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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 31, 1996
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Commission file number 1-12471
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INTEGRATED SURGICAL SYSTEMS, INC.
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(Name of Small Business Issuer in its Charter)
Delaware 68-0232575
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
829 West Stadium Lane, Sacramento, CA 95834
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(Address of Principal Executive Offices) (Zip Code)
(916) 646-3487
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange on Which
Title of Each Class Each Class is Registered
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Common Stock, $.01 par value The Pacific Stock Exchange Incorporated
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Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /X/
Revenues for the issuer's most recent fiscal year were $2,280,311.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the closing price at which the stock was sold on March
14, 1997 was $13,973,844.
As of March 14, 1997, the issuer had 3,366,028 shares of Common Stock,
$.01 par value, outstanding.
Transitional Small Business Disclosure Format: Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Introduction
Integrated Surgical Systems, Inc. (the "Company") was incorporated
under the laws of the State of Delaware on October 1, 1990. The Company's
executive offices are located in Sacramento, California.
On November 21, 1996, the Company successfully completed an initial
public offering ("IPO") of 1,525,000 shares of its Common Stock and Warrants to
purchase an additional 1,753,750 shares of Common Stock. The initial public
offering price of the Common Stock was $5.00 per share and the Warrants were
$.10 per Warrant. The Company received net proceeds of approximately $6,137,000.
Business of the Company
The Company develops, manufactures, markets and services
image-directed, computer-controlled robotic products for surgical applications.
The Company's principal product is the ROBODOC(R) Surgical Assistant System (the
"ROBODOC System"), consisting of a computer-controlled surgical robot and the
Company's ORTHODOC(R) Presurgical Planner (the "ORTHODOC"). The ROBODOC System
has been used for primary total hip replacement ("THR") surgery on over 800
patients worldwide. The Company believes its "active" robotic system is the only
available system that can accurately perform key segments of surgical procedures
with precise tolerances generally not attainable by traditional manual surgical
techniques. The ROBODOC System also allows the surgeon to prepare a preoperative
plan specifically designed for the characteristics of the individual patient's
anatomy. The technology for the ROBODOC System was initially developed at the
University of California, Davis, in collaboration with International Business
Machines Corporation ("IBM").
The ORTHODOC is a computer workstation that utilizes the Company's
proprietary software for preoperative surgical planning. The ORTHODOC is
included as part of the ROBODOC System and may be marketed separately by the
Company. The ORTHODOC converts computerized tomography ("CT") scan data of a
patient's femur into three-dimensional images, and through a graphical user
interface allows the surgeon to examine the bone more thoroughly and to select
the optimal implant for the patient using a built-in library of available
implants. A tape of the planned surgical procedure, developed by the ORTHODOC,
guides the surgical robot arm of the ROBODOC System to accurately mill a cavity
in the bone, thus allowing the surgeon to properly orient and align the implant.
Prior to the primary surgery, three titanium locator pins are placed in the
patient's femur in an out-patient procedure. These locator pins are used during
the primary procedure to orient the ROBODOC System to the ORTHODOC preoperative
plan. Non-clinical scientific data published by scientists from the Company and
IBM demonstrate that as a result of the precise milling of a
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cavity, the ROBODOC System achieves over 95% bone-to-implant contact, as
compared to an average of 20% bone-to-implant contact when surgery is performed
manually.
THR surgery involves the insertion of an implant into a cavity created
in the patient's femur. Precise fit and correct alignment of the implant within
the femoral cavity are generally considered key factors in the long-term success
of THR surgery. In conventional THR surgery, a bone cavity is cut in the shape
of the implant manually with metal tools, and the surgical plan, including the
selection of the size and shape of the implant, is generally formulated based
upon patient data obtained from two-dimensional x-ray images of the patient's
femur. Based upon clinical experience to date in Germany with the ROBODOC
System, patients have become weight-bearing in a shorter period than generally
experienced by patients who have had this surgery performed manually. In
addition, worldwide clinical data indicates that intraoperative fractures have
been dramatically reduced in the THR surgeries performed with the ROBODOC System
(no intraoperative fractures have resulted from THR surgeries performed with the
ROBODOC System to date). The Company also believes fewer hip revision surgeries
(implant replacements) may be necessary for patients who have had primary THR
surgery performed with the ROBODOC System, as compared to patients who have this
surgery performed manually.
In the past, a majority of THR implants have been held in place with
acrylic cement, which fills the spaces between the implant and the bone, thereby
anchoring the implant to the femoral cavity ("cemented implants"). During the
1980's, implants that did not require cement ("cementless implants") were
developed with materials designed to stimulate bone in-growth. The selection of
a cemented or cementless implant generally is based upon a patient's bone
condition and structure, age and activity level. Typically, cemented implants
are used for older, less active patients. Furthermore, most implants require
replacement within five to 20 years of the first operation. The software package
developed by the Company in collaboration with IBM and Johns Hopkins University
reduces the distortion of the x-ray images of the patient's femur used in
planning hip revision surgery caused by the metal in the existing implant.
Consequently, the surgeon would have a clearer view of the remaining bone in
planning hip revision surgery and thereby be better able to remove fragmented
cement without removing any of the remaining thin thigh bone.
Products
ROBODOC System. The ROBODOC System, whose principal components are a
computer-controlled, five-axis surgical robot and the Company's ORTHODOC
Presurgical Planner, is an active robotic system that can accurately perform key
segments of surgical procedures with precise tolerances generally not attainable
by traditional surgical techniques. The ROBODOC System allows the surgeon to
prepare a preoperative plan customized to the characteristics of the individual
patient's anatomy and generates a tape instructing the computer-controlled robot
to implement the surgical plan. The ROBODOC System includes a display console
for screen prompts and surgical plan
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simulation, a control cabinet for computers and other electronic components, and
proprietary applications and robot control software. The surgeon communicates
with the robot via a sterile controller. Attendant supplies include custom
surgical drapes, specially designed cutters, a leg- holding device (fixator) and
a bone motion-detecting apparatus.
ORTHODOC. The ORTHODOC is a Pentium(R)-based computer workstation that
utilizes the Company's proprietary software for preoperative surgical planning.
The ORTHODOC 500, an integral part of the ROBODOC System, may be sold separately
as a surgical planner. The ORTHODOC 500 converts CT scan data of a patient's
femur into three dimensional models of the femur on a high-resolution monitor,
and through a graphical user interface permits the surgeon to examine the bone
more thoroughly, select the optimal implant for the patient using a built-in
library of available implants and select the position of the implant in the
femur prior to surgery. The ORTHODOC 100, which will be sold only on a
stand-alone basis, converts digitized x-rays of a patient's femur into pseudo
three-dimensional images for planning surgery.
Potential Future Applications
The Company intends to offer ROBODOC System customers separate software
packages for each new orthopaedic application if, as and when developed by the
Company. Consequently, the Company's customers would be able to use the ROBODOC
System as the platform to perform a variety of orthopaedic surgical procedures
without incurring significant additional hardware costs. The Company plans to
develop software packages for the following orthopaedic surgical procedures for
use with the ROBODOC System:
Hip Revision. Hip revision surgery generally is required to replace
loose or otherwise failed implants. Most implants require replacement in five to
20 years after the first operation. Hip revision surgery generally is difficult,
time consuming and complex. The metal in the existing implant distorts x-ray
images used for planning the surgery, obstructing the view of the remaining bone
and, if a cemented implant is to be replaced, the location of the fragmented
cement. The removal of the fragmented cement without removing any of the
remaining thin bone structure is a major challenge for the surgeon.
The Company is developing a software package for hip revision surgery
using the ROBODOC System, in collaboration with IBM and Johns Hopkins
University. The development of the hip revision application is being funded in
part by a grant from the National Institute for Standards and Technology
(Advanced Technology Program) of the United States Department of Commerce. See
"Description of Business -- Research and Development." The first phase of the
hip revision project relates to the development and implementation of software
to create a clearer image of the remaining bone and fragmented cement in
preparing the surgical plan. The second phase of the project involves its
validation in a clinical setting. The Company believes that its hip revision
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software will improve surgical planning and enable the five-axis robot to remove
cement more precisely than if the hip revision procedure were performed
manually. The Company began to conduct clinical trials of the hip revision
application in Europe during the fourth quarter of 1996. Upon completion of the
clinical trials, the Company intends to offer software packages for the hip
revision application to its customers.
Total Knee Replacement. The Company plans to develop a software package
for total knee replacement ("TKR") surgery using the ROBODOC System. The
proposed software package to be developed for TKR surgery is intended to enable
the ROBODOC System to select the optimal implant for the patient and make
accurate cuts in the bone, thus allowing the surgeon to properly orient and
align the implant. The proposed software package to be developed by the Company
for TKR surgery performed with the ROBODOC System, if and when developed, is
intended to result in a precise and accurate fit for implants that are properly
sized and placed, regardless of bone quality. Furthermore, the Company believes
that if and when this software package is developed, implant longevity and the
prognosis for restored biomechanics will be significantly improved as a result
of TKR surgery performed with the ROBODOC System.
Vertebral Pedicle Screws. Pedicle screws are used to fuse vertebrae in
need of repair due to trauma or herniated disc disease. The procedure involves
the placement of screws straight down the center of an irregular section of a
fragile bone only twice the diameter of the screw itself. Precise placement of a
screw affects the outcome of the surgery. Misplacement of a screw can result in
failure of the repair, trauma to the adjacent spinal cord, or rupture of nearby
blood sinuses which can hemorrhage severely. The Company believes that if and
when the development of the proposed software package for this surgical
procedure is completed, the ROBODOC System will be capable of performing this
surgical procedure more safely and effectively than surgery performed manually
since the computer-controlled robot is better able to precisely orient its tool
in a manner compatible with what is required for screw placement.
Acetabulum Replacement and Revision. The Company plans to complement
the THR femoral replacement application with acetabular cup planning and bone
preparation for hip socket replacement surgery. Currently, surgeons estimate the
size of the cup-shaped cavity in hip socket surgery using x-rays, which are
subject to distortion. Working in a narrow space with a limited view, the
surgeon ultimately selects the final cup size through trial and error. Due to
the limitations of available surgical tools, the surgeon is obliged to use a
hemispheric reamer and cup, although the human acetabulum (hip socket) is an
irregular shape. The Company believes that the software for this application, if
and when developed, would enable the computer-controlled robot to prepare an
accurate bed for the implant, based on its specifications, and could prepare an
irregularly shaped socket for a custom or anatomically-shaped acetabular
component. The three-dimensional capability of the ORTHODOC would better enable
it to determine and display the irregular shape of the
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acetabulum and instruct the robot to prepare the proper socket. This procedure
potentially could solve the problem of leg-length discrepancies which often
originate at the acetabulum.
Osteotomies. Osteotomies are precise cuts in bone intended to reshape
or realign abnormal or deformed structures. The Company's engineers have
generated a detailed work plan to adapt the ROBODOC System for use in performing
long-bone osteotomies on femurs and tibias (i.e., shin bones). The proposed
software for this application, if and when developed, is intended to enable the
surgeon using the views of the bone created by the ORTHODOC from CT scan data,
to make trial cuts, remove bone and manipulate the remaining fragments, and
experiment with the appropriate placement of plates and screws. The surgeon's
final plan would be saved on a tape that would instruct the robot where to make
saw cuts. The computer-controlled, five-axis robot would then orient itself in
space by using topographical features of the operative bone. A fixator would
secure the bone to the robot. The computer-controlled robot would then pre-place
screw holes to facilitate the final realignment and make the actual cuts.
Sales, Marketing and Customers
The ROBODOC System cannot be marketed in the United States until
clearance or approval is obtained from the Food and Drug Administration (the
"FDA"). The Company has received 510(k) clearance from the FDA to sell the
ORTHODOC 500 in the United States.
The Company has commenced marketing the ROBODOC System to orthopaedic
and trauma surgeons and hospitals in Western Europe, through direct sales and
arrangements with implant manufacturers. During February, 1997, the Company
hired a European resident Marketing and Sales Manager. Presentations to
potential customers focus on the clinical benefits obtained by patients, and the
potential financial and marketing benefits obtained by hospitals and surgeons.
The Company promotes its products in Europe through presentations at trade shows
and advertisements in professional journals and technical and clinical
publications, as well as through direct mail campaigns. A significant portion of
the Company's financial resources will be used for marketing and sales
activities with respect to Company's products, principally in Europe, and to
establish a sales and marketing staff. To date, the Company's direct sales
efforts have been primarily in Germany. Over 500 THR surgeries have been
performed with the ROBODOC System at the Berufsgenossenschaftliche Unfallklinik
("BGU") clinic in Frankfurt, Germany since August 1994. As result of a
significant increase in the number of THR surgeries performed at the clinic with
the ROBODOC System, the BGU clinic purchased a second ROBODOC System in the
second quarter 1996.
To accelerate sales and reduce the lengthy sales cycle, the Company has
entered into informal leasing arrangements with two major multinational leasing
companies. Based upon lease financing proposals offered to customers in Germany
by these leasing companies, the monthly lease payment
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for a five-year lease for the ROBODOC System would be equivalent to the average
price of one THR surgery. No leasing transactions have been consummated under
these arrangements as of December 31, 1996.
The Company intends to commence marketing the ORTHODOC to hospitals,
orthopaedic surgeons and implant manufacturers in the United States and Western
Europe in late 1997. See "Description of Business -- Government Regulation."
During the years ended December 31, 1995 and 1996, export sales of
ROBODOC Systems amounted to approximately $165,000 and $2,280,000, respectively.
Manufacturing
The Company's manufacturing process consists primarily of final
assembly of purchased components, testing of the products and packaging, and is
conducted at its facility in Sacramento, California, which currently can support
the construction of two ROBODOC Systems per month. The Company purchases
substantially all components for its ROBODOC System from outside vendors, then
assembles these parts and installs its proprietary software. The ROBODOC System
consists of the robot base and the control cabinet, which are connected through
four interface cables, and the ORTHODOC. The robot is supplied by a sole source
vendor, Sankyo Seiki of Japan, which customizes the robot to the Company's
specifications for use with the ROBODOC System. Upon delivery of a robot, the
Company performs a series of tests to verify proper functioning. The
customization and supply process for the robot currently requires four months
lead time. While the robot can be obtained from other suppliers with appropriate
modifications and engineering effort, there can be no assurance that delays
resulting from the required modifications or engineering effort to adopt
alternative components would not adversely affect the Company. Ancillary items
required to perform a robotic THR, including devices for fixing the hip and
attaching it to the robot, numerous probes and cutter bearing sleeves, are
assembled and tested separately.
Consumables, including sterile drapes, bone screws, cutters and
pendants, are also manufactured by outside vendors according to the Company's
specification and are inspected upon receipt to ensure that these specifications
are consistently met. The Company purchases these items in quantity and
distributes them on a per order basis. The Company also coordinates the
packaging and sterilization of certain items. The Company's policy is to procure
its consumables from vendors that it approves after ensuring that the goods
comply with the Company's sterilization requirements.
The ORTHODOC consists of a pentium-based computer workstation and
associated peripherals, and includes the Company's proprietary software. The
Company purchases and then tests the computer as a complete package. A computer
board is added to interface to CT/x-ray scanner input modules and, if required,
the ROBODOC System's tape output drive. The hard drive
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is reformatted to accept the operating system, and appropriate ORTHODOC software
is installed. The unit is built configured for 110 or 220 AC volt operation.
The Company's manufacturing facilities are subject to periodic
inspection by the FDA for compliance with Good Manufacturing Practices ("GMP").
In addition, the Company's products will be required to satisfy European
manufacturing standards for sale in Europe. The Company believes that it is in
compliance with GMP and expects to obtain ISO-9000 certification, which will be
required for sales of its products in Europe after June 14, 1998, by the end of
1997. See "Description of Business -- Government Regulation."
Research and Development
Since its inception, the Company's research and development activities
have focused on the development of innovative image-directed computer-controlled
robotic products for surgical applications and operating software for these
products. The Company incurred research and development expenses of
approximately $2,469,000 and $2,361,000 in connection with the development of
the ROBODOC System and the ORTHODOC for the years ended December 31, 1996 and
December 31, 1995, respectively.
The Company is developing a software package for hip revision surgery,
in collaboration with IBM and Johns Hopkins University, funded in part by a
grant from the National Institute for Standards and Technology (Advanced
Technology Program) of the United States Department of Commerce ("NIST"). Hip
revision surgery generally is difficult, time consuming and complex. The metal
in the existing implant distorts x-ray images used for planning the surgery,
obstructing the remaining bone and, if a cemented implant is to be replaced, the
location of the fragmented cement. The removal of the fragmented cement without
removing any of the remaining thin bone structure is a major challenge for the
surgeon. The first phase of the hip revision project relates to the development
and implementation of software to create a clearer image of the remaining bone
and fragmented cement in preparing the surgical plan. The second phase of the
project involves its validation in a clinical setting. The Company believes that
its hip revision software will improve surgical planning for hip revision
surgery and would enable the five-axis robot to remove cement more precisely
than if the hip revision procedure was performed manually.
Under the terms of the NIST grant, the Company, IBM and Johns Hopkins
University are entitled to reimbursement for 49% of the expenses incurred in
connection with the project for a period of three years. The maximum amount of
expenses subject to reimbursement under the grant is approximately $4,000,000,
so that not more than approximately $1,960,000 in expenses may be reimbursed in
the aggregate to the Company, IBM and Johns Hopkins University under the grant.
The Company has incurred research and development expenses of approximately
$460,000 in connection with the hip revision project through December 31, 1996.
As of December 1996, the
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Company had received $135,458 distributed under the grant. See "Description of
Business--Potential Future Applications". The Company began clinical trials for
the hip revision application in Europe in the last quarter of 1996.
During December, 1996, the Company was awarded an order from Johnson &
Johnson's Professional ("J & J") to add J & J's S-ROM hip prostheses to its
software library. When completed, this will allow orthopedic surgeons to plan
hip replacement surgeries using J & J's line of implants. The Company will
further expand the library of implants used at clinical sites to include
multiple implant lines, revision stems, and custom-made prostheses. The Company
has also commenced preliminary work with respect to the application of the base
technology for total knee replacement surgery.
As of March 14, 1997, the Company's engineering staff was comprised of
18 engineers (including four Ph.D.s and five temporary engineers) in a variety
of specialities.
Competition
The principal competition for the ROBODOC System is manual surgery
performed by orthopaedic surgeons, using surgical power tools and manual
devices. The providers of these instruments are the major orthopaedic companies,
which include Howmedica, Inc. (a subsidiary of Pfizer, Inc.), located in New
York; Zimmer, Inc. (a subsidiary of Bristol-Myers Squibb Company), located in
Indiana; Johnson & Johnson Orthopaedics, Inc. (a subsidiary of Johnson &
Johnson), located in New Jersey; DePuy, Inc. (a subsidiary of Corange Limited),
located in Indiana; Biomet, Inc. located in Indiana; and Osteonics, Inc. (a
subsidiary of the Stryker Corporation), located in New Jersey. Stierlin MAQUET,
a medical device manufacturer located in Germany, has recently announced that it
intends to market a device similar to ROBODOC in early 1998. In addition, there
are companies in the medical products industry, particularly the major
orthopaedic companies, capable of developing and marketing computer-controlled
robotic systems for surgical applications, many of whom have significantly
greater financial, technical, manufacturing, marketing and distribution
resources than the Company, and have established reputations in the medical
device industry. However, the Company believes that it enjoys a significant
competitive advantage over such companies in view of the time required to
develop an image-directed, computer controlled robotic system and to obtain the
necessary regulatory approvals, including the sponsorship of clinical trials.
There can be no assurance that future competition will not have a material
adverse effect on the Company's business.
The Company's ROBODOC System represents a significant technological
advancement with respect to the manner in which THR surgery is performed. The
Company's image-directed, computer-controlled robotic technology is intended to
complement, rather than replace, surgeons in performing THR and other
orthopaedic surgeries. Although there are companies which market
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technologically advanced surgical tools used by surgeons in performing
orthopaedic surgeries, including passive robot systems that direct the surgeon
in planning and performing surgical procedures (e.g., aiming and holding
devices), the Company believes that the ROBODOC System is the only active
robotic system that performs a key segment of THR surgery (i.e., milling a bone
cavity) under the supervision of a surgeon. The cost of the ROBODOC System
represents a significant capital expenditure for a customer, and accordingly may
discourage purchases by certain customers. The Company intends to offer its
customers separate software packages for other orthopaedic applications that may
be developed by the Company. Consequently, the Company's customers would be able
to use the ROBODOC System as the platform to perform a variety of orthopaedic
surgical procedures without incurring significant additional hardware costs.
Warranty and Service
The Company offers a full warranty, covering parts and labor, for the
first year following the purchase of its products, which warranty coverage can
be extended on an annual basis by purchasing a maintenance agreement at a price
of 10% of the original purchase price of the product.
Generally, minor problems have been diagnosed through modem and fixed
on-site by users. The Company has developed a service program using a high
volume clinical site as a model. The Company plans to provide 24-hour turnaround
time for any site. The Company has contracted with a third party in Europe to
service the Company's customer base.
To date, the Company has trained its customers with its in-house
technical staff. The Company has recently contracted with a third-party trainer
in Europe to supplement its in-house staff.
Patents and Proprietary Rights
The Company relies on a combination of patent, trade secret, copyright
and trademark laws and contractual restrictions to establish and protect
proprietary rights in its products and to maintain its competitive position.
The Company has filed four patent applications, and is preparing for
filing additional patent applications covering various aspects of its
technology. In addition, IBM has agreed not to assert infringement claims
against the Company with respect to an IBM patent relating to robotic medical
technology, to the extent such technology is used in the Company's products.
Furthermore, significant portions of the ORTHODOC and ROBODOC System software
are protected by copyrights. IBM has granted the Company a royalty-free license
for the underlying software code for the ROBODOC System. In addition, the
Company has registered the marks ROBODOC and ORTHODOC.
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Government Regulation
The medical devices to be marketed and manufactured by the Company are
subject to extensive regulation by the FDA and, in some instances, by foreign
and state governments. Pursuant to the Federal Food, Drug, and Cosmetic Act of
1976, as amended, and the regulations promulgated thereunder (the "FDC Act"),
the FDA regulates the clinical testing, manufacture, labeling, distribution, and
promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant pre-market clearance or pre-market approval for devices,
withdrawal of marketing clearances or approvals, and criminal prosecution. The
FDA also has the authority to request repair, replacement or refund of the cost
of any device manufactured or distributed by the Company.
Any products manufactured or distributed by the Company pursuant to the
FDA clearances or approvals are subject to pervasive and continuing regulation
by the FDA, including record keeping requirements and reporting of adverse
experiences with the use of the device. Device manufacturers are required to
register their establishments and list their devices with the FDA and with
certain state agencies and are subject to periodic inspections by the FDA and
certain state agencies. The FDC Act requires devices to be manufactured in
accordance with GMP regulations, which impose certain procedural and
documentation requirements upon the Company with respect to manufacturing and
quality assurance activities. Recently adopted GMP requirements, including those
pertaining to design controls, are likely to increase the cost of GMP
compliance.
The Company intends to file a pre-market approval application ("PMA")
with the FDA in mid to late 1997 for approval to market the ROBODOC System in
the United States. The Company intends to make an informal pre-PMA submission of
the clinical data to the FDA. Depending upon the FDA's review of this
submission, the target date for submitting a PMA application could be extended.
There can be no assurance that the PMA application, once submitted, will be
accepted for filing, found approvable, or, if found approvable, will not take
longer than expected to obtain approval, or will not include unfavorable
post-approval restrictions (for example, limitations on the indicated patient
population).
After receipt of PMA approval, if any, the Company expects that the FDA
would consider new surgical applications for the ROBODOC System to be new
indications for use, which generally would require FDA approval of a PMA
supplement or, possibly, a new PMA. The FDA is also likely to require additional
approvals before the agency will permit the Company to incorporate new imaging
modalities (such as ultrasound and MRI) or other new technologies in the ROBODOC
System. The FDA likely will require that such additional approvals be supported
by new clinical data.
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In February 1996, the Company filed a Pre-Market Approval Notification
510(k) submission for the ORTHODOC 500 as a stand-alone device. Such 510(k)
submission is the first product marketing clearance filing made by the Company
with the FDA. In January 1997, the Company received notification from the FDA
that the ORTHODOC 500 has received marketing clearance in the United States .
There can be no assurance that the Company will be able to obtain
necessary regulatory approvals for current products or products under
development on a timely basis, or at all, or that the Company will have the
necessary resources to obtain such approval. Delays in receipt of or failure to
receive such approvals, the loss of previously received approvals, or failure to
comply with existing or future regulatory requirements would have a material
adverse effect on the Company's business, financial condition and results of
operation.
Labeling and promotion activities are subject to scrutiny by the FDA
and, in certain instances, by the Federal Trade Commission. Current FDA
enforcement policy prohibits marketing approved medical devices for unapproved
uses. The Company and its products are also subject to a variety of state laws
and regulations in those states or localities where its products are or will be
marketed. Any applicable state or local regulations may hinder the Company's
ability to market its products in those states or localities. Manufacturers are
also subject to numerous federal, state and local laws relating to such matters
as safe working conditions, manufacturing practices, environmental protection,
fire hazard control and disposal of hazardous or potentially hazardous
substances. There can be no assurance that the Company will not be required to
incur significant costs to comply with such laws and regulations now or in the
future or that such laws or regulations will not have a material adverse effect
upon the Company's business, financial position or results of operations.
Exports of products subject to the 510(k) notification requirements,
but not yet cleared to market, are permitted without FDA export approval
provided certain requirements are met. Unapproved products subject to the PMA
requirements must receive prior FDA export approval unless they are approved for
use by any member country of the European Union and certain other countries,
including Australia, Canada, Israel, Japan, New Zealand, Switzerland and South
Africa, in which case they can be exported to any country without prior FDA
approval. To obtain FDA export approval, when it is required, certain
requirements must be met and information must be provided to the FDA, including
documentation demonstrating that the product is approved for import into the
country to which it is to be exported and, in some instances, safety data from
animal or human studies. There can be no assurance that the Company will receive
FDA export approval when such approval is necessary, or that countries to which
the devices are to be exported will approve the devices for import. Failure of
the Company to obtain CPEs, meet FDA's export requirements, or
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obtain FDA export approval when required to do so, could have a material adverse
effect on the Company's business, financial condition and results of operations.
The introduction of the Company's products in foreign markets will also
subject the Company to foreign regulatory clearances which may impose additional
substantive costs and burdens. International sales of medical devices are
subject to the regulatory requirements of each country. The regulatory review
process varies from country to country. Many countries also impose product
standards, packaging requirements, labeling requirements and import restrictions
on devices. In addition, each country has its own tariff regulations, duties and
tax requirements. Approval by the FDA and foreign government authorities is
unpredictable and uncertain, and no assurance can be given that the necessary
approvals or clearances for the Company's products will be granted on a timely
basis or at all. Delays in receipt of, or a failure to receive, such approvals
or clearances, or the loss of any previously received approvals or clearances,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The ROBODOC System satisfies international electromedical standard IEC
601-1 and the protection requirements of the Electromagnetic Compatibility
Directive (89/336/EEC), thus allowing the Company to apply the CE Mark. This
conformity is evidenced by the grant of a GS-Mark by Technische Ubermachtungs
Verein Rheinland ("TUV"), a testing body in Germany, under current German
regulations.
Product Liability
The manufacture and sale of medical products exposes the Company to the
risk of significant damages from product liability claims. The Company maintains
product liability insurance against product liability claims in the amount of $5
million per occurrence and $5 million in the aggregate. In addition, in
connection with the sale of ROBODOC Systems, the Company enters into
indemnification agreements with its customers pursuant to which the customers
indemnify the Company against any claims against it arising from improper use of
the ROBODOC System. There can be no assurance, however, that the coverage limits
of the Company's insurance policies will be adequate, that the Company will
continue to be able to procure and maintain such insurance coverage, that such
insurance can be maintained at acceptable costs, or that customers will be able
to satisfy indemnification claims. Although the Company has not experienced any
product liability claims to date, a successful claim brought against the Company
in excess of its insurance coverage could have a materially adverse effect on
the Company's business, financial condition, and results of operations.
13
<PAGE> 14
Employees
As of March 14, 1997, the Company had 35 full time employees, including
19 in research and development, 2 in sales and marketing, 6 in manufacturing, 3
in regulatory affairs and quality assurance, and 5 in administration. The
Company also had 6 part-time or temporary employees. None of the Company's
employees is covered by a collective bargaining agreement. The Company believes
its relationship with its employees is satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's executive offices and production facility, comprising a
total of approximately 15,000 square feet of space, are located in Sacramento,
California. The Company occupies its manufacturing facility premises pursuant to
a lease that expires in 1998 and occupies its office facilities on a
month-to-month tenancy. The total rent expense for these premises is
approximately $12,300 per month. The lease for the Company's manufacturing
facility provides for escalation of rent at the rate of 5% per annum. The
Company is considering alternative lease arrangements, and believes that
alternative space is available on reasonable terms. While the Company believes
that its existing facilities are adequate for its present operations, it
anticipates that within the next two years it will be required to relocate to a
larger facility of from 20,000 to 25,000 square feet to accommodate future
growth in manufacturing and research and development.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any pending legal proceeding and its
property is not subject to such proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders, through the
solicitations of proxies or otherwise, during the fourth quarter of the fiscal
year ended December 31, 1996.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Since November 21, 1996, the Common Stock and redeemable Common
Stock Purchase Warrants ("Warrants") of the Company (i) have been quoted on the
National Association of Securities Dealers, Inc. Automated Quotation System
SmallCap Market ("Nasdaq") under the symbols "RDOC" and "RDOCW" and (ii) have
been traded on The Pacific Stock Exchange Incorporated under the symbols "ROB"
and "ROBWS".
The following table sets forth the high and low closing prices as
reported by Nasdaq of the Company's Common Stock and Warrants from November 21,
1996 through the fiscal year ended December 31, 1996, and from January 1, 1997
through March 14, 1997.
<TABLE>
<CAPTION>
SECURITY TRADING PERIOD HIGH LOW
-------- -------------- ---- ---
<S> <C> <C> <C>
Common Stock Fiscal Year Ended December 31, 1996
November 21, 1996 - December 31, 1996 5 3/4 5
Fiscal Year Ended December 31, 1997
January 1, 1997 - March 14, 1997 6 3/4 5
Warrants Fiscal Year Ended December 31, 1996
November 21, 1996 - December 31, 1996 1 1/2
Fiscal Year Ended December 31, 1997 1 1/2 5/8
January 1, 1997 - March 14, 1997
</TABLE>
(b) There were approximately 41 stockholders of record of the Company's
Common Stock and 6 holders of the Company's Warrants as of March 14, 1997.
(c) The Company has not paid or declared any cash dividends to date and
does not anticipate paying any in the foreseeable future. The Company intends to
retain earnings, if any, to support the growth of the Company's business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction
with the Company's Financial Statements, including the notes thereto, appearing
elsewhere in this report.
15
<PAGE> 16
General
From its inception in October 1990, the Company has been primarily
engaged in the development and clinical evaluation of the ROBODOC System. Net
sales are derived from the sale of ROBODOC Systems and related consumables.
Prior to 1996, sales of the ROBODOC System were limited to sales for clinical
evaluation. In the first quarter of 1996, the ROBODOC System satisfied the
appropriate international electromedical safety standards and complied with the
requirements of the Electromagnetic Compatibility Directive, thus allowing the
Company to apply the CE Mark and to distribute the ROBODOC System throughout the
European Union. The Company sold its first commercial ROBODOC System to a clinic
in Germany in March 1996.
In the United States, the Company's products are subject to regulation
by the FDA. The Company intends to file an application for pre-market approval
with the FDA in mid to late 1997 for approval to market the ROBODOC System in
the United States.
Until the commercial introduction of the ROBODOC System in the first
quarter of 1996, the Company operated as a development stage enterprise. In
addition, the Company has incurred a net loss for each period since its
inception. The Company intends to develop additional surgical applications for
the ROBODOC System and to significantly increase its technical staff. The
Company also plans to increase spending on sales and marketing. The Company
expects operating losses to continue until sales of its products, if ever,
increase significantly.
Results of Operations
Fiscal Years Ended December 31, 1996 and 1995
Net Sales. Net sales for the year ended December 31, 1996 ("Fiscal
1996"), increased by approximately $2,106,000, as compared to the year ended
December 31, 1995 (the "Fiscal 1995 "), as a result of commercial sales of the
ROBODOC System to customers in Germany and Austria. No clinical evaluation
systems were sold during Fiscal 1995. Sales of consumables during Fiscal 1996
(approximately $140,000, or 6% of net sales) decreased by approximately $35,000,
or 20%, as compared to Fiscal 1995 when sales of consumables accounted for all
net revenues, primarily due to a certain number of consumables being given
without charge to new customers during 1996.
Cost of Sales. Cost of sales for Fiscal 1996 (approximately $884,000),
increased significantly as compared to Fiscal 1995 (approximately $70,000), as a
result of the first commercial sales of the ROBODOC System in Fiscal 1996. Cost
of sales as a percentage of net sales was 40% and 39% for Fiscal 1995 and Fiscal
1996, respectively.
16
<PAGE> 17
Selling, General and Administrative. Selling, general and
administrative expenses for Fiscal 1996 (approximately $2,066,000) increased by
approximately $397,000, or 24%, as compared to Fiscal 1995 (approximately
$1,669,000), due primarily to the Company's participation in trade shows in
Germany during Fiscal 1996.
Research and Development. Research and development expenses for Fiscal
1996 (approximately $2,469,000) increased by approximately $107,000, or
approximately 5%, as compared to Fiscal 1995 (approximately $2,361,000), due to
increased staffing required for the development of additional applications.
Stock Compensation. During Fiscal 1996, the Company recorded deferred
stock compensation of approximately $784,000 relating to stock options granted
during the period with exercise prices less than the estimated fair value of the
Company's Common Stock, as determined by an independent valuation analysis, on
the date of grant. The deferred stock compensation is being amortized into
expense over the vesting period of the stock options, which generally ranges
from 3 to 5 years. Deferred compensation relating to stock options which vested
immediately was expensed on the date of grant. Compensation expense of
approximately $357,000 was recorded during Fiscal 1996 relating to these stock
options, and the remaining $427,000 will be amortized into expense in future
periods.
Interest Income. Interest income for Fiscal 1996 (approximately
$88,000) decreased by approximately $19,000, or 18%, as compared to Fiscal 1995,
primarily due to higher average cash balances during Fiscal 1995.
Interest Expense. The Company had no interest expense for Fiscal 1996,
as compared to Fiscal 1995 (approximately $288,000), primarily as a result of
the conversion in December 1995 of a $3,000,000 convertible note payable,
bearing interest at 9.25% per annum, into a warrant to purchase Common Stock.
Other Income and Expense. Other expense for Fiscal 1996 was
approximately $31,000, as compared to other income for Fiscal 1995 of
approximately $56,000. The primary reason for the difference is the
strengthening of the Dutch Guilder against the U.S. Dollar during Fiscal 1995,
as compared to a weakening of the Dutch Guilder against the U.S. Dollar in
Fiscal 1996. This resulted in currency transaction gains and losses on the U.S.
currency obligations of the Company's wholly owned subsidiary in The
Netherlands, Integrated Surgical Systems BV.
Net Loss. The net loss for Fiscal 1996 (approximately $3,449,000)
decreased by approximately $605,000, or approximately 15%, as compared to the
net loss for Fiscal 1995 (approximately $4,054,000), primarily due to the gross
margin realized on the increased net sales. This increase was partially offset
by an increase in operating expenses, principally due to stock
17
<PAGE> 18
compensation expense, increased participation in trade shows in Germany and
increased research and development staffing.
Preferred Stock Dividends. The Company accumulated preferred stock
dividends of approximately 8% on the outstanding shares of Series B and Series C
Preferred Stock for Fiscal 1995. These cumulative dividends, together with the
Series B and Series C Preferred Stock, were converted into Common Stock in
December 1995. The Series D Preferred Stock which was outstanding until it was
automatically converted upon the close of the Company's Initial Public Offering
did not provide for cumulative dividends.
Liquidity and Capital Resources
Since inception, the Company's expenses have exceeded net sales.
Operations have been funded primarily from the issuance of debt and the sale of
equity securities aggregating approximately $23.8 million. In addition, the
Company was the beneficiary of proceeds from a $3 million key-man life insurance
policy in 1993 upon the death of one of its executives.
The Company used cash from operating activities of approximately
$3,508,000 and $3,432,000 in Fiscal 1995 and Fiscal 1996. Net cash used for
operations in each of these periods resulted primarily from the net loss. Cash
used for operations in Fiscal 1995 reflected a decrease in inventory, an
increase in other liabilities and payments made under a severance agreement with
a former executive officer. Cash used for operations in Fiscal 1996 reflected a
payment made on a note payable held by a supplier, a decrease in a customer
deposit relating to the delivery of a commercial system and increases in
accounts receivable and inventory. The Company is eligible to receive
reimbursement for 49% of its qualified expenditures under the terms of a grant
from the National Institute for Standards & Technology ("NIST"). The Company
received reimbursements from this program of approximately $19,000 and $116,000
for Fiscal 1995 and Fiscal 1996, respectively.
The Company's investing activities have consisted primarily of
expenditures for property and equipment which totaled approximately $121,000 and
$41,000 in Fiscal 1995 and Fiscal 1996, respectively. Included in Fiscal 1995 is
a ROBODOC System owned by the Company and placed in a clinic in Germany for
clinical evaluation. This system was sold to the clinic during Fiscal 1996.
Cash provided by financing activities from inception through December
31, 1996 is comprised of the net cash proceeds from the sale of a convertible
note in the principal amount of $3,000,000, the sale of convertible preferred
stock and warrants for $14,676,000, and the sale of Common Stock and Warrants
for $6,137,000, resulting from the Company's Initial Public Offering in November
1996. As part of the recapitalization of the Company in December 1995, the
entire $3,000,000 principal amount of the convertible note, together with
accrued interest thereon of approximately $1,224,000, was converted into a
warrant to purchase Common Stock. A total of
18
<PAGE> 19
$11,734,000 and $2,942,000 of preferred stock was converted into Common Stock in
December 1995 and November 1996, respectively.
The Company expects to incur additional operating losses at least
through 1997. These losses will be as a result of expenditures related to
product development projects and the establishment of marketing, sales, service
and training organizations. The timing and amounts of these expenditures will
depend on many factors, some of which are beyond the Company's control, such as
the requirements for and time required to obtain FDA authorization to market the
ROBODOC System, the progress of the Company's product development projects and
market acceptance of the Company's products. The Company expects that its
current funding, together with cash flow from operations, will be sufficient to
finance its operations through 1997.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements follow Item 13 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
The Company did not have any changes in or disagreements with its
accountants on accounting and financial disclosure.
19
<PAGE> 20
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth information concerning the Company's
executive officers, directors and certain other management personnel.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ramesh C. Trivedi......... 57 President, Chief Executive Officer and a Director
James C. McGroddy(1)(2)... 59 Chairman of the Board
Michael J. Tomczak........ 41 Vice President, Chief Financial Officer and Secretary
Peter Kazanzides.......... 35 Director of Robotics and Software
Brent D. Mittelstadt...... 37 Director of Biomedical Applications
Naser N. Salman........... 52 Director of Regulatory Affairs
Stu Heald................. 60 Manager of Manufacturing
John N. Kapoor(1)(2)...... 53 Director
Paul A.H. Pankow(1)(2).... 67 Director
Wendy Shelton-Paul........ 44 Director
</TABLE>
- ----------
(1) Member of Compensation Committee of the Board of Directors.
(2) Member of Audit Committee of the Board of Directors.
Biographical Information
RAMESH C. TRIVEDI, PH.D., has been President, Chief Executive Officer and a
Director of the Company since November 1995, and served as a consultant to the
Company from February 1995 until November 1995. Dr. Trivedi has over 25 years
experience in the healthcare field. Dr. Trivedi founded California Biomedical
Consultants in 1987, an international consulting firm. From 1985 to 1986, Dr.
Trivedi was the President and Chief Executive Officer of DigiRad Corporation, a
medical imaging company. From 1978 to 1984, he was the director of business
development of Syva Company and the General Manager of Synaco, Inc., divisions
of Syntex Corporation, a pharmaceutical company. From 1972 to 1978, Dr. Trivedi
was the head of the product management group at the Worthington division of
Millipore Corporation, a membrane filtration company, and the head of the
chemistry group of the Diagnostic Division of Pfizer, Inc. from 1971 to 1972.
Dr. Trivedi received a Ph.D. in Chemical Engineering from Lehigh University in
1970 and an MBA from Pepperdine University in 1981.
JAMES C. MCGRODDY, PH.D., has been Chairman of the Board of Directors of the
Company since November 1995. From 1965 through December 1996, Dr. McGroddy was
employed by IBM. From January 1996, Dr. McGroddy served as Senior Vice President
and Special Advisor to the Chairman
20
<PAGE> 21
of IBM. From May 1989 to December 31, 1995, Dr. McGroddy was Senior Vice
President of Research of IBM with responsibility for approximately 2,500
technical professionals in IBM's seven research laboratories around the world.
He is a member of IBM's Worldwide Management Council. Dr. McGroddy has been
involved in the development of the Company since its inception in October 1990,
initially as an advisor and since November 1995 as a Director. Dr. McGroddy
received a Ph.D. in physics from the University of Maryland in 1965.
MICHAEL J. TOMCZAK has been Vice President and Chief Financial Officer of the
Company since October 1991 and Secretary since September 1996. From September
1988 to October 1991, Mr. Tomczak served as a Senior Manager of Ernst & Young
LLP, directing its Entrepreneurial Services Group in the Sacramento office. From
September 1985 to September 1988, Mr. Tomczak served as Vice President of
Finance for Valley Industries, a manufacturer of automotive products. Mr.
Tomczak became a certified public accountant in Michigan in 1981 and in
California in 1989. He received a B.A. from Western Michigan University in 1979.
PETER KAZANZIDES, PH.D., a co-founder of the Company, has been an employee of
the Company since November 1990 and Director of Robotics and Software of the
Company since December 1995. He received Sc.B., Sc.M., and Ph.D. degrees in
electrical engineering from Brown University in 1983, 1985, and 1988,
respectively. His dissertation focused on force control and multiprocessor
systems for robotics. He performed post-doctoral research in surgical robotics
from March 1989 to March 1990 at the IBM T.J. Watson Research Center.
BRENT D. MITTELSTADT, a co-founder of the Company, has been an employee of the
Company since November 1990 and Director of Surgical Applications of the Company
since December 1995. He began research in surgical robotics in 1986 as a
visiting research scientist at the IBM T.J. Watson Research Center and is
responsible for much of the early development of CT guided robotic systems for
total hip replacement surgery. Mr. Mittelstadt received a B.S. in Biology from
the University of Arizona in 1984.
NASER N. SALMAN, PH.D., has been Director of Regulatory Affairs of the Company
since February 1997. From May 1985 to February 1997, Dr. Salman was
self-employed as a consultant providing regulatory and technical assistance to
medical device manufacturers. From December 1980 to April 1985, Dr. Salman
served as Senior Scientific Reviewer for the Food and Drug Administration. Dr.
Salman received a Ph.D. in Bio-Engineering from Clemson University in 1980.
STU HEALD has been Manager of Manufacturing of the Company since June 1996. Mr.
Heald has over 30 years experience in manufacturing products. From September
1993 to June 1996, Mr. Heald served as Operations Manager at Advanced Power
Solutions, a division of M&L Enterprises, Inc., a manufacturer of power
supplies. From October 1986 to August 1993, Mr. Heald served as Shop Operation
Manager at Resonex Inc., a manufacturer of magnetic resonance imaging systems.
Mr.
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<PAGE> 22
Heald received a B.S. in Industrial Management from California State University
San Francisco in 1962.
JOHN N. KAPOOR, PH.D., has been a Director of the Company since December 1995.
Dr. Kapoor founded EJ Financial Enterprises, Inc., a healthcare consulting and
investment company, in March 1990, of which he is currently President. Since
October 1990, Dr. Kapoor has been Chairman of Option Care, Inc., a home health
care provider franchisor. Dr. Kapoor has been the Chairman of Unimed
Pharmaceuticals, Inc., a specialty pharmaceutical company since 1990. Since May
1996, Dr. Kapoor has been Chief Executive Officer of Akorn, Inc., a manufacturer
and distributor of ophthalmic products, of which Dr. Kapoor also serves as
Chairman. In addition, Dr. Kapoor serves as Chairman of NeoPharm, Inc., a cancer
drug research and development company. Dr. Kapoor also served as Chairman of
Lyphomed, Inc., a pharmaceutical company, from 1983 to 1990, and was a Director
of Lunar Corp., a manufacturer and marketer of x-ray and ultrasound systems,
from May 1990 to April 1996. Dr. Kapoor received a Ph.D. in medicinal chemistry
from State University of New York in 1970.
On August 16, 1992, a lawsuit was filed against Dr. Kapoor in the United States
District Court for the Northern District of Illinois by Fujisawa Pharmaceutical
Co., Ltd. and Fujisawa USA, Inc. ("Fujisawa"). The complaint alleged that Dr.
Kapoor, while President and Chief Executive Officer of Lyphomed, Inc., a company
acquired by Fujisawa, violated provisions of the Federal securities laws and the
Racketeer Influenced and Corrupt Organizations Act (RICO), and also asserted
certain state law claims. On July 25, 1996, the complaint was dismissed in part,
and Dr. Kapoor was granted summary judgment on the remaining claims. On August
22, 1996, Fujisawa filed a notice of appeal of the dismissal and summary
judgment decision. Dr. Kapoor vigorously denies the allegations and
filed a complaint against Fujisawa in Illinois state court on August 27, 1996
claiming breach of contract, defamation of character and other state law claims.
PAUL A.H. PANKOW has been a Director of the Company since May 1995. Since March
1995, Mr. Pankow has been President of PAP Consulting, a business and technical
consulting firm. From September 1959 to February 1995, Mr. Pankow held various
positions with 3M Corporation, most recently as a Vice President, and as Chief
Executive Officer of its Imaging Systems Division. He currently serves as
chairman of the Optoelectronic Industry Development Association and is a member
of several other industry boards. Mr. Pankow received a B.S. in mechanical
engineering and business administration from the University of Minnesota in
1956.
WENDY SHELTON-PAUL, DVM, has been a Director of the Company since February 1993.
Dr. Shelton-Paul served as a consultant to the Company from June 1993 to January
1994, when she joined the Company as its Vice President of Science and
Technology. From February 1995 through November 1995, she served as Acting Chief
Executive Officer of the Company. From November 1995 to December 1996, she
served as Vice President of Medical Affairs. Until 1993, Dr. Shelton-Paul owned
and operated a private veterinary practice. Dr. Shelton-Paul received a DVM from
the University of California School of Veterinary Medicine in 1981.
22
<PAGE> 23
All directors hold office until the annual meeting of stockholders of
the Company following their election or until their successors are duly elected
and qualified. Officers are appointed by the Board of Directors and serve at its
discretion.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's Officers, Directors and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "Commission"). Officers, Directors and ten percent stockholders are
required by regulation to furnish the Company with copies of all Section 16(a)
forms they file. Based on the Company's copies of such forms received, or
written representations from certain reporting persons that no Form 5's were
required for those persons, the Company believes that, during 1996, Officers,
Directors and greater than ten percent beneficial owners complied with all
applicable filing requirements.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the compensation awarded to, earned by
or paid to the Company's Chief Executive Officer and each other executive
officer and certain other management personnel of the Company whose salary and
bonus for the year ended December 31, 1996 exceeded $100,000 (collectively, the
"Named Executives and Certain Other Management").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION(2) OPTIONS
--------------------------- ---- ------ -------------- -------
<S> <C> <C> <C> <C>
Ramesh C. Trivedi
Chief Executive Officer and President....... 1996 $264,000 $50,000 316,907
Wendy Shelton-Paul (1)
Vice President of Medical Affairs........... 1996 $120,000 $30,000 30,415
Michael J. Tomczak
Vice President and Chief Financial Officer.. 1996 $112,060 $30,000 30,415
Peter Kazanzides
Director of Robotics and Software........... 1996 $80,080 $30,000 77,726
Brent Mittelstadt
Director of Biomedical Applications......... 1996 $76,670 $30,000 77,726
</TABLE>
23
<PAGE> 24
(1) Dr. Shelton-Paul resigned from her position as Vice President of
Medical Affairs effective December 31, 1996.
(2) Represents cash compensation under the Company's incentive bonus plan.
The Company has adopted a policy of compensating independent directors
in the amount of $7,500 annually and $500 additional for each Board of Directors
meeting attended and $250 for each telephonic Board of Directors meeting
attended. Members who serve on either the Audit or Compensation Committees are
to be paid $300 for each meeting attended and $150 for each telephonic meeting
attended. Committee chairmen also are to be paid a fee of $500 per annum.
The Company will also grant independent members of the Board of
Directors ten year non-qualified stock options to purchase 3,500 shares of the
Company's Common Stock at an exercise price equal to the greater of the fair
market value on the date of issue or $5.00 per share.
On July 26, 1996, Mr. Pankow was granted an option to purchase 2,704
shares of Common Stock at an exercise price of $2.07 share. On January 24, 1997,
Dr. McGroddy was granted an option to purchase 25,000 shares of Common Stock at
an exercise price of $5.00 share.
Employment Agreements
On December 8, 1995, the Company entered into an employment agreement
with Dr. Ramesh C. Trivedi, the Company's Chief Executive Officer and President.
The agreement is for no specified term and provides for the at-will employment
of Dr. Trivedi. Pursuant to the employment agreement, Dr. Trivedi is to receive
an annual salary of $264,000 ($22,000 per month), plus out-of-pocket expenses.
Dr. Trivedi's employment agreement provides for the grant of options to purchase
316,907 shares of the Company's Common Stock, at an exercise price of $0.07 per
share, which were granted in February 1996. Upon termination by the Company,
other than for cause (as defined in the employment agreement), Dr. Trivedi is
entitled to receive his monthly salary for a period of nine months following the
date of termination and consulting fees (at his then prevailing consulting rate)
for three months of consulting services to be rendered during the twelve months
following such termination.
None of the other Named Executives and Certain Other Management has an
employment agreement with the Company.
Stock Options
The following table contains information concerning the grant of stock
options under the Company's 1995 Stock Option Plan to all Named Executives and
Certain Other Management during the fiscal year ended December 31, 1996. See
"Executive Compensation -- Stock Option Plan" and Note 6 to the Company's
Financial Statements appearing elsewhere in this report.
24
<PAGE> 25
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL
SHARES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED(1)(3) FISCAL YEAR(3) SHARE(2) DATE
---- ------------- -------------- -------- ----
<S> <C> <C> <C> <C>
Ramesh C. Trivedi 316,907 41.7% $ 0.07 2/16/06
Wendy Shelton-Paul 30,415 4.3% $ 0.07 2/16/06
Michael J. Tomczak 30,415 4.3% $ 0.07 2/16/06
Peter Kazanzides 77,726 11.0% $ 0.07 2/16/06
Brent D. Mittelstadt 77,726 11.0% $ 0.07 2/16/06
</TABLE>
- ----------
(1) Stock options are granted at the discretion of the Compensation
Committee of the Company's Board of Directors. Stock options have a
10-year term and vest periodically over a period not to exceed five
years.
(2) The Compensation Committee of the Company's Board of Directors may
elect to reduce the exercise price of any option to the current fair
market value of the Common Stock if the value of the Common Stock has
declined from the date of grant.
(3) Does not include the options previously outstanding under the Company's
1991 Stock Option Plan which were repriced on February 16, 1996. See
the table captioned "Repricing of Options" under "Stock Options."
The following table summarizes for each of the Named Executives and
Certain Other Management the total number of unexercised options, if any, held
at December 31, 1996, and the aggregate dollar value of in-the-money,
unexercised options, held at December 31, 1996. The value of the unexercised,
in-the-money options at December 31, 1996, is the difference between their
exercise or base price and the value of the underlying Common Stock on December
31, 1996, at an assumed price of $5.00 per share.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY END OPTION VALUES
<TABLE>
<CAPTION>
SHARES ACQUIRED NUMBER OF SECURITIES VALUE OF UNEXERCISED
UPON EXERCISE OF UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS AT OPTIONS AT
DURING FISCAL 1996 DECEMBER 31, 1996 DECEMBER 31, 1996
VALUE
NAME NUMBER REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------ -------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
RAMESH C. TRIVEDI -- -- 163,559 153,348 $806,346 $756,006
WENDY SHELTON-PAUL -- -- 40,553 57,449 $199,926 $283,224
MICHAEL J. TOMCZAK -- -- 64,620 33,850 $318,577 $166,881
PETER KAZANZIDES -- -- 19,822 78,884 $ 97,722 $388,898
BRENT D. MITTELSTADT -- -- 19,960 79,014 $ 98,403 $389,539
</TABLE>
25
<PAGE> 26
REPRICING OF OPTIONS
<TABLE>
<CAPTION>
MARKET EXERCISE LENGTH OF
NUMBER OF PRICE OF PRICE OF ORIGINAL
SECURITIES STOCK AT STOCK AT OPTION TERM
UNDERLYING TIME PF TIME OF REMAINING
REPRICE/ OPTIONS REPRICING REPRICING NEW AT DATE OF
REGRANT REPRICED OR OR OR EXERCISE REPRICING OR
NAME DATE AMENDED AMENDMENT AMENDMENT PRICE AMENDMENT
---- ---- ------- --------- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Wendy Shelton-Paul 2/16/96 67587 $ .888 $ 4.88 $ .07 9.25 years
Michael J. Tomczak 2/16/96 43932 $ .888 $ 4.88 $ .07 9.25 years
Michael J. Tomczak 2/16/96 6759 $ .888 $ 7.84 $ .07 8.00 years
Michael J. Tomczak 2/16/96 13308 $ .888 $ 7.84 $ .07 6.50 years
Michael J. Tomczak 2/16/96 4056 $ .888 $ 7.84 $ .07 6.00 years
Peter Kazanzides 2/16/96 3380 $ .888 $ 4.88 $ .07 9.25 years
Peter Kazanzides 2/16/96 1014 $ .888 $ 7.84 $ .07 8.00 years
Peter Kazanzides 2/16/96 4420 $ .888 $ 7.84 $ .07 6.50 years
Peter Kazanzides 2/16/96 12166 $ .888 $ 3.33 $ .07 6.00 years
Brent D. Mittelstadt 2/16/96 3380 $ .888 $ 4.88 $ .07 9.25 years
Brent D. Mittelstadt 2/16/96 1352 $ .888 $ 7.84 $ .07 8.00 years
Brent D. Mittelstadt 2/16/96 4350 $ .888 $ 7.84 $ .07 6.50 years
Brent D. Mittelstadt 2/16/96 12166 $ .888 $ 3.33 $ .07 6.00 years
</TABLE>
The Compensation Committee of the Board of Directors approved the
replacement of these options to Dr. Shelton-Paul, Mr. Tomczak, Dr. Kazanzides,
and Mr. Mittelstadt and options to other employees of the Company, at an
exercise price of $.07 per share, having concluded that the principal purpose of
the Company's stock option program (i.e., to provide an equity incentive to
employees to remain in the employment of the Company and to work diligently in
its best interests) would not be achieved for those employees holding options
exercisable above the market price of the Common Stock. In connection with the
granting of these replacement options, participating option holders agreed not
to exercise any option for a period of six months from the date of such regrant.
Stock Option Plan
On December 13, 1995, the Board of Directors adopted, and stockholders
approved, the 1995 Stock Option Plan (the "Plan"). The Plan is to be
administered by the Board of Directors or a committee thereof. The Plan is
currently administered by the Compensation Committee of the Board of Directors.
The Plan, as initially adopted, authorized the Company to grant stock purchase
rights and/or options to acquire an aggregate of 1,108,949 shares of Common
Stock to directors, employees (including officers) and consultants of the
Company ("Plan participants"). On September 16, 1996, the Board of Directors of
the Company adopted an amendment to the Plan, increasing the number of shares of
Common Stock covered by the Plan to 1,249,070 shares, subject to stockholder
approval.
26
<PAGE> 27
As of December 31, 1996, there were outstanding options to purchase an
aggregate of 925,859 shares granted pursuant to the Plan and options to purchase
an aggregate of 21,325 shares granted pursuant to the Company's 1991 Stock
Option Plan, which was terminated in December 1995. At December 31, 1996,
options to purchase an aggregate 292,366 shares of Common Stock were available
for grant under the Plan. No stock purchase rights have been granted pursuant to
the Plan. See Note 6 to the Company's Financial Statements appearing elsewhere
in this report.
The Plan authorizes the issuance of incentive stock options ("ISOs"),
as defined in Section 422A of the Internal Revenue Code of 1986, non-qualified
stock options ("NQSOs", and together with ISOs, "Options") and stock purchase
rights ("SPRs"). Consultants and directors who are not also employees of the
Company are eligible for grants of only NQSOs and/or SPRs. The exercise price of
each ISO may not be less than 100% of the fair market value of the Common Stock
at the time of grant, except that in the case of a grant to an employee who owns
10% or more of the outstanding stock of the Company or a subsidiary or parent of
the Company (a "10% Stockholder"), the exercise price may not be less than 110%
of the fair market value on the date of grant. The aggregate fair market value
of the shares covered by ISOs granted under the Plan that become exercisable by
a Plan participant for the first time in any calendar year is subject to a
$100,000 limitation. The exercise price of each NQSO is determined by the Board,
or committee thereof, in its discretion, provided that the exercise price of a
NQSO is not less than 85% of the fair market value of the Common Stock on the
date of grant. The Board, or Committee thereof, shall determine the term of the
Options and SPRs; provided, however, that in no event may an Option have a term
of more than ten (10) years (no more than five (5) years with respect to ISOs
granted to a 10% Stockholder). Any Option which is granted shall be vested and
exercisable at such time as determined by the Board, or committee thereof, but
in no event at a rate less than 20% per year. A recipient of an SPR must
exercise such right within the period, not to exceed thirty (30) days from the
date of grant, determined by the Board, or committee thereof. The Board, or
committee thereof, may reserve to the Company upon the grant of an SPR, an
option to repurchase upon a Plan participant's termination of employment, any
stock acquired upon his exercise of the SPR at the SPR exercise price. Any such
repurchase option shall lapse at a rate of not less than 20% per year commencing
on the date of the Plan participant's purchase. Options and SPRs granted under
the Plan are not transferable, other than by will or by the laws of descent and
distribution. No stock options or SPRs may be granted under the Plan after
December 12, 2005.
Subject to the provisions of the Plan, the Board, or a committee
thereof, has the authority to determine the individuals to whom the stock
options or SPRs are to be granted, the number of shares to be covered by each
option or SPR, the exercise price, the type of option, the exercise period, the
restrictions, if any, on the exercise of the option or SPR, the terms for the
payment of the exercise price and other terms and conditions. Payments by
holders of options or SPRs upon exercise of an option may be made (as determined
by the Board or a committee thereof) in cash or such other form
27
<PAGE> 28
of payment as may be permitted under the Plan, including without limitation, by
promissory note or by delivery of shares of Common Stock.
In February 1996, the Compensation Committee of the Board of Directors
authorized the grant of options to purchase an aggregate of 242,746 shares of
Common Stock, at an exercise price of $0.07 per share, to certain officers,
directors and employees of the Company pursuant to the Company's 1995 Stock
Option Plan, including options to purchase 67,587 shares granted to Dr. Wendy
Shelton-Paul, Vice President of Medical Affairs of the Company, and options to
purchase 68,055 shares granted to Michael J. Tomczak, Vice President and Chief
Financial Officer of the Company, options to purchase 20,980 shares granted to
Peter Kazanzides, Director of Robotics and Software and options to purchase
21,248 shares granted to Brent D. Mittelstadt, Director of Biomedical
Applications. These options were issued in replacement of options previously
granted pursuant to the Company's 1991 Stock Option Plan, with exercise prices
ranging from $3.33 to $7.84 per share, surrendered for cancellation.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information concerning the
beneficial ownership of the Company's Common Stock at March 14, 1997 by (i) each
person known by the Company to be a beneficial owner of more than five (5%)
percent of the outstanding Common Stock, (ii) each Director of the Company and
each executive officer and certain other management personnel named in the
Summary Compensation Table above and (iii) all Directors, executive officers and
certain other management personnel as a group.
28
<PAGE> 29
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENTAGE OF
BENEFICIAL COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNERS OWNERSHIP BENEFICIALLY OWNED(1)(2)
- ------------------------------------- --------- ------------------------
<S> <C> <C>
International Business Machines Corp. ..... 2,274,066(4) 40.32%(5)
Old Orchard Road
Armonk, NY 10504
EJ Financial Investments V, L.P. .......... 1,039,792 30.89%
225 East Deer Path Road
Suite 250
Lake Forest, IL 60045
Sutter Health and Sutter Health Venture.... 611,607(6) 18.17%
Partners, L.P.
One Capitol Mall
Sacramento, CA 95814
Ramesh C. Trivedi(3)....................... 175,355(7) 4.95%(8)
John N. Kapoor............................. 1,039,792(9) 30.89%
James J. McGroddy(3)....................... 21,000(10) 0.62%
Paul A.H. Pankow(3)........................ 1,127(7) 0.03%(11)
Wendy Shelton-Paul(3)...................... 89,290(12) 2.61%(13)
Mike Tomczak(3)............................ 71,407(7) 2.08%(14)
Peter Kazanzides(3)........................ 41,784(15) 1.23%(16)
Brent Mittelstadt(3)....................... 45,046(17) 1.32%(18)
All directors and officers
as a group (8 persons)..................... 1,463,801(19) 39.10%(20)
</TABLE>
- ---------
(1) Under Securities and Exchange Commission rules, beneficial ownership
includes any shares as to which an individual has sole or shared voting
power or investment power. Unless otherwise indicated, the Company
believes that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock
beneficially owned by them. A person is also deemed to be the
beneficial owner of securities that can be acquired by such person
within 60 days from the date hereof upon the exercise of warrants or
options. Each beneficial owner's percentage ownership is determined by
assuming that options or warrants that are held by such person (but not
those held by any other person) and which are exercisable within 60
days from the date hereof have been exercised.
(2) Except as otherwise stated, calculated on the basis of 3,366,028 shares
of Common Stock issued and outstanding.
(3) Address is c/o the Company, 829 West Stadium Lane, Sacramento,
California 95834.
(4) Includes warrants to purchase 2,079,584 shares of Common Stock at an
exercise price of $0.01 per share exercisable until December 31, 2005,
warrants to purchase 67,587 shares of Common Stock at an exercise price
29
<PAGE> 30
of $0.07 per share exercisable until December 31, 2000, and warrants to
purchase 126,895 shares of Common Stock at an exercise price of $0.01
per share exercisable until December 31, 2005, all of which warrants
are presently exercisable.
(5) Calculated on the basis of 5,640,094 shares of Common Stock issued and
outstanding.
(6) Includes 593,538 shares of Common Stock owned by Sutter Health and
18,069 shares of Common Stock beneficially owned by Sutter Health
Venture Partners I, L.P. ("Sutter Partners"), an affiliate of Sutter
Health.
(7) Represents shares issuable upon the exercise of stock options
exercisable within 60 days, at an exercise price of $0.07 per share.
(8) Calculated on the basis of 3,541,383 shares of Common Stock issued and
outstanding.
(9) 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.
(10) Includes 20,000 shares of Common Stock owned by Dr. McGroddy and 1,000
shares of Common Stock beneficially owned by his daughter.
(11) Calculated on the basis of 3,367,155 shares of Common Stock issued and
outstanding.
(12) Includes 50,410 shares issuable upon exercise of stock options
exercisable within 60 days, at an exercise price of $0.07 per share.
(13) Calculated based upon 3,416,438 shares of Common Stock issued and
outstanding.
(14) Calculated based upon 3,437,435 shares of Common Stock issued and
outstanding.
(15) Includes 39,452 shares issuable upon exercise of stock options
exercisable within 60 days at an exercise price of $0.07 per share.
(16) Calculated based upon 3,405,480 shares of Common Stock issued and
outstanding.
(17) Includes 39,605 shares issuable upon exercise of stock options
exercisable within 60 days at an exercise price of $0.07 per share.
(18) Calculated based upon 3,405,633 shares of Common Stock issued and
outstanding.
(19) Includes 377,356 shares of Common Stock issuable upon exercise of
options exercisable within 60 days, at exercise prices ranging from
$0.07 to $2.07 per share.
(20) Calculated based upon 3,743,384 shares of Common Stock issued and
outstanding.
30
<PAGE> 31
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
December 1995 Recapitalization
Pursuant to a Series D Preferred Stock and Warrant Purchase Agreement
(the "1995 Stock Purchase Agreement") dated as of December 21, 1995, the Company
effected the recapitalization described below.
The Company effected a one-for-five reverse stock split of its capital
stock, and all outstanding shares of Series B and Series C Preferred Stock were
converted into shares of Common Stock. Upon conversion of the Series B Preferred
Stock, the Company issued 30,482 shares of Common Stock to each of Sutter Health
and the Kapoor Trust, or a total of 60,964 shares. In addition, the Company
issued 8,955 shares of Common Stock to each of Sutter Health and the Kapoor
Trust, or a total of 17,910 shares, in exchange for the cancellation of all
accumulated dividends on the Series B Preferred Stock. Upon conversion of the
Series C Preferred Stock, the Company issued 89,604 shares. In addition, the
Company issued 19,512 shares of Common Stock to Sutter Health and 3,169 shares
of Common Stock to Keystone, or a total of 22,681 shares, in exchange for the
cancellation of all accumulated dividends on the Series C Preferred Stock.
As part of the recapitalization, IBM received a warrant to purchase
126,895 shares of Common Stock, at an exercise price of $0.01 per share, which
expires on December 31, 2005, in exchange for the cancellation of the IBM Note
in the principal amount of $3,000,000 and accrued interest thereon of
$1,224,373. In addition, the expiration date of the warrant issued to IBM in
connection with the formation of the Company was extended until December 31,
2000.
Pursuant to the 1995 Stock Purchase Agreement, EJ Financial Investments
V, L.P. ("EJ Financial") purchased 693,195 shares of Series D Preferred Stock
for an aggregate purchase price of $666,667 ($0.96 per share), and IBM purchased
a warrant to purchase 1,386,390 shares of Series D Preferred Stock, exercisable
at any time prior to December 31, 2005, at an exercise price of $0.01 per share,
for an aggregate purchase price of $1,333,333 ($0.96 per warrant). In addition,
EJ Financial received an option to purchase an additional 346,597 shares of
Series D Preferred Stock, on the same terms it purchased the Series D Preferred
Stock and IBM received an option to purchase warrants to purchase an additional
693,194 shares of Series D Preferred being hereinafter referred to collectively
as the "Standby Options"). On February 19, 1996, each of EJ Financial and IBM
exercised its Standby Option, as required by the terms thereof, since the
Company was unable to obtain alternative financing on substantially the same
terms as the Standby Options prior to the expiration thereof.
As part of the recapitalization of the Company, Sutter Health, Sutter
Health Venture Partners and Keystone received warrants to purchase 390,888
shares, 11,899 shares and 43,300 shares, of
31
<PAGE> 32
Common Stock, respectively, at an exercise price of $0.74 per share, in
consideration for their consent to the terms of the recapitalization, including
the sale of the Series D Preferred Stock. Sutter Health, Sutter Health Venture
Partners and Keystone agreed to amend these warrants to permit payment of the
exercise price by surrender of a portion of the warrants in lieu of payment of
the cash exercise price. Accordingly, on August 25, 1996, Sutter Health and
Sutter Health Venture Partners received 449,374 shares and 13,680 shares of
Common Stock, respectively (or 63,200 fewer shares and 1,924 fewer shares,
respectively, than they would have received if the exercise price had been paid
in cash) and on October 29, 1996, Keystone received 49,777 shares of Common
Stock (or 7,002 fewer shares than it would have received if the exercise price
had been paid in cash.)
In connection with the recapitalization of the Company, the Company
granted stockholders who did not purchase Series D Preferred Stock or warrants
to purchase Series D Preferred Stock rights to purchase Series D Preferred Stock
on the same terms and conditions as those shares purchased under the 1995 Stock
Purchase Agreement, which rights expired unexercised on March 5, 1996.
Regrant of Lower-Exercise Price Options To Replace Prior Grants
In February 1996, the Compensation Committee of the Board of Directors
authorized the grant of options to purchase an aggregate of 242,736 shares of
Common Stock, at an exercise price of $0.07 per share, to certain officers,
directors, and employees of the Company pursuant to the Company's 1995 Stock
Option Plan, including options to purchase 67,587 shares granted to Dr. Wendy
Shelton-Paul, Vice President of Medical Affairs of the Company, options to
purchase 68,055 shares granted to Michael J. Tomczak, Vice President and Chief
Financial Officer of the Company, options to purchase 20,980 shares granted to
Peter Kazanzides, Director of Robotics and Software and options to purchase
21,248 shares granted to Brent D. Mittelstadt, Director of Biomedical
Applications. These options were issued in replacement of options previously
granted pursuant to the Company's 1991 Stock Option Plan, with exercise prices
ranging from $3.33 to $7.84 per share, surrendered for cancellation. See the
table captioned "Repricing of Options" above.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
3.1- Form of Certificate of Incorporation of the Company, as amended. (1)
3.2- By-laws of the Company. (1)
4.1- Form of Underwriter's Warrants. (1)
</TABLE>
32
<PAGE> 33
<TABLE>
<S> <C>
4.2- Form of Public Warrant Agreement. (1)
4.3- Specimen Common Stock Certificate. (1)
4.4- Specimen Warrant Certificate. (1)
4.5- Form of Series D Preferred Stock Certificate. (1)
4.6- Form of Consulting Agreement between the Company and Rickel
&Associates, Inc. (1)
4.7- Common Stock Purchase Warrant issued by the Company to International
Business Machines Corporation ("IBM"), dated February 6, 1991, as
amended. (1)
4.8- Stockholders' Agreement between the Founders of the Company and IBM,
dated February 6, 1991 as amended. (1)
4.9- Common Stock Purchase Warrant issued by the Company to IBM, dated
December 21, 1995. (1)
4.10- Series D Preferred Stock Purchase Warrant issued by the Company to IBM,
dated December 21, 1995. (1)
4.11- Warrant issued by the Company to Sutter Health, Sutter Health Venture
Partners ("Sutter Health VP") and Keystone Financial Corporation
("Keystone"), dated December 21, 1995. (1)
4.12- Registration Rights Agreement among the Company, IBM, John N. Kapoor
Trust ("Kapoor"), EJ Financial Investments V, L.P. ("EJ Financial"),
Keystone, Sutter Health an Sutter Health VP, dated as of December 21,
1995. (1)
4.13- 1995 Stock Option Plan, as amended. (1)
4.14- Series D Preferred Stock Purchase Warrant issued by the Company to IBM,
dated February 29, 1996. (1)
10.1- Loan and Warrant Purchase Agreement between the Company and IBM, dated
as of February 6, 1991. (1)
10.2- License Agreement between the Company and IBM, dated February 6, 1991.
(1)
10.3- Series B Preferred Stock Purchase Agreement among the Company, Sutter
Health and The John N. Kapoor Trust, dated as of April 10, 1992. (1)
10.4- Series C Preferred Stock Purchase Agreement among the Company, Sutter
Health and Keystone, dated as of November 13, 1992, as amended December
13, 1995. (1)
10.5- Series D Preferred Stock and Warrant Purchase Agreement among the
Company, IBM and EJ Financial, dated December 21, 1995. (1)
10.6- Investors Agreement among the Company, 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. (1)
</TABLE>
33
<PAGE> 34
<TABLE>
<S> <C>
10.7- Employment Agreement between the Company and Ramesh Trivedi, dated
December 8, 1995. (1)
10.8- Licence Agreement between the Company and IBM, Dated February 4, 1991.
(1)
10.9- Agreement for the Purchase and Use of Sankyo Industrial Products
between the Company and Sankyo Seiki (American) Inc. dated November 1,
1992. (1)
11.1- Statement of Computation of earnings per share. *
21.1- Subsidiaries of the Company. (1)
27.1- Financial Data Schedule.*
</TABLE>
- -------------
* Filed with this report.
(1) Incorporated by reference from the Company's Registration Statement
on Form SB-2 (No. 333-09207) declared effective by the Securities and Exchange
Commission on November 21, 1996.
(b) Report on Form 8-K
No report on Form 8-K was filed by the Company during the quarter ended
December 31, 1996.
34
<PAGE> 35
Integrated Surgical Systems, Inc.
Consolidated Balance Sheet
December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,001,079
Accounts receivable 600,568
Inventory 1,030,262
Other current assets 128,648
------------
Total current assets 7,760,557
Net property and equipment 251,037
Other assets 17,837
------------
$ 8,029,431
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 676,201
Value added taxes payable 272,596
Accrued payroll and related expenses 195,742
Customer deposits 125,000
Accrued product retrofit costs 135,348
Payable to subcontractor 110,176
Other current liabilities 192,064
------------
Total current liabilities 1,707,127
Commitments
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized; no shares issued and outstanding --
Common stock, $0.01 par value, 15,000,000 shares
authorized; 3,361,161 shares issued and outstanding 33,611
Additional paid-in capital 25,807,264
Deferred stock compensation (426,417)
Accumulated translation adjustment 8,657
Accumulated deficit (19,100,811)
------------
Total stockholders' equity 6,322,304
------------
$ 8,029,431
============
</TABLE>
See accompanying notes.
37
<PAGE> 36
Integrated Surgical Systems, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1995 1996
-----------------------------
<S> <C> <C>
Net sales $ 174,521 $ 2,280,311
Cost of sales 70,179 884,152
-----------------------------
104,342 1,396,159
Operating expenses:
Selling, general and administrative 1,668,947 2,066,236
Research and development 2,361,125 2,468,535
Stock compensation -- 357,249
-----------------------------
4,030,072 4,892,020
Other income (expense):
Interest income 107,306 87,933
Interest expense (287,792) --
Other 55,801 (30,635)
-----------------------------
Loss before provision for income taxes (4,050,415) (3,438,563)
Provision for income taxes 3,113 10,266
-----------------------------
Net loss $(4,053,528) $(3,448,829)
=============================
Preferred stock dividends $ (936,325) $ --
-----------------------------
Net loss applicable to common stockholders $(4,989,853) $(3,448,829)
=============================
Net loss per common and common share
equivalent $ (1.19) $ (0.79)
=============================
Shares used in per share calculations 4,178,877 4,373,947
=============================
</TABLE>
See accompanying notes.
38
<PAGE> 37
Integrated Surgical Systems, Inc.
Consolidated Statements Of Stockholders' Equity
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED
-------------------------- -------------------- PAID-IN STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 163,369 $ 1,634 69,205 $ 691 $ 11,748,261 $ --
Sale of common stock -- -- 781 8 2,585 --
Conversion of note payable into a
warrant to purchase common stock -- -- -- -- 4,224,373 --
Conversion of Series B and Series C
preferred stock into common stock (163,369) (1,634) 163,369 1,634 -- --
Conversion of accumulated dividends on
preferred stock into common stock -- -- 40,591 406 (406) --
Sale of Series D convertible preferred
stock and a warrant to purchase
Series D preferred stock 693,195 6,932 -- -- 1,934,719 --
Net loss -- -- -- -- -- --
Translation adjustment -- -- -- -- -- --
----------------------------------------------------------------------------------
Balance at December 31, 1995 693,195 6,932 273,946 2,739 17,909,532 --
Exercise of stock options -- -- 9,592 96 587 --
Sale of Series D convertible preferred
stock and a warrant to purchase
Series D preferred stock 346,597 3,466 -- -- 996,534 --
Sale of common stock and warrants,
net of expenses -- -- 1,525,000 15,250 6,122,073 --
Exercise of warrants -- -- 512,831 5,128 (5,128) --
Conversion of Series D convertible
preferred stock to common stock (1,039,792) (10,398) 1,039,792 10,398 -- --
Deferred stock compensation -- -- -- -- 783,666 (783,666)
Stock compensation expense -- -- -- -- -- 357,249
Net loss -- -- -- -- -- --
Translation adjustment -- -- -- -- -- --
----------------------------------------------------------------------------------
Balance at December 31, 1996 -- $ -- 3,361,161 $33,611 $ 25,807,264 $(426,417)
===================================================================================
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
TRANSLATION ACCUMULATED STOCKHOLDERS'
ADJUSTMENT DEFICIT EQUITY
----------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1994 $1,754 $(11,598,454) $ 153,886
Sale of common stock -- -- 2,593
Conversion of note payable into a
warrant to purchase common stock -- -- 4,224,373
Conversion of Series B and Series C
preferred stock into common stock -- -- --
Conversion of accumulated dividends on
preferred stock into common stock -- -- --
Sale of Series D convertible preferred
stock and a warrant to purchase
Series D preferred stock -- -- 1,941,651
Net loss -- (4,053,528) (4,053,528)
Translation adjustment 3,543 -- 3,543
----------------------------------------------
Balance at December 31, 1995 5,297 (15,651,982) 2,272,518
Exercise of stock options -- -- 683
Sale of Series D convertible preferred
stock and a warrant to purchase
Series D preferred stock -- -- 1,000,000
Sale of common stock and warrants,
net of expenses -- -- 6,137,323
Exercise of warrants -- -- --
Conversion of Series D convertible
preferred stock to common stock -- -- --
Deferred stock compensation -- -- --
Stock compensation expense -- -- 357,249
Net loss -- (3,448,829) (3,448,829)
Translation adjustment 3,360 -- 3,360
----------------------------------------------
Balance at December 31, 1996 $8,657 $(19,100,811) $ 6,322,304
==============================================
</TABLE>
See accompanying notes
39
<PAGE> 38
Integrated Surgical Systems, Inc.
Consolidated Statements Of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1995 1996
---------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,053,528) $(3,448,829)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 288,344 221,162
Stock compensation -- 357,249
Changes in operating assets and liabilities:
Accounts receivable (30,326) (549,761)
Inventory 137,625 (283,290)
Other current assets 850 15,769
Note payable 20,701 (274,498)
Accounts payable (42,058) 466,796
Value added taxes payable 9,321 258,395
Accrued payroll and related expenses (222,896) 156,142
Customer deposits (1,883) (344,991)
Accrued product retrofit costs (114,680) (24,652)
Accrued interest 286,645 --
Payable to subcontractor -- 110,176
Other current liabilities 210,023 (94,852)
Translation adjustment 3,543 3,360
---------------------------
Net cash used in operating activities (3,508,319) (3,431,824)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (121,008) (41,348)
Decrease (increase) in other assets 1,035 (3,578)
---------------------------
Net cash used in investing activities (119,973) (44,926)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from convertible preferred stock 1,941,651 1,000,000
Net proceeds from sale of common stock and
warrants -- 6,137,323
Proceeds from exercise of stock options 2,593 683
---------------------------
Net cash provided by financing activities 1,944,244 7,138,006
---------------------------
Net increase (decrease) in cash and cash equivalents (1,684,048) 3,661,256
Cash and cash equivalents at beginning of period 4,023,871 2,339,823
---------------------------
Cash and cash equivalents at end of period $ 2,339,823 $ 6,001,079
===========================
</TABLE>
See accompanying notes.
40
<PAGE> 39
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements
December 31, 1996
1. DESCRIPTION OF BUSINESS AND FINANCING REQUIREMENTS
Integrated Surgical Systems, Inc. (the "Company") was incorporated on October 1,
1990 in Delaware. The Company develops, manufactures, markets and services
image-directed, robotic products for surgical applications. The Company's
principal product is the ROBODOC(R) Surgical Assistant System ("ROBODOC
System"), a computer-controlled surgical robot, and the Company's ORTHODOC(R)
Presurgical Planner, consisting of a computer workstation that utilizes the
Company's proprietary software for pre-operative surgical planning. The first
application for the ROBODOC System has been directed at cementless primary total
hip replacement surgery and is currently marketed to customers in Europe.
On June 1, 1994, the Company acquired all shares of Gasfabriek Thijssen Holding
BV (later renamed Integrated Surgical Systems BV), a non-operating Netherlands
corporation, for approximately $4,000. The acquisition was accounted for as a
purchase. Integrated Surgical Systems BV purchases and licenses products and
technology from Integrated Surgical Systems, Inc. for distribution in Europe and
other markets.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of Integrated Surgical Systems
BV are measured using the subsidiary's local currency (Guilders). The
subsidiary's balance sheet accounts are translated at the current year-end
exchange rate and statement of operations amounts are translated at the average
exchange rate for the period. Translation adjustments are recorded as a separate
component of stockholders' equity. Foreign currency transaction gains and losses
were not material during the years ended December 31, 1995 and 1996.
41
<PAGE> 40
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenues from sales without significant Company obligations beyond delivery are
recognized upon delivery of the products. Revenues pursuant to agreements which
include significant Company obligations beyond delivery are deferred until the
Company's remaining obligations are insignificant. Revenues are recognized net
of any deferrals for estimated future liabilities under contractual product
warranty provisions. Estimated future product retrofit costs for ROBODOC Systems
sold for clinical trials have been accrued in the accompanying financial
statements. Future retrofit costs are those expected to be required to update
ROBODOC Systems to the equivalent level of performance expected to be approved
by the Food and Drug Administration ("FDA").
RESEARCH AND DEVELOPMENT
Software development costs incurred subsequent to the determination of the
product's technological feasibility and prior to the product's general release
to customers are not material to the Company's financial position or results of
operations, and have been charged to research and development expense in the
accompanying consolidated statements of operations. Grants received from third
parties for research and development activities are recorded as revenue over the
term of the agreement as the related activities are conducted. Research and
development costs are expensed as incurred.
CONCENTRATION OF CREDIT RISK
The Company sells its products to companies in the healthcare industry and
performs periodic credit evaluations of its customers and generally does not
require collateral. The Company believes that adequate provision for
uncollectible accounts receivable has been made in the accompanying financial
statements. The Company maintains substantially all of its cash at three
financial institutions.
42
<PAGE> 41
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL STATEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company invests its excess cash in high-quality debt instruments. The
Company considers highly liquid investments with maturities of three months or
less from the acquisition date of the instrument to be cash equivalents. The
carrying amounts reported in the balance sheet for cash and cash equivalents
approximate those assets' fair values. Cash equivalents at December 31, 1996
consist primarily of commercial paper. At December 31, 1996, the fair value of
available-for-sale securities of $4,969,266 included in cash and cash
equivalents approximates their historical cost.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method over estimated useful lives of 3 to 5 years, or the lease
term, whichever is shorter.
INVENTORY
Inventory is recorded at the lower of cost (first-in, first-out method) or
market and consists of materials and supplies used in the manufacture of the
ROBODOC System.
Inventory consists of the following at December 31, 1996:
<TABLE>
<S> <C>
Raw materials $ 321,313
Work-in process 459,524
Finished goods 249,425
----------
$1,030,262
==========
</TABLE>
43
<PAGE> 42
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
As permitted under the provisions of Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company
has elected to account for stock-based compensation using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25"). Under the intrinsic value method,
compensation cost is the excess, if any, of the quoted market price or fair
value of the stock at the grant date or other measurement date over the amount
an employee must pay to acquire the stock.
INCOME TAXES
The liability method is used to account for income taxes. Under this method,
deferred income tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that are scheduled to be in effect
when the differences are expected to reverse.
NET LOSS PER SHARE
Except as noted below, net loss per share is based on the weighted average
number of shares of common stock outstanding during the period. Common stock
issuable upon the conversion of convertible preferred stock and note payable and
upon the exercise of common stock warrants and stock options have been excluded
from the computation because their inclusion would be anti-dilutive. Pursuant to
the Securities and Exchange Commission Staff Accounting Bulletins, common and
common equivalent shares issued by the Company at prices below the initial
public offering price during the 12 month period prior to the offering have been
included in the calculation as if they were outstanding for all periods
presented prior to the initial public offering (using the treasury stock method
at the initial public offering price of $5.00 per share). As described in Note
6, common stock was issued on December 20, 1995 in connection with the
conversion of preferred stock and accumulated dividends. Net loss per share for
the year ended December 31, 1995 would have been $(0.93) per share had the
conversion occurred on January 1, 1995.
44
<PAGE> 43
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT CUSTOMERS AND FOREIGN SALES
The Company recognized approximately 95% of its revenue from one customer during
the year ended December 31, 1995, and approximately 29%, 27%, 22% and 22% of its
revenues from four customers during the year ended December 31, 1996. Foreign
sales were approximately $165,000 and $2,280,000 for the years ended December
31, 1995 and December 31, 1996, respectively.
RECLASSIFICATIONS
Certain amounts reported in prior years financial statements have been
reclassified to conform with the 1996 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1996:
<TABLE>
<S> <C>
ROBODOC System equipment $ 327,793
Other equipment 800,374
Furniture and fixtures 41,258
Leasehold improvements 86,816
----------
1,256,241
Less accumulated depreciation 1,005,204
----------
$ 251,037
==========
</TABLE>
4. REVERSE STOCK SPLITS
On December 20, 1995, the Company effected a one-for-five reverse split of the
Company's common stock. In November, 1996, the Company effected a
one-for-1.479586 reverse split of the Company's common stock. All references in
the accompanying financial statements to the number of capital shares and
per-share amounts have been retroactively restated to reflect the reverse
splits.
45
<PAGE> 44
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
5. NOTE PAYABLE
A long-term note payable was entered into between the Company and a large
corporation, a representative of which was a member of the Company's Board of
Directors. The corporation is also a warrant holder of the Company. Simple
interest on the note payable accrued at 9.25% per annum. On December 20, 1995,
the long-term note payable and accrued interest totaling $4,224,373 was
converted into a warrant to purchase 126,895 shares of the Company's common
stock at $0.01 per share which is currently exercisable and expires on December
31, 2005.
In conjunction with the note agreement, the Company also entered into a License
Agreement with this corporation whereby the corporation granted the Company the
rights to the technology underlying the ROBODOC System at the time of the
Company's incorporation. In consideration for this License Agreement, the
Company issued to the corporation a warrant to purchase 67,587 shares of the
Company's common stock at a price of $0.07 per share. This warrant expires on
December 31, 2000 and has not been exercised as of December 31, 1996.
6. STOCKHOLDERS' EQUITY
COMMON STOCK
As of December 31, 1996 the Company has reserved a total of 5,572,366 shares of
common stock pursuant to warrants and options outstanding and reserved for
future issuance.
INITIAL PUBLIC OFFERING
In November, 1996, the Company sold in its initial public offering, a total of
1,525,000 shares of common stock at $5.00 per share and 1,753,750 warrants at
$0.10 per warrant. In addition, the Company sold to its underwriter warrants to
purchase an additional 305,000 shares for total consideration of $10.00. The net
proceeds after underwriters' commissions and fees and other costs associated
with the offering were approximately $6,137,000.
46
<PAGE> 45
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
INITIAL PUBLIC OFFERING (CONTINUED)
Each warrant entitles the holder to purchase one share of common stock at an
exercise price of $6.00 per share, subject to adjustment in certain events, at
any time during the period commencing November 20, 1997, and thereafter for a
period of four years. The warrants are subject to redemption by the Company at
$0.10 per warrant at any time during the exercise period on not less than 30
days prior written notice to the holders of the warrants provided certain
criteria regarding the price performance of the Company's common stock are met.
CONVERTIBLE PREFERRED STOCK
On December 20, 1995, all outstanding shares of Series B and Series C preferred
stock were converted into 60,964 and 102,405 shares of common stock,
respectively. Also on that date, all accumulated and unpaid dividends on Series
B and Series C were converted into 17,910 and 22,681 shares of the Company's
common stock, respectively.
The Company entered into a Series D preferred stock and warrant agreement during
1995. Under the terms of this agreement, the Company received $2 million in
proceeds at the first closing which occurred on December 21, 1995, and granted
an option to purchase additional Series D stock and a warrant to purchase Series
D Stock as described below. At the first closing, the Company sold 693,195
shares of Series D preferred stock for $0.96 per share. It also sold for
$1,333,333 a warrant to purchase 1,386,390 shares of Series D at $0.01 per
share. The warrant expires on December 31, 2005 and has not been exercised as of
December 31, 1996. The purchasers received an option to purchase an additional
346,597 shares of Series D preferred stock and a warrant to purchase an
additional 693,194 shares of Series D preferred stock, all with the same terms
as in the first closing.
On February 19, 1996, the option holder exercised the option and the Company
sold 346,597 shares of Series D preferred stock for $0.96 per share. The Company
also sold a warrant for $666,667 to purchase 693,194 shares of Series D at $0.01
per share.
47
<PAGE> 46
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK (CONTINUED)
Series B and Series C preferred stockholders who did not purchase Series D stock
were issued warrants to purchase an aggregate of 584,959 shares of the Company's
common stock at a price of $0.74 per share in consideration for their consent to
the terms of the recapitalization and Series D stock sale. On August 25, 1996
and October 29, 1996, certain holders of these warrants entered into amended
warrant agreements with the Company which included a provision allowing for a
cashless exercise. Under the terms of the cashless exercise, these warrant
holders accepted 72,126 fewer shares as consideration for not being required to
make the cash exercise payment of $0.74 per share. This resulted in these
warrant holders receiving 512,831 shares of Common Stock upon their exercise on
August 25, 1996 and October 29, 1996.
As per the terms of the convertible preferred stock agreement, upon the closing
of the Company's initial public offering in November, 1996, each of the
1,039,792 shares of outstanding Series D preferred stock were automatically
converted into the same number of shares of common stock. On the same date, the
warrants outstanding to purchase a total of 2,079,584 shares of Series D
preferred stock were converted into warrants to purchase the same number of
shares of common stock.
In November, 1996, the Board of Directors amended, and the stockholders
subsequently approved, the Company's Articles of Incorporation to authorize
1,000,000 shares of undesignated preferred stock. Preferred stock may be issued
from time to time in one or more series. The Board of Directors is authorized to
determine the rights, preferences, privileges and restrictions granted to and
imposed upon any wholly unissued series of preferred stock and the designation
of any such series without any vote or action by the Company's stockholders.
STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations in
accounting for its employees stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options.
48
<PAGE> 47
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
The Company established a stock option plan in 1991 (the "1991 Plan") and on
December 13, 1995, it established a new stock option plan (the "1995 Plan").
Certain employees of the Company surrendered their options under the 1991 Plan
in return for new and additional options granted under the 1995 Plan. Officers,
employees, directors and consultants to the Company may participate in the
Plans. Options granted under the Plans may be incentive stock options or
non-statutory stock options. 1,249,070 shares of the Company's common stock have
been reserved for issuance under the Plans. Options granted generally have a
term of ten years from the date of the grant. The exercise price of incentive
stock options granted under the Plans may not be less than 100% of the fair
market value of the Company's common stock on the date of the grant. The
exercise price of non-statutory stock options granted under the Plans may not be
less than 85% of the fair market value of the Company's common stock on the date
of the grant. For a person who, at the time of the grant, owns stock
representing 10% of the voting power of all classes of Company stock, the
exercise price of the incentive stock options or the non-statutory stock options
granted under the Plans may not be less than 110% of the fair market value of
the common stock on the date of the grant.
Pro forma information regarding net income (loss) and earnings (loss) per share
is required by SFAS No. 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996, respectively: risk-free interest rates of 6.25%
and 5.43%; a dividend yield of 0%; volatility factors of the expected market
price of the Company's common stock of 0.50; and an expected life of the option
of 5 and 3.2 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value
49
<PAGE> 48
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
1995 1996
------------------------------------
<S> <C> <C>
Pro forma net loss $(4,064,392) $(3,464,434)
Pro forma net loss per share $ (1.20) $ (0.79)
</TABLE>
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1999.
The following summarizes activity under the Plans for the years ended December
31, 1995 and 1996:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
---------------------------
<S> <C> <C>
Outstanding at December 31, 1994 53,032
Granted (at $4.88 per share) 32,713
Canceled (at $3.33 to $7.84 per share) (9,439)
Exercised (at $3.33 per share) (781)
--------
Outstanding at December 31, 1995 (at $3.33 to
$7.84 per share) 75,525 $4.63
Granted (at $0.07 to $5.00 per share) 951,545 0.27
Canceled (at $0.07 to $7.84 per share) (70,294) 4.08
Exercised (at $0.07 and $0.25 per share) (9,592) 0.07
--------
Outstanding at December 31, 1996 (at $0.07 to
$7.84 per share) 947,184 0.42
========
</TABLE>
50
<PAGE> 49
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
The weighted average exercise price of options granted in 1996 with option
prices less than the fair market value of the Company's stock on the grant date
was $0.48 and the weighted average grant date fair value of these options was
$0.89. The weighted average exercise price of options granted in 1996 with
option prices equal to the fair market value of the Company's stock on the grant
date was $5.00 and the weighted average grant date fair value of these options
was $2.31.
The following summarizes information related to options outstanding and options
exercisable at December 31, 1996:
<TABLE>
<CAPTION>
Weighted
Average
Remaining
Exercise Options Contractual Options
Price Outstanding Life (in years) Exercisable
- ---------------------------------------------------------------
<S> <C> <C> <C>
$ 0.07 873,949 9.2 344,352
$ 2.07 21,631 9.6 1,014
$ 3.33 4,867 5.1 4,867
$ 4.88 2,704 8.4 902
$ 5.00 30,277 9.8 -
$ 7.84 13,756 6.0 10,777
------- -------
947,184 361,912
</TABLE>
Of the options outstanding at December 31, 1996, options to purchase 361,912
shares of common stock were immediately exercisable at a weighted-average
exercise price of $0.36 per share. A total of 292,366 shares were still
available for grant under the 1995 Plan at December 31, 1996.
During the year ended December 31, 1996, the Company recorded deferred stock
compensation of $783,666 relating to stock options granted during the period
with exercise prices less than the estimated fair value of the Company's common
stock, as determined by an independent valuation analysis, on the date of grant.
The deferred stock
51
<PAGE> 50
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
compensation is being amortized into expense over the vesting period of the
stock options which generally range from 3 to 5 years. Deferred compensation
relating to stock options which vested immediately was expensed on the date of
grant. Compensation expense of $357,249 was recorded during the year ended
December 31, 1996 relating to these stock options, and the remaining $426,417
will be amortized into expense in future periods.
7. INCOME TAXES
The income tax provisions for the years ended December 31, 1995 and 1996 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, 1995
and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
-----------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryover $ 2,200,000 $ 3,000,000
Capitalized research and development 16,000 245,000
Accrued product retrofit costs 95,000 56,000
Inventory 97,000 85,000
Depreciation 65,000 102,000
Stock compensation -- 154,000
Other 39,000 158,000
---------------------------
2,512,000 3,800,000
Less: Valuation allowance (2,512,000) (3,800,000)
---------------------------
Net deferred taxes $ -- $ --
===========================
</TABLE>
52
<PAGE> 51
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
7. INCOME TAXES (CONTINUED)
The principal reasons for the difference between the effective income tax rate
and the federal statutory income tax rate are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1995 1996
---------------------------
<S> <C> <C>
Federal benefit expected at statutory
rates $(1,377,000) $(1,172,000)
Net operating loss with no current
benefit 1,377,000 1,172,000
State franchise taxes 3,046 10,000
Foreign income taxes 67 266
---------------------------
$ 3,113 $ 10,266
===========================
</TABLE>
In connection with the Company's Series D preferred stock sale (Note 6) a change
of ownership (as defined in Section 382 of the Internal Revenue Code of 1986, as
amended) occurred. As a result of this change, the Company's federal and state
net operating loss carryforwards generated through December 21, 1995
(approximately $13,500,000 and $4,500,000, respectively) will be subject to a
total annual limitation in the amount of approximately $400,000. Except for the
amounts described below, the Company expects that the carryforward amounts will
not be utilized prior to the expiration of the carryforward periods.
As a consequence of the limitation, the Company has at December 31, 1996 a net
operating loss carryover of approximately $8,700,000 for federal income tax
purposes which expires between 2005 and 2011, and net operating loss
carryforward of approximately $2,100,000 for state income tax purposes which
expires between 1997 and 2001.
The Company paid $5,280 and $1,600 for income and franchise taxes during the
years ended December 31, 1995 and 1996, respectively.
53
<PAGE> 52
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
8. COMMITMENTS
The Company leases its facilities under two operating leases. One of the leases
is non-cancelable, has an escalation clause of 5% per annum and has a term of
approximately five years. The Company's other facility is on a month-to-month
basis. Future payments under the non-cancelable facility operating lease are
approximately as follows:
1997 86,000
1998 44,000
Aggregate rental expense under these leases amounted to $135,980 and $141,456
during the years ended December 31, 1995 and 1996, respectively.
Future minimum payments under non-cancelable equipment operating leases are
approximately $13,000 per year through the year ended December 31, 2001. Rental
expense for these non-cancelable leases during the years ended December 31, 1995
and 1996 was approximately $14,000 and $13,000, respectively.
9. NIST GRANT
During 1994, the Company received notification it was awarded a $1,960,000
National Institute of Science and Technology ("NIST") grant from the U.S.
Department of Commerce ("USDC"). The grant is shared by the Company and two
strategic partners to fund approximately 49% of a $4 million joint development
project to adapt the ROBODOC System for use in hip revision surgery. The
development project and related NIST Grant began in 1995. The Company received
$19,409 and $116,049 in proceeds under this grant during the years ended
December 31, 1995 and December 31, 1996, respectively. As of December 31, 1996,
the Company had received $110,176 from the USDC which is payable to a
subcontractor for work performed by it under the development agreement.
54
<PAGE> 53
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: March 31, 1997
INTEGRATED SURGICAL SYSTEMS , INC.
By: /s/ Ramesh C. Trivedi
--------------------------------
Ramesh C. Trivedi, President
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Ramesh C. Trivedi Chief Executive Officer, March 31, 1997
- -----------------------------------
Ramesh C. Trivedi President and Director
(Principal Executive
Officer)
/s/ Michael J. Tomczak Vice President and Chief March 31, 1997
- -----------------------------------
Michael J. Tomczak Financial Officer
(Principal Financial
Officer)
/s/ James C. McGroddy Chairman of the Board March 31, 1997
- ----------------------------------
James C. McGroddy of Directors
/s/ Wendy Shelton-Paul Director March 31, 1997
- ----------------------------------
Wendy Shelton-Paul
/s/ John N. Kapoor Director March 31, 1997
- ----------------------------------
John N. Kapoor
/s/ Paul A. H. Pankow Director March 31, 1997
- ----------------------------------
Paul A. H. Pankow
</TABLE>
35
<PAGE> 54
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Integrated Surgical Systems, Inc.
We have audited the accompanying consolidated balance sheet of Integrated
Surgical Systems, Inc. as of December 31, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1995 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Integrated
Surgical Systems, Inc. at December 31, 1996, and the consolidated results of its
operations and its cash flows for the years ended December 31, 1995 and 1996 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Sacramento, California
January 31, 1997
36
<PAGE> 55
EXHIBIT INDEX
11.1- Statement of Computation of earnings per share.
27.1- Financial Data Schedule.
36
<PAGE> 1
EXHIBIT 11.1
INTEGRATED SURGICAL SYSTEMS, INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1995 1996
------------------------
<S> <C> <C>
Primary and fully diluted:
Average common shares outstanding 75,180 721,657
Common and common equivalent shares issued
during the twelve month period prior to the
initial public offering at prices below the
assumed public offering price in accordance
with Staff Accounting Bulletin No. 83 4,103,697 3,652,290
----------- -----------
Shares used in per share calculations 4,178,877 4,373,947
=========== ===========
Net loss $(4,053,528) $(3,448,829)
Preferred stock dividends (936,325) --
----------- -----------
Net loss applicable to common stockholders $(4,989,853) $(3,448,829)
=========== ===========
Net loss per common and common share equivalent $ (1.19) $ (0.79)
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,001,079
<SECURITIES> 0
<RECEIVABLES> 600,568
<ALLOWANCES> 0
<INVENTORY> 1,030,262
<CURRENT-ASSETS> 7,760,557
<PP&E> 1,256,241
<DEPRECIATION> 1,005,204
<TOTAL-ASSETS> 8,029,431
<CURRENT-LIABILITIES> 1,707,127
<BONDS> 0
0
0
<COMMON> 33,611
<OTHER-SE> 6,288,690
<TOTAL-LIABILITY-AND-EQUITY> 8,029,431
<SALES> 2,280,311
<TOTAL-REVENUES> 2,280,311
<CGS> 884,152
<TOTAL-COSTS> 4,892,020
<OTHER-EXPENSES> (57,298)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,438,563)
<INCOME-TAX> 10,266
<INCOME-CONTINUING> (3,448,829)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,448,829)
<EPS-PRIMARY> (0.79)
<EPS-DILUTED> (0.79)
</TABLE>
