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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934For the fiscal year ended December 31, 2001
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number 1-12471
INTEGRATED SURGICAL SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
1850 Research Park Drive, Davis, CA
(Address of Principal Executive Offices)
68-0232575
(IRS Employer Identification Number)
95616-4884
(Zip Code)
(530) 792-2600
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of Each Exchange on Which Each Class is Registered
Common Stock, $.01 Par Value None
Common Stock Purchase Warrants None
Securities registered pursuant to Section 12(g) of the Act:
Not Applicable
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Revenue for the issuer's most recent fiscal year was $9,136,223
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the closing price of the common stock
on March 15, 2002 was $3,064,917
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
On March 15, 2002, the issuer had 38,311,464 shares of common stock, $.01 par
value, outstanding.
Transitional Small business Disclosure Format: Yes [ ] No [X]
DOCUMENTS INDORPORATED BY REFERENCE
None.
Integrated Surgical Systems, Inc.
Form 10-KSB
For the fiscal year ended December 31, 2001
Table of Contents
Page
Part I.
Item 1. Description of Business 1
Item 2. Description of Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a
Vote of Security Holders 5
Part II.
Item 5. Market for Common Equity and
Related Stockholder Matters 6
Item 6. Management's Discussion and
Analysis 6
Item 7. Financial Statements 15
Item 8. Changes In and Disagreements
With Accountants on Accounting
and Financial Disclosure 15
Part III.
Item 9. Directors, Executive Officers,
Promoters and Control Persons;
Compliance With Section 16(a)
of the Exchange Act 16
Item 10. Executive Compensation 17
Item 11. Security Ownership of Certain
Beneficial Owners and
Management 18
Item 12. Certain Relationships and
Related Transactions 19
Item 13. Exhibits and Reports on
Form 8-K 19
Signatures 23
Part I
Item 1. Description of Business
Integrated Surgical Systems, Inc. designs, manufactures, sells and services
image-directed, computer-controlled robotic products for use in orthopaedic
and neurosurgical procedures. We were incorporated in Delaware in 1990.
Orthopaedic Applications
Our principal orthopaedic product, the ROBODOC(R) Surgical Assistant System
("ROBODOC"), combines our ORTHODOC(R) Presurgical Planner ("ORTHODOC") with a
computer-controlled robot for use in hip and knee replacement surgery. The
surgeon uses ORTHODOC, a computer workstation with our proprietary software,
for preoperative surgical planning. ORTHODOC converts a computerized
tomography ("CT") scan of the patient's joint into a three-dimensional bone
image. The surgeon selects prosthesis images from the ORTHODOC prosthesis
library, and manipulates the three-dimensional prosthesis models against the
bone image. We offer several lines of prostheses in our software library, and
implant manufactures contract with us for the development of prosthesis image
software. After the surgeon selects the optimal prosthesis, ORTHODOC creates a
surgical plan, which is then transferred to the surgical robot. The surgical
plan guides the robot as it mills the bone in the operating room. Both hip and
knee replacement surgery involve removing a portion of the bone at the joint
and replacing it with a prosthesis. For hip replacement surgery, the ball-end
of the ball-and-socket prosthesis is attached to a pin which is inserted into
a cavity made in the upper leg bone by ROBODOC. In knee replacement surgery,
ROBODOC mills the leg bone ends for precise and accurate prosthesis alignment.
Neurosurgical Applications
We entered the neurosurgical equipment sector when we acquired Innovative
Medical Machines International, S.A., of Lyon, France, in September 1997. This
wholly owned subsidiary, now Integrated Surgical Systems, S.A., designs,
manufactures, sells and services the NeuroMate(TM) System ("NeuroMate"), a
computer-controlled robotic arm, head stabilizer and presurgical planning
workstation.
NeuroMate's proprietary robotic arm and control system are designed to
position and hold critical tools during stereotactic brain surgery precisely.
The brain remains largely unexposed in stereotactic neurosurgery, and the
surgeon works without requiring direct visualization of the brain itself. This
minimally invasive surgery is made possible by NeuroMate's spatial coordinate
system. During presurgical planning, the patient's CT, magnetic resonance or
other images are correlated to the patient's physical characteristics. During
surgery, the NeuroMate's robotic arm guides the surgeon, through small holes
in the skull, to the pre-selected sites in the brain.
Marketing, Sales and Distribution
ROBODOC cannot be marketed in the United States until it has been cleared by
the U.S. Food and Drug Administration (See "Government Regulation"). We market
the ROBODOC System to orthopaedic and trauma surgeons and hospitals in Europe
through direct sales and arrangements with implant manufacturers and in Japan
through a Japanese distributor. NeuroMate is marketed in Europe and the U.S
through direct sales and in Japan through our Japanese distributor.
We also promote our products through presentations at trade shows, through
advertisements in professional journals and technical and clinical
publications, and through direct mail campaigns. Presentations to potential
customers focus on the clinical benefit to the patient and the potential
financial and marketing benefit to hospitals and surgeons.
The ISS installed base at December 31, 2001 was:
Product Germany Japan Other
ROBODOC Systems 28 8 9
NeuroMate Systems 1 3 13
Manufacturing
Our primary manufacturing process is assembly of purchased components,
integration of our proprietary software, product testing, and packaging. Our
manufacturing facilities are located in Davis, California and Lyon, France.
We purchase substantially all of our system components from outside vendors.
The surgical component of the ROBODOC consists of a customized robot arm
supplied by Sankyo Seiki of Japan, a robot base and a control cabinet. Upon
delivery and assembly, robot arms are tested and devices such as the bone
fixator, probes, cutter-bearing sleeves and tool guides are attached to the
robot.
ORTHODOC is composed of a computer workstation and associated data peripherals
incorporating our proprietary software. A computer board interface to CT or
x-ray scanner input modules is added to the workstation, as is the ROBODOC
transfer drive. The unit is configured for 100 to 240 AC volt operation.
NeuroMate consists of a robot arm, electronic control, and base, and is
operated by our proprietary software. Audemars-Piguet supplies the customized
robot arm for NeuroMate.
Surgical supplies, including sterile drapes, bone screws and cutters, are
manufactured to our specification by outside vendors and are inspected upon
receipt to ensure that our specifications are consistently met. We purchase
these items in quantity and distribute them to our customers as needed.
Our production facilities are subject to periodic inspection by the FDA for
compliance with Good Manufacturing Practices. We are also subject to European
manufacturing standards for our European sales, and have secured the required
ISO-9001 registration. All products are shipped bearing the CE Mark,
certifying that they meet the European Union's marketing requirement.
Research and Development
Since inception, our engineering activities have focused on the development of
innovative image-directed computer-controlled robotic products for surgical
applications, along with specialized operating hardware and software systems
to support these products. We incurred research and development expenses of
approximately $3,511,000 during the year ending December 31, 2001, and
$4,175,000 in the year ending December 31, 2000.
Orthopaedic applications in the research and development stage include
acetabular cup planning and bone preparation for hip socket replacement
surgery, and long-bone osteotomies (cuts in bone intended to reshape or
realign abnormal or deformed structures).
We have received an interest-free loan from ANVAR, a French agency established
to aid research and development projects. The loan provided funding for the
first phase of the development of NeuroMate applications for spinal surgery.
Competition
The principal competition for ROBODOC comes from manual surgery performed by
orthopaedic surgeons using surgical power tools and manual devices. These
tools and devices are manufactured by major orthopaedic companies, including:
Howmedica, Inc. and Osteonics, Inc. (divisions of Stryker Corporation);
Zimmer, Inc.; DePuy, Inc. (a subsidiary of Johnson & Johnson); and Biomet,
Inc.
Navigational systems, offered by the major manufacturers of orthopaedic
devices, are an intermediate step between free-hand and robotic surgery.
Navigational systems use a tracking device affixed to the end of traditional
cutting tools to assist the surgeon in visualizing bone preparation for
implant placement.
The principal competition for NeuroMate comes from manufacturers of frame-
based and frameless stereotactic systems, some of which are also referred to
as navigators. Approximately twenty navigator models have been introduced,
including those by Radionics, Sofamor Danek, and Ohio Medical Surgical
Products, all located in the U.S.; Elekta, located in Sweden; and Brain Lab of
Germany.
URS GmbH, a German medical robotics company, competes with us in both the
orthopaedic and neurosurgery fields. URS purchased the Caspar orthopaedic
robotic line from Orto Maquet after the latter ceased operation in 2001, and
has developed a neurosurgery system of its own.
Warranty and Service
Our customers purchase warranty coverage (parts and labor) as well as surgical
disposables through annual service and maintenance agreements.
Our technical staff trains medical professionals in the use of our products
and provides field service. Technical support is also provided from our
engineering department.
Patents and Proprietary Rights
We rely on a combination of patent, trade secret, copyright and trademark laws
and contractual restrictions to establish and protect proprietary rights in
our products and to maintain our competitive position.
We have been issued five U.S. patents, have four patents pending, and have
filed additional patent applications covering various aspects of our
technology. U.S. patents include:
Computer aided system for revision total hip replacement surgery;
Computer system and method for finish cutting bone cavities;
Computer system and method for positioning a surgical robot;
Computer system and method for cavity generation for surgical
planning and initial placement of a bone prosthesis; and
Computer system and method for performing image directed robotic
orthopaedic procedures without a fiducial reference system.
Significant portions of ORTHODOC and ROBODOC software are protected by
copyrights. IBM has granted us a royalty-free license for the underlying
software code for ROBODOC. In addition, IBM has agreed not to assert
infringement claims against us with respect to an IBM patent relating to
robotic medical technology, to the extent that this technology is used in our
products. We have registered the marks ROBODOC and ORTHODOC.
Government Regulation
The medical devices we manufacture and market are subject to extensive
regulation by the U.S. Food and Drug Administration ("FDA") and by foreign and
state governments.
Our ROBODOC and NeuroMate Systems are approved for use in Europe and carry the
European Union's CE Mark. Both ORTHODOC and NeuroMate are cleared by the FDA
for marketing in the United States, and NeuroMate has been approved for use by
the Japanese Ministry of Health ("JMH"). While ROBODOC has not yet been
approved for use by the JMH, Japanese hospitals and surgeons are able to
purchase and use our systems while approval is pending. We have completed
clinical trials in Japan and hope to receive a determination from the JMH in
2002. However, there can be no assurance that the determination will be
favorable, or that any determination will not include unfavorable limitations
or restrictions.
In December 2000, we started U.S. clinical trials designed to secure FDA
clearance to market the ROBODOC System in the U.S. The trials anticipate the
completion of hip replacement surgeries in 188 subjects. Upon completion of
the surgeries, we will submit our application for clearance to market to the
FDA.
Products manufactured or distributed pursuant to FDA clearances or approvals
are subject to pervasive and continuing regulation by the FDA, including
quality system requirements, documentation and reporting of adverse
experiences with the use of the device. Device manufacturers are required to
register their facilities and list their devices with the FDA and with certain
state agencies and are subject to periodic compliance inspections by the FDA
and others.
Labeling and promotion activities are subject to scrutiny by the FDA and, in
certain instances, by the Federal Trade Commission. We are also subject to a
variety of state laws and regulations in those states or localities where our
products are or will be marketed. As is the case with other manufacturers, we
are 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.
Although we have not been cleared to market the ROBODOC System in the U.S., we
are permitted to export the system provided certain requirements are met.
Products approved for use by European Union member countries, Australia,
Canada, Israel, Japan, New Zealand, Switzerland and South Africa do not
require FDA export approval. FDA export approval, when it is required, is
granted when certain requirements are met 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.
The introduction of our products in foreign markets has subjected us and will
continue to subject us to foreign regulatory clearances that vary from country
to country. Many countries also impose product standards, packaging
requirements, labeling requirements and import restrictions on medical
devices. In addition, each country has its own tariff regulations, duties and
tax requirements.
ROBODOC satisfies international electromedical standard IEC 601-1 and the
protection requirements of the Electromagnetic Compatibility Directive
(89/336/EEC). We have also received ISO 9001 registration, EN 46001
certification, and ED Directive 93/42/eec Annex II, Article 3 approval.
Meeting these standards and requirements, and receiving these certifications
and approvals, allows us to apply the CE Mark to our products. ROBODOC and
NeuroMate also satisfy the relevant provisions of the Medical Device Directive
for Class IIb Medical Devices.
Product Liability
We maintain product liability insurance against product liability claims in
the amount of $10 million per occurrence and $10 million in the aggregate. We
have experienced no liability claims to date.
Employees
On December 31, 2001 ISS had 59 full time employees: 26 in engineering, 12 in
manufacturing, 7 in field service and 14 in sales and administration. None of
our employees is covered by a collective bargaining agreement and we believe
that our relationship with our employees is satisfactory.
Item 2. Description of Property
Our executive offices and principal production facilities, which comprise a
total of approximately 30,500 square feet of space, are located in Davis,
California. We occupy the facilities in Davis under a lease that expires in
June 2005. The lease provides for rent of approximately $32,000 per month in
2002 (plus real estate taxes and assessments, utilities and maintenance) and
is subject to adjustment in subsequent years for cumulative increases in the
cost of living index, not to exceed 4% per year.
We lease our European facility under a renewable operating lease with terms
that include three year non-cancelable periods that expire in 2007. The lease
provides for rent of approximately $6,000 per month.
Item 3. Legal Proceedings
We have from time to time been notified of various claims incidental to our
business that are not the subject of pending litigation. While the results of
claims cannot be predicted with certainty, we believe that the final outcome
of all such matters will not have a materially adverse effect on our
consolidated financial position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II.
Item 5. Market for Common Equity and Related Stockholder Matters
(a) Our common stock and redeemable common stock purchase warrants
("warrants") are traded in the over-the-counter market and quoted on the
OTC Bulletin Board. On February 14, 2001, our common stock and warrants
were delisted from the Nasdaq SmallCap Market because the common stock
failed to maintain a minimum bid price of $1.00 per share as required
under Nasdaq rules. Our common stock and warrants were delisted by
EASDAQ on March 2, 2001, and by the Pacific Exchange on April 17, 2001
for a failure to satisfy a similar minimum bid price requirement.
Set forth below are the high and low closing sale prices for the common
stock and warrants for each quarter since January 1, 2000, as reported
by the Nasdaq.
Common Stock Warrants
(RDOC) (RDOCW)
Quarter ended 2001 High Low High Low
March 31, $0.438 $0.156 $0.100 $0.001
June 30, $0.180 $0.085 $0.100 $0.001
September 30, $0.110 $0.055 $0.001 $0.001
December 31, $0.190 $0.040 $0.050 $0.001
Quarter ended 2000
March 31, $4.063 $1.656 $3.125 $0.406
June 30, $2.625 $1.250 $2.000 $0.500
September 30, $1.500 $0.469 $0.719 $0.156
December 31, $0.438 $0.094 $0.156 $0.001
(b) On December 31, 2001, there were 198 holders of record of the common
stock and 6 holders of record of the warrants.
(c) During the fourth quarter of 2001, we issued a total of 1,375,000 shares
of common stock to an accredited investor upon conversion of our
preferred stock. The issuance and sale of these shares were exempt from
the registration requirements of the Securities Act under Section
3(a)(9).
Item 6. Management's Discussion and Analysis
The following discussion and analysis relates to the consolidated operations
of Integrated Surgical Systems, Inc. and should be read in conjunction with
the consolidated financial statements of Integrated Surgical Systems, Inc.,
including the notes thereto, appearing elsewhere in this report.
Results of Operations (2001 vs. 2000)
At $9.1 million, 2001 revenue was the highest in our history with the
number of units sold more than double the 2000 level and a 70% increase
in systems sales and leasing revenue. While revenue increased, expenses
were reduced, yielding a 2001 net loss of $3.4 million compared to a net
loss of $12.5 million in 2000.
The components of revenue were:
2001 2000
ROBODOC Systems (units) 8 3
NeuroMate Systems (units) 2 1
Systems sales and leasing revenue $5,550,000 $3,255,000
Systems parts and services sales 2,746,000 1,872,000
Product development revenue 840,000 807,000
____________ ____________
$9,136,000 $5,934,000
We started 2000 with an exclusive European distribution agreement which was
terminated in May of that year, leaving us without a European sales force.
Consequently, we sold only two systems in Europe in 2000. The other systems
sold in 2000 were sold in Japan. By 2001, we were rebuilding our European
presence and our Japanese sales were growing. Our 47% increase in systems
parts and services sales is the result of the growth of our installed base.
The gross margin improvement, 57% in 2001 versus 41% in 2000, reflects
increased unit production in 2001 as a relatively fixed manufacturing
overhead was spread over more units than in 2000.
Selling, general and administrative expenses were lower in 2001 than 2000, the
result of headcount reduction and a continuing focus on cost control. Research
and development expense for 2000 included costs associated with the August
2000 launch of our knee replacement technology. These costs had no
corresponding cost in 2001, resulting in a 16% decrease in research and
development expense. Other expense includes $150,000 and $165,000 of foreign
currency exchange losses in 2001 and 2000 respectively, primarily related to
intercompany amounts owed by and to our wholly-owned subsidiaries. Other
income for 2000 included approximately $740,000 of licensing fees related to
the termination of our European distribution agreement.
During the fourth quarter of 2001, we discovered clerical errors which arose
in 2001 relating to the elimination of certain intercompany sales by our
wholly-owned French subsidiary. In 2001, we recorded a fourth quarter
adjustment to reduce net revenue by approximately $516,000 and to reduce cost
of revenue by an equivalent amount. This adjustment related to an equivalent
amount of net revenue and cost of revenue for the first three quarters of 2001
of approximately $299,000, $150,000 and $67,000, respectively. The impact of
this adjustment had no effect on previously reported gross margin, operating
loss, net loss or net loss per share for our 2001 interim periods or the
fourth quarter of 2001.
Cumulative Effects of a Change in Accounting Principles
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," and effective January 1, 2000, we changed our method of
accounting for revenue recognition in accordance with SAB No. 101. Previously,
we generally recognized revenue upon delivery of equipment to customers. The
costs of installation and training were accrued in the same period revenue was
recognized. Under the new accounting method adopted retroactively to January
1, 2000, we now recognize revenue upon completion of training and installation
of the equipment at the end-user's site, except when the sales contract
requires formal customer acceptance. Equipment sales with contractual customer
acceptance provisions are recognized as revenue upon written notification of
customer acceptance, which occurs after the completion of training and
installation. Furthermore, due to business customs in Japan and our
interpretation of Japanese law, all equipment sales to Japan are recognized
upon customer acceptance, which occurs after the completion of training and
installation. Revenue related to maintenance and service contracts is
recognized ratably over the duration of the contracts. The cumulative effect
of the change on prior years resulted in an increase in the consolidated loss
of $581,907, which is included in the consolidated statement of operations for
the year ended December 31, 2000. The effect of the change on the year ended
December 31, 2000 was to decrease the consolidated loss before the cumulative
effect of the accounting change by $581,907 ($0.03 per share). For the years
ended December 31, 2001 and 2000, we recognized $0 and $1,137,907 respectively,
of revenue previously deferred in connection with the cumulative effect
adjustment at January 1, 2000. The effect of that revenue and related cost of
revenue was to reduce the consolidated loss before the cumulative effect of
the accounting change by $0 and $581,907 for the years ended December 31, 2001
and 2000, respectively. The unaudited pro forma amounts presented in the
statement of operations were calculated assuming the accounting change was
made retroactively to prior periods.
On November 16, 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-
27, "Application of EITF Issue No. 98-5, Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios to Certain Convertible Instruments." EITF 00-27 requires that any
beneficial conversion feature associated with a convertible instrument be
calculated using the intrinsic value of a conversion option after first
allocating the proceeds received to the convertible instrument and any other
detachable instruments included in the exchange (such as detachable warrants).
As a result of adopting EITF 00-27, we recorded a one-time, non-cash charge in
the fourth quarter of 2000 to accumulated deficit of $707,131 as the
cumulative effect of a change in accounting for the embedded beneficial
conversion feature associated with the Series C through H Convertible
Preferred Stock.
Liquidity
The reports of our independent auditors on our 2001 and 2000 consolidated
financial statements included explanatory paragraphs stating that there is
substantial doubt with respect to our ability to continue operating as a
going concern. We believe that we have a viable plan to address these issues
and enable us to continue through the end of 2002. This plan includes
increasing sales of our products in existing markets, increasing sales of
system upgrades, and reducing operating expenses as necessary. Although we
believe that our plan will be realized, there is no assurance that we will
be successful. In the event that we are unsuccessful, it is possible that we
will cease operations. The consolidated financial statements do not include
any adjustments to reflect the uncertainties related to the recoverability
and classification of assets or the amounts and classification of liabilities
that may result from an inability on our part to continue as a going concern.
Our expenses have always exceeded our revenue, and until 2001, this deficit
has been funded through sales of equity securities (see, however, "Capital
Resources"). At December 31, 2001 our "quick ratio" (cash and accounts
receivable divided by current liabilities), a conservative liquidity measure
designed to predict our ability to pay our bills, was only .28. It has been
difficult for us to meet our obligations, including payroll, as they come due,
and we expect this situation to continue through 2002.
We expect to derive most of the cash required to support our operations
through sales of our ROBODOC System. Inventory, $4,100,000 in 2000, was our
largest source of operating cash as $1,745,000 of inventory was converted into
sales. We had no sales-order backlog at December 31, 2000 and a corresponding
backlog of two ROBODOC Systems sold but not delivered at December 31, 2001.
Continued conversion of our inventory balance into cash is critical to our
survival in 2002.
Accounts receivable provided $366,000 of operating cash in 2001 as we
accelerated collection of outstanding accounts. Collection of these
receivables is critical to our survival in 2002.
Increases in our accounts payable provided $450,000 in operating cash, offset
by a $347,000 decrease in other liability accounts. Unearned income,
representing payments for systems sales on which revenue is not yet
recognized, as well as advance payment for service contracts on which revenue
is recognized ratably over the period of the contract, used $273,000 of cash
as fewer of our installation commitments remained unmet at December 31, 2001.
We have the following contractual obligations and commercial commitments at
December 31, 2001:
Total < 1 year 1-3 years >3 years
Facility operating leases $1,625,000 $470,000 $976,000 $179,000
Equipment operating leases 71,000 35,500 35,500
Research grant 87,000
We will require substantial funds for further product development, future
clinical trials, regulatory approvals, and the marketing of our products. Our
future capital requirements will depend upon the progress of our research and
development programs; the time and costs involved in securing regulatory
approvals; the cost of filing, defending and enforcing our intellectual
property rights; and competing technology and market developments. Future
expenditures for product development and clinical trials are discretionary
and, accordingly, can be adjusted, as can certain selling, general and
administrative expenses, based on the availability of cash.
The financial statements of Integrated Surgical Systems, S.A. ("ISS-
SA"), our wholly-owned French subsidiary, for the year ended December
31, 2001 have net assets of less than 50% of ISS-SA's capital stock.
This equity deficit is considered to be a sign of bankruptcy under
French law. Unless this situation is remedied before December 31, 2002,
a third party or the French courts could petition for correction or the
dissolution of ISS-SA. We plan to correct this equity deficiency by
converting a portion of ISS-SA's intercompany payables into equity of
ISS-SA.
Capital Resources
On March 15, 2002 there were 38.3 million shares of our common stock
outstanding, trading in the over-the-counter market at $0.08 a share, giving
us a market capitalization of $3.1 million. In the first quarter of 2001, our
common stock and warrants were delisted by the Nasdaq because the stock did
not maintain the market's minimum bid price of $1.00 per share. Securities
traded at less than $5.00 and not traded on a national securities exchange or
quoted on the Nasdaq are called penny stocks. The Securities and Exchange
Commission rules require brokers to provide information to purchasers of penny
stocks, and these disclosure requirements and the requirement that brokers
must make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement to
the transaction in advance may have the effect of reducing trading activity in
our common stock and make it more difficult for investors to sell.
We have received net proceeds of $696,000 through our equity line of credit
through December 31, 2001, and through that date, have $11.3 million in
additional credit on which to draw. However, the terms of the agreement
provide that we may not take advantage of the line of credit if the
contemplated transaction results in the investor's ownership of more than 4.9%
of our common stock. At December 31, 2001, we had 38,306,385 shares of common
stock outstanding. A theoretical purchase of 4.9% of our shares on that date,
the maximum available under the line, would have provided net proceeds of
$176,000.
Equity line of credit shares are purchased by the investor at 85% of the
lowest closing bid price of our common stock measured in the period before the
purchase. We anticipate that the investor will place orders to resell the
shares it will purchase from us. The sale of a large number of shares may
exacerbate declines or impede increases in the market price of our common
stock.
In 2000, we sold approximately $4,500,000 of convertible preferred stock and
warrants. Conversion of our preferred stock and the subsequent sale of our
common stock to the public may result in a decrease in our common stock market
price. At December 31, 2001, we had 312 shares of convertible preferred stock
outstanding. Each share of preferred stock has a stated value of $1,000 and is
convertible into common stock at a conversion price equal to 80% of the lowest
sale price of the common stock over the five trading days preceding the date
of conversion. Because there is no minimum conversion price, there is no limit
on the number of shares of common stock that holders of preferred stock may
acquire upon conversion. These shares acquired at a 20% discount from the
market price, may then be sold at market price realizing a profit on the
difference.
The holders of the preferred stock could also engage in short sales of our
common stock after delivering a conversion notice to us, which could
contribute to a decline in the market price of the common stock and give them
the opportunity to profit from that decrease by covering their short position
with the converted shares acquired at a 20% discount to the prevailing market
price. This activity, or the possibility of such activity, could exacerbate
any decline or impede any increase in the market price of our shares.
We do not expect, therefore, that we will be able to raise significant funds
through the sale of equity securities in 2002.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these consolidated financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to bad debts, inventories, warranties, contingencies and
litigation. We base our estimates on historical experience and on other
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our
consolidated financial statements:
We recognize revenue from sales of our systems upon the completion of
equipment installation and training at the end-user's site, except when the
sales contract requires formal customer acceptance. Equipment sales with
contractual customer acceptance provisions are recognized as revenue upon
written notification of customer acceptance, which generally occurs after the
completion of installation and training. Furthermore, due to business customs
in Japan and our interpretation of Japanese law, all equipment sales to Japan
are recognized after customer acceptance, which generally occurs after the
completion of installation and training. Revenue related to maintenance and
service contracts is recognized ratably over the duration of the contracts.
We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
Where our products are not covered by separate service agreements, we provide
for the estimated cost of product warranties at the time revenue is
recognized. Our warranty obligation is affected by product failure rates,
material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service
delivery costs differ from our estimates, revisions to the estimated warranty
liability would be required.
We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those we
projected, additional inventory write-downs may be required.
Property, plant and equipment and intangible assets are amortized over their
useful lives. Useful lives are based on our estimates of the period that the
assets will generate revenue. Property and equipment and intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 eliminates the pooling-of-interests method of accounting
for business combinations. Under statement No. 142, goodwill and indefinite
lived intangible assets are no longer amortized but are reviewed annually, or
more frequently if impairment indicators arise, for impairment. Intangible
assets whose lives are not indefinite are amortized over their useful lives,
and reviewed for impairment in accordance with SFAS No. 121. We will adopt
SFAS Nos. 141 and 142 on January 1, 2002. We adopted SFAS No. 141 on July 1,
2001 with no impact on our consolidated financial statements. We will adopt
SFAS No. 142 on January 1, 2002, and we do not expect that the adoption will
have any impact on our consolidated financial position or results of
operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
associated asset retirement costs. The new rules apply to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) normal operation of a long-
lived asset. We will adopt SFAS No. 143 on January 1, 2003, and we do not
expect that the adoption will have any impact on our consolidated financial
position or results of operations.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144, which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," provides a single accounting model for long-lived assets
to be disposed of. Although retaining many of the fundamental recognition and
measurement provisions of SFAS No. 121, SFAS No. 144 significantly changes
the criteria that would have to be met to classify an asset as held-for-
sale. The distinction is important because assets held-for-sale are stated
at the lower of their fair values or carrying amounts and depreciation is no
longer recognized. We will adopt SFAS No. 144 effective January 1, 2002, and
we do not expect that the adoption will have any impact on our consolidated
financial position or results of operations.
Risk Factors and Cautionary Statement Regarding Forward-Looking Information
You are cautioned that this Form 10-KSB contains "forward-looking statements,"
within the meaning of the Private Securities Litigation Reform Act of 1995,
that involve risks and uncertainties. Our plans, strategies, objectives,
expectations and intentions are subject to change at any time at the
discretion of management and the board of directors. Our plans and results of
operations will be affected by our ability to manage any growth and working
capital and our ability to finance future operations, none of which is
assured. In addition, the risk factors that follow may affect our actual
results and may cause actual results to differ materially from those expressed
in or implied by any forward-looking statement. These risk factors are not an
exhaustive list. Additional factors are discussed from time to time in our
filings with the Securities and Exchange Commission.
The reports of our independent auditors on our 2001 and 2000 consolidated
financial statements included explanatory paragraphs stating that there is
substantial doubt with respect to our ability to continue as a going concern.
We believe that we have a viable plan to address these issues and enable us to
continue through the end of 2002. This plan includes increasing sales of our
products in existing markets, increasing sales of system upgrades, and
reducing operating expenses as necessary. Although we believe that our plan
will be realized, there is no assurance that we will be successful. In the
event that we are unsuccessful, it is possible that we will cease operations.
The consolidated financial statements do not include any adjustments to
reflect the uncertainties related to the recoverability and classification of
assets or the amounts and classification of liabilities that may result from
an inability on our part to continue as a going concern.
We have never had an operating profit, nor net income and we may not achieve
or maintain profitability. We have experienced significant losses since we
began operations, and we will continue to incur losses until such time, if
ever, as we derive significant revenue from the sale of our products.
Our future financial performance will depend almost entirely on sales of our
ROBODOC System. We expect to derive most of our near-term revenue from sales
of our ROBODOC System. Having recognized revenue on eight systems in 2001 and
three systems in 2000, we must develop an effective sales and marketing
organization and expend sufficient funds to inform potential customers of the
distinctive characteristics and advantages of using our system instead of
traditional surgical tools and procedures.
Because the ROBODOC System employs innovative technology rather than an
improvement of existing technology, and because it represents a substantial
capital expenditure, we expect to encounter resistance to change, which we
must overcome if the system is to achieve significant market acceptance.
Furthermore, our ability to market the ROBODOC System in the U.S. is dependent
upon clearance by the FDA. We can give you no assurance that we will receive
FDA clearance, or that the ROBODOC System will achieve the market acceptance
in the U.S. and foreign markets to generate sufficient revenue to secure our
profitability.
We are dependent on foreign sales. Most of our sales have been to customers in
Germany and Japan. Until such time, if ever, as we receive clearance from the
FDA to market the ROBODOC System in the U.S., we will continue to be subject
to the risks of foreign sales. These risks include economic or political
instability, shipping delays, fluctuations in foreign currency exchange rates,
changes in regulatory requirements, customs duties and export quotas and other
trade restrictions. Any of these risks could have a material adverse effect on
our business. To date, payment for substantially all systems has been fixed in
U.S. dollars. However, future customers may not be willing to make payment for
our products in U.S. dollars. If the U.S. dollar strengthens substantially
against the foreign currency of a country in which we sell our products, the
cost of purchasing our products in U.S. dollars would increase and may inhibit
purchases of our products by customers in that country. We are unable to
predict the nature of future changes in foreign currency markets or the
effect, if any, they may have on us.
Our ability to maintain operations in foreign countries will depend on
whether we can continue to comply with any minimum capitalization
criteria required in such countries, and given our lack of adequate
liquidity, there is no assurance that we will be able to comply with
such requirements in the future. In the event that we cannot meet the
minimum capital requirements to operate in foreign countries, we may be
required to cease operations in those countries.
Our quarterly revenue and results of operations may fluctuate and may not be
indicative of expected revenue and results of operations for the full year.
The level of our revenue and results of operations fluctuate with the number
of ROBODOC Systems sold. We had a sales-order backlog of two ROBODOC Systems
sold but not delivered at December 31, 2001. The number and timing of the
systems we sell may cause revenue and earnings swings on a quarterly basis
that may not be indicative of revenue and earnings for the full year.
We may not be able to secure the regulatory approvals needed to expand the
sales of our products to new foreign markets. The introduction of our products
in foreign markets has subjected and will continue to subject us to foreign
regulatory approvals. These approvals may be unpredictable and uncertain and
may impose substantial additional costs and burdens. Many countries also
impose product standards, packaging requirements, labeling requirements and
import restrictions on medical devices. We can give you no assurance that any
of our products will receive further approvals.
We need, but have not yet secured, clearance from the FDA to market our
ROBODOC System in the U.S. In December 2000, we began U.S. clinical trials
designed to demonstrate that the ROBODOC System is safe and effective for its
intended use as an alternative to other surgical power tools and manual
devices used in hip replacement surgery. The trials anticipate the completion
of hip replacement surgeries in 188 subjects performed at three or four
clinical trial sites. The first site, Sutter General Hospital in Sacramento,
California, performed the first surgery under study protocol in December 2000
and has performed 46 surgeries through December 31, 2001. The second site, the
University of Arkansas in Little Rock, Arkansas, performed the first surgery
under study protocol in October 2001 and has performed 6 surgeries through
December 31, 2001.
We can provide you no assurance that, at the completion of the clinical
trials, the FDA will agree that our system is safe and effective, or that if
the FDA grants us clearance to market our system in the U.S. that such
clearance will not include unfavorable limitations or restrictions.
Even after receipt of any FDA clearance to market, we expect that the FDA will
consider any new ROBODOC surgical applications to be new indications for use,
which generally require FDA clearance prior to marketing. The FDA may require
additional approvals before allowing us to incorporate new imaging modalities
(such as ultrasound and MRI) or other different technologies in the ROBODOC
System. The FDA will likely require new clinical data to support new
indications and may require new clinical data for clearance of enhanced
technological characteristics.
We may not be able to comply with Quality System and other FDA reporting and
inspection requirements. Assuming that we secure the necessary FDA clearances
for our products, in order to maintain these clearances we must, among other
things, register our establishment and list our devices with the FDA and with
certain state agencies, We must maintain extensive records, report any adverse
experiences on the use of our products and submit to periodic inspections by
the FDA and state agencies, The Food, Drug and Cosmetic Act also requires
devices to be manufactured in accordance with the quality system regulation,
which sets forth good manufacturing practices requirements with respect to
manufacturing and quality assurance activities.
Noncompliance with FDA requirements can result in fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant pre-market clearance or pre-
market approval for devices, withdrawal of marketing clearances or approvals,
and criminal prosecution. The FDA also has the authority to request repair,
replacement or refund of the cost of any device we manufacture or distribute.
The manufacture and sale of medical products exposes us to the risk of
significant damages from product liability claims. We maintain product
liability insurance against product liability claims in the amount of $10
million per occurrence and $10 million in the aggregate. Although we have not
experienced any product liability claims to date, a successful claim in excess
of our insurance coverage could have a materially adverse effect on our
business, financial condition and results of operations.
We have produced only 49 commercial ROBODOC Systems through December 31, 2001,
and we may not be able to manufacture our systems at a cost or in such
quantity as will be necessary for profitable operation. We have produced only
49 commercial systems in the past six years. Manufacturers often encounter
difficulties in scaling up for manufacturing new products, including problems
involving product yields, quality control and assurance, component and service
availability, adequacy of control policies and procedures, lack of qualified
personnel, compliance with FDA regulations, and the need for further FDA
approval of new manufacturing processes and facilities. We can give you no
assurance that production yields, costs or quality will not be adversely
affected as we seek to increase production, and any such adverse effect could
have a material adverse effect on our business, financial condition and
results of operations.
We are dependent on our supplier of robots. Although we have multiple sources
for most of the components, parts and assemblies used in our systems, we are
dependent on Sankyo Seiki of Japan for the ROBODOC System robot arm, and
Audemars-Piguet of Switzerland for the supply of the customized NeuroMate
robot. Although we believe we can secure a robot arm for either system from
other suppliers, we can give you no assurance that delays resulting from the
engineering effort to adapt alternative components would not have a material
adverse effect on our business, financial condition and results of operations.
We depend heavily on the principal members of our management and on our
engineers. Our growth and future success will depend in large part on the
continued contributions of our key technical and senior management personnel.
Dr. Ramesh Trivedi, our President and Chief Executive Officer, is employed
pursuant to an employment agreement terminable by us or Dr. Trivedi at any
time. None of our executives or technical personnel, other than Dr. Trivedi,
is employed pursuant to an employment agreement. The loss of the services of
Dr. Trivedi or other senior management or key technical personnel could have a
material adverse effect on our business, financial condition and results of
operations.
Our success may depend, in part, on our ability to defend our intellectual
property. We have secured patent and other proprietary right protection for
our technologies and we rely on trade secrets, proprietary know-how and
continuing technological innovation to develop our products. Any defense of
our intellectual property could be costly and require significant time and the
attention of our management and technical personnel.
Purchases of our shares are subject to the SEC's penny stock rules. Securities
traded at less than $5.00 and not traded on a national securities exchange or
quoted on the Nasdaq are called penny stocks. The Securities and Exchange
Commission rules require brokers to provide information to purchasers of penny
stocks, and these disclosure requirements and the requirement that brokers
must make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement to
the transaction in advance may have the effect of reducing trading activity in
our common stock and make it more difficult for investors to sell.
Item 7. Financial Statements
The financial statements follow Item 13 of this report.
Item 8. Changes in and disagreements with accountants on accounting and
financial disclosure
We did not have any changes in or disagreements with our accountants on
accounting and financial disclosure.
Part III
Item 9. Directors, Executive Officers and Control Persons;
Compliance with Section 16(A) of the Exchange Act
Our executive officers and directors are listed below:
Name Age Position with the Company
Ramesh C. Trivedi 62 President, Chief Executive Officer, Director
Patricia E. Pilz 53 Chief Financial Officer
Leland Witherspoon 49 Vice President
Falah Al-Kadi 51 Chairman of the Board of Directors
Elliot J. Smith 69 Director
Ramesh C. Trivedi has been president, chief executive officer and a director
of Integrated Surgical Systems since 1995. Prior to that time, Dr. Trivedi was
a principal of California Biomedical Consultants, an international consulting
firm, and he served as the president and chief executive officer of DigiRad
Corporation, a medical imaging company. Dr. Trivedi received his Ph.D. in
chemical engineering from Lehigh University, and holds an MBA from Pepperdine
University.
Patricia E. Pilz was appointed chief financial officer upon joining Integrated
Surgical Systems in March 2001. From 1999 through 2000, she was employed by
Transamerica Intellitech, Inc., a software developer and data supplier to the
real estate industry, as its vice president of finance. From 1996 through
1998, Miss Pilz was employed by ECN Health Systems, Inc., a startup engaged in
business process reengineering for managed healthcare, as its executive vice
president for systems development. Prior to that time, she served in a senior
financial executive capacity for other public and private corporations. Miss
Pilz received a Bachelor's degree from Harvard University, an MBA from Boston
University and became a Certified Public Accountant in 1980.
Leland Witherspoon has been vice president of engineering since joining ISS in
1997. From 1992 to 1997, Mr. Witherspoon was director of product research and
development for Biomedicals, Inc., a developer and manufacturer of
cardiopulmonary and cardiovascular products. Prior to that time, he served in
various technical and management positions for Pfizer/Shiley, Xerox Medical
Systems and IBM. Mr. Witherspoon received his Bachelor of Science from
Rensselaer Polytechnic Institute.
Falah Al-Kadi has been chairman of the board of directors since January 2000
and a director since December 1999. Mr. Al-Kadi is vice chairman of the
Dogmoch Group of Companies, a position he has held since 1994.
Elliot J. Smith was appointed to the board of directors in January 2001. He
has been the managing director of Broadband Capital Management, LLC of New
York since May of 2000. Mr. Smith began a 29-year career with Bache & Company,
Inc. in 1954, was elected to the board of directors in 1973, and in 1980 was
elected president of Bache Haley Stuart Metal Company, Inc. After leaving
Prudential-Bache in 1983, Mr. Smith served as executive vice president of R.
Lewis Securities, Inc., and from 1983 to 1995, was president of Whale
Securities Company, L.P. In 1995, he joined Rickel & Associates, Inc. as the
president of its Equity Division. Mr. Smith is a former member and director of
the Chicago Board of Options Exchange; governor of the American Stock Exchange
(AMEX); governor and chairman of the AMEX Commodities Exchange; director and
member of the Executive Committee of the Securities Industry Automation Corp.
and a past president of the Association of Investment Brokers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers,
directors and persons who own more than ten percent of a registered class of
our equity securities within specified time periods to file certain reports
of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and ten-percent stockholders are required by
regulation to furnish us with copies of all Section 16(a) forms they file.
Based solely on a review of copies of the reports we received and written
representations from persons concerning the necessity to file these reports,
we are not aware of any failure to file reports or report transactions in a
timely manner during the fiscal year ended December 31, 2001, except that Mr.
Witherspoon did not file, in a timely manner, an initial report of beneficial
ownership on Form 3 upon joining Integrated Surgical Systems, Inc. in April
1997, nor file, in a timely manner, Forms 4 and 5 reporting the grant of
additional stock options since that time; Miss Pilz did not file, in a timely
manner, an initial report of beneficial ownership on Form 3 upon joining
Integrated Surgical Systems, Inc. in March 2001; and Mr. Al-Kadi did not file,
in a timely manner, an initial report of beneficial ownership on Form 3 upon
the granting of stock options in September 2002.
Item 10. Executive Compensation
The following table sets forth the compensation awarded to, earned by or paid
to our Chief Executive Officer and each other of our executive officers whose
salary and bonus exceeded $100,000 for the year ended December 31, 2001
(collectively, the "Named Executive Officers").
Summary Compensation Table
Annual Compensation Long-Term
Compensation
Securities
Cash Underlying
Name Year Salary Bonus Other (1) Options
Ramesh C. Trivedi 2001 $301,434 $0 $17,214 0
2000 302,215 0 29,003 240,000
1999 279,840 27,984 48,281 6,210
Leland Witherspoon 2001 141,335 0 0 0
2000 141,400 0 0 30,000
1999 147,413 0 0 0
(1) Represents expense allowances paid under the terms of Dr. Trivedi's
employment agreement.
Employment Agreement
Dr. Trivedi serves as the company's Chief Executive Officer and President
pursuant to an employment agreement terminable at will by either party. Upon
termination by Integrated Surgical Systems, Inc., other than for cause (as
defined in the employment agreement), Dr. Trivedi is entitled to receive his
monthly salary for a period of eighteen months following the date of
termination. Dr. Trivedi's salary for 2002 is $302,215 ($25,185 per month).
Stock Options
There were no grants of stock options under any of our stock option plans to
the Named Executive Officers during the fiscal year ended December 31, 2001.
The following table summarizes, for each of the Named Executive Officers, the
total number of unexercised options held at December 31, 2001, and the
aggregate dollar value of in-the-money, unexercised options, held at December
31, 2001. The value of the unexercised, in-the-money options at December 31,
2001, is the difference between their exercise or base price and the value of
the underlying common stock on December 31, 2001. The closing sale price of
the common stock on December 31, 2001 was $0.115 per share.
Aggregated Option Exercises in the Last Fiscal Year and Fiscal Year End
Option Values
Shares Acquired
Upon Exercise Number of Securities Value of Unexercised
of Options Underlying In-The-Money
During Fiscal Unexercised Options Options at
2001 at December 31, 2001 December 31, 2001
Value Exercisable Exercisable
Name Number Realized Unexercisable Unexercisable
Ramesh C. Trivedi None None 571,861 175,556 $14,354(1) $0
Leland Witherspoon None None 52,569 22,431 0 0
(1) Represents value of options to purchase 6,210 shares at an exercise
price of $0.10 per share and 316,907 shares at an exercise price of
$0.07 per share.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information concerning the beneficial
ownership of our common stock at December 31, 2001 by (i) each stockholder we
know to be a beneficial owner of more than five percent of the outstanding
common stock, (ii) each of our directors, (iii) each of our executive officers
listed in the Summary Compensation Table and (iv) all directors and officers
as a group.
Amount and Percentage of
Nature of Common Stock
Beneficial Beneficially
Name Ownership (1) Owned (2)
International Business Machines Corporation;
Old Orchard Road, Armonk, N.Y. 10504 2,248,900 (3) 5.55%
ILTAG International Licensing
Holding S.A.L.; Adnan Al Hakim Street;
Assaf Bldg.; P.O. Box 135660; Beirut,
Lebanon 3,461,198 (4) 8.59%
Ramesh C. Trivedi (7) 602,807 (8) 1.55%
Leland Witherspoon (7) 67,005 (11) *
Falah Al-Kadi (5) 3,486,198 (6) 8.64%
Elliot Smith (9) 1,678,413 (10) 4.22%
All directors and officers as a group
(4 persons) 5,834,423 13.76%
* Less than one percent.
(1) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares indicated, subject to community
property laws, where applicable.
(2) For purposes of computing the percentage of outstanding shares held by
each person or group of persons named above on December 31, 2001, any
security which such person or group of persons has the right to acquire
within 60 days after such date is deemed to be outstanding for the
purpose of computing the percentage ownership for such person or
persons, but is not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person. There were
38,306,385 shares of common stock outstanding on December 31, 2001.
(3) Includes warrants to purchase 2,206,479 shares of common stock at an
exercise price of $0.01 per share, exercisable until December 31, 2006.
(4) Includes warrants to purchase 2,000,000 shares of common stock at an
exercise price of $1.027 per share, exercisable until December 13, 2003.
(5) Address is c/o Dogmoch Group of Companies, Adnan Al Hakim St., Assaf
Bldg., P.O. Box 135660, Beirut, Lebanon .
(6) Includes the 3,461,198 shares and warrants owned by ILTAG, an affiliate
of Dogmoch, of which Mr. Al-Kadi is Vice-Chairman, and 25,000 shares
that Mr. Al-Kadi may acquire upon exercise of stock options exercisable
within 60 days at an exercise price of $0.06 per share.
(7) Address is c/o Integrated Surgical Systems, Inc., 1850 Research Park,
Davis, California 95616.
(8) Includes 588,807 shares that Dr. Trivedi may acquire upon exercise of
stock options exercisable within 60 days -- 316,907 shares at an exercise
price of $0.07 per share, 107,200 shares at an exercise price of $3.00
per share, 158,490 shares at an exercise price of $1.81 per share, and
6,210 shares at an exercise price of $0.10 per share. Dr. Trivedi may
acquire an additional 158,610 shares upon exercise of stock options that
become exercisable over the remaining term of the options -- 12,800
shares at an exercise price of $3.00 per share and 145,810 shares at an
exercise price of $1.81 per share.
(9) Address is c/o Broadband Capital, 805 Third Avenue, New York, New York
10022.
(10) Includes 55,000 shares owned by his wife, warrants to purchase an
additional 1,415,413 shares, including warrants to purchase 262,207
shares owned by his wife and warrants to purchase 15,974 shares owned by
a partnership of which he is the general partner, and 25,000 shares that
Mr. Smith may acquire upon exercise of stock options exercisable within
60 days at an exercise price of $0.06 per share. Mr. Smith disclaims
beneficial ownership of the shares owned by his wife and the other
partners of the partnership.
(11) Includes 55,521 shares that Mr. Witherspoon may acquire upon exercise of
stock options exercisable within 60 days -- 39,896 shares at an exercise
price of $3.00 per share and 15,625 shares at an exercise price of $1.81
per share. Mr. Witherspoon may acquire an additional 19,479 shares upon
exercise of stock options that become exercisable over the remaining
term of the options -- 5,104 shares at an exercise price of $3.00 per
share and 14,375 shares at an exercise price of $1.81 per share.
Item 12. Certain Relationships and Related Transactions
During the year ended December 31, 2001 certain of our officers, on five
occasions, advanced to us, in the aggregate, $477,000 in order to permit us to
meet our payroll obligations. Each of these advances was non-interest bearing
and was repaid within one to five days.
At December 31, 2001, we had amounts due to our Chief Executive Officer of
approximately $193,000: $50,000 of this amount related to salary deferred in
the fourth quarter of 2001, included in accrued payroll and related expense,
and $143,000 related to unreimbursed travel expenses, included in accounts
payable.
Item 13. Exhibits and Reports on Form 8-K
Exhibit Description
3.1 Form of Certificate of Incorporation of the Registrant, as amended.
3.2 By-laws of the Registrant, as amended.
3.3 Certificate of Designations for Series F Convertible Preferred Stock.(4)
3.4 Certificate of Designations for Series G Convertible Preferred Stock.(11)
3.5 Certificate of Designations for Series H Convertible Preferred Stock.(12)
4.1 Form of warrant issued to the underwriters for the Registrant's initial
public offering in November 1996.(2)
4.2 Form of Warrant Agreement relating to the Registrant's Redeemable
Common Stock Purchase Warrants.(2)
4.3 Specimen Common Stock Certificate.(2)
4.4 Specimen Warrant Certificate (included as Exhibit A to Exhibit 4.2
herein).(2)
4.5 1998 Stock Option Plan.(5)
4.6 Employee Stock Purchase Plan.(5)
4.7 Common Stock Purchase Warrant issued by the Registrant to International
Business Machines Corporation ("IBM"), dated February 6, 1991, as
amended (included as Exhibit J to Exhibit 10.5 herein).(2)
4.8 Stockholders' Agreement between the Founders of the Registrant and IBM,
dated February 6, 1991 as amended.(2)
4.9 Common Stock Purchase Warrant issued by the Registrant to IBM, dated
December 21, 1995 (included as Exhibit I to Exhibit 10.5 herein).(2)
4.10 Series D Preferred Stock Purchase Warrant issued by the Company to IBM,
dated December 21, 1995 (included as Exhibit H to Exhibit 10.5 herein).(2)
4.11 Warrant issued by the Registrant to Sutter Health, Sutter Health
Venture Partners ("Sutter Health VP") and Keystone Financial
Corporation ("Keystone"), dated December 21, 1995 (included as Exhibits
K, L and M, respectively, to Exhibit 10.5 herein).(2)
4.12 Registration Rights Agreement among the Registrant, IBM, John N, Kapoor
Trust ("Kapoor"), EJ Financial Investments V, L.P. ("EJ Financial"),
Keystone, Sutter Health and Sutter Health VP, dated as of December 21,
1995 (included as Exhibit G to Exhibit 10.5 herein).(2)
4.13 1995 Stock Option Plan, as amended.(2)
4.14 Series D Preferred Stock Purchase Warrant issued by the Registrant to
IBM, dated February 29, 1996 (together with the warrant referred to in
Exhibit 4.10, the "Series D Warrants").(2)
4.15 Letter Agreement between the Registrant and IBM dated October 29, 1997,
amending the Series D Preferred Stock and Warrant Purchase Agreement
among the Registrant, IBM and EJ Financial, dated December 21, 1995.(6)
4.16 Form of warrant issued to CA IB Investmentbank Aktiengesellschaft and
Value Management & Research GmbH. (6)
4.17 Form of warrant issued to purchasers of Series A Convertible Preferred
Stock.(7)
4.18 Form of warrant issued to purchasers of Series B Convertible Preferred
Stock.(8)
4.19 Form of warrant issued to purchasers of Series C Convertible Preferred
Stock.(3)
4.20 Form of warrant issued to purchasers of Series D Convertible Preferred
Stock.(3)
4.21 Form of warrant issued to purchasers of Series E Convertible Preferred
Stock.(9)
4.22 Form of warrant issued to purchasers of Series F Convertible Preferred
Stock.(4)
4.23 Form of warrant issued to purchasers of Series G Convertible Preferred
Stock.(11)
4.24 Form of warrant issued to purchasers of Series H Convertible Preferred
Stock.(12)
4.25 Form of Registration Rights Agreement for Series A Convertible
Preferred Stock financing.(7)
4.26 Form of Registration Rights Agreement for Series B Convertible
Preferred Stock financing.(8)
4.27 Form of Registration Rights Agreement for Series C Convertible
Preferred Stock financing.(3)
4.28 Form of Registration Rights Agreement for Series D Convertible
Preferred Stock financing.(3)
4.29 Form of Registration Rights Agreement for Series E Convertible
Preferred Stock financing.(9)
4.30 Form of Registration Rights Agreement for Series F Convertible
Preferred Stock financing.(4)
4.31 Form of Registration Rights Agreement for Series G Convertible
Preferred Stock financing.(11)
4.32 Form of Registration Rights Agreement for Series H Convertible
Preferred Stock financing.(12)
4.33 Form of warrant dated December 14, 1999 issued to ILTAG International
Licensing Holding S.A.L., Bernd Herrmann and Urs Wettstein.(10)
4.34 Form of Registration Rights Agreement dated December 14, 1999 among the
Registrant, ILTAG International Licensing Holding S.A.L., Bernd
Herrmann and Urs Wettstein.(10)
4.35 Registration Rights Agreement for the purchasers of Stock under the
Equity Line of Credit Agreement (included as Exhibit C to Exhibit 10.26).
4.36 Form of warrant issued under the Equity Line of Credit Agreement
(included as Exhibit D to Exhibit 10.26).
4.37 2000 Stock Award Plan
4.38 2000 Long Term Performance Plan.
10.1 Loan and Warrant Purchase Agreement between the Registrant and IBM,
dated as of February 6, 1991.(2)
10.2 License Agreement between the Registrant and IBM, dated February 4,
1991.(2)
10.3 Series B Preferred Stock Purchase Agreement among the Registrant,
Sutter Health and Kapoor, dated as of April 10, 1992.(2)
10.4 Series C Preferred Stock Purchase Agreement among the Registrant,
Sutter Health and Keystone, dated as of November 13, 1992, as amended
December 13, 1995.(2)
10.5 Series D Preferred Stock and Warrant Purchase Agreement among the
Registrant, IBM and EJ Financial, dated December 21, 1995.(2)
10.6 Investors Agreement among the Registrant, IBM, Wendy Shelton-Paul
Trust, William Bargar, Brent Mittelstadt, Peter Kazanzides, Kapoor,
Sutter Health, Sutter Health VP, and EJ Financial, dated as of December
21, 1995.(2)
10.7 Employment Agreement between the Registrant and Ramesh Trivedi, dated
December 8, 1995.(2)
10.8 License Agreement between the Registrant and IBM, dated February 4,
1991.(2)
10.9 Agreement for the Purchase and Use of Sankyo Industrial Products
between the Registrant and Sankyo Seiki (American) Inc. dated November
1, 1992.(2)
10.10 Stock Purchase Agreement dated as of September 5, 1997 between the
Registrant and the holders of the outstanding capital stock of
Innovative Medical Machines International, S.A.(6)
10.11 Registration Rights Agreement dated September 5, 1997 by and among the
Registrant and the holders of the outstanding capital stock of
Innovative Medical Machines International, S.A.(6)
10.12 Preferred Stock Purchase Agreement for Series A Convertible Preferred
Stock.(7)
10.13 Preferred Stock Purchase Agreement for Series B Convertible Preferred
Stock.(8)
10.14 Preferred Stock Purchase Agreement for Series C Convertible Preferred
Stock.(3)
10.15 Preferred Stock Purchase Agreement for Series D Convertible Preferred
Stock.(3)
10.16 Preferred Stock Purchase Agreement for Series E Convertible Preferred
Stock.(9)
10.17 Preferred Stock Purchase Agreement for Series F Convertible Preferred
Stock.(4)
10.18 Preferred Stock Purchase Agreement for Series G Convertible Preferred
Stock.(11)
10.19 Preferred Stock Purchase Agreement for Series H Convertible Preferred
Stock.(12)
10.20 Stock and Warrant Purchase Agreement dated as of October 1, 1999 among
the Registrant, ILTAG International Licensing Holding S.A.L., Bernd
Herrmann and Urs Wettstein.(10)
10.21 Distribution Agreement dated November 12, 1999 between the Registrant
and Spark 1st Vision GmbH & Co. KG.(14)
10.22 Mutual Termination Agreement dated May 9, 2000 between the Registrant
and Spark 1st Vision GmbH & Co. KG.(14)
10.23 Personal Undertaking dated May 30, 2000 by ILTAG International
Licensing Holding S.A.L. towards the Registrant.(14)
10.24 Personal Undertaking dated may 21, 2000 of Urs Wettstein.(14)
10.25 Personal Undertaking dated May 16, 2000 of Bernd Herrmann.(14)
10.26 Private Equity Line of Credit Agreement dated September 15, 2000 with
Triton West Group, Inc.(14)
10.27 Escrow Agreement dated September 15, 2000 for the Equity Line of Credit
Agreement (included as Exhibit A to Exhibit 10.26).(14)
10.28 Letter Agreement dated October 6, 2000 amending the Private Equity Line
of Credit Agreement dated September 15, 2000.(14)
23.1 Consent of Ernst & Young LLP, Independent Auditors
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-9207), declared effective on November 20,
1996.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Registration No. 333-83067), declared effective on October 14,
1999.
(4) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Registration No. 333-30422), declared effective on February 22,
2000.
(5) Incorporated by reference to the Registrant's Annual Report on Form 10-
KSB for the fiscal year ended December 31, 1997.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-31481), declared effective on November 14,
1997.
(7) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Registration No. 333-66133), declared effective on January 14,
1999.
(8) Incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB for the fiscal quarter ended March 31, 1999.
(9) Incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB for the fiscal quarter ended June 30, 1999.
(10) Incorporated by reference to the Registrant's proxy statement dated
October 5, 1999.
(11) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Registration No. 333-40710), declared effective on July 28,
2000.
(12) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Registration No. 333-45706), declared effective on September 28,
2000.
(13) Incorporated by reference to the Registrant's Annual Report on Form 10-
KSB for the fiscal year ended December 31, 1999.
(14) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-48040) declared effective on October 31,
2000.
Signatures
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Integrated Surgical Systems, Inc.
By: /s/ RAMESH C. TRIVEDI
Ramesh C. Trivedi, President
(Principal Executive Officer)
By: /s/ PATRICIA E. PILZ
Patricia E. Pilz
(Principal Financial and Accounting Officer)
Dated: March 27, 2002
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant on March 27,
2002 in the capacities indicated.
Signature and Title
/s/ RAMESH C. TRIVEDI
Ramesh C. Trivedi
Chief Executive Officer, President and a Director
(Principal Executive Officer)
/s/ PATRICIA E. PILZ
Patricia E. Pilz
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ FALAH AL-KADI
Falah Al-Kadi
Chairman of the Board
/s/ ELLIOT SMITH
Elliot Smith
Director
Integrated Surgical Systems, Inc.
Index to Consolidated Financial Statements
PAGE
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheet at December 31, 2001 F-3
Consolidated Statements of Operations for the years ended
December 31, 2001 and 2000 F-4
Consolidated Statements of Convertible Preferred Stock and
Stockholders' Equity (Deficit) for the years ended
December 31, 2001 and 2000 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001 and 2000 F-6
Notes to Consolidated Financial Statements F-7
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, 2001, and the related consolidated
statements of operations, convertible preferred stock and stockholders' equity
(deficit), and cash flows for the years ended December 31, 2001 and 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Integrated
Surgical Systems, Inc. at December 31, 2001, and the consolidated results of its
operations and its cash flows for the years ended December 31, 2001 and 2000 in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that
Integrated Surgical Systems, Inc. will continue as a going concern. As more
fully described in Note 1, the Company has incurred recurring operating losses,
has a working capital deficit of $1,299,460 and has an accumulated deficit of
$61,663,243 as of December 31, 2001. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments to reflect the uncertainties related
to the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
As discussed in Note 2, in 2000 the Company changed its method of accounting
for revenue recognition in accordance with guidance provided in SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."
As discussed in Note 2, in 2000 the Company changed its method of accounting for
convertible securities with beneficial conversion features in accordance with
the consensus reached by the Emerging Issues Task Force ("EITF") on issue
No. 00-27, "Application of EITF Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, to Certain Convertible Instruments."
ERNST & YOUNG LLP
Sacramento, California
March 22, 2002
Integrated Surgical Systems, Inc.
Consolidated Balance Sheet
December 31, 2001
Assets
Current assets:
Cash $ 800,374
Accounts receivable less
allowance for doubtful accounts of $52,972 582,720
Inventory 2,051,100
Other current assets 227,354
________________
Total current assets 3,661,548
Net property and equipment 246,457
Leased equipment, net 169,269
Intangible assets, net 497,858
Other assets 10,222
________________
$ 4,585,354
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 1,740,135
Accrued payroll and related expense 394,125
Accrued liabilities 227,605
Unearned income 2,148,088
Other current liabilities 451,055
_______________
Total current liabilities 4,961,008
Note payable 87,122
Commitments and contingencies (Notes 1, 8 and 9
Convertible preferred stock, $0.01 par value,
1,000,000 shares authorized; 312 shares
issued and outstanding ($312,056 aggregate
liquidation value) 312,056
Stockholders' equity (deficit):
Common stock, $0.01 par value, 100,000,000
shares authorized; 38,306,385 shares issued
and outstanding 383,064
Additional paid-in capital 61,793,784
Accumulated other comprehensive loss (1,288,437)
Accumulated deficit (61,663,243)
_______________
Total stockholders' equity (deficit) (774,832)
_______________
$ 4,585,354
See accompanying notes.
Integrated Surgical Systems, Inc.
Consolidated Statements of Operations
Years ended December 31,
2001 2000
Net revenue $ 9,136,223 $ 5,934,263
Cost of revenue 3,897,189 3,490,748
______________ ______________
5,239,034 2,443,515
Operating expenses:
Selling, general and administrative 4,084,897 5,564,341
Research and development 3,510,568 4,175,352
Amortization of intangibles 839,040 839,040
______________ ______________
8,434,505 10,578,733
______________ ______________
Operating loss (3,195,471) (8,135,218)
Other income (expense):
Foreign currency exchange loss (149,552) (165,169)
Other, net 31,018 692,154
______________ ______________
Loss before cumulative effect of accounting
changes (3,314,005) (7,608,233)
Cumulative effect of SAB 101 accounting
change (Note 2) - (581,907)
Cumulative effect of EITF 00-27 accounting
change (Note 5) - (707,131)
______________ ______________
Net loss before preferred stock accretion
and dividend (3,314,005) (8,897,271)
Preferred stock accretion and dividend (41,143) (3,609,845)
______________ ______________
Net loss to common stockholders $ (3,355,148) $ (12,507,116)
Basic and diluted net loss per common share
before cumulative effect of accounting
changes $ (0.09) $ (0.62)
Cumulative effect of SAB 101 accounting
change (Note 2) - (0.03)
Cumulative effect of EITF 00-27 accounting
change (Note 5) - (0.04)
______________ ______________
Basic and diluted net loss per common share $ (0.09) $ (0.69)
Shares used in computing basic net loss per
share 35,927,994 18,125,301
Pro forma amounts assuming the accounting
change under SAB 101 is applied
retroactively:
Net loss to common stockholders $ (3,355,148) $ (11,925,209)
Basic and diluted net loss per common
share $ (0.09) $ (0.66)
See accompanying notes.
Integrated Surgical Systems, Inc.
Consolidated Statements of Convertible Preferred Stock
and Stockholders' Equity (Deficit)
Convertible Preferred Stock
Additional Preferred
Paid-in Stock
Shares Amount Capital Discount Total
Balance at December 31, 1999 2,925 $ 29 $ 2,662,420 $ (19,853) $2,642,596
Exercise of stock options
and warrants - - - - -
Stock compensation,
non-employees - - - - -
Stock compensation,
employees - - - - -
Sale of convertible preferred
stock and warrants,
net of offering costs 5,000 50 3,956,088 - 3,956,138
Preferred stock discount - - 3,380,816 (3,380,816) -
Preferred stock accretion
and dividend - - 209,176 3,400,669 3,609,845
Conversions of preferred stock (5,651) (57) (8,367,535) - (8,367,592)
Redemption of Series E
Preferred Stock (1,185) (11) (1,184,989) - (1,185,000)
Shares issued in equity-line
financings - - - - -
Cumulative effect of accounting
change under EITF 00-27 - - 318,479 - 318,479
Comprehensive loss:
Net loss - - - - -
Foreign currency translation
adjustments - - - - -
Comprehensive loss - - - - -
________________________________________________
Balance at December 31, 2000 1,089 11 974,455 - 974,466
Preferred stock accretion - - - 41,143 41,143
Conversions of preferred stock (777) (8) (703,545) - (703,553)
Shares issued in equity-line
financings - - - - -
Stock compensation, employees - - - - -
Stock compensation, non-employees - - - - -
Comprehensive loss:
Net loss - - - - -
Foreign currency translation
adjustments - - - - -
Comprehensive loss - - - - -
________________________________________________
Balance at December 31, 2001 312 $ 3 $ 270,910 $ 41,143 $ 312,056
Stockholders' Equity (Deficit)
Additional
Common Stock Paid-in
Shares Amount Capital
Balance at December 31, 1999 14,291,915 $ 142,919 $ 50,968,798
Exercise of stock options
and warrants 164,128 1,641 30,827
Stock compensation,
non-employees 49,108 491 205,036
Stock compensation,
employees 22,500 225 40,556
Sale of convertible preferred
stock and warrants,
net of offering costs 30,000 300 571,969
Preferred stock discount - - -
Preferred stock accretion
and dividend - - -
Conversions of preferred stock 8,362,672 83,627 8,283,965
Redemption of Series E
Preferred Stock - - -
Shares issued in equity-line
financings 287,353 2,874 61,126
Cumulative effect of accounting
change under EITF 00-27 - - 388,652
Comprehensive loss:
Net loss - - -
Foreign currency translation
adjustments - - -
Comprehensive loss - - -
________________________________________
Balance at December 31, 2000 23,207,676 232,077 60,550,929
Preferred stock accretion - - -
Conversions of preferred stock 10,020,850 100,209 603,344
Shares issued in equity-line
financings 4,563,027 45,630 586,370
Stock compensation, employees 314,832 3,148 31,141
Stock compensation, non-employees 200,000 2,000 22,000
Comprehensive loss:
Net loss - - -
Foreign currency translation
adjustment - - -
Comprehensive loss - - -
________________________________________
Balance at December 31, 2001 38,306,385 $ 383,064 $ 61,793,784
Accumulated
Deferred Other Total
Stock Comprehensive Accumulated Stockholders'
Compensation Loss Deficit Equity (Deficit)
Balance at December 31, 1999 $ (10,513) $(487,327) $ (45,800,979) $ 4,812,898
Exercise of stock options
and warrants - - - 32,468
Stock compensation,
non-employees - - - 205,527
Stock compensation,
employees 10,513 - - 51,294
Sale of convertible preferred
stock and warrants,
net of offering costs - - - 572,269
Preferred stock discount - - - -
Preferred stock accretion
and dividend - - (3,609,845) (3,609,845)
Conversions of preferred stock - - - 8,367,592
Redemption of Series E
Preferred Stock - - - -
Shares issued in equity-line
financings - - - 64,000
Cumulative effect of accounting
change under EITF 00-27 - - - 388,652
Comprehensive loss:
Net loss - - (8,897,271) (8,897,271)
Foreign currency translation
adjustments - (49,086) - (49,086)
__________
Comprehensive loss - - - (8,946,357)
_______________________________________________
Balance at December 31, 2000 - (536,413) (58,308,095) 1,938,498
Preferred stock accretion - - (41,143) (41,143)
Conversions of preferred stock - - - 703,553
Shares issued in equity-line
financings - - - 632,000
Stock compensation, employees - - - 34,289
Stock compensation, non-employees - - - 24,000
Comprehensive loss:
Net loss - - (3,314,005) (3,314,005)
Foreign currency translation
adjustment - (752,024) - (752,024)
_________
Comprehensive loss - - - (4,066,029)
_______________________________________________
Balance at December 31, 2001 $ - $(1,288,437) $ (61,663,243) $ (774,832)
See accompanying notes.
Integrated Surgical Systems, Inc.
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash
Years ended December 31,
2001 2000
Cash flows from operating activities:
Net loss $(3,314,005) $(8,897,271)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 403,914 614,570
Provision for losses on accounts
receivable (64,779) 127,601
Amortization of intangible assets 839,040 839,040
Stock compensation 58,289 256,821
Cumulative effect of accounting changes - 1,289,038
Changes in operating assets and
liabilities:
Accounts receivable 365,768 (734,767)
Inventory 1,745,033 (850,875)
Other current assets 92,312 106,808
Accounts payable 450,310 (552,648)
Accrued payroll and related expenses (23,048) 54,795
Accrued liabilities (140,834) 170,831
Unearned income (273,159) 1,416,952
Other current liabilities (183,090) 154,091
__________ __________
Net cash (used) in operating activities
(44,249) (6,005,014)
Cash flows from investing activities:
Principal payments received on sales-type
lease 58,553 430,592
Purchases of property and equipment (17,245) (461,175)
Proceeds from sale of property and
equipment - 56,160
__________ __________
Net cash provided by investing activities 41,308 25,577
Cash flows from financing activities:
Payments on notes payable (248,438) -
Payments on bank loan (41,336) (62,017)
Net proceeds from issuance of note payable 200,000 -
Proceeds from sale of preferred stock and
warrants - 4,528,407
Proceeds from sale of common stock and
warrants 632,000 64,000
Proceeds from exercise of stock options - 32,468
Proceeds from officer advances 477,000 -
Payments on officer advances (477,000) -
Redemption of preferred stock - (1,185,000)
__________ ___________
Net cash provided by financing activities 542,226 3,377,858
Effect of exchange rate changes on cash (15,233) (40,115)
__________ ___________
Net increase (decrease) in cash 524,052 (2,641,694)
Cash at beginning of year 276,322 2,918,016
__________ ___________
Cash at end of year $ 800,374 $ 276,322
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 192 $ 47,143
Supplemental disclosure of non-cash
activity:
Supplemental disclosure of non-cash
financing activities:
Preferred stock accretion and dividend $ 41,143 $3,609,845
Conversion of preferred stock $ 703,553 $ 83,627
See accompanying notes.
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
1. Description of Business and Basis of Presentation
Integrated Surgical Systems, Inc. designs, manufactures, sells and services
image-directed, computer-controlled robotic products for use in orthopaedic
and neurosurgical procedures. We were incorporated in Delaware in 1990.
In 1997, we acquired a French company, Innovative Medical Machines
International, S.A. ("ISS-SA"). ISS-SA, a wholly-owned subsidiary,
manufactures and services our neurosurgical products world-wide and
distributes and services our orthopaedic products in Europe.
We have recurring operating losses and an accumulated deficit of $61,663,243
at December 31, 2001. The report of independent auditors on our December 31,
2001 consolidated financial statements includes an explanatory paragraph
indicating there is substantial doubt about our ability to continue as a going
concern. We believe that we have a viable plan to address these issues and
enable us to continue operating through the end of 2002. This plan includes
increasing sales of our products in existing markets, increasing sales of
system upgrades, and reducing operating expenses as necessary. Although we
believe that our plan will be realized, there is no assurance that we will be
successful. In the event that we are unsuccessful, it is possible that we will
cease operations. The consolidated financial statements do not include any
adjustments to reflect the uncertainties related to the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from an inability on our part to continue as a going concern.
2. Significant Accounting Policies
Revenue Recognition
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," and effective January 1, 2000, we changed our method of
accounting for revenue recognition in accordance with SAB No. 101. Previously,
we generally recognized revenue upon delivery of equipment to customers. The
costs of installation and training were accrued in the same period revenue was
recognized. Under the new accounting method adopted retroactively to January
1, 2000, we now recognize revenue upon completion of training and installation
of the equipment at the end-user's site, except when the sales contract
requires formal customer acceptance. Equipment sales with contractual customer
acceptance provisions are recognized as revenue upon written notification of
customer acceptance, which generally occurs after the completion of training
and installation. Furthermore, due to business customs in Japan and our
interpretation of Japanese law, all equipment sales to Japan are recognized
after customer acceptance, which generally occurs after the completion of
training and installation. Revenue related to maintenance and service
contracts is recognized ratably over the duration of the contracts. The
cumulative effect of the change on prior years resulted in an increase in the
consolidated loss of $581,907, which is included in the consolidated statement
of operations for the year ended December 31, 2000. The effect of the change
on the year ended December 31, 2000 was to decrease the consolidated loss
before the cumulative effect of the accounting change by $581,907
($0.03 per share). For the years ended December 31, 2001 and 2000, we
recognized $0 and $1,137,907 respectively, of revenue previously deferred
in connection with the cumulative effect adjustment at January 1, 2000.
The effect of that revenue and related cost of revenue was to reduce the
consolidated loss before the cumulative effect of the accounting change by
$0 and $581,907 for the years ended December 31, 2001 and 2000, respectively.
The unaudited pro forma amounts presented in the statement of operations were
calculated assuming the accounting change was made retroactively to prior
periods.
Product development revenue is recognized when development is complete under
the terms of the contract, the software has performed satisfactorily in a
field test, and the customer has accepted the product. These contracts are
accounted for under the provisions of SOP 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts," using the completed
contract method of accounting. Losses on contracts are accrued in the period
that such losses are determined.
We recognize revenue from leasing activities in accordance with SFAS No. 13,
"Accounting for Leases." Accordingly, leases that transfer substantially all
the benefits and risks of ownership are accounted for as sales-type leases.
All other leases are accounted for as operating leases.
Under the sales-type method, profit is recognized at lease inception by
recording revenue and cost. Revenue consists of the present value of the
future minimum lease payments discounted at the rate implicit in the lease.
Cost consists of the equipment's book value. The present value of the
estimated value of the equipment at lease termination (the residual value),
which is generally not material, and the present value of the future minimum
lease payments are recorded as assets. In each period, interest income is
recognized as a percentage return on asset carrying values.
We are the lessor of equipment under operating leases expiring in various
years. The cost of equipment subject to these leases is recorded as leased
equipment and is depreciated on a straight-line basis over the estimated
service life of the equipment. Operating lease revenue is recognized as earned
over the term of the underlying lease.
Consolidation
The consolidated financial statements include the accounts of Integrated
Surgical Systems, Inc. and our wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Foreign Currency Translation
The financial position and results of our foreign subsidiaries are measured in
euros. Balance sheet accounts are translated into dollars at the year-end
exchange rate and statement of operations amounts are translated at the
average exchange rate for the period. The resulting translation adjustments
are recorded in the other comprehensive income section of stockholders' equity
(deficit). Our foreign currency transactions are usually recorded and settled
in the same foreign currency, without foreign exchange transaction gains or
losses. Foreign exchange transaction gains or losses are, however, recognized
when translating inter-company receivables and payables.
Research and Development
Research and development costs are expensed as incurred. Software development
costs incurred subsequent to the determination of the product's technological
feasibility and prior to the product's general release to customers are not
material to our financial position or results of operations, and have been
charged to research and development expense in the accompanying consolidated
statements of operations. The direct cost, primarily labor, of product
development contracts is deferred until the development revenue is recognized.
Grants received from third parties for research and development activities are
recorded as reductions of research and development expense over the term of
the agreement as the related activities are conducted.
Concentration of Credit Risk
We sell our products to companies in the healthcare industry most of which are
located in foreign countries. We are generally paid upon product delivery and
we typically do not require collateral. We believe that adequate provision for
uncollectable accounts receivable has been made in the accompanying
consolidated financial statements.
We maintain substantially all of our cash at three financial institutions.
Financial Statement Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires us 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
Cash includes cash deposited in bank checking and money market fund accounts.
Fair Values of Financial Instruments
Active markets do not exist for our financial instruments (long-term lease
receivables and note payable) that are subject to the fair value disclosure
requirements of Statement of Financial Accounting Standards ("SFAS") No. 107.
There are no quoted market prices for these assets and liabilities.
Accordingly, we do not estimate the fair values of these financial instruments
due to the limited information available and the significance of the cost to
obtain independent appraisals for this purpose.
Intangible Assets
Intangible assets consist primarily of developed technology relating to the
NeuroMate(R) and ROBODOC(R) systems. We believe that the developed technology
is complete and has alternative future uses. Accumulated amortization of
intangible assets was $3,635,840 at December 31, 2001. The estimated useful
lives range from 3 to 5 years.
Under the provisions of SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of," impairment losses
are recognized when expected future cash flows are less than the assets'
carrying value. Accordingly, when indicators of impairment are present, we
evaluate the carrying value of property, furniture and equipment, and
intangibles, in relation to the operating performance and expected future
undiscounted cash flows of the underlying business. We adjust the net book
value of the underlying assets if the sum of expected future cash flows is
less than book value. Since adoption of SFAS No. 121, no impairment losses
have been recognized.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over estimated useful lives of 3 to 5 years or the
lease term, whichever is shorter.
Operating Leases
We lease certain of our systems to customers under cancelable operating
leases. The typical lease period is 5 years and certain of the leases contain
purchase options. The cost of equipment under operating leases at December 31,
2001 was $461,931 and the related accumulated amortization thereon was
$292,662.
Inventory
Inventory is recorded at the lower of cost (first-in, first-out method) or
market and consists of materials and supplies used in the manufacture and
service support of the ROBODOC and NeuroMate Systems.
Inventory consisted of the following at December 31, 2001:
Raw materials $ 441,720
Work-in-process 733,336
Finished goods 722,348
Deferred product development
contract costs 153,696
___________
$2,051,100
Stock-Based Compensation
As permitted under the provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation," we have elected to account for stock-based compensation using
the intrinsic value method prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." Under the
intrinsic value method, compensation cost is the excess, if any, of the quoted
market price or fair value of the stock at the grant date or other measurement
date over the amount an employee must pay to acquire the stock.
Income Taxes
The liability method is used to account for income taxes. Under this method,
deferred income tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws that are scheduled to be in
effect when the differences are expected to reverse.
Significant Relationships and Foreign Sales
Approximately 39% of our revenue was the result of sales to one Japanese
customer during the year ended December 31, 2001. Approximately 10% of our
2000 revenue was the result of sales to this same Japanese customer. A
significant ROBODOC System component, the custom-built robot arm, is
manufactured by a single Japanese company. A French company is the sole
supplier of the custom-built robot arm for the NeuroMate System. Any
significant component supply delay or interruption could require us to search
for new sources of supply, if available, and could have a material adverse
effect on our financial condition, results of operations, or cash flows.
Foreign revenue, substantially all from Western European countries and Japan,
was approximately $8,013,000 and $5,845,000 for the years ended December 31,
2001 and December 31, 2000, respectively.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 eliminates the pooling-of-interests method of accounting
for business combinations. Under statement No. 142, goodwill and indefinite
lived intangible assets are no longer amortized but are reviewed annually, or
more frequently if impairment indicators arise, for impairment. Intangible
assets whose lives are not indefinite are amortized over their useful lives,
and reviewed for impairment in accordance with SFAS No. 121. We adopted SFAS
No. 141 on July 1, 2001 with no impact on our consolidated financial
statements. We will adopt SFAS No. 142 on January 1, 2002, and we do not
expect that the adoption will have any impact on our consolidated financial
position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
associated asset retirement costs. The new rules apply to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) normal operation of a long-
lived asset. We will adopt SFAS No. 143 on January 1, 2003, and we do not
expect that the adoption will have any impact on our consolidated financial
position or results of operations.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144, which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," provides a single accounting model for long-lived assets to
be disposed of. Although retaining many of the fundamental recognition and
measurement provisions of SFAS No. 121, SFAS No. 144 significantly changes
the criteria that would have to be met to classify an asset as held-for-
sale. The distinction is important because assets held-for-sale are stated
at the lower of their fair values or carrying amounts and depreciation is no
longer recognized. We will adopt SFAS No. 144 effective January 1, 2002, and
we do not expect that the adoption will have any impact on our consolidated
financial position or results of operations.
Reclassifications
Certain amounts reported in prior years financial statements have been
reclassified to conform with the 2001 presentation.
3. Property and Equipment
Property and equipment consists of the following at December 31, 2001:
Other equipment $1,828,711
ROBODOC and NeuroMate System equipment 816,458
Furniture and fixtures 313,677
Leasehold improvements 44,354
__________
3,003,200
Less accumulated depreciation 2,756,743
__________
$ 246,457
4. Note Payable
We have an interest free loan from a grant organization for the development of
a new neurological system with an outstanding balance of $87,122 at December
31, 2001. In the event of failure of the project, we will have to repay
approximately $36,000 of the loan. If we sell either a license for the related
technology, the prototype developed, or articles manufactured specifically for
the research project, 50% of the revenue must be paid to the grant
organization in the subsequent year, up to the balance of the loan amount
outstanding. The loan balance was reduced by payments of approximately $48,000
during the year ended December 31, 2001 as a result of such sales.
On May 31, 2001, we entered into a $220,000 demand note payable with a
financial institution with a stated interest rate of 10% per annum in order to
meet short term obligations. The note was repaid on June 8, 2001.
5. Stockholders' Equity
Common Stock
At December 31, 2001 we have reserved a total of 21,627,041 shares of common
stock for future issuance pursuant to Series G & H Convertible Preferred
Stock, warrants and options outstanding.
We established an Employee Stock Purchase Plan in 1998. The plan provides all
eligible employees an opportunity to acquire an ownership interest in
Integrated Surgical Systems, Inc. on a payroll deduction or other compensation
basis at a 15% discount. The plan is intended to qualify as an employee stock
purchase plan under Section 423 of the Internal Revenue Code. The plan covers
an aggregate of 300,000 shares of our common stock. At December 31, 2001, no
offerings have been made to employees.
Equity Line of Credit
In April 2000, we entered into a three year, $12,000,000 Private Equity Line
of Credit Agreement ("the Line") with Triton West Group, Inc. ("Triton").
Under the terms of the agreement, we may sell shares of common stock to Triton
at a price equal to 85% of the lowest bid price during the nine trading days
commencing two trading days prior to the delivery of a put notice to Triton.
The number and dollar amount of shares that may be purchased on each closing
date is based upon a formula that varies with the market price and trading
volume of the common stock. Activity under the Line from its inception through
December 31, 2001 was:
Date of Put Shares Issued Net Proceeds
November 2, 2000 287,353 $ 64,000
January 22, 2001 806,723 143,000
January 23, 2001 1,344,538 243,000
February 9, 2001 882,353 143,000
March 30, 2001 745,099 50,000
April 19, 2001 784,314 53,000
Warrants
The following table summarizes information about warrants outstanding at
December 31, 2001 and 2000:
Outstanding at
Issue Exercise December 31,
Warrants issued Year Issued Range 2001 2000
Pursuant to stock purchase
agreement (2) 1997 2,274,066 $0.01 2,206,479 2,206,479
As units in our initial
public offering (2) 1996 1,567,000 $6.00 1,567,000 1,567,000
To public offering
underwriters (2) 1996 491,750 $6.00- 491,750 491,750
$8.25
To acquisition consultants
(2),(3) 1997 75,000 $2.00- 75,000 75,000
$7.50
To public offering
underwriters (2) 1997 150,000 $8.34 150,000 150,000
With Series A preferred
stock (1) 1998 44,000 $2.00 - 44,000
With Series B preferred
stock (1) 1999 12,500 $2.75 12,500 12,500
With Series C preferred
stock (1) 1999 9,375 $2.15 9,375 9,375
With Series D preferred
stock (1) 1999 25,000 $3.41 25,000 25,000
With Series E preferred
stock (1) 1999 37,500$ 4.39 37,500 37,500
With Series F preferred
stock (1) 2000 125,000 $2.38 125,000 125,000
With Series G preferred
stock (1) 2000 63,000 $1.88 63,000 63,000
With Series H preferred
stock (1) 2000 650,000 $0.50- 650,000 650,000
$1.02
Pursuant to stock purchase
agreement 1999 11,700,000 $1.03 4,000,000 4,000,000
In connection with equity
financing (4) 2000 35,000 $0.86 35,000 35,000
__________ ____________________
17,259,191 9,447,604 9,491,604
Unless otherwise stated in (1) below, the warrants are exercisable when
granted and expire between 2002 and 2006.
_____________________________________
(1) Warrants are exercisable when vested, generally within one year of issue.
(2) Number of common shares and exercise price are subject to dilution
adjustment.
(3) Aggregate estimated fair value of $93,885.
(4) Aggregate estimated fair value of $14,350.
Preferred Stock
Our Articles of Incorporation authorize 1,000,000 shares of undesignated
preferred stock. Preferred stock may be issued from time to time in one or
more series. The Board of Directors is authorized to determine the rights,
preferences, privileges, and restrictions granted to and imposed upon any
wholly unissued series of preferred stock and designation of any such series
without any vote or action by our stockholders.
Convertible Preferred Stock
Our convertible preferred stock is classified as mezzanine financing, outside
of permanent equity, due to its liquidation rights upon a change in control,
as this condition is not solely within our control. Given the liquidation
rights of our convertible preferred stock, these securities have been
accounted for as if they were redeemable preferred stock. As such, the
redemption value of the convertible preferred stock is its liquidation
preference, and the carrying value of the convertible preferred stock is
adjusted to its redemption amount at each balance sheet date through
corresponding debits and credits to accumulated deficit and convertible
preferred stock respectively.
Since September 1998, we have received aggregate net proceeds of $14,084,995
from the sale of eight series of convertible preferred stock. Information
concerning these convertible preferred stock financings is set forth below:
Shares Net
Series Date of Sale Sold Proceeds
A September 10, 1998 3,520 $ 3,300,447
B March 26, 1999 1,000 916,918
C June 10, 1999 750 658,190
D June 30, 1999 2,000 1,861,549
E July 30, 1999 3,000 2,819,484
F February 8, 2000 2,000 1,850,861
G May 30, 2000 1,800 1,610,555
H August 17, 2000 1,200 1,066,991
Each series of convertible preferred stock has a stated value of $1,000 per
share and is convertible into common stock at conversion prices equal to 80%
or 85% of the lowest sale price of the common stock on its listed market over
the five trading days preceding the date of conversion subject to a maximum
conversion price. The number of shares of common stock that may be acquired
upon conversion is determined by dividing the stated value of the number of
shares of convertible preferred stock to be converted by the conversion price.
At December 31, 2001, 250 shares of Series G convertible preferred stock and
62 shares of Series H convertible preferred stock were outstanding. No other
shares of preferred stock were outstanding. The number of shares of common
stock issued upon conversion and the average actual conversion price for each
series of convertible preferred stock converted into shares of common
stock at December 31, 2001 was as follows:
Series Common Shares Price
A 2,867,135 $2.23
B 459,831 $2.17
C 563,497 $1.33
D 1,605,203 $1.25
E 1,490,101 $1.22
F 2,143,242 $0.93
G 6,998,858 $0.22
H 7,843,902 $0.15
The value assigned to the beneficial conversion feature is based upon the
difference between the maximum conversion price and the quoted market price of
our common stock on the date the convertible preferred stock was sold (the
"Discount"). The Discount has been accreted using the straight-line method
over the conversion period. The following table sets forth the value assigned
to the beneficial conversion feature and its accretion for each series of
convertible preferred stock.
Series Value 2001 Accretion 2000 Accretion
A $616,000 $ - $ -
B 176,471 - -
C 143,793 - -
D 352,941 - -
E 529,559 - 19,853
F 2,652,140 - 2,652,140
G 428,529 8,229 428,529
H 300,147 32,914 300,147
__________ ________________________________
$5,199,580 $ 41,143 $3,400,669
No series of convertible preferred stock entitles holders to dividends or
voting rights, unless required by law or with respect to certain matters
relating to a particular series of convertible preferred stock.
In February 2000 we redeemed, for cash, 1,185 outstanding shares of Series E
convertible preferred stock for a total redemption price of $1,185,000, or
$1,000 per share, the stated value of a share of Series E convertible
preferred stock. The excess of the fair value of the consideration over the
related carrying amount of the convertible preferred stock was $209,176 and
was added to the net loss for 2000 to arrive at net loss to common
stockholders for 2000.
On November 16, 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-
27, "Application of EITF Issue No. 98-5, Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios to Certain Convertible Instruments." EITF 00-27 requires that any
beneficial conversion feature associated with a convertible instrument be
calculated using the intrinsic value of a conversion option after first
allocating the proceeds received to the convertible instrument and any other
detachable instruments included in the exchange (such as detachable warrants).
As a result of adopting EITF 00-27, we recorded a one-time, non-cash charge in
the fourth quarter of 2000 to accumulated deficit of $707,131 as the
cumulative effect of a change in accounting for the embedded beneficial
conversion feature associated with the Series C through H Convertible
Preferred Stock, of which $318,479 related to Series G and H convertible
preferred stock which remained outstanding at December 31, 2001.
Stock Option and Long-Term Performance Plans
We have elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" and related Interpretations in
accounting for our employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options.
We have established various stock option plans in which our officers,
employees, directors, and consultants may participate. Options granted under
the plans may be incentive stock options or non-statutory stock options and
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 our 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 our 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 our stock, the exercise
price of the incentive stock options or the non-statutory stock options
granted under the plans may not be less than 110% of the fair market value of
the common stock on the date of the grant.
In 2000 we established a long-term performance plan, the 2000 Long-Term
Performance Plan (the "2000 Plan"). The 2000 Plan provides for stock awards of
up to 1,000,000 shares. The 2000 Plan permits the grant of any form of award,
including, but not limited to stock options, stock appreciation rights, stock,
and cash awards, whether granted singly, in combination or in tandem. Stock
options are granted at an exercise price of not less than 100% of fair market
value (as defined in the 2000 Plan) on the date of grant and it is expected
that options and stock appreciation rights, will typically be granted for
periods of 10 years or less. The 2000 Plan also permits the grant of other
awards in stock or denominated in units of stock, which may be subject to
restrictions or transfer and/or forfeiture provisions.
We also have a 2000 Stock Award Program under which up to 500,000 shares of
common stock may be granted to employees and consultants, but not our officers
and directors. 1,703,017 shares of our common stock have been reserved at
December 31, 2001, for issuance under the stock option plans, the 2000 Plan
and the 2000 Stock Award program.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS No. 123, which also requires that the information be
determined as if we had accounted for our 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 2001 and 2000, respectively: risk-free interest rates of 3.0%
and 5.0%; dividend yield of 0%; volatility factors of the expected market
price of our common stock of 1.010 and 0.995; and an expected life of the
option of 4 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because our employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in our
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of our employee stock options. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the vesting period.
Pro forma information:
December 31,
2001 2000
Pro forma net loss $(3,722,711) $(12,923,286)
Pro forma basic net loss per
share ($0.10) ($0.71)
The following table summarizes activity under the plans for the years ended
December 31, 2001 and 2000:
Weighted
Number Average
of Shares Exercise Price
Outstanding at December 31, 1999
(at $.07 to $8.63 per share) 1,369,344 $2.01
Granted (at $1.00 to $3.44 per share) 744,000 $1.86
Cancelled (at $1.50 to $8.56 per share) (220,000) $3.50
Exercised (at $0.07 to $1.65 per share) (121,707) $0.27
__________
Outstanding at December 31, 2000
(at $.07 to $8.63 per share) 1,771,637 $1.89
Granted (at $0.06 to $0.19 per share) 315,700 $0.07
Cancelled (at $0.06 to $6.13 per share) (384,320) $2.02
Exercised - -
__________
Outstanding at December 31, 2001
(at $.06 to $8.63 per share) 1,703,017 $1.52
The weighted average exercise price of options granted in 2001 and 2000 with
option prices equal to the fair market value of our stock on the grant date
was $0.07 and $1.86, respectively. The weighted average grant date fair value
of these options was $0.05 in 2001 and $1.31 in 2000. No options with option
prices less than the fair market value of our stock on the date of grant were
granted to employees in 2001 or 2000.
The following table summarizes information related to options outstanding and
options exercisable at December 31, 2001:
Weighted
Weighted Average Weighted
Average Remaining Average
Exercise Options Exercise Contractual Options Exercise
Price Outstanding Price Life (in Years) Exercisable Price
$0.00-$ .99 738,240 $0.07 6.4 484,540 $0.07
1.00- 1.99 539,500 $1.81 8.1 258,940 $1.81
2.00- 2.99 30,000 $2.75 7.7 16,458 $2.81
3.00- 3.99 308,000 $3.10 6.8 251,828 $3.09
4.00- 4.99 15,000 $4.88 6.3 13,750 $4.88
5.00- 6.99 43,277 $5.28 4.9 43,090 $5.28
7.00- 8.63 29,000 $7.88 5.7 29,000 $7.88
_______ _______
1,703,017 $1.52 7.0 1,097,606 $1.68
6. 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 our deferred taxes as of December 31, 2001 and 2000
are as follows:
2001 2000
Deferred tax assets:
Net operating loss carryover $10,098,000 $8,072,000
Research and development credit 1,792,000 1,399,000
Research and development 465,000 511,000
Accrued product retrofit costs 83,000 83,000
Inventory 159,000 356,000
Depreciation 346,000 354,000
Stock compensation 289,000 289,000
Loss on investment 126,000 127,000
Deferred income 661,000 681,000
Other 196,000 163,000
___________ __________
14,215,000 12,035,000
Less valuation allowance (14,215,000) (12,035,000)
___________ __________
Net deferred taxes $ - $ -
We expect the carryforward amounts will not be used prior to the expiration of
the carryforward periods. The principal reasons for the difference between the
effective income tax rate and the federal statutory income tax rate as of
December 31, 2001 and 2000 are as follows:
2001 2000
Federal benefit expected at
statutory rates $(1,136,054) $(2,586,799)
Domestic net operating loss with
no current benefit 1,524,624 2,208,715
Net effect of foreign operations (393,468) 369,811
Other taxes - -
Other non-deductible items 4,898 8,273
___________ ___________
$ - $ -
As a result of stock sales, a change of ownership (as defined in Section 382
of the Internal Revenue Code of 1986, as amended) has occurred. As a result of
this change, our federal and state net operating loss carryforwards will be
subject to a total annual limitation in the amount of approximately $400,000.
Subsequent to this change of ownership an additional change in ownership may
have occurred. As a result, the net operating loss carryforwards may be
further limited.
We had at December 31, 2001 a net operating loss carryover of approximately
$35,085,000 for federal income tax purposes which expires between 2005 and
2021, a net operating loss carryforward of approximately $7,741,000 for state
income tax purposes which expires through 2006, and a net operating loss
carryforward of approximately $1,218,000, which is net of the current year
utilization of approximately $444,000, for foreign income tax purposes of
which approximately $236,000 expires between 2001 and 2005. We had at December
31, 2001 research and development credit carryovers of approximately
$1,022,000 and $1,166,000 for federal and state income tax purposes,
respectively.
We paid $800 for income and franchise taxes during each of the two years ended
December 31, 2001 and 2000. The valuation allowance increased by $2,180,000 in
2001 and $563,000 in 2000.
7. Net Loss Per Share Information
At December 31, 2001, outstanding options to purchase 1,703,017 shares of
common stock (with exercise prices ranging from $0.06 to $8.63), 9,447,604
outstanding warrants to purchase 16,023,324 shares of common stock (with
exercise prices from $0.01 to $8.34), and 3,900,700 shares of common stock
issuable upon conversion of Series G and H Preferred Stock could potentially
dilute basic earnings per share in the future and have not been included in
the computation of diluted net loss per share because to do so would have been
antidilutive for the periods presented. The exercise price and the ultimate
number of shares of common stock issuable upon conversion of the warrants are
subject to adjustments based upon the occurrence of certain future events.
8. Commitments
We lease our U.S. facility under a non-cancelable operating lease expiring in
June 2005. The lease provided for rent of approximately $32,000 per month
during 2001 (plus real estate taxes and assessments, utilities and
maintenance) and is subject to adjustment in subsequent years for cumulative
increases in the cost of living index, not to exceed 4% per year. We lease our
European facility under a renewable operating lease with terms that include
three year non-cancelable periods that expire in 2007. The lease provides for
rent of approximately $6,000 per month.
Future payments under non-cancelable facility operating leases are
approximately as follows:
2002 $469,950
2003 485,303
2004 491,124
2005 178,357
2006 -
________
$1,624,734
Aggregate rental expense under these leases amounted to $456,000 and $440,000
during the years ended December 31, 2001 and 2000, respectively.
Future minimum payments under non-cancelable equipment operating leases are
approximately as follows:
2002 $35,438
2003 35,438
2004 -
2005 -
2006 -
_______
$70,876
Rental expense associated with these leases during the years ended December
31, 2001 and 2000 was approximately $35,000 and $11,000 respectively.
9. Contingencies
We have from time to time been notified of various claims incidental to our
business that are not the subject of pending litigation. While the results of
claims cannot be predicted with certainty, we believe that the final outcome
of all such matters will not have a materially adverse effect on our
consolidated financial position, results of operations, or cash flows.
10. Distribution Agreement Settlement
In May 2000, we terminated our distribution agreement with the German
corporation Spark 1st Vision GmbH & Co. KG. On termination, we received
payment of approximately $928,000 consisting of pro rata licensing fees of
$740,000, which are included in other income in 2000, and reimbursed selling
expenses of $188,000, which are offset against 2000 selling, general and
administrative expenses.
12. Related Party Transactions
During the year ended December 31, 2001 certain of our officers, on five
occasions, advanced to us, in the aggregate, $477,000 in order for us to meet
our payroll obligations. Each of these advances was non-interest bearing and
was repaid within one to five days.
At December 31, 2001, we had amounts due to our Chief Executive Officer of
approximately $193,000: $50,000 of this amount related to salary deferred in
the fourth quarter of 2001, included in accrued payroll and related expense,
and $143,000 related to unreimbursed travel expenses, included in accounts
payable.
13. Unaudited Interim Financial Information
During the fourth quarter of 2001, we discovered clerical errors which arose
in 2001 relating to the elimination of certain intercompany sales by our
wholly-owned French subsidiary. In 2001, we recorded a fourth quarter
adjustment to reduce net revenue by approximately $516,000 and to reduce cost
of revenue by an equivalent amount. This adjustment related to an equivalent
amount of net revenue and cost of revenue for the first three quarters of 2001
of approximately $299,000, $150,000 and $67,000, respectively. The impact of
this adjustment had no effect on previously reported gross margin, operating
loss, net loss or net loss per share for our 2001 interim periods or the
fourth quarter of 2001.
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 333-44093, 333-70779, 333-53188, 333-53190)
pertaining to the 1995 Stock Option Plan, As Amended, 1998 Stock Option
Plan and Employee Stock Purchase Plan, 2000 Stock Award Plan, and 2000
Long-Term Performance Plan of Integrated Surgical Systems, Inc. of our
report dated March 22, 2002, with respect to the consolidated financial
statements of Integrated Surgical Systems, Inc. included in this Annual
Report (Form 10-KSB) for the year ended December 31, 2001.
ERNST & YOUNG LLP
Sacramento, California
March 25, 2002