<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
INTEGRATED SURGICAL SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: 1
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
$
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE> 2
INTEGRATED SURGICAL SYSTEMS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 28, 1998
To the Stockholders of Integrated Surgical Systems, Inc.:
Notice is hereby given that the Annual Meeting of Stockholders of
Integrated Surgical Systems, Inc., a Delaware corporation (the "Company"), will
be held on April 28, 1998, at the Hyatt Regency, 1209 L Street, Sacramento,
California 95814, at the hour of 9:00 A.M., for the following purposes:
1. To elect six Directors of the Company to serve until the next annual
meeting of stockholders and until their successors are duly elected and
qualified.
2. To approve the adoption of the Company's 1998 Stock Option Plan.
3. To approve the adoption of the Company's Employee Stock Purchase Plan.
4. To approve an amendment to the Company's Restated Certificate of
Incorporation eliminating the Series D Preferred Stock.
5. To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the year ending December 31, 1998.
6. To transact such other business as may properly come before the Annual
Meeting or any adjournments thereof.
Only stockholders of record at the close of business on March 18, 1998 are
entitled to notice of and to vote at the Annual Meeting or any adjournments
thereof.
A list of stockholders entitled to vote at the Annual Meeting will be open
to examination by any stockholder for any purpose germane to the meeting, at the
executive offices of the Company, 829 West Stadium Lane, Sacramento, California
95834, for a period of ten days prior to the Annual Meeting. Such list also
shall be available during the Annual Meeting.
By Order of the Board of Directors
MARK W. WINN
Secretary
Sacramento, California
March 26, 1998
IMPORTANT:
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE PROMPTLY
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY, WHICH IS SOLICITED BY THE BOARD OF
DIRECTORS OF THE COMPANY, AND RETURN IT TO THE COMPANY. THE PROXY MAY BE REVOKED
AT ANY TIME BEFORE IT IS VOTED, AND STOCKHOLDERS EXECUTING PROXIES MAY ATTEND
THE MEETING AND VOTE IN PERSON SHOULD THEY SO DESIRE.
<PAGE> 3
INTEGRATED SURGICAL SYSTEMS, INC.
829 WEST STADIUM LANE
SACRAMENTO, CALIFORNIA 95834
(916) 646-3487
------------------------
PROXY STATEMENT
------------------------
The Board of Directors of Integrated Surgical Systems, Inc. (the "Company")
presents this Proxy Statement and the enclosed proxy card to all stockholders
and solicits their proxies for the Annual Meeting of Stockholders to be held on
Tuesday, April 28, 1998. The record date of this proxy solicitation is March 18,
1998. All proxies duly executed and received will be voted on all matters
presented at the Annual Meeting in accordance with the instructions given by
such proxies. In the absence of specific instructions, proxies so received will
be voted FOR the named nominees for election to the Company's Board of Directors
(Proposal 1), FOR approval of the adoption of the Company's 1998 Stock Option
Plan (Proposal 2) and Employee Stock Purchase Plan (Proposal 3), FOR approval of
an amendment to the Company's Restated Certificate of Incorporation eliminating
the Series D Preferred Stock (Proposal 4) and FOR ratification of the
appointment of Ernst & Young LLP as the Company's independent auditors for the
year ending December 31, 1998 (Proposal 5). The Board of Directors does not
anticipate that any of its nominees will be unavailable for election and does
not know of any matters that may be brought before the Annual Meeting other than
those listed in the Notice of Annual Meeting.
In the event that any other matter should come before the Annual Meeting or
that any nominee is not available for election, the persons named in the
enclosed proxy will have discretionary authority to vote all proxies not marked
to the contrary with respect to such matter in accordance with their best
judgment. A proxy may be revoked at any time before being voted by sending a new
proxy bearing a later date or a revocation notice to the Company at the above
address, attn: Secretary, or by notifying the Secretary of the Company at the
Annual Meeting. The Company is soliciting these proxies and will pay the entire
expense of solicitation which will be made by use of the mails. This Proxy
Statement is being mailed on or about March 26, 1998.
The total number of shares of common stock, $.01 par value ("Common
Stock"), of the Company outstanding as of March 18, 1998, was 5,503,390 shares.
The Common Stock is the only outstanding class of securities of the Company
entitled to vote. Each share of Common Stock has one vote. Only stockholders of
record as of the close of business on March 18, 1998 will be entitled to vote at
the Annual Meeting or any adjournments thereof.
The affirmative vote by holders of a plurality of the votes cast for the
election of directors at the Annual Meeting is required for the election of
Directors. The affirmative vote by the majority of the votes present at the
Annual Meeting and entitled to vote is required to approve the adoption of the
Company's 1998 Stock Option Plan and Employee Stock Purchase Plan, and the
ratification of the appointment of Ernst & Young LLP. The affirmative vote of a
majority of the outstanding shares of Common Stock is required for approval of
the amendment to the Restated Certificate of Incorporation eliminating the
Series D Preferred Stock. All proxies will be counted for determining the
presence of a quorum. Votes withheld in connection with the election of one or
more nominees for Director will not be counted as votes cast for such
individuals and shares represented by proxies which are marked "abstain" for any
other Proposal on the proxy card and proxies which are marked to deny
discretionary authority on all other matters will only be counted for the
purpose of determining the presence of a quorum on such proposals. In addition,
where brokers are prohibited from exercising discretionary authority for
beneficial owners who have not provided voting instructions (commonly referred
to as "broker non-votes"), those shares will not be included in the vote totals.
A list of stockholders entitled to vote at the Annual Meeting will be
available at the Company's principal office, 829 West Stadium Lane, Sacramento,
California 95834, during business hours, for a period of ten (10) days prior to
the Annual Meeting for examination by any stockholder. Such list shall also be
available at the Annual Meeting.
<PAGE> 4
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 at March 18, 1998 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,
(iii) each executive officer of the Company listed in the Summary Compensation
Table (see Proposal 1) and (iv) all directors and officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENTAGE OF
BENEFICIAL COMMON STOCK
NAME OWNERSHIP BENEFICIALLY OWNED(1)(2)
---- ---------- ------------------------
<S> <C> <C>
International Business Machines Corporation................ 2,274,066(3) 29.24%(4)
Old Orchard Road, Armonk, NY 10504
EJ Financial Investments V, L.P. .......................... 1,039,792 18.89%
225 East Deer Path Road, Suite 250
Lake Forest, IL 60045
Sutter Health and Sutter Health Venture Partners, L.P. .... 611,607(5) 11.11%
One Capitol Mall
Sacramento, CA 95814
Ramesh C. Trivedi(6)....................................... 302,047(7) 5.21%(8)
John N. Kapoor(9).......................................... 1,039,792(10) 18.89%
James C. McGroddy(11)...................................... 33,824(12) *
Paul A.H. Pankow(13)....................................... 6,936(14) *
Patrick G. Hays(15)........................................ 4,375(16) *
Gerald D. Knudson(17)...................................... 4,375(16) *
Michael J. Tomczak......................................... 81,279(18) 1.46%(19)
All directors and officers as a group (7 persons).......... 1,392,349(20) 23.88%(21)
</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
March 18, 1998, 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 5,503,390 shares of
Common Stock issued and outstanding.
(3) 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.
(4) Calculated based upon 7,777,456 shares of Common Stock issued and
outstanding.
(5) 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
L.P. ("Sutter Partners"), an affiliate of Sutter Health.
(6) Address is c/o the Company, 829 West Stadium Lane, Sacramento, California
95834.
(7) Includes 298,047 shares issuable upon the exercise of stock options
exercisable within 60 days -- 264,089 shares at an exercise price of $0.07
per share, 28,125 shares at an exercise price of $4.75 and 5,833 at an
exercise price of $6.13 per share. An additional 71,875 shares issuable
upon exercise of stock options will become exercisable over the remaining
term of the options.
2
<PAGE> 5
(8) Calculated based upon 5,801,437 shares of Common Stock issued and
outstanding.
(9) Address is c/o EJ Financial Enterprises, 225 E. Deer Path Road, Suite 250,
Lake Forest, Illinois 60045.
(10) 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.
(11) Address is 200 Business Park Drive, Armonk, New York 10504.
(12) Includes 20,000 shares of Common Stock owned by Dr. McGroddy, 1,000 shares
of Common Stock beneficially owned by his daughter, and 12,824 shares of
Common Stock issuable upon exercise of stock options exercisable within 60
days -- 8,907 shares at an exercise price of $5.00 per share, 417 shares at
an exercise price of $5.625 and 3,500 shares at an exercise price of
$3.9375. An additional 20,842 shares issuable upon exercise of stock
options will become exercisable over the remaining term of the options at
exercise prices ranging from $5.00 to $5.625.
(13) Address is 7840 East Lake Carlos Drive N.E., Carlos, Minnesota 56319.
(14) Represents shares issuable upon exercise of stock options exercisable
within 60 days -- 676 shares at an exercise price of $2.07 per share, 1,094
shares at an exercise price of $5.00 per share, 1,666 shares at an exercise
price of $5.625 per share, and 3,500 shares at an exercise price of $3.9375
per share. An additional 4,434 shares issuable upon exercise of stock
options will become exercisable over the remaining term of the options at
exercise prices ranging from $2.07 to $5.625 per share.
(15) Address is c/o Blue Cross/Blue Shield Association, 225 North Michigan, 9th
Floor, Chicago, Illinois 60601-7680.
(16) Represents shares of issuable upon exercise of options exercisable within
60 days -- 875 shares at an exercise price of $5.625 per share and 3,500
shares at an exercise price of $3.9375. An additional 2,625 shares issuable
upon exercise of stock options will become exercisable over the remaining
term of the options at an exercise price of $5.625 per share.
(17) Address is c/o Sterling Diagnostic Imaging, Inc., 10 South Academy Street,
Greenville, South Carolina 29602.
(18) Represents shares issuable upon exercise of options exercisable within 60
days at an exercise price of $0.07 per share.
(19) Calculated on the basis of 5,592,028 shares issued and outstanding.
(20) Includes 298,432 shares issuable upon exercise of options exercisable
within 60 days at exercise prices ranging from $0.07 to $5.625 per share.
Does not include shares beneficially owned by Mr. Tomczak, who is no longer
employed by the Company.
(21) Calculated based upon 5,829,947 shares of Common Stock issued and
outstanding.
3
<PAGE> 6
ACTIONS TO BE TAKEN AT THE ANNUAL MEETING
PROPOSAL 1. ELECTION OF DIRECTORS
The Directors to be elected at the Annual Meeting will serve until the next
Annual Meeting of Stockholders and until their successors are duly elected and
qualified. Proxies not marked to the contrary will be voted "FOR" the election
to the Board of Directors of the following six persons, all of whom are
incumbent Directors.
Set forth below is certain information as of March 18, 1998 concerning each
nominee for Director, including his age, present principal occupation and
business experience during the past five years and the period he has served as a
director.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE PRINCIPAL OCCUPATION AND RELATED INFORMATION SINCE
---- --- ------------------------------------------------------- --------
<S> <C> <C> <C>
Ramesh C.
Trivedi.......... 58 Chief Executive Officer of the Company since November November
1995; consultant to the Company from February 1995 1995
until November 1995; Principal of California Biomedical
Consultants (an international consulting firm) since
1987; President and Chief Executive Officer of DigiRad
Corporation (a medical imaging company) from 1985 to
1986.
James C.
McGroddy......... 60 Chairman of the Board of Directors of the Company since November
November 1995; Senior Vice President and Special 1995
Advisor to the Chairman of IBM from January 1996
through December 1996; Senior Vice President of
Research of IBM from May 1989 to December 1995.
John N. Kapoor..... 53 President of EJ Financial Enterprises, Inc. (a December
healthcare consulting and investment company); Chairman 1995
of Option Care, Inc. (a franchiser of home infusion
therapy businesses) since October 1990; Chairman of
Unimed Pharmaceuticals, Inc. (a specialty
pharmaceutical company) since 1990; Chief Executive
Officer and Chairman of Akorn, Inc. (a manufacturer and
distributor of ophthalmic products) since May 1996;
Chairman of NeoPharm, Inc. (cancer drug research and
development company).
Paul A.H. Pankow... 68 President of PAP Consulting (business and technical May 1995
consulting firm) since March 1995, held various
positions with 3M Corporation, including Vice President
and Chief Executive Officer of its Imaging Systems
Division, from September 1959 to February 1995.
Gerald D.
Knudson.......... 54 Executive Vice President of Sterling Diagnostic May 1997
Imaging, Inc. (manufacturer and distributor of medical
diagnostic imaging products) since January 1997;
President, Medical Systems Division of Polaroid
(manufacturer of medical diagnostic imaging printers
and film) from 1994 to 1996; Chief Executive Officer of
Resonex, Inc. (manufacturer of MRI systems) from 1988
to 1994.
Patrick G. Hays.... 55 President and Chief Executive Officer of Blue Cross and May 1997
Blue Shield Association (national coordinating body for
the United States' sixty-two community-based and
independent Blue Cross and Blue Shield Plans) since
February 1995; President and Chief Executive Officer of
Sutter Health (vertically integrated provider of health
services in northern California) from 1980 to 1995.
</TABLE>
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
4
<PAGE> 7
complaints alleges that Dr. Kapoor filed false applications for generic drug
approvals with the FDA on behalf 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 dismissing the RICO and state law claims and
remanded the case to the District Court. Dr. Kapoor has filed a motion for
summary judgment on the RICO and state law claims. 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.
MEETINGS OF THE BOARD OF DIRECTORS AND INFORMATION REGARDING COMMITTEES
The Board of Directors has two standing committees, an Audit Committee and
a Compensation Committee.
The Audit Committee is composed of Dr. Kapoor (Chairman), Mr. Hays and Mr.
Pankow. The duties of the Audit Committee include recommending the engagement of
independent auditors, reviewing and considering actions of management in matters
relating to audit functions, reviewing with independent auditors the scope and
results of its audit engagement, reviewing reports from various regulatory
authorities, reviewing the system of internal controls and procedures of the
Company, and reviewing the effectiveness of procedures intended to prevent
violations of law and regulations. The Audit Committee held two meetings in
1997.
The Company's Compensation Committee is composed of Dr. McGroddy
(Chairman), Dr. Kapoor and Mr. Knudson. The duties of this 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 meetings in 1997.
The Board of Directors held five meetings in 1997. All Directors other than
Mr. Hays attended at least 75% of the total number of Board meetings and
meetings of committees on which they served during the period they served
thereon in 1997.
The Company pays independent Directors $7,500 per annum, plus $500 for each
Board of Directors meeting attended in person and $250 for each Board of
Directors meeting attended by telephone. Members who serve on either the Audit
or Compensation Committees are paid $300 for each meeting attended in person and
$150 for each meeting attended by telephone. Committee chairmen also are paid
$500 per annum. Independent Directors (other than Dr. Kapoor) also receive
annually ten year non-qualified stock options to purchase 3,500 shares of the
Company's Common Stock at an exercise price equal to the fair market value of
the Common Stock on the date of grant.
5
<PAGE> 8
The following table sets forth information concerning stock options granted
to independent Directors since January 1, 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING EXERCISE PRICE EXPIRATION
NAME OPTIONS GRANTED PER SHARE DATE
---- --------------------------- -------------- ----------
<S> <C> <C> <C>
James C. McGroddy........................... 25,000 $ 5.00 1/24/07
3,500 5.00 1/24/07
1,666 5.625 5/14/07
3,500 3.9375 1/23/08
Paul A. H. Pankow........................... 3,500 5.00 1/24/07
1,666 5.625 5/14/07
3,500 3.9375 1/23/08
Gerald D. Knudson........................... 3,500 5.625 5/14/07
3,500 3.9375 1/23/08
Patrick G. Hays............................. 3,500 5.625 5/14/07
3,500 3.9375 1/23/08
</TABLE>
THE BOARD OF DIRECTORS RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" THE NOMINEES FOR
DIRECTOR NAMED ABOVE (PROPOSAL 1)
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 exceeded $100,000 for the year ended
December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION(1) OPTIONS
--------------------------- ---- -------- --------------- ------------
<S> <C> <C> <C> <C>
Ramesh C. Trivedi.................................. 1997 $264,000 $50,400 20,000
Chief Executive Officer and President 1996 $264,000 $50,000 316,907
Michael J. Tomczak(2).............................. 1997 $ 88,500 $21,000 15,000
Vice President and Chief Financial Officer 1996 $112,060 $30,000 30,415
</TABLE>
- ---------------
(1) Represents cash incentive bonus
(2) Mr. Tomczak resigned from his positions with the Company and ceased to be an
employee of the Company effective September 30, 1997.
EMPLOYMENT AGREEMENT
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 terminable at will by either party. 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 annual salary for 1998 has
been increased to $278,400 ($23,200 per month). 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.
6
<PAGE> 9
STOCK OPTIONS
The following table contains information concerning the grant of stock
options under the Company's Amended 1995 Stock Option Plan to Dr. Trivedi and
Mr. Tomczak (collectively, the "Named Executive Officers") during the fiscal
year ended December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL
SHARES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED(1) FISCAL YEAR SHARE(2) DATE
---- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Ramesh C. Trivedi..................................... 20,000 5.67% $6.13 3/12/07
Michael J. Tomczak.................................... 15,000 4.25% 6.13 3/12/07
</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.
The following table summarizes for each of the Named Executive Officers the
total number of unexercised options, if any, held at December 31, 1997, and the
aggregate dollar value of in-the-money, unexercised options, held at December
31, 1997. The value of the unexercised, in-the-money options at December 31,
1997, is the difference between their exercise or base price and the value of
the underlying Common Stock on December 31, 1997. The closing sale price of the
Common Stock on The Nasdaq SmallCap Market on December 31, 1997 was $4.00 per
share.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY END OPTION VALUES
<TABLE>
<CAPTION>
SHARES ACQUIRED NUMBER OF SECURITIES VALUE OF UNEXERCISED
UPON EXERCISE UNDERLYING IN-THE-MONEY
OF OPTIONS UNEXERCISED OPTIONS OPTIONS AT
DURING FISCAL 1997 AT DECEMBER 31, 1997 DECEMBER 31, 1997
------------------- --------------------------- ---------------------------
VALUE
NAME NUMBER REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ramesh C. Trivedi..................... None None 234,746 102,161 $922,552(1) $322,893(2)
Michael J. Tomczak.................... None None 80,531 748 $316,487(3) 2,940(4)
</TABLE>
- ---------------
(1) Represents value of options to purchase 234,746 shares at an exercise price
of $0.07 per share.
(2) Represents value of options to purchase 82,161 shares at an exercise price
of $0.07 per share.
(3) Represents value of options to purchase 80,531 shares at an exercise price
of $0.07 per share.
(4) Represents value of options to purchase 748 shares at an exercise price of
$0.07 per share.
PROPOSAL 2. APPROVAL OF THE COMPANY'S 1998 STOCK OPTION PLAN
The Board of Directors of the Company, subject to stockholder approval, has
adopted the Company's 1998 Stock Option Plan (the "1998 Plan"), which authorizes
the grant of options to purchase an aggregate of 850,000 shares of Common Stock.
7
<PAGE> 10
The Board of Directors has deemed it in the best interest of the Company to
establish the 1998 Plan so as to provide employees and other persons involved in
the continuing development and success of the Company and its subsidiaries an
opportunity to acquire a proprietary interest in the Company by means of grants
of options to purchase Common Stock. The 1998 Plan authorizes additional options
for grant to eligible participants since only options to purchase 50,394 shares
remain available for grant under the Company's Amended 1995 Stock Option Plan
(the "1995 Plan"). It is the opinion of the Board of Directors that by providing
the Company's employees and other individuals contributing to the Company and
its subsidiaries the opportunity to acquire an equity investment in the Company,
the 1998 Plan will maintain and strengthen their desire to remain with the
Company, stimulate their efforts on the Company's behalf, and also attract other
qualified personnel to provide services on behalf of the Company.
As of March 6, 1998, options to purchase 145,000 shares of Common Stock had
been granted or allocated under the 1998 Plan, including options to purchase
107,000 shares of Common Stock granted to three Directors, including options to
purchase 100,000 shares at an exercise price of $4.75 per share granted to Dr.
Trivedi, the Chief Executive Officer and President of the Company. As of that
date, no options had been granted or allocated to or any other executive officer
of the Company pursuant to the 1998 Plan.
The following statements summarize certain provisions of the 1998 Plan. All
statements are qualified in their entirety by reference to the text of the 1998
Plan, copies of which are available for examination at the Securities and
Exchange Commission and at the principal office of the Company, 829 West Stadium
Lane, Sacramento, California.
The 1998 Plan allows the Company to grant incentive stock options ("ISOs"),
as defined in Section 422(b) of the Internal Revenue Code of 1986, as amended
(the "Code"), Non-Qualified Stock Options ("NQSOs") not intended to qualify
under Section 422(b) of the Code and Stock Appreciation Rights ("SARs"). ISO's,
NQSO's and SAR's may be collectively referred to as "Options." The vesting of
one or more options granted hereunder may be based on the attainment of
specified performance goals of the participant or the performance of the
Company, one or more subsidiaries, parent and/or division of one or more of the
above. The 1998 Plan is intended to provide the employees, directors,
independent contractors and consultants of the Company with an added incentive
to commence or continue their services to the Company and to induce them to
exert their maximum efforts toward the Company's success. The Board of Directors
has deemed it in the best interest of the Company to establish the 1998 Plan so
as to provide employees and the other persons listed above the opportunity to
acquire a proprietary interest in the Company by means of grants of options to
purchase Common Stock. The 1998 Plan is not subject to ERISA.
ELIGIBILITY FOR PARTICIPATION
Under the 1998 Plan, ISOs or ISOs in tandem with SARs, which are subject to
the requirements set forth in Temp. Reg. Section 14a.422A-1, A-39 (a)-(e), may
be granted, from time to time, to employees of the Company, including officers,
but excluding directors who are not otherwise employees of the Company. NQSOs
and SARs may be granted from time to time, under the 1998 Plan, to employees of
the Company, officers, directors, independent contractors, consultants and other
individuals who are not employees of, but are involved in the continuing
development and success of the Company persons entitled to receive ISOs, NQSOs,
and/or SARs are hereinafter referred to as "Participants" and the persons
receiving same are Optionees. ISOs and ISOs in tandem with SARs may not be
granted under the 1998 Plan to any person for whom shares first become
exercisable under the 1998 Plan or any other stock option plan of the Company in
any calendar year having an aggregate fair market value (measured at the
respective time of grant of such options) in excess of $100,000. Any grant in
excess of such amount shall be deemed a grant of a NQSO. To date, the Company
has approximately 60 employees (three of whom are also Officers) who are
eligible for grants of one or more types of Options under the 1998 Plan. The
Company cannot presently compute the number of non-employees who may be entitled
to NQSOs. Pursuant to the terms of the Plan, the maximum number of options which
can be granted to a Participant under the Plan is 212,500.
ADMINISTRATION
The 1998 Plan is to be administered by the Board of Directors of the
Company and/or by a stock option or compensation committee (the administrator of
the 1998 Plan whether the Board of Directors itself or a
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committee thereof is hereinafter referred to as the "Committee" unless the
context otherwise requires) which shall be comprised solely of at least two
"outside directors" (as such term is defined under Section 162(m) of the Code).
The Committee will have the authority, in its discretion, to determine the
persons to whom Options shall be granted, the character of such Options and the
number of shares of Common Stock to be subject to each Option. The Board of
Directors may administer the 1998 Plan; provided, however, that in the event a
Committee has been appointed, the Committee will administer the 1998 Plan with
respect to employees included within the term "covered employee" under Section
162(m) of the Code.
TERMS OF OPTIONS
The terms of Options granted under the 1998 Plan are to be determined by
the Board of Directors or the Committee. Each Option is to be evidenced by a
stock option agreement between the Company and the person to whom such option is
granted, and is subject to the following additional terms and conditions:
(a) Exercise of the Option: The Committee will determine the time
periods during which Options granted under the 1998 Plan may be exercised.
An Option must be granted within ten (10) years from the date the 1998 Plan
was adopted or the date the 1998 Plan is approved by the stockholders of
the Company, whichever is earlier. Options will be exercisable in whole or
in part at any time during the period but will not have an expiration date
later than ten (10) years from the date of grant. Unless otherwise provided
in any option agreement issued under the 1998 Plan, any Option granted
under the 1998 Plan may be exercisable in whole or in part at any time
during the exercise period and except for performance based options, must
become fully exercisable within five years from the date of its grant, and
not less than 20% of the Option shall become exercisable on an aggregate
basis by the end of any of the first five years of the Option. The
Committee may, in its sole discretion, accelerate any such vesting period
after the grant thereof. Notwithstanding the above, ISOs or SARs granted in
tandem with ISOs, granted to holders owning directly or through attribution
more than 10% of the Company's Common Stock are subject to the additional
restriction that the expiration date shall not be later than five (5) years
from the date of grant. An Option is exercised by giving written notice of
exercise to the Company specifying the number of full shares of Common
Stock to be purchased and tendering payment of the purchase price to the
Company in cash or certified check, or if permitted by the instrument of
grant, with respect to an ISO, or at the discretion of the Committee with
respect to NQSOs, by delivery of Common Stock or surrender of options
having a fair market value equal to the Option Price, by delivery of an
interest bearing promissory note having an original principal balance equal
to the Option Price and an interest rate not below the rate which would
result in imputed interest under the Code or by a combination of cash,
shares of Common Stock, surrender of options and promissory notes.
Furthermore, at the discretion of the Committee, the Participant may have
the Company withhold from the Common Stock to be issued upon exercise of
the Option that number of shares having a fair market value equal to the
exercise price and/or the withholding amount due.
(b) Option Price: The option price of an NQSO or an SAR granted in
tandem with an NQSO granted pursuant to the 1998 Plan will be determined in
the sole discretion of the Committee, but in no event shall be less than
85% of the fair market value of the Common Stock underlying the option on
the date of grant. The option price of an ISO or SAR granted in tandem with
an ISO pursuant to the 1998 Plan shall not be less than the fair market
value of the Common Stock underlying the option at the date of grant. Such
fair market value shall be determined by the Committee and, if the Common
Stock is listed on a national securities exchange or quoted on The Nasdaq
Stock Market, Inc. ("Nasdaq"), the fair market value shall be the closing
price of the Common Stock on such exchange or Nasdaq, or if closing prices
are not available or the Common Stock is quoted on the National Association
of Securities Dealers, Inc. ("NASD") OTC Bulletin Board ("OTC Bulletin
Board") or otherwise in the over-the-counter market, the mean of the
closing bid and asked prices of the Common Stock, as reported by Nasdaq,
the NASD, the OTC Bulletin Board or the National Quotation Bureau, Inc., as
the case may be, on such date, or if there is no closing price or bid or
asked price on that day, the closing price or mean of the closing bid and
asked prices on the most recent day preceding the day on which the Option
is granted for which such prices are available.. ISOs or SARs granted in
tandem with ISOs, granted to holders
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owning directly or through attribution, more than 10% of the Company's
Common Stock are subject to the additional restriction that the option
price must be at least 110% of the fair market value of the Company's
Common Stock on the date of grant.
(c) Termination of Employment or Consulting Agreement; Death;
Disability: Except as provided in the 1998 Plan, or otherwise extended by
the Committee in its sole discretion, subject to the last paragraph of this
subparagraph (c), upon the voluntary termination of employment with the
Company, or, in the case of a consultant, termination of the consulting
relationship prior to the termination of the term thereof a holder of an
Option under the 1998 Plan may exercise such Option to the extent such
Option was exercisable as of the date of termination or at any time within
thirty (30) days after the date of such termination. Except as provided
herein, or otherwise determined by the Board of Directors or the Committee
in its sole discretion, if such employment or consulting relationship shall
terminate for any reason other than death, voluntary termination by the
employee or for cause, then such Options may be exercised at anytime within
three (3) months after such termination. Notwithstanding the above, unless
otherwise determined by the Committee in its sole discretion, any Options
granted under the 1998 Plan shall immediately terminate in the event the
Optionee is terminated as a result of the Optionee having not adequately
performed the services for which the Optionee was hired.
Unless extended by the Committee, if the holder of an Option granted
under the 1998 Plan dies (i) while employed by the Company or a subsidiary
or parent corporation or (ii) within three (3) months after the termination
of such holder's employment, such option may be exercised at any time
determined by the Committee, but in no event less than six months of death
by a legatee or legatees of such option under such individual's last will
or by such individual's estate, to the extent such option was exercisable
as of the date of death or date of termination of employment, whichever
date is earlier.
If the holder of an Option under the 1998 Plan becomes disabled within
the definition of Section 22(e)(3) of the Code while employed by the
Company or a subsidiary or parent corporation, such Option may be exercised
at any time within six months less one day after such holder's termination
of employment due to the disability.
An Option may not be exercised except to the extent that the holder
was entitled to exercise the option at the time of termination of
employment or death unless otherwise extended by the Committee in its sole
discretion, and in any event it may not be exercised after the original
expiration date of the Option.
(d) Nontransferability of Options; No Liens: ISOs and SARs granted in
tandem with ISOs shall be nontransferable and nonassignable except by will
or the laws of intestacy, and any ISO or SAR in tandem with an ISO is
exercisable during the lifetime of the Optionee only by the Optionee, or in
the event of his or her death, by a person who acquires the right to
exercise the Option by bequest or inheritance or by reason of the death of
the Optionee. The Board or its Committee has the right to grant options
other than ISO's or SAR's in tandem with ISO's which may or may not include
the right to transfer or assign same.
The option agreement may contain such other terms, provisions and
conditions not inconsistent with the 1998 Plan as may be determined by the
Committee.
TERMINATION; MODIFICATION AND AMENDMENT
The 1998 Plan (but not options previously granted under the 1998 Plan)
shall terminate ten years from the earlier of the date of its adoption by the
Board of Directors or the date the 1998 Plan is approved by the stockholders of
the Company. No Option will be granted after termination of the 1998 Plan.
The Board of Directors of the Company may terminate the 1998 Plan at any
time prior to its expiration date, or from time to time make such modifications
or amendments of the 1998 Plan, as it deems advisable. However, the Board of
Directors may not, without the approval of a majority of the then shares of the
capital stock of the Company present in person or by proxy at an Annual or
Special Meeting of Stockholders and voting thereon, except under conditions
described under "Adjustments Upon Changes in Capitalization,"
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increase the maximum number of shares as to which options may be granted under
the 1998 Plan or materially change the standards of eligibility under the 1998
Plan.
No termination, modification or amendment of the 1998 Plan may adversely
affect the terms of any outstanding Options without the consent of the holders
of such Options.
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event that the number of outstanding shares of Common Stock of the
Company is changed by reason of recapitalization, reclassification, stock split,
stock dividend, combination, exchange of shares, or the like, the Board of
Directors of the Company will make an appropriate adjustment in the aggregate
number of shares of Common Stock available under the 1998 Plan, in the number of
shares of Common Stock reserved for issuance upon the exercise of then
outstanding Options and in the exercise prices of such Options. Any adjustment
in the number of shares will apply proportionately only to the unexercised
portion of Options granted under the 1998 Plan. Fractions of shares resulting
from any such adjustment shall be revised to the next higher whole number of
shares.
In the event of the proposed dissolution or liquidation of substantially
all of the assets of the Company, all outstanding Options will automatically
terminate, unless otherwise provided by the Board of Directors.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is only a summary of the principal federal income
tax consequences of the Options granted under the 1998 Plan and is based on
existing federal law, which is subject to change, in some cases retroactively.
This discussion is also qualified by the particular circumstances of individual
optionees, which may substantially alter or modify the federal income tax
consequences discussed below. Accordingly, optionees should consult their own
tax advisors.
Generally, under present law, when an option qualifies as an ISO under
Section 422 of the Code (i) an employee will not realize taxable income either
upon the grant or the exercise of the option, (ii) the amount by which the fair
market value of the shares acquired by the exercise of the option at the time of
exercise exceeds the option price is included in alternative minimum taxable
income for purposes of determining the employee's alternative minimum tax, (iii)
any gain or loss (the difference between the net proceeds received upon the
disposition of the shares and the option price paid therefor) upon a qualifying
disposition of the shares acquired by the exercise of the option will be treated
as capital gain or loss if the stock qualifies as a capital asset in the hands
of the employee, and (iv) no deduction will be allowed to the Company for
federal income tax purposes in connection with the grant or exercise of an
incentive stock option or a qualifying disposition of the shares. A disposition
by an employee of shares acquired upon exercise of an ISO will constitute a
qualifying disposition if it occurs after the holder's death or more than two
years after the grant of the option and one year after the issuance of the
shares to the employee. If such shares are disposed of by the employee before
the expiration of those time limits, the transfer would be a "disqualifying
disposition" and the employee, in general, will recognize ordinary income (and
the Company will receive an equivalent deduction) equal to the lesser of (i) the
aggregate fair market value of the shares as of the date of exercise less the
option price or (ii) the amount realized on the disqualifying disposition less
the option price. Ordinary income from a disqualifying disposition will
constitute compensation for which withholding may be required under federal and
state law. Currently under the Code, the maximum rate of tax on ordinary income
is greater than the rate of tax on long-term capital gains.
The holding period for shares of stock received upon the exercise of an ISO
commences on the date of exercise of the grant. Under present Federal income tax
law, in the event that such shares are sold after two (2) years from the date of
the grant and between twelve (12) and within eighteen (18) months of the
exercise of the grant, the Federal capital gains tax will be at the rate of 28%.
In the event such shares are sold after two years from the date of the grant,
and eighteen months or more from the date of exercise of the grant, the Federal
capital gains tax will be at the rate of 20%. To the extent that an optionee
recognizes a capital loss, such loss may currently generally offset capital
gains and $3,000 of ordinary income. Any excess capital loss is carried forward
indefinitely.
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In the case of a non-qualified stock option granted under the 1998 Plan, no
income generally is recognized by the optionee at the time of the grant of the
option assuming such non-qualified stock option does not have a readily
ascertainable fair market value. The optionee generally will recognize ordinary
income when the non-qualified stock option is exercised equal to the aggregate
fair market value of the shares acquired less the option price. Ordinary income
from non-qualified stock options will constitute compensation for which
withholding may be required under federal and state law, and the Company will
receive an equivalent deduction, subject to the limitations of Section 162(m) of
the Code which limits the amount a publicly held corporation may deduct with
respect to remuneration generally paid to an executive officer of the
Corporation to $1,000,000. Income recognized by such executive officer on the
exercise of a NQSO or SAR would be deemed remuneration. However, there are
certain requirements which, if met, will allow income from the exercise of a
NQSO or SAR to be excluded from remuneration for such purposes. Even though the
Company and the 1998 Plan satisfy such requirements, no assurance can be given
that they will be met in the future.
Shares acquired upon exercise of non-qualified stock options will have a
tax basis equal to their fair market value on the exercise date or other
relevant date on which ordinary income is recognized and the holding period for
the shares generally will begin on the date of the exercise or such other
relevant date. Upon subsequent disposition of the shares, the optionee will
recognize capital gain or loss if the stock is a capital asset in his hands.
Provided the shares are held by the optionee for more than one year prior to
disposition, such gain or loss will be long-term capital gain or loss. As set
forth above, the maximum rate of tax on ordinary income is currently greater
than the rate of tax on long-term capital gains. To the extent an optionee
recognizes a capital loss, such loss may currently generally offset capital
gains and $3,000 of ordinary income. Any excess capital loss is carried forward
indefinitely.
The grant of an SAR is generally not a taxable event for the optionee. Upon
the exercise of an SAR the optionee will recognize ordinary income in an amount
equal to the amount of cash and with respect to SARs granted in tandem with
NQSOs, the fair market value of any shares of Common Stock received upon such
exercise, and the Company will be entitled to a deduction equal to the same
amount. However, if the sale of any shares received would be subject to Section
16(b) of the Securities Exchange Act of 1934, ordinary income attributable to
such shares received will be recognized on the date such sale would not give
rise to a Section 16(b) action, valued at the fair market value at such later
time, unless the optionee has made a Section 83(b) election within 30 days after
the date of exercise to recognize ordinary income as of the date of exercise
based on the fair market value at the date of exercise.
The foregoing discussion is only a brief summary of the applicable federal
income tax laws as in effect on this date and should not be relied upon as being
a complete statement. The federal tax laws are complex, and they are subject to
legislative changes and new or revised judicial or administrative
interpretations at any time. In addition to the federal income tax consequences
described herein, an optionee may also be subject to state and/or local income
tax consequences in the jurisdiction in which the grantee works and/or resides.
OTHER STOCK OPTION PLANS
The 1995 Plan authorizes the Company to grant stock purchase rights and/or
options to acquire an aggregate of 1,249,070 shares of Common Stock to
directors, employees (including officers) and consultants of the Company ("Plan
participants"). The Company has outstanding options to purchase an aggregate of
1,129,095 shares granted pursuant to the 1995 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
27,894 shares of Common Stock granted pursuant to the 1995 Plan have been
exercised and options to purchase an aggregate of 50,394 shares of Common Stock
remain available for grant under the 1995 Plan. No stock purchase rights have
been granted pursuant to the 1995 Plan.
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 1995 Plan. These options
were
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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.
The affirmative vote of a majority of the outstanding shares of Common
Stock of the Company present in person or by proxy at the Annual Meeting and
voting on the 1998 Plan is required for approval of the 1998 Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS
VOTE "FOR" THE APPROVAL OF THE ADOPTION OF
THE 1998 STOCK OPTION PLAN (PROPOSAL 2)
PROPOSAL 3. APPROVAL OF THE COMPANY'S EMPLOYEE STOCK PURCHASE PLAN
The Board of Directors of the Company, subject to stockholder approval, has
adopted the Company's Employee Stock Purchase Plan (the "Purchase Plan"). The
Purchase Plan provides all eligible employees an opportunity to acquire a
proprietary interest in the Company on a payroll deduction or other compensation
basis at a discount. The Purchase Plan is intended to qualify as an employee
stock purchase plan under Section 423 of the Code. The Purchase Plan covers an
aggregate 300,000 shares of the Company's Common Stock.
The following statements summarize certain provisions of the Purchase Plan.
All statements are qualified in their entirety by reference to the text of the
Plan, copies of which are available for examination at the Securities and
Exchange Commission and at the principal office of the Company, 829 West Stadium
Lane, Sacramento, California.
The Purchase Plan provides that all employees (including officers and
Directors who are also employees) who have been in the employ of the Company
and/or corporations in which the Company owns 50% or more of the voting shares
thereof (the term "Company" for purposes of this summary shall hereinafter be
deemed to include all of such subsidiaries of the Company) for six months or
more and who customarily work more than 20 hours per week and more than five
months per calendar year are eligible to participate in the Plan. The Purchase
Plan authorizes the Committee, as defined below, to grant options to purchase
Common Stock to eligible employees pursuant to one or more offerings to be made
under the Purchase Plan, to determine the number of offerings and the terms and
conditions thereof. Unless the Committee decides otherwise, the Purchase Plan
will be implemented by up to 20 consecutive six-month offerings, with the first
offering being from the date the Purchase Plan becomes effective through the
next June 30th or December 31st, whichever is earlier. Thereafter, offerings
will commence on each subsequent January 1 or July 1 and terminate 6 months
thereafter until the Purchase Plan is terminated or no additional shares of
Common Stock are available for purchase under the Plan.
The Committee may exclude the employees of any specific subsidiary from any
offering under the Purchase Plan. In addition, no option may be granted to an
employee who, immediately after the option is granted, owns five percent or more
of the value or voting power of all classes of stock of the Company or its
parent, if any, or subsidiary corporations, taking into account certain
attributable rules. Furthermore, no eligible employee may be granted an option
which permits him the right to purchase stock under all employee stock purchase
plans of the Company, parent or subsidiary which accrues at a rate that exceeds
$25,000 of fair market value of such stock (determined at the time such option
is granted) for any one calendar year.
Prior to any offering made under the Purchase Plan, the Company will grant
to each eligible employee the right to become a participant in the Purchase
Plan.
Participants in the Purchase Plan will have deducted from their base weekly
salaries, a percentage or stated amount thereof to be applied toward the
purchase of shares of Common Stock of the Company. Each eligible participant is
empowered to authorize salary or commission deductions of up to a maximum of 15%
of the employee's weekly base pay and any bonus or similar compensation. On the
date on which a particular offering begins, participants will automatically be
granted, subject to certain limitations set forth in the Purchase Plan, an
option to purchase the number of full shares of Common Stock which his
accumulated payroll deductions will purchase as of the date such offering
terminates. The option price will be based upon a
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price equal to 85% of the lesser of the closing price of the Common Stock at the
date the respective offering commences or terminates. These options, to the
extent remaining outstanding, will be automatically exercised as of the date on
which a particular offering terminates. As such, the Company will be deemed to
be contributing 15% (85% of the purchase price of the Common Stock is to be
borne by the participants) of the employee's contributions toward the purchase
of such shares. Furthermore, the Company shall bear all administrative and
commission costs in connection with the acquisition of the Common Stock and
reasonable administrative costs, other than commissions, from a sale of the
Common Stock or transfer to a participant.
The Purchase Plan is not subject to any provisions of the Employee
Retirement Income Security Act of 1974.
PAYROLL DEDUCTION
Provisions are included in the Purchase Plan for termination of
participation, increase or reduction of payroll deductions, the effect of death
or termination of employment and the use of dividends to purchase additional
shares (which purchase is also at the discounted price). Participants shall bear
the cost of sales commissions on the sale of the Common Stock as well as
administrative costs associated with a sale or transfer of Common Stock at a
time different from the prearranged dates set by the Company.
ADMINISTRATION
The Purchase Plan is to be administered by a committee (the "Committee") of
not less than three members appointed by the Board of Directors of the Company.
Each member of the Committee shall be either a Director, an officer, or an
employee of the Company. The interpretation and construction of any provision of
the Plan by the Committee shall be final and conclusive. Members of the
Committee will receive no compensation for their services in connection with the
administration of the Purchase Plan. The Company has engaged American Stock
Transfer & Trust Company to establish payroll deduction accounts and investment
accounts for each participant. American Stock Transfer & Trust Company will be
responsible, subject to supervision by the committee, to acquire the Common
Stock, allocate the same among the Purchase Plan's participants, and distribute
or sell the same as directed from time to time.
The Purchase Plan may be terminated at any time by the Board of Directors.
ADJUSTMENT IN CASE OF CHANGES AFFECTING THE COMPANY'S STOCK
Appropriate adjustments in the maximum number of shares which shall be made
available for sale under the Purchase Plan shall be made to give effect to any
mergers, consolidations, acquisitions, stock splits, stock dividends, or other
relevant changes in the capitalization occurring after the effective date of the
Purchase Plan. Shares held in an employee's investment account are deemed owned
by such employee and the above changes in the shares of the Company's Stock
shall affect him in the same manner as such changes affect any other stockholder
of the Company.
FEDERAL INCOME TAX CONSIDERATION
Under Section 423(a) of the Code, the transfer of a share of stock to an
employee pursuant to the Purchase Plan will be entitled to the benefits of
Section 421(a) of the Code. Under that Section, an employee will not be required
to recognize income at the time the option is granted or at the time the option
is exercised. If, as currently contemplated by the Purchase Plan, the option
price applicable to any offering made under the Purchase Plan is less than the
fair market value of the Common Stock on the date of grant, then, provided the
holding periods described below are met, upon the disposition of the shares of
Common Stock by the employee (or in the event of the death of the employee while
owning such Common Stock whether or not the holding period requirements are
met), the employee will recognize compensation income (taxed as ordinary income)
in an amount equal to the lesser of (i) the excess of the fair market value of
the Common Stock at the time of such disposition or death over the amount paid
for the Common Stock (i.e., the option price); or (ii) the excess of the fair
market value of the Common Stock on the date the option is granted over the
option price (determined as of the date the option is granted). The amount
recognized as ordinary compensation
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income will increase the employee's basis in such shares. Any additional gain or
any loss resulting from the disposition will be taxed as long-term capital gain
or loss. The Company will not be entitled to any deduction with respect to the
Purchase Plan, except in connection with a disqualifying disposition as
discussed below.
In order for an employee to receive the favorable tax treatment provided in
Section 421(a) of the Code, Section 423(a) requires that the employee make no
disposition of the Common Stock within two years from the date the option was
granted nor within one year from the date the option was exercised and the
Common Stock transferred to him. If an employee disposes of Common Stock
acquired pursuant to the Purchase Plan before the expiration of these holding
period requirements, the employee will recognize, at the time of the
disposition, ordinary compensation income in an amount equal to the excess of
the fair market value of the Common Stock on the date the Common Stock was
purchased (i.e., the date the option was exercised) over the option price. The
amount recognized as ordinary compensation income will increase the employee's
tax basis in such shares. Any gain or loss resulting from the disposition (i.e.,
the difference between the amount received by the employee and the employee's
basis in the transferred shares) will be taxed as capital gain or loss. At the
time of the disposition, the Company would be allowed a deduction equal to the
amount included in the employee's income as ordinary compensation income.
The affirmative vote of a majority of the outstanding shares of Common
Stock of the Company present in person or by proxy at the Annual Meeting and
voting on the Purchase Plan is required for approval of the Purchase Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS
VOTE "FOR" THE APPROVAL OF THE ADOPTION OF THE
EMPLOYEE STOCK PURCHASE PLAN (PROPOSAL 3)
PROPOSAL 4. AMENDMENT TO THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION
ELIMINATING THE SERIES D PREFERRED STOCK
The Board of Directors has adopted, subject to stockholder approval, an
amendment to the Company's Restated Certificate of Incorporation eliminating the
Company's Series D Preferred Stock.
The Company's Restated Certificate of Incorporation authorizes the issuance
of 5,750,000 shares of Series D Preferred Stock. Shares of Series D Preferred
Stock were issued in connection with a recapitalization of the Company in 1995.
See "Other Matters -- Certain Transactions." All outstanding shares of Series D
Preferred Stock were automatically converted into Common Stock upon consummation
of the Company's initial public offering in November 1996 and the outstanding
warrants to purchase Series D Preferred Stock were amended in November 1997 to
provide for the issuance of Common Stock upon the exercise thereof. Accordingly,
no shares of Series D Preferred Stock are outstanding or issuable upon exercise
or conversion of any of the Company's outstanding securities.
The proposed amendment does not alter the right of the Board of Directors,
pursuant to the Restated Certificate of Incorporation, to issue, without further
stockholder approval, up to 1,000,000 shares of "blank check" preferred stock,
with such designations, rights and preferences as it may determine from time to
time in accordance with the applicable provisions of the General Corporation Law
of the State of Delaware.
The affirmative vote of a majority of the outstanding shares of Common
Stock is required for the approval of the amendment to the Restated Certificate
of Incorporation eliminating the Series D Preferred Stock.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS
VOTE "FOR" THE ADOPTION OF THE AMENDMENT TO THE RESTATED CERTIFICATE
OF INCORPORATION ELIMINATING THE SERIES D PREFERRED STOCK (PROPOSAL 4)
PROPOSAL 5. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed Ernst & Young LLP, independent
auditors, to continue as the Company's auditors and to audit the consolidated
financial statements of the Company for the fiscal year
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ending December 31, 1998. Ernst & Young LLP has audited the Company's financial
statements since the fiscal year ended December 31, 1991. They have no financial
interest, either direct or indirect, in the Company. Representatives of Ernst &
Young LLP are expected to be present at the Annual Meeting to respond to
appropriate questions from stockholders and to make a statement if they desire
to do so.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE
STOCKHOLDERS VOTE "FOR" THE RATIFICATION OF APPOINTMENT
OF INDEPENDENT AUDITORS (PROPOSAL 5)
OTHER MATTERS
The Board of Directors is not aware of any business to be presented at the
Annual Meeting except the matters set forth in the Notice of Annual Meeting and
described in this Proxy Statement. Unless otherwise directed, all shares
represented by Board of Directors' proxies will be voted in favor of the
proposals of the Board of Directors described in this Proxy Statement. If any
other matters come before the Annual Meeting, the persons named in the
accompanying Proxy will vote on those matters according to their best judgment.
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The names, ages and business backgrounds of the executive officers and
other significant employees of the Company who are not nominees for Director are
as follows:
MARK W. WINN, 47, has been Chief Financial Officer and Secretary of the
Company since September 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 November 1991 to
August 1997. Mr. Winn was the Vice President and Chief Financial Officer of Gory
Associated Industries (a South Florida building products manufacturer) from 1984
to 1991.
LELAND WITHERSPOON, 45, has been Vice President, Engineering since April
1997. Mr. Witherspoon was Director Product Research and Development for Sorin
Biomedicals, Inc. (a developer and manufacturer of cardiopulmonary and
cardiovascular products) from February 1992 to April 1997. He was Manager of
Research and Development for Pfizer/Shiley (a developer and manufacturer of
cardiopulmonary and cardiovascular equipment and disposables) from February 1992
to April 1997. Mr. Witherspoon held various technical and management positions
with Xerox Medical Systems (a manufacturer and developer of diagnostic medical
electronic and mechanical systems) from March 1979 to October 1990.
PETER KAZANZIDES, PH.D., 35, 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, 38, 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.
HANS WEYENSCHENK, 47, 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, 42, has been Director of Marketing, Neurosurgery of the
Company since September 5, 1997. He was Executive Vice President of
International Sales of Innovative Medical Machines International, S.A. (a
manufacturer and distributor of neurosurgical products), which the Company
acquired in September
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<PAGE> 19
1997, from 1996 until September 1997. He was International Vice President of
Technomed International (a lithrotripsy company in France) from 1987 to 1995.
JEFFREY A. JOHNSON, 46, has been Director of Marketing, U.S.A. of the
Company since June 1997. Mr. Johnson was Marketing Manager for Sorin Biomedical,
Inc. (a developer and manufacturer of cardiopulmonary and cardiovascular
equipment) from 1992 to June 1997. Mr. Johnson was a Product Manager for the
Ultrasound division of Philips Medical Systems, Inc. from 1984 to 1991.
KENNETH M. SAN VINCENTE, 37, has been Director of Software Systems of the
Company since July 1997. Mr. San Vincente was Software Engineering Manager for
EndoSonics Corporation (a developer and manufacturer of intravascular ultrasound
equipment) from 1994 to June 1997 and a project engineering manager for the
Control Systems Division of Parker Hannifin Corporation from 1989 to 1993.
CERTAIN TRANSACTIONS
Pursuant to a Series D Preferred Stock and Warrant Purchase Agreement (the
"1995 Stock Purchase Agreement") dated as of December 21, 1995, the Company
effected the recapitalization described below.
The Company effected a one-for-five reverse stock split of its capital
stock, and all outstanding shares of Series B and Series C Preferred Stock were
converted into shares of Common Stock. Upon conversion of the Series B Preferred
Stock, the Company issued 30,482 shares of Common Stock to each of Sutter Health
and the Kapoor Trust, or a total of 60,964 shares. In addition, the Company
issued 8,955 shares of Common Stock to each of Sutter Health and the Kapoor
Trust, or a total of 17,910 shares, in exchange for the cancellation of 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 Financial
Corporation ("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, International Business Machines ("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 a promissory note payable to IBM 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
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<PAGE> 20
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, 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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Officers, Directors and persons who own more than ten percent of a registered
class of the Company's equity securities within specified time periods to file
certain reports of ownership and changes in ownership with the Securities and
Exchange Commission (the "Commission"). Officers, Directors and ten percent
stockholders are required by regulation to furnish the Company with copies of
all Section 16(a) forms they file. Based solely on a review of copies of such
reports received by the Company and written representations from such persons
concerning the necessity to file such reports, the Company is not aware of any
failures to file reports or report transactions in a timely manner during the
fiscal year ended December 31, 1997, except that Messrs. Knudson and Hays did
not timely file initial reports of beneficial ownership on Form 3s upon becoming
directors of the Company in May 1997 and Messrs. McGroddy and Pankow did not
timely file Form 5s reporting the grant of stock options in May 1997.
EXPENSES
The entire cost of preparing, assembling, printing and mailing this Proxy
Statement, the enclosed Proxy and other materials, and the cost of soliciting
Proxies with respect to the Annual Meeting, will be borne by the Company. The
Company will request banks and brokers to solicit their customers who
beneficially own shares listed of record in names of nominees, and will
reimburse those banks and brokers for the reasonable out-of-pocket expenses of
such solicitations. The original solicitation of proxies by mail may be
supplemented by telephone and telegram by officers and other regular employees
of the Company, but no additional compensation will be paid to such individuals.
STOCKHOLDER PROPOSALS
No person who intends to present a proposal for action at a forthcoming
stockholders' meeting of the Company may seek to have the proposal included in
the proxy statement or form of proxy for such meeting unless that person (a) is
a record beneficial owner of at least 1% or $1,000 in market value of shares of
Common Stock, has held such shares for at least one year at the time the
proposal is submitted, and such person shall continue to own such shares through
the date on which the meeting is held, (b) provides the Company in writing with
his name, address, the number of shares held by him and the dates upon which he
acquired such shares with documentary support for a claim of beneficial
ownership, (c) notifies the Company of his intention to appear personally at the
meeting or by a qualified representative under Delaware law to present his
proposal for action, and (d) submits his proposal timely. A proposal to be
included in the proxy statement or proxy for the Company's next annual meeting
of stockholders, will be submitted timely only if the proposal has been received
at the Company's principal executive office no later than November 25, 1998. If
the date of such meeting is changed by more than 30 calendar days from the date
such meeting is scheduled to be held under the Company's By-Laws, or if the
proposal is to be presented at any meeting other than the
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<PAGE> 21
next annual meeting of stockholders, the proposal must be received at the
Company's principal executive office at a reasonable time before the
solicitation of proxies for such meeting is made.
Even if the foregoing requirements are satisfied, a person may submit only
one proposal with a supporting statement of not more than 500 words, if the
latter is requested by the proponent for inclusion in the proxy materials, and
under certain circumstances enumerated in the Securities and Exchange
Commission's rules relating to the solicitation of proxies, the Company may be
entitled to omit the proposal and any statement in support thereof from its
proxy statement and form of proxy.
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997
Copies of the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997 as filed with the Securities and Exchange Commission,
including the financial statements, can be obtained without charge by
stockholders (including beneficial owners of the Company's Common Stock) upon
written request to Mark W. Winn, the Company's Secretary, Integrated Surgical
Systems, Inc., 829 West Stadium Lane, Sacramento, California 95834 or on the
Commission's Web Site at www.sec.gov.
By Order of the Board of Directors
Mark W. Winn, Secretary
Sacramento, California
March 26, 1998
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<PAGE> 22
INTEGRATED SURGICAL SYSTEMS, INC.
829 WEST STADIUM LANE
SACRAMENTO, CALIFORNIA 95834
PROXY
The undersigned, a holder of Common Stock of INTEGRATED SURGICAL SYSTEMS,
INC., a Delaware corporation (the "Company"), hereby appoints DR. RAMESH C.
TRIVEDI and MARK W. WINN, and each of them, the proxy of the undersigned, with
full power of substitution, to attend represent and vote for the undersigned,
all of the shares of the Company which the undersigned would be entitled to
vote, at the Annual Meeting of Stockholders of the Company to be held on April
28, 1998 and any adjournments thereof, as follows:
1. The election of six Directors of the Company to serve until the next annual
meeting of stockholders and until their successors are duly elected and
qualified.
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote for all
nominees listed below.
(Instructions: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE
A LINE THROUGH OR OTHERWISE STRIKE OUT HIS NAME BELOW)
Ramesh C. Trivedi, James C. McGroddy, John N. Kapoor, Paul A.H. Pankow, Gerald
D. Knudson and Patrick G. Hays
2. The approval of the adoption of the 1998 Stock Option Plan.
<TABLE>
<S> <C> <C>
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>
3. The approval of the adoption of the Employee Stock Purchase Plan.
<TABLE>
<S> <C> <C>
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>
4. The approval of an amendment to the Restated Certificate of Incorporation of
the Company eliminating the Series D Preferred Stock.
<TABLE>
<S> <C> <C>
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>
5. The ratification of the appointment of Ernst & Young LLP as the Company's
independent auditors for the year ending December 31, 1998.
<TABLE>
<S> <C> <C>
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>
6. Upon such other matters as may properly come before the meeting or any
adjournments thereof.
(continued, and to be signed, on other side)
<PAGE> 23
(continued from other side)
The undersigned hereby revokes any other proxy to vote at such Annual
Meeting, and hereby ratifies and confirms all that said attorneys and proxies,
and each of them, may lawfully do by virtue hereof. With respect to matters not
known at the time of the solicitations hereby, said proxies are authorized to
vote in accordance with their best judgment.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS ON THE OTHER SIDE HEREOF. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR THE ELECTION OF THE SIX DIRECTORS NAMED IN PROPOSAL 1 AND FOR THE
ADOPTION OF PROPOSALS 2, 3, 4 AND 5, AND AS SAID PROXIES SHALL DEEM ADVISABLE ON
SUCH OTHER BUSINESS AS MAY COME BEFORE THE MEETING.
The undersigned acknowledges receipt of a copy of the Notice of Annual
Meeting dated March 26, 1998 relating to the Annual Meeting.
Date: ,
1998
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SIGNATURE(S) OF STOCKHOLDER(S)
The signature(s) hereon should
correspond exactly with the name(s)
of the Stockholder(s) appearing on
the Stock Certificate. If stock is
jointly held, all joint owners
should sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give
full title as such. If signer is a
corporation, please sign the full
corporate name, and give title of
signing officer.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF INTEGRATED SURGICAL
SYSTEMS, INC.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.
