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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, 2000
[ ] 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)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
68-0232575
(IRS Employer Identification Number)
1850 Research Park Drive, Davis, CA
(Address of Principal Executive Offices)
95616-4884
(Zip Code)
(530) 792-2600
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of Each Exchange on Which
Each Class is Registered
Common Stock, $.01 Par Value None
Common Stock Purchase Warrants None
Securities registered pursuant to Section 12(g) of the Act:
Not Applicable
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 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 [ ]
No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained
to the best of the 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. [ ]
Revenue for the issuer's most recent fiscal year was $5,934,263
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 May 31, 2001 was $5,500,980
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
On May 31, 2001, the issuer had 36,673,202 shares of common stock, $.01 par
value, outstanding.
Transitional Small business Disclosure Format: Yes [ ] No [X]
DOCUMENTS INDORPORATED BY REFERENCE
None.
INTEGRATED SURGICAL SYSTEMS, INC.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Part I. Page
Item 1. Description of Business 1
Item 2. Description of Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
Part II.
Item 5. Market for Common Equity and Related Stockholder Matters 8
Item 6. Management's Discussion and Analysis 8
Item 7. Financial Statements 12
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 12
Part III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 13
Item 10.Executive Compensation 14
Item 11.Security Ownership of Certain Beneficial Owners and
Management 16
Item 12.Certain Relationships and Related Transactions 17
Item 13.Exhibits and Reports on Form 8-K 17
Signatures 21
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Integrated Surgical Systems, Inc. ("ISS" or "the Company") designs,
manufactures, sells and services image-directed, computer-controlled robotic
products for use in orthopaedic and neurosurgical procedures. ISS was
incorporated under the laws of Delaware in 1990.
Orthopaedic Applications
Our principal orthopaedic product is the ROBODOC(R) Surgical Assistant System
("ROBODOC"). ROBODOC combines our ORTHODOC(R) Presurgical Planner ("ORTHODOC")
with a computer-controlled robot for use in hip and, since August 2000, knee
replacement surgery. The surgeon uses ORTHODOC, a computer workstation with
our proprietary software, for preoperative surgical planning. ORTHODOC
converts a computerized tomography ("CT") scan of the patient's joint into a
three-dimensional bone image. The surgeon selects prosthesis images from the
ORTHODOC prosthesis library, and manipulates the three-dimensional prosthesis
models against the bone image. We offer several lines of prostheses in our
software library, and implant manufactures contract with us for the
development of these prostheses software programs. After selecting the optimal
prosthesis, ORTHODOC creates a surgical plan, which is then transferred to the
surgical robot. The surgical plan guides the robot as it mills the bone in the
operating room. Both hip and knee surgeries involve removing portions of the
bone at the joint and placing a prosthesis at the new bone end. For hip
replacement surgery, the ball-end of the ball-and-socket prosthesis is
inserted into a cavity made in the upper leg bone by ROBODOC. In knee
replacement surgery, ROBODOC mills the leg bone ends for precise and accurate
prosthesis alignment.
Our patented DigiMatch Single Surgery System ("DigiMatch") eliminates the need
for an initial surgery to place locator pins in a patient's thigh bone before
using ROBODOC in hip replacement surgery. ROBODOC has been used for over
10,000 hip replacement surgeries worldwide, approximately half of these
surgeries using DigiMatch technology. The ROBODOC knee module has been used
in over 300 knee replacement surgeries.
Neurosurgical Applications
We entered the neurosurgical equipment sector when we acquired Innovative
Medical Machines International, S.A., of Lyon, France, in September 1997. This
wholly owned subsidiary, renamed Integrated Surgical Systems, S.A., designs,
manufactures, sells and services the NeuroMate(R) System ("NeuroMate"), a
computer-controlled robotic arm, head stabilizer and presurgical planning
workstation.
NeuroMate's proprietary robotic arm and control system are designed to
precisely position and hold critical tools during stereotactic brain surgery.
The brain remains largely unexposed in stereotactic neurosurgery, and the
surgeon works without the requirement of direct visualization of the brain
itself. This minimally invasive surgery is made possible by NeuroMate's
spatial coordinate system. During presurgical planning, the patient's CT,
magnetic resonance or other images are correlated to the patientss physical
characteristics. During surgery, the NeuroMate's robotic arm guides the
surgeon, through small holes in the skull, to the pre-selected sites in the
brain. NeuroMate was used in over 250 neurosurgical procedures in calendar
2000.
Marketing, Sales and Distribution
ROBODOC cannot be marketed in the United States until it has been cleared by
the U.S. Food and Drug Administration ("FDA") (See "Government Regulation").
We market the ROBODOC System to orthopaedic and trauma surgeons and hospitals
in Europe through direct sales and arrangements with implant manufacturers
and in Japan through a Japanese distributor. NeuroMate is marketed in Europe
and the U.S through direct sales and in Japan through our Japanese
distributor.
We also promote our products through presentations at trade shows and
advertisements in professional journals and technical and clinical
publications, as well as through direct mail campaigns. Presentations to
potential customers focus on the clinical benefit to the patient, and the
potential financial and marketing benefit to hospitals and surgeons.
The ISS installed base at May 15, 2001 was:
Product Europe Japan Mid-East U.S.
ROBODOC Systems 33 (1) 7 0 1
NeuroMate Systems 8 3 1 2
____________________________
(1) 27 in Germany
Manufacturing
Our primary manufacturing process is the assembly of purchased components,
integration of our proprietary software, product testing, and packaging. Our
manufacturing facilities are located in Davis, California and Lyon, France.
We purchase substantially all of our system components from outside vendors.
The surgical component of the ROBODOC consists of a customized robot arm
supplied by Sankyo Seiki of Japan, a robot base and a control cabinet. Upon
delivery and assembly, robots are tested and devices for attaching the bone to
the robot, probes, cutter bearing sleeves and tool guides are attached.
ORTHODOC is made up of a computer workstation and associated data peripherals
incorporating our proprietary software. A computer board interface to CT or
x-ray scanner input modules is added to the workstation, as is the ROBODOC
transfer drive. The unit is configured for 100 to 240 AC volt operation.
NeuroMate consists of a robot arm, electronic control and base and is operated
by our proprietary software. Audemars-Piguet supplies the customized robot arm
for NeuroMate.
Surgical supplies, including sterile drapes, bone screws and cutters, are
manufactured to our specification by outside vendors and are inspected upon
receipt to ensure that our specifications are consistently met. We purchase
these items in quantity and distribute them to our customers as needed.
Our production facilities are subject to periodic inspection by the FDA for
compliance with Good Manufacturing Practices. We are also subject to European
manufacturing standards for our European sales, and have secured the required
ISO-9001 certification. All products are shipped bearing the CE Mark, meeting
the European Union's marketing requirement.
Research and Development
Since inception, our research and development activities have focused on the
development of innovative image-directed computer-controlled robotic products
for surgical applications, along with specialized operating hardware and
software systems to support these products. We incurred research and
development expenses of approximately $4,175,000 during the year ended
December 31, 2000, and $5,561,000 in the year ended December 31, 1999.
Orthopaedic applications in the research and development stage include
acetabular cup planning and bone preparation for hip socket replacement
surgery, long-bone osteotomies (cuts in bone intended to reshape or realign
abnormal or deformed structures), and revision knee surgery.
Our French subsidiary has received an interest-free loan from ANVAR, a French
agency established to aid research and development projects. The loan provided
funding for the first phase of the development of NeuroMate applications for
spinal surgery.
Competition
The principal competition for ROBODOC is manual surgery performed by
orthopaedic surgeons, using surgical power tools and manual devices. These
tools and devices are manufactured by major orthopaedic companies, including
Howmedica, Inc. (a division of Stryker Corporation), located in New York;
Zimmer, Inc. (a subsidiary of Bristol-Myers Squibb), located in Indiana;
DePuy, Inc. (a subsidiary of Johnson & Johnson), located in Indiana; Biomet,
Inc. located in Indiana; and Osteonics, Inc. (a subsidiary of the Stryker
Corporation), located in New Jersey.
Navigational systems, offered by the major manufacturers of orthopaedic
devices, are an intermediate step between free-hand and robotic surgery.
Navigational systems use a tracking device affixed to the end of traditional
cutting tools to assist the surgeon in visualizing bone preparation for
implant placement. Our chief robotics competitor, the German manufacturer
Orto Maquet, ceased operations in May 2001.
The principal competition for NeuroMate is from manufacturers of frame-based
and frameless stereotactic systems, some of which are also referred to as
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 Brain Lab of
Germany.
Warranty and Service
We offer a full warranty, covering parts and labor, for the first year
following the purchase of our products. Warranty coverage can be extended
through the purchase of a maintenance agreement.
Our technical staff, including European-based personnel, trains medical
professionals in the use of our products and provides field service. Technical
support is also provided from the U.S. and French engineering organization.
Patents and Proprietary Rights
We rely 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.
We have been issued five U.S. patents, have four patents pending, and have
filed additional patent applications covering various aspects of our
technology. U.S. patents include:
* Computer aided system for revision total hip replacement surgery;
* Computer system and method for finish cutting bone cavities;
* Computer system and method for positioning a surgical robot;
* Computer system and method for cavity generation for surgical
planning and initial placement of a bone prosthesis; and
* Computer system and method for performing image directed robotic
orthopaedic procedures without a fiducial reference system.
Significant portions of ORTHODOC and ROBODOC software are protected by
copyrights. IBM has granted the Company a royalty-free license for the
underlying software code for ROBODOC. In addition, IBM has agreed not to
assert infringement claims against us with respect to an IBM patent relating
to robotic medical technology, to the extent that this technology is used in
our products. ISS has registered the marks ROBODOC and ORTHODOC.
Government Regulation
In January 2001, the FDA changed DigiMatch ROBODOC's U.S Health Care Financing
Administration reimbursement category from "Experimental" to "Non-
experimental/Investigational."
The medical devices manufactured and marketed by ISS are subject to extensive
regulation by the FDA and by foreign and state governments. Under the Federal
Food, Drug, and Cosmetic Act of 1976, the FDA regulates the clinical testing,
manufacturing, labeling, distribution, and promotion of medical devices.
Noncompliance with FDA requirements can result in 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
ISS.
Our ROBODOC and NeuroMate Systems are approved for use in Europe and carry the
European Union's CE Mark. Both ORTHODOC and NeuroMate are cleared by the FDA
for marketing in the United States, and NeuroMate has been approved for use by
the Japanese Ministry of Health ("JMH"). While ROBODOC has not yet been
approved for use by the JMH, Japanese hospitals and surgeons are able to
purchase and use our systems while approval is pending. We expect that the JMH
will approve ROBODOC for use following the completion of the U.S. clinical
trials.
In March 2000, ISS applied for a new investigational device exemption under
the Food, Drug and Cosmetic Act, in order to conduct U.S. clinical trials for
ROBODOC. The exemption, approved in April 2000, allows for a clinical study
designed to show a correlation between the ROBODOC with DigiMatch technology
and the three pin system used in the initial ROBODOC clinical evaluations
conducted in 1997. We believe that DigiMatch technology enhances our prospects
for securing FDA approval.
Data obtained from the current clinical trial will also be used to support a
request to reclassify ROBODOC from a Class III to a Class II medical device.
We believe, based on our discussions with the FDA, that it would be possible
for ROBODOC to be cleared for marketing in the U.S. through the 510(k) process
as a result of such reclassification. However, there is no assurance as to
when or if the FDA will approve the Company's application or that such
approval, if received, will not include unfavorable limitations or
restrictions.
Even after receipt of any FDA clearance to market, we expect that the FDA will
consider any new ROBODOC surgical applications to be new indications for use,
which generally require FDA clearance prior to marketing. The FDA may require
additional approvals before allowing us to incorporate new imaging modalities
(such as ultrasound and MRI) or other different technologies in ROBODOC. The
FDA will likely require new clinical data to support new indications and
enhanced technological characteristics.
Products manufactured or distributed pursuant to FDA clearances or approvals
are subject to pervasive and continuing regulation by the FDA, including
quality system requirements, documentation and reporting of adverse
experiences with the use of the device. Device manufacturers are required to
register their facilities and list their devices with the FDA and with certain
state agencies and are subject to periodic compliance inspections by the FDA
and others.
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 regulation may hinder our ability to
market our 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 we 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 our 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 provided certain requirements are met.
Unapproved products subject to the pre-market approval requirements must
receive prior FDA export approval unless they are approved for use by a member
country of the European Union and certain other countries, including
Australia, Canada, Israel, Japan, New Zealand, Switzerland and South Africa.
In light of such approval, products may be exported to any country without
action by the FDA. To secure 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 our products in foreign markets has subjected and will
continue to subject us to foreign regulatory clearances which may impose
additional substantive costs and burdens. The regulatory review process and
requirements vary 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.
ROBODOC satisfies international electromedical standard IEC 601-1 and the
protection requirements of the Electromagnetic Compatibility Directive
(89/336/EEC). We have also received ISO 9001 and EN 46001 certification and
ED Directive 93/42/eec Annex II, Article 3 approval. Meeting these standards
and requirements, and receiving these certifications and approvals, allows us
to apply the CE Mark to our products. ROBODOC and NeuroMate also satisfy the
relevant provisions of the Medical Device Directive for Class IIb Medical
Devices.
Product Liability
The manufacture and sale of medical products exposes us to the risk of
significant damages from product liability claims. We maintain product
liability insurance against product liability claims in the amount of $10
million per occurrence and $10 million in the aggregate. Although we have not
experienced any product liability claims to date, a successful claim brought
against us in excess of our insurance coverage could have a materially adverse
effect on our business and financial condition.
Employees
On May 31, 2001 ISS had 54 full time employees; including 32 in research and
development, 6 in manufacturing, 1 in regulatory affairs, 6 in sales and
marketing and 9 in administration. None of our employees is covered by a
collective bargaining agreement and we believe that our relationship with our
employees is satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
Our executive offices and principal production facilities, comprising a total
of approximately 30,500 square feet of space, are located in Davis,
California. We occupy the facilities in Davis under a lease that expires in
June 2005. The lease provides for rent of approximately $31,000 per month in
2001 (plus real estate taxes and assessments, utilities and maintenance) and
is subject to adjustment in subsequent years for cumulative increases in the
cost of living index, not to exceed 4% per year.
We lease our European facility under a non-cancelable operating lease which
expires in 2003. The lease provides for rent of approximately $7,000 per
month.
ITEM 3. LEGAL PROCEEDINGS
We have from time to time been notified of various claims incidental to our
business that are not the subject of pending litigation. While the results of
claims cannot be predicted with certainty, we believe that the final outcome
of all such matters will not have a materially adverse effect on our
consolidated financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on December 12, 2000. At the
meeting, stockholders:
1. Elected the following directors:
NOMINEE FOR AUTHORITY WITHHELD
Ramesh C. Trivedi 15,754,079 318,379
John N. Kapoor (1) 15,799,379 273,079
Falah Al-Kadi 15,795,379 277,079
(1) Dr. Kapoor resigned from the board in April 2001.
2. Failed to approve an amendment to the Restated Certificate of
Incorporation and by-laws to eliminate cumulative voting rights with
respect to the election of directors. Adopting this proposal required
the vote of a majority of the outstanding shares of common stock.
FOR AGAINST ABSTAIN BROKER NON-VOTES
6,016,199 541,881 191,905 9,825,968
3. Approved an amendment to the Restated Certificate of Incorporation to
increase the authorized capital stock by increasing the number of
authorized shares of common stock from 50 million to 100 million
shares.
FOR AGAINST ABSTAIN BROKER NON-VOTES
15,244,453 562,025 265,980 0
4. Approved the issuance under an equity line of credit agreement of
more than 3,843,939 shares of common stock, representing 19.9% of
the outstanding shares of common stock on the date the Company
entered into the equity line of credit agreement.
FOR AGAINST ABSTAIN BROKER NON-VOTES
6,210,621 261,589 277,775 9,825,968
5. Approved the Company's 2000 Long-Term Performance Plan:
FOR AGAINST ABSTAIN BROKER NON-VOTES
15,514,436 247,147 310,875 0
6. Ratified the appointment of Ernst & Young LLP as independent
auditors for the year ending December 31, 2000.
FOR AGAINST ABSTAIN BROKER NON-VOTES
15,680,975 228,483 169,000 0
7. Approved the issuance upon conversion of Series H Convertible
Preferred Stock of more than 3,494,298 shares of common stock.
FOR AGAINST ABSTAIN BROKER NON-VOTES
6,188,576 276,128 279,781 9,831,468
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Our common stock and redeemable common stock purchase warrants
("warrants") are traded in the over-the-counter market. On February 14,
2001, our common stock and warrants were delisted from the Nasdaq
SmallCap Market because the common stock failed to maintain a minimum
bid price of $1.00 per share as required under Nasdaq rules. Our common
stock and warrants were delisted by EASDAQ on March 2, 2001, and by the
Pacific Exchange on April 17, 2001 for a failure to satisfy a similar
minimum bid price requirement. From February 14 to May 24, our common
stock and warrants were quoted on the OTC Bulletin Board ("OTCBB"). On
May 24, 2001 we were no longer eligible for OTCBB quotation because we
had not yet filed this Form 10-KSB for the year ended December 31, 2000
and Form 10-QSB for the quarter ended March 31, 2001 with the Securities
and Exchange Commission ("SEC").
Set forth below are the high and low closing sale prices for the common stock
and warrants for each quarter since January 1, 1999, as reported by Bloomberg,
LLP.
Common Stock Warrants
(RDOC) (RDOCW)
Quarter ended 2000 High Low High Low
March 31, $4.0625 $1.65630 $3.12500 $0.40600
June 30, $2.6250 $1.25000 $2.00000 $0.50000
September 30, $1.5000 $0.46875 $0.71875 $0.15625
December 31, $0.4375 $0.09375 $0.15625 $0.01563
Quarter ended 1999
March 31, $3.9380 $1.0310 $1.0310 $0.4050
June 30, $2.9690 $1.0310 $1.5000 $0.2500
September 30, $4.1250 $2.5000 $2.3440 $1.0000
December 31, $2.7500 $1.4380 $1.1250 $0.3750
(b) On March 31, 2001, there were 170 holders of record of the common stock
and six holders of record of the warrants. We estimate that on March 31,
2001 there were approximately 4,700 and 530 beneficial owners of common
stock and warrants, respectively.
(c) On November 17, 2000, we sold an aggregate of 282,353 shares of common
stock to Triton West Group, Inc. for a total purchase price of $75,000
under an equity line of credit agreement. The purchaser is an accredited
investor. 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.
(d) During the fourth quarter of 2000, we issued a total of 3,076,280 shares
of common stock to four accredited investors upon conversion of our
preferred stock. The issuance and sale of these shares were exempt from
the registration requirements of the Securities Act under Section
3(a)(9).
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
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
Distribution Agreement. In November 1999, ISS entered into an agreement giving
a German company, Spark 1st Vision GmbH & Co. KG ("Spark"), the exclusive
right to distribute our products in Europe, the Middle East and Africa. The
distribution agreement provided for a minimum of 24 ROBODOC System sales in
2000, and 32 ROBODOC System sales in 2001. These sales levels would have
represented a significant increase in business for us, considering that we
delivered seven ROBODOC Systems in 1999. Consequently, in late 1999 and early
2000, we increased our production capacity and reorganized marketing
activities. However, because the distributor had not sold any systems or made
the advance payments required under the agreement, the agreement was
terminated in May 2000. At termination, Spark paid us approximately $928,000,
representing four months of licensing fees and sales expense reimbursement.
Revenue Recognition. In December, 1999, the Securities and Exchange Commission
staff issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition
in Financial Statements," and effective January 1, 2000, we changed our method
of accounting for revenue recognition in accordance with SAB No. 101.
Previously, we generally recognized revenue upon delivery of equipment to
customers. The costs of installation and training were accrued in the same
period revenue was recognized. Under the new accounting method adopted
retroactively to January 1, 2000, we now recognize revenue upon completion of
training and installation of the equipment at the end-user's site, except when
the sales contract requires formal customer acceptance. Equipment sales with
contractual customer acceptance provisions are recognized as revenue upon
written notification of customer acceptance, which occurs after the completion
of training and installation. Furthermore, due to business customs in Japan
and our interpretation of Japanese law, all equipment sales to Japan are
recognized upon customer acceptance, which occurs after the completion of
training and installation. Revenue related to maintenance and service
contracts is recognized ratably over the duration of the contracts. The
cumulative effect of the change on prior years resulted in an increase in the
consolidated loss of $581,907, which is included in the consolidated statement
of operations for the year ended December 31, 2000. The effect of the change
on the year ended December 31, 2000 was to decrease the consolidated loss
before the cumulative effect of the accounting change by $581,907 ($0.03 per
share).
For the three months ended March 31, 2000, we recognized $1,138,000 in revenue
that was included in the cumulative effect adjustment as of January 1, 2000.
The effect of that revenue and related cost of revenue of $556,000 in the
first quarter was to reduce the consolidated loss by $581,907 during that
period.
New accounting pronouncement. On November 16, 2000, the Emerging Issues Task
Force ("EITF") issued EITF 00-27, "Application of EITF Issue No. 98-5,
Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios to Certain Convertible Instruments."
EITF 00-27 requires that any beneficial conversion feature associated with a
convertible instrument be calculated using the intrinsic value of a conversion
option after first allocating the proceeds received to the convertible
instrument and any other detachable instruments included in the exchange (such
as detachable warrants). As a result of adopting EITF 00-27, we recorded a
charge to accumulated deficit of $707,131 as the cumulative effect of a change
in accounting for the embedded beneficial conversion feature associated with
the Series C through H Convertible Preferred Stock.
2000 versus 1999. In addition to the revenue from sales of our systems, we
earn revenue from servicing our systems and from developing ROBODOC implant
modules under contract with implant manufacturers. Revenue components for
2000 and 1999 were:
2000 1999
ROBODOC Systems sold 3 7
NeuroMate Systems sold 1 3
Systems sales and leasing revenue $3,255,000 $3,754,000
Systems parts and services sales 1,872,000 1,675,000
Product development revenue 807,000 812,000
__________ __________
$5,934,000 $6,241,000
Revenue for 2000 was below the 1999 level primarily due to the decline in
systems sales caused by the failure of the distribution agreement in the first
half of the year and the time required to reestablish sales in the second
half.
While systems unit sales decreased more than 50%, related revenue decreased
only 44% as those systems sold commanded a higher price due to improved
features and applications. Parts and services sales increased 12%, reflecting
the 2000 full year servicing of systems sold in 1999. Cost of sales, as a
percentage of revenue, deteriorated on a year-over-year basis (59% in 2000 vs.
57% in 1999) due to a decline in our systems gross margin as manufacturing
overhead was absorbed by fewer units.
Despite the gross margin decline, the 2000 operating loss of $8.1 million was
a 14% improvement over 1999. Actual selling, general and administrative
expenses were flat year-over-year, but were offset by approximately $188,000
paid by Spark for selling expenses we incurred on Spark's behalf before the
termination of the distribution agreement. The 25% reduction in research and
development expense reflects deferral of approximately $723,000 of costs
associated with product development contracts, and approximately $663,000 in
savings from personnel reductions achieved as we reorganized after the Spark
agreement termination.
Our lower interest income was the direct result of lower average cash
balances, offset by a corresponding reduction in interest expense incurred as
we paid down our bank loans and line of credit. Other income for 2000 included
approximately $740,000 of Spark licensing fees, while in 1999 the other
expense category included a $480,000 loss on our investment in Marbella High
Care B.V.
During the fourth quarter of 2000, we changed our method of accounting,
retroactive to January 1, 2000, for equipment sales in accordance with the
guidance contained in SAB No. 101 which was issued by the SEC in December
1999, as described above. Also during the fourth quarter of 2000, we adopted
EITF 00-27, as described above.
Net loss before cumulative effect of accounting changes decreased $2,547,000
from the previous year, primarily due to the $928,000 termination payment from
Spark in 2000, the Marbella loss of $480,000 in 1999 and the deferral of
$723,000 of product development contract costs. Net loss applicable to common
stockholders for the year ended December 31, 2000 increased $929,000 from the
previous year due to the cumulative effect of accounting changes and a $2.2
million increase in preferred stock accretion and dividend. While basic and
diluted net loss per common share improved from ($1.47) to ($0.69), this
change was wholly due to a 130% increase in the average number of common
shares outstanding.
Liquidity
The reports of our independent auditors on our 2000 and 1999 consolidated
financial statements included explanatory paragraphs stating that there is
substantial doubt with respect to the Company's ability to continue as a going
concern. Since inception, our expenses have exceeded our revenue, and
operations have been funded primarily through the sale of equity securities.
As discussed below under "Capital Resources," it is unlikely that the equity
markets will continue to support fund-raising at historic levels. We believe,
however, that we have begun to generate sales at a level sufficient to ensure
our survival through the remainder of 2001. Although we believe that our plan
will be realized, there is no assurance that these events will occur. The
consolidated 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 our
inability to continue as a going concern.
At year-end 2000, our total assets were $3.5 million below their 1999 level
while total liabilities increased by $1.1 million. This $4.6 million balance
sheet deterioration was primarily caused by the difference between the two
years in funds raised through the sale of equity securities: We raised $4.6
million in 2000 against $9.9 million in 1999. This change is most evident in
cash, reduced by 90% from 1999 to 2000. As a result, it has been difficult for
us to meet our obligations as they become due.
Inventory accounts for 73% of our current assets and current assets exceed our
current liabilities by only $571,000. Our ability to generate adequate cash
flows on a short-term basis is therefore dependent on our ability to convert
these inventories into sales. We believe that we have begun to do so, having
shipped four ROBODOC and two NeuroMate Systems, generating approximately $1.7
million in cash, through May 31, 2001.
Unearned revenue, at $2.5 million, represented 47% of the company's
liabilities at December 31, 2000 and was our largest source of operating cash
for the year then ended. Unearned revenue includes payments for systems sales
on which revenue is not yet recognized, as well as advance payment for service
contracts which revenue is recognized ratably over the period of the contract.
Capital Resources
On May 31, 2001 there were 36.7 million shares of our common stock
outstanding, trading in the over-the-counter market at $0.15 a share, giving
us a market capitalization of $5.5 million. Our share price declined steadily
throughout 2000, from a high of $4.06 in the first quarter of the year to a
low of $0.09 in the last quarter.
In 2000, we sold approximately $4.5 million of convertible preferred stock. By
December 31, 2000, 78% of the preferred stock had been converted to common
shares against the steadily declining common share price, resulting in
significant dilution of our common shares. All of the series F convertible
preferred stock was converted into 2.1 million common shares by September 30,
2000, at an average common share price of $0.93, while at December 31, 2000,
only 55% of the series H convertible preferred stock had been converted, but
into 2.4 million shares at an average share price of $0.27.
In the first quarter of 2001, our common stock and warrants were delisted from
the NASDAQ because the stock did not maintain the exchange's minimum bid price
of $1.00 per share. On May 24th, the OTC Bulletin Board ceased providing
quotes for our common stock and warrants because we had not filed this Form
10-KSB for the year ended December 31, 2000 and our Form 10-QSB for the
quarter ended March 31, 2001 with the Securities and Exchange Commission.
Quotes for our common stock and warrants are now available only through the
pink sheets.
We have received net proceeds of $742,000 through our equity line of credit
through May 31, 2001, and through that date, have $11.3 million in additional
credit on which to draw. However, the conversion rate of the equity line draw
of April 19, 2001 was $0.0765, causing significant dilution to our common
shareholders.
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
We did not have any changes in or disagreements with our accountants on
accounting and financial disclosure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The executive officers and directors of the Company are listed below:
Name Age Position with the Company
Ramesh C. Trivedi 61 President, Chief Executive Officer,
Director
Patricia E. Pilz 52 Chief Financial Officer
Leland Witherspoon 48 Vice President
Falah Al-Kadi 50 Chairman of the Board of Directors
Elliot J. Smith 68 Director
Ramesh C. Trivedi has been president, chief executive officer and a director
of the Company since 1995. Prior to that time, Dr. Trivedi was a principal of
California Biomedical Consultants, an international consulting firm, and he
served as the president and chief executive officer of DigiRad Corporation, a
medical imaging company. Dr. Trivedi received his Ph.D. in chemical
engineering from Lehigh University, and holds an MBA from Pepperdine
University.
Patricia E. Pilz was appointed chief financial officer upon joining Integrated
Surgical Systems in March 2001. From 1999 through 2000, she was employed by
Transamerica Intellitech, Inc., a software developer and data supplier to the
real estate industry, as its vice president of finance. From 1996 through
1998, Miss Pilz was employed by ECN Health Systems, Inc., a startup engaged in
business process reengineering for managed healthcare, as its executive vice
president for systems development. Prior to that time, she served in a senior
financial executive capacity for other public and private corporations. Miss
Pilz received a Bachelor's degree from Harvard University, an MBA from Boston
University and became a Certified Public Accountant in 1980.
Leland Witherspoon has been vice president of engineering since joining ISS in
1997. From 1992 to 1997, Mr. Witherspoon was director of product research and
development for Biomedicals, Inc., a developer and manufacturer of
cardiopulmonary and cardiovascular products. Prior to that time, he served in
various technical and management position for Pfizer/Shiley, Xerox Medical
Systems and IBM. Mr. Witherspoon received his Bachelor of Science from
Rensselaer Polytechnic Institute.
Falah Al-Kadi has been chairman of the board of directors since January 2000
and a director since December 1999. Mr. Al-Kadi is vice chairman of the
Dogmoch Group of Companies, a position he has held since 1994.
Elliot J. Smith was appointed to the board of directors in January 2001. He
has been the managing director of Broadband Capital Management, LLC of New
York since May of 2000. Mr. Smith began a 29-year career with Bache & Company,
Inc. in 1954, was elected to the board of directors in 1973, and in 1980 was
elected president of Bache Haley Stuart Metal Company, Inc. After leaving
Prudential-Bache in 1983, Mr. Smith served as executive vice president of R.
Lewis Securities, Inc., and from 1983 to 1995, was president of Whale
Securities Company, L.P. In 1995, he joined Rickel & Associates, Inc. as the
president of its Equity Division. Mr. Smith is a former member and director of
the Chicago Board of Options Exchange; governor of the American Stock Exchange
(AMEX); governor and chairman of the AMEX Commodities Exchange; director and
member of the Executive Committee of the Securities Industry Automation Corp.
and a past president of the Association of Investment Brokers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers,
directors and persons who own more than ten percent of a registered class of
our equity securities within specified time periods to file certain reports
of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and ten-percent stockholders are required by
regulation to furnish us with copies of all Section 16(a) forms they file.
Based solely on a review of copies of such reports we received and written
representations from such persons concerning the necessity to file such
reports, we are not aware of any failure to file reports or report
transactions in a timely manner during the fiscal year ended December 31,
2000, except that Mr. Witherspoon did not in a timely manner file an initial
report of beneficial ownership on Form 3 upon becoming an officer in April
1997, nor in a timely manner file Forms 4 and 5 reporting the grant of
additional stock options since that time.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded to, earned by or paid
to our Chief Executive Officer and each other executive officer whose salary
and bonus exceeded $100,000 for the year ended December 31, 2000
(collectively, the "Named Executive Officers").
Summary Compensation Table
Annual Compensation Long-Term
Compensation
Securities
Cash Underlying
Name Year Salary Bonus Other(1) Options
Ramesh C. Trivedi 2000 $302,215 $0 $29,003 240,000
1999 279,840 27,984 48,281 6,210
1998 279,840 0 42,501 120,000
Louis J. Kirchner(2)2000 105,482 0 0 35,000
Leland Witherspoon 2000 141,400 0 0 30,000
1999 147,413 0 0 0
1998 143,254 0 0 45,000(3)
_________________________________________
(1) Represents expense allowances paid under the terms of Dr. Trivedi's
employment agreement.
(2) Mr. Kirchner's employment commenced in February of 2000 and ended
February 1, 2001.
(3) Accumulated options repriced in August 1998.
Employment Agreement
Dr. Trivedi serves as our Chief Executive Officer and President pursuant to an
employment agreement terminable at will by either party. Upon termination by
the Company, other than for cause (as defined in the employment agreement),
Dr. Trivedi is entitled to receive his monthly salary for a period of eighteen
months following the date of termination. Dr. Trivedi's salary for 2001 is
$302,215 ($25,185 per month).
Stock Options
The following table contains information concerning the grant of stock options
under our various Stock Option Plans to the Named Executive Officers during
the fiscal year ended December 31, 2000.
Option Grants in Last Fiscal Year
(Individual Grants)
Percent of
Number of Total
Shares Options
Underlying Granted to Exercise
Options Employees in Price Per Expiration
Name Granted (1) Fiscal Year Share (2) Date
Ramesh C. Trivedi 304,300 40.90% $1.813 January 27, 2010
Louis J. Kirchner 35,000 4.70% 1.813February 21, 2010 (3)
Leland Witherspoon 30,000 4.03% 1.813 January 28, 2010
(1) Stock options are granted at the discretion of the Compensation
Committee of our board of directors. Stock options have a 10-year term
and vest periodically over a period not to exceed five years.
(2) The Compensation Committee may elect to reduce the exercise price of any
option to the current fair market value of the common stock if the value
of the common stock has declined from the date of grant.
(3) These options expired on February 1, 2001 as a result of the termination
of Mr. Kirchner's employment.
The following table summarizes, for each of the Named Executive Officers, the
total number of unexercised options, if any, held at December 31, 2000, and
the aggregate dollar value of in-the-money, unexercised options, held at
December 31, 2000. The value of the unexercised, in-the-money options at
December 31, 2000, is the difference between their exercise or base price and
the value of the underlying Common Stock on December 31, 2000. The closing
sale price of the common stock on December 31, 2000 was $0.1875 per share.
Aggregated Option Exercises in the Last Fiscal Year and Fiscal Year End
Option Values
Shares Acquired
Upon Exercise Number of Securities Value of Unexercised
of Options Underlying In-The-Money
During Fiscal Unexercised Options Options at
2000 at December 31, 2000 December 31, 2000
Value
Name Number Realized Exercisable Unexercisable Exercisable Unexercisable
Ramesh C. Trivedi None None 400,452 346,965 $37,779.95(1) $ 0
Louis J. Kirchner None None 0 35,000 0 0
Leland Witherspoon 1,149 $4,445 27,986 47,014 0 0
(1) Represents value of options to purchase 316,907 shares at an exercise
price of $0.07 per share and 6,210 shares at an exercise price of $0.10
per share.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the beneficial
ownership of our common stock at May 31, 2001 by (i) each stockholder we know
to be a beneficial owner of more than five percent of the outstanding common
stock, (ii) each of our directors, (iii) each of our executive officers listed
in the Summary Compensation Table and (iv) all directors and officers as a
group.
Amount and Percentage of
Nature of Common Stock
Beneficial Beneficially
Ownership (1) Owned (2)
Name
International Business Machines Corporation; 2,248,900 (3) 5.78%
Old Orchard Road, Armonk, N.Y. 10504
ILTAG International Licensing Holding S.A.L.; 3,461,198 (4) 8.95%
Adnan Al Hakim Street; Assaf Bldg.;
P.O. Box 135660; Beirut, Lebanon
Ramesh C. Trivedi (7) 543,497 (8) 1.46%
Leland Witherspoon (7) 56,675 (13) *
Falah Al-Kadi (5) 3,461,198 (6) 8.95%
John N. Kapoor (9) (15) 1,039,792 (10) 2.84%
Elliot Smith (11) 1,653,413 (12) 4.34%
Louis J. Kirchner (7) (14) 0
All directors and officers as a group
(6 persons) 6,754,575 17.21%
_____________________________________________
* Less than one percent.
(1) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares indicated, subject to community
property laws, where applicable.
(2) For purposes of computing the percentage of outstanding shares held by
each person or group of persons named above on May 31, 2001, any
security which such person or group of persons has the right to acquire
within 60 days after such date is deemed to be outstanding for the
purpose of computing the percentage ownership for such person or
persons, but is not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person. There were
36,673,202 shares of common stock outstanding on May 31, 2001.
(3) Includes warrants to purchase 2,206,479 shares of common stock at an
exercise price of $0.01 per share, exercisable until December 31, 2005.
(4) Includes warrants to purchase 2,000,000 shares of common stock at an
exercise price of $1.027 per share, exercisable until December 13, 2002.
(5) Address is c/o Dogmoch Group of Companies, Adnan Al Hakim St., Assaf
Bldg., P.O. Box 135660, Beirut, Lebanon .
(6) Represents shares and warrants owned by ILTAG, an affiliate of Dogmoch,
of which Mr. Al-Kadi is Vice-Chairman.
(7) Address is c/o the Company, 1850 Research Park, Davis, California
95616-4884
(8) Includes 529,497 shares that Dr. Trivedi may acquire upon exercise of
stock options exercisable within 60 days: 316,907 shares at an exercise
price of $0.07 per share, 92,267 shares at an exercise price of $3.00
per share, 114,113 shares at an exercise price of $1.81 per share, and
6,210 shares at an exercise price of $0.10 per share. Dr. Trivedi may
acquire an additional 217,920 shares upon exercise of stock options that
become exercisable over the remaining term of the options: 27,733
shares at an exercise price of $3.00 per share and 190,187 shares at an
exercise price of $1.81 per share.
(9) Address is c/o EJ Financial Enterprises, 225 E. Deer Path Road, Suite
250, Lake Forest, Illinois 60045.
(10) Represents shares of common stock owned by EJ Financial Investments V,
L.P., a limited partnership of which Mr. Kapoor is the managing general
partner. Mr. Kapoor disclaims beneficial ownership of such shares.
(11) Address is c/o Broadband Capital, 805 Third Avenue, New York, New York
10022.
(12) Includes 55,000 shares owned by his wife and warrants to purchase an
additional 1,415,413 shares, including warrants to purchase 262,207
shares owned by his wife and warrants to purchase 15,974 shares owned by
a partnership of which he is the general partner. Mr. Smith disclaims
beneficial ownership of the shares owned by his wife and the other
partners of the partnership.
(13) Includes 45,191 shares that Mr. Witherspoon may acquire upon exercise of
stock options exercisable within 60 days: 33,941 shares at an exercise
price of $3.00 per share and 11,250 shares at an exercise price of $1.81
per share. Mr. Witherspoon may acquire an additional 29,809 shares upon
exercise of stock options that become exercisable over the remaining
term of the options: 11,059 shares at an exercise price of $3.00 per
share and 18,750 shares at an exercise price of $1.81 per share.
(14) Mr. Kirchner's employment ended in February 2001.
(15) Dr. Kapoor resigned from the board in April 2001.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Description
3.1 Form of Certificate of Incorporation of the Registrant, as amended.
3.2 By-laws of the Registrant, as amended.
3.3 Certificate of Designations for Series F Convertible Preferred Stock.(4)
3.4 Certificate of Designations for Series G Convertible Preferred
Stock. (11)
3.5 Certificate of Designations for Series H Convertible Preferred
Stock. (12)
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)
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 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 Form of warrant issued to purchasers of Series A Convertible
Preferred Stock. (7)
4.18 Form of warrant issued to purchasers of Series B Convertible
Preferred Stock. (8)
4.19 Form of warrant issued to purchasers of Series C Convertible
Preferred Stock. (3)
4.20 Form of warrant issued to purchasers of Series D Convertible
Preferred Stock. (3)
4.21 Form of warrant issued to purchasers of Series E Convertible
Preferred Stock. (9)
4.22 Form of warrant issued to purchasers of Series F Convertible
Preferred Stock. (4)
4.23 Form of warrant issued to purchasers of Series G Convertible
Preferred Stock. (11)
4.24 Form of warrant issued to purchasers of Series H Convertible
Preferred Stock. (12)
4.25 Form of Registration Rights Agreement for Series A Convertible
Preferred Stock financing. (7)
4.26 Form of Registration Rights Agreement for Series B Convertible
Preferred Stock financing. (8)
4.27 Form of Registration Rights Agreement for Series C Convertible
Preferred Stock financing. (3)
4.28 Form of Registration Rights Agreement for Series D Convertible
Preferred Stock financing. (3)
4.29 Form of Registration Rights Agreement for Series E Convertible
Preferred Stock financing. (9)
4.30 Form of Registration Rights Agreement for Series F Convertible
Preferred Stock financing. (4)
4.31 Form of Registration Rights Agreement for Series G Convertible
Preferred Stock financing. (11)
4.32 Form of Registration Rights Agreement for Series H Convertible
Preferred Stock financing. (12)
4.33 Form of warrant dated December 14, 1999 issued to ILTAG International
Licensing Holding S.A.L., Bernd Herrmann and Urs Wettstein. (10)
4.34 Form of Registration Rights Agreement dated December 14, 1999 among
the Registrant, ILTAG International Licensing Holding S.A.L., Bernd
Herrmann and Urs Wettstein. (10)
4.35 Registration Rights Agreement for the purchasers of Stock under the
Equity Line of Credit Agreement (included as Exhibit C to Exhibit 10.26).
4.36 Form of warrant issued under the Equity Line of Credit Agreement
(included as Exhibit D to Exhibit 10.26).
4.37 2000 Stock Award Plan
4.38 2000 Long Term Performance Plan.
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 Kapoor, 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. (2)
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)
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 Preferred Stock Purchase Agreement for Series A Convertible Preferred
Stock. (7)
10.13 Preferred Stock Purchase Agreement for Series B Convertible Preferred
Stock. (8)
10.14 Preferred Stock Purchase Agreement for Series C Convertible Preferred
Stock. (3)
10.15 Preferred Stock Purchase Agreement for Series D Convertible Preferred
Stock. (3)
10.16 Preferred Stock Purchase Agreement for Series E Convertible Preferred
Stock. (9)
10.17 Preferred Stock Purchase Agreement for Series F Convertible Preferred
Stock. (4)
10.18 Preferred Stock Purchase Agreement for Series G Convertible Preferred
Stock. (11)
10.19 Preferred Stock Purchase Agreement for Series H Convertible Preferred
Stock. (12)
10.20 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)
10.21 Distribution Agreement dated November 12, 1999 between the Registrant
and Spark 1st Vision GmbH & Co. KG. (14)
10.22 Mutual Termination Agreement dated May 9, 2000 between the Registrant
and Spark 1st Vision GmbH & Co. KG. (14)
10.23 Personal Undertaking dated May 30, 2000 by ILTAG International
Licensing Holding S.A.L. towards the Registrant. (14)
10.24 Personal Undertaking dated may 21, 2000 of Urs Wettstein. (14)
10.25 Personal Undertaking dated May 16, 2000 of Bernd Herrmann. (14)
10.26 Private Equity Line of Credit Agreement dated September 15, 2000 with
Triton West Group, Inc. (14)
10.27 Escrow Agreement dated September 15, 2000 for the Equity Line of
Credit Agreement (included as Exhibit A to Exhibit 10.26). (14)
10.28 Letter Agreement dated October 6, 2000 amending the Private Equity
Line of Credit Agreement dated September 15, 2000. (14)
23.1 Consent of Ernst & Young LLP, Independent Auditors
____________________________________
(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.
(11) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Registration No. 333-40710), declared effective on July 28,
2000.
(12) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Registration No. 333-45706), declared effective on September
28, 2000.
(13) Incorporated by reference to the Registrant's Annual Report on Form 10-
KSB for the fiscal year ended December 31, 1999.
(14) Incorporated by reference to the Registrant's Registration Statement on
From SB-2 (Registration No. 333-48040) declared effective on October
31, 2000.
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/ PATRICIA E. PILZ
Patricia E. Pilz
(Principal Financial and Accounting Officer)
Dated: June 27, 2001
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 June 27,
2001 in the capacities indicated.
Signature Title
/s/RAMESH C. TRIVEDI Chief Executive Officer, President and a Director
Ramesh C. Trivedi (Principal Executive Officer)
/s/PATRICIA E. PILZ Chief Financial Officer
Patricia E. Pilz (Principal Financial and Accounting Officer)
/s/FALAH AL-KADI Chairman of the Board
Falah Al-Kadi
/s/ELLIOT SMITH Director
Elliot Smith
INTEGRATED SURGICAL SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheet at December 31, 2000 F-3
Consolidated Statements of Operations for the years ended
December 31, 2000 and 1999 F-4
Consolidated Statements of Convertible Preferred Stock and
Stockholders' Equity for the years ended December 31,
2000 and 1999 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-8
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, 2000, and the related consolidated
statements of operations, convertible preferred stock and stockholders'
equity, and cash flows for the years ended December 31, 2000 and 1999. 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, 2000, and the consolidated results of
its operations and its cash flows for the years ended December 31, 2000 and
1999 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 $58,308,095 as of December 31, 2000.
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.
As discussed in Note 2, in 2000 the Company changed its method of accounting
for revenue recognition in accordance with guidance provided in SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."
As discussed in Note 2, in 2000 the Company changed its method of accounting
for convertible securities with beneficial conversion features in accordance
with the consensus reached by the Emerging Issues Task Force ("EITF") on
issue No. 00-27, "Application of EITF Issue No. 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, to Certain Convertible Instruments."
ERNST & YOUNG LLP
Sacramento, California
April 24, 2001
Integrated Surgical Systems, Inc.
Consolidated Balance Sheet
December 31, 2000
Assets
Current assets:
Cash and cash equivalents $ 276,322
Accounts receivable less allowance for
doubtful accounts of $117,751 924,578
Inventory 4,077,714
Other current assets 328,982
Total current assets 5,607,596
Net property and equipment 755,785
Leased equipment, net 319,365
Long-term net investment in sales-type leases 61,076
Intangible assets, net 1,336,898
Other assets 12,051
$ 8,092,771
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,098,509
Accrued payroll and related expenses 426,959
Accrued liabilities 387,980
Unearned revenue 2,451,119
Current portion of bank loans 42,960
Other current liabilities 629,080
Total current liabilities 5,036,607
Note payable 143,200
Commitments and contingencies (Notes 1, 9 and 10) -
Convertible preferred stock, $0.01 par value,
1,000,000 shares authorized, 1,089 shares
issued and outstanding ($1,089,000 aggregate
liquidation value) 974,466
Stockholders' equity:
Common stock, $0.01 par value, 100,000,000 shares
authorized; 23,207,676 shares issued and
outstanding 232,077
Additional paid-in capital 60,550,929
Accumulated other comprehensive loss (536,413)
Accumulated deficit (58,308,095)
Total stockholders' equity 1,938,498
$ 8,092,771
See accompanying notes.
Integrated Surgical Systems, Inc.
Consolidated Statements of Operations
Years ended December 31,
2000 1999
Net sales $ 5,934,263 $ 6,240,842
Cost of sales 3,490,748 3,563,943
_________ _________
2,443,515 2,676,899
Operating expenses:
Selling, general and
administrative 5,564,341 5,750,182
Research and development 4,175,352 5,561,288
Amortization of intangibles 839,040 839,040
__________ __________
10,578,733 12,150,510
Operating loss (8,135,218) (9,473,611)
Other income (expense):
Interest income 45,341 197,551
Interest expense (47,144) (198,479)
Foreign currency exchange loss (165,169) (183,197)
Other, net 693,957 (510,840)
Loss before provision for _________ __________
income taxes (7,608,233) (10,168,576)
Provision for income taxes - (13,155)
Net loss before cumulative
effect of accounting
changes (7,608,233) (10,155,421)
Cumulative effect of
accounting change
under SAB 101 (Note 2) (581,907) -
Cumulative effect of
accounting change
under EITF 00-27 (Note 2) (707,131) -
Net loss before preferred stock___________ ____________
accretion and dividend (8,897,271) (10,155,421)
Preferred stock accretion
and dividend (3,609,845) (1,422,500)
Net loss applicable to
common stockholders $ (12,507,116) $ (11,577,921)
Basic and diluted net
loss per share before
cumulative effect of
accounting changes $(0.62) $(1.47)
Cumulative effect of
accounting change
under SAB 101 (Note 2) (0.03) -
Cumulative effect of
accounting change under
EITF 00-27 (Note 2) (0.04) -
Basic and diluted net loss
per common share $(0.69) $(1.47)
Shares used in computing
basic net loss per share 18,125,301 7,896,171
Pro forma amounts assuming
the accounting change
under SAB 101 is applied
retroactively:
Net loss applicable to
common stockholders $ (11,925,209) $(11,684,276)
Basic and diluted net loss
per common share $(0.66), $(1.48)
See accompanying notes.
Integrated Surgical Systems, Inc.
Consolidated Statements of
Convertible Preferred Stock and Stockholders' Equity
Convertible Preferred Stock
Additional Preferred
Paid-in Stock
Shares Amount Capital Discount Total
Balance at December 31, 1998 3,520 $35 $3,837,587 $(239,736) $3,597,886
Exercise of stock options - - - - -
Stock compensation,
non-employees - - - - -
Stock compensation,
employees - - - - -
Sale of common stock
and warrants - - - - -
Sale of convertible preferred
stock and warrants, net of
offering costs 6,750 67 6,106,110 - 6,106,177
Preferred stock discount - - 1,202,617 (1,202,617) -
Preferred stock accretion - - - 1,422,500 1,422,500
Conversions of preferred
stock (7,345) (73) (8,483,894) - (8,483,967)
Comprehensive loss:
Net loss before preferred
stock accretion - - - - -
Adjustment to unrealized
gains on available-for-sale
securities - - - - -
Foreign currency translation
adjustments - - - - -
Comprehensive loss - - - - -
Balance at December 31, 1999 2,925 29 2,662,420 (19,853) 2,642,596
Exercise of stock options
and warrants - - - - -
Stock compensation,
non-employees - - - - -
Stock compensation,
employees - - - - -
Sale of convertible preferred
stock and warrants, net of
offering costs 5,000 50 3,956,088 - 3,956,138
Preferred stock discount - - 3,380,816 (3,380,816) -
Preferred stock accretion
and dividend - - 209,176 3,400,669 3,609,845
Conversions of
preferred stock (5,651) (57) (8,367,535) - (8,367,592)
Redemption of Series E
Preferred Stock (1,185) (11) (1,184,989) - (1,185,000)
Shares issued in equity-line
financings - - - - -
Cumulative effect of
accounting change under
EITF 00-27 - - 318,479 - 318,479
Comprehensive loss:
Net loss before preferred
stock accretion and dividend - - - - -
Foreign currency translation
adjustments - - - - -
Comprehensive loss - - - - -
Balance at December 31, 2000 1,089 $11, $974,455 $ - $974,466
Accumulated
Additional Deferred Other Total
Common Stock Paid-in Stock Comprehensive Accumulated Stockholders'
Shares Amount Capital Compensation Loss Deficit Equity
Balance at December 31, 1998:
5,650,400 $56,504 $38,505,700 $(85,638)$207,216 $(34,223,058) $4,460,724
Exercise of stock options:
80,546 806 4,982 - - - 5,788
Stock compensation, non-employees:
30,351 304 204,123 - - - 204,427
Stock compensation, employees:
10,335 103 48,175 75,125 - - 123,403
Sale of common stock and warrants:
2,922,396 29,224 3,627,865 - - - 3,657,089
Sale of convertible preferred stock and warrants, net of offering costs:
9,640 96 149,868 - - - 149,964
Preferred stock discount:
- - - - - - -
Preferred stock accretion:
- - - - - (1,422,500) (1,422,500)
Conversions of preferred stock:
5,588,247 55,882 8,428,085 - - - 8,483,967
Comprehensive loss:
Net loss before preferred stock accretion:
- - - - - (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:
4,291,915 142,919 50,968,798 (10,513)(487,327) (45,800,979) 4,812,898
Exercise of stock options and warrants:
164,128 1,641 30,827 - - - 32,468
Stock compensation, non-employees:
49,108 491 205,036 - - - 205,527
Stock compensation, employees:
22,500 225 40,556 10,513 - - 51,294
Sale of convertible preferred stock and warrants, net of offering costs:
30,000 300 571,969 - - - 572,269
Preferred stock discount:
- - - - - - -
Preferred stock accretion and dividend:
- - - - - (3,609,845) (3,609,845)
Conversions of preferred stock:
8,362,672 83,627 8,283,965 - - - 8,367,592
Redemption of Series E Preferred Stock:
- - - - - - -
Shares issued in equity-line financings:
287,353 2,874 61,126 - - - 64,000
Cumulative effect of accounting change under EITF 00-27:
- - 388,652 - - - 388,652
Comprehensive loss:
Net loss before preferred stock accretion and dividend:
- - - - - (8,897,271) (8,897,271)
Foreign currency translation adjustments:
- - - - (49,086) - (49,086)
Comprehensive loss:
- - - - - - (8,946,357)
Balance at December 31, 2000:
23,207,676 $232,077 $60,550,929 $ -$(536,413) $ (58,308,095) $1,938,498
See accompanying notes.
Integrated Surgical Systems, Inc.
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
Years ended December 31, 2000 1999
Cash flows from operating activities:
Net loss $ (8,897,271) $ (10,155,421)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation 614,570 576,812
Provision for losses on accounts
receivable 127,601 463,611
Amortization of intangible assets 839,040 839,040
Stock compensation, employees 51,294 123,403
Stock compensation, non-employees 205,527 204,427
Gain on short-term investments - (65,309)
Cumulative effect of
accounting changes 1,289,038 -
Changes in operating assets
and liabilities:
Accounts receivable (734,767) 751,271
Inventory (850,875) (996,248)
Other current assets 106,808 (96,260)
Accounts payable (552,648) (8,030)
Accrued payroll and related expenses 54,795 (54,996)
Accrued liabilities 170,831 (24,837)
Unearned revenue 1,416,952 109,418
Other current liabilities 154,091 (42,040)
Net cash used
in operating activities (6,005,014) (8,375,159)
Cash flows from investing activities:
Proceeds from sale of short-term
investments - 2,038,961
Principal payments received on
sales-type lease 430,592 92,489
Purchases of property and equipment (461,175) (410,384)
Proceeds from sale of property
and equipment 56,160 50,367
Net cash provided by investing
activities 25,577 1,771,433
Cash flows from financing activities:
Proceeds from bank loans - 32,600
Payments on bank loans (62,017) (762,723)
Proceeds from sale of preferred stock
and warrants 4,528,407 6,256,141
Net proceeds from sale of common stock
and warrants 64,000 3,657,089
Proceeds from exercise of
stock options 32,468 5,788
Redemption of preferred stock (1,185,000) -
Net cash provided by
financing activities 3,377,858 9,188,895
Effect of exchange rate changes on
cash and cash equivalents (40,115) 109,266
Net (decrease) increase in cash and
cash equivalents (2,641,694) 2,694,435
Cash and cash equivalents at
beginning of year 2,918,016 223,581
Cash and cash equivalents at
end of year, $ 276,322 $ 2,918,016
Supplemental disclosure of
cash flow information:
Cash paid for interest $ 47,143 $ 70,856
Supplemental disclosure of
non-cash activity:
Supplemental disclosure of
non-cash financing activities:
Preferred stock accretion
and dividend, $3,609,845 $ 1,202,617
Conversion of preferred stock $ 83,627 $ 55,882
See accompanying notes.
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements
December 31, 2000
1. Description of Business and Basis of Presentation
Integrated Surgical Systems, Inc. ("the Company") designs, manufactures,
sells and services image-directed, computer-controlled robotic products for
use in orthopaedic and neurosurgical procedures. The Company was incorporated
under the laws of Delaware in 1990.
In 1997, the Company acquired Innovative Medical Machines International, S.A.
Renamed Integrated Surgical Systems, S.A. ("ISS-SA"), this wholly owned
French subsidiary focuses on the Company's neurosurgical products. The
Company's wholly owned Dutch subsidiary, Integrated Surgical Systems BV
("ISS-BV") distributes the Company's orthopaedic products in Europe.
The Company has recurring operating losses and has an accumulated deficit of
$58,308,095 at December 31, 2000. The report of independent auditors on the
Company's December 31, 2000 consolidated 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 a viable plan to address these issues and that its plan will enable
the Company to continue through the end of 2001. This plan includes increased
sales of the Company's products through geographic expansion, development of
new applications for its products, meeting 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
an inability of the Company to continue as a going concern.
2. Significant Accounting Policies
Revenue Recognition
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," and effective January 1, 2000, the Company changed its method of
accounting for revenue recognition in accordance with SAB No. 101.
Previously, the Company generally recognized revenue upon delivery of
equipment to customers. The costs of installation and training were accrued
in the same period revenue was recognized. Under the new accounting method
adopted retroactively to January 1, 2000, the Company now recognizes revenue
upon completion of training and installation of the equipment at the end-
user's site, except when the sales contract requires formal customer
acceptance. Equipment sales with contractual customer acceptance provisions
are recognized as revenue upon written notification of customer acceptance,
which occurs after the completion of training and installation. Furthermore,
due to business customs in Japan and the Company's interpretation of Japanese
law, all equipment sales to Japan are recognized upon customer acceptance,
which occurs after the completion of training and installation. Revenue
related to maintenance and service contracts is recognized ratably over the
duration of the contracts. The cumulative effect of the change on prior years
resulted in an increase in the consolidated loss of $581,907, which is
included in the consolidated statement of operations for the year ended
December 31, 2000. The effect of the change on the year ended December 31,
2000 was to decrease the consolidated loss before the cumulative effect of
the accounting change by $581,907 ($0.03 per share). The unaudited pro forma
amounts presented in the statement of operations were calculated assuming the
accounting change was made retroactively to prior periods.
For the three months ended March 31, 2000, the Company recognized $1,137,907
in revenue that was included in the cumulative effect adjustment as of
January 1, 2000. The effect of that revenue and related cost of revenues of
$556,000 in the first quarter was to reduce the consolidated loss by $581,907
during that period.
Product development revenue is recognized when development is complete under
the terms of the contract, the software has performed satisfactorily in a
field test, and customer acceptance has occurred.
The Company recognizes revenues from leasing activities in accordance with
SFAS No. 13, "Accounting for Leases." Accordingly, leases that transfer
substantially all the benefits and risks of ownership are accounted for as
sales-type leases. All other leases are accounted for as operating leases.
Under the sales-type method, profit is recognized at lease inception by
recording revenue and cost. Revenue consists of the present value of the
future minimum lease payments discounted at the rate implicit in the lease.
Cost consists of the equipment's book value. The present value of the
estimated value of the equipment at lease termination (the residual value),
which is generally not material, and the present value of the future minimum
lease payments are recorded as assets. In each period, interest income is
recognized as a percentage return on asset carrying values.
The Company is the lessor of equipment under operating leases expiring in
various years. The cost of equipment subject to such leases is recorded as
leased equipment and is depreciated on a straight-line basis over the
estimated service life of the equipment. Operating lease revenue is
recognized as earned over the term of the underlying lease.
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. The resulting translation adjustments are recorded in the other
comprehensive income section of stockholders' equity. The Company's foreign
currency transactions are usually recorded and settled in the same foreign
currency, without foreign exchange transaction gains or losses. Foreign
exchange transaction gains or losses are, however, recognized when
translating inter-company receivables and payables.
Research and Development
Research and development costs are expensed as incurred. 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. The direct cost, primarily labor, of
product development contracts is deferred until the development revenue is
recognized.
Grants received from third parties for research and development activities
are recorded as reductions of research and development expense over the term
of the agreement as the related activities are conducted.
Concentration of Credit Risk
The Company sells its products to companies in the healthcare industry and
performs periodic credit evaluations of its customers and generally does not
require collateral. The Company believes that adequate provision for
uncollectable accounts receivable has been made in the accompanying financial
statements. The Company maintains substantially all of its cash at three
financial institutions.
Financial Statement Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents. Cash and cash equivalents
include cash on hand and money market funds.
Fair Values of Financial Instruments
The carrying values of the bank loans approximate their fair values at
December 31, 2000, based on current incremental borrowing rates for similar
types of borrowing arrangements.
Active markets do not exist for the Company's other financial instruments
(long-term lease receivables and notes payable) that are subject to the fair
value disclosure requirements of Statement of Financial Accounting Standards
("SFAS") No. 107. There are no quoted market prices for these assets and
liabilities. Accordingly, the Company does not estimate the fair values of
these financial instruments due to the limited information available and the
significance of the cost to obtain independent appraisals for this purpose.
Intangible Assets
Intangible assets consist primarily of developed technology relating to the
NeuroMate(R) system. In the opinion of the Company's management, the developed
technology is complete and has alternative future uses. Accumulated
amortization on intangible assets was $2,796,800 at December 31, 2000. The
estimated useful lives range from 3 to 5 years.
Under the provisions of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of," impairment losses are recognized when expected future
cash flows are less than the assets' carrying value. Accordingly, when
indicators of impairment are present, the Company evaluates the carrying
value of property, furniture and equipment, and intangibles, in relation to
the operating performance and expected future undiscounted cash flows of the
underlying business. The Company adjusts the net book value of the underlying
assets if the sum of expected future cash flows is less than book value.
Since adoption, no impairment losses have been recognized.
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, 2000:
Total minimum lease payments receivable $ 168,972
Less: unearned interest 8,164
_______
Net investment in sales type leases 160,808
Less: current portion
(included in other current assets) 99,732
______
Long-term net investment in sales-type leases $ 61,076
Future minimum lease payments to be received by the Company under its sales-
type leases at December 31, 2000 was:
2001 $ 106,667
2002 62,305
_______
$ 168,972
Operating Leases
The Company leases certain of its 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 under operating leases
as of December 31, 2000 was $559,472 and the related accumulated amortization
thereon was $240,107.
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(R) Systems. Inventory
consists of the following at December 31, 2000:
Raw materials $ 1,273,895
Work-in-process 1,267,493
Finished goods 813,597
Deferred product
development contract
costs 722,729
_________
$ 4,077,714
Stock-Based Compensation
As permitted under the provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation," the Company has elected to account for stock-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." 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.
Significant Customers and Foreign Sales
The Company recognized approximately 10% of its revenue from one Japanese
customer during the year ended December 31, 2000. The Company recognized
approximately 15% of its revenue from one German customer in 1999. Foreign
sales, substantially all to Western European countries and Japan, were
approximately $5,845,000 and $5,794,000 for the years ended December 31, 2000
and December 31, 1999, respectively.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which was amended by
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities (an Amendment of FASB Statement 133)," (collectively "SFAS
133"). SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Statement will require the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings
or recognized in other comprehensive income until the hedged item is
recognized in earnings. The inefficient portion of a derivative's change in
fair value will be immediately recognized in earnings. The Company will adopt
SFAS 133 in its quarter ending March 31, 2001. Management does not anticipate
that the adoption of SFAS 133 will have a significant effect on earnings or
the financial position of the Company.
On November 16, 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-
27, "Application of EITF Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios to Certain Convertible Instruments." EITF 00-27 requires
that any beneficial conversion feature associated with a convertible
instrument be calculated using the intrinsic value of a conversion option
after first allocating the proceeds received to the convertible instrument
and any other detachable instruments included in the exchange (such as
detachable warrants). As a result of adopting EITF 00-27, the Company has
recorded a one-time, non-cash charge in the fourth quarter of 2000 to
accumulated deficit of $707,131 as the cumulative effect of a change in
accounting for the embedded beneficial conversion feature associated with the
Series C through H Convertible Preferred Stock, of which $318,479 relates to
Series G and H convertible preferred stock which remains outstanding at
December 31, 2000.
Reclassifications
Certain amounts reported in prior years financial statements have been
reclassified to conform with the 2000 presentation.
3. Property and Equipment
Property and equipment consists of the following at December 31, 2000:
ROBODOC and NeuroMate System equipment $ 860,261
Other equipment 2,052,970
Furniture and fixtures 304,547
Leasehold improvements 43,669
_________
3,261,447
Less accumulated depreciation (2,505,662)
_________
$ 755,785
4. Investment in Marbella High Care B.V.
As of December 31, 2000, the Company owned approximately 24% 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 $0 and $480,000 for the years ended
December 31, 2000 and 1999, respectively. These charges are included in other
income (expense). As of December 31, 2000 and 1999, the Company's investment
in MBHC has been reduced to $0 in accordance with APB No. 18, "The Equity
Method of Accounting for Investments in Common Stock."
5. Bank Loan and Note Payable
Bank loan consists of the following at December 31, 2000:
Revolving line of credit through July 2001 with an available
amount of $43,000 at December 31, 2000, with interest accruing
at 7.15% per annum $ 42,960
The bank loan is secured by substantially all of ISS-SA's tangible assets
(with a net book value of approximately $1.8 million at December 31, 2000)
and is guaranteed by the Company.
The Company has an interest free loan from a grant organization for the
development of a new neurological system with an outstanding balance of
$143,200 at December 31, 2000. In the event of failure of the project, the
Company will have to repay approximately $36,000 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, 2000.
6. Stockholders' Equity
Common Stock
At December 31, 2000 the Company has reserved a total of 25,099,248 shares of
common stock for future issuance pursuant to Series G & H Convertible
Preferred Stock, warrants and options outstanding.
The Company issued shares of common stock to Trinity Capital Advisors, Inc.
for financial advisory services performed in connection with the sale of a
series of convertible preferred stock as follows:
Number of Fair Value at
Series Date 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 July 1999 4,284 13,923
F February 2000 25,000 63,280
G May 2000 5,000 6,875
In December 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 warrants to purchase an additional 11,700,000
shares of common stock under a Stock and Warrant Purchase Agreement dated
October 1, 1999. The purchase price for the shares and warrants was $4
million. The warrants vest immediately and are exercisable at $1.02656 per
share. Warrants to purchase 5,700,000 shares of common stock have been
cancelled and warrants to purchase 2,000,000 shares of common stock have
expired. The remaining 4,000,000 warrants are exercisable for three years
after the date of issue. None of the warrants have been exercised as of
December 31, 2000.
The Company established an Employee Stock Purchase Plan in 1998. The plan
provides all eligible employees an opportunity to acquire an ownership
interest in the Company on a payroll deduction or other compensation basis at
a 15% discount. The plan is intended to qualify as an employee stock purchase
plan under Section 423 of the Code. The plan covers an aggregate of 300,000
shares of the Company's common stock. At December 31, 2000, no offerings have
been made to employees.
Equity Line of Credit
In April 2000, the Company entered into a three year, $12,000,000 Private
Equity Line of Credit Agreement ("the Line") with Triton West Group, Inc.
("Triton"). Under the terms of the agreement, the Company may sell shares of
common stock to Triton at a price equal to 85% of the lowest bid price during
the nine trading days commencing two trading days prior to the delivery of a
put notice to Triton. The number and dollar amount of shares that may be
purchased on each closing date is based upon a formula that varies with the
market price and trading volume of the common stock. Activity under the Line
from its inception through May 31, 2001 was:
Date of Put Shares Issued Proceeds
November 2, 2000 282,353 $ 75,000
January 22, 2001 806,723 150,000
January 23, 2001 1,344,538 250,000
February 9, 2001 882,353 150,000
March 30, 2001 745,099 57,000
April 19, 2001 784,314 60,000
In April 2000, the Company issued 5,000 shares of common stock (with a fair
value at date of issue of $11,000) to Trinity Capital Advisors, Inc. for
financial advisory services performed in connection with the Line.
Warrants
As part of a 1995 Stock Purchase Agreement, the Company sold a warrant to
purchase 1,386,390 shares of Series D Preferred Stock at $0.01 per share, and
in 1996 sold a warrant to purchase 693,194 shares of Series D Preferred Stock
at $0.01 per share. In 1997, the Stock Purchase Agreement was amended so that
these combined warrants to purchase 2,274,066 shares of Series D Preferred
Stock would be exercisable for only 2,274,066 shares of common stock at $0.01
to $0.07 per share. Warrants for 42,421 shares of common stock were exercised
in December 2000. The remaining warrants expire on December 31, 2005.
In 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 warrants to purchase
3,272,754 shares of common stock at $0.10 per share which expire in November
19, 2001. The Company sold to its underwriter warrants to purchase an
additional 343,281 common shares at an adjusted exercise price of $1.54 per
share as of December 31, 2000, subject to future adjustment in certain
events, at any time during the period expiring November 19, 2001. In
addition, the Company issued 708,540 warrants to underwriters to purchase
common stock or warrants. Each warrant entitles the holder to purchase one
share of common stock or warrants at an adjusted exercise price of $1.54 per
share as of December 31, 2000, subject to future adjustment in certain
events, at any time during the period expiring November 19, 2001. 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.
In connection with a 1997 European offering, the Company sold to its
underwriters warrants to purchase 338,412 shares. Each of the warrants
entitles the holder to purchase one share of common stock at an adjusted
exercise price of $1.91 per share as of December 31, 2000, subject to future
adjustments in certain events, at any time during the period expiring
November 21, 2002.
In 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) as payment for services performed in connection with the
acquisition of ISS-SA. The warrants have an exercise price of $1.78 per share
and expire in September 2002.
The following table summarizes information about warrants issued in
connection with each series of convertible preferred stock:
Series Warrants Issued Exercise Price
A 44,000 $2.00
B 12,500 2.28
C 9,375 2.15
D 25,000 3.41
E 37,500 4.39
F 125,000 2.38
G 63,000 1.63
H 500,000 .93 to 1.02
The warrants are exercisable upon vesting and expire between March 3, 2002
and February 17, 2004. 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,
2000.
In September 2000, the Company issued a warrant to purchase 35,000 shares of
common stock (with an aggregate estimated fair value of $14,350) to Triton in
connection with the Equity Line of Credit financing. The warrant is
exercisable at $0.86 per share during the period commencing March 15, 2001
and ending September 14, 2003.
Preferred Stock
The Company's Articles of Incorporation 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, the Company has received aggregate net proceeds of
approximately $14.1 million from the sale of eight series of convertible
preferred stock. Information concerning these convertible preferred stock
financings is set forth below:
Shares 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 8, 2000 2,000 1,850,861
G May 30, 2000 1,800 1,610,555
H August 17, 2000 1,200 1,066,991
Each series of convertible preferred stock has a stated value of $1,000 per
share and is convertible into common stock at conversion prices equal to 80%
or 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 determined by
dividing the stated value of the number of shares of convertible preferred
stock to be converted by the conversion price. In February 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.
At December 31, 2000, 544 shares of Series G convertible preferred stock and
545 shares of Series H convertible preferred stock were outstanding. No other
shares of preferred stock were outstanding. The number of shares of common
stock issued upon conversion and the average actual conversion price for each
series of convertible preferred stock converted into shares of common stock
at December 31, 2000 was as follows:
Series Common Shares Price
A 2,867,135 $2.23
B 459,831 $2.17
C 563,497 $1.33
D 1,605,203 $1.25
E 1,490,101 $1.22
F 2,143,242 $0.93
G 2,422,573 $0.51
H 2,399,337 $0.27
From January 1, 2001 through May 31, 2001, additional shares of the Series G
and H were converted, resulting in the issuance of an additional 8,645,850
shares of common stock.
The value assigned to the beneficial conversion feature is based upon the
difference between the maximum conversion price and the quoted market price
of the Company's common stock on the date the convertible preferred stock was
sold (the "Discount"). The Discount has been accreted using the straight-line
method over the conversion period. The following table sets forth the value
assigned to the beneficial conversion feature and its accretion for each
series of convertible preferred stock.
2000 1999
Series Value Accretion Accretion
A $ 616,000 $ - $ 239,736
B 176,471 - 176,471
C 143,793 - 143,793
D 352,941 - 352,941
E 529,559 19,853 509,559
F 2,652,140 2,652,140 -
G 428,529 428,529 -
H 300,147 300,147 -
_________ __________ _________
$ 5,199,580 $3,400,669 $ 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.
Stock Option and Long-Term Performance 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
return for new and additional options granted under the 1995 Plan. Officers,
employees, directors, and consultants to the Company may participate in the
Plans. Options granted under the Plans may be incentive stock options or non-
statutory stock options. 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.
In 2000 the Company established a long-term performance plan, the 2000 Long-
Term Performance Plan (the "2000 Plan"). The 2000 Plan provides for stock
awards of up to 1,000,000 shares. The 2000 Plan permits the grant of any form
of award, including, but not limited to stock options, stock appreciation
rights, stock, and cash awards, whether granted singly, in combination or in
tandem. Stock options are granted at an exercise price of not less than 100%
of fair market value (as defined in the 2000 Plan) on the date of grant and
it is expected that options and stock appreciation rights, will typically be
granted for periods of 10 years or less. The 2000 Plan also permits the grant
of other awards in stock or denominated in units of stock, which may be
subject to restrictions or transfer and/or forfeiture provisions.
The Company also has a 2000 Stock Award Program under which up to 500,000
shares of common stock may be granted to employees and consultants, but not
officers and directors of the Company. 3,376,624 shares of the Company's
common stock have been reserved for issuance under the Plans and the 2000
Stock Award program.
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 2000 and 1999, respectively: risk-free
interest rates of 5.0% and 6.0%; dividend yield of 0%; volatility factors of
the expected market price of the Company's common stock of 0.995 and 0.91;
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:
December 31,
2000 1999
Pro forma net loss $(12,923,286) $(11,908,599)
Pro forma basic net loss per share ($0.71) ($1.51)
The following table summarizes activity under the Plans for the years ended
December 31, 1999 and 2000:
Weighted
Number Average
of Shares Exercise Price
Outstanding at December 31, 1998
(at $.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 $.10 per share) (80,436) $0.07
Outstanding at December 31, 1999
(at $.07 to $8.63 per share) 1,369,344 $2.01
Granted (at $1.00 to $3.44 per share) 744,000 $1.86
Cancelled (at $1.50 to $8.56 per share) (220,000) $3.50
Exercised (at $.07 to $1.65 per share) (121,707) $0.27
Outstanding at December 31, 2000
(at $.07 to $8.63 per share) 1,771,637 $1.89
The weighted average exercise price of options granted in 2000 and 1999 with
option prices equal to the fair market value of our stock on the grant date
was $1.86 and $3.13, respectively. The weighted average grant date fair value
of these options was $1.31 in 2000 and $2.08 in 1999.
No options with option prices less than the fair market value of our stock on
the date of grant were granted to employees in 2000. The weighted average
exercise price of options granted in 1999 with option prices less than the
fair market value on the date of grant was $1.50 and the weighted average
grant date fair value of these options was $2.33.
The following table summarizes information related to options outstanding and
options exercisable at December 31, 2000:
Weighted
Average Weighted
Weighted Remaining Average
Exercise Options Average Contractual Options Exercise
Price Outstanding Exercise Price Life (in Years) Exercisable Price
$0.00-$ .99 532,824 $0.07 4.9 532,824 $0.07
1.00- 1.99 668,000 $1.78 9.0 32,967 $1.80
2.00- 2.99 78,704 $2.81 8.8 18,839 $2.75
3.00- 3.99 354,000 $3.14 7.7 210,553 $3.14
4.00- 4.99 17,000 $4.78 7.4 11,042 $4.80
5.00- 6.99 92,109 $5.24 6.0 87,771 $5.22
7.00- 8.88 29,000 $7.88 6.7 23,376 $7.89
1,771,637 $1.89 7.3 917,372 $1.64
In 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, generally ranging 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 in deferred stock
compensation relating to canceled options in 1999. Compensation expense of
$10,513 and $75,125 was recorded during the years ended December 31, 2000 and
1999, respectively, relating to these options.
7. Income Taxes
The income tax provisions for the years ended December 31, 2000 and 1999 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, 2000 and 1999 are as follows:
2000 1999
Deferred tax assets:
Net operating loss carryover $ 8,072,000 $ 8,085,000
Research and development credit 1,399,000 1,261,000
Research and development 511,000 417,000
Accrued product retrofit costs 83,000 83,000
Inventory 356,000 192,000
Depreciation 354,000 224,000
Stock compensation 289,000 285,000
Loss on investment 127,000 319,000
Deferred income 681,000 506,000
Other 163,000 100,000
12,035,000 11,472,000
Less valuation allowance (12,035,000) (11,472,000)
Net deferred taxes $ - $ -
The Company expects the carryforward amounts will not be used 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 as of December 31, 2000 and
1999 are as follows:
2000 1999
Federal benefit expected at
statutory rates $(2,586,799) $(3,445,977)
Domestic net operating loss with
no current benefit 2,208,715 2,978,323
Effect of foreign loss with no
current benefit 369,811 467,654
Other taxes - (13,155)
Other non-deductible items 8,273 -
$ - $ (13,155)
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. Subsequent to this change of ownership an additional
change in ownership may have occurred. As a result, the net operating loss
carryforwards may be further limited.
The Company has at December 31, 2000 a net operating loss carryover of
approximately $29,475,000 for federal income tax purposes which expires
between 2005 and 2019, a net operating loss carryforward of approximately
$5,618,000 for state income tax purposes which expires through 2005, and a
net operating loss carryforward of approximately $1,795,000 for foreign
income tax purposes of which approximately $769,000 expires between 2001 and
2005. The Company has at December 31, 2000 research and development credit
carryovers of approximately $820,000 and $875,000 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, 2000 and 1999. The valuation allowance increased by
$563,000 in 2000 and $3,760 in 1999.
8. Net Loss Per Share Information
At December 31, 2000, outstanding options to purchase 1,771,637 shares of
common stock (with exercise prices ranging from $0.01 to $8.88), 11,843,560
outstanding warrants to purchase 16,067,324 shares of common stock (with
exercise prices from $0.01 to $4.39), and 5,445,215 shares of common stock
issuable upon conversion of Series G and H 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. The exercise price and the
ultimate number of shares of common stock issuable upon conversion of the
warrants are subject to adjustments based upon the occurrence of certain
future events.
9. Commitments
The Company leases its U.S. facility under a non-cancelable operating lease
expiring in June 2005. The lease provided for rent of approximately $30,000
per month during 2000 (plus real estate taxes and assessments, utilities and
maintenance) and is 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 which expires in 2003. The lease provides for rent of approximately
$7,000 per month.
Future payments under non-cancelable facility operating leases are
approximately as follows:
2001 $ 450,000
2002 457,000
2003 465,000
2004 392,000
2005 165,000
$ 2,009,000
Aggregate rental expense under these leases amounted to $440,000 and $422,000
during the years ended December 31, 2000 and 1999, respectively.
Future minimum payments under non-cancelable equipment operating leases are
approximately as follows:
2001 $ 11,000
2002 11,000
2003 11,000
2004 11,000
$ 44,000
Rental expense associated with these leases during each of the years ended
December 31, 2000 and 1999 was approximately $11,000.
10. 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.
11. NIST Grant
During 1994, the Company was awarded a $1,960,000 National Institute of
Science and Technology ("NIST") grant from the U.S. Department of Commerce.
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 in proceeds under the grant during the year ended
December 31, 1999.
12. Distribution Agreement Settlement
In May 2000, the Company terminated its distribution agreement with the
German corporation Spark 1st Vision GmbH & Co. KG. On termination, ISS
received payment of approximately $928,000 consisting of pro rata licensing
fees of $740,000, which are included in other income, and reimbursed selling
expenses of $188,000, which are offset against selling, general and
administrative expenses.
13. Unaudited Quarterly Financial Data
Based on the guidance provided by the SEC staff in SAB No. 101, the Company
determined that it was preferable to recognize revenue on delivered systems
only when training and installation are complete and customer acceptance
provisions, if any, have been met. The Company's previous revenue recognition
policy was to recognize system revenue upon delivery. The Company recorded a
non-cash reduction in its consolidated loss of $581,907, or $0.04 per share,
to reflect the cumulative effect of the accounting change as of the beginning
of the fiscal year. The Company's revenue recognition policies are disclosed
in Note 2.
As described in Note 6 to the consolidated financial statements, in February
2000 the Company redeemed for cash 1,185 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 excess of the fair value of the consideration over the
related carrying amount of the convertible preferred stock was $209,176 and
has been added to the net loss to arrive at net loss applicable to common
stockholders.
Quarter ended Quarter ended
March 31, 2000 June 30, 2000
Reported Restated Reported Restated
Net sales $730,144 $1,868,051 $1,310,882 $1,111,882
Gross margin $387,804 $898,340 $754,729 $674,729
Net loss before
cumulative effect of
accounting changes $(2,640,257) $(2,058,350) $(906,960) $(986,960)
Cumulative effect of
accounting change
under EITF 00-27 - - - -
Cumulative effect of
accounting change
under SAB 101 - (581,907) - -
Net loss before preferred
stock accretion and
dividend (2,640,257) (2,640,257) (906,960) (986,960)
Preferred stock accretion
and dividend (2,671,993) (2,881,169) (317,647) (317,647)
Net loss to common
stockholders $(5,312,250) $(5,521,426) $(1,224,607)$(1,304,607)
Per share data:
Basic and diluted net
loss per common share
before cumulative effect
of accounting changes ($0.34) ($0.32) ($0.07) ($0.08)
Cumulative effect of
accounting change under
EITF 00-27 - - - -
Cumulative effect of
accounting change under
SAB 101 - (0.04) - -
Basic and diluted net
loss per common share ($0.34) ($0.36) ($0.07) ($0.08)
Shares used in computing
per share data 15,577,822 15,577,822 16,905,472 16,905,472
Quarter ended Quarter ended
September, 2000 December 31, 2000
Reported Restated
Net sales $2,201,689 $2,400,689 $553,641
Gross margin $1,091,281 $1,171,281 $(300,835)
Net loss before
cumulative effect of
accounting changes $(1,668,762)$(1,588,762) $(2,974,161)
Cumulative effect of
accounting change
under EITF 00-27 - - (707,131)
Cumulative effect of
accounting change
under SAB 101 - - -
Net loss before preferred
stock accretion and
dividend (1,668,762) (1,588,762) (3,681,292)
Preferred stock accretion
and dividend (411,029) (411,029) -
Net loss to common
stockholders $(2,079,791) $(1,999,791) $(3,681,292)
Per share data:
Basic and diluted net
loss per common share
before cumulative effect
of accounting changes ($0.12) ($0.11) ($0.13)
Cumulative effect of
accounting change under
EITF 00-27 - - (0.03)
Cumulative effect of
accounting change under
SAB 101 - - -
Basic and diluted net
loss per common share ($0.12) ($0.11) ($0.16)
Shares used in computing
per share data 17,927,065 17,927,065 22,109,690
Quarter ended Quarter ended Quarter ended Quarter ended
March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999
Net sales $2,286,723 $629,236 $2,269,044 $1,055,839
Gross margin $1,181,344 $182,998 $1,027,558 $284,999
Net loss
before
preferred stock
accretion $(2,306,015) $(2,429,644) $(1,840,561) $(3,579,201)
Preferred stock
accretion (244,638) (263,969) (659,996) (253,897)
Net loss
applicable to
common
stockholders, $(2,550,653) $(2,693,613) $(2,500,557) $(3,833,098)
Per share data:
Basic and diluted
net loss per common
share ($0.45) ($0.40) ($0.28) ($0.49)
Shares used in
computing per
share data 5,675,744 6,713,469 8,873,184 7,896,171
EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-44093, 333-70779, 333-53188, 333-53190) pertaining to the 1995 Stock Option Plan, As Amended, 1998 Stock Option Plan and Employee Stock Purchase Plan, 2000 Stock Award Plan, and 2000 Long-Term Performance Plan of Integrated Surgical Systems, Inc. of our report dated April 24, 2001, with respect to the consolidated financial statements of Integrated Surgical Systems, Inc. included in this Annual Report (Form 10-KSB) for the year ended December 31, 2000. ERNST & YOUNG LLP Sacramento, California June 20, 2001