-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F1ogF36W+3NbV0VfeN7hAoD3ipY3zkOA0kOi2tUq6QhGNkGDhTpZfSHMINgrkcxQ UgdUDkZviPPvMP5g5Sd0TA== /in/edgar/work/20000725/0001012870-00-003933/0001012870-00-003933.txt : 20000921 0001012870-00-003933.hdr.sgml : 20000921 ACCESSION NUMBER: 0001012870-00-003933 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20000724 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RITA MEDICAL SYSTEMS INC CENTRAL INDEX KEY: 0001056421 STANDARD INDUSTRIAL CLASSIFICATION: [3845 ] IRS NUMBER: 943199149 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-36160 FILM NUMBER: 677898 BUSINESS ADDRESS: STREET 1: 967 N SHORELINE BLVD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94013 BUSINESS PHONE: 6503858500 MAIL ADDRESS: STREET 1: 967 NORTH SHORELINE BLVD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 S-1/A 1 0001.txt FORM S-1/A #5 As filed with the Securities and Exchange Commission on July 24, 2000 Registration No. 333-36160 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ AMENDMENT NO. 5 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) Delaware 3845 94-3199149 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification No.)
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: 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
------------ 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +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 24, 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. --------
Per Share Total --------- --------- Public Offering Price $ $ Underwriting Discount $ $ Proceeds to RITA Medical Systems, Inc. (before expenses) $ $
The underwriters expect to deliver the shares to purchasers on or about , 2000. -------- Salomon Smith Barney Robertson Stephens , 2000. [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. TABLE OF CONTENTS
Page ---- 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
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 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 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 The Offering 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"
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 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."
Three Months ended Years Ended December 31, March 31, ---------------------------- -------------------- 1997 1998 1999 1999 2000 -------- -------- -------- --------- --------- (in thousands, except (unaudited) per share data) 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
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.
As of March 31, 2000 ----------------------------- Pro Pro Forma Actual Forma As Adjusted -------- ------- ----------- Balance Sheet Data: (in thousands) 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
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 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 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 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 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 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 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 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 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 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 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 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.
March 31, 2000 -------------------------------- Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- (in thousands, except share and per share data) 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 ======== ======== ========
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 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: 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 ======
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.
Shares Purchased Total Consideration ------------------ ------------------- Average Price Number Percent Amount Percent Per Share ---------- ------- ----------- ------- ------------- 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% ========== ===== =========== =====
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 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.
Three Months Ended Years Ended December 31, March 31, ------------------------------------------- ---------------- 1995 1996 1997 1998 1999 1999 2000 ------- ------- ------- ------- ------- ------- ------- (in thousands, except per share data) (unaudited) 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
20
December 31, -------------------------------------------- March 31, 1995 1996 1997 1998 1999 2000 ------ ------ -------- -------- -------- ----------- (in thousands) (unaudited) 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)
21 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 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 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 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 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.
Quarter Ended ------------------------------------------------ Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, 1999 1999 1999 1999 2000 -------- -------- --------- -------- -------- (in thousands) 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
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.
Quarter Ended June 30, 2000 --------------------- (in thousands, except per share data) (unaudited) 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 =======
26 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 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 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 . 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 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 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 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.
Product Name Description Status - ------------------------------------------------------------------------------- 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
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 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 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 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 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 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 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 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 MANAGEMENT Executive Officers and Directors The following table shows specific information about our executive officers and directors as of March 31, 2000.
Name Age Position(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
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. 41 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 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 Summary Compensation Table
Long-Term Annual Compensation Compensation ------------------------------- ------------ Securities Other Annual Underlying All Other Name and Position(s) Salary Bonus Compensation Options Compensation - --------------------------------- -------- ------ ------------ ------------ ------------ 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
- ------------------------- (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 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.
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% - ------------------------ ---------- ---------------- -------- ---------- ---------- ---------- Barry Cheskin........... 63,079 17.95% $1.00 10/7/09 $1,130,239 $1,799,717
- ------------------------- (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.
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 - ------------------------ ----------- ----------- ----------- ------------- ----------- ------------- 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
- ------------------------- (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 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 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 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 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 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 The purchasers of the preferred stock include the following holders of more than 5% of our securities and their affiliated entities:
Shares of Preferred Stock ------------------------------------ Investor Series B Series C Series D Series E - ----------------------------------------- -------- -------- -------- --------- 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
- -------- 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 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. 52 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. 53 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 Executive Officers and Directors
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 - ------------------------ ------------------ --------------- -------------- ---------- ----------- 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
- -------- * 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 5% Stockholders
Percent of Common Stock Beneficially Owned Number of Shares ------------------------------ Name and Address of of Common Stock Beneficial Owner Beneficially Owned Before Offering After Offering - ---------------------------- ------------------ --------------- -------------- 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
- -------- (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 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 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 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 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 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 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 62 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 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.
Number Name of shares ---- --------- Salomon Smith Barney Inc. ......................................... FleetBoston Robertson Stephens Inc. ............................... ---- Total ........................................................... ----
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 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.
Paid by RITA ---------------------- No Exercise Full Exercise -------- ------------- Per share............................................. $ $ Total................................................. $ $
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 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 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. 67 RITA MEDICAL SYSTEMS, INC. INDEX TO FINANCIAL STATEMENTS
Page ---- 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
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of RITA Medical Systems, Inc. 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 RITA Medical Systems, Inc. Balance Sheets (in thousands)
Pro Forma Stockholders' December 31, Equity at ------------------ March 31, March 31, 1998 1999 2000 2000 -------- -------- --------- ------------- (unaudited) 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 ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-3 RITA Medical Systems, Inc. Statements of Operations and Comprehensive Loss (in thousands, except per share data)
Three Months Years Ended December 31, Ended March 31, ---------------------------- ---------------- 1997 1998 1999 1999 2000 -------- -------- -------- ------- ------- (unaudited) 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
The accompanying notes are an integral part of these financial statements. F-4 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)
Common Stock Accumulated ------------- Additional Deferred Stockholder Other Shares Paid-in Stock-based Note Comprehensive Accumulated Issued Amount Capital Compensation Receivable Income (Loss) Deficit Total ------ ------ ---------- ------------ ----------- ------------- ----------- -------- 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) ===== === ======= ======= ===== ==== ======== ========
The accompanying notes are an integral part of these financial statements. F-5 RITA Medical Systems, Inc. Statements of Cash Flows (in thousands)
Three Months Ended Year Ended December 31, March 31, ------------------------- -------------------- 1997 1998 1999 1999 2000 ------- ------- ------- --------- --------- (unaudited) 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
The accompanying notes are an integral part of these financial statements. F-6 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 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):
Cost Unrealized Fair Value Gain/Loss Value ------ ---------- ------ Corporate commercial paper......................... $ 683 $-- $ 683 Corporate notes.................................... 1,637 2 1,639 ------ --- ------ $2,320 $ 2 $2,322 ====== === ======
The cost and fair value of available-for-sale securities at December 31, 1999 are as follows (in thousands):
Cost Unrealized Fair Value Gain/Loss Value ------ ---------- ------ 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 ====== === ======
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: Machinery and equipment......................................... 1 to 5 years Computers and software.......................................... 3 to 5 years Furniture and fixtures.......................................... 5 years
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 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 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):
Years Ended December 31, ------------------------- 1997 1998 1999 ------- ------- ------- 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) =======
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):
Years Ended December 31, ----------------- 1997 1998 1999 ----- ----- ----- Options and warrants....................................... 806 1,260 1,700 Convertible preferred stock................................ 3,310 5,927 7,550 ----- ----- ----- 4,116 7,187 9,250 ===== ===== =====
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 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
December 31, ---------------- 1998 1999 ------- ------- 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 ======= =======
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. Accrued liabilities (in thousands): Payroll and related expenses...................................... $ 78 $177 Deferred revenue.................................................. -- 64 Other accrued liabilities......................................... 886 715 ---- ---- $964 $956 ==== ====
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 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): 2000................................................................. $ 312 2001................................................................. 750 2002................................................................. 438 ------ 1,500 Less: Warrants issued................................................ (97) ------ $1,403 ======
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 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): 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 =====
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): 2000.................................................................. $ 489 2001.................................................................. 489 2002.................................................................. 489 2003.................................................................. 489 2004.................................................................. 347 ------ $2,303 ======
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 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):
Shares Issued and Outstanding Number of -------------- Minimum Shares Book Liquidation 1998 Authorized Shares Value Value ---- ---------- ------ ------- ----------- 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 ====== ===== ======= ======= Shares Issued and Outstanding Number of -------------- Minimum Shares Book Liquidation 1999 Authorized Shares Value Value ---- ---------- ------ ------- ----------- 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 ====== ===== ======= =======
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 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 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):
Options Outstanding -------------------------- Weighted Average Shares Aggregate Exercise Available Shares Price Price --------- ------ --------- -------- 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 ==== ===== ======
F-16 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):
Options Outstanding Options Exercisable -------------------------------- -------------------- Remaining Number Contractual Exercise Number Exercise Exercise Price Outstanding Life Price Exercisable Price -------------- ----------- ----------- -------- ----------- -------- $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 ===== ===
The options outstanding and currently exercisable by exercise price and at March 31, 2000 are as follows (in thousands, except per share data):
Options Outstanding Options Exercisable -------------------------------- -------------------- Remaining Number Contractual Exercise Number Exercise Exercise Price Outstanding Life Price Exercisable Price -------------- ----------- ----------- -------- ----------- -------- $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 ===== ===
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):
December 31, ------------------------- 1997 1998 1999 ------- ------- ------- 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)
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 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:
December 31, ----------------------- 1997 1998 1999 ------- ------- ------- Risk-free interest rate.............................. 6.56% 5.22% 5.54% Expected life........................................ 5 years 5 years 5 years Expected dividends................................... 0% 0% 0%
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):
December 31, ----------------- 1998 1999 ------- -------- 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) ------- -------- $ -- $ -- ======= ========
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 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:
Years Ended December 31, -------------------- 1997 1998 1999 ---- ------ ------ 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%
F-19 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:
1998 1999 ----- ----- Customer A..................................................... 42.29% 11.89% Customer B..................................................... 10.57% -- Customer C..................................................... -- 24.02% Customer D..................................................... -- 28.87%
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 [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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3,400,000 Shares [LOGO OF RITA MEDICAL SYSTEMS, INC.] Common Stock -------- PROSPECTUS , 2000 -------- Salomon Smith Barney Robertson Stephens - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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.
Amount to be Paid ---------- 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 ==========
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 (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 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
Number Description ------ ----------- +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.
II-3
Number Description ------ ----------- 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.
- -------- + Previously filed. ++ Supercedes previously filed exhibit. * 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 Report of Independent Accountants........................................ S-1 Schedule II -- Valuation and Qualifying Accounts......................... S-2
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 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 24, 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:
Signature Title Date --------- ----- ---- /s/ Barry Cheskin President, Chief July 24, 2000 ___________________________________ Executive Officer Barry Cheskin and Director (Principal Executive Officer) /s/ Marilynne Solloway Chief Financial Officer July 24, 2000 ___________________________________ (Principal Marilynne Solloway Financial and Accounting Officer) * Director July 24, 2000 ___________________________________ Gordon Russell * Director July 24, 2000 ___________________________________ Scott Halsted * Director July 24, 2000 ___________________________________ Janet Effland * Director July 24, 2000 ___________________________________ Vincent Bucci * Director July 24, 2000 ___________________________________ John Gilbert
* Power of attorney. /s/ Marilynne Solloway *By____________________________ Marilynne Solloway Attorney-in-Fact II-5 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 RITA Medical Systems, Inc. Schedule II--Valuation & Qualifying Accounts (in thousands)
Charged Balance Balance to Costs at End Beginning and of Description of Period Expenses Deductions Period - ----------- --------- -------- ---------- ------- 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
S-2 EXHIBIT INDEX
Number Description ------ ----------- +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.
- -------- + Previously filed. ++ Supercedes previously filed exhibit. * Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. EX-5.1 2 0002.txt OPINION OF VENTURE LAW GROUP EXHIBIT 5.1 July 24, 2000 RITA Medical Systems, Inc. 967 North Shoreline Blvd. Mountain View, CA 94043 Registration Statement on Form S-1 (File No. 333-36160) Ladies and Gentlemen: We have examined the Registration Statement on Form S-1 (File No. 333-36160) (the "Registration Statement") filed by you with the Securities and Exchange Commission on May 3, 2000, as amended by Amendment No. 1 to the Registration Statement filed June 14, 2000, Amendment No. 2 to the Registration Statement filed on June 28, 2000, Amendment No. 3 to the Registration Statement filed on July 14, 2000, Amendment No. 4 to the Registration Statement filed on July 19, 2000 and Amendment No. 5 to the Registration Statement filed on July 24, 2000 in connection with the registration under the Securities Act of 1933 of shares of your Common Stock (the "Shares"). As your legal counsel in connection with this transaction, we have examined the proceedings taken and we are familiar with the proceedings proposed to be taken by you in connection with the sale and issuance of the Shares. It is our opinion that, assuming effectiveness of the Registration Statement, the Shares when issued and sold in the manner described in the Registration Statement will be legally and validly issued, fully paid and nonassessable. We are admitted to practice law only in the State of California, and, accordingly, we express no opinion as to any matter relating to the laws of any jurisdiction other than the laws of California, the General Corporation Law of the State of Delaware, and the federal securities laws of the United States. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to the use of our name wherever appearing in the Registration Statement, including the Prospectus constituting a part thereof, and in any amendment thereto. Very truly yours, VENTURE LAW GROUP A Professional Corporation /s/ Venture Law Group EX-10.13 3 0003.txt DISTRIBUTION AGREEMENT EXHIBITS 10.13 EXCLUSIVE INTERNATIONAL DISTRIBUTOR AGREEMENT --------------------------------------------- THIS AGREEMENT made as of March 12, 1999, as specified herein, by and between RITA Medical Systems, Inc. (and its successors and assigns, the "Seller"), a California corporation having its principal office at 967 North Shoreline Boulevard, Mountain View, California 94043, NISSHO IWAI CORPORATION ("Distributor"), a Japanese corporation having its primary office at 4-5 Akasaka 2-chome, Minato-ku, Tokyo 107, and NISSHO IWAI AMERICAN CORPORATION ("Distributor Agent"), a New York corporation with an office at 44 Montgomery Street, Suite 2150, San Francisco, California 94104-4708 (the Distributor and Distributor Agent shall be referred to collectively as "Distributors"). WITNESSETH WHEREAS, Seller has been engaged in the manufacture and marketing of the Products (as hereinafter defined) and desires to expand the sale of the same; WHEREAS, among other things, Distributors are collectively engaged in exporting, distributing and marketing various products in Korea; and WHEREAS, Distributors desire to act as, and Seller desires to appoint Distributors as described below; NOW, THEREFORE, the parties hereto agree as follows: 1. PRODUCTS AND TERRITORY ---------------------- Distributors shall act as Seller 's exclusive distributor in the Territory (described in Exhibit A) to promote, sell and distribute the Products (described in Exhibit B) for applications which the Seller approves in writing, and to provide service with respect to the Products, to customers, as they are defined below. Further, Seller authorizes, and Distributors agree to, the prompt appointment of the following entity as Distributors' exclusive sub-distributor ("Sub-Distributor") within the territory: Daeyoung Medical Corporation, 9-1, Hongdo-Don, Donk-ku, Taejeon, Korea. Distributors shall cause Sub-Distributor to be bound by and comply with all relevant sections of this Agreement, and any breach by Sub-Distributor shall be deemed a breach by Distributors. Failure to appoint said Sub- Distributor within sixty (60) days of the date hereof shall be grounds for immediate termination of this Agreement at the option of the Seller. "Customers" means medical doctors, institutions such as hospitals and clinics, and similar institutions which are active in the personal care of patients. Distributors are not authorized to sell any Products to any of Distributors' competitors or to any of Seller 's competitors without Seller 's prior written consent. Distributors shall not actively solicit orders from Customers domiciled outside the Territory, or sell or deliver any Product to any Customer which is not in the Territory, except as permitted under the Exclusive Distributorship Agreement between Seller and Distributors dated November 12, 1997 for the distribution of Products in Japan. Furthermore, Distributors shall not appoint any distributor or any agent or maintain any sales, service or stock facility outside the Territory. Except with the prior written consent of Seller, Distributors shall not sell or advertise within the Territory, either on Distributors' own behalf or on behalf of any other person, company, or corporation, products which are similar to or competitive with the Products. 2. SALES PROMOTION AND REPORTING RESPONSIBILITIES ---------------------------------------------- Distributors shall be obligated to use commercially reasonable efforts to promote Seller's products according to Section 1 above, at Distributors' sole expense. This includes, but is not limited to, the activities described below in this Section. Distributors shall provide training and clinical education to all of the Customers in Distributors' Territory. Distributors shall provide appropriate promotional materials in the language of Distributors' Territory. Distributors shall be obligated to provide a sales report to Seller on a monthly basis, by the 15th of the month following the reporting period, which summarizes unit sales, free goods and the number of active accounts as well as the current inventory status of all Products which are in Distributors' possession at the end of the month. Distributors shall provide to Seller, on request, copies of any tenders for the Products in Distributors' Territory. Prior to the commencement of each Sales Year (defined in Section 14) Distributors shall provide to Seller a business plan which will describe Distributors' results for the prior year and Distributors' plans for the coming year. Seller shall be obligated to provide Distributors with such technical support, advice and information as may be deemed necessary by Seller to provide Distributors with a full understanding of the Products at no cost to Distributors. Seller shall also provide Distributors at Seller's cost with a reasonable number of its then existing catalogs, brochures and other promotional materials in the English language to facilitate Distributors' promotion of the Products. Promptly, after this Agreement is signed by both parties, Seller shall also provide Distributors [***]with [***] Model 500 PA Generators and [***] Model 30 Electrodes which are brand new and not used or refurbished (or Model 70 electrodes, depending upon availability) for the exclusive use of Distributors' Sub-Distributor for promoting and marketing the Products in the Territory provided that Distributors provide a like quantity of generators and electrodes to Distributors' Sub- Distributor at no charge as well. Seller agrees to sell the above mentioned "matching" no charge product to Distributors [***] as described in Section 5 below. 3. ORDERS AND MINIMUM PURCHASE QUANTITIES -------------------------------------- The sale and purchase of the Products hereunder shall be based on the terms and conditions set forth herein and in the applicable Purchase Order, provided that if any discrepancy should occur between the terms and conditions of this Agreement and those _______________________________ *** Material has been omitted pursuant to a request for confidential treatment, and such Material has been filed separately with SEC. set out in the printed portion of the Purchase Order, this Agreement shall prevail. An Individual Contract for the Products shall be deemed to have been made when Distributor Agent receives Seller's acceptance of the Purchase Order, such acceptance being indicated by Seller's countersignature on the Purchase Order, Seller's issuance of a sales confirmation or similar document, Seller's delivery of the Products or the like, provided that if any terms in such sales confirmation or similar document conflict with, or supplement, the terms of this Agreement or the Purchase Order, such conflicting or supplemental terms shall be deemed null and void and the provisions of this Agreement and/or the Purchase Order shall govern. In any case, Seller shall respond to each Purchase Order within fifteen (15) days after its receipt by Seller, and failure by Seller to so respond shall be deemed acceptance by Seller. Seller shall endeavor to timely fill all Purchase Orders. Seller agrees that Nissho Iwai American Corporation, a wholly owned subsidiary of Nissho Iwai Corporation, shall act as Distributors' agent specifically in the formal execution of purchase orders to Seller. In the first three years of this Agreement, Distributors shall purchase the minimum quantity of Products set forth on Exhibit C. In (a) succeeding years or (b) if additional products are added by Seller to the Products listed in Exhibit B; then, in accordance with Section 14, the parties shall make best efforts to negotiate commercially reasonable terms regarding the minimum quantities so as to enable both parties to realize a fair profit on their sales by taking into consideration the normal practices of the trade, if any, and competitive circumstances. Such terms shall be considered in effect only when reduced to writing and signed by both parties. Purchases in excess of the minimum quantity required in a given Sales Year shall be credited toward satisfying the minimum quantity required for the following Sales Year. For the purpose of securing orderly shipments, Distributors shall submit to Seller a rolling four quarter forecast, conforming to calendar quarters, of orders for the Products at the beginning of each quarter. The first and second quarters of such forecast shall be considered to be a binding commitment. Distributors shall have, upon Seller's consent, which consent shall not be unreasonably withheld, the right to a visual inspection of the Products by a full-time employee of Distributors at the place of manufacture prior to final packing for shipment. Seller shall timely notify Distributors of packing and shipping schedules for the Products. Inspection shall be at Distributors' expense and shall not cause interruption to Seller's production or shipping operations. Inspection of Products by Distributors shall not constitute a waiver of any claim or right which Distributors or Purchasers may have with respect to Product warranties. 4. RETURNS ------- A Product may only be returned with the prior written approval of the Seller, such approval not to be unreasonably withheld. Any such approval shall reference a return material authorization number issued by Seller. Repair and direct out-of- pocket transportation costs for returned Products under warranty and their replacements shall be for Seller's account, provided, if Seller determines that the returned Products were not defective, such costs shall be for Distributors' account. 5. PRICES ------ In the first three years of this Agreement, Distributors shall pay for Products the prices listed on Exhibit D hereto. In (a) succeeding years or (b) if additional products are added by Seller to the Products listed in Exhibit B; then, in accordance with Section 14, the parties shall make best efforts to negotiate commercially reasonable terms regarding the prices so as to enable both parties to realize a fair profit on their sales by taking into consideration the normal practices of the trade, if any, and competitive circumstances. Such terms shall be considered in effect only when reduced to writing and signed by both parties. 6. PAYMENT ------- Full payment of Distributors' purchase price for the Products shall be in United States of America dollars. Payment terms shall be net sixty (60) days, and payment shall be made by wire transfer, check or other instrument approved by Seller. Any invoiced amount not paid when due shall be subject to a service charge at the lower of the rate of one and one-half percent (1.5%) per month or the maximum rate permitted by law. If Distributors fail to make any payment to Seller when due, Seller may, without affecting its rights under this Agreement, cancel or delay any future shipments of the Products to Distributors. Further, a failure to pay within twenty (20) days after the applicable due date shall be considered a failure to fulfill a material obligation under this Agreement. In the case of the authorized return of Products under warranty or recall, the sixty (60) day payment terms for such Products only shall begin upon shipment of replacement Products from Seller's manufacturing location. 7. COMPLAINTS ---------- If Distributors receive or become aware of any complaints concerning the Products Distributors shall promptly report them to Seller on copies of the form attached as Exhibit E to this Agreement (or on such form as Seller may provide from time to time) and Distributors shall provide all necessary reasonable assistance in connection with any corrective action with respect to the Products. Any determination of corrective action shall be made by Seller in its sole discretion. 8. COMPLIANCE WITH TERRITORIAL REGULATIONS --------------------------------------- _________________________________ *** Material has been omitted pursuant to a request for confidential treatment, and such Material has been filed separately with SEC. Distributors shall comply with all applicable laws, rules and regulations of the Territory governing the use, sale, distribution, shipment and import of the Products. With respect to those Products that have not yet received approval for commercial sale, Distributors shall also comply with the laws, rules and regulations of the Territory concerning use, sale, distribution, shipment and import of unapproved products, and with any applicable Seller clinical trial protocol. In connection with this obligation, Distributors shall obtain and keep in effect all required licenses, permits and authorizations (collectively, "Registration(s)") in the name of Seller, or if this is specifically prohibited by applicable law, in the name of Distributors or Sub-Distributor. Seller shall provide Distributors with all necessary assistance in connection with Distributors or Sub-Distributor obtaining Registrations which Seller concurs in writing are necessary for the conduct of Distributors' business. Distributors will advise Seller, upon Seller 's request, of the status of all Registrations. Seller shall have the sole authority to cancel or transfer (or direct the cancellation or transfer of) all such Registrations. If this Agreement is terminated for any reason, Seller shall make best commercial efforts to appoint a designee qualified under applicable law to assume distribution of the Products in the Territory within a period of ninety (90) days following termination of this Agreement, and Distributors or Sub-Distributor shall, at Seller's expense, promptly transfer all Registrations held by Distributors or Sub-Distributor in connection with Distributors' or Sub- Distributor's distribution of the Products to Seller or its qualified designee. If such transfer is explicitly prohibited by applicable law, as confirmed by Seller and Distributors and/or Sub-Distributor in writing, Distributors and/or Sub-Distributor shall terminate their Registrations within thirty (30) days following Seller's request and shall use best commercial efforts to assist Seller, at Seller's expense, in obtaining new Registrations for the Seller's qualified designee within thirty (30) days of appointment of said designee. Distributors and/or Sub-Distributor shall use Distributors' best efforts to obtain the Registrations necessary to sell the current Products within sixty (60) days of the effective date of this Agreement provided that if such Registrations are not obtained by Distributors or Sub-Distributor within six (6) months for any reason, this shall be grounds for immediate termination of this Agreement at the option of the Seller. Whenever possible under specific tender conditions, all activities with respect to tenders shall be conducted so as to allow, upon termination of this Agreement for any reason, and upon Seller's written request, transfer of such tenders to Seller or to such party as Seller designates in writing. Seller may provide Distributors with information concerning the manufacture of the Products to increase Distributors' ability to obtain Registrations. Distributors agree that such information will be disclosed only to those of Distributors' employees who are authorized by Seller in writing to receive such information. 9. COMPLIANCE WITH U.S. REGULATIONS -------------------------------- Seller shall be responsible for compliance with all applicable United States laws and regulations governing the manufacture and sale of the Products. Distributors shall comply, and use Distributors' commercially reasonable efforts to assist Seller in complying, with all United States laws and regulations applicable to the import and distribution of the Products in the Territory including the maintenance of all required books, records and reports. In particular, Distributors shall track the serial numbers and lot numbers of Products delivered to Distributors' Customers. The obligation to maintain all legally required records shall survive the termination of this Agreement. 10. RECALLS ------- Distributors shall cooperate with Seller in effecting any recall of any specific lot(s) of the Products which, in Seller's opinion, is necessary, provided, however, that Seller shall bear all reasonable, direct out-of- pocket transportation costs relating to the Products under recall and their replacements. This section of the Agreement shall survive the termination of this Agreement, provided however that Seller shall reimburse Distributors and/or Sub-Distributor for all reasonable direct out-of-pocket costs relating to support provided to Seller in the event of a Recall following termination of this Agreement. 11. PROPRIETARY PROPERTY OF SELLER ------------------------------- Seller warrants and represents that, to the best of its knowledge, as of the date hereof, it is the rightful and legal owner of all Seller's rights, title and interest to any and all patents, trademarks and trade names used in connection with the manufacture, sale and promotion of the Products. Distributors expressly acknowledge that Distributors do not have and shall not acquire under this Agreement any rights in or to any of Seller 's patents, trademarks or trade names or to any patents, trademarks or trade names of any subsidiary or other affiliate of Seller. Distributors further acknowledge that Distributors shall not at any time use, register, or obtain in Distributors' own or any other name, Seller 's corporate name, or any of its other trademarks or trade names without Seller's prior consent in writing. Both parties agree at all times during the term of this Agreement to hold in strictest confidence, and not use, or to disclose to any person, firm, corporation or any other entity without written authorization of the other party, any Confidential Information of the other party. Both parties further agree not to make copies of such Confidential Information except as authorized by the other party. Distributors understand that "Confidential Information" of Seller means any of Seller's proprietary information, technical data, trade secrets or know-how, including, but not limited to research, product plans, products, services, suppliers, Customer lists and Customers, prices and costs, markets, software, developments, inventions, laboratory notebooks, processes, formulas, technology, designs, drawings, engineering, hardware configuration information, marketing, licenses, finances, budgets or other business information disclosed to Distributors by Seller orally, in writing or by drawings. Seller understands that "Confidential Information" of Distributors means any of Distributors' proprietary information including, but not limited market information, trade secrets or know how, Customer lists and Customers, prices and costs, finances, budgets or other information disclosed to Seller by Distributors orally, in writing or by drawings. Confidential Information shall not in any case include information which is or becomes generally available or comes to either party's attention through means which do not involve a violation of this Agreement. 12. WARRANTY -------- Seller hereby warrants to Distributor, Sub-Distributors, and to Distributors or Sub-Distributor's Customers that the Products shall (i) strictly conform to the Product specifications as provided by Seller and received by Distributor from time to time and all U.S. governmental regulations therefor, (ii) be free from defects in design, material and workmanship and (iii) be of merchantable quality and fit for the ordinary purposes for which the Products are used. This warranty shall survive any inspection, delivery, acceptance or payment by Distributors. Distributors shall have no obligation to provide any warranty to the Customers with respect to the Products, except that Distributor and Sub-Distributor shall pass on to Customers a copy of Seller's statement of warranty which shall conform to this Agreement. Seller's liability under these warranties, subject to Section 13, shall be limited to a refund of the Customer's purchase price or repair or replacement. In no event shall Seller be liable for the cost of procurement of substitute goods. Seller shall promptly repair or replace (i) any Generator which does not comply with Seller's warranty for a period of twelve (12) months from the date of delivery by Sub-Distributor to the Customers or eighteen (18) months after shipment from Seller's manufacturing location to the Distributors, whichever is earlier, or (ii) any Electrode which does not comply with Seller's warranty for a period of twenty four (24) months from the date of delivery by Sub-Distributor to Customers or until the date of the Electrode expiration date, whichever is earlier, provided, Seller warrants that the Electrode shall be manufactured with a minimum shelf-life of twenty-four (24) months, and provided further that Seller shall endeavor to achieve a shelf-life of thirty-six (36) months for the Electrodes as soon as commercially reasonable, and shall deliver to Distributors Electrodes with a manufacture date no more than ninety (90) days from the date of manufacture/sterilization date, or one hundred eighty (180) days once a three year shelf-life is obtained. Seller represents that it shall promptly and diligently comply with all its warranty obligations. From the date hereof and until two (2) years after the termination of this Agreement, Seller shall maintain a general comprehensive product liability insurance policy in the amount of two million U.S. dollars ($2,000,000) per occurrence and two million U.S. dollars ($2,000,000) in the aggregate per year. Distributor and Sub-Distributor shall be named as additional insureds. Within sixty (60) days from the date hereof, Seller shall send Distributor Agent a copy of such insurance policy. Such policy shall provide that Distributors and Sub-Distributor must be notified within thirty (30) days of such policy's expiration, termination or modification. ALL OTHER GUARANTEES, WARRANTIES, CONDITIONS AND REPRESENTATIONS, EITHER EXPRESS OR IMPLIED, WHETHER ARISING UNDER ANY STATUTE, COMMON LAW, CASE LAW, COMMERCIAL USAGE, CUSTOM OR OTHERWISE, INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, ARE HEREBY EXCLUDED. 13. INDEMNIFICATION --------------- Seller shall indemnify and hold Distributors, Sub-Distributor, their parent, subsidiaries and affiliates and their directors, officers and employees ("Related Parties") harmless from any and all losses, obligations, liabilities, costs and expenses including, but not limited to, legal fees and out-of-pocket expenses arising out of or in connection with (i) any claim of a third party regarding any breach of Seller's warranty, or any product liability claims arising from the Products that are otherwise not covered by Seller's general comprehensive product liability insurance, excluding those claims which arise from the Distributors' or Sub-Distributor's misconduct or gross negligence and (ii) any claim of a third party regarding infringement of patent, trademark or tradename rights with respect to the Products; provided that in either case (i) or (ii) above, (x) Distributors or Sub-Distributor shall have promptly informed Seller thereof (y) Distributors and/or Sub-Distributor do not defend against or settle any claim without the written consent of Seller and (z) Distributors and/or Sub-Distributor make best efforts to cooperate with Seller in connection with the defense or settlement of such claim, provided that Seller shall reimburse Distributors and/or Sub-Distributor for reasonable expenses associated with such cooperation. In complying with the provisions of this paragraph, Seller, and not Distributors or Sub- Distributor, shall actively and at Seller's own expense defend against or settle any such claim. Notwithstanding the foregoing, Seller's obligations hereunder shall not extend to special or consequential damage claims of Distributors, Sub-Distributors, and Related Parties. Seller's obligations hereunder shall survive the expiration or termination of this Agreement provided that any claim under this section was made within ten (10) years of the termination of this Agreement or until the termination of any applicable statutes of limitations. In the event of any such claim after such period, Seller shall use its reasonable commercial efforts to assist Distributors and/or Sub-Distributor in defending against any such claim. 14. DURATION AND TERMINATION ------------------------ This Agreement shall be for a three (3) year period commencing on the first full month following Distributors' or Sub-Distributor's obtaining the Registrations necessary to sell the current Products. This Agreement shall automatically renew for successive one year periods beginning on the first day following the end of the initial three year period of this Agreement, unless notice of termination is given by either party for any reason or no reason within the ninety (90) days proceeding the commencement of any one year renewal period. Each one year period, as described in this section, shall be called a "Sales Year". Further, this agreement may be terminated or, at the exclusive option of the Seller, converted to a non-exclusive distributorship: (1) by Seller, upon thirty (30) days written notice to Distributors, if minimum quantity of Products, as per Section 3, is not purchased by Distributors by the end of any Sales Year. (2) by either party upon thirty (30) days written notice to the other if the parties fail to reach agreement as to the Minimum Purchase Quantity (according to Section 3 above) or as to the prices (according to Section 5 above) either (a) prior to the commencement of any one year renewal period or (b) within sixty (60) days of written notification by Seller of an addition to the Products. Should Seller terminate the Agreement or convert the Agreement to a non- exclusive distributorship according to either (1) or (2) above, Distributor may, in its sole discretion and without penalty withdraw the most recent rolling four-quarter forecast for orders submitted to the Seller, the effect of which shall be to make all purchase commitments by Distributor and all supply commitments by Seller under this Agreement null and void. Further, this Agreement may be terminated: (3) by either party upon written notice to the other if the other party fails to fulfill its material obligations hereunder and such failure is not cured within sixty (60) days after its receipt of written notice requesting a remedy thereof, provided that there shall be no such cure period if another provision in this Agreement excludes it or specifies another period. (4) by either party upon written notice if the other party or the Sub- Distributor becomes insolvent or any voluntary or involuntary petition in bankruptcy is filed by or against such party or a trustee is appointed with respect to any of the assets of such party or a liquidation proceeding is commenced by or against such party and such proceeding has not been terminated within ninety (90) days, or if such party discontinues its business. (5) by Seller upon sixty (60) days written notice to Distributors if there is a change of control of Seller. Upon termination of this Agreement, Seller shall have the following additional obligations with respect to repurchase of Product inventory held by Distributors or Sub-Distributor: (i) if the termination arises from (3) or (4) above, and the Distributors are the terminating party, or termination arises from (5), Seller shall, upon Distributors' request, promptly repurchase at Seller's risk and expense and at the original invoice price any undamaged "Saleable"inventory, defined as inventory in the Seller's catalog at the time of termination of this Agreement and having a minimum remaining shelf life of at least eighteen (18) months. If the termination arises from (3) or (4) above, and the Seller is the terminating party or if termination arises from (1) or (2) above, Seller shall have the right, but not the obligation, to repurchase undamaged, Saleable inventory at the original invoice price. Only the following Sections of this Agreement shall survive its termination: Sections 4, 6, 8, 11, 12, 13 and 16. Other than the specific provisions in this Section, neither party shall have any remedy upon termination due to such termination, provided that this shall have no effect on the surviving Sections of this Agreement, which remain in effect and enforceable along allowing any remedy specifically associated with them. 15. FORCE MAJEURE ------------- Neither party shall be responsible to the other party for non-performance or delay in performance under this Agreement due to acts of God, civil commotion, war, riots, strikes, lockouts, severe weather, fires, explosions, governmental actions or other similar causes beyond the control of such party, provided that the party so affected shall promptly give notice thereof to the other party and shall continue to take all action reasonably within its power to comply herewith as fully as possible. In any event, the time for performance hereunder shall only be extended for the duration of the delay. 16. GENERAL PROVISIONS ------------------ The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California, without giving effect to the principles of conflict of laws. Any dispute or claim arising out of or in connection with any provision of this Agreement will be finally settled by binding arbitration in Santa Clara County, California in accordance with the rules of the American Arbitration Association by one arbitrator appointed in accordance with said rules. The arbitrator shall apply California law, without reference to rules of conflicts of law or rules of statutory arbitration, to the resolution of any dispute. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Notwithstanding the foregoing, the parties may apply to any court of competent jurisdiction for preliminary or interim equitable relief, or to compel arbitration in accordance with this paragraph, without breach of this arbitration provision. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon receipt, when delivered personally or by courier, overnight delivery service or confirmed facsimile, or forty-eight (48) hours after being deposited in the regular mail as certified or registered mail (airmail if sent internationally) with postage prepaid, if such notice is addressed to the party to be notified at such party's address or facsimile number as set forth below, or as subsequently modified by written notice. RITA Medical Systems, Inc. 967 N. Shoreline Boulevard, Mountain View, CA 94043 USA Attn: Barry Cheskin - President and CEO Fax: 650-390-8505 Nissho Iwai Corporation 4-5 Akasaka 2-chome, Minato-ku, Tokyo 107, Japan Attn: Ryuichi Kumagai - General Manager Medical Systems Department Fax: 03-3588-3975 Nissho Iwai American Corporation 1211 Avenue of the Americas, New York, NY10036, USA Attn: Shin-ichi Kawaratani - Assistant Vise President Fax: 212-704-6961 The provisions of this Agreement shall be deemed to be severable and the invalidity of any provision of this Agreement shall not affect the validity of the remaining provisions of this Agreement. No amendment or modification of this Agreement shall be binding on the parties unless made in writing expressly referring to this Agreement and signed by authorized representatives of each party. This Agreement is not assignable by either party in whole or in part without the prior written consent of the other party, and any attempted assignment without such approval shall be null and void, except that Seller may assign this Agreement to an individual or entity which acquires a controlling interest in Seller. This Agreement constitutes the entire agreement and understanding of the parties with respect to the subject matter of this Agreement and supersedes all prior discussions, agreements and understandings. SIGNATURE PAGE FOLLOWS Both parties acknowledge and agree to all of the foregoing terms and conditions. Until so executed by Distributors and Seller and returned to Seller, this Agreement shall not be binding on either party, and unless executed by Distributors and returned to Seller within ten days of the date set forth on the first page hereof, this Agreement shall expire without further notice and shall be null and void. The parties executed this Agreement on the respective dates set forth below. RITA MEDICAL SYSTEMS, INC. /s/: Barry Cheskin ------------------- By: Barry Cheskin Title: President and CEO Address: 967 N. Shoreline Blvd. Mountain View, CA 94043, USA NISSHO IWAI CORPORATION /s/: Ryuichi Kumagai --------------------- By: Ryuichi Kumagai Title: General Manager Address: 4-5, Akasaka 2-chome, Minato-ku, Tokyo 107, Japan NISSHO IWAI AMERICAN CORPORATION /s/: Shin-ichi Kawaratani ------------------------- By: Shin-ichi Kawaratani Title: Assistant Vise President Address: 1211 Avenue of the Americas, New York, NY10036, USA Exhibit A Territory South Korea Exhibit B Products GENERATORS Model Number Part Number ------------ ----------- Model 500PA 700-101082 ELECTRODES Model Number Part Number Description ------------ ----------- ----------- Model 30 700-100890 4 array, 3cm, 15cm Model 30 700-100852 4 array, 3cm, 25cm Model 70* ACCESSORIES Model Number Part Number ------------ ------------ Main Cable 700-101086 Foot Switch 410-100453 Dispersive Electrode 700-100379 Power Cord TBD At its sole discretion with sixty (60) days prior written notice: (1) Seller may discontinue any product on this list and (2) Seller may add additional products to this list, provided that the list shall contain those Seller products which are direct replacements for the current Products in applications which the Seller approves in writing. * When, and if, such product is introduced for Korea Exhibit C Minimum Purchase Target - ------------------------------------------------------------------------------ Product 1st Sales Year 2nd Sales Year 3rd Sales Year ------- -------------- -------------- -------------- - ------------------------------------------------------------------------------ Model 500PA Generator [***] [***] [***] - ------------------------------------------------------------------------------ Model 30 Electrodes [***] [***] [***] - ------------------------------------------------------------------------------ * Each generator is supplied with Power Cord, a Main Cable and a Footswitch ** Each electrode is supplied with one Dispersive Electrode; if, and when the Model 70 is introduced for Korea, both Model 30 and Model 70 purchases shall be credited against the minimum purchase target ______________________________________ *** Material has been omitted pursuant to a request for confidential treatment, and such Material has been filed separately with SEC. Exhibit D Pricing Schedule - -------------------------------------------------------------------------------- Product 1st Sales Year 2nd Sales Year 3rd Sales Year ------- -------------- -------------- -------------- - -------------------------------------------------------------------------------- Model 500PA Generator* [***] [***] [***] - -------------------------------------------------------------------------------- Model 30 Electrodes** [***] [***] [***] - -------------------------------------------------------------------------------- Main Cable [***] [***] [***] - -------------------------------------------------------------------------------- Foot Switch [***] [***] [***] - -------------------------------------------------------------------------------- Dispersive Electrode [***] [***] [***] - -------------------------------------------------------------------------------- Power Cord [***] [***] [***] - -------------------------------------------------------------------------------- * Each generator is supplied with Power Cord, a Main Cable and a Foot Switch ** Each Model 30 electrode is supplied with one Dispersive Electrode; Model 70 pricing shall be the same as Model 30 pricing in the 1st, 2nd and 3rd Sales Years + Applies to first 1,000 units; quantity discounts for 1st Sales Year only are as follows (if, and when, the Model 70 is introduced for Korea, both Model 30 and Model 70 purchases shall be credited against these quantity discounts): 1,001/st/ - 1,999/th/ units [***] 2,000/th/ - 2,999/th/ units [***] 3,000/th/ + units [***] Note that all part numbers are per Exhibit B and that terms are F.O.B. Seller's manufacturing location. All freight, insurance and other direct shipping expense shall be borne by Distributors from Seller's manufacturing location. _________________________________ *** Material has been omitted pursuant to a request for confidential treatment, and such Material has been filed separately with SEC. Exhibit E Complaint Form Complaint Report Form Complaint No._____ - -------------------------------------------------------------------------------- 1. Date Received:_____________________________________________________ 2. Received by:_______________________________________________________ 3. Complaint Acknowledgement Letter Sent:_____________________________ 4. Product Description:_______________________________________________ Lot No. _____________________________Model No.______________________ 5. Customer Name:_____________________________________________________ 6. Contact Person:____________ Telephone:_______________ Fax:_________ 7. Hospital/Address:__________________________________________________ __________________________________________________________________ - -------------------------------------------------------------------------------- 8. Nature of Complaint: ___________________________________________________________________________ ___________________________________________________________________________ _______________________________[ ]See Attached - -------------------------------------------------------------------------------- 9. Complete Medical Complaint Decision Tree (Form #160-101223). - -------------------------------------------------------------------------------- 10. A. Treatment Date:______________________ C. Device Returned Indication:__________________________ [ ] Yes, Date Returned:____ Treatment Site:______________________ [ ] No B. Origin of Complaint D. Confirmed Complaint?: [ ] Domestic [ ] Clinical Study [ ] Yes [ ] International [ ] Literature [ ] No E. RMA Number: ________________ - -------------------------------------------------------------------------------- 11. Investigation: [ ] Yes By who:________________________ Date Complete:_______________________ Results of Investigation :_____________________________________________ _______________________________________________________________________ ____________________________________________________[ ]See Attached 12. Corrective Action Number (if assigned): ___________________________________ 13. Additional Information:____________________________________________________ - -------------------------------------------------------------------------------- Complaint Response Sent:____________________ Approved by:__________________________ __________ Regulatory Affairs or Designated Date ________________ __________ Quality Assurance Date Date File Closed:_______________________ - -------------------------------------------------------------------------------- EX-10.14 4 0004.txt DISTRIBUTION AGREEMENT (MDH) EXHIBITS 10.14 INTERNATIONAL DISTRIBUTOR AGREEMENT ----------------------------------- December 21, 1998 MDH s.r.1. Forniture Ospedaliere Via delle Gardenie 9 Milano 20147 Italy Dear Gianfranco Bellezza: This letter is the agreement ("Agreement") between MDH s.r.l. Forniture Ospedaliere ("you") and RITA Medical Systems, Inc. ("RITA") under which you are appointed as a distributor in the territory described on Exhibit A to this Agreement (the "Territory") of the RITA-branded products listed on Exhibit B to this Agreement (the "Products"). This Agreement constitutes the entire agreement and understanding of the parties with respect to the subject matter of this Agreement and supersedes all prior discussions, agreements and understandings, including, without limitation, that certain International Distributor Agreement between RITA, you and Gianfranco Bellezza made as of December 1, 1996. That certain agreement is hereby terminated as of December 31, 1998. The terms and conditions under which you will act as RITA's distributor are as follows: 1. PRODUCTS AND TERRITORY ---------------------- You shall act as RITA s distributor in the Territory (described in Exhibit A) to promote, sell and distribute the Products (described in Exhibit B) for RITA approved applications only and to provide service with respect to the Products, to the medical community. As used in this Agreement, "medical community" means medical doctors, institutions such as hospitals and clinics, and similar institutions which are active in the personal care of patients. You are not authorized to sell any Products to any of your competitors or to any of RITA's competitors without RITA's prior written consent. You shall not actively solicit orders from customers domiciled outside the Territory, or sell or deliver any Product to any customer which is not in the Territory. Furthermore, you shall not appoint any distributor or any agent or maintain any sales, service or stock facility outside the Territory. Except with the prior written consent of RITA , you shall not sell or advertise within the Territory, either on your own behalf or on behalf of any other person, company, or corporation, products which compete, directly or indirectly, with the Products. 2. SALES PROMOTION AND REPORTING RESPONSIBILITIES ---------------------------------------------- You shall be obligated to actively promote RITA's products according to Section 1 above, at your sole expense. This includes, but is not limited to, the activities described below in this Section. You shall attend and exhibit at all major trade shows in your Territory related to the Products. You shall provide training and clinical education to all of the customers in your Territory. You shall provide appropriate promotional materials in the language of your Territory. You shall be obligated to provide a sales report to RITA on a monthly basis, by the 15th of the month following the reporting period, which details your sales to customers, including the customer name, quantity and selling price as well as the current inventory status of all Products which are in your possession at the end of the month. You shall provide to RITA, on request, copies of any tenders for the Products in your Territory. Prior to the commencement of each Sales Year (defined in Section 14) you shall provide to RITA a business plan which will describe your results for the prior year and your plans for the coming year. RITA shall be obligated to provide you with such technical support as may be deemed necessary by RITA to provide you with a full understanding of the Products. RITA shall also provide you with a reasonable number of its then existing catalogs, brochures and other promotional materials in the English language to facilitate your promotion of the Products. 3. ORDERS AND MINIMUM PURCHASE QUANTITIES -------------------------------------- All purchase orders shall be governed by the terms of this Agreement and RITA's standard acknowledgement form, provided that if any conflicts shall occur, this Agreement shall prevail. In the first two years of this Agreement, you shall purchase the minimum quantity of Products set forth on Exhibit C. In (a) succeeding years or (b) if additional products are added by RITA to the Products listed in Exhibit B; then, in accordance with Section 14, the minimum quantity of Products to be purchased shall be as agreed between the parties in writing. For the purpose of securing orderly shipments, you shall submit to RITA a rolling four quarter forecast of orders for the Products at the beginning of each quarter. 4. RETURNS ------- Products may only be returned with the prior written approval of RITA. Any such approval shall reference a return material authorization number issued by RITA. Repair and transportation costs for returned Products shall be borne by RITA, provided, if RITA determines that the returned Products were not defective, such costs shall be borne by you. -2- 5. PRICES ------ In the first two years of this Agreement, you shall pay for Products the prices listed on Exhibit D hereto. In (a) succeeding years or (b) if additional products are added by RITA to the Products listed in Exhibit B; then, in accordance with Section 14, the prices of Products to be purchased shall be as agreed between the parties in writing. 6. PAYMENT ------- Full payment of your purchase price for the Products (including any freight, taxes or other applicable costs initially paid by RITA but to be borne by you) shall be in United States of America dollars. All exchange, interest, banking, collection, and other charges shall be at your expense. Payment terms shall be net ninety (90) days, and payment shall be made by wire transfer, check or other instrument approved by RITA. Any invoiced amount not paid when due shall be subject to a service charge at the lower of the rate of one and one-half percent (1.5%) per month or the maximum rate permitted by law. If you fail to make any payment to RITA when due, RITA may, without affecting its rights under this Agreement, cancel or delay any future shipments of the Products to you. Further, such a failure to pay shall be considered a failure to fulfill a material obligation under this Agreement. 7. COMPLAINTS ---------- If you receive or become aware of any complaints concerning the Products you shall promptly report them to RITA on copies of the form attached as Exhibit E to this Agreement (or on such form as RITA may provide from time to time) and you shall provide all necessary assistance in connection with any corrective action with respect to the Products. Any determination of corrective action shall be made by RITA in its sole discretion. 8. COMPLIANCE WITH TERRITORIAL REGULATIONS --------------------------------------- You shall comply with all applicable laws, rules and, regulations of the Territory governing the use, sale, distribution, shipment and import of the Products. With respect to those Products that have not yet received approval for commercial sale, you shall also comply with the laws, rules and regulations of the Territory concerning use, sale, distribution, shipment and import of unapproved products, and with any applicable RITA clinical trial protocol. In connection with this obligation, you shall obtain and keep in effect all required licenses, permits and authorizations (collectively, "Registration(s)"). RITA shall provide you with all necessary assistance in connection with your obtaining Registrations which RITA concurs in writing are necessary for the conduct of your business. You will advise RITA, upon RITA's request, of the status of all Registrations, -3- and will notify RITA whenever any change of Registration status occurs and whenever any Registration is called into question. All such Registrations shall be in the name of RITA or, if Registration in RITA's name is prohibited by applicable law, in the name of a party designated in writing by RITA or in trust for RITA. RITA shall have the sole authority to cancel or transfer (or direct the cancellation or transfer of) all such Registrations. If this Agreement is terminated for any reason, you shall promptly transfer all Registrations held by you in connection with your distribution of the Products to RITA or its designee. You shall pay all applicable Registration fees, duties, taxes and other expenses relating to the sale and use of the Products within the Territory. To the extent that the law requires RITA. rather than you, to file any Registration, RITA may register the Products as required by law. You shall provide all necessary assistance in connection with the filing of such Registrations. All activities with respect to tenders shall be conducted so as to allow, upon termination of this Agreement for any reason, and upon RITA's written request, transfer of such tenders to RITA or to such party as RITA designates in writing. RITA may provide you with information concerning the manufacture of the Products to increase your ability to obtain Registrations. You agree that such information will be disclosed only to those of your employees who are authorized by RITA in writing to receive such information. 9. COMPLIANCE WITH U.S. REGULATIONS -------------------------------- RITA shall be responsible for compliance with all applicable United States laws and regulations governing the manufacture and sale of the Products. You shall comply, and use your best efforts to assist RITA in complying, with all applicable United States laws and regulations including the maintenance of all required books, records and reports. In particular, you shall track the serial numbers and lot numbers of Products delivered to your customers. 10. RECALLS ------- You shall cooperate with RITA in effecting any recall of the Products which, in RITA's opinion, is necessary. 11. PROPRIETARY PROPERTY OF RITA ---------------------------- You expressly acknowledge that you do not have and shall not acquire under this Agreement any rights in or to any of RITA's patents, trademarks or trade names or to any patents, trademarks or trade names of any subsidiary or other affiliate of RITA. You further acknowledge that you shall not at any time use, register, or obtain in your own or any other name, RITA's corporate name, or any of its other trademarks or trade names. -4- You agree at all times during the term of this Agreement with RITA and thereafter, to hold in strictest confidence, and not use, except for the benefit of RITA, or to disclose to any person, firm, corporation or any other entity without written authorization of the President of RITA, any Confidential Information of RITA which you obtain or create. You further agree not to make copies of such Confidential Information except as authorized by RITA. You understand that "Confidential Information" means any RITA proprietary information, technical data, trade secrets or know- how, including, but not limited to research, product plans, products, services, suppliers, customer lists and customers (including, but not limited to, customers of RITA on whom you called or with whom you became acquainted during the relationship), prices and costs, markets, software, developments, inventions, laboratory notebooks, processes, formulas, technology, designs, drawings, engineering, hardware configuration information, marketing, licenses, finances, budgets or other business information disclosed to you by RITA orally, in writing or by drawings. 12. WARRANTY -------- RITA extends to you, only, in respect of each new and unused Product supplied to you, a warranty on terms identical to that contained in the warranty certificate enclosed and delivered with such Product when sold directly by RITA. RITA's liability is limited in all respects by the terms and conditions of such warranty. RITA agrees that such warranty will have a minimum term of twelve (12) months from the date of its sale to you for Products with no expiration date and a minimum term extending until the expiration date for Products which have such an expiration date, providing they are unopened and undamaged. ALL OTHER GUARANTEES, WARRANTIES, CONDITIONS AND REPRESENTATIONS, EITHER EXPRESS OR IMPLIED, WHETHER ARISING UNDER ANY STATUTE, COMMON LAW, CASE LAW, COMMERCIAL USAGE, CUSTOM OR OTHERWISE, INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, ARE HEREBY EXCLUDED. 13. LIABILITY ACTIONS ----------------- You shall give RITA immediate written notice if you become aware of any legal action deriving from the use of the Products by customers, and include in such notice all facts relating to the legal action of which you are aware. RITA shall indemnify you during the term of this agreement to the extent that it and you are covered by its commercial general liability policy (including products liability) then in effect for any such claims which are brought against you, except for claims which arise from your negligence, action or failure to act. RITA shall have the right, but not the obligation, to defend any such claim, even after this Agreement terminates, and settle it on such terms as RITA deems appropriate. You shall cooperate fully with RITA in connection with such defense. -5- 14. DURATION AND TERMINATION ------------------------ This Agreement shall be for a two (2) year period commencing on January 1, 1999. This agreement shall automatically renew for successive one year periods beginning on January 1, 2001 unless notice of termination is given by either party for any reason or no reason within the ninety (90) days proceeding the commencement of any succeeding one year renewal period. Each one year period, as described above, shall be called a "Sales Year". Further, this agreement may be terminated: (1) by RITA, upon thirty (30) days written notice if minimum quantity of Products, as per Section 3, is not purchased by you by the end of any Sales Year. (2) by either party upon thirty (30) days written notice to the other if the parties fail to reach agreement as to the Minimum Purchase Quantity (according to Section 3 above) or as to the prices (according to Section 5 above) either (a) prior to the commencement of any one year renewal period or (b) within sixty days of written notification by RITA of an addition to the Products. (3) by either party upon written notice to the other if the other party fails to fulfill its material obligations hereunder and such failure is not cured within sixty (60) days after its receipt of written notice requesting a remedy thereof. (4) by either party upon written notice if the other party becomes insolvent or any voluntary or involuntary petition in bankruptcy is filed by or against such party or a trustee is appointed with respect to any of the assets of such party or a liquidation proceeding is commenced by or against such party and such proceeding has not been terminated within ninety (90) days, or if such party discontinues its business. (5) by RITA upon thirty (30) days written notice if Gianfranco Bellezza, for any reason, fails to devote substantially all of his time to fulfilling the terms of this Agreement. 15. FORCE MAJEURE Neither party shall be responsible to the other party for non-performance or delay in performance under this Agreement due to acts of God, civil commotion, war, riots, strikes, lockouts, severe weather, fires, explosions, governmental actions or other similar causes beyond the control of such party, provided that the party so affected shall promptly give notice thereof to the other party and shall continue to take all action reasonably within its power to comply herewith as fully as possible. In any event, the time for performance hereunder shall only be extended for the duration of the delay. -6- 16. GENERAL PROVISIONS The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California, without giving effect to the principles of conflict of laws. Any dispute or claim arising out of or in connection with any provision of this Agreement will be finally settled by binding arbitration in Santa Clara County, California in accordance with the rules of the American Arbitration Association by one arbitrator appointed in accordance with said rules. The arbitrator shall apply California law, without reference to rules of conflicts of law or rules of statutory arbitration, to the resolution of any dispute. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Notwithstanding the foregoing, the parties may apply to any court of competent jurisdiction for preliminary or interim equitable relief, or to compel arbitration in accordance with this paragraph, without breach of this arbitration provision. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon receipt, when delivered personally or by courier, overnight delivery service or confirmed facsimile, or forty-eight (48) hours after being deposited in the regular mail as certified or registered mail (airmail if sent internationally) with postage prepaid, if such notice is addressed to the party to be notified at such party's address or facsimile number as set forth below, or as subsequently modified by written notice. RITA Medical Systems, Inc. 967 N. Shoreline Boulevard Mountain View, CA 94043 USA Attn: Barry Cheskin Fax: 650.390-8505 MDH s.r.l. Forniture Ospedaliere Via Delle Gardenie 9 Milano 20147 Italy Attn: Gianfranco Bellezza Fax: 39-02-417 875 The provisions of this Agreement shall be deemed to be severable and the invalidity of any provision of this Agreement shall not affect the validity of the remaining provisions of this Agreement. No amendment or modification of this Agreement shall be binding on the parties unless made in writing expressly referring to this Agreement and signed by authorized representatives of each party. This Agreement is not assignable by either party in whole or in part without the prior written consent of the other party, and any attempted assignment without such approval -7- shall be null and void, except that RITA may assign this Agreement to an individual or entity which acquires a controlling interest in RITA. By your signature below, you acknowledge and agree to all of the foregoing terms and conditions. Until so executed by you and RITA and returned to RITA, this Agreement shall not be binding on either party, and unless executed by you and returned to RITA within ten days of the date set forth on the first page hereof, this Agreement shall expire without further notice and shall be null and void. The parties executed this Agreement on the respective dates set forth below. RITA MEDICAL SYSTEMS, INC. By: /s/: Barry Cheskin ------------------ Title: President & CEO Address: 967 N. Shoreline Blvd. Mountain View, CA 94043 Date: December 22, 1998 MDH S.R.L. FORNITURE OSPEDALIERE By: /s/: Gianfranco Bellezza ------------------------ Title: General Manager Address: Via Delle Gardenie 9 Milano 20147 Italy Date: January 4, 1999 By his signature below, Gianfranco Bellezza acknowledges and agrees to the termination as of December 31, 1998 of that certain International Distributor Agreement between RITA, MDH s.r.l. Forniture Ospedaliere and Gianfranco Bellezza made as of December 1, 1996, as set forth on the first page hereof. GIANFRANCO BELLEZZA By: /s/: Gianfranco Bellezza ------------------------ Title: General Manager -8- Address: Via Delle Gardenie 9 Milano 20147 Italy Date: January 4, 1999 -9- Exhibit A Territory Italy Switzerland -10- Exhibit B Products GENERATORS Model Number Part Number ------------ ----------- Model 500LA 700-101081 ELECTRODES Model Number Part Number Description - ------------ ----------- ----------- Model 30 700-100890 4 array, 3cm, 15cm Model 30 700-100852 4 array,'3czn, 25cm Model 70* ACCESSORIES Model Number Part Number - ------------ ----------- Main Cable 410-100837 Foot Switch 410-100453 Dispersive Electrode 700-100379 Power Cord (Italy) 410-100698 Power Cord (Predabesi, Italy) 410-100703 Power Cord (Europe) 410-100700 At its sole discretion: (1) RITA may discontinue any product on this list and (2) RITA may add additional products to this list, provided that the list shall contain those RITA products which are direct replacements for the current Products in RITA approved applications. * When, and if, such product is introduced for Italy Exhibit C Minimum Purchase Target Product 1999 Sales Year 2000 Sales Year ------- --------------- --------------- Model 500LA Generator* [***] [***] Model 30Electrodes** [***] [***] * Each generator is supplied with Power Cord, 2 Main cables and a Footswitch ** Each electrode is supplied with one Dispersive Electrode; if, and when the Model 70 is introduced for Italy, both Model 30 and Model 70 purchases shall be credited against the minimum purchase target ___________________________________ *** Material has been omitted pursuant to a request for confidential treatment, and such Material has been filed separately with the SEC. Exhibit D Pricing Schedule Distributor Price Distributor Price Product 1999 Sales Year 2000 Sales Year - -------------------------- ------------------- ------------------ Model 500LA Generator* [***] [***] Model 30 Electrodes** [***] [***] Main Cable [***] [***] Foot Switch [***] [***] Dispersive Electrode [***] [***] Power Cord (Italy) [***] [***] Power Cord (Predabesi, Italy) [***] [***] Power Cord (Europe) [***] [***] No discounts for sub-agents * Each generator is supplied with Power Cord, 2 Main Cables and a Foot Switch ** Each Model 30 electrode is supplied with one Dispersive Electrode Model 70 pricing shall be the same as Model 30 pricing in the 1999 and 2000 Sales Year Note that all part numbers are per Exhibit B and that terms are F.O.B. RITA's manufacturing location. _________________________________ *** Material has been omitted pursuant to a request for confidential treatment, and such Material has been filed separately with the SEC. Exhibit E Complaint Form - -------------------------------------------------------------------------------- RITA MEDICAL SYSTEMS - -------------------------------------------------------------------------------- Complaint Report Form - -------------------------------------------------------------------------------- 1. Date Received:______________________________________________________________ 2. Received by:________________________________________________________________ 3. Complaint Acknowledgement Letter Sent:______________________________________ 4. Product Description:________________________________________________________ Lot No. _________________________________Model No.__________________________ 5. Customer Name:______________________________________________________________ 6. Contact Person:_____________ Telephone:_____________ Fax:___________________ 7. Hospital/Address:___________________________________________________________ ________________________________________________________________________________ - -------------------------------------------------------------------------------- 8. Nature of Complaint: __________________________________________________________________________ __________________________________________________________________________ ____________________________________________________________[See Attached] - -------------------------------------------------------------------------------- 9. Complete Medical Complaint Decision Tree (Form 160-101223) - -------------------------------------------------------------------------------- [ ] 10. A. Complaint Number:_________________ C. Device Returned_____________ Treatment Date:___________________ [ ] Yes, Date Returned:_____ Indication:_______________________ [ ] No Treatment Site:___________________ D. Confirmed Complaint?: B. Origin of Complaint [ ] Yes [ ] Domestic [ ] Clinical Study [ ] No [ ] International E. RMA Number: 11. Investigation: [ ] Yes By who:____________________ Date Complete: ________________________ Results of Investigation _______________________________________________ ________________________________________________________________________ _________________________________________________________ [See Attached] 12. Corrective Action Number (if assigned): ____________________________________ 13. Additional Information: Complaint Response Sent:____________________ Approved by:_____________________ ____________ Regulatory Affairs Date _____________________ ____________ Quality Assurance Date Date File Closed: - -------------------------------------------------------------------------------- AMENDMENT TO INTERNATIONAL DISTRIBUTOR AGREEMENT ------------------------------------------------ September 27, 1999 MDH s.r.l. Forniture Ospedaliere Via Delle Gardenie 9 Milano 20147 Italy Dear Gianfranco Bellezza: This letter is to amend that certain agreement ("Agreement") between MDH s.r.1. Forniture Ospedaliere ("you") and RITA Medical Systems, Inc. ("RITA") dated December 21, 1998. Specifically, Section 1 of the Agreement, PRODUCTS AND ------------ TERRITORY, is hereby replaced with the new version below: - --------- 1. PRODUCTS AND TERRITORY ---------------------- You shall act as RITA's distributor in the Territory (described in Exhibit A) to promote, sell and distribute the Products (described in Exhibit B) for RITA approved applications only and to provide service with respect to the Products, to the medical community. As used in this Agreement, "medical community" means medical doctors, institutions such as hospitals and clinics, and similar institutions which are active in the personal care of patients. You are not authorized to sell any Products to any of your competitors or to any of RITA's competitors without RITA's prior written consent. You shall not actively solicit orders from any customers domiciled outside the Territory, or sell or deliver any Product to any customer which is not in the Territory. Notwithstanding the foregoing, from time to time, you may be asked to sell or deliver Products (or you may have sold or delivered Products) to customers in nations outside the Territory but within the European Economic Area (EEA). You may only sell or deliver Products to such customers with RITA's prior written consent for each order or shipment, which will specify the terms on which such a sale or delivery are acceptable to RITA. In no event does any such sale or delivery or RITA's consent to such a sale or delivery confer on you any rights to sell or deliver Products or provide services to such a customer in the future, nor does any such sale or delivery entitle you to request any future compensation regarding that customer. Further, in case RITA does not consent to the sale or delivery of Products to a customer outside the Territory, as described above, you shall not have any rights to any indemnification or compensation for your activities related to that customer. Furthermore, you shall not appoint any distributor or any agent or maintain any sales, service or stock facility outside the Territory. Except with the prior written consent of RITA, you shall not sell or advertise within the Territory, either on your own behalf or on behalf of any other person, company, or corporation, products which compete, directly or indirectly, with the Products. Further, you shall not participate in the development or clinical testing either on your own behalf or on behalf of any other person, company, or corporation, products which compete, directly or indirectly, with the Products. All terms of the original Agreement (including this amendment, which describes the modification of Section 1, as above, and forms part of the Agreement) remain in full force and effect except to the extent that it is amended or modified in writing and signed by authorized representatives of each party, as specified in Section 16 of the Agreement. In that case, the Agreement as modified and amended shall remain in full force and effect. By your signature below, you acknowledge and agree to the above. The parties executed this amendment to the "Agreement" on the respective dates set forth below: RITA MEDICAL SYSTEMS, INC. By: /s/: Barry Cheskin ------------------ Title: PRESIDENT AND CEO Address: 967 North Shoreline Blvd. Mountain View, CA 94043 Date: September 28, 1999 MDH S.R.L. FORNITURE OSPEDALIERE By: /s/: Gianfranco Bellezza ------------------------ Title: General Manager Address: Via delle Gardenie 9 Milano 20147 Italy Date: September 28, 1999 EX-10.15 5 0005.txt MANUFACTURING AGREEMENT EXHIBIT 10.15 SeaMED ------ A PLEXUS.Company Professional Services Agreement (For Use with Manufacturing Services for Medical Customers Only) This Agreement is hereby entered into on this 17th day of February, 2000 by and between Rita Medical Systems, Inc., of 967 N. Shoreline Boulevard, Mountain View, CA 94043, (hereinafter "Customer") and Plexus Corp. of 55 Jewelers Park Drive, Neenah, WI 54956, (along with its wholly-owned subsidiaries Plexus Technology Group, Plexus Electronic Assembly and SeaMED, a Plexus Company, hereafter collectively referred to as "Plexus".) A. MANUFACTURING PHASE - ------------------------ The terms and conditions set forth in this Section A, Manufacturing Phase, Section B, Medical Device Provisions, as well as the terms and conditions set forth in Section C, Standard Terms and Conditions, shall be applicable to this portion of the Agreement. The parties may conduct a mutual review of component pricing, material mark-up, and labor on a semi-annual basis. Unit prices shall not be increased or decreased more often than semi-annually unless the quantity on order changes, or in the event of an engineering change that impacts either material or labor costs. Unit prices shall be determined for the quantity of Product on an individual Customer Purchase Order. (For example, if Customer orders 200 units, the 200 piece price shall apply. If the Customer's next Purchase Order is for 50 units, the 50 piece price shall apply.) Attachment C provides an example of unit cost calculations for various production rates. As part of the semi-annual reviews, Plexus shall review unit costs at various production rates and shall provide Customer with updated unit costs at these production rates. Customer's Purchase Orders for quantities outside the scope of Attachment C shall be mutually negotiated. The estimated quantity of Products is a factor used to determine unit pricing. In the event of a significant quantity change, either increasing or decreasing the estimated quantity of assemblies, the parties agree to evaluate and negotiate the impact and timing of unit price adjustments. 1. DEFINITIONS - ---------------- For the purpose of this Manufacturing Phase: "Assemblies" shall mean finished Product. "Long Lead Time Component(s)" shall mean all of those individual parts and materials whose current lead times extend beyond forty (40) business days. The Long Lead Time Components may, from time to time, be reviewed by Plexus and Customer, at the request of either party due to possible changes in market conditions of supply and demand affecting the procurement by Plexus of the Components and/or Long Lead Time Components for the assemblies hereunder. Any changes resulting from such review shall be with the mutual written agreement of Plexus and Customer. "NCNR Component(s)" shall mean those parts that are not cancelable once placed on order with Plexus suppliers, and are not returnable once delivered to Plexus. The NCNR Component(s) may, from time to time, be reviewed by Plexus and Customer, at the request of either party due to possible changes in market conditions of supply and demand affecting the procurement by Plexus of the Components and/or NCNR Component(s) for the assemblies hereunder. Any *** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. changes resulting from such review shall be with the mutual written agreement of Plexus and Customer. "Special Component(s)" shall mean those parts that have special procurement conditions such as limited change parameters or other special liability conditions that are required by Plexus' suppliers. The Special Component(s) may, from time to time, be reviewed by Plexus and Customer, at the request of either party due to possible changes in market conditions of supply and demand affecting the procurement by Plexus of the Components and/or Special Component(s) for the assemblies hereunder. Any changes resulting from such review shall be with the mutual written agreement of Plexus and Customer. "Monthly Rolling Quantity Forecast of Delivery Requirements" shall mean the written documents provided to Plexus by Customer each month indicating the delivery requirements projected for the next twelve (12) months. 2. AUTHORIZATION OF WORK/PROCUREMENT OF MATERIALS - --------------------------------------------------- The following terms will apply assuming Customer's credit has been established to Plexus' satisfaction: a) The purpose of this section is to define the methods under which Plexus will procure materials to support manufacturing of product for the Customer. The intent is to provide the Customer with flexibility to alter and/or cancel schedules within a reasonable period of time while at the same time minimizing Plexus liability that is a result of those alterations and cancellations. In order to offer the best possible price, Plexus does not attempt to build unanticipated carrying charges into its price. When changes in Customer requirements occur that cause Plexus to incur unanticipated expenses that are the result of Customer actions, the Customer is expected to reimburse Plexus for the costs incurred. For each assembly to be manufactured, Plexus establishes a manufacturing lead time, which is the number of business days it will take, on average, to receive and kit all components, assemble, test and ship the lot. Manufacturing lead time shall be established during the pre-production phase of the program. Plexus schedules all components for a particular lot of assemblies to arrive one manufacturing lead-time prior to the Customer due date. Plexus then uses this information, together with the Forecast and Purchase Order information as defined below, to place commitments to its suppliers for materials. b) Customer shall place purchase orders for the first six (6) months of production and maintain six (6) months of firm purchase orders on a month to month rolling basis. Customer will provide Plexus on a monthly basis with a minimum of twelve (12) month schedule of demand for product. The schedule will show firm orders for months 1-6 and forecasted demand for months 7/12. Customer authorizes Plexus to procure, as material lead times dictate, the material to support 100% of Buyers forecasted requirements for months 7 through 9. On a quarterly basis Plexus will place orders for material for months 7 through 9 of the current forecast in order to lot size Printed Circuit Board Assemblies and to determine economic order quantity buys or components or unique parts. Months 10, 11 and 12 are provided for Plexus *** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. visibility and may be utilized by Plexus to request additional material authorizations from Customer. Prior to entering full production Customer and Plexus will review the final bill of material, discuss material lead times and production ordering parameters. Customer and Plexus agree to develop a material ordering plan which will ensure timely delivery of material to meet production objectives, while limiting the exposure to materials in the event of a program shut down. c) Schedule Changes: The Customer may request a change to the delivery schedule at any time. Schedule changes can have an extraordinary effect on the amount of inventory at Plexus, the impact for which is not considered in the original cost of the assembly. Frequent schedule changes may result in additional administrative charges including but not limited to administrative charges required for Plexus to reschedule component deliveries. *** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. Customer and Plexus recognize that each program is unique and will require program specific ordering parameters. These parameters are mutually agreed to after the bill of material is finalized and production quantities are provided to Plexus in the form of a purchase order or delivery forecast. The parameters set forth below offer a typical scenario where the Customer may, without cost or liability, but with the assent of Plexus, reschedule deliveries of Products already on order. Customer may request to move in delivery dates of quantities on order. Plexus will complete an analysis of material availability and will provide Customer with estimated ship dates based on material availability. Likewise, Customer may request to move out delivery dates of quantities on order. Plexus will complete an analysis of the impact of this change to material on hand and on order. If Customer chooses to move out deliveries and material is already at or shipping to Plexus's facility, Customer may be charged an inventory deposit for this material as set forth below. Production Schedule Ordering Parameters --------------------------------------- - -------------------------------------------------------------------------------- 0 to 3 Months Firm PO's, Schedule unchangeable - -------------------------------------------------------------------------------- 4 to 6 Months Firm P0's. May move up to 20% of scheduled deliveries on PO's out 30 days without incurring an inventory deposit, or in 30 days depending on material availability. - -------------------------------------------------------------------------------- 7 to 9 Months May move up to 30% of scheduled deliveries on PO's out 60 days without incurring an inventory deposit, or in 60 days depending on material availability. Deliveries extended >60 days will require an inventory deposit. - -------------------------------------------------------------------------------- Customer may request to increase the total quantity of Products on order. For quantity increases, Plexus will make its best effort to obtain the components necessary to meet Customer requirements. Plexus will complete an analysis of material availability and will provide Customer with estimated ship dates based on material availability. However, Plexus may be unsuccessful in obtaining all of the components required to meet the Customer's increased requirements. In that situation, Plexus will complete an analysis of material availability and will provide Customer with estimated ship dates based on material availability. Customer may request to decrease the total quantity of Products on order. If Customer decreases the total quantity of Products on order, all non-cancelable, non-returnable material procured in accordance with Customer's original Purchase Order schedule will be the responsibility of Customer. d) Engineering Change The term "Engineering Change(s)" (hereinafter called "EC" or "EC's") shall mean those mechanical, software, or electrical design and/or specification and requirement changes which, if made to the assemblies to be delivered hereunder, would affect the schedule performance, reliability, availability, serviceability, appearance, dimensions, tolerance, safety or purchase price of such assemblies or which would require additional approval test. *** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. Plexus may determine that Engineering Changes will affect its ability to maintain the delivery schedule, due to the lead time of newly specified parts and/or the impact of substantial rework or modification. Under these circumstances, Plexus reserves the right to define a new schedule for delivery and treat this as a Schedule Change, with the Customer liability as defined under the Schedule Change condition. Plexus shall process engineering changes per the agreed upon Document Change Control Agreement, attached hereto and made a part hereof as Attachment A. Upon receipt, Plexus shall review Customer's proposed EC and Plexus shall give to Customer a written evaluation of the EC, stating Plexus' cost to implement the EC (including the cost to modify any tooling), the excess quantity of Components and/or Long Lead Time Components, NCNR Components and/or Special Components Plexus has inventoried and/or has on order with its Components and/or Long Lead Time Components, NCNR Components and/or Special Components suppliers that are unusable for any other assembly requirement and excess due to the EC, and associated costs and expenses such Components and/or Long Lead Time Components, NCNR Components and/or Special Components that Customer shall be liable for and the cost savings, if any, resulting from the EC, and the expected effect on the schedule, availability and/or purchase price of such assemblies, or which may require additional approval tests by Customer. e) Customer Supplied Parts In the event the Customer supplies material to Plexus for use in the manufacturing of the product, Customer agrees to supply the material on time and in accordance with purchase orders placed by Plexus. Customer supplied material will be subject to normal incoming inspection, and the value of the incoming material will be included in the unit price. For purposes of payment relating to this section only, Plexus and Customer agree to develop a method for providing Customer with payment for such accepted customer supplied material such that Customer will not be charged twice for any individual customer supplied material. If material supplied by Customer is rejected or not delivered on time, therefore preventing Plexus from completing and shipping product, Plexus may invoice Customer for the full unit price as listed on Customer's purchase order. f) Minimum Component Purchases Plexus may have to place orders for quantities of components in excess of that required to support Customer requirements. This may be as a result of minimum order size requirements or standard package sizes from the supplier. Plexus and Customer will work together using best efforts to identify components that require or may be likely to require a minimum buy prior to the initial build. However, the Customer's responsibility for minimum component purchases is not solely confined to this list since additional components may require minimum buy purchases at any time. Plexus shall provide Customer with periodic updates as well as inventory reports showing excess and obsolete components. The Customer will agree to have the cost of the excess components amortized over a maximum of six (6) month's requirements, or will place a purchase order separately for the excess components. g) Cancellation *** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. Customer may cancel requirements defined in orders and/or forecasts at any time before the scheduled delivery date. Any assembly requirements canceled within the manufacturing lead-time of the scheduled delivery date will be invoiced at the full agreed to price for the completed assembly. For assembly requirements canceled outside the manufacturing lead time of the scheduled delivery date, Customer's liability to Plexus will be the value of the components in Plexus' inventory (including the full markup as defined in the Plexus quotation), and other components for which Plexus has liability but which are not in Plexus inventory, as well as payment for any and all work-in-process (WIP) manufacturing costs and expenses, and reasonable administrative costs and expenses. Plexus will deliver an itemized list of these costs to customer. Customer agrees to pay the costs identified by Plexus within ten (10) business days of notification of such costs. To help minimize the impact of cancellation charges, Plexus will attempt to restock components at the supplier, resell the components, and/or utilize the components on non-customer assemblies. 3. PAYMENT - ------------ As full compensation for the assemblies and spare parts (i.e. to include but not limited to components shipped to Customer for field service) provided by Plexus hereunder and its obligations contained herein. Customer will make payments subject to terms of net amount due thirty (30) days following the date of the invoice. Unless stated otherwise, prices quoted are F.O.B. Plexus' manufacturing facility. Unless specifically stated otherwise, all quoted prices are firm for thirty (30) days from the date of quotation. Quotations are based on drawings, specifications, and other written information available to Plexus at the time of quotation. Any additional data supplied at the time of purchase may necessitate price adjustments. Any manufacturer's tax, retailer's occupation tax, use tax, sales tax, excise tax, or tax of any nature whatsoever imposed on or measured by the transaction between Plexus and Customer shall be paid by the Customer in addition to the prices quoted or invoiced. In the event Plexus is required to pay such tax, the Customer shall reimburse Plexus therefore, within ten (10) days of written demand by Plexus to the Customer for such reimbursement. If the transaction between Plexus and the Customer is exempt from all such taxes, Customer shall provide Plexus with a tax exemption certification or other document acceptable to all taxing authorities at the time the order or contract is submitted. 4. WARRANTY - ------------- PLEXUS EXPRESSLY WARRANTS THE WORK AS SET FORTH HEREIN. PLEXUS MAKES NO OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED (INCLUDING WITHOUT LIMITATION WARRANTIES AS TO MERCHANTABILITY OR FITNESS FOR PARTICULAR PURPOSES). IN ADDITION, THE FOLLOWING SHALL CONSTITUTE THE EXCLUSIVE REMEDIES FOR CUSTOMER FOR ANY BREACH BY PLEXUS OF ITS WARRANTIES HEREUNDER. *** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. Plexus warrants the assemblies against all defects in workmanship where the assemblies do not conform to the agreed upon manufacturing specifications, for a period of twelve (12) months from date of delivery to Customer's end-user, not to exceed 16 months from date of invoice from Plexus, provided agreed upon testing is conducted by Plexus prior to shipment, except as set forth below. Plexus shall repair or replace, at Plexus' option and free of charge, any portion of the assemblies which is returned to Plexus' factory securely packaged, insured and with freight pre-paid within the warranty period, and which upon examination Plexus determines in its sole discretion to be defective in workmanship. Plexus will return the repaired or replaced assemblies to customer with freight pre-paid. Plexus will pay for inbound freight for any new units delivered dead on arrival (DOA) to Customer. DOA is defined as any product that does not perform in compliance with the applicable mutually agreed upon specifications upon receipt by Customer. Plexus agrees to pay return freight to Customer and method of shipment will be consistent with the method of inbound freight to Plexus. This Warranty does not apply to: a) Design deficiencies. Plexus expressly disclaims any warranty responsibility for design deficiency, and for infringement for the like. b) Any modifications and/or alterations made to the Assemblies, or any portion thereof, without the express written authorization of Plexus obtained in advance. If this is the case, all warranties made herein are invalid and Customer shall have no further remedies hereunder against Plexus. c) Any defect, loss or damage resulting from theft, loss, fire, misuse, abuse, negligence, vandalism, acts of God, accident, casualty, power failures or surges, alteration, modification or failure to follow installation, operation or maintenance instructions, or any other cause beyond Plexus' reasonable control. d) Any defect, unless written notice of the defect is given by the Customer to Plexus as soon as practical after the defect first appears. The right to make a claim under this warranty expires twelve (12) months from the date of delivery to Customer's end-user, not to exceed 16 months from date of invoice from Plexus. e) Components incorporated into the assemblies. In the event of any recall of any Product, caused by Plexus's sole negligence, and within product warranty as defined, (i) Plexus shall repair or replace, at Plexus' sole discretion, the recalled Product without charge to Customer, and (ii) Plexus shall reimburse Customer for its reasonable out-of-pocket expenses incurred in connection with such recall up to a maximum of $100,000. IN NO EVENT, REGARDLESS OF CAUSE, SHALL EITHER PARTY BE LIABLE FOR INCIDENTAL, INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES OR LOSSES OF ANY KIND, WHETHER IN CONTRACT OR IN TORT, ARISING FROM ITS PERFORMANCE UNDER THIS SECTION. 5. TEST EQUIPMENT - ------------------- *** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. Unless otherwise noted, any test equipment quoted herein and built by Plexus is warranted to be free from defects in material and workmanship for a period of ninety (90) days from the date of certification. After the warranty period the equipment will be repaired on a time and materials basis. Labor will be charged at the current billing rate. Parts will be charged at cost plus 25%. Travel expenses will be added to any repairs including travel between Plexus and/or one of its affiliates. All dedicated test/burn in fixtures will be progress billed monthly up to 95% of the program cost. The remaining 5% is due upon fixture certification. 6. DOCUMENTATION - ------------------ Unless Plexus is or has generated the documentation for the Customer as part of its services to the Customer, then the Customer is responsible for supplying Plexus with complete documentation. This includes, at a minimum, (three) 3 complete and current sets of documentation including, at a minimum, all prints, softwares, artwork, and bill of materials with manufacturer and part number, and any specifications, including test specializations or procedure, called for on any customer prints. It is the Customer's responsibility to assure that Plexus receives timely notification of any changes to the documentation, and updated prints reflecting the changes. 7. TOOLING - ------------ All tooling produced or obtained for the assemblies delivered hereunder and paid for by Customer shall become and remain the property of Customer at the time payment in full is received for the tooling by Plexus. Such tooling shall be used by Plexus only for the benefit of Customer, and shall be delivered to Customer upon request. If Customer requests the return of any tooling from Plexus and Plexus determines the return of such tooling prevents Plexus from providing the assemblies to Customer, then Plexus shall inform Customer in writing, and Customer and Plexus shall negotiate a mutually acceptable resolution. Customer, at its sole discretion, may consign to Plexus, items, including, but not limited to, materials and/or equipment relating to the production and/or testing of the assemblies at Plexus' location. The material and/or equipment shall be utilized by Plexus only for the production and/or testing of the assemblies. Customer shall assist Plexus in installing the materials and/or equipment and shall provide training and maintenance instructions, if requested by Plexus or required by Customer. Customer shall be responsible for repairing, upgrading, replacing and/or maintaining the materials and/or equipment consigned to Plexus. However, Plexus shall provide routine maintenance. 8. TERMINATION AND CANCELLATION OF MANUFACTURING PHASE - -------------------------------------------------------- During the Manufacturing Phase, either party shall have the right to terminate any or all activities under this agreement for any reason and at any time upon six (6) months prior written notice to the other party. Plexus agrees to immediately terminate the specified activity pursuant to this Agreement upon termination or cancellation. If this entire Agreement is terminated, Plexus shall complete all existing Customer POs as specified below unless otherwise specified by Customer. Customer agrees to reimburse Plexus for reasonable and allowable expenses directly incurred by *** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. Plexus including, but not limited to, packaging and related transportation costs and expenses, and the return to Customer of any Customer owned material(s), tools, equipment and/or any other related items, consistent with Section A2 Cancellation, above. Customer and Plexus shall negotiate a settlement of any other reasonable and allowable expenses directly incurred by Plexus. If this entire agreement is terminated, then Plexus shall: a) Deliver to Customer all completed assemblies which conform to the applicable and then current specifications and requirements; and b) Return to Customer, at Customer's expense, all tooling, equipment, Components and/or Long Lead Time Components, drawings, specifications, documentations and supplies that are owned by Customer pursuant to the Agreement (in the event of Plexus' material breach and the failure of Plexus to cure such breach 60 days after receiving written notice thereof from Customer then Plexus shall pay for freight costs associated with returning all tooling, equipment, Components and/or Long Lead Time Components, drawings, specifications, documentations and supplies that are owned by Customer pursuant to the Agreement); and c) Prepare and submit to Customer an itemized document to include the quantity of assemblies in the production process. Plexus shall complete and customer agrees to pay for any work in process and open purchase orders if so requested by Customer as if no termination notice was given. Customer further agrees to pay for all material ordered in accordance with Section A2 above or as otherwise authorized in writing by Customer. B. MEDICAL DEVICE PROVISIONS - ------------------------------ The terms and conditions set forth in this Section B, Medical Device Provisions, Section A, Manufacturing Phase, as well as the terms and conditions set forth in Section C, Standard Terms and Conditions, shall be applicable to this portion of the Agreement. Engineering Phase: - ------------------ 1. Plexus shall be in substantial compliance with design controls as defined by its product development medical device quality procedures for the device designs covered by this contract. Plexus responsibilities under these provisions include: a) contributions to the Device History File (DHF) shall be limited to those items identified in the deliverables section of the project Proposal and/or Project Plan; b) Contributions to the Design Master Record (DMR) shall be limited to those items identified in the deliverables section of the project Proposal and/or Project Plan; *** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. c) Maintenance of quality system quality records, as defined by Plexus Technology Group's Document Retention Chart, (e.g., Internal Audit Results, QIP database, Supplier Records, Management Review Meeting Records, etc.) which are not provided to the customer. 2. Customer is responsible for identifying all applicable laws and regulations, including the Food, Drug and Cosmetic Act, and compliance with those regulations for all devices covered by this contract. Manufacturing Phase: - -------------------- 1. Customer is responsible for ensuring that the devices covered by this contract comply with all applicable laws and regulations, including the Food, Drug and Cosmetic Act and implementing regulations. Customer responsibilities under these provisions, include but are not limited to the following: a) Establishing the finished device specifications. b) Ensuring that governmentally-required marketing authorizations, including any necessary Food and Drug Administration (FDA) approvals or clearances, have been obtained. c) Determining the content of any label or labeling. d) Making any required reports to governmental entities, including but not limited to Medical Device Reports. e) Determining whether any recall or other corrective action is required or appropriate, and developing, implementing and financing any voluntary or mandatory recall or corrective action. f) Reviewing and approving the quality system prior to production of the devices. 2. Plexus will provide Customer ongoing access to its facilities and procedures for quality assurance related to the devices covered by this contract. Plexus authorizes Customer to conduct periodic quality systems audits of the manufacturing processes and quality systems related to this contract. Plexus will manufacture the devices covered by this contract in accordance with its procedures for manufacturing components of medical devices or finished medical devices, as applicable. 3. Customer will provide Plexus with sufficient information to verify, calibrate, operate, test and maintain any Customer supplied equipment. 4. Customer shall be responsible for the software validation of any embedded product software and the validation of all Customer supplied: (1) test equipment or test software; (2) production equipment or software; and (3) firmware. Plexus is responsible for the validation of any Plexus software used in production in, or as part of the Quality System. The responsibilities described in this section also apply to any revisions of any software. *** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. 5. The Customer will provide Plexus with copies of the specifications and written certification that the validation reports for the items listed in Section #4 above have been performed prior to the production of the devices. 6. Customer is responsible for defining and validating the finished device packaging. The Customer will provide Plexus with written certification that the packaging validation has been performed prior to the production of the devices. 7. Plexus is responsible for conducting and documenting corrective and preventive actions based upon the analysis of the quality data available to Plexus. Quality data or information known to the Customer, but not provided to Plexus, shall not be included in the analysis of quality data, and the Customer shall be responsible for the analysis of data not provided to Plexus. 8. Any Customer initiated request for change to a specification, method, process or procedure or customer supplied equipment will be evaluated by Plexus, and Plexus reserves the right to decline to make such change. Customer is responsible for verification and/or validation of such changes. Customer shall reimburse Plexus for any costs Plexus incurs in making and/or implementing such changes. 9. Plexus shall notify Customer of significant changes in specifications, methods, processes or procedures that could affect the quality of the devices covered by this contract, and, as to any such change, Customer and Plexus shall decide jointly whether, how and when to implement such change, and who shall be responsible for verification and/or validation of such changes. Customer and Plexus shall also decide jointly who will be responsible for the costs associated with such changes. 10. The Customer must define any traceability requirements. Plexus is responsible for implementing the defined manufacturing level traceability requirements and for ensuring that the appropriate manufacturing level traceability records and associated records are retained for the duration of the contract. 11. Unless otherwise specified in the contract, Plexus is not responsible for ensuring traceability of the devices covered by this contract after distribution to the end user(s). 12. Plexus is responsible for retaining the appropriate manufacturing records as required. When the contract between Plexus and the Customer terminates, Plexus shall forward all applicable documentation and records to the Customer, upon request. 13. Customer may authorize in writing the release of nonconforming components or devices covered by this contract. The Customer must assess whether the use of the nonconforming product will affect any regulatory submittals or requirements, and accept responsibility therefore. 14. Customer will promptly provide to Plexus copies of all complaints received by Customer that refer or relate to an assembly manufactured by Plexus and all adverse event reports to a governmental entity that refer or relate to an assembly manufactured by Plexus. Plexus will *** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. provide to Customer information regarding any complaints Plexus receives about the product in which the devices covered by this contract are incorporated. 15. Sections C.(5) and C.(7) "Liability and Indemnification" & "Compliance with Regulations and Standards", respectively, both a part of Section C "Standard Terms and Conditions" of this Agreement is further supplemented to provide that the indemnification of Plexus will further cover Customers' failure to comply with applicable laws and regulations, including but not limited to the Food, Drug and Cosmetic Act and implementing regulations. C. STANDARD TERMS AND CONDITIONS - ---------------------------------- The terms and conditions set forth in this Section C, STANDARD TERMS AND CONDITIONS shall be applicable to Section A, Manufacturing Phase, as well as the terms and conditions set forth in Section B, Medical Device Provisions of this Agreement. 1. MUTUAL COOPERATION - ----------------------- Plexus represents that it will pursue the Agreement to the best of its ability and in the best interest of the Customer, and the Customer represents that it will cooperate with Plexus in reaching the objectives of the Agreement. Plexus will appoint a project manager for the duration of the Agreement and will require the Customer to establish one person to coordinate all activities through. In the event that the project manager is not operating in the best interest of the Customer, the Customer shall contact Plexus to discuss Agreement related concerns and/or complaints. 2. CONFIDENTIAL INFORMATION - ----------------------------- Plexus and the Customer will use best efforts to prevent the disclosure of any confidential information, unless specifically instructed otherwise in writing by the disclosing party, and excepting in such instances where Plexus may be compelled by law to make disclosures. The mechanisms for controlling and processing confidential information may be covered under a separate Confidential Disclosure Agreement (if required). 3. FORCE MAJEURE - ------------------ Plexus shall not be liable for any delay in or failure of performance under this agreement due to any contingency beyond Plexus' control, including, but not limited to, an act of God, war, insurrection, fire, riot, strike or labor dispute, sabotage, act of public enemy, flood, storm, accident, equipment failure, inability to obtain suitable or sufficient labor or material, laws or regulations, or any other cause beyond its reasonable control. 4. INTELLECTUAL PROPERTY RIGHTS - --------------------------------- All patents, copyrights, trademarks, or other rights pertaining to inventions, developments, or improvements made in the course of the work, and funded by the Customer, are the property of Customer. Plexus will, upon written direction from Customer, execute any and all papers and documents prepared or submitted by Customer as may be reasonably required to transfer or *** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. secure to Customer full title and authority over such rights. Plexus will be compensated by Customer for time and expense as incurred in this obligation at the then current billing rates for those of its employees necessary for these purposes. Customer agrees that it shall assume all responsibility for determining whether the assemblies to be designed and assembled infringe on any patent, copyright or trademark, and Customer shall indemnify and hold harmless Plexus from any liability, including legal costs and expenses, damages and attorney fees arising from any claim demand or suit, including a claim by Customer, based on allegations or claims that the assemblies or any design, patent, copyright, or trademark sought to be obtained or obtained by Customer as a result of this agreement constitutes an infringement of any patent, trademark or copyright of the United States or any foreign county. In the event any such claim or suit is asserted or instituted against Plexus, Plexus shall promptly notify Customer of the assertion of any such allegation or claim. Customer shall thereupon assume responsibility for and conduct the defense of each assertion or suit at its expense, and reasonable information and assistance for the defense of same shall be provided by Plexus for which Plexus will be compensated for time and expenses at its then current billing rate. Plexus shall have the right, at its expense, to be represented in the defense of any such assertion or suit by counsel of its own selection. The prices quoted do not include, unless specifically stated otherwise, the cost for testing and/or submittals for assembly approvals or any annual file maintenance fee, such as for UL, VDE, CSA or FCC. Plexus will assist Customer in obtaining such approvals and charge for same services at Plexus' current hourly billing rate. 5. LIABILITY AND INDEMNIFICATION - ---------------------------------- Plexus will use its discretion to pursue the Agreement in the best interest of Customer. Plexus will be under no liability to Customer or otherwise for its choice of methods employed, the character or tests and experiments performed, the results obtained, nor for the use which shall thereafter be made by Customer of such results. IT IS UNDERSTOOD THAT OTHER THAN THE WARRANTY SET FORTH IN SECTION A4, NO OTHER GUARANTEES OR WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, ARE GIVEN BY PLEXUS, INCLUDING, BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. PLEXUS SHALL NOT BE LIABLE FOR ANY INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS) SUSTAINED OR INCURRED IN CONNECTION WITH THIS AGREEMENT. Customer will fully indemnify and hold harmless Plexus from any and all liability, claims demands, costs and expense arising out of the use, publication, and/or marketing of the results of the assemblies or test results provided by Plexus, the functioning of the assemblies or the product(s) which they are a part of, or any other matter resulting from Plexus' performance under this Agreement, whether such liability, claims or demands be in the nature of patent, trademark or copyright infringement, public or product liability, contract liability, or otherwise during or following the terms of this Agreement, and Customer shall, at its own expense, defend any and *** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. all such actions based thereon and shall pay all attorney's fees and cost and other expenses arising therefrom. Plexus will not be liable for errors, or expenses which may be incurred in its performance of this work which results from the engineering and/or design of the Assemblies, or from Plexus' reliance upon information, technological records, sketches, drawings, or prototypes furnished by Customer or Customer's design engineering firm. Customer will forthwith, during the term of this Agreement, notify Plexus of any and all information, technology changes, or other facts relevant to any aspect or phase of the Agreement. 6. ARBITRATION - ---------------- All rights and remedies conferred by this Agreement, by any other instrument, or by law are cumulative and may be exercised singularly or concurrently. If any provision of this Agreement is held by any court or governmental agency to be invalid, such invalidity shall not affect the enforceability of any other provision(s) hereof. This Agreement and any Purchase Orders issued hereunder shall be governed by and interpreted in accordance with the laws of the State of Wisconsin. Unless otherwise agreed to in writing by the parties, any controversy or claim arising out or relating to this Agreement, or the parties' decision to enter into this Agreement, or the breach thereof, shall be settled by arbitration through the American Arbitration Association and in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitration proceeding shall be conducted and presided over by a single neutral arbitrator chosen pursuant to American Arbitration Association procedures. Decision of the arbitrator shall be final, binding, and not subject to appeal or review; provided that, either party may request that the arbitrator review and reconsider his or her decision, in whole or in part. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitration shall be held in Neenah, Wisconsin and the arbitrator shall apply the substantive law of Wisconsin except that the interpretation and enforcement of this arbitration provision shall be governed by the federal Arbitration Act. The arbitrator shall not award either party punitive damages and the parties shall be deemed to have waived any right to such damages. 7. CONSENT TO JURISDICTION AND APPLICABLE LAW - ----------------------------------------------- The parties hereby irrevocably submit to the jurisdiction of the courts of the State of Wisconsin in any action or proceeding arising out of or relating to this Agreement, and the parties hereby irrevocably agree that all claims in respect of such action or proceeding may be determined by such courts. The parties hereby waive, to the fullest extent possible, the defense of an inconvenient forum to the maintenance of such action or proceeding, and the parties agree that a final judgement in any action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgement or in any other matter provided by law. The parties hereby agree that this Agreement shall be governed by and will be construed in accordance with the laws of the State of Wisconsin, irrespective of the conflicts of laws provisions thereof. *** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. 8. NO RECRUITING - ------------------ Plexus and the Customer agree that during the term of this program and for twelve (12) months thereafter, it shall not solicit or recruit (even though professional recruiters) the employees of the other. This shall not preclude an employee of either Plexus or the Customer from independently pursuing and securing employment opportunities with the other on such employee's own initiative. 9. ENTIRE AGREEMENT - --------------------- This Agreement, along with the Proposal and/or Project Plan, and Confidential Disclosure Agreement and/or quotation (if any) and Plexus' invoices, contains the entire understanding of the parities pertaining to the subject matter hereof, and no other agreements, oral or otherwise, shall be deemed to exist or to bind the parties. Notwithstanding anything to the contrary contained herein, the parties hereto agree that the terms and conditions set forth herein and in Plexus' invoices, Proposal and/or Project Plan and Confidential Disclosure Agreement (if any), shall supersede any and all terms and conditions submitted by the Customer in any document, including but not limited to any terms and conditions contained in the Customer's purchase order. This agreement may not be modified or terminated orally, and no claimed modification, termination, or waiver shall be binding unless in writing and signed by both parties. Accepted and agreed to:
RITA MEDICAL SYSTEMS, INC. PLEXUS CORP. ENGINEERING AUTHORIZATION: By: /s/ Barry Cheskin By: /s/ ---------------------------------------- ------------------------------------- Title: President and Chief Financial Officer Title: Vice President of Engineering ------------------------------------- ---------------------------------- Date: February 24, 2000 Date: February 17, 2000 -------------------------------------- ----------------------------------- MANUFACTURING AUTHORIZATION: By: /s/ Don Reid ------------------------------------- Title: Vice President and General Manager ---------------------------------- Date: February 17, 2000 -----------------------------------
*** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. Attachments to Professional Services Agreement Attachment A Document Change Control Agreement Attachment B Project Plan (subject to revision upon mutual agreement) Attachment C Unit Cost Calculation to be used for Planning Purposes Attachment D Specification (subject to revision upon mutual agreement) *** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. Attachment A Attachment A DOCUMENT CHANGE CONTROL AGREEMENT between SeaMED, a Plexus Company and Rita Medical Systems, Inc. for Project Red Butte February 17, 2000 1. Purpose and scope of this agreement. 1.1. The objective of this agreement is to define the document change control process for documents involved in SeaMED's manufacture of devices for Rita Medical Systems, Inc. 1.2. It is a goal of this agreement that there be only one document and one point of change control for each item and/or document. Since SeaMED is the manufacturer and purchaser of the device's component parts, engineering change control for all related documentation will reside at SeaMED. To ensure uniform document content, Rita Medical Systems, Inc. should release only the SeaMED-supplied version of any document, in those cases where both companies release a document. Changes should be made by the terms of this agreement. 1.3. SeaMED will administer change control in accordance with SeaMED Document Change Procedure (Document # 900319), including determination of change classes as described below. 1.4. This agreement affects all documents in the Device Master Record Index of products at Production-level release that SeaMED manufactures for Rita Medical Systems, Inc. 2. Document Change Procedure. This procedure defines the classes of changes and the mechanics of the change process based on those classifications per SeaMED's internal Quality Assurance requirements. 2.1 Document classifications: Documents may be described as either common or product-specific. The common category includes Source and Specification Control Drawings (SCD) used for buying and inspecting commercially available, "off-the-shelf" parts. Product-specific documents include all documents that are unique to the design of the product. 2.2. Document Change Classifications: Change Class defines the impact of the change. Where the term "form, fit, or function" is used, the meaning includes: specifications/limits/dimensions, regulatory compliance, appearance, cosmetic criteria, manufacturing or test processes, design verification test status, increase in manufacturing costs, and scheduled shipping dates. A DCN may have changes from more than one change class; the change class for the DCN as a whole shall be that of the highest level on the DCN. The classes are defined as follows: 2.2.1. Class 0: Changes to SeaMED procedures, common parts and any documents without a project name in the title. Class 0 changes do not fit within the definition of Class 1, 2 or 3 changes. Class 0 changes are not design changes. Class 0 changes do not require customer approval or notification. 2.2.2. Class 1: Changes to product-specific or common parts documents where there is no impact on component or assembly form, fit, --------- or function. Class 1 changes are not design changes. Class 1 changes are typically documentation corrections and clarifications. Class 1 changes do not require customer approval, but do require customer notification within one (1) working day after approval by SeaMED. 2.2.3. Class 2: Changes to product-specific or common parts documents where there is no intended impact on end-item form, fit, or ------------------ function, but an element (document, part, process, etc.) of the established baseline is changing. Class 2 changes are design changes and require justification. Class 2 changes are typically physical changes to a part or assembly's dimensions, manufacturing process, or test process. Class 2 changes require customer approval. 2.2.4. Class 3: Changes to a product-specific document where there is impact on end-item form, fit, or function. Class 3 changes are ------ design changes and require justification. Class 3 changes are typically due to unit performance improvements, unit packaging, physical configuration changes, etc. Class 3 changes require customer approval. 3. Mechanics of the change process. 3.1. It is a goal of this agreement that all correspondence regarding document changes be handled promptly and speedily. Delays can seriously upset scheduled buys, work orders, and shipments. 3.2. SeaMED Documentation Control will handle all correspondence for SeaMED regarding document changes. 3.3. SeaMED will notify Rita Medical Systems, Inc. by telefax of Class 1 changes as they are signed and implemented. 3.4. SeaMED will submit Class 2 and 3 changes to Rita Medical Systems, Inc. by telefax for approval after SeaMED's Change Control Board has approved the proposed change. 3.5. Rita Medical Systems, Inc. will designate one representative and one alternate with authority to approve/disapprove proposed changes as they are presented by SeaMED. Proposed changes should be addressed within one week. 3.6. Rita Medical Systems, Inc. may request a change to any document, common or product-specific, by submitting a written change request. Change requests are to be signed by the designated Rita Medical Systems, Inc. representative, or their alternate, with the authority to approve/disapprove the request. SeaMED should address requested changes in one week or less. 3.7. SeaMED will periodically provide copies of all incorporated changes to product specific documents. 4. Costs associated with document changes. 4.1. A certain number of changes is normal during the life of a product. Also, once production is underway, SeaMED or Rita Medical Systems, Inc. may suggest changes to ease manufacture or inspection. SeaMED may elect to waive the administrative costs associated with these changes. 4.2. Changes which occur at Rita Medical Systems, Inc. request, regarding the established design of the product or affecting parts already ordered or in SeaMED's inventory, will be considered individually. In some cases, an administrative charge may be assessed by SeaMED for the cost of processing and incorporating a change aside from any material costs involved. Agreed to, for Rita Medical Systems, Inc., by on _______________ _____________ Agreed to, for SeaMED, a Plexus Company, by on Documentation Control _______________ _____________ Project Director _______________ on _____________ Attachment A Designated Representatives Rita Medical Systems, Inc. designated representatives with authority to approve/disapprove proposed changes. Rita Medical Systems, Inc. is responsible for providing SeaMED with updated names of designated representatives. Name (printed) Signature Initial -------------- --------- Representative -------------------- -------------------- --------- Alternate -------------------- -------------------- --------- SeaMED ------ A PLEXUS.Compuny PROJECT PLAN, REDBUTTE Drawing Number 950053 Revision P1 REVISION HISTORY
- -------------------------------------------------------------------------------------------------------------- Rev Change Number/Description Date Change Originator Incorp by Chkr - -------------------------------------------------------------------------------------------------------------- P1 Initial Release 1/31/00 G. Overbye- - - - - - -------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------
1. PURPOSE This document outlines the content of Project RedButte. This document further defines how SeaMED will meet the objectives set out in the Quotation sent to Rita Medical Systems Janury 12, 2000 for the manufacturing transfer of the Rita model 1500 RF ablation system. 2. SCOPE This document is the defining document for how the RedButte project is planned at SeaMED and is used to manage and track the progress of the project. The Project Plan is reviewed as part of a Phase Ending Design Review. The Project Plan is one deliverable during the planning phase of a project as defined in the SeaMED Product Development Procedure, 902148. 3. SIGNATURE PAGE Project signing block Example
- ------------------------------------------------------------------------------------------------- Role Name Signature Date - ------------------------------------------------------------------------------------------------- Project Director Gordon Overbye - ------------------------------------------------------------------------------------------------- Quality Systems Stephanie Houck Manager - ------------------------------------------------------------------------------------------------- Director of Project Russ Pasic Management - ------------------------------------------------------------------------------------------------- VP of Quality of Marcia Page Regulatory Affairs - ------------------------------------------------------------------------------------------------- Manufacturing Dave Hval Engineering - ------------------------------------------------------------------------------------------------- Quality Engineering Darin Ronken - ------------------------------------------------------------------------------------------------- Test Engineering Wayne Waldroup - ------------------------------------------------------------------------------------------------- Materials Shelley Cleary - ------------------------------------------------------------------------------------------------- Customer - Program Zia Yassinzadeh Manager - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
3.1. Customer Team Members . Rita Medical Systems, Inc. 967 N. Shoreline Blvd. Mountain View, CA 94043 Telephone: (650) 390-8500 Fax: (650) 390-8505 . Zia Yassinzadeh, Program Manger, Director, Electrical Engineering . Ron Steckel, Vice-President, Operations . Dan Balbierz, Vice-President, Research and Development TABLE OF CONTENTS 1. PURPOSE 3 2. SCOPE 3 3. SIGNATURE PAGE 3 3.1. PROJECT SIGNING BLOCK (INCLUDING CUSTOMER SIGNATORIES) 3 3.2. NON SIGNING CUSTOMER TEAM MEMBERS 4 4. TABLE OF CONTENTS 5 5. REFERENCE DOCUMENTS - INCLUDE BOTH INTERNAL AND EXTERNAL 7 6. EXECUTIVE SUMMARY 7 6.1. PRODuCT DESCRIPTION 7 6.2. DESCRIPTION OF PROJECT NAME 8 6.3. SEAMED'S ROLE IN THE PROJECT 8 6.4. RITA'S ROLE IN THE PROJECT 9 6.6. SCHEDULE OVERVIEW 9 6.7. FINANCIAL OVERVIEW 10 7. REGULATORY AND SAFETY AGENCY APPROACH 10 7.1. PRODUCT CLASS DESIGNATION 10 7.1.1. FDA-21 CFR Ch. 1(4-1-87 Edition) Part 820-Good Manufacturing Practices 10 7.1.2. EC-Medical Device Directive (MDD) 93/42/EEC of 14 June 1993 11 7.2. REGULATORY APPROACH - DOMESTICE AND EUROPEAN/INTERNATIONAL 11 7.3. SAFETY AGENCY APPROACH 11 8. ADMINISTRATION OF PROJECT 11 8.1. TEAM ORGANIZATION AND RESPONSIBILITIES 11 8.2. TEAM MEETINGS 12 8.3. COMMUNICATION (POINTS OF CONTACT) 12 8.4. PROJECT NOTEBOOK 12 8.4.1. Project Notebook 12 8.5. DESIGN HISTORY FILE 13 8.5.1. Purpose and Contents 13 8.6. DETAILED PROJECT SCHEDULE 13 8.6.1. Project Phases 13 8.6.2. Key Milestones 15 8.7. ASSUMPTIONS 15 8.8. APPROVALS AND CUSTOMER DELIVERABLES 16 8.8.1. Customer Approvals Required 16 8.8.2. SeaMED Executive Approval Required 16 8.8.3. Signature Authority 16 8.8.4. Customer Deliverables 16 8.8.5. Summary of Unit Allocation and Pricing 16 8.9. DESIGN REVIEWS 17 8.10. CHANGES TO PROJECT - I.E. SCOPE, SPEC, SCHEDULE, RESPONSIBILITY, ETC 17 8.10.1. Minor 17 8.10.2. Major 18 8.11. TRANSFER TO PRODUCTION AND PROJECT CLOSURE 18 9. FINANCE 18 9.1. BUDGETS 18 9.2. COST OF UNITS 18
APPENDICIES APPENDIX A - SCOPE I SPECIFICATION CHANGE REQUEST FORM 18 APPENDIX B - MASTER SCHEDULE 19 APPENDIX C - PROJECT MATERIAL PLAN 21 APPENDIX D - PROJECT QUOTATION, JANUARY 12, 2000 22
5. REFERENCE DOCUMENTS - INCLUDE BOTH INTERNAL AND EXTERNAL This section contains a listing of all internal SeaMED Procedures and external documents referenced in the Project Plan, including safety agency and regulatory standards, directives or documents. . SeaMED Document Change Procedure 900319 . SeaMED Documentation Control Operations Manual 908608 . SeaMED Product Requirements Specification, RedButte TBD . Manufacturing Plan, RedButte 950056 . Manufacturing Test Plan, RedButte 950047 . SeaMED Product Development Procedure 902148 . SeaMED Design Review Procedure 915005 . Service Plan, RedButte TBD . UL 2601-1 . CSA C22.22 No.60101 . EN 60601-1/IEC 601-1 6. EXECUTIVE SUMMARY The RedButte project is a Manufacturing transfer project of the Rita Model 1500 ablation system from Apical to SeaMED. This project will be conducted in accordance with SeaMED Product Development Procedure (SeaMED dwg. #902148) The NRE work is described in the Quote sent to Rita January 12, 2000, which is attached as Appendix D. SeaMED will transfer the Rita design into Manufacturing at SeaMED. Design responsibilty for the product resides with Rita. SeaMED will not create a Design History File nor conduct a Hazard Analysis. Thse are understood to be responsibilities of Rita. SeaMED will not conduct Design Verification Testing. Rita is responsible for conducting "correlation" testing to make sure the product has been transferred without violating the Product Specifications. 6.1. Product Description The customer is Rita Medical Systems Inc., located in Mountain View, California. The product is the Rita Model 1500 RF Generator. The product is an electro-surgical cutting and coagulation device, which generates RF energy for the ablation of soft tissue. The product includes a sheet metal enclosure, plastic bezel, overlay, 7 PCBAs, custom magnetics, power supply, 9 wire harnesses, footswitch, detachable power cord, and a disposable probe. This product is an evolution of an earlier model device. Both it and its predecessor have been manufactured previously by Apical. 6.2. Description of project name SeaMED traditionally names its projects after a Washington state mountain peak which has the same first letter as the name of the customer. The name chosen for this project is Red Butte, elevation 7,208 feet, in the North Cascades of Washington State. 6.3. SeaMED's Role in the Project . SeaMED has been hired to manufacture the Model 1500 RF ablation device for Rita Medical Systems. SeaMED will transfer the design from Rita to SeaMED. . SeaMED will not be doing electrical or mechanical design. There is no software development on SeaMED's part. . Primary SeaMED activities described later in this Project plan include: SeaMED Project Planning, including a Project Plan (This is a non- billable activity), Project Schedule, Manufacturing Plan, Manufacturing Test Plan, and Manufacturing Test specifications. Documentation Transfer of Rita drawings. Review and audit Rita BOM dated 11/29/99 to physical samples provided by Rita to correct any BOM errors prior to loading BOM into SeaMED MRP System, Proteus. Document 9 Wire Harnesses from BOM and Physical sample provided by Rita Medical. Create source control drawings for parts that are not currently documented at SeaMED. Release Rita drawings in SeaMED's system in order to procure, inspect, and stock parts for manufacturing. Create a Final Assembly Drawing with instructions that SeaMED can use to build the device. Generate the Bill of Material in MRP to structure material procurement and the manufacturing process in the most efficient manner. Create and release a Process FMEA (This is a non-billable activity) Develop Manufacturing Test procedures to test the model 1500 in manufacturing: Design and build a Golden Board Test Fixture (GBTF) to support board level test, calibration and debugging of individual PCBAs. This fixture will also be used to provide in/out of house service boards. Design and build a System Test Fixture, a QA Final Test Fixture and a Run-In Test Fixture. Make layout modifications of the Display PCBA as requested by Rita to remove switches and obsolete traces, eliminate interference between PCB and connectors, trim/notch PCB top and bottom, add 11 position single row ribbon cable locking connector, and eliminate extra mounting holes not needed. Provide input for Rita Run-In test code to be developed by Rita. . SeaMED will not be responsible for performing clinical research, submitting FDA applications, providing repair services in the field, or providing marketing and sales services. . SeaMED will not be performing Design Verification Testing to verify the product meets the Device Specifications. . Rita has the responsibility for the final Design Validation. . SeaMED can make no claims about the clinical efficacy of this product. SeaMED's responsibility is to manufacture the device to meet the specification document. . SeaMED will service the product in accordance with RedButte project- specific Service Plan, document number TBD. 6.4. Rita's Role in the Project Rita is responsible for providing to SeaMED all Bills of Materials, part drawings, schematics, and electronic files necessary to order, receive and inspect materials. Rita deliverables are listed in sections 8.6, 8.7, and 8.8.4. Rita is responsible for all design in the project, including providing documented evidence to the FDA that the Product Functional Specifications given to SeaMED are appropriate and address the intended use of the device, including the needs of the user and the patient. Rita is responsible for providing validated Run-In Test software. Rita is responsible for Design History File, Design Verification and Design Validation which proves that the product satisfies the user needs and intended use of the device. 6.5. Schedule Overview . The goal of this project is to transfer Rita documentation to SeaMED such that first 25 Production units can be built by May 8, 2000. . This project is managed in phases, which may overlap. . In Phase I SeaMED will develop planning documents (Project Plan, Materials Plan, Manufacturing Plan, and Manufacturing Test Plan). . Phase II runs in parallel with Phase I and comprises the documentation transfer aspect of the project - BOM transfer into the SeaMED system, release of drawings into SeaMED, creation of wire harness assembly drawings, as well as procurement of long-lead parts, design of test fixtures. . Phase III includes the procurement of materials for Production units, creation of Final assembly drawings, build of test fixtures, and creation of test procedures. . Phase IV includes verification and validation of test fixtures and Production build of the first 25 Production units which are subsequently tested by Rita as "correlation units". . Phase V contains a Production Readiness Review at SeaMED to check that all manufacturing issues have been addressed, and the project is released to Manufacturing, bringing the project to closure. . All phases have Phase-ending reviews per SeaMED's Design Review Procedure (#915005). . Deliverables by Phase are described in section 8.6. . Key milestone dates are shown in section 8.6.2 . Appendix B is the RedButte Project schedule 6.6. Financial Overview . Total NRE for the project, per the January 12, 2000 quotation was quoted at $163,268. . $10,518 is budgted for Test fixture materials. The remaining $152,750 was budgeted as labor. . On January 14, 2000, it was agreed to reduce the labor by $1575. The new NRE totals are: $161,693 total, $151,175 labor. . Labor to support the acitivities described in this project are billed out at the following rates: . Project Director $ 0 . Quality Engineer $ 0 . Manufacturing Engineer $105 . Test Engineer $105 . Material Coordinator $ 0 . Technician $ 55 . Document Tech $ 55 . PCB Designer $ 65 . Drafting $ 55 . In the event of a scope change, the billing rate for the Quality Engineer will be $105 per hour for efforts to support the scope change only. . Project RedButte is a fixed price project. SeaMED will invoice Rita monthly for the amount of work performed until the fixed price limit is reached. Payments are not based on milestones. 7. REGULATORY AND SAFETY AGENCY APPROACH 7.1. Product Class Designation 7.1.1. FDA-21 CFR Ch. 1 (4-1-87 Edition) Part 820-Good Manufacturing Practices . The FDA classifies RedButte as a Class II medical device SeaMED Team: - ----------- Project Director (PD) Gordon Overbye Manufacturing Engineer (MfgE) Dave Hval, Jean Rempel Test Engineer (TE) Wayne Waldroup, Jack Ross Quality Engineer (QE) Darin Ronken Document Technician (Doc Tech) Jeanie Hofland Drafting (Drft) Tim Tate Materials Support Materials Coordinator (MC) Shelley Cleary Production Control (PC) Ramona Clifton Customer Support Team Customer Support (CS) Sandy Carter 8.2. Team Meetings Project Team Meetings will be held weekly throughout the project to plan global activities and track overall progress. This meeting is intended to be a one hour status meeting. The Project Director is responsible for conducting this meeting and will publish minutes, which will be distributed to the Customer, the project team, and the Project Notebook. If the project director is absent, either the Test Engineer or another team member will be so designated. Project Team Meetings will be posted in the corporate weekly schedule so that other members of the company may attend if desired. Even though a member may be absent from a meeting they are still responsible for any action items or information that occurs at the meeting they missed. The Customer may elect to be involved in team meetings via telephone or via on-site visits at their discretion. 8.3. Communication (Points of Contact) Good communication between SeaMED and Rita is critical to the success of the project. Essential communication between companies should pass through, in writing via fax or E-mail, between the Project Director (Gordon Overbye) and Zia Yassinzadeh. Technical communication may pass through other points of contact, as practical. The SeaMED Project Director and Rita contacts should be apprised of important information passing through other channels. Communication regarding unit deliveries should pass through Customer Support (Sandy Carter) at SeaMED and Lori Nelson at Rita. 8.4. Project Notebook 8.4.1. Project Notebook The Project Notebook serves as a central file for project correspondence that relates to project administration. All project related correspondence should be entered into the Project Notebook. This includes meeting minutes, faxes, letters, memos, phone call logs, notes, correspondence, etc. Documents that are formally released under Configuration Control need not be placed into the notebook. The author of the correspondence or a document decides who on the Project Team receives that document. Documents shall be filed in chronological order with an index at the front. The Project Notebook shall be located and retained in the SeaMED Document Control area. It is audited and maintained by Documentation Control per the Document Control Operations Manual, 908608. 8.5. Design History File SeaMED will not create a Design History File for this project. The responsibility for creating and maintaining a Design History File lies with Rita. Rita maintains the DHF for the system design. Any design changes at SeaMED will be processed through Document Change Notices per SeaMED Document Change Procedure, document 900319. All design related material will be filed in the Design History File by Rita. The Design History File will be maintained by Rita throughout the manufacturing phase. 8.6. Detailed Project Schedule 8.6.1. Project Phases Phase I: Proiect Planning, SeaMED output deliverables ------------------------------------------------------ (Note: Rita is responsible for Design content, Design History File, Risk Management, Verification and Validation of hardware and software.) . Release Project Plan (PD) . Release Manufacturing Plan (MfgE) . Release Manufacturing Test Plan (TE) . Transfer a Product Requirements Specification (MfgE) . Phase I (Spec) Ending Review (PD, team) Phase I: Proiect Planning. Rita input deliverables --------------------------------------------------- . PO for NRE . PO for production units . Product Reuirements Specification . Sample unit for evaluation Phase II: Conceptual Design/Documentation Transfer, SeaMED output deliverables - ------------------------------------------------------------------------------- . Release Rita BOM into SeaMED MRP (MfgE) . Transfer Rita drawings and schematics into SeaMED system (MfgE, Doc Tech) . Create wire harness assembly drawings (MfgE, Drft) . Re-layout Display PCBA (PCB Designer) . Create Test Specifications (TE, Rita) . Design Test Fixtures (TE) . Phase II (Paper) Ending Review (PD, team) Phase II: Conceptual Design/Documentation Transfer, Rita input deliverables - ---------------------------------------------------------------------------- . Rita BOM . Electronic files of Rita drawings and schematics . Procure Long Lead Items for first Production Build (MC) . Mechanical requirements for Display PCBA redesign actvity . A set of PCBAs for use as Test Fixtures . Test specification requirements . Packaging documentation . Operator's Manual Phase Ill: Prototype & Engineering Confidence Testing, SeaMED output - --------------------------------------------------------------------- deliverables - ------------ (Note: there are no prototypes in this project.) . Review and RedlineDrawings and Documents (MfgE, QE) . Send first article custom magnetics to Rita for Engineering Confidence Testing (TE, Rita) . Build Test Fixtures (TE) . Create process FMEA (MfgE) . Finalize Pre-Prod Manufacturing Plans and Procedures (MfgE, TE) . Phase III (Verification) Ending Review (PD, team) Phase III: Prototype & Engineering Confidence Testing, Rita input deliverables - ------------------------------------------------------------------------------- . Run-in Test Software Phase IV: PreProduction & Design Verification, SeaMED output deliverables - -------------------------------------------------------------------------- . Build 25 correlation Production Units at SeaMED (Production, MfgE) . Verify and Validate Test Fixtures (TE) . Verify Test Procedures (TE) . Update Drawings as necessary (MfgE, Drft) . Perform correlation Testing of Hardware (Rita) . Support for Regulatory Submittals (QE) . Phase IV (Final) Ending Reviews (PD, team) Phase IV: PreProduction & Design Verification, Rita input deliverables - ----------------------------------------------------------------------- . Test results of custom magnetics 1st articles Phase V: Transfer to Production, SeaMED output deliverables -------------------------------------------------------------- . Production Readiness Review (MfgE, team) . Build remaining Production units on 1st P.O. (Production) Phase V: Transfer to Production, Rita input deliverables ----------------------------------------------------------- . Correlation test results . Production forecast 8.6.2. Key Milestones . Project Start Phase I 1/00 . Phase I Design Review Phase I 2/00 . Phase II Design Review Phase II 2/00 . Phase III Design Review Phase III 4/00 . Build 1st 25 Production units Phase IV 5/00 . Phase IV Design Review Phase IV 5/00 . Production Readiness Review Phase V 6/00 8.7. Assumptions . Rita Medical Systems will specify and qualify suppliers for any key subassemblies and Plexus will be able to purchase from these suppliers at the Rita Medical prices. . Any inspection data or reports available from previous receipt or inspection of material will be made available to SeaMED/Plexus in an effort to reduce material inspection time. . Rita will provide one complete, current set of documentation, including the specifications called for on any customer documents, and properly identified (part number and rev) software or magnetic media, if customer supplied. . Rita will not provide electronic files for an assembly drawing. --- Therefore, SeaMED will need to generate the files. . A unit, built to the configuration to be transferred to SeaMED, will be provided. This unit will be used to generate the Assembly Drawing. . CAD Models of tooled components such as sheetmetal and cast urethane plastic parts will be available. Other parts will need to be created by SeaMED Drafting. . Rita will provide drawings for all parts in the unit. . SeaMED will release customer-supplied Rita drawings into the SeaMED system without SeaMED signatures. . Operator's Manuals will be supplied by Rita. . Packaging for the device has been designed by Rita/Apical and is suitable for shipping production units. The packaging documentation will be released in the Document Transfer process. Test Specification Documents are supplied by customer. 8.8. Approvals and Customer Deliverables 8.8.1. Customer Approvals Required The following is a list of items that require Rita's approval. The Customer will be notified in writing that their approval is required, but serious delays can result if the approvals are not granted in a timely way: . Project Plan . All Phase -Ending Reviews . Scope / Specification Change Requests . Document Change Notices as defined by the Document Change Control Agreement (DCCA) between SeaMED and Rita. . Production Readiness Review (PRR) Note: Customer Approval is required per SeaMED Procedure on the Phase Ending Reviews and the PRR. 8.8.2. SeaMED Approvals Required The following is a list of items that require approval of the Director of Project Management: . Project Plan . Phase Ending Reviews The following is a list of items that require approval of SeaMED's Vice President and General Manager of Manufacturing: . Production Readiness Review Note: See SeaMED Design and Phase Ending Review Procedure, 915005 and SeaMED Production Readiness Review Procedure, 913872 for approvals required. 8.8.3. Signature Authority . The following are authorized to sign for Rita: . Zia Yassinzadeh (Program Manager), Ron Steckel (VP Operations), Dan Balbierz (VP R & D) 8.8.4. Customer Deliverables . See section 8.6 8.8.5. Summary of Unit Allocation and Pricing . Unit pricing is defined in the Quote given Rita, dated January 12, 2000 . The first P.O. will be for 200 units. All will be built as Production units. . Rita will conduct correlation testing on the first 25 units to ensure that units built at SeaMED conform to the Product Specifications. 8.9. Design Reviews Various Design Reviews are held throughout a phase as well as at the completion of each phase, or group of phases as appropriate, and conducted per SeaMED Design and Phase Ending Review Procedure, 915005. Design Reviews are documented with a report and placed into the Project Notebook. Design reviews are identified as a task on the Project Schedule, (Appendix B). 8.10. Changes to Project - i.e. scope, spec, schedule, responsibility, etc. The Project Plan is revised and changed through the SeaMED Document Change Procedure, 900319, at the end of each phase, and additionally when determined necessary by the Project Director. The Project plan may also be revised thought the "Scope / Specification Change Request Form," see Appendix A. This change request form is used when either SeaMED or the Customer request changes, and is classified into two groups, Major and Minor. Additional pages may be attached as necessary to describe and support the request. The Project Director numbers and tracks the Change number assigned to the Scope Change Request Form. The completed and approved Scope / Specification Change Request Form becomes part of the DHF. Example: SeaMED recognizes that plans change. SeaMED will notify the customer in writing of any changes foreseen and the ramifications of changes requested by either SeaMED or the Customer. SeaMED classifies changes into two groups. 8.10.1. Minor . Minor scope changes are those activities which are outside the work defined in the January 12, 2000 scope that do not affect milestone dates and are below $2000. . Minor scope changes may be documented in team meeting minutes, a Scope Change request form, or an e-mail sent to the customer, estimating the cost of the change. . Scope changes may be approved by the customer by written acknowledgement via letter, fax, or e-mail. . Scope changes shall be implemented by revising the appropriate documents, including this project plan. . Scope change costs will be handled by Rita either increasing the original NRE P.O. or by issuing a P.O. to cover the Scope Change. . In the event that it is necessary to DCN a drawing because it was discovered to be in error or inadequate, and it is determined that the cause was documentation provided by Rita, the implementation of the DCN will be charged to Rita as a minor scope change. Should the DCN be for the convenience of SeaMED or to correct a SeaMED error, there will be no charge. 8.10.2. Major . Major scope changes are those activities which are outside the work defined in the January 12, 2000 scope that do affect milestone dates and are in excess of $2000. . Major Scope changes require a re-evaluation of the overall Project schedule and project NRE costs. . Major scope changes may be documented in a Scope Change request form, or an e-mail sent to the customer, estimating the cost of the change and effect on schedule. . Major scope changes may be approved by the customer by written acknowledgement via letter, fax, or e-mail. . Scope changes shall be implemented by revising the appropriate documents, including this project plan. . Scope change costs will be handled by Rita either increasing the original NRE P.O. or by issuing a P.O. to cover the Scope Change. 8.11. Transfer to Production and Project Closure . Transfer of the product to production will be per SeaMED Production Readiness Review Procedure, 913872 9. FINANCE 9.1. Budgets . This project is a fixed-price project, per the quotation sent January 12, 2000. . See Section 6.6 for any revisions to the budget. . At each Phase-ending Design Review, the project NRE totals and unit pricing will be reviewed. Any amendments to NRE or unit pricing will be documented in Phase-Ending Review minutes and a revision update of this Project Plan, . See Appendix D for the January 12, 2000 quotation. 9.2. Cost of Units . The first 25 units will be built to validate the manufacturing transfer of the device; these units will be billed at actual material and labor rates. The remainder of the units will be priced according to the January 12, 2000 quotation. Appendix A - Scope Change Request Form Appendix B - Master Schedule (subject to change without revision to this document) Appendix C - Material Plan Appendix D - January 12, 2000 Quotation Appendix A - Scope / Specification Change Request Form
Sheet 1 of______ Project Name: Change Number: - -------------------------------------------------------------------------------------------------------- Requested by: Date: - -------------------------------------------------------------------------------------------------------- Specification Change: [_] YES [_] NO Scope Change: [_] Major [_] Minor - -------------------------------------------------------------------------------------------------------- Requested Change: - -------------------------------------------------------------------------------------------------------- Reason: - -------------------------------------------------------------------------------------------------------- Schedule Impact: - -------------------------------------------------------------------------------------------------------- Program Cost Impact: - -------------------------------------------------------------------------------------------------------- Unit Cost Impact: - -------------------------------------------------------------------------------------------------------- CUSTOMER RESPONSE: [_] Accept [_] Reject (attach explanation) - ---------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Reviewed By: (Customer & SeaMED) Date:__________________ Name:___________________________________ Date:_________________ Name:________________________________ - --------------------------------------------------------------------------------------------------------
Return completed form to SeaMED, Attn: Project Director Appendix B - Master Schedule Team identification and abbreviation table: On the following schedule, to the right of each task name is the name of the team member responsible for that task. Abbreviations used below and in the schedules: Initials Title/Function Team Member -------- -------------- ----------- PD Project Director Gordon Overbye EE Electrical Engineer None EET Electrical Technician TBD Drft Drafter TBD PCB PCB Designer Tim Tate MC Materials Coordinator Shelley Cleary ME Mechanical Engineer None MET Mechanical Technician TBD DC Document Control Technician Jeanie Hofland QE Quality/Reliability Engineer Darin Ronken QET Quality Technician TBD TE Test Engineer Wayne Waldroup, Bruce Mainwaring MfgE Manufacturing Engineer Dave HvaI, Jean Rempel Prod Production TBD Appendix C - Project Material Plan REDBUTTE MATERIAL PLAN 1. SCOPE This document outlines the plans for procurement and management of the materials required for the Prototype and PreProduction builds of the RedButte project. This document is supplemental to the existing Project Plan and associated proposals. 2. PURPOSE The purpose of this plan is to document the management of the material for the RedButte project to meet the schedule, cost and manufacturing objectives. 3. REFERENCE DOCUMENTS 906817 SeaMED Supplier Qualification Procedure 916304 SeaMED Revision Q Procedure 905245 SeaMED Documentation Manual 913571 SeaMED Project Plan Procedure 950053 Project Plan, RedButte 950056 Plan, Manufacturing RedButte 4. MATERIAL TEAM The Material Support Team (MST) shall consist of representatives from Purchasing, Stores, Receiving Inspection, Production Control, and Supplier Quality and shall be under the leadership of a Material Coordinator. The Material Coordinator shall provide a single point interface on material matters to the Red Butte Project Director, to the Red Butte team, and to the customer. The Material Coordinator reviews the master schedule, interprets requirements and develops and manages lower tier schedules which include: Identification and procurement of long lead material. Accuracy of the BOM, sales order and/or master schedule. Release dates of drawings to support schedule. Supplier approval schedules. Schedule for initialization of hard tooling. The Material Coordinator will manage and report to the Project Director material shortages, excess and inactive inventory amounts, transfer price estimates, and any material issues which may impact project schedule or cost. 5. PROTOTYPEBUILD No prototype units will be built for this project. 6. PREPRODUCTION BUILD There is no pre-production build. All units are production units built at rev A. The first 25 units will be billed at actual labor and material cost. Remaining units will be billed as per unit cost quoted on January 12, 2000 quotation (see appendix D). A long lead (greater than 8 weeks lead time) BOM will be generated and master scheduled to support the Production schedule. Upon receipt of a purchase order from Rita the master schedule for the long lead BOM will be removed and a sales order will be loaded to drive the demand for the remaining material. All custom part drawings will be released to Revision A for the purchasing team to buy. Assembly drawings will be released to Revision A prior to work orders being opened. While the overall responsibility still resides with the Material Coordinator, the Planner will have the responsibility for the day to day operations (opening work orders, monitoring shortages, expediting, etc.), and data entry of the BOM and BOM changes as provided by the Manufacturing Engineer. The Material Coordinator will work with the Material Team to implement design changes. The Production Planner will monitor the shortage report and expedite material from receiving through to the work cell. MRB meetings will be held as needed to move material through MRB to the work cell. The Planner will provide shortage reports to the Material Coordinator. 7. SUPPLIERS Suppliers for custom parts will be selected the Material Support Team from suppliers on the Approved Supplier List (ASL). Initially, Rita's suppliers will be used to meet production deadlines and requirements until SeaMED is in a position to conduct an orderly transition to its own approved suppliers. If a new supplier is needed to meet project production requirements, the Material Coordinator will initiate and oversee the approval process (ref. SeaMED Supplier Qualification Procedure 90618). The cost of the approval process will be billed to the project. A status will be given at Phase Ending reviews. Suppliers selected by Rita will be added to the ASL with a Conditional Status-project specific. To initiate this process the customer will send a letter to the Material Coordinator directing SeaMED to procure from the specified supplier. 8. CUSTOMER SUPPLIED MATERIAL (CSM) No customer supplied material will be provided for this project. 9. SPARES AND OTHER NON-PRODUCTION DEMAND It is the customer's responsibility to identify requirements for spares and other non-production demand as early as possible. Failure to plan prudently will result in higher piece part costs and increased risk in achieving schedules. 10. FINANCIAL 10.1. Excess and Inactive During the performance of this project, SeaMED will purchase materials support the requirements defined in the contract agreement and the project plan. Certain materials that SeaMED will acquire will be subject to minimum-buy requirements, scrap and attrition additions and quantity price breaks which may result in excess material accumulation on the project. Additionally, design changes may cause other materials to become inactive. SeaMED will use it's best efforts to minimize the impact on the project of excess and/or inactive. However, the final costs associated with the accumulation of excess or inactive materials (including storage costs if off site storage is required) will be billed to the customer. A separate SeaMED project billing account will be opened for RedButte project scrap material for the development (including PreProduction) phase of the project. Parts purchased by SeaMED that become inactive due to design changes will be billed to this account on a monthly basis. Due to the difficulty in estimating the amount of scrap, it was not included in the NRE estimate. The Material Coordinator will report on a monthly basis to the Project Director the status and amount of Excess and Inactive Material. 10.2. Tooling The NRE budget does not include estimates for production tooling. If hard tooling is required, prior to initiation of hard tooling, estimates will be obtained and additional PO coverage will be needed. Ownership of the tooling resides with Rita. For confidentiality, Rita's name will not be marked on the tooling. All tooling purchased on this contract shall have the following statement added to the Purchase Order: The tooling procured or fabricated under this Purchase Order shall become the property of SeaMED. Each item shall be permanently marked or labeled "Property of SeaMED Corp." Tooling shall be returned to SeaMED on request. 10.3. Material Deposits No material deposit is required. 10.4. Transfer Price Estimate The Material Coordinator will track the unit price throughout the development process. The initial quote was based on a 11/29/99 BOM. It has been agreed the final transfer price is to be determined following a BOM audit conducted in January 2000. Appendix D - Project Quotation January 12, 2000 Section One - ----------- Company Introduction The merger of Plexus Corp. and SeaMED Corp. has created a world-class product development and manufacturing organization with a major focus on creating custom electronic and electromechanical products for the medical industry. Plexus has the experience to manufacture and service a complex instrument such as the NSX device. We have a broad range of capabilities in Procurement, Material Handling, Quality Assurance, Test, Manufacturing, Quality, Test Engineering, and Customer Support to support this type of product in the volumes you require. Corporate Level Plexus is the premier engineering and product development company in the EMS industry. Plexus engineering services allow our customers to develop reliable products delivered to the market on time and at an acceptable unit cost. At Plexus Corp. we pride ourselves in being able to supply a complete menu of value-added design and manufacturing services, from which our customers can choose. The focus of these services is to provide a competitive advantage in time-to-market, technology, flexibility, and total cost. The capabilities that Plexus offers span the product life cycle from design, test, and proto-typing through production manufacturing and depot repair/service. This range of expertise allows for the seamless transition of a product from any one phase to another throughout the development and manufacturing cycle. Plexus is able to support product transition from any of these phases of the product life cycle. As part of our corporate strategy, Plexus Corp. provides value-added services while minimizing cost to the customer. Section Two - ----------- Procurement and Materials Management Due to changing market conditions and customer requirements, Plexus is continuously reviewing materials procurement and management solutions. Our objective in materials management is to provide the proper mix of flexibility, low cost and minimal component lead-time to meet our customer's objectives. To date, we have provided unique solutions for our existing customers, which include the following: . Flexibility Model (covers up-side and down-side schedule fluctuations) . Assured Supply Models . Bill of Material obsolescence review and management . Proactive Cost Reduction Program . Transition of supply from existing sources (customer supplied inventory) . EDI - 830 MRP share with supply base Each of these strategies is made possible due in part to our excellent supplier relationships and our supply chain management. Plexus corporate procurement is broken into Commodity Teams with experience in the industry and established vendor relationships for each of the major component types (semi-conductors, mechanical parts, OEM components, passive components, interconnecting devices and printed circuit boards). Manufacturing The facilities are equipped to support a wide range of manufacturing and test requirements including leading edge technologies as described below. Plexus has successfully transitioned numerous existing products into manufacturing and has instituted a dedicated product introduction team to ensure continuity of supply to our customers. Plexus is committed to on-time delivery and notification in advance of any delivery variances. Plexus customers have access to a dedicated Program Manager to provide up to date product manufacturing and delivery status. In addition we support all of our products in production through Focus Factories and Product Companies. A typical Focus Factory provides the following services: . Machinery and staff tailored to your products . Self managed and directed production staff . Minimized manufacturing cycle time . Material acquisition and consumption plans . Finished goods management . Agency requirement standards and documentation . Efficient manufacturing (leading to lower manufacturing costs) . Higher quality products (information feedback cycle time is shortened) . Dedicated Mfg. Engineering, Materials, and Quality Engineering resources to support continuous improvement of the product Quality Assurance Plexus has established solutions for quality inspection and test of all printed circuit card and system level assemblies we manufacture. Quality Engineering works with the Product Company to resolve supplier related quality issues and monitor any field failure trends for continuous improvement opportunities. Test Our objective in product testing is to provide the proper test type to ensure a robust product at the lowest possible cost. Our preference is to be involved in the test development as early as possible in the product design process in order to maximize test coverage at the board and system level. The test services Plexus offers include the following: . In-circuit: HP307X, GenRad 227X & 228X, Teradyne 18XX . Functional: Base & Nest, Subassembly, stand alone . Environmental Test: Temperature, vibration, shock . X-ray Laminography . Functional Test (custom designed by Plexus or customer supplied) . Environmental Stress Screen (including vibration, temperature cycling and shock) . Automated data collection . Test software development . Test fixture fabrication . Integrated design for testability Test Engineering Plexus has a world-class test design staff with experience in developing tests for medical, industrial, network/telecom, transportation, and other products. For new test requirements, we utilize state-of-the-art development tools, processes and procedures that enable us to develop comprehensive manufacturing test strategies and solutions while managing the NRE costs associated with the program. Customer Support Plexus provides a Customer Support Representative for every customer. The Customer Support Representative will provide you information on order and material status, billing and cost information, service and warranty information, and also provides a point of contact for any additional technical services you might need from minor design changes to complete redesigns, and new product introductions. Section Three - ------------- Unit Price The unit price is budgetary and is based on the model 1500 BOM dated 11/29/99. Any changes to this BOM may affect the final unit cost. Please see Attachment A for pricing details. Unit Labor Price Board level labor is an estimate. Firm custom PCBA labor pricing will be based upon an accurate BOM, assembly drawings, fab drawings, and or a sample. The HLA unit labor price for the device is based on a cellular manufacturing approach for the device. This cell will incorporate point-of-use stocked material and a progressive assembly and test approach. The Product will be built by assemblers and tested by Production Technicians; at lower volumes the product may be built and tested by Production Technicians. Unit Materials Price Unit material price is budgetary and is based on the BOM that was dated 11/29/99. When comparing the BOM with the individual BOMS provided 12/15/99 we found many parts discrepancies. We ignored the individual BOMS and got quotes on the BOM dated 11/29/99. In order to solidify material pricing we will need accurate assembly BOMS completed with manufactures and manufactures P/N's. Please see attachment B for comments for custom components. Please see attachment C for material pricing comments. Unit Test Price Based on our experience with similar products the following tests have been added to the unit labor cost. . Back-plane . CPU PCA . IO PCA . Thermo Board . Display Driver Board . Display Board . RF Board . System Test . Electrical Safety . Run-in Test . Final Test . QA Final Test Unit Pricing Notes and Assumptions . The assembly labor hours were derived by assembling unit Serial Number 002 that was provided by Rita. There have not been any major mechanical design changes since that time that would significantly affect the assembly process. . Minimal amount of Loctite is used. Recommend changing to SEM screws and Kepnuts where possible. . Calibration of unit is expected to be direct and not iterative. All calibrations are independent. Test procedures were not available to actually perform this operation at the time of this estimate. . Programmable devices can be programmed on an Allpro model 96 programmer and there are six programmable devices in the unit (five SMT and one DIP). . Power Entry Module assembly can be performed and is sufficiently documented for assembly by sub-contract wire harness supplier. . The RF PCBA only requires attachment of the Fan and Bracket to the Heatsink in Final Assembly. All other assembly (including daughter PCBA/Hybrid) will be performed by PCBA assembly manufacturer. . No Polyimide Tape in unit. . No soldering of wires such as the Fan to the RF PCBA. All connections are made with connectors. . This quotation is valid for thirty (30) days. Prices will be firm for orders placed within this thirty (30) day period and deliverable within one year of the date of this quotation. . Plexus Professional Service Agreement (PSA) or similar, comprehensive manufacturing agreement to be complete and in place prior to acceptance of purchase order for production units. . Customer has a completed product specification. . All critical sub-assemblies have been qualified to meet product specification requirements. . There will be 25 units built to validate the manufacturing transfer of the device; these units will be billed at actual material and labor rates. . The BOM used for estimating the Unit Cost is based on information provided by Rita Medical and our understanding of the system. . Rita Medical Systems will specify and qualify vendors for any key subassemblies and Plexus will be able to purchase from these suppliers at the Rita Medical prices. . Changes to the system design and/or manufacturing process, after release for production, will include review and written approval by both Rita Medical Systems and Plexus. . Assembly, Test, and Receiving Inspection first pass yields will be at least 95%. . Any materials transferred to SeaMED/Plexus will be shipped in individual containers with SeaMED/Plexus part numbers for easy identification. . Any inspection data or reports available from previous receipt or inspection of material should be made available to SeaMED/Plexus in an effort to reduce material inspection time. . Plexus Electronic Assembly normally uses No Clean Solder Paste and Wave Soldering Flux. Plexus Electronic Assembly does not attempt to clean the flux residues from assemblies unless otherwise specified. . Plexus Electronic Assembly Documentation Control Dept. will require the following at the time a purchase order is placed: A. One complete, current set of documentation. B. The specifications called for on any customer documents. C. Properly identified (part number and rev) software or magnetic media, if customer supplied. . Plexus Electronic Assembly must be placed on internal routings, to ensure that we will always have the latest revision of any of the above. . Plexus' Corporate Engineering, Safety and Environmental Departments must review all chemicals specified for the manufacture of the products herein for health and safety issues, compliance with regulations and manufacturability. . All products, test fixtures and manufacturing equipment required to assemble these products must be year 2000 compliant before acceptance of purchase order. . Terms of payment are net-thirty (30) days and subject to final credit approval by Plexus Electronic Assembly. . All shipments are FOB point of shipment Bothell, WA Section Four - ------------ Mfg. Transfer Non-Recurring Encilneerina Services for the Model 1500 -------------------------------------------------------------------- 1. Assembly Drawing and Instructions Generation $13,450 Value Added Service: . Create Assembly Drawing with Instructions that SeaMED can use to build the device. Assumptions: . Rita will not provide electronic files for an assembly drawing. Therefore, --- SeaMED will need to generate the files. . A unit, built to the configuration to be transferred to SeaMED, will be provided. This unit will be used to generate the Assembly Drawing. . CAD Models of tooled components such as sheetmetal and cast urethane plastic parts will be available. Other parts will need to be created by Drafting. 2. Documentation Transfer $16,700 Value Added Service: . Drawings will be released in SeaMED's system in order to procure, inspect, and stock parts for manufacturing. . SeaMED will minimize the cost of this activity by simply taking Rita's drawings, creating a part number, and releasing them as is with a cover sheet. Assumptions: . Rita will provide drawings for all parts in the unit. . Documents will be transferred at $50/part. . Per a Rita Excel BOM, dated 11-29-99, there are 392 parts that need to be transferred. . There will only be one A-Level assembly. . All drawings have had a thorough tolerance analysis and include complete material and finish callouts. . All dimensions are in inches. . All components have completed Source Control Drawings that include manufacturer, part numbers and data sheets. 3. Production Process Setup $16,800 Value Added Service: . Create a Manufacturing Plan that will ensure the product is built in the most efficient manner. . The production processes to build and test the device will be created at SeaMED. . Generate the Bill of Material in MRP to structure material procurement and the manufacturing process in the most efficient manner. . All assembly tools will be identified and setup in the Product Cell at the point of use. . Any assembly fixtures needed will be identified during this activity. . Assemblers and Technicians will be trained to build and test the device. . Release of the Product and Processes to production. Assumptions: . Hands on training at Apical where units could be built, tested, and shipped by SeaMED personnel will not be provided. --- . A unit, built to the configuration to be transferred, will be provided to SeaMED in order to setup the manufacturing process. . A representative of Rita who knows the product, will be on-site at SeaMED as needed to help set up the manufacturing process. . There is minimal tribal knowledge required to build and test the unit. . Generic assembly tools (e.g. screwdrivers, torque drivers, wrenches, etc.) are not charged to the customer. . No assembly fixtures and jigs will be transferred to SeaMED. The cost to build assembly fixtures is not included in this cost estimate. . A Process FMEA is already done by Rita and is not part of this proposal. The Process FMEA will be released in the Document Transfer process. . Operators' Manuals will be supplied by Rita. . Packaging for the device has been designed by Rita/Apical and is suitable for shipping production units. The packaging documentation will be released in the Document Transfer process. 4. Mfg. Test Planning and Approach $14,700 Value Added Service: . A manufacturing test plan will be developed to outline the approach for testing the device in production. The customer will approve this plan before proceeding into detailed test fixture design and development. . A manufacturing test specification will be developed that outlines all of the characteristics that will be tested on the device and to what tolerance. Assumptions: . Due to low quantities, ICT will not be implemented, however the PCBAs could be modified to allow for ICT in the future should quantities exceed estimates. . ICT fixtures and programming are not included in this proposal and exceed the scope the project. All tests are manual with the exception of Run-In Test which will be automated. . Testing will consist of PCBA and system level tests. Power supply voltages and signals necessary to meet device specifications will be measured. . The HCU's software will be used in a test mode to read external stimulus (inputs) and control outputs that will be measured by independent test equipment. . The safety functions will also be tested. . PCBAs may be tested in the system or on a bench top tester depending on access to the PCBAs in the HCU. . Electrical safety of the HCU will be tested. This will consist of leakage current tests and dielectric strength tests. These tests will not require or include the disposable. 5. Mfg. Test Procedures $33,495 Value Added Service: The following test procedures will be developed and released to test the model 1500 in manufacturing: . Back-plane . CPU PCA . IO PCA . Thermo Board . Display Driver Board . Display Board . RF Board . System Test . Electrical Safety . Run-in Test . Final Test . QA Final Test Assumptions: none 6. Mfg. Test Fixture Material and Labor $44,750 Value Added Service: . Golden Board Test Fixture (GBTF) will be designed and built to support board level test, calibration and debugging of individual PCBAs. This fixture will also be used to provide in/out of house service boards. This fixture will include various RF loads, thermocouple simulation, provide open thermocouple simulation, load for audio drivers, and foot switch or foot switch simulator. Additional bench top equipment will be required to support the testing including a temperature measuring device, PC (to communicate with the unit), Oscilloscope, DMM, etc. Standard bench top test equipment is supplied by SeaMED. Specialized equipment specific to the HCU testing or equipment built into test fixtures is charged to the customer. . System Test Fixture will be almost identical to the GBTF less the portion that holds and powers the Golden Boards. It will probably share the various RF loads, Thermocouple simulation, provide open thermocouple simulation, load for audio drivers, and foot switch or foot switch simulator. The bench top test equipment will also be shared. This approach will reduce the quantity of fixtures and equipment and therefore cost. . Run-In Test Fixture will be very dependent on the type of requirements defined by the customer. The level of support needed to energize the RF output and the duration it can be driven will affect the complexity of the fixture design. We propose the fixture be modular and initially be built to support 4 units simultaneously. It will be designed to extend to 8 units by adding components when higher production quantities require additional capacity. The approach includes a PC, 8 port RS-232 board, Digital I/O board, AC line control switch system, RF loads and pneumatic control system. Test software will be developed to automate this fixture. . The Electrical Safety Test will use SeaMED's safety analyzer and Hipot tester. Custom cables will be required to connect the unit being tested to the test equipment. These are considered test fixtures and will be documented, verified, and validated as such. . The Quality Assurance (QA) Final will be a stripped down version of the System Test Fixture. It will not require bench top test equipment. Assumptions: . The system test pneumatic system could be eliminated if the unit's RF output can be Controlled via its RS-232 port or method other than the foot switch. If the unit's RF output can be controlled continuously without over heating the unit and there is no requirement for power cycling, the majority of the test equipment can be eliminated. This proposal estimates the worst case cost for a 4 station run-in test fixture. . The GBTF gold board set is not included in the cost of this proposal. 7. Additional Documentation Included The following documentation will be created during the test development process. . Manufacturing Test Plan. . Test Specification Documents (supplied by customer). . Test Fixture Documentation including Theory of operation, Verification and Validation Procedures (one for each type of fixture). . Test Fixture Verification and Validation Reports (one for each type of fixture). . Test Procedures (one for each test identified above). . Test Procedure Verification Reports. 8. PCBA Design Upgrade $6,000 This section covers the added design work and costs to move the PCB mounted switches to a new membrane switch panel. The plan would incorporate this design concurrent with manufacturing transfer of the device, starting with concurrent approval. SeaMED will provide the PCBA redesign, Rita will perform the redesign of the Front Panel and overlay. Value added service: . Re-layout the LED PCBA to: . Remove switches and obsolete traces . Eliminate interference between PCB and connectors . Trim/notch PCB top and bottom . Add 11 position single row ribbon cable locking connector . Eliminate extra mounting holes not needed Assumptions: . Existing electronic files are available for the PCB in a format that can be used at SeaMED. . No function or specification change to unit or unit performance. . No re-qualification required. Estimate - Labor NRE --- EE, PCB designer, ME, drafting -- $6,000 Material NRE None. At this time it is not envisioned that a prototype run the new PCBA will be done. Film and tooling for the PCB will be billed out as a pass-through cost when parts are ordered for production TOTAL DESIGN NRE -- $6,000 9. Additional Engineering Services Requested By Rita Medical Value Added Service: . Review BOM dated 11/29/99 with 392 parts listed and audit to physical sample provided by Rita Medical week of 1/3/00 to correct any BOM errors prior to loading BOM into SeaMED MRP system. Manufacturers and P/Ns will also be audited as part of this process. Any discrepancies will be reported to Rita Medical for disposition. $6,600 . Document 9 Wire Harnesses from BOM and Physical sample provided by Rita Medical. These documents will be suitable for purchasing wire harnesses as sub-assemblies from wire harness suppliers. $4,140 . Create source control drawings for parts that are not currently documented at SeaMED. There are approximately 262 parts that will require SCDs and we estimate that we will have to create SCDs for approximately 1/3 of these or 87 SCDs. $6,633. [BAR TABLE GRAPHICS] [BAR TABLE GRAPHICS] Attachment C [LOGO HERE] Plexus Corporation Quote # 0 The Product Realization Company 2121 Harrison Street Neenah, WI 54957-0529 Date: 2/28/00 (920) 722-2826 Fax (920) 720-6700 =================================================================================================================================== Company: Rita Medical Systems Project Name: Ablation System 967 N. Shoreline Blvd. Assembly #: Model 1500 Mountain View, CA Assembly Rev: N/A Assembly Name: Attention: Ron Steckel Prepared by: John Grein cc: Phone: 425-398-2825
UNIT COST INFORMATION --------------------------------------- Estimated Annual Quantity [***] [***] [***] [***] --------------------------------------- Estimated Release Quantity [***] [***] [***] [***] --------------------------------------- I. MATERIALS [***] [***] [***] [***] II. PCBA LABOR [***] [***] [***] [***] III. FINAL ASSY. LABOR [***] [***] [***] [***] IV. ICT TEST N/A N/A N/A N/A V. FUNCTIONAL TEST Inc. Inc. Inc. Inc. VI. RUN IN TEST Inc. Inc. Inc. Inc. VII. PACKAGING Inc. Inc. Inc. Inc. ---------------------------------------- VIII. TOTAL [***] [***] [***] [***] ---------------------------------------- INVENTORY CARRY/MONTH [***] [***] [***] [***] See Note 3 Notes ----- 1. ICT Test is not included, PCBA design does not support ICT. 2. Functional PCBA, System Test, Ambient Run-In Test. Electrial Saftey, and Final Testing Inc. in Final Assy Labor. 3. Investory Carrying Cost/Month is based on purchasing [***] in material for Initial PO of [***] units. On initial PO of less than [***] units a carrying charge of [***] will apply from date of last shipment on Initial PO to date of first shipment on next PO. NON-RECURRING CHARGES A. PCB TOOLING [***] B. PCB ETF [***] C. ICT FIXTURE N/A D. FUNCTIONAL FIXTURE [***] E. PCBA PROCESS DEVELOPMENT N/C F. XRAY TOOLING N/A G. SMT PROGRAMMING Inc. H. SMT STENCIL (S) Inc. I. AUTO-INSERT PROGRAMMING N/A J. CONFORMAL COATING PROG. N/A K. MANUFACTURING SETUP [***] L. OTHER [***] SPECIFIC ASSEMBLY NOTES AND ASSUMPTIONS A. See Previous Proposal Dated January 12, 2000. B. Final Assembly Labor is Estimated Within +/- 15%. C. Current PCB Supplier is Capable of Meeting Plexus Production Requirements. D. PCBA process development costs up to [***] will be paid by Plexus. E. Rita Medical responsible for additional costs due to design costs. F. G. H. Attachment D 1. DESCRIPTION The RITA Medical Systems, Inc. Model 1500 Series Electrosurgical Generator is designed to provide monopolar radio frequency energy to be used for coagulation and ablation of soft tissue. The unit is specifically designed for use with RITA Electrosurgical Devices. It provides multiple temperature sensor measurements, impedance and power monitoring to assist the practitioner in delivering the desired energy to the target tissue. The RITA Electrosurgical system consists of an RF generator, a disposable electrode, here referred to as the device, a patient connection cable, a return pad, a power cord, and may also include an auxiliary temperature probe. The generator provides the RF energy to the device through the cable. The device consists of a number of deployable branches, some or all equipped with a thermocouple. The return pad, also known as the dispersive electrode, provides the return path for the RF energy applied by the device. The power cord is a medical grade line cord that provides AC power to the generator. The system is capable of reading up to three auxiliary temperatures through a passive auxiliary probe. This probe is not capable of delivering any RF energy, and is used to provide temperature information about the surrounding tissue. This probe is connected to the auxiliary port of the generator via an auxiliary cable. To use the system, the generator is plugged into the wall outlet. The device is connected to the generator via the patient connection cable. The dispersive electrode is placed on the appropriate location on the body and connected to its port on the generator. Once the system is successfully powered up, the user can set the parameters of the procedure such as the mode of operation, procedure time, procedure temperature, and the power delivery level. With the device placed in the tissue to be ablated and its electrodes deployed, RF can be turned on. The system parameters are continuously monitored and reported by the generator. If the measured parameters are outside the acceptable limits, the RF energy delivery stops and a message appears on the LCD display. The RF energy delivery ceases once the procedure is completed based on the initial user defined parameters. 2. SPECIFICATION 2.1. Product Classification Base on IEC 601-1 the product is classified as Class I, Defibrillator Proof, type BF Medical Electrical Equipment. 2.2. Power Requirements 100-240V, 50-60 Hz. Auto switching universal power supply. 2.3. Rated Input Power 600 VA 2.4. Rated Output Power 2.4.1. 150 Watts into25-100 OHMS 2.4.2. Minimum of 100 Watts into impedance ranges of 10-25 OHMS, and 100-150 OHMS 2.4.3. Power Accuracy +/-10% or 2 Watts, whichever is greater 2.4.4. Operating Frequency 460 kHz +/-5% 2.5. Environmental 2.5.1. Temperature 10-40(degrees)C 2.5.2. Humidity 85% Non-Condensing 2.6. Operating Impedance 2.6.1. 10-999 OHMS in all modes 2.6.2. Outside these ranges RF can not get activated, or if active it will turn OFF. 2.6.3. Impedance Accuracy +/-20% 2.7. Temperature Measurement 2.7.1. Up to 9 channels of temperature measurement. Six channels of device temperature monitoring and three channels of passive electrode temperature monitoring 2.7.2. T type thermocouple temperature sensors 2.7.3. Cold Junction Compensation capability 2.7.4. Temperature measurement display range 15(degrees)C to 125(degrees)C. Internal measurement capability up to 150(degrees)C minimum. 2.7.5. Temperature measurement accuracy +/-3(degrees)C for 20- 120(degrees)C, -5/+3(degrees)C for LO,-3/+5(degrees)C for HI, +5(degrees)C for OP. 2.8. Microprocessor Motorola 68HC11 2.9. Software Mainly in "C" Language Software Programming. Assembly language to be used as required. 2.10. User Interface 2.10.1. Front Panel Ports 2.10.1.1. Device Port: Provide means of connecting the device to the generator via the patient cable. The port is keyed for proper connection. 2.10.1.2. Auxiliary Port: Provides means of connecting the passive probe to the generator via the auxiliary cable. The port is keyed (different from the Device port) for proper connection. 2.10.1.3. Return Pad Port: Provides means for connecting a dual pad Dispersive Electrode to the generator. 2.10.1.4. Foot Pedal Port: Connects a pneumatic foot switch for activating and deactivating RF delivery. 2.10.2. Front Panel Switches 2.10.2.1. RF ON/OFF Switch: Push type switch to turn the RF energy delivery ON and OFF. 2.10.2.2. Track Ablation Switch: Toggles the system in and out of Track Ablation mode. In this mode the power defaults to 15 watts and can be adjusted from 0 to 25 watts. 2.10.2.3. Control Mode Switch: Sets the mode of operation. Modes are: . Automatic Temperature Control (ATC). Uses temperature as feedback for delivery of power. There are three Modes under ATC: A. ATC on average of all selected thermocouples. This is an automatic control mode of operation where the power delivery is served about a set temperature point. The measured temperature used in this control loop is the average of all selected temperature sensors of the device. B. ATC on the highest reading. This is the same as in A above, except that the measured temperature for the control loop is the highest reading of all the selected thermocouple. C. ATC on the lowest reading. This is the same as in A above. except that the measured temperature for the control loop is the lowest reading of all the selected thermocouple. . Power Control. This is an automatic control mode of operation where the power delivery is servoed about a set power. The system delivers the maximum of the preset power for the preset amount of time. In this mode measured temperatures are displayed only, and are not used in the control of the power delivery. 2.10.2.4. Set Temperature Switches: An up switch and a down switch for setting the target temperature set point in ATC mode. This is the maximum temperature the system would try to achieve and maintain during the procedure. Target temperature can be set from 50-120(degrees)C with 1(degrees)C resolution. Default is 100(degrees)C. Target temperature can be changed at any time during the procedure. 2.10.2.5. Set Power Switches: An up switch and a down switch to set the maximum power the system would deliver during the procedure. In Power Control default is set to 1 Watt, in ATC mode default is set to 150 Watts. Power set resolution is 1 Watt. Switches when held down will auto increment/decrement the Power set. 2.10.2.6. Timer Switches: Sets the time the treatment would run at the set point temperature in ATC. In Power mode this sets the RF delivery time. Time can be set from 0.1 to 60.0 minutes in 0.1 minute resolution. Once this time is counted down to zero, RF delivery ceases. An up switch and a down switch set the Timer value. These switches can be held down to auto increment decrement. A third switch (Manual Timer Switch), in the ATC mode allows the user to manually start the count down once the RF delivery starts. In ATC mode the count down starts when the measured temperature is equal or greater than the target temperature for 15 seconds. Count down stops if the measured temperature is 5(degrees)C less than the target temperature for 15 seconds. Default timer is set to 8.0 minutes. 2.10.2.7. Device Temperature Switches: Each Device Temperature sensor has an accompanying switch adjacent to its display. The switch is used to select or deselect the reading of the sensor in the temperature control algorithm. If the sensor is selected, its reading is used in the calculation of the average device temperature, or in determining the highest or lowest measured temperatures. The last sensor can not be deselected in the ATC mode prior or during RF delivery. 2.10.2.8. Auxiliary Temperature Switches: Each Auxiliary Temperature sensor has an accompanying switch adjacent to its display. These switches function similar to Device Temperature sensors. 2.10.3. Front Panel LED's 2.10.3.1. RF LED: A blue LED that flashes once a second when the system is in standby. When RF is turned on, this LED stays on continuously. The LED is OFF under system failure condition. 2.10.3.2. Track Ablation LED: A green LED that is OFF when this mode is not selected, flashing approximately every second when the mode is selected, and is ON when the mode is active. 2.10.3.3. Device Temperature LED's: Each Device Temperature sensor has an accompanying green LED adjacent to its display. The LED is ON when the temperature sensor is selected and is OFF when it is deselected. 2.10.3.4. Auxiliary Temperature LED's: Each Auxiliary Temperature sensor has an accompanying green LED adjacent to its display. The LED's function similar to Device LED's. 2.10.4. Front Panel Displays: 2.10.4.1. LCD Display: A 40 x 2 character back lit LCD. Informs the user of the status of the generator. 2.10.4.2. Control Mode Display: A two digit, seven segment, green LED display for displaying the mode of operation. It displays: A For ATC average on all selected thermocouples H For ATC on the highest thermocouple reading L For ATC on the lowest thermocouple reading P For Automatic Power Control C For Track Ablation 2.10.4.3. Set Temp Display: A three digit, seven segment, green LED display for displaying the Set Temperature in whole units of (degrees)C. 2.10.4.4. Set Temp Display: A three digit, seven segment, green LED display for displaying the Set Power in whole units of watts. 2.10.4.5. Power Delivered Display: A three digit, seven segment, green LED display for displaying instantaneous power delivered in whole units of watts. 2.10.4.6. Timer Display: A three digit, seven segment, green LED display. Displays time to 1/10 of a minute resolution. Maximum allowed time is 60.0 minutes. This display, prior to the start of the treatment, shows the time set for treatment at the set point temperature. Once the treatment starts, the display shows the remaining time of treatment at the preset temperature. If the set point is lost, the timer also stops. The count down resumes once the target temperature is reached again. During Cool Down cycle, this display counts up 0.5 minute to indicate the duration of this cycle. 2.10.4.7. RF Time Display: A three digit, seven segment, green LED display. Displays total time RF has been on in 1/10 of a minute resolution. The display resets to zero at the onset of a new treatment cycle. 2.10.4.8. Impedance Display: A three digit, seven segment, green LED display. Displays the real time impedance value of the tissue in whole units of ohms. The display shows impedance range of 0- 999(OHMS). If the measured impedance is above 999(OHMS), the display shows OP. 2.10.4.9. Device Temperature Displays: 6, three digit, seven segment, green LED displays that display the temperature readings of the device thermocouples in whole units of (degrees)C for temperatures between 15-125(degrees)C. For temperatures below 15(degrees)C, LO is displayed. For temperatures greater than 125(degrees)C and less than 150(degrees)C HI is displayed. For temperatures above 150(degrees)C OP is displayed. OP is also displayed if there are no thermocouples present in that location. If all temperature channels measure OP, the displays remain blank. When HI is displayed or when OP is displayed for values above 150(degrees)C, the actual temperature readings are used for the temperature control algorithm. 2.10.4.10. Auxiliary Temperature Displays: 3, three digit, seven segment, green LED displays that display the temperature readings of the thermocouples in the passive auxiliary probe. The auxiliary probe displays functions similar to the Device Temperature Displays. 2.10.5. Power Entry Module Located on the rear of the generator. The module is equipped with fuses on line and neutral. It also includes the main power switch. The fuses are rated at 6.3 Amps. 2.10.6. Equipotential Stud Located on the rear panel of the generator. 2.10.7. RS-232 Port DB-9 connector located on the rear panel of the generator. Unidirectional, 9600 Baud,8 bits, I stop bit, and no parity. Rx pin 2, Tx pin 3, GND pin 5. Cable is a direct 1:1 connection, no (Rx, Tx) reversal. 2.10.8. Buzzer To provide audible feedback when the state of the machine is changed, or the switches are pressed, and when RF delivery is active. 2.11. Mechanical 2.11.1. Dimensions: 14.75 IN wide, 17 IN deep, 5.25 IN high 2.11.2. Weight: 25 lbs, +10%. - 2.11.3. Enclosure: Steel enclosure with plastic front bezel and side brackets with RITA's approved colors. 2.11.4. Overlay: Front overlay with RITA's approved graphics and colors. 2.12. Shipping and Vibration ASTM-D41 69 2.13. Cleaning and Disinfecting Isopropyl alcohol can be used with no degradation in quality and finish of labels. 2.14. Standards U12601, IEC 601-1, IEC 601-1-2, IEC 601-2-2. Must meet the requirements of FDA Quality System Regulation, 21CFR820, Medical Device Directive 93/42/EEC, and Quality System Standards, ISO 9001, and EN 46001. 3. ACCESSORIES SPECIFICATIONS 3.1. Device Specification Refer to each product's Design Inputs documents. 3.2. Auxiliary Temperature Probe Refer to each product's Design Inputs documents. 3.3. Auxiliary Temperature Cable Specification 3.3.1. The auxiliary cable shall have locking, keyed connectors for connection to only the Model 500 and 1500 Series RF Generator on one end and only RITA Auxiliary Temperature Probes on other end. The connectors shall be the same on both ends. 3.3.2. The auxiliary cable shall meet the IEC 601-1 requirements for cables and interconnects. 3.3.3. The auxiliary cable shall be 120+2 inches long. - 3.3.4. The auxiliary cable shall be manufactured non-sterile but be reusable (be capable of withstanding 50 steam sterilization cycles. 3.4. Main Cable Specification 3.4.1. The main cable shall have locking, keyed connectors for connection to only the Model 1500 Series RF Generator on one end and only RITA Devices on other end. The connectors shall be the same on both ends. 3.4.2. The main cable shall meet the IEC 601-1 requirements for cables and interconnects. 3.4.3. The main cable shall be 120+2 inches long. - 3.4.4. The main cable shall be manufactured non-sterile but be reusable (be capable of withstanding 50 steam sterilization cycles. 3.5. Dispersive Electrode Specification 3.5.1. The dispersive electrode shall meet the appropriate sections of AAMI/ANSI HF18. 3.5.2. The dispersive electrode shall be capable of adhering adequately to skin without adverse skin irritation upon removal. 3.5.3. The dispersive electrode area shall be of sufficient size to dissipate energy at the maximum rated power output in accordance with ANSI/AAMI HF-18 requirements. 3.5.4. The connector on the dispersive electrode shall be compatible with the dispersive electrode connection port on the Model 1500 Series RF Generator. 3.6. Power Cord Specification 3.6.1. The power cord shall be a medical grade line cord that provides AC power to the generator 3.7. Foot Pedal Specification 3.7.1. The foot pedal shall be a pneumatic-type switch that allows continuous RF energy. 3.7.2. The connector on the foot pedal shall be compatible with the foot pedal connection port on the Model 1500 RF Generator. 3.7.3. The user shall be able to use the foot pedal to turn on RF power only when the RF Generator is in Ready mode. 3.7.4. The user shall be able to use the foot pedal to turn off RF power at any time. 3.7.5 The length of the cable connecting the foot pedal to the RF generator shall be 120+4 inches - ATTACHMENT D 1. SCOPE The purpose of this document is to describe the software used in the model 1500 RF generator and to provide a guide for its verification. This document only applies to the software used in the RITA model 1500 Generator. 2. PRODUCT DEFINITION The RITA Medical Systems, Inc. Model 1500 Series Electrosurgical Generator is designed to provide monopolar radiofrequency energy to be used for coagulation and ablation of soft tissue. The unit is specifically designed for use with RITA Electrosurgical Devices. It provides multiple temperature sensor measurements, impedance and power monitoring to assist the practitioner in delivering the desired energy to the target tissue. The RITA Electrosurgical system consists of an RF generator, a disposable electrode, here referred to as the device, a patient connection cable, a return pad, a power cord, and may also include an auxiliary temperature probe. The generator provides the RF energy to the device through the cable. The device consists of a number of deployable branches, some or all equipped with a thermocouple. The return pad also known as the dispersive electrode, provides the return path for the RF energy applied by the device. The power cord is a medical grade line cord that provides AC power to the generator. The system is capable of reading up to three auxiliary temperatures through a passive auxiliary probe. This probe is not capable of delivering any RF energy, and is used to provide temperature information about the surrounding tissue. This probe is connected to the auxiliary port of the generator via an auxiliary cable. To use the system, the generator is plugged into the wall outlet. The device is connected to the generator via the patient connection cable. The dispersive electrode is placed on the appropriate location on the body and connected to its port on the generator. Once the system is successfully powered up, the user can set the parameters of the procedure such as the mode of operation, procedure time, procedure temperature, and the power delivery level. With the device placed in the tissue to be ablated and its electrodes deployed, RF can be turned on. The system parameters are continuously monitored and reported by the generator. If the measured parameters are outside the acceptable limits the RF energy delivery stops and a message appears on the LCD display. The RF energy delivery ceases once the procedure is completed based on the initial user defined parameters. 3. OVERALL SYSTEM DESCRIPTION The RITA Generator is a class I, Defibrillator proof, type BF medical equipment. The system is powered by a universal power supply, and can deliver 150 watts of RF energy. The range of allowable impedance is 10- 999U. The system runs on a Motorola 68HC11 microprocessor with "C" programming language software. The user interface and functions are as follow: 3.1. RS-232 Unidirectional serial port located on the rear panel 3.2. RF ON/OFF Switch Turns the RF energy on and off 3.3. Foot Pedal Functions like RF ON/OFF switch 3.4. RF LED A blue LED that flashes once a second when system is in standby, and is continuously on when the RF is being delivered. 3.5. Track Ablation Switch Toggles the system in and out of Track Ablation (TA) mode. It also turns RF OFF when RF is active in TA mode. It can not turn RF ON. TA mode allows the user to ablate the needle track usually at the termination of a procedure. In this mode the power defaults to 15 watts and can be adjusted from 0 to 25 watts. Temperatures are monitored in this mode. No time information is available. The buzzer beeps intermittently in this mode. 3.6. Track Ablation LED A green LED that is off when this mode is not selected, flashing when the mode is selected, and is on when the mode is active. 3.7. Control Mode Switch Sets the mode of operation. The modes are: 1. Automatic Temperature Control (ATC). Uses temperature as feedback for delivery of power. There are three modes under ATC: A. ATC on average of all selected thermocouples. This is an automatic control mode of operation where the power. B. delivery is servo controlled about a set temperature point. The measured temperature used in this control loop is the average of all selected temperature sensors of the device. C. ATC on the highest reading. This is the same as in A above; except that the measured temperature for the control loop is the highest reading of all the selected thermocouple. D. ATC on the lowest reading. This is the same as in A above, except that the measured temperature for the control loop is the lowest reading of all the selected thermocouple. 2. Power Control. This is an automatic control mode of operation where the power delivery is servoed about a set power. The system delivers the pre set power for the pre set amount of time. In this mode measured temperatures are displayed only, and are not used in the control of the power delivery. 3.8. Control Mode Display Displays: "A" For ATC on all selected thermocouples "H" For ATC on the highest thermocouple reading "L" For ATC on the lowest thermocouple reading "P" For Automatic Power Control "C" For Track Ablation 3.9. Set Temp Display Displays the set temperature in whole units of (degrees)C. 3.10. Set Temp Switches The up arrow increments and the down arrow decrements the temperature set point. The set point is the maximum temperature the system would try to achieve and maintain during the procedure. Temperature can be set from 50-120(degrees)C. The switches can be held down for auto increment/decrement. 3.11. Set Power Switches Sets the maximum power the system would deliver during the procedure. The up arrow increments and the down arrow decrements the setting respectively. Power can be set from 1-150 watts. The switches can be held down for auto increment/decrement. 3.12. Set Power Display Displays the power setting in whole units of watts. 3.13. Power Delivered Display Displays the instantaneous power delivered in whole units of watts. 3.14 Timer Switches Sets the time that the treatment would run at the set point temperature. Once this time is count down to zero the RF delivery ceases. The up arrow switch increments and the down arrow switch decrements the desired time setting. These two switches can be held down for auto increment/decrement. The third switch allows the user to manually start the count down once the RF delivery starts. 3.15. Timer Display Displays the time to 1/10 of a minute resolution. Maximum allowed time is 60.0 minutes. This display, prior to the start of the treatment, shows the time set for treatment at the set point temperature. Once the treatment starts the display shows the remaining time of treatment at the preset temperature. If the set point is lost the timer also stops. The count down resumes once the target temperature is reached again. During the cool down cycle this display counts up 0.5 minute to indicate the duration of this cycle. 3.16. RF Time Display Displays the total time the RF has been on in 1/10 of a minute resolution. This display resets to zero at the onset of a new treatment cycle. A treatment cycle is considered to be complete if in the previous cycle the Timer reached zero or if TA mode was activated. 3.17. Impedance Display Displays the real time impedance value of the tissue in ohms. The display shows impedance range of 0-999U. When the measured impedance is above 999 U, the display shows OP. 3.18. Device Temperatures Displays the temperature readings of the device thermocouples in whole units of (degrees)C for temperatures between 15- 125(degrees)C. For temperatures below 15(degrees)C, LO is displayed. For temperatures greater than 125(degrees)C and less than 150(degrees)C, HI is displayed. For temperatures above 150(degrees)C, OP is displayed. OP is also displayed if there are no thermocouples present in that location. If all temperature channels measure OP, this may indicate that the device is not connected. In this case all temperature displays remain blank. When HI is displayed, or if OP is displayed as result of temperature going above 150(degrees)C, the actual measured temperatures are used for temperature control algorithm. 3.19. Device Switches and LED's Each device temperature display has an accompanying switch and a green LED. The switch toggles the LED on and off. When the LED is on, the reading of that temperature sensor is used in the temperature control algorithm. If the LED is off, the displayed value is not used in the calculation of the average device temperature, or in determining the highest or lowest measured temperatures. The last sensor can not be deselected in ATC mode. The sensors that indicate OP prior to the activation of RF are excluded from temp algorithm in ATC mode and their LED's are OFF. 3.20. Auxiliary Temperatures Displays the temperature readings of the thermocouples in the passive auxiliary probe. The auxiliary probe has the same features as in the device temperatures. 3.21. Aux Switches and LED's Functions similar to the switches and LED's for the device temperature and LED's. 3.22. LCD Display: A 40X2 character display used to inform the user about the status of the procedure 4. RS-232 Protocol: The format of the data string is 0XXXXXXX0XXXXXXX, with the high bit for the start of packet signal. The protocol is 9600 baud, 8 bits, no parity, 1 stop bit. The 35 byte packet is formatted as follows: Byte 0: 80(hex): bit 7 is the start of packet, bits 6-0 are the version number Byte 1: 00-7 F: counter, gets incremented by one with each packet then 127 wraps to 0 Byte 2: mode and status, 3 LO bits are mode, 0=power, 1 =ternp LO, 2=temp AVG, 3=temp HI, bits 3 and 4 are status, 0=standby, 1 =ready, 2= RF ON Bytes 9 & 10: RF time, 14 bit number, units are .10 seconds Bytes 11 & 12: impedance, 14 bit number, units are .10 ohms Bytes 13 through 24: device temps 1 through 6. 14 bits, .10 degree units Bytes 25 & 26: aux temp 1, Bytes 27,28:aux temp2, Bytes 29 & 30: aux temp 3. 14 bits, .10 degree units Bytes 31 & 32: temperature set point, 14 bits, .10 degree units Byte 33: tool thermocouple (TC) selection, bits0 -5 represent TC 1-6, 0 = OFF, 1 = ON Byte 34: aux temp selection, bits 0-2 represent TC 1 -3, 0 = OFF, 1 = ON Byte 35: Bits set to "1" if true else "0" Bit 0 is set to 0, bit 1 is Track Ablation mode on, bit 2 is target temp reached, bit 3 is target Temp lost, bit 4 is target temp not reached, bit 5 is manual activation, bit 6 is cool down, and bit 7 is RF interrupted. Byte 36: Bits set to "1" if true else "0" Bit 0 is set to 0, bit 1 is impedance too high, bit 2 is impedance too low, bit 3 is heat sink temp too high, bit 4 is voltage test failure, bit 5, 6, and 7 are set to zero. Byte 37: 7 bit checksum, 00 - 7F computed by adding all previous bytes in packet and using the 7 LSB's. 5. Operational Specifications (poling, refresh rate): The internal timer is configured to generate an interrupt 100 times a second. This interrupt is used to scan the front panel switches, feed the UART any data that is ready to be sent out, update the procedure timer, and read the next thermocouple (each device thermocouple and the cold junction compensation is read 10 times a second. The auxiliary probe temperatures are read 5 times a second). Every 10 times through the foreground loop checks the status of the generator, updates the front panel, queues up a packet of data for the serial port (from the processor buffer), resets and checks the watch dog timer, and runs the RF generator loop. During RF generator loop device impedance and split pad impedance are measured and RF power delivery is controlled. The thermocouple temperature displays, power delivered display, timer and impedance readings are updated at a rate of once per second. Other displays and LED's are updated in response to button presses and status of the system. 6. Temperature Set Point Control: At the onset of RF energy delivery, the set point temperature is first set to measured temperature. The set point is then increased at the rate of 1(degrees)C per 2.5 seconds until the desired set point temperature is reached. 7. Power Control and Power Ramp-Up: A proportional-derivative (PD) filter is used to generate the change in power demand. The PD filter consists of a proportional term, which is the difference between the desired temperature and the actual temperature multiplied by a constant, and a derivative term, which is the change in temperature error multiplied by a constant. The proportional term forces the temperature towards the target temperature and the derivative term provides damping. The demand is increased if the change in error is increasing and the demand is decreased if the change in error is decreasing. 8. Machine States: The following defines the different states of the procedure: . Power up and initial diagnostics After initial diagnostic state "STANDBY Mode" Automatic Temperature Control mode Ready state, Automatic Temperature Control mode Power Control mode Ready state, Power Control mode Track Ablation mode Ready state, Track Ablation mode RF Active, Automatic Temperature Control mode Target Temperature Not Reached state Manual Switch Activation state . Target Temperature Reached state . Target Temperature Lost state . RF Active, Power mode . Cool Down state . After Cool Down state . RF Active, Track Ablation mode . RF Interrupted state . Fatal Error state . Soft Error state 8.1. Power Up and Initial Diagnostics: In power up mode the following takes place: 8.1.1. LCD displays "SELF TEST, PLEASE WAIT REV. X.XX" 8.1.2. The beep sounds continuously during the test 8.1.3. All segments of the LED displays light up for duration of test 8.1.4. All switches are disabled 8.1.5. RF LED turns on for the duration of the test 8.1.6. TA LED turns on for the duration of the test 8.1.7. After a successful completion of the test the system goes into after initial diagnostic state 8.1.8. The following tests are performed during this period: RAM Test: RAM test is the first power-up test. First the external RAM and then the processor internal RAM are tested. The test is composed of writing alternate 0's and l's in selected addresses and verifying the contents. ROM Test: This is done by calculating a 16 bit CRC for the low and hi parts of the ROM. Voltage Tests: +5V, +12V, -12V, and the high voltage (+36V) are checked. Their values need to be within +/-10% of the nominal. Reference Impedance lest: The internal relays of the RF board are switched to the I 00~ internal reference resistor. A few watts of RF energy are generated and put into this resistor. The resistance is then calculated by reading the current through and the voltage across this resistor. The calculated value should be within +/-10% of the reference resistor value of 100. Heat Sink Temp Test: The temperature of the main transistor heat sink has to be less than 50+5(degrees)C. If not the - actions of section 8.1.9 are taken. Once the temperature is less than 50+5(degrees)C, the system exits the power-up test. - Temp Board Cal. Voltage Test: A reference voltage is read through the temp measurement circuitry. This reading has to be within 5% of nominal. Ambient Temp Test: The cold-junction compensation sensor is read. The measured temperature should be between 10- 40(degrees)C. If the measured temperature is outside the range the appropriate action is taken as described in table of section 8.1.9. Once the temperature is within the range, the system exits the power-up test. 8.1.9. If the power up test fails the following happens. To recover, the power needs to be cycled (turn OFF, then ON). NOTE: Due to the nature of the failure, the expected the following table may not result.
- ---------------------------------------------------------------------------------------------------------------------------- TEST BEEP LED SWITCHES RF TA LCD DISPLAY DISPLAYS LED LED - ---------------------------------------------------------------------------------------------------------------------------- RAM ON OFF Disabled OFF OFF "SYSTEM FAILURE 1 TURN POWER OFF" - ---------------------------------------------------------------------------------------------------------------------------- ROM ON OFF Disabled OFF OFF "SYSTEM FAILURE 2 TURN POWER OFF CRC XXXXX" - ---------------------------------------------------------------------------------------------------------------------------- Voltage ON OFF Disabled OFF OFF "SYSTEM FAILURE 3 TURN POWER OFF" - ---------------------------------------------------------------------------------------------------------------------------- Reference ON OFF Disabled OFF OFF "SYSTEM FAILURE 4 TURN Impedance POWER OFF" (lo limit test) - ---------------------------------------------------------------------------------------------------------------------------- Reference ON OFF Disabled OFF OFF "SYSTEM FAILURE 5 TURN Impedance (Hi POWER OFF" limit test) - ---------------------------------------------------------------------------------------------------------------------------- Heat Sink Temp ON 1 second Disabled OFF OFF "SYSTEM TEMP TOO HIGH" - ---------------------------------------------------------------------------------------------------------------------------- Temp Board Cal. ON OFF Disabled OFF OFF "SYSTEM FAILURE 6 TURN volt. test POWER OFF" - ---------------------------------------------------------------------------------------------------------------------------- Temp Check ON 1 second OFF Disabled OFF OFF "AMBIENT TEMP OUT OF RANGE" - ----------------------------------------------------------------------------------------------------------------------------
8.2. "Standby" Mode: 8.2.1. LCD Displays `SELF TEST COMPLETE" "PRESS RF ON/OFF SWITCH TO CONTINUE" 8.2.2. All displays are blank and LED's are OFF 8.2.3. All switches are disabled (except for RF ON/OFF) 8.2.4. Pressing RF ON/OFF puts system into automatic temp control mode 8.3. Automatic Temperature Control Mode: After successful power up and once RF switch is pressed1 the system defaults to Automatic Temperature Control Mode average of all temperatures as follows: 8.3.1 LCD displays " TEMP CONTROL: AVERAGE OF ALL" 8.3.2 If the device is not connected all device temperature LED's are off. 8.3.3 If the device is plugged in all device sensors are showing the current temperatures, their corresponding LED's are ON, and their switches are enabled. If a device does not have all the six sensors present, the position with no sensor displays OP, their corresponding LED's are OFF, and the their switches are disabled. The last LED can not be turned off (amongst the active and passive probe sensors, at least one sensor needs to be selected for the ATC). 8.3.4 The same applies for the passive probe temperature displays, LED's, and switches. LED's are OFF by default. 8.3.5 RF LED flashes once a second. 8.3.6 RF switch is enabled. 8.3.7 TA LED is OFF. 8.3.8 TA switch is enabled. 8.3.9 Control Mode display shows A (under default condition), and toggles through A, H, L, and P, sequentially. Every time the mode is changed the buzzer beeps with a short burst. 8.3.10 The Set Temp display shows 100. The temp switches are enabled. The switch with up arrow increments and the switch with a down arrow decrements the setting in whole units of degree C. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The temp can be set between 50-120(degrees)C. 8.3.11 Power is defaulted to 150 watts. The power set switches are enabled. The switch with up arrow increments and the switch with a down arrow decrements the setting in whole units of watt. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The power can be set between 1-150 W. 8.3.12 The Timer displays 10.0. The switch with up arrow increments and the switch with a down arrow decrements the setting in units of 1/10 of a minute. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The time can be set between 0-60.0 minutes. The Manual Timer switch is disabled. 8.3.13 Power Delivered display shows 1. 8.3.14 RF Time display shows 0.0 or previously accumulated time. 8.3.15 Impedance display is live. 8.3.16 In Automatic Temperature control mode if the mode is changed to L (Control on the lowest temp reading) or H (control on the highest temperature reading) all the above applies with the exception that the LCD display indicates " TEMP CONTROL: LOWEST OF ALL" and TEMP CONTROL: HIGHEST OF ALL", respectively. 8.4 Ready State Temp Control Mode: When the procedure parameters are in the acceptable range, i.e.; device impedance is in operating range, the system goes into the ready mode and the LCD displays "READY TEMP CONTROL AVERAGE OF ALL", "READY " TEMP CONTROL: LOWEST OF ALL" or "READY TEMP CONTROL: HIGHEST OF ALL". All of the above conditions listed in section 8.3 apply. 8.5 Power Control Mode: 8.5.1 LCD displays " POWER CONTROL" 8.5.2 If the device is not connected all device temperature LED's are off. 8.5.3 If the device is plugged in all the device sensors are showing the current temperatures, their corresponding LED's are OFF, and their switches are disabled. If a device does not have all six sensors present, the position with no sensor displays OP. 8.5.4 The same applies for the passive probe temperature displays, LED's, and switches. 8.5.5 RF LED flashes once a second. 8.5.6 RF switch is enabled. 8.5.7 TA LED is off. 8.5.8 TA switch is enabled. 8.5.9 Control Mode displays P, and can toggle through other modes (P, A, H, and L) sequentially. Every time the mode is changed the buzzer beeps with a short burst. 8.5.10 The Set Temp display is blank. The temp switches are disabled. 8.5.11 Power is defaulted to 1 watt. The power set switches are enabled. The switch with up arrow increments and the switch with a down arrow decrements the setting in whole units of watt. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The power can be set between 1-150 W. 8.5.12 The Timer display shows 10.0. The switch with up arrow increments and the switch with a down arrow decrements the setting in units of 1110 of a minute. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The time can be set between 0-60.0 minutes. The Manual Timer switch is disabled. 8.5.13 Power Delivered display shows 1. 8.5.14 RF Time display shows 0.0 or previously accumulated time. 8.5.15 Impedance display is live. 8.6 Ready State, Power Control Mode: When the procedure parameters are in the acceptable range, i.e.; device impedance is in operating range, the system goes into the ready mode and the LCD displays "READY POWER CONTROL". All of the above conditions listed in section 8.5 apply. 8.7 Track Ablation Mode: Pressing the Track Ablation switch puts the system in Track Ablation mode. The following happens: 8.7.1 LCD displays "TRACK ABLATION" 8.7.2 All device temperature LED's are off. 8.7.3 If the device is plugged in all the device sensors are showing the current temperatures, their corresponding LED's are OFF, and their switches are disabled. If a device does not have all six sensors present, the position with no sensor displays OP. 8.7.4 The same applies for the passive probe temperature displays, LED's, and switches. 8.7.5 RF LED flashes once a second. 8.7.6 RF switch is enabled. 8.7.7 TA LED flashes once a second. 8.7.8 TA switch is enabled. 8.7.9 Control Mode display shows C. The Control Mode switch is enabled. Activation of Mode Select switch puts the system back into the mode prior to selection of Track Ablation mode with all the parameters preserved from the last setting. Every time the mode is changed the buzzer beeps with a short burst. 8.7.10 The Set Temp display is blank. The Set Temp switches are disabled. 8.7.11 Power is defaulted to 15 watts. The Power Set switches are enabled. The switch with up arrow increments and the switch with a down arrow decrements the setting in whole units of watt. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The power can be set between 1-25W. 8.7.12 The Timer display is blank. All three Timer switches are disabled. 8.7.13 Power Delivered display shows 1. 8.7.14 RF Time display shows 0.0 or previously accumulated time. 8.7.15 Impedance display is live. 8.8 Ready State, Track Ablation Mode: When the procedure parameters are in the acceptable range, i.e.; device impedance is in operating range, the system goes into the ready mode and the LCD displays "READY TRACK ABLATION". All of the above conditions listed in section 8.7 apply. 8.9 RF Active, Automatic Temperature Control Mode: 8.9.1 Once the RF switch is activated, the system enters the RF active state LCD displays "RF ON TEMP CONTROL: AVERAGE OF ALL HEATING TO TARGET TEMPERATURE" Note: For H and L modes, LCD displays: "RF ON TEMP CONTROL: HIGHEST OF ALL HEATING TO TARGET TEMPERATURE". , and RF ON TEMP CONTROL: LOWEST OF ALL HEATING TO TARGET TEMPERATURE". All other conditions apply. 8.9.2 The buzzer beeps for 1 second. 8.9.3 Device temperature displays are live and their switches are enabled. The LED is ON for the selected sensors. If a device does not have all the six sensors present, the position with no sensor displays OP, their corresponding LED's are OFF, and the their switches are disabled. The last LED can not be turned off (amongst the active and passive probe sensors, at least one sensor needs to be selected for the ATC). 8.9.4 The same applies for the passive probe temperature displays, LED's, and switches. 8.9.5 RF LED is on. 8.9.6 Buzzer beeps with a short burst once every four seconds. 8.9.7 RF switch is enabled. 8.9.8 TA LED is off. 8.9.9 TA switch is disabled. 8.9.10 Control Mode displays A (under default condition), H, or L. The control mode switch is disabled. 8.9.11 The Set Temp display shows the set temp. The temp switches are enabled. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The temperature can be set between 50-120(degrees) C. 8.9.12 Power display shows the setting. The Power Set switches are enabled. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The power can be set between 1-150 W. 8.9.13 The Timer display shows the set time. The switches are enabled. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The time can be set between 0- 60.0 minutes. The Manual Timer switch is enabled. 8.9.14 Power Delivered display is live. 8.9.15 RF Time display counts up in 1/10 minute increments. 8.9.16 Impedance display is live. 8.9.17 Once the target temperature is reaches the system enters the TARGET TEMPERATURE REACHED state. 8.10. Target Temperature Not Reached State: In ATC mode if the desired temp is not reached within 10 minutes from the start of RF delivery the following happens: 8.10.1 LCD displays `READY TEMP CONTROL: AVERAGE OF ALL TARGET TEMP NOT REACHED" Note: For H and L modes, the LCD displays: "READY TEMP CONTROL: HIGHEST OF ALL TARGET TEMP NOT REACHED". And, "READY TEMP CONTROL: LOWEST OF ALL TARGET TEMP NOT REACHED". All other conditions apply. 8.10.2 The buzzer beeps for 1 second. 8.10.3 Device temperature displays are live and their switches are enabled. The LED is ON for the selected sensors. If a device does not have all the six sensors present, the position with no sensor displays OP, their corresponding LED's are OFF, and the their switches are disabled. The last LED can not be turned off (amongst the active and passive probe sensors, at least one sensor needs to be selected for the ATC). 8.10.4 The same applies for the passive probe temperature displays, LED1s, and switches. 8.10.5 RF LED flashes once a second. 8.10.6 RF switch is enabled. 8.10.7 TA LED is OFF. 8.10.8 TA switch is enabled. 8.10.9 Control Mode displays A (under default condition), H, or L. The control mode switch is enabled. 8.10.10 The Set Temp display shows the set temp. The temp switches are enabled. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The temperature can be set between 50-120(degrees)C. 8.10.11 Power Set display shows the setting. The power set switches are enabled. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The power can be set between 1-150W. 8.10.12 The Timer displays the set time. The switches are enabled. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The time can be set between 0-60.0 minutes. The Manual Timer switch is disabled. 8.10.13 Power Delivered display shows 1. 8.10.14 RF Time display shows accumulated RF time and is frozen. 8.10.l5 Impedance display is live. 8.11 Manual Switch Activation state: In ATC mode if the Manual Timer Switch is pressed the following happens; 8.11.1 LCD displays "RF ON TEMP CONTROL: AVERAGE OF ALL MANUAL COUNT DOWN ACTIVATED" Note: For H and L modes the LCD displays: "RF ON TEMP CONTROL: HIGHEST OF ALL MANUAL COUNT DOWN ACTIVATED". And, "RF ON TEMP CONTROL: LOWEST OF ALL MANUAL COUNT DOWN ACTIVATED". All other conditions apply. 8.11.2 The buzzer beeps for 1 second. 8.11.3 Device temperature displays are live and their switches are enabled. The LED is ON for the selected sensors. If a device does not have all the six sensors present, the position with no sensor displays OP, their corresponding LED's are OFF, and their switches are disabled. The last LED can not be turned off (amongst the active and passive probe sensors, at least one sensor needs to be selected for the ATC). 8.11.4 The same applies for the passive probe temperature displays, LED's, and switches. 8.11.5 RF LED is ON. 8.11.6 Buzzer beeps with a short burst once every four seconds. 8.11.7 RF switch is enabled. 8.11.8 TA LED is OFF. 8.11.9 TA switch is disabled. 8.11.10 Control Mode display shows A (under default condition), H or L. The control mode switch is disabled. 8.11.11 The Set Temp display shows the set temp. The temp switches are enabled. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The temperature can be set between 50-120(degrees) C. 8.11.12 Power display shows the setting. The power set switches are enabled. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The power can be set between 1-150 W. 8.11.13 The Timer display counts down. The switches are enabled. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The time can be set between 0-60.0 minutes. 8.11.14 The Manual Timer switch is disabled. 8.11.15 Power Delivered display is live. 8.11.16 RF Time display is live and shows accumulated RF time. 8.11.17 Impedance display is live. 8.11.18 Once Timer counts down to zero the system goes into COOL DOWN state. 8.12 Target Temperature Reached state: In ATC mode, once the measured temperature is equal or greater than the target temperature for 15 seconds the system enters the Target Temperature Reached state. The following happens: 8.12.1. LCD displays `RF ON TEMP CONTROL: AVERAGE OF ALL TARGET TEMPERATURE REACHED" Note: For H and L modes, the LCD displays: "RF ON TEMP CONTROL: HIGHEST OF ALL TARGET TEMPERATURE REACHED". And, "RF ON TEMP CONTROL LOWEST OF ALL TARGET TEMPERATURE REACHED". All other conditions apply. 8.12.2 The buzzer beeps for 1 second. 8.12.3 Device temperature displays are live and their switches are enabled. The LED is ON for the selected sensors. If a device does not have all the six sensors present, the position with no sensor displays OP, their corresponding LED's are OFF, and the their switches are disabled. The last LED can not be turned off (amongst the active and passive probe sensors, at least one sensor needs to be selected for the ATC). 8.12.4 The same applies for the passive probe temperature displays, LED's, and switches. 8.12.5 RF LED is ON. 8.12.6 Buzzer beeps with a short burst once every four seconds. 8.12.7 RF switch is enabled. 8.12.8 TA LED is OFF. 8.12.9 TA switch is disabled. 8.12.10 Control Mode displays A (under default condition), H or L. The control mode switch is disabled. 8.12.11 The Set Temp display shows the set temp. 8.12.12 The Set Temp switches are enabled. Every time the setting is increased or decreased the change is accompanied by a short beep from the buzzer. The temp can be set from 50- 120(degrees)C. 8.12.13 Power display shows the setting. The Power Set switches are enabled. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The power can be set between 1-150W. 8.12.14 The Timer display counts down. The switches are enabled. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The time can be set between 0-60.0 minutes. 8.12.15 The Manual Timer switch is disabled. 8.12.16 Power Delivered display is live. 8.12.17 RF Time display is live and shows accumulated RF time. 8.12.18 Impedance display is live. 8.12.19 Once Timer counts down to zero the system goes into COOL DOWN state. 8.13 Target Temperature Lost state: Once the target temperature is reached, if the measured temperature drops below set temperature by more than 5(degrees)C for more than 15 seconds, the system enters Target Temperature Lost state. The following happens: 8.13.1. LCD displays "RF ON TEMP CONTROL: AVERAGE OF ALL TARGET TEMPERATURE LOST" Note: For H and L modes, the LCD displays: "RF ON TEMP CONTROL: HIGHEST OF ALL TARGET TEMPERATURE LOST", and "RF ON TEMP CONTROL: LOWEST OF ALL TARGET TEMPERATURE LOST". All other conditions apply. 8.13.2 The buzzer beeps for 1 second. 8.13.3 Device temperature displays are live and their switches are enabled. The LED is ON for the selected sensors. If a device does not have all the six sensors present, the position with no sensor displays OP, their corresponding LED's are OFF, and the their switches are disabled. The last LED can not be turned off (amongst the active and passive probe sensors, at least one sensor needs to be selected for the ATC). 8.13.4 The same applies for the passive probe temperature displays, LED's and switches. 8.13.5 RF LED is ON. 8.13.6 Buzzer beeps with a short burst once every four seconds. 8.13.7 RF switch is enabled. 8.13.8 TA LED is OFF. 8.13.9 TA switch is disabled. 8.13.10 Control Mode displays A (under default condition) H, or L. The control mode switch is disabled. 8.13.11 The Set Temp display shows the set temp. The Set Temp switches are enabled. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The temperature can be set between 50-120(degrees)C. 8.13.12 Power display shows the setting. The Power Set switches are enabled. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The power can be set between 1-150W. 8.13.13 The Timer display shows the remaining time and is frozen. The switches are enabled. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The time can be set between 0-60.0 minutes. The Manual Timer switch is enabled. 8.13.14 Power Delivered display is live. 8.13.15 RF Time display is live and shows accumulated RF time. 8.13.16 Impedance display is live. 8.13.17 If Temperature is not reached in 10 mm, system goes into target temperature not reached state. 8.14 RF Active, Power Mode: Once the RF switch is activated, the system enters the RF active state: 8.14.1 LCD displays "RF ON POWER CONTROL" 8.14.2 The buzzer beeps for 1 second. 8.14.3 Device temperature displays are live and their switches are disabled. The LED's are off for all the sensors. If a device does not have all the six sensors present, the position with no sensor displays OP. 8.14.4 The same applies for the passive probe temperature displays, LED's, and switches. 8.14.5 RF LED is ON. 8.14.6 Buzzer beeps with a short burst once every four seconds. 8.14.7 RF switch is enabled. 8.14.8 TA LED is OFF. 8.14.9 TA switch is disabled. 8.14.10 Control Mode displays P. The control mode switch is disabled. 8.14.11 The Set Temp display is blank. The Set Temp switches are disabled. 8.14.12 Set Power display shows the setting. The Power Set switches are enabled. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The power can be set between 1-150W. 8.14.13 The Timer display is live and counts down. The switches are enabled. Every time the setting is increased or decreased the change is accompanied by a short burst from the buzzer. The time can be set between 0-60.0 minutes. The Manual Timer switch is disabled. 8.14.14 Power Delivered display is live. 8.14.15 RF Time display counts up in 1/10 minute increments. 8.14.16 Impedance display is live. 8.15 Cool Down state: In RF power delivery mode, once the Timer counts down to 0.0, the system is entered into Cool Down mode for 30 seconds. The following happens: 8.15.1 Depending on the mode, LCD displays: "RF OFF TEMP CONTROL: AVERAGE OF ALL COOL DOWN CYCLE" or, "RF OFF TEMP CONTROL: HIGHEST OF ALL COOL DOWN CYCLE" or, "RF OFF TEMP CONTROL: LOWEST OF ALL COOL DOWN CYCLE" or, "RF OFF POWER CONTROL COOL DOWN CYCLE" 8.15.2 The buzzer beeps for 1 second. 8.15.3 Device temperature displays are live and their switches are disabled. The LED is ON for the selected sensors from the previous RF active state (ATC mode). If a device does not have all the six sensors present, the position with no sensor displays OP, their corresponding LED's are OFF, and the their switches are disabled. In power mode, the LED's are ON for positions that are not OP. 8.15.4 The same applies for the passive probe temperature displays, LED's, and switches. 8.15.5 RF LED flashes once a second. 8.15.6 RF switch is disabled. 8.15.7 TA LED is OFF. 8.15.8 TA switch is enabled. 8.15.9 Control Mode displays the previous mode. The control mode switch is disabled. 8.15.10 The Set Temp display shows the set temp. The Set Temp switches are disabled. 8.15.11 Power Set display shows the setting. The Power Set switches are disabled. 8.15.12 The Timer display counts up from 0.0 to 0.5. The switches are disabled. The Manual Timer switch is disabled. 8.15.13 Power Delivered display shows 1. 8.15.14 RF Time display shows accumulated RF time and is frozen. Impedance display is live. 8.15.5 Impedance display is live. 8.16 After Cool Down State: After the completion of the 30 second Cool Down the system enters the After Cool Down state. The following happens: 8.16.1 Depending on the mode, LCD displays: "READY TEMP CONTROL: AVERAGE OF ALL COOL DOWN CYCLE COMPLETE" or, "READY TEMP CONTROL: HIGHEST OF ALL COOL DOWN CYCLE COMPLETE" or, "READY TEMP CONTROL: LOWEST OF ALL COOL DOWN CYCLE" or, "READY POWER CONTROL COOL DOWN CYCLE COMPLETE" 8.16.2 The buzzer beeps for 1 second. 8.16.3 Device temperature displays are live and their switches are enabled. The LED is ON for the selected sensors. If a device does not have all the six sensors present, the position with no sensor displays OP, their corresponding LED's are OFF, and the their switches are disabled. (In power mode the switches are disabled and the LED's are off) 8.16.4 The same applies for the passive probe temperature displays, LED's, and switches. 8.16.5 RF LED flashes once a second. 8.16.6 RF switch is enabled. 8.16.7 TA LED is off. 8.16.8 TA switch is enabled. 8.16.9 Control Mode displays the previous mode. The control mode switch is enabled. 8.16.10 The Set Temp display shows the previous set temp (for P mode it is blank and switches are disabled). The Set Temp switches are enabled. 8.16.11 Power display shows the previous setting. The Power Set switches are enabled. 8.16.12 The Timer display shows the previous set time. The Timer switches are enabled. The Manual Timer switch is disabled. 8.16.13 Power Delivered display shows 1. 8.16.14 RF Time display shows accumulated RF time. The time resets to zero at the onset of the next treatment cycle. 8.16.15 Impedance display is live. 8.17 RF Active, Track Ablation Mode: When in TA mode, pressing the RF switch puts the system in this mode: 8.17.1 LCD displays "RF ON TRACK ABLATION" 8.17.2 All device temperature LED's are OFF. 8.17.3 Temp displays show the current temperatures, and their switches are disabled. If a device does not have all six sensors present, the position with no sensor displays OP. 8.17.4 The same applies for the passive probe temperature displays, LED's, and switches. 8.17.5 RF LED is ON. 8.17.6 Buzzer gives two consecutive short beeps every one second. 8.17.7 RF switch is enabled. 8.17.8 TA LED is ON. 8.17.9 TA switch is enabled (turns RF OFF). 8.17.10 Control Mode display shows C. The Control Mode switch is disabled. 8.17.11 The Set Temp display is blank. The Set Temp switches are disabled. 8.17.12 Set Power display indicates the setting. The power set switches are enabled. The switch with up arrow increments and the switch with a down arrow decrements the setting in whole units of watt. The power can be set between 1-25W. 8.17.13 The Timer display is blank. Timer switches are disabled. 8.17.14 Manual Timer switch is disabled. 8.17.15 Power Delivered display is live. 8.17.16 RF Time display shows the accumulated time and is frozen. 8.17.17 Impedance display is live. 8.18 RF Interrupted State: 8.18.1 RF Interrupted, Track Ablation state: During the RF ON Track Ablation state, if the RF switch or the TA switch is pressed the LCD displays: "READY TRACK ABLATION RF WAS TURNED OFF" and the system goes into System Ready, Track Ablation state. However, the power setting is the previous setting and not the default setting of 15 Watts. 8.18.2 RF Interrupted state, Power Control mode: During RF delivery if the RF switch is pressed the RF delivery is interrupted. In Power Control mode the following happens: 8.18.2.1 LCD displays: "READY POWER CONTROL" RF WAS TURNED OFF" 8.18.2.2 Device sensors are showing the current temperatures, their corresponding LED's are OFF, and their switches are disabled. If a device does not have all six sensors present, the position with no sensor displays OP. 8.18.2.3 The same applies for the passive probe temperature displays, LED's, and switches. 8.18.2.4 RF LED flashes once a second. 8.18.2.5 RF switch is enabled. 8.18.2.6 Track Ablation LED is off. 8.18.2.7 Track Ablation switch is enabled. 8.18.2.8 Control Mode displays P, and the Control Mode switch is enabled. 8.18.2.9 The Set Temp display is blank. The temp switches are disabled. 8.18.2.10 Power display shows the previous set power. The power set switches are enabled. The power can be set between 1-150 W. 8.18.2.11 The Timer display shows the remaining time and is frozen. The Timer switches are enabled. The Manual Timer switch is disabled. 8.18.2.12 Power Delivered display shows 1. 8.18.2.13 RF Time display shows accumulated RF time and is frozen. 8.18.2.14 Impedance display is live. 8.18.3 RF Interrupted state, ATC Mode: In ATC mode (A, H, or L), when RF delivery is interrupted the following happens: 8.18.3.1 Depending on the mode, the LCD displays: "READY TEMP CONTROL: AVERAGE OF ALL RF WAS TURNED OFF" "READY TEMP CONTROL: HIGHEST OF ALL RF WAS TURNED OFF" "READY TEMP CONTROL: LOWEST OF ALL RF WAS TURNED OFF" 8.18.3.2 All the device sensors are showing the current temperatures, their corresponding LED's on the selected sensors are ON. Temp switches are enabled. If a device does not have all the six sensors present, the position with no sensor displays OP, their corresponding LED's are OFF, and the their switches are disabled. The last LED can not be turned off (amongst the active and passive probe sensors, at least one sensor needs to be selected for the ATC). 8.18.3.3 The same applies for the passive probe temperature displays, LED's, and switches. 8.18.3.4 RF LED flashes once a second. 8.18.3.5 RF switch is enabled. 8.18.3.6 Track Ablation LED is OFF. 8.18.3.7 Track Ablation switch is enabled. 8.18.3.8 Control Mode display shows A, H, or L. The mode switch is enabled. 8.18.3.9 The Set Temp display shows the set temperature. The Set Temp switches are enabled. 8.18.3.10 Power Set shows the previous power setting. The Power Set switches are enabled. 8.18.3.11 The Timer displays the remaining time. The Timer switches are enabled. The Manual Timer switch is disabled. 8.18.3.12 Power Delivered display shows 1. 8.18.3.13 RF Time display shows the accumulated RF time and is frozen. 8.18.3.14 Impedance display is live. 8.19 Fatal Error State: A Fatal Error State is a state caused by a system failure at any time after the completion of the initial power-up test. The system can only recover by cycling the power. The following tests are performed: Hardware Watch Dog Timer: Every 0.25 second the processor refreshes the watch dog. If this does not happen the RF is disabled. The watch dog status is checked once a second. If the watch dog is tripped, the system halts. Voltage Check: The internal voltages are checked once a second as described in sections 8.1.8 and 8.1.9. Foreground Loop Test: The foreground loop has to be completed before it can be run again. Temp Board Cal. Voltage Test: The Ref voltage through temp signal processing circuitry is read once a second. Under this condition the following happens: NOTE: Due to the nature of the failure, the expected outcome outlined below may not result 8.19.1 LCD displays "SYSTEM FAILURE X TURN POWER OFF" (Where X is 3 for voltage test and 6 for temp cal. voltage test) 8.19.2 All device temperature LED's are OFF. 8.19.3 Device temperature displays are blank, and their switches are disabled. 8.19.4 Passive probe temperature displays are blank. Their LED's are OFF and switches are disabled. 8.19.5 RF LED is OFF. 8.19.6 Buzzer beeps continuously. 8.19.7 RF switch is disabled. 8.19.8 Track Ablation LED is OFF. 8.19.9 Track Ablation switch is disabled. 8.19.10 Control Mode display is blank. The control mode switch is disabled. 8.19.11 The Set Temp display is blank. The temp switches are disabled. 8.19.12 Set Power display is blank. The Power Set switches are disabled. 8.19.13 The Stop Timer display is blank. All three Stop Timer switches are disabled. 8.19.14 Power Delivered display is blank. 8.19.15 RF Time display is blank. 8.19.16 Impedance display is blank. 8.20 Soft Error State: At the completion of the power up test, in addition to the tests mentioned in section 8.19, the system routinely monitors the device impedance and heat sink temperature. The output current is also monitored and is limited to 3.5 Amps by adjusting the output power. This action is internally controlled and does not result in any prompts. 8.20.1 Impedance Out of Range state: If impedance is out of the allowable range, prior to delivery of RF energy, activation of RF switch keeps the system in the current mode. Additionally the buzzer beeps with three half second beeps and on the second line of the LCD display "IMPEDANCE TOO HIGH" or "IMPEDANCE TOO LOW" is displayed (any existing text on the second line is replaced with the impedance too high or too low message). In this state once the impedance measurement is within the operational range, the impedance too high or too low message is removed from the second line of the LCD and the buzzer beeps once for one second. If correcting the impedance out of range issue makes the system ready for RF delivery, the system goes directly into ready state and the impedance too high or too low message is removed. The acceptable impedance range in all modes is 10-999U. If impedance goes out of the allowable range during RF delivery, the system remains in the current mode with the LCD displaying "RF OFF" on the first line along with the mode display. Additionally on the second line of the LCD "IMPEDANCE TOO HIGH" or "IMPEDANCE TOO LOW" is displayed (any existing text on the second line is replaced with the impedance too high or too low message). The buzzer gives three half second beeps. In this mode once the impedance measurement is within the operational range, the "RF OFF" in the first line is replaced with "READY" and the buzzer beeps once for one second. The second line remains until RF is activated or if the mode is changed. 8.20.2 Heat Sink Temperature Test: After the completion of the initial power-up tests, the temperature of the heat sink is routinely measured. If the temperature is above 60(degrees)C the system remains in the current mode with the LCD displaying "RF OFF" on the first line along with the mode display. Additionally on the second line of the LCD "SYSTEM TEMP TOO HIGH" is displayed (any existing text on the second line is replaced with the system temp too high message). The buzzer gives three half second beeps. In this mode once the temperature of the heat sink is less than 50(degrees)C the "RF OFF" in the first line is replaced with "READY" and the buzzer beeps once for one second. The second line of the LCD will be blank. MASTER DOCUMENT PREPARATION VERIFIED BY:________________________________________ DATE:________________________ EX-23.1 6 0006.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated April 10, 2000, relating to the financial statements of RITA Medical Systems, Inc., which appears in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP PRICEWATERHOUSECOOPERS LLP San Jose, California July 24, 2000 -----END PRIVACY-ENHANCED MESSAGE-----