<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 1997
REGISTRATION NO. 333-31481
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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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<S> <C> <C>
DELAWARE 3841 68-0232575
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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:
JACK BECKER, ESQ.
SNOW BECKER KRAUSS P.C.
605 THIRD AVENUE
NEW YORK, NEW YORK 10158-0125
TELEPHONE: (212) 687-3860
TELECOPIER: (212) 949-7052
------------------------
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]
CALCULATION OF REGISTRATION FEE
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===========================================================================================================================
PROPOSED PROPOSED
TITLE OF EACH CLASS AMOUNT MAXIMUM MAXIMUM AMOUNT OF
OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SECURITY(1) OFFERING PRICE(1) FEE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value................... 1,725,000(2) $7.50(3) $12,937,000 $4,269.37
Advisors' Warrants to purchase shares of Common
Stock........................................ 150,000 -- $ 10.00 (4)
Common Stock issuable upon exercise of
Advisors' Warrants........................... 150,000(5) $9.00 $ 1,350,000 $ 445.50
---------
Total Registration Fee................ $4,714.87(6)
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</TABLE>
(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 Lead
Manager to cover over-allotments, if any.
(3) Calculated on the basis of the closing bid price of the Common Stock on the
Nasdaq SmallCap Market on September 23, 1997.
(4) Pursuant to Rule 457(g) promulgated under the Securities Act of 1933, no
filing fee is required.
(5) 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 the Advisors' Warrants.
(6) A fee of $9,582.44 previously has been 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 SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
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
<TABLE>
<CAPTION>
ITEM AND HEADING LOCATION IN PROSPECTUS
------------------------------------------- -------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus..... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Inside Front and Outside 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;
Market for Common Stock and Related
Stockholder Matters; Underwriting
6. Dilution................................... Dilution
7. Selling Security Holders................... Not Applicable
8. Plan of Distribution....................... Underwriting
9. Legal Proceedings.......................... Business -- Litigation
10. Directors, Executive Officers Promoters
and/Control Persons........................ Management
11. Security Ownership of Certain Beneficial
Owners and Management...................... Security Ownership of Certain Beneficial
Owners and Management
12. Description of the Securities.............. Description of Securities
13. Interest of Named Experts and Counsel...... Not Applicable
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ Management -- Indemnification of Officers
and Directors and Limitation on Director
Liability
15. Organization Within Last Five Years........ Not Applicable
16. Description of Business.................... Prospectus Summary; Business
17. Management's Discussion and Analysis or
Plan of Operation.......................... Management's Discussion and Analysis of
Financial Condition and Results of
Operations
18. Description of Property.................... Business -- Facilities
19. Certain Relationships and Related
Transactions............................... Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters........................ Market for Common Stock and Related
Stockholder Matters; Description of
Securities
21. Executive Compensation..................... Management
22. Financial Statements....................... Consolidated Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................. Not Applicable
</TABLE>
<PAGE> 3
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.
SUBJECT TO COMPLETION, DATED NOVEMBER 14, 1997
INTEGRATED SURGICAL SYSTEMS, INC.
1,500,000 SHARES OF COMMON STOCK
OFFERED ONLY IN EUROPE
This Prospectus relates to an offering in Europe (the "European Offering")
by Integrated Surgical Systems, Inc. (the "Company") of 1,500,000 shares of
common stock, par value $.01 per share (the "Common Stock"), through CA IB
Investmentbank Aktiengesellschaft ("CA IB" or the "Lead Manager") and
KB-Securities N.V. (the "Co-Manager," and together with the Lead Manager, the
"Underwriters"). The European Offering comprises private placements and
offerings utilizing other exemptions from public offering registration
requirements in Europe. None of the shares of Common Stock offered in the
European Offering will be offered or sold in the United States.
The Common Stock is quoted on The Nasdaq SmallCap Market under the symbol
"RDOC" and is listed on the Pacific Stock Exchange Incorporated under the symbol
"ROB". Application has been made for the admission of the Common Stock to the
European Association of Securities Dealers' Automated Quotation ("EASDAQ")
System under the symbol "RDOC". Prior to the European Offering, there has been
no public market for the Common Stock on EASDAQ, and there can be no assurance
that any such market will develop after the closing of the European Offering or
that, if developed, it will be sustained. On November , 1997, the closing bid
price of the Common Stock on the Nasdaq Smallcap Market was $ per share. See
"Price Range of Common Stock."
THE SECURITIES OFFERED IN THE EUROPEAN OFFERING ARE SPECULATIVE AND INVOLVE
A HIGH DEGREE OF RISK. FOR A DESCRIPTION OF CERTAIN RISKS REGARDING AN
INVESTMENT IN THE COMPANY, SEE "RISK FACTORS" COMMENCING ON PAGE 9 AND
"DILUTION" ON PAGE 21.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
<TABLE>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)(3)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................... DM DM DM
- -----------------------------------------------------------------------------------------------------------
Total(3).................................... DM DM DM
===========================================================================================================
</TABLE>
(1) Does not include (i) a fee of 3.5% of the gross proceeds of the European
Offering payable to Value Management & Research GmbH ("VMR"), a German
limited liability company which acted as a consultant to the Company, (ii) a
non-accountable expense allowance payable to CA IB and VMR equal to 2% and
0.75%, respectively, of the gross proceeds of the European Offering, of
which $25,000 has been paid to VMR by the Company to date, and (iii) a
consulting fee of $2,000 per month payable to VMR for 12 months following
the closing of the European Offering, or a total of $24,000, and (iv)
warrants (the "Advisors' Warrants") entitling each of CA IB and VMR to
purchase up to 5% of the shares of Common Stock sold in the European
Offering (exclusive of the over-allotment option referred to in note(3)
below). The fees payable to VMR may be deemed to be underwriting
compensation. 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 underwriting discounts and commissions payable to the
Underwriters (estimated at 6% of the gross proceeds of the European
Offering), but before payment of the fee payable to VMR, the non-accountable
expense allowance (DM , or DM if the Over-Allotment Option is
exercised in full) and the other expenses of the European Offering
(estimated at $325,000) payable by the Company. See "Underwriting."
(3) The Company has granted CA IB an option, exercisable for a period of 30 days
after the closing of the Offering, to purchase up to an additional 15% of
the Common Stock offered hereby, upon the same terms and conditions solely
for the purpose of covering over-allotments, if any (the "Over-Allotment
Option"). If the Over-Allotment Option is exercised in full, the Total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be DM , DM and DM , respectively. See
"Underwriting."
The Common Stock will be offered by the Underwriters in Europe 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
purchase agreement between the Underwriters and the Company, the Underwriters
reserve the right to withdraw, cancel or modify the European Offering and to
reject any order in whole or in part. It is expected that ownership of shares of
Common Stock may be credited to the accounts of investors with financial
institutions that have direct or indirect access to INTERSETTLE, the Swiss-based
clearing and settlement system ("INTERSETTLE"). The term financial institution
includes the Euroclear System ("Euroclear") and Cedel Bank, societe anonyme
("Cedel Bank"), which have each made arrangements with INTERSETTLE to have
shares of the Common Stock credited to accounts with Euroclear or Cedel Bank
through intermediaries.
CA IB INVESTMENTBANK AG KB-SECURITIES
Lead Manager Co-Manager
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE> 4
CERTAIN PERSONS PARTICIPATING IN THE EUROPEAN OFFERING MAY ENGAGE IN
TRANSACTIONS ON EASDAQ OR OTHER NON-U.S. OVER-THE COUNTER MARKETS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE
COMPANY.
------------------------
CAUTIONARY STATEMENT FOR PURPOSES
OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
THIS DOCUMENT SPECIFIES FORWARD-LOOKING STATEMENTS OF MANAGEMENT OF THE
COMPANY, INCLUDING REVENUE PROJECTIONS. FORWARD-LOOKING STATEMENTS ARE
STATEMENTS THAT ESTIMATE THE HAPPENING OF FUTURE EVENTS, ARE NOT BASED ON
HISTORICAL FACT AND ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS MAY
BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY", "WILL",
"EXPECT", "ESTIMATE", "ANTICIPATE", "PROBABLE", "CONTINUE", OR SIMILAR TERMS,
VARIATIONS OF THOSE TERMS OR THE NEGATIVE OF THOSE TERMS. THE "RISK FACTORS" SET
FORTH IN THIS DOCUMENT CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENT IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS. THE
FORWARD-LOOKING STATEMENTS SPECIFIED IN THIS DOCUMENT HAVE BEEN COMPILED BY
MANAGEMENT OF THE COMPANY ON THE BASIS OF ASSUMPTIONS MADE BY MANAGEMENT AND
CONSIDERED BY MANAGEMENT TO BE REASONABLE. FUTURE OPERATING RESULTS OF THE
COMPANY, HOWEVER, ARE IMPOSSIBLE TO PREDICT AND NO REPRESENTATION, GUARANTY, OR
WARRANTY IS TO BE INFERRED FROM THOSE FORWARD-LOOKING STATEMENTS. THEREFORE,
PROSPECTIVE PURCHASERS OF SHARES OF COMMON STOCK ARE URGED TO CONSULT WITH THEIR
ADVISORS (THE OPINIONS OF WHICH MAY DIFFER FROM THOSE SPECIFIED IN THOSE
FORWARD-LOOKING STATEMENTS) WITH RESPECT TO THOSE ASSUMPTIONS OR HYPOTHESES.
THE ASSUMPTIONS USED FOR PURPOSES OF THE FORWARD-LOOKING STATEMENTS
SPECIFIED IN THIS DOCUMENT, INCLUDING THOSE REVENUE PROJECTIONS, REPRESENT
ESTIMATES OF FUTURE EVENTS AND ARE SUBJECT TO UNCERTAINTY AS TO POSSIBLE CHANGES
IN ECONOMIC, LEGISLATIVE, INDUSTRY, AND OTHER CIRCUMSTANCES. AS A RESULT, THE
IDENTIFICATION AND INTERPRETATION OF DATA AND OTHER INFORMATION AND THEIR USE IN
DEVELOPING AND SELECTING ASSUMPTIONS FROM AND AMONG REASONABLE ALTERNATIVES
REQUIRE THE EXERCISE OF JUDGMENT. TO THE EXTENT THAT THE ASSUMED EVENTS DO NOT
OCCUR, THE OUTCOME MAY VARY SUBSTANTIALLY FROM ANTICIPATED OR PROJECTED RESULTS,
AND ACCORDINGLY, NO OPINION IS EXPRESSED ON THE ACHIEVABILITY OF THOSE
FORWARD-LOOKING STATEMENTS, INCLUDING THOSE REVENUE PROJECTIONS.
THESE FORWARD-LOOKING STATEMENTS, INCLUDING THESE REVENUE PROJECTIONS, HAVE
BEEN COMPILED AS OF THE DATE OF THIS DOCUMENT AND SHOULD BE EVALUATED WITH
CONSIDERATION OF ANY CHANGES OCCURRING AFTER THE DATE OF THIS DOCUMENT. NO
ASSURANCE CAN BE GIVEN THAT ANY OF THE ASSUMPTIONS RELATING TO THE
FORWARD-LOOKING STATEMENTS SPECIFIED IN THIS DOCUMENT, INCLUDING THOSE REVENUE
PROJECTIONS, ARE ACCURATE OR THAT THEY WILL PROVIDE TO BE APPLICABLE TO A
PARTICULAR PURCHASER OF THE SHARES OF COMMON STOCK. IT IS THE RESPONSIBILITY OF
THE PURCHASERS OF THE COMMON STOCK AND THEIR ADVISORS TO REVIEW THOSE
FORWARD-LOOKING STATEMENTS, INCLUDING THOSE REVENUE PROJECTIONS TO CONSIDER THE
ASSUMPTIONS ON WHICH THOSE FORWARD-LOOKING STATEMENTS ARE BASED AND TO ASCERTAIN
THEIR REASONABLENESS.
2
<PAGE> 5
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE EUROPEAN
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, THE UNDERWRITERS OR VMR. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE IN THE EUROPEAN OFFERING 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
<TABLE>
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PAGE
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<S> <C>
Prospectus Summary.................................................................... 4
Risk Factors.......................................................................... 9
Use of Proceeds....................................................................... 21
Market for Common Stock and Related Stockholder Matters............................... 22
Capitalization........................................................................ 23
Dilution.............................................................................. 24
Dividend Policy....................................................................... 24
Selected Consolidated Financial Information........................................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 26
Glossary.............................................................................. 30
Business.............................................................................. 31
Management............................................................................ 49
Certain Transactions.................................................................. 56
Security Ownership of Certain Beneficial Owners and Management........................ 59
Description of Securities............................................................. 61
Underwriting.......................................................................... 67
Legal Matters......................................................................... 68
Experts............................................................................... 69
Additional Information................................................................ 69
Index to Consolidated Financial Statements............................................ F-1
</TABLE>
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"), and, in accordance therewith, files,
reports, proxy and information statements and other information with the
Securities and Exchange Commission (the "Commission"). The Company has filed a
Registration Statement on Form SB-2 under the Securities Act with the Commission
in Washington, D.C. with respect to the shares of Common Stock offered hereby.
This Prospectus, which is part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement and the exhibits
thereto. For further information with respect to the Company and the shares
offered in the European Offering, reference is made to the Registration
Statement and such exhibits as well as the reports, proxy and information
statements and other information filed under the Exchange Act, which may 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 distributes to its
stockholders annual reports containing audited financial statements and such
other reports as the Company deems appropriate or as may be required by law or
by the rules or regulations of any exchange on which the Company's Common Stock
is listed.
3
<PAGE> 6
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,
(i) all references to the Company in this Prospectus include Integrated Surgical
Systems, Inc., a Delaware corporation, and its wholly owned subsidiaries, except
that information concerning the Company prior to September 5, 1997, does not
include Innovative Medical Machines International, S.A. ("IMMI"), acquired by
the Company on that date, and (ii) 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 Over-Allotment Option is not exercised. See the "Glossary"
appearing at page 27 of this Prospectus for the definitions of certain technical
terms used herein.
The offering price of the shares of Common Stock in the European Offering
will be in Deutsche marks as negotiated between the Company and CA IB with
reference to recent sales prices of the Common Stock as reported by Nasdaq and
the exchange rate between the U.S. dollar and the Deutsche mark ("DM") at the
time the offering price is determined. Information in this Prospectus derived
from the offering price of the shares of Common Stock in the European Offering
has been computed based upon an assumed offering price of $7.50 per share (or DM
12.93 based upon the representative exchange rate on November 12, 1997 of
$1.00 = DM 1.7236 as reported by the Federal Reserve Bank of New York).
Information in this Prospectus concerning or derived from the estimated net
proceeds of the European Offering (expressed in U.S. Dollars), after payment of
underwriting discounts and commissions, the fee payable to VMR and the
non-accountable expense allowance payable to CA IB and VMR (aggregating 12.25%
of the gross proceeds of the European Offering and all of which are payable in
Deutsche marks), has been computed based upon an assumed exchange rate of DM
1 = $.5756, the representative exchange rate on November 12, 1997, as reported
by The Wall Street Journal. The closing bid price per share of Common Stock on
the Nasdaq SmallCap Market on November 12, 1997 was $8.1875. See "Prospectus
Summary -- Summary of Consolidated Financial Information -- Balance Sheet Data,"
"Use of Proceeds," "Capitalization," "Dilution" and "Market for Common Stock and
Related Stockholder Matters." The actual offering price, as well as the currency
exchange rates in effect at the time the offering price is determined and the
date upon which the Company receives the net proceeds of the European Offering,
may differ from the assumed offering price and the representative exchange rates
reported above.
THE COMPANY
Integrated Surgical Systems, Inc. develops, assembles, markets and services
image-directed, computer-controlled robotic products for surgical applications.
The Company's principal products are 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"), and as a result
of the acquisition of IMMI, the NeuroMate System, consisting of a computer
controlled robotic arm, head stabilizer and monitor (the ROBODOC System and the
NeuroMate System are sometimes referred to collectively as the "Systems").
The ROBODOC System has been used for primary total hip replacement ("THR")
surgery on over 1,500 patients in Europe and the United States. 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 European Offering, IBM will retain
rights to acquire approximately 20% of the Common Stock on a fully diluted
basis.
4
<PAGE> 7
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, but is also planned to 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. The Company believes that precise fit and
correct alignment of the implant within the femoral cavity are 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 Europe, patients generally have become weight-bearing in a shorter
period than generally experienced by patients who have had this surgery
performed manually. In addition, clinical data obtained from trials in Europe
and the United States 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 NeuroMate System has been used to perform over 1,500 neurosurgical
procedures in Europe and Japan. The Company believes that the NeuroMate System,
which uses its proprietary robotic arm design and control systems designed
specifically for use in the operating room, is the only image-guided, computer-
controlled stereotactic robot currently in use to precisely position and hold
critical tools used in the performance of neurosurgical procedures. Stereotactic
neurosurgery is a minimally invasive approach to operating on the brain. Because
the brain is largely unexposed, it requires the surgeon to work without direct
visualization of the brain itself. This is overcome by a thorough understanding
of brain anatomy and by using a spatial coordinate system that allows the
surgeon to "navigate" within the brain without directly visualizing it.
Essentially, the coordinate space of the patient's brain is correlated to the
patient's own CT, magnetic resonance (MR) or other images by using anatomical
landmarks that are shared by the patient and the images. This is known as
"registration" of the patient's coordinate space to the coordinate space of the
images. Once this is accomplished, the patient's CT scan can be used to guide
the surgeon to specific sites within the brain through small holes the surgeon
has made in the cranium (i.e.,not necessitating a craniotomy).
The Company is seeking to establish itself as a leading provider of
innovative image-directed, computer-controlled robotic technologies worldwide,
initially for orthopaedic and neurosurgical applications and subsequently for
other surgical applications. The Company's business strategy over the next two
years is to concentrate its marketing and sales efforts on selling the ROBODOC
System throughout Europe and then Japan, subject to obtaining the requisite
approval from the Japanese Ministry of Health, and selling the NeuroMate System
throughout Europe, Japan and the United States. The Company will thereby attempt
to establish an installed customer base in the United States, Europe, Japan and
other foreign markets through the sale of its systems, and offer its customers
separate software packages for each new 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, and the NeuroMate System as the platform for performing a variety of
neurosurgical procedures, without incurring significant additional hardware
costs. The Company also plans to further exploit its image-directed robotics
5
<PAGE> 8
technology by incorporating additional imaging modalities for presurgical
planning, including ultrasound (which is less expensive than CT) and MRI (which,
unlike CT, does not involve the risk of radiation).
The Company markets the ROBODOC System in Europe through direct marketing
and arrangements with implant companies. The ROBODOC System satisfies the
appropriate international standards for medical equipment and meets the
requirements for the European conformity mark ("CE Mark"). The Company markets
the NeuroMate through direct marketing in Europe and through its distributor in
Japan. It is anticipated that marketing of the NeuroMate in the United States
will commence in early 1998 through a combination of direct marketing and select
distributors/agents. During the nine months ended September 30, 1997, the
Company realized revenues of approximately $2,818,000 from the commercial sales
of the ROBODOC System (including related consumables) in Europe.
The Company has developed 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
has completed clinical evaluations of the hip revision application in Europe and
plans to commence marketing the software for the hip revision application to its
customers in Europe in early 1998. The development of the hip revision
application has been funded in part by a grant from the National Institute for
Standards and Technology (Advanced Technology Program) of the United States
Department of Commerce.
The ROBODOC System cannot be marketed in the United States until clearance
or approval is obtained from the U.S. Food and Drug Administration ("FDA"). The
Company previously announced its intention to submit a pre-market approval
application ("PMA") to the FDA in late 1997 for approval to market the ROBODOC
System in the United States. The Company currently is exploring a regulatory
strategy that may allow the Company to pursue FDA clearance of the ROBODOC
System through a 510(k) submission in lieu of a PMA application, which would be
a less onerous and lengthy regulatory path if such an approach were acceptable
to the FDA. The Company is currently gathering and evaluating clinical and
radiographic data from the U.S. clinical trial and European studies. Therefore,
the submission of a 510(k) or PMA application will be delayed beyond the
projected late 1997 date. There can be no assurance that the Company will obtain
clearance or approval to market the ROBODOC System in the United States. See
"Risk Factors -- Government Regulation."
The Company has received clearance from the FDA to sell the ORTHODOC in the
United States, and intends to commence marketing the ORTHODOC in the United
States in early 1998. See "Risk Factors -- Available Clinical Data; Risk Versus
Benefit Issues" and "Risk Factors -- Government Regulation."
The NeuroMate System has received clearance from the FDA for marketing in
the United States and from the Japanese Ministry of Health for marketing in
Japan. It also satisfies the relevant provisions of the European Medical Device
Directive for Class II Medical Devices, thus allowing the Company to apply the
"CE Mark."
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> 9
THE EUROPEAN OFFERING
Securities Offered in
Europe..................... 1,500,000 shares of Common Stock. NONE OF THE
SHARES OF COMMON STOCK OFFERED IN THE EUROPEAN
OFFERING WILL BE OFFERED OR SOLD IN THE UNITED
STATES.
"See "Description of Securities" and
"Underwriting."
Common Stock Outstanding:
Prior to the European
Offering(1)............ 3,990,811 shares of Common Stock.
After the European
Offering(1)(2)......... 5,490,811 shares of Common Stock.
Use of Proceeds............ The net proceeds of the European Offering will be
used (i) for product development, (ii) for sales
and marketing, (iii) for investment in a clinic
located in Spain to train surgeons in the use of
the ROBOC System, and (iv) for working capital and
general corporate purposes, which may include
acquisitions. See "Use of Proceeds."
Risk Factors............... The securities offered in the European Offering
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
Symbol................... RDOC
Pacific Stock Exchange
Symbol..................... ROB
Proposed EASDAQ Symbol..... RDOC
CUSIP No. ................. 45812 Y 10 8
- ---------------
(1) Does not include (i) 4,357,816 shares of Common Stock issuable upon the
exercise of warrants at exercise prices ranging from $.01 to $8.25, or (ii)
1,216,542 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 $8.75 per share. See "Management -- Stock
Option Plan," "Certain Transactions" and "Description of Securities."
(2) Does not include (i) 225,000 shares of Common Stock reserved for issuance
upon exercise of the Over-Allotment Option, and (ii) 150,000 shares reserved
for issuance upon exercise of the Advisors' Warrants. See "Underwriting."
7
<PAGE> 10
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 and unaudited pro forma combined condensed financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. The
historical summary financial information set forth below includes the results of
operations of IMMI for the period subsequent to its acquisition by the Company
on September 5, 1997.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMBINED
YEAR ENDED COMBINED NINE MONTHS ENDED NINE MONTHS
DECEMBER 31, YEAR ENDED SEPTEMBER 30, ENDED
--------------------------- DECEMBER --------------------------- SEPTEMBER 30,
1995 1996 31, 1996(2) 1996 1997 1997(2)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales..................... $ 174,521 $ 2,280,311 $ 2,727,621 $ 1,748,065 $ 2,818,262 $ 3,438,323
Gross profit.................. 104,342 1,396,159 1,642,587 1,083,086 1,701,685 2,034,145
Operating loss................ (3,925,730) (3,495,861) (5,218,358) (2,168,228) (2,998,831) (3,360,242)
Net loss...................... (4,053,528) (3,448,829) (5,176,800) (2,122,377) (2,851,419) (3,153,217)
Net loss applicable to common
stockholders................ (4,989,853) (3,448,829) (5,176,800) (2,122,377) (2,851,419) (3,153,217)
Net loss per common and common
share equivalent............ $(1.19) $(0.79) $(1.04) $(0.48) $(0.83) $(0.78)
Shares used in per share
calculations(1)............. 4,178,877 4,373,947 4,993,302 4,377,679 3,422,703 4,042,058
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------
AS
ACTUAL ADJUSTED(3)
------------ ------------
<S> <C> <C>
Working capital............................................... $ 2,648,744 $ 12,119,744
Total assets.................................................. 10,367,637 19,838,637
Accumulated deficit........................................... (21,952,230) (21,952,230)
Stockholders' equity.......................................... 7,557,365 17,028,365
</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 the acquisition of IMMI using the purchase method of
accounting as of January 1, 1996 for statement of operations data. The pro
forma information is presented for illustrative purposes only and may not be
indicative of the results that would have been obtained had the transaction
actually occurred on the date assumed nor is it necessarily indicative of
the future combined results of operations. See the unaudited Pro Forma
Combined Condensed Financial Statements appearing elsewhere in this
Prospectus.
(3) Gives effect to the issuance and sale of 1,500,000 shares of Common Stock in
the European Offering at an assumed price of $7.50 per share and the
application of the estimated net proceeds from the sale thereof. See "Use of
Proceeds." Does not include 4,357,816 shares of Common Stock issuable upon
exercise of outstanding warrants at exercise prices ranging from $0.01 to
$8.25 per share, (ii) 1,216,542 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 $8.75 per share,
(iii) 225,000 shares of Common Stock reserved for issuance upon exercise of
the Over-Allotment Option or (iv) 150,000 shares reserved for issuance upon
exercise of the Advisors' Warrants.
8
<PAGE> 11
RISK FACTORS
The shares of Common Stock offered in the European Offering 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. None of the shares
of Common Stock offered in the European Offering will be offered or sold in the
United States.
HISTORY OF LOSSES; ACCUMULATED DEFICIT; ANTICIPATED FUTURE LOSSES. Since
its inception, the Company has incurred losses. The Company incurred a net loss
of approximately $3,449,000 (on net sales of approximately $2,280,000) for its
fiscal year ended December 31, 1996 and a net loss of approximately $4,054,000
(on net sales of approximately $175,000) for its fiscal year ended December 31,
1995. In addition, the Company incurred a net loss of approximately $2,851,000
(on net sales of approximately $2,818,000) for the nine months ended September
30, 1997, as compared to a net loss of approximately $2,122,000 (on net sales of
approximately $1,748,000), for the nine months ended September 30, 1996. IMMI
also has incurred losses since its inception, including a net loss of
approximately $910,000 (on net sales of approximately $447,000) for its fiscal
year ended December 31, 1996, and a net loss of approximately $27,000 (on net
sales of approximately $618,000) for the six months ended June 30, 1997, as
compared to a net loss of approximately $423,000 (on net sales of approximately
$147,000) for the six months ended June 30, 1996. At September 30, 1997, the
Company's accumulated deficit was approximately $21,952,000 and at June 30, 1997
IMMI's accumulated deficit was approximately $1,605,000, in each case 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 its orthopaedic and neurosurgical products, 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 its products will achieve market acceptance in the United States,
Europe and other foreign markets to generate sufficient revenues to become
profitable.
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 commercial sales of
the ROBODOC System have been made in Europe, the Company has engaged only in
clinical testing of the ROBODOC System in the United States, and the Company's
ability to market the ROBODOC System 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, product approval or clearance, 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.
LENGTHY SALES CYCLE. Since the purchase of a ROBODOC System or NeuroMate
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 a 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 for either the ROBODOC
System or the NeuroMate System is approximately four months after receipt of the
order. Although the Company generally intends to require a deposit upon receipt
of an order for a 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 of a System may not
be recognized until a fiscal quarter subsequent to the fiscal quarter in which
the Company incurred marketing and sales
9
<PAGE> 12
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.
CHALLENGES OF GROWTH. The Company intends to use a portion of the net
proceeds of the European Offering to hire and retain sales and marketing,
research and development and technical personnel to increase and support sales
of Systems and to develop additional surgical applications for its orthopaedic
and neurosurgical systems. 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."
DEPENDENCE ON PRINCIPAL PRODUCT. For the near term, 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.
The Company has not obtained, and there can be no assurance that the Company
will obtain, clearance or approval to market the ROBODOC System in the United
States. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Risk Factors -- Government Regulation."
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's ability to successfully
commercialize its Systems 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 Systems instead of traditional surgical tools and procedures. Since
the Systems employ 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 Systems to achieve significant
market acceptance would materially and adversely affect the Company's business,
financial condition and results of operations.
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. located in Indiana; Biomet, Inc.,
located in Indiana; and Osteonics, Inc. (a subsidiary of the Stryker
Corporation), located in New Jersey. MAQUET, a manufacturer of operating tables
located in Germany, has recently announced that it intends to market a device
similar to ROBODOC System in mid 1998. The principal competition for the
NeuroMate System are frame-based and frameless navigators, which are manually
operated. Approximately twenty navigator models have been introduced, including
those by Radionics, Sofamor-Danek and Ohio Medical Surgical products, all
located in the United States; Elekta, located in Sweden; and Fischer Leibingher
and Brain Lab, both located in Germany. In general, there are companies in the
medical products industry 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 embodied in the ROBODOC
System and hold patents relating thereto, will not enter the market or license
the technology to other companies.
10
<PAGE> 13
There can be no assurance that future competition will not have a material
adverse effect on the Company's business. The cost of the Systems represents a
significant capital expenditure for a customer and accordingly may discourage
purchases by certain customers. See "Business -- Competition."
AVAILABLE CLINICAL DATA; RISK VERSUS BENEFIT ISSUES. The Company has
conducted a randomized clinical trial for the ROBODOC System in the United
States at three centers. Of the 120 patients enrolled in the U.S. clinical
study, 71 hips received treatment with the ROBODOC System and 65 hips in a
control group received conventional THR surgery. In addition, at least 1,400
patients have received treatment with the ROBODOC System in Europe, although not
as a part of the formal U.S. clinical study and without comparison to randomized
control patients.
In order to obtain FDA clearance or approval, the Company will be required
to demonstrate that the ROBODOC System is safe and effective. This can include a
requirement to show a clinical benefit to patients. The Company believes that a
reduced incidence of intraoperative fractures with the ROBODOC System compared
to conventional THR surgery would offer an important benefit. 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 1,500 primary THR surgeries performed with
the ROBODOC System in the combined U.S. clinical trial and the European study
without a single intraoperative fracture. Since the observed fracture rate in
the control group in the U.S. clinical trial was lower than anticipated, the
data from this study are not sufficient to establish a statistically significant
reduction in intraoperative fractures compared to the control group.
Nevertheless, the data from both the U.S. trial and the European study suggest
that the ROBODOC System reduces intraoperative fractures when compared to the
fracture rate of approximately 6 to 24 percent for conventional THR surgery
reported in the scientific and medical literature. There can be no assurance,
however, that the FDA will agree that the ROBODOC System offers a clinically
significant reduction in intraoperative fractures, in the absence of a
controlled trial demonstrating such a reduction.
The FDA has advised the Company that the agency believes long-term
functional and pain assessments are the primary endpoints for evaluating the
safety and effectiveness of the ROBODOC System. A preliminary review by the
Company of the functional and pain assessment data from the U.S. clinical trial
shows equivalence between the ROBODOC System and conventional THR surgery. The
Company believes that achieving better implant fit and alignment in the femoral
cavity are significant factors in the success of cementless THR surgery,
although the FDA has questioned whether fit is an appropriate endpoint and has
not addressed alignment.
The Company's preliminary comparison completed in May 1997 of fit and
alignment parameters from the 3 month radiographs showed that the ROBODOC System
surgeries produced fit and alignment equivalent to conventional THR surgeries.
Subsequently, the Company's outside radiologist and outside biostatistician have
refined the analytical technique applied to the 3-month radiographic data in a
manner that the Company believes more accurately reflects the implant
manufacturers' design goals for implant cavity preparation. Based upon the
preliminary results of this technique, the Company believes that the data will
show that the ROBODOC System achieves better fit and alignment compared to
conventional THR surgeries. The Company also will be reviewing long term fit and
alignment. Although the Company believes that the refined technique produces a
more appropriate comparison, there can be no assurance that the FDA will accept
the Company's methodology for measuring fit and alignment, that the data, once
fully reviewed and analyzed, will demonstrate that the ROBODOC System achieves
better implant fit and alignment, or that the FDA will agree that better fit and
alignment are significant surgical endpoints. In addition, there can be no
assurance 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 will not require the Company to obtain additional clinical data
from a randomized, controlled trial 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
several years.
11
<PAGE> 14
In prior communications with the Company, the FDA indicated a strong
"preference" for two year post-operative data from patients participating in the
U.S. clinical trial, although in a late 1996 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 who has received surgery in the U.S.
clinical trial will reach the two year post-operative mark in February 1998.
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 additional data analyzed subsequent to the law firm's February 1995
report address many of the concerns identified in that report. These data and
analyses include non-radiographic clinical follow-up data from the U.S. trial,
preliminary analysis and review by an outside radiologist and an outside
biostatistician of 3-month radiographic films from the U.S. trial, and data on
additional patients from the European studies. The Company also is in the
process of collecting 12-month and 24-month follow-up clinical (including
radiological) data for patients in the U.S. clinical trial and obtaining
analyses and review from the outside consultants, which process is expected to
be completed by the end of 1997 or early 1998. There can be no assurance that
the data, once fully analyzed and reviewed, will demonstrate 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, similar to that expressed in the February 1995 law firm report, about
the adequacy of the Company's clinical data to support product approval. See
"Risk Factors -- U.S. Regulation -- FDA Review Process for ROBODOC System" and
"Business -- Available Clinical Data; Risk Versus Benefit Issues."
If the FDA concludes that the existing clinical data are insufficient to
establish the safety and efficacy of the ROBODOC System, the FDA could require
the Company to obtain additional clinical data from a randomized, controlled
trial, which could significantly delay completion of the PMA review process, and
which could accordingly have a material adverse effect on the Company's
business, financial condition and results of operations.
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 manufacturing facilities and 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.
General. 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
12
<PAGE> 15
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."
FDA Review 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 for medical
devices which are substantially similar to other approved medical devices or the
costlier, lengthier and less certain pre-market approval ("PMA") application
process. The Company previously announced its intention to submit a PMA in late
1997 for approval to market the ROBODOC System in the United States. The Company
currently is exploring a regulatory strategy that may allow the Company to
pursue FDA clearance of the ROBODOC System through a 510(k) submission in lieu
of a PMA application, which would be a less onerous and lengthy regulatory path
if such an approach were acceptable to the FDA. The Company is currently
gathering and evaluating clinical and radiographic data from the U.S. clinical
trial and European studies. Therefore, the submission of a 510(k) notification
or PMA application will be delayed beyond the projected late 1997 date. Pursuant
to this strategy, the Company intends to request that the FDA review the
Company's clinical and radiographic data in connection with a pre-filing meeting
with FDA representatives. The Company intends to provide the data to the FDA by
the end of 1997 or in early 1998. The purpose of the pre-filing meeting would be
to seek feedback from the FDA about whether a 510(k) clearance pathway is a
viable alternative to a PMA application for the ROBODOC System and to provide
additional data to the FDA, including information in support of the Company's
belief that implant fit and alignment are significant clinical endpoints.
Although the FDA previously indicated to the Company that the ROBODOC System was
more likely to require PMA approval rather than 510(k) clearance, the Company
believes that the recent 510(k) clearance of a potential predicate device may
offer a new basis for seeking 510(k) clearance for the ROBODOC System based, in
part, upon a claim that the ROBODOC System is substantially equivalent to this
predicate device. There can be no assurance that the FDA will agree to a pre-
filing meeting with the Company or will provide the Company with feedback as to
whether a 510(k) submission is a possible alternative to a PMA application for
the ROBODOC System or will agree with the Company's assessment of the
appropriate endpoints.
Unless the FDA rules out the 510(k) clearance path, the Company currently
intends to submit a 510(k) notification to the FDA sometime during the first
quarter of 1998. On the other hand, if the FDA indicates that a PMA application
will be required, the filing of a PMA application by the Company could be
delayed until the latter part of 1998 or later. These submission time frames
could be substantially extended if the FDA indicates that the existing clinical
data is insufficient to support clearance or approval or that additional
clinical data will be necessary in order to submit a 510(k) notification or PMA
application for the ROBODOC System. The Company's submission of a PMA
application also could be delayed if the Company invests substantial time
pursuing 510(k) clearance but is ultimately unsuccessful. There can be no
assurance that the FDA will grant 510(k) clearance or PMA approval to the
ROBODOC System on a timely basis, or at all, or that such clearance or approval
will not include unfavorable limitations or restrictions. See "Risk Factors --
Available Clinical Data; Risk Versus Benefit Issues."
New surgical applications for the ROBODOC System generally will require FDA
clearance or approval of a new 510(k) submission or a PMA supplement or,
possibly, a new PMA application. 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
different technologies in the ROBODOC System. 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 of
previously unknown problems can result in product labeling restrictions or
withdrawal of the product from the market. See "Business -- Government
Regulation."
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<PAGE> 16
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."
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 the Quality System Regulation ("QSR"), which
sets forth good manufacturing practices ("GMP") requirements with respect to
manufacturing and quality assurance activities. The QSR revises the previous GMP
regulation and imposes certain enhanced requirements that are likely to increase
the cost of compliance, including design controls. See "Business -- Government
Regulation."
Modifications to Cleared Devices. The Company has made what it believes
are nonsignificant modifications to the ORTHODOC and the NeuroMate System which
the Company believes do not require the submission of new 510(k) notices. There
can be no assurance, however, that the FDA would agree with any of the Company's
determinations not to submit a new 510(k) notice for any of these changes or
would not require the Company to submit a new 510(k) notice for any of the
changes made to the device. If the FDA requires the Company to submit a new
510(k) notice for any device modification, the Company may be prohibited from
marketing the modified device until the 510(k) notice is cleared by the FDA.
FOREIGN REGULATION. The introduction of the Company's products in foreign
markets has subjected and will continue to subject the Company to foreign
regulatory clearances, which may be unpredictable and uncertain, and which may
impose substantial additional costs and burdens. The ROBODOC and NeuroMate
Systems satisfy the appropriate international electromedical safety standards
and comply with the requirements of the Electromagnetic Compatibility Directive,
thus allowing the Company to apply the CE Mark under the European Directives and
to distribute the ROBODOC and NeuroMate Systems throughout the European Union.
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."
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 five
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 five 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
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<PAGE> 17
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 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 due to the
Company's belief that an infringement study would not be cost-effective, nor
offer sufficient protection against potential infringement claims, if and when
made. 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."
LIMITED PRODUCTION EXPERIENCE. The Company's success will depend in part
on its ability to assemble 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
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<PAGE> 18
regulatory requirements. The assembly of the Company's products is a complex
operation involving a number of separate processes and components. The Company's
production activities to date have consisted primarily of assembling 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 assembling 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.
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 production 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."
DEPENDENCE ON SUPPLIER FOR ROBOT. Although the Company has multiple
sources for most of the components, parts and assemblies used in the ROBODOC and
NeuroMate Systems, the Company is dependent on Sankyo Seiki of Japan for the
ROBODOC System robot and Audemars-Piguet of Switzerland for the supply of the
customized NeuroMate robot. The robot for either the ROBODOC System or the
NeuroMate System 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."
RELIANCE ON FOREIGN SALES. From inception through September 30, 1997,
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, Austria, France
and Japan. 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 for the ROBODOC System 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
substantially all ROBODOC Systems in Europe has been fixed in U.S. Dollars.
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 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 -- Marketing, Sales and
Distribution."
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. Although the Company is not aware of any potential
customer that has declined to purchase the ROBODOC System based upon third party
reimbursement policies, cost control measures adopted by third-party payors may
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.
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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 operation
could be materially and adversely affected.
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 has obtained key-man insurance
on the life of Dr. Trivedi in the amount of $1,000,000. 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 Systems and training surgeons in their 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."
CONTROL OF THE COMPANY; OWNERSHIP OF SHARES BY CURRENT MANAGEMENT AND
PRINCIPAL SECURITYHOLDERS. Upon completion of the European Offering, the current
executive officers, directors and other significant securityholders of the
Company will continue to own or have rights to acquire 4,335,626 shares of
Common Stock (or approximately 39% 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."
NEED FOR ADDITIONAL FINANCING. Although the Company anticipates that the
net proceeds of the European Offering, together with cash flow from operations,
will be sufficient to finance its operations for approximately 24 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 its products,
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."
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 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 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.
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
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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."
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."
POSSIBLE VOLATILITY OF MARKET PRICE FOR THE COMMON STOCK. Since the
completion of the Company's initial public offering in November 1996, the market
price of the Common Stock has fluctuated significantly. The Company believes
that factors such as announcement of developments related to the Company's
business, announcements of technological innovations or new products by the
Company or its competitors, sales of the Company's Common Stock in the public
market, and shortfalls or changes in the Company's financial results from
analysts' expectations could cause the price of the Common Stock to fluctuate
substantially. The Company's operating results and various factors affecting the
medical device industry generally also 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 price of the Common Stock will not experience significant fluctuations or
decline below the public offering price.
POSSIBLE VOLATILITY OF MARKET PRICE FOR COMMON STOCK DUE TO DUAL LISTING IN
DIFFERENT CURRENCIES. Following the completion of the European Offering, the
Common Stock will be quoted on the Nasdaq SmallCap Market in US dollars, and
quoted on EASDAQ in Deutsche marks. Fluctuations in the value of the US dollar
against the Deutsche mark may affect the market value of the Common Stock and
result in trading therein by currency speculators or otherwise, which may cause
further volatility in the price of the Common Stock.
EXCHANGE RATE EXPOSURE. Fluctuations in the value of the (i) Deutsche
mark, the currency in which the Common Stock of the Company (including the
shares offered hereby) will be traded on EASDAQ, and/or (ii) the US dollar, the
currency in which the Common Stock of the Company is currently traded on the
NASDAQ SmallCap Market (and on which the shares offered in the European Offering
may be traded), against an investor's currency will affect the market value of
the shares of Common Stock offered in the European Offering, expressed in the
investor's currency. In addition, such fluctuations may also affect the
conversion into the investor's currency of cash dividends and other
distributions paid on the Common Stock, including proceeds received upon a sale
or other disposition of the shares of Common Stock offered in the European
Offering. None of the shares of Common Stock offered in the European Offering
will be offered or sold in the United States.
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 the European
Offering, the Company will have 5,490,811 shares of Common Stock outstanding, of
which only 3,041,218 shares of Common Stock will be transferable without
restriction under the Securities Act of 1933 (the "Securities Act"). The
remaining 2,449,593 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 one year, 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
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<PAGE> 21
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 two 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 5,129,759 shares of Common Stock constituting restricted securities,
have agreed not to sell or otherwise dispose of any shares of Common Stock prior
to May 21, 1998 ("Lock-Up Agreements"), without the prior written consent of
Rickel & Associates, Inc. ("Rickel"), managing underwriter of the Company's
initial public offering. Rickel has agreed with the Company and CA IB that it
will not consent to the sale of such shares prior to that date. Following
expiration of the term of the Lock-Up Agreements, 1,828,778 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. 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 prior to May 21,
1998. The Company has agreed to file a registration statement for the resale in
the United States of the 619,355 shares of Common Stock ("the IMMI Shares")
issued in connection with the acquisition of IMMI, on or about November 21,
1997. The former securityholders of IMMI have agreed not to sell their IMMI
Shares prior to March 5, 1999, except as follows: (i) prior to December 5, 1997,
an aggregate of 50,000 shares; (ii) from December 6, 1997 through March 5, 1998,
an aggregate of 50,000 shares plus 1% of the total number of shares of Common
Stock traded on Nasdaq during the preceding three month period; (iii) from March
6, 1998 through June 5, 1998, an aggregate of 75,000 shares plus 1% of the total
number of shares of Common Stock traded on Nasdaq during the preceding three
month period; (iv) from June 6, 1998 through September 5, 1998, an aggregate of
100,000 shares plus 1% of the total number of shares of Common Stock traded on
Nasdaq during the preceding three month period; (v) from September 6, 1998
through December 5, 1998, an aggregate of 100,000 shares plus 1% of the total
number of shares of Common Stock traded on Nasdaq during the preceding three
month period; and (vi) from December 6, 1998 through March 5, 1999, an aggregate
of 100,000 shares plus 1% of the total number of shares of Common Stock traded
on Nasdaq during the preceding three month period. Thereafter, the IMMI Shares
must be resold in compliance with the volume limitation and other conditions of
Rule 144. The Company also has granted the former securityholders of IMMI
piggyback registration rights (other than in connection with the Offering and
certain other types of offerings) for resales of the IMMI Shares. The Company
granted Rickel demand and piggyback registration rights with respect to the
shares of Common Stock and warrants issuable upon exercise of the underwriters'
warrants issued in connection with that offering and piggyback registration
rights (fully subordinated to the registration rights of the other holders of
the Company's securities) with respect to 25,000 shares of Common Stock
purchasable upon exercise of certain other warrants. In addition, the Company
has granted the holders of the Advisors' Warrants demand and piggyback
registration rights with respect to the shares of Common Stock issuable upon
exercise thereof. See "Description of Securities -- Shares Eligible for Future
Sale," "Description of Securities -- Registration Rights," "Certain
Transactions" and "Underwriting."
EFFECT OF ISSUANCE OF COMMON STOCK UPON EXERCISE OF WARRANTS AND OPTIONS;
POSSIBLE ISSUANCE OF ADDITIONAL OPTIONS. Immediately after the European
Offering, the Company will have an aggregate of 4,003,069 shares of Common Stock
authorized but unissued and not reserved for specific purposes and an additional
5,506,120 shares of Common Stock unissued but reserved for issuance pursuant to
(i) the Company's stock option plans, (ii) outstanding warrants, and (iii)
exercise of the Advisors' Warrants . 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 Rickel
that it will not issue any securities, or rights thereto, without its consent
until November 21, 1999. Rickel, which ceased operations as a registered broker
dealer on September 19, 1997, has consented to the issuance of the securities
specifically described herein. The Company also has agreed with CA IB that,
except for shares of Common Stock issuable upon exercise of the publicly-traded
Warrants issued in the Company's initial public offering in November 1997 (the
"Public Warrants") and outstanding options granted pursuant to the
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Company's existing stock option plans, for a period of six months following the
closing of the European Offering, it will not issue or sell, offer or contract
to issue or sell, grant any option for issuance or sale of, or otherwise dispose
of, directly or indirectly, any Common Stock or any securities convertible into,
exchangeable for, or representing the right to receive Common Stock without, in
each case, the prior written consent of CA IB, which consent will not be
unreasonably withheld.
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."
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 agreed with CA IB that, except for shares of Common Stock issuable
upon exercise of the Public Warrants and outstanding options granted pursuant to
the Company's existing stock option plans, for a period of six months following
the closing of the European Offering, it will not issue or sell, offer or
contract to issue or sell, grant any option for issuance or sale of, or
otherwise dispose of, directly or indirectly, any Common Stock or any securities
convertible into, exchangeable for, or representing the right to receive Common
Stock without, in each case, the prior written consent of CA IB, which shall not
be unreasonably withheld. However, there can be no assurance that preferred
stock will not be issued at some time in the future. The Company has agreed with
Rickel & Associates, Inc. that it will not issue any securities, or rights
thereto, without its consent until November 21, 1998. Rickel & Associates, Inc.
has consented to the issuance of the securities specifically described herein.
See "Description of Securities -- Preferred Stock."
In addition, the Company's Restated Certificate of Incorporation, as
amended, authorizes the issuance of up to 5,750,000 shares of Series D Preferred
Stock. On October 29, 1997, the Company delivered to CA IB an agreement not to
issue any shares of the Series D Preferred Stock, or any options, warrants or
other rights to subscribe for or purchase Series D Preferred Stock or any other
securities convertible into, exercisable or exchangeable for, shares of the
Series D Preferred Stock without the consent of CA IB. In addition, the
Company's management has undertaken to cause the Board of Directors to present a
resolution at the next annual meeting of the Company's stockholders to amend the
Company's Restated Certificate of Incorporation to eliminate the Series D
Preferred Stock. However, there can be no assurance that such resolution will be
presented by the Company's Board of Directors, or, if presented, adopted by the
Company's stockholders. See "Description of Securities -- Series D Preferred
Stock".
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."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
PROSPECTUS. This Prospectus contains certain forward-looking statements
regarding, among other items, the Company's expansion strategy. The
forward-looking statements included herein are based on current expectations
that involve numerous risks
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and uncertainties. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Prospectus will prove to be accurate. In light of
the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
in the European Offering (at an assumed offering price of $7.50 per share),
after deducting underwriting discounts and commissions, the fee payable to VMR,
the non-accountable expense allowance and the other expenses of the Offering,
are estimated to be $9,471,000 ($10,941,000 if the Over-Allotment Option is
exercised in full). None of the shares of Common Stock offered in the European
Offering will be offered or sold in the United States. The Company currently
expects to use the net proceeds of the European Offering as follows:
<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT PERCENT
----------- -------
<S> <C> <C>
Product development(1).................................. $ 3,788,000 40.0%
Sales and marketing(2).................................. 3,788,000 40.0%
Investment in clinic(3)................................. 290,000 3.1%
Working capital and general corporate purposes, which
may include acquisitions(4)........................... 1,605,000 16.9%
--------- ---
Total................................................. $ 9,471,000 100.0%
========= ===
</TABLE>
- ---------------
(1) Includes development of software packages for total knee replacement and
acetabulum surgeries, as well as neurosurgical applications and product
design improvements.
(2) Represents costs associated with marketing and sales activities with respect
to the Company's products, including advertising and promotional activities,
as well as participation in trade shows. Also includes costs associated with
market development and sales activities.
(3) Represents costs associated with an investment to be made in a clinic
located in Spain which is intended to be a training center for use of the
ROBODOC System for surgeons from Southern Europe, Latin America and the
Middle East.
(4) The Company seeks to acquire new businesses, product lines and technologies
that are compatible with its existing business strategies for product line
diversification and growth. To the extent attractive opportunities are
available, the Company intends to use a portion of the net proceeds to
finance such acquisitions. The Company is not engaged in any negotiations,
nor does it have any understandings or agreements with respect to any
acquisitions for which the net proceeds are required.
The foregoing represents the Company's best estimate of its allocation of
the net proceeds from the sale of the Common Stock offered in the European
Offering based upon the current state of its business operations, its current
plans and current economic and industry conditions and is subject to
reallocation among the categories listed above. The amount and timing of actual
expenditures 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 the European Offering will be sufficient to
satisfy the Company's anticipated cash requirements for approximately 24 months
following the date of this Prospectus.
Additional proceeds from the exercise of the Over-Allotment Option 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 the
European Offering in United States government securities and investment-grade
commercial paper.
21
<PAGE> 24
MARKET FOR COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
Since November 21, 1996, the Company's Common Stock and Warrants have
traded on the Nasdaq SmallCap Market under the symbols "RDOC" and "RDOCW",
respectively. The Company's Common Stock and Warrants also are listed on the
Pacific Stock Exchange under the symbols "ROB" and "ROBWS", respectively.*
Set forth below are the high and low bid prices for the Common Stock and
Warrants on the Nasdaq SmallCap Market for each quarter since November 21, 1996.
Nasdaq SmallCap quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
NASDAQ SMALLCAP MARKET
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
("RDOC") ("RDOCW")
-------------- ---------------
QUARTER ENDED HIGH LOW HIGH LOW
---------------------------------------------------- ---- ---- ---- -----
<S> <C> <C> <C> <C>
December 31, 1996................................... $5 3/4 $ 5 $ 1 $ 1/2
March 31, 1997...................................... $6 3/4 $ 5 $1 1/2 $ 5/8
June 30, 1997....................................... $7 5/8 $ 5 $2 1/4 $7/16
September 30, 1997.................................. $9 1/2 $6 1/2 $3 3/8 $1 1/2
December 31, 1997 (through November 12, 1997)....... $8 5/8 $6 3/8 $ 3 $1 3/4
</TABLE>
On November 12, 1997, the closing bid price of the Common Stock and
Warrants on the Nasdaq SmallCap Market was $8 3/16 and $2 1/2, respectively.
As of September 1, 1997, there were 64 holders of record of the Common
Stock and 7 holders of record of the Warrants.
- ---------------
* No trading activity has been reported by the Pacific Stock Exchange.
22
<PAGE> 25
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
September 30, 1997, and (ii) such pro forma capitalization on an as adjusted
basis to give effect to the sale of the 1,500,000 shares of Common Stock offered
in the European Offering at an assumed price of $7.50 per share, 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>
ACTUAL(1) AS ADJUSTED(1)(2)
------------ --------------------
<S> <C> <C>
Long-term debt..................................... $ 177,873 $ 177,873
------------ ------------
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000
shares authorized, no shares issued or
outstanding................................... -- --
Convertible Preferred Stock, $0.01 par value,
5,750,000 shares authorized, no shares issued
or outstanding................................ -- --
Common stock, $0.01 par value, 15,000,000 shares
authorized; 3,366,956 shares issued and
outstanding; 5,490,811 shares issued and
outstanding as adjusted....................... 39,907 54,907
Additional paid-in capital....................... 29,752,852 39,208,852
Deferred stock compensation...................... (291,417) (291,417)
Accumulated translation adjustment............... 8,253 8,253
Accumulated deficit.............................. (21,952,230) (21,952,230)
------------ ------------
Total stockholders' equity......................... 7,557,365 17,028,365
------------ ------------
Total capitalization..................... $ 7,735,238 $ 17,206,238
============ ============
</TABLE>
- ---------------
(1) Does not include (i) 4,357,816 shares of Common Stock issuable upon exercise
of outstanding warrants at exercise prices ranging from $0.01 to $8.25 per
share, and (ii) 1,216,542 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 $8.75 per share. See "Certain
Transactions."
(2) Does not include 225,000 shares of Common Stock reserved for issuance upon
exercise of the Over-Allotment Option and 150,000 shares of Common Stock
reserved for issuance upon exercise of the Advisors' Warrants, or the
proceeds therefrom.
23
<PAGE> 26
DILUTION
The net tangible book value of the Company as of September 30, 1997 was
$3,572,995 or approximately $0.90 per share of Common Stock. The net tangible
book value of the Company is the tangible assets less total liabilities.
Dilution per share to new investors represents the difference between the amount
paid per share of Common Stock by purchasers in the European Offering, and the
adjusted net tangible book value per share after the European Offering.
After giving effect to the sale by the Company of the 1,500,000 shares of
Common Stock offered in the European Offering at an assumed price of $7.50 per
share, the adjusted net tangible book value of the Company as of September 30,
1997, would have been $13,043,995 or $2.38 per share. This represents an
increase in net tangible book value per share of $1.48 to the Company's existing
stockholders and an immediate dilution of $5.12 per share (or approximately 68%
of the assumed offering price) to new stockholders purchasing shares of Common
Stock in the European Offering. The following table illustrates this dilution on
a per share basis:
<TABLE>
<S> <C> <C>
Assumed public offering price per share in the European Offering.... $ 7.50
Net tangible book value before European Offering.................... $0.90
Increase attributable to new investors.............................. 1.48
-----
Adjusted net tangible book value after European Offering............ 2.38
-----
Dilution to new investors........................................... $ 5.12
=====
</TABLE>
The above table does not include the possible exercise of outstanding stock
options or warrants. As of September 30, 1997, there were outstanding options to
purchase an aggregate of 1,216,542 shares of Common Stock having exercise prices
from $0.07 per share to $8.75 per share and outstanding warrants to purchase an
aggregate of 4,357,816 shares of Common Stock having exercise prices from $0.01
per share to $8.25 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 "Certain Transactions," "Description of
Securities" and "Underwriting."
The information in the following table summarizes the number and
percentages of shares of Common Stock, purchased from the Company through
September 30, 1997, the amount and percentage of consideration paid and the
average price per share paid to the Company by existing stockholders and by new
investors pursuant to the European Offering at an assumed price of $7.50 per
share.
<TABLE>
<CAPTION>
TOTAL CONSIDERATION AVERAGE PRICE
SHARES PURCHASED PAID PER SHARE
-------------------- --------------------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders....... 3,990,811 72.7% $24,579,303 68.6% $ 6.16
New Investors............... 1,500,000 27.3% 11,250,000 31.4% $ 7.50
--------- ----- ----------- -----
5,490,811 100.0% $35,829,303 100.0%
========= ===== =========== =====
</TABLE>
The information in the foregoing table excludes 1,216,542 shares of Common
Stock issuable upon the exercise of outstanding options, 4,357,816 shares of
Common Stock issuable upon exercise of outstanding warrants, 225,000 shares of
Common Stock reserved for issuance upon exercise of the Over-Allotment Option
and 150,000 shares of Common Stock reserved for issuance pursuant to the
Advisors' Warrants. 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> 27
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated 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, 1996 and for the years ended December 31, 1995 and 1996 have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included elsewhere in this Prospectus. The selected financial
information as of September 30, 1997 and for the nine months ended September 30,
1996 and 1997 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 periods. The results of operations for the nine months ended September
30, 1997 are not necessarily indicative of the results to be expected for the
full year. The historical selected consolidated financial information set forth
below includes the results of operations of IMMI only for the period subsequent
to its acquisition by the Company on September 5, 1997. 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,
------------------------- --------------------------
1995 1996 1996 1997
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales................................... $ 174,521 $ 2,280,311 $ 1,748,065 $ 2,818,262
Cost of sales............................... 70,179 884,152 664,979 1,116,577
----------- ----------- ---------- ------------
104,342 1,396,159 1,083,086 1,701,685
Operating expenses:
Selling, general and administrative....... 1,668,947 2,066,236 1,369,079 2,214,230
Research and development.................. 2,361,125 2,468,535 1,572,076 2,026,063
Stock compensation........................ -- 357,249 310,159 135,000
In process research and development
acquired............................... -- -- -- 325,223
----------- ----------- ---------- ------------
4,030,072 4,892,020 3,251,314 4,700,516
Other income (expense):
Interest income........................... 107,306 87,933 54,872 155,605
Interest expense.......................... (287,792) -- -- (1,888)
Other..................................... 55,801 (30,635) (3,754) 20,695
----------- ----------- ---------- ------------
Loss before provision for income taxes...... (4,050,415) (3,438,563) (2,117,110) (2,824,419)
Provision for income taxes.................. 3,113 10,266 5,267 27,000
----------- ----------- ---------- ------------
Net loss.................................... (4,053,528) (3,448,829) (2,122,377) (2,851,419)
Preferred stock dividends................... (936,325) -- -- --
----------- ----------- ---------- ------------
Net loss applicable to common
stockholders.............................. $(4,989,853) $(3,448,829) $(2,122,377) $ 2,851,419
=========== =========== ========== ============
Net loss per common and common share
equivalent................................ $ (1.19) $ (0.79) $ (0.48) $ (0.83)
=========== =========== ========== ============
Shares used in per share calculations(1).... 4,178,877 4,373,947 4,377,679 3,422,703
=========== =========== ========== ============
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Working capital............................................ $ 6,053,430 $ 2,648,744
Total assets............................................... 8,029,431 10,367,637
Accumulated deficit........................................ (19,100,811) (21,952,230)
Stockholders' equity....................................... 6,322,304 7,557,365
</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> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis relates to the operations of
Integrated Surgical Systems, Inc. and does not include the operations of IMMI,
except for the results of its operations subsequent to its acquisition by the
Company on September 5, 1997, should be read in conjunction with the
consolidated financial statements of Integrated Surgical Systems, Inc.,
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. The
ROBODOC System satisfies the appropriate international standards for medical
electrical equipment and the Electromagnetic Compatibility Directive ("CE
Mark"), and complies with the relevant provisions of the Medical Device
Directive for a Class IIb Medical Device, thus allowing the Company 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 previously announced its intention to file a PMA
application in late 1997 for approval to market the ROBODOC System in the United
States. The Company currently is exploring a regulatory strategy that may allow
the Company to pursue FDA clearance of the ROBODOC System through a 510(k)
submission in lieu of a PMA application, which would be a less onerous and
lengthy regulatory path if such an approach were acceptable to the FDA. The
Company is currently gathering and evaluating clinical and radiographic data
from the U.S. clinical trial and European studies. Therefore, the submission of
a 510(k) or PMA application will be delayed beyond the projected late 1997 date.
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, 1997 Compared to Nine Months Ended September
30, 1996
Net Sales. Net sales for the nine months ended September 30, 1997 (the
"1997 Interim Period") were approximately $2,818,000, largely attributable to
the sale of four ROBODOC Systems, compared to the nine months ended September
30, 1996 (the "1996 Interim Period") of approximately $1,748,000 which included
the sale of four ROBODOC Systems. The increase in net sales for the 1997 Interim
Period is due to a higher average selling price of the ROBODOC System to
customers, as compared to the initial commercial units sold in 1996. The selling
price of the ROBODOC System is negotiated with each customer and varies based
upon the terms of payment, terms of the service contract and arrangements for
supplying consumables.
Cost of Sales. Cost of sales for the 1997 Interim Period was approximately
$1,117,000 (40% of net sales) as compared to the 1996 Interim Period of
approximately $665,000 (38% of net sales). The higher cost as a percent of sales
in the 1997 Interim Period is a result of higher manufacturing overhead costs in
the 1997 Interim Period as the Company moved from it's pilot manufacturing
operation in the 1996 Interim Period towards creating the infrastructure
necessary to support on-going manufacturing.
Selling, General and Administrative. Selling, general and administrative
expenses for the 1997 Interim Period (approximately $2,214,000) increased by
approximately $845,000, or 62%, as compared to the 1996 Interim Period
(approximately $1,369,000). Marketing costs increased approximately $431,000
with the addition of a European Sales Manager, increased participation in
medical conferences and travel to potential customer sites. General and
administrative costs increased approximately $414,000 to support increased
growth and as well as investor relations.
26
<PAGE> 29
Research and Development. Research and development expenses for the 1997
Interim Period (approximately $2,026,000) increased by approximately $454,000,
or approximately 29%, as compared to the 1996 Interim Period (approximately
$1,572,000), due to additional engineering staff required to support new
applications of existing products and new product development projects.
In-process Research and Development Acquired. During the 1997 interim
period, the Company recorded a charge to operations in the amount of $325,223 in
connection with in-process research and development acquired from IMMI on
September 5, 1997. ISS management does not believe that technological
feasibility of the acquired in-process research and development has been
established. Further, ISS management believes the acquired in-process research
and development has no alternative future uses. Therefore, the amount allocated
to in-process research and development is required to be immediately expensed
under generally accepted accounting principles.
Stock Compensation. Stock compensation expense during the 1997 Interim
Period was $135,000, $175,000 lower than the 1996 Interim Period ($310,000).
This decrease is due to the immediate vesting of certain stock options in the
1996 Interim Period. The Company charged to operations in 1996 deferred stock
compensation relating to stock options granted during 1996 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. Deferred
compensation for the non-vested portion is being amortized into expense over the
vesting period of the stock options, which generally range from three to five
years. Stock compensation expense in the 1997 Interim Period represents the
additional vesting which occurred in the first nine months of 1997.
Interest Income. Interest income for the 1997 Interim Period
(approximately $156,000) increased by approximately $101,000, or 184%, as
compared to the 1996 Interim Period (approximately $55,000), primarily due to
higher average cash balances during the 1997 Interim Period as a result of the
Company's initial public offering in November 1996.
Other Income and Expense. Other income for the 1997 Interim Period was
approximately $21,000 compared to an expense of approximately $4,000 in the 1996
Interim Period. The primary reason for the difference is the weakening of the
Dutch Guilder against the U.S. Dollar during 1996, as compared to a
strengthening Dutch Guilder against the dollar in the first nine months of 1997.
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 1997 Interim Period (approximately
$2,851,000) increased by approximately $729,000, or approximately 34%, as
compared to the net loss for the 1996 Interim Period (approximately $2,122,000),
primarily due to the higher operating expenses and the write-off of IMMI
in-process research and development in connection with the acquisition of IMMI,
partially offset by improved gross margins. The improved gross margin is
primarily attributable to a higher selling price for the ROBODOC System.
Fiscal Years Ended December 31, 1996 and 1995
Net Sales. Net sales for the fiscal year ended December 31, 1996 ("Fiscal
1996") increased by approximately $2,106,000, as compared to the fiscal year
ended December 31, 1995 ("Fiscal 1995"). The increase is a result of commercial
sales of the ROBODOC System to customers in Germany and Austria. No ROBODOC
Systems were sold during Fiscal 1995. Sales of consumables during Fiscal 1996
(approximately $140,000, or 6% of net sales), decreased by approximately
$35,000, or 20%, as compared to Fiscal 1995 when sales of consumables accounted
for all net revenue, primarily due to certain number of consumables being
provided without charge to new customers during 1996.
Cost of Sales. Cost of sales for Fiscal 1996 (approximately $884,000)
increased by approximately $814,000 as compared to Fiscal 1995 (approximately
$70,000), as a result of the first commercial sales of the ROBODOC System in
Fiscal 1996. Cost of sales as a percentage of net sales was 39% for Fiscal 1996
and 40% for Fiscal 1995.
Selling, General and Administrative. Selling, general and administrative
expenses for Fiscal 1996 (approximately $2,066,000), increased by approximately
$397,000, or 24%, as compared to Fiscal 1995
27
<PAGE> 30
(approximately $1,669,000), primarily due to the Company's participation in
tradeshows in Europe during Fiscal 1996.
Research and Development. Research and development expenses for Fiscal
1996 (approximately $2,469,000) increased by approximately $108,000, or
approximately 5%, as compared to Fiscal 1995 (approximately $2,361,000),
primarily due to staff increases required for development of additional
applications.
Stock Compensation. During Fiscal 1996, the Company recorded deferred
stock compensation of approximately $784,000 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 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 $357,000 was recorded during Fiscal 1996 relating to these stock
options, and the remaining $427,000 will be amortized into expense in future
periods.
Interest Income. Interest income for Fiscal 1996 (approximately $88,000)
decreased by approximately $19,000, or 18%, as compared to Fiscal 1995
(approximately $107,000), due to money market conditions resulting in improved
return on the Company's investments during Fiscal 1995.
Interest Expense. The Company had no interest expense for Fiscal 1996
compared to Fiscal 1995 (approximately $288,000). Interest expense for Fiscal
year 1995 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 expense for Fiscal 1996 was approximately
$31,000, as compared to other income for Fiscal 1995 of approximately $56,000.
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 1996. 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 available prior to the
expiration of the carryforward periods. As a consequence of the limitation, the
Company had at December 31, 1996 a net operating loss carryover of approximately
$8,700,000 for federal income tax purposes which expires between 2005 and 2011,
and a net operating loss carryforward of approximately $2,100,000 for state
income tax purposes which expires between 1997 and 2001. See Note 8 of notes to
consolidated financial statements.
Net Loss. The net loss for Fiscal 1996 (approximately $3,449,000)
decreased by approximately $605,000, or 15%, as compared to the net loss for
Fiscal 1995 (approximately $4,054,000), primarily due to improved gross margin
partially offset by an increase in operating expenses, principally due to stock
compensation expense, increased participation in tradeshows in Germany and
increased research and development staffing.
Preferred Stock Dividends. The Company accumulated preferred stock
dividends on the Series B and Series C Preferred Stock at 8% per annum 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, which was outstanding until it was automatically converted upon
the close of the Company's Initial Public Offering, did not provide for
cumulative dividends.
28
<PAGE> 31
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 $23.8 million. 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
$3,508,000, $3,432,000, $1,969,751 and $4,178,000 in Fiscal 1995, Fiscal 1996,
and the 1996 and 1997 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 1995 reflected a decrease in inventory of
approximately $138,000 due to the disbursement of items in inventory to conduct
clinical trials, an increase in other liabilities due to an accrual to recognize
costs related to the completion of the Robodoc clinical trials and payments made
under a severance agreement with a former executive officer in the approximate
amount of $163,000. Cash used for operations in Fiscal 1996 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 increases in accounts
receivable and inventory. Cash used for operations in the 1996 Interim Period
reflected a payment made on a note payable held by a supplier and a decrease in
a customer deposit relating to the delivery of a commercial system. Cash used
for operations in the 1997 Interim Period reflected an increase in inventories,
an increase in customer deposits, a decrease in receivables and a decrease in
payables to a subcontractor. 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 approximately $19,000 and $116,000 for
Fiscal 1995 and Fiscal 1996, respectively.
The Company's investing activities have consisted primarily of expenditures
for property and equipment which totaled approximately $121,000, $41,000,
$14,000 and $185,000 in Fiscal 1995, Fiscal 1996, and the 1996 and 1997 Interim
Periods, respectively. Included in 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 Fiscal 1996.
Cash provided by financing activities from inception through September 30,
1997 comprised the net cash proceeds from the sale of a convertible note in the
principal amount of $3,000,000, the sale of convertible preferred stock and
warrants for $14,676,000, and the sale of Common Stock and warrants for
approximately $6,090,000, resulting from the Company's initial public offering
in November 1996, and approximately $16,300 from the exercise of stock options
during the first nine months of 1997. 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 and $2,942,000 of preferred stock and warrants to purchase preferred
stock was converted into Common Stock and warrants to purchase common stock in
December 1995 and November 1996, respectively.
The Company expects to incur additional operating losses 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 its current
funding (including the anticipated proceeds of the European Offering) and cash
flow from operations will be sufficient to finance its operations through 1999.
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<PAGE> 32
INVESTMENTS IN PLANT, PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
---------------------- SEPTEMBER 30,
1994 1995 1996 1997
---- ---- ---- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Integrated Surgical Systems, Inc......................... $476 $121 $41 $ 185
IMMI..................................................... $ 36 $194 $39 $ 194
---- ---- --- ----
$512 $315 $80 $ 379
---- ---- --- ----
</TABLE>
Investments in 1994 included the capitalization of ROBODOC equipment used
for clinical evaluations.
Investments in 1995 and 1996 were comprised primarily of computers, office
furniture and fixtures and other equipment to support research and engineering
development efforts.
Investments during the nine months ended September 30, 1997 were for
computers, office furniture and fixtures and other equipment necessary to
support expanding operations. In addition, IMMI spent $180,000 on the
capitalization of NeuroMate equipment.
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<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 that
were previously cleared by the FDA or which have been
marketed in the United States since prior to May 28,
1976 (the date of the Medical Device Amendment to the
FDC Act) pursuant to the FDC Act.
ACETABULUM................ Hip socket.
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 approval 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.
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<PAGE> 34
BUSINESS
The Company develops, assembles, markets and services image-directed,
computer-controlled robotic products for orthopaedic and neurosurgical
applications.
Orthopaedic Business
The Company's principal orthopaedic product is the ROBODOC(R) Surgical
Assistant System, consisting of a computer-controlled surgical robot and the
Company's ORTHODOC(R) Presurgical Planner. The ROBODOC System has been used for
primary total hip replacement surgery on over 1,500 patients in Europe and the
United States. 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 a part
of the ROBODOC System, but the Company also plans to market it separately. 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,
two titanium locator pins are placed in the patient's femur in an outpatient
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. The Company believes that precise fit and correct alignment
of the implant within the femoral cavity are 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 Europe with the
ROBODOC System, patients generally have become weight-bearing in a shorter
period than generally experienced by patients who have had this surgery
performed manually. In addition, clinical data obtained from trials in Europe
and the United States 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 ingrowth. 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
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<PAGE> 35
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.
Neurosurgical Business
The Company entered the neurosurgical business through the acquisition of
IMMI on September 5, 1997. See "Business Acquisition of IMMI." IMMI's principal
neurosurgical product is the NeuroMate System, consisting of an image-guided,
computer-controlled robotic arm, head stabilizer and monitor. The Company also
offers a workstation with presurgical planning software through arrangements
with original equipment manufacturers ("OEMs").
The NeuroMate System has been used to perform over 1,500 neurosurgical
procedures in France and Japan. The Company believes that the NeuroMate System,
which uses IMMI's proprietary robotic arm design and control systems designed
specifically for use in the operating room, is the only image-guided,
computer-controlled robot currently in use to precisely position and hold
critical tools used in the performance of neurosurgical procedures.
Stereotactic neurosurgery is a minimally invasive approach to operating on
the brain. Because the brain is largely unexposed, it requires the surgeon to
work without direct visualization of the brain itself. This is overcome by a
thorough understanding of brain anatomy and by using a spatial coordinate system
that allows the surgeon to "navigate" within the brain without directly
visualizing it. Essentially, the coordinate space of the patient's brain is
correlated to the patient's own CT, magnetic resonance (MR) or other images by
using anatomical landmarks that are shared by the patient and the images. This
is known as "registration" of the patient's coordinate space to the coordinate
space of the images. Once this is accomplished, the patient's CT scan can be
used to guide the surgeon to specific sites within the brain through small holes
the surgeon has made in the cranium (i.e., not necessitating a craniotomy).
In 1996, IMMI sold two NeuroMate Systems and its total revenues were
$447,310. During the nine months ended September 30, 1997, IMMI sold two
NeuroMate Systems and its total revenues were $620,145.
------------------
The following table sets forth by product category and geographic area
sales of orthopedic products by the Company and neurosurgical products by IMMI
for the fiscal years ended December 31, 1994, 1995 and 1996 and the nine months
ended September 30, 1997.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
NINE MONTHS ENDED
1994 1995 1996 SEPTEMBER 30, 1997
----------------------- --------------------- ----------------------- -----------------------
$'S % OF SALES $'S % OF SALES $'S % OF SALES $'S % OF SALES
---------- ---------- -------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales by Product
Category
Orthopaedic...... $ 289,047 100% $174,521 100% $2,280,311 84% $2,774,150 81%
Neurosurgical.... -- -- -- -- 447,310 16% 620,145 18%
Other............ -- -- -- -- -- -- 44,028 1%
---------- --- -------- --- -------- --- ---------- ---
Total
Sales..... $ 289,047 100% $174,521 100% $2,727,621 100% $3,438,323 100%
========== === ======== === ======== === ========== ===
Sales by Geographic
Area
United States.... $ 261,778 91% $ 9,295 5% -- -- -- --
Europe........... 27,269 9% 165,226 95% $2,727,621* 100% $2,851,622 83%
Japan............ -- -- -- -- -- -- 586,701 17%
---------- --- -------- --- -------- --- ---------- ---
Total
Sales..... $ 289,047 100% $174,521 100% $2,727,621 100% $3,438,323 100%
========== === ======== === ======== === ========== ===
</TABLE>
- ---------------
* Includes sales of neurosurgical products by IMMI.
INDUSTRY OVERVIEW
The orthopaedic and neurosurgery markets are well established and are now
evolving toward increased reliance on image guidance and computer assistance in
the planning and execution of surgical procedures.
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<PAGE> 36
Industry experts estimate that the worldwide image-guided, computer assisted
surgery market will rapidly grow to $7.6 billion by the year 2000.
Orthopaedic 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 24% 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
prostheses 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.
Neurosurgical Market
Because of the relative inaccessibility of the brain and the need to
provide brain-conserving surgical techniques, neurosurgery is rapidly moving
toward increased utilization and reliance on image guidance and the use of
computers in planning and executing surgical procedures. In fact, modern
computer assisted, image-guided surgery was chiefly pioneered in neurosurgical
applications. The market now consists of traditional frame-based devices;
non-microscope, freehand "navigators"; and stereotactic microscopes. All of
these systems are capable of using, or are controlled through, image guidance.
The Company estimates that stereotactic neurosurgery is performed at 1,200
sites worldwide. Eighty-five percent of those sites are in the United States,
Europe and Japan, where the Company will concentrate its sales and marketing
efforts.
BUSINESS STRATEGY
The Company is seeking to establish itself as a leading provider of
innovative image-directed, computer-controlled robotic technologies worldwide.
The current focus is on the orthopaedic and neurosurgical markets. 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).
Orthopaedic Market
The Company currently markets and sells ROBODOC Systems in Europe. The
Company's business strategy over the next two years is to concentrate its
marketing and sales efforts on selling the ROBODOC System throughout Europe and
then Japan, subject to obtaining the requisite approval from the Japanese
Ministry of Health. When and if approval is received from the FDA, the Company
plans to market and sell the ROBODOC System in the United States. The Company
will thereby attempt to establish an installed
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<PAGE> 37
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.
Neurosurgical Market
The NeuroMate is currently marketed in Europe and Japan, and its
introduction in the United States is anticipated in early 1998. The Company's
strategy is to market its NeuroMate as the platform system for major
neurosurgeries, and will require its customers to purchase only the
application-specific software and accessories for each new application.
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.
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 that includes a service contract for the first year, installation,
training and some consumables. The service contract is renewable annually for
$63,500 and entitles the customer to upgrades and limited consumables.
- ORTHODOC System
The ORTHODOC is a Pentium(R)-based computer workstation that utilizes the
Company's proprietary software for preoperative surgical planning. The ORTHODOC,
an integral part of the ROBODOC System also may be sold separately as a surgical
planner. The ORTHODOC 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. Additional software that will utilize images obtained by digitizing
x-ray film is planned as an option for ORTHODOC customers, in addition to other
features such as providing surgeons the ability to plan hip revision cases.
The Company expects the price of the ORTHODOC to range from $33,000 to
$95,000, depending on the features selected.
- NeuroMate System
The NeuroMate's principal component is a five-axis robot designed
specifically for surgical applications. This proprietary design includes
automatic self-braking joints, sensor redundancy and embedded controllers. In
addition, NeuroMate's low electro-magnetic emissions, easy cleaning and
ergonomic design are all specific to operating room requirements. The NeuroMate
can utilize data (e.g., CT and MRI images) from the site's existing presurgical
planning workstation. If the site does not have a presurgical planning
workstation, the Company can supply one through OEM arrangements with vendors,
or the site can purchase its own independently. Using the workstation and
NeuroMate's virtual images, the surgeon plans the optimal
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<PAGE> 38
trajectory and robot position for the surgery. NeuroMate can be configured to
position and hold a variety of surgical tools used in stereotactic surgery with
a degree of accuracy unattainable from other stereotactic devices. Tool guide
and robot positioning is achieved within 45 seconds.
The sales price of the NeuroMate System is approximately $300,000 and
includes full warranty that includes a service contract for the first year,
installation and training. Installation includes interfacing the customer's
presurgical planning workstation to NeuroMate, when required. The service
contract is renewable annually for $30,000.
POTENTIAL ORTHOPAEDIC AND NEUROSURGICAL APPLICATIONS
The Company intends to offer separate software packages for each new
application if, as and when developed by the Company. Consequently, the
Company's customers would be able to use the Systems as platforms to perform a
variety of surgical procedures without incurring significant additional hardware
costs. The Company plans to develop software packages for the following
orthopaedic and neurosurgical surgical procedures.
- Potential Orthopaedic Applications
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 cement mantle.
The removal of the fragmented cement without removing any of the remaining thin
bone structure is a major challenge for the surgeon.
The Company has developed 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 has been 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 related 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 involved its validation in a clinical setting. The Company
believes that its hip revision software will improve surgical planning and
enable the robot to remove cement more precisely than if the hip revision
procedure were performed manually. The Company has completed clinical
evaluations of the hip revision application in Europe and plans to commence
marketing the software package for the hip revision application to its customers
in Europe in early 1998.
Total Knee Replacement. The Company plans to develop a software package
for total knee replacement ("TKR") surgery using the ROBODOC System. The
proposed application module 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
application module 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
application module 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.
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 application module 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,
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<PAGE> 39
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 application
module 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 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.
- Potential Neurosurgical Applications
Spine surgery. Surgical interventions in the spine generally involve tumor
biopsy/resection; vascular repair; implants of plates, rods, screws, or other
implantable devices or substances; and bone fusions of various types. The
Company believes that its image-directed, computer-controlled robotic technology
is applicable in most of these interventions and will significantly enhance
precision and accuracy in many of them. Spine surgery is a large segment of both
neurosurgery and orthopaedic surgery, as the nature of the abnormality may
involve the nervous system or the vertebral column, or both. A significant part
of this application involves the insertion of vertebral pedicle screws,
discussed below.
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 application module for this surgical
procedure is completed, the NeuroMate 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.
AVAILABLE CLINICAL DATA; RISK VERSUS BENEFIT ISSUES
The Company has conducted a randomized clinical trial in the United States
at three centers using the ROBODOC System. Of the 120 patients enrolled in the
U.S. clinical study, 71 hips received treatment with the ROBODOC System and 65
hips in a control group received conventional THR surgery. In addition, at least
1,400 patients have received treatment with the ROBODOC System in Europe,
although not as part of the formal U.S. clinical study and without comparison to
randomized control patients.
In order to obtain FDA clearance or approval, the Company will be required
to demonstrate that the ROBODOC System is safe and effective. This can include a
requirement to show a clinical benefit to patients. The Company believes that a
reduced incidence of intraoperative fractures with the ROBODOC System compared
to conventional THR surgery would offer an important benefit. The number of
patients enrolled in the U.S. clinical trial 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 1,500 primary THR surgeries performed with
the ROBODOC System in the combined U.S. clinical trial and the European study
without a single intraoperative fracture. Since the observed fracture rate in
the control group in the U.S. clinical trial was lower than anticipated, the
data from this study are not sufficient to establish a statistically significant
reduction in intraoperative fractures compared to the control group.
Nevertheless, the data from both the U.S. trial and the European study suggest
that the ROBODOC System reduces intraoperative fractures when compared to the
fracture rate of approximately 6 to 24 percent for conventional THR surgery
reported in the scientific and medical literature.
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There can be no assurance, however, that the FDA will agree that the ROBODOC
System offers a clinically significant reduction in intraoperative fracture in
the absence of a controlled trial demonstrating such a reduction.
The FDA has advised the Company that the agency believes long-term
functional and pain assessments are the primary endpoints for evaluating the
safety and effectiveness of the ROBODOC System. A preliminary review by the
Company of the functional and pain assessment data from the U.S. clinical trial
shows equivalence between the ROBODOC System and conventional THR surgery. The
Company believes that achieving better implant fit and alignment in the femoral
cavity are significant factors in the success of cementless THR surgery,
although the FDA has questioned whether fit is an appropriate endpoint and has
not addressed alignment.
The Company's preliminary comparison completed in May 1997 of fit and
alignment parameters from the 3 month radiographs showed that the ROBODOC System
surgeries produced fit and alignment equivalent to conventional THR surgeries.
Subsequently, the Company's outside radiologist and outside biostatistician have
refined the analytical technique applied to the 3-month radiographic data in a
manner that the Company believes more accurately reflects the implant
manufacturers' design goals for implant cavity preparation. Based upon the
preliminary results of this technique, the Company believes that the data will
show that the ROBODOC System achieves better fit and alignment compared to
conventional THR surgeries. The Company also will be reviewing long term fit and
alignment. Although the Company believes that the refined technique produces a
more appropriate comparison, there can be no assurance that the FDA will accept
the Company's methodology for measuring fit and alignment, that the data, once
fully reviewed and analyzed, will demonstrate that the ROBODOC System achieves
better implant fit and alignment, or that the FDA will agree that implant fit
and alignment are significant surgical endpoints.
The U.S. 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 increased risk
to the patient attributable to the increased surgery time or blood loss. Also,
the European data suggest that it is possible to reduce surgery time as surgeons
gain experience with the device. The surgeons in Europe 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 European 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 European data
adequate to extrapolate that surgery time can be reduced in the U.S.
In prior communications with the Company, the FDA indicated a strong
"preference" for two-year post-operative data from patients in the U.S. clinical
trial. In a late 1996 meeting, however, the FDA indicated that it may accept a
PMA application for filing with two-year post-operative data only 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.
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
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from 71 ROBODOC System hips and 65 control group hips, and in the European study
from at least 1,400 ROBODOC System patients. The Company's Director of
Regulatory Affairs and Quality Assurance resigned in September 1996 and
subsequently asserted that one of the reasons for his resignation was his
concern, similar to that expressed in the February 1995 law firm report, about
the adequacy of the Company's clinical data to support product approval.
The Company believes that the preliminary data at the time of the interim
report were not sufficient to allow a meaningful evaluation. For example,
radiographic interpretations measuring the implant fit and alignment parameters
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 believes that the
additional data analyzed subsequent to the law firm's February 1995 report
address many of the concerns identified in that report. These data and analyses
include non-radiographic clinical follow-up data from the U.S. trial,
preliminary analysis and review by an outside radiologist and an outside
biostatistician of 3-month radiographic films from the U.S. trial, and data on
additional patients from the European studies. The Company also is in the
process of collecting 12-month and 24-month follow-up clinical (including
radiological) data for patients in the U.S. clinical trial and obtaining
analyses and review from the outside consultants, which process is expected to
be completed by the end of 1997 or early 1998. See "Business -- Government
Regulation."
No assurance can be given that the data, when fully analyzed and reviewed,
will 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 will not require the Company to obtain additional
clinical data from a randomized, controlled trial 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 several years.
MARKETING, SALES AND DISTRIBUTION
The ROBODOC System cannot be marketed in the United States until clearance
or approval is obtained from the FDA. The Company has received 510(k) clearance
from the FDA to sell the ORTHODOC in the United States. The NeuroMate System
also has received 510(k) clearance from the FDA for marketing in the United
States and from the Japanese Ministry of Health for marketing in Japan.
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 has commenced marketing the ROBODOC System to orthopaedic and
trauma surgeons and hospitals in Europe through direct sales and arrangements
with implant manufacturers. To date, the Company's direct sales efforts have
been primarily in Germany and Austria. Over 850 THR surgeries have been
performed with the ROBODOC Systems 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 of 1996. The Company intends to commence marketing the ORTHODOC
to hospitals, orthopaedic surgeons and implant manufacturers in the United
States and Europe in early 1998.
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The NeuroMate System is being marketed in Europe through a direct sales
force and in Japan through a Japanese distributor. In the United States it will
be marketed through a direct sales force and select distributors beginning in
early 1998.
The Company promotes its products 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, primarily in Europe, and to establish a sales and
marketing staff. See "Use of Proceeds."
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 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.
MANUFACTURING
The Company's production process consists primarily of final assembly of
purchased components, testing of the products and packaging, and is conducted at
its facilities in Sacramento, California and Lyon, France. The Company purchases
substantially all the components for its Systems 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
NeuroMate System consists of a robot arm, electronics control and base. Sankyo
Seiki of Japan supplies the robot for the ROBODOC System customized to the
Company's specifications and Audemars-Piguet supplies the customized robot for
the NeuroMate System. Upon delivery of a robot, the Company performs a series of
tests to verify proper functioning. The customization and supply process for the
robots currently requires approximately four months lead time. While the robots
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 robotic surgeries,
including devices for fixing the hip and attaching it to the robot, numerous
probes, cutter bearing sleeves and tool guides, 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 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 production 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 1997. See
"Business -- Government Regulation."
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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 $2,469,000 and $2,361,000 in connection with the development of
the ROBODOC System and the ORTHODOC for the years ended December 31, 1996 and
December 31, 1995, respectively.
The Company has developed 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 cement mantle. The removal of the cement mantle without removing
any of the remaining thin bone structure is a major challenge for the surgeon.
The first phase of the hip revision project related 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 involved its validation in a clinical setting. The Company believes that
its hip revision application module will improve surgical planning for hip
revision surgery and enable the robot to remove cement more precisely than if
the hip revision procedure were 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 $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 $923,000 in
connection with the hip revision project through September 30, 1997. As of
September 30, 1997, the Company had received $385,781 under the terms of the
grant. See "Use of Proceeds" and "Business -- Potential Orthopaedic and
Neurosurgical Applications." The Company has completed clinical trials for the
hip revision application in Europe and plans to commence marketing the software
for the hip revision application to its customers in Europe in early 1998.
The Company offers five lines of prostheses on its library of hip implants
at clinical sites. It is expanding the library to include multiple implant
lines, revision stems, and custom-made prostheses. The Company has received
orders from Howmedica, a division of Pfizer, and Johnson & Johnson Professional,
Inc. ("J&J") to add their respective hip prostheses to its existing software
library, which included the implant libraries of Biomet and DePuy. When
completed, this will allow orthopaedic surgeons to plan hip replacement
surgeries using Howmedica's and J&J's line of implants. The Company will further
expand 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 and with respect to the application of the
base technology for total knee replacement surgery.
IMMI is the recipient of an interest-free loan from ANVAR (a national
agency in France established to aid research and development projects) in the
amount of approximately $153,000. This loan provides funding for the development
of the NeuroMate System for spine surgery. This project is currently in its
first phase of development in connection with a University hospital in Lille,
France. Under certain conditions (e.g., if at the completion of the project it
is not deemed a "success") there will be no requirement to repay the loan.
IMMI also is the recipient of a grant from ANVAR in the amount of
approximately $222,000, of which IMMI has received approximately $174,000
through June 30, 1997. This grant funds 50% of the cost to build and install
NeuroMate Systems at two clinics in France as well as the costs to perform a
clinical study at these sites.
As of September 30, 1997, the Company's engineering staff comprised 32
engineers (including 4 Ph.D.s) in a variety of specialities.
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ACQUISITION OF IMMI
On September 5, 1997, the Company acquired all of the outstanding capital
stock of IMMI in exchange for 619,355 shares of Common Stock (the "IMMI Shares")
in a transaction to be accounted for as a purchase. In connection with the
acquisition, the Company agreed to file a registration statement for the resale
of the IMMI Shares in the United States on or about November 21, 1997, subject
to certain volume limitations. See "Description of Securities -- Shares Eligible
for Future Sale." In addition, the Company guaranteed the payment of
indebtedness incurred by IMMI under a revolving line of credit with Societe
Generale and Banque Populaire du Dauphine Et Des Alpes Du Sud ("Banque
Populaire") up to a maximum amount of 1,270,000 French francs. As of September
30, 1997, the aggregate amount of indebtedness payable under this credit
facility was approximately $270,000. The payment of this indebtedness is secured
by a lien on substantially all of the assets of IMMI.
Based on management's allocation of the purchase price, the Company
incurred a charge of approximately $325,000 for in-process research and
development. In addition, the Company will record approximately $823,000 in
annual amortization charges for the acquired technology and assembled work force
in connection with the acquisition of IMMI.
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., located in Indiana; Biomet, Inc.
located in Indiana; and Osteonics, Inc. (a subsidiary of the Stryker
Corporation), located in New Jersey. MAQUET, a manufacturer of operating tables
located in Germany, has recently
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announced that it intends to market a device similar to ROBODOC in mid 1998. The
principal competition for NeuroMate is from manufacturers of frame-based and
frameless stereotactic systems, some of which are commonly called "navigators".
Approximately twenty navigator models have been introduced, including those by
Radionics, Sofamor Danek, and Ohio Medical Surgical Products, all located in the
U.S.; Elekta, located in Sweden; and, Fischer Leibingher and Brain Lab, both
located in Germany. In addition, there are companies in the medical products
industry 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 those of 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 Company believes the NeuroMate System is the only robotic system
presently used for neurosurgery which provides superior accuracy and flexibility
as compared to other techniques.
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
approximately 8 to 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 trains its customers with its in-house technical staff and with
a third party trainer in Europe.
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 five 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 patents will issue from pending or future patent applications, 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
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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 whether the Company's products and pending patent applications
infringe on other existing patents due to the Company's belief that an
infringement study would not be cost-effective, nor offer significant protection
against potential infringement claims, if and when made. 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 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
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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 pre-amendment 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 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 the Quality System ("QS") regulation, which imposes certain
procedural and documentation requirements upon the Company with respect to
manufacturing and quality assurance activities. The QS regulation revises the
previous GMP regulation and imposes certain enhanced quality requirements that
are likely to increase the cost of compliance, including design controls.
If the FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA will either issue an approval letter or an
approvable letter, which usually contains a number of conditions
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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 the ROBODOC System 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
exemption ("IDE") application prior to commencing human clinical trials. The IDE
application must be supported by data, typically including the results of animal
and laboratory testing. If the IDE application is reviewed and approved by the
FDA and one or more appropriate Institutional Review Boards ("IRBs"), human
clinical trials may begin at a specific number of investigational sites with a
specific number of patients, as approved by the FDA. If the device presents a
"nonsignificant risk" to the patient, a sponsor may begin the clinical trial
after obtaining approval for the study by one or more appropriate IRBs, 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 GMP requirements, 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 compliance
inspections by the FDA and certain state agencies.
The Company previously announced its intention to submit a PMA to the FDA
in late 1997 for approval to market the ROBODOC System in the United States. The
Company currently is exploring a regulatory strategy that may allow the Company
to pursue FDA clearance of the ROBODOC System through a 510(k) submission in
lieu of a PMA application, which would be a less onerous and lengthy regulatory
path if such an approach were acceptable to the FDA. The Company is currently
gathering and evaluating clinical and radiographic data from the U.S. clinical
trial and European studies. Therefore, the submission of a 510(k) or PMA
application will be delayed beyond the projected late 1997 date. Pursuant to
this strategy, the Company intends to request that the FDA review the Company's
clinical and radiographic data in connection with a pre-filing meeting with FDA
representatives. The Company intends to provide the data to the FDA by the end
of 1997 or in early 1998. The purpose of the pre-filing meeting would be to seek
feedback from the FDA about whether a 510(k) clearance pathway is a viable
alternative to a PMA application for the ROBODOC System and to provide
additional data to the FDA, including information in support of the Company's
belief that fit and alignment are significant clinical endpoints. See "Risk
Factors -- Available Clinical Data; Risk Versus Benefit Issues." Although the
FDA previously indicated to the Company that the ROBODOC System was
46
<PAGE> 49
more likely to require PMA approval rather than 510(k) clearance, the Company
believes that the recent 510(k) clearance of a potential predicate device may
offer a new basis for seeking 510(k) clearance for the ROBODOC System based, in
part, upon a claim that the ROBODOC System is substantially equivalent to this
predicate device. There can be no assurance that the FDA will agree to a
pre-filing meeting with the Company or will provide the Company with feedback as
to whether a 510(k) submission is a possible alternative to a PMA application
for the ROBODOC System.
Unless the FDA rules out the 510(k) clearance path, the Company currently
intends to submit a 510(k) notification to the FDA sometime during the first
quarter of 1998. On the other hand, if the FDA indicates that a PMA application
will be required, the filing of a PMA application by the Company could be
delayed until the latter part of 1998 or later. These submission time frames
could be substantially extended if the FDA indicates that the existing clinical
data is insufficient to support clearance or approval or that additional
clinical data will be necessary in order to submit a 510(k) notification or PMA
application for the ROBODOC System. The Company's submission of a PMA
application also could be delayed if the Company invests substantial time
pursuing 510(k) clearance but is ultimately unsuccessful. There can be no
assurance that the FDA will grant 510(k) clearance or PMA approval to the
ROBODOC System on a timely basis, or at all, or that such clearance or approval
will not include unfavorable limitations or restrictions. See "Risk Factors --
Available Clinical Data; Risk Versus Benefit Issues."
After receipt of 510(k) clearance or 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 new 510(k) submission or 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 different 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 January 1997, the ORTHODOC
received clearance from the FDA for marketing in the United States.
The NeuroMate System received 510(k) clearance from the FDA for marketing
in the United States in May 1997.
The Company has made what it believes are nonsignificant modifications to
the ORTHODOC and the NeuroMate System which the Company believes do not require
the submission of new 510(k) notices. There can be no assurance, however, that
the FDA would agree with any of the Company's determinations not to submit a new
510(k) notice for any of these changes or would not require the Company to
submit a new 510(k) notice for any of the changes made to the device. If the FDA
requires the Company to submit a new 510(k) notice for any device modification,
the Company may be prohibited from marketing the modified device until the
510(k) notice is cleared by the FDA.
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,
47
<PAGE> 50
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 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 has subjected
will continue to 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 Compatibility
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 Ueberwachungs
Verein Rheinland ("TUV"), a testing body in Germany, under current German
regulations. The ROBODOC System also satisfies the relevant provisions of the
Medical Device Directive for a Class II b Medical Device.
The NeuroMate System satisfies the relevant provisions of the Medical
Device Directive for a Class IIb Medical Device, thus allowing the Company to
apply the CE Mark. In June 1997, the NeuroMate System received clearance from
the Japanese Ministry of Health for marketing in Japan.
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 its ROBODOC System, 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.
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<PAGE> 51
FACILITIES
The Company's executive offices and production facilities, comprising a
total of approximately 17,000 square feet of space, are located in Sacramento,
California and Lyon, France. The Company occupies the facilities in Sacramento
pursuant to two leases that expire on June 30, 1998. The total rent expense for
these premises is approximately $12,600 per month. The lease for the Company's
production facility in Sacramento provides for escalation of rent at the rate of
5% per annum. The facility in Lyon is located within a university and is
provided free of charge to the Company at this time. See Note 8 of notes to
IMMI's consolidated financial statements. On September 19, 1997, the Company
entered into a lease for an approximately 30,500 square foot office and
production facility in Davis, California. The lease is for a term of seven
years, commencing not later than September 1, 1998, and provides for rent of
$27,810 per month during the first year of the lease (plus real estate taxes and
assessments, utilities and maintenance), subject to adjustment in subsequent
years for cumulative increases in the cost of living index, not to exceed 4% per
year.
EMPLOYEES
As of September 30, 1997, the Company had 68 full time employees, of which
8 employees are employed by other entities but work full time for the Company,
including 32 in research and development, 9 in manufacturing, 4 in regulatory
affairs and quality assurance, 9 in sales and marketing and 8 in administration.
The Company also has 3 part-time employees. Except for the employees of IMMI,
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.
49
<PAGE> 52
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............... 57 President, Chief Executive Officer and a Director
James C. McGroddy............... 60 Chairman of the Board
Mark Winn....................... 47 Vice President, Chief Financial Officer and Secretary
Leland Witherspoon.............. 45 Vice President, Engineering
Peter Kazanzides................ 35 Director of Robotics and Software
Brent D. Mittelstadt............ 38 Director of Biomedical Applications
Mary Edwards.................... 42 Director of Regulatory Affairs
Hans Weynschenk................. 47 Director of Marketing, Orthopaedics
Jerome Lebon.................... 42 Director of Marketing, Neurosurgery
Stu Heald....................... 60 Manager of Manufacturing
Jeffrey A. Johnson.............. 46 Director of Marketing, U.S.A.
John N. Kapoor.................. 53 Director
Paul A.H. Pankow................ 67 Director
Gerald D. Knudson............... 53 Director
Patrick G. Hays................. 54 Director
</TABLE>
The Board of Directors has two standing committees, an Audit Committee and
a Compensation Committee.
The Audit Committee is composed of Dr. McGroddy, Dr. Kapoor and Mr. Pankow.
The duties of the Audit Committee include recommending the engagement of
independent auditors, reviewing and considering reports of the auditors and
others relating to management and internal controls. The Audit Committee,
appointed in December 1996, held no meetings in 1996 and has held one meeting in
1997.
The Company's Compensation Committee is composed of Dr. McGroddy, Dr.
Kapoor and Mr. Pankow. The duties of the Compensation Committee are to recommend
to the Board remuneration for officers of the Company to determine the number
and issuance of options pursuant to the Company's stock option plans and to
recommend the establishment of and to monitor a compensation and incentive
program for all executives of the Company. The Compensation Committee held four
meetings in 1996 and has held five meetings in 1997.
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. From 1965 through December 1996, Dr. McGroddy
was employed by IBM. From January 1996 through December 1996, Dr. McGroddy
served as Senior Vice President and Special Advisor to the
50
<PAGE> 53
Chairman of IBM. From May 1989 to December 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 was a member of IBM's Worldwide Management Council. 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. See
"Certain Transactions -- Initial Transactions with IBM."
MARK W. WINN has been Vice President, Chief Financial Officer and Secretary
of the Company since September 1997. From November 1991 to August 1997 Mr. Winn
served as the Senior Vice President and Chief Financial Officer of Research
Medical, Inc., a manufacturer and developer of specialty cardiovascular and
pharmaceutical products. From 1984 to 1991 Mr. Winn was the Vice President and
Chief Financial Officer of Gory Associated Industries, a South Florida building
products manufacturer. He received his MBA and BA from Brigham Young University
in 1975 and 1974 respectively.
LELAND WITHERSPOON, has been Vice President, Engineering since April 1997.
From February 1992 to April 1997, Mr. Witherspoon was Director Product Research
and Development for Sorin Biomedicals, Inc., a developer and manufacturer of
cardiopulmonary and cardiovascular products. From November 1990 to January 1992,
he was Manager of Research and Development for Pfizer/Shiley, a developer and
manufacturer of cardiopulmonary and cardiovascular equipment and disposables.
From March 1979 to October 1990, Mr. Witherspoon held various technical and
management positions with Xerox Medical Systems, a manufacturer and developer of
diagnostic medical electronic and mechanical systems. Mr. Witherspoon received a
BSEE from Rensselaer Polytechnic Institute in 1974.
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.
MARY J. EDWARDS has been Director of Regulatory Affairs of the Company
since July, 1997. Ms. Edwards served as a Senior Consultant for C.L. McIntosh,
Inc., a Washington, D.C. based regulatory consulting group directing its west
coast operations. Ms. Edwards also worked as the Director of Regulatory Affairs
for Nobel Biocare, an international medical device company located in
Gothenburg, Sweden, and for W.L. Gore & Associates, Inc., a Class III medical
device manufacturer. Ms. Edwards also served as the Industry Representative to
FDA's Scientific Advisory Panel for Dental Products.
HANS WEYENSCHENK has been Director of Marketing, Orthopaedics, of the
Company since February 1997. Prior thereto, he was employed by Vitatron Medical,
Inc., a wholly-owned subsidiary of Medtronics (a manufacturer of cardiac
products), as Director of Marketing, Communications and Services from 1996 to
February 1997 and Director of International Sales from 1987 to 1995.
JEROME LEBON has been Director of Marketing, Neurosurgery, of the Company
since September 5, 1997. From 1996 until September 1997, he was Executive Vice
President of International Sales of IMMI. From 1987 to 1995, he was
International Vice President of Technomed International, a lithrotripsy company
in France. From 1984 to 1986, Mr. Lebon was Business Development Manager of Sopa
Development Company, an engineering hospital turn-key company in France. From
1980 to 1985, he was employed by Thomson CGR, initially as Area Manager for
Latin America and then as Vice President, Sales and Marketing of its Brazilian
and Argentinian subsidiaries.
51
<PAGE> 54
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.
JEFFREY A. JOHNSON has been Director of Marketing, U.S.A. of the Company
since June 1997. From 1992 to June 1997 Mr. Johnson was Marketing Manager for
Sorin Biomedical, Inc., a developer and manufacturer of cardiopulmonary and
cardiovascular equipment. From 1984 to 1991 Mr. Johnson was a Product Manager
for the Ultrasound division of Philips Medical Systems, Inc. He received an MBA
from the University of California, Irvine in 1991 and an MS from University of
California, Los Angeles in 1976.
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 franchiser 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 has served 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.
GERALD D. KNUDSON has been a Director of the Company since May 1997. Since
January 1997, Mr. Knudson has been Executive Vice President of Sterling
Diagnostic Imaging, Inc., a manufacturer and distributor of medical diagnostic
imaging products. From 1994 to 1996, Mr. Knudson was President, Medical Systems
Division of Polaroid which manufactured medical diagnostic imaging printers and
film. From 1988 to 1994, Mr. Knudson was Chief Executive Officer of Resonex,
Inc., a manufacturer of MRI systems. Previously, Mr. Knudson held various
executive and marketing positions in the life science industry since 1966. Mr.
Knudson received a B.A. in Biology from Augustana College in 1965.
PATRICK G. HAYS has been a Director of the Company since May 1997. Since
February 1995, Mr. Hays has been President and Chief Executive Officer of Blue
Cross and Blue Shield Association, the national coordinating body for the United
States' sixty-two community-based and independent Blue Cross and Blue Shield
Plans, collectively, the United States' largest insurer. From 1980 to 1995, Mr.
Hays was President and Chief Executive Officer of Sutter Health, a vertically
integrated provider of health services in northern California. Previously, Mr.
Hays held various administrative and executive positions with healthcare
providers since 1971. Mr. Hays received a Master's degree in Healthcare
Administration from the University of Minnesota in 1971.
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. The factual basis of the
complaints alleges that Dr. Kapoor filed false applications for generic drug
approvals with the FDA on behalf
52
<PAGE> 55
of Lyphomed, Inc. On July 25, 1996, the complaint was dismissed in part, and Dr.
Kapoor was granted summary judgment on the remaining claims. On June 16, 1997,
the Court of Appeals for the 7th Circuit reversed the District Court's order
granting summary judgment and remanded the case to the District Court. 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.
The Company has adopted a policy of compensating independent directors in
the amount of $7,500 annually and $500 additional for each Board of Directors
meeting attended and $250 for each telephonic Board of Directors meeting
attended. Members who serve on either the Audit or Compensation Committees are
to be paid $300 for each meeting attended and $150 for each telephonic meeting
attended. Committee chairmen are also to be paid a fee of $500 per annum.
The Company will also grant independent members of the Board of Directors
ten year non-qualified stock options to purchase 3,500 shares of the Company's
Common Stock at an exercise price equal to the greater of the fair market value
on the date of issue or $5.00 per share.
No member of the Compensation Committee was an officer or employee of the
Company or of any of its subsidiaries during the prior year or was formerly an
officer of the Company or of any of its subsidiaries. None of the Executive
Officers of the Company has served on the Board of Directors or Compensation
Committee during the last fiscal year of any other entity, any of whose officers
served either on the Board of Directors of the Company or on the Compensation
Committee of the Company.
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. On January 24, 1997,
Dr. McGroddy was granted an option to purchase 25,000 shares of Common Stock at
an exercise price of $5.00 per share.
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, 1996
exceeded $100,000 (collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL LONG-TERM COMPENSATION
COMPENSATION ----------------------
------------------ OTHER ANNUAL SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION(3) OPTIONS
- ------------------------------------ ----- --------- --------------- ----------------------
<S> <C> <C> <C> <C>
Ramesh C. Trivedi................... 1996 $264,000 $50,000 316,907
Chief Executive Officer and
President
Wendy Shelton-Paul(1)............... 1996 $120,000 $30,000 98,002(4)
Vice President of Medical Affairs
Michael J. Tomczak(2)............... 1996 $112,000 $30,000 98,470(5)
Vice President and Chief Financial
Officer
</TABLE>
- ---------------
(1) Dr. Shelton-Paul resigned from her position as Vice President of Medical
Affairs effective December 31, 1996.
(2) Mr. Tomczak resigned from his positions with the Company and ceased to be an
employee of the Company effective September 30, 1997.
(3) Represents cash incentive bonus.
(4) Includes stock options to purchase 67,587 shares of Common Stock that were
repriced to $.07 per share on February 16, 1996. See "Management -- Stock
Options."
(5) Includes stock options to purchase 68,055 shares of Common Stock that were
repriced to $.07 per share on February 16, 1996. See "Management -- Stock
Options."
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<PAGE> 56
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.
STOCK OPTIONS
The following table contains information concerning the grant of stock
options under the Company's 1995 Stock Option Plan to Dr. Trivedi, Dr.
Shelton-Paul and Mr. Tomczak during the fiscal year ended December 31, 1996. See
"Management -- Stock Option Plan" and Note 7 to notes to consolidated financial
statements appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES TOTAL OPTIONS EXERCISE
UNDERLYING GRANTED TO PRICE
OPTIONS EMPLOYEES IN PER EXPIRATION
NAME GRANTED(1)(3) FISCAL YEAR(3) SHARE(2) DATE
----------------------------------------- ------------- -------------- -------- ----------
<S> <C> <C> <C> <C>
Ramesh C. Trivedi........................ 316,907 41.7% $ 0.07 02/16/06
Wendy Shelton-Paul....................... 30,415 4.3% $ 0.07 02/16/06
Michael J. Tomczak....................... 30,415 4.3% $ 0.07 02/16/06
</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) Does not include the options previously outstanding under the Company's 1991
Stock Option Plan which were repriced on February 16, 1996. See the table
captioned "Repricing of Options" below.
The following table summarizes for each of the Named Executive Officers the
total number of unexercised options, if any, held at December 31, 1996, and the
aggregate dollar value of in-the-money, unexercised options, held at December
31, 1996, 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, 1996, is the difference between the value of the underlying
Common Stock on December 31, 1996 ($5.00 per share) and their exercise or base
price ($0.07 per share).
AGGREGATED OPTION EXERCISES -- JANUARY 1, 1996 -- DECEMBER 31, 1996 AND DECEMBER
31, 1996 OPTION VALUES
<TABLE>
<CAPTION>
SHARES ACQUIRED UPON
EXERCISE OF OPTIONS
DURING FISCAL NUMBER OF SECURITIES VALUE OF UNEXERCISED
1996(1) UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
-------------------- OPTIONS AT DECEMBER 31, 1996 DECEMBER 31, 1996
VALUE ----------------------------- -----------------------------
NAME NUMBER REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- ------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ramesh C. Trivedi.... -- -- 163,559 153,348 $ 806,346 $ 756,006
Wendy Shelton-Paul... -- -- 40,553 57,449 $ 199,926 $ 283,224
Michael J. Tomczak... -- -- 64,620 33,850 $ 318,577 $ 166,881
</TABLE>
54
<PAGE> 57
REPRICING OF OPTIONS
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF EXERCISE ORIGINAL
SECURITIES PRICE OF OPTION
UNDERLYING MARKET PRICE OF STOCK AT TERM REMAINING
REPRICE/ OPTIONS STOCK AT TIME TIME OF NEW AT DATE OF
REGRANT REPRICED OF REPRICING REPRICING OR EXERCISE REPRICING OR
NAME DATE OR AMENDED OR 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, and approved by the
stockholders in November 1996.
The Company has outstanding options to purchase an aggregate of 1,211,134
shares granted pursuant to the Plan and options to purchase an aggregate of
5,408 shares granted pursuant to the Company's 1991 Stock Option Plan, which was
terminated in December 1995. Options to purchase an aggregate of 17,213 shares
of Common Stock remain available for grant under the Plan. No stock purchase
rights have been granted pursuant to the Plan.
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, determines the term of the
Options and SPRs, except that in no event may an Option have a term of more than
ten (10) years (five (5) years with respect to ISOs granted to a 10%
Stockholder), and the terms of vesting, except that in no event may an Option
vest 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 will
lapse at a rate of not less than 20% per year commencing
55
<PAGE> 58
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 Company, 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
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.
56
<PAGE> 59
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
57
<PAGE> 60
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 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 693,194 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 as 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.
The 1,039,791 shares of Series D Preferred Stock outstanding prior to the
consummation of the Company's initial public offering (the "IPO") on November
21, 1996, all of which were owned by EJ Financial, were automatically converted
into an equal number of shares of Common Stock in accordance with the provisions
of the Company's Restated Certificate of Incorporation, as amended, upon
consummation of the IPO. On October 29, 1997, warrants to purchase 2,079,584
shares of Series D Preferred Stock, all of which were owned by IBM, were amended
so as to become exercisable for an equal number of shares of Common Stock and on
such other terms and conditions stated in the Series D Warrants, pursuant to an
amendment to the 1995 Stock Purchase Agreement and the Series D Warrants
executed by the Company and IBM. See "Description of Securities -- Series D
Preferred Stock."
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<PAGE> 61
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."
59
<PAGE> 62
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 European 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.
<TABLE>
<CAPTION>
PERCENTAGE OF COMMON STOCK
AMOUNT AND NATURE OF BENEFICIALLY OWNED(1)
BENEFICIAL OWNERSHIP(1) -----------------------------
----------------------- BEFORE AFTER
NAME OWNERSHIP(1) OFFERING(2) OFFERING(3)
- ----------------------------------------------- ----------------------- ----------- -----------
<S> <C> <C> <C>
International Business Machines Corporation.... 2,274,066(5) 36.30%(6) 26.29%(7)
Old Orchard Road
Armonk, NY 10504
EJ Financial Investments V, L.P................ 1,039,792 26.05% 18.94%
225 East Deer Path Road
Suite 250
Lake Forest, IL 60045
Sutter Health and Sutter Health Venture........ 611,607(8) 15.33% 11.14%
Partners, L.P
One Capitol Mall
Sacramento, CA 95814
Ramesh C. Trivedi(4)........................... 210,743(9) 5.01%(10) 3.70%(11)
John N. Kapoor(4).............................. 1,039,792(12) 26.05% 18.94%
James C. McGroddy(4)........................... 21,000(13) * *
Paul A.H. Pankow(4)............................ 1,465(14) * *
Patrick G. Hays(4)............................. -- -- --
Gerald D. Knudson(4)........................... -- -- --
Michael J. Tomczak............................. 77,103(9) 1.90%(15) 1.38%(16)
Wendy Shelton Paul............................. 99,850(17) 2.46%(18) 1.80%(19)
All directors and officers as a group (8
persons)..................................... 1,449,953(20) 33.40%(21) 24.90%(22)
</TABLE>
- ---------------
* Less than one percent.
(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
September 1, 1997, 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 based upon 3,990,811 shares of
Common Stock issued and outstanding.
(3) Gives effect to the issuance of 1,500,000 shares of Common Stock in the
European 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.
(6) Calculated based upon 6,264,877 shares of Common Stock issued and
outstanding.
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<PAGE> 63
(7) Calculated based upon 7,764,877 shares of Common Stock issued and
outstanding.
(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 based upon 4,201,554 shares of Common Stock issued and
outstanding.
(11) Calculated based upon 5,701,554 shares of Common Stock issued and
outstanding.
(12) 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.
(13) Includes 20,000 shares of Common Stock owned by Dr. McGroddy and 1,000
shares of Common Stock beneficially owned by his daughter.
(14) Represents shares issuable upon exercise of stock options exercisable
within 60 days, at an exercise price of $2.07.
(15) Calculated based upon 4,067,914 shares of Common Stock issued and
outstanding.
(16) Calculated based upon 5,567,914 shares of Common Stock issued and
outstanding.
(17) Includes 60,970 shares issuable upon exercise of stock options exercisable
within 60 days at an exercise price of $0.07 per share.
(18) Calculated based upon 4,051,781 shares of Common Stock issued and
outstanding.
(19) Calculated based upon 5,551,781 shares of Common Stock issued and
outstanding.
(20) Includes 331,734 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.
(21) Calculated based upon 4,341,092 shares of Common Stock issued and
outstanding.
(22) Calculated based upon 5,822,545 shares of Common Stock issued and
outstanding.
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<PAGE> 64
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 15,000,000 shares
of Common Stock, $0.01 par value per share, 5,750,000 shares of Series D
Preferred Stock, $.01 par value per share, and 1,000,000 shares of "blank check"
preferred stock, par value $0.01 per share. As of the date of this Prospectus,
3,990,811 shares of Common Stock are issued and outstanding and no shares of
Series D Preferred Stock or any other series of preferred stock are outstanding.
The following are brief descriptions of the Common Stock (including the
shares offered in the European Offering) and the other securities of the
Company. None of the shares of Common Stock offered in the European Offering
will be offered or sold in the United States. 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, when issued upon payment of the
purchase price set forth on the cover page of this Prospectus, 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 that it will not issue any securities, except as disclosed in this
Prospectus, through November 21, 1998, without the consent of Rickel &
Associates, Inc. The Company has agreed with CA IB that, except for shares of
Common Stock issuable upon exercise of the Public Warrants and outstanding
options granted pursuant to the Company's existing stock option plans, for a
period of six months following the closing of the European Offering, it will not
issue or sell, offer or contract to issue or sell, grant any option for issuance
or sale of, or otherwise dispose of, directly or indirectly, any Common Stock or
any securities convertible into, exchangeable for, or representing the right to
receive Common Stock without, in each case, the prior written consent of CA IB,
which consent will not be unreasonably withheld.
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<PAGE> 65
OPTIONS AND WARRANTS
Options. The Company has outstanding options to purchase an aggregate of
1,216,542 shares of Common Stock, at exercise prices ranging from $0.07 to
$8.75, which expire at various dates from February 4, 2002 to October 6, 2007.
See "Management -- Stock Option Plan."
Warrants. The Company has outstanding warrants to purchase an aggregate of
4,357,816 shares of Common Stock, at exercise prices ranging from $0.01 to
$8.25, which expire at various dates through December 31, 2005. Warrants to
purchase 1,753,750 shares of Common Stock were issued in the Company's initial
public offering in November 1996 (the "Public Warrants"). Each Public Warrant
entitles the registered holder thereof to purchase one share of Common Stock at
$6.00 per share for a period of four years commencing November 20, 1997 and
ending November 19, 2001 (the "Exercise Period"). The exercise price and the
number of shares of Common Stock issuable upon the exercise of each Public
Warrant are subject to adjustment in the event of a stock split, stock dividend,
recapitalization, merger, consolidation or certain other events. The Public
Warrants may be redeemed by the Company, at a price of $.10 per Public Warrant,
upon not less than 30 days prior written notice at any time during the Exercise
Period, 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 Public
Warrants. The Company has agreed to pay Rickel & Associates, Inc. under
circumstances in accordance with applicable NASD rules a fee of 5% of the
exercise price of each Public Warrant exercised for soliciting the exercise of
outstanding Public Warrants.
The Company has agreed to sell to each of CA IB and VMR, for nominal
consideration, the Advisors' Warrants to purchase that number of shares of
Common Stock equal to 5% of the shares of Common Stock sold in the European
Offering (exclusive of the Over-Allotment Option). The Advisors' 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 Advisors' Warrants will be
exercisable at an amount equal to 120% above the offering price of the Common
Stock sold in the European Offering. The Advisors' Warrants are not transferable
for a period of one year after the date of this Prospectus, except to certain
parties mentioned in the Placement Agreement. The Company also has granted
certain demand and "piggyback" registration rights to the holders of the
Advisors' Warrants.
SERIES D PREFERRED STOCK
The Restated Certificate of Incorporation of the Company, as amended,
currently authorizes the issuance of up to 5,750,000 shares of Series D
Preferred Stock. Shares of Series D Preferred Stock and warrants to purchase
Series D Preferred Stock were issued in connection with the recapitalization of
the Company in 1995. See "Certain Transactions -- December 1995
Recapitalization." Each share of Series D Preferred Stock is convertible into
Common Stock on a share-for-share basis, subject to adjustment in the event of a
stock split, combination, stock dividend or similar event. Holders of Series D
Preferred Stock are entitled to receive cash dividends declared on the Common
Stock calculated as if their shares of Series D Preferred Stock had been
converted into Common Stock. Subject to the prior rights of the Company's
creditors, holders of Series D Preferred Stock would be entitled to receive,
upon any liquidation, dissolution or winding-up of the Company, $0.96 per share,
plus accrued but unpaid dividends (if any). Except as otherwise provided by law
and the aforementioned liquidation preference, holders of Series D Preferred
Stock have no rights in addition to those of the holders of Common Stock.
Pursuant to a Series D Preferred Stock and Warrant Purchase Agreement (the
"1995 Stock Purchase Agreement") dated as of December 21, 1995 between the
Company, International Business Machines Corporation ("IBM") and EJ Financial
Investments V, L.P. ("EJ Financial"), EJ Financial purchased 693,194 shares of
Series D Preferred Stock 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. In addition, EJ Financial
63
<PAGE> 66
received an option to purchase an additional 346,597 shares of Series D
Preferred Stock, on the same terms as 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 as 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. See "Certain Transactions -- December 1995 Recapitalization".
Immediately prior to the consummation of the Company's initial public
offering on November 26, 1996, there were outstanding 1,039,791 shares of Series
D Preferred Stock (all owned by EJ Financial) and warrants to purchase 2,079,584
shares of Series D Preferred Stock (all owned by IBM). Upon consummation of the
Company's initial public offering on November 26, 1996, all 1,039,791 issued and
outstanding shares of Series D Preferred Stock were automatically converted, on
a share for share basis, into shares of Common Stock, in accordance with the
provisions of the Company's Restated Certificate of Incorporation, as amended.
On October 29, 1997, the Company and IBM executed an amendment to the 1995 Stock
Purchase Agreement pursuant to which the Company and IBM agreed that the Series
D Warrants to purchase 2,079,584 shares of Series D Preferred Stock would be
exercisable only for 2,079,584 shares of Common Stock. Also on October 29, 1997,
the Company delivered to CA IB an agreement not to issue any shares of Common
Stock, or any warrants, options or other rights to subscribe for or purchase
shares of Series D Preferred Stock, or any other securities convertible into or
exercisable or exchangeable for, Series D Preferred Stock, without the consent
of CA IB. In addition, the Company's management has undertaken to cause the
Board of Directors to present a resolution at the next annual meeting of the
Company's stockholders to amend the Company's Restated Certificate of
Incorporation to eliminate the Series D Preferred Stock therefrom. There can be
no assurance that such resolution will be presented by the Board of Directors,
or, if presented, adopted by the Company's stockholders.
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of 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. Until November 21,
1998, the Company is required to obtain the consent of Rickel & Associates,
Inc., to the issuance of any securities other than as specified in this
Prospectus. The Company has agreed with CA IB that, except for shares of Common
Stock issuable upon exercise of the Public Warrants and outstanding options
granted pursuant to the Company's existing stock option plans, for a period of
six months following the closing of the European Offering, it will not issue or
sell, offer or contract to issue or sell, grant any option for issuance or sale
of, or otherwise dispose of, directly or indirectly, any Common Stock or any
securities convertible into, exchangeable for, or representing the right to
receive Common Stock without, in each case, the prior written consent of CA IB,
which consent will not be unreasonably withheld.
STATUTORY PROVISIONS AFFECTING STOCKHOLDERS
The Company is 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
64
<PAGE> 67
"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 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 issued on 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 ("piggyback
registration rights"). 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
managing underwriter for that offering determines that additional Registrable
Shares can be sold, the balance of the Registrable Shares will be included pro
rata in the registration.
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 until
May 21, 1998.
Pursuant to a Registration Rights Agreement dated as of September 5, 1997
entered into in connection with the acquisition of IMMI, the Company granted
piggyback registration rights to the former shareholders of IMMI with respect to
the shares of Common Stock issued to them in connection with the acquisition. If
the Company proposes to register any of its securities under the Securities Act
(other than the European Offering or 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 former shareholders
of IMMI are entitled to include the IMMI
65
<PAGE> 68
shares owned by them in any such registration. These registration rights expire
on the earlier of September 5, 1999 and the resale of all the IMMI Shares.
The Company granted Rickel & Associates, Inc. ("Rickel"), managing
underwriter of its initial public offering in November 1996, certain
registration rights with respect to the shares of Common Stock and warrants
issuable upon the exercise of the underwriter's warrants issued in connection
with that offering. Rickel has agreed not to exercise such registration rights
until May 21, 1998, or until such earlier date as the Company gives holders of
the warrants issued in that offering written notice of the redemption of such
warrants. The Company also has granted Rickel piggyback registration rights with
respect to 25,000 shares of Common Stock purchasable upon exercise of certain
other warrants, which rights are fully subordinated to the registration rights
of other holders of the Company securities. In addition, the Company has granted
the holders of the Advisors' Warrants certain registration rights with respect
to the shares of Common Stock issuable upon the exercise thereof. See
"Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the European Offering, the Company will have 5,490,811
shares of Common Stock outstanding, of which only 3,041,218 shares of Common
Stock will be transferable without restriction under the Securities Act. The
remaining 2,449,593 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 5,129,759 shares of Common Stock constituting restricted securities,
have agreed not to sell or otherwise dispose of any shares of Common Stock
(other than shares purchased in open market transactions), until May 21, 1998
without the prior written consent of Rickel. Rickel has agreed with the Company
and CA IB that it will not consent to the sale of such shares prior to that
date. Following expiration of the term of the Lock-Up Agreements, 1,806,850
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. 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 until
May 21, 1998. The Company has agreed to file a registration statement for the
resale in the United States of the 619,355 shares of Common Stock (the "IMMI
Shares") issued in connection with the acquisition of IMMI, on or about November
21, 1997. The former securityholders of IMMI have agreed not to sell their IMMI
Shares prior to March 5, 1999, except as follows: (i) prior to December 5, 1997,
an aggregate of 50,000 shares; (ii) from December 6, 1997 through March 5, 1998,
an aggregate of 50,000 shares plus 1% of the total number of shares of Common
Stock traded on Nasdaq during the preceding three month period; (iii) from March
6, 1998 through June 5, 1998, an aggregate of 75,000 shares plus 1% of the total
number of shares of Common Stock traded on Nasdaq during the preceding three
month period; (iv) from June 6, 1998 through September 5, 1998, an aggregate of
100,000 shares plus 1% of the total number of shares of Common Stock traded on
Nasdaq during the preceding three month period; (v) from September 6, 1998
through December 5, 1998, an aggregate of 100,000 shares plus 1% of the total
number of shares of Common Stock traded on Nasdaq during the preceding three
month period; and (vi) from December 6, 1998 through March 5, 1999, an aggregate
of 100,000 shares plus 1% of the total number of shares of Common Stock traded
on Nasdaq during the preceding three month period. Thereafter, resales of the
IMMI Shares must be in compliance with the volume limitation and other
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<PAGE> 69
conditions of Rule 144. The Company also has granted the former securityholders
of IMMI piggyback registration rights (other than in connection with the
Offering and certain other types of offerings) for resales of the IMMI Shares.
In addition, the Company granted Rickel demand and piggyback registration rights
with respect to the shares of Common Stock and warrants issuable upon exercise
of the underwriter's warrants issued in connection with its initial public
offering and piggyback registration rights (fully subordinated to the
registration rights of other holders of the Company's securities) with respect
to 25,000 shares of Common Stock purchasable upon exercise of certain other
warrants. Furthermore, the holders of the Advisors' Warrants have demand and
piggyback registration rights with respect to the shares of Common Stock
issuable upon exercise thereof. See "Description of Securities -- Registration
Rights" and "Certain Transactions."
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 distributes to its stockholders annual reports containing
financial statements audited and reported upon by its independent certified
public accountants after the end of each fiscal year, and makes available such
other periodic reports as the Company may deem to be appropriate or as may be
required by law or by the rules or regulations of any stock exchange on which
the Company's Common Stock is listed. The Company's fiscal year end is December
31.
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.
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<PAGE> 70
UNDERWRITING
Subject to the terms and conditions of the purchase agreement between the
Company and the Underwriters (the "Purchase Agreement"), the Company has agreed
to sell to the Underwriters named below, and the Underwriters have severally,
and not jointly, agreed to purchase, the number of shares of Common Stock set
forth opposite their respective names below. None of the shares of Common Stock
offered in the European Offering will be offered or sold in the United States.
<TABLE>
<CAPTION>
MANAGERS SHARES
------------------------------------------------------------------ ----------
<S> <C>
CA IB Investmentbank AG........................................... --
KB-Securities N.V................................................. --
----------
1,500,000
========
</TABLE>
The Purchase Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent. CA IB has advised the Company that
the Underwriters propose initially to offer the shares of Common Stock in the
European Offering only in Europe at the offering price set forth on the cover
page of this Prospectus in private placements and offerings utilizing other
exemptions from public offering registration requirements in Europe. Purchasers
of Common Stock in the European Offering may be required to pay stamp taxes and
other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page hereof.
The Purchase Agreement provides that the Underwriters will receive an
underwriting commission of 6% of the gross proceeds of the European Offering.
Pursuant to the Over-Allotment Option, which is exercisable for a period of
30 days after the closing of the European Offering, CA IB may purchase up to 15%
of the total number of shares of Common Stock offered, solely to cover
over-allotments, if any.
The Company has entered into a Restated Placement Agreement dated October
24, 1997 (the "Placement Agreement") with CA IB and VMR, a German limited
liability company which acted as consultant of the Company, but which is not an
underwriter in the European Offering. VMR is not affiliated with any of the
major stockholders of the Company. The Placement Agreement replaced an agreement
between the Company and VMR in which, inter alia, VMR agreed to find one or
several underwriters who will, pursuant to certain conditions, subscribe for and
purchase shares of Common Stock of the Company. The Placement Agreement
provides, among other things, that VMR will not act as an underwriter in the
European Offering and that VMR will not be actively involved in the European
Offering. Pursuant to the Placement Agreement, VMR will receive a fee of 3.5% of
the gross proceeds of the European Offering for services provided to the
Company.
The Purchase Agreement and the Placement Agreement provide that CA IB will
receive a non-accountable expense allowance equal to 2% of the gross proceeds of
the European Offering. The Placement Agreement provides that VMR will receive a
non-accountable expense allowance equal to 0.75% of the gross proceeds of the
European Office, of which $25,000 has been paid to VMR by the Company to date.
The fees payable to VMR may be deemed to be underwriting compensation
The Company has agreed to sell to each of CA IB and VMR, for nominal
consideration, the Advisors' Warrants to purchase that number of shares of
Common Stock equal to 5% of the shares of Common Stock sold in the European
Offering (exclusive of the Over-Allotment Option). The Advisors' Warrants will
not be exercisable for a period of one year after the date of the closing of the
European Offering. Thereafter, for a period of four years, the Advisors'
Warrants will be exercisable at an amount equal to 120% above the offering price
of the Common Stock sold in the European Offering. The Advisors' Warrants are
not transferable for a period of one year after the date of the closing of the
European Offering, except to certain parties mentioned in the Placement
Agreement. The Company also has granted certain demand and "piggyback"
registration rights to the holders of the Advisors' Warrants.
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<PAGE> 71
For the life of the Advisors' 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 Advisors' 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 Advisors' Warrants.
The Purchase Agreement requires the Company to indemnify the Underwriters
against certain liabilities in connection with the European Offering, including
liabilities under the Securities Act. The Placement Agreement also requires the
Company to indemnify CA IB and VMR against certain liabilities.
The Company has agreed to retain VMR as a consultant for a 12 month period
following the European Offering for a fee of $2,000 per month, or a total of
$24,000. VMR will provide the Company with general financial advisory services
on an as-needed basis with respect to possible financing or acquisitions by the
Company and related matters. VMR will not be obligated to provide any minimum
number of hours of consulting services to the Company.
LEGAL MATTERS
The validity of the securities registered in the Registration Statement of
which this Prospectus forms a part will be passed upon for the Company by Snow
Becker Krauss P.C., 605 Third Avenue, New York, New York 10158-0125.
EXPERTS
The consolidated financial statements of Integrated Surgical Systems, Inc.
at December 31, 1996 and for each of the two years in the period ended December
31, 1996, appearing in this Prospectus and Registration Statement, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of Innovative Medical Machines
International, S.A. at December 31, 1996 and for each of the two years in the
period ended December 31, 1996, appearing in this Prospectus and Registration
Statement, have been audited by Ernst & Young Entrepreneurs Department D'Ernst &
Young Audit, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such 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.
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<PAGE> 72
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INTEGRATED SURGICAL SYSTEMS, INC.
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Consolidated Balance Sheets at December 31, 1996 (audited) and September 30, 1997
(unaudited)......................................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1995 and 1996
(audited) and the nine months ended September 30, 1996 and 1997 (unaudited)......... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995
and 1996 (audited) and the nine months ended September 30, 1997 (unaudited)......... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996
(audited) and the nine months ended September 30, 1996 and 1997 (unaudited)......... F-6
Notes to Consolidated Financial Statements............................................ F-7
INNOVATIVE MEDICAL MACHINES INTERNATIONAL, SA.
Report of Ernst & Young Entrepreneurs Department D'Ernst & Young Audit, Independent
Auditors............................................................................ F-18
Consolidated Balance Sheets at December 31, 1996 (audited)............................ F-19
Consolidated Statements of Operations for the years ended December 31, 1995 and 1996
(audited) and the six months ended June 30, 1996 and 1997 (unaudited)............... F-20
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December
31, 1995 and 1996 (audited) and the six months ended June 30, 1997 (unaudited)...... F-21
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996
(audited) and the six months ended June 30, 1996 and 1997 (unaudited)............... F-22
Notes to Consolidated Financial Statements............................................ F-23
INDEX TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Condensed Financial Statements........................... F-30
Unaudited Pro Forma Combined Condensed Statement of Operations for the year ended
December 31, 1996................................................................... F-31
Unaudited Pro Forma Combined Condensed Statement of Operations for the nine months
ended September 30, 1997............................................................ F-32
Notes to Unaudited Pro Forma Combined Condensed Financial Statements.................. F-33
</TABLE>
F-1
<PAGE> 73
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Integrated Surgical Systems, Inc.
We have audited the accompanying consolidated balance sheet of Integrated
Surgical Systems, Inc. as of December 31, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1995 and 1996. 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, 1996, and the consolidated results of its
operations and its cash flows for the years ended December 31, 1995 and 1996 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Sacramento, California
January 31, 1997
F-2
<PAGE> 74
INTEGRATED SURGICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
DECEMBER 31, ------------
1996
------------ (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 6,001,079 $ 1,630,613
Accounts receivable........................................... 600,568 1,023,626
Inventory..................................................... 1,030,262 2,123,868
Other current assets.......................................... 128,648 503,036
------------ ------------
Total current assets............................................ 7,760,557 5,281,143
Net property and equipment...................................... 251,037 534,934
Leased equipment, net........................................... -- 182,135
Long-term net investment in sales-type leases................... -- 371,556
Intangible assets, net.......................................... -- 3,984,370
Other assets.................................................... 17,837 13,499
------------ ------------
$ 8,029,431 $ 10,367,637
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 676,201 $ 828,404
Value added taxes payable..................................... 272,596 365,342
Accrued payroll and related expenses.......................... 195,742 198,170
Customer deposits............................................. 125,000 325,099
Accrued product retrofit costs................................ 135,348 135,348
Payable to subcontractor...................................... 110,176 147,462
Current portion of bank loans................................. -- 289,744
Other current liabilities..................................... 192,064 342,830
------------ ------------
Total current liabilities....................................... 1,707,127 2,632,399
Bank loans, long term........................................... -- 32,390
Note payable.................................................... -- 145,483
Commitments
Stockholders' equity:
Convertible preferred stock, $0.01 par value, 5,750,000 shares
authorized, no shares issued and outstanding............... -- --
Preferred stock, $0.01 par value, 1,000,000 shares authorized;
no shares issued and outstanding........................... -- --
Common stock, $0.01 par value, 15,000,000 shares authorized;
3,361,161 shares issued and outstanding at December 31,
1996 and 3,990,811 shares issued and outstanding at
September 30, 1997......................................... 33,611 39,907
Additional paid-in capital.................................... 25,807,264 29,752,852
Deferred stock compensation................................... (426,417) (291,417)
Accumulated translation adjustment............................ 8,657 8,253
Accumulated deficit........................................... (19,100,811) (21,952,230)
------------ ------------
Total stockholders' equity...................................... 6,322,304 7,557,365
------------ ------------
$ 8,029,431 $ 10,367,637
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 75
INTEGRATED SURGICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............................. $ 174,521 $ 2,280,311 $ 1,748,065 $ 2,818,262
Cost of sales......................... 70,179 884,152 664,979 1,116,577
----------- ----------- ---------- ----------
104,342 1,396,159 1,083,086 1,701,685
Operating expenses:
Selling, general and
administrative................... 1,668,947 2,066,236 1,369,079 2,214,230
Research and development............ 2,361,125 2,468,535 1,572,076 2,026,063
Stock compensation.................. -- 357,249 310,159 135,000
In-process research and development
acquired......................... -- -- -- 325,223
----------- ----------- ---------- ----------
4,030,072 4,892,020 3,251,314 4,700,516
Other income (expense):
Interest income..................... 107,306 87,933 54,872 155,605
Interest expense.................... (287,792) -- -- (1,888)
Other............................... 55,801 (30,635) (3,754) 20,695
----------- ----------- ---------- ----------
Loss before provision for income
taxes............................... (4,050,415) (3,438,563) (2,117,110) (2,824,419)
Provision for income taxes............ 3,113 10,266 5,267 27,000
----------- ----------- ---------- ----------
Net loss.............................. (4,053,528) (3,448,829) (2,122,377) (2,851,419)
Preferred stock dividends............. (936,325) -- -- --
----------- ----------- ---------- ----------
Net loss applicable to common
stockholders........................ $(4,989,853) $(3,448,829) $(2,122,377) $(2,851,419)
=========== =========== ========== ==========
Net loss per common and common share
equivalent.......................... $(1.19) $(0.79) $(0.48) $(0.83)
=========== =========== ========== ==========
Shares used in per share
calculations........................ 4,178,877 4,373,947 4,377,679 3,422,703
=========== =========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 76
INTEGRATED SURGICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED ACCUMULATED
--------------------- ------------------- PAID-IN STOCK TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION ADJUSTMENT
---------- -------- --------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Exercise of stock options.............. -- -- 9,592 96 587 -- --
Sale of Series D convertible preferred
stock and a warrant to purchase
Series D preferred stock............. 346,597 3,466 -- -- 996,534 -- --
Sale of common stock and warrants, net
of expense........................... -- -- 1,525,000 15,250 6,122,073 -- --
Exercise of warrants................... -- -- 512,831 5,128 (5,128) -- --
Conversion of Series D convertible
preferred stock to common stock...... (1,039,792) (10,398) 1,039,792 10,398 -- -- --
Deferred stock compensation............ -- -- -- -- 783,666 (783,666) --
Stock compensation expense............. -- -- -- -- -- 357,249 --
Net loss............................... -- -- -- -- -- -- --
Translation adjustment................. -- -- -- -- -- -- 3,360
---------- --------- --------- ------- ----------- --------- -------
Balance at December 31, 1996............. -- -- 3,361,161 33,611 25,807,264 (426,417) 8,657
Exercise of stock options
(unaudited).......................... -- -- 5,795 58 16,214 -- --
Issuance of stock warrants
(unaudited).......................... -- -- -- -- 65,625 -- --
Acquisition of IMMI (unaudited)........ -- -- 619,355 6,193 3,883,356 -- --
Issuance of common stock (unaudited)... -- -- 4,500 45 28,215 -- --
Stock compensation expense
(unaudited).......................... -- -- -- -- -- 135,000 --
Additional offering expenses
(unaudited).......................... -- -- -- -- (47,822) -- --
Translation adjustment (unaudited)..... -- -- -- -- -- -- (404)
Net loss (unaudited)................... -- -- -- -- -- -- --
---------- --------- --------- ------- ----------- --------- -------
Balance at September 30, 1997
(unaudited)............................ -- $ -- 3,990,811 $39,907 $29,752,852 $ (291,417) $ 8,253
========== ========= ========= ======= =========== ========= =======
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -----------
<S> <C> <C>
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
Exercise of stock options.............. -- 683
Sale of Series D convertible preferred
stock and a warrant to purchase
Series D preferred stock............. -- 1,000,000
Sale of common stock and warrants, net
of expense........................... -- 6,137,323
Exercise of warrants................... -- --
Conversion of Series D convertible
preferred stock to common stock...... -- --
Deferred stock compensation............ -- --
Stock compensation expense............. -- 357,249
Net loss............................... (3,448,829) (3,448,829)
Translation adjustment................. -- 3,360
------------ -----------
Balance at December 31, 1996............. (19,100,811) 6,322,304
Exercise of stock options
(unaudited).......................... -- 16,272
Issuance of stock warrants
(unaudited).......................... -- 65,625
Acquisition of IMMI (unaudited)........ -- 3,889,549
Issuance of common stock (unaudited)... -- 28,260
Stock compensation expense
(unaudited).......................... -- 135,000
Additional offering expenses
(unaudited).......................... -- (47,822)
Translation adjustment (unaudited)..... -- (404)
Net loss (unaudited)................... (2,851,419) (2,851,419)
------------ -----------
Balance at September 30, 1997
(unaudited)............................ $(21,952,230) $ 7,557,365
============ ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 77
INTEGRATED SURGICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(4,053,528) $(3,448,829) $(2,122,377) $(2,851,419)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation.................................. 288,344 221,162 137,457 135,363
In-process research and development
acquired................................... -- -- -- 325,223
Amortization of intangible assets............. -- -- -- 68,552
Stock compensation............................ -- 357,249 310,159 135,000
Changes in operating assets and liabilities:
Accounts receivable........................ (30,326) (549,761) 38,086 (406,412)
Inventory.................................. 137,625 (283,290) (121,723) (1,112,294)
Other current assets....................... 850 15,769 85,054 (86,655)
Net investment in sales-type leases........ -- -- -- (553,250)
Accounts payable........................... (42,058) 466,796 192,558 (49,690)
Value added taxes payable.................. 9,321 258,395 -- 87,469
Accrued payroll and related expenses....... (222,896) 156,142 23,462 (91,456)
Customer deposits.......................... (1,883) (344,991) (469,991) 200,099
Accrued product retrofit costs............. (114,680) (24,652) (3,676) --
Accrued interest........................... 286,645 -- -- --
Payable to subcontractor................... -- 110,176 -- (31,012)
Other current liabilities.................. 210,023 (94,852) 181,497 50,097
Note payable............................... 20,701 (274,498) (207,461) 2,858
Translation adjustment..................... 3,543 3,360 (12,796) (404)
---------- ---------- --------- ---------
Net cash used in operating activities........... (3,508,319) (3,431,824) (1,969,751) (4,177,931)
Cash flows from investing activities:
Purchase of property and equipment......... (121,008) (41,348) (14,195) (185,413)
Payments in connection with purchase of
subsidiary, net of cash acquired......... -- -- -- (31,649)
Decrease (increase) in other assets........ 1,035 (3,578) 325 4,338
---------- ---------- --------- ---------
Net cash used in investing activities........... (119,973) (44,926) (13,870) (212,724)
Cash flows from financing activities:
Proceeds from bank loans................... -- -- -- 3,917
Increase in deferred offering costs........ -- -- (223,716) --
Proceeds from convertible preferred
stock.................................... 1,941,651 1,000,000 1,000,000 --
Net proceeds from sale of common stock and
warrants................................. -- 6,137,323 17 --
Proceeds from exercise of stock options.... 2,593 683 -- 16,272
---------- ---------- --------- ---------
Net cash provided by financing activities....... 1,944,244 7,138,006 776,301 20,189
---------- ---------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................... (1,684,048) 3,661,256 (1,207,320) (4,370,466)
Cash and cash equivalents at beginning of
period........................................ 4,023,871 2,339,823 2,339,823 6,001,079
---------- ---------- --------- ---------
Cash and cash equivalents at end of period...... $ 2,339,823 $ 6,001,079 $ 1,132,503 $ 1,630,613
========== ========== ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 78
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS
Integrated Surgical Systems, Inc. (the "Company") was incorporated on
October 1, 1990 in Delaware. 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 and is currently marketed to customers in
Europe.
On September 5, 1997, the Company acquired all of Innovative Medical
Machines International, S.A.'s ("IMMI") issued and outstanding capital stock,
stock warrants and convertible debt in a transaction accounted for as a purchase
(Note 3). IMMI develops, manufactures and markets image guided robotic devices
for surgical applications. Its principal product is the NeuroMate(R), a computer
controlled surgical robot dedicated to stereotactic neurosurgery.
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.
2. SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The unaudited interim consolidated financial statements as of September 30,
1997 and for the nine months ended September 30, 1996 and 1997 have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the nine-month period ended September
30, 1997 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1997.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of IMMI and Integrated
Surgical Systems BV are measured using the respective local currencies. The
subsidiary 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, 1995 and 1996 and the nine
months ended September 30, 1996 and 1997.
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
F-7
<PAGE> 79
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 three
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 invests its excess cash in high-quality debt instruments. The
Company considers highly liquid investments with maturities of three months or
less from the acquisition date of the instrument to be cash equivalents. The
carrying amounts reported in the balance sheet for cash and cash equivalents
approximate those assets' fair values. Cash equivalents consist primarily of
commercial paper. At December 31, 1996, and September 30, 1997, the fair value
of available-for-sale securities of $4,969,266 and $997,546, respectively,
included in cash and cash equivalents approximates their historical cost.
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.
NET INVESTMENT IN SALES-TYPE LEASES
The net investment in sales-type leases consists of the following at
September 30, 1997 (unaudited):
<TABLE>
<S> <C>
Total minimum lease payments receivable........................... $633,333
Less unearned interest............................................ 80,083
--------
Net investment in sales type leases..................... $553,250
========
</TABLE>
F-8
<PAGE> 80
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and NeuroMate Systems. Inventory consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
DECEMBER 31, -------------
1996
------------ (UNAUDITED)
<S> <C> <C>
Raw materials...................................... $ 321,313 $ 806,500
Work-in process.................................... 459,524 808,783
Finished goods..................................... 249,425 508,585
--------- ---------
$1,030,262 $ 2,123,868
========= =========
</TABLE>
STOCK-BASED COMPENSATION
As permitted under the provisions of Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
the Company has elected to account for stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"). Under the intrinsic
value method, compensation cost is the excess, if any, of the quoted market
price or fair value of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock.
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 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
date of November 21, 1996 have been included in the calculation as if they were
outstanding for all periods presented prior to the initial public offering
(using the treasury stock method at the initial public offering price of $5.00
per share). As described in Note 7, 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.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact of Statement 128 on the Company's
calculation of earnings per share is not expected to be material.
F-9
<PAGE> 81
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SIGNIFICANT CUSTOMERS AND FOREIGN SALES
The Company recognized approximately 95% of its revenue from one customer
during the year ended December 31, 1995, and approximately 100% of its revenues
from four customers during the year ended December 31, 1996. Foreign sales were
approximately $165,000 and $2,280,000 for the years ended December 31, 1995 and
December 31, 1996, respectively. During the nine months ended September 30,
1996, the Company recognized 100% of its revenues from three customers. During
the nine months ended September 30, 1997, the Company recognized 87% of its
revenues from four different customers. Foreign sales for the nine months ended
September 30, 1996 and 1997 were $1,748,065 and $2,818,262, respectively.
RECLASSIFICATIONS
Certain amounts reported in prior years financial statements have been
reclassified to conform with the 1996 presentation.
3. ACQUISITION OF IMMI
Effective September 5, 1997, ISS acquired all of IMMI's issued and
outstanding capital stock, stock warrants and convertible debt in a transaction
accounted for as a purchase. The purchase price included 619,355 shares of ISS
common stock with a fair market value of approximately $3.9 million and
liabilities assumed and acquisition costs of approximately $1.1 million. The
purchase agreement places certain restrictions on the future sale of the ISS
stock issued in connection with the purchase for a period of eighteen months.
<TABLE>
<S> <C>
The estimated purchase price consists of the following (unaudited):
619,355 shares of ISS common stock..................................... $3,889,549
Liabilities assumed.................................................... 883,043
Acquisition costs...................................................... 178,855
----------
$4,951,447
=========
Certain items affecting the purchase price remain unresolved at this time. A
summary of management's preliminary allocation of purchase price is as follows
(unaudited):
Tangible assets acquired............................................... $ 573,302
Identified intangible assets........................................... 4,052,922
In-process research and development.................................... 325,223
----------
$4,951,447
=========
</TABLE>
Intangible assets consist primarily of developed technology relating to the
NeuroMate System. In the opinion of ISS and IMMI management, the developed
technology is completed and has alternative future uses. The estimated useful
lives are expected to range from 3 to 5 years. ISS management does not believe
that technological feasibility of the acquired in-process research and
development has been established. Further, ISS management believes the acquired
in-process research and development has no alternative future uses. Therefore,
the amount allocated to in-process research and development is required to be
immediately expensed under generally accepted accounting principles.
F-10
<PAGE> 82
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
ROBODOC and NeuroMate System equipment..... $ 327,793 $ 522,000
Other equipment............................ 800,374 1,090,111
Furniture and fixtures..................... 41,258 98,964
Leasehold improvements..................... 86,816 148,852
---------- ----------
1,256,241 1,859,927
Less accumulated depreciation.............. 1,005,204 1,324,993
---------- ----------
$ 251,037 $ 534,934
========== ==========
</TABLE>
5. REVERSE STOCK SPLIT
On December 20, 1995, the Company effected a one-for-five reverse split of
the Company's common stock. In November 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
splits.
6. NOTES PAYABLE AND LONG TERM DEBT
A long-term note payable was entered into between the Company and a large
corporation, a representative of which was a member of the Company's Board of
Directors. The corporation is also a warrant holder of the Company. Simple
interest on the note payable accrued 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, 1997.
Bank loans consist of the following at September 30, 1997 (unaudited):
<TABLE>
<S> <C>
Revolving line of credit established in July 1996 for five years with an
available amount of $386,347 at a fixed rate of interest of 7.15%. The amount
available decreases quarterly by 5% of the original amount, beginning October
1996......................................................................... $ 269,616
Bank term loan with monthly principal and interest payments over three years
from May 1997 at a fixed rate of interest of 5.75%........................... 51,382
Bank term loan with monthly principal and interest payments through October
1997 at a fixed rate of interest of 8%....................................... 1,136
---------
322,134
Less current portion........................................................... (289,744)
---------
Total long-term bank loans..................................................... $ 32,390
=========
</TABLE>
The bank term loans are secured by substantially all of IMMI's assets.
The Company received an interest free loan of $152,561 from a grant
organization for the development of a new system. In the case of the failure of
the project, the contractual agreement is that the grant organization
F-11
<PAGE> 83
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
may decide to forgive all or part of the repayments. If the Company sells either
a license for technology, the prototype developed, or articles manufactured
specifically for the research project, 50% of the revenue must be paid to the
grant body in the subsequent year up to the balance of the loan amount
outstanding. According to the contract, any such payments would be considered to
be an advance repayment of the loan. The Company has not made any sales of this
type through September 30, 1997.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
As of December 31, 1996 the Company has reserved a total of 5,572,366
shares of common stock pursuant to warrants and options outstanding and reserved
for future issuance.
INITIAL PUBLIC OFFERING
In November 1996, the Company sold in its initial public offering, a total
of 1,525,000 shares of common stock at $5.00 per share and 1,753,750 warrants at
$0.10 per warrant. In addition, the Company sold to its underwriter warrants to
purchase an additional 305,000 shares for total consideration of $10.00. The net
proceeds after underwriters' commissions and fees and other costs associated
with the offering were approximately $6,090,000.
Each warrant entitles the holder 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 20, 1997, and thereafter for a
period of four years. The warrants are subject to redemption by the Company at
$0.10 per warrant at any time during the exercise period on not less than 30
days prior written notice to the holders of the warrants provided certain
criteria regarding the price performance of the Company's common stock are met.
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, 1997. 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 584,959 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.
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
F-12
<PAGE> 84
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
terms of the cashless exercise, these warrant holders accepted 72,126 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 per the terms of the convertible preferred stock agreement, upon the
closing of the Company's initial public offering in November 1996, each of the
1,039,792 shares of outstanding Series D preferred stock were automatically
converted into the same number of shares of common stock.
On October 29, 1997, the Company and IBM executed an amendment to the 1995
Stock Purchase Agreement pursuant to which the Company and IBM agreed that the
Series D Warrants to purchase 2,079,584 shares of Series D Preferred Stock would
be exercisable only for 2,079,584 shares of Common Stock. Also on October 29,
1997, the Company delivered to CA IB Investmentbank AG ("CA IB") an agreement
not to issue any shares of Common Stock, or any warrants, options or other
rights to subscribe for or purchase shares of Series D Preferred Stock, or any
other securities convertible into or exercisable or exchangeable for, Series D
Preferred Stock, without the consent of CA IB. In addition, the Company's
management has undertaken to cause the Board of Directors to present a
resolution at the next annual meeting of the Company's stockholders to amend the
Company's Restated Certificate of Incorporation to eliminate the Series D
Preferred Stock therefrom. There can be no assurance that such resolution will
be presented by the Board of Directors, or, if presented, adopted by the
Company's stockholders.
In November 1996, the Board of Directors amended, and the stockholders
subsequently approved, the Company's Articles of Incorporation to authorize
1,000,000 shares of undesignated preferred stock. Preferred stock may be issued
from time to time in one or more series. The Board of Directors is authorized to
determine the rights, preferences, privileges and restrictions granted to and
imposed upon any wholly unissued series of preferred stock and designation of
any such series without any vote or action by the Company's stockholders.
ISSUANCE OF STOCK AND STOCK WARRANTS
In September 1997, the Company issued 4,500 shares of Common Stock and
warrants to purchase 25,000 shares of Common Stock (with an aggregate estimated
fair value of $93,885) to Rickel & Associates, Inc. for services performed in
connection with the acquisition of IMMI. The warrants have an exercise price of
$7.50 per share and expire in September 2002.
STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" and related Interpretations in
accounting for its employees stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options.
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 surrendered 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
term of ten 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
F-13
<PAGE> 85
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS No. 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996, respectively: risk-free interest rates of 6.25%
and 5.43%; a dividend yield of 0%; volatility factors of the expected market
price of the Company's common stock of 0.50; and an expected life of the option
of 5 and 3.2 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. For purposes of
pro forma disclosures, the estimated fair value of the options is amortized to
expense over the vesting period. The Company's pro forma information follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Pro forma net loss................................ $(4,064,392) $(3,464,434)
Pro forma net loss per share...................... $ (1.20) $ (0.79)
</TABLE>
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1999.
The following summarizes activity under the Plans for the years ended
December 31, 1995 and 1996 and the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
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 $ 4.63
Granted (at $0.07 to $5.00 per share)................ 951,545 0.27
Canceled (at $.07 to $7.84 per share)................ (70,294) 4.08
Exercised (at $.07 to $.25 per share)................ (9,592) 0.07
---------
Outstanding at December 31, 1996 (at $0.07 to $7.84 per
share)............................................... 947,184 0.42
Granted (at $5.00 to $8.75 per share) (unaudited).... 335,334
Canceled (at $.07 to $6.13 per share) (unaudited).... (60,181)
Exercised (at $.07 to $3.33 per share) (unaudited)... (5,795)
---------
Outstanding at September 30, 1997 (at $0.07 to $8.75
per share)(unaudited)................................ 1,216,542
=========
</TABLE>
The weighted average exercise price of options granted in 1996 with option
prices less than the fair market value of the Company's stock on the grant date
was $0.48 and the weighted average grant date fair
F-14
<PAGE> 86
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of these options was $0.89. The weighted average exercise price of options
granted in 1996 with option prices equal to the fair market value of the
Company's stock on the grant date was $5.00 and the weighted average grant date
fair value of these options was $2.31.
The following summarizes information related to options outstanding and
options exercisable at December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE OPTIONS REMAINING CONTRACTUAL OPTIONS
PRICE OUTSTANDING LIFE (IN YEARS) EXERCISABLE
- -------- ----------- --------------------- -----------
<S> <C> <C> <C>
$ 0.07 873,949 9.2 344,352
$ 2.07 21,631 9.6 1,014
$ 3.33 4,867 5.1 4,867
$ 4.88 2,704 8.4 902
$ 5.00 30,277 9.8 --
$ 7.84 13,756 6.0 10,777
----------- -------- ---
947,184 361,912
=========== ===========
</TABLE>
Of the options outstanding at December 31, 1996, options to purchase
361,912 shares of common stock were immediately exercisable at a
weighted-average exercise price of $0.36 per share. A total of 292,366 shares
were still available for grant under the 1995 Plan at December 31, 1996.
During the year ended December 31, 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 $357,249 was recorded
during the year ended December 31, 1996 relating to these options, and the
remaining $426,417 will be amortized into expense in future periods.
8. INCOME TAXES
The income tax provisions for the years ended December 31, 1995 and 1996
and the nine months ended September 30, 1996 and 1997 are comprised of currently
payable state franchise taxes and currently payable foreign income taxes.
F-15
<PAGE> 87
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryover.................... $ 2,200,000 $ 3,000,000
Capitalized research and development............ 16,000 245,000
Accrued product retrofit costs.................. 95,000 56,000
Inventory....................................... 97,000 85,000
Depreciation.................................... 65,000 102,000
Stock compensation.............................. -- 154,000
Other........................................... 39,000 158,000
---------- ----------
2,512,000 3,800,000
Less: Valuation allowance....................... (2,512,000) (3,800,000)
---------- ----------
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,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Federal benefit expected at statutory rates....... $(1,377,000) $(1,172,000)
Net operating loss with no current benefit........ 1,377,000 1,172,000
State franchise taxes............................. 3,046 10,000
Foreign income taxes.............................. 67 266
----------- -----------
$ 3,113 $ 10,266
=========== ===========
</TABLE>
In connection with the Company's Series D preferred stock sale (Note 7) 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 available prior to the expiration of the carryforward periods.
As a consequence of the limitation, the Company has at December 31, 1996 a
net operating loss carryover of approximately $8,700,000 for federal income tax
purposes which expires between 2005 and 2011, and a net operating loss
carryforward of approximately $2,100,000 for state income tax purposes which
expires between 1997 and 2001.
The Company paid $5,280 and $1,600 for income and franchise taxes during
the years ended December 31, 1995 and 1996, respectively.
9. 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's other facility
F-16
<PAGE> 88
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1997............................................... $86,000
1998............................................... $44,000
</TABLE>
Aggregate rental expense under these leases amounted to $135,980, $141,456
and $113,526 during the years ended December 31, 1995 and 1996, and the nine
months ended September 30, 1997, respectively.
Future minimum payments under non-cancelable equipment operating leases are
approximately $13,000 per year through the year ended December 31, 2000. Rental
expense for these non-cancelable leases during the years ended December 31, 1995
and 1996 and the nine months ended September 30, 1997 was approximately $14,000,
$13,000 and $10,000, respectively.
On September 19, 1997, the Company entered into a lease for an office and
production facility in Davis, California. The lease is for a term of seven
years, commencing not later than September 1, 1998, and provides for rent of
$27,810 per month during the first year of the lease (plus real estate taxes and
assessments, utilities and maintenance), subject to adjustment in subsequent
years for cumulative increases in the cost of living index, not to exceed 4% per
year.
10. 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 ("USDC"). The grant is 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 and $116,049 in proceeds under this grant during the years ended
December 31, 1995 and December 31, 1996, respectively. As of December 31, 1996,
the Company had received $110,176 from the USDC which is payable to a
subcontractor for work performed by it under the development agreement.
11. ANVAR GRANT
During 1996, IMMI received notification it was awarded a $222,492 grant
from the French agency Agence Nationale de Valorisation de la Recherche
("ANVAR") which is a French national agency set up to aid research and
development projects. The grant is to fund the clinical tests to be performed at
two university hospitals on the NeuroMate system over a period of one year. The
project and related ANVAR grant began in March 1997 and will last for one year.
IMMI received $173,595 in proceeds under this grant during the period ended June
30, 1997. The grant income is being recognized ratably over the project period.
F-17
<PAGE> 89
REPORT OF ERNST & YOUNG ENTREPRENEURS DEPARTMENT
D'ERNST & YOUNG AUDIT, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Innovative Medical Machines International, S.A.
We have audited the accompanying consolidated balance sheet of Innovative
Medical Machines International, S.A. as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years ended December 31, 1995 and 1996. 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 Innovative
Medical Machines International, S.A. at December 31, 1996, and the consolidated
results of its operations and its cash flows for the years ended December 31,
1995 and 1996 in accordance with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Innovative Medical Machines International, S.A. 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 ENTREPRENEURS DEPARTMENT
D'ERNST & YOUNG AUDIT
Marc Bonhomme
Partner
Villeurbanne, France
September 10, 1997
F-18
<PAGE> 90
INNOVATIVE MEDICAL MACHINES INTERNATIONAL, S.A.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
ASSETS
Current assets
Cash.......................................................................... $ 93,658
Accounts receivable........................................................... --
Value added tax receivable.................................................... 39,353
Tax credit receivable......................................................... 110,264
Inventory..................................................................... 274,158
Other current assets.......................................................... 80,538
-----------
Total current assets............................................................ 597,971
Property and equipment, net..................................................... 125,111
-----------
$ 723,082
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable to affiliates................................................ $ 53,315
Accounts payable.............................................................. 137,009
Accrued payroll and related expenses.......................................... 114,248
Current portion of long term bank loans....................................... 107,966
Customer deposits............................................................. 317,265
Deferred grant income......................................................... --
Other current liabilities..................................................... 69,334
-----------
Total current liabilities....................................................... 799,137
Long term bank loans.......................................................... --
Convertible debt.............................................................. 143,221
Note payable.................................................................. 164,856
Commitments and contingencies (Notes 1 and 8)
Stockholders' equity (deficit)
Common stock, $28.41 par value, 25,225 shares authorized, issued and
outstanding................................................................ 716,578
Additional paid in capital.................................................... 466,932
Accumulated translation adjustment............................................ 9,654
Accumulated deficit........................................................... (1,577,296)
-----------
Total stockholders' equity (deficit)............................................ (384,132)
-----------
$ 723,082
===========
</TABLE>
See accompanying notes.
F-19
<PAGE> 91
INNOVATIVE MEDICAL MACHINES INTERNATIONAL, S.A.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER SIX MONTHS ENDED JUNE
31, 30,
----------------------- ----------------------
1995 1996 1996 1997
--------- --------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales................................ $ -- $ 447,310 $ 147,158 $617,580
Cost of sales............................ -- 200,882 90,525 285,120
--------- --------- --------- --------
Gross profit............................. -- 246,428 56,633 332,460
Operating expenses:
Selling, general and administrative.... 266,144 600,466 231,592 295,865
Research and development............... 458,728 545,823 244,373 107,739
--------- --------- --------- --------
Total operating expenses................. 724,872 1,146,289 475,965 403,604
--------- --------- --------- --------
Loss from operations..................... (724,872) (899,861) (419,332) (71,144)
Other income (expense):
Interest income........................ 28,756 567 569 --
Interest expense....................... (7,350) (10,625) (4,155) (16,038)
Grant income........................... -- -- -- 59,787
--------- --------- --------- --------
Loss before benefit for income taxes..... (703,466) (909,919) (422,918) (27,395)
Benefit for income taxes............... (73,940) -- -- --
--------- --------- --------- --------
Net loss................................. $(629,526) $(909,919) $(422,918) $(27,395)
========= ========= ========= ========
Net loss per share....................... $ (39.01) $ (39.77) $ (20.60) $ (1.09)
========= ========= ========= ========
Shares used in per share calculations.... 16,137 22,879 20,531 25,225
========= ========= ========= ========
</TABLE>
See accompanying notes.
F-20
<PAGE> 92
INNOVATIVE MEDICAL MACHINES INTERNATIONAL, S.A.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL ACCUMULATED STOCKHOLDERS'
------------------ PAID-IN TRANSLATION ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT (DEFICIT)
------ --------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994....................... 10,000 $ 187,056 $ -- $ -- $ (37,851) $ 149,205
Net loss................... -- -- -- -- (629,526) (629,526)
Cumulative translation
adjustment.............. -- -- -- 15,514 -- 15,514
Issuance of common stock... 8,182 164,188 638,693 -- -- 802,881
Legal change in par
value................... -- 638,503 (638,503) -- -- --
------ -------- -------- ------- ----------- ---------
Balance at December 31,
1995....................... 18,182 989,747 190 15,514 (667,377) 338,074
Net loss................... -- -- -- -- (909,919) (909,919)
Cumulative translation
adjustment.............. -- -- -- (5,860) -- (5,860)
Issuance of common stock... 7,043 192,650 -- -- -- 192,650
Issuance of common stock
warrants................ -- -- 923 -- -- 923
Legal change in par
value................... -- (465,819) 465,819 -- -- --
------ -------- -------- ------- ----------- ---------
Balance at December 31,
1996....................... 25,225 716,578 466,932 9,654 (1,577,296) (384,132)
Net loss (unaudited)....... -- -- -- -- (27,395) (27,395)
Cumulative translation
adjustment
(unaudited)............. -- -- -- 20,511 -- 20,511
------ -------- -------- ------- ----------- ---------
Balance at June 30, 1997
(unaudited)................ 25,225 $ 716,578 $ 466,932 $30,165 $(1,604,691) $(391,016)
====== ======== ======== ======= =========== =========
</TABLE>
See accompanying notes.
F-21
<PAGE> 93
INNOVATIVE MEDICAL MACHINES INTERNATIONAL, S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------ -----------------------
1995 1996 1996 1997
---------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................... $ (629,526) $(909,919) $(422,918) $ (27,395)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation............................. 31,983 101,776 28,298 43,019
Changes in operating assets and
liabilities:
Accounts receivable................... (10,287) 37,313 37,447 (204,789)
Value added tax receivable............ (49,354) 17,079 36,255 7,752
Tax credit receivable................. (73,940) -- -- --
Inventory............................. (148,790) 28,737 5,695 113,563
Other current assets.................. 7,996 (70,511) (17,396) 59,362
Accounts payable to affiliates........ 84,552 (138,150) (153,084) 38,806
Accounts payable...................... (48,213) 78,452 24,963 121,706
Accrued payroll and related
expenses............................ 47,695 59,542 40,213 (18,424)
Customer deposits..................... 156,625 171,989 140,914 (292,166)
Deferred grant income................. -- -- -- 97,140
Other current liabilities............. 7,621 62,756 11,253 246
---------- --------- --------- ---------
Net cash used in operating activities...... (623,638) (560,936) (268,360) (61,180)
Cash flows from investing activities:
Purchases of property and equipment........ (194,078) (38,808) (4,764) (194,329)
---------- --------- --------- ---------
Net cash used in investing activities...... (194,078) (38,808) (4,764) (194,329)
Cash flows from financing activities:
Proceeds from bank loans................... 355,167 95,475 -- 264,054
Payments on bank loans..................... (4,560) (327,099) (323,257) (901)
Increase in notes payable.................. -- 168,795 12,430 --
Net proceeds from sale of common stock and
warrants................................. 802,881 193,573 193,573 --
Net proceeds from issuance of convertible
debt..................................... -- 148,258 148,258 --
---------- --------- --------- ---------
Net cash provided by financing
activities............................... 1,153,488 279,002 31,004 263,153
---------- --------- --------- ---------
Effect of exchange rate changes on cash.... 12,629 (18,295) (15,352) (10,017)
---------- --------- --------- ---------
Increase (decrease) in cash................ 348,401 (339,037) (257,472) (2,373)
Cash beginning of period................... 84,294 432,695 432,695 93,658
---------- --------- --------- ---------
Cash end of period......................... $ 432,695 $ 93,658 $ 175,223 $ 91,285
========== ========= ========= =========
</TABLE>
See accompanying notes.
F-22
<PAGE> 94
INNOVATIVE MEDICAL MACHINES INTERNATIONAL, S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS
UNAUDITED)
1. DESCRIPTION OF BUSINESS AND FINANCING REQUIREMENTS
Innovative Medical Machines International (the "Company") was incorporated
on July 28, 1993 in Grenoble, France. The Company develops, manufactures and
markets image guided robotic devices for surgical applications. The Company's
principal product is the NeuroMate(R), a computer controlled surgical robot
dedicated to stereotactic neurosurgery.
On August 14, 1995 the Company established a wholly owned subsidiary,
Innovative Medical Machines International Inc., as a Delaware corporation for
the purpose of developing its business in the United States.
The Company has incurred substantial losses since inception. The Company
incurred a net loss of $909,919 for the year ended December 31, 1996 and has an
accumulated deficit of $1,577,296 as of December 31, 1996. To date, the Company
has funded its operations primarily through the sale of debt and 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 1997. Ultimately,
however, the Company will need to achieve profitable operations.
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 uncertainties related to 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
INTERIM FINANCIAL INFORMATION
The unaudited interim consolidated financial statements as of June 30, 1997
and for the six months ended June 30, 1996 and 1997 have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the six-month period ended June 30,
1997 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1997.
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.
CURRENCY TRANSLATION
The financial position and results of operations of Innovative Medical
Machines International, S.A. are measured using the Company's functional
currency (French Francs). The Company's balance sheet accounts are translated
into US dollars at the current year-end exchange rate and statement of
operations 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, 1995 and 1996 and the six months ended June 30,
1996 and 1997.
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.
F-23
<PAGE> 95
INNOVATIVE MEDICAL MACHINES INTERNATIONAL, S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
Company's consolidated statements of operations. Research and development costs
are expensed as incurred.
GRANT INCOME
Grant income for clinical tests is recognized as the related clinical tests
are performed. Grants received in advance of work to be performed are recorded
as deferred grant income.
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
request collateral. The Company believes that adequate provision for doubtful
accounts receivable has been made in the accompanying financial statements. The
Company maintains substantially all of its cash at two banking institutions.
FINANCIAL STATEMENT ESTIMATES
The preparation of financial statements in conformity with United States
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
NeuroMate system equipment used for grant related clinical testing is
included in 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 8 years.
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
NeuroMate System.
Inventory consists of finished goods at December 31, 1996.
STOCK-BASED COMPENSATION
As permitted under the provisions of Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
the Company has elected to account for stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"). Under the intrinsic
value method, compensation cost is the excess, if any, of the quoted market
price or fair value of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock.
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 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
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
exercise of common stock warrants and convertible debt have been excluded from
the computation because their inclusion would be anti-dilutive.
F-24
<PAGE> 96
INNOVATIVE MEDICAL MACHINES INTERNATIONAL, S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact of Statement 128 on the Company's
calculation of earnings per share is not expected to be material.
CUSTOMERS AND FOREIGN SALES
Approximately 99% of the Company's revenues were from two customers in
France during the year ended December 31, 1996 and approximately 95% of the
Company's revenues during the six months ended June 30, 1997 were from a
different customer in Japan.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1996:
<TABLE>
<S> <C>
NEUROMATE System equipment................................... $ 72,560
Other equipment.............................................. 92,768
Furniture and fixtures....................................... 35,820
Leasehold improvements....................................... 61,247
--------
262,395
Less accumulated depreciation................................ (137,284)
--------
Total property and equipment................................. $ 125,111
========
</TABLE>
4. ACCOUNTS PAYABLE TO AFFILIATES
Accounts payable to affiliates consists of the following at December 31,
1996:
<TABLE>
<S> <C>
Accounts payable for purchases of materials.................. $ 12,918
Wages and salaries due to stockholders....................... 33,992
Accrued interest on convertible debt......................... 6,405
-------
Total accounts payable to affiliates......................... $ 53,315
=======
</TABLE>
Purchases for substantially all of the mechanical components of the robot
are made from an affiliate. Total purchases from this company for the years
ended December 31, 1995 and 1996 and the six months ended June 30, 1996 and 1997
were $286,805, $157,334, $37,013 and $36,927 respectively.
Certain stockholders who are also employees have elected to defer payment
of their wages and salaries in order to provide short-term financing for the
Company. These accounts payable bear interest at 6%.
5. LONG-TERM DEBT
BANK LOANS
Bank loans consist of the following at December 31, 1996:
<TABLE>
<S> <C>
Revolving line of credit established in July 1996 for five years with an
available amount of $386,347 at a fixed rate of interest of 7.15%. The
amount available decreases quarterly by 5% of the original amount,
beginning October 1996..................................................... $ 95,474
Bank term loan with monthly principal and interest payments over three years
from May 1997 at a fixed rate of interest of 5.75%......................... --
Bank term loan with monthly principal and interest payments through October
1997 at a fixed rate of interest of 8%..................................... 12,492
---------
107,966
Less current portion......................................................... (107,966)
---------
Total long-term bank loans................................................... $ --
=========
</TABLE>
F-25
<PAGE> 97
INNOVATIVE MEDICAL MACHINES INTERNATIONAL, S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The revolving line of credit is under a single agreement with the Company's
two banks in France. During 1996 and the six months ended June 30, 1997 the
proceeds under this line of credit were obtained equally from each bank. Half of
the credit line was secured by the Company's common stock. On September 5, 1997
the banks waived their security interests in order to enable the sale of the
Company's common stock to Integrated Surgical Systems, Inc., as more fully
described in Note 10. At December 31, 1996, $267,328, of the line of credit was
unused.
The bank term loans are secured by substantially all of the Company's
assets.
CONVERTIBLE DEBT
In May 1996, the Company sold 2,143 units of convertible debt at $67.42 per
unit which may be converted into common stock at a rate of one unit of
convertible debt for one share of common stock between January 1, 1999 and
December 31, 1999. The convertible debt earns interest at 5% which is payable at
December 31 each year.
If the convertible debt is not converted into common stock, it will be
repayable at 102% of the original offering price on December 31, 1999. In
agreement with the convertible debt holders no interest was paid in 1996. The
amount due for interest is accrued and shown in the balance sheet as accounts
payable to affiliates.
On May 31, 1996, the Company sold 1,057 warrants to purchase its common
stock at $28.41 per share for approximately $0.19 per warrant in conjunction
with the convertible debt offering. These warrants expire on December 31, 1999.
NOTE PAYABLE
The Company received an interest free loan of $152,561 from a grant
organization for the development of a new system. In the case of the failure of
the project, the contractual agreement is that the grant organization may decide
to forgive all or part of the repayments.
If the Company sells either a license for technology, the prototype
developed, or articles manufactured specifically for the research project, 50%
of the revenue must be paid to the grant body in the subsequent year up to the
balance of the loan amount outstanding. According to the contract, any such
payments would be considered to be an advance repayment of the loan. The Company
has not made any sales of this type through June 30, 1997.
FUTURE PRINCIPAL PAYMENTS
As of December 31, 1996, future principal payments by year on long-term
debt are due as follows :
<TABLE>
<S> <C>
1997.................................................. $ 107,966
1998.................................................. --
1999.................................................. 184,435
2000.................................................. 41,214
2001 and thereafter................................... 82,428
---------
416,043
Less current portion.................................. (107,966)
---------
Total long-term debt.................................. $ 308,077
=========
</TABLE>
Interest payments on total long-term debt during the years ended December
31, 1995 and 1996 and the six months ended June 30, 1996 and 1997 were $800,
$14,813, $8,104 and $12,858, respectively.
F-26
<PAGE> 98
INNOVATIVE MEDICAL MACHINES INTERNATIONAL, S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
As of December 31, 1996 pursuant to warrants and convertible debt
outstanding, a total of 4,789 and 2,143 shares of common stock would be issued
upon conversion or exercise of the warrants and convertible debt, respectively.
As the Company's authorized common stock is fully issued the Company will need
to increase authorized common stock prior to any issuance or conversion related
to the warrants or the convertible debt.
During 1995 the Company increased par value from $18.71 to $54.44 resulting
in a reclassification of additional paid in capital to common stock. The Company
subsequently decreased the par value to $28.41 in 1996 resulting in a further
reclassification from common stock to additional paid in capital.
COMMON STOCK WARRANTS
On May 31, 1996, the Company sold to an executive officer 3,732 warrants to
purchase its common stock at $28.41 per share for approximately $0.19 per
warrant. These warrants expire on December 31, 1999.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related Interpretations in
accounting for these warrants because, as discussed below, the alternative fair
value accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") requires use of valuation models that
were not developed for use in valuing employee common stock warrants.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS No. 123, which also requires that the information be
determined as if the Company has accounted for warrants granted to the employees
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value for these warrants was estimated at the date of the grant using
the minimum value pricing model with the following assumptions: risk-free
interest rate of 5.5%; a dividend yield of 0%; and an expected life of the
warrants of 3.5 years. As determined by the minimum value pricing model using
the above assumptions, the fair value of the warrants on the grant date was
$4.97 per warrant.
Valuation models require the input of highly subjective assumptions.
Because the Company's warrants granted to its President have characteristics
significantly different from those of traded warrants and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its warrants.
For purposes of pro forma disclosures, the estimated fair value of the
warrants granted to the President is amortized to expense over the vesting
period. The following is the Company's pro forma information for the year ended
December 31, 1996:
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Pro forma net loss..................................... $(913,013)
Pro forma net loss per share........................... $ (39.91)
</TABLE>
7. INCOME TAXES
Deferred taxes result from temporary differences in the recognition of
revenue and expense items for income tax and financial reporting.
F-27
<PAGE> 99
INNOVATIVE MEDICAL MACHINES INTERNATIONAL, S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The significant components of the Company's deferred taxes as of December
31, 1996 are as follows:
<TABLE>
<S> <C>
Net operating loss carryover............................. $ 376,830
Income recognition....................................... 155,582
Research and development................................. 38,803
Other.................................................... 23,643
---------
594,858
Less: valuation allowance................................ (594,858)
---------
Net deferred taxes....................................... $ --
=========
</TABLE>
The principal reasons for the difference between the effective income tax
and the statutory income tax rate are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Income tax benefit expected at statutory rates....... $(244,678) $(328,268)
Net operating loss with no current benefit........... 244,678 328,268
Net research tax credit.............................. (73,940) --
--------- ---------
$ (73,940) $ --
========= =========
</TABLE>
The research tax credit is allowable based on the increase in research
expenditures in the fiscal year as compared to the average of the two prior
fiscal years. The research tax credit is subject to a review by the tax
authorities up to three years after the credit is claimed. The research tax
credit is payable by tax authorities after the third year following the year in
which it arose. Management has recorded an allowance against a portion of the
research tax credit. At December 31, 1996 the total tax research credit due for
payment between 1998 and 2000 and the related allowance are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
Research tax credit receivable............................... $ 235,496
Allowance.................................................... (125,232)
---------
$ 110,264
=========
</TABLE>
The Company has at December 31, 1996 a net operating loss carryforward of
approximately $610,300 which expires between 1999 and 2002, and a net operating
loss carryforward which does not expire of $141,189 for statutory income taxes.
8. COMMITMENTS
LEASES
Through December 31, 1996, the Company leased its facilities under a 9 year
operating lease, cancelable every 3 years. The Company relocated in January
1997. Future lease payments of $33,080 which are due until the end of the
current three year period are accrued in other current liabilities and charged
to operations at December 31, 1996 because the Company no longer uses the
premises. An additional amortization of leasehold improvements of $42,375 was
also recorded during 1996 because of early termination of the lease.
The aggregate annual rental expense under this lease amounted to $22,598
and $22,054 during 1995 and 1996.
In January 1997, the Company obtained an 18 month operating lease of its
facilities from a university in Lyon. This lease is given free of charge by the
University and the local council, as part of a program to encourage the
relocation of new technical companies to Lyon.
Future minimum payments under non-cancelable equipment operating leases are
$12,000 per year through the year ended December 31, 1998. Rental expense for
these non-cancelable leases during the years
F-28
<PAGE> 100
INNOVATIVE MEDICAL MACHINES INTERNATIONAL, S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ended December 31, 1995 and 1996 and the six months ended June 30, 1997 was
approximately $12,000, $12,000 and $6,000, respectively.
SALE OF RECEIVABLES WITH RECOURSE
In May 1997 a note for $173,595 was sold to the bank with recourse. No gain
or loss was recognized on this transaction; however, the Company has an
obligation to pay the bank interest on all amounts outstanding on the note at
10.70% until the bank is paid in full. The full amount remained unpaid as of
June 30, 1997.
9. ANVAR GRANT
During 1996, the Company received notification it was awarded a $222,492
grant from the French agency Agence Nationale de Valorisation de la Recherche
("ANVAR") which is a French national agency set up to aid research and
development projects. The grant is to fund the clinical tests to be performed at
two university hospitals on the NeuroMate system over a period of one year. The
project and related ANVAR grant began in March 1997 and will last for one year.
The Company received $173,595 in proceeds (Note 8) under this grant during the
period ended June 30, 1997, of which $59,787 has been recognized as income and
the remainder has been recorded as deferred grant income to be recognized as
income over the period of the project.
10. SUBSEQUENT EVENT
Effective September 5, 1997, Integrated Surgical Systems, Inc. ("ISS")
acquired all of the Company's issued and outstanding capital stock, stock
warrants and convertible debt in a transaction accounted for as a purchase. The
purchase price consisted of 619,355 shares of ISS common stock with a fair
market value of approximately $3.9 million, the assumption of approximately
$900,000 of the Company's liabilities and acquisition costs of approximately
$179,000. The purchase agreement places certain restrictions for a period of
eighteen months on the future sale of the ISS stock issued in connection with
the purchase.
F-29
<PAGE> 101
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited Pro Forma Combined Condensed Financial Statements,
including the notes thereto, are qualified in their entirety by reference to and
should be read in conjunction with the historical Consolidated Financial
Statements of Integrated Surgical Systems, Inc., ("ISS") and Innovative Medical
Machines International, S.A., ("IMMI"), including the notes thereto, included
herein.
The unaudited Pro Forma Combined Condensed Statements of Operations for the
year ended December 31, 1996 and the nine months ended September 30, 1997, give
effect to the business combination involving Integrated Surgical Systems, Inc.
and Innovative Medical Machines International, S.A. accounted for using the
purchase method of accounting. The Pro Forma Combined Condensed Statements of
Operations are presented as if the business combination had occurred as of
January 1, 1996. The pro forma information is presented for illustrative
purposes only and may not be indicative of the results that would have been
obtained had the transaction actually occurred on the dates assumed nor is it
necessarily indicative of the future combined results of operations. ISS has
retained independent valuation professionals to assist in the final
determination of the value to be assigned to the individual assets acquired
including the intangibles and in-process research and development. The results
of the preliminary valuation have been included in the pro forma adjustments to
the combined condensed financial statements; however, results of the final
valuation could differ from those reflected herein.
F-30
<PAGE> 102
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
---------------------------
ISS IMMI ADJUSTMENTS COMBINED
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales............................... $ 2,280,311 $ 447,310 $ -- $ 2,727,621
Cost of sales........................... 884,152 200,882 -- 1,085,034
----------- ---------- ---------- ----------
1,396,159 246,428 -- 1,642,587
Operating expenses:
Selling, general and administrative... 2,066,236 600,466 822,636(a) 3,489,338
Research and development.............. 2,468,535 545,823 -- 3,014,358
Stock compensation.................... 357,249 -- -- 357,249
----------- ---------- ---------- ----------
4,892,020 1,146,289 822,636 6,860,945
Other income (expense):
Interest income....................... 87,933 567 -- 88,500
Interest expense...................... -- (10,625) 4,584(c) (6,041)
Other................................. (30,635) -- -- (30,635)
----------- ---------- ---------- ----------
Loss before provision for income
taxes................................. (3,438,563) (909,919) (818,052) (5,166,534)
Provision for income taxes.............. 10,266 -- -- 10,266
----------- ---------- ---------- ----------
Net loss................................ $(3,448,829) $ (909,919) $ (818,052) $(5,176,800)
=========== ========== ========== ==========
Net loss per share...................... $ (0.79) $ (39.77) $ (1.04)
=========== ========== ==========
Shares used in per share calculations... 4,373,947 22,879 4,993,302
=========== ========== ==========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
F-31
<PAGE> 103
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------
IMMI
OPERATIONS FOR
ISS IMMI THE PERIOD
FOR THE NINE MONTHS FOR THE SIX JULY 1, 1997
ENDED SEPTEMBER 30, MONTHS ENDED THROUGH PRO FORMA
1997 JUNE 30, 1997 SEPTEMBER 5, 1997 OTHER COMBINED
------------------- -------------- ------------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Net sales................. $ 2,818,262 $617,580 $ 2,481 $ -- $ 3,438,323
Cost of sales............. 1,116,577 285,120 2,481 -- 1,404,178
----------- -------- --------- --------- -----------
1,701,685 332,460 -- -- 2,034,145
Operating expenses:
Selling, general and
administrative....... 2,214,230 295,865 34,734 548,424(a) 3,093,253
Research and
development.......... 2,026,063 107,739 32,332 -- 2,166,134
Stock compensation...... 135,000 -- -- -- 135,000
In-process research and
development
acquired............. 325,223 -- -- (325,223)(b) --
----------- -------- --------- --------- -----------
4,700,516 403,604 67,066 223,201 5,394,387
Other income (expense):
Interest income......... 155,605 -- -- -- 155,605
Interest expense........ (1,888) (16,038) (5,047) 3,968(c) (19,005)
Other................... 20,695 59,787 16,943 -- 97,425
----------- -------- --------- --------- -----------
Loss before provision for
income taxes............ (2,824,419) (27,395) (55,170) (219,233) (3,126,217)
Provision for income
taxes................... 27,000 -- -- -- 27,000
----------- -------- --------- --------- -----------
Net loss.................. $(2,851,419) $(27,395) $(55,170) $(219,233) $(3,153,217)
=========== ======== ========= ========= ===========
Net loss per share........ $ (0.83) $ (1.09) $ (0.78)
=========== ======== ===========
Shares used in per share
calculations............ 3,422,703 25,225 4,042,058
=========== ======== ===========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
F-32
<PAGE> 104
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1. INTEGRATED SURGICAL SYSTEMS, INC. ACQUISITION OF INNOVATIVE MEDICAL MACHINES
INTERNATIONAL, S.A.
Effective September 5, 1997, ISS acquired all of IMMI's issued and
outstanding capital stock, stock warrants and convertible debt in a transaction
accounted for as a purchase. The purchase price included 619,355 shares of ISS
common stock with a fair market value of approximately $3.9 million and
liabilities assumed of approximately $1 million. The purchase agreement places
certain restrictions on the future sale of the ISS stock issued in connection
with the purchase for a period of eighteen months.
<TABLE>
<S> <C>
The estimated purchase price consists of the following:
619,355 shares of ISS common stock..................................... $3,889,549
Liabilities assumed.................................................... 883,043
Estimated acquisition costs............................................ 178,855
----------
$4,951,447
=========
Certain items affecting the purchase price remain unresolved at this time. A
summary of management's preliminary allocation of purchase price is as follows:
Tangible assets acquired............................................... $ 573,302
Identified intangible assets........................................... 4,052,922
In-process research and development.................................... 325,223
----------
$4,951,447
=========
</TABLE>
2. INTANGIBLE ASSETS
Intangible assets consist primarily of developed technology relating to the
NeuroMate System. In the opinion of ISS and IMMI management, the developed
technology is completed and has alternative future uses. The estimated useful
lives are expected to range from 3 to 5 years. ISS management does not believe
that technological feasibility of the acquired in-process research and
development has been established. Further, ISS management believes the acquired
in-process research and development has no alternative future uses. Therefore,
the amount allocated to in-process research and development is required to be
immediately expensed under generally accepted accounting principles. Such amount
is a nonrecurring charge related to the acquisition and as such is not reflected
in the Pro Forma Statements of Operations pursuant to Regulation S-B.
3. PRO FORMA ADJUSTMENTS
Adjustments to the Pro Forma Combined Condensed Statements of Operations
were made:
(a) To record the amortization of the intangible assets acquired in
ISS' acquisition of IMMI.
(b) To reverse charge for in-process research and development
acquired.
(c) To eliminate interest expense accrued on convertible debt.
F-33
<PAGE> 105
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.
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 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.
II-1
<PAGE> 106
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses (other than underwriting
discounts and commissions, the fee payable to Value Management & Research GmbH
and the non-accountable expense allowance) 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...................................................... $ 9,582
NASD filing fee........................................................... 4,000
Easdaq Filing Fee......................................................... 10,000
Nasdaq Filing Fee......................................................... 7,500
Pacific Stock Exchange filing fee......................................... 8,125
Printing expenses (other than stock certificates)......................... 95,000
Printing and engraving of stock and warrant certificates)................. 3,000
Legal fees and expenses (other than blue sky)............................. 80,000
Accounting fees and expenses.............................................. 100,000
Transfer Agent fees and expenses.......................................... 5,000
Miscellaneous............................................................. 2,793
--------
Total........................................................... $325,000
========
</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 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.
II-2
<PAGE> 107
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 $0.01 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 693,194 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 $5.00
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 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.
II-3
<PAGE> 108
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 December 31, 1996, the Registrant issued
and sold an aggregate of 9,592 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. Of such
shares, 9,537 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. From January 1, 1997 through June 30, 1997, the Registrant issued and
sold an aggregate of 5,795 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, 928 were
issued at an exercise price of $0.07 per share and 4,867 shares were
issued at an exercise price of $3.33 per share. The issuance and sale
of these shares were exempt from registration pursuant to Rule 701
promulgated under the Securities Act.
17. 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.
18. 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.
19. On August 25, 1996, the Registrant 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.
20. On October 29, 1996, the Registrant 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.
21. On September 5, 1997, the Registrant issued 619,355 shares of Common
Stock to the former shareholders of Innovative Medical Machines
International ("IMMI") in connection with the acquisition of IMMI. The
issuance of these shares was exempt from registration pursuant to
Regulation S and Section 4(2) of the Securities Act.
22. On September 5, 1977, the Registrant issued 4,500 shares of Common
Stock and warrants to purchase 25,000 shares of Common Stock at an
exercise price of $7.50 per share to Rickel & Associates, Inc.
("Rickel") and its designees for services rendered by Rickel. The
issuance of these securities was exempt from registration pursuant to
Section 4(2) of the Act.
23. From December 1996 through May 1997, the Registrant issued and sold an
aggregate of 15,315 shares of Common Stock to two former employees
(each of whom was an officer of the Registrant) and one existing
employee of the Registrant upon exercise of stock options granted
pursuant to the Registrant's stock option plans. The issuance and sale
of these shares was exempt from registration under Section 4(2) of the
Act.
II-4
<PAGE> 109
ITEM 27. EXHIBITS
<TABLE>
<C> <C> <S>
1.1 -- Form of Purchase Agreement.
1.2 -- Form of Restated Placement Agreement
3.1 -- Form of Certificate of Incorporation of the Registrant, as amended.*
3.2 -- By-laws of the Registrant.*
4.1 -- Form of Advisors' Warrant.
4.2 -- Form of Public Warrant Agreement.*
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 Registrant and Rickel & Associates,
Inc.*
4.7 -- Common Stock Purchase Warrant issued by the Registrant 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 Registrant and IBM, dated
February 6, 1991, as amended.*
4.9 -- Common Stock Purchase Warrant issued by the Registrant 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 Registrant 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 Registrant, 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 Registrant to IBM, dated
February 29, 1996 (together with the warrant referred to in Exhibit 4.10, the
"Series D Warrants").*
4.15 -- Form of Lock-up Agreement.*
4.16 -- Letter Agreement between the Registrant and IBM dated October 29, 1997, amending
the Series D Warrants and the Series D Preferred Stock and Warrant Purchase
Agreement among the Registrant, IBM and EJ Financial, dated December 21, 1995.
5.1 -- Opinion of Snow Becker Krauss P.C.
10.1 -- Loan and Warrant Purchase Agreement between the Registrant and IBM, dated as of
February 6, 1991.*
10.2 -- License Agreement between the Registrant and IBM, dated February 4, 1991.*
10.3 -- Series B Preferred Stock Purchase Agreement among the Registrant, Sutter Health
and The John N. Kapoor Trust, dated as of April 10, 1992.*
10.4 -- Series C Preferred Stock Purchase Agreement among the Registrant, 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 Registrant, IBM
and EJ Financial, dated December 21, 1995.*
</TABLE>
II-5
<PAGE> 110
<TABLE>
<C> <C> <S>
10.6 -- Investors Agreement among the Registrant, 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 Registrant and Ramesh Trivedi, dated December 8,
1995.*
10.8 -- License Agreement between the Registrant and IBM, dated February 4, 1991.*
10.9 -- Agreement for the Purchase and Use of Sankyo Industrial Products between the
Registrant and Sankyo Seiki (American) Inc. dated November 1, 1992. *
10.10 -- Stock Purchase Agreement dated as of September 5, 1997 between the Registrant and
the holders of the outstanding capital stock of Innovative Medical Machines
International, S.A.
10.11 -- Registration Rights Agreement dated September 5, 1997 by and among the Registrant
and the holders of the outstanding capital stock of Innovative Medical Machines
International, S.A.
11.1 -- Statement of computation of earnings per share.
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of Snow Becker Krauss P.C. (included in Exhibit 5.1 to this Registration
Statement).
23.2 -- Consent of Ernst & Young LLP, independent auditors.**
23.3 -- Consent of Ernst & Young Entrepreneurs Department D'Ernst & Young Audit,
Independent Auditors.**
24.1 -- Power of Attorney (included on the signature page of this Registration
Statement).
27.1 -- Financial Data Schedule.
</TABLE>
Exhibits filed or incorporated by reference herein bear the same numbers as
used in the Registrant's Registration Statement on Form SB-2 effective November
21, 1996, and therefore are not necessarily sequential.
- ---------------
* Incorporated by reference to the Company's Form SB-2 Registration Statement
(Registration No. 333-9207) declared effective on November 20, 1996
** Filed with Amendment No. 3.
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.
II-6
<PAGE> 111
(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.
II-7
<PAGE> 112
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 14, 1997.
INTEGRATED SURGICAL SYSTEMS, INC.
<TABLE>
<S> <C>
By: /s/ RAMESH C. TRIVEDI By: /s/ MARK WINN
- --------------------------------------------- ---------------------------------------------
Ramesh C. Trivedi Mark Winn
Chief Executive Officer and President Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on November 14,
1997, 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/ MARK WINN Chief Financial Officer (Principal Financial
- --------------------------------------------- and Accounting Officer)
Mark Winn
* Chairman of the Board of Directors
- ---------------------------------------------
James C. McGroddy
* Director
- ---------------------------------------------
John N. Kapoor
* Director
- ---------------------------------------------
Paul A.H. Pankow
* Director
- ---------------------------------------------
Gerald D. Knudson
Director
- ---------------------------------------------
Patrick G. Hayes
</TABLE>
*By: /s/ RAMESH C. TRIVEDI
-----------------------------------------------------
Ramesh C. Trivedi
(Attorney-In-Fact)
II-8
<PAGE> 113
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ---------------------------------------------------------------------- ------------
<C> <C> <S> <C>
1.1 -- Form of Purchase Agreement
1.2 -- Form of Revised Placement Agreement
3.1 -- Form of Certificate of Incorporation of the Company, as amended*
3.2 -- By-laws of the Company*
4.1 -- Form of Advisors' Warrants
4.2 -- Form of Public Warrant Agreement*
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, 1996, 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, 1996, 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 Registrant to
IBM, dated February 29, 1996 (together with the warrant referred to in
Exhibit 4.10, the "Series D Warrants").*
4.15 -- Form of Lock-up Agreement*
4.16 -- Letter Agreement between the Registrant and IBM dated October 29,
1997, amending the Series D Warrants and the Series D Preferred Stock
and Warrant Purchase Agreement among the Registrant, IBM and EJ
Financial, dated December 21, 1995.
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 4, 1991*
10.3 -- Series B Preferred Stock Purchase Agreement among the Registrant,
Sutter Health and The John N. Kapoor Trust, dated as of April 10,
1992.*
10.4 -- Series C Preferred Stock Purchase Agreement among the Registrant,
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
Registrant, IBM and EJ Financial, dated December 21, 1995.*
</TABLE>
<PAGE> 114
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ---------------------------------------------------------------------- ------------
<C> <C> <S> <C>
10.6 -- Investors Agreement among the Company, IBM, Wendy Shelton-Paul Trust,
William Barger, 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*
10.10 -- Stock Purchase Agreement dated as of September 5, 1997 between the
Company and the holders of the outstanding capital stock of Innovative
Medical Machines International, S.A.
10.11 -- Registration Rights Agreement dated September 5, 1997 by and among the
Company and the holders of the outstanding capital stock of Innovative
Medical Machines International, S.A.
11.1 -- Statement of computation of earnings per share
21.1 -- Subsidiaries of the Company
23.1 -- Consent of Snow Becker Krauss P.C. (included in Exhibit 5.1 to this
Registration Statement)
23.2 -- Consent of Ernst & Young LLP, independent auditors.**
23.3 -- Consent of Ernst & Young Entrepreneurs Department D'Ernst & Young
Audit, Independent Auditors**
24.1 -- Power of Attorney (included on the signature page of this Registration
Statement)
27.1 -- Financial Data Schedule
</TABLE>
Exhibits filed or incorporated by reference herein bear the same numbers as
used in the Registrant's Registration Statement on Form SB-2 effective November
21, 1996, and therefore are not necessarily sequential.
- ---------------
* Incorporated by reference to the Company's Form SB-2 Registration Statement
(Registration No. 333-9207) declared effective on November 20, 1996
** Filed with Amendment No. 3.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Financial Information" and to the use of our report dated
January 31, 1997 in Amendment No. 3 to the Registration Statement (Form SB-2,
No. 333-31481) and related Prospectus of Integrated Surgical Systems, Inc. for
the registration of 1,875,000 shares of its common stock and warrants to
purchase 150,000 shares of its common stock.
ERNST & YOUNG LLP
Sacramento, California
November 12, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG ENTREPRENEURS' DEPARTMENT
D'ERNST & YOUNG AUDIT, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated September 10, 1997 with respect to the consolidated
financial statements of Innovative Medical Machines International, S.A. included
in Amendment No. 3 to the Registration Statement (Form SB-2, No. 333-31481) and
related Prospectus of Integrated Surgical Systems, Inc. for the registration
1,875,000 shares of its common stock and warrants to purchase 150,000 shares of
its common stock.
ERNST & YOUNG ENTREPRENEURS
DEPARTMENT D'ERNST & YOUNG
AUDIT
Marc Bonhomme
Partner
Villeurbanne, France
November 12, 1997
