As filed with the Securities and Exchange Commission on December 28, 2001.
Registration No._________
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM S-1
REGISTRATION STATEMENT
Under The Securities Act of 1933
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R2 TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
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Delaware 3841 77-0347993
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
325 Distel Circle
Los Altos, California 94022
(650) 254-7200
(Address, including zip code, and telephone number, including area code, of the
Registrant's principal executive offices)
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Michael S. Klein
Chairman, President and Chief Executive Officer
R2 Technology, Inc.
325 Distel Circle
Los Altos, California 94022
(650) 254-7200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Alan C. Mendelson, Esq. Christopher D. Mitchell, Esq.
Patrick A. Pohlen, Esq. Mark Casillas, Esq.
Latham & Watkins Gregory Grove, Esq.
135 Commonwealth Drive Andrew Kim, Esq.
Menlo Park, California 94025-1105 Wilson Sonsini Goodrich & Rosati
Tel: (650) 328-4600 650 Page Mill Road
Palo Alto, California 94304-1050
Tel: (650) 493-9300
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of this prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
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CALCULATION OF REGISTRATION FEE CHART
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Title of Each Class of Proposed Maximum Proposed Maximum Amount of
Securities to be Amounts to be Offering Price Per Aggregate Offering Registration
Registered Registered/(1)/ Share/(2)/ Price/(2)/ Fee
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Common Stock, $0.001 par value $ $86,250,000 $20,614
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/(1)/ Includes shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
/(2)/ Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o).
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The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell securities, and we are not soliciting offers to buy these
securities, in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED [ ], [ ]
[R2 Technology, Inc. Logo]
[ ] Shares
Common Stock
R2 Technology, Inc. is offering [ ] shares of its common stock. This is
our initial public offering and no public market currently exists for our
common stock. We have applied for approval for quotation of our common stock on
the Nasdaq National Market under the symbol "RTWO." We anticipate that the
initial public offering price will be between $[ ] and $[ ] per share.
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Investing in our common stock involves risks.
See "Risk Factors" beginning on page 6.
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Per
Share Total
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Public Offering Price...................................... $[ ] $[ ]
Underwriting Discounts and Commissions..................... $[ ] $[ ]
Proceeds to R2 Technology, Inc............................. $[ ] $[ ]
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
R2 Technology, Inc. has granted the underwriters a 30-day option to
purchase up to an additional [ ] shares of common stock to cover
over-allotments.
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Joint Lead Managers
Robertson Stephens U.S. Bancorp Piper Jaffray
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CIBC World Markets
The date of this Prospectus is [ ], 2002
[Inside flap (one page):
[Photograph of mammography image as marked by the ImageChecker system with
identification of marks as microcalcifications or masses.]]
[Inside front gatefold (two pages):
[Illustrated explanation of computer aided detection, or CAD, process:
Step one: mammogram taken;
Step two: two pathways - radiologist reviews without CAD at film review
station and ImageChecker CAD system;
Step three: radiologist reviews CAD at review station with ImageChecker
system display;
Step four: ImageChecker system image display enlarged to show marks.]]
1
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock. In this prospectus, the
"Company," "R2," "we," "us," and "our" refer to R2 Technology, Inc.
Until [ ,] 2002 (25 days after the commencement of this offering),
all dealers effecting transactions in the common stock, whether or not
participating in this distribution, may be required to deliver a prospectus.
This delivery requirement is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
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TABLE OF CONTENTS
Page
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Summary.............................................................................. 2
Risk Factors......................................................................... 6
Special Note Regarding Forward-Looking Statements.................................... 19
Use of Proceeds...................................................................... 20
Dividend Policy...................................................................... 20
Capitalization....................................................................... 21
Dilution............................................................................. 23
Selected Financial Data.............................................................. 24
Management's Discussion and Analysis of Financial Condition and Results of Operations 26
Business............................................................................. 35
Management........................................................................... 48
Related Party Transactions........................................................... 57
Principal Stockholders............................................................... 60
Description of Capital Stock......................................................... 63
Shares Eligible for Future Sale...................................................... 66
Underwriting......................................................................... 68
Legal Matters........................................................................ 71
Experts.............................................................................. 71
Where You Can Find More Information.................................................. 72
Index to Financial Statements........................................................ F-1
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ImageChecker is our registered trademark. The R2 Technology logo is our
unregistered trademark and service mark. Other service marks, trademarks and
trade names referred to in this prospectus are the property of their respective
owners.
1
SUMMARY
You should read the following summary together with the more detailed
information in this prospectus, including risk factors, regarding our company
and the common stock being sold in this offering.
Our Business
We develop, manufacture and sell proprietary medical systems to assist
radiologists in the detection of cancer. Our computer-aided detection, or CAD,
system analyzes medical images and identifies and marks suspicious image
features. Our ImageChecker system is the first and only CAD product approved by
the United States Food and Drug Administration, or FDA, for use with both
screening and diagnostic mammograms. We received FDA regulatory approval in
1998 to market the system in the United States. We have also obtained the right
to affix the CE Mark, which allows us to commercially distribute our system
throughout the European Union. One of our current FDA-approved claims is that
"for every 100,000 cancers currently detected by screening mammography, the use
of the ImageChecker could result in early detection of an additional 20,500
breast cancers," which reflects a potential cancer detection improvement of up
to 20.5%. An independent study of 12,860 women undergoing mammography showed
that radiologists working with the ImageChecker system were able to detect
19.5% more breast cancers than radiologists working alone, which provides
support for our approved FDA claim.
In connection with the sales and marketing of our ImageChecker products,
we have associated the R2 brand with innovative CAD solutions and established
strategic collaborations with leading medical imaging equipment manufacturers,
such as GE Medical Systems and the Eastman Kodak Company. We have secured
nationwide reimbursement, which includes Medicare and a national billing code,
for use of our ImageChecker system. As of September 30, 2001, we had shipped
over 275 ImageChecker products, which have been used in more than two million
screening and diagnostic procedures. We plan to leverage our installed base to
produce a steady stream of recurring revenue through line extensions of the
ImageChecker system and software and service contracts on our products. While
our products are currently used in mammography, we plan to leverage our CAD
technology, our first commercial mover advantage, our strategic relationships,
and our installed base to expand our product line to detect other cancers,
including lung cancer.
Our Markets
Medical imaging procedures are used to detect many types of cancer. We
believe that the current methods used for screening and diagnosing cancers in
breast and lung tissue face significant clinical and economic limitations,
including: observational oversights by radiologists, information overload
generated by increasing volumes of medical images and poor economics for many
mammography centers.
Breast cancer is the most commonly diagnosed cancer in women and the
second leading cause of cancer mortality in the United States. In 2000, in the
United States and Europe alone, over 548,000 people were diagnosed with breast
cancer, and nearly 181,000 people died from the disease. The widespread
recognition of both the devastating impact of breast cancer and the importance
of early detection has led to almost 58 million screening and diagnostic
mammograms annually in the United States and Europe. Currently, there is an
installed base of over 25,000 mammography systems worldwide.
Lung cancer is the most common form of cancer diagnosed worldwide and is
the leading cause of cancer mortality in the United States. In 2000, in the
United States and Europe alone, over 580,000 people were diagnosed with lung
cancer, and nearly 528,000 people died from the disease. Despite the high
mortality rate and annual costs of the disease, few screening programs are in
place for this disease, in part because traditional chest X-ray technologies
have not been very effective in detecting early-stage lung cancer. Recently,
computed tomography, or CT, has started to become an important technology for
the detection of lung cancer. Currently, there is an installed base of
approximately 36,800 CT systems worldwide.
2
The number of cancer cases is expected to grow due to a number of
factors, including the aging demographics of the United States population.
Early detection, diagnosis and treatment of cancer generally results in more
favorable outcomes.
Our Solution
We believe that the ImageChecker system represents an advance in cancer
detection and overcomes many of the limitations of medical imaging by offering
the following benefits:
. Improved detection accuracy. The ImageChecker system assists
radiologists in detecting cancer more accurately by analyzing medical
images and identifying and marking suspicious image features
suggestive of further investigation.
. Ability to analyze increasing volumes of medical images. The
ImageChecker system allows radiologists to review and manage the
analysis of an increasing volume of mammograms. Our CAD technology
also is designed to enable radiologists to review and manage the
analysis of the increasing volume of medical images generated by other
imaging technologies, such as CT.
. Improved economics of mammography centers. The ImageChecker system can
improve the profitability of a mammography center by providing
additional reimbursement for the application of CAD with mammography.
CAD for mammography received Medicare coverage in April 2001 and a
national billing code, effective January 1, 2002.
The ImageChecker system is comprised of two major subsystems, a
processing unit and a display unit. The processing unit is comprised of a
high-resolution digitizer and a proprietary pattern recognition neural network
program. The display unit permits viewing of CAD results in a variety of
formats, ranging from digital display to paper printout.
We market and sell our ImageChecker products worldwide through a direct
sales force and distributors. We also have multi-year and sole-source CAD
contracts with group purchasing organizations, or GPOs.
Our Strategy
Our objective is to be the leading provider of proprietary CAD solutions
that improve the accuracy of cancer detection, are easy to use, are cost
efficient and improve the quality of patient care. To achieve this objective,
we are pursuing the following business strategies:
. establish our proprietary CAD technology as the standard of care for
cancer screening and detection;
. leverage our CAD technology to work with a broad range of imaging
products and to help detect other cancers;
. leverage our growing installed base and strategic relationships to
produce a steady stream of new and recurring revenue; and
. provide fully integrated image and data management solutions to
customers.
Our Address
Our principal executive offices are located at 325 Distel Circle, Los
Altos, California 94022, and our telephone number is (650) 254-7200.
3
The Offering
Common stock offered.............. [ ] shares
Common stock to be outstanding
after the offering.............. [ ] shares
Use of proceeds................... For general corporate purposes, including working
capital, research and development, sales and
marketing, clinical and regulatory studies, capital
expenditures, and investments in and potential
acquisitions of complementary businesses, products,
and technologies.
Proposed Nasdaq National Market
symbol.......................... RTWO
The number of shares to be outstanding after this offering is based on:
. 3,617,089 shares of our common stock outstanding on September 30, 2001;
. automatic conversion of all redeemable convertible preferred stock
outstanding on September 30, 2001 into 27,429,705 shares of our common
stock upon completion of this offering; and
. automatic conversion of all Series G-1 redeemable convertible
preferred stock issued in December 2001 into 3,514,500 shares of our
common stock upon completion of this offering.
The number of shares to be outstanding after this offering excludes:
. 7,995,307 shares issuable upon exercise of common stock options and
warrants outstanding on September 30, 2001 at a weighted-average
exercise price of $1.55 per share;
. 1,757,296 common shares reserved as of September 30, 2001, under our
stock option plans, as amended, and available for grant;
. 945,621 shares issuable upon exercise and conversion of outstanding
warrants to purchase Series F-1 and Series G-1 redeemable convertible
preferred stock at a weighted-average exercise price of $3.98 per
share. Upon completion of this offering, these warrants will either
expire or become exercisable for common stock; and
. shares intended to be reserved upon adoption of an employee stock
purchase plan prior to completion of this offering.
4
Summary Financial Data
(in thousands, except per share data)
Nine Months Ended
Year Ended December 31, September 30,
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1998 1999 2000 2000 2001
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Statements of Operations Data:
Revenue................................................. $ 172 $ 1,894 $ 4,932 $ 3,351 $18,174
Total costs and expense................................. 10,949 12,310 19,209 12,098 26,649
Loss from operations.................................... (10,777) (10,416) (14,277) (8,747) (8,475)
Net loss................................................ (10,229) (9,955) (14,032) (8,540) (8,309)
Accretion of redeemable convertible preferred stock..... 43 62 34 19 48
Net loss attributable to common stockholders............ (10,272) (10,017) (14,066) (8,559) (8,357)
Basic and diluted net loss per share.................... $ (4.14) $ (3.70) $ (4.46) $ (2.75) $ (2.46)
Shares used in computing basic and diluted net loss per
share................................................. 2,480 2,708 3,156 3,114 3,402
Pro forma basic and diluted net loss per share.......... $ (0.53) $ (0.27)
Shares used in computing pro forma basic and diluted net
loss per share........................................ 26,676 30,831
September 30, 2001
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Pro Forma
Actual Pro Forma As Adjusted
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Balance Sheet Data:
Cash, cash equivalents and short-term investments $ 5,500 $19,500 $
Working capital.................................. 5,512 19,512
Total assets..................................... 21,370 35,370
Deferred revenue, including current portion...... 13,761 13,761
Long-term obligations, less current portion...... 1,224 1,224
Redeemable convertible preferred stock........... 59,979 --
Total stockholders' equity (deficit)............. (58,529) 15,450
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See Notes 2 and 9 of Notes to Financial Statements for an explanation of the
determination of the amounts used in computing net loss per share and pro forma
net loss per share amounts. See also Note 14 of Notes to Financial Statements
for the pro forma effects resulting from the sale, issuance and assumed
conversion of the Series G-1 redeemable convertible preferred stock.
The pro forma balance sheet data above gives effect to receipt of the net
proceeds from our sale of 3,514,500 shares of Series G-1 redeemable convertible
preferred stock in December 2001 and reflects the conversion of all shares of
our preferred stock into 30,944,205 shares of common stock automatically upon
completion of this offering.
The pro forma as adjusted balance sheet data gives effect to the sale of
shares of common stock in this offering at an assumed initial public offering
price of $[ ] per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses, and the application of the net
proceeds.
5
RISK FACTORS
Any investment in shares of our common stock involves a high degree of
risk. You should consider carefully the following information about these
risks, together with the other information contained in this prospectus, before
you decide to buy our common stock. If any of the following risks actually
occur, our business, results of operations and financial condition would likely
suffer. In these circumstances, the market price of our common stock could
decline, and you may lose all or part of the money you paid to buy our common
stock.
Risks Related to Our Operations
We have limited operating experience and a history of losses, and we may not
achieve or maintain profitability in the future.
We have a limited history of operations focused primarily on research and
development, product engineering, clinical trials and seeking FDA regulatory
approval to market our products. As of September 30, 2001, we had an
accumulated deficit of $60.3 million. We have limited experience manufacturing,
selling and marketing the ImageChecker system.
Our limited operating history may affect our business. The market for CAD
technology is unproven and we may be unable to generate significant commercial
revenue. In addition, our costs may be higher than we expect. If we fail to
generate sufficient revenue or to control our costs, our results of operations
will suffer, which in turn could cause our stock price to decline.
Our results of operations will depend upon numerous factors, including:
. market acceptance of the ImageChecker system;
. our ability to develop, introduce and market new or enhanced versions
of our products on a timely basis;
. our ability to develop our manufacturing and sales and marketing
capabilities;
. Medicare and third-party payor reimbursement policies;
. effects of competition, including pricing and margin pressures;
. regulatory matters affecting our products;
. the progress and results of clinical trials;
. our ability to maintain key licenses and to license additional
intellectual property rights; and
. our ability to protect our intellectual property.
These factors could negatively impact our operating results in one or
more periods, which could present an unreliable indication of our future
performance. It is possible that in some future quarters, our operating results
may fall short of the expectations of securities analysts or investors. If this
occurs, our common stock price, and the value of your investment, may decline.
Our revenue in the near term will be derived primarily from the ImageChecker
products, and if these products fail to achieve broader market acceptance, we
may never achieve, sustain or increase profitability, and our revenue may be
insufficient to maintain or expand our operations.
Our current product offerings are limited to mammography. We derive
substantially all of our revenue from sales of ImageChecker systems and from
sales of original equipment manufacturer, or OEM, ImageChecker-DM products
through GE Medical Systems. We do not expect significant revenue from any other
products until at least 2003, and as a result, our near-term revenue is
dependent on sales of our ImageChecker products.
6
We are planning to increase our operating expenses, specifically by:
. expanding our sales and marketing and distribution activities for the
ImageChecker system in the U.S. and in international markets;
. expanding our manufacturing capacity;
. increasing our research and development on chest radiography and lung
cancer screening products;
. performing clinical research and trials in order to obtain regulatory
clearance and approval for the commercial sale of our chest
radiography and lung cancer screening products; and
. hiring, training, managing, retaining and integrating new personnel.
We will need to increase our revenue significantly in order to cover
these planned increases. If the ImageChecker system does not achieve broad
market acceptance among radiologists, hospital administrators, and patients,
our ability to generate revenue will be limited and operating losses are
likely. Our future profitability is highly uncertain. We may never generate the
revenue necessary to become profitable. Even if we do achieve profitability, we
may not be able to sustain or increase profitability on a quarterly or annual
basis.
Our strategy for commercializing products depends in part on our ability to
form and maintain strategic relationships. If we are not able to enter into and
maintain such arrangements on acceptable terms, our results will suffer.
We currently have a small direct sales force and rely heavily on
distributors. Our sales force is focused on the mammography CAD market. We may
require a significant number of new sales personnel. In addition, because our
current and planned products require a complex sales and marketing strategy,
involving radiologists, patients, healthcare facility administrators and
third-party payors, we will need to diversify the experience and market
knowledge of our sales force. We face significant challenges in recruiting,
training, managing and retaining our sales and marketing personnel.
We rely heavily on distributors to sell our products in the U.S. We also
rely entirely on a single distributor in each of our international markets. If
our U.S. and international distributors do not commit the resources necessary
to execute our sales and marketing strategy, or if we are unable to attract
additional distributors, we may fail to generate sufficient revenue in one or
more markets. This would harm our financial condition, and our stock price
could decline.
We also rely and expect to continue to rely on strategic manufacturing
and development collaborations. For example, we have entered into contracts to
manufacture OEM digital chest products for Kodak through December 2005 and
ImageChecker-DM products for GE Medical Systems through December 2002. If the
Kodak contract is terminated early, or if Kodak chooses a competing development
partner, our chest radiography and chest CAD product development will suffer.
In addition, Kodak will invest $2.8 million toward our research and development
in lung nodule detection, subject to development milestones. Fifty percent of
Kodak's license fees payable to us during the exclusivity period will be
credited to the amount of this investment until the amount of the investment
has been fully credited. In the event all of the investment has not been
credited by December 31, 2005, we will be obligated to repay the outstanding
balance. If the GE Medical Systems contract is terminated early, or if GE
Medical Systems chooses a competing development partner, our ImageChecker-DM
sales will suffer. In addition, the digital mammography market is not
established, and the sales of our ImageChecker-DM software through GE Medical
Systems are dependent on the ability of GE Medical Systems to secure
appropriate regulatory approvals and to develop and penetrate that market.
Further, if these or future strategic manufacturing and development partners
bundle a competitive product into their product offerings or include their own
proprietary systems in their product offerings, our revenue and operating
results would suffer.
7
Any adverse changes in reimbursement procedures by Medicare or other
third-party payors may limit our ability to market and sell our products.
In the U.S., use of the ImageChecker system to perform CAD in mammography
for both screening and for diagnostic use is generally covered by Medicare and
by a number of commercial third-party payors, which provide reimbursement for
each use of the product. Although the ImageChecker system is currently being
reimbursed through Medicare and certain commercial third-party payors,
including health maintenance and preferred provider organizations, our other
products and planned products may not be approved for reimbursement at
favorable rates or at all.
International market acceptance for our products may depend, in part,
upon the availability of reimbursement within prevailing healthcare payment
systems. Reimbursement and healthcare payment systems in international markets
vary significantly by country and include both government-sponsored healthcare
and private insurance. Our failure to receive international reimbursement
approvals may impede market acceptance for our products in the international
markets in which we seek those approvals.
In the future, third-party reimbursement and coverage may be unavailable
or inadequate in either the U.S. or international markets. Future legislation,
regulation or reimbursement policies of third-party payors may adversely affect
the demand for our existing or planned products. If physicians, hospitals and
other healthcare providers are unable to obtain coverage and reimbursement from
third-party healthcare payors for the cost of our current or future products,
or if reimbursement is insufficient to cover the cost of purchasing our
products, our business, financial condition and operating results could be
harmed.
We face competitors with greater resources, which may make it more difficult
for us to achieve or maintain significant market share. If the CAD market
grows, competitors with greater resources are likely to intensify their
competitive activities.
The market for medical equipment is intensely competitive, rapidly
changing, and highly sensitive to new product introductions and other market
factors. A number of major medical imaging equipment manufacturers, including
GE Medical Systems, Siemens AG, Philips Medical Systems, Toshiba Corporation,
Kodak and Fuji PhotoFilm Co., Ltd., or Fuji, have indicated an interest in
bringing CAD products to market. These companies may be able to respond more
rapidly to changing or emerging technologies and changes in customer
requirements, or develop their own proprietary CAD products or acquire our
smaller competitors to bring competing products to market more quickly. Each of
these companies enjoys several competitive advantages, including:
. significantly greater name recognition than we have;
. a longer history of established relationships with healthcare
professionals, customers and third-party payors;
. diversified product lines, and the ability to engage in price
competition, including offering rebates or bundling products to offer
greater discounts;
. more firmly established relationships in the distribution channel for
medical imaging equipment; and
. substantially greater financial resources and resources for research,
product development, manufacturing, sales and marketing, and
intellectual property protection and litigation.
In addition, we currently encounter direct competition from competitors
such as CADx Medical Systems in mammography CAD. We expect that some of our
competitors may seek to enter the mammography CAD market with low-priced
products. Customers seeking a low-cost CAD solution may prefer a competitor's
lower-priced product to ours. Further, we expect that Deus Technologies will be
a direct competitor for our lung CAD product under development.
8
If the market continues to grow for CAD technologies related to various
cancers, our competitors may increase their focus on products directly
competitive with our current and planned products. Our competitors with
proprietary solutions and interfaces may attempt to keep us from integrating
our products with healthcare provider information networks that use their
products. This would make it more difficult for us to sell to potential
customers employing such proprietary systems.
We have limited manufacturing experience and facilities and rely on sole-source
suppliers for some of our major product components. Any problems we encounter
in expanding manufacturing capacity or managing our supply relationships could
harm our business.
We have manufactured only a limited number of our products for sale to
customers and have never manufactured our products in the volume that will be
necessary for us to achieve significant commercial sales. Our current
manufacturing capacity is insufficient for high-volume production of our
products, and we may need to establish new manufacturing facilities and
processes.
Facilities and operations expansion and development can be delayed by
unforeseen circumstances, including:
. inability to obtain needed key manufacturing equipment on a timely
basis;
. shortages of qualified personnel to operate equipment and manage
manufacturing operations;
. unexpected delivery failures by sole or limited source suppliers;
. shortages of key components;
. difficulties with facility construction or adaptation;
. difficulties associated with expanding from small-scale, pilot
production to higher volume capacity; and
. the need to obtain additional regulatory approvals for new
manufacturing facilities.
If we are unable to complete facilities expansion on schedule, obtain
additional regulatory approvals or if we fail to meet our facilities needs, we
may become unable to provide our customers with the quantity of products they
require. As a result, we could lose customers and suffer reduced revenue.
Some of our components used in the manufacture of our ImageChecker system
and our ImageChecker-DM product are available only from one supplier or vendor,
or from a limited number of sources. For example, we expect that it would
require at least six months to qualify a second supplier of our continuous
loading film digitizer components from Canon, Inc. A loss of our Canon supply
agreement would cause a significant disruption to our business. Any significant
problem with a sole source supplier could result in a delay or interruption in
that supplier's supply of product components that could disrupt our
manufacturing operations or expansion plans. As a result, we may be unable to
establish or maintain reliable, high-volume manufacturing capacity. Even if we
are able to do so, the related expenses may increase the cost of our products
and reduce our ability to compete.
We are subject to extensive regulation by various Federal, state and
international bodies, which could cause us to incur significant costs.
Our ImageChecker system is a medical device subject to extensive
regulation by the FDA under the Federal Food, Drug, and Cosmetic Act. The FDA's
regulations govern, among other things, product development, product testing,
product labeling, product storage, premarket clearance or approval, advertising
and promotion, and sales and distribution. Unanticipated changes in existing
regulatory requirements or adoption of new requirements could hurt our
business, financial condition and results of operations.
9
Numerous regulatory requirements apply to our marketed products,
including adherence to the FDA's Quality System Regulation, or QSR, which
requires that our manufacturing operations follow elaborate design, testing,
control, documentation and other quality assurance procedures during the
manufacturing process; labeling regulations; adverse event reporting; and the
FDA's general prohibition against promoting products for unapproved or
"off-label" uses. Our most recent FDA inspection was in 1999. We cannot be
certain that an FDA inspection would determine that we are in compliance with
all requirements. Our failure to comply could lead to warning letters,
non-approvals, suspensions of existing approvals, civil penalties and criminal
fines, product seizures and recalls, operating restrictions, injunctions, and
criminal prosecution.
In order to market and sell our products in other countries, we must
obtain and maintain regulatory approvals and comply with the regulations of
those countries. These regulations, including the requirements for approvals,
and the time required for regulatory review, vary from country to country.
Obtaining and maintaining foreign regulatory approvals is expensive and time
consuming. We have applied for regulatory approvals in certain countries, but
we cannot be certain that we will receive regulatory approvals timely or at all
in any foreign country in which we plan to market our products, and if we fail
to receive such approvals, our ability to generate revenue will be harmed.
As a medical device manufacturer, our manufacturing facilities are
subject to periodic unannounced inspections for compliance with extensive
regulatory requirements by the FDA and corresponding state agencies and
international regulatory authorities. We cannot assure you we will be able to
maintain our compliance with regulatory requirements that pertain to our
manufacturing activities.
The FDA has recently informally suggested that the methodology of our
pre-market approval study may not permit the analysis necessary to support one
of our approved labeling claims. As a result, the FDA may require changes, or
we may need to submit an application for different labeling.
One of our current FDA-approved claims is that "for every 100,000 cancers
currently detected by screening mammography, the use of the ImageChecker could
result in early detection of an additional 20,500 breast cancers." In October
2001, we received an informal communication from an FDA official raising
questions about the methodology that we used to analyze the study that supports
the 20,500 figure. Subsequently, we have had informal communications with this
official. In December 2001, we provided a written report from our outside
biostatistical consultant supporting our analysis. To date, we have not
received any response. We cannot assure you that the FDA will accept our
analysis or methodology. The FDA may require us to revise the claim by, for
example: adding clarifying language, reducing the claim from 20,500 to a
significantly lower number, or by using a different methodology altogether to
report the efficacy of the ImageChecker system. Any such revision could harm
our ability to advertise, promote, and sell the ImageChecker system.
If we fail to comply with the FDA's Quality System Regulation, our
manufacturing operations could be delayed, and our product sales could suffer.
Our manufacturing operations for the ImageChecker system are required to
comply with the FDA's Quality System Regulation which covers the methods and
documentation of the design, testing, production, control, quality assurance,
labeling, packaging, storage, and shipping of our products. The FDA enforces
the QSR through unannounced inspections. We have not been subject to a QSR
inspection since we first commercialized the ImageChecker system. If we fail a
QSR inspection, our operations could be disrupted and our manufacturing could
be delayed. If we fail to take adequate corrective action in response to any
FDA observations of noncompliance, we could face various enforcement actions,
which could include a shutdown of our manufacturing operations and a recall of
our products, which would cause our product sales to suffer.
Our products are subject to recalls even after receiving FDA approval or
clearance. A recall would harm our reputation.
The FDA and similar governmental authorities in other countries have the
authority to require the recall of our products in the event of material
deficiencies or defects in design or manufacture. A government mandated
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recall, or a voluntary recall by us, could occur as a result of component
failures, manufacturing errors or design defects, including defects in
labeling. Any recall would divert managerial and financial resources and harm
our reputation with customers. In 2000, we transferred part of our in-house
manufacturing operation to a third-party contract manufacturer. In 2001, we
transferred the operation back in-house. We reported both transfers to the FDA
in annual reports. In hindsight, we believe that we may have been required to
obtain prior approval of a pre-market approval, or PMA, supplement before
transferring our manufacturing operation to a third party rather than simply
reporting the transfer after the fact. We have disclosed this apparent
oversight to FDA officials and we believe that enforcement action is unlikely.
Nonetheless, we cannot assure you that the FDA will not take enforcement
action. We have applied for but have not received a device manufacturing
license from the State of California.
Our research and development, sales and marketing, and manufacturing experience
is limited to the market for CAD in mammography. We may be unable to transfer
our experience in breast cancer products to products that focus on other
cancers.
We cannot assure you that we will be able to complete and commercialize
our chest products that are currently under development. Nearly all of our
research and development, manufacturing, and marketing experience has focused
on our ImageChecker products for breast cancer. This experience may prove to be
difficult to transfer to our new technologies and products under development
for chest radiography and lung cancer screening. As a result, our development
of chest products may require substantial additional efforts and resources and
may not be successful.
Most of our research and development has focused on breast tissue, which
is very different from lung tissues. In addition, chest image acquisition
techniques yield a much larger amount of digital data than our current CAD
technology can process. These factors may prevent us from leveraging our
experience and technology in breast-imaging CAD to develop effective products
for other cancers, different tissue structures or alternate image acquisition
techniques.
We may encounter delays or difficulties in our clinical trials, which may delay
or prevent regulatory approval of products under development.
We have not received FDA approvals for non-mammography products under
development, including our chest products. In order to commercialize our
products under development, we will need to obtain regulatory approvals for
each indicated use. Satisfying regulatory requirements generally takes many
years and involves compliance with complex standards for research and
development, testing, manufacturing, quality control, labeling, and promotion
of products.
We are not currently conducting clinical trials for products outside the
ImageChecker product line. If we cannot secure 510(k) clearance for any of our
future product candidates, we will need to conduct significant additional
research and clinical trials and obtain approval of a pre-market application
before we can commercially market them. Failure to secure clearance or approval
for such products could occur at any stage of testing, and any delays or
difficulties we encounter in our clinical trials may delay or prevent
regulatory approval and commercial introduction of the affected products. We or
the FDA might delay or halt any of our clinical trials at any time for various
reasons, including:
. failure of our products to be more effective than competing products;
. longer than expected time required to determine whether our products
are effective;
. death of a patient during a clinical trial, even if the death was not
caused by one of our products; or
. failure to enroll a sufficient number of patients in our clinical
trials.
Delays in testing or regulatory approvals, or a need to perform more or
larger clinical trials than we planned, would increase our product development
costs significantly.
11
We expect our near-term sales to be seasonal and largely dependent on the
ImageChecker system's long and unpredictable sales cycle, while we expect our
expenses, and possibly our revenue, to be more evenly distributed. This may
lead to fluctuating or unpredictable quarterly results.
Many of our customers are large organizations with significant purchasing
power and have cyclical ordering practices, driven by hospital budgeting and
procurement cycles. The ImageChecker system has a lengthy sales and purchase
order cycle because it is a major capital item with a typical list price of
between $160,000 and $240,000 and generally requires the approval of senior
management at purchasing institutions. We have encountered sales cycles for
ImageChecker system units longer than one year from first contact to final
sale. A sales cycle of that length makes it difficult to estimate manufacturing
and support requirements. In addition, the size of many of our customers may
lead to price pressures. If actual sales differ substantially from estimated
sales, we may under- or over-allocate resources for projected sales.
These factors may contribute to substantial fluctuations in our quarterly
operating results, particularly during the periods in which our sales volume is
low. If we ever do achieve profitability, it may occur in a quarter with
concentrated revenue. In that case, we would expect reduced revenue in the
following quarter, and possibly a quarterly loss. If this sequence of events
occurs, our stock price could drop. These fluctuations also mean that you will
not be able to rely upon our operating results in any particular period as an
indication of future performance.
Because the medical equipment industry is litigious, we may be sued for
allegedly violating the intellectual property rights of others.
Because the medical device industry is litigious, we may be sued for
allegedly violating the intellectual property rights of others. The medical
technology industry has in the past been characterized by a substantial amount
of litigation and related administrative proceedings regarding patents and
intellectual property rights. In addition, major medical device companies have
used litigation against emerging growth companies as a means of gaining a
competitive advantage.
From time to time, we have received and may again receive letters from
third parties drawing our attention to their patent rights. While we do not
believe that we infringe any valid and enforceable patents that have been
brought to our attention, there may be other more pertinent rights of which we
are presently unaware.
Should third parties file patent applications or be issued patents
claiming technology also claimed by us in pending applications, we may be
required to participate in interference proceedings in the U.S. Patent and
Trademark Office to determine the relative priorities of our inventions and the
third parties' inventions. We could also be required to participate in
interference proceedings involving our issued patents and pending applications
of another entity. An adverse outcome in an interference proceeding could
require us to cease using the technology or to license rights from prevailing
third parties.
We are aware of third parties whose business involves the use of CAD
systems. Certain of these parties have issued patents or pending patent
applications on technology that they may assert against us. Third parties may
claim we are using their patented inventions and may go to court to stop us
from engaging in our normal operations and activities. These lawsuits are
expensive to defend and conduct and would also consume and divert the time and
attention of our management. A court may decide that we are infringing a third
party's patents and may order us to cease the infringing activity. The court
could also order us to pay damages for the infringement. These damages could be
substantial and could harm our business, financial condition, and operating
results.
If we were unable to obtain any necessary license following a
determination of infringement or an adverse determination in litigation or in
interference or other administrative proceedings, we would have to redesign our
products to avoid infringing a third party's patent and could temporarily or
permanently have to discontinue manufacturing and selling some of our products.
If this were to occur, it would negatively impact future revenue.
12
If we fail to protect our intellectual property rights, our competitors may
take advantage of our ideas and compete directly against us.
We rely on patent protection, as well as a combination of copyright,
trade secret and trademark laws, and nondisclosure, confidentiality agreements
and other contractual restrictions to protect our proprietary technology. We
have licensed technology, and we have also submitted patent applications
directed to our own technological improvements. However, these legal means
afford only limited protection and may not adequately protect our rights or
permit us to gain or keep any competitive advantage. For example, our patents
may be challenged, invalidated or circumvented by third parties. Our U.S. and
foreign patent applications, including those already allowed, may not be issued
as patents in a form that will be advantageous to us. We may not be able to
prevent the unauthorized disclosure or use of our technical knowledge or other
trade secrets by employees. Furthermore, the laws of foreign countries may not
protect our intellectual property rights to the same extent as the laws of the
U.S. If competitors engage in activities that infringe our proprietary rights,
our management's focus will be diverted and we may incur significant costs in
asserting our rights. We may not be successful in asserting our proprietary
rights, which could result in our patents being held invalid or a court holding
that the competitor is not infringing, either of which would harm our
competitive position. We cannot be sure that others will not design around our
patented technology. If our intellectual property is not adequately protected,
our competitors could use our intellectual property to enhance their products.
This would harm our competitive position, decrease our market share, or
otherwise harm our business.
Failure to maintain existing licenses of key technology from third parties, or
our inability to secure licenses necessary to improve current products or
develop new products, may harm our business.
We rely on licenses to use various technologies that are material to our
business. We do not own the patents that underlie these licenses. In
particular, licenses from ARCH Development Corporation, or ARCH, and Shih-Ping
Bob Wang, one of our founders, contain technology underlying our ImageChecker
system. Some of these licenses are not exclusive, and do not prevent
competitors or potential competitors who have also licensed the technology from
developing competing products. Our current rights to use these technologies and
employ the inventions claimed in the licensed patents are subject to our
licensors abiding by the terms of these licenses and may be restricted or
terminated by the licensor under certain circumstances. Some of these
technologies would be difficult or impossible to replace or bypass in the short
term. Losing the right to use these technologies would prevent us from selling
the affected products, which would accordingly reduce our revenue and
significantly harm our business.
A number of universities and privately and publicly held corporations are
conducting significant research in CAD and medical imaging. We expect that
improvements to our existing and planned products, and potentially, fundamental
technological underpinnings for planned products, will be or become
intellectual property owned by third parties. For example, we are aware of
certain patents owned by Wake Forest University that relate to medical imaging.
The cost of licensing such technology may significantly increase the unit cost
of our products. In addition, owners of such intellectual property may refuse
to offer licenses to us on commercially reasonable terms, or at all. In such
event, we may not be able to manufacture competitive products with the most
desirable features, if we can manufacture affected products at all. Even if we
were able to obtain rights to a third party's patented intellectual property,
these rights may be non-exclusive, thereby giving our competitors access to the
same intellectual property.
We do not control the prosecution, enforcement, or maintenance of the
patent applications and patents to which we hold licenses. Instead we rely upon
the licensors to determine appropriate prosecution and enforcement strategies.
To the extent licensors do not adequately protect their intellectual property,
competitors may take advantage of the situation and field competing products
without incurring the licensing expenses that we pay, which could harm our
competitive position and ultimately harm our operating results.
13
Failure to protect our proprietary methods and technologies could impair our
competitive advantage, divert management attention, require additional
intellectual property to be developed, and prevent us from commercializing the
affected products.
Our commercial success will depend, in large part, on our ability to
obtain patent protection on many aspects of our business, including the
products, methods and services we develop. We rely on a combination of patents,
copyrights, trademarks and trade secrets to establish and protect our
intellectual property rights. As of December 20, 2001, we owned or had rights
in over 85 patents and patent applications; however, patents issued to us may
not provide us with substantial protection or be commercially beneficial to us.
The issuance of a patent is not conclusive as to its validity or its
enforceability. In addition, our patent applications may not result in issued
patents. Our competitors may obtain rights to commercialize our discoveries,
which would harm our competitive position.
In addition, we seek to avoid disclosure of our trade secrets in a number
of ways, including restrictions on access to our technology, and requiring that
those with access to our intellectual property execute nondisclosure agreements
with us. If we are unable to protect our intellectual property in the U.S. and
abroad, the results of our operations could suffer.
Adverse events could undercut our efforts to protect our intellectual
property. Our competitors could develop competing technologies or products
without infringing our patents, or copyrights or other intellectual property.
If a competitor infringed our intellectual property rights, we may fail to
bring or to prevail in a suit to protect our rights. In addition, unauthorized
parties, including employees, may attempt to obtain or copy information we
consider proprietary, or misappropriate our trade secrets. The laws of some
foreign countries do not protect intellectual property as effectively as do the
laws of the U.S. As a result of all of these factors, our efforts to protect
our intellectual property may not be adequate, and our competitors may
independently develop similar competing technologies or products, duplicate our
products, or design around our intellectual property.
If customers adopt a centralized screening model, we may need to change our
pricing strategy, product development, sales and marketing strategies, we could
lose market momentum, and our revenue and operating results may be harmed.
We have pursued a pricing strategy of seeking an outright purchase of our
products at a single price. A radiologist generally screens images acquired in
or near the healthcare facility where the radiologist works, and our strategy
contemplates the purchase of our products by individual healthcare facilities
that may find them useful. If healthcare providers were to centralize their
radiology services, however, so that image acquisition occurred in satellite
locations and images were transmitted to teleradiology centers serving multiple
satellite locations, fewer units of our products would be required to analyze
the same number of patient images. As a result, the unit sales of our products
and our revenue may decrease. If this circumstance develops in the future, we
may need to change our billing practices from an outright sale model to a
different model based on the manner in which our products are used. Such a
change could dissatisfy certain customers and harm our revenue and operating
results.
Product liability claims may require us to pay damages, reduce the demand for
our products, and harm our reputation.
Our business exposes us to a significant risk of product liability
claims. The field of breast cancer screening and detection has one of highest
rates of litigation in the medical industry, and has been subject to some of
the highest aggregate damages. We may be subject to legal complaints arising
from incorrect breast cancer screening results, or from screening for other
diseases addressed by our CAD products. We maintain product liability insurance
in the amount we believe reasonably insures us against product liability risk.
While we believe that we are reasonably insured against product liability
risks, we may not be able to obtain insurance in amounts or scope sufficient to
provide us with protection against all potential liabilities, particularly as
sales of our products increase. A product liability claim can result in
significant legal defense costs regardless of its merit
14
or eventual outcome. If we were required to pay damages that exceeded our
insurance coverage to one or more plaintiffs, such amounts would have to be
paid out of cash reserves and the amount of such payments could significantly
harm our financial condition. A product liability claim could also harm our
reputation and lead to a decline in revenue.
We depend on key personnel, and the loss of our current personnel, or our
failure to hire and retain additional qualified personnel, could affect our
ability to grow the business, or to effectively manage growth that does occur.
In that case, our product development and operating results could be harmed.
Our future success depends upon the continued service of our executive
and technical officers and other key personnel, and upon their ability to work
together. Of particular importance to our continued operation is our Chairman
of the Board, President and Chief Executive Officer, Michael S. Klein.
Searching for replacements for executive and technical officers or other
key personnel could divert management time and increase operating expenses.
Most of our executive and technical officers and other key employees are not
bound by an employment agreement, and we do not maintain any key person life
insurance policies. If we lose the services of one or more of our executive
officers or other key employees, or if one or more of them decided to join a
competitor or otherwise compete directly or indirectly with us, our business
could be seriously harmed.
In order to scale-up manufacturing, expand marketing and distribution
capabilities, develop future products, and enter new markets, actions we must
undertake in order to increase revenue and become profitable, our executive
officers must manage the expansion of our operations. Any failure by our
executive officers and other key personnel to manage this growth could impede
our ability to increase revenue and achieve and maintain profitability.
Some studies have questioned the efficacy of mammography to reduce mortality.
If mammography proves to be less effective, our business would be seriously
harmed. In addition, competing technologies could replace mammography as the
preferred method for screening for breast cancer.
Some publications have questioned the efficacy of screening mammography
to reduce mortality. If mammography is proven to be ineffective, our business
would be seriously harmed. From time-to-time analyses are published that
question the efficacy of mammography to reduce mortality from breast cancer.
Most recently, we are aware of a publication from a group of researchers in
Denmark that conducted a re-analysis of other published studies. They claim
that most of the earlier studies were flawed in their design and there was no
real reduction in mortality. Many academicians and health policy groups
question their findings, but even if untrue, these claims could influence
mammography usage in the U.S. and undermine adoption of mammography in
countries where screening is not widely adopted. Other articles could also
negatively affect the practice of mammography and thereby harm our business.
We are aware of companies that are developing alternatives to traditional
breast cancer detection, including refractive light, thermal technologies,
breast ultrasound, magnetic resonance imaging and non-imaging tests.
We may not be able to raise additional funds in the foreseeable future to fund
our operations or future acquisitions, or additional funding may not be
available to us on favorable terms.
We expect our cash resources to be sufficient to meet our currently
predicted working capital and capital expenditure needs for the next twelve
months. We might, however, need to raise additional funds through public or
private financings, strategic relationships or other arrangements in order to:
. develop additional CAD technologies, such as computed radiography, or
CR, digital radiography, or DR, and CT;
15
. enhance the current ImageChecker product line to improve detection
accuracy and display, among other things;
. fund additional sales and marketing programs, including co-operative
reimbursement programs;
. invest in or acquire complementary businesses or technologies; or
. hire additional personnel, particularly to expand manufacturing,
marketing and distribution capabilities.
Our ability to run our business could be damaged if we are unable to
identify additional sources of capital to fund these activities on favorable
terms.
Our activities in several different countries expose us to inherent risks in
doing business internationally. Our growth may be limited if we are unable to
successfully manage our international activities.
In addition to our domestic operations, we currently conduct sales and
marketing in other countries in North America, Europe and Asia. Our
international operations pose risks that include:
. potential adverse tax consequences;
. foreign currency fluctuations;
. greater difficulty in collecting accounts receivable;
. protectionist laws and business practices that favor local competitors;
. the expense and logistics of establishing facilities and operations in
new foreign markets;
. the difficulty of building and managing an organization with
geographically dispersed operations;
. burdens and uncertainties related to compliance with foreign laws;
. uncertain protections in international markets against infringement of
our intellectual property; and
. lengthy sales cycles typical in certain overseas markets.
In particular, we currently expect that all of our sales overseas will be
denominated in U.S. dollars, and as a result, an increase in the value of the
U.S. dollar relative to foreign currencies could make our products less
competitive, and impede our ability to penetrate the international market.
If we are unable to meet and overcome these challenges, our international
operations may not be successful, which would limit the growth of our business.
Risks Related to this Offering
Our common stock has not been publicly traded, and we expect that the price of
our common stock will fluctuate substantially. An active trading market for our
stock may not develop, and selling your stock may be difficult.
Prior to this offering, our common stock has not been traded on a public
market. We cannot predict whether an active public trading market for our stock
will develop following this offering, or whether such a market will be
sustained. We have negotiated with the underwriters to determine the price of
the shares of common stock sold in this offering, but this price will not
necessarily reflect the market price of the common stock following this
offering. A number of factors will influence the market price for the common
stock following this offering, including:
. volume and timing of orders for our products;
. quarterly variations in our or our competitors' results of operations;
16
. changes in the availability of third-party reimbursement in the U.S.
or other countries;
. the announcement and introduction of new products or product
enhancements by us or our competitors;
. our ability to develop, obtain regulatory clearance for, and market,
new and enhanced products;
. changes in governmental regulations or in the status of our regulatory
approvals or applications;
. product liability claims or other litigation;
. announcements of technological or medical innovations in the CAD or
mammography markets;
. changes in earnings estimates or recommendations by securities
analysts; and
. general market conditions and other factors which may be unrelated to
our operating performance or the operating performance of our
competitors.
If no trading market develops, securities analysts may decide not to
provide research coverage of our company. We cannot assure you that any
securities analysts will initiate or maintain research coverage of our company
and our shares, and this could further depress the market for our shares.
A large number of shares may be sold into the market following this offering.
This may cause the price of our common stock to decline.
After this offering, [ ] shares of our common stock will be
outstanding, or [ ] shares if the [ ] underwriters exercise their
over-allotment in full. The [ ] shares we are selling in this offering, or [
] shares if the underwriters exercise their over-allotment in full, will be
freely tradable, without restriction or further registration, under the federal
securities laws unless purchased by our affiliates. The remaining shares of
common stock outstanding after this offering, based upon shares outstanding as
of [ ], 2001 and assuming no exercise of options or warrants outstanding
prior to this offering, will be available for sale in the public market as
follows:
Percent of Total Shares
Number of Outstanding Immediately
Shares After Offering Date of Availability for Resale Into Public Market
- ---------- ----------------------- ---------------------------------------------------------------------
0 [ ]% The day our common stock commences trading in the public market,
taking into account agreements these stockholders have with us and
the underwriters.
31,541,828 [ ]% The 181st day following the day our common stock commences
trading in the public market, taking into account agreements these
stockholders have with us and the underwriters. However, Robertson
Stephens, Inc. or we, with the written consent of Robertson Stephens,
Inc., can waive this restriction and allow these stockholders to sell
their shares at any time.
The table above takes into account the lock-up agreements under which
substantially all of our stockholders have agreed not to sell their shares of
stock for 180 days after the completion of this offering. Robertson Stephens,
Inc., or we with the written consent of Robertson Stephens, Inc., may waive any
of these lock-up restrictions prior to the expiration of the lock-up period
without prior notice. Approximately 15,348,535 million of the shares of common
stock that will be available for sale after the expiration of the lock-up
period will be subject to volume restrictions under federal securities laws
because they are held by our affiliates.
If our common stockholders sell substantial amounts of common stock in
the public market, or if the market perceives that these sales may be about to
occur, the market price of our common stock could fall. After
17
the completion of this offering, the holders of approximately 34,914,057 shares
of common stock, including common stock issued upon conversion of our preferred
stock and upon exercise of outstanding warrants, will continue to have rights,
subject to some conditions, to require us to file registration statements
covering their shares, or to include their shares in registration statements
that we may file for ourselves or for other stockholders. If these holders
exercise their registration rights in one of our future registration
statements, their stock sales could impair our ability to raise necessary
capital by depressing the price at which we could sell our common stock.
Purchasers in this offering will experience immediate and substantial dilution.
We expect the price of our shares in this offering to be substantially
higher than the pro forma net tangible book value per share of our outstanding
common stock after this offering. Accordingly, investors purchasing shares of
common stock in this offering will pay a price per share substantially higher
than the value of our assets less liabilities. Assuming the sale of [ ]
shares of our common stock in this offering at an assumed initial public
offering price of $[ ] per share, the mid-point of the range on the cover of
this prospectus, the investors in this offering will contribute [ ]% of the
total amount invested to date in our company, but will own only [ ]% of the
shares of common stock outstanding. The exercise of outstanding stock options
or warrants, or the issuance of new stock, will further dilute new investors.
Our principal stockholders, executive officers and directors own a significant
percentage of our stock, and as a result, the trading price for our shares may
be depressed and these stockholders can take actions that may be adverse to
your interests.
Our executive officers and directors, and entities affiliated with
directors, will beneficially own a total of approximately [ ]% of our common
stock following this offering. These stockholders, acting together, will have
the ability to exert substantial influence over all matters requiring approval
by our stockholders, including the election and removal of directors, and any
proposed merger, consolidation or sale of all or substantially all of our
assets. In addition, they could dictate the management of our business and
affairs. A significant concentration of share ownership can adversely affect
the trading price for our common stock because investors often discount the
value of stock in companies that have controlling stockholders. Further, the
concentration of ownership in our company could delay, defer or prevent a
merger or consolidation, takeover or other business combination that could be
favorable to you.
Anti-takeover provisions in our charter documents and Delaware law could
prevent a potential acquirer from buying our stock.
Our amended and restated certificate of incorporation and bylaws will
contain provisions that could delay or prevent a change in control of our
company. Some of these provisions:
. authorize the issuance of preferred stock which can be created and
issued by the board of directors without prior stockholder approval,
commonly referred to as "blank check" preferred stock, with rights
senior to those of common stock;
. prohibit stockholder actions by written consent; and
. provide for a classified board of directors.
In addition, we are governed by the provisions of Section 203 of Delaware
General Corporate Law. These provisions may prohibit stockholders owning 15% or
more of our outstanding voting stock from merging or combining with us. These
and other provisions in our amended and restated certificate of incorporation
and bylaws, and under Delaware law, could reduce the price that investors might
be willing to pay for shares of our common stock in the future.
18
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere, contains forward-looking
statements. These statements relate to future events or our future financial
performance and involve known and unknown risks, uncertainties and other
factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by the forward-looking statements. These risks and other factors
include those listed under "Risk Factors" and elsewhere in this prospectus. In
some cases, you can identify forward-looking statements by terminology such as
"aim," "seek," "intend," "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "continue" or
the negative of these terms or other comparable terminology. These statements
are only predictions and you should not place undue reliance on these
statements. Actual events or results may differ materially. In evaluating these
statements, you should specifically consider various factors, including the
risks outlined under "Risk Factors." These factors may cause our actual results
to differ materially from any forward-looking statement.
Although we believe that the expectations reflected in our
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Moreover, neither we nor any
other person assumes responsibility for the accuracy and completeness of these
forward-looking statements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform our
prior statements to actual results, as a result of new information or otherwise.
19
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the [ ] shares of
common stock that we are selling in this offering will be approximately $[ ]
million, or $[ ] if the underwriters exercise their over-allotment option in
full, based on an initial public offering price of $[ ] per share and after
deducting the underwriting discounts and commissions and estimated offering
expenses payable by us. We intend to use the net proceeds from the securities
to be offered for general corporate purposes, including working capital,
research and development, sales and marketing, clinical and regulatory studies,
and capital expenditures. A portion of the net proceeds may also be used for
the acquisition of or investment in businesses, products and technologies that
are complementary to ours. We have no current plans, agreements or commitments
and are not currently engaged in any negotiations with respect to any such
transaction. Pending such uses, we will invest the net proceeds of this
offering in investment grade, interest-bearing securities.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock
since our inception. We intend to retain any future earnings for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future. Any future determination as to the payment
of dividends will be at the discretion of our board of directors.
20
CAPITALIZATION
The following table sets forth our capitalization as of September 30,
2001, on the following three bases: (i) on an actual basis (ii) on a pro forma
basis to give effect to receipt of the net proceeds from our sale of 3,514,500
shares of Series G-1 redeemable convertible preferred stock in December 2001
and to reflect the conversion of all shares of our preferred stock into
30,944,205 shares of common stock automatically upon completion of this
offering, and (iii) on a pro forma as adjusted basis to reflect the sale of
shares of common stock in this offering at an assumed initial public offering
price of $[ ] per share, after deducting estimated underwriting discounts
and commissions and estimated offering expenses, and the application of the net
proceeds. You should read this information together with our Financial
Statements and Notes thereto appearing elsewhere in this prospectus.
September 30, 2001
--------------------------------
Pro
Forma
As
Actual Pro Forma Adjusted
-------- --------- --------
(in thousands, except share data
Redeemable convertible preferred stock:
Redeemable convertible preferred stock; $0.001 par value; 54,100,000 shares
authorized and designated; aggregate shares issued and outstanding: 25,993,041
(aggregate redemption and liquidation value $59,903); no shares pro forma and pro
forma as adjusted:
Series A-1: 4,000,000 shares designated; shares issued and outstanding: 3,825,500
actual; no shares pro forma and pro forma as adjusted............................... $ 3,823 $ -- $ --
Series B-1: 4,850,000 shares designated; shares issued and outstanding: 4,769,213
actual; no shares pro forma and pro forma as adjusted............................... 9,533 -- --
Series C-1: 7,500,000 shares designated; shares issued and outstanding: 7,045,687
actual; no shares pro forma and pro forma as adjusted............................... 14,085 -- --
Series D-1: 4,400,000 shares designated; shares issued and outstanding: 4,399,998
actual; no shares pro forma and pro forma as adjusted............................... 10,988 -- --
Series E-1: 1,800,000 shares designated; shares issued and outstanding: 1,747,526
actual; no shares pro forma and pro forma as adjusted............................... 5,670 -- --
Series F-1: 4,500,000 shares designated; shares issued and outstanding: 4,205,117
actual; no shares pro forma and pro forma as adjusted............................... 15,880 -- --
-------- -------- --------
Total redeemable convertible preferred stock...................................... 59,979 -- --
-------- -------- --------
Stockholders' equity (deficit):
Common stock, $0.001 par value; 74,300,000 shares authorized;
shares issued and outstanding: 3,617,089 actual; 34,561,294 pro forma; [ ]
pro forma as adjusted.................................................................. 2,248 78,879
Common stock warrants................................................................... 154 2,920 2,920
Deferred stock compensation............................................................. (633) (633) (633)
Notes receivable from stockholders...................................................... -- -- --
Accumulated deficit..................................................................... (60,298) (65,716) (65,716)
-------- -------- --------
Total stockholders' equity (deficit)...................................................... (58,529) 15,450
-------- -------- --------
Total capitalization...................................................................... $ 1,450 $ 15,450 $
======== ======== ========
21
This table excludes:
. 7,995,307 shares issuable upon exercise of common stock options and
warrants outstanding on September 30, 2001 at a weighted-average
exercise price of $1.55 per share;
. 1,757,296 common shares reserved as of September 30, 2001, under our
stock option plans, as amended, and available for grant;
. 945,621 shares issuable upon exercise and conversion of outstanding
warrants to purchase Series F-1 and Series G-1 redeemable convertible
preferred stock at a weighted-average exercise price of $3.98 per
share. Upon completion of this offering, these warrants will either
expire or become exercisable for common stock; and
. [ ] shares intended to be reserved upon adoption of an employee
stock purchase plan prior to completion of this offering.
22
DILUTION
Our pro forma net tangible book value as of September 30, 2001, was $15.4
million, or $0.45 per share of common stock. Net tangible book value per share
is calculated by subtracting our total liabilities from our total tangible
assets, after giving effect to the net proceeds of our Series G-1 redeemable
convertible preferred stock financing in December 2001, and dividing this
amount by the total number of shares of common stock outstanding as of
September 30, 2001, assuming conversion of our preferred stock, including
shares of Series G-1 preferred stock issued in December 2001. After giving
effect to the adjustments set forth above and assuming the sale by us of [ ]
shares of common stock offered in this offering at an assumed initial public
offering price of $[ ] per share and the application of the estimated net
proceeds from this offering, our pro forma net tangible book value as of
September 30, 2001 would have been $[ ] million, or $[ ] per share of
common stock. Assuming completion of this offering, there will be an immediate
increase in the pro forma net tangible book value of $[ ] per share to our
existing stockholders and an immediate dilution in the pro forma net tangible
book value of $[ ] per share to new investors. The following table
illustrates this per share dilution:
Initial public offering price per share.......................... $
Pro forma net tangible book value per share as of September
30, 2001...................................................... $0.45
Increase per share attributable to new investors...............
-----
Pro forma net tangible book value per share after this offering..
--
Pro forma dilution per share to new investors.................... $
==
The following table summarizes on a pro forma basis as of September 30,
2001 the total number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by existing
stockholders and by new investors. The pro forma basis gives effect to receipt
of the net proceeds from our sale of 3,514,500 shares of Series G-1 redeemable
convertible preferred stock in December 2001 and reflects the conversion of all
shares of our preferred stock into 30,944,205 shares of common stock
automatically upon completion of this offering.
Shares Purchased Total Consideration
----------------- ------------------ Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
Existing stockholders........ 34,561,294 % $74,614,000 % $2.16
New investors................
---------- ----- ----------- -----
Total.................... 100.0% $ 100.0%
========== ===== =========== =====
If the underwriters' over-allotment option is exercised in full, the
number of shares of common stock held by existing stockholders will be reduced
to [ ], or [ ]% of the total number of shares of common stock to be
outstanding after this offering, and will increase the number of shares of
common stock held by the new investors to [ ], or [ ]% of the total number of
shares of common stock to be outstanding immediately after this offering. See
"Principal Stockholders." As of September 30, 2001 (i) options and warrants to
purchase 7,995,307 common shares were outstanding with a weighted-average
exercise price of $1.55 per share, (ii) 1,757,296 shares were reserved under
our stock option plans, as amended, and available for grant, (iii) 945,621
shares were issuable upon exercise and conversion of outstanding warrants to
purchase Series F-1 and Series G-1 redeemable convertible preferred stock at a
weighted-average exercise price of $3.98 per share (which will either expire
upon completion of this offering or become exercisable for common stock), and
(iv) [ ] shares are intended to be reserved upon adoption of an employee
stock purchase plan prior to completion of the offering. The issuance of common
stock under these plans will result in further dilution to new investors.
23
SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
Notes thereto and the other information contained in this prospectus.
The selected balance sheet data as of December 31, 1999 and 2000 and the
selected statements of operations data for each of the three years in the
period ended December 31, 2000, have been derived from our audited Financial
Statements appearing elsewhere in this prospectus. The balance sheet data as of
September 30, 2001 and the statements of operations data for the nine months
ended September 30, 2000 and 2001, have been derived from our unaudited
Financial Statements appearing elsewhere in this prospectus. The selected
balance sheet data as of December 31, 1996, 1997 and 1998, and the selected
statements of operations data for the years ended December 31, 1996 and 1997,
have been derived from our audited Financial Statements not included in this
prospectus. The unaudited Financial Statements as of September 30, 2001 and the
nine months ended September 30, 2000 and 2001 have been prepared by us on a
basis consistent with the audited Financial Statements appearing elsewhere in
this prospectus and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of this data. Historical results are not necessarily indicative of
future results.
Nine Months
Ended
Year Ended December 31, September 30,
---------------------------------------------- ----------------
1996 1997 1998 1999 2000 2000 2001
------- ------- -------- -------- -------- ------- -------
(in thousands, except per share amounts)
Statements of Operations Data:
Revenue................................ $ -- $ -- $ 172 $ 1,894 $ 4,932 $ 3,351 $18,174
Costs and expenses:
Cost of revenue....................... 122 1,219 1,510 2,550 4,700 2,936 9,051
Research and development.............. 3,539 4,537 5,416 4,246 5,880 3,983 6,284
Sales and marketing................... 1,244 2,017 2,789 4,017 5,822 3,339 7,763
General and administrative............ 790 616 1,206 1,443 2,649 1,713 2,637
Stock-based compensation*............. -- -- 28 54 158 127 914
------- ------- -------- -------- -------- ------- -------
Total costs and expenses............ 5,695 8,389 10,949 12,310 19,209 12,098 26,649
------- ------- -------- -------- -------- ------- -------
Loss from operations................... (5,695) (8,389) (10,777) (10,416) (14,277) (8,747) (8,475)
Interest income, net................... 159 607 548 461 245 207 166
------- ------- -------- -------- -------- ------- -------
Net loss............................... (5,536) (7,782) (10,229) (9,955) (14,032) (8,540) (8,309)
Accretion of redeemable convertible
preferred stock....................... -- -- 43 62 34 19 48
------- ------- -------- -------- -------- ------- -------
Net loss attributable to common
stockholders.......................... $(5,536) $(7,782) $(10,272) $(10,017) $(14,066) $(8,559) $(8,357)
======= ======= ======== ======== ======== ======= =======
Basic and diluted net loss per share... $ (2.83) $ (3.44) $ (4.14) $ (3.70) $ (4.46) $ (2.75) $ (2.46)
======= ======= ======== ======== ======== ======= =======
Shares used in computing basic and
diluted net loss per share............ 1,958 2,259 2,480 2,708 3,156 3,114 3,402
======= ======= ======== ======== ======== ======= =======
Pro forma basic and diluted net loss
per share............................. $ (0.53) $ (0.27)
======== =======
Shares used in computing pro forma
basic and diluted net loss per share.. 26,676 30,831
======== =======
- ----------------
* Stock-based compensation:
Cost of revenue....................... $ -- $ -- $ -- $ -- $ -- $ -- $ 5
Research and development.............. 9 36 39 21 286
Sales and marketing................... -- 3 7 2 316
General and administrative............ 19 15 112 104 307
------- ------- -------- -------- -------- ------- -------
$ -- $ -- $ 28 $ 54 $ 158 $ 127 $ 914
======= ======= ======== ======== ======== ======= =======
24
December 31,
----------------------------------------------- September 30,
1996 1997 1998 1999 2000 2001
------- -------- -------- -------- -------- -------------
(in thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term
investments........................... $ 2,490 $ 7,603 $ 10,027 $ 8,213 $ 17,509 $ 5,500
Working capital........................ 2,555 8,535 10,371 8,262 13,305 5,512
Total assets........................... 4,594 11,088 14,654 17,620 32,941 21,370
Deferred revenue, including current
portion............................... -- -- 2,152 8,468 15,869 13,761
Long-term obligations, less current
portion............................... 19 63 8 3 440 1,224
Redeemable convertible preferred stock. 13,054 27,111 38,114 43,827 59,845 59,979
Total stockholders' deficit............ (9,708) (17,508) (27,730) (37,537) (51,243) (58,529)
- --------
See Notes 2 and 9 of Notes to Financial Statements for an explanation of
the determination of the amounts used in computing net loss per share and pro
forma net loss per share amounts. See also Note 14 of Notes to Financial
Statements for the pro forma effects resulting from the sale, issuance and
assumed conversion of the Series G-1 redeemable convertible preferred stock.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Financial
Data" and our financial statements and the related notes included elsewhere in
this prospectus. In addition to historical information, the discussion in this
prospectus contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results could differ materially from
those anticipated by these forward-looking statements due to factors including,
but not limited to, those set forth under "Risk Factors" and elsewhere in this
prospectus.
Overview
We develop, manufacture and sell proprietary medical systems to assist
radiologists in the detection of cancer. Our ImageChecker system is the first
and only CAD product approved by the FDA for both screening and diagnostic
mammography. We received regulatory approval from the FDA in June 1998 to
market the ImageChecker system in the U.S. and commenced commercial operations
in the third quarter of 1998. In connection with the sales and marketing of our
ImageChecker product line, we have associated the R2 brand with innovative CAD
solutions and established strategic collaborations with leading medical imaging
equipment providers, such as GE Medical Systems and Kodak. As of September 30,
2001, we had shipped over 275 ImageChecker products.
We have incurred significant operating losses and negative cash flows
from operations in each full fiscal year since inception. We incurred net
losses of $10.2 million in 1998, $10.0 million in 1999, $14.0 million in 2000
and $8.3 million for the nine month period ended September 30, 2001. As of
September 30, 2001, we had an accumulated deficit of $60.3 million. We expect
to incur significant additional losses as we expand our sales and marketing
efforts and continue to develop new products.
Revenue
Our revenue is derived primarily from sales of our ImageChecker products.
For sales on or after
January 1, 2001, revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable,
and collectibility is probable. Delivery is considered to have occurred upon
shipment for sales to our distributors and upon installation for sales directly
to end customers. Revenue is allocated to various elements of the arrangement
based on vendor specific objective evidence, or VSOE, as evidenced by published
price lists communicated to our distributors and direct customers. Amounts
attributable to undelivered elements such as technical support and maintenance
are recorded as deferred revenue and recognized ratably over the period the
service is to be provided, generally one year. Prior to January 1, 2001, we had
not established sufficient VSOE for the undelivered elements of our sales
arrangements and, accordingly, revenue on sales through December 31, 2000 is
being recognized ratably over the estimated life of the system, generally three
years. Associated hardware costs are deferred and recognized as cost of revenue
ratably over the same time period.
Revenue from ImageChecker-DM software licensed pursuant to the
distribution agreement with GE Medical Systems is being recognized as revenue
ratably, over the longer of the term of the contract, of which the initial term
expires on December 31, 2002, or the one-year warranty period provided under
the contract. Associated hardware costs are deferred and recognized ratably
over the corresponding period.
We generally sell our ImageChecker products through distributors and
directly to end customers. Our sales are final and not subject to a right of
return. Our distributor contracts contain non-binding minimum purchase
commitments, which are generally cancelable by us. We do not consider backlog
to be a meaningful measure of future revenues because our customers can
generally cancel orders without penalty.
In late 2000 and in 2001, we entered into agreements with three GPOs.
These agreements provide the members of these organizations, such as hospitals,
the ability to purchase our products at a discount from our list
26
prices. We also pay an administrative fee to the GPOs in connection with these
agreements. Revenue from customers covered under GPO agreements totaled 14% of
our revenues for the nine months ended September 30, 2001. From time to time we
will consider and may enter into additional agreements with other GPOs. If more
of our revenue is generated under these kinds of agreements, the average
selling price of our products and our profit margin may decline, and we may
have to pay increased administrative fees.
Deferred Revenue
Changes in deferred revenue (including current portion) during each of
the periods presented consist of the following:
Years Ended Nine Months Ended
December 31, September 30,
------------------------ ----------------
1998 1999 2000 2000 2001
------ ------- ------- ------- -------
(in thousands)
Deferred revenue, beginning of period...................... $ -- $ 2,152 $ 8,468 $ 8,468 $15,869
Revenue deferred on products shipped during the period..... 2,285 8,049 11,850 6,842 4,035
Revenue recognized on products shipped in current and prior
periods.................................................. (133) (1,733) (4,449) (3,011) (6,143)
------ ------- ------- ------- -------
Deferred revenue, end of period............................ $2,152 $ 8,468 $15,869 $12,299 $13,761
====== ======= ======= ======= =======
Approximately 75% of the deferred revenue balance at September 30, 2001
was attributable to products shipped prior to December 31, 2000.
Deferred Product Costs
Changes in deferred product costs (including current portion) during each
of the periods presented consist of the following:
Years Ended Nine Months Ended
December 31, September 30,
--------------------- ----------------
1998 1999 2000 2000 2001
---- ------ ------- ------- -------
(in thousands)
Deferred product costs, beginning of period................... $ -- $ 831 $ 3,416 $ 3,416 $ 5,876
Cost of revenue deferred on products shipped during the period 884 3,290 4,218 2,487 526
Cost of revenue recognized on products shipped in current and
prior periods............................................... (53) (705) (1,758) (1,202) (2,072)
---- ------ ------- ------- -------
Deferred product costs, end of period......................... $831 $3,416 $ 5,876 $ 4,701 $ 4,330
==== ====== ======= ======= =======
Approximately 88% of the deferred product costs balance at September 30,
2001 were attributable to products shipped prior to December 31, 2000.
Costs and Expenses
We manufacture our ImageChecker products at our facility in Los Altos,
California. The primary components of the ImageChecker system are manufactured
by, and purchased from, third-party suppliers. Our manufacturing activities
consist of final assembly, integration and testing of the major components.
Cost of revenue comprises:
. purchase cost of materials, including amortization of deferred product
costs;
. expenses related to internal operations of the manufacturing, service,
and quality organizations;
. expenses relating to technical support and maintenance; and
. royalties related to technology licenses.
27
Significant investment in research and development has been, and we
believe will continue to be, required to develop new products and enhance
existing products to allow us to further penetrate our current and future
markets. In addition, the timing of development activities including clinical
trials, can impact research and development expenses. Research and development
expenses comprise primarily the following components:
. salaries and related expenses of personnel engaged in research and
development activities;
. legal costs associated with filings and prosecution of patents and
regulatory matters; and
. research grants and consulting fees paid to various third parties.
Sales and marketing expenses comprise primarily the following components:
. salaries, commissions, and related expenses for personnel engaged in
sales and marketing activities; and
. costs associated with advertising, trade shows, promotional, and other
marketing activities.
General and administrative expenses comprise primarily the following:
. salaries for personnel engaged in administrative functions; and
. legal and accounting fees for professional services.
Stock-Based Compensation
During the nine months ended September 30, 2001, we issued common stock
options to employees at a weighted-average exercise price of $2.35 per share.
The weighted-average exercise price was below the weighted-average deemed fair
value of $2.71 per share. The cumulative deferred stock-based compensation with
respect to these grants was $928,000, and is being amortized to expense on an
accelerated method over the vesting periods of the options, generally four
years. During the nine months ended September 30, 2001, we amortized $295,000
to stock-based compensation expense. The deferred stock compensation balance at
September 30, 2001 will be amortized over the remaining vesting periods through
July 2005. Due to the accelerated method of amortization, most of the deferred
stock-based compensation charge will be amortized over the first one to two
years of the vesting of the options. Through December 31, 1999, cumulative
stock-based compensation related to non-employee awards was not material.
During the year ended December 31, 2000 and the nine months ended September 30,
2001, we recorded stock-based compensation of approximately $158,000 and
$619,000, respectively, related to non-employee stock awards.
Results of Operations
We have historically experienced fluctuations from period to period. We
expect these fluctuations to continue, therefore historical results are not
indicative of future results.
Nine Months Ended September 30, 2000 and 2001
Revenue
Our revenue increased $14.8 million from $3.4 million for the nine months
ended September 30, 2000 to $18.2 million for the nine months ended September
30, 2001. Approximately 79% of this increase was attributable to an increase
over the corresponding period in the prior year in the number of ImageChecker
systems sold combined with the recognition of a greater portion of our sales
arrangements upon shipment during 2001 as a result of the establishment of VSOE
for undelivered elements. The remainder of the increase was due primarily to
changes in deferred revenue between the respective periods.
28
Cost of Revenue
Our cost of revenue increased $6.2 million from $2.9 million for the nine
months ended September 30, 2000 to $9.1 million for the nine months ended
September 30, 2001. Approximately 86% of this increase was attributable to an
increase over the corresponding period in the prior year in the number of
ImageChecker systems sold combined with the recognition of substantially all
system hardware costs upon shipment during 2001 concurrent with the recognition
of the corresponding revenue. The remainder of the increase was due primarily
to changes in deferred product costs between the respective periods.
Research and Development Expenses
Research and development expenses increased from $4.0 million for the
nine months ended September 30, 2000 to $6.3 million for the corresponding
period of 2001, representing an increase of $2.3 million. This increase was
primarily attributable to increased personnel costs from the hiring of
additional development staff along with their associated recruitment costs.
Additional factors contributing to the increase included costs related to the
filing and prosecution of patents and greater facility allocation charges. We
expect research and development spending to increase over the next several
years in response to clinical trial costs for new products under development
along with the costs of supporting enhancements to our current products.
Sales and Marketing Expenses
Sales and marketing expenses increased from $3.3 million for the nine
months ended September 30, 2000 to $7.8 million for the corresponding period of
2001, representing an increase of $4.5 million. This increase was primarily
attributable to the hiring of additional sales and marketing personnel and
associated costs in support of the expansion of our commercial activities and,
to a lesser extent, an increase in promotional costs. We expect our sales and
marketing expenses to increase as we expand our domestic and international
sales and marketing activities.
General and Administrative Expenses
General and administrative expenses increased from $1.7 million for the
nine months ended September 30, 2000 to $2.6 million for the corresponding
period of 2001, representing an increase of $924,000. This increase was
primarily attributable to hiring additional personnel in 2001 and increased
facility overhead allocations. We expect our general and administrative
expenses to increase as a result of operating as a public company.
Net Interest Income
Net interest income was $207,000 and $166,000 for the nine month period
ended September 30, 2000 and 2001, respectively. The fluctuation was primarily
the result of a decrease in the average balance of cash, cash equivalents, and
short-term investments available for investment.
Years Ended December 31, 1998, 1999 and 2000
Revenue
Our revenue increased $1.7 million from $172,000 in 1998 to $1.9 million
in 1999 and increased $3.0 million to $4.9 million in 2000. The increase in
1999 was attributable primarily to a full year of commercial operations as
compared to a partial year of commercial operations in 1998. The increase from
1999 to 2000 was primarily attributable to an increase in the number of
ImageChecker systems sold and, to a lesser extent, an increase in the average
selling price, exclusive of the effect of the change in deferred revenue.
Revenue deferred from products shipped during 1998, 1999, and 2000 totaled $2.3
million, $8.0 million, and $11.9 million,
29
respectively. Such amounts are being amortized over approximately three years
resulting in the recognition of revenue under such arrangements of $133,000,
$1.7 million, and $4.4 million during 1998, 1999, and 2000, respectively.
Cost of Revenue
Our cost of revenue increased $1.1 million from $1.5 million in 1998 to
$2.6 million in 1999 and increased by $2.1 million to $4.7 million in 2000. The
increase in 1999 was attributable primarily to a full year of commercial
operations as compared to a partial year of commercial operations in 1998. The
increase from 1999 to 2000 was primarily attributable to an increase in the
number of ImageChecker systems sold, exclusive of the effect of the change in
deferred product costs. Cost of revenue deferred on products shipped during
1998, 1999, and 2000 totaled $884,000, $3.3 million, and $4.2 million,
respectively. Such amounts are being amortized in accordance with the related
revenue resulting in the recognition of cost of revenue of $53,000, $705,000,
and $1.8 million during 1998, 1999, and 2000, respectively. Cost of revenue
exceeded revenue during 1998 and 1999 primarily due to manufacturing support
costs in excess of deferred product costs.
Research and Development Expenses
Research and development expenses were $5.4 million, $4.2 million, and
$5.9 million in 1998, 1999, and 2000, respectively. The decrease of $1.2
million from 1998 to 1999 was due to the completion of the clinical trials and
regulatory approval process in 1998 which were not recurring costs. The
increase of $1.7 million from 1999 to 2000 is primarily attributable to
increased personnel costs from the hiring of additional development staff along
with their associated recruitment costs. Additional factors contributing to the
increase included costs related to the filing and prosecution of patents and
greater facility allocation charges.
Sales and Marketing Expenses
Sales and marketing expenses were $2.8 million, $4.0 million, and $5.8
million in 1998, 1999, and 2000, respectively. The increase from 1998 to 1999
was primarily attributable to the incurrence of a full year of costs associated
with the sales force hired in connection with the launch of commercial
operations in the middle of 1998. The increase from 1999 to 2000 was primarily
attributable to the hiring of additional sales and marketing personnel and
associated costs in support of the expansion of our commercial activities as
well as an increase in promotional costs.
General and Administrative Expenses
General and administrative expenses were $1.2 million, $1.4 million, and
$2.6 million in 1998, 1999, and 2000, respectively. The increase from 1999 to
2000 was primarily attributable to higher personnel costs related to the hiring
of executive personnel commencing in 1999 and continuing through 2000. Other
factors contributing to this increase included greater legal and accounting
fees, and facility overhead allocations.
Net Interest Income
Net interest income was $548,000, $461,000, and $245,000 in 1998, 1999,
and 2000, respectively. Fluctuations were primarily the result of decreases in
the average balances of cash, cash equivalents and short-term investments.
30
Quarterly Results of Operations
The following table sets forth selected quarterly statement of operations
data for each of the seven quarters in the period from January 1, 2000, to
September 30, 2001. The information for each of these quarters is unaudited and
has been prepared on the same basis as our audited financial statements
appearing elsewhere in this prospectus. In the opinion of management, all
necessary adjustments, consisting only of normal recurring adjustments, have
been included to present fairly the unaudited quarterly results when read in
conjunction with our audited financial statements and related notes appearing
elsewhere in this prospectus. We believe that results of operations for interim
periods should not be relied upon as any indication of the results to be
expected or achieved in any future period.
Quarter Ended
---------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
2000 2000 2000 2000 2001 2001 2001
-------- -------- --------- -------- -------- -------- ---------
(in thousands)
Revenue............................. $ 944 $ 1,075 $ 1,332 $ 1,581 $ 4,496 $ 6,457 $ 7,221
Costs and expenses:
Cost of revenue.................. 905 1,021 1,010 1,764 2,403 3,158 3,490
Research and development......... 1,227 1,210 1,546 1,897 1,889 2,161 2,234
Sales and marketing.............. 903 1,039 1,397 2,483 1,922 3,020 2,821
General and administrative....... 422 591 700 936 938 912 787
Stock-based compensation......... 3 108 16 31 238 344 332
------- ------- ------- ------- ------- ------- -------
Total costs and expenses..... 3,460 3,969 4,669 7,111 7,390 9,595 9,664
------- ------- ------- ------- ------- ------- -------
Loss from operations................ (2,516) (2,894) (3,337) (5,530) (2,894) (3,138) (2,443)
Interest income, net................ 82 72 53 38 123 56 (13)
------- ------- ------- ------- ------- ------- -------
Net loss............................ $(2,434) $(2,822) $(3,284) $(5,492) $(2,771) $(3,082) $(2,456)
======= ======= ======= ======= ======= ======= =======
The quarter-to-quarter increases in revenue are primarily attributable to
increases in the number of ImageChecker systems sold. Contributing to the
increases in 2001 as compared to 2000 was the recognition of a greater portion
of revenues under our sales arrangements upon shipment as a result of the
establishment of VSOE for undelivered elements in 2001. Cost of revenue has
generally increased each quarter as a result of corresponding increases in
revenue. Further, manufacturing support costs in excess of direct and deferred
product costs generally decreased as a percentage of revenue as a result of the
growth in revenue over the seven quarters. The increase in cost of revenue
during the quarter ended December 31, 2000 as compared to the immediately
preceding quarter and as a percentage of revenue was attributable primarily to
costs associated with our decision to provide hardware upgrades to customers
who acquired ImageChecker systems through early 2000. Research and development
expenses have fluctuated from quarter to quarter due to the rate of hiring of
personnel and related recruitment costs. Sales and marketing has generally
increased over the seven quarters presented primarily due to the hiring of
additional sales and marketing personnel associated with the expansion of
commercial operations and timing of promotions and trade shows.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through
private placements of our redeemable convertible preferred stock resulting in
net proceeds of $74.0 million, including the proceeds provided from the Series
G-1 preferred stock financing that closed in December 2001, in which we sold
3,514,500 shares of our Series G-1 stock at $4.00 per share and received net
proceeds of approximately $14.0 million. Additional funding of $1.6 million
through December 1, 2001 has been provided under a software development and
distribution agreement with Kodak. As of September 30, 2001, we had cash, cash
equivalents and short-term investments of $5.5 million, an accumulated deficit
of $60.3 million and working capital of $5.5 million.
31
Operating Activities
Net cash used in operating activities was $8.2 million for the year ended
December 31, 1998 and resulted primarily from net losses in that period and
increases in accounts receivable and deferred product costs totaling $1.9
million offset by an increase in deferred revenue of $2.1 million. These
increases resulted from the commencement of commercial operations and the sale
of products that resulted therefrom.
Net cash used in operating activities was $7.0 million for the year ended
December 31, 1999 and resulted primarily from net losses in that period and
increases in accounts receivable and deferred product costs totaling $4.8
million offset by an increase in deferred revenue of $6.3 million. These
increases resulted primarily from increased sales volume over the prior year.
Net cash used in operating activities was $9.4 million for the year ended
December 31, 2000 and resulted primarily from net losses in that period and
increases in accounts receivable, inventory and deferred product costs totaling
$5.7 million offset by increases in accounts payable and accrued compensation
totaling $1.8 million and deferred revenue of $7.4 million. The increases in
accounts receivable, deferred product costs, and deferred revenue resulted
primarily from increased sales volume over the prior year. The increase in
inventories and accounts payable reflects increased inventory purchases in
support of the increased demand for our products. The increase in accrued
compensation was attributable to an increase in personnel over the prior year
and increased commissions on higher sales volume.
Net cash used in operating activities was $8.4 million for the nine
months ended September 30, 2001 and resulted primarily from net losses in that
period and increases in accounts receivable and inventory totaling $2.0 million
offset by decreases in deferred product costs and deferred revenue totaling a
net of $562,000. The increase in accounts receivable resulted primarily from
increased sales volume over the prior period. The increase in inventories
reflects an increase in inventory levels to support increasing demand for our
products. The decreases in deferred product costs and deferred revenue were
attributable to recognition of a greater portion of our sales arrangements upon
shipment as compared to previous periods as a result of the establishment of
VSOE for the undelivered element.
Investing Activities
Cash used in investing activities was $2.7 million in 1998 and $1.8
million in 1999 and primarily represented the net purchases of short-term
investments and to a lesser extent purchases of property and equipment. Cash
provided by investing activities was $1.5 million in 2000 and $734,000 for the
nine months ended September 30, 2001 and primarily represented net maturities
of short-term investments partially offset by purchases of property and
equipment.
Financing Activities
Net cash provided by financing activities was $11.0 million, $5.8
million, and $19.4 million in 1998, 1999, and 2000, respectively, which was
attributable primarily to proceeds from the sale of redeemable convertible
preferred stock of $11.0 million, $5.7 million, and $15.7 million in 1998,
1999, and 2000, respectively, and $3.3 million of borrowings under a line of
credit agreement in 2000. Cash used in financing activities for the nine months
ended September 30, 2001 primarily resulted from net repayments under a line of
credit agreement of $3.3 million.
Other Matters
At September 30, 2001, the Company had outstanding non-cancelable
purchase commitments for inventory components totaling $1.5 million.
32
As of December 31, 2000, we had approximately $35.5 million and $15.3
million of federal and state net operating loss carryforwards, respectively,
for tax reporting purposes available to offset future taxable income. The
federal net operating loss carryforwards expire beginning in 2008 through 2020,
whereas the state net operating loss carryforwards expire beginning in 2001
through 2010. We have not recognized any benefit from the future use of loss
carryforwards for any period since inception because of uncertainties
surrounding their realization. We may not be able to utilize our net operating
loss carryforwards before they expire if we continue to generate net losses.
The amount of net operating losses that we can utilize may be limited under tax
regulations in circumstances including a cumulative stock ownership change of
more than 50% over a rolling three-year period. Accordingly, even if we have
net income, the amount of net operating loss carryforwards we can use in any
given year may be limited, and we may not be able to use some portion or all of
our net operating loss carryforwards. This offering may result in a cumulative
change in ownership sufficient to limit our ability to use our net operating
loss carryforwards.
Our future liquidity and capital requirements will depend on a number of
factors, including the following:
. the amount and timing of revenues;
. the extent to which our existing and new products gain market
acceptance;
. the extent to which we make acquisitions, if any;
. the cost and timing of expansion of product development efforts and
the success of these development efforts, including the costs
associated with acquisition of licenses to technology that may be
required;
. the cost and timing of expansion of marketing and selling activities;
and
. the availability of other means of financing.
We believe that the net proceeds from this offering, together with our
current cash and investment balances and any cash generated from operations,
will be sufficient to meet our operating and capital requirements for at least
the next 12 months. However, it is possible that we may require additional
financing within this period. We have no current plans, and we are not
currently negotiating, to obtain additional financing following the completion
of this offering. We intend to continue to invest heavily in the development of
new products and enhancements to our existing products. The factors described
above will affect our future capital requirements and the adequacy of our
available funds. In addition, even if we raise sufficient funds to meet our
anticipated cash needs during the next 12 months, we may need to raise
additional funds beyond this time. We may be required to raise those funds
through public or private financings, strategic relationships or other
arrangements. Any additional equity financing may be dilutive to stockholders,
and debt financing, if available, may involve restrictive covenants.
Quantitative and Qualitative Discussion of Market Risk
Our operations and sales are based primarily in the U.S. Our exposure to
foreign exchange fluctuations has been minimal, because international sales
have been less than 10% of total revenues to date. However, we do anticipate
expansion in Europe and Japan and sales in new markets including countries in
Asia and South America. As a result, our financial results could be affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. As all of our sales are currently denominated in
U.S. dollars, a strengthening of the dollar could make our products less
competitive in foreign markets.
The primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we receive from our
invested cash without significantly increasing risk of loss. As of September
30, 2001, our cash and cash equivalents consisted primarily of demand deposits
and money market funds maintained at major financial institutions and our
short-term investments consisted primarily of high-credit quality commercial
paper and corporate notes. The recorded carrying amounts of cash, cash
equivalents and short-term investments approximate fair value due to their
short-term maturities.
33
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in cash
and short-term instruments. We expect that our interest income will be
negatively affected by recent declines in short-term interest rates. However,
due to the nature of our cash, cash equivalents, and short-term investments, we
have concluded that we do not have a material risk exposure.
Recently Issued Accounting Pronouncements
New Accounting Standards
In June 1998, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133, as amended, requires that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded on the
balance sheet at its fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. We adopted SFAS No. 133, as
amended, effective January 1, 2001. The adoption of SFAS No. 133, as amended,
did not have an impact on our financial position, results of operations or cash
flows as the Company had no standalone or embedded derivatives at December 31,
2000 and had not historically entered into any derivative transactions to hedge
currency or other expenses.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that
all business combinations initiated after June 30, 2001, be accounted for under
the purchase method and addresses the initial recognition and measurement of
goodwill and other intangible assets acquired in a business combination. SFAS
No. 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination and
the accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 provides that intangible assets with finite useful
lives be amortized and that goodwill and intangible assets with indefinite
lives not be amortized, but rather be tested at least annually for impairment.
We will adopt SFAS No. 141 and SFAS No. 142 for the fiscal year beginning
January 1, 2002. As we have no goodwill or other intangible assets associated
with business combinations on our balance sheet as of September 30, 2001, the
adoption of SFAS No. 141 and SFAS No. 142 is not expected to have an impact on
our financial position, results of operations or cash flows.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment of Disposal of Long-Lived Assets, effective for fiscal years
beginning after December 31, 2001. Under the new rules, the criteria required
for classifying an asset as held-for-sale have been significantly changed.
Assets held for sale are stated at the lower of their fair values or carrying
amounts, and depreciation is no longer recognized. In addition, the expected
future operating losses from discontinued operations will be displayed in
discontinued operations in the period in which the losses are incurred rather
than as of the measurement date. More dispositions will qualify for
discontinued operations treatment in the income statement under the new rules.
We will adopt SFAS No. 144 for our fiscal year beginning January 1, 2002 and we
are currently evaluating the impact of adoption on our financial statements.
34
BUSINESS
Overview
We develop, manufacture and sell proprietary medical systems to assist
radiologists in the detection of cancer. Our CAD system analyzes medical images
and identifies and marks suspicious image features. Our ImageChecker system is
the first and only CAD product approved by the FDA for use with both screening
and diagnostic mammograms. We received FDA regulatory approval in 1998 to
market the system in the U.S. We have also obtained the right to affix the CE
Mark, which allows us to commercially distribute our system throughout the
European Union. One of our current FDA-approved claims is that "for every
100,000 cancers currently detected by screening mammography, the use of the
ImageChecker could result in early detection of an additional 20,500 breast
cancers," which reflects a potential cancer detection improvement of up to
20.5%. An independent study of 12,860 women undergoing mammography showed that
radiologists working with the ImageChecker system were able to detect 19.5%
more breast cancers than radiologists working alone, which provides support for
our approved FDA claim.
In connection with the sales and marketing of our ImageChecker products,
we have associated the R2 brand with innovative CAD solutions and established
strategic collaborations with leading medical imaging equipment manufacturers,
such as GE Medical Systems and Kodak. We have secured nationwide reimbursement,
which includes Medicare and a national billing code, for use of our
ImageChecker system. As of September 30, 2001, we had shipped over 275
ImageChecker products, which have been used in more than two million screening
and diagnostic procedures. We plan to leverage our installed base to produce a
steady stream of recurring revenue through line extensions of the ImageChecker
system and software and service contracts on our products. While our products
are currently used in mammography, we plan to leverage our CAD technology, our
first commercial mover advantage, our strategic relationships, and our
installed base to expand our product line to detect other cancers, including
lung cancer.
Market Opportunity
Medical imaging procedures are used to detect many types of cancer. The
number of cancer cases is expected to grow due to a number of factors,
including the aging demographics of the U.S. population. Early detection,
diagnosis, and treatment of cancer generally results in more favorable outcomes.
Breast Cancer
Breast cancer is the most commonly diagnosed cancer in women and the
second leading cause of cancer mortality in the U.S. It is estimated that the
lifetime risk for women of developing breast cancer is one in eight in the
U.S., with an even higher rate for those with established risk factors such as
genetic predisposition, hormone therapy, and exposure to external environmental
factors. Breast cancer may remain localized, but if left untreated, may spread
to other sites. Breast cancer that remains localized is highly amenable to
treatment, whereas metastatic cancer generally results in increased mortality.
In 2000, in the U.S. and Europe alone, over 529,000 people were diagnosed
with breast cancer, and approximately 175,000 people died from the disease. The
widespread recognition of both the devastating impact of breast cancer and the
importance of early detection has led to approximately 58 million screening and
diagnostic mammograms annually in the U.S. and Western Europe. In the U.S.,
mammography is currently indicated for all women over the age of 50 at least
once every two years. Some cancer organizations recommend more frequent
screenings, or regular screenings at an earlier age.
Currently there is an installed base of over 25,000 mammography systems
worldwide, of which approximately 15,000 are in operation at approximately
9,500 sites in the U.S.
35
Lung Cancer
Lung cancer is the most common form of cancer diagnosed worldwide and is
the leading cause of cancer mortality in the U.S. Despite widespread and
longstanding educational programs, lung cancer remains a growing problem. Lung
cancer, if left untreated, may spread either through direct invasion of
adjacent tissues or through the lymphatic system or blood stream to other parts
of the body.
In 2000, in the U.S. and Europe alone, over 580,000 people were diagnosed
with lung cancer, and nearly 528,000 people died from the disease. Despite the
high mortality rate, few screening programs are in place for this disease, in
part because traditional chest X-ray technologies have not been very effective
in detecting early-stage lung cancer. A majority of patients are diagnosed at a
later stage, after they become symptomatic. Recently, CT scanners have started
to become an important technology for the detection of lung cancer. Results of
the Early Lung Cancer Action Project have shown that annual screening detects
early-stage lung cancers, 85% of them at Stage I. The identification and
treatment of Stage I lung cancer currently results in a 49% five-year survival
rate. If lung cancer is diagnosed in Stage IV, a two percent survival rate is
expected.
Currently there is an installed base of approximately 6,000 CT scanners
in the U.S. and 5,300 in Europe. In addition, there are approximately 30,000 CT
scanners in the rest of the world.
Limitations of Medical Imaging
We believe the current limitations of medical imaging include:
observational oversights, information overload generated by increasing volumes
of medical images, and poor economics for many mammography centers.
Observational Oversights
It is a radiologist's responsibility to view and interpret the data
derived from medical imaging technologies. However, radiologists can fail to
detect cancers that could be detected with existing technology due to a variety
of factors, including fatigue, time pressure, and human error. These
observational oversights can have important clinical implications. The
five-year survival rate for breast and lung cancer, when detected early, are
97% and 49%, respectively. When detected in the late stage, survival rates drop
to 21% and two percent, respectively. According to the study used to support
our regulatory approval, radiologists do not identify one out of six breast
cancers that are detectable on screening mammograms. Generally, the error rate
for detection of early lung cancer is between 20% and 50%.
Failure to detect cancer early can result in progression of the disease
from early stage, in which the cancer is confined within the breast or the
lung, to later stages, in which the cancer has metastasized to other parts of
the body. If detected in the early stage, the treatment of cancer is more
likely to be successful. However, patients diagnosed with late-stage cancers
have poor prognoses, and treatment costs are significantly increased. For
example, the treatment costs of early-stage breast cancer are approximately
$22,000 per patient, whereas breast cancer detected at a later stage may
require approximately $250,000 in therapy.
Information Overload
Although medical imaging has improved the way physicians detect and
diagnose cancer, growth of the aging population, improved cancer education, and
the emergence of new technologies, such as multi-slice CT, have created a
significant increase in the amount and complexity of data. For example, in the
U.S., approximately 34 million women were screened for breast cancer in 2001.
In lung cancer, new imaging products generate hundreds of images per patient
where formerly there had been typically less than five using traditional
X-rays. To accurately detect cancers, radiologists often retrieve historical
images and compare them with current images. However, we believe that no
current system comprehensively integrates and automates the labor-intensive
36
process of retrieval, storage and comparison of these images. As the number and
complexity of medical images has increased, the number of radiologists has
remained constant and new tools to assist radiologists in analyzing these
images have not been introduced.
Poor Economics for Many Mammography Centers
Many mammography centers are not profitable. The costs associated with
mammography equipment, personnel and malpractice insurance have outpaced
reimbursement levels and resulted in poor economics for many hospitals and
mammography centers. Nonetheless, many healthcare providers will continue to
offer this essential service due to patient demand. Providing mammography
services also attracts and retains female patients, who are often the primary
healthcare decision makers for their families. Attracting and retaining these
female patients and their families helps generate additional revenue through
other services a hospital offers.
The R2 Solution
Our ImageChecker system is the first and only CAD system approved by the
FDA for use with both screening and diagnostic mammograms. We believe that the
ImageChecker system represents an advance in cancer detection and overcomes
many of the limitations of medical imaging by offering the following benefits:
Improved detection accuracy. The ImageChecker system assists radiologists
in detecting cancer more accurately by analyzing medical images. The
ImageChecker system's overall sensitivity for marking biopsy-proven breast
cancers has been shown to be 90%, with an additional 0.5 average marks per
image on locations that are not cancer. The computerized analysis serves as a
"second pair of eyes" to identify, and mark suspicious image features, and to
prompt the radiologist to review specific areas, resulting in up to 20.5%
higher detection rates of breast cancer, according to the study used to support
our regulatory approval. Additionally, an independent prospective study
published in the journal Radiology demonstrated 19.5% higher detection rates of
breast cancer.
Ability to analyze increasing volumes of medical images. The ImageChecker
system allows radiologists to review and manage the analysis of an increasing
volume of mammograms by focusing their attention on the identified and marked
areas of suspicion without adversely affecting workflow. By placing the marked
image display within the radiologist's immediate field of vision, the ordinary
screening process is not disrupted. In mammography centers that use a second
reviewing radiologist, workflow efficiency may be enhanced if the second reader
is replaced by the ImageChecker system. Our CAD technology is designed to
enable radiologists to improve efficiency in managing analysis of the
increasing volume of medical images generated by other imaging technologies,
such as CT.
Improved economics of mammography centers. The ImageChecker system can
improve the profitability of a mammography center by providing additional
reimbursement for the application of CAD with mammography. In April 2001, CAD
for screening mammography received a Medicare reimbursement rate of $15.00 per
procedure, which subsequently was increased to $17.74 effective January 1,
2002. In addition, use of the ImageChecker system for hospital-based diagnostic
screens will receive reimbursement of $28.26 per procedure beginning January
2002 under the recently announced Ambulatory Patient Codes. Furthermore, in
January 2002, an add-on Category I Current Procedural Terminology, or CPT,
billing code for computer-aided detection used in screening mammography will go
into effect. Private insurance carriers rely in large part on such billing
codes to determine their reimbursement policies. As of December 1, 2001,
approximately 140 insurance carriers, including Medicare, have reimbursed
screening procedures that include ImageChecker system analysis. These carriers
represent approximately 144 million covered lives in the U.S.
37
Our Strategy
Our objective is to be the leading provider of proprietary CAD solutions
that improve the accuracy of cancer detection, are easy to use, are cost
efficient and improve the quality of patient care. To achieve this objective,
we are pursuing the following business strategies:
Establish our proprietary CAD technology as the standard of care for
cancer screening and detection.The ImageChecker system is the first
commercially available CAD product for use with both screening and diagnostic
mammograms. We seek to associate the R2 brand with comprehensive programs to
establish CAD as a standard of care for cancer detection. To accomplish this
objective, we will continue to develop key luminary sites, publish clinical
results, seek expanded nationwide reimbursement, and educate radiologists,
insurers, hospital administrators, and patients.
Leverage our CAD technology to work with a broad range of imaging
products and to help detect other cancers. We seek to apply our CAD technology
to multiple imaging modalities. We believe that the high replicability of our
algorithmic methods will accelerate our time to market in the application of
CAD technology to the detection of other cancers. We are currently applying our
CAD technology to the early detection of lung cancer.
Leverage our growing installed base and strategic relationships to
produce a steady stream of new and recurring revenue. In addition to selling
our products to new and existing customers, we also plan to leverage our
strategic relationships to provide sources of recurring revenue through the
following methods:
. line extensions of ImageChecker products;
. software and service contracts for mammography; and
. software and service contracts on new products.
Provide fully integrated image and data management solutions to
customers. We believe that medical professionals will seek to connect all image
acquisition devices, image processing devices and display options to a
centralized network. We intend to capitalize on this inherent networking
opportunity through an open architecture design that integrates with other
vendors' solutions.
Our Products
ImageChecker System
The ImageChecker system is comprised of two major subsystems, a
processing unit and a display unit, connected by an open architecture. The
processing unit is comprised of a high-resolution digitizer, a computer and a
proprietary pattern recognition neural network program. Up to 80 images can be
loaded at once into our continuous-loader unit. Alternative display units are
available which permit viewing of the CAD results, in a range of formats from
digital display to paper printout.
The following diagram illustrates the components of the ImageChecker
system.
[Photograph of the ImageChecker system including processor unit and
display unit]
The pattern recognition program uses a set of over 50 features to
identify regions in medical images that have characteristics associated with
cancer and assigns to each of these regions a likelihood that a problematic
pattern is present at that location. The neural network processor then
identifies the various patterns and determines a significance level for each
suspicious region. When a region's significance level is above a certain
threshold, the system marks that region for review by the radiologist.
38
ImageChecker-DM
The most recent ImageChecker product is ImageChecker-DM, which analyzes
full-field digital mammograms which are intended to permit imaging of the
entire breast.
Products Under Development
CAD for Chest Computed Tomography. Currently radiologists evaluate
hundreds of two-dimensional CT images per patient. Our CAD application under
development for CT transforms these two-dimensional images into a
three-dimensional space, orients the radiologist to suspected lesions, measures
abnormalities in cross-section and volume, and allows the radiologist to see
areas of interest in three dimensions from any perspective. Images can be
archived and retrieved for comparison with later images to show lesion growth
or reduction. In addition, the system automatically locates the same lesions
among the hundreds of images, measures their volume and density change, and
reports those results in visual and text form to the radiologist.
CAD for Chest Computed Radiography and Digital Radiography. Many cancers
are detected when X-rays are taken for purposes other than the detection of
cancer, for example, to examine broken ribs or investigate bronchial distress.
Accordingly, we are leveraging our mammography CAD core competencies to develop
and market a CAD product that detects unexpected radiological findings in
X-rays not taken to detect cancer. The product is designed to report findings
that could be lung lesions indicative of cancer on chest radiographs performed
with CR and DR technologies.
Clinical Results and Related Studies
We have conducted three retrospective clinical studies demonstrating the
safety and effectiveness of the ImageChecker system. Recently, our FDA
approvals were expanded to include analysis of diagnostic mammograms and GE
Medical Systems' full-field digital mammograms. As a result, we are the only
company to have a commercially available FDA-approved CAD product for use with
both screening and diagnostic mammograms.
For our primary retrospective clinical study supporting our PMA
application to demonstrate the safety and effectiveness of the ImageChecker
system, we gathered 1,083 biopsy-proven breast cancers from 13 institutions, as
well as 493 prior negative mammograms. Three reviewers, four reviewers or five
reviewers out of panels of five independent reviewers determined that 112 of
the 493 prior mammograms showed obvious signs of breast cancer. The CAD
technology correctly marked 101 of the cancers, leading to a potential
improvement of up to 20.5% in cancer detection.
A second retrospective study measured the ImageChecker system's ability
to mark microcalcifications and masses, which are indicators of breast cancer,
on mammograms. Retrospectively analyzing biopsy-proven cancers, the
ImageChecker system correctly marked 98% of microcalcifications, often an early
indicator of localized breast cancer, and 86% of masses, often an indicator of
more invasive breast cancer. Overall, the sensitivity in this second study for
marking biopsy-proven breast cancers was 90%, with an additional 0.5 average
marks per image on locations that were not cancer.
We also conducted a third retrospective study to estimate the
radiologists' patient recall rates. The study, in which 14 radiologists at five
sites participated, compared patient recall rates, the rates at which patients
are recalled for workup, or further investigation by radiologists for a
population of approximately 24,000 patients examined by radiologists without
the ImageChecker system against a population of approximately 15,000 patients
examined by radiologists assisted by the ImageChecker system. No statistically
significant increase in patient recall rates resulted.
In addition, an independent prospective study has been conducted since
FDA approval of the ImageChecker system in 1998. In that study, a community
breast center purchased an ImageChecker system and
39
collected data for one year to assess the impact of the system by comparing
ImageChecker system's performance to their unassisted breast cancer detection
results. Forty-one cancers were detected by the radiologist alone and 49
cancers were detected by the radiologist assisted by the ImageChecker system.
This prospective study of 12,860 women was published in the journal Radiology.
The results were as follows: patient recall rate increased from 6.5% to 7.7%;
biopsy positive predictive value remained unchanged at 38%; and the number of
cancers detected increased by 19.5%.
Sales and Marketing
We market and sell our ImageChecker products worldwide through a direct
sales force and distributors. We market through research collaborations with
luminary sites, clinical education programs, cooperative efforts with health
advocacy groups, involvement in key trade shows, targeted trade advertising,
and public relations activities.
Our sales and marketing strategy is to provide comprehensive CAD
technology solutions to customers for both analog and digital medical imaging
products. We expect to penetrate the market through strategic distribution
collaborations and national accounts programs. We also provide extensive local
advertising and reimbursement advice to assist our customers in educating their
target patient audience and local insurers about the benefits of the
ImageChecker system.
Our direct sales force is comprised of 20 sales managers and executives
covering North America, Europe and Asia. A large portion of our revenue comes
from our network distributors in North America, Europe, the Asia-Pacific
region, and Latin America. Our largest distributors are Diagnostic Imaging,
MedImaging Technology, Inc., Cassling Diagnostic Imaging, Associated X-Ray, and
Delta Medical.
In addition, we have an exclusive agreement with GE Medical Systems for
the distribution of our ImageChecker-DM with the GE Medical Systems full field
digital mammography system. As of December 2001, 40 ImageChecker-DMs have been
sold to GE Medical Systems. We have also signed a multi-year agreement with
Kodak to support the application of CAD software to aid in the detection of
lung cancers.
We have multi-year and sole-source CAD contracts with group purchasing
organizations such as Novation, AmeriNet, and HSCA. In addition, we have
conducted group volume purchases with Premier.
We provide direct customer training through seven full-time and five
independent contractor applications support specialists who work closely with
our distributors and end users. Our customer technical support center employs
six people to respond to customer questions and provides technical support
through modem connections built into our equipment.
Reimbursement
We plan to gain private and government third-party payor coverage and
reimbursement for CAD technology in North America, Europe and Asia. In the
U.S., third-party reimbursement for mammography is available through Medicare
and several private health insurance plans. After FDA approval is received,
third-party reimbursement generally depends on decisions by individual health
plans for privately insured individuals, the Centers for Medicare & Medicaid
Services, or CMS, for Medicare beneficiaries, and State Medicaid agencies for
Medicaid recipients. As of December 1, 2001, approximately 140 different payors
have provided reimbursement for CAD with mammography. These payors represented
approximately 144 million covered lives in the U.S.
In December 2000, Congress granted nationwide Medicare coverage and
reimbursement for computer-aided detection when used with certain mammography
procedures. The legislation mandated incremental reimbursement of $15.00 for
certain CAD procedures from April through December 2001. This legislation was
40
supplemented by a temporary "G" code from CMS to assist providers in filing
claims for CAD. As of January 1, 2002, the national average Medicare
reimbursement rate for the physician's professional services, and the technical
services component of CAD used with either screening or diagnostic mammography,
will be $17.74 per procedure. As of that same date, the national average
Medicare reimbursement for hospital outpatient departments will be $14.48 for
CAD with a screening mammogram and $25.00 for CAD with a diagnostic mammogram,
and the national average Medicare reimbursement rate for the physician
providing the professional services related to these hospital outpatient
department procedures will receive a payment of $3.26 per procedure. CMS has
announced that there will be a delay in implementing the payment rates for all
hospital outpatient services until April 1, 2002. Until then, payment for
hospital outpatient services will be made if the hospital elects to receive
special interim payments, which in turn are based on the hospital's 2001 rates.
These payments for CAD will be made under Medicare as a payment additional to
Medicare's payment for the underlying mammogram.
In 2001, the American Medical Association approved an add-on Category I
CPT code for CAD with screening mammography, effective January 1, 2002. We
expect CMS will also use this new code for CAD performed in conjunction with
screening mammography. In addition, CMS created an add-on "G" code for CAD
performed in conjunction with diagnostic mammography beginning in the year
2002. We are seeking a CPT code for use of CAD with diagnostic mammography to
replace our current "G" code.
We continue to approach additional private payors, both through customers
and directly, to solicit coverage and reimbursement for CAD. We expect that the
combination of national Medicare coverage, a unique CPT code, strong clinical
literature in support of CAD, broad FDA labeling, a rapidly growing installed
base, strong support of customers, and recognition of breast cancer detection
as a critical women's health issue will lead to increasing coverage and
reimbursement. We also intend to provide a strong customer support
reimbursement function to assist customers in their interaction with local and
regional payors. As part of this function, we are tracking the coverage and
reimbursement policies of individual payors in North America, and on a
country-specific basis in Europe and Asia. In Europe, we are working through
our distributor network to secure reimbursement through the appropriate
government agencies.
Research and Development
We maintain an ongoing research program designed to provide clinical and
operational improvements to the ImageChecker system for mammography.
Specifically, we have targeted research in the following areas of clinical
performance:
. improved detection accuracy;
. classification of lesion characteristics;
. new display capabilities; and
. comparison of past images with current images.
We also continue to research and develop applications of CAD to CR, DR
and CT image acquisition technology. Specifically, we are focused on:
. improved radiologist workflow;
. improved detection accuracy;
. new display capabilities;
. data storage, retrieval, integration and comparison of past and
current images; and
. automatic measurement of volume and change in size of abnormality over
time.
41
Manufacturing
We lease manufacturing facilities in Los Altos, California. These
facilities must adhere to the FDA's QSR, which requires manufacturers to follow
design, testing, control, documentation and other quality assurance procedures
during the manufacturing process. In December 2001, the International Standards
Organization renewed our ISO 9001 certification.
Our manufacturing employees assemble, test, and package our products from
components purchased from third-party manufacturers. We purchase video monitors
and film digitizers from sole-source suppliers. We are currently qualifying
second sources for both of these components. Our agreement to purchase
continuous-loading film digitizers from Canon Inc. terminates in April 2003.
Our key suppliers for motorized viewers are S&S Technology, Inc. and American
Medical Sales, Inc. All other ImageChecker system components are readily
available from multiple suppliers.
In our current location we have a manufacturing capacity of approximately
400 units per year. We expect to add additional capacity to meet projected
demand through expansion of current facilities, lease of new facilities, and
outsource manufacturing where appropriate and permitted by applicable
regulation.
Government Regulation
Overview
Our products are medical devices subject to extensive regulation by the
FDA under the Federal Food, Drug, and Cosmetic Act. The FDA's regulations
govern, among other things, the following activities:
. product development;
. product testing;
. product labeling;
. product storage;
. premarket clearance or approval;
. advertising and promotion; and
. sales and distribution.
Access to U.S. Market
Each medical device that we wish to commercially distribute in the U.S.,
unless otherwise exempt, will likely require either 510(k) clearance or PMA
approval prior to commercial distribution. Devices deemed to pose relatively
less risk are placed in either class I or II, which requires the manufacturer
to submit a premarket notification requesting permission for commercial
distribution; this is known as 510(k) clearance. Some low risk devices are
exempted from this requirement. Devices deemed by the FDA to pose the greatest
risk, such as life-sustaining, life-supporting or implantable devices, or
devices deemed not substantially equivalent to a previously 510(k) cleared
device or a preamendment class III device for which PMA applications have not
been filed, are placed in Class III requiring PMA approval.
510(k) clearance pathway. To obtain 510(k) clearance, a manufacturer must
submit a premarket notification demonstrating that the proposed device is
substantially equivalent in intended use and in safety and effectiveness to a
"predicate device" -- either a previously 510(k) cleared device or a device
that was in commercial distribution before May 28, 1976, for which the FDA has
not called for submission of PMA applications. The FDA's 510(k) clearance
pathway usually takes from three to 12 months, but it can last longer. After a
device receives 510(k) clearance, any modification that could significantly
affect its safety or
42
effectiveness, or that would constitute a major change in its intended use,
requires a new 510(k) clearance prior to commercializing the modification, or
could even require a PMA approval.
PMA approval pathway. If the FDA denies 510(k) clearance, the product
must follow the PMA approval pathway, which requires proof of the safety and
effectiveness of the device to the FDA's satisfaction. A PMA application must
provide extensive preclinical and clinical trial data and also information
about the device and its components regarding, among other things, device
design, manufacturing and labeling. The PMA approval pathway is much more
costly, lengthy and uncertain. It generally takes from one to three years or
even longer. After approval of a PMA, a new PMA or PMA supplement is required
in the event of a modification to the device, its labeling or its manufacturing
process that affects safety or effectiveness. Depending upon the nature of the
modification, some supplemental approvals may require clinical data and
extensive information.
We obtained PMA approval for the ImageChecker system in 1998 and have
since obtained approval of 11 PMA supplements covering various modifications.
Our market strategy includes a continual expansion of indications for use,
performance claims and approval of new features for the mammography product
line. Each such expansion is likely to require a separate PMA supplement
approval. We cannot assure you that any supplemental approval will be obtained
in a timely fashion or at all.
Our original PMA approval granted in 1998 allowed us to state that "for
every 100,000 cancers currently detected by screening mammography, use of the
ImageChecker could result in early detection of an additional 12,800 breast
cancers." This statement was based upon the clinical data we submitted to
support our approval. In 2000, the FDA approved a PMA supplement requesting
permission to revise the claim upward to 20,500 breast cancers, based upon a
reanalysis of our clinical data. In October 2001, we received an informal
communication from an FDA official raising questions about the methodology
supporting the 20,500 breast cancer detection claim. In December 2001, we
provided a written report from our outside biostatistical consultant supporting
our analysis. As of December 28, 2001, we have not received any formal
response. We cannot assure you that FDA will accept our analysis or
methodology. The FDA may require us to revise the claim by, for example: adding
clarifying language; reducing the claim from 20,500 to a significantly lower
number; or by using a different method altogether to report the efficacy of the
ImageChecker system.
Clinical studies. A clinical study is generally required to support a PMA
application and may be required for a PMA supplement or even a 510(k) premarket
notification. For "significant risk" devices, such studies generally require
submission of an application for an Investigational Device Exemption, or IDE.
The IDE application must be supported by appropriate data, such as animal and
laboratory testing results, showing that it is safe to test the device in
humans and that the testing protocol is scientifically sound. The IDE must be
approved in advance by the FDA for a specified number of patients. Clinical
studies may begin once the IDE application is approved by the FDA and the
appropriate institutional review boards at the study sites. For "nonsignificant
risk" devices, one or more institutional review boards must review the study,
but submission of an IDE to FDA for advance approval is not required. Both
types of studies are subject to record keeping, reporting, and other IDE
regulation requirements.
Pervasive and Continuing FDA Regulation
After FDA permits a device to enter commercial distribution, numerous
regulatory requirements apply. These include: the QSR, which requires
manufacturers to follow elaborate design, testing, control, documentation and
other quality assurance procedures during the manufacturing process; labeling
regulations; the FDA's general prohibition against promoting products for
unapproved or "off-label" uses; and the Medical Device Reporting regulation,
which requires that manufacturers report to the FDA if their device may have
caused or contributed to a death or serious injury or malfunctioned in a way
that would likely cause or contribute to a death or serious injury if it were
to recur.
In 2000, we transferred part of our in-house manufacturing operation to a
third party contract manufacturer. In 2001, we transferred the operation back
in-house. We reported both transfers to the FDA in
43
annual reports. In hindsight, we believe that we may have been required to
obtain prior approval of a PMA supplement before transferring our manufacturing
operation to a third party rather than simply reporting the transfer after the
fact. We have disclosed this apparent oversight to FDA officials and we believe
that enforcement action is unlikely. Nonetheless, we cannot assure you that FDA
will not take enforcement action.
We are subject to inspection and market surveillance by the FDA to
determine compliance with regulatory requirements. Our most recent FDA
inspection was in 1999. We cannot be certain that an FDA inspection would
determine that we are in compliance with all requirements. If the FDA finds
that we have failed to comply, the agency can institute a wide variety of
enforcement actions. We are also required to obtain a manufacturing license
from the state of California before we begin manufacturing our products. We
have applied for but have not yet received our California manufacturing license.
International
Internationally, we use the appropriate approval process for the device
classification in the country of interest. In Europe, we maintain our European
certification through our European office. In Japan, we utilize the In Country
Caretaker option to obtain and maintain approvals, awarding distribution rights
to our partners. Other countries in the world generally follow the guidance of
the FDA or one of these regulatory bodies.
Sales of medical devices outside of the U.S. are subject to foreign
regulatory requirements that vary from country to country. The time required to
obtain approval for sale internationally may be longer or shorter than that
required for FDA approval, and the requirements may differ. The primary
regulatory environment in Europe is that of the European Union, which consists
of 15 member countries encompassing most of the major countries in Europe. The
European Union has adopted numerous directives and standards regulating the
design, manufacturing, clinical trials, labeling and adverse event reporting
for medical devices. Devices that comply with the requirements of a relevant
directive will be entitled to bear a CE Mark, indicating that the device
conforms to the essential requirements of the applicable directive, and
accordingly, can be commercially distributed throughout the European Union. We
have received authorization to affix the CE Mark to the ImageChecker system.
We received a Direct Manufacturing Shonin product approval for one of our
products from the Ministry of Health and Welfare of Japan in January 2000.
Intellectual Property
We rely on a combination of copyright, patent, trademark, trade secret
and other intellectual property laws, nondisclosure agreements and other
measures to protect our proprietary rights. Our success may depend in part on
our ability to obtain and enforce patent protection for our current and future
technology. In total, we own or have rights to over 85 patents and patent
applications with claims that cover the detailed algorithms, graphical user
interfaces, and workflow aspects of CAD technology and software.
We currently own, or have acquired exclusive or nonexclusive licenses to,
over 50 patents already granted by the U.S. Patent and Trademark Office. These
patents begin to expire in 2006. We have also filed patent applications in
Japan and a number of European countries. We hold a royalty-bearing exclusive
license that covers patents from ARCH. We also hold a non-exclusive license
from ARCH for patents for which there is one other licensee. ARCH is prohibited
from granting additional licenses under this license, and the other licensee is
only permitted to sublicense to third parties that have been designated by
ARCH. We have also licensed patents and patent applications from the University
of Chicago. All licenses from both ARCH and the University of Chicago terminate
upon the last-to-expire patent. In addition, we hold an exclusive worldwide,
royalty-bearing license from Mr. Shih-Ping Bob Wang for patents and patent
applications relating to the display technology used in the ImageChecker
system. The license agreement requires that we maintain and prosecute all
patents and patent applications and terminates with the expiration of the
patent. We also hold a non-exclusive,
44
worldwide license from Sandia Corporation for patents relating to software
designed to detect certain suspicious regions on mammograms. The license
terminates with the expiration of the patents.
The patents owned or licensed by us relate to, among other things:
. computer-aided lesion detection system;
. automatic detection of spiculated lesions in mammograms;
. methods and systems for detecting chest abnormalities;
. chest computed tomography;
. chest radiography; and
. computer-aided diagnosis systems and methods.
We have been granted a trademark for the mark ImageChecker in the U.S. and have
applied for registration of this mark in Europe.
Competition
The medical device industry, including the market for breast cancer
screening devices, is highly competitive. The market for breast cancer
screening devices is characterized by innovation and technological advances and
companies compete on the basis of product performance, price and breadth of
product line. Large, well-funded companies with known CAD development programs
include GE Medical Systems, Siemens AG, Philips Medical Systems, Toshiba
Corporation, Kodak and Fuji. These companies have substantially greater
resources, financial and otherwise, than we do. Other companies with publicly
disclosed CAD development programs include SCANIS, Inc., Intelligent Systems
Software, Inc. and MedDetect, LLC. We are also aware that a competitor, CADx
Medical Systems, has received an approvable letter from the FDA for a CAD
product that competes with the ImageChecker system. CADx Medical Systems is
selling its CAD product in Europe and may be selling in other areas of the
world outside the U.S. In addition, Deus Technologies is selling an
FDA-approved CAD product for lung cancer detection with film chest radiographs.
We are aware of several research groups with activities relating to CAD in
breast cancer screening and detection, including universities and small
early-stage private companies.
Employees
As of December 26, 2001, we employed 131 persons full-time. Approximately
10 persons are engaged in manufacturing, 50 persons are engaged in research and
development, of whom 28 have advanced degrees, 36 persons are engaged in sales
and marketing, and 15 persons are engaged in customer support, regulatory
activities, and reimbursement. No employees are covered by collective
bargaining agreements.
Facilities
We currently lease office and research and development facilities in
three adjacent buildings in Los Altos, California, totaling approximately
26,000 square feet. The lease for our two primary facilities at 325 Distel
Circle, containing approximately 16,300 square feet, began in June 2000 and
terminates on November 30, 2005. An additional approximately 8,400 square feet
at 5050 El Camino Real are leased on a month-to-month basis. We are currently
exploring alternative facilities to meet our expansion needs. Finally we lease
office space totaling approximately 1,355 square feet in Markham, Ontario,
Canada. This lease began in July 2001 and terminates on July 15, 2004.
Legal Proceedings
We are not party to any material pending legal proceedings.
45
Medical Advisory Board
We have established a medical advisory board composed of individuals with
recognized expertise in fields relating to cancer detection who provide us with
clinical and medical advice. Our medical advisory board meets annually to
review our clinical progress, to identify potential applications of our
technology and to advise us concerning long-term product planning, research,
development and marketing. In addition, members of our medical advisory board
are available to us on a limited individual basis for consultation. We
compensate the members of the medical advisory board for attendance at and
expenses relating to each meeting. At present the following persons compose our
medical advisory board:
Chairman:
Alexander Margulis, M.D......... Former Chairman, Department of Radiology, University of
California, San Francisco, San Francisco, California.
N.R. Dunnick, M.D............... Chairman, Department of Radiology, University of Michigan,
Ann Arbor, Michigan.
Gary Glazer, M.D................ Chairman, Department of Radiology, Stanford University,
Palo Alto, California.
Linda J. Warren-Burhenne, M.D... Professor, Department of Radiology, University of British Columbia,
Vancouver, British Columbia.
James E. Youker, M.D............ Chairman, Department of Radiology, Medical College of Wisconsin,
Milwaukee, Wisconsin.
Elias A. Zerhouni, M.D.......... Chairman, Department of Radiology, Johns Hopkins University,
Baltimore, Maryland.
Guy Frija, M.D.................. Professor at Radiology, UFR Necker Sick Children, Universite Rene
Descartes, Paris, France.
Janet Husband, M.D.............. Chairwoman, Department of Radiology, Royal Marsden Hospital,
London, England.
Roberto Passariello, M.D........ Chairman, Department of Radiology, University La Sapienza,
Rome, Italy.
Maximillian F. Reiser, M.D...... Head of the Institute for Diagnostic Radiology, University of
Munich, Munich, Germany.
Hans G. Ringertz, M.D........... Chairman, Department of Radiology, Karolinska Institute,
Stockholm, Sweden.
Jian-Ping Dai, M.D.............. President, Tiantan Hospital & Neurosciences Institute,
Beijing, China.
Kuni Ohtomo, M.D................ Chairman, Department of Radiology, University of Tokyo, Tokyo,
Japan.
Lenny K. Tan, M.D............... Head of Department of Diagnostic Radiology, National University,
Singapore.
46
Mammography Advisory Committee
We have established a mammography advisory committee composed of individuals
who provide us with clinical and medical guidance. Our mammography advisory
committee meets twice annually to review our clinical progress and to identify
potential applications of our technology in the field of mammography. In
addition, members of our mammography advisory committee are available to us on
an individual basis for consultation. We compensate the members of our
mammography advisory committee for attendance at and expenses relating to each
meeting of our committee members. At present the following persons compose our
mammography advisory committee:
Chairman:
Linda J. Warren-Burhenne, M.D. Professor, Department of Radiology, University of British Columbia,
Vancouver, British Columbia.
Carl J. D'Orsi, M.D........... Professor, Department of Radiology, University of Massachusetts
Medical Center, Boston, Massachusetts.
Stephen A. Feig, M.D.......... Director, Breast Imaging, Mount Sinai Medical Center, New York,
New York.
Daniel B. Kopans, M.D......... Director of Breast Imaging, Massachusetts General Hospital and
Harvard Medical School, Boston, Massachusetts.
Edward A. Sickles, M.D........ Director of Breast Imaging, University of California, San Francisco,
San Francisco, California.
Laszlo Tabar, M.D............. Director of Mammography Department, Central Hospital,
Falun, Sweden.
47
MANAGEMENT
Executive Officers and Directors
The following table presents information relating to our executive
officers, senior management and directors, including their positions and ages,
as of December 20, 2001. No immediate family relationships exist among any of
our directors or executive officers.
Name Age Position
- ---- --- --------
Michael S. Klein.................... 48 Chairman of the Board, President and Chief Executive Officer
Kevin R. Davidge.................... 42 Vice President, Chief Financial Officer and Assistant Secretary
Richard S. Enck, Jr................. 55 Vice President and Chief Operating Officer
Kenneth F. Miller................... 45 Senior Vice President and Chief Marketing Officer
Peter Mazonson, M.D................. 45 Senior Vice President, Business Operations
Scott S. Halsted/(2)/............... 41 Director
J. Burgess Jamieson/(2)/............ 71 Director
Steven Lazarus/(2)/................. 70 Director
William J. Mercer/(2)/.............. 53 Director
Ruediger Naumann-Etienne, Ph.D./(1)/ 55 Director
Guy P. Nohra/(1)/................... 41 Director
Thomas M. Prescott/(1)/............. 46 Director
John Yu............................. 53 Director
- --------
/(1)/ Member of the Audit Committee
/(2)/ Member of the Compensation Committee
Michael S. Klein has served as our President, Chief Executive Officer and
Chairman of the Board of Directors since May 2000. From 1997 to 2000, he served
as Vice President and subsequently as General Manager of the Oncology Systems
Group of Varian Medical Systems, Inc., an integrated cancer therapy systems
company. In this capacity, he had responsibility for several business units.
From 1990 to 1997, Mr. Klein served in a series of senior management positions
at Becton Dickinson and Company, a medical supplies, devices and diagnostic
systems company, the last of which was Vice President of Sales and Marketing
for BD Medical's North American Sales & Marketing. Before that, Mr. Klein held
various sales, marketing, planning and business development management
positions with other corporations. Mr. Klein received an M.B.A. from the New
York Institute of Technology and a B.A. in history and education from the State
University of New York, Albany.
Kevin R. Davidge has served as our Vice President and Chief Financial
Officer since May 1999, and as our Assistant Secretary since October 2000. From
July 1997 to April 1999, he was Vice President in charge of finance at
ViroLogic, Inc., a publicly traded biotechnology company. From June 1992 to
July 1997, Mr. Davidge served as Vice President in charge of finance for Athena
Neurosciences, Inc., a publicly traded pharmaceutical company that merged with
Elan Corporation LC. From 1981 to 1992, he held various financial management
positions at Network Equipment Technologies Inc., a networking hardware
company, and KPMG Peat Marwick, a tax, legal and financial consulting company.
Mr. Davidge is a Certified Public Accountant. Mr. Davidge received a B.S. in
business administration from the University of California, Berkeley.
Richard S. Enck, Jr. is a co-founder of our company and joined us full
time in September 1998 to serve as our Vice President and Chief Operating
Officer. From 1992 to 1998, he served as President of Kevex X-Ray, Inc. and
Kevex Instruments, Inc., X-ray tubes and integrated X-ray processes companies,
both subsidiaries of Thermo Electron Corporation, a materials analysis
solutions company. From 1989 to 1992, he was President and Chief Executive
Officer of Surface Science Instruments, Inc., a surface measurement instruments
company. Mr. Enck's prior experience includes senior operating positions at
Picker International and Varian Associates. He received a B.S. in electronics
from Northeastern University in Boston, Massachusetts.
48
Kenneth F. Miller has served as our Senior Vice President and Chief
Marketing Officer since June 2000. From October 1999 to May 2000, he served as
the Chief Operating Officer for Liquid Borders, Inc., an e-commerce company.
From April 1997 to October 1999, he served as Vice President for Sales &
National Accounts with ALARIS Medical Systems, Inc., an infusion therapy
products company. His prior senior management positions include a 13-year
career with Becton Dickinson and Company, in general management, marketing,
sales and national accounts. He has had additional experience with Medical
Technology Corporation, a medical supplies company, MetPath Inc., a medical
testing laboratory company, Sterling Drug, Inc., a pharmaceutical company, and
Hoffmann-La Roche, Inc., a pharmaceutical company. Mr. Miller received an
M.B.A. in pharmaceutical marketing from Farleigh Dickinson University and a
B.S. in chemistry, zoology and physiology from Rutgers University.
Peter Mazonson, M.D., has served as our Senior Vice President in charge
of Business Operations since September 2001, and prior to that, from April 2001
to August 2001, Dr. Mazonson served as our Vice President in charge of
Reimbursement and Outcomes Research. From 1998 to 2000, Dr. Mazonson served as
Senior Vice President at The Lewin Group, Inc., a healthcare consulting
company, a subsidiary of Quintiles Transnational Corp., a full-service
healthcare solutions company. From 1997 to 1998, he served as President of
Technology Assessment Group, an international health outcomes research
consulting firm that was acquired by Quintiles in 1998. From 1991 to 1997, he
served as Vice President of Technology Assessment Group. Dr. Mazonson received
an M.D. from Dartmouth Medical School, an M.B.A. with distinction from Stanford
Graduate School of Business and a B.A. cum laude in economics from Harvard
College.
Scott S. Halsted has served as a member of our board of directors since
December 1996. Since 1987, Mr. Halsted has focused on investing in medical
technology, biotechnology and healthcare services on behalf of Morgan Stanley
Venture Partners L.P., a venture capital company. Before joining Morgan
Stanley, Mr. Halsted worked in the Business Development Group of Hexcel Medical
Corporation, a structural material company, and for Intermedics Orthopedics,
Inc., an orthopedic devices company. Mr. Halsted is a member of the boards of
Intuitive Surgical, Inc., a computer-enhanced surgery systems company, Rita
Medical Systems, Inc., an ablation devices company, and several private medical
imaging companies. Mr. Halsted received an M.M. from the Kellogg Graduate
School of Management at Northwestern University, as well as a B.A. and a B.E.
in biomechanical engineering from Dartmouth College.
J. Burgess Jamieson has served as a member of our board of directors
since May 1994. Mr. Jamieson is Founder and General Partner of Sigma Management
II, L.P., a venture capital firm, the General Partner of Sigma Partners II and
partner of various other affiliated entities. Sigma is a private venture
capital organization. Mr. Jamieson he has been affiliated with Sigma since
1984. In addition to being one of our directors, Mr. Jamieson is a director of
FileNet Corporation, a software products company. Mr. Jamieson received a B.S.
in electrical engineering from the Massachusetts Institute of Technology.
Steven Lazarus has served as a member of our board of directors since
August 1993. Since 1994, he has been the managing director of ARCH Venture
Partners, a seed and early stage investment partnership. From 1986 to 1994, he
served as President and Chief Executive Officer of ARCH Development
Corporation, a venture capital company, and he was an Associate Dean of the
Graduate School of Business of the University of Chicago. Mr. Lazarus serves as
a member of the boards of directors of Amgen Inc., a biopharmaceutical company,
First Consulting Group, a healthcare consulting company, the National
Association of Corporate Directors, a professional organization, and RAND
Health, a health research division of RAND. Mr. Lazarus received an M.B.A. with
high distinction from Harvard Business School and an A.B. from Dartmouth
College.
William J. Mercer has served as a member of our board of directors since
October 2000. Since founding Avocet Ventures, Inc., a private equity firm in
February 2000, Mr. Mercer has served as its Managing Member. From November 1999
to January 2000, Mr. Mercer served as Managing Partner of Aberdeen Strategic
Capital, LP, a private equity fund. From November 1996 to October 1999, Mr.
Mercer served as President and Chief Executive Officer of ALARIS Medical
Systems, Inc. and IVAC Medical Systems, Inc., an infusion therapy
49
products company. From May 1995 to November 1996, he served as President and
Chief Executive Officer of IVAC Medical Systems, Inc., prior to its merger with
Advanced Medical, Inc., a drug infusion therapy company. From December 1992 to
July 1994, Mr. Mercer served as President and Chief Executive Officer of
Mallinckrodt Veterinary, Inc., a veterinary pharmaceutical company, where he
had served in various positions, primarily in medical imaging, since November
1977. Mr. Mercer serves as a member of the board of directors of Invitrogen
Corporation, a biotechnology company. Mr. Mercer received B.S. in zoology from
North Carolina State University and a certificate from the advanced management
program of Harvard Business School.
Rudieger Naumann-Etienne, Ph.D. has served as a member of our board of
directors since February 2001. Dr. Naumann-Etienne serves as the owner and
Managing Director of Intertec Group, Inc., a private investment group
specializing in the medical technology field. Since 2000, he has served as
Chairman of the Board of Directors and Chief Executive Officer of Quinton,
Inc., a privately held diagnostic cardiology company. From 1993 to 1999, Dr.
Naumann-Etienne served as Chairman of the Board of Directors of OEC Medical
Systems, Inc., a medical imaging company, and from 1995 to 1997, he served as
Chief Executive Officer of OEC Medical Systems. Dr. Naumann-Etienne currently
serves as a member of the boards of directors of Bio-Rad Laboratories Inc., a
research and clinical diagnostic products company, and Laserscope, a medical
laser systems and devices company. Dr. Naumann-Etienne received a Ph.D. from
the University of Michigan, an M.S. from the Georgia Institute of Technology
and a B.S. from the Technical University in Berlin, Germany.
Guy P. Nohra has served as a member of our board of directors since July
1994. He is a founder and Managing Director of Alta Partners LLC, a venture
capital firm investing in information technologies and life science companies.
Prior to founding Alta Partners in 1996, Mr. Nohra was a Partner at Burr, Egan,
Deleage & Co., Inc., which he joined in 1989 and for which he served as a Vice
President from 1989 to 1997. Previously, Mr. Nohra was a Product Manager of
Medical Products with Security Pacific Trading Corporation, a financial
company, where he was responsible for a multi-million dollar product line and
traveled extensively in Korea, Taiwan, Hong Kong, China and Southeast Asia. Mr.
Nohra is or has served as a member of the boards of directors of Vesica, Inc.,
a urology surgery company, Pilot Cardiovascular Systems, Inc., a surgical
devices company, InnerDyne, Inc., a laparoscopic instruments company, Interpore
International, a medical device company, deCODE genetics, Inc., a genomics
company, and several life science companies. Mr. Nohra received an M.B.A. from
the University of Chicago Graduate School of Business and a B.A. from Stanford
University.
Thomas M. Prescott has served as a member of our board of directors since
February 2001. From May 1999 to August 2001, he served as President, Chief
Executive Officer and a member of the board of directors of Cardiac Pathways
Corporation, an ablation systems company. In August 2001, Boston Scientific
Corporation, a medical devices company, completed its acquisition of Cardiac
Pathways Corporation, and since that time, Mr. Prescott has served as a
consultant to Boston Scientific Corporation. From April 1994 to May 1999, Mr.
Prescott served in a series of executive positions at Nellcor Incorporated, a
sleep diagnostics company, and its successor company Nellcor Puritan Bennett
Incorporated, most recently as Vice President and General Manager of oxygen
therapy, spirometry and medical gases. From October 1987 to April 1994, Mr.
Prescott served in a series of management positions at GE Medical Systems, a
medical devices company. Mr. Prescott received an M.M. from the Kellogg
Graduate School of Management at Northwestern University and a B.S. in
engineering from Arizona State University.
John Yu has served as a member of our board of directors since December
2001. Since September 1995, Dr. Yu has served as Manager of the Technology
Department in the venture capital operation of China Development Industrial
Bank, an investment bank. From August 1992 to September 1995, Dr. Yu served as
Manager of the Oversees Business Department of China Development Industrial
Bank, during which time he oversaw direct investments primarily in the Asia
Pacific region. Dr. Yu received a Ph.D. from the University of Illinois at
Urbana-Champaign, an M.A. from Wayne State University and a B.S. from Taiwan
Cheng Kung University.
50
Board Composition
We currently have authorized nine directors. In accordance with the terms
of our bylaws, upon the closing of this offering, the terms of office of our
directors will be divided into three separate classes:
. Class I, whose term will expire at the annual meeting of stockholders
to be held in 2002;
. Class II, whose term will expire at the annual meeting of stockholders
to be held in 2003; and
. Class III, whose term will expire at the annual meeting of
stockholders to be held in 2004.
The Class I directors are Messrs. Halsted, Klein and Prescott, the Class
II directors are Messrs. Lazarus and Yu and Dr. Naumann-Etienne and the Class
III directors are Messrs. Jamieson, Mercer and Nohra. At each annual meeting of
stockholders after the initial classification, the successors to directors
whose term will then expire will be elected to serve from the time of election
and qualification until the third annual meeting following election. In
addition, our amended and restated certificate of incorporation provides that
the authorized number of directors may be changed only by resolution of our
board of directors and eliminates cumulative voting for directors. Any
additional directorships resulting from an increase in the number of directors
will be distributed among the three classes so that, as nearly as possible,
each class will consist of one-third of the directors. This classification of
our board of directors may have the effect of delaying or preventing changes in
control or management.
Each of our executive officers is elected by and serves at the discretion
of our board of directors. Each of our executive officers and directors, other
than non-employee directors, devotes substantially full-time attention to our
business affairs. Our non-employee directors devote such time to our business
affairs as is necessary to discharge their duties. There are no immediate
family relationships among any of our directors, executive officers or key
employees.
Board Committees
Audit committee. Our audit committee reviews and monitors our financial
statements and internal accounting procedures, makes recommendations to our
board of directors regarding the selection of independent accountants and
consults with and reviews the services provided by our independent accountants.
The members of our audit committee are Dr. Naumann-Etienne and Messrs. Nohra
and Prescott.
Compensation committee. Our compensation committee reviews and recommends
to our board of directors the compensation and benefits of all officers and
establishes and reviews general policies relating to compensation and benefits
of our executive employees and administers our stock plans and employee benefit
plans. The members of our compensation committee are Messrs. Halsted, Jamieson,
Lazarus, and Mercer.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the board of
directors or the compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or our
compensation committee. Mr. Mercer and various investment entities affiliated
with Messrs. Halsted, Jamieson, and Lazarus have purchased shares of our
preferred stock. See "Related Party Transactions" for a detailed explanation of
these transactions.
Director Compensation
Members of our board of directors receive no cash compensation from us
for their services as members of our board or for attendance at board or
committee meetings. Members of our board of directors are reimbursed for their
expenses incurred in connection with attendance at board and committee meetings.
51
In the past, we have granted non-employee directors options to purchase
our common stock under our Amended and Restated 1996 Stock Option Plan. In
consideration for serving as a member of our board of directors, in October
2000, we granted Mr. Mercer an option to purchase 25,000 shares of our common
stock at $1.50 per share, and in January 2001, we granted each of Dr.
Naumann-Etienne and Mr. Prescott an option to purchase 25,000 shares of our
common stock at $2.25 per share.
Our board of directors will continue to have discretion to grant options
to non-employee directors from time to time under our Amended and Restated 1996
Stock Option Plan. We intend to revise our current stock option plan so that
each non-employee director who joins our board following the completion of this
offering upon joining our board of directors will receive a non-discretionary,
automatic grant of an option to purchase a pre-determined number of shares of
our common stock. Our intention, moreover, is that each of our existing
non-employee directors will a receive yearly non-discretionary, automatic grant
of an option to purchase a pre-determined number of shares of our common stock,
in accordance with the stock option plan then in effect.
Executive Compensation
Summary Compensation Table
The following table sets forth summary information relating to compensation
we paid for services rendered to us during the fiscal year ended December 31,
2000, by our current chief executive officer, former chief executive officer
and our four most highly compensated executive officers. These seven executive
officers are referred to elsewhere in this prospectus as the named executive
officers.
Long-Term
Compensation
------------
Annual Compensation Securities
------------------- Underlying All Other
Name and Principal Position Salary Bonus/(1)/ Options Compensation/(2)/
- --------------------------- -------- --------- ------------ ----------------
Michael S. Klein/(3)/................................. $154,077 $77,175 1,526,300 $79,815
President and Chief Executive Officer
James W. Pell, Jr./(4)/............................... 176,783 -- -- --
Former Chief Executive Officer and President
Kevin R. Davidge...................................... 157,646 39,724 -- --
Vice President, Chief Financial Officer and Assistant
Secretary
Richard S. Enck, Jr................................... 156,023 39,312 -- --
Vice President and Chief Operating Officer
Kenneth F. Miller/(5)/................................ 100,064 50,000 300,000 --
Senior Vice President and Chief Marketing Officer
Alan Stein, Ph.D/(6)/................................. 117,950 -- -- --
Vice President of Regulatory Sales
- --------
/(1)/ Represents bonus earned in the year 2000 and paid in the year 2001.
Excludes bonus earned in the year 1999
and paid in the year 2000, if any.
/(2)/ Includes a relocation loan, incurred in the year 2000 at 6.4% interest,
the principal and interest of whichwere completely forgiven in May 2001.
/(3)/ Mr. Klein joined us as our President and Chief Executive Officer on May
15, 2000. His annualized salarywas $245,000.
/(4)/ Our former President and Chief Executive Officer Mr. Pell left our
company as of May 15, 2000.
/(5)/ Mr. Miller joined our company in June 2000 as Vice President of Business
Development. His annualizedsalary was $175,000.
/(6)/ Dr. Stein resigned as an executive officer and employee of our company
effective as of January 1, 2001.
52
Option Grants in Fiscal Year 2000
The following table sets forth the individual grant of stock options made
during the fiscal year 2000 to each of the named executive officers.
The exercise price of each option was equal to the fair market value of
our common stock as valued by our board of directors or compensation committee
on the date of the grant. The exercise price may be paid in cash, in shares of
our common stock valued at fair value on the exercise date or through a
cashless exercise procedure involving a same-day sale of the purchased shares.
The potential realizable value is calculated based on the ten-year term
of the option at the time of grant. Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange Commission
and does not represent our prediction of our stock price performance. The
potential realizable values at 5% and 10% appreciation are calculated by the
following method:
. multiplying the number of shares of common stock subject to a given
option by the assumed initial public offering price of [ ] per share;
. assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table until the
expiration of the options; and
. subtracting from that result the aggregate option exercise price.
The shares listed in the following table under the column heading "Number
of Securities Underlying Options Granted" are subject to vesting. For a
first-time optionee, upon completion of one year of service from the vesting
start date, 25% of the option shares vest and the balance vests in a series of
equal monthly installments over the next 36 months of service. For subsequent
grants, options vest in a series of equal monthly installments over 48 months
of service. Each stock option grant has a ten-year term, subject to earlier
termination if the optionee's service with us ceases. See "Employee Benefit
Plans" for a description of the material terms of a typical option.
Percentages shown under "Percent of Total Options Granted to Employees in
Fiscal Year 2000" are based on an aggregate of 2,856,676 shares subject to
options granted to our employees and consultants pursuant to our Amended and
Restated 1996 Stock Option Plan during the fiscal year ended December 31, 2000.
No SARs were granted in fiscal year 2000.
Potential Realizable
Individual Grants Value at Assumed
------------------------------------------------ Annual Rates
Number of of Stock Price
Securities Percent of Total Appreciation for
Underlying Options Granted Exercise Option Term
Options to Employees in Price Per Expiration --------------------
Name Granted Fiscal Year 2000 Share Date 5% 10%
- ---- ---------- ---------------- --------- ---------- --------- ---------
Michael S. Klein....................... 1,526,300 53.4% $1.10 05/24/2010
James W. Pell, Jr...................... -- -- -- -- -- --
Kevin R. Davidge....................... -- -- -- -- -- --
Richard S. Enck, Jr.................... -- -- -- -- -- --
Kenneth F. Miller...................... 275,000 9.6% $1.30 07/27/2010
25,000 0.9% $1.50 10/26/2010
Alan Stein, Ph.D....................... -- -- -- -- -- --
53
Aggregate Option Exercises in Fiscal Year 2000 and Fiscal Year-End Option
Values
The following table sets forth information with respect to option
exercises of each of the named executive officers for the year ended December
31, 2000, and a listing of his exercisable and unexercisable options as of
December 31, 2000. All options were granted under our Amended and Restated 1996
Stock Option Plan, which allows for the grant of options to employees,
directors or consultants exercisable early upon the administrator's consent at
the time of grant. Any option exercised early is subject to certain
restrictions, among them repurchase by us at the original exercise price upon
the optionee's cessation of service prior to the vesting of the shares.
Number of Securities Value of Unexercised
Number of Underlying Unexercised In-the-Money Options at
Securities Options at December 31, 2000 December 31, 2000/(2)/
Acquired Value ---------------------------- -------------------------
Name on Exercise Realized/(1)/ Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------ ----------- ------------- ----------- -------------
Michael S. Klein............. -- -- -- 1,526,300 $ $
James W. Pell, Jr............ 170,000 $152,500 550,000 100,000
Kevin R. Davidge............. -- -- 125,000 175,000
Richard S. Enck, Jr.......... -- -- 123,750 96,250
Kenneth F. Miller............ -- -- -- 300,000
Alan Stein, Ph.D............. 155,810 $ 36,934 62,083 92,106
- --------
/(1)/ Equal to the fair market value of the purchased shares on the option
exercise date, less the exercise price paidfor such shares.
/(2)/ Equal to the assumed initial public offering price per share of $[
], less the exercise price per sharemultiplied by the aggregate number
of shares.
Employee Benefit Plans
Amended and Restated 1996 Stock Option Plan
Adoption and Summary. Our board of directors originally adopted the 1996
Stock Option Plan on May 7, 1996, and our stockholders approved the adoption on
June 19, 1996. The plan was subsequently amended by consent of the stockholders
on December 4, 1996, June 15, 2000 and most recently on May 9, 2001. The
Amended and Restated 1996 Stock Option Plan allows us to issue awards of
incentive or nonqualified stock options. Our employees, consultants and
directors are eligible to receive awards under the plan, but only employees may
receive incentive stock options. The plan is administered by our board of
directors, or a committee of our board appointed by the board to administer the
plan. The board of directors or the committee administering the plan selects
the participants who will receive awards and determines the terms and
conditions of such awards.
Share Reserve. We have reserved 10,000,000 shares for issuance under the
plan.
Effect of an Acquisition or Merger. In the event of certain corporate
transactions, such as a merger or a sale of all or substantially all of our
assets, the plan provides that each outstanding award will be assumed or
replaced with a comparable award by our successor company or its parent. If the
successor company or its parent does not assume or replace the awards, all
unvested awards will become immediately exercisable through a specified date,
after which the awards will terminate.
If an option holder's employment or consulting relationship or
directorship is terminated as a result of an involuntary termination other than
for cause or a voluntary termination by the option holder due to a constructive
termination within 18 months following a change of control, that option
holder's outstanding options will become 100% vested and exercisable
immediately.
54
1993 Stock Plan
Adoption and Summary. Our board of directors originally adopted the 1993
Stock Plan on October 6, 1993, and our stockholders approved the adoption as of
the same date. A total of 500,000 shares were reserved for issuance under the
plan. The plan allowed us to issue awards of incentive or nonqualified stock
options or stock purchase rights. Our employees and consultants were eligible
to receive awards under the plan, but only employees may receive incentive
stock options. The plan is administered by our board of directors, or a
committee of our board appointed by the board to administer the plan.
Share Reserve. We have reserved 500,000 shares for issuance under the
plan, of which an aggregate of 367,500 shares are the subject of stock option
grants. We have not granted stock options under the plan since the adoption of
the 1996 Stock Option Plan. All stock options granted since that time have been
pursuant to our Amended and Restated 1996 Stock Option Plan.
Effect of an Acquisition or Merger. In the event of certain corporate
transactions, such as a merger or a sale of all or substantially all of our
assets, the plan provides that each outstanding award will be assumed or
replaced with a comparable award by our successor company or its parent. If the
successor company or its parent does not assume or replace the awards, all
unvested awards will terminate upon the closing of the transaction.
2001 Employee Stock Purchase Plan
Adoption and Share Reserve. We intend to adopt an Employee Stock Purchase
Plan prior to the completion of the offering. The plan will become effective
concurrently with the initial public offering of our common stock. The plan is
designed to allow our eligible employees and the eligible employees of our
participating subsidiaries to purchase shares of common stock, at semi-annual
intervals, with their accumulated payroll deductions. We will initially reserve
[ ] shares of our common stock for issuance under the plan. The reserve will
automatically increase on each anniversary date of the adoption of the plan by
the board of directors during the term of the plan by an amount equal to the
lesser of (1) [ ] shares, (2) [ ]% of our outstanding shares on such date
or (3) a lesser amount determined by our board of directors.
Offerings. The plan will have a series of successive 24-month offering
periods. The first offering period will commence on the effective date of this
offering. Individuals scheduled to work more than 20 hours per week for more
than five calendar months per year may join an offering period on the first day
of the offering period or the beginning of any semi-annual purchase period
within that period.
Eligibility. Individuals who become eligible employees after the start
date of an offering period may join the plan at the beginning of any subsequent
semi-annual purchase period. Participants may contribute up to 20.0% of their
cash earnings through payroll deductions, and the accumulated deductions will
be applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85.0% of the fair market value per
share on the participant's entry date into the offering period or, if lower,
85.0% of the fair market value per share on the semi-annual purchase date. If
the fair market value per share of our common stock on any purchase date is
less than the fair market value per share on the start date of the two-year
offering period, then that offering period will automatically terminate, and a
new 24-month offering period will begin on the next business day. All
participants in the terminated offering will be transferred to the new offering
period.
Effect of an Acquisition or Merger. In the event of a proposed sale of
all or substantially all of our assets, or our merger with or into another
company, the outstanding rights under the plan will be assumed or an equivalent
right substituted by the successor company or its parent. If the successor
company or its parent refuses to assume the outstanding rights or substitute an
equivalent right, then all outstanding purchase rights will automatically be
exercised prior to the effective date of the transaction. The purchase price
will be equal to 85.0% of the market value per share on the participant's entry
date into the offering period in which an acquisition occurs or, if lower,
85.0% of the fair market value per share on the date the purchase rights are
exercised.
55
The plan will terminate no later than the tenth anniversary of its
initial adoption by our board of directors.
Limitations of Liability and Indemnification of Officers and Directors
Our certificate of incorporation and bylaws limit the liability of
directors to the fullest extent permitted by Delaware law. Delaware law permits
us to eliminate a director's personal liability for monetary damages resulting
from a breach of fiduciary duty, except in circumstances involving wrongful
acts, such as:
. breach of the director's duty of loyalty to us or to our stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions, as more fully described in Section 174 of the Delaware
General Corporation Law; or
. transaction from which the director derived an improper personal
benefit.
Delaware law does not limit or eliminate our rights or any stockholders'
rights to seek non-monetary or equitable relief including an injunction or
rescission, in the event of a breach of a director's fiduciary duty. Delaware
law does not alter a director's liability under federal securities laws. In
addition to limiting each director's personal liability, our certificate of
incorporation and bylaws permit us to indemnify to the fullest extent permitted
by law any person made or threatened to be made a party to an act or a
proceeding by reason of the fact that such person served as our director,
officer or employee. Moreover, we intend to enter into separate indemnification
agreements with our directors and officers which would require us, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service (other than liabilities arising from willful
misconduct of a culpable nature) and which provide each of them indemnification
protection in the event our certificate of incorporation and bylaws are
subsequently amended. We also intend to maintain director and officer liability
insurance, if available on reasonable terms. We believe that the foregoing
provisions and arrangements will assist us in attracting and retaining
qualified individuals to serve as directors and officers.
56
RELATED PARTY TRANSACTIONS
Number of Shares of Capital Stock/(1) /
The following executive officers, directors and holders of more than five
percent of our securities purchased securities in the amounts and as of the
dates shown below.
Common Series A-1 Series B-1 Series C-1 Series D-1 Series E-1 Series F-1 Series G-1
-------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Directors and Executive Officers
Michael S. Klein.................... 90,909 -- -- -- -- -- -- --
Kevin R. Davidge.................... -- -- -- -- -- -- -- --
Richard S. Enck, Jr................. 400,000 -- -- -- -- -- -- --
Peter Mazonson, M.D................. 18,750 -- -- -- -- -- -- --
Kenneth F. Miller................... 38,500 -- -- -- -- -- -- --
William J. Mercer................... -- -- -- -- -- -- 13,333 --
Thomas M. Prescott.................. -- -- -- -- -- -- -- 12,500
Entities Affiliated with Directors
Morgan Stanley Venture Partners III,
L.P. and affiliates................ -- -- -- 3,500,000 533,492 76,923 200,000 125,000
Alta V Limited Partnership and
affiliates......................... -- 1,000,000 362,184 750,000 350,599 76,923 132,000 50,000
ARCH Venture Fund II, L.P. and
affiliates......................... 375,000 500,000 264,425 375,000 392,903 133,809 26,666 75,000
Sigma Partners II, L.P. and
affiliates......................... -- 1,000,000 362,185 375,000 293,439 107,692 106,666 25,000
China Development Industrial
Bank............................... -- -- -- -- -- -- -- 1,250,000
Other Five Percent Stockholders
G.E. Capital affiliates............. -- -- -- -- 2,400,000 184,615 -- 75,000
Price Per Share..................... $0.35 to
$4.00 $ 1.00 $ 2.00 $2.00 $ 2.50 $ 3.25 $ 3.75 $ 4.00
Date(s) of Purchase................. 12/96 to 11/00 to
12/01 6/94 3/96 1/97 5/98 5/99 12/00 12/01
- --------
/(1)/Does not include unexercised warrants.
We have entered into the following agreements with our executive
officers, directors and holders of more than five percent of our voting
securities.
Stockholder Rights Agreement
We and the preferred stockholders described above have entered into an
Amended and Restated Stockholder Rights Agreement pursuant to which all
preferred stockholders as well as certain other common stockholders will have
registration rights relating to their shares of common stock following this
offering. Upon completion of this offering, all shares of our outstanding
preferred stock will be automatically converted into shares of common stock.
For further information on these registration rights, please see "Description
of Capital Stock -- Registration Rights of Stockholders." The agreement also
provides certain stockholders a right of first offer against us in case we
propose to offer new securities. The right of first offer will terminate
following this offering.
Licensing Agreements
In October 1993, we entered into an exclusive license agreement with Mr.
Shih-Ping Bob Wang, who served at the time as our President and Chief Executive
Officer. Pursuant to the license agreement, Mr. Wang
57
licensed to us certain patent rights in exchange for payments of royalties
calculated as a percentage of product sales incorporating such technology. This
agreement terminates upon the expiration of the last to expire of the patents
subject to this agreement.
In December 1996, we entered into license agreements whereby we obtained
rights to certain technology, patents and patent applications from ARCH in
exchange for payment of fees, reimbursement of costs, contributions, royalties
equal to a percentage of our sales and warrants to purchase shares of our
common stock. This agreement terminates upon the expiration of the royalty
obligations contained in this agreement, following our written notice or
following ARCH's notice upon the occurrence of certain events.
In January 2001, we entered into license agreement with the University of
Chicago, an affiliate of ARCH. Under the license agreement, we obtained rights
to certain patents, software and related technical information in exchange for
payments of royalties equal to a percentage of our sales and for warrants to
purchase shares of our Series F-1 preferred stock. This agreement terminates
upon the expiration of the intellectual property rights licensed under this
agreement.
Stock Options
We have granted Messrs. Mercer and Prescott and Dr. Naumann-Etienne
options to purchase common stock in connection with their services to us as
members of our board of directors. Please see "Management --Director
Compensation" for a description of these stock option grants. For a description
of the change of control provisions contained in these option agreements,
please see "Management -- Employee Benefit Plans" above.
Executive Employment and Change of Control Arrangements
On May 15, 2000, we entered into an agreement with Mr. Klein pursuant to
which he became our President and Chief Executive Officer. The agreement set
forth his salary, annual cash bonus eligibility and specifications for a loan
that was subsequently forgiven on the first anniversary of his employment. The
agreement requires Mr. Klein to enter into our standard proprietary information
agreement. In connection with the agreement, we granted Mr. Klein an option
exercisable for 1,526,300 shares of our common stock at $1.10 per share with
initial vesting on May 24, 2001 of twenty five percent (25%) of the total
underlying shares, and the balance of underlying shares vesting one
forty-eighth ( 1/48) per month over the thirty-six month period following May
24, 2001. The agreement provides for the accelerated vesting of Mr. Klein's
stock option in its entirety in the case of his constructive or involuntary
termination, following a sale of the business in which control is transferred.
The agreement may be terminated for any reason by Mr. Klein upon 30 days notice
or by us for justifiable cause upon 30 days notice, in both cases without any
severance obligation. In the case of involuntary termination without
justifiable cause, a severance obligation arises on our part to pay Mr. Klein's
salary and benefits for a maximum of nine months following the date of
termination. Justifiable cause as defined in the agreement includes acts of
moral turpitude, the willful habitual neglect of his obligations under the
agreement, misuse of corporate funds or any other act of gross misconduct.
In May 1996, we hired Mr. Pell as our President and Chief Executive
Officer. In connection with the hiring, we granted Mr. Pell a stock option to
purchase 620,000 shares of our common stock at an exercise price of $0.25 per
share, of which one ninety-sixth (1/96th) of the shares became exercisable at
the end of each calendar month between May 7, 1996 and July 1, 1996, and one
forty-eighth (1/48th) became exercisable at the end of each calendar month,
thereafter, until all of the shares were exercisable, based upon Mr. Pell
continuing to provide services to us. Mr. Pell's service to us was based on an
at-will employment relationship. Mr. Pell left our employ on May 15, 2000, and
no severance arrangements were entered into with him.
Other than the foregoing arrangements and the provisions of our 1993
Stock Plan and 1996 Stock Option Plan, we have no other employment, termination
of employment or change of control agreements between us and any of our named
executive officers.
58
Agreement with GE Medical Systems
In September 2000, we entered into an Amended and Restated Distributor
Agreement with GE Medical Systems. Under this agreement, GE Medical Systems has
the exclusive sales and marketing right to distribute ImageChecker and digital
mammography software and associated hardware. In consideration of this right,
we receive payments based on the number of units purchased by GE Medical
Systems.
Indemnification Agreements
We intend to enter into indemnification agreements with our directors and
officers which will provide each of them indemnification of, and advancement of
expenses to, these persons to the fullest extent permitted by law. We also
intend to enter into such agreements with our future directors and officers.
All future transactions, including any loans by us to our officers,
directors, principal stockholders or affiliates, will be approved by a majority
of our board of directors, including a majority of the independent and
disinterested members of the board of directors or, if required by law, a
majority of disinterested stockholders, and will be on terms no less favorable
to us than could be obtained from unaffiliated third parties.
59
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information relating to the
beneficial ownership of the shares of our common stock as of December 20, 2001,
and as adjusted to reflect the sale of our common stock offered by this
prospectus:
. each person or group of affiliated persons, who is known by us
beneficially to own more than 5% of our common stock;
. each of our directors;
. each of the named executive officers listed in the Summary
Compensation Table; and
. all of our current executive officers and directors as a group.
Beneficial ownership of shares is determined under the rules of the
Securities and Exchange Commission and generally includes any shares over which
a person exercises sole or shares voting or investment power. In computing the
number of shares beneficially owned by a person and the percentage ownership of
that person, shares of options held by that person which are currently
exercisable or exercisable within 60 days of December 20, 2001, are deemed
outstanding. These shares, however, are not deemed outstanding for the purposes
of computing the percentage ownership of each other person.
Except as indicated in the footnotes to the following table and pursuant
to applicable community property laws, each stockholder named in the following
table has sole voting and investment power regard to the shares shown as
beneficially owned by him. Percentage of ownership is based on 40,235,343
shares of common stock equivalents outstanding as of December 20, 2001, and [
] shares of common stock outstanding after completion of this offering. This
table assumes no exercise of the underwriters' over-allotment option. Unless
otherwise indicated in the footnotes, the address of each of the individuals
and entities named below is as follows: c/o R2 Technology, Inc., 325 Distel
Circle, Los Altos, California 94022.
Shares Issuable Percent of
Shares of Pursuant to Options & Outstanding Shares
Common Stock Warrants Exercisable ------------------
Beneficially Within 60 Days of Before After
Name of Beneficial Owner Owned(1) December 20, 2001 Offering Offering
- ------------------------ ------------ --------------------- -------- --------
Five Percent Stockholders
Morgan Stanley Venture Partners III, L.P. and
affiliates (2)............................. 4,497,913 31,249 11.2% %
Alta V Limited Partnership and affiliates (3) 2,934,644 12,500 7.3%
Equity Asset Investment Trust (4)............ 2,697,115 18,750 6.7%
ARCH Venture Fund II, L.P. and affiliates (5) 2,826,948 303,750 7.0%
Sigma Partners II, L.P. and affiliates (6)... 2,470,418 6,249 6.1%
Directors & Executive Officers
Scott S. Halsted (7)......................... 4,497,913 31,249 11.2%
J. Burgess Jamieson (8)...................... 2,470,418 6,249 6.1%
Steven Lazarus (9)........................... 2,826,948 303,750 7.0%
William J. Mercer............................ 21,146 7,813 *
Rudi Naumann-Etienne, Ph.D................... 6,771 6,771 *
Guy P. Nohra (10)............................ 2,934,644 12,500 7.3%
Thomas M. Prescott........................... 22,396 9,896 *
John Yu (11)................................. 1,562,500 312,500 3.9%
Michael S. Klein............................. 718,195 627,286 1.8%
James W. Pell, Jr............................ 698,333 558,333 1.7%
Kevin R. Davidge............................. 229,792 229,792 *
Richard S. Enck, Jr.......................... 588,750 188,750 1.5%
Peter Mazonson, M.D.......................... 81,875 63,125 *
Kenneth F. Miller............................ 148,542 110,042 *
Alan Stein, Ph.D............................. 217,894 62,083 *
All directors and executive officers
as a group (15 persons).................... 17,026,117 2,530,139 42.3%
60
- --------
/*/ Less than 1%.
/(1)/ Includes shares of preferred stock as if converted to common stock and shares of common stock issuable
pursuant to warrants and options exercisable within sixty days of December 20, 2001.
/(2)/ Consists of 388,558 shares held by Morgan Stanley Venture Investors III, L.P. and 4,046,857 shares held by
Morgan Stanley Venture Partners III, L.P., as well as 2,737 and 28,512 shares issuable upon the exercise of
outstanding warrants held by Morgan Stanley Venture Investors III L.P., and Morgan Stanley Venture
Partners III, L.P., respectively. Mr. Halsted, a member of our board of directors, is a managing member of
the Morgan Stanley entity that manages these two Morgan Stanley venture funds. Mr. Halsted disclaims
beneficial ownership of the shares beneficially owned by these entities, and the shares issuable upon exercise
of warrants held by these entities, except to the extent of his proportional partnership interest therein. The
address of Morgan Stanley Venture Investors III, L.P. and its affiliates is 3000 Sand Hill Road, Menlo Park,
CA 94025.
/(3)/ Consists of 2,693,400 shares held by Alta V Limited Partnership and 28,306 shares held by Customs House
Partners, as well as 49,480 and 520 shares issuable upon the exercise of outstanding warrants held by Alta V
Limited Partnership and Customs House Partners, respectively. Mr. Nohra, a member of our board since July
1994, is a general partner of Alta V Limited Partnership. He is a general partner of certain venture funds
affiliated with Burr, Egan, Deleage & Co. including Customs House Partners. Mr. Nohra disclaims
beneficial ownership of the shares beneficially owned by all of these entities, and the shares issuable upon
the exercise of warrants held by these entities, except to the extent of his proportionate partnership interest
therein. The address of Alta V Limited Partnership and its affiliates is One Embarcadero Center, Suite 4050,
San Francisco, CA 94111.//
/(4)/ Consists of 2,584,615 shares held by Equity Asset Investment Trust and 75,000 shares held by G.E. Capital
Equity Investments, Inc., as well as 18,750 shares issuable upon the exercise of outstanding warrants held by
G.E. Capital Equity Investments, Inc. The managing entity of Equity Asset Investment Trust is an affiliate of
G.E. Capital Equity Investments, Inc.
/(5)/ Consists of 1,190,258 shares held by ARCH Venture Fund II, L.P., 577,545 shares held by ARCH Venture
Fund III, L.P., and 375,000 shares held by ARCH Development Corporation, as well as 9,375, 9,375 and
250,000 shares issuable upon the exercise of outstanding warrants held by, respectively, ARCH Venture
Fund II, L.P., ARCH Venture Fund III, L.P., and ARCH Development Corporation. In addition, the
University of Chicago, an affiliate of ARCH Venture Partners, holds a warrant exercisable for 35,000 shares.
Mr. Lazarus, a member of our board of directors, is Managing Director of ARCH Venture Partners and
former Chief Executive Officer of ARCH Development Corporation. Mr. Lazarus disclaims beneficial
ownership of the shares beneficially owned by such entities and the shares issuable upon the exercise of the
warrant held by such entities, except to the extent of his proportionate partnership interest therein. The
address of ARCH Venture Fund II, L.P. is 8725 W. Higgins Road, Chicago, IL 60631.
/(6)/ Consists of 2,110,712 shares held by Sigma Partners II, L.P. and 159,270 shares held Sigma Associates II,
L.P., as well as 5,812 and 437 shares issuable upon the exercise of outstanding warrants held by Sigma
Partners II, L.P. and Sigma Associates II, L.P., respectively. Mr. Jamieson, a member of our board of
directors, is a general partner of Sigma Partners II, L.P., and Sigma Associates II, L.P. Mr. Jamieson
disclaims beneficial ownership of the shares beneficially owned, and the shares issuable upon the exercise of
warrants held by, such entities except to the extent of his proportionate partnership interest therein. The
address of Sigma Partners II, L.P. is 1600 El Camino Road, Menlo Park, CA 94025.
/(7)/ Represents 388,558 shares held by Morgan Stanley Venture Investors III, L.P. and 4,046,857 shares held by
Morgan Stanley Venture Partners III, L.P., as well as 2,737 and 28,512 shares issuable upon the exercise of
outstanding warrants held by Morgan Stanley Venture Investors III L.P., and Morgan Stanley Venture
Partners III, L.P., respectively. Mr. Halsted, a member of our board of directors, is a managing member of
the Morgan Stanley entity that manages these two Morgan Stanley venture funds. Mr. Halsted disclaims
beneficial ownership of the shares beneficially owned by these entities, and the shares issuable upon exercise
of warrants held by these entities, except to the extent of his proportional partnership interest therein.
61
/(8)/ Represents 2,110,712 shares held by Sigma Partners II, L.P. and
159,270 shares held Sigma Associates II,L.P., as well as 5,812 and 437
shares issuable upon the exercise of outstanding warrants held by
SigmaPartners II, L.P. and Sigma Associates II, L.P., respectively.
Mr. Jamieson, a member of our board ofdirectors, is a general partner
of Sigma Partners II, L.P., and Sigma Associates II, L.P. Mr.
Jamiesondisclaims beneficial ownership of the shares beneficially
owned, and the shares issuable upon the exercise ofwarrants held by,
such entities except to the extent of his proportionate partnership
interest therein.
/(9)/ Represents 1,190,258 shares held by ARCH Venture Fund II, L.P.,
577,545 shares held by ARCH VentureFund III, L.P., and 375,000 shares
held by ARCH Development Corporation, as well as 9,375, 9,375
and250,000 shares issuable upon the exercise of outstanding warrants
held by, respectively, ARCH VentureFund II, L.P., ARCH Venture Fund
III, L.P., and ARCH Development Corporation. In addition,
theUniversity of Chicago, an affiliate of ARCH Venture Partners, holds
a warrant exercisable for 35,000 shares.Mr. Lazarus, a member of our
board of directors, is Managing Director of ARCH Venture Partners
andformer Chief Executive Officer of ARCH Development Corporation. Mr.
Lazarus disclaims beneficialownership of the shares beneficially owned
by such entities and the shares issuable upon the exercise of
thewarrant held by such entities, except to the extent of his
proportionate partnership interest therein.
/(10)/ Represents 2,693,400 shares held by Alta V Limited Partnership and
28,306 shares held by Customs HousePartners, as well as 49,480 and 520
shares issuable upon the exercise of outstanding warrants held by Alta
VLimited Partnership and Customs House Partners, respectively. Mr.
Nohra, a member of our board since July1994, is a general partner of
Alta V Limited Partnership. He is a general partner of certain venture
fundsaffiliated with Burr, Egan, Deleage & Co. including Customs House
Partners. Mr. Nohra disclaimsbeneficial ownership of the shares
beneficially owned by all of these entities, and the shares issuable
uponthe exercise of warrants held by these entities, except to the
extent of his proportionate partnership interesttherein.
/(11)/ Represents 1,250,000 shares and 312,500 shares issuable upon exercise
of outstanding warrants held byChina Development Industrial Bank. Mr.
Yu, a member of our board of directors since December 2001, isManager
of the Technology Department in the venture capital operation of China
Development IndustrialBank. Mr. Yu disclaims beneficial ownership of
the shares beneficially owned by China DevelopmentIndustrial Bank, and
the shares issuable upon the exercise of warrants held by China
Development IndustrialBank.
62
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will
consist of [ ] shares of common stock, $0.001 par value per share, and [
] shares of preferred stock, $0.001 par value per share.
Common Stock
As of December 20, 2001, there were 34,561,294 shares of common stock
outstanding, not including unexercised warrants and options, which were held by
83 stockholders of record, as adjusted to reflect the conversion of all
outstanding shares of preferred stock upon the closing of this offering at a
one-to-one ratio, except for our Series A-1 preferred stock, each share of
which will convert into one and one-ninth (1 1/9) shares of our common stock,
and our Series B-1 preferred stock, each share of which will convert into one
and seven thirty-thirds (1 7/33) shares of our common stock. There will be [
] shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options and warrants,
after giving effect to the sale of shares of common stock offered pursuant to
this prospectus.
The holders of our common stock are entitled to one vote for each share
held on all matters to be voted upon by the stockholders. Subject to
preferences that may be applicable to any preferred stock outstanding at the
time, holders of outstanding shares of common stock are entitled to receive
ratably any dividends out of assets legally available therefore as our board of
directors may from time to time determine. In the event of a liquidation,
dissolution or winding up of our company, holders of our common stock would be
entitled to share ratably in all assets remaining after payment of liabilities
and satisfaction of any liquidation preference granted the holders of any
outstanding shares of preferred stock. Holders of our common stock have no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to our common stock. All
outstanding shares of our common stock are fully paid and non-assessable.
Preferred Stock
Our certificate of incorporation provides that our board of directors
will have the authority, without further action by the stockholders, to provide
for the issuance of all or any shares of preferred stock from the amount
authorized in the certificate of incorporation to be issued.
Warrants
Upon completion of this offering, we will have outstanding warrants to
purchase 1,322,813 shares of our common stock. Some of these warrants are
exercisable prior to the closing of this offering for preferred stock. Upon the
closing of the offering some of these warrants currently exercisable for shares
of our preferred stock will automatically become warrants to purchase shares of
our common stock and the remaining warrants currently exercisable for shares of
our preferred stock will become warrants to purchase shares of our common stock
only if certain conditions are met, or with the passage of time. These latter
warrants are described more fully below.
As of December 20, 2001, warrants to purchase in the aggregate 377,192
shares of common stock were outstanding. These outstanding warrants to purchase
common stock comprise one warrant exercisable for 250,000 shares of common
stock at $4.00 per share, which expires on the earlier of December 23, 2006, or
nine months following the completion of this offering, and another warrant
exercisable for 127,192 shares of common stock at $1.10 per share, which
expires on May 24, 2007.
As of December 20, 2001, two warrants to purchase in the aggregate 67,000
shares of Series F-1 preferred stock were outstanding at an exercise price of
$3.75 per share. One of these warrants, exercisable for
63
32,000 shares of Series F-1 preferred stock, expires on November 17, 2007, and
the other warrant, exercisable for 35,000 shares of Series F-1 preferred stock,
expires on January 1, 2006. These warrants currently exercisable for Series F-1
preferred stock will, upon completion of this offering, become exercisable for
an aggregate 67,000 shares of common stock at a rate of one share of common
stock for each share of Series F-1 preferred stock, at an exercise price of
$3.75 per share.
As of December 20, 2001, warrants to purchase in the aggregate 878,621
shares of Series G-1 preferred stock were outstanding at an exercise price of
$4.00 per share. These warrants currently exercisable for Series G-1 preferred
stock will, upon completion of this offering, become exercisable for 878,621
shares of common stock at a rate of one share of common stock for each share of
Series G-1 preferred stock, at an exercise price of $4.00 per share. These
warrants expire on December 6, 2006, or upon an initial public offering of the
Company's common stock at (i) $6.00 per share on or prior to June 30, 2002 or
(ii) $7.00 per share after June 30, 2002 and on or prior to December 31, 2002
or (iii) after December 31, 2002. In the event all of the outstanding Series
G-1 stock is converted to common stock at the election of our preferred
stockholders, these warrants will automatically convert into warrants to
purchase common stock.
Registration Rights of Stockholders
Upon completion of this offering, the holders of an aggregate of [ ]
shares of our common stock, or their transferees, will be entitled to rights to
register these shares under the Securities Act of 1933, including piggyback
rights in the event we propose to register any of our securities under the
Securities Act of 1933 either for our own account or for the account of other
security holders.
Stockholder Meetings
Our bylaws provide that a special meeting of our stockholders may be
called at any time by our board of directors, by the chairman of our board, by
our president or by one or more stockholders holding shares in the aggregate
entitled to cast at least ten percent of the votes at such a special meeting.
If a special meeting is called by anyone other than our board of directors,
then the request must be in writing and must conform to content, timing and
delivery requirements set forth in our bylaws.
Anti-Takeover Effects of Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law.
This statute regulating corporate takeovers prohibits a Delaware corporation
such as ours from engaging in any business combination with any interested
stockholder for three years following the date that the stockholder became an
interested stockholder unless:
. prior to the date of the transaction, the board of directors of the
Delaware corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder;
. the interested stockholder owned at least 85% of the voting stock of
the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding
(a) shares owned by persons who are directors and also officers, and
(b) shares owned by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or
exchange offer; or
. on or subsequent to the date of the transaction, the business
combination is approved by the board and authorized at an annual or
special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock
which is not owned by the interested stockholder.
64
Section 203 defines a "business combination" to include the following:
. any merger or consolidation involving the corporation and the
interested stockholder;
. any sale, transfer, pledge or other disposition involving the
interested stockholder of 10% or more of the assets of the corporation;
. subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by
or through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
Our bylaws provide that candidates for director may be nominated only by
our board of directors or its proxy committee, or by a stockholder who gives
written notice to us not less than 120 calendar days in advance of the date of
the first anniversary of the last annual meeting of stockholders. Our
certificate of incorporation provides that our board of directors will consist
of nine members. Upon the closing of this offering, our directors will be
divided into three classes, having staggered terms, as more fully described
above in "Management -- Board Composition." As a result, only one class of
directors will be elected at each annual meeting of our stockholders, with the
other classes continuing for the remainder of their respective terms. In case
there arises a vacancy on our board at a time between stockholder meetings, the
majority of our directors then in office may elect a new director to hold
office for a term expiring at the next annual meeting of the stockholders at
which the term of office of the class to which such director has been elected
expires.
Our bylaws require that upon completion of this offering, any action
required or permitted to be taken by our stockholders must be effected at a
duly called annual or special meeting of stockholders and may not be effected
by a consent in writing. According to our bylaws, upon completion of this
offering, the authorized number of directors on our board may be changed by an
amendment to the bylaws duly adopted by all of our directors unanimously, by
our stockholders or by an amendment to our certificate of incorporation.
Delaware law and these charter provisions may have the effect of deterring
hostile takeover bids or delaying changed in control of our management, which
could have the relative effect of depressing the market price of our common
stock.
Section 2115 of the California Corporations Code
We are currently subject to Section 2115 of the California Corporations
Code. Section 2115 provides that, regardless of a company's legal domicile,
provisions of California corporate law including those relating to shareholders
rights, elections and removal of directors and distributions to shareholders
will apply to that company if the company meets the stated requirements of
Section 2115. We will not be subject to Section 2115 if:
. we are qualified for trading as a national market security on the
Nasdaq National Market, and we have at least 800 shareholders of
record as of the record date of our most recent annual meeting; or
. during any income year less than 50% of our outstanding voting
securities are held of record by persons having addresses in
California.
Our bylaws include a provision requiring cumulative voting for directors
whenever Sections 2115 and 301.5 of the California Corporations Code apply to
us. Under cumulative voting, a minority stockholder holding a sufficient
percentage of a class of shares may be able to ensure the election of one or
more directors.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock has not been
selected.
65
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock, and there can be no assurance that a significant public market for our
common stock will develop or be sustained following this offering. Future sales
of substantial amounts of our common stock in the public market, including
sales of shares issued upon exercise of outstanding options and warrants, could
adversely affect market prices prevailing from time to time and could impair
our ability to raise capital through the sale of our equity securities.
Furthermore, because only a limited number of shares will be available for sale
shortly after this offering because of existing contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
our common stock in the public market after the restrictions lapse could
adversely affect the prevailing market price and our ability to raise equity
capital in the future.
Upon completion of this offering, we will have outstanding [ ] shares
of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options and warrants after December 20,
2001. Of these shares, all of the shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act
of 1933, unless these shares are purchased by our affiliates, as this term is
defined in Rule 144 under the Securities Act of 1933. The remaining [ ]
shares of our common stock held by existing stockholders are restricted
securities, as this term is defined in Rule 144 under the Securities Act of
1933. Restricted securities may be sold in the public market only if registered
or if they qualify for an exemption from registration described below under
Rules 144, 144(k) or 701 promulgated under the Securities Act of 1933.
Taking into account the lock-up agreements, under which holders of
substantially all of our stock have agreed not to sell their shares of stock
for 180 days after the completion of this offering, the number of shares which
will be available for sale in the public market under the provisions of Rules
144, 144(k) and 701 will be as follows:
Date of Availability for Sale Number of Shares
----------------------------- ----------------
On the effective date of this offering........... 0
181st day after commencement of trading in the 31,541,828
public market..................................
At various times after the 181st day following 3,514,500
commencement of trading........................
Following the expiration of the initial 180 day lock-up period, shares
issued upon exercise of options granted by us prior to the completion of this
offering will also be available for sale in the public market pursuant to Rule
701 under the Securities Act of 1933 unless those shares are held by one of our
affiliates, directors or officers.
Beginning [ ], 2002, approximately [ ] additional shares of common
stock subject to vested options will become available for sale in the public
market in reliance of Rule 701 or pursuant to a registration statement on Form
S-8.
Registration Rights
Upon the completion of this offering, the holders of 33,785,436 shares of
our common stock will be entitled to certain rights with respect to
registration of such shares under the Securities Act assuming no exercise of
outstanding options and warrants after December 20, 2001. Registration of these
shares under the Securities Act would result in these shares becoming freely
tradable without restriction under the Securities Act except for shares
purchased by affiliates. See "Description of Capital Stock -- Registration
Rights."
Securities Act Rule 144
Upon expiration of the lock-up agreements, approximately [ ] shares of
common stock (including approximately [ ] shares subject to outstanding
vested options) will become eligible for
66
immediate public resale, subject in some cases to vesting provisions and volume
limitations pursuant to Rule 144. The remaining approximately [ ] shares
held by existing stockholders will become eligible for public resale at various
times over a period of less than two years following the completion of this
offering, subject in some cases to vesting provisions and volume limitations. [
] of the shares outstanding immediately following the completion of this
offering will be entitled to registration rights with respect to such shares
upon the release of lock-up agreements. The number of shares sold in the public
market could increase if such rights are exercised.
As of December 20, 2001, 8,419,898 shares were subject to outstanding
options. All of these shares are subject to the lock-up agreements described
above. Approximately [ ] days after the date of this Prospectus, we intend to
file a Registration Statement on Form S-8 covering shares issuable under our
1993 Stock Plan and 1996 Stock Option Plan, thus permitting the resale of such
shares in the public market without restriction under the Securities Act after
expiration of the applicable lock-up agreements.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year (including the holding period of any prior owner, except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (approximately [ ] shares
immediately after this offering) or (ii) the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the required filing
of a Form 144 with respect to such sale. Sales under Rule 144 are generally
subject to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company.
Securities Act Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been our affiliate
at any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell such
shares without having to comply with the manner of sale, public information,
volume limitation or notice provisions of Rule 144. Under Rule 701 under the
Securities Act, persons who purchase shares upon exercise of options granted
prior to the effective date of this offering are entitled to sell such shares
90 days after the effective date of this offering in reliance on Rule 144,
without having to comply with the holding period requirements of Rule 144 and,
in the case of non-affiliates, without having to comply with the public
information, volume limitation or notice provisions of Rule 144.
Securities Act Rule 701
Any of our employees or consultants who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permits non-affiliates to sell their Rule
701 shares without having to comply with the public information, holding
period, volume limitations or notice provisions of Rule 144 and permits
affiliates to sell their Rule 701 shares without having to comply with the Rule
144 holding period restrictions, in each case commencing 90 days after the date
of this prospectus.
Stock Options
We intend to file a registration statement on Form S-8 under the
Securities Act to register shares of our common stock which are subject to
outstanding options or reserved for issuance under our Amended and Restated
1996 Stock Option Plan and our 1993 Stock Plan, 90 days following the
effectiveness of the registration statement filed pursuant to this offering,
which provision permits the resale of these shares by non-affiliates in the
public market without restriction under the Securities Act.
67
UNDERWRITING
The underwriters named below, acting through their representatives,
Robertson Stephens, Inc., U.S. Bancorp Piper Jaffray Inc. and CIBC World
Markets Corp., have severally agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase from us the number of
shares of common stock set forth opposite their respective names below. The
underwriters are committed to purchase and pay for all of these shares if any
are purchased.
Number
Underwriters of Shares
------------ ---------
Robertson Stephens, Inc..........................
U.S. Bancorp Piper Jaffray Inc...................
CIBC World Markets Corp..........................
----
Total.........................................
====
Number
International Underwriters of Shares
-------------------------- ---------
Robertson Stephens International, Ltd............
U.S. Bancorp Piper Jaffray Inc...................
CIBC World Markets, Inc..........................
----
Total.........................................
====
The representatives of the underwriters have advised us that the
underwriters propose to offer the shares of common stock to the public at the
public offering price shown on the cover page of this prospectus and to certain
dealers at that price less a concession of not more than $[ ] per share, of
which $[ ] may be reallowed to other dealers. After the completion of this
offering, the public offering price, concession and reallowance to dealers may
be reduced by the representatives. No such reduction will change the amount of
proceeds we are to receive as set forth on the cover page of this prospectus.
The common stock is offered by the underwriters as stated in this prospectus,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to [ ] additional shares of common stock at the same price per
share we will receive for the shares that the underwriters have agreed to
purchase. To the extent that the underwriters exercise this option, each of the
underwriters will have a firm commitment, subject to limited conditions, to
purchase approximately the same percentage of these additional shares that the
number of shares of common stock to be purchased by it shown in the above table
bears to the total number of shares offered by this prospectus. If purchased,
the additional shares will be sold by the underwriters on the same terms as
those on which the other shares are being sold. The underwriters may exercise
this option only to cover over-allotments made in connection with the sale of
the shares of common stock in this offering.
The following table sets forth the compensation that we are to pay to the
underwriters. This information is presented assuming either no exercise or full
exercise by the underwriters of their over-allotment option.
Total
-----------------------------
Per Without With
Share Over-allotment Over-allotment
----- -------------- --------------
Underwriting Discounts and Commissions
payable by us........................ $ $ $
Expenses. We estimate the expenses of this offering, other than the
compensation to the underwriters, will be approximately $[ ], and are
payable entirely by us. Expenses include the Securities and
68
Exchange Commission filing fee, the NASD filing fee, Nasdaq National Market
listing fees, printing expenses, legal and accounting fees, transfer agent and
registrar fees and other miscellaneous fees and expenses.
Determination of Offering Price. Prior to this offering, there has been
no public market for our common stock. Consequently, the initial public
offering price for our common stock will be determined through negotiations
between us and the representatives. Principal factors to be considered in these
negotiations include:
. information in this prospectus and otherwise available to the
underwriters;
. our industry's history and prospects;
. ability of our management team;
. prospects for our future revenues and earnings;
. present state of our business operations and financial condition;
. general condition of the securities markets at the time of this
offering; and
. recent market prices of, and demand for, publicly traded common stock
of comparable companies.
The estimated initial public offering price range set forth on the cover
page of this prospectus is subject to change as a result of market conditions
and other factors. A pricing committee of our board of directors will establish
the initial public offering price following such negotiations. The underwriters
have advised us that they do not expect sales to discretionary accounts to
exceed 5% of the total number of shares offered.
Listing. We have applied for approval for quotation of our common stock
on the Nasdaq National Market under the symbol "RTWO."
Indemnity. The underwriting agreement contains covenants of indemnity
among the underwriters and us against civil liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-up Agreements. Each of our executive officers and directors, and
substantially all of our other stockholders and warrant holders have agreed,
subject to limited exceptions, not to offer to sell, contract to sell, or
otherwise sell or dispose of, loan, pledge or grant any rights with respect to
any shares of common stock, any options or warrants to purchase any shares of
common stock, or any securities convertible into, exercisable for or
exchangeable for shares of common stock owned by the holder as of the date of
this prospectus or acquired directly from us or with respect to which these
holders have or may acquire the power of disposition, without the prior written
consent of Robertson Stephens, Inc. This restriction terminates after the close
of trading of the shares on the 180th day after, and including, the day the
shares began trading on the Nasdaq National Market. However, Robertson
Stephens, Inc. may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements.
There are no existing agreements between the representatives and any of our
stockholders or warrant holders who have executed a lock-up agreement providing
consent to the sale of shares prior to the expiration of the lock-up period.
In addition, we have agreed that for a period of 180 days following the
date of this prospectus, we will not, without the prior written consent of
Robertson Stephens, Inc.: (a) consent to the disposition of any shares held by
stockholders, warrant holders or option holders before the expiration of the
180-day lockup period or (b) offer, sell, contract to sell or otherwise dispose
of any shares of common stock, any options or warrants to purchase any shares
of common stock or any securities convertible into, exercisable for or
exchangeable for shares of common stock, other than our sale of shares in this
offering, the issuance of shares of common stock upon the exercise of options
or warrants outstanding on the date of this prospectus and the grant of options
to purchase shares of common stock under existing employee stock option or
stock purchase plans provided that those options are subject to 180-day lock up.
69
Syndicated Short Sales. The representatives have advised us that, on
behalf of the underwriters, they may make short sales of our common stock in
connection with this offering, resulting in the sale by the underwriters of a
greater number of shares than they are required to purchase pursuant to the
underwriting agreement. The short position resulting from those short sales
will be deemed a "covered" short position to the extent that it does not exceed
the [ ] shares subject to the underwriters' over-allotment option and will
be deemed a "naked" short position to the extent that it exceeds that number. A
naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the trading price of the
common stock in the open market the could adversely affect investors who
purchased shares in the offering. The underwriters may reduce or close out
their covered short position either by exercising the over-allotment option or
by purchasing shares in the open market. In determining which of these
alternatives to pursue, the underwriters will consider the price at which
shares are available for purchase in the open market as compared to the price
at which they may purchase shares through the over-allotment option. Any naked
short position will be closed out by purchasing shares in the open market.
Similar to the other stabilizing transactions described below, open market
purchases made by the underwriters to cover all or a portion of their short
position may have the effect of preventing or retarding a decline in the market
price of our common stock following this offering. As a result, our common
stock may trade at a price that is higher than the price that otherwise might
prevail in the open market.
Stabilization. The underwriters' representatives have advised us that,
pursuant to Regulation M under the Securities Exchange Act of 1934, certain
persons participating in this offering may engage in transactions, including
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids, that may have the effect of stabilizing or maintaining the market price
of our common stock at a level above that which might otherwise prevail in the
open market. A "stabilizing bid" is a bid for or the purchase of shares of
common stock on behalf of the underwriters for the purpose of fixing or
maintaining the price of the common stock. A "syndicate covering transaction"
is the bid for or the purchase of the common stock on behalf of the
underwriters to reduce a short position incurred by the underwriters in
connection with this offering. A "penalty bid" is an arrangement permitting the
representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with the offering if the common
stock originally sold by that underwriter or syndicate member is purchased by
the representatives in the open market pursuant to a stabilizing bid or to
cover all or part of a syndicate short position. The representatives have
advised us that such transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
Passive market making. Following the pricing of this offering, and until
the commencement of any stabilizing bid, underwriters and dealers who are
qualified market makers on the Nasdaq National Market may engage in passive
market making transactions. Passive market making is allowed during the period
when the SEC's rules would otherwise prohibit market activity by the
underwriters and dealers who are participating in this offering. Passive market
makers must comply with applicable volume and price limitations and must be
identified as such. In general, a passive market maker must display its bid at
a price not in excess of the highest independent bid for our common stock; but
if all independent bids are lowered below the passive market maker's bid, the
passive market maker must also lower its bid once it exceeds specified purchase
limits. Net purchases by a passive market maker on each day are limited to a
specified percent of the passive market maker's average daily trading volume in
our common stock during a specified period and must be discontinued when such
limit is reached. Underwriters and dealers are not required to engage in
passive market making and may end passive market making activities at any time.
Directed Shares. At our request, the underwriters will reserve up to five
percent of the shares of common stock for sale in this offering, at the initial
public offering price, to our customers, partners and business associates. The
number of shares of common stock available for sale to the general public will
be reduced to the extent that these individuals purchase all or a portion of
the reserved shares. Any reserved shares that are not purchased may be
reallocated to other customers, partners and business associates or offered to
the general public on the same underwriters of the directed share program
against liabilities and expenses, including liabilities under the Securities
Act, in connection with the sale of the reserved shares.
70
Online activities. A prospectus in electronic format may be made
available on the internet sites or through other online services maintained by
one or more of the underwriters of this offering, or by their affiliates. In
those cases, prospective investors may view offering terms online and,
depending on the particular underwriter, prospective investors may be allowed
to place orders online. The underwriters may agree with us to allocate a
specific number of shares for sale to online brokerage account holders. Any
such allocation for online distributions will be made by the representatives on
the same basis as other allocations.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be
passed upon for us by Latham & Watkins, Menlo Park, California. As of the date
of this prospectus, persons and entities affiliated with Latham & Watkins
beneficially own an aggregate of approximately 25,832 shares of our preferred
stock, all of which will convert to common stock immediately prior to the
completion of this offering. The underwriters have been represented by Wilson
Sonsini Goodrich & Rosati, Palo Alto, California. As of the date of this
prospectus, persons and entities affiliated with Wilson Sonsini Goodrich &
Rosati beneficially own an aggregate of approximately 20,000 shares of our
common stock and 20,000 shares of our preferred stock, all of which will
convert to common stock immediately prior to the completion of this offering.
EXPERTS
The financial statements as of December 31, 1999 and 2000, and for each
of the three years in the period ended December 31, 2000, included in this
prospectus and the related financial statement schedule included elsewhere in
the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and elsewhere
in the registration statement, and have been so included in reliance upon the
reports of such firm given upon their authority as experts in auditing and
accounting.
71
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act which registers the shares of
common stock to be sold in this offering. The term registration statement
includes any amendment to the registration statement previously filed on Form
S-1 in accordance with the Securities Act of 1933, with regard to the shares of
common stock offered by our company. This prospectus, which constitutes a part
of the registration statement, does not contain all of the information set
forth in the registration statement, some items of which are contained in
exhibits and schedules to the registration statement as permitted by the rules
and regulations of the Securities and Exchange Commission. Please be mindful
that any statements contained in this prospectus as to the contents of any
contract or any other document referred to are not necessarily complete, and in
each instance, we refer you to the copy of the contract or other document which
is filed as an exhibit to the registration statement. You may inspect a copy of
the registration statement at the Securities and Exchange Commission's
principal office in Washington, DC, and copies of all or any part of the
registration statement may be obtained from the Public Reference Section of the
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, DC
20549, upon payment of fees prescribed by the Securities and Exchange
Commission. The Securities and Exchange Commission maintains a World Wide Web
site that contains reports, proxy and information statements and other
information relating to registrants that file electronically with the
Securities and Exchange Commission. The URL of the web site is
http://www.sec.gov.
In addition, upon completion of this offering, we will become subject to
the reporting and information requirements of the Securities Exchange Act of
1934, as amended, and, as a result, we will file periodic reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and/or copy this information at the public reference rooms of the
Securities and Exchange Commission:
Washington, DC New York, New York Chicago, Illinois
450 Fifth Street, N.W. 233 Broadway 500 West Madison Street
Room 1024 New York, NY 10279 Suite 1400
Washington, DC 20549 Chicago, IL 60661-2511
You may also obtain copies of this information by mail from the Public
Reference Section of the Securities and Exchange Commission, 450 Fifth Street,
N.W., Room 1024, Washington, DC 20549, at prescribed rates. You may obtain
information on the operation of the public reference rooms by calling the
Securities and Exchange Commission at 1-800-SEC-0330.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent public accountants and to make
available to our stockholders quarterly reports for the first three quarters of
each fiscal year containing unaudited interim financial information. Our
telephone number is (650) 254-7200.
72
R2 TECHNOLOGY, INC.
Index to Financial Statements
Page
----
Independent Auditors' Report.......................................................................... F-2
Balance Sheets as of December 31, 1999 and 2000 and September 30, 2001 (Unaudited).................... F-3
Statements of Operations for Each of the Three Years in the Period Ended December 31, 2000 and for the
Nine Months Ended September 30, 2000 (Unaudited) and 2001 (Unaudited)............................... F-4
Statements of Stockholders' Deficit for Each of the Three Years in the Period Ended December 31, 2000
and for the Nine Months Ended September 30, 2001 (Unaudited)........................................ F-5
Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 2000 and for the
Nine Months Ended September 30, 2000 (Unaudited) and 2001 (Unaudited)............................... F-6
Notes to Financial Statements......................................................................... F-7
F-1
Independent Auditors' Report
To the Board of Directors and Stockholders
of R2 Technology, Inc.:
We have audited the accompanying balance sheets of R2 Technology, Inc. as
of December 31, 1999 and 2000, and the related statements of operations,
stockholders' deficit and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of R2 Technology, Inc. as of December 31, 1999
and 2000, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
San Jose, California
December 19, 2001
F-2
R2 TECHNOLOGY, INC.
Balance Sheets
(in thousands, except per share amounts)
December 31,
------------------
1999 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 3,712 $ 15,241
Short-term investments............................................................... 4,501 2,268
Trade receivables, net of allowances of $91 in 1999, $202 in 2000 and $202 in 2001... 3,251 5,419
Inventories.......................................................................... 1,314 2,401
Deferred product costs............................................................... 1,391 2,738
Prepaid expenses and other current assets............................................ 396 537
-------- --------
Total current assets............................................................. 14,565 28,604
Property and equipment, net............................................................ 887 1,039
Deferred product costs................................................................. 2,025 3,138
Other assets........................................................................... 143 160
-------- --------
Total assets..................................................................... $ 17,620 $ 32,941
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable..................................................................... $ 1,317 $ 2,480
Accrued compensation................................................................. 833 1,473
Accrued and other liabilities........................................................ 704 757
Line of credit....................................................................... -- 3,300
Current portion of deferred revenue.................................................. 3,444 7,269
Current portion of capital lease obligations......................................... 5 20
-------- --------
Total current liabilities........................................................ 6,303 15,299
-------- --------
Deferred revenue....................................................................... 5,024 8,600
Capital lease obligations.............................................................. 3 40
Other long-term liabilities............................................................ -- 400
Commitments (Note 6)
Redeemable convertible preferred stock:
Redeemable convertible preferred stock; $0.001 par value; 54,100 shares authorized
and designated; none issued and outstanding on a pro forma basis:
Series A-1: 4,000 shares designated; shares issued and outstanding: 3,826 in 1999,
2000 and 2001; redemption and liquidation value: $3,826............................ 3,821 3,822
Series B-1: 4,850 shares designated; shares issued and outstanding: 4,656 in 1999,
4,765 in 2000 and 4,769 in 2001; redemption and liquidation value: $9,538.......... 9,298 9,522
Series C-1: 7,500 shares designated; shares issued and outstanding: 7,046 in 1999,
2000 and 2001; redemption and liquidation value: $14,091........................... 14,078 14,082
Series D-1: 4,400 shares designated; shares issued and outstanding: 4,400 in 1999,
2000 and 2001; redemption and liquidation value: $11,000........................... 10,970 10,980
Series E-1: 1,800 shares designated; shares issued and outstanding: 1,748 in 1999,
2000 and 2001; redemption and liquidation value: $5,679............................ 5,660 5,666
Series F-1: 4,500 shares designated; shares issued and outstanding: 4,205 in 2000
and 2001; redemption and liquidation value: $15,769................................ -- 15,773
-------- --------
Total redeemable convertible preferred stock..................................... 43,827 59,845
-------- --------
Stockholders' equity (deficit):
Common stock, $0.001 par value; 74,300 shares authorized; shares issued and
outstanding: 2,995 in 1999, 3,379 in 2000, 3,617 in 2001 and 31,047 on a pro
forma basis......................................................................... 324 567
Common stock warrants................................................................ 50 154
Deferred stock compensation.......................................................... (30) --
Notes receivable from stockholders................................................... (6) (23)
Accumulated deficit.................................................................. (37,875) (51,941)
-------- --------
Total stockholders' equity (deficit)............................................. (37,537) (51,243)
-------- --------
Total liabilities and stockholders' equity (deficit)............................. $ 17,620 $ 32,941
======== ========
Pro Forma
(Note 2)
September 30, September 30,
2001 2001
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 4,526
Short-term investments............................................................... 974
Trade receivables, net of allowances of $91 in 1999, $202 in 2000 and $202 in 2001... 6,841
Inventories.......................................................................... 3,016
Deferred product costs............................................................... 2,772
Prepaid expenses and other current assets............................................ 416
--------
Total current assets............................................................. 18,545
Property and equipment, net............................................................ 1,155
Deferred product costs................................................................. 1,558
Other assets........................................................................... 112
--------
Total assets..................................................................... $ 21,370
========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable..................................................................... $ 1,976
Accrued compensation................................................................. 1,743
Accrued and other liabilities........................................................ 1,195
Line of credit....................................................................... --
Current portion of deferred revenue.................................................. 8,098
Current portion of capital lease obligations......................................... 21
--------
Total current liabilities........................................................ 13,033
--------
Deferred revenue....................................................................... 5,663
Capital lease obligations.............................................................. 24
Other long-term liabilities............................................................ 1,200
Commitments (Note 6)
Redeemable convertible preferred stock:
Redeemable convertible preferred stock; $0.001 par value; 54,100 shares authorized
and designated; none issued and outstanding on a pro forma basis:
Series A-1: 4,000 shares designated; shares issued and outstanding: 3,826 in 1999,
2000 and 2001; redemption and liquidation value: $3,826............................ 3,823 $ --
Series B-1: 4,850 shares designated; shares issued and outstanding: 4,656 in 1999,
4,765 in 2000 and 4,769 in 2001; redemption and liquidation value: $9,538.......... 9,533 --
Series C-1: 7,500 shares designated; shares issued and outstanding: 7,046 in 1999,
2000 and 2001; redemption and liquidation value: $14,091........................... 14,085 --
Series D-1: 4,400 shares designated; shares issued and outstanding: 4,400 in 1999,
2000 and 2001; redemption and liquidation value: $11,000........................... 10,988 --
Series E-1: 1,800 shares designated; shares issued and outstanding: 1,748 in 1999,
2000 and 2001; redemption and liquidation value: $5,679............................ 5,670 --
Series F-1: 4,500 shares designated; shares issued and outstanding: 4,205 in 2000
and 2001; redemption and liquidation value: $15,769................................ 15,880 --
-------- --------
Total redeemable convertible preferred stock..................................... 59,979 --
-------- --------
Stockholders' equity (deficit):
Common stock, $0.001 par value; 74,300 shares authorized; shares issued and
outstanding: 2,995 in 1999, 3,379 in 2000, 3,617 in 2001 and 31,047 on a pro
forma basis......................................................................... 2,248 62,053
Common stock warrants................................................................ 154 328
Deferred stock compensation.......................................................... (633) (633)
Notes receivable from stockholders................................................... -- --
Accumulated deficit.................................................................. (60,298) (60,298)
-------- --------
Total stockholders' equity (deficit)............................................. (58,529) $ 1,450
-------- ========
Total liabilities and stockholders' equity (deficit)............................. $ 21,370
========
See notes to financial statements.
F-3
R2 TECHNOLOGY, INC.
Statements of Operations
(in thousands, except per share amounts)
Nine Months Ended
Years Ended December 31, September 30,
---------------------------- ----------------
1998 1999 2000 2000 2001
-------- -------- -------- ------- -------
(Unaudited)
Revenue................................................... $ 172 $ 1,894 $ 4,932 $ 3,351 $18,174
Costs and expenses:
Cost of revenue.......................................... 1,510 2,550 4,700 2,936 9,051
Research and development................................. 5,416 4,246 5,880 3,983 6,284
Sales and marketing...................................... 2,789 4,017 5,822 3,339 7,763
General and administrative............................... 1,206 1,443 2,649 1,713 2,637
Stock-based compensation*................................ 28 54 158 127 914
-------- -------- -------- ------- -------
Total costs and expenses............................. 10,949 12,310 19,209 12,098 26,649
-------- -------- -------- ------- -------
Loss from operations...................................... (10,777) (10,416) (14,277) (8,747) (8,475)
Interest income........................................... 560 469 317 232 306
Interest and other expense................................ (12) (8) (72) (25) (140)
-------- -------- -------- ------- -------
Net loss.................................................. (10,229) (9,955) (14,032) (8,540) (8,309)
Accretion of redeemable convertible preferred stock....... 43 62 34 19 48
-------- -------- -------- ------- -------
Net loss attributable to common stockholders.............. $(10,272) $(10,017) $(14,066) $(8,559) $(8,357)
======== ======== ======== ======= =======
Basic and diluted net loss per share...................... $ (4.14) $ (3.70) $ (4.46) $ (2.75) $ (2.46)
======== ======== ======== ======= =======
Shares used in computing basic and diluted net loss per
share................................................... 2,480 2,708 3,156 3,114 3,402
======== ======== ======== ======= =======
Pro forma basic and diluted net loss per share (unaudited)
(Note 2)................................................ $ (0.53) $ (0.27)
======== =======
Shares used in computing pro forma basic and diluted net
loss per share (unaudited) (Note 2)..................... 26,676 30,831
======== =======
- -----------------
* Stock-based compensation:
Cost of revenue........................................ $ -- $ -- $ -- $ -- $ 5
Research and development............................... 9 36 39 21 286
Sales and marketing.................................... -- 3 7 2 316
General and administrative............................. 19 15 112 104 307
-------- -------- -------- ------- -------
$ 28 $ 54 $ 158 $ 127 $ 914
======== ======== ======== ======= =======
See notes to financial statements.
F-4
R2 TECHNOLOGY, INC.
Statements of Stockholders' Deficit
(in thousands, except share amounts)
Notes
Common Stock Common Deferred Receivable Total
------------- Stock Stock from Accumulated Stockholders'
Shares Amount Warrants Compensation Stockholders Deficit Deficit
------ ------ -------- ------------ ------------ ----------- -------------
Balances, January 1, 1998.......... 2,637 $ 118 $ 50 $ (90) $ -- $(17,586) $(17,508)
Stock options exercised............ 117 22 -- -- -- -- 22
Grant of non-employee options for
services.......................... -- 12 -- (12) -- -- --
Amortization of deferred stock
compensation for non-employee
options........................... -- -- -- 28 -- -- 28
Accretion of redeemable convertible
preferred stock................... -- -- -- -- -- (43) (43)
Net loss and comprehensive loss.... -- -- -- -- -- (10,229) (10,229)
----- ------ ---- ----- ----- -------- --------
Balances, December 31, 1998........ 2,754 152 50 (74) -- (27,858) (27,730)
========
Stock options exercised............ 241 162 -- -- (6) -- 156
Grant of non-employee options for
services.......................... -- 10 -- (10) -- -- --
Amortization of deferred stock
compensation for non-employee
options........................... -- -- -- 54 -- -- 54
Accretion of redeemable convertible
preferred stock................... -- -- -- -- -- (62) (62)
Net loss and comprehensive loss.... -- -- -- -- -- (9,955) (9,955)
----- ------ ---- ----- ----- -------- --------
Balances, December 31, 1999........ 2,995 324 50 (30) (6) (37,875) (37,537)
========
Stock options exercised............ 384 219 -- -- (23) -- 196
Stock compensation for non-employee
options granted for services...... -- 24 -- -- -- -- 24
Amortization of deferred stock
compensation for non-employee
options........................... -- -- -- 30 -- -- 30
Collection of notes receivable from
stockholders...................... -- -- -- -- 6 -- 6
Common stock warrants issued for
services.......................... -- -- 104 -- -- -- 104
Accretion of redeemable convertible
preferred stock................... -- -- -- -- -- (34) (34)
Net loss and comprehensive loss.... -- -- -- -- -- (14,032) (14,032)
----- ------ ---- ----- ----- -------- --------
Balances, December 31, 2000........ 3,379 567 154 -- (23) (51,941) (51,243)
========
Stock options exercised*........... 238 219 -- -- -- -- 219
Deferred stock compensation for
employee options*................. -- 928 -- (928) -- -- --
Amortization of deferred stock
compensation for employee options* -- -- -- 295 -- -- 295
Stock compensation for non-employee
options granted for services*..... -- 534 -- -- -- -- 534
Collection of notes receivable from
stockholders*..................... -- -- -- -- 23 -- 23
Accretion of redeemable convertible
preferred stock*.................. -- -- -- -- -- (48) (48)
Net loss and comprehensive loss*... -- -- -- -- -- (8,309) (8,309)
----- ------ ---- ----- ----- -------- --------
Balances, September 30, 2001*...... 3,617 $2,248 $154 $(633) $ -- $(60,298) $(58,529)
===== ====== ==== ===== ===== ======== ========
- --------
*Unaudited
See notes to financial statements.
F-5
R2 TECHNOLOGY, INC.
Statements of Cash Flows
(in thousands)
Years Ended December 31,
----------------------------
1998 1999 2000
-------- -------- --------
Operating activities:
Net loss....................................................................... $(10,229) $(9,955) $(14,032)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................. 468 536 527
Loss on sale or disposal of assets............................................ -- -- 95
Stock compensation for employee options and options and warrants issued to
non-employees for services................................................... 28 54 158
Changes in operating assets and liabilities:
Trade receivables............................................................ (1,075) (2,176) (2,168)
Inventories.................................................................. 363 343 (1,087)
Prepaid expenses and other current assets.................................... 175 (237) (58)
Other assets................................................................. 151 (60) (17)
Deferred product costs....................................................... (831) (2,585) (2,460)
Accounts payable............................................................. 152 862 1,163
Accrued compensation......................................................... 563 126 640
Accrued and other liabilities................................................ (28) (239) 53
Deferred revenue............................................................. 2,102 6,316 7,401
Other long-term liabilities.................................................. -- -- 400
-------- -------- --------
Net cash used in operating activities...................................... (8,161) (7,015) (9,385)
-------- -------- --------
Investing activities:
Purchases of property and equipment............................................ (393) (601) (706)
Purchases of short-term investments............................................ (18,756) (4,508) (3,070)
Maturities of short-term investments........................................... 16,436 3,350 5,303
-------- -------- --------
Net cash provided by (used in) investing activities........................ (2,713) (1,759) 1,527
-------- -------- --------
Financing activities:
Borrowings under line of credit................................................ -- -- 3,300
Principal payments under line of credit........................................ -- -- --
Proceeds from sale of redeemable convertible preferred stock, net of issuance
costs......................................................................... 10,960 5,651 15,676
Proceeds from exercise of common stock options................................. 22 156 196
Proceeds from exercise of redeemable convertible preferred stock warrants...... -- -- 219
Repayments of capital lease obligations........................................ (4) (5) (10)
Collection of notes receivable from stockholders............................... -- -- 6
-------- -------- --------
Net cash provided by (used in) financing activities........................ 10,978 5,802 19,387
-------- -------- --------
Net increase (decrease) in cash and cash equivalents............................. 104 (2,972) 11,529
Cash and cash equivalents:
Beginning of period............................................................ 6,580 6,684 3,712
-------- -------- --------
End of period.................................................................. $ 6,684 $ 3,712 $ 15,241
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest......................................................... $ 2 $ 2 $ 6
======== ======== ========
Supplemental disclosure of noncash investing and financing activities:
-Options exercised for notes receivable........................................ $ -- $ 6 $ 23
======== ======== ========
Redeemable convertible preferred stock warrants issued in connection with line
of credit..................................................................... $ -- $ -- $ 89
======== ======== ========
Property and equipment acquired under capital leases........................... $ -- $ -- $ 62
======== ======== ========
Redeemable convertible preferred stock accretion............................... $ 43 $ 62 $ 34
======== ======== ========
Nine Months
Ended
September 30,
-----------------
2000 2001
------- --------
(Unaudited)
Operating activities:
Net loss....................................................................... $(8,540) $ (8,309)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................. 354 369
Loss on sale or disposal of assets............................................ 44 75
Stock compensation for employee options and options and warrants issued to
non-employees for services................................................... 127 914
Changes in operating assets and liabilities:
Trade receivables............................................................ (314) (1,422)
Inventories.................................................................. (852) (615)
Prepaid expenses and other current assets.................................... (57) 121
Other assets................................................................. (18) 48
Deferred product costs....................................................... (1,285) 1,546
Accounts payable............................................................. 737 (504)
Accrued compensation......................................................... 106 270
Accrued and other liabilities................................................ (47) 438
Deferred revenue............................................................. 3,831 (2,108)
Other long-term liabilities.................................................. -- 800
------- --------
Net cash used in operating activities...................................... (5,914) (8,377)
------- --------
Investing activities:
Purchases of property and equipment............................................ (258) (605)
Purchases of short-term investments............................................ -- (1,461)
Maturities of short-term investments........................................... 4,501 2,800
------- --------
Net cash provided by (used in) investing activities........................ 4,243 734
------- --------
Financing activities:
Borrowings under line of credit................................................ -- 6,300
Principal payments under line of credit........................................ -- (9,600)
Proceeds from sale of redeemable convertible preferred stock, net of issuance
costs......................................................................... -- (7)
Proceeds from exercise of common stock options................................. 196 219
Proceeds from exercise of redeemable convertible preferred stock warrants...... -- 8
Repayments of capital lease obligations........................................ (6) (15)
Collection of notes receivable from stockholders............................... 6 23
------- --------
Net cash provided by (used in) financing activities........................ 196 (3,072)
------- --------
Net increase (decrease) in cash and cash equivalents............................. (1,475) (10,715)
Cash and cash equivalents:
Beginning of period............................................................ 3,712 15,241
------- --------
End of period.................................................................. $ 2,237 $ 4,526
======= ========
Supplemental disclosure of cash flow information:
Cash paid for interest......................................................... $ 6 $ 22
======= ========
Supplemental disclosure of noncash investing and financing activities:
-Options exercised for notes receivable........................................ $ 20 $ --
======= ========
Redeemable convertible preferred stock warrants issued in connection with line
of credit..................................................................... $ -- $ --
======= ========
Property and equipment acquired under capital leases........................... $ 62 $ --
======= ========
Redeemable convertible preferred stock accretion............................... $ 19 $ 48
======= ========
See notes to financial statements.
F-6
R2 TECHNOLOGY, INC.
Notes to Financial Statements
Years Ended December 31, 1998, 1999 and 2000 and Nine Months Ended
September 30, 2000 (Unaudited) and 2001 (Unaudited)
1. Organization
R2 Technology, Inc. (the "Company"), incorporated in Delaware in May
1993, develops, manufactures and sells proprietary medical systems to assist
radiologists in the detection of cancer. The Company's ImageChecker system, a
computer-aided detection ("CAD") product, was approved by the United States
Food and Drug Administration ("FDA") for both screening and diagnostic
mammography in 1998. In connection with the sales and marketing of the
ImageChecker products, the Company has associated the R2 brand with innovative
CAD solutions and established strategic collaborations with leading medical
imaging equipment manufacturers. The Company plans to leverage its CAD
technology, its first commercial mover advantage, its strategic relationships,
and its installed base to expand its product line to detect other cancers,
including lung cancer.
2. Summary of Significant Accounting Policies
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue and expenses as of the dates and for
the periods presented. Actual results could differ from those estimates.
Unaudited Interim Financial Information. The interim financial
information as of September 30, 2001 and for the nine months ended September
30, 2000 and 2001 is unaudited and has been prepared on the same basis as the
audited financial statements. In the opinion of management, such unaudited
information includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the interim information.
Operating results for the nine months ended September 30, 2001 are not
necessarily indicative of the results that may be expected for the full fiscal
year ending December 31, 2001.
Certain Significant Risks and Uncertainties. The Company continues to be
subject to certain risks common to companies in similar stages of development,
including dependence on a limited product line, uncertainty of market
acceptance and limited manufacturing, marketing and sales experience.
Future enhancements and new products developed by the Company
(collectively, "future products") require clearances or approvals from the FDA
and foreign regulatory agencies prior to commercialized sales. There can be no
assurance that the Company's future products will receive any of these required
clearances or approvals. Delays in receipt of or failure to receive any
necessary clearances or approvals could have a material adverse effect on the
Company.
The Company participates in a dynamic high technology industry and
believes that changes in any of the following areas could have a material
adverse effect on the Company's future financial position or results of
operations: advances and trends in new technologies and industry standards;
competitive pressures in the form of new products or price reductions on
current products; changes in product mix; changes in the overall demand for
products and services offered by the Company; changes in certain strategic or
customer relationships; risk associated with changes in domestic and
international economic and/or political conditions or regulations; availability
of necessary components; and the Company's ability to attract and retain
employees necessary to support its growth.
The Company presently relies on single suppliers for certain component
parts. Although the Company believes that there are alternative sources for
these components, there can be no assurance that alternative sources can be
integrated with the Company's technology in a timely or cost-efficient manner.
Delays associated with identifying and qualifying alternative component
sources, any prolonged interruption in the manufacturing
F-7
R2 TECHNOLOGY, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1998, 1999 and 2000 and Nine Months Ended
September 30, 2000 (Unaudited) and 2001 (Unaudited)
process or an inability to obtain suitable components at acceptable prices
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Concentrations of Credit Risk. Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash
and cash equivalents, short-term investments and trade receivables. The
Company's cash and cash equivalents are deposited with major financial
institutions. Such deposits are generally in excess of insured limits and are
regularly monitored by management. Short-term investments are placed in
high-credit quality commercial paper and corporate notes.
The Company sells its products primarily to hospitals and medical
institutions and generally does not require its customers to provide collateral
or other security to support accounts receivable. The Company maintains
allowances for estimated potential bad debt losses. At December 31, 1999, three
customers' accounts receivable balance accounted for 28%, 11% and 11% of total
trade receivables, respectively. At December 31, 2000, one customer's accounts
receivable balance accounted for 51% of total trade receivables. At September
30, 2001, three customers' accounts receivable balance accounted for 53%, 11%
and 11% of total trade receivables, respectively.
Cash and Cash Equivalents. The Company considers all highly liquid
investments purchased with a maturity of three months or less at the date of
purchase to be cash equivalents.
Short-Term Investments. Short-term investments in marketable debt
securities are classified as available-for-sale and are recorded at amortized
cost which approximates fair market value. Realized gains and losses are
reported in earnings and computed based on the specific identification method.
Short-term investments at December 31, 1999 and 2000 and September 30, 2001
consist of commercial paper with maturities of less than one year.
Inventories. Inventories primarily include components acquired for
integration and assembly into finished goods and demonstration units.
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Demonstration units are recorded at their net
realizable value.
Property and Equipment. Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method based
on estimated useful lives of three to five years. Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful lives of
the related asset.
Long-Lived Assets. The Company evaluates long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. When the sum of the undiscounted future net
cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount, an impairment loss would be
measured based on the discounted cash flows compared to the carrying amount. No
impairment charge has been recorded in any of the periods presented.
Unaudited Pro Forma Information. The unaudited pro forma information in
the accompanying balance sheet assumes that the automatic conversion of the
outstanding shares of redeemable convertible preferred stock into 27,429,705
shares of common stock to occur upon the completion of the planned initial
public offering had actually occurred on September 30, 2001.
Revenue Recognition. The Company's revenue is derived primarily from the
sale of its ImageChecker products. The Company recognizes revenue in accordance
with the provisions of American Institute of Certified
F-8
R2 TECHNOLOGY, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1998, 1999 and 2000 and Nine Months Ended
September 30, 2000 (Unaudited) and 2001 (Unaudited)
Public Accountants Statement of Position 97-2, Software Revenue Recognition, as
amended. Accordingly, revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable,
and collectibility is probable. Delivery is considered to have occurred upon
shipment for sales to distributors (who have no return rights or price
protection) and upon installation for direct sales. Revenue is allocated to
various elements of the arrangement based on vendor specific objective evidence
("VSOE") as determined by published price lists evidencing the price
established by management having the relevant authority. Amounts attributable
to undelivered elements such as technical support and maintenance are
recognized ratably over the period the service is to be provided, generally one
year. Through December 31, 2000, the Company had not established sufficient
VSOE for the undelivered elements of its sales arrangements and, accordingly,
revenue from sales through December 31, 2000, is being recognized ratably over
the estimated life of the system, generally three years. Associated hardware
costs (not in excess of the related deferred revenue) are deferred and
recognized ratably over the corresponding period. Commencing in January 2001,
the Company established VSOE through the communication to its distributors and
direct customers of separately priced elements, including technical support and
maintenance renewal rates.
Revenue from ImageChecker products sold under the distribution agreement
with GE Medical Systems (see Note 6) is being recognized ratably, commencing
upon customer acceptance, over the longer of the term of the contract or the
one-year warranty period provided under the contract due to the lack of
established VSOE for the various elements of such arrangement. Associated
hardware costs (not in excess of the related deferred revenues) are deferred
and recognized ratably over the corresponding period.
Research and Development. Research and development costs are expensed as
incurred and include expenses associated with new product research and
regulatory activities. The Company's products include certain software
applications that are integral to the operation of the product. The costs to
develop such software have not been capitalized as the Company believes its
current software development process is essentially completed concurrent with
the establishment of technological feasibility of the software.
Advertising Costs. Advertising costs are expensed as incurred.
Advertising costs for 1998, 1999, 2000 and for the nine months ended September
30, 2001 were approximately $6,000, $34,000, $112,000 and $253,000,
respectively.
Stock-Based Compensation. The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to
Employees. Stock-based awards to consultants and other nonemployees are
accounted for using the fair value method in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, Emerging Issues Task Force ("EITF") Issue No. 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or in Conjunction with Selling, Goods or Services, and EITF D-90, Grantor
Balance Sheet Presentation of Unvested, Forfeitable Equity Instruments Granted
to a Nonemployee.
Net Loss Per Share. Basic net loss per share ("EPS") excludes the effects
of dilution and is computed by dividing net loss attributable to common
stockholders by the weighted-average number of common shares outstanding for
the period, excluding shares subject to repurchase (see Note 9). Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock (redeemable convertible preferred stock,
redeemable convertible preferred stock warrants, common stock warrants and
common stock options using the treasury stock method) were exercised or
converted into common stock. Potential common shares in the diluted EPS
computation are excluded in net loss periods as their effect would be
antidilutive.
F-9
R2 TECHNOLOGY, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1998, 1999 and 2000 and Nine Months Ended
September 30, 2000 (Unaudited) and 2001 (Unaudited)
Unaudited Pro Forma Net Loss Per Share. Pro forma basic and diluted net
loss per share is computed by dividing net loss attributable to common
stockholders by the weighted-average number of common shares outstanding for
the period and the weighted-average number of common shares outstanding for the
period resulting from the assumed conversion of all outstanding shares of
redeemable convertible preferred stock.
Comprehensive Loss. SFAS No. 130, Reporting Comprehensive Income,
requires an entity to report, by major components and as a single total, the
change in its net assets during the period from nonowner sources. Comprehensive
loss was the same as net loss for all periods presented.
New Accounting Standards. In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, as amended, requires that
every derivative instrument, including certain derivative instruments embedded
in other contracts, be recorded on the balance sheet at its fair value. Changes
in the fair value of derivatives are recorded each period in current earnings
or other comprehensive income, depending on whether a derivative is designated
as part of a hedge transaction and, if it is, the type of hedge transaction.
The Company adopted SFAS No. 133, as amended, effective January 1, 2001. The
adoption of SFAS No. 133, as amended, did not have an impact on the Company's
financial position, results of operations or cash flows as the Company had no
stand-alone or embedded derivatives at December 31, 2000 and had not
historically entered into any derivative transactions to hedge currency or
other exposures.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that
all business combinations initiated after June 30, 2001 be accounted for under
the purchase method and addresses the initial recognition and measurement of
goodwill and other intangible assets acquired in a business combination. SFAS
No. 142 addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 provides
that intangible assets with finite useful lives be amortized and that goodwill
and intangible assets with indefinite lives not be amortized, but rather be
tested at least annually for impairment. The Company will adopt SFAS No. 141
and SFAS No. 142 for its fiscal year beginning January 1, 2002. As the Company
has no goodwill or other intangible assets associated with business
combinations on its balance sheet as of September 30, 2001, the adoption of
SFAS No. 141 and SFAS No. 142 is not expected to have an impact on the
Company's financial position, results of operations or cash flows.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, effective for fiscal years
beginning after December 31, 2001. Under the new rules, the criteria required
for classifying an asset as held-for-sale have been significantly changed.
Assets held for sale are stated at the lower of their fair values or carrying
amounts, and depreciation is no longer recognized. In addition, the expected
future operating losses from discontinued operations will be displayed in
discontinued operations in the period in which the losses are incurred rather
than as of the measurement date. More dispositions will qualify for
discontinued operations treatment in the income statement under the new rules.
The Company will adopt SFAS No. 144 for its fiscal year beginning January 1,
2002 and is currently evaluating the impact of adoption on its financial
statements.
Reclassification. Certain amounts in the fiscal 1998, 1999 and 2000
financial statements have been reclassified to conform to the current period
presentation.
F-10
R2 TECHNOLOGY, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1998, 1999 and 2000 and Nine Months Ended
September 30, 2000 (Unaudited) and 2001 (Unaudited)
3. Inventories
Inventories consist of the following (in thousands):
December 31,
------------- September 30,
1999 2000 2001
------ ------ -------------
(Unaudited)
Components................................. $ 845 $1,388 $1,794
Work in process............................ 4 46 229
Finished goods............................. 322 569 462
Demonstration units........................ 143 398 531
------ ------ ------
Total................................... $1,314 $2,401 $3,016
====== ====== ======
4. Property and Equipment
Property and equipment consist of the following (in thousands):
December 31,
---------------- September 30,
1999 2000 2001
------- ------- -------------
(Unaudited)
Computer equipment and software........ $ 1,635 $ 2,114 $ 2,590
Demonstration and test equipment....... 1,057 1,178 1,063
Office equipment....................... 558 522 522
Furniture and fixtures................. 95 95 136
Leasehold improvements................. 152 209 209
------- ------- -------
3,497 4,118 4,520
Accumulated depreciation and
amortization......................... (2,610) (3,079) (3,365)
------- ------- -------
Property and equipment, net............ $ 887 $ 1,039 $ 1,155
======= ======= =======
5. Line of Credit
In October 2000, the Company entered into a revolving credit and security
agreement with a commercial bank for borrowings of up to $4,000,000,
collateralized by a security interest in receivables, inventory, equipment and
other property, excluding intellectual property. The net book value of assets
pledged as collateral under the loan and security agreement totaled $12,181,000
at December 31, 2000. Borrowings under this agreement bear interest at the
prime rate (9.50% at December 31, 2000) plus 0.5%, payable monthly. Borrowings
under this facility require the Company to meet certain financial covenants.
Included in these financial covenants, among others, is a requirement that the
Company maintain quarterly net losses within permitted limits, as defined. At
December 31, 2000, the Company was not in compliance with one of these
covenants. However, the Company has received a waiver from the bank for this
event of noncompliance. At December 31, 2000, the amount outstanding under the
line of credit was $3,300,000. The agreement expired on September 30, 2001 and
all amounts borrowed were repaid by September 30, 2001.
In connection with the revolving credit and security agreement, the
Company issued to the bank fully vested warrants to purchase 32,000 shares of
Series F-1 redeemable convertible preferred stock at an initial exercise price
of $3.75 per share, subject to adjustment for stock dividends and splits. The
warrants expire in
F-11
R2 TECHNOLOGY, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1998, 1999 and 2000 and Nine Months Ended
September 30, 2000 (Unaudited) and 2001 (Unaudited)
November 2007. The fair value of the warrants of approximately $89,000 has been
amortized to interest expense over the term of the loan and security agreement
and was determined using the Black-Scholes option pricing model with the
following assumptions: contractual life of seven years, volatility of 75%,
risk-free interest rate of 5.28% and no dividends during the contractual term.
6. Commitments
Lease Obligations. Property and equipment with a net book value of
$7,000, $58,000 and $50,000 (net of accumulated amortization of $184,000,
$195,000 and $203,000) at December 31, 1999 and 2000 and September 30, 2001,
respectively, has been acquired under capital leases. The Company leases its
facilities under noncancelable operating leases expiring through November 2005.
Rent expense for 1998, 1999, 2000 and for the nine months ended September 30,
2001 was approximately $376,000, $467,000, $545,000 and $535,000, respectively.
Future minimum lease payments under the Company's capital and operating leases
as of December 31, 2000 are as follows (in thousands):
Capital Operating
Years Ending December 31, Leases Leases
2001........................................... $32 $ 620
2002........................................... 29 620
2003........................................... 19 620
2004........................................... -- 620
2005........................................... -- 550
--- ------
Total......................................... 80 $3,030
======
Less amounts representing interest (22.3%)....... 20
---
Present value of minimum lease payments.......... 60
Less current portion............................. 20
---
Long-term portion................................ $40
===
Purchase Commitments. Non-cancelable purchase commitments for inventory
components at September 30, 2001 totaled $1.5 million.
License Agreements. In September 1993, the Company entered into a
co-exclusive license agreement with a nonprofit corporation. The license
relates to issued patents and additional patent applications covering the
detection of micro-calcifications and masses. In December 1996, this agreement
was incorporated into two new royalty bearing license agreements, whereby the
Company obtained the rights to certain additional technology, patents and
patent applications. In connection with these agreements, the Company issued a
warrant to purchase 250,000 shares of common stock at $4.00 per share of which
50,000 shares become exercisable annually. Such warrant, valued at $50,000,
expires on the earlier of December 2006 or nine months after the closing of an
initial public offering of common stock, for which the aggregate proceeds are
not less than $20 million and the offering price is not less than $4.00 per
share. The Company also agreed to make a $200,000 unrestricted gift for each of
the subsequent five years through December 2000 to a university provided the
agreements remain in effect. This resulted in charges of $200,000 to research
and development expense for each of the years ended December 31, 1998, 1999 and
2000. The Company is also obligated to pay a royalty of 1% of sales from
products developed utilizing the licensed technology, with a minimum royalty of
$12,500 per quarter. Royalties related to products sold in 1998, 1999 and 2000
and for the nine months ended September 30, 2001 were approximately $110,000,
$161,000, $235,000 and $271,000, respectively.
F-12
R2 TECHNOLOGY, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1998, 1999 and 2000 and Nine Months Ended
September 30, 2000 (Unaudited) and 2001 (Unaudited)
In July 1995, the Company entered into a nonexclusive, nontransferable
sublicense in which the Company obtained certain patents and patent
applications in two foreign markets covering the detection of
micro-calcifications and masses. In exchange for the license, the Company
appointed the licensor as the exclusive distributor of the licensed product in
Japan. Under the agreement, the Company is also responsible for paying
royalties based on 1% of sales in the licensed territory. No royalties were due
under this agreement in 1998, 1999 or 2000 or for the nine months ended
September 30, 2001.
In July 1999, the Company entered into a manufacturing and supply
agreement with RELA, a division of Colorado MEDtech, Inc. Under this agreement,
RELA manufactures and supplies to the Company its ImageChecker product. The
Company paid a deposit to RELA in the amount of $50,000 in November 1999. The
term of the agreement is two years, with the option to renew for an additional
two years. On July 17, 2001, the Company terminated its agreement with RELA.
In August 2000, the Company modified an existing supply agreement with
Lumisys (now owned by the Eastman Kodak Company). Under the modified agreement,
the Company committed to purchase 28 scanners for use in the ImageChecker
product at a fixed price by September 30, 2001. In connection with this
modification, the Company paid a deposit of approximately $126,000 which will
be credited against the scanners delivered under the agreement. As of December
31, 2000 and September 30, 2001, the total amount of commitment remaining under
the agreement was approximately $318,000 and $0, respectively.
In September 2000, the Company entered into a software development and
distribution agreement with GE Medical Systems ("GEMS"). Under the agreement,
the Company and GEMS agreed to jointly further develop specifications to define
the interface and compatibility between the Company's product and GEMS's Full
Field Digital Based Mammography System ("GEMS Digital Mammography System").
Additionally, GEMS received an exclusive license to purchase R2's ImageChecker
software for digital mammography applications and associated hardware at
specified prices during the term of the agreement and to distribute the
ImageChecker software worldwide for use with its GEMS Digital Mammography
System. The initial term of the agreement expires on December 31, 2002, however
GEMS has the right to notify the Company prior to September 30, 2002 of an
intent to extend the term for an additional two years. No transactions occurred
under this agreement in the year ended December 31, 2000. For the nine months
ended September 30, 2001, the Company delivered units of the ImageChecker
software and associated hardware totaling approximately $1,618,000, all of
which have been deferred as of September 30, 2001. The deferred amount will be
amortized over the longer of the initial term of the agreement or the one-year
warranty period.
In October 2000, the Company entered into a software development and
distribution agreement with the Eastman Kodak Company ("Kodak"). Under the
agreement, the Company will utilize its proprietary computer-aided detection
algorithms in the development of potential products for lung nodule detection
in Kodak's Computer Radiography ("CR") and Digital Radiography ("DR")
applications. Subject to the achievement of development milestones, Kodak will
make payments to the Company totaling $2.8 million. Kodak shall receive a
credit of 50% of license fees to be paid to the Company in the event a product
is developed, until the $2.8 million has been fully credited. In the event such
funds are not fully credited to Kodak by December 31, 2005, the Company shall
be obligated to repay any outstanding balance then owed. In exchange for this
funding, Kodak was granted eighteen (18) months exclusivity for incorporation
of the developed software into Kodak's CR and DR applications. The term of this
agreement is seven years with the option of additional extensions. Cummulative
payments received by the Company under this agreement as of December 31, 2000
and September 30, 2001 totaled $400,000 and $1,200,000, respectively, and were
recorded as a long-term liability.
F-13
R2 TECHNOLOGY, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1998, 1999 and 2000 and Nine Months Ended
September 30, 2000 (Unaudited) and 2001 (Unaudited)
7. Redeemable Convertible Preferred Stock
At December 31, 2000, the Company had outstanding 3,825,500, 4,765,080,
7,045,687, 4,399,998, 1,747,526 and 4,205,117 shares of Series A-1, Series B-1,
Series C-1, Series D-1, Series E-1 and Series F-1 redeemable convertible
preferred stock, respectively. Changes in each class of redeemable convertible
preferred stock from January 1, 1998 to September 30, 2001 are as follows (in
thousands, except share and per share amounts):
Series A-1 Series B-1 Series C-1 Series D-1 Series E-1 Series F-1 Total
---------- ---------- ---------- ---------- ---------- ---------- -------
Balances, January 1, 1998............... $3,813 $9,276 $14,022 $ -- $ -- $ -- $27,111
Issuance of 18,625 shares of Series C-1
redeemable convertible preferred
stock at $2.00 per share............... -- -- 36 -- -- -- 36
Issuance of 4,399,998 shares of Series
D-1 redeemable convertible preferred
stock at $2.50 per share, net of
issuance costs of $76.................. -- -- -- 10,924 -- -- 10,924
Accretion to redemption values.......... 4 11 10 18 -- -- 43
------ ------ ------- ------- ------ ------- -------
Balances, December 31, 1998............. 3,817 9,287 14,068 10,942 -- -- 38,114
=======
Issuance of 1,747,526 shares of Series
E-1 redeemable convertible preferred
stock at $3.25 per share, net of
issuance costs of $28.................. -- -- -- -- 5,651 -- 5,651
Accretion to redemption values.......... 4 11 10 28 9 -- 62
------ ------ ------- ------- ------ ------- -------
Balances, December 31, 1999............. 3,821 9,298 14,078 10,970 5,660 -- 43,827
=======
Issuance of 4,205,117 shares of Series
F-1 redeemable convertible preferred
stock at $3.75 per share, net of
issuance costs of $93.................. -- -- -- -- -- 15,676 15,676
Issuance of warrants to purchase 32,000
shares of Series F-1 redeemable
convertible preferred stock............ -- -- -- -- -- 89 89
Issuance of 109,499 shares of Series B-1
redeemable convertible preferred
stock upon exercise of warrants........ -- 219 -- -- -- -- 219
Accretion to redemption values.......... 1 5 4 10 6 8 34
------ ------ ------- ------- ------ ------- -------
Balances, December 31, 2000............. 3,822 9,522 14,082 10,980 5,666 15,773 59,845
=======
Issuance of warrants to purchase 35,000
shares of Series F-1 redeemable
convertible preferred stock*........... -- -- -- -- -- 85 85
Issuance of 4,133 shares of Series B-1
redeemable convertible preferred
stock upon exercise of warrants*....... -- 8 -- -- -- -- 8
Additional issuance cost of Series F-1
redeemable convertible preferred
stock*................................. -- -- -- -- -- (7) (7)
Accretion to redemption values*......... 1 3 3 8 4 29 48
------ ------ ------- ------- ------ ------- -------
Balances, September 30, 2001*........... $3,823 $9,533 $14,085 $10,988 $5,670 $15,880 $59,979
====== ====== ======= ======= ====== ======= =======
- --------
* Unaudited
F-14
R2 TECHNOLOGY, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1998, 1999 and 2000 and Nine Months Ended
September 30, 2000 (Unaudited) and 2001 (Unaudited)
The Series A-1, Series B-1, Series C-1, Series D-1, Series E-1 and Series
F-1 redeemable convertible preferred stock are being accreted to their
redemption value through the initial redemption date of February 15, 2003. In
connection with the Series B-1 financing, the Company issued 163,419 warrants
to purchase shares of Series B-1 redeemable convertible preferred stock at
$2.00 per share, of which 109,499 warrants were exercised and 49,787 were
canceled in fiscal year 2000. At December 31, 2000, 4,133 warrants to purchase
Series B-1 remained outstanding and were exercised during the nine months ended
September 30, 2001. In 2000, the Company issued warrants to purchase 32,000
shares of Series F-1 redeemable convertible preferred stock at $3.75 per share
(see Note 5) which remained outstanding at December 31, 2000 and September 30,
2001 and expire in November 2007. In 2001, the Company issued warrants to
purchase 35,000 shares of Series F-1 redeemable convertible preferred stock at
$3.75 per share in exchange for a license for undeveloped technology. The fair
value of the warrant was $85,000. Such warrants remained outstanding at
September 30, 2001 and expire at the earlier of January 2006 or the closing of
an initial public offering of common stock, for which aggregate proceeds are
not less than $20 million and the offering price is not less than $4.00 per
share.
Significant terms of the Series A-1, Series B-1, Series C-1, Series D-1,
Series E-1 and Series F-1 redeemable convertible preferred stock are as follows:
. Each share of Series A-1, Series B-1, Series C-1, Series D-1, Series
E-1 and Series F-1 redeemable convertible preferred stock is
convertible at the option of the holder into 1.11, 1.21, 1, 1, 1, and
1 share of common stock (subject to adjustments for events of
dilution, as defined), respectively. Shares will be automatically
converted upon a public offering of common stock for which the
aggregate proceeds are not less than $20 million and the offering
price is not less than $4.00 per share.
. Each share of preferred stock has the same voting rights as the number
of shares of common stock into which it is convertible.
. Holders of Series A-1, Series B-1, Series C-1, Series D-1, Series E-1
and Series F-1 redeemable convertible preferred stock are entitled at
any time and from time-to-time after February 15, 2003, with the
approval of a majority of the then outstanding preferred stockholders,
to require the Company to redeem all shares of Series A-1, Series B-1,
Series C-1, Series D-1, Series E-1 and Series F-1 redeemable
convertible preferred stock then outstanding at a redemption price of
$1.00, $2.00, $2.00, $2.50, $3.25 and $3.75 per share, respectively,
as adjusted for any stock dividends, combinations or splits, plus all
declared and unpaid dividends.
. Holders of Series A-1, Series B-1, Series C-1, Series D-1, Series E-1
and Series F-1 redeemable convertible preferred stock are also
entitled to receive dividends of $0.08, $0.16, $0.16, $0.20, $0.26 and
$0.30 per share per annum, respectively, which are noncumulative and
in preference to any common stock dividends, when and if declared by
the Board of Directors. As of December 31, 2000 and September 30,
2001, no dividends have been declared.
. In the event of liquidation, dissolution or winding up of the Company,
the holders of Series A-1, Series B-1, Series C-1, Series D-1, Series
E-1 and Series F-1 redeemable convertible preferred stock shall
receive an amount equal to $1.00, $2.00, $2.00, $2.50, $3.25 and $3.75
per share, respectively, plus any declared and unpaid dividends, prior
to any distribution to the common stockholders. If the available
assets and funds are insufficient to permit payment of the aggregate
preferential amounts to the redeemable convertible preferred
stockholders, then payments will be distributed ratably in proportion
to their full liquidation preference amount. After payment of the
liquidation preference to the Series A-1, Series B-1, Series C-1,
Series D-1, Series E-1 and Series F-1 redeemable convertible preferred
stockholders, the remaining assets of the Company will
F-15
R2 TECHNOLOGY, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1998, 1999 and 2000 and Nine Months Ended
September 30, 2000 (Unaudited) and 2001 (Unaudited)
be distributed ratably to the common and Series A-1, Series B-1,
Series C-1, Series D-1, Series E-1 and Series F-1 preferred
stockholders if the total assets available for distribution is less
than the product obtained by multiplying $3.75 by the number of shares
of common stock outstanding (including any shares of common stock
issuable upon conversion of the redeemable convertible
preferred stock). If the total assets available for distribution is
equal to or greater than the product obtained by multiplying $3.75 by
the number of shares of common stock outstanding (including any shares
of common stock issuable upon conversion of the redeemable convertible
preferred stock), the remaining assets will be distributed ratably to
the holders of common stock.
8. Stockholders' Deficit
Common Stock
Through December 31, 1996 the Company had issued 2,492,500 shares of its
common stock to founders and key employees of the Company under stock purchase
agreements. These stock purchase agreements (the Agreements) contain provisions
for the repurchase of common stock by the Company at its original purchase
price, in the event of termination of employment during the four years
following the date of the Agreements. Of the shares of common stock purchased
under the Agreements, 20% were released from the Company's repurchase option
immediately upon execution of the Agreements with the remaining shares being
released from repurchase generally ratably over 48 months. At December 31,
2000, 81,646 shares were subject to repurchase under the Agreements. Each share
of common stock has the right to one vote. The holders of common stock are also
entitled to receive dividends whenever funds are legally available and when
declared by the Board of Directors, subject to the prior rights of holders of
all other classes of stock at the time outstanding having priority rights as to
dividends.
At December 31, 2000 and September 30, 2001, the Company had reserved
shares of common stock for issuance as follows (in thousands):
December 31, September 30,
2000 2001
------------ -------------
(Unaudited)
Conversion of redeemable convertible preferred stock... 27,423 27,430
Issuance under stock option plans...................... 8,014 9,375
Issuance from exercise and conversion of warrants...... 414 444
------ ------
Total............................................... 35,851 37,249
====== ======
Stock Option Plan
Under the 1993 and 1996 Stock Option Plans (the "Plan"), 8,900,000
options (amended to 10,500,000 options in 2001) may be granted to eligible
employees, directors and consultants. Under the Plan, incentive options may be
granted at prices not lower than fair market value at the date of grant or 110%
of the fair market value if the optionee, immediately prior to the grant, owns
stock representing 10% or more of the voting power of all classes of stock.
Nonstatutory options may be granted at prices not lower than 85% of fair market
value at the date of grant or 110% of the fair market value if the optionee,
immediately prior to the grant, owns stock representing 10% or more of the
voting power or value of all securities.
Options granted under the Plan are exercisable and vest at such times and
under such conditions as determined by the Board, generally over four years.
Options generally expire ten years from date of grant.
F-16
R2 TECHNOLOGY, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1998, 1999 and 2000 and Nine Months Ended
September 30, 2000 (Unaudited) and 2001 (Unaudited)
Activity under the Plan is as follows (in thousands, except per share
data):
Outstanding Options
--------------------------
Number Weighted-Average
of Shares Exercise Price
--------- ----------------
Balances, January 1, 1998.................................. 2,183 $0.52
Granted (weighted-average fair value of $0.35 per share)... 1,443 1.71
Canceled................................................... (4) 0.36
Exercised.................................................. (117) 0.19
----- -----
Balances, December 31, 1998 (1,450 shares exercisable at a
weighted-average exercise price of $0.47 per share)...... 3,505 1.02
Granted (weighted-average fair value of $0.22 per share)... 706 1.07
Canceled................................................... (216) 1.30
Exercised.................................................. (241) 0.67
----- -----
Balances, December 31, 1999 (2,285 shares exercisable at a
weighted-average exercise price of $0.70 per share)...... 3,754 1.04
Granted (weighted-average fair value of $0.89 per share)... 2,857 1.20
Canceled................................................... (230) 1.28
Exercised.................................................. (384) 0.57
----- -----
Balances, December 31, 2000 (2,157 shares exercisable at a
weighted-average exercise price of $0.96 per share)...... 5,997 1.14
Granted (weighted-average fair value of $0.48 per share)*.. 2,215 2.35
Canceled*.................................................. (355) 1.49
Exercised*................................................. (239) 0.92
----- -----
Balances, September 30, 2001 (3,153 shares exercisable at a
weighted-average exercise price of $1.11 per share)*..... 7,618 $1.48
===== =====
- --------
* Unaudited
A summary of outstanding and exercisable stock options as of December 31,
2000 is as follows (share numbers in thousands):
Options Outstanding Options Exercisable
-------------------------------------- ---------------------
Weighted-Average Weighted- Weighted-
Remaining Average Average
Exercise Number Contractual Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
---------- ----------- ---------------- --------- ----------- ---------
$0.10 62 3.50 $0.10 62 $0.10
0.20-0.30 748 5.24 0.24 747 0.24
0.70-1.00 844 7.40 0.80 470 0.79
1.10-1.50 3,596 9.18 1.20 422 1.19
2.20 747 7.50 2.20 456 2.20
----- -----
$0.10-2.20 5,997 8.17 $1.14 2,157 $0.96
===== ==== ===== ===== =====
As of December 31, 2000 and September 30, 2001 there were 2,016,946 and
1,757,296 shares, respectively, of common stock available for grant under the
Plan.
F-17
R2 TECHNOLOGY, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1998, 1999 and 2000 and Nine Months Ended
September 30, 2000 (Unaudited) and 2001 (Unaudited)
As discussed in Note 2, the Company continues to account for its employee
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees,"
and its related interpretations. Under the intrinsic-value method of accounting
for stock-based compensation arrangements for employees, compensation cost is
recognized to the extent the fair value of the underlying common stock exceeds
the exercise price of the stock options at the date of grant. Deferred stock
compensation, net of reversals due to employee terminations, of $928,000 has
been recorded during the nine months ended September 30, 2001 for the excess of
fair value of the common stock underlying the options at the date of grant over
the exercise price of the options. This amount is being amortized on an
accelerated basis over the vesting period, generally four years, consistent
with the method described in FASB Interpretation No. 28. Amortization of
deferred compensation related to employee grants, net of reversals due to
terminations, was $295,000 during the nine months ended September 30, 2001.
Pro forma information regarding net income is required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for employee stock options was estimated at the date of grant using the
minimum value pricing model with the following weighted-average assumptions:
risk-free interest rates of 5.00%, 5.44% and 6.79% in 1998, 1999 and 2000,
respectively; no dividend yields; and a weighted-average expected life of the
option of 4.5 years for 1998 and 1999 and 6.5 years for 2000.
Option valuation models require the input of highly subjective
assumptions, because the Company's employee stock options have characteristics
significantly different from traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period using the
multiple option approach with forfeitures recognized as they occur. The
Company's pro forma information is as follows (in thousands, except per share
amounts):
Years Ended December 31,
----------------------------
1998 1999 2000
-------- -------- --------
Pro forma net loss..................... $(10,344) $(10,136) $(14,647)
======== ======== ========
Pro forma net loss per share........... $ (4.17) $ (3.74) $ (4.64)
======== ======== ========
Nonemployee Stock-Based Compensation
For the years ended December 31, 1998, 1999, 2000 and the nine months
ended September 31, 2001, nonemployee options were valued using the
Black-Scholes pricing model with the following weighted-average assumptions:
contractual life of 4.5 to 10 years; risk-free interest rates ranging from
4.90% to 6.77%; volatility of 50% to 75%; and no dividends expected during the
term. The value of stock-based compensation related to unvested awards at
December 31, 2000 and September 30, 2001 is subject to adjustment based upon
the future value of the Company's common stock.
During the years ended December 31, 1998, 1999, 2000 and the nine months
ended September 30, 2001, the Company granted nonstatutory options to purchase
common stock to consultants and advisory board members
F-18
R2 TECHNOLOGY, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1998, 1999 and 2000 and Nine Months Ended
September 30, 2000 (Unaudited) and 2001 (Unaudited)
("nonemployees"), which combined with options attributable to employees
changing status to non-employees, aggregated 57,000, 1,725, 233,543 and 50,875
shares, respectively. These options had weighted-average exercise prices of
$2.20 per share, $1.10 per share, $1.03 per share and $2.00 per share,
respectively, and vesting periods, which approximated the period of service, of
immediate to four years. These options were originally valued at approximately
$85,000, $1,000, $229,000 and $141,000, respectively. The values attributable
to these options have been amortized over the service period on a graded
vesting method and the vested portion of these options were remeasured at each
vesting date. For the years ended December 31, 1998, 1999, 2000 and the nine
months ended September 30, 2001, 3,000, 10,000, 36,267 and 4,312 nonemployee
options, respectively, were cancelled.
In May 2000, the Company issued fully vested warrants to purchase 127,192
shares of common stock to a consultant at an exercise price of $1.10 per share
which expire in May 2007. The fair value of the warrants of $104,000 was
determined using the Black-Scholes pricing model with the following
assumptions: contractual life of 7 years, risk-free interest rate of 6.48%;
volatility of 75%; and no dividends during the expected term.
Nonemployee stock-based compensation, including amortization and warrants
issued to purchase Series F-1 redeemable convertible preferred stock in
exchange for technology (see Note 7), was approximately $28,000, $54,000,
$158,000 and $619,000 in 1998, 1999, 2000 and the nine months ended September
30, 2001, respectively.
Unvested nonemployee options and warrants are as follows:
Unvested Options and
Warrants
------------------------
Weighted-Average
Exercise Price
Number per Share
------- ----------------
December 31, 1998........................... 352,296 $2.31
December 31, 1999........................... 193,527 $2.64
December 31, 2000........................... 257,187 $1.68
September 30, 2001 (unaudited).............. 134,347 $1.30
F-19
R2 TECHNOLOGY, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1998, 1999 and 2000 and Nine Months Ended
September 30, 2000 (Unaudited) and 2001 (Unaudited)
9. Net Loss Per Share
The following table presents the calculation of basic and diluted net
loss per share (in thousands, except per share amounts):
Nine Months Ended
Years Ended December 31, September 30,
---------------------------- ----------------
1998 1999 2000 2000 2001
-------- -------- -------- ------- -------
(Unaudited)
(In thousands, except per share amounts)
Net loss attributable to common
stockholders (numerator)............. $(10,272) $(10,017) $(14,066) $(8,559) $(8,357)
======== ======== ======== ======= =======
Weighted-average common shares
outstanding.......................... 2,668 2,861 3,263 3,222 3,463
Weighted-average common shares
outstanding subject to repurchase.... (188) (153) (107) (108) (61)
-------- -------- -------- ------- -------
Shares used in computing basic and
diluted net loss per share
(denominator)........................ 2,480 2,708 3,156 3,114 3,402
======== ======== ======== ======= =======
Net loss per share, basic and diluted.. $ (4.14) $ (3.70) $ (4.46) $ (2.75) $ (2.46)
======== ======== ======== ======= =======
Shares used in computing basic and
diluted net loss per share........... 3,156 3,402
Weighted-average redeemable
convertible preferred stock
outstanding (unaudited).............. 23,520 27,429
-------- -------
Shares used in computing pro forma
basic and diluted net loss per share
(unaudited).......................... 26,676 30,831
======== =======
Pro forma net loss per share, basic and
diluted (unaudited).................. $ (0.53) $ (0.27)
======== =======
During all periods presented, the Company had securities outstanding
which could potentially dilute basic EPS in the future, but were excluded in
the computation of diluted EPS in such periods as their effect would have been
antidilutive due to the net loss reported in such periods. Such outstanding
securities consist of the following:
Nine Months Ended
Years Ended December 31, September 30,
------------------------ -----------------
1998 1999 2000 2000 2001
------ ------ ------ ------ ------
(Unaudited)
Redeemable convertible preferred stock....... 19,927 21,674 25,989 21,674 25,993
Redeemable convertible preferred stock
warrants................................... 163 163 36 163 67
Restricted common stock...................... 175 128 82 93 47
Common stock warrants........................ 250 250 377 377 377
Stock options................................ 3,505 3,754 5,997 5,612 7,618
------ ------ ------ ------ ------
Total..................................... 24,020 25,969 32,481 27,919 34,102
====== ====== ====== ====== ======
F-20
R2 TECHNOLOGY, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1998, 1999 and 2000 and Nine Months Ended
September 30, 2000 (Unaudited) and 2001 (Unaudited)
10. Income Taxes
The Company's income tax rate differs from the amount using the federal
statutory rate as follows:
Years Ended
December 31,
---------------------
1998 1999 2000
----- ----- -----
Federal statutory tax benefit.......... (35.0)% (35.0)% (35.0)%
General business credits............... (2.0) (2.0) (2.1)
Valuation allowance.................... 36.8 36.8 36.9
Other.................................. 0.2 0.2 0.2
----- ----- -----
-- % -- % -- %
===== ===== =====
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, as well as
operating loss and tax credit carryforwards.
Significant components of the Company's deferred income tax assets are as
follows (in thousands):
December 31,
------------------
1999 2000
-------- --------
Deferred tax assets:..............................
Net operating loss carryforwards............... $ 8,824 $ 13,321
Capitalized start-up and research and
development costs............................ 1,902 1,393
Tax credits.................................... 1,590 2,244
Revenue, net of cost of revenue recognized in
different periods............................ 1,854 3,732
Other.......................................... 1,306 1,014
-------- --------
Total deferred tax assets......................... 15,476 21,704
Valuation allowance............................... (15,476) (21,704)
-------- --------
Total...................................... $ -- $ --
======== ========
The Company has established a 100% valuation allowance against its
deferred tax assets due to the uncertainty that future tax benefits can be
realized from the Company's net operating loss carryforwards and other deferred
tax benefits.
At December 31, 2000, the Company had net operating loss carryforwards of
approximately $35,539,000 and $15,342,000 available to offset future federal
and state taxable income for tax reporting purposes, respectively. The federal
carryforwards expire in 2008 through 2020. State carryforwards expire in 2001
through 2010. At December 31, 2000, the Company also had tax credit
carryforwards available to offset future federal and state taxes totaling
$1,312,000 and $932,000, respectively, expiring in 2009 through 2020.
Federal and California tax rules impose substantial restrictions on the
utilization of net operating loss and tax credit carryforwards in certain
situations where changes occur in the stock ownership of the Company. In the
event the Company has a change in ownership, utilization of these carryforwards
could be restricted.
F-21
R2 TECHNOLOGY, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1998, 1999 and 2000 and Nine Months Ended
September 30, 2000 (Unaudited) and 2001 (Unaudited)
11. Employee Benefit Plan
The Company has a 401(k) tax deferred savings plan under which
participants may contribute a portion of their compensation (subject to certain
IRS limitations) and the Company may make discretionary contributions. There
have been no Company contributions to the plan to date.
12. Customer and Geographic Information
The Company operates in one reportable segment and is engaged in the
development, manufacture and sale of proprietary medical systems to assist
radiologists in the detection of cancer. The nature of the Company's products
and production processes as well as type of customers and distribution method
are consistent among all of the Company's products. All of the Company's
long-lived assets are located in the United States.
For the year ended December 31, 1998, sales in foreign countries were 29%
of total revenue. For the years ended December 31, 1999 and 2000 and the nine
months ended September 30, 2001, sales in foreign countries were less than 10%
of total revenue.
Three customers accounted for 17%, 15% and 14% of total revenue for the
year ended December 31, 1998. One customer accounted for 11%, 26% and 48% of
total revenue for the years ended December 31, 1999 and 2000 and the nine
months ended September 30, 2001, respectively.
13. Related Party Transactions
In October 1993, the Company entered into an exclusive license agreement
for a CAD system with a unique display with an individual who was an officer of
the Company at the time of the agreement and former member of the Board of
Directors. The Company is obligated to pay a royalty of 1% of sales from
products using the licensed technology with a minimum royalty of $12,500 per
quarter. Royalties related to products sold in 1998, 1999 and 2000 and for the
nine months ended September 30, 2001 were $110,000, $161,000, $235,000 and
$271,000, respectively. Royalty fees accrued at December 31, 1999 and 2000 and
September 30, 2001 were approximately $24,000, $50,000 and $44,000,
respectively.
14. Subsequent Event (Unaudited)
In December 2001, the Company authorized and designated 5,725,000 shares
as Series G-1 redeemable convertible preferred stock ("Series G-1").
Significant terms of the Series G-1 shares are consistent with those for
outstanding shares of Series A-1 through F-1 (see Note 7) except that each
share of Series G-1 is entitled to receive dividends of $0.32 per share, when
and if declared by the Board of Directors, and each share has a liquidation
preference of $4.00 per share, plus any declared and unpaid dividends.
In connection with the authorization and designation of Series G-1, the
Company amended its Certificate of Incorporation to provide for:
. The automatic conversion of all redeemable convertible preferred stock
into shares of common stock upon the closing of an underwritten public
offering of the Company's common stock at an offering price not less
than $4.50 per share and resulting proceeds of at least $20 million,
or the election of the holders of a majority of the outstanding shares
of redeemable convertible preferred stock, voting as a single class.
F-22
R2 TECHNOLOGY, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1998, 1999 and 2000 and Nine Months Ended
September 30, 2000 (Unaudited) and 2001 (Unaudited)
. The distribution of remaining assets, after payments of the
liquidation preference to all classes of redeemable convertible
preferred stock, based on the product obtained by multiplying $4.00 by
the number of shares common stock outstanding (including any shares of
common stock issuable upon conversion of the redeemable convertible
preferred stock).
In December 2001, the Company sold 3,514,500 shares of its Series G-1
redeemable convertible preferred stock at $4.00 per share. Net proceeds
received from this sale were $14.0 million. In connection with the sale of
Series G-1 stock, the Company issued fully exercisable warrants to the
investors to purchase 878,621 shares of Series G-1 stock at $4.00 per share.
The Company expects to record a reduction to the net proceeds from the sale of
the Series G-1 stock representing the value of the embedded beneficial
conversion feature and related warrants, preliminarily estimated to be $5.4
million. This amount will be accreted as a charge to accumulated deficit
through the redemption date of February 15, 2003 with any unaccreted amount
being recorded upon conversion of the Series G-1 stock to common stock.
Had the sale issuance and conversion (which will occur upon the closing
of the planned initial public offering) of the Series G-1 stock taken place at
the beginning of fiscal 2000 and 2001, respectively, pro forma basic and
diluted net loss per share for the year ended December 31, 2000 and the nine
months ended September 30, 2001 would have been ($0.65) and ($0.40),
respectively.
* * * * *
F-23
[Inside back cover (one page):
[Photos of ImageChecker products]]
[Back cover (one page):
[Logo of R2 Technology, Inc.]]
1
[R2 Technology, Inc. Logo]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fees.
Securities and Exchange Commission registration fee........ $ 20,614
NASD filing fee............................................ $ 9,125
Nasdaq National Market application fee..................... *
Blue sky qualification fees and expenses................... *
Printing and engraving expenses............................ *
Legal fees and expenses.................................... *
Accounting fees and expenses............................... *
Director and officer liability insurance................... *
Transfer agent and registrar fees.......................... *
Miscellaneous expenses..................................... *
--------
Total................................................... $ *
========
- --------
* To be completed by amendment
Item 14. Indemnification of Directors and Officers
Section 102 of the Delaware General Corporation Law, as amended (the
"DGCL"), permits the Registrant as a corporation formed under the laws of the
State of Delaware to eliminate a director's personal liability to the
Registrant or to its stockholders for monetary damages resulting from a breach
of his fiduciary duty, except where the director breached his duty of loyalty
to the Registrant or to its stockholders, failed to act in good faith, engaged
in intentional misconduct or knowingly violated a law, authorized the payment
of a dividend or approved a stock repurchase in violation of Delaware corporate
law or obtained an improper personal benefit.
Section 145 of the DGCL provides, among other things, that we may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (other than
an action by or in the right of our company) by reason of the fact that the
person is or was our director, officer, agent or employee, or is or was serving
at our request as a director, officer, agent or employee of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding. The power to indemnify applies (a) if such
person is successful on the merits or otherwise in defense of any action, suit
or proceeding, or (b) if such person acting in good faith and in a manner he or
she reasonably believed to be in our best interest, or not opposed to our best
interest, and with respect to any criminal action or proceeding had no
reasonable cause to believe his or her conduct was unlawful. The power to
indemnify applies to actions brought by or in the right of our company, but
only to the extent of defense expenses (including attorneys' fees but excluding
amounts paid in settlement) actually and reasonably incurred and not to any
satisfaction of judgment or settlement of the claim itself, and with the
further limitation that in such actions no indemnification shall be made in the
event of any adjudication of liability to us, unless the court believes that in
light of all the circumstances indemnification should apply.
Section 174 of the DGCL provides, among other things, that a director,
who willfully or negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be held liable
II-1
for such actions. A director who was either absent when the unlawful actions
were approved or dissented at the time, may avoid liability by causing his or
her dissent to such actions to be entered in the books containing minutes of
the meetings of the board of directors at the time such action occurred or
immediately after such absent director receives notice of the unlawful acts.
Our certificate of incorporation (Exhibit 3.1 hereto) and bylaws (Exhibit
3.3 hereto) provide that we may indemnify our directors, officers or employees
to the fullest extent permitted by Delaware Law, including in circumstances in
which indemnification is otherwise discretionary under Delaware Law. In
addition, we intend to enter into separate indemnification agreements with our
directors and officers which would require us, among other things, to indemnify
them against certain liabilities that may arise by reason of their status or
service (other than liabilities arising from willful misconduct of a culpable
nature) and which would provide each of them indemnification protection in the
event our certificate of incorporation and bylaws are subsequently amended. We
also intend to maintain director and officer liability insurance, if available
on reasonable terms. The foregoing indemnification provisions and the
indemnification agreements may be sufficiently broad to permit indemnification
of our officers and directors for liabilities (including reimbursement of
expenses incurred) arising under the Securities Act of 1933, as amended.
The Underwriting Agreement (Exhibit 1.1) hereto provides for
indemnification by the underwriters of us, our officers and our directors for
certain liabilities, including matters arising under the Securities Act of
1933, as amended.
Item 15. Recent Sales of Unregistered Securities
Within the past three years, since December 1998, we have issued and sold
the following unregistered securities:
On May 14, 1999, we sold an aggregate of 1,747,526 shares of our Series
E-1 preferred stock at a price of $3.25 per share to thirteen investors.
In May 2000, we issued a warrant to the executive search firm Heidrick
and Struggles exercisable for the purchase of 127,192 shares of our common
stock at an exercise price of $1.10 per share.
On November 22, 2000 and December 19, 2000, we sold an aggregate of
4,205,117 shares of our Series F-1 preferred stock at a price of $3.75 per
share to 25 investors and their affiliates.
In November 2000, we issued a warrant to Comerica Bank exercisable for
the purchase of 32,000 shares of our Series F-1 preferred stock at an exercise
price of $3.75 per share.
In January 2001, we issued a warrant to the University of Chicago
exercisable for the purchase of 35,000 shares of our Series F-1 preferred stock
at an exercise price of $3.75 per share.
On December 6, 2001 and December 19, 2001, we sold an aggregate of
3,514,500 shares of our Series G-1 preferred stock at a price of $4.00 per
share to twenty-six investors and their affiliates.
On December 6, 2001 and December 19, 2001, we issued warrants to
twenty-six different investors and their affiliates exercisable for the
purchase of an aggregate of 878,621 shares of our Series G-1 preferred stock at
an exercise price of $4.00 per share.
Since December 1998, we have granted options to purchase 7,304,776 shares
of common stock to our employees, directors and consultants under our Amended
and Restated 1996 Stock Option Plan at exercise prices ranging from $0.80 to
$2.25 per share. Of the shares granted, 8,262,715 remain outstanding, 971,730
shares of common stock have been purchased pursuant to exercises of stock
options and 1,132,872 shares have been cancelled and returned to the Amended
and Restated 1996 Stock Option Plan.
II-2
The issuances of securities in the transactions described above were
deemed exempt from registration under the Securities Act in reliance on Section
4(2), Regulation D or Rule 701 promulgated thereunder as transactions pursuant
to compensatory benefit plans and contracts relating to compensation. The
recipients of securities in each such transaction represented their intention
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were
affixed to the share certificates and other instruments issued in such
transactions. All recipients had adequate information about us or had access,
through employment or other relationships, to such information.
There were no underwritten offerings employed in connection with any of
the foregoing transactions.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
Exhibit
Number Description of Document
- ------ -----------------------
1.1+ Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation, as currently in effect.
3.2+ Form of Amended and Restated Certificate of Incorporation to be effective upon the completion of
the offering made under this Registration Statement.
3.3 Bylaws, as currently in effect.
3.4+ Form of Amended and Restated Bylaws, to be effective upon completion of the offering made under
this Registration Statement.
4.1+ Specimen Common Stock Certificate.
4.2 Amended and Restated Voting Agreement dated May 14, 1999.
4.3 Amended and Restated Stockholder Rights Agreement, effective as of December 6, 2001.
4.4 Amended and Restated First Refusal and Co-Sale Agreement, effective as of December 6, 2001.
5.1+ Opinion of Latham & Watkins.
10.1 1993 Stock Plan.
10.2 Amended and Restated 1996 Stock Option Plan.
10.3 Form of Employee Stock Purchase Plan.
10.4* Exclusive License Agreement dated October 1, 1993, between Registrant and Shih-Ping Bob Wang.
10.5* License Agreement dated March 28, 1995, between Registrant and Sandia Corporation.
10.6* License Agreement I dated December 23, 1996, between Registrant and ARCH Development
Corporation.
10.7* License Agreement II dated December 23, 1996, between Registrant and ARCH Development
Corporation.
10.8 Lease dated March 16, 2000, for Registrant's headquarters in Los Altos, California.
10.9* Production Purchase Agreement dated April 27, 2000, between Registrant and CANON U.S.A.
10.10 Employment Agreement between Registrant and Michael S. Klein dated as of May 15, 2000.
10.11* Amended and Restated Distributor Agreement dated September 27, 2000, between Registrant and
General Electric Medical Systems.
10.12* OEM Software Development and Distribution Agreement dated October 13, 2000, between
Registrant and Eastman Kodak.
10.13* License Agreement dated January 1, 2001, between Registrant and University of Chicago.
II-3
Exhibit
Number Description of Document
------ -----------------------
23.1 Independent Auditors' Consent.
23.2+ Consent of Latham & Watkins (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
- --------
* Confidential treatment has been requested as to certain portions of this
exhibit. The confidential portion has been filed separately with the
Securities and Exchange Commission.
+ To be filed by amendment.
(b) Financial Statement Schedule.
Independent Auditors' Report on Schedule................... S-1
Schedule II -- Valuation and Qualifying Accounts........... S-2
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions referenced in Item 14 of this
Registration Statement or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in the form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective; and
2. For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at the
time shall be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los Altos,
State of California, on December 28, 2001.
R2 Technology, Inc.
By: /s/ MICHAEL S. KLEIN
__________________________________
Name: Michael S. Klein
Title: President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Michael S. Klein and Kevin R.
Davidge, and each of them acting individually, as his true and lawful
attorneys-in-fact and agents, each with full power of substitution, for him in
any and all capacities, to sign any and all amendments to this Registration
Statement (including post-effective amendments or any abbreviated registration
statement and any amendments thereto filed pursuant to Rule 462(b) increasing
the number of securities for which registration is sought), and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, with full power of each to act alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully for all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ MICHAEL S. KLEIN President & Chief Executive Officer December 17, 2001
- ----------------------------- (Principal Executive Officer)
Michael S. Klein
/s/ KEVIN R. DAVIDGE Vice President & Chief Financial December 17, 2001
- ----------------------------- Officer (Principal Financial and
Kevin R. Davidge Accounting Officer)
/s/ MICHAEL S. KLEIN Chairman of the Board December 17, 2001
- -----------------------------
Michael S. Klein
/s/ SCOTT HALSTED Director December 17, 2001
- -----------------------------
Scott Halsted
/s/ J. BURGESS JAMIESON Director December 17, 2001
- -----------------------------
J. Burgess Jamieson
/s/ STEVEN LAZARUS Director December 17, 2001
- -----------------------------
Steven Lazarus
II-5
Signature Title Date
--------- ----- ----
/s/ WILLIAM J. MERCER Director December 17, 2001
------------------------------
William J. Mercer
/s/ RUEDIGER NAUMANN-ETIENNE Director December 17, 2001
------------------------------
Ruediger Naumann-Etienne
/s/ GUY P. NOHRA Director December 17, 2001
------------------------------
Guy P. Nohra
/s/ THOMAS M. PRESCOTT Director December 17, 2001
------------------------------
Thomas M. Prescott
/s/ JOHN YU Director December 17, 2001
------------------------------
John Yu
II-6
Independent Auditors' Report on Schedule
To the Board of Directors and Stockholders of
R2 Technology, Inc.
We have audited the balance sheets of R2 Technology, Inc. (the "Company") as of
December 31, 1999 and 2000, and the related statements of operations,
stockholders' deficit and cash flows for each of the three years in the period
ended December 31, 2000 and have issued our report thereon dated December 19,
2001. Our audits also included the financial statement schedule listed in Item
16(b) of this registration statement. The financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
December 19, 2001
S-1
R2 Technology, Inc.
Schedule II--Valuation and Qualifying Accounts
(in thousands)
Balance-- Balance--
Beginning End of
Description of Period Additions Deductions Period
- ----------- --------- --------- ---------- ---------
Year ended December 31, 1998
Allowance for doubtful accounts..... 0 141 0 141
Year ended December 31, 1999
Allowance for doubtful accounts..... 141 34 84 91
Year ended December 31, 2000
Allowance for doubtful accounts..... 91 120 9 202
S-2
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------ -----------------------
1.1+ Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation, as currently in effect.
3.2+ Form of Amended and Restated Certificate of Incorporation to be effective upon the completion of
the offering made under this Registration Statement.
3.3 Bylaws, as currently in effect.
3.4+ Form of Amended and Restated Bylaws, to be effective upon completion of the offering made under
this Registration Statement.
4.1+ Specimen Common Stock Certificate.
4.2 Amended and Restated Voting Agreement dated May 14, 1999.
4.3 Amended and Restated Stockholder Rights Agreement, effective as of December 6, 2001.
4.4 Amended and Restated First Refusal and Co-Sale Agreement, effective as of December 6, 2001.
5.1+ Opinion of Latham & Watkins.
10.1 1993 Stock Plan.
10.2 Amended and Restated 1996 Stock Option Plan.
10.3 Form of Employee Stock Purchase Plan.
10.4* Exclusive License Agreement dated October 1, 1993, between Registrant and Shih-Ping Bob Wang.
10.5* License Agreement dated March 28, 1995, between Registrant and Sandia Corporation.
10.6* License Agreement I dated December 23, 1996, between Registrant and ARCH Development
Corporation.
10.7* License Agreement II dated December 23, 1996, between Registrant and ARCH Development
Corporation.
10.8 Lease dated March 16, 2000, for Registrant's headquarters in Los Altos, California.
10.9* Production Purchase Agreement dated April 27, 2000, between Registrant and CANON U.S.A.
10.10 Employment Agreement between Registrant and Michael S. Klein dated as of May 15, 2000.
10.11* Amended and Restated Distributor Agreement dated September 27, 2000, between Registrant and
General Electric Medical Systems.
10.12* OEM Software Development and Distribution Agreement dated October 13, 2000, between
Registrant and Eastman Kodak.
10.13* License Agreement dated January 1, 2001, between Registrant and University of Chicago.
23.1 Independent Auditors' Consent.
23.2+ Consent of Latham & Watkins (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
- --------
* Confidential treatment has been requested as to certain portions of this
exhibit. The confidential portion has been filed separately with the
Securities and Exchange Commission.
+ To be filed by amendment.
1