<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1997
REGISTRATION NO. 333-29505
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
COMPUTER MOTION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3845 77-0458805
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
130-B CREMONA DRIVE, GOLETA, CALIFORNIA 93117
(805) 968-9600
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
GENE WANG
CHIEF EXECUTIVE OFFICER AND PRESIDENT
COMPUTER MOTION, INC.
130-B CREMONA DRIVE, GOLETA, CALIFORNIA 93117
(805) 968-9600
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
COPIES TO:
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LAWRENCE B. COHN, ESQ. JOHN T. SHERIDAN, ESQ.
MARK L. SKAIST, ESQ. BRUCE M. MCNAMARA, ESQ.
WILLIAM E. GARRETT, ESQ. DANIEL F. VAUGHN, ESQ.
STRADLING, YOCCA, CARLSON & RAUTH WILSON, SONSINI, GOODRICH & ROSATI
660 NEWPORT CENTER DRIVE, SUITE 1600 650 PAGE MILL ROAD
NEWPORT BEACH, CALIFORNIA 92660 PALO ALTO, CALIFORNIA 94304
(714) 725-4000 (415) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration 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. [ ]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE> 2
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 JULY 18, 1997
2,500,000 SHARES
[COMPUTER MOTION LOGO]
COMMON STOCK
All of the 2,500,000 shares of Common Stock offered hereby are being sold
by Computer Motion, Inc. (the "Company"). Prior to this offering, there has been
no public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price for the Common Stock will be between
$13.00 and $15.00 per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price. The Common
Stock has been approved for quotation on the Nasdaq National Market under the
symbol "RBOT."
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS IN PURCHASING THE SHARES OF COMMON STOCK
OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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=======================================================================================
<CAPTION>
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------
Per Share................................ $ $ $
Total (3)................................ $ $ $
=======================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $600,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 375,000 shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $ , the Underwriting Discount will
total $ and the Proceeds to Company will total $ . See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities, on or about , 1997.
------------------------
MONTGOMERY SECURITIES PIPER JAFFRAY INC.
, 1997.
<PAGE> 3
ZEUS
ENABLING MINIMALLY INVASIVE MICROSURGERY
The ZEUS robotic surgical system under development is designed to fundamentally
improve surgeon dexterity and precision, and to enable a new class of minimally
invasive microsurgery procedures by allowing conventional open microsurgery
procedures to be performed using endoscopic techniques.
The Company believes that these new procedures will result in reduced pain and
trauma for patients and lowered health care costs.
HERMES
OPERATING SYSTEM FOR THE OPERATING ROOM
The HERMES OR Control Center under development is comprised of a centralized
control unit networked to medical devices in the operating room. HERMES is
designed to enable surgeons to directly control these devices using verbal
commands. With fast, accurate responses to direct surgeon commands, OR
efficiency can be improved, surgical case times shortened and labor costs
reduced.
AESOP
AUTOMATED ENDOSCOPIC SYSTEM FOR
OPTIMAL POSITIONING
AESOP is a surgical robot capable of positioning an endoscope in response to a
surgeon's verbal commands. This allows the surgeon to have direct control over
the endoscope in minimally invasive surgical procedures.
The Company believes that AESOP is the world's first FDA-cleared surgical robot
and incorporates the world's first FDA-cleared voice control interface for use
in the operating room. Computer Motion's new products under development, ZEUS
and HERMES, leverage the core technologies underlying AESOP.
- --------------------------------------------------------------------------------
The Company's ZEUS and HERMES products are under development and have not been
approved by the FDA for sale in the United States. These products have not
been operated in clinical practice to date. Approval by the FDA could take
several years and there can be no assurance that such approval will ever be
obtained. In addition, these products have not been approved by international
regulatory agencies for sale in international markets. See "Risk
Factors -- Government Regulation and Lack of Regulatory Approval" and "-- Lack
of Clinical Testing Experience; Safety and Efficacy Not Yet Established."
- --------------------------------------------------------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN ACTIVITIES THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY INCLUDING OVERALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. THESE TRANSACTIONS MAY BE EFFECTED ON
NASDAQ OR OTHERWISE AND, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
[PHOTOS]
<PAGE> 4
INTEGRATED OR NETWORK -- The HERMES OR Control Center under development is
designed to form an integrated network of operating room devices, allowing
surgeons to have direct control over these devices using verbal commands. In
addition, HERMES can be controlled by a touch-screen hand control.
[PHOTO]
INTERACTIVE INTERFACES -- HERMES is designed to bring a new dimension of
efficiency and safety to the operating room by providing both audible and visual
feedback to the surgical team regarding the status of medical devices.
HERMES OR CONTROL CENTER
[PHOTO]
[PHOTO]
- --------------------------------------------------------------------------------
The Company's ZEUS and HERMES products are under development and have not been
approved by the FDA for sale in the United States. These products have not
been operated in clinical practice to date. Approval by the FDA could take
several years and there can be no assurance that such approval will ever be
obtained. In addition, these products have not been approved by international
regulatory agencies for sale in international markets. The final design of the
Company's products may differ from the artist's rendering above. See "Risk
Factors -- Government Regulation and Lack of Regulatory Approval" and "-- Lack
of Clinical Testing Experience; Safety and Efficacy Not Yet Established."
- --------------------------------------------------------------------------------
<PAGE> 5
[PHOTO]
ROBOTIC SURGICAL INSTRUMENTS -- ZEUS is comprised of three robotic arms,
reusable and single-use instruments, a dedicated computer controller and an
ergonomic surgeon console. One robotic arm is used to position the endoscope,
while the other two are used to position and manipulate surgical instruments.
SURGEON CONSOLE -- The surgeon precisely controls the movements of the robotic
instruments by manipulating corresponding handles housed in the mobile console.
The endoscope and other key features of ZEUS can be controlled using voice
commands.
MINIMALLY INVASIVE (MI) MICROSURGERY
The ZEUS robotic surgical system under development is designed to enable new
microsurgery procedures such as E-CABG (Endoscopic Coronary Artery Bypass Graft)
on a beating or stopped heart, providing patients with the potential benefits of
significantly reduced pain and trauma, shortened convalescent periods and
lowered cosmetic concerns.
ENABLING MI MICROSURGERY
[PHOTO]
ROBOTIC SURGICAL INSTRUMENTS
[PHOTO]
SURGEON CONSOLE
[PHOTO]
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and related Notes appearing elsewhere in
this Prospectus. The following summary and certain portions of this Prospectus
include forward-looking statements which involve risks and uncertainties. The
Company's actual results may differ materially from the results predicted by
such forward-looking statements due to various factors, including but not
limited to those discussed in "Risk Factors." Except as otherwise specified, all
information in this Prospectus reflects (i) the reincorporation of the Company
in Delaware which will be effected prior to or upon completion of this offering,
(ii) the automatic conversion of each outstanding share of Preferred Stock into
Common Stock upon completion of this offering, (iii) a reverse stock split of
1-for-1.928 shares of the Preferred Stock and Common Stock of the Company which
will be effected prior to or upon completion of this offering and (iv) no
exercise of the Underwriters' over-allotment option.
Computer Motion, Inc. (the "Company") develops and markets proprietary
robotic and computerized surgical systems that enhance a surgeon's performance
and centralize and simplify a surgeon's control of the operating room ("OR").
The Company believes that its products and technologies under development have
the potential to revolutionize surgery and the OR by providing a surgeon with
the precision and dexterity necessary to perform complex, minimally invasive
surgical procedures including fully endoscopic multivessel coronary artery
bypass grafts ("E-CABG") and by enabling a surgeon to control critical devices
in the OR through simple verbal commands. The Company believes that its products
and technologies under development will broaden the scope and increase the
effectiveness of minimally invasive surgery, improve patient outcomes, and
create a safer, more efficient and cost effective OR. The Company's current
commercial product, AESOP, is an FDA-cleared, robotic endoscope positioning
system.
Traditionally, the vast majority of all surgeries have been open, requiring
large incisions measuring up to 18 inches to access the operative site. Although
this approach can be highly effective, it often results in significant trauma,
pain and complications, as well as significant costs related to lengthy
convalescent periods for the patient. In an effort to mitigate these
shortcomings, minimally invasive surgical techniques and related technologies
have been developed. According to Medical Data International ("MDI"), in the
United Sates in 1995, over 13 million procedures which traditionally would have
been performed in an open manner were performed using minimally invasive
techniques. Minimally invasive surgery is intended to be as effective as
traditional open surgery while offering patients substantially reduced pain and
collateral trauma, shortened convalescent periods and decreased overall patient
care costs. While these benefits are significant, the minimally invasive
approach presents numerous challenges to surgeons, including the intricate
reconstruction of patient tissue by suturing, delicate manipulation of small
anatomical features and constrained access to, and limited visualization of, the
operative site.
The Company's robotic surgical system under development, ZEUS, is designed
to fundamentally improve a surgeon's ability to perform complex surgical
procedures and enable new, minimally invasive microsurgical procedures that are
currently impossible or very difficult to perform. ZEUS is comprised of three
surgeon-controlled robotic arms, one of which positions the endoscope and two of
which manipulate the Company's proprietary single-use and reusable surgical
instruments. The Company believes that ZEUS will improve a surgeon's dexterity
and precision and enhance visualization of, and access to, confined operative
sites. The Company also believes that new minimally invasive surgical procedures
performed with ZEUS will, like currently available minimally invasive surgical
procedures, result in reduced patient pain and trauma, fewer complications,
lessened cosmetic concerns and shortened convalescent periods and will increase
the number of patients qualified for certain surgical procedures. In addition,
the Company believes that an increase in minimally invasive options will result
in lower overall healthcare costs to providers, payors and patients. The Company
has commenced limited experimental animal testing with ZEUS at The Cleveland
Clinic, Pennsylvania State University's Hershey Medical Center and Sarasota
Memorial Hospital. The Company intends to commence testing with ZEUS in the near
future at Columbia/HCA Healthcare Corporation's Medical City of Dallas Hospital.
The Company intends to seek premarket approval ("PMA") by the FDA to market ZEUS
in the United States.
The Company also develops technologies to centralize and simplify control
of the OR. The modernization of the OR has resulted in the introduction of
numerous medical devices with widely varied methods of control
3
<PAGE> 7
and feedback. These devices aid a surgeon but also increase the complexity and
costs of the OR. In many instances, these devices are manually controlled and
monitored by someone other than a surgeon in response to a surgeon's spoken
commands and requests for status. The Company's voice controlled technology
platform under development, HERMES, is designed to enable a surgeon to directly
control multiple OR devices, including various laparoscopic, arthroscopic and
video devices, as well as the Company's robotic devices, through simple verbal
commands. HERMES is also designed to provide standardized visual and digitized
voice feedback to a surgical team. The Company believes that the enhanced
control and feedback provided by HERMES has the potential to improve safety,
increase efficiency, shorten procedure times and reduce costs. The Company has
developed a prototype of HERMES and expects to commence functionality testing
under Institutional Review Board approval during the second half of 1997.
The Company's current commercial product, AESOP, approximates the form and
function of a human arm and allows control of the endoscope through simple
verbal commands. This eliminates the need for a member of a surgical staff to
manually control the endoscope and provides a surgeon with direct control of the
endoscope and results in a more stable and sustainable endoscopic image. As of
July 1, 1997, the Company had sold 240 AESOP units worldwide, which the Company
believes have been used to perform over 18,000 procedures.
In addition to directly marketing its products, the Company intends to
commercialize its robotic and computerized surgical systems by forming strategic
alliances with prominent corporate and clinical partners. For instance, the
Company and Medtronic, Inc. ("Medtronic"), a leading manufacturer of medical
devices, entered into an agreement pursuant to which ZEUS, for cardiothoracic
applications, will be co-marketed in North America by the Company and Medtronic
and distributed exclusively in Europe, the Middle East and Africa by Medtronic.
The Company has also entered into an agreement with Stryker Corporation
("Stryker"), a leading manufacturer of endoscopic equipment, pursuant to which
Stryker will purchase HERMES on an OEM basis and will market HERMES as an
integrated component of several of its laparoscopic and arthoroscopic products.
The Company intends to enter into similar development and OEM relationships with
other leading manufacturers of OR devices in order to establish the Company's
HERMES technology as the standard method of controlling devices and equipment in
the OR. The Company utilizes a number of third-party representatives to
distribute AESOP internationally, including Johnson & Johnson which distributes
AESOP in Australia, New Zealand, Singapore, Malaysia, Indonesia and Brunei. To
date, the Company has not generated a material amount of revenue from any of
these strategic alliances. The Company has also entered into agreements with a
number of leading medical institutions and formed a Clinical Advisory Board in
order to validate and guide the development process of the Company's robotic and
computerized surgical systems.
The Company was founded in 1989 and incorporated in California on April 11,
1990. The Company intends to reincorporate in Delaware prior to or effective
upon completion of this offering. The Company's principal offices are located at
130-B Cremona Drive, Goleta, CA 93117 and its telephone number is (805)
968-9600. AESOP is a registered trademark and Computer Motion is a trademark of
the Company. This Prospectus also includes trademarks of companies other than
the Company.
4
<PAGE> 8
THE OFFERING
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Common Stock offered by the Company................... 2,500,000 shares
Common Stock to be outstanding after the offering..... 7,114,354 shares(1)
Use of proceeds....................................... For repayment of debt, research and
development, sales and marketing and
working capital.
Proposed Nasdaq National Market symbol................ RBOT
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL NINE- THREE MONTHS
YEAR MONTHS ENDED
ENDED ENDED YEAR ENDED DECEMBER 31, MARCH 31,
MARCH 31, DECEMBER 31, ----------------------------- -----------------
1993 1993(2) 1994 1995 1996 1996 1997
--------- ------------ ------- ------- ------- ------ -------
(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Revenue.................................... $ 393 $ 66 $ 607 $ 2,271 $ 4,057 $ 676 $ 1,373
Cost of revenue............................ 259 88 500 1,973 2,627 444 651
----- ----- ------- ------- ------- ------ -------
Gross profit (loss)........................ 134 (22) 107 298 1,430 232 722
Operating expenses:
Research and development................. 132 495 630 739 1,359 336 558
Selling, general and administrative...... 134 367 2,784 3,158 4,144 745 1,338
----- ----- ------- ------- ------- ------ -------
Total operating expenses............... 266 862 3,414 3,897 5,503 1,081 1,896
----- ----- ------- ------- ------- ------ -------
Loss from operations....................... (132) (884) (3,307) (3,599) (4,073) (849) (1,174)
Interest and other income (expense), net... 1 10 63 9 (486) (41) (356)
----- ----- ------- ------- ------- ------ -------
Net loss................................... $(131) $ (874) $(3,244) $(3,590) $(4,559) $ (890) $(1,530)
===== ===== ======= ======= ======= ====== =======
Pro forma net loss per share............... $ (0.88) $(0.18) $ (0.28)
======= ====== =======
Pro forma shares used in per share
computations(3).......................... 5,151 5,041 5,460
======= ====== =======
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<CAPTION>
MARCH 31, 1997
----------------------------
ACTUAL AS ADJUSTED(4)
------- --------------
(UNAUDITED)
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BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 3,986 $ 32,686
Working capital...................................................................... 1,101 32,968
Total assets......................................................................... 7,052 38,623
Redeemable preferred stock........................................................... 6,002 --
Long-term debt, net of current portion............................................... 3,350 100
Total stockholders' equity (deficit)................................................. (7,054) 34,065
</TABLE>
- ---------------
(1) Excludes 1,553,981 shares of Common Stock issuable upon exercise of
outstanding stock options and 1,609,250 shares of Common Stock issuable upon
exercise of outstanding warrants as of June 1, 1997. Includes 2,414,646
shares of Common Stock issuable upon the automatic conversion of each
outstanding share of Preferred Stock into Common Stock that will occur upon
the completion of this offering. See "Capitalization," "Management -- Stock
Plans," "Certain Transactions," and Notes 6, 14 and 15 of Notes to Financial
Statements.
(2) In 1993, the Company changed its fiscal year end from March 31 to December
31.
(3) See Note 2 of Notes to Financial Statements for a description of the
computation of pro forma net loss per share and net loss per share.
(4) Adjusted to reflect the sale of the 2,500,000 shares of Common Stock offered
by the Company hereby at an assumed initial public offering price of $14.00
per share after deducting the underwriting discount and the estimated costs
of this offering, the automatic conversion of all outstanding shares of the
Company's Preferred Stock into Common Stock that will occur upon completion
of this offering, the conversion of the Secured Convertible Debenture issued
to Medtronic (the "Medtronic Debenture") which occurred in May 1997 and the
repayment of bridge debt, as if such sale, conversions and repayments had
occurred at March 31, 1997. The number of shares issued to Medtronic is
subject to further adjustment under certain circumstances. See
"Capitalization" and "Selected Financial Data" and "Certain Transactions."
5
<PAGE> 9
RISK FACTORS
Prospective investors should consider carefully the following risk factors,
in addition to the other information contained in this Prospectus concerning the
Company and its business, before purchasing the shares of Common Stock offered
hereby. This Prospectus contains forward-looking statements within the meaning
of the federal securities laws, that involve certain risks and uncertainties.
Discussions containing such forward-looking statements may be found in the
material set forth under "Risk Factors," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business," as well as in
the Prospectus generally. The Company's actual results could differ materially
from those anticipated in such forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and appearing
elsewhere in this Prospectus.
LIMITED OPERATING HISTORY; ABSENCE OF PROFITABILITY
From its inception in 1989 through March 31, 1997, the Company has
generated revenues of approximately $9.3 million and incurred cumulative losses
of approximately $14.0 million. The Company
expects to incur significant additional losses for the foreseeable future and
the Company expects to significantly increase its spending over the next several
years with respect to research and development efforts, clinical trials,
manufacturing and marketing. There can be no assurance that the Company will
ever achieve significant commercial revenues, particularly from sales of HERMES
or ZEUS, or that the Company will be profitable. There can be no assurance that
the Company will not encounter substantial delays or incur unexpected expenses
related to the introduction of HERMES and ZEUS, or future products. Failure to
achieve significant commercial revenues and profitability would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Products."
RELIANCE ON SALES OF FUTURE PRODUCTS; UNCERTAINTY OF MARKET ACCEPTANCE
The Company has been producing and selling its AESOP products since 1994,
but the Company has not received regulatory clearance or approval to market its
other products and will not commence commercial sales of these products until
such clearance or approval is obtained. If regulatory clearance or approval for
HERMES and ZEUS is obtained, the Company anticipates that HERMES and ZEUS will
comprise a substantial majority of the Company's sales. Accordingly, the
Company's future success depends on the successful development, regulatory
clearance or approval, commercialization and market acceptance of these
products. Even if the Company is successful in obtaining the necessary
regulatory clearances or approvals for HERMES and ZEUS, their successful
commercialization will depend upon the Company's ability to demonstrate the
clinical safety and efficacy, ease-of-use, reliability and cost-effectiveness of
such products in a clinical setting. Neither HERMES nor ZEUS has yet been
operated in clinical practice. There can be no assurance that these products
will adequately demonstrate these characteristics or that they will receive
market acceptance among surgeons, patients and health care payors. The Company
believes that surgeons' acceptance of, and health care payors' reimbursement of
procedures using, HERMES or ZEUS will be essential for market acceptance of
these products, and there can be no assurance that such acceptance and
reimbursement will be obtained. Surgeons will not adopt the Company's products
unless they conclude, based on clinical data and other factors, that they are an
attractive alternative to other drug or surgical treatments. In addition,
cardiac surgeons may elect not to use the proposed ZEUS system until such time
as the efficacy of the medical procedures using ZEUS, including its E-CABG
indication, can be successfully demonstrated as compared to conventional and
other methods of performing such procedures. Even if the safety and efficacy of
procedures using HERMES and ZEUS is established, surgeons may elect not to
recommend the use of these products for any number of reasons, including
inadequate levels of reimbursement. Broad use of the Company's products will
require training surgeons and the time required to complete such training could
adversely affect market acceptance. In addition, surgeons will not elect to use
the Company's products until they are comfortable relying on voice control to
adjust instruments and devices and are comfortable controlling robotic arms to
manipulate surgical instruments. Surgeons have traditionally relied on their
direct sight and sense of touch for delicate surgical operations. Using the ZEUS
product, physicians will rely primarily on
6
<PAGE> 10
video images and computerized feedback as they manipulate instruments using
robotic controls. Surgeons will not elect to use the Company's ZEUS product
until they are convinced that surgical procedures performed in this manner are
as safe and effective as those performed by traditional manual methods.
Successful commercialization of the Company's products will also require the
Company to satisfactorily address the needs of various decision makers in the
hospitals that constitute the target market for the Company's products and to
address potential resistance to change in existing surgical methods. Such
efforts may extend the sales cycle for the Company's products and delay
commercial sales and market acceptance. If the Company is unable to gain market
acceptance of HERMES or ZEUS, the Company's business, financial condition and
results of operations will be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Products."
GOVERNMENT REGULATION AND LACK OF REGULATORY APPROVAL
The research and development, design, testing, manufacture, labeling,
distribution and marketing of the Company's products in the United States are
regulated as medical devices by the United States Food and Drug Administration
("FDA") as well as various state agencies. The process of obtaining required
regulatory approvals and clearances is lengthy, expensive and uncertain.
Before a new device can be introduced into the market, the manufacturer
must generally obtain marketing clearance through a premarket approval ("PMA")
application under the Federal Food, Drug and Cosmetic Act (the "FDC Act"), or
through a premarket notification submission under Section 510(k) of the FDC Act,
and the regulations promulgated thereunder. The Company has obtained 510(k)
premarket notification clearance for AESOP, including its voice control
interface, but has not obtained FDA approval or clearance for HERMES or ZEUS.
Because HERMES will be sold by the Company to medical device manufacturers on an
OEM basis, the device manufacturers will be responsible for obtaining FDA
clearance for any product incorporating HERMES. There can be no assurance that
the FDA will determine that products incorporating HERMES can be cleared for
marketing through the 510(k) notification process, causing the device
manufacturers to incur increased costs and delay in seeking FDA approval through
PMA applications for this device. The Company intends to seek approval of a PMA
application for its ZEUS system. Generally, a PMA application may be submitted
to the FDA only after clinical trials and the required patient follow-up are
successfully completed. Upon acceptance of a PMA application for filing, the FDA
commences a review process that could take two years or more from the date on
which the PMA application is filed. Before approval of a PMA application, the
FDA will inspect the Company to determine whether its manufacturing facilities
and processes comply with FDA regulations.
The process of obtaining required regulatory approvals and clearances can
be expensive, and there can be no assurance that the Company or the device
manufacturers for HERMES will obtain such approvals or clearances on a timely
basis, if at all. There can be no assurance that the FDA will act favorably or
quickly on any submissions for approval or clearance of the Company's products,
and significant difficulties and costs may be encountered by the Company in its
efforts to obtain FDA approvals or clearances that could delay or preclude the
Company from selling its products in the United States. Furthermore, there can
be no assurance that the FDA will not request additional data or require the
Company to conduct further clinical trials, causing the Company to incur
substantial costs and delay. In addition, there can be no assurance that the FDA
will not impose strict labeling requirements, onerous operator training
requirements or other requirements as a condition to approval or clearance. The
FDA strictly prohibits the marketing of FDA-cleared or approved medical devices
for unapproved uses. Failure to receive or delays in receipt of FDA clearances
or approvals, including as a result of the need for additional clinical trials
or data as a prerequisite to approval or clearance, or any FDA conditions that
limit the ability of the Company to market its products for particular uses or
indications, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Commercial distribution of the Company's products in foreign countries is
also subject to varying government regulations which may delay or restrict
marketing of the Company's products in those countries. The time required to
obtain approval for the Company's products internationally may be longer or
shorter than that required for FDA approval or clearance and the requirements
may differ significantly. In addition, such
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regulatory authorities may impose limitations on the use of the Company's
products. After mid-1998, the Company will be required to obtain the
certifications necessary to enable the CE mark to be affixed to the Company's
products in order to sell its products in member countries of the European
Union. The Company has not obtained such certification and there can be no
assurance it will be able to do so in a timely manner, if at all.
Federal, state and international government regulations regarding the
manufacture and sale of medical devices are subject to future change, and
additional regulations may be adopted which may prevent the Company from
obtaining, or affect the timing of, future regulatory approvals or clearances.
The failure to obtain or any significant delay in obtaining any regulatory
approvals or clearances could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's manufacturing operations are subject to the FDA's Quality
System Regulation ("QSR"), formerly known as Good Manufacturing Practice
regulations, and similar regulations in other countries regarding the
manufacture, testing, labeling, record keeping and storage of devices. Ongoing
compliance with QSR requirements and other applicable regulatory requirements
will be monitored through periodic inspection by federal and state agencies,
including the FDA, and comparable agencies in other countries.
The Company's manufacturing processes are subject to stringent federal,
state and local regulations governing the use, generation, manufacture, storage,
handling and disposal of certain materials and wastes. Although the Company
believes that it has complied in all material respects with such laws and
regulations, the Company is subject to periodic inspection to ensure its
continued compliance with such laws and regulations. There can be no assurance
that the Company will not be required to incur significant costs in the future
in complying with such laws and regulations, or that the Company will not be
required to cease operations in the event of its continued failure to effect
compliance.
Failure to comply with applicable regulatory requirements can result in,
among other things, suspensions or withdrawals of approvals, product seizures,
injunctions, recalls of products, operating restrictions, and civil fines and
criminal prosecutions. Delays or failure to receive approvals or clearances to
market products, or loss of previously received approvals or clearances, would
materially adversely affect the marketing of the Company's products and the
Company's business, financial condition and results of operations. See
"Business -- Government Regulation."
LACK OF CLINICAL TESTING EXPERIENCE; SAFETY AND EFFICACY NOT YET ESTABLISHED
The Company has only limited, experimental animal data with respect to ZEUS
and HERMES. In addition, neither HERMES nor ZEUS has been operated in clinical
practice. The Company also has no experience conducting clinical trials and will
likely rely on its clinical development partners to perform any clinical study.
In order to conduct clinical trials with ZEUS, which is considered to be a
significant risk device, the Company must submit and obtain approval of an
Investigational Device Exemption ("IDE") application. The IDE application must
be supported by adequate data typically including the results of laboratory and
animal testing conducted under Good Laboratory Practices ("GLPs"). To date the
Company has not conducted any GLP animal studies on any of its products. The
Company will be required to submit the clinical data gathered in the study
and/or a summary thereof under its IDE to the FDA for review. The Company has
not yet submitted an IDE to the FDA. There can be no assurance that the FDA will
allow the Company to conduct clinical trials or that ZEUS will prove to be safe
and effective in clinical trials under United States or international regulatory
requirements or that the Company will not encounter problems in clinical testing
that will cause a delay in or prohibit commercialization of ZEUS. Moreover, the
clinical trials may identify significant technical or other obstacles to
overcome prior to obtaining necessary regulatory or reimbursement approvals, if
granted at all, also resulting in significant additional product development
expense and delays. Such expense and delays could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Government Regulation."
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INTENSE COMPETITION
The Company's products are designed to address the markets for minimally
invasive surgery and minimally invasive microsurgery, which are currently in
early stages of development. These markets are and the Company believes will
continue to be intensely competitive. Competitors have been pursuing or will be
pursuing opportunities in these markets, and most of these competitors have
significantly greater financial, manufacturing, marketing, distribution and
technical resources and experience than the Company. In addition, some of these
companies may be able to market their products sooner than the Company if they
are able to achieve regulatory approval before the Company.
Many medical conditions that can be treated using the Company's systems,
particularly ZEUS, can also be treated by pharmaceuticals or other medical
devices and procedures. For example, many coronary artery diseases can be
treated with PTCA, intravascular stents, atherectomy catheters and lasers. Many
of these alternative treatments are widely accepted in the medical community and
have a long history of use. In addition, technological advances with other
procedures could make such therapies more effective or inexpensive than using
the Company's products and could render the Company's technology obsolete or
unmarketable. There can be no assurance that physicians will use the Company's
products to replace or supplement established treatments or that the Company's
products will be competitive with current or future technologies. In addition,
the Company may also experience competitive pricing pressures which may
adversely affect unit prices and sales levels. Such competition could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RELIANCE ON STRATEGIC RELATIONSHIPS AND CLINICAL SITES
The Company's future success will depend, in part, on its ability to enter
into and successfully develop strategic relationships with corporations and
medical institutions with respect to the research and development, regulatory
approval or clearance, production, marketing and distribution of its products.
For instance, the Company and Medtronic entered into an agreement pursuant to
which ZEUS, for cardiothoracic applications, will be co-marketed in North
America by the Company and Medtronic and distributed exclusively in Europe, the
Middle East and Africa by Medtronic. The Company has also entered into an
agreement with Stryker, pursuant to which Stryker will purchase HERMES on an OEM
basis and will market HERMES as an integrated component of several of its
laparoscopic and arthroscopic products. The Company intends to enter into
similar OEM relationships with other leading manufacturers of OR devices with
the goal of establishing the Company's HERMES technology as the standard method
of controlling devices and equipment in the OR. The Company utilizes a number of
third-party representatives to distribute AESOP internationally, including
Johnson & Johnson, which distributes AESOP in Australia and New Zealand. The
Company has also entered into agreements with a number of leading medical
institutions in order to validate and guide the development process of the
Company's robotic and computerized surgical systems. The success of the
Company's strategic relationships will depend on the other parties' strategic
interests in the specific products involved and their willingness and ability to
perform the role contemplated by the Company. The Company will have limited or
no control over the resources that any particular third party partner devotes to
its relationship with the Company. To date, the Company has not generated a
material amount of revenue from any of these strategic relationships. There can
be no assurance that the Company's current strategic relationships will be
successful, that the Company will be successful in locating qualified parties
with whom to enter into additional strategic relationships or that any strategic
relationships can be maintained or will ultimately prove beneficial to the
Company. See "Business -- Corporate Alliances and Clinical Sites" and "-- Sales,
Marketing and Distribution."
LIMITATIONS ON THIRD PARTY REIMBURSEMENT
Sale of the Company's proposed products in most markets in the United
States and internationally will depend on the availability of adequate
reimbursement from third-party health care payors, such as government and
private insurance plans, health maintenance organizations and preferred provider
organizations. In the United States, the Company's products under development,
if and when approved for commercial sale, would be acquired primarily by medical
institutions which then bill various third-party payors, such as Medicare,
Medicaid and other government programs and private insurance plans for the
health care services provided to
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their patients. Government agencies, certain private insurers and certain other
payors generally reimburse hospitals for medical treatment at a fixed rate based
on the diagnosis related group ("DRG") established by the federal Health Care
Financing Administration ("HCFA") which covers this treatment. The Company
believes that the procedures using AESOP are eligible and future products will
be eligible for reimbursement under existing DRG reimbursement codes. However,
Medicare and other third-party payors are increasingly scrutinizing whether to
cover new products and the level of reimbursement for covered products and
procedures. Third-party payors have challenged, and in certain circumstances
have ceased, reimbursement for procedures under existing codes where the
aggregate level of reimbursement has been significantly increased. In addition,
third-party payors have required, following further study regarding safety and
efficacy, establishment of new reimbursement codes. Even if a procedure is
covered by a DRG, payors may deny reimbursement if they determine that the
device used in a treatment was unnecessary, inappropriate, not cost-effective,
experimental or used for a non-approved indication. Medicare reimburses
hospitals on a prospectively determined fixed amount for the costs associated
with an in-patient hospitalization based on the patient's discharge diagnosis,
and reimburses physicians on a prospectively determined fixed amount based on
the procedure performed, regardless of the actual costs incurred by the hospital
or physician in furnishing the care and unrelated to the specific devices used
in that procedure.
Capital costs for medical equipment purchased by hospitals are currently
reimbursed under Medicare separately from medical procedure payments. Recent
federal Medicare legislation has called for these capital costs to be reimbursed
on a prospective payment system. During a transition period due to end in 2000,
each hospital's capital expenditures will be based in part on its own historical
capital costs and in part on the prospective payment system. There can be no
assurance that the movement to a prospective payment system will not cause
hospitals to reduce their expenditure payments for products developed or being
developed by the Company.
Medicare coverage may be available, under certain circumstances for
investigational devices when used in clinical IDE trials, which have not been
approved or cleared for marketing by the FDA. However, Medicare coverage may be
denied if certain coverage requirements are not met, including if the treatment
is not medically needed for the specific patient. There can be no assurance that
the Company's products under development will be covered when they are used in
clinical trials and, if covered, whether the payment amounts for their use will
be considered to be adequate by hospitals and physicians. If the devices are not
covered or the payments are considered inadequate, the Company may need to bear
additional costs to sponsor such trials and such costs could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. Many international markets have
government managed health care systems that control reimbursement for new
products and procedures. In most markets, there are private insurance systems as
well as government managed systems. Market acceptance of the Company's products
will depend on the availability and level of reimbursement in international
markets targeted by the Company. There can be no assurance that the Company will
obtain reimbursement in any country within a particular time, for a particular
time, for a particular amount, or at all.
The Company believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the United States
and in foreign markets, as the overall escalating costs of medical products and
services has led to and will continue to lead to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by the Company. There can be no
assurance that third-party reimbursement and coverage for the Company's products
will be available or adequate, that current reimbursement amounts will not be
decreased in the future, or that future legislation, regulation or reimbursement
policies of third-party payors will not otherwise affect the demand for the
Company's products or its ability to sell its products on a profitable basis,
particularly if the Company's products are more expensive than competing
surgical or other procedures. If third-party payor coverage or reimbursement is
unavailable or inadequate, the Company's business, financial condition and
results of operations would be materially adversely affected.
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DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY
The success of the Company will depend, in part, on its ability to obtain
and maintain patent protection for its products, to preserve its trade secrets
and to operate without infringing the proprietary rights of others. The
Company's policy is to seek to protect its proprietary positions by, among other
methods, filing United States and foreign patent applications related to its
technology, inventions and improvements that are important to the development of
its business. As of July 8, 1997, the Company has six issued United States
patents which cover certain technologies embodied in its products relating to
computer processing, endoscopic positioning techniques by means of robotics and
user interface elements. The patented inventions have use in certain
applications, including computer assisted surgery and robotic tissue
manipulation. The Company also has 16 United States patent applications pending,
two of which have received a Notice of Allowance, by which it is seeking to
obtain protection for its concepts relating to robotic assisted surgery and
operating room control systems. In addition, the Company has four foreign patent
applications pending. There can be no assurance that the Company's issued
patents or any patents that may be issued in the future will provide significant
proprietary protection or provide a competitive advantage for the Company. In
addition, there can be no assurance that any pending patents will be issued, or
that any patents or patent applications will not be challenged, invalidated or
circumvented in the future. Further, 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 seek to apply for
and 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 and robotics 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 is aware of patents issued to third parties, particularly
in the field of robotics, that contain subject matters related to the Company's
technology. Based in part on advice of its patent counsel, Blakely, Sokoloff,
Taylor & Zafman LLP, the Company believes that the technologies employed by the
Company in its devices and systems do not infringe the claims of such patents.
There can be no assurance, however, that third parties will not seek to assert
that the Company's devices and systems infringe their patents or seek to expand
their patent claims to cover aspects of the Company's technology. In addition,
the laws of some foreign countries do not protect the Company's proprietary
rights to the same extent as the laws of the United States. The failure of the
Company to protect its intellectual property rights could have a material
adverse effect on its business, financial condition and results of operations.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not
become subject to patent infringement claims or litigation in a court of law, or
interference proceedings declared by the United States Patent and Trademark
Office (the "USPTO") to determine the priority of inventions or an opposition to
a patent grant in a foreign jurisdiction. The defense and prosecution of
intellectual property suits, USPTO interference or opposition proceedings and
related legal and administrative proceedings are costly, time-consuming, divert
the attention of management and technical personnel and could result in
substantial uncertainty regarding the Company's future viability. Litigation or
regulatory proceedings, which could result in substantial cost and uncertainty
to the Company, may also be necessary to enforce patent or other intellectual
property rights of the Company or to determine the scope and validity of other
parties' proprietary rights. If any relevant claims of third-party patents are
upheld as valid and enforceable in any litigation or administrative proceeding,
the Company could be prevented from practicing the subject matter claimed in
such patents, or would be required to obtain licenses from the patent owners of
each such 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
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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 intends to vigorously protect and defend its
intellectual property. Costly and time-consuming litigation brought by the
Company may be necessary to enforce patents issued to the Company, 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.
The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants and advisors
to execute confidentiality and assignment of inventions agreements in connection
with their employment, consulting or advisory relationships with the Company.
There can be no assurance, however, that these agreements will not be breached
or that the Company will have adequate remedies for any breach. Furthermore, no
assurance can be given that competitors will not independently develop
substantially equivalent proprietary information and technologies or otherwise
gain access to the Company's proprietary technology, or that the Company can
meaningfully protect its rights in unpatented proprietary technology.
RAPID TECHNOLOGICAL CHANGE; NEW PRODUCT DEVELOPMENT
The market for the Company's products and products under development is
characterized by rapidly changing technology and new product introductions and
enhancements. In addition to the risks associated with market acceptance of
AESOP and the Company's other products under development, the Company's success
will depend to a significant extent upon its ability to enhance and expand the
utility of AESOP and its other products and to develop and introduce additional
innovative products that gain market acceptance. The Company maintains research
and development programs to continually improve and refine its product offerings
and those under development. There can be no assurances, however, that such
efforts will be successful or that the Company will be successful in selecting,
developing, manufacturing and marketing new products or enhancing its existing
products on a timely or cost-effective basis. Moreover, the Company may
encounter technical problems in connection with its product development efforts
that could delay introduction of new products or product enhancements. Failure
to develop or introduce new products or product enhancements on a timely basis
that achieve market acceptance could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
technological advances with other therapies could make such therapies less
expensive or more effective than using the Company's products and could render
the Company's technology obsolete or unmarketable. There can be no assurance
that physicians will use the Company's products to replace or supplement
established treatments or that the Company's products will be competitive with
current or future technologies. See "Business -- Research and Development" and
"-- Competition."
BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS
The Company expects that the proceeds of this offering will be used for
repayment of certain debt, research and development, sales and marketing and
working capital. The Company is not able to estimate precisely the allocation of
the proceeds among such uses, and the timing and amount of expenditures will
vary depending upon numerous factors. The Company's management will have broad
discretion to allocate the proceeds of this offering and to determine the timing
of expenditures. See "Use of Proceeds."
CONTROL BY MANAGEMENT, EXISTING STOCKHOLDERS AND AFFILIATED ENTITIES
Upon completion of this offering, the present directors and executive
officers of the Company and their affiliates will, in the aggregate,
beneficially own 35.7% of the outstanding Common Stock (34.0% if the
Underwriters' over-allotment option is exercised in full). As a result, these
stockholders, acting together, will have the ability to control the election of
the Company's directors and most other stockholders' actions and, as a result,
direct the Company's affairs and business. Such concentration may have the
effect of delaying or preventing a change in control of the Company.
Additionally, pursuant to a Stockholders Agreement, among Chase Manhattan
Capital Corporation, the Company and certain executives designated therein, each
party to
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the Stockholder's Agreement, other than the Company, is obligated to vote their
shares to cause one representative designated by the holders of a majority of
the shares issuable upon conversion of the Series D Preferred Stock which have
not been sold into the public market (the "Underlying Stock") to be elected to
the Company's Board of Directors. This provision shall terminate upon the
earlier of (i) August 24, 2004 or (ii) such time as the Underlying Stock
constitutes less than 2.5% of the aggregate voting power of all classes of the
Company's voting securities. The Underlying Stock is expected to constitute
approximately 8.9% of the aggregate voting power of all classes of the Company's
voting securities following completion of this offering. See "Principal
Stockholders" and "Management -- Election of Directors and Officers."
FLUCTUATIONS IN OPERATING RESULTS; LENGTHY SALES CYCLE
The Company's results of operations may vary significantly from quarter to
quarter depending upon numerous factors, including the following: delays
associated with the FDA and other regulatory approval processes; health care
reimbursement policies; timing and results of clinical trials; demand for the
Company's products; changes in pricing policies by the Company or its
competitors; the number, timing and significance of product enhancements and new
products by the Company and its competitors; and product quality problems.
The sale of the Company's products is often subject to delays associated
with the lengthy approval processes that typically accompany capital
expenditures by bureaucratic entities such as hospitals. Sales of the Company's
products therefore often have a lengthy sales cycle, which can range from 30
days to 180 days, while the customer evaluates and receives approvals for the
acquisition of the Company's products. It is not unusual for several months to
lapse between a new customer's initial evaluation of the Company's products and
the execution of a contract. Accordingly, it is inherently difficult to
accurately predict the sales cycle of any particular order. A failure by the
Company to ship orders as forecasted could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
EXPANSION OF MARKETING ACTIVITIES; LIMITED DISTRIBUTION
The Company currently has a limited domestic sales force consisting of ten
field sales persons, whose efforts are complemented by clinical education
specialists. The Company anticipates it will significantly increase the number
of sales personnel to more fully cover its target markets, particularly as
additional products become commercially available. There can be no assurance
that the Company will be able to compete effectively in attracting, motivating
and retaining qualified sales personnel, as needed. The Company currently
intends to market and sell its products outside the United States principally
through distributors. In order to accomplish this, the Company will be required
to significantly expand its distributor network. The Company's ability to
distribute its products in certain areas may depend on strategic alliances with
distribution partners. There can be no assurance that the Company will be able
to identify suitable distribution partners in desirable markets or, if
identified, that the Company will be successful in entering into distribution
agreements on acceptable terms, if at all, or that such distribution agreements
will result in significant sales. Any such failure could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Sales, Marketing and Distribution."
DEPENDENCE ON INDEPENDENT CONTRACT MANUFACTURERS; LIMITED MANUFACTURING
EXPERIENCE
The Company relies on independent contract manufacturers, some of which are
single source suppliers, for the manufacture of the principal components of
AESOP. The Company anticipates that it will continue to rely to a significant
extent on third parties to manufacture components of AESOP and its products
currently under development. Reliance on independent contract manufacturers
involves several risks, including the potential inadequacy of capacity, the
unavailability of or interruptions in access to certain process technologies and
reduced control over product quality, delivery schedules, manufacturing yields
and costs. Shortages of raw materials, production capacity constraints or delays
on the part of the Company's contract manufacturers could negatively affect the
Company's ability to meet its production obligations and result in increased
prices for affected parts. Any such reduction, constraint or delay may result in
delays in shipments of the Company's
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products or increases in the prices of components, either of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company has no supply agreements with certain of its
current contract manufacturers and orders through purchase orders which are
subject to supplier acceptance. The unanticipated loss of any of the Company's
contract manufacturers could cause delays in the Company's ability to deliver
products while the Company identifies and qualifies a replacement manufacturer.
Such an event could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
current or future independent contract manufacturers will be able to meet the
Company's requirements for manufactured products.
The Company does not have experience in manufacturing its products in
commercial quantities. The Company's manufacturing experience to date has been
focused primarily on assembling components produced by third party manufacturers
for its AESOP product. The Company's manufacturing activities to date with
respect to HERMES and ZEUS have consisted primarily of manufacturing a limited
number of prototypes for use in laboratory testing. The manufacture of the
Company's products and products under development involves and will involve
complex operations, including a number of separate processes and components.
Manufacturers often encounter difficulties in scaling up manufacturing of new
products, including problems involving quality control and assurance, component
and service availability, adequacy of control policies and procedures, lack of
qualified personnel, compliance with FDA QSR regulations, and the need for
further FDA approval of new manufacturing processes that could affect the safety
or efficacy of the product or new manufacturing facilities. The Company has
considered and will continue to consider as appropriate the internal manufacture
of components currently provided by third parties, as well as the implementation
of new production processes. There can be no assurance that manufacturing yields
or costs will not be adversely affected by a transition to in-house production
or to new production processes if such efforts are undertaken or that the FDA's
QSR requirements or any international ISO certification requirements can be met
and that such a transition would not have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
believes that, in connection with the commercialization of its products, it may
also be necessary to expand its manufacturing capabilities. If necessary, this
expansion will require the commitment of capital resources for facilities,
tooling and equipment and for leasehold improvements. Further, any delay by or
inability of the Company in expanding its manufacturing capacity or in obtaining
the commitment of such resources could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company expects to continue to manufacture its products based on
product orders, and intends to continue to purchase subassemblies and components
prior to receipt of purchase orders from customers. Lead times for materials and
components ordered by the Company vary significantly, and depend on factors such
as the business practices of the specific suppliers, contract terms, and general
demand for a component at a given time. Certain components used in the Company's
products have long lead-times. As a result, the Company may not be able to
maintain adequate inventories of certain components which could result in delays
in shipments. An inability of the Company to ship its products on a timely basis
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Manufacturing."
POSSIBLE NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company's operations to date have consumed substantial amounts of cash,
and the Company expects its capital and operating expenditures to increase in
the next few years. The Company believes that its existing capital resources and
anticipated cash flow from planned operations together with the net proceeds of
this offering and the interest earned thereon, should be adequate to satisfy its
cash requirements at least through 1998. There can be no assurance, however,
that the Company will not need significant additional capital before such time.
The Company's need for additional financing will depend upon numerous factors,
including, but not limited to, the extent and duration of the Company's future
operating losses, the level and timing of future revenues and expenditures, the
progress and scope of clinical trials, the timing and costs required to receive
both United States and international governmental approvals or clearances,
market acceptance of new products, the results and scope of ongoing research and
development projects, competing technologies, the
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costs of training physicians to become proficient in the use of the Company's
products and procedures, the cost of developing marketing and distribution
capabilities, and other market and regulatory developments. To the extent that
existing resources are insufficient to fund the Company's activities, the
Company may seek to raise additional funds through public or private financings.
There can be no assurance that additional financing, if required, would be
available on acceptable terms, if at all. If additional funds are raised by
issuing equity securities, further dilution to then existing stockholders may
result. If adequate funds were not available, the Company's business, financial
condition and results of operations would be materially adversely affected. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
RISK OF PRODUCT LIABILITY CLAIMS
The development, manufacture and sale of medical products, such as the
Company's robotic and computerized surgical systems, entail significant risk of
product liability claims and product failure claims. The Company has not
conducted any clinical trials and does not have sufficient data to allow the
Company to measure the risk of such claims with respect to its products
currently under development. The Company faces an inherent business risk of
financial exposure to product liability claims in the event that the use of it
products results in personal injury or death. The Company also faces the
possibility that defects in the design or manufacture of the Company's products
might necessitate a product recall. There can be no assurance that the Company
will not experience losses due to product liability claims or recalls in the
future. The Company currently maintains product liability insurance with
coverage limits of $5 million per occurrence and $5 million annually in the
aggregate and there can be no assurance that the coverage limits of the
Company's insurance policies will be adequate. In addition, the Company may
require increased product liability coverage if any potential products are
successfully commercialized. Such insurance is expensive, difficult to obtain
and may not be available in the future on acceptable terms, or at all. Any
claims against the Company, regardless of their merit or eventual outcome, could
have a material adverse effect upon the Company's business, financial condition
and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's future business and operating results depend in significant
part on its key management, scientific and technical personnel, many of whom
would be difficult to replace, and its future success will depend partially upon
its ability to retain these persons and recruit additional qualified management,
technical, marketing, sales and support, regulatory and manufacturing personnel
for its operations. Competition for such personnel is intense, and there can be
no assurance that the Company will be successful in attracting or retaining such
personnel. The loss of the services of one or more members of the management
group or the inability to hire additional qualified personnel as needed may have
a material adverse affect on the Company's business, financial condition and
results of operations. See "Management."
MANAGEMENT OF GROWTH
The Company's business has grown rapidly over the past three years and such
growth has placed and, if sustained, will continue to place, significant demands
on the Company's management and resources. In order to compete effectively
against current and future competitors, prepare products for clinical trials and
develop future products, the Company believes it must continue to expand its
operations, particularly in the areas of research and development and sales and
marketing. Although the Company believes that its current operating and
financial control systems are adequate for the present time, it is likely that
the Company will be required to implement additional operating and financial
controls, as well as hire and train additional technical, marketing and
administrative personnel, install additional reporting and management
information systems for order processing, system monitoring, customer service
and financial reporting, successfully expand its operations, improve its
operating and financial control systems, hire additional personnel and otherwise
improve coordination between the product development, marketing, sales and
finance functions. The Company's future success will depend, in part, on
management's ability to manage any future growth and there can be no assurance
that these efforts will be successful.
15
<PAGE> 19
NO PRIOR TRADING MARKET; MARKET VOLATILITY
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market for
the Common Stock will develop or, if one does develop, that it will be
maintained. The initial public offering price, which has been established by
negotiations between the Company and the Underwriters, may not be indicative of
prices that will prevail in the trading market. See "Underwriting" for
information relating to the method of determining the initial public offering
price. The market price of shares of the Common Stock is likely to be volatile
and may be affected by actual or anticipated decisions by the FDA with respect
to approvals or clearances of the Company's products, actual or anticipated
fluctuations in the Company's operating results, announcements of technological
innovations, new commercial products by the Company or its competitors, changes
in third party reimbursement policies, developments concerning proprietary
rights, conditions and trends in the medical device and other technology
industries, governmental regulation, changes in financial estimates by
securities analysts, general market conditions and other factors. In addition,
the stock market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. These broad market fluctuations may adversely affect the market price
of the Company's Common Stock. In particular, the securities of medical device
companies have experienced extreme price and volume fluctuations, which have
often been unrelated to the companies' operating performances.
EFFECT OF ANTITAKEOVER PROVISIONS
Upon the completion of this offering, the Board of Directors will have
authority to issue up to 5,000,000 shares of Preferred Stock, $.001 par value,
and to fix the rights, preferences, privileges and restrictions, including
voting rights, of those shares without any future vote or action by the
stockholders. The rights of the holders of the Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company, thereby delaying,
deferring or preventing a change in control of the Company. Furthermore, such
Preferred Stock may have other rights, including economic rights senior to the
Common Stock, and, as a result, the issuance thereof could have a material
adverse effect on the market value of the Common Stock. The Company has no
present plans to issue shares of Preferred Stock.
Upon the completion of this offering, certain provisions of the Company's
charter documents, including a provision eliminating the ability of stockholders
to take actions by written consent, and of the Delaware law could delay or make
difficult a merger, tender offer or proxy contest involving the Company.
Further, Section 203 of General Corporation Law of Delaware prohibits the
Company from engaging in certain business combinations with interested
stockholders. These provisions may have the effect of delaying or preventing
change in control of the Company without action by the stockholders and
therefore could adversely affect the price of the Company's Common Stock. See
"Description of Capital Stock."
ADVERSE IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE; OUTSTANDING WARRANTS;
REGISTRATION RIGHTS
Sales of substantial amounts of Common Stock (including shares issued upon
the exercise of outstanding options or warrants) in the public market after this
offering could materially adversely affect the market price of the Common Stock.
Such sales also might make it more difficult for the Company to sell equity
securities or equity-related securities in the future at a time and price that
the Company deems appropriate. In addition to the 2,500,000 shares of Common
Stock offered hereby, upon completion of this offering, the Company will have
4,614,354 shares of Common Stock outstanding, all of which are restricted shares
("Restricted Shares") under the Securities Act. The Company's directors,
officers and certain of its stockholders (beneficially holding an aggregate of
4,347,926 of such Restricted Shares) have agreed that they will not sell,
directly or indirectly, any Common Stock without the prior written consent of
Montgomery Securities for a period of 180 days from the date of this Prospectus.
The number of outstanding shares that will be available for sale, subject in
certain circumstances to volume and manner of sale restrictions, in the public
market, after giving effect to the lock-up agreements, will be as follows: (i)
240,239 shares of Common Stock will be eligible for sale as of the effective
date of this offering, (ii) 141,185 shares of Common Stock will be eligible for
sale
16
<PAGE> 20
beginning 90 days after the effective date of this offering, including
approximately 110,000 shares of Common Stock issuable upon exercise of
outstanding vested options, and (iii) 4,194,614 shares of Common Stock,
including approximately 474,000 shares of Common Stock issuable upon exercise of
outstanding vested options, will be eligible for sale 180 days after the date of
this Prospectus. The approximately 4,658,838 remaining Restricted Shares and
shares of Common Stock issuable upon exercise of outstanding warrants and
options will be eligible for sale thereafter pursuant to Rules 144 and 701. In
addition, following the closing of this offering, the holders of 2,998,639
Restricted Shares (including shares issuable upon the exercises of the Company's
outstanding warrants) will be entitled to certain rights with respect to
registration of such shares for sale in the public market. See "Shares Eligible
for Future Sale."
SUBSTANTIAL AND IMMEDIATE DILUTION; ABSENCE OF DIVIDENDS
Purchasers of the shares of Common Stock offered hereby will incur
immediate dilution of approximately $9.17 per share in net tangible book value
(assuming an initial public offering price of $14.00 per share). The exercise of
existing options and warrants would also have a dilutive effect on the interests
of the investors in this offering. The Company has not paid any dividends on its
Common Stock since its inception and does not contemplate or anticipate paying
any dividends upon its Common Stock in the foreseeable future. It is currently
anticipated that earnings, if any, will be used to finance the development and
expansion of the Company's business. The terms of certain outstanding notes
currently prohibit the Company from paying dividends until such notes are repaid
in full. See "Dividend Policy."
17
<PAGE> 21
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock in this offering at an assumed initial public offering price of
$14.00 per share, after deducting the estimated underwriting discount and
offering expenses payable by the Company, are estimated to be approximately
$32.0 million ($36.8 million if the Underwriters' over-allotment option is
exercised in full).
The Company intends to use a portion of the net proceeds of this offering
to repay up to $3.5 million due under outstanding adjustable rate bridge notes
issued by the Company in 1995 and 1996 (the "Bridge Notes"). The Bridge Notes
have an interest rate of prime plus 1%. Of the amounts owed thereunder
$1,840,000 are due upon the completion of this offering and the remainder are
due from July to November 1998. The Company intends to use the remainder of the
net proceeds for research and development, including new product introductions
(approximately 43% of the remainder of the net proceeds), sales and marketing
(approximately 18% of the remainder of the net proceeds), capital expenditures
(approximately 11% of the remainder of the net proceeds) and for working capital
and general corporate purposes (approximately 11% of the remainder of the net
proceeds). A portion of the net proceeds may also be used for strategic
acquisitions of businesses, products or technologies complementary to those of
the Company. The Company is not currently a party to any commitments or
agreements, and is not currently involved in any negotiations, with respect to
any acquisitions. Except as approximated above, the Company has not precisely
determined the amounts it plans to expend with respect to each of the listed
uses or the timing of such expenditures. The amounts actually expended for each
use may vary significantly depending on a number of factors and contingencies,
including the Company's success in obtaining FDA and other clearances or
approvals for its products, the Company's future revenue growth, if any, the
amount of cash generated or used by the Company's operations, the progress of
the Company's product development efforts, technological advances, the status of
competitive products and acquisition opportunities presented to the Company.
Pending such uses, the Company intends to invest the net proceeds of this
offering in short-term, interest bearing, investment-grade securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock and does not
anticipate paying any dividends on the Common Stock in the foreseeable future.
The Company's Bridge Notes currently prohibit the Company from paying dividends
until such notes are repaid in full. The Company anticipates that all future
earnings will be retained to finance future growth.
18
<PAGE> 22
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of March 31, 1997, (ii) the pro forma capitalization of the Company, giving
effect to the reincorporation of the Company in Delaware, the conversion of all
outstanding shares of Preferred Stock into Common Stock upon completion of this
offering and the conversion of the Medtronic Debenture based upon an assumed
initial public offering price of $14.00 per share, (iii) the capitalization of
the Company as adjusted to give effect to the sale of the 2,500,000 shares of
Common Stock offered by the Company hereby (at an assumed initial public
offering price of $14.00 per share, after deduction of the estimated
underwriting discount and offering expenses) and (iv) the repayment by the
Company of all amounts owed under the Bridge Notes. This table should be read in
conjunction with the Financial Statements and Notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Convertible subordinated debt(1).............................. $ 3,167 $ -- $ --
Long-term debt, net of current portion(2)..................... 3,250 100 100
Redeemable Preferred Stock.................................... 6,002 -- --
Stockholders' equity:
Preferred Stock, $.001 par value, 5,000,000 shares
authorized; 1,704,317 shares outstanding actual; no
shares outstanding, pro forma and as adjusted(3)......... 5,930 -- --
Common Stock, $.001 par value, 25,000,000 shares authorized;
1,744,207 shares outstanding actual; 4,522,596 shares
outstanding, pro forma; 7,022,596 shares outstanding as
adjusted(4).............................................. 431 5 7
Additional paid-in capital.................................. 1,104 16,629 48,577
Deferred compensation....................................... (555) (555) (555)
Accumulated deficit......................................... (13,964) (13,964) (13,964)
-------- --------- --------
Total stockholders' equity (deficit)..................... (7,054) 2,115 34,065
-------- --------- --------
Total capitalization................................... $ 5,365 $ 2,215 $ 34,165
======== ========= ========
</TABLE>
- ---------------
(1) See Note 14 of Notes to Financial Statements.
(2) See Notes 8 and 9 of Notes to Financial Statements.
(3) See Note 6 of Notes to Financial Statements.
(4) Excludes (i) 1,383,623 shares of Common Stock issuable upon exercise of
outstanding stock options as of March 31, 1997 at a weighted average
exercise price of $4.05 per share under the Company's stock option plans,
(ii) 1,609,250 shares of Common Stock issuable upon exercise of outstanding
warrants as of March 31, 1997, which are exercisable at a weighted average
exercise price of $5.32 per share and (iii) a total of 1,283,545 additional
shares of Common Stock reserved for future issuance under the Company's
stock option plans and its Employee Stock Purchase Plan. See
"Management -- Stock Plans," "Description of Capital Stock" and Notes 5, 6
and 15 of Notes to Financial Statements.
19
<PAGE> 23
DILUTION
The pro forma net tangible book value of the Company's Common Stock at
March 31, 1997 was $2,021,900, or $0.45 per share of Common Stock. "Pro forma
net tangible book value" per share represents the amount of the Company's total
tangible assets less total liabilities, divided by the number of shares of
Common Stock outstanding, after giving effect to the automatic conversion of
each outstanding share of Preferred Stock into Common Stock upon the completion
of this offering and the conversion of the Medtronic Debenture based upon an
assumed initial public offering price of $14.00 per share. After giving effect
to the receipt of the net proceeds from the sale by the Company of the 2,500,000
shares offered hereby at an assumed initial public offering price of $14.00 per
share and after deduction of the estimated underwriting discount and offering
expenses, pro forma net tangible book value of the Company at March 31, 1997
would have been approximately $33,971,900, or $4.83 per share of Common Stock.
This represents an immediate increase in the pro forma net tangible book value
of $4.38 per share of Common Stock to existing stockholders and an immediate
dilution of $9.17 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price.............................. $14.00
Pro forma net tangible book value as of March 31, 1997........... $ 0.45
Increase attributable to new investors........................... 4.38
------
Pro forma net tangible book value after this offering.............. 4.83
------
Dilution to new investors.......................................... $ 9.17
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1997,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the existing stockholders and by the investors purchasing shares of Common Stock
in this offering (based on an assumed initial public offering price of $14.00
per share and before deducting the estimated underwriting discount and offering
expenses payable).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 4,526,710 64.4% $16,053,000 31.4% $ 3.55
New investors............... 2,500,000 35.6 35,000,000 68.6 14.00
--------- ----- ----------- -----
Total..................... 7,026,710 100.0% $51,053,000 100.0%
========= ===== =========== =====
</TABLE>
The foregoing tables and calculations assume no exercise of outstanding
options or warrants. As of March 31, 1997, 1,383,623 shares of Common Stock were
subject to outstanding options at a weighted average exercise price of $4.05 per
share under the Company's stock option plans and 1,609,250 shares of Common
Stock were subject to outstanding warrants at a weighted average exercise price
of $5.32 per share. If all of the options and warrants outstanding as of March
31, 1997 were exercised, the new investors would experience an additional
dilution of $0.03 per share. In addition, as of March 31, 1997, 1,283,545 shares
of Common Stock were reserved for future issuance under the Company's stock
option plans and its Employee Stock Purchase Plan. To the extent that any shares
available for issuance upon exercise of outstanding options, warrants or
reserved for future issuance under the Company's stock option plans or Employee
Stock Purchase Plan are issued, there will be further dilution to new investors.
See "Management -- Stock Plans," "Certain Transactions," "Description of Capital
Stock" and Notes 5, 6 and 15 of Notes to Financial Statements.
20
<PAGE> 24
SELECTED FINANCIAL DATA
The selected financial data set forth below for the fiscal years ended
December 31, 1994, 1995 and 1996 are derived from the Company's financial
statements audited by Arthur Andersen LLP, independent public accountants,
included elsewhere in this Prospectus. The selected financial data for the nine
months ended December 31, 1993 and for the fiscal year ended March 31, 1993 are
derived from the Company's audited financial statements not included in this
Prospectus. The selected financial data for the three-month periods ended March
31, 1996 and 1997 are derived from the Company's unaudited financial statements
which, in the opinion of management, reflect all adjustments necessary for a
fair presentation of the Company's financial position and results of operations
for such periods. The results of interim periods are not necessarily indicative
of the results that may be expected for future periods including the year ending
December 31, 1997. The data set forth below is qualified in its entirety by and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR NINE-MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED DECEMBER 31, ENDED MARCH 31,
MARCH 31, DECEMBER 31, --------------------------- ----------------
1993 1993(1) 1994 1995 1996 1996 1997
----------- ------------ ------- ------- ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.............................. $ 393 $ 66 $ 607 $ 2,271 $ 4,057 $ 676 $ 1,373
Cost of revenue...................... 259 88 500 1,973 2,627 444 651
----- ----- ------- ------- ------- ------ -------
Gross profit (loss).................. 134 (22) 107 298 1,430 232 722
Operating expenses:
Research and development........... 132 495 630 739 1,359 336 558
Selling, general and
administrative................... 134 367 2,784 3,158 4,144 745 1,338
----- ----- ------- ------- ------- ------ -------
Total operating expenses......... 266 862 3,414 3,897 5,503 1,081 1,896
----- ----- ------- ------- ------- ------ -------
Loss from operations................. (132) (884) (3,307) (3,599) (4,073) (849) (1,174)
Interest and other income (expense),
net................................ 1 10 63 9 (486) (41) (356)
----- ----- ------- ------- ------- ------ -------
Net loss............................. $(131) $ (874) $(3,244) $(3,590) $(4,559) $ (890) $(1,530)
===== ===== ======= ======= ======= ====== =======
Pro forma net loss per share......... $ (0.88) $(0.18) $ (0.28)
======= ====== =======
Pro forma shares used in per share
computations(2).................... 5,151 5,041 5,460
======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------------------- MARCH 31,
1993 1993 1994 1995 1996 1997
--------- ---- ------ ------- ------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 227 $377 $ 12 $ 64 $ 433 $ 3,986
Working capital (deficit)................. 597 310 3,136 (44) (665) 1,101
Total assets.............................. 697 595 4,699 2,017 3,556 7,052
Redeemable preferred stock................ -- -- 5,438 5,882 6,002 6,002
Long-term debt, net of current portion.... 0 2 46 535 3,326 3,350
Total stockholders' equity (deficit)...... 648 471 (1,231) (5,269) (8,694) (7,054)
</TABLE>
- ---------------
(1) In 1993, the Company changed its fiscal year end from March 31 to December
31.
(2) See Note 2 of Notes to Financial Statements for a description of the
computation of pro forma net loss per share and net loss per share.
21
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Financial Statements and Notes included elsewhere in this Prospectus. This
Prospectus contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those set forth under "Risk Factors" and
elsewhere in this Prospectus.
OVERVIEW
From its inception in 1989 through 1991, the Company conducted contract
research in the area of robotics for several government agencies such as the
National Aeronautics and Space Administration, the National Science Foundation,
National Institutes of Health and the United States Navy. In 1991, the Company
began applying its research efforts to the medical marketplace, focusing on the
development of robotic systems for surgical applications. As a result, the
Company introduced AESOP, which it believes is the world's first FDA-cleared
surgical robot, in October 1994. In October 1996, the Company introduced the
next version of AESOP which incorporates what the Company believes is the
world's first FDA-cleared voice control interface for a surgical device. Since
AESOP's commercial introduction, a significant portion of the Company's revenues
have been derived from the sale of AESOP and related single-use surgical
accessories. Since AESOP's introduction, approximately 240 units have been sold.
The Company is leveraging its AESOP technology to develop HERMES, a voice
controlled, networked, computer interface providing a surgeon with direct
control of and feedback from multiple devices in the OR. The Company is also
developing ZEUS, a surgical robotic system for minimally invasive surgery
utilizing technologies from both AESOP and HERMES. The initial target market for
ZEUS will be cardiovascular procedures. To date, all revenues from ZEUS and
HERMES have been payments made pursuant to development agreements.
The Company has entered into several strategic partnerships with
international medical device manufacturers and has established relationships
with leading medical institutions. The Company has entered into clinical
development agreements for ZEUS with The Cleveland Clinic, Hershey Medical
Center and Sarasota Memorial Hospital in order to enhance its research efforts
through use of prototype systems and provide cost sharing and revenue to the
Company. For cardiothoracic applications, Medtronic will act as the Company's
exclusive distributor of ZEUS in Europe, the Middle East and Africa and will
co-market ZEUS with the Company in North America. Stryker will purchase the
Company's HERMES system on an OEM basis, as a means of providing surgeons with
centralized and simplified voice control over a number of Stryker's endoscopic
and arthroscopic products. The Company currently distributes AESOP directly in
the United States and utilizes third-party distributors internationally. Johnson
& Johnson distributes AESOP in Australia and New Zealand and provides the
Company with certain strategic support in the areas of customer service and
training.
Since inception, the Company has sustained significant losses resulting in
an accumulated deficit of $14.0 million as of March 31, 1997. From inception
through March 31, 1997, the Company has raised approximately $11.5 million from
issuances of Common and Preferred Stock, $4.2 million in debt financing and $5.0
million in debt from strategic corporate partners. These financings have been
used to fund the Company's working capital needs, develop AESOP, HERMES and ZEUS
and continue its research and development efforts.
The Company expects to continue to incur significant operating losses due
to its research and development efforts, costs associated with obtaining
regulatory approvals and clearances, continued marketing expenditures to
increase sales and other costs associated with the Company's planned growth.
Furthermore, the Company anticipates that its operating results may fluctuate
significantly from quarter to quarter in the future, and that fluctuation will
depend on a number of factors, many of which are outside the Company's control.
These factors include timing and results of clinical trials, delays associated
with FDA and other
22
<PAGE> 26
approval and clearance processes, changes in pricing policy by the Company or
its competitors, the number, timing and significance of product enhancements and
new products by the Company and its competitors, health care reimbursement
policies and product quality issues.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 Compared to the Three Months Ended March 31,
1996
Revenues. Revenues increased 103% to $1.4 million for the three months
ended March 31, 1997 from $676,000 for the same period in 1996. Approximately
20% of the increase resulted from an increase in unit sales volume,
approximately 55% is attributable to an increase in the selling price of AESOP
from the introduction of an enhanced version of AESOP in the fourth quarter of
1996 and the balance of the increase primarily related to increases in product
development revenues.
Cost of Revenues. Cost of revenues increased to $651,000 for the three
months ended March 31, 1997 from $444,000 for the same period in 1996. Gross
margin increased to 53% in the first quarter of 1997 as compared to 34% in the
first quarter of 1996. The increase in gross margin was primarily due to
increases in selling price per unit.
Research and Development. Research and development expense increased 66% to
$558,000 in the three months ended March 31, 1997 from $336,000 for the same
period in 1996, primarily as a result of increased expenditures for HERMES and
ZEUS. The Company expects these expenditures to increase as it continues to
develop its technologies.
Selling, General and Administrative. Selling, general and administrative
expenses increased 79% to $1.3 million in the three months ended March 31, 1997
from $746,000 for the same period in 1996, an increase of approximately
$592,000. Approximately $250,000 of the increase is due to the addition of sales
and managerial personnel and commissions on increased AESOP unit sales accounted
for $60,000 of the increase. The balance of the increase relates to general
increases as the Company expanded its infrastructure. The Company expects
selling, general and administrative expenses to increase in future periods as
the Company continues to expand its infrastructure and incurs compensation
charges related to the grant of stock options. See Note 15 of Notes to Financial
Statements.
Interest and Other Expense, Net. Interest and other expense, net, increased
to $356,000 for the three months ended March 31, 1997, from $41,000 for the same
period in 1996. Interest and other expense, net, in the first quarter of 1997
included the amortization of approximately $167,000 of interest cost
attributable to the fixed conversion feature of the Medtronic Debenture and
approximately $63,000 of interest cost related to warrants issued with the
Bridge Notes. The remainder of the increase in interest expense was attributable
to an increase in overall indebtedness. See "Certain Transactions" and Notes 8
and 14 of the Notes to the Financial Statements.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Revenues. Revenues increased 79% to $4.1 million in 1996 from $2.3 million
in 1995. Approximately 50% of this increase was due to the commercial
introduction of the enhanced version of AESOP in the fourth quarter of 1996. The
Company also received additional revenue in 1996 as a result of the sale of ZEUS
prototypes which accounted for approximately 35% of the increase. The balance
primarily related to additional revenue from development contracts.
Cost of Revenues. Cost of revenues increased to $2.6 million in 1996 from
$2.0 million in 1995. Gross margin increased to 35% in 1996 as compared to 13%
in 1995. Increases in selling price accounted for approximately 55 percent of
the increase in gross margin with efficiencies of scale associated with
increased production accounting for most of the balance of the increase.
Research and Development. Research and development expenses increased 84%
to $1.4 million in 1996 as compared to $739,000 in 1995. During 1996, the
Company incurred additional costs for the development of voice control and more
sophisticated user interfaces related to the enhanced version of AESOP as well
as research and development efforts with respect to HERMES and ZEUS.
Selling, General and Administrative. Selling, general and administrative
expenses increased 31% to $4.1 million in 1996 as compared to $3.2 million in
1995. The increase was due almost entirely to additional
23
<PAGE> 27
salary and commission paid as the Company increased its personnel in the Selling
and Administrative functions.
Interest and Other Expense, Net. Interest and other expense, net, was
$486,000 in 1996 as compared to interest and other income, net, of $9,000 in
1995. The increase was due primarily to interest cost on Bridge Notes issued in
1996.
Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994
Revenues. Revenues increased 274% to $2.3 million in 1995 from $607,000 in
1994 primarily due to the timing of the commercial introduction of AESOP in
October 1994.
Cost of Revenues. Cost of revenues increased to $2.0 million in 1995 from
$500,000 in 1994. Gross margin decreased to 13% in 1995 as compared to 18% in
1994. The decrease in gross margin was primarily attributable to investments in
manufacturing capabilities to support expanded production.
Research and Development. Research and development expenses increased 17%
to $739,000 in 1995 as compared to $630,000 in 1994. The increase was primarily
due to the addition of research and development staff and research related to
the development of AESOP.
Selling, General and Administrative. Selling general and administrative
expenses increased 13% to $3.2 million in 1995 as compared to $2.8 million in
1994. The increase was primarily attributable to payroll and commissions as the
Company transitioned from selling through independent representatives to a
direct sales force and as the Company grew to support the manufacture and
distribution of AESOP.
INCOME TAXES
Minimal provision for state income taxes has been recorded for the
Company's pre-tax losses through December 31, 1996. As of December 31, 1996, the
Company had federal and state net operating loss carryforwards of approximately
$11.0 million and $4.9 million, respectively, which are available to offset
future federal and state taxable income. Federal carryforwards expire fifteen
years after the year of loss and state carry forwards expire from five to seven
years after the year of loss. Under the Tax Reform Act of 1986, the amounts of
and the benefits from net operating loss carryforwards may be impaired in
certain circumstances. Events which may cause such limitations in the amount of
available net operating losses which the Company may utilize in any one year
include, but are not limited to, a cumulative ownership change of more than 50%
over a three year period. The effect of such limitation, if imposed, has not
been determined. The Company has provided a full valuation allowance on the
deferred tax asset because of the uncertainty regarding its realization. See
Note 7 of Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have exceeded cash inflows,
resulting in an accumulated deficit of approximately $13.9 million as of March
31, 1997. In addition to AESOP product sales and product development and grant
revenues totaling approximately $8.1 million from the date of introduction of
AESOP through March 31, 1997, the Company has primarily relied on proceeds from
issuances of Preferred Stock and Common Stock of approximately $11.5 million,
bridge debt financing of approximately $4.2 million and proceeds from debt
financing from strategic corporate partners of approximately $5.0 million to
fund operations.
For the three months ended March 31, 1997, the Company had net cash used in
operating activities of $1.4 million primarily attributable to a net loss and an
increase in accounts payable partially offset by depreciation and amortization,
amortization of fixed discount on convertible subordinated debt and a decrease
in accounts receivable. In fiscal 1996, 1995 and 1994, net cash used in
operating activities totaled $3.5 million, $3.6 million and $3.3 million,
respectively. Net cash used in operating activities for these periods has been
primarily attributable to net losses and increases in accounts receivable.
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For the three months ended March 31, 1997, cash outflows from investing
activities of approximately $45,000 related to purchases of property and
equipment. The Company currently has no material commitments for capital
expenditures. In 1994 and certain periods of 1995, unspent proceeds from equity
and debt offerings were invested, generating earnings on cash balances.
For the three months ended March 31, 1997, net cash provided by financing
activities of approximately $5.0 million was attributable to net proceeds from
long-term debt of approximately $3.0 million and preferred stock sales of
approximately $2.2 million. In fiscal years 1996, 1995 and 1994, net cash
provided by financing activities resulted primarily from issuances of Preferred
Stock and Common Stock and proceeds from issuances of long-term debt.
The Company's operations to date have consumed substantial amounts of cash,
and the Company expects its capital and operating expenditures to increase in
the next few years. The Company believes that its existing capital resources and
anticipated cash flow from planned operations together with the net proceeds of
this offering should be adequate to satisfy its capital requirements at least
through 1998. There can be no assurance, however, that the Company will not need
significant additional capital before such time. The Company's need for
additional financing will depend upon numerous factors, including, but not
limited to, the extent and duration of the Company's future operating losses,
the level and timing of future revenues and expenditures, the progress and scope
of clinical trials, the timing and costs required to receive both United States
and international governmental approvals or clearances, market acceptance of new
products, the results and scope of ongoing research and development projects,
competing technologies, the costs of training physicians to become proficient in
the use of the Company's products and procedures, the cost of developing
marketing and distribution capabilities, and other market and regulatory
developments. To the extent that existing resources are insufficient to fund the
Company's activities, the Company may seek to raise additional funds through
public or private financings. If additional funds are raised by issuing equity
securities, further dilution to then existing stockholders may result. There can
be no assurance that additional financing, if required, would be available on
acceptable terms, if at all. If adequate funds are not available, the Company's
business, financial condition and results of operations would be materially
adversely affected.
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BUSINESS
INTRODUCTION
The Company develops and markets proprietary robotic and computerized
surgical systems that enhance a surgeon's performance and centralize and
simplify a surgeon's control of the operating room ("OR"). The Company believes
that its products and technologies under development have the potential to
revolutionize surgery and the OR by providing a surgeon with the precision and
dexterity necessary to perform complex, minimally invasive surgical procedures
including E-CABG and by enabling a surgeon to control critical devices in the OR
through simple verbal commands. The Company believes that its products and
technologies under development will broaden the scope and increase the
effectiveness of minimally invasive surgery, improve patient outcomes and create
a safer, more efficient and cost effective OR.
BACKGROUND
Surgical techniques and related technologies have changed rapidly over the
past twenty years. The widespread adoption of minimally invasive surgical
techniques has significantly expanded the number of surgical procedures
available to patients, and the increasing complexity of these minimally invasive
procedures has placed substantial emphasis on technical surgical skills. The
demand for minimally invasive surgical procedures has largely been driven by
patients and payors, as such procedures generally result in improved patient
outcomes and reduced overall procedure costs. In addition, the number of
surgical devices in the OR has grown dramatically, increasing the potential for
error and miscommunication during surgery. Finally, the impact of managed care
has increased pressure on hospitals to minimize the costs of surgery.
Minimally Invasive Surgery
Traditionally, the vast majority of all surgeries have been open, requiring
large incisions measuring up to 18 inches to access the operative site. These
large openings enable the surgeon to manipulate and view the operative site and
allow unobstructed access to the patient's anatomy. However, the invasiveness of
open surgery often results in significant trauma, pain and complications, as
well as significant costs related to lengthy convalescence periods for the
patient.
In an effort to mitigate the shortcomings of traditional surgical
techniques, minimally invasive surgery and related technologies have been
developed. In minimally invasive surgery, specially designed surgical
instruments and an endoscope (a miniature camera attached to a maneuverable
tube) are inserted into the patient through ports in the body measuring
approximately 3-to-10 millimeters. The endoscope is connected to a video monitor
which allows the surgeon to view the operative site. Minimally invasive surgery
is intended to be as effective as traditional open surgery while offering
patients substantially reduced pain and trauma, shortened convalescent periods
and decreased overall patient care costs.
The development and subsequent widespread adoption of minimally invasive
techniques have revolutionized many surgical fields, including orthopedics,
gynecology and general surgery. According to MDI, in the United States in 1995,
over 13 million procedures which traditionally would have been performed in an
open manner were performed minimally invasively. MDI estimates that the number
of minimally invasive procedures will grow to over 15 million annually in the
United States by 2000. The majority of minimally invasive procedures are
currently limited to less complex excisional or dissection-based procedures that
do not require microsuturing or other intricate surgical techniques. In cases
where minimally invasive surgical options are not available, many patients who
cannot withstand the trauma associated with open surgical procedures must forego
surgery as a means of treatment.
To date, the application of minimally invasive techniques to more complex
procedures, including microsurgical procedures such as cardiovascular, neuro and
ophthalmic surgery, has been limited. Microsurgical procedures involve accessing
and delicately manipulating extremely small anatomical structures. A surgeon's
ability to perform microsurgical procedures with traditional minimally invasive
instruments is often limited by the small size of the surgical workspace within
the patient's body, constrained access to, and limited visualization of, the
operative site and the difficulty of manually performing extremely precise
manipulations
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<PAGE> 30
with currently available minimally invasive surgical instruments. As a result,
the Company believes that for minimally invasive microsurgical procedures to be
more widely applied, technology must be developed which improves visualization
of, and access to, confined operative sites and enhances a surgeon's dexterity
and precision.
The Operating Room
Another key challenge for a surgeon is the efficient control of the
multitude of devices which have been introduced into the OR. The typical OR
contains a variety of devices which aid a surgeon, such as patient monitors,
electrocautery devices, imaging systems and endoscopic equipment. Coordination
and control of these devices can be difficult, since they generally have
different user interfaces, such as buttons, dials, foot pedals and hand
controls, as well as numerous, non-intuitive methods of providing feedback to a
surgeon, such as small LCD screens on their front panels and numerous audible
alarms, including beeps, buzzes and bells. In most instances, these devices are
manually controlled by someone other than a surgeon in response to a surgeon's
spoken commands, and the person controlling the devices is often responsible for
giving a surgeon verbal feedback with regard to the status of these devices.
Such indirect control and feedback are necessary because a surgeon's hands are
usually occupied with surgical instruments and a surgeon cannot exit the sterile
operating field. This indirect control and feedback is inefficient and can
increase the potential for miscommunication and error. As a result, the Company
believes that technology which provides a surgeon with greater control over, and
enhanced feedback from, the devices within the OR will increase the efficiency
of surgical procedures, while reducing the potential for error during surgery.
Surgical Costs
The impact of managed care has placed significant pressure on hospitals to
minimize the costs associated with patient care, especially with regard to
surgical procedures and the associated pre-operative and post-operative care. A
number of procedural and administrative measures have been implemented during
the past decade which reduced these costs, although these costs are still
significant. For instance, it is still common for members of the surgical team
to perform manual tasks, such as holding and maneuvering the endoscope, even
though managed care has increased pressure to re-deploy these often highly paid
OR personnel to more value-added roles. The Company believes that there is
considerable demand for technology which will result in increased efficiency and
lower surgical costs.
THE COMPUTER MOTION SOLUTION
The Company's strategy is to become the leading provider of robotic and
computerized surgical systems. The Company intends to implement this strategy by
developing technologies and products to broaden the scope and effectiveness of
minimally invasive surgery, centralize and simplify control of the OR and reduce
the costs associated with surgical procedures.
The Company is developing robotic surgical systems to fundamentally improve
a surgeon's performance. The proprietary technologies underlying these systems
include voice control, robotic motion control, motion scaling, tremor filtering,
positioning memory and sophisticated mechanical and electrical redundancies. The
Company believes that its robotic surgical systems will provide a surgeon with
greater dexterity and precision and enhanced visualization of, and access to,
confined operative sites. The Company's robotic surgical system under
development, ZEUS, incorporates a robotic endoscope positioner, as well as two
robotic arms which permit a surgeon to remotely manipulate surgical instruments
while seated at a control console. The Company believes that this technology
will improve a surgeon's ability to perform complex, minimally invasive surgical
procedures and will allow a surgeon to perform new, minimally invasive
microsurgical procedures that currently are impossible or very difficult to
perform safely and economically.
The Company is also developing voice controlled technologies which simplify
and centralize a surgeon's control of the OR. These proprietary technologies
include advanced speech recognition software, intuitive user interfaces, device
networking software and computer hardware. The Company has commenced marketing a
product incorporating this technology, AESOP, a robotic endoscope positioner,
which is controlled through
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<PAGE> 31
simple verbal commands. The initial version of AESOP has been cleared by the FDA
and has been commercially available since October 1994. The voice control
interface incorporated into the current version of AESOP is also FDA-cleared,
and has been commercially available since October 1996. The Company is also
developing HERMES, a voice control system that is designed to enable a surgeon
to directly control various critical devices in the OR, such as laparoscopic,
arthroscopic and video devices, through simple verbal commands. HERMES is also
designed to provide standardized visual and digitized voice feedback, which the
Company believes has the potential to increase safety by substantially reducing
the various non-intuitive feedback mechanisms associated with most medical
devices. The Company also believes that this enhanced control and feedback in
the OR has the potential to increase efficiency, shorten procedure times and
reduce costs.
The Company believes that its products and technologies under development
have the potential to revolutionize surgery and the OR by broadening the scope
and increasing the effectiveness and safety of minimally invasive surgery and
improving patient outcomes. The Company also believes that its proprietary
technology could reduce the direct costs of performing complex surgical
procedures by decreasing the number of personnel required to operate the devices
in the OR, shortening procedure times and enabling more effective deployment of
clinical personnel.
PRODUCTS AND MARKETS
The Company currently has three robotic and computerized surgical systems
in various stages of development, one of which is commercially available. The
Company believes that its products can be used in conjunction with devices
common to most ORs today. The following table identifies the Company's
commercially available products and products under development:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION DEVELOPMENT STATUS
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
AESOP Proprietary robotic voice Commercially available and
controlled endoscope positioning FDA-cleared through the 510(k)
system used in laparoscopic, process
cardiovascular and thorascopic
procedures
- ----------------------------------------------------------------------------------------------
HERMES Proprietary voice controlled Functionality testing under
system designed to centralize Institutional Review Board approval
and simplify control of various expected in second half of 1997
OR devices, which is expected to
initially include certain Initial OEM Customer -- Stryker
laparoscopic, arthroscopic and
video devices
- ----------------------------------------------------------------------------------------------
ZEUS Proprietary robotic surgical Limited, experimental animal
system designed to facilitate functionality procedures commenced
performance of minimally at clinical sites including The
invasive surgical procedures and Cleveland Clinic, Pennsylvania
enable performance of new State University's Hershey Medical
minimally invasive microsurgical Center and Sarasota Memorial
procedures, including Hospital; testing is expected to
cardiovascular, neuro and commence in the near future at
gynecologic surgeries Columbia/HCA Healthcare
Corporation's Medical City of
Dallas Hospital
Cardiothoracic Marketing Partner --
Medtronic
</TABLE>
- --------------------------------------------------------------------------------
AESOP
The Company's Automated Endoscopic System for Optimal Positioning ("AESOP")
is a robotic endoscope positioner that enables surgeons to directly control the
movement of the endoscope through simple verbal commands and provides surgeons
with an image that is more stable and sustainable than the image provided when a
human assistant holds the scope. AESOP connects directly to the operating table
and
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approximates the form and function of a human arm. AESOP can accommodate nearly
any brand and size of endoscope. The scopes are attached to AESOP by a magnetic,
sterilizable collar and the arm is covered by a sterile single-use drape. AESOP
consists of a voice control microphone, and a proprietary, fault-tolerant
computer controller which translates a surgeon's commands into movements of the
robotic arm as well as a customized cart which allows AESOP to be easily
transported throughout the hospital. This system also includes manual, back-up
hand and foot controls that provide a surgeon and other members of a surgical
team with multiple interfaces to the robot. The Company believes that AESOP is
the world's first FDA-cleared surgical robot and incorporates the world's first
FDA-cleared voice interface for use in the OR.
Prior to the introduction of AESOP, surgeons were forced to rely primarily
on a surgical assistant to hold and maneuver the endoscope to provide the
surgical field of view. This approach contributes to some of the
inefficiencies associated with minimally invasive surgical procedures, including
an unstable video image caused by the human endoscope holder's involuntary hand
tremors, the difficulty of the human endoscope holder to properly execute a
surgeon's verbal commands, including returning to a specific surgical site, the
resultant crowding around the OR table, often requiring the human endoscope
holder to reach under or across the surgeon to hold the endoscope, and the
frequent smearing of the endoscope lens caused by the human endoscope holder
inadvertently touching it against tissue.
The use of AESOP eliminates the need for a human endoscope holder and some
of the inefficiencies associated with minimally invasive surgical procedures by
providing a steady and sustainable video image and allowing a surgeon to
maneuver the endoscope by means of a proprietary voice control interface that
recognizes a surgeon's voice and moves the endoscope in response to a surgeon's
simple verbal commands. This direct control by a surgeon mitigates the risks
associated with miscommunication between the human endoscope holder and the
surgeon and allows a surgeon to access specific operative sites, including a
specific suture or the position of a clamp, stored in AESOP's memory. The use of
AESOP also reduces crowding in the OR, while allowing a surgical staff to
perform more productive tasks. The Company believes that the advantages of AESOP
result in shorter, safer and more cost effective minimally invasive surgical
procedures. AESOP has been cleared by the FDA for use in general thorascopy,
cardiothoracic and laparoscopic, as well as in a number of minimally invasive
ear, nose and throat ("ENT") procedures. These applications are performed by
thoracic, cardiac, general, orthopedic, gynecologic, urologic, plastic and ENT
surgeons.
In October 1994, the Company released the initial version of AESOP, which
utilized a foot pedal to control the robotic arm. The Company introduced the
current version of AESOP in October 1996. The initial version of AESOP can be
upgraded to include the Company's proprietary voice control technology. As of
July 1, 1997, the Company sold 240 AESOP units, which were used to perform over
18,000 minimally invasive surgical procedures. Of the 240 AESOP units sold
worldwide, 164 are the initial versions of AESOP (of which 95 have been upgraded
to the current version of AESOP) and 76 are the current version of AESOP. The
domestic and international list prices of AESOP were $44,900 and $31,500,
respectively, during the first quarter of 1997.
HERMES
The Company's OR control system, HERMES, is a voice controlled technology
platform which is designed to serve as a centralized and simplified interface
for a surgeon to control a variety of medical devices in the OR. These devices
currently include the endoscopic camera and light source, insufflator,
arthroscopic shaver and pump, VCR, video printer, video frame grabber and the
Company's robotic devices. HERMES consists of a control box which is networked
with multiple HERMES compatible devices, and is controlled by a surgeon using a
headset microphone.
HERMES allows a surgeon to directly control the OR devices and equipment to
which it is connected through simple verbal commands. In addition, HERMES can
also be controlled by a touch screen pendant. HERMES also provides visual and
digitized voice feedback to a surgical team. The digitized voice feedback is
device-specific and the video feedback is displayed on the endoscopic video
monitor. Both the audio and video feedback features are customizable by a
surgeon in real time, allowing a surgeon to modify the amount and type of
feedback received. The Company believes that HERMES has the potential to
increase the
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<PAGE> 33
effectiveness of a surgical team by augmenting the utility of the devices it
controls, thereby enhancing the efficiency and safety of surgical procedures. As
a result of these efficiencies, the Company believes that use of HERMES also has
the potential to reduce costs associated with surgical procedures.
The Company has developed a prototype of HERMES and expects to commence
functionality testing under Institutional Review Board ("IRB") approval at
selected sites in the second half of 1997. These sites are expected to include,
among others, Stanford University Medical Center, Duke University, Johns
Hopkins, Baylor College of Medicine and Louisiana State University Medical
Center. The Company believes that HERMES could be utilized in a majority of the
approximately 23,000 ORs in the United States.
In order to leverage its proprietary voice recognition technology in the
arthroscopic and laparoscopic market, the Company entered into a Development and
Supply Agreement with Stryker, a leading manufacturer of endoscopic equipment,
during the third quarter of 1996. Pursuant to this agreement, the Company is
developing interfaces between the Company's proprietary voice recognition
technology and certain of Stryker's arthroscopic and laparoscopic surgical
devices. The Company anticipates that Stryker will apply for 510(k) FDA
marketing clearance of the initial devices integrated with HERMES during the
latter half of 1997. The Company intends to enter into additional OEM agreements
with other leading medical device manufacturers to potentially expand the number
and type of devices to be integrated with HERMES, including the OR table, the OR
lights, electrocautery devices, various imaging systems, as well as numerous
devices in the catheterization laboratory. See "Business -- Corporate Alliances
and Clinical Sites."
ZEUS
The Company's robotic surgical system under development, ZEUS, is designed
to fundamentally improve a surgeon's ability to perform complex, minimally
invasive procedures and enable new, minimally invasive microsurgical procedures
that are currently impossible or very difficult to perform with conventional
surgical methods. ZEUS is comprised of three surgeon-controlled robotic arms,
one of which positions an endoscope while the other two hold the Company's
proprietary single-use and reusable surgical instruments. The Company believes
that these new minimally invasive surgical procedures, like currently available
minimally invasive surgical procedures, would result in reduced patient pain and
trauma, fewer complications, lessened cosmetic concerns and shortened
convalescence periods and would increase the number of patients qualified for
certain surgical procedures. In addition, the Company believes that an increase
in minimally invasive options would result in lower overall health care costs to
providers, payors and patients.
ZEUS' robotic arms can be directly attached to the surgical table in order
to maintain a constant orientation to the patient. A surgeon controls the
movement of the robotic arms by manipulating two corresponding robotic
instrument handles, which are housed in a mobile console which can be positioned
anywhere in the OR. The physical design of these instrument handles are similar
to conventional surgical instrument handles. A surgeon's precise manipulation of
the instrument handles is communicated to a proprietary computer controller
which filters, scales and translates the movements to the robotic arms. A
surgeon can operate these instrument handles from a comfortable, ergonomic
position, including sitting with his or her forearms positioned on an armrest.
The surgeon controls the robotic arm which holds the endoscope through means of
simple verbal commands spoken into a headset microphone. A video display of the
endoscopic image is placed directly in front of the surgeon and a second monitor
is positioned next to the patient for use by the other members of the surgical
team. In addition, the Company believes that ZEUS could be used in conjunction
with the Company's HERMES technology to control a variety of ZEUS' features,
including motion scaling and tactile feedback.
The Company believes that ZEUS will enable new minimally invasive
microsurgical procedures and facilitate the performance of existing minimally
invasive procedures by providing clinicians with the following technical
benefits:
Improved Precision. ZEUS incorporates technology that is designed to enable
a surgeon to scale his or her movements, allowing manipulation of instruments on
a microsurgical scale while utilizing normal hand and arm movements. For
instance, in microsurgical procedures which involve extremely small bodily
structures and which utilize sutures ranging from 20-to-40 microns, or one-third
to two-thirds of the width of a
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<PAGE> 34
human hair, if a surgeon selects a scaling ratio of 15-to-1, each one inch
movement by the surgeon would result in a 1/15 inch movement by the robotic
surgical instruments.
Improved Dexterity. ZEUS is designed to enhance a surgeon's performance by
enabling manipulations of the surgical instruments, which are impossible or very
difficult to use when manually performing surgery. For instance, a surgeon can
activate and deactivate the instrument handles to further extend his or her
range of motion to complete a particular movement, such as suturing, without
having to physically contort his or her arms. In addition, in order to gain
anatomical access to certain regions of the body in a minimally invasive manner,
the instruments must be placed in positions that would be extremely difficult
for a surgeon to manipulate manually using conventional minimally invasive
surgical techniques, due to the distance between the instruments and their
relative positions to each other. ZEUS allows a surgeon to control the
instruments by means of the robotic instrument handles, regardless of the
positions of the instruments relative to each other.
Eliminated Effects of Involuntary Hand Tremors. ZEUS is designed to hold
the surgical instruments and the endoscope in a steady manner, eliminating a
surgeon's incidental and unintended hand motions and tremors which are
intensified when holding surgical instruments for extended periods of time.
Enhanced Tactile Feedback. ZEUS is designed to provide a surgeon with
computerized, scaleable feedback which enhances and amplifies the surgeon's
sense of touch while grasping delicate tissue as compared to traditional
minimally invasive surgical instruments.
Enhanced Visualization. ZEUS incorporates a robotic arm that controls the
endoscope to produce a steady, magnified video image under direct surgeon
control which facilitates performance of minimally invasive surgical procedures.
Improved Minimally Invasive Anatomical Access. ZEUS is designed to provide
a surgeon with access to confined areas in the body and critical anatomical
structures that are currently only accessible by means of highly invasive, open
surgical procedures or multiple "less invasive" incisions. In the case of
cardiac surgery, these less invasive approaches can require multiple 3-to-5 inch
incisions and often involve the removal of rib cartilage. In contrast, ZEUS
provides a surgeon with complete access to the heart through several 3
millimeter ports.
Minimized Surgeon Fatigue. ZEUS allows a surgeon to operate the surgical
instrument handles in a comfortable, ergonomic position, including sitting down
and positioning his or her forearms on armrests. The Company believes that these
enhanced ergonomics would extend the professional lives of surgeons and increase
the efficiency and effectiveness of demanding and lengthy microsurgical
procedures.
ZEUS has been used by the Company's clinical development partners to
perform limited, experimental procedures on animals, including minimally
invasive coronary artery bypass grafts, as well as anastomosis of the small
bowel, bile duct, ureteral and iliac artery. Each clinical development partner
has purchased a prototype ZEUS system and has provided funds to the Company to
partially offset the ongoing costs associated with the development and clinical
validation of ZEUS.
The Company will seek PMA approval by the FDA to market ZEUS for a number
of indications. To date, the Company has no experience with the testing of ZEUS
in clinical trials. The Company anticipates that it will begin clinical trials
during the first quarter of 1998. However, there can be no assurance that the
FDA will allow such trials to commence in a timely manner, if at all. Any delay
in the commencement of clinical trials would delay market introduction of ZEUS.
See "Risk Factors -- Government Regulation and Lack of Regulatory Approval."
Initial Applications for ZEUS
Conventional, open chest coronary artery bypass graft ("CABG") procedures
have been performed on a widespread basis for over 35 years, with approximately
318,000 patients undergoing this procedure in the United States during 1994,
according to the American Heart Association. Although many other surgical
procedures in the areas of arthroscopic, gynecologic and general surgery have
been performed in a minimally
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<PAGE> 35
invasive manner during the past three decades, the Company believes that
cardiovascular surgery remains the largest surgical discipline which still
utilizes a highly invasive approach. This is primarily due to the difficulty of
accessing and visualizing all regions of the heart within the confines of the
patient's body and performing the precise and highly dexterous movements
required to suture cardiac vessels with minimally invasive instruments. In order
to gain access to the heart, the surgeon currently must open the chest by
cutting a 12-to-18-inch incision in the patient's sternum with a bone saw and
split the ribcage apart approximately 6 inches by means of a steel retractor.
The surgeon then sutures a vein or artery harvested from elsewhere in the
patient's body directly onto the heart, effectively bypassing the diseased areas
of the coronary arteries. The anastomosis, or suturing process, is one of the
most critical aspects of the CABG procedure and is very difficult to perform
minimally invasively. This efficacious, but highly traumatic, open chest
approach results in a lengthy and painful convalescence period for the patient.
The typical hospital stay resulting from this procedure ranges from 5 to 10
days, with several additional weeks required for a complete recovery. The total
cost of this procedure ranges from $25,000 to $50,000.
A number of cardiovascular surgeons and medical device companies have
developed surgical procedures which are less invasive than the open chest
approach. These less invasive approaches are divided between the "beating" and
"stopped" heart methodologies. These approaches require making one or more
3-to-5 inch incisions parallel to the patient's ribs and, in many cases,
removing a portion of the patient's rib cartilage and retracting the
non-dissected ribs in order to gain access to the heart. Although the
anastomosis is performed under the surgeon's direct vision, it is still
extremely difficult to execute due to the limited anatomical and visual access
and the crowded surgical field, which place significant demands on the surgeon's
precision and dexterity. In most multiple bypass procedures, multiple incisions
are required to access all of the necessary regions of the heart. While
substantial progress has been made to reduce the pain and trauma associated with
cardiovascular surgery, the Company believes that significant limitations remain
which will preclude the wide application of these less invasive techniques
without the introduction of technology to enhance a surgeon's performance.
ZEUS is designed to enable a surgeon to perform a beating or stopped heart
E-CABG by providing visual and anatomical access to all regions of the heart as
well as the precision and dexterity required to perform the anastomosis
minimally invasively. This approach may greatly diminish collateral damage,
resulting in reduced pain and trauma, fewer complications, lessened cosmetic
concerns, shortened convalescence periods, increased patient qualification for
certain cardiovascular surgical procedures and lower overall costs for the
provider, payor and patient. In addition to the E-CABG, the Company believes
that ZEUS will also enable fully endoscopic heart valve replacement and repair
procedures, of which approximately 54,000 open procedures were performed in the
United States during 1994.
Potential Applications for ZEUS
In addition to cardiovascular procedures, ZEUS is also being designed to
enable a surgeon to perform new minimally invasive microsurgical procedures
which are impossible or very difficult to perform without robotic instruments.
These procedures include bowel resection, the treatment of female stress
incontinence, radical prostatectomy and nissen fundoplications. The Company
anticipates that ZEUS may make these, and numerous other procedures more
efficient and cost effective by simplifying the suturing process and allowing a
surgeon to more effectively manipulate a number of existing medical instruments,
such as clips, staples, energy sources, and lasers. The Company believes that
this precision would increase the number and scope of complex surgical
procedures that can be consistently, safely and economically performed minimally
invasively.
Digital imaging technology, including MRI, ultrasound and X-ray, generates
three dimensional renderings of soft anatomical features, such as organs and
other porous tissue. Due to the constraints associated with interpreting two
dimensional images on video monitors, the Company believes that significant
clinical and economic benefits could be derived by combining robotic systems
with digital imaging. By interfacing the imaging source with a positioning
robot, the robot can be "guided" in three dimensional space to the desired
location within the patient's body. Procedures which could potentially benefit
from the use of image guided robots include breast and brain biopsies, as well
as orthopedic implants and organ transplants.
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The Company also believes that ZEUS may allow clinicians to remotely
perform certain diagnostic and therapeutic procedures which involve the use of
low levels of radiation, such as radioactive seed implants for chemotherapy and
radioactive stents for cardiovascular therapies. Such radioactive materials do
not harm patients, but can have an adverse cumulative impact on clinicians. This
separation of the clinician from the radioactive substances would minimize the
clinician's exposure to the radiation, while enhancing his or her precision with
respect to placing radioactive materials in the patient's body. The Company
believes that the clinician's enhanced precision will also reduce collateral
damage to the patient's non-diseased tissue.
The Company has also developed proprietary technology that allows robotic
commands to be transmitted over conventional phone lines and the Internet. The
Company intends to eventually couple this technology with ZEUS in order to
enable telesurgery, in which a surgeon could operate on a patient irrespective
of the geographic distance between them. The Company has sold custom AESOP
Telesurgery Systems, which incorporate this proprietary technology, to a number
of leading teaching institutions, including Yale University, Johns Hopkins
University and George Washington University.
The Company has no immediate plans to obtain FDA clearance or approval for
any of the foregoing purposes and there can be no assurance that ZEUS will be
successfully utilized to perform these surgical procedures or that ZEUS will be
granted required regulatory clearances or approvals to enable ZEUS to be
marketed for these purposes. See "Risk Factors -- Government Regulation and Lack
of Regulatory Approval."
CORPORATE ALLIANCES AND CLINICAL SITES
In order to access development capital and marketing resources and to
rapidly commercialize its products, the Company has pursued strategic alliances
with corporations and has undertaken testing at clinical institutions in order
to advance the development, marketing and distribution of its robotic and
computerized surgical systems. To date, the Company has formed the following
corporate alliances and has commenced testing, or will commence testing, at the
following clinical sites:
Medtronic, Inc. In the first quarter of 1997, the Company and Medtronic, a
leading manufacturer of medical devices, entered into an agreement pursuant to
which Medtronic will act as the Company's exclusive distributor of ZEUS for use
in cardiothoracic applications in Europe, the Middle East and Africa. Under this
agreement, Medtronic and the Company will co-market ZEUS in North America for
use in cardiothoracic applications. In addition, the Company granted to
Medtronic a right of first refusal for distribution rights outside of Europe,
the Middle East and Africa and for distribution or license rights for the use of
ZEUS in cardiology, urology and neurology. The Company anticipates cooperating
closely with Medtronic in the areas of training, service and after-market
support with regard to ZEUS. In connection with the distribution and
co-promotion arrangement, Medtronic invested $4.0 million in the Company in the
form of a loan which converted into 363,743 shares of Common Stock of the
Company, which number of shares is subject to adjustment. See "Certain
Transactions."
Stryker Corporation. In the third quarter of 1996, the Company entered into
an agreement with Stryker, a leading manufacturer of endoscopic equipment,
pursuant to which Stryker will purchase the Company's HERMES system on an OEM
basis and sell it worldwide, as a means of providing surgeons with centralized
and simplified voice control over certain of Stryker's endoscopic products.
Stryker has agreed to pay a significant percentage of the development costs of
HERMES. The Company will retain all intellectual property rights arising from
this development effort with respect to its proprietary voice control and
networking technology. Although Stryker is under no obligation to purchase the
developed product, the agreement between the Company and Stryker provides that
Stryker must meet certain sales targets in order to maintain marketing rights
and exclusivity of this voice control technology for use with specified OR
devices within specific fields of use. The Company intends to enter into similar
OEM relationships with other leading manufacturers of OR devices with the goal
of establishing the Company's HERMES technology as the standard method of
controlling devices and equipment in the OR, including the OR table, the OR
lights, electrocautery devices, imaging systems, as well as numerous devices in
the catheterization laboratory.
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Clinical Sites. The Company has entered into several agreements with
leading medical institutions in order to validate and guide the development
process of the Company's products and technology. These sites include The
Cleveland Clinic, Pennsylvania State University's Hershey Medical Center and
Sarasota Memorial Hospital. The Company intends to commence testing with Zeus in
the near future at Columbia/HCA Healthcare Corporation's Medical City of Dallas
Hospital. Each of these facilities has purchased a ZEUS prototype system and has
agreed to assist the Company in developing and validating ZEUS.
SALES, MARKETING AND DISTRIBUTION
The Company utilizes two methods to sell and distribute AESOP.
Domestically, the Company sells AESOP and its related single-use products
through a direct sales force comprised of nine field sales persons and six
clinical education specialists. The Company employs a two-tier sales force,
which combines a field
sales person and one or more clinical education specialists in each territory.
The clinical education specialists, who are registered nurses, train new
customers and increase the utilization rate of the Company's products among
existing customers. This structure separates the selling and training functions
to increase the sales force's efficiency. Internationally, the Company
distributes AESOP through independent, third party distributors. The Company
currently has distributors serving a number of countries in Asia and Europe,
including Johnson & Johnson in Australia, New Zealand, Singapore, Malaysia,
Indonesia and Brunei, AMCO in Japan and Joseph Trading Co. in Korea. The Company
intends to initially sell HERMES on an OEM basis to manufacturers of surgical
devices for use with their respective products. HERMES will initially be
marketed by Stryker as an integrated component of several of Stryker's
endoscopic products.
The Company intends to utilize a combination of direct sales personnel and
strategic partners to sell its future products. In the United States and Canada,
the Company intends to sell ZEUS through its direct sales representatives and
the product will be co-marketed by Medtronic for cardiothoracic applications.
Internationally, the Company currently intends to distribute ZEUS through
independent, third party distributors. The Company believes that this approach
will allow the Company to maximize the size of its international installation
base in a rapid and economical manner. In Europe, the Middle East and Africa,
Medtronic will act as the exclusive distributor of ZEUS together with related
single-use and reusable products for use in cardiothoracic applications.
The Company's international sales, as a percentage of its total sales, were
9%, 21% and 49% in 1994, 1995 and 1996, respectively. See Note 12 of Notes to
Financial Statements.
RESEARCH AND DEVELOPMENT
As of July 1, 1997, the Company's research and development department was
comprised of 22 engineers and medical clinicians, including four Ph.D.s. This
group has collectively earned 13 Masters Degrees in areas including electrical
engineering and mechanical engineering. Certain members of this team have been
working together for over ten years and have built numerous sophisticated
robotic systems and advanced motion control computers for a variety of companies
and government agencies, including the National Institutes of Health and the
National Aeronautical Space Agency. During 1994, 1995, 1996 and the three month
period ended March 31, 1997, the Company spent approximately $630,000, $739,000,
$1.4 million and $558,000, respectively, on research and development activities.
In certain cases, the Company places a full-time employee at the facilities of
its strategic partners in order to enhance communications between the Company
and these strategic partners and to maximize the value of the development
partnership. In addition, certain of the Company's strategic partners fund a
portion of the Company's research and development activities. See
"Business -- Corporate Alliances and Clinical Sites."
MANUFACTURING
The Company purchases most of the components and certain subassemblies used
in the manufacture of its AESOP products from outside vendors. These items are
generally produced to the Company's specifications and the final products are
assembled, tested and shipped by the Company at its headquarters. Certain
components of its product are obtained by the Company from single source
suppliers. However, the Company believes that alternative suppliers are
available for its product components and intends to qualify additional
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suppliers as sales volume warrants. The Company plans to utilize a similar
approach to engage third parties to manufacture components of its other products
under development, including HERMES and ZEUS. Although the Company intends to
maintain sufficient levels of inventory to avoid any material disruption
resulting from increased demand or a disruption in supply, there can be no
assurance that the Company will be able to manufacture and supply products to
meet potential demand.
The Company has implemented quality control systems as part of its
manufacturing process, as required by the FDA's QSR. The Company has also been
inspected by the California Department of Health Services ("CDHS") on behalf of
the State and on behalf of the FDA, and is registered with the State of
California to manufacture its medical devices. The Company believes that it is
in compliance, in all material respects, with the FDA QSR requirements for
medical devices. There can be no assurance, however, that the Company will
remain in compliance with QSR requirements. Failure to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, if the Company files a PMA application for
ZEUS, the FDA will conduct, and the Company must pass, a pre-approval QSR
inspection, before approval of ZEUS can be granted.
The Company is also in the process of implementing policies and procedures
which are intended to allow the Company to achieve ISO 9001/EN 46001
certification of its quality control systems. The European Union has promulgated
rules which require that medical products receive the right to affix the CE
Mark, an international symbol of adherence to quality assurance standards, by
mid-1998. Failure to receive the right to affix the CE Mark would prohibit the
Company from selling its products in member countries of the European Union, and
there can be no assurance that the Company will be successful in meeting the
European quality standards or other certification requirements. See "Risk
Factors -- Government Regulation and Lack of Regulatory Approval" and
"-- Dependence on Independent Contract Manufacturers; Limited Manufacturing
Experience."
PATENTS AND PROPRIETARY RIGHTS
The success of the Company will depend, in part, on its ability to obtain
and maintain patent protection for its products, to preserve its trade secrets
and to operate without infringing the proprietary rights of others. The
Company's policy is to seek to protect its proprietary positions by, among other
methods, filing United States and foreign patent applications related to its
technology, inventions and improvements that are important to the development of
its business. As of July 8, 1997, the Company has six issued United States
patents which cover certain technologies embodied in its products relating to
computer processing, endoscopic positioning techniques by means of robotics and
user interface elements. The patented inventions have use in certain
applications, including computer assisted surgery and robotic tissue
manipulation. The Company also has 16 United States and five foreign patent
applications pending, two of which have received a Notice of Allowance, by which
it is seeking to obtain protection for its concepts relating to robotic assisted
surgery and operating room control systems. There can be no assurance that the
Company's issued patents or any patents that may be issued in the future will
provide significant proprietary protection or provide a competitive advantage
for the Company. In addition, there can be no assurance that any pending patents
will be issued, or that any patents or patent applications will not be
challenged, invalidated or circumvented in the future. Further, 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 seek to apply for and 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 and robotics 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 is aware of patents issued to third parties, particularly
in the field of robotics, that contain subject matters related to the Company's
technology. Based, in part, on advice of its patent counsel,
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Blakely, Sokoloff, Taylor & Zafman LLP, the Company believes that the
technologies employed by the Company in its devices and systems do not infringe
the claims of such patents. There can be no assurance, however, that third
parties will not seek to assert that the Company's devices and systems infringe
their patents or seek to expand their patent claims to cover aspects of the
Company's technology. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as the laws of the
United States. The failure of the Company to protect its intellectual property
rights could have a material adverse effect on its business, financial condition
and results of operations.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not
become subject to patent infringement claims or litigation in a court of law, or
interference proceedings declared by the USPTO to determine the priority of
inventions or an opposition to a patent grant in a foreign jurisdiction. The
defense and prosecution of intellectual property suits, USPTO interference or
opposition proceedings and related legal and administrative proceedings are
costly, time-consuming, divert the attention of management and technical
personnel and could result in substantial uncertainty regarding the Company's
future viability. Litigation or regulatory proceedings, which could result in
substantial cost and uncertainty to the Company, may also be necessary to
enforce patent or other intellectual property rights of the Company or to
determine the scope and validity of other parties' proprietary rights. If any
relevant claims of third-party patents are upheld as valid and enforceable in
any litigation or administrative proceeding, the Company could be prevented from
practicing the subject matter claimed in such patents, or would be required to
obtain licenses from the patent owners of each such 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
intends to vigorously protect and defend its intellectual property. Costly and
time-consuming litigation brought by the Company may be necessary to enforce
patents issued to the Company, 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.
The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants and advisors
to execute confidentiality and assignment of inventions agreements in connection
with their employment, consulting or advisory relationships with the Company.
There can be no assurance, however, that these agreements will not be breached
or that the Company will have adequate remedies for any breach. Furthermore, no
assurance can be given that competitors will not independently develop
substantially equivalent proprietary information and technologies or otherwise
gain access to the Company's proprietary technology, or that the Company can
meaningfully protect its rights in unpatented proprietary technology.
COMPETITION
The Company's products are designed to address the markets for minimally
invasive surgery and minimally invasive microsurgery, which are currently in
early stages of development. These markets are and the Company believes will
continue to be intensely competitive. The Company believes that it competes, and
intends to compete, primarily on the basis of its operational competence in, and
its reputation for, developing, protecting, manufacturing and marketing unique
and technologically advanced robotic products and obtaining timely regulatory
agency approvals. Competitors have been pursuing or will be pursuing
opportunities in these markets, most of which have significantly greater
financial, manufacturing, marketing, distribution and technical resources and
experience than the Company. In addition, some of these companies may be able to
market their products sooner than the Company if they are able to achieve
regulatory approval before the Company.
Many medical conditions that can be treated using the Company's systems,
particularly ZEUS, can also be treated by pharmaceuticals or other medical
devices and procedures. For example, many coronary artery
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diseases can be treated with PTCA, intravascular stents, atherectomy catheters
and lasers. Many of these alternative treatments are widely accepted in the
medical community and have a long history of use. In addition, technological
advances with other procedures could make such therapies more effective or
inexpensive than using the Company's products and could render the Company's
technology obsolete or unmarketable. There can be no assurance that physicians
will use the Company's products to replace or supplement established treatments
or that the Company's products will be competitive with current or future
technologies. In addition, the Company may also experience competitive pricing
pressures which may adversely affect unit prices and sales levels. Such
competition could have a material adverse effect on the Company's business,
financial condition and results of operations.
GOVERNMENT REGULATION
United States
The Company's products, including AESOP, HERMES and ZEUS, are regulated as
medical devices. Accordingly, clinical trials, product development,
manufacturing processes, labeling, promotional activities and product
distribution are subject to extensive review and rigorous regulation by
government agencies in most countries in which the Company will seek to
commercialize its products. In the United States, the Company's products are
subject to applicable provisions of the FDC Act and implementing regulations and
require clearance or approval by the FDA prior to commercialization. In
addition, significant changes or modifications to medical devices also are
subject to regulatory review and clearance or approval. Under the FDC Act, the
FDA regulates, among other things, the research, clinical testing,
manufacturing, labeling, storage, record keeping, advertising, distribution,
sale and promotion of medical devices in the United States. In addition, the FDA
has promulgated regulations effective in June 1997 to extend its oversight of
medical devices to design and development activities. The testing for,
preparation of and subsequent review of applications by the FDA and foreign
regulatory authorities is expensive, lengthy and uncertain. Noncompliance with
applicable requirements can result in, among other things, Warning Letters,
proceedings to detain imported products, fines, injunctions, civil and criminal
penalties against the Company, its officers and its employees, recall or seizure
of products, total or partial suspension of production, refusal of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing approvals and a recommendation by the FDA that the
Company not be permitted to enter into government contracts. Changes in existing
requirements or adoption of new requirements could have a material adverse
effect on the Company's business, financial condition and results of operations.
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 efficacy. Under FDA regulations,
Class I devices are subject to general controls (for example, labeling,
premarket notification and adherence to QSR) and Class II devices are subject to
general and special controls (for example, performance standards, postmarket
surveillance, patient registries, and FDA guidelines). Generally, Class III
devices are those that must receive premarket approval ("PMA") by the FDA to
ensure their safety and efficacy (for example, certain life-sustaining,
life-supporting and implantable devices, or new devices that have not been found
substantially equivalent to legally marketed Class I or Class II devices).
The FDA also has the authority to require clinical testing of certain
medical devices as part of the clearance or approval process. If clinical
testing of a device is required and if the device presents a "significant risk,"
an Investigation Device Exemption ("IDE") application must be approved by the
FDA prior to commencing clinical trials. If a device does not present a
significant risk to patients, a clinical investigation may commence subject to
obtaining IRB approval and the patients' informed consent. The IDE application
must be supported by adequate data, typically including the results of
laboratory and animal testing. If the IDE application is approved by the FDA,
clinical trials may begin at a specific number of investigational sites with a
maximum number of patients, as approved by the agency. Sponsors of clinical
trials are permitted to sell those devices distributed in the course of the
study provided such costs do not exceed recovery of the costs of manufacture,
research, development and handling. All clinical trials must be conducted under
the auspices of IRBs pursuant to FDA regulations and informed consent. To date,
the Company has conducted only limited experimental animal procedures, has not
conducted any clinical trials and has not submitted an IDE to the FDA.
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Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA approval of a PMA
application or clearance of a 510(k) submission. If the manufacturer or
distributor cannot establish that a proposed device is substantially equivalent
to a legally marketed Class I or II predicate device as discussed below, or a
Class III device not requiring a PMA, the manufacturer or distributor must seek
premarket approval of the proposed device through submission of a PMA
application. A PMA application must be supported by extensive data, including
laboratory, preclinical and clinical trial data to prove the safety and efficacy
of the device for each of its intended uses, as well as extensive manufacturing
information. If the FDA determines, upon initial review, that a submitted PMA
application is sufficiently complete to permit substantive review, the FDA will
accept the PMA application for filing. Depending on the technology and the
quality of the PMA application, the FDA review of a PMA application on average
takes approximately one year from the date of acceptance for filing, but review
times vary depending upon FDA resources and workload demands and the complexity
of PMA submissions. In addition, there can be no assurance that the FDA will
approve the PMA. Additionally, as one of the conditions for approval, the FDA
will inspect the manufacturing establishment at which the subject device will be
manufactured to determine whether the quality control and manufacturing
procedures conform to QSR requirements. If granted, the PMA approval may include
significant limitations on the indicated uses for which a product may be
marketed.
If a medical device manufacturer or distributor can establish, among other
things, that a device is "substantially equivalent" in intended use and
technological characteristics to a legally marketed Class I or Class II medical
device, or to a Class III medical device for which the FDA has not required a
PMA (known as a predicate device), the manufacturer or distributor may seek
clearance from the FDA to market the device by filing a 510(k). The 510(k)
submission must establish to the satisfaction of the FDA the claim of
substantial equivalence to the predicate device. In recent years, the FDA has
been requiring a more rigorous demonstration of substantial equivalence,
including the requirement for IDE clinical trials, before 510(k) clearance.
Following submission of the 510(k), the manufacturer or distributor may not
place the device into commercial distribution unless and until an order is
issued by the FDA finding the product to be substantially equivalent. In
response to a 510(k), the FDA may declare that the device is substantially
equivalent to another legally marketed device and allow the proposed device to
be marketed in the United States. The FDA, however, may require further
information including clinical data, to make a determination regarding
substantial equivalence, or may determine that the proposed device is not
substantially equivalent and require a PMA submission. Such a request for
additional information including clinical data or a determination that the
device is not substantially equivalent would delay market introduction of the
products that are the subject of the 510(k). According to the FDA's Office of
Device Evaluation Annual Report for fiscal year 1996, it generally takes 150
days from the date the FDA files a 510(k) to obtain clearance, although it may
take significantly longer, in particular if the device is novel and clinical
trials are required.
As of July 1, 1997, the Company had received three 510(k) clearances for
certain intended uses and indications of AESOP, including general thorascopy,
general laparoscopy and general cardiothoracic surgery. Because HERMES will be
sold by the Company to medical device manufacturers on an OEM basis, the device
manufacturers will be responsible for obtaining FDA clearance for their products
incorporating HERMES. There can be no assurance that the FDA will determine that
HERMES can be cleared for marketing through the 510(k) notification process. If
HERMES cannot be cleared for marketing through the 510(k) notification process,
the Company or the device manufacturers will be required to seek FDA approval
for HERMES through submission of a PMA application. The Company intends to
submit an IDE application with regards to ZEUS, in the second half of 1997, in
order to commence clinical trials. Following completion of clinical trials, the
Company plans to file a PMA application for ZEUS.
There can be no assurance that the Company or any device manufacturers for
HERMES will be able to obtain necessary PMA approvals or 510(k) clearances to
market the Company's products for the intended uses on a timely basis, if at
all, and delays in receipt of or failure to receive such approvals or
clearances, the loss of previously received approvals or clearances, or failure
to comply with existing or future regulatory
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requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is also required to register its manufacturing establishment
with the FDA and state agencies such as the CDHS and to list its products with
the FDA. As such, the Company will be inspected by both the FDA and CDHS for
compliance with the QSR and other applicable regulations. These regulations
require that the Company manufacture its products and maintain its documents in
a prescribed manner. In July 1994, the Company's facility in Goleta, California
was inspected by the CDHS, acting on behalf of the State and under contract with
the FDA. The Company received no significant inspectional observations and was
subsequently granted a California medical device manufacturing license. In March
1995, the Company's facility was inspected by the FDA and no significant
inspectional observations were received. There can be no assurance that the
Company will be able to continue to be in substantial compliance on an ongoing
basis with CDHS and FDA QSR requirements or that it 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 and results of operations.
The Company is required to provide information to the FDA on deaths or
serious injuries that its medical devices have allegedly caused or contributed
to, as well as certain product malfunctions that would likely cause or
contribute to a death or serious injury if the malfunction was to reoccur. In
addition, the FDA prohibits the marketing of devices for uses other than those
specifically cleared or approved for marketing by the FDA. Failure to comply
with the regulatory requirements could have a material adverse effect on the
Company's business, financial condition and results of operations. Regulations
regarding the manufacture and sale of the Company's products are subject to
change. The Company cannot predict what impact, if any, such changes might have
on its business, financial condition and results of operations.
International
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain clearance required by foreign countries may be longer or
shorter than that required for FDA clearance, and requirements for licensing a
product in a foreign country may differ significantly from FDA requirements.
Some countries have historically permitted human studies earlier in the product
development cycle than regulations in the United States permit. Other countries,
such as Japan, have requirements similar to those of the United States. This
disparity in the regulation of medical devices may result in more rapid product
clearance in certain countries than in others.
The Company has received registrations and approvals to market AESOP in
Japan, Australia, New Zealand and certain European countries.
The primary regulatory environment in Europe is that of the European Union,
which consists of 15 member countries encompassing most of the major countries
in Europe. The European Union has adopted numerous directives and standards
regulating the design, manufacturing, clinical trials, labeling and adverse
event reporting for medical devices. Devices that comply with the requirements
of a relevant directive will be entitled to bear a CE Mark, indicating that the
device conforms with the essential requirements of the applicable directive, and
accordingly, can be commercially distributed throughout the European Union.
Medical products must receive by mid-1998 the right to affix the CE Mark. ISO
9000/EN 46001 certification is one of the CE Mark certification requirements.
Failure to receive the right to affix the CE Mark will prohibit the Company from
selling its products in member countries of the European Union and there can be
no assurance that the Company will be successful in meeting the European quality
standards or other certification requirements.
Unapproved devices subject to the PMA requirements generally must receive
prior FDA export approval unless they are approved for use by any member country
of the European Union and certain other countries, including Australia, Canada,
Israel, Japan, New Zealand, Switzerland and South Africa, in which case they can
be exported to any country without prior FDA approval upon meeting certain
requirements. 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. However, the Company must, among
other
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things, notify the FDA and meet the importing countries' requirements. 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 receive import
approval from foreign countries, or to obtain Certificates for Products for
Export when required, 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.
THIRD-PARTY REIMBURSEMENT
In the United States, the Company's new products, if and when approved for
commercial sale, would be purchased primarily by medical institutions which then
bill various third-party payors, such as Medicare, Medicaid and other government
programs and private insurance plans for the health care services provided to
their patients. Government agencies, certain private insurers and certain other
payors generally reimburse hospitals for medical treatment at a fixed rate based
on the DRG established by the HCFA which covers this treatment. The Company
believes that the procedures using the Company's AESOP are eligible and future
products will be eligible for reimbursement under existing DRG reimbursement
codes. However, Medicare and other third-party payors are increasingly
scrutinizing whether to cover new products and the level of reimbursement for
covered products and procedures. Third-party payors have challenged, and in
certain circumstances have ceased, reimbursement for procedures under existing
codes where the aggregate level of reimbursement has been significantly
increased and required, following further study regarding safety and efficacy,
establishment of new reimbursement codes. Even if a procedure is covered by a
DRG, payors may deny reimbursement if they determine that the device used in a
treatment was unnecessary, inappropriate or not cost-effective, experimental or
used for a non-approved indication. Medicare reimburses hospitals on a
prospectively determined fixed amount for the costs associated with an
in-patient hospitalization based on the patient's discharge diagnosis, and
reimburses physicians on a prospectively determined fixed amount based on the
procedure performed, regardless of the actual costs incurred by the hospital or
physician in furnishing the care and unrelated to the specific devices used in
that procedure.
Capital costs for medical equipment purchased by hospitals are currently
reimbursed under Medicare separately from medical procedure payments. Recent
Federal Medicare legislation has called for these capital costs to be reimbursed
on a prospective payment system. During a transition period due to end in 2000,
each hospital's capital expenditures will be based in part on its own historical
capital costs and in part on the prospective payment system. There can be no
assurance that the movement to a prospective payment system will not cause
hospitals to reduce their expenditure payments for equipment such as the
products developed or being developed by the Company.
Medicare coverage may be available, under certain circumstances for
devices, such as the Company's HERMES and ZEUS products, which have not been
approved or cleared for marketing by the FDA. However, Medicare coverage may be
denied if certain coverage requirements are not met, including if the treatment
is not medically needed for the specific patient. There can be no assurance that
the Company's future products will be covered when they are used in clinical
trials and, if covered, whether the payment amounts for their use will be
considered to be adequate by hospitals and physicians. If the devices are not
covered or the payments are considered inadequate, the Company may need to bear
additional costs to sponsor such trials and such costs could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. Many international markets have
government managed health care systems that control reimbursement for new
products and procedures. In most markets, there are private insurance systems as
well as government managed systems. Market acceptance of the Company's products
will depend on the availability and level of reimbursement in
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international markets targeted by the Company. There can be no assurance that
the Company will obtain reimbursement in any country within a particular time,
for a particular time, for a particular amount, or at all.
The Company believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the United States
and in foreign markets, as the overall escalating costs of medical products and
services has led to and will continue to lead to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by the Company. There can be no
assurance that third-party reimbursement and coverage for the Company's products
will be available or adequate, that current reimbursement amounts will not be
decreased in the future, or that future legislation, regulation or reimbursement
policies of third-party payors will not otherwise affect the demand for the
Company's products or its ability to sell its products on a profitable basis,
particularly if the Company's products are more expensive than competing
surgical procedures. If third-party payor coverage or reimbursement is
unavailable or inadequate, the Company's business, financial condition and
results of operations could be materially adversely affected.
PRODUCT LIABILITY AND INSURANCE
The development, manufacture and sale of medical products, such as the
Company's robotic and computerized surgical systems, entail significant risk of
product liability claims and product failure claims. The Company has conducted
only limited clinical trials and does not yet have, and will not have for a
number of years, sufficient clinical data to allow the Company to measure the
risk of such claims with respect to its products. The Company faces an inherent
business risk of financial exposure to product liability claims in the event
that the use of it products results in personal injury or death. The Company
also faces the possibility that defects in the design or manufacture of the
Company's products might necessitate a product recall. There can be no assurance
that the Company will not experience losses due to product liability claims or
recalls in the future. The Company currently maintains product liability
insurance with coverage limits of $5 million per occurrence and $5 million
annually in the aggregate and there can be no assurance that the coverage limits
of the Company's insurance policies will be adequate. In addition, the Company
may require increased product liability coverage if any potential products are
successfully commercialized. Such insurance is expensive, difficult to obtain
and may not be available in the future on acceptable terms, or at all. Any
claims against the Company, regardless of their merit or eventual outcome, could
have a material adverse effect upon the Company's business, financial condition
and results of operations.
BACKLOG
The Company ships products as ordered and, therefore, does not have a
backlog of orders.
EMPLOYEES
As of July 1, 1997, the Company had 84 employees, of which 11 were
primarily involved in manufacturing operations, 31 in research and development
and clinical affairs, 15 in administration and 27 in sales, marketing and
customer service. None of the Company's employees are covered by a collective
bargaining agreement and management believes that its relationship with its
employees is good.
FACILITIES
The Company occupies approximately 17,500 square feet in a complex in
Goleta, California. The facility is subject to a lease which expires in November
2001, with a five-year renewal option. The Company believes that currently
leased facilities will be sufficient for the immediate future and that adequate
additional space is available within the same geographical area, should
expansion prove necessary or advisable in the future. The Company's business,
financial condition and results of operations could be materially adversely
effected if additional space were required and could not be obtained in near
proximity to the Company's current facilities at an acceptable cost.
LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
41
<PAGE> 45
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
July 1, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- --- ---------------------------------------------------------------
<S> <C> <C>
Gene Wang.................... 40 Chief Executive Officer, President and Director
Yulun Wang................... 37 Executive Vice President, Chief Technical Officer and Director
Stephen L. Wilson............ 44 Executive Vice President, Chief Financial Officer and Secretary
John M. Greathouse........... 35 Vice President of Business Development
Kermit R. (Kerry) Pope,
Jr......................... 50 Vice President of Sales and Marketing
David A. Stuart.............. 40 Vice President of Operations
Robert W. Duggan(1)(2)....... 53 Chairman of the Board of Directors
Daniel R. Doiron............. 46 Director
W. Peter Geis................ 55 Director
Stephen F. Wiggins(1)(2)..... 40 Director
William D. Williams(2)....... 50 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Gene Wang has been Chief Executive Officer, President and a Director of the
Company since January 1996. Mr. Wang served as Executive Vice President at
Symantec Corporation from 1992 to 1995 and served as Vice President and General
Manager of the Languages Business Unit of Borland International from 1988 to
1992. Mr. Wang earned a B.S. in computer science from the University of
California at Berkeley. Gene Wang is the brother of Yulun Wang.
Yulun Wang, Ph.D., has been Executive Vice President and Chief Technical
Officer of the Company since January 1996 and a Director since 1990 and has
served in numerous other capacities since he founded the Company in 1989. Prior
to founding the Company, Dr. Wang had been the principal investigator on
research and development contracts and grants from the National Science
Foundation, the National Aeronautics and Space Administration ("NASA")/Jet
Propulsion Laboratories, NASA/Langley, National Institutes of Health and the
United States Navy. Dr. Wang earned B.S., M.S. and Ph.D. degrees in electrical
engineering from the University of California at Santa Barbara. Yulun Wang is
the brother of Gene Wang.
Stephen L. Wilson joined the Company as Executive Vice President, Chief
Financial Officer and Secretary in May 1997. Prior to joining the Company, Mr.
Wilson had served as the Vice President of Finance and Chief Financial Officer
at St. Jude Medical Inc., a medical device manufacturer, since 1990. Mr. Wilson
earned a B.S. in accounting from the University of Connecticut School of
Business Administration.
John M. Greathouse joined the Company as Director of Finance in 1993 and
has served as the Company's Vice President of Business Development since
February 1997. Prior to joining the Company, Mr. Greathouse served as Manager of
Corporate Development with Mitchell Humphrey & Co., a developer of financial
software, from 1990 to 1993. Mr. Greathouse earned his B.S. degree in accounting
from the University of Maryland and an M.B.A. from the University of
Pennsylvania's Wharton School of Business.
Kerry R. Pope, Jr. joined the Company in May 1997 as Vice President of
Sales and Marketing. Prior to joining the Company, Mr. Pope served as a Vice
President of Baxter Healthcare's Vascular Systems Division since May 1994. Prior
to that, Mr. Pope served in several sales related capacities at Vitaphone
Corporation, a manufacturer of collagen-based medical devices, since December
1986. Mr. Pope earned a B.S. in business from the University of Maryland.
David A. Stuart has been Vice President of Operations of the Company since
June 1996. From 1992 to 1996, Mr. Stuart served as Director of Materials at
Quantum Corporation, a disk drive manufacturer, and served as Director of
Materials and Manager of Manufacturing Finance for LTX Corporation, a
manufacturer and distributor of semi-conductor automatic test equipment, from
1984 to 1991.
42
<PAGE> 46
Robert W. Duggan has been Chairman of the Board of Directors of the Company
since 1990. Mr. Duggan is a venture capitalist and private investor. Mr. Duggan
has served as a member of the board of directors of a number of public and
private companies and currently serves as a member of the board of directors at
several private companies. Mr. Duggan serves on the Board of Trustees for the
University of California at Santa Barbara Foundation and is a member of the
University of California at Santa Barbara's Engineering Steering Committee.
Daniel R. Doiron, Ph.D., has been a Director of the Company since November
1996. Dr. Doiron is a founder and director of PDT, Inc., a pharmaceutical
company specializing in photodynamic therapy for certain cancers and other
diseases, where he served in various capacities, including Vice President of
Technology and Chief Scientist and President of its subsidiary, PDT Systems,
Inc., from 1989 to 1997. Dr. Doiron holds B.S. and M.S. degrees in Nuclear
Engineering and a Ph.D. in Chemical Engineering from the University of
California at Santa Barbara.
W. Peter Geis, M.D., has been a Director of the Company since March 1996.
Dr. Geis is a Director of the Minimally Invasive Surgical Training Institute
("MISTI"), an endoscopic training institution in Baltimore, Maryland. Dr. Geis
was an Associate Professor of Surgery at the University of Illinois. Dr. Geis
has been Clinical Professor of Surgery for the University of Chicago since 1991.
Dr. Geis is a member of the American College of Surgeons and the Society of
American Gastrointestinal Endoscopic Surgeons. Dr. Geis also sits on the
advisory faculty of Johnson & Johnson's Ethicon Endo-Surgery Unit. Dr. Geis
received his M.D. from Loyola University in Chicago in 1968, where he
subsequently served as an Associate Professor from 1974 to 1983.
Stephen F. Wiggins has been a Director of the Company since February 1996.
Mr. Wiggins is Chairman and Chief Executive Officer of Oxford Health Plans, Inc.
("Oxford"), a health management organization, which he founded in 1984. Mr.
Wiggins serves on the White House Commission for Consumer Protection and Quality
in Health Care and the Executive Committee of the National Healthcare Leadership
Council. Prior to founding Oxford, Mr. Wiggins founded Accessible Space
Incorporated ("A.S.I."), a residential housing program for individuals with
physical handicaps and brain injuries. Mr. Wiggins continues to serve on the
board of directors of A.S.I. Mr. Wiggins earned a B.A. from Macalester College
and an M.B.A. from the Harvard School of Business.
William D. Williams has been a Director of the Company since 1995. Mr.
Williams has served as the President of Pyxis Corporation ("Pyxis"), a
subsidiary of Cardinal Health Inc., since 1996. From 1988 to 1996, Mr. Williams
served as Vice President of Sales and Marketing for Pyxis. Mr. Williams earned a
B.S. from the University of Missouri.
ELECTION OF DIRECTORS AND OFFICERS
All members of the Company's Board of Directors hold office until the next
annual meeting of stockholders or until their successors are elected and
qualified. Officers serve at the discretion of the Board of Directors and are
elected annually. Gene Wang is the brother of Yulun Wang. There are no other
familial relationships among the directors and officers of the Company.
Pursuant to the terms of a Stockholders Agreement among Chase Manhattan
Capital Corporation, the Company and certain executives designated therein, each
party to the Stockholders Agreement, other than the Company, is obligated to
take all necessary or desirable actions within its control to cause one
representative designated by the holders of a majority of shares issued upon
conversion of the Series D Preferred Stock which have not been sold into the
public market (the "Underlying Stock") to be elected as a member of the
Company's Board of Directors until the earlier of (i) August 24, 2004 or (ii)
such time as the Underlying Stock constitutes less than 2.5% of the aggregate
voting power of all classes of the Company's voting securities. The Series D
Preferred Stock will convert to Common Stock upon completion of this offering,
and the Underlying Stock is expected to constitute approximately 8.9% of the
aggregate voting power of all classes of the Company's voting securities. No
designee of the holders of the Underlying Stock currently sits on the Board. In
addition, until such time that the holders of the Underlying Stock no longer
have the right to
43
<PAGE> 47
designate a member of the Company's Board of Directors, the Company cannot
increase the size of the Board of Directors above seven members without such
holders' consent.
BOARD COMMITTEES AND COMPENSATION
The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee consists of Messrs. Duggan and Wiggins. The Audit Committee
makes recommendations to the Board of Directors regarding the selection of
independent auditors, reviews the results and scope of the audit and other
services provided by the Company's independent auditors and reviews and
evaluates the Company's internal control functions.
The Company's Board of Directors formed a Compensation Committee, which
currently consists of Messrs. Duggan, Wiggins and Williams, in April 1997. The
Compensation Committee administers the Company's Tandem Stock Option Plan, 1997
Stock Incentive Plan and Employee Stock Purchase Plan and makes recommendations
to the Board of Directors concerning compensation for executive officers of the
Company. Prior to the formation of the Compensation Committee, such functions
were performed by the Board of Directors as a whole.
The Company does not currently compensate its directors for service in such
capacity. The Company intends to consider compensating non-employee directors in
the future.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1996, the Company had no
Compensation Committee or other committee of the Board of Directors performing
similar functions. Decisions regarding compensation of executive officers were
made by the Board of Directors as a whole. The Company anticipates that
executive compensation for future periods will be determined by the Compensation
Committee.
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth compensation earned
during the fiscal year ended December 31, 1996, by the Company's Chief Executive
Officer and the two other most highly compensated executive officers whose total
salary and bonus during such year exceeded $100,000 and one additional selected
officer (collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OTHER($)(1) OPTIONS(#)
- --------------------------------------------- --------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Gene Wang, Chief Executive Officer and
President.................................. $ 183,462 $50,000 $11,070(2) 250,259
Yulun Wang, Executive Vice President and
Chief Technical Officer.................... 110,208 -- -- 47,976
John M. Greathouse, Vice President of
Business Development....................... 60,000 5,822 50,000(3) 15,560
David A. Stuart, Vice President of
Operations(4).............................. 55,000 4,244 -- 70,020
</TABLE>
- ---------------
(1) Except as indicated below other annual compensation in the case of each
indicated Named Executive Officer consisted exclusively of perquisites
which, in each instance, did not exceed the lesser of $50,000 or 10% of such
Named Executive Officer's salary plus bonus.
(2) In the case of Mr. Wang, other annual compensation consisted of
reimbursement of certain expenses and a housing allowance in connection with
the initiation of his employment with the Company.
(3) In the case of Mr. Greathouse, other annual compensation consisted of
commissions.
(4) Mr. Stuart joined the Company as its Vice President of Operations in June of
1996 at an annual base salary of $110,000.
44
<PAGE> 48
In May 1997, the Company hired Stephen L. Wilson and Kerry R. Pope, Jr. as
the Executive Vice President, Chief Financial Officer and Secretary and the Vice
President of Sales and Marketing, respectively. Each has an annual salary of
$150,000.
Option Grants in Last Fiscal Year. The following table sets forth certain
information concerning grants of options to each of the Named Executive Officers
during the fiscal year ended December 31, 1996:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------ POTENTIAL REALIZABLE
PERCENT OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(4)
OPTIONS DURING PRICE EXPIRATION ------------------------
NAME GRANTED(#)(1) 1996(%)(2) ($/SHARE)(3) DATE 5%($) 10%($)
- ----------------------- ------------- ---------------- ------------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gene Wang.............. 207,469 21.6% $ 4.57 1/08/06 $596,276 $ 1,511,080
42,790 4.4 4.57 12/25/06 122,980 311,657
Yulun Wang............. 5,186 0.5 5.03 10/01/01 4,162 12,084
42,790 4.4 5.03 12/25/01 34,344 99,702
John M. Greathouse..... 15,560 1.6 4.57 12/25/06 44,720 113,330
David A. Stuart........ 51,867 5.4 4.57 6/01/06 149,068 377,768
7,780 0.8 4.57 8/01/06 22,360 56,665
10,373 1.1 4.57 12/25/06 29,813 75,551
</TABLE>
- ---------------
(1) Options were granted under the Company's Tandem Stock Option Plan and vest
over five years from the date of grant, with the exception of 5,186 options
granted to Yulun Wang, which vested immediately on the date of grant.
(2) Based on an aggregate of 961,859 options granted by the Company in the
fiscal year ended December 31, 1996 to employees, including the Named
Executive Officers.
(3) The exercise price per share of each option was equal to the fair market
value of the underlying Common Stock on the date of grant as determined by
the Board of Directors.
(4) The potential realizable value is calculated based on the term of the option
at its time of grant (ten years). It is calculated assuming that the fair
market value of the Company's Common Stock on the date of grant appreciates
at the indicated annual rate compounded annually for the entire term of the
option and that the option is exercised and sold on the last day of its term
for the appreciated stock price. The 5% and 10% assumed annual rates of
stock price appreciation are mandated by the rules of the Securities and
Exchange Commission and do not represent the Company's estimate or
projection of the Company's future Common Stock prices. Actual gain, if any,
on stock options exercises are dependent on the future performance of the
Common Stock and overall stock market condition. The amounts reflected in
the table may be higher or lower than the amounts actually realized.
45
<PAGE> 49
In May 1997, Messrs. Wilson and Pope received a total of 116,701 and 77,801
options, respectively, at an exercise price of $4.57 per share in connection
with the initiation of their employment.
Option Exercises in 1996 and Fiscal Year-End Option Values. No options were
exercised by the Named Executive Officers during 1996. The following table sets
forth certain information regarding the number and value of securities
underlying unexercised options held by the Named Executive Officers at December
31, 1996:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gene Wang................................ -- 250,259 $ -- $ 2,359,942
Yulun Wang............................... 2,999 44,977 26,901 403,453
John M. Greathouse....................... 15,301 23,599 164,157 236,599
David A. Stuart.......................... -- 70,020 -- 660,289
</TABLE>
- ---------------
(1) Calculated by determining the difference between the assumed initial public
offering price of $14.00 per share and the exercise price of the options.
STOCK PLANS
Tandem Stock Option Plan. The Company's Tandem Stock Option Plan (the
"Tandem Plan") was adopted by the Board of Directors and approved by the
shareholders in 1993. At June 1, 1997, of the 1,556,017 shares of Common Stock
which have been reserved for issuance under the Tandem Plan, 1,408,740 were
subject to outstanding options at a weighted average exercise price of $4.05 per
share and 147,277 shares had been purchased upon exercise of options. There are
no additional shares available for grant under the Tandem Plan. The Tandem Plan
provides for the grant to employees of the Company of "incentive stock options,"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") and for the grant of nonstatutory options to employees,
consultants and non-employee directors of the Company. The purpose of the Tandem
Plan is to provide participants with incentives which will encourage them to
acquire a proprietary interest in, and continue to provide services to, the
Company. The Tandem Plan is administered by the Compensation Committee which has
discretion and authority, consistent with the provisions of the Tandem Plan, to
determine which eligible participants will receive options, the time when
options will be granted, the terms of options granted and the number of shares
which will be subject to options granted under the Tandem Plan.
The exercise price under the Tandem Plan is determined by the Board of
Directors, provided that, generally in the case of an incentive stock option,
the exercise price shall be equal to the fair market value of the Common Stock
as of the date of grant, as determined by the Board of Directors. In the case of
an incentive stock option granted to an optionee who owns at least 10% of the
voting power of all classes of stock of the Company or any parent or subsidiary
of the Company, the exercise price may be no less than 110% of the fair market
value of the Common Stock on the date the option is granted. Payment of the
exercise price may be made in cash or by cashiers' check, or, in the discretion
of the Company, by delivery of shares of the Company's Common Stock having a
fair market value equal to the exercise price of the options being exercised.
The Board has the authority to determine the time or times at which options
granted under the Tandem Plan become exercisable, provided that incentive
options must expire no later than ten years from the date of grant (five years
with respect to optionees who own at least 10% of the voting power of all
classes of stock of the Company or any parent or subsidiary of the Company).
Options are not assignable and are nontransferable, other than by will and the
laws of descent and distribution upon death, and generally may be exercised only
by an employee while employed by the Company or within 30 days after termination
of employment. The Tandem Plan will terminate in 2003, unless earlier terminated
by the Board of Directors.
1997 Stock Incentive Plan. The Company adopted the 1997 Stock Incentive
Plan (the "Stock Incentive Plan") in April 1997. The purpose of the Stock
Incentive Plan is to provide participants with incentives which
46
<PAGE> 50
will encourage them to acquire a proprietary interest in, and continue to
provide services to, the Company. The Stock Incentive Plan provides for the
granting of incentive stock options, nonstatutory options and rights to purchase
restricted stock. An aggregate of 1,037,344 shares have been reserved for grant
under the Stock Incentive Plan. As of June 1, 1997, there were 145,241 options
outstanding under the Stock Incentive Plan. The Stock Incentive Plan provides
that options to purchase shares of the Company's Common Stock and restricted
stock grants of the Company's Common Stock may be granted to directors,
officers, employees and consultants of the Company, except that incentive stock
options may not be granted to non-employee directors or consultants. The Stock
Incentive Plan is administered by the Compensation Committee, which has sole
discretion and authority, consistent with the provisions of the Stock Incentive
Plan, to determine which eligible participants will receive options, the time
when options will be granted, the terms of options granted and the number of
shares which will be subject to options granted under the Stock Incentive Plan.
The exercise price of incentive stock options must at least be equal to the
fair market value of a share of Common Stock on the date the option is granted
(110% with respect to optionees who own at least 10% of the voting power of all
classes of stock of the Company or any parent or subsidiary of the Company).
Nonstatutory options shall have an exercise price of not less than 85% of the
fair market value of a share of Common Stock on the date such option is granted.
Payment of the exercise price may be made in cash, by delivery of shares of the
Company's Common Stock, waiver of compensation due or accrued or, in certain
circumstances, through the delivery of a promissory note. The Compensation
Committee has the authority to determine the time or times at which options
granted under the Plan become exercisable, provided that options must expire no
later than ten years from the date of grant (five years with respect to
optionees who own at least 10% of the voting power of all classes of stock of
the Company or any parent or subsidiary of the Company). Options are
nontransferable, other than upon death by will and the laws of descent and
distribution.
Employee Stock Purchase Plan. The Company's Employee Stock Purchase Plan
(the "Purchase Plan") was adopted by the Board of Directors in April 1997. An
aggregate of 129,668 shares of Common Stock have been reserved for issuance
under the Purchase Plan. The Purchase Plan, which is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Code, will be
implemented by two year offerings with purchases occurring at six-month
intervals commencing on the completion of this offering. The initial offering
period will conclude on June 30, 1999. The Purchase Plan will be administered by
the Compensation Committee. Employees will be eligible to participate if they
are employed by the Company for at least 20 hours per week and if they have been
employed by the Company for at least 90 days. The Purchase Plan permits eligible
employees to purchase Common Stock through payroll deductions, which may not
exceed 10% of an employee's compensation. The price of stock purchased under the
Purchase Plan will be 85% of the lower of the fair market value of the Common
Stock at the beginning of the two year offering period or on the applicable
purchase date. Employees may end their participation in the offering at any time
during the offering period, and participation ends automatically on termination
of employment. The Board may at any time amend or terminate the Purchase Plan,
except that no such amendment or termination may adversely affect shares
previously purchased under the Purchase Plan. In addition, the Board may not,
without stockholder approval, materially increase the number of shares of Common
Stock available for issuance, alter the purchase price formula so as to reduce
the purchase price payable for shares of Common Stock or materially modify the
eligibility requirements for participation or the benefits available to
participants. The Purchase Plan will terminate on June 30, 2007.
EMPLOYMENT AGREEMENT
The Company has entered into an agreement relating to the employment of
Stephen L. Wilson whereby the Company has agreed to provide Mr. Wilson with
severance benefits during the first year of employment equal to one year's
salary plus bonus and thereafter equal to two years' salary plus bonus. The
Agreement also provides that, in the event of termination following a change of
control of the Company, Mr. Wilson will receive three years' salary plus bonus
and all his outstanding options will fully vest.
47
<PAGE> 51
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company will indemnify its directors
and officers and may indemnify its other employees and agents to the fullest
extent permitted by law. The Company believes that indemnification under its
Bylaws covers at least negligence and gross negligence by indemnified parties,
and permits the Company to advance litigation expenses in the case of
stockholder derivative actions or other actions, against an undertaking by the
indemnified party to repay such advances if it is ultimately determined that the
indemnified party is not entitled to indemnification. Prior to the completion of
this offering, the Company expects to have in place liability insurance for its
officers and directors.
In addition, the Company's Second Amended and Restated Certificate of
Incorporation provides that, pursuant to Delaware law, its directors shall not
be liable to the Company or its stockholders for monetary damages for breach of
the directors' fiduciary duty. This provision in the Second Amended and Restated
Certificate of Incorporation does not eliminate the directors' fiduciary duty,
however, and in appropriate circumstances equitable remedies such as injunctive
or other forms of non-monetary relief will remain available under Delaware law.
In addition, each director will continue to be subject to liability for breach
of the director's duty of loyalty to the Company for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
unlawful under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
The Company has entered into separate indemnification agreements with its
directors and officers. These agreements require the Company, among other
things, to indemnify the directors and officers against certain liabilities that
may arise by reason of their status or service as directors or officers (other
than liabilities arising from actions not taken in good faith or in a manner the
indemnitee believed to be opposed to the best interests of the Company), to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified and to obtain directors' insurance if available
on reasonable terms. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company 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. The Company believes that these provisions of
its Second Amended and Restated Certificate of Incorporation and Bylaws and the
indemnification agreements are necessary to attract and retain qualified persons
as directors and officers.
48
<PAGE> 52
CERTAIN TRANSACTIONS
In April 1997, the Company entered into an agreement relating to the
employment of Stephen L. Wilson whereby the Company has agreed to provide Mr.
Wilson with severance benefits during the first year of employment equal to one
years' salary plus bonus and thereafter equal to two years' salary plus bonus.
The Agreement also provides that, in the event of termination following a change
of control of the Company, Mr. Wilson will receive three years' salary plus
bonus and all his outstanding options will fully vest. In June 1997, pursuant to
such agreement, Stephen L. Wilson purchased 32,417 shares of Common Stock at
$4.57 per share and was issued warrants to purchase an additional 32,417 shares
of Common Stock at $4.57 per share.
In March 1997, the Company and Medtronic entered into an agreement
providing for the distribution and co-promotion of the Company's robotic systems
that position and maneuver both visualization equipment and instruments for
minimally invasive cardiothoracic surgery, including ZEUS (the "Systems").
Pursuant to a Sales Agreement dated May 28, 1997 (the "Sales Agreement"),
Medtronic will act as the Company's exclusive distributor for the Systems for
use in cardiothoracic surgical procedures in Europe, the Middle East and Africa
and will co-promote the Systems for use in cardiothoracic surgical procedures in
North America. In exchange for co-promoting the Systems in North America,
Medtronic will receive a commission based on the Company's net revenues from the
sale of the Systems. The Company retains direct distribution rights in North
America, as well as the worldwide right to distribute its systems for use in
other procedures. In connection with the strategic alliance, Medtronic invested
$4.0 million in the Company in the form of a convertible loan, evidenced by a
convertible debenture (the "Medtronic Debenture"), which bore interest at a rate
equal to prime, as announced by Norwest Bank of Minnesota N.A., plus 1%. Such
loan was converted into 363,743 shares of Common Stock of the Company upon the
execution of the Sales Agreement. In the event the actual initial offering price
is less than $11.20 per share Medtronic shall be entitled to receive additional
shares of Common Stock, without additional consideration, so that the aggregate
number of shares of Common Stock held by Medtronic with respect to the
conversion of the Medtronic Debenture equals the number of shares of Common
Stock Medtronic would have received had it converted the Medtronic Debenture at
a conversion price equal to the actual initial public offering price per share
(the "Offering Price"). In addition, Medtronic has the right, at its election,
to invest up to an additional $10.0 million for shares of the Company's Common
Stock at the Offering Price, which right will terminate at the completion of
this offering.
In February 1997, Daniel R. Doiron, a director of the Company, loaned the
Company the sum of $150,000 at an interest rate equal to the prime rate plus 1%.
Such loan was evidenced by a promissory note and was repaid in April 1997
pursuant to its terms.
Between September 1996 and March 1997, the Company sold 405,302 common
equivalent shares of Series E Preferred Stock at an effective purchase price of
$7.71 per share and warrants to purchase 405,302 shares of Common Stock at an
effective purchase price of $.015 per warrant. The effective exercise price of
each warrant is $7.71 per share. All of the aforementioned issuances were made
pursuant to Purchaser Representation and Subscription Agreements. Of such shares
and warrants, 116,702 were sold to certain directors of the Company as follows:
<TABLE>
<CAPTION>
SHARES OF
SERIES E PREFERRED
STOCK PURCHASED WARRANTS TO
PURCHASER AND RELATIONSHIP (COMMON EQUIVALENT PURCHASE AGGREGATE
TO THE COMPANY BASIS) COMMON STOCK CONSIDERATION
-------------------------------------------- ------------------ ------------ -------------
<S> <C> <C> <C>
Robert W. Duggan, Director.................. 25,934 25,934 $ 200,000
Stephen F. Wiggins, Director................ 58,351 58,351 450,000
William D. Williams, Director............... 6,483 6,483 50,000
Daniel R. Doiron, Director.................. 25,934 25,934 200,000
</TABLE>
49
<PAGE> 53
On various dates between November 6, 1995 and May 20, 1996, the Company
entered into Bridge Financing Agreements with certain officers and directors of
the Company, pursuant to which agreements the Company issued promissory notes
("Bridge Notes") in the total original principal amount indicated below,
together with warrants to purchase shares of its common stock as indicated
below:
<TABLE>
<CAPTION>
PURCHASER AND RELATIONSHIP ORIGINAL PRINCIPAL WARRANTS TO PURCHASE
TO THE COMPANY BALANCE OF BRIDGE NOTE COMMON STOCK
- -------------------------------------------------------- ---------------------- --------------------
<S> <C> <C>
Robert W. Duggan, Director.............................. $750,000 245,687
Gene Wang, Chief Executive Officer, President and 100,000 32,758
Director..............................................
Yulun Wang, Executive Vice President, Chief Technical 12,000 3,931
Officer and Director..................................
Stephen F. Wiggins, Director............................ 350,000 114,654
Daniel R. Doiron, Director.............................. 100,000 32,758
</TABLE>
The Bridge Notes bear interest at a rate equal to the lesser of the prime
rate quoted by Chase Manhattan Bank plus one percent or the highest rate
permitted by law, and have a term of thirty months. The Bridge Notes held by Mr.
Duggan, Messrs. Wang and Mr. Wiggins were subsequently amended to waive current
payment of interest thereon and to make the entire balance of principal and
accrued interest due and payable within 30 days following a public offering of
the Company's Common Stock. The warrants issued in connection with the Bridge
Notes were sold for $.0002 per warrant, may be exercised at any time, have an
exercise price of $4.57 per share and expire seven years after the applicable
issuance date.
On August 24, 1994, the Company entered into a Series D Convertible
Preferred Stock and Warrant Purchase Agreement with Chase Manhattan Capital
Corporation, a principal stockholder of the Company, pursuant to which the
Company issued 545,971 shares of its Series D Preferred Stock for aggregate
consideration totaling $5.0 million. On April 13, 1995, Chase Manhattan Capital
Corporation transferred 59,688 of such shares to Archery Partners, an affiliated
entity.
Holders of Series D Preferred Stock and Series E Preferred Stock, the
warrants issued in connection with the Bridge Notes and Medtronic are entitled
to certain registration rights. See "Description of Capital
Stock -- Registration Rights."
50
<PAGE> 54
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Common Stock
as of June 1, 1997, adjusted to reflect the sale of Common Stock offered hereby
for (i) each person or entity known to the Company to own beneficially more than
5% of the outstanding shares of Common Stock, (ii) each of the Company's
directors, (iii) each of the Named Executive Officers and (iv) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENT OF TOTAL
SHARES ------------------------
BENEFICIALLY BEFORE AFTER
NAME OWNED(1) OFFERING OFFERING
- --------------------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Robert W. Duggan(2)............................................ 1,164,755 23.8% 15.8%
Yulun Wang(3).................................................. 999,178 21.6 14.0
Chase Manhattan Capital Corporation ("CMCC")(4)................ 870,026 17.9 11.8
c/o Chase Capital Partners
380 Madison, 12th Floor
New York, NY 10017
Medtronic, Inc.(5)............................................. 363,743 7.9 5.1
Corporate Center
7000 Central Avenue N.E.
Minneapolis, MN 55432
Stephen F. Wiggins(6).......................................... 239,135 5.0 3.3
Gene Wang(7)................................................... 235,922 4.9 3.2
Stephen L. Wilson(8)........................................... 103,734 2.2 1.4
Daniel R. Doiron(9)............................................ 84,626 1.8 1.2
John M. Greathouse(10)......................................... 27,749 * *
William D. Williams(11)........................................ 38,900 * *
David A. Stuart(12)............................................ 21,914 * *
W. Peter Geis(13).............................................. 12,189 * *
Kerry R. Pope.................................................. -- * *
All executive officers and directors as a group (11
persons)(14)................................................. 2,811,401 52.2 35.7
</TABLE>
- ---------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options currently exercisable, or exercisable within 60 days of June 1,
1997, are deemed outstanding for computing the percentage of the person
holding such options but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote and subject
to community property laws where applicable, the persons named in the table
have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them.
(2) Includes an aggregate of 275,498 shares subject to options and warrants
exercisable within 60 days of June 1, 1997.
(3) Includes 16,004 shares subject to options and warrants exercisable within
60 days of June 1, 1997 and 8,754 shares owned by minor children of Yulun
Wang. Dr. Wang disclaims beneficial ownership of shares owned by such
children. Also includes 311,204 shares subject to an option granted by Dr.
Wang to Gene Wang. An aggregate of 116,701 shares subject to such option
are exercisable within 60 days of June 1, 1997.
(4) Includes (i) 138,591 shares subject to a warrant, exercisable within 60
days of June 1, 1997, (ii) 69,151 outstanding shares and 17,011 shares
subject to warrants exercisable within 60 days of June 1, 1997 owned by
Archery Partners, an affiliate of CMCC, and (iii) 81,896 shares subject to
a warrant exercisable within 60 days of June 1, 1997 owned by Chemical
Venture Capital Associates, an affiliate of CMCC. CMCC disclaims beneficial
ownership of the shares referenced in items (ii) and (iii) above.
(5) The number of shares held by Medtronic are subject to adjustment upon
completion of this offering. See "Certain Transactions."
(6) Includes an aggregate of 180,785 shares subject to options and warrants
exercisable within 60 days of June 1, 1997.
(7) Includes an aggregate of 192,791 shares subject to options exercisable
within 60 days of June 1, 1997, including 116,701 shares owned by Yulun
Wang subject to an option exercisable within 60 days of June 1, 1997 and
32,758 shares subject to a warrant exercisable within 60 days of June 1,
1997. Excludes 194,503 shares owned by Yulun Wang subject to an option
exercisable after 60 days after June 1, 1997.
(8) Includes an aggregate of 71,317 shares subject to options and warrants
exercisable within 60 days of June 1, 1997.
(9) Includes an aggregate of 58,691 shares subject to warrants exercisable
within 60 days of June 1, 1997.
(10) Includes an aggregate of 20,487 shares subject to options exercisable
within 60 days of June 1, 1997.
(11) Consists of 32,420 shares subject to an option exercisable within 60 days
of June 1, 1997.
(12) Includes an aggregate of 21,006 shares subject to options exercisable
within 60 days of June 1, 1997.
(13) Consists of an aggregate of 12,189 shares subject to options exercisable
within 60 days of June 1, 1997.
(14) Includes an aggregate of 764,487 shares subject to options and warrants
exercisable within 60 days of June 1, 1997.
51
<PAGE> 55
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, the authorized capital stock of the
Company will consist of 25,000,000 shares of Common Stock, $.001 par value per
share, and 5,000,000 shares of Preferred Stock, $.001 par value per share.
COMMON STOCK
As of June 1, 1997, there were 1,831,852 shares of Common Stock outstanding
held by 52 stockholders of record. There will be 7,114,354 shares of Common
Stock outstanding after giving effect to the sale of 2,500,000 shares of Common
Stock offered by the Company hereby and after giving effect to the conversion of
all shares of Preferred Stock and the Medtronic Debenture into an aggregate of
2,778,388 shares of Common Stock.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders, including the election of
directors, and do not have cumulative voting rights. Subject to preferences that
may be applicable to the holders of outstanding shares of Preferred Stock, if
any, the holders of Common Stock are entitled to receive ratably such dividends,
if any, as may be declared from time to time by the Board of Directors out of
funds legally available therefor. See "Dividend Policy." In the event of
liquidation, dissolution or winding up of the Company, the holders of shares of
Common Stock shall be entitled to receive pro rata all of the assets of the
Company available for distribution to its stockholders. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and shares
of Common Stock to be issued pursuant to this offering shall be fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors has authority to issue up to 5,000,000 shares of
Preferred Stock, $.001 par value, and to fix the rights, preferences, privileges
and restrictions, including voting rights, of those shares without any future
vote or action by the stockholders. The rights of the holders of the Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock could have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock of the Company,
thereby delaying, deferring or preventing a change in control of the Company.
Furthermore, such Preferred Stock may have other rights, including economic
rights senior to the Common Stock, and, as a result, the issuance thereof could
have a material adverse effect on the market value of the Common Stock. The
Company has no present plans to issue shares of Preferred Stock.
REGISTRATION RIGHTS
Pursuant to the terms of a Registration Agreement dated as of August 24,
1994, as amended to date (the "Registration Agreement"), subject to the terms
and conditions therein, and upon expiration of lock-up agreements with the
Underwriters, persons who are the holders of an aggregate of (i) 1,021,531
outstanding shares of Common Stock issuable upon conversion of all outstanding
shares of Series D and Series E Preferred Stock, (ii) 1,609,250 shares issuable
upon exercise of the warrants to purchase Common Stock issued in connection with
the Company's Bridge Note financing and the issuance of Series E Preferred Stock
and (iii) 363,743 shares of Common Stock issued upon conversion of the Medtronic
Debenture, which number of shares is subject to adjustment upon completion of
this offering (collectively, the "Registrable Securities") are entitled to
certain rights, including demand registration rights and piggyback rights, with
respect to the registration of such shares under the Securities Act. Subject to
certain limitations in the Registration Agreement, at any time after completion
of this offering, the holders of 20% or more of the Registrable Securities may
request registration under the Securities Act of all or part of their
Registrable Securities on Form S-1 and the holders of any Registrable Securities
may request registration under the Securities Act of all or part of their
Registrable Securities on Form S-2 or S-3 or any similar short form. In
addition, the holders of
52
<PAGE> 56
a majority of the Common Stock issuable upon conversion of the Medtronic
Debenture are entitled to request one registration on Form S-1, provided that
the amount of Registrable Securities sold by Medtronic shall not be less than
$2.0 million. See "Certain Transactions."
ANTI-TAKEOVER EFFECT OF DELAWARE LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (an anti-takeover law). In general, the statute
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless either (i) prior to the date at which the person becomes an
interested stockholder, the Board of Directors approves such transaction or
business combination, (ii) the stockholder acquires more than 85% of the
outstanding voting stock of the corporation (excluding shares held by directors
who are officers or held in certain employee stock plans) upon consummation of
such transaction, or (iii) the business combination is approved by the Board of
Directors and by two-thirds of the outstanding voting stock of the corporation
(excluding shares held by the interested stockholder) at a meeting of
stockholders (and not by written consent). A "business combination" includes a
merger, asset sale or other transaction resulting in a financial benefit to such
interested stockholder. For purposes of Section 203, "interested stockholder" is
a person who, together with affiliates and associates, owns (or within three
years prior, did own) 15% or more of the corporation's voting stock.
STOCK TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for the Company's Common Stock is
American Stock Transfer and Trust Company.
LISTING
The Company has applied to have its Common Stock approved for quotation on
the Nasdaq National Market under the symbol "RBOT."
53
<PAGE> 57
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of
the Company. Future sales of substantial amounts of Common Stock in the public
market could adversely and materially affect market prices prevailing from time
to time. Furthermore, because only a limited number of shares will be available
for sale shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.
Upon completion of this offering, the Company will have 7,114,354 shares of
Common Stock outstanding assuming (i) no exercise of the Underwriters'
over-allotment option, (ii) no exercise after June 1, 1997 of the approximately
3,163,232 shares issuable pursuant to outstanding options and warrants, and
(iii) the conversion of all outstanding shares of Preferred Stock into 2,414,646
shares of Common Stock. Of these outstanding shares of Common Stock, the
2,500,000 shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, unless purchased
by an "affiliate" of the Company, as that term is defined in Rule 144 under the
Securities Act. The remaining outstanding shares of Common Stock are "restricted
securities" as that term is defined in Rule 144 under the Securities Act (the
"Restricted Shares"). Restricted Shares may be sold in the public market only if
registered or if they qualify for an exemption from registration such as Rules
144 or 701 promulgated under the Securities Act, which are summarized below.
Sales of the Restricted Shares in the public market, or the availability of such
shares for sale, could adversely affect the market price of the Common Stock.
The Company's directors, officers and certain holders of its Common Stock
(beneficially holding an aggregate of approximately 4,347,926 Restricted Shares)
have agreed, pursuant to certain "lock-up" agreements, that they will not offer,
sell, contract to sell or grant any option to purchase or otherwise dispose of
the shares of Common Stock owned by them or that could be purchased by them
through the exercise of options to purchase Common Stock of the Company for
certain designated periods. All shares owned by any holder signing such lock-ups
will be restricted from sale for 180 days following the date of this Prospectus,
unless such holder receives the prior written consent of Montgomery Securities
to sell such shares. The number of outstanding shares that will be available for
sale, subject in certain circumstances to volume and manner of sale
restrictions, in the public market, after giving effect to the lock-up
agreements, will be as follows: (i) 240,239 shares of Common Stock will be
eligible for sale as of the effective date of this offering, (ii) 141,185 shares
of Common Stock will be eligible for sale beginning 90 days after the effective
date of this offering, including approximately 110,000 shares of Common Stock
issuable upon exercise of outstanding vested options, and (iii) 4,194,614 shares
of Common Stock, including approximately 474,000 shares of Common Stock issuable
upon exercise of outstanding vested options, will be eligible for sale beginning
180 days after the date of this Prospectus. The approximately 4,658,838
remaining Restricted Shares and shares of Common Stock issuable upon exercise of
outstanding vested options and warrants will be eligible for sale pursuant to
Rule 144 upon the expiration of their respective one-year holding periods
required under Rule 144. In addition, following the completion of this offering,
the holders of 2,998,639 Restricted Shares (including shares issuable upon the
exercises of the Company's outstanding warrants) will be entitled to certain
rights with respect to registration of such shares for sale in the public
market.
Under Rule 144 as currently in effect, beginning 90 days after the date of
this Prospectus, a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least one year, including persons
who may be deemed affiliates of the Company, would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of:
(i) one percent of the number of shares of Common Stock then outstanding (which
will equal approximately 71,185 shares immediately after the effective date of
this offering); or (ii) the average weekly trading volume of the Common Stock as
reported through the Nasdaq National Market during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
54
<PAGE> 58
(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144; therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
In addition, any employee, officer or director of or consultant to the
Company who purchased his or her shares pursuant to a written compensatory plan
or contract may be entitled to rely on the resale provisions of Rule 701. Rule
701 permits an affiliate to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the public information, volume limitation or
notice provisions of Rule 144. In both cases, a holder of Rule 701 shares is
required to wait until 90 days after the date of this Prospectus before selling
such shares. On June 1, 1997, the Company had outstanding options to purchase
1,553,981 shares of Common Stock, 359,407 of which were then exercisable, and an
additional 892,103 shares of Common Stock are available for issuance pursuant to
the Stock Incentive Plan.
The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register all shares of Common Stock subject to
outstanding stock options and Common Stock issued or issuable pursuant to the
Company's Tandem Plan, Stock Incentive Plan and Common Stock issuable pursuant
to the Company's Purchase Plan. Accordingly, shares issuable upon exercise of
these options or under the Purchase Plan may be sold under such registration
statements, subject to Rule 144 volume limitations applicable to affiliates in
the open market, except to the extent that such shares are subject to vesting
restrictions with the Company or the contractual restrictions described above.
See "Management -- Stock Plans."
55
<PAGE> 59
UNDERWRITING
The Underwriters named below, represented by Montgomery Securities and
Piper Jaffray Inc. (the "Representatives"), have severally agreed, subject to
the terms and conditions of the Underwriting Agreement, to purchase from the
Company the number of shares of Common Stock indicated below opposite their
respective names at the initial public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters to pay for and
accept delivery of the shares of Common Stock are subject to certain conditions
precedent, and that the Underwriters are committed to purchase all of such
shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Montgomery Securities...........................................................
Piper Jaffray Inc ..............................................................
---------
Total................................................................... 2,500,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters may
allow to selected dealers a concession of not more than $ per share;
and the Underwriters may allow, and such dealers may reallow, a concession of
not more than $ per share to certain other dealers. After the offering,
the price, concessions and reallowances to dealers may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters, and to certain other conditions, including the right to
reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 375,000 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial 2,500,000 shares to be purchased by
the Underwriters. To the extent the Underwriters exercise this option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
such additional shares in approximately the same proportion as set forth in the
above table.
The Representatives have advised the Company that the Underwriters do not
expect to make sales to accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
The holders of approximately 94% of the shares of the Company's Common
Stock, including all of the Company's directors and executive officers, have
agreed that, for a period of 180 days after the date of this Prospectus, they
will not, without the prior written consent of Montgomery Securities, directly
or indirectly, sell, offer to sell or otherwise dispose of any shares of Common
Stock or any options owned directly by such holders or with respect to which
they have the power of disposition. The Company has agreed not to sell, offer to
sell, contract to sell, grant any options to purchase or otherwise dispose of
any shares of Common Stock, or any securities convertible into or exercisable or
exchangeable for shares of Common Stock or any rights to acquire Common Stock
for a period of 180 days after the date of this Prospectus, other than the
issuance of shares of Common Stock upon the exercise of outstanding options, and
the grant of options to purchase shares or the issuance of shares of Common
Stock under the Company's Tandem Plan, Stock Incentive Plan and Purchase Plan.
The lock-up agreements may be released at any time as to all or any portion of
the shares subject to such agreements at the discretion of Montgomery
Securities.
56
<PAGE> 60
Prior to the offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price will be
negotiated between the Company and the Representatives. Among the factors
considered in determining the initial public offering price of the Common Stock,
in addition to prevailing market conditions, are the Company's historical
performance, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and the consideration of the
above factors in relation to market valuation of companies in related
businesses.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
Representatives to reclaim a selling concession from a syndicate member when the
Common Stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the Common Stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Stradling, Yocca, Carlson & Rauth, a Professional Corporation,
Newport Beach, California. Certain shareholders of Stradling, Yocca, Carlson &
Rauth, and an investment partnership, certain partners of which are affiliated
with Stradling, Yocca, Carlson & Rauth, own 19,450 shares of the Company's
Common Stock and warrants to purchase an additional 19,450 shares of the
Company's Common Stock at an exercise price equal to $7.71 per share.
Certain legal matters in connection with this offering will be passed upon
for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California.
EXPERTS
The financial statements and schedules of the Company as of December 31,
1996 and 1995, and for each of the three years in the period ended December 31,
1996, included in this Prospectus and elsewhere in the Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said report.
Portions of this Prospectus entitled "Risk Factors -- Dependence on Patents
and Proprietary Technology" and "Business -- Patents and Proprietary Rights"
have been reviewed and approved by Blakely, Sokoloff, Taylor & Zafman, patent
counsel to the Company, as experts in such matters, and are included herein in
reliance on their review and approval.
57
<PAGE> 61
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement (including any
amendments thereto) on Form S-1 under the Securities Act 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 and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, and such exhibits and schedules
filed therewith, which may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials may be obtained at prescribed
rates from the Public Reference Section of the Commission, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its public reference
facilities in New York, New York and Chicago, Illinois. The Registration
Statement and such exhibits and schedules are also available through the
Commission's Website: http://www.sec.gov. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
The Company intends to furnish to its stockholders annual reports
containing audited financial statements, with an opinion thereon expressed by an
independent certified public accounting firm, and quarterly reports containing
unaudited financial information for the first three quarters of each fiscal
year.
58
<PAGE> 62
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Balance Sheets as of December 31, 1995 and 1996, and March 31, 1997 (unaudited)....... F-3
Statements of Operations for each of the three years in the period ended December 31,
1996, and the three month periods ended March 31, 1996 and 1997 (unaudited)......... F-4
Statements of Shareholders' Equity (Deficit) for each of the three years in the period
ended December 31, 1996, and the three month period ended March 31, 1997
(unaudited)......................................................................... F-5
Statements of Cash Flows for each of the three years in the period ended December 31,
1996, and the three month periods ended March 31, 1996 and 1997 (unaudited)......... F-7
Notes to Financial Statements......................................................... F-9
</TABLE>
The financial statements as of March 31, 1997, and for the three month
periods ended March 31, 1996 and 1997, are unaudited.
The information required by the applicable financial statement schedules
has been disclosed in the financial statements and notes thereto and,
accordingly, the schedules have been omitted.
F-1
<PAGE> 63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Computer Motion, Inc.:
After the reincorporation discussed in Note 13 of Computer Motion, Inc.'s
financial statements is effected, we expect to be in a position to render the
following audit report.
ARTHUR ANDERSEN LLP
Los Angeles, California
August 6, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Computer Motion, Inc.:
We have audited the accompanying balance sheets of Computer Motion, Inc. (a
Delaware corporation) as of December 31, 1995 and 1996, and the related
statements of operations, shareholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 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 financial position of Computer Motion, Inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
August , 1997
F-2
<PAGE> 64
COMPUTER MOTION, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, 1997
DECEMBER 31, ---------------------------
-------------------------- PRO FORMA
1995 1996 HISTORICAL (NOTE 2)
----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................. $ 64,048 $ 432,518 $ 3,986,339 $ 3,986,339
Accounts receivable, net of allowance for doubtful
accounts of $5,000 in 1995, $75,000 in 1996 and
$53,467 in 1997..................................... 350,909 1,151,733 939,102 939,102
Inventories........................................... 728,566 645,311 683,441 683,441
Prepaid expenses...................................... 55,887 88,493 187,479 187,479
----------- ------------ ------------ ------------
1,199,410 2,318,055 5,796,361 5,796,361
----------- ------------ ------------ ------------
PROPERTY AND EQUIPMENT:
Furniture and fixtures................................ 146,257 185,656 250,985 250,985
Computer equipment.................................... 209,657 400,818 424,015 424,015
Machinery and equipment............................... 863,548 836,671 851,136 851,136
----------- ------------ ------------ ------------
1,219,462 1,423,145 1,526,136 1,526,136
Less: Accumulated depreciation........................ (484,588) (814,378) (904,629) (904,629)
----------- ------------ ------------ ------------
734,874 608,767 621,507 621,507
----------- ------------ ------------ ------------
DEFERRED FINANCING COST AND OTHER ASSETS................ 82,665 629,613 634,053 634,053
----------- ------------ ------------ ------------
Total assets................................... $ 2,016,949 $ 3,556,435 $ 7,051,921 $ 7,051,921
=========== ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable...................................... $ 223,860 $ 901,731 $ 526,201 $ 526,201
Accrued expenses...................................... 280,314 761,652 758,328 758,328
Deferred revenue...................................... 32,350 74,219 168,787 168,787
Current portion of capital lease obligations.......... 13,446 60,349 75,464 75,464
Line of credit........................................ -- 185,500 -- --
Current portion of long-term debt..................... 693,200 1,000,000 -- --
Convertible subordinated debt......................... -- -- 3,167,000 --
----------- ------------ ------------ ------------
1,243,170 2,983,451 4,695,780 1,528,780
----------- ------------ ------------ ------------
LONG-TERM LIABILITIES:
Capital lease obligations, net of current portion..... 34,510 75,734 100,477 100,477
Long-term debt, net of current portion................ 500,000 3,250,000 3,250,000 3,250,000
Deferred rent......................................... 70,659 59,381 57,764 57,764
----------- ------------ ------------ ------------
605,169 3,385,115 3,408,241 3,408,241
----------- ------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK, SERIES D
At redemption value, 545,971 shares outstanding....... 5,437,686 5,881,686 6,001,686 --
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock, Series A, B, C and E --
Authorized -- 9,415,000 shares
Outstanding -- 1,393,114 shares, 1,474,545 shares and
1,704,317 shares in 1995, 1996 and 1997,
respectively, and none on a pro forma basis......... 2,606,094 3,715,702 5,930,702 --
Common stock --
Authorized -- 25,000,000 shares
Issued and outstanding -- 1,695,173 shares in 1995,
1,734,289 shares in 1996 and 1,744,207 shares in
1997 and 4,526,710 shares on a pro forma basis at
$.001 par value................................... -- 385,932 431,254 4,526
Additional paid-in capital............................ -- 153,536 1,103,566 16,629,682
Deferred compensation................................. -- (515,000) (555,000) (555,000)
Accumulated deficit................................... (7,875,170) (12,433,987) (13,964,308) (13,964,308)
----------- ------------ ------------ ------------
(5,269,076) (8,693,817) (7,053,786) 2,114,900
----------- ------------ ------------ ------------
Total liabilities and shareholders' equity
(deficit).................................... $ 2,016,949 $ 3,556,435 $ 7,051,921 $ 7,051,921
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 65
COMPUTER MOTION, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Products and product
development.................... $ 477,316 $ 2,001,375 $ 3,842,195 $ 619,291 $ 1,312,441
Grant............................. 130,000 269,839 214,696 56,751 60,818
----------- ----------- ----------- ----------- -----------
607,316 2,271,214 4,056,891 676,042 1,373,259
COSTS AND EXPENSES:
Cost of revenue -- products and
product development............ 369,999 1,703,348 2,412,582 387,091 590,432
Cost of revenue -- grant.......... 130,000 269,839 214,696 56,751 60,818
Research and development.......... 630,143 739,093 1,358,970 335,577 558,104
Selling, general and
administrative................. 2,784,450 3,158,298 4,143,544 745,602 1,337,573
----------- ----------- ----------- ----------- -----------
3,914,592 5,870,578 8,129,792 1,525,021 2,546,927
----------- ----------- ----------- ----------- -----------
LOSS FROM OPERATIONS................ (3,307,276) (3,599,364) (4,072,901) (848,979) (1,173,668)
INTEREST INCOME..................... 74,959 63,714 14,355 2,601 8,183
INTEREST EXPENSE.................... (10,953) (15,380) (475,420) (39,585) (357,076)
OTHER EXPENSE....................... -- (37,943) (23,651) (3,742) (7,460)
----------- ----------- ----------- ----------- -----------
NET LOSS BEFORE PROVISION FOR INCOME
TAXES............................. (3,243,270) (3,588,973) (4,557,617) (889,705) (1,530,021)
PROVISION FOR INCOME TAXES.......... 800 800 1,200 300 300
----------- ----------- ----------- ----------- -----------
NET LOSS............................ $(3,244,070) $(3,589,773) $(4,558,817) $ (890,005) $(1,530,321)
=========== =========== =========== =========== ===========
PRO FORMA NET LOSS PER COMMON SHARE,
giving effect to the conversion of
Series A, B, C, D and E preferred
stock upon completion of the
initial public offering as if
converted on the first day of
each period....................... $ (0.88) $ (0.18) $ (0.28)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, used to
compute pro forma net loss per
common share...................... 5,155,381 5,045,420 5,463,578
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 66
COMPUTER MOTION, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1994, 1995, 1996 AND THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES E
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------ -------------------- -------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- -------- ------- ---------- ------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance -- December 31, 1993.......... 422,718 $107,500 586,446 $1,277,652 -- $ -- -- $ --
Common stock issued for cash.......... -- -- -- -- -- -- -- --
Preferred stock issued for cash, net
of expenses......................... -- -- -- -- 296,920 1,188,150 -- --
Preferred stock issued as repayment of
debt................................ -- -- -- -- 97,403 400,000 -- --
Exercise of stock options............. -- -- -- -- -- -- -- --
Common stock issued for services...... -- -- -- -- -- -- -- --
Accrued mandatory redemption premium
on redeemable preferred stock Series
D................................... -- -- -- -- -- -- -- --
Net loss.............................. -- -- -- -- -- -- -- --
------- --------- ------- ---------- ------- ---------- ------- --------
Balance -- December 31, 1994.......... 422,718 $107,500 586,446 $1,277,652 394,323 $1,588,150 -- $ --
------- --------- ------- ---------- ------- ---------- ------- --------
Common stock issued for cash.......... -- -- -- -- -- -- -- --
Exercise of options................... -- -- -- -- -- -- -- --
Common stock repurchase from
employees........................... -- -- -- -- -- -- -- --
Common stock redeemed for note
payable............................. -- -- -- -- -- -- -- --
Preferred stock repurchase............ -- -- -- -- (10,373) (42,600) -- --
Accrued mandatory redemption premium
on redeemable preferred stock Series
D................................... -- (12,985) -- (139,581) -- (172,042) -- --
Net loss.............................. -- -- -- -- -- -- -- --
------- --------- ------- ---------- ------- ---------- ------- --------
Balance -- December 31, 1995.......... 422,718 $ 94,515 586,446 $1,138,071 383,950 $1,373,508 -- --
------- --------- ------- ---------- ------- ---------- ------- --------
<CAPTION>
NET
COMMON STOCK ADDITIONAL SHAREHOLDERS'
--------------------- PAID-IN DEFERRED (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT) (DEFICIT)
--------- --------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance -- December 31, 1993.......... 1,642,733 $ 127,398 $ -- $ -- $(1,041,327) $ 471,223
Common stock issued for cash.......... 6,743 9,750 -- -- -- 9,750
Preferred stock issued for cash, net
of expenses......................... -- -- -- -- -- 1,188,150
Preferred stock issued as repayment of
debt................................ -- -- -- -- -- 400,000
Exercise of stock options............. 571 1,551 -- -- -- 1,551
Common stock issued for services...... 56,405 81,562 -- -- -- 81,562
Accrued mandatory redemption premium
on redeemable preferred stock Series
D................................... -- (139,000) -- -- -- (139,000)
Net loss.............................. -- -- -- -- (3,244,070) (3,244,070)
--------- --------- -------- -------- ----------- -----------
Balance -- December 31, 1994.......... 1,706,452 $ 81,261 $ -- -- $(4,285,397) $(1,230,834)
--------- --------- -------- -------- ----------- -----------
Common stock issued for cash.......... 59,899 273,700 -- -- -- 273,700
Exercise of options................... 7,832 16,567 -- -- -- 16,567
Common stock repurchase from
employees........................... (24,298) (35,136) -- -- -- (35,136)
Common stock redeemed for note
payable............................. (54,712) (250,000) -- -- (250,000)
Preferred stock repurchase............ -- -- -- -- -- (42,600)
Accrued mandatory redemption premium
on redeemable preferred stock Series
D................................... -- (86,392) -- -- -- (411,000)
Net loss.............................. -- -- -- -- (3,589,773) (3,589,773)
--------- --------- -------- -------- ----------- -----------
Balance -- December 31, 1995.......... 1,695,173 $ -- $ -- -- $(7,875,170) $(5,269,076)
--------- --------- -------- -------- ----------- -----------
</TABLE>
F-5
<PAGE> 67
COMPUTER MOTION, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, 1996 AND THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES E
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------ -------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- -------- ------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of options............... -- -- -- -- -- -- -- --
Common stock warrants issued for
cash............................ -- -- -- -- -- -- -- --
Fair market value of warrants
issued with bridge financing
debt............................ -- -- -- -- -- -- -- --
Common stock issued for
services........................ -- -- -- -- -- -- -- --
Common stock issued for inventory
and other asset................. -- -- -- -- -- -- -- --
Preferred stock Series E issued
for cash........................ -- -- -- -- -- -- 81,431 785,000
Issuance of stock options at
exercise prices below fair
market value.................... -- -- -- -- -- -- -- --
Accrued mandatory redemption
premium on redeemable preferred
stock Series D.................. -- 12,985 -- 139,581 -- 172,042 -- --
Net loss.......................... -- -- -- -- -- -- -- --
--------
-
------- -------- ---------- ------- ---------- ------- -------
Balance -- December 31, 1996...... 422,718 $107,500 586,446 $1,277,652 383,950 $1,545,550 81,431 $ 785,000
--------
-
------- -------- ---------- ------- ---------- ------- -------
Exercise of options (unaudited)... -- -- -- -- -- -- -- --
Common stock warrants issued for
cash (unaudited)................ -- -- -- -- -- -- -- --
Preferred Stock Series E issued
for cash (unaudited)............ -- -- -- -- -- -- 229,772 2,215,000
Accrued mandatory redemption
premium on redeemable preferred
stock Series D (unaudited)...... -- -- -- -- -- -- -- --
Interest cost for fixed conversion
of subordinated convertible debt
(unaudited)..................... -- -- -- -- -- -- -- --
Issuance of stock options at
exercise prices below fair
market value.................... -- -- -- -- -- -- -- --
Amortization of deferred
compensation.................... -- -- -- -- -- -- -- --
Net loss (unaudited).............. -- -- -- -- -- -- -- --
--------
-
------- -------- ---------- ------- ---------- ------- -------
Balance -- March 31, 1997
(unaudited)..................... 422,718 $107,500 586,446 $1,277,652 383,950 $1,545,550 311,203 $3,000,000
======= ======== ========= ========== ======= ========== ======= =======
<CAPTION>
NET
COMMON STOCK ADDITIONAL SHAREHOLDERS'
--------------------- PAID-IN DEFERRED (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT) (DEFICIT)
--------- --------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Exercise of options............... 13,226 42,240 -- $ -- -- 42,240
Common stock warrants issued for
cash............................ -- -- 1,366 -- -- 1,366
Fair market value of warrants
issued with bridge financing
debt............................ -- -- 631,170 -- -- 631,170
Common stock issued for
services........................ 5,017 22,922 -- -- -- 22,922
Common stock issued for inventory
and other asset................. 20,873 95,378 -- -- -- 95,378
Preferred stock Series E issued
for cash........................ -- -- -- -- -- 785,000
Issuance of stock options at
exercise prices below fair
market value.................... -- -- 515,000 (515,000) -- --
Accrued mandatory redemption
premium on redeemable preferred
stock Series D.................. -- 225,392 (994,000) -- -- (444,000)
Net loss.......................... -- -- -- -- (4,558,817) (4,558,817)
--------- --------- -------- -------- ----------- -----------
Balance -- December 31, 1996...... 1,734,289 $ 385,932 $ 153,536 $ (515,000) $(12,433,987) $(8,693,817)
--------- --------- -------- -------- ----------- -----------
Exercise of options (unaudited)... 9,918 45,322 -- -- -- 45,322
Common stock warrants issued for
cash (unaudited)................ -- -- 4,030 -- -- 4,030
Preferred Stock Series E issued
for cash (unaudited)............ -- -- -- -- -- 2,215,000
Accrued mandatory redemption
premium on redeemable preferred
stock Series D (unaudited)...... -- -- (120,000) -- -- (120,000)
Interest cost for fixed conversion
of subordinated convertible debt
(unaudited)..................... -- -- 1,000,000 -- -- 1,000,000
Issuance of stock options at
exercise prices below fair
market value.................... -- -- 66,000 (66,000) -- --
Amortization of deferred
compensation.................... -- -- -- 26,000 -- 26,000
Net loss (unaudited).............. -- -- -- -- (1,530,321) (1,530,321)
--------- --------- -------- -------- ----------- -----------
Balance -- March 31, 1997
(unaudited)..................... 1,744,207 $ 431,254 $ 1,103,566 $ (555,000) $(13,964,308) $(7,053,786)
========= ========= ======== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 68
COMPUTER MOTION, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................ $(3,244,070) $(3,589,773) $(4,558,817) $ (890,005) $(1,530,321)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization.... 146,083 330,686 345,858 82,185 91,809
Provision for doubtful
accounts....................... 5,000 -- 70,000 -- (21,533)
(Gain)/loss on sale of fixed
assets......................... 47,482 (1,804) 8,434 (600) --
Common stock issued for
services....................... 81,562 -- 22,922 -- --
Amortization of warrant costs
with long-term debt............ -- -- 189,351 -- 63,117
Amortization of fixed discount on
convertible subordinated
debt........................... -- -- -- -- 167,000
Compensation for stock options
issued below fair market
value.......................... 52,006 24,000 -- -- 26,000
Changes in:
Accounts receivable.............. (168,434) (187,475) (870,824) (59,154) 234,164
Inventories...................... (725,918) (2,648) 148,633 132,733 (38,130)
Prepaid expenses................. (95,435) 82,243 (32,606) (18,151) (98,986)
Other assets..................... (41,679) -- -- -- --
Accounts payable................. 591,884 (420,541) 677,871 79,801 (375,529)
Accrued expenses................. 281 145,434 481,338 14,581 (3,324)
Deferred revenue................. 10,598 21,752 41,869 123,544 94,568
Deferred rent.................... 79,233 (8,574) (11,278) (20,538) (1,617)
----------- ----------- ----------- --------- -----------
Net cash used in operating
activities.......................... (3,261,407) (3,606,700) (3,487,249) (555,604) (1,392,782)
----------- ----------- ----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment........................ (710,101) (347,146) (116,330) (27,344) (45,410)
Proceeds from sale of property and
equipment........................ 3,125 2,605 14,350 7,000 --
Net proceeds from (purchases of)
short-term investments........... (2,874,785) 2,874,785 -- -- --
----------- ----------- ----------- --------- -----------
Net cash provided by (used in)
investing activities................ (3,581,761) 2,530,244 (101,980) (20,344) (45,410)
----------- ----------- ----------- --------- -----------
</TABLE>
F-7
<PAGE> 69
COMPUTER MOTION, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt............................. $ 400,000 $ 1,011,370 $ 4,155,000 $1,327,000 $ 4,150,000
Repayment of long-term debt......... -- (68,170) (1,098,200) (429,500) (1,150,000)
Proceeds from line of credit........ -- -- 513,532 -- 76,979
Repayment of line of credit......... -- -- (328,032) -- (262,479)
Repayment of capital lease
obligations...................... (9,419) (12,234) (33,165) (3,125) (17,723)
Proceeds from common stock and
warrant issuance................. 11,301 290,267 43,606 -- 49,352
Proceeds from preferred stock
issuance......................... 6,075,836 -- 785,000 -- 2,215,000
Repurchase of preferred stock....... -- (42,600) -- -- --
Repurchase of common stock.......... -- (35,136) -- -- --
Investment in sales-type leases..... -- (14,649) (80,042) (88,153) (69,116)
----------- ----------- ----------- ---------- -----------
Net cash provided by financing
activities.......................... 6,477,718 1,128,848 3,957,699 806,222 4,992,013
----------- ----------- ----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................... (365,450) 52,392 368,470 230,274 3,553,821
CASH AND CASH EQUIVALENTS, beginning
of period........................... 377,106 11,656 64,048 64,048 432,518
----------- ----------- ----------- ---------- -----------
CASH AND CASH EQUIVALENTS, end of
period.............................. $ 11,656 $ 64,048 $ 432,518 $ 294,322 $ 3,986,339
=========== =========== =========== ========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for --
Income taxes..................... $ 800 $ 800 $ 1,700 $ -- $ --
Interest......................... $ 10,953 $ 15,380 $ 270,958 $ 32,532 $ 71,017
SCHEDULE OF NON-CASH TRANSACTIONS:
Capital lease obligations incurred
for certain equipment............ $ 64,781 $ 1,995 $ 121,292 $ 10,443 $ 57,581
Accretion of dividend on Series D
preferred stock.................. $ 139,000 $ 411,000 $ 444,000 $ 111,000 $ 120,000
Common stock redeemed for note
payable.......................... $ -- $ 250,000 $ -- $ -- $ --
Common stock issued for inventory... $ -- $ -- $ 65,378 $ -- $ --
Common stock issued for other
asset............................ $ -- $ -- $ 30,000 $ -- $ --
Additional Paid-In Capital for
issuance of warrants with debt... $ -- $ -- $ 631,170 $ 350,542 $ --
Debt exchanged for 97,403 shares of
Series C preferred stock......... $ 400,000 $ -- $ -- $ -- $ --
Additional Paid-In Capital for
conversion of convertible
subordinated debt................ $ -- $ -- $ -- $ -- $ 1,000,000
Deferred compensation for stock
options issued with exercise
prices below fair market value... $ -- $ -- $ 515,000 $ -- $ 66,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 70
COMPUTER MOTION, INC.
NOTES TO FINANCIAL STATEMENTS
1. LINE OF BUSINESS AND RISKS
Computer Motion, Inc. (the "Company"), a Delaware corporation, develops and
markets proprietary robotic and computerized surgical systems that enhance a
surgeon's performance and centralize and simplify a surgeon's control of the
operating room. The Company has developed AESOP, the first surgical robotics
assistant used in minimally invasive surgery. AESOP became commercially
available in October 1994. The Company's primary efforts are now directed to the
development of the market for AESOP, rollout of the Company's next generation
medical robot, continued development of new medical robots which will enable
high-volume, low cost minimally invasive procedures and commercializing
intuitive interface modalities which will enhance the surgical team's overall
productivity. The Company's objective is to become the leading provider of
robotic and computerized surgical systems. Like other companies at this stage of
development, it is subject to numerous risks including the uncertainty of its
chosen markets, its ability to obtain regulatory approvals and to develop its
markets, uncertainty of acceptance of its products, its ability to finance its
operations, limited operating history, the absence of profitability,
competition, and other risks.
Through December 31, 1996, the Company raised approximately $9.3 million
from private placements of preferred and common stock and approximately $4.0
million of bridge financing debt obtained primarily from officers and
shareholders of the Company (see Notes 6 and 8).
The Company expects to raise additional funds to meet its 1997 cash needs.
Subsequent to December 31, 1996, the Company has raised $2,215,000 from private
placement of preferred stock, $4,000,000 from the issuance of convertible debt,
and borrowed $150,000 from a director (see Note 14). The Company also plans to
raise additional funds through an initial public offering of its common stock.
2. METHODS OF ACCOUNTING
a. Revenue Recognition
The Company's revenue has been derived primarily from the manufacture and
sale of AESOP systems. In addition, the Company also leases its systems under
sales-type leases. Supplies for all AESOP systems are also available for sale.
Revenues from sales-type leases are recognized when the systems are
installed, the customer accepts the system, and the lease term becomes
noncancellable. Outright systems and supplies sales are recognized upon
shipment. Unearned finance income on sales-type leases is recognized using the
interest method. Collections may be accelerated if the lease contracts are sold
to third parties, generally without recourse. Revenues from service contracts
are recognized on a straight-line basis over the life of the maintenance or
support services agreement, generally 48 months.
The Company has entered into agreements with several health care
institutions to jointly research, develop and test the Company's next generation
medical robot. The Company has recognized $645,000 of revenues in 1996 for
prototype robots delivered under these contracts. The contracts also provide
quarterly development revenues to the Company for support services which totaled
approximately $100,000 in 1996. These contracts are terminable at will by the
parties involved or will terminate upon achieving commercial production of the
robot which is planned for the second quarter of 1999. Management expects
development revenue under these agreements to approximate $100,000 per quarter
in 1997.
Grant income is recognized by the percentage-of-completion method, measured
by the percentage of cost incurred to date to estimated total cost for each
grant. This method is used because management considers total cost to be the
best available measure of the grants. The grants' proceeds are generally a
reimbursement of the related costs incurred.
F-9
<PAGE> 71
COMPUTER MOTION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
b. Inventories
Inventories are stated at the lower of cost or market and consist of
finished AESOP systems and component parts as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Component parts................................................ $522,805 $553,157
Finished systems............................................... 205,761 92,154
-------- --------
$728,566 $645,311
======== ========
</TABLE>
c. Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
Under SFAS No. 109, deferred income tax assets or liabilities are computed based
on the temporary difference between the financial statement and income tax bases
of assets and liabilities using the enacted marginal tax rate in effect for the
year in which the differences are expected to reverse. Deferred income tax
expenses or credits are based on the changes in the deferred income tax assets
or liabilities from period to period.
d. Loss Per Common Share
Loss per common share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the related
periods. For purposes of computing pro forma net loss per share, all shares of
outstanding preferred stock are assumed converted into common stock. For all
periods presented, per share information was computed pursuant to the rules of
the Securities and Exchange Commission, which require that the dilutive effect
of common shares issued by the Company during the 12 months immediately
preceding the Company's initial public offering plus the number of common shares
issuable pursuant to the issue of warrants or the grant of options during the
same period, be included in the calculation of the shares outstanding from the
beginning of all periods presented.
A summary of the shares used to compute loss per share is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDING
YEAR ENDING DECEMBER 31, MARCH 31,
--------------------------------- -------------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average common shares
outstanding.................... 1,706,184 1,691,173 1,706,319 1,695,173 1,744,081
Dilutive effect of common stock
equivalents.................... -- -- -- -- --
Additional dilutive effect of
shares, options and warrants
issued within 12 months of
initial public offering........ 1,131,468 1,131,468 1,128,484 1,131,468 1,111,714
--------- --------- --------- --------- ---------
Weighted average common shares
used to compute loss per
share.......................... 2,837,652 2,822,641 2,834,803 2,826,641 2,855,795
========= ========= ========= ========= =========
Conversion of preferred stock.... 1,952,711 1,850,922 2,239,926
Conversion of subordinated
debt........................... 363,743 363,743 363,743
--------- --------- ---------
Weighted average common shares
used to compute pro forma net
loss per share................. 5,151,257 5,041,306 5,459,464
========= ========= =========
Net loss per share............... $ (1.14) $ (1.27) $ (1.61) $ (.31) $ (.53)
========= ========= ========= ========= =========
Pro forma net loss per share..... $ (.88) $ (.18) $ (.28)
========= ========= =========
</TABLE>
F-10
<PAGE> 72
COMPUTER MOTION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Pro forma net loss per share has been presented to provide meaningful
disclosure of the effect on net loss per share of the conversion of all
preferred shares and the conversion of subordinated debt. The preferred shares
will automatically convert into common shares upon the closing of the offering
contemplated by this prospectus and the subordinated debt converted in May 1997.
e. Patents
Patents, which are included in other assets, consist primarily of legal
fees and are stated at cost. Patent cost is amortized on a straight-line basis
over 17 years.
f. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
g. New Authoritative Pronouncements
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share" and SFAS
No. 129, "Disclosure of Information about Capital Structure." SFAS No. 128
revises and simplifies the computation for earnings per share and requires
certain additional disclosures. SFAS No. 129 requires additional disclosures
regarding the Company's capital structure. Both standards will be adopted in the
fourth quarter of fiscal 1997. Management does not expect the adoption of these
standards to have a material effect on the Company's financial position or
results of operations.
h. Unaudited Pro Forma Balance Sheet Presentation
The unaudited pro forma balance sheet is presented to show the effects on
the unaudited March 31, 1997 balance sheet of the conversion of all outstanding
shares of preferred stock into 2,414,646 shares of common stock which will occur
upon the completion of the offering (see Note 6) and the conversion of the
$3,167,000 of convertible debt, net of value assigned to related warrants, into
367,857 shares of common stock which occurred in May 1997 (see Note 14) as if
both conversions took place on March 31, 1997.
3. SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents.
4. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line and double-declining balance methods over the following
estimated useful lives:
<TABLE>
<S> <C>
Furniture and fixtures............................................ 7 years
Computer equipment................................................ 5 years
Machinery and equipment........................................... 3-7 years
</TABLE>
Depreciation expense related to property and equipment was approximately
$142,000, $326,000 and $341,000 for the years ended December 31, 1994, 1995 and
1996, respectively.
F-11
<PAGE> 73
COMPUTER MOTION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCK OPTION PLANS AND STOCK PURCHASE PLAN
The Company has stock option plans (the "Plans") for which it is authorized
to issue up to 2,593,361 shares of common stock. Under the Plans, options are
generally issued to employees at an exercise price equal to fair market value,
as determined by the Board of Directors. The options generally vest at five
percent per quarter. During the last quarter of 1996, the Company issued options
to purchase approximately 425,000 shares of common stock at prices which
included approximately $515,000 of a compensation element. The $515,000 is being
recognized as expense over the vesting periods of the related options and has
been presented as a reduction of shareholders' equity in the accompanying
balance sheets.
The Company has also established the Employee Stock Purchase Plan (the
"ESPP") to provide employees the opportunity to purchase shares of the Company's
common stock up to a maximum of 10% of annual compensation. The Company has
reserved 129,668 shares of common stock for purchase under the ESPP. As of June
16, 1997, no shares have been issued under the ESPP.
A summary of activity under the Plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
COMMON EXERCISE PRICE OPTION PRICE
SHARES PER SHARE PER SHARE
--------- ---------------- -------------
<S> <C> <C> <C>
Outstanding at December 31, 1993.......... 228,477 $ 1.10 $ .02 to 1.45
Granted.............................. 338,926 $ 2.20 $1.45 to 4.57
Exercised............................ (571) $ 2.72 $ .02 to 2.72
Canceled............................. (90,977) $ 1.75 $ .02 to 4.57
--------- ----- -------------
Outstanding at December 31, 1994.......... 475,855 $ 1.75 $ .02 to 4.57
Granted.............................. 331,172 $ 4.49 $1.45 to 4.57
Exercised............................ (7,832) $ 2.12 $1.45 to 3.66
Canceled............................. (175,311) $ 3.51 $ .02 to 4.57
--------- ----- -------------
Outstanding at December 31, 1995.......... 623,884 $ 2.72 $ .02 to 4.57
Granted.............................. 961,859 $ 4.57 $ 4.57
Exercised............................ (13,226) $ 3.20 $1.45 to 4.57
Canceled............................. (230,757) $ 2.95 $1.45 to 4.57
--------- ----- -------------
Outstanding at December 31, 1996.......... 1,341,760 $ 4.01 $ .02 to 4.57
========= ===== =============
</TABLE>
As of December 31, 1994, 1995 and 1996, options for 148,522, 244,310 and
334,401 shares, respectively, were exercisable.
If the Company had recognized compensation cost for stock-based employee
compensation in accordance with SFAS No. 123, the Company's net loss would have
been increased as follows:
<TABLE>
<CAPTION>
NET LOSS
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
As reported............................................... $(3,589,773) $(4,558,817)
Pro forma................................................. $(3,630,947) $(4,798,099)
</TABLE>
For the above disclosure, the fair value of each option grant is estimated
on the date of grant using an option pricing model with the following weighted
average assumptions used in 1995 and 1996: risk-free interest rates of
approximately 6.0% to 7.5%; expected life of seven years; no expected dividend
yield; no expected volatility.
The option pricing 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. 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
F-12
<PAGE> 74
COMPUTER MOTION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
6. STOCK TRANSACTIONS
a. Preferred Stock
As of December 31, 1996, the Series A, B, C and E preferred shares carry
rights, preferences, privileges and restrictions as follows:
- Dividend preference over common stock is non-cumulative at a rate of
$.073 per share per annum if declared, except in the case of non-cash
dividends at which point a proportionate share will be paid as if the
number of preferred shares were common shares. This preference is
subordinate to Series D.
- Preferred shares are voting shares equivalent to common shares, and
are convertible to common shares on a one-for-one basis. Subsequent to
December 31, 1996, the Company did not complete minimum equity financing
detailed in the Series E offering, at which time all Series E became
convertible to common at a rate of 1.25 common shares per Series E share.
- Liquidation preference over common stock is at a rate of $.19 per
share for Series A, $2.18 for Series B, $4.11 for Series C and $9.64 for
Series E, plus an amount equal to all declared but unpaid dividends per
share. This preference is subordinate to Series D.
During 1994, the Company converted a note payable, due an officer and
shareholder, in the amount of $400,000 into 97,403 Series C preferred
shares at the then estimated fair market value of $4.11 per share.
As of December 31, 1996, the Series D preferred shares carry rights,
preferences, privileges and restrictions as follows:
- Dividend preference is cumulative on a daily basis from the date of
original issue at a rate of 8 percent per annum of the sum of $9.16 per
share plus all accumulated and unpaid dividends from prior years, as
applicable. This dividend is being accreted in the accompanying financial
statements.
- Upon the conversion of Series D stock to common shares, all
dividends accumulated or accrued shall be canceled.
- Preferred Series D shares are voting shares equivalent to common
shares, and are convertible at the option of the holder to common shares on
a one-to-one basis subject to certain anti-dilutive provisions.
- Liquidation preference is at a rate of $9.16 per share plus an
amount equal to all accumulated or accrued dividends.
The Series D preferred shares are redeemable by the shareholders beginning
in 2001, with a maximum redemption of 25% of the shares outstanding in each year
from 2001 to 2004. The redemption price will equal the original issuance price
plus accreted cumulative dividends. Additionally, the accrued mandatory
redemption premium will be cancelled and all shares of Series D preferred shares
will convert to common stock upon an initial public offering with proceeds in
excess of $15,000,000. Series D preferred stock has been reflected in the
accompanying balance sheets outside of shareholders' equity due to its
redemption feature.
The Company may not redeem, purchase or otherwise acquire directly or
indirectly any Series A, B, C or E preferred stock nor shall the Company pay or
declare any dividends or make distributions on Series A, B, C or E preferred
stock without prior approval of the Series D preferred shareholder.
The Series D preferred stock purchase agreement contains certain covenants
and restrictions. As of December 31, 1996 and 1995, the Company had borrowed
funds in excess of $500,000, which exceeds one of
F-13
<PAGE> 75
COMPUTER MOTION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the restrictions set forth in the Series D preferred stock purchase agreement.
The holder of the Series D preferred shares has provided the Company with a
consent and waiver of its rights as they apply in the purchase agreement in
regards to these borrowings.
All shares of preferred stock will convert into common stock (2,414,646
shares of common stock) in the event of an initial public offering with net
proceeds in excess of $15,000,000.
b. Common Stock Warrants
As of December 31, 1996, the Company had the following outstanding warrants
to purchase common stock:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
WARRANTS PRICE EXPIRATION
- ---------- -------- -------------------------------
<C> <C> <S>
1,064,645 $ 4.57 November 2002 through May 2003
155,602 $ 4.57 September 2003
81,432 $ 9.64 December 2003
</TABLE>
Subsequent to December 31, 1996, the Company adjusted the price per warrant
from $9.64 to $7.71 pursuant to the terms of the agreements relating to the
Series E offering.
7. INCOME TAXES
The provision for income taxes for the years ended December 31, 1994, 1995
and 1996 consisted of minimum state income taxes.
Net deferred income tax assets at December 31, 1995 and 1996 consisted of
the following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Allowance for doubtful accounts........................... $ 2,007 $ 30,104
Accrued liabilities....................................... 55,865 197,546
Deferred rent............................................. 28,361 23,834
Depreciation and amortization............................. 527 16,055
Uniform capitalization costs.............................. 80,276 80,276
Net operating loss carryforwards.......................... 2,570,000 4,039,000
Tax credits............................................... 180,000 219,000
Other..................................................... 45,294 11,048
----------- -----------
Total deferred income taxes.......................... 2,962,330 4,616,863
Valuation reserve......................................... (2,962,330) (4,616,863)
----------- -----------
Net deferred income tax assets....................... $ -- $ --
=========== ===========
</TABLE>
The provision for income taxes reconciles to the amount computed by
applying the federal statutory rate to loss before provision for income taxes as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Computed expected federal benefit............... $(1,102,712) $(1,220,251) $(1,549,590)
State income taxes, net of federal income tax
effect........................................ 800 800 1,200
Tax benefits not recognized..................... 1,102,712 1,220,251 1,549,590
----------- ----------- -----------
$ 800 $ 800 $ 1,200
=========== =========== ===========
</TABLE>
The Company had federal and state net operating loss (NOL) carryforwards of
approximately $11,000,000 and $4,900,000, respectively, as of December 31, 1996.
The Company also had research and
F-14
<PAGE> 76
COMPUTER MOTION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
development tax credit carryforwards of approximately $219,000 at December 31,
1996. The federal tax credit and NOL carryforwards expire after 15 years from
the year of loss and are restricted if significant changes in ownership occur.
The California NOL carryforwards expire in 5 to 7 years from the year of loss.
Realization of deferred tax assets is dependent on generating sufficient
taxable income during the periods in which the temporary differences will
reverse. The amount of the deferred tax assets considered realizable could be
adjusted if estimates of future taxable income during the reversal periods are
revised.
8. DEBT
The following is a summary of long-term debt as of December 31, 1995 and
1996:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Bridge financing debt, from officers and shareholders,
bearing interest at prime rate plus 1% (9.25% at December
31, 1996), interest payable monthly, principal due at
various maturities between July 1998 and November 1998... $ 500,000 $ 3,250,000
Note payable to corporation, bearing interest at 10%,
principal and interest due January 1997, collateralized
by certain tangible and intangible assets................ -- 1,000,000
Note payable to vendor, bearing interest at bank's prime
rate, principal and interest due monthly through May
1996..................................................... 477,365 --
Other...................................................... 215,835 --
---------- -----------
1,193,200 4,250,000
Less-current portion....................................... (693,200) (1,000,000)
---------- -----------
$ 500,000 $ 3,250,000
========== ===========
</TABLE>
The Company's debt obligations mature as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997.............................................................. $1,000,000
1998.............................................................. 3,250,000
----------
$4,250,000
==========
</TABLE>
The bridge financing debt from officers and shareholders, with original
face maturities totaling $3,655,000 as of December 31, 1996, included the
granting of 1,064,645 warrants to purchase shares of the Company's common stock.
Under SFAS No. 123, the fair market value of these warrants at the date of grant
totaling $631,170 was recorded as additional paid-in capital and deferred
financing cost. During fiscal 1996, $189,351 of this financing cost was
amortized to interest expense. During fiscal 1997 and 1998, $252,468 and
$189,351, respectively, will be amortized to interest expense.
At December 31, 1996, the Company had drawn $185,500 against a $250,000
line of credit maintained with a bank. The line bears interest at prime rate
plus 1.5% (9.75% at December 31, 1996), with interest due monthly and
outstanding principal due at maturity in June 1997. The line is collateralized
by certain inventory and equipment and contains financial and non-financial
covenants. The maximum borrowing in 1996 under this line was approximately
$226,000, the average borrowing was approximately $103,000, and the weighted
average interest rate was 9.75%.
F-15
<PAGE> 77
COMPUTER MOTION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
a. Leases
As of December 31, 1996, the Company has the following minimum lease
payments for certain equipment and facilities under capital and operating
leases:
<TABLE>
<CAPTION>
CAPITAL OPERATING
-------- ----------
<S> <C> <C>
Year Ended December 31:
1997.................................................. $ 79,955 $ 309,000
1998.................................................. 69,193 322,000
1999.................................................. 25,934 329,000
2000.................................................. -- 337,000
2001.................................................. -- 316,000
-------- ----------
175,082 $1,613,000
==========
Less -- amount representing interest......................... (38,999)
--------
Present value of minimum capital lease payments.............. 136,083
Less -- current portion...................................... (60,349)
--------
$ 75,734
========
</TABLE>
Rent expense for the years ended December 31, 1994, 1995 and 1996 was
approximately $136,000, $211,000 and $214,000, respectively.
b. Legal Matters
The Company is party to various legal proceedings in the normal course of
business. In the opinion of management, the outcome of such proceedings will not
have a material adverse impact on the Company's financial position or results of
operations.
10. FINANCING ARRANGEMENTS
During 1994, the Company entered into an agreement with a third party
finance company, whereby the Company sells its sales-type leases with and
without recourse. The Company recognized approximately $140,000, $797,000 and
$494,000 in revenues from sales-type leases sold for the years ended December
31, 1994, 1995 and 1996, respectively. As of December 31, 1995 and 1996,
approximately $34,000 and $193,000, respectively, had not been collected on
leases sold with recourse for which the Company is contingently liable.
As of December 31, 1995 and 1996 and March 31, 1997, the future lease
payments to be received by the Company, unguaranteed residual values and
unearned income related to all leasing transactions were insignificant.
11. PROFIT SHARING PLAN
Effective January 1, 1996, the Company adopted a defined contribution
profit sharing plan (the "Plan"). All employees are eligible to participate in
the Plan after meeting certain minimum age and service requirements. Employees
may make discretionary contributions to the Plan subject to Internal Revenue
Service limitations. Employer contributions to the Plan are discretionary and
are determined by the Board of Directors annually. No employer contribution was
made during 1996. Plan participants are fully vested in all contributions to the
Plan.
F-16
<PAGE> 78
COMPUTER MOTION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. MAJOR CUSTOMERS AND VENDORS
As of December 31, 1996, one customer accounted for approximately 20% of
total accounts receivable. The Company's AESOP robot has three significant
components which are manufactured on an outsource basis. Three vendors act as
sole source providers of these components with each manufacturing a separate
component.
Sales to foreign countries represented 9%, 21% and 49% of the Company's
product revenues in 1994, 1995, and 1996, respectively. Foreign sales were as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Europe........................................................... 5% 6% 19%
Japan............................................................ 0% 13% 7%
Korea............................................................ 0% 1% 10%
Other............................................................ 4% 1% 13%
</TABLE>
13. REINCORPORATION
The Company reincorporated in Delaware and effected a reverse stock split
of its existing common and preferred stock of 1 for 1.928 shares in July 1997.
This reincorporation and reverse stock split have been retroactively reflected
in the accompanying financial statements.
14. UNAUDITED INFORMATION
a. Basis of Presentation
The unaudited financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and note disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to those rules and regulations, although the Company
believes that the disclosures made are adequate to make the information
presented not misleading. These unaudited financial statements reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to fairly present the results of operations, changes in
cash flows and financial position as of and for the periods presented. The
unaudited financial statements should be read in conjunction with the audited
financial statements and related notes thereto. The results for the interim
periods presented are not necessarily indicative of results to be expected for
the full year.
b. Inventories
Inventories are stated at the lower of cost or market and consist of
finished AESOP systems and component parts as follows:
<TABLE>
<CAPTION>
MARCH 31,
1997
-----------
(UNAUDITED)
<S> <C>
Component parts.......................................... $ 533,751
Finished systems......................................... 149,690
---------
$ 683,441
=========
</TABLE>
F-17
<PAGE> 79
COMPUTER MOTION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
c. Income Taxes
The provision for income taxes differs from the amount computed by applying
the federal statutory income tax rate to the loss before provision for income
taxes as follows:
<TABLE>
<CAPTION>
MARCH 31,
1997
-----------
(UNAUDITED)
<S> <C>
Expected federal tax benefit............................. $ (511,367)
State income taxes, net of federal income tax effect..... 300
Tax benefit not recognized............................... 511,367
----------
$ 300
==========
</TABLE>
d. Major Customers and Vendors
As of March 31, 1997, three customers accounted for approximately 44% of
total accounts receivable, with each individually exceeding 10% of total
accounts receivable. The Company also replaced one of its three inventory
component manufacturers, with the new manufacturer acting as the sole source
provider of the same component.
e. Placement of Debt
In March 1997, the Company borrowed $4,000,000 from a corporation, bearing
interest at bank's prime rate plus 1% (9.5% at March 31, 1997), principal and
interest due December 31, 1997, secured by certain intangible assets.
Outstanding principal and interest are convertible to common stock at a fixed
discount of 80% of initial offering price per share upon an initial public
offering by the Company. For the three month period ending March 31, 1997,
approximately $167,000 of interest expense related to the fixed discount
conversion has been recognized in the accompanying statements of operations, and
an additional $833,000 of deferred interest expense has been netted against
principal in the accompanying balance sheets.
Effective May 1997, the lender converted its note and all accrued interest
thereon into 363,743 shares of the Company's Common Stock. If the Company
completes an initial public offering with an initial offering price of less than
$11.20 per share, the lender will receive additional shares without additional
consideration so that the aggregate number of shares upon conversion equals the
number of shares the lender would have received had it converted at a price
equal to the actual initial offering price per share.
An additional $150,000 was raised in the form of a short term, unsecured
note from a director and was repaid in the first quarter of 1997.
f. Preferred Stock
The Company secured an additional $2,215,000 from private placements of
preferred stock, closing out its Series E offering. Each share of Series E
preferred stock will convert into 1.25 shares of common stock upon completion of
an initial public offering in excess of $15,000,000.
F-18
<PAGE> 80
COMPUTER MOTION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. STOCK OPTIONS
During the period from January 1, 1997 through June 16, 1997 the Company
issued 323,029 additional stock options. A summary of the options granted is as
follows:
<TABLE>
<CAPTION>
ESTIMATED FAIR
MARKET VALUE
OF COMMON STOCK
NUMBER OF EXERCISE AT DATE OF AGGREGATE
OPTIONS PRICE GRANT COMPENSATION
- --------- -------- --------------- ------------
<S> <C> <C> <C>
54,927 $ 4.57 $ 5.78 $ 66,462
260,477 $ 4.57 $ 11.20 $1,726,963
7,625 $ 9.93 $ 11.20 $ 9,684
</TABLE>
Certain options were granted at prices less than the estimated fair market
value of the common stock. The difference between the exercise price and
estimated fair market value at date of grant has been reflected as deferred
compensation in the accompanying balance sheets and is being recognized as
compensation expense over the vesting period of the options, generally five
years.
In June 1997, 5,187 shares of restricted common stock were granted to an
officer and vest over a 5 year period. Compensation expense of approximately
$58,000 will be recognized over the next 5 years as the restrictions lapse. In
addition, the same officer purchased 32,417 shares of common stock for $4.57 per
share and was issued warrants to purchase 32,417 shares at $4.57 per share. The
difference between the exercise price of 4.57 per share and the estimated fair
market value at date of grant will be a charge to operations of approximately
$430,000 in June 1997.
F-19
<PAGE> 81
======================================================
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the shares of Common Stock to which it relates, or an offer to, or a
solicitation of, any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
there has been no change in the affairs of the Company since the date hereof or
that the information contained herein is correct as of any time subsequent to
the date hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 18
Dividend Policy....................... 18
Capitalization........................ 19
Dilution.............................. 20
Selected Financial Data............... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 26
Management............................ 42
Certain Transactions.................. 49
Principal Stockholders................ 51
Description of Capital Stock.......... 52
Shares Eligible For Future Sale....... 54
Underwriting.......................... 56
Legal Matters......................... 57
Experts............................... 57
Additional Information................ 58
Index to Financial Statements......... F-1
</TABLE>
----------------------------
Until , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
======================================================
======================================================
2,500,000 SHARES
[COMPUTER MOTION LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MONTGOMERY SECURITIES
PIPER JAFFRAY INC.
, 1997
======================================================
<PAGE> 82
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the Common Stock being registered hereunder. All of the amounts
shown are estimates except for the SEC registration fee, the NASD filing fee and
the Nasdaq National Market application fee.
<TABLE>
<CAPTION>
TO BE PAID BY
THE COMPANY
-------------
<S> <C>
SEC registration fee............................................ $ 13,069
NASD filing fee................................................. 4,813
Nasdaq National Market application fee.......................... 8,133
Printing expenses............................................... 120,000
Legal fees and expenses......................................... 225,000
Accounting fees and expenses.................................... 100,000
Blue sky fees................................................... 5,000
Transfer agent and registrar fees............................... 2,000
Director and Officer liability insurance........................ 65,000
Miscellaneous................................................... 56,985
---------
Total................................................. $ 600,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) As permitted by the Delaware General Corporation Law, the Second
Amended and Restated Certificate of Incorporation of the Company (Exhibit 3.1
hereto) eliminates the liability of directors to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a directors, except to the
extent otherwise required by the Delaware General Corporation Law.
(b) The Second Amended and Restated Certificate of Incorporation provides
that the Company will indemnify each person who was or is made a party to any
proceeding by reason of the fact that such person is or was a director or
officer of the Company against all expense, liability and loss reasonably
incurred or suffered by such person in connection therewith to the fullest
extent authorized by the Delaware General Corporation Law. The Company's Bylaws
(Exhibit 3.2 hereto) provide for a similar indemnity to directors and officers
of the Company to the fullest extent authorized by the Delaware General
Corporation Law.
(c) The Amended and Restated Certificate of Incorporation also gives the
Company the ability to enter into indemnification agreements with each of its
directors and officers. The Company has entered into indemnification agreements
with each of its directors and officers (Exhibit 10.18 hereto), which provide
for the indemnification of directors an officers of the Company against any an
all expenses, judgments, fines, penalties and amounts paid in settlement, to the
fullest extent permitted by law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by the Company during the last
three years preceding the date hereof involving sales of the Company's
securities that were not registered under the Securities Act:
(1) From time to time during the three years preceding the date
hereof, the Registrant issued incentive stock options, nonqualified stock
options and rights to purchase Common Stock pursuant to the Registrant's
Tandem Plan to officers, directors and employees of the Registrant.
Exemption from the registration provisions of the Securities Act is
claimed, with respect to the grant of options referred to above, on the
basis that the grant of options did not involve a "sale" of securities and,
therefore, registration thereof was not required. During the period
referred to above, 55,861 options and rights to
II-1
<PAGE> 83
purchase granted pursuant to the Tandem Plan were exercised for an
aggregate exercise price of $1.31. The issuance of Common Stock upon the
exercise of such options securities is exempt by reason of Section 4(2) of
the Securities Act and Rule 701 thereunder.
(2) During the three years preceding the date hereof, the Registrant
issued approximately 36,151 shares of its Common Stock from time to time to
eight providers of goods or services to the Company as follows, all of whom
were accredited investors at the time of such issuances.
<TABLE>
<CAPTION>
EFFECTIVE PRICE
NAME DATE PER SHARE SHARES
------------------------------------------------ --------- --------------- ------
<S> <C> <C> <C>
Andronic Devices Ltd............................ 8/27/96 $4.57 6,565
Thomas P. Riederer.............................. 11/30/96 $4.57 4,227
Plexus Enterprise, Inc. ........................ 5/17/96 $4.57 14,308
David O. Weibel................................. 12/31/96 $4.57 789
David O. Weibel................................. 1/9/97 $4.57 360
American Surgical Education, Inc. .............. 12/19/96 $4.57 3,939
Baysinger Search & Associates................... 12/19/96 $4.57 3,939
Linda Thomas.................................... 1/17/97 $4.57 1,297
Power Presentations............................. 4/1/97 $4.57 726
------
36,151
======
</TABLE>
(3) In August 1994, the Registrant issued 545,971 shares of its Series
D Preferred Stock to Chase Manhattan Capital Corporation for an aggregate
purchase price of $5,000,002.
(4) Beginning in November 1995 and continuing through May, 1996, the
Registrant issued certain 30-month promissory notes in aggregate principal
amount of $3,250,000 (the "Bridge Notes") together with warrants to
purchase Common Stock pursuant to Bridge Financing Agreements to a total of
21 investors, including certain officers and directors of the Company. The
warrants to purchase Common Stock have an exercise price of $4.57 per
share. Subsequently holders of $1,840,000 in principal amount of Bridge
Notes, including certain officers and directors of the Company, agreed to
waive current payment of interest in exchange for prepayment of the
principal and accrued interest thereon within 30 days following the
consummation of this offering. The holders of such Bridge Notes and
warrants are as follows:
<TABLE>
<CAPTION>
NOTE WARRANTS
NAME DATE AMOUNT ISSUED
---------------------------------------------------------- --------- --------- ----------
<S> <C> <C> <C>
Robert W. Duggan.......................................... 11/6/95 250,000 157,895
Blazon Profit Sharing..................................... 12/1/95 200,000 126,316
Robert W. Duggan.......................................... 12/1/95 50,000 31,579
Robert W. Duggan.......................................... 1/3/96 80,000 50,526
Blazon Profit Sharing..................................... 1/3/96 170,000 107,369
Mauerman, George S........................................ 1/22/96 250,000 157,895
Sanders, Jeff Barbaro & Brenda Gail....................... 2/1/96 10,000 6,316
Dorr, Turtle Trust #2 c/o Emily Hass Dorr................. 2/1/96 50,000 31,579
Ghodoussi, Modjtaba and Maryam Fetrossi................... 2/1/96 30,000 18,947
Wang, Yulun and Susan..................................... 2/7/96 12,000 7,579
Hass, Turtle Trust #1 c/o Andrew T. Hass.................. 2/15/96 50,000 31,579
Wiggins, Steve............................................ 2/15/96 350,000 221,053
Beheko Corp., Ltd. Attn. Charles Barlow................... 3/1/96 250,000 157,895
Barber, William........................................... 4/5/96 50,000 31,579
Wang, Gene and Leslie..................................... 4/15/96 50,000 31,579
Wright, Peter............................................. 4/15/96 20,000 12,632
Malenke, Faith c/o Paul Hopler............................ 4/22/96 50,000 31,579
Lincoln American Investment, Inc. Attn: David McKenzie.... 5/1/96 250,000 157,895
Beheko Corp, Attn: Charles Barlow......................... 5/1/96 250,000 157,895
</TABLE>
II-2
<PAGE> 84
<TABLE>
<CAPTION>
NOTE WARRANTS
NAME DATE AMOUNT ISSUED
---------------------------------------------------------- --------- ---------
<S> <C> <C> <C>
Doiron, Daniel R. and Pamela G............................ 5/1/96 100,000 63,158
Ilvento, Joseph P., MD., Judy C. Dean, MD., Inc. Defined
Pension Plan............................................ 5/1/96 100,000 63,158
Community Investment Partners II, L.P..................... 5/1/96 125,000 78,948
Hower, Thomas R........................................... 5/1/96 50,000 31,579
RGRJ Venture Fund II, L.L.C............................... 5/1/96 100,000 63,158
Wang, Gene and Leslie..................................... 5/6/96 50,000 31,579
Chase Venture Capital Associates.......................... 5/20/96 250,000 157,895
Mauerman, George S........................................ 1/22/96 27,667 17,474
Mauerman, William D....................................... 1/22/96 25,333 16,000
--------- ---------
3,250,000 2,052,636
========= =========
</TABLE>
(5) Beginning in September, 1996 and continuing through March, 1997,
the Registrant issued a total of 324,242 shares of its Series E Preferred
Stock together with an equal number of warrants to purchase common stock to
approximately fifty investors. Subsequently, pursuant to the certificate of
determinations governing such series, the number of shares of Common Stock
into which the Series E Preferred Stock is convertible was increased to
405,302 by an adjustment to the conversion ratio. The warrants to purchase
common stock have undergone a similar adjustment and are now exercisable
for 405,302 shares of Common Stock at an exercise price of $7.71 per share.
The aggregate consideration for the Series E Preferred Stock totaled
$3,000,000 as follows:
<TABLE>
<CAPTION>
CONSIDERATION EFFECTIVE SHARES
NAME DATE RECEIVED PRICE ISSUED
----------------------------------------------------- --------- ------------- --------- -------
<S> <C> <C> <C> <C>
RGRJ Venture Fund II LLC............................. 09/06/96 62,500.00 7.71 8,104
Comm Invest Ptrs, II LP.............................. 09/06/96 125,000.00 7.71 16,209
Hower, Thomas R...................................... 09/06/96 37,500.00 7.71 4,863
Bermant, Jeffrey C................................... 10/21/96 50,000.00 7.71 6,483
Doiron, Paul R. and Peggy............................ 10/03/96 50,000.00 7.71 6,483
Ilvento, Joseph P., MD, Judy C. Dean MD, DBPP........ 10/18/96 50,000.00 7.71 6,483
Perez, Roberto J. and Danna.......................... 10/31/96 10,000.00 7.71 1,297
Wiggins. Stephen..................................... 10/30/96 100,000.00 7.71 12,967
Doiron Family Trust.................................. 09/16/96 40,000.00 7.71 5,187
MLPF & S Custodian FBO Patricia J. Duggan............ 12/31/96 50,000.00 7.71 6,483
Blazon Profit Sharing................................ 12/31/96 50,000.00 7.71 6,483
Andrews, Harold Wayne Jr............................. 01/30/97 15,000.00 7.71 1,945
Dunne, James D....................................... 01/29/97 50,000.00 7.71 6,483
Wiggins. Stephen..................................... 01/27/97 350,000.00 7.71 45,384
Plucknett, Knowland James Plucknett Revocable Trust,
Knowland James Plucknett Trustee................... 01/28/97 200,000.00 7.71 25,934
Dorr, Frederick Charles Dorr and Emily Jean Hass
Revocable Trust.................................... 01/28/97 50,000.00 7.71 6,483
Glenn, Paul F. Glenn Revocable Trust, Paul F. Glenn
Trustee............................................ 01/28/97 100,000.00 7.71 12,967
MLPF & Custodian FBO, Robert W. Duggan............... 01/29/97 100,000.00 7.71 12,967
Raede, Robert L. Raede and Ellen Sue Raede TTEES FBO
The Raede Family Trust............................. 01/31/97 75,000.00 7.71 9,725
Dunne, Caren L....................................... 02/05/97 20,000.00 7.71 2,593
Smith Barney as Custodian for Caren L. Dunne......... 02/11/97 15,000.00 7.71 1,945
Lamey, Bryan A....................................... 01/31/97 16,000.00 7.71 2,075
Smith Barney as Custodian for Brian A. Lamey......... 02/11/97 25,000.00 7.71 3,242
Chavarria, Greg J.................................... 02/11/97 10,000.00 7.71 1,297
</TABLE>
II-3
<PAGE> 85
<TABLE>
<CAPTION>
CONSIDERATION EFFECTIVE SHARES
NAME DATE RECEIVED PRICE ISSUED
----------------------------------------------------- --------- ------------- --------- -------
<S> <C> <C> <C> <C>
Smith Barney as Custodian for Greg J. Chavarria...... 02/11/97 25,000.00 7.71 3,242
Smith Barney as Custodian for Shanna Assister........ 02/11/97 9,500.00 7.71 1,232
Smith Barney as Custodian for Harold W. Andrews,
Jr................................................. 02/11/97 25,000.00 7.71 3,242
Arington: Richard L. Arington and Marita S. Arington
as Community....................................... 02/20/97 20,000.00 7.71 2,593
Richard L. Arington.................................. 02/20/97 15,000.00 7.71 1,945
Marita S. Arington................................... 02/20/97 15,000.00 7.71 1,945
Chewakin, Bradley and Kathleen....................... 02/20/97 3,200.00 7.71 415
Chewakin, Kathleen as custodian for Reed Chewakin.... 02/20/97 500.00 7.71 65
Chewakin, Kathleen as custodian for Eric Lee
Chewakin........................................... 02/20/97 500.00 7.71 65
Arington, Michael as custodian for Alyssa Arington... 02/20/97 500.00 7.71 65
Evans, Donald and Diana.............................. 02/20/97 5,000.00 7.71 648
Arington, Brian and Renee............................ 02/20/97 500.00 7.71 65
Laby: Jordan M. Laby & Sandra Laby Trustees of the
Laby Family Trust Dated November 10, 1997.......... 02/10/97 100,000.00 7.71 12,967
Heftel, Richard Heftel Living Trust dated
January 9, 1996.................................... 02/13/97 100,000.00 7.71 12,967
Heftel, Cecil........................................ 02/13/97 200,000.00 7.71 25,934
Ben, Christopher A................................... 02/27/97 5,000.00 7.71 648
Ben, Mike S.......................................... 02/27/97 5,000.00 7.71 648
Mitchell, Frank Louis................................ 02/24/97 25,000.00 7.71 3,242
Buntz, Mark Alan..................................... 02/25/97 25,000.00 7.71 3,242
Mauerman............................................. 02/28/97 175,000.00 7.71 22,692*
Williams, William D.................................. 03/12/97 50,000.00 7.71 6,483
Laby: Todd Mitchell Laby............................. 02/28/97 10,000.00 7.71 1,297
Hvolboll, Eric P..................................... 02/28/97 10,000.00 7.71 1,297
Braswell: Laura Burnam Braswell & Ann Bennett........ 02/28/97 25,000.00 7.71 3,242
Cannon, Peter A...................................... 03/04/97 15,000.00 7.71 1,945
Chan, Michael........................................ 03/21/97 50,000.00 7.71 6,483
Slatkin, Reed........................................ 02/28/97 250,000.00 7.71 32,417
Stradling, Yocca, Carlson & Rauth Investment
partnership of 1982................................ 03/05/97 50,000.00 7.71 6,483
California Central Trust Bank TTEE Craig Carlson..... 03/05/97 8,125.00 7.71 1,053
California Central Trust Bank TTEE Lawrence Cohn..... 03/05/97 8,125.00 7.71 1,053
California Central Trust Bank TTEE Bruce Feuchter.... 03/05/97 8,125.00 7.71 1,053
California Central Trust Bank TTEE Ben Frydman....... 03/05/97 8,125.00 7.71 1,053
California Central Trust Bank TTEE Paul Gale......... 03/05/97 8,125.00 7.71 1,053
</TABLE>
- ---------------
* In July 1997, the Company issued an additional 16,299 shares of its Series E
Preferred Stock to certain investors who claimed and the Company acknowledged
that they had a contractual right to subscribe for additional shares of such
issuance pursuant to a Subscription Agreement dated February 1997. Such
shares, included in the figure indicated, were issued on terms identical to
those on which the other Series E shares were issued and the investors entered
into a release of all claims relating to such issuance.
II-4
<PAGE> 86
<TABLE>
<CAPTION>
CONSIDERATION EFFECTIVE SHARES
NAME DATE RECEIVED PRICE ISSUED
----------------------------------------------------- --------- ------------- --------- -------
<S> <C> <C> <C> <C>
California Central Trust Bank TTEE Rich Goodman...... 03/05/97 8,125.00 7.71 1,053
California Central Trust Bank TTEE John Ireland...... 03/05/97 2,500.00 7.71 324
California Central Trust Bank TTEE John Murphy....... 03/05/97 8,125.00 7.71 1,053
California Central Trust Bank TTEE William R.
Rauth.............................................. 03/05/97 8,125.00 7.71 1,053
California Central Trust Bank TTEE K.C. Schaaf....... 03/05/97 8,125.00 7.71 1,053
California Central Trust Bank TTEE Bruce Stuart...... 03/05/97 8,125.00 7.71 1,053
California Central Trust Bank TTEE Robert Whalen..... 03/05/97 8,125.00 7.71 1,053
Yocca: California Central Trust Bank TTEE Nick E.
Yocca.............................................. 03/05/97 8,125.00 7.71 1,053
Douglas A. Pecchenino and Laureen N. Pecchenino,
Trustees of the Doiron Family Children's Trust,
u/a/d/ December 13, 1996........................... 09/16/96 50,000.00 7.71 6,483
Daniel R. and Pamela G. Doiron....................... 09/16/96 110,000.00 7.71 14,263
------------- -------
3,125,700.00 405,302
============ ========
</TABLE>
(6) In March 1997, Medtronic, Inc. ("Medtronic"), invested $4,000,000
in the Company in the form of a convertible loan bearing interest at a rate
equal to prime, as announced by Norwest Bank of Minnesota N.A., plus 1%.
Such loan was converted into 363,743 shares of Common Stock, based on an
assumed initial public offering price of $14.00 per share. In the event the
actual initial public offering price is less than $11.20 per share,
Medtronic shall be entitled to receive additional shares of Common Stock,
without additional consideration, so that the aggregate number of shares of
Common Stock issued to Medtronic in connection with the conversion of such
loan equals the number of shares of Common Stock Medtronic would have
received had it converted such loan at a conversion price equal to the
actual initial public offering price per share.
(7) In June 1997, Stephen L. Wilson purchased 32,417 shares of Common
Stock for $4.57 per share.
Except as set forth in item (1) above, exemption from the registration
requirement of the Act for the transactions described above is claimed
under Section 4(2) of the Act, among others, on the basis that such
transactions did not involve any public offering and the purchasers were
sophisticated with access to the kind of information registration would
provide. No underwriting fees or broker's commissions were paid in
connection with the foregoing transactions.
On or prior to the completion of this offering the Company will
reincorporate in Delaware. To affect the reincorporation, Computer Motion, Inc.,
a California corporation ("CMI California") will be merged with and into its
wholly-owned subsidiary, the Company. In connection with the merger, the Company
will issue an aggregate of 4,614,354 shares of Common Stock and Preferred Stock
to the holders of Common Stock and Preferred Stock of CMI California, such that
holders of Common Stock and Preferred Stock of CMI California received an
equivalent number of shares of CMI Delaware Common Stock and Preferred Stock.
This issuance of securities was not registered under the Securities Act by
reason of the exemption from registration provided by Section 3(a)(9) thereof.
II-5
<PAGE> 87
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Agreement and Plan of Merger between the Company and Computer Motion, Inc., a
California Corporation dated , 1997.*
3.1 Second Amended and Restated Certificate of Incorporation, as shall be in effect
upon the completion of this offering.*
3.2 Bylaws of the Company, as currently in effect.*
4.1 Specimen Certificate of Common Stock.
5.1 Opinion of Stradling, Yocca, Carlson & Rauth, a Professional Corporation.
10.1 Computer Motion, Inc. Tandem Stock Option Plan ("Tandem Plan").*
10.2 Forms of Stock Option Agreements pertaining to the Tandem Plan.*
10.3 Computer Motion, Inc. 1997 Stock Incentive Plan ("Stock Incentive Plan").*
10.4 Form of Stock Option Agreement pertaining to the Stock Incentive Plan.*
10.5 Computer Motion, Inc. Employee Stock Purchase Plan.*
10.6 Development And Supply Agreement between the Stryker Endoscopy Division of
Stryker Corporation and the Company dated August 21, 1996.***
10.7 Series D Convertible Preferred Stock and Warrant Purchase Agreement dated as of
August 24, 1994 between Chase Manhattan Capital Corporation and the Company.*
10.8 Registration Agreement between the Company and certain shareholders thereof, as
amended to date.*
10.9 Stockholders Agreement dated August 24, 1994 between Chase Manhattan Capital
Corporation, the Company and the Executives designated therein.*
10.10 Sales Agreement between the Company and Medtronic, Inc. dated May 28, 1997.***
10.11 Secured Convertible Debenture of the Company to Medtronic, Inc. dated March 19,
1997.*
10.12 Forms of Bridge Financing Agreements.*
10.13 Form of Warrant to Purchase Common Stock issued to the Bridge Financing
Agreements.*
10.14 Purchaser Representation and Subscription Agreement relating to the Company's
Series E Preferred Stock and Warrant to Purchase Common Stock issuance.*
10.15 Form of Redeemable Warrant to Purchase Common Stock of the Company issued in
conjunction with the Company's Series E Preferred Stock.*
10.16 Business Agreement between the Company and Bulova Technologies, L.L.C. dated
February 18, 1997.***
10.17 Lease between the Company and University Business Center Associates dated March
1, 1994 and amendment thereto dated October, 1996.*
10.18 Form of Indemnification Agreement for Officers and Directors of the Company.*
10.19 Agreement relating to the Company's employment of Stephen L. Wilson.
10.20 Letter Agreement between the Company and Medtronic, Inc. dated June 17, 1997.*
10.21 ZEUS Development Agreement between Company and Galen Healthcare, Inc. dated
July 3, 1997.***
10.22 Product Development Agreement between the Company and Sarasota Memorial
Hospital dated July 31, 1996.***
</TABLE>
II-6
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -------------------------------------------------------------------------------
<C> <S>
10.23 Research and Development Agreement between the Company and The Milton S.
Hershey Medical Center at the Pennsylvania State University dated September 27,
1996.***
10.24 Product Development Agreement between the Company and The Cleveland Clinic
Foundation dated July 31, 1996.***
21.1 Subsidiaries of the Company.*
23.1 Consent of Stradling, Yocca, Carlson & Rauth (see Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Blakely, Sokoloff, Taylor & Zafman LLP.*
24.1 Power of Attorney.*
27.1 Financial Data Schedule.*
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
*** Registrant has sought confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit
with the Commission.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have
been omitted.
ITEM 17. UNDERTAKINGS
The Company hereby undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification 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. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company 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 Company 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 of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE> 89
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Goleta,
State of California, on the 5th day of August, 1997.
Computer Motion, Inc.
By: /s/ GENE WANG
------------------------------------
Gene Wang
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ----------------------------------- ----------------
<S> <C> <C>
/s/ GENE WANG Chief Executive Officer, August 5, 1997
- ------------------------------------- President and Director
Gene Wang (Principal Executive Officer)
/s/ STEPHEN L. WILSON Executive Vice President, Chief August 5, 1997
- ------------------------------------- Financial Officer and Secretary
Stephen L. Wilson (Principal Financial and
Principal Accounting Officer)
/s/ ROBERT W. DUGGAN* Chairman of the Board of Directors August 5, 1997
- -------------------------------------
Robert W. Duggan
/s/ YULUN WANG, PH.D.* Executive Vice President, Chief August 5, 1997
- ------------------------------------- Technical Officer and Director
Yulun Wang, Ph.D.
/s/ STEPHEN F. WIGGINS* Director August 5, 1997
- -------------------------------------
Stephen F. Wiggins
/s/ DANIEL R. DOIRON, PH.D.* Director August 5, 1997
- -------------------------------------
Daniel R. Doiron, Ph.D.
/s/ W. PETER GEIS, M.D.* Director August 5, 1997
- -------------------------------------
W. Peter Geis, M.D.
/s/ WILLIAM D. WILLIAMS* Director August 5, 1997
- -------------------------------------
William D. Williams
</TABLE>
*By: /s/ GENE WANG
---------------------------
Gene Wang,
as Attorney-In-Fact
II-8
<PAGE> 90
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Agreement and Plan of Merger between the Company and Computer Motion, Inc., a
California Corporation dated , 1997.*
3.1 Second Amended and Restated Certificate of Incorporation, as shall be in effect
upon the completion of this offering.*
3.2 Bylaws of the Company, as currently in effect.*
4.1 Specimen Certificate of Common Stock.
5.1 Opinion of Stradling, Yocca, Carlson & Rauth, a Professional Corporation.
10.1 Computer Motion, Inc. Tandem Stock Option Plan ("Tandem Plan").*
10.2 Forms of Stock Option Agreements pertaining to the Tandem Plan.*
10.3 Computer Motion, Inc. 1997 Stock Incentive Plan ("Stock Incentive Plan").*
10.4 Form of Stock Option Agreement pertaining to the Stock Incentive Plan.*
10.5 Computer Motion, Inc. Employee Stock Purchase Plan.*
10.6 Development And Supply Agreement between the Stryker Endoscopy Division of
Stryker Corporation and the Company dated August 21, 1996.***
10.7 Series D Convertible Preferred Stock and Warrant Purchase Agreement dated as of
August 24, 1994 between Chase Manhattan Capital Corporation and the Company.*
10.8 Registration Agreement between the Company and certain shareholders thereof, as
amended to date.*
10.9 Stockholders Agreement dated August 24, 1994 between Chase Manhattan Capital
Corporation, the Company and the Executives designated therein.*
10.10 Sales Agreement between the Company and Medtronic, Inc. dated May 28, 1997.***
10.11 Secured Convertible Debenture of the Company to Medtronic, Inc. dated March 19,
1997.*
10.12 Forms of Bridge Financing Agreements.*
10.13 Form of Warrant to Purchase Common Stock issued to the Bridge Financing
Agreements.*
10.14 Purchaser Representation and Subscription Agreement relating to the Company's
Series E Preferred Stock and Warrant to Purchase Common Stock issuance.*
10.15 Form of Redeemable Warrant to Purchase Common Stock of the Company issued in
conjunction with the Company's Series E Preferred Stock.*
10.16 Business Agreement between the Company and Bulova Technologies, L.L.C. dated
February 18, 1997.***
10.17 Lease between the Company and University Business Center Associates dated March
1, 1994 and amendment thereto dated October, 1996.*
10.18 Form of Indemnification Agreement for Officers and Directors of the Company.*
10.19 Agreement relating to the Company's employment of Stephen L. Wilson.
10.20 Letter Agreement between the Company and Medtronic, Inc. dated June 17, 1997.*
10.21 ZEUS Development Agreement between Company and Galen Healthcare, Inc. dated
July 3, 1997.***
10.22 Product Development Agreement between the Company and Sarasota Memorial
Hospital dated July 31, 1996.***
</TABLE>
<PAGE> 91
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -------------------------------------------------------------------------------
<C> <S>
10.23 Research and Development Agreement between the Company and The Milton S.
Hershey Medical Center at the Pennsylvania State University dated September 27,
1996.***
10.24 Product Development Agreement between the Company and The Cleveland Clinic
Foundation dated July 31, 1996.***
21.1 Subsidiaries of the Company.*
23.1 Consent of Stradling, Yocca, Carlson & Rauth (see Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Blakely, Sokoloff, Taylor & Zafman LLP.*
24.1 Power of Attorney.*
27.1 Financial Data Schedule.*
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
*** Registrant has sought confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit
with the Commission.
<PAGE> 1
EXHIBIT 1.1
MONTGOMERY SECURITIES
FORM UNDERWRITING AGREEMENT
[Draft of May 7, 1997]
_______________ SHARES
COMPUTER MOTION, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
DATED [___]
<PAGE> 2
UNDERWRITING AGREEMENT
______________, 1997
MONTGOMERY SECURITIES
PIPER JAFFRAY INC.
As Representatives of the several Underwriters
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
INTRODUCTORY. Computer Motion, Inc., a [Delaware] corporation (the
"Company"), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of [___] shares (the "Firm Common
Shares") of its Common Stock, par value $[0.001] per share (the "Common Stock").
In addition, the Company has granted to the Underwriters an option to purchase
up to an additional [___] shares (the "Optional Common Shares") of Common Stock,
as provided in Section 2. The Firm Common Shares and, if and to the extent such
option is exercised, the Optional Common Shares are collectively called the
"Common Shares". Montgomery Securities and Piper Jaffray Inc. have agreed to act
as representatives of the several Underwriters (in such capacity, the
"Representatives") in connection with the offering and sale of the Common
Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-[___]), which contains a form of prospectus to be used in connection with
the public offering and sale of the Common Shares. Such registration statement,
as amended, including the financial statements, exhibits and schedules thereto,
in the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including any information deemed to be a
part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434
under the Securities Act, is called the "Registration Statement". Any
registration statement filed by the Company pursuant to Rule 462(b) under the
Securities Act is called the "Rule 462(b) Registration Statement", and from and
after the date and time of filing of the Rule 462(b) Registration Statement the
term "Registration Statement" shall include the Rule 462(b) Registration
Statement. Such prospectus, in the form first used by the Underwriters to
confirm sales of the Common Shares, is called the "Prospectus"; provided,
however, if the Company has, with the consent of Montgomery
<PAGE> 3
Securities, elected to rely upon Rule 434 under the Securities Act, the term
"Prospectus" shall mean the Company's prospectus subject to completion (each, a
"preliminary prospectus") dated [___] (such preliminary prospectus is called the
"Rule 434 preliminary prospectus"), together with the applicable term sheet (the
"Term Sheet") prepared and filed by the Company with the Commission under Rules
434 and 424(b) under the Securities Act and all references in this Agreement to
the date of the Prospectus shall mean the date of the Term Sheet. All references
in this Agreement to the Registration Statement, the Rule 462(b) Registration
Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any
amendments or supplements to any of the foregoing, shall include any copy
thereof filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval System ("EDGAR").
The Company hereby confirms its agreement with the Underwriters as
follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents, warrants and covenants to each
Underwriter as follows:
(a) Compliance with Registration Requirements. The
Registration Statement and any Rule 462(b) Registration Statement have been
declared effective by the Commission under the Securities Act. The Company has
complied to the Commission's satisfaction with all requests of the Commission
for additional or supplemental information. No stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement is in effect and no proceedings for such purpose have been instituted
or are pending or, to the best knowledge of the Company, are contemplated or
threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied in
all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Common Shares.
Each of the Registration Statement, any Rule 462(b) Registration Statement and
any post-effective amendment thereto, at the time it became effective and at all
subsequent times, complied and will comply in all material respects with the
Securities Act and did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. The Prospectus, as
amended or supplemented, as of its date and at all subsequent times, did not and
will not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements thereto,
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Representatives expressly
for use therein. There are no contracts or other documents required to
-2-
<PAGE> 4
be described in the Prospectus or to be filed as exhibits to the Registration
Statement which have not been described or filed as required.
(b) Offering Materials Furnished to Underwriters. The Company
has delivered to the Representatives two complete manually signed copies of the
Registration Statement and of each consent and certificate of experts filed as a
part thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Representatives have
reasonably requested for each of the Underwriters.
(c) Distribution of Offering Material By the Company. The
Company has not distributed and will not distribute, prior to the later of the
Second Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Common Shares, any offering material in connection with the
offering and sale of the Common Shares other than a preliminary prospectus, the
Prospectus or the Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement of,
the Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles.
(e) Authorization of the Common Shares. The Common Shares to
be purchased by the Underwriters from the Company have been duly authorized for
issuance and sale pursuant to this Agreement and, when issued and delivered by
the Company pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There
are no persons with registration or other similar rights to have any equity or
debt securities registered for sale under the Registration Statement or included
in the offering contemplated by this Agreement, except for such rights as have
been duly waived.
(g) No Material Adverse Change. Except as otherwise disclosed
in the Prospectus, subsequent to the respective dates as of which information is
given in the Prospectus: (i) there has been no material adverse change, or any
development that could reasonably be expected to result in a material adverse
change, in the condition, financial or otherwise, or in the earnings, business,
operations or prospects, whether or not arising from transactions in the
ordinary course of business, of the Company and its subsidiaries, considered as
one entity (any such change is called a "Material Adverse Change"); (ii) the
Company has not incurred any material liability or obligation, indirect, direct
or contingent, not in the ordinary course of business nor entered into any
material transaction or agreement not in the ordinary course of business; and
(iii) there has been no dividend or distribution of any kind declared, paid or
made
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<PAGE> 5
by the Company or, except for dividends paid to the Company or other
subsidiaries, any of its subsidiaries on any class of capital stock or
repurchase or redemption by the Company or any of its subsidiaries of any class
of capital stock.
(h) Independent Accountants. Arthur Andersen, LLP, who have
expressed their opinion with respect to the financial statements (which term as
used in this Agreement includes the related notes thereto) and supporting
schedules filed with the Commission as a part of the Registration Statement and
included in the Prospectus, are independent public or certified public
accountants as required by the Securities Act
(i) Preparation of the Financial Statements. The financial
statements filed with the Commission as a part of the Registration Statement and
included in the Prospectus present fairly the consolidated financial position of
the Company and its subsidiaries as of and at the dates indicated and the
results of their operations and cash flows for the periods specified. The
supporting schedules included in the Registration Statement present fairly the
information required to be stated therein. Such financial statements and
supporting schedules have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved, except as may be expressly stated in the related notes thereto. No
other financial statements or supporting schedules are required to be included
in the Registration Statement. The financial data set forth in the Prospectus
under the captions "Prospectus Summary--Summary Selected Financial Data",
"Selected Financial Data" and "Capitalization" fairly present the information
set forth therein on a basis consistent with that of the audited financial
statements contained in the Registration Statement. The Company's ratios of
earnings to fixed charges and preferred stock dividends set forth in the
Prospectus under the captions "Prospectus Summary--Summary Selected Financial
Data", "Selected Financial Data" and in Exhibit 12 to the Registration Statement
have been calculated in compliance with Item 503(d) of Regulation S-K under the
Securities Act.
(j) Incorporation and Good Standing of the Company and its
Subsidiaries. The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation and has corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the Prospectus and to
enter into and perform its obligations under this Agreement. The Company is duly
qualified as a foreign corporation to transact business and is in good standing
in [the State of California and] each other jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except for such jurisdictions [(other than
the State of California)] where the failure to so qualify or to be in good
standing would not, individually or in the aggregate, result in a Material
Adverse Change. The Company has no subsidiaries.
(k) Capitalization and Other Capital Stock Matters. The
authorized, issued and outstanding capital stock of the Company is as set forth
in the Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans
-4-
<PAGE> 6
described in the Prospectus or upon exercise of outstanding options or warrants
described in the Prospectus). The Common Stock (including the Common Shares)
conforms in all material respects to the description thereof contained in the
Prospectus. All of the issued and outstanding shares of Common Stock have been
duly authorized and validly issued, are fully paid and nonassessable and have
been issued in compliance with federal and state securities laws. None of the
outstanding shares of Common Stock were issued in violation of any preemptive
rights, rights of first refusal or other similar rights to subscribe for or
purchase securities of the Company. There are no authorized or outstanding
options, warrants, preemptive rights, rights of first refusal or other rights to
purchase, or equity or debt securities convertible into or exchangeable or
exercisable for, any capital stock of the Company other than those accurately
described in the Prospectus. The description of the Company's stock option,
stock bonus and other stock plans or arrangements, and the options or other
rights granted thereunder, set forth in the Prospectus accurately and fairly
presents the information required to be shown with respect to such plans,
arrangements, options and rights.
(l) Stock Exchange Listing. The Common Shares have been
approved for inclusion on the Nasdaq National Market, subject only to official
notice of issuance.
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. The Company is not in violation of its
charter or by-laws or in default (or, with the giving of notice or lapse of
time, would be in default) ("Default") under any indenture, mortgage, loan or
credit agreement, note, contract, franchise, lease or other instrument to which
the Company is a party or by which it may be bound, or to which any of the
property or assets of the Company or any of its subsidiaries is subject (each,
an "Existing Instrument"), except for such Defaults as would not, individually
or in the aggregate, result in a Material Adverse Change. The Company's
execution, delivery and performance of this Agreement and consummation of the
transactions contemplated hereby and by the Prospectus (i) have been duly
authorized by all necessary corporate action and will not result in any
violation of the provisions of the charter or by-laws of the Company or any
subsidiary, (ii) will not conflict with or constitute a breach of, or Default or
a Debt Repayment Triggering Event (as defined below) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of its subsidiaries pursuant to, or require the
consent of any other part to, any Existing Instrument, except for such
conflicts, breaches, Defaults, liens, charges or encumbrances as would not,
individually or in the aggregate, result in a Material Adverse Change and (iii)
will not result in any violation of any law, administrative regulation or
administrative or court decree applicable to the Company or any subsidiary. No
consent, approval, authorization or other order of, or registration or filing
with, any court or other governmental or regulatory authority or agency, is
required for the Company's execution, delivery and performance of this Agreement
and consummation of the transactions contemplated hereby and by the Prospectus,
except such as have been obtained or made by the Company and are in full force
and effect under the Securities Act, applicable state securities or blue sky
laws and from the National Association of Securities Dealers, Inc. (the "NASD").
As used herein, a "Debt Repayment Triggering Event" means any event or condition
which gives, or with the
-5-
<PAGE> 7
giving of notice or lapse of time would give, the holder of any note, debenture
or other evidence of indebtedness (or any person acting on such holder's behalf)
the right to require the repurchase, redemption or repayment of all or a portion
of such indebtedness by the Company.
(n) No Material Actions or Proceedings. There are no legal or
governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened (i) against or affecting the Company or any of
its subsidiaries, (ii) which has as the subject thereof any officer or director
of, or property owned or leased by, the Company or any of its subsidiaries or
(iii) relating to environmental or discrimination matters, where in any such
case (A) there is a reasonable possibility that such action, suit or proceeding
might be determined adversely to the Company or such subsidiary and (B) any such
action, suit or proceeding, if so determined adversely, would reasonably be
expected to result in a Material Adverse Change or adversely affect the
consummation of the transactions contemplated by this Agreement. No material
labor dispute with the employees of the Company, or with the employees of any
principal supplier of the Company, exists or, to the best of the Company's
knowledge, is threatened or imminent.
(o) Intellectual Property Rights. The Company owns or
possesses sufficient licenses or other rights to use all patents, copyrights,
trademarks, service marks, trade names, technology and know-how (collectively,
the "Intellectual Property Rights") reasonably necessary to conduct its business
in the manner described in the Prospectus, and the expected expiration of any
Intellectual Property Rights would not result in a Material Adverse Change. The
Company is not obligated (in any material respect) to pay a royalty, grant a
license, or provide other consideration to any third party in connection with
its patents, copyrights, trademarks, service marks, trade names, or technology
other than as disclosed in the Prospectus, and, except as disclosed in the
Prospectus, the Company has not received any notice of infringement or conflict
with (and the Company knows of no infringement or conflict with) asserted rights
of others with respect to the Intellectual Property Rights which could
reasonably be expected to result in a Material Adverse Change and, except as
disclosed in the Prospectus, the discoveries, inventions, products or processes
of the Company referred to in the Prospectus do not, to the best knowledge of
the Company, infringe or conflict with any right or patent of any third party,
or any discovery, invention, product or process which is the subject of a patent
application filed by any third party, known to the Company which could result in
a Material Adverse Change. No third party including any academic or governmental
organization, possesses rights to the Intellectual Property Rights which, if
exercised, could enable such third party to develop products competitive to
those of the Company or could result in a Material Adverse Change.
(p) All Necessary Permits, etc. The Company is in possession
of such valid and current certificates, authorizations or permits issued by the
appropriate state, federal or foreign regulatory agencies or bodies necessary to
conduct its businesses, and the Company has not received any notice of
proceedings relating to the revocation or modification of, or non-compliance
with, any such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, could
result in a Material Adverse
-6-
<PAGE> 8
Change.
(q) Title to Properties. The Company has good and marketable
title to all the properties and assets reflected as owned in the financial
statements referred to in Section 1(i) above (or elsewhere in the Prospectus),
in each case free and clear of any security interests, mortgages, liens,
encumbrances, equities, claims and other defects, except such as do not
materially and adversely affect the value of such property and do not materially
interfere with the use made or proposed to be made of such property by the
Company or such subsidiary. The real property, improvements, equipment and
personal property held under lease by the Company or any subsidiary are held
under valid and enforceable leases, with such exceptions as are not material and
do not materially interfere with the use made or proposed to be made of such
real property, improvements, equipment or personal property by the Company or
such subsidiary.
(r) Tax Law Compliance. The Company has filed all necessary
federal, state and foreign income and franchise tax returns and have paid all
taxes required to be paid by the Company, if due and payable, any related or
similar assessment, fine or penalty levied against the Company. The Company has
made adequate charges, accruals and reserves in the applicable financial
statements referred to in Section 1(i) above in respect of all federal, state
and foreign income and franchise taxes for all periods as to which the tax
liability of the Company has not been finally determined.
(s) Company Not an "Investment Company". The Company has been
advised of the rules and requirements under the Investment Company Act of 1940,
as amended (the "Investment Company Act"). The Company is not, and after receipt
of payment for the Common Shares will not be, an "investment company" within the
meaning of Investment Company Act and will conduct its business in a manner so
that it will not become subject to the Investment Company Act.
(t) Insurance. The Company is insured by recognized,
financially sound and reputable institutions with policies in such amounts and
with such deductibles and covering such risks as are generally deemed adequate
and customary for its businesses including, but not limited to, policies
covering real and personal property owned or leased by the Company against
theft, damage, destruction, acts of vandalism and earthquakes. The Company has
no reason to believe that it will not be able (i) to renew its existing
insurance coverage as and when such policies expire or (ii) to obtain comparable
coverage from similar institutions as may be necessary or appropriate to conduct
its business as now conducted and at a cost that would not result in a Material
Adverse Change. The Company has not been denied any insurance coverage which it
has sought or for which it has applied.
(u) No Price Stabilization or Manipulation. The Company has
not taken and will not take, directly or indirectly, any action designed to or
that might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Common Shares.
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<PAGE> 9
(v) Related Party Transactions. There are no business
relationships or related-party transactions involving the Company or any person
required to be described in the Prospectus which have not been described as
required.
(w) No Unlawful Contributions or Other Payments. Neither the
Company nor any of its subsidiaries nor, to the best of the Company's knowledge,
any employee or agent of the Company or any subsidiary, has made any
contribution or other payment to any official of, or candidate for, any federal,
state or foreign office in violation of any law or of the character required to
be disclosed in the Prospectus.
(x) Company's Accounting System. The Company maintains a
system of accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(y) Compliance with Environmental Laws. Except as would not,
individually or in the aggregate, result in a Material Adverse Change (i)
neither the Company nor any of its subsidiaries is in violation of any federal,
state, local or foreign law or regulation relating to pollution or protection of
human health or the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata) or wildlife,
including without limitation, laws and regulations relating to emissions,
discharges, releases or threatened releases of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum and
petroleum products (collectively, "Materials of Environmental Concern"), or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of Environment Concern
(collectively, "Environmental Laws"), which violation includes, but is not
limited to, noncompliance with any permits or other governmental authorizations
required for the operation of the business of the Company or its subsidiaries
under applicable Environmental Laws, or noncompliance with the terms and
conditions thereof, nor has the Company or any of its subsidiaries received any
written communication, whether from a governmental authority, citizens group,
employee or otherwise, that alleges that the Company or any of its subsidiaries
is in violation of any Environmental Law; (ii) there is no claim, action or
cause of action filed with a court or governmental authority, no investigation
with respect to which the Company has received written notice, and no written
notice by any person or entity alleging potential liability for investigatory
costs, cleanup costs, governmental responses costs, natural resources damages,
property damages, personal injuries, attorneys' fees or penalties arising out
of, based on or resulting from the presence, or release into the environment, of
any Material of Environmental Concern at any location owned, leased or operated
by the Company or any of its subsidiaries, now or in the past (collectively,
"Environmental Claims"), pending or, to the best of the Company's knowledge,
threatened
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<PAGE> 10
against the Company or any of its subsidiaries or any person or entity whose
liability for any Environmental Claim the Company or any of its subsidiaries has
retained or assumed either contractually or by operation of law; and (iii) to
the best of the Company's knowledge, there are no past or present actions,
activities, circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge, presence or disposal of any
Material of Environmental Concern, that reasonably could result in a violation
of any Environmental Law or form the basis of a potential Environmental Claim
against the Company or any of its subsidiaries or against any person or entity
whose liability for any Environmental Claim the Company or any of its
subsidiaries has retained or assumed either contractually or by operation of
law.
(z) Periodic Review of Costs of Environmental Compliance. In
the ordinary course of its business, the Company conducts a periodic review of
the effect of Environmental Laws on the business, operations and properties of
the Company and its subsidiaries, in the course of which it identifies and
evaluates associated costs and liabilities (including, without limitation, any
capital or operating expenditures required for clean-up, closure of properties
or compliance with Environmental Laws or any permit, license or approval, any
related constraints on operating activities and any potential liabilities to
third parties). On the basis of such review and the amount of its established
reserves, the Company has reasonably concluded that such associated costs and
liabilities would not, individually or in the aggregate, result in a Material
Adverse Change.
(aa) ERISA Compliance. The Company and its subsidiaries and
any "employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or maintained by
the Company, its subsidiaries or their "ERISA Affiliates" (as defined below) are
in compliance in all material respects with ERISA. "ERISA Affiliate" means, with
respect to the Company or a subsidiary, any member of any group of organizations
described in Sections 414(b), (c), (m) or (o) of the Internal Revenue Code of
1986, as amended, and the regulations and published interpretations thereunder
(the "Code") of which the Company or such subsidiary is a member. No "reportable
event" (as defined under ERISA) has occurred or is reasonably expected to occur
with respect to any "employee benefit plan" established or maintained by the
Company, its subsidiaries or any of their ERISA Affiliates. No "employee benefit
plan" established or maintained by the Company, its subsidiaries or any of their
ERISA Affiliates, if such "employee benefit plan" were terminated, would have
any "amount of unfunded benefit liabilities" (as defined under ERISA). Neither
the Company, its subsidiaries nor any of their ERISA Affiliates has incurred or
reasonably expects to incur any liability under (i) Title IV of ERISA with
respect to termination of, or withdrawal from, any "employee benefit plan" or
(ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates that is intended to be qualified under Section 401(a) of the Code is
so qualified and nothing has occurred, whether by action or failure to act,
which would cause the loss of such qualification.
(bb) Governmental Approvals. The Company owns, possesses or
has obtained
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<PAGE> 11
all licenses, permits, certificates, consents, orders, approvals and other
authorizations from, and has made all declarations and filings with, all
federal, state, local and other governmental authorities (including foreign
regulatory agencies), all self-regulatory organizations and all courts and other
tribunals, domestic or foreign, necessary to own or lease, as the case may be,
and to operate its properties and to carry on its business as conducted as of
the date hereof, and the Company not has received any actual notice of any
proceeding relating to revocation or modification of any such license, permit,
certificate, consent, order, approval or other authorization, except as
described in the Registration Statement and the Prospectus; and the Company is
in compliance with all laws and regulations relating to the conduct of its
business as conducted as of the date hereof; the Company is not in violation of
any foreign, state or local law, order, rule, regulation, writ, injunction or
decree of any court or governmental agency or body, including, but not limited
to, the United States Food and Drug Administration (the "FDA"); all of the
descriptions in the Registration Statement and Prospectus of the legal and
governmental proceedings by or before the FDA or any foreign, state or local
government body exercising comparable authority are true, complete and accurate
in all material respects.
Any certificate signed by an officer of the Company and delivered to
the Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES.
The Firm Common Shares. The Company agrees to issue and sell to the
several Underwriters the Firm Common Shares upon the terms herein set forth. On
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase from the Company the
respective number of Firm Common Shares set forth opposite their names on
Schedule A. The purchase price per Firm Common Share to be paid by the several
Underwriters to the Company shall be $[___] per share.
The First Closing Date. Delivery of certificates for the Firm Common
Shares to be purchased by the Underwriters and payment therefor shall be made at
the offices of Montgomery Securities, 600 Montgomery Street, San Francisco,
California (or such other place as may be agreed to by the Company and the
Representative) at 6:00 a.m. San Francisco time, on [____________][ten (10)
business days following the original contemplated First Closing Date], or such
other time and date not later than 10:30 a.m. San Francisco time, as the
Representative shall designate by notice to the Company (the time and date of
such closing are called the "First Closing Date"). The Company hereby
acknowledges that circumstances under which the Representatives may provide
notice to postpone the First Closing Date as originally scheduled include, but
are in no way limited to, any determination by the Company or the
Representatives to recirculate to the public copies of an amended or
supplemented Prospectus or a delay as contemplated by the provisions of Section
10.
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<PAGE> 12
The Optional Common Shares; the Second Closing Date. In addition, on
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of [___] Optional Common Shares from the Company
at the purchase price per share to be paid by the Underwriters for the Firm
Common Shares. The option granted hereunder is for use by the Underwriters
solely in covering any over-allotments in connection with the sale and
distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) upon notice by the
Representatives to the Company which notice may be given at any time within 30
days from the date of this Agreement. Such notice shall set forth (i) the
aggregate number of Optional Common Shares as to which the Underwriters are
exercising the option, (ii) the names and denominations in which the
certificates for the Optional Common Shares are to be registered and (iii) the
time, date and place at which such certificates will be delivered (which time
and date may be simultaneous with, but not earlier than, the First Closing Date;
and in such case the term "First Closing Date" shall refer to the time and date
of delivery of certificates for the Firm Common Shares and the Optional Common
Shares). Such time and date of delivery, if subsequent to the First Closing
Date, is called the "Second Closing Date" and shall be determined by the
Representative and shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. If any Optional Common
Shares are to be purchased, each Underwriter agrees, severally and not jointly,
to purchase the number of Optional Common Shares (subject to such adjustments to
eliminate fractional shares as the Representative may determine) that bears the
same proportion to the total number of Optional Common Shares to be purchased as
the number of Firm Common Shares set forth on Schedule A opposite the name of
such Underwriter bears to the total number of Firm Common Shares. The
Representatives may cancel the option at any time prior to its expiration by
giving written notice of such cancellation to the Company.
Public Offering of the Common Shares. The Representatives hereby advise
the Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Common Shares as
soon after this Agreement has been executed and the Registration Statement has
been declared effective as the Representatives, in their judgment, have
determined is advisable and practicable.
Payment for the Common Shares. Payment for the Common Shares shall be
made at the First Closing Date (and, if applicable, at the Second Closing Date)
by wire transfer of immediately available funds to the order of the Company.
It is understood that the Representatives have been authorized, for
their own accounts and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Common Shares and any Optional Common Shares the Underwriters have agreed
to purchase. Montgomery Securities, individually and not as a Representative of
the Underwriters, may (but shall not be obligated to) make payment for any
Common Shares to be purchased by any Underwriter whose funds shall not have been
received
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<PAGE> 13
by the Representatives by the First Closing Date or the Second Closing Date, as
the case may be, for the account of such Underwriter, but any such payment shall
not relieve such Underwriter from any of its obligations under this Agreement.
Delivery of the Common Shares. The Company shall deliver, or cause to
be delivered, to the Representatives for the accounts of the several
Underwriters certificates for the Firm Common Shares at the First Closing Date,
against the irrevocable release of a wire transfer of immediately available
funds for the amount of the purchase price therefor. The Company shall also
deliver, or cause to be delivered, to the Representatives for the accounts of
the several Underwriters, certificates for the Optional Common Shares the
Underwriters have agreed to purchase at the First Closing Date or the Second
Closing Date, as the case may be, against the irrevocable release of a wire
transfer of immediately available funds for the amount of the purchase price
therefor. The certificates for the Common Shares shall be in definitive form and
registered in such names and denominations as the Representatives shall have
requested at least two full business days prior to the First Closing Date (or
the Second Closing Date, as the case may be) and shall be made available for
inspection on the business day preceding the First Closing Date (or the Second
Closing Date, as the case may be) at a location in New York City as the
Representatives may designate. Time shall be of the essence, and delivery at the
time and place specified in this Agreement is a further condition to the
obligations of the Underwriters.
Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m.
on the second business day following the date the Common Shares are released by
the Underwriters for sale to the public, the Company shall delivery or cause to
be delivered copies of the Prospectus in such quantities and at such places as
the Representatives shall request.
SECTION 3. ADDITIONAL COVENANTS OF THE COMPANY.
A. COVENANTS OF THE COMPANY. The Company further covenants and agrees
with each Underwriter as follows:
(a) Representatives' Review of Proposed Amendments and
Supplements. During such period beginning on the date hereof and ending on the
later of the First Closing Date or such date, as in the opinion of counsel for
the Underwriters, the Prospectus is no longer required by law to be delivered in
connection with sales by an Underwriter or dealer (the "Prospectus Delivery
Period"), prior to amending or supplementing the Registration Statement
(including any registration statement filed under Rule 462(b) under the
Securities Act) or the Prospectus, the Company shall furnish to the
Representatives for review a copy of each such proposed amendment or supplement,
and the Company shall not file any such proposed amendment or supplement to
which the Representatives reasonably object.
(b) Securities Act Compliance. After the date of this
Agreement, the Company shall promptly advise the Representatives in writing (i)
of the receipt of any comments
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<PAGE> 14
of, or requests for additional or supplemental information from, the Commission,
(ii) of the time and date of any filing of any post-effective amendment to the
Registration Statement or any amendment or supplement to any preliminary
prospectus or the Prospectus, (iii) of the time and date that any post-effective
amendment to the Registration Statement becomes effective and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or of any order
preventing or suspending the use of any preliminary prospectus or the
Prospectus, or of any proceedings to remove, suspend from listing or quotation
the Common Stock from any securities exchange upon which Common Stock is listed
for trading or included or designated for quotation, or of the threatening or
initiation of any proceedings for any of such purposes. If the Commission shall
enter any such stop order at any time, the Company will use its best efforts to
obtain the lifting of such order at the earliest possible moment. Additionally,
the Company agrees that it shall comply with the provisions of Rules 424(b),
430A and 434, as applicable, under the Securities Act and will use its
reasonable efforts to confirm that any filings made by the Company under such
Rule 424(b) were received in a timely manner by the Commission.
(c) Amendments and Supplements to the Prospectus and Other
Securities Act Matters. If, during the Prospectus Delivery Period, any event
shall occur or condition exist as a result of which it is necessary to amend or
supplement the Prospectus in order to make the statements therein, in the light
of the circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if in the opinion of the Representatives or counsel for the
Underwriters it is otherwise necessary to amend or supplement the Prospectus to
comply with law, the Company agrees to promptly prepare (subject to Section
3(A)(a) hereof), file with the Commission and furnish at its own expense to the
Underwriters and to dealers, amendments or supplements to the Prospectus so that
the statements in the Prospectus as so amended or supplemented will not, in the
light of the circumstances when the Prospectus is delivered to a purchaser, be
misleading or so that the Prospectus, as amended or supplemented, will comply
with law.
(d) Copies of any Amendments and Supplements to the
Prospectus. The Company agrees to furnish the Representatives, without charge,
during the Prospectus Delivery Period, as many copies of the Prospectus and any
amendments and supplements thereto as the Representatives may request.
(e) Blue Sky Compliance. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register the
Common Shares for sale under (or obtain exemptions from the application of) the
state securities or blue sky laws or Canadian provincial securities laws of
those jurisdictions designated by the Representatives, shall comply with such
laws and shall continue such qualifications, registrations and exemptions in
effect so long as required for the distribution of the Common Shares. The
Company shall not be required to qualify as a foreign corporation or to take any
action that would subject it to general service of process in any such
jurisdiction where it is not presently qualified or where it would be subject to
taxation as a foreign corporation. The Company will advise the
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<PAGE> 15
Representatives promptly of the suspension of the qualification or registration
of (or any such exemption relating to) the Common Shares for offering, sale or
trading in any jurisdiction or any initiation or threat of any proceeding for
any such purpose, and in the event of the issuance of any order suspending such
qualification, registration or exemption, the Company shall use its best efforts
to obtain the withdrawal thereof at the earliest possible moment.
(f) Use of Proceeds. The Company shall apply the net proceeds
from the sale of the Common Shares sold by it in the manner described under the
caption "Use of Proceeds" in the Prospectus.
(g) Transfer Agent. The Company shall engage and maintain, at
its expense, a registrar and transfer agent for the Common Stock.
(h) Earnings Statement. As soon as practicable, the Company
will make generally available to its security holders and to the Representatives
an earnings statement (which need not be audited) covering the twelve-month
period ending [___] that satisfies the provisions of Section 11(a) of the
Securities Act.
(i) Periodic Reporting Obligations. During the Prospectus
Delivery Period the Company shall file, on a timely basis, with the Commission
and the Nasdaq National Market all reports and documents required to be filed
under the Exchange Act. Additionally, the Company shall file with the Commission
all reports on Form SR as may be required under Rule 463 under the Securities
Act.
(j) Agreement Not To Offer or Sell Additional Securities.
During the period of 180 days following the date of the Prospectus, the Company
will not, without the prior written consent of the Representatives (which
consent may be withheld at the discretion of the Representatives), directly or
indirectly, sell, offer, contract or grant any option to sell, pledge, transfer
or establish an open "put equivalent position" within the meaning of Rule
16a-1(h) under the Exchange Act, or otherwise dispose of or transfer, or
announce the offering of, or file any registration statement under the
Securities Act in respect of, any shares of Common Stock, options or warrants to
acquire shares of the Common Stock or securities exchangeable or exercisable for
or convertible into shares of Common Stock (other than as contemplated by this
Agreement with respect to the Common Shares); provided, however, that the
Company may issue shares of its Common Stock or options to purchase its Common
Stock, or Common Stock upon exercise of options, pursuant to any stock option,
stock bonus or other stock plan or arrangement described in the Prospectus, but
only if the holders of such shares, options, or shares issued upon exercise of
such options, agree in writing not to sell, offer, dispose of or otherwise
transfer any such shares or options during such 180 day period without the prior
written consent of the Representatives (which consent may be withheld at the
discretion of the Representatives).
(k) Future Reports to the Representatives. During the period
of five years hereafter the Company will furnish to the Representatives at 600
Montgomery Street, San
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<PAGE> 16
Francisco, CA 94111 Attention:[ ] and to Piper Jaffray Inc. at 222 South Ninth
Street, Minneapolis, Minnesota 55402, Attention: [_______]: (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report of
the Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, stockholders' equity and cash flows for
the year then ended and the opinion thereon of the Company's independent public
or certified public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Current Report on Form 8-K or other report filed by the
Company with the Commission, the NASD or any securities exchange; and (iii) as
soon as available, copies of any report or communication of the Company mailed
generally to holders of its capital stock.
The Representatives, on behalf of the several Underwriters, may, in
their discretion, waive in writing the performance by the Company of any one or
more of the foregoing covenants or extend the time for their performance.
SECTION 4. PAYMENT OF EXPENSES.
The Company agrees to pay all costs, fees and expenses incurred in
connection with the performance of its obligations hereunder and in connection
with the transactions contemplated hereby, including without limitation (i) all
expenses incident to the issuance and delivery of the Common Shares (including
all printing and engraving costs), (ii) all fees and expenses of the registrar
and transfer agent of the Common Stock, (iii) all necessary issue, transfer and
other stamp taxes in connection with the issuance and sale of the Common Shares
to the Underwriters, (iv) all fees and expenses of the Company's counsel,
independent public or certified pubic accountants and other advisors, (v) all
costs and expenses incurred in connection with the preparation, printing,
filing, shipping and distribution of the Registration Statement (including
financial statements, exhibits, schedules, consents and certificates of
experts), each preliminary prospectus and the Prospectus, and all amendments and
supplements thereto, and this Agreement, (vi) all filing fees, attorneys' fees
and expenses incurred by the Company or the Underwriters in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Common Shares for offer and sale under
the state securities or blue sky laws or the provincial securities laws of
Canada, and, if requested by the Representatives, preparing and printing a "Blue
Sky Survey" or memorandum, and any supplements thereto, advising the
Underwriters of such qualifications, registrations and exemptions, (vii) the
filing fees incident to, and the reasonable fees and expenses of counsel for the
Underwriters in connection with, the NASD's review and approval of the
Underwriters' participation in the offering and distribution of the Common
Shares, (viii) the fees and expenses associated with including the Common Shares
on the Nasdaq National Market, and (ix) all other fees, costs and expenses
referred to in Item 13 of Part II of the Registration Statement. Except as
provided in this Section 4, Section 6, Section 8 and Section 9 hereof, the
Underwriters shall pay their own expenses, including the fees and disbursements
of their counsel.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS.
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<PAGE> 17
The obligations of the several Underwriters to purchase and pay for the
Common Shares as provided herein on the First Closing Date and, with respect to
the Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company set
forth in Section 1 hereof as of the date hereof and as of the First Closing Date
as though then made and, with respect to the Optional Common Shares, as of the
Second Closing Date as though then made, to the timely performance by the
Company of its covenants and other obligations hereunder, and to each of the
following additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, the Representative
shall have received from Arthur Andersen, LLP, independent public or certified
public accountants for the Company, a letter dated the date hereof addressed to
the Underwriters, in form and substance satisfactory to the Representatives,
containing statements and information of the type ordinarily included in
accountant's "comfort letters" to underwriters, delivered according to Statement
of Auditing Standards No. 72 (or any successor bulletin), with respect to the
audited and unaudited financial statements and certain financial information
contained in the Registration Statement and the Prospectus (and the
Representatives shall have received an additional [___] conformed copies of such
accountants' letter for each of the several Underwriters).
(b) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD. For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the Optional
Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A under the Securities
Act) in the manner and within the time period required by Rule 424(b) under the
Securities Act; or the Company shall have filed a post-effective amendment to
the Registration Statement containing the information required by such Rule
430A, and such post-effective amendment shall have become effective; or, if the
Company elected to rely upon Rule 434 under the Securities Act and obtained the
consent of the Representatives thereto, the Company shall have filed a Term
Sheet with the Commission in the manner and within the time period required by
such Rule 424(b);
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement, or any
post-effective amendment to the Registration Statement, shall be in effect and
no proceedings for such purpose shall have been instituted or threatened by the
Commission; and
(iii) the NASD shall have raised no objection to the fairness
and reasonableness of the underwriting terms and arrangements.
(c) No Material Adverse Change or Ratings Agency Change. For the period
from and after the date of this Agreement and prior to the First Closing Date
and, with respect to the Optional Common Shares, the Second Closing Date:
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<PAGE> 18
(i) in the judgment of the Representatives there shall not
have occurred any Material Adverse Change; and
(ii) there shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading or of any
review for a possible change that does not indicate the direction of the
possible change, in the rating accorded any securities of the Company or any of
its subsidiaries by any "nationally recognized statistical rating organization"
as such term is defined for purposes of Rule 436(g)(2) under the Securities Act.
(d) Opinion of Counsel for the Company. On each of the First Closing
Date and the Second Closing Date the Representative shall have received the
favorable opinion of (i) Stradling, Yocca, Carlson & Rauth, counsel for the
Company, the form of which is attached as Exhibit A, (ii) __________________,
patent counsel for the Company, the form of which is attached as Exhibit D, and
(iii) ________________________, regulatory counsel for the Company, the form of
which is attached as Exhibit C, each dated as of such Closing Date (and the
Representative shall have received an additional [___] conformed copies of such
counsel's legal opinion for each of the several Underwriters).
(e) Opinion of Counsel for the Underwriters. On each of the First
Closing Date and the Second Closing Date the Representatives shall have received
the favorable opinion of Wilson Sonsini Goodrich & Rosati, counsel for the
Underwriters, dated as of such Closing Date, with respect to the matters set
forth in paragraphs (i), (vii) (with respect to subparagraph (i) only, (viii),
(ix), (x) (xi), (xii) and (xiii) (with respect to the captions "Description of
Capital Stock" and "Underwriting" under subparagraph (i) only) and the
next-to-last paragraph of Exhibit A (and the Representatives shall have received
an additional [___] conformed copies of such counsel's legal opinion for each of
the several Underwriters).
(f) Officers' Certificate. On each of the First Closing Date and the
Second Closing Date the Representatives shall have received a written
certificate executed by the Chairman of the Board, Chief Executive Officer or
President of the Company and the Chief Financial Officer or Chief Accounting
Officer of the Company, dated as of such Closing Date, to the effect set forth
in subsections (b)(ii) and (c)(ii) of this Section 5, and further to the effect
that:
(i) for the period from and after the date of this Agreement
and prior to such Closing Date, there has not occurred any Material Adverse
Change;
(ii) the representations, warranties and covenants of the
Company set forth in Section 1 of this Agreement are true and correct with the
same force and effect as though expressly made on and as of such Closing Date;
and
(iii) the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at or
prior to such Closing Date.
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<PAGE> 19
(g) Bring-down Comfort Letter. On each of the First Closing Date and
the Second Closing Date the Representatives shall have received from Arthur
Andersen, LLP, independent public or certified public accountants for the
Company, a letter dated such date, in form and substance satisfactory to the
Representatives, to the effect that they reaffirm the statements made in the
letter furnished by them pursuant to subsection (a) of this Section 5, except
that the specified date referred to therein for the carrying out of procedures
shall be no more than three business days prior to the First Closing Date or
Second Closing Date, as the case may be (and the Representatives shall have
received an additional [___] conformed copies of such accountants' letter for
each of the several Underwriters).
(h) Lock-Up Agreement from Certain Stockholders of the Company. On the
date hereof, the Company shall have furnished to the Representatives an
agreement in the form of Exhibit D hereto from each director, officer, and each
beneficial owner of Common Stock (as defined and determined according to Rule
13A-3 under the Exchange Act, except that a one hundred eighty (180) day period
shall be used rather than the sixty (60) day period set forth therein), and such
agreement shall be in full force and effect on each of the First Closing Date
and the Second Closing Date.]
(i) Additional Documents. On or before each of the First
Closing Date and the Second Closing Date, the Representatives and counsel for
the Underwriters shall have received such information, documents and opinions as
they may reasonably require for the purposes of enabling them to pass upon the
issuance and sale of the Common Shares as contemplated herein, or in order to
evidence the accuracy of any of the representations and warranties, or the
satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Optional Common Shares, at any time prior
to the Second Closing Date, which termination shall be without liability on the
part of any party to any other party, except that Section 4, Section 6, Section
8 and Section 9 shall at all times be effective and shall survive such
termination.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES.
If this Agreement is terminated by the Representatives pursuant to
Section 5, Section 7, Section 10 or Section 11, or if the sale to the
Underwriters of the Common Shares on the First Closing Date is not consummated
because of any refusal, inability or failure on the part of the Company to
perform any agreement herein or to comply with any provision hereof, the Company
agrees to reimburse the Representatives and the other Underwriters (or such
Underwriters as have terminated this Agreement with respect to themselves),
severally, upon demand for all out-of-pocket expenses that shall have been
reasonably incurred by the Representatives and the Underwriters in connection
with the proposed purchase and the offering and sale of the Common Shares,
including but not limited to fees and disbursements of counsel, printing
expenses, travel
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<PAGE> 20
expenses, postage, facsimile and telephone charges.
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT.
This Agreement shall not become effective until the later of (i) the
execution of this Agreement by the parties hereto and (ii) notification by the
Commission to the Company and the Representatives of the effectiveness of the
Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated by any
party by notice to each of the other parties hereto, and any such termination
shall be without liability on the part of (a) the Company to any Underwriter,
except that the Company shall be obligated to reimburse the expenses of the
Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b) of
any Underwriter to the Company, or (c) of any party hereto to any other party
except that the provisions of Section 8 and Section 9 shall at all times be
effective and shall survive such termination.
SECTION 8. INDEMNIFICATION.
(a) Indemnification of the Underwriters. The Company agrees to
indemnify and hold harmless each Underwriter, its officers and employees, and
each person, if any, who controls any Underwriter within the meaning of the
Securities Act and the Exchange Act against any loss, claim, damage, liability
or expense, as incurred, to which such Underwriter or such controlling person
may become subject, under the Securities Act, the Exchange Act or other federal
or state statutory law or regulation, or at common law or otherwise (including
in settlement of any litigation, if such settlement is effected with the written
consent of the Company), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of or
is based (i) upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, or any amendment thereto,
including any information deemed to be a part thereof pursuant to Rule 430A or
Rule 434 under the Securities Act, or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make the
statements therein not misleading; or (ii) upon any untrue statement or alleged
untrue statement of a material fact contained in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the omission or
alleged omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; or (iii) in whole or in part upon any inaccuracy in the
representations and warranties of the Company contained herein; or (iv) in whole
or in part upon any failure of the Company to perform its obligations hereunder
or under law; or (v) any act or failure to act or any alleged act or failure to
act by any Underwriter in connection with, or relating in any manner to, the
Common Stock or the offering contemplated hereby, and which is included as part
of or referred to in any loss, claim, damage, liability or action arising out of
or based upon any matter covered by clause (i) or (ii) above, provided that the
Company shall not be liable under this clause (v) to the extent that a court of
competent jurisdiction shall have determined by a final judgment that such loss,
claim, damage, liability or
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<PAGE> 21
action resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such Underwriter through its bad faith or willful
misconduct; and to reimburse each Underwriter and each such controlling person
for any and all expenses (including the fees and disbursements of counsel chosen
by Montgomery Securities) as such expenses are reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that the foregoing indemnity
agreement shall not apply to any loss, claim, damage, liability or expense to
the extent, but only to the extent, arising out of or based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by the Representatives expressly for use in the Registration Statement,
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto); and provided, further, that with respect to any preliminary
prospectus, the foregoing indemnity agreement shall not inure to the benefit of
any Underwriter from whom the person asserting any loss, claim, damage,
liability or expense purchased Common Shares, or any person controlling such
Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Common Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense. The indemnity agreement
set forth in this Section 8(a) shall be in addition to any liabilities that the
Company may otherwise have.
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company, or any such
director, or controlling person may become subject, under the Securities Act,
the Exchange Act, or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar as
such loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in reliance
upon and in conformity with written information furnished to the Company by the
Representatives expressly for use therein; and to reimburse the Company, or any
such director, officer, or controlling person for any legal and other expense
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<PAGE> 22
reasonably incurred by the Company, or any such director, officer, or
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action. The Company hereby acknowledges that the only information that the
Underwriters have furnished to the Company expressly for use in the Registration
Statement, any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto) are the statements set forth (A) as the last [two]
paragraphs on the inside front cover page of the Prospectus concerning
stabilization [and passive market making] by the Underwriters and (B) in the
table in the first paragraph and as the second paragraph [second and [_]
paragraphs] under the caption "Underwriting" in the Prospectus; and the
Underwriters confirm that such statements are correct. The indemnity agreement
set forth in this Section 8(b) shall be in addition to any liabilities that each
Underwriter may otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 8, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 8 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with local counsel), approved by the
indemnifying party (Montgomery Securities in the case of Section 8(b) and
Section 9), representing the indemnified parties who are parties to such action)
or (ii) the indemnifying party shall not have employed counsel satisfactory to
the indemnified party to represent the
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<PAGE> 23
indemnified party within a reasonable time after notice of commencement of the
action, in each of which cases the fees and expenses of counsel shall be at the
expense of the indemnifying party.
(d) Settlements. The indemnifying party under this Section 8 shall not
be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
against any loss, claim, damage, liability or expense by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by Section
8(c) hereof, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than 30 days after receipt by such indemnifying
party of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to the
date of such settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement, compromise or consent
to the entry of judgment in any pending or threatened action, suit or proceeding
in respect of which any indemnified party is or could have been a party and
indemnity was or could have been sought hereunder by such indemnified party,
unless such settlement, compromise or consent includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such action, suit or proceeding.
SECTION 9. CONTRIBUTION.
If the indemnification provided for in Section 8 is for any reason held
to be unavailable to or otherwise insufficient to hold harmless an indemnified
party in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then each indemnifying party shall contribute to the
aggregate amount paid or payable by such indemnified party, as incurred, as a
result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company, on the one hand, and the Underwriters, on the
other hand, from the offering of the Common Shares pursuant to this Agreement or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company, on the one hand, and the Underwriters, on the other hand, in
connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company, on the one hand,
and the Underwriters, on the other hand, in connection with the offering of the
Common Shares pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the Common
Shares pursuant to this Agreement (before deducting expenses) received by the
Company, and the total underwriting discount received by the Underwriters, in
each case as set
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<PAGE> 24
forth on the front cover page of the Prospectus (or, if Rule 434 under the
Securities Act is used, the corresponding location on the Term Sheet) bear to
the aggregate initial public offering price of the Common Shares as set forth on
such cover. The relative fault of the Company, on the one hand, and the
Underwriters, on the other hand, shall be determined by reference to, among
other things, whether any such untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact or any such
inaccurate or alleged inaccurate representation or warranty relates to
information supplied by the Company, on the one hand, or the Underwriters, on
the other hand, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 8(c), any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
Section 8(c) with respect to notice of commencement of any action shall apply if
a claim for contribution is to be made under this Section 9; provided, however,
that no additional notice shall be required with respect to any action for which
notice has been given under Section 8(c) for purposes of indemnification.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall
be required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
Schedule A. For purposes of this Section 9, each officer and employee of an
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act shall have the same rights to contribution as the Company.
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITER.
If, on the First Closing Date or the Second Closing Date, as the case
may be, any one or more of the several Underwriters shall fail or refuse to
purchase Common Shares that it or they
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<PAGE> 25
have agreed to purchase hereunder on such date, and the aggregate number of
Common Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase does not exceed 10% of the aggregate number of the
Common Shares to be purchased on such date, the other Underwriters shall be
obligated, severally, in the proportions that the number of Firm Common Shares
set forth opposite their respective names on Schedule A bears to the aggregate
number of Firm Common Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as may be specified by
the Representatives with the consent of the non-defaulting Underwriters, to
purchase the Common Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase on such date. If, on the First Closing
Date or the Second Closing Date, as the case may be, any one or more of the
Underwriters shall fail or refuse to purchase Common Shares and the aggregate
number of Common Shares with respect to which such default occurs exceeds 10% of
the aggregate number of Common Shares to be purchased on such date, and
arrangements satisfactory to the Representatives and the Company for the
purchase of such Common Shares are not made within 48 hours after such default,
this Agreement shall terminate without liability of any party to any other party
except that the provisions of Section 4, Section 6, Section 8 and Section 9
shall at all times be effective and shall survive such termination. In any such
case either the Representatives or the Company shall have the right to postpone
the First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
SECTION 11. TERMINATION OF THIS AGREEMENT.
Prior to the First Closing Date this Agreement maybe terminated by the
Representatives by notice given to the Company if at any time (i) trading or
quotation in any of the Company's securities shall have been suspended or
limited by the Commission or by the Nasdaq National Market, or trading in
securities generally on either the Nasdaq National Market or the New York Stock
Exchange shall have been suspended or limited, or minimum or maximum prices
shall have been generally established on any of such stock exchanges by the
Commission or the NASD; (ii) a general banking moratorium shall have been
declared by any of federal, New York [, Delaware] or California authorities;
(iii) there shall have occurred any outbreak or escalation of national or
international hostilities or any crisis or calamity, or any change in the United
States or international financial markets, or any substantial change or
development involving a prospective substantial change in United States' or
international political, financial or economic conditions, as in the judgment of
the Representatives is material and adverse and makes it impracticable to market
the Common Shares in the manner and on the terms described in the Prospectus or
to enforce contracts for the sale of securities; (iv) in the judgment of the
Representatives there shall
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<PAGE> 26
have occurred any Material Adverse Change; or (v) the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as in the judgment of the Representatives may interfere
materially with the conduct of the business and operations of the Company
regardless of whether or not such loss shall have been insured. Any termination
pursuant to this Section 11 shall be without liability on the part of (a) the
Company to any Underwriter, except that the Company shall be obligated to
reimburse the expenses of the Representatives and the Underwriters pursuant to
Sections 4 and 6 hereof, (b) any Underwriter to the Company, or (c) of any party
hereto to any other party except that the provisions of Section 8 and Section 9
shall at all times be effective and shall survive such termination.
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY.
The respective indemnities, agreements, representations, warranties and
other statements of the Company, of its officers and of the several Underwriters
set forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Common Shares sold hereunder and any termination of this Agreement.
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<PAGE> 27
SECTION 13. NOTICES.
All communications hereunder shall be in writing and shall be mailed,
hand delivered or telecopied and confirmed to the parties hereto as follows:
If to the Representatives:
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Facsimile: 415-249-5558
Attention: Richard A. Smith
with a copy to:
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
Piper Jaffray Inc.
222 South Ninth Street
Minneapolis, Minnesota 55402
Facsimile: (612) 342-6979
Attention: ________________
If to the Company:
Computer Motion, Inc.
130-B Cremona Drive
Coleta, California 93117
Facsimile: (805) 685-9277
Attention: Eugene Wang
With a copy to:
Stradling, Yocca, Carlson & Rauth
660 Newport Center Drive
Newport Beach, California 92660
Facsimile: (714) 725-4100
Attention: Lawrence B. Cohn, Esq.
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
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<PAGE> 28
SECTION 14. SUCCESSORS.
This Agreement will inure to the benefit of and be binding upon the
parties hereto, including any substitute Underwriters pursuant to Section 10
hereof, and to the benefit of the employees, officers and directors and
controlling persons referred to in Section 8 and Section 9, and in each case
their respective successors, and no other person will have any right or
obligation hereunder. The term "successors" shall not include any purchaser of
the Common Shares as such from any of the Underwriters merely by reason of such
purchase.
SECTION 15. PARTIAL UNENFORCEABILITY.
The invalidity or unenforceability of any Section, paragraph or
provision of this Agreement shall not affect the validity or enforceability of
any other Section, paragraph or provision hereof. If any Section, paragraph or
provision of this Agreement is for any reason determined to be invalid or
unenforceable, there shall be deemed to be made such minor changes (and only
such minor changes) as are necessary to make it valid and enforceable.
SECTION 16. GOVERNING LAW.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO AGREEMENTS MADE AND
TO BE PERFORMED IN SUCH STATE.
SECTION 17. GENERAL PROVISIONS.
This Agreement constitutes the entire agreement of the parties to this
Agreement and supersedes all prior written or oral and all contemporaneous oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may be executed in two or more counterparts, each one of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. This Agreement may not be amended or
modified unless in writing by all of the parties hereto, and no condition herein
(express or implied) may be waived unless waived in writing by each party whom
the condition is meant to benefit. The Table of Contents and the Section
headings herein are for the convenience of the parties only and shall not affect
the construction or interpretation of this Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the
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<PAGE> 29
risks in light of the ability of the parties to investigate the Company, its
affairs and its business in order to assure that adequate disclosure has been
made in the Registration Statement, any preliminary prospectus and the
Prospectus (and any amendments and supplements thereto), as required by the
Securities Act and the Exchange Act.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
COMPUTER MOTION, INC.
By:
---------------------------------
President and Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Representatives in San Francisco, California as of the date first above
written.
MONTGOMERY SECURITIES
PIPER JAFFRAY INC.
Acting as Representatives of the several Underwriters named in the attached
Schedule A.
By: MONTGOMERY SECURITIES
By:
-----------------------
Name: Richard A. Smith
Authorized Signatory
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<PAGE> 30
SCHEDULE A
NUMBER OF
FIRM COMMON
UNDERWRITERS SHARES
TO BE PURCHASED
Montgomery Securities [---]
Piper Jaffray Inc. [---]
[---] [---]
[---] [---]
[---] [---]
Total [---]
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<PAGE> 31
EXHIBIT A
The final opinion in draft form should be attached as Exhibit A at the time this
Agreement is executed.
Opinion of counsel for the Company to be delivered pursuant to Section
5(e) of the Underwriting Agreement.
References to the Prospectus in this Exhibit A include any supplements
thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
[__________].
(ii) The Company has corporate power and authority to own,
lease and operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Underwriting
Agreement.
(iii) The Company is duly qualified as a foreign corporation
to transact business and is in good standing in [the State of California and] in
each other jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of business,
except for such jurisdictions [(other than the State of California)] where the
failure to so qualify or to be in good standing would not, individually or in
the aggregate, result in a Material Adverse Change.
(iv) Each significant subsidiary (as defined in Rule 405
under the Securities Act) has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus and, to
the best knowledge of such counsel, is duly qualified as a foreign corporation
to transact business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except for such jurisdictions where the
failure to so qualify or to be in good standing would not, individually or in
the aggregate, result in a Material Adverse Change.
(v) All of the issued and outstanding capital stock of each
such significant subsidiary has been duly authorized and validly issued, is
fully paid and non-assessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge, lien,
encumbrance or, to the best knowledge of such counsel, any pending or threatened
claim.
(vi) The authorized, issued and outstanding capital stock of
the Company (including
<PAGE> 32
the Common Stock) conform to the descriptions thereof set forth in the
Prospectus. All of the outstanding shares of Common Stock have been duly
authorized and validly issued, are fully paid and nonassessable and, to the best
of such counsel's knowledge, have been issued in compliance with the
registration and qualification requirements of federal and state securities
laws. The form of certificate used to evidence the Common Stock is in due and
proper form and complies with all applicable requirements of the charter and
by-laws of the Company and the General Corporation Law of the State of
[Delaware] [California]. The description of the Company's stock option, stock
bonus and other stock plans or arrangements, and the options or other rights
granted and exercised thereunder, set forth in the Prospectus accurately and
fairly presents the information required to be shown with respect to such plans,
arrangements, options and rights.
(vii) No stockholder of the Company or any other person has any
preemptive right, right of first refusal or other similar right to subscribe for
or purchase securities of the Company arising (i) by operation of the charter or
by-laws of the Company or the General Corporation Law of the State of [Delaware]
[California] or (ii) to the best knowledge of such counsel, otherwise.
(viii) The Underwriting Agreement has been duly authorized, executed
and delivered by, and is a valid and binding agreement of, the Company,
enforceable in accordance with its terms, except as rights to indemnification
thereunder may be limited by applicable law and except as the enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles.
(ix) The Common Shares to be purchased by the Underwriters from the
Company have been duly authorized for issuance and sale pursuant to the
Underwriting Agreement and, when issued and delivered by the Company pursuant to
the Underwriting Agreement against payment of the consideration set forth
therein, will be validly issued, fully paid and nonassessable.
(x) Each of the Registration Statement and the Rule 462(b) Registration
Statement, if any, has been declared effective by the Commission under the
Securities Act. To the best knowledge of such counsel, no stop order suspending
the effectiveness of either of the Registration Statement or the Rule 462(b)
Registration Statement, if any, has been issued under the Securities Act and no
proceedings for such purpose have been instituted or are pending or are
contemplated or threatened by the Commission. Any required filing of the
Prospectus and any supplement thereto pursuant to Rule 424(b) under the
Securities Act has been made in the manner and within the time period required
by such Rule 424(b).
(xi) Registration Statement, including any Rule 462(b) Registration
Statement, the Prospectus, and each amendment or supplement to the Registration
Statement and the Prospectus [including any document incorporated by reference
therein], as of their respective effective or issue dates (other than the
financial statements and supporting schedules included therein or in
A--2
<PAGE> 33
exhibits to or excluded from the Registration Statement, as to which no opinion
need be rendered) comply as to form in all material respects with the applicable
requirements of the Securities Act.
(xii) The Common Shares have been approved for listing on the Nasdaq
National Market.
(xiii) The statements (i) in the Prospectus under the captions "Risk
Factors--[Government Regulation]"; "Risk Factors--[Intellectual Property]";
"Risk Factors--Limitations on Third Party Reimbursement"; "Risk Factors--Shares
Eligible for Future Sale"; "Risk Factors -- [____________]"; "Description of
Capital Stock"; "Management's Discussion and Analysis and Results of
Operations--Liquidity"; "Business--Litigation"; "Business--Intellectual
Property"; "Certain Relationships and Related Transactions"; "Shares Eligible
for Future Sale"; "Certain United States Income Tax Considerations" and
"Underwriting" and (ii) in Item 14 and Item 15 of the Registration Statement,
insofar as such statements constitute matters of law, summaries of legal
matters, the Company's charter or by-law provisions, documents or legal
proceedings, or legal conclusions, has been reviewed by such counsel and fairly
present and summarize, in all material respects, the matters referred to
therein.
(xiv) To the best knowledge of such counsel, there are no legal or
governmental actions, suits or proceedings pending or threatened which are
required to be disclosed in the Registration Statement, other than those
disclosed therein.
(xv) To the best knowledge of such counsel, there are no Existing
Instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed as exhibits thereto; and the descriptions thereof
and references thereto are correct in all material respects.
(xvi) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the Company's execution, delivery and performance of the
Underwriting Agreement and consummation of the transactions contemplated thereby
and by the Prospectus, except as required under the Securities Act, applicable
state securities or blue sky laws and from the NASD.
(xvii) The execution and delivery of the Underwriting Agreement by the
Company and the performance by the Company of its obligations thereunder (other
than performance by the Company of its obligations under the indemnification
section of the Underwriting Agreement, as to which no opinion need be rendered)
(i) have been duly authorized by all necessary corporate action on the part of
the Company; (ii) will not result in any violation of the provisions of the
A--3
<PAGE> 34
charter or by-laws of the Company or any subsidiary; (iii) will not constitute a
breach of, or Default or a Debt Repayment Triggering Event under, or result in
the creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or any of its subsidiaries pursuant to (A)
[_____________] with [______________], as lender, or (B) to the best knowledge
of such counsel, any other material Existing Instrument; or (iv) to the best
knowledge of such counsel, will not result in any violation of any law,
administrative regulation or administrative or court decree applicable to the
Company or any subsidiary.
(xviii) The Company is not, and after receipt of payment for the Common
Shares will not be, an "investment company" within the meaning of Investment
Company Act.
(xix) Except as disclosed in the Prospectus under the caption "Shares
Eligible for Future Sale", to the best knowledge of such counsel, there are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by the Underwriting Agreement, except for such rights
as have been duly waived.
(xx) To the best knowledge of such counsel, neither the Company nor
any subsidiary is in violation of its charter or by-laws or any law,
administrative regulation or administrative or court decree applicable to the
Company or any subsidiary or is in Default in the performance or observance of
any obligation, agreement, covenant or condition contained in any material
Existing Instrument, except in each such case for such violations or Defaults as
would not, individually or in the aggregate, result in a Material Adverse
Change.
In addition, such counsel shall state that they have participated in
conferences with officers and other Representatives of the Company,
Representatives of the independent public or certified public accountants for
the Company and with Representatives of the Underwriters at which the contents
of the Registration Statement and the Prospectus, and any supplements or
amendments thereto, and related matters were discussed and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus (other than as specified above), and
any supplements or amendments thereto, on the basis of the foregoing, nothing
has come to their attention which would lead them to believe that either the
Registration Statement or any amendments thereto, at the time the Registration
Statement or such amendments became effective, contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date or at the First Closing Date or the Second Closing
Date, as the case may be, contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements
therein, in the light of the
A--4
<PAGE> 35
circumstances under which they were made, not misleading (it being understood
that such counsel need express no belief as to the financial statements or
schedules or other financial or statistical data derived therefrom, included [or
incorporated by reference] in the Registration Statement or the Prospectus or
any amendments or supplements thereto).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Delaware, the General Corporation Law of the
State of California or the federal law of the United States, to the extent they
deem proper and specified in such opinion, upon the opinion (which shall be
dated the First Closing Date or the Second Closing Date, as the case may be,
shall be satisfactory in form and substance to the Underwriters, shall expressly
state that the Underwriters may rely on such opinion as if it were addressed to
them and shall be furnished to the Representatives) of other counsel of good
standing whom they believe to be reliable and who are satisfactory to counsel
for the Underwriters; provided, however, that such counsel shall further state
that they believe that they and the Underwriters are justified in relying upon
such opinion of other counsel, and (B) as to matters of fact, to the extent they
deem proper, on certificates of responsible officers of the Company and public
officials.
A--5
<PAGE> 36
EXHIBIT B
The final opinion in draft form should be attached as Exhibit B at the time this
Agreement is executed.
Opinion of counsel for the Company to be delivered pursuant to Section
5(e) of the Underwriting Agreement.
References to the Prospectus in this Exhibit B include any supplements
thereto at the Closing Date.
(i) such counsel represents the Company in certain matters
relating to intellectual property, including patents, trade secrets and certain
trademark matters, related to the Company's products under development as
described in the Prospectus;
(ii) such counsel is familiar with the foregoing technology
and products as used by the Company in its business and the manner of its use
and has read the portions of the Registration Statement and the Prospectus
entitled "Risk Factors -- Dependence on Patents and Proprietary Technology" and
"Business -- Patents and Proprietary Technology" (collectively, the
"Intellectual Property Portion");
(iii) the Intellectual Property Portion contains accurate
descriptions of the patent applications filed in the United States and outside
the United States related to the foregoing technology and products (the "Patent
Applications") and issued and allowed patents related to the foregoing
technology and products (the "Patents") and including those patent applications
licensed to the Company (the "Licensed Applications") and the patents licensed
to the Company (the "Licensed Patents"), (the Patent Applications and the
Licensed Applications are referred to collectively herein as the "Company
Applications," and the Patents and the Licensed Patents are referred to
collectively herein as the "Company Patents") each of which Company
Applications, Company Patents shall be listed on exhibits to such opinion, and
fairly summarizes the legal matters, documents and proceedings relating thereto;
(iv) based upon a review of the third party rights made known
to counsel and discussions with scientific personnel of the Company, such
counsel is not aware of any valid United States or foreign patent, that is or
would be infringed by the activities of the Company in the manufacture, use or
sale of any presently proposed product, the technologies employed by the Company
or the method of their use in any presently proposed product, each as described
in the
<PAGE> 37
Prospectus and as such are related to the foregoing technology and products;
(v) such counsel has reviewed the Company Applications, which
Company Applications are described in the Intellectual Property Portion, and in
the opinion of such counsel the Company Applications have been properly prepared
and filed, and are being diligently pursued by the Company, and the inventions
described in the Company Applications are owned by, assigned or licensed to the
Company;
(vi) to such counsel's knowledge, no other entity or
individual has any right or claim in any of the inventions, the Company Patents,
the Company Applications, or any patent to be issued therefrom, and in such
counsel's opinion each of the Company Applications discloses patentable subject
matter;
(vii) such counsel is aware of no pending or threatened claim,
suit, judicial or governmental proceedings relating to the Company Patents or
the Company Applications or the subject matter therein, based upon review of the
Company Patents and the Company Applications, such counsel is not aware of any
rights of third parties to any of the inventions described in the Company
Patents or the Company Applications which could reasonably be expected to
materially affect the ability of the Company to conduct its business as
described in the Prospectus, including the commercialization of its products
currently under development; and
(viii) such counsel has no reason to believe that the
information contained in the Intellectual Property Portion of the Registration
Statement or the Prospectus at the time it became effective contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not misleading or
that, at the Closing Date, the information contained in the Intellectual
Property Portion of the Prospectus or any amendment or supplement to the
Intellectual Property Portion of the Prospectus contains any untrue statement of
a material fact or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
B--2
<PAGE> 38
EXHIBIT C
The final opinion in draft form should be attached as Exhibit C at the time this
Agreement is executed.
Opinion of counsel for the Company to be delivered pursuant to Section
5(e) of the Underwriting Agreement.
References to the Prospectus in this Exhibit C include any supplements
thereto at the Closing Date.
(i) The statements under the captions "Risk Factors--Government
Regulation," "Risk Factors--Limitations on Third Party Reimbursement,"
"Business--Third Party Reimbursement," "Business--Government Regulation,"
"Business--Products" and "Business--New Product Development" (collectively, the
"Regulatory Portion") in the Registration Statement and the Prospectus which
constitutes a part thereof (the "Prospectus") and any amendment or supplement
thereto, to the extent that they reflect matters of law, summaries of law or
regulations, are correct in all material respects, subject to the qualifications
set forth therein.
(ii) Subject to the conditions and limitations expressed in this
opinion letter and in the Prospectus, nothing has come to the attention of such
counsel that would lead such counsel to believe that the Regulatory Portion of
the Registration Statement, at the time it became effective, contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading or that,
on the closing date of the public offering, the information contained in the
Regulatory Portion of the Prospectus or any amendment or supplement to the
Prospectus contained any untrue statement of a material fact or omitted to state
a material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
Terms used but not defined herein shall have the meaning set forth in
the Underwriting Agreement.
We assume no obligations to advise you of any changes in the foregoing
subsequent to the delivery of this opinion. This opinion has been prepared
solely for your use in connection with the subject transaction that is the one
represented by the Registration Statement and the Prospectus. This opinion may
not be used for any other purpose, quoted or otherwise referred to
<PAGE> 39
by any person without the written consent of this law firm.
C--2
<PAGE> 40
EXHIBIT D
LOCK-UP AGREEMENT
May __, 1997
MONTGOMERY SECURITIES
PIPER JAFFRAY INC.
c/o Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Re: Computer Motion, Inc.
Ladies and Gentlemen:
The undersigned, is an owner of record or beneficially of certain
shares of Common Stock ("Common Stock") of Computer Motion, Inc., a Delaware
corporation (the "Company") or securities convertible into or exchangeable or
exercisable for the Company's Common Stock. The Company proposes to carry out a
public offering of the Company's Common Stock (the "Offering") pursuant to a
Registration Statement to be filed under the Securities Act of 1933, as amended
(the "Registration Statement") for which you will act as underwriters. The
undersigned recognizes that the Offering will be of benefit to the undersigned
and will benefit the Company by, among other things, raising additional capital
for its operations. The undersigned acknowledges that you are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering (the "Underwriting Agreement").
In consideration of the foregoing, the undersigned hereby agrees that
the undersigned will not, without the prior written consent of Montgomery
Securities (which consent may be withheld in its sole discretion), directly or
indirectly, sell, offer, contract, grant any option to sell or purchase, make
any short sale (including without limitation any "short against the box"),
pledge, transfer, establish an open "put equivalent position" within the meaning
of
<PAGE> 41
Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended, or
otherwise dispose of any shares of the Company's Common Stock, options or
warrants to acquire shares of the Company's Common Stock, or securities
exchangeable or exercisable for or convertible into shares of the Company's
Common Stock currently or hereafter owned either of record or beneficially (as
defined in Rule 13d-3 under Securities Exchange Act of 1934, as amended) by the
undersigned, or publicly announce the undersigned's intention to do any of the
foregoing, for a period commencing on the date hereof and continuing to a date
180 days after the date of the Prospectus (as such term is defined in the
Underwriting Agreement). Notwithstanding the foregoing, the undersigned may sell
or otherwise transfer shares of the Company's Common Stock (i) pursuant to the
Underwriting Agreement, (ii) as a bona fide gift or gifts, provided that the
undersigned provides prior written notice of such gift or gifts to you and the
donee or donees thereof agree to be bound by the restrictions set forth herein
or (iii) with the prior written consent of Montgomery Securities. The
undersigned also agrees and consents to the entry of stop transfer instructions
with the Company's transfer agent and registrar against the transfer of any of
the Company's Common Stock or securities convertible into or exchangeable or
exercisable for the Company's Common Stock held by the undersigned except in
compliance with the foregoing restrictions.
The undersigned understands that this agreement is irrevocable and
shall be binding on the undersigned and the respective successors, heirs,
personal representatives and assigns of the undersigned.
Very truly yours,
----------------------------------------------
Signature
----------------------------------------------
Please Type or Print Name
----------------------------------------------
Please Type or Print Title, if applicable
----------------------------------------------
Additional Signature(s), if stock jointly held
D--2
<PAGE> 1
EXHIBIT 4.1
NUMBER SHARES
CM
COMPUTER MOTION
COMMON STOCK THE LEADER IN MEDICAL ROBOTICS COMMON STOCK
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP 205253 10 7
This Certifies that
Is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK,
$.001 PAR VALUE PER SHARE, OF
- -------------------------- COMPUTER MOTION, INC. ----------------------------
transferable on the books of the Corporation in person or by duly authorized
attorney on surrender of this certificate properly endorsed. This certificate
shall not be valid until countersigned and registered by the Transfer Agent and
Registrar.
WITNESS the facsimile seal of the Corporation and the signatures of its
duly authorized officers.
Dated:
COMPUTER MOTION, INC.
CORPORATE SEAL 1997
DELAWARE
[SIG] [SIG]
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED,
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
The Corporation shall furnish without charge to each stockholder who
so requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ..............Custodian...............
TEN ENT - as tenants by the entireties (Cust.) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act...................................
in common (State)
UNIF TRF MIN ACT - ...........Custodian (until age......)
(Cust.)
............., under Uniform Transfers
(Minor)
to Minors Act.........................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
______________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ____________________________
X ______________________________________
X ______________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
NOTICE: WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By_____________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
- -----------------------------------------------------------
AMERICAN BANK NOTE COMPANY JULY 12, 1997 fm
3504 ATLANTIC AVENUE
SUITE 12 051711bk
LONG BEACH, CA 90807
(562) 989-2333 Proof [SIG] NEW
(FAX) (562) 426-7450 -----------
- -----------------------------------------------------------
<PAGE> 1
EXHIBIT 5.1
Computer Motion, Inc.
130-B Cremona Drive
Goleta, California 93117
Re: Registration Statement on Form S-1;
Registration No. 333-29505
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1, Registration
No. 333-29505, filed by Computer Motion, Inc., a Delaware corporation (the
"Company"), with the Securities and Exchange Commission on June 18, 1997 (as
amended by Amendment Nos. 1 and 2 thereto filed on July 24, 1997 and August 6,
1997, respectively, as such may be amended or supplemented, the "Registration
Statement"), in connection with the registration under the Securities Act of
1933, as amended, of 2,875,000 shares of common stock, $.001 par value (the
"Shares"). The Shares, which include up to 375,000 shares of common stock
issuable pursuant to an over-allotment option granted to the underwriters, are
to be sold to the underwriters as described in such Registration Statement for
the sale to the public or issued to the Representatives of the underwriters.
As your counsel in connection with this transaction, we have examined
the proceedings taken and are familiar with the proceedings proposed to be
taken by you in connection with the sale and issuance of the Shares.
Based on the foregoing, it is our opinion that, upon conclusion of the
proceedings being taken or contemplated by us, as your counsel, to be taken
prior to the issuance of the Shares and upon completion of the proceedings
taken in order to permit such transactions to be carried out in accordance with
the securities laws of various states where required, the Shares, when issued
and sold in the manner described in the Registration Statement will be legally
issued, fully paid and nonassessable.
<PAGE> 2
August 5, 1997
Page Two
We consent to the use of the opinion as an exhibit to the Registration
Statement and to the use of our name under the caption "Legal Matters" in the
Prospectus which is a part of the Registration Statement, including the
Prospectus constituting a part thereof and any amendment thereto.
Very truly yours,
STRADLING, YOCCA, CARLSON & RAUTH
/s/ Stradling, Yocca, Carlson & Rauth
<PAGE> 1
Certain portions of this exhibit have been omitted based upon a request for
confidential treatment. Omitted portions have been separately filed with the
Commission.
EXHIBIT 10.6
DEVELOPMENT AND SUPPLY AGREEMENT dated as of this
21st day of August 1996, by and between THE STRYKER ENDOSCOPY DIVISION of
Stryker Corporation, a Michigan corporation ("Stryker"), and COMPUTER MOTION
INCORPORATED, a California corporation ("CMI").
WITNESSETH:
WHEREAS, CMI has designed, engineered and developed and is the owner of
all right, title and interest in and to the intellectual and commercial rights
relating to a voice activated system for controlling surgical equipment that
incorporates (a) know-how, drawings, sketches, configurations, models,
prototypes, designs, schematics, layouts, inventions, processes, machines,
ideas, concepts and other information developed by CMI used in the design,
development, modification, improvement and manufacture of such system (the "CMI
Technology") and (b) patents controlled by CMI or patent applications filed by
CMI with respect to the CMI Technology and any reissues, reexaminations,
continuations or continuations-in-part thereof (the "CMI Patent Rights");
WHEREAS, Stryker believes that the System (as that term is defined in
Section I hereof) is complementary to its existing business and desires that CMI
and Stryker engage in a joint development project (the "Development Project") to
adapt the System for use in conjunction with the medical products manufactured
and/or marketed by Stryker that are listed on Schedule A hereto (the "Stryker
Products") and CMI has agreed to undertake its portion of the development
program, all upon the terms and subject to the conditions hereinafter set forth;
and WHEREAS, Stryker and CMI have agreed that, if Stryker determines to market
the System in conjunction with Stryker Products, CMI shall manufacture and
supply the System to Stryker and Stryker shall purchase the System from CMI for
resale in conjunction with the Stryker Products, all upon the terms and subject
to the conditions hereinafter set forth;
NOW, THEREFORE, in reliance upon the representations, warranties and
agreements herein contained and other valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. The System. As used in this Agreement, the term "System" shall mean CD4I's
"Hermes Surgical Equipment Control System," as more fully described on Schedule
B attached hereto, and modifications and improvements thereof hereafter
developed by CMI or in which CMI has any rights.
2. Development Project. CMI agrees to diligently conduct research and
development with a view toward completing the System development and engineering
work to be performed by it as more fully described on Schedule C hereto (the
"CMI Tasks"). Stryker agrees to fund [*] of the cost of the CD4I Tasks, up to a
maximum expenditure therefor by Stryker of
<PAGE> 2
[*], but subject, unless Stryker agrees otherwise in writing, to the maximum
amount budgeted for each Phase of the Development Project specified in Schedule
C. CMI shall keep Stryker informed at reasonable times, orally or in writing,
with respect to the status of the CMI Tasks and the overall Development Project
and shall provide Stryker with a written report at the conclusion of each Phase.
Promptly after the delivery of each such report, CMI shall, if requested to do
so by Stryker, also give an oral presentation describing in reasonable detail
the results of the Development Project through the end of that Phase as defined
in Schedule C to persons designated by Stryker at a "Phase-End Meeting." The
Phase-End Meetings shall be held within twenty-one (21) days of the end of that
phase at locations alternately determined by CMI and Stryker. Stryker shall have
the right, within 45 days of the holding of each Phase-End Meeting, to cancel
the Development Project without further obligation to CMI except as set forth in
paragraph 16 if the results thereof are unsatisfactory to Stryker or if Stryker
shall have determined not to proceed with commercialization of the Systems.
Stryker's share of the expenses for each Phase as set forth above shall be paid
within forty-five (45) days after receipt of an invoice therefor, which shall be
issued by CMI monthly subject to the maximum ceiling for each Phase of the
Development Project and shall document in reasonable detail the total expenses
incurred by CMI during the month to which it relates. As part of the Development
Project, Stryker shall be responsible for the performance of the tasks assigned
to it in Schedule C that are necessary to permit the interface of the System
with the Stryker Products (the "Stryker Tasks"). Each of Stryker and CMI agrees
to use its reasonable best efforts to perform the tasks for which it is
responsible within the time allotted thereto in Schedule C. In the event that
the entire project is delayed by six months or more, the party responsible
therefor shall be penalized -- by a one-month reduction of the Exclusivity
Period (as defined in Section 4) if Stryker's failure to perform the Stryker
Tasks in a timely manner is the cause of the delay or a one-month increase in
the Exclusivity Period if CMI's failure to perform the CMI Tasks in a timely
manner is the cause of the delay. If the failure is a result of both CMI and
Stryker actions, no change will be made to the Exclusivity Period. If the
Development Project has not been completed on or before June 30, 1998 or such
later date as the parties may agree in writing, this Agreement shall terminate
and neither party shall have any continuing obligation to the other except as
set forth in Section 16 hereof. In consideration of the payments to be made by
Stryker hereunder, CMI agrees that it shall not conduct research and development
activities with respect to products of the type described in Schedule B for use
with products of the type described on Schedule A for any party other than
Stryker as long as the Development Project is continuing and, thereafter, until
the end of the Exclusivity Period.
3. Ownership of Rights. CMI shall remain the owner of the CMI
Technology and the CMI Patent Rights. Stryker shall own patent rights, if any,
that arise out of inventions or
<PAGE> 3
discoveries conceived, made or reduced to practice by it as a result of the
performance by it of the Stryker Tasks. The intellectual property and commercial
rights that arise out of inventions or discoveries conceived, made or reduced to
practice by CMI as a result of the performance by it of the CMI Tasks shall be
owned by CMI and deemed "CMI Technology" or "CMI Patent Rights," as the case may
be.
4. Manufacturing and Supply of the Systems.
(a) Exclusivity of Stryker. If the Development Project is successfully
completed and Stryker advises CMI of its intention to market the System in
conjunction with the Stryker Products which it shall do within forty-five (45)
days of the completion of Phase 4 as set forth on Schedule C or this Agreement
shall terminate, CMI agrees that it shall supply the System to Stryker for use
in conjunction with the Stryker Products and that it will not supply the System
to any other manufacturer or marketer of products of the type described in
Schedule A for as long as Stryker meets the minimum purchase requirements set
forth below (the "Annual Minimum") for the successive twelve-month periods (each
an "Agreement Year") commencing on the date that the first 30 Systems have been
delivered to Stryker as provided herein (the "Exclusivity Period"):
First Agreement Year [*] Systems
(including the first
[*] Systems)
Second Agreement Year [*] Systems
Third Agreement Year [*] Systems
Thereafter [*] Annual Growth
In the event that Stryker fails to purchase the Annual Minimum in any Agreement
Year, CMI shall thereafter be free to sell Systems to any other party. In
addition, in the event that Stryker fails to purchase more than [*] percent
([*]) of any Annual Minimum in any Agreement Year, CMI may, at any time within
ninety (90) days after the end of such Agreement Year, give written notice to
Stryker of its intention to terminate this Agreement. Such termination shall be
effective on the date specified in such notice, which date shall not be earlier
than six (6) months after the date such notice is given. CMI will continue to
deliver product to Stryker for twelve (12) months following the effective
termination date for all "Active Customers", defined as customers which Stryker
has submitted quotations and/or has received purchase orders at the time written
notice of termination is submitted by CMI. Stryker shall supply CMI with a list
of such Active Customers within thirty (30) days of receipt of such notice of
termination. CMI shall have the right to reasonably request copies of
documentation required to substantiate the propriety of customers being
categorized as Active Customers. In consideration of the exclusivity of supply
provided in this Section 4(a), Stryker shall pay $[*] to CMI in three (3)
equal monthly installments commencing on the date of execution and delivery of
this Agreement, and, thereafter, on the same date in each of the two (2)
succeeding months. During the Exclusivity Period, Stryker shall not develop,
have developed, purchase or utilize any products serving
<PAGE> 4
the same function as the System with the products described in Schedule A unless
technology with greater market acceptance or a lower cost is available. In the
event Stryker intends to develop, have developed, purchase or utilize any such
other products, it shall provide to CMI, at least forty-five (45) days prior to
such action, a statement setting out Stryker's intent and the basis for
Stryker's bona fide belief that such other products have technology with greater
market acceptance or are available at a lower cost. For purposes hereof, lower
cost shall mean at least [*] percent ([*]%) less than the then current cost of
the similar System from CMI. During the forty-five (45) day period following
Stryker's notice, CMI and Stryker shall confer with the goal of retaining CMI as
Stryker's exclusive supplier by mutually agreed changes to the Systems and/or
the prices therefor. It is understood and agreed by the parties hereto that the
only consequence of a failure of Stryker's purchases from CMI to meet the Annual
Minimum for any Agreement Year shall be the loss of exclusivity of supply or
termination of this Agreement as provided in this Section 4(a) and that Stryker
shall have no obligation to CMI for the shortfall in revenues or profit as a
result of such failure. Stryker shall sell Systems only in conjunction with the
products listed on Schedule A.
(b) Pricing. CMI agrees to price the System components sold to Stryker
hereunder at an amount no more than [*] times the direct manufacturing cost (as
defined by generally accepted accounting principles ("GAAP") and including costs
of raw materials, direct labor, indirect labor and overhead) thereof and, in any
event, not more than the amount set forth therefor on Schedule D hereto. CMI
further agrees to reduce the overall System price by [*] percent ([*]%) in each
successive Agreement Year during the Exclusivity Period and that the price for
new models of the System will not exceed the price then in effect for existing
Systems unless additional features requested by Stryker increase the cost
thereof, in which case CMI may increase the price in proportion to the increased
costs.
Notwithstanding the foregoing, CMI agrees to sell Systems to Stryker
for use as sales and marketing samples and up to [*] ([*]) Systems as
requested by Stryker for placement in "Centers of Excellence" at one and one
half times CMI's direct manufacturing cost.
(c) Ordering and Delivery. Commencing on the date after completion of
the Development Project that Stryker confirms to CMI its intention to market the
System in conjunction with the Stryker Products, Stryker shall place purchase
orders with CMI, at least quarterly, specifying quantities and shipment dates,
which shall be not less than sixty (60) days after the placing of such order
unless otherwise agreed by CMI. Each quarterly order shall be accompanied by a
forecast of Stryker's anticipated requirements for Systems for the next three
quarters. Stryker shall not be obligated to purchase any System that is not the
subject of a confirmed purchase order. If CMI foresees any problem in meeting
the proposed delivery schedule set forth in any purchase order, it shall
promptly advise Stryker in writing. In the event that CMI does not deliver
Systems that are accepted by Stryker in a quantity at least equal to [*]
percent ([*]%) of the Systems ordered within the time period specified in
Stryker's purchase orders for delivery in quarter of any
<PAGE> 5
Agreement Year, provided such purchase orders for such quarter do not exceed
[*] percent ([*]%) of the amounts forecast by Stryker for such
quarter at the time of its order for the preceding quarter as set forth above,
the Annual Minimum for such Agreement Year shall be reduced by the number of
Systems not supplied on a timely basis. CMI will package and ship the Systems to
such Stryker facility as is designated by Stryker in accordance with such other
instructions as Stryker shall specify in the applicable purchase order. CMI's
prices to Stryker are F.O.B. Santa Barbara, California, with Stryker being
obligated to pay for shipping and insurance. Title and risk of loss to the
Systems delivered hereunder shall pass to Stryker at such time as they are
delivered to and accepted by Stryker or its agents and, in any event, within 15
business days of receipt unless rejected as non-conforming.
(d) Invoicing. upon shipment of each order, CMI will invoice Stryker
therefor. All such invoices for Components accepted by Stryker shall be paid
within forty-five (45) days of their receipt.
(e) Quality and Inspection. CMI warrants and agrees that the Systems
will be manufactured in accordance with Good Manufacturing Practice (IIGMP") as
required pursuant to applicable provisions of the U.S. Food, Drug, Cosmetic and
Device Act, as amended, and promulgated by the Food and Drug Administration
("FDA"). CMI further specifically agrees that it will use commercially
reasonable efforts to assure that the Systems will comply with the electrical
safety requirements of UL and CSA per IEC 601-1 and with the Quality Assurance
and Good Manufacturing Practice requirements of ISO 9000/EN46000 as soon as
possible and that the Products will be EMC compliant and carry the 'ICE" mark,
all expenses in connection therewith to be borne by CMI. CMI agrees to undertake
such quality control and inspection procedures as required by the FDA or any
other appropriate regulatory agency and to provide Stryker with access to its
manufacturing facilities in order that Stryker may make GMP audits at such
reasonable times as Stryker shall deem necessary. If, within thirty (30) days
after receiving any shipment of Systems, Stryker shall, in its reasonable
judgment and in accordance with applicable GMP regulations, determine that any
of the Systems in such shipment is non-conforming, CMI will, unless it disputes
such claim within fifteen (15) business days after receiving notice of
non-conformity from Stryker, ship new Systems to Stryker in replacement for the
non-conforming Systems within fourteen (14) days. Stryker shall return
non-conforming Systems to CMI at CMI's expense or otherwise hold or dispose of
them at CMI's expense as CMI may direct.
(f) Product Labeling. The Systems sold to Stryker for marketing in
conjunction with the Stryker Products shall be labeled and advertised under
Stryker's name but shall refer to CMI as the manufacturer thereof. The type size
of CMI's name on System labeling and in brochures and demonstration videos shall
be approximately one-half the size of Stryker's name unless otherwise agreed by
CMI. CMI's name shall also appear on each System in a position visible to users
thereof.
<PAGE> 6
(g) Manufacture by Stryker. In the event that CMI shall fail to supply
[*] percent ([*]%) of the quantity of Systems ordered by Stryker pursuant to
subsection (c) of this Section 4 to Stryker in a timely manner for [*] ([*])
consecutive quarters during the first two Agreement Years or shall fail to
deliver [*] percent ([*]%) of the quantity of Systems ordered by Stryker
pursuant to subsection (e) of this Section 4 to Stryker in a timely manner for
[*] ([*]) consecutive quarters during any subsequent two Agreement Years, (ii)
the Systems delivered to Stryker shall consistently fail to meet the
requirements set forth in subsection (e) of this Section 4 and, in either case,
such failure shall continue for thirty (30) days after written notice from
Stryker or (iii) CMI shall become insolvent or admit in writing the inability to
pay its debts as they fall due, shall make an assignment for the benefit of
creditors or shall apply for, consent to or acquiesce in the appointment of a
trustee or receiver for it or any substantial part of its property; or, in the
absence of such application, consent or acquiescence, a trustee, receiver or
similar officer is appointed for it or for a substantial part of its property
and is not discharged within thirty (30) days; or any bankruptcy,
reorganization, debt arrangement or other proceeding under any bankruptcy or
insolvency law, or any dissolution or liquidation proceeding, is instituted by
or against it and is consented to or acquiesced in by it or remains undismissed
for thirty (30) days, CMI shall grant Stryker the irrevocable right and
exclusive, royalty-bearing license to use all CMI Technology and CMI Patent
Rights in the manufacture of Systems for use in, and only in, conjunction with
products having the same or similar applications as the Stryker Products. Such
license shall continue to be exclusive as long as Stryker has paid royalties on
sales of a number of Systems at least equal to the Annual Minimum that it would
have been required to purchase in order that the Exclusivity Period continue in
effect pursuant to subsection (a) of this Section 4 for the prior Agreement
Year, commencing with the Agreement Year in which the first System manufactured
by Stryker is sold (if the first System manufactured by Stryker is sold during
an Agreement Year, Stryker shall only be required to have paid royalties on
sales of a number of Systems in such Agreement Year equal to that proportion of
the applicable Annual Minimum that the number of full months after such first
sale is to twelve (12)) and shall be non-exclusive thereafter. CMI may elect to
terminate such license at any time after it becomes non-exclusive by giving
Stryker at least six (6) months, prior written notice of its intention to do so.
Such right and license shall not be assignable by Stryker and shall not be
sublicensable by Stryker, except to the extent necessary for Stryker to have
Systems manufactured by a third party for resale by Stryker. In the event
Stryker exercises its rights hereunder, Stryker shall pay CMI royalties equal to
[*] percent ([*]%) of the Net Sales Price of the Systems sold by Stryker. For
purposes hereof, "Net Sales Price,, shall mean the standard cost of Stryker's
Endoscopy Division plus [*] in the case of intra-company sales of Systems to
any other division or subsidiary of Stryker and the gross
<PAGE> 7
sales price billed for all other sales of Systems less, in each case:
(i) transportation and insurance charges or allowances, if included in
such amount;
(ii) discounts allowed, and commissions paid in lieu of trade discounts
(other than commissions paid to the seller's employees) in amounts customary in
the trade;
(iii) credits and allowances, if any, given or made on account of the
return or rejection of Systems previously delivered or retroactive price
reductions; and
(iv) any tax or other governmental charge on the sale, transportation
or use of Systems that is paid, absorbed or allowed by the seller.
Stryker shall deliver to CMI within [*] ([*]) days after the end of each
calendar quarter, a true and accurate report, covering the preceding calendar
quarter in sufficient detail to accurately account for the number of Systems or
components thereof sold, and Stryker's Net Sales Price therefor. Royalties shown
by such report to be due shall accompany such report. Stryker shall keep full,
true and accurate books of accounts containing all particulars which may be
necessary for the purpose of determining the number of Systems or components
thereof sold, the Net Sales Price thereof and royalty payments. Stryker agrees,
at the request of CMI and at CMI's expense, to permit an independent certified
accountant selected by CMI and reasonably acceptable to Stryker, to have access
upon at least ten (10) business days, prior notice and no more than once per
calendar year to such books of accounts for the purpose of verifying the
statements described herein. Such accountant shall not be entitled to disclose
any information relating to the business of Stryker except that which should be
properly contained in any report to CMI contemplated in this Section 4(g). Such
inspection shall be at the sole cost and expense of CMI; provided, however, that
if such inspection reveals a deficiency of five percent (5%) or more in the
payment of royalties due hereunder, the cost of such inspection shall be paid by
Stryker. Interest at the rate of ten percent (10%) per annum shall accrue and be
paid by Stryker on all delinquent payments. CMI agrees that it will execute such
documents as Stryker shall reasonably request in order to confirm the grant of
such license and shall instruct the employees of CMI to cooperate with employees
and representatives of Stryker or any third party with which Stryker has
contracted for the manufacture of the Systems and answer questions they may have
concerning the CMI Technology and CMI Patent Rights. In connection with the
transfer of the CMI Technology and CMI Patent Rights at such time as Stryker is
entitled under the terms of this Agreement to manufacture or cause third parties
designated by it to manufacture Systems, CMI shall make available to Stryker the
services of such personnel of CMI as Stryker may reasonably request in order to
assist Stryker or its designee in establishing production facilities for the
manufacture of Systems and otherwise to assist in the transfer of the CMI
Technology and the CMI Patent Rights to Stryker and/or its designee. Stryker
<PAGE> 8
shall pay reasonable out-of-pocket expenses incurred by such employees in
connection with the performance of such services.
5. Warranty and Repairs; Defective Products; Recalls. (a) CMI hereby
warrants that the Systems manufactured and sold hereunder by it to Stryker shall
meet the performance characteristics, specifications and drawings in the most
recent form agreed to by Stryker and CMI and shall be free from defects in
material and workmanship for a period of [*] ([*]) [*] from the date of purchase
from Stryker by the end user of a System. During the [*] warranty period,
CMI agrees that it shall correct or cause to be corrected, by repair or
replacement at its option, any System that proves to be defective within
[*] ([*]) hours of receipt of the defective System at a designated CMI
repair station. CMI agrees to maintain a field clinical specialist force of at
least [*] specialists during the Exclusivity Period to support the Stryker Sales
Force with respect to training, in-servicing and related marketing issues and to
provide an "800" technical support phone service for sales representatives and
customers of Stryker to be manned between 6 A.M. and 5:30 P.M. (Pacific time) on
each Monday through Friday (other than federal holidays) during such period.
(b) CMI shall notify Stryker promptly upon becoming aware of any
defect in any of the Systems and shall initiate corrective action at CMI's
expense. In the event that a recall is required by a governmental agency or
deemed advisable by Stryker or CMI, CMI shall, at its expense, develop and
implement a recall program. Defective and recalled Systems will be returned to
CMI for credit.
6. Regulatory Approvals. CMI shall be primarily responsible for
obtaining ETL, CSA, and IEC 601 approval and any other regulatory approvals
required from the FDA (or other equivalent regulatory authorities) for the
manufacture of the Systems. Stryker shall be primarily responsible for obtaining
such acceptance and approvals that are required for the marketing of the
Systems, including 510(k) clearance in conjunction with Stryker Products. CMI
and Stryker each agree to cooperate with the other in connection with the
obtaining of such approvals.
7. Marketing Assistance. CMI agrees to provide Stryker with reasonable
sales and marketing assistance as may be requested by Stryker in connection with
its sales, marketing and promotional programs, which assistance shall include
providing sales or technical service support and providing training courses for
personnel of Stryker and its dealers and distributors and educational programs
for surgical personnel. In connection with such activities, during the
Exclusivity Period CMI agrees to reasonably make available the services of its
employees, including at least [*] ([*]) field clinical specialists who will
assist Stryker's marketing efforts with key accounts as requested and provide
training and support for Stryker's customers, upon the reasonable request of
Stryker. Stryker acknowledges that such field clinical specialists shall also
support other CMI products and will not be exclusively devoted to the support of
<PAGE> 9
Stryker's customers. Stryker and CMI will cooperate regarding exhibitions at
trade shows and conventions demonstrating the use of Systems in conjunction with
the Stryker Products.
8. Indemnification; Insurance. (a) CMI indemnities and holds Stryker
harmless from any and all loss, liability and expense arising out of (i) the
death or injury to any person or damage to property resulting from any
negligence or defect in the design or manufacture of any System furnished by CMI
in the performance of this Agreement or (ii) any claim of patent infringement
with respect to any System furnished by CMI in the performance of this
Agreement, except to the extent such claims arise from modifications to the
Systems made by Stryker after delivery thereof by CMI or as a result of the use
of the Systems in a manner not in compliance with the directions for use as
approved by CMI or the use of the Systems in connection with products not listed
on Schedule A. CMI shall, on behalf of Stryker, defend any action brought
against Stryker for any such claim, shall bear all the costs and expenses,
including reasonable attorneys' fees, in the defense thereof and shall pay any
judgment that may be awarded against Stryker in respect thereof.
(b) CMI shall carry and maintain in force at least one million dollars
($1,000,000) per occurrence of product liability coverage with respect to the
Systems sold to Stryker pursuant to this Agreement and shall provide Stryker
with a Certificate of Insurance evidencing that such coverage extends to Stryker
under a Broad Form Vendors Endorsement.
(c) Stryker indemnifies and holds CMI harmless from any and all loss,
liability and expense arising out of the death or injury to any person or damage
to property resulting from the marketing or sale by Stryker of products
incorporating Systems or any use thereof, except to the extent such death or
injury or damage results, in whole or in part, from any negligence or defect in
the design or manufacture of any System furnished by CMI in the performance of
this Agreement. Stryker shall, on behalf of CMI, defend any action brought
against CMI for any such claim, shall bear all the costs and expenses, including
reasonable attorneys' fees, in the defense thereof and shall pay any judgment
that may be awarded against CMI in respect thereof. Stryker shall carry and
maintain in force product liability coverage in amounts determined by it from
time to time to be appropriate and shall provide CMI with a Certificate of
Insurance evidencing such coverage and naming CMI as an additional insured
thereunder.
9. Representations and Warranties.
(a) Organization; Authority. CMI is a corporation duly organized and
validly existing in good standing under the laws of the State of California. CMI
has the corporate power to execute, deliver and perform this Agreement.
(b) Binding Obligation. The execution and delivery of this Agreement by
CMI does not, and the performance of its obligations hereunder will not, violate
any
<PAGE> 10
provision of the articles of incorporation or by-laws of CMI or violate any
provisions of, or result in a breach of any of the terms or provisions of or the
acceleration of any of the obligations under, or constitute a default under, any
mortgage, lease, agreement, instrument, order, arbitration award, judgment or
decree to which CMI is a party or to which CMI or its assets, properties or
business are subject. This Agreement is a valid and binding agreement of CMI
enforceable against it in accordance with its terms.
10. Representations and Warranties of Stryker.
(a) Organization. Stryker is a corporation duly organized and validly
existing in good standing under the laws of the State of Michigan.
(b) Binding Obligation. The execution and delivery of this Agreement by
Stryker does not, and the performance of its obligations hereunder will not,
violate any provision of the certificate of incorporation or by-laws of Stryker
or violate any provisions of, or result in a breach of any of the terms or
provisions of or the acceleration of any of the obligations under, or constitute
a default under, any mortgage, lease, agreement, instrument, order, arbitration
award, judgment or decree to which Stryker is a party or to which Stryker or its
assets, properties or business are subject. This Agreement is a valid and
binding agreement of Stryker enforceable against it in accordance with its
terms.
11. Prosecution and Maintenance of Patents. CMI, through its own patent
attorney and at its own cost and expense, shall cause to be filed and prosecuted
patent applications corresponding to the CMI Patent Rights in such other
countries as Stryker shall reasonably request, in which event such patent
applications and any patents issued thereon shall become a part of the CMI
Patent Rights as that term is used in this Agreement. CMI agrees to exercise all
reasonable efforts to cause such applications to be prosecuted and all patents
issued in respect thereof to be maintained in such manner that the best possible
patent protection may be obtained thereon. In the event that CMI fails to take
action with respect to the CMI Patent Rights under the patent law of any country
pursuant to Stryker's request, Stryker may, on behalf and in the name of CMI but
at Stryker's own cost and expense and through patent attorneys designated by it,
cause to be filed and/or prosecute applications for patents, and cause to be
maintained all patents, in such country, in which case Stryker shall be entitled
to take a credit against payments that are or become due as a result of
purchases of Systems in an amount equal to the out-of-pocket expenses and costs
incurred by Stryker in connection with the filing, prosecution and/or
maintenance of any application or patent in such country.
12. Infringement of Licensed Patents. In the event that either party
shall become aware that the CMI Patent Rights are being infringed by a third
party, such party shall notify the other of the facts in respect thereof. In the
event Stryker deems that a CMI Patent Right is being or has been infringed by a
third party and CMI does not file suit or resolve the matter within a period of
90 days after notice from Stryker, then and in such event Stryker shall have the
right to file suit, at its
<PAGE> 11
own expense and for its own benefit as regards any damages and costs recovered,
and shall have the right to join CMI in the event CMI is determined to be an
indispensable party. In any such suit brought by Stryker, CMI shall have the
right to be represented by counsel of its selection at its expense.
13. Unforeseen Occurrences. Neither party to this Agreement shall be
liable for any delay or failure of performance that is the result of any
happening or event that could not reasonably have been avoided or that is
otherwise beyond its control. Such happenings or events shall include, but not
be limited to, fire, flood, explosion, action of the elements, inability to
obtain or shortage of material, equipment or transportation, governmental
orders, regulations, restrictions, priorities or rationing, acts of God,
accidents and strikes, lockouts or other labor trouble or shortage.
14. Confidentiality. Each party agrees that, except to the extent
necessary for the commercialization of Stryker Products in conjunction with the
System, all information relating to the design, manufacture, assembly, testing
and marketing of the products of the other, whether of a technical, engineering,
manufacturing, operational or economic nature, that comes into its possession as
a result of this Agreement that is not generally known to the public shall be
held in confidence and safeguarded by it with the same care and precautionary
procedures that it would use to hold and safeguard its own proprietary
information. Each party further agrees that it will not disclose the existence
of this Agreement or the terms hereof through a press release, public filing or
otherwise, unless required to do so by applicable disclosure requirements and
that, if any such disclosure is required, it will submit the text of the
proposed disclosure to the other party and consult with the other party hereto
regarding the form and content thereof. Notwithstanding the foregoing, CMI may
disclose the existence of this Agreement on a confidential basis to noncompeting
customers with which it is negotiating similar agreements and to potential
investors and their advisors, to which investors and representatives CMI may
also disclose the terms hereof provided that the Annual Minimums are disclosed
as targets to preserve exclusivity rather than commitments and provided further
that any written disclosure regarding such terms is first submitted to Stryker
for its review.
15. Termination. This Agreement shall terminate on the tenth (10th)
anniversary hereof. This Agreement shall also terminate if the Development
Project is not completed as provided in Section 2 and may be terminated by
Stryker within forty-five (45) days of the holding of each Phase-End meeting as
provided in section 2 hereof, by CMI as provided in Section 4(a) hereof and
otherwise upon the earlier to occur of any of the following:
(a) By either party for breach of this Agreement, unless the
breaching party shall have corrected such breach within ninety (90)
days from the receipt by it of written notice thereof from the other
party; and (b) By either party in the event that the other shall go
into liquidation, or seek the benefit of any bankruptcy or insolvency
act, or a
<PAGE> 12
receiver or trustee is appointed for its property or estate, or it
makes an assignment for the benefit of creditors, whether any of the
aforesaid events be the outcome of the voluntary act of Stryker or
otherwise.
The termination of this Agreement for any reason shall be without prejudice to
CMI's right to receive all payments accrued and unpaid for development expenses
and for Systems delivered at or prior to the effective date of such termination
and to the remedy of either party hereto in respect of any previous breach of
any of the covenants herein contained. The termination of this Agreement shall
not release CMI from its obligation to deliver all Products theretofore ordered
by Stryker. Section 14 shall survive the termination hereof.
16. Notices. All notices and consents hereunder shall be in writing and
shall be deemed to have been properly given and to be effective on the date of
delivery if delivered in person, by one-day courier service or by facsimile
transmission (provided a copy is sent by one-day courier service) to the
respective address or facsimile number provided below or to such other address
or facsimile number as either party shall designate by written notice to the
other in such manner:
If to Stryker:
2590 Walsh Avenue
Santa Clara, California 95051
Attention: Michael A. Pierce
Facsimile: 408-567-2505
If to CMI:
130-B Cremona Drive
Goleta, California 93117
Attention: President
Facsimile: 805-685-9277
17. Entire Agreement. This Agreement supersedes all prior agreements,
understandings, representations, and statements, if any, regarding the subject
matter contained herein, whether oral or written, and no amendment of this
Agreement shall be valid and binding upon the parties unless made in writing and
signed on behalf of each of such parties BY an authorized officer.
18. Governing Law; Dispute Resolution. This Agreement shall be
construed and interpreted in accordance with the laws of the State of
California. In an effort to resolve informally and amicably any claim,
controversy, or dispute arising out of or related to the interpretation,
performance, or breach of this Agreement (a "Dispute") without resorting to
litigation, each party shall notify the other party to the Dispute in writing of
any Dispute hereunder that requires resolution. Such notice shall set forth the
nature of the Dispute, the amount involved, if any, and the remedy sought. Each
party shall promptly designate an employee to investigate, discuss and seek to
settle the matter between them. If the two designated representatives are unable
to settle the matter within thirty (30) days after such notification, the matter
shall be submitted to CMI's Chief
<PAGE> 13
Executive Officer and the General Manager of the Stryker Endoscopy Division for
consideration. If settlement cannot be reached through their efforts within an
additional thirty (30) days (or such longer time period as they shall agree upon
in writing) then either party may thereafter take such actions as they deem
appropriate. The parties agree that any applicable statute of limitations shall
be tolled during the pendency of such informal dispute resolution process and
that neither party shall raise or assert any claim of laches or other legal or
equitable principle of limitation or repose of action based upon such process.
Each of the parties hereto submits to the jurisdiction of any California state
court or United States federal court sitting in Santa Clara County, California
for the purposes of any suit, action or proceeding arising out of or related to
this Agreement and the transactions contemplated hereby.
19. Waiver of Default. The waiver of any default under this Agreement
by either party shall not constitute a waiver of any rights for any subsequent
default.
20. Assignability, Successors and Assigns. Neither party shall be
entitled to assign its rights and obligations under this Agreement without the
other party's written consent, provided however either party (after providing
written notice thereof to the other party) may assign this Agreement in
connection with any sale or transfer of substantially all of its business,
whether by way of sale of assets, sale of stock, merger or otherwise. This
Agreement shall be binding upon and inure to the benefit of the successors and
permitted assigns of the parties hereto and, to the extent any successor or
assign is not bound by operation of law, each party shall cause such successor
or assign to expressly agree in writing to be bound by this Agreement.
21. Severing Clause. If any portion of this Agreement is held invalid
by a court of competent jurisdiction, such portion shall be deemed to be of no
force and effect and the Agreement shall be construed as if such portion had not
been included herein; provided however, if the deletion of such provision
materially impairs the commercial value of this Agreement to either party, the
parties shall attempt to renegotiate such provision in good faith. If after
ninety (90) days the parties are unsuccessful in negotiating an appropriate
remedy, a party so impaired may terminate this Agreement on ninety (90) days
notice to the other party.
22. Independent Contractor. Each party hereto shall be and remain an
independent contractor and nothing herein shall be deemed to constitute the
parties as partners. Further, neither party shall have any authority to act, or
attempt to act, or represent itself, directly or by implication, as an agent of
the other or in any manner assume or create, or attempt to assume or create, any
obligation on behalf of or in the name of the other, nor shall either be deemed
the agent of the other. IN WITNESS WHEREOF, the parties have executed this
agreement as of the day and year first above written.
STRYKER CORPORATION COMPUTER MOTION INCORPORATED
/s/ /s/
---------------------------- ----------------------------
<PAGE> 14
SCHEDULE "A"
[*]
[*]
[*]
[*]
[*]
SCHEDULE "B"
,4 system for the control of surgical devices composed of some combination of
the following:
[*]
[*]
[*]
[*]
[*]
[*]
[*]
System components listed above will at a minimum control the following functions
and provide [*] feedback on the status of the Stryker Products
as specified below:
The functional specifications of the System Components are described below:
[*] CONTROLLED
- - The HERMES INTERFACE COMPUTER will be manufactured by CMI, and have the
ability to interpret information via [*] control from selected Stryker
Equipment through various interfaces.
- - The [*] control unit should interface with the Hermes Interface Computer
to provide functional control of the specified Stryker Equipment as well
as display feedback on the Monitor for said equipment. The [*] will be
designed and manufactured by CMI to operate all of the specified controls
of the Stryker equipment and should also trigger the [*] feedback on the
monitor. The [*] Control should also have the ability to control [*]
feedback independent of function controls.
- - The Hermes Interface Computer should be able to interface with the Stryker
Equipment via [*] that will be co-designed by Stryker and CMI and
manufactured by Stryker, and will also be incorporated into the Hermes
Interface Computer.
- - The [*] will be designed and manufactured by CMI, and will be incorporated
into the Hermes Interface Computer to generate [*] feedback [*].
- - CONTROLLED COMPONENTS
-[*]
-[*]
<PAGE> 15
-[*]
-[*]
-[*]
[*] CONTROLLED
- - The HERMES INTERFACE COMPUTER will be manufactured by CNU, and have the
ability to interpret information via [*] from selected Stryker Equipment
through [*] interfaces.
- - The [*] should interface with the Hermes Interface Computer to provide
functional control of the specified Stryker Equipment as well as display
feedback on the Monitor for said equipment by [*] commands that have been
stored [*]. The [*] will be designed and manufactured by CMI to operate
all of the specified controls of the Stryker equipment which should also
trigger the [*] feedback [*]. This will be accomplished by issuing [*]
commands stored on the [*] card. The [*] Interfaces should also have the
ability to control [*] feedback independent of function controls.
- - The Hermes Interface Computer should be able to interface to the Stryker
Equipment via [*] that will be co-designed by Stryker and CMI and
manufactured by Stryker, and will be incorporated into the Hermes
Interface Computer.
- - The [*] will be designed and manufactured by CMI, and will be incorporated
into the Hermes Interface Computer to generate [*] feedback [*].
- - The [*] will be an OEM Product with [*] technology modifications performed
by CMI to allow [*] command and control all of the functions outlined for
the Stryker equipment. This [*] will be inserted into [*] the Hermes
Computer to activate the [*] capabilities.
- - CONTROLLED COMPONENTS
-[*]
-[*]
-[*]
-[*]
-[*]
[*] COMPUTER
The [*] COMPUTER will be a Hermes Computer without the Interface card
capabilities. The Training Computer should provide a [*] slot, and have the
capability of teaching individual [*] cards and their respective [*] commands
which will be recognized by the Hermes Interface Computer for all interfaces and
functional capabilities.
<PAGE> 16
<TABLE>
<CAPTION>
SCHEDULE "C"
Hermes Project Milestones
<S> <C>
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
</TABLE>
<TABLE>
<S> <C>
[*]
[*]
[*]
[*]
[*]
[*]
[*]
</TABLE>
CMI TASKS
Functional Design Specification - a document which describes in detail all of
the functionality of the complete system.
High Level Design - a schematic block diagram of the entire system, which
includes the selection of all of the major components used in the design (e.g.
processors, memory type and sizes).
[*] Feedback defined - CMI and Stryker agree on the [*] feedback parameters
for all of the devices.
[*] defined - CMI and Stryker agree on all of the [*] chosen to control and
status each device.
IF Card Schematically Defined - CMI will develop a generic schematic definition
and then work with Stryker to refine this design to the specific requirements of
each device to be controlled.
<PAGE> 17
[*] Display card working - CMI will demonstrate to Stryker a card which can
plug into the Hermes box, accept [*] input, and can superimpose the agreed
upon [*] feedback onto the accepted [*] input.
Hermes working prototype - CMI will demonstrate to Stryker the Hermes box
working and running test programs which demonstrate its operation.
IF Bus Prototype we - CMI will demonstrate Hermes controlling and receiving
[*] feedback information from the Stryker devices.
[*] Prototype working - CMI will demonstrate Hermes controlling the Stryker
devices through a [*] control.
[*] Interface working - CMI will demonstrate Hermes controlling the Stryker
devices with the [*] interface.
[*] Computer working - CMI will demonstrate the [*] training process for the
Stryker [*] card which can enable the controlling of the Stryker devices [*].
Safety agency approvals - IEC-601 and ETL listings received.
Pilot Production Run - CMI will deliver to Stryker [*] working Hermes system.
STRYKER TASKS
Define Interfaces to Devices - Stryker defines all of the interfaces to each of
the Stryker devices which need to be controlled in terms of an analog voltage, a
binary logic level, a relay, or other.
Prototype Devices with Connection points - Stryker physically demonstrates to
CMI how each of their devices can be controlled by the appropriate control
means.
Prototype IF cards installed in units - Stryker will deliver to CMI one of each
type of unit with prototype IF cards installed.
FDA filing for Stryker devices - Stryker will file the appropriate FDA
documentation, including the 51O(k), for each of the devices which require FDA
clearance. Computer Motion will assist in this process with specifications,
validations, and documentation for the Hermes component.
<TABLE>
<CAPTION>
SCHEDULE "D"
<S> <C>
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
</TABLE>
<PAGE> 18
AMENDMENT #1 TO:
CMI/STRYKER DEVELOPMENT AND SUPPLY AGREEMENT
The Development and Supply Agreement between the Stryker Endoscopy Company
("Stryker") and Computer Motion Incorporated ("CMI") is hereby amended in order
to include the [*] at an additional cost to Stryker of up to $[*]. Of this cost,
up to $[*] will be funded in cash in accordance with the payment terms of the
Development and Supply Agreement, Section 2. The remainder will be paid to CMI
in the form of video equipment valued at $[*], to be delivered to CMI by May 15,
1997. Modifications to the Development and Supply Agreement are as follows:
Clause 2, Paragraph 1, which currently reads:
- ---------------------------------------------
"Stryker agrees to fund [*] percent ([*]%) of the cost of the CMI Tasks, up to
a maximum expenditure therefore by Stryker of $[*], but subject, unless Stryker
agrees otherwise in writing, to the maximum amount budgeted for each Phase of
the Development Project specified in Schedule C."
is hereby modified to read:
- ---------------------------
"Stryker agrees to fund [*] percent ([*]%) of the cost of the CMI Tasks, up
to a maximum expenditure therefore by Stryker of $[*], but with Stryker's
maximum cost liability per Phase subject, unless Stryker agrees otherwise in
writing, to the maximum amount budgeted for each Phase of the Development
Project, as specified in Schedule C."
Schedule "A" currently reads as follows:
- -------------------------------------------
[*]
[*]
[*]
[*]
[*]
Schedule "A" is modified to read as follows:
- --------------------------------------------
[*]
[*]
[*]
[*]
[*]
[*]
[*]
<PAGE> 19
Schedule "B" is amended to include the following text:
- ------------------------------------------------------
[*]
- ---
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
- ---
[*]
[*]
[*]
[*]
[*]
[*]
Paragraph 4(a) "Exclusive of Stryker", First Sentence Modified as Follows (new
text in italics):
". . . CMI agrees that it shall supply the System to Stryker for use in
conjunction with the Stryker Products and that it will not supply the System to
any other manufacturer or marketer of products of the type described in
Schedule A, with the exception of the [*] for as long as Stryker meets the
minimum purchase requirements,. . . "
IN WITNESS WHEREOF, the parties have executed this amendment as of the date and
year first written below.
STRYKER CORPORATION COMPUTER MOTION INCORPORATED
By: /s/ By: /s/
---------------------------- ----------------------------
Title: Title:
------------------------- -------------------------
Date: Date:
------------------------- -------------------------
2
<PAGE> 1
Certain portions of this exhibit have been omitted based upon a request for
confidential treatment. Omitted portions have been separately filed with the
Commission.
EXHIBIT 10.10
SALES AGREEMENT
THIS SALES AGREEMENT (the "Agreement") is made and entered into as of
the 28th day of May, 1997, between COMPUTER MOTION, INC. (as defined below,
"CMI"), a California corporation, and MEDTRONIC, INC. (as defined below,
"Medtronic"), a Minnesota corporation.
WITNESSETH:
WHEREAS, CMI and Medtronic have entered into a Debenture Purchase
Agreement dated March 19, 1997 (the "Debenture Purchase Agreement") pursuant to
which (i) Medtronic purchased a $4 million convertible debenture dated March 19,
1997 (the "Debenture") and received a security interest in CMI's intellectual
property pursuant to a Security Agreement dated March 19, 1997 (the "Security
Agreement"), and (ii) Medtronic and CMI agreed to the Principal Terms attached
to the Debenture Purchase Agreement as Exhibit C thereto (the "Principal
Terms"); and
WHEREAS, the parties desire to enter into this Agreement further
elaborating on the Principal Terms in more detail.
NOW THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained herein, and for other valuable consideration,
the receipt and adequacy of which is hereby acknowledged, the parties mutually
agree as follows:
ARTICLE 1
DEFINITIONS
-----------
1.1) Specific Definitions. As used in this Agreement, the following
terms have the meanings set forth or referenced below:
"Affiliate" of a specified person (natural or juridical) means a person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the person specified. "Control"
shall mean ownership of more than 50% of the shares of stock entitled to vote
for the election of directors in the case of a corporation, and more than 50% of
the voting power in the case of a business entity other than a corporation.
"Change of Control" means, with respect to CMI, any of the following events: (1)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange
Act) in a single transaction acquires "beneficial ownership" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of CMI
representing 50% or more of the combined voting power (with respect to the
election of directors) of CMI's then outstanding securities; (2) the
consummation of a merger, combination or consolidation of CMI with or into any
other corporation, other than a merger, combination or consolidation which would
result in the voting securities of CMI outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or
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by being converted into voting securities of the surviving entity) more than 50%
of the combined voting power (with respect to the election of directors) of the
securities of CMI or of such surviving entity outstanding immediately after such
merger, combination or consolidation; or (3) the consummation of a plan of
complete liquidation of CMI or of an agreement for the sale or disposition by
CMI of all or substantially all of CMI's business or assets.
"CMI" means Computer Motion, Inc. and its Affiliates.
"Confidential Information" means know-how, trade secrets, and other unpublished
or proprietary information disclosed (whether before or during the term of this
Agreement) by one of the parties (the "disclosing party") to the other party
(the "receiving party") or generated under this Agreement, excluding information
which:
(a) is now or comes to be in the public domain through no fault of the
receiving party;
(b) is released without restriction to the receiving party by the
disclosing party in writing;
(c) is lawfully obtained by the receiving party from third parties;
(d) can be demonstrated by competent proof to have been known by the
receiving party prior to any disclosure of "Confidential Information by
the disclosing party;
(e) has been in the possession of the receiving party, as a result of
disclosure under this Agreement, for a period of five (5) years; or
(f) is required by law to be disclosed; provided that the receiving
party has given the disclosing party prompt written notice of such
disclosure requirement and has cooperated with the disclosing party so
that the disclosing party may seek a protective order or other
appropriate remedy to avoid or limit such disclosure.
All Confidential Information disclosed by one party to the other under
this Agreement shall be in writing and bear a legend "Proprietary,"
"Confidential" or words of similar import or, if disclosed in any manner other
than writing, shall be preceded by an oral statement indicating that the
information is Company proprietary or confidential, and shall be followed by
transmittal of a reasonably detailed written summary of the information provided
to the receiving party with identification as Confidential Information
designated as above within thirty (30) days.
"FDA" means the U.S. Food and Drug Administration.
"FDA Good Manufacturing Practices" means as defined in 21 Code of Federal
Regulations Part 820.
"Field of Use" means minimally invasive cardiothoracic surgical procedures.
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"Intellectual Property" means all patents, trade names, trademarks, service
marks, copyrights, and applications or registrations for any of the foregoing,
inventions, discoveries, know-how, trade secrets, data, information, technology,
processes, formulas, drawings, designs, computer programs, licenses, and all
amendments, modifications, and improvements to any of the foregoing.
"Medtronic" means Medtronic, Inc. and its Affiliates.
"Medtronic Competitors" means any person engaged in the manufacture or sale of
cardiac surgery products that are marketed to the same class of persons (e.g.
cardiac surgeons) to whom Medtronic markets the Systems.
"Medtronic Territory" means those countries included within Medtronic's
currently designated "Europe", "Middle East" and "Africa" sales regions as more
fully described on Schedule 1.1 hereto.
"Net Revenues of Systems" in North America for a particular period means the
aggregate amount CMI invoices non-Affiliated third parties (or invoices
Medtronic pursuant to Section 2.3) for the sale, lease, license or other use of
Systems during such period, excluding sales, use or excise tax, freight, duty or
insurance included therein, discounts, rebates, and credits or repayments due to
rejection, defects or returns, and excluding a reasonable allowance for bad
debts and excluding amounts invoiced for installation fees, training, and other
services. In the event CMI combines the Systems with other CMI products in a
package in which the individual Systems are not invoiced separately, then CMI's
Net Revenues attributable to the Systems component of such combined package
shall be established by CMI in good faith; provided, however, that if the
Systems component of such combined package is sold, leased, or licensed as an
individual product by CMI in the same geographic area, then CMI's Net Revenues
attributable to such Systems in the combined package shall be based on the Net
Revenues of such Systems when sold, leased, or licensed individually in such
geographic area.
"North America" means The United States of America and Canada, including all
territories and possessions thereof.
"Prime Rate" means, for any calendar quarter, the prime commercial lending rate
quoted by the Wall Street Journal, as in effect on the first day of such
quarter.
"Specifications" means the current specifications for the Systems, as may be
amended from time to time hereafter by CMI.
"Systems" means CMI's current and future computer and voice controlled robotic
systems that position and maneuver both visualization equipment and instruments
for minimally invasive surgical solutions in the Field of Use, including
disposables and reusables, and further including without limitation current and
future ZEUS systems.
1.2) Other Terms. Other terms may be defined elsewhere in the text of
this Agreement and shall have the meaning indicated throughout this Agreement.
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1.3) Other Definitional Provisions.
(a) The words "hereof," "herein," and "hereunder" and words of
similar import, when used in this Agreement, shall refer to this
Agreement as a whole and not to any particular provisions of this
Agreement.
(b) The terms defined in the singular shall have a comparable
meaning when used in the plural, and vice versa.
(c) References to an "Exhibit" are, unless otherwise
specified, to one of the Exhibits attached to or referenced in this
Agreement, and references to an "Article" or a "Section" are, unless
otherwise specified, to one of the Articles or Sections of this
Agreement.
(d) The term "person" includes any individual, partnership,
joint venture, corporation, trust, unincorporated organization or
government or any department or agency thereof.
(e) The term "Dollars" or "$" shall refer to the currency of
the United States of America.
(f) The term "knowledge" means actual knowledge of a fact or
the knowledge which such person or its officers or employees could
reasonably be expected to have based on reasonable investigation and
inquiry.
(g) All references to time shall refer to Minneapolis,
Minnesota time.
ARTICLE 2
MEDTRONIC AS SALES AGENT IN NORTH AMERICA
-----------------------------------------
2.1) Appointment. Subject to commencement of the term of this Agreement
as set forth in Section 6.1, CMI hereby appoints Medtronic and Medtronic hereby
accepts appointment as CMI's exclusive sales agent for sales of the Systems in
the Field of Use in North America. Medtronic's duties, to be performed by
applicable portions of Medtronic's "cardiac surgery sales force" (i.e. the sales
force within Medtronic responsible for selling the products of Medtronic's
Cardiac Surgery Business) listed on Schedule 2.1, shall include (without
limitation of the other provisions of this Agreement):
(i) introducing the Systems and distributing literature and sales
materials about the Systems to current and potential customers who may
be interested in purchasing a System;
(ii) providing CMI with names of and contacts for potential purchasers
of Systems;
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(iii) passing along to CMI information or ideas of which Medtronic's
cardiac surgery sales force becomes aware in the Field of Use for
increasing utilization or new potential applications of the Systems;
and
(iv) acting as an account manager to monitor the performance of, and
customer satisfaction with, the Systems within Medtronic accounts in
the Field of Use, including but not limited to reviewing and suggesting
ways to improve utilization of the Systems within such accounts, and
communicating this information to CMI on a regular basis.
Except as otherwise agreed to by the parties, Medtronic will not have the right
to quote prices on the Systems to potential customers.
2.2) CMI Sales and Distribution.
(a) CMI shall retain the exclusive right to distribute Systems within
the Field of Use in North America and, subject to Sections 4.1 and 4.2, outside
the Field of Use worldwide and within the Field of Use outside of the Medtronic
Territory. CMI shall establish a direct sales force for Systems in North America
through a combination of CMI employees and/or independent third-party sales
representatives. CMI shall use its best efforts to ensure that any such
independent third-party sales representatives of Systems in North America are
not Medtronic Competitors. During the term of Medtronic's sales agency pursuant
to this Article 2, CMI shall not appoint or permit any persons other than CMI
employees or independent third-party sales representatives to act as
distributors or sales agents for the System in the Field of Use in North
America. For clarification purposes, the parties acknowledge that CMI is not
restricted from licensing any third party, whether or not a competitor of
Medtronic, rights for such third party to make and sell devices developed by
such third party which are adapted to be used with the System (such third
parties are referred to herein as "Compatible Product Sellers"). Such Compatible
Product Sellers may promote and market their products for use with the Systems
and train their customers on the use of their products with the Systems;
provided, however, that such Compatible Product Sellers shall not be permitted
to promote or market the Systems independently. Subject to Section 4.2, nothing
herein shall impair CMI's rights to distribute or sell any product for any use
outside of the Field of Use.
(b) CMI shall cooperate with Medtronic as Medtronic reasonably requests
to enable Medtronic to include the System in Medtronic's "strategic alliance"
sales program, including making a CMI sales manager available to participate
with Medtronic in such meetings with such customers as Medtronic may reasonably
request; provided that such sales manager (i) shall be an employee of CMI, and
(ii) shall enter into a confidentiality agreement providing that all information
received by such CMI sales manager in connection with Medtronic's "strategic
alliance" program shall be held strictly confidential.
2.3) Completion of Sales. Except as otherwise agreed to by the parties,
CMI shall be solely responsible for undertaking and completing the actual sale
and invoicing of all Systems in North America and the collection of accounts
receivable therefrom; provided that, in those instances where Medtronic
reasonably believes it is necessary for Medtronic to invoice sales of Systems to
a customer under Medtronic's "strategic alliance" sales program (in order
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for Medtronic to obtain credit under such program for the sale of such System),
CMI and Medtronic shall cooperate to have CMI invoice Medtronic for such Systems
and thereby allow Medtronic to invoice the sales of Systems to such "strategic
alliance" customer. In such event, Medtronic shall pay CMI the price quoted by
CMI to Medtronic or such customer for the Systems so purchased by Medtronic.
Such payment shall be due and payable 60 days after CMI's invoice date.
2.4) North America Installation and Service; Training.
(a) CMI shall be solely responsible for installing and servicing all
Systems at CMI's cost and expense.
(b) CMI shall be solely responsible for providing, at CMI's cost and
expense, customer and physician in-service training to any purchaser of a System
in North America. CMI shall coordinate with Medtronic and allow Medtronic the
opportunity to concurrently train those purchasers who are also purchasers of
Medtronic's cardiothoracic surgical products on the use of such Medtronic
products with the Systems, provided that Medtronic shall bear its proportional
share of the cost for any such training. Notwithstanding the foregoing,
Medtronic and CMI shall share the cost of training at those designated "centers
of excellence", as the parties may mutually agree, with the sites, strategy,
scope and cost of such training as may be mutually agreed to by the parties.
(c) CMI will provide training for Medtronic's U.S. and Canadian sales
personnel on such dates and at such locations as Medtronic reasonably designates
to CMI. Medtronic will be responsible for all out-of-pocket expenses incurred by
CMI personnel in the course of such training, unless Medtronic elects to receive
such training at a scheduled CMI training session for other CMI sales personnel.
2.5) Regulatory Approvals.
(a) CMI shall be solely responsible for obtaining, at CMI's cost and
expense and in CMI's name, all necessary regulatory and other approvals from the
FDA and any other applicable regulatory agencies prerequisite to the commercial
sale of the Systems in the Field of Use in North America. Such approval efforts
shall include, but not necessarily be limited to, the preparation and filing of
any required Investigational Device Exemption, Pre-Market Approval or Section
510(k) filings and the establishment and oversight of any required clinical
investigations and clinical follow-up relating to future commercial sale of the
Systems. CMI shall promptly notify Medtronic of receipt of any such approvals,
and shall provide Medtronic with such information regarding the status of
pending approvals as Medtronic may reasonably request.
(b) CMI shall be responsible for obtaining, at CMI's cost and expense,
all import licenses and permits as may be required to import the Systems into
the United States (if applicable) and Canada in accordance with then prevailing
laws and regulations of such country. All such filings and registrations of the
Systems shall be in the name of CMI. Medtronic shall cooperate fully with CMI in
its efforts to obtain any such approvals.
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2.6) Sales and Marketing.
(a) Medtronic and CMI shall jointly develop and carry out protocols and
sales strategies for use by the Medtronic sales agents and CMI sales
representatives to co-market the Systems and Medtronic's minimally invasive
cardiac surgery products to potential customers in North America.
Notwithstanding the foregoing, CMI shall have no responsibility to market
Medtronic's minimally invasive cardiac surgical products except in connection
with CMI Systems. CMI and Medtronic also will establish protocols and procedures
for coordinating System demonstrations.
(b) CMI and Medtronic shall jointly fund such additional marketing
clinical studies for use of Medtronic minimally invasive surgical products in
connection with the Systems as the parties mutually agree, the results of which
could be used by either or both of Medtronic and CMI in connection with the
marketing and sale of the Systems in the Field of Use.
(c) CMI shall be responsible for designing, developing and producing,
at CMI's cost and expense, Systems sales and marketing and promotional materials
for use in the Field of Use in North America. CMI, at its cost, shall provide
Medtronic with reasonable and adequate quantities of such appropriate sales and
marketing and promotional materials. In addition, CMI and Medtronic may jointly
develop sales and marketing materials that feature and showcase both the Systems
and Medtronic's minimally invasive surgical products, with the costs thereof to
be paid as mutually agreed by the parties.
(d) CMI and Medtronic may jointly fund and participate in those North
America trade shows as mutually agreed to by the parties. As further mutually
agreed to by the parties, employees of CMI and Medtronic, respectively, shall be
allowed to interact with customers in the appropriate trade show booth of the
other. In addition, Medtronic shall have the right to demonstrate the Systems in
its North America trade show booths in connection with the application of its
minimally invasive surgical products.
2.7) Medtronic's Commission.
(a) In consideration of Medtronic's performance as sales agent for the
Systems in North America, CMI shall pay to Medtronic on a calendar quarterly
basis a commission in an amount equal to [*] percent [*] of CMI's [*] of Systems
in the Field of Use in North America. Such payments shall be made within 45 days
after the end of each calendar quarter, and shall be accompanied by a written
statement setting forth the calculation of such amount in such detail as
Medtronic may reasonably request. CMI shall also give Medtronic monthly
estimates of the amount of commissions which have accrued for payment to
Medtronic.
(b) Medtronic will pay a percentage commission to Medtronic's cardiac
surgery sales force marketing the System in North America, the rate(s) of which
shall be in Medtronic's sole discretion.
(c) CMI shall keep accurate written records sufficient in detail to
enable CMI's Net Revenues of Systems in the Field of Use in North America to be
determined and verified
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by Medtronic. Such records for each calendar quarter shall be retained by CMI
for a period of not less than three years after the end of such quarter.
(d) Upon reasonable notice and during regular business hours, CMI shall
from time to time (but no more frequently than once annually) make available the
records referred to in Section 2.7(c) for audit by independent accounting
representatives selected by Medtronic and reasonably acceptable to CMI to verify
the accuracy of the statements provided to Medtronic. Such representatives shall
execute a suitable confidentiality agreement reasonably acceptable to CMI prior
to conducting such audit. Such representatives may disclose to Medtronic only
their conclusions regarding the accuracy of CMI's calculation of CMI's Net
Revenues of Systems in the Field of Use in North America, and shall not disclose
CMI's confidential business information to Medtronic without the prior written
consent of CMI. Such audit shall be at Medtronic's cost and expense unless such
audit demonstrates that CMI's Net Revenues of Systems in the Field of Use in
North America was understated in the written report given to Medtronic pursuant
to Section 2.7(a) above by more than 5%, in which event CMI shall reimburse
Medtronic for all costs and expenses incurred in connection with such audit.
2.8) Noncompetition. During the term of Medtronic's sales agency
pursuant to this Article 2, Medtronic shall not market or sell in North America
minimally invasive cardiothoracic surgery products which are competitive with
the Systems in the Field of Use ("Competitive Products").
2.9) Demonstration Units. Medtronic will be entitled to purchase from
CMI a reasonable number of System demonstration units, as mutually determined by
CMI and Medtronic, for use in selected Medtronic training centers at a transfer
price equal to CMI's fully burdened manufacturing costs reasonably determined in
accordance with generally accepted accounting principles (excluding freight,
duties and customs, and any extraordinary start-up costs). This "reasonable
number of demonstration units" will be consistent with the number of Medtronic
"training centers" for the Systems in North America. Medtronic and CMI will
agree by December 31, 1997 upon terms pursuant to which CMI will be entitled to
reasonable access and use of such Medtronic "training centers" in North America.
During the fourth quarter of calendar 1998 or upon earlier availability,
Medtronic may purchase two (2) demonstration Systems for use in Medtronic's
"training centers" in North America at a price equal to [*]. Payment for all
demonstration units purchased by Medtronic shall be made within 15 days of CMI's
invoice. No commission shall be payable by CMI to Medtronic with respect to such
sales of demonstration units. Medtronic shall not be entitled to resell such
demonstration units.
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ARTICLE 3
MEDTRONIC AS DISTRIBUTOR IN EUROPE, MIDDLE EAST AND AFRICA
----------------------------------------------------------
3.1) Appointment.
(a) Subject to commencement of the term of this Agreement as set forth
in Section 6.1, CMI hereby appoints Medtronic, and Medtronic hereby accepts
appointment, as CMI's exclusive distributor, with the right to sell and
distribute the Systems in the Field of Use in the Medtronic Territory. CMI
represents and warrants to Medtronic that all other distributorship agreements
or sales representative agreements, if any, written or oral, with any third
party permitting the sale of Systems in the Field of Use in the Medtronic
Territory have been terminated at CMI's sole cost and expense. For clarification
purposes, the parties acknowledge that CMI is not restricted from licensing
Compatible Product Sellers, whether or not a competitor of Medtronic, rights to
make and sell devices developed by such Compatible Product Seller which are
adapted to be used with the System. Such Compatible Product Sellers may promote
and market their products for use with the Systems and train their customers on
the use of their products with the Systems; provided, however, that such
Compatible Product Sellers shall not be permitted to promote or market the
Systems independently.
(b) Medtronic may appoint subdistributors for the sale or distribution
of Systems in the Field of Use in the Medtronic Territory, and will provide to
CMI a list of such subdistributors from time to time. Notwithstanding such
appointment of subdistributors, Medtronic shall remain fully responsible for the
performance of all of its covenants and obligations hereunder, and any sales by
CMI to such Medtronic subdistributors shall be billed by CMI to Medtronic
directly.
(c) CMI shall promptly forward to Medtronic all leads for sales of
Systems in the Field of Use in \the Medtronic Territory.
(d) During the term of Medtronic's distribution rights pursuant to this
Article 3. Medtronic shall not market or sell Competitive Products (as defined
in Section 2.8) in the Medtronic Territory.
3.2) Regulatory Approvals.
(a) Medtronic shall be solely responsible for obtaining as desired by
Medtronic, at Medtronic's cost and expense and in Medtronic's name, all
necessary regulatory and other approvals from the applicable regulatory agencies
prerequisite to the commercial sale of the Systems in the Field of Use in the
Middle East and Africa. Any such approval efforts which are undertaken by
Medtronic shall include, but not necessarily be limited to, the preparation and
filing of any required filings and the establishment and oversight of any
required clinical investigations and clinical follow-up relating to future
commercial sale of the Systems in the Field of Use in the Middle East and
Africa.
(b) In Europe, CMI will be responsible for gaining, at CMI's cost and
expense and in CMI's name, the CE Mark under the appropriate Medical Device
Directive. Medtronic will be responsible for all dealings with the appropriate
Competent Authority such as Notification,
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Medical Device Vigilance and national labeling issues, provided that CMI will
bear final legal responsibility for the content of all its own labeling.
Medtronic will assist CMI in translating the directions for use of the System
and other System labeling into the requisite languages for obtaining the CE Mark
as follows: (i) Medtronic will recommend vendors to perform such translations
for CMI at CMI's expense, and (ii) Medtronic will send drafts of such
translations to Medtronic personnel in the applicable country for review and
comment by such personnel. The commercial printing of such directions for use
and labeling will either (as the parties may agree) be the responsibility of CMI
and the costs thereof included in CMI's fully-burdened manufacturing cost, or be
the responsibility of Medtronic and excluded from the calculation of CMI's
fully-burdened manufacturing cost. Medtronic will also be named as the
"Authorized Representative" as defined in the Directives. Medtronic may also
distribute Systems in particular countries within Europe under country-specific
regulatory approvals prior to CMI's gaining the CE Mark or in particular
countries where CE Mark approval is not the requisite form of commercial sale
approval, and in such circumstances CMI shall (i) provide Medtronic with such
information and cooperation as is necessary to obtain any such country-specific
approvals in Europe, (ii) bear the expenses of meeting any applicable product
design and manufacturing facility requirements, and (iii) take all steps as are
necessary to meet the EMC Directive.
3.3) Pricing.
(a) For the period from the date hereof until December 31, 1998,
Medtronic shall purchase the reusable (or "hardware") and/or disposable
components of the System from CMI at price(s) (the "Transfer Prices") to be
agreed to by the parties on or before March 31, 1998 based on expected market
conditions for the System and the following parameters: (i) the target Transfer
Prices for the hardware components shall target a [*] ([*]%) gross margin for
CMI, shall give Medtronic all of the upside profit potential thereafter, and
shall in no event exceed $[*] per set of System hardware components (as
presently contemplated), and (ii) the Transfer Prices for the disposables shall
assure Medtronic a minimum [*] of [*] ([*%]) and CMI a minimum of [*] of [*]
([*%]), with a formula whereby Medtronic would share a [*] of any additional
upside profit with CMI. In the event the parties are unable to agree upon such
Transfer Prices then such dispute shall be settled by binding arbitration
pursuant to Section 10.15. No later than December 31, 1998, and by each December
31 thereafter, the parties shall amend the Transfer Price for the following
twelve-month period pursuant to a formula to be mutually agreed to by the
parties, taking into account then market conditions and the foregoing
parameters.
(b) In addition, Medtronic shall be entitled to purchase from CMI a [*]
of demonstration Systems, as mutually determined by CMI and Medtronic, at a
price equal to [*]. Such [*] of demonstration Systems shall be consistent with
the number of Medtronic's "sales specialists" that Medtronic hires to
demonstrate and sell the Systems in the Medtronic Territory. Such demonstration
units may not be resold by Medtronic.
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(c) Payments made by Medtronic for Systems purchased for resale by
Medtronic pursuant to Section 3.3(a) shall be due and payable in full within
sixty (60) days after the date of invoice by CMI. Payments made by Medtronic for
demonstration Systems shall be due and payable in full within fifteen (15) days
after the date of invoice by CMI.
3.4) Inspection and Warranty
(a) In the event of any shortage, damage or discrepancy in or to a
shipment of Systems or in the event any of the Systems fail to comply with the
then current Specifications for the Systems, Medtronic shall report the same to
CMI and furnish such written evidence or other documentation as CMI reasonably
may deem appropriate. If the substantiating evidence delivered by Medtronic
demonstrates that such shortage, damage or discrepancy or non-conformity with
Specifications existed at the time of delivery of the Systems at the F.O.B.
point, Medtronic may return the Systems to CMI at CMI's expense, and at
Medtronic's request CMI shall use all reasonable efforts to deliver promptly
replacement Systems to Medtronic in accordance with the delivery procedures set
forth herein.
(b) CMI represents and warrants to Medtronic that all Systems sold and
delivered to any account under this Agreement will have been manufactured, if
required by law, in accordance with FDA Good Manufacturing Practices, European
Medical Device Directive requirements, ISO 9001 certification or successor
requirements, and all other applicable manufacturing requirements, and that
continually during the term of this Agreement no Systems delivered by CMI to
Medtronic or to any Medtronic account shall be adulterated or misbranded at the
time of delivery within the meaning of the U.S. Food, Drug and Cosmetic Act and
regulations thereunder. CMI shall cause Medtronic's regulatory personnel to be
provided with reasonable access from time to time to the facilities and records
of CMI for the purpose of confirming CMI's compliance with all applicable
requirements noted in this Section.
(c) CMI warrants to Medtronic and to Medtronic's customers that Systems
sold by CMI will not infringe any currently issued patents, trade secrets,
trademarks, or other intellectual property rights of any third party, and that
such products shall, when delivered at the F.O.B. point, meet the Specifications
and shall be free from defects in materials and workmanship. Medtronic shall
invoice CMI for, and CMI shall promptly pay, Medtronic's reasonable labor
charges and Medtronic's out-of-pocket materials, handling, shipping,
transportation, insurance and other expenses actually incurred in replacing
defective Systems which were under warranty.
(d) THE WARRANTIES SET FORTH ABOVE ARE IN LIEU OF ALL OTHER WARRANTIES,
EXPRESS OR IMPLIED, WHICH ARE HEREBY DISCLAIMED AND EXCLUDED BY CMI, INCLUDING,
WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE OR USE, EXCEPT CMI SHALL ALSO PROVIDE WITH RESPECT TO SYSTEMS SOLD TO
MEDTRONIC OR TO MEDTRONIC'S CUSTOMERS SUCH OTHER WARRANTIES AS CMI CUSTOMARILY
PROVIDES TO ITS CUSTOMERS OR END-USERS OF THE SYSTEMS IN THE FIELD OF USE (A
COPY OF THE CURRENT VERSION OF SUCH CUSTOMER WARRANTY IS ATTACHED HERETO AS
SCHEDULE 3.4).
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3.5) Sales and Service.
(a) Medtronic shall be solely responsible for selling, installing and
servicing all Systems in the Field of Use in the Medtronic Territory. The
Systems shall be sold under CMI trademarks and trade names subject to
Medtronic's right to indicate its status as distributor thereof on sales and
marketing materials for the Systems.
(b) Subject to Section 3.7 below, Medtronic shall be solely responsible
for providing customer and physician training to any purchaser of Systems for
use in the Field of Use in the Medtronic Territory.
(c) Medtronic shall be solely responsible for establishing the
marketing, selling and pricing strategies for the Systems in the Field of Use in
the Medtronic Territory. Such strategies will be available for review by CMI.
3.6) Marketing.
(a) CMI, at CMI's cost and expense, shall provide Medtronic from time
to time as requested by Medtronic with an adequate supply of Systems sales,
marketing, advertising and promotional materials in English for use in the
Medtronic Territory. Medtronic shall have the right, at its cost and expense and
subject to the reasonable approval of CMI, to adapt or modify the CMI sales,
marketing, advertising and promotional materials and user manuals as deemed
appropriate by Medtronic to reflect the culture or business practices and
languages of the particular regions within the Medtronic Territory and to
reflect Medtronic as the exclusive distributor of the Systems, or as otherwise
deemed appropriate by Medtronic.
(b) CMI and Medtronic may jointly fund and participate in trade shows
as mutually agreed to by the parties. As further mutually agreed to by the
parties, employees of CMI and Medtronic, respectively, shall be allowed to
interact with customers in the appropriate trade show booth of the other. In
addition, Medtronic shall have the right to demonstrate the Systems in its trade
show booths in connection with the application of its minimally invasive
surgical products.
3.7) Training.
(a) CMI, one time at its cost and expense, will provide the initial
technical training of Medtronic's sales specialists and field service
supervisors in the use, installation and service of the Systems on such date and
place as Medtronic shall designate. CMI shall also provide, at its cost and
expense, any additional training necessary with respect to any enhancements or
modifications made by CMI to the System. Medtronic will be responsible for the
cost and expense of ongoing training of its field sales and service
representatives, such training to be provided by CMI (e.g., Medtronic will pay
travel costs for its sales personnel). CMI will be responsible for the costs and
expenses of CMI's personnel and training materials for one additional annual
training course. In the event Medtronic requests any additional training, CMI
shall provide such training at a cost to Medtronic of $500 per day plus travel,
meals and other expenses reasonably incurred by CMI training personnel.
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(b) CMI will provide training for the "customer trainers" (i.e., those
Medtronic personnel and other third parties engaged in training customers at
training sites) on such dates and at such places as Medtronic shall designate to
CMI (not to exceed once per quarter). CMI will bear the cost of such training
and Medtronic will bear the costs associated with the Medtronic personnel and
customers.
3.8) Orders.
(a) Medtronic and CMI shall jointly develop order and delivery
procedures and guidelines for the Systems, including quarterly forecasts that
correspond to Medtronic's fiscal periods. Medtronic's orders shall be given no
less favorable treatment by CMI than orders from customers in North America. The
parties intend that Medtronic will maintain minimal inventories of Systems and
that, under most circumstances, CMI will ship Systems directly to locations
designated by Medtronic.
(b) Medtronic shall submit purchase orders for Systems to CMI in
writing, whether by mail, telecopier, telegram or otherwise, which shall, at a
minimum, set forth the product numbers, quantities, delivery dates, and shipping
instructions and shipping addresses for all Systems ordered. All orders shall be
subject to acceptance in accordance with the terms of this Agreement by CMI at
its office. Each purchase order shall, upon acceptance by CMI, give rise to a
contract between Medtronic and CMI for the sale of the Systems ordered and shall
be subject to and governed by the terms of this Agreement. The terms and
conditions of this Agreement shall so govern and supersede any additional or
contrary terms set forth in Medtronic's purchase order or any CMI or Medtronic
acceptance, confirmation, invoice or other document unless duly signed by an
officer of Medtronic and an officer of CMI and expressly stating and identifying
which specific additional or contrary terms shall supersede the terms and
conditions of this Agreement. Deliveries will first commence to Medtronic no
earlier than 90 days from the date Medtronic delivers its initial forecast to
CMI.
(c) On or before March 31, 1998, Medtronic shall provide CMI with a
twelve-month international sales plan indicating by month the number of Systems
anticipated to be sold by Medtronic or purchased by Medtronic for use as
demonstration units (as updated as provided herein, the "Plan"). The Plan shall
be updated by Medtronic on a monthly basis (on or before the first day of each
subsequent month) for a rolling successive twelve-month period. The first three
months of each Plan shall constitute a firm purchase commitment by Medtronic for
delivery of the number of Systems specified therein. The fourth through sixth
months of each Plan shall constitute a firm purchase commitment only insofar as
Medtronic agrees not to reduce the quantity specified therein by more than 50%,
but Medtronic otherwise may modify such quantity in the next Plan. The seventh
through twelfth months of each Plan shall be used for purposes of facilitating
Medtronic's marketing plans and meeting the lead times required by certain of
CMI's suppliers, but are not legally binding on Medtronic in any manner.
(d) CMI shall not be required to deliver quantities in excess of 100%
of forecasted requirements unless CMI has been given at least 90 days advance
written notice of the quantities to be delivered which exceed the forecasted
amounts; provided, however, that CMI shall use all commercially reasonable
efforts to supply such excess.
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(e) No purchase order shall be modified or canceled except upon the
mutual agreement of the parties. Mutually agreed change orders shall be subject
to all provisions of this Agreement, whether or not the change order so states.
Notwithstanding the foregoing, any purchase order may be cancelled by Medtronic
as to any Systems which are not delivered within sixty (60) days of the delivery
date requested by Medtronic, and any such cancellation shall not limit or affect
any contract remedies available to Medtronic with respect thereto. Any such
cancellation by Medtronic must be by written notice to CMI given within fifteen
(15) business days after such 60th day.
(f) All deliveries of Systems shall be F.O.B. CMI's manufacturing
facility. Except as provided in Section 3.4 above, CMI shall have no further
responsibility for Systems, and all risk of damage to or loss or delay of
Systems shall pass to Medtronic, upon their delivery at the aforesaid F.O.B
point. All Systems deliveries shall be made by a common carrier specified by
Medtronic or, in the event that no carrier shall have been specified by
Medtronic on or before the date fifteen (15) days prior to the requested
shipment date, a common carrier reasonably selected by CMI.
(g) CMI shall promptly inform Medtronic of any modifications or
enhancements of the Systems or any other material changes in the Specifications
for the Systems. If such changes would affect the applicable regulatory
approvals of the Systems, Medtronic shall not be required to purchase such
Systems. Notwithstanding the foregoing, CMI shall not, without Medtronic's
consent, make any changes to the Product which would make the System less useful
or effective for the Field of Use.
(h) CMI shall be responsible for packaging and any necessary
sterilization of Systems purchased under this Agreement in accordance with the
Specifications.
3.9) Upgrades. CMI shall make software and hardware upgrades and
replacement parts available to Medtronic for the Systems at prices and on terms
and conditions no less favorable than those offered to CMI's "preferred
customers" (defined as distributors, not "end users") if any, in the Field of
Use.
3.10) Reports. Medtronic shall provide CMI, on a quarterly basis, with
current customer lists for Systems sold by Medtronic and physician users (of
which Medtronic is aware) of the Systems in the Field of Use in the Medtronic
Territory. Medtronic also will periodically provide CMI with the customer name
and address for each System installation in the Field of Use in the Medtronic
Territory for warranty and regulatory purposes. Medtronic shall report any
"adverse events" (as defined by FDA regulations) promptly to CMI.
3.11) Export/Import Approvals.
(a) CMI shall be responsible for obtaining, at CMI's cost and expense,
all export licenses and permits as may be required to export the Systems from
the country of manufacture into the particular countries within the Medtronic
Territory.
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(b) Medtronic shall be responsible for obtaining, at Medtronic's cost
and expense, all import licenses and permits as may be required to import the
Systems into particular countries within the Medtronic Territory as selected by
Medtronic in accordance with then prevailing laws and regulations of such
countries. All such filings and registrations of the Systems shall be in the
name of Medtronic, whenever feasible in accordance with prevailing laws and
regulations. CMI shall cooperate fully with Medtronic in its efforts to obtain
any such approvals.
3.12) Development Sites. Medtronic will assist CMI in establishing a
reasonable number of System development sites in Europe. Medtronic will receive
a fee equal to [*]% of all proceeds received by CMI for the placement of Systems
in each of the selected sites, excluding from such proceeds any development,
consulting or upgrade expenses charged to such site. Such fee will be payable
when and as the proceeds are received by CMI.
ARTICLE 4
FIRST REFUSAL FOR OTHER DISTRIBUTION RIGHTS
-------------------------------------------
4.1 Right of First Refusal Outside Medtronic Territory.
(a) In the event that CMI proposes to enter into any distribution,
sales representative or similar license agreement which would give such third
party rights to sell the Systems with any third party regarding the sale,
distribution or licensing of the Systems in the Field of Use in North America
and/or outside the Medtronic Territory (such regions to be described as (i)
Japan (ii) Asia Pacific (excluding Japan), (iii) Australia/New Zealand, and (iv)
Central/South America), then, prior to entering into any discussions regarding
such distribution, sales representative or similar license agreement, CMI shall
notify Medtronic in writing of such intention to enter into such discussions,
including the material terms and provisions upon which CMI would be willing to
enter into such a distribution, sales representative or similar license
agreement for such region (for purposes of this Section 4.1, "CMI's Notice").
(b) For a period of 45 days after Medtronic's receipt of CMI's Notice
(for purposes of this Section 4.1, the "Exclusive Period"), CMI shall negotiate
in good faith exclusively with Medtronic regarding such distribution, sales
representative or similar license agreement for the applicable region specified
in CMI's Notice. During the Exclusive Period, CMI will not solicit offers from,
negotiate with, or provide information to any third party regarding any
distribution, sales representative or similar license relationship for Systems
in such region.
(c) If Medtronic and CMI fail to reach mutual agreement upon the terms
and provisions of a definitive agreement for such distribution, sales
representative or license relationship, then CMI may enter into a definitive
agreement for such distribution, sales representative or similar license
relationship with a third party for the applicable region specified in CMI's
Notice; provided that CMI may not enter into such definitive agreements unless
the terms and provisions thereof are, in the aggregate, no less favorable to CMI
than the terms and provisions proposed by Medtronic during the Exclusive Period.
If CMI fails to enter into such definitive agreement for the applicable region
within 180 days after expiration of the Exclusive Period, then Medtronic's
rights under this Section shall be reinstated and CMI may not enter into
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any distribution, sales representative or similar license relationship with
respect to Systems in such region without first giving Medtronic a new CMI's
Notice and complying with the terms of this Section.
(d) Medtronic's rights under this Section 4.1 shall terminate upon a
Change of Control of CMI. Notwithstanding the foregoing, Medtronic will continue
to have distribution rights to the Systems in any such region pursuant to the
terms of any then effective distribution agreement between CMI and Medtronic.
4.2 Right of First Refusal Outside Field of Use.
(a) In the event that CMI proposes to enter into any distribution,
sales representative or license agreement with any third party regarding the
sale, distribution or licensing of the Systems for use in enabling minimally
invasive surgical procedures in cardiology (outside of the Field of Use), [*]
procedures, then, prior to entering into any discussions regarding such
distribution, sales representative or licensing agreement, CMI shall notify
Medtronic in writing of such intention to enter into such discussions, including
the material terms and provisions upon which CMI would be willing to enter into
such a distribution, sales representative or licensing agreement for such
procedures (for purposes of this Section 4.2, "CMI's Notice").
(b) For a period of 45 days after Medtronic's receipt of CMI's Notice
(for purposes of this Section 4.2, the "Exclusive Period"), CMI shall negotiate
in good faith exclusively with Medtronic regarding such distribution, sales
representative or licensing agreement for the applicable procedures specified in
CMI's Notice. During the Exclusive Period, CMI will not solicit offers from,
negotiate with, or provide information to any third party regarding any
distribution, sales representative or licensing relationship for Systems for
such procedures.
(c) If Medtronic and CMI fail to reach mutual agreement upon the terms
and provisions of a definitive agreement for such distribution, sales
representative or licensing relationship, then CMI shall have [*] days from the
earlier of expiration of the Exclusive Period or termination by Medtronic of
negotiations between CMI and Medtronic in which to negotiate and enter into a
definitive agreement for such distribution, sales representative or licensing
relationship with a third party for the applicable procedures specified in CMI's
Notice; provided that CMI may not enter into such definitive agreements unless
the terms and provisions thereof are, in the aggregate, no less favorable to CMI
than the terms and provisions proposed by Medtronic during the Exclusive Period.
If CMI fails to enter into such definitive agreement for the applicable
procedures within such definitive agreement for the applicable procedures within
such [*] period, then Medtronic's rights under this Section shall be reinstated
and CMI may not enter into any distribution, sales representative or licensing
relationship for the sale of Systems for such procedures without first giving
Medtronic a new CMI's Notice and complying with the terms of this Section.
(d) Medtronic's rights under this Section 4.2 will terminate at the end
of the "Initial Term" (as defined below).
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ARTICLE 5
PRODUCT DEVELOPMENT
-------------------
5.1) Customized Systems. Medtronic may refer new product ideas or
product customization requests for the Systems in the Field of Use to designated
CMI marketing representatives. CMI shall undertake development of Medtronic's
custom product requests in a reasonable and timely manner consistent with the
way in which CMI undertakes custom product requests for its customers in North
America.
5.2) New Products. CMI and Medtronic shall each have the right, in
their respective discretion, to offer to the other party the opportunity to
co-develop products or technologies with potential application inside or outside
the Field of Use which the offering party owns or has the right to use, subject
to such mutually acceptable terms and conditions as the parties may agree. The
cost of such co-development efforts shall be shared as may be mutually agreed to
by the parties.
ARTICLE 6
TERM AND TERMINATION
--------------------
6.1) Initial Term. The initial term (the "Initial Term") for
Medtronic's rights and obligations as the sales agent for Systems in North
America and the exclusive distributor for Systems in the Medtronic Territory
shall commence on the date the Debenture is converted into shares of CMI common
stock and continue until the third anniversary of the initial commercial release
of Systems in Europe for the Field of Use.
6.2) Renewal Term; Performance Objectives.
(a) The Initial Term of Medtronic's rights and obligations as sales
agent for Systems in North America may be renewed for successive periods (a
"Renewal Term") by mutual agreement of the parties. The parties agree to
negotiate in good faith the terms and provisions of any Renewal Period. The
Initial Term of Medtronic's rights and obligations as exclusive distributor for
Systems in the Medtronic Territory shall be automatically renewed for an
additional three year period (a "Renewal Term"), provided Medtronic has met or
exceeded certain reasonable and mutually agreeable performance objectives to be
established by the parties pursuant to (b) below and as further specified in
Schedule 6.2 hereto (the "Performance Objectives"). Thereafter, the term will be
automatically renewed for additional (2) years periods (each a "Renewal Term"),
provided Medtronic has met or exceeded the Performance Objectives for the
Medtronic Territory for the then current Renewal Term to be established by the
parties.
(b) CMI and Medtronic shall negotiate in good-faith to establish on or
before December 31, 1997 the Performance Objectives for the Medtronic Territory
for the Initial Term. Six (6) months prior to the end of the Initial Term and
any Renewal Term, CMI and Medtronic shall negotiate in good faith the
Performance Objectives for the Medtronic Territory for the upcoming Renewal
Term. The Performance Objectives for the Medtronic Territory shall take into
account such factors as the size of the market, average selling prices of the
Systems,
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potential applications of the Systems, selling cycle, CMI's manufacturing
capacity, size of the relative sales forces, and other relevant factors. There
shall be one set of Performance Objectives with respect to Medtronic's rights
and obligations as the sales agent for Systems in North America on an aggregate
basis, and one set of Performance Objectives with respect to Medtronic's rights
and obligations as the exclusive distributor for Systems in the Medtronic
Territory on an aggregate basis. In the event the parties are unable to agree
upon the Performance Objectives for the Medtronic Territory, then such dispute
shall be settled by binding arbitration pursuant to Section 10.15.
6.3) Termination for Failure to meet Performance Objectives.
(a) Subject to Article 8 hereof, if Medtronic fails to meet the
Performance Objectives for North America, CMI shall have the right to terminate
Medtronic's future rights and obligations as sales agent for North America. CMI
shall give Medtronic written notice of any such intent to terminate, and
Medtronic shall have sixty (60) days in which to cure such failure to meet the
Performance Objectives or present CMI with reasonable evidence of a plan that
will cure any such failure to meet the Performance Objectives within an
additional 60 days. In the event Medtronic does not cure such failure within
such additional 60 days, CMI shall have the right to terminate Medtronic's
rights as sales agent for North America. CMI's rights under this Section 6.3(a)
shall be CMI's sole and exclusive remedy for Medtronic's failure to meet the
Performance Objectives with respect to North America.
(b) Upon any such termination of Medtronic's rights and obligations as
sales agent in North America pursuant to Subsection 6.3(a) above, CMI will
repurchase from Medtronic, at Medtronic's cost, Medtronic's entire inventory of
demonstration Systems, accessories and related materials that Medtronic may have
as of the termination date relating to Medtronic's activities as North America
sales agent. For purposes of CMI's repurchase of demonstration units,
Medtronic's cost of the Systems shall be adjusted in accordance with the
depreciation schedule attached hereto as Schedule 6.3. Notwithstanding the
foregoing, CMI shall not be obligated to repurchase any Systems, accessories or
related materials which are not in good repair or which are not, due to any
action or inaction by Medtronic, suitable for their original intended purposes.
(c) If (i) CMI has elected to utilize a "procedure-based pricing
strategy" in North America (which strategy would involve the payment of
Medtronic's commission over the collective term of individual System
agreements), and (ii) CMI terminates Medtronic's rights and obligations as its
North American sales agent for failure to meet the Performance Objectives
pursuant to subsection (a) above, CMI will be required to pay Medtronic for only
[*] of the revenue-based commissions earned but not yet paid on all such
agreements in effect on the termination date, up to a maximum of [*] of such
revenue-based commissions from the date CMI gives Medtronic written notice of
failure to meet such Performance Objectives. This formula will recognize that
all such agreements were entered into during the period that Medtronic was CMI's
sales agent, and that Medtronic's revenue-based commissions were to be paid over
the term of each such agreement; provided that Medtronic will not be entitled to
the full amount of such revenue-based commissions as a result of its failure to
meet the mutually agreed Performance Objectives.
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6.4) Conversion to Non-Exclusive for Failure to meet Performance
Objectives. Subject to Article 8 hereof, if Medtronic fails to meet the
Performance Objectives for the Medtronic Territory, CMI shall have the right to
convert Medtronic's future rights and obligations as distributor for the
Medtronic Territory to a non-exclusive basis. CMI shall give Medtronic at least
90 days prior written notice of any such intent to convert to non-exclusive, and
Medtronic shall have sixty (60) days in which to cure such failure to meet the
Performance Objectives or present CMI with reasonable evidence of a plan that
will cure any such failure to meet the Performance Objectives within an
additional 60 days. In the event Medtronic does not cure such failure within
such additional 60 days, CMI shall have the right to convert Medtronic's rights
as distributor in the Medtronic Territory to nonexclusive. CMI's rights under
this Section 6.4 shall be CMI's sole and exclusive remedy for Medtronic's
failure to meet the Performance Objectives with respect to the Medtronic
Territory.
6.5) Termination for Change of Control; Nonrenewal. In the event (i)
CMI has elected to utilize a "procedure-based pricing strategy" in North
America, and (ii) there has been a Change of Control of CMI, then CMI will have
the right, exercisable by written notice to Medtronic within 90 days after such
Change of Control, to terminate Medtronic's rights and obligations as its North
American sales agent effective six months after such written notice. In the
event of such termination, or in the event of nonrenewal of the Initial Term or
any Renewal Term of Medtronic's rights as sales agent for the Systems in North
America, Medtronic will be entitled to receive payment for [*] percent of the
revenue-based commissions earned but not yet paid on all such agreements in
effect on the termination or expiration date. In the event of such termination
or nonrenewal, CMI will repurchase from Medtronic, [*], any inventory of Systems
(including demonstration Systems), accessories and related materials that
Medtronic may have as of the termination date relating to Medtronic's activities
as North American sales agent. For purposes of CMI's repurchase of demonstration
units, Medtronic's cost of the Systems shall be adjusted in accordance with the
depreciation schedule attached hereto as Schedule 6.3. Notwithstanding the
foregoing, CMI shall not be obligated to repurchase any Systems, accessories or
related materials which are not in good repair or which are not, due to any
action or inaction by Medtronic, suitable for their original intended purposes.
In no event will CMI have the right to terminate Medtronic's rights as the
exclusive distributor for the Systems in the Medtronic Territory, or any other
region, upon any Change in Control of CMI (other than upon expiration of the
term of the exclusive distribution rights as provided herein between CMI and
Medtronic).
6.6) Medtronic's Termination for CMI Breach.
(a) Subject to Article 8 hereof, if CMI breaches any of its material
obligations under this Agreement with respect to Article 2 and/or Article 3 of
this Agreement, then Medtronic shall be entitled to terminate Medtronic's rights
and obligations under Article 2 and/or, at Medtronic's election, Article 3 of
this Agreement. Medtronic shall give CMI written notice of any such intent to
terminate, specifying whether such termination will apply to Medtronic's rights
and obligations under Article 2 or Article 3, or both, and CMI shall have sixty
(60) days in which to cure such material breach.
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(b) Upon any such termination pursuant to Subsection 6.6(a) above, CMI
will repurchase from Medtronic, at a price equal to [*] thereof, Medtronic's
entire inventory of Systems (including demonstration Systems), accessories and
related materials as of the termination date relating to Medtronic's rights and
obligations under Article 2 and/or Article 3 of this Agreement, as applicable.
For purposes of CMI's repurchase of demonstration units, Medtronic's cost of the
Systems shall be adjusted in accordance with the depreciation schedule attached
hereto as Schedule 6.3. Notwithstanding the foregoing, CMI shall not be
obligated to repurchase any Systems, accessories or related materials which are
not in good repair or which are not, due to any action or inaction by Medtronic,
suitable for their original intended purposes.
(c) Upon any such termination pursuant to Subsection 6.6(a) above with
respect to Medtronic's rights and obligations under Article 2, if CMI has
elected to utilize a "procedure-based pricing strategy" in North America, CMI
shall continue to pay Medtronic for [*] percent [*]% of all revenue-based
commissions which would have become due and payable but for such termination on
all such North America "procedure-based pricing" customer agreements in effect
on the termination date.
6.7) CMI's Termination for Medtronic Breach.
(a) Subject to Article 8 hereof and except as otherwise provided in
Section 6.4, if Medtronic breaches any of its material obligations under this
Agreement with respect to Article 2 and/or Article 3 of this Agreement, then CMI
shall be entitled to terminate Medtronic's rights and obligations under Article
2 and/or, at CMI's election, Article 3 of this Agreement. CMI shall give
Medtronic written notice of any such intent to terminate, specifying whether
such termination will apply to Medtronic's rights and obligations under Article
2 or Article 3, or both, and Medtronic shall have sixty (60) days in which to
cure such material breach.
(b) Upon any such termination pursuant to Subsection 6.7(a) above, CMI
shall have the option, exercisable within 20 days after such termination, to
repurchase from Medtronic, at Medtronic's cost, Medtronic's entire inventory of
Systems (including demonstration Systems), accessories and related materials, as
of the termination date relating to Medtronic's rights and obligations under
Article 2 and/or Article 3 of this Agreement, as applicable. In the event CMI
fails to exercise such repurchase option, Medtronic shall have the right to
sell-off its remaining inventory of Systems. For purposes of CMI's repurchase of
demonstration units, Medtronic's cost of the Systems shall be adjusted in
accordance with the depreciation schedule attached hereto as Schedule 6.3.
Notwithstanding the foregoing, CMI shall not be obligated to repurchase any
Systems, accessories or related materials which are not in good repair or which
are not, due to any action or inaction by Medtronic, suitable for their original
intended purposes.
(c) Upon any such termination pursuant to Subsection 6.7(a) above with
respect to Medtronic's rights and obligations under Article 2, if CMI has
elected to utilize a "procedure-based pricing strategy" in North America, CMI
shall continue to pay Medtronic for [*] percent [*]% of all revenue-based
commissions which would have become due and payable but for such termination on
all such North America "procedure-based pricing" customer agreements in effect
on the termination date up to a maximum of eighteen months (measured from the
date CMI gives Medtronic written notice of such breach).
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6.8) Rights and Obligations on Termination. In the event of termination
of all or a portion of this Agreement for any reason, the parties shall have the
following rights and obligations:
(a) Termination of all or a portion of this Agreement shall not release
either party from the obligation to make payment of all amounts
previously due and payable;
(b) In the event of the termination of Medtronic's distribution rights
with respect to all of the Medtronic Territory in accordance with
Section 6.6 or Section 6.7, (i) all purchase orders for Systems which
provide for delivery after the effective date of termination shall be
cancelled, (ii) Medtronic shall assign, at CMI's cost and expense, all
regulatory approvals and files regarding sales of Systems in such
geographic area to CMI, and (iii) Medtronic and CMI shall cooperate to
assure continued service and support to customers in such geographic
area who purchased Systems from Medtronic. CMI hereby acknowledges
Medtronic's right to continue to sell Systems purchased from CMI to any
person or entity in the Medtronic Territory until such time as
Medtronic's entire inventory of Systems is sold; and
(c) Without limitation of Section 10.6 hereof, the parties' payment and
audit obligations pursuant to Articles 2 and 3 hereof, and the parties
obligations pursuant to Articles 7, 9 and 10 hereof, shall survive
termination of this Agreement.
ARTICLE 7
INDEMNIFICATION
---------------
7.1) CMI's Liability. CMI shall indemnify, defend and hold harmless
Medtronic and each of its subsidiaries, officers, directors, employees,
shareholders and distributors from and against and in respect of any and all
demands, claims, actions or causes of action, assessments, losses, damages,
liabilities, interest and penalties, costs and expenses (including, without
limitation, reasonable legal fees and disbursements incurred in connection
therewith and in seeking indemnification therefor, and any amounts or expenses
required to be paid or incurred in connection with any action, suit, proceeding,
claim, appeal, demand, assessment or judgment) ("Indemnifiable Losses"),
resulting from, arising out of, or imposed upon or incurred by any person to be
indemnified hereunder by reason of (i) any breach of representation, warranty,
covenant or agreement on the part of CMI under this Agreement, (ii) total or
partial Systems recalls, or (iii) alleged defects in materials, workmanship,
product performance, or design of the Systems, but in any event excluding
matters for which Medtronic is responsible under Section 7.2 below. CMI shall
maintain product liability insurance or self-insurance in such amounts as is
advisable pursuant to ordinary good business practice for a similar company in a
similar type of business, and shall provide Medtronic with evidence of this
coverage.
7.2) Medtronic's Liability. Medtronic shall indemnify, defend and hold
harmless CMI and each of its subsidiaries, officers, directors, employees,
shareholders and suppliers from and against and in respect of any and all
demands, claims, actions or causes of action, assessments,
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losses, damages, liabilities, interest and penalties, costs and expenses
(including, without limitation, reasonable legal fees and disbursements incurred
in connection therewith and in seeking indemnification therefor, and any amounts
or expenses required to be paid or incurred in connection with any action, suit,
proceeding, claim, appeal, demand, assessment or judgment) ("Indemnifiable
Losses"), resulting from, arising out of, or imposed upon or incurred by any
person to be indemnified hereunder by reason of (i) any breach of
representation, warranty, covenant or agreement on the part of Medtronic under
this Agreement, (ii) product claims whether written or oral, made or alleged to
be made, by Medtronic in its advertising, publicity, promotion, or sale of any
Systems where such product claims were not provided by or approved by CMI, or
(iii) negligent handling by Medtronic of the Systems, but in any event excluding
matters for which CMI is responsible under Section 7.1 above.
7.3) Third Party Claims. If a claim by a third party is made against
any indemnified party, and if the indemnified party intends to seek indemnity
with respect thereto under this Article 7, such indemnified party shall promptly
notify the indemnifying party of such claim; provided, however, that failure to
give timely notice shall not affect the rights of the indemnified party so long
as the failure to give timely notice does not materially adversely affect the
indemnifying party's ability to defend such claim against a third party. The
indemnifying party shall be entitled to settle or assume the defense of such
claim, including the employment of counsel reasonably satisfactory to the
indemnified party, as provided below. If the indemnifying party elects to settle
or defend such claim, it shall notify the indemnified party within thirty (30)
days (but in no event less than twenty (20) days before any pleading, filing or
response on behalf of the indemnified party is due) of its intent to do so. If
the indemnifying party elects not to settle or defend such claim or fails to
notify the indemnified party of its election within thirty (30) days (or such
shorter period provided above) after receipt of the indemnified party's notice
of a claim of indemnity hereunder, the indemnified party shall have the right to
contest, settle or compromise the claim without prejudice to any rights to
indemnification hereunder. Regardless of which party is controlling the
settlement or defense of any claim, (i) both the indemnified party and
indemnifying party shall act in good faith, (ii) the indemnifying party shall
not thereby permit to exist any lien, encumbrance or other adverse charge upon
any asset of any indemnified party or of its subsidiaries, (iii) the
indemnifying party shall permit the indemnified party to participate in such
settlement or defense through counsel chosen by the indemnified party, provided
that all fees, costs and expenses of such counsel in an action controlled by the
indemnifying party shall be borne by the indemnified party, unless the
indemnifying party and indemnified party have conflicting available defenses to
such third party claim, in which case such fees, costs and expenses shall be
borne by the indemnifying party, (iv) no entry of judgment or settlement of a
claim may be agreed to without the written consent of both the indemnified party
and the indemnifying party, which consents shall not be unreasonably withheld,
and (v) the indemnifying party shall agree promptly to reimburse the indemnified
party for the full amount of such claim pursuant to this Article 7. So long as
the indemnifying party is reasonably contesting any such claim in good faith as
permitted herein, the indemnified party shall not pay or settle any such claim;
provided that the indemnified party may settle any such claim so long as the
indemnifying party is not adversely affected thereby. The controlling party
shall deliver, or cause to be delivered, to the other party copies of all
correspondence, pleadings, motions, briefs, appeals or other written statements
relating to or submitted in connection with the settlement or
22
<PAGE> 23
defense of any such claim, and timely notices of, and the right to participate
pursuant to (iii) above in any hearing or other court proceeding relating to
such claim.
7.4) Cooperation as to Indemnified Liability. Each party hereto shall
cooperate fully with the other parties with respect to access to books, records,
or other documentation within such party's control, if deemed reasonably
necessary or appropriate by any party in the defense of any claim which may give
rise to indemnification hereunder.
ARTICLE 8
FORCE MAJEURE
-------------
8.1) Force Majeure. "Force Majeure" shall mean any event or condition,
not existing as of the date of signature of this Agreement, not reasonably
foreseeable as of such date and not reasonably within the control of either
party, which prevents in whole or in material part the performance by one of the
parties of its obligations hereunder, such as act of God, act of government, war
or related actions, civil insurrection, riot, sabotage, strike, epidemic, fire,
flood, windstorm, and similar events.
8.2) Notice. Upon giving notice to the other party, a party affected by
an event of Force Majeure shall be released without any liability on its part
from the performance of its obligations under this Agreement, except for the
obligation to pay any amounts due and owing hereunder, but only to the extent
and only for the period that its performance of such obligations is prevented by
the event of Force Majeure.
8.3) Suspension of Performance. During the period that the performance
by one of the parties of its obligations under this Agreement has been suspended
by reason of an event of Force Majeure, the other party may likewise suspend the
performance of all or part of its obligations (other than payment obligations)
hereunder to the extent that such suspension is commercially reasonable.
ARTICLE 9
INTELLECTUAL PROPERTY
---------------------
9.1) Trademark License. Medtronic shall have a royalty-free license to
use all trademarks, trade names and logotypes of CMI relating to the Systems
solely in connection with the sale or other distribution, promotion, advertising
and/or maintenance of the Systems in the Field of Use. Medtronic shall acquire
no right, title or interest in such CMI trademarks, trade names and logotypes,
other than as provided for above, and Medtronic shall not use any CMI
trademarks, trade names and logotypes as part of Medtronic's corporate or trade
name or permit any third party under Medtronic's control to do so without the
prior written consent of CMI. All rights under this Section 9.1 shall terminate
upon termination of this Agreement under Article 6, subject to Section 6.8(b).
23
<PAGE> 24
9.2) Ownership. CMI represents and warrants to Medtronic the following:
CMI is the exclusive owner or licensee of all right, title and interest in and
to all Intellectual Property used in the research, design, development,
manufacture or sale of the Systems (the "CMI Intellectual Property") free and
clear of any liens, charges, security interests, mortgages, pledges,
restrictions, adverse claims or any other encumbrances of any kind except for
Medtronic's security interest. To the knowledge of CMI, neither CMI, its
business, any of the Systems, nor the execution and performance of this
Agreement and the transactions contemplated herein, infringes, misuses,
misappropriates or conflicts with the rights, including patent and other
intellectual property rights or contract rights, of others. To the knowledge of
CMI, the CMI Intellectual Property is valid and has not been challenged in any
judicial or administrative proceeding. To the knowledge of CMI, CMI has not
failed to take any necessary steps or appropriate actions to record its
interests, or to protect its rights, in the CMI Intellectual Property. To the
knowledge of CMI, no person or entity nor such person's or entity's business or
products has infringed, misused, misappropriated or conflicted with the CMI
Intellectual Property or currently is infringing, misusing, misappropriating or
conflicting with the CMI Intellectual Property.
9.3) Protection of CMI's Intellectual Property and Improvements. During
the term of this Agreement, CMI shall promptly inform Medtronic of any
invention, improvement, upgrading or modification relating to the Systems or
CMI's Intellectual Property relating to the Systems.
ARTICLE 10
MISCELLANEOUS
-------------
10.1) Non-Disclosure. Except as permitted or required for performance
by the party receiving such Confidential Information of its rights or duties
hereunder, each party agrees (i) not to disclose or use any Confidential
Information of the other party obtained in connection with the performance of
this Agreement, and (ii) not to disclose or provide any of such Confidential
Information of the other party to any third party and to take appropriate
measures to prevent any such disclosure by its present and future employees,
officers, agents, subsidiaries, or consultants.
10.2) Relationship. This Agreement does not make either party the
employee, agent or legal representative of the other for any purpose whatsoever.
Neither party is granted any right or authority to assume or to create any
obligation or responsibility, express or implied, on behalf of or in the name of
the other party. In fulfilling its obligations pursuant to this Agreement, each
party shall be acting as an independent contractor.
10.3) Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and the successors or assigns of the parties
hereto; provided, that (i) the rights and obligations of CMI herein may not be
assigned except to any person who succeeds to substantially all of the assets
and business of CMI to which this Agreement relates, and (ii) the rights and
obligations of Medtronic herein may not be assigned except to any person who
succeeds to substantially all of that portion of Medtronic's business to which
this Agreement relates.
24
<PAGE> 25
10.4) Complete Agreement. This Agreement, the Debenture Purchase
Agreement, the Debenture, the Security Agreement, and the Exhibits hereto and
thereto constitute the entire agreement between the parties hereto with respect
to the subject matter hereof and supersede all prior agreements whether written
or oral relating hereto. This Agreement supersedes those portions of the
Principal Terms that are directly related to the subject matter hereof.
10.5) Governing Law. Except as set forth in Section 10.15, the parties
agree that in the event of any dispute, the resolution of that dispute shall be
conducted on the state or federal courts in and for the county of Santa Barbara,
California. The parties agree that this contract is entered into and is to be
performed in the county of Santa Barbara. This Agreement shall be governed by
and interpreted in accordance with the laws of the State of California,
including all matters of construction, validity, performance and enforcement,
without giving effect to principles of conflict of laws.
10.6) Survival. All of the representations, warranties, and covenants
made in this Agreement, and all terms and provisions hereof intended to be
observed and performed by the parties after the termination hereof, shall
survive such termination and continue thereafter in full force and effect.
10.7) Waiver, Discharge, Amendment, Etc. The failure of any party
hereto to enforce at any time any of the provisions of this Agreement shall in
no way be construed to be a waiver of any such provision, nor in any way to
affect the validity of this Agreement or any part thereof or the right of the
party thereafter to enforce each and every such provision. No waiver of any
breach of this Agreement shall be held to be a waiver of any other or subsequent
breach. Any amendment to this Agreement shall be in writing and signed by the
parties hereto.
10.8) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed as original and all of which
together shall constitute one instrument.
10.9) Titles and Headings; Construction. The titles and headings to
Sections herein are inserted for the convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement. This Agreement shall be construed without regard to any presumption
or other rule requiring construction hereof against the party causing this
Agreement to be drafted.
10.10) Benefit. Nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties to this Agreement or
their respective successors or assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
10.11) Notices. All notices or other communications to a party required
or permitted hereunder shall be deemed given if in writing and delivered
personally or sent by telecopy (with confirmation of transmission) or certified
mail (return receipt requested) to such party at the following addresses (or at
such other addresses as shall be specified by like notice):
25
<PAGE> 26
if to Medtronic, to:
Medtronic, Inc.
Corporate Center
7000 Central Avenue N.E.
Minneapolis, MN 55432
Attention: General Counsel
FAX (612) 572-5459
with a copy to:
Medtronic, Inc.
Corporate Center
7000 Central Avenue N.E.
Minneapolis, MN 55432
Attention: Vice President Corporate Development and
Associate General Counsel
FAX (612) 572-5404
and if to CMI, to:
Computer Motion, Inc.
130-B Cremona Drive
Goleta, CA 93117
Attention: Gene Wang
FAX (805) 685-5170
with a copy to:
Stradling, Yocca, Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, CA 92660
Attention: Lawrence B. Cohn
FAX (714) 725-4100
Medtronic or CMI may change their respective above-specified recipient and/or
mailing address by notice to the other party given in the manner herein
prescribed. All notices shall be deemed given on the day when actually delivered
as provided above (if delivered personally or by telecopy) or on the day shown
on the return receipt (if delivered by mail).
10.12) Illegality. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
10.13) Public Announcement. Each of the parties to this Agreement
hereby agrees with the other parties hereto that, except as may be required to
comply with the requirements of applicable law or any exchange upon which such
party's capital stock is listed or traded, no press release or similar public
announcement or communication will be made or caused to be made
26
<PAGE> 27
concerning the execution or performance of this Agreement unless specifically
approved in advance by Medtronic and CMI. The foregoing shall not restrict
either party's communications with employees, customers or private investors.
10.14) Execution of Further Documents. Each party agrees to execute and
deliver without further consideration any further applications, licenses,
assignments or other documents, and to perform such other lawful acts as the
other party may reasonably require to fully secure and/or evidence the rights or
interests herein.
10.15) Dispute Resolution. Any dispute with respect to the
determination of the Transfer Prices pursuant to Section 3.3 or the Performance
Objectives pursuant to Section 6.2(b) which remains unresolved for a period of
at least 90 days despite the parties good faith efforts to negotiate a
resolution thereof may be submitted by either party to binding arbitration
pursuant to the commercial arbitration rules of the American Arbitration
Association. The arbitrator shall be an individual mutually agreed to by the
parties, or if the parties are unable to agree, selected by the AAA, who is
knowledgeable and experienced in the high-technology medical device industry.
IN WITNESS WHEREOF, each of the parties has caused this Sales Agreement
to be executed in the manner appropriate to each, as of the date first above
written.
COMPUTER MOTION, INC.
By
_____________________________________
Its
____________________________
MEDTRONIC, INC.
By
_______________________________________
Its
_____________________________
ATTACHMENTS:
Schedule 1.1 - The Medtronic Territory
Schedule 2.1 - Medtronic's "cardiac surgery sales force"
Schedule 3.4 - CMI's System product warranty
Schedule 6.2 - Performance Objectives
Schedule 6.3 - Depreciation Schedule
27
<PAGE> 28
Schedule 1.1
The Medtronic Territory
-----------------------
1. Europe. Europe shall include all of continental Europe, and further
include the United Kingdom, Ireland and the Scandinavian countries and
Eastern Europe, including the Czech Republic, Serbia, Russia and
Central Independent States of the former USSR.
2. Middle East. The Middle East shall include all of the Middle East north
and east of the Red Sea, from Turkey in the north and west, to Iran in
the east and Yemen in the south, excluding Afghanistan and Pakistan.
3. Africa. Africa shall include the entire continent of Africa and all
islands appurtenant thereto.
<PAGE> 29
Schedule 2.1
Medtronic's "Cardiac Surgery Sales Force"
-----------------------------------------
Medtronic's "cardiac surgery sales force" shall mean: (1) Medtronic's DLP sales
force (selling cannulae and related products); (2) Medtronic's heart valve sales
force (selling heart valves and related products); and /or (3) such other sales
force(s) as Medtronic, with CMI's consent (not to be unreasonably withheld),
deems appropriate to promote the System.
<PAGE> 30
SCHEDULE 3.4
CMI PRODUCT WARRANTY
COMPUTER MOTION
The Leader in Medical Robotics
================================================================================
SERVICE WARRANTY
The Zeus System is covered by warranty against defects in materials and
workmanship or malfunctions under normal use and operation. The warranty period
is twelve (12) months from the date of sale. The warranty does not apply when
the System has been subject to misuse, abuse, neglect, improper installation or
operation that has been altered, adjusted, or tampered with by any person other
than authorized service personnel.
This warranty is limited to the repair (parts and labor) of or replacement with
new or refurbished-to-new equipment -- at Computer Motion's discretion -- of
any product that is returned within the specified warranty period, and which,
after examination, shall disclose that the product is defective.
A Service Manual is included with each System. Only trained personnel should be
allowed to repair or maintain the System. The Computer Motion Technical Service
Department can supply support during business hours at 800-739-8000.
Should a malfunction occur, troubleshooting should first be done by the OR
staff or hospital biomedical staff. If, after consultation with Computer Motion
service personnel, the unit needs to be returned, freight must be prepaid by
the purchaser. Freight back ("return") is paid by Computer Motion.
After the warranty period has expired, a service contract will be available.
Computer Motion reserves the right to service the unit both during and after
the warranty period.
===============================================================================
<PAGE> 31
Schedule 6.2
Performance Objectives
----------------------
North America. The Performance Objectives for North America shall be considered
to have been satisfied so long as Medtronic uses commercially reasonable best
efforts to perform its obligations under Section 2.1.
Medtronic Territory. The Performance Objectives for the Medtronic Territory
shall consist of aggregate unit volume sales targets for the hardware components
of the System to be negotiated pursuant to Section 6.2(b) based on the factors
specified therein.
<PAGE> 32
Schedule 6.3
Depreciation of Demonstration Systems
-------------------------------------
CMI's repurchase of demonstration Systems shall be at a depreciated
price based on the generally accepted accounting principles and depreciation
schedule used by CMI for financial accounting purposes.
<PAGE> 1
Certain portions of this exhibit have been omitted based upon a request for
confidential treatment. Omitted portions have been separately filed with the
Commission.
EXHIBIT 10.16
BUSINESS AGREEMENT between
Computer Motion, Inc. and Bulova Technologies, L.L.C.
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
1. Purpose
2. Period of Agreement
3. Scope
4. Authorized Manufacturer Status
5. Quality Statement
6. Purchase Orders
7. Forecasts
8. Batch Manufacturing
9. Finished Goods Inventory
10. Pricing
11. Inventory Transfer from CMI to Bulova
12. Approved Suppliers and Open Purchase Orders
13. Invoices and Payment Terms
14. Shipping and Packaging
15. ECO Management, Document Control, and Configuration History
16. Non-Conforming Materials
16. Obsolete materials
18. Warranty & Non-Warranty
19. Service Spares and Replacement Parts
20. Root Cause and Corrective Action Process
21. Regulatory Compliance
22. Proprietary Information
23. Ownership
24. License
25. Product Liability and Insurance Coverage
26. Publicity
27. Survival
28. Assignments or Termination of Agreement
29. Miscellaneous
30. Agreement Signature Approvals
ADDENDUM A: Forecast Details
</TABLE>
Business Agreement
Page 1 of 10
<PAGE> 2
1. PURPOSE: This business agreement is made between Computer Motion, Inc.
(CMI) of Goleta, California and Bulova Technologies, L.L.C. (Bulova) of
Lancaster, Pennsylvania. CMI desires to purchase contract manufacturing
services provided by Bulova in accordance with the terms and conditions
established within this business agreement. Exclusive manufacturing
privileges are not provided by this agreement. Addendum's to this
agreement will be created as future products become available and the
specific terms and conditions for those products are defined by CMI and
Bulova. The addition of future products into this agreement is highly
dependent upon the performance and results associated with this first
product, the AESOP Positioner, and subject to mutual agreement of CMI and
Bulova.
2. PERIOD OF AGREEMENT: This agreement begins on February 28, 1997, and
continues until either CMI or Bulova exercises the termination clause
defined within section 28 of this agreement, "Assignments or Termination
of Agreement".
3. SCOPE
3.4 AESOP SCOPE POSITIONER: CMI will provide a completed design,
production ready samples, drawings, assembly instructions, certain
assembly tools, specifications, test fixtures, and test programs
related to an assembly referred to as a robotic positioning arm
(positioner), which is part of a CMI medical product system known as
AESOP (Automated Endoscopic System for Optimal Positioning). Bulova
will provide turnkey manufacturing services for this positioner
assembly, including component purchasing quality and reliability
management, documentation and configuration management, assembly
labor, manufacturing engineering, assembly processes, and functional
verification testing.
4. AUTHORIZED MANUFACTURER STATUS: Bulova is required to maintain status as
an authorized manufacturer, as defined in the following sections that
address assessments, qualification, product acceptance, and business
reviews.
4.1 ASSESSMENT PROCESS: The site assessment and product performance
review processes are conducted using CMI's TQRDCB assessment
techniques (Technology, Quality, Reliability, Delivery, Cost,
Business Relationship). CMI will provide a quarterly report card to
Bulova indicating the CMI rating of Bulova for performance against
expectations using these six assessment elements.
4.2 QUALIFICATIONS: Bulova will conform to a 2 level qualification
process, as described below.
4.2A MANUFACTURING SITE QUALIFICATION (MSQ): CMI has performed a
full assessment of the Bulova facility in Lancaster, PA, and
effective at the signing of this agreement, Bulova has earned
"manufacturing site" approval for this facility. This site
qualification is valid for the next 12 months and site
approval must renew each year by CMI. This renewal process
will include a follow-up site assessment and performance
review of the most recent year's contract activities with CMI.
Bulova will only manufacture CMI products from qualified
locations. If Bulova desires additional site qualifications, a
request should be made in writing to CMI at least 60 days in
advance of when any product or subassembly manufacturing
activity would begin. CMI will conduct the necessary site
audits within 30 days of receiving the written request, and
upon acceptance by CMI, a formal letter of Site Acceptance
would be provided. In no circumstance will any product or
subassembly work begin before this formal acceptance is
provided by CMI. Additionally, Bulova must maintain its
ISO9002 Registration for each site that is qualified.
4.2B PRODUCT MANUFACTURE QUALIFICATION (PMQ): CMI will allow a
conditional PMQ for the AESOP Positioner pending results from
the first quarterly performance review. PMQ is valid for an
indefinite period, and will be re-examined during all
quarterly performance reviews. Bulova must receive and
maintain specific PMQ for each product under contract with
CMI. Quarterly reviews will be conducted in conjunction with
Executive Business Reviews when possible, either by on site
visit or by telephone.
Page 2 of 10
<PAGE> 3
4.3 PRODUCT ACCEPTANCE CRITERIA: Bulova agrees to ship products that
conform to the CMI product acceptance checklist. This will include
functional test exercises and visual inspections that will be
documented by Bulova, and a duplicate copy of these acceptance test
results will be included with all shipments of the product to CMI.
Bulova will historically maintain all records of inspection and test
of components, sub-assemblies, and finished goods related to this
CMI agreement. Any shipment of non-conforming product to CMI will
result in an immediate suspension of all manufacturing activity for
that specific product. This suspension will remain in effect until
root cause and corrective actions are defined, as outlined in
section 20, "Root Cause and Corrective Action Process".
4.4 EXECUTIVE BUSINESS REVIEWS: Business reviews to discuss ratings,
performance, corrective actions, and building the strategic
relationship will be organized twice annually. Additional reviews
may be conducted as required, and can be initiated by either party.
The location of the semi-annual reviews will rotate between CMI and
Bulova.
5. QUALITY STATEMENT: Bulova agrees and assures that all products
manufactured by Bulova for CMI must conform to the rigorous requirements
that are typical of a class 2 medical device as they relate to quality and
long term reliability. Bulova will measure quality and reliability
performance for the duration of this agreement and provide written
quantitative results on a quarterly basis. The metrics for measurement and
reporting will be mutually agreed upon by Bulova and CMI.
6. PURCHASE ORDERS: CMI will issue blanket purchase orders as required
authorizing Bulova to procure all AESOP components required to meet at
least the next 12 months' delivery requirements. These blanket purchase
orders will be binding on CMI for all material required to meet CMI's 12
month delivery requirements. Monthly, all current open delivery dates will
be reviewed, and delivery dates and quantities will be adjusted to match
CMI requirements. Bulova will provide a detailed rolling delivery date
commitment with a horizon of 90 days. A blanket purchase order for 210
units will be issued with the signing of this business agreement, which
should meet the delivery requirements of CMI for the first 12 month
delivery period beginning June 1997.
7. FORECASTS: Quarterly, CMI will provide Bulova with a rolling 18 month
forecast. There is no commitment by CMI to Bulova resulting from this
forecast information, except as defined in blanket purchase orders. It is
the intent of CMI to limit all purchase liability to the commitments
provided in blanket purchase orders. The 18 month rolling forecast is
provided for strategic planning purposes only, and is non-binding. See
addendum A for the first forecast for the AESOP Scope Positioner.
8. BATCH MANUFACTURING: In order for Bulova to achieve economies associated
with component purchasing and product assembly, it is the intent of Bulova
to build positioner assemblies in 6 month batches. The first forecast
build schedule is estimated as follows, with trigger points and the
resulting build/ship periods defined.
<TABLE>
<CAPTION>
==============================================================================
fresh build supplier kit complete build ship
forecast qty POs Placed & released period period
- ------------------------------------------------------------------------------
6 months 30 days 90 days 30 days 6 months
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
[*] [*] [*] [*] [*] [*]
[*] [*] [*] [*] [*] [*]
[*] [*] [*] [*] [*] [*]
==============================================================================
</TABLE>
Page 3 of 10
<PAGE> 4
9. FINISHED GOODS INVENTORY: In order to meet the demands of a dynamic
industry, Bulova shall manufacture and keep available a minimum of 90 days
worth of finished goods inventory on hand at all times. CMI will be liable
for this 90 days worth of finished goods inventory to include all material
and labor. This 90 day quantity will be defined directly from the
forecasts provided by CMI. This finished goods Inventory will provide the
necessary shipment flexibility to meet all planned and unplanned customer
demand. CMI agrees to purchase the number of units projected in the 90 day
forecast. Bulova agrees to store these completed units a maximum of 30
days beyond the 90 day rolling forecast at no cost. At the end of this 30
day period, Bulova will invoice for units not shipped.
10. PRICING: AESOP SCOPE POSITIONER: Initial AESOP positioner pricing will be
on a "cost plus not to exceed" basis. The unit price target for the first
100 units is $5,200, with a maximum unit price cap of $5,500. Cost plus
pricing will be calculated as follows:
<TABLE>
<S> <C>
[*] [*]
[*] [*]
[*] [*]
[*] [*]
---
[*] [*]
[*] [*]
</TABLE>
All costs shown above are estimated. Actual prices to CMI are variable and will
depend upon actual cost results, except for Overhead (facility, OH, indirect
labor, profit). The overhead fee of $[*] per unit is fixed for these first 100
units. Pricing for the second batch of 100 units manufactured by Bulova will be
negotiated after all cost information is available from the first batch of 100
units. Bulova agrees to provide all cost information relating to materials,
direct labor, overhead labor, and overhead costs. The time frame of this
negotiation will be May/June 1997. All finished product prices shall include
packaging materials, packing labor, and taxes associated with the manufacture of
the product. Shipping costs will be charged separately at actual cost, or billed
direct to CMI in accordance with CMI instructions.
11. INVENTORY TRANSFER FROM CMI TO BULOVA: Bulova agrees to purchase existing
inventories from Teleflex Control Systems (TCS) in Oxnard, Ca. This is
CMI's current subcontractor for use in the manufacture of the AESOP
Positioner. The value of these inventories is approximately $[*].
Within 30 days of signing this agreement, Bulova agrees to issue a
purchase order to TCS for this inventory. Invoicing for these materials
will be 50% at the time of initial inventory transfer, and 50% 4 months
later. Payment terms will be net 45 days from invoice date. It is
estimated that this first 50% represents two thirds of the materials
requirement for the first 100 positioners. It is further estimated that
90% of this inventory will be consumed with the manufacture of the first
200 positioners. CMI assumes full responsibility for any non-conforming
materials that are a part of this initial inventory transfer, and as such
will facilitate a return for credit or replacement to TCS. CMI will
reimburse Bulova for the full value of any non-conforming product no later
than 45 days after Bulova determines the product is non-conforming. Bulova
agrees to make best efforts to control and protect the integrity of this
inventory, and to resolve all potential non-conformance's in a timely
fashion. Further, all non-conforming material dispositions must be in the
best interests of both CMI and Bulova. Non-conforming material
dispositions must be made jointly between CMI and Bulova if that
disposition results in a cost to CMI. Bulova will assume responsibility
for all materials damaged by Bulova.
12. APPROVED SUPPLIERS AND OPEN PURCHASE ORDERS: All component suppliers are
subject to approval by CMI prior to incorporating any supplied components
or assemblies into the final assembly for shipment to CMI or a CMI
customer. As part of the technical document package, an approved supplier
list will be provided. This approved supplier list will be ECO controlled
and all proposed changes to current approved suppliers will require
written ECO acceptance by CMI. The words "supplier" and "vendor" shall be
synonymous. This approved supplier list will be referred to as the AVL.
Bulova retains full responsibility for supplier compliance to quality and
reliability requirements independent of the AVL approval process.
Page 4 of 10
<PAGE> 5
Additionally, CMI will be assuming approximately $[*] in open component
purchase commitments from Teleflex Control Systems. These open purchase
orders are for current revision components related to the manufacture of
the AESOP positioner. In order to reduce this open purchase liability
between CMI and various approved suppliers, Bulova agrees to place
purchase orders with these current approved suppliers prior to placing
orders with any other approved suppliers. A complete listing of the open
purchase commitments will be provided with the technical document package
at the commencement of this business agreement. Quarterly reviews between
CMI and Bulova will examine progress toward reducing this CMI open
purchase order liability. Bulova agrees to make its best effort to
cooperate with CMI in this effort.
13. INVOICES AND PAYMENT TERMS: All invoices will reflect PO#, line#, ship
date, part#, and serial numbers for all products shipped. All invoices
will be dated no earlier than the date product is shipped to CMI or to a
CMI customer, and payable in net 45 days from invoice date. Invoices for
non-conforming products will be credited by Bulova to CMI upon
conformation of the non-conformance by Bulova. At the time of disposition
as a conforming product, a new invoice will be submitted by Bulova.
14. SHIPPING AND PACKAGING: Unless otherwise specified within the purchase
order, all products will be delivered F.O.B. Lancaster, PA to the CMI
delivery address. All products shipped from Bulova to CMI or to CMI
customers will conform to the CMI packaging specification for that
product. Shipping materials will be procured by Bulova in accordance with
these specifications. CMI will provide these specifications and
instructions prior to the shipment of first articles. Bulova will be
responsible for all damage or loss due to Bulova's failure to properly
package products in accordance with specifications and instructions. Under
no circumstances will Bulova ever ship CMI products via United Parcel
Service, unless prior written consent is provided by CMI.
15. ECO MANAGEMENT, DOCUMENT CONTROL, & CONFIGURATION HISTORY: CMI retains all
ECO (engineering change order) approval responsibility. All component
specification changes or design modifications must be approved by the CMI
Director of Quality and Regulatory Affairs. Bulova is permitted to propose
and document proposed changes. However all changes must be approved by CMI
prior to incorporation into any product manufactured for CMI. It will be
the responsibility of Bulova to maintain a complete technical document
package at the Lancaster facility, and properly manage the revision level
and location of all document copies. All documents that will change as a
result of an approved ECO, will be updated by Bulova, and a copy
(electronic or hard copy) will be provided to CMI within 30 days after
approval and incorporation. All products will display a unique serial
number. This serial number will be created in accordance with CMI
instructions. A detailed configuration history by product serial number
and ship date must be maintained at all times, with quarterly updates
provided to CMI. All documentation, approved ECO's, configuration
histories, inspection data, and acceptance test reports must be
periodically archived and held in a safe location other than the
manufacturing site in Lancaster, PA. Archives can be electronic, hard
copy, or microfilm, as long as duplication is possible in the event of a
forced recovery.
16. NON-CONFORMING MATERIALS: Bulova will fully manage and take responsibility
for all conformance requirements for materials. Bulova will make best
efforts to assure all material conformance, and seek return for
replacement or credit from suppliers who do not meet design, performance
or reliability specifications.
17. OBSOLETE MATERIALS: CMI will assume all responsibility for obsolete
materials resulting from any changes approved by CMI. It will be incumbent
upon Bulova to negotiate an equitable disposition of all obsolete material
for Bulova and CMI.
18. WARRANTY AND NON-WARRANTY: Bulova warrants that all finished products and
the components required to manufacture these products will be new at time
of delivery and, for a period
Page 5 of 10
<PAGE> 6
of [*] years following acceptance by CMI, will be free from defects in
material and workmanship. Bulova will repair or replace all products
returned to Bulova within this [*] year period at no additional charge to
CMI or CMI customers. All repairs or replacements performed by Bulova for
non-warranty products will be in accordance with the following formula.
Actual material cost plus [*]% to cover overhead, and actual direct
"touch" labor wages plus [*]% to cover overhead and G&A. Alternatively,
Bulova may negotiate fixed pricing for these non-warranty repairs. It is
the intent of CMI to minimize the revenue opportunity in non-warranty
repairs, and Bulova agrees to structure this activity as a non-profit
service to CMI and CMI customers. With this philosophy in mind, CMI and
Bulova agree to invest reasonable resources into designing and
manufacturing products intended to remain defect free for the useful life
of the product. This useful life is considered to be [*] years active duty
in an operating room or medical research environment. The warranty and
remedy provided under this section is the sole and exclusive warranty and
remedy offered by Bulova hereunder; and in particular Bulova hereby
excludes any implied warranty or merchantability or fitness for a
particular purpose. Bulova agrees to manufacture this product in
accordance with the appropriate specifications and drawings.
19. SERVICE SPARES AND REPLACEMENT PARTS: In the event that CMI desires to
provide repair services for products manufactured by Bulova, it is agreed
that Bulova will provide any spare or replacement parts to CMI at actual
cost plus [*]% to cover overhead and G&A. Bulova will provide these
components at any time during the production life of the product, but only
so long as the actual replacement part desired remains part of the
product. If any component or product is planned to experience an
end-of-life in production, CMI will be given notice and opportunity to
place an end-of-life purchase for spares and replacement components no
later than 120 days prior to a components end-of-production life. Bulova
will create and gain approval from CMI on an end-of-life component
purchase that Bulova will maintain for a period of two years after the
last product containing that component is shipped from Bulova to CMI or a
CMI customer. After this two year period, CMI will be responsible for the
purchase of these remaining material inventories less all quantities
consumed in the repair/replacement relationship. The purchase price will
be actual purchase prices without markup for overhead. Bulova will assume
responsibility for all other excess materials that were not part of the
inventory repair/replacement plan and remain after this two year period.
20. ROOT CAUSE AND CORRECTIVE ACTION PROCESS: All non-conforming products that
are identified at Bulova during the final test process, or any
non-conforming products that are discovered at CMI must become part of a
formal corrective action process. This process can be defined by Bulova
and approved by CMI. This process must include a conclusive root cause
effort and written corrective action plan for each non-conformance. It is
imperative that this process be as timely as possible. Any non-conforming
product that ships to CMI may result in an immediate suspension of all
future shipments to CMI until the root cause effort is complete, and the
corrective actions identified. This possible suspension of product
shipments will be at the discretion of CMI. Invoices for product found to
be non-conforming at CMI or CMI customer site, will be placed on hold
until final disposition as a conforming product, per section 13, "Invoices
and Payment Terms".
21. REGULATORY COMPLIANCE: CMI will forward copies of all customer complaints,
user reports, and MDR's relating to possible failures in performance of
any products manufactured by Bulova for CMI. Bulova will cooperate fully
in the investigation of these complaints and root cause determination of
all possible failure modes. If the investigation reveals that the affected
products were the result of non-compliance to this agreement by Bulova,
than all affected products will be modified or replaced by Bulova during a
CMI defined corrective action implementation effort, and the costs for
that investigation and corrective action implementation will be the sole
responsibility of Bulova. For any root cause determination that indicates
Bulova was not responsible, CMI will bear the cost of the investigation
and corrective action implementation. If suppliers contracted by Bulova
are found to be responsible for failures, than Bulova will take full
responsibility for the corrective action implementation with that
supplier, including the investigation activities by Bulova or the
supplier. All investigative activities and corrective action
implementation efforts will be documented in written reports provided to
CMI in a timely fashion. Bulova agrees to become registered with the FDA
as a
Page 6 of 10
<PAGE> 7
Contract Medical Device Manufacturer, in accordance with FDA Cosmetic Act
21 CFR Part 807 as amended, and manufacture all products in compliance
with all applicable regulations. Bulova will provide copies of any FAD GMP
Compliance inspection reports, FDA Form 483 observations, warning letters,
and close-out reports for any Bulova facility where CMI products are
manufactured.
22. PROPRIETARY INFORMATION: Bulova will maintain proprietary information (PI)
as confidential and protect against disclosure to any unauthorized person.
PI is defined as any and all drawings, specifications, blueprints, data,
trade secrets, manufacturing information, internal reports, testing
results, customer names, other confidential information or correspondence,
and business or business strategy information that Bulova learns or
aquires by virtue of the relationship between CMI and Bulova. PI shall not
include: a) information known to Bulova at the time of its disclosure by
CMI; b) information obtained by Bulova from a 3'rd party which to Bulova's
knowledge, is under no restriction as to its disclosure; c) information
which is subsequently developed by Bulova without reference to proprietary
information provided by CMI; d) information which enters into the public
domain without breech of this business agreement by Bulova. Authorized
persons are defined as Bulova employees or supplier employees needing to
have access to CMI PI in order for them to perform their job in support of
this agreement. Bulova will assure that all Bulova or supplier employees
that are provided access to PI will have a legal duty to protect all PI
and will fully understand their responsibility to protect all PI against
disclosure to any unauthorized person. Unauthorized persons are defined as
not employed by Bulova, or employed by Bulova but not required by job
responsibility to become involved in activities relating to this agreement
between Bulova and CMI.
23. OWNERSHIP: CMI will retain exclusive ownership of all PI, tooling, test
fixtures, test programs, ECO's, and related writings that are either
provided to Bulova, or created by Bulova as a result of this agreement. In
the event of a termination of this agreement by either party, these
exclusive rights will remain with CMI, and Bulova will provide all of
these documents, materials and equipment to CMI in a timely fashion
(within 90 days after termination notice is provided) in order for CMI to
transfer the manufacture of CMI products.
24. LICENSE: CMI grants no license, nor is any license, right, or privilege
implied by this agreement for Bulova to manufacture and ship products to
any customer or location other than as defined by CMI in a written
purchase order from CMI. All products under this agreement will be shipped
by Bulova in accordance with CMI instructions, and paid for by CMI
directly to Bulova. Bulova will not participate in any business
arrangement that conflicts with this agreement.
25. PRODUCT LIABILITY AND INSURANCE COVERAGE: Bulova agrees to indemnify, hold
harmless, and defend CMI, and CMI officers, directors, employees,
shareholders, and agents against all claims, damages, and costs including
attorneys' fees arising in favor of any person, group, or corporation on
account of product liability relating to a defect other than a defect for
which CMI bears responsibility in the manufacture of any product by Bulova
for CMI. Bulova will not enter into any settlement that affects CMI rights
or interest without prior written consent from CMI. Bulova shall have no
authority to settle any claim on behalf of CMI. During the period of this
agreement, Bulova will maintain at its expense the following minimum
levels of insurance coverage:
Comprehensive General Liability Insurance with personal and bodily
injury and property damage with a combined single limit of not less
than $2,000,000.
Workers Compensation Insurance to cover the full liability under the
laws of the state in which work is performed, with Employers'
Liability Coverage with a limit of not less than $500,000.
Page 7 of 10
<PAGE> 8
Automobile Liability Insurance covering bodily injury and property
damage liability arising out of the use by or on hired automobile
with combined single limits of not less than $1,000,000.
Product Liability Insurance with a single limit of not less than
$2,000,000.
26. PUBLICITY: Bulova will not disclose or advertise the existence of this
business agreement or any activities resulting from this business
agreement, as such information will be considered "proprietary
information". This includes information required by law to be incorporated
into financial or regulatory reports. Any financial or regulatory reports
containing proprietary information will be protected as proprietary
information, and provided only to those entities or persons who require it
by legal regulation.
27. SURVIVAL: All provisions defined in sections 15, 18, 19, 21, 22, 23, 24,
25, 26, and 27 of this agreement shall survive the termination of this
agreement for a period of five years.
28. ASSIGNMENTS OR TERMINATION OF AGREEMENT: The rights, duties, and
obligations of this business agreement are not transferable by Bulova in
part or in whole without prior written consent from CMI. Either Bulova or
CMI may terminate this agreement at any time. If Bulova terminates, such
termination must include formal written notification of intent to
terminate, and must include a transition plan that provides product
coverage to CMI for at least [*] months from the written termination
notification date. If CMI terminates. CMI agrees to purchase, and Bulova
agrees to release, all component and product inventory that is covered by
purchase order from CMI to Bulova. The cost for finished products will be
in accordance with the established pricing at the time of termination. The
cost for components will be at actual purchase cost without markup.
29. MISCELLANEOUS:
29.30 SECTION HEADINGS: The section headings used in this Business
Agreement (Agreement) are for purposes of convenience only. They
shall not be construed to limit or extend the meaning of any part of
this agreement.
29.31 NOTICES: Any notice, demand, approval, consent, or other
communication required or desired to be given under this Agreement
shall be in writing and shall be either personally served or mailed
in the United States mails, certified, return receipt requested,
postage prepaid, addressed to the party to be served with the copies
indicated below, at the last address given by that party to the
other under the provisions of this section. All such communications
shall be deemed delivered at the earlier of actual receipt or three
(3) business days following mailing as aforesaid.
CMI: Computer Motion, Inc.
130-B Cremona Drive
Goleta, CA 93117
Attention: David A. Stuart
VP of Operations
Bulova: Bulova Technologies, L.L.C.
P.O. Box 4787
101 N. Queen Street
Lancaster, PA 17604-4787
Attention: Ralph C. Buehler
Sr. Contract Administrator
Page 8 of 10
<PAGE> 9
29.3 BINDING EFFECT: All the terms, covenants and conditions of this
Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors.
29.4 ENTIRE AGREEMENT: This Agreement sets forth the entire understanding
and agreement between the parties with respect to the subject matter
hereof, and supersedes and replaces any prior understanding,
agreement or statement, written or oral, with respect to the same.
No provision of this Agreement shall be construed to confer any
rights or remedies on any person other than parties hereto.
29.5 CALIFORNIA LAW: This Agreement shall be governed by and interpreted
in accordance with the laws of the State of California applicable to
agreements made and to be performed entirely within such state.
29.6 TIME OF THE ESSENCE: Time is of the essence in the performance of
each and every provision of this Agreement.
29.7 ATTORNEYS' FEES: In the event of any controversy, claim or dispute
between the parties hereto rising out of or relating to this
Agreement or any of the documents provided for herein, or the breach
thereof, the prevailing party shall be entitled to recover from the
losing party reasonable attorneys' fees, expenses and costs.
29.8 PARTIES IN INTEREST: Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any persons other than the parties to it
and their respective successors and assigns, nor is anything in this
Agreement intended to relieve or discharge the obligation or
liability of any third persons to any party to this Agreement, nor
shall any right of subrogation or action over or against any party
to this Agreement.
29.9 MODIFICATION: This Agreement, and the Schedules referenced herein,
shall not be modified except by a writing signed on behalf of each
of the parties hereto.
29.10 SEVERABILITY: If any term, provision, covenant or condition of this
Agreement is found by a court of competent jurisdiction to be
invalid, void or unenforceable, then such term, provision, covenant
or condition shall be deemed to be stricken from this Agreement and
the remainder of this Agreement shall remain in full force and
effect and shall in no way be effected, impaired or invalidated
thereby.
29.11 INDEPENDENT CONTRACTOR STATUS, NO AGENCY: Bulova's and CMI's
activities hereunder shall be conducted as independent contractors
and no agency relationship shall exist between the parties.
30. AGREEMENT SIGNATURE APPROVALS
CMI and Bulova agree to execute this agreement on this day, February 18, 1997.
Computer Motion, Inc. Bulova Technologies, LLC
By: David A. Stuart By: Douglas A. Bell
Title: Vice President of Operations Title: Senior Vice President Operations
Signature: Signature:
- ----------------------------- -----------------------------
Page 9 of 10
<PAGE> 10
WITNESS: WITNESS:
By: By:
------------------------ --------------------------
Signature: Signature:
- ---------------------------- ------------------------------
ADDENDUM A: FORECAST DETAILS
Date of this forecast: February 18, 1997
Shipment Forecast for AESOP Scope Positioner over the first 18 shipment
months of this agreement will be as follows:
<TABLE>
<S> <C>
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
</TABLE>
Page 10 of 10
<PAGE> 1
EXHIBIT 10.19
[COMPUTER MOTION LETTERHEAD]
April 24, 1997
Dear Steve:
I trust that the following points of exchange closely approximate what we
discussed earlier today and as such comprise the employment agreement between
you and Computer Motion, Inc.
o CMI would like to offer you the position of Executive Vice President and
Chief Financial Officer. You will report directly to the Chief Executive
Officer/President, Gene Wang.
o You will receive a starting salary of one hundred and fifty thousand dollars
($150,000) per annum. In addition, you will be eligible for an annual bonus
of seventy five thousand dollars ($75,000). During your first year of
employment you will be guaranteed a minimum of a fifty thousand dollars
($50,000) payable February 1998, thereafter your annual bonus will be solely
based upon performance. Your bonus opportunity will be 50% of your base
salary.
o In addition, CMI will grant to you stock options of two hundred and
twenty-five thousand (225,000) shares of the Company's Common Stock at two
dollars and thirty-seven cents ($2.37) per share. Seventy-five thousand
(75,000) option shares will vest immediately, twenty five thousand (25,000)
option shares will vest six months from your commencement date, fifty
thousand (50,000) option shares will vest on the date of your first
anniversary as an employee with CMI and cumulatively thereafter, in sixteen
(16) quarterly installments four thousand six hundred eighty-seven and
one-half (4,687.5) option shares per quarter.
o You can purchase up to sixty-two thousand five hundred (62,500) shares of
Computer Motion stock, at a price of two dollars and thirty seven cents
($2.37) per share and warrants providing the rights to purchase an additional
sixty-two thousand five hundred (62,500) shares of common stock at a
two-dollars and thirty-seven cents ($2.37) per share. The warrant purchase
price is one cent ($.01) per share. The settlement date for this portion of
the transaction will be June 2, 1997. The total consideration will be one
hundred forty-eight thousand seven hundred and fifty dollars ($148,750).
o CMI will reimburse temporary living expenses for you and your family on an as
needed basis through June 30, 1998, not to exceed $3,000 per month. CMI will
reimburse you for any tax liabilities incurred regarding these expense
payments for temporary living expenses.
o In the unlikely event that you are terminated during the first twelve (12)
months of employment you will receive a severance package equal to your first
years salary and cash bonus, thereafter you will receive a severance of two
(2) years salary and cash bonus.
o In the event that the control of ownership of CMI were to change, all
unvested options and restricted shares would vest if not assumed by the new
controlling party. In addition, if you are requested to continue your
employment with CMI or the new controlling entity your unvested options would
vest on the first anniversary date of your employment with such parties. Upon
the later of either event or termination you would receive severance of
three times your annual salary and bonus.
o CMI will cover all moving expenses incurred, including commission expense and
closing transaction costs of current residence. It is anticipated that these
expenses will approximate seventy-five thousand dollars ($75,000). CMI will
reimburse you for any tax liabilities incurred regarding these expense
payments for relocation.
o As a final consideration you will be granted 10,000 shares of restricted
Computer Motion Common Stock. These shares will vest at the rate of 2,000
shares annually, commencing with the first full year of your employment with
Computer Motion.
Please acknowledge your acceptance of this offer by signing one of the copies
of this letter. Thank you and WELCOME TO COMPUTER MOTION!
Sincerely,
/s/ ROBERT DUGGAN
- -------------------------
Robert Duggan
Chairman of the Board
/s/ STEVE WILSON 4/25/97
- ------------------------ -----------------
Steve Wilson Date
<PAGE> 1
Certain portions of this exhibit have been omitted based upon a request for
confidential treatment. Omitted portions have been separately filed with the
Commission.
EXHIBIT 10.21
ZEUS DEVELOPMENT AGREEMENT
This ZEUS DEVELOPMENT AGREEMENT (hereinafter the "Agreement") is made
as of this 3rd day of July, 1997, by and between COMPUTER MOTION, INC., a
California corporation, having its principal place of business at 130-B Cremona
Drive, Goleta, California, 93117, (hereinafter referred to as "CMI"), and GALEN
HEALTHCARE, INC., a Delaware corporation, having its principal place of business
at One Park Plaza, Nashville Tennessee 37203-0550 and its subsidiaries and
affiliates (hereinafter referred to as "Columbia").
R E C I T A L S :
A. CMI has developed or acquired substantial expertise, know-how and
technical information relating to the design, development, manufacture and
testing of hardware and software for a robotic microsurgery system (hereinafter
referred to collectively as "Proprietary Information");
B. CMI is in the process of developing and refining its Zeus
Microsurgery Robotic System (the "Product");
C. CMI has developed or acquired rights to valuable hardware and
software incorporated in the Product (hereinafter referred to collectively as
"Technology") and holds patent, copyright, trade secret, trade identity and
other proprietary rights which exist in and to the Product, Proprietary
Information and Technology;
D. Columbia shall underwrite the purchase of the Product on behalf of
Medical City of Dallas Hospital ("Hospital"). The Product will reside at the
Hospital, which is owned by Columbia; and
E. CMI desires to have Columbia assist in the development and
refinement of the Product and is willing to provide Columbia a prototype Product
and certain support services in connection with Columbia's use thereof on such
terms and conditions as are provided herein.
A G R E E M E N T :
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, CMI and Columbia, intending to be
legally bound, have agreed and do hereby agree as follows:
1. LOCATION OF DEFINITIONS
(a) "CMI" and "Columbia" shall be defined as set forth in the opening
paragraph of this Agreement.
(b) "Deliverable Items" shall be defined as set forth in Paragraph
2(a) and Exhibit A.
<PAGE> 2
(c) "Hospital" shall be defined as set forth in Recital D.
(d) "Improvement" shall be defined as set forth in Paragraph 4(b).
(e) "Product" shall be defined as set forth in Recital B.
(f) "Proprietary Information" shall be defined as set forth in Recital
A and Paragraph 6(a).
(g) "Technology" shall be defined as set forth in Recital C.
(h) "Work" shall be defined as set forth in Paragraph 4(a).
2. AGREEMENTS OF CMI
(a) CMI shall deliver the "Deliverable Items" as listed on Exhibit A on
the schedule specified on Exhibit B.
(b) For eighteen months following the date of delivery of Product, CMI
shall place a Clinical Engineer, to be primarily stationed at the Hospital, with
principle responsibility for the day-to-day operations and activities relating
to the Product. The responsibilities of the Clinical Engineer shall include, but
not be limited to the following:
(i) The coordination of quarterly engineering meetings the
location of which shall alternate between Santa Barbara and
the various development partners, including the Hospital;
(ii) Arranging conference calls no less than monthly between CMI
engineering personnel and the clinical staff of the
Hospital;
(iii) Make hardware retrofit and software upgrades directly
related to the Product;
(iv) Training of Columbia staff relating to modifications and
improvements to hardware and software incorporated into the
Product; and
(v) General ongoing support of Columbia clinical studies and
research relating to the Product and the Work.
(vi) Perform Product maintenance to maintain Product in proper
working condition.
(c) CMI shall furnish Columbia with all available information relating
to the Product and such other materials as may be reasonably requested in
writing by Columbia. In addition, CMI management and engineering personnel shall
be available to answer questions and provide telephone consultation to
Hospital's medical and clinical personnel, such availability to be coordinated
by the Clinical Engineer at no additional cost. Clinical Engineer will use good
faith efforts to abide by the same policies as Columbia employees working at the
Hospital.
<PAGE> 3
3. AGREEMENTS OF COLUMBIA
(a) Columbia agrees to pay CMI the amounts set forth at the times
specified on Exhibit B, such payments to be effected by bank draft into an
account designated by CMI.
(b) Columbia acknowledges that the Product has not been approved by the
United States Food and Drug Administration, or any other governmental agency for
use on humans. Columbia agrees that it shall not use, nor permit the use of, the
Product on humans until such time as CMI has confirmed in writing to Columbia
that the Product, in the form then existing at Hospital, has been so approved.
After receipt of such confirmation, Columbia shall use the Product only in the
manner and for the procedures so approved by the applicable governmental
authorities. Columbia acknowledges that such approval may not be obtained for
several years, if at all, and that the Product, as the existing at the Hospital,
may require substantial modification to conform to the Products as approved by
the applicable governmental authorities. If and when approval is obtained, CMI
shall furnish Columbia with a copy of the FDA approval documentation.
4. OWNERSHIP OF THE WORK
(a) The results of the efforts by Columbia and its personnel under this
Agreement (the "Work"), and all revisions, amendments, modifications and
enhancements and sequels thereto produced by Columbia, a third party acting on
behalf of Columbia or CMI, including but not limited to reports, memoranda,
studies, drawings, computer programs and appurtenant object code and source
code, documentation, molds, copyrights, prototypes and models, shall be the
exclusive property of CMI.
(b) In the event that Columbia shall make any modification, improvement
or enhancement (an "Improvement") to the Product or the Technology which shall
be sufficiently original and distinct so as not to constitute a derivative work
thereof or otherwise infringe on the rights of CMI or others, Columbia and CMI
shall enter into good faith negotiations with respect to the amount and form of
compensation to which Columbia shall be entitled with respect thereto either in
the form of a one-time fee or a royalty. In order to allow an evaluation of the
modification, improvement or enhancement, Columbia will submit a confidential
written report describing in reasonable detail the nature of the Improvements
which may be compensable under the terms of this Paragraph 4(b) and identifying
the inventors therefore. Such report shall be presented to CMI not more than
forty-five (45) days after the origination of the idea or concept relating to
the Product or the Technology. CMI shall have sole and exclusive right to
assignment of, and to prosecute and maintain any and all patents arising from
the activities contemplated by this Agreement, including any Improvement. If no
agreement on compensation can be reached between CMI and Columbia, both parties
agree to submit this issue to binding arbitration.
(c) Columbia acknowledges that no such title to any such enhancements,
modifications, improvements, updates or derivative works made by Columbia to the
Technology, and related documentation, is granted by CMI to Columbia under this
Agreement, and that no such assertion shall be made by Columbia. Notwithstanding
anything to the contrary in this Paragraph 4(c), Columbia shall not assign or
sublicense its right to develop, modify and enhance the Technology to any entity
(other than a subsidiary of Columbia or any entity into which Columbia merges or
which acquires substantially all of the stock or assets of Columbia) without the
prior written consent of CMI, which shall not be unreasonably withheld.
<PAGE> 4
(d) Other than disposable products used in the performance of the
Product, Columbia may use the Product without payment of any additional fees,
royalties or other charges for usage or intellectual property rights.
5. EXPENSES
Each party shall pay its own expenses incurred by such party while
engaged in the performance of their respective duties under this Agreement.
6. CONFIDENTIALITY
(a) Each party acknowledges and agrees that certain information which
it may receive from the other party will be proprietary information to the
disclosing party. Such information includes but is not limited to:
(i) the fact that the disclosing party intends to develop or has
developed the Product;
(ii) any information concerning the Product and its intended
marketing;
(iii) any information concerning the existence, terms and
conditions of this Agreement; except that CMI or Columbia
may disclose such terms and conditions as may be required by
law;
(iv) nonpublic information concerning the business or finances of
the disclosing party; and
(v) any other information which if disclosed to a third party
could adversely affect a competitive advantage of the
disclosing party, including expertise, know-how and
technical information relating to the design, development,
manufacture and testing of Technology integrated or to be
integrated into the Product.
All of (i) through (v) shall be collectively referred to herein as
"Proprietary Information".
(b) Each party agrees, to hold in confidence all Proprietary
Information of the other party and to use at least the same degree of care to
prevent the unauthorized copying, use and/or disclosure of the other party's
Proprietary Information that it uses to protect its own confidential information
of like importance. Further, each party agrees to have each of its, consultants,
and subcontractors having access to Proprietary Information of CMI sign an
agreement to protect such confidential information. Columbia and its employees
agree that no papers, presentations or other public disclosure of the
Proprietary Information will be made without CMI's prior written approval.
(c) Each party agrees that the other party shall have the right to
approve in advance the content, time, place and manner of any announcement or
other such statement pertaining to this Agreement and the subject matter hereof,
which approval shall not be unreasonably withheld. Information which CMI will
not approve for public disclosure thereof includes, without limitation, the
financial arrangements, development and delivery schedules.
<PAGE> 5
(d) Each party's respective obligation to hold the other party's
Proprietary Information in strict confidence shall not apply to any information
that:
(i) becomes known to the general public without breach of the
non-disclosure obligations of this Agreement;
(ii) is disclosed by the owner of the Proprietary Information to
others without restriction on disclosure;
(iii) is obtained from a third party without breach of a legal,
contractual or fiduciary obligation to CMI; or
(iv) is required to be disclosed in connection with any suit,
action or other dispute related to this Agreement.
(e) Each party agrees that the unauthorized use or disclosure of the
other party's Proprietary Information may cause irreparable injury to the party
concerned. Both parties further agree that all confidentiality commitments
hereunder shall reasonably survive this Agreement.
7. PROTECTION OF PROPRIETARY RIGHTS
Columbia covenants and agrees that it shall take all reasonable actions
necessary or prudent for the protection of CMI's proprietary rights in and to
the Technology and the Work.
8. COLUMBIA'S WARRANTIES AND INDEMNIFICATIONS
(a) Columbia represents and warrants to CMI as follows:
(i) Columbia possesses full power and authority to enter into
this Agreement, and to carry out its obligations hereunder.
(ii) The performance of the terms of this Agreement and the
performance of Columbia's duties hereunder will not breach
any separate agreement by which Columbia is bound. Columbia
shall not commit any act or enter into any agreement or
understanding with any third party which is inconsistent or
in conflict with this Agreement.
(iii) There is presently no litigation or other claim, pending or
threatened, nor a fact which may be the basis of any claim,
against Columbia which would restrict or prohibit the
transactions contemplated by this Agreement. Columbia has
not taken any action or failed to take any action which
would interfere with the rights of CMI under this Agreement.
(b) Hospital agrees to indemnify and hold CMI and its officers,
directors, agents and employees harmless from and against any and all claims,
losses, liabilities, damages, expenses and costs (including reasonable attorneys
and expert witness fees) (collectively "Claims") which result from Hospital's
negligence or misuse of the Product; or any breach of any of the representations
or
<PAGE> 6
or warranties of Hospital contained in this Agreement; including Claims incurred
in the settlement or avoidance as a result of any of the foregoing; provided,
however, that CMI shall give prompt written notice to Hospital of the assertion
of any such Claim and provided further that Hospital shall have the right to
select counsel and control the defense and settlement thereof, subject to the
right of CMI to participate in any such action or to proceed at its own expense
with counsel of its own choosing.
(c) The representations, warranties and indemnification rights set
forth in this Agreement shall survive execution of this Agreement and the
performance of the obligation of Columbia hereunder.
9. CMI'S WARRANTIES AND INDEMNIFICATIONS
(a) CMI represents and warrants to Columbia as follows:
(i) CMI possesses full power and authority to enter into this
Agreement, and to carry out its obligations hereunder.
(ii) With respect to any intellectual property to be developed by
CMI which CMI will disclose to Columbia in performance of
this Agreement, CMI warrants, to the best of its knowledge,
that it has the right to make use and disclose without
liability to any third party.
(iii) The performance of the terms of this Agreement, the use of
the Product by Columbia and the performance of CMI's duties
hereunder will not breach any separate agreement by which
CMI is bound or violate or infringe any rights of any third
party, including third party intellectual property rights.
CMI shall not commit any act or enter into any agreement or
understanding with any third party which is inconsistent or
in conflict with this Agreement.
(iv) There is presently no litigation or other claim, pending or
threatened, nor a fact which may be the basis of any claim,
against CMI which would restrict or prohibit the
transactions contemplated by this Agreement or Columbia's
use of the Product. CMI has not taken any action or failed
to take any action which would interfere with the rights of
Columbia under this Agreement.
(v) The Product will substantially perform in accordance with
the representations stated in this Agreement and the
documentation and materials supplied by CMI.
(b) CMI agrees to indemnify and hold Hospital and its officers,
directors, agents and employees harmless from and against (i) any Claims of
third parties to the extent caused by defects in the design and/or manufacture
of the Product and (ii) any and all Claims which arise from the Product, the
Technology, or the use thereof, including any Claims arising from alleged
infringement of patent or other intellectual property rights of others. If such
a Claim is made or appears possible, Hospital agrees to allow CMI to modify or
replace the allegedly infringing
<PAGE> 7
component. CMI has no obligation under this Section 9 for any Claim to the
extent based on Hospital's modification of the Product or the Technology or its
combination, operation, or use with any other product, data or apparatus not
specified or provided by CMI.
(c) The representations, warranties and indemnification rights set
forth in this Agreement shall survive execution of this Agreement and the
performance of the obligation of CMI hereunder.
10. GENERAL
(a) Any notice required or permitted to be sent hereunder shall be
effective upon receipt, in writing, and shall be sent by registered or certified
mail, return receipt requested, or overnight delivery with proof of delivery, to
the appropriate party at the addresses set forth below, or to such other
addresses as such party shall have designated by notice hereunder.
Columbia
One Park Plaza
Nashville Tennessee 37203-0550
Attn: Mike Georgulis, Jr.
cc. General Counsel
Columbia
One Park Plaza
Nashville Tennessee 37203-0550
Computer Motion, Inc.
130-B Cremona Drive
Goleta, CA 93117
Attn: John Greathouse
(b) This Agreement shall be governed and interpreted in accordance with
the internal laws of the State of Tennessee. In the event of any legal
proceeding between the parties arising from this Agreement, the prevailing party
shall be entitled to recover, in addition to any other relief awarded or
granted, its costs and expenses (including reasonable attorneys' and expert
witness' fees) incurred in any such proceeding.
(c ) This Agreement does not constitute Columbia as the agent
or legal representative of CMI, or CMI as the agent or legal representative of
Columbia for any purpose whatsoever. Neither party is granted any express or
implied right or authority by the other party to assume or to create any
obligation or responsibility in behalf of or in the name of the other party, or
to bind the other party in any manner or thing whatsoever.
(d) Columbia shall be responsible for any withholding taxes,
payroll taxes, disability insurance payments, workmens' compensation,
unemployment taxes, and other similar taxes or charges on the wages and payments
received by its agents or employees and CMI shall be responsible for any
withholding taxes, payroll taxes, disability insurance payments, unemployment
taxes, and other similar taxes or charges on the wages and payments received by
the Clinical Engineer. CMI shall be responsible for the actions of the Clinical
Engineer as it would any of its employees.
<PAGE> 8
(e) Neither party shall be deemed in default of this Agreement to the
extent that performance of their obligations or attempts to cure any breach are
delayed or prevented by reason of any act of God, fire, natural disaster,
accident, act of government, shortages of materials or supplies, or any other
cause beyond the control of such party ("force majeure") provided that such
party gives the other party written notice thereof promptly and, in any event,
within fifteen (15) days of discovery thereof and uses its best efforts to cure
any such breach. In the event of any such force majeure, the time for
performance or cure shall be extended for a period equal to the duration of the
force majeure but not in excess of three (3) months.
(f) This Agreement shall be binding upon and inure to the benefit of
the successors and assigns of the parties.
(g) Should any provision of this Agreement be held to be void, invalid,
or inoperative, the remaining provisions hereof shall not be affected and shall
continue in effect as though such unenforceable provision(s) had not been
included herein. The name of this Agreement and the headings of the sections of
this Agreement are inserted for convenience of reference only and shall not be
used or relied upon in or in connection with the construction or interpretation
of this Agreement.
(h) No failure or delay by either party in exercising any right, power,
or remedy hereunder shall operate as a waiver of any such right, power, or
remedy. It is agreed that any remedies provided for in this Agreement shall be
cumulative and shall not be exclusive of any other remedies available hereunder,
or at law or in equity. No waiver or modification of any provision of this
Agreement shall be effective unless in writing and signed by the party against
whom such waiver or modification is sought to be enforced.
(i) This Agreement, including the Exhibits hereto, sets forth the
entire agreement between the parties with respect to the subject matter hereof
and supersedes all prior negotiations, understandings and agreements between the
parties hereto concerning the subject matter hereof.
(j) This Agreement may be executed in counterparts, but shall not be
binding upon the parties until it has been signed by both parties.
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first written above.
GALEN HEALTHCARE, INC. COMPUTER MOTION, INC.
By: _____________________________ By: _________________________________
Name: ___________________________ Name: _______________________________
Title: __________________________ Title: ______________________________
<PAGE> 10
EXHIBIT A
Deliverable Items
1. Fully executed copy of this Agreement.
2. One (1) fully operational prototype of the Product.
<PAGE> 11
EXHIBIT B
Schedule of Payments and Deliverable Items
<TABLE>
<CAPTION>
Description of Payment or Milestone Delivery Date Payment
- ----------------------------------- ------------- -------
<S> <C> <C>
Upon signing of this agreement by CMI and Columbia Date hereof [*]
Delivery of prototype Product Within 90 days of the date hereof [*]
Post-delivery payment due Within 30 days after delivery and [*]
acceptance of prototype Product
</TABLE>
<PAGE> 1
Certain portions of this exhibit have been omitted based upon a request for
confidential treatment. Omitted portions have been separately filed with the
Commission.
EXHIBIT 10.22
PRODUCT DEVELOPMENT AGREEMENT
This PRODUCT DEVELOPMENT AGREEMENT (hereinafter the "Agreement") is
made as of this 31st day of July, 1996, by and between COMPUTER MOTION, INC., a
California corporation, having its principal place of business at 130-B Cremona
Drive, Goleta, California, 93117, (hereinafter referred to as "CMI"), and
SARASOTA MEMORIAL HOSPITAL, a Florida corporation, having its principal place of
business at 1700 South Tamiami Trail, Sarasota, Florida, 34239-3555, and its
subsidiaries and affiliates (hereinafter referred to as "Hospital").
R E C I T A L S :
A. CMI has developed or acquired substantial expertise, know-how and
technical information relating to the design, development, manufacture and
testing of hardware and software for a robotic microsurgery system (hereinafter
referred to collectively as "Proprietary Information");
B. CMI is in the process of developing and refining its Zeus
Microsurgery Robotic System (the "Product");
C. CMI has developed or acquired rights to valuable hardware and
software incorporated in the Product (hereinafter referred to collectively as
"Technology") and holds patent, copyright, trade secret, trade identity and
other proprietary rights which exist in and to the Product, Proprietary
Information and Technology;
D. CMI desires to have Hospital assist in the development and
refinement of the Product and is willing to provide Hospital a prototype Product
and certain support services in connection with Hospital's use thereof on such
terms and conditions as are provided herein; and
E. Hospital has experience in the application of surgical techniques
and equipment and in clinical research activities which it desires to apply in
the use and refinement of the Product.
A G R E E M E N T :
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, CMI and Hospital, intending to be
legally bound, have agreed and do hereby agree as follows:
1. LOCATION OF DEFINITIONS
(a) "Claims" shall be defined as set forth in Paragraph 9(b).
(b) "CMI" shall be defined as set forth in the opening paragraph of
this Agreement.
(c) "Deliverable Items" shall be defined as set forth in Paragraph
2(a) and Exhibit A.
1
<PAGE> 2
(d) "Development Offset Payment" shall be defined as set forth in
Exhibit B.
(e) "Hospital" shall be defined as set forth in the opening paragraph
of this Agreement.
(f) "Improvement" shall be defined as set forth in Paragraph 4(b).
(g) "Product" shall be defined as set forth in Recital B.
(h) "Proprietary Information" shall be defined as set forth in Recital
A and Paragraph 7(a).
(i) "Technology" shall be defined as set forth in Recital C.
(j) "Work" shall be defined as set forth in Paragraph 4(a).
2. AGREEMENTS OF CMI
(a) CMI agrees to use diligent, good faith efforts to deliver the
"Deliverable Items" as listed on Exhibit A on the schedule specified on
Exhibit B.
(b) From the date specified on Exhibit B and throughout the term of
this Agreement, CMI shall retain and have in place a Clinical Engineer, to be
primarily stationed at the Hospital, with principle responsibility for the
day-to-day operations and activities relating to the Product. The
responsibilities of the Clinical Engineer shall include, but not be limited to
the following:
(i) The coordination of quarterly engineering meetings the
location of which shall alternate between Santa Barbara and
Sarasota;
(ii) Arranging conference calls no less than monthly between CMI
engineering personnel and the clinical staff of the Hospital;
(iii) Make hardware retrofit and software upgrades directly related
to the Product;
(iv) Training relating to modifications and improvements to
hardware and software incorporated into the Product; and
(v) General ongoing support of clinical studies and research
relating to the Product and the Work.
(c) CMI shall furnish Hospital with all available information relating
to the Product and such other materials as may be reasonably requested in
writing by Hospital. In addition, CMI management and engineering personnel shall
be available to answer questions and provide
2
<PAGE> 3
telephone consultation to Hospital's medical and clinical personnel, such
availability to be coordinated by the Clinical Engineer.
(d) Improvements made to the Production Version of the Product to be
delivered to Hospital at the conclusion of this Agreement shall be charged to
Hospital at CMI's Cost of Goods Sold (as defined by Generally Accepted
Accounting Principles), plus [*] percent ([*]%). "Production Version" is
defined as a system which has received all required federal regulatory
approvals and is being actively marketed on the open market.
(e) CMI shall waive any and all usage or other similar fees which would
otherwise be levied on Hospital related to the use of the Production Version of
the Product to be delivered to Hospital at the conclusion of this Agreement for
seven (7) years following such delivery.
3. AGREEMENTS OF HOSPITAL
(a) Hospital agrees to pay CMI the amounts set forth at the times
specified on Exhibit B, such payments to be effected by bank draft or by bank
wire transfer into an account designated by CMI, as specified in writing by CMI
not less than three (3) business days prior to the date such payment is due.
(b) Hospital agrees to utilize the Product in the performance of
surgical procedures and to utilize its facilities, clinical personnel and their
expertise to further develop and refine the Product and the Technology. Efforts
pursuant to this Paragraph 3(b) shall be in partial consideration for the use of
the Product during the term hereof and shall be uncompensated unless provided
for under Paragraph 4(b).
(c) Hospital shall, at its sole cost and expense, during the term of
this Agreement, provide:
(i) Secure space for the storage and utilization of the Product
for the conduct of the Work;
(ii) Office space, standard office supplies and general office
support services for utilization by the Clinical Engineer in
the performance of his duties under this Agreement;
(d) Hospital shall provide CMI with reasonable access to its clinical
and administrative personnel, its operating rooms and training facilities in
furtherance of the rights and obligations provided under this Agreement. The
Hospital shall, within thirty (30) days of the date hereof, designate a liaison
whom shall act as CMI's primary contact at the Hospital, such designation to be
subject to change from time to time by Hospital's written notice to CMI.
(e) Hospital shall fund mutually agreed upon hardware design
modifications, such modifications to be invoiced at CMI's actual cost, not to
exceed [*] in the aggregate. In the event Hospital desires hardware
modifications which are unilaterally requested by Hospital and not
3
<PAGE> 4
agreed to by CMI, Hospital will be responsible for the costs thereof at a rate
of [*] of the material cost relating thereto, with no additional charges being
made for labor, administration or overhead.. Any amounts payable under this
Paragraph 3(e) shall be payable by Hospital within thirty (30) days of being
submitted a written invoice with respect thereto by CMI.
4. OWNERSHIP OF THE WORK
(a) The results of the efforts by Hospital and its personnel under this
Agreement (the "Work"), and all revisions, amendments, modifications and
enhancements and sequels thereto produced by Hospital, a third party acting on
behalf of Hospital or CMI, as well as all materials produced by Hospital in
fulfillment of its obligations hereunder, including but not limited to reports,
memoranda, studies, drawings, computer programs and appurtenant object code and
source code, documentation, molds, prototypes and models, shall be the exclusive
property of CMI.
(b) In the event that Hospital shall make any modification, improvement
or enhancement (an "Improvement") to the Product or the Technology which shall
be sufficiently original and distinct so as not to constitute a derivative work
thereof or otherwise infringe on the rights of CMI or others, Hospital and CMI
shall enter into good faith negotiations with respect to the amount and form of
compensation to which Hospital shall be entitled with respect thereto. The form
of compensation contemplated under this Paragraph 4(b) shall be options for
shares of CMI common stock or royalty payments on sales of the Product
incorporating the improvement. In order to allow an evaluation of the
modification, improvement or enhancement, the Hospital will submit a written
report describing in reasonable detail the nature of the Improvements which may
be compensable under the terms of this Paragraph 4(b). Such report shall be
presented to CMI not more than forty-five (45) days after the origination of the
idea or concept relating to the Product or the Technology. CMI shall have sole
and exclusive right to prosecute and maintain any and all patents arising from
the activities contemplated by this Agreement, including any Improvement.
(c) Hospital acknowledges and agrees that CMI shall have, at its sole
and final discretion, the right to decide, specify or otherwise to determine the
following:
(i) the terms of sale of the Product, including but not limited
to wholesale and recommended retail price levels, discounts,
and returned goods policy use fees and all related matters;
(ii) territories where the Product shall be, or shall not be, sold
and distributed, and the method of sales and distribution,
whether directly by CMI, its subsidiaries or affiliates, by a
sub-licensee, or by other means;
(ii) the preparation, whether by CMI, or by a third party, of
additional versions of the Product, compatible with other
computer systems or other devices, or the preparation of any
other derivative
4
<PAGE> 5
works from the Product, which at all times shall be for the
sole benefit of CMI, except as otherwise agreed to by the
parties in writing.
(d) Hospital acknowledges that no such title to any such enhancements,
modifications, improvements, updates or derivative works made by Hospital to the
Technology, and related documentation, is granted under this Agreement, and that
no such assertion shall be made by Hospital. Notwithstanding anything to the
contrary in this Paragraph 4(d), Hospital shall not assign or sublicense its
right to develop, modify and enhance the Technology to any entity (other than a
subsidiary of Hospital or any entity into which Hospital merges or which
acquires substantially all of the stock or assets of Hospital) without the prior
written consent of CMI, which shall not be unreasonably withheld.
(e) The provisions of this Section 4 shall survive termination or
cancellation of this Agreement.
5. EXPENSES
Each party shall pay its own expenses incurred by such party while
engaged in the performance of their respective duties under this Agreement.
6. LIMITATION OF LIABILITY
Unless otherwise agreed upon in writing by CMI and Hospital, CMI's
maximum liability with respect to the Product and its use by Hospital during the
term of this Agreement shall not exceed the total of all amounts paid to CMI by
Hospital hereunder.
7. CONFIDENTIALITY
(a) Each party acknowledges and agrees that certain information which
it may receive from the other party will be proprietary information to the
disclosing party. Such information includes but is not limited to:
(i) (the fact that the disclosing party intends to develop or has
developed the Product;
(ii) any information concerning the Product and its intended
marketing;
(iii) any information concerning the terms and conditions of this
Agreement; except that CMI or Hospital may disclose such
terms and conditions as may be required by law;
5
<PAGE> 6
(iv) nonpublic information concerning the business or finances of
the disclosing party; and
(v) any other information which if disclosed to a third party
could adversely affect a competitive advantage of the
disclosing party, including expertise, know-how and technical
information relating to the design, development, manufacture
and testing of Technology integrated or to be integrated into
the Product.
All of (i) through (v) shall be collectively referred to herein as
"Proprietary Information".
(b) Each party agrees, both during and after the term of this
Agreement, to hold in confidence all Proprietary Information of the other party
and to use at least the same degree of care to prevent the unauthorized copying,
use and/or disclosure of the other party's Proprietary Information that it uses
to protect its own confidential information of like importance. Further, each
party agrees to have each of its employees, consultants, and subcontractors
having access to Proprietary Information of CMI sign an agreement to protect
such confidential information.
(c) Hospital agrees that CMI shall have the right to approve in advance
the content, time, place and manner of any announcement or other such statement
pertaining to this Agreement and the subject matter hereof, which approval shall
not be unreasonably withheld. Information which CMI will not approve for public
disclosure thereof includes, without limitation, the financial arrangements,
development and delivery schedules.
(d) Each party's respective obligation to hold the other party's
Proprietary Information in strict confidence shall not apply to any information
that:
(i) becomes known to the general public without breach of the
non-disclosure obligations of this Agreement;
(ii) is disclosed by the owner of the Proprietary Information to
others without restriction on disclosure;
(iii) is obtained from a third party without breach of a legal,
contractual or fiduciary obligation to CMI; or
(iv) is required to be disclosed in connection with any suit,
action or other dispute related to this Agreement.
(e) Each party agrees that the unauthorized use or disclosure of the
other party's Proprietary Information may cause irreparable injury to the party
concerned. Accordingly, both parties agree that the remedy at law for any breach
of this Section 7 may be inadequate and, in recognition thereof, agree that the
party suffering from unauthorized use or disclosure shall be entitled to ex
parte injunctive relief to prevent any such breach or threatened breach, without
any
6
<PAGE> 7
requirement that such party post any bond therefor. Both parties further agree
that all confidentiality commitments hereunder shall survive any cancellation or
termination of this Agreement.
8. PROTECTION OF PROPRIETARY RIGHTS
Hospital covenants and agrees that it shall take all actions necessary
or prudent for the protection of CMI's proprietary rights in and to the
Technology and the Work.
9. HOSPITAL'S WARRANTIES AND INDEMNIFICATIONS
(a) Hospital represents and warrants to CMI as follows:
(i) Hospital possesses full power and authority to enter into
this Agreement, and to carry out its obligations hereunder.
(ii) With respect to any intellectual property to be developed by
Hospital which Hospital will disclose to CMI in performance
of this Agreement, Hospital warrants that it has the right to
make use and disclosure thereof without liability to any
third party.
(iii) The performance of the terms of this Agreement and the
performance of Hospital's duties hereunder will not breach
any separate agreement by which Hospital is bound, or violate
or infringe any rights of any third party. Hospital shall
not, at any time during the term of this Agreement commit any
act or enter into any agreement or understanding with any
third party which is inconsistent or in conflict with this
Agreement.
(iv) There is presently no litigation or other claim, pending or
threatened, nor a fact which may be the basis of any claim,
against the Hospital which would restrict or prohibit the
transactions contemplated by this Agreement. Hospital has not
taken any action or failed to take any action which would
interfere with the rights of CMI under this Agreement.
(b) Hospital agrees to indemnify and hold CMI and its officers,
directors, agents and employees harmless from and against any and all claims,
losses, liabilities, damages, expenses and costs (including reasonable attorneys
and expert witness fees) (collectively "Claims") which result from Hospital's
negligence or misuse of the Product or any infringement in the creation of the
Work of any copyright, trademark or trade name, invasion of the right of
privacy, publicity, or other property right of any third party; or any breach of
any of the representations or warranties of Hospital contained in this
Agreement; including Claims incurred in the settlement or avoidance as a result
of any of the foregoing; provided, however, that CMI shall give prompt written
notice to
7
<PAGE> 8
Hospital of the assertion of any such Claim and provided further that
Hospital shall have the right to select counsel and control the defense and
settlement thereof, subject to the right of CMI to participate in any such
action or to proceed at its own expense with counsel of its own choosing.
(c) The representations, warranties and indemnification rights set
forth in this Agreement shall survive execution of this Agreement, the
performance of the obligation of Hospital hereunder and cancellation or
termination of this Agreement.
10. CMI'S WARRANTIES AND INDEMNIFICATIONS
(a) CMI represents and warrants to Hospital as follows:
(i) CMI possesses full power and authority to enter into this
Agreement, and to carry out its obligations hereunder.
(ii) With respect to any intellectual property to be developed by
CMI which CMI will disclose to Hospital in performance of
this Agreement, CMI warrants that it has the right to make
use and disclosure thereof without liability to any third
party.
(iii) The performance of the terms of this Agreement and the
performance of CMI's duties hereunder will not breach any
separate agreement by which CMI is bound, or violate or
infringe any rights of any third party. CMI shall not, at any
time during the term of this Agreement commit any act or
enter into any agreement or understanding with any third
party which is inconsistent or in conflict with this
Agreement.
(iv) There is presently no litigation or other claim, pending or
threatened, nor a fact which may be the basis of any claim,
against the CMI which would restrict or prohibit the
transactions contemplated by this Agreement. CMI has not
taken any action or failed to take any action which would
interfere with the rights of Hospital under this Agreement.
(b) CMI agrees to indemnify and hold Hospital and its officers,
directors, agents and employees harmless from and against (i) any Claims of
third parties to the extent caused by defects in the design and/or manufacture
of the Product and (ii) any and all Claims which arise from the Product or the
Technology's alleged breach of patent or other intellectual property right of
others. If such a Claim is made or appears possible, Hospital agrees to allow
CMI to modify or replace the allegedly infringing component. CMI has no
obligation under this Section 10 for any Claim to the extent based on Hospital's
modification of the Product or the Technology or its combination, operation, or
use with any other product, data or apparatus not specified or provided by CMI.
8
<PAGE> 9
(c) The representations, warranties and indemnification rights set
forth in this Agreement shall survive execution of this Agreement, the
performance of the obligation of CMI hereunder and cancellation or termination
of this Agreement.
11. TERM AND CANCELLATION
(a) The term of this Agreement shall commence on the date hereof and
continue until CMI delivers a Production Version of the Product, unless canceled
or terminated earlier in accordance with the provisions of this Agreement
("Production Version" is defined in Paragraph 2(d)).
(b) CMI or Hospital may cancel this Agreement on thirty (30) days
written notice to such other party without any liability whatsoever, excepting
rights or remedies provided pursuant to other provisions of this Agreement. The
Product and all materials provided to Hospital by CMI under this Agreement shall
be returned promptly to CMI upon the termination of this Agreement.
(c) Any unpaid Quarterly Development Offset fees payable at the time of
any cancellation or termination of this Agreement shall be prorated for the
portion of the applicable quarter during which this Agreement is in effect. Such
prorated fees and any other amounts payable hereunder shall be due and payable
in full upon such cancellation or termination.
12. GENERAL
(a) Any notice required or permitted to be sent hereunder shall be in
writing and shall be sent by registered or certified mail, return receipt
requested, or Federal Express, to the appropriate party at the address set forth
above, or to such other address as such party shall have designated by notice
hereunder.
(b) This Agreement shall be governed and interpreted in accordance with
the internal laws of the State of California. Any action or proceeding brought
to enforce the terms of this Agreement shall be brought in Santa Barbara County,
State of California, and each agrees to waive any objections to personal
jurisdiction, service of process and venue in the United States District Court
for Central District of California or California Superior Court for Santa
Barbara County. In the event of any legal proceeding between the parties arising
from this Agreement, the prevailing party shall be entitled to recover, in
addition to any other relief awarded or granted, its costs and expenses
(including reasonable attorneys' and expert witness' fees) incurred in any such
proceeding.
(c) This Agreement does not constitute Hospital as the agent or legal
representative of CMI, or CMI as the agent or legal representative of Hospital
for any purpose whatsoever. Neither party is granted any express or implied
right or authority by the other party to assume or to create
9
<PAGE> 10
any obligation or responsibility in behalf of or in the name of the other party,
or to bind the other party in any manner or thing whatsoever.
(d) Hospital shall be responsible for any withholding taxes, payroll
taxes, disability insurance payments, unemployment taxes, and other similar
taxes or charges on the payments received by its agents or employees and CMI
shall be responsible for any withholding taxes, payroll taxes, disability
insurance payments, unemployment taxes, and other similar taxes or charges on
the payments received by the Clinical Engineer.
(e) Neither party shall be deemed in default of this Agreement to the
extent that performance of their obligations or attempts to cure any breach are
delayed or prevented by reason of any act of God, fire, natural disaster,
accident, act of government, shortages of materials or supplies, or any other
cause beyond the control of such party ("force majeure") provided that such
party gives the other party written notice thereof promptly and, in any event,
within fifteen (15) days of discovery thereof and uses its best efforts to cure
any such breach. In the event of any such force majeure, the time for
performance or cure shall be extended for a period equal to the duration of the
force majeure but not in excess of six (6) months.
(f) This Agreement shall be binding upon and inure to the benefit of
the successors and assigns of the parties.
(g) Should any provision of this Agreement be held to be void, invalid,
or inoperative, the remaining provisions hereof shall not be affected and shall
continue in effect as though such unenforceable provision(s) had not been
included herein. The name of this Agreement and the headings of the sections of
this Agreement are inserted for convenience of reference only and shall not be
used or relied upon in or in connection with the construction or interpretation
of this Agreement.
(h) No failure or delay by either party in exercising any right, power,
or remedy hereunder shall operate as a waiver of any such right, power, or
remedy. It is agreed that any remedies provided for in this Agreement shall be
cumulative and shall not be exclusive of any other remedies available hereunder,
or at law or in equity. No waiver or modification of any provision of this
Agreement shall be effective unless in writing and signed by the party against
whom such waiver or modification is sought to be enforced.
(i) This Agreement, including the Exhibits hereto, sets forth the
entire agreement between the parties with respect to the subject matter hereof
and supersedes all prior negotiations, understandings and agreements between the
parties hereto concerning the subject matter hereof.
(j) This Agreement may be executed in counterparts, but shall not be
binding upon the parties until it has been signed by both parties.
10
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first written above.
Hospital: CMI:
SARASOTA COUNTY PUBLIC HOSPITAL COMPUTER MOTION, INC.
BOARD AS OWNER AND OPERATOR OF
SARASOTA MEMORIAL HOSPITAL
By: ______________________________ By: _________________________________
Name: ____________________________ Name: _______________________________
Title: ___________________________ Title: ______________________________
11
<PAGE> 12
EXHIBIT A
Deliverable Items
1. Fully executed copy of this Agreement.
2. One (1) prototype of the Product.
3. Retention of Clinical Engineer.
4. Hardware upgrades and design modifications.
A-1
<PAGE> 13
EXHIBIT B
Schedule of Payments and Deliverable Items
<TABLE>
<CAPTION>
Description of
Payment or Milestone Delivery Date Payment
-------------------- ------------- -------
<S> <C> <C>
Upon signing of this agreement by CMI and Hospital Date hereof [*]
Pro-rata portion of initial Quarterly Development Date hereof [*]
Offset Payment, prorated for partial quarter
Delivery of prototype Product Within ___ days of the date hereof. [*]
Post-delivery payment due Within 30 days after delivery of [*]
prototype Product
Retain Clinical Engineer Within ___ days of delivery of the
Product
Quarterly Development Offset Payments 1st day of each calendar quarter [*]
during the Term of this Agreement
</TABLE>
B-1
<PAGE> 1
Certain portions of this exhibit have been omitted based upon a request for
confidential treatment. Omitted portions have been separately filed with the
Commission.
EXHIBIT 10.23
RESEARCH AND DEVELOPMENT AGREEMENT
This RESEARCH AND DEVELOPMENT AGREEMENT (hereinafter the "Agreement")
is made as of this 27th day of September, 1996, by and between COMPUTER MOTION,
INC., a California corporation, having its principal place of business at 130-B
Cremona Drive, Goleta, California, 93117, (hereinafter referred to as "CMI"),
and THE MILTON S. HERSHEY MEDICAL CENTER AT THE PENNSYLVANIA STATE UNIVERSITY, a
Pennsylvania corporation, having its principal place of business at 500
University Drive, Hershey, Pennsylvania, 17033, and its subsidiaries and
affiliates (hereinafter referred to as "HMC").
R E C I T A L S :
A. CMI has developed or acquired substantial expertise, know-how and
technical information relating to the design, development, manufacture and
testing of hardware and software for a robotic microsurgery system and HMC has
substantial knowledge, expertise, know-how and technical information relating
surgical procedures and operating room protocols (hereinafter referred to
collectively as "Proprietary Information");
B. CMI is in the process of developing and refining its Zeus
Microsurgery Robotic System (the "Robotic System" described in Appendix A);
C. CMI has developed or acquired rights to valuable hardware and
software incorporated in the Robotic System (hereinafter referred to
collectively as "Technology") and holds patent, copyright, trade secret, trade
identity and other proprietary rights which exist in and to the Robotic System,
Proprietary Information and Technology;
D. CMI desires to have HMC assist in the development and refinement of
the Robotic System and is willing to provide HMC a prototype Robotic System and
certain support services in connection with HMC's use thereof on such terms and
conditions as are provided herein; and
E. HMC is a not-for-profit academic research institution with
significant expertise in the area of surgery.
A G R E E M E N T :
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, CMI and HMC, intending to be
legally bound, have agreed and do hereby agree as follows:
1. LOCATION OF DEFINITIONS
(a) "Claims" shall be defined as set forth in Paragraph 9(b).
(b) "CMI" shall be defined as set forth in the opening paragraph of
this Agreement.
(c) "Deliverable Items" shall be defined as set forth in Paragraph
2(a) and Exhibit A.
<PAGE> 2
(d) "Development Offset Fee" shall be defined as set forth in Exhibit
B.
(e) "HMC" shall be defined as set forth in the opening paragraph of
this Agreement.
(f) "Proprietary Information" shall be defined as set forth in Recital
A and Paragraph 7(a).
(g) "Production Version" shall be defined as set forth in Paragraph
10(a).
(h) "Robotic System" shall be defined as set forth in Recital B and
Appendix A.
(i) "Technology" shall be defined as set forth in Recital C.
(j) "Work" shall be defined as set forth in Paragraph 3(b) and
Appendix B.
2. AGREEMENTS OF CMI
(a) CMI agrees to use diligent, good faith efforts to deliver the
"Deliverable Items" as listed on Exhibit A on the schedule specified on
Exhibit B.
(b) From the date specified on Exhibit B and throughout the term of
this Agreement, CMI shall retain and have in place a Clinical Engineer, to be
primarily stationed at HMC, with principle responsibility for the day-to-day
operations and activities relating to the Robotic System. The responsibilities
of the Clinical Engineer shall include, but not be limited to the following:
(i) The coordination of quarterly engineering meetings the
location of which shall alternate between Santa Barbara and
Hershey;
(ii) Arranging conference calls no less than monthly between CMI
engineering personnel and the clinical staff of HMC;
(iii) Make hardware retrofit and software upgrades directly related
to the Robotic System;
(iv) Training relating to CMI's modifications and improvements to
hardware and software incorporated into the Robotic System;
and
(v) General ongoing support of clinical studies and research
relating to the Robotic System, as described in Appendix B.
(c) CMI shall furnish HMC with all available information solely
developed by CMI relating to the Robotic System and such other materials as may
be reasonably requested in writing by HMC. In addition, CMI management and
engineering personnel shall be available to answer questions and provide
telephone consultation to HMC's medical and clinical personnel, such
availability to be coordinated by the Clinical Engineer.
(d) CMI shall reimburse HMC up to [*] per animal lab performed at
HMC's facilities, up to an aggregate of [*], during the term of this
Agreement. All such animal labs must be approved in advance by CMI in order to
be eligible for reimbursement.
2
<PAGE> 3
3. AGREEMENTS OF HMC
(a) HMC agrees to pay CMI the amounts set forth at the times specified
on Exhibit B, such payments to be effected by bank draft or by bank wire
transfer into an account designated by CMI, as specified in writing by CMI not
less than three (3) business days prior to the date such payment is due.
(b) HMC agrees to utilize the Robotic System in the performance of
surgical procedures and to utilize its facilities, clinical personnel and their
expertise to further develop and refine the Robotic System and the Technology,
as described in Appendix B ("Work"). Efforts pursuant to this Paragraph 3(b)
shall be in partial consideration for the use of the Robotic System during the
term hereof and shall be uncompensated unless provided for under Paragraph 4(b).
(c ) HMC shall, at its sole cost and expense, during the term of this
Agreement, provide:
(i) Secure space for the storage and utilization of the Robotic
System for the conduct of the Work;
(ii) Office space, standard office supplies and general office
support services for utilization by the Clinical Engineer in
the performance of his/her duties under this Agreement;
(d) HMC shall provide CMI with reasonable access to its clinical and
administrative personnel, its operating rooms and training facilities in
furtherance of the rights and obligations provided under this Agreement. HMC
shall, within thirty (30) days of the date hereof, designate a liaison whom
shall act as CMI's primary contact at HMC, such designation to be subject to
change from time to time by HMC's written notice to CMI.
(e) HMC shall fund mutually agreed upon hardware design modifications,
such modifications to be invoiced at CMI's actual cost, not to exceed [*]
in the aggregate. HMC shall have the right to approve all such hardware design
modifications in advance of incurring any liability, as described in this
Paragraph 3(e). Reasonable approval of such hardware design modifications will
not be withheld. HMC shall have no right to unilaterally initiate or otherwise
execute such hardware design modifications which are not agreed to in advance by
CMI. Any amounts payable under this Paragraph 3(e) shall be payable by HMC
within thirty (30) days of being submitted a written invoice with respect
thereto by CMI.
4. OWNERSHIP OF THE WORK
(a) HMC and CMI each acknowledge and agree that all Intellectual
Property rights made or discovered pursuant to this Agreement made solely by
both party's employees and with the use of that party's facilities, will solely
be owned by that party, subject to the license option granted herein, and that
any and all Intellectual Property rights made jointly by employees or on the
facilities of both HMC and CMI pursuant to this Agreement will be jointly owned
("Joint Intellectual Property"), as determined in accordance with US laws of
inventorship.
3
<PAGE> 4
(b) In the case of Joint Intellectual Property, CMI shall have a six
(6) month option to obtain an exclusive, royalty-bearing license for such Joint
Intellectual Property. Such six (6) month period shall begin to run from the
date that CMI receives a written report from HMC as set out hereinbelow in
Paragraph 4(d). The terms to obtain or license such Intellectual Property will
be fairly based upon the amount of contribution made by HMC and its employees in
the Invention.
(c) In the case of wholly-owned HMC Intellectual Property, HMC grants
to CMI a non-exclusive license to make, use or sell Intellectual Property
developed at HMC under the terms of this Agreement under either of the following
conditions: 1) CMI has background patent rights to the Intellectual Property, or
2) the invention physically attaches to the Robotic System. CMI shall have a six
(6) month option to obtain an exclusive, royalty bearing license for such
Intellectual Property. Such six (6) month period shall begin to run from the
date that CMI receives a written report from HMC as set out hereinbelow in
Paragraph 4(d). The terms to obtain or license such Intellectual Property will
be fairly based upon the standard rates for the industry, and shall include the
right of reassignment of the Intellectual Property to CMI.
(d) The form of compensation contemplated under Paragraphs 4(b) and (c)
shall be royalty payments on sales of the Robotic System incorporating the
improvement. In order to allow an evaluation of the modification, improvement or
enhancement, HMC will submit a written report describing in reasonable detail
the nature of the Improvements which may be compensable under the terms of
Paragraphs 4(b) and (c). Such report shall be presented to CMI not more than
forty-five (45) days after the origination of the idea or concept relating to
the Robotic System or the Technology. CMI shall have sole and exclusive right to
prosecute and maintain any and all patents arising from the activities
contemplated by this Agreement, including any Improvement.
(e) HMC acknowledges that no such title to any such enhancements,
modifications, improvements, updates or derivative works made by HMC to the
Technology, and related documentation, is granted under this Agreement, and that
no such assertion shall be made by HMC. In addition, CMI will not be estopped
from utilizing written technical information relating to the Technology or the
Robotic System which may be developed solely by HMC or jointly by both parties.
Notwithstanding anything to the contrary in this Paragraph 4(e), HMC shall not
assign or sublicense its right to develop, modify and enhance the Technology to
any entity (other than a subsidiary of HMC or any entity into which HMC merges
or which acquires substantially all of the stock or assets of HMC) without the
prior written consent of CMI, which shall not be unreasonably withheld.
(f) The provisions of this Section 4 shall survive termination or
cancellation of this Agreement.
5. ARBITRATION
(a) Both parties acknowledge the strategic needs of CMI to retain
rights to the physical modification of the Robotic System and the development of
methods of use with commercial applications. In the event that HMC and CMI are
unable to reach mutually-acceptable terms on any royalty bearing license related
to this Agreement within a period of six (6) months as defined hereinabove, the
Parties agree to seek arbitration.
(b) All controversies and/or disputes arising out of attempts to
license Intellectual Property shall be decided by one sole arbitrator. Written
notice of any dispute shall be given by
4
<PAGE> 5
the aggrieved party, specifying the nature of the dispute and the relief
requested. If Agreement cannot be reached within fourteen days of written
notice:
(c) The Parties shall select a single arbitrator who shall be
independent and without conflict of interest. If the parties cannot agree within
fourteen (14) days, then each party shall select one arbitrator and the two
arbitrators shall then select a third. Each party shall be responsible for half
the cost of the arbitration. All pre-hearing, hearing and post-hearing
procedures shall be governed by the Arbitration Rules of the American
Arbitration Association then in effect. The arbitrator shall be bound to make
specific findings of fact and reach conclusions of law, based upon the
submissions and evidence of the parties and shall issue a written decision
explaining the basis for the decision and award.
6. EXPENSES
Each party shall pay its own expenses incurred by such party while
engaged in the performance of their respective duties under this Agreement,
except as otherwise set forth in this Agreement.
7. CONFIDENTIALITY
(a) Each party acknowledges and agrees that certain information which
it may receive from the other party will be proprietary information to the
disclosing party. Such information includes but is not limited to:
(i) the fact that the disclosing party intends to develop or has
developed the Robotic System;
(ii) any information concerning the Robotic System and its
intended marketing;
(iii) any information concerning the terms and conditions of this
Agreement; except that CMI or HMC may disclose such terms and
conditions as may be required by law;
(iv) nonpublic information concerning the business or finances of
the disclosing party; and
(v) any other information which if disclosed to a third party
could adversely affect a competitive advantage of the
disclosing party, including expertise, know-how and technical
information relating to the design, development, manufacture
and testing of Technology integrated or to be integrated into
the Robotic System.
All of (i) through (v) shall be collectively referred to herein as
"Proprietary Information".
(b) Each party agrees, both during and after the term of this
Agreement, to hold in confidence all Proprietary Information of the other party
and to use at least the same degree of care to prevent the unauthorized copying,
use and/or disclosure of the other party's Proprietary Information that it uses
to protect its own confidential information of like importance. Further,
5
<PAGE> 6
each party agrees to have each of its employees, consultants, and subcontractors
having access to Proprietary Information sign an agreement to protect such
confidential information. All confidential information shall be marked as such
and sent to a sole point of contact for either party.
(c) HMC agrees that CMI shall have the right to approve in advance the
content, time, place and manner of any announcement or other such statement
pertaining to this Agreement and the subject matter hereof, which approval shall
not be unreasonably withheld. Information which CMI will not approve for public
disclosure thereof includes, without limitation, the financial arrangements,
development and delivery schedules.
(d) Each party's respective obligation to hold the other party's
Proprietary Information in strict confidence shall not apply to any information
that:
(i) becomes known to the general public without breach of the
non-disclosure obligations of this Agreement;
(ii) is disclosed by the owner of the Proprietary Information to
others without restriction on disclosure;
(iii) is obtained from a third party without breach of a legal,
contractual or fiduciary obligation;
(iv) is required to be disclosed in connection with any suit,
action or other dispute related to this Agreement; or
(v) independently developed by either party.
(e) Each party agrees that the unauthorized use or disclosure of the
other party's Proprietary Information may cause irreparable injury to the party
concerned. Accordingly, both parties agree that the remedy at law for any breach
of this Section 7 may be inadequate and, in recognition thereof, agree that the
party suffering from unauthorized use or disclosure shall be entitled to ex
parte injunctive relief to prevent any such breach or threatened breach, without
any requirement that such party post any bond therefor. Both parties further
agree that all confidentiality commitments hereunder shall survive any
cancellation or termination of this Agreement.
8. PROTECTION OF PROPRIETARY RIGHTS
Both parties agree to use best efforts and shall take all reasonable
actions within the limits of their respective organizations to ensure the
protection of the Technology and Work, and any Intellectual Property developed
therefrom.
9. CMI'S WARRANTIES AND INDEMNIFICATIONS
(a) CMI represents and warrants to HMC as follows:
(i) CMI possesses full power and authority to enter into this
Agreement, and to carry out its obligations hereunder.
6
<PAGE> 7
(ii) With respect to any intellectual property to be developed by
CMI which CMI will disclose to HMC in performance of this
Agreement, CMI warrants that it has the right to make use and
disclosure thereof without liability to any third party.
(iii) The performance of the terms of this Agreement and the
performance of CMI's duties hereunder will not breach any
separate agreement by which CMI is bound, or violate or
infringe any rights of any third party. CMI shall not, at any
time during the term of this Agreement commit any act or
enter into any agreement or understanding with any third
party which is inconsistent or in conflict with this
Agreement.
(iv) There is presently no litigation or other claim, pending or
threatened, nor a fact which may be the basis of any claim,
against CMI which would restrict or prohibit the transactions
contemplated by this Agreement. CMI has not taken any action
or failed to take any action which would interfere with the
rights of HMC under this Agreement.
(b) CMI agrees to indemnify and hold HMC and its officers, directors,
agents and employees harmless from and against (i) any Claims of third parties
to the extent caused by defects in the design and/or manufacture of the Robotic
System and (ii) any and all Claims which arise from the Robotic System or the
Technology's alleged breach of patent or other intellectual property right of
others. If such a Claim is made or appears possible, HMC agrees to allow CMI to
modify or replace the allegedly infringing component. CMI has no obligation
under this Section 9 for any Claim to the extent based on HMC's modification of
the Robotic System or the Technology or its combination, operation, or use with
any other product, data or apparatus not specified or provided by CMI.
(c) The representations, warranties and indemnification rights set
forth in this Agreement shall survive execution of this Agreement, the
performance of the obligation of CMI hereunder and cancellation or termination
of this Agreement.
10. TERM AND CANCELLATION
(a) The term of this Agreement shall commence on the date hereof and
continue until CMI delivers a Production Version of the Robotic System, unless
canceled or terminated earlier in accordance with the provisions of this
Agreement. A Production Version of the Robotic System is defined as a system
which has received all required federal regulatory approvals and is being
actively marketed on the open market.
(b) CMI or HMC may cancel this Agreement on thirty (30) days written
notice to such other party without any liability whatsoever, excepting rights or
remedies provided pursuant to other provisions of this Agreement. The Robotic
System and all materials provided to HMC by CMI under this Agreement shall be
returned promptly to CMI upon the termination of this Agreement. In the event of
termination, MHC will retain any and all specific rights to Intellectual
Property, as set forth in Section 4 herein, accrued during the term of this
Agreement.
7
<PAGE> 8
(c) Any unpaid Development Offset Fees payable at the time of any
cancellation or termination of this Agreement shall be prorated for the portion
of the applicable quarter during which this Agreement is in effect. Such
prorated fees and any other amounts payable hereunder shall be due and payable
in full upon such cancellation or termination.
11. GENERAL
(a) Any notice required or permitted to be sent hereunder shall be in
writing and shall be sent by registered or certified mail, return receipt
requested, or Federal Express, to the appropriate party at the address set forth
above, or to such other address as such party shall have designated by notice
hereunder.
(b) This Agreement does not constitute HMC as the agent or legal
representative of CMI, or CMI as the agent or legal representative of HMC for
any purpose whatsoever. Neither party is granted any express or implied right or
authority by the other party to assume or to create any obligation or
responsibility in behalf of or in the name of the other party, or to bind the
other party in any manner or thing whatsoever.
(c) HMC shall be responsible for any withholding taxes, payroll taxes,
disability insurance payments, unemployment taxes, and other similar taxes or
charges on the payments received by its agents or employees and CMI shall be
responsible for any withholding taxes, payroll taxes, disability insurance
payments, unemployment taxes, and other similar taxes or charges on the payments
received by the Clinical Engineer.
(d) Neither party shall be deemed in default of this Agreement to the
extent that performance of their obligations or attempts to cure any breach are
delayed or prevented by reason of any act of God, fire, natural disaster,
accident, act of government, shortages of materials or supplies, or any other
cause beyond the control of such party ("force majeure") provided that such
party gives the other party written notice thereof promptly and, in any event,
within fifteen (15) days of discovery thereof and uses its best efforts to cure
any such breach. In the event of any such force majeure, the time for
performance or cure shall be extended for a period equal to the duration of the
force majeure but not in excess of six (6) months.
(e) This Agreement shall be binding upon and inure to the benefit of
the successors and assigns of the parties.
(f) Should any provision of this Agreement be held to be void, invalid,
or inoperative, the remaining provisions hereof shall not be affected and shall
continue in effect as though such unenforceable provision(s) had not been
included herein. The name of this Agreement and the headings of the sections of
this Agreement are inserted for convenience of reference only and shall not be
used or relied upon in or in connection with the construction or interpretation
of this Agreement.
(g) No failure or delay by either party in exercising any right, power,
or remedy hereunder shall operate as a waiver of any such right, power, or
remedy. It is agreed that any remedies provided for in this Agreement shall be
cumulative and shall not be exclusive of any other remedies available hereunder,
or at law or in equity. No waiver or modification of any provision of this
Agreement shall be effective unless in writing and signed by the party against
whom such waiver or modification is sought to be enforced.
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<PAGE> 9
(h) This Agreement, including the Exhibits and Appendixes hereto, sets
forth the entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior negotiations, understandings and
agreements between the parties hereto concerning the subject matter hereof.
(i) This Agreement may be executed in counterparts, but shall not be
binding upon the parties until it has been signed by both parties.
(j) (i) HMC recognizes that the public dissemination of information
based upon the research performed under this Agreement cannot contain
Proprietary Information nor should it jeopardize CMI's ability to commercialize
the Robotic System. Similarly, CMI recognizes that the scientific results of
HMC's research must be publishable and, subject to the confidentiality provision
of the agreement, may be presented at symposium, national or regional
professional meetings or be published in journals, theses, or dissertations.
(ii) HMC agrees not to publish or otherwise disclose Proprietary
Information. CMI agrees that HMC, subject to review by CMI, shall have the right
to publish results related to the Work performed under the auspices of this
Agreement which are not proprietary to the design or composition of specified
products or processes derived from the Work. CMI shall be furnished copies of
any proposed publication or presentation at least (sixty) 60 days before
submission of such proposed publication or presentation. During that time, CMI
shall have the right to review the material for Proprietary Information provided
by the CMI and to assess the patentability of any invention described in the
material. If CMI decides that a patent application should be filed, the
publication or presentation shall be delayed an additional seventy-five (75)
days or until a patent application is filed, whichever is sooner. At CMI's
request, Proprietary Information provided by CMI shall be deleted.
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<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as
of the date first written above.
HMC: CMI:
THE MILTON S. HERSHEY COMPUTER MOTION, INC.
MEDICAL CENTER AT THE
PENNSYLVANIA STATE UNIVERSITY
By: _____________________________ By: _________________________________
Name: ___________________________ Name: _______________________________
Title: __________________________ Title: ______________________________
By: _____________________________
Name: ___________________________
Title: __________________________
10
<PAGE> 11
EXHIBIT A
Deliverable Items
1. Fully executed copy of this Agreement.
2. One (1) prototype of the Robotic System.
3. Retention of Clinical Engineer.
4. Hardware upgrades and design modifications.
11
<PAGE> 12
EXHIBIT B
Schedule of Payments and Deliverable Items
<TABLE>
<CAPTION>
Description of
Payment or Milestone Delivery Date Payment
-------------------- ------------- -------
<S> <C> <C>
Upon signing of this agreement by CMI and HMC Date hereof [*]
Pro-rata portion of initial Quarterly Development Date hereof TBD
Offset Payment, prorated for partial quarter
Delivery of prototype Robotic System Within 90 days of the date hereof [*]
Post-delivery payment due Within 30 days after delivery of [*]
prototype Robotic System
Retain Clinical Engineer Within 15 days of delivery of the
Robotic System
Animal Trials (PAYABLE BY CMI) Within 30 days of Invoice [*]
Hardware Upgrades Within 30 days of Invoice [*]
Development Offset Fees 1st day of each calendar quarter [*]
during the Term of this Agreement
</TABLE>
- ----------------
(a) This figure represents CMI's maximum obligation. The ultimate amount will
be based on actual costs, as incurred, and may be less than this figure.
(b) This figure represents HMC's maximum obligation. The ultimate amount will
be based on actual costs, as incurred, and may be less than this figure.
12
<PAGE> 13
APPENDIX A
ROBOTIC SYSTEM
1. Robotic Surgical Instruments
o Instrument Tips
o Two Robotic System Robotic Arms
o 2 robot cables
o 2 10 mm collars
o 2 sets of instrument changing hardware
o 2 sets of hand controls
o 2 DS Controller Boxes
o 2 carts and means for connecting them
2. Surgeon Control Handles
o Handles
o Handle base
o Actuation cable which enables grasping action at the instrument
tips
3. AESOP 1000 System
o Robotic laparoscopic positioner
o Hand and foot controls
o Computer controller
o Cart
o 10mm collar
4. IBM Compatible Personal Computer
o 2 free serial ports with minimum 38.4 Kbytes communication rate
o 2 cables to connect the AESOP 1000DS serial ports
o Keyboard, monitor and personal computer
o User interface software
5. Other Equipment
o Cart for storing all AESOP controllers and PC
o 3 table rail simulators and clamps
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<PAGE> 14
APPENDIX B
ROBOTIC SYSTEM RESEARCH AND DEVELOPMENT PLAN
This Appendix is intended to generally describe the primary tasks to be
performed by HMC and CMI in the development of the Robotic System, which is
described more fully in Appendix A. Due to the development nature of this
endeavor, it is understood by both HMC and CMI that other tasks, not outlined
herein, may arise from time to time that are critical to proper completion of
this Research and Development Plan.
This Robotic System Research and Development schedule is broken into 5 phases.
The phases are designed to ensure an orderly and thorough progression for each
target procedure. This schedule will allow an optimal sequencing of technical,
clinical, and regulatory developments. It is important that the sequence and
content of each phase is adhered to. The length of time at each phase will be
dependent on several factors: surgeon time commitment, complexity of the
clinical objective, the nature of the technical changes required, and certain
regulatory milestones.
Phases 1 and 2 are generic and apply to all surgeons participating in the
project. Phases 3-5 are specific to target procedures, with each procedure
progressing at different rates. For example, the development of less complicated
abdominal procedures will progress through the phases more rapidly than coronary
grafting research.
This staging is an important part of the underlying regulatory strategy we will
employ in clearing the product through the FDA. The on-site Clinical Engineer
("CE") will maintain master phase schedules of each specific clinical project
and monitor the progress of each schedule.
PHASE 1: SYSTEM INSTALLATION
Phase Overview and Concepts
In phase 1, the CE will physically install the Robotic System in a safe,
controlled environment. In addition to physically installing and configuring the
system, the following activities are performed by the CE during this period:
o Establish data collection and tracking processes, including IDE
bench testing processes, surgeon skills measurement processes,
Robotic System configuration tracking methods.
o Setup laparoscopic skills trainers.
o Demonstrate and promote Robotic System to the key surgeons.
o Conduct an orientation meeting in which surgeons are presented
with the development schedule.
o Secure key surgeons' time commitments and develop a Robotic
System Master Schedule.
Length of Phase
o 2 weeks
Resources Needed
o Full-time On-site CE
o Lab Setting for Robotic System demonstrations
o Facilities support (e.g., wiring, electrical, logistical, etc.)
o 2-3 hours of surgeon time to attend orientation and arrange Robotic
System Master Schedule
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PHASE 2: ROBOTIC SYSTEM SKILLS DEVELOPMENT
Phase Overview and Concepts
The CE is the gatekeeper to the Robotic System and will maintain the Robotic
System Master Schedule. All users must schedule their time through the CE. The
CE must be present at any time the system is in use. Data collection will be
done primarily by the CE, although each surgeon must first understand and agree
with the data collection goals.
During this phase, the surgeons will become familiar with the Robotic System and
begin to benchmark their basic laparoscopic skills, both with and without the
Robotic System. At this phase, all work will be done in an inanimate setting.
Minimum levels of competency with the system are required to progress to the
next phase. Engineering changes will continue during this phase, based on
surgeon feedback.
Laparoscopic Skills With and Without Robotic System
During this phase, laparoscopic skills are tested and quantitatively measured in
a dry lab setting. CMI has developed standardized drills for basic laparoscopic
skills and suturing skills development. Each surgeon's skills will be measured
performing these drills both with and without the Robotic System.
This inanimate testing will continue for each user until there is a quantitative
plateau of the data (i.e., testing will terminate once each user can demonstrate
they have traversed the Robotic System's basic skills the learning curve).
Data Collection and Record Keeping
A record is kept of all users, time spent, and activities performed on the
Robotic System. The CE will record both qualitative and quantitative
observations on:
o laparoscopic skill tests
o areas of strength and weakness with the Robotic System
o desired functional changes
The CE will provide feedback to CMI on technical issues as well as surgeon
feedback on potential clinical applications of the Robotic System. IDE
bench-test data will be recorded per the requirements of Computer Motion's
Regulatory Affairs guidelines.
Length of Phase
o 6 weeks
Resources Needed
o Full-time, on-site CE
o Dry lab Setting for the Robotic System
o Surgeons: One 1/2-day per week
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<PAGE> 16
PHASE 3: PROCEDURE DEVELOPMENT
Phase Overview and Concepts
In this phase, the target procedures are identified by each discipline. These
procedures are broken into steps and the applicability of the Robotic System is
examined in its current state as well with feasible changes. Some engineering
changes will be likely at this stage based on specialized instruments needed to
proceed with procedures.
Target procedures
Lap general surgery:
o small bowel reanastomosis
o bile duct reconstruction
o aortic bypass and other vascular anastomosis
Lap urology:
o pyloplasty
o radical prostatectomy
Lap gynecology:
o tubal reanastomosis
Open microsurgery procedures:
o opthamology
o plastic surgery
o neurosurgery
Thorocoscopy
o valve replacement
o angioplasty assistance
o arrhythmia correction
o coronary by-pass surgery
Surgeon Planning/Strategy
The surgeons will need to document each procedure, on a step-by-step basis. The
applicability and usefulness of the Robotic System must then be determined for
each step of the procedure. The instruments needed for the Robotic System can
then be assessed and adapted by CMI engineering and the appropriate animal model
can then be selected, based on the particular procedure to be performed.
Other activities at this phase include:
o Determine successful animal trial
o outcome measures.
o Establish port placements, room setup, and the Robotic System setup
strategy.
o Document protocols for animals trials.
o Identify goals for publishing and public presentation, based on
animate work.
Length of Phase
o 7 weeks
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Resources Needed
o Full-time, on-site CE
o Dry lab Setting for the Robotic System
o CMI technical support for instrument adaptations
o Surgeons: Two 1/2-days per week
PHASE 4: CADAVER AND ANIMATE MODELS
Phase Overview and Concepts
In this phase, the Robotic System is used on cadaver and live animal models. The
exact number of models required will be dependent on the difficulty of the
procedure and on successful achievement of the desired outcomes.
This phase will also serve as an important data collection basis for IDE and IRB
submission. Significant engineering changes are expected during this phase and
might be one of the limiting factors for progression to the next phase, which
will include human clinical trials.
Animal Trials Conducted
The number of trials needed will depend on procedure targeted, the IDE needs,
the clinical challenge, and the relative success of the procedure outcomes. Each
step of the procedures will be timed, as will the overall procedure. These times
will be compared with those measured without the use of the Robotic System.
Robotic System and non-Robotic System outcomes will also be evaluated, as
appropriate. In addition, certain procedures may be included in a randomized
study to compare the Robotic System and non-Robotic System procedures.
This phase will likely afford clinicians and CMI the opportunity to prepare and
publish clinical papers, based on the outcomes of the animals trials.
Regulatory: preparation for clinicals
Various regulatory activities will occur during this phase in preparation for
IDE, IRB, and 510(k) filings.
o Establish the IDE animal trial data collection forms
o File the IDE
o File the hospital IRB
Cadaver Models
In addition to live animals trials, cadaver work may be necessary in some
procedures. The following activities will need to be completed in connection
with these cadaver trials.
o Protocols and approvals completed
o Procedures performed
o Papers written
Length of Phase
o 21 weeks
Resources Needed
o Full-time, on-site CE
o Animal and cadaver lab facilities
o CMI technical support for engineering changes
o Surgeons: Two 1/2-days per week
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PHASE 5: HUMAN TRIALS
Phase Overview and Concepts
In this phase, the first human trials will be performed. This is clearly
dependent on successful IDE and IRB clearance. These clinicals will be performed
with Beta Robotic System that will have the look and feel of the pre-production
systems that become the actual product.
These clinical trials will generate a great deal of media and clinical interest,
and therefore it is critical that these initial procedures are successful. CMI
shall approve all media coverage initiated by the Hospital during this phase.
Regulatory Objectives Prior to use on humans:
o IDE clearance must be obtained and all data collection forms and protocols
completed.
o IRB must be approved at the site.
o All software and hardware changes must be completed and validated.
During this phase, 510(k) clearance will be filed for the applications
indicated.
Note: The length of this phase is contingent upon a successful 510(k) filing. If
the Robotic System is deemed to be a PMA approval device, then the human trials
might be considerably longer. A PMA approval cycle would at least double the
length of this phase.
Surgeon Activities
An initial number of trials will be performed to generate a clinical experience
paper. This paper will be the basis for a follow-on study. A prospective,
randomized study will then be initiated, based on performing the various
procedures with and without the Robotic System, as appropriate. This follow-on
study is expected to be published in surgical journals and will include the
appropriate be statistical measures.
Length of Phase
o 25 weeks
Resources Needed
o Full-time, on-site CE
o OR support and facilities
o CMI technical support for engineering changes
o Surgeons: One 1/2-day per week in addition to normal surgery time
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Certain portions of this exhibit have been omitted based upon a request for
confidential treatment. Omitted portions have been separately filed with the
Commission.
EXHIBIT 10.24
PRODUCT DEVELOPMENT AGREEMENT
This PRODUCT DEVELOPMENT AGREEMENT (hereinafter the "Agreement") is
made as of this 31st day of July, 1996, by and between COMPUTER MOTION, INC., a
California corporation, having its principal place of business at 130-B Cremona
Drive, Goleta, California, 93117, (hereinafter referred to as "CMI"), and The
Cleveland Clinic Foundation, having its principal place of business at 9500
Euclid Avenue, Cleveland, OH 34239-3555 and its subsidiaries and affiliates
(hereinafter referred to as "CCF").
R E C I T A L S:
A. CMI has developed or acquired substantial expertise, know-how and
technical information relating to the design, development, manufacture and
testing of hardware and software for a robotic microsurgery system.
B. CMI is in the process of developing and refining its Zeus
Microsurgery Robotic System (the "Product");
C. CMI has developed or acquired rights to valuable hardware and
software incorporated in the Product (hereinafter referred to collectively as
"Technology") and holds patent, copyright, trade secret, trade identity and
other proprietary rights which exist in and to the Product, Proprietary
Information and Technology;
D. CMI desires to have CCF assist in the development and refinement of
the Product and is willing to provide CCF a prototype Product and certain
support services in connection with CCF's use thereof on such terms and
conditions as are provided herein; and
E. CCF has experience in the application of surgical techniques and
equipment and in clinical research activities which it desires to apply in the
use and refinement of the Product.
A G R E E M E N T:
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, CMI and CCF, intending to be
legally bound, have agreed and do hereby agree as follows:
1. LOCATION OF DEFINITIONS
(a) "Best Customer Rates" shall be defined as set forth in
Paragraph 2(d).
(b) "Claims" shall be defined as set forth in Paragraph 7(b).
(c) "CMI" shall be defined as set forth in the opening paragraph
of this Agreement.
(d) "Deliverable Items" shall be defined as set forth in Paragraph
2(a) and Exhibit A.
<PAGE> 2
(e) Documentation shall be defined to mean technical specifications,
operating manuals (as they become available), proposals, Exhibit C and other
relevant data provided to CCF by CMI.
(f) Intellectual Property Definitions:
"Intellectual Property" means individually and collectively: all
inventions, improvements or discoveries, whether patentable or not, and any
technical data, software, or original works of authorship, which are conceived,
made, developed or first reduced to practice in the performance of this
Agreement.
"CMI Intellectual Property" means Intellectual Property for which,
pursuant to U.S. law, only investor(s) from CMI would properly be named as the
inventor(s) in a corresponding U.S. patent application.
"CCF Intellectual Property" means Intellectual Property for which,
pursuant to U.S. law, only investor(s) from CCF would properly be named as the
inventor(s) in a corresponding U.S. patent application.
"CMI/CCF Intellectual Property" means Intellectual Property for which,
pursuant to U.S. law, inventors from both CMI and CCF, would properly be named
as inventors in a corresponding U.S. patent application.
(g) "Product" shall be defined as set forth in Recital B.
(h) "Production Version" shall be defined as set forth in
Paragraph 2(c).
(i) "Proprietary Information" shall be defined as set forth in
Paragraph 6(a).
(j) "Quarterly Development Offset Fees" shall be defined as set
forth in Paragraph 9(e).
(k) "Technology" shall be defined as set forth in Recital C.
(l) "Unilateral Improvements" shall be defined as set forth in
Paragraph 3(e).
2. AGREEMENTS OF CMI
(a) CMI agrees to use diligent, good faith efforts to deliver the
"Deliverable Items" as listed on Exhibit A on the schedule specified on Exhibit
B. CMI shall incur all shipping and insurance charges for such Deliverable
Items, which shall be delivered to CFF FOB Cleveland
(b) CMI shall furnish CCF with all available documentation, operations,
technical specs relating to the Product and such other materials as may be
reasonably requested in writing by CCF, as they become available. In addition,
CMI management and engineering personnel shall be available to answer questions
and provide telephone consultation to CCF's medical and clinical personnel, such
availability to be coordinated by the Clinical Engineer.
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<PAGE> 3
(c) CMI shall waive any and all fees which would otherwise be levied on
CCF related to the use of the Production Version of the Product to be delivered
to CCF at the conclusion of this Agreement. The CCF will own such Production
Version at the conclusion of this Agreement, and hereafter. A Production Version
is defined as a system which has received all required federal regulatory
approvals and is being actively marketed by CMI on the open market.
(d) CCF shall be charged no more than "Best Customer Rates" for
disposable items required to operate such Production Version. Best Customer
Rates shall herein be defined as the lowest price charged by CMI to customers
substantially similar to CCF with regard to annual purchase volumes.
(e) CCF shall be charged no more than Best Customer Rates for any and
all enhancements and upgrades made to Production Version for a period of (5)
years following delivery of such Production Version to CCF.
3. AGREEMENTS OF CCF
(a) CCF agrees to pay CMI the amounts set forth at the times specified
on Exhibit B, such payments to be effected by bank draft or by bank wire
transfer into an account designated by CMI, as specified in writing by CMI not
less than three (3) business days prior to the date such payment is due.
(b) CCF agrees to utilize the Product in the performance of surgical
procedures and to utilize its facilities, clinical personnel and their expertise
to further develop and refine the Product and the Technology on a non-exclusive
basis and, based solely on its independent medical and fiscal judgment.. Efforts
pursuant to this Paragraph 3(b) shall be in partial consideration for the use of
the Product during the term hereof and shall be uncompensated unless provided
for elsewhere in this Agreement.
(c) CCF shall, at its sole cost and expense, during the term of this
Agreement, provide secure space for the storage and utilization of the Product
for the conduct of the Work.
(d) CCF shall provide CMI with reasonable access to its clinical and
administrative personnel, its operating rooms and training facilities in
furtherance of the rights and obligations provided under this Agreement, subject
to its patient care considerations and other policies and preexisting
administrative commitments.
(e) In the event CCF desires hardware modifications which are
unilaterally requested by CCF ("Unilateral Improvements") and not agreed to by
CMI, CCF will be responsible for the costs thereof at a rate of [*] of the
material cost relating thereto, with no additional charges being made for labor,
administration or overhead. CMI shall provide CCF written estimates of any such
charges and shall not commence work on such Unilateral Improvements without
CCF's express written consent. Any amounts payable under this Paragraph 3(e)
shall be payable by CCF within thirty (30) days of being submitted a written
invoice with respect thereto by CMI. CCF retains the right to seek competitive
cost estimates of
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such Unilateral Upgrades. CMI shall have the right to match any such competitive
estimates. In the event CMI does not elect to match such competitive estimates,
CCF shall have the right to perform such Unilateral Improvements, either through
its internal resources or through a third party, so long as such third party
agrees to be bound by the confidentiality and non-use provisions set forth in
Section 6 herein.
(f) From the date specified on Exhibit B and throughout the term of
this Agreement, the CCF shall retain and have in place a Clinical Engineer, to
be primarily stationed at CCF, with principle responsibility for the day-to-day
operations and activities relating to the Product. This CCF employee will serve
as the principle liaison between CMI and the CCF. The selection, evaluation and
monitoring of the Clinical Engineer's efforts shall be the CCF's sole right and
responsibility. The responsibilities of the Clinical Engineer shall include, but
not be limited to the following:
(i) The coordination of quarterly engineering meetings
the location of which shall alternate between Santa
Barbara and Cleveland;
(ii) Arranging conference calls no less than monthly
between CMI engineering personnel and the clinical
staff of CCF;
(iii) Install hardware retrofittings and software upgrades
directly related to the Product;
(iv) Training relating to modifications and improvements
to hardware and software incorporated into the
Project; and
(v) General ongoing support of clinical studies and
research relating to the development of the Product.
4. OWNERSHIP OF THE WORK
(a) It is acknowledged that employees of both CCF and CMI are under an
obligations to assign certain inventions and discoveries developed or conceived
by them to CCF and CMI, respectively, during the term of their employment. CCF
and CMI warrant and represent that their respective employees shall be obligated
to execute instruments necessary to cause all rights in any Intellectual
Property, whether sole or joint, to be assigned to CCF and CMI, respectively,
prior to any involvement in the development work.
(b) The parties represent that this Agreement does not and will not
breach any agreement with others. The parties will not disclose to the other
party, or induce the other party to use, any proprietary information belonging
to others. The parties agree not to enter into any agreement either written or
oral in conflict herewith.
(c) New Invention or Discovery shall mean any invention or discovery
conceived or reduced to practice during and as part of the development work
performed pursuant to this Agreement. The terms conceived and firs reduced to
practice shall be given the meaning of those terms as they appear in 35 USC
Section 102(g).
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<PAGE> 5
(d) The parties will retain title to any patent or other intellectual
property rights in New Inventions or Discoveries made solely by their respective
employees in the course of the development work performed pursuant to this
Agreement. New Inventions or Discoveries made jointly be CCF and CMI shall be
jointly owned by the parties.
(e) For New Inventions or Discoveries developed solely by CCF and/or
jointly by CCF and CMI, that may include a method for operating the Product or a
method for performing a surgical procedure, using the Product, CMI will have a
right of first refusal to obtain an exclusive, worldwide, royalty-bearing
license to all of CCF's rights in the New Invention or Discovery, which must be
exercised within one (1) year of CMI's receipt of notice of such New Invention
or Discovery. If CMI commercializes such New Invention or Discovery, CMI shall
pay CCF a royalty based upon the relative contribution of parties and commercial
value of such New Invention or Discovery, according to the terms of a licensing
agreement to be negotiated and executed prior to the grant of any license by CCF
to CMI. In the event CMI fails to exercise its right of first refusal within
this one (1) year period, CCF is unrestricted in its right to commercialize such
New Invention or Discovery with no further obligation to CMI.
For New Inventions or Discoveries developed solely by CCF and/or jointly by CCF
and CMI, that attach directly to the Product (Attachments), CCF hereby grants
CMI an exclusive, worldwide, royalty-bearing license, with right to sublicense,
to all of CCF's rights in the Attachments. The specific terms of the license
will be determined by the parties within twelve months of first disclosure by
CCF to CMI of the Attachment. Unless otherwise agreed to by the parties, if CCF
and CMI do not execute a license agreement within twelve months of disclosure of
an Attachment, the license right in such Attachment granted herein is revoked
whereby CMI is relieved of all obligations under the license and CCF is
unrestricted in its right to commercialize such Attachment with no further
obligation to CMI. The royalty rate payable to CCF based on gross sales of any
licensed Attachment will be determined by mutual agreement of CCF and CMI on the
basis of the following factors: cost for regulatory approval of the Attachment,
measure of value added by the Attachment to the Zeus Product, relative
contribution of the parties (if jointly invented), the commercial value of the
Attachment, disposable/non-disposable/reusable nature of the Attachment, whether
the innovation is patented or nonpatented, marketing/sale strategy of the Zeus
Product and the Attachment, and such other factors as the parties deem
appropriate for consideration. In addition to royalties, CCF and CMI agree to
incorporate appropriate diligence terms to ensure that the Attachment is
successfully commercialized, including reversion of the technology to CCF if CMI
will not or can not commercialize the technology. In the event that the terms
cannot be mutually agreed upon by both parties at the time of license execution,
CCF and CMI agree to refer the matter to an objective third party with
recognized expertise in medical device valuations. If CCF and CMI cannot agree
upon a third party, they will submit the selection of the third party medical
device expert to arbitration in accordance with the terms of Section 10 of this
Agreement.
(f) CMI shall be responsible for all patent costs for both CMI
Intellectual Property and CMI/CCF Intellectual Property. CCF shall be
responsible for patent costs for CCF Intellectual Property; however, CMI shall
be responsible for patent costs for CCF Intellectual Property if CMI elects to
license such technology from CCF as set out above in section (e) and CMI shall
fully reimburse CCF for all patent cots incurred by CCF prior to CMI's exercise
of
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<PAGE> 6
its licensed rights. CCF shall promptly disclose to CMI any New Invention or
Discovery developed solely by CCF and/or jointly by CCF and CMI. CCF shall
assist CMI in gaining patent protection for any New Invention or Discovery that
is CMI/CCF Intellectual Property or for any CCF Intellectual Property for which
CMI has exercised its right of first refusal.
(g) If CMI elects to discontinue the financial support of the
prosecution or maintenance of any patent covering a CMI/CCF Intellectual
Property, CMI shall give CCF written notice of such election and CCF, at its
sole expense, may file or continue prosecuting or maintaining any such
applications and to maintain any Patents issuing thereon in the U.S. or any
international country. CMI shall continue to be liable for any and all expenses
incurred before such notice. CMI shall, by written instrument, transfer to CCF
full right and title in such Intellectual Property and CCF shall not be
accountable to CMI for revenues related to the sale or other disposition of the
Intellectual Property.
(h) CMI grants to CF a non-assignable, non-transferable, royalty-free
license to make, use and practice CMI Intellectual Property Rights for CCF's
internal, non-commercial research, education and patient care purposes.
(i) CCF grants to CMI a non-assignable, non-transferable, royalty-free
license to make, use and practice CCF Intellectual Property Rights for CMI's
internal, non-commercial research purposes.
(j) CMI and CCF reciprocally grant to each other a non-assignable,
non-transferable, royalty-free license to make, use and practice CMI/CCF
Intellectual Property for each parties respective internal, non-commercial
research purposes.
(k) CCF acknowledges and agrees that CMI shall have, at its sole and
final discretion, the right to decide, specify or otherwise to determine the
following:
(i) the terms of sale of the Product, including but not
limited to wholesale and recommended retail price
levels, discounts, and returned goods policy use fees
and all related matters;
(ii) territories where the Product shall be, or shall not
be, sold and distributed, and the method of sales and
distribution, whether directly by CMI, its
subsidiaries or affiliates, by a sub-licensee, or by
other means;
(iii) the preparation, whether by CMI, or by a third party,
of additional versions of the Product, compatible
with other computer systems or other devices, or the
preparation of any other derivative works from the
Product, which at all times shall be for the sole
benefit of CMI, except as otherwise agreed to by the
parties in writing.
(l) Both parties acknowledge that they shall have no claims, right or
entitlement to any Intellectual Property that has been conceived, documented
and/or reduced to practice by either party prior to the effective date of this
Agreement.
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(m) The provisions of this Section 4 shall survive termination or
cancellation of this Agreement.
5. EXPENSES
Except as otherwise expressly set forth in Section 4 herein, each party
shall pay its own expenses incurred by such party while engaged in the
performance of their respective duties under this Agreement.
6. CONFIDENTIALITY
(a) Each party acknowledges and agrees that certain information which
it may receive from the other party will be proprietary information to the
disclosing party. Such information includes but is not limited to:
(i) the fact that the disclosing party intends to develop
or has developed the Product;
(ii) any information concerning the Product and its
intended marketing;
(iii) any information concerning the terms and conditions
of this Agreement; except that CMI or CCF may
disclose such terms and conditions as may be required
by law;
(iv) nonpublic information concerning the business or
finances of the disclosing party; and
(v) any other information which if disclosed to a third
party could adversely affect a competitive advantage
of the disclosing party, including expertise,
know-how and technical information relating to the
design, development, manufacture and testing of
Technology integrated or to be integrated into the
Product.
All of (i) through (v) shall be collectively referred to herein as
"Proprietary Information". The definition of Proprietary Information shall also
include all information provided by one party to the other which is clearly
identified as "Confidential" by the transmitting party at the time of
disclosure. If such transmittal occurs orally, the transmitting party will,
within a reasonable period of time of its oral disclosure, reduce such
transmittal to writing, mark and identify it as confidential, and provide such
record to the other party.
Each party shall honor this obligation of confidence for a period of
five (5) years from the time of disclosure.
(b) Each party agrees, both during and after the term of this
Agreement, to hold in confidence all Proprietary Information of the other party
and to use at least the same degree of care to prevent the unauthorized copying,
use and/or disclosure of the other party's Proprietary Information that it uses
to protect its own confidential information of like importance. Further,
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<PAGE> 8
each party agrees to have each of its employees, consultants, and subcontractors
having access to Proprietary Information of CMI sign an agreement to protect
such confidential information.
(c) Each party agrees that the other party shall have the right to
approve in advance the content, time, place and manner of any announcement or
other such statement pertaining to this Agreement and the subject matter hereof,
which approval shall not be unreasonably withheld. Information which CMI will
not approve for public disclosure thereof includes, without limitation, the
financial arrangements, development and delivery schedules.
(d) Each party's respective obligation to hold the other party's
Proprietary Information in strict confidence shall not apply to any information
that:
(i) becomes known to the general public without breach of
the non-disclosure obligations of this Agreement;
(ii) is disclosed by the owner of the Proprietary
Information to others without restriction on
disclosure;
(iii) is obtained from a third party without breach of a
legal, contractual or fiduciary obligation to CMI or
CFF; or
(iv) is required to be disclosed in connection with any
suit, action or other dispute related to this
Agreement.
(e) Each party agrees that the unauthorized use or disclosure of the
other party's Proprietary Information may cause irreparable injury to the party
concerned. Accordingly, both parties agree that the remedy at law for any breach
of this Section 7 may be inadequate and, in recognition thereof, agree that the
party suffering from unauthorized use or disclosure shall be entitled to ex
parte injunctive relief to prevent any such breach or threatened breach, without
any requirement that such party post any bond therefor. Both parties further
agree that all confidentiality commitments hereunder shall survive any
cancellation or termination of this Agreement.
7. CCF'S WARRANTIES AND INDEMNIFICATIONS
(a) CCF represents and warrants to CMI as follows:
(i) CCF possesses full power and authority to enter into
this Agreement, and to carry out its obligations
hereunder.
(ii) With respect to any intellectual property to be
developed by CCF which CCF will disclose to CMI in
performance of this Agreement, CCF warrants that it
has the right to make use and disclosure thereof
without liability to any third party.
(iii) The performance of the terms of this Agreement and
the performance of CCF's duties hereunder will not
breach any separate
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agreement by which CCF is bound, or violate or
infringe any rights of any third party. CCF shall
not, at any time during the term of this Agreement
commit any act or enter into any agreement or
understanding with any third party which is
inconsistent or in conflict with this Agreement.
(iv) There is presently no litigation or other claim,
pending or threatened, nor a fact which may be the
basis of any claim, against the CCF which would
restrict or prohibit the transactions contemplated by
this Agreement. CCF has not taken any action or
failed to take any action which would interfere with
the rights of CMI under this Agreement.
(b) CCF agrees to indemnify and hold CMI and its officers, directors,
agents and employees harmless from and against any and all claims, losses,
liabilities, damages, expenses and costs (including reasonable attorneys and
expert witness fees) (collectively "Claims") which result from CCF's negligence
or misuse of the Product or any infringement in the creation of the Work of any
copyright, trademark or trade name, invasion of the right of privacy, publicity,
or other property right of any third party; or any breach of any of the
representations or warranties of CCF contained in this Agreement; including
Claims incurred in the settlement or avoidance as a result of any of the
foregoing; provided, however, that CMI shall give prompt written notice to CCF
of the assertion of any such Claim and provided further that CCF shall have the
right to select counsel and control the defense and settlement thereof, subject
to the right of CMI to participate in any such action or to proceed at its own
expense with counsel of its own choosing.
(c) The representations, warranties and indemnification rights set
forth in this Agreement shall survive execution of this Agreement, the
performance of the obligation of CCF hereunder and cancellation or termination
of this Agreement.
8. CMI'S WARRANTIES AND INDEMNIFICATIONS
(a) CMI represents and warrants to CCF as follows:
(i) CMI possesses full power and authority to enter into
this Agreement, and to carry out its obligations
hereunder.
(ii) With respect to any intellectual property to be
developed by CMI which CMI will disclose to CCF in
performance of this Agreement, CMI warrants that it
has the right to make use and disclosure thereof
without liability to any third party.
(iii) The performance of the terms of this Agreement and
the performance of CMI's duties hereunder will not
breach any separate agreement by which CMI is bound,
or violate or infringe any rights of any third party.
CMI shall not, at any time during the term of this
Agreement commit any act or enter into any agreement
or
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understanding with any third party which is
inconsistent or in conflict with this Agreement.
(iv) There is presently no litigation or other claim,
pending or threatened, nor a fact which may be the
basis of any claim, against the CMI which would
restrict or prohibit the transactions contemplated by
this Agreement. CMI has not taken any action or
failed to take any action which would interfere with
the rights of CCF under this Agreement.
(v) The product and its associated software shall perform
as an integrated system for the purpose of enabling
minimally invasive microsurgery, encompassing some or
all of the procedures set forth in the Documentation
and Exhibit D herein. It is understood by both
parties that the time periods referenced in Exhibit D
are estimates. Both parties agree to make a good
faith effort to complete each development phase in a
timely manner. However, both parties understand that
there is no guarantee that the development process
will be completed within the time frames outlined in
Exhibit D and that failure to meet these time frames
does not constitute breach of this Agreement, so long
as both parties otherwise act in good faith with
regard to meeting their respective obligations per
the terms of this agreement.
(b) CMI agrees to indemnify and hold CCF and its officers, directors,
agents and employees harmless from and against (i) any Claims of third parties
to the extent caused by defects in the design and/or manufacture of the Product
and (ii) any and all Claims which arise from the Product or the Technology's
alleged breach of patent or other intellectual property right of others. If such
a Claim is made or appears possible, CCF agrees to allow CMI to modify or
replace the allegedly infringing component. CMI has no obligation under this
Section 10 for any Claim to the extent based on CCF's modification of the
Product or the Technology or its combination, operation, or use with any other
product, data or apparatus not specified or provided by CMI.
(c) The representations, warranties and indemnification rights set
forth in this Agreement shall survive execution of this Agreement, the
performance of the obligation of CMI hereunder and cancellation or termination
of this Agreement.
9. TERM AND CANCELLATION
(a) The term of this Agreement shall commence on the date hereof and
continue until CMI delivers a Production Version of the Product, unless canceled
or terminated earlier in accordance with the provisions of this Agreement
("Production Version" is defined in Paragraph 2(c)).
(b) Subject to the terms of Section 9(c) herein, CMI or CCF may cancel
this Agreement or thirty (30) days written notice to such other party without
liability whatsoever.
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(c) In the event of breach by either party, the non-breaching party
shall give written notice of the breach and, within 30 days of notice, the
breaching party will have an opportunity to cure such breach to the reasonable
satisfaction of the non-breaching party. In the event of early termination of
this Agreement for breach by either party, in addition to the terms of Section
9(c) herein, the parties retain all rights and remedies which they may have at
law or in equity for harms suffered due to material breach of the other party.
(d) With respect to CCF's payment of Purchase Price for Materials, as
defined in Exhibit B and CMI's rights in the Materials, the following shall
apply: for early termination, independent of claims of breach or cure by either
party, CCF will retain possession of and all right and title in the Materials if
all Purchase Price Monies have been paid to CMI, subject only to CMI's
intellectual property rights in the Materials. In the event of termination prior
to full payment by CCF, CMI retains all right and title in the Materials and CCF
shall either pay the balance of sums due to CMI in exchange for ownership of the
Materials, or CMI may reclaim the Materials in return for the Purchase Price
Monies already paid by CCF. In the event that CCF has fully paid all Purchase
Price Monies for and has full right and title in the Materials and CMI wishes to
recover the Materials, CMI shall fully reimburse CCF all Purchase Price Monies
in exchange for the Materials.
(e) Any unpaid "Quarterly Development Offset Fees" payable at the time
of any cancellation or termination of this Agreement shall be prorated for the
portion of the applicable quarter during which this Agreement is in effect. Such
prorated fees payable hereunder shall be due and payable in full upon such
cancellation or termination. Quarterly Development Offset Fees are herein
defined as financial obligations paid by CCF to CMI as compensation for certain
development costs, including, but not limited to, travel, lodging and
development of software and hardware upgrades. Upon request, CMI shall make
available to CCF copies of relevant documentation which substantiates that such
fees are properly utilized to fund bona fide costs associated with the
development of the Product.
10. DISPUTE RESOLUTION
In the event of any material dispute between the parties which they are
unable to resolve directly through manual, good-faith efforts, the parties agree
to submit this matter for final and binding arbitration in Cleveland, Ohio in
accordance with the rules of the American Arbitration Association, with costs of
the proceeding, including out-of-pocket travel expenses, borne proportionate to
the arbitrators' finding of fault.
11. PUBLICATION OF SCIENTIFIC PAPERS
CCF will have the right to publish and disclose the results of
development work performed under this Agreement. In order to balance this CCF
right with the proprietary interests of CMI, CCF will submit for review to CMI
manuscripts, abstracts or presentations intended for publication or other public
disclosure at least thirty (30) days prior to the date of submission for
publication or the date of public disclosure (fifteen (15) days in the case of
meeting abstracts). CMI will use reasonable efforts to complete its review
promptly, and will complete its review within thirty (30) days of receipt of the
submitted documents (five (5) days in the case of meeting abstracts). In the
11
<PAGE> 12
event that CMI requires additional time for patentability review or to file any
desired patent applications, CCF will defer publication or other disclosure for
an additional period of thirty (30) days, for a maximum total delay period of
sixty (60) days from the date of submission of the materials to CMI.
12. NOTICE
(a) Any notice required or permitted by the terms of this Agreement
will be given by registered mail, prepaid and properly addressed or delivered by
hand or by other recognized express carrier to CMI or CCF at the respective
addresses first given above or at such other address as either party hereto may
designate by notice pursuant hereto. If mailed, any such notice will be deemed
to have been given when received; and if delivered by hand, when received.
(b) All communications and reports from CCF to CMI will be directed as
follows:
Communications related to technical matters to:
Yulun Wang, Ph.D.
Computer Motion, Inc.
130-B Cremona Drive
Goleta, CA 93019
Communications of a legal nature to:
Ken Stein, Esq.
Computer Motion, Inc.
130-B Cremona Drive
Goleta, CA 93019
(c) All communications from CMI to CCF will be directed as follows:
Communications related to technical matters to:
Dr. Joseph Hahn
The Cleveland Clinic Foundation (A-16)
9500 Euclid Avenue
Cleveland, Ohio 44195
Communications of a legal nature to:
Mr. David Rowan
General Counsel (Mail Code: HA18)
Communications relating to intellectual property and
licensing to:
Office of Technology Transfer
(Mail Code: Wb-3)
13. USE OF NAME
Unless otherwise required by law, each party agrees not to use or refer
to in any oral or written public statement the name, trademark, logo, symbol, or
other image of the other party or
12
<PAGE> 13
that party's employee or agent without the other party's written permission,
which written permission will not be unreasonably withheld. Such public
statements include, but are not limited to, shareholder reports, prospectuses,
communications with stock market analysts, press releases or other
communications with the media.
14. GENERAL
(a) Any notice required or permitted to be sent hereunder shall be in
writing and shall be sent by registered or certified mail, return receipt
requested, or Federal Express, to the appropriate party at the address set forth
above, or to such other address as such party shall have designated by notice
hereunder.
(b) This Agreement shall be governed and interpreted in accordance with
the internal laws of the State of California. Any action or proceeding brought
to enforce the terms of this Agreement shall be brought in Santa Barbara County,
State of California, and each agrees to waive any objections
to personal jurisdiction, service of process and venue in the United States
District Court for Central District of California or California Superior Court
for Santa Barbara County. In the event of any legal proceeding between the
parties arising from this Agreement, the prevailing party shall be entitled to
recover, in addition to any other relief awarded or granted, its costs and
expenses (including reasonable attorneys' and expert witness' fees) incurred in
any such proceeding.
(c) This Agreement does not constitute CCF as the agent or legal
representative of CMI, or CMI as the agent or legal representative of CCF for
any purpose whatsoever. Neither party is granted any express or implied right or
authority by the other party to assume or to create any obligation or
responsibility in behalf of or in the name of the other party, or to bind the
other party in any manner or thing whatsoever.
(d) CCF shall be responsible for any withholding taxes, payroll taxes,
disability insurance payments, unemployment taxes, and other similar taxes or
charges on the payments received by its agents or employees and CMI shall be
responsible for any withholding taxes, payroll taxes, disability insurance
payments, unemployment taxes, and other similar taxes or charges on the payments
received by the Clinical Engineer.
(e) Neither party shall be deemed in default of this Agreement to the
extent that performance of their obligations or attempts to cure any breach are
delayed or prevented by reason of any act of God, fire, natural disaster,
accident, act of government, shortages of materials or supplies, or any other
cause beyond the control of such party ("force majeure") provided that such
party gives the other party written notice thereof promptly and, in any event,
within fifteen (15) days of discovery thereof and uses its best efforts to cure
any such breach. In the event of any such force majeure, the time for
performance or cure shall be extended for a period equal to the duration of the
force majeure but not in excess of six (6) months.
(f) This Agreement shall be binding upon and inure to the benefit of
the successors and assigns of the parties.
(g) Should any provision of this Agreement be held to be void, invalid,
or inoperative, the remaining provisions hereof shall not be affected and shall
continue in effect as though such
13
<PAGE> 14
unenforceable provision(s) had not been included herein. The name of this
Agreement and the headings of the sections of this Agreement are inserted for
convenience of reference only and shall not be used or relied upon in or in
connection with the construction or interpretation of this Agreement.
(h) No failure or delay by either party in exercising any right, power,
or remedy hereunder shall operate as a waiver of any such right, power, or
remedy. It is agreed that any remedies provided for in this Agreement shall be
cumulative and shall not be exclusive of any other remedies available hereunder,
or at law or in equity. No waiver or modification of any provision of this
Agreement shall be effective unless in writing and signed by the party against
whom such waiver or modification is sought to be enforced.
(i) This Agreement, including the Exhibits hereto, sets forth the
entire agreement between the parties with respect to the subject matter hereof
and supersedes all prior negotiations, understandings and agreements between the
parties hereto concerning the subject matter hereof.
(j) This Agreement may be executed in counterparts, but shall not be
binding upon the parties until it has been signed by both parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first written above.
CCF: CMI:
THE CLEVELAND CLINIC FOUNDATION
By: ________________________________ By: __________________________
Name: ________________________________ Name: __________________________
Title: ________________________________ Title: __________________________
14
<PAGE> 15
EXHIBIT A
Deliverable Items
1. Fully executed copy of this Agreement.
2. One (1) prototype of the Product.
3. Hardware upgrades and design modifications.
<PAGE> 16
EXHIBIT B
Schedule of Payments and Deliverable Items
"Purchase price for Materials" shall herein be defined as the three payments
made by CCF to CMI in exchange for the delivered Zeus Product prototype. The
Purchase money payments are identified herein as Performance Milestones and
total [*].
<TABLE>
<CAPTION>
Performing
Performance Milestone Performance Date Party Payment
--------------------- ---------------- ----- -------
<S> <C> <C> <C>
Execution of Agreement Agreement Execution CCF and CMI
First Purchase Payment Agreement Execution CCF [*]
Quarterly Development Payment Agreement Execution CCF [*]
Delivery of Materials 90 Days from Execution CCF
Second Purchase Payment Upon Delivery of Materials CCF [*]
Retain Clinical Engineer 15 Days from Delivery CCF
Final Purchase Payment 30 Days from Delivery CCF [*]
Quarterly Development Payment 90 Days from Execution CCF [*]
Quarterly Development Payment 180 Days from Execution CCF [*]
Quarterly Development Payment 270 Days from Execution CCF [*]
Quarterly Development Payment 360 Days from Execution CCF [*]
Quarterly Development Payment 450 Days from Execution CCF [*]
</TABLE>
<PAGE> 17
EXHIBIT C
Product Components
------------------
1. Robotic Surgical Instruments
- -------------------------------------
. Instrument Tips
. Two Zeus Robotic Arms
. 2 robot cables
. 2 10 mm collars
. 2 sets of instrument changing hardware
. 2 sets of hand controls
. 2 DS Controller Boxes
. 2 carts and means for connecting them
2. Surgeon Control Handles
- --------------------------------
. Handles
. Handle base
. Actuation cable which enables grasping action at the
instrument tips
3. AESOP 1000 System
- --------------------------
. Robotic laparoscopic positioner
. Hand and foot controls
. Computer controller
. Cart
. 10mm collar
4. IBM Compatible Personal Computer
- -----------------------------------------
. 2 free serial ports with minimum 38.4 Kbytes communications
rate
. 2 cables to connect the AESOP 1000DS serial ports
. Keyboard, monitor and personal computer
. User interface software
5. Other Equipment
- ------------------------
. Cart for storing all AESOP controllers and PC
. 3 table rail simulators and clamps
<PAGE> 18
EXHIBIT D
Zeus On-site Development Program
ZEUS DEVELOPMENT OVERVIEW
The Zeus development schedule is broken into 5 phases. The phases are designed
to ensure an orderly and thorough progression for each target procedure. This
schedule will allow an optimal sequencing of technical, clinical and regulatory
developments. It is important that the sequence and content of each phase is
adhered to. The length of time at each phase will be dependent on several
factors: surgeon time commitment, complexity of the clinical objective, the
nature of the technical changes required, and certain regulatory milestones.
Phases 1 and 2 are generic and apply to all surgeons participating in the
project. Phases 3-5 are specific to target procedures, with each procedure
progressing at different rates. For example, the development of less complicated
abdominal procedures will progress through the phases more rapidly than coronary
grafting research.
This staging is an important part of the underlying regulatory strategy we will
employ in clearing the product through the FDA. The on-site Clinical Engineer
("CE") will maintain master phase schedules of each specific clinical project
and monitor the progress of each schedule.
PHASE 1: SYSTEM INSTALLATION
Phase Overview and Concepts
- ---------------------------
In phase 1, the CE will physically install the Zeus system in a safe, controlled
environment. In addition to physically installing and configuring the system,
the following activities are performed by the CE during this period:
. Establish data collection and tracking processes, including
IDE bench testing processes, surgeon skills measurement
processes, Zeus configuration tracking methods.
. Setup laparoscopic skills trainers.
. Demonstrate and promote Zeus to the key surgeons.
. Conduct an origination meeting in which surgeons are presented
with the development schedule.
. Secure key surgeons' time commitments and develop a master
usage schedule.
Length of Phase
- ---------------
. 2 weeks
Resources Needed
- ----------------
. Full-time On-site Clinical Engineer
. Lab Setting for Zeus demonstrations
. Facilities support (e.g., wiring, electrical, logistical, etc.)
. 2-3 hours of surgeon time to attend orientation and arrange Zeus
schedule
<PAGE> 19
PHASE 2: ZEUS SKILLS DEVELOPMENT
Phase Overview and Concepts
- ---------------------------
The CE is the gatekeeper to the system and will maintain the Zeus master
schedule. All users must schedule their time through the CE. The CE must be
present at any time the system is in use. Data collection will be done primarily
by the CE, although each surgeon must first understand and agree with the data
collection goals.
During this phase, the surgeons will become familiar with the Zeus system and
begin to benchmark their basic laparoscopic skills, both with and without Zeus.
At this phase, all work will be done in an inanimate setting. Minimum levels of
competency with the system are required to progress to the next phase.
Engineering changes will continue during this phase, based on surgeon feedback.
Laparoscopic Skills With and Without Zeus
- -----------------------------------------
During this phase, laparoscopic skills are tested and quantitatively measured in
a dry lab setting. Computer Motion ("CMI") has developed standardized drills for
basic laparoscopic skills and suturing skills development. Each surgeon's skills
will be measured performing these drills both with and without Zeus.
This inanimate testing will continue for each user until there is a quantitative
plateau of the data (i.e., testing will terminate once each user can
demonstration they have traversed Zeus' basic skills the learning curve).
Data Collection and Record Keeping
- ----------------------------------
A record is kept of all users, time spent, and activities performed on the
system. The CE will record both qualitative and quantitative observations on:
. laparoscopic skill tests
. areas of strength and weakness with Zeus
. desired functional changes
The CE will provide feedback to CMI on technical issues as well as surgeon
feedback on potential clinical applications of the system. IDE bench-test data
will be recorded per the requirements of Computer Motion's Regulatory Affairs
guidelines.
Length of Phase
- ---------------
. 6 weeks
Resources Needed
- ----------------
. Full-time, on-site Clinical Engineer
. Dry lab Setting for Zeus
. Surgeons: One 1/2-day per week
<PAGE> 20
PHASE 3: PROCEDURE DEVELOPMENT
Phase Overview and Concepts
- ---------------------------
In this phase, the target procedures are identified by each discipline. These
procedures are broken into steps and the applicability of Zeus is examined in
its current state as well with feasible changes. Some engineering changes will
be likely at this stage based on specialized instruments needed to proceed with
procedures.
Target procedures
- -----------------
Lap general surgery:
. small bowel reanastomosis
. bile duct reconstruction
. aortic bypass and other vascular anastomisis
Lap urology:
. pyloplasty
. radical prostatectomy
Lap gynecology:
. tubal reanastomosis
Open microsurgery procedures:
. opthamology
. plastic surgery
. neurosurgery
Thorocoscopy
. valve replacement
. angioplasty assistance
. arrhythmia correction
. coronary by-pass surgery
Surgeon Planning/Strategy
- -------------------------
The surgeons will need to document each procedure, on a step-by-step basis. The
applicability and usefulness of Zeus must then be determined for each step of
the procedure. The instruments needed for Zeus can then be assessed and adapted
by CMI engineering and the appropriate animal model can then be selected, based
on the particular procedure to be performed.
Other activities at this phase include:
. Determine successful animal trial outcome measures
. Establish port placements, room setup, and Zeus setup strategy
. Document protocols for animals trials
. Identify goals for publishing and public presentation, based on animate
work
Length of Phase
- ---------------
. 7 weeks
<PAGE> 21
Resources Needed
- ----------------
. Full-time, on-site Clinical Engineer
. Dry lab Setting for Zeus
. CMI technical support for instrument adaptations
. Surgeons: Two 1/2-day per week
PHASE 4: CADAVER AND ANIMAL MODELS
Phase Overview and Concepts
- ---------------------------
In this phase the Zeus system is used on cadaver and live animal models. The
exact number of models required will be dependent on the difficulty of the
procedure and on successful achievement of the desired outcomes.
This phase will also serve as an important data collection basis for IDE and IRB
submission. Significant engineering changes are expected during this phase and
might be one of the limiting factors for progression to the next phase, which
will include human clinical trials.
Animal Trials Conducted
- -----------------------
The number of trials needed will depend on procedure targeted, the IDE needs,
the clinical challenge, and the relative success of the procedure outcomes. Each
step of the procedures will be timed, as well the overall procedure. These times
will be compared with those measured without the use of Zeus. Zeus and non-Zeus
outcomes will also be evaluated, as appropriate. In addition, certain procedures
may be included in a randomized study to compare the Zeus and non-Zeus
procedures.
This phase will likely afford clinicians and CMI the opportunity to preapte and
publish clinical papers, based on the outcomes of the animals trials.
Regulatory; preparation for clinical
- ------------------------------------
Various regulatory activities will occur during this phase in preparation for
IDE, IRB, and 510(k) filings.
. Establish the IDE animal trial data collection forms
. File the IDE
. File the hospital IRB
Cadaver Models
- --------------
In addition to live animals trials, cadaver work may be necessary in some
procedures. The following activities will need to be completed in connection
with these cadaver trials.
. Protocols and approvals completed
. Procedures performed
. Papers written
Length of Phase
- ---------------
. 21 weeks
<PAGE> 22
Resources needed
- ----------------
. Full time, on site Clinical Engineer
. Animal and cadaver lab facilities
. CMI technical support for entering changes
. Surgeons: Two 1/2-days per week
PHASE 5: HUMAN TRAILS
Phase overview and Concepts
- ---------------------------
In this phase, the first human trials will be performed. This is clearly
dependent on successful IDE and IRB clearance. These clinicals will be performed
with Beta Zeus systems that will have the look and feel of the pre-production
systems that become the actual product.
These clinical trials will generate a great deal of medial and clinical
interest, and therefore it is critical that these initial procedures are
successful. CMI shall approve all media coverage initiated by the Hospital
during this phase.
Regulatory Objectives
- ----------------------
Prior to use on humans:
. IDE clearance must be obtained and all data collection forms and
protocols completed
. IRB must be approved at the site
. All software and hardware changes must be completed and validated
During this phase, 510(k) clearance will be filed for the applications indicated
Note: The length of this phase is contingent upon a successful 510k filing. If
the device is deemed PMA approval device, then the human trials might be
considerably longer. A PMA approval cycle would at least double the length of
this phase.
Surgeon Activities
- ------------------
An initial number of trials will be performed to generate a clinical experience
paper. This paper will be the basis for a follow on study. A prospective,
randomized study will then be initiated, based on performing the various
procedures with and without Zeus, as appropriate. This follow-on study is
expected to be published in surgical journals and will include the appropriate
be statistical measures.
Length of Phase
- ---------------
. 25 weeks
Resources Needed
- ----------------
. Full-time, on-site Clinical Engineer
. OR support and facilities
. CMI technical support for engineering changes
. Surgeons: One 1/2-day per week in addition to normal surgery time
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the use of our report
and to all references to our firm included in or made a part of this
Registration Statement on Form S-1.
ARTHUR ANDERSEN LLP
Los Angeles, California
August 6, 1997
