<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 18, 1996
REGISTRATION NO. 333-09103
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
IMAGE GUIDED TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
COLORADO 3829 84-1139082
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
Number)
</TABLE>
------------------------
5710-B FLATIRON PARKWAY
BOULDER, COLORADO 80301
(303) 447-0248
(Address, including zip code, and telephone number, including area code, of
business and principal executive offices)
------------------------------
PAUL L. RAY, CHIEF EXECUTIVE OFFICER
IMAGE GUIDED TECHNOLOGIES, INC.
5710-B FLATIRON PARKWAY
BOULDER, COLORADO 80301
(303) 447-0248
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
<TABLE>
<S> <C>
WILLIAM E. TANIS, ESQ. ROBERT S. BROWN, ESQ.
IRELAND, STAPLETON, PRYOR & PASCOE, BROCK, FENSTERSTOCK, SILVERSTEIN,
P.C. MCAULIFFE & WADE, LLC
1675 BROADWAY, 26TH FLOOR ONE CITICORP CENTER, 56TH FLOOR
DENVER, COLORADO 80202 NEW YORK, NEW YORK 10022-4614
(303) 623-2700 (212) 371-2000
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
(SEE NEXT PAGE)
------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE
<S> <C> <C> <C> <C>
1,437,500
Common Stock, no par value.... shares(2) $5.00 $7,187,500 $2,478.45(5)
Warrants to purchase Common
Stock(3)..................... 125,000 0.001 125 0.04(5)
Common Stock underlying
warrants, no par value....... 125,000(4) 5.75 718,750 247.84(5)
Total......................... -- -- 7,906,375 2,726.33(5)
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended.
(2) Includes 187,500 shares that the Underwriters have the option to purchase
from the Company to cover over-allotments, if any.
(3) To be acquired by the Underwriters.
(4) Issuable upon exercise of the Underwriters' Warrants.
(5) The filing fee was previously paid.
<PAGE>
PROSPECTUS
1,250,000 SHARES
[LOGO]
COMMON STOCK
Image Guided Technologies, Inc. (the "Company") is hereby offering 1,250,000
shares (the "Shares") of common stock, no par value (the "Common Stock").
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that any such market will develop upon
completion of this offering. The initial public offering price will be $5.00 per
Share. The Common Stock has been approved for quotation on the Nasdaq
SmallCap-TM- Market under the symbol "IGTI" and the Common Stock has been
approved for listing on the Boston Stock Exchange under the proposed symbol
"IGK." For a description of the factors considered in determining the initial
public offering price, see "Underwriting."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share................................ $5.00 $.50 $4.50
Total (3)................................ $6,250,000 $625,000 $5,625,000
</TABLE>
(1) Does not include additional consideration to be received by Hampshire
Securities Corporation, (the "Underwriter"), in the form of (a) a 3%
non-accountable expense allowance and (b) warrants entitling the Underwriter
to purchase up to 125,000 shares of Common Stock (the "Underwriter's
Warrants"). The Company has agreed to indemnify the Underwriter against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses of the offering payable by the Company
of $660,000, including the Underwriter's non-accountable expense allowance,
assuming no exercise of the Underwriter's over-allotment option.
(3) The Company has granted the Underwriter an option, exercisable by the
Underwriter within 45 days after the date of this Prospectus, to purchase up
to an aggregate of 187,500 shares of Common Stock, solely to cover
over-allotments, if any. If the Underwriter exercises such option in full,
the Price to Public, Underwriting Discounts and Commissions, and Proceeds to
Company will be $7,187,500, $718,750, and $6,468,750, respectively. See
"Underwriting."
------------------------------
The Shares are being offered by the Underwriter, subject to prior sale,
when, as, and if delivered to, and accepted by it, and subject to its right to
reject orders in whole or in part and to certain other conditions. It is
expected that delivery of certificates will be made against payment therefor at
the offices of Hampshire Securities Corporation on or about October 24, 1996.
------------------------
HAMPSHIRE SECURITIES CORPORATION
----------------
THE DATE OF THIS PROSPECTUS IS OCTOBER 21, 1996
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
[A photograph appears on this page which depicts the Company's FlashPoint
product and the use of such product in a medical application. From top to
bottom, the photograph shows (i) an overhead mounted sensor assembly, (ii) a
small square picture of the Company's sensor assembly, dynamic reference frame,
handheld probe and host computer, (iii) a handheld probe with light emitting
diodes overlapping the top left hand corner of a square picture of the Company's
optical localizer in an operating microscope setting with the words "Operating
Microscope Application" beneath such picture and the word
"FLASHPOINT-Registered Trademark-" above such picture and (iv) a small picture
of the Company's optical localizer in an operating room setting with the words
"Neurosurgical Tools Application" at the bottom of such picture. Depictions of a
human skull, a human body and three doctors standing over an operating room
table are superimposed onto the background of the photograph in addition to
scattered words and numbers such as those that appear on a radiological image.
The stabilization language above appears within and toward the bottom of such
photograph.
Another photograph appears on the inside of the back cover of the Prospectus
which depicts the Company's Pixsys product and the use of such product in
commercial applications. From top to bottom, the photograph shows (i) a small
square picture of the Company's sensor assembly, dynamic reference frame,
handheld probe and host computer with the word "PIXSYS-TM-" immediately to the
left of such picture, (ii) a rectangular picture of a hand holding a probe with
light emitting diodes with the words "Product Design Application" beneath the
picture, (iii) a handheld probe with light emitting diodes and (iv) a small
square picture of a sensor array mounted on a tripod with a hand holding a probe
with the words "Inspection Application" beneath the picture. Depictions of two
automobiles, a space shuttle, a motorcycle and a digitized propeller are
superimposed onto the background of the photograph.]
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS DOES NOT GIVE EFFECT TO (I) THE EXERCISE OF THE UNDERWRITER'S
OVER-ALLOTMENT OPTION, (II) THE UNDERWRITER'S WARRANTS, (III) UP TO 620,397
SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF OPTIONS GRANTED UNDER THE
COMPANY'S 1994 STOCK OPTION PLAN (THE "PLAN") OR (IV) UP TO 40,000 SHARES OF
COMMON STOCK ISSUABLE UPON THE EXERCISE OF WARRANTS OUTSTANDING AS OF THE DATE
HEREOF. IN ADDITION, UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS
PROSPECTUS GIVES EFFECT TO (I) THE CONVERSION OF 83,332 SHARES OF SERIES A
PREFERRED STOCK OF THE COMPANY INTO 304,290 SHARES OF COMMON STOCK, AS ADJUSTED
FOR CERTAIN ANTI-DILUTION PROVISIONS, UPON THE CLOSING OF THIS OFFERING AND (II)
A FOUR FOR FIVE REVERSE STOCK SPLIT OF THE COMMON STOCK EFFECTED ON SEPTEMBER
23, 1996. SEE "DESCRIPTION OF SECURITIES -- RECAPITALIZATION."
THE COMPANY
Image Guided Technologies, Inc. (the "Company") designs, develops,
manufactures and markets products for real-time, precise, free-hand,
localization of points in three dimensional ("3D") space. The Company's optical
localizers, typically consisting of a number of custom-manufactured light
emitting diodes ("LEDs") mounted on a device or instrument to be tracked in 3D
space, a relative position dynamic reference device connected to the measured
object, a multi-camera array for detecting the LED emissions, a proprietary
microprocessor-based control system and proprietary software to calculate the
digital coordinate location of the LEDs, have both medical and industrial
applications. The Company manufactures its FlashPoint localizer for medical uses
and its Pixsys localizer for industrial uses.
MEDICAL APPLICATIONS. The Company's FlashPoint localizer is a key
component of the anatomical image display workstation used by physicians to
perform image guided surgery, a specialty procedure in the field of
minimally invasive surgery. When the FlashPoint localizer is combined with
the imaging software provided by the Company's customers, such as Carl
Zeiss, Inc. ("Zeiss"), GE Medical Systems ("GEMS"), Surgical Navigation
Technologies, Inc./Sofamor Danek Group ("SNT/Sofamor Danek"), DeeMed
International ("DeeMed") and Radionics Software Applications, Inc.
("Radionics"), all of which use the Company's FlashPoint product, the
location of specially designed surgical instruments can be tracked in
relation to the patient's anatomy during surgical procedures by display as
an overlay on medical images (such as magnetic resonance imaging ("MRI") and
computerized tomography ("CT")). The Company believes that the ability of
the surgeon to track the relative location of specially designed surgical
instruments on the image display workstation can result in less invasive
procedures that lead to shorter hospital stays and improved patient
outcomes.
INDUSTRIAL APPLICATIONS. The Company's Pixsys localizer is used in
various industrial applications to measure the position or shape of objects
in 3D space. Illustrative uses include inspection of parts by
Harley-Davidson, Inc., detection of surface deformities in car bodies during
manufacture by Daimler-Benz and as a 3D navigation aid in its zero-gravity
chamber by the United States National Aeronautic and Space Administration
("NASA").
The Company's business strategy is to systematically enhance the performance
of its optical localizers while expanding the market for such products. With
respect to enhancing its products, the Company is seeking to increase the
products' accuracy, enlarge the field-of-view, increase the sample/ frame rate
(throughput) and improve the customer computer interface. With regard to market
expansion, the Company is seeking to identify additional measurement
applications for its products.
The Company was founded in 1986 and was incorporated in Colorado in February
1990. The Company's place of business is at 5710-B Flatiron Parkway, Boulder,
Colorado 80301, and its telephone number is (303) 447-0248.
Flashpoint-Registered Trademark-, Dynamic Reference
Frame-Registered Trademark- and Pixsys-TM- are trademarks of the Company.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Shares of Common Stock Offered by the
Company.................................... 1,250,000
Common Stock outstanding:
Prior to the Offering..................... 1,667,741(1)
Following the Offering.................... 2,917,741(1)(2)
</TABLE>
<TABLE>
<S> <C>
Use of Proceeds............................. Repayment of indebtedness, research and
development, marketing and technical support,
purchase of capital equipment, working capital
and other general corporate purposes. See "Use
of Proceeds."
Risk Factors................................ The purchase of the shares of Common Stock of-
fered hereby involves a high degree of risk
and immediate substantial dilution.
Prospective investors should carefully review
and consider the information set forth under
"Risk Factors" and "Dilution."
SmallCap Market Trading Symbol.............. IGTI
Boston Stock Exchange Trading Symbol........ IGK
</TABLE>
- ------------------------------
(1) Excludes up to (i) 620,397 shares of Common Stock issuable upon the
exercise of options granted under the Plan and (ii) 40,000 shares of Common
Stock issuable upon the exercise of warrants outstanding as of the date
hereof.
(2) Excludes the exercise of (i) the Underwriter's over-allotment option and
(ii) the Underwriter's Warrants.
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following summary financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Financial Statements and the Notes thereto
included elsewhere in this Prospectus. The statement of operations data for the
years ended December 31, 1994 and 1995, and the balance sheet data at December
31, 1995, are derived from, and should be read in conjunction with, the
Company's Financial Statements and the Notes thereto audited by Price Waterhouse
LLP, independent accountants, included elsewhere in this Prospectus. The
statement of operations data for the six month periods ended June 30, 1995 and
1996, and the balance sheet data at June 30, 1996, have been derived from
unaudited interim financial statements and include, in the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the results of operations for such periods. The
operating results for the six months ended June 30, 1996 are not necessarily
indicative of the results to be expected for the full year or any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------ ----------------------------
1994 1995 1995 1996
-------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................. $ 908,146 $ 1,883,802 $ 496,865 $ 1,746,657
Gross Profit........................................ 405,521 1,090,180 237,956 1,012,854
Operating Expenses.................................. 1,448,599 1,990,533 974,913 849,367
Income (Loss) from Operations....................... (1,043,078) (900,353) (736,957) 163,487
Net Income (Loss)................................... $ (1,060,255) $ (1,051,949) $ (725,851) $ 125,834
Pro forma Net Income (Loss) per Common Share
(1)(2)............................................. -- $ (0.63) -- $ 0.06
Pro forma Weighted Average Number of Common Shares
Outstanding (2).................................... -- 1,675,937 -- 2,241,588
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------
PRO FORMA AS
DECEMBER 31, 1995 ACTUAL ADJUSTED (3)
----------------- -------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents..................................... $ 31,822 $ 137,851 $ 4,241,551
Working Capital (Deficit)..................................... (695,147) (296,840) 4,668,160
Total Assets.................................................. 858,615 1,455,840 5,559,540
Notes Payable................................................. 775,000 775,000 --
Accumulated Deficit........................................... (3,380,855) (3,255,021) (3,255,021)
Shareholder's Equity (Deficit)................................ (603,672) (140,338) 4,824,662
</TABLE>
- ------------------------------
(1) Supplemental pro forma net income (loss) per share for the year ended
December 31, 1995 and the six-month period ended June 30, 1996, assuming
the notes payable were retired at the beginning of the period using the net
proceeds of the offering, are $(0.57) and $0.07, respectively. See "Use of
Proceeds," "Capitalization," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and Note 1 of Notes to Financial Statements.
(2) The weighted average number of common shares outstanding is pro forma to
reflect common and common equivalent shares issued during the 12 month
period prior to the filing of the Company's proposed initial public
offering. Such shares have been included in the calculation as if they were
outstanding for all periods, using the treasury stock method and the
initial public offering price of $5.00 per Share. The weighted average
number of common shares outstanding is also pro forma to reflect the
conversion of all outstanding shares of Series A Preferred Stock to common
shares at the time of their issuance.
(3) Pro forma as adjusted to give effect to the sale of the Shares offered by
the Company at the initial public offering price of $5.00 per Share, after
the deduction of underwriting discounts and commissions and estimated
offering expenses and giving effect to the anticipated application of the
net proceeds therefrom. See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OFFERED HEREBY IS HIGHLY SPECULATIVE, INVOLVES A
HIGH DEGREE OF RISK AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN AFFORD THE LOSS
OF THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS, PRIOR TO MAKING AN INVESTMENT
DECISION, SHOULD CAREFULLY CONSIDER, TOGETHER WITH THE OTHER MATTERS REFERRED TO
HEREIN, INCLUDING THE FINANCIAL STATEMENTS AND THE NOTES THERETO, THE RISK
FACTORS SET FORTH BELOW:
LIMITED HISTORY OF PROFITABILITY; POTENTIAL FLUCTUATIONS IN OPERATING
RESULTS. The Company has experienced significant operating losses since its
inception, had an accumulated deficit of $3,380,855 at December 31, 1995 and
$3,255,021 at June 30, 1996 and had a net tangible book value deficit of
$603,672 at December 31, 1995 and $140,338 at June 30, 1996. While the Company
has been profitable during the six months ended June 30, 1996, there can be no
assurance that the Company will ever generate sufficient revenues to attain
profitability on an annual basis. In addition, because the Company generally
ships its products on the basis of purchase orders, operating results in any
quarter are highly dependent on orders booked and shipped in that quarter and,
accordingly, may fluctuate materially from quarter to quarter. The Company's
operating expense levels are based on the Company's internal forecasts of future
demand and not on firm customer orders. Failure by the Company to achieve these
internal forecasts could result in expense levels which are inconsistent with
actual revenues, which could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, the Company's
quarterly results may also be affected by fluctuating demand for the Company's
products, declines in the average selling prices for its products, and by
increases in the costs of the components and subassemblies acquired by the
Company from vendors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON A SINGLE TYPE OF PRODUCT. All the Company's revenues are
derived from sales of its optical localizers. Although the Company is currently
seeking to expand the markets for its localizers, there can be no assurance that
it will be successful. Unless the Company can expand its product line or develop
additional applications for its products, the Company will be subject to all the
risks inherent in a single product enterprise, including increased risk of
technological obsolescence. See "Risk Factors--Uncertainty of Market
Acceptance."
UNCERTAINTY OF MARKET ACCEPTANCE. The market for optical localizers has
only recently commenced to develop. The Company's largest medical device
customers, Zeiss and SNT/Sofamor Danek, began commercial sale of their image
guided surgery products in 1996. If the market for optical localizers fails to
continue to develop, develops more slowly than the Company anticipates or
ceases, the Company's business, financial condition and results of operations
would be materially and adversely affected. Demand for optical localizers could
be affected by numerous factors outside the Company's control, including, among
others, market acceptance by medical and industrial customers, changes in
governmental regulation and the introduction of new or superior competing
technologies. See "Business."
RAPID TECHNOLOGICAL CHANGE. The market for localizers is characterized by
rapid and significant technological change. There can be no assurance that the
Company's competitors will not succeed in developing or marketing products or
technologies that are more effective and/or less costly and which render the
Company's products obsolete or non-competitive. In addition, new technologies
and procedures could be developed for medical and other industries that replace
or reduce the value of the Company's products. The Company's success will depend
in part on its ability to respond quickly to technological changes through the
development and improvement of its products. Accordingly, the Company has
estimated that approximately $1,000,000 (20.1%) of the estimated net proceeds of
this offering will be allocated to fund further research and development
activities, and the Company believes that a substantial amount of capital will
be required to be allocated to such activities in the future. There can be no
assurance that the Company's product development efforts will be successful.
6
<PAGE>
The failure by the Company to improve its existing products and develop new
products could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Research and
Development" and "Business--Competition."
CUSTOMER CONCENTRATION. For the year ended December 31, 1995 and the six
months ended June 30, 1996, sales to Zeiss accounted for 19% and 45%,
respectively, and sales to SNT/Sofamor Danek accounted for 38% and 30%,
respectively, of the Company's revenues. The Company's contract with Zeiss will
expire at the end of October 1996 (though shipments are scheduled through
December 1996) and SNT/Sofamor Danek purchases product from the Company by
purchase order. The loss of, or substantial diminution of purchases from the
Company by, either of these customers could have a material adverse effect on
the Company. None of the Company's customers has entered into any long-term
minimum purchase agreements with the Company. Accordingly, purchases from the
Company by such customers in any prior period may not be indicative of orders or
purchases in any future period, and there can be no guarantee that these
companies will remain customers of the Company. See "Risk Factors--Uncertainty
of Market Acceptance," "Risk Factors--Rapid Technological Change," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business-- Customers and Use" and "Business--Backlog."
PATENTS ON SYSTEMS THAT UTILIZE LOCALIZERS. There are a number of patents
that utilize a localizer as part of their claimed inventions, several of which
relate to the medical industry. One of the patents relating to the medical
industry is a patent granted to St. Louis University on January 24, 1995 (the
"SLU Patent"), and subsequently licensed to Surgical Navigation Technologies,
Inc. ("SNT"), one of the Company's major customers. In general, the SLU Patent
covers a particular technique for determining the position of a surgical probe
within a patient's body on an historical image of that body. The Company is not
in a position to evaluate whether its customers may be infringing the SLU Patent
or any of the other patents. If any infringement claim is brought or threatened
against any of the Company's customers, it could have a material adverse effect
on orders of the Company's products from these customers. See
"Business--Intellectual Property."
ABSENCE OF PATENT PROTECTION. The Company does not have any patents
covering its FlashPoint or Pixsys optical localizers. The Company has been
issued one U.S. patent (which may cover future products or uses) in connection
with which a reissue patent application has been filed which, if granted, may
broaden the claims of that patent. In addition, the Company has four original
U.S. patent applications pending (three of which, if granted, relate to current
uses of the Company's product and the other of which, if granted, may cover
future products). The Company primarily relies on a combination of trade secret
and copyright laws, together with nondisclosure agreements to protect its
know-how and proprietary rights. There can be no assurance that such measures
will provide adequate protection for the Company's intellectual property rights,
that disputes with respect to the ownership of its intellectual property rights
will not arise, that the Company's trade secrets or proprietary technology will
not otherwise become known or be independently developed by competitors or that
the Company can otherwise meaningfully protect its intellectual property rights.
Furthermore, there can be no assurance that others will not develop similar
products or software, duplicate the Company's products or software or that third
parties will not assert intellectual property infringement claims against the
Company. The Company believes that the manufacture and sale of its FlashPoint
localizer does not infringe the SLU Patent, since a localizer is only a
component part in the system patented by SLU and since the Company's FlashPoint
localizer has substantial non-infringing uses. Moreover, there can be no
assurance that any of the Company's pending or future patent applications will
be issued, that any patent owned by, or issued to, the Company will not be
invalidated, circumvented or challenged (including, without limitation, on the
basis of the SLU Patent or other patents), or that the rights granted thereunder
will provide meaningful competitive advantages to the Company. The failure of
the Company to protect its proprietary rights could have a material adverse
effect on its business, financial condition and results of operations. See
"Business--Intellectual Property."
7
<PAGE>
Litigation may be necessary to protect the Company's intellectual property
rights and trade secrets, to determine the validity and scope of the proprietary
rights of others or to defend against claims of infringement or invalidity
(including, without limitation, claims brought by parties whose technology, such
as that which may be the basis of the SLU Patent, utilizes a localizer). Such
litigation could also result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that
infringement, invalidity, right to use or ownership claims by third parties or
claims for indemnification resulting from infringement claims will not be
asserted in the future. If any claims or actions are asserted against the
Company, the Company may be required to obtain a license under a third party's
intellectual property rights. There can be no assurance, however, that a license
will be available to the Company on reasonable terms or at all. In addition,
should the Company determine to litigate such claims, such litigation could also
result in substantial costs and diversion of resources and could materially and
adversely affect the Company's business, financial condition and results of
operations, regardless of the outcome of the litigation. See
"Business--Intellectual Property."
COMPETITION. The Company's primary competitor in the medical market
currently is Northern Digital, Inc. ("NDI"). In addition, companies with
substantially greater financial, technical, marketing, manufacturing and human
resources, as well as name recognition, than the Company may also enter the
market. Competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements and to devote substantially
greater resources to the development, marketing and sale of their products than
the Company. The Company's customers may determine to develop their own
localizers to ensure control over their localizer technology, to be able to
differentiate their product or for other reasons. Furthermore, such competitors
may develop technology other than that based on infrared optics that is more
effective or economical than the technology of the Company in localizing a point
in space. Any failure by the Company to develop products that compete favorably
in the marketplace would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Competition."
POSSIBLE NEED FOR ADDITIONAL FINANCING. Based on the Company's operating
plan, the Company believes that the net proceeds of this offering, together with
funds from operations, will be sufficient to satisfy its capital requirements
and finance its plans for expansion for at least the next 18 months. Such belief
is based on certain assumptions, and there can be no assurance that such
assumptions are correct. In addition, contingencies or opportunities may arise
which would require the Company to obtain additional capital. Accordingly, there
can be no assurance that such resources will be sufficient to satisfy the
Company's capital requirements for such period. After such 18-month period, the
Company may require additional financing. Such financing may take the form of
the issuance of common or preferred stock or debt securities, or may involve
bank financing. There can be no assurance that the Company will be able to
obtain such additional capital on a timely basis, on favorable terms or at all.
GOVERNMENT REGULATION. The Company's FlashPoint localizer is incorporated
by the Company's customers into medical devices that are subject to extensive
regulation by the United States Food and Drug Administration (the "FDA") and, in
some instances, by foreign and state governments. The FDA regulates the clinical
testing, manufacture, labeling, sale, distribution and promotion of medical
devices. Before a new device can be introduced into the market, the manufacturer
must obtain market clearance through either the 510(k) premarket notification
process or the lengthier and more costly premarket approval ("PMA") application
process. Noncompliance with applicable requirements can result in, among other
things, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, failure of the government to grant
premarket clearance or premarket approval for devices, withdrawal of marketing
approvals and criminal prosecution. The FDA also has the authority to request
repair, replacement or refund of the cost of any device.
The Company believes that the FlashPoint localizer is a medical device
component not subject to the full panoply of the FDA medical device regulations,
including the market clearance requirements. The medical equipment manufacturers
that incorporate the FlashPoint localizer into their products
8
<PAGE>
are, however, required to obtain market clearance from the FDA for such
products. Modifications to such products manufactured by the medical equipment
manufacturers will require additional clearances or approvals, if such
modifications could significantly affect the safety and effectiveness of the
devices or establish a new intended use for the devices. There can be no
assurance that the Company's customers have complied or will be able to comply
with all applicable market clearance requirements, including those which may
arise from the incorporation of the Company's Flashpoint product into the
customer's product. Failure on the part of the Company's customers to comply
with such requirements could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Government Regulation."
There can be no assurance that the FDA will not require, or change its
interpretations or regulations so as to require, the Company to obtain 510(k)
clearance for its FlashPoint localizer apart from or in addition to any market
clearances obtained by its medical device customers. Failure of the Company to
comply with such market clearance requirements could have a material adverse
affect on the Company's business, financial condition and results of operations.
See "Business--Government Regulation."
Products manufactured by the Company and its medical device customers that
incorporate the Company's products are subject to continuing regulation by the
FDA. FDA enforcement policy strictly prohibits the promotion of products for any
uses other than those for which clearance or approval was obtained. The
Company's manufacturing facilities and those of its medical device customers
that incorporate its products may also be subject to periodic inspection for
compliance with good manufacturing practices ("GMP") and other regulatory
requirements by the FDA and comparable state agencies. In addition,
international sales of medical devices are subject to foreign regulatory
requirements, which vary from country to country. Violations of regulatory
requirements of the FDA or foreign or state regulatory agencies or changes in
such regulations or interpretations of such regulations, could have a material
adverse affect on the Company's business, financial condition and results of
operations. See "Business--Government Regulation."
HEALTH CARE REFORM. The health care industry is undergoing fundamental
changes as a result of political, economic and regulatory influences. In the
United States, comprehensive programs have been proposed that seek to increase
access to health care for the uninsured, control the escalation of health care
expenditures within the economy and use health care reimbursement policies to
help control the federal deficit. The Company anticipates that Congress and
state legislatures will continue to review and assess alternative health care
delivery systems and methods of payment and public debate of these issues will
likely continue. Due to uncertainties regarding the outcome of reform
initiatives and their enactment and implementation, the Company cannot predict
which, if any, of such reform proposals will be adopted or when they might be
adopted. Other countries are also considering health care reform. Significant
changes in health care systems could have a substantial impact on the manner in
which the Company conducts its business and could have a material adverse effect
on the Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends in significant
part on the continued contribution of certain key management and technical
personnel, including: Paul L. Ray, Chairman of the Board and Chief Executive
Officer of the Company; Robert E. Silligman, President and Chief Operating
Officer of the Company; Waldean Schulz, Vice President, Technology and Secretary
of the Company; and Jeffrey J. Hiller, Vice President, Finance and Chief
Financial Officer of the Company. Although the Company has employment contracts
with all four of these individuals through December 31, 1998, the loss of
services of any of these individuals could have a material adverse effect on the
Company. The Company has obtained, owns and is the sole beneficiary of key man
life insurance policies in the amount of $1,000,000 on the lives of each of Mr.
Ray and Mr. Silligman. The Company's growth and profitability also depend on its
ability to attract and retain other management and technical personnel. See
"Management."
9
<PAGE>
RISK OF PRODUCT LIABILITY CLAIMS. The Company faces an inherent business
risk of exposure to product liability claims in the event that the use of its
products is alleged to have resulted in adverse effects. To date, no product
liability claims have been asserted against the Company. The Company maintains a
product liability and commercial general liability insurance policy with
coverage of $1,000,000 per occurrence and an annual aggregate maximum coverage
of $2,000,000 ($1,000,000 for lawsuits outside the United States, Canada and
Puerto Rico). The Company's product liability and general liability policy is
provided on an occurrence basis and is subject to annual renewal. There can be
no assurance that liability claims will not exceed the coverage limits of such
policy or that such insurance will continue to be available on commercially
reasonable terms or at all. If the Company does not or cannot maintain
sufficient liability insurance, its ability to market its products could be
significantly impaired. See "Business--Product Liability Insurance."
IMMEDIATE AND SUBSTANTIAL DILUTION. The initial public offering price is
substantially higher than the Company's negative $0.08 per share pro forma net
tangible book value at June 30, 1996. Investors purchasing the Shares will
therefore incur immediate, substantial dilution of at least $3.35 per share of
Common Stock (67%) (after underwriting discounts and estimated offering expenses
payable by the Company). To the extent that outstanding stock options and
warrants to purchase shares of Common Stock are exercised, there may be further
dilution. See "Dilution."
ARBITRARY OFFERING PRICE. The public offering price of the Shares has been
determined by negotiation between the Company and the Underwriter and may not be
indicative of the price at which the Shares will trade after the completion of
the offering. Among the factors considered in such negotiations were (i) an
assessment of the Company's future prospects, (ii) the experience of the
Company's management, (iii) the current financial position of the Company, (iv)
the prevailing conditions in the securities markets, including the market value
of the publicly traded common stock of companies in similar industries, (v) the
market conditions for new offerings of securities and (vi) the demand for
similar securities of comparable companies. See "Underwriting."
NO PRIOR MARKET FOR THE COMMON STOCK. Prior to this offering, there has
been no public market for the Common Stock, and there can be no assurance that
an active trading market therefore will develop or, if any such market develops,
that it will be sustained. Accordingly, purchasers of the Common Stock may
experience difficulty selling or otherwise disposing of their shares of Common
Stock.
NASDAQ ELIGIBILITY AND MAINTENANCE; POSSIBLE DELISTING OF SECURITIES FROM
NASDAQ. In September 1991, the Commission approved new rules that establish new
criteria for initial and continued listing of securities on the Nasdaq SmallCap
Market. Under such rules, for initial listing, a company must have at least
$4,000,000 in total assets, at least $2,000,000 in stockholders' equity, and a
minimum bid price of $3.00 per share. For continued listing, a company must
maintain at least $2,000,000 in total assets, at least $1,000,000 in
stockholders' equity, and a minimum bid price of $1.00 per share.
If at any time after issuance the Common Stock is not listed on the Nasdaq
SmallCap Market, and no other exclusion from the definition of "penny stock"
under the Exchange Act is available, transactions in the Common Stock would
become subject to the penny stock regulations which impose additional sales
practice requirements on broker-dealers who sell securities. See "Risk
Factors--Risk of Low-Priced Stocks."
If the Company should experience losses from operations, it may be unable to
maintain the standards for continued listing and the Common Stock could be
subject to delisting from the Nasdaq SmallCap Market. Trading, if any, in the
Common Stock would thereafter be conducted in the over-the-counter market on an
electronic bulletin board established for securities that do not meet the Nasdaq
SmallCap Market listing requirements or in what are commonly referred to as the
"pink sheets." As a result, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, the Common Stock.
RISK OF LOW-PRICED STOCK. If the Common Stock were delisted from the Nasdaq
SmallCap Market, and no other exclusion from the definition of a "penny stock"
under the Exchange Act were available,
10
<PAGE>
such securities would be subject to the penny stock rules that impose additional
sales practice requirements on broker-dealers who sell such securities to
persons other than established customers and accredited investors (generally
defined as investors with net worth in excess of $1,000,000 or annual income
exceeding $200,000 or $300,000 together with a spouse). For transactions covered
by these rules, the broker-dealer must make a special suitability determination
for the purchase and must have received the purchaser's written consent to the
transaction prior to sale. Consequently, such delisting, if it were to occur,
could materially adversely affect the ability of broker-dealers to sell the
Common Stock and the ability of purchasers in this offering to sell the Shares
in the secondary market.
DIVIDENDS. The Company has not paid any dividends on the Common Stock since
inception and does not intend to pay any dividends to its shareholders in the
foreseeable future. The Company currently intends to reinvest earnings, if any,
in the development and expansion of its business. See "Dividend Policy" and
"Description of Securities--Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE. The sale, or availability for sale, of a
substantial number of shares of Common Stock in the public market subsequent to
this offering pursuant to Rule 144 under the Securities Act ("Rule 144") or
otherwise could materially adversely affect the market price of the Common Stock
and could impair the Company's ability to raise additional capital through the
sale of its equity securities or debt financing. The availability of Rule 144 to
the holders of restricted securities of the Company would be conditioned on,
among other things, the availability of certain public information concerning
the Company. All of the 1,667,741 shares of Common Stock outstanding immediately
prior to the closing of this offering are "restricted securities" as that term
is defined in Rule 144 and may, under certain circumstances, be sold without
registration under the Securities Act. In addition, any shares issuable upon
exercise of options ordinarily could be sold publicly, pursuant to Rule 701
under the Securities Act, commencing 90 days after the Company becomes a
reporting Company under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). However, shareholders owning 1,612,183 of the outstanding
1,667,741 shares of Common Stock and all holders of outstanding stock options
and warrants (other than the Underwriter's Warrants) have agreed not to sell or
otherwise dispose of their shares of Common Stock for a period of 18 months from
the date of this Prospectus without the Underwriter's prior written consent
(which consent will not be unreasonably withheld); in addition, one shareholder
who owns 6,400 shares has agreed to the above restrictions on sale for a
12-month period. The Underwriter may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to such
agreements.
The holders of the Underwriter's Warrants will have certain demand and
"piggy back" registration rights with respect to such warrants and the shares of
Common Stock underlying such warrants (the "Warrant Shares") commencing one year
after the date hereof. If the Underwriter should exercise its registration
rights to effect a distribution of the Underwriter's Warrants or the Warrant
Shares, the Underwriter, prior to and during such distribution, will be unable
to make a market in the Company's securities, which may therefore be limited. If
the Underwriter ceases making a market in the Common Stock, the Company could
lose the ability to list the Common Stock on the Nasdaq SmallCap Market because
of such market's requirement of at least two market makers, the market and
market prices for the Common Stock may be materially adversely affected, and
holders thereof may be unable to sell or otherwise dispose of shares of Common
Stock. See "Shares Eligible For Future Sale" and "Underwriting."
SUBSTANTIAL OPTIONS AND WARRANTS RESERVED; CONTINGENT ISSUANCES OF COMMON
STOCK. The Company has reserved 640,000 shares of Common Stock for issuance
pursuant to the Plan. To date options to purchase an aggregate of 620,397 shares
of Common Stock have been granted pursuant to the Plan and warrants to purchase
an additional 40,000 shares of Common Stock are outstanding, although the
Underwriter is requiring the holders of all of such options and warrants to
agree not to sell any shares of Common Stock issuable upon exercise of such
options and warrants for a period of 18 months from the date of this Prospectus
without the Underwriter's prior written consent (which consent will not be
unreasonably withheld). The Company will also sell to the Underwriter in
connection with this
11
<PAGE>
offering, for nominal consideration, the Underwriter's Warrants to purchase an
aggregate of 125,000 shares of Common Stock at a price per share equal to 115%
of the initial public offering price per share, subject to adjustment as
provided therein. The Company has agreed that, under certain circumstances, it
will register under federal and state securities laws the Underwriter's Warrants
and/ or the Warrant Shares. The existence of the Underwriter's Warrants, the
outstanding options issued under the Plan and such other warrants may prove to
be a hindrance to future financings, since the holders of such warrants and
options may be expected to exercise them at a time when the Company would
otherwise be able to obtain additional equity capital on terms more favorable to
the Company. See "Management" and "Underwriting--Underwriter's Warrants."
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Common Stock
may be highly volatile. Factors such as fluctuations in the Company's operating
results, announcements of technological innovations or new products by the
Company or its competitors, FDA and international regulatory actions,
developments with respect to patents or proprietary rights, changes in health
care policy in the United States or internationally, changes in stock market
analyst recommendations regarding the Company, other companies selling
components to the medical device industry and general market conditions may have
a significant effect on the market price of the Common Stock. In addition, the
stock market has from time to time experienced significant price and volume
fluctuations that are unrelated to operating performance of particular
companies. These broad market fluctuations may adversely affect the market price
of the Common Stock.
SUBSTANTIAL PORTION OF NET PROCEEDS ALLOCATED FOR REPAYMENT OF INDEBTEDNESS
AND GENERAL CORPORATE AND WORKING CAPITAL PURPOSES. Approximately 17.9%
($890,181) of the estimated net proceeds from the sale of the Shares has been
allocated for repayment of indebtedness of the Company, and approximately 33.8%
($1,674,819) of the estimated net proceeds from the sale of the Shares has been
allocated to general corporate and working capital purposes. Proceeds allocated
to general corporate and working capital purposes may be utilized in the
discretion of the Board of Directors. As a result, investors will not know in
advance how such net proceeds will be utilized by the Company. See "Use of
Proceeds."
ELIMINATION OF LIABILITY FOR DIRECTORS. The Company's Articles of
Incorporation limit the liability of a director of the Company to the Company
and its shareholders for monetary damages for breach of fiduciary duty to the
fullest extent permitted by the Colorado Business Corporation Act ("CBCA"). The
CBCA permits elimination of a director's personal liability for monetary damages
for breach of fiduciary duty, except (i) for breach of the director's duty of
loyalty to a company or its shareholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the law,
(iii) for acts specified in Section 7-108-403, CBCA and (iv) for transactions in
which the director directly or indirectly derived an improper personal benefit.
As a result of such provisions, the rights of Company stockholders to recover
monetary damages from directors of the Company for certain breaches of
directors' fiduciary duties may be significantly limited. See "Management."
PREFERRED STOCK; POSSIBLE ANTI-TAKEOVER EFFECTS. The Company's Articles of
Incorporation authorizes the Board of Directors to issue up to 2,416,668 shares
of preferred stock. The preferred stock may be issued in one or more series, the
terms of which may be determined at the time of issuance by the Board of
Directors, without further action by shareholders, and may include, among other
things, voting rights (including the right to vote as a series on particular
matters), preferences as to dividends and liquidation, conversion and redemption
rights, and sinking fund provisions. At the date hereof, there are outstanding
83,332 shares of Series A Preferred Stock which will be mandatorily converted
into an aggregate of 304,290 shares of Common Stock upon the closing of this
offering. The Company has no present plans for the issuance of any additional
preferred stock. However, the issuance of any such preferred stock could
materially adversely affect the rights of holders of Common Stock and,
therefore, could reduce the value of the Common Stock. In addition, specific
rights granted to future holders of preferred stock could be used to restrict
the Company's ability to merge with, or sell its assets to, a third party. The
ability of the Board of Directors to issue preferred stock could discourage,
delay or prevent a takeover of the Company, thereby preserving control of the
Company by the current shareholders. See "Description of Securities."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,250,000 Shares
offered hereby are estimated to be approximately $4,965,000 (approximately
$5,808,750 if the Underwriter's over-allotment option is exercised in full)
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company. The Company presently intends to use the net
proceeds of this offering as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF NET
APPLICATION OF NET PROCEEDS AMOUNT PROCEEDS
- -------------------------------------------------------------- ------------- -------------------------
<S> <C> <C>
Repayment of indebtedness(1).................................. $ 890,181 17.9%
Research and development...................................... 1,000,000 20.1%
Marketing and technical support(2)............................ 1,000,000 20.1%
Capital equipment(3).......................................... 400,000 8.1%
General corporate and working capital purposes(4)............. 1,674,819 33.8%
------------- -----
$ 4,965,000 100.0%
------------- -----
------------- -----
</TABLE>
- ------------------------------
(1) The Company intends to repay debt of approximately $890,181, consisting of
$775,000 in principal amount of outstanding loans and $115,181 in interest
accrued through October 31, 1996. These loans were made in 1995 and used
for working capital and other general corporate purposes. The loans bear
interest at the rate of 11% per annum and mature upon the earlier of the
closing of a public offering with gross proceeds of at least $5,000,000 or
June 30, 1997. See "Certain Transactions".
(2) Includes salaries and associated costs of additional marketing and
technical support personnel, trade show expenses and product literature
costs.
(3) Includes cost of additional computers, test equipment for research and
development, and calibration and manufacturing equipment.
(4) The balance of the estimated net proceeds will be used for general
corporate and working capital purposes (including payment of outstanding
trade payables). The Company may also utilize a portion of the proceeds of
this offering to acquire or license technology or to acquire businesses or
establish joint ventures that are complementary to the current or future
business of the Company. While the Company is currently evaluating various
possibilities, it has no agreements, arrangements or undertakings with any
third party for any acquisitions, licenses or joint ventures. There can be
no assurance that any new technology will be acquired or licensed,
businesses acquired or joint ventures effected or that, if consummated, any
such transaction will be successful. See "Business--Research and
Development."
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the sale of the Shares based upon the Company's currently
contemplated operations, the Company's business plan and current economic and
industry conditions and is subject to reapportionment among the categories
listed above or to new categories in response to, among other things, changes in
its plans, economic and industry conditions and future revenues and
expenditures. The amount and timing of expenditures will vary depending on a
number of factors, including changes in the Company's contemplated operations or
business plan and changes in economic and industry conditions.
Based on the Company's business plan, the Company believes that the net
proceeds of this offering, together with funds generated by continuing
operations, will be sufficient to permit the Company to conduct its operations
as currently contemplated for at least the next 18 months. Such belief is based
on, among other things, budgeted revenues from product sales and budgeted
expenses, and there can be no assurance that such resources will be sufficient
for such purpose. The Company may be required to raise substantial additional
capital in the future in order to expand operations. In addition, contingencies
may arise which may require the Company to obtain additional capital. There can
be no assurance that the Company will be able to obtain such capital from any
other sources on favorable terms or at all. See "Capitalization," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Pending the use of the net proceeds for the above purposes, the Company
intends to invest such funds in short-term, investment-grade securities,
including government obligations and money market instruments.
13
<PAGE>
DIVIDEND POLICY
The Company has not paid any cash dividends on its capital stock since its
inception, and does not expect to pay cash dividends on its Common Stock in the
foreseeable future. The Company currently intends to reinvest earnings, if any,
in the development and expansion of its business.
14
<PAGE>
CAPITALIZATION
The following table sets forth the short term debt and capitalization of the
Company at June 30, 1996 (i) on an actual basis, (ii) on a pro forma basis to
reflect the mandatory conversion of the 83,332 shares of outstanding Series A
Preferred Stock into 304,290 shares of Common Stock upon the closing of this
offering and (iii) on a pro forma, as adjusted basis to reflect such conversion
and to give effect to the application by the Company of the estimated net
proceeds from the sale of the Shares. See "Use of Proceeds." This table should
be read in conjunction with the Financial Statements and Notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------------- -------------- --------------
<S> <C> <C> <C>
Short Term Notes Payable (1)...................................... $ 775,000 $ 775,000 $ --
-------------- -------------- --------------
-------------- -------------- --------------
Shareholders' Equity (Deficit):
Series A Convertible Preferred Stock, no par value; 2,500,000
shares authorized, 83,332 issued and outstanding; 2,416,668
shares authorized, none issued and outstanding pro forma or pro
forma as adjusted.............................................. 999,960 -- --
Common Stock, no par value; 10,000,000 shares authorized;
1,363,451 shares issued and outstanding actual, 1,667,741
shares issued and outstanding pro forma, 2,917,741 shares
issued and outstanding pro forma as adjusted................... 2,114,723 3,114,683 8,079,683
Accumulated Deficit............................................. (3,255,021) (3,255,021) (3,255,021)
-------------- -------------- --------------
Total Shareholders' Equity (Deficit)............................ (140,338) (140,338) 4,824,662
-------------- -------------- --------------
Total Capitalization.......................................... $ (140,338) $ (140,338) $ 4,824,662
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
- ------------------------------
(1) See Notes 5 and 9 of Notes to Financial Statements for information
concerning the Company's indebtedness.
15
<PAGE>
DILUTION
The pro forma net tangible book value (deficit) of the Company at June 30,
1996, was $(140,338), or $(0.08) per share of Common Stock. Pro forma net
tangible book value per share of Common Stock represents the tangible assets
(total assets less intangible assets) less total liabilities, divided by the
number of shares of Common Stock outstanding assuming conversion of all
outstanding shares of the Company's Series A Preferred Stock. After giving
effect to the sale of the Shares offered hereby, and the application of the net
proceeds therefrom, the net tangible book value of the Common Stock at June 30,
1996 would have been approximately $4,824,662 or $1.65 per share. This
represents an immediate increase in net tangible book value of $1.73 per share
to existing shareholders and an immediate dilution to new investors of $3.35
(67%) per share.
<TABLE>
<CAPTION>
PER SHARE
----------------------
<S> <C> <C>
Initial public offering price...................................................... $ 5.00
Pro forma net tangible book value at June 30, 1996................................. $ (0.08)
Increase attributable to new investors (1)......................................... $ 1.73
Pro forma net tangible book value after this offering (2).......................... $ 1.65
-----
Dilution to new investors.......................................................... $ 3.35
-----
-----
</TABLE>
The following table sets forth, as of the date of this Prospectus, the
number of shares of Common Stock purchased from the Company, the percentage of
total shares of Common Stock purchased, the total consideration paid, the
percentage of total consideration paid and the average price per share of Common
Stock paid by the investors in this offering and the current shareholders of the
Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION (3)
------------------------ --------------------------
NUMBER PERCENT AMOUNT PERCENT AVERAGE PER SHARE
----------- ----------- ------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders....................... 1,667,741 57.2% $ 2,966,524 32.2% $ 1.78
New Investors (4)........................... 1,250,000 42.8% $ 6,250,000 67.8% $ 5.00
----------- ----- ------------- -----
Total....................................... 2,917,741 100.0% $ 9,216,524 100.0%
----------- ----- ------------- -----
----------- ----- ------------- -----
</TABLE>
- ------------------------------
(1) Does not give effect to the exercise of the Underwriter's over-allotment
option.
(2) After deducting underwriting discounts and commissions and offering
expenses of approximately $1,285,000 payable by the Company.
(3) Before deducting underwriting discounts and commissions and offering
expenses payable by the Company.
(4) In the event of the exercise in full of the Underwriter's over-allotment
option, the number of shares of Common Stock purchased, the percentage of
total shares of Common Stock purchased, the total consideration paid, the
percentage of total consideration paid and the average price per share of
Common Stock paid by the investors in this offering would be 1,437,500,
46.3%, $7,187,500, 70.8% and $5.00, respectively, and the percentage of
total shares of Common Stock purchased and the percentage of total
consideration paid by existing investors would be 53.7% and 29.2%,
respectively.
Other than as noted above, the foregoing computations exclude (i) 620,397
shares of Common Stock issuable upon exercise of stock options and 40,000 shares
of Common Stock issuable upon the exercise of warrants outstanding as of June
30, 1996, at a weighted average exercise price of approximately $1.70 per share
and (ii) 19,603 shares reserved for future grants under the Plan. Assuming that
all of these options and warrants were deemed to be exercised and proceeds were
received therefrom, dilution to new investors would be $3.34 per share. See
"Management--1994 Stock Option Plan," "Description of Securities" and Note 7 of
Notes to Financial Statements.
16
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Financial Statements and Notes thereto included
elsewhere in this Prospectus. The statement of operations data for the years
ended December 31, 1994 and 1995, and the balance sheet data at December 31,
1994 and 1995, are derived from, and should be read in conjunction with the
Company's Financial Statements and Notes thereto audited by Price Waterhouse
LLP, independent accountants, and included elsewhere in this Prospectus. The
statement of operations data for the six months ended June 30, 1995 and 1996 and
the balance sheet data at June 30, 1996 have been derived from unaudited interim
financial statements and include, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the results of operations for such periods. The operating results for the six
months ended June 30, 1996 are not necessarily indicative of the results to be
expected for the full year or for any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------ ---------------------------
1994 1995 1995 1996
-------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.............................................. $ 908,146 $ 1,883,802 $ 496,865 $ 1,746,657
Cost of Goods Sold................................... 502,625 793,622 258,909 733,803
-------------- -------------- ------------ -------------
Gross Profit......................................... 405,521 1,090,180 237,956 1,012,854
-------------- -------------- ------------ -------------
Operating Expenses:
Research and Development........................... 291,461 627,266 384,812 328,442
Selling and Marketing.............................. 605,745 767,664 353,223 224,541
General and Administrative......................... 551,393 595,603 236,878 296,384
-------------- -------------- ------------ -------------
Total Operating Expenses......................... 1,448,599 1,990,533 974,913 849,367
-------------- -------------- ------------ -------------
Income (Loss) from Operations........................ (1,043,078) (900,353) (736,957) 163,487
Other Income (Expense)............................... (17,177) (151,596) 11,106 (37,653)
-------------- -------------- ------------ -------------
Net Income (Loss).................................... $ (1,060,255) $ (1,051,949) $ (725,851) $ 125,834
-------------- -------------- ------------ -------------
-------------- -------------- ------------ -------------
Pro Forma Net Income (Loss) per share (1)............ -- $ (0.63) -- $ 0.06
-------------- -------------
-------------- -------------
Pro Forma Weighted Average Number of Common Shares
Outstanding (2)..................................... -- 1,675,937 -- 2,241,588
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995 JUNE 30, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents......................................... $ 92,406 $ 31,822 $ 137,851
Working Capital (Deficit)......................................... 244,537 (695,147) (296,840)
Total Assets...................................................... 570,882 858,615 1,455,840
Notes Payable..................................................... -- 775,000 775,000
Accumulated Deficit............................................... (2,328,906) (3,380,855) (3,255,021)
Shareholders' Equity (Deficit).................................... 316,544 (603,672) (140,338)
</TABLE>
- ------------------------------
(1) Supplemental pro forma net income (loss) per share for the year ended
December 31, 1995 and the six-month period ended June 30, 1996, assuming
the notes payable were retired at the beginning of the period using the net
proceeds of the offering, are $(0.57) and $0.07, respectively. See "Use of
Proceeds", "Capitalization", "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and Note 1 of Notes to Financial Statements.
(2) See Note 1 of Notes to Financial Statements for an explanation of the
calculation of the pro forma weighted average number of common shares
outstanding.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company designs, develops, manufactures and markets products for
real-time, precise, free-hand, localization of points in 3D space. The Company's
optical localizers typically consist of a number of custom-manufactured LEDs
mounted to the device or instrument to be tracked in 3D space, a relative
position dynamic reference device connected to the measured object, a
multi-camera array for detecting the LED emissions, a proprietary
microprocessor-based control system and proprietary software. The Company
shipped its first product in 1992. It introduced its current products, the
FlashPoint 5000 and the Pixsys 5000, in the spring of 1995.
The following table sets forth for the periods indicated certain line items
derived from the Company's statement of operations as a percentage of the
Company's revenues.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------ ------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue................................................. 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold...................................... 55.3% 42.1% 52.1% 42.0%
----------- ----------- ----------- -----------
Gross Profit.......................................... 44.7% 57.9% 47.9% 58.0%
----------- ----------- ----------- -----------
Operating Expenses:
Research and Development.............................. 32.1% 33.3% 77.4% 18.8%
Selling and Marketing................................. 66.7% 40.8% 71.1% 12.9%
General and Administrative............................ 60.7% 31.6% 47.7% 16.9%
----------- ----------- ----------- -----------
Total Operating Expenses............................ 159.5% 105.7% 196.2% 48.6%
----------- ----------- ----------- -----------
Income (Loss) from Operations........................... (114.8)% (47.8)% (148.3)% 9.4%
Other Income (Expense).................................. (1.9)% (8.0)% 2.2% (2.2)%
----------- ----------- ----------- -----------
Net Income (Loss)....................................... (116.7)% (55.8)% (146.1)% 7.2%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Revenue increased by $1,249,800, or approximately 252%, to $1,746,700 for
the six months ended June 30, 1996, as compared to $496,900 for the six months
ended June 30, 1995. Such increase was attributable to the introduction and sale
of the FlashPoint 5000 and Pixsys 5000 Products.
Cost of goods sold increased by $474,900, or approximately 183%, to $733,800
for the six months ended June 30, 1996, compared to $258,900 for the six months
ended June 30, 1995. Cost of goods sold as a percentage of revenue decreased to
42% for the six months ended June 30, 1996, as compared to 52% for the six
months ended June 30, 1995. The increase in cost of goods sold was attributable
to increased sales volume and the decrease in cost of goods sold as a percentage
of revenue was primarily attributable to the resulting economies of scale from
higher production volume.
Gross profit increased by $774,900, or approximately 326%, to $1,012,900 for
the six months ended June 30, 1996, as compared to $238,000 for the six months
ended June 30, 1995. Such increase was primarily attributable to the increase in
sales volume.
Research and development expenses decreased by $56,400, or approximately
15%, to $328,400 for the six months ended June 30, 1996, as compared to $384,800
for the six months ended June 30, 1995. This decrease was principally due to the
reduction of costs associated with the completion of the FlashPoint 5000 and
Pixsys 5000, which products were released during the second quarter of 1995.
Selling and marketing expenses decreased by $128,700, or approximately 36%,
to $224,500 for the six months ended June 30, 1996, as compared to $353,200 for
the six months ended June 30, 1995. Such decrease was primarily attributable to
the Company's decision to focus its sales and marketing efforts on selling its
FlashPoint product to medical device companies rather than also attempting to
sell SNT's ear, nose and throat ("ENT") system directly to end users. The
Company decided to
18
<PAGE>
terminate its efforts to sell SNT's ENT system because the Company believed it
could better utilize its resources by concentrating on sales of its FlashPoint
product to its medical device customers. See "Business -- Intellectual
Property."
General and administrative expenses increased by $59,500, or approximately
25%, to $296,400 for the six months ended June 30, 1996, compared to $236,900
for the six months ended June 30, 1995. Such increase was primarily attributable
to additional personnel and associated costs.
Operating income increased by $900,500 to $163,500 for the six months ended
June 30, 1996, compared to an operating loss of $737,000 for the six months
ended June 30, 1995. This increase was primarily attributable to increased
revenue, improved gross margin and decreased total operating expenses.
Net other income (expense) decreased by $48,800 to ($37,700) for the six
months ended June 30, 1996 from $11,100 for the six months ended June 30, 1995.
This change was primarily due to interest expense of $44,100 incurred in
connection with the funds borrowed by the Company during 1995. See "Certain
Transactions."
As a result of the foregoing, net income increased to $125,800 for the six
months ended June 30, 1996, compared to a net loss of $725,900 for the six
months ended June 30, 1995.
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109. Due to the Company's history of pre-tax losses and
uncertainty surrounding the timing of realizing the benefits of net operating
loss carryforwards, the Company has recorded a valuation allowance against all
of its net deferred tax assets as of June 30, 1996. In reaching the Company's
determination of the need to provide a deferred tax valuation allowance, the
Company considered all available evidence, both positive and negative, as well
as the weight and importance given to such evidence. Management concluded that a
valuation allowance against deferred tax assets was appropriate at the current
time, in accordance with Statement of Financial Accounting Standards No. 109.
Specifically, the Company has had annual losses in each of the two years ended
December 31, 1994 and 1995, and has only had net income for the six months ended
June 30, 1996.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Revenue increased by $975,700, or approximately 107%, to $1,883,800 for the
year ended December 31, 1995, as compared to $908,100 for the year ended
December 31, 1994. Such increase was primarily attributable to the commercial
introduction and sale of the FlashPoint 5000 and Pixsys 5000 products.
Cost of goods sold increased by $291,000, or approximately 58%, to $793,600
for the year ended December 31, 1995, compared to $502,600 for the year ended
December 31, 1994. Cost of goods sold as a percentage of revenue decreased to
42% for the year ended December 31, 1995, as compared to 55% for the year ended
December 31, 1994. The increase in cost of goods sold was primarily attributable
to the increased revenue during the year ended December 31, 1995 and the
decrease in cost of goods sold as a percentage of revenue was primarily
attributable to the resulting economies of scale from higher production volume.
Gross profit increased by $684,700, or approximately 169%, to $1,090,200 for
the year ended December 31, 1995, compared to $405,500 for the year ended
December 31, 1994. Such increase was principally a result of the increase in
revenue.
Research and development expenses increased by $335,800, or approximately
115%, to $627,300 for the year ended December 31, 1995, compared to $291,500 for
the year ended December 31, 1994. This increase was principally due to the
development of the FlashPoint 5000 and Pixsys 5000 products, which were
commercially introduced during the second quarter of 1995.
Selling and marketing expenses increased by $162,000, or approximately 27%,
to $767,700 for the year ended December 31, 1995, compared to $605,700 for the
year ended December 31, 1994. Such increase was primarily a result of the
Company's plan to sell SNT's ENT system, which effort ended in the fourth
quarter of 1995. See "Business--Intellectual Property."
19
<PAGE>
General and administrative expenses increased by $44,200, or approximately
8%, to $595,600 for the year ended December 31, 1995, compared to $551,400 for
the year ended December 31, 1994. Such increase was attributable to the addition
of personnel and related expenses.
Operating loss decreased by $142,700, or approximately 14%, to $900,400 for
the year ended December 31, 1995, compared to an operating loss of $1,043,100
for the year ended December 31, 1994. This decrease was primarily attributable
to increased revenue.
Net other expenses, comprised principally of interest expense, increased by
$134,400 (781%) to $151,600 for the year ended December 31, 1995 from $17,200
for the year ended December 31, 1994 due to additional borrowings in 1995.
As a result of the foregoing, net loss decreased by $8,400, or approximately
1%, to $1,051,900 for the year ended December 31, 1995, compared to $1,060,300
for the year ended December 31, 1994.
Income tax benefits were not recognized on the Company's 1994 and 1995 net
operating losses due to the uncertainty surrounding the future utilization of
such net operating losses. As of December 31, 1995, the Company's net operating
loss carryforwards were approximately $2,788,000 which expire from the years
2006 to 2010. The Company's ability to use the net operating loss carryforwards
are limited due to certain changes in ownership as defined by the Internal
Revenue Code. Due to the Company's history of pre-tax losses and the uncertainty
surrounding the timing of realizing the benefits of net operating loss
carryforwards, the Company has placed a valuation allowance against its deferred
tax assets. See Note 6 of Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1996, the Company used $154,400 in cash
for operating activities, principally to fund increased accounts receivable,
inventories and other assets. The Company also used $77,100 in cash for
investing activities during the six month period ended June 30, 1996 to purchase
property and equipment. Also during the six month period ended June 30, 1996,
$337,500 in cash was provided by the exercise by certain warrantholders of their
warrants to purchase 270,000 shares of Common Stock. See "Certain Transactions."
During 1995, the Company issued $775,000 in promissory notes, all of which
are scheduled to mature on the earlier of the closing of a public offering with
gross proceeds of at least $5,000,000 or June 30, 1997. In connection with the
issuance of such notes (and the warrants coupled therewith), the Company
recorded a debt discount of $131,700 in 1995. As of June 30, 1996, $86,300 in
interest had accrued on these notes. The Company intends to pay the principal
amount of, and accrued and unpaid interest on, these notes in full with a
portion of the proceeds of this offering. See "Certain Transactions" and "Use of
Proceeds."
As of June 30, 1996, the Company had a working capital deficit of $296,800
compared to a working capital deficit of $695,100 at December 31, 1995 (which
included $861,300 and $818,200, respectively, of principal and interest owed on
the loans which are to be repaid in connection with this offering). See "Use of
Proceeds". The improvement in working capital was primarily the result of
increases in accounts receivable, inventories and cash resulting from the
Company's 1996 net income and the exercise of the warrants. Historically,
working capital required to finance the Company's growth has been provided by
short-term borrowings and private placement offerings of securities. As of June
30, 1996, the Company did not have a line of credit.
Based on the Company's business plan, the Company believes that the net
proceeds of this offering, together with funds generated by continuing
operations, will be sufficient to permit the Company to conduct its operations
as currently contemplated for at least the next 18 months. Such belief is based
on, among other things, budgeted revenues from product sales and budgeted
expenses, and there can be no assurance that such resources will be sufficient
for such purpose. The Company may be required to raise substantial additional
capital in the future in order to expand operations. In addition, contingencies
may arise which may require the Company to obtain additional capital. There can
be no assurance that the Company will be able to obtain such capital on
favorable terms or at all. See "Use of Proceeds."
20
<PAGE>
BUSINESS
GENERAL
The Company designs, develops, manufactures and markets products for
real-time, precise, free-hand, localization of points in 3D space. The Company's
optical localizers, typically consisting of a number of custom-manufactured LEDs
mounted on a device or instrument to be tracked in 3D space, a relative position
dynamic reference device connected to the measured object, a multi-camera array
for detecting the LED emissions, a proprietary microprocessor-based control
system and proprietary software to calculate the digital coordinate location of
the LEDs, have both medical and industrial applications.
MEDICAL APPLICATIONS. The Company's FlashPoint localizer is a key
component of the anatomical image display workstation used by physicians to
perform image guided surgery, a specialty procedure in the field of
minimally invasive surgery. When the FlashPoint localizer is combined with
the imaging software provided by the Company's customers (such as Zeiss,
GEMS, SNT/ Sofamor Danek, DeeMed and Radionics), the location of specially
designed surgical instruments can be tracked in relation to the patient's
anatomy during surgical procedures by display as an overlay on the MRI or CT
image. The Company believes that the ability of the surgeon to track the
location of specially designed surgical instruments on the image display
workstation can result in less invasive procedures that lead to shorter
hospital stays and improved patient outcomes.
INDUSTRIAL APPLICATIONS. The Company's Pixsys localizer is used in
various industrial applications to measure the position or shape of objects
in 3D space. Illustrative uses include inspection of parts by
Harley-Davidson, Inc., detection of surface deformities in car bodies during
manufacture by Daimler Benz and as a 3D navigation aid in its zero gravity
chamber by NASA.
The Company's business strategy is to systematically enhance the performance
of its optical localizers while expanding the market for such products. With
respect to enhancing its products, the Company is seeking to increase the
products' accuracy, enlarge the field-of-view, increase the sample/ frame rate
(throughput) and improve the customer computer interface. With regard to market
expansion, the Company is seeking to identify additional measurement
applications for its products.
IMAGE GUIDED SURGERY
In image guided surgery, a surgeon tracks the location of specially designed
surgical instruments on the medical image (such as CT or MRI). Image guided
surgery requires a method for registering (i.e., mapping) the points in the
medical image onto the patient's anatomical physical space and a method for
localizing (i.e., determining the position in 3D space) the surgical probe or
pointer. Surgical position of the probe or pointer is key to the successful
completion of a surgical procedure.
Localization determines the position in 3D space of the registration points
and the surgical probe or pointer. The Company's FlashPoint product is used as a
localizer for medical applications.
Until registered, the medical image is only a picture of the relevant
anatomy and not a map. By registering the image space with the physical space
itself, the image is said to have been registered. By registering the image
space with the physical space, medical images become true, point-to-point maps
available for precise surgical guidance. The imaging software provided by the
Company's medical customers registers the medical image with the physical space.
Traditionally, pre-operative medical images (such as CT or MRI) were
available as pictures that were used for surgical guidance only insofar as the
judgment, skill and experience of the surgeon permitted. Prior to surgery, the
surgeon arranged the patient's CT or MRI scans (images) upon a light box and
carefully reviewed them. Upon commencement of the surgical procedure, the
surgeon, based upon his or her memory of the information displayed on such
images, performed the surgical procedure.
21
<PAGE>
Image guided surgery, by allowing the patient's CT, MRI or other medical
image to be used as a map, provides the surgeon with a real-time visual
representation of the surgical probe or pointing device on the interactive
medical image. It allows the spatial position of the probe or pointer to be
tracked during the surgical procedure and to be displayed as an overlay on the
medical image shown on the workstation. The medical image may either be
historical (i.e., pre-operative) as in the products currently being sold by
Zeiss, SNT/Sofamor Danek, DeeMed and Radionics, or real-time (i.e.,
intraoperative) as in the product being developed by GEMS. See
"Business--Customers and Use."
Image guided surgery couples recent advances in imaging with the instruments
used in the course of surgery. The result, the Company believes, can be smaller,
less invasive procedures that lead to shorter hospital stays and improved
patient outcomes. While image guided surgery has been most extensively used in
neurosurgery, the Company anticipates that image guided surgery will provide
benefits for ear, nose and throat surgery, needle biopsies, orthopedics (e.g.,
hip replacement surgery), maxillofacial surgery and radiosurgery.
PRODUCTS
The FlashPoint and Pixsys localizers consist of a number of markers (LEDs)
mounted on a pointer device or surgical instrument, a relative position dynamic
reference device ("Dynamic Reference Frame") connected to the measured object (a
patient in a medical application or a part in an industrial application), a
multi-camera array for detecting the X, Y and Z positions of the LEDs, a
proprietary microprocessor based control system, and a proprietary, internally
developed, software package. The Company's optical localizer is an input
subsystem providing real-time mathematical coordinates to a host computer. The
Company's optical localizer determines the position of the hand-held probe or
surgical instrument and the patient reference device by tracking the X, Y and Z
coordinates of each infrared light emitting diode mounted on the probe or
surgical instrument and reference device. It then communicates this position in
the form of X, Y and Z coordinates to the host computer.
DYNAMIC REFERENCE FRAME. The Dynamic Reference Frame, typically three LEDs
mounted on a fixed frame, allows the patient to be moved during an image guided
surgical procedure while maintaining registration between the scanned image, the
surgical instrument and the patient. Without this type of feature, the physician
would be unable to move the patient, or, if the patient was moved, the
registration process would have to be repeated, adding significant time to the
surgical procedure.
INSTRUMENTS. The Company, in conjunction with custom fabricators and
surgical instrument manufacturers, provides various instruments, such as probes
and pointers, containing LEDs as component parts to its optical localizers. For
medical applications, the LED is placed on the instrument, and the distance
between the LED and the tip of the instrument is precisely calibrated. These
instruments are designed to be reused on a limited basis. The Company plans to
design and market other instruments, some of which may be disposable, for use
with its localizer.
MARKERS. The Company's present line of optical localizers utilize infrared
LED markers, the positions of which are tracked by the FlashPoint and Pixsys
systems. Because the emission characteristics of each LED affects overall system
performance, the Company provides a custom-manufactured line of LEDs for its
products. The LEDs are consumable items and, depending upon the customer's
application, the life expectancy varies.
Most localizers sold by the Company are customized to satisfy customer
requirements. Some customers either do not use, or purchase their requirements
from others for, reference devices, instruments and markers. A standard
localizer for medical applications containing all of the above parts, other than
the Dynamic Reference Frame, currently has a list price of $25,000.
22
<PAGE>
The FlashPoint and Pixsys localizers have a mean accuracy of better than 0.4
mm with a maximum error within a 1 meter sphere of less than 1 mm. This accuracy
is achieved both through the design of the product and through the use of a
highly accurate calibration process. The device used to calibrate the FlashPoint
and Pixsys products is a Zeiss DB 900 4860-36 bridge type, dual beam Coordinate
Measuring Machine ("CMM"). The CMM is a measurement device which has a linear
displacement accuracy of: X axis = 0.0076 mm, Y axis = 0.0102 mm, Z axis =
0.0064 mm, and a volumetric performance of 0.0165 mm. The CMM is routinely
calibrated to, and the results are traceable to the appropriate standards of,
the National Institute of Science and Technology ("NIST"). See
"Business--Manufacturing Operations."
CUSTOMERS AND USE
MEDICAL APPLICATIONS
The Company's FlashPoint product is used to determine the position in 3D
space of the surgical probe or instrument. The FlashPoint 5000 medical optical
localizer is a component currently being integrated into medical devices
manufactured by GEMs, Zeiss, SNT/Sofamor Danek, DeeMed and Radionics. For the
year ended December 31, 1995 and the six months ended June 30, 1996, sales to
Zeiss accounted for 19% and 45%, respectively, and sales to SNT/Sofamor Danek
accounted for 38% and 30%, respectively, of the Company's revenues. The
Company's contract with Zeiss will expire at the end of October 1996 (though
shipments are scheduled through December 1996) and SNT/Sofamor Danek purchases
product from the Company by purchase order. The loss of, or substantial
diminution of purchases from the Company by, either of these customers could
have a material adverse effect on the Company. None of the customers listed
below has entered into any long-term minimum purchase agreements with the
Company. Accordingly, purchases from the Company by such customers in any prior
period may not be indicative of orders or purchases in any future period, and,
of course, there can be no guarantee that these companies will remain customers
of the Company.
GE MEDICAL SYSTEMS, MILWAUKEE, WISCONSIN. In 1993, GEMS introduced its
magnetic resonance guided therapy ("MRT") system which provides direct physician
access to the patient during imaging, giving a real-time, internal view of
patients for procedures such as needle biopsies. MRT is currently used to plan,
guide and monitor surgical procedures in a minimally invasive manner. FlashPoint
is being used by GEMS for the guidance system in its MRT device. The initial
GEMS MRT system is at Harvard University's Brigham and Women's Hospital. GEMS is
currently shipping this system to clinical sites worldwide and is preparing its
submission to the FDA.
CARL ZEISS, INC., THORNWOOD, NEW YORK, A SUBSIDIARY OF CARL ZEISS,
OBERKOCHEN, GERMANY. The Company's FlashPoint product is an integral and key
component of the Zeiss SMN Stereotactic System. By combining imaging diagnostic
data with powerful computers, precision optics and finely crafted hand-held
instrumentation, Zeiss has created a product enhancement to its operating
microscope line. The SMN product is targeted as an enhancement to Zeiss'
worldwide installed base of surgical microscope systems.
SURGICAL NAVIGATION TECHNOLOGIES, INC., BROOMFIELD, COLORADO. SNT
integrates FlashPoint into its StealthStation-TM-, which offers precise
real-time positional information for free-hand stereotaxy in neurosurgical and
spinal applications. SNT is the system integrator for Sofamor Danek Group's
neuro-navigation system. Sofamor Danek is SNT's exclusive distributor for SNT's
StealthStation and acquired SNT in May 1996.
DEEMED INTERNATIONAL, GRENOBLE, FRANCE. DeeMed incorporates the FlashPoint
product into the Surgiscope, its surgical robot utilized for accurate
positioning of surgical microscopes. DeeMed first used the FlashPoint system in
its initial prototype in early 1993. The original system continues in operation
at Necker Hospital, Paris, France. DeeMed was acquired by Electa Instrument AB
in July 1996.
RADIONICS SOFTWARE APPLICATIONS, INC., A SUBSIDIARY OF RADIONICS, INC.,
BURLINGTON, MASSACHUSETTS. Radionics employs the FlashPoint in the Radionics
Optical Tracking System for Frameless Stereotaxy.
23
<PAGE>
This real-time, free-hand stereotaxy system is primarily used in neurosurgical
applications. Radionics began using an earlier model of the FlashPoint in 1994
and has recently incorporated the latest generation FlashPoint product into its
system.
INDUSTRIAL APPLICATIONS
The Company's Pixsys product is used to determine the position or shape of
an object by rapidly collecting a large number of points on the object's
surface. To date, each of the Company's industrial customers has purchased no
more than several Pixsys products. The following sets forth several indicative
ways in which the Pixsys product is used in industrial applications:
Harley-Davidson (whose Pixsys localizer is integrated into a product sold by
Computer Design, Inc.) uses such product to inspect parts; Daimler Benz uses
such product in its system for detecting surface deformities in car bodies
during manufacture; and NASA uses such product as a 3D navigation aid in its
zero gravity chamber. Sales to industrial customers constituted approximately
24% of sales in 1994, 11% of sales in 1995 and 11% of sales during the first six
months of 1996.
The Company is seeking additional applications for its Pixsys product. For
example, Brewco, Inc., Central City, Kentucky ("Brewco"), has contracted with
the Company for the Company to develop a proof of concept model of its Pixsys
product for use with Brewco's frame straightening machines for automobile
collision repair. If the concept proves viable, the parties contemplate entering
into an OEM agreement pursuant to which the Company will supply its Pixsys
product to Brewco and Brewco will incorporate the Pixsys into its system to
measure the distortion caused by the collision and the results of the
straightening operation. There can be no assurance, however, that any such
product will be developed, or if developed, be economical or accurate, or that
the parties will enter into an OEM agreement.
MARKETING AND SALES
The Company employs a marketing strategy focused on selling its localizer
under OEM agreements to a number of medical device companies. Since the
localizer is a key component in the medical device company's image guided
surgery system and since the medical device company has to design its system
specifically to incorporate the localizer, the OEM agreements are intended to
assure the medical device company that the Company will be a reliable supplier.
The Company anticipates that it may make available source code escrow agreements
to the medical device company which, in appropriate circumstances, may grant the
medical device company the license to manufacture the localizer using the
Company's technology for the purpose of incorporating it into the medical device
company's product if the Company is unwilling or unable to comply with its
obligations under the OEM agreement.
The Company currently has OEM agreements with Zeiss, DeeMed and Radionics;
GEMS and SNT/Sofamor Danek do not have supply agreements and instead purchase
product by purchase order. Zeiss' agreement with the Company is a one-year
agreement for a fixed number of units at a fixed price that expires at the end
of October 1996. DeeMed's agreement is a five-year agreement with no minimum
purchase requirements, though the agreement can be terminated by the Company
after three years if a minimum number of units has not been purchased. Prices
are subject to annual renegotiation. Radionics' agreement is a three-year
agreement with no minimum purchase requirements. Prices are subject to change
upon 90 days prior written notice by the Company. Since there are no long-term
purchase requirements with any of the Company's customers, past sales to
customers may not be indicative of orders or purchases in any future period. See
"Business--Backlog."
The Company's industrial marketing strategy includes selling pursuant to OEM
and value added reseller ("VAR") agreements to companies which will include the
Company's Pixsys product in their systems for industrial applications. The
Pixsys product used by Harley-Davidson was sold to Computer Design, Inc. and
integrated into its proprietary CAD (computer aided design) software package.
The Company also has a domestic sales representation agreement with SANDAB, Inc.
("SANDAB") under which SANDAB has been appointed the Company's exclusive
representative to sell the Company's products to non-medical users, but
including dental and orthodontic users, in the States of
24
<PAGE>
Michigan, Ohio, Pennsylvania and West Virginia and the Province of Ontario and
as the Company's non-exclusive representative in the State of Indiana. This
agreement can be terminated on 90 days advance written notice by either party,
but commissions will continue to be due on orders received prior to termination.
BACKLOG
At December 31, 1995, the Company's backlog was $1,832,700 and at June 30,
1996 it was $870,600. Since backlog fluctuates depending on how customers order
their products and over what period of time, the Company currently does not
consider backlog to be a meaningful indicator of future sales.
COMPETITION
Although 3D localization can be performed in a number of ways, the use of
LEDs as markers and optical sensor arrays as receivers is currently the
technology of choice for manufacturers of image guided surgery systems.
Currently, two designs of optical localizers are available. The Company's
FlashPoint product, as well as the NDI OPTOTRAK-Registered Trademark-, use a
technical approach that employs three linear photo detectors, also known as
linear charge coupled devices ("CCDs"), in the camera assembly. Each of these
linear arrays has between 2000 and 5000 discrete CCD elements called pixels,
arrayed in a single line which can be quickly scanned to determine the location
of the light energy being detected. The second approach employs two
two-dimensional arrays having between 250 to 1000 elements (pixels) in each row
of a CCD that is arrayed in a matrix of equal length rows and columns. In this
configuration, the CCD array must be scanned sequentially through each row from
top to bottom, the same as a standard television camera, to measure the location
of the light energy being emitted. Since the linear array CCD has a greater
number of pixels than any row of the two-dimensional (matrix) CCD, there is an
increased resolution in the linear array which contributes to increased
accuracy. Additionally, since the linear array only needs to be scanned from end
to end to measure the light being detected and the 2D array must be scanned from
the beginning of the top row to the end of the bottom row in the matrix, the
linear array systems can provide faster throughput of measurements.
The Company believes it is currently a leader in the sale of optical
localizers to the medical market. The Company's primary competitor in the
medical OEM market is NDI. NDI markets both the OPTOTRAK and the Polaris to the
medical OEM marketplace. The OPTOTRAK is a high performance 3D, infrared based
optical localizer having a selling price of approximately $60,000. Although the
OPTOTRAK has been found useful in motion tracking, its physical size and cost
have generally limited its medical applications to proof-of-concept and research
applications. In April 1996, NDI introduced the Polaris, an infrared based
optical localizer using two two-dimensional CCD cameras. Preliminary feedback
from the marketplace indicates the Polaris has reduced performance compared to
the OPTOTRAK and has an approximate selling price of $25,000, which is
comparable to the Company's list price for its FlashPoint product. Other
companies, such as Phillips Medical Systems, BrainLab GmbH and Radionics, have
developed two camera optical localization devices for their prototype image
guided surgery systems. The Company believes competition with respect to sales
of optical localizers is based primarily on price, ease of use, ability to
satisfy customer requirements and accuracy.
Companies have also attempted to use other mediums as localization devices
for medical applications. For example, much of the early technical work relative
to medical applications involved the tracking of sound markers. The inherent
characteristics of the sound markers used in medical applications, coupled with
the technical limitations of the use of sound based systems in an MRI or
operating room environment, hampered the medical application of this technology.
Only one major medical company used the sonic technology. That company no longer
uses such technology. Sonic technology is still used in industrial applications
because of its ability to make measurements in large fields-of-view.
Mechanical arm localizers are used extensively in industrial application,
but are used as the basis of only two medical devices. In medical applications,
the "feel" and range of motion of the arm impose
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<PAGE>
significant constraints on the surgeon, thus limiting the use of the device.
Similarly, magnetic field localizers have also been used in, or evaluated for,
such applications. Errors caused by the movement of metal components in and
around the surgical field have made these magnetic field localizers impractical
for most general surgery applications.
Companies other than NDI may also become competitors. Competitors may have
substantially greater financial, technical, marketing, manufacturing and human
resources, as well as name recognition, than the Company. Competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements and to devote substantially greater resources to the
research and development, marketing and sale of their products than the Company.
Also, the Company's customers may determine to develop their own localizers to
insure control over their localizer technology, to be able to differentiate
their product or for other reasons. Furthermore, such competitors may develop
technology other than that based on infrared optics that is more effective or
economical than the technology of the Company in localizing a point in 3D space.
See "Risk Factors-- Competition."
MANUFACTURING OPERATIONS
The Company's manufacturing activities primarily consist of assembling and
testing components and subassemblies acquired from qualified vendors, as well as
final assembly and testing of the Company's fully-configured systems. Components
are generally available from several sources although the order lead-time for
the semi-custom isolated power supply used in the FlashPoint 5000 varies from
four to six months. The Company's recent relocation to its new facility has
allowed it to expand its manufacturing space. The new facility has adequate
expansion room to nearly double the manufacturing space presently being used. An
integrated manufacturing planning and control computer system is in place which
provides for material requirements planning and inventory control, manufacturing
planning and scheduling and production work order tracking. See "Business--
Facilities."
The Company recently made a significant investment to improve the
calibration process for the products being shipped to its customers. A CMM
measurement device was leased and installed in the new facility. This new system
provides a higher degree of accuracy and consistency in the Company's
calibration process and gives the Company a final calibration tool which is
traceable to NIST standards. The CMM system is also used by the Company's
research and development staff for research and development projects. See
"Business--Products."
INTELLECTUAL PROPERTY
The Company has been issued U.S. Patent 5,198,877 on its SprayLight
technology which is a non-contact, laser based, hand-held 3D localizer that
allows the user to acquire simply and easily a multitude of points on the
surface of an object or anatomy by sweeping a hand-held scanner over the desired
target. This patent expires in 2010 and its claims do not cover any product
currently being sold by the Company. An application to reissue this patent has
been filed which, if granted, may broaden its claims. The Company has four
original patent applications which are currently pending in the U.S. Patent and
Trademark Office (three of which, if granted, relate to current uses of the
Company's product and the other of which, if granted, may cover future products)
and has submitted several applications for patents to various international
patent agencies. However, the Company primarily relies on a combination of trade
secret and copyright laws, together with non-disclosure agreements, to establish
and protect proprietary rights in its products. The non-disclosure agreements
generally prohibit disclosure and use of the Company's confidential information
by the parties to the agreements. Since trade secret, copyright and
non-disclosure agreements do not protect against reverse engineering or
independent invention, there can be no assurance that the steps taken by the
Company to protect its proprietary rights will be adequate to prevent
misappropriation of its technology.
The Company's optical localizer is a complicated measuring device. Its
software contains elaborate mathematical modeling and its manufacture requires
precise production and careful calibration. The Company believes that it would
be impractical and not cost-effective for third parties to attempt
26
<PAGE>
to duplicate the Company's software and production process. Unauthorized
parties, nevertheless, may attempt to copy aspects of the Company's products or
to obtain and use information that the Company regards as proprietary. The cost
of enforcement by the Company of its proprietary rights could be significant,
regardless of the outcome of such enforcement proceedings. Moreover, the
Company's proprietary rights will not prevent competitors of the Company from
developing their own localizers using their own technology. See "Risk
Factors--Absence of Patent Protection" and "Risk Factors-- Competition."
On January 24, 1995, St. Louis University was granted a patent covering a
particular technique for determining the position of a surgical probe within a
patient's body on an historical image of that body. Shortly thereafter, the
Company entered into an agreement with SNT, under which, among other things, (i)
the Company agreed to supply, and SNT agreed to purchase, the Company's optical
localizer, (ii) the Company agreed not to sell its optical localizer to any
customer whose use would knowingly infringe the SLU Patent and (iii) the Company
was granted the exclusive right, subject to certain minimums, to sell SNT's
image display workstations to ENT (ear, nose and throat) customers worldwide.
The agreement with SNT was terminated at the Company's request in the fall of
1995 due to the Company's decision to focus on the sale of its FlashPoint
product to medical device customers. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations-- Results of Operations."
SNT/Sofamor Danek remains a key customer of the Company. The Company believes
that the manufacture and sale of its FlashPoint localizer does not infringe the
SLU Patent, since a localizer is only a component part in the system patented by
SLU and since the Company's FlashPoint localizer has substantial non-infringing
uses. Under one part of the agreement with SNT which was not terminated, the
Company assigned to St. Louis University all right, title and interest it had in
the SLU Patent. See "Risk Factors--Customer Concentration; Patents on Systems
That Utilize Localizers" and Risk Factors--Absence of Patent Protection."
The Company recently entered into a license agreement with Vexcel
Corporation pursuant to which Vexcel granted the Company a non-exclusive
world-wide license to make, use and sell products covered by Vexcel's mandibular
motion monitoring system. This license may be of value in connection with
systems utilizing the Company's products in maxillofacial surgery.
GOVERNMENT REGULATION
The Company's FlashPoint localizer is incorporated into medical devices that
are subject to extensive regulation by the FDA and, in some instances, by
foreign and state governments. The FDA regulates the clinical testing,
manufacture, labeling, distribution and promotion of medical devices. Before a
new device can be introduced into the market, the manufacturer must generally
obtain market clearance through either the 510(k) premarket notification process
or the lengthier and more costly PMA application process. Noncompliance with
applicable requirements can result in, among other things, fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing approvals and criminal
prosecution. The FDA also has the authority to request repair, replacement or
refund of the cost of any device.
In the United States, medical devices are classified in one of three classes
(Class I, II or III), on the basis of the controls deemed necessary by the FDA
to reasonably assure their safety and effectiveness. Under FDA regulations,
Class I devices are subject to general controls (for example, labeling,
premarket notification and adherence to GMPs) and Class II devices are subject
to general and special controls (for example, performance standards, postmarket
surveillance, patient registries and FDA guidelines). Generally, Class III
devices are those which must receive premarket approval by the FDA to ensure
their safety and effectiveness (for example, life-sustaining, life-supporting
and implantable devices or new devices which have not been found substantially
equivalent to legally marketed devices).
Before a new device can be introduced into the market, the manufacturer must
generally obtain market clearance through either a 510(k) notification or a PMA
application. A 510(k) clearance will be
27
<PAGE>
granted if the submitted information establishes that the proposed device is
"substantially equivalent" to a legally marketed Class I or II medical device or
to a Class III medical device for which the FDA has not called for a PMA.
Commercial distribution of a device for which a 510(k) notification is required
can begin only after FDA issues an order finding the device to be "substantially
equivalent" to a predicate device. The FDA has recently been requiring a more
rigorous demonstration of substantial equivalence than in the past. It generally
takes from four to twelve months from the date of submission to obtain a 510(k)
clearance, though it may take longer.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device or if it is a Class
III device for which FDA has called for PMAs. A PMA application must be
supported by valid scientific evidence which typically includes extensive data,
including human clinical trial data to demonstrate the safety and effectiveness
of the device. The PMA application must also contain the results of all relevant
bench tests, laboratory and animal studies, a complete description of the device
and its components and a detailed description of the methods, facilities and
controls used to manufacture the device. In addition, the submission must
include the proposed labeling, advertising literature and training methods, if
required. The PMA process can be expensive, uncertain and lengthy and a number
of devices for which FDA approval has been sought have never been approved for
marketing.
If human clinical trials of a device are required in connection with either
a 510(k) notification or a PMA, and the device presents a "significant risk,"
the sponsor of the trial (usually the manufacturer or the distributor of the
device) is required to file an investigational device exemption ("IDE")
application prior to commencing human clinical trials. The IDE application must
be supported by data, typically including the results of animal and laboratory
testing. If the IDE application is reviewed and approved by the FDA and one or
more appropriate Institutional Review Boards ("IRBs"), human clinical trials may
begin at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. If the device presents a "nonsignificant risk"
to the patient, a sponsor may begin the clinical trial after obtaining approval
for the study by one or more appropriate IRBs.
The Company believes that the FlashPoint localizer is a medical device
component not subject to the full panoply of the FDA medical device regulations,
including the market clearance requirements. The medical equipment manufacturers
that incorporate the FlashPoint localizer into their products are, however,
required to obtain market clearance from the FDA for such products.
Modifications to such products manufactured by the medical equipment
manufacturers will require additional clearances or approvals if such
modifications could significantly effect the safety and effectiveness of the
devices or establish a new intended use for the devices. There can be no
assurance that the Company's customers have, with respect to their products that
incorporate FlashPoint localizers, complied or will be able to comply with all
applicable market clearance requirements. Failure on the part of the Company's
customers to comply with such requirements could have a material adverse effect
on the Company's business, financial condition and results of operations.
There can be no assurance that the FDA will not require, or change its rules
or interpretations so as to require, the Company to obtain 510(k) clearance for
its FlashPoint localizer apart from, or in addition to, any market clearances
obtained by its medical device customers. Failure of the Company to comply with
such market clearance requirements could have a material adverse affect on the
Company's business, financial condition and results of operations.
Products manufactured by the Company and its medical device customers that
incorporate the Company's products are subject to pervasive and continuing
regulation by the FDA. FDA enforcement policy strictly prohibits the promotion
of products for any uses other than those for which clearance or approval was
obtained. The Company's manufacturing facilities and those of its medical device
customers that incorporate its products may also be subject to periodic
inspection for compliance with GMP and other regulatory requirements by the FDA
and comparable state agencies. The Company is
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<PAGE>
currently installing the necessary systems and controls to become certified
under the ISO 9001 standards (the European equivalent to GMPs). This process
requires a significant investment of time and resources to complete.
The introduction into foreign markets of the Company's FlashPoint localizer
and the products of the medical equipment manufacturers that incorporate the
FlashPoint localizer may also subject the Company and such customers to foreign
regulatory clearances and requirements which may impose additional substantial
costs and burdens. International sales of medical devices are subject to the
regulatory requirements of each country. The regulatory process varies from
country to country.
Violations of regulatory requirements of the FDA or foreign or state
regulatory agencies or changes in such regulations or in interpretations of such
regulations, could have a material adverse affect on the Company's business,
financial condition and results of operations.
RESEARCH AND DEVELOPMENT
The Company devotes a significant portion of its resources to research and
development. In 1995, 33% of revenues (or $627,266) were spent on the
development and commercial introduction of the FlashPoint 5000 and Pixsys 5000.
The Company has estimated that approximately $1,000,000 (20.1%) of the estimated
net proceeds of this offering will be allocated to fund further research and
development activities and the Company believes that a substantial amount of
capital will be required to be allocated to such activities in the future.
The Company has developed core competencies in software development,
mathematical modeling of the 3D measurement process, digital signal processing,
circuit design, computer system integration and 3D optical sensor system
development. Outside consultants and contract engineering are employed, when
needed, for optical system design, surgical instrument development and safety
engineering. The Company's engineers work closely with its OEMs and VARs to
assist in the integration of the Company's products with customer systems and to
identify new applications for the Company's products.
The Company is currently developing a family of infrared optical camera
systems to meet a range of requirements for different sized fields-of-view and
measurement accuracy. Although optical sensing systems appear to be the best
technology choice for the present time, the Company's advanced development team
is evaluating a number of methodologies for detecting and measuring a point in
space and/or creating an image of a complex surface. These include a variety of
both passive and active markers, video imaging techniques and advanced software
and hardware designs.
The Company's product development engineering staff is currently in the
requirements development phase for the FlashPoint 6000, which will have a higher
degree of accuracy, a larger field-of-view, a faster sample/frame rate and a
more flexible interface to customers' systems. The Company's current target date
for the release of the FlashPoint 6000 is in the first quarter of 1998. There
can be no assurance that this target date will be met or that the Company will
successfully develop this product.
Additional projects are in the planning stage to create a series of unique,
proprietary marker devices such as high accuracy LEDs, passive markers,
non-magnetic markers for surgical instruments used in magnetic resonance
environments and a family of probes and instruments for both the medical and
industrial markets. The Company is currently considering making some or all of
the probes and instruments cost effective, single-use disposable items. These
are especially important for the medical markets served by the Company. There
can be no assurance, however, that any of these products will be developed.
Although the Company intends to build on, and expand its current technical
competencies to introduce new products and product enhancements, it also intends
to review compatible, complimentary technology for possible acquisition or
licensing. See "Use of Proceeds."
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<PAGE>
PRODUCT LIABILITY INSURANCE
The Company faces an inherent business risk of exposure to product liability
claims in the event that the use of its products is alleged to have resulted in
adverse effects. To date, no product liability claims have been asserted against
the Company. The Company maintains a product liability and commercial general
liability insurance policy with coverage of $1,000,000 per occurrence and an
annual aggregate maximum coverage of $2,000,000 ($1,000,000 for lawsuits outside
the United States, Canada and Puerto Rico). The Company's product liability and
general liability policy is provided on an occurrence basis and is subject to
annual renewal. There can be no assurance that liability claims will not exceed
the coverage limits of such policy or that such insurance will continue to be
available on commercially reasonable terms or at all. If the Company does not or
cannot maintain sufficient liability insurance, its ability to market its
products could be materially adversely affected. See "Risk Factors--Risk of
Product Liability Claims."
EMPLOYEES
At August 31, 1996, the Company had twenty-five full-time employees,
including six employees in research and development, nine in manufacturing and
support services, three in sales and marketing and seven employees in
administration and finance. None of the Company's employees are party to a
collective bargaining agreement. The Company believes its relations with its
employees are satisfactory.
FACILITIES
The Company occupies 12,900 square feet within a 133,000 square foot
multi-tenant facility in Boulder, Colorado, where it performs all development,
manufacturing, marketing and corporate activities. The base rent payment is
approximately $9,200 per month for 1996, $9,700 per month for 1997 and $10,200
per month for 1998. In addition to base rent, the Company pays its pro-rata
share of building operating expenses, insurance and taxes and its own utilities.
The Company believes the present facility will provide adequate space during the
remaining term of the lease, which expires in January 1999.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth certain information with respect to each executive
officer and director of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ---------------------------------------------
<S> <C> <C>
Paul L. Ray........................ 49 Chief Executive Officer and Chairman of the
Board of Directors
Robert E. Silligman................ 56 President and Chief Operating Officer
Jeffrey J. Hiller.................. 44 Chief Financial Officer and Vice President of
Finance
Waldean Schulz, Ph.D............... 51 Vice President of Technology, Secretary and
Director
Ray Hauser, Ph.D. (2).............. 69 Director
Clifford F. Frith (1).............. 57 Director
Robert T. Hamilton (1)(2).......... 52 Director
David G. Sengpiel (1)(2)........... 43 Director
</TABLE>
- ------------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
PAUL L. RAY has served as Chief Executive Officer and Chairman of the Board
of Directors of the Company since January 1994, has served as a Director of the
Company since 1992 and served as President of the Company from January 1994
through November 1995. Prior to his employment with the Company, Mr. Ray was a
Managing Partner and a Director of Paradigm Partners, LLC, Boulder, Colorado.
Paradigm Partners, LLC is the managing general partner of Paradigm Capital
Network, Ltd., a Colorado limited partnership which engages in venture
investment. Prior to co-founding Paradigm Partners in 1992, Mr. Ray, through his
own company, MedCap, Ltd., Denver, Colorado, provided management consulting
services to companies in the medical industry. Mr. Ray has 27 years of
management experience in the medical industry, with an emphasis on medical
devices. He is a founder and a board member of the Colorado Biomedical Venture
Center and serves as a director for several private companies. Mr. Ray holds a
Bachelor of Science in Business Administration from Ball State University.
ROBERT E. SILLIGMAN joined the Company as President and Chief Operating
Officer in November 1995. From June 1992 to November 1995, Mr. Silligman served
as President of Leadership Development Systems, Inc. a productivity improvement
and management development consulting firm. Before founding Leadership
Development Systems, Inc., Mr. Silligman, from March 1990 through June 1992, was
Vice President and General Manager of Medtronic Hemotec, Inc., a medical
diagnostic products company. Mr. Silligman has also held the positions of Vice
President and General Manager of Becton Dickenson Critichem Products Group,
President and Chief Executive Officer of Advanced Surgical Technologies, Inc.
and Executive Vice President and Chief Operating Officer of Irex Corp., all
manufacturers of high technology medical products. Mr. Silligman holds an
Engineering Degree from Perry Institute of Technology and a Bachelor of Science
in Business Administration from California Western University.
JEFFREY J. HILLER joined the Company in January 1994 as Chief Financial
Officer and was elected Vice President, Finance in May 1994. From 1988 through
1993, Mr. Hiller was employed by BI Incorporated, a publicly held electronic
monitoring equipment company, first, as manager of business development and,
from 1989 through 1993, as Vice President of Finance and Chief Financial
Officer. From 1985 to 1988, Mr. Hiller was President of Flatiron Capital
Corporation, a capital equipment
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leasing company that provided computer and aircraft financing to highly
capitalized public companies. Mr. Hiller held several management positions in
the Treasury Division of Storage Technology Corporation from 1978 to 1985. Mr.
Hiller holds a Bachelor of Science in Business Administration from the
University of Colorado.
WALDEAN A. SCHULZ, PH.D., is the Vice President, Technology, Secretary and a
Director of the Company. Dr. Schulz is the founder of the Company and served as
its President from its inception until December 1990, at which time he assumed
his present position. In 1979, Dr. Schulz co-founded Language Resources, a
software company. Prior to 1986, Dr. Schulz was a Product Manager for multiple
projects at NBI, Inc., a word processing company, and Intel Corporation. At
Intel Corporation, Dr. Schulz led the development of the first ANSI-76 FORTRAN
compiler and participated in the design of the microprocessors now used in
DOS-based personal computers. Dr. Schulz obtained his undergraduate and masters
degrees in mathematics, as well as his Ph.D. in computer science, from the
University of Colorado.
RAY L. HAUSER, PH.D., has served as a Director of the Company since 1991.
Dr. Hauser has started several companies, including Dental Science Laboratories,
an electro-anaesthesia device company, Tele:Time Corporation, a digital
telephone call duration measurement device company, and Hauser Laboratories,
Inc., an independent materials testing and chemical laboratory. He was
co-founder and has been director of Hauser Chemical Research, Inc. from 1983 to
present, a company that supplies Taxol for cancer therapy. Dr. Hauser has also
been a Senior Scientist with Hauser Chemical Research, Inc. since 1990. From
1961 to 1990, Dr. Hauser was a founder, and held various management positions
at, Hauser Laboratories, Inc. From 1957 to 1961, Dr. Hauser was employed by
Martin Marietta Corporation as head of the Materials Engineering Unit, Titan
Missile Project. Dr. Hauser has a Ph.D. in Chemical Engineering from the
University of Colorado, a Masters of Engineering in Chemical Engineering from
Yale University and a Bachelor of Science in Chemical Engineering from the
University of Illinois.
CLIFFORD F. FRITH has served as a Director of the Company since January
1994. Mr. Frith currently serves as the President of several small start-up
companies including Poretics, a clinical chemistry and medical filter company
which is a division of Osmonics, Inc., a water purification equipment company.
He joined American Business Advisors, Inc., as a Vice President in November 1993
until he left that company in January 1996. In this capacity, Mr. Frith has
provided research and development, marketing and corporate management services
to a wide variety of small to mid-size high technology companies. He has been
the President and a director of Boulder Intertec Inc., a business management
advising service, since June 1992. Mr. Frith was a founder, director and chief
executive officer of Anatel Corporation, a provider of high purity water
instrumentation from 1983 to 1991. Prior to that, he held management positions
with Millipore Corporation, a provider of separations processes and analysis. In
addition to over 30 years of management experience, Mr. Frith has broad
experience in both domestic and international medical and industrial marketing.
Mr. Frith holds a Bachelor of Science in Chemistry from the Virginia Military
Institute.
DAVID G. SENGPIEL has served as a Director of the Company since April 1995.
He has been a Vice-President of Equity Dynamics, Inc., a financial consulting
firm, since March 1995. Equity Dynamics, Inc. is owned by John Pappajohn, a
principal shareholder of the Company. See "Principal and Management
Shareholders." Prior to such time, Mr. Sengpiel was the Alternate Investment
Manager with Farm Bureau Life Insurance Company for five years. Mr. Sengpiel
holds a Bachelor of Science in Business degree from Carroll College.
ROBERT T. HAMILTON has served as a Director of the Company since April 1995.
He is President of Rexam Coatings, a film and paper specialty coatings company.
Prior to that, Mr. Hamilton was President and Chief Executive Officer of
Hamilton & Associates, a consulting firm specializing in strategy and
operational management services. He is also Senior Vice President of Intrados
International Management Group, which consults for major healthcare,
communications and imaging companies. Prior to 1995, Mr. Hamilton spent 31 years
with Eastman Kodak Company ("Kodak") where he
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served most recently as Vice President and Regional General Manager of the Kodak
Imaging division. From 1986 to 1991, he was Vice President and General Manager
of Kodak's Health Sciences Division. Prior thereto, Mr. Hamilton held a variety
of senior management positions with Kodak. Mr. Hamilton has a Masters of Science
in Business Management from Massachusetts Institute of Technology (Sloan
Fellow), a Master of Science in Chemical Engineering from the University of
Rochester and a Bachelor of Science in Math and Science from Hobart College.
Directors are elected to serve until the next annual meeting of shareholders
or until their successors are elected and qualified. Each officer is appointed
and serves at the discretion of the Board of Directors. Each of the Company's
officers and directors, other than non-employee directors, devotes substantially
full time to the affairs of the Company. There are no family relationships among
any of the directors, officers or key employees of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established a Compensation Committee which
currently consists of Messrs. Frith, Hamilton and Sengpiel. The Compensation
Committee reviews and recommends to the Board the compensation and benefits for
all officers of the Company and reviews general policy relating to compensation
and benefits of the employees.
The Board of Directors has also established an Audit Committee consisting of
Dr. Hauser and Messrs. Hamilton and Sengpiel. Such committee recommends the
selection of the Company's independent public accountants to the Board of
Directors, evaluates the independent public accountants, and consults with the
independent public accountants as to the Company's internal accounting controls.
DIRECTOR COMPENSATION
Directors do not currently receive any cash compensation from the Company
for their service as members of the Board of Directors, although they are
reimbursed for certain expenses associated with attendance at Board and
Committee meetings. Non-employee directors have the following options: Clifford
Frith -- options to acquire 23,806 shares of Common Stock at prices ranging from
$1.24 to $1.25 per share and 1,600 shares at the initial public offering price;
Robert Hamilton -- options to acquire 20,606 shares of Common Stock at $1.25 per
share and 1,600 shares at the initial public offering price; Ray Hauser --
options to acquire 23,806 shares of Common Stock at prices ranging from $1.24 to
$1.25 per share and 1,600 shares at the initial public offering price and David
Sengpiel -- options to acquire 20,606 shares of Common Stock at $1.25 per share
and 1,600 shares at the initial public offering price.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation earned for services rendered in all capacities to the Company for
the fiscal year ended December 31, 1995 by the Company's Chief Executive
Officer. No executive officer had a combined salary and bonus in excess of
$100,000 for such fiscal year.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
NAME AND PRINCIPAL ------------------------------- OPTIONS ALL OTHER
POSITION SALARY BONUS OTHER GRANTED (1) COMPENSATION
- ----------------------------------------------------- --------- --------- --------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Paul L. Ray, Chairman and
Chief Executive Officer............................. $ 88,545 $ 0.00 $ 0.00 40,000 $ 0.00
</TABLE>
- ------------------------------
(1) On June 23, 1995, Mr. Ray was granted an option to purchase 40,000 shares
of Common Stock at the exercise price of $1.25 per share. Such option is
subject to a three-year vesting period and will thus be fully vested on
June 22, 1998. See "Management--Employment Agreements." At the time of
grant, the fair market value of the option was determined by the Board of
Directors to be $1.25 per share.
1994 STOCK OPTION PLAN
In March 1994, the Board of Directors of the Company and, in November 1994,
the shareholders of the Company adopted the Plan. The Plan provides for the
grant of options to purchase up to 640,000 shares of Common Stock to employees,
directors and consultants of the Company. Options may be either "incentive stock
options" within the meaning of Section 422 of the United States Internal Revenue
Code of 1986, as amended (the "Code"), or non-qualified stock options. Incentive
stock options may be granted only to employees of the Company, while
non-qualified stock options may be issued to non-employee directors and
consultants, as well as to employees of the Company.
The Plan will be administered by the Board of Directors or a committee of
the Board made up of non-employee directors (as defined by Rule 16b-3 under the
Exchange Act), who determine, among other things, the individuals who shall
receive options, the time period during which the options may be partially or
fully exercised, the number of shares of Common Stock issuable upon the exercise
of each option, and the option exercise price.
The exercise price per share of Common Stock subject to an incentive stock
option may not be less than the fair market value per share of Common Stock on
the date the option is granted. The exercise price per share of Common Stock
subject to a non-qualified stock option may not be less than 85% of the fair
market value per share of Common Stock on the date the option is granted. The
aggregate fair market value (determined as of the date the option is granted) of
Common Stock for which any person may be granted incentive stock options which
first become exercisable in any calendar year may not exceed $100,000. No person
who owns, directly or indirectly, at the time of the granting of an incentive
stock option to such person, 10% or more of the total combined voting power of
all classes of stock of the Company (a "10% Stockholder") shall be eligible to
receive any incentive stock options under the Plan unless the exercise price is
at least 110% of the fair market value of the shares of Common Stock subject to
the option, determined on the date of grant. Non-qualified stock options are not
subject to such limitation.
No stock option may be transferred by an optionee other than by will or the
laws of descent and distribution, and, during the lifetime of an optionee, the
option will be exercisable only by the optionee, unless otherwise determined by
the Board of Directors or committee. In the event of termination of employment
other than by death or disability, the optionee will have no more than three
months after such termination during which the optionee shall be entitled to
exercise the option, unless otherwise determined by the Board of Directors or
committee. Upon termination of employment of an optionee by reason of death or
disability, such optionee's options remain exercisable for one year thereafter
to the extent such options were exercisable on the date of such termination,
unless otherwise determined by the Board of Directors or committee.
Options under the Plan must be issued within ten years from the effective
date of the Plan. The effective date of the Plan is March 15, 1994. Stock
options granted under the Plan cannot be exercised more than ten years from the
date of grant. Incentive stock options issued to a 10% Stockholder are
34
<PAGE>
limited to five-year terms. Options granted under the Plan provide for the
payment of the exercise price in cash or, with the approval of the Board of
Directors or committee, provide for the payment of the exercise price by
delivery to the Company of shares of Common Stock already owned by the optionee
having a fair market value equal to the exercise price of the options being
exercised. Therefore, such optionee may be able to tender shares of Common Stock
to purchase additional shares of Common Stock and may theoretically exercise all
of his stock options with no additional investment other than the purchase of
his original shares.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by the Company become available again for issuance under
the Plan.
At September 15, 1996, options to acquire 620,397 shares of Common Stock
were outstanding under the Plan. Of such options, options to acquire 169,598
shares of Common Stock are exercisable at an exercise price of $1.24 per share,
options to acquire 80,960 shares of Common Stock are exercisable at an exercise
price of $1.67 per share, options to acquire 303,039 shares of Common Stock are
exercisable at an exercise price of $1.25 per share, options to acquire 62,800
shares of Common Stock are exercisable at an exercise price equal to the initial
public offering price per share and options to acquire 4,000 shares of Common
Stock are exercisable at an exercise price equal to 110% of the initial public
offering price per share.
1997 STOCK OPTION PLAN
The Company anticipates requesting its shareholders to approve a 1997 Stock
Option Plan during calendar year 1997. Under the Underwriting Agreement, the
Company may grant options to purchase up to 164,662 additional shares of its
Common Stock (and a greater amount with the Underwriter's consent) during the 18
months after the date of this Prospectus. See "Underwriting".
401(K) PLAN
In June 1996, the Company adopted a tax-qualified employee savings and
retirement plan (the "401(k) Plan") covering all of the Company's employees.
Pursuant to the 401(k) Plan, employees who have been employed by the Company for
at least one year may elect to reduce their current compensation by an amount up
to the annual statutory limit ($9,500 in 1996) and have the amount of the
reduction contributed to the 401(k) Plan. The Company may also make additional
discretionary employer contributions to the 401(k) Plan. The trustee under the
401(k) Plan invests the assets of the 401(k) Plan in any of several investment
options. The 401(k) Plan is intended to qualify under Section 401 of the Code so
that contributions by the employees to the 401(k) Plan, and income earned on
plan contributions, are not taxable to employees until withdrawn, and so that
the contributions by employees will be deductible from gross income by the
Company when made. Any Company contributions vest at a rate of 20% per year from
the employee's date of employment through the fifth anniversary thereof.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock options
granted under the Plan to Paul L. Ray, the Chairman of the Board of Directors
and Chief Executive Officer of the Company, during the fiscal year ended
December 31, 1995.
OPTION GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------------- ANNUAL RATES OF
PERCENT OF STOCK PRICE
TOTAL OPTIONS APPRECIATION FOR
GRANTED TO EXERCISE OPTION TERM (1)
OPTIONS EMPLOYEES IN PRICE PER --------------------
NAME GRANTED FISCAL YEAR SHARE EXPIRATION DATE 5% 10%
- ----------------------------------- --------- ------------- ----------- ----------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Paul L. Ray........................ 40,000 25.05%(2) $ 1.25 June 22, 2002 $ 20,500 $ 47,500
</TABLE>
- ------------------------------
(1) Potentially realizable value is based on the assumption that the Common
Stock price appreciates at the annual rate shown (compounded annually) from
the date of grant until the end of the seven-year option term for the
options shown. The fair
35
<PAGE>
market value of the Common Stock as of the date of grant, June 23, 1995,
was determined to be $1.25 per share. The Common Stock price at the end of
the seven-year option term would be $1.76 based on an annual 5%
appreciation rate and $2.44 based on an annual 10% appreciation rate. The
amounts have been calculated based on the requirements promulgated by the
Securities and Exchange Commission (the "Commission"). There can be no
assurance that the value realized will be at or near the potential
realizable value as shown in this table.
(2) Based on 159,680 options granted to employees during the year ended
December 31, 1995.
AGGREGATE OPTION EXERCISES IN 1995 AND HOLDINGS
The following table sets forth information concerning option exercises and
option holdings for the fiscal year ended December 31, 1995 with respect to Paul
L. Ray, the Chairman of the Board of Directors and the Chief Executive Officer
of the Company:
AGGREGATE OPTIONS EXERCISED IN THE
LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUE
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED,
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS HELD AT DECEMBER OPTIONS AT
NUMBER OF SHARES 31, 1995 DECEMBER 31, 1995 (2)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ----------------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul L. Ray.............. 0.00 $ 0.00 60,640 69,361 $ 0.00 $ 0.00
</TABLE>
- ------------------------------
(1) Based on the fair market value of the Common Stock on the exercise date,
less the per share exercise price.
(2) Based on the fair market value of the Common Stock of $1.25 per share, as
determined by the Company's Board of Directors, less the per share exercise
price.
EMPLOYMENT AGREEMENTS
Paul L. Ray, Chief Executive Officer and Chairman of the Board of Directors
of the Company, has an employment agreement (the "Ray Agreement") with the
Company that terminates on December 31, 1998. Mr. Ray's current salary is
$125,000. Mr. Ray's compensation package (including salary, bonus and stock
options and/or other equity incentives) is subject to an annual review by the
Board of Directors, but no portion of such compensation package can be decreased
without Mr. Ray's written consent. Pursuant to the Ray Agreement, options
granted to Mr. Ray by virtue of option agreements with the Company shall expire
seven years from the date of grant and remain exercisable for a seven-year
period regardless of whether Mr. Ray's employment with the Company terminates
earlier and notwithstanding contrary provisions in said option agreements.
Options not vested on Mr. Ray's termination of employment shall be forfeited
unless the Board of Directors decides otherwise. In the event of a Change in
Control of the Company (as defined in the Ray Agreement), all options previously
granted to Mr. Ray which remain unvested will automatically vest immediately.
Upon a termination of Mr. Ray's employment following a Change in Control, unless
Mr. Ray voluntarily terminates his employment for other than certain listed
reasons (which he has the right to do upon at least thirty days written notice
to the Company), the Company is to pay Mr. Ray a lump sum severance payment of
one-half of his then current annual salary. In addition, if Mr. Ray's employment
is terminated (i) upon his death, (ii) by the Company due to various described
disability circumstances, (iii) by the Company without cause or (iv) by Mr. Ray
voluntarily upon the Company's default or unremedied Adverse Change in Duties
(as defined in the Ray Agreement), then the Company is to pay Mr. Ray a lump sum
severance payment of one-half of his then current annual salary. Upon the
termination of Ray's Agreement, Mr. Ray is subject to certain non-compete,
non-disturbance and non-interference provisions for a period of six months.
Robert E. Silligman, President and Chief Operating Officer of the Company,
has an employment agreement with the Company which expires on December 31, 1998
(the "Silligman Agreement"). The Silligman Agreement provides for annual
compensation review provisions similar to those described above with respect to
the Ray Agreement and similar provisions to those set forth in the Ray Agreement
with respect to (i) automatic option vesting on Change in Control, (ii)
severance on
36
<PAGE>
termination following Change in Control, (iii) severance on termination for
other causes and (iv) non-compete, non-interference and non-disturbance upon
termination of employment. Mr. Silligman's current salary is $115,000.
Waldean A. Schulz, Vice President, Technology of the Company, also has an
employment agreement with the Company (the "Schulz Agreement") which expires on
December 31, 1998. The Schulz Agreement provides for an annual salary of $80,000
and provisions similar to those described above with respect to the Silligman
Agreement except that the Schulz Agreement, provides for a longer, twelve-month
non-compete, non-interference and non-disturbance upon termination of
employment.
Jeffrey J. Hiller, Vice President, Finance of the Company and Chief
Financial Officer, also has an employment agreement with the Company (the
"Hiller Agreement") which expires on December 31, 1998. The Hiller Agreement
contains provisions similar to those described above for Mr. Silligman. Mr.
Hiller's current salary is $100,000.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation limit the liability of a director of
the Company to the Company and its shareholders for monetary damages for breach
of fiduciary duty to the fullest extent permitted by the Colorado Business
Corporation Act ("CBCA"). The CBCA permits elimination of a directors personal
liability for monetary damages for breach of fiduciary duty, except (i) for
breach of the director's duty, of loyalty to a company or its shareholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) for acts specified in Section7-108-403,
CBCA and (iv) for transactions in which the director directly or indirectly
derived an improper personal benefit.
The Company's By-Laws provide that the Company shall indemnify its officers
and directors to the fullest extent permitted by the CBCA, as amended from time
to time. Subject to several exceptions, the CBCA provides in part that a company
shall have the power to indemnify any person made a party to a proceeding (as
defined in the CBCA) because such person is or was a director or officer of the
company or is or was serving at the company's request in a representative
capacity for another person or entity against liability incurred in the
proceeding if the person conducted himself or herself in good faith, and such
person reasonably believed, in the case of conduct in an official capacity, that
his or her conduct was in the company's best interests and in all other cases,
that his or her conduct was at least not opposed to the company's best
interests. In addition, a company is authorized to advance expenses to officers
and directors provided the officer or director furnishes to the company a
written affirmation of his or her good faith belief that he or she has met the
standard of conduct described above and the officer or director provides the
company with a written undertaking to repay the advance if it is ultimately
determined that he or she did not meet such standard of conduct. Any
indemnification may be made only as authorized in each specific case after a
determination has been made that indemnification is permissible by the board of
directors, a committee of the board of directors, the shareholders or
independent legal counsel as provided in the CBCA. Where an officer or director
is wholly successful, on the merits or otherwise, in the defense of any
proceeding, a company must indemnify him or her against reasonable expenses
incurred. The Company also maintains directors' and officers' liability coverage
to insure indemnification of its directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
37
<PAGE>
CERTAIN TRANSACTIONS
Ray L. Hauser, a shareholder and member of the Board of Directors of the
Company, is an owner of the facility that was leased by the Company until it
moved into its current office space in February 1996. Rent expense under such
lease was $21,645 in 1994 and $48,604 in 1995.
During 1995, the Company issued a series of short-term notes in the
aggregate principal amount of $775,000 for working capital. These were issued to
five of the Company's existing shareholders and one director (the "Lenders").
Each Lender also received warrants ("Warrants") to purchase one share of Common
Stock at an exercise price of $1.25 per share (and expiring at various times in
the year 2000) for each $2.50 loaned to the Company as a term of the loan
transaction. Each note accrues interest at the rate of 11% per annum and is
secured by the Company's current and future inventory, accounts receivable,
intangible assets and intellectual property. The Company intends to repay the
principal amount of, and accrued and unpaid interest on, such notes with a
portion of the proceeds of this offering. See "Use of Proceeds." The following
table sets forth each Lender's name, his or its relationship to the Company, the
original principal amount of each note, the number of warrants issued in
connection with the issuance of such note, and the amount of interest accrued on
such note as of June 30, 1996. With the exception of the Warrants to purchase
40,000 shares of Common Stock held by Mr. Hamilton, (which expire with respect
to 20,000 shares on April 6, 2000 and the balance of 20,000 shares on October
19, 2000), all of the other Warrants issued to the Lenders have been exercised
in full.
<TABLE>
<CAPTION>
ACCRUED
INTEREST
WARRANTS AS OF
LENDER TITLE NOTE AMOUNT ISSUED JUNE 30, 1996
- ------------------------------------------------------ -------------- ------------ --------- ---------------
<S> <C> <C> <C> <C>
Colorado Incubator Fund, L.P.......................... Shareholder $ 10,000 4,000 $ 1,299
Edgewater Private Equity Fund, L.P.................... Shareholder 100,000 40,000 14,025
Edgewater Private Equity Fund, L.P.................... Shareholder 50,000 20,000 4,874
Edgewater Private Equity Fund, L.P.................... Shareholder 70,000 28,000 5,903
Farm Bureau Life Insurance............................ Shareholder 100,000 40,000 13,567
Farm Bureau Life Insurance............................ Shareholder 50,000 20,000 4,874
Farm Bureau Life Insurance............................ Shareholder 70,000 28,000 5,497
Robert Hamilton....................................... Director 50,000 20,000 3,835
Robert Hamilton....................................... Director 50,000 20,000 6,875
John Pappajohn........................................ Shareholder 100,000 40,000 14,086
John Pappajohn........................................ Shareholder 50,000 20,000 4,904
John Pappajohn........................................ Shareholder 70,000 28,000 5,903
Paradigm Capital Network, Ltd......................... Shareholder 5,000 2,000 649
------------ --------- ---------------
TOTAL............................................. $ 775,000 310,000 $ 86,291
------------ --------- ---------------
------------ --------- ---------------
</TABLE>
The Company believes that the above transactions were on terms at least as
favorable to the Company as those then available in the marketplace. The Company
intends that all future transactions between the Company and its officers,
directors and 5% shareholders will be on terms no less favorable than could be
obtained from unaffiliated third parties and will be approved by a majority of
the independent, disinterested directors of the Company.
38
<PAGE>
PRINCIPAL AND MANAGEMENT SHAREHOLDERS
The following table sets forth certain information concerning the beneficial
ownership of the Common Stock as of August 31, 1996 by (i) each director, (ii)
the Chief Executive Officer of the Company, (iii) each shareholder known by the
Company to own beneficially five percent or more of the outstanding shares of
Common Stock and (iv) the Chief Executive Officer and all directors of the
Company as a group, and their percentage ownership of Common Stock after
completion of this offering. All information in this table gives effect to the
conversion of the Company's outstanding Series A Preferred Stock into 304,290
shares of Common Stock.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING COMMON
STOCK BENEFICIALLY
NUMBER OF SHARES OWNED
OF COMMON STOCK ------------------------
NAME AND ADDRESS OF BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER(1) OWNED(2) OFFERING OFFERING
- ------------------------------------------------------------------------- ---------------- ----------- -----------
<S> <C> <C> <C>
Paul L. Ray(3)........................................................... 94,739 5.39% 3.15%
Ray L. Hauser(4)......................................................... 304,068 18.06% 10.37%
Clifford F. Frith(5)..................................................... 15,786 * *
David G. Sengpiel(6)..................................................... 8,586 * *
Robert Hamilton(7)....................................................... 48,586 2.83% 1.64%
Waldean A. Schulz(8)..................................................... 170,230 10.10% 5.80%
Edgewater Private Equity Fund, L.P ...................................... 413,847 24.81% 14.18%
667 Grand Avenue, Suite 200
Des Moines, Iowa 50309
John Pappajohn .......................................................... 232,821 13.96% 7.98%
2116 Financial Center
Des Moines, Iowa 50309
FBL Ventures of South Dakota ............................................ 120,686 7.24% 4.14%
5400 University Avenue
West Des Moines, Iowa 50266
Attn: Steven Hunter
Timothy L. Feaver(9)..................................................... 113,600 6.77% 3.88%
Farm Bureau Life Insurance(10) .......................................... 208,686 12.51% 7.15%
5400 University Avenue
West Des Moines, Iowa 50266
Attn: Steven Hunter
Chief Executive Officer and all directors as a group (6 persons)(11)..... 641,995 34.46% 20.62%
</TABLE>
- ------------------------------
* Less than one percent.
(1) Unless otherwise noted, the address for each beneficial owner is c/o the
Company, 5710-B Flatiron Parkway, Boulder, Colorado 80301.
(2) Except as otherwise noted, each individual or entity has sole voting and
investment power with respect to the shares listed. Beneficial ownership is
determined in accordance with the rules of the Commission and generally
includes voting or investment power with respect to securities. In
accordance with Commission rules, shares of the Common Stock which may be
acquired upon exercise of stock options which are currently exercisable or
which become exercisable within 60 days of August 31, 1996 are deemed
beneficially owned by the optionee and each beneficial owner's percentage
ownership is determined by assuming that options or warrants that are held
by such person (but not those held by any other person) and which are
exercisable within 60 days of August 31, 1996 have been exercised. Except
as indicated by footnote, and subject to community property laws where
applicable, the persons or entities named in the table above have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them.
39
<PAGE>
(3) Includes 88,652 shares which Mr. Ray has a right to acquire upon exercise
of stock options currently exercisable or exercisable within 60 days of the
date of this Prospectus. Does not include (i) 5,318 shares of Common Stock
held by Paradigm Partners ("Paradigm"), a limited liability company of
which Mr. Ray is a member, but not a manager, (ii) 10,000 shares Paradigm
has a right to acquire upon exercise of stock options currently exercisable
or exercisable within 60 days of the date of this Prospectus and (iii)
14,071 shares of Common Stock held by Paradigm Capital Network, Ltd., a
Colorado limited partnership of which Paradigm is the general partner.
(4) Includes 15,786 shares of Common Stock Dr. Hauser has a right to acquire
upon exercise of stock options currently exercisable or exercisable within
60 days of the date of this Prospectus and 2,560 shares of Common Stock
owned by Dr. Hauser's wife of which Dr. Hauser disclaims beneficial
ownership.
(5) Includes 15,786 shares of Common Stock Mr. Frith has a right to acquire
upon exercise of stock options currently exercisable or exercisable within
60 days of the date of this Prospectus.
(6) Includes 8,586 shares of Common Stock Mr. Sengpiel has a right to acquire
upon exercise of stock options currently exercisable or exercisable within
60 days of the date of this Prospectus.
(7) Includes 8,586 shares of Common Stock Mr. Hamilton has a right to acquire
upon exercise of stock options currently exercisable or exercisable within
60 days of the date of this Prospectus and 40,000 shares of Common Stock Mr.
Hamilton has a right to acquire upon exercise of Warrants which are
currently exercisable.
(8) Includes 17,680 shares of Common Stock Dr. Schulz has a right to acquire
upon exercise of stock options currently exercisable or exercisable within
60 days of the date of this Prospectus.
(9) Includes 10,000 shares of Common Stock Mr. Feaver has a right to acquire
upon exercise of stock options currently exercisable or exercisable within
60 days of the date of this Prospectus and 12,160 shares of Common Stock
held by Mr. Feaver and his wife, Dewi Anne Feaver, as joint tenants.
(10) Includes 120,685 shares of Common Stock owned by FBL Ventures of South
Dakota, which is a wholly-owned subsidiary of Farm Bureau Life Insurance.
(11) Includes 167,664 shares of Common Stock issuable upon exercise of options
currently exercisable or exercisable within 60 days of the date of this
Prospectus, 40,000 shares of Common Stock issuable upon exercise of Warrants
which are currently exercisable and 2,560 shares of Common Stock owned by
Dr. Hauser's wife of which Dr. Hauser disclaims beneficial ownership.
40
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of (i) 10,000,000
shares of Common Stock and (ii) 2,416,668 shares of Preferred Stock, no par
value (after giving effect to the mandatory conversion of 83,332 shares of
Preferred Stock into 304,290 shares of Common Stock effective upon the closing
of this offering; the "Preferred Stock"). The discussions of the Common Stock
and Preferred Stock here and elsewhere in this Prospectus are qualified in their
entirety by reference to (i) the Restated and Amended Articles of Incorporation
of the Company, as amended, a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part, and (ii) the
applicable provisions of the laws of the State of Colorado.
COMMON STOCK
Immediately prior to the closing of this offering, 1,667,741 shares of
Common Stock were issued and outstanding and were held of record by 43
shareholders (after giving effect to the mandatory conversion of 83,332 shares
of Series A Preferred Stock into 304,290 shares of Common Stock effective upon
the closing of this offering). Holders of Common Stock are entitled to one vote
for each share held of record on each matter submitted to a vote of shareholders
and do not have cumulative voting rights in the election of directors. Subject
to the preferences that may be applicable to any outstanding Preferred Stock,
the holders of Common Stock are entitled to receive such dividends, if any, as
may be declared from time to time by the Board of Directors. In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets of the Company remaining after
payment of liabilities, subject to distribution preferences of the Preferred
Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock and the shares of Common Stock to be issued upon completion of
this offering will be validly authorized and issued, fully paid and non-
assessable. The rights, preferences and privileges of holders of Common Stock
are subject to the rights of the holders of shares of any series of Preferred
Stock which the Company may issue in the future.
PREFERRED STOCK
Upon the closing of this offering, the Company will be authorized to issue
up to 2,416,668 shares of Preferred Stock. At the closing of this offering, no
shares of Preferred Stock will be issued and outstanding. The Board of Directors
has the authority to issue the Preferred Stock in one or more series, to fix the
number of shares constituting each such series and the designations thereof
(including the right to increase or decrease such numbers of shares), and to fix
the rights, preferences, privileges and restrictions thereof, within the
limitations of the CBCA, as such act may be amended, including, but not limited
to, dividend rights, dividend rates, conversion rights, redemption rights,
voting rights and liquidation preferences. The issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of the
Company without further action by the shareholders and may adversely affect the
voting and other rights of the holders of Common Stock, The issuance of the
Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of Common Stock, including the loss of voting
control to others. At present, the Company has no plans to issue any additional
Preferred Stock. See "Risk Factors--Preferred Stock; Possible Anti-Takeover
Effects."
WARRANTS
Immediately prior to the closing of this offering, the Company will have
outstanding warrants to purchase 40,000 shares of the Common Stock at an
exercise price of $1.25 per share. In lieu of delivering the exercise price in
cash or by check, the holder may elect to receive shares equal to the value of
the warrant or portion thereof being exercised. Holders of the warrants are
entitled to advance notice of certain dividends and distributions, proposed
liquidation, merger or consolidation and benefit from anti-dilution protection.
Holders of warrants are entitled to the piggyback rights described in
"Description of Securities--Registration Rights."
41
<PAGE>
REGISTRATION RIGHTS
The holders of 574,291 shares of Common Stock and the holder of warrants to
purchase 40,000 shares of Common Stock will be entitled to the registration
rights described below with respect to such shares, subject to the terms of the
lockup agreements described elsewhere in this Prospectus. See "Shares Eligible
For Future Sale" and "Underwriting." Under the terms of the Registration Rights
Agreement, dated as of July 8, 1994, between the Company and the holders of its
Series A Preferred Stock ("Registration Rights Agreement"), if the Company
proposes at any time after 12 months after the date of this Prospectus to
register any of its shares under the Securities Act either for its own account
or for the account of other shareholders, such holders are entitled to notice of
such registration and are entitled to include in such registration (the
"Piggyback Rights"), their 304,290 shares of Common Stock received on conversion
of their Series A Preferred Stock. Such shareholders may also require the
Company, by request of the holders of a majority of the aggregate outstanding
registrable securities, on one and only one occasion after 12 months after the
effective date of this offering, to file a registration statement under the
Securities Act at the Company's expense with respect to such shares of Common
Stock, and the Company is required to use its best efforts to effect such
registration. In addition, holders of (i) 270,000 shares of Common Stock
acquired pursuant to the exercise of warrants and (ii) outstanding warrants to
purchase 40,000 shares of Common Stock have the Piggyback Rights described above
with respect to such shares. The above registration rights granted to the
holders of the Series A Preferred Stock expire on July 7, 1999 and the
registration rights granted to the holders of the warrants expire on March 15,
2000, unless in each case expiring sooner as a result of such securities being
eligible for resale pursuant to the provisions of Rule 144(k) under the
Securities Act (so long as the holder owns less than 3% of the Company's
outstanding Common Stock).
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Continental Stock
Transfer & Trust Company, 2 Broadway, New York, New York 10004.
RECAPITALIZATION
On September 23, 1996, the shareholders approved a four for five reverse
stock split of the Common Stock.
42
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 2,917,741 shares of
Common Stock outstanding (3,105,241 shares of Common Stock outstanding if the
Underwriter's over-allotment option is exercised in full). Of these shares, the
1,250,000 Shares offered hereby (1,437,500 shares if the Underwriter's
over-allotment option is exercised in full) and 9,600 of the shares outstanding
immediately prior to the offering will be freely tradeable without further
registration under the Securities Act. The holders of 1,612,183 of the 1,667,741
shares of the Common Stock outstanding immediately prior to the offering, all
the option holders under the Plan and the holder of currently outstanding
warrants to purchase 40,000 shares of Common Stock have agreed (i) not to
publicly sell, or otherwise dispose of, any shares of Common Stock or shares of
Common Stock issuable upon exercise of options or warrants for a period of 18
months from the date of this offering without the Underwriter's prior written
consent (which will not be unreasonably withheld); and (ii) not to privately
sell or otherwise dispose of any such shares during such period unless the
proposed transferee agrees to be bound by such restrictions on transfer; in
addition, one shareholder who owns 6,400 shares has agreed to the above
restrictions on sale for a 12-month period. The Underwriter may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to the above described restrictions on sale.
All of the 1,667,741 shares of Common Stock outstanding prior to this
offering are "restricted securities" within the meaning of Rule 144 of the
Securities Act and, if held for at least two years, would be eligible for sale
in the public market in reliance upon, and in accordance with, the provisions of
Rule 144 following the expiration of such two-year period. As of August 31,
1996, 1,327,588 shares of Common Stock had been held for at least two years. In
general, under Rule 144 as currently in effect, a person or persons whose shares
are aggregated, including a person who may be deemed to be an "affiliate" of the
Company as that term is defined under the Securities Act (an "Affiliate"), would
be entitled to sell within any three-month period a number of shares
beneficially owned for at least two years that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock, or (ii) the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and the availability of current
public information about the Company. However, a person who is not deemed to
have been an affiliate of the Company during the 90 days preceding a sale by
such person and who has beneficially owned shares of Common Stock for at least
three years may sell such shares without regard to the volume, manner of sale or
notice requirements of Rule 144. Since 9,600 shares of Common Stock have been
held for at least three years and such shares are not subject to the above
described restriction on sale, they will be eligible for immediate sale without
restriction in the public market. The Commission has proposed an amendment to
Rule 144 which would reduce the holding period for shares subject to Rule 144 to
become eligible for sale in the public market upon expiration or release from
such restrictions on sale.
Rule 701 under the Securities Act provides that the shares of Common Stock
acquired on the exercise of options granted under a written compensatory plan of
the Company or contract with the Company prior to the date of this Prospectus
may be resold by persons, other than Affiliates, beginning 90 days after the
date of this Prospectus, subject only to the manner of sale provisions of Rule
144, and by Affiliates under Rule 144 without compliance with its two-year
minimum holding period, subject to certain limitations. There are 620,397 shares
of Common Stock issuable upon the exercise of outstanding options under the Plan
(the "Option Shares"). Beginning 90 days after the date of this Prospectus, all
of the Option Shares would be eligible for sale in reliance on Rule 701, subject
to certain vesting provisions. In addition, the Company intends to file a
registration statement on Form S-8 to permit the shares of Common Stock acquired
upon exercise of the options to be freely tradeable or sold.
Prior to this offering, there has been no public market for the Company's
securities. Following this offering, the Company cannot predict the effect, if
any, that sales of shares of Common Stock pursuant to Rule 144 or otherwise, or
the availability of such shares for sale, will have on the market
43
<PAGE>
price prevailing from time to time. Nevertheless, sales by the current
shareholders of a substantial number of shares of Common Stock in the public
market could materially adversely affect prevailing market prices for the Common
Stock. In addition, the availability for sale of a substantial number of shares
of Common Stock acquired through the exercise of the Underwriter's Warrants or
the outstanding options under the Plan or the outstanding warrant could
materially adversely affect prevailing market prices for the Common Stock. See
"Risk Factors--Shares Eligible For Future Sale."
Up to 125,000 additional shares of Common Stock may be purchased by the
Underwriter during the period commencing on the first anniversary of the date of
this Prospectus and terminating on the fifth anniversary of the date of this
Prospectus through the exercise of the Underwriter's Warrants. Any and all
shares of Common Stock purchased upon the exercise of the Underwriter's Warrants
may be freely tradeable, provided that the Company satisfies certain securities
registration and qualification requirements in accordance with the terms of the
Underwriter's Warrants. See "Underwriting."
After the offering, the holders of 574,291 shares of Common Stock and the
holder of the warrants to purchase 40,000 shares of Common Stock, or their
transferees, will be entitled to certain rights with respect to the registration
of such shares under the Securities Act. See "Description of Securities--
Registration Rights." Registration of such shares under the Securities Act would
result in such shares becoming freely tradeable without restriction under the
Securities Act (except for shares purchased by Affiliates) immediately upon the
effectiveness of such registration.
44
<PAGE>
UNDERWRITING
GENERAL
The Underwriter has agreed, subject to the terms and conditions contained in
the Underwriting Agreement, to purchase from the Company, and the Company has
agreed to sell to the Underwriter, the Shares offered hereby.
A copy of the Underwriting Agreement has been filed as an exhibit to the
Registration Statement, to which reference is hereby made. The Underwriting
Agreement provides that the obligations of the Underwriter are subject to
certain conditions. The Underwriter shall be obligated to purchase all of the
shares of Common Stock offered hereby if any are purchased.
The Underwriter has advised the Company that it proposes to offer the shares
of Common Stock offered hereby to the public at the public offering price set
forth on the cover page of this Prospectus and that they may allow to certain
dealers who are members of the National Association of Securities Dealers, Inc.
(the "NASD"), and to certain foreign dealers, concessions not in excess of $0.30
per share, of which amount a sum not in excess of $0.10 per share may in turn be
reallowed by such dealers to other dealers who are members of the NASD and to
certain foreign dealers. After the commencement of this offering, the
concessions and the reallowances may be changed by the Underwriter. The
Underwriter does not intend to sell any of the Company's securities to accounts
over which it exercises discretionary authority.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriter may be required to make in respect thereof.
The Company has agreed to pay to the Underwriter an aggregate expense
allowance, on a non-accountable basis, equal to 3% of the gross proceeds derived
from the sale of 1,250,000 shares of Common Stock offered hereby (or 1,437,500
shares of Common Stock if the Underwriter's over-allotment option is exercised
in full). The Company paid an advance on such allowances in the amount of
$50,000. The Company has also agreed to pay certain of the Underwriter's
expenses in connection with this offering, including expenses in connection with
qualifying the shares of Common Stock for sale under the laws of such states as
the Underwriter may designate. In addition, the Company will sell to the
Underwriter, at an aggregate purchase price of $125, the Underwriter's Warrants
to purchase up to an aggregate of 125,000 shares of Common Stock exercisable at
a price per share equal to 115% of the initial public offering price per Share.
The holders of 1,612,183 of the 1,667,741 shares of Common Stock currently
outstanding and all the option holders under the Plan and the holder of the
warrants (to purchase 40,000 shares of Common Stock) have agreed (i) not to
publicly sell, or otherwise dispose of, any shares of Common Stock or shares of
Common Stock issuable upon exercise of options or warrants for a period of 18
months from the date of this offering without the Underwriter's prior written
consent (which consent will not be unreasonably withheld) and (ii) not to
privately sell or otherwise dispose of any such shares during such period unless
the proposed transferee agrees to be bound by such restrictions on transfer;
also, one shareholder who owns 6,400 shares has agreed to the above restrictions
on sale for a 12-month period. In addition, for a period of 18 months after the
date of this Prospectus, the Company has agreed that, without the Underwriter's
prior consent (which consent will not be unreasonably withheld), it will not
sell any shares of Common Stock or grant any options or warrants to purchase
Common Stock other than (i) the Underwriter's Warrants, (ii) options which may
be granted under the Plan and up to 164,662 additional options, (iii) shares of
Common Stock issued in connection with the exercise of any such options or
warrants, (iv) shares of Common Stock issued upon the exercise of options and
warrants outstanding on the date hereof and (v) shares of Common Stock issued in
connection with an acquisition by the Company.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price of the shares of Common Stock has been
determined by negotiation between the
45
<PAGE>
Company and the Underwriter. Among the factors considered in such negotiations
were (i) an assessment of the Company's future prospects, (ii) the experience of
the Company's management, (iii) the current financial position of the Company,
(iv) the prevailing conditions in the securities markets, including the market
value of the publicly traded common stock of companies in similar industries,
(v) the market conditions for new offerings of securities and (vi) the demand
for similar securities of comparable companies.
OVER-ALLOTMENT OPTION
The Company has granted to the Underwriter an option, exercisable in the
sole discretion of the Underwriter within 45 days after the date of this
Prospectus, to purchase up to an aggregate of 187,500 shares of Common Stock
solely to cover over-allotments, if any. Such options are exercisable at the
public offering price per share less underwriting discounts and commissions.
After the commencement of this offering, the Underwriter may confirm sales of
shares of Common Stock subject to this over-allotment option. Purchases of
shares of Common Stock upon exercise of the over-allotment option will result in
the realization of additional compensation by the Underwriter.
UNDERWRITER'S WARRANTS
In connection with this offering, the Company has agreed to sell to the
Underwriter for an aggregate purchase price of $125, the Underwriter's Warrants
to purchase up to 125,000 shares of Common Stock. The Underwriter's Warrants are
exercisable for a period of four years commencing one year from the date hereof
at an exercise price per share (the "Exercise Price") equal to 115% of the
initial public offering price per share. The Underwriter's Warrants may not be
sold, transferred, assigned, pledged or hypothecated for a period of 12 months
from the date of the Prospectus, except to members of the selling group and
officers and partners of the Underwriter and members of the selling group. The
Underwriter's Warrants contain anti-dilution provisions providing for adjustment
of the Exercise Price and the number of shares of Common Stock issuable upon the
exercise thereof upon the occurrence of certain events, including stock
dividends, stock splits, recapitalizations and sales of Common Stock below the
then current market price (as defined therein). The holders of the Underwriter's
Warrants have no voting, dividend or other rights as shareholders of the Company
with respect to shares of Common Stock underlying the Underwriter's Warrants,
unless the Underwriter's Warrants have been exercised.
The Company has agreed, on one occasion during the period beginning one year
after the date hereof and ending four years thereafter, if requested by the
holders of a majority of the Underwriter's Warrants or Warrant Shares, to make
all necessary filings to permit a public offering of the Warrant Shares and to
use its best efforts to cause such filing to become effective under the
Securities Act and to remain effective for at least nine months, at the
Company's sole expense. Notwithstanding the foregoing, the Company shall have no
obligation to prepare and file such new registration statement or post-effective
amendment to the registration statement if, within 20 days after it receives the
request therefor, the Company or insiders who own individually in excess of 5%
of the Common Stock agree to purchase the Underwriter's Warrants and/or the
underlying securities from such requesting holders at a price, in the case of
the Underwriter's Warrants, equal to the difference between the exercise price
of the Underwriter's Warrants and the current market price (as defined therein)
of the Warrant Shares. In addition, the Company has agreed, for the period
starting at the beginning of the second year and concluding at the end of the
fifth year after the effective date of the Registration Statement of which this
Prospectus is a part, to give advance notice to holders of the Underwriter's
Warrants and Warrant Shares of its intention to file a registration statement,
and in such case, holders of the Underwriter's Warrants and the Warrant Shares
shall have the right to require the Company to include the Warrant Shares in
such registration statement at the Company's expense.
During the period that the Underwriter's Warrants are exercisable, the
Underwriter and any transferee will have the opportunity to profit from a rise
in the market price of the Common Stock with a resulting dilution in the
interest of other shareholders. In addition, the terms on which the Company will
be able to obtain additional capital during the exercise period may be adversely
affected
46
<PAGE>
since the Underwriter is likely to exercise the Underwriter's Warrants at a time
when the Company would, in all likelihood, be able to obtain capital by a new
offering of securities on terms more favorable than those provided by the terms
of the Underwriter's Warrants.
OBSERVER OF THE BOARD
In connection with this offering, the Company has agreed that, for the three
year period commencing on the date of this Prospectus, the Underwriter has the
right to appoint a designee as an observer at all meetings of the Company's
Board of Directors. This designee has the right to attend all meetings of the
Board of Directors and shall be entitled to receive reimbursement for all
out-of-pocket expenses of attendance at such meetings. In addition, such
designee shall be indemnified and insured to the same extent as the Company's
directors.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Ireland, Stapleton, Pryor & Pascoe, P.C., Denver, Colorado. Certain
legal matters will be passed upon for the Underwriters by Brock, Fensterstock,
Silverstein, McAuliffe & Wade, LLC, New York, New York.
EXPERTS
The financial statements as of December 31, 1994 and 1995, and for each of
the two years in the period ended December 31, 1995, included in this Prospectus
have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The statements with respect to the SLU Patent, and the statements regarding
infringement with respect thereto, included in this Prospectus have been so
included in reliance on Nikaido, Marmelstein, Murray & Oram, given on the
authority of said firm as experts in patent law.
CHANGE IN INDEPENDENT ACCOUNTANTS
On November 17, 1994, the Company dismissed its then current auditors and,
on November 28, 1994, the Company retained Price Waterhouse LLP as the Company's
independent accountants. Such actions were approved by the Company's Board of
Directors. The former auditors' report on the Company's financial statements for
the two years ended December 31, 1993, does not cover the financial statements
of the Company included in this Prospectus. The former auditors' report was not
modified as to audit scope or accounting principles, but did contain an
explanatory paragraph relating to the Company's ability to continue as a going
concern. There were no disagreements with the former auditors on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure at the time of the change or with respect to the Company's
financial statements for either of the two years in the period ended December
31, 1993, which, if not resolved to the former auditors' satisfaction, would
have caused them to make reference to the subject matter of the disagreement in
connection with their report. Prior to retaining Price Waterhouse LLP, the
Company had no consultations with Price Waterhouse LLP regarding the audit
reports of the former auditors or application of accounting principles.
47
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington D.C. 20549, a registration statement on Form SB-2 (the "Registration
Statement"), including amendments thereto, under the Securities Act with respect
to the securities offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules filed therewith, as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and this
offering, reference is hereby made to the Registration Statement and to the
exhibits and schedules filed therewith. Statements contained in this Prospectus
as to the contents of any contract or other document which has been filed as an
exhibit to the Registration Statement are qualified in their entirety by
reference to such exhibits for a complete statement of their terms and
conditions. The Registration Statement and the exhibits and schedules thereto
may be inspected without charge at the offices of the Commission and copies of
all or any part thereof may be obtained from the Commission's principal office
at 450 Fifth Street, N.W., Washington D.C. 20549 or at certain of the regional
offices of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, upon payment of the fees prescribed by the Commission. Electronic
registration statements filed through the Electronic Data Gathering, Analysis
and Retrieval system are publicly available through the Commission's Web site
(http://www.sec.gov). Reports and other information concerning the Company may
be inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington D.C. 20006. In addition, reports and other
information concerning the Company may be inspected at the offices of the Boston
Stock Exchange, One Boston Place, Boston, Massachusetts 02108.
The Company is not currently a reporting company. The Company intends to
furnish its shareholders with annual reports containing audited financial
statements and such other periodic reports as it may determine to furnish or as
may be required by law, including Sections 13(a) and 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
48
<PAGE>
IMAGE GUIDED TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants......................................... F-2
Balance Sheet............................................................. F-3
Statement of Operations................................................... F-4
Statement of Changes in Shareholders' Equity (Deficit).................... F-5
Statement of Cash Flows................................................... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Image Guided Technologies, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in shareholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Image Guided
Technologies, Inc. (the "Company") at December 31, 1994 and 1995, and the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1995 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Boulder, Colorado
July 12, 1996, except for the third paragraph of
Note 9, as to which the date is September 23, 1996
F-2
<PAGE>
IMAGE GUIDED TECHNOLOGIES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
DECEMBER 31, DECEMBER 31, JUNE 30, EQUITY
1994 1995 1996 JUNE 30, 1996
-------------- ------------ ----------- -------------
(UNAUDITED) (NOTE 1)
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 92,406 $ 31,822 $ 137,851
Accounts receivable, net of allowance for doubtful accounts of $0,
$23,506, and $40,656 at December 31, 1994 and 1995 and June 30,
1996 (unaudited), respectively..................................... 279,401 522,405 577,384
Inventories......................................................... 113,366 175,256 355,384
Other current assets................................................ 13,702 37,657 119,748
-------------- ------------ -----------
Total current assets................................................ 498,875 767,140 1,190,367
Property and equipment, net of accumulated depreciation of $18,435,
$54,535 and $93,113 at December 31, 1994 and 1995 and June 30, 1996
(unaudited), respectively............................................ 72,007 91,475 253,473
Deposits.............................................................. 12,000
-------------- ------------ -----------
Total assets...................................................... $ 570,882 $ 858,615 $ 1,455,840
-------------- ------------ -----------
-------------- ------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................... $ 159,053 $ 302,659 $ 320,937
Accrued liabilities................................................. 95,285 384,628 391,270
Notes payable....................................................... 775,000 775,000
-------------- ------------ -----------
Total current liabilities........................................... 254,338 1,462,287 1,487,207
Capital lease obligation.............................................. 108,971
-------------- ------------ -----------
Total liabilities................................................... 254,338 1,462,287 1,596,178
Commitments and contingencies (Note 8)
Shareholders' equity (deficit):
Series A Convertible Preferred Stock, no par value; 2,500,000 shares
authorized; 83,332 issued and outstanding; 2,416,668 shares
authorized pro forma; none issued and outstanding pro forma........ 999,960 999,960 999,960
Common Stock, no par value; 10,000,000 shares authorized; 1,080,142,
1,093,451, and 1,363,451 shares issued and outstanding at December
31, 1994 and 1995 and June 30, 1996 (unaudited), respectively, and
1,667,741 at June 30, 1996 pro forma (unaudited)................... 1,645,490 1,777,223 2,114,723 $ 3,114,683
Accumulated deficit................................................. (2,328,906) (3,380,855) (3,255,021) (3,255,021)
-------------- ------------ ----------- -------------
Total shareholders' equity (deficit).............................. 316,544 (603,672) (140,338) (140,338)
-------------- ------------ ----------- -------------
Total liabilities and shareholders' equity (deficit).............. $ 570,882 $ 858,615 $ 1,455,840 $ 1,455,840
-------------- ------------ ----------- -------------
-------------- ------------ ----------- -------------
</TABLE>
The accompanying notes are an integral part these financial statements.
F-3
<PAGE>
IMAGE GUIDED TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ ------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue................................. $ 908,146 $ 1,883,802 $ 496,865 $1,746,657
Cost of goods sold...................... 502,625 793,622 258,909 733,803
----------- ----------- ----------- -----------
Gross profit............................ 405,521 1,090,180 237,956 1,012,854
----------- ----------- ----------- -----------
Operating expenses:
Research and development.............. 291,461 627,266 384,812 328,442
Selling and marketing................. 605,745 767,664 353,223 224,541
General and administrative............ 551,393 595,603 236,878 296,384
----------- ----------- ----------- -----------
Total operating expenses............ 1,448,599 1,990,533 974,913 849,367
----------- ----------- ----------- -----------
Operating income (loss)................. (1,043,078) (900,353) (736,957) 163,487
Other income (expense):
Interest expense...................... (41,472) (175,806) (16) (44,099)
Interest and other income............. 24,295 24,210 11,122 6,446
----------- ----------- ----------- -----------
Net income (loss)....................... $(1,060,255) $(1,051,949) $ (725,851) $ 125,834
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Pro forma net income (loss) per common
share (unaudited)...................... -- $ (.63) -- $ .06
----------- -----------
----------- -----------
Pro forma weighted average number of
common shares outstanding
(unaudited)............................ -- 1,675,937 -- 2,241,588
----------- -----------
----------- -----------
Supplemental pro forma net income (loss)
per common share (unaudited)........... -- $ (.57) -- $ .07
----------- -----------
----------- -----------
Supplemental pro forma weighted average
number of common shares outstanding
(unaudited)............................ -- 1,778,152 -- 2,349,249
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
IMAGE GUIDED TECHNOLOGIES, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TOTAL
---------------- --------------------- UNEARNED ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT EQUITY (DEFICIT)
------ -------- --------- ---------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993.............. 403,373 $ 938,585 $(13,257) $(1,268,651) $ (343,323)
Stock issued upon conversion of debt and
interest................................. 33,175 55,256 55,256
Exercise of stock options and warrants.... 122,336 2,713 2,713
Issuance of common stock and preferred
stock.................................... 83,332 $999,960 521,258 632,469 1,632,429
Grant of options to directors, officers,
and employees in exchange for services... 16,467 (16,467)
Stock option compensation expense......... 29,724 29,724
Net loss.................................. (1,060,255 ) (1,060,255)
------ -------- --------- ---------- ------------ ----------- ----------------
Balance at December 31, 1994.............. 83,332 999,960 1,080,142 1,645,490 -- (2,328,906 ) 316,544
Exercise of stock options and warrants.... 13,309 41 41
Warrants issued with debt................. 131,692 131,692
Net loss.................................. (1,051,949 ) (1,051,949)
------ -------- --------- ---------- ------------ ----------- ----------------
Balance at December 31, 1995.............. 83,332 999,960 1,093,451 1,777,223 -- (3,380,855 ) (603,672)
Exercise of warrants...................... 270,000 337,500 337,500
Net income................................ 125,834 125,834
------ -------- --------- ---------- ------------ ----------- ----------------
Balance at June 30, 1996 (unaudited)...... 83,332 $999,960 1,363,451 $2,114,723 $ -- $(3,255,021) $ (140,338)
------ -------- --------- ---------- ------------ ----------- ----------------
------ -------- --------- ---------- ------------ ----------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
IMAGE GUIDED TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ --------------------------
1994 1995 1995 1996
-------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income (loss)..................................... $ (1,060,255) $ (1,051,949) $ (725,851) $ 125,834
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation........................................ 23,710 52,082 22,684 41,127
Amortization of debt discount....................... 131,692
Provision for doubtful accounts..................... 26,907 6,175 17,428
Write-off of fixed assets........................... 51,046 40,828
Stock option compensation expense................... 29,724
Allowance for inventory obsolescence................ 32,546 12,892 20,546 (3,339)
Changes in operating assets and liabilities:
Accounts receivable............................... (177,178) (269,911) 306,329 (72,407)
Inventories....................................... (89,742) (74,782) (70,693) (176,789)
Other current assets.............................. (11,796) (23,955) (17,583) (82,091)
Deposits.......................................... (12,000)
Accounts payable.................................. (39,959) 143,606 63,043 18,278
Accrued liabilities............................... 70,143 289,343 46,411 (10,403)
-------------- -------------- ------------ ------------
Net cash used by operating activities............. (1,171,761) (723,247) (348,939) (154,362)
-------------- -------------- ------------ ------------
INVESTING ACTIVITIES
Additions to property and equipment................... (121,689) (112,378) (78,381) (77,109)
-------------- -------------- ------------ ------------
Net cash used by investing activities............. (121,689) (112,378) (78,381) (77,109)
-------------- -------------- ------------ ------------
FINANCING ACTIVITIES
Payments on short-term line of credit................. (250,000)
Proceeds from issuance of debt and warrants........... 775,000 365,000
Proceeds from the issuance of common stock and
preferred stock...................................... 1,635,142 41 40 337,500
-------------- -------------- ------------ ------------
Net cash provided by financing activities......... 1,385,142 775,041 365,040 337,500
-------------- -------------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents.......................................... 91,692 (60,584) (62,280) 106,029
Cash and cash equivalents at beginning of period...... 714 92,406 92,406 31,822
-------------- -------------- ------------ ------------
Cash and cash equivalents at end of period............ $ 92,406 $ 31,822 $ 30,126 $ 137,851
-------------- -------------- ------------ ------------
-------------- -------------- ------------ ------------
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid......................................... $ 26,154 $ 250 $ 5,416
Equipment acquired under capital lease................ $ 126,016
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
IMAGE GUIDED TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Image Guided Technologies, Inc. (the "Company") was incorporated in 1990 in
the State of Colorado to design, develop, manufacture and market proprietary,
hand-held electro-optical 3-dimensional position input devices for medical and
industrial applications. In March 1995, the Company changed its name from
Pixsys, Inc. to Image Guided Technologies, Inc.
REVENUE RECOGNITION AND WARRANTY
Revenue is recognized upon shipment. The Company offers a one-year warranty
on products sold. The costs of product warranties are accrued at the time sales
are recorded based upon estimates of costs to be incurred to repair or replace
items under warranty.
INVENTORIES
Inventories are carried at the lower of cost or market. Cost is determined
using the first-in, first-out ("FIFO") method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated on a straight-line
basis over their estimated useful lives of two to five years.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are carried at cost which approximates fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the related reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL DATA
The interim financial data as of June 30, 1996 and for the six months ended
June 30, 1995 and June 30, 1996 is unaudited; however, in the opinion of
management of the Company, the interim data includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
results for the interim periods presented. All data presented in these notes at
such date and for such periods is unaudited.
UNAUDITED PRO FORMA SHAREHOLDERS' EQUITY
The Board of Directors authorized management of the Company to file a
registration statement with the Securities and Exchange Commission ("SEC")
permitting the Company to sell shares of its common stock to the public. If the
Company's initial public offering is consummated under the terms presently
anticipated, all of the convertible preferred stock outstanding will
automatically convert into 304,290 shares of common stock. Unaudited pro forma
shareholders' equity as of June 30, 1996, as set forth on the accompanying
balance sheet, is adjusted for the anticipated conversion of preferred stock.
F-7
<PAGE>
IMAGE GUIDED TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED PRO FORMA NET INCOME (LOSS) PER COMMON SHARE
The Company's historical capital structure is not indicative of its
prospective structure due to the automatic conversion of convertible preferred
stock into common stock concurrent with the closing of the Company's anticipated
initial public offering. Accordingly, historical net income (loss) per common
share is not considered meaningful and has not been presented herein.
Pro forma net income (loss) per common share is computed based on the
weighted average number of common shares outstanding and gives effect to certain
adjustments described below. Common equivalent shares are not included in the
per share calculation where the effect of their inclusion would be antidilutive,
except that, in conformity with SEC requirements, common and common equivalent
shares issued during the twelve-month period prior to the filing of the
Company's proposed initial public offering have been included in the calculation
as if they were outstanding for all periods, using the treasury stock method and
the assumed initial public offering price of $5 per share. Additionally, all
outstanding shares of convertible preferred stock are assumed to have been
converted to common stock at the time of their issuance.
UNAUDITED SUPPLEMENTAL PRO FORMA NET INCOME (LOSS) PER SHARE
Supplemental pro forma net income (loss) per share is based on the weighted
average number of shares of common stock and common stock equivalents used in
the calculation of pro forma net income (loss) per share plus the number of
shares that would be required to be sold, on a net proceeds basis, to repay
borrowings outstanding on the Company's notes payable ($775,000 in the aggregate
at June 30, 1996) as contemplated in connection with the Company's initial
public offering. For purposes of this calculation, net income has been increased
by $43,098 for the six-month period ended June 30, 1996 and net loss has been
reduced by $43,192 for the year ended December 31, 1995, to reflect elimination
of interest expense on such notes payable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash,
short-term trade receivables and payables and long-term debt, approximate their
fair values.
CONCENTRATION OF CREDIT RISK
The majority of the Company's revenues during 1994 and 1995 resulted from
sales of a single product which is used to determine the location of a surgical
instrument in a three dimensional space. Customers accounting for 10% or more of
total revenues during 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Customer A............................................................................... 18%
Customer B............................................................................... 18%
Customer C............................................................................... 12%
Customer D............................................................................... 19%
Customer E............................................................................... 13%
Customer F............................................................................... 38%
</TABLE>
At December 31, 1994, 17%, 0% and 29% of accounts receivable were with
customers A, B, and C, respectively. At December 31, 1995, 25%, 6% and 60% of
accounts receivable were with customers D, E and F, respectively.
EXPORT SALES
The Company had export sales totaling approximately $400,247 and $450,187
for the years ended December 31, 1994 and 1995, respectively, principally to
Germany, France, and Canada.
F-8
<PAGE>
IMAGE GUIDED TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ADOPTION OF NEW ACCOUNTING STANDARDS
The Company has reviewed Statements of Financial Accounting Standards No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF, and
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, for applicability. Based on
management's estimates and its intention to continue to apply its existing
accounting for stock options, the adoption of these standards is not expected to
have a material effect on the Company's financial statements.
2. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
----------- ----------- JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials................................................... $ 126,281 $ 211,029 $ 173,868
Work-in-process................................................. 4,125 4,104 182,912
Finished goods.................................................. 15,506 5,561 40,703
----------- ----------- -----------
145,912 220,694 397,483
Less allowance for obsolescence................................. (32,546) (45,438) (42,099)
----------- ----------- -----------
$ 113,366 $ 175,256 $ 355,384
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
---------- -----------
<S> <C> <C>
Demonstration equipment........................................................ $ 2,885 $ 30,938
Computer equipment............................................................. 52,695 54,746
Production equipment........................................................... 23,909 44,658
Furniture and fixtures......................................................... 10,953 15,668
---------- -----------
90,442 146,010
Less accumulated depreciation.................................................. (18,435) (54,535)
---------- -----------
$ 72,007 $ 91,475
---------- -----------
---------- -----------
</TABLE>
4. CREDIT ARRANGEMENTS
In April 1994, a shareholder of the Company repaid amounts owed under a
$250,000 revolving line of credit in return for 187,616 shares of the Company's
common stock. The Company has no current lines of credit.
F-9
<PAGE>
IMAGE GUIDED TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE
The notes payable at December 31, 1995 and June 30, 1996 (unaudited) consist
of the following:
<TABLE>
<S> <C>
Notes payable to shareholders or shareholders' wholly-owned subsidiaries;
interest at 11% per year; principal and interest payable on demand...... $ 210,000
Note payable to related party; interest at 11% per year; principal and
interest payable on demand.............................................. 50,000
Notes payable to shareholders or shareholders' wholly-owned subsidiaries;
interest at 11% per year; matures 1996 (as extended).................... 465,000
Note payable to related party; interest at 11% per year; matures 1996 (as
extended)............................................................... 50,000
---------
$ 775,000
---------
---------
</TABLE>
The Company issued 310,000 warrants to purchase common stock at an exercise
price of $1.25 per share pursuant to each of the notes payable above. These
warrants are fully vested and outstanding at December 31, 1995 and are
exercisable through 2000. The warrants were valued in good faith by management
at $131,692 and a corresponding amount was recorded as debt discount which was
fully amortized, over the original term of the notes payable, during 1995. Of
these warrants, 270,000 warrants were exercised in May and June of 1996.
The notes payable are secured by the Company's current and future inventory,
accounts receivable, intangible assets and intellectual property. The fair
market value of the notes payable approximates their carrying value at December
31, 1995. Subsequent to December 31, 1995, the Company negotiated extended
payment terms on the above notes payable. See Note 9.
6. INCOME TAXES
At December 31, 1994, the Company had net operating loss carryforwards of
approximately $1,967,000. At December 31, 1995, the Company has net operating
loss carryforwards of approximately $2,788,000 which expire from 2006-2010.
During 1994, certain changes in the Company's ownership occurred which limit the
future utilization of these net operating loss carryforwards. Future ownership
changes may further limit the ability of the Company to realize its net
operating loss carryforwards.
At December 31, 1994 and 1995, the Company had gross deferred tax assets of
approximately $792,000 and $1,180,000, respectively, consisting primarily of the
tax effect of net operating loss carryforwards. The gross deferred tax assets
have been reduced by a valuation allowance of $792,000 and $1,180,000,
respectively, because, based on the weight of available evidence, management
believes it is more likely than not that such benefits will not be realized. The
valuation allowance increased by approximately $383,000 and $388,000 during 1994
and 1995, respectively, primarily because no benefit was recorded for current
year losses.
The difference between the expected statutory benefit, determined by
applying the federal income tax rate of 34% to loss before income tax, and the
Company's tax benefit was primarily the additional valuation allowance recorded
against net operating loss benefits generated during 1994 and 1995. No provision
for income taxes has been recorded during 1996, as the Company has been able to
utilize net operating loss carryforwards.
F-10
<PAGE>
IMAGE GUIDED TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SHAREHOLDERS' EQUITY
STOCK SPLIT
During 1994, the Company effected a four-for-one stock split of the
Company's common stock. All common stock and stock option amounts presented in
these financial statements reflect this stock split.
CONVERTIBLE PREFERRED STOCK
Holders of Series A Convertible Preferred Stock ("Series A stock") are
entitled to receive dividends equal to those paid on the number of common shares
into which the preferred shares are convertible. Each share of outstanding
Series A stock is entitled to as many votes as the number of shares of common
stock into which it is convertible. The holders of Series A shares may, at any
time, convert their preferred shares into common shares on a one-for-one basis,
subject to adjustments for stock splits and certain antidilution provisions. As
of December 31, 1995, such Series A shares outstanding would convert to
approximately 304,290 shares of common stock. All Series A stock automatically
converts into common stock at the closing of an underwritten public offering of
common stock of the Company with aggregate offering proceeds of no less than
$5,000,000 or when at least 75% of all outstanding Series A stock has been
converted.
In the event of a liquidation of the Company, holders of Series A shares
will be entitled to a liquidation preference of $3.75 per share, before
adjustment for any future stock splits.
COMMON STOCK
At December 31, 1995, the Company has reserved an aggregate of 1,234,454
shares of its common stock for the conversion of the outstanding Series A stock
and stock issuable upon exercise of outstanding options and warrants.
STOCK OPTIONS
Stock option activity is as follows:
<TABLE>
<CAPTION>
OPTIONS EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1993................................. 184,356 $ .0031
Options granted.......................................................... 359,600 .0031-1.6625
Options exercised........................................................ (103,136) .0031
Options forfeited........................................................ (2,452) .0031
---------- ----------------
Options outstanding at December 31, 1994................................. 438,368 .0031-1.6625
Options granted.......................................................... 248,312 1.25
Options exercised........................................................ (13,328) .0031
Options forfeited........................................................ (37,800) 1.25
---------- ----------------
Options outstanding at December 31, 1995................................. 635,552 $ 1.25-1.6625
---------- ----------------
---------- ----------------
</TABLE>
The Company has authorized 640,000 options to be granted pursuant to its
stock option plan. At December 31, 1995, there were 4,448 options available for
grant under the plan. Options are generally granted at fair market value as
determined by the Board of Directors at the date of grant and vest over a
five-year period. At December 31, 1995, 264,824 options are exercisable.
WARRANTS
At December 31, 1995, and in addition to those warrants described in Note 5,
22,240 warrants to purchase common stock of the Company are outstanding at an
exercise price of $3.13 per share. The warrants are fully exercisable and expire
in 1996. Subsequent to December 31, 1995, the warrants expired prior to
exercise.
F-11
<PAGE>
IMAGE GUIDED TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under non-cancelable leases and the
Company has required future minimum rental payments of $1,004 at December 31,
1995. A shareholder of the Company is an owner of the facility leased by the
Company under a short-term cancelable lease which expired in February, 1996.
Rent expense for 1994 and 1995 was $21,645 and $48,604, respectively.
9. OTHER EVENTS SUBSEQUENT TO DECEMBER 31, 1995
Subsequent to December 31, 1995, the Company and the note holders agreed to
extend the due dates of all principal ($775,000 at December 31, 1995) and
accrued interest at December 31, 1995 to the earlier of June 30, 1997 or thirty
days after the closing of an underwritten initial public offering of the
Company's common stock with gross proceeds of not less than $5,000,000.
Subsequent to December 31, 1995, the Company's board of directors authorized
the Company to undertake an initial public offering of the Company's common
stock pursuant to a letter of intent dated May 21, 1996.
On September 23, 1996, the Company's shareholders approved a four for five
reverse split of the Company's outstanding shares of common stock, as well as an
equivalent change in the conversion rate applicable to Series A Convertible
Preferred Stock and the exercise prices and related common shares subject to
outstanding stock options and warrants. As a result of the reverse stock split,
all share and per share information included in these financial statements have
been restated for all periods presented.
F-12
<PAGE>
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATES AS OF WHICH SUCH INFORMATION IS FURNISHED.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Financial Information............................................ 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 22
Management................................................................ 32
Certain Transactions...................................................... 39
Principal and Management Shareholders..................................... 40
Description of Securities................................................. 42
Shares Eligible for Future Sale........................................... 44
Underwriting.............................................................. 46
Legal Matters............................................................. 48
Experts................................................................... 48
Change In Independent Accountants......................................... 48
Additional Information.................................................... 48
</TABLE>
------------------------------
UNTIL NOVEMBER 15, 1996 (25 DAYS AFTER THE DATE OF THE PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS 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.
1,250,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
HAMPSHIRE SECURITIES
CORPORATION
OCTOBER 21, 1996
- --------------------------------------------------------------------------------
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation limit the liability of a director of
the Company to the Company and its shareholders for monetary damages for breach
of fiduciary duty to the fullest extent permitted by the Colorado Business
Corporation Act ("CBCA"). The CBCA permits elimination of a directors personal
liability for monetary damages for breach of fiduciary duty except (i) for
breach of the director's duty of loyalty to a company or its shareholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) for acts specified in Section7-108-403,
CBCA and (iv) for transactions in which the director directly or indirectly
derived an improper personal benefit.
The Company's By-Laws provide that the Company shall indemnify its officers
and directors to the fullest extent permitted by the CBCA, as amended from time
to time. Subject to several exceptions, the CBCA provides in part that a company
shall have the power to indemnify any person made a party to a proceeding (as
defined in the CBCA) because such person is or was a director or officer of the
company or is or was serving at the company's request in a representative
capacity for another person or entity against liability incurred in the
proceeding if the person conducted himself or herself in good faith, and such
person reasonably believed, in the case of conduct in an official capacity, that
his or her conduct was in the company's best interests and in all other cases,
that his or her conduct was at least not opposed to the company's best
interests. In addition, a company is authorized to advance expenses to officers
and directors provided the officer or director furnishes to the company a
written affirmation of his or her good faith belief that he or she has met the
standard of conduct described above and the officer or director provides the
company with a written undertaking to repay the advance if it is ultimately
determined that he or she did not meet such standard of conduct. Any
indemnification may be made only as authorized in each specific case after a
determination has been made that indemnification is permissible by the board of
directors, a committee of the board of directors, the shareholders or
independent legal counsel as provided in the CBCA. Where an officer or director
is wholly successful, on the merits or otherwise, in the defense of any
proceeding, a company must indemnify him or her against reasonable expenses
incurred. The Company also maintains directors' and officers' liability coverage
to insure indemnification of its directors and officers.
Section 8 of the Underwriting Agreement filed as Exhibit 1.1 hereto provides
for the indemnification by the Underwriter of the Registrant and its directors
and officers, and by the Registrant of the Underwriter, for certain liabilities
arising under the Securities Act of 1933, as amended (the "Securities Act"), or
otherwise.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses (other than underwriting discounts
and commissions) of the issuance and distribution of the securities being
registered, all of which will be paid by the Registrant.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 3,500
NASD filing fee.................................................. 1,400
Nasdaq listing Fee............................................... 10,000
Boston Stock Exchange listing fee................................ 7,250
Blue Sky filing fees and expenses................................ 47,750
Printing and engraving expenses.................................. 70,000
Legal fees and expenses.......................................... 160,000
Accounting fees and expenses..................................... 55,000
Transfer agent and registrar fees................................ 1,000
Premium on directors and officers liability insurance............ 50,000
Premiums on key-man life insurance............................... 6,500
Underwriter's non-accountable expense allowance*................. 187,500
Miscellaneous.................................................... 60,100
---------
Total........................................................ $ 660,000
---------
---------
</TABLE>
- ------------------------
* Will increase to $215,625 if the Underwriter's over-allotment option is
exercised in full.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant has issued unregistered
securities in the transactions described below. The sales of securities were
made without the use of an underwriter and the certificates evidencing the
shares bear a restrictive legend permitting the transfer thereof only upon
registration of the shares or an exemption under the Securities Act.
(1) On July 1, 1993 and April 5, 1994, the Registrant issued an aggregate of
1,804 shares of Common Stock (5,773 after the Registrant's December 1994 four
for one stock split and the September 1996 four for five reverse stock split) to
a director of the Registrant upon conversion of a note payable by the Registrant
to the director at a conversion price of $5.33 per share for a total
consideration of $9,615.32. Securities issued in this transaction were offered
and sold in reliance upon Sections 3(a)(9) and 4(2) of the Securities Act.
(2) On March 25, 1994, the Registrant issued 6,000 shares of Common Stock
(19,200 after the Registrant's December 1994 four for one stock split and the
September 1996 four for five reverse stock split) to a director of the
Registrant upon exercise of a warrant at an exercise price of $.40 per share for
a total consideration of $2,400. Securities issued in this transaction were
offered and sold in reliance upon Section 4(2) of the Securities Act.
(3) On March 18, 1994, the Registrant issued 15,465 shares of Common Stock
(49,488 after the Registrant's December 1994 four for one stock split and the
September 1996 four for five reverse stock split) to 10 existing shareholders of
the Registrant at a price of $5.33 per share for an aggregate consideration of
$82,428.45. Securities issued in this transaction were offered and sold in
reliance upon Section 4(2) of the Securities Act and Rule 504 of Regulation D
promulgated thereunder.
(4) On March 18, 1994, the Registrant issued an aggregate of 8,448 shares of
Common Stock (27,034 after the Registrant's December 1994 four for one stock
split and the September 1996 four for five reverse stock split) to two directors
of the Registrant, a partnership affiliated with one of such directors, and an
employee of the Registrant. Such issuances were made upon the conversion of
notes payable by the Registrant to said parties at a conversion price of $5.33
per share for a total consideration of $45,006.52. Securities issued in this
transaction were offered and sold in reliance upon Sections 3(a)(9) and 4(2) of
the Securities Act.
II-2
<PAGE>
(5) Between March 18, 1994 and June 23, 1995, the Registrant issued an
aggregate of 36,395 shares of Common Stock (116,464 after the Registrant's
December 1994 four for one stock split and the September 1996 four for five
reverse stock split) to various employees, directors and a consultant of the
Registrant, in addition to a limited liability company affiliated with one of
such directors, at a price of $.01 per share for aggregate consideration of
$363.95, pursuant to the exercise of options previously granted to such parties
by the Registrant. Securities issued in this transaction were offered and sold
in reliance upon Section 4(2) of the Securities Act and Rule 504 of Regulation D
promulgated thereunder.
(6) On July 6, 1994, the Registrant issued 46,904 shares of Common Stock
(150,093 after the Registrant's December 1994 four for one stock split and the
September 1996 four for five reverse stock split) to a director of the Company
at a price of $5.33 per share in exchange for the director's payment of a note
payable by the Registrant to Vectra Bank in the amount of $250,000 which the
director had guaranteed and previously agreed to pay in full. Securities issued
in this transaction were offered and sold in reliance upon Section 4(2) of the
Securities Act.
(7) In July and August, 1994, the Registrant issued an aggregate of 101,024
shares of Common Stock and an aggregate of 83,332 shares of Series A Preferred
Stock pursuant to a private placement of such stock to six sophisticated
investors (323,277 and 266,663 shares, respectively, after the Registrant's
December 1994 four for one stock split and the September 1996 four for five
reverse stock split). The purchase price was $2.97 per share for Common Stock
and $12.00 per share for Series A Preferred Stock for an aggregate purchase
price of $1,300,000. One of the investors received his shares in lieu of payment
of a $300,000 note payable by the Registrant to such investor. Securities issued
in this transaction were offered and sold in reliance upon Section 4(2) of the
Securities Act and Rule 505 and 506 of Regulation D promulgated thereunder.
(8) During 1995, the Registrant issued a series of short-term notes in
aggregate principal amount of $775,000 together with warrants to purchase
310,000 shares of the Registrant's Common Stock at $1.25 per share to five of
the Company's existing shareholders and one director. See "Certain
Transactions." The notes and warrants were offered and sold in reliance on
Section 4(2) of the Securities Act and Rule 505 and 506 of Regulation D
promulgated thereunder.
(9) In May and June, 1996, the Registrant issued 270,000 shares of Common
Stock to five warrant holders upon the exercise of warrants issued by the
Registrant to such parties in connection with their loans to the Registrant in
1995. See paragraph (8) above. The warrants were exercised at a price of $1.25
per share for an aggregate consideration of $337,500. Securities issued in this
transaction were offered and sold in reliance upon Section 4(2) of the
Securities Act and Rule 505 and 506 of Regulation D promulgated thereunder.
ITEM 27. EXHIBITS.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
1.1 -- Form of Underwriting Agreement.+
3.1 -- Amended and Restated Articles of Incorporation of the Company and Articles of Amendment and
Certificate of Correction thereto.+
3.2 -- Bylaws of the Company.+
4.1 -- Specimen Common Stock Certificate.+
5.1 -- Opinion of Ireland, Stapleton, Pryor & Pascoe, P.C.+
10.1 -- 1994 Stock Option Plan of the Company, as amended, and after the Company's December 1994 four
for one stock split.+
10.2 -- Form of Stock Option Agreement under the Company's 1994 Stock Option Plan.+
10.3 -- Registration Rights Agreement dated as of July 8, 1994, among the Company and holders of the
Company's Series A Preferred Stock.+
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
10.4 -- Form of Consultant Non-Disclosure Agreement used between the Company and consultants.+
10.5 -- Form of Employee Non-Disclosure and Inventions Agreement used between the Company and its
employees.+
10.6 -- Form of Promissory Notes payable by the Company to each of the Company's Lenders and form of
Extension Agreements thereto.+
10.7 -- Form of Security Agreement between the Company and each of the Company's Lenders.+
10.8 -- Form of Stock Purchase Warrants issued by the Company to each of the Company's Lenders.+
10.9 -- OEM Agreement dated as of April 25, 1996, between the Company and DeeMed International.**,+
10.10 -- Strategic Alliance Agreement dated as of February 27, 1995 between the Company and Surgical
Navigation Technologies, Inc. and letters regarding termination of such agreement.+
10.11 -- Equipment Lease Agreement between the Company and Machinery Systems, Inc., for a refurbished
Zeiss Coordinate Measuring Machine.+
10.12 -- Commercial Industrial Lease dated January 11, 1996, between the Company and Life Investors
Company of America.+
10.13 -- Domestic Sales Representation Agreement dated December 21, 1993, between the Company and Sandab,
Inc.+
10.14 -- Terms and Conditions of Sale between the Company and Carl Zeiss, Inc.**,+
10.15 -- Employment Agreement between the Company and Paul L. Ray and Amendment thereto.+
10.16 -- Employment Agreement between the Company and Robert E. Silligman.+
10.17 -- Employment Agreement between the Company and Waldean A. Schulz.+
10.18 -- Employment Agreement between the Company and Jeffrey J. Hiller.+
10.19 -- Lease between the Company and Raycon Properties.+
10.20 -- Form of Representative's Warrants.+
10.21 -- Letter Agreement dated June 24, 1992, between the Company and Giken Shoji Company, Ltd. and
notice of termination thereof.+
10.22 -- License Agreement dated as of August 1, 1996, between the Company and Vexcel Corporation.**,+
10.23 -- OEM Purchase Agreement dated August 6, 1996, between the Company and Radionics Software
Applications, Inc.**,+
11.1 -- Statement re computation of earnings per share.+
16.1 -- Letter from Ernst & Young to the Commission.+
23.1 -- Consent of Independent Accountants.
23.2 -- Consent of Ireland, Stapleton, Pryor & Pascoe, P.C. (included in Exhibit 5.1).+
23.3 -- Consent of Nikaido, Marmelstein, Murray & Oram.+
24.1 -- Power of Attorney (included in signature pages).+
27.1 -- Financial Data Schedule.+
</TABLE>
- ------------------------
+ Previously filed.
** The Company has applied for confidential treatment with respect to portions
of this exhibit.
II-4
<PAGE>
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the 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, 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 a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it is declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) It will:
(a) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement; and notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in the volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement.
(iii) Include any additional or changed material information on the
plan of distribution.
(b) For determining liability under the Securities Act, treat each
post-effective amendment as a new Registration Statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(c) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and authorized this Amendment No. 4 to
the Registration Statement to be signed on its behalf by the undersigned, in
Boulder, Colorado, on this 18th day of October, 1996.
IMAGE GUIDED TECHNOLOGIES, INC.
By: /s/ ROBERT E. SILLIGMAN
-----------------------------------
Robert E. Silligman, President
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT WAS SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES STATED.
SIGNATURES TITLE DATE
- ----------------------------------- ------------------------- ----------------
*
- ----------------------------------- Principal Executive October 18, 1996
Paul L. Ray Officer and Director
/s/ ROBERT E. SILLIGMAN
- ----------------------------------- President October 18, 1996
Robert E. Silligman
* Principal Financial
- ----------------------------------- Officer and Principal October 18, 1996
Jeffrey J. Hiller Accounting Officer
*
- ----------------------------------- Vice President, October 18, 1996
Waldean A. Schulz Technology and Director
*
- ----------------------------------- Director October 18, 1996
Ray L. Hauser
*
- ----------------------------------- Director October 18, 1996
Clifford F. Frith
*
- ----------------------------------- Director October 18, 1996
Robert Hamilton
*
- ----------------------------------- Director October 18, 1996
David G. Sengpiel
*By /s/ ROBERT E.
SILLIGMAN
- -----------------------------------
Robert E. Silligman
ATTORNEY-IN-FACT
II-6
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form SB-2 of our report dated July 12, 1996, except
for the third paragraph of Note 9, as to which the date is September 23, 1996,
relating to the financial statements of Image Guided Technologies, Inc., which
appears in such Prospectus. We also consent to the references to us under the
headings "Summary Financial Information", "Selected Financial Information" and
"Experts" in such Prospectus. However, it should be noted that Price Waterhouse
LLP has not prepared or certified such "Summary Financial Information" or
"Selected Financial Information."
Price Waterhouse LLP
Boulder, Colorado
October 16, 1996
