upon the election of
directors.
Dividends
The holders of shares of all series of preferred stock are entitled to
receive noncumulative dividends, prior and in preference to any declaration or
payment of any dividend on the common stock of the Company, at the rate of
$0.6238, $0.0842, $0.4000, $0.8000 and $0.3667 per share per annum for Series A
stockholders, Series B stockholders, Series C stockholders, Series D
stockholders and Series E stockholders, respectively, as declared by the Board
of Directors. No dividends have been declared as of December 31, 1999.
Dividends for the Series D and Series E Stockholders become cumulative on
December 31, 2000 if the Company's common stock is not traded on a stock
exchange.
Conversion rights
Shares of all series of preferred stock are convertible into common shares
at the option of the holder, or automatically upon a public offering of at
least $15,000,000 of common stock at an offering price of at least $11.4667 per
share, or upon the election of the holders of more than 50% of the then
outstanding shares of Series A, Series B, Series C, Series D or Series E
preferred stock. Each share of preferred stock shall be
F-14
<PAGE>
RITA Medical Systems, Inc.
Notes to Financial Statements--(Continued)
convertible into the number of fully paid and non-assessable shares of common
stock which results from dividing the conversion price per share in effect for
each series of preferred stock at the time of conversion into the per share
conversion value of such series. The conversion price per share of Series A
preferred stock is $6.0685, Series B preferred stock is $1.0523, Series C
preferred stock is $4.7759, Series D preferred stock is $7.0863 and Series E
preferred stock is $4.5833. The conversion terms of Series A, Series C and
Series D Preferred Stock were modified based on price based anti-dilution
rights in the articles of incorporation.
Liquidation
In the event of liquidation or sale of the Company, holders of Series C,
Series D and Series E preferred stock are entitled to receive in preference
over other preferred and common stockholders, an amount of $5.00, $10.00 and
$4.5833 per share, respectively, including any declared but unpaid dividends.
In the event that the Company assets are insufficient to permit the holders
full payment as mentioned above, the entire assets and funds of the Company
shall be distributed ratably among the holders of Series C, Series D and Series
E preferred stock in proportion to the aggregate preferential amount each
holder would otherwise be entitled to receive.
Holders of Series B preferred stock are entitled to receive in preference
over the Series A and common stockholders, an amount of $1.0523 per share,
respectively, including any declared but unpaid dividends. In the event that
the Company's assets are insufficient to permit the holders full payment as
mentioned above, the entire assets and funds of the Company shall be
distributed ratably among the holders of Series B preferred stock in proportion
to the aggregate preferential amount each holder would otherwise be entitled to
receive.
Holders of Series A preferred stock are entitled to receive in preference
over the common stockholders, an amount of $7.7973 per share, respectively,
including any declared but unpaid dividends. In the event that the Company's
assets are insufficient to permit the holders full payment as mentioned above,
the entire assets and funds of the Company shall be distributed ratably among
the holders of Series A preferred stock in proportion to the aggregate
preferential amount each holder would otherwise be entitled to receive.
After distributions to preferred stockholders have been paid, the remaining
assets of the Company available for distribution to stockholders shall be
distributed ratably among the common shareholders.
Warrants
In conjunction with a line of credit obtained in August 1996, the Company
issued warrants to purchase 18,200 shares of Series C preferred stock at an
exercise price of $5.00 per share. The warrants are exercisable for five years
from the date of issuance. The Company has reserved 18,200 shares of its Series
C preferred stock in the event of exercise of the warrants. The aggregate fair
value of the warrants, as determined using the Black-Scholes method, was
$20,020. The fair value of these warrants has been reflected as a discount on
the debt and accreted as interest expense to be amortized over the life of the
line of credit.
In conjunction with the 1997 bridge loan, the Company issued warrants to
purchase 111,818 shares of Series E preferred stock at $4.5833 per share and
warrants to purchase 25,000 shares of Series C preferred stock at $5.00 per
share. The Series E and Series C preferred stock warrants had fair values of
$2.62 and $2.85 per warrant, respectively, at the time of issuance, as
calculated based on the Black-Scholes valuation model. The aggregate fair value
of these warrants of $321,920 has been reflected as additional consideration
for the bridge loan, recorded as a discount on the debt and accreted as
interest expense to be amortized over the life of the bridge loan.
In connection with a September 1998 capital lease agreement, the Company
issued warrants to purchase 10,909 shares of Series E preferred stock at
$4.5833 per share. These warrants expire in September 2006. The aggregate fair
value of these warrants was $31,273 based on the Black-Scholes valuation model,
and has been reflected as a discount on the lease obligation and is being
amortized as interest expense over the term of the lease.
F-15
<PAGE>
RITA Medical Systems, Inc.
Notes to Financial Statements--(Continued)
In connection with the establishment of the June 1999 loan arrangement, the
Company issued warrants to purchase 85,091 shares of the Company's Series E
preferred stock at $4.5833 per share. These warrants expire the earlier of June
2006 on the fifth anniversary of the Company's initial public offering. The
aggregate fair value of these warrants was $231,646 based on the Black-Scholes
valuation model. Of the total warrants under the loan and security agreement,
42,546 are subject to cancellation if the Company does not draw down the second
term. Such warrants are included as a component of other assets and will be
offset against the debt upon its draw downs.
NOTE 7--STOCK OPTIONS
As at December 31, 1999, the Company has reserved 1,958,448 shares of common
stock for sale to employees, directors and consultants under the 1994 Incentive
Stock Plan. Under the Plan, options may be granted at prices not lower than 85%
and 100% of the fair market value of the common stock, as determined by the
board of directors, for non-statutory and incentive stock options,
respectively. For individuals, who at the time of the grant, own stock
representing more than 10% of the voting power of all classes of stock, options
may be granted at prices not lower than 110% of the fair market value of the
common stock for both non-statutory and incentive stock options. Options become
exercisable and vest on a cumulative basis at the discretion of the Board of
Directors and generally expire ten years from the date of grant.
Activity under the Plan are set forth below (in thousands, except per share
data):
<TABLE>
<CAPTION>
Options Outstanding
--------------------------
Weighted
Average
Shares Aggregate Exercise
Available Shares Price Price
--------- ------ --------- --------
<S> <C> <C> <C> <C>
Balances, January 1, 1997.............. 682 198 $ 279 $1.41
Additional shares reserved........... 455
Options granted...................... (743) 743 234 0.31
Options exercised.................... (64) (37) 0.58
Options canceled..................... 26 (26) (17) 0.65
---- ----- ------
Balances, December 31, 1997............ 420 851 459 0.54
Additional shares reserved........... 600
Options granted...................... (769) 769 769 1.00
Options exercised.................... -- (196) (106) 0.54
Options canceled..................... 64 (64) (38) 0.59
---- ----- ------
Balances, December 31, 1998............ 315 1,360 1,084 0.80
Options granted...................... (406) 406 404 1.00
Options exercised.................... -- (149) (92) 0.62
Options canceled..................... 156 (155) (145) 0.94
---- ----- ------
Balances, December 31, 1999............ 65 1,462 1,251 0.86
Additional shares reserved........... 900
Options granted...................... (710) 710 1,011 1.42
Options exercised.................... -- (277) (340) 1.23
Options canceled..................... 39 (39) (39) 1.00
---- ----- ------ -----
Balances, March 31, 2000 (unaudited)... 294 1,856 $1,883 $1.01
==== ===== ======
</TABLE>
F-16
<PAGE>
RITA Medical Systems, Inc.
Notes to Financial Statements--(Continued)
The options outstanding and currently exercisable by exercise price at
December 31, 1999 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Remaining
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.0133.............. 1 4.45 years $0.0133 1 $0.0133
$0.5000.............. 386 7.06 years $0.5000 301 $0.5000
$0.8000.............. 86 5.83 years $0.8000 86 $0.8000
$1.0000.............. 989 8.83 years $1.0000 288 $1.0000
----- ---
1,462 676
===== ===
</TABLE>
The options outstanding and currently exercisable by exercise price and at
March 31, 2000 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Remaining
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.0133.............. 1 4.19 years $0.0133 1 $0.0133
$0.5000.............. 362 6.79 years $0.5000 309 $0.5000
$0.8000.............. 86 5.57 years $0.8000 86 $0.8000
$1.0000.............. 1,066 9.14 years $1.0000 326 $1.0000
$1.6667.............. 341 9.98 years $1.6667 0 $1.6667
----- ---
1,856 722
===== ===
</TABLE>
Stock-based compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-
Based Compensation." Had compensation cost for the Incentive Stock Plan been
determined based on the fair value at the grant date for awards during 1997,
1998 and 1999, consistent with the provisions of SFAS No. 123, the Company's
pro forma net loss and pro forma net loss per share would have been as follows
(in thousands, except per share amount):
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net loss, as reported........................... $(5,860) $(6,749) $(7,510)
Net loss, pro forma............................. $(5,890) $(6,812) $(7,589)
Net loss per share, as reported, basic and
diluted........................................ $(11.02) $(10.10) $ (9.33)
Net loss per share, pro forma, basic and
diluted........................................ $(11.07) $(10.20) $ (9.43)
</TABLE>
Such pro forma disclosure may not be representative of future compensation
cost because options vest over several years and additional grants are
anticipated to be made each year.
The weighted average fair values of options granted during 1997, 1998 and
1999 were $0.08, $0.13 and $0.14, respectively.
F-17
<PAGE>
RITA Medical Systems, Inc.
Notes to Financial Statements--(Continued)
The value of each option grant is estimated on the date of grant using the
minimum value method with the following weighted assumptions:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate.............................. 6.56% 5.22% 5.54%
Expected life........................................ 5 years 5 years 5 years
Expected dividends................................... 0% 0% 0%
</TABLE>
During 1997, 1998 and 1999, the Company recorded a total of approximately
$3.4 million of deferred stock-based compensation in accordance with APB No.
25, SFAS No. 123 and EITF 96-18, related to options granted to employees and
non-employees. For options granted to non-employees during 1998 and 1999, the
Company determined the fair value using the Black-Scholes option pricing model
with the following assumptions: expected volatility of 50%, risk-free interest
rate of 5.75% and deemed values of common stock between $1.00 and $6.38 per
share. Stock compensation expense is being recognized in accordance with FIN 28
over the vesting periods of the related options, generally four years. The
Company recognized stock compensation expense of approximately $39,000,
$403,000 and $991,000 for the years ended December 31, 1997, 1998 and 1999,
respectively, and $220,000 and $1.6 million for the three month periods ended
March 31, 1999 and 2000.
NOTE 8--INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
------- --------
<S> <C> <C>
Net operating loss carryforwards......................... $ 7,717 $ 9,745
Capitalized startup and research and development costs... 895 830
Research and development credit.......................... 331 597
Other.................................................... 52 308
------- --------
Total deferred tax assets.............................. 8,995 11,480
Less valuation allowance................................. (8,995) (11,480)
------- --------
$ -- $ --
======= ========
</TABLE>
At December 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $24,608,000 and $15,984,000, respectively,
available to offset future regular taxable income. The Company's federal and
state operating loss carryforwards expire between 2010 and 2019 and between
2001 and 2004, respectively, if not utilized.
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its deferred tax assets. At such times as it is determined that it is
more likely than not that the deferred tax assets are realizable, the valuation
allowance will be reduced.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. In the event the Company has had a change in ownership,
utilization of the carryforwards could be restricted.
F-18
<PAGE>
RITA Medical Systems, Inc.
Notes to Financial Statements--(Continued)
NOTE 9--RELATED PARTY TRANSACTIONS
In August 1994, the Company entered into a cross-license agreement (the
"Agreement") with VIDAMed (a company whose founder was also one of the founders
of the Company) whereby the Company granted VIDAMed an exclusive royalty-free
license to use the Company's technology for certain applications. In return,
VIDAMed granted the Company an exclusive license to use VIDAMed's technology
for certain applications. The Company is required to pay a royalty of 2.5% of
net sales on products developed incorporating the VIDAMed technology. The
obligation to pay royalties terminates on the earlier of ten years from the
effective date of the Agreement or when payments by the Company to VIDAMed
total $500,000. To date we have not made any payments under this agreement.
During the year, the Company entered into a nonrecourse promissory note
arrangement with an officer and director of the Company. The balance due to the
Company of $72,881 arose on the exercise of stock options and is to be repaid
over 4 years at a 6.11% interest rate. The note is prepayable at any time,
collateralized by common stock of the Company and becomes repayable in full
immediately should the shareholder leave the employment of the Company. The
accrued interest is a nonrecourse obligation.
At the exercise date, the original fixed options converted into variable
options resulting in additional deferred stock based compensation of
approximately $790,000. As the options vest, the Company revalues the remaining
unvested options and records as additional deferred stock-based compensation
the change in fair value from period to period.
NOTE 10--SEGMENT INFORMATION
The Company operates in one business segment. The Company sells its products
and systems directly to customers in the United States, Europe and Asia.
Sales for geographic regions reported below are based upon the customers'
locations. Following is a summary of the geographic information related to
revenues, long-lived assets and information related to significant customers
for the years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------
1997 1998 1999
---- ------ ------
<S> <C> <C> <C>
Sales:
United States............................................. $ 95 $ 669 $1,669
Italy..................................................... 125 468 646
Japan..................................................... -- -- 1,420
Other..................................................... -- -- 894
---- ------ ------
Total..................................................... $220 $1,137 $4,629
==== ====== ======
Long-lived assets:
United States............................................. $491 $ 248 $ 613
Europe.................................................... -- -- 262
---- ------ ------
Total..................................................... $491 $ 248 $ 875
==== ====== ======
Significant customers:
Revenue:
Customer 1................................................ 14% -- --
Customer 2................................................ 57% 41% 14%
Customer 3................................................ 13% -- --
Customer 4................................................ -- -- 41%
</TABLE>
F-19
<PAGE>
RITA Medical Systems, Inc.
Notes to Financial Statements--(Continued)
Accounts Receivable
As of December 1998 and 1999, the accounts receivable balances comprise of
the following:
<TABLE>
<CAPTION>
1998 1999
----- -----
<S> <C> <C>
Customer A..................................................... 42.29% 11.89%
Customer B..................................................... 10.57% --
Customer C..................................................... -- 24.02%
Customer D..................................................... -- 28.87%
</TABLE>
NOTE 11--SUBSEQUENT EVENTS (UNAUDITED)
Initial public offering
In May 2000, the Board of Directors authorized management of the Company to
file a registration statement with the Securities and Exchange Commission
permitting the Company to sell shares of its common stock to the public. If the
initial public offering is closed under the terms presently anticipated, all of
the convertible preferred stock outstanding will automatically convert into
8,934,628 shares of common stock. Unaudited pro forma stockholders' equity, as
adjusted for the assumed conversion of the preferred stock, is set forth on the
balance sheet.
Certificate of Incorporation
On May 1, 2000 the board of directors approved the filing of an amended and
restated certificate of incorporation in connection with the Company's initial
public offering. The amendment, which will become effective upon the completion
of the offering will increase the Company's authorized common stock to
100 million shares and decrease authorized preferred stock to 2 million shares.
Stock Split
On May 1, 2000, the board of directors approved a 3-for-5 reverse stock
split of the common and preferred stock. Stockholders approval of the reverse
stock split was obtained on June 20, 2000. All share and per share amounts in
the accompanying financial statements have been adjusted retroactively.
F-20
<PAGE>
[INSIDE BACK COVER]
Graphic 6: The RITA Model 1500 Radiofrequency Generator with Graphic Display
and Patient Documentation Software
Our new high-power generator is an advance in tissue ablation technology,
allowing the physician to create a 5 centimeter diameter volume of treated
tissue in a simple procedure. Software also allows physicians to monitor
graphically the treated tissue in real time and to record procedural
information for the patient's record.
The RITA Family of Disposable Devices
Since the introduction of our Model 30 disposable devices, we have continued
to advance our technology to allow physicians to create larger ablations. The 5
centimeter StarBurst XL, our newest device, features our second-generation
space-filling curved wire array which allows broad and consistent heat
dispersion within the targeted tissue. Temperature sensors embedded within the
tips of the disposable devices allow the physician to monitor tissue
temperature during the procedure.
Graphic 8: RITA Model 30
Graphic 9: RITA Model 70
Graphic 10: RITA StarBurstXL
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
3,400,000 Shares
[LOGO OF RITA MEDICAL SYSTEMS, INC.]
Common Stock
--------
PROSPECTUS
, 2000
--------
Salomon Smith Barney
Robertson Stephens
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of common stock being registered. All amounts are estimates
except the Securities and Exchange Commission registration fee, the NASD filing
fee and the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
Amount
to be Paid
----------
<S> <C>
Securities and Exchange Commission registration fee.............. $ 13,419
NASD filing fee.................................................. $ 6,480
Nasdaq National Market listing fee .............................. $ 95,000
Printing and engraving expenses ................................. $ 200,000
Legal fees and expenses.......................................... $ 450,000
Accounting fees and expenses..................................... $ 350,000
Blue Sky qualification fees and expenses......................... $ 5,000
Transfer Agent and Registrar fees................................ $ 15,000
Miscellaneous fees and expenses.................................. $ 65,101
----------
Total.......................................................... $1,200,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "Delaware Law")
authorizes a court to award, or a corporation's board of directors to grant,
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). The Registrant's certificate of
incorporation (Exhibit 3.1 hereto) and Bylaws (Exhibit 3.3 hereto) provide for
indemnification of the Registrant's directors, officers, employees and other
agents to the maximum extent permitted by Delaware Law. In addition, the
Registrant has entered into Indemnification Agreements (Exhibit 10.1 hereto)
with certain officers and directors. The Underwriting Agreement (Exhibit 1.1)
also provides for cross-indemnification among the Registrant and the
underwriters with respect to certain matters, including matters arising under
the Securities Act.
Item 15. Recent Sales of Unregistered Securities
(a) Since April 1, 1996, the Registrant has issued and sold the following
unregistered securities:
(1) In May 1996, the Registrant issued and sold shares of Series B
Preferred Stock convertible into an aggregate of 1,160,526 shares of common
stock to a total of 36 investors for an aggregate purchase price of
$1,221,182.
(2) In June 1996, the Registrant issued and sold shares of Series B
Preferred Stock convertible into an aggregate of 259,179 shares of common
stock to a total of 34 investors for an aggregate purchase price of
$272,700.
(3) In December 1996, the Registrant issued and sold shares of Series C
Preferred Stock convertible into an aggregate of 1,113,591 shares of common
stock to a total of 43 investors for an aggregate purchase price of
$5,318,013.
(4) In January 1998, the Registrant issued and sold shares of Series D
Preferred Stock convertible into an aggregate of 317,475 shares of common
stock to a total of 1 investor for an aggregate purchase price of
$2,250,000.
II-1
<PAGE>
(5) In April 1998, the Registrant issued and sold shares of Series E
Preferred Stock convertible into an aggregate of 2,076,043 shares of common
stock to a total of 13 investors for an aggregate purchase price of
$9,515,200.
(6) In June 1998, the Registrant issued and sold shares of Series E
Preferred Stock convertible into an aggregate of 872,727 shares of common
stock to a total of 1 investor for an aggregate purchase price of
$4,000,002.
(7) In July 1999, the Registrant issued and sold shares of Series E
Preferred Stock convertible into an aggregate of 218,182 shares of common
stock to a total of 1 investor for an aggregate purchase price of
$1,000,002.
(8) In August 1999, the Registrant issued and sold shares of Series E
Preferred Stock convertible into an aggregate of 1,527,273 shares of common
stock to a total of 3 investors for an aggregate purchase price of
$7,000,001.
(9) In October 1999, the Registrant issued and sold shares of Series E
Preferred Stock convertible into an aggregate of 436,363 shares of common
stock to a total of 3 investors for an aggregate purchase price of
$2,000,001.
(10) In September 1996, December 1996, July 1997, and January 1998, the
Registrant issued warrants to a lender for the purchase of preferred stock
convertible into 4,397 shares, 14,657 shares, 26,173 shares, 21,818 shares
and 73,636 shares, respectively of common stock in connection with
equipment financings. Consideration for these warrants was a nominal amount
of cash plus the warrantholders' agreement to loan the Company funds.
(11) In October 1997, the Registrant issued warrants to a total of 7
investors for the purchase of shares of Series E preferred stock
convertible into an aggregate of 16,361 shares of common stock.
Consideration for these warrants was a nominal amount of cash for each
warrant plus the warrantholders' agreement to loan the Company funds in a
bridge financing.
(12) In September 1998 and November 1998, the Registrant issued warrants
to persons affiliated with a lender for the purchase of preferred stock
convertible into 2,596 shares, 5,040 shares, 1,113 shares and 2,160 shares,
respectively, of common stock in connection with equipment financings.
Consideration for these warrants was a nominal amount of cash plus the
warrantholders' agreement to loan the Company funds.
(13) In June 1999, the Registrant issued a warrant to a lender for the
purchase of preferred stock convertible into 85,091 shares of common stock
in connection with a term loan. Consideration for this warrant was a
nominal amount of cash plus the warrantholders' agreement to loan the
Company funds.
(14) From March, 1994 (the Registrant's date of inception) to March 31,
2000, 1,204,400 shares of common stock had been issued upon exercise of
options or pursuant to restricted stock purchase agreements for an
aggregate purchase price of $624,117, and 1,855,616 shares of common stock
were issuable upon exercise of outstanding options under the Registrant's
1994 Incentive Stock Plan for an aggregate purchase price of $1,882,556.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
The consideration for the above issuances was cash. The issuances described
in Items 15(a)(1) through 15(a)(11) were deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) thereof as transactions
by an issuer not involving any public offering. Certain of the issuances
described in Items 15(a)(11) were deemed to be exempt from registration under
the Securities Act in reliance upon Rule 701 promulgated thereunder in that
they were offered and sold either pursuant to written compensatory benefit
plans or pursuant to a written contract relating to compensation, as provided
by Rule 701. The recipients of securities in each such transaction represented
their intentions to acquire the securities for investment only and
II-2
<PAGE>
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the securities issued in such transactions.
All recipients had adequate access, through their relationships with the
Company, to information about the Registrant.
Item 16. Exhibits and Financial Statement Schedule
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
+1.1 Form of Underwriting Agreement (subject to negotiation).
+2.1 Form of Agreement and Plan of Merger between the Registrant and RITA
Medical Systems, Inc., a Delaware corporation.
+3.1 Amended and Restated Certificate of Incorporation of RITA Medical
Systems, Inc., a Delaware corporation.
+3.2 Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be filed upon completion of this offering.
+3.3 Amended and Restated Bylaws of RITA Medical Systems, Inc., a
Delaware corporation and an Amendment to the Bylaws.
+3.4 Amended and Restated Bylaws of the Registrant, to be effective upon
completion of this offering.
+4.1 Form of Stock Certificate.
5.1 Opinion of Venture Law Group.
+10.1 Sixth Amended and Restated Shareholder Rights Agreement dated May
26, 2000 by and among the Registrant and certain security holders.
+10.2 1994 Incentive Stock Plan (as amended) and form of option agreement.
+10.3 2000 Stock Plan and form of option agreement.
+10.4 2000 Directors' Stock Option Plan and form of option agreement.
+10.5 2000 Employee Stock Purchase Plan and form of subscription
agreement.
+10.6(a) Master Lease Agreement with Brown Mountain View Joint Venture dated
July 12, 1994 and extension of Master Lease Agreement dated May 12,
1999.
+10.6(b) Standard Sublease Agreement with Computer LANscapes, Inc. (now
Cohesive Technology Solutions, Inc.) dated January 13, 1997,
extension to Sublease Agreement dated June 22, 1999, Addendum
Number One to Sublease dated January 21, 1997 and Addendum Number
Two to Sublease Agreement dated February 19, 1999.
+10.7 Form of Indemnification Agreement between the Registrant and its
officers and directors.
+10.8 Employment Agreement with Barry Cheskin dated March 21, 1997.
+10.9 Employment Agreement with Ronald Steckel dated May 26, 1998.
+10.10 Employment Agreement with David Martin dated February 11, 2000.
+10.11 Form of Change of Control Agreement entered into between the Company
and it officers.
*+10.12 Distribution Agreement with Nissho Iwai Corporation for Japan dated
December 1, 1997.
*+10.13 Distribution Agreement with Nissho Iwai Corporation for South Korea
dated March 12, 1999.
*+10.14 Distribution Agreement with MDH s.r.1. Forniture Ospedaliere for
Italy and Switzerland dated December 21, 1998.
*+10.15 Manufacturing Agreement with Plexus Corporation dated February 17,
2000.
*+10.16 Manufacturing Agreement with Apical Instruments, Inc. dated February
23, 2000.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2 Consent of Venture Law Group, A Professional Corporation (included in
Exhibit 5.1).
+23.3 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
+23.4 Consent of Olsson, Frank & Weeda, P.C.
24.1 Power of Attorney (See page II-5).
+24.2 Power of Attorney of John Gilbert.
+27.1 Financial Data Schedule.
</TABLE>
--------
+ Previously filed.
* Material has been omitted pursuant to a request for confidential treatment
and such material has been filed separately with the SEC.
(b) Financial Statement Schedule
<TABLE>
<S> <C>
Report of Independent Accountants........................................ S-1
Schedule II -- Valuation and Qualifying Accounts......................... S-2
</TABLE>
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amended registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the city of Menlo Park, State
of California, on July 19, 2000.
RITA MEDICAL SYSTEMS, INC.
/s/ Barry Cheskin
By: _________________________________
Barry Cheskin
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Barry Cheskin President, Chief July 19, 2000
___________________________________ Executive Officer
Barry Cheskin and Director (Principal
Executive
Officer)
/s/ Marilynne Solloway Chief Financial Officer July 19, 2000
___________________________________ (Principal
Marilynne Solloway Financial and
Accounting Officer)
* Director July 19, 2000
___________________________________
Gordon Russell
* Director July 19, 2000
___________________________________
Scott Halsted
* Director July 19, 2000
___________________________________
Janet Effland
* Director July 19, 2000
___________________________________
Vincent Bucci
* Director July 19, 2000
___________________________________
John Gilbert
</TABLE>
* Power of attorney.
/s/ Marilynne Solloway
*By____________________________
Marilynne Solloway
Attorney-in-Fact
II-5
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of RITA Medical Systems, Inc.
Our audits of the financial statements referred to in our report dated April
10, 2000 appearing in the Form S-1 of RITA Medical Systems, Inc. also included
an audit of the financial statement schedule listed in Item 16(b) of this Form
S-1. In our opinion, the financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related financial statements.
PricewaterhouseCoopers LLP
San Jose, California
April 10, 2000
S-1
<PAGE>
RITA Medical Systems, Inc.
Schedule II--Valuation & Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Charged Balance
Balance to Costs at End
Beginning and of
Description of Period Expenses Deductions Period
----------- --------- -------- ---------- -------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Allowance for doubtful accounts....... $ -- $ -- $-- $ --
Inventory reserve..................... $ -- $ -- $-- $ --
Valuation allowance on deferred tax
assets............................... $ 3,391 $2,475 $-- $ 5,866
Year Ended December 31, 1998:
Allowance for doubtful accounts....... $ -- $ 31 $ (2) $ 29
Inventory reserve..................... $ -- $ 52 $-- $ 52
Valuation allowance on deferred tax
assets............................... $ 5,866 $3,129 $-- $ 8,995
Year Ended December 31, 1999:
Allowance for doubtful accounts....... $ 29 $ 27 $ (2) $ 54
Inventory reserve..................... $ 52 $ 144 $(39) $ 157
Valuation allowance on deferred tax
assets............................... $ 8,995 $2,485 $-- $11,480
Three Months Ended March 31, 2000
(unaudited):
Allowance for doubtful accounts....... $ 54 $ 9 $-- $ 63
Inventory reserve..................... $ 157 $ 26 $(18) $ 165
Valuation allowance on deferred tax
assets............................... $11,840 $ 808 $-- $12,648
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
+1.1 Form of Underwriting Agreement (subject to negotiation).
+2.1 Form of Agreement and Plan of Merger between the Registrant and RITA
Medical Systems, Inc., a Delaware corporation.
+3.1 Amended and Restated Certificate of Incorporation of RITA Medical
Systems, Inc., a Delaware corporation.
+3.2 Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be filed upon completion of this offering.
+3.3 Amended and Restated Bylaws of RITA Medical Systems, Inc., a
Delaware corporation and an Amendment to the Bylaws.
+3.4 Amended and Restated Bylaws of the Registrant, to be effective upon
completion of this offering.
+4.1 Form of Stock Certificate.
5.1 Opinion of Venture Law Group.
+10.1 Sixth Amended and Restated Shareholder Rights Agreement dated May
26, 2000 by and among the Registrant and certain security holders.
+10.2 1994 Incentive Stock Plan (as amended) and form of option agreement.
+10.3 2000 Stock Plan and form of option agreement.
+10.4 2000 Directors' Stock Option Plan and form of option agreement.
+10.5 2000 Employee Stock Purchase Plan and form of subscription
agreement.
+10.6(a) Master Lease Agreement with Brown Mountain View Joint Venture dated
July 12, 1994 and extension of Master Lease Agreement dated May 12,
1999.
+10.6(b) Standard Sublease Agreement with Computer LANscapes, Inc. (now
Cohesive Technology Solutions, Inc.) dated January 13, 1997,
extension to Sublease Agreement dated June 22, 1999, Addendum
Number One to Sublease dated January 21, 1997 and Addendum Number
Two to Sublease Agreement dated February 19, 1999.
+10.7 Form of Indemnification Agreement between the Registrant and its
officers and directors.
+10.8 Employment Agreement with Barry Cheskin dated March 21, 1997.
+10.9 Employment Agreement with Ronald Steckel dated May 26, 1998.
+10.10 Employment Agreement with David Martin dated February 11, 2000.
+10.11 Form of Change of Control Agreement entered into between the Company
and it officers.
*+10.12 Distribution Agreement with Nissho Iwai Corporation for Japan dated
December 1, 1997.
*+10.13 Distribution Agreement with Nissho Iwai Corporation for South Korea
dated March 12, 1999.
*+10.14 Distribution Agreement with MDH s.r.1. Forniture Ospedaliere for
Italy and Switzerland dated December 21, 1998.
*+10.15 Manufacturing Agreement with Plexus Corporation dated February 17,
2000.
*+10.16 Manufacturing Agreement with Apical Instruments, Inc. dated February
23, 2000.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2 Consent of Venture Law Group, A Professional Corporation (included
in Exhibit 5.1).
+23.3 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
+23.4 Consent of Olsson, Frank & Weeda, P.C.
24.1 Power of Attorney (See page II-5).
+24.2 Power of Attorney of John Gilbert.
+27.1 Financial Data Schedule.
</TABLE>
--------
+ Previously filed.
* Material has been omitted pursuant to a request for confidential treatment
and such material has been filed separately with the SEC.
