<PAGE>
As filed with the Securities and Exchange Commission on October 19, 2000
Registration No. 333-45734
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
-------------------
KYPHON INC.
(Exact name of Registrant as specified in its charter)
-------------------
<TABLE>
<S> <C> <C>
Delaware 3841 77-0366069
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or
organization) Classification Code Number) Identification No.)
</TABLE>
1350 Bordeaux Drive
Sunnyvale, California 94089
(408) 548-6500
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-------------------
RICHARD D. MURDOCK
Chief Executive Officer
KYPHON INC.
1350 Bordeaux Drive
Sunnyvale, California 94089
(408) 548-6500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------
Copies to:
<TABLE>
<S> <C>
J. Casey McGlynn, Esq. Laura A. Berezin, Esq.
David J. Saul, Esq. Cooley Godward LLP
Philip H. Oettinger, Esq. Five Palo Alto Square
Wilson Sonsini Goodrich & Rosati 3000 El Camino Real
Professional Corporation Palo Alto, California 94306
650 Page Mill Road (650) 843-5000
Palo Alto, California 94304
(650) 493-9300
</TABLE>
-------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration 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 number of the earlier effective registration statement for the
same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration 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
<TABLE>
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-----------------------------------------------------------------------------------------------
<CAPTION>
Proposed Proposed Proposed Maximum
Maximum Amount Maximum Aggregate Amount of
Title of Each Class of to be Offering Price Offering Price Registration
Securities to be Registered Registered (1) Per Share (2) (2) Fee (3)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock $0.001 par value ... 4,600,000 $12.00 $55,200,000 $14,573
-----------------------------------------------------------------------------------------------
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</TABLE>
(1) Includes 600,000 shares of common stock issuable upon exercise of the
underwriters' over-allotment options.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act.
(3) $15,180 was previously paid by the Registrant pursuant to Rule 457(o) of
the Securities Act in connection with the initial filing on October 18,
2000.
-------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the Securities and Exchange Commission +
+declares our registration statement effective. This prospectus is not an +
+offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion, dated October 19, 2000
4,000,000 Shares
KYPHON INC.
Common Stock [KYPHON LOGO]
$[ ] per share
--------------------------------------------------------------------------------
. This is our initial
. Kyphon Inc. is public offering and no
offering 4,000,000 public market
shares. currently exists for
our shares.
. We anticipate that the
initial public . Proposed trading
offering price will be symbol: Nasdaq
between $10.00 and National Market--KYPH
$12.00 per share.
---------------------
This investment involves risk. See "Risk Factors"
beginning on page 5.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- ------
<S> <C> <C>
Public offering price.......................................... $[ ] $[ ]
Underwriting discount.......................................... $[ ] $[ ]
Proceeds to Kyphon............................................. $[ ] $[ ]
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The underwriters have a 30 day option to purchase
up to 600,000 additional shares of common stock
from us to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor
any state securities commission has approved of
anyone's investment in these securities or
determined if this prospectus is truthful or
complete. Any representation to the contrary is a
criminal offense.
U.S. Bancorp Piper Jaffray
Bear, Stearns & Co. Inc.
Chase H&Q
The date of this prospectus is , 2000.
<PAGE>
INSIDE FRONT COVER
[Heading: "KyphX System"
Subheading: "KyphX Bone Access System"
Picture of KyphX Bone Access System and the following caption: "Small
instruments to access and create a working channel into the vertebral body. Two
configurations are offered."]
[Heading: "KyphX Inflatable Bone Tamp"
Picture of KyphX Inflatable Bone Tamp and the following caption: "Proprietary
balloon catheter specially designed for use in bone. The balloon compacts the
bone and creates a cavity."]
[Heading: "KyphX Inflation Syringe"
Picture of KyphX Inflation Syringe and the following caption: "Syringe used to
inflate the KyphX Inflatable Bone Tamp."]
[Heading: "KyphX Bone Filler Device"
Picture of KyphX Bone Filler Device and the following caption: "Nozzle with an
inner rod to dispense bone filler material."]
LEFT SIDE OF INSIDE FRONT COVER FOLD OUT
[Heading: "Balloon Kyphoplasty Procedure Overview"
Graphic depiction of Balloon Kyphoplasty Procedure with the following captions:
"Fractured vertebral body," "1. The KyphX Inflatable Bone Tamp is placed", "2.
Inflation of the balloon pushes the hard outer bone back towards its natural
position and compacts the soft inner bone, creating a cavity", "3. Surgeon's
choice of bone filler material delivered into cavity under manual control and
low pressure", "4. An `internal cast' is placed to support the bone and prevent
further collapse".]
RIGHT SIDE OF INSIDE OF FRONT COVER FOLD OUT
[Picture of human spine before Kyphoplasty procedure and picture of human spine
after Kyphoplasty procedure.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 5
Forward-Looking Statements............................................... 12
Use of Proceeds.......................................................... 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Financial Data.................................................. 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 24
Management............................................................... 40
Certain Relationships and Related Transactions........................... 49
Principal Stockholders................................................... 50
Description of Capital Stock............................................. 52
Shares Eligible for Future Sale.......................................... 55
Underwriting............................................................. 57
Legal Matters............................................................ 59
Experts.................................................................. 59
Where You Can Find More Information...................................... 59
Index to Financial Statements............................................ F-1
</TABLE>
-------------------------------
You should rely only on the information contained in this prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any state where the offer or sale
is not permitted. The information in this prospectus is complete and accurate
as of the date on the front cover, but the information may have changed since
that date.
Kyphon(TM), KyphX(TM), Kyphoplasty(TM), Balloon Kyphoplasty(TM) and the Kyphon
logo are our trademarks. All other trademarks or service marks appearing in
this prospectus are the property of their respective companies.
<PAGE>
SUMMARY
This summary provides an overview of information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, especially the
risks of investing in our common stock which we discuss under "Risk Factors."
Business of Kyphon
We develop medical devices for orthopedic applications using our proprietary
balloon technology. Our first commercial products, comprising our KyphX system,
are used in a surgical spine procedure called Kyphoplasty for the treatment of
vertebral body compression fractures, the most common type of spine fracture.
We believe that Kyphoplasty offers an effective and minimally-invasive
alternative to other spine fracture treatments, including medication, bed rest,
a minimally-invasive surgical procedure called vertebroplasty and highly-
invasive surgical procedures. We market our products primarily to spine-focused
orthopedic surgeons and neurosurgeons.
In January 1999, we began to build our direct sales and marketing organization
and we initiated limited sales for our KyphX System to several major medical
centers. In May 2000, we commenced full commercial introduction of our KyphX
system in the United States. From our inception until September 30, 2000, we
recognized approximately $3.2 million in revenue from the sale of our products
and sustained approximately $21.6 million in losses. As of September 30, 2000,
we had trained over 350 physicians in the United States and Europe in the
Kyphoplasty procedure, and physicians had performed the procedure on
approximately 1,500 vertebral body compression fractures in over 975 patients.
We expect to have trained over 425 physicians in the United States and 20 in
Europe by the end of the year.
Our Target Market
Each year, there are approximately 700,000 vertebral body compression fractures
in the United States. Of these, approximately 275,000 fractures are diagnosed,
most of which are treated with bed rest and medication. These fractures result
in approximately 150,000 hospitalizations costing over $1.6 billion. The
leading cause of vertebral body compression fractures is osteoporosis, a
disease characterized by bone deterioration. In the United States, 16% of women
and five percent of men over the age of 50 have one or more diagnosed vertebral
body compression fractures caused by osteoporosis. Vertebral body compression
fractures can result in significant pain, reduced respiratory function,
impaired quality of life and increased risk of death.
Vertebral body compression fractures are difficult to repair. Conventional
spine surgery is highly invasive and risky due to the proximity of the surgical
site to the spinal cord and vital organs. In addition, the metal implants used
in conventional surgical procedures can fail to hold in patients with
osteoporotic bone. Vertebroplasty, a recent alternative to conventional spine
surgery, is not designed to restore vertebral height, but simply to reduce pain
and stabilize the already compressed vertebral body. Nonsurgical treatments,
including medication, bed rest and back braces, cannot repair vertebral body
compression fractures, and treat only the symptoms of the fracture.
Kyphoplasty: A Restorative Treatment for Vertebral Body Compression Fractures
Kyphoplasty is a minimally-invasive orthopedic procedure that involves the
insertion of one or two of our disposable proprietary balloon devices into the
fractured vertebral body. Once inserted, the surgeon inflates our balloons to
create a cavity and to compact the deteriorated bone with the intent to restore
vertebral height. The balloons are then removed and the newly created cavity is
filled with the surgeon's choice of bone filler material, creating an internal
cast for the fractured area. Potential benefits of Kyphoplasty include:
. restoration of vertebral body height;
. reduction of spinal deformities;
1
<PAGE>
. reduction of pain; and
. enhanced quality of life.
Our goal is to become the leading provider of minimally-invasive medical
devices for the treatment of spinal fractures. We are also adapting our
products for orthopedic applications in the wrist, knee, and hip. The products
we currently market, which comprise the KyphX system, include the KyphX
Inflatable Bone Tamp, the KyphX Inflation Syringe, the KyphX Bone Access System
and the KyphX Bone Filler Device. The KyphX Inflatable Bone Tamp, our
proprietary balloon, has received United States Food and Drug Administration
clearance for the reduction of fractures and/or the creation of a void in soft
inner, or cancellous, bone. We believe that we are not required to obtain FDA
clearance for the other KyphX products identified above. We also have CE Mark
approval for the commercialization of our products in Europe, a market we
believe could offer substantial opportunities. As of September 30, 2000, we had
11 issued patents and 62 pending applications worldwide.
We were incorporated in Delaware in January 1994 and commenced operations in
September 1996. The address of our corporate headquarters is 1350 Bordeaux
Drive, Sunnyvale, California 94089. Our telephone number is (408) 548-6500. Our
web site is located at http://www.kyphon.com. We do not intend information
contained in our web site or web sites linked to our web site to be a part of
this prospectus.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered................................... 4,000,000 shares
Common stock outstanding after the offering............ 18,282,602 shares
Offering price......................................... $11.00 per share
Use of proceeds........................................ We intend to use the
proceeds from the offering
to pay for sales and
marketing initiatives, to
support outcome studies and
reimbursement efforts, for
product research and product
development and general
corporate purposes. See "Use
of Proceeds" for more
detailed information about
our use of proceeds from the
offering.
Proposed Nasdaq National Market symbol................. KYPH
</TABLE>
The number of shares of common stock to be outstanding after the offering is
based on shares outstanding as of September 30, 2000 and excludes:
. 1,971,220 shares of our common stock issuable upon exercise of options
outstanding as of September 30, 2000 under our 1996 stock option plan at
a weighted average exercise price of $1.07 per share;
. 21,680 shares of our common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $4.09 per share;
. 187,071 shares of common stock reserved for future issuance under our
1996 stock option plan;
. 2,500,000 shares of our common stock reserved for issuance under our 2000
stock plan; and
. 1,000,000 shares of our common stock reserved for issuance under our 2000
employee stock purchase plan.
Except as otherwise noted, all information in this prospectus:
. assumes no exercise of the underwriters' over-allotment option;
. reflects the completion of a 1 for 2 reverse stock split that will occur
prior to the closing of this offering; and
. reflects the conversion of all of our shares of outstanding preferred
stock into 13,145,655 shares of our common stock upon completion of this
offering.
3
<PAGE>
Summary Financial Data
(in thousands, except share and per share data)
The following table summarizes the financial data for our business during the
periods indicated. See Note 2 of notes to financial statements for an
explanation of the determination of the number of shares used in computing per
share data.
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
---------- ------- --------- ------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Sales..................... $ -- $ -- $ 261 $ 142 $ 2,969
Cost of goods sold........ -- -- 505 267 2,350
---------- ------- --------- ------- ----------
Gross profit (loss)....... -- -- (244) (125) 619
---------- ------- --------- ------- ----------
Operating expenses:
Research and develop-
ment.................... 763 1,694 1,997 1,411 3,134
Sales and marketing...... -- 87 1,269 535 7,392
General and administra-
tive.................... 384 872 1,883 1,216 3,508
---------- ------- --------- ------- ----------
Total operating expenses.. 1,147 2,653 5,149 3,162 14,034
---------- ------- --------- ------- ----------
Loss from operations...... (1,147) (2,653) (5,393) (3,287) (13,415)
Interest income, net...... 3 10 222 150 961
---------- ------- --------- ------- ----------
Net loss.................. $ (1,144) $(2,643) $ (5,171) $(3,137) $ (12,454)
========== ======= ========= ======= ==========
Net loss per common share,
basic and diluted........ $(1,431.99) $(28.22) $ (25.93) $(18.18) $ (23.89)
========== ======= ========= ======= ==========
Weighted-average shares
used in computing net
loss per common share,
basic and diluted........ 799 93,658 199,466 172,495 521,402
========== ======= ========= ======= ==========
Pro forma net loss per
common share, basic and
diluted (unaudited)...... $ (0.56) $ (0.92)
========= ==========
Weighted-average shares
used in computing pro
forma net loss per common
share, basic and diluted
(unaudited).............. 9,312,379 13,561,979
========= ==========
</TABLE>
In the pro forma as adjusted column of the balance sheet data below, we have
adjusted the balance sheet data as of September 30, 2000, to reflect the
conversion of preferred stock into common stock upon the closing of this
offering and to give effect to our receipt of the estimated net proceeds of
$39.7 million from the sale of 4,000,000 shares of common stock we are offering
for sale under this prospectus at an assumed initial public offering price of
$11.00 per share after deducting the underwriting discounts and commissions and
estimated offering expenses.
<TABLE>
<CAPTION>
As of September 30, 2000
----------------------------
Pro Forma
Actual As Adjusted
------------ --------------
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ........................ $ 15,514 $ 55,214
Working capital................................... 15,347 55,047
Total assets...................................... 20,414 60,114
Long-term obligations, net........................ 168 168
Convertible preferred stock....................... 38,024 --
Deferred stock-based compensation, net............ (8,591) (8,591)
Total stockholders' equity (deficit).............. (20,085) 57,639
</TABLE>
4
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before participating in
this offering. If any of the following risks actually occur, our business,
financial condition, operating results or cash flows could be materially
harmed. As a result, the trading price of our common stock could decline, and
you might lose all or part of your investment.
Risks Related to our Business
We have a history of net losses; we expect to continue to incur net losses and
we may never achieve or maintain profitability.
We have a limited operating history upon which you can evaluate our business.
We have incurred losses every year since we began operations. In particular, we
incurred losses of $2.6 million in 1998, $5.2 million in 1999 and $12.5 million
in the nine months ended September 30, 2000. As of September 30, 2000, we had
an accumulated deficit of approximately $21.6 million. Through September 30,
2000, we have only generated $3.2 million from the sale of our products and it
is possible that we will never generate significant revenue. Currently, we
recognize revenue upon our hand delivery of products to treating surgeons
immediately prior to a Kyphoplasty procedure. As a result, our revenue
potential may be limited by our ability to attend procedures. Even if we do
achieve significant revenue from our product sales, we expect to incur
significant operating losses over the next several years. We may never achieve
profitable operations.
If the commercial introduction of our KyphX products is not successful, we may
be unable to generate sales and our revenue may decline.
We began full commercial introduction of our KyphX products in May 2000. Since
our KyphX products account for all of our revenue, we are highly dependent on
their sales. To date, we have sold only limited quantities. We cannot assure
you that we will be able to market these products successfully. If we are
unable to market our KyphX products successfully, we may not generate
sufficient sales to support our business.
If physicians are unable to obtain reimbursement for Kyphoplasty, our products
may not be widely used.
Physicians are unlikely to purchase our products in significant numbers if they
do not receive reimbursement from payors for their services in performing the
Kyphoplasty procedure. Currently, there is no specific procedure code under
which reimbursement to physicians is available for performing Kyphoplasty. We
will not be able to obtain a specific Kyphoplasty procedure code before January
1, 2002. Until a specific code is granted, physician reimbursement may be
unavailable or difficult to obtain in some states. As a result, in some cases
the physicians performing the procedure have not been reimbursed. In the
absence of a specific procedure code, payors, including large insurance
companies and Medicare, may refuse to reimburse for the cost of the Kyphoplasty
procedure until peer reviewed clinical data has been published. In particular,
there are three states, Georgia, Illinois and Wisconsin, which have refused to
provide reimbursement, and we do not expect these states to consider
reimbursement until peer reviewed journal articles are published.
There are no published peer reviewed journal articles regarding Kyphoplasty and
we do not anticipate publication of the first peer reviewed journal article
before November 2000. Even upon the publication of peer reviewed data, payors
still may not reimburse for the procedure at all or in an adequate amount. If
physicians are unable to obtain adequate reimbursement for Kyphoplasty, we may
be unable to sell our products and our business could suffer. See "Business--
Reimbursement."
Adverse changes in reimbursement procedures by domestic and international
payors may limit our ability to market and sell our products.
Even if the Kyphoplasty procedure is reimbursed by private payors and Medicare,
adverse changes in payors' policies toward reimbursement for the procedure
would harm our ability to market and sell our products. We
5
<PAGE>
are unable to predict what changes will be made in the reimbursement methods
used by payors. We cannot be certain that under prospective payment systems,
such as those utilized by Medicare, and in many managed care systems used by
private health care payors, the cost of our products will be justified and
incorporated into the overall cost of the procedure.
Once we have fulfilled international regulatory requirements to market our
products, our success will be partly dependent upon the availability of
reimbursement within prevailing health care payment systems. Reimbursement and
health care payment systems in international markets vary significantly by
country and include both government-sponsored health care and private
insurance. In addition, health care cost containment efforts similar to those
we face in the United States are prevalent in many of the other countries in
which we intend to sell our products and these efforts are expected to
continue. Although we intend to seek international reimbursement approvals, we
cannot assure you that any such approvals will be obtained in a timely manner,
if at all. See "Business--Reimbursement."
We may be required to seek additional regulatory clearance or approval to
market the KyphX system for Kyphoplasty or new uses, which may harm our
competitive position or prevent us from selling our products.
The Federal Food, Drug and Cosmetic Act and FDA enforcement policy prohibits
the marketing of approved medical devices for unapproved uses. Our KyphX
Inflatable Bone Tamp is cleared by the FDA with general language allowing for
its use in the reduction of fractures and/or creation of a void in cancellous
bone. Based upon the information we submitted to the FDA, we believe that this
general clearance permits us to market and promote the KyphX system
specifically for the repair of fractures in the vertebral body, a procedure
that for marketing purposes we have named Kyphoplasty. We cannot assure you
that the FDA will not take the position that promoting the KyphX system
specifically for Kyphoplasty is a new use requiring a new 510(k) clearance or
premarket approval application. In such circumstances, the FDA could issue a
warning letter requiring that we cease promoting our KyphX system for
Kyphoplasty until we obtain the new clearance or approval. We cannot be certain
that such clearance or approval could be obtained in a timely fashion or at
all.
If the FDA were to conclude that we have promoted the KyphX system for use with
a bone filler not approved for the spine, we could face regulatory sanctions.
The FDA has not approved most bone filler materials for use in the spine.
Surgeons performing Kyphoplasty can choose any bone filler they wish, because
the FDA does not regulate the practice of medicine. The FDA has indicated that
we are prohibited from promoting or advertising the use of any specific bone
filler, unless it is approved for spinal use. Our promotional approach,
therefore, is to leave the choice of bone filler to the surgeon and avoid
promoting the KyphX system for use with any specific bone filler. However, if
the FDA were to conclude that we have promoted the KyphX system for use with a
bone filler material not approved for use in the spine, we could be required to
revise our promotional claims, to halt sales or recall product or to take other
remedial action. The FDA could also require us to pay significant fines or
penalties. These FDA actions could harm our profitability. See "Business--
Government Regulation."
To be commercially successful, we will have to convince physicians that
Kyphoplasty is an attractive alternative to existing spine fracture treatments.
We believe that physicians will not widely adopt our products unless they
determine, based on experience, clinical data and published peer reviewed
journal articles, that the Kyphoplasty procedure and our KyphX system provide
an attractive alternative to conventional means of treating spinal fractures.
There are no independently published clinical reports and limited long-term
clinical follow-up data to support the marketing efforts for our KyphX system.
Patient studies or clinical experience may indicate that treatment with our
products does not provide patients with sustained benefits. Further, because
some of our data has been produced in studies that are not randomized and
involve small patient groups, our data may not be reproduced in wider patient
populations. In addition, we believe that continued recommendations and support
of
6
<PAGE>
Kyphoplasty by influential physicians are essential for market acceptance of
our KyphX system. If Kyphoplasty does not continue to receive support from
these physicians or from long-term data, surgeons may not use and hospitals may
not purchase our products. See "Business--Outcome Studies."
If we are unable to train sufficient numbers of surgeons effectively in the use
of our products, sales may not increase significantly and market acceptance may
be delayed.
There is a learning process involved for surgeons to become proficient in the
Kyphoplasty procedure and the use of our products. Broad use of our products
will require us to educate and initially monitor more surgeons than those that
currently perform Kyphoplasty procedures. Market acceptance could be delayed by
the time required to complete this education and monitoring process. In
addition, we currently have more surgeons who want to perform Kyphoplasty than
can be trained or supported by our sales representatives. Although we are
currently hiring additional personnel, this process may take longer than
expected and may harm sales of our products.
Because injuries occurring during spine surgery can be significant, we are
subject to an increased risk of product liability lawsuits. If we are sued in a
product liability action, we could be forced to pay substantial damages.
We manufacture medical devices that are used on patients in spine surgery
procedures. Spine surgery involves significant risk of serious complications,
including bleeding, nerve injury, paralysis and death. Consequently, companies
that produce products for use in the spine are subject to a significant risk of
product liability litigation. Of the more than 975 patients treated with our
products, physicians have reported six instances in which our products may have
contributed to a serious complication. If our products are found to have caused
or contributed to these or other injuries, we could be held liable for
substantial damages.
We cannot assure you that our current product liability coverage limits will be
adequate to protect us from any liabilities we might incur in connection with
the use of our products. In addition, we may require increased product
liability coverage if sales of our products increase. Product liability
insurance is expensive and may not be available to us in the future on
acceptable terms, if at all. Additionally, if longer term patient studies or
clinical experience indicate that our procedures cause tissue damage, motor
impairment or other negative effects, we could be subject to significant
liability.
We have no experience manufacturing our products in commercial quantities,
which could adversely impact the rate at which we grow.
We may encounter difficulties manufacturing our products for the following
reasons:
. our limited experience manufacturing products in commercial quantities;
. our limited experience manufacturing products in compliance with
regulatory requirements;
. the difficulty in recruiting and retaining qualified employees; and
. our dependence on a single supplier for one key product component.
Manufacturers often experience difficulties in scaling up production, including
problems with production yields and quality control and assurance. If we are
unable to provide customers with high quality products in a timely manner, we
may not be able to achieve market acceptance. Our inability to successfully
manufacture our products would cause our revenue to decline. See "Business--
Manufacturing."
Our reliance on suppliers of components used in our products, including one
single source supplier, could limit our ability to meet demand for our products
in a timely manner or within our budget.
We are dependent upon outside suppliers to provide us with key components
necessary for the manufacture of our products. Because we obtain components
through purchase orders rather than long-term supply agreements
7
<PAGE>
and generally do not maintain large volumes of inventory, the disruption or
termination of the supply of components could lead to:
. a significant increase in manufacturing costs associated with the need
to obtain replacement components;
. our inability to meet demand for our products, which could lead to
customer dissatisfaction and damage our reputation; and
. delays associated with regulatory qualifications required for use of
replacement suppliers.
Any one of these results could harm our sales and profits forecasts and make it
difficult to meet our business goals.
There is only one company that produces the particular polymer material that we
currently use in our balloons. We obtain our inventory from this supplier on a
purchase order basis and cannot be sure that the supplier will continue to meet
our needs as we grow our business. We may not be able to locate an alternative
polymer material on a timely and cost-effective basis, if necessary. Because
the polymer is critical to our KyphX Inflatable Bone Tamp, a disruption in
supply would also disrupt our sale of products. See "Business--Manufacturing."
If we are unable to expand our sales, marketing and product distribution
infrastructure, we may be unable to increase sales of our KyphX products or
generate additional revenue.
We currently have limited experience in marketing and selling our products. We
will need to expand our sales team significantly over the next 12 months to
achieve our sales growth goals. We will face significant challenges and risks
in building and managing our sales team, including managing geographically
dispersed sales efforts and adequately training our sales people in the use and
benefits of our products. We are in the process of recruiting significant
additional sales and marketing personnel in order to support our
commercialization efforts. We cannot be certain that we will be able to hire
sufficient personnel to keep up with demand for our products. Currently a sales
representative attends most Kyphoplasty procedures. As a result, our failure to
recruit additional sales personnel may cause sales and use of our products to
decline. In addition, to the extent that we enter into distribution
arrangements for the sale of our products, we will be dependent upon the
efforts of third party distributors. We cannot assure you that these
distributors will commit the necessary resources to effectively market and sell
our products, or that they will be successful in selling our products. To the
extent our marketing and sales efforts are unsuccessful, we may not achieve
expected revenue. See "Business--Sales and Marketing."
Because we face significant competition from other medical device companies
with greater resources than we have, we may be unable to maintain our
competitive position and sales of our KyphX products may decline.
The market for medical devices is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. Our industry also includes large
pharmaceutical companies that are developing drug products which may reduce the
incidence of osteoporosis and, therefore, the market for our products. Our
ability to compete successfully depends in part on our ability to respond
quickly to medical and technological change and user preference through the
development and introduction of new products that are of high quality and that
address patient and surgeon requirements. We compete with many larger companies
that enjoy several competitive advantages, including:
. established distribution networks;
. established relationships with health care providers and payors;
. additional lines of products, and the ability to bundle products to
offer higher discounts or other incentives to gain a competitive
advantage; and
. greater resources for product development, sales and marketing and
patent litigation.
8
<PAGE>
At any time, other companies may develop additional competitive products. If we
are unable to compete effectively against existing or future competitors, sales
of our products will decline. See "Business-- Competition."
The amounts that we raise in this offering may not be adequate to take us to
profitability. We may be unable to obtain future capital in adequate amounts
and on satisfactory terms.
We may require supplemental financing in addition to the net proceeds of this
offering before we achieve profitable operations. We cannot assure you that
such additional financing will be available on a timely basis on terms
acceptable to us, or at all, or that such financing will not be dilutive to
stockholders. If adequate funds are not available, we may have to delay
development or commercialization of our products or license to third parties
the rights to commercialize products or technologies that we would otherwise
seek to commercialize for ourselves. We also may have to reduce the marketing,
customer support or other resources devoted to our products.
Our failure to obtain or maintain necessary regulatory clearances or approvals
could hurt our ability to commercially distribute and market our products.
Our products are considered medical devices and are subject to extensive
regulation in the United States and in foreign countries where we intend to do
business. Unless an exemption applies, each medical device that we wish to
market in the United States must first receive either 510(k) clearance or
premarket approval from the FDA. The FDA's 510(k) clearance process usually
takes from four to twelve months, but may take longer. The, premarket
application, PMA, approval generally takes from one to three years or even
longer and can be significantly more expensive. Although we have obtained
510(k) clearance for the KyphX Inflatable Bone Tamp for the reduction of
fractures and/or creation of a void in cancellous bone, our 510(k) clearance
can be revoked if safety or effectiveness problems develop. We also may be
required to obtain 510(k) clearance or PMA approval to market additional
products or indications for the KyphX system. We cannot be certain that we can
do so in a timely manner or at all. Delays in obtaining clearance or approval
will adversely affect our revenue and profitability.
International sales of our products are also subject to strict regulatory
requirements. The regulatory review process varies from country to country. We
have obtained regulatory clearance to market our products in Europe, but we may
be unable to maintain such approval in the future, which would preclude us from
selling our products. We have not obtained other international regulatory
approvals. We cannot assure you that we will obtain clearances and approvals in
any particular country on a timely basis, or at all. See "Business--Government
Regulation."
Modifications to our marketed devices may require new 510(k) clearances or PMA
approvals or require us to cease marketing or recall the modified devices until
such clearances are obtained.
Any modification to a 510(k)-cleared device that could significantly affect its
safety or effectiveness, or that would constitute a major change in its
intended use, requires a new 510(k) clearance or, possibly, PMA approval. The
FDA requires every manufacturer to make this determination in the first
instance, but the FDA can review any such decision. We have modified aspects of
our KyphX system, but we believe that new 510(k) clearances are not required.
We cannot assure you that the FDA will agree with any of our decisions not to
seek new clearances or approvals. If the FDA requires us to seek 510(k)
clearance or PMA approval for any modification to a previously cleared product,
we also may be required to cease marketing or recall the modified device until
we obtain such clearance or approval. Also, we may be subject to significant
regulatory fines or penalties. See "Business--Government Regulation."
If we or our suppliers fail to comply with regulatory requirements, our
manufacturing operations could be delayed.
Our manufacturing processes and those of our suppliers are required to comply
with the Quality System Regulation, or QSR, which covers the procedures and
documentation of the design, testing, production, control, quality assurance,
labeling, packaging and shipping of our products. The FDA enforces the QSR
through
9
<PAGE>
inspections. We have never been through a QSR inspection and we cannot assure
you that we would pass. If we or our suppliers fail a QSR inspection, our
operations could be disrupted and our manufacturing delayed. Failure to take
adequate corrective action in response to a QSR inspection could force a shut-
down of our manufacturing operations and a recall of our products, which would
cause our product sales and profitability to suffer. See "Business--
Manufacturing."
If we are unable to protect our intellectual property from use by third
parties, our ability to compete in the market will be harmed.
Protection of our patent portfolio is key to our future success, particularly
because we compete in the heavily patented medical device industry. We rely on
patent protection, as well as on a combination of copyright, trade secret and
trademark laws, to protect our proprietary technology. However, these legal
means afford only limited protection and may not adequately protect our rights
or permit us to gain or keep any competitive advantage. For example, our
patents may be challenged, invalidated or circumvented by third parties. Our
patent applications and the notice of allowance we have received may not issue
as patents at all or in a form that will be advantageous to us. We may not be
able to prevent the unauthorized disclosure or use of our technical knowledge
or other trade secrets by consultants, vendors, former employees and current
employees, despite the existence of nondisclosure and confidentiality
agreements and other contractual restrictions. Furthermore, the laws of foreign
countries may not protect our intellectual property rights to the same extent
as the laws of the United States. If our intellectual property rights are not
adequately protected, we will be unable to keep other companies from competing
directly with us, which could result in a decrease in our market share. "See
Business--Patents and Proprietary Technology."
Our products could infringe on the intellectual property rights of others,
which may lead to costly litigation, substantial damages or royalties and our
inability to use essential technologies.
The medical device industry has been characterized by extensive litigation and
administrative proceedings regarding patents and other intellectual property
rights, and companies have employed such actions to gain a competitive
advantage. Whether a product infringes a patent involves complex legal and
factual issues, the determination of which is often uncertain. Our competitors
may assert that our products and methods infringe their patents. In addition,
they may claim that their patents have priority over ours because their patents
issued first. Because patent applications can take many years to issue, there
may be applications now pending of which we are unaware, which may later result
in issued patents that our products may infringe. There could also be existing
patents that one or more of our products may inadvertently be infringing of
which we are unaware. As the number of competitors in the market for minimally-
invasive spine disorder treatments grows, the possibility of a patent
infringement claim against us increases.
Infringement and other intellectual property claims, with or without merit, can
be expensive and time-consuming to litigate and can divert management's
attention from our core business. In addition, if we lose in this kind of
litigation, a court could require us to pay substantial damages and/or
royalties and prohibit us from using essential technologies. Also, although we
may seek to obtain a license under a third party's intellectual property rights
to bring an end to certain claims or actions asserted against us, we may not be
able to obtain such a license on reasonable terms or at all. See "See
Business--Patents and Proprietary Technology."
To manage our growth successfully, we must compete with others to attract and
retain key personnel, and any loss of, or inability to attract, such personnel
would hurt our ability to grow.
We believe our future success will depend upon our ability to successfully
manage our growth, including attracting and retaining engineers and other
highly skilled personnel. Our employees are at will and not subject to
employment contracts. Hiring qualified management and technical personnel will
be difficult due to the limited number of qualified professionals. Competition
for these types of employees is intense, especially in the geographic area
where our business is located. We have in the past experienced difficulty in
recruiting qualified personnel. Failure to attract and retain personnel,
particularly management and technical personnel, would materially harm our
business.
10
<PAGE>
Risks Related to the Offering
Our principal stockholders have significant voting power and may take actions
that may not be in the best interests of our other stockholders.
After this offering, our officers, directors and principal stockholders will
together control approximately 56.9% of our outstanding common stock. As a
result, these stockholders, if they act together, will be able to control our
management and affairs in all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions.
This concentration of ownership may have the effect of delaying or preventing a
change in control and might affect the market price of our common stock. This
concentration of ownership may not be in the best interest of our other
stockholders.
Anti-takeover provisions in our certificate of incorporation, our bylaws and
Delaware law contain provisions that could discourage a takeover.
Provisions of our certificate of incorporation, bylaws and Delaware law may
discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. See "Management--Board of Directors" and "Description of
Capital Stock--Anti-takeover Effects of Provisions of Our Charter and Bylaws"
and "--Section 203 of the General Corporation Law of the State of Delaware."
A sale of a substantial number of shares of our common stock may cause the
price of our common stock to decline.
Sales of a substantial number of shares of our common stock in the public
market following this offering could harm the market price for our common
stock. As additional shares of our common stock become available for resale in
the public market, the supply of our common stock will increase, which could
decrease the price. There will be 14,282,602 additional shares of common stock
eligible for sale beginning 180 days after the effective date of this
prospectus upon the expiration of lock-up arrangements between our stockholders
and underwriters. See "Shares Eligible for Future Sale."
Our common stock has not been publicly traded, and we expect that the price of
our common stock will fluctuate substantially.
Prior to this offering, there has been no public market for shares of our
common stock. An active public trading market may not develop following
completion of this offering or, if developed, may not be sustained. The price
of the shares of common stock sold in this offering will be determined by
negotiation between the underwriters and us. This price will not necessarily
reflect the market price of the common stock following this offering. The
market price for the common stock following this offering will be affected by a
number of factors, including:
. regulatory or reimbursement developments in the United States or other
countries;
. product liability claims or other litigation;
. the announcement of new products or product enhancements by us or our
competitors;
. quarterly variations in our or our competitors' results of operations;
. changes in earnings estimates or recommendations by securities analysts;
. developments in our industry; and
. general market conditions and other factors, including factors unrelated
to our operating performance or the operating performance of our
competitors.
New investors will experience immediate and substantial dilution in the value
of their common stock following the offering.
If you purchase shares of our common stock in this offering, you will incur
immediate and substantial dilution in pro forma net tangible book value. If the
holders of outstanding options exercise those options, you will incur further
dilution. See "Dilution."
11
<PAGE>
FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute forward-
looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by such forward-looking statements. Such factors include, among other
things, those listed under "Risk Factors" and elsewhere in this prospectus. In
some cases, you can identify forward-looking statements by terminology such as
"may," "will," "should," "could," "expect," "plan," "intend," "anticipate,"
"believe," "estimate," "predict," "potential" or "continue" or the negative of
such terms and other comparable terminology. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Moreover, neither we nor anyone else assumes responsibility for
the accuracy and completeness of such statements. We are under no duty to
update any of the forward-looking statements after the date of this prospectus
to conform these statements to actual results, unless required by law.
12
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of common stock
we are offering will be approximately $39.7 million at an assumed initial
public offering price of $11.00 per share. If the underwriters fully exercise
the over-allotment option, the net proceeds will be approximately $45.9
million. "Net proceeds" are what we expect to receive after we pay the
underwriting discounts and commissions and estimated offering expenses.
Of the net proceeds that we will receive from the offering, we expect to use
approximately:
. $20.0 million for sales and marketing initiatives to support the
commercialization of the KyphX system;
. $3.0 million for support of outcome studies and reimbursement efforts;
and
. $4.0 million for product research and product development.
We intend to use the remainder of the net proceeds for general corporate
purposes. We may also use a portion of the net proceeds for potential strategic
acquisitions and investments in third parties. We currently have no specific
plans or agreements with regard to such acquisitions or investments. Pending
our uses of the proceeds, we intend to invest the net proceeds of this offering
primarily in short-term, investment-grade, interest-bearing instruments.
The timing and amount of our actual expenditures will be based on many factors,
including cash flows from operations and the growth of our business.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends
in the foreseeable future.
13
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2000. It
also sets forth our capitalization:
. on a pro forma basis to give effect to the automatic conversion of our
preferred stock into 13,145,655 shares of common stock which will occur
upon the closing of this offering; and
. on a pro forma as adjusted basis to give effect to the conversion of our
preferred stock into common stock and to reflect our receipt of the net
proceeds from the sale of 4,000,000 shares of common stock at an assumed
initial public offering price of $11.00 per share, less underwriting
discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
As of September 30, 2000
-------------------------------
Pro Pro Forma
Actual Forma As Adjusted
-------- -------- -----------
(in thousands, except share
data)
(unaudited)
<S> <C> <C> <C>
Long-term obligations.......................... $ 168 $ 168 168
-------- -------- --------
Convertible preferred stock, $0.001 par value;
26,438,116 shares authorized, actual;
5,000,000 shares authorized, pro forma and pro
forma as adjusted; 13,145,655 shares issued
and outstanding, actual; no shares issued and
outstanding, pro forma and pro forma as ad-
justed........................................ 38,024 -- --
-------- -------- --------
Stockholders' equity (deficit):
Common stock, $0.001 par value; 40,000,000
shares authorized, actual; 50,000,000 shares
authorized, pro forma and pro forma as ad-
justed; 1,136,947 shares issued and outstand-
ing, actual; 14,282,602 shares issued and
outstanding, pro forma; 18,282,602 shares is-
sued and outstanding, pro forma as adjusted.. 1 14 18
Additional paid-in capital..................... 10,135 48,146 87,842
Deferred stock-based compensation, net......... (8,591) (8,591) (8,591)
Accumulated deficit............................ (21,630) (21,630) (21,630)
-------- -------- --------
Total stockholders' equity (deficit).......... (20,085) 17,939 57,639
-------- -------- --------
Total capitalization......................... $ 18,107 $ 18,107 $ 57,807
======== ======== ========
</TABLE>
The outstanding share information in the table above is based on the number of
shares outstanding as of September 30, 2000. This table excludes:
. 1,971,220 shares of our common stock issuable upon exercise of
outstanding options as of September 30, 2000 under our 1996 stock option
plan, at a weighted average exercise price of $1.07 per share;
. 21,680 shares of our common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $4.09;
. 187,071 shares of our common stock reserved for future issuance under
our 1996 stock option plan;
. 2,500,000 shares of our common stock reserved for issuance under our
2000 stock plan; and
. 1,000,000 shares of our common stock reserved for issuance under our
2000 employee stock purchase plan.
See "Management--Employee Benefit Plans" and "Description of Capital Stock."
14
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock as of September 30,
2000, was $17.9 million, or $1.26 per share. Pro forma net tangible book value
per share represents the amount of our total tangible assets reduced by the
amount of our total liabilities and divided by the total number of shares of
common stock outstanding after giving effect to the conversion of all
outstanding shares of preferred stock into common stock. Dilution in pro forma
net tangible book value per share represents the difference between the amount
per share paid by purchasers of shares of our common stock in this offering and
the pro forma net tangible book value per share of our common stock immediately
afterwards. After giving effect to our sale of 4,000,000 shares of common stock
at an issued initial public offering price of $11.00 per share offered by this
prospectus and after deducting the underwriting discounts and commissions and
estimated offering expenses payable by us, our net tangible book value will be
$57.6 million, or approximately $3.15 per share. This represents an immediate
increase in net tangible book value of $1.89 per share to existing stockholders
and an immediate dilution in net tangible book value of $7.85 per share to new
investors. The following table illustrates this dilution:
Pro forma net tangible book value dilution per share represents the incremental
dilutive effect of the exercise of options to purchase 1,971,220 shares of
common stock outstanding as of September 30, 2000, at a weighted average
exercise price of $1.07 per share and the exercise of warrants to purchase
21,680 shares of convertible preferred stock outstanding as of September 30,
2000, at a weighted average exercise price of $4.09 per share.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $11.00
------
Pro forma net tangible book value per share as of September 30,
2000........................................................... $1.26
Increase per share attributable to the offering................. 1.89
-----
Pro forma net tangible book value per share after the offering... 3.15
------
Dilution per share to new investors.............................. 7.85
Incremental dilution occurring upon exercise of outstanding op-
tions and warrants.............................................. 0.20
------
Pro forma dilution per share to new investors.................... $ 8.05
======
</TABLE>
The following table sets forth, on a pro forma basis as of September 30, 2000,
the differences between the number of shares of common stock purchased from us,
the total consideration paid to us and the average price per share paid by
existing stockholders and by the new investors, before deducting the
underwriting discounts and commissions and estimated offering expenses payable
by us, using an assumed initial public offering price of $11.00 per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 14,282,602 78.1% $38,320,964 46.6% $ 2.68
New investors.................. 4,000,000 21.9% $44,000,000 53.4% $11.00
---------- ---- ----------- ----
Total......................... 18,282,602 100% $82,320,964 100%
========== ==== =========== ====
</TABLE>
The tables above assume no exercise of options or warrants after September 30,
2000. The number of shares outstanding as of September 30, 2000 excludes:
. 1,971,220 shares of common stock issuable upon exercise of options
outstanding as of September 30, 2000, under our 1996 stock option plan
with a weighted average exercise price of $1.07 per share;
. 21,680 shares issuable upon exercise of outstanding warrants at a
weighted average price of $4.09 per share;
15
<PAGE>
. 187,071 shares of common stock reserved for future issuance under our
1996 stock option plan;
. 2,500,000 shares available for future grant under our 2000 stock plan
and 1,000,000 shares reserved for issuance under our 2000 employee stock
purchase plan.
The exercise of outstanding options and warrants, all of which have an exercise
price less than the offering price would increase the dilutive effect to new
investors.
If the underwriters' over-allotment option is exercised in full, the following
will occur:
. the percentage of shares of common stock held by existing stockholders
will decrease to approximately 75.6% of the total number of shares of
common stock outstanding; and
. the number of shares held by new public investors will be increased to
4,600,000 or approximately 24.4% of the total number of shares of our
common stock outstanding after this offering.
16
<PAGE>
SELECTED FINANCIAL DATA
We were incorporated in Delaware in January 1994 and commenced operations in
September 1996. From 1994 until 1996 our activities focused on raising capital.
From 1996 until 1998 our activities focused on development of our KyphX system.
The following statements of operations data for the years ended December 31,
1997, 1998 and 1999 and balance sheet data as of December 31, 1998 and 1999
have been derived from our audited financial statements and notes thereto,
which are included elsewhere in this prospectus. The statements of operations
data for the years ended December 31, 1995 and 1996 and the balance sheet data
as of December 31, 1995, 1996 and 1997 were derived from our audited financial
statements, which do not appear in this prospectus. The statements of
operations data for the nine months ended September 30, 1999 and 2000 and the
balance sheet data as of September 30, 2000 were derived from unaudited
financial statements included elsewhere in this prospectus. We have prepared
this unaudited information on the same basis as the audited financial
statements and have included all adjustments, consisting only of normal
recurring adjustments that we consider necessary for a fair presentation of our
financial position and operating results for such periods. When you read this
selected financial data, it is important that you also read the historical
financial statements and related notes included in this prospectus, as well as
the section of this prospectus related to "Management's Discussion and Analysis
of Financial Condition and Results of Operations." Historical results are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
-------------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- --------- ------------- ----------
(in thousands, except share and per share data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Sales................... $ -- $ -- $ -- $ -- $ 261 $ 142 $ 2,969
Cost of goods sold...... -- -- -- -- 505 267 2,350
---------- ---------- ---------- ---------- --------- ---------- ----------
Gross profit (loss)..... -- -- -- -- (244) (125) 619
---------- ---------- ---------- ---------- --------- ---------- ----------
Operating expenses:
Research and
development........... -- 132 763 1,694 1,997 1,411 3,134
Sales and marketing.... -- -- -- 87 1,269 535 7,392
General and
administrative........ -- 95 384 872 1,883 1,216 3,508
---------- ---------- ---------- ---------- --------- ---------- ----------
Total operating
expenses............... -- 227 1,147 2,653 5,149 3,162 14,034
---------- ---------- ---------- ---------- --------- ---------- ----------
Loss from operations.... -- (227) (1,147) (2,653) (5,393) (3,287) (13,415)
Interest income, net.... -- 9 3 10 222 150 961
---------- ---------- ---------- ---------- --------- ---------- ----------
Net loss................ $ -- $ (218) $ (1,144) $ (2,643) $ (5,171) $ (3,137) $ (12,454)
========== ========== ========== ========== ========= ========== ==========
Net loss per common
share, basic and
diluted................ $ -- $ (0.19) $(1,431.99) $ (28.22) $ (25.93) $ (18.18) $ (23.89)
========== ========== ========== ========== ========= ========== ==========
Weighted-average shares
used in computing net
loss per common share,
basic and diluted...... 1,800,000 1,124,384 799 93,658 199,466 172,495 521,402
========== ========== ========== ========== ========= ========== ==========
Pro forma net loss per
common share, basic and
diluted (unaudited).... $ (0.56) $ (0.92)
========= ==========
Weighted-average shares
used in computing pro
forma net loss per
common share, basic
and diluted............ 9,312,379 13,561,979
========= ==========
<CAPTION>
As of
September 30,
December 31, 2000
-------------------------------------------------------- -------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ---------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
and short-term
investments............ $ -- $ 802 $ 2,366 $ 8,123 $ 25,318 $ 15,514
Working capital......... -- 755 2,103 7,632 24,725 15,347
Total assets............ -- 815 2,507 8,637 26,292 20,414
Long-term obligations,
net.................... -- -- 95 308 209 168
Convertible preferred
stock.................. -- 983 3,479 11,718 34,156 38,024
Deferred stock-based
compensation, net...... -- -- -- -- (768) (8,591)
Total stockholders'
deficit................ -- (218) (1,352) (3,917) (9,014) (20,085)
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read together with the "Selected Financial Data" and with
the financial statements and the notes included elsewhere in this prospectus.
Overview
We develop medical devices for orthopedic applications using our proprietary
balloon technology. From inception in 1994 until 1998, our operations consisted
primarily of start-up activities, including development of our KyphX system,
recruiting personnel and raising capital. Our KyphX system consists of our
KyphX Inflatable Bone Tamp, KyphX Inflation Syringe, KyphX Bone Access Systems
and KyphX Bone Filler Device. In July 1998, we gained FDA clearance for our
KyphX Inflatable Bone Tamp. We believe that we are not required to obtain FDA
clearance for our other KyphX products. Surgeons are using our KyphX system in
Kyphoplasty procedures to treat vertebral body compression fractures, which are
mainly caused by osteoporosis. We estimate the cost to a hospital for the
Kyphoplasty procedure to range from $8,000 to $10,000. In January 1999, we
began to build our direct sales and marketing organization, and we initiated
our sales effort of the KyphX system to major medical centers involved in our
post-marketing outcome studies. In May 2000, we commenced full commercial
introduction of our KyphX system. From inception to September 30, 2000, we
recognized $3.2 million in revenue from sales of our products.
Since our inception we have been unprofitable. For the years ended December 31,
1998 and 1999, and for the nine months ended September 30, 2000, we incurred
net losses of approximately $2.6 million, $5.2 million and $12.5 million,
respectively. As of September 30, 2000, we had an accumulated deficit of $21.6
million. The process of commercializing our initial products, obtaining third-
party reimbursement, and completing outcome studies will continue to require
significant expenditures. These activities, together with our general and
administrative expenses, are expected to result in significant additional
operating losses for the foreseeable future.
We currently market our products through a direct sales organization to
physicians who perform spine surgery, including orthopedic spine surgeons and
neurosurgeons. Currently, our sales representatives attend most Kyphoplasty
procedures. As we proceed with commercialization, we will require additional
sales and marketing resources, long-term data from our outcome studies, greater
reimbursement acceptance by payors, and training of additional physicians.
We have opened a small European office in Belgium, which is run by a general
manager. We expect to sell directly in some European countries and use
distributors in others. The risks of operating in Europe include the difficulty
of attracting a sufficient number of experienced sales representatives and
operational personnel, the inability to locate qualified distributors, the
risks associated with currency fluctuation, the uncertainty of reimbursement
and the challenge of establishing a referral network in foreign countries.
Our future growth depends on penetration of our current target market and on
finding new markets in which we can leverage our proprietary balloon
technology. To the extent any current or additional markets do not materialize
or grow in accordance with our expectations, our sales could be lower than
expected.
Results of Operations
Nine Months Ended September 30, 1999 and 2000
Sales. Sales increased from $142,000 in the nine months ended September 30,
1999 to $3.0 million in the nine months ended September 30, 2000. The increase
in sales was a result of an increase in the number physicians trained as well
as an increase in the number of procedures performed by trained physicians.
These procedures were performed almost exclusively in the United States.
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<PAGE>
Cost of goods sold. Cost of goods sold consists of material, labor and overhead
costs. Cost of goods sold increased from $267,000 in the nine months ended
September 30, 1999 to $2.3 million in the nine months ended September 30, 2000.
The increase in cost of goods sold resulted from the increased costs of
additional products sold of $555,000 as well as higher overhead costs of $1.4
million due to additional manufacturing personnel and larger manufacturing
space following our move into a larger leased facility in April 2000.
Research and development. Research and development expenses consist of costs of
product research, product development, regulatory and clinical functions,
outcome studies and personnel. These expenses increased from $1.4 million in
the nine months ended September 30, 1999 to $3.1 million in the nine months
ended September 30, 2000. The increase was primarily attributable to increased
personnel costs of $624,000, amortization of deferred stock-based compensation
of $462,000, higher facilities expenses of $186,000 associated with the move
into our larger leased facility, additional product testing and development
expenditures of $175,000, and increased outcome studies costs of $56,000. We
expect to continue to make substantial investments in research and development
and anticipate that research and development expenses will continue to increase
in the future.
Sales and marketing. Sales and marketing expenses consist of personnel costs,
medical conference participation, physician training programs and promotional
activities. These expenses increased from $535,000 in the nine months ended
September 30, 1999 to $7.4 million in the nine months ended September 30, 2000.
The increase in sales and marketing expenses related primarily to the costs of
hiring, training and initial selling efforts of additional direct selling
representatives of $4.5 million, higher costs to train physicians in the use of
our products of $1.2 million, increased expenditures of $320,000 related to the
creation of training and promotional materials and the amortization of deferred
stock-based compensation of $282,000. As we continue to commercialize our KyphX
system, we expect to significantly increase our sales and marketing efforts and
expenses.
General and administrative. General and administrative expenses consist of
personnel costs, professional service fees, expenses related to intellectual
property rights and general corporate expenses. These expenses increased from
$1.2 million in the nine months ended September 30, 1999 to $3.5 million in the
nine months ended September 30, 2000. Increases in general and administrative
expenses resulted primarily from increased personnel costs of $1.0 million
related to our growth in operations, amortization of deferred stock-based
compensation of $424,000, increased legal expenditures of $400,000 and higher
facilities expenses of $206,000 associated with the move into our larger leased
facility. We expect general and administrative expenses to increase in the
future as we add personnel, continue to expand our patent portfolio and incur
reporting and investor-related expenses as a public company.
Interest income, net. Interest income, net, increased from $150,000 in the nine
months ended September 30, 1999 to $961,000 in the nine months ended September
30, 2000. Interest income increased from $186,000 in the nine months ended
September 30, 1999 to $988,000 in the nine months ended September 30, 2000. The
increase in interest income was attributable to higher cash, cash equivalent
and short-term investment balances that increased as a result of the sale of
convertible preferred stock. Interest expenses decreased from $36,000 in the
nine months ended September 30, 1999 to $27,000 in the nine months ended
September 30, 2000. The decrease in interest expense resulted from a lower
balance on our equipment financings in 1997 and 1998, repayments of which will
end in 2001 and 2003, respectively.
Years Ended December 31, 1997, 1998 and 1999
Sales. We commenced limited sales to physicians in connection with outcome
studies in the second quarter of 1999 and we recognized $261,000 in sales
during 1999.
Cost of goods sold. Cost of goods sold of $505,000 in 1999 was related to
product sales. No cost of goods sold was incurred prior to 1999.
19
<PAGE>
Research and development. Research and development expenses increased from
$763,000 in 1997 to $1.7 million in 1998, and to $2.0 million in 1999. The
increase from 1997 to 1998 was attributable primarily to increased personnel
costs of $386,000 as well as the additional clinical and regulatory consulting
expenses of $382,000 incurred in the process of obtaining 510(k) clearance from
the FDA for our KyphX Inflatable Bone Tamp. The increase from 1998 to 1999 was
attributable primarily to increased personnel costs of $200,000, increased
expenses of $67,000 related to the commencement of our outcome studies and
increased recruiting costs of $31,000.
Sales and marketing. Sales and marketing expenses of $1.3 million were incurred
in 1999 as we continued to build our sales and marketing organization in
conjunction with increased product sales. No significant sales and marketing
expenses were incurred prior to 1999.
General and administrative. General and administrative expenses increased from
$384,000 in 1997 to $871,000 in 1998, and to $1.9 million in 1999. Increases in
general and administrative expenses from 1997 to 1998 resulted primarily from
increased personnel expenses of $188,000, increased recruiting costs of
$125,000 and higher facilities costs of $111,000. The increase from 1998 to
1999 resulted primarily from increased personnel costs of $755,000 and
increased facilities costs of $60,000. The increase in costs in both years was
related to our growth in operations.
Interest income, net. Interest income, net, increased from $3,000 in 1997 to
$10,000 in 1998, and to $222,000 in 1999. Interest income increased from
$13,000 in 1997 to $44,000 in 1998, and to $269,000 in 1999. The increase in
interest income was attributable to higher cash, cash equivalent and short-term
investment balances that increased in each of the reporting years as a result
of sales of convertible preferred stock. Interest expense increased from
$11,000 in 1997 to $34,000 in 1998, and to $46,000 in 1999. The increase in
interest expense was a result of the borrowings obtained through equipment
financing in 1997 and 1998, repayments of which will end in 2001 and 2003,
respectively.
Quarterly Results of Operations
The following table sets forth our operating results for each of the eleven
quarters in the period ended September 30, 2000. This data has been derived
from unaudited financial statements that, in the opinion of our management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such information when read in conjunction
with our annual audited financial statements and notes thereto. The amount and
timing of our operating expenses may fluctuate significantly in the future as a
result of a variety of factors. These operating results are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000
-------- -------- --------- -------- -------- -------- --------- -------- -------- -------- ---------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales............ $ -- $ -- $ -- $ -- $ -- $ 45 $ 98 $ 118 $ 324 $ 691 $ 1,954
Cost of goods
sold............ -- -- -- -- -- 102 166 237 552 788 1,010
----- ----- ----- ----- ----- ------- ------- ------- ------- ------- -------
Gross profit
(loss).......... -- -- -- -- -- (57) (68) (119) (228) (97) 944
----- ----- ----- ----- ----- ------- ------- ------- ------- ------- -------
Operating
expenses:
Research and
development.... 333 488 346 527 448 385 579 585 645 914 1,575
Sales and
marketing...... -- -- 26 62 96 201 237 735 1,549 2,447 3,396
General and
administrative.. 132 215 187 334 350 473 392 668 972 1,216 1,320
----- ----- ----- ----- ----- ------- ------- ------- ------- ------- -------
Total operating
expenses........ 465 703 559 923 894 1,059 1,208 1,988 3,166 4,577 6,291
----- ----- ----- ----- ----- ------- ------- ------- ------- ------- -------
Loss from
operations...... (465) (703) (559) (923) (894) (1,116) (1,276) (2,107) (3,394) (4,674) (5,347)
Interest income
(expense), net.. 7 5 (2) (3) 42 60 48 72 207 52 702
----- ----- ----- ----- ----- ------- ------- ------- ------- ------- -------
Net loss......... $(458) $(698) $(561) $(926) $(852) $(1,056) $(1,228) $(2,035) $(3,187) $(4,622) $(4,645)
===== ===== ===== ===== ===== ======= ======= ======= ======= ======= =======
</TABLE>
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<PAGE>
Deferred Stock-Based Compensation
We record deferred stock-based compensation for financial reporting purposes as
the difference between the exercise price of options granted to employees and
the deemed fair value of our common stock at the time of grant. Deferred stock-
based compensation is amortized to research and development expense, sales and
marketing expense and general and administrative expense. Deferred stock-based
compensation recorded through September 30, 2000 was approximately $8.8 million
with accumulated amortization of $842,000. The remaining approximately
$8.0 million will be amortized over the vesting periods of the options,
generally four years from the date of grant. We expect to record amortization
expense for deferred stock-based compensation as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------------
<S> <C>
Fourth quarter of 2000 $0.6 million
2001 $2.2 million
2002 $2.2 million
2003 $2.1 million
2004 $0.9 million
</TABLE>
All option amounts are being amortized using a straight-line method.
Stock-based compensation expense related to stock options granted to non-
employees is recognized as the stock options are earned. The stock-based
compensation expense will fluctuate as the deemed fair market value of the
common stock fluctuates. In connection with the grant of stock options to non-
employees, we recorded deferred stock-based compensation of $966,000 at
September 30, 2000, of which $355,500 has been amortized to expense in the nine
months ended September 30, 2000.
Income Taxes
Realization of deferred tax assets is dependent on the uncertainty of the
timing and amount of future earnings, if any. Accordingly, a full deferred tax
asset valuation allowances have been established as of December 31, 1998 and
1999 to reflect these uncertainties.
As of December 31, 1999, we had federal and state net operating loss
carryforwards of approximately $6.3 million and federal and state tax credit
carryforwards of approximately $342,000. The net operating loss and tax credit
carryforwards will expire at various dates through 2019, if not utilized.
Utilization of the net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code. This annual limitation may
result in the expiration of net operating loss and tax credit carryforwards
before utilization. See Note 9 of notes to financial Statements.
Liquidity and Capital Resources
From inception through September 30, 2000, we financed our operations primarily
through private sales of convertible preferred stock yielding net proceeds of
$38.0 million. To a lesser extent, we also financed our operations through
equipment financing loans, which totaled $323,000 in principal outstanding at
September 30, 2000. As of September 30, 2000, we had $15.5 million of cash and
cash equivalents and $15.3 million of working capital.
Cash used in operations. Net cash used in operations was $1.1 million in 1997,
$2.3 million in 1998, $4.9 million in 1999 and $12.1 million for the nine
months ended September 30, 2000. Cash used in operations was attributable
primarily to net losses after adjustment for non-cash charges related to
depreciation and amortization of deferred stock-based compensation, increases
in accounts receivable and inventories in 1999 and the nine months ended
September 30, 2000. These increases in use of cash in operations were offset in
part by increases in accounts payable, accrued compensation and other accrued
liabilities also resulting from the upward trend in business activities in all
periods.
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<PAGE>
Cash used in investing activities. Net cash used in investing activities was
$134,000 in 1997, $377,000 in 1998, $1.5 million in 1999 and $382,000 for the
nine months ended September 30, 2000. For each of these periods, cash used in
investing activities reflected purchases of property and equipment. In 1999 and
the nine months ended September 30, 2000, it also reflected net purchases of
short-term investments.
Cash provided by financing activities. Net cash provided by financing
activities was $2.8 million in 1997, $8.5 million in 1998, $22.3 million in
1999 and $4.0 million for the nine months ended September 30, 2000. Cash
provided during these periods was attributable to proceeds from the issuance of
convertible preferred and common stock and debt obligations.
Debt and other commitments. In 1997 and 1998, we entered into two equipment
lease lines totaling $650,000. Both of these lines have expired and are
currently being repaid. The interest rates for these financings ranges from
11.77% to 12.84% per year and provide for aggregate monthly payments of
$14,000. As of September 30, 2000, the principal balance outstanding on these
lines totaled $323,000. We have granted a security interest in all equipment
covered under these lines. We have issued warrants in connection with these
lines for the purchase of up to 9,180 shares of common stock at a weighted-
average exercise price of $1.24 per share. See "Description of Capital Stock."
We expect to increase capital expenditures consistent with our anticipated
growth in manufacturing, infrastructure and personnel. We also may increase our
capital expenditures as we expand our product lines or invest to address new
markets.
We believe that the net proceeds from this offering, together with our current
cash and investment balances and cash generated from operations, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. If existing cash and cash
generated from operations are insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or debt securities or
obtain an additional credit facility. The sale of additional equity or
convertible debt securities could result in dilution to our stockholders. If
additional funds are raised through the issuance of debt securities, these
securities could have rights senior to those associated with our common stock,
and could contain covenants that would restrict our operations. Any additional
financing may not be available in amounts or on terms acceptable to us, or at
all. If we are unable to obtain this additional financing, we may be required
to reduce the scope of our planned product development and marketing efforts.
Quantitative and Qualitative Disclosures About Market Risk
Our exposure to interest rate risk at December 31, 1999 related to our
investment portfolio and our borrowings. Fixed rate investments and borrowings
may have their fair market value adversely impacted from changes in interest
rates. Floating rate investments may produce less income than expected if
interest rates fall, and floating rate borrowings will lead to additional
interest expense if interest rates increase. Due in part to these factors, our
future investment income may fall short of expectations due to changes in U.S.
interest rates. Further, we may suffer losses in investment principal if we are
forced to sell securities which have declined in market value due to changes in
interest rates.
We invest our excess cash in debt instruments of the U.S. government and its
agencies and in high quality corporate issuers. Due to the short-term nature of
these investments, we have assessed that there is no material exposure to
interest rate risk arising from our investments.
To date, we have operated mainly in the United States and all sales have been
made in U.S. dollars. Accordingly, we have not had any material exposure to
foreign currency rate fluctuations.
Recently Issued Accounting Pronouncements
In March 2000, the Financial Accounting Board issued Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of the Accounting Principles Board Opinion
22
<PAGE>
No. 25. This interpretation clarifies the definition of the employee for
purposes of applying APB No. 25, "Accounting for Stock Issued to Employees,"
the criteria for determining whether a plan qualifies as a noncompensatory
plan, the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and the accounting for an exchange of
stock compensation awards in a business combination. FIN No. 44 is effective
July 1, 2000, but certain conclusions cover specific events that occurred after
either December 15, 1998, or January 12, 2000. The adoption of FIN No. 44 did
not and will not have a material impact on our financial statements.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
which provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements filed with the SEC. SAB No. 101 outlines the
basic criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. We have complied with the
guidance in SAB No. 101 for all periods presented.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 establishes new standards of accounting
and reporting for derivative instruments and hedging activities. SFAS No. 133
requires that all derivatives be recognized at fair value in the statement of
financial position, and that the corresponding gains or losses be reported
either in the statement of operations or as a component of comprehensive
income, depending on the type of relationship that exists. As amended SFAS No.
133 will be effective for fiscal years beginning after June 15, 2000. We do not
currently hold derivative instruments or engage in hedging activities and do
not believe that the implementation of SFAS No. 133 will have any significant
impact on our financial position or results of operations.
23
<PAGE>
BUSINESS
Overview
We develop medical devices for orthopedic applications using our proprietary
balloon technology. Our first commercial products, comprising our KyphX system,
are used for the treatment of vertebral body compression fractures. Our KyphX
system is designed to enable physicians to access and repair the fractured area
of a vertebrae in a procedure called Kyphoplasty. We believe Kyphoplasty offers
an effective and minimally-invasive alternative to other spine fracture
treatments.
Each year, there are approximately 700,000 vertebral body compression fractures
in the United States. Vertebral body compression fractures occur when the
vertebral body portion of the vertebra collapses as a result of the weakening
of the bone. The leading cause of vertebral body compression fractures is
osteoporosis, which primarily affects women over the age of 50. Osteoporosis is
a disease characterized by bone deterioration, leading to an increased
susceptibility to compression fractures. These fractures can result in
significant pain, reduced respiratory function, impaired quality of life and
increased risk of death.
As of September 30, 2000, over 150 physicians in the United States and Europe
have performed the Kyphoplasty procedure on 982 patients with a total of 1,515
fractures. Physicians performing Kyphoplasty have reported the ability to
improve or restore height to vertebrae in many patients. Vertebral height
restoration can reduce spinal deformity, increase mobility and, we believe,
improve respiratory function in patients. Most patients who have been treated
with the Kyphoplasty procedure have reported reduced pain immediately following
their procedure and an improved quality of life. Risks of Kyphoplasty include
the same risks common to performing surgery using anesthesia and to performing
surgery on older patients. In addition, like other spine surgeries, Kyphoplasty
may result in serious complications, including bleeding, nerve injury,
paralysis and death.
In early 1999, we began a limited release of our products to key physicians at
selected major medical centers. In May 2000, we began a full commercial launch
of our KyphX system. We devote significant resources to building our sales and
marketing team, training and educating physicians and documenting further
clinical outcomes in support of reimbursement. As of September 30, 2000, we had
11 issued patents and 62 pending applications worldwide.
Our goal is to become the leading provider of minimally-invasive medical
devices for the treatment of spinal and other compression fractures. We are
adapting our products for future application in the wrist, knee, and hip.
24
<PAGE>
Spinal Anatomy
The spinal column contains 24 bones called vertebrae. Each vertebra consists of
a large block of bone, called the vertebral body, which helps maintain upright
posture. The vertebral body consists of soft inner bone surrounded by a thin
outer shell of hard bone. Each vertebra also has bone segments that extend out
from the vertebral body, called the posterior elements, which surround and
protect the spinal cord.
[Drawing of three vertabrae together as they would appear in the spine along
side a cross-sectional view of a single vertabra.]
Consequences of Spine Fractures
Vertebral body compression fractures, the most common type of spine fracture,
are characterized by the collapse of the vertebral body and are primarily
caused by deterioration of the inner bone due to osteoporosis. Other causes of
vertebral body compression fractures include trauma, tumors and infection. When
structurally weakened, normal downward pressure on the spine can cause a
vertebral body to collapse and fracture. The vertebral body generally fractures
at the front, which can subsequently cause the spine to tilt forward. Over
time, such fractures result in a curved deformity of the spine and a forward
stooped posture called kyphosis. Once osteoporotic patients suffer one
fracture, they are five times more likely to suffer additional fractures.
[Drawing of elderly woman with a curved deformity of the spine. The picture
contains a blow up of three vertabra showing a vertebral body compression
fracture and a collapsed vertebral body.]
25
<PAGE>
Spinal deformities, including kyphosis, and their associated loss of height
caused over time by unrepaired vertebral body compression fractures, can result
in serious physical and emotional consequences, including:
. Acute and Chronic Pain. About one-third of the spinal fractures caused
by osteoporosis are accompanied by severe acute back pain. In addition,
the spinal deformity caused by these fractures changes the position of
muscles and ligaments, leading to chronic pain. In a 1998 study
coordinated by the University of California at San Francisco Medical
Center involving 7,223 women over the age of 65, those who had a single
undiagnosed vertebral body compression fracture spent nine times longer
in bed during the day due to back pain than women without these
fractures. In a 1995 study from the Hawaii Osteoporosis Center of nearly
2,000 women, those with spinal deformity were two times more likely to
suffer back pain than equivalently aged women without spinal deformity.
. Health Effects Resulting from Organ Compression. The loss of vertebral
body height shortens and tilts the spine, moving the ribs down toward
the pelvis, which can subsequently compress the chest and stomach. This
downward pressure can result in compression of internal organs.
Compression of the lungs can create new, or worsen already existing,
respiratory disorders, including pneumonia. In addition, compression of
the stomach can result in a reduced appetite and malnutrition. A 1999
study coordinated by the University of California at San Francisco
Medical Center involving 9,500 women followed for more than eight years
showed that patients with vertebral body compression fractures had a 23%
increased risk of death compared to patients of the same age without
these fractures. The primary cause of the increased risk of death in
these patients was respiratory disorders.
. Functional Limitation. Vertebral body compression fractures can cause
prolonged or permanent disability. A 1993 McMaster University study of
100 women with osteoporosis demonstrated that most women with vertebral
body compression fractures experienced a decrease in ability to reach,
bend forward and backward, and/or a reduction in general mobility. These
women can require significant assistance, including the use of walkers
or other aids, during normal physical activities. The change in
alignment of the spine also can shift a patient's center of balance,
increasing the risk of falls and further fractures.
. Emotional Effects. Studies have demonstrated that the physical deformity
caused by vertebral body compression fractures, and the resulting fear of
falling, can create anxiety and clinical depression, leading to a
reduction in normal daily and social activities. For example, a 1993
study from Duke University of 20 women with osteoporosis found a 17%
increase in psychiatric symptoms in patients with vertebral body
compression fractures compared to those without.
Market Opportunity for Treatment of Spine Fractures
An estimated 700,000 vertebral body compression fractures occur in the United
States each year, of which approximately 425,000 go undiagnosed. The remaining
275,000 fractures are predominantly managed by bed rest, pain medication and
back braces. Each year, approximately 150,000 people in the United States are
hospitalized due to pain associated with vertebral body compression fractures,
resulting in costs in excess of $1.6 billion. The number of fractures caused by
osteoporosis is increasing primarily due to the aging of the population.
Existing Treatments for Spine Fractures
Conventional Orthopedic Surgery
Vertebral body compression fractures are difficult to repair. Spine surgery is
complex and difficult due to the proximity of the surgical site to the spinal
cord and major organs. Conventional surgical procedures can repair fractured
vertebrae and restore height, but are highly invasive and involve significant
risks. These procedures involve making long incisions in the patient's chest so
that large stainless steel instruments can move the fractured bones back into
their normal position. The fractured bones are then held in place by metal
implants, which can fail to hold due to the softness of the osteoporotic bone
to which they are attached. Additional
26
<PAGE>
complications may include pain, nerve damage, bleeding, infection, and blood
clots. As a result, this surgery is performed in very limited circumstances.
The invasiveness of these procedures may lead to death, spinal cord injury,
extensive post-operative hospital stays and prolonged bed rest for recovery. As
an alternative, some spine surgeons perform a less involved surgery that fuses
the bones in the spine. We estimate that the cost of a spinal fusion procedure
is currently $26,000.
Non-Surgical Treatments
Due to the limitations of conventional orthopedic surgery for patients with
vertebral body compression fractures, the vast majority are treated non-
surgically. Non-surgical therapies include:
. bed rest, at home or in the hospital;
. prescription and over-the-counter pain medication;
. back braces;
. home health care;
. physical therapy;
. exercise; and
. chiropractic care.
These non-surgical treatments provide only temporary pain relief and periods of
treatment can be lengthy, resulting in expensive hospital stays and follow-up
appointments. In addition, these treatments are not designed to restore
vertebral height or spinal anatomy. Non-surgical treatment can also worsen the
underlying problem. Bed rest is known to cause bone and muscle loss, making
recovery more difficult in elderly patients, which may lead to further
fractures.
Doctors report that patient compliance in non-surgical treatments is low
because of the:
. prolonged nature of treatment;
. patients' reluctance to wear back braces;
. difficulty and pain associated with exercising and physical therapy; and
. inadequate pain reduction.
Vertebroplasty
In vertebroplasty, interventional radiologists place one or two large needles
into fractured vertebrae and inject bone filler material into the compressed
vertebral body. Vertebroplasty is not designed to restore vertebral height, but
simply to reduce pain and stabilize the already compressed vertebral body. This
procedure requires high manual pressure to effectively penetrate the inner
spaces of the bone with filler material. Consequently, according to published
studies, vertebroplasty results in a high incidence of bone filler leaks,
occurring in 33% to 50% of all procedures. Such leaks can result in damage to
surrounding organs and tissue, including the lungs, heart, and spinal cord.
Also, stabilizing the vertebral body in its collapsed position may make the
spine deformity permanent.
Kyphoplasty: An Orthopedic Solution
Kyphoplasty is designed to offer physicians a comprehensive orthopedic solution
for vertebral body compression fractures. Kyphoplasty is a minimally-invasive
alternative to conventional spine surgery that reduces pain and, unlike
vertebroplasty, can also restore height to the vertebral body and reduce
deformity in the spine. We believe that Kyphoplasty will be adopted by
physicians as an effective alternative to other treatments for vertebral body
compression fractures.
27
<PAGE>
The Kyphoplasty procedure involves the insertion of one or two of our KyphX
Inflatable Bone Tamps, our proprietary balloons, into the fractured vertebral
body. Once inserted, the surgeon inflates the balloons to create a cavity and
to compact the deteriorated bone. As a result of the inflation of the balloons,
vertebral height may be improved or completely restored. The balloons are then
removed and the newly created cavity is filled with the surgeon's choice of
bone filler material.
We believe that Kyphoplasty provides the following benefits:
. Restoration of vertebral body height. The KyphX Inflatable Bone Tamp is
designed to permit a physician to move the bone back towards its
original position. The amount of height that can be restored depends on
the age of the fracture, the nature of the fracture, and the original
condition of the patient's bone. In a peer-reviewed paper, to be
published in the Journal of Women's Imaging in November 2000, three of
our medical advisors reported that vertebral bodies, which had been
compressed to an average of 79% of their original height, were restored
to an average of 99% of their original height. These measurements were
made in 27 consecutive Kyphoplasty procedures performed by the same
physician on fractures that were two to 20 weeks old.
. Reduction of spinal deformities. In situations where Kyphoplasty is able
to restore vertebral body height, it can consequently reduce the
curvature of the spine. Muscles and ligaments are then correspondingly
restored to their original positions, thereby reducing or preventing
disabling deformities and decreasing stress and pain.
. Reduction of pain. Most patients have reported immediate pain relief
following the Kyphoplasty procedure. At a joint meeting of the American
Association of Neurological Surgeons and the Congress of Neurological
Surgeons in February 2000, five physicians, four of whom are our medical
advisors, reported that 23 of 25 patients reported substantial and rapid
relief from their back pain following the procedure. In a different
study presented at the World Congress of Osteoporosis in June 2000, four
physicians, two of whom are our medical advisors, reported that 23
patients receiving the Kyphoplasty procedure had, on average, a
threefold improvement in scores measuring their pain.
. Enhanced quality of life. Patients have reported a return to normal
daily activities and increased mobility within one week of the
Kyphoplasty procedure. Reducing or eliminating the deformity caused by
fractures can also reduce the compression on the lungs and stomach,
improving breathing and appetite. Physicians speaking at the World
Congress of Osteoporosis in June 2000 reported that scores for physical
function improved approximately 93% in 23 patients with vertebral body
compression fractures treated by Kyphoplasty.
. Minimally invasive. Kyphoplasty is designed to provide the benefits of
conventional spine surgery without the associated risks and
complications. Because Kyphoplasty is a minimally-invasive procedure,
physicians report that patients experience shorter hospital stays, less
post-operative pain or trauma and quicker recovery.
Risks of Kyphoplasty include the same risks common to performing surgery using
anesthesia and in performing surgery on older patients. In addition, as with
other spine surgeries, Kyphoplasty may result in serious complications,
including bleeding, nerve injury, paralysis and death.
As of September 30, 2000, we had trained 368 physicians in the Kyphoplasty
procedure. These physicians have performed the procedure on a total of
1,515 compression fractures in 982 patients. Since January 1, 2000, we have
trained 292 physicians in the United States and 15 physicians in Europe and
expect to have trained over 425 physicians in the United States and 20 in
Europe by the end of 2000. Kyphoplasty currently is being performed at over 125
medical centers in the United States and five in Europe.
28
<PAGE>
The Kyphoplasty Procedure
The Kyphoplasty procedure is minimally invasive and is generally performed by
spine-focused orthopedic surgeons and neurosurgeons. The first step in the
Kyphoplasty procedure is to create a working channel from the patient's back
into the fractured vertebral body using our KyphX Bone Access System.
[Drawing of first step of Kyphoplasty procedure: the creation of a working
channel from the patient's back into the fractured vertebral body using the
KyphX Bone Access System.]
The surgeon then inserts one or two of our proprietary disposable KyphX
Inflatable Bone Tamps and carefully inflates them with fluid using X-ray images
to monitor the procedure. Surgeons can control inflation volume and pressure
using our KyphX Inflation Syringe. Inflation of the balloon pushes the hard
outer bone up towards its natural position and compacts the soft inner bone,
creating a cavity.
[Drawing of second step of Kyphoplasty procedure: the insertion and inflation
of the KyphX Inflatable Bone Tamp using the KyphX Inflation Syringe to create a
cavity.]
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<PAGE>
The KyphX Inflatable Bone Tamps are then removed and the surgeon selects an
appropriate bone filler for the fracture. Using the KyphX Bone Filler Device,
the surgeon delivers the bone filler material into the cavity under fine manual
control and low pressure to reduce the risk of filler leaks.
[Drawing of third step of the Kyphoplasty procedure: the delivery of bone
filler material into the cavity using the KyphX Bone Filler Device.]
Once the procedure is complete, the incisions are closed with a small number of
stitches. Kyphoplasty is designed to be performed in the operating room, but
may also be performed in an outpatient setting. Surgeons choose local or
general anesthesia based on patient health and preference and the number of
fractures to be treated. The entire surgical procedure is designed to be
performed in about one hour per fracture treated. Because the patients are
often older, they are usually admitted for observation in an overnight hospital
stay. Including the cost of an overnight stay, we estimate that the procedure
typically costs approximately $10,000.
Business Strategy
Our goal is to establish treatments using our proprietary balloon technology as
the standard of care in orthopedic applications. We are initially focusing our
efforts on vertebral body compression fractures. The key elements of our
strategy are to:
. Penetrate the Spinal Market Using a Direct Sales Force. We believe that
a direct sales force will allow us to most effectively educate and train
physicians in the use of our products. Our products are sold directly to
physicians by our experienced sales team, comprised of 21 sales
representatives, three managers and a vice president of sales. By
leveraging their extensive spinal market experience, our sales people
are able to identify key physicians and provide effective case support
to accelerate market adoption of our procedure. Our sales team is
supported by two in-house coordinators and four field-based associates.
. Educate Referring Physicians and Patients. Patients with vertebral body
compression fractures often are not referred to spine surgeons for
treatment. Our objective is to establish referrals from physicians who
initially diagnose vertebral body compression fractures to spine-focused
surgeons who perform Kyphoplasty. As a result, we have implemented an
awareness marketing campaign to educate internists, family physicians,
gerentologists, and other primary care physicians about Kyphoplasty and
its potential to be an effective therapy. As part of this campaign we
provide educational materials to treating physicians, referring
physicians and patients, and organize regional market seminars where
surgeons trained in performing Kyphoplasty educate referring physicians.
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<PAGE>
. Expand Clinical Support of the Kyphoplasty procedure. We are conducting
outcome studies to increase awareness of the procedure within the
medical community, to develop additional marketing claims and to support
third party reimbursement. Through our own outcome studies and those of
surgeons currently performing the Kyphoplasty procedure, we are
gathering data for peer reviewed journal articles in support of
reimbursement efforts.
. Work with Opinion Leaders. We have obtained the advice and support of
nationally recognized spine surgeons who are helping us to further
develop our products and the procedure, to demonstrate the benefits of
Kyphoplasty, and to obtain third-party reimbursement. Because these
leading physicians help set medical policy in their respective areas of
expertise and are experienced in outcome assessments, we believe they
will help create patient referrals and advance third-party
reimbursement. The reputations of these physicians and their leadership
in professional societies help bring recognition and credibility to our
products.
. Expand Surgeon Adoption of Kyphoplasty through Training. We have
implemented specialized training programs and are rapidly expanding the
number of physicians trained in Kyphoplasty. As of September 30, 2000,
we had trained 368 physicians in the United States and Europe and we
plan to have trained more than 425 by the end of 2000. We support these
physicians through professional development programs, which include
funding local seminars, funding travel to national medical conferences
and assisting in the preparation of scientific papers for publication.
. Expand into Additional Orthopedic Markets. We intend to leverage our
proprietary balloon technology platform for other applications including
compression fractures of the wrist, knee and hip. These new applications
involve refinements of our current products, and we intend to conduct
outcome studies in these applications to support market adoption. We
believe our intellectual property position and our position within the
orthopedic marketplace will allow us to become the leading provider of
minimally-invasive medical devices for the treatment of compression
fractures.
Products
We currently manufacture the KyphX system, including the KyphX Bone Access
System, KyphX Inflatable Bone Tamp, KyphX Inflation Syringe and KyphX Bone
Filler Device, which surgeons use in performing Kyphoplasty procedures:
Currently Marketed KyphX Products
<TABLE>
<CAPTION>
Product Description Function
<C> <C> <S>
KyphX Bone Access System Sterile set of small disposable Create working channel into
tools fractured bone
KyphX Inflatable Bone Tamp Sterile disposable balloon Elevate fractured hard outer
catheter and optional inflation bone and compact soft inner
syringe bone to create a cavity
KyphX Inflation Syringe Sterile disposable syringe with Inflate Kyphx Inflatable
twist handle and pressure gauge Bone Tamp
KyphX Bone Filler Device Sterile disposable stainless Deliver bone filler material
steel nozzle with inner rod chosen by physician into
bone cavity
</TABLE>
--------------------------------------------------------------------------------
The KyphX Bone Access System. The KyphX Bone Access System is a sterile set of
small disposable surgical tools used to access and create a working channel in
the fractured bone. One version contains a long guide pin, an instrument used
to separate tissue and a small hand drill. In addition, it contains two small
tubes through which other tools are passed and a proprietary handle which can
be used with multiple KyphX tools. We also
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<PAGE>
offer a second version of the KyphX Bone Access System that combines the
instrument used to separate tissue, the small tube through which other tools
are passed and the proprietary handle into one tool.
The KyphX Inflatable Bone Tamp. Our proprietary KyphX Inflatable Bone Tamps
combine the functionality of a metal bone tamp with the engineering principles
of medical balloon technologies. Unlike other medical balloons, however, our
balloons are specially designed to be used in bone. Other currently available
medical balloons are not used in bone because they are not an appropriate size
and shape and are not designed to withstand sharp bony edges.
Conventional bone tamps are rigid stainless steel instruments which move
fractured hard bone and compact soft bone using indirect mechanical force.
While it is the goal of orthopedic surgeons to move a fractured area all at
once, conventional bone tamps cannot do this without a large incision and
without significant tissue and bone disruption. Unlike conventional bone tamps,
the KyphX Inflatable Bone Tamp contains a balloon which can be placed inside a
fractured bone through a narrow working channel and expanded to move fractured
bone all at once. Once inside, the balloon portion of the KyphX Inflatable Bone
Tamp is carefully inflated under X-ray monitoring. This applies direct
mechanical force to compact the soft inner bone and push up the broken hard
outer bone.
The KyphX Inflation Syringe. Our KyphX Inflation Syringe is a disposable
sterile device with a rotating handle and a built-in pressure gauge that
precisely controls the inflation of our KyphX Inflatable Bone Tamp. The
rotating handle allows the surgeon to deliver a measured volume of the fluid
that inflates the balloon.
The KyphX Bone Filler Device. The KyphX Bone Filler Device is a nozzle with an
inner rod. Bone filler can be loaded into the nozzle and pushed into the cavity
with the inner rod under low pressure and fine manual control.
Outcome Studies
We are currently supporting various outcome and economic studies to provide
information in support of our marketing and reimbursement efforts.
We are sponsoring a registry of patients undergoing Kyphoplasty. We intend to
gather outcome data on patients treated by Kyphoplasty at up to 50 centers. As
of September 30, 2000, six centers were open and four patients were enrolled in
the registry. We intend to enroll up to 200 patients in this registry and will
follow these patients for up to two years.
We are also conducting a multi-center, randomized, controlled, outcome
assessment of Kyphoplasty in up to 100 patients with painful vertebral body
compression fractures due to osteoporosis. Approximately half of the patients
in the study will be treated with the Kyphoplasty procedure, while the other
half will receive only the currently used nonsurgical therapies. In this study,
we are comparing the ability of each treatment to reduce disability caused by
back pain. We are making additional comparisons between the two treatments
using measures of quality of life, vertebral body height, spinal deformity,
functional tests and cost. The study will follow the patients for up to two
years. As of September 30, 2000, ten centers were open and 31 patients were
enrolled.
In addition, we are engaging third parties to conduct economic studies of the
cost of treating osteoporotic patients with clinically-diagnosed vertebral body
compression fractures.
Reimbursement
Establishing reimbursement for any new medical technology is a challenge in the
current environment of cost containment, managed care and Medicare law. We must
prove that our technology improves health outcomes such as quality of life or
functional ability and does so in a cost effective manner.
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<PAGE>
Payment for patient care in the United States is generally made by private
insurers. These insurers act on their own behalf or under contract with the
U.S. government to administer the Medicare program. Medicare covers most of the
medical care expenses of individuals over the age of 64. Most of the patients
with fractures of the spine caused by osteoporosis are covered by Medicare,
while the rest are covered by private insurers. Even when patients are not
covered by Medicare, private insurers often follow the coverage and payment
policies of Medicare.
For inpatient procedures such as Kyphoplasty, Medicare pays the hospital a
prospectively determined amount based primarily on the patient's diagnosis and
the type of procedure performed during the hospital stay. We receive payment
from the hospital for our products, and Medicare reimburses the hospital under
this reimbursement system for its costs of admitting and treating the patient.
The surgeon who performs the procedure is reimbursed under a different system
that is based on procedure codes, called current procedural terminology, or
CPT, codes. Currently, Medicare reimbursement to physicians who perform
Kyphoplasty is not uniform because there is no specific CPT code for
Kyphoplasty.
We are collaborating with physicians and their specialty societies to establish
appropriate CPT coding guidelines which can then be used by Medicare. However,
under the process for establishing new CPT codes, a CPT code for Kyphoplasty
cannot be implemented until January 1, 2002, at the earliest. We believe that
our outcome studies and published clinical data in peer reviewed journals will
facilitate the development of medical policy for Kyphoplasty procedures, the
adoption of CPT codes and appropriate reimbursement rates. Until there is a
specific CPT code and rate, physicians will report the Kyphoplasty procedure
using an unlisted CPT code, submit their bills for review and request payment
based on their time, work and risk involved with the procedure. Medicare and
third-party payors have in the past declined to reimburse physicians, delayed
reimbursement or reimbursed physicians at a rate that is inadequate to cover
physicians' costs and may continue to do so. There are three states, Georgia,
Illinois and Wisconsin, that will not consider providing reimbursement before
the publication of peer reviewed journal articles. We believe that the first
peer reviewed article will be published this year. However, even after
publication of articles, a state may continue to refuse to provide
reimbursement. Our products and procedure are unlikely to be widely adopted by
physicians unless and until physicians receive adequate reimbursement for the
procedure.
In the absence of national coverage and a Kyphoplasty-specific CPT code,
Medicare reimbursement is authorized or denied at the discretion of individual
states. We are working with surgeons to present information to the state
Medicare authorities to establish reimbursement.
Sales and Marketing
We are selling and marketing our KyphX system through a direct sales force in
the United States. We target the approximately 3,500 physicians who perform
spine surgery, including orthopedic spine surgeons and neurosurgeons.
Our U.S. sales organization currently has 29 field personnel, including a vice
president, two regional managers and one field support manager. Nearly all of
our sales organization has extensive experience selling spine or neurological
products for major U.S. medical companies. We intend to add clinical case
support personnel, who answer questions and provide technical information about
our products.
In 2000, we opened a small European office in Brussels, Belgium, hired a
general manager experienced in selling medical devices and contracted with an
experienced sales representative to sell our products throughout Europe. We
intend to follow a similar sales and marketing model in Europe to the one
established in the United States, working with the internationally recognized
spine surgeons on their outcome studies, and assisting them in publishing their
results by reviewing and commenting on selected manuscripts. We plan to sell
direct in selected European countries and to use distributors elsewhere. We do
not anticipate substantial revenue from European sales for at least the next 12
months.
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<PAGE>
Our marketing programs focus on the use of thought leaders, outcome study data
and professional education to recruit physicians focused on spine surgery to
perform Kyphoplasty. Patients with vertebral body compression fractures often
are not referred to spine surgeons for treatment, so we are implementing an
awareness marketing campaign to educate these primary care physicians about the
Kyphoplasty procedure and to encourage referrals to spine surgeons. We are in
the process of recruiting significant additional sales and marketing personnel
to support our commercialization efforts. We cannot be certain that we will be
able to hire enough sales personnel to meet demand for our products. Currently,
a sales representative attends most procedures performed using our KyphX system
to answer questions and provide technical information. Our failure to recruit
additional sales personnel may cause sales and use of our product to slow.
During 1999, three California hospitals, Alta Bates Hospital in Berkeley, the
University of California at San Diego Medical Center and Summit Hospital in
Oakland, accounted for 23%, 18% and 15%, respectively, of our total revenue.
Manufacturing
We manufacture in-house some of our disposable products. In addition, we
inspect, assemble, test, package and sterilize components that have been
manufactured by us or to our specifications by outside contractors. We inspect
each lot of components and finished products to determine compliance with our
specifications.
We are required to be in conformance with regulations mandated by the FDA and
the European Union. We have been an FDA registered and California licensed
medical device manufacturer since 1998. Our new Sunnyvale, California facility
was inspected by the California Department of Health Services in September 2000
and we are currently awaiting the written results of the inspection. The
results of this inspection will be forwarded to the FDA, which also may conduct
further inspections. Our facility was inspected by European regulators in
August 2000. As a result of this inspection, we are currently making revisions
to our quality manual and to our corrective and preventative action system.
Pending approval of these revisions by European regulators, our facility will
continue our ISO 9001/EN 46001 manufacturing certification and will be in
conformance with the Medical Device Directive for sale of products in Europe.
Most purchased components for our products are available from more than one
supplier. There are no contractual obligations by suppliers to continue to
supply to us, nor are we contractually obligated to purchase from a particular
supplier. For the components for which there are relatively few alternate
sources of supply, establishment of additional or replacement suppliers for
such components may not be accomplished quickly. For example, there is only one
company that produces the polymer material that we use in our balloons. This
polymer material may not continue to be available in adequate quantities,
particularly as we increase our commercialization efforts. We are in the
process of identifying suppliers of alternate polymer material. We are also in
the process of developing capability for manufacturing polymer material.
We are currently increasing our manufacturing capabilities as we increase
commercialization efforts. Manufacturers often experience difficulties in
scaling up production, including problems with production yields, and quality
control and assurance. If we are unable to manufacture our products to keep up
with demand, we would not meet our expectations for growth of our business.
Research and Development
We have a product development program to improve upon our current products and
to develop additional products based on our proprietary balloon technology. The
ongoing focus of our research and development group is to design products that
improve patient results, simplify techniques, shorten procedure time and reduce
costs. As of September 30, 2000, we had 14 employees in our research and
development department.
Our major focus of research and clinical development is the identification and
development of technologies for use in orthopedic applications, including
treatment of spinal as well as other compression fractures in the wrist,
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<PAGE>
knee and hip. In addition, we intend to further develop balloon technology to
treat various other bone disorders. When appropriate, we will partner with
companies whose products could benefit by our targeted delivery to bone.
Competition
Kyphoplasty competes with non-surgical treatments, drugs to prevent
osteoporosis, open surgical procedures and vertebroplasty. We believe the
primary competitive factors that affect our products are cost, reimbursement
status, efficacy and safety.
Osteoporosis drugs marketed and in development today generally reduce the risk
of fracture by up to 70%. These drugs are made by large pharmaceutical
companies such as Merck & Co., Inc., Eli Lilly and Company, American Home
Products Corp., The Procter & Gamble Company, Novartis AG and Aventis
Pharmaceuticals. These and future drugs may further reduce the incidence of
vertebral body compression fractures.
Vertebroplasty is an alternative treatment for pain caused by vertebral body
compression fractures, and the criteria by which a patient will be selected for
Kyphoplasty versus vertebroplasty have not yet been established. We are aware
of a number of major medical device companies which have entered or plan to
enter the vertebroplasty market, including Stryker Corporation and Medtronic,
Inc. The entrance of these companies is likely to increase the awareness and
frequency of vertebroplasty procedures.
Any products that we commercialize will compete in a highly competitive market.
Many of our potential competitors in these markets have substantially greater
financial, technical and marketing resources than we do, and we cannot assure
you that they will not succeed in developing products that would render our
products obsolete or noncompetitive. In addition, many of these competitors
have significantly greater experience than we do in their respective fields.
Our ability to compete successfully will depend on our ability to develop
procedures based on proprietary products that reach the market in a timely
manner, receive adequate reimbursement, and are safer, less invasive and less
expensive than other procedures or treatments for the same condition. Current
competitors or other companies may develop technologies and products that are
more effective than ours. Because of the size of the potential market, we
anticipate that companies will dedicate significant resources to developing
competing procedures. Our technologies and products may be rendered obsolete or
uneconomical by technological advances or entirely different approaches
developed by one or more of our competitors.
Patents and Proprietary Technology
We believe that in order to have a competitive advantage, we must develop and
maintain the proprietary aspects of our technologies. As of September 30, 2000,
we had six issued U.S. patents, five issued foreign patents, one notice of
allowance, 21 pending U.S. patent applications and 41 pending foreign
counterpart patent applications. The issued and allowed patents claim, among
other things, the method of Kyphoplasty and similar treatments for other types
of compression fractures.
We require our employees, consultants and advisors to execute confidentiality
agreements in connection with their employment, consulting or advisory
relationships with us. We also require our employees, consultants and advisors
who we expect to work on our products to agree to disclose and assign to us all
inventions conceived during the Kyphon work day, using our property or which
relate to our business. Despite any measures taken to protect our intellectual
property, unauthorized parties may attempt to copy aspects of our products or
to obtain and use information that we regard as proprietary. Finally, our
competitors may independently develop similar technologies. Because of the
importance of our patent portfolio to our business, we may lose market share to
our competitors if we fail to protect our intellectual property rights.
The medical device industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement.
As the number of entrants into our market increases, the
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<PAGE>
possibility of an infringement claim against us grows. While we attempt to
ensure that our products do not infringe other parties' patents and proprietary
rights, our competitors may assert that our products and the methods they
employ may be covered by U.S. patents held by them. In addition, our
competitors may assert that future products we may market infringe their
patents.
Government Regulation
Our products are medical devices subject to extensive regulation by the FDA,
under the Federal Food, Drug, and Cosmetic Act. FDA regulations govern, among
other things, the following activities that we will perform:
. product development;
. product testing;
. product labeling;
. product storage;
. premarket clearance or approval;
. advertising and promotion; and
. product sales and distribution.
Each medical device that we wish to commercially distribute in the United
States requires either 510(k) clearance or PMA approval from the FDA prior to
marketing. Devices deemed to pose relatively less risk are placed in either
class I or II, which requires the manufacturer to submit a premarket
notification requesting permission for commercial distribution; this is known
as 510(k) clearance. Some low risk devices are exempted from this requirement.
Devices deemed by the FDA to pose the greatest risk, such as life-sustaining,
life-supporting or implantable devices, or devices deemed not substantially
equivalent to a previously 510(k) cleared device or a preamendment class III
device for which PMA applications have not been called, are placed in Class III
requiring PMA approval. We have obtained 510(k) clearance for the KyphX
Inflatable Bone Tamp for the treatment of fractures and/or the creation of a
void in cancellous bone. The KyphX Inflation Syringe is a 510(k) cleared
product that we currently obtain from a contract supplier. We believe our KyphX
Bone Access System and KyphX Bone Filler Device are exempt from clearance or
approval requirements. Our future products may not meet the requirements for
510(k) clearance and may be required to undergo the lengthier and more costly
PMA approval process.
510(k) Clearance Pathway. To obtain 510(k) clearance for one of our products,
we must submit a premarket notification demonstrating that the proposed device
is substantially equivalent in intended use and in safety and effectiveness to
a previously 510(k) cleared device or a device that was in commercial
distribution before May 28, 1976 for which the FDA has not yet called for
submission of PMA applications. The FDA's 510(k) clearance pathway usually
takes from four to 12 months, but it can last longer.
After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k) clearance or could
require a PMA approval. The FDA requires each manufacturer to make this
determination in the first instance, but the FDA can review any such decision.
If the FDA disagrees with a manufacturer's decision not to seek a new 510(k)
clearance, the agency may retroactively require the manufacturer to seek 510(k)
clearance or PMA approval. The FDA can also require the manufacturer to cease
marketing and/or recall the modified device until 510(k) clearance or PMA
approval is obtained.
Our KyphX Inflatable Bone Tamp received a general clearance for use in the
reduction of fractures and/or creation of a void in cancellous bone. During the
510(k) process, we submitted data to the FDA describing the specific use of
each tool in the KyphX system to repair compression fractures in the spine and
other bones and information about related devices marketed for use in the spine
and other bones. Therefore, we believe that the
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more general language of our 510(k) clearance encompasses to the repair of
vertebral body compression fractures, which we have named Kyphoplasty for
marketing purposes. We cannot assure you that the FDA would agree with our
interpretation. If the FDA does not agree, we could be required to obtain a new
510(k) clearance or PMA approval in order to promote the KyphX system
specifically for Kyphoplasty. In such circumstances, the FDA could issue a
warning letter requiring that we cease promoting our KyphX system for use in
Kyphoplasty until we obtained the new clearance or approval. We cannot be
certain that such clearance or approval could be obtained in a timely fashion
or at all.
The FDA has not approved most bone filler materials for use in the spine.
During the 510(k) process, we made the FDA aware of the likelihood that
surgeons would choose to use bone fillers not approved for spinal use with the
KyphX system. The FDA acknowledged that surgeons performing Kyphoplasty can use
the bone filler of their choice, because the FDA does not regulate the practice
of medicine. The FDA indicated, however, that we are prohibited from promoting
or advertising the use of any specific bone filler that has not been approved
for spinal use. Our promotional approach, therefore, is to leave the choice to
the surgeon and avoid promoting the KyphX system for use with any specific bone
filler. If the FDA were to conclude, however, that we promoted the KyphX system
for use with a bone filler material not approved for spinal use, we could be
required to revise our promotional claims, to halt sales or recall product, to
take other remedial action or to pay significant fines or penalties.
PMA Approval Pathway. If the FDA denies 510(k) clearance for one of our
products or a product modification, the product must follow the PMA approval
pathway, which requires proof of the safety and effectiveness of the device to
the FDA's satisfaction. A PMA application must provide extensive preclinical
and clinical trial data and also information about the device and its
components regarding, among other things, device design, manufacturing and
labeling. After approval of a PMA, a new PMA or PMA supplement is required in
the event of a modification to the device, its labeling or its manufacturing
process. The PMA approval pathway is much more costly, lengthy and uncertain
than the 510(k) clearance pathway and generally takes from one to three years,
or longer, to be completed.
Clinical Trials. A clinical trial is almost always required to support a PMA
application and is sometimes required for a 510(k) submission. Such trials
generally require submission of an application for an Investigational Device
Exemption, or IDE. The outcome studies we are currently conducting do not
require an IDE because they are intended to study the KyphX system for uses
that have already received 510(k) clearance.
Postmarket. After a device is placed on the market, numerous regulatory
requirements apply. These include:
. the Quality System Regulation, or QSR, which requires manufacturers to
follow elaborate design, testing, control, documentation and other
quality assurance procedures during the manufacturing process;
. the FDA's general prohibition against promoting products for unapproved,
or off-label, uses; and
. the Medical Device Reporting regulation, which requires that
manufacturers report to the FDA instances where their device may have
caused or contributed to a death or serious injury or malfunctioned in a
way that would likely cause or contribute to a death or serious injury
if it were to recur.
We are subject to inspection and marketing surveillance by the FDA to determine
our compliance with regulatory requirements. If the FDA finds that we have
failed to comply, it can institute a wide variety of enforcement actions,
ranging from a public warning letter to more severe sanctions such as:
. fines, injunctions, and civil penalties;
. recall or seizure of our products;
. operating restrictions, partial suspension or total shutdown of
production;
. refusing our requests for 510(k) clearance or PMA approval of new
products;
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. withdrawing 510(k) clearance or PMA approvals already granted; and
. criminal prosecution.
The FDA also has the authority to require repair, replacement or refund of the
cost of any medical device that we have manufactured or distributed.
International. International sales of medical devices are subject to foreign
government regulations, which vary substantially from country to country. The
time required to obtain approval by a foreign country may be longer or shorter
than that required for FDA approval, and the requirements may differ. The
primary regulatory authority in Europe is that of the European Union, or EU,
which consists of 15 countries encompassing most of the major countries in
Europe. Other countries, such as Switzerland, have voluntarily adopted laws and
regulations that mirror those of the EU with respect to medical devices. The EU
has adopted numerous directives and standards regulating the design,
manufacture, clinical trial, labeling, and adverse event reporting for medical
devices. Devices that comply with the requirements of a relevant directive will
be entitled to bear CE conformity marking, indicating that the device conforms
with the essential requirements of the applicable directives and, accordingly,
can be commercially distributed throughout Europe. The method of assessing
conformity varies depending on the class of the product, but normally involves
a combination of self-assessment by the manufacturer and a third party
assessment by a "Notified Body." This third-party assessment may consist of an
audit of the manufacturer's quality system and specific testing of the
manufacturer's product. An assessment by a Notified Body in one country within
the EU is required in order for a manufacturer to commercially distribute the
product throughout the EU. During this process, we must demonstrate compliance
with designated manufacturing and quality requirements known as the "ISO"
requirements.
We have obtained a CE Mark from the EU for our products. We have certification
of our manufacturing facilities to ISO 9001/EN46001 quality system
requirements. As the result of an annual inspection in August 2000, we are
currently making revisions to our quality manual and to our corrective and
preventative action system. Pending approval of these revisions by European
regulators, our facility will continue in ISO 9001/EN46001 certification and in
its conformance with relevant directives. While no additional premarket
approvals in individual EU countries are required, prior to marketing of a
device bearing the CE Mark, practical complications with respect to market
introduction may occur. For example, differences among countries have arisen
with regard to labeling requirements.
Employees
As of September 30, 2000, we had a total of 121 employees, with 39 people in
operations, 14 people in research and development, 31 people in sales, 16
people in general and administrative, 14 people in clinical and regulatory, and
seven people in marketing. None of our employees is represented by a labor
union, and we believe our employee relations are good.
Facilities
Our operations are headquartered in a 34,500 square foot building in Sunnyvale,
California. This facility is leased through March 2005 with an option to renew
through 2010. We believe that our existing facility is adequate for our current
needs.
Legal Proceedings
We are not a party to any material legal proceedings.
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Scientific and Clinical Advisors
Our scientific and clinical advisory boards work collaboratively with us to
provide advice, assistance and consultation in the orthopedic and osteoporosis
fields. We consider our advisory board members to be opinion leaders in their
fields, and they offer us advice regarding one or more of the following:
. preclinical and clinical study design;
. medical and surgical treatment of patients with fractures caused by
osteoporosis;
. surgical procedure refinement with our products;
. the applicability of our products to procedures;
. feedback on both existing products and products under development; and
. physician training.
The following individuals advise us in the specified capacities:
Principal Investigator, Post-Marketing Outcome Studies
<TABLE>
<CAPTION>
Name Position and Affiliation
---- ------------------------
<C> <S>
Steven R. Garfin, M.D. ......... Spine Surgeon; Professor and Chair in the
Department of Orthopedics, University of
California, San Diego Medical Center, San
Diego, CA
Clinical and Scientific Advisory Board Members
<CAPTION>
Name Position and Affiliation
---- ------------------------
<C> <S>
Courtney W. Brown, M.D. ........ Spine Surgeon; Panorama Orthopedic Clinic,
Golden, CO, and Clinical Instructor of
Orthopedic Surgery, University of Colorado
Health Sciences Center, Denver, CO
Joseph N. Lane, M.D. ........... Orthopedic Surgeon; Chief, Metabolic Bone
Disease Service and Medical Director,
Osteoporosis Prevention Center, Hospital for
Special Surgery, New York, NY; Professor of
Orthopedic Surgery, Weill Medical College of
Cornell University, New York, NY
Nancy E. Lane, M.D.............. Rheumatologist; Associate Professor of
Medicine, University of California at San
Francisco Medical Center, San Francisco, CA
Isador H. Lieberman, M.D. ...... Spine Surgeon; Staff, Department of
Orthopedic Surgery and Spine Center,
Cleveland Clinic Foundation, Cleveland, OH
Robert A. Marcus, M.D. ......... Endocrinologist; Department of Endocrinology,
Geriatrics and Metabolism, Stanford
University Medical Center, Palo Alto, CA
Hallett B. Mathews, M.D. ....... Spine Surgeon; Mid-Atlantic Spine
Specialists, Richmond, VA
Mark A. Reiley, M.D. ........... Orthopedic Surgeon; Berkeley Orthopedics
Medical Group, Berkeley, CA, and Co-Founder,
Kyphon Inc.
Frank M. Phillips, M.D. ........ Spine Surgeon; Assistant Professor of
Surgery, Section of Orthopedic Surgery and
Rehabilitation, University of Chicago,
Chicago, IL
Harry B. Skinner, M.D., Ph.D. .. Orthopedic Surgeon; Professor and Chair,
Department of Orthopedics, University of
California at Irvine Medical Center, Irvine,
CA
Hansen A. Yuan, M.D. ........... Spine Surgeon; Professor of Orthopedic and
Neurological Surgery, State University of
New York at Syracuse Medical Center,
Syracuse, NY
</TABLE>
Except for Dr. Joseph Lane, we have granted each of the above individuals an
option to purchase shares of our common stock. In addition, some of these
individuals have purchased preferred stock in prior financings. All of the
physicians perform Kyphoplasty except for Drs. Nancy Lane, Robert Marcus and
Harry Skinner.
39
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth information concerning our executive officers
and directors as of September 30, 2000:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Richard D. Murdock...... 53 President, Chief Executive Officer and Director
Karen D. Talmadge,
Ph.D................... 48 Executive Vice President, Co-Founder and Director
Jeffrey L. Kaiser....... 49 Vice President, Finance and Administration and Chief Financial Officer
Robert M. Scribner...... 44 Vice President, Research and Development
Eric N. Doelling........ 42 Vice President, Operations
Duane A. Linenkugel..... 36 Vice President, Marketing and Professional Education
Anthony J. Recupero..... 42 Vice President, Sales
Stephen Campe(/1/)...... 35 Director
Douglas W. Kohrs........ 42 Director
Jack W.
Lasersohn(/1/)(/2/).... 47 Director
Terry E. Spraker,
Ph.D.(/1/)............. 51 Director
Elizabeth H. Weather-
man(/2/)............... 40 Director
</TABLE>
-------------------------------
(/1/)Member of the Audit Committee
(/2/)Member of the Compensation Committee
Richard D. Murdock has served as our President, Chief Executive Officer and a
director since December 1998. From September 1991 through October 1998, Mr.
Murdock served as President, Chief Executive Officer and a director of CellPro,
Inc., a manufacturer of systems to treat blood cancers. Currently, Mr. Murdock
serves as a director of SangStat Medical Corp., a manufacturer of drugs to
improve organ transplants. Mr. Murdock holds a B.A. in Zoology from the
University of California at Berkeley.
Karen D. Talmadge, Ph.D. co-founded Kyphon and has served as a director since
January 1994. She also has served as our Executive Vice President since
November 1998. From January 1994 to November 1998, Dr. Talmadge served as our
President, Chief Executive Officer and Treasurer. Dr. Talmadge holds an A.B.,
in Biology from Bryn Mawr College and a Ph.D. in Biochemistry and Molecular
Biology from Harvard University.
Jeffrey L. Kaiser has served as our Chief Financial Officer and Vice President,
Finance and Administration since March 2000. From May 1997 through December
1999, he was Vice President, Chief Financial Officer, Treasurer and Secretary
of UroQuest Medical Corporation, a manufacturer of products to treat urological
disorders. From March 1990 to June 1996, Mr. Kaiser was Vice President, Finance
and Administration and Chief Financial Officer of EP Technologies, Inc., a
manufacturer of interventional cardiac electrophysiology products. Mr. Kaiser
is a Certified Public Accountant and holds a B.S. in Business Administration
from Miami University, Oxford, Ohio.
Robert M. Scribner has served as our Vice President, Research and Development
since September 1999. From November 1996 through September 1999 he served as
our Director of Research and Development. From October 1992 to November 1996,
Mr. Scribner was President of Scribner Browne, Inc., a medical device
development and research firm. Mr. Scribner holds a B.S. in Mechanical
Engineering from Northeastern University and a B.S. in Natural Resource
Management from the University of Maine.
Eric N. Doelling has served as our Vice President, Operations since September
1999. From July 1996 to May 1999, Mr. Doelling was Chief Operating Officer of
Somnus Medical Technologies, Inc., a manufacturer of devices to treat upper
airway disorders. From April 1993 to July 1996, Mr. Doelling was Vice President
of Manufacturing for Cardiac Pathways, a manufacturer of arrhythmia mapping and
treatment systems. Mr. Doelling holds a B.S. in Engineering and an M.B.A. from
Rensselaer Polytechnic Institute.
40
<PAGE>
Duane A. Linenkugel has served as our Vice President, Marketing and
Professional Education since September 2000. From November 1999 through August
2000, he served as our Director of Marketing. From March 1996 through October
1999, Mr. Linenkugel served as Director of Professional Education at Sulzer
Spine-Tech, Inc., a supplier of spinal implants. From August 1991 through
February 1996, he held various management positions in sales, marketing,
professional education and business development at Ethicon Endo-Surgery, a
division of Johnson & Johnson. Mr. Linenkugel holds a B.S. in Engineering from
the United States Military Academy, West Point, New York.
Anthony J. Recupero has served as our Vice President, Sales since September
2000. From October 1999 through August 2000, he served as our Director of Sales
for North America. From January 1998 through September 1999, Mr. Recupero was
Director of Sales for Sulzer Spine-Tech. From July 1987 through December 1997,
he held various positions with United States Surgical Corporation, a
manufacturer of minimally invasive surgical devices, including Director of
National Accounts and Divisional Sales Director. Mr. Recupero holds a B.A. in
Communications from the State of University of New York at Albany.
Stephen Campe has served as a director since December 1999. Since April 1998,
Mr. Campe has been a Managing Director of Investor Growth Capital, Inc., a
wholly-owned subsidiary of Investor AB, a venture capital firm focusing on
health care and information technology investments. From September 1995 to
April 1998, Mr. Campe was a consultant at McKinsey & Co., a management
consulting firm. He currently serves on the boards of several private
companies. Mr. Campe holds a B.S. in Economics and a B.A. in Systems Science
Engineering from the University of Pennsylvania and an M.B.A. from Yale
University.
Douglas W. Kohrs has served as a director since April 2000. Since April 1999,
Mr. Kohrs has been President, Chief Executive Officer and a director of
American Medical Systems Holdings, Inc., a supplier of devices to treat
urological disorders. From May 1998 to April 1999, Mr. Kohrs was general
manager of Sulzer Spine-Tech. From August 1991 to May 1998, Mr. Kohrs served as
Vice President of Research and Development and Vice President of Marketing for
Spine-Tech, Inc. Mr. Kohrs holds a B.S. in Bioengineering from Texas A&M
University, a B.A. in Engineering Sciences from Austin College and an M.B.A.
from Northeastern University.
Jack W. Lasersohn has served as a director since August 1996. From 1989 to the
present, Mr. Lasersohn has served as a general partner of The Vertical Group,
L.P., a private venture capital firm. From 1981 through 1989, Mr. Lasersohn was
a vice president and then director of the venture capital division of F.
Eherstad & Co., Inc. Mr. Lasersohn serves as a director of VitalCom, Inc. a
publicly-held medical technology company and several privately-held medical
companies. Mr. Lasersohn holds a B.S. in Physics from Tufts University, an M.A.
from the Fletcher School of Law & Diplomacy and a J.D. from Yale University.
Terry E. Spraker, Ph.D. has served as a director since November 1996. Dr.
Spraker was President, Chief Executive Officer and a director of UroQuest
Medical from May 1997 through December 1999. From October 1992 to August 1996,
Dr. Spraker was President, Chief Executive Officer and a director of EP
Technologies. Dr. Spraker holds a B.S. in Electrical Engineering from the
University of Bridgeport and an M.S. in Electrical Engineering and a Ph.D. in
Bioengineering from Pennsylvania State University.
Elizabeth H. Weatherman has served as a director since September 2000. She also
served as a director from August 1996 through January 1998 and since September
2000. Ms. Weatherman is a Managing Director of E.M. Warburg, Pincus & Co., LLC,
a private equity and venture capital firm, where she has been a member of the
health care group since 1988. She is responsible for Warburg Pincus' medical
device investment activities. Ms. Weatherman also serves as a director of
American Medical Systems Holdings, VitalCom and several privately-held
companies, including Wright Medical Group, an orthopedic implant company, and
SURx Inc., a developer of minimally-invasive devices for female urology.
Ms. Weatherman holds a B.A. from Mount Holyoke College and an M.B.A. from
Stanford University.
41
<PAGE>
Executive Officers
Our executive officers are elected by, and serve at the discretion of, our
board of directors. There are no family relationships among our directors and
officers.
Board of Directors
We currently have authorized seven directors. Our certificate of incorporation,
which will be effective prior to this offering, provides that as of the closing
of this offering our board of directors will be divided into three classes,
with each class being as nearly equal in size as possible. Mr. Murdock and Ms.
Talmadge have been designated as Class I directors whose term expires at the
2001 annual meeting of stockholders; Messrs. Campe, Kohrs and Lasersohn have
been designated as Class II directors whose term expires at the 2002 annual
meeting of stockholders; and Mr. Spraker and Ms. Weatherman have been
designated as Class III directors whose term expires at the 2003 annual meeting
of stockholders. At each annual meeting of our stockholders after the initial
classification, the term of one class expires and their successors are elected
for three-year terms. This classification of our board of directors may have
the effect of delaying or preventing changes in control of Kyphon.
Board Committees
Our board of directors has an audit committee and a compensation committee.
The audit committee was formed in January 1998 and new members and a charter
were approved in September 2000. The committee currently consists of Messrs.
Campe, Lasersohn and Spraker. The audit committee reviews the results and scope
of the annual audit and other services provided by our independent accountants,
reviews and evaluates our internal audit and control functions and monitors
transactions between us and our employees, officers and directors.
The compensation committee was formed in January 1998 and new members and a
charter were approved in September 2000. The committee currently consists of
Mr. Lasersohn and Ms. Weatherman. The compensation committee administers the
1996 stock option plan, the 2000 stock plan and the 2000 employee stock
purchase plan and reviews the compensation and benefits for our executive
officers.
Compensation Committee Interlocks and Insider Participation
Prior to establishing the compensation committee, the board of directors as a
whole performed the functions delegated to the compensation committee. No
member of the compensation committee or executive officer of Kyphon has a
relationship that would constitute an interlocking relationship with executive
officers or directors of another entity. No compensation committee member is an
officer or employee of Kyphon.
Director Compensation
Our non-employee directors are reimbursed for their out-of-pocket expenses
incurred in connection with attending board and committee meetings but are not
compensated for their services as board members. We have in the past granted
directors options to purchase our common stock pursuant to the terms of our
1996 stock option plan. In addition, directors are eligible for the automatic
grant of options under our 2000 stock plan. Upon the initial election of the
directors, they receive an option to purchase 30,000 shares and annually
thereafter, they receive an option to purchase an additional 10,000 shares. See
"--Stock Plans."
42
<PAGE>
Executive Compensation
The following table sets forth summary information concerning compensation of
our chief executive officer and each of the next three most highly compensated
current executive officers whose total annual salary and bonus exceeded
$100,000 during the fiscal year ended December 31, 1999. We refer to these
persons as our named executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
---------------------
Annual
Compensation
-------------- Restricted Securities
Name and Principal Stock Underlying All Other
Position Salary Bonus Awards Options Compensation
------------------ -------- ----- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Richard D. Murdock
President & Chief Execu-
tive Officer............ $250,000 -- -- -- $123,842(/1/)
Karen D. Talmadge, Ph.D.
Executive Vice Presi-
dent.................... $160,000 -- -- -- --
Robert M. Scribner
Vice President, Research
& Development........... $117,776 -- -- 40,000 --
Eric N. Doelling
Vice President, Opera-
tions(/2/).............. $ 42,692 -- -- 137,500 --
</TABLE>
-------------------------------
(/1/)Consists of life insurance premiums in the amount of $300, cost of living
allowance in the amount of $57,330 and relocation payments in the amount
of $66,212.
(/2/)Mr. Doelling joined our company in September 1999 as Vice President of
Operations at an annual salary of $150,000.
Option Grants in Last Fiscal Year
The following table sets forth information with respect to stock options
granted to each of our named executive officers during the fiscal year ended
December 31, 1999.
Option Grants in 1999
<TABLE>
<CAPTION>
Potential Realizable
Value At Assumed
Number of Percent of Annual Rates Of Stock
Securities Total Price Appreciation
Underlying Options Exercise For Option Term
Options Granted to Price Per Expiration ---------------------
Name Granted Employees Share Date 5% 10%
---- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert M. Scribner...... 12,500 1.7% $0.26 4/13/09 $ 220,723 $ 353,390
27,500 3.6% $0.26 9/21/09 $ 485,591 $ 777,457
Eric N. Doelling........ 137,500 18.1% $0.26 9/21/09 $2,427,953 $3,887,285
</TABLE>
The amounts disclosed in the column captioned "Exercise Price Per Share"
represented the fair market value of the underlying shares of common stock on
the dates the respective options were granted as determined by our board of
directors.
The potential realizable values are calculated by multiplying the number of
shares granted by the assumed initial public offering price of $11.00 per
share, assuming that the common stock appreciates at the indicated rate for the
entire term of the option and that the option is exercised at the exercise
price and sold on the last day of the option term at the appreciated price, and
subtracting the exercise price. Stock price appreciation of 5% and 10% is
assumed pursuant to rules of the U.S. Securities and Exchange Commission and
does not represent our estimate or projection of our future common stock
prices.
43
<PAGE>
Aggregated Option Exercises in 1999 and Option Values
The following table sets forth information concerning the number and value of
unexercised options held by each of our named executive officers on December
31, 1999. The value of "in-the-money" stock options represents the positive
spread between the exercise price of stock options and the assumed initial
public offering price of $11.00 per share.
In the last fiscal year, we granted options to purchase an aggregate of 758,750
shares. All options are fully exercisable, subject to our right to repurchase
any unvested shares at the original exercise price in the event of the
optionee's termination. Options generally vest over a four-year period, with
25% of the option shares vesting after one year and 2.1% of the option shares
vesting monthly thereafter. Options have a term of ten years but may terminate
before their expiration dates if the optionee's status as an employee is
terminated or upon the optionee's death or disability.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Shares Acquired Value Unexercised Options at In-the-Money Options at
on Exercise (#) Realized(/1/) December 31, 1999 December 31, 1999(/1/)
--------------- ------------- ------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Karen D. Talmadge,
Ph.D. ................. -- -- 50,000 -- $550,000 --
Robert M. Scribner...... 27,500 -- 13,750 58,750 $151,250 $ 646,250
Eric N. Doelling........ -- -- -- 137,500 -- $1,512,500
</TABLE>
-------------------------------
(/1/) Based upon an assumed initial offering price of $11.00 per share.
Benefit Plans
1996 Stock Option Plan
Our board of directors and stockholders adopted our 1996 stock option plan in
August 1996. Our board of directors has decided not to grant any additional
options under the 1996 stock option plan following the effective date of this
offering. However, the 1996 stock option plan will continue to govern the terms
and conditions of the outstanding options granted under the 1996 stock option
plan.
A total of 2,500,000 shares of our common stock are authorized for issuance
under the 1996 stock option plan. As of September 30, 2000, options to acquire
a total of 1,971,220 shares of our common stock were issued and outstanding,
and a total of 341,709 shares of our common stock had been issued upon the
exercise of options granted under the 1996 stock option plan. In 2000, we
granted an option to purchase 187,500 shares to Jefferey L. Kaiser, our
Vice President, Finance and Administration, and Chief Financial Officer, in
conjunction with his hiring. We also granted options to purchase 25,000 shares
to: Eric N. Doelling, our Vice President, Operations; Robert M. Scribner, our
Vice President, Research and Development; Duane Linenkugel, our Vice President,
Marketing and Professional Education; and Anthony Recupero, our Vice President,
Sales. Each of these grants vests over a four year period.
Our 1996 stock option plan provides that in the event of our merger with or
into another corporation or a sale of substantially all of our assets, the
successor corporation will assume or substitute each option. If the outstanding
options are not assumed or substituted, the administrator will provide notice
to the optionee that he or she has the right to exercise the option as to all
of the shares subject to the option, including shares which would not otherwise
be exercisable, for a period of 15 days from the date of notice. The option
will terminate upon the expiration of the 15-day period.
44
<PAGE>
2000 Stock Plan
Our board of directors adopted the 2000 stock plan in September 2000 and we
anticipate that the stockholders will approve our 2000 stock plan in November
2000. Our 2000 stock plan is the successor equity incentive plan to our 1996
stock option plan. Our board of directors has decided not to grant any
additional options under the 1996 stock option plan as of the effective date of
this offering.
The purpose of the 2000 stock plan is to provide us with a continued
opportunity to retain and attract employees, directors and consultants who are
essential to our future growth and success by providing such individuals with
an opportunity to acquire shares of our common stock. Our 2000 stock plan
provides for the grant of nonstatutory stock options to our employees,
directors and consultants, and for the grant of incentive stock options, within
the meaning of Section 422 of the Internal Revenue Code, to our employees and
employees of our parent and subsidiary corporations.
Number of Shares of Common Stock Available under the 2000 Stock Plan. A total
of 2,500,000 shares of our common stock are authorized for issuance under the
2000 stock plan. Also authorized under the 2000 stock plan are any shares of
common stock that were reserved but unissued under our 1996 stock option plan
and any shares that are subsequently returned to the 1996 stock option plan as
a result of termination of options or our repurchase of shares previously
issued under that plan. On the first day of each fiscal year during the term of
the 2000 stock plan, beginning with our fiscal year 2001, the number of shares
available for issuance under our 2000 stock plan will increase by an amount of
shares equal to the lesser of 5.0% of the outstanding shares of our common
stock on the last day of our immediately preceding fiscal year, 3,000,000
shares or a lesser amount as our board may determine.
Administration of the Incentive Plan. Our board of directors or a committee of
our board administers the 2000 stock plan. In the case of options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Internal Revenue Code, the committee will consist of two or more
"outside directors" within the meaning of Section 162(m) of the Internal
Revenue Code. The administrator has the power to determine the terms of the
options granted, including the exercise price, the number of shares subject to
each option, the exercisability of the options and the form of consideration
payable upon exercise.
Options. The administrator determines the exercise price of options granted
under the 2000 stock plan, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code and all incentive stock options,
the exercise price must at least be equal to the fair market value of our
common stock on the date of grant. The term of an incentive stock option may
not exceed 10 years, except with respect to any participant who owns 10% of the
voting power of all classes of our outstanding capital stock, the term must not
exceed five years and the exercise price must equal at least 110% of the fair
market value on the grant date. The administrator determines the term of all
other options.
No optionee may be granted an option to purchase more than 750,000 shares in
any fiscal year. However, in connection with his or her initial service, an
optionee may be granted options to purchase up to an additional
2,000,000 shares.
After termination of one of our employees, directors or consultants, he or she
may exercise his or her option for the period of time stated in the option
agreement. Generally, if termination is due to death or disability, the option
will remain exercisable for 12 months. In all other cases, the option will
generally remain exercisable for three months. However, an option may never be
exercised later than the expiration of its term.
Automatic Grants to Nonemployee Directors. Our 2000 stock plan provides for the
periodic automatic grant of options to our nonemployee directors. Each option
granted under this automatic grant provision will have an exercise price per
share equal to 100% of the fair market value per share of our common stock on
the date of
45
<PAGE>
grant, and will have a term of 10 years, unless terminated earlier upon the
optionee's termination of service as a director. The following is a brief
description of the options that will automatically be granted to nonemployee
directors under the 2000 stock plan:
. Initial Grant. A nonemployee director will automatically be granted an
option to purchase 30,000 shares of our common stock on the date the
individual first becomes a nonemployee director, whether by appointment
by our board or election by our stockholders. An employee director who
ceases to be an employee will not be eligible to receive this initial
grant. Each initial 30,000-share option grant will vest in three annual
installments of 10,000 shares measured from the option grant date.
. Annual Grants. Each nonemployee director will automatically be granted
an option to purchase 10,000 shares of our common stock on the date of
our annual stockholder meeting each year (except for the first such
meeting if held within six months of this offering), provided the
individual has been a nonemployee director for at least six months on
the date of grant. Each annual grant will become fully vested on the
third anniversary of the option grant date.
The other terms and conditions of the options automatically granted to
nonemployee directors under the 2000 stock plan will be governed by the terms
of our 2000 stock plan.
Transferability of Options. Our 2000 stock plan generally does not allow for
the transfer of options and only the optionee may exercise an option during his
or her lifetime. The administrator may, however, allow options to be
transferable.
Adjustments upon Merger or Asset Sale. Our 2000 stock plan provides that in the
event of our merger with or into another corporation or a sale of substantially
all of our assets, the successor corporation will assume or substitute each
option. If the outstanding options are not assumed or substituted, the
administrator will provide notice to the optionee that he or she has the right
to exercise the option as to all of the shares subject to the option, including
shares which would not otherwise be exercisable, for a period of 15 days from
the date of the notice. The option will terminate upon the expiration of the
15-day period.
Amendment and Termination of our 2000 Stock Plan. Our 2000 stock plan will
automatically terminate in 2010, unless we terminate it sooner. In addition,
our board of directors has the authority to amend, suspend or terminate the
2000 stock plan provided it does not adversely affect any option previously
granted under our 2000 stock plan.
2000 Employee Stock Purchase Plan
Our board of directors adopted the 2000 employee stock purchase plan in
September 2000 and we anticipate that the stockholders will approve our
purchase plan in November 2000. Our purchase plan provides eligible employees
the opportunity to purchase shares of our common stock at a discount through
payroll deductions.
Number of Shares of Common Stock Available under the Purchase Plan. A total of
1,000,000 shares of our common stock are authorized for issuance under the
purchase plan. In addition, the number of shares authorized for issuance under
the purchase plan will increase annually on the first day of each fiscal year,
beginning with our fiscal year 2001, equal to the lesser of 2.0% of the
outstanding shares of our common stock on the last day of the immediately
preceding fiscal year, 1,200,000 shares, or such other amount as may be
determined by our board of directors.
Administration of the Purchase Plan. Our board of directors or a committee of
our board administers the purchase plan. Our board of directors or its
committee has full and exclusive authority to interpret the terms of the
purchase plan and determine eligibility.
Eligibility to Participate. All of our employees are eligible to participate if
they are customarily employed by us or any participating subsidiary for at
least 20 hours per week and more than five months in any calendar
46
<PAGE>
year. However, an employee may not be granted an option to purchase stock under
the purchase plan if such employee:
. immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
. has rights to purchase stock under all of our employee stock purchase
plans which accrue at a rate that exceeds $25,000 worth of stock for
each calendar year.
Offering Periods and Contributions. Our purchase plan is intended to qualify
under Section 423 of the Internal Revenue Code and contains consecutive,
overlapping 24-month offering periods. Each offering period includes four six
month purchase periods. The offering periods generally start on the first
trading day on or after February 1 and August 1 of each year, except for the
first such offering period which will commence on the first trading day on or
after the effective date of this offering and will end on the first trading day
on or after the earlier of (i) February 1, 2003 or (ii) 27 months after the
beginning of the first offering period.
Our purchase plan permits participants to purchase common stock through payroll
deductions of up to 15% of their eligible compensation which includes a
participant's base straight time gross earnings and commissions. A participant
may purchase a maximum of 6,000 shares during a 6-month purchase period.
Purchase of Shares. Amounts deducted from a participant's eligible compensation
and accumulated during a six month purchase period are used to purchase shares
of our common stock at the end of the six-month purchase period. The price is
85% of the lower of the fair market value of our common stock at the beginning
of an offering period or at the end of a purchase period. If the fair market
value at the end of a purchase period is less than the fair market value at the
beginning of the offering period, participants will be withdrawn from the
current offering period following their purchase of shares on the purchase date
and will be automatically re-enrolled in a new offering period. Participants
may end their participation at any time during an offering period, and will be
paid their payroll deductions to date. Upon an employee's termination with us,
he or she will have the opportunity to continue to participate in the purchase
plan for three months after termination. Upon the expiration of such three
month period, the employee's participation will automatically end.
Transferability of Rights. A participant may not transfer rights granted under
the purchase plan other than by will, the laws of descent and distribution or
as otherwise provided under the purchase plan.
Adjustments upon Merger or Asset Sale. In the event of a change of control, a
successor corporation may assume or substitute each outstanding option. If the
successor corporation refuses to assume or substitute for the outstanding
options, the offering period then in progress will be shortened, and a new
exercise date will be set.
Amendment and Termination of the Purchase Plan. Our board of directors has the
authority to amend or terminate our purchase plan, except that, subject to
certain exceptions described in the purchase plan, no such action may adversely
affect any outstanding rights to purchase stock under our purchase plan.
Change in Control Arrangements
Employment at our company is at will. It is our policy to extend offer letters
to our prospective employees, which contain the material terms of their
employment. Offer letters for Eric N. Doelling and Jeffrey L. Kaiser also
provide that in the event of a change in control all of their outstanding stock
options will fully and immediately vest. In addition, Mr. Kaiser's offer letter
provides for acceleration of options and a severance payment equal to six
months of his annual salary upon termination of employment other than for
cause.
Limitations on Liability and Indemnification
Our bylaws provide that we will indemnify our directors and executive officers
and may indemnify our other officers, employees and other agents to the fullest
extent permitted by Delaware law. We are also empowered
47
<PAGE>
under our bylaws to enter into indemnification agreements with our directors
and officers and to purchase insurance on behalf of any person whom we are
required or permitted to indemnify. We are obtaining a policy of directors' and
officers' liability insurance that insures such persons against the cost of
defense, settlement or payment of a judgment under certain circumstances.
We intend to enter into agreements with our directors and executive officers
regarding indemnification. Under these agreements we will be required to
indemnify them against expenses, judgments, fines, settlements and other
amounts actually and reasonably incurred, including expenses of a derivative
action, in connection with an actual, or a threatened, proceeding if any of
them may be made a party because he or she is or was one of our directors or
officers. We are obligated to pay these amounts only if the officer or director
acted in good faith and in a manner that he or she reasonably believed to be in
or not opposed to our best interests. With respect to any criminal proceeding,
we are obligated to pay these amounts only if the officer or director had no
reasonable cause to believe his or her conduct was unlawful. The
indemnification agreements also will set forth procedures that will apply in
the event of a claim for indemnification thereunder.
In addition, our amended and restated certificate of incorporation filed in
connection with this offering provides that the liability of our directors for
monetary damages shall be eliminated to the fullest extent permissible under
Delaware law. This provision in our amended and restated certificate of
incorporation does not eliminate a director's duty of care, and, in appropriate
circumstances, equitable remedies such as an injunction or other forms of non-
monetary relief would remain available. Each director will continue to be
subject to liability for breach of the director's duty of loyalty to us, for
acts or omissions not in good faith or involving intentional misconduct or
knowing violations of law, for acts or omissions that the director believes to
be contrary to our best interests or our stockholders, for any transaction from
which the director derived an improper personal benefit, for improper
transactions between the director and us and for improper distributions to
stockholders and loans to directors and officers. This provision also does not
affect a director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended, may be permitted to our directors, officers and controlling
persons pursuant to the foregoing provisions, or otherwise, we have been
advised that in the opinion of the U.S. Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933, as amended, and is, therefore, unenforceable.
Except as disclosed in this paragraph, there is no pending litigation or
proceeding involving any of our directors as to which indemnification is being
sought, nor are we aware of any pending or threatened litigation that may
result in claims for indemnification by any director. Three of our officers,
Eric N. Doelling, Richard D. Murdock and Karen D. Talmadge, have been named
along with us in a wrongful termination lawsuit brought by a former employee.
We have agreed to indemnify these officers from any liability which may result
from this lawsuit.
48
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1997 and March 1999, we sold shares of our series C preferred
stock, which are convertible into an aggregate of 2,382,015 shares of common
stock, at a price per share of $1.05. In December 1998 and January 1999, we
sold shares of our series D preferred stock, which are convertible into an
aggregate of 3,316,796 shares of common stock, at a price per share of $2.62.
In December 1999 and February 2000, we sold shares of our series E preferred
stock, which are convertible into an aggregate of 4,185,772 shares of common
stock, at a price per share of $6.18. Upon completion of this offering all
outstanding shares of preferred stock will automatically convert into shares of
common stock. The purchasers of our preferred stock will have registration
rights with respect to their shares of common stock following the completion of
this offering. See "Description of Capital Stock--Registration Rights."
The following directors, executive officers, and holders of more than 5% of our
voting securities purchased securities in the amounts and on the dates shown
below:
<TABLE>
<CAPTION>
Directors, Executive Officers and 5% Common Series C Series D Series E
Stockholders Stock Preferred Preferred Preferred
------------------------------------ ------- --------- --------- -----------
<S> <C> <C> <C> <C>
Investor (Guernsey) Ltd............... -- -- -- 2,129,248
Vertical Fund Associates, L.P.(/1/)... -- 561,905 477,100 181,551
Warburg, Pincus Ventures, L.P.(/2/)... -- 1,650,192 2,671,756 1,687,665
Richard D. Murdock.................... 650,000 -- -- --
Price per share....................... $ 0.105 $ 1.05 $ 2.62 $ 6.18
Date(s) of purchase................... 11/98 12/97 12/98 12/99, 2/00
</TABLE>
-------------------------------
(/1/)Jack W. Lasersohn, a general partner of The Vertical Group, L.P., the sole
general partner of Vertical Fund Associates, L.P., is one of our
directors.
(/2/)Elizabeth H. Weatherman, a managing director of Warburg Pincus Ventures,
L.P., is one of our directors.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to
beneficial ownership of our common stock as of September 30, 2000, as adjusted
to reflect the sale of shares in this offering by:
. each person, or group of affiliate persons, known by us to own
beneficially more than 5% of our outstanding stock;
. each of our directors;
. each of our named executive officers; and
. all of our current executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the U.S.
Securities and Exchange Commission. Shares of common stock subject to options
or warrants currently exercisable or exercisable within 60 days of September
30, 2000, are deemed outstanding for calculating the percentage of outstanding
shares of the person holding these options, but are not deemed outstanding for
calculating the percentage of any other person. Percentage of beneficial
ownership is based upon 14,282,602 shares of common stock outstanding as of
September 30, 2000 and 18,282,602 shares of common stock outstanding after this
offering. To our knowledge, except as set forth in the footnotes to this table
and subject to applicable community property laws, each person named in the
table has sole voting and investment power with respect to the shares set forth
opposite such person's name. Except as otherwise indicated, the address of each
of the persons in this table is as follows: c/o Kyphon Inc., 1350 Bordeaux
Drive, Sunnyvale, California 94089.
<TABLE>
<CAPTION>
Percent Beneficially Owned
------------------------------
Shares Issuable
Pursuant to the
Shares Kyphon Exercise of
May Repurchase Options Within
Shares Within 60 Days 60 Days of
Beneficially of September 30, September 30,
Name of Beneficial Owner Owned 2000 2000 Before Offering After Offering
------------------------ ------------ ---------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Warburg, Pincus Ven-
tures, L.P.(/1/) ...... 7,045,329 -- -- 49.3% 38.5%
Elizabeth H. Weatherman
466 Lexington Avenue
New York, NY 10017
Investor (Guernsey)
Ltd.(/2/).............. 2,129,248 -- -- 14.9% 11.6%
National Westminster
House
Le Truchot St. Peter
Port
Guernsey Channel Island
GYI 4PW, U.K.
Vertical Fund Associ-
ates, L.P. ............ 1,756,273 -- -- 12.3% 9.6%
Jack W. Lasersohn
18 Bank Street
Summit, NJ 07901
Elizabeth H. Weather-
man(/3/)............... 7,045,329 -- -- 49.3% 38.5%
Jack W. Lasersohn(/4/).. 1,756,273 -- -- 12.3% 9.6%
Richard D. Murdock...... 650,000 325,000 -- 4.6% 3.6%
Karen D. Talmadge,
Ph.D................... 650,000 -- 50,000 4.5% 3.5%
Terry E. Spraker,
Ph.D................... 135,506 -- 1,042 *
Robert M. Scribner...... 108,303 25,000 19,844 *
Eric N. Doelling........ 65,104 25,000 40,104 *
Douglas W. Kohrs........ 4,167 -- 4,167 *
Stephen Campe........... -- -- -- *
All directors and execu-
tive officers as a
group (12 persons)..... 10,490,724 425,000 141,199 72.7% 56.9%
</TABLE>
50
<PAGE>
-------------------------------
* Less than 1%.
(/1/)The stockholder is Warburg, Pincus Ventures, L.P. Warburg, Pincus & Co. is
the sole general partner of Warburg, Pincus Ventures. Warburg, Pincus
Ventures is managed by E.M. Warburg, Pincus & Co., LLC. Lionel I. Pincus
is the managing partner of Warburg, Pincus and the managing member of E.M.
Warburg, Pincus, and may be deemed to control both entities and the voting
and/or investment decisions regarding these shares. Elizabeth H.
Weatherman, one of our directors, is a managing director and member of
E.M. Warburg, Pincus and a general partner of Warburg, Pincus.
(/2/)David Jeffreys and Guje Holmberg, both managing directors of Investor
(Guernsey) Ltd, exercise voting and/or investment control over these
shares.
(/3/)All shares indicated as owned by Ms. Weatherman are included because of
her affiliation with the Warburg, Pincus entities described in note 1
above. Ms. Weatherman disclaims beneficial ownership of all shares owned
by the Warburg, Pincus entities.
(/4/)Consists of 1,756,273 shares of common stock held by Vertical Fund
Associates, L.P. Jack W. Lasersohn, one of our directors, is a General
Partner of The Vertical Group, L.P., the sole general partner of Vertical
Fund Associates. Mr. Lasersohn disclaims beneficial ownership of the
shares held by this fund except to the extent of his pecuniary interest
therein. Mr. Lasersohn and the other three partners of The Vertical Group,
L.P. exercise voting and/or investment control over these shares.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue up to
50,000,000 shares of common stock, $0.001 par value per share, and 5,000,000
shares of preferred stock, $0.001 par value per share.
Common Stock
As of September 30, 2000, there were 14,282,602 shares of common stock
outstanding held of record by 91 stockholders. There will be 18,282,602 shares
of common stock outstanding after giving effect to the sale of common stock
offered in this offering. As of September 30, 2000, there are outstanding
options to purchase a total of 1,971,220 shares of our common stock under our
stock plans.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Our stockholders
do not have cumulative voting rights in the election of directors. Subject to
preferences that may be granted to any then outstanding preferred stock,
holders of common stock are entitled to receive ratably only those dividends as
may be declared by the board of directors out of funds legally available
therefor, as well as any distributions to the stockholders. See "Dividend
Policy." In the event of our liquidation, dissolution or winding up, holders of
common stock are entitled to share ratably in all of our assets remaining after
we pay our liabilities and distribute the liquidation preference of any then
outstanding preferred stock. Holders of common stock have no preemptive or
other subscription or conversion rights. There are no redemption or sinking
fund provisions applicable to the common stock.
Warrants
As of September 30, 2000, there were three warrants outstanding to purchase an
aggregate of 21,680 shares of common stock at a weighted average exercise price
of $4.09 per share. As of September 30, 2000, there was one warrant outstanding
to purchase 4,864 shares of series B preferred stock at an exercise price of
$0.70 per share and one warrant outstanding to purchase 4,316 shares of series
C preferred stock at an exercise price of $1.05 per share. We issued both of
these warrants in conjunction with our equipment lease lines. As of September
30, 2000, there was a warrant outstanding to purchase 12,500 shares of series E
preferred stock at an exercise price of $6.18 per share issued in connection
with our facility lease. The warrant to purchase 4,864 shares of series B
preferred stock expires on the earlier of April 2003 or our merger or
acquisition with another company. The warrant to purchase 4,316 shares of
series C preferred stock expires if not exercised by the closing of this
offering. The warrant exercisable for 12,500 shares of series E preferred stock
also expires if not exercised by the closing of this offering.
Preferred Stock
Our board of directors will have the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof.
These rights, preferences and privileges include dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of such series, any or all of which may be greater than the rights of common
stock. The issuance of preferred stock could adversely affect the voting power
of holders of common stock and the likelihood that such holders will receive
dividend payments and payments upon liquidation. In addition, the issuance of
preferred stock could have the effect of delaying, deferring or preventing a
change in control of Kyphon. We have no present plan to issue any shares of
preferred stock.
Registration Rights
Following the closing of this offering, the holders of 13,145,655 shares of our
common stock will be entitled to certain rights with respect to the
registration of their shares under the Securities Act. In the event that we
propose to register any of our securities under the Securities Act, either for
our own account or for the account of other security holders, these holders are
entitled to notice of the registration and are entitled to include their
52
<PAGE>
common stock in the registration, subject to certain marketing and other
limitations. Beginning six months after the closing of this offering, the
holders of at least 50% of these securities have the right to require us, on
not more than two occasions, to file a registration statement under the
Securities Act in order to register all or any part of their common stock. We
may, in certain circumstances, defer such registrations and the underwriters
have the right, subject to certain limitations, to limit the number of shares
included in such registrations. Further, these holders may require us to
register all or a portion of their shares on a Form S-3, subject to certain
conditions and limitations.
Anti-takeover Effects of Provisions of Our Charter and Bylaws
Our bylaws provide for our board of directors to be divided into three classes,
with staggered three-year terms. When this division is effective, only one
class of directors will be elected at each annual meeting of our stockholders,
with the other classes continuing for the remainder of their respective three-
year terms. Our bylaws also provide that all stockholder action must be
effected at a duly called meeting of stockholders and not by a consent in
writing, and that only our board of directors, chairman of the board, chief
executive officer, president and one or more stockholders holding shares in the
aggregate in at least 10% of the voting shares of our stock may call a special
meeting of stockholders.
The combination of the classification of our board of directors, when
effective, and lack of cumulative voting will make it more difficult for our
existing stockholders to replace our board of directors as well as for another
party to obtain control of Kyphon by replacing our board of directors. Since
the board of directors has the power to retain and discharge our officers,
these provisions could also make it more difficult for existing stockholders or
another party to effect a change in management. In addition, the authorization
of undesignated preferred stock makes it possible for the board of directors to
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of Kyphon.
These provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of Kyphon. These provisions are intended to
enhance the likelihood of continued stability in the composition of our board
of directors and in the policies furnished them and to discourage certain types
of transactions that may involve an actual or threatened change of control of
Kyphon. These provisions are designed to reduce our vulnerability to an
unsolicited acquisition proposal. The provisions also are intended to
discourage certain tactics that may be used in proxy fights. However, these
provisions could have the effect of discouraging others from making tender
offers for our shares and, as a consequence, they also may inhibit fluctuations
in the market price of our shares that could result from actual or rumored
takeover attempts. Such provisions may also have the effect of preventing
changes in our management.
Section 203 of the General Corporation Law of the State of Delaware
We are subject to Section 203 of the General Corporation Law of the State of
Delaware, which prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder, with
the following exceptions:
. prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested holder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by persons who are
directors and also officers and by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; and
53
<PAGE>
. on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
the stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock that is not owned by
the interested stockholder.
Section 203 defines business combination to include the following:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock or any class or series
of the corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loss,
advances, guarantees, pledges or other financial benefits by or through
the corporation.
In general, Section 203 defines interested stockholder as an entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation or any entity or person affiliated with or controlling or
controlled by such entity or person.
Nasdaq National Market Listing
Application has been made for quotation of our common stock on The Nasdaq
National Market under the symbol "KYPH."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services L.L.C. Its address is 400 South Hope St., 4th Floor, Los
Angeles, California 90071, and its telephone number is (213) 553-9730.
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could reduce prevailing market prices. Some shares will not be available for
sale shortly after this offering because of contractual and legal restrictions
on resale as described below. Sales of substantial amounts of our common stock
in the public market after any such restrictions on sale lapse could adversely
affect the prevailing market price of the common stock and impair our ability
to raise equity capital in the future.
Upon completion of this offering, we will have 18,282,602 shares of common
stock outstanding based on shares outstanding as of September 30, 2000. Of
these shares, the 4,000,000 shares sold in this offering will be freely
transferable without restriction under the Securities Act, unless they are held
by our "affiliates" as that term is used under the Securities Act and the
regulations promulgated thereunder.
Of these shares, the remaining 14,282,602 shares were sold by us in reliance on
exemptions from the registration requirements of the Securities Act, are
restricted securities within the meaning of Rule 144 under the Securities Act
and become eligible for sale in the public market as follows:
. 90 days after the effective date of this prospectus, no shares will
become eligible for sale;
. beginning 180 days after the effective date of this prospectus,
14,282,602 shares will become eligible for sale, subject to the
provisions of Rule 144, Rule 144(k) or Rule 701, upon the expiration of
agreements not to sell such shares entered into between the underwriters
and such stockholders.
Beginning 180 days after the date of this prospectus, 187,579 additional shares
subject to vested options as of the date of completion of this offering will be
available for sale subject to compliance with Rule 701 and upon the expiration
of agreements not to sell such shares entered into between the underwriters and
such stockholders. Any shares subject to lock-up agreements may be released at
any time without notice by the underwriters.
Rule 144
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated), including an affiliate, who has beneficially owned
restricted shares for at least one year is entitled to sell, within any three-
month period commencing 90 days after the date of completion of this offering,
a number of shares that does not exceed the greater of 1% of the then
outstanding shares of common stock (approximately shares immediately
after this offering), or the average weekly trading volume in the common stock
during the four calendar weeks preceding such sale, subject to the filing of a
Form 144 with respect to such sale and certain other limitations and
restrictions. In addition, a person who is not deemed to have been an affiliate
of Kyphon at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years, would
be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above.
Rule 701
Any of our employees, officers, directors or consultants who purchased his or
her shares prior to the date of completion of this offering or who holds vested
options as of that date pursuant to a written compensatory plan or contract is
entitled to rely on the resale provisions of Rule 701, which permits non-
affiliates to sell their Rule 701 shares without having to comply with the
public-information, holding-period, volume-limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with the holding-period restrictions of Rule 144, in each case
commencing 90 days after the date of completion of this offering. However, we
and certain officers, directors and other stockholders have agreed not to sell
or
55
<PAGE>
otherwise dispose of any shares of our common stock for the 180-day period
after the date of this prospectus without the prior written consent of the
underwriters. See "Underwriting."
Options
As soon as practicable after the date of completion of this offering, we intend
to file a registration statement on Form S-8 under the Securities Act to
register shares of common stock reserved for issuance under the 1996 stock
option plan, 2000 stock plan and 2000 employee stock purchase plan, thus
permitting the resale of such shares by non-affiliates in the public market
without restriction under the Securities Act. Such registration statements will
become effective immediately upon filing.
56
<PAGE>
UNDERWRITING
The underwriters named below have agreed to buy, subject to the terms of the
purchase agreement, the number of shares listed opposite their names below. The
underwriters are committed to purchase and pay for all of the shares if any are
purchased.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
U.S. Bancorp Piper Jaffray Inc. ..............................
Bear, Stearns & Co. Inc. .....................................
Chase Securities Inc. ........................................
---------
Total..................................................... 4,000,000
=========
</TABLE>
The underwriters have advised us that they propose to offer the shares to the
public at $11.00 per share. The underwriters propose to offer the shares to
certain dealers at the same price less a concession of not more than $ per
share. The underwriters may allow and the dealers may reallow a concession of
not more than $ per share on sales to certain other brokers and dealers.
After the offering, these figures may be changed by the underwriters.
At our request, the underwriters have reserved for sale at the initial public
offering price up to 280,000 shares of common stock to directors, officers,
employees, business associates and related persons of Kyphon. The number of
shares of common stock available for sale to the general public will be reduced
to the extent that such individuals purchase all or a portion of these reserved
shares. Any reserved shares which are not purchased will be offered by the
underwriters to the general public on the same basis as the shares of common
stock offered hereby.
We have granted to the underwriters an option to purchase up to an additional
600,000 shares of common stock from us at the same price to the public, and
with the same underwriting discount, as set forth in the table above. The
underwriters may exercise this option any time during the 30-day period after
the date of this prospectus, but only to cover over-allotments, if any. To the
extent the underwriters exercise the option, each underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of the additional shares as it was obligated to purchase under the
purchase agreement.
The following table shows the underwriting fees to be paid to the underwriters
in connection with this offering. These amounts are shown assuming both no
exercise and full exercise of the over-allotment option.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share..................................... $ $
Total......................................... $ $
</TABLE>
We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments that the underwriters may be required to make in respect of those
liabilities.
The underwriters have informed us that neither they, nor any other underwriter
participating in the distribution of the offering, will make sales of the
common stock offered by this prospectus to accounts over which they exercise
discretionary authority without the prior specific written approval of the
customer.
57
<PAGE>
The offering of our shares of common stock is made for delivery when, and as if
accepted by the underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offering without notice. The underwriters
reserve the right to reject an order for the purchase of shares in whole or
part.
We and each of our directors, executive officers and our shareholders have
agreed to certain restrictions on our ability to sell additional shares of our
common stock for a period of 180 days after the date of this prospectus. We
have agreed not to directly or indirectly offer for sale, sell, contract to
sell, grant any option for the sale of, or otherwise issue or dispose of, any
shares of common stock, options or warrants to acquire shares of common stock,
or any related security or instrument, without the prior written consent of
U.S. Bancorp Piper Jaffray.
Prior to the offering, there has been no established trading market for the
common stock. The initial public offering price for the shares of common stock
offered by this prospectus was negotiated by us and the underwriters. The
factors considered in determining the initial public offering price include:
. the history of and the prospects for the industry in which we compete;
. our past and present operations;
. our prospects for future earnings;
. the recent market prices of securities of generally comparable
companies; and
. the general condition of the securities markets at the time of the
offering and other relevant factors.
There can be no assurance that the initial public offering price of the common
stock will correspond to the price at which the common stock will trade in the
public market subsequent to this offering or that an active public market for
the common stock will develop and continue after this offering.
To facilitate the offering, the underwriters may engage in transactions that
stabilize, maintain or otherwise affect the price of the common stock during
and after the offering. Specifically, the underwriters may over-allot or
otherwise create a short position in the common stock for their own account by
selling more shares of common stock than have been sold to them by us. Short
sales involve the sale by the underwriters of a greater number of shares than
they are required to purchase in the offering. "Covered" short sales are sales
made in an amount not greater than the underwriters' option to purchase
additional shares from the issuer in the offering. The underwriters may close
out any covered short position by either exercising their option to purchase
additional shares or purchasing shares in the open market. In determining the
source of shares to close out the covered short position, the underwriters will
consider, among other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase shares through
the over-allotment option. "Naked" short sales are sales in excess of this
option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the common stock in the open market after pricing that could adversely
affect investors who purchase in the offering.
In addition, the underwriters may stabilize or maintain the price of the common
stock by bidding for or purchasing shares of common stock in the open market
and may impose penalty bids. If penalty bids are imposed, selling concessions
allowed to syndicate members or other broker-dealers participating in the
offering are reclaimed if shares of common stock previously distributed in the
offering are repurchased, whether in connection with stabilization transactions
or otherwise. The effect of these transactions may be to stabilize or maintain
the market price of the common stock at a level above that which might
otherwise prevail in the open market. The imposition of a penalty bid may also
effect the price of the common stock to the extent that it discourages resales
of the common stock. The magnitude or effect of any stabilization or other
transactions is uncertain. These transactions may be effected on the Nasdaq
National Market or otherwise and, if commenced, may be discontinued at any
time.
58
<PAGE>
LEGAL MATTERS
The validity of the common stock offered here by will be passed upon for us by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the underwriters by Cooley Godward LLP, Palo Alto, California.
As of the date of this prospectus, WS Investment Company, an investment
partnership composed of certain current and former members of and persons
associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, as
well as certain individual attorneys of Wilson Sonsini Goodrich & Rosati,
beneficially own an aggregate of 83,936 shares of our common stock.
EXPERTS
The financial statements as of December 31, 1998 and 1999 and for each of the
three years in the period ended December 31, 1999, included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the SEC for the stock
we are offering by this prospectus. This prospectus does not include all of the
information contained in the registration statement and the exhibits. You
should refer to the registration statement and its exhibits for additional
information. When we complete this offering, we will also be required to file
annual, quarterly and special reports, proxy statements and other information
with the SEC.
You can read our SEC filings, including the registration statement, over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file with the SEC at its public reference facilities at
450 Fifth Street, NW, Washington, DC 20549, 7 World Trade Center, Suite 1300,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. You may also obtain copies of the documents
at prescribed rates by writing to the Public Reference Section of the SEC at
450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-
0330 for further information on the operation of the public reference
facilities.
59
<PAGE>
KYPHON INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.................................. F-2
Balance Sheets..................................................... F-3
Statements of Operations........................................... F-4
Statements of Stockholders' Deficit................................ F-5
Statements of Cash Flows........................................... F-6
Statements of Comprehensive Loss................................... F-7
Notes to Financial Statements...................................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Kyphon Inc.
The reverse stock split and the reduction in the automatic conversion price per
share of preferred stock described in Note 11 to the financial statements has
not been consummated at the date of our opinion. When they have been
consummated, we will be in a position to furnish the following report:
"In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Kyphon Inc. (the "Company") at
December 31, 1998 and 1999 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion."
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 20, 2000, except for Note 5
as to which the date is June 21, 2000
and Note 11 as to which the date is October , 2000
F-2
<PAGE>
KYPHON INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma at
December 31, September 30,
------------------------ September 2000
1998 1999 30, 2000 (See Note 10)
----------- ----------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents............. $ 8,122,540 $24,002,806 $ 15,514,166
Short-term investments... -- 1,314,867 --
Accounts receivable, net
of allowance for
doubtful accounts of
none, none and $50,000
(unaudited),
respectively............ -- 116,908 1,179,093
Inventory................ -- 103,020 675,508
Prepaid expenses and
other current assets.... 37,611 129,145 284,310
----------- ----------- ------------
Total current assets... 8,160,151 25,666,746 17,653,077
Property and equipment,
net...................... 396,018 544,174 2,419,104
Other assets.............. 81,037 81,037 341,386
----------- ----------- ------------
Total assets.............. $ 8,637,206 $26,291,957 $ 20,413,567
=========== =========== ============
Liabilities, Convertible
Preferred
Stock and Stockholders'
Equity (Deficit)
Current liabilities:
Current portion of notes
payable................. $ 115,284 $ 141,368 $ 155,396
Accounts payable......... 169,814 338,293 657,394
Accrued liabilities...... 242,815 461,871 1,493,478
----------- ----------- ------------
Total current
liabilities........... 527,913 941,532 2,306,268
Notes payable, net of
current portion.......... 308,397 208,524 167,863
----------- ----------- ------------
Total liabilities...... 836,310 1,150,056 2,474,131
----------- ----------- ------------
Commitments and
contingencies (Notes 5
and 11)
Convertible preferred
stock, par value: $0.001
Authorized: 26,438,116
shares
Issued and outstanding:
8,765,488 shares in
1998, 12,519,755 shares
in 1999, 13,145,655
shares at September 30,
2000 (unaudited); and
none pro forma
(unaudited)
(Liquidation preference:
$13,006,091 at
December 31, 1998,
$35,473,881 at
December 31, 1999 and
$39,341,943 at
September 30, 2000
(unaudited))............ 11,717,614 34,156,030 38,024,064 $ --
----------- ----------- ------------ ------------
Stockholders' equity
(deficit):
Common stock, par value:
$0.001
Authorized: 40,000,000
shares
Issued and outstanding:
752,530 shares in 1998,
878,053 shares in 1999,
1,136,947 shares at
September 30, 2000
(unaudited); and
14,282,602 shares pro
forma (unaudited)...... 752 878 1,137 14,283
Additional paid-in
capital................ 88,008 905,155 10,135,426 48,146,345
Deferred stock-based
compensation, net...... -- (768,016) (8,590,638) (8,590,638)
Accumulated other
comprehensive income.... -- 24,504 -- --
Accumulated deficit...... (4,005,478) (9,176,650) (21,630,553) (21,630,553)
----------- ----------- ------------ ------------
Total stockholders'
equity (deficit)...... (3,916,718) (9,014,129) (20,084,628) $ 17,939,437
----------- ----------- ------------ ============
Total liabilities,
convertible preferred
stock and
stockholders' equity
(deficit)............ $ 8,637,206 $26,291,957 $ 20,413,567
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
KYPHON INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Sales................... $ -- $ -- $ 260,589 $ 142,240 $ 2,969,023
Cost of goods sold...... -- -- 504,700 267,339 2,349,572
----------- ----------- ----------- ----------- ------------
Gross profit (loss)..... -- -- (244,111) (125,099) 619,451
----------- ----------- ----------- ----------- ------------
Operating expenses:
Research and develop-
ment.................. 763,429 1,694,319 1,996,674 1,411,348 3,134,407
Sales and marketing.... -- 87,201 1,269,480 535,056 7,392,327
General and administra-
tive.................. 383,530 871,247 1,883,159 1,215,444 3,507,667
----------- ----------- ----------- ----------- ------------
Total operating ex-
penses.............. 1,146,959 2,652,767 5,149,313 3,161,848 14,034,401
----------- ----------- ----------- ----------- ------------
Loss from operations.... (1,146,959) (2,652,767) (5,393,424) (3,286,947) (13,414,950)
Interest income......... 13,399 43,725 268,750 186,140 988,100
Interest expense........ (10,597) (34,223) (46,498) (35,715) (27,053)
----------- ----------- ----------- ----------- ------------
Net loss................ $(1,144,157) $(2,643,265) $(5,171,172) $(3,136,522) $(12,453,903)
=========== =========== =========== =========== ============
Net loss per common
share, basic and dilut-
ed..................... $ (1,431.99) $ (28.22) $ (25.93) $ (18.18) $ (23.89)
=========== =========== =========== =========== ============
Weighted-average shares
used in computing net
loss per common share,
basic and diluted...... 799 93,658 199,466 172,495 521,402
=========== =========== =========== =========== ============
Pro forma net loss per
common share, basic and
diluted (unaudited).... $ (0.56) $ (0.92)
=========== ============
Weighted-average shares
used in computing pro
forma net loss per com-
mon share, basic and
diluted (unaudited).... 9,312,379 13,561,979
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
KYPHON INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Deferred Other
---------------- Paid-In Common Stock Stock-Based Comprehensive
Shares Amount Capital Subscriptions Compensation Income
--------- ------ ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1,
1997................. -- $ -- $ -- $ -- $ -- $ --
Exercise of stock op-
tions................ 7,292 7 503 -- -- --
Return of Series C
preferred stock in
December in connec-
tion with common
stock subscription... -- -- -- 4,000 -- --
Common stock subscrip-
tion received in ex-
change for services
received............. -- -- -- 6,000 -- --
Net loss.............. -- -- -- -- -- --
--------- ------ ----------- -------- ----------- --------
Balances at December
31, 1997............. 7,292 7 503 10,000 -- --
Issuance of common
stock for cash....... 745,238 745 77,505 -- -- --
Forgiveness of common
stock subscriptions.. -- -- 10,000 (10,000) -- --
Net loss.............. -- -- -- -- -- --
--------- ------ ----------- -------- ----------- --------
Balances at December
31, 1998............. 752,530 752 88,008 -- -- --
Exercise of stock op-
tions................ 75,523 76 6,497 -- -- --
Issuance of common
stock for cash....... 50,000 50 12,950 -- -- --
Change in unrealized
appreciation on in-
vestments............ -- -- -- -- -- 24,504
Deferred stock-based
compensation......... -- -- 797,700 -- (797,700) --
Amortization of deferred stock-based compensation.. -- -- -- -- 29,684 --
Net loss.............. -- -- -- -- -- --
--------- ------ ----------- -------- ----------- --------
Balances at December
31, 1999............. 878,053 878 905,155 -- (768,016) 24,504
Exercise of stock op-
tions (unaudited).... 258,894 259 188,307 -- -- --
Issuance of warrants
to purchase Series E
preferred stock (un-
audited)............. -- -- 51,475 -- --
Change in unrealized
appreciation on in-
vestments (unau-
dited)............... -- -- -- -- -- (24,504)
Deferred stock-based
compensation (unau-
dited)............... -- -- 8,990,489 -- (8,990,489) --
Amortization of de-
ferred stock-based
compensation (unau-
dited)............... -- -- -- -- 1,167,867 --
Net loss (unaudited).. -- -- -- -- -- --
--------- ------ ----------- -------- ----------- --------
Balances at September
30, 2000 (unau-
dited)............... 1,136,947 $1,137 $10,135,426 $ -- $(8,590,638) $ --
========= ====== =========== ======== =========== ========
<CAPTION>
Accumulated
Deficit Total
------------- -------------
<S> <C> <C>
Balances at January 1,
1997................. $ (218,056) $ (218,056)
Exercise of stock op-
tions................ -- 510
Return of Series C
preferred stock in
December in connec-
tion with common
stock subscription... -- 4,000
Common stock subscrip-
tion received in ex-
change for services
received............. -- 6,000
Net loss.............. (1,144,157) (1,144,157)
------------- -------------
Balances at December
31, 1997............. (1,362,213) (1,351,703)
Issuance of common
stock for cash....... -- 78,250
Forgiveness of common
stock subscriptions.. -- --
Net loss.............. (2,643,265) (2,643,265)
------------- -------------
Balances at December
31, 1998............. (4,005,478) (3,916,718)
Exercise of stock op-
tions................ -- 6,573
Issuance of common
stock for cash....... -- 13,000
Change in unrealized
appreciation on in-
vestments............ -- 24,504
Deferred stock-based
compensation......... -- --
Amortization of deferred stock-based compensation.. -- 29,684
Net loss.............. (5,171,172) (5,171,172)
------------- -------------
Balances at December
31, 1999............. (9,176,650) (9,014,129)
Exercise of stock op-
tions (unaudited).... -- 188,566
Issuance of warrants
to purchase Series E
preferred stock (un-
audited)............. -- 51,475
Change in unrealized
appreciation on in-
vestments (unau-
dited)............... -- (24,504)
Deferred stock-based
compensation (unau-
dited)............... -- --
Amortization of de-
ferred stock-based
compensation (unau-
dited)............... -- 1,167,867
Net loss (unaudited).. (12,453,903) (12,453,903)
------------- -------------
Balances at September
30, 2000 (unau-
dited)............... $(21,630,553) $(20,084,628)
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
KYPHON INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(1,144,157) $(2,643,265) $(5,171,172) $(3,136,522) $(12,453,903)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Preferred stock
issued for services
received............ -- -- 27,778 -- --
Stock subscription in
exchange for
services received... 6,000 -- -- -- --
Depreciation and
amortization........ 24,507 100,203 196,958 133,685 406,739
Amortization of
deferred stock-based
compensation........ -- -- 29,684 3,563 1,167,867
Loss on disposal of
property and
equipment........... -- -- 2,417 -- 6,349
Realized gain on
investments......... -- -- (91,603) (78,145) (608,954)
Allowance for
doubtful accounts... -- -- --
Changes in operating
assets and
liabilities:
Accounts receivable.. -- -- (116,908) (77,648) (1,062,185)
Inventory............ -- -- (103,020) (20,000) (572,488)
Prepaid expenses and
other current
assets.............. (17,986) (15,930) (80,757) (35,404) (155,165)
Other assets......... -- (81,037) -- -- (215,738)
Accounts payable..... 55,226 95,745 168,479 47,575 319,101
Accrued liabilities.. 11,744 199,800 219,056 22,010 1,031,607
----------- ----------- ----------- ----------- ------------
Net cash used in
operating
activities......... (1,064,666) (2,344,484) (4,919,088) (3,140,886) (12,136,771)
----------- ----------- ----------- ----------- ------------
Cash flows from
investing activities:
Acquisition of
property and
equipment............ (133,998) (377,115) (347,531) (267,908) (2,321,861)
Proceeds from sale of
property and
equipment............ -- -- -- -- 40,707
Acquisition of
investments.......... -- -- (5,573,760) (5,282,163) (21,471,604)
Maturities and sales
from investments..... -- -- 4,375,000 725,000 23,370,921
----------- ----------- ----------- ----------- ------------
Net cash used in
investing
activities.......... (133,998) (377,115) (1,546,291) (4,825,071) (381,837)
----------- ----------- ----------- ----------- ------------
Cash flows from
financing activities:
Proceeds from issuance
of common stock...... -- 78,250 13,000 13,000 --
Proceeds from issuance
of convertible
preferred stock,
net.................. 2,499,589 8,238,927 22,410,638 436,691 3,868,028
Proceeds from exercise
of stock options..... 510 -- 6,573 3,664 188,566
Proceeds from notes
payable.............. 280,923 360,765 35,160 34,159 97,799
Repayment of notes
payable.............. (17,803) (200,204) (119,726) (86,804) (124,425)
----------- ----------- ----------- ----------- ------------
Net cash provided by
financing
activities.......... 2,763,219 8,477,738 22,345,645 400,710 4,029,968
----------- ----------- ----------- ----------- ------------
Net increase (decrease)
in cash and cash
equivalents........... 1,564,555 5,756,139 15,880,266 (7,565,247) (8,488,640)
Cash and cash
equivalents, beginning
of period............. 801,846 2,366,401 8,122,540 8,122,540 24,002,806
----------- ----------- ----------- ----------- ------------
Cash and cash
equivalents, end of
period................ $ 2,366,401 $ 8,122,540 $24,002,806 $ 557,293 $ 15,514,166
=========== =========== =========== =========== ============
Supplementary
disclosure of noncash
financing activities:
Return of Series C
preferred stock...... $ 4,000 $ -- $ -- $ -- $ --
=========== =========== =========== =========== ============
Forgiveness of common
stock subscriptions.. $ -- $ 10,000 $ -- $ -- $ --
=========== =========== =========== =========== ============
Issuance of warrants
in connection with an
operating lease...... $ -- $ -- $ -- $ -- $ 51,475
=========== =========== =========== =========== ============
Deferred stock-based
compensation......... $ -- $ -- $ 797,700 $ 342,000 $ 8,990,489
=========== =========== =========== =========== ============
Supplementary
disclosure of cash
flow information:
Cash paid during
period for interest.. $ 10,597 $ 34,223 $ 46,498 $ 35,715 $ 27,053
=========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
KYPHON INC.
STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net loss................ $(1,144,157) $(2,643,265) $(5,171,172) $(3,136,522) $(12,453,903)
----------- ----------- ----------- ----------- ------------
Other comprehensive in-
come
Unrealized gain on in-
vestments:
Unrealized holding
gains arising during
period.............. -- -- 116,107 78,145 584,450
Reclassification
adjustment for gains
included in net
loss................ -- -- (91,603) (78,145) (608,954)
----------- ----------- ----------- ----------- ------------
Other comprehensive in-
come................... -- -- 24,504 -- (24,504)
----------- ----------- ----------- ----------- ------------
Comprehensive loss...... $(1,144,157) $(2,643,265) $(5,146,668) $(3,136,522) $(12,478,407)
=========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
KYPHON INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- FORMATION AND BUSINESS OF THE COMPANY:
Kyphon Inc. (the "Company") was incorporated in the State of Delaware on
January 10, 1994 and commenced operations in September 1996. The Company
develops innovative devices using its proprietary balloon technology for
orthopedic applications. The Company's first commercial products are used for
the treatment of vertebral body compression fractures, which are primarily
caused by osteoporosis. During 1999, the Company commenced planned principal
operations and emerged from the development stage.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Unaudited interim results
The accompanying balance sheet as of September 30, 2000, the statements of
operations and of cash flows for the nine months ended September 30, 1999 and
2000, and the statement of stockholders' deficit for the nine months ended
September 30, 2000 are unaudited. The unaudited interim financial statements
have been prepared on the same basis as the annual financial statements and, in
the opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the Company's financial
position and results of operations and of cash flows for the nine months ended
September 30, 1999 and 2000. The financial data and other information disclosed
in these notes to financial statements related to the nine month periods are
unaudited. The results for the nine months ended September 30, 2000 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000.
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 assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents
Investments with an original maturity of 90 days or less as of the date of
purchase are considered cash equivalents.
Available-for-sale securities
The Company has classified its investments as "available-for-sale." Such
investments are recorded at fair value and unrealized gains and losses are
recorded as a separate component of stockholders' equity (deficit) until
realized. Interest income is recorded using an effective interest rate, with
associated premium or discount amortized to "investment income." The cost of
securities sold is based upon the specific identification method.
Inventories
Inventories are stated at the lower of cost (principally standard cost, which
approximates actual cost on a first-in, first-out basis) or market value.
Depreciation and amortization
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets, generally one to five years. Amortization
of leasehold improvements and leased assets is provided on a straight-line
basis over the life of
F-8
<PAGE>
KYPHON INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
the related asset or the lease term, if shorter. Upon sale or retirement of
assets, the cost and related accumulated depreciation and amortization are
removed from the balance sheet and the resulting gain or loss is reflected in
operations.
Impairment of long-lived assets
The Company accounts for long-lived assets under Statement of Financial
Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
requires the Company to review for impairment of long-lived assets, whenever
events or changes in circumstances indicate that the carrying amount of an
asset might not be recoverable. When such an event occurs, management
determines whether there has been an impairment by comparing the anticipated
undiscounted future net cash flows to the related asset's carrying value. If an
asset is considered impaired, the asset is written down to fair value, which is
determined based either on discounted cash flows or appraised value, depending
on the nature of the asset.
Concentrations of credit risk and other risks and uncertainties
The Company's cash and cash equivalents are deposited with one major financial
institution in the United States. Deposits in this institution may exceed the
amount of insurance provided on such deposits.
For financial instruments consisting of cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued liabilities
included in the Company's financial statements, the carrying amounts
approximate fair value due to their short maturities. Based on borrowing rates
currently available to the Company for loans with similar terms, the carrying
value of notes payable and long-term debt approximates fair value. Estimated
fair values for marketable securities, which are separately disclosed
elsewhere, are based on quoted market prices for the same or similar
instruments.
The Company's accounts receivable are derived from revenue earned from
customers located in the United States. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers.
Revenues from three customers accounted for 23%, 18% and 15% of total revenues
for the year ended December 31, 1999. Two of these customers accounted for 27%
and 11% of total accounts receivable at December 31, 1999.
Some of the Company's products require clearance or approval from the Food and
Drug Administration ("FDA") prior to the commencement of commercialized sales.
In July 1998, the Company received FDA clearance for its KyphX inflatable Bone
Tamp. Internationally, the Company received CE Mark approval from the European
regulatory agency in April 2000 to market its products.
The Company is subject to risks common to companies in the medical device
industry including, but not limited to, new technological innovations,
dependence on key personnel, protection of proprietary technology, compliance
with government regulations, uncertainty of market acceptance of products,
product liability and the need to obtain additional financing.
Revenue recognition
Revenue from product sales is recognized upon receipt of a valid purchase
order, delivery of the products to customers and when collection of the
receivables is deemed probable.
F-9
<PAGE>
KYPHON INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Research and development
Research and development expenses are charged to operations as incurred.
Advertising costs
Advertising costs, included in sales and marketing expenses, are expensed as
incurred. No expenses were incurred in 1997, 1998 and 1999.
Segments
The Company operates in one segment, using one measurement of profitability to
manage its business. As of December 31, 1998 and 1999, all long-lived assets
are maintained in the United States. All revenue was generated in the United
States during the year ended December 31, 1999.
Income taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using the enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
Accounting for stock-based compensation
The Company uses the intrinsic value method of Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," in
accounting for its employee stock options, and presents disclosure of pro forma
information required under Statement of Financial Accounting Standard No. 123
or ("SFAS No. 123"), "Accounting for Stock-Based Compensation."
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services," which require that such equity instruments are recorded at their
fair value on the measurement date. The measurement of stock-based compensation
is subject to periodic adjustment as the underlying equity instruments vest.
Comprehensive income (loss)
Comprehensive income (loss) generally represents all changes in stockholders'
deficit except those resulting from investments or contributions by
stockholders. The Company's unrealized gains on available-for-sale securities
represent the only component of comprehensive loss that are excluded from the
net loss. The Company's comprehensive loss has been presented as a separate
statement. As the Company is in a loss position tax effects have not been
allocated.
Net loss per common share
Basic net loss per share is computed by dividing net loss by the weighted-
average number of vested common shares outstanding for the period. Diluted net
loss per share is computed giving effect to all dilutive potential common
shares, including options, convertible preferred stock, common stock subject to
repurchase and warrants. Potentially dilutive securities have been excluded
from the computation of diluted net loss per share because the effect would be
antidilutive due to the Company's losses.
F-10
<PAGE>
KYPHON INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
A reconciliation of the numerator and denominator used in the calculation of
basic and diluted net loss per common share follows:
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net loss per common
share, basic and dilut-
ed:
Net loss.............. $(1,144,157) $(2,643,265) $(5,171,172) $(3,136,522) $(12,453,903)
=========== =========== =========== =========== ============
Weighted-average common
shares outstanding..... 799 159,549 832,558 822,495 1,014,452
Less weighted-average
shares subject to re-
purchase............... -- (65,891) (633,092) (650,000) (493,050)
----------- ----------- ----------- ----------- ------------
Weighted-average shares
used in computing basic
and diluted net loss
per common share....... 799 93,658 199,466 172,495 521,402
=========== =========== =========== =========== ============
</TABLE>
The following outstanding options, convertible preferred stock, common stock
subject to repurchase and warrants were excluded from the computation of
diluted net loss per share as they had an antidilutive effect:
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------ ---------------------
1997 1998 1999 1999 2000
--------- --------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Options to purchase com-
mon stock............... 119,000 347,250 1,005,792 730,000 1,971,220
Convertible preferred
stock................... 5,616,632 8,765,488 12,519,755 8,959,883 13,145,655
Common stock subject to
repurchase.............. -- 650,000 473,959 650,000 452,084
Warrants................. 4,864 9,180 9,180 9,180 21,680
--------- --------- ---------- ---------- ----------
5,740,496 9,771,918 14,008,686 10,349,063 15,590,639
========= ========= ========== ========== ==========
</TABLE>
Recent accounting pronouncements
In March 2000, the Financial Accounting Board issued Interpretation No. 44
("FIN No. 44") "Accounting for Certain Transactions Involving Stock
Compensation," an interpretation of the Accounting Principles Board Opinion No.
25 ("APB No. 25"). This interpretation clarifies the definition of the employee
for purposes of applying APB No. 25, "Accounting for Stock Issued to
Employees," the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and the accounting for
an exchange of stock compensation awards in a business combination. FIN No. 44
is effective July 1, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998, or January 12, 2000. The adoption of FIN
No. 44 did not and will not have a material impact on the Company's financial
statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB No. 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. The Company
has complied with the guidance in SAB No. 101 for all periods presented.
F-11
<PAGE>
KYPHON INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS No. 133 requires that all derivatives be recognized at fair
value in the statement of financial position, and that the corresponding gains
or losses be reported either in the statement of operations or as a component
of comprehensive income, depending on the type of relationship that exists. As
amended, SFAS No. 133 will be effective for fiscal years beginning after June
15, 2000. The Company does not currently hold derivative instruments or engage
in hedging activities and does not believe that the implementation of SFAS No.
133 will have any significant impact on its financial position or results of
operations.
NOTE 3 -- BALANCE SHEET ACCOUNTS:
At December 31, 1998, the Company held no short-term investments. Short-term
investments at December 31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
Amortized
Cost Fair Value
---------- -----------
<S> <C> <C>
Federal government obligations....................... $1,290,363 $ 1,314,867
========== ===========
</TABLE>
All short-term investments mature within one year.
Inventory consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------- September 30,
1998 1999 2000
------ -------- -------------
(unaudited)
<S> <C> <C> <C>
Raw materials.................................. $ -- $ 65,903 $490,148
Work-in-process................................ -- 16,260 110,913
Finished goods................................. -- 20,857 74,447
------ -------- --------
$ -- $103,020 $675,508
====== ======== ========
</TABLE>
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Furniture and fixtures................................. $ 109,236 $ 150,332
Computer software and hardware......................... 130,638 297,316
Laboratory and manufacturing equipment................. 281,111 402,094
Leasehold improvements................................. -- 6,375
--------- ---------
520,985 856,117
Less: Accumulated depreciation and amortization........ (124,967) (321,791)
Plus: Construction-in-progress......................... -- 9,848
--------- ---------
$ 396,018 $ 544,174
========= =========
</TABLE>
F-12
<PAGE>
KYPHON INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
-------- --------
<S> <C> <C>
Accrued compensation and related expenses................. $149,434 $329,757
Accrued legal and accounting fees......................... 14,500 82,943
Accrued travel and entertainment.......................... -- 10,000
Accrued other............................................. 78,881 39,171
-------- --------
$242,815 $461,871
======== ========
</TABLE>
NOTE 4 -- NOTES PAYABLE:
Line of credit
In February 1997, the Company entered into a revolving line of credit agreement
with a bank for borrowings up to $200,000 with interest at the prime rate plus
2.0%. All borrowings under this agreement were repaid and the agreement expired
in December 1998.
Equipment financing line
In February 1997, the Company entered into an equipment financing line with a
financial institution which provided for borrowings up to $150,000. Prior to
the line's expiration, on February 28, 1998, the Company had drawn down a total
of $145,923 which was collateralized by the related property and equipment. The
notes are repayable in 42 monthly payments and a final lump sum. All payments
comprise both principal and interest ranging from 12.54% to 12.84%. The
repayment began on May 1, 1997 with the last lump sum payment to be made June
1, 2001.
In August 1998, the Company entered into an equipment financing line which
provided for borrowings up to $500,000 and expired in July 1999. As of December
31, 1999 the Company had drawn down $395,925 which was collateralized by the
related property and equipment. The notes are repayable in 48 monthly payments.
All payments comprise both principal and interest ranging from 11.77% to
12.14%. The repayment began on September 1, 1998 and will end on June 1, 2003.
Aggregate annual maturities of the notes payable are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
<S> <C>
2000............................................................. $141,368
2001............................................................. 115,902
2002............................................................. 87,298
2003............................................................. 5,324
--------
$349,892
========
</TABLE>
In connection with the equipment financing lines, warrants to purchase 4,864
and 4,316 shares of the Company's Series B and Series C convertible preferred
stock, respectively, have been issued (see Note 6).
F-13
<PAGE>
KYPHON INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 5 -- COMMITMENTS AND CONTINGENCIES:
Facility lease
The Company leases its facility under an operating lease which will expire July
31, 2002. In addition to the base rental, the Company is responsible for
certain expenses including property tax, insurance and maintenance costs.
At December 31, 1999, future minimum lease payments are as follows:
<TABLE>
<S> <C>
2000................................................................ $176,988
2001................................................................ 185,808
2002................................................................ 112,529
--------
$475,325
========
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $45,700, $143,200 and $181,400, respectively.
Litigation
In November 1999, the Company commenced a declaratory action in the Superior
Court of the State of California in and for the County of Santa Clara against
Sulzer Spine-Tech, Inc. ("Spine-Tech"). The action asserts that the Company's
hiring of certain Spine-Tech employees did not constitute a tortious
interference of the employment agreements between Spine-Tech and those
employees, and that its actions did not otherwise constitute an unfair
competition or illegal misappropriation of trade secrets.
In January 2000, Spine-Tech filed a complaint that named the Company and
fifteen of its employees as defendants in the District Court of the State of
Minnesota in and for the County of Hennepin in the State of Minnesota. The
complaint alleged that the Company's hiring of certain Spine-Tech employees
constituted a tortious interference of the employment agreements, of the
fifteen employees, misappropriation of trade secrets, unfair competition and
unjust enrichments, breach of contract and defamation. In June 2000, the
Company and Spine-Tech settled all outstanding litigation.
In April 2000, a former employee filed a complaint against the Company in the
Superior Court of California for wrongful termination. The Company intends to
vigorously defend itself in this matter. The Company believes that the
complaint is without merit and the outcome of this matter will not have a
material effect on the Company's financial position, results of operations or
cash flows. No provision for any liability that may result upon the resolution
of this matter has been made in the accompanying financial statements.
From time to time, the Company may become involved in litigation relating to
additional claims arising from the ordinary course of business. Management does
not believe the final disposition of these matters will have a material adverse
affect on the financial position, results of operations or cash flows of the
Company.
F-14
<PAGE>
KYPHON INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 6 -- CONVERTIBLE PREFERRED STOCK:
Under the Company's Certificate of Incorporation, the Company's convertible
preferred stock is issuable in series and the Company's Board of Directors is
authorized to determine the rights, preferences and terms of each series. As of
December 31, 1998, the convertible preferred stock comprises:
<TABLE>
<CAPTION>
Proceeds,
Net of Non-cumulative
Shares Issuance Annual Liquidation Conversion
Shares Issued and Costs and Dividends Preference Value/Price
Series Designated Outstanding Repurchases Per Share Per Share Per Share
------ ---------- ----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Series A................ 2,000,000 1,532,500 $ (208,683) $0.056 $0.700 $0.700
Series B................ 1,900,000 1,728,572 1,191,780 $0.056 $0.700 $0.700
Series C................ 2,500,000 2,355,560 2,495,590 $0.084 $1.050 $1.050
Series D................ 3,500,000 3,148,856 8,238,927 $0.210 $2.620 $2.620
--------- --------- -----------
Total.................. 9,900,000 8,765,488 $11,717,614
========= ========= ===========
</TABLE>
As of December 31, 1999, the convertible preferred stock comprises:
<TABLE>
<CAPTION>
Proceeds,
Net of Non-cumulative
Shares Issuance Annual Liquidation Conversion
Shares Issued and Costs and Dividends Preference Value/Price
Series Designated Outstanding Repurchases Per Share Per Share Per Share
------ ---------- ----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Series A................ 1,532,500 1,532,500 $ (208,683) $0.056 $0.700 $0.700
Series B................ 1,733,436 1,728,572 1,191,780 $0.056 $0.700 $0.700
Series C................ 2,386,327 2,382,015 2,523,369 $0.084 $1.050 $1.050
Series D................ 3,316,796 3,316,796 8,675,618 $0.210 $2.620 $2.620
Series E................ 3,750,000 3,559,872 21,973,946 $0.494 $6.180 $6.180
---------- ---------- -----------
Total.................. 12,719,059 12,519,755 $34,156,030
========== ========== ===========
</TABLE>
As of September 30, 2000, the convertible preferred stock comprises
(unaudited):
<TABLE>
<CAPTION>
Proceeds,
Net of Non-cumulative
Shares Issuance Annual Liquidation Conversion
Shares Issued and Costs and Dividends Preference Value/Price
Series Designated Outstanding Repurchases Per Share Per Share Per Share
------ ---------- ----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Series A................ 1,532,500 1,532,500 $ (208,683) $0.056 $0.700 $0.700
Series B................ 1,733,436 1,728,572 1,191,780 $0.056 $0.700 $0.700
Series C................ 2,386,327 2,382,015 2,523,369 $0.084 $1.050 $1.050
Series D................ 3,316,796 3,316,796 8,675,618 $0.210 $2.620 $2.620
Series E................ 4,250,000 4,185,772 25,841,980 $0.494 $6.180 $6.180
---------- ---------- -----------
Total.................. 13,219,059 13,145,655 $38,024,064
========== ========== ===========
</TABLE>
The rights, privileges and preferences of the convertible preferred stock are
as follows:
Dividends
The holders of convertible preferred stock are entitled to receive dividends,
out of any assets legally available, prior and in preference to any declaration
or payment of any dividend on the common stock of the Company, at
F-15
<PAGE>
KYPHON INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
the rate stated above. Such dividends are payable when, as and if, declared by
the Board of Directors, and are not cumulative. As of September 30, 2000, no
dividends have been declared.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series B, Series C, Series D,
and Series E convertible preferred stock are entitled to receive, prior and in
preference to any distribution of any assets of the Company to the holders of
common stock and Series A preferred stock, by reason of their ownership, an
amount equal to the rates as shown in the table above, (as adjusted for any
stock dividends, combinations or splits) plus any declared but unpaid dividends
on such shares.
After the payment of the preferential amount to the holders of Series B, Series
C, Series D and Series E preferred stock, the holders of Series A preferred
stock shall be entitled to receive, prior and in preference to any distribution
of any of the assets of the Company to the holders of common stock by reason of
their ownership, an amount per share equal to $0.70 for each outstanding share
of Series A preferred stock plus any declared but unpaid dividends on such
shares. After the distributions to the holders of the preferred stock have been
made, the remaining assets of the Company available for distribution to
stockholders shall be distributed pro rata among the holders of common stock.
Mergers
A merger, reorganization, or sale of all or substantially all of the assets of
the Company in which the stockholders of the Company immediately prior to the
transaction possess less than 50% of the voting power of the surviving entity
(or its parent) immediately after the transaction, shall be deemed to be a
liquidation, dissolution or winding up.
Voting
The holder of each share of convertible preferred stock is entitled to the
number of votes equal to the number of whole shares of common stock into which
each share could be converted on the record date for the vote or consent of
stockholders, except as otherwise required by law, and has voting rights and
powers equal to the voting rights and powers of holders of common stock.
Notwithstanding the foregoing, the holders of Series B, Series C, Series D, and
Series E convertible preferred stock, voting together as a single class, are
entitled to elect three directors of the Company. The holders of Series A
convertible preferred stock and holders of common stock, voting together as a
single class, are entitled to elect two directors of the Company, and the
holders of common stock and preferred stock, voting together as single class
are entitled to elect two directors of the Company.
Conversion
Each share of convertible preferred stock, at the option of the holder, is
convertible into the number of fully paid and non assessable shares of common
stock which results from dividing the conversion price per share in effect for
the preferred stock at the time of conversion into the per share conversion
value of such shares. The conversion price per share and the per share
conversion value of the convertible preferred stock is stated above. The
conversion price of the convertible preferred stock is subject to adjustment
from time to time. The number of shares into which a share of preferred stock
is convertible is referred to as the conversion rate of such series. At
September 30, 2000, the Company has reserved 13,145,655 shares of common stock
in the event of conversion.
Conversion is automatic at its then effective conversion rate immediately upon
the closing of a firm commitment underwritten public offering pursuant to an
effective registration statement under the Securities
F-16
<PAGE>
KYPHON INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Act of 1933, as amended, covering the offer and sale of common stock in which
(i) the public offering price equals or exceeds $12.36 per share (adjusted to
reflect subsequent stock dividends, stock splits or recapitalization) and (ii)
the aggregate proceeds raised exceed $15,000,000 (Note 11).
Alternatively, once less than 250,000 shares of Series B, Series C, Series D
and Series E convertible preferred stock is outstanding, each share of Series A
convertible preferred stock will automatically convert to common stock.
Warrants
In connection with equipment financing arrangements, in April 1997 and August
1998, the Company issued warrants to purchase 4,864 and 4,316 shares of its
Series B and Series C convertible preferred stock, respectively. The Series B
and Series C convertible preferred stock warrants have exercise prices of $0.70
and $1.84 per share, respectively, and are exercisable at any time. The Series
B convertible preferred stock warrants expire in April 2003 or upon the
effective date of a merger or acquisition, as defined, of the Company,
whichever is earlier. The Series C convertible preferred stock warrants expire
in August 2004, upon the effective date of a merger or acquisition, as defined,
or upon the closing date of the Company's initial public offering, whichever is
earlier. The fair value of these warrants, determined using the Black-Scholes
pricing model, was not material.
In connection with the execution of a facility lease, in February 2000, the
Company issued warrants to purchase a total of 12,500 shares of its Series E
convertible preferred stock. The warrant has an exercise price of $6.18 per
share. The warrants are exercisable at any time and expire in February 2005 or
upon the effective date of the Company's initial public offering, whichever is
earlier. The fair value of these warrants, determined using the Black-Scholes
pricing model, of $51,475 has been charged to additional paid in capital and
amortized to rent expense over the life of the lease.
NOTE 7 -- STOCKHOLDERS EQUITY (DEFICIT):
Common stock
Each share of common stock is entitled to one vote. The holders of common stock
are also entitled to receive dividends whenever funds are legally available and
when declared by the Board of Directors, subject to the prior rights of holders
of all classes of stock outstanding. No dividends have been declared or paid as
of September 30, 2000.
The Company issued shares of its common stock to certain employees under stock
purchase agreements, some of which contain repurchase provisions in the event
of termination of employment. The shares are generally released from repurchase
provisions ratably over 4 years. Included in common stock as of December 31,
1999 and September 30, 2000, are 473,959 and 452,084 (unaudited) shares subject
to repurchase, respectively.
Common stock subscription
As of December 31, 1997, the Company had received services from a consultant,
who is also a board member of the Company, and signed an agreement to issue
57,143 shares of common stock in exchange for the services received. Also, in
1997, the Company entered into an agreement with two of its investors, which
specified that upon the return of 38,095 shares of Series C convertible
preferred stock, the Company would issue 38,095 shares of common stock to the
consultant. As of December 31, 1997, the services had been rendered and the
preferred stock had been returned to the Company but the common stock was
unissued. As such, the Company accounted for this transaction as a common stock
subscription at the end of 1997. Total amount of common stock subscriptions at
December 31, 1997 was $10,000. In 1998, the consultant forgave the stock
subscription and accordingly the common subscription was released to additional
paid-in capital. No common stock subscription remained outstanding as of
December 31, 1998.
F-17
<PAGE>
KYPHON INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock option plan
The Company has reserved shares of common stock for issuance under the 1996
Stock Incentive Plan (the "Plan"). Under the Plan, the Board of Directors may
issue incentive stock options to employees and nonstatutory stock options to
consultants or employees of the Company. The Board of Directors has the
authority to determine to whom options will be granted, the number of shares,
the term and exercise price (which cannot be less than estimated fair market
value at date of grant for incentive stock options or 85% of estimated fair
market value for nonqualified stock options). If an employee owns stock
representing more than 10% of the outstanding shares, the price of each share
shall be at least 110% of estimated fair market value, as determined by the
Board of Directors. The options are exercisable at times and increments as
specified by the Board of Directors, and generally expire ten years from date
of grant.
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
Options Outstanding
Shares ----------------------------------- Average
Available Number of Exercise Aggregate Exercise
for Grant Shares Price Price Price
---------- --------- ------------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balances, January 1,
1997................... 401,000 99,000 $0.070 $ 6,930 $0.070
Options granted........ (45,000) 45,000 $0.070 3,150 $0.070
Options exercised...... -- (7,292) $0.070 (510) $0.070
Options canceled....... 17,708 (17,708) $0.070 (1,240) $0.070
---------- --------- ----------
Balances, December 31,
1997................... 373,708 119,000 $0.070 8,330 $0.070
Options granted........ (229,250) 229,250 $0.105-$0.260 24,846 $0.108
Options canceled....... 1,000 (1,000) $0.260 (260) $0.260
---------- --------- ----------
Balances, December 31,
1998................... 145,458 347,250 $0.070-$0.260 32,916 $0.095
Additional shares re-
served................ 1,000,000
Options granted........ (758,750) 758,750 $0.260-$0.620 203,935 $0.269
Options exercised...... -- (75,523) $0.070-$0.105 (6,573) $0.087
Options canceled....... 24,685 (24,685) $0.070-$0.260 (2,731) $0.111
---------- --------- ----------
Balances, December 31,
1999................... 411,396 1,005,792 $0.070-$0.620 227,547 $0.226
Additional shares re-
served (unaudited).... 1,000,000
Options granted (unau-
dited)................ (1,391,000) 1,391,000 $0.620-$2.000 2,176,410 $1.565
Options exercised (un-
audited).............. -- (258,894) $0.070-$2.000 (188,566) $0.728
Options canceled (unau-
dited)................ 166,678 (166,678) $0.105-$2.000 (105,453) $0.633
---------- --------- ----------
Balances, September 30,
2000 (unaudited)........ 187,071 1,971,220 $0.070-$2.000 $2,109,938 $1.070
========== ========= ==========
</TABLE>
The options outstanding and currently exercisable by exercise price at December
31, 1999 are as follows:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------------------
Weighted
Average
Remaining Options
Exercise Number Contractual Currently
Price Outstanding Life in Years Exercisable
-------- ----------- ------------- -----------
<S> <C> <C> <C> ---
$ 0.070 66,500 7.00 44,750
$ 0.105 180,542 8.53 92,792
$ 0.260 740,250 9.69 9,897
$ 0.620 18,500 9.96 1,573
--------- -------
1,005,792 149,011
========= =======
</TABLE>
F-18
<PAGE>
KYPHON INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The options outstanding and currently exercisable by exercise price at
September 30, 2000 (unaudited) are as follows:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------------------
Weighted
Average
Remaining Options
Exercise Number Contractual Currently
Price Outstanding Life in Years Exercisable
-------- ----------- ------------- -----------
<S> <C> <C> <C> ---
$0.070 21,042 6.45 16,250
$0.105 118,292 7.84 78,901
$0.260 590,865 9.00 63,179
$0.620 269,000 9.35 2,042
$1.540 366,000 9.49 14,875
$2.000 606,021 9.83 12,334
--------- -------
1,971,220 187,580
========= =======
</TABLE>
Stock-based compensation
The Company has adopted the disclosure only provisions of SFAS No. 123. The
Company calculated the fair value of each option on the date of grant using the
minimum value method as prescribed by SFAS No. 123 with the following
assumptions:
<TABLE>
<CAPTION>
Nine Months Ended September
Years Ended December 31, 30,
------------------------------------------- ----------------------------
1997 1998 1999 1999 2000
------------- ------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Risk-free interest rate... 5.90% to 6.11% 4.31% to 5.77% 4.64% to 6.20% 4.64% to 5.96% 6.36% to 6.78%
Expected life (in years).. 4 4 4 4 4
Dividend yield............ -- -- -- -- --
</TABLE>
As the determination of fair value of all options granted after such time as
the Company becomes a public entity will include an expected volatility factor
in addition to the factors described in the preceding table, the following
results may not be representative of future periods.
Had compensation costs been determined based upon the fair value at the grant
date, consistent with the methodology prescribed under SFAS No. 123, the
Company's pro forma net loss and pro forma basic and diluted net loss per share
under SFAS No. 123 would have been as follows:
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net loss -- as report-
ed..................... $(1,144,157) $(2,643,265) $(5,171,172) $(3,136,522) $(12,453,903)
Net loss -- pro forma... $(1,144,554) $(2,644,766) $(5,194,422) $(3,149,919) $(12,500,951)
Net loss per common
share, basic and dilut-
ed -- as reported...... $ (1,431.99) $ (28.22) $ (25.93) $ (18.18) $ (23.89)
Net loss per common
share, basic and dilut-
ed -- pro forma........ $ (1,432.48) $ (28.24) $ (26.04) $ (18.26) $ (23.98)
</TABLE>
F-19
<PAGE>
KYPHON INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The weighted-average grant date fair value per share of options granted during
the years ended December 31, 1997, 1998 and 1999 was $0.056, $0.090 and $0.212,
respectively.
Deferred stock-based compensation
During 1999 and the first nine months of 2000, the Company issued options to
certain employees under the Plan with exercise prices below the deemed fair
market value of the Company's common stock at the date of grant. In accordance
with the requirements of APB 25, the Company has recorded deferred stock-based
compensation for the difference between the exercise price of the stock options
and the deemed fair market value of the Company's stock at the date of grant.
This deferred stock-based compensation is amortized to expense on a straight
line basis, over the period during which the Company's right to repurchase the
stock lapses or the options become exercisable, generally four years. In the
year ended December 31, 1999, and the nine month period ended September 30,
2000, the Company had recorded deferred stock-based compensation related to
these options in the amounts of $797,700 and $8,024,394 (unaudited), net of
cancellations, of which $29,684 and $812,321 (unaudited) had been amortized to
expense during 1999 and the nine months ended September 30, 2000, respectively.
Stock-based compensation expense related to stock options granted to non-
employees is recognized as the stock options are earned. The Company believes
that the fair value of the stock options is more reliably measurable than the
fair value of the services received. The fair value of the stock options
granted is calculated at each reporting date using the Black-Scholes option
pricing model as prescribed by SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, September 30,
------------------------------------------- ----------------------------
1997 1998 1999 1999 2000
------------- ------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Risk-free interest
rate................... 5.67% to 5.78% 4.49% to 6.01% 5.63% to 6.20% 5.04% to 6.51% 6.36% to 6.78%
Expected life (in
years)................. 10 10 10 10 10
Dividend yield.......... -- -- -- -- --
Expected volatility..... 76% 76% 76% 76% 76%
</TABLE>
The stock-based compensation expense will fluctuate as the deemed fair market
value of the common stock fluctuates. In connection with the grant of stock
options to non-employees, the Company recorded deferred stock-based
compensation of $966,095 (unaudited) in the nine month period ended September
30, 2000, of which $355,546 (unaudited) has been amortized to expense in the
nine months ended September 30, 2000.
NOTE 8 -- RELATED PARTY TRANSACTIONS:
In August 1996, the Company entered into two consulting agreements with
consultants who are stockholders of the Company, one of which was formerly a
member of the Board of Directors. Amounts paid for services for the years ended
December 31, 1997, 1998 and 1999 were $11,670 and $45,500, and $15,000 and
$89,578, $9,000 and $138,667, respectively. At December 31, 1998 and 1999, the
Company had accounts payable of $20,000 and $3,000, respectively, relating to
these agreements.
NOTE 9 -- INCOME TAXES:
At December 31, 1999, the Company had approximately $6.3 million of federal net
operating loss carryforwards which will expire in the years 2011 through 2019,
and approximately $6.3 million of California net operating loss carryforwards
which will expire in the years 2001 through 2004, if unused. Additionally, the
Company has research and development tax credits of approximately $342,000
which will expire beginning in 2001 through 2019, if unused.
F-20
<PAGE>
KYPHON INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Tax Reform Act of 1986 limits the use of net operating loss and tax credit
carryforwards in certain situations where changes of the Company's stock
ownership occur. If the Company should have an ownership change, as defined by
the tax law, utilization of the carryforwards could be restricted.
The Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Net operating loss carryforwards.................... $ 1,383,000 $ 2,543,000
Research and development credit carryforwards....... 187,000 342,000
Capitalized research and development costs.......... 527,000 896,000
Capitalized patent costs............................ 88,000 83,000
Capitalized start-up costs.......................... 19,000 12,000
Depreciation and amortization....................... (8,000) 2,000
Other accruals and reserves not currently deductible
for tax purposes................................... 56,000 105,000
Less: Valuation allowance........................... (2,252,000) (3,983,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The Company has established a full valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
NOTE 10 -- UNAUDITED PRO FORMA NET LOSS PER SHARE:
Pro forma basic and diluted net loss per share have been computed to give
effect to common equivalent shares from convertible preferred stock that will
convert to common stock upon the closing of the Company's initial public
offering (using the as-if converted method) for the year ended December 31,
1999, and the nine months ended September 30, 2000. A reconciliation of the
numerator and denominator used in the calculation of pro forma basic and
diluted net loss per common share follows:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, September 30,
1999 2000
------------ -------------
(unaudited)
<S> <C> <C>
Pro forma net loss per common share, basic and di-
luted:
Net loss......................................... $(5,171,172) $(12,453,903)
=========== ============
Weighted-average shares used in computing net loss
per common share, basic and diluted.............. 199,466 521,402
Adjustments to reflect the effect of the assumed
conversion of the preferred stock from the date
of issuance...................................... 9,112,913 13,040,577
----------- ------------
Weighted-average shares used in computing pro
forma net loss per common share, basic and dilut-
ed............................................... 9,312,379 13,561,979
=========== ============
Pro forma net loss per common share, basic and di-
luted............................................ $ (0.56) $ (0.92)
=========== ============
</TABLE>
If an initial public offering is consummated, all of the convertible preferred
stock outstanding, as of the closing date, will be converted into an aggregate
of 13,145,655 shares of common stock based on the shares of
F-21
<PAGE>
KYPHON INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
convertible preferred stock outstanding at September 30, 2000. Unaudited pro
forma stockholders' equity at September 30, 2000, as adjusted for the
conversion of convertible preferred stock, is disclosed on the balance sheet.
NOTE 11 -- SUBSEQUENT EVENTS (unaudited):
Preferred stock financing
In February 2000, the Company issued 625,900 shares of Series E preferred stock
at $6.18 per share for cash proceeds of $3,868,028 in the aggregate.
Lease of new facilities
In February 2000, the Company entered into a non-cancelable operating lease
commencing in April 2000 for a new facility. The lease provides that the
Company is responsible for utilities, insurance and taxes, and expires in March
2005. In addition, warrants to purchase 12,500 shares of Series E convertible
preferred stock at an exercise price of $6.18 per share were issued in
conjunction with the lease (see Note 6).
Future minimum lease payments for this lease are as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
<S> <C>
2000............................................................. $ 698,625
2001............................................................. 962,550
2002............................................................. 1,003,950
2003............................................................. 1,045,350
2004............................................................. 1,086,750
Thereafter....................................................... 274,275
----------
$5,071,500
==========
</TABLE>
Initial public offering
In September 2000, the Company's Board of Directors authorized management to
file a registration statement with the SEC to permit the Company to sell its
common stock to the public. Upon completion of the Company's initial public
offering, all of the outstanding convertible preferred stock will be converted
into shares of common stock.
2000 Stock Plan
In September 2000, the Board of Directors approved the 2000 Stock Option Plan
("2000 Plan"), subject to stockholder approval. The 2000 Plan, which will
terminate no later than 2010, provides for the granting of incentive stock
options to employees and nonstatutory stock options to employees, directors and
consultants. 2,500,000 shares of common stock are reserved for issuance and
will be increased on the first day of each fiscal year, commencing in 2001, by
an amount equal to the lesser of (i) 3,000,000, (ii) 5.0% of the outstanding
shares of common stock on the last day of the preceeding fiscal year or (iii)
an amount as determined by the Board of Directors.
Under the terms of the 2000 Plan, each new non-employee director elected on, or
after, the effectiveness of an initial public offering of the Company's stock,
will be granted a nonstatutory option to purchase 30,000 shares of common stock
which vest annually over a three year period. Thereafter, on an annual basis,
on the date of the annual stockholder meeting each director will be granted a
nonstatory option to purchase 5,000 shares of
F-22
<PAGE>
KYPHON INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
common stock which vest after three years. The exercise price of an option
shall not be less than 100% of the fair market value of the common stock on the
date of grant and the term shall not exceed 10 years.
2000 Employee Stock Purchase Plan
In September 2000, the Board of Directors approved the 2000 Employee Stock
Purchase Plan ("2000 ESPP"), subject to stockholder approval, under which
eligible employees are permitted to purchase common stock at a discount through
payroll deductions. 1,000,000 shares of common stock are reserved for issuance
and will be increased on the first day of each fiscal year, commencing in 2001,
by an amount equal to the lesser of (i) 1,200,000, (ii) 2.0% of the outstanding
shares of common stock on such date or (iii) an amount as determined by the
Board of Directors.
The 2000 ESPP contains consecutive, overlapping twenty-four month offering
periods. Each offering period includes four six-month purchase periods. The
price of the common stock purchased shall be the lower of 85% of the fair
market value of the common stock at the beginning of an offering period or at
the end of a purchase period. The initial offering period will commence on the
effective date of the Company's initial public offering.
Stock Split and reduction in automatic conversion price
On October 10, 2000, the Board of Directors approved a 2-for-1 reverse stock
split of the common and preferred stock. Stockholders' approval of the reverse
stock split was obtained on , 2000. All share and per share amounts for
all periods presented in the accompanying financial statements have been
adjusted retroactively. On October , 2000 the Company obtained approval from
greater than 66 2/3% of the outstanding shares of its preferred stock to reduce
the automatic conversion price upon which the preferred stock converts into
common stock from $12.36 per share to $8.48 per share.
F-23
<PAGE>
INSIDE BACK COVER PAGE
[Heading: "New Heights in Compression Fracture Management"
Picture of happy elderly couple walking hand in hand.]
<PAGE>
4,000,000 Shares
KYPHON INC.
Common Stock
[KYPHON LOGO]
---------------------
PROSPECTUS
---------------------
Until , 2000, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
U.S. Bancorp Piper Jaffray
Bear, Stearns & Co. Inc.
Chase H&Q
, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than underwriting
discounts and commissions, payable by Kyphon in connection with the sale of the
Common Stock being registered hereby. All amounts are estimates except the SEC
Registration Fee and the NASD filing fee.
<TABLE>
<CAPTION>
Amount to
be Paid
----------
<S> <C>
Securities and Exchange Commission registration fee............ $ 14,573
NASD filing fee................................................ 6,250
Nasdaq National Market listing fee............................. 95,000
Blue Sky fees and expenses..................................... 10,000
Printing and Engraving expenses................................ 250,000
Legal fees and expenses........................................ 400,000
Accounting fees and expenses................................... 300,000
Transfer Agent and Registrar fees.............................. 15,000
Miscellaneous.................................................. 109,177
----------
Total......................................................... $1,200,000
==========
</TABLE>
-------------------------------
ITEM 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article VII of the Registrant's Amended and Restated Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.
Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the Registrant if
such person acted in good faith and in a manner reasonably believed to be in
and not opposed to the best interest of the Registrant, and, with respect to
any criminal action or proceeding, the indemnified party had no reason to
believe his or her conduct was unlawful.
The Registrant has entered into indemnification agreements with its directors
and executive officers, in addition to indemnification provided for in the
Registrant's Bylaws, and intends to enter into indemnification agreements with
any new directors and executive officers in the future.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification by
the Underwriters of the registrant and its executive officers and directors,
and by the registrant of the underwriters for certain liabilities, including
liabilities arising under the Securities Act, in connection with matters
specifically provided in writing by the Underwriters for inclusion in the
Registration Statement.
The Registrant intends to purchase and maintain insurance on behalf of any
person who is or was a director or officer against any loss arising from any
claim asserted against him or her and incurred by him or her in any such
capacity, subject to certain exclusions.
See also the undertakings set out in response to Item 17 herein.
II-1
<PAGE>
ITEM 15. Recent Sales of Unregistered Securities.
The Registrant has issued and sold the following securities:
(1) From January 1994 through September 30, 2000, 2,523,000 shares were
granted under the Registrant's 1996 Stock Option Plan, of which 341,709
shares were exercised, and 210,071 shares were cancelled and returned to
the Plan. The Registrant sold 795,238 shares to seven individuals or
entities pursuant to stock purchase agreements at prices ranging from
$0.105 to $0.26.
(2) In December 1999 and February 2000, the Registrant issued and sold to
19 individual accredited investors and three venture capital investors an
aggregate of 4,185,772 shares of Series E Preferred Stock, convertible into
an aggregate of 4,185,772 shares of Common Stock at a purchase price per
share of $6.18.
(3) In December 1998 and January 1999, the Registrant issued and sold to 10
individual accredited investors and two venture capital investors an
aggregate of 3,316,796 shares of Series D Preferred Stock, convertible into
an aggregate of 3,316,796 shares of Common Stock at a purchase price per
share of $2.62.
(4) In December 1997 and March 1999, the Registrant issued and sold to
seven individual accredited investors and three venture capital investors
an aggregate of 2,382,015 shares of Series C Preferred Stock, convertible
into an aggregate of 2,382,015 shares of Common Stock at a purchase price
per share of $1.05.
The above share and dollar amounts reflect the 1 for 2 reverse stock split to
be effected prior to the closing of this offering. The sales of the above
securities were deemed to be exempt from registration under the Securities Act
with respect to items 2 through 4 above in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, and with respect to
item 1 above Rule 701 promulgated under Section 3(b) of the Securities Act as
transactions by an issuer not involving a public offering or transactions
pursuant to compensatory benefit plans and contracts relating to compensation
as provided under such Rule 701. The recipients of securities in each such
transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and warrants issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Registrant.
ITEM 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of the Registrant and
Certificate of Amendment of Certificate of Incorporation of the
Registrant, both as currently in effect.
3.2* Amended and Restated Certificate of Incorporation of the Registrant to
be effective upon closing of the offering.
3.3 Bylaws of the Registrant as currently in effect.
3.4* Bylaws of the Registrant effective on the closing of the offering.
4.1 Specimen Common Stock certificate of the Registrant.
4.2* Amended and Restated Stockholder Rights Agreement effective as of
December 14, 1999, among the Registrant and Certain Stockholders of
the Registrant.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Form of Indemnification Agreement for directors and executive officers.
10.2* 1996 Stock Option Plan.
10.3* 2000 Stock Plan.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
10.4* 2000 Employee Stock Purchase Plan.
10.5 Lease dated January 27, 2000 for office space located at 1350 Bordeaux Drive, Sunnyvale, CA 94089.
23.1 Consent of Independent Accountants.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (See Exhibit 5.1).
24.1* Power of Attorney (See Page II-4).
27.1 Financial Data Schedule.
</TABLE>
-------------------------------
* Previously filed.
** Documents to be filed by amendment.
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are inapplicable or
the requested information is shown in the financial statements of the
Registrant or notes thereto.
ITEM 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions described in Item 14 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, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(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.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Sunnyvale, State of
California, on the 19th day of October 2000.
Kyphon Inc.
Richard D. Murdock*
By: _________________________________
Richard D. Murdock
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment to
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
Richard D. Murdock* President, Chief Executive October 19, 2000
____________________________________ Officer and Director
Richard D. Murdock (Principal Executive
Officer)
/s/ Jeffrey Kaiser Vice President, Finance and October 19, 2000
____________________________________ Chief Financial Officer
Jeffrey L. Kaiser (Principal Financial
Officer)
Stephen Campe* Director October 19, 2000
____________________________________
Stephen Campe
Douglas W. Kohrs* Director October 19, 2000
____________________________________
Douglas W. Kohrs
Jack W. Lasersohn* Director October 19, 2000
____________________________________
Jack W. Lasersohn
Terry E. Spraker, Ph.D.* Director October 19, 2000
____________________________________
Terry E. Spraker, Ph.D.
Karen D. Talmadge, Ph.D.* Executive Vice President and October 19, 2000
____________________________________ Director
Karen D. Talmadge, Ph.D.
Elizabeth H. Weatherman* Director October 19, 2000
____________________________________
Elizabeth H. Weatherman
</TABLE>
/s/ Jeffrey L. Kaiser
*By: __________________________
Jeffrey L. Kaiser
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of the Registrant and
Certificate of Amendment of Certificate of Incorporation of the
Registrant, both as currently in effect.
3.2* Amended and Restated Certificate of Incorporation of the Registrant to
be effective upon closing of the offering.
3.3 Bylaws of the Registrant as currently in effect.
3.4* Bylaws of the Registrant effective on the closing of the offering.
4.1 Specimen Common Stock certificate of the Registrant.
4.2* Amended and Restated Stockholder Rights Agreement effective as of
December 14, 1999, among the Registrant and Certain Stockholders of
the Registrant.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Form of Indemnification Agreement for directors and executive officers.
10.2* 1996 Stock Option Plan.
10.3* 2000 Stock Plan.
10.4* 2000 Employee Stock Purchase Plan.
10.5 Lease dated January 27, 2000 for office space located at 1350 Bordeaux
Drive, Sunnyvale, CA 94089.
23.1 Consent of Independent Accountants.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(See Exhibit 5.1).
24.1* Power of Attorney (see page II-4).
27.1 Financial Data Schedule.
</TABLE>
-------------------------------
* Previously filed.
** Documents to be filed by amendment.
