Document/Exhibit Description Pages Size
1: 10KSB Integrated Surgical Systems, Inc. 38 232K
2: EX-10.13 Distribution Agreement 9 35K
3: EX-23.1 Consent of Ernst & Young LLP 1 6K
4: EX-27.1 Finacial Data Schedule 1 6K
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-12471
INTEGRATED SURGICAL SYSTEMS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
[Download Table]
DELAWARE 68-0232575
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1850 RESEARCH PARK DRIVE, DAVIS, CA 95616-4884
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(530) 792-2600
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
[Download Table]
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS EACH CLASS IS REGISTERED
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COMMON STOCK, $.01 PAR VALUE THE PACIFIC EXCHANGE INCORPORATED
COMMON STOCK PURCHASE WARRANTS THE PACIFIC EXCHANGE INCORPORATED
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
NOT APPLICABLE
(TITLE OF CLASS)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Revenues for the issuer's most recent fiscal year were $6,240,842.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the closing price of the common stock
on March 24, 2000 was $63,330,180.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
As of March 24, 2000, the issuer had 16,888,048 shares of common stock,
$.01 par value, outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2000 Annual
Meeting of Stockholders are incorporated by reference into Part III of this Form
10-KSB in response to Items 9, 10, 11 and 12 of Part III.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Integrated Surgical Systems, Inc. (the "Company") develops, assembles,
markets and services image-directed, computer-controlled robotic products for
orthopaedic and neurosurgical applications. The Company was incorporated under
the laws of the State of Delaware on October 1, 1990.
ORTHOPAEDIC BUSINESS
The Company's principal orthopaedic product is the ROBODOC(R) Surgical
Assistant System, consisting of a computer-controlled surgical robot and the
Company's ORTHODOC(R) Presurgical Planner. The ROBODOC System has been used for
primary total hip replacement surgery on over 6,600 patients in Europe and the
United States. The Company believes its "active" robotic system is the only
available system that can accurately perform key segments of surgical procedures
semi-autonomously with precise tolerances generally not attainable by
traditional manual surgical techniques. The ROBODOC System also allows the
surgeon to prepare a preoperative plan specifically designed for the
characteristics of the individual patient's anatomy. The technology for the
ROBODOC System was initially developed at the University of California, Davis,
in collaboration with IBM.
The ORTHODOC is a computer workstation that uses the Company's proprietary
software for preoperative surgical planning. The ORTHODOC is a part of the
ROBODOC Surgical Assistant System. The ORTHODOC converts CT scan data of a
patient's femur into three-dimensional images, and through a graphical user
interface, allows the surgeon to examine the bone more thoroughly and to select
the optimal implant for the patient using a built-in library of available
implants. A tape of the planned surgical procedure, developed by the ORTHODOC,
guides the surgical robot arm of the ROBODOC System to accurately mill a cavity
in the bone, thus allowing the surgeon to properly orient and align the implant.
Prior to the development of the DigiMatch(TM) Single Surgery System, two
titanium locator pins were placed in the patient's femur in an outpatient
procedure before the primary surgery. These locator pins were used during the
primary procedure to orient the ROBODOC System to the ORTHODOC preoperative
plan. With the development of the DigiMatch technology, this pre-operative
outpatient procedure has been eliminated. The orientation of the patient is now
accomplished using a proprietary, pinless registration system. Non-clinical
scientific data published by scientists from the Company and IBM demonstrate
that as a result of the precise milling of a cavity, the ROBODOC System achieves
over 95% bone-to-implant contact, as compared to an average of 20%
bone-to-implant contact when surgery is performed manually.
Total hip arthroplasty ("THA") surgery involves the insertion of an implant
into a cavity created in the patient's femur. The Company believes that precise
fit and correct alignment of the implant within the femoral cavity are key
factors in the long-term success of THA surgery. In conventional THA surgery, a
bone cavity is cut in the shape of the implant manually with metal tools, and
the surgical plan, including the selection of the size and shape of the implant,
is generally formulated based upon patient data obtained from two-dimensional
x-ray images of the patient's femur. Based upon clinical experience to date in
Europe with the ROBODOC System, patients generally have become weight-bearing in
a shorter period than generally experienced by patients who have had this
surgery performed manually. In addition, clinical data obtained from trials in
Europe and the United States indicates that intraoperative fractures have been
dramatically reduced in the THA surgeries performed with the ROBODOC System (to
the Company's knowledge, no intraoperative fractures have resulted from THA
surgeries performed with the ROBODOC System to date). The Company also believes
fewer hip revision surgeries (implant replacements) may be necessary for
patients who have had primary THA surgery performed with the ROBODOC System, as
compared to patients who have this surgery performed manually.
In the past, a majority of THA implants have been held in place with
acrylic cement, which fills the spaces between the implant and the bone, thereby
anchoring the implant to the femoral cavity ("cemented implants"). During the
1980s, implants that did not require cement ("cementless implants") were
developed with materials designed to stimulate bone ingrowth. The selection of a
cemented or cementless implant
1
generally is based upon a patient's bone condition and structure, age and
activity level. Typically, cemented implants are used for older, less active
patients. Furthermore, most implants require replacement within five to 20 years
of the first operation. The software package developed by the Company in
collaboration with IBM and Johns Hopkins University eliminates the distortion of
the x-ray images of the patient's femur used in planning hip revision surgery
caused by the metal in the existing implant. A surgeon using this proprietary
hip revision software will have a clearer view of the remaining bone in planning
hip revision surgery and therefore will be better able to plan the surgery to
have the ROBODOC remove fragmented cement without removing any of the remaining
thin thigh bone.
The Company has developed and commenced marketing to its customers in
Europe the DigiMatch Single Surgery System, that, in most cases, eliminates the
need for an initial surgery to place registration pins in a patient's femur
before using the ROBODOC System in total hip replacement surgery. More than
1,500 patient surgeries have been successfully performed in Europe with the
DigiMatch Single Surgery System.
The Company plans to amend its investigational device exemption under the
Food, Drug and Cosmetic Act, which allowed it to conduct clinical trials for the
ROBODOC System in the United States, to permit it to perform a relatively small
clinical study showing a correlation between the ROBODOC System using the
DigiMatch System technology and the three pin system that was used in its
initial clinical evaluations. The Company has deferred the filing of its
pre-market approval application to market the ROBODOC System in the United
States so that it may incorporate the DigiMatch Single Surgery System, and
possibly other technical developments, as part of its pre-market approval
application. The Company believes, based upon discussions with representatives
of the FDA, that the incorporation of the DigiMatch Single Surgery System will
enhance its prospects for obtaining FDA approval. However, there can be no
assurance as to when or if the FDA will approve the Company's pre-market
approval application to market the ROBODOC System or that such approval, if
obtained, will not include unfavorable limitations or restrictions.
The Company has developed a software package for total knee replacement
("TKR") surgery using the ROBODOC System. This application module enables the
ROBODOC System to select the optimal implant for the patient and make accurate
cuts in the bone, thus allowing the surgeon to properly orient and align the
implant. This application module is intended to provide patients with a precise
and accurate fit for implants that are properly sized and placed, regardless of
bone quality. The Company believes that TKR surgery performed with the ROBODOC
System will significantly improve implant longevity and the prognosis for
restored biomechanics. The Company anticipates that its TKA surgical
applications will be made available to customers in the second quarter of 2000.
NEUROSURGICAL BUSINESS
The Company entered the neurosurgical business through the acquisition of
Innovative Medical Machines International, S.A. ("IMMI") on September 5, 1997.
The Company's principal neurosurgical product is the NeuroMate System,
consisting of an image-guided, computer-controlled robotic arm, head stabilizer
and monitor. The Company also offers a workstation with presurgical planning
software through arrangements with original equipment manufacturers.
The NeuroMate System has been used to perform over 2,000 neurosurgical
procedures in France and Japan. The Company believes that the NeuroMate System,
which uses IMMI's proprietary robotic arm and control systems designed
specifically for use in the operating room, is the only image-guided, computer-
controlled robot currently in use to precisely position and hold critical tools
used in the performance of neurosurgical procedures.
Stereotactic neurosurgery is a minimally invasive approach to operating on
the brain. Because the brain is largely unexposed, it requires the surgeon to
work without direct visualization of the brain itself. This is overcome by a
thorough understanding of brain anatomy and by using a spatial coordinate system
that allows the surgeon to "navigate" within the brain without directly
visualizing it. Essentially, the coordinate space of the patient's brain is
correlated to the patient's own CT, magnetic resonance (MR) or other images by
using anatomical landmarks that are shared by the patient and the images. This
is known as "registration" of the patient's coordinate space to the coordinate
space of the images. Once this is accomplished, the patient's CT
2
scan can be used to guide the surgeon to specific sites within the brain through
small holes the surgeon has made in the cranium (i.e., not necessitating a
craniotomy).
POTENTIAL ORTHOPAEDIC AND NEUROSURGICAL APPLICATIONS
The Company intends to offer separate software packages supporting each new
robotic application, when developed by the Company. Some of these developments
may be given to the Company's customers without charge. Customers may be
required to pay for other developments, such as alternative prosthesis software.
Consequently, the Company's customers would be able to use the Systems as
platforms to perform a variety of surgical procedures without incurring
significant additional hardware costs. The Company plans to develop software
packages for the following orthopaedic surgical and neurosurgical procedures.
- POTENTIAL ORTHOPAEDIC APPLICATIONS
Acetabulum Replacement. The Company plans to complement the THA femoral
replacement application with acetabular cup planning and bone preparation for
hip socket replacement surgery. Currently, surgeons estimate the size of the
cup-shaped cavity in hip socket surgery using x-rays, which are subject to
distortion. Working in a narrow space with a limited view, the surgeon
ultimately selects the final cup size through trial and error. Due to the
limitations of available surgical tools, the surgeon is obliged to use a
hemispheric reamer and cup, although the human acetabulum (hip socket) is an
irregular shape. The Company believes that the application module for this
application, when developed, would enable the computer-controlled robot to
prepare an accurate bed for the implant, based on its specifications, and could
prepare an irregularly shaped socket for a custom or anatomically-shaped
acetabular component. The three-dimensional capability of the ORTHODOC would
better enable it to determine and display the irregular shape of the acetabulum
and instruct the robot to prepare the proper socket. This procedure potentially
could solve the problem of leg-length discrepancies which often originate at the
acetabulum.
Osteotomies. Osteotomies are precise cuts in bone intended to reshape or
realign abnormal or deformed structures. The Company's engineers have generated
a detailed work plan to adapt the ROBODOC System for use in performing long-bone
osteotomies on femurs and tibias (i.e., shin bones). The proposed application
module for this application, when developed, is intended to enable the surgeon
using the views of the bone created by the ORTHODOC from CT scan data, to make
trial cuts, remove bone and manipulate the remaining fragments, and experiment
with the appropriate placement of plates and screws. The surgeon's final plan
would be saved on a tape that would instruct the robot where to make saw cuts.
The computer-controlled robot would then orient itself in space by using
topographical features of the operative bone. A fixator would secure the bone to
the robot. The computer-controlled robot would then pre-place screw holes to
facilitate the final realignment and make the actual cuts.
- POTENTIAL NEUROSURGICAL APPLICATIONS
Spine surgery. Surgical interventions in the spine generally involve tumor
biopsy/resection; vascular repair; implants of plates, rods, screws, or other
implantable devices or substances; and bone fusions of various types. The
Company believes that its image-directed, computer-controlled robotic technology
is applicable in most of these interventions and will significantly enhance
precision and accuracy in many of them. Spine surgery is a large segment of both
neurosurgery and orthopaedic surgery, as the nature of the abnormality may
involve the nervous system or the vertebral column, or both. A significant part
of this application involves the insertion of vertebral pedicle screws,
discussed below.
Vertebral Pedicle Screws. Pedicle screws are used to fuse vertebrae in
need of repair due to trauma or herniated disc disease. The procedure involves
the placement of screws straight down the center of an irregular section of a
fragile bone only twice the diameter of the screw itself. Precise placement of a
screw affects the outcome of the surgery. Misplacement of a screw can result in
failure of the repair, trauma to the adjacent spinal cord, or rupture of nearby
blood sinuses which can hemorrhage severely. The Company believes that when the
development of the proposed application module for this surgical procedure is
completed, the NeuroMate System will be capable of performing this surgical
procedure more safely and effectively than surgery performed manually since the
computer-controlled robot is better able to precisely orient its tool in a
manner compatible with what is required for screw placement.
3
MARKETING, SALES AND DISTRIBUTION
The ROBODOC System cannot be marketed in the United States until clearance
or approval is obtained from the FDA. The Company has received 510(k) clearance
from the FDA to sell the ORTHODOC in the United States. The NeuroMate System
also has received 510(k) clearance from the FDA for marketing in the United
States and from the Japanese Ministry of Health for marketing in Japan.
Presentations to potential customers focus on the clinical benefits obtained by
patients, and the potential financial and marketing benefits obtained by
hospitals and surgeons.
The Company's products are marketed and sold in Europe, the Middle East and
Africa through Spark 1(st) Vision GmbH & Co. KG, a German company. The
distributor is obligated to purchase a minimum of 24 ROBODOC systems during 2000
and 32 ROBODOC systems during 2001. The distributor is required to pay the
Company advance payments of $200,000 per month for the first six months of 2000,
$300,000 per month for the remainder of 2000, and $400,000 per month for 2001,
to be applied as a credit against the products purchased. However, the
distributor has no minimum purchase or advance payment obligation after 2001,
even though it will retain exclusive rights to distribute the Company's products
in Europe, the Middle East and Africa through 2003. The distributor's only
obligation to the Company after 2001 is to pay for products that it purchases.
The Company will continue to receive service contract revenues and bear the cost
of maintenance, training and customer support. The distribution agreement will
eliminate marketing; sales and administrative expenses associated with the
Company's European activities and provide the Company with a more predictable
source of revenues based upon the minimum purchase commitments of the
distributor.
As of March 30, 2000 the Company had only received the advance payments
from the distributor for January, and had not received any orders from the
German distributor for the Company's products.
To date, the Company's products have been marketed primarily in Germany,
Switzerland and Austria. Over 2,450 THA surgeries have been performed with the
ROBODOC Systems at a clinic in Frankfurt, Germany since August 1994. As result
of a significant increase in the number of THA surgeries performed at the clinic
with the ROBODOC System, the clinic purchased a third ROBODOC System in 1999.
The Company has been marketing the ORTHODOC to hospitals, orthopaedic surgeons
and implant manufacturers in the United States since early 1998.
The NeuroMate System is marketed in Japan through a Japanese distributor
and in the United States through a direct sales force.
The Company promotes its products through presentations at trade shows and
advertisements in professional journals and technical and clinical publications,
as well as through direct mail campaigns.
MANUFACTURING
The Company's production process consists primarily of final assembly of
purchased components, testing of the products and packaging, and is conducted at
its facilities in Davis, California and Lyon, France. The Company purchases
substantially all the components for its systems from outside vendors, then
assembles these parts and installs its proprietary software.
The ROBODOC System consists of the robot, base and the control cabinet,
which are connected through four interface cables, and the ORTHODOC. The
NeuroMate System consists of a robot arm, electronics control and base. Sankyo
Seiki of Japan supplies the robot for the ROBODOC System customized to the
Company's specifications and Audemars-Piguet supplies the customized robot for
the NeuroMate System. Upon delivery of a robot, the Company performs a series of
tests to verify proper functioning. The customization and supply process for the
robots currently requires approximately four months lead time. While the robots
can be obtained from other suppliers with appropriate modifications and
engineering effort, there can be no assurance that delays resulting from the
required modifications or engineering effort to adopt alternative components
would not adversely affect the Company. Ancillary items required to perform
robotic surgeries, including devices for fixing the hip and attaching it to the
robot, numerous probes, cutter bearing sleeves and tool guides, are assembled
and tested separately.
4
Consumables, including sterile drapes, bone screws and cutters, are also
manufactured by outside vendors according to the Company's specification and are
inspected upon receipt to ensure that these specifications are consistently met.
The Company purchases these items in quantity and distributes them on a per
order basis. The Company also coordinates the packaging and sterilization of
certain items. The Company's policy is to procure its consumables from vendors
that it approves after ensuring that the goods comply with the Company's
sterilization requirements.
The ORTHODOC consists of a pentium-based computer workstation and
associated peripherals, and includes the Company's proprietary software. The
Company purchases and then tests the computer as a complete package. A computer
board is added to interface to CT/x-ray scanner input modules and, if required,
the ROBODOC System's tape output drive. The hard drive is reformatted to accept
the operating system, and appropriate ORTHODOC software is installed. The unit
is configured for 110 or 220 AC volt operation.
The Company's production facilities are subject to periodic inspection by
the FDA for compliance with Good Manufacturing Practices ("GMP"). In addition,
the Company's products will be required to satisfy European manufacturing
standards for sale in Europe. The Company believes that it is in compliance with
GMP and it has obtained ISO-9001 certification, which is required for sales of
its products in Europe.
RESEARCH AND DEVELOPMENT
Since its inception, the Company's research and development activities have
focused on the development of innovative image-directed computer-controlled
robotic products for surgical applications and operating software for these
products. The Company incurred research and development expenses of
approximately $5,581,000 and $6,603,000 in connection with the development of
the ROBODOC System, the ORTHODOC and the NeuroMate System for the years ended
December 31, 1999 and December 31, 1998, respectively.
The Company offers its customers hardware and software packages for primary
and revision hip surgery and functional neurosurgery. Revision hip surgery,
which was developed in collaboration with IBM and Johns Hopkins University was
funded in part by a grant from the National Institute for Standards and
Technology (Advanced Technology Program) of the United States Department of
Commerce ("NIST"). Hip revision surgery generally is difficult, time consuming
and complex. The metal in the existing implant distorts x-ray images used for
planning the surgery, obstructing the remaining bone and, if a cemented implant
is to be replaced, the location of the cement mantle. The removal of the cement
mantle without removing any of the remaining thin bone structure is a major
challenge for the surgeon. The Company believes that its patented hip revision
application module improves surgical planning for hip revision surgery and
enables the robot to remove cement more precisely than if the hip revision
procedure were performed manually.
Under the terms of the NIST grant, the Company, IBM and Johns Hopkins
University are entitled to reimbursement for 49% of the expenses incurred in
connection with the project for a period of three years. The maximum amount of
expenses subject to reimbursement under the grant is approximately $4,000,000,
so that not more than $1,960,000 in expenses may be reimbursed in the aggregate
to the Company, IBM and Johns Hopkins University under the grant. The Company
had incurred research and development expenses of approximately $2,471,000 in
connection with the NIST project through December 31, 1998. As of December 31,
1998, the Company had received approximately $831,000 under the terms of the
grant. All expenses related to the grant were submitted and paid through March
of 1999 thereby closing the grant.
The Company offers a number of lines of prostheses in its software library
of hip implants on its ORTHODOC. It is expanding the library to include multiple
implant lines, revision stems, and custom-made prostheses. In 1999, the Company
received orders from Howmedica (a division of Stryker Corporation), DePuy Inc.
(a subsidiary of Johnson & Johnson), Aesculap, AG & Co. KG, Zimmer Inc. (a
subsidiary of Bristol-Myers Squibb Company) and PLUS Endoprothetik A.G. to add
their respective hip prostheses to its existing software library. When
completed, the ROBODOC System will support 14 lines of popular prostheses from
seven of the largest orthopaedic companies in the world. The Company will
further expand the library of implants used at clinical sites to include
multiple implant lines, revision stems, and custom-made prostheses.
5
The Company has also commenced work with respect to the application of the base
technology for total knee replacement and acetabular cup replacement.
IMMI is the recipient of an interest-free loan from ANVAR (a national
agency in France established to aid research and development projects) in the
amount of approximately $153,400. This loan provided funding for the development
of the NeuroMate System for spine surgery. This project is currently in its
first phase of development in connection with a University hospital in Lille,
France. Under certain conditions (e.g., if at the completion of the project it
is not deemed a "success") there will be no requirement to repay the loan.
IMMI also is the recipient of a grant from ANVAR in the amount of
approximately $222,000, of which IMMI had received $174,000 as of December 31,
1998. This grant funds 50% of the cost to build and install NeuroMate Systems at
two clinics in France as well as the costs to perform a clinical study at these
sites over a period of fifteen months commencing March 1997.
COMPETITION
The principal competition for the ROBODOC System is manual surgery
performed by orthopaedic surgeons, using surgical power tools and manual
devices. The providers of these instruments are the major orthopaedic companies,
which include Howmedica, Inc. (a division of Stryker Corporation), located in
New York; Zimmer, Inc. (a subsidiary of Bristol-Myers Squibb), located in
Indiana; Johnson & Johnson Orthopaedics, Inc. (a subsidiary of DePuy Inc.),
located in New Jersey; DePuy, Inc., located in Indiana; Biomet, Inc. located in
Indiana; and Osteonics, Inc. (a subsidiary of the Stryker Corporation), located
in New Jersey. The principal competitor, Orto MAQUET, a manufacturer of
operating tables located in Germany, has entered the market with a device
intended to compete with ROBODOC. Orto MAQUET's system uses only pin-based
registration which requires a preliminary surgical procedure to place pins prior
to performing hip replacement surgery.
The principal competition for NeuroMate is from manufacturers of
frame-based and frameless stereotactic systems, some of which are commonly
called "navigators". Approximately twenty navigator models have been introduced,
including those by Radionics, Sofamor Danek, and Ohio Medical Surgical Products,
all located in the U.S.; Elekta, located in Sweden; and, Fischer Leibingher and
Brain Lab, both located in Germany. In addition, there are companies in the
medical products industry capable of developing and marketing
computer-controlled robotic systems for surgical applications, many of whom have
significantly greater financial, technical, manufacturing, marketing and
distribution resources than those of the Company, and have established
reputations in the medical device industry. However, the Company believes that
it enjoys a significant competitive advantage over such companies in view of the
time required to develop an image-directed, computer controlled robotic system
and to obtain the necessary regulatory approvals, including the sponsorship of
clinical trials. There can be no assurance that future competition will not have
a material adverse effect on the Company's business.
The Company's ROBODOC System represents a significant technological
advancement with respect to the manner in which THR surgery is performed. The
Company's image-directed, computer-controlled, robotic technology is intended to
complement surgeons in performing THA and other orthopaedic surgeries. Although
there are companies which market technologically advanced surgical tools used by
surgeons in performing orthopaedic surgeries, including passive robot systems
that direct the surgeon in planning and performing surgical procedures (e.g.,
aiming and holding devices), the Company believes that the ROBODOC System is the
most technologically advanced active robotic system that performs a key segment
of THA surgery (i.e., milling a bone cavity) under the supervision of a surgeon.
The Company believes the NeuroMate System is the only robotic system
presently used for neurosurgery which provides superior accuracy and flexibility
as compared to other techniques.
6
WARRANTY AND SERVICE
The Company offers a full warranty, covering parts and labor, for the first
year following the purchase of its products, which warranty coverage can be
extended on an annual basis by purchasing a maintenance agreement at a price
negotiated on a customer by customer basis.
The Company trains its customers with its in-house technical staff and
services its customers with a direct service staff located in Europe. As needed,
technical support also is provided from the U.S. engineering organization.
PATENTS AND PROPRIETARY RIGHTS
The Company relies on a combination of patent, trade secret, copyright and
trademark laws and contractual restrictions to establish and protect proprietary
rights in its products and to maintain its competitive position.
The Company has been issued four U.S. patents, including one for revision
surgery procedures and pinless THA surgery procedures. The Company has filed
seven patent applications covering various aspects of its technology. In
addition, IBM has agreed not to assert infringement claims against the Company
with respect to an IBM patent relating to robotic medical technology, to the
extent such technology is used in the Company's products. Furthermore,
significant portions of the ORTHODOC and ROBODOC System software are protected
by copyrights. IBM has granted the Company a royalty-free license for the
underlying software code for the ROBODOC System. In addition, the Company has
registered the marks ROBODOC and ORTHODOC.
Our U.S. patents include:
-- Computer assisted software system for planning and performing hip
revision surgery;
-- Computer assisted system and method for creating cavities in the femur
that will accept a prosthesis;
-- Computer system and method for creating a pre-operative surgical plan
for hip replacement surgery ; and
-- Method for orienting real patient anatomy to a digital image of the
patient's anatomy.
GOVERNMENT REGULATION
The medical devices to be marketed and manufactured by the Company are
subject to extensive regulation by the FDA and by foreign and state governments.
Pursuant to the Federal Food, Drug, and Cosmetic Act of 1976, as amended, and
the regulations promulgated thereunder (the "FDC Act"), the FDA regulates the
clinical testing, manufacturing, labeling, distribution, and promotion of
medical devices. Noncompliance with applicable requirements can result in, among
other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant pre-market clearance or pre-market approval for devices, withdrawal of
marketing clearances or approvals, and criminal prosecution. The FDA also has
the authority to request repair, replacement or refund of the cost of any device
manufactured or distributed by the Company.
Any products manufactured or distributed by the Company pursuant to the FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, including quality system requirements ("QSR"), documentation and
reporting of adverse experiences with the use of the device. Device
manufacturers are required to register their establishments and list their
devices with the FDA and with certain state agencies and are subject to periodic
compliance inspections by the FDA and certain state agencies.
Following a pre-filing meeting with representatives of the FDA in early
1998, the Company stated that it intended to file its pre-market approval
application to market the ROBODOC System with the FDA as part of the PMA
submission review process (which process is intended to expedite the FDA's
formal pre-market approval process). The Company has deferred the filing of its
pre-market approval application with the FDA so that it may incorporate the
DigiMatch anatomically based registration technology and possibly other
technical developments, as part of its pre-market approval application. The
Company believes, based upon discussions with representatives of the FDA, that
the incorporation of the DigiMatch System will enhance its
7
prospects for obtaining FDA approval. There can be no assurance as to when or if
the FDA will grant PMA approval to the ROBODOC System or that such approval, if
obtained, will not include unfavorable limitations or restrictions.
After receipt of PMA approval, if any, the Company expects that the FDA
would consider new surgical applications for the ROBODOC System to be new
indications for use, which generally would require FDA approval of a PMA
supplement or, possibly a new PMA. The FDA is also likely to require additional
approvals before the agency will permit the Company to incorporate new imaging
modalities (such as ultrasound and MRI) or other different technologies in the
ROBODOC System. The FDA likely will require new clinical data to support new
indications and enhanced technological characteristics.
In February 1996, the Company filed a 510(k) submission for the ORTHODOC as
a stand-alone device. This 510(k) was the first product submission filed by the
Company with the FDA. In January 1997, the ORTHODOC received clearance from the
FDA for marketing in the United States. The NeuroMate System received 510(k)
clearance from the FDA for marketing in the United States in May 1997. Medical
device companies may make regulatory decisions that certain non-significant
modifications to a 510(k) cleared product do not require additional regulatory
submissions or notifications.
Labeling and promotion activities are subject to scrutiny by the FDA and,
in certain instances, by the Federal Trade Commission. Current FDA enforcement
policy prohibits marketing approved medical devices for unapproved uses. The
Company and its products are also subject to a variety of state laws and
regulations in those states or localities where its products are or will be
marketed. Any applicable state or local regulations may hinder the Company's
ability to market its products in those states or localities. Manufacturers are
also subject to numerous federal, state and local laws relating to such matters
as safe working conditions, manufacturing practices, environmental protection,
fire hazard control and disposal of hazardous or potentially hazardous
substances. There can be no assurance that the Company will not be required to
incur significant costs to comply with such laws and regulations now or in the
future or that such laws or regulations will not have a material adverse effect
upon the Company's business, financial condition or results of operations.
Exports of products subject to the 510(k) notification requirements, but
not yet cleared to market, are permitted without FDA export approval provided
certain requirements are met. Unapproved products subject to the PMA
requirements must receive prior FDA export approval unless they are approved for
use by any member country of the European Union and certain other countries,
including Australia, Canada, Israel, Japan, New Zealand, Switzerland and South
Africa, in which case they can be exported to any country without prior FDA
approval. To obtain FDA export approval, when it is required, certain
requirements must be met and information must be provided to the FDA that may
include 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.
The introduction of the Company's products in foreign markets has subjected
and will continue to subject the Company to foreign regulatory clearances which
may impose additional substantive costs and burdens. International sales of
medical devices are subject to the regulatory requirements of each country. The
regulatory review process varies from country to country. Many countries also
impose product standards, packaging requirements, labeling requirements and
import restrictions on devices. In addition, each country has its own tariff
regulations, duties and tax requirements.
The ROBODOC System satisfies international electromedical standard IEC
601-1 and the protection requirements of the Electromagnetic Compatibility
Directive (89/336/EEC), thus allowing the Company to apply the CE Mark. This
conformity is evidenced by the grant of a GS-Mark by Technische Uebermachungs
Verein Rheinland ("TUV"), a testing body in Germany, under current German
regulations. The ROBODOC System also satisfies the relevant provisions of the
Medical Device Directive for a Class II b Medical Device.
The NeuroMate System satisfies the relevant provisions of the Medical
Device Directive for a Class IIb Medical Device, thus allowing the Company to
apply the CE Mark. In June 1997, the NeuroMate System received clearance from
the Japanese Ministry of Health for marketing in Japan.
8
PRODUCT LIABILITY
The manufacture and sale of medical products exposes the Company to the
risk of significant damages from product liability claims. The Company maintains
product liability insurance against product liability claims in the amount of $5
million per occurrence and $5 million in the aggregate. There can be no
assurance, however, that the coverage limits of the Company's insurance policies
will be adequate, that the Company will continue to be able to procure and
maintain such insurance coverage, or that such insurance can be maintained at
acceptable costs. Although the Company has not experienced any product liability
claims to date, a successful claim brought against the Company in excess of its
insurance coverage could have a materially adverse effect on the Company's
business, financial condition, and results of operations.
EMPLOYEES
As of March 3, 2000, the Company had 81 full time employees, including 41
in research and development, 7 in manufacturing, 9 in regulatory affairs and
quality assurance, 14 in sales and marketing and 10 in administration. Except
for the employees of IMMI, none of the Company's employees is covered by a
collective bargaining agreement. The Company believes its relationship with its
employees is satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's executive offices and principal production facilities,
comprising a total of approximately 30,500 square feet of space, are located in
Davis, California. The Company occupies the facilities in Davis pursuant to a
lease that expires in September 2004. The lease provides for rent of $30,000 per
month (plus real estate taxes and assessments, utilities and maintenance),
through May 31, 1999, subject to adjustment in subsequent years for cumulative
increases in the cost of living index, not to exceed 4% per year.
The Company leases its European facility under a non-cancelable operating
lease. The lease is for a term of eight years and expires in 2006. The lease
provides for rent of $7,197 per month.
ITEM 3. LEGAL PROCEEDINGS.
The Company has from time to time been notified of various claims
incidental to its business that are not the subject of pending litigation. While
the results of claims cannot be predicted with certainty, the Company believes
that the final outcome of all such matters will not have a materially adverse
effect on its consolidated financial position, results of operations or cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A special meeting of stockholders was held on November 17th, 1999 to
approve the issue and sale to ILTAG International Licensing Holding S.A.L.
("ILTAG"), Bernd Herrmann and Urs Wettstein of an aggregate of 2,922,396 shares
of Common Stock and warrants to purchase an additional number of shares of
Common Stock that would give them 40% of the fully diluted Common Stock, for a
purchase price of $4 million pursuant to a Stock and Warrant Purchase Agreement
dated as of October 1, 1999. The Company issued three year warrants to purchase
an additional 11,700,000 shares of Common Stock at an exercise price of $1.02656
per share to fulfill the terms of the agreement. At the special meeting
4,254,806 shares were voted for the sale, 52,510 shares were voted against the
sale and 479,734 shares abstained.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) The Company's Common Stock and redeemable Common Stock Purchase
Warrants ("Warrants") are traded on the Nasdaq SmallCap Market under the symbols
"RDOC" and "RDOCW", respectively. The Company's Common Stock and Warrants also
are listed on the Pacific Exchange under the symbols "ROB" and "ROBWS",
respectively.* Since November 21, 1997, the Common Stock also has been traded on
EASDAQ under the symbol "RDOC."
9
Set forth below are the high and low closing sale prices for the Common
Stock and Warrants on the Nasdaq SmallCap Market for each quarter since January
1, 1998.
[Download Table]
COMMON STOCK WARRANTS
("RDOC") ("RDOCW")
--------------- ----------------
QUARTER ENDED 1999 HIGH LOW HIGH LOW
------------------ ----- ------ ------ ------
March 31, 1999................................... $3.938 $1.031 $1.031 $0.406
June 30, 1999.................................... $2.969 $1.031 $1.500 $0.250
September 30, 1999............................... $4.125 $2.500 $2.344 $1.000
December 31, 1999................................ $2.750 $1.438 $1.125 $0.375
[Download Table]
QUARTER ENDED 1998
------------------
March 31, 1998................................... $5.875 $3.938 $1.813 $1.125
June 30, 1998.................................... $7.313 $4.875 $2.750 $1.250
September 30, 1998............................... $5.000 $3.000 $1.563 $0.688
December 31, 1998................................ $4.563 $2.563 $1.250 $0.438
(b) As of March 17, 1999, there were 119 holders of record of the Common
Stock and 10 holders of record of the Warrants. The Company believes that as of
March 17, 1999 there were approximately 1,500 and 400 beneficial owners of
Common Stock and Warrants, respectively.
(c) On December 14, 1999, the Registrant sold an aggregate of 2,922,396
shares of Common Stock and warrants to purchase an additional 11,700,000 shares
of Common Stock to ILTAG, Bernd Herrmann and Urs Wettstein for a total purchase
price of $4,000,000. The sale was exempt from the registration requirements of
the Securities Act under Section 4(2) of the Securities Act and Rule 506 of
Regulation D. Each of the purchasers is an accredited investor.
---------------
* No trading activity has been reported by the Pacific Exchange.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis relates to the consolidated
operations of Integrated Surgical Systems, Inc. and should be read in
conjunction with the consolidated financial statements of Integrated Surgical
Systems, Inc., including the notes thereto, appearing elsewhere in this report.
RESULTS OF OPERATIONS
Net Sales. Net Sales for the year ended December 31, 1999 increased by
approximately $100,000 or 1.5% to $6,241,000 compared to $6,146,000 for year
ended December 31, 1998. This increase in net sales is due to increase in the
sales of Neuromate systems, service contracts and implant software libraries.
Cost of Sales. Cost of sales for 1999 was $3,564,000 or 57% of net sales
as compared to $3,413,000 or 56% of net sales for the prior year.
Selling, General and Administrative. Selling, general and administrative
expenses for 1999 were $6,589,000 compared to $6,348,000 for 1998. Selling,
general and administrative expenses increased by 2% as a percentage of sales.
Research and Development. Expenses for research and development during
1999 decreased by 15% to $5,581,000 from $6,603,000 during 1998. During 1999,
the Company concentrated on its' core products and technologies in order to
strengthen its' position in the marketplace. This concentration led to the
decrease in R&D expenditures in non-core areas and therefore, the lower level of
expenditures in 1999.
During 1999, the Company amortized $839,000 of identified intangible assets
acquired in the ISS-SA transaction in 1997. This charge was equal to the amount
recorded in 1998.
10
Interest Income and Expense. For 1999, interest income amounted to
$198,000 compared to $241,000 in 1998. The difference is the result of generally
lower average cash balances during the year. During the 1999 year, the Company
also made borrowings against a revolving line of credit, and had other interest
expenses which, in total, generated interest expense in the amount of $198,000.
Foreign Currency Gain (Loss). Losses incurred in connection with foreign
currency transactions amounted to $183,000 in 1999 as a result of exchange rates
that strengthened the U.S. Dollar relative to European currencies. In 1998,
transaction gains were approximately $129,000.
Other Income and Expense. Other expense for 1999 amounted to $491,000
compared to other expense of $270,000 for the same period in 1998. As of
December 31, 1999, the Company owned approximately 27% of the outstanding shares
of Marbella High Care B.V. ("MBHC") and accounts for its investment under the
equity method. The Company recorded expenses relating to its investment and
advances in MBHC of $480,000 and $317,000 for years ended December 31, 1999 and
1998, respectively. These charges are included in other income (expense).
Preferred Stock Accretion. During 1999, the Company entered into private
placement agreements whereby the Company's Series B, C, D & E Convertible
Preferred Stock issues were placed with private investors. The terms of the
preferred stock include a Beneficial Conversion Feature. The values assigned to
the Beneficial Conversion Feature, as determined using the quoted market prices
of the Company's common stock on the dates the Series B, C, D & E Preferred
Stock were sold, amounted to $176,000, $144,000, $353,000 and $529,000
respectively, which represented a discount to the values of the Series B, C, D &
E Preferred Stocks (the "Discount"). The Discounts are being accreted using the
vesting terms through January 27, 2000. Approximately $1,423,000 of the
Discounts were accreted in 1999 including $240,000 attributable to the Series A
Preferred issued in 1998.
Net Loss. The net loss applicable to common stockholders for 1999
increased by 8.8% from $10,644,000 in 1998 to $11,578,000 in 1999. The increase
in the loss is due primarily to an increase in the foreign currency transaction
loss versus a gain in 1998, the write-off of the Company's investment in MBHC,
and amounts attributable to the preferred stock accretion in connection with the
private placements in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have exceeded net sales. Operations
have been funded primarily from the issuance of debt and the sale of equity
securities aggregating approximately $46.5 million. In addition, the Company was
the beneficiary of proceeds from a $3 million key-man life insurance policy in
1993 upon the death of one of its executives.
The Company used cash from operating activities of approximately $8,375,000
and $8,673,000 in 1999 and 1998, respectively. Net cash used for operations in
each of these periods resulted primarily from the net loss. Cash used for
operations in 1998 reflected an increase in accounts receivable and inventories.
Cash used for operations in 1999 reflected a decrease in accounts receivable, an
increase in inventories and a decrease in value added taxes payable and other
current liabilities.
Investing activities provided $1,771,000 of cash in 1999. The sale of short
term investments, purchased in 1998 provided $2,039,000 of cash in 1999. The
Company used cash in investing activities of approximately $4,258,000 in 1998.
The Company's other investing activities have consisted primarily of
expenditures for property and equipment that totaled approximately $410,000 and
$1,746,000 in 1999 and 1998, respectively.
Cash provided from financing activities from inception through 1999 is
comprised principally of the net cash proceeds from the sale of a convertible
note in the principal amount of $3,000,000 that, along with the accrued interest
of $1,224,000, was converted into a warrant to purchase Common Stock, as part of
the recapitalization of the Company in December 1995. Cash was also provided by
the sale of convertible preferred stock and warrants in the amount of
$14,676,000 in 1995. These were converted into Common Stock and warrants to
purchase Common Stock in December 1995 and November 1996 in the amounts of
$11,734,000 and $2,942,000 respectively. The sale of Common Stock and warrants
provided an additional source of cash as a result of the Company's initial
public offering in November 1996 and its' European offering
11
of Common Stock in November 1997 in the amounts of $6,137,000 and 8,440,00
respectively. Furthermore, the Company sold five series of convertible preferred
stock and warrants during 1998 and 1999 that provided additional cash. Cash
provided was: $3,300,400 from series A in September, 1998, $911,000 from Series
B in March 1999, $658,000 from Series C in June 1999, $1,862,000 in June 1999
from Series D and $2,819,000 from Series E in July 1999. In December 1999, the
Company sold 2,922,396 shares of Common Stock and warrants to purchase an
additional 11,700,000 shares of Common Stock to three private investors for
$3,657,000, net of offering expense. In 1998, the Company established a $1.5
million revolving credit facility with a bank which has been subsequently
closed.
The Company believes that it has developed a viable plan to address the
going concern issues raised by its independent auditors and that its plan will
enable the Company to continue as a going concern through the end of 2000. This
plan includes the expansion of the geographic markets in which its products are
sold, new applications for its products, the consummation of equity financings
in amounts sufficient to fund further growth, to attain its product development
and marketing objectives and meet its working capital demands, and the reduction
of certain operating expenses as necessary. Although the Company believes that
its plan will be realized, there is no assurance that these events will occur.
The financial statements do not include any adjustments to reflect the
uncertainties related to the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the inability of
the Company to continue as a going concern.
YEAR 2000 COMPLIANCE
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its upgrade and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expensed approximately $100,000 during 1999 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements follow Item 13 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company did not have any changes in or disagreements with its
accountants on accounting and financial disclosure.
12
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, AND PROMOTION AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information called for by this Item is incorporated by reference to the
Company's definitive proxy statement for the 2000 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A.
ITEM 10. EXECUTIVE COMPENSATION.
The information called for by this Item is incorporated by reference to the
Company's definitive proxy statement for the 2000 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this Item is incorporated by reference to the
Company's definitive proxy statement for the 2000 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this Item is incorporated by reference to the
Company's definitive proxy statement for the 2000 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
[Download Table]
EXHIBIT DESCRIPTION
------- -----------
3.1 Form of Certificate of Incorporation of the Registrant, as
amended.(1)
3.2 By-laws of the Registrant.(2)
3.3 Certificate of Designations for Series D Convertible
Preferred Stock.(3)
3.4 Certificate of Designations for Series F Convertible
Preferred Stock.(4)
4.1 Form of warrant issued to the underwriters for the
Registrant's initial public offering in November 1996.(2)
4.2 Form of Warrant Agreement relating to the Registrant's
Redeemable Common Stock Purchase Warrants.(2)
4.3 Specimen Common Stock Certificate.(2)
4.4 Specimen Warrant Certificate (included as Exhibit A to
Exhibit 4.2 herein).(2)
4.5 1998 Stock Option Plan.(5)
4.6 Employee Stock Purchase Plan.(5)
4.7 Common Stock Purchase Warrant issued by the Registrant to
International Business Machines Corporation ("IBM"), dated
February 6, 1991, as amended (included as Exhibit J to
Exhibit 10.5 herein).(2)
4.8 Stockholders' Agreement between the Founders of the
Registrant and IBM, dated February 6, 1991, as amended.(2)
4.9 Common Stock Purchase Warrant issued by the Registrant to
IBM, dated December 21, 1995 (included as Exhibit I to
Exhibit 10.5 herein).(2)
4.10 Series D Preferred Stock Purchase Warrant issued by the
Company to IBM, dated December 21, 1995 (included as Exhibit
H to Exhibit 10.5 herein).(2)
4.11 Warrant issued by the Registrant to Sutter Health, Sutter
Health Venture Partners ("Sutter Health VP") and Keystone
Financial Corporation ("Keystone"), dated December 21, 1995
(included as Exhibits K, L and M, respectively, to Exhibit
10.5 herein).(2)
13
[Download Table]
EXHIBIT DESCRIPTION
------- -----------
4.12 Registration Rights Agreement among the Registrant, IBM,
John N. Kapoor Trust ("Kapoor"), EJ Financial Investments V,
L.P. ("EJ Financial"), Keystone, Sutter Health and Sutter
Health VP, dated as of December 21, 1995 (included as
Exhibit G to Exhibit 10.5 herein).(2)
4.13 1995 Stock Option Plan, as amended.(2)
4.14 Series D Preferred Stock Purchase Warrant issued by the
Registrant to IBM, dated February 29, 1996 (together with
the warrant referred to in Exhibit 4.10, the "Series D
Warrants").(2)
4.15 Letter Agreement between the Registrant and IBM dated
October 29, 1997, amending the Series D Warrants and the
Series D Preferred Stock and Warrant Purchase Agreement
among the Registrant, IBM and EJ Financial, dated December
21, 1995.(6)
4.16 Form of warrant issued to CA IB Investmentbank
Aktiengesellschaft and Value Management & Research GmbH.(6)
4.17 Preferred Stock Purchase Agreement for Series D Convertible
Preferred Stock.(3)
4.18 Preferred Stock Purchase Agreement for Series F Convertible
Preferred Stock.(4)
4.19 Form of warrant issued to purchasers of Series A Convertible
Preferred Stock.(7)
4.20 Form of warrant issued to purchasers of Series B Convertible
Preferred Stock.(8)
4.21 Form of warrant issued to purchasers of Series C Convertible
Preferred Stock.(3)
4.22 Form of warrant issued to purchasers of Series D Convertible
Preferred Stock.(3)
4.23 Form of warrant issued to purchasers of Series E Convertible
Preferred Stock.(9)
4.24 Form of warrant issued to purchasers of Series F Convertible
Preferred Stock.(4)
4.25 Form of Registration Rights Agreement for Series D
Convertible Preferred Stock financing.(3)
4.26 Form of Registration Rights Agreement for Series F
Convertible Preferred Stock financing.(4)
4.27 Form of warrant dated December 14, 1999 issued to ILTAG
International Licensing Holding S.A.L., Bernd Herrmann and
Urs Wettstein (included as Exhibit B to Exhibit 10.12).
4.28 Form of Registration Rights Agreement dated December 14,
1999 among the Registrant, ILTAG International Licensing
Holding S.A.L., Bernd Herrmann and Urs Wettstein (included
as Exhibit C to Exhibit 10.12).
10.1 Loan and Warrant Purchase Agreement between the Registrant
and IBM, dated as of February 6, 1991.(2)
10.2 License Agreement between the Registrant and IBM, dated
February 4, 1991.(2)
10.3 Series B Preferred Stock Purchase Agreement among the
Registrant, Sutter Health and The John N. Kapoor Trust,
dated as of April 10, 1992.(2)
10.4 Series C Preferred Stock Purchase Agreement among the
Registrant, Sutter Health and Keystone, dated as of November
13, 1992, as amended December 13, 1995.(2)
10.5 Series D Preferred Stock and Warrant Purchase Agreement
among the Registrant, IBM and EJ Financial, dated December
21, 1995.(2)
10.6 Investors Agreement among the Registrant, IBM, Wendy
Shelton-Paul Trust, William Bargar, Brent Mittelstadt, Peter
Kazanzides, Kapoor, Sutter Health, Sutter Health VP and EJ
Financial, dated as of December 21, 1995 (included as
Exhibit F to Exhibit 10.5 herein).
10.7 Employment Agreement between the Registrant and Ramesh
Trivedi, dated December 8, 1995.(2)
10.8 License Agreement between the Registrant and IBM, dated
February 4, 1991.(2)
10.9 Agreement for the Purchase and Use of Sankyo Industrial
Products between the Registrant and Sankyo Seiki (American)
Inc. dated November 1, 1992.(2)
10.10 Stock Purchase Agreement dated as of September 5, 1997
between the Registrant and the holders of the outstanding
capital stock of Innovative Medical Machines International,
S.A.(6)
14
[Download Table]
EXHIBIT DESCRIPTION
------- -----------
10.11 Registration Rights Agreement dated September 5, 1997 by and
among the Registrant and the holders of the outstanding
capital stock of Innovative Medical Machines International,
S.A.(6)
10.12 Stock and Warrant Purchase Agreement dated as of October 1,
1999 among the Registrant, ILTAG International Licensing
Holding S.A.L., Bernd Herrmann and Urs Wettstein. (10)
10.13 Distribution Agreement dated November 12, 1999 between the
Registrant and Spark 1st Vision GmbH & Co. KG.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
---------------
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-9207), declared effective on November 20,
1996.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Registration No. 333-83067), declared effective on October 14,
1999.
(4) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Registration No. 333-30422), declared effective on February 22,
2000.
(5) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-31481), declared effective on November 14,
1997.
(7) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Registration No. 333-66133), declared effective on January 14,
1999.
(8) Incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB for the fiscal quarter ended March 31, 1999.
(9) Incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB for the fiscal quarter ended June 30, 1999.
(10) Incorporated by reference to the Registrant's proxy statement dated October
5, 1999.
(b) Reports on Form 8-K:
The Registrant filed a Form 8-K dated December 14, 1999 reporting a change
in control of the Registrant (Item 1) and that it had entered into a
distribution agreement for Europe, the Middle East and Africa (Item 5).
15
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTEGRATED SURGICAL SYSTEMS, INC.
By: /s/ RAMESH C. TRIVEDI
------------------------------------
Ramesh C. Trivedi, President
(Principal Executive Officer)
By: /s/ LOUIS J. KIRCHNER
------------------------------------
Louis J. Kirchner, Chief Financial
Officer
(Principal Financial and Accounting
Officer)
Dated: March 29, 2000
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant on March
29, 2000 in the capacities indicated.
[Enlarge/Download Table]
SIGNATURE TITLE
--------- -----
/s/ RAMESH C. TRIVEDI Chief Executive Officer, President and a
----------------------------------------------------- Director (Principal Executive Officer)
Ramesh C. Trivedi
/s/ LOUIS J. KIRCHNER Chief Financial Officer (Principal Financial
----------------------------------------------------- and Accounting Officer)
Louis J. Kirchner
/s/ FALAH AL-KADI Chairman of the Board
-----------------------------------------------------
Falah Al-Kadi
/s/ JOHN N. KAPOOR Director
-----------------------------------------------------
John N. Kapoor
/s/ BERND HERRMANN Director
-----------------------------------------------------
Bernd Herrmann
/s/ URS WETTSTEIN Director
-----------------------------------------------------
Urs Wettstein
16
INTEGRATED SURGICAL SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
[Download Table]
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheet at December 31, 1999............. F-3
Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998................................ F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999 and 1998.................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998................................ F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Integrated Surgical Systems, Inc.
We have audited the accompanying consolidated balance sheet of Integrated
Surgical Systems, Inc. as of December 31, 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1999 and 1998. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Integrated
Surgical Systems, Inc. at December 31, 1999, and the consolidated results of its
operations and its cash flows for the years ended December 31, 1999 and 1998 in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that
Integrated Surgical Systems, Inc. will continue as a going concern. As more
fully described in Note 1, the Company has incurred recurring operating losses
and has an accumulated deficit of $45,800,979 as of December 31, 1999. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments to reflect
the uncertainties related to the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
ERNST & YOUNG LLP
Sacramento, California
March 10, 2000
F-2
INTEGRATED SURGICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
[Download Table]
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,918,016
Accounts receivable less allowance for doubtful accounts
of $345,466............................................ 634,216
Inventory................................................. 3,332,191
Other current assets...................................... 526,927
------------
Total current assets........................................ 7,411,350
Net property and equipment.................................. 905,001
Leased equipment, net....................................... 638,357
Long-term net investment in sales-type leases............... 433,985
Intangible assets, net...................................... 2,175,938
Other assets................................................ 12,558
------------
$ 11,577,189
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,648,124
Value added taxes payable................................. 78,408
Accrued payroll and related expenses...................... 386,418
Customer deposits......................................... 1,047,066
Accrued product retrofit costs............................ 207,953
Current portion of bank loans............................. 114,433
Other current liabilities................................. 485,893
------------
Total current liabilities................................... 3,968,295
Note payable................................................ 153,400
Commitments and contingencies (Notes 1, 10 and 11)
Stockholders' equity:
Convertible preferred stock, $0.01 par value, 1,000,000
shares authorized, 2,925 shares issued and outstanding
($2,925,000 aggregate liquidation value)............... 29
Common stock, $0.01 par value, 50,000,000 shares
authorized; 14,291,915 shares issued and outstanding... 142,919
Additional paid-in capital................................ 53,631,218
Deferred stock compensation............................... (10,513)
Preferred stock discount.................................. (19,853)
Accumulated other comprehensive loss...................... (487,327)
Accumulated deficit....................................... (45,800,979)
------------
Total stockholders' equity.................................. 7,455,494
------------
$ 11,577,189
============
See accompanying notes.
F-3
INTEGRATED SURGICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
----------------------------
1999 1998
------------ ------------
Net sales................................................... $ 6,240,842 $ 6,146,434
Cost of sales............................................... 3,563,943 3,413,221
------------ ------------
2,676,899 2,733,213
Operating expenses:
Selling, general and administrative....................... 6,589,222 6,347,592
Research and development.................................. 5,580,648 6,602,550
------------ ------------
12,169,870 12,950,142
Other income (expense):
Interest income........................................... 197,551 240,959
Interest expense.......................................... (198,479) (124,095)
Foreign currency gain (loss).............................. (183,197) 129,158
Other, net................................................ (491,480) (269,737)
------------ ------------
Loss before provision for income taxes...................... (10,168,576) (10,240,644)
Provision for income taxes.................................. (13,155) 27,235
------------ ------------
Net loss.................................................... (10,155,421) (10,267,879)
Preferred stock accretion................................... (1,422,500) (376,264)
------------ ------------
Net loss applicable to common stockholders.................. $(11,577,921) $(10,644,143)
============ ============
Basic and diluted net loss per share........................ $ (1.47) $ (1.91)
============ ============
Shares used in computing basic net loss per share........... 7,896,171 5,584,639
============ ============
See accompanying notes.
F-4
INTEGRATED SURGICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
[Enlarge/Download Table]
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED PREFERRED
--------------- --------------------- PAID-IN STOCK STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DISCOUNT
------ ------ ---------- -------- ----------- ------------ ----------
Balance at December 31, 1997............... -- -- 5,503,390 55,034 $38,219,836 $(239,530) --
Exercise of stock options................. -- -- 142,010 1,420 14,313 -- --
Issuance of stock options to consultant... -- -- -- -- 208,386 -- --
Sale of common stock warrants............. -- -- -- -- 6,930 -- --
Sale of convertible preferred stock and
warrants, net of offering expenses...... 3,520 35 5,000 50 3,300,362 -- --
Stock compensation expense................ -- -- -- -- (22,540) 153,892 --
Preferred stock discount.................. -- -- -- -- 616,000 -- (616,000)
Preferred stock accretion................. -- -- -- -- -- -- 376,264
Comprehensive loss:
Net loss................................ -- -- -- -- -- -- --
Unrealized gains of securities.......... -- -- -- -- -- -- --
Foreign currency translation
adjustments........................... -- -- -- -- -- -- --
Comprehensive loss........................ -- -- -- -- -- -- --
---------------------------------------------------------------------------------
Balance at December 31, 1998............... 3,520 35 5,650,400 $ 56,504 $42,343,287 $ (85,638) $ (239,736)
Exercise of stock options................. -- -- 80,546 806 4,982 -- --
Stock compensation, non-employees......... -- -- 30,351 304 204,123 -- --
Stock compensation, employees............. -- -- 10,335 103 48,175 75,125 --
Sale of common stock and warrants......... -- -- 2,922,396 29,224 3,627,865 -- --
Sale of convertible preferred stock and
warrants, net of offering expenses...... 6,750 67 9,640 96 6,255,978 -- --
Conversions of preferred stock............ (7,345) (73) 5,588,247 55,882 (55,809) -- --
Preferred stock discount.................. -- -- -- -- 1,202,617 -- (1,202,617)
Preferred stock accretion................. -- -- -- -- -- -- 1,422,500
Comprehensive loss:
Net loss................................ -- -- -- -- -- -- --
Adjustment to unrealized gains on
available-for-sale securities......... -- -- -- -- -- -- --
Foreign currency translation
adjustments........................... -- -- -- -- -- -- --
Comprehensive loss...................... -- -- -- -- -- -- --
---------------------------------------------------------------------------------
Balance at December 31, 1999............... 2,925 $29 14,291,915 $142,919 $53,631,218 $ (10,513) $ (19,853)
=================================================================================
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED STOCKHOLDERS
INCOME DEFICIT EQUITY
------------- ------------ ------------
Balance at December 31, 1997............... $ 26,272 $(23,578,915) $ 14,482,697
Exercise of stock options................. -- -- 15,733
Issuance of stock options to consultant... -- -- 208,386
Sale of common stock warrants............. -- -- 6,930
Sale of convertible preferred stock and
warrants, net of offering expenses...... -- -- 3,300,447
Stock compensation expense................ -- -- 131,352
Preferred stock discount.................. -- -- --
Preferred stock accretion................. (376,264) --
Comprehensive loss:
Net loss................................ -- (10,267,879) (10,267,879)
Unrealized gains of securities.......... 50,626 -- 50,626
Foreign currency translation
adjustments........................... 130,318 -- 130,318
------------
Comprehensive loss........................ -- -- (10,086,935)
------------
-------------------------------------------
Balance at December 31, 1998............... $ 207,216 $(34,223,058) $ 8,058,610
Exercise of stock options................. -- -- 5,788
Stock compensation, non-employees......... -- -- 204,427
Stock compensation, employees............. -- -- 123,403
Sale of common stock and warrants......... -- -- 3,657,089
Sale of convertible preferred stock and
warrants, net of offering expenses...... -- -- 6,256,141
Conversions of preferred stock............ -- -- --
Preferred stock discount.................. -- -- --
Preferred stock accretion................. -- (1,422,500) --
Comprehensive loss:
Net loss................................ -- (10,155,421) (10,155,421)
Adjustment to unrealized gains on
available-for-sale securities......... (50,626) -- (50,626)
Foreign currency translation
adjustments........................... (643,917) -- (643,917)
------------
Comprehensive loss...................... -- -- (10,849,964)
------------
-------------------------------------------
Balance at December 31, 1999............... $ (487,327) $(45,800,979) $ 7,455,494
===========================================
See accompanying notes.
F-5
INTEGRATED SURGICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
----------------------------
1999 1998
------------ ------------
Cash flows from operating activities:
Net loss.................................................... $(10,155,421) $(10,267,879)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 576,812 579,666
Amortization of intangible assets......................... 839,040 839,040
Stock compensation, employees............................. 123,403 131,352
Stock compensation, non-employees......................... 204,427 208,386
Gain on short-term investments............................ (65,309) 50,626
Equity in net loss of Marbella High Care B.V. ............ -- 317,000
Changes in operating assets and liabilities:
Accounts receivable..................................... 1,214,882 (478,596)
Inventory............................................... (996,248) (1,110,320)
Other current assets.................................... (96,260) 9,188
Accounts payable........................................ 234,703 65,539
Value added taxes payable............................... (242,733) (91,098)
Accrued payroll and related expenses.................... (54,996) 54,655
Customer deposits....................................... 109,418 757,604
Accrued product retrofit costs.......................... 72,605 --
Other current liabilities............................... (139,482) 262,217
Note payable............................................ -- (203)
------------ ------------
Net cash used in operating activities....................... (8,375,159) (8,672,823)
Cash flows from investing activities:
Purchase of short-term investments........................ -- (2,024,278)
Proceeds from sale of short-term investments.............. 2,038,961 --
Investment in Marbella High Care B.V. .................... -- (563,273)
Principal payments received on sales-type lease........... 92,489 88,425
Purchases of property and equipment....................... (410,384) (1,746,127)
Proceeds from sale of property and equipment.............. 50,367 --
Decrease (increase) in other assets....................... -- (12,868)
------------ ------------
Net cash provided (used) in investing activities............ 1,771,433 (4,258,121)
Cash flows from financing activities:
Proceeds from bank loans.................................. 32,600 678,447
Payments on bank loans.................................... (762,723) (69,138)
Proceeds from sale of preferred stock and warrants........ 6,256,141 3,300,447
Net proceeds from sale of common stock and warrants....... 3,657,089 6,930
Proceeds from exercise of stock options................... 5,788 15,733
------------ ------------
Net cash provided by financing activities................... 9,188,895 3,932,419
Effect of exchange rate changes on cash and cash
equivalents............................................... 109,266 130,318
------------ ------------
Net increase (decrease) in cash and cash equivalents........ 2,694,435 (8,868,207)
Cash and cash equivalents at beginning of year.............. 223,581 9,091,788
------------ ------------
Cash and cash equivalents at end of year.................... $ 2,918,016 $ 223,581
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest...................................... $ 70,856 $ 118,925
See accompanying notes.
F-6
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Integrated Surgical Systems, Inc. (the "Company") was incorporated on
October 1, 1990 in Delaware. The Company develops, manufactures, markets and
services computer-controlled, image-directed robotic products for surgical
applications. The Company's principal product is the ROBODOC(R) Surgical
Assistant System (ROBODOC(R)), which is designed for orthopedic applications.
ROBODOC(R) is currently marketed in Europe and the Middle East.
On September 5, 1997, the Company acquired all of Innovative Medical
Machines International, S.A.'s issued and outstanding capital stock, stock
warrants and convertible debt in a transaction accounted for as a purchase. In
April 1999 Innovotive Medical Machines International S.A. was renamed Integrated
Surgical Systems, S.A. (ISS-SA). ISS-SA develops, manufactures and markets image
guided robotic devices for surgical applications. Its principal product is the
NeuroMate(R), a computer controlled surgical robot supporting neurosurgical
procedures.
On June 1, 1994, the Company acquired all shares of Gasfabriek Thijssen
Holding BV (later renamed Integrated Surgical Systems BV), a non-operating
Netherlands corporation, for approximately $4,000. The acquisition was accounted
for as a purchase. Integrated Surgical Systems BV (ISS-BV) purchases and
licenses products and technology from Integrated Surgical Systems, Inc. for
distribution in Europe and other markets.
The Company has incurred recurring operating losses and has an accumulated
deficit of $45,800,979 as of December 31, 1999. The report of independent
auditors on the Company's December 31, 1999 financial statements includes an
explanatory paragraph indicating there is substantial doubt about the Company's
ability to continue as a going concern. The Company believes that it has
developed a viable plan to address these issues and that its plan will enable
the Company to continue as a going concern through the end of 2000. This plan
includes the expansion of the geographical markets in which its products are
sold, new applications for its products, the consummation of equity financings
in amounts sufficient to fund further growth, attain its product development and
marketing objectives and meet its working capital demands, and the reduction of
certain operating expenses as necessary. Although the Company believes that its
plan will be realized, there is no assurance that these events will occur. The
financial statements do not include any adjustments to reflect the uncertainties
related to the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the inability of the Company
to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of ISS-SA and ISS-BV are
measured using their respective local currencies. The subsidiary balance sheet
accounts are translated at the year-end exchange rate and statement of
operations amounts are translated at the average exchange rate for the period.
Translation adjustments are recorded as a separate component of stockholders'
equity. Foreign currency transaction gain (loss) was ($183,197) and $129,158
during the years ended December 31, 1999 and December 31, 1998, respectively.
F-7
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
Revenues from sales without significant Company obligations beyond delivery
are recognized upon delivery of the products and transfer of title. Revenues
pursuant to agreements which include significant Company obligations beyond
delivery are deferred until the Company's remaining obligations are
insignificant. Revenues are recognized net of any deferrals for estimated future
contractual liabilities. Estimated future product retrofit costs for ROBODOC(R)
sold for clinical trials have been accrued in the accompanying financial
statements. Future retrofit costs are those expected to be required to update
ROBODOC(R) to the equivalent level of performance expected to be approved by the
Food and Drug Administration ("FDA").
RESEARCH AND DEVELOPMENT
Software development costs incurred subsequent to the determination of the
product's technological feasibility and prior to the product's general release
to customers are not material to the Company's financial position or results of
operations, and have been charged to research and development expense in the
accompanying consolidated statements of operations. Grants received from third
parties for research and development activities are recorded as reductions of
expense over the term of the agreement as the related activities are conducted.
Research and development costs are expensed as incurred.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT DISTRIBUTOR (SEE NOTE 15)
The Company sells its products to companies in the healthcare industry and
performs periodic credit evaluations of its customers and generally does not
require collateral. The Company believes that adequate provision for
uncollectible accounts receivable has been made in the accompanying financial
statements. The Company maintains substantially all of its cash at four
financial institutions.
FINANCIAL STATEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company invests its excess cash in various investment grade,
interest-bearing securities. As of December 31, 1999, cash equivalents and
short-term investments consisted of money market mutual funds. The Company has
not experienced any losses on such investments.
Management determines the appropriate classification of debt securities at
the time of purchase and re-evaluates such designation as of each balance sheet
date. At December 31, 1999, the Company's entire portfolio of investments is
classified as available-for-sale. These securities are stated at fair market
value, determined based on quoted market prices, with the unrealized gains and
losses reported in a separate component of stockholders' equity.
The amortized cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity,
over the estimated life of the security. Such amortization is included in
interest income. Realized gains are included in other income (expense) in the
statement of operations. The cost of securities sold is based on the specific
identification method.
For purposes of reporting cash flows, the Company considers highly liquid
investments with original maturities of three months or less as cash
equivalents.
F-8
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying values of the bank loans approximate their fair values as of
December 31, 1999, based on current incremental borrowing rates for similar
types of borrowing arrangements.
Active markets for the Company's other financial instruments that are
subject to the fair value disclosure requirements of Statement of Financial
Accounting Standards No. 107, which consist of long-term lease receivables and
notes payable, do not exist and there are no quoted market prices for these
assets and liabilities. Accordingly, it is not practicable to estimate the fair
values of such financial instruments because of the limited information
available to the Company and because of the significance of the cost to obtain
independent appraisals for this purpose.
INTANGIBLE ASSETS
The Company continually evaluates the value and future benefits of its
intangible assets. The Company assesses recoverability from future operations
using cash flows and income from operations of the related acquired business as
measures. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, the carrying value would be reduced to estimated net
realizable value if it becomes probable that the Company's best estimate for
expected future cash flows of the related business would be less than the
carrying amount of the related intangible assets. There have been no adjustments
to the carrying amounts of intangible assets resulting from these evaluations as
of December 31, 1999.
Intangible assets consist primarily of developed technology relating to the
NeuroMate(R) system. In the opinion of the Company's management the developed
technology was completed and had alternative future uses. Accumulated
amortization on intangible assets was $1,957,760 on December 31, 1999. The
estimated useful lives range from 3 to 5 years.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over estimated useful lives of 3 to 5 years, or the
lease term, whichever is shorter.
NET INVESTMENT IN SALES-TYPE LEASES
The net investment in sales-type leases consists of the following at
December 31, 1999:
[Download Table]
Total minimum lease payments receivable..................... $ 686,444
Less unearned interest...................................... (78,062)
---------
Net investment in sales type leases......................... 608,382
Less current portion (included in other current assets)..... (174,397)
---------
Long-term net investment in sales-type leases............... $ 433,985
=========
The following represents future minimum lease payments to be received by
the Company under its net investment in sales-type leases as of December 31,
1999:
[Download Table]
2000...................................................... 240,667
2001...................................................... 240,667
2002...................................................... 205,111
--------
$686,444
========
OPERATING LEASES
The Company leases certain of its ROBODOC systems to customers under
cancelable operating leases. The typical lease period is 5 years and certain of
the leases contain purchase options. The cost of equipment
F-9
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
under operating leases as of December 31, 1999 was $774,029 and the related
accumulated amortization thereon was $135,672.
INVENTORY
Inventory is recorded at the lower of cost (first-in, first-out method) or
market and consists of materials and supplies used in the manufacture and
service support of the ROBODOC(R) and NeuroMate(TM) Systems. Inventory consists
of the following at December 31, 1999:
[Download Table]
Raw materials............................................... $1,766,365
Work-in process............................................. 742,663
Finished goods.............................................. 823,163
----------
$3,332,191
==========
STOCK-BASED COMPENSATION
As permitted under the provisions of Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
the Company has elected to account for stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"). Under the intrinsic
value method, compensation cost is the excess, if any, of the quoted market
price or fair value of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock.
INCOME TAXES
The liability method is used to account for income taxes. Under this
method, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
scheduled to be in effect when the differences are expected to reverse.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 128, Earnings per Share. Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts have been presented on the
basis set forth in Statement 128 (Note 9).
SIGNIFICANT CUSTOMERS AND FOREIGN SALES
The Company recognized approximately 15% of its revenues from one customer
during the year ended December 31, 1999 and 64% of its revenue from five
customers each representing at least 10% of the Company's total revenue, during
the year ended December 31, 1998. Foreign sales, substantially all to Western
European countries, were approximately $5,794,000 and $6,005,000 for the years
ended December 31, 1999 and December 31, 1998, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"), SFAS 133
establishes accounting and reporting standards of derivative instruments,
including certain derivative instruments embedded in other contracts, and
F-10
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for hedging activities. In July 1999, the Financial Accounting Standards Board
issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133". SFAS
137 deferred the effective date until the first fiscal quarter of the fiscal
year beginning after June 15, 2000. The Company will adopt SFAS 133 in its
quarter ending March 31, 2001 and has not yet determined whether such adoption
will have a material impact on the Company's financial statements.
In December, 1999, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements. The SAB states that all registrants are expected to apply the
accounting and disclosures described it in. The SEC staff, however, will not
object if registrants that have not applied this accounting do not restate prior
financial statements provided they report a change in accounting principle in
accordance with APB Opinion No. 20, Accounting Changes, by cumulative catch-up
adjustment no later than the second fiscal quarter of the fiscal year beginning
after December 15, 1999. The Company is currently evaluating the impact, if any,
of SAB 101 on its financial statements.
RECLASSIFICATIONS
Certain amounts reported in prior years financial statements have been
reclassified to conform with the 1999 presentation.
3. SHORT-TERM INVESTMENTS
The company held no marketable securities on December 31, 1999. As of
December 31, 1998 marketable debt securities were all classified as available
for sale and consisted of 1,849,000 shares of U.S. Treasury Strips and a 1-year
certificate of deposit. The treasury strips had an original cost of $1,767,773
on August 11, 1998. The net unrealized holding gain as of December 31, 1998 of
$50,626 was included as a separate component of stockholders' equity. The
certificate of deposit had an original cost of $200,000.
All of these marketable securities were sold during 1999 and all remaining
income was realized as interest income in the Statement of Operations.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1999:
[Download Table]
ROBODOC and NeuroMate System equipment...................... $ 937,201
Other equipment............................................. 1,722,089
Furniture and fixtures...................................... 308,107
Leasehold improvements...................................... 45,418
-----------
3,012,815
Less accumulated depreciation............................... (2,107,814)
-----------
$ 905,001
===========
5. INVESTMENT IN MARBELLA HIGH CARE B.V.
As of December 31, 1999 the Company owned approximately 27% of the
outstanding shares of Marbella High Care B.V. ("MBHC") and accounts for its
investment under the equity method. The Company recorded expenses relating to
its investment and advances in MBHC of $480,000 and $317,000 for years ended
December 31, 1999 and 1998, respectively. These charges are included in other
income (expense).
F-11
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. BANK LOANS AND NOTE PAYABLE
Bank loans consist of the following at December 31, 1999:
[Download Table]
Revolving line of credit established in July 1996 for five
years with an available amount of $107,380 at December 31,
1999, with interest accruing at 7.15% per annum. The
amount available decreases quarterly by 5% of the original
amount beginning October 1996............................. 107,380
Bank term loan with monthly principal and interest payments
of approximately $1,762 over three years from May 1997,
with interest accruing at 5.75% per annum................. 7,053
--------
114,433
Less current portion........................................ 114,433
--------
Long-term bank loans........................................ $ 0
========
The bank term loan is secured by substantially all of IMMI's tangible
assets (with a net book value of approximately $1,041,000 at December 31, 1999)
and is guaranteed by the Company.
The Company received an interest free loan with a balance of $153,400 at
December 31, 1999 from a grant organization for the development of a new system.
In the case of failure of the project, the Company will have to repay
approximately $38,000 of the loan. If the Company sells either a license for the
related technology, the prototype developed, or articles manufactured
specifically for the research project, 50% of the revenue must be paid to the
grant organization in the subsequent year, up to the balance of the loan amount
outstanding. According to the contract, any such payments would be considered to
be an advance repayment of the loan. The Company has not made any sales of this
type through December 31, 1999.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
As of December 31, 1999 the Company has reserved a total of 22,587,445
shares of common stock pursuant to Series D&E Convertible Preferred Stock,
warrants and options outstanding and reserved for future issuance.
INITIAL PUBLIC OFFERING
In November 1996, the Company sold in its initial public offering, a total
of 1,525,000 shares of common stock at $5.00 per share and 3,272,754 warrants at
$0.10 per warrant. In addition, the Company sold to its underwriter warrants to
purchase an additional 343,281 shares for total consideration of $10.00. The net
proceeds after underwriters' commissions and fees and other costs associated
with the offering were approximately $6,137,000.
The Company issued 708,540 warrents to underwirters to purchase Common
Stock or warrents. Each warrant entitles the holder to purchase one share of
Common Stock or warrents at an adjusted exercise price of $2.87 per share as of
December 31, 1999, subject to future adjustment in certain events, at any time
during the period commencing November 20, 1997, and thereafter for a period of
four years. The warrants are subject to redemption by the Company at $0.10 per
warrant at any time during the exercise period on not less than 30 days prior
written notice to the holders of the warrants provided certain criteria
regarding the price performance of the Company's common stock are met.
EUROPEAN OFFERING
On November 20, 1997, the Company sold 1,500,000 shares of Common Stock at
approximately $7.00 per share in an offering to European investors (the
"European Offering"). In addition, the Company sold to its
F-12
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
underwriters in the European Offering warrants to purchase an additional 338,412
shares for nominal consideration. The net proceeds of the European Offering were
approximately $8,440,000.
Each of the warrants issued to the European Offering underwriters entitles
the holder to purchase one share of common stock at an adjusted exercise price
of $3.70 per share as of December 31, 1999, subject to future adjustments in
certain events, at any time during the period commencing November 21, 1998, and
thereafter for a period of four years.
PREFERRED STOCK
As part of a Stock Purchase Agreement in December 1995 the Company sold a
warrant for $1,333,333 to purchase 1,386,390 shares of Series D Preferred Stock
at $0.01 per share, and in February 1996 sold a warrant for $666,667 to purchase
693,194 shares of Series D Preferred Stock at $0.01 to per share. On October 29,
1997, the Company and IBM executed an amendment to the Stock Purchase Agreement
pursuant to which the Company and IBM agreed that these combined warrants to
purchase 2,274,066 shares of Series D Preferred Stock would be exercisable only
for 2,274,066 shares of Common Stock at $0.01 to $0.07 per share. The warrants
expire on December 31, 2005 and have not been exercised as of December 31, 1999.
Also on October 29, 1997, the Company delivered to CA IB Investmentbank AG ("CA
IB") an agreement not to issue any shares of Common Stock, or any warrants,
options or other rights to subscribe for or purchase shares of Series D
Preferred Stock, or any other securities convertible into or exercisable or
exchangeable for, Series D Preferred Stock, without the consent of CA IB. In
addition, the Company's management caused the Board of Directors to present a
resolution at the annual meeting of the Company's stockholders to amend the
Company's Restated Certificate of Incorporation to eliminate the Series D
Preferred Stock therefrom. On April 28, 1998 elimination of Series D Preferred
Stock was adopted by the Company's stockholders.
In November 1996, the Board of Directors amended, and the stockholders
subsequently approved, the Company's Articles of Incorporation to authorize
1,000,000 shares of undesignated preferred stock. Preferred stock may be issued
from time to time in one or more series. The Board of Directors is authorized to
determine the rights, preferences, privileges and restrictions granted to and
imposed upon any wholly unissued series of preferred stock and designation of
any such series without any vote or action by the Company's stockholders.
CONVERTIBLE PREFERRED STOCK
Since September 1998, we have received aggregate net proceeds of
approximately $11.4 million from the sale of six series of our convertible
preferred stock. Information concerning these convertible preferred stock
financings is set forth below.
[Download Table]
SHARES OF
PREFERRED
STOCK NET
SERIES DATE OF SALE SOLD PROCEEDS
------ ------------------ --------- ----------
A September 10, 1998 3,520 $3,300,447
B March 26, 1999 1,000 916,918
C June 10, 1999 750 658,190
D June 30, 1999 2,000 1,861,549
E July 30, 1999 3,000 2,819,484
F February 22, 2000 2,000 1,880,000
Each series of convertible preferred stock has a stated value of $1,000 per
share and is convertible into common stock at a conversion price equal to 85% of
the lowest sale price of the Common Stock on the Nasdaq SmallCap Market over the
five trading days preceding the date of conversion (the "Market Price") subject
to a maximum conversion price. The number of shares of common stock that may be
acquired upon conversion is
F-13
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined by dividing the stated value of the number of shares of convertible
preferred stock to be converted by the conversion price. As of December 31,
1999, 1,725 shares of series D convertible preferred stock and 1,200 shares of
Series E convertible preferred stock were outstanding. No other shares of
preferred stock were outstanding. On February 7, 2000 the Company redeemed the
remaining outstanding shares of series E convertible preferred stock for a total
redemption price of $1,185,000, or $1,000 per share, the stated value of a share
of series E convertible preferred stock.
The maximum conversion price for the series D and series F preferred stock
is $1.22 per share. There is no minimum conversion price for any series of
convertible preferred stock.
Holders of series D convertible preferred stock may convert 25% of their
shares commencing September 29, 1999, 50% of their shares commencing October 28,
1999, 75% of their shares commencing November 27, 1999 and 100% of their shares
commencing December 27, 1999. The Company may require holders to convert all
(but not less than all) of the Series D convertible preferred stock at any time
after June 30, 2002, or buy out all outstanding shares, at the then conversion
price.
The number of shares of Common Stock issued upon conversion of each series
of convertible preferred stock as of December 31, 1999 was as follows: series
A -- 2,867,135; series B -- 459,831; series C -- 563,497; series D -- 219,961;
series E -- 1,477,823. The average actual conversion price for shares of each
series of convertible preferred stock converted into shares of Common Stock as
of December 31, 1999 was as follows: series A -- $2.23; Series B -- $2.17;
Series C -- $1.33; Series D -- $1.61; Series E -- $1.22.
The value assigned to the beneficial conversion feature is based upon the
quoted market price of the Company's Common Stock on the date the convertible
preferred stock was sold which represents a discount to the value of each series
of convertible preferred stock (the "Discount"). The Discount is being accreted
using the straightline method over certain conversion periods. The following
table sets forth information pertaining to the beneficial conversion feature for
each series of convertible preferred stock.
[Enlarge/Download Table]
VALUE ASSIGNED TO ACCRETION
BENEFICIAL CONVERSION FEATURES ----------------------
SERIES AT DATE OF SALE 1998 1999
------ ------------------------------ -------- ----------
A........................................... $616,000 $376,264 $ 239,736
B........................................... 176,471 -- 176,471
C........................................... 143,793 -- 143,793
D........................................... 352,941 -- 352,941
E........................................... 529,559 -- 509,559
-------- -------- ----------
1,818,764 376,264 1,422,500
No series of convertible preferred stock entitles holders to dividends or
voting rights, unless required by law or with respect to certain matters
relating to a particular series of convertible preferred stock.
The Company may redeem the series D convertible preferred stock upon
written notice to the holders of the series D convertible preferred stock at any
time after the earlier of December 30, 1999 and the closing of a registered firm
underwritten secondary offering of equity securities, at a redemption price
equal to the greater of $1,500 per share and the Market Price of the shares of
Common Stock into which such series D convertible preferred stock could have
been converted on the date of the notice of redemption. All other series of
convertible preferred stock have been converted as of December 31, 1999 except
series E which was subsequently converted and redeemed in February, 2000.
F-14
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about warrants issued in
connection with each series of convertible preferred stock and outstanding as of
December 31, 1999:
[Enlarge/Download Table]
ISSUE WARRANTS EXERCISE
SERIES DATE ISSUED PRICE
------ ------------------ --------------- --------
A............................................... September 10, 1998 44,000 $2.00
B............................................... March 26, 1999 12,500 2.28
C............................................... June 10, 1999 9,375 2.15
D............................................... June 30, 1999 25,000 3.41
E............................................... July 30, 1999 37,500 4.39
The warrants are exercisable upon vesting and expire between March 5, 2002
and February 11, 2003. The exercise price and the number of shares of Common
Stock issuable upon conversion are subject to adjustment based upon certain
future events. None of the warrants had been exercised as of December 31, 1999.
ISSUANCE OF STOCK AND STOCK WARRANTS
In September 1997, the Company issued 4,500 shares of Common Stock and
warrants to purchase 55,132 shares of Common Stock (with an aggregate estimated
fair value of $93,885) to Rickel & Associates, Inc. for services performed in
connection with the acquisition of IMMI. The warrants have an exercise price of
$7.50 per share and expire in September 2002.
The Company issued shares of Common Stock to Trinity Capital Advisors, Inc.
for financial advisory services performed in connection with each series of
convertible preferred stock as follows:
[Download Table]
AGGREGATE ESTIMATED
DATE NUMBER OF FAIR VALUE AT
SERIES ISSUED SHARES DATE OF ISSUE
------ ------ --------- -------------------
A September 1998 5,000 $20,625
B March 1999 1,429 2,903
C June 1999 1,071 1,941
D June 1999 2,856 8,479
E August 1999 4,284 13,923
On December 14, 1999 the Company issued and sold to ILTAG International
Licensing Holding S.A.L., Bernd Herrmann and Urs Wettstein an aggregate of
2,922,396 shares of Common Stock and three-year warrants to purchase an
additional 11,700,000 shares of common stock under a Stock and Warrant Purchase
Agreement dated as of October 1, 1999. The purchase price for the shares and
warrants was $4 million. The warrants vest immediately, are exercisable at
$1.02656 per share and expire in December, 2002. The warrants are exercisable
for three years after the date of issue. None of the warrants have been
exercised as of December 31, 1999.
STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options.
The Company established a stock option plan in 1991 (the "1991 Plan") and
on December 13, 1995, it established a new stock option plan (the "1995 Plan").
The Company adopted a third plan on April 28, 1998 (the "1998 Plan"). Certain
employees of the Company surrendered their options under the 1991 Plan in
F-15
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
return for new and additional options granted under the 1995 Plan. During the
year ended December 31, 1998, the Company reduced the exercise prices of certain
outstanding stock options with exercise prices ranging from $4.31 to $8.63
(377,752 options) to $3.00 per share which was the fair market value of common
stock as determined by the Company's Board of Directors on the date of
repricing. Officers, employees, directors and consultants to the Company may
participate in the Plans. Options granted under the Plans may be incentive stock
options or non-statutory stock options. 1,876,624 shares of the Company's common
stock have been reserved for issuance under the Plans. Options granted generally
have a term of ten years from the date of the grant. The exercise price of
incentive stock options granted under the Plans may not be less than 100% of the
fair market value of the Company's common stock on the date of the grant. The
exercise price of non-statutory stock options granted under the Plans may not be
less than 85% of the fair market value of the Company's common stock on the date
of the grant. For a person who, at the time of the grant, owns stock
representing 10% of the voting power of all classes of Company stock, the
exercise price of the incentive stock options or the non-statutory stock options
granted under the Plans may not be less than 110% of the fair market value of
the common stock on the date of the grant.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS No. 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions for 1999 and 1998, respectively: risk-free interest rates of 6.0%
and 5.0%; dividend yield of 0%; volatility factors of the expected market price
of the Company's common stock of 0.91 and 0.77; and an expected life of the
option of 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. For purposes of
pro forma disclosures, the estimated fair value of the options is amortized to
expense over the vesting period. The Company's pro forma information follows:
[Download Table]
1999 1998
------------ ------------
Pro forma net loss.............................. $(11,908,599) $(10,997,076)
Pro forma basic net loss per share.............. $ (1.51) $ (1.97)
F-16
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes activity under the Plans for the years ended
December 31, 1998 and 1999:
[Download Table]
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
Outstanding at December 31, 1997 (at $0.07 to $8.88
per share)........................................ 1,203,373 $1.97
Granted (at $2.84 to $6.06 per share)............. 724,252 3.23
Canceled (at $.07 to $8.88 per share)............. (456,356) 5.33
Exercised (at $.07 to $2.07 per share)............ (142,010) 0.11
---------
Outstanding at December 31, 1998 (at $0.07 to $8.88
per share)........................................ 1,329,259 $1.93
---------
Granted (at .01 to 3.94 per share)................ 167,288 2.41
Canceled (at .01 to 8.63 per share)............... (46,767) 4.43
Exercised (at .01 to 0.10 per share).............. (80,436) 0.07
Outstanding at December 31, 1999 (at .07 to 8.63 per
share)............................................ 1,369,344 $1.40
=========
All options granted in 1998 were granted with option prices equal to the
fair market value of the Company's stock on the grant date. The weighted average
exercise price of options granted in 1998 was $3.23 and the weighted average
grant date fair value of these options was $1.47.
The weighted average exercise price of options granted in 1999 with option
prices equal to the fair market value of the Company's stock on the grant date
was $3.13 and the weighted average grant date fair value of these options was
$2.08.
The weighted average exercise price of options granted in 1999 with option
prices less than the fair market value of the company's stock on the date of
grant was 1.50 and the weighted average grant date fair value of these options
was 2.33.
The following summarizes information related to options outstanding and
options exercisable at December 31, 1999:
[Enlarge/Download Table]
WEIGHTED AVERAGE
WEIGHTED REMAINING WEIGHTED
EXERCISE OPTIONS AVERAGE CONTRACTUAL LIFE OPTIONS AVERAGE
PRICE OUTSTANDING EXERCISE PRICE (IN YEARS) EXERCISABLE EXERCISE PRICE
---------- ----------- -------------- ---------------- ----------- --------------
$0 - $ .99 639,531 $0.07 5.9 625,703 $0.07
$1 - $1.99 48,000 $1.74 9.6 4,000 $1.88
$2 - $2.99 45,056 $2.72 9.2 12,234 $2.65
$3 - $3.99 447,648 $3.12 8.7 162,161 $3.11
$4 - $4.99 40,500 $4.71 8.4 15,865 $4.73
$5 - $6.99 102,109 $5.33 7.0 73,722 $5.29
$7 - $8.88 46,500 $7.88 7.7 30,884 $7.91
--------- ----- --- ------- -----
1,369,344 $2.01 7.3 924,569 $1.40
--------- ----- --- ------- -----
Of the options outstanding at December 31, 1999, options to purchase
924,569 shares of common stock were immediately exercisable at a
weighted-average exercise price of $1.40 per share. A total of 216,926 shares
were still available for grant under the 1995 Plan at December 31, 1999. A total
of 290,354 shares were still available for grant under the 1998 Plan at December
31, 1999.
F-17
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended December 31, 1996, the Company recorded deferred
stock compensation of $783,666 relating to stock options granted during the
period with exercise prices less than the estimated fair value of the Company's
common stock, as determined by an independent valuation analysis, on the date of
grant. The deferred stock compensation is being amortized into expense over the
vesting period of the stock options which generally range from 3 to 5 years.
Deferred compensation relating to stock options which vested immediately was
expensed on the date of grant. The Company recorded a reduction of $5,675 and
$22,540 in deferred stock compensation relating to canceled options in 1999 and
1998, respectively. Compensation expense of $69,450 and $131,352 was recorded
during the years ended December 31, 1999 and 1998, respectively, relating to
these options. The remaining $10,513 will be amortized into expense in future
periods.
8. INCOME TAXES
The income tax provisions for the years ended December 31, 1999 and 1998
are comprised of currently payable state franchise taxes and currently payable
foreign income taxes.
Deferred taxes result from temporary differences in the recognition of
certain revenue and expense items for income tax and financial reporting
purposes. The significant components of the Company's deferred taxes as of
December 31, 1999 and 1998 are as follows:
[Enlarge/Download Table]
1999 1998
------------ -----------
Deferred tax assets:
Net operating loss carryover........................... $ 8,085,000 $ 5,842,000
Research and Development Credit........................ 1,261,000 559,000
Research and development............................... 417,000 285,000
Accrued product retrofit costs......................... 83,000 54,000
Inventory.............................................. 192,000 330,000
Depreciation........................................... 224,000 109,000
Stock compensation..................................... 285,000 256,000
Loss on investment..................................... 319,000 230,000
Deferred income........................................ 506,000 358,000
Other.................................................. 100,000 (311,000)
------------ -----------
11,472,000 7,712,000
Less: Valuation allowance................................ (11,472,000) (7,712,000)
------------ -----------
Net deferred taxes....................................... $ -- $ --
============ ===========
The Company expects the carryforward amounts will not be utilized prior to
the expiration of the carryforward periods.
The principal reasons for the difference between the effective income tax
rate and the federal statutory income tax rate are as follows:
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998
----------- -----------
Federal benefit expected at statutory rates............... $(3,445,977) $(3,481,777)
Domestic net operating loss with no current benefit....... 2,978,323 3,012,575
Effect of foreign loss with no current benefit............ 467,654 469,202
Other taxes............................................... (13,155) 14,000
Foreign income taxes...................................... -- 13,235
----------- -----------
$ (13,155) $ 27,235
=========== ===========
F-18
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of stock sales a change of ownership (as defined in Section 382
of the Internal Revenue Code of 1986, as amended) has occurred. As a result of
this change, the Company's federal and state net operating loss carryforwards
will be subject to a total annual limitation in the amount of approximately
$400,000.
The Company has at December 31, 1999 a net operating loss carryover of
approximately $22,712,000 for federal income tax purposes which expires between
2005 and 2014, a net operating loss carryforward of approximately $6,110,000 for
state income tax purposes which expires through 2004, and a net operating loss
carryforward of approximately $1,615,000 for foreign income tax purposes of
which approximately $769,000 expires between 2000 and 2004. The Company has at
December 31, 1999 research and development credit carryovers of approximately
$572,000 and $689,000 for federal and state income tax purposes, respectively.
The Company paid $800 for income and franchise taxes during each of the two
years ended December 31, 1999 and 1998. The valuation allowance increased by
$2,194,000 in 1998 and $1,718,000 in 1997.
9. NET LOSS PER SHARE INFORMATION
As of December 31, 1999, outstanding options to purchase 1,369,344 shares
of common stock (with exercise prices ranging from $0.01 to $8.88), outstanding
warrants to purchase 18,820,560 shares of common stock (with exercise prices
from $0.07 to $8.26) and 2,397,541 shares of common stock issuable upon
conversion of Series D and E Preferred Stock could potentially dilute basic
earnings per share in the future and have not been included in the computation
of diluted net loss per share because to do so would have been antidilutive for
the periods presented.
10. COMMITMENTS
The Company leases its U.S. facility under a non-cancelable operating
lease. The lease is for a term of seven years and expires on June 2, 2005. The
lease provides for rent of $29,229 per month during the first year of the lease
(plus real estate taxes and assessments, utilities and maintenance), subject to
adjustment in subsequent years for cumulative increases in the cost of living
index, not to exceed 4% per year.
The Company leases its European facility under a non-cancelable operating
lease. The lease is for a term of eight years and expires on 2006. The lease
provides for rent of $7,197 per month.
Future payments under non-cancelable facility operating leases are
approximately as follows:
[Download Table]
2000................................................... 440,000
2001................................................... 450,000
2002................................................... 457,000
2003................................................... 465,000
2004................................................... 242,000
Thereafter............................................. 182,000
----------
$2,236,000
==========
Aggregate rental expense under these leases amounted to $422,000 and
$309,000 during the years ended December 31, 1999 and 1998, respectively.
F-19
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments under non-cancelable equipment operating leases are
approximately as follows:
[Download Table]
2000..................................................... 11,000
2001..................................................... 11,000
2002..................................................... 11,000
2003..................................................... 11,000
-------
$44,000
=======
Rental expense for these non-cancelable equipment operating leases during
the years ended December 31, 1999 and 1998 was approximately $11,000 and
$41,000, respectively.
11. CONTINGENCIES
The Company has from time to time been notified of various claims
incidental to its business that are not the subject of pending litigation. While
the results of claims cannot be predicted with certainty, the Company believes
that the final outcome of all such matters will not have a materially adverse
effect on its consolidated financial position, results of operations or cash
flows.
12. NIST GRANT
During 1994, the Company received notification it was awarded a $1,960,000
National Institute of Science and Technology ("NIST") grant from the U.S.
Department of Commerce ("USDC"). The grant is shared by the Company and two
strategic partners to fund approximately 49% of a $4 million joint development
project to adapt the ROBODOC System for use in hip revision surgery. The
development project and related NIST Grant began in 1995 and ended in 1999. The
Company received approximately $129,000 and $514,000 in proceeds under this
grant during the years ended December 31, 1999, and 1998, respectively.
13. ANVAR GRANT
During 1996, IMMI received notification it was awarded a $222,492 grant
from the French agency Agence Nationale de Valorisation de la Recherche
("ANVAR") which is a French national agency established to aid research and
development projects. The grant is to fund the clinical tests to be performed at
two university hospitals on the NeuroMate system over a period of fifteen months
commencing March 1997. IMMI received $173,595 in proceeds under this grant
during the year ended December 31, 1997. The grant income is being recognized
ratably over the project period.
14. EMPLOYEE STOCK PURCHASE PLAN
Shareholders approved and the Board of Directors adopted the Company's
Employee Stock Purchase Plan (the "Purchase Plan") at the annual Shareholders
meeting held April 28, 1998. The Purchase Plan provides all eligible employees
an opportunity to acquire a proprietary interest in the Company on a payroll
deduction or other compensation basis at a 15% discount. The Purchase Plan is
intended to qualify as an employee stock purchase plan under Section 423 of the
Code. The Purchase Plan covers an aggregate of 300,000 shares of the Company's
Common Stock. As of December 31, 1999, no offerings have been made to employees.
F-20
INTEGRATED SURGICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. DISTRIBUTION AGREEMENT
The Company has entered into a distribution agreement, dated November 12,
1999, with Spark 1st Vision GmbH & Co. KG, a German company, that gives the
distributor the exclusive right to distribute the Company's products in Europe,
the Middle East and Africa through 2003. The distributor is obligated to
purchase a minimum of 24 ROBODOC systems during 2000 and 32 ROBODOC systems
during 2001. The distributor is required to pay the Company advance payments of
$200,000 per month for the first six months of 2000, $300,000 per month for the
remainder of 2000, and $400,000 per month for 2001, to be applied as a credit
against the products purchased. However, the distributor has no minimum purchase
or advance payment obligation after 2001, even though it will retain exclusive
rights to distribute the Company's products in Europe, the Middle East and
Africa through 2003. The distributor's only obligation to the Company after 2001
is to pay for products that it purchases. The distributor's liability to the
Company under the distribution agreement is limited to $1 million, exclusive of
the minimum purchase obligation. The Company will continue to receive service
contract revenues and bear the cost of maintenance, training and customer
support. The distribution agreement will eliminate marketing; sales and
administrative expenses associated with the Company's European activities and
provide the Company with a more predictable source of revenues based upon the
minimum purchase commitments of the distributor. The Company believes that the
terms of the distribution agreement are as fair to the Company as those that
could have been obtained from an unaffiliated party.
As of March 30, 2000 the Company had only received the advance payments
from the distributor for January , and had not received any orders for the
Company's products from the distributor.
F-21
Dates Referenced Herein and Documents Incorporated by Reference
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