<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1996
REGISTRATION NO. 333-9207
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INTEGRATED SURGICAL SYSTEMS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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DELAWARE 3841 68-0232575
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NO.)
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
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829 West Stadium Lane
Sacramento, California 95834
Telephone: (916) 646-3487
Telecopier: (916) 646-4075
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
------------------------
DR. RAMESH C. TRIVEDI
CHIEF EXECUTIVE OFFICER AND PRESIDENT
INTEGRATED SURGICAL SYSTEMS, INC.
829 West Stadium Lane
Sacramento, California 95834
Telephone: (916) 646-3487
Telecopier: (916) 646-4075
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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JACK BECKER, ESQ. CHARLES P. GREENMAN, ESQ.
SNOW BECKER KRAUSS P.C. TIMOTHY I. KAHLER, ESQ.
605 Third Avenue PARKER CHAPIN FLATTAU & KLIMPL, LLP
New York, New York 10158-0125 1211 Avenue of the Americas
Telephone: (212) 687-3860 New York, New York 10036
Telecopier: (212) 949-7052 Telephone: (212) 704-6000
Telecopier: (212) 704-6288
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this registration statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
If any of the securities on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act please check the
following box. [X]
<PAGE> 2
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SECURITY(1) PRICE(1) FEE
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Common Stock, $.01 par value....... 1,725,000(2) $6.00 $10,350,000 $3,568.97
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Warrants to purchase shares of
Common Stock..................... 1,725,000(3) $0.10 $172,500 $59.48
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Common Stock issuable upon exercise
of Warrants...................... 1,725,000(4) $7.00 $12,075,000 $4,163.79
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Underwriters' Warrants to purchase
shares of Common Stock........... 150,000 $0.000033 $5 (5)
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Underwriters' Warrants to purchase
Warrants......................... 150,000 $0.000033 $5 (5)
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Common Stock issuable upon exercise
of Underwriters' Warrants........ 150,000(4) $9.90 $1,485,000 $512.07
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Warrants issuable upon exercise of
Underwriters' Warrants........... 150,000 $0.165 $24,750 $8.53
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Common Stock issuable upon exercise
of Warrants underlying
Underwriters' Warrants........... 150,000(4) $7.00 $1,050,000 $362.07
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Total Registration Fee...... $8,674.91(6)
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 promulgated under the Securities Act of 1933.
(2) Includes 225,000 shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any.
(3) Includes 225,000 Warrants which may be purchased by the Underwriters to
cover over-allotments, if any.
(4) Pursuant to Rule 416, there are also being registered such indeterminate
number of additional shares as may become issuable pursuant to the
anti-dilution provisions of the Warrants, the Underwriters' Warrants and the
Warrants issuable upon exercise of the Underwriters' Warrants.
(5) Pursuant to Rule 457(g) promulgated under the Securities Act of 1933, no
filing fee is required.
(6) Previously paid.
------------------------
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> 3
INTEGRATED SURGICAL SYSTEMS, INC.
CROSS REFERENCE SHEET SHOWING LOCATION
IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS 1 THROUGH 23, PART I OF FORM SB-2
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ITEM AND HEADING LOCATION IN PROSPECTUS
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1. Forepart of the Registration Statement Outside Front Cover Page
and
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Inside Front and Outside
Cover Pages of Prospectus Back Cover Pages of Prospectus;
Description of Securities - Reports to
Stockholders
3. Summary Information, Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page; Risk Factors;
Underwriting
6. Dilution Dilution
7. Selling Security Holders Not Applicable
8. Plan of Distribution Underwriting
9. Legal Proceedings Business -- Litigation
10. Directors, Executive Officers Management
Promoters and/Control Persons
11. Security Ownership of Certain Security Ownership of Certain
Beneficial Owners and Management Beneficial Owners and Management
12. Description of the Securities Description of the Securities
13. Interest of Named Experts and Counsel Not Applicable
14. Disclosure of Commission Position on Management -- Indemnification of Officers
Indemnification for Securities Act and Directors and Limitation on Director
Liabilities Liability
15. Organization Within Last Five Years Not Applicable
16. Description of Business Prospectus Summary; Business
17. Management's Discussion and Analysis Management's Discussion and Analysis of
or Plan of Operation Financial Condition and Results of
Operations
18. Description of Property Business -- Facilities
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market for Common Equity and Related Description of Securities
Stockholder Matters
21. Executive Compensation Management
22. Financial Statements Consolidated Financial Statements
23. Changes in and Disagreements with Not Applicable
Accountants on Accounting and
Financial Disclosure
</TABLE>
<PAGE> 4
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION, DATED NOVEMBER 12, 1996
INTEGRATED SURGICAL SYSTEMS, INC.
1,500,000 SHARES OF COMMON STOCK AND
1,500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
This Prospectus relates to an offering (the "Offering") by Integrated
Surgical Systems, Inc. (the "Company") of 1,500,000 shares of common stock, par
value $.01 per share (the "Common Stock"), and 1,500,000 redeemable Common Stock
purchase warrants (the "Warrants") through Rickel & Associates, Inc. (the
"Representative") and Aegis Capital Corp. ("Aegis" and, together with the
Representative, the "Underwriters"). The shares of Common Stock and the Warrants
offered hereby may be purchased separately and the Warrants will be transferable
separately after issuance. The Common Stock is being offered at $5.00 per share
and the Warrants at $.10 per Warrant.
Each Warrant entitles the registered holder thereof to purchase one share
of Common Stock at an exercise price of $6.00 per share, subject to adjustment
in certain events, at any time during the period commencing November , 1997
(or earlier upon notice of redemption as provided below), and ending November
, 2001 (the "Exercise Period"). The Warrants are subject to redemption by the
Company at $.10 per Warrant at any time during the Exercise Period (or earlier
with the prior written consent of the Representative), on not less than 30 days
prior written notice to the holders of the Warrants, provided the average of the
closing bid quotations of the Common Stock, during the period of 20 consecutive
trading days ending on the third day prior to the date on which the Company
gives notice of redemption, is at least 150% of the then current exercise price
of the Warrants (initially, $9.00 per share). The Warrants will be exercisable
until the close of business on the day immediately preceding the date fixed for
redemption. See "Description of Securities -- Warrants." The Common Stock and
the Warrants have been approved for listing on The NASDAQ SmallCap Market under
the trading symbols "RDOC" and "RDOCW," respectively. The Company's eligibility
for listing the Common Stock and the Warrants on The Pacific Stock Exchange has
been confirmed.
Prior to the Offering, there has been no public market for the Common Stock
or the Warrants, and there can be no assurance that any such market for the
Common Stock or the Warrants will develop after the closing of the Offering or
that, if developed, it will be sustained. The offering prices of the Common
Stock and the Warrants and the initial exercise price and other terms of the
Warrants were established by negotiation between the Company and the
Underwriters and do not necessarily bear any direct relationship to the
Company's assets, earnings, book value per share or other generally accepted
criteria of value.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. ONLY INVESTORS WHO CAN BEAR THE RISK OF LOSS OF THEIR ENTIRE
INVESTMENT SHOULD INVEST. FOR A DESCRIPTION OF CERTAIN RISKS REGARDING
AN INVESTMENT IN THE COMPANY AND IMMEDIATE SUBSTANTIAL DILUTION,
SEE "RISK FACTORS" COMMENCING ON PAGE 10 AND "DILUTION" ON PAGE
24.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
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Per Share............................. $5.00 $.475 $4.525
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Per Warrant........................... $.10 $.0095 $.0905
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Total(3).............................. $7,650,000 $726,750 $6,923,250
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</TABLE>
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(footnotes appear on page 3)
RICKEL & ASSOCIATES, INC. AEGIS CAPITAL CORP.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE> 5
[TO BE LOCATED ON INSIDE OF FRONT COVER]
[LOGO]
[PHOTO]
Integrated Surgical System's first product, the ROBODOC(@) Surgical Assistant
System (the "ROBODOC System"), has been used safely on over 425 patients
worldwide for total hip replacement. (Actual operating room photo.) The robot
included in the ROBODOC System is manufactured to the Company's specifications
by an independent supplier and incorporated into the ROBODOC System. See
"Business -- Manufacturing."
------------------------
ROBODOC(@) and ORTHODOC(@) are registered trademarks of Integrated Surgical
Systems, Inc. All other trademarks appearing in this Prospectus are the property
of their respective holders.
<PAGE> 6
(1) Does not include additional compensation to the Underwriters consisting
of (i) a non-accountable expense allowance payable to the Underwriters
equal to 2.75% of the gross proceeds of the Offering, of which $50,000
has been paid by the Company to date, (ii) warrants (the "Underwriters'
Warrants") entitling the Underwriters to purchase up to 150,000 shares
of Common Stock and 150,000 Warrants, and (iii) a financial consulting
agreement with the Representative for 12 months from the closing of the
Offering at an annual fee of $24,000, all of which is payable at the
closing of the Offering. The Company has agreed to pay the
Representative, under certain circumstances, a warrant solicitation fee
of 5% of the exercise price for each Warrant exercised. The Company has
also agreed to indemnify the Underwriters against certain civil
liabilities, including those arising under the Securities Act. See
"Underwriting."
(2) After deducting discounts and commissions payable to the Underwriters,
but before payment of the Underwriters' non-accountable expense
allowance ($210,375, or $241,931 if the Underwriters' Over-Allotment
Option is exercised in full), the consulting fee ($24,000) and the
other expenses of the Offering (estimated at $539,625) payable by the
Company. See "Underwriting."
(3) The Company has granted the Underwriters an option, exercisable for a
period of 45 days after the closing of the Offering, to purchase up to
an additional 15% of the Common Stock and/or Warrants, upon the same
terms and conditions solely for the purpose of covering
over-allotments, if any (the "Underwriters' Over-Allotment Option"). If
the Underwriters' Over-Allotment Option is exercised in full, the Total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $8,797,500, $835,763 and $7,961,737, respectively. See
"Underwriting."
The Common Stock and Warrants are being offered by the Underwriters on a
firm commitment basis, subject to prior sale, when, as and if delivered to the
Underwriters and subject to certain conditions. Subject to the provisions of the
underwriting agreement between the Underwriters and the Company, the
Underwriters reserve the right to withdraw, cancel or modify the Offering and to
reject any order in whole or in part. It is expected that delivery of
certificates will be made against payment therefor at the office of the
Representative, 875 Third Avenue, New York, New York 10022, on or about November
, 1996.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND THE WARRANTS OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
3
<PAGE> 7
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAD BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN
JURISDICTIONS IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
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PAGE
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<CAPTION>
PAGE
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Prospectus Summary.................... 5
Risk Factors.......................... 10
Use of Proceeds....................... 22
Capitalization........................ 23
Dilution.............................. 24
Dividend Policy....................... 24
Selected Financial Information........ 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 26
Glossary.............................. 30
Business.............................. 31
Management............................ 45
Certain Transactions.................. 52
Security Ownership of Certain
Beneficial Owners and Management.... 54
Description of Securities............. 56
Underwriting.......................... 61
Legal Matters......................... 62
Experts............................... 62
Additional Information................ 63
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TO INVEST IN THESE SECURITIES A CALIFORNIA RESIDENT MUST HAVE, AS A MINIMUM,
EITHER (I) A NET WORTH OF $250,000, EXCLUSIVE OF HOME, HOME FURNISHINGS AND
AUTOMOBILES, AND $65,000 OF GROSS INCOME DURING THE LAST TAX YEAR AND ESTIMATED
GROSS INCOME OF $65,000 FOR THE CURRENT TAX YEAR OR (II) A NET WORTH OF
$500,000, EXCLUSIVE OF HOME, HOME FURNISHINGS AND AUTOMOBILES.
------------------------
On the Effective Date, the Company will become subject to the reporting
requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), and,
in accordance therewith, will file reports, proxy and information statements and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy and information statements and other
information can be inspected and copied at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the following regional offices: New York Regional Office,
Suite 1300, 7 World Trade Center, New York, New York 10048, and Chicago Regional
Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and
copies of such material may also be obtained from the Public Reference Section
of the Commission at prescribed rates. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically. The Company
intends to furnish its stockholders with annual reports containing audited
financial statements and such other reports as the Company deems appropriate or
as may be required by law.
4
<PAGE> 8
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, financial statements and the notes thereto appearing elsewhere in
this Prospectus. Unless otherwise indicated or the context otherwise requires,
all share and per share data and information in this Prospectus relating to the
number of shares of Common Stock outstanding give effect to a one-for-five
reverse stock split with respect to the Company's capital stock effected on
December 20, 1995, and a one-for-1.479586 reverse stock split with respect to
the Common Stock effected on November 6, 1996, and assumes that the
Underwriters' Over-Allotment Option is not exercised. See the "Glossary"
appearing at page 30 of this Prospectus for the definitions of certain technical
terms used herein.
THE COMPANY
Integrated Surgical Systems, Inc. (the "Company") develops, manufactures,
markets and services image-directed, computer-controlled robotic products for
surgical applications. The Company's principal product is the ROBODOC(R)
Surgical Assistant System (the "ROBODOC System"), consisting of a
computer-controlled surgical robot and the Company's ORTHODOC(R) Presurgical
Planner (the "ORTHODOC"). The ROBODOC System has been used for primary total hip
replacement ("THR") surgery on over 495 patients worldwide. The Company believes
its "active" robotic system is the only available system that can accurately
perform key segments of surgical procedures with precise tolerances generally
not attainable by traditional manual surgical techniques. The ROBODOC System
also allows the surgeon to prepare a preoperative plan specifically designed for
the characteristics of the individual patient's anatomy. The technology for the
ROBODOC System was initially developed at the University of California, Davis,
in collaboration with International Business Machines Corporation ("IBM"). Upon
completion of the Offering, IBM will retain rights to acquire approximately 27%
of the Common Stock on a fully diluted basis.
The ORTHODOC is a computer workstation that utilizes the Company's
proprietary software for preoperative surgical planning. The ORTHODOC is
included as part of the ROBODOC System and may be marketed separately by the
Company. The ORTHODOC converts computerized tomography ("CT") scan data of a
patient's femur (i.e., thigh bone) into three-dimensional images, and through a
graphical user interface allows the surgeon to examine the bone more thoroughly
and to select the optimal implant for the patient using a built-in library of
available implants. A tape of the planned surgical procedure, developed by the
ORTHODOC, guides the surgical robot arm of the ROBODOC System to accurately mill
a cavity in the bone, thus allowing the surgeon to properly orient and align the
implant. Non-clinical scientific data published by scientists from the Company
and IBM demonstrate that as a result of the precise milling of a cavity, the
ROBODOC System achieves over 95% bone-to-implant contact, as compared to an
average of 20% bone-to-implant contact when surgery is performed manually.
THR surgery involves the insertion of an implant or metal prosthesis into a
cavity created in the patient's femur. Precise fit and correct alignment of the
implant within the femoral cavity are generally considered key factors in the
long-term success of THR surgery. In conventional THR surgery, a bone cavity is
cut in the shape of the implant manually with metal tools, and the surgical
plan, including the selection of the size and shape of the implant, is generally
formulated based upon patient data obtained from two-dimensional x-ray images of
the patient's femur. Based upon clinical experience with the ROBODOC System to
date in Germany, patients have become weight-bearing in a shorter period than
generally experienced by patients who have had this surgery performed manually.
In addition, worldwide clinical data indicates that intraoperative fractures
have been dramatically reduced in THR surgeries performed with the ROBODOC
System (no intraoperative fractures have resulted from THR surgeries performed
with the ROBODOC system to date). The Company also believes fewer hip revision
surgeries (implant replacements) may be necessary for patients who have had
primary THR surgery performed with the ROBODOC System, as compared to patients
who have had this surgery performed manually.
The Company will seek to establish itself as a leading provider of
innovative image-directed, computer-controlled robotic technologies worldwide,
initially for orthopaedic applications and subsequently for non-orthopaedic
surgical applications. The Company's business strategy is to concentrate its
marketing and sales
5
<PAGE> 9
efforts on selling the ROBODOC System throughout Europe and then Japan over the
next three years. The Company will thereby attempt to establish an installed
customer base in Europe, Japan and other foreign markets through the sale of its
ROBODOC System, and offer its customers separate software packages for each new
orthopaedic application if, as and when developed by the Company. Consequently,
the Company's customers would be able to use the ROBODOC System as the platform
for performing a variety of orthopaedic surgical procedures without incurring
significant additional hardware costs. The Company also plans to further exploit
its image-directed robotics technology by incorporating additional imaging
modalities for presurgical planning, including ultrasound (which is less
expensive than CT) and magnetic resonance imaging (which unlike CT does not
involve the risk of radiation). The Company also intends to develop an active
robotic system capable of performing non-orthopaedic surgical procedures.
The Company has commenced marketing the ROBODOC System in Western Europe,
through direct marketing and arrangements with implant manufacturers. The
ROBODOC System satisfies the appropriate international electromedical safety
standards and complies with the requirements of the Electromagnetic
Compatability Directive, thus allowing the Company to apply the European
Conformity Mark (the "CE Mark") under the European Directives and to distribute
the ROBODOC System throughout the European Union. During the nine months ended
September 30, 1996, the Company realized revenues of approximately $1,748,000
from the initial commercial sales of the ROBODOC System (including related
consumables) in Europe, and at September 30, 1996, the Company had a signed
purchase order for a ROBODOC System for approximately $635,000.
The Company is developing a software package, in collaboration with IBM and
Johns Hopkins University, for surgery to replace loose or otherwise failed hip
implants (the "hip revision application") using the ROBODOC System. The Company
plans to commence clinical trials of the hip revision application in Europe
before the end of 1996. Upon completion of the clinical trials, the Company
intends to offer software for the hip revision application to its customers. The
development of the hip revision application is being funded in part by a grant
from the National Institute for Standards and Technology (Advanced Technology
Program) of the United States Department of Commerce.
Neither the ROBODOC System nor the ORTHODOC can be marketed in the United
States until clearance or approval is obtained from the U.S. Food and Drug
Administration ("FDA"). The Company intends to file a pre-market approval
application ("PMA") with the FDA in mid to late 1997 for approval to market the
ROBODOC System in the United States. The Company does not expect to commence
marketing the ROBODOC System in the United States before 1999, subject to prior
FDA approval. The Company filed a 510(k) pre-market notification for the
ORTHODOC as a stand-alone device in February 1996 and, subject to prior FDA
clearance, expects to commence marketing the ORTHODOC in the United States in
early 1997. See "Risk Factors -- Available Clinical Data; Risk Versus Benefit
Issues" and "Risk Factors -- Government Regulation."
The Company was incorporated under the laws of the State of Delaware on
October 1, 1990. The Company's offices are located at 829 West Stadium Lane,
Sacramento, California 95834, and its telephone number is (916) 646-3487.
6
<PAGE> 10
THE OFFERING
<TABLE>
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Securities Offered.......................... 1,500,000 shares of Common Stock and
1,500,000 Warrants. Each Warrant entitles
the holder thereof to purchase one share of
Common Stock at an exercise price of $6.00
per share, subject to adjustment in certain
events. The Common Stock and the Warrants
are separately tradeable and transferable.
See "Description of Securities" and
"Underwriting."
Offering Price.............................. $5.00 per share of Common Stock and $.10 per
Warrant
Common Stock Outstanding:
Prior to the Offering(1).................. 1,826,641 shares of Common Stock
After the Offering(1)(2).................. 3,326,641 shares of Common Stock
Warrants Outstanding after
the Offering(3)........................... 1,500,000 Warrants
Terms of Warrants:
Exercise price............................ $6.00 per share, subject to adjustment in
certain events. See "Description of
Securities -- Warrants."
Exercise period........................... Any time during the period commencing
November , 1997 (or earlier upon notice of
redemption as provided below) and ending
November , 2001 (the "Exercise Period").
Redemption................................ Redeemable by the Company at a price of $.10
per Warrant upon not less than 30 days prior
written notice to the holders of the
Warrants at any time during the Exercise
Period (or earlier with the prior written
consent of the Representative), provided
that the average of the closing bid
quotations of the Common Stock on The Nasdaq
SmallCap Market (or if not quoted thereon,
the average of the closing sale prices of
the Common Stock on the principal securities
exchange, including the Nasdaq National
Market, on which the Common Stock is then
traded), during the period of 20 consecutive
trading days ending on the third day prior
to the date on which the Company gives
notice of redemption, has been at least 150%
of the then current exercise price of the
Warrants (initially, $9.00 per share). See
"Description of Securities -- Warrants."
Use of Proceeds............................. The net proceeds of this Offering,
aggregating approximately $6,173,250, will
be used (i) for product development, (ii)
for sales and marketing, and (iii) for
working capital and general corporate
purposes. See "Use of Proceeds."
</TABLE>
7
<PAGE> 11
<TABLE>
<S> <C>
Risk Factors................................ The securities offered hereby involve a high
degree of risk and immediate substantial
dilution to new investors. Only investors
who can bear the loss of their entire
investment should invest. See "Risk Factors"
and "Dilution."
Nasdaq SmallCap
Market Symbols............................ Common Stock -- RDOC; Warrants -- RDOCW
Pacific Stock Exchange Listing.............. The Company's eligibility for listing the
Common Stock and Warrants on the Pacific
Stock Exchange has been confirmed. There can
be no assurance that trading, if commenced,
will continue.
</TABLE>
- ---------------
(1) Gives effect to the automatic conversion of the outstanding shares of Series
D Preferred Stock into 1,039,792 shares upon consummation of the sale of the
shares of Common Stock and Warrants offered hereby (the "Closing"). Does not
include (i) 2,274,066 shares of Common Stock issuable upon exercise of
outstanding warrants, including (A) shares issuable upon exercise of
outstanding warrants to purchase Series D Preferred Stock (the "Series D
Warrants"), at an exercise price of $0.01 per share, which will become
exercisable for 2,079,584 shares of Common Stock following the automatic
conversion of the Series D Preferred Stock at the Closing, and (B) 194,482
shares issuable upon exercise of outstanding warrants, at exercise prices
ranging from $0.01 to $0.07 per share, and (ii) 949,070 shares of Common
Stock issuable upon exercise of outstanding options granted pursuant to the
Company's stock option plans, at exercise prices ranging from $0.07 to $7.84
per share. See "Management -- Stock Option Plan," "Certain Transactions" and
"Description of Securities -- Warrants."
(2) Does not include (i) 1,500,000 shares reserved for issuance upon exercise of
the Warrants, (ii) 450,000 shares of Common Stock reserved for issuance upon
exercise of the Underwriters' Over-Allotment Option and the Warrants
included therein, and (iii) 300,000 shares reserved for issuance upon
exercise of the Underwriters' Warrants and the Warrants included therein.
See "Description of Securities -- Warrants" and "Underwriting."
(3) Does not include (i) 225,000 Warrants reserved for issuance upon exercise of
the Underwriters' Over-Allotment Option, (ii) 150,000 Warrants reserved for
issuance upon exercise of the Underwriters' Warrants, and (iii) outstanding
warrants to purchase 2,274,066 shares of Common Stock, including the Series
D Warrants which will become exercisable for Common Stock following the
automatic conversion of the Series D Preferred Stock into Common Stock at
the Closing. See "Underwriting."
8
<PAGE> 12
SUMMARY OF CONSOLIDATED FINANCIAL INFORMATION
The summary financial information set forth below is derived from and
should be read in conjunction with the Company's consolidated financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
SEPTEMBER 30,
------------------------ ------------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales................................... $289,047 $174,521 $112,613 $1,748,065
Gross profit................................ 85,191 104,342 70,329 1,083,086
Operating loss.............................. (4,608,396) (3,925,730) (2,890,998) (2,168,228)
Net loss.................................... (4,840,385) (4,053,528) (2,960,445) (2,122,377)
Net loss applicable to common
stockholders.............................. (5,796,959) (4,989,853) (3,680,445) (2,122,377)
Net loss per common and common share
equivalent................................ ($1.39) ($1.19) ($0.88) ($0.48)
Shares used in per share calculations(1).... 4,172,052 4,178,877 4,172,897 4,377,679
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------
PRO FORMA
AS
ACTUAL ADJUSTED(2)
------------ ------------
<S> <C> <C>
Working capital............................ $1,125,998 $7,299,248
Total assets............................... 2,618,521 8,791,771
Accumulated deficit........................ (17,774,359) (17,774,359)
Stockholders' equity....................... 1,447,521 7,620,771
</TABLE>
- ---------------
(1) See Note 2 of notes to consolidated financial statements for an explanation
of the determination of the number of shares used in computing net loss per
share.
(2) Gives effect to (i) the automatic conversion of the outstanding shares of
Series D Preferred Stock into 1,039,792 shares at the Closing, and (ii) the
issuance and sale of 1,500,000 shares of Common Stock and 1,500,000 Warrants
offered hereby and the application of the estimated net proceeds from the
sale thereof. See "Use of Proceeds." Does not include (i) 2,274,066 shares
of Common Stock issuable upon exercise of outstanding warrants, including
(A) shares issuable upon exercise of the Series D Warrants, at an exercise
price of $0.01 per share, which will become exercisable for 2,079,584 shares
of Common Stock following the automatic conversion of the Series D Preferred
Stock at the Closing, and (B) 194,482 shares issuable upon exercise of
outstanding warrants, at exercise prices ranging from $0.01 to $0.07 per
share, (ii) 949,070 shares of Common Stock issuable upon exercise of
outstanding options granted pursuant to the Company's stock option plans, at
exercise prices ranging from $0.07 to $7.84 per share, (iii) the
Underwriters' Over-Allotment Option, (iv) the Warrants and the Warrants
included therein and (v) the Underwriters' Warrants and the Warrants
included therein.
9
<PAGE> 13
RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk, including, but not limited to, the risk factors described below. Each
prospective investor should carefully consider the following risk factors before
making an investment decision.
1. HISTORY OF LOSSES; ACCUMULATED DEFICIT; ANTICIPATED FUTURE
LOSSES. Since its inception, the Company has incurred losses. The Company
incurred a net loss of approximately $4,054,000 (on net sales of approximately
$175,000) for its fiscal year ended December 31, 1995 and a net loss of
approximately $4,840,000 (on net sales of approximately $289,000) for its fiscal
year ended December 31, 1994. In addition, the Company incurred a net loss of
approximately $2,122,000 (on net sales of approximately $1,748,000) for the nine
months ended September 30, 1996, as compared to a net loss of approximately
$2,960,000 (on net sales of approximately $113,000), for the nine months ended
September 30, 1995. At September 30, 1996, the Company's accumulated deficit was
approximately $17,774,000 as a result of continuing losses. The Company expects
to continue to incur operating losses until such time, if ever, as it derives
significant revenues from the sale of its products. The Company's ability to
operate profitably depends upon market acceptance of the ROBODOC System, the
development of an effective sales and marketing organization, and the
development of new products and improvements to existing products. There can be
no assurance that the Company will obtain FDA approval to market the ROBODOC
System in the United States or that the ROBODOC System will achieve market
acceptance in the United States, Europe and other foreign markets to generate
sufficient revenues to become profitable.
2. INDEPENDENT AUDITORS' "GOING CONCERN" EXPLANATORY PARAGRAPH. The
Company's independent auditors have included an explanatory paragraph in their
report on the Company's financial statements for the year ended December 31,
1995, which indicates there is substantial doubt about the Company's ability to
continue as a going concern due to the Company's need to generate cash from
operations and obtain additional financing. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Report of
Independent Auditors" on the Company's consolidated financial statements
appearing at page F-2 of this Prospectus.
3. LIMITED OPERATING HISTORY. Although the Company commenced operations
in October 1990, its operations have consisted primarily of the development and
clinical testing of the ORTHODOC and the ROBODOC System, the organization of its
manufacturing facility, the hiring of key personnel and the formulation of a
plan for marketing the ROBODOC System in Europe. Although the Company has
commenced marketing the ROBODOC System in Europe, it has engaged only in
clinical testing of the ROBODOC System in the United States, and the Company's
ability to market its products in the United States is dependent upon FDA
approval. See "Risk Factors -- Government Regulation." Accordingly, the Company
must be evaluated in light of the uncertainties, delays, difficulties and
expenses commonly experienced by companies in the early operating stage, which
generally include unanticipated problems and additional costs relating to the
development and testing of products, regulatory compliance, commencement of
production, product introduction and marketing, and competition. Many of these
factors may be beyond the Company's control, including but not limited to
unanticipated results of product tests requiring modification in product design,
changes in applicable government regulations or the interpretation thereof,
market acceptance of the Company's products and development of competing
products by others. In addition, the Company's future performance also will be
subject to other factors beyond the Company's control, including general
economic conditions and conditions in the healthcare industry or targeted
commercial markets.
4. LENGTHY SALES CYCLE. Since the purchase of a ROBODOC System represents
a significant capital expenditure for a customer, the placement of orders may be
delayed due to customers' internal procedures to approve large capital
expenditures. The Company anticipates that the period between initial contact of
a customer for the ROBODOC System and submission of a purchase order by that
customer could be as long as 9 to 12 months. Furthermore, the current lead time
required by the supplier of the robot is four months after receipt of the order.
Although the Company generally intends to require a deposit upon receipt of an
order for the ROBODOC System, the Company may be required to expend significant
cash resources to fund its operations until the balance of the purchase price is
paid. Accordingly, a significant portion of the sales price
10
<PAGE> 14
of a ROBODOC System may not be recognized until a fiscal quarter subsequent to
the fiscal quarter in which the Company incurred marketing and sales expenses
associated with that order. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's consolidated
financial statements appearing elsewhere herein.
5. CHALLENGES OF GROWTH. The Company intends to use a portion of the net
proceeds of this Offering to hire and retain sales and marketing, research and
development and technical personnel to increase and support sales of ROBODOC
Systems and to develop additional surgical applications for the ROBODOC System.
See "Use of Proceeds." The anticipated growth of the Company will likely result
in new and increased responsibilities for management personnel and place
significant strain upon the Company's management, operating and financial
systems and resources. To accommodate such growth and compete effectively, the
Company must continue to implement and improve its operational, financial,
management and information systems, procedures and controls, and to expand,
train, motivate and manage its personnel. There can be no assurance that the
Company's personnel, systems, procedures and controls will be adequate to
support the Company's future operations. Any failure to implement and improve
the Company's operational, financial, management and information systems,
procedures or controls, or to expand, train, motivate or manage employees, could
materially and adversely affect the Company's business, financial condition and
results of operations. See "Risk Factors -- Dependence on Key Personnel,"
"Business -- Employees" and "Management -- Directors, Executive Officers and Key
Employees."
6. AVAILABLE CLINICAL DATA; RISK VERSUS BENEFIT ISSUES. The Company has
conducted a randomized clinical trial in the United States at three centers. Of
the 117 patents enrolled in the U.S. clinical study, 70 hips received treatment
with the ROBODOC System and 61 hips in a control group received conventional THR
surgery. In addition, at least 425 patients have received treatment with the
ROBODOC System in Germany, but without comparison to randomized control group
patients.
In communications with the Company, the FDA has indicated a strong
"preference" for two year post-operative data from patients participating in the
U.S. clinical trial, although in a recent meeting the FDA indicated that it may
accept a PMA application for filing with only two year post-operative data on
some patients and permit the Company to submit the additional post-operative
data while the PMA application is under review. However, there can be no
assurance that the FDA will not require complete two year post-operative data on
all patients participating in the U.S. clinical trial before accepting a PMA
application for filing. The last patient receiving surgery in the U.S. clinical
trial will reach the two year post-operative mark in February 1998.
No assurance can be given that the FDA will agree that the data indicates
that the ROBODOC System achieves better implant fit and alignment and reduces
intraoperative fractures compared to conventional THR surgery, nor can assurance
be given that the FDA will agree that the greater surgery time and blood loss
associated with the ROBODOC System does not pose a significant safety concern or
create an unfavorable risk/benefit ratio. Further, no assurance can be given
that the FDA would not require the Company to obtain additional clinical data to
resolve any concern about the risk/benefit ratio offered by the ROBODOC System.
If the Company were required to obtain such additional data, the FDA review
process could be prolonged by as long as several years.
In February 1995, a law firm specializing in FDA regulatory matters
examined an interim report of preliminary data and concluded that it was
doubtful that the FDA would find that the device was safe and effective for its
intended use, or provided a therapeutic benefit, sufficient to permit PMA
approval, if the FDA were presented with the then existing preliminary data or
future data qualitatively similar to the preliminary data. The Company believes
that the currently available data, which have not been reviewed by an
independent third party, address many of the concerns identified in the law
firm's report. However, there can be no assurance that the FDA would agree that
the Company's current clinical data show that the ROBODOC System is safe and
effective for its intended use, provides a therapeutic benefit, or has an
acceptable risk/benefit ratio in light of increased surgery time and
intraoperative blood loss. In addition, the Company's Director of Regulatory
Affairs and Quality Assurance resigned in September 1996 and subsequently has
asserted that one of the reasons for his resignation was his concern about the
adequacy of the Company's clinical data. See "Business -- Available Clinical
Data; Risk Versus Benefit Issues."
11
<PAGE> 15
7. GOVERNMENT REGULATION.
Summary. The Company's products are subject to continued and pervasive
regulation by the FDA and foreign and state regulatory authorities. In the
United States, the Company must comply with food and drug laws and with
regulations promulgated by the FDA. These laws and regulations require the
Company's products to obtain various authorizations prior to being marketed in
the United States, and there is no assurance the Company's products will receive
these authorizations. The Company's facilities and manufacturing practices will
also be subject to FDA regulations. In each foreign market, the Company's
products may be subject to substantially different regulations. Failure to
comply with U.S. or applicable foreign regulations could have a material adverse
effect on the Company. See "Business -- Government Regulation."
U.S. Regulation. Pursuant to the Federal Food, Drug, and Cosmetic Act, as
amended, and regulations thereunder (collectively, the "FDC Act"), the FDA
regulates the clinical testing, manufacture, labeling, sale, distribution and
promotion of medical devices in the United States. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant pre-market clearance or pre-
market approval for devices, withdrawal of marketing clearances or approvals,
and criminal prosecution. The FDA also has the authority to request recall,
repair, replacement or refund of the cost of any device manufactured or
distributed by the Company. Failure to comply with regulatory requirements,
including any future changes to such requirements, could have a material adverse
effect on the Company's business, financial condition and results of operation.
See "Business -- Government Regulation."
Lengthy "Pre-Market" Approval Process for ROBODOC System. Before a new
device can be introduced into the U.S. market, the manufacturer must obtain FDA
permission to market through either the 510(k) pre-market notification process
or the costlier, lengthier and less certain pre-market approval ("PMA")
application process. The Company intends to file a PMA in mid to late 1997 for
approval to market the ROBODOC System in the United States. The Company intends
to make an informal pre-PMA submission of the clinical data to the FDA.
Depending upon the FDA's review of this submission, the target date for
submitting a PMA application could be extended. There can be no assurance that
the PMA application, once submitted, will be accepted for filing, found
approvable, or, if found approvable, will not take longer than expected to
obtain approval, or will not include unfavorable post-approval restrictions (for
example, limitations on the indicated patient population). See "Risk
Factors -- Available Clinical Data; Risk Versus Benefit Issues."
New surgical applications for the ROBODOC System generally will require FDA
approval of a PMA supplement or, possibly, a new PMA. The Company is also likely
to require additional FDA approvals, supported by additional clinical data,
before incorporating new imaging modalities such as ultrasound and MRI or other
new technologies in the ROBODOC System. See "Business -- Government Regulation."
510(k) Notification for ORTHODOC. In February 1996, the Company filed a
510(k) notification for the ORTHODOC as a stand-alone device. In October 1996,
the Company submitted a response to correspondence from the FDA in which the FDA
stated that it could not determine the ORTHODOC's substantial equivalence to
legally marketed predicate devices without certain additional information,
primarily related to the documentation and testing of the software. There can be
no assurance that the FDA will consider the Company's response adequate or that
the ORTHODOC will receive 510(k) clearance in a timely fashion, or at all. See
"Business -- Government Regulation."
No Assurance of Approvals; Subsequent Review of Approvals, Etc. There can
be no assurance that any of the Company's current or future products will obtain
required FDA approvals on a timely basis, or at all, or that the Company will
have the necessary resources to obtain such approvals. If any of the Company's
products are not approved for use in the United States, the Company will be
limited to marketing them in foreign countries. Furthermore, approvals that have
been or may be granted are subject to continual review, and later discovery if
previously unknown problems result in product labeling restrictions or
withdrawal of the product from the market. See "Business -- Government
Regulation."
12
<PAGE> 16
Requirement to Follow Good Manufacturing Practices. Assuming the Company
obtains the necessary FDA approvals and clearances for its products, in order to
maintain such approvals and clearances the Company will be required, among other
things, to register its establishment and list its devices with the FDA and with
certain state agencies, maintain extensive records, report any adverse
experiences on the use of its products and submit to periodic inspections by the
FDA and certain state agencies. The FDC Act also requires devices to be
manufactured in accordance with good manufacturing practices ("GMP")
regulations, which impose certain procedural and documentation requirements upon
the Company with respect to manufacturing and quality assurance activities.
Recently adopted GMP requirements, including those pertaining to design control,
are likely to increase the cost of GMP compliance. See "Business -- Government
Regulation."
Foreign Regulation. The introduction of the Company's products in foreign
markets will also subject the Company to foreign regulatory clearances, which
may be unpredictable and uncertain, and which may impose substantial additional
costs and burdens. The ROBODOC System satisfies the appropriate international
electromedical safety standards and complies with the requirements of the
Electromagnetic Compatability Directive, thus allowing the Company to apply the
CE Mark under the European Directives and to distribute the ROBODOC System
throughout the European Union; provided, however, that in order to continue to
distribute the ROBODOC System after June 14, 1998, the ROBODOC System must
attain a CE Mark under the essential requirements of the Medical Device
Directive. Compliance with the Medical Device Directive requires a conformity
assessment by a notified body (i.e., authorized independent testing body) based
upon inspection of the ROBODOC System. The Company has commenced the
certification process for compliance with the Medical Device Directive and
believes that the ROBODOC System will be granted a CE Mark under the Medical
Device Directive prior to June 14, 1998; however, there can be no assurance that
such CE Mark will be granted by such date, or at all. Failure to obtain a CE
Mark for the ROBODOC System under the Medical Device Directive prior to June 14,
1998 would have a material adverse effect on the Company's business, results of
operations and financial condition. Outside the European Union, international
sales of medical devices are subject to the regulatory requirements of each
country. The regulatory review process varies from country to country. Many
countries also impose product standards, packaging requirements, labeling
requirements and import restrictions on devices. No assurance can be given that
any additional necessary approvals or clearances for the Company's products will
be granted on a timely basis, or at all. See "Business -- Government
Regulation."
Adverse Effect of Delays or Loss of Approvals. Delays in the receipt of,
or failure to receive, FDA approvals or clearances, or the loss of any
previously received approvals or clearances, or limitations on intended use
imposed as a condition of such approvals or clearances, would have a material
adverse effect on the business, financial condition and results of operations of
the Company. See "Business -- Government Regulation."
8. DEPENDENCE ON PRINCIPAL PRODUCT. The Company expects to derive most of
its revenues from sales of the ROBODOC System. Accordingly, the Company's
potential future success and financial performance will depend almost entirely
on its ability to successfully market its ROBODOC System. If the Company is
unable to obtain the requisite regulatory approvals or to achieve commercial
acceptance of its ROBODOC System, the Company's business, financial condition
and results of operations will be materially and adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
9. UNCERTAINTY OF MARKET ACCEPTANCE. The Company's ability to
successfully commercialize its ROBODOC System will require substantial marketing
efforts and the expenditure of significant funds to inform potential customers,
including hospitals and physicians, of its distinctive characteristics and the
advantages of using the ROBODOC System instead of traditional orthopaedic
surgical tools and procedures. Since the ROBODOC System employs innovative
technology, rather than being an improvement of existing technology, and
represents a substantial capital expenditure, the Company expects to encounter
resistance to change, which it must overcome to successfully market its
products. Failure of the ROBODOC System to achieve significant market acceptance
would materially and adversely affect the Company's business, financial
condition and results of operations.
10. COMPETITION. The principal competition for the ROBOCOC System is
manual surgery performed by orthopaedic surgeons, using surgical power tools and
manual devices. The providers of these instruments
13
<PAGE> 17
are the major orthopaedic companies, which include Howmedica, Inc. (a subsidiary
of Pfizer, Inc.), located in New York; Zimmer, Inc. (a subsidiary of
Bristol-Myers Squibb Company), located in Indiana; Johnson & Johnson
Orthopaedics, Inc. (a subsidiary of Johnson & Johnson), located in New Jersey;
DePuy, Inc. (a subsidiary of Corange Limited), located in Indiana; Biomet, Inc.,
located in Indiana; and Osteonics, Inc. (a subsidiary of the Stryker
Corporation), located in New Jersey. There are companies in the medical products
industry, particularly the major orthopaedic companies, capable of developing
and marketing computer-controlled robotic systems for surgical applications,
many of whom have significantly greater financial, technical, manufacturing,
marketing and distribution resources than the Company, and have established
reputations in the medical device industry. Furthermore, there can be no
assurance that IBM or the University of California, which developed the
technology for the Company's active surgical robot and hold patents relating
thereto, will not enter the market or license the technology to other companies.
There can be no assurance that future competition will not have a material
adverse effect on the Company's business. The cost of the ROBODOC System
represents a significant capital expenditure for a customer and accordingly may
discourage purchases by certain customers. See "Business -- Competition."
11. UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY
TECHNOLOGY.
Summary. Certain technology underlying the Company's products is the
subject of one United States patent issued to IBM, which IBM has agreed not to
enforce against the manufacture and sale of the Company's products, and two
patent applications by the Company, the outcome of which applications is
uncertain. Third party claims to the technology used in the Company's products
could, if valid, require the Company to obtain licenses to the technology; those
licenses may not be available on acceptable terms. The technology used in the
Company's products could be (a) disclosed by Company employees despite their
confidentiality obligations to the Company or (b) independently developed or
otherwise acquired by potential competitors. See "Business -- Patents and
Proprietary Rights."
General. The Company's ability to compete successfully may depend, in
part, on its ability to obtain and protect patents, protect trade secrets and
operate without infringing the proprietary rights of others. The Company's
policy is to seek to protect its proprietary position by, among other methods,
filing U.S. and foreign patent applications relating to its technology,
inventions and improvements that are important to the development of its
business. The Company has filed four patent applications, and is preparing for
filing additional patent applications covering various aspects of its
technology. In addition, IBM has agreed not to assert infringement claims
against the Company with respect to an IBM patent relating to robotic medical
technology, to the extent such technology is used in the Company's products.
Significant portions of the ROBODOC System and ORTHODOC software are protected
by copyrights. IBM has granted the Company a royalty-free license for the
underlying software code for the ROBODOC System. See "Business -- Patents and
Proprietary Rights."
There can be no assurance that the Company's pending or future patent
applications will mature into issued patents, or that the Company will continue
to develop its own patentable technologies. Further, there can be no assurance
that any patents that may be issued in the future will effectively protect the
Company's technology or provide a competitive advantage for the Company's
products or will not be challenged, invalidated, or circumvented in the future.
In addition, there can be no assurance that competitors, many of which have
substantially more resources than the Company and have made substantial
investments in competing technologies, will not obtain patents that will
prevent, limit or interfere with the Company's ability to make, use or sell its
products either in the United States or internationally. See
"Business -- Patents and Proprietary Rights."
Secrecy of Patent Applications Until Patents Issued. Patent applications
in the United States are maintained in secrecy until patents issue, and patent
applications in foreign countries are maintained in secrecy for a period after
filing. Publication of discoveries in the scientific or patent literature tends
to lag behind actual discoveries and the filing of related patent applications.
Patents issued and patent applications filed relating to medical devices are
numerous and there can be no assurance that current and potential competitors
and other third parties have not filed or in the future will not file
applications for, or have not
14
<PAGE> 18
received or in the future will not receive, patents or obtain additional
proprietary rights relating to products or processes used or proposed to be used
by the Company. See "Business -- Patents and Proprietary Rights."
Lack of Infringement Study. The Company's patent counsel has not
undertaken any infringement study to determine if the Company's products and
pending patent applications infringe on other existing patents. The medical
device industry has been characterized by substantial competition and litigation
regarding patent and other proprietary rights. The Company intends to vigorously
protect and defend its patents and other proprietary rights relating to its
proprietary technology. Litigation alleging infringement claims against the
Company (with or without merit), or instituted by the Company to enforce patents
and to protect trade secrets or know-how owned by the Company or to determine
the enforceability, scope and validity of the proprietary rights of others, is
costly and time consuming. If any relevant claims of third-party patents are
upheld as valid and enforceable in any litigation or administrative proceedings,
the Company could be prevented from practicing the subject matter claimed in
such patents, or could be required to obtain licenses from the patent owners of
each patent, or to redesign its products or processes to avoid infringement.
There can be no assurance that such licenses would be available or, if
available, would be available on terms acceptable to the Company or that the
Company would be successful in any attempt to redesign its products or processes
to avoid infringement. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
the Company from manufacturing and selling its products, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Patents and Proprietary Rights."
Possibility of Disclosure or Discovery of Proprietary
Information. Although the Company requires each of its employees, consultants,
and advisors to execute confidentiality and assignment of inventions and
proprietary information agreements in connection with their employment,
consulting or advisory relationships with the Company, there can be no assurance
that these agreements will provide effective protection for the Company's
proprietary information in the event of unauthorized use or disclosure of such
information. Furthermore, no assurance can be given that competitors will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's proprietary technology, or
that the Company can meaningfully protect its rights in unpatented proprietary
technology. See "Business -- Patents and Proprietary Rights."
12. PRODUCT LIABILITY. The manufacture and sale of medical products
exposes the Company to the risk of significant damages from product liability
claims. The Company maintains product liability insurance in amounts that it
believes are adequate to protect against foreseeable risks. In addition, in
connection with the sale of ROBODOC Systems, the Company enters into
indemnification agreements with its customers pursuant to which the customers
indemnify the Company against any claims against it arising from improper use of
the ROBODOC System. However, there can be no assurance that the coverage limits
of the Company's insurance policies will be adequate, that the Company will
continue to be able to procure and maintain such insurance coverage, that such
insurance can be maintained at acceptable costs, or that customers will be able
to satisfy indemnification claims. Although the Company has not experienced any
product liability claims to date, a successful claim brought against the Company
in excess of its insurance coverage could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Product Liability."
13. LIMITED MANUFACTURING EXPERIENCE. The Company's success will depend
in part on its ability to manufacture its products in a timely, cost-effective
manner and in compliance with GMP, and manufacturing requirements of other
countries, including the International Standards Organization ("ISO") 9000
standards and other regulatory requirements. The manufacture of the Company's
products is a complex operation involving a number of separate processes and
components. The Company's manufacturing activities to date have consisted
primarily of manufacturing limited quantities of systems for use in clinical
trials and a limited number of systems for commercial sale. The Company does not
have experience in manufacturing its products in the commercial quantities that
might be required. Furthermore, as a condition to receipt of PMA approval, the
Company's facilities, procedures and practices will be subject to pre-approval
and ongoing GMP inspections by FDA.
15
<PAGE> 19
Manufacturers often encounter difficulties in scaling up manufacturing of
new products, including problems involving product yields, quality control and
assurance, component and service availability, adequacy of control policies and
procedures, lack of qualified personnel, compliance with FDA regulations, and
the need for further FDA approval of new manufacturing processes and facilities.
There can be no assurance that manufacturing yields, costs or quality will not
be adversely affected as the Company seeks to increase production, and any such
adverse effect could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Manufacturing."
14. DEPENDENCE ON SUPPLIER FOR ROBOT. Although the Company has multiple
sources for most of the components, parts and assemblies used in the ROBODOC
System, the Company is dependent on Sankyo Seiki of Japan for the robot. The
robot can be obtained from other suppliers with appropriate modifications and
engineering effort. If the Company were no longer able to obtain the robot from
its supplier, there can be no assurance that the delays resulting from the
required modifications or engineering effort to adapt alternative components
would not have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Manufacturing."
15. RELIANCE ON FOREIGN SALES. From inception through September 30, 1996,
substantially all of the Company's sales (other than clinical sales in the
United States pursuant to an exemption in the rules and regulations of the FDA
for investigational devices) have been to customers in Germany. The Company
believes that until such time, if ever, as it receives approval from the FDA to
market the ROBODOC System in the United States, substantially all of its sales
will be derived from customers in foreign markets. Foreign sales are subject to
certain risks, including economic or political instability, shipping delays,
fluctuations in foreign currency exchange rates, changes in regulatory
requirements, custom duties and export quotas and other trade restrictions, any
of which could have a material adverse effect on the Company's business. To
date, payment for all ROBODOC Systems in Europe has been fixed in U.S. Dollars,
and the Company expects to continue this practice. However, there can be no
assurance that in the future the customers will be willing to make payment to
the Company for its products in fixed U.S. Dollars. If the U.S. Dollar
strengthens substantially against the foreign currency of a country in which the
Company sells its products, the cost of purchasing the Company's products in
U.S. Dollars would increase and may inhibit purchases of the Company's products
by customers in that country. The Company is unable to predict the nature of
future changes in foreign markets or the effect, if any, they might have on the
Company. See "Business -- Sales and Marketing."
16. UNCERTAINTY CONCERNING THIRD PARTY REIMBURSEMENT. The Company expects
that its ability to successfully commercialize its products will depend
significantly on the availability of reimbursement for surgical procedures using
the Company's products from third-party payors such as governmental programs,
private insurance and private health plans. Reimbursement is a significant
factor considered by hospitals in determining whether to acquire new equipment.
Notwithstanding FDA approval, if granted, third-party payors may deny
reimbursement if the payor determines that a therapeutic medical device is
unnecessary, inappropriate, not cost-effective or experimental or is used for a
nonapproved indication. Cost control measures adopted by third-party payors in
recent years have had and may continue to have a significant effect on surgeries
performed with the ROBODOC System or as to the levels of reimbursement. There
also can be no assurance that levels of reimbursement, if any, will not be
decreased in the future, or that future legislation, regulation, or
reimbursement policies of third-party payors will not otherwise adversely affect
the demand for the Company's products or its ability to sell its products on a
profitable basis. Fundamental reforms in the healthcare industry in the United
States and Europe that could affect the availability of third-party
reimbursement continue to be proposed, and the Company cannot predict the timing
or effect of any such proposal. If third-party payor coverage or reimbursement
is unavailable or inadequate, the Company's business, financial condition and
results of operations could be materially and adversely affected.
17. DEPENDENCE ON KEY PERSONNEL. The Company's business and marketing
plan was formulated by, and is to be implemented under the direction of, Dr.
Ramesh C. Trivedi, the Chief Executive Officer and President of the Company. Dr.
Trivedi is employed by the Company pursuant to an employment agreement
terminable by the Company or Dr. Trivedi at any time. The Company will obtain
key-man insurance on the life of Dr. Trivedi in the amount of $1,000,000 on or
before the date upon which the Registration Statement of
16
<PAGE> 20
which this Prospectus forms a part becomes or is declared effective by the
Securities and Exchange Commission (the "Effective Date"). The Company's growth
and future success also will depend in large part on the continued contributions
of its key technical and senior management personnel, as well as its ability to
attract, motivate and retain highly qualified personnel generally and, in
particular, trained and experienced professionals capable of developing, selling
and installing the ROBODOC System and training surgeons in its use. Competition
for such personnel is intense, and there can be no assurance that the Company
will be successful in hiring, motivating or retaining such qualified personnel.
None of the Company's executive or key technical personnel, other than Dr.
Trivedi, is employed by the Company pursuant to an employment agreement with the
Company. The loss of the services of Dr. Trivedi or other senior management or
key technical personnel, or the inability to hire or retain qualified personnel,
could have a material adverse effect on the Company's business, financial
condition and results of operations. "See Management."
18. CONTROL OF THE COMPANY; OWNERSHIP OF SHARES BY CURRENT MANAGEMENT AND
PRINCIPAL SECURITY-HOLDERS. Upon completion of this Offering, the current
executive officers, directors and other significant securityholders of the
Company will continue to own or have rights to acquire 4,217,661 shares of
Common Stock (or approximately 65% of the shares of Common Stock on a fully
diluted basis). Although these securityholders may or may not agree on any
particular matter that is the subject of a vote of the stockholders, these
securityholders may be effectively able to control the outcome of any issues
which may be subject to a vote of securityholders, including the election of
directors, proposals to increase the authorized capital stock, or the approval
of mergers, acquisitions, or the sale of all or substantially all of the
Company's assets. See "Security Ownership of Certain Beneficial Owners and
Management."
19. REPRESENTATIVE'S POTENTIAL INFLUENCE ON THE COMPANY. The Company has
agreed that for three years from the Effective Date, the Representative may
designate one person for election to the Company's Board of Directors and that
the Company will reasonably cooperate with the Representative in respect of such
designation. The election of such designee, if any, may enable the
Representative to exert influence on the Company. As of the date of this
Prospectus, the Representative has not designated any individual for election to
the Company's Board of Directors. See "Underwriting."
20. NEED FOR ADDITIONAL FINANCING. Although the Company anticipates that
the net proceeds of this Offering, together with cash flow from operations, will
be sufficient to finance its operations for the 12 months following the date of
this Prospectus, there can be no assurance that the Company will not require
additional financing at an earlier date. This will depend upon the Company's
ability to generate sufficient sales of ROBODOC Systems in Europe and other
foreign markets, and the timing of required expenditures. If the Company is
required to obtain financing in the future, there can be no assurance that such
financing will be available on terms acceptable to the Company, if at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
21. LIMITATION ON DIRECTOR LIABILITY. The Company's certificate of
incorporation provides that a director of the Company shall not be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, with certain exceptions under Delaware law. This
may discourage stockholders from bringing suit against a director for breach of
fiduciary duty and may reduce the likelihood of derivative litigation brought by
stockholders on behalf of the Company against a director. In addition, the
Company's By-laws provide for mandatory indemnification of directors and
officers. See "Management -- Indemnification of Officers and Directors and
Limitation on Director Liability."
22. ABSENCE OF DIVIDENDS. Since inception, the Company has not paid any
dividends on its Common Stock and it does not anticipate paying such dividends
in the foreseeable future. The Company intends to retain earnings, if any, to
finance its operations. See "Dividend Policy."
23. DILUTION. Purchasers of Common Stock in this Offering will suffer
immediate dilution of $2.74 per share (or approximately 55%) in the net tangible
book value of their investment from the initial public offering price of $5.00
per share of Common Stock. See "Dilution."
24. NO ASSURANCE OF PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE;
POSSIBLE VOLATILITY OF MARKET PRICE FOR THE COMMON STOCK AND WARRANTS. Prior to
the Offering, there has been no public trading
17
<PAGE> 21
market for the Common Stock or the Warrants. Consequently, the initial public
offering prices of the Common Stock and the Warrants and the exercise price and
other terms of the Warrants were determined through negotiations between the
Company and the Underwriters and bear no relationship whatsoever to the
Company's assets, book value per share, results of operations or other generally
accepted criteria of value. The offering prices of the Common Stock and the
Warrants, as well as the exercise price of the Warrants, should not be construed
as indicative of their value. There can be no assurance that an active trading
market for the Common Stock or Warrants will develop after the Offering or that,
if developed, it will be sustained. As a result, purchasers of the Common Stock
and Warrants will be exposed to a risk of a decline in the market prices of the
Common Stock and Warrants after the Offering. The market prices of the Common
Stock and Warrants following this Offering may be highly volatile as has been
the case with the securities of many emerging companies. The Company's operating
results and various factors affecting the medical device industry generally may
significantly impact the market price of the Company's securities. In addition,
the stock market generally, and the securities of technology companies in
particular, have experienced a high level of price and volume volatility, and
market prices for the securities of many companies have experienced wide price
fluctuations not necessarily related to the operating performance of such
companies. There can be no assurance that the market prices of the Common Stock
and the Warrants will not experience significant fluctuations or decline below
their initial public offering prices.
25. UNDERWRITERS' INFLUENCE ON THE MARKET; POSSIBLE LIMITATIONS ON MARKET
MAKING ACTIVITIES. A significant number of the securities offered hereby may be
sold to customers of the Underwriters. Such customers subsequently may engage in
transactions for the sale or purchase of such securities through or with the
Underwriters. The Underwriters have indicated that they intend to act as
market-makers and otherwise effect transactions in the securities offered
hereby. To the extent the Underwriters act as market-makers in the Common Stock
or Warrants, they may exert a dominating influence in the markets for those
securities. The prices and liquidity of the Common Stock and Warrants may be
significantly affected to the extent, if any, that the Underwriters participate
in such markets. Furthermore, the Underwriters may discontinue such activities
at any time or from time to time. The Representative also has the right to act
as the Company's exclusive agent, for a period of five years, in connection with
any future solicitation of holders of Warrants to exercise the Warrants. Unless
granted an exemption by the Commission from Rule 10b-6 under the Exchange Act,
the Representative and any other soliciting broker-dealers will be prohibited
from engaging in any market making activities or solicited brokerage activities
with regard to the Company's securities for a period of up to nine business days
prior to the solicitation of the exercise of any Warrants until the later of the
termination of such solicitation activity or the termination of any right the
Representative may have to receive a fee for the solicitation of the Warrants.
As a result, the Representative and such soliciting broker-dealers may be unable
to continue to make a market for the Company's securities during certain periods
while the Warrants are exercisable. Such a limitation, while in effect, could
impair the liquidity and market price of the Company's securities. See
"Underwriting."
26. POSSIBLE DELISTING. The Common Stock and Warrants have been approved
for quotation on The Nasdaq SmallCap Market. In addition, the Company's
eligibility for listing the Common Stock and the Warrants on The Pacific Stock
Exchange ("PSE") has been confirmed. There can be no assurance that following
the Offering the Company will be able to satisfy specified financial tests and
market related criteria required for continued quotation on The Nasdaq SmallCap
Market or for continued listing on the PSE. If the Company is unable to satisfy
The Nasdaq SmallCap Market and PSE maintenance criteria in the future, its
Common Stock and Warrants may be delisted from trading on The Nasdaq SmallCap
Market and PSE, and if delisted, trading, if any, would thereafter be conducted
in the over-the-counter market in the so-called "pink sheets" or the "Electronic
Bulletin Board" of the National Association of Securities Dealers, Inc.
("NASD"), and, consequently, an investor could find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, the Company's
securities.
27. RISK OF LOW-PRICED SECURITIES. The regulations of the Securities and
Exchange Commission promulgated under the Exchange Act require additional
disclosure relating to the market for penny stocks in connection with trades in
any stock defined as a penny stock. Commission regulations generally define a
penny
18
<PAGE> 22
stock to be an equity security that has a market price of less than $5.00 per
share, subject to certain exceptions. Unless an exception is available, those
regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the risks
associated therewith and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). In addition, the broker-
dealer must provide the customer with current bid and offer quotations for the
penny stock, the compensation of the broker-dealer and its salesperson in the
transaction, and monthly account statements showing the market value of each
penny stock held in the customer's account. Moreover, broker-dealers who
recommend such securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. If the Company's securities become subject to the regulations
applicable to penny stocks, the market liquidity for the Company's securities
could be severely affected. In such an event, the regulations on penny stocks
could limit the ability of broker-dealers to sell the Company's securities and
thus the ability of purchasers of the Company's securities to sell their
securities in the secondary market.
28. SHARES ELIGIBLE FOR FUTURE SALE. No assurance can be given as to the
effect, if any, that future sales of Common Stock, or the availability of shares
of Common Stock for future sales, will have on the market price of the Common
Stock from time to time. Sales of substantial amounts of Common Stock (including
shares issued upon the exercise of warrants or stock options), or the
possibility of such sales, could adversely affect the market price of the Common
Stock and also impair the Company's ability to raise capital through an offering
of its equity securities in the future. Upon completion of this Offering, the
Company will have 3,326,641 shares of Common Stock outstanding, of which only
the 1,500,000 shares of Common Stock offered hereby will be transferable without
restriction under the Securities Act of 1933 (the "Securities Act"). The
remaining 1,826,641 shares, issued in private transactions, will be "restricted
securities" (as that term is defined in Rule 144 promulgated under the
Securities Act) which may be publicly sold only if registered under the
Securities Act or if sold in accordance with an applicable exemption from
registration, such as Rule 144. In general, under Rule 144 as currently in
effect, subject to the satisfaction of certain other conditions, a person,
including an affiliate of the Company, who has beneficially owned restricted
securities for at least two years, is entitled to sell (together with any person
with whom such individual is required to aggregate sales), within any
three-month period, a number of shares that does not exceed the greater of 1% of
the total number of outstanding shares of the same class or, if the Common Stock
is quoted on Nasdaq or a national securities exchange, the average weekly
trading volume during the four calendar weeks preceding the sale. A person who
has not been an affiliate of the Company for at least three months and who has
beneficially owned restricted securities for at least three years is entitled to
sell such restricted securities under Rule 144 without regard to any of the
limitations described above. Officers, directors and the other existing
securityholders of the Company, owning or having rights to acquire in the
aggregate 5,031,708 shares of Common Stock constituting restricted securities,
have entered into agreements with the Underwriters not to sell or otherwise
dispose of any shares of Common Stock for a period of 18 months following the
Effective Date (the "Lock-Up Agreements"), without the prior written consent of
the Representative. Following expiration of the term of the Lock-Up Agreements,
3,308,572 shares of Common Stock will become eligible for resale pursuant to
Rule 144 commencing in the second quarter of 1998, subject to the volume
limitations and compliance with the other provisions of Rule 144. An additional
2,465 shares and 15,604 shares constituting restricted securities not subject to
Lock-Up Agreements will become eligible for resale pursuant to Rule 144
following the completion of this Offering and in the fourth quarter of 1997,
respectively, subject to the volume limitations and compliance with the other
provisions of Rule 144. In addition, securityholders of the Company owning or
having rights to acquire in the aggregate 4,030,649 shares of Common Stock
granted certain registration rights with respect to those shares have agreed
that they will not exercise such registration rights for a period of 18 months
following the Effective Date. Furthermore, the holders of the Underwriters'
Warrants (including the securities issuable upon exercise thereof) have demand
and piggyback registration rights with respect to the shares of Common Stock and
Warrants issuable upon exercise of the Underwriters' Warrants. See "Description
of Securities -- Shares Eligible for Future Sale," "Description of
Securities -- Registration Rights," "Certain Transactions" and "Underwriting."
19
<PAGE> 23
29. EFFECT OF ISSUANCE OF COMMON STOCK UPON EXERCISE OF WARRANTS AND
OPTIONS; POSSIBLE ISSUANCE OF ADDITIONAL OPTIONS. Immediately after the
Offering, assuming the Underwriters' Over-Allotment Option is not exercised, the
Company will have an aggregate of 6,125,223 shares of Common Stock authorized
but unissued and not reserved for specific purposes and an additional 5,548,136
shares of Common Stock unissued but reserved for issuance pursuant to (i) the
Company's stock option plans, (ii) outstanding warrants, (iii) exercise of the
Warrants and (iv) exercise of the Underwriters' Warrants and the Warrants
included therein. All of such shares may be issued without any action or
approval by the Company's stockholders. Although there are no present plans,
agreements, commitments or undertakings with respect to the issuance of
additional shares or securities convertible into any such shares by the Company,
any shares issued would further dilute the percentage ownership of the Company
held by the public stockholders. The Company has agreed with the Underwriters
that, except for the issuances disclosed in or contemplated by this Prospectus,
it will not issue any securities, including but not limited to any shares of
Common Stock, for a period of 24 months following the Effective Date, without
the prior written consent of the Representative. See "Underwriting."
The exercise of warrants or options and the sale of the underlying shares
of Common Stock (or even the potential of such exercise or sale) may have a
depressive effect on the market price of the Company's securities. Moreover, the
terms upon which the Company will be able to obtain additional equity capital
may be adversely affected since the holders of outstanding warrants and options
can be expected to exercise them, to the extent they are able, at a time when
the Company would, in all likelihood, be able to obtain any needed capital on
terms more favorable to the Company than those provided in the warrants and
options. See "Management -- Stock Option Plan," "Description of Securities" and
"Underwriting."
30. POSSIBLE ADVERSE EFFECT OF ISSUANCE OF PREFERRED STOCK. The Company's
certificate of incorporation authorizes the issuance of 1,000,000 shares of
"blank check" preferred stock, with designations, rights and preferences
determined from time to time by the Company's Board of Directors. Accordingly,
the Company's Board of Directors is empowered, without further stockholder
approval, to issue preferred stock with dividend, liquidation, conversion,
voting or other rights that could adversely affect the voting power or other
rights of the holders of the Common Stock. In the event of issuance, the
preferred stock could be used, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company, since
the terms of the preferred stock that might be issued could effectively restrict
the Company's ability to consummate a merger, reorganization, sale of all or
substantially all of its assets, liquidation or other extraordinary corporate
transaction without the approval of the holders of the preferred stock. The
Company has no current plans to issue any shares of preferred stock. However,
there can be no assurance that preferred stock will not be issued at some time
in the future. The Company has agreed with the Underwriters that it will not
issue any shares of preferred stock, or any options, warrants or other rights to
purchase shares of preferred stock, for a period of 24 months following the
Effective Date, without the prior written consent of the Representative. See
"Description of Securities -- Preferred Stock."
31. ANTITAKEOVER PROVISIONS OF DELAWARE BUSINESS COMBINATION STATUTE. The
Company is subject to Section 203 of the Delaware General Corporation Law
("DGCL"), which limits transactions between a publicly held company and
"interested stockholders" (generally, those stockholders who, together with
their affiliates and associates, own 15% or more of a company's outstanding
capital stock). This provision of the DGCL also may have the effect of deterring
certain potential acquisitions of the Company. See "Description of
Securities -- Statutory Provisions Affecting Stockholders."
32. ADVERSE EFFECT OF REDEMPTION OF WARRANTS. Under certain conditions,
the Warrants may be redeemed by the Company, prior to their expiration, at a
redemption price of $0.10 per Warrant, upon not less than 30 days prior written
notice to the holders of such Warrants. Redemption of the Warrants could force
the holders to exercise the Warrants and pay the exercise price at a time when
it may be disadvantageous for the holders to do so, to sell the Warrants at the
then current market price when they might otherwise wish to hold the Warrants or
to accept the redemption price, which is likely to be substantially less than
the market value of the Warrants at the time of redemption. See "Description of
Securities -- Warrants."
20
<PAGE> 24
33. NEED FOR FUTURE REGISTRATION OF WARRANTS; STATE BLUE SKY REGISTRATION;
EXERCISE OF WARRANTS. The Warrants will trade separately upon the completion of
the Offering. Although the Warrants will not knowingly be sold to purchasers in
jurisdictions in which the Warrants are not registered or otherwise qualified
for sale, purchasers may buy Warrants in the after-market or may move to
jurisdictions in which the Warrants and the Common Stock underlying the Warrants
are not so registered or qualified. In this event, the Company would be unable
to issue Common Stock to those persons desiring to exercise their Warrants
unless and until the Warrants and the underlying Common Stock are qualified for
sale in jurisdictions in which such purchasers reside, or an exemption from such
qualification exists in such jurisdictions. There can be no assurance that the
Company will be able to effect any required qualification.
The Warrants will not be exercisable unless the Company maintains a current
Registration Statement on file with the Commission through post-effective
amendments to the Registration Statement containing this Prospectus. Although
the Company has agreed to file appropriate post-effective amendments to the
Registration Statement containing this Prospectus and to maintain a current
Prospectus with respect to the Warrants, there can be no assurance that the
Company will file post-effective amendments necessary to maintain a current
Prospectus or that the Warrants will continue to be so registered. See
"Description of Securities -- Warrants."
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<PAGE> 25
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
and Warrants offered hereby, after deducting underwriting discounts and other
expenses of the Offering, are estimated to be $6,173,250 ($7,180,181 if the
Underwriters' Over-Allotment Option is exercised in full). The Company expects
to use the net proceeds of the Offering as follows:
<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT PERCENT
---------- -----
<S> <C> <C>
Product development(1)............................................ $3,050,000 49%
Sales and marketing(2)............................................ 2,900,000 47%
Working capital and general corporate purposes.................... 223,250 4%
---------- -----
Total........................................................ $6,173,250 100%
========= =====
</TABLE>
- ---------------
(1) Includes development of software packages for revision and total knee
replacement surgeries, as well as other orthopaedic surgical
applications, expansion of the implant libraries for the Company's
products and development of multiple imaging modalities for use with
the ROBODOC System.
(2) Represents costs associated with marketing and sales activities with
respect to the Company's products, principally in Europe, including
advertising and promotional activities, as well as participation in
trade shows. Also includes costs associated with hiring, training and
maintaining sales, marketing and service personnel.
Additional proceeds from the exercise of the Underwriters' Over-Allotment
Option and the Warrants will be added to the Company's working capital and be
available for general corporate purposes. Pending application, the Company will
invest the net proceeds of this Offering in United States government securities
and investment-grade commercial paper.
The Company has not determined the specific allocation of the net proceeds
among the various uses described above. Specific allocations of such net
proceeds will ultimately depend on the development of the Company's products and
the related technology, the adaptation of its products to additional surgical
applications and commercial acceptance of its products. The Company anticipates,
based on currently proposed plans and assumptions relating to its operations,
that the net proceeds of this Offering will be sufficient to satisfy the
Company's anticipated cash requirements for at least 12 months following the
date of this Prospectus.
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<PAGE> 26
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
September 30, 1996, and (ii) such capitalization on a pro forma basis after
giving effect to the automatic conversion of the outstanding Series D Preferred
Stock at the Closing, and as adjusted to give effect to the sale of 1,500,000
shares of Common Stock and 1,500,000 Warrants offered hereby, and the
application of the estimated net proceeds thereof. The information set forth
below should be read in conjunction with the consolidated financial statements
and notes thereto appearing elsewhere in this Prospectus, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------
PRO FORMA
AS
ACTUAL(1)(2) ADJUSTED(1)(3)
------------ -----------
<S> <C> <C>
Stockholders' equity:
Preferred stock, $0.01 par value, no shares authorized,
issued or outstanding; 1,000,000 shares authorized, no
shares issued or outstanding, pro forma as adjusted....... $ -- $ --
Convertible preferred stock, $0.01 par value, 5,750,000
shares authorized; 1,039,792 shares issued and
outstanding; no shares authorized, issued or outstanding,
pro forma as adjusted; liquidation preference value of
$1,000,000................................................ 10,398 --
Common stock, $0.01 par value, 15,000,000 shares authorized;
737,072 shares issued and outstanding; 3,276,864 shares
issued and outstanding, pro forma as adjusted............. 7,370 32,768
Additional paid-in capital..................................... 19,685,118 25,843,368
Deferred stock compensation.................................... (473,507) (473,507)
Accumulated translation adjustment............................. (7,499) (7,499)
Accumulated deficit............................................ (17,774,359) (17,774,359)
-------- --------
Total stockholders' equity..................................... 1,447,521 7,620,771
-------- --------
Total capitalization...................................... $ 1,447,521 $ 7,620,771
======== ========
</TABLE>
- ---------------
(1) Does not include (i) 2,274,066 shares of Common Stock issuable upon exercise
of outstanding warrants, including (A) shares issuable upon exercise of the
Series D Warrants, at an exercise price of $0.01 per share, which will
become exercisable for 2,079,584 of Common Stock following the automatic
conversion of the Series D Preferred Stock at the Closing, and (B) 194,482
shares issuable upon exercise of outstanding warrants at exercise prices
ranging from $0.01 to $0.07 per share, and (ii) 949,070 shares of Common
Stock issuable upon exercise of outstanding options granted pursuant to the
Company's stock option plans, at exercise prices ranging from $0.07 to $7.84
per share. See "Certain Transactions."
(2) Does not include 1,039,792 shares of Common Stock issuable upon conversion
of the Series D Preferred Stock.
(3) Gives effect to the automatic conversion of the outstanding shares of Series
D Preferred Stock into 1,039,792 shares of Common Stock upon the
consummation of the sale of the shares of Common Stock and Warrants offered
hereby. Does not include (i) 1,500,000 shares of Common Stock reserved for
issuance upon the exercise of the Warrants, (ii) 450,000 shares of Common
Stock reserved for issuance upon exercise of the Underwriters'
Over-Allotment Option, including the Warrants included therein, and (iii)
300,000 shares of Common Stock reserved for issuance upon the exercise of
the Underwriters' Warrants and the Warrants included therein.
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<PAGE> 27
DILUTION
The net tangible book value of the Company as of September 30, 1996, was
$1,223,805 or approximately $0.69 per share of Common Stock, assuming conversion
of the outstanding shares of Series D Preferred Stock into Common Stock. The net
tangible book value of the Company is the tangible assets (total assets less
deferred financing and offering costs) less total liabilities. Dilution per
share represents the difference between the amount paid per share of Common
Stock by purchasers in the Offering, attributing no value to the Warrants, and
the pro forma net tangible book value per share after the Offering.
After giving effect to the sale by the Company of the 1,500,000 shares of
Common Stock and 1,500,000 Warrants offered hereby, the pro forma net tangible
book value of the Company as of September 30, 1996, would have been $7,397,055
or $2.26 per share. This represents an increase in net tangible book value per
share of $1.57 to the Company's existing stockholders and an immediate dilution
of $2.74 per share (or approximately 55% of the offering price) to new
stockholders purchasing shares of Common Stock in the Offering. The following
table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Public offering price per share.................................. $5.00
Net tangible book value before Offering.......................... $0.69
Increase attributable to new investors........................... 1.57
-----
Pro forma net tangible book value after Offering................. 2.26
-----
Dilution to new investors........................................ $2.74
=====
</TABLE>
The above table assumes the conversion of the outstanding shares of the
Series D Preferred Stock into Common Stock, but no exercise of outstanding stock
options or warrants. As of September 30, 1996, there were outstanding options to
purchase an aggregate of 949,070 shares of Common Stock having exercise prices
from $0.07 per share to $7.84 per share and outstanding warrants to purchase an
aggregate of 2,274,066 shares of Common Stock having exercise prices from $0.01
per share to $0.07 per share. To the extent that stock options or warrants are
exercised at prices below the public offering price per share, there will be
further dilution to new investors. See "Risk Factors," "Certain Transactions,"
"Description of Securities" and "Underwriting."
The information in the following table summarizes the number and
percentages of shares of Common Stock, including Series D Preferred Stock which
will convert into Common Stock, purchased from the Company through September 30,
1996, the amount and percentage of cash consideration paid and the average price
per share paid to the Company by existing stockholders and by new investors
pursuant to the Offering:
<TABLE>
<CAPTION>
AVERAGE
PRICE
TOTAL CONSIDERATION PER
SHARES PURCHASED PAID SHARE
------------------- --------------------- ------
<S> <C> <C> <C> <C> <C>
Existing Stockholders.................. 1,776,864 54.2% $13,019,556 63.4% $ 7.33
New Investors.......................... 1,500,000 45.8% 7,500,000 36.6% 5.00
------ ----------- ------
3,276,864 100.0% $20,519,556 100.0%
====== =========== ======
</TABLE>
The information in the foregoing table gives effect to the conversion of
the outstanding shares of Series D Preferred Stock, but it excludes 949,070
shares of Common Stock issuable upon the exercise of outstanding options,
2,274,066 shares of Common Stock issuable upon exercise of outstanding warrants,
1,500,000 shares of Common Stock reserved for issuance upon exercise of the
Warrants, 450,000 shares of Common Stock reserved for issuance upon exercise of
the Underwriters' Over-Allotment Option and the Warrants included therein, and
300,000 shares of Common Stock reserved for issuance pursuant to the
Underwriters' Warrants and the Warrants included therein. See "Capitalization"
and "Underwriting."
DIVIDEND POLICY
The payment of dividends by the Company is within the discretion of its
Board of Directors and depends in part upon the Company's earnings, capital
requirements and financial condition. Since its inception, the Company has not
paid any dividends on its Common Stock and does not anticipate paying such
dividends in the foreseeable future. The Company intends to retain earnings, if
any, to finance its operations.
24
<PAGE> 28
SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial information regarding the
results of operations and financial position of the Company for the periods and
at the dates indicated. The financial statements of the Company as of December
31, 1995 and for the years ended December 31, 1994 and 1995 have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report included
elsewhere in this Prospectus, which includes an explanatory paragraph which
indicates there is substantial doubt about the Company's ability to continue as
a going concern due to the Company's need to generate cash from operations and
obtain additional financing. The selected financial information as of September
30, 1996 and for the nine months ended September 30, 1995 and 1996 are derived
from the unaudited interim consolidated financial statements of the Company set
forth elsewhere in this Prospectus and include, in the opinion of management,
all adjustments (consisting only of normal recurring adjustments) necessary for
the fair presentation of its results of operations for such period. The results
of operations for the nine months ended September 30, 1996, are not necessarily
indicative of the results to be expected for the full year. This data should be
read in conjunction with the Company's consolidated financial statements
(including the notes thereto) and the Company's unaudited interim consolidated
financial statements appearing elsewhere in this Prospectus, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ -------------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales............................... $ 289,047 $ 174,521 $ 112,613 $1,748,065
Cost of sales........................... 203,856 70,179 42,284 664,979
----------- ----------- ----------- -----------
85,191 104,342 70,329 1,083,086
Operating expenses:
Selling, general and administrative... 1,973,816 1,668,947 1,313,119 1,369,079
Research and development ............. 2,719,771 2,361,125 1,648,208 1,572,076
Stock compensation.................... -- -- -- 310,159
----------- ----------- ----------- -----------
4,693,587 4,030,072 2,961,327 3,251,314
Other income (expense):
Interest income....................... 74,956 107,306 98,199 54,872
Interest expense...................... (281,650) (287,792) (221,426) --
Other................................. (14,508) 55,801 58,248 (3,754)
----------- ----------- ----------- -----------
Loss before provision for income
taxes................................. (4,829,598) (4,050,415) (2,955,977) (2,117,110)
Provision for income taxes.............. 10,787 3,113 4,468 5,267
----------- ----------- ----------- -----------
Net loss................................ (4,840,385) (4,053,528) (2,960,445) (2,122,377)
Preferred stock dividends............... (956,574) (936,325) (720,000) --
----------- ----------- ----------- -----------
Net loss applicable to common
stockholders.......................... $(5,796,959) $(4,989,853) $(3,680,445) $(2,122,377)
=========== =========== =========== ===========
Net loss per common and common share
equivalent............................ $ (1.39) $ (1.19) $ (0.88) $ (0.48)
=========== =========== =========== ===========
Shares used in per share calculations
(1)................................... 4,172,052 4,178,877 4,172,897 4,377,679
=========== =========== =========== ===========
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
Working capital.......................................... $ 1,827,408 $ 1,125,998
Total assets............................................. 3,727,129 2,618,521
Accumulated deficit...................................... (15,651,982) (17,774,359)
Stockholders' equity..................................... 2,272,518 1,447,521
</TABLE>
- ---------------
(1) See Note 2 of notes to consolidated financial statements for an
explanation of the determination of the number of shares used in
computing net loss per share.
25
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the consolidated financial statements, including the notes thereto, appearing
elsewhere in this Prospectus.
From its inception in October 1990, the Company has been primarily engaged
in the development and clinical evaluation of the ROBODOC System. Net sales are
derived from the sale of ROBODOC Systems and related consumables. Prior to 1996,
sales of the ROBODOC System were limited to sales for clinical evaluation. In
the first quarter of 1996, the ROBODOC System satisfied the appropriate
international electromedical safety standards and complied with the requirements
of the Electromagnetic Compatibility Directive, thus allowing the Company to
apply the CE Mark and to distribute the ROBODOC System throughout the European
Union. The Company sold its first commercial ROBODOC System to a clinic in
Germany in March 1996. The Company intends to use a significant portion of the
net proceeds of this Offering for marketing and sales in Europe. See "Use of
Proceeds."
In the United States, the Company's products are subject to regulation by
the FDA. The Company intends to file an application for pre-market approval with
the FDA in mid to late 1997 for approval to market the ROBODOC System in the
United States. See "Risk Factors -- Government Regulation" and
"Business -- Government Regulation."
Until the commercial introduction of the ROBODOC System in the first
quarter of 1996, the Company operated as a development stage enterprise, and
incurred a net loss for each period since its inception. The Company intends to
develop additional surgical applications for the ROBODOC System and to
significantly increase its technical staff. The Company also plans to increase
spending on sales and marketing. See "Use of Proceeds." The Company expects
operating losses to continue until sales of its products increase significantly.
See "Risk Factors -- History of Losses; Accumulated Deficit; Anticipated Future
Losses."
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
Net Sales. Net sales for the nine months ended September 30, 1996 (the
"1996 interim period"), increased by approximately $1,635,000, as compared to
the nine months ended September 30, 1995 (the "1995 interim period"), as a
result of commercial sales of the ROBODOC System to customers in Germany. Prior
to 1996, sales of the ROBODOC System were limited to heavily discounted clinical
evaluation systems. No clinical evaluation systems were sold during the 1995
interim period. Sales of consumables during the 1996 interim period
(approximately $102,000, or 6% of net sales) decreased by approximately $11,000,
or 10%, as compared to the 1995 interim period when sales of consumables
accounted for all net revenues, primarily due to the completion of U.S. clinical
trials in February 1996.
Cost of Sales. Cost of sales for the 1996 interim period (approximately
$665,000), increased significantly as compared to the 1995 interim period
(approximately $42,000), as a result of the first commercial sales of the
ROBODOC System. Cost of sales as a percentage of net sales was 38% for both the
1995 and 1996 interim periods.
Selling, General and Administrative. Selling, general and administrative
expenses for the 1996 interim period (approximately $1,369,000) increased by
approximately $56,000, or 4%, as compared to the 1995 interim period
(approximately $1,313,000), due primarily to the Company's participation in
trade shows in Germany during the 1996 interim period.
Research and Development. Research and development expenses for the 1996
interim period (approximately $1,572,000) decreased by approximately $76,000, or
approximately 5%, as compared to the 1995 interim period (approximately
$1,648,000), due to staff reductions in regulatory and quality control in
February 1995. In addition, the completion of U.S. clinical trials in February
1996 resulted in a decrease in
26
<PAGE> 30
costs associated with the sponsorship of the trials. These decreases were
partially offset by an increase in consulting and outside service costs during
the 1996 interim period.
Stock Compensation. During the 1996 interim period, the Company recorded
deferred stock compensation of approximately $784,000 relating to stock options
granted during the interim period with exercise prices less than the estimated
fair value of the Company's Common Stock, as determined by an independent
valuation analysis, on the date of grant. The deferred stock compensation is
being amortized into expense over the vesting period of the stock options, which
generally ranges from 3 to 5 years. Deferred compensation relating to stock
options which vested immediately was expensed on the date of grant. Compensation
expense of approximately $310,000 was recorded during the 1996 interim period
relating to these stock options, and the remaining $474,000 will be amortized
into expense in future periods.
Interest Income. Interest income for the 1996 interim period
(approximately $55,000) decreased by approximately $43,000, or 44%, as compared
to the 1995 interim period, primarily due to higher average cash balances during
the 1995 interim period.
Interest Expense. The Company had no interest expense for the 1996 interim
period, as compared to the 1995 interim period (approximately $221,000),
primarily as a result of the conversion in December 1995 of a $3,000,000
convertible note payable, bearing interest at 9.25% per annum, into a warrant to
purchase Common Stock.
Other Income and Expense. Other expense for the 1996 interim period was
approximately $4,000, as compared to other income for the 1995 interim period of
approximately $58,000. The primary reason for the difference is the
strengthening of the Dutch Guilder against the U.S. Dollar during the 1995
interim period, as compared to a weakening of the Dutch Guilder against the U.S.
Dollar in the 1996 interim period. This resulted in currency transaction gains
and losses on the U.S. currency obligations of the Company's wholly owned
subsidiary in The Netherlands, Integrated Surgical Systems BV.
Net Loss. The net loss for the 1996 interim period (approximately
$2,122,000) decreased by approximately $838,000, or approximately 28%, as
compared to the net loss for the 1995 interim period (approximately $2,960,000),
primarily due to the gross margin realized on the increased net sales. This
increase was partially offset by an increase in operating expenses, principally
due to stock compensation expense.
Preferred Stock Dividends. The Company accumulated preferred stock
dividends of approximately 8% on the outstanding shares of Series B and Series C
Preferred Stock for the 1995 interim period. These cumulative dividends,
together with the Series B and Series C Preferred Stock, were converted into
Common Stock in December 1995. The Series D Preferred Stock outstanding at
September 30, 1996 does not provide for cumulative dividends.
FISCAL YEAR ENDED DECEMBER 31, 1995 AND 1994
Net Sales. Net sales for the fiscal year ended December 31, 1995 ("Fiscal
1995") decreased by approximately $114,000, as compared to the fiscal year ended
December 31, 1994 ("Fiscal 1994"). During Fiscal 1995, all net sales were
derived from consumables. During Fiscal 1994, the Company recognized the sale of
one clinical evaluation system for approximately $242,000 (or approximately 84%
of net sales), to an affiliate of Keystone Financial Corporation, a stockholder
of the Company, with the remaining net sales in Fiscal 1994 related to
consumables. See "Certain Transactions." Sales of consumables increased
significantly in Fiscal 1995 due to the operation of a clinical system at the
Berufsgenossenschaftliche Unfallklinik in Germany for all of Fiscal 1995. Sales
to the clinic represented approximately 95% of net sales for Fiscal 1995.
Revenue was not recognized for the installation of the ROBODOC System in Germany
in 1994 because the ROBODOC System was temporarily placed at the site for
purposes of clinical evaluation until the ROBODOC System satisfied the
appropriate international electromedical safety standards and complied with the
requirements of the Electromagnetic Compatibility Directive, thus allowing the
Company to apply the CE Mark and to distribute the ROBODOC System throughout the
European Union.
Cost of Sales. Cost of sales for Fiscal 1995 (approximately $70,000)
decreased by approximately $134,000, or 66%, as compared to Fiscal 1994
(approximately $204,000). Cost of sales as a percentage of net sales decreased
from 71% in Fiscal 1994 to 40% in Fiscal 1995 since net sales in Fiscal 1995
consisted entirely of consumables, which generate a higher gross margin
percentage than sales of clinical evaluation systems.
27
<PAGE> 31
Selling, General and Administrative. Selling, general and administrative
expenses for Fiscal 1995 (approximately $1,669,000), decreased by approximately
$305,000, or 15%, as compared to Fiscal 1994 (approximately $1,974,000),
primarily due to staff reductions in February 1995. This decrease was partially
offset by increased consulting fees associated with a consultant involved with
marketing and general business strategy.
Research and Development. Research and development expenses for Fiscal
1995 (approximately $2,361,000) decreased by approximately $359,000, or 13%, as
compared to Fiscal 1994 (approximately $2,720,000), primarily due to staff
reductions in February 1995. This decrease was partially offset by the cost of a
comparative histology study at Auburn University, which commenced in the fourth
quarter of 1995.
Interest Income. Interest income for Fiscal 1995 (approximately $107,000)
increased by approximately $32,000, or 43%, as compared to Fiscal 1994
(approximately $75,000), due to an improvement in money market conditions
resulting in an improved return on the Company's investments during Fiscal 1995.
The Company had an investment in an intermediate term bond fund in Fiscal 1994
which had a negative return due to rising interest rates.
Interest Expense. Interest expense for Fiscal 1995 (approximately
$288,000) increased slightly as compared to Fiscal 1994 (approximately
$282,000). Interest expense for both periods was primarily associated with a
$3,000,000 convertible note, bearing interest at 9.25% per annum. The principal
amount of this note, together with interest that had accrued from the date of
issuance, was converted in December 1995 into a warrant to purchase Common
Stock.
Other Income and Expense. Other income for Fiscal 1995 was approximately
$56,000, as compared to other expense for Fiscal 1994 of approximately $15,000.
The primary reason for the difference is the strengthening of the Dutch Guilder
against the U.S. Dollar during Fiscal 1995, as compared to a weakening of the
Dutch Guilder against the U.S. Dollar in Fiscal 1994. This resulted in currency
transaction gains and losses on the U.S. currency obligations of the Company's
wholly owned subsidiary in The Netherlands, Integrated Surgical Systems BV.
Provision for Income Taxes. As a result of the issuance of the Company's
Series D Preferred Stock in connection with the recapitalization of the Company
in December 1995, a change of ownership (as defined in Section 382 of the
Internal Revenue Code of 1986, as amended) occurred. As a result of this change,
the Company's federal and state net operating loss carryforwards generated
through December 31, 1995 (approximately $13,500,000 and $4,500,000,
respectively) will be subject to a total annual limitation in the amount of
approximately $400,000. Except for the amounts described below, the Company
expects that the carryforward amounts will not be utilized prior to the
expiration of the carryforward periods. As a consequence of the limitation, the
Company had at December 31, 1995 a net operating loss carryover of approximately
$6,000,000 for federal income tax purposes which expires between 2005 and 2009,
and a net operating loss carryforward of approximately $2,000,000 for state
income tax purposes which expires between 1997 and 1999. See Note 7 of notes to
consolidated financial statements.
Net Loss. The net loss for Fiscal 1995 (approximately $4,054,000)
decreased by approximately $786,000, or 16%, as compared to Fiscal 1994
(approximately $4,840,000), primarily due to improved gross margins, reduced
operating expenses, resulting principally from staff reductions, improved
returns on invested cash and an increase in other income due to a strengthening
of the Dutch Guilder against the U.S. Dollar.
Preferred Stock Dividends. The Company accumulated preferred stock
dividends on the Series B and Series C Preferred Stock at 8% per annum
throughout Fiscal 1994 and until December 1995, when these cumulative dividends,
together with the Series B and Series C Preferred Stock, were converted into
Common Stock. The Series D Preferred Stock outstanding at June 30, 1996 does not
provide for cumulative dividends.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have exceeded net sales. Operations
have been funded primarily from the issuance of debt and the sale of equity
securities aggregating approximately $17.7 million.
28
<PAGE> 32
In addition, the Company was the beneficiary of proceeds from a $3 million
key-man life insurance policy in 1993 upon the death of one of its executives.
The Company used cash from operating activities of approximately $170,000,
$3,508,000, $2,690,000 and $1,970,000 in Fiscal 1994, Fiscal 1995 and the 1995
and 1996 interim periods, respectively. Net cash used for operations in each of
these periods resulted primarily from the net loss. Cash used for operations in
Fiscal 1994 reflected a transfer of cash from short term investments, a deposit
received relating to the initial commercial system, decreases in accounts
receivable and inventory and an increase in accrued retrofit costs for the
systems used in the United States clinical trials. Cash used for operations in
Fiscal 1995 reflected a decrease in inventory, an increase in other liabilities
and payments made under a severance agreement with a former executive officer.
Cash used for operations in the 1995 interim period reflected an increase in
accrued interest and payments made to a former executive officer. Cash used for
operations in the 1996 interim period reflected a payment made on a note payable
held by a supplier, a decrease in a customer deposit relating to the delivery of
a commercial system and prepaid costs related to the Offering. The Company is
eligible to receive reimbursement for 49% of its qualified expenditures under
the terms of a grant from the National Institute for Standards & Technology
("NIST"). The Company received reimbursements from this program of $19,000 and
$93,000 for Fiscal 1995 and the 1996 interim period, respectively.
The Company's investing activities have consisted primarily of expenditures
for property and equipment which totaled approximately $476,000, $121,000,
$101,000 and $14,000 in Fiscal 1994, Fiscal 1995, and the 1995 and 1996 interim
periods, respectively. Included in Fiscal 1994 and Fiscal 1995 is a ROBODOC
System owned by the Company and placed in a clinic in Germany for clinical
evaluation. This system was sold to the clinic during the 1996 interim period.
Cash provided by financing activities from inception through September 30,
1996 is comprised of the net cash proceeds from the sale of a convertible note
in the principal amount of $3,000,000, together with accrued interest thereon of
$1,224,373 which was converted into a warrant to purchase 126,895 shares of
Common Stock at an exercise price of $0.01 per share in December 1995, the sale
of convertible preferred stock and warrants for $14,676,000, and the sale of
Common Stock for $9,000. As part of the recapitalization of the Company in
December 1995, the entire $3,000,000 principal amount of the convertible note,
together with accrued interest thereon of approximately $1,224,000, was
converted into a warrant to purchase Common Stock. A total of $11,734,000 of
preferred stock was converted into Common Stock in December 1995.
The Company expects to incur additional operating losses and cash
requirements at least through 1997. These losses will be as a result of
expenditures related to product development projects and the establishment of
marketing, sales, service and training organizations. The timing and amounts of
these expenditures will depend on many factors, some of which are beyond the
Company's control, such as the requirements for and time required to obtain FDA
authorization to market the ROBODOC System, the progress of the Company's
product development projects and market acceptance of the Company's products.
The Company expects that the net proceeds of this Offering, together with cash
flow from operations, will be sufficient to finance its operations for the 12
months following the date of this Prospectus.
The Company's independent auditors have included an explanatory paragraph
in their report on the Company's financial statements for the year ended
December 31, 1995, which indicates there is substantial doubt about the
Company's ability to continue as a going concern due to the Company's need to
generate cash from operations and obtain additional financing. See "Report of
Independent Auditors" on the Company's consolidated financial statements
appearing at page F-2 of this Prospectus.
29
<PAGE> 33
GLOSSARY
The following glossary is intended to provide the reader with an
explanation of certain terms used in this Prospectus.
510(k) Pre-market notification application required in the
United States to market medical devices that are
"substantially equivalent" to medical devices
previously approved by the FDA or were marketed in
the United States prior to May 28, 1976 (the date
of the Medical Device Amendment to the FDC Act)
pursuant to the FDC Act.
ACTIVE ROBOT A robot that is capable of moving by itself. In the
context of robotic surgery, active robot refers to
a robot that performs a segment of a surgical
procedure under the supervision of a surgeon.
CE MARK The European conformity mark.
CONSUMABLES Disposable items consumed each time a surgery is
performed including sterile drapes, bone screws,
cutters and control pendants.
CT SCAN Computerized tomography scan, which produces
multiple x-ray "slices" taken close together, which
when reconstructed by a computer provide an
accurate three dimensional picture of a patient's
anatomy.
FDA U.S. Food and Drug Administration.
FDC Act Federal Food, Drug and Cosmetic Act, as amended,
and the regulations promulgated thereunder.
FIXATOR Device which holds the leg bone still and attaches
it to the robot base.
IDE Investigational device exemption pursuant to the
FDC Act.
GMP Good manufacturing practices regulations
promulgated by the FDA pursuant to the FDC Act.
IMPLANT Usually inert metal "hardware" left in the body to
repair injuries or replace joints.
IMPLANT LIBRARY Visual three dimensional renderings of all the
sizes and shapes of implants available for use on
the system.
ISO Manufacturing standards established by the
International Standards Organization.
MRI Magnetic resonance imaging, a method of collecting
images of the body using radio waves, but without
radiation.
NIST National Institute of Standards and Technology of
the United States Department of Commerce.
ORTHOPAEDICS The branch of surgery concerned with the skeletal
system.
OSTEOTOMY An angular cut in a bone usually removing a wedge.
PASSIVE ROBOT A passive robot requires the application of
external forces to cause motion. In the context of
robotic surgery, a passive robot is used only as an
aiming or holding device.
PMA Pre-market approved application required in the
United States to market new medical devices
pursuant to the FDC Act.
PROSTHESIS An artificial substitute for a body part, including
joints.
THR Primary total hip replacement.
TKR Total knee replacement.
30
<PAGE> 34
BUSINESS
The Company develops, manufactures, markets and services image-directed,
computer-controlled robotic products for surgical applications. The Company's
principal product is the ROBODOC(@) Surgical Assistant System, consisting of a
computer-controlled surgical robot and the Company's ORTHODOC(@) Presurgical
Planner. The ROBODOC System has been used for primary total hip replacement
surgery on over 495 patients worldwide. The Company believes its "active"
robotic system is the only available system that can accurately perform key
segments of surgical procedures with precise tolerances generally not attainable
by traditional manual surgical techniques. The ROBODOC System also allows the
surgeon to prepare a preoperative plan specifically designed for the
characteristics of the individual patient's anatomy. The technology for the
ROBODOC System was initially developed at the University of California, Davis,
in collaboration with IBM.
The ORTHODOC is a computer workstation that utilizes the Company's
proprietary software for preoperative surgical planning. The ORTHODOC is
included as part of the ROBODOC System and may be marketed separately by the
Company. The ORTHODOC converts CT scan data of a patient's femur into
three-dimensional images, and through a graphical user interface allows the
surgeon to examine the bone more thoroughly and to select the optimal implant
for the patient using a built-in library of available implants. A tape of the
planned surgical procedure, developed by the ORTHODOC, guides the surgical robot
arm of the ROBODOC System to accurately mill a cavity in the bone, thus allowing
the surgeon to properly orient and align the implant. Prior to the primary
surgery, three titanium locator pins are placed in the patient's femur in an
out-patient procedure. These locator pins are used during the primary procedure
to orient the ROBODOC System to the ORTHODOC preoperative plan. Non-clinical
scientific data published by scientists from the Company and IBM demonstrate
that as a result of the precise milling of a cavity, the ROBODOC System achieves
over 95% bone-to-implant contact, as compared to an average of 20% bone-to-
implant contact when surgery is performed manually.
THR surgery involves the insertion of an implant into a cavity created in
the patient's femur. Precise fit and correct alignment of the implant within the
femoral cavity are generally considered key factors in the long-term success of
THR surgery. In conventional THR surgery, a bone cavity is cut in the shape of
the implant manually with metal tools, and the surgical plan, including the
selection of the size and shape of the implant, is generally formulated based
upon patient data obtained from two-dimensional x-ray images of the patient's
femur. Based upon clinical experience to date in Germany with the ROBODOC
System, patients have become weight-bearing in a shorter period than generally
experienced by patients who have had this surgery performed manually. In
addition, worldwide clinical data indicates that intraoperative fractures have
been dramatically reduced in the THR surgeries performed with the ROBODOC System
(no intraoperative fractures have resulted from THR surgeries performed with the
ROBODOC System to date). The Company also believes fewer hip revision surgeries
(implant replacements) may be necessary for patients who have had primary THR
surgery performed with the ROBODOC System, as compared to patients who have this
surgery performed manually.
In the past, a majority of THR implants have been held in place with
acrylic cement, which fills the spaces between the implant and the bone, thereby
anchoring the implant to the femoral cavity ("cemented implants"). During the
1980s, implants that did not require cement ("cementless implants") were
developed with materials designed to stimulate bone in-growth. The selection of
a cemented or cementless implant generally is based upon a patient's bone
condition and structure, age and activity level. Typically, cemented implants
are used for older, less active patients. Furthermore, most implants require
replacement within five to 20 years of the first operation. The software package
developed by the Company in collaboration with IBM and Johns Hopkins University
eliminates the distortion of the x-ray images of the patient's femur used in
planning hip revision surgery caused by the metal in the existing implant.
Consequently, the surgeon would have a clearer view of the remaining bone in
planning hip revision surgery and thereby be better able to remove fragmented
cement without removing any of the remaining thin thigh bone.
31
<PAGE> 35
THE MARKET
According to an industry study, in 1995 the worldwide orthopaedic market
(which includes power surgical instruments, prosthetic devices, fixation devices
and bone growth stimulants) was approximately $6.8 billion, including
approximately $3.9 billion in the United States (constituting approximately 57%
of the worldwide market) and approximately $1.6 billion in Europe (constituting
approximately 23% of the worldwide market). In 1995, over 600,000 hip implants
were sold worldwide, of which 280,000 were sold in the United States. Similarly
in 1995, over 400,000 knee implants were sold worldwide, of which 289,000 were
sold in the United States. The growth in hip and knee surgeries is expected to
be in the range of 4% to 7% per annum over the next several years. This
anticipated growth is based upon the growth in the number of people reaching an
age (60 and over) where orthopaedic surgeries are more prevalent, and also on an
increasingly active population. Finally, an earlier generation of implanted
protheses have reached an age where replacement is increasingly necessary, thus
resulting in an increased demand for hip and knee revision surgeries.
According to the American Academy of Orthopaedic Surgeons, in the United
States there are approximately 15,000 orthopaedic surgeons and over 5,000
hospitals performing orthopaedic surgeries that have, or have access to, CT
scanners. Of these, approximately 1,000 hospitals perform over 150 orthopaedic
surgeries (hip and knee) per year. There are approximately 800 hospitals in
Germany that have a CT scanner and perform the vast majority of the orthopaedic
surgeries. Since the procedure for performing THR surgery using the ROBODOC
System requires a CT scan of the patient prior to surgery, these are the primary
centers that would consider purchasing the ROBODOC System. According to industry
sources, there are an additional 1,000 hospitals in the rest of Europe that
perform a significant number of orthopaedic and trauma surgeries. Thus, a total
of 1,800 hospitals in Europe are likely to consider acquiring the ROBODOC
System.
STRATEGY
The Company will seek to establish itself as a leading provider of
innovative image-directed, computer-controlled robotic technologies worldwide,
initially for orthopaedic applications and subsequently for non-orthopaedic
surgical applications. The Company currently markets and sells ROBODOC Systems
only in Europe. The Company's business strategy is to concentrate its marketing
and sales efforts on selling the ROBODOC System throughout Europe and then Japan
over the next three years. The Company will thereby attempt to establish an
installed customer base in Europe, Japan and other foreign markets through the
sale of its ROBODOC System, and offer its customers separate software packages
for each new orthopaedic application if, as and when developed by the Company.
Consequently, the Company's customers would be able to use the ROBODOC System as
the platform for performing a variety of orthopaedic surgical procedures without
incurring significant additional hardware costs. The Company also plans to
further exploit its image-directed robotics technology by incorporating
additional imaging modalities for presurgical planning, including ultrasound
(which is less expensive than CT) and magnetic resonance imaging (which unlike
CT does not involve the risk of radiation). The Company also intends to develop
an active robotic system capable of performing non-orthopaedic surgical
procedures.
PRODUCTS
The Company's products are:
-- ROBODOC SYSTEM
The ROBODOC System, whose principal components are a computer-controlled,
five-axis surgical robot and the Company's ORTHODOC Presurgical Planner, is an
active robotic system that can accurately perform key segments of surgical
procedures with precise tolerances generally not attainable by traditional
surgical techniques. The ROBODOC System allows the surgeon to prepare a
preoperative plan customized to the characteristics of the individual patient's
anatomy and generates a tape instructing the computer-controlled robot to
implement the surgical plan. The ROBODOC System includes a display console for
screen prompts and surgical plan simulation, a control cabinet for computers and
other electronic components, and proprietary applications and robot control
software. The surgeon communicates with the robot via a sterile controller.
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Attendant supplies include custom surgical drapes, specially designed cutters, a
leg-holding device (fixator) and a bone motion-detecting apparatus.
The sales price of the ROBODOC System is currently $635,000 and includes
full warranty, service, installation, training and some consumables. The current
list price for consumables averages approximately $700 per surgery. The service
contract is renewable annually for 10% of the original purchase price and
entitles the customer to upgrades and limited consumables.
-- ORTHODOC
The ORTHODOC is a Pentium(@)-based computer workstation that utilizes the
Company's proprietary software for preoperative surgical planning. The ORTHODOC
500, an integral part of the ROBODOC System, may be sold separately as a
surgical planner. The ORTHODOC 500 converts CT scan data of a patient's femur
into three dimensional models of the femur on a high-resolution monitor, and
through a graphical user interface permits the surgeon to examine the bone more
thoroughly, select the optimal implant for the patient using a built-in library
of available implants and select the position of the implant in the femur prior
to surgery. The ORTHODOC 100, which will be sold only on a stand-alone basis,
converts digitized x-rays of a patient's femur into pseudo three-dimensional
images for planning surgery.
The Company expects the price of the ORTHODOC to range from $33,000 to
$95,000, depending on the features selected.
POTENTIAL ORTHOPAEDIC APPLICATIONS OF ROBODOC SYSTEM
The Company intends to offer ROBODOC System customers separate software
packages for each new orthopaedic application if, as and when developed by the
Company. Consequently, the Company's customers would be able to use the ROBODOC
System as the platform to perform a variety of orthopaedic surgical procedures
without incurring significant additional hardware costs. The Company plans to
develop software packages for the following orthopaedic surgical procedures for
use with the ROBODOC System:
Hip Revision. Hip revision surgery generally is required to replace loose
or otherwise failed implants. Most implants require replacement in five to 20
years after the first operation. Hip revision surgery generally is difficult,
time consuming and complex. The metal in the existing implant distorts x-ray
images used for planning the surgery, obstructing the view of the remaining bone
and, if a cemented implant is to be replaced, the location of the fragmented
cement. The removal of the fragmented cement without removing any of the
remaining thin bone structure is a major challenge for the surgeon.
The Company is developing a software package for hip revision surgery using
the ROBODOC System, in collaboration with IBM and Johns Hopkins University. The
development of the hip revision application is being funded in part by a grant
from the National Institute for Standards and Technology (Advanced Technology
Program) of the United States Department of Commerce. See "Business -- Research
and Development." The first phase of the hip revision project relates to the
development and implementation of software to create a clearer image of the
remaining bone and fragmented cement in preparing the surgical plan. The second
phase of the project involves its validation in a clinical setting. The Company
believes that its hip revision software will improve surgical planning and
enable the five-axis robot to remove cement more precisely than if the hip
revision procedure were performed manually. The Company plans to conduct
clinical trials of the hip revision application in Europe before the end of
1996. Upon completion of the clinical trials, the Company intends to offer
software packages for the hip revision application to its customers.
Total Knee Replacement. The Company plans to develop a software package
for total knee replacement ("TKR") surgery using the ROBODOC System. The
proposed software package to be developed for TKR surgery is intended to enable
the ROBODOC System to select the optimal implant for the patient and make
accurate cuts in the bone, thus allowing the surgeon to properly orient and
align the implant. The proposed software package to be developed by the Company
for TKR surgery performed with the ROBODOC System, if and when developed, is
intended to result in a precise and accurate fit for implants that are properly
sized and placed, regardless of bone quality. Furthermore, the Company believes
that if and when this software
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package is developed, implant longevity and the prognosis for restored
biomechanics will be significantly improved as a result of TKR surgery performed
with the ROBODOC System.
Vertebral Pedicle Screws. Pedicle screws are used to fuse vertebrae in
need of repair due to trauma or herniated disc disease. The procedure involves
the placement of screws straight down the center of an irregular section of a
fragile bone only twice the diameter of the screw itself. Precise placement of a
screw affects the outcome of the surgery. Misplacement of a screw can result in
failure of the repair, trauma to the adjacent spinal cord, or rupture of nearby
blood sinuses which can hemorrhage severely. The Company believes that if and
when the development of the proposed software package for this surgical
procedure is completed, the ROBODOC System will be capable of performing this
surgical procedure more safely and effectively than surgery performed manually
since the computer-controlled robot is better able to precisely orient its tool
in a manner compatible with what is required for screw placement.
Acetabulum Replacement and Revision. The Company plans to complement the
THR femoral replacement application with acetabular cup planning and bone
preparation for hip socket replacement surgery. Currently, surgeons estimate the
size of the cup-shaped cavity in hip socket surgery using x-rays, which are
subject to distortion. Working in a narrow space with a limited view, the
surgeon ultimately selects the final cup size through trial and error. Due to
the limitations of available surgical tools, the surgeon is obliged to use a
hemispheric reamer and cup, although the human acetabulum (hip socket) is an
irregular shape. The Company believes that the software for this application, if
and when developed, would enable the computer-controlled robot to prepare an
accurate bed for the implant, based on its specifications, and could prepare an
irregularly shaped socket for a custom or anatomically-shaped acetabular
component. The three-dimensional capability of the ORTHODOC would better enable
it to determine and display the irregular shape of the acetabulum and instruct
the robot to prepare the proper socket. This procedure potentially could solve
the problem of leg-length discrepancies which often originate at the acetabulum.
Osteotomies. Osteotomies are precise cuts in bone intended to reshape or
realign abnormal or deformed structures. The Company's engineers have generated
a detailed work plan to adapt the ROBODOC System for use in performing long-bone
osteotomies on femurs and tibias (i.e., shin bones). The proposed software for
this application, if and when developed, is intended to enable the surgeon using
the views of the bone created by the ORTHODOC from CT scan data, to make trial
cuts, remove bone and manipulate the remaining fragments, and experiment with
the appropriate placement of plates and screws. The surgeon's final plan would
be saved on a tape that would instruct the robot where to make saw cuts. The
computer-controlled, five-axis robot would then orient itself in space by using
topographical features of the operative bone. A fixator would secure the bone to
the robot. The computer-controlled robot would then pre-place screw holes to
facilitate the final realignment and make the actual cuts.
AVAILABLE CLINICAL DATA; RISK VERSUS BENEFIT ISSUES
The Company has conducted a randomized clinical trial in the United States
at three centers. Of the 117 patients enrolled in the U.S. clinical study, 70
hips received treatment with the ROBODOC System and 61 hips in a control group
received conventional THR surgery. In addition, at least 425 patients have
received treatment with the ROBODOC System in Germany, but without comparison to
randomized control group patients.
In communications with the Company, the FDA has indicated a strong
"preference" for two year post-operative data from patients in the U.S. clinical
trial, although in a recent meeting the FDA indicated that it may accept a PMA
application for filing with only two year post-operative data on some patients
and permit the Company to submit the additional post-operative data while the
PMA application is under review. However, there can be no assurance that the FDA
will not require complete two year post-operative data on all patients
participating in the U.S. clinical trial before accepting a PMA application for
filing. The last patient receiving surgery in the U.S. clinical trial will reach
the two year post-operative mark in February 1998.
The number of patients enrolled in the U.S. clinical study is less than the
300 patients (150 ROBODOC System; 150 control group) initially requested to be
studied by the Company in its Investigational Device Exemption ("IDE")
application to the FDA. Nonetheless, there have been at least 495 primary THR
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surgeries performed with the ROBODOC System in the U.S. clinical trial and the
German study (without a control group). If the FDA concludes that the existing
clinical data is insufficient to establish the safety and efficacy of the
ROBODOC System, the FDA could require the Company to obtain additional clinical
data, which could significantly delay completion of the PMA review process.
It is generally believed that achieving better implant fit and alignment in
the femoral cavity are significant factors in the success of cementless THR
surgery. Based upon a comparison in the U.S. clinical trial of radiographs for
ROBODOC System surgeries versus conventional THR surgeries, the Company believes
that the clinical data appear to indicate that the ROBODOC System achieves
better implant fit and alignment.
The Company also believes that a reduced incidence of intraoperative
fractures with the ROBODOC System compared to conventional THR surgery would
offer an important benefit. The scientific and medical literature reports an
intraoperative fracture rate ranging from approximately 6 to 24 percent with
conventional THR surgery. The clinical data from the U.S. clinical trials
reflect no such fractures for ROBODOC System patients versus three for the
control group patients. The clinical data from the German study reflect no
intraoperative fractures with ROBODOC System patients.
The clinical data reflect significantly greater surgery time and blood loss
with the ROBODOC System, which could raise an issue with the FDA as to the risk
versus benefit of the device. Based on the clinical data to date, the Company is
not aware of clinically significant adverse effects or any increased risk to the
patient attributable to the increased surgery time or blood loss. Also, the
German data suggest that it is possible to reduce surgery time as surgeons gain
experience with the device. The surgeons in Germany who have used the ROBODOC
System have reduced surgery time to levels roughly comparable to those they have
experienced with conventional methods of THR surgery. The more limited clinical
data from the U.S. clinical trial, with fewer patients per center, do not show a
decrease. Nonetheless, the Company believes that the reduction in surgery time
shown in the German data can be replicated in the U.S. as surgeons receive more
training and gain more experience with the ROBODOC System. However, there can be
no assurance that the FDA will consider the German data adequate to extrapolate
that surgery time can be reduced in the U.S.
In February 1995, a law firm specializing in FDA regulatory matters
examined an interim report of preliminary data and concluded that it was
doubtful that the FDA would find that the device was safe and effective for its
intended use, or provided a therapeutic benefit, sufficient to permit PMA
approval, if the FDA were presented with the then existing preliminary data or
future data qualitatively similar to the preliminary data. One of the Company's
principal investigators and a co-inventor of the ROBODOC System reviewed the law
firm's report contemporaneously and disagreed with its conclusions. The interim
report reflected available data from: (i) the U.S. clinical trial, which at the
time consisted of reported data from 34 ROBODOC System hips and 18 control group
hips (except for the intraoperative fracture rate data, which was reported for
51 ROBODOC System subjects and 42 control group subjects); and (ii) the German
study, which consisted of reported data from 20 ROBODOC System patients. To
date, there is reported data in the U.S. clinical trial from 70 ROBODOC System
hips and 61 control group hips, and in the German study from at least 425
ROBODOC System patients. The Company's Director of Regulatory Affairs and
Quality Assurance resigned in September 1996 and subsequently has asserted that
one of the reasons for his resignation was his concern about the adequacy of the
Company's clinical data.
The Company believes that the preliminary data at the time of the interim
report were not sufficient to allow a meaningful evaluation. For example, the
radiographic interpretations measuring the implant fit and alignment parameters
were not yet completed and, therefore, were not included in the interim report
upon which the law firm's analysis was based. Similarly, the law firm's analysis
of the surgery time and blood loss safety concerns does not reflect additional
clinical data collected subsequent to February 1995, which the Company believes
continue to show a lack of clinically significant adverse effects and, in the
German data, a reduction in surgery time as surgeons gain experience with the
ROBODOC System. Also, the more complete data appear to show that the variety of
other adverse events cited in the law firm's report are roughly comparable to
those experienced by the control group subjects, with the exception of
post-operative knee pain (lasting up to six weeks) resulting from the locator
pins used to orient the ROBODOC System. Finally, the law firm's report cited
reliability problems with the device, which at the time was in the prototype
stage. The Company believes that subsequent refinements in the device and the
development of a commercial model have improved the ROBODOC System's
reliability. The Company has not engaged an independent third party to review
the currently available data.
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No assurance can be given that the FDA would agree that the Company's
currently available clinical data show that the ROBODOC System is safe and
effective for its intended use, provides a therapeutic benefit, or has an
acceptable risk/benefit ratio in light of increased surgery time and
intraoperative blood loss or other adverse events not generally associated with
conventional THR surgery. Further, no assurance can be given that the FDA would
not require the Company to obtain additional clinical data to resolve any
concern about the risk/benefit ratio offered by the ROBODOC System. If the
Company were required to obtain such additional data, the FDA review process
could be prolonged by as long as several years.
SALES AND MARKETING
Neither the ROBODOC System nor the ORTHODOC can be marketed in the United
States until clearance or approval is obtained from the FDA.
The Company has commenced marketing the ROBODOC System, and plans to market
the ORTHODOC, to orthopaedic and trauma surgeons and hospitals in Western
Europe, through direct sales and arrangements with implant manufacturers.
Presentations to potential customers focus on the clinical benefits obtained by
patients, and the potential financial and marketing benefits obtained by
hospitals and surgeons. The Company promotes its products in Europe through
presentations at trade shows and advertisements in professional journals and
technical and clinical publications, as well as through direct mail campaigns. A
significant portion of the net proceeds of this Offering will be used for
marketing and sales activities with respect to Company's products, principally
in Europe, and to establish a sales and marketing staff. See "Use of Proceeds."
To date, the Company's direct sales efforts have been primarily in Germany. Over
315 THR surgeries have been performed with the ROBODOC System at the
Berufsgenossenschaftliche Unfallklinik ("BGU") clinic in Frankfurt, Germany
since August 1994. As result of a significant increase in the number of THR
surgeries performed at the clinic with the ROBODOC System, the BGU clinic
purchased a second ROBODOC System in the second quarter 1996.
To accelerate sales and reduce the lengthy sales cycle, the Company has
entered into informal leasing arrangements with two major multinational leasing
companies. Based upon lease financing proposals offered to customers in Germany
by these leasing companies, the monthly lease payment for a five-year lease for
the ROBODOC System would be equivalent to the average price of one THR surgery.
The Company intends to commence marketing the ORTHODOC to hospitals,
orthopaedic surgeons and implant manufacturers in the United States, upon
receipt of clearance from the FDA. See "Business -- Government Regulation."
MANUFACTURING
The Company's manufacturing process consists primarily of final assembly of
purchased components, testing of the products and packaging, and is conducted at
its facility in Sacramento, California, which currently can support the
construction of two ROBODOC Systems per month. The Company purchases
substantially all components for its ROBODOC System from outside vendors, then
assembles these parts and installs its proprietary software. The ROBODOC System
consists of the robot base and the control cabinet, which are connected through
four interface cables, and the ORTHODOC. The robot is supplied by a sole source
vendor, Sankyo Seiki of Japan, which customizes the robot to the Company's
specifications for use with the ROBODOC System. Upon delivery of a robot, the
Company performs a series of tests to verify proper functioning. The
customization and supply process for the robot currently requires four months
lead time. While the robot can be obtained from other suppliers with appropriate
modifications and engineering effort, there can be no assurance that delays
resulting from the required modifications or engineering effort to adopt
alternative components would not adversely affect the Company. See "Risk
Factors -- Dependence on Supplier for Robot." Ancillary items required to
perform a robotic THR, including devices for fixing the hip and attaching it to
the robot, numerous probes and cutter bearing sleeves, are assembled and tested
separately.
Consumables, including sterile drapes, bone screws, cutters and pendants,
are also manufactured by outside vendors according to the Company's
specification and are inspected upon receipt to ensure that these specifications
are consistently met. The Company purchases these items in quantity and
distributes them on a
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per order basis. The Company also coordinates the packaging and sterilization of
certain items. The Company's policy is to procure its consumables from vendors
that it approves after ensuring that the goods comply with the Company's
sterilization requirements.
The ORTHODOC consists of a pentium-based computer workstation and
associated peripherals, and includes the Company's proprietary software. The
Company purchases and then tests the computer as a complete package. A computer
board is added to interface to CT/x-ray scanner input modules and, if required,
the ROBODOC System's tape output drive. The hard drive is reformatted to accept
the operating system, and appropriate ORTHODOC software is installed. The unit
is built configured for 110 or 220 AC volt operation.
The Company's manufacturing facilities are subject to periodic inspection
by the FDA for compliance with Good Manufacturing Practices ("GMP"). In
addition, the Company's products will be required to satisfy European
manufacturing standards for sale in Europe. The Company believes that it is in
compliance with GMP and expects to obtain ISO-9000 certification, which will be
required for sales of its products in Europe after June 14, 1998, by the end of
1996. See "Business -- Government Regulation."
RESEARCH AND DEVELOPMENT
Since its inception, the Company's research and development activities have
focused on the development of innovative image-directed computer-controlled
robotic products for surgical applications and operating software for these
products. The Company incurred research and development expenses of
approximately $2,361,000 and $2,720,000 in connection with the development of
the ROBODOC System and the ORTHODOC for the years ended December 31, 1995 and
December 31, 1994, respectively.
The Company is developing a software package for hip revision surgery, in
collaboration with IBM and Johns Hopkins University, funded in part by a grant
from the National Institute for Standards and Technology (Advanced Technology
Program) of the United States Department of Commerce ("NIST"). Hip revision
surgery generally is difficult, time consuming and complex. The metal in the
existing implant distorts x-ray images used for planning the surgery,
obstructing the remaining bone and, if a cemented implant is to be replaced, the
location of the fragmented cement. The removal of the fragmented cement without
removing any of the remaining thin bone structure is a major challenge for the
surgeon. The first phase of the hip revision project relates to the development
and implementation of software to create a clearer image of the remaining bone
and fragmented cement in preparing the surgical plan. The second phase of the
project involves its validation in a clinical setting. The Company believes that
its hip revision software will improve surgical planning for hip revision
surgery and would enable the five-axis robot to remove cement more precisely
than if the hip revision procedure was performed manually.
Under the terms of the NIST grant, the Company, IBM and Johns Hopkins
University are entitled to reimbursement for 49% of the expenses incurred in
connection with the project for a period of three years. The maximum amount of
expenses subject to reimbursement under the grant is approximately $4,000,000,
so that not more than approximately $1,960,000 in expenses may be reimbursed in
the aggregate to the Company, IBM and Johns Hopkins University under the grant.
The Company has incurred research and development expenses of approximately
$414,000 in connection with the hip revision project through September 30, 1996.
As of September 30, 1996, the Company had received $112,508 and IBM had received
$107,340 of a total of $219,848 distributed under the grant. A portion of the
net proceeds of this Offering will be used for the development of the hip
revision application. See "Use of Proceeds" and "Business--Potential Orthopaedic
Applications of ROBODOC System." The Company expects to commence clinical trials
for the hip revision application in Europe before the end of 1996.
The Company is expanding the library of implants used at clinical sites to
include multiple implant lines, revision stems, and custom-made prostheses. The
Company has also commenced preliminary work with respect to the application of
the base technology for total knee replacement surgery.
As of November 1, 1996, the Company's engineering staff was comprised of 15
engineers (including three Ph.D.s) in a variety of specialities.
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SCIENTIFIC ADVISORY BOARD
The Company has established relationships with the outside scientific
advisors listed below. These scientific and medical experts provide strategic
advice to the Company regarding its research and development programs, new
technological advances and medical requirements. It is anticipated that meetings
of the Company's scientific advisors will be held quarterly.
RUSSELL TAYLOR, PH.D., has been a professor of Computer Science at Johns
Hopkins University since 1995. From 1976 through 1995, Dr. Taylor was a staff
member or manager of various departments at the Research Division of IBM. Dr.
Taylor is a member of the editorial board of the International Journal of
Robotics Research and the Journal of Image Guided Surgery and Medical Image
Analysis. Dr. Taylor received a Ph.D. in Computer Science from Stanford
University in 1976.
RONALD KIKINIS, M.D. has been the Director of the Surgical Planning
Laboratory of the Department of Radiology, Brigham & Women's Hospital and
Harvard Medical School since 1990 and has been a Research Assistant Professor of
Biomedical Engineering at Boston University since 1992. From 1986 to 1988, Dr.
Kikinis was a research fellow at the University Hospital in Zurich, Switzerland.
He received his M.D. from the University of Zurich in 1982.
KENNETH ALAN KRACKOW, M.D., an orthopaedic surgeon specializing in total
knee replacement, has been a professor of Orthopaedics at the State University
of New York at Buffalo and head of the Department of Orthopaedic Surgery at
Buffalo General Hospital since 1992. From 1978 through 1992, he was a Professor
of Orthopaedic Surgery at Johns Hopkins University. Dr. Krackow received an M.D.
from Duke University in 1971.
RAINER KOTZ, M.D., an orthopaedic surgeon specializing in total hip
replacement and limb salvage, has been the Head of the Department of
Orthopaedics, University of Vienna, Austria since 1984. He is President-elect of
the German Association for Orthopaedics and Traumatology. Dr. Kotz received an
M.D. from the University of Vienna in 1967.
COMPETITION
The principal competition for the ROBODOC System is manual surgery
performed by orthopaedic surgeons, using surgical power tools and manual
devices. The providers of these instruments are the major orthopaedic companies,
which include Howmedica, Inc. (a subsidiary of Pfizer, Inc.), located in New
York; Zimmer, Inc. (a subsidiary of Bristol-Myers Squibb Company), located in
Indiana; Johnson & Johnson Orthopaedics, Inc. (a subsidiary of Johnson &
Johnson), located in New Jersey; DePuy, Inc. (a subsidiary of Corange Limited),
located in Indiana; Biomet, Inc. located in Indiana; and Osteonics, Inc. (a
subsidiary of the Stryker Corporation), located in New Jersey. There are
companies in the medical products industry, particularly the major orthopaedic
companies, capable of developing and marketing computer-controlled robotic
systems for surgical applications, many of whom have significantly greater
financial, technical, manufacturing, marketing and distribution resources than
the Company, and have established reputations in the medical device industry.
However, the Company believes that it enjoys a significant competitive advantage
over such companies in view of the time required to develop an image-directed,
computer controlled robotic system and to obtain the necessary regulatory
approvals, including the sponsorship of clinical trials. There can be no
assurance that future competition will not have a material adverse effect on the
Company's business.
The Company's ROBODOC System represents a significant technological
advancement with respect to the manner in which THR surgery is performed. The
Company's image-directed, computer-controlled robotic technology is intended to
complement, rather than replace, surgeons in performing THR and other
orthopaedic surgeries. Although there are companies which market technologically
advanced surgical tools used by surgeons in performing orthopaedic surgeries,
including passive robot systems that direct the surgeon in planning and
performing surgical procedures (e.g., aiming and holding devices), the Company
believes that the ROBODOC System is the only active robotic system that performs
a key segment of THR surgery (i.e., milling a bone cavity) under the supervision
of a surgeon. The cost of the ROBODOC System represents a significant capital
expenditure for a customer, and accordingly may discourage purchases by certain
customers. The Company intends to offer its customers separate software packages
for each new orthopaedic application that may be developed by the Company.
Consequently, the Company's customers would be able to
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use the ROBODOC System as the platform to perform a variety of orthopaedic
surgical procedures without incurring significant additional hardware costs.
WARRANTY AND SERVICE
The Company offers a full warranty, covering parts and labor, for the first
year following the purchase of its products, which warranty coverage can be
extended on an annual basis by purchasing a maintenance agreement at a price of
10% of the original purchase price of the product.
Generally, minor problems have been diagnosed through modem and fixed
on-site by users. The Company has developed a service program using a high
volume clinical site as a model. The Company plans to provide 24-hour turnaround
time for any site. The Company has contracted with a third party in Europe to
service the Company's customer base.
The Company plans to continue training its customers with its in-house
technical staff. Following the completion of this Offering, the Company
anticipates hiring a staff of technicians to train customers.
PATENTS AND PROPRIETARY RIGHTS
The Company relies on a combination of patent, trade secret, copyright and
trademark laws and contractual restrictions to establish and protect proprietary
rights in its products and to maintain its competitive position.
The Company has filed two patent applications, and is preparing for filing
additional patent applications covering various aspects of its technology. In
addition, IBM has agreed not to assert infringement claims against the Company
with respect to an IBM patent relating to robotic medical technology, to the
extent such technology is used in the Company's products. Furthermore,
significant portions of the ORTHODOC and ROBODOC System software are protected
by copyrights. IBM has granted the Company a royalty-free license for the
underlying software code for the ROBODOC System. In addition, the Company has
registered the marks ROBODOC and ORTHODOC.
The Company's ability to compete successfully may depend, in part, on its
ability to obtain and protect patents, protect trade secrets and operate without
infringing the proprietary rights of others. However, there can be no assurance
that pending or future patent applications will mature into issued patents, or
that the Company will continue to develop its own patentable technologies.
Further, there can be no assurance that any patents that may be issued in the
future will effectively protect the Company's technology or provide a
competitive advantage for the Company's products or will not be challenged,
invalidated, or circumvented in the future. In addition, there can be no
assurance that competitors, many of which have substantially more resources than
the Company and have made substantial investments in competing technologies,
will not obtain patents that will prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or
internationally.
Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Patents issued and patent applications filed
relating to medical devices are numerous and there can be no assurance that
current and potential competitors and other third parties have not filed or in
the future will not file applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights relating to
products or processes used or proposed to be used by the Company.
The Company's patent counsel has not undertaken any infringement study to
determine if the Company's products and pending patent applications infringe on
other existing patents. The medical device industry has been characterized by
substantial competition and litigation regarding patent and other proprietary
rights. The Company intends to vigorously protect and defend its patents and
other proprietary rights relating to its proprietary technology. Litigation
alleging infringement claims against the Company (with or without merit), or
instituted by the Company to enforce patents issued to the Company or to protect
trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others, is
costly and time consuming. If any relevant claims of third-party patents are
upheld as valid and enforceable in any litigation or administrative proceedings,
the Company could be prevented from practicing
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the subject matter claimed in such patents, or could be required to obtain
licenses from the patent owners of each patent, or to redesign its products or
processes to avoid infringement. There can be no assurance that such licenses
would be available or, if available, would be available on terms acceptable to
the Company or that the Company would be successful in any attempt to redesign
its products or processes to avoid infringement. Accordingly, an adverse
determination in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling its
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company requires each of its employees, consultants, and advisors to
execute confidentiality and assignment of inventions and proprietary information
agreements in connection with their employment, consulting or advisory
relationships with the Company. These agreements generally provide that all
inventions, ideas and improvements made or conceived by the individual arising
out of his relationship with the Company will be the exclusive property of the
Company. This information is required to be kept confidential and not disclosed
to third parties, except with the consent of the Company or under certain
circumstances. However, there can be no assurance that these agreements will
provide effective protection for the Company's proprietary information in the
event of unauthorized use or disclosure of such information, or that the Company
will have adequate remedies in the event of such breach. Furthermore, no
assurance can be given that competitors will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's proprietary technology, or that the Company can
meaningfully protect its rights in unpatented proprietary technology.
GOVERNMENT REGULATION
The medical devices to be marketed and manufactured by the Company are
subject to extensive regulation by the FDA and, in some instances, by foreign
and state governments. Pursuant to the Federal Food, Drug, and Cosmetic Act of
1976, as amended, and the regulations promulgated thereunder (the "FDC Act"),
the FDA regulates the clinical testing, manufacture, labeling, distribution, and
promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant pre-market clearance or pre-market approval for devices,
withdrawal of marketing clearances or approvals, and criminal prosecution. The
FDA also has the authority to request repair, replacement or refund of the cost
of any device manufactured or distributed by the Company.
In the United States, medical devices are classified into one of three
classes (Class I, II or III), on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and effectiveness. Under FDA
regulations, Class I devices are subject to general controls (e.g., labeling,
pre-market notification and adherence to good manufacturing practices ("GMP"))
and Class II devices are subject to general and special controls (e.g.,
performance standards, postmarket surveillance, patient registries, and FDA
guidelines). Generally, Class III devices are those which must receive
pre-market approval by the FDA to ensure their safety and effectiveness (e.g.,
life-sustaining, life-supporting and implantable devices, or new devices which
are not substantially equivalent to legally marketed devices).
Before a new device can be introduced into the market, the manufacturer
must generally obtain FDA permission to market through either a 510(k)
notification or a pre-market approval ("PMA") application. A 510(k) clearance
will be granted if the submitted information establishes that the proposed
device is "substantially equivalent" to a legally marketed Class I or II medical
device, or to a Class III medical device for which the FDA has not called for
PMAs. The FDA has recently been requiring a more vigorous demonstration of
substantial equivalence than in the past, including in some cases requiring
clinical data. It generally takes from four to 12 months from the date of
submission to obtain a 510(k) clearance, but it may take longer. The FDA may
determine that a proposed device is not substantially equivalent to a legally
marketed device, or that additional information is needed before a substantial
equivalence determination can be made. A "not substantially equivalent"
determination, or a request for additional information, could delay the market
introduction of a new product that falls into this category and could have a
material adverse effect on the Company's business, financial condition and
results of operations. For any of the Company's products that are cleared
through the 510(k) process, modifications or enhancements that could
significantly affect the
40
<PAGE> 44
safety or efficacy of the device or that constitute a major change to the
intended use of the device will require new 510(k) submissions.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a
pre-amendment Class III device for which FDA has called for PMAs. A PMA
application must be supported by valid scientific evidence, which typically
includes extensive data, including human clinical trial data to demonstrate the
safety and effectiveness of the device. The PMA application must also contain
the results of all relevant bench tests, laboratory and animal studies, a
complete description of the device and its components, and a detailed
description of the methods, facilities and controls used to manufacture the
device. In addition, the submission must include the proposed labeling,
advertising literature and any required training materials.
Upon receipt of a PMA application, the FDA makes a threshold determination
as to whether the application is sufficiently complete to permit a substantive
review. If the FDA determines that the PMA application is sufficiently complete
to permit a substantive review, the FDA will accept the application for filing.
Once the submission is accepted for filing, the FDA begins an in-depth review of
the PMA. An FDA review of a PMA application generally takes one to two years
from the date the PMA application is accepted for filing, but may take
significantly longer. The review time is often significantly extended by the FDA
asking for more information or clarification of information already provided in
the submission. During the review period, an advisory committee, typically a
panel of clinicians, will likely be convened to review and evaluate the
application and provide recommendations as to whether the device should be
approved. The FDA is not bound by the recommendations of the advisory panel.
Toward the end of the PMA review process, the FDA generally will conduct an
inspection of the manufacturer's facilities to ensure that the facilities are in
compliance with applicable GMP requirements.
If the FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, FDA will either issue an approval letter or an
approvable letter, which usually contains a number of conditions which must be
met in order to secure final approval of the PMA. When and if those conditions
have been fulfilled to the satisfaction of FDA, the agency will issue a PMA
approval letter, authorizing commercial marketing of the device for certain
indications. If the FDA's evaluation of the PMA application or manufacturing
facilities are not favorable, the FDA will deny approval of the PMA application
or issue a "non-approvable letter." The FDA may also determine that additional
clinical trials are necessary, in which case PMA approval may be delayed for
years while additional clinical trials are conducted and submitted in an
amendment to the PMA. The PMA process can be expensive, uncertain and lengthy
and a number of devices for which FDA approval has been sought by other
companies have never been approved for marketing.
Modifications to a device that is the subject of an approved PMA, its
labeling, or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA.
There can be no assurance that the Company will be able to obtain necessary
regulatory approvals for current products or products under development on a
timely basis, or at all, or that the Company will have the necessary resources
to obtain such approval. Delays in receipt of or failure to receive such
approvals, the loss of previously received approvals, or failure to comply with
existing or future regulatory requirements would have a material adverse effect
on the Company's business, financial condition and results of operation.
If human clinical trials of a device are required in connection with either
a 510(k) notification or a PMA application, and the device presents a
"significant risk," the sponsor of the trial (usually the manufacturer or the
distributor of the device) is required to file an investigational device ("IDE")
application prior to commencing human clinical trials. The IDE application must
be supported by data, typically including the results of animal and laboratory
testing. If the IDE application is reviewed and approved by the FDA and one or
more appropriate Institutional Review Boards ("IRBs"), human clinical trials may
begin at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. If the device presents a "nonsignificant risk"
to the patient, a sponsor may begin the clinical trial after obtaining approval
41
<PAGE> 45
for the study by one or more appropriate IRBs, without the need for FDA
approval. Sponsors of clinical trials are permitted to sell those devices
distributed in the course of the study provided such compensation does not
exceed recovery of the costs of manufacture, research, development and handling.
An IDE supplement must be submitted to and approved by the FDA before a sponsor
or an investigator may make a change to the investigational plan that may affect
its scientific soundness or the rights, safety or welfare of human subjects.
Any products manufactured or distributed by the Company pursuant to the FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, including recordkeeping requirements and reporting of adverse
experiences with the use of the device. Device manufacturers are required to
register their establishments and list their devices with the FDA and with
certain state agencies and are subject to periodic inspections by the FDA and
certain state agencies. The FDC Act requires devices to be manufactured in
accordance with GMP regulations, which impose certain procedural and
documentation requirements upon the Company with respect to manufacturing and
quality assurance activities. Recently adopted GMP requirements, including those
pertaining to design controls, are likely to increase the cost of GMP
compliance.
The Company intends to file a pre-market approval application ("PMA") with
the FDA in mid to late 1997 for approval to market the ROBODOC System in the
United States. The Company intends to make an informal pre-PMA submission of the
clinical data to the FDA. Depending upon the FDA's review of this submission,
the target date for submitting a PMA application could be extended. There can be
no assurance that the PMA application, once submitted, will be accepted for
filing, found approvable, or, if found approvable, will not take longer than
expected to obtain approval, or will not include unfavorable post-approval
restrictions (for example, limitations on the indicated patient population). See
"Risk Factors -- Available Clinical Data; Risk Versus Benefit Issues."
After receipt of PMA approval, if any, the Company expects that the FDA
would consider new surgical applications for the ROBODOC System to be new
indications for use, which generally would require FDA approval of a PMA
supplement or, possibly, a new PMA. The FDA is also likely to require additional
approvals before the agency will permit the Company to incorporate new imaging
modalities (such as ultrasound and MRI) or other new technologies in the ROBODOC
System. The FDA likely will require that such additional approvals be supported
by new clinical data.
In February 1996, the Company filed a 510(k) submission for the ORTHODOC as
a stand-alone device. Such 510(k) submission is the first product clearance or
approval filing made by the Company with the FDA. In October 1996, the Company
submitted a response to correspondence in May and July 1996 from the FDA in
which the agency stated that it could not determine the ORTHODOC's substantial
equivalence to legally marketed predicate devices without certain additional
information, primarily related to the documentation and testing of the software.
There can be no assurance that the FDA will consider the Company's response
adequate or that the ORTHODOC will receive 510(k) clearance in a timely fashion,
or at all.
Labeling and promotion activities are subject to scrutiny by the FDA and,
in certain instances, by the Federal Trade Commission. Current FDA enforcement
policy prohibits marketing approved medical devices for unapproved uses. The
Company and its products are also subject to a variety of state laws and
regulations in those states or localities where its products are or will be
marketed. Any applicable state or local regulations may hinder the Company's
ability to market its products in those states or localities. Manufacturers are
also subject to numerous federal, state and local laws relating to such matters
as safe working conditions, manufacturing practices, environmental protection,
fire hazard control and disposal of hazardous or potentially hazardous
substances. There can be no assurance that the Company will not be required to
incur significant costs to comply with such laws and regulations now or in the
future or that such laws or regulations will not have a material adverse effect
upon the Company's business, financial condition or results of operations.
Exports of products subject to the 510(k) notification requirements, but
not yet cleared to market, are permitted without FDA export approval provided
certain requirements are met. Unapproved products subject to the PMA
requirements must receive prior FDA export approval unless they are approved for
use by any member country of the European Union and certain other countries,
including Australia, Canada, Israel, Japan, New Zealand, Switzerland and South
Africa, in which case they can be exported to any country without prior FDA
approval. To obtain FDA export approval, when it is required, certain
requirements must
42
<PAGE> 46
be met and information must be provided to the FDA, including documentation
demonstrating that the product is approved for import into the country to which
it is to be exported and, in some instances, safety data from animal or human
studies. There can be no assurance that the Company will receive FDA export
approval when such approval is necessary, or that countries to which the devices
are to be exported will approve the devices for import. Failure of the Company
to obtain CPEs, meet FDA's export requirements, or obtain FDA export approval
when required to do so, could have a material adverse effect on the Company's
business, financial condition and results of operations.
The introduction of the Company's products in foreign markets will also
subject the Company to foreign regulatory clearances which may impose additional
substantive costs and burdens. International sales of medical devices are
subject to the regulatory requirements of each country. The regulatory review
process varies from country to country. Many countries also impose product
standards, packaging requirements, labeling requirements and import restrictions
on devices. In addition, each country has its own tariff regulations, duties and
tax requirements. Approval by the FDA and foreign government authorities is
unpredictable and uncertain, and no assurance can be given that the necessary
approvals or clearances for the Company's products will be granted on a timely
basis or at all. Delays in receipt of, or a failure to receive, such approvals
or clearances, or the loss of any previously received approvals or clearances,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The ROBODOC System satisfies international electromedical standard IEC
601-1 and the protection requirements of the Electromagnetic Compatability
Directive (89/336/EEC), thus allowing the Company to apply the CE Mark. This
conformity is evidenced by the grant of a GS-Mark by Technische Ubermachtungs
Verein Rheinland ("TUV"), a testing body in Germany, under current German
regulations.
The Company's products are subject to continued and pervasive regulation by
the FDA and foreign and state regulatory authorities. Changes in existing
requirements or adoption of new requirements or policies could adversely affect
the ability of the Company to comply with regulatory requirements. Failure to
comply with regulatory requirements could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will not be required to incur significant costs to
comply with laws and regulations in the future or that the failure to comply
with such laws or regulations will not have a material adverse effect upon the
Company's business, financial condition or results of operations.
PRODUCT LIABILITY
The manufacture and sale of medical products exposes the Company to the
risk of significant damages from product liability claims. The Company maintains
product liability insurance against product liability claims in the amount of $5
million per occurrence and $5 million in the aggregate. In addition, in
connection with the sale of ROBODOC Systems, the Company enters into
indemnification agreements with its customers pursuant to which the customers
indemnify the Company against any claims against it arising from improper use of
the ROBODOC System. There can be no assurance, however, that the coverage limits
of the Company's insurance policies will be adequate, that the Company will
continue to be able to procure and maintain such insurance coverage, that such
insurance can be maintained at acceptable costs, or that customers will be able
to satisfy indemnification claims. Although the Company has not experienced any
product liability claims to date, a successful claim brought against the Company
in excess of its insurance coverage could have a materially adverse effect on
the Company's business, financial condition, and results of operations.
FACILITIES
The Company's executive offices and production facility, comprising a total
of approximately 15,000 square feet of space, are located in Sacramento,
California. The Company occupies its manufacturing facility premises pursuant to
a lease that expires in 1998 and occupies its office facilities on a
month-to-month tenancy. The total rent expense for these premises is
approximately $12,300 per month. The lease for the Company's manufacturing
facility provides for escalation of rent at the rate of 5% per annum. See Note 8
of notes to consolidated financial statements. The Company is considering
alternative lease arrangements, and believes that alternative space is available
on reasonable terms. While the Company believes that its existing facilities are
adequate for its present operations, it anticipates that within the next two
years it will be required
43
<PAGE> 47
to relocate to a larger facility of from 20,000 to 25,000 square feet to
accommodate future growth in manufacturing and research and development.
EMPLOYEES
As of November 1, 1996, the Company had 28 full time employees, including
15 in research and development, three in manufacturing, four in regulatory
affairs and quality assurance, one in sales and marketing and five in
administration. The Company also has three part-time employees. None of the
Company's employees is covered by a collective bargaining agreement. The Company
believes its relationship with its employees is satisfactory.
LITIGATION
The Company is not a party to any legal proceedings.
44
<PAGE> 48
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Ramesh C. Trivedi(1)............. 57 President, Chief Executive Officer and a Director
James C. McGroddy(1)(2).......... 59 Chairman of the Board
Wendy Shelton-Paul............... 44 Vice President of Medical Affairs and a Director
Michael J. Tomczak............... 41 Vice President, Chief Financial Officer and Secretary
Peter Kazanzides................. 35 Director of Robotics and Software
Brent D. Mittelstadt............. 37 Director of Biomedical Applications
Stu Heald........................ 59 Manager of Manufacturing
John N. Kapoor(1)(2)............. 52 Director
Paul A.H. Pankow................. 66 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee of the Board of Directors.
(2) Member of Audit Committee of the Board of Directors.
RAMESH C. TRIVEDI, PH.D., has been President, Chief Executive Officer and a
Director of the Company since November 1995, and served as a consultant to the
Company from February 1995 until November 1995. Dr. Trivedi has over 25 years
experience in the healthcare field. Dr. Trivedi founded California Biomedical
Consultants in 1987, an international consulting firm. From 1985 to 1986, Dr.
Trivedi was the President and Chief Executive Officer of DigiRad Corporation, a
medical imaging company. From 1978 to 1984, he was the director of business
development of Syva Company and the General Manager of Synaco, Inc., divisions
of Syntex Corporation, a pharmaceutical company. From 1972 to 1978, Dr. Trivedi
was the head of the product management group at the Worthington division of
Millipore Corporation, a membrane filtration company, and the head of the
chemistry group of the Diagnostic Division of Pfizer, Inc. from 1971 to 1972.
Dr. Trivedi received a Ph.D. in Chemical Engineering from Lehigh University in
1970 and an MBA from Pepperdine University in 1981.
JAMES C. MCGRODDY, PH.D., has been Chairman of the Board of Directors of
the Company since November 1995. He has been employed by IBM since 1965, and
since January 1, 1996 has served as Senior Vice President and Special Advisor to
the Chairman of IBM. From May 1989 to December 31, 1995, Dr. McGroddy was Senior
Vice President of Research of IBM with responsibility for approximately 2,500
technical professionals in IBM's seven research laboratories around the world.
He is a member of IBM's Worldwide Management Council. The Company has been
advised by IBM that Dr. McGroddy is retiring from IBM effective December 31,
1996 and that his service as a member of the Company's Board of Directors
thereafter will be in his personal capacity and not as a designee of IBM. Dr.
McGroddy has been involved in the development of the Company since its inception
in October 1990, initially as an advisor and since November 1995 as a Director.
Dr. McGroddy received a Ph.D. in physics from the University of Maryland in
1965. Dr. McGroddy was appointed to the Board of Directors as the designee of
IBM pursuant to a Stockholders' Agreement. See "Certain Transactions -- Initial
Transactions with IBM."
WENDY SHELTON-PAUL, DVM, has been a Director of the Company since February
1993. Dr. Shelton-Paul served as a consultant to the Company from June 1993 to
January 1994, when she joined the Company as its Vice President of Science and
Technology. From February 1995 through November 1995, she served as Acting Chief
Executive Officer of the Company. Since November 1995, she has served as Vice
President of Medical Affairs. Until 1993, Dr. Shelton-Paul owned and operated a
private veterinary practice. Dr. Shelton-Paul received a DVM from the University
of California School of Veterinary Medicine in 1981.
MICHAEL J. TOMCZAK has been Vice President and Chief Financial Officer of
the Company since October 1991 and Secretary since September 1996. From
September 1988 to October 1991, Mr. Tomczak served as a Senior Manager of Ernst
& Young LLP, directing its Entrepreneurial Services Group in the Sacramento
office. From September 1985 to September 1988, Mr. Tomczak served as Vice
President of Finance for Valley Industries, a manufacturer of automotive
products. Mr. Tomczak became a certified public accountant in Michigan in 1981
and in California in 1989. He received a B.A. from Western Michigan University
in 1979.
45
<PAGE> 49
PETER KAZANZIDES, PH.D., a co-founder of the Company, has been an employee
of the Company since November 1990 and Director of Robotics and Software of the
Company since December 1995. He received Sc.B., Sc.M., and Ph.D. degrees in
electrical engineering from Brown University in 1983, 1985, and 1988,
respectively. His dissertation focused on force control and multiprocessor
systems for robotics. He performed post-doctoral research in surgical robotics
from March 1989 to March 1990 at the IBM T.J. Watson Research Center.
BRENT D. MITTELSTADT, a co-founder of the Company, has been an employee of
the Company since November 1990 and Director of Surgical Applications of the
Company since December 1995. He began research in surgical robotics in 1986 as a
visiting research scientist at the IBM T.J. Watson Research Center and is
responsible for much of the early development of CT guided robotic systems for
total hip replacement surgery. Mr. Mittelstadt received a B.S. in Biology from
the University of Arizona in 1984.
STU HEALD has been Manager of Manufacturing of the Company since June 1996.
Mr. Heald has over 30 years experience in manufacturing products. From September
1993 to June 1996, Mr. Heald served as Operations Manager at Advanced Power
Solutions, a division of M&L Enterprises, Inc., a manufacturer of power
supplies. From October 1986 to August 1993, Mr. Heald served as Shop Operation
Manager at Resonex Inc., a manufacturer of magnetic resonance imaging systems.
Mr. Heald received a B.S. in Industrial Management from California State
University San Francisco in 1962.
JOHN N. KAPOOR, PH.D., has been a Director of the Company since December
1995. Dr. Kapoor founded EJ Financial Enterprises, Inc., a healthcare consulting
and investment company, in March 1990, of which he is currently President. Since
October 1990, Dr. Kapoor has been Chairman of Option Care, Inc., a franchisor of
home infusion therapy businesses. Dr. Kapoor has been the Chairman of Unimed
Pharmaceuticals, Inc., a specialty pharmaceutical company since 1990. Since May
1996, Dr. Kapoor has been Chief Executive Officer of Akorn, Inc., a manufacturer
and distributor of ophthalmic products, of which Dr. Kapoor has also served as
Chairman since May 1996. In addition, Dr. Kapoor has served as chairman of
NeoPharm, Inc., a cancer drug research and development company. Dr. Kapoor also
served as Chairman of Lyphomed, Inc., a pharmaceutical company, from 1983 to
1990, and was a Director of Lunar Corp., a manufacturer and marketer of x-ray
and ultrasound systems, from May 1990 to April 1996. Dr. Kapoor received a Ph.D.
in medicinal chemistry from State University of New York in 1970.
PAUL A.H. PANKOW has been a Director of the Company since May 1995. Since
March 1995, Mr. Pankow has been President of PAP Consulting, a business and
technical consulting firm. From September 1959 to February 1995, Mr. Pankow held
various positions with 3M Corporation, most recently as a Vice President, and as
Chief Executive Officer of its Imaging Systems Division. He currently serves as
chairman of the Optoelectronic Industry Development Association and is a member
of several other industry boards. Mr. Pankow received a B.S. in mechanical
engineering and business administration from the University of Minnesota in
1956.
On August 16, 1992, a lawsuit was filed against Dr. Kapoor in the United
States District Court for the Northern District of Illinois by Fujisawa
Pharmaceutical Co., Ltd. and Fujisawa USA, Inc. ("Fujisawa"). The complaint
alleged that Dr. Kapoor, while President and Chief Executive Officer of
Lyphomed, Inc., a company acquired by Fujisawa, violated provisions of the
Federal securities laws and the Racketeer Influenced and Corrupt Organizations
Act (RICO), and also asserted certain state law claims. On July 25, 1996, the
complaint was dismissed in part, and Dr. Kapoor was granted summary judgment on
the remaining claims. On August 22, 1996, Fujisawa filed a notice of appeal of
the dismissal and summary judgment decision. Dr. Kapoor vigorously denies the
allegations and filed a complaint against Fujisawa in Illinois state court on
August 27, 1996 claiming breach of contract, defamation of character and other
state law claims.
All directors hold office until the annual meeting of stockholders of the
Company following their election or until their successors are duly elected and
qualified. Officers are appointed by the Board of Directors and serve at its
discretion.
Directors do not receive any cash compensation from the Company for service
as members of the Board of Directors; however, the Company reserves the right to
adopt a policy providing for compensation of independent directors. On July 26,
1996, Mr. Pankow was granted an option to purchase 2,704 shares of Common Stock
at an exercise price of $2.07 per share.
46
<PAGE> 50
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation awarded to, earned by or
paid to the Company's Chief Executive Officer and each other executive officer
of the Company whose salary and bonus for the year ended December 31, 1995
exceeded $100,000 (collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
---------------------------------- COMPENSATION
OTHER SECURITIES
ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION OPTIONS
- ------------------------------------------- ----- -------- ------------ --------------
<S> <C> <C> <C> <C>
Ramesh C. Trivedi.......................... 1995 $ 34,014(1) -- 0(2)
Chief Executive Officer and President
Wendy Shelton-Paul......................... 1995 $120,000(3) -- 13,517(4)
Vice President of Medical Affairs
Michael J. Tomczak......................... 1995 $104,000(5) -- 8,786(4)
Vice President and Chief Financial
Officer
</TABLE>
- ---------------
(1) Includes compensation awarded to, earned by or paid to Dr. Trivedi as Chief
Executive Officer and President of the Company from November 15, 1995, when
he assumed these offices, through the end of the year. Does not include fees
of $256,175 for consulting services rendered to the Company from February
1995 until November 15, 1995 pertaining to the formulation and
implementation of the Company's business and marketing plan.
(2) Although Dr. Trivedi received no options during fiscal 1995, he was granted
options to purchase 316,907 shares of Common Stock, at an exercise price of
$0.07 per share, on February 16, 1996.
(3) Dr. Shelton-Paul served as acting Chief Executive Officer of the Company
from February 1995 through November 15, 1995, and has been Vice President of
Medical Affairs of the Company since January 1994. Dr. Shelton-Paul receives
a salary of $120,000 per annum.
(4) The options covering these shares of Common Stock were repriced on February
16, 1996. See the table captioned "Repricing of Options" under
"Management -- Stock Options."
(5) Mr. Tomczak receives a salary of $112,000 per annum.
EMPLOYMENT AGREEMENTS
On December 8, 1995, the Company entered into an employment agreement with
Dr. Ramesh C. Trivedi, the Company's Chief Executive Officer and President. The
agreement is for no specified term and provides for the at-will employment of
Dr. Trivedi. Pursuant to the employment agreement, Dr. Trivedi is to receive an
annual salary of $264,000 ($22,000 per month), plus out-of-pocket expenses. Dr.
Trivedi's employment agreement provides for the grant of options to purchase
316,907 shares of the Company's Common Stock, at an exercise price of $0.07 per
share, which were granted in February 1996. Upon termination by the Company,
other than for cause (as defined in the employment agreement), Dr. Trivedi is
entitled to receive his monthly salary for a period of nine months following the
date of termination and consulting fees (at his then prevailing consulting rate)
for three months of consulting services to be rendered during the 12 months
following such termination.
None of the other Named Executive Officers has an employment agreement with
the Company.
47
<PAGE> 51
STOCK OPTIONS
The following table contains information concerning the grant of stock
options under the Company's 1991 Stock Option Plan (which was terminated in
December 1995) to Dr. Shelton-Paul and Mr. Tomczak during the fiscal year ended
December 31, 1995. See "Management -- Stock Option Plan" and Note 6 to notes to
consolidated financial statements appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL
SHARES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED(1) FISCAL YEAR SHARE(2) DATE
- ------------------------------------------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Ramesh C. Trivedi..................... --(3) -- -- --
Wendy Shelton-Paul.................... 13,517(4) 41.3% $ 4.88 4/30/05
Michael J. Tomczak.................... 8,786(4) 26.9% $ 4.88 4/30/05
</TABLE>
- ---------------
(1) Stock options are granted at the discretion of the Compensation Committee of
the Company's Board of Directors. Stock options have a 10-year term and vest
periodically over a period not to exceed five years.
(2) The Compensation Committee of the Company's Board of Directors may elect to
reduce the exercise price of any option to the current fair market value of
the Common Stock if the value of the Common Stock has declined from the date
of grant.
(3) Although Dr. Trivedi received no options during fiscal 1995, he was granted
options to purchase 316,907 shares of Common Stock, at an exercise price of
$0.07 per share, on February 16, 1996 pursuant to the Company's 1995 Stock
Option Plan.
(4) The options covering these shares of Common Stock were repriced on February
16, 1996. See the table captioned "Repricing of Options" below.
48
<PAGE> 52
The following table summarizes for each of the Named Executive Officers the
total number of unexercised options, if any, held at December 31, 1995, and the
aggregate dollar value of in-the-money, unexercised options, held at December
31, 1995, in each case after giving effect to the replacement in February 1996
of previously held options. The value of the unexercised, in-the-money options
at December 31, 1995, is the difference between their exercise or base price and
the value of the underlying Common Stock on December 31, 1995, at an assumed
price of $5.00 per share.
AGGREGATED OPTION EXERCISES -- JANUARY 1, 1995 -
DECEMBER 31, 1995 AND DECEMBER 31, 1995 OPTION VALUES
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
SHARES ACQUIRED NUMBER OF SECURITIES VALUE OF UNEXERCISED
UPON EXERCISE OF UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS AT OPTIONS AT
DURING FISCAL 1995(1) DECEMBER 31, 1995(1) DECEMBER 31, 1995(1)
VALUE
NAME NUMBER REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------- -------- ----------- ----------- ---------- -----------
Ramesh C. Trivedi.................... -- -- -- -- -- --
Wendy Shelton-Paul................... -- -- 5,407 8,110 -- --
Michael J. Tomczak................... -- -- 10,202 3,409 -- --
</TABLE>
- ---------------
(1) Gives effect to the cancellation of options granted pursuant to the
Company's 1991 Stock Option Plan and the granting of replacement options in
February 1996 pursuant to the Company's 1995 Stock Option Plan. See
"Management -- Stock Option Plan" and "Certain Transactions."
REPRICING OF OPTIONS
<TABLE>
<CAPTION>
MARKET EXERCISE LENGTH OF
NUMBER OF PRICE OF PRICE OF ORIGINAL
SECURITIES STOCK AT STOCK AT OPTION TERM
UNDERLYING TIME OF TIME OF REMAINING
REPRICE/ OPTIONS REPRICING REPRICING NEW AT DATE OF
REGRANT REPRICED OR OR OR EXERCISE REPRICING OR
NAME DATE AMENDED AMENDMENT AMENDMENT PRICE AMENDMENT
- ---------------------------- --------- ----------- ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Wendy Shelton-Paul.......... 2/16/96 67,587 $.888 $4.88 $.07 9.25 years
Michael J. Tomczak.......... 2/16/96 43,932 $.888 $4.88 $.07 9.25 years
Michael J. Tomczak.......... 2/16/96 6,759 $.888 $7.84 $.07 8 years
Michael J. Tomczak.......... 2/16/96 13,308 $.888 $7.84 $.07 6.5 years
Michael J. Tomczak.......... 2/16/96 4,056 $.888 $3.33 $.07 6 years
</TABLE>
The Compensation Committee of the Board of Directors approved the
replacement of these options to Dr. Shelton-Paul and Mr. Tomczak, and options to
other employees of the Company, at an exercise price of $.07 per share, having
concluded that the principal purpose of the Company's stock option program
(i.e., to provide an equity incentive to employees to remain in the employment
of the Company and to work diligently in its best interests) would not be
achieved for those employees holding options exercisable above the market price
of the Common Stock. In connection with the granting of these replacement
options, participating option holders agreed not to exercise any option for a
period of six months from the date of such regrant.
STOCK OPTION PLAN
On December 13, 1995, the Board of Directors adopted, and stockholders
approved, the 1995 Stock Option Plan (the "Plan"). The Plan is to be
administered by the Board of Directors or a committee thereof. The Plan is
currently administered by the Compensation Committee of the Board of Directors.
The Plan, as initially adopted, authorized the Company to grant stock purchase
rights and/or options to acquire an aggregate of 1,108,949 shares of Common
Stock to directors, employees (including officers) and consultants of the
Company ("Plan participants"). On September 16, 1996, the Board of Directors of
the Company adopted an amendment to the Plan, increasing the number of shares of
Common Stock covered by the Plan to 1,249,070 shares, subject to stockholder
approval.
As of November 1, 1996, there were outstanding options to purchase an
aggregate of 927,745 shares granted pursuant to the Plan and options to purchase
an aggregate of 21,325 shares granted pursuant to the Company's 1991 Stock
Option Plan, which was terminated in December 1995. At November 1, 1996, options
to purchase an aggregate 300,000 shares of Common Stock were available for grant
under the Plan. No stock
49
<PAGE> 53
purchase rights have been granted pursuant to the Plan. See Note 6 to notes to
consolidated financial statements appearing elsewhere in this Prospectus.
The Plan authorizes the issuance of incentive stock options ("ISOs"), as
defined in Section 422A of the Internal Revenue Code of 1986, non-qualified
stock options ("NQSOs", and together with ISOs, "Options") and stock purchase
rights ("SPRs"). Consultants and directors who are not also employees of the
Company are eligible for grants of only NQSOs and/or SPRs. The exercise price of
each ISO may not be less than 100% of the fair market value of the Common Stock
at the time of grant, except that in the case of a grant to an employee who owns
10% or more of the outstanding stock of the Company or a subsidiary or parent of
the Company (a "10% Stockholder"), the exercise price may not be less than 110%
of the fair market value on the date of grant. The aggregate fair market value
of the shares covered by ISOs granted under the Plan that become exercisable by
a Plan participant for the first time in any calendar year is subject to a
$100,000 limitation. The exercise price of each NQSO is determined by the Board,
or committee thereof, in its discretion, provided that the exercise price of a
NQSO is not less than 85% of the fair market value of the Common Stock on the
date of grant. The Board, or Committee thereof, shall determine the term of the
Options and SPRs; provided, however, that in no event may an Option have a term
of more than ten (10) years (no more than five (5) years with respect to ISOs
granted to a 10% Stockholder). Any Option which is granted shall be vested and
exercisable at such time as determined by the Board, or committee thereof, but
in no event at a rate less than 20% per year. A recipient of an SPR must
exercise such right within the period, not to exceed thirty (30) days from the
date of grant, determined by the Board, or committee thereof. The Board, or
committee thereof, may reserve to the Company upon the grant of an SPR, an
option to repurchase upon a Plan participant's termination of employment, any
stock acquired upon his exercise of the SPR at the SPR exercise price. Any such
repurchase option shall lapse at a rate of not less than 20% per year commencing
on the date of the Plan participant's purchase. Options and SPRs granted under
the Plan are not transferable, other than by will or by the laws of descent and
distribution. No stock options or SPRs may be granted under the Plan after
December 12, 2005.
Subject to the provisions of the Plan, the Board, or a committee thereof,
has the authority to determine the individuals to whom the stock options or SPRs
are to be granted, the number of shares to be covered by each option or SPR, the
exercise price, the type of option, the exercise period, the restrictions, if
any, on the exercise of the option or SPR, the terms for the payment of the
exercise price and other terms and conditions. Payments by holders of options or
SPRs upon exercise of an option may be made (as determined by the Board or a
committee thereof) in cash or such other form of payment as may be permitted
under the Plan, including without limitation, by promissory note or by delivery
of shares of Common Stock.
In February 1996, the Compensation Committee of the Board of Directors
authorized the grant of options to purchase an aggregate of 242,746 shares of
Common Stock, at an exercise price of $0.07 per share, to certain officers,
directors and employees of the Company pursuant to the Company's 1995 Stock
Option Plan, including options to purchase 67,587 shares granted to Dr. Wendy
Shelton-Paul, Vice President of Medical Affairs of the Company, and options to
purchase 68,055 shares granted to Michael J. Tomczak, Vice President and Chief
Financial Officer of the Company. These options were issued in replacement of
options previously granted pursuant to the Company's 1991 Stock Option Plan,
with exercise prices ranging from $3.33 to $7.84 per share, surrendered for
cancellation.
INDEMNIFICATION OF OFFICERS AND DIRECTORS AND LIMITATION ON DIRECTOR LIABILITY
Article VI of the Company's by-laws provides that a director or officer
shall be indemnified against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement (provided such settlement is approved in
advance by the Company) in connection with certain actions, suits or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation--a "derivative action") if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. A similar standard of care is applicable in the case of derivative
actions, except that indemnification only extends to expenses (including
attorneys' fees) incurred in connection with the defense or settlement of such
an action, except that no person who has been
50
<PAGE> 54
adjudged to be liable to the Company shall be entitled to indemnification unless
a court determines that despite such adjudication of liability, but in view of
all of the circumstances of the case, the person seeking indemnification is
fairly and reasonably entitled to be indemnified for such expenses as the court
deems proper.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
Article 11 of the Company's certificate of incorporation eliminates the
personal liability of the Company's directors to the Company or its stockholders
for monetary damages for breach of their fiduciary duties as a director to the
fullest extent provided by Delaware law. Section 102(b)(7) of the Delaware
General Corporation Law ("DGCL") provides for the elimination of such personal
liability, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL or (iv) for any transaction from which
the director derived any improper personal benefit.
51
<PAGE> 55
CERTAIN TRANSACTIONS
TRANSACTIONS WITH FOUNDERS
In connection with the formation of the Company, the Company sold 38,880
shares, 20,935 shares, 5,441 shares and 2,332 shares of Common Stock to Howard
A. Paul, William Bargar, Brent Mittelstadt and Peter Kazanzides (collectively
the "Founders"), respectively, for a purchase price of $0.07 per share. Dr. Paul
served as the Chief Executive Officer and President of the Company from
inception until his death in February 1993. Dr. Kazanzides and Mr. Mittelstadt
are key employees of the Company, and Dr. Bargar serves as a consultant to the
Company. See "Management."
INITIAL TRANSACTIONS WITH IBM
In connection with the formation of the Company and pursuant to a Loan and
Warrant Purchase Agreement dated as of February 6, 1991 (the "IBM Loan
Agreement"), the Company granted IBM a warrant to purchase 67,587 shares of
Common Stock, at an exercise price of $0.07 per share, originally exercisable
until February 6, 1998. The expiration date of the warrant was extended until
December 31, 2000 in connection with the recapitalization of the Company in
December 1995, described below. In addition, pursuant to the IBM Loan Agreement,
during 1991 the Company borrowed an aggregate of $3,000,000 from IBM in
consideration for the Company's 9.25% Convertible Subordinated Loan Note in the
principal amount of $3,000,000 (the "IBM Note"). The IBM Note was convertible
into shares of Series A Preferred Stock at a conversion price of $33.29 per
share.
In connection with the IBM loan transaction, the Company entered into a
Stockholders' Agreement with the Founders and IBM dated February 6, 1991 (the
"Stockholders' Agreement"). Pursuant to the Stockholders' Agreement, IBM has the
right to nominate a member of the Board of Directors of the Company (and the
stockholders agreed to vote their shares for such nominee) and to have a
non-voting observer attend meetings of the Board of Directors. In addition, the
Stockholders' Agreement grants IBM a right of first refusal with respect to
proposed transfers of Founder's shares to a "Competitor" (as defined). The
Stockholders' Agreement also restricts transfers of Founder's shares other than
to the Company, IBM or to a third party approved by IBM in writing. The
foregoing restriction will terminate on February 6, 1998, or earlier upon
consummation of (i) an initial underwritten firm commitment public offering of
the Common Stock resulting in gross proceeds of at least $15 million, or (ii)
the acquisition of the Company, whether by merger, acquisition of all or
substantially all of its assets, or acquisition of substantially all of its
voting securities.
Pursuant to a License Agreement, dated February 6, 1991, IBM granted the
Company a non-exclusive, worldwide royalty-free license to the underlying
software code for the ROBODOC System.
SERIES B PREFERRED STOCK FINANCING
Pursuant to a Stock Purchase Agreement dated as of April 10, 1992, Sutter
Health and The John N. Kapoor Trust (the "Kapoor Trust") each purchased 30,482
shares of the Company's Series B Preferred Stock, or a total of 60,964 shares,
for a purchase price of $4,000,370 ($65.62 per share). The Series B Preferred
Stock was convertible into shares of Common Stock at a conversion price of
$65.62 per share.
SERIES C PREFERRED STOCK FINANCING
Pursuant to a Stock Purchase Agreement dated as of November 13, 1992,
Sutter Health and Keystone Financial Corporation ("Keystone") purchased 89,604
and 12,801 shares, respectively, for a total of 102,405 shares, of the Company's
Series C Preferred Stock, for a purchase price of $7,000,002 and $1,000,000,
respectively ($78.12 per share). The Series C Preferred Stock was convertible
into shares of Common Stock at a conversion price of $78.12 per share.
DECEMBER 1995 RECAPITALIZATION
Pursuant to a Series D Preferred Stock and Warrant Purchase Agreement (the
"1995 Stock Purchase Agreement") dated as of December 21, 1995, the Company
effected the recapitalization described below.
The Company effected a one-for-five reverse stock split of its capital
stock, and all outstanding shares of Series B and Series C Preferred Stock were
converted into shares of Common Stock. Upon conversion of the Series B Preferred
Stock, the Company issued 30,482 shares of Common Stock to each of Sutter Health
and the Kapoor Trust, or a total of 60,964 shares. In addition, the Company
issued 8,955 shares of Common Stock to each of Sutter Health and the Kapoor
Trust, or a total of 17,910 shares, in exchange for the cancellation of
52
<PAGE> 56
all accumulated dividends on the Series B Preferred Stock. Upon conversion of
the Series C Preferred Stock, the Company issued 89,604 shares of Common Stock
to Sutter Health and 12,801 shares of Common Stock to Keystone, or a total of
102,405 shares. In addition, the Company issued 19,512 shares of Common Stock to
Sutter Health and 3,169 shares of Common Stock to Keystone, or a total of 22,681
shares, in exchange for the cancellation of all accumulated dividends on the
Series C Preferred Stock.
As part of the recapitalization, IBM received a warrant to purchase 126,895
shares of Common Stock, at an exercise price of $0.01 per share, which expires
on December 31, 2005, in exchange for the cancellation of the IBM Note in the
principal amount of $3,000,000 and accrued interest thereon of $1,224,373. In
addition, the expiration date of the warrant issued to IBM in connection with
the formation of the Company was extended until December 31, 2000.
Pursuant to the 1995 Stock Purchase Agreement, EJ Financial Investments V,
L.P. ("EJ Financial") purchased 693,195 shares of Series D Preferred Stock for
an aggregate purchase price of $666,667 ($0.96 per share), and IBM purchased a
warrant to purchase 1,386,390 shares of Series D Preferred Stock, exercisable at
any time prior to December 31, 2005, at an exercise price of $0.01 per share,
for an aggregate purchase price of $1,333,333 ($0.96 per warrant). In addition,
EJ Financial received an option to purchase an additional 346,597 shares of
Series D Preferred Stock, on the same terms it purchased the Series D Preferred
Stock and IBM received an option to purchase warrants to purchase an additional
693,194 shares of Series D Preferred Stock, on the same terms it purchased the
Series D Warrants (the options granted to EJ Financial and IBM being hereinafter
referred to collectively as the "Standby Options"). On February 19, 1996, each
of EJ Financial and IBM exercised its Standby Option, as required by the terms
thereof, since the Company was unable to obtain alternative financing on
substantially the same terms as the Standby Options prior to the expiration
thereof.
As part of the recapitalization of the Company, Sutter Health, Sutter
Health Venture Partners and Keystone received warrants to purchase 390,888
shares, 11,899 shares and 43,300 shares, of Common Stock, respectively, at an
exercise price of $0.74 per share, in consideration for their consent to the
terms of the recapitalization, including the sale of the Series D Preferred
Stock. Sutter Health, Sutter Health Venture Partners and Keystone received
additional warrants to purchase 121,686 shares, 3,705 shares and 13,481 shares,
respectively, of Common Stock, at an exercise price of $0.74 per share, in
connection with the exercise by EJ Financial and IBM of the Standby Options.
Subsequently, Sutter Health, Sutter Health Venture Partners and Keystone agreed
to amend these warrants to permit payment of the exercise price by surrender of
a portion of the warrants in lieu of payment of the cash exercise price.
Accordingly, on August 25, 1996, Sutter Health and Sutter Health Venture
Partners received 449,374 shares and 13,680 shares of Common Stock, respectively
(or 63,200 fewer shares and 1,924 fewer shares, respectively, than they would
have received if the exercise price had been paid in cash) and on October 29,
1996, Keystone received 49,777 shares of Common Stock (or 7,002 fewer shares
than it would have received if the exercise price had been paid in cash.)
In connection with the recapitalization of the Company, the Company granted
stockholders who did not purchase Series D Preferred Stock or warrants to
purchase Series D Preferred Stock rights to purchase Series D Preferred Stock on
the same terms and conditions as those shares purchased under the 1995 Stock
Purchase Agreement, which rights expired unexercised on March 5, 1996.
REGRANT OF LOWER-EXERCISE PRICE OPTIONS TO REPLACE PRIOR GRANTS
In February 1996, the Compensation Committee of the Board of Directors
authorized the grant of options to purchase an aggregate of 242,736 shares of
Common Stock, at an exercise price of $0.07 per share, to certain officers,
directors, and employees of the Company pursuant to the Company's 1995 Stock
Option Plan, including options to purchase 67,587 shares granted to Dr. Wendy
Shelton-Paul, Vice President of Medical Affairs of the Company, and options to
purchase 68,055 shares granted to Michael J. Tomczak, Vice President and Chief
Financial Officer of the Company. These options were issued in replacement of
options previously granted pursuant to the Company's 1991 Stock Option Plan,
with exercise prices ranging from $3.33 to $7.84 per share, surrendered for
cancellation. See the table captioned "Repricing of Options" under
"Management -- Stock Options."
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<PAGE> 57
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of the Company's Common Stock immediately prior to and
after the Offering by (i) each stockholder known by the Company to be a
beneficial owner of more than five percent of the outstanding Common Stock, (ii)
each director of the Company and each executive officer listed in the
Compensation Table under the caption "Management -- Summary Compensation Table"
and (iii) all directors and officers as a group. The information set forth in
the table gives effect to the automatic conversion of the outstanding shares of
Series D Preferred Stock into 1,039,792 shares of Common Stock upon consummation
of the sale of 1,500,000 shares of Common Stock and 1,500,000 Warrants in the
Offering.
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT AND COMMON STOCK
NATURE BENEFICIALLY OWNED(1)
OF -----------------------------
BENEFICIAL BEFORE AFTER
NAME OWNERSHIP(1) OFFERING(2) OFFERING(3)
- ----------------------------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
International Business Machines Corporation.... 2,274,066(5) 55.46%(6) 40.60%
Old Orchard Road
Armonk, NY 10504
EJ Financial Investments V, L.P................ 1,039,792(7) 56.92% 31.26%
225 East Deer Path Road
Suite 250
Lake Forest, IL 60045
Sutter Health and Sutter Health Venture
Partners, L.P................................ 611,607(8) 33.48% 18.39%
One Capitol Mall
Sacramento, CA 95814
Ramesh C. Trivedi(4)........................... 151,763(9) 7.67%(10) 4.36%
John N. Kapoor................................. 1,039,792(11) 56.92% 31.26%
James J. McGroddy.............................. -- -- --
Paul A.H. Pankow............................... 902(12) 0.05%(13) 0.03%
Wendy Shelton-Paul(4).......................... 77,179(14) 4.14%(15) 2.29%
Mike Tomczak(4)................................ 62,352(16) 3.30%(17) 1.84%
All directors and officers as a group (6
persons)..................................... 1,331,988(18) 64.04%(19) 37.21%
</TABLE>
- ---------------
(1) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares indicated, subject to community property
laws, where applicable. For purposes of computing the percentage of
outstanding shares held by each person or group of persons named above on
November 1, 1996, any security which such person or group of persons has
the right to acquire within 60 days after such date is deemed to be
outstanding for the purpose of computing the percentage ownership for such
person or persons, but is not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person.
(2) Except as otherwise stated, calculated on the basis of 1,826,641 shares of
Common Stock issued and outstanding.
(3) Gives effect to the issuance of 1,500,000 shares of Common Stock in the
Offering.
(4) Address is c/o the Company, 829 West Stadium Lane, Sacramento, California
95834.
(5) Includes warrants to purchase 2,079,584 shares of Common Stock at an
exercise price of $0.01 per share exercisable until December 31, 2005,
warrants to purchase 67,587 shares of Common Stock at an exercise price of
$0.07 per share exercisable until December 31, 2000, and warrants to
purchase 126,895 shares of Common Stock at an exercise price of $0.01 per
share exercisable until December 31, 2005, all of which warrants are
presently exercisable.
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<PAGE> 58
(6) Calculated on the basis of 4,100,707 shares of Common Stock issued and
outstanding.
(7) Represents shares of Common Stock issuable upon the automatic conversion of
the Series D Preferred Stock at the closing of this Offering.
(8) Includes 593,538 shares of Common Stock owned by Sutter Health and 18,069
shares of Common Stock beneficially owned by Sutter Health Venture Partners
I, L.P. ("Sutter Partners"), an affiliate of Sutter Health.
(9) Represents shares issuable upon the exercise of stock options exercisable
within 60 days, at an exercise price of $0.07 per share.
(10) Calculated on the basis of 1,978,404 shares of Common Stock issued and
outstanding.
(11) Represents shares of Common Stock owned by EJ Financial Investments V,
L.P., a limited partnership of which Mr. Kapoor is the managing general
partner. Mr. Kapoor disclaims beneficial ownership of such shares.
(12) Represents shares issuable upon exercise of stock options exercisable
within 60 days, at an exercise price of $2.07.
(13) Calculated on the basis of 1,827,543 shares of Common Stock issued and
outstanding.
(14) Includes 38,299 shares issuable upon exercise of stock options exercisable
within 60 days, at an exercise price of $0.07 per share.
(15) Calculated based upon 1,864,940 shares of Common Stock issued and
outstanding.
(16) Represents shares issuable upon exercise of stock options exercisable
within 60 days, at an exercise price of $0.07 per share.
(17) Calculated based upon 1,888,993 shares of Common Stock issued and
outstanding.
(18) Includes 253,316 shares of Common Stock issuable upon exercise of options
exercisable within 60 days, at exercise prices ranging from $0.07 to $2.07
per share.
(19) Calculated based upon 2,079,957 shares of Common Stock issued and
outstanding.
55
<PAGE> 59
DESCRIPTION OF SECURITIES
On the Effective Date, the authorized capital stock of the Company will
consist of 15,000,000 shares of Common Stock, $0.01 par value per share,
5,750,000 shares of Series D Preferred Stock, $0.01 par value per share, and
1,000,000 shares of "blank check" preferred stock, par value $0.01 per share. On
the Effective Date, 786,849 shares of Common Stock will be issued and
outstanding and 1,039,792 shares of Series D Preferred Stock will be issued and
outstanding. All of the issued outstanding shares of Series D Preferred Stock
will be automatically converted into shares of Common Stock at the Closing of
this Offering.
The following are brief descriptions of the securities offered hereby and
other securities of the Company. The rights of the holders of shares of the
Company's capital stock are established by the Company's certificate of
incorporation, as amended, the Company's by-laws and Delaware law. The following
statements do not purport to be complete or give full effect to statutory or
common law, and are subject in all respects to the applicable provisions of the
certificate of incorporation, by-laws and state law.
COMMON STOCK
Holders of the Common Stock are entitled to one vote per share, and subject
to the rights of holders of preferred stock, to receive dividends when, as and
if declared by the Board of Directors and to share ratably in the assets of the
Company legally available for distribution to holders of Common Stock in the
event of the liquidation, dissolution or winding up of the Company. Holders of
the Common Stock do not have subscription, redemption, conversion or preemptive
rights.
Each share of Common Stock is entitled to one vote on any matter submitted
to the holders, except that holders are entitled to cumulate their votes in the
election of Directors. In other words, a stockholder may give one nominee a
number of votes equal to the number of Directors to be elected, multiplied by
the number of votes to which the stockholder's shares are normally entitled, or
he may distribute his votes among as many candidates as he sees fit. The
candidates receiving the highest number of votes shall be elected. If a
stockholder gives notice at the meeting prior to the voting, of such
stockholder's intention to cumulate his votes, all stockholders may cumulate
their votes for candidates in nomination. On all other matters which may
properly come before the meeting, each share has one vote. The Board is
empowered to fill any vacancies on the Board created by the resignation of
Directors. Except as otherwise required by the DGCL, all stockholder action
(other than the election of the Directors, who are elected by a plurality vote)
is subject to approval by a majority of the shares of Common Stock present at a
stockholders' meeting at which a quorum (a majority of the issued and
outstanding shares of the Common Stock) is present in person or by proxy, or by
written consent pursuant to Delaware law.
All shares of Common Stock outstanding are fully paid and non-assessable,
and the shares of Common Stock offered hereby and shares of Common Stock
issuable upon exercise of the Warrants, when issued upon payment of the purchase
price set forth on the cover page of this Prospectus or payment of the exercise
price specified in the Warrants, as the case may be, will be fully paid and
non-assessable.
The Board of Directors is authorized to issue additional shares of Common
Stock within the limits authorized by the Company's certificate of
incorporation, as amended, without further stockholder action. The Company has
agreed with the Underwriters, that it will not issue any securities, including
but not limited to shares of Common Stock, for a period of 24 months following
the Effective Date, except as disclosed in or contemplated by this Prospectus,
without the prior written consent of the Representative.
WARRANTS
The Warrants offered hereby will be issued in registered form under a
Warrant Agreement (the "Warrant Agreement") between the Company and American
Stock Transfer and Trust Company, as Warrant Agent (the "Warrant Agent"). The
following summary of the provisions of the Warrants is qualified in its entirety
by reference to the Warrant Agreement, a copy of which is filed as an exhibit to
the Registration Statement of which this Prospectus forms a part.
56
<PAGE> 60
Each Warrant will be separately transferable and will entitle the
registered holder thereof to purchase one share of Common Stock at $6.00 per
share (subject to adjustment as described below) for a period of four years
commencing November , 1997 (or earlier upon notice of redemption as provided
below) and ending November , 2001 (the "Exercise Period"). The exercise price
and the number of shares of Common Stock issuable upon the exercise of each
Warrant are subject to adjustment in the event of a stock split, stock dividend,
recapitalization, merger, consolidation or certain other events. A holder of
Warrants may exercise such Warrants by surrendering the certificate evidencing
such Warrants to the Warrant Agent, together with the form of election to
purchase on the reverse side of such certificate attached thereto properly
completed and executed and the payment of the exercise price and any transfer
tax. If less than all of the Warrants evidenced by a Warrant certificate are
exercised, a new certificate will be issued for the remaining number of
Warrants.
The Company has authorized and reserved for issuance a number of shares of
Common Stock sufficient to provide for the exercise of the Warrants. When
issued, each share of Common Stock will be fully paid and nonassessable. Holders
of Warrants will not have any voting or other rights as stockholders of the
Company unless and until Warrants are exercised and shares issued pursuant
thereto.
The Warrants may be redeemed by the Company, at a price of $.10 per
Warrant, upon not less than 30 days prior written notice at any time during the
Exercise Period (or earlier with the prior written consent of the
Representative), provided the average of the closing bid quotations of the
Common Stock, during the period of twenty (20) consecutive trading days ending
on the third day prior to the date upon which the notice of redemption is given,
as reported on The Nasdaq SmallCap Market (or if the Common Stock is not quoted
thereon, the closing sale price of the Common Stock on the Nasdaq National
Market or other principal securities exchange upon which the Common Stock is
then quoted or listed, or such other reporting system that provides closing sale
prices for the Common Stock), has been at least 150% of the then exercise price
of the Warrants (initially, $9.00 per share). The Warrants will be exercisable
until the close of business on the day immediately preceding the date fixed for
the redemption of the Warrants in the notice of redemption.
Commencing one year after the Effective Date and until the expiration of
the exercise period of the Warrants, the Company will pay the Representative a
fee of 5% of the exercise price of each Warrant exercised, provided (i) the
market price of the Common Stock on the date the Warrant was exercised was equal
to or greater than the Warrant exercise price on that date, (ii) the exercise
price of the Warrant was solicited by a member of the NASD, (iii) the Warrant
was not held in a discretionary account, (iv) the disclosure of compensation
arrangements was made in documents provided to the holders of the Warrants, (v)
the solicitation of the exercise of the Warrant was not a violation of Rule
10b-6 under the Exchange Act and (vi) the Representative is designated in
writing as the soliciting NASD member. Unless granted an exemption from Rule
10b-6 under the Exchange Act by the Commission, the Representative and any other
soliciting broker/dealers will be prohibited from engaging in any market making
activities or solicited brokerage activities with regard to the Company's
securities during the periods prescribed by exemption (xi) to Rule 10b-6 before
the solicitation of the exercise of any Warrant until the later of the
termination of such solicitation activity or the termination of any right the
Representative and any other soliciting broker/dealer may have to receive a fee
for the solicitation of the exercise of the Warrants.
For a holder of a Warrant to exercise the Warrant, there must be a current
registration statement on file with the Securities and Exchange Commission and
various state securities commissions. The Company will be required to file
post-effective amendments to the registration statement when events require such
amendments and to take appropriate action under state securities laws. While it
is the Company's intention to file post-effective amendments when necessary and
to take appropriate action under state securities laws, there can be no
assurance that the Company will file all post-effective amendments required to
maintain the effectiveness of the registration statement or that the Company
will take all appropriate action under state securities laws. If the
registration statement is not kept current for any reason, the Warrants will not
be exercisable, and holders thereof may be deprived of value.
57
<PAGE> 61
OPTIONS AND WARRANTS
Options. On the Effective Date, there will be outstanding options to
purchase an aggregate of 949,070 shares of Common Stock, at exercise prices
ranging from $0.07 to $7.84, which expire at various dates from February 4, 2002
to July 8, 2006. See "Management -- Stock Option Plan."
Warrants. On the Effective Date, there will be outstanding warrants to
purchase an aggregate of 2,274,066 shares of Common Stock, including the Series
D Warrants, at exercise prices ranging from $0.01 to $0.07, which expire at
various dates through December 31, 2005.
PREFERRED STOCK
At the Closing of this Offering, all of the Company's outstanding Series D
Preferred Stock will be automatically converted into 1,039,792 shares of Common
Stock.
On the Effective Date, the Company will be authorized to issue up to
1,000,000 shares of preferred stock (in addition to the Series D Preferred
Stock) with such designations, rights and preferences as may be determined from
time to time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without further stockholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting or other rights that could decrease
the amount of earnings and assets available for distribution to holders of
Common Stock or adversely affect the voting power or other rights of the holders
of the Company's Common Stock. In the event of issuance, the preferred stock
could be utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of the Company. The Company has no
present intention to issue any shares of preferred stock, and following the
Closing, no shares of preferred stock will be outstanding. The Company has
agreed with the Underwriters that it will not issue any shares of preferred
stock, or any options, warrants or rights to purchase preferred stock, for a
period of 24 months after the Effective Date, without the prior written consent
of the Representative.
STATUTORY PROVISIONS AFFECTING STOCKHOLDERS
Following the consummation of this Offering, the Company will be subject to
Section 203 of the Delaware General Corporation Law, the State of Delaware's
"business combination" statute. In general, such statute prohibits a publicly
held Delaware corporation from engaging in various "business combination"
transactions with any "interested stockholder" for a period of three years after
the date of the transaction in which the person became an "interested
stockholder," unless (i) the transaction in which the interested stockholder
obtained such status or the "business combination" is approved by the Board of
Directors prior to the date the interested stockholder obtained such status;
(ii) upon consummation of the transaction which resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder" owned at
least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned by (a) persons who are directors and
officers and (b) employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or (iii) on or subsequent to
such date the "business combination" is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the "interested stockholder." A "business combination" includes mergers, asset
sales and other transactions resulting in financial benefit to a stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of a corporation's
voting stock. The statute could prohibit or delay mergers or other takeover or
change in control attempts with respect to the Company and, accordingly, may
discourage attempts to acquire the Company.
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement dated as of December 21, 1995
entered into in connection with the 1995 Stock Purchase Agreement and the
recapitalization of the Company effected thereby, the Company granted certain
registration rights to IBM, the Kapoor Trust, EJ Financial, Sutter Health
Venture
58
<PAGE> 62
Partners I, L.P., and Keystone (collectively, the "Rights Holders"), with
respect to shares of Common Stock issued or issuable to the Rights Holders in
certain financing transactions, including shares issuable upon exercise of
warrants or the conversion of the Series D Preferred Stock (collectively,
"Registrable Shares").
If the Company proposes to register any of its securities under the
Securities Act (other than in connection with an employee benefit plan or
pursuant to a merger, exchange offer or other acquisition transaction requiring
registration under the Securities Act), whether for its own account or for the
account of another holder of Company securities, the Rights Holders are entitled
to include Registrable Shares owned by them in any such registration. If any
such registration is an underwritten registration, the Company is required to
include that portion of the Registrable Shares that each Rights Holder proposes
to sell representing an aggregate of 25% of the offering (or in the case of an
initial public offering, an aggregate of 15% of such offering) before inclusion
of other shares. If, after taking into account shares offered by the Company and
other holders of registration rights, the Underwriters determine that additional
Registrable Shares can be sold, the balance of the Registrable Shares will be
included pro rata in the registration.
At any time after the earlier of (i) December 31, 1996 or (ii) six months
after the effective date of the first registration statement for a public
offering of securities of the Company, Rights Holders holding at least 35% of
the aggregate Registrable Shares and securities convertible into Registrable
Shares also have the right to require the Company to prepare and file on two
occasions a registration statement with respect to the Registrable Shares.
However, the Company is not required to effect a registration (x) with respect
to less than 35% of the aggregate Registrable Shares and shares convertible into
Registrable Shares, unless the aggregate offering price (net of underwriting
discounts and commissions), would exceed $7,500,000 or (y) if the Company
delivers an opinion reasonably acceptable to counsel for the Rights Holders that
the Registrable Shares may be sold without registration under Rule 144 under the
Securities Act without any limitation with respect to offerees or the size of
the transaction. The Registered Holders have agreed not to exercise their
registration rights for a period of 18 months following the Effective Date.
In addition, the Company has granted the holders of the Underwriters'
Warrants (including the securities issuable upon exercise thereof) certain
registration rights with respect to the shares of Common Stock and Warrants
issuable upon the exercise thereof. The Underwriters have agreed not to exercise
such registration rights for a period of 18 months following the Effective Date,
or until such earlier date as the Company gives holders of the Warrants written
notice of the redemption of the Warrants. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 3,326,641 shares of
Common Stock outstanding, of which only the 1,500,000 shares of Common Stock
offered hereby will be transferable without restriction under the Securities
Act. The remaining 1,826,641 shares, issued in private transactions, will be
"restricted securities" (as that term is defined in Rule 144 promulgated under
the Securities Act) which may be publicly sold only if registered under the
Securities Act or if sold in accordance with an applicable exemption from
registration, such as Rule 144. In general, under Rule 144 as currently in
effect, subject to the satisfaction of certain other conditions, a person,
including an affiliate of the Company, who has beneficially owned restricted
securities for at least two years, is entitled to sell (together with any person
with whom such individual is required to aggregate sales), within any
three-month period, a number of shares that does not exceed the greater of 1% of
the total number of outstanding shares of the same class, or, if the Common
Stock is quoted on Nasdaq or a national securities exchange, the average weekly
trading volume during the four calendar weeks preceding the sale. A person who
has not been an affiliate of the Company for at least three months, and who has
beneficially owned restricted securities for at least three years is entitled to
sell such restricted securities under Rule 144 without regard to any of the
limitations described above. Officers, directors and the other existing
securityholders of the Company owning or having rights to acquire in the
aggregate 5,031,708 shares of Common Stock constituting restricted securities,
have entered into agreements with the Underwriters not to sell or otherwise
dispose of any shares of Common Stock (other than shares purchased in open
market transactions) for a period of 18 months following the Effective Date,
without the prior written consent of the Representative. Following expiration of
the term of the Lock-Up Agreements, 3,308,572 shares of Common Stock will become
eligible for resale pursuant to Rule 144 commencing in the
59
<PAGE> 63
second quarter of 1998, subject to the volume limitations and compliance with
the other provisions of Rule 144. An additional 2,465 shares and 15,604 shares
constituting restricted securities not subject to Lock-Up Agreements will become
eligible for resale pursuant to Rule 144 following the completion of this
Offering and in the fourth quarter of 1997, respectively, subject to the volume
limitations and compliance with the other provisions of Rule 144. In addition,
securityholders of the Company owning or having rights to acquire in the
aggregate 4,030,649 shares of Common Stock granted certain registration rights
with respect to those shares have agreed that they will not exercise such
registration rights for a period of 18 months following the Effective Date. See
"Description of Securities -- Registration Rights" and "Certain Transactions."
As a result of this Offering, an additional 1,500,000 shares of Common
Stock (1,725,000 if the Underwriter's Over-Allotment Option is fully exercised)
will be subject to issuance pursuant to the exercise of the Warrants offered
hereby.
As of November 1, 1996, there were 22 record holders of the Common Stock.
DIVIDEND POLICY
Since its inception, the Company has not paid any dividends on its Common
Stock and it does not anticipate paying such dividends in the foreseeable
future. The Company intends to retain earnings, if any, to finance its
operations.
REPORTS TO STOCKHOLDERS
The Company intends to furnish its stockholders with annual reports
containing financial statements audited and reported upon by its independent
certified public accountants after the end of each fiscal year, and will make
available such other periodic reports as the Company may deem to be appropriate
or as may be required by law. The Company's fiscal year end is December 31. The
Company has filed a Registration Statement on Form 8-A with the Commission to
register under, and be subject to the reporting requirements of, the Exchange
Act.
TRANSFER AGENT AND WARRANT AGENT
The Company has engaged American Stock Transfer and Trust Company to act as
Transfer Agent for the Company's Common Stock and Warrant Agent for the
Warrants.
60
<PAGE> 64
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement between
the Company and the Underwriters (the "Underwriting Agreement"), the Company has
agreed to sell to the Underwriters named below, for whom Rickel & Associates,
Inc. is acting as representative (in such capacity, the "Representative"), and
the Underwriters have severally, and not jointly, agreed to purchase, the number
of securities set forth opposite their respective names below.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER
-------------------------------------------------------- ----------
<S> <C>
Rickel & Associates, Inc................................ 1,000,000
Aegis Capital Corp...................................... 500,000
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent. The Underwriters are
committed to purchase all of the above securities if any are purchased.
The Representative has advised the Company that the Underwriters propose
initially to offer the 1,500,000 shares of Common Stock and 1,500,000 Warrants
to the public at the initial public offering prices set forth on the cover page
of this Prospectus and that it may allow to selected dealers who are members of
the NASD concessions not in excess of $ per share of Common Stock and
$ per Warrant, of which not more than $ per share of Common
Stock and $ per Warrant may be re-allowed to certain other dealers.
After the Offering, the offering price and other selling terms may be changed by
the Representative.
The Underwriting Agreement provides further that the Underwriters will
receive a non-accountable expense allowance of 2.75% of the gross proceeds of
the Offering, of which $50,000 has been paid by the Company to date. The Company
also has agreed to pay all expenses in connection with qualifying the shares of
Common Stock and the Warrants offered hereby for sale under the laws of such
states as the Representative may designate, including expenses of counsel
retained for such purpose by the Underwriters.
Pursuant to the Underwriters' Over-Allotment Option, which is exercisable
for a period of 45 days after the closing of the Offering, the Underwriters may
purchase up to 15% of the total number of shares of Common Stock and Warrants
offered hereby, solely to cover over-allotments.
The Company has agreed to sell to the Underwriters, for nominal
consideration, the Underwriters' Warrants to purchase 150,000 shares of Common
Stock and 150,000 Warrants. The Underwriters' Warrants will not be exercisable
for a period of one year after the date of this Prospectus. Thereafter, for a
period of four years, the Underwriters' Warrants will be exercisable at an
amount equal to 165% above the offering price of the Common Stock and Warrants
sold in this offering. The Underwriters' Warrants are not transferable for a
period of one year after the date of this Prospectus, except to officers of the
Underwriters, members of the selling group and their officers and partners. The
Company also has granted certain demand and "piggyback" registration rights to
the holders of the Underwriters' Warrants.
For the life of the Underwriters' Warrants, the holders thereof are given,
at nominal cost, the opportunity to profit from a rise in the market price of
the Common Stock with a resulting dilution in the interest of other
stockholders. Further, such holders may be expected to exercise the
Underwriters' Warrants at a time when the Company would in all likelihood be
able to obtain equity capital on terms more favorable than those provided in the
Underwriters' Warrants.
The Company has agreed, for a period of 24 months after the Effective Date,
not to issue any shares of Common Stock, preferred stock or any warrants,
options or other rights to purchase Common Stock or preferred stock without the
prior written consent of the Representative. Notwithstanding the foregoing, the
Company may issue shares of Common Stock upon exercise of any warrants or
convertible securities outstanding on the date hereof or to be outstanding upon
closing of the Offering as described herein. Subject to certain exceptions, all
of the Company's existing securityholders have agreed not to sell or otherwise
dispose of any shares of Common Stock for a period of up to 18 months following
the Effective Date, without the prior written consent of the Representative. See
"Description of Securities -- Shares Eligible for Future Sale."
61
<PAGE> 65
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against liabilities in connection with the
Offering, including liabilities under the Securities Act.
The Company has agreed that upon closing of the Offering it will, for a
period of not less than three years, engage a designee of the Representative as
advisor to the Board. In addition and in lieu of the Representative's right to
designate an advisor, the Company has agreed, if requested by the
Representative, during such three-year period, to nominate and use its best
efforts to cause the election of a designee of the Representative as a director
of the Company. The Representative has not yet designated any such person.
The Underwriters intend to act as market makers for the Common Stock and
the Warrants after the closing of the Offering.
Commencing one year after the date of this Prospectus and until the
expiration of the exercise period of the Warrants, the Company will pay the
Representative a fee of 5% of the exercise price of each Warrant exercised,
provided (i) the market price of the Common Stock on the date the Warrant was
exercised was equal to or greater than the Warrant exercise price on that date,
(ii) the exercise price of the Warrant was solicited by a member of the NASD,
(iii) the Warrant was not held in a discretionary account, (iv) the disclosure
of compensation arrangements was made in documents provided to the holders of
the Warrants, (v) the solicitation of the exercise of the Warrant was not a
violation of Rule 10b-6 under the Exchange Act and (vi) the Representative is
designated in writing as the soliciting NASD member. Unless granted an exemption
from Rule 10b-6 under the Exchange Act by the Commission, the Representative and
any other soliciting broker/dealers will be prohibited from engaging in any
market making activities or solicited brokerage activities with regard to the
Company's securities during the periods prescribed by exemption (xi) to Rule
10b-6 before the solicitation of the exercise of any Warrant until the later of
the termination of such solicitation activity or the termination of any right
the Representative and any other soliciting broker/dealer may have to receive a
fee for the solicitation of the exercise of the Warrants.
The Company has agreed to retain the Representative as a consultant at an
annual fee of $24,000 for a 12-month period commencing on the closing of the
Offering. The entire fee ($24,000) is payable at the closing of the Offering.
Pursuant to this agreement, the Representative will be obligated to provide
general financial advisory services to the Company on an as-needed basis with
respect to possible future financing or acquisitions by the Company and related
matters. The agreement does not require the Representative to provide any
minimum number of hours of consulting services to the Company.
The initial public offering prices of the shares of Common Stock and the
Warrants offered hereby and the initial exercise price and the other terms of
the Warrants have been determined by negotiation between the Company and the
Underwriters and do not necessarily bear any direct relationship to the
Company's assets, earnings, book value per share or other generally accepted
criteria of value. Factors considered in determining the offering prices of the
shares of Common Stock and Warrants and the exercise price of the Warrants
included the business in which the Company is engaged, the Company's financial
condition, an assessment of the Company's management, the general condition of
the securities markets and the demand for similar securities of comparable
companies.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Snow Becker Krauss P.C., 605 Third Avenue, New York, New York
10158-0125. Parker Chapin Flattau & Klimpl, LLP, 1211 Avenue of the Americas,
New York, New York 10036 has acted as counsel to the Underwriters in connection
with this Offering.
EXPERTS
The consolidated financial statements of the Company at December 31, 1995
and for each of the two years in the period ended December 31, 1995, appearing
in this Prospectus and Registration Statement, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon appearing
62
<PAGE> 66
elsewhere herein, and are included in reliance upon such report given upon the
authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 under the Securities Act with respect to the
securities offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement and the exhibits thereto as permitted by
the Rules and Regulations of the Commission. For further information with
respect to the Company and such securities, reference is made to the
Registration Statement and to the exhibits filed therewith. Statements contained
in this Prospectus as to the contents of any contracts or other documents
referred to herein are not necessarily complete and where such contract or other
document is an exhibit to the Registration Statement, each such statement is
qualified in all respects by the provisions of such exhibit to which reference
is made for a full statement of the provisions thereof. The Registration
Statement, including exhibits filed therewith, may be inspected, without charge,
at the principal office of the Commission located at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549 and at the Commission's regional offices
located at Seven World Trade Center, Suite 1300, New York, New York 10048, and
at 500 West Madison Street, Suite 1400 Chicago, Illinois 60661-2511. Copies of
all or any part of the Registration Statement (including the exhibits thereto)
also may be obtained from the Public Reference Section of the Commission at the
Commission's principal office in Washington, D.C., at the Commission's
prescribed rates. Electronic registration statements made through the Electronic
Data Gathering Analysis and Retrieval system are publicly available through the
Commission's web site at http://www.sec.gov.
63
<PAGE> 67
INTEGRATED SURGICAL SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors......................................................... F-2
Consolidated Balance Sheets at December 31, 1995 (audited)
and September 30, 1996 (unaudited)................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1994 and 1995 (audited) and the nine months ended
September 30, 1995 and 1996 (unaudited).............................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994 and 1995 (audited) and the nine months ended
September 30, 1996 (unaudited)....................................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1994 and 1995 (audited) and the nine months ended
September 30, 1995 and 1996 (unaudited).............................................. F-6
Notes to Consolidated Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE> 68
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Integrated Surgical Systems, Inc.
We have audited the accompanying consolidated balance sheet of Integrated
Surgical Systems, Inc. as of December 31, 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1994 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Integrated
Surgical Systems, Inc. at December 31, 1995, and the consolidated results of its
operations and its cash flows for the years ended December 31, 1994 and 1995 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Integrated Surgical Systems, Inc. will continue as a going concern. As more
fully described in Note 1, the Company has incurred recurring operating losses.
This condition raises substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to this matter are also
described in Note 1. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
ERNST & YOUNG LLP
Sacramento, California
January 29, 1996
F-2
<PAGE> 69
INTEGRATED SURGICAL SYSTEMS, INC.,
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, SEPTEMBER 30, EQUITY
1995 1996 SEPTEMBER 30, 1996
------------ ------------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 2,339,823 $ 1,132,503
Accounts receivable............................. 50,807 12,721
Inventory....................................... 746,972 868,695
Deferred offering costs......................... -- 223,716
Other current assets............................ 144,417 59,363
------------ ------------
Total current assets.............................. 3,282,019 2,296,998
Net property and equipment........................ 430,851 307,589
Other assets...................................... 14,259 13,934
------------ ------------
$ 3,727,129 $ 2,618,521
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable.................................... $ 274,498 $ 67,037
Accounts payable................................ 209,405 401,963
Accrued payroll and related expenses............ 39,600 63,062
Customer deposits............................... 469,991 --
Accrued product retrofit costs.................. 160,000 156,324
Other current liabilities....................... 301,117 482,614
------------ ------------
Total current liabilities......................... 1,454,611 1,171,000
Commitments and contingencies (Notes 1 and 8)
Stockholders' equity:
Convertible preferred stock, $0.01 par value,
5,750,000 shares authorized; 693,195 and
1,039,792 shares issued and outstanding at
December 31, 1995 and September 30, 1996,
respectively (no shares pro forma);
liquidation preference value of $666,667 at
December 31, 1995 ($1,000,000 at September
30, 1996).................................... 6,932 10,398 $ --
Common stock, $0.01 par value, 15,000,000 shares
authorized; 273,946 and 737,072 shares issued
and outstanding at December 31, 1995 and
September 30, 1996, respectively (1,776,864
shares pro forma)............................ 2,739 7,370 17,768
Additional paid-in capital...................... 17,909,532 19,685,118 19,685,118
Deferred stock compensation..................... -- (473,507) (473,507)
Accumulated translation adjustment.............. 5,297 (7,499) (7,499)
Accumulated deficit............................. (15,651,982) (17,774,359) (17,774,359)
------------ ------------ ------------
Total stockholders' equity........................ 2,272,518 1,447,521 $ 1,447,521
============
------------ ------------
$ 3,727,129 $ 2,618,521
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 70
INTEGRATED SURGICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEARS ENDED DECEMBER 31, 30,
--------------------------- ---------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............................. $ 289,047 $ 174,521 $ 112,613 $ 1,748,065
Cost of sales......................... 203,856 70,179 42,284 664,979
----------- ----------- ----------- -----------
85,191 104,342 70,329 1,083,086
Operating expenses:
Selling, general and
administrative................... 1,973,816 1,668,947 1,313,119 1,369,079
Research and development............ 2,719,771 2,361,125 1,648,208 1,572,076
Stock compensation.................. -- -- -- 310,159
----------- ----------- ----------- -----------
4,693,587 4,030,072 2,961,327 3,251,314
Other income (expense):
Interest income..................... 74,956 107,306 98,199 54,872
Interest expense.................... (281,650) (287,792) (221,426) --
Other............................... (14,508) 55,801 58,248 (3,754)
----------- ----------- ----------- -----------
Loss before provision for income
taxes............................... (4,829,598) (4,050,415) (2,955,977) (2,117,110)
Provision for income taxes............ 10,787 3,113 4,468 5,267
----------- ----------- ----------- -----------
Net loss.............................. (4,840,385) (4,053,528) (2,960,445) (2,122,377)
Preferred stock dividends............. (956,574) (936,325) (720,000) --
----------- ----------- ----------- -----------
Net loss applicable to common
stockholders........................ $(5,796,959) $(4,989,853) $(3,680,445) $(2,122,377)
=========== =========== =========== ===========
Net loss per common and common share
equivalent.......................... $ (1.39) $ (1.19) $ (0.88) $ (0.48)
=========== =========== =========== ===========
Shares used in per share
calculations........................ 4,172,052 4,178,877 4,172,897 4,377,679
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 71
INTEGRATED SURGICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUMULATED
------------------- ---------------- PAID-IN DEFERRED STOCK TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION ADJUSTMENT
--------- ------- ------- ------ ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993................. 163,369 $ 1,634 67,652 $ 676 $11,736,912 $ -- $ --
Sale of common stock....................... -- -- 1,553 15 11,349 -- --
Net loss................................... -- -- -- -- -- -- --
Translation adjustment..................... -- -- -- -- -- -- 1,754
------- ------- ------- ------- ----------- --------- -------
Balance at December 31, 1994................. 163,369 1,634 69,205 691 11,748,261 -- 1,754
Sale of common stock....................... -- -- 781 8 2,585 -- --
Conversion of note payable into a warrant
to purchase common stock................. -- -- -- -- 4,224,373 -- --
Conversion of Series B and Series C
preferred stock into common stock........ (163,369) (1,634) 163,369 1,634 -- -- --
Conversion of accumulated dividends
preferred stock into common stock........ -- -- 40,591 406 (406) -- --
Sale of Series D convertible preferred
stock and a warrant to purchase Series D
preferred stock.......................... 693,195 6,932 -- -- 1,934,719 -- --
Net loss................................... -- -- -- -- -- -- --
Translation adjustment..................... -- -- -- -- -- -- 3,543
------- ------- ------- ------- ----------- --------- -------
Balance at December 31, 1995................. 693,195 6,932 273,946 2,739 17,909,532 -- 5,297
Sale of common stock (unaudited)........... -- -- 72 1 16 -- --
Sale of Series D convertible preferred
stock and a warrant to purchase Series D
preferred stock (unaudited).............. 346,597 3,466 -- -- 996,534 -- --
Exercise of warrants....................... -- -- 463,054 4,630 (4,630) -- --
Deferred stock compensation (unaudited).... -- -- -- -- 783,666 (783,666) --
Stock compensation expense (unaudited)..... -- -- -- -- -- 310,159 --
Net loss (unaudited)....................... -- -- -- -- -- -- --
Translation adjustment (unaudited)......... -- -- -- -- -- -- (12,796)
------- ------- ------- ------- ----------- --------- -------
Balance at September 30, 1996 (unaudited).... 1,039,792 $10,398 737,072 $7,370 $19,685,118 $ (473,507) $ (7,499)
======= ======= ======= ======= =========== ========= =======
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
<S> <C> <C>
Balance at December 31, 1993................. $ (6,758,069) $ 4,981,153
Sale of common stock....................... -- 11,364
Net loss................................... (4,840,385) (4,840,385)
Translation adjustment..................... -- 1,754
------------ ----------
Balance at December 31, 1994................. (11,598,454) 153,886
Sale of common stock....................... -- 2,593
Conversion of note payable into a warrant
to purchase common stock................. -- 4,224,373
Conversion of Series B and Series C
preferred stock into common stock........ -- --
Conversion of accumulated dividends
preferred stock into common stock........ -- --
Sale of Series D convertible preferred
stock and a warrant to purchase Series D
preferred stock.......................... -- 1,941,651
Net loss................................... (4,053,528) (4,053,528)
Translation adjustment..................... -- 3,543
------------ ----------
Balance at December 31, 1995................. (15,651,982) 2,272,518
Sale of common stock (unaudited)........... -- 17
Sale of Series D convertible preferred
stock and a warrant to purchase Series D
preferred stock (unaudited).............. -- 1,000,000
Exercise of warrants....................... -- --
Deferred stock compensation (unaudited).... -- --
Stock compensation expense (unaudited)..... -- 310,159
Net loss (unaudited)....................... (2,122,377) (2,122,377)
Translation adjustment (unaudited)......... -- (12,796)
------------ ----------
Balance at September 30, 1996 (unaudited).... $(17,774,359) $ 1,447,521
============ ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 72
INTEGRATED SURGICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEARS ENDED DECEMBER 31, 30,
--------------------------- ---------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................ $(4,840,385) $(4,053,528) $(2,960,445) $(2,122,377)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on short-term investments.............. 37,402 -- -- --
Issuance of common stock for non-cash
items..................................... 9,540 -- -- --
Depreciation................................ 261,056 288,344 214,358 137,457
Stock compensation.......................... -- -- -- 310,159
Changes in operating assets and liabilities:
Short-term investments.................... 2,985,437 -- -- --
Accounts receivable....................... 202,641 (30,326) 20,014 38,086
Inventory................................. 184,277 137,625 (12,244) (121,723)
Other current assets...................... (96,747) 850 4,405 85,054
Note payable.............................. -- 20,701 32,853 (207,461)
Accounts payable.......................... 15,717 (42,058) 45,502 192,558
Accrued payroll and related expenses...... 113,296 (222,896) (184,986) 23,462
Customer deposits......................... 471,874 (1,883) (1,880) (469,991)
Accrued product retrofit costs............ 274,680 (114,680) (109,854) (3,676)
Accrued interest.......................... 277,500 286,645 208,126 --
Other current liabilities................. (68,460) 219,344 51,174 181,497
Translation adjustment.................... 1,754 3,543 2,918 (12,796)
----------- ----------- ----------- -----------
Net cash used in operating activities........... (170,418) (3,508,319) (2,690,059) (1,969,751)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.............. (476,071) (121,008) (100,701) (14,195)
Decrease (increase) in other assets............. (4,234) 1,035 926 325
----------- ----------- ----------- -----------
Net cash used in investing activities........... (480,305) (119,973) (99,775) (13,870)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deferred offering costs............. -- -- -- (223,716)
Proceeds from convertible preferred stock....... -- 1,941,651 -- 1,000,000
Proceeds from common stock...................... 1,824 2,593 2,593 17
----------- ----------- ----------- -----------
Net cash provided by financing activities....... 1,824 1,944,244 2,593 776,301
----------- ----------- ----------- -----------
Net decrease in cash and cash equivalents....... (648,899) (1,684,048) (2,787,241) (1,207,320)
Cash and cash equivalents at beginning of
period........................................ 4,672,770 4,023,871 4,023,871 2,339,823
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period...... $ 4,023,871 $ 2,339,823 $ 1,236,630 $ 1,132,503
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 73
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND FINANCING REQUIREMENTS
Integrated Surgical Systems, Inc. was incorporated on October 1, 1990 as a
Delaware corporation and was a development stage enterprise through the year
ended December 31, 1995. The Company develops, manufactures, markets and
services image-directed, robotic products for surgical applications. The
Company's principal product is the ROBODOC(R) Surgical Assistant System
("ROBODOC System"), a computer-controlled surgical robot, and the Company's
ORTHODOC(R) Presurgical Planner, consisting of a computer workstation that
utilizes the Company's proprietary software for pre-operative surgical planning.
The first application for the ROBODOC System has been directed at cementless
primary total hip replacement surgery.
On June 1, 1994, the Company acquired all shares of Gasfabriek Thijssen
Holding BV (later renamed Integrated Surgical Systems BV), a non-operating
Netherlands corporation, for approximately $4,000. The acquisition was accounted
for as a purchase. Integrated Surgical Systems BV purchases and licenses
products and technology from Integrated Surgical Systems, Inc. for distribution
in Europe and other markets.
The Company has not yet generated significant revenue and has funded its
operations primarily through the issuance of debt and sale of equity.
Accordingly, the Company's ability to accomplish its business strategy and to
ultimately achieve profitable operations is dependent upon its ability to raise
additional financing. The Company's management is exploring several funding
options and expects to raise additional capital during 1996 (Note 10).
Ultimately, however, the Company will need to achieve profitable operations in
order to continue as a going concern. The Company incurred a net loss of
$4,053,528 for the year ended December 31, 1995 and a net loss of $2,122,377 for
the nine months ended September 30, 1996. The Company has an accumulated deficit
of $15,651,982 and $17,774,359 as of December 31, 1995 and September 30, 1996,
respectively.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of Integrated Surgical
Systems BV are measured using the subsidiary's local currency (Guilders). The
subsidiary's balance sheet accounts are translated at the current year-end
exchange rate and statement of operations amounts are translated at the average
exchange rate for the period. Translation adjustments are recorded as a separate
component of stockholders' equity. Foreign currency transaction gains and losses
were not material during the years ended December 31, 1994 and 1995 and the nine
months ended September 30, 1995 and 1996.
F-7
<PAGE> 74
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
REVENUE RECOGNITION
Revenues from sales without significant Company obligations beyond delivery
are recognized upon delivery of the products. Revenues pursuant to agreements
which include significant Company obligations beyond delivery are deferred until
the Company's remaining obligations are insignificant. Revenues are recognized
net of any deferrals for estimated future liabilities under contractual product
warranty provisions. Estimated future product retrofit costs for ROBODOC Systems
sold for clinical trials have been accrued in the accompanying financial
statements. Future retrofit costs are those expected to be required to update
ROBODOC Systems to the equivalent level of performance expected to be approved
by the Food and Drug Administration ("FDA").
RESEARCH AND DEVELOPMENT
Software development costs incurred subsequent to the determination of the
product's technological feasibility and prior to the product's general release
to customers are not material to the Company's financial position or results of
operations, and have been charged to research and development expense in the
accompanying consolidated statements of operations. Grants received from third
parties for research and development activities are recorded as revenue over the
term of the agreement as the related activities are conducted. Research and
development costs are expensed as incurred.
CONCENTRATION OF CREDIT RISK
The Company sells its products to companies in the healthcare industry and
performs periodic credit evaluations of its customers and generally does not
require collateral. The Company believes that adequate provision for
uncollectible accounts receivable has been made in the accompanying financial
statements. The Company maintains substantially all of its cash at four
financial institutions.
FINANCIAL STATEMENT 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
disclosures 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 EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents
consist primarily of certificates of deposits, banker's acceptances and U.S.
Government securities.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over estimated useful lives of 3 to 5 years, or the
lease term, whichever is shorter.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments" ("SFAS No. 107"). The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values.
Active markets for the
F-8
<PAGE> 75
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
Company's other financial instruments that are subject to the fair value
disclosure requirements of SFAS No. 107, which consist of privately-issued notes
payable, do not exist and there are no quoted market prices for these notes.
Accordingly, it is not practicable to estimate the fair values of such financial
instruments because of the limited information available to the Company and
because of the significance of the cost to obtain independent appraisals for
this purpose.
INVENTORY
Inventory is recorded at the lower of cost (first-in, first-out method) or
market and consists of materials and supplies used in the manufacture of the
ROBODOC System.
Inventory consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
DECEMBER 31, -------------
1995
------------ (UNAUDITED)
<S> <C> <C>
Raw materials.............................................. $381,756 $ 448,189
Work-in process............................................ 306,828 322,533
Finished goods............................................. 58,388 97,973
-------- --------
$746,972 $ 868,695
======== ========
</TABLE>
INCOME TAXES
The liability method is used to account for income taxes. Under this
method, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
scheduled to be in effect when the differences are expected to reverse.
NET LOSS PER SHARE
Except as noted below, net loss per share is based on the weighted average
number of shares of common stock outstanding during the period. Common stock
issuable upon the conversion of convertible preferred stock and note payable and
upon the exercise of common stock warrants and stock options have been excluded
from the computation because their inclusion would be anti-dilutive. Pursuant to
the Securities and Exchange Commission Staff Accounting Bulletins, common and
common equivalent shares issued by the Company at prices below the initial
public offering price during the 12 month period prior to the offering have been
included in the calculation as if they were outstanding for all periods
presented (using the treasury stock method at an assumed initial public offering
price of $5.00 per share). As described in Note 6, common stock was issued on
December 20, 1995 in connection with the conversion of preferred stock and
accumulated dividends. Net loss per share for the year ended December 31, 1995
would have been ($0.93) per share had the conversion occurred on January 1,
1995.
SIGNIFICANT CUSTOMERS AND FOREIGN SALES
During the year ended December 31, 1994, the Company recognized 87% of its
revenues from one customer. During the year ended December 31, 1995, the Company
recognized 95% of its revenues from one customer. Foreign sales were
approximately $27,000 and $165,000 for the years ended December 31, 1994 and
December 31, 1995, respectively. During the nine months ended September 30, 1995
and 1996, the Company
F-9
<PAGE> 76
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
SIGNIFICANT CUSTOMERS AND FOREIGN SALES -- (CONTINUED)
recognized 92% and 36%, 36% and 28% of its revenues from one and three
customers, respectively. Foreign sales for the nine months ended September 30,
1995 and 1996 were $103,613 and $1,747,925, respectively.
RECLASSIFICATIONS
Certain amounts reported in prior years financial statements have been
reclassified to conform with the 1995 and 1996 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER
30,
DECEMBER 31, 1996
1995 ------------
------------ (UNAUDITED)
<S> <C> <C>
ROBODOC System equipment.................................. $ 552,660 $ 386,504
Other equipment........................................... 738,215 809,204
Furniture and fixtures.................................... 40,040 41,258
Leasehold improvements.................................... 80,866 86,816
---------- ----------
1,411,781 1,323,782
Less accumulated depreciation............................. (980,930) (1,016,193)
---------- ----------
$ 430,851 $ 307,589
========== ==========
</TABLE>
4. REVERSE STOCK SPLIT
On December 20, 1995, as part of a recapitalization and preferred stock
sale described in Note 6, the stockholders authorized a one-for-five reverse
split of all capital stock. All references in the accompanying financial
statements to the number of capital shares and per-share amounts have been
retroactively restated to reflect the reverse stock split (Note 10).
5. NOTES PAYABLE
During 1994, the Company issued a $237,184 short-term note payable to a
vendor in exchange for inventory. Additional inventory purchases of $20,701 were
added to the outstanding balance during 1995. Simple interest on the note
payable accrues at 7% per annum. As partial payment for the interest obligation,
the Company issued 676 shares of its common stock to the vendor during the year
ended December 31, 1994, with an estimated fair value of $7.84 per share. The
outstanding principal balance of the note and the remaining interest obligation
which was due on September 30, 1995 was not paid due to the Company's limited
cash flow at that time and, as a result, the note payable is in default. The
Company is currently negotiating with the vendor to extend the terms of the note
payable; however, there is no assurance that such negotiations will be
successful or that the vendor will not pursue legal action against the Company.
The Company does not believe the outcome of the matter will have a material
adverse impact on its financial position or results of operations. Subsequent to
December 31, 1995, the Company began making payment on the note payable, and as
of September 30, 1996, the unpaid balance of the note payable was $67,037. The
Company intends to pay the remaining balance in November 1996.
A long-term note payable was entered into between the Company and a large
corporation, a representative of which is a member of the Company's Board of
Directors. Simple interest on the note payable accrued
F-10
<PAGE> 77
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE -- (CONTINUED)
at 9.25% per annum. On December 20, 1995, the long-term note payable and accrued
interest totaling $4,224,373 was converted into a warrant to purchase 126,895
shares of the Company's common stock at $0.01 per share which is currently
exercisable and expires on December 31, 2005.
In conjunction with the note agreement, the Company also entered into a
License Agreement with this corporation whereby the corporation granted the
Company the rights to the technology underlying the ROBODOC System at the time
of the Company's incorporation. In consideration for this License Agreement, the
Company issued to the corporation a warrant to purchase 67,587 shares of the
Company's common stock at a price of $0.07 per share. This warrant expires on
December 31, 2000 and has not been exercised as of September 30, 1996.
6. STOCKHOLDERS' EQUITY
COMMON STOCK
As of December 31, 1995 the Company has reserved a total of 5,836,747
shares of common stock pursuant to outstanding warrants, options and convertible
preferred stock.
CONVERTIBLE PREFERRED STOCK
On December 20, 1995, all outstanding shares of Series B and Series C
preferred stock were converted into 60,964 and 102,405 shares of common stock,
respectively. Also on that date, all accumulated and unpaid dividends on Series
B and Series C were converted into 17,910 and 22,681 shares of the Company's
common stock, respectively.
The Company entered into a Series D preferred stock and warrant agreement
during 1995. Under the terms of this agreement, the Company received $2 million
in proceeds at the first closing which occurred on December 21, 1995, and
granted an option to purchase additional Series D stock and a warrant to
purchase Series D Stock as described below. At the first closing, the Company
sold 693,195 shares of Series D preferred stock for $0.96 per share. It also
sold for $1,333,333 a warrant to purchase 1,386,390 shares of Series D at $0.01
per share. The warrant expires on December 31, 2005 and has not been exercised
as of September 30, 1996. The purchasers received an option to purchase an
additional 346,597 shares of Series D preferred stock and a warrant to purchase
an additional 693,194 shares of Series D preferred stock, all with the same
terms as in the first closing.
On February 19, 1996, the option holder exercised the option and the
Company sold 346,597 shares of Series D preferred stock for $0.96 per share. The
Company also sold a warrant for $666,667 to purchase 693,194 shares of Series D
at $0.01 per share.
Series B and Series C preferred stockholders who did not purchase Series D
stock were issued warrants to purchase an aggregate of 446,087 shares of the
Company's common stock at a price of $0.74 per share in consideration for their
consent to the terms of the recapitalization and Series D stock sale. The
Company granted another warrant to purchase an additional 138,872 shares of
common stock at $0.74 per share in conjunction with the second closing of the
Series D preferred stock described above. These warrants may be exercised only
under certain conditions including the closing of a registered public offering
in which the Company would have a pre-money market valuation of at least
$10,000,000 (Note 10), the sale of the Company for consideration at least equal
to $10,000,000, or in certain circumstances when the Company s valuation exceeds
$10,000,000. These warrants expire on the earlier of 30 days after a notice of a
proposed exercise event or December 31, 2005. On August 25, 1996 and October 29,
1996, certain holders of these warrants entered into amended warrant agreements
with the Company which included a provision allowing for a cashless exercise.
Under the terms of the cashless exercise, these warrant holders accepted 72,126
F-11
<PAGE> 78
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
CONVERTIBLE PREFERRED STOCK -- (CONTINUED)
fewer shares as consideration for not being required to make the cash exercise
payment of $0.74 per share. This resulted in these warrant holders receiving
512,831 shares of Common Stock upon their exercise on August 25, 1996 and
October 29, 1996.
As part of the Series D offering, the Company offered to all stockholders
who did not purchase Series D stock or the Series D warrant ("non-participating
stockholder(s)") the right to purchase Series D stock with the same terms and
conditions as the December 1995 offering. The Company has reserved 753,589
shares of Series D stock for this offering. Each non-participating stockholder
will be allowed to purchase a number of shares based upon current ownership in
relation to other non-participating stockholders. This offer expired in March
1996.
The holders of Series D convertible preferred stock have the following per
share liquidation preferences and conversion rates:
<TABLE>
<S> <C>
Liquidation preference............................................... $0.96
Conversion rate...................................................... $0.96
</TABLE>
The holders of convertible preferred stock have participating rights to
receive dividends when and as declared on the shares of common stock by the
Board of Directors. No dividends have been declared as of September 30, 1996.
Each share of the convertible preferred stock is convertible into common
stock at the conversion rate described above divided by the "Conversion Price"
subject to certain anti-dilution adjustments. At December 31, 1995 and September
30, 1996, the Conversion Price was $0.96 per share for Series D, making each
share of convertible preferred stock convertible into common stock on a
one-for-one basis. Automatic conversion of shares will occur in the event of a
firm underwritten public offering resulting in aggregate gross cash proceeds to
the Company of at least $7,500,000 (Note 10).
Holders of the Company's convertible preferred stock vote as if their
shares have been converted to common stock. In addition, preferred shares are
subject to certain transfer restrictions and are entitled to certain
registration rights.
Whenever the Company proposes to issue, deliver, or sell certain "Voting
Securities," the holder of the warrant resulting from the conversion of the
long-term note payable (Note 5) has the right of first offer to purchase such
Voting Securities. Subsequently, the holders of convertible preferred stock are
entitled to purchase an amount of such Voting Securities which would result in
the preferred stockholder retaining its percentage interest in the total voting
power of the Company in effect prior to such issuance. These shares may be
purchased at a price per share equal to the selling price of the Voting
Securities. The anti-dilution rights granted to the holders of convertible
preferred stock terminate in the event the stockholder holds less than 337,933
shares of convertible preferred stock.
STOCK OPTION PLANS
The Company established a stock option plan in 1991 (the "1991 Plan") and
on December 13, 1995, it established a new stock option plan (the "1995 Plan").
Certain employees of the Company will surrender their options under the 1991
Plan in return for new and additional options granted under the 1995 Plan.
Officers, employees, directors and consultants to the Company may participate in
the Plans. Options granted under the Plans may be incentive stock options or
non-statutory stock options. 1,249,070 shares of the Company's common stock have
been reserved for issuance under the Plans. Options granted generally have a
F-12
<PAGE> 79
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
STOCK OPTION PLANS -- (CONTINUED)
term of five years from the date of the grant. The exercise price of incentive
stock options granted under the Plans may not be less than 100% of the fair
market value of the Company's common stock on the date of the grant. The
exercise price of non-statutory stock options granted under the Plans may not be
less than 85% of the fair market value of the Company's common stock on the date
of the grant. For a person who, at the time of the grant, owns stock
representing 10% of the voting power of all classes of Company stock, the
exercise price of the incentive stock options or the non-statutory stock options
granted under the Plans may not be less than 110% of the fair market value of
the common stock on the date of the grant.
The following summarizes activity under the Plans for the years ended
December 31, 1994 and 1995 and the nine months ended September 30, 1996:
<TABLE>
<S> <C>
Outstanding at December 31, 1993........................................... 46,465
Granted (at $7.84 per share).......................................... 11,415
Canceled (at $3.33 to $7.84 per share)................................ (4,513)
Exercised (at $3.33 and $7.84 per share).............................. (335)
-------
Outstanding at December 31, 1994........................................... 53,032
Granted (at $4.88 per share).......................................... 32,713
Canceled (at $3.33 to $7.84 per share)................................ (9,439)
Exercised (at $3.33 per share)........................................ (781)
-------
Outstanding at December 31, 1995 (at $3.33 to $7.84 per share)............. 75,525
Granted (at $0.07 per share) (unaudited).............................. 941,545
Canceled (at $3.33 to $7.84 per share) (unaudited).................... (67,928)
Exercised (at $0.25 per share) (unaudited)............................ (72)
-------
Outstanding at September 30, 1996 (at $0.07 to $7.84 per share)
(unaudited).............................................................. 949,070
=======
</TABLE>
Of the options outstanding at December 31, 1995, options to purchase 46,453
shares of common stock were immediately exercisable at prices ranging from $3.33
to $7.84 per share. Of the options outstanding at September 30, 1996, options to
purchase 396,370 shares of common stock were immediately exercisable at prices
ranging from $0.07 to $7.84 per share. A total of 1,033,495 and 300,000 shares
were still available for grant under the Plan at December 31, 1995 and September
30, 1996, respectively.
During the nine months ended September 30, 1996, the Company recorded
deferred stock compensation of $783,666 relating to stock options granted during
the period with exercise prices less than the estimated fair value of the
Company's common stock, as determined by an independent valuation analysis, on
the date of grant. The deferred stock compensation is being amortized into
expense over the vesting period of the stock options which generally range from
3 to 5 years. Deferred compensation relating to stock options which vested
immediately was expensed on the date of grant. Compensation expense of $310,159
was recorded during the nine months ended September 30, 1996 relating to these
stock options, and the remaining $473,507 will be amortized into expense in
future periods.
7. INCOME TAXES
The income tax provisions for the years ended December 31, 1994 and 1995
and the nine months ended September 30, 1995 and 1996 are comprised of currently
payable state franchise taxes and currently payable foreign income taxes.
F-13
<PAGE> 80
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES -- (CONTINUED)
Deferred taxes result from temporary differences in the recognition of
certain revenue and expense items for income tax and financial reporting
purposes. The significant components of the Company's deferred taxes as of
December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryover............................ $ 4,759,000 $ 2,200,000
Research and development credit......................... 404,000 --
Capitalized research and development.................... 566,000 16,000
Accrued product retrofit costs.......................... 88,000 95,000
Inventory............................................... -- 97,000
Other................................................... 178,000 104,000
----------- -----------
5,995,000 2,512,000
Less: Valuation allowance............................... (5,995,000) (2,512,000)
----------- -----------
Net deferred taxes........................................ $ -- $ --
=========== ===========
</TABLE>
The principal reasons for the difference between the effective income tax
rate and the federal statutory income tax rate are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995
----------- -----------
<S> <C> <C>
Federal benefit expected at statutory rates........... $(1,642,063) $(1,377,000)
Net operating loss with no current benefit............ 1,642,063 1,377,000
State franchise taxes................................. 4,532 3,046
Foreign income taxes.................................. 6,255 67
----------- -----------
$ 10,787 $ 3,113
=========== ===========
</TABLE>
In connection with the Company's Series D preferred stock sale (Note 6) a
change of ownership (as defined in Section 382 of the Internal Revenue Code of
1986, as amended) occurred. As a result of this change, the Company's federal
and state net operating loss carryforwards generated through December 21, 1995
(approximately $13,500,000 and $4,500,000, respectively) will be subject to a
total annual limitation in the amount of approximately $400,000. Except for the
amounts described below, the Company expects that the carryforward amounts will
not be utilized prior to the expiration of the carryforward periods.
As a consequence of the limitation, the Company has at December 31, 1995 a
net operating loss carryover of approximately $6,000,000 for federal income tax
purposes which expires between 2005 and 2009, and net operating loss
carryforward of approximately $2,000,000 for state income tax purposes which
expires between 1997 and 1999.
The Company paid $10,787 and $5,280 for income and franchise taxes during
the years ended December 31, 1994 and 1995, respectively.
8. COMMITMENTS
The Company leases its facilities under two non-cancelable operating
leases. One of the leases has an escalation clause of 5% per annum and has a
term of approximately five years. The Company has the right to terminate the
lease at the end of the third year. The fee associated with this cancellation
privilege is 50% of the unamortized portion of the total tenant improvements
(which is expected to be approximately $32,000). The
F-14
<PAGE> 81
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS -- (CONTINUED)
Company's other facility does not have an escalation clause and has a term of
approximately 3 years. Future payments under non-cancelable facility operating
leases are approximately as follows:
<TABLE>
<S> <C>
1996.............................................................. $114,000
1997.............................................................. 86,000
1998.............................................................. 44,000
</TABLE>
Aggregate rental expense under these leases amounted to $136,880 and
$135,980 during the years ended December 31, 1994 and 1995, respectively.
Future minimum payments under non-cancelable equipment operating leases are
approximately $10,000 per year through the year ended December 31, 2000. Rental
expense for these non-cancelable leases during the years ended December 31, 1994
and 1995 was approximately $11,000 and $14,000, respectively.
9. NIST GRANT
During 1994, the Company received notification it was awarded a $1,960,000
National Institute of Science and Technology ("NIST") grant from the U.S.
Department of Commerce. The grant will be shared by the Company and two
strategic partners to fund approximately 49% of a $4 million joint development
project to adapt the ROBODOC System for use in hip revision surgery. The
development project and related NIST Grant began in 1995. The Company received
$19,409 in proceeds under this grant during the year ended December 31, 1995 and
$93,099 during the nine months ended September 30, 1996.
10. SUBSEQUENT EVENTS
On November 6, 1996, the Company effected a one-for-1.479586 reverse split
of the Company's common stock. All references in the accompanying financial
statements to the number of capital shares and per-share amounts have been
retroactively restated to reflect the reverse split.
If the Company's initial public offering is consummated and results in
aggregate gross cash proceeds to the Company of at least $7,500,000, all of the
Series D convertible preferred stock outstanding as of the closing date will
automatically be converted into an aggregate of approximately 1,039,792 shares
of common stock, based on the shares of Series D outstanding at September 30,
1996. Unaudited pro forma stockholders' equity at September 30, 1996, as
adjusted for the conversion of preferred stock, is disclosed on the consolidated
balance sheets.
F-15
<PAGE> 82
[TO BE LOCATED ON INSIDE COVER OF BACK PAGE]
[LOGO]
[PHOTO] [PHOTO]
The ROBODOC(R) Surgical Assistant System(the "ROBODOC System"). Pictured on the
left is the ORTHODOC(R) Presurgical Planner. The computer controlled surgical
robot is seen on the right. The robot included in the ROBODOC System ("ROBODOC
System") is manufactured to the Company's specifications by an independent
supplier and is incorporated into the ROBODOC System. See
"Business -- Manufacturing."
[PHOTO]
ORTHODOC's software reduces image
distortion caused by the metal in an
existing hip implant, allowing the
surgeon to visualize the bone, the
cement, and the implant clearly. The
surgery can now be planned in 3-D and
frequent complications can be avoided.
<PAGE> 83
[LOGO]
<PAGE> 84
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VI of the Registrant's by-laws provides that a director or officer
shall be indemnified against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement (provided such settlement is approved in
advance by the Registrant) in connection with certain actions, suits or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation--a "derivative action") if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. A similar standard of care is applicable in the case of derivative
actions, except that indemnification only extends to expenses (including
attorneys' fees) incurred in connection with the defense or settlement of such
an action, except that no person who has been adjudged to be liable to the
Registrant shall be entitled to indemnification unless a court determines that
despite such adjudication of liability but in view of all of the circumstances
of the case, the person seeking indemnification is fairly and reasonably
entitled to be indemnified for such expenses as the court deems proper.
Article 6.5 of the Registrant's by-laws further provides that directors and
officers are entitled to be paid by the Registrant the expenses incurred in
defending the proceedings specified above in advance of their final disposition,
provided that such payment will only be made upon delivery to the Registrant by
the indemnified party of an undertaking to repay all amounts so advanced if it
is ultimately determined that the person receiving such payments is not entitled
to be indemnified.
Article 6.4 of the Registrant's by-laws provides that a person indemnified
under Article VI of the by-laws may contest any determination that a director,
officer, employee or agent has not met the applicable standard of conduct set
forth in the by-laws by petitioning a court of competent jurisdiction.
Article 6.6 of the Registrant's by-laws provides that the right to
indemnification and the payment of expenses incurred in defending a proceeding
in advance of its final disposition conferred in the Article will not be
exclusive of any other right which any person may have or acquire under the
by-laws, or any statute or agreement, or otherwise.
Finally, Article 6.7 of the Registrant's by-laws provides that the
Registrant may maintain insurance, at its expense, to reimburse itself and
directors and officers of the Registrant and of its direct and indirect
subsidiaries against any expense, liability or loss, whether or not the
Registrant would have the power to indemnify such persons against such expense,
liability or loss under the provisions of Article VI of the by-laws. The
Registrant has applied for such insurance, and expects to have such insurance in
effect on the date this Registration Statement is declared effective by the
Securities and Exchange Commission.
Article 11 of the Registrant's certificate of incorporation eliminates the
personal liability of the Registrant's directors to the Registrant or its
stockholders for monetary damages for breach of their fiduciary duties as a
director to the fullest extent provided by Delaware law. Section 102(b)(7) of
the DGCL provides for the elimination off such personal liability, except for
liability (i) for any breach of the director's duty of loyalty to the Registrant
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction from which the director
derived any improper personal benefit.
Reference is made to Section of the Underwriting Agreement between the
Registrant, Rickel & Associates, Inc. and Aegis Capital Corp. (the
"Underwriters"), filed as Exhibit 1.1 to this Registration Statement, which
provides for indemnification by the Underwriters of the Registrant and the
directors and officers of the Registrant under certain limited circumstances.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers or
persons controlling the Registrant pursuant to the foregoing
II-1
<PAGE> 85
provisions, the Registrant has been informed 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.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses (other than underwriting
discounts and commissions) which will be paid by the Registrant in connection
with the issuance and distribution of the securities being registered hereby.
With the exception of the SEC registration fee and the NASD filing fee, all
amounts indicated are estimates.
<TABLE>
<S> <C>
SEC Registration fee........................................ $ 8,674.91
NASD filing fee............................................. 3,015.72
NASDAQ filing fee........................................... 8,776.00
Pacific Stock Exchange filing fee........................... 22,000.00
Underwriters' expense allowance............................. 210,375.00
Representatives's consulting fee............................ 24,000.00
Directors' and Officers' liability insurance................ 150,000.00
Printing expenses (other than stock certificates)........... 80,000.00
Printing and engraving of stock and warrant certificates.... 3,000.00
Legal fees and expenses (other than blue sky)............... 100,000.00
Accounting fees and expenses................................ 70,000.00
Blue sky fees and expenses (including legal and filing
fees)..................................................... 50,000.00
Transfer Agent and Warrant Agent fees and expenses.......... 3,500.00
Miscellaneous............................................... 16,658.37
--------
Total............................................. $750,000.00
========
</TABLE>
ITEM 26. RECENT SALE OF UNREGISTERED SECURITIES
During the past three years, the Registrant has sold securities to a
limited number of persons, as described below. Except as indicated, there were
no underwriters involved in the transactions and there were no underwriting
discounts or commissions paid in connection therewith. The purchasers 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
certificates for the securities issued in such transactions. All purchasers of
securities in each such transaction had adequate access to information about the
Registrant, and in the case of transactions exempt from registration under
Section 4(2) of the Securities Act, were sophisticated investors.
1. On December 20, 1995, as part of a recapitalization, the Registrant
issued 30,482 shares of Common Stock to each of Sutter Health and the
John N. Kapoor Trust (the "Kapoor Trust") upon conversion of the
Series B Preferred Stock. The issuance of these shares was exempt from
registration under Section 3(a)(9) of the Securities Act.
2. On December 20, 1995, as part of a recapitalization, the Registrant
issued 8,955 shares of Common Stock to each of Sutter Health and the
Kapoor Trust in consideration for the cancellation of all accumulated
dividends on the Series B Preferred Stock. The issuance of these
shares was exempt from registration under Section 4(2) of the
Securities Act.
3. On December 20, 1995, as part of a recapitalization, the Registrant
issued 89,604 shares of Common Stock to Sutter Health and 12,801
shares of Common Stock to Keystone Financial Corporation ("Keystone")
upon conversion of the Series C Preferred Stock. The issuance of these
shares was exempt from registration under Section 3(a)(9) of the
Securities Act.
4. On December 20, 1995, as part of a recapitalization, the Registrant
issued 19,512 shares of Common Stock to Sutter Health and 3,169 shares
of Common Stock to Keystone in consideration
II-2
<PAGE> 86
for the cancellation of all accumulated dividends on the Series C
Preferred Stock. The issuance of these shares was exempt from
registration under Section 4(2) of the Securities Act.
5. On December 21, 1995, as part of a recapitalization, the Registrant
issued a warrant to purchase 126,895 shares of Common Stock, at an
exercise price of $0.02 per share, to International Business Machines
Corporation ("IBM") in exchange for the cancellation of the Company's
promissory note in the principal amount of $3,000,000 and accrued
interest thereon. The issuance of this warrant was exempt from
registration under Section 4(2) of the Securities Act.
6. On December 21, 1995, as part of a recapitalization, the Registrant
issued 693,195 shares of Series D Preferred Stock to EJ Financial
Investments V, L.P. ("EJ Financial") for an aggregate purchase price
of $666,667 ($0.96 per share). In addition, EJ Financial received an
option to purchase an additional 346,597 shares of Series D Preferred
Stock on the same terms and conditions as it purchased the Series D
Preferred Stock, which option was exercised on February 19, 1996. The
issuance of these securities was exempt from registration under
Section 4(2) of the Securities Act.
7. On December 21, 1995, as part of a recapitalization, the Registrant
issued a warrant to purchase 1,386,390 shares of Series D Preferred
Stock (the "Series D Warrants") to IBM, at an exercise price of $0.01
per share, for an aggregate purchase price of $1,333,333 ($0.96 per
warrant). In addition, IBM received an option to purchase Series D
Warrants to purchase an additional 693,194 shares of Series D
Preferred Stock on the same terms and conditions as it purchased the
Series D Warrants, which option was exercised on February 19, 1996.
The issuance of these securities was exempt from registration under
Section 4(2) of the Securities Act.
8. On December 21, 1995, as part of a recapitalization, the Registrant
issued warrants to purchase 390,888 shares, 11,899 shares and 43,300
shares of Common Stock to Sutter Health, Sutter Health Venture
Partners L.P. and Keystone, respectively, at an exercise price of
$0.74 per share, in consideration for their consent to the terms of
the recapitalization. The issuance of these warrants was exempt from
registration under Section 4(2) of the Securities Act.
9. On December 21, 1995, as part of a recapitalization, the Registrant
issued warrants to purchase 121,686 shares, 3,705 shares and 13,481
shares of Common Stock to Sutter Health, Sutter Health Venture
Partners L.P. and Keystone, respectively, at an exercise price of
$0.74 per share, in connection with the exercise of certain options by
EJ Financial and IBM. The issuance of these warrants was exempt from
registration under Section 4(2) of the Securities Act.
10. From July 24, 1993 through December 31, 1994, the Registrant granted
options to purchase an aggregate of 11,415 shares of Common Stock to
employees of the Registrant pursuant to the Registrant's employee
stock option plans, at an exercise price of $7.84 per share. The grant
of these options was exempt from registration under Rule 701 of the
Securities Act.
11. From January 1, 1995 through December 31, 1995, the Registrant granted
options to purchase an aggregate of 32,713 shares of Common Stock to
employees of the Registrant pursuant to the Registrant's employee
stock option plans, at an exercise price of $4.88 per share. The grant
of these options was exempt from registration under Rule 701 of the
Securities Act.
12. From January 1, 1996 through September 30, 1996, the Registrant
granted options to purchase an aggregate of 941,545 shares of Common
Stock to employees of the Registrant pursuant to the Registrant's
employee stock option plans. Of these options, options to purchase
899,637 shares were granted at an exercise price of $0.07 per share,
options to purchase 21,631 shares were granted at an exercise price of
$2.07 per share, and options to purchase 20,277 were granted at an
exercise price of $5.92 per share. The grant of these options was
exempt from registration under Rule 701 of the Securities Act.
13. From January 1, 1993 through December 31, 1994, the Registrant issued
and sold an aggregate of 399 shares of Common Stock to two employees of
the Registrant upon exercise of stock options granted pursuant to the
Registrant's employee stock option plans. Of such shares, 241 were
issued at
II-3
<PAGE> 87
an exercise price of $3.33 per share and 158 were issued at an exercise
price of $7.84 per share. The issuance and sale of these shares was
exempt from registration under Rule 701 of the Securities Act.
14. From January 1, 1995 through December 31, 1995, the Registrant issued
and sold an aggregate of 781 shares of Common Stock to three employees
of the Registrant upon exercise of stock options granted pursuant to the
Registrant's employee stock option plans, at an exercise price of $3.33
per share. The issuance and sale of these shares was exempt from
registration pursuant to Rule 701 promulgated under the Securities Act.
15. From January 1, 1996 through September 30, 1996, the Registrant issued
and sold an aggregate of 72 shares of Common Stock to two employees of
the Registrant upon exercise of stock option granted pursuant to the
Registrant's employee stock option plans. Of such shares, 17 shares were
issued at an exercise price of $0.07 per share and 55 shares were issued
at an exercise price of $0.31 per share. The issuance and sale of these
shares was exempt from registration pursuant to Rule 701 promulgated
under the Securities Act.
16. On June 17, 1994, the Registrant issued 390 shares of Common Stock to
a former employee of the Registrant and 152 shares of Common Stock to
his attorney, in connection with the termination of the employee's
employment. These shares were valued at $7.84 per share. The issuance of
the shares was exempt from registration pursuant to Rule 504 promulgated
under the Securities Act.
17. On November 23, 1994, the Registrant issued 676 shares of Common Stock
to a supplier of the Registrant in payment of accrued interest on note
payable. The issuance of the shares was exempt from registration under
Section 4(2) of the Securities Act.
18. On August 25, 1996, the Company issued 449,374 and 13,680 shares of
Common Stock to Sutter Health and Sutter Health Venture Partners,
respectively, at an exercise price of $0.74 per share. The issuance of
these securities was exempt from Registration under Section 4(2) of
the Securities Act.
19. On October 29, 1996, the Company issued 49,777 shares of Common Stock
to Keystone Financial Corporation at an exercise price of $0.74 per
share. The issuance of these securities was exempt from registration
under Section 4(2) of the Securities Act.
ITEM 27. EXHIBITS
<TABLE>
<S> <C>
1.1 -- Form of Underwriting Agreement, as revised.
3.1 -- Form of Certificate of Incorporation of the Company, as amended.
3.2 -- By-laws of the Company.
4.1 -- Form of Underwriters' Warrants, as revised.
4.2 -- Form of Public Warrant Agreement, as revised.
4.3 -- Specimen Common Stock Certificate.
4.4 -- Specimen Warrant Certificate (included as Exhibit A to Exhibit 4.2 herein).
4.5 -- Form of Series D Preferred Stock Certificate.
4.6 -- Form of Consulting Agreement between the Company and Rickel & Associates,
Inc.
4.7 -- Common Stock Purchase Warrant issued by the Company to International
Business Machines Corporation ("IBM"), dated February 6, 1991, as amended
(included as Exhibit J to Exhibit 10.5 herein).
4.8 -- Stockholders' Agreement between the Founders of the Company and IBM, dated
February 6, 1991, as amended.
4.9 -- Common Stock Purchase Warrant issued by the Company to IBM, dated December
21, 1995 (included as Exhibit I to Exhibit 10.5 herein).
</TABLE>
II-4
<PAGE> 88
<TABLE>
<S> <C>
4.10 -- Series D Preferred Stock Purchase Warrant issued by the Company to IBM,
dated December 21, 1995 (included as Exhibit H to Exhibit 10.5 herein).
4.11 -- Warrant issued by the Company to Sutter Health, Sutter Health Venture
Partners ("Sutter Health VP") and Keystone Financial Corporation
("Keystone"), dated December 21, 1995 (included as Exhibits K, L and M,
respectively, to Exhibit 10.5 herein).
4.12 -- Registration Rights Agreement among the Company, IBM, John N. Kapoor Trust
("Kapoor"), EJ Financial Investments V, L.P. ("EJ Financial"), Keystone,
Sutter Health and Sutter Health VP, dated as of December 21, 1995 (included
as Exhibit G to Exhibit 10.5 herein).
4.13 -- 1995 Stock Option Plan, as amended.
4.14 -- Series D Preferred Stock Purchase Warrant issued by the Company to IBM,
dated February 29, 1996.
4.15 -- Form of Lock-up Agreement.
5.1 -- Opinion of Snow Becker Krauss P.C.
10.1 -- Loan and Warrant Purchase Agreement between the Company and IBM, dated as
of February 6, 1991.
10.2 -- License Agreement between the Company and IBM, dated February 6, 1991.
10.3 -- Series B Preferred Stock Purchase Agreement among the Company, Sutter
Health and The John N. Kapoor Trust, dated as of April 10, 1992.
10.4 -- Series C Preferred Stock Purchase Agreement among the Company, Sutter
Health and Keystone, dated as of November 13, 1992, as amended December 13,
1995.
10.5 -- Series D Preferred Stock and Warrant Purchase Agreement among the Company,
IBM and EJ Financial, dated December 21, 1995.
10.6 -- Investors Agreement among the Company, IBM, Wendy Shelton-Paul Trust,
William Bargar, Brent Mittelstadt, Peter Kazanzides, Kapoor, Sutter Health,
Sutter Health VP and EJ Financial, dated as of December 21, 1995 (included
as Exhibit F to Exhibit 10.5 herein).
10.7 -- Employment Agreement between the Company and Ramesh Trivedi, dated December
8, 1995.
10.8 -- License Agreement between the Company and IBM, dated February 4, 1991.
10.9 -- Agreement for the Purchase and Use of Sankyo Industrial Products between
the Company and Sankyo Seiki (American) Inc. dated November 1, 1992.
*11.1 -- Statement of computation of earnings per share.
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Snow Becker Krauss P.C. (to be included in Exhibit 5.1 to this
Registration Statement).
*23.2 -- Consent of Ernst & Young LLP, independent auditors, is included in Part II
of this Registration Statement.
24.1 -- Power of Attorney (included on the signature page of this Registration
Statement).
*27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
* Filed with Amendment No. 3.
II-5
<PAGE> 89
ITEM 28. UNDERTAKINGS
(A) RULE 415 OFFERING
The undersigned small business issuer hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act.
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information set forth in the registrant statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment as a new registration statement relating
to the securities offered, and the offering of such securities at
that time to be the initial bona fide offering thereof.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(D) EQUITY OFFERINGS BY NON-REPORTING SMALL BUSINESS ISSUERS
The undersigned small business issuer hereby undertakes that it will
provide 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.
(E) REQUEST FOR ACCELERATION OF EFFECTIVE DATE
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to
directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer 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 small business issuer
of the expenses incurred or paid by a director, officer, or
controlling person of the small business issuer 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 small business issuer 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.
(F) RULE 430A OFFERING
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the small business issuer under Rule
424(b)(1) or (4) or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared it
effective.
(2) For determining any liability under the Securities Act, treat each
post-effect amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
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<PAGE> 90
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENT FOR FILING ON FORM SB-2 AND HAS DULY CAUSED THIS AMENDMENT TO THE
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF SACRAMENTO IN THE STATE OF CALIFORNIA ON
NOVEMBER 6, 1996.
INTEGRATED SURGICAL SYSTEMS, INC.
<TABLE>
<S> <C>
By: /s/ RAMESH C. TRIVEDI By: /s/ MICHAEL J. TOMCZAK
---------------------------- ------------------------------
Ramesh C. Trivedi Michael J. Tomczak
Chief Executive Officer and Chief Financial Officer
President (Principal Financial and
(Principal Executive Officer) Accounting Officer)
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1993, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON
NOVEMBER 6, 1996, IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<C> <S>
/s/ RAMESH C. TRIVEDI Chief Executive Officer, President, and
- --------------------------------------------- Director (Principal Executive Officer)
Ramesh C. Trivedi
/s/ MICHAEL J. TOMCZAK Vice President and Chief Financial Officer
- --------------------------------------------- (Principal Financial and Accounting
Michael J. Tomczak Officer)
* Chairman of the Board of Directors
- ---------------------------------------------
James C. McGroddy
* Director
- ---------------------------------------------
Wendy Shelton-Paul
* Director
- ---------------------------------------------
John N. Kapoor
* Director
- ---------------------------------------------
Paul A.H. Pankow
*/s/ RAMESH C. TRIVEDI
- ---------------------------------------------
By: Ramesh C. Trivedi
(Attorney-in-fact)
</TABLE>
II-7
<PAGE> 91
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGED
- ------------ ----------------------------------------------------------------------- ------------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement, as revised.............................
3.1 -- Form of Certificate of Incorporation of the Company, as amended........
3.2 -- By-laws of the Company.................................................
4.1 -- Form of Underwriters' Warrants, as revised.............................
4.2 -- Form of Public Warrant Agreement, as revised...........................
4.3 -- Specimen Common Stock Certificate......................................
4.4 -- Specimen Warrant Certificate (included as Exhibit A to Exhibit 4.2
herein)................................................................
4.5 -- Form of Series D Preferred Stock Certificate...........................
4.6 -- Form of Consulting Agreement between the Company and Rickel &
Associates, Inc........................................................
4.7 -- Common Stock Purchase Warrant issued by the Company to International
Business Machines Corporation ("IBM"), dated February 6, 1991, as
amended (included as Exhibit J to Exhibit 10.5 herein).................
4.8 -- Stockholders' Agreement between the Founders of the Company and IBM,
dated February 6, 1991, as amended.....................................
4.9 -- Common Stock Purchase Warrant issued by the Company to IBM, dated
December 21, 1995 (included as Exhibit I to Exhibit 10.5 herein).......
4.10 -- Series D Preferred Stock Purchase Warrant issued by the Company to IBM,
dated December 21, 1995 (included as Exhibit H to Exhibit 10.5
herein)................................................................
4.11 -- Warrant issued by the Company to Sutter Health, Sutter Health Venture
Partners ("Sutter Health VP") and Keystone Financial Corporation
("Keystone"), dated December 21, 1995 (included as Exhibits K, L and M,
respectively, to Exhibit 10.5 herein)..................................
4.12 -- Registration Rights Agreement among the Company, IBM, John N. Kapoor
Trust ("Kapoor"), EJ Financial Investments V, L.P. ("EJ Financial"),
Keystone, Sutter Health and Sutter Health VP, dated as of December 21,
1995 (included as Exhibit G to Exhibit 10.5 herein)....................
4.13 -- 1995 Stock Option Plan, as amended.....................................
4.14 -- Series D Preferred Stock Purchase Warrant issued by the Company to IBM,
dated February 29, 1996.
4.15 -- Form of Lock-up Agreement.
5.1 -- Opinion of Snow Becker Krauss P.C......................................
10.1 -- Loan and Warrant Purchase Agreement between the Company and IBM, dated
as of February 6, 1991.................................................
10.2 -- License Agreement between the Company and IBM, dated February 6,
1991...................................................................
10.3 -- Series B Preferred Stock Purchase Agreement among the Company, Sutter
Health and The John N. Kapoor Trust, dated as of April 10, 1992........
10.4 -- Series C Preferred Stock Purchase Agreement among the Company, Sutter
Health and Keystone, dated as of November 13, 1992, as amended December
13, 1995...............................................................
10.5 -- Series D Preferred Stock and Warrant Purchase Agreement among the
Company, IBM and EJ Financial, dated December 21, 1995.................
10.6 -- Investors Agreement among the Company, IBM, Wendy Shelton-Paul Trust,
William Bargar, Brent Mittelstadt, Peter Kazanzides, Kapoor, Sutter
Health, Sutter Health VP and EJ Financial, dated as of December 21,
1995 (included as Exhibit F to Exhibit 10.5 herein)....................
</TABLE>
<PAGE> 92
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGED
- ------------ ----------------------------------------------------------------------- ------------
<S> <C> <C>
10.7 -- Employment Agreement between the Company and Ramesh Trivedi, dated
December 8, 1995.......................................................
10.8 -- License Agreement between the Company and IBM, dated February 4,
1991...................................................................
10.9 -- Agreement for the Purchase and Use of Sankyo Industrial Products
between the Company and Sankyo Seiki (American) Inc. dated November 1,
1992...................................................................
11.1 -- Statement of computation of earnings per share.........................
21.1 -- Subsidiaries of the Company............................................
23.1 -- Consent of Snow Becker Krauss P.C. (to be included in Exhibit 5.1 to
this Registration Statement)...........................................
*23.2 -- Consent of Ernst & Young LLP, independent auditors, is included in Part
II of this Registration Statement......................................
24.1 -- Power of Attorney (included on the signature page of this Registration
Statement).............................................................
27.1 -- Financial Data Schedule................................................
</TABLE>
- ---------------
* Filed with Amendment No. 3.
<PAGE> 1
EXHIBIT 11.1
INTEGRATED SURGICAL SYSTEMS, INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------- -------------------------------
1994 1995 1995 1996
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Primary and fully diluted:
Average common shares outstanding............................ 68,356 75,180 69,200 335,044
Common and common equivalent shares issued during the
twelve month period prior to the initial public
offering at prices below the assumed
public offering price in accordance with Staff
Accounting Bulletin No. 83................................. 4,103,697 4,103,697 4,103,697 4,042,635
----------- ----------- ----------- -----------
Shares used in per share calculations........................ 4,172,052 4,178,877 4,172,897 4,377,679
=========== =========== =========== ===========
Net loss..................................................... $(4,840,385) $(4,053,528) ($2,960,445) $(2,122,377)
Preferred stock dividends.................................... (956,574) (936,325) (720,000) --
----------- ----------- ----------- -----------
Net loss applicable to common stockholders................... $(5,796,959) $(4,989,853) ($3,680,445) $(2,122,377)
=========== =========== =========== ===========
Net loss per common and common share equivalent.............. $ (1.39) $ (1.19) $ (0.88) $ (0.48)
=========== =========== =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Information" and to the use of our report dated January 29,
1996, in Amendment No. 3 to the Registration Statement (Form SB-2, No. 333-9207)
and related Prospectus of Integrated Surgical Systems, Inc. for the registration
of 3,750,000 shares of its common stock and warrants to purchase 2,175,000
shares of its common stock.
ERNST & YOUNG LLP
Sacramento, California
November 5, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,132,503
<SECURITIES> 0
<RECEIVABLES> 12,721
<ALLOWANCES> 0
<INVENTORY> 868,695
<CURRENT-ASSETS> 2,296,998
<PP&E> 307,589
<DEPRECIATION> 1,016,193
<TOTAL-ASSETS> 2,618,521
<CURRENT-LIABILITIES> 1,171,000
<BONDS> 0
10,398
0
<COMMON> 7,370
<OTHER-SE> 1,437,123
<TOTAL-LIABILITY-AND-EQUITY> 2,618,521
<SALES> 1,748,065
<TOTAL-REVENUES> 1,748,065
<CGS> 664,979
<TOTAL-COSTS> 3,251,314
<OTHER-EXPENSES> (51,118)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,117,110)
<INCOME-TAX> 5,267
<INCOME-CONTINUING> (2,122,377)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,122,377)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
