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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
[ ] 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.
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(Name of small business issuer in its charter)
Delaware 68-0232575
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1850 Research Park Drive, Davis, CA 95616-4884
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(Address of Principal Executive Offices) (Zip Code)
(530) 792-2600
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(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Name of Each Exchange on Which
each Class Each Class is Registered
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Common Stock, $0.01 Par Value None
Common Stock Purchase Warrants None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and no disclosure will 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. [ X ]
State issuer's revenues for its most recent fiscal year: $5,831,482
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
April 30, 2004 was $4,121,164
As of April 30, 2004, the issuer had 44,867,358 shares of common stock, $0.01
par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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Integrated Surgical Systems, Inc.
Form 10-KSB
For the fiscal year ended December 31, 2003
Table of Contents
Part I. Page
Item 1. Description of Business 1
Item 2. Description of Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
Part II.
Item 5. Market for Common Equity and Related Stockholder Matters 6
Item 6. Management's Discussion and Analysis 8
Item 7. Financial Statements 16
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 16
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 18
Item 11. Security Ownership of Certain Beneficial Owners and
Management 21
Item 12. Certain Relationships and Related Transactions 22
Item 13. Exhibits and Reports on Form 8-K 22
Item 14. Principal Accountants Fees and Services 25
Signatures 27
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Part I
Item 1. Description of Business
Integrated Surgical Systems, Inc. ("the Company") designs, manufactures, sells
and services image-directed, computer-controlled robotic software and hardware
products for use in orthopaedic and neurosurgical procedures. The Company was
incorporated in Delaware in 1990.
In 1997, the Company acquired a 100% interest in a French company, Innovative
Medical Machines International, S.A. ("ISS-SA"), involved in the manufacturing
and servicing of neurosurgical products.
Under French law, a company whose net assets are less than 50% of its capital
stock may come under the supervision and control of a regional administrative
tribunal. On September 30, 2003 the Tribunal de Commerce (the "Tribunal") in
Lyon, France determined that ISS-SA met the criteria for it to appoint an
administrator to manage the Company's operations. The Tribunal acted after a
hearing in which the Company and ISS-SA discussed the ability of ISS-SA to meet
its obligations over the next four months and the Company's unwillingness to
further fund its operations due to its history of operating losses. The Tribunal
authorized the administrator to manage ISS-SA's operations pending a review of
ISS-SA's operations and cash flow projections. Subsequent to its appointment,
the administrator exercised control over all aspects of ISS-SA's operations
including employee retention, purchasing, sales and inventory management. As a
result, effective with the administrator's appointment the Company no longer had
access to the assets, personnel or records of ISS-SA.
On October 30, 2003, representatives of the Company met with the Tribunal, to
review the status of ISS-SA. At this meeting, the Tribunal determined that
ISS-SA was making progress in improving its financial position and scheduled
another meeting for December 2003. Prior to such meeting, the Tribunal
reevaluated its decision to allow ISS-SA to continue operating and caused the
assets and operations of ISS-SA to be sold, effectively terminating its
operations on December 23, 2003.
Orthopaedic Applications
The Company's principal orthopaedic product, the ROBODOC(R) Surgical Assistant
System ("ROBODOC"), integrates the ORTHODOC(R) Presurgical Planner ("ORTHODOC")
with a computer-controlled robot for use in joint replacement surgeries. The
surgeon uses ORTHODOC, a computer workstation with the Company's proprietary
software, for preoperative surgical planning. ORTHODOC converts a computerized
tomography ("CT") scan data of the patient's joint into three-dimensional bone
images. The surgeon selects a prosthesis from the ORTHODOC prosthesis software
library, and manipulates the three-dimensional prosthesis models against the
bone image. The ORTHODOC then allows the surgeon to visualize preoperatively the
possible results of the surgical outcome. The Company offers software for
several lines of prostheses in its software library. Implant manufacturers
contract with the Company for the development of prosthesis software. After the
surgeon selects the optimal bone cuts and 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 surgeries involve removing a portion of the bone at the joint
and replacing it with a prosthesis. For hip replacement surgery, a cavity is
milled by the robot into which the selected prosthesis is inserted. In case of
knee replacement surgery, ROBODOC mills both the upper and lower leg bone ends
for precise and accurate prosthesis placement to plan.
Neurosurgical Applications
The Company entered the neurosurgical equipment sector with the acquisition of
Innovative Medical Machines International, S.A., of Lyon, France, in September
1997. This wholly-owned subsidiary, which was renamed Integrated Surgical
Systems, S.A., designed, manufactured, sold and serviced the NeuroMate(TM)
System ("NeuroMate"). Based on its experience of over five years in
1
commercializing the NeuroMate System on a worldwide basis, the Company has
developed a new strategy for the neurosurgery market. It consists of
consolidating different robotic platforms to increase overall functionality
while lowering the costs. The Company will offer a new proprietary product to
the neurosurgical market on a worldwide basis.
Specialized Product Development
The Company develops specialized presurgical planning software for several major
implant manufacturing companies. These implant manufacturers contract with the
Company for the development of software for particular lines of new prostheses
to be used with the ROBODOC system.
Utilizing its many years of experience in presurgical planning in the 3D mode,
the Company has entered the presurgical planning software market for orthopedics
on an OEM basis. The Company offers presurgical planning software for use in
stand-alone systems as well as an integral part of 2D PACS (Picture, Archiving
and Communication Systems) commercialized worldwide by all major imaging
corporations.
Marketing, Sales and Distribution
As further discussed in "Government Regulations", ROBODOC cannot be marketed in
the United States until it has been cleared by the U.S. Food and Drug
Administration (the "FDA"). Accordingly, substantially all of the Company's
sales are to customers located in foreign countries. The Company markets the
ROBODOC system to orthopaedic and trauma surgeons and hospitals in Europe
through direct sales and through distributors in Japan, Korea and India.
The Company promotes the ROBODOC system through presentations at trade shows,
advertisements in professional journals and technical and clinical publications,
and direct mail campaigns. Presentations to potential customers focus on the
clinical benefits to the patient and the potential financial and marketing
benefits to hospitals and surgeons.
Manufacturing
The Company's manufacturing process primarily consists of the assembly of
purchased components, integration of proprietary software, product testing and
packaging. The Company's manufacturing facility is located in Davis, California.
The surgical components of the ROBODOC consist of readily available commercial
parts, a customized robot arm, a robot base and a control cabinet. Upon receipt,
these and other components are tested and assembled into a complete system. The
final assembled product is tested once again before shipment to a customer.
A significant ROBODOC system component, a custom-built robot arm, is
manufactured by a single Japanese company. Any significant delay or interruption
in sourcing this component could require the Company to search for new sources
of supply, if available, and could have a material adverse effect on the
financial condition, results of operations, or cash flows.
ORTHODOC consists of a computer workstation and associated data peripherals
incorporating the Company's 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 use in the country it is sold in.
Surgical supplies, including sterile drapes, bone screws and cutters, are
manufactured to the Company's specification by outside vendors. These vendors
are inspected periodically by the Company and samples are evaluated to ensure
that these specifications are consistently met. The Company and the Company's
authorized distributors purchase these items in quantity and distribute them to
customers as needed.
The Company's production facilities are subject to periodic inspection by the
FDA for compliance with Good Manufacturing Practices. The Company is also
subject to European manufacturing standards for European sales, and is routinely
2
audited to ensure compliance to the EC Medical Device Directives. All products
are shipped bearing the CE Mark, certifying that they meet the European Union's
marketing requirement.
Research and Development
Since inception, the Company's engineering activities have focused on the
development of innovative image-directed computer-controlled robotic products
for surgical applications, along with specialized operating software and
hardware systems to support these products. The Company incurred research and
development expenses of approximately $1,664,000 during the year ended December
31, 2003, and $2,515,000 in the year ended December 31, 2002.
The Company received a $143,403 interest-free loan in 1997 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. Under the terms of the loan, 50% of the revenue generated from
sales or licensing of the related technology, prototype, or articles
manufactured specifically for the research project, were to be paid to ANVAR in
the subsequent year, up to the balance of the loan amount outstanding. No such
revenues were recorded during the years ended December 31, 2003 and 2002. The
loan also provided for the forgiveness of the loan under certain conditions,
including a review by ANVAR. In August 2003, ANVAR completed its review of the
loan balance and determined that the remaining balance of $109,000 would be
forgiven. The Company has recorded the forgiveness of the loan as other income.
Competition
The principal competition for ROBODOC comes from manual surgery performed by
orthopaedic surgeons using surgical power tools, navigated instrumentation and
manual devices. These tools and devices are manufactured and/or distributed by
major orthopaedic companies, including Howmedica, Inc. and Osteonics, Inc.
(divisions of Stryker Corporation), Zimmer, Inc., DePuy, Inc. (a subsidiary of
Johnson & Johnson), Smith and Nephew, and Biomet, Inc.
Navigational instrumentation systems, offered by the major manufacturers of
orthopaedic devices, are an intermediate step between unaided 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 tool positions
for bone preparation and implant placement.
Since URS GmbH, a German medical robotics company, ceased its operations in
2002, there is no direct competition to the Company's product.
Warranty and Service
The Company offers a one-year warranty for parts and labor on all ROBODOC
systems commencing upon the completion of training and installation, except when
the sales contract requires formal customer acceptance. In most cases, the
Company's customers purchase a service contract, which includes warranty
coverage (parts and labor), unspecified product maintenance updates, customer
support services and various consumables required during surgical procedures.
Customers not covered by warranties or service contracts are billed on a time
and materials basis for service, and on a per unit basis for products.
The Company's technical staff trains medical professionals in the use of the
products and provides field service. Additional technical support is also
provided by the Company's engineering department.
Patents and Proprietary Rights
The Company relies on a combination of patent, trade secret, copyright and
trademark laws and contractual restrictions to establish and protect proprietary
rights in the products and to maintain a competitive position.
3
ROBODOC and ORTHODOC are registered trademarks of the Company. The Company has
been issued five U.S. patents, has four patents pending, and has filed
additional patent applications covering various aspects of the technology in
Europe and in the United States. U.S. issued patents include:
o Computer aided system for revision total hip replacement surgery;
o Computer system and method for finish cutting bone cavities;
o Computer system and method for positioning a surgical robot;
o Computer system and method for cavity generation for surgical planning
and initial placement of a bone prosthesis; and
o Computer system and method for performing image directed robotic
orthopaedic procedures without a fiducial reference system.
Significant portions of ORTHODOC and ROBODOC software are protected by
copyrights. IBM has granted the Company a royalty-free license for the
underlying software code for ROBODOC. In addition, IBM has agreed not to assert
infringement claims against the Company with respect to an IBM patent relating
to robotic medical technology, to the extent that this technology is used in the
products. The Company has registered the marks ROBODOC and ORTHODOC.
The Company can not guarantee that it will have the necessary working capital to
enforce and/or defend its patents, copyrights or trademarks if challenged.
Government Regulation
The medical devices the Company manufactures and markets are subject to
extensive regulation by the FDA and other federal and foreign governmental
authorities.
The ROBODOC system is approved for use in Europe and carries the European
Union's CE Mark. The ORTHODOC is cleared by the FDA for marketing in the United
States of America. While ROBODOC has not yet been approved for use by the
Japanese regulatory agency, the Ministry of Health, Labor and Welfare ("MHLW"),
Japanese hospitals and surgeons are able to purchase and use the systems while
approval is pending. The Company completed clinical trials in Japan and
submitted a petition for approval in 2002. Although no assurance can be offered,
the Company believes the approval can reasonably be expected in late 2004.
However, there can be no assurance that the determination will be favorable, or
that any determination will not include unfavorable limitations or restrictions.
U.S. clinical trials designed to secure FDA clearance to market the ROBODOC
system in the U.S. began in December 2000. It calls for performing pinless hip
(latest version) replacement surgeries on up to 181 subjects. Upon completion,
the Company will submit the application to the FDA for clearance to market in
the United States. At December 31, 2003, a total of 108 patients have been
enrolled in this study. The Company added a third clinical study site in
Buffalo, N.Y., and with this addition, it anticipates the completion of clinical
trials by the end of 2004, although no assurances can be given.
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.
4
Labeling and promotion activities are subject to scrutiny by the FDA and, in
certain instances, by the Federal Trade Commission. The Company is also subject
to a variety of state laws and regulations in those states or localities where
the products are or will be marketed. As is the case with other manufacturers,
the Company is 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 the Company has not been cleared to market the ROBODOC System in the
U.S., the Company is permitted to export the system provided certain
requirements are met. Products approved for use by European Union member
countries, Australia, Canada, India, Israel, Japan, Korea, 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 the products in foreign markets has subjected the Company,
and will continue to subject the Company, 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). The Company has 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 the Company to apply the CE Mark to its products. ROBODOC
meets the relevant provisions of the Medical Device Directive for Class IIb
Medical Devices.
Product Liability
The Company maintains product liability insurance against product liability
claims in the amount of $10 million per occurrence and $10 million in the
aggregate. The Company has experienced no liability claims to date.
Major Customers
The Company sells it's robotic systems to international distributors, who in
turn resell the product to specific international hospitals and clinics. The
Company's major international distributors are Imatron (KTEC) in Japan, Shin Han
Systek Co., Ltd, in Korea and Paramount Implex in India.
During the entire year 2002, and for the first nine months of 2003, the Company
sold its products in Europe through its wholly owned subsidiary, ISS-SA. On
September 30, 2003 the Tribunal de Commerce, in Lyon, France, determined that
ISS-SA met the criteria for it to appoint an administrator to manage the
Company's ISS-SA operations. This action caused the assets and operations of
ISS-SA to be sold, effectively terminating its operations on December 23, 2003.
Since December 23, 2003, the Company's Davis, California headquarters office has
assumed the sales responsibility for its products in Europe.
The Company also develops specialized presurgical planning software for several
major customers, including DePuy International Limited, Fujifilm Medical Systems
USA, Inc, Stryker and Zimmer Inc.
Employees
On December 31, 2003, the Company had a total of 28 employees: 19 in
engineering, 3 in manufacturing and 6 in sales and administration. None of the
employees is covered by a collective bargaining agreement and the Company
believes that the relationship with its employees is satisfactory.
5
Item 2. Description of Property
The Company's executive offices and production facility, which comprise a total
of approximately 30,500 square feet of space, are located in Davis, California.
The Company occupies the facility in Davis under a lease that expires in June
2005. The lease provided for rent of approximately $34,000 per month in 2003
(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.
Item 3. Legal Proceedings
The Company is subject to legal proceedings and claims that arise in the normal
course of business. The Company cannot assure that it would prevail in such
matters nor can it assure that any remedy could be reached on mutually agreeable
terms, if at all. Due to the inherent uncertainties of litigation, were there
any such matters, the Company would not be able to accurately predict their
ultimate outcome. As of December 31, 2003, there were no current proceedings or
litigation involving the Company that management believes would have a material
adverse impact on its financial position, results of operations, or cash flows.
In accordance with SFAS No. 5. "Accounting for Contingencies," the Company has
reviewed the facts related to the liquidation of its investment in ISS-SA and
closure of its European operations (see detail explanation in Part II, Item 7,
Note 1 to the audited financial statements contained elsewhere in this Annual
Report on Form 10-KSB) and has determined that no provision for loss is required
related to this action. As of December 31, 2003, there were no current
proceedings or litigation involving the Company. Were a claim to be filed the
Company would not be able to accurately predict its ultimate outcome.
Item 4. Submission of Matters to a Vote of Security Holders
None
Part II.
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information for Common Stock
The Company's common stock is currently quoted on the OTC Bulletin Board (OTCBB
Symbol: RDOC.OB). The following table sets forth the high and low sales prices
as reported on the over-the-counter market for shares of the Company's common
stock for the periods. Such prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
Common Stock
(RDOC.OB)
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Fiscal Year Ended High Low
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December 31, 2003
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First Quarter $0.055 $0.022
Second Quarter $0.044 $0.025
Third Quarter $0.055 $0.038
Fourth Quarter $0.190 $0.040
Fiscal Year Ended
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December 31, 2002
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First Quarter $0.160 $0.060
Second Quarter $0.105 $0.040
Third Quarter $0.065 $0.025
Fourth Quarter $0.060 $0.025
6
As of April 30, 2004 there were 251 holders of record of the common stock.
Dividends
The Company has never paid dividends on its common stock and its present policy
is to retain anticipated future earnings for use in its business.
Recent Sale of Unregistered Securities
During 2003, the Company issued a total of 2,888,889 shares of common stock to
an accredited investor upon conversion of preferred stock. The issuance and sale
of these shares were exempt from the registration requirements of the Securities
Act under Sections 3(a)(9) and 4(2).
Equity Compensation Plans
The following table provides information as of the fiscal year ended December
31, 2003 with respect to the Company's compensation plans (including individual
compensation arrangements).
EQUITY COMPENSATION PLAN INFORMATION TABLE
(a) (b) (c)
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
(excluding securities
reflected in column (a))
Equity compensation plans
approved by security holders 2,478,642 (1) $0.77 250,232
Equity compensation plans not
approved by security holders 235,000 (2) $0.37 ---
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Total 2,713,642 $0.74 250,232
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(1) Includes the Company's 1991, 1995 and 1998 Stock Option Plans and its 2000
Long-Term Performance Plan.
(2) Consists of: (i)100,000 warrants for consulting services which expire in
August 2004 and have an exercise price of $0.50 per share; (ii) 35,000
warrants for consulting services which expire in September 2004 and have an
exercise price of $0.86 per share; (iii) 100,000 warrants for consulting
services which expire in May 2007 and have an exercise price of $0.06 per
share.
7
Item 6. Management's Discussion and Analysis
The following discussion and analysis relates to the consolidated operations of
the Company and should be read in conjunction with the consolidated financial
statements of the Company, including the notes thereto, appearing elsewhere in
this report.
Results of Operations (2003 vs. 2002)
Revenue of $5.8 million for the year ended December 31, 2003 was up 13% when
compared to $5.2 million for the year ended December 31, 2002 primarily due to
the increase in product sales. Cost of revenue of $4.0 million for the year
ended December 31, 2003 was up $2.2 million when compared to $1.8 million for
the year ended December 31, 2002, primarily due to the increased level of
product sales. Operating expenses of $5.6 million for the year ended December
31, 2003 decreased by $0.9 million when compared to the year ended December 31,
2002. This decrease of $0.9 million in operating expenses was comprised of $1.0
million decrease in sales, general and administrative expense, $0.9 million
decrease in research and development expense, and a $0.5 million decrease in
amortization expense, offset by the $1.5 million loss on disposal of subsidiary
resulting from the liquidation of the Company's investment in ISS-SA and closure
of its European operations in the fourth quarter 2003. Other income, net for the
year ended December 31, 2003, increased by $0.2 million when compared to $0.3
million for the year ended December 31, 2002, primarily due to forgiveness of a
$0.1 million loan and a gain of $0.2 million for the reversal of a reserve for
clinical robots in the fourth quarter of 2003 offset by a reduction in the
Company's foreign currency gains. These changes in revenue and expenses resulted
in a net loss of $1.4 million for the period ended December 31, 2003 when
compared to the previous year.
The increase in revenue of $0.6 million consisted of changes in the following
categories of the Company's sales. ROBODOC systems revenue increased by $1.9
million as four ROBODOC system sales were recognized in 2003 compared to one in
2002; NeuroMate systems revenue increased $0.6 million as three NeuroMate system
sales were recognized in 2003 compared to one in 2002; Service/Parts/Consumables
revenue decreased by $1.4 million from $3.3 million in 2002 to $1.9 million in
2003 due to the loss of the fourth quarter 2003 European service revenue that
was retained by the administrator of ISS-SA and because of a reduction in
overall European service contracts; and a decrease in development revenue of
$0.5 million from $1.0 million in 2002 to $0.5 in 2003 due to the completion of
fewer development contracts. The Company has one ROBODOC system reported as
unearned income and expects to recognize this system as revenue during 2004 upon
completion of training and installation at the end user site.
The FDA allows the Company to market NeuroMate as described in the Company's
510(k) pre-market notification.
The gross margin for 2003 was 32% compared to 65% in 2002. This decrease was
primarily due to changes in product mix and idle facility costs. For the year
ended December 31, 2003 ROBODOC and NeuroMate systems generated 58% of revenues
compared to 15% for the year ended December 31, 2002. Service contracts, parts,
consumables and development revenues were 42% for the year ended December 31,
2003 as compared to 85% for the year ended December 31, 2002. The Company's
margins for its service contracts, parts, consumables and development are
substantially higher than margins on ROBODOC and NeuroMate systems. As a result
of reduced demand, the Company limited its production activities in 2003,
creating minimal absorption of manufacturing overhead costs resulting in
increased cost of goods sold.
Selling and general administrative expenses are comprised of salaries,
commissions, travel expenses and costs associated with trade shows as well as
its finance, legal and human resources functions. Selling and general
administrative expenses for the year ended December 31, 2003 decreased 30% to
$2,439,000 from $3,468,000 for the year ended December 31, 2002. The decrease in
selling and general administrative expenses was primarily due to a 40% decrease
in average staffing levels in the year ended December 31, 2003.
8
Research and development expenses are comprised of the engineering and related
costs associated with the development of innovative image-directed
computer-controlled robotic products for surgical applications, along with
specialized operating software and hardware systems to support these products,
quality assurance and testing. Research and development expenses decreased 34%
to $1,664,000 during the year ended December 31, 2003 as compared to $2,515,000
for the year ended December 31, 2002. The decrease in the year ended December
31, 2003 is due to decreased staffing and staffing related expenses and
approximately $125,000, received in April 2003 as the final payment under a
grant from the National Institute for Standards and Technology of the United
States Department of Commerce ("NIST"). Under the terms of the NIST grant, the
Company was entitled to reimbursement for certain of the expenses incurred in
connection with the development of its revision hip surgery product. As of
December 31, 2003, the Company had received a cumulative total of approximately
$1,221,000 in funding from NIST since 1995. The Company has recorded the
proceeds from the NIST grant as a reduction of its research and development
expenses.
Other income, net of approximately $528,000 when compared to other income, net
of approximately $287,000 for the years ended December 31, 2003 and 2002,
respectively, changed primarily due to a gain of $109,000 recognized in the
third quarter of 2003 related to a loan forgiven by ANVAR and a gain of $208,000
recognized in the fourth quarter of 2003 related to the reversal of a reserve
for clinical robots. The remaining balance in other income (expense) for the
years ended December 31, 2003 and 2002 is a result of a favorable currency
exchange rate for the Euro related to the Company's business in Europe, and one
month of sublease rent income related to the Company's Davis, California
facility in 2003 compared to a slightly more favorable rate and nine months of
sublease rent income related to the Company's Davis, California facility in
2002.
Liquidity
The reports of the Company's independent auditors on the 2003 and 2002
consolidated financial statements included explanatory paragraphs stating that
there is substantial doubt with respect to the Company's ability to continue as
a going concern. The Company believes that it has a plan to address these issues
and enable the Company to continue through the end of 2004. This plan includes
obtaining additional equity or debt financing, increasing sales of the products
in existing markets, increasing sales of system upgrades, and reducing operating
expenses as necessary. Although the Company believes that the plan will be
realized, there is no assurance that these events will occur. In the event that
the Company is unsuccessful, it is possible that it will cease operations or
seek bankruptcy protection. 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 the Company's part to continue as a going
concern.
9
Through December 31, 2003, the Company has been funded through cash from
operations and sales of equity securities (see, "Capital Resources"). At
December 31, 2003, the "quick ratio" (cash and accounts receivable divided by
current liabilities), a conservative liquidity measure designed to predict the
Company's ability to pay bills, was only .04. It has been difficult for the
Company to meet financial obligations, including payroll, as they come due, and
the Company expects this situation to continue through 2004.
Net cash provided by operating activities was $186,000 for the year ended
December 31, 2003. This primarily resulted from the net loss of $3,250,000,
which included the loss on disposal of subsidiary of $1,447,000, a decrease in
the accounts receivable balance of $1,116,000, a decrease in inventory of
$663,000, an increase of $586,000 in accrued payroll and related expenses and a
decrease in unearned income of $435,000. The decrease in accounts receivable,
inventory and unearned income were a result of limited shipments of the ROBODOC
and NeuroMate systems during the year. The increase in accrued payroll and
related expenses is directly related to lack of cash resulting in delayed
payroll payments. The Company expects to derive most of the cash required to
support operations through sales of the ROBODOC system, continued conversion of
the inventory balance into cash, collection of accounts receivable and through
additional financing. It is critical for the Company to obtain cash from these
sources to survive in 2004. There can be no assurance given that the Company can
continue to convert inventory, collect receivables or raise additional funds on
acceptable terms or at all.
The Company has the following contractual obligations and commercial commitments
at December 31, 2003:
Less than More than
Total 1 year 1-3 years 3 years
----- ---------- --------- ---------
Facility operating leases $592,674 $416,363 $176,311 $0
The Company will require substantial funds for operating activities, further
product development, future clinical trials, regulatory approvals, and marketing
of the products. The Company's future capital requirements will depend upon the
progress of the research and development programs; the time and costs involved
in securing regulatory approvals; the cost of filing, defending and enforcing
the 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.
In January 2004, as a result of the liquidation of ISS-SA, the Company entered
into a new arrangement with a distributor under a royalty agreement to service
its European operations in the future. While this new arrangement ensures
European business obligations will be met, the Company can not guarantee
favorable financial results from this change in business operations. Future
revenues from such activities will be limited to royalty payments, if any,
received from the distributor.
At December 31, 2003, the Company had an aggregate amount due to executive
officers of approximately $636,000. These amounts due are in the form of an
interest bearing advance, non-interest bearing advances, deferred salaries and
unreimbursed travel expenses. Of such amounts, $201,000, $273,000 and $57,000
are included in accrued payroll and related expense, accounts payable and
accrued liabilities, respectively, and are due to Ramesh C. Trivedi, president
and chief executive officer of the Company; $54,000 and $14,000 are included in
accrued payroll and related expense and accounts payable, respectively, and are
due to Leland Witherspoon, vice president of engineering of the Company; and
10
$38,000 is included in accrued payroll and related expense and is due to Charles
J. Novak, chief financial officer of the Company. At December 31, 2003, the
Company had accrued payroll and related expenses of $371,000 for all other
employees.
Capital Resources
On April 30, 2004, there were 44.9 million shares of the Company's common stock
outstanding, and is listed on the Over-The-Counter Bulletin Board (OTC BB) at
$0.095 a share, giving the Company a market capitalization of $4.1 million. In
the first quarter of 2001, the Company's 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 the common stock and make it more difficult for
investors to sell.
At December 31, 2003, the Company had 168 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.
The holders of the preferred stock could also engage in short sales of the
common stock after delivering a conversion notice to the Company, which could
contribute to a decline in the market price of the Company's 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 the
Company's common stock.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of the financial condition and results of
operations are based upon the Company's audited consolidated financial
statements included elsewhere in this Form 10-KSB and have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of such audited consolidated financial statements
requires the Company 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, the Company evaluates
the estimates, including those related to bad debts, inventories, impairment of
assets, warranties, contingencies and litigation. The Company bases these
estimates on historical experience and on other assumptions believed 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. The Company has discussed its critical
accounting policies with the audit committee of the Company. Actual results may
differ from these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect the
Company's more significant judgments and estimates used in the preparation of
the consolidated financial statements:
The Company recognizes revenue from sales of its products 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 the interpretation of
11
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.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of the Company's customers to make required
payments. If the financial condition of the customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
Where the Company's products are not covered by separate service
agreements, the Company reserves against the estimated cost of product
warranties at the time revenue is recognized. The 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 these
estimates, revisions to the estimated warranty liability would be required.
The Company writes down the 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 the Company projected, additional inventory
write-downs may be required.
Property, plant and equipment are amortized over their useful lives. Useful
lives are based on estimates of the period that the assets will generate
revenue. Property and equipment 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 May 2003, FASB issued Statement of Financial Accounting Standards No. (SFAS
No. 150), "Accounting for Certain Instruments with Characteristics of Both
Liabilities and Equity". SFAS No. 150 requires certain financial instruments
that embody obligations of the issuer and have characteristics of both
liabilities and equity to be classified as liabilities. Many of these
instruments previously were classified as equity or temporary equity and, as
such, SFAS No. 150 represents a significant change in practice in the accounting
for a number of mandatory redeemable equity instruments and certain equity
derivatives that frequently are used in connection with share repurchase
programs. SFAS No. 150 is effective for all financial instruments created or
modified after May 31, 2003, and to other instruments at the beginning of the
first interim period beginning after June 15, 2003. The adoption of SFAS No. 150
did not have a material impact on the Company's consolidated financial position,
cash flows or results of operations.
In November 2002, the EITF reached a consensus on Issue 00-21, "Multiple
Deliverable Revenue Arrangements" (EITF 00-21). EITF 00-21 addresses how to
account for arrangements that may involve the delivery or performance of
multiple products, services, and/or rights to use assets. The consensus mandates
how to identify whether goods or services or both that are to be delivered
separately in a bundled sales arrangement should be accounted for separately
because they are "separate units of accounting." The guidance can affect the
timing of revenue recognition for such arrangements, even though it does not
change rules governing the timing or pattern of revenue recognition of
individual items accounted for separately. The final consensus is applicable to
agreements entered into in fiscal periods beginning after June 15, 2003, with
early adoption permitted. Additionally, companies will be permitted to apply the
consensus guidance to all existing arrangements as the cumulative effect of a
change in accounting principle in accordance with APB Opinion No. 20,
"Accounting Changes." The adoption of EITF 00-21 did not have a material impact
on the Company's consolidated financial position, cash flows or results of
operations.
12
Risk Factors and Cautionary Statement Regarding Forward-Looking Information
The Company cautions 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. The Company's plans, strategies,
objectives, expectations and intentions are subject to change at any time at the
discretion of management and the board of directors. The plans and results of
operations will be affected by the Company's ability to manage any growth and
working capital and the ability to finance future operations, none of which is
assured. In addition, the risk factors that follow may affect the 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 elsewhere in this Form 10-KSB
and also from time to time in the Company's filings with the Securities and
Exchange Commission. The Company undertakes no obligation to update such factors
in the future.
The reports of the Company's independent auditors on the 2003 and 2002
consolidated financial statements included explanatory paragraphs stating that
there is substantial doubt with respect to the Company's ability to continue as
a going concern. The Company has a plan to address these issues which it
believes will enable the Company to continue through the end of 2004. This plan
includes obtaining additional equity or debt financing, increasing sales of the
products in existing markets, increasing sales of system upgrades, and reducing
operating expenses as necessary. Although the Company believes that the plan
will be realized, there is no assurance that these events will occur. In the
event that the Company is unsuccessful, it is possible that it will cease
operations or seek bankruptcy protection. 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 the Company's part to continue
as a going concern.
The Company's future financial performance will depend almost entirely on sales
of the ROBODOC system. The Company expects to derive most of its near-term
revenue from sales of the ROBODOC System. Having recognized revenue on four
ROBODOC systems in 2003 and one ROBODOC system in 2002, the Company must develop
an effective sales and marketing organization and expend sufficient funds to
inform potential customers of the distinctive characteristics and advantages of
using the 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, the Company expects to encounter resistance to change,
which it must overcome if the system is to achieve significant market
acceptance.
Furthermore, the Company's ability to market the ROBODOC System in the U.S. is
dependent upon clearance by the FDA. The Company can give no assurance that it
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 profitability.
The Company is dependent on foreign sales. Most of the sales have been to
customers in Europe and Asia. Until such time, if ever, as the Company receives
clearance from the FDA to market the ROBODOC System in the U.S., it 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 the business.
13
The Company's 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 revenue and results of operations fluctuate with the number
of ROBODOC Systems sold. The number and timing of the systems sold may cause
revenue and earnings to vary significantly on a quarterly basis and a quarter's
results may not be indicative of revenue and earnings for the full year.
The Company may not be able to secure the regulatory approvals needed to expand
the sales of the products to new foreign markets. The introduction of the
products in foreign markets has subjected and will continue to subject the
Company 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. The Company can give no
assurance that any of the products will receive further approvals.
The Company needs, but has not yet secured, clearance from the FDA under 510(k)
petition to market the ROBODOC System in the U.S. In December 2000, the Company
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 a total of 181
subjects performed at up to four clinical trial sites. The Company has
established three sites, Sutter General Hospital in Sacramento, California, the
University of Arkansas in Little Rock, Arkansas and Buffalo General Hospital in
Buffalo, New York. As of December 31, 2003, approximately 60% of the mandated
total surgeries have been performed.
The Company can provide no assurance that, at the completion of the clinical
trials, the FDA will grant clearance to market the system in the U.S. and that
such clearance will not include unfavorable limitations or restrictions. In
addition, FDA clearance gives no assurance of market acceptance or that the
Company will generate gross margins to obtain substantial profitability.
Even after receipt of any FDA clearance to market, the Company expects that the
FDA may 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 the Company to incorporate new
imaging modalities (such as ultrasound and MRI) or other different technologies
in the ROBODOC System. The FDA may require new clinical data to support new
indications and may require new clinical data for clearance of enhanced
technological characteristics.
The Company may not be able to comply with quality system and other FDA
reporting and inspection requirements. Although the Company is in full
compliance with the regulatory requirements in markets it participates, there
can be no assurance that the Company will be able to continue to comply with
these requirements. Assuming that the Company secures the necessary FDA
clearances for the products, in order to maintain these clearances the Company
must, among other things, register its establishment and list the devices with
the FDA and with certain state agencies, the Company must maintain extensive
records, report any adverse experiences on the use of the 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 the Company manufactures
or distributes.
14
The manufacture and sale of medical products exposes the Company to the risk of
significant damages from product liability claims. The Company maintains product
liability insurance against product liability claims in the amount of $10
million per occurrence and $10 million in the aggregate. Although the Company
has not experienced any product liability claims to date, a successful claim in
excess of the Company's insurance coverage could have a materially adverse
effect on the business, financial condition, cash flows and results of
operations of the Company.
The Company has produced a limited number of commercial ROBODOC Systems and may
not be able to manufacture the systems at a cost or in such quantity as will be
necessary for profitable operation. 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. The Company can give no
assurance that production yields, costs or quality will not be adversely
affected as the Company seeks to increase production, and any such adverse
effect could have a material adverse effect on the business, financial
condition, cash flows and results of operations.
The Company is dependent on the suppliers of robots. Although the Company has
multiple sources for most of the components, parts and assemblies used in the
systems, the Company is dependent on Sankyo Seiki MFG.CO., LTD of Japan for the
robot arm of the ROBODOC System and is renegotiating the renewal of the
agreement with Sankyo for the purchase and use of Sankyo industrial products.
Although the Company believes it can secure a robot arm for the ROBODOC system
from other suppliers, the Company can give no assurance that delays resulting
from the engineering effort to adapt alternative components would not have a
material adverse effect on the business, financial condition, cash flows and
results of operations.
The Company depends heavily on the principal members of its management team and
engineers. The Company's growth and future success will depend in large part on
the continued contributions of key technical and senior management personnel.
Dr. Ramesh Trivedi, the Company's President and Chief Executive Officer, Charles
J. Novak, the Company's Chief Financial Officer and Leland Witherspoon, the
Company's Vice President, Engineering, are employed pursuant to employment
agreements terminable by the Company or by such officer at any time. None of the
executives or technical personnel, other than Dr. Trivedi, Mr. Novak and Mr.
Witherspoon are employed pursuant to an employment agreement. The loss of the
services of Dr. Trivedi, Mr. Novak, Mr. Witherspoon or other senior management
or key technical personnel could have a material adverse effect on the business,
financial condition, cash flows and results of the Company's operations.
The Company's success may depend, in part, on its ability to defend its
intellectual property. The Company has secured patent and other proprietary
right protection for the technologies and relies on trade secrets, proprietary
know-how and continuing technological innovation to develop the products. Any
defense of the intellectual property could be costly and require significant
time and the attention of the management and technical personnel.
Purchases of the Company's 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 the common stock and make it more difficult for investors to sell.
15
Impact of issuing additional shares. The Company is seeking additional financing
that may require issuing additional common or preferred shares of the Company.
Although the dilution factor cannot be determined until the amount of shares are
known, there will be a dilution of some unknown magnitude. Additional financing
also could result in a change of control of the Company.
Item 7. Financial Statements
The financial statements follow Item 14 of this report.
Item 8. Changes in and disagreements with accountants on accounting and
financial disclosure
The Company did not have any changes in or disagreements with the accountants on
accounting and financial disclosure except as noted below.
On January 20, 2004, Ernst & Young LLP ("Ernst & Young") was dismissed from its
existing professional relationship with the Company. The decision to dismiss the
auditors was approved by the Company's audit committee. On January 21, 2004, the
Audit Committee of the Board of Directors of the Company appointed Macias Gini &
Company, LLP ("Macias Gini & Company") as its independent auditor to audit the
financial statements of the Company for the year ended December 31, 2003.
During the Registrant's fiscal years ended December 31, 2002 and 2001, and the
subsequent period through January 20, 2004, there were no disagreements with
Ernst & Young, on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which, if not resolved to
Ernst & Young's satisfaction, would have caused Ernst & Young to make reference
to the subject matter of disagreement(s) in connection with its reports.
The audit report of Ernst & Young on the consolidated financial statements of
the Registrant as of and for the past two audited fiscal years ended December
31, 2002 and 2001, did not contain any adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles, except that the audit reports for the past two fiscal
years contained an explanatory paragraph indicating that there is substantial
doubt about the Registrant's ability to continue as a going concern.
During the Registrant's fiscal years ended December 31, 2002 and 2001, and the
subsequent period through January 20, 2004, the Registrant did not consult with
Macias Gini & Company with respect to the application of accounting principles
to a specifically completed or contemplated transaction or the type of audit
opinion that might be rendered on the Registrant's financial statements nor has
Macias Gini & Company provided to the Company a written report or oral guidance
regarding such principles or audit opinion. Additionally, the Registrant did not
consult with Macias Gini & Company on any matter that was the subject of a
disagreement or event identified under Item 304 (a)(1)(iv) of Regulation S-B.
Item 8A. Controls and Procedures
An evaluation was performed, as of December 31, 2003, under the supervision and
with the participation of the Company's management, including its President,
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on such evaluation, the Company's management has concluded that its disclosure
controls and procedures were effective as of December 31, 2003. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect the Company's internal controls subsequent to
December 31, 2003.
Part III
Item 9. Directors, Executive Officers and Control Persons; Compliance with
Section 16(A) of the Exchange Act The Company's executive officers and directors
are listed below:
Name Age Position with the Company
---- --- -------------------------
Ramesh C. Trivedi 64 President, Chief Executive Officer, Director
Charles J. Novak 56 Chief Financial Officer, Treasurer, Secretary
Leland Witherspoon 51 Vice President
Falah Al-Kadi 53 Chairman of the Board of Directors
Jack W. Moorman 56 Director
Paul A.H. Pankow 73 Director
16
The directors hold office until the next annual meeting of shareholders and
until their successors have been duly elected and qualified. The Board of
Directors elects the officers at its annual meeting immediately following the
shareholders annual meeting and hold office until they resign or are removed
from office. There are no family relationships that exist between any director,
executive officer, significant employee or person nominated or chosen by the
Company to become a director or executive officer. The Company has established
audit and incentive compensation committees, consisting of the independent
directors.
Biographical Information on Officers, Directors and Control Persons
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.
Charles J. Novak has been the chief financial officer since joining Integrated
Surgical Systems in July 2002. From September 2001 to December 2001, Mr. Novak
was the vice president of finance and administration and CFO for Realty Plus
Online, a real estate software transaction system company. From January 2001 to
September 2001, he was the vice president of finance and administration and CFO
for WebRaiser Technologies, Inc., an integration and professional services firm.
From February 1999 to January 2001, Mr. Novak was the director of operations for
MRI Sierra International Group, Inc., an executive search firm. From September
1995 to February 1999, he was the assistant corporate controller for USCS
International, Inc., a supplier of customer management software and open billing
solutions. Prior to that, Mr. Novak served in executive management positions for
Describe, Inc. and HealthTek, Inc. and he served in various management positions
with the Hewlett-Packard Company. Mr. Novak earned his BS in Accounting from
Lewis University in Lockport, Illinois.
Leland Witherspoon has been vice president of engineering since joining ISS in
late 1997. From 1992 to 1997, Mr. Witherspoon was director of product research
and development for Sorin Biomedicals, Inc., a developer and manufacturer of
cardiopulmonary and cardiovascular hardware and software 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 International
Licensing Holding sal ("ILTAG"), a position he has held since 1994. ILTAG is a
Lebanese holding company registered under Commercial Registration no. 855.
Jack W. Moorman has been a director of the Company since October 2002. Since
August 2002, Mr. Moorman has been president and chief executive officer of
Microbar Inc., a capital equipment manufacturer of advanced chemical management
systems, and acted as interim president of Microbar Inc., from December 2001 to
August 2002. From December 2000 to December 2001, Mr. Moorman was a
self-employed start-up consultant to various companies. From July 1999 to
December 2000, Mr. Moorman served as President of Vivant Medical Incorporated,
an early stage venture capital funded medical device company, which merged with
MCT Medical Inc., a liver tumor ablation medical device company founded by Mr.
Moorman in November 1998. From June 1999 to July 1999, Mr. Moorman provided
business and consulting services to the Company. From December 1997 to July
1999, Mr. Moorman was self-employed as a business and technical consultant in
parallel with MCT Medical Inc. Mr. Moorman received his BS in Ceramic
Engineering from the University of Illinois and his MS in Management from
Stanford Graduate School of Business.
17
Paul A. H. Pankow has been a director of the Company since January 2003. Mr.
Pankow previously served as a director of the Company from May 1995 through
December 1999. Since March 1995, Mr. Pankow has been president of PAP
Consulting, a business and technical consulting firm. From September 1959 to
February 1995, he held various positions with 3M Corporation, most recently as a
vice president of its Imaging Systems Division, staff vice president of Digital
Imaging Application Center and staff vice president of special programs. He
currently serves as a member of several private boards. Mr. Pankow received his
B.S. in mechanical engineering and business administration from the University
of Minnesota.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, directors, and persons who own more than ten percent of a registered
class of the Company's equity securities 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 the Company with copies of all Section 16(a)
forms they file. Based solely on a review of copies of the reports the Company
received and written representations from persons concerning the necessity to
file these reports, the Company is not aware of any failure to file reports or
report transactions in a timely manner during the fiscal year ended December 31,
2003.
Item 10. Executive Compensation
The following table sets forth for the fiscal years ended December 31, 2003,
2002 and 2001, the compensation awarded to, earned by or paid to the Company's
Chief Executive Officer and each of the other executive officers whose total
salary and bonus exceeded $100,000 for the year ended December 31, 2003
(collectively, the "Named Executive Officers").
Summary Compensation Table
Long-Term
Annual Compensation Compensation
------------------- ------------
Securities
Name and Cash Underlying
Principal Position Year Salary (1) Bonus Other (2) Options
------------------ ---- ---------- ----- --------- -------
Ramesh C. Trivedi 2003 (3) $302,226 $0 $25,139 300,000
President and Chief 2002 (4) 302,215 0 16,752 0
Executive Officer 2001 301,434 0 17,214 0
Leland Witherspoon 2003 (5) 142,600 0 0 125,000
Vice President, 2002 (6) 142,600 0 0 0
Engineering 2001 141,335 0 0 0
Charles J. Novak 2003 (7) 120,000 0 0 80,000
Chief Financial Officer 2002 (8) 55,000 0 0 30,000
2001 0 0 0 0
18
(1) The 2002 salary information for Charles J. Novak represents a partial year
as his start date with the Company was in July 2002.
(2) Represents expense allowances under the terms of Dr. Trivedi's employment
agreement.
(3) For the year 2003, $112,277 of Dr. Trivedi's salary was deferred.
(4) For the year 2002, $32,451 of Dr. Trivedi's salary was deferred.
(5) For the year 2001, $56,324 of Dr. Trivedi's salary was deferred.
(6) For the year 2003, $38,322 of Mr. Witherspoon's salary was deferred.
(7) For the year 2002, $15,282 of Mr. Witherspoon's salary was deferred.
(8) For the year 2003, $34,350 of Mr. Novak's salary was deferred.
(9) For the year 2002, $3,289 of Mr. Novak's salary was deferred.
Employment Agreements
Dr. Ramesh C. Trivedi serves as President and Chief Executive Officer of the
Company pursuant to an employment agreement with the Company dated December 8,
1995, as amended on March 31, 1998 and January 1, 2000 terminable at will by
either party. Pursuant to such employment agreement, as amended, Dr. Trivedi is
to receive a base salary of $25,186 per month and incentive compensation.
Pursuant to such employment agreement, Dr. Trivedi received a 10-year option to
purchase an aggregate of 100,000 shares of common stock of the Company at a
purchase price of $4.75 per share, the closing price of the Company's common
stock on February 19, 1998, exercisable as follows: (i) 28,125 exercisable
immediately and (ii) the remaining 71,875 shares exercisable over a period of 48
months commencing on February 19, 1998. Dr. Trivedi's employment with the
Company is for no specified period and constitutes at-will employment. However,
it is provided in the employment agreement that in the event (i) that Dr.
Trivedi is terminated by the Company for reasons other than for Cause (as
defined in his employment agreement), he will be entitled to receive severance
pay of his base salary for a period of 18 months from the date of termination;
and (ii) the vesting of his option as indicated above will accelerate and become
immediately exercisable at the time of termination.
On February 14, 2003, the Company entered into substantially similar employment
agreements with Charles J. Novak and Leland Witherspoon (individually, the
"Executive") to serve as Chief Financial Officer and Vice President,
Engineering, respectively, of the Company. The employment agreements provide for
an annual base salary of $10,000 and $11,883.34 per month to Mr. Novak and Mr.
Witherspoon, respectively, and such incentive compensation as shall be
determined from time to time by the Board of Directors of the Company. The
Executives' employment with the Company is for no specified period and
constitutes at-will employment. However, it is provided in each of the
employment agreements that in the event (i) that the Executive is terminated by
the Company for reasons other than for Cause (as defined in his employment
agreement), the Executive will be entitled to receive severance pay of his base
salary for a period of three months from the date of termination; and (ii) of
any consolidation or merger of the Company with or into another entity, or the
sale of all or substantially all of the assets of the Company to another entity,
the Executive is unable to reach a reasonable agreement of employment with such
entity, he will be entitled to receive severance pay of his base salary for a
period of six months from the date of termination, provided, however, the
Executive agrees to make reasonable efforts to assist such entity in its
transition for a reasonable period of time.
19
Stock Options
The following table contains information concerning the grant of stock options
under any of the Company stock option plans to the Named Executive Officers
during the fiscal year ended December 31, 2003.
Stock Option Grants in Last Fiscal Year
(Individual Grants)
% of Total
Number of Options Potential Realizable Value at Assumed
Shares Granted to Annual Rates of Stock Price
Underlying Employees Exercise Appreciation for Option
Options in Fiscal Price per Term (2)
Name Granted (1) Year Share Expiration Date 5% 10%
---- ----------- ---- ----- --------------- ----- ------
Ramesh C. Trivedi 300,000 26.55% $0.0250 February 27, 2013 4,717 11,953
Leland Witherspoon 125,000 11.06% $0.0250 February 27, 2013 1,965 4,980
Charles J. Novak 80,000 7.08% $0.0250 February 27, 2013 1,258 3,187
(1) All options have an exercise price per share equal to 100% of the fair
market value of the Company's common stock on the grant date. Stock options
have a 10-year term and vest periodically over a period not to exceed five
years.
(2) As required by SEC rules, these columns show the potential gains that may
exist for respective options, assuming that the market price for Integrated
Surgical Systems, Inc.'s common stock appreciates from the date of grant to
the end of the option terms at the annual rates of 5% and 10%,
respectively. These numbers are not estimates of the Company's future stock
price performance and are not necessarily indicative of the Company's
future stock price performance. If the price of the Company's common stock
does not increase above the exercise price, no value will be realizable
from these options.
The following table summarizes, for each of the Named Executive Officers, the
total number of unexercised options held at December 31, 2003, and the aggregate
dollar value of in-the-money, unexercised options, held at December 31, 2003.
The value of the unexercised in-the-money options at December 31, 2003, is the
difference between their exercise or base price and the value of the underlying
common stock on December 31, 2003. The closing sale price of the common stock on
December 31, 2003 was $0.105 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
2003 At December 31, 2003 December 31, 2003
---- -------------------- -----------------
Value
Name Number Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ------ -------- ----------- ------------- ----------- -------------
Ramesh C. Trivedi 0 - 741,077 306,340 $11,123 $24,000
Leland Witherspoon 0 - 74,375 125,625 0 10,000
Charles J. Novak 0 - 10,625 99,375 531 7,369
20
Director Compensation
The Company currently does not have in effect a policy regarding compensation
for serving on the Company's board of directors. However, the Company does
reimburse its directors for their reasonable expenses incurred in attending
meetings of the Company's board and its non-employee directors are periodically
granted options to purchase shares of the Company's common stock.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information concerning the beneficial
ownership of the Company's common stock as of April 30, 2004 by (i) each person
known by the Company to be the owner of more than 5% of the outstanding common
stock, (ii) each director, (iii) each executive officer named in the Summary
Compensation Table above and (iv) all directors and officers as a group.
Percentage of
Amount and Nature Common Stock
of Beneficial Beneficially
Name Ownership (1) Owned (2)
---- ------------- ---------
Ramesh C. Trivedi (3) 1,061,417 (4) 2.37%
Leland Witherspoon (3) (5) *
211,484
Charles J. Novak (3) 92,500 (6) *
Falah Al-Kadi (7) (8) 3.41%
1,531,511
Jack W. Moorman (9) 45,313 (10) *
Paul A.H. Pankow (3) 45,313 (10) *
All directors and officers
as a group (6 persons) 2,987,538 6.66%
- --------------------------------------------------------------------------------
* 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. Includes any securities that such person has the
right to acquire within 60 days pursuant to options, warrants, conversion
privileges or other rights.
(2) Based on 44,867,358 shares of common stock outstanding as of April 30,
2004.
(3) Address is c/o Integrated Surgical Systems, Inc., 1850 Research Park Drive,
Davis, California 95616.
(4) Includes 1,047,417 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, 120,000 shares at an exercise price of $3.00 per
share, 304,300 shares at an exercise price of $1.81 per share, 6,210 shares
at an exercise price of $0.10 per share and 300,000 shares at an exercise
price of $0.025 per share.
(5) Includes 200,000 shares that Mr. Witherspoon may acquire upon exercise of
stock options exercisable within 60 days - 45,000 shares at an exercise
price of $3.00 per share, 30,000 shares at an exercise price of $1.81 per
share and 125,000 shares at an exercise price of $0.025 per share.
(6) Includes 92,500 shares that Mr. Novak may acquire upon exercise of stock
options exercisable within 60 days - 12,500 shares at an exercise price of
$0.055 per share and 80,000 shares at an exercise price of $0.025 per
share. Does not include options to purchase 17,500 shares at an exercise
price of $0.055 per share, none of which are currently exercisable.
21
(7) Address is c/o Dogmoch Group of Companies, Adnan Al Hakim St., Assaf Bldg.,
P.O. Box 135660, Beirut, Lebanon.
(8) Includes 1,461,198 shares of the Company's common stock, all of which are
owned by ILTAG, an affiliate of Dogmoch, of which Mr. Al-Kadi is
Vice-Chairman, and 70,313 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. Does not include options to purchase 29,687 shares at an
exercise price of $0.060 per share, none of which are currently
exercisable.
(9) Address is c/o Microbar Inc. 1252 Orleans Drive, Sunnyvale, California
94089.
(10) Includes 45,313 shares that may be acquired upon exercise of stock options
exercisable within 60 days at an exercise price of $0.035 per share. Does
not include options to purchase 54,687 shares at an exercise price of
$0.035 per share, none of which are currently exercisable.
Securities Authorized for Issuance Under Equity Incentive Plans
The Company has provided in the "Equity Compensation Plans" section of Item 5 of
this Annual Report on Form 10-KSB certain information with respect to securities
authorized for issuance under the Company's equity plans.
Item 12. Certain Relationships and Related Transactions
At December 31, 2003, the Company had an aggregate amount due to executive
officers of approximately $636,000. These amounts due are in the form of an
interest bearing advance, non-interest bearing advances, deferred salaries and
unreimbursed travel expenses. Of such amounts, $201,000, $273,000 and $56,000
are included in accrued payroll and related expense, accounts payable and
accrued liabilities, respectively, and are due to Ramesh C. Trivedi, president
and chief executive officer of the Company; $54,000 and $14,000 are included in
accrued payroll and related expense and accounts payable, respectively, and are
due to Leland Witherspoon, vice president of engineering of the Company; and
$38,000 is included in accrued payroll and related expense and is due to Charles
J. Novak, chief financial officer of the Company. At December 31, 2003, the
Company had accrued payroll and related expenses of $371,000 for all other
employees.
See also "Item 5 - Market for Common Equity and Related Stockholder Matters -
Recent Sale of Unregistered Securities" and "Item 10 - Executive Compensation -
Employment Agreements."
Item 13. Exhibits and Reports on Form 8-K
Exhibit Description
- ------- ------------
3.1 Composite of Restated Certificate of Incorporation of the Registrant,
as amended. (14)
3.2 By-laws of the Registrant, as amended. (1)
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)
22
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.
4.39 Change in Auditing Firm
23
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 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)
10.10 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)
10.11 Preferred Stock Purchase Agreement for Series A Convertible Preferred
Stock. (7)
10.12 Preferred Stock Purchase Agreement for Series B Convertible Preferred
Stock. (8)
10.13 Preferred Stock Purchase Agreement for Series C Convertible Preferred
Stock. (3)
10.14 Preferred Stock Purchase Agreement for Series D Convertible Preferred
Stock. (3)
10.15 Preferred Stock Purchase Agreement for Series E Convertible Preferred
Stock. (9)
10.16 Preferred Stock Purchase Agreement for Series F Convertible Preferred
Stock. (4)
10.17 Preferred Stock Purchase Agreement for Series G Convertible Preferred
Stock. (11)
10.18 Preferred Stock Purchase Agreement for Series H Convertible Preferred
Stock. (12)
10.19 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)
10.20 Distribution Agreement dated November 12, 1999 between the Registrant
and Spark 1st Vision GmbH & Co. KG. (14)
10.21 Mutual Termination Agreement dated May 9, 2000 between the Registrant
and Spark 1st Vision GmbH & Co. KG. (14)
10.22 Personal Undertaking dated May 30, 2000 by ILTAG International Licensing
Holding S.A.L. towards the Registrant. (14)
10.23 Personal Undertaking dated May 21, 2000 of Urs Wettstein. (14)
10.24 Personal Undertaking dated May 16, 2000 of Bernd Herrmann. (14)
10.25 Private Equity Line of Credit Agreement dated September 15, 2000 with
Triton West Group, Inc. (14)
10.26 Escrow Agreement dated September 15, 2000 for the Equity Line of Credit
Agreement (included as Exhibit A to Exhibit 10.26). (14)
10.27 Letter Agreement dated October 6, 2000 amending the Private Equity
Line of Credit Agreement dated September 15, 2000. (14)
10.28 Addendum One dated March 31, 1998 to Employment Agreement between
Registrant and Ramesh Trivedi dated December 8, 1995. (14)
10.29 Employment Agreement between Integrated Surgical Systems, Inc. and
Charles J. Novak. (14)
10.30 Employment Agreement between Integrated Surgical Systems, Inc. and
Leland Witherspoon.
14.1 Code of ethics (14)
21.1 List of Subsidiaries
23.0 Consent of Macias, Gini and Company LLP, Independent Auditors *
23.1 Consent of Ernst & Young LLP, Independent Auditors *
24
31.1 Certification Pursuant to Exchange Act Rule 13a-14(a) of Ramesh
Trivedi *
31.2 Certification Pursuant to Exchange Act Rule 13a-14(a) of Charles Novak*
32.1 Certification Pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002
of Ramesh Trivedi*
32.2 Certification Pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002
of Charles Novak*
- --------------------------------------------------------------------------------
* File Herewith
(1) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-48040) declared effective on October 31,
2000.
(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 Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2002.
Item 14. Principal Accountant Fees and Services
Audit Fees
All audit related fees are approved by the Audit Committee. The Audit Committee
has considered whether the provisions of such services, including non-audit
services, by the Company's Independent Auditors is compatible with maintaining
their independence and has concluded that it is.
The following table sets forth the Company's aggregate fees billed by its
independent accountants for each of the last two fiscal years for the categories
of services indicated.
Category 2003 2002
--------------- --------- ---------
Audit fees (1) $ 176,800 $ 235,400
Audit-related fees (2) - 2,700
Tax fees (3) 35,600 39,300
All other fees (4) - -
25
(1) Consists of the Company estimates of the aggregate fees billed by its
Independent Auditors for professional services rendered in connection with
the audit of the Company's annual financial statements on Form10-KSB and
the review of the Company's quarterly financial statements on Form 10-QSB
and services that are normally provided by the independent auditors in
connection with the statutory and regulatory filings or engagements.
(2) Fees for audit-related services totaled approximately $2,700. Audit-related
services principally includes internal control reviews.
(3) Consists of professional services rendered for tax compliance, tax advise
and tax planning.
(4) The Company's Independent Auditors did not provide any other services
during the two fiscal years.
26
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/ CHARLES J. NOVAK
------------------------------------------------------
Charles J. Novak
(Principal Financial and Accounting Officer)
Dated: May 11, 2004
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 May 11,
2004 in the capacities indicated.
Signature Title
--------- -----
/s/ RAMESH C. TRIVEDI Chief Executive Officer, President and a Director
- ---------------------------- (Principal Executive Officer)
Ramesh C. Trivedi
/s/ CHARLES J. NOVAK Chief Financial Officer
- ---------------------------- (Principal Financial and Accounting Officer)
Charles J. Novak
/s/ FALAH AL-KADI Chairman of the Board
- ----------------------------
Falah Al-Kadi
/s/ JACK W. MOORMAN Director
- ----------------------------
Jack W. Moorman
/s/ PAUL A.H. PANKOW Director
- ----------------------------
Paul A.H. Pankow
27
Index to Consolidated Financial Statements
PAGE
----
Report of Macias, Gini & Company LLP, Independent Auditors, 29
for the year ended December 31, 2003
Report of Ernst & Young LLP, Independent Auditors, for the year 30
ended December 31, 2002
Consolidated Balance Sheet at December 31, 2003 31
Consolidated Statements of Operations for the years ended 32
December 31, 2003 and 2002
Consolidated Statements of Convertible Preferred Stock and 33
Stockholders' Deficit for the years ended December 31, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended 34
December 31, 2003 and 2002
Notes to Consolidated Financial Statements 35
28
REPORT OF MACIAS GINI & COMPANY 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, 2003, and the related consolidated
statements of operations, convertible preferred stock and stockholders' deficit,
and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2003 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Integrated
Surgical Systems, Inc. at December 31, 2003, and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
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 2, the Company has incurred recurring operating losses,
has a working capital deficit of $5,246,343 and an accumulated deficit of
$67,731,209 as of December 31, 2003. 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 2. 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.
/s/ MACIAS GINI & COMPANY LLP
-----------------------------
MACIAS GINI & COMPANY LLP
Sacramento, California
May 11, 2004
29
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Integrated Surgical Systems, Inc.
We have audited the accompanying consolidated statements of operations,
convertible preferred stock and stockholders' deficit, and cash flows of
Integrated Surgical Systems, Inc. for the year ended December 31, 2002. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Integrated Surgical Systems, Inc. for the year ended December 31, 2002, 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 2, the Company has incurred recurring operating losses
and has an accumulated deficit. 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 2. 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.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Sacramento, California
March 14, 2003
30
Integrated Surgical Systems, Inc.
Consolidated Balance Sheet
December 31, 2003
Assets
Current assets:
Cash $ 142,909
Accounts receivable less allowance
for doubtful accounts of $37,744 110,756
Inventory 486,955
Other current assets 112,909
------------
Total current assets 853,529
Property and equipment, net 34,996
------------
$ 888,525
============
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 1,962,849
Accrued payroll and related expense 881,447
Accrued liabilities 354,914
Unearned income 2,844,173
Other current liabilities 56,489
------------
Total current liabilities 6,099,872
Convertible preferred stock, $0.01 par value,
1,000,000 shares authorized;
168 shares issued and outstanding
($168,496 aggregate liquidation value) 168,496
Stockholders' deficit:
Common stock, $0.01 par value, 100,000,000
shares authorized;
44,867,358 shares issued and outstanding 448,674
Additional paid-in capital 61,902,692
Accumulated deficit (67,731,209)
------------
Total stockholders' deficit (5,379,843)
------------
$ 888,525
============
See accompanying notes to the consolidated financial statements.
31
Integrated Surgical Systems, Inc.
Consolidated Statements of Operations
Years ended December 31,
----------------------------
2003 2002
------------ ------------
Net revenue $ 5,831,482 $ 5,162,854
Cost of revenue 3,990,140 1,787,620
------------ ------------
1,841,342 3,375,234
Operating expenses:
Selling, general and administrative 2,439,172 3,467,727
Research and development 1,664,160 2,514,694
Loss on disposal of subsidiary 1,516,519 --
Amortization of intangibles -- 497,858
------------ ------------
5,619,851 6,480,279
------------ ------------
Operating loss (3,778,509) (3,105,045)
Other income:
Foreign currency exchange gain 143,321 200,596
Loan forgiveness 109,000 --
Other, net 275,969 86,702
------------ ------------
528,290 287,298
------------ ------------
Net loss available to common stockholders $ (3,250,219) $ (2,817,747)
============ ============
------------ ------------
Basic and diluted net loss per common share $ (0.08) $ (0.07)
============ ============
Shares used in computing basic and
diluted net loss per share
43,015,760 38,647,454
============ ============
See accompanying notes to the consolidated financial statements
32
Integrated Surgical Systems, Inc.
Consolidated Statements of Convertible Preferred Stock and Stockholders' Deficit
Convertible Preferred Stock Stockholders' Deficit
------------------------------------------------------ -------------------------
Additional Common Stock
Paid-in -------------------------
Shares Amount Capital Total Shares Amount
------------------------------------------------------ -------------------------
Balance at December 31, 2001 312 $ 3 $ 312,053 $ 312,056 38,306,385 $ 383,064
Conversions of
preferred stock (62) (1) (61,559) (61,560) 3,078,000 30,780
Stock compensation,
non-employees -- -- -- -- 594,084 5,941
Comprehensive loss:
Net loss -- -- -- -- -- --
Foreign currency
translation
adjustments -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- --
------------------------------------------------------- -------------------------
Balance at December 31, 2002 250 2 250,494 250,496 41,978,469 419,785
Conversions of
preferred stock (82) -- (82,000) (82,000) 2,888,889 28,889
Comprehensive loss:
Net loss -- -- -- -- -- --
Foreign currency
translation adjustments -- -- -- -- -- --
Foreign currency
translation
adjustment
related to
disposal
of subsidiary -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- --
------------------------------------------------------------ -------------------------
Balance at December 31, 2003 168 $ 2 $ 168,494 $ 168,496 44,867,358 $ 448,674
============================================================ =========================
33
Integrated Surgical Systems, Inc.
Consolidated Statements of Convertible Preferred Stock and Stockholders' Deficit
Stockholders' Deficit
--------------------------------------------------------------
Accumulated
Additional Other Total
Paid-in Comprehensive Accumulated Stockholders'
Capital Loss Deficit Deficit
--------------------------------------------------------------
Balance at December 31, 2001 $ 61,793,784 $ (1,288,437) $(61,663,243) $ (774,832)
Conversions of
preferred stock 30,780 -- -- 61,560
Stock compensation,
non-employees 25,017 -- -- 30,958
Comprehensive loss:
Net loss -- -- (2,817,747) (2,817,747)
Foreign currency
translation
adjustments -- 70,530 -- 70,530
------------
Comprehensive loss -- -- -- (2,747,217)
------------------------------------------------------------
Balance at December 31, 2002 61,849,581 (1,217,907) (64,480,990) (3,429,531)
Conversions of
preferred stock 53,111 -- -- 82,000
Comprehensive loss:
Net loss -- -- (3,250,219) (3,250,219)
Foreign currency
translation
adjustments -- (66,862) -- (66,862)
Foreign currency
translation
adjustment
related to
disposal
of subsidiary -- 1,284,769 -- 1,284,769
------------
Comprehensive loss -- -- -- (2,032,312)
------------------------------------------------------------
Balance at December 31, 2003 $ 61,902,692 $ -- $(67,731,209) $ (5,379,843)
============================================================
See accompanying notes to the consolidated financial statements
33a
Integrated Surgical Systems, Inc.
Consolidated Statements of Cash Flows
Years ended December 31,
------------------------------------
2003 2002
----------- ----------
Cash flows from operating activities:
Net loss $(3,250,219) $(2,817,747)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Loss on disposal of subsidiary 1,446,597 --
Depreciation 236,992 208,285
Provision for losses on accounts receivable -- (181,358)
Amortization of intangible assets -- 497,858
Forgiveness of note payable (109,262) --
Stock compensation, non-employees -- 30,958
Changes in operating assets and liabilities:
Accounts receivable 1,115,890 (678,069)
Inventory 663,301 372,545
Other current assets 46,310 (40,796)
Accounts payable 72,244 319,781
Accrued payroll and related expenses 585,779 82,508
Accrued liabilities 70,376 56,933
Unearned income (434,892) 1,303,397
Other current liabilities (257,468) (126,678)
----------- -----------
Net cash provided by (used in) operating activities 185,648 (972,383)
Cash flows from investing activities:
Principal payments received on sales-type lease -- 45,545
Purchases of property and equipment (20,174) (13,676)
Disposal of property and equipment 9,343 738
----------- -----------
Net cash provided by (used in) investing activities (10,831) 32,607
Cash flows from financing activities:
Proceeds from officers advances, deferred salaries and
unreimbursed travel expenses -- 260,591
Payments on officers advances, deferred salaries and
unreimbursed travel expenses -- (70,592)
Proceeds from officers advances 70,099 --
Payments on officers advances (66,286) --
----------- -----------
Net cash provided by financing activities 3,813 189,999
Effect of exchange rate changes on cash (117,790) 31,472
----------- -----------
Net increase (decrease) in cash 60,840 (718,305)
Cash at beginning of year 82,069 800,374
----------- -----------
Cash at end of year $ 142,909 $ 82,069
=========== ===========
Supplemental disclosure of non-cash activity:
Supplemental disclosure of
non-cash financing activities:
Conversion of preferred stock $ 82,000 $ 61,560
See accompanying notes to the consolidated financial statements
34
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements
Note 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. The Company was incorporated in Delaware in 1990.
In 1997, the Company acquired a 100% interest in a French company, Innovative
Medical Machines International, S.A. ("ISS-SA"), involved in the manufacturing
and servicing of neurosurgical products. Under French law, a company whose net
assets are less than 50% of its capital stock may come under the supervision and
control of a regional administrative tribunal. On September 30, 2003 the
Tribunal de Commerce (the "Tribunal") in Lyon, France determined that ISS-SA met
the criteria for it to appoint an administrator to manage the Company's
operations. The Tribunal acted after a hearing in which the Company and ISS-SA
discussed the ability of ISS-SA to meet its obligations over the next four
months and the Company's unwillingness to further fund its operations due to its
history of operating losses. The Tribunal authorized the administrator to manage
ISS-SA's operations pending a review of ISS-SA's operations and cash flow
projections. Subsequent to its appointment, the administrator exercised control
over all aspects of ISS-SA's operations including employee retention,
purchasing, sales and inventory management. As a result, effective with the
administrator's appointment the company no longer had access to the assets,
personnel or records of ISS-SA.
On October 30, 2003, representatives of the Company met with the Tribunal to
review the status of ISS-SA. At this meeting, the Tribunal determined that
ISS-SA was making progress in improving its financial position and scheduled
another meeting for December 2003. Prior to such meeting, the Tribunal
reevaluated its decision to allow ISS-SA to continue operating and caused the
assets and operations of ISS-SA to be sold, effectively terminating its
operations on December 23, 2003. The Company received no proceeds from the sale
of ISS-SA's assets.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary Integrated Surgical Systems, BV
("ISS-BV") for the years ended December 31, 2003 and 2002. The results of
operations of ISS-SA are included for the nine months ended September 30, 2003,
reflecting the Company's decision to liquidate its operations concurrent with
the assumption of control by the Tribunal. The Company has recorded a loss of
$1,516,519 in connection with the liquidation of its investment in ISS-SA and
closure of its European operations in the fourth quarter of 2003. All
significant intercompany balance and transactions have been eliminated.
Note 2. Results of Operations and Management's Plans
The Company had net losses of $3,250,219 and $2,817,747 for the years ended
December 31, 2003 and 2002, respectively. In addition, the Company had a working
capital deficit of $5,246,343 and an accumulated deficit of $67,731,209 at
December 31, 2003. The report of independent auditors on the Company's December
31, 2003 consolidated financial statements includes an explanatory paragraph
indicating there is substantial doubt about the Company's ability to continue as
a going concern. The Company believes that it has a plan to address these
issues and enable the Company to continue operating through December 31, 2004.
This plan includes obtaining additional equity or debt financing, increasing
product sales in existing markets, increasing sales of system upgrades, and
further reductions in operating expenses as necessary. Although the Company
believes that the plan will be realized, there is no assurance that these events
will occur. In the event that the Company is unsuccessful, it is possible that
35
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements
it will cease operations or seek bankruptcy protection. 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 the Company's
part to continue as a going concern.
Note 3. Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
(SAB) 104, "Revenue Recognition", which superceded the earlier related guidance
in SAB 101, "Revenue Recognition". Revenue is recognized when persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, the price is fixed or determinable and collectability is reasonably
assured.
Revenue for product sales is generally recognized 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
the Company's 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.
Effective with its adoption of EITF 00-21, "Multiple Deliverable Revenue
Arrangements", when elements such as products and services or other elements are
combined in a single arrangement, or in related arrangements with same customer,
the Company allocates revenue to each element based on its relative fair value,
provided that such element meets the criteria for treatment as a separate unit
of accounting. The price charged when the element is sold separately generally
determines fair value. In the absence of fair value for an undelivered element,
the arrangement is accounted for as a single unit of accounting, resulting in a
delay of revenue recognition for the delivered elements until the undelivered
elements are fulfilled.
The Company develops specialized operating software for several implant
manufacturing companies. These implant manufacturers contract with the Company
for the development of particular lines of new prosthesis software to be used
with the ROBODOC system. 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 and units-of-delivery
method of accounting. Product development revenue is recognized when development
is complete under the terms of the contract, and the customer has accepted the
product. The direct cost, primarily labor, of product development contracts is
deferred until the development revenue is recognized. Losses on contracts are
accrued in the period that such losses are determined.
36
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements
The Company, through its ISS-SA subsidiary, recognizes 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. The cost of
equipment subject to operating 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. All such leasing activity was performed by, and recorded on
the books of, ISS-SA. As a result, at December 31, 2003, the Company held no
such leases. During the year ended December 31, 2003 and the year ended December
31, 2002 the Company recorded $238,000 and $369,000 respectively in revenues
from cancelable operating leases.
Foreign Currency Translation
The financial position and results of ISS-SA and ISS-BV 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' deficit. The Company's foreign
currency transactions are usually recorded and settled in the same foreign
currency, without foreign exchange transaction gains or losses. Foreign exchange
transaction gains or losses are, however, recognized when translating
inter-company receivables and payables. Primarily due to the liquidation of
ISS-SA and the closure of ISS-BV, the Company reversed its existing accumulated
foreign exchange translation adjustment balance of $1,284,769 in December 2003.
Research and Development
Research and development costs are expensed as incurred. 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.
Shipping and Handling Costs
Costs related to shipping and handling are included in costs of revenues for all
periods presented.
Certain Risks and Uncertainties
The Company uses financial instruments that potentially subject it to
concentrations of credit risk. Such instruments consist primarily of cash and
accounts receivable. The Company's cash is invested in cash deposits,
substantially all with one financial institution. The Company sells its products
to companies in the healthcare industry, most of which are located in foreign
countries. The Company requires a down payment when an order is received, with a
progress payment upon shipment, and final payment upon completion of training
37
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements
and installation or customer acceptance. The Company believes that adequate
provisions for uncollectable accounts receivable has been made in the
accompanying consolidated financial statements.
A significant portion of the Company's sales are to a limited number of
customers located in foreign countries. Three major foreign customers of the
Company accounted for 22%, 14%, and 13% of the Company's revenue during the year
ended December 31, 2003, and three major customers accounted for 16%, 13% and
11% for the year ended December 31, 2002. At December 31, 2003 two customers and
at December 31, 2002 three customers accounted for 100% and 94% of accounts
receivable, respectively.
Foreign revenue, substantially all from Western European countries, Japan, India
and Korea was approximately $5,225,000 and $4,885,000 for the years ended
December 31, 2003 and December 31, 2002, respectively.
A significant ROBODOC System component, a custom-built robot arm, is
manufactured by a single Japanese company. Any significant delay or interruption
in sourcing this component could require the Company to search for new sources
of supply, if available, and could have a material adverse effect on the
financial condition, results of operations, or cash flows.
Financial Statement Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company 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 accounts.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method over estimated useful lives of 3 to 5 years or the lease
term, whichever is shorter.
Inventory
Inventory is recorded at the lower of cost (first-in, first-out method) or
market and consists of materials and supplies used in the manufacture and
service support of the Company's products.
38
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements
Inventory consisted of the following at December 31, 2003:
Raw materials $170,998
Work-in-process 210,699
Finished goods 85,366
Deferred product development contract costs 19,893
--------
$486,955
========
Warranty
The Company offers a one-year warranty for parts and labor on all ROBODOC
systems commencing upon the completion of training and installation, except when
the sales contract requires formal customer acceptance. In most cases, the
Company's customers purchase a service contract, which includes warranty
coverage (parts and labor), unspecified product maintenance updates, customer
support services and various consumables required during surgical procedures.
Revenue from service contracts is initially deferred and then recognized ratably
over the term of the agreements. Service contracts can be renewed at the
customers' option, annually thereafter. Where the Company's products are not
covered by separate service agreements, the Company provides for the estimated
cost of product warranties at the time revenue is recognized, based on
historical results. The 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 these estimates, revisions to the estimated warranty
liability would be required. The Company periodically assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary.
At December 31, 2002, the Company's product liability for warranties included in
accrued liabilities were approximately $8,000. During 2003, the Company's ISS-SA
subsidiary issued warranties of approximately $65,000 and reduced existing
warranties, including expirations, by approximately $54,000. The remaining
$19,000 was eliminated with the liquidation of ISS-SA. The Company has no
recorded warranty liability for the period ending December 31, 2003, as all
systems within the one-year warranty period were covered by service contracts.
Stock-Based Compensation
As permitted under the provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation," the Company has elected to account for stock-based compensation
using the intrinsic value method prescribed by Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Under the
intrinsic value method, compensation cost is the excess, if any, of the quoted
market price or fair value of the stock at the grant date or other measurement
date over the amount an employee must pay to acquire the stock.
Pro forma information regarding net income (loss) and earnings (loss) per share
is required by SFAS No. 123, which also requires that the information be
determined as if the Company had accounted for the 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 2003 and 2002, respectively: risk-free interest rates of 3.0%
and 3.5%; dividend yield of 0%; volatility factors of the expected market price
of the common stock of 1.006 and 0.955; and an expected life of the option of 4
years.
39
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements
The weighted average grant date fair value of these options was $0.03 in 2003
and $0.04 in 2002. No options with option prices less than the fair market value
of the Company's stock on the date of grant were granted to employees in 2003 or
2002. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, it
is the Company's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of the employee stock options. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the vesting period.
Year Ended December 31,
2003 2002
----------- -----------
Net loss, as reported $(3,250,219) $(2,817,747)
Less: stock-based employee compensation
cost included in net loss, as reported -- --
Stock-based employee compensation
expense, determined under fair
value method for all awards (112,444) (62,946)
----------- -----------
Pro forma net loss $(3,362,663) $(2,880,693)
=========== ===========
Loss per share:
Basic and diluted net
loss per share $ (0.08) $ (0.07)
=========== ===========
Pro forma basic and diluted
net loss per share $ (0.08) $ (0.07)
=========== ===========
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.
Recent Accounting Pronouncements
In May 2003, FASB issued Statement of Financial Accounting Standards No. (SFAS
No. 150), "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity". SFAS No. 150 requires certain financial
instruments that embody obligations of the issuer and have characteristics of
both liabilities and equity to be classified as liabilities. Many of these
instruments previously were classified as equity or temporary equity and, as
such, SFAS No. 150 represents a significant change in practice in the accounting
for a number of mandatorily redeemable equity instruments and certain equity
derivatives that frequently are used in connection with share repurchase
programs. SFAS No. 150 is effective for all financial instruments created or
modified after May 31, 2003, and to other instruments at the beginning of the
first interim period beginning after June 15, 2003.
40
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements
The adoption of SFAS No. 150 did not have a material impact on the Company's
consolidated financial position, cash flows or results of operations.
In November 2002, the EITF reached a consensus on Issue 00-21, "Multiple
Deliverable Revenue Arrangements" (EITF 00-21). EITF 00-21 addresses how to
account for arrangements that may involve the delivery or performance of
multiple products, services, and/or rights to use assets. The consensus mandates
how to identify whether goods or services or both that are to be delivered
separately in a bundled sales arrangement should be accounted for separately
because they are "separate units of accounting." The guidance can affect the
timing of revenue recognition for such arrangements, even though it does not
change rules governing the timing or pattern of revenue recognition of
individual items accounted for separately. The final consensus is applicable to
agreements entered into in fiscal periods beginning after June 15, 2003, with
early adoption permitted. Additionally, companies will be permitted to apply the
consensus guidance to all existing arrangements as the cumulative effect of a
change in accounting principle in accordance with APB Opinion No. 20,
"Accounting Changes". The adoption of EITF 00-21 did not have a material impact
on the Company's consolidated financial position, cash flows or results of
operations.
Reclassifications
Certain items in the fiscal 2002 consolidated financial statements have been
reclassified to conform to the fiscal 2003 presentation. These reclassifications
had no effect on net loss or stockholders' equity.
Note 4. Property and Equipment
Property and equipment consists of the following at December 31, 2003:
Computer hardware and purchased software $ 332,285
Machinery and equipment 290,872
ROBODOC and NeuroMate System equipment 687,082
Furniture and fixtures 174,546
Leasehold improvements 18,877
----------
1,503,662
Less accumulated depreciation 1,468,666
----------
$ 34,996
==========
Note 5. Note Payable
The Company received a $143,403 interest-free loan in 1997 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. Under the terms of the loan, 50% of the revenues generated from
the sale or licensing of the related technology, prototype, or articles
manufactured specifically for the research project, were to be paid to ANVAR in
the subsequent year, up to the balance of the loan amount outstanding. No such
revenues were recorded during the years ending December 31, 2003 and 2002.
The loan also provided for the forgiveness of the loan under certain conditions,
including a review by ANVAR. In August 2003, ANVAR completed a review of the
loan balance and determined that the remaining balance of approximately $109,000
was forgiven. The Company has recorded the forgiveness of the loan in other
income as other, net.
41
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements
Note 6. Stockholders' Equity
Common Stock
At December 31, 2003 the Company has reserved a total of 7,664,026 shares of
common stock for future issuance pursuant to Series G Convertible Preferred
Stock, warrants and options outstanding.
The Company established an Employee Stock Purchase Plan ("ESPP") in 1998. The
ESPP 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 the Company's common stock. At
December 31, 2003, no offerings have been made to employees under the ESPP plan.
Warrants
The following table summarizes information about common stock warrants
outstanding at December 31, 2003 and 2002:
Outstanding at
Issue Expiration Exercise December 31,
Warrants issued Year Date Issued Range 2003 2002
--------------- ---- ---- ------ ----- ---- ----
Pursuant to stock purchase agreement (2) 1997 December 2006 2,274,066 $0.01 2,206,479 2,206,479
In connection with services (2),(3) 1997 September 2003 75,000 2.00-7.50 - 75,000
To public offering underwriters (2) 1997 November 2003 150,000 8.34 - 150,000
With Series B preferred stock (1) 1999 March 2003 12,500 2.75 - 12,500
With Series C preferred stock (1) 1999 June 2003 9,375 2.15 - 9,375
With Series D preferred stock (1) 1999 June 2003 25,000 3.41 - 25,000
With Series E preferred stock (1) 1999 July 2003 37,500 4.39 - 37,500
With Series F preferred stock (1) 2000 February 2004 125,000 2.38 125,000 125,000
With Series G preferred stock (1) 2000 May 2004 63,000 1.88 63,000 63,000
With Series H preferred stock (1) 2000 August 2004 650,000 0.50-1.02 650,000 650,000
Pursuant to stock purchase agreement 1999 December 2003 11,700,000 1.03 - 4,000,000
In connection with equity financing (4) 2000 September 2004 35,000 0.86 35,000 35,000
In connection with services (5) 2002 May 2007 100,000 0.06 100,000 100,000
---------- -----------------------
15,256,441 3,179,479 7,488,854
========== =======================
Unless otherwise stated below, the warrants are exercisable when granted and
expire between 2003 and 2007. There were no exercises of warrants during the
years ended December 31, 2003 and 2002.
- -------------------------------------
(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, based on Black-Scholes option
valuation model.
(4) Aggregate estimated fair value of $14,350, based on Black-Scholes option
valuation model.
(5) Aggregate estimated fair value of $4,000, based on Black-Scholes option
valuation model.
42
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements
Preferred Stock
The Company's Certificates of Incorporation authorize 1,000,000 shares of
undesignated, serial 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 further vote or action by the Company's stockholders.
Convertible Preferred Stock
The Company's 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 the Company's control. Given the
liquidation rights of the Company's 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 has been its
liquidation preference of $168,496, 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, up to the liquidation preference.
Since September 1998, the Company has received aggregate net proceeds of
$14,084,995 from the sale of eight series of convertible preferred stock.
Information concerning these convertible preferred stock financing 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 ("Beneficial Conversion
Feature") 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.
The value assigned to the Beneficial Conversion feature of each class of
preferred stock was based upon the difference between the maximum conversion
43
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements
price and the quoted market price of the common stock on the date the
convertible preferred stock was sold (the "Discount"). The Discount was accreted
using the straight-line method over the conversion period.
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.
During the year ended December 31, 2003, 82 shares of Series G convertible
preferred stock were converted into 2,888,889 shares of common stock. During the
year ended December 31, 2002, 62 shares of Series H convertible preferred stock
were converted into 3,078,000 shares of common stock. At December 31, 2003 and
2002, 168 and 250 shares, respectively, of Series G convertible preferred stock
were outstanding. At December 31, 2003, the series G shares would have converted
into a minimum of 103,371 shares of common stock based upon its maximum
conversion price of $1.63 No other series 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 as of December 31, 2003 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 9,887,747 0.17
H 10,921,902 0.11
Stock Option and Long-Term Performance Plans
The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" and related Interpretations in
accounting for the employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options.
The Company has established various stock option plans in which the 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
44
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements
price of incentive stock options granted under the plans may not be less than
100% of the fair market value of the common stock on the date of the grant. The
exercise price of non-statutory stock options granted under the plans may not be
less than 85% of the fair market value of the 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 the Company's stock, the exercise price of
the incentive stock options or the non-statutory stock options granted under the
plans may not be less than 110% of the fair market value of the common stock on
the date of the grant.
In 2000, the Company established a long-term performance plan, the 2000
Long-Term Performance Plan (the "2000 Plan"). The 2000 Plan provides for stock
awards of up to 1,000,000 shares. The 2000 Plan permits the grant of any form of
award, including, but not limited to stock options, stock appreciation rights,
stock, and cash awards, whether granted singly, in combination or in tandem.
Stock options are granted at an exercise price of not less than 100% of fair
market value (as defined in the 2000 Plan) on the date of grant and it is
expected that options and stock appreciation rights will typically be granted
for periods of 10 years or less. The 2000 Plan also permits the grant of other
awards in stock or denominated in units of stock, which may be subject to
restrictions or transfer and/or forfeiture provisions.
The Company also has a 2000 Stock Award Program under which up to 500,000 shares
of common stock may be granted to employees and consultants, but not to officers
and directors.
The following table summarizes activity under the plans for the years ended
December 31, 2003 and 2002:
Number Weighted Average
of Shares Exercise Price
--------- ----------------
Outstanding at December 31, 2001 (at $.03 to $8.63 per share) 1,703,017 $ 1.52
Granted (at $0.03 to $0.08 per share) 303,490 0.05
Cancelled (at $0.06 to $8.63 per share) (397,536) 1.38
Exercised -- --
--------
Outstanding at December 31, 2002 (at $.03 to $8.50 per share) 1,608,971 1.28
Granted (at $0.03 to $0.06 per share) 1,130,100 0.03
Cancelled (at $0.03 to $3.94 per share) (260,429) 0.67
Exercised -- --
--------
Outstanding at December 31, 2003 (at $.03 to $8.50 per share) 2,478,642 $ 0.77
========
The weighted average exercise price of options granted in 2003 and 2002 with
option prices equal to the fair market value of the stock on the grant date was
$0.06 and $0.05, respectively. At December 31, 2003 there were 250,232 shares of
common stock reserved for future grants under the Stock Option Plan.
45
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements
The following table summarizes information related to options outstanding and
options exercisable at December 31, 2003:
Weighted Average
Weighted Remaining Weighted
Exercise Price Options Average Contractual Options Average
Outstanding Exercise Price Life (in Years) Exercisable Exercise Price
--------------------------------------------------------------------------------------------------------
$0.00 - $.99 1,771,565 $0.04 7.5 682,546 $0.06
1.00 - 1.99 403,300 $1.81 6.1 448,140 1.81
2.00 - 2.99 20,000 $2.65 5.7 14,792 2.66
3.00 - 3.99 221,500 $3.11 4.8 241,875 3.11
4.00 - 5.99 33,277 $5.06 2.8 33,277 5.06
6.00 - 8.50 29,000 $6.97 3.6 29,000 6.97
---------- --------
2,478,642 $0.77 6.9 1,449,630 1.39
========== =========
Note 7. Income Taxes
Deferred taxes result from temporary differences in the recognition of certain
revenue and expense items for income tax and financial reporting purposes. The
significant components of the Company's deferred taxes as of December 31, 2003
and 2002 are as follows:
2003 2002
------------------------------
Deferred tax assets:
Net operating loss carryover $ 19,882,000 $ 14,269,000
Research and development credit 2,212,000 1,927,000
Research and development 305,000 345,000
Accrued product retrofit costs -- 83,000
Inventory 303,000 220,000
Depreciation 154,000 257,000
Stock compensation 289,000 289,000
Loss on investment 126,000 126,000
Deferred income 1,130,000 1,091,000
Other 227,000 166,000
------------ ------------
24,628,000 18,773,000
Less valuation allowance 24,628,000 (18,773,000)
------------ ------------
Net deferred taxes $ -- $ --
============ ============
The Company expects the carryforward amounts will not be used prior to the
expiration of the carryforward periods. The principal reasons for the difference
between the effective income tax rate and the federal statutory income tax rate
as of December 31, 2003 and 2002 are as follows:
46
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements
2003 2002
----------- -----------
Federal benefit expected at statutory rates $(1,136,670) $ (958,039)
Domestic net operating loss with
no current benefit 5,019,945 752,824
Net effect of foreign operations (70,744) 199,989
Reversal of basis difference for
foreign operations (3,814,892) --
Other non-deductible items 2,361 5,226
----------- -----------
$ -- $ --
=========== ===========
As a result of stock sales through December 31, 1995, a change of ownership (as
defined in Section 382 of the Internal Revenue Code of 1986, as amended) has
occurred. As a result of this change, the federal and state net operating loss
carryforwards will be subject to a total annual limitation in the amount of
approximately $400,000.
The Company had at December 31, 2003 a net operating loss carryover of
approximately $55,296,000 for federal income tax purposes which expires between
2005 and 2023, a net operating loss carryforward of approximately $18,205,000
for state income tax purposes which expires between 2004 and 2013. The Company
had at December 31, 2003 research and development credit carryovers of
approximately $1,394,000 and $1,240,000 for federal and state income tax
purposes, respectively.
The Company paid $800 for income and franchise taxes during each of the two
years ended December 31, 2003 and 2002. The valuation allowance increased by
$5,855,000 in 2003 and $4,558,000 in 2002.
Note 8. Net Loss Per Share Information
At December 31, 2003, outstanding options to purchase 2,478,642 shares of common
stock (with exercise prices ranging from $0.03 to $8.50), 3,179,479 outstanding
warrants to purchase 3,179,479 shares of common stock (with exercise prices from
$0.01 to $2.38), and 2,005,905 shares of common stock issuable upon conversion
of Series G 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.
Note 9. Commitments
The Company leases its U.S. facility under a non-cancelable operating lease
expiring in June 2005. The lease provides for rent of approximately $34,000 and
$33,000 per month during 2003 and 2002, respectively (plus real estate taxes and
assessments, utilities and maintenance) and is subject to adjustment for
cumulative increases in the cost of living index, not to exceed 4% per year. The
Company entered into a sublease of approximately 5,000 square feet of its U.S.
facility to a third party from April 2002 through January 2003, for
approximately $7,000 per month. Sublease income of $7,000 and $63,000 for the
years ended December 31, 2003 and 2002, respectively has been included in other
income, in the consolidated statements of operations.
47
Integrated Surgical Systems, Inc.
Notes to Consolidated Financial Statements
Future payments under the non-cancelable facility operating lease is
approximately as follows:
Year Ending
December 31,
2004 $416,363
2005 176,311
--------
Total $592,674
========
Aggregate rental expense under this lease and the Company's lease for ISS-SA's
facility in France amounted to approximately $438,000 and $476,000 during the
years ended December 31, 2003 and 2002, respectively. Effective October 1, 2003,
the lease in France was terminated by the Tribunal and no further expenses were
recorded.
Note 10. Contingencies
The Company is subject to legal proceedings and claims that arise in the normal
course of business. The Company cannot assure that it would prevail in such
matters nor can it assure that any remedy could be reached on mutually agreeable
terms, if at all. Due to the inherent uncertainties of litigation, were there
any such matters, the Company would not be able to accurately predict their
ultimate outcome. As of December 31, 2003, there were no current proceedings or
litigation involving the Company that management believes would have a material
adverse impact on its financial position, results of operations or cash flows.
In accordance with SFAS No. 5. "Accounting for Contingencies," the Company has
reviewed the facts related to the liquidation of its investment in ISS-SA and
closure of its European operations (see detail explanation in Part II, Item 7,
Note 1 to the audited financial statements contained elsewhere in this Annual
Report on Form 10-KSB) and has determined that no provision for loss is required
related to this action. As of December 31, 2003, there were no current
proceedings or litigation involving the Company. Were a claim to be filed the
Company would not be able to accurately predict its ultimate outcome.
Note 11. Related Party Transactions
At December 31, 2003, the Company had amounts due to three executive officers
(the "Officers") of the Company of approximately $636,000, in the aggregate, in
the form of an interest bearing advance, non-interest bearing advances, deferred
salaries and unreimbursed travel expenses. Amounts outstanding related to the
advance at December 31, 2003 of $57,000 bear interest at 7.25%. A summary of the
amounts due the Officers at December 31, 2003 follows:
Accrued payroll and related expense $ 292,000
Accounts payable 287,000
Accrued liabilities 57,000
---------
$ 636,000
=========
48
EXHIBIT 14.1
INTEGRATED SURGICAL SYSTEMS, INC.
CODE OF ETHICS
(As Adopted on April 8, 2004)
This Code of Ethics of Integrated Surgical Systems (the "Company") applies to
the Company's principal executive officer, principal financial officer,
controller, and all other persons performing similar functions for the Company
(each, a "Subject Employee").
The Company expects all of its employees, including its Subject Employees, to
act in accordance with the highest standards of personal and professional
integrity in all aspects of their activities, to comply with all applicable
laws, rules and regulations, to deter wrongdoing and abide by the policies and
procedures adopted by the Company that govern the conduct of its employees.
Accordingly, each Subject Employee shall:
(a) Engage in and promote honest and ethical conduct, including the ethical
handling of actual or apparent conflicts of interest between personal and
professional relationships;
(b) Avoid conflicts of interest and to disclose to the Corporate Governance
Committee of the Board of Directors of the Company or, if no such
committee exists, the full Board of Directors of the Company (in either
case, the "Code of Ethics Administrator") any material transaction or
relationship that reasonably could be expected to give rise to such a
conflict;
(c) Take all reasonable measures to protect the confidentiality of non-public
information about the Company and its customers obtained or created in
connection with the Subject Employee's activities and to prevent the
unauthorized disclosure of such information unless required by applicable
law or regulation or legal or regulatory process;
(d) Produce full, fair, accurate, timely, and understandable disclosure in
reports and documents that the Company files with, or submits to, the
Securities and Exchange Commission and other regulators and in other
public communications made by the Company;
(e) Comply with applicable governmental laws, rules and regulations, as well
as the rules and regulations of each self-regulatory organization (a
"SRO") of which the Company is a member or subject to the SRO's rules and
regulations; and
(f) Promptly report any possible violation of this Code of Ethics to the Code
of Ethics Administrator.
Each Subject Employee is prohibited from directly or indirectly taking any
action to fraudulently influence, coerce, manipulate or mislead the Company's
independent public auditors for the purpose of rendering the financial
statements of the Company or its subsidiaries misleading.
Each Subject Employee shall be held accountable for the Subject Employee's
adherence to this Code of Ethics. Any failure to observe the terms of this
Code of Ethics may result in disciplinary action, up to and including
termination of employment as may be determined by the Code of Ethics
Administrator. Any violation of this Code of Ethics by a Subject Employee
also may constitute violations of law and may result in civil and criminal
penalties against the Subject Employee and/or the Company.
Each Subject Employee should direct any questions regarding the best course
of action in a particular situation to the Code of Ethics Administrator.
Each Subject Employee, as well as all other employees of the Company, may
elect to remain anonymous in reporting any possible violation of this Code of
Ethics.
Any attempt to discourage or discipline a Subject Employee or other employee
of the Company for reporting a possible or actual violation of this Code of
Ethics shall, in itself, be a violation of this Code of Ethics for which
disciplinary action by the Code of Ethics Administrator may be taken.
YOUR PERSONAL COMMITMENT TO THE INTEGRATED SURGICAL SYSTEMS, INC.
CODE OF ETHICS
I acknowledge that I have received and read Integrated Surgical Systems,
Inc. Code of Ethics, as adopted on April 8, 2004, and understand my
obligations as a Subject Employee to comply with the Code of Ethics. I
further understand that my agreement to comply with the Code of Ethics does
not constitute a contract of employment.
Signature of Subject Employee: ---------------------------------------
Print name of Subject Employee: ---------------------------------------
Print date of signing: ---------------------------------------
EXHIBIT 23.0
CONSENT OF MACIAS GINI & COMPANY LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 Nos. 333-44093, 333-70779, 333-53188 and 333-53190 pertaining to the
1995 Stock Option Plan, as Amended, the 1998 Stock Option Plan and Employee
Stock Purchase Plan, the 2000 Stock Award Plan, and the 2000 Long-Term
Performance Plan of Integrated Surgical Systems, Inc. of our report dated May
11, 2004, with respect to the consolidated financial statements of Integrated
Surgical Systems, Inc. included in the Annual Report on Form 10-KSB for the year
ended December 31, 2003.
/s/ MACIAS GINI & COMPANY LLP
-----------------------------
MACIAS GINI & COMPANY LLP
Sacramento, California
May 19, 2004
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 Nos. 333-44093, 333-70779, 333-53188 and 333-53190 pertaining to the
1995 Stock Option Plan, as Amended, the 1998 Stock Option Plan and Employee
Stock Purchase Plan, the 2000 Stock Award Plan, and the 2000 Long-Term
Performance Plan of Integrated Surgical Systems, Inc. of our report dated March
14, 2003, with respect to the consolidated financial statements of Integrated
Surgical Systems, Inc. included in the Annual Report on Form 10-KSB for the year
ended December 31, 2003.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Sacramento, California
May 18, 2004
EXHIBIT 31.1
CERTIFICATION
I, Ramesh C. Trivedi, Chief Executive Officer of Integrated Surgical Systems,
Inc., certify that:
1. I have reviewed this annual report on Form 10-KSB for the year ended
December 31, 2003 of Integrated Surgical Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the small
business issue and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the small
business issuer, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusion
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small business
issuer's fourth quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
small business issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weakness in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 11, 2004 By: /s/ RAMESH C. TRIVEDI
-------------------------------
Ramesh C. Trivedi
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, Charles J. Novak, Chief Financial Officer of Integrated Surgical Systems,
Inc., certify that:
1. I have reviewed this annual report on Form 10-KSB for the year ended
December 31, 2003 of Integrated Surgical Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the small
business issue and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the small
business issuer, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusion
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small business
issuer's fourth quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
small business issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weakness in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 11, 2004 By: /s/ CHARLES J. NOVAK
----------------------------------------
Charles J. Novak
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION
I, Ramesh C. Trivedi, Chief Executive Officer of Integrated Surgical Systems,
Inc. (the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Annual Report on Form 10-KSB of the Company for the year ended December
31, 2003, which this certification accompanies (the "Periodic Report"),
fully complies with the requirements of Section 13(a) of the Securities
Exchange Act of 1934; and
2. The information contained in the Periodic Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: May 11, 2004 /s/ Ramesh C. Trivedi
-------------------------------
Ramesh C. Trivedi
Chief Executive Officer
EXHIBIT 32.2
CERTIFICATION
I, Charles J. Novak, Chief Financial Officer of Integrated Surgical Systems,
Inc. (the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Annual Report on Form 10-KSB of the Company for the year ended December
31, 2003, which this certification accompanies (the "Periodic Report"),
fully complies with the requirements of Section 13(a) of the Securities
Exchange Act of 1934; and
2. The information contained in the Periodic Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: May 11, 2004 /s/ Charles J. Novak
---------------------------------
Charles J. Novak
Chief Financial Officer