-----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, CQmnNdTKIlqGlNQrjw/Vvb2vhpDDSxitMz+C82mIjnPYpEKo7nYCr/xakA6Dp2Jm FDJZ5IV6yq3388es9As4pQ== 0001012870-01-502797.txt : 20020410 0001012870-01-502797.hdr.sgml : 20020410 ACCESSION NUMBER: 0001012870-01-502797 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RITA MEDICAL SYSTEMS INC CENTRAL INDEX KEY: 0001056421 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 943199149 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-30959 FILM NUMBER: 1786550 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 10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 000-30959 ================================================================================ RITA MEDICAL SYSTEMS, INC. (Exact name of registrant as specified in its charter) Delaware 94-3199149 (State or other jurisdiction of incorporation (I.R.S. Employer Identification No.) or organization)
967 N. Shoreline Blvd. Mountain View, CA 94043 (Address of principal executive offices, including zip code) 650-314-3400 (Registrant's telephone number, including area code) ================================================================================ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| As of October 31, 2001, there were 14,532,954 shares of the registrant's Common Stock outstanding. INDEX -----
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited). Condensed Balance Sheets - September 30, 2001 and 3 December 31, 2000 Condensed Statements of Operations - Three months and nine months 4 ended September 30, 2001 and 2000 Condensed Statements of Cash Flows - nine months 5 ended September 30, 2001 and 2000 Notes to Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and 8 Results of Operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk. 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 16 Item 2. Changes in Securities and Use of Proceeds. 17 Item 3. Defaults Upon Senior Securities. 17 Item 4. Submission of Matters to a Vote of Security Holders. 17 Item 5. Other Information. 17 Item 6. Exhibits and Reports on Form 8-K. 17 SIGNATURES 18 EXHIBIT INDEX 19
-2- PART I. FINANCIAL INFORMATION Item 1. Financial Statements RITA MEDICAL SYSTEMS, INC. CONDENSED BALANCE SHEETS (In thousands, unaudited)
September 30, December 31, 2001 2000 ---- ---- Assets Current assets: Cash and cash equivalents ....................................... $ 11,927 $ 12,676 Marketable securities ........................................... 15,027 27,381 Accounts receivable, net ........................................ 4,364 2,437 Inventories, net ................................................ 2,504 1,638 Prepaid assets and other current assets ......................... 1,111 823 ------------ ---------- Total current assets ......................................... 34,933 44,955 Long term securities ................................................ 1,579 - Property and equipment, net ......................................... 1,923 1,255 Intangibles and other assets ........................................ 144 60 ------------ ---------- Total assets ................................................. $ 38,579 $ 46,270 ============ ========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable ................................................ $ 711 $ 425 Accrued liabilities ............................................. 1,979 1,895 Current portion of long term obligations ........................ 224 1,123 ------------ ---------- Total current liabilities .................................... 2,914 3,443 Long term obligations .............................................. 42 180 ------------ ---------- Total liabilities ............................................ 2,956 3,623 ------------ ---------- Contingencies (Note 5) Stockholders' equity Common stock, $0.001 par value .................................. 15 14 Additional paid-in capital ...................................... 88,458 88,421 Deferred stock compensation ..................................... (2,208) (4,202) Receivable from stockholders .................................... (97) (164) Accumulated other comprehensive income .......................... 89 13 Accumulated deficit ............................................. (50,634) (41,435) ------------ ---------- Total stockholders' equity ................................... 35,623 42,647 ------------ ---------- Total liabilities and stockholders' equity ................... $ 38,579 $ 46,270 ============ ==========
See accompanying notes -3- RITA MEDICAL SYSTEMS, INC. CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share data, unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ----------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Sales ...................................................... $ 3,707 $ 2,712 $ 10,780 $ 6,980 Cost of goods sold ......................................... 1,472 1,622 4,912 4,298 --------- -------- --------- --------- Gross profit ........................................ 2,235 1,090 5,868 2,682 --------- -------- --------- --------- Operating expenses Research and development ............................... 1,627 1,262 4,837 4,335 Selling, general and administrative .................... 4,016 3,023 11,539 8,347 --------- -------- --------- --------- Total operating expenses ............................ 5,643 4,285 16,376 12,682 --------- -------- --------- --------- Loss from operations ....................................... (3,408) (3,195) (10,508) (10,000) Interest income and other expense, net ..................... 324 239 1,309 259 --------- -------- --------- --------- Net loss ................................................... $ (3,084) $ (2,956) $ (9,199) $ (9,741) ========= ======== ========= ========= Net loss per share, basic and diluted ...................... $ (0.21) $ (0.31) $ (0.64) $ (2.47) ========= ======== ========= ========= Shares used in computing basic and diluted net loss per share ......................................... 14,406 9,607 14,299 3,945
See accompanying notes -4- RITA MEDICAL SYSTEMS, INC. CONDENSED STATEMENTS OF CASH FLOWS (In thousands, unaudited)
Nine Months Ended September 30, ------------------------- 2001 2000 --------- ----------- Operating activities: Net loss ................................................................................... $ (9,199) $ (9,741) Adjustments to reconcile net loss to net cash used in operating activities: ................ Depreciation and amortization ....................................................... 704 784 Amortization of stock-based compensation ............................................ 1,417 4,022 Allowance for doubtful accounts ..................................................... 389 34 Allowance for inventory reserve ..................................................... 223 (28) Changes in operating assets and liabilities Accounts receivable ............................................................... (2,316) (1,159) Inventory ......................................................................... (1,090) (586) Prepaid and other current assets .................................................. (289) (421) Accounts payable and accrued liabilities .......................................... 370 186 -------- -------- (9,791) (6,909) Net cash used in operating activities .......................................... -------- -------- Cash flows from investing activities: Purchase of property and equipment .................................................. (1,364) (344) Purchases of short term investments ................................................. (15,087) (12,370) Maturities of short term investments ................................................ 27,499 3,556 Purchases of long term investments .................................................. (1,560) - Capitalization of patent litigation costs ........................................... (88) - Other assets ........................................................................ 5 5 -------- -------- Net cash provided by (used in) investing activities ............................ 9,405 (9,153) -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock .............................................. 682 38,998 Proceeds from borrowings of long term debt .......................................... - 1,500 Payments on long term debt .......................................................... - (3,000) Proceeds from revolving term loan ................................................... 25 770 Payments on revolving term loan ..................................................... (858) (65) Payments on capital lease obligations ............................................... (212) (124) -------- -------- Net cash provided by (used in) financing activities ............................ (363) 38,079 -------- -------- Net increase (decrease) in cash and cash equivalents ...................................... (749) 22,017 Cash and cash equivalents at beginning of period .......................................... 12,676 7,067 -------- -------- Cash and cash equivalents at end of period ................................................ $ 11,927 $ 29,084 ======== ========
See accompanying notes -5- RITA MEDICAL SYSTEMS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation The accompanying unaudited condensed financial statements have been prepared by RITA Medical Systems, Inc. (the "Company") in accordance with accounting principles generally accepted in the United States of America for interim financial information. These principles are consistent in all material respects with those applied in the Company's financial statements contained in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2000 and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission. However, interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited condensed financial statements contain all adjustments (all of which are normal and recurring in nature) necessary to present fairly the financial position, results of operations and cash flows of the Company for the periods indicated. Interim results of operations are not necessarily indicative of the results to be expected for the full year or any other interim periods. These condensed financial statements should be read in conjunction with the financial statements and footnotes thereto for the year ended December 31, 2000 contained in the Company's annual report on Form 10-K. 2. Net loss per share Basic earnings (loss) per share figures are calculated based on the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share figures include the dilutive effect of common stock equivalents consisting of stock options, warrants, shares subject to repurchase and shares issuable upon conversion of preferred stock provided that the inclusion of such common stock equivalents is not antidilutive. For the three and nine month periods ended September 30, 2001 and September 30, 2000, the Company has excluded potentially dilutive securities from earnings per share computations as they have an antidilutive effect due to the Company's net losses. The following weighted options and warrants (prior to application of the treasury stock method), convertible preferred shares (on an as-if-converted method) and common shares subject to repurchase were so excluded (in thousands):
Three months ended Nine months ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- Options and warrants ............................................ 2,438 2,139 2,358 2,071 Convertible preferred stock ..................................... - 3,011 - 6,945 Common shares subject to repurchase ............................. 61 98 69 77 ------ ------ ------ ------ 2,499 5,248 2,427 9,093 ====== ====== ====== ======
The reconciliation of total outstanding common shares to shares used in determining net loss per share is as follows (in thousands):
Three months ended Nine months ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- Weighted average shares of common stock outstanding ............. 14,467 9,705 14,368 4,022 Less: weighted-average shares subject to repurchase ............ 61 98 69 77 ------- ------ ------ ------ Weighted average shares used in basic and diluted net loss per share ............................................ 14,406 9,607 3,945 14,299 ======= ====== ====== ======
-6- 3. Inventories (in thousands) September 30, December 31, 2001 2000 ---- ---- Raw materials .............. $ 538 $ 404 Work-in-process ............ 283 203 Finished goods ............. 1,683 1,031 ------ ------ $2,504 $1,638 ====== ====== 4. Recent Accounting Pronouncements In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal periods. This Statement supersedes FASB Statement No. 121 and APB 30, however, this Statement retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in a distribution to owners) or is classified as held for sale. This Statement addresses financial accounting and reporting for the impairment of certain long-lived assets and for long-lived assets to be disposed of. Management does not expect the adoption of SFAS No. 144 to have a material impact on the Company's financial position and results of operations. 5. Contingencies 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. Also, in August 2001 the Company filed a complaint in the United States District Court for the Northern District of California against RadioTherapeutics Corporation. This complaint, which is distinct from the patent interference proceeding described above, alleges that RadioTherapeutics' radiofrequency ablation products infringe six different patents held by the Company. The Company has to date capitalized approximately $88,000 in litigation costs incurred in this defense of its patent positions. -7- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates", and similar expressions identify such forward-looking statements. These statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or forecasted. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Factors That May Affect Future Results" and those appearing elsewhere in this Form 10-Q. Readers are cautioned not to place undue reliance on these forward-looking statements that reflect management's analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. Overview We develop, manufacture and market minimally invasive 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 product shipments. In 2000, we commercially launched our Model 1500 generator and StarBurst family of disposable devices and significantly expanded our direct domestic sales organization and our international distribution network. Our products are sold in the United States through our direct sales force and internationally through distribution partners. For the three months ended September 30, 2001, sales in the United States accounted for 56% of our total sales while sales in our international markets accounted for 44% of our total sales. The percentage of our revenues from international markets has decreased in 2001 as reimbursement concerns in Europe and Japan have slowed the growth of our business in these markets and as our revenue in the United States has responded to continued investment. We expect this trend to continue through the balance of 2001 and 2002. Longer term, 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. All of our revenue is derived from the sale of our disposable devices and radiofrequency generators. For the three months ended September 30, 2001, 80% of our sales were derived from our disposable devices and 20% were derived from the sale of our generators. Placement of generators at hospitals is necessary for customers to use our disposable devices, and we continue to focus on expanding our base of customer accounts. We are also continuing to focus on increasing usage of our disposable products at our established accounts, and we expect that a significant proportion of our revenues will continue to be derived from the sale of our higher-margin disposable devices. 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 margins are affected by production volumes and average selling prices. In addition, margins are affected by the sales mix of disposable devices versus generators, the mix of domestic direct sales versus international sales, which provide for standard distributor discounts, and our regular provisions for obsolete or excess inventory. For the three months ended September 30, 2001, 29% of our operating expenses were related to research and development activities, while 71% of our operating expenses were related to selling, general and administrative activities. We expect to continue to devote significant resources to product development and clinical research programs. We also expect to continue to devote the majority of our operating expenses to selling, general and administrative activities, particularly to our sales and marketing efforts. These efforts include the selective expansion of our domestic sales force and our international distribution support activities as well as physician training and patient awareness programs. In connection with grants 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 $0.4 million for the three months ended September 30, 2001. We expect to record additional amortization expense for deferred compensation in future periods. We incurred net losses of $3.1 million for the three months ended September 30, 2001. As of September 30, 2001, we had an accumulated deficit of $50.6 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 balance of 2001 and for the year 2002. -8- 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 new markets do not materialize in accordance with our expectations, our sales could be lower than expected. On August 15, 2001 we filed a complaint against RadioTherapeutics Corporation which alleges that the sale by RadioTherapeutics of its radiofrequency ablation products infringes six of our patents. In addition, we are currently involved in other patent disputes with RadioTherapeutics and may become a party to additional patent or product liability proceedings in the ordinary course of business. 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 September 30, 2001 and 2000 Sales increased 37% to $3.7 million for the quarter ended September 30, 2001 from $2.7 million for the quarter ended September 30, 2000. We saw growth in both domestic and international markets, with domestic sales increasing by 60% and international sales up by 15% over the comparable prior year period. Sales of our disposable products totaled $3.0 million for the quarter, an increase of 59% over the comparable prior year period. Higher unit shipments of disposable products 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. Also, average selling prices of disposable products benefited from the increasing proportion of domestic business in our sales mix. Generator sales for the quarter were 13% lower than sales in the third quarter of 2000. Cost of goods sold for the quarter ended September 30, 2001 was $1.5 million compared to $1.6 million for the quarter ended September 30, 2000, a 9% reduction. This reduction in cost of goods sold reflects a significant change in our sales mix, from relatively high cost generators to relatively low cost disposable products. Also, charges for amortization of deferred stock-based compensation totaled $0.1 million for the third quarter of 2001, down from $0.2 million in the corresponding period of 2000. With sales up 37% and cost of goods sold down 9%, the company's gross margin rate improved to 60% for the quarter ended September 30, 2001 compared to 40% for the quarter ended September 30, 2000. Research and development expenses for the quarter ended September 30, 2001 were $1.6 million compared to $1.3 million for the corresponding period in 2000. This increase was attributable to new product development charges and increased activity in clinical programs investigating new applications for our technology. Charges to research and development expense for amortization of deferred stock-based compensation were $0.1 million for the period compared to $0.2 million for the corresponding period in 2000. Selling, general and administrative expenses for the quarter ended September 30, 2001 were $4.0 million as compared to $3.0 million in the corresponding period in 2000. The increase resulted from the major expansion of our domestic sales organization and increased administrative expenses due to added personnel to support our growth in operations. Charges to selling, general and administrative expense for amortization of deferred stock-based compensation were $0.2 million for the period compared to $0.6 million for the corresponding period in 2000. Interest income, net of interest expense, was $0.3 million for the quarter ended September 30, 2001 compared to $0.2 million of net expense in the corresponding period of 2000. The change was primarily attributable to earnings on short-term investments made with cash received from our initial public offering of common shares, completed in the third quarter of 2000. Nine months ended September 30, 2001 and 2000 Sales increased 54% to $10.8 million for the nine months ended September 30, 2001 from $7.0 million for the nine months ended September 30, 2000. We saw growth in both domestic and international markets, with domestic sales increasing by 95% and international sales up by 28% over the comparable prior year period. Sales of our disposable products totaled $8.3 million for the first nine months of 2001, an increase of 85% over the comparable prior year period, while generator sales were flat. Higher unit shipments of disposable products 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. Also, average selling prices of disposable products benefited from the increasing proportion of domestic business in our sales mix. Cost of goods sold for the nine months ended September 30, 2001 was $4.9 million compared to $4.3 million for the nine months ended September 30, 2000, an increase of 14%. The growth in cost of goods sold was attributable primarily to higher material, labor, and overhead costs associated with increased unit shipments. Charges to cost of goods sold for amortization of deferred stock-based compensation were $0.5 million for the period compared to $0.7 million for the corresponding period in -9- 2000. With sales increasing by 54% and cost of goods sold increasing by only 14%, the company's gross margin rate improved to 54% for the nine months ended September 30, 2001 compared to 38% for the nine months ended September 30, 2000. Research and development expenses for the nine months ended September 30, 2001 were $4.8 million compared to $4.3 million for the corresponding period in 2000. This increase was attributable to new product development charges and increased activity in clinical programs investigating new applications for our technology. Charges to research and development expense for amortization of deferred stock-based compensation were $0.3 million for the period compared to $0.8 million for the corresponding period in 2000. Selling, general and administrative expenses for the nine months ended September 30, 2001 were $11.5 million compared to $8.3 million in the corresponding period in 2000. The increase resulted from the major expansion of our domestic sales organization, increased administrative expenses due to added personnel to support our growth in operations and additional costs associated with our operation as a public company. Charges to selling, general and administrative expense for amortization of deferred stock-based compensation were $0.6 million for the period compared to $2.5 million for the corresponding period in 2000. Interest income, net of interest expense, was $1.3 million for the nine months ended September 30, 2001 compared to $0.3 million in the corresponding period of 2000. The change was primarily attributable to earnings on short-term investments made with cash received from our initial public offering of common shares, completed in the third quarter of 2000. Liquidity and Capital Resources Prior to August 2000, we financed our operations principally through private placements of convertible preferred stock, raising approximately $37.9 million net of expenses. On August 1, 2000, we completed our initial public offering of 3.6 million common shares at a price of $12 per share, raising approximately $39.0 million net of expenses. All outstanding convertible preferred shares were converted to common shares at that time. To a lesser extent, we also financed our operations through equipment financing and other loans, of which there was $0.3 million in principal outstanding at September 30, 2001. As of September 30, 2001, we had $11.9 million of cash and cash equivalents, $15.0 million of short term marketable securities, $1.6 million of long term securities and $32.0 million of working capital. For the nine months ended September 30, 2001, net cash used in operating activities was $9.8 million, principally due to our net loss and increases in accounts receivable. Our investing activities for this period were limited to the purchase of property and equipment in the amount of $1.4 million and net purchases or sales of both short-term and long-term investment instruments. Net cash used by financing activities was $0.4 million in the first nine months of 2001 with $1.1 million in debt reduction offset by proceeds from the issuance of common shares. Our capital requirements depend on numerous factors including our research and development expenditures, expenses related to selling, marketing and administration as well as working capital to support business growth. Although it is difficult for us to predict future liquidity requirements with certainty, we believe that our current cash and cash equivalents 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 or obtain an additional credit facility. There can be no assurance that additional financing will be available to us or, if available, that such financing will be available on terms favorable to the Company and our stockholders. Factors That May Affect Future Results In addition to the other information in this report, the following factors should be considered carefully in evaluating the Company's business and prospects. 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 are currently involved in patent infringement, priority and validity disputes with RadioTherapeutics Corporation, and if we do not prevail in these disputes, we may be unable to sell the RITA system. -10- In August 2001, we filed a complaint against RadioTherapeutics Corporation alleging that RadioTherapeutics' radiofrequency ablation products infringe six of our patents. Our complaint seeks damages against RadioTherapeutics for its sale of radiofrequency ablation products, including the LeVeen CoAccess Electrode System and preliminary and permanent injunctive relief enjoining RadioTherapeutics from further infringement of our patents. On October 17, 2001, RadioTherapeutics filed an answer and affirmative defenses to our complaint denying certain of the allegations in the complaint and asserting counterclaims requesting declaratory relief that RadioTherapeutics is not infringing our patents and that our asserted patents are invalid and unenforceable. While we believe that our complaint has merit and that we have strong defenses against the counterclaims made by RadioTherapeutics, we expect this litigation to be expensive and time consuming and the outcome cannot be predicted. In July 1999, the United States Patent and Trademark Office declared an interference involving us, which was provoked by RadioTherapeutics, 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 cover the curvature of the array at the tip of our disposable devices. In February 2001, the USPTO issued a decision on preliminary motions filed in the patent interference proceeding. The decision found that one of the claims in our United States Patent No. 5,536,267 (claim no. 32) is invalid. We expect to receive the final confirmation of that decision in 2002. In the event that the decision is confirmed, we plan to file a motion in a United States District Court or the Court of Appeals for the Federal Circuit requesting review of the decision. Final determination of both the patent infringement and the patent interference proceedings may take several years. If the final determination in either patent dispute results in our patents being declared invalid and the issuance of the disputed patent rights to RadioTherapeutics and we were unable to obtain a license to use the relevant patent or modify our disposable devices, we could be unable to sell the RITA system and our business would suffer. In March 2000, RadioTherapeutics 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. A final decision is not expected in this proceeding for several years. If we do not prevail in the opposition proceeding, we could lose our only currently issued patent in Europe. 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. Historically, we have never shown a profit for any year or quarterly reporting period, and our accumulated deficit stands at $50.6 million as of September 30, 2001. 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 in the domestic and international markets: RadioTherapeutics Corporation, a privately held company, and Radionics, Inc., a division of Tyco Healthcare LP, a publicly traded company with substantial resources. Both RadioTherapeutics and Radionics sell products that use radiofrequency energy to ablate soft tissue. Boston Scientific Corporation, a publicly traded company with substantially greater resources than we have, has recently announced plans to acquire RadioTherapeutics. 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 that use radiofrequency energy to ablate soft tissue, we also compete against companies developing, manufacturing and marketing alternative 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 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. -11- 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. If we are unable to protect our intellectual property rights, we may lose market share to a competitor and our business could suffer. 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 that 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. 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. If we are unable to protect our intellectual property rights we could lose market share to a competitor and our business could suffer. 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. Our dependence on international revenues, which account for a significant portion of our 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: - the challenge of managing international sales without direct access to the end customer; - the risk of inventory build-up by our distributors which could negatively impact sales in future periods; - 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. We are substantially dependent on two distributors in our international markets, and if we lose either distributor or if either distributor reduces their product demand, our international and total revenues could decline. -12- 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. ITX Corporation, formerly known as Nissho Iwai Corporation, is our primary distributor in Asia. It accounted for 34 percent of our international revenues for the nine months ended September 30, 2001 and 48 percent of our international revenues in 2000. M.D.H. s.r.l. Forniture Ospedaliere, our distributor in Italy, accounted for 18 percent of our international revenues for the nine months ended September 30, 2001 and 17 percent of our international revenues for 2000. Because international revenues accounted for 50 percent of our total revenues for the nine months ended September 30, 2001 and these two distributors represented 52 percent of that total, the loss of either distributor or a significant decrease in unit purchases by 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 our distributors or we 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. If customers in markets outside the United States experience difficulty obtaining reimbursement for procedures using our products, international sales could decline. Certain of the markets outside the United States in which we sell our products require that specific reimbursement codes be obtained before reimbursement for procedures using our products can be approved. As a result, in countries where specific reimbursement codes are strictly required and have not yet been issued, reimbursement has been denied on that basis. ITX, our distributor in Japan, is conducting studies that are necessary to obtain reimbursement coverage in Japan, but to date has not yet received this approval. If we are unable to either obtain the required reimbursement codes or develop an effective strategy to resolve the reimbursement issue, physicians may be unwilling to purchase our products which could negatively impact our international revenues. 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. Hospitals using our products are currently reimbursed based on established general reimbursement codes. Because there is no specific reimbursement code for physicians performing 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. Although we have been notified by the American Medical Association Coding Committee that specific reimbursement codes for radiofrequency ablation of liver tumors will be established in 2002, they reserve the right to reverse this decision. In this case, we would be required to reapply for a specific code. This process is time consuming and costly and may require 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. 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. Any failure to build and manage our direct sales organization may negatively affect our revenues. We have significantly expanded our direct sales force in the United States over the past twelve months and plan to continue to increase the domestic direct sales force in the future. There is intense competition for skilled sales and marketing employees, -13- 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 and effectively manage 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. 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 that utilize our products. We have established formal physician training programs and rely on physicians to devote adequate time to understanding how and when 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 that could have an adverse effect on our product sales. 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: - failure of the public market to support the valuation established in our initial public offering; - our ability to successfully commercialize our products; - announcements regarding patent litigation or the issuance of patents to us or our competitors; - quarterly fluctuations in our results of operations; - announcements of technological or competitive developments; - regulatory developments regarding us or our competitors; - acquisitions or strategic alliances by us or our competitors; - 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. -14- 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 that meet customer demand, we could lose customers and our business could suffer. At the present time, we have limited high-volume 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 and 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 as 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 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 divert engineering resources from other projects or add to product costs. 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 third-party supplier currently manufactures, to our specifications, one of the generators we sell. There is only one other third-party contractor who we have used who could readily assume this manufacturing function. Two third-party suppliers produce the other generator we sell. 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 our employees and us. 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. 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. For example, some of our newer products have not received approval in Japan. Any failure to obtain necessary regulatory approvals for our new products in foreign countries could negatively affect revenues. 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. -15- Unless we are exempt, we must obtain the appropriate FDA approval or clearance before we can sell a new medical device in the United States. This 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 now expect, 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 some of 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. 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. We may need to raise additional capital in the future resulting in dilution to our stockholders. We may need to raise additional funds for our business operations and to execute our business strategy. 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. Our executive officers and directors own a large percentage of our voting stock and could exert significant influence over matters requiring stockholder approval. Because our executive officers and directors, and their respective affiliates, own approximately 28 percent of our outstanding common stock, 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, our bylaws, Delaware law and our stockholder rights plan contain provisions that could discourage a takeover. Provisions of our certificate of incorporation, our bylaws, Delaware law and our stockholder rights plan contain provisions that may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. Item 3. Quantitative and Qualitative Disclosures About Market Risk Our market risk disclosures have not changed significantly from those set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K filing dated March 27, 2001. PART II. OTHER INFORMATION Item 1. Legal Proceedings. On August 27, 2001 we filed a complaint against RadioTherapeutics Corporation in the United States District Court for the Northern District of California. The principal parties in the proceeding are RadioTherapeutics and RITA. The factual basis underlying the dispute is our claim that the sale by RadioTherapeutics of its radiofrequency ablation products infringes six of our patents. On October 17, 2001, RadioTherapeutics filed an answer and affirmative defenses to our complaint denying certain of the allegations in the complaint and asserting counterclaims requesting declaratory relief that RadioTherapeutics is not infringing our patents and that our asserted patents are invalid and unenforceable. RadioTherapeutics has also moved to stay the litigation pending the outcome of the patent interference proceeding described below. Our complaint seeks treble damages against RadioTherapeutics for its sale of radiofrequency ablation products, as well as temporary and permanent injunctive relief enjoining RadioTherapeutics from further infringement of our patents. -16- We are also involved in a patent interference proceeding 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. The principal parties in the proceeding are RadioTherapeutics and RITA. The factual basis underlying the claim is the determination by the 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. Item 2. Changes in Securities and Use of Proceeds On August 1, 2000, we completed our initial public offering of 3,600,000 common shares at a price of $12.00 per share, raising approximately $39.0 million net of underwriting discounts, commissions and other offering costs. The managing underwriters were Salomon Smith Barney and Robertson Stephens. We intend to use the proceeds of the offering to expand sales, marketing, physician and patient awareness programs, to continue product development and clinical research programs, to repay debt and to fund general corporate purposes including working capital. Additionally, we may use the proceeds of the offering to fund the acquisition of complementary businesses, products or technologies, although there are no current agreements or negotiations with respect to any specific transaction. As of September 30, 2001, we had applied $31.9 million of the $39.0 million in net proceeds from our offering as follows:
------------------------------------------------------------------------ Approximate Dollar Amount Use (in millions) ------------------------------------------------------------------------ Permanent working capital $ 5.0 ------------------------------------------------------------------------ Repayment of term loans and other debt $ 4.6 ------------------------------------------------------------------------ Sales, marketing, research and clinical $22.3 programs and general corporate purposes ------------------------------------------------------------------------ TOTAL: $31.9 ------------------------------------------------------------------------
Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: ** Exhibit 10.3: 2000 Stock Plan, as amended, and form of option agreement ** Exhibit 10.4: 2000 Director's Stock Option Plan, as amended, and form of option agreement (b) Reports on Form 8-K: Not applicable. ** Supersedes previously filed exhibit. -17- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RITA MEDICAL SYSTEMS, INC. By: /s/ Donald Stewart ------------------------------------- Donald Stewart Chief Financial Officer and Vice President, Finance and Administration Date: November 14, 2001 -18- EXHIBIT INDEX ------------- ** Exhibit 10.3: 2000 Stock Plan, as amended, and form of option agreement. ** Exhibit 10.4: 2000 Director's Stock Option Plan, as amended, and form of option agreement **Supersedes previously filed exhibit. -19- EX-10.3 3 dex103.txt 2000 STOCK PLAN Exhibit 10.3 RITA MEDICAL SYSTEMS, INC. 2000 STOCK PLAN 1. Purposes of the Plan. The purposes of this 2000 Stock Plan are to -------------------- attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees and Consultants of the Company and its Subsidiaries and to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options (as defined under Section 422 of the Code) or Nonstatutory Stock Options, as determined by the Administrator at the time of grant of an option and subject to the applicable provisions of Section 422 of the Code, as amended, and the regulations promulgated thereunder. Stock purchase rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall ----------- apply: (a) "Administrator" means the Board or any of its Committees ------------- appointed pursuant to Section 4 of the Plan. (b) "Applicable Laws" means the legal requirements relating to --------------- the administration of stock option and restricted stock purchase plans under applicable U.S. state corporate laws, U.S. federal and applicable state securities laws, the Code, any stock exchange rules or regulations and the applicable laws of any other country or jurisdiction where Options or Stock Purchase Rights are granted under the Plan, as such laws, rules, regulations and requirements shall be in place from time to time. (c) "Board" means the Board of Directors of the Company. ----- (d) "Code" means the Internal Revenue Code of 1986, as amended. ---- (e) "Committee" means one or more committees or subcommittees --------- appointed by the Board of Directors to administer the plan in accordance with Section 4 below. (f) "Common Stock" means the Common Stock of the Company. ------------ (g) "Company" means RITA Medical Systems, Inc., a Delaware ------- corporation. (h) "Consultant" means any person, including an advisor, who is ---------- engaged by the Company or any Parent or Subsidiary to render services and is compensated for such services, and any Director of the Company whether compensated for such services or not. (i) "Continuous Service Status" means the absence of any ------------------------- interruption or termination of service as an Employee or Consultant. Continuous Service Status shall not be considered interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Administrator, provided that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; or (iv) in the case of transfers between locations of the Company or between the Company, its Subsidiaries or their respective successors. For purposes of this Plan, a change in status from an Employee to a Consultant or from a Consultant to an Employee will not constitute an interruption of Continuous Service Status. (j) "Director" means a member of the Board of Directors of the -------- Company. (k) "Employee" means any person employed by the Company or any -------- Parent or Subsidiary of the Company, with the status of employment determined based upon such minimum number of hours or periods worked as shall be determined by the Administrator in its discretion, subject to any requirements of the Code or the Applicable Laws. The payment by the Company of a director's fee to a Director shall not be sufficient to constitute "employment" of such Director by the Company. (l) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (m) "Fair Market Value" means, as of any date, the Fair Market ----------------- Value of the Common Stock as determined by the Administrator in good faith on such basis as it deems appropriate and applied consistently with respect to Participants. Whenever possible, the determination of Fair Market Value shall be based upon the closing price for the Shares as reported in the Wall Street ----------- Journal for the applicable date. - ------- (n) "Incentive Stock Option" means an Option intended to qualify ---------------------- as an incentive stock option within the meaning of Section 422 of the Code, as designated in the applicable written Option Agreement. (o) "Listed Security" means any security of the Company that is --------------- listed or approved for listing on a national securities exchange or designated or approved for designation as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. (p) "Named Executive" means any individual who, on the last day --------------- of the Company's fiscal year, is the chief executive officer of the Company (or is acting in such capacity) or among the four most highly compensated officers of the Company (other than the chief executive officer). Such officer status shall be determined pursuant to the executive compensation disclosure rules under the Exchange Act. (q) "Nonstatutory Stock Option" means an Option not intended to ------------------------- qualify as an Incentive Stock Option, as designated in the applicable written Option Agreement. (r) "Officer" means a person who is an officer of the Company ------- within the meaning of Section 16(a) of the Exchange Act and the rules and regulations promulgated thereunder. (s) "Option" means a stock option granted pursuant to the Plan. ------ -2- (t) "Option Agreement" means a written agreement between an ---------------- Optionee and the Company reflecting the terms of an Option granted under the Plan and includes any documents attached to such Option Agreement, including, but not limited to, a notice of stock option grant and a form of exercise notice. (u) "Optioned Stock" means the Common Stock subject to an Option -------------- or a Stock Purchase Right. (v) "Optionee" means an Employee or Consultant who receives an -------- Option. (w) "Parent" means a "parent corporation," whether now or ------ hereafter existing, as defined in Section 424(e) of the Code, or any successor provision. (x) "Participant" means any holder of one or more Options or ----------- Stock Purchase Rights, or the Shares issuable or issued upon exercise of such awards, under the Plan. (y) "Plan" means this 2000 Stock Plan. ---- (z) "Reporting Person" means an Officer, Director, or greater ---------------- than 10% stockholder of the Company within the meaning of Rule 16a-2 under the Exchange Act, who is required to file reports pursuant to Rule 16a-3 under the Exchange Act. (aa) "Restricted Stock" means shares of Common Stock acquired ---------------- pursuant to a grant of a Stock Purchase Right under Section 11 below. (bb) "Restricted Stock Purchase Agreement" means a written ----------------------------------- agreement between a holder of a Stock Purchase Right and the Company reflecting the terms of a Stock Purchase Right granted under the Plan and includes any documents attached to such agreement. (cc) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange ---------- Act, as the same may be amended from time to time, or any successor provision. (dd) "Share" means a share of the Common Stock, as adjusted in ----- accordance with Section 13 of the Plan. (ee) "Stock Exchange" means any stock exchange or consolidated -------------- stock price reporting system on which prices for the Common Stock are quoted at any given time. (ff) "Stock Purchase Right" means the right to purchase Common -------------------- Stock pursuant to Section 11 below. (gg) "Subsidiary" means a "subsidiary corporation," whether now ---------- or hereafter existing, as defined in Section 424(f) of the Code, or any successor provision. (hh) "Ten Percent Holder" means a person who owns stock ------------------ representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary. -3- 3. Stock Subject to the Plan. Subject to the provisions of Section 12 ------------------------- of the Plan, the maximum aggregate number of Shares that may be optioned and sold under the Plan is 2,500,000 shares of Common Stock, plus an automatic annual increase on the first day of each of the Company's fiscal years beginning in 2001 and ending in 2010 equal to the lesser of (i) 1,000,000 Shares, (ii) seven percent (7%) of the Shares outstanding on the last day of the immediately preceding fiscal year, or (iii) such lesser number of shares as is determined by the Board of Directors. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares that were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. In addition, any Shares of Common Stock which are retained by the Company upon exercise of an Option or Stock Purchase Right in order to satisfy the exercise or purchase price for such Option or Stock Purchase Right or any withholding taxes due with respect to such exercise shall be treated as not issued and shall continue to be available under the Plan. Shares repurchased by the Company pursuant to any repurchase right which the Company may have shall not be available for future grant under the Plan. 4. Administration of the Plan. -------------------------- (a) General. The Plan shall be administered by the Board or a ------- Committee, or a combination thereof, as determined by the Board. The Plan may be administered by different administrative bodies with respect to different classes of Participants and, if permitted by the Applicable Laws, the Board may authorize one or more officers to grant Options and Stock Purchase Rights under the Plan. (b) Administration With Respect to Reporting Persons. With ------------------------------------------------ respect to Options and Stock Purchase Rights granted to Reporting Persons and Named Executives, the Plan may (but need not) be administered so as to permit such Options and Stock Purchase Rights to qualify for the exemption set forth in Rule 16b-3 and to qualify as performance-based compensation under Section 162(m) of the Code. (c) Committee Composition. If a Committee has been appointed --------------------- pursuant to this Section 4, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of any Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies (however caused) and remove all members of a Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws and, in the case of a Committee administering the Plan pursuant to Section 4(b) above, to the extent permitted or required by Rule 16b-3 and Section 162(m) of the Code. (d) Powers of the Administrator. Subject to the provisions of the --------------------------- Plan and in the case of a Committee, the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: -4- (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(m) of the Plan; (ii) to select the Consultants and Employees to whom Options and Stock Purchase Rights or any combination thereof may from time to time be granted hereunder; (iii) to determine whether and to what extent Options and Stock Purchase Rights or any combination thereof are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each such award granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each such award granted thereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder; (vii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted; (viii) to determine the terms and restrictions applicable to Stock Purchase Rights and the Restricted Stock purchased by exercising such Stock Purchase Rights; and (ix) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; and (x) in order to fulfill the purposes of the Plan and without amending the Plan, to modify grants of Options or Stock Purchase Rights to participants who are foreign nationals or employed outside of the United States in order to recognize differences in local law, tax policies or customs. (e) Effect of Administrator's Decision. All decisions, ----------------------------------- determinations and interpretations of the Administrator shall be final and binding on all holders of Options or Stock Purchase Rights. 5. Eligibility. ----------- (a) Recipients of Grants. Nonstatutory Stock Options and Stock -------------------- Purchase Rights may be granted to Employees and Consultants. Incentive Stock Options may be granted only to Employees. An Employee or Consultant who has been granted an Option or Stock Purchase Right may, if he or she is otherwise eligible, be granted additional Options or Stock Purchase Rights. (b) Type of Option. Each Option shall be designated in the -------------- Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. -5- (c) $100,000 Limitation. Notwithstanding any designation under ------------------- Section 5(b), to the extent that the aggregate Fair Market Value of Shares with respect to which Options designated as Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares subject to an Incentive Stock Option shall be determined as of the date of the grant of such Option. (d) Employment Relationship. The Plan shall not confer upon the ----------------------- holder of any Option or Stock Purchase Right any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with such holder's right or the Company's right to terminate his or her employment or consulting relationship at any time, with or without cause. 6. Term of Plan. The Plan shall become effective upon the earlier to ------------ occur of its adoption by the Board of Directors or its approval by the stockholders of the Company as described in Section 20 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 16 of the Plan. 7. Term of Option. The term of each Option shall be the term stated -------------- in the Option Agreement; provided, however, that the term shall be no more than ten years from the date of grant thereof or such shorter term as may be provided in the Option Agreement and provided further that, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, is a Ten Percent Holder, the term of the Option shall be five years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. 8. Limitation on Grants to Employees. Subject to adjustment as --------------------------------- provided in Section 13 below, the maximum number of Shares which may be subject to Options granted to any one Employee under this Plan for any fiscal year of the Company shall be 1,000,000 Shares, provided that this Section 8 shall apply only after such time, if any, as the Common Stock becomes a Listed Security. 9. Option Exercise Price and Consideration. --------------------------------------- (a) The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Board and set forth in the applicable agreement, but shall be subject to the following: (i) In the case of an Incentive Stock Option that is: (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option, is a Ten Percent Holder, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. -6- (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option that is: (A) granted prior to the date, if any, on which the Common Stock becomes a Listed Security, to a person who, at the time of the grant of such Option, is a Ten Percent Holder, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of the grant. (B) granted, prior to the date, if any on which the Common Stock becomes a Listed Security, to any other person, the per share Exercise Price shall be no less than 85% of the Fair Market Value on the date of grant, if required by the Applicable Laws and, if not so required, shall be such price as it determined by the Administrator; or (C) granted on or after the date, if any, on which the Common Stock becomes a Listed Security to any person, the per Share exercise price shall be such price as determined by the Administrator; provided, however, that if the person is, at the time of grant of such option, a Named Executive of the Company, the per share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant if such Option is intended to qualify as performance-based compensation under Section 162(m) of the Code; or (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above pursuant to a merger or other corporate transaction. (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (1) cash, (2) check, (3) promissory note (subject to the provisions of Section 153 of the Delaware General Corporation Law), (4) cancellation of indebtedness, (5) other Shares that (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender or such other period as may be required to avoid a charge to the Company's earnings, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (6) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price and any applicable income or employment taxes, (7) any combination of the foregoing methods of payment, or (8) such other consideration and method of payment for the issuance of Shares to the extent permitted under the Applicable Laws. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. -7- 10. Exercise of Option. ------------------ (a) Procedure for Exercise; Rights as a Shareholder. Any Option ----------------------------------------------- granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan; provided, however, that if required by the Applicable Laws, any Option granted prior to the date, if any, upon which the Common Stock becomes a Listed Security shall become exercisable at the rate of at least 20% per year over five years from the date the Option is granted. In the event that any of the Shares issued upon exercise of an Option (which exercise occurs prior to the date, if any, upon which the Common Stock becomes a Listed Security) should be subject to a right of repurchase in the Company's favor, such repurchase right shall, if required by the Applicable Laws, lapse at the rate of at least 20% per year over five years from the date the Option is granted. Notwithstanding the above, in the case of an Option granted to an officer (including but not limited to Officers), Director or Consultant of the Company or any Parent or Subsidiary of the Company, the Option may become fully exercisable, and a repurchase right, if any, in favor of the Company shall lapse, at any time or during any period established by the Administrator. The Administrator shall have the discretion to determine whether and to what extent the vesting of Options shall be tolled during any unpaid leave of absence; provided, however, that in the absence of such determination, vesting of Options shall be tolled during any such leave. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and the Company has received full payment for the Shares with respect to which the Option is exercised. Full payment may, as authorized by the Board, consist of any consideration and method of payment allowable under Section 9(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, not withstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 13 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares that thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Employment or Consulting Relationship. ---------------------------------------------------- Subject to Section 10(c) below, in the event of termination of an Optionee's Continuous Service Status, such Optionee may, but only within three months (or such other period of time not less than 30 days as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option and not exceeding three months) after -8- the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise his or her Option to the extent that the Optionee was entitled to exercise it at the date of such termination. To the extent that the Optionee was not entitled to exercise the Option at the date of such termination, or if the Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. No termination shall be deemed to occur and this Section 10(b) shall not apply if (i) the Optionee is a Consultant who becomes an Employee, or (ii) the Optionee is an Employee who becomes a Consultant. (c) Disability of Optionee. ---------------------- (i) Notwithstanding Section 10(b) above, in the event of termination of an Optionee's Continuous Service Status as a result of his or her total and permanent disability (within the meaning of Section 22(e)(3) of the Code), such Optionee may, but only within six months from the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination. To the extent that the Optionee was not entitled to exercise the Option at the date of termination, or if the Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. (ii) In the event of termination of an Optionee's Continuous Service Status as a result of a disability which does not fall within the meaning of total and permanent disability (as set forth in Section 22(e)(3) of the Code), such Optionee may, but only within six months from the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination. However, to the extent that such Optionee fails to exercise an Option which is an Incentive Stock Option ("ISO") (within the meaning of Section 422 of the Code) within three months of the date of such termination, the Option will not qualify for ISO treatment under the Code. To the extent that the Optionee was not entitled to exercise the Option at the date of termination, or if the Optionee does not exercise such Option to the extent so entitled within six months from the date of termination, the Option shall terminate. (d) Death of Optionee. In the event of the death of an Optionee ----------------- during the period of Continuous Service Status since the date of grant of the Option, or within 30 days following termination of the Optionee's Continuous Service Status, the Option may be exercised, at any time within twelve months following the date of death (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), by such Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of death or, if earlier, the date of termination of the Optionee's Continuous Status as an Employee or Consultant. To the extent that the Optionee was not entitled to exercise the Option at the date of death or termination, as the case may be, or if the Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. -9- (e) Extension of Exercise Period. The Administrator shall have ---------------------------- full power and authority to extend the period of time for which an Option is to remain exercisable following termination of an Optionee's Continuous Service Status from the periods set forth in Sections 10(b), 10(c) and 10(d) above or in the Option Agreement to such greater time as the Board shall deem appropriate, provided that in no event shall such Option be exercisable later than the date of expiration of the term of such Option as set forth in the Option Agreement. (f) Rule 16b-3. Options granted to Reporting Persons shall ---------- comply with Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption for Plan transactions. 11. Stock Purchase Rights. --------------------- (a) Rights to Purchase. Stock Purchase Rights may be issued ------------------ either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer, which shall in no event exceed 30 days from the date upon which the Administrator made the determination to grant the Stock Purchase Right. If required by the Applicable Laws, the purchase price of Shares subject to Stock Purchase Rights shall not be less than 85% of the Fair Market Value of the Shares as of the date of the offer, or, in the case of a Ten Percent Holder, the price shall not be less than 100% of the Fair Market Value of the Shares as of the date of the offer. If the Applicable Laws do not impose restrictions on the purchase price, the purchase price of Shares subject to Stock Purchase Rights shall be as determined by the Administrator. The offer to purchase Shares subject to Stock Purchase Rights shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. (b) Repurchase Option. Unless the Administrator determines ----------------- otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with the Company for any reason (including death or disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original purchase price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at such rate as the Administrator may determine; provided, however, that with respect to an Optionee who is not an officer, director or Consultant of the Company or of any Parent or Subsidiary of the Company, it shall lapse at a minimum rate of 20% per year if required by the Applicable Laws. (c) Other Provisions. The Restricted Stock Purchase Agreement ---------------- shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. In addition, the provisions of Restricted Stock Purchase Agreements need not be the same with respect to each purchaser. -10- (d) Rights as a Stockholder. Once the Stock Purchase Right is ----------------------- exercised, the purchaser shall have the rights equivalent to those of a stockholder, and shall be a stockholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 12 of the Plan. 12. Taxes. ----- (a) As a condition of the exercise of an Option or Stock Purchase Right granted under the Plan, the Participant (or in the case of the Participant's death, the person exercising the Option or Stock Purchase Right) shall make such arrangements as the Administrator may require for the satisfaction of any applicable federal, state, local or foreign withholding tax obligations that may arise in connection with the exercise of Option and the issuance of Shares. The Company shall not be required to issue any Shares under the Plan until such obligations are satisfied. (b) In the case of an Employee and in the absence of any other arrangement, the Employee shall be deemed to have directed the Company to withhold or collect from his or her compensation an amount sufficient to satisfy such tax obligations from the next payroll payment otherwise payable after the date of an exercise of the Option. (c) This Section 12(c) shall apply only after the date, if any, upon which the Common Stock becomes a Listed Security. In the case of Participant other than an Employee (or in the case of an Employee where the next payroll payment is not sufficient to satisfy such tax obligations, with respect to any remaining tax obligations), in the absence of any other arrangement and to the extent permitted under the Applicable Laws, the Participant shall be deemed to have elected to have the Company withhold from the Shares to be issued upon exercise of the Option or Stock Purchase Right that number of Shares having a Fair Market Value determined as of the applicable Tax Date (as defined below) equal to the minimum statutory amounts required to be withheld. For purposes of this Section 12, the Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined under the Applicable Laws (the "Tax Date"). -------- (d) If permitted by the Administrator, in its discretion, a Participant may satisfy his or her tax withholding obligations upon exercise of an Option or Stock Purchase Right by surrendering to the Company Shares that (i) in the case of Shares previously acquired from the Company, have been owned by the Participant for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value determined as of the applicable Tax Date equal to the minimum statutory amounts required to be withheld. (e) Any election or deemed election by a Participant to have Shares withheld to satisfy tax withholding obligations under Section 12(c) or (d) above shall be irrevocable as to the particular Shares as to which the election is made and shall be subject to the consent or disapproval of the Administrator. Any election by a Participant under Section 12(d) above must be made on or prior to the applicable Tax Date. -11- (f) In the event an election to have Shares withheld is made by a Participant and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Participant shall receive the full number of Shares with respect to which the Option is exercised but such Participant shall be unconditionally obligated to tender back to the Company the proper number of Shares on the applicable Tax Date. 13. Adjustments Upon Changes in Capitalization, Merger or Certain ------------------------------------------------------------- Other Transactions. - ------------------- (a) Changes in Capitalization. Subject to any required action by ------------------------- the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option or Stock Purchase Right, the number of shares of Common Stock that have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or that have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, and the number of shares set forth in Sections 3(a)(i) and 8 above, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination, recapitalization or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed -------------------------- dissolution or liquidation of the Company, the Board shall notify the Participant at least 15 days prior to such proposed action. To the extent it has not been previously exercised, the Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. (c) Merger or Sale of Assets. In the event of a proposed sale of ------------------------ all or substantially all of the Company's assets or a merger of the Company with or into another corporation where the successor corporation issues its securities to the Company's stockholders, each outstanding Option or Stock Purchase Right shall be assumed or an equivalent option or right shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the successor corporation does not agree to assume the Option or Stock Purchase Right or to substitute an equivalent option or right, in which case such Option or Stock Purchase Right shall terminate as of the date of closing of the merger or sale of assets. For purposes of this Section 13(c), an Option or a Stock Purchase Right shall be considered assumed, without limitation, if, at the time of issuance of the stock or other consideration upon such merger or sale of assets, each holder of an Option or a Stock Purchase Right would be entitled to receive upon exercise of the Option or Stock Purchase Right the same number and kind of shares -12- of stock or the same amount of property, cash or securities as such holder would have been entitled to receive upon the occurrence of such transaction if the holder had been, immediately prior to such transaction, the holder of the number of Shares of Common Stock covered by the Option or the Stock Purchase Right at such time (after giving effect to any adjustments in the number of Shares covered by the Option or Stock Purchase Right as provided for in this Section 13). (d) Certain Distributions. In the event of any distribution to --------------------- the Company's stockholders of securities of any other entity or other assets (other than dividends payable in cash or stock of the Company) without receipt of consideration by the Company, the Administrator may, in its discretion, appropriately adjust the price per share of Common Stock covered by each outstanding Option or Stock Purchase Right to reflect the effect of such distribution. 14. Non-Transferability of Options and Stock Purchase Rights. -------------------------------------------------------- (a) General. Except as set forth in this Section 14, Options and ------- Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution. The designation of a beneficiary by a Participant will not constitute a transfer. An Option or Stock Purchase Right may be exercised, during the lifetime of the holder of an Option or Stock Purchase Right, only by such holder or a transferee permitted by this Section 14. (b) Limited Transferability Rights. Notwithstanding anything ------------------------------ else in this Section 14, prior to the date, if any, on which the Common Stock becomes a Listed Security, the Administrator may in its discretion grant Nonstatutory Stock Options that may be transferred by instrument to an inter vivos or testamentary trust in which the Options are to be passed to beneficiaries upon the death of the trustor (settlor) or by gift to "Immediate Family" (as defined below), on such terms and conditions as the Administrator deems appropriate. Following the date, if any, on which the Common Stock becomes a Listed Security, the Administrator may in its discretion grant transferable Nonstatutory Stock Options pursuant to Option Agreements specifying the manner in which such Nonstatutory Stock Options are transferable. "Immediate Family" ---------------- means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and shall include adoptive relationships. 15. Time of Granting Options and Stock Purchase Rights. The date of -------------------------------------------------- grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other date as is determined by the Board; provided, however, that in the case of any Incentive Stock Option, the grant date shall be the later of the date on which the Administrator makes the determination granting such Incentive Stock Option or the date of commencement of the Optionee's employment relationship with the Company. Notice of the determination shall be given to each Employee or Consultant to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant. -13- 16. Amendment and Termination of the Plan. ------------------------------------- (a) Authority to Amend or Terminate. The Board may at any time ------------------------------- amend, alter, suspend or discontinue the Plan, but no amendment, alteration, suspension or discontinuation shall be made that would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with the Applicable Laws, the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required. (b) Effect of Amendment or Termination. No amendment or ---------------------------------- termination of the Plan shall adversely affect Options already granted, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 17. Conditions Upon Issuance of Shares. Shares shall not be issued ---------------------------------- pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any Stock Exchange. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by law. 18. Reservation of Shares. The Company, during the term of this Plan, --------------------- will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 19. Agreements. Options and Stock Purchase Rights shall be evidenced ---------- by written Option Agreements and Restricted Stock Purchase Agreements, respectively, in such form(s) as the Administrator shall approve from time to time. 20. Stockholder Approval. Continuance of the Plan shall be subject to -------------------- approval by the stockholders of the Company within twelve months before or after the date the Plan is adopted. Such stockholder approval shall be obtained in the degree and manner required under the Applicable Laws. All Options and Stock Purchase Rights issued under the Plan shall become void in the event such approval is not obtained. -14- 21. Information and Documents to Participants and Purchasers. Prior -------------------------------------------------------- to the date, if any, on which the Common Stock becomes a Listed Security and if required by the Applicable Laws, the Company shall provide financial statements at least annually to each Participant and to each individual who acquired Shares Pursuant to the Plan, during the period such Participant or purchaser has one or more Options or Stock Purchase Rights outstanding, and in the case of an individual who acquired Shares pursuant to the Plan, during the period such individual owns such Shares. The Company shall not be required to provide such information if the issuance of Options or Stock Purchase Rights under the Plan is limited to key employees whose duties in connection with the Company assure their access to equivalent information. In addition, at the time of issuance of any securities under the Plan, the Company shall provide to the Participant or the Purchaser a copy of the Plan and any agreement(s) pursuant to which securities granted under the Plan are issued. -15- RITA MEDICAL SYSTEMS, INC. 2000 STOCK PLAN STOCK OPTION AGREEMENT ---------------------- You have been granted an option to purchase Common Stock of RITA Medical Systems, Inc., (the "Company") as indicated on the Certificate of Stock ------- Option Grant on the AST Stockplan website (the "Certificate"). Please review this Notice and the attached Stock Option Agreement before executing your grant at the AST Stockplan website at www.aststockplan.com. Vesting/Exercise Schedule: So long as your employment or consulting relationship with the Company continues, the Shares underlying this Option shall vest and become exercisable in accordance with the vesting schedule indicated on the Certificate. Termination Period: Option may be exercised for three (3) months after termination of employment or consulting relationship except as set out in Section 5 of the Stock Option Agreement (but in no event later than the Expiration Date). Optionee is responsible for keeping track of these exercise periods following termination for any reason of his or her service relationship with the Company. The Company will not provide further notice of such periods. 1. Grant of Option. RITA Medical Systems, Inc., a Delaware --------------- corporation (the "Company"), hereby grants to the ("Optionee"), an option (the ------- -------- "Option") to purchase the total number of shares of Common Stock (the "Shares") ------ ------ set forth in the Certificate of Stock Option Grant available from the AST Stockplan website (the "Certificate"), at the exercise price per Share set forth ----------- in the Certificate (the "Exercise Price") subject to the terms, definitions and -------------- provisions of the RITA Medical Systems, Inc. 2000 Stock Plan (the "Plan") ---- adopted by the Company, which is incorporated in this Agreement by reference. Unless otherwise defined in this Agreement, the terms used in this Agreement shall have the meanings defined in the Plan. This Stock Option Agreement shall be deemed executed by the Company and Optionee upon execution by such parties of the Certificate. 2. Designation of Option. This Option is intended to be an Incentive --------------------- Stock Option as defined in Section 422 of the Code only to the extent so designated in the Certificate, and to -16- the extent it is not so designated or to the extent the Option does not qualify as an Incentive Stock Option, it is intended to be a Nonstatutory Stock Option. Notwithstanding the above, if designated as an Incentive Stock Option, in the event that the Shares subject to this Option (and all other Incentive Stock Options granted to Optionee by the Company or any Parent or Subsidiary, including under other plans of the Company) that first become exercisable in any calendar year have an aggregate fair market value (determined for each Share as of the date of grant of the option covering such Share) in excess of $100,000, the Shares in excess of $100,000 shall be treated as subject to a Nonstatutory Stock Option, in accordance with Section 5(c) of the Plan. 3. Exercise of Option. This Option shall be exercisable during its ------------------ term in accordance with the Vesting/Exercise Schedule set out in the Certificate and with the provisions of Section 10 of the Plan as follows: (a) Right to Exercise. ----------------- (i) This Option may not be exercised for a fraction of a share. (ii) In the event of Optionee's death, disability or other termination of employment, the exercisability of the Option is governed by Section 5 below, subject to the limitations contained in this Section 3. (iii) In no event may this Option be exercised after the Expiration Date of the Option as set forth in the Certificate. (b) Method of Exercise. ------------------ (i) This Option shall be exercisable by delivering to the Company a Stock Option Cash Exercise Letter of Authorization which is a written notice of exercise (in the form available from the AST Stockplan website) which shall state Optionee's election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such Shares as may be required by the Company pursuant to the provisions of the Plan. The Cash Letter of Authorization shall be signed by Optionee and shall be delivered to the Company by such means as are determined by the Plan Administrator in its discretion to constitute adequate delivery. The Cash Letter of Authorization shall be accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon receipt by the Company of the Cash Letter of Authorization accompanied by the Exercise Price. (ii) As a condition to the exercise of this Option and as further set forth in Section 12 of the Plan, Optionee agrees to make adequate provision for federal, state or other tax withholding obligations, if any, which arise upon the vesting or exercise of the Option, or disposition of Shares, whether by withholding, direct payment to the Company, or otherwise. -17- (iii) The Company is not obligated, and will have no liability for failure, to issue or deliver any Shares upon exercise of the Option unless such issuance or delivery would comply with the Applicable Laws, with such compliance determined by the Company in consultation with its legal counsel. This Option may not be exercised until such time as the Plan has been approved by the stockholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 221 of Title 12 of the Code of Federal Regulations as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by the Applicable Laws. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to Optionee on the date on which the Option is exercised with respect to such Shares. 4. Method of Payment. Payment of the Exercise Price shall be by any ----------------- of the following, or a combination of the following, at the election of Optionee: (a) cash or check; or (b) following the date, if any, upon which the Common Stock is a Listed Security, delivery of a properly executed exercise notice together with irrevocable instructions to a broker approved by the Company to deliver promptly to the Company the amount of sale or loan proceeds required to pay the exercise price. 5. Termination of Relationship. Following the date of termination of --------------------------- Optionee's Continuous Service Status for any reason (the "Termination Date"), ---------------- Optionee may exercise the Option only as set forth in the Certificate and this Section 5. To the extent that Optionee is not entitled to exercise this Option as of the Termination Date, or if Optionee does not exercise this Option within the Termination Period set forth in the Certificate or the termination periods set forth below, the Option shall terminate in its entirety. In no event, may any Option be exercised after the Expiration Date of the Option as set forth in the Notice. (a) Termination. In the event of termination of Optionee's ----------- Continuous Service Status other than as a result of Optionee's disability or death, Optionee may, to the extent otherwise so entitled at the date of such termination (the "Termination Date"), exercise this Option during the ---------------- Termination Period set forth in the Certificate. (b) Other Terminations. In connection with any termination other ------------------ than a termination covered by Section 5(a), Optionee may exercise the Option only as described below: (i) Termination upon Disability of Optionee. In the event --------------------------------------- of termination of Optionee's Continuous Service Status as a result of Optionee's disability, Optionee may, but only within six months from the Termination Date, exercise this Option to the extent Optionee was entitled to exercise it as of such Termination Date. -18- (ii) Death of Optionee. In the event of the death of ----------------- Optionee (a) during the term of this Option and while an Employee or Consultant of the Company and having been in Continuous Service Status since the date of grant of the Option, or (b) within thirty (30) days after Optionee's Termination Date, the Option may be exercised at any time within twelve months following the date of death by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent Optionee was entitled to exercise the Option as of the Termination Date. 6. Non-Transferability of Option. This Option may not be transferred ----------------------------- in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by him or her. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of Optionee. 7. Tax Consequences. Below is a brief summary as of the date of this ---------------- Option of certain of the federal tax consequences of exercise of this Option and disposition of the Shares under the laws in effect as of the Date of Grant. THIS SUMMARY IS INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Incentive Stock Option. ---------------------- (i) Tax Treatment upon Exercise and Sale of Shares. If this ---------------------------------------------- Option qualifies as an Incentive Stock Option, there will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject Optionee to the alternative minimum tax in the year of exercise. If Shares issued upon exercise of an Incentive Stock Option are held for at least one year after exercise and are disposed of at least two years after the Option grant date, any gain realized on disposition of the Shares will also be treated as long-term capital gain for federal income tax purposes. If Shares issued upon exercise of an Incentive Stock Option are disposed of within such one-year period or within two years after the Option grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price and the lesser of (i) the fair market value of the Shares on the date of exercise, or (ii) the sale price of the Shares. (ii) Notice of Disqualifying Dispositions. With respect to ------------------------------------ any Shares issued upon exercise of an Incentive Stock Option, if Optionee sells or otherwise disposes of such Shares on or before the later of (i) the date two years after the Option grant date, or (ii) the date one year after the date of exercise, Optionee shall immediately notify the Company in writing of such disposition. Optionee acknowledges and agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized by Optionee from the early disposition by payment in cash or out of the current earnings paid to Optionee. (b) Nonstatutory Stock Option. If this Option does not qualify ------------------------- as an Incentive Stock Option, there may be a regular federal (and state) income tax liability upon the -19- exercise of the Option. Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. If Optionee is an Employee, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. If Shares issued upon exercise of a Nonstatutory Stock Option are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. 8. Effect of Agreement. Optionee acknowledges receipt of a copy of ------------------- the Plan and represents that he or she is familiar with the terms and provisions thereof (and has had an opportunity to consult counsel regarding the Option terms), and hereby accepts this Option and agrees to be bound by its contractual terms as set forth herein and in the Plan. Optionee hereby agrees to accept as binding, conclusive and final all decisions and interpretations of the Plan Administrator regarding any questions relating to the Option. In the event of a conflict between the terms and provisions of the Plan and the terms and provisions of the Certificate, the Notice and this Agreement, the Plan terms and provisions shall prevail. The Option, including the Plan, constitutes the entire agreement between Optionee and the Company on the subject matter hereof and supersedes all proposals, written or oral, and all other communications between the parties relating to such subject matter. By your electronic signature and the electronic signature of the Company, you and the Company agree that this option is granted under and governed by the terms and conditions of the RITA Medical Systems, Inc. 2000 Stock Plan which is attached and made a part of this document. In addition, you agree and acknowledge that your rights to any Shares underlying the Option will be earned only as you provide services to the Company over time, that the grant of the Option is not as consideration for services you rendered to the Company prior to your Vesting Commencement Date, and that nothing in the Certificate or the attached documents confers upon you any right to continue your employment or consulting relationship with the Company for any period of time, nor does it interfere in any way with your right or the Company's right to terminate that relationship at any time, for any reason, with or without cause. RITA Medical Systems, Inc. -20- EX-10.4 4 dex104.txt 2000 DIRECTOR'S STOCK OPTION PLAN Exhibit 10.4 RITA MEDICAL SYSTEMS, INC. 2000 DIRECTORS' STOCK OPTION PLAN --------------------------------- 1. Purposes of the Plan. The purposes of this Directors' Stock Option Plan -------------------- are to attract and retain the best available personnel for service as Directors of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. All options granted hereunder shall be nonstatutory stock options. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Board" means the Board of Directors of the Company. ----- (b) "Change of Control" means a sale of all or substantially all of the ----------------- Company's assets, or a merger, consolidation or other capital reorganization of the Company with or into another corporation, or any other transaction or series of related transactions in which the Company's stockholders immediately prior thereto own less than 50% of the voting stock of the Company (or its successor or parent) immediately thereafter. (c) "Code" means the Internal Revenue Code of 1986, as amended. ---- (d) "Common Stock" means the Common Stock of the Company. ------------ (e) "Company" means RITA Medical Systems, Inc., a Delaware corporation. ------- (f) "Continuous Status as a Director" means the absence of any ------------------------------- interruption or termination of service as a Director. (g) "Director" means a member of the Board. -------- (h) "Employee" means any person, including any officer or Director, -------- employed by the Company or any Parent or Subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient in and of itself to constitute "employment" by the Company. (i) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (j) "Option" means a stock option granted pursuant to the Plan. All ------ options shall be nonstatutory stock options (i.e., options that are not intended to qualify as incentive stock options under Section 422 of the Code). (k) "Optioned Stock" means the Common Stock subject to an Option. -------------- (l) "Optionee" means an Outside Director who receives an Option. -------- (m) "Outside Director" means a Director who is not an Employee. ---------------- (n) "Parent" means a "parent corporation," whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (o) "Plan" means this 2000 Directors' Stock Option Plan. ---- (p) "Share" means a share of the Common Stock, as adjusted in accordance ----- with Section 11 of the Plan. (q) "Subsidiary" means a "subsidiary corporation," whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 11 of ------------------------- the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 500,000 Shares of Common Stock (the "Pool"). The Shares may be ---- authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan has been terminated, become available for future grant under the Plan. In addition, any Shares of Common Stock that are retained by the Company upon exercise of an Option in order to satisfy the exercise price for such Option, or any withholding taxes due with respect to such exercise, shall be treated as not issued and shall continue to be available under the Plan. If Shares that were acquired upon exercise of an Option are subsequently repurchased by the Company, such Shares shall not in any event be returned to the Plan and shall not become available for future grant under the Plan. 4. Administration of and Grants of Options under the Plan. ------------------------------------------------------ (a) Administrator. Except as otherwise required herein, the Plan shall ------------- be administered by the Board. (b) Procedure for Grants. All grants of Options hereunder shall be -------------------- automatic and nondiscretionary and shall be made strictly in accordance with the following provisions: (i) No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options granted to Outside Directors. (ii) Each individual who becomes an Outside Director after the Effective Date of this Plan, as determined in accordance with Section 6 hereof, shall be automatically granted an Option to purchase 25,000 Shares (the "Initial ------- Option") on the date on which such person first becomes an Outside Director, - ------ whether through election by the stockholders of the Company or appointment by the Board of Directors to fill a vacancy. An -2- Outside Director who previously was an Employee shall not receive a grant under this Section 4(b)(ii). (iii) On the date of each Annual Meeting of the Company's shareholders immediately following which an Outside Director is serving on the Board, and provided that, as of such date, he or she shall have served on the Board for at least six (6) months, each eligible Outside Director shall be automatically granted an Option to purchase 10,000 Shares (the "Annual Option"). An Outside Director who previously was an Employee shall be eligible to receive grants under this Section 4(b)(iii). (iv) Notwithstanding the provisions of subsections (ii) and (iii) hereof, in the event that a grant would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased upon exercise of Options to exceed the Pool, then each such automatic grant shall be for that number of Shares determined by dividing the total number of Shares remaining available for grant by the number of Outside Directors receiving an Option on the automatic grant date. Any further grants shall then be deferred until such time, if any, as additional Shares become available for grant under the Plan through action of the stockholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder. (v) Notwithstanding the provisions of subsections (ii) and (iii) hereof, any grant of an Option made before the Company has obtained stockholder approval of the Plan in accordance with Section 17 hereof shall be conditioned upon obtaining such stockholder approval of the Plan in accordance with Section 17 hereof. (vi) The terms of each Initial Option granted hereunder shall be as follows: (1) each Initial Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Section 9 below; (2) the exercise price per Share shall be 100% of the fair market value per Share on the date of grant of each Initial Option, determined in accordance with Section 8 hereof; (3) each Initial Option shall vest and become exercisable at the rate of 1/48 of the Shares subject to the Initial Option on each monthly anniversary of the date of grant of the Initial Option. (vii) The terms of each Annual Option granted hereunder shall be as follows: (1) each Annual Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Section 9 below; -3- (2) the exercise price per Share shall be 100% of the fair market value per Share on the date of grant of each Annual Option, determined in accordance with Section 8 hereof; (3) each Annual Option shall vest and become exercisable at the rate of one hundred percent (100%) of the Shares subject to the Annual Option on the day before the first anniversary of the date of grant of the Annual Option. (c) Powers of the Board. Subject to the provisions and ------------------- restrictions of the Plan, the Board shall have the authority, in its discretion: (i) to determine, upon review of relevant information and in accordance with Section 8(b) of the Plan, the fair market value of the Common Stock; (ii) to determine the exercise price per Share of Options to be granted, which exercise price shall be determined in accordance with Section 8 of the Plan; (iii) to interpret the Plan; (iv) to prescribe, amend and rescind rules and regulations relating to the Plan; (v) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted hereunder; and (vi) to make all other determinations deemed necessary or advisable for the administration of the Plan. (d) Effect of Board's Decision. All decisions, determinations -------------------------- and interpretations of the Board shall be final and binding on all Optionees and any other holders of any Options granted under the Plan. (e) Suspension or Termination of Option. If the Chief Executive ----------------------------------- Officer or his or her designee reasonably believes that an Optionee has committed an act of misconduct, such officer may suspend the Optionee's right to exercise any option pending a determination by the Board (excluding the Outside Director accused of such misconduct). If the Board (excluding the Outside Director accused of such misconduct) determines an Optionee has committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the Company, breach of fiduciary duty or deliberate disregard of the Company rules resulting in loss, damage or injury to the Company, or if an Optionee makes an unauthorized disclosure of any Company trade secret or confidential information, engages in any conduct constituting unfair competition, induces any Company customer to breach a contract with the Company or induces any principal for whom the Company acts as agent to terminate such agency relationship, neither the Optionee nor his or her estate shall be entitled to exercise any Option whatsoever. In making such determination, the Board of Directors (excluding the Outside Director accused of such misconduct) shall act fairly and shall give the Optionee an opportunity to appear and present evidence on Optionee's behalf at a hearing before the Board or a committee of the Board. 5. Eligibility. Options may be granted only to Outside Directors. ----------- All Options shall be automatically granted in accordance with the terms set forth in Section 4(b) above. An Outside Director who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options in accordance with such provisions. The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in -4- any way with any rights which the Director or the Company may have to terminate his or her directorship at any time. 6. Term of Plan; Effective Date. The Plan shall become effective on the ---------------------------- effectiveness of the registration statement under the Securities Act of 1933, as amended, relating to the Company's initial public offering of securities (the "Effective Date"). It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 13 of the Plan. 7. Term of Options. The term of each Option shall be ten (10) years from --------------- the date of grant thereof unless an Option terminates sooner pursuant to Section 9 below. 8. Exercise Price and Consideration. -------------------------------- (a) Exercise Price. The per Share exercise price for the Shares to be -------------- issued pursuant to exercise of an Option shall be 100% of the fair market value per Share on the date of grant of the Option. (b) Fair Market Value. The fair market value shall be determined by ----------------- the Board; provided however that in the event the Common Stock is traded on the Nasdaq National Market or listed on a stock exchange, the fair market value per Share shall be the closing sales price on such system or exchange on the date of grant of the Option (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported in The Wall -------- Street Journal, or if there is a public market for the Common Stock but the - -------------- Common Stock is not traded on the Nasdaq National Market or listed on a stock exchange, the fair market value per Share shall be the mean of the bid and asked prices of the Common Stock in the over-the-counter market on the date of grant, as reported in The Wall Street Journal (or, if not so reported, as otherwise ----------------------- reported by the National Association of Securities Dealers Automated Quotation ("Nasdaq") System). (c) Form of Consideration. The consideration to be paid for the --------------------- Shares to be issued upon exercise of an Option shall consist entirely of cash, check, other Shares of Common Stock having a fair market value on the date of surrender equal to the aggregate exercise price of the Shares as to which the Option shall be exercised (which, if acquired from the Company, shall have been held for at least six months), or any combination of such methods of payment and/or any other consideration or method of payment as shall be permitted under applicable corporate law. 9. Exercise of Option. ------------------ (a) Procedure for Exercise; Rights as a Stockholder. Any Option ----------------------------------------------- granted hereunder shall be exercisable at such times as are set forth in Section 4(b) above; provided however that no Options shall be exercisable prior to stockholder approval of the Plan in accordance with Section 17 below has been obtained. An Option may not be exercised for a fraction of a Share. -5- An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Continuous Status as a Director. If an ---------------------------------------------- Outside Director ceases to serve as a Director, he or she may, but only within ninety (90) days after the date he or she ceases to be a Director of the Company, exercise his or her Option to the extent that he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 7 has expired. To the extent that such Outside Director was not entitled to exercise an Option at the date of such termination, or does not exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan. (c) Disability of Optionee. Notwithstanding Section 9(b) above, ---------------------- in the event a Director is unable to continue his or her service as a Director with the Company as a result of his or her total and permanent disability (as defined in Section 22(e)(3) of the Code), he or she may, but only within twelve (12) months from the date of such termination, exercise his or her Option to the extent he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 7 has expired. To the extent that he or she was not entitled to exercise the Option at the date of termination, or if he or she does not exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan. (d) Death of Optionee. In the event of the death of an Optionee: ----------------- (A) during the term of the Option who is, at the time of his or her death, a Director of the Company and who shall have been in Continuous Status as a Director since the date of grant of the Option, or (B) three (3) months after the termination of Continuous Status as a Director, the Option may be exercised, at any time within twelve (12) months following the date of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of death or the date of termination, as applicable. Notwithstanding the foregoing, in no event may the Option be -6- exercised after its term set forth in Section 7 has expired. To the extent that an Optionee was not entitled to exercise the Option at the date of death or termination or if he or she does not exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan. 10. Nontransferability of Options. The Option may not be sold, ----------------------------- pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution or pursuant to a qualified domestic relations order (as defined by the Code or the rules thereunder). The designation of a beneficiary by an Optionee does not constitute a transfer. An Option may be exercised during the lifetime of an Optionee only by the Optionee or a transferee permitted by this Section. 11. Adjustments Upon Changes in Capitalization; Corporate ----------------------------------------------------- Transactions. ------------ (a) Adjustment. Subject to any required action by the ---------- stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option, the number of Shares of Common Stock set forth in Sections 4(b)(ii), (iii) and (iv) above, and the number of Shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per Share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued Shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock (including any such change in the number of Shares of Common Stock effected in connection with a change in domicile of the Company) or any other increase or decrease in the number of issued Shares of Common Stock effected without receipt of consideration by the Company; provided however that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) Change of Control. In the event of any transaction that ----------------- qualifies as a Change of Control and notwithstanding whether or not outstanding Options are assumed, substituted for or terminated in connection with the transaction, the vesting of each outstanding Option shall accelerate in full such that each Optionee shall have the right to exercise his or her Option as to all of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable, immediately prior to consummation of the transaction. For purposes of this Section 11(b), an Option shall be considered assumed, without limitation, if, at the time of issuance of the stock or other consideration upon such Change of Control, each Optionee would be entitled to receive upon exercise of an Option the same number and kind of shares of stock or the same amount of property, cash or securities as the Optionee would have been entitled to receive upon the occurrence of such transaction if the -7- Optionee had been, immediately prior to such transaction, the holder of the number of Shares of Common Stock covered by the Option at such time (after giving effect to any adjustments in the number of Shares covered by the Option as provided for in this Section 11); provided however that if such consideration received in the transaction was not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon exercise of the Option to be solely common stock of the successor corporation or its Parent equal to the Fair Market Value of the per Share consideration received by holders of Common Stock in the transaction. (c) Certain Distributions. In the event of any distribution to --------------------- the Company's stockholders of securities of any other entity or other assets (other than dividends payable in cash or stock of the Company) without receipt of consideration by the Company, the Administrator may, in its discretion, appropriately adjust the price per Share of Common Stock covered by each outstanding Option to reflect the effect of such distribution. 12. Time of Granting Options. The date of grant of an Option shall, ------------------------ for all purposes, be the date determined in accordance with Section 4(b) hereof. Notice of the determination shall be given to each Outside Director to whom an Option is so granted within a reasonable time after the date of such grant. 13. Amendment and Termination of the Plan. ------------------------------------- (a) Amendment and Termination. The Board may amend or terminate ------------------------- the Plan from time to time in such respects as the Board may deem advisable; provided that, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act (or any other applicable law or regulation), the Company shall obtain approval of the stockholders of the Company to Plan amendments to the extent and in the manner required by such law or regulation. (b) Effect of Amendment or Termination. Any such amendment or ---------------------------------- termination of the Plan that would impair the rights of any Optionee shall not affect Options already granted to such Optionee and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 14. Conditions Upon Issuance of Shares. Notwithstanding any other ---------------------------------- provision of the Plan or any agreement entered into by the Company pursuant to the Plan, the Company shall not be obligated, and shall have no liability for failure, to issue or deliver any Shares under the Plan unless such issuance or delivery would comply with the legal requirements relating to the administration of stock option plans under applicable U.S. state corporate laws, U.S. federal and applicable state securities laws, the Code, any stock exchange or Nasdaq rules or regulations to which the Company may be subject and the applicable laws of any other country or jurisdiction where Options are granted under the Plan, as such laws, rules, regulations and requirements shall be in place from time to time (the "Applicable Laws"). Such compliance shall be determined by the Company --------------- in consultation with its legal counsel. -8- As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by law. 15. Reservation of Shares. The Company, during the term of this Plan, --------------------- will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 16. Option Agreement. Options shall be evidenced by written option ---------------- agreements in such form as the Board shall approve. 17. Stockholder Approval. If required by the Applicable Laws, -------------------- continuance of the Plan shall be subject to approval by the stockholders of the Company. Such stockholder approval shall be obtained in the manner and to the degree required under the Applicable Laws. -9- RITA MEDICAL SYSTEMS, INC. 2000 DIRECTORS' STOCK OPTION PLAN NOTICE OF STOCK OPTION GRANT ---------------------------- (Optionee) (OptioneeAddress1) (OptioneeAddress2) You have been granted an option to purchase Common Stock of RITA Medical Systems, Inc. (the "Company") as follows: ------- Date of Grant (GrantDate) Vesting Commencement Date (VestingStartDate) Exercise Price per Share (ExercisePrice) Total Number of Shares Granted (SharesGranted) Total Exercise Price (TotalExercisePrice) Expiration Date (ExpirDate) Vesting Schedule: This Option may be exercised, in ---------------- whole or in part, in accordance with the following schedule: _________ of the Option Shares shall vest and be exercisable on each _____ anniversary of the Vesting Commencement Date. Termination Period: This Option may be exercised for ------------------ 90 days after termination of Optionee's Continuous Status as a Director, or such longer period as may be applicable upon death or Disability of Optionee as provided in the Plan, but in no event later than the Expiration Date as provided above. By your signature and the signature of the Company's representative below, you and the Company agree that this option is granted under and governed by the terms and conditions of the 2000 Directors' Stock Option Plan and the Nonstatutory Stock Option Agreement, all of which are attached and made a part of this document. OPTIONEE: RITA MEDICAL SYSTEMS, INC. ____________________________ By:____________________________ Signature Title:_________________________ ____________________________ Print Name -2- RITA MEDICAL SYSTEMS, INC. NONSTATUTORY STOCK OPTION AGREEMENT ----------------------------------- 1. Grant of Option. The Board of Directors of the Company hereby grants to --------------- the Optionee named in the Notice of Stock Option Grant attached as Part I of this Agreement (the "Optionee"), an option (the "Option") to purchase a number -------- ------ of Shares, as set forth in the Notice of Stock Option Grant, at the exercise price per share set forth in the Notice of Stock Option Grant (the "Exercise -------- Price"'), subject to the terms and conditions of the 2000 Directors' Stock - ----- Option Plan (the "Plan"), which is incorporated herein by reference. ---- (Capitalized terms not defined herein shall have the meanings ascribed to such terms in the Plan.) In the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Nonstatutory Stock Option Agreement, the terms and conditions of the Plan shall prevail. 2. Exercise of Option. ------------------ (a) Right to Exercise. This Option is exercisable during its term in ----------------- accordance with the Vesting Schedule set out in the Notice of Stock Option Grant and the applicable provisions of the Plan and this Nonstatutory Stock Option Agreement. In the event of Optionee's death, disability or other termination of Optionee's employment or consulting relationship, the exercisability of the Option is governed by the applicable provisions of the Plan and this Nonstatutory Stock Option Agreement. (b) Method of Exercise. This Option is exercisable by delivery of an ------------------ exercise notice, in the form attached as Exhibit A (the "Exercise Notice"), --------- --------------- which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and ---------------- such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with all relevant provisions of law and the requirements of any stock exchange or quotation service upon which the Shares are then listed. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. 3. Method of Payment. Payment of the aggregate Exercise Price shall be by ----------------- any of the following, or a combination thereof, at the election of the Optionee: (a) cash; (b) check; (c) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price; or (d) surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares. 4. Non-Transferability of Option. This Option may not be transferred in any ----------------------------- manner otherwise than by will or by the laws of descent or distribution or pursuant to a domestic relations order (as defined by the Code or the rules thereunder) and may be exercised during the lifetime of Optionee only by the Optionee or a transferee permitted by Section 10 of the Plan. The terms of the Plan and this Nonstatutory Stock Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 5. Term of Option. This Option may be exercised only within the term set -------------- out in the Notice of Stock Option Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Nonstatutory Stock Option Agreement. 6. Tax Consequences. Set forth below is a brief summary of certain federal ---------------- tax consequences relating to this Option under the law in effect as of the date of grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT HIS OR HER OWN TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Exercising the Option. Since this Option does not qualify as an --------------------- incentive stock option under Section 422 of the Code, the Optionee may incur regular federal income tax liability upon exercise. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. (b) Disposition of Shares. If the Optionee holds the Option Shares for --------------------- more than one year, gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. The long-term capital gain will be taxed for federal income tax purposes at a maximum rate of 20 percent. -2- By your signature and the signature of the Company's representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Nonstatutory Stock Option Agreement. Optionee has reviewed the Plan and this Nonstatutory Stock Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Nonstatutory Stock Option Agreement and fully understands all provisions of the Plan and Nonstatutory Stock Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Nonstatutory Stock Option Agreement. RITA MEDICAL SYSTEMS, INC. _________________________________ By:_________________________________ (Optionee) Title:______________________________ CONSENT OF SPOUSE ----------------- The undersigned spouse of Optionee has read and hereby approves the terms and conditions of the Plan and this Nonstatutory Stock Option Agreement. In consideration of the Company's granting his or her spouse the right to purchase Shares as set forth in the Plan and this Nonstatutory Stock Option Agreement, the undersigned hereby agrees to be irrevocably bound by the terms and conditions of the Plan and this Nonstatutory Stock Option Agreement and further agrees that any community property interest shall be similarly bound. The undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Plan or this Nonstatutory Stock Option Agreement. ________________________________ Spouse of Optionee -3- EXHIBIT A NOTICE OF EXERCISE ------------------ To: RITA Medical Systems, Inc. Attn: Stock Option Administrator Subject: Notice of Intention to Exercise Stock Option -------------------------------------------- This is official notice that the undersigned ("Optionee") intends to -------- exercise Optionee's option to purchase __________ shares of RITA Medical Systems, Inc. Common Stock, under and pursuant to the Company's 2000 Directors' Stock Option Plan and the Nonstatutory Stock Option Agreement dated _______________, as follows: Grant Number: _______________________________ Date of Purchase: _______________________________ Number of Shares: _______________________________ Purchase Price: _______________________________ Method of Payment of Purchase Price: _______________________________ Social Security No.: _______________________________ The shares should be issued as follows: Name: _________________________ Address: _________________________ _________________________ _________________________ Signed: _________________________ Date: _________________________ -4- -----END PRIVACY-ENHANCED MESSAGE-----