<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 2, 1998
REGISTRATION NO. 333-50723
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
INTUITIVE SURGICAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3842 77-0416458
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
-------------------
1340 W. MIDDLEFIELD ROAD
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 237-7000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
LONNIE M. SMITH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
INTUITIVE SURGICAL, INC.
1340 W. MIDDLEFIELD ROAD
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 237-7000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
ALAN C. MENDELSON, ESQ. JAY K. HACHIGIAN, ESQ.
PATRICK A. POHLEN, ESQ. RENEE F. LANAM, ESQ.
Cooley Godward LLP Gunderson Dettmer Stough
Five Palo Alto Square Villeneuve Franklin &
3000 El Camino Real Hachigian, LLP
Palo Alto, California 94306 155 Constitution Drive
(650) 843-5000 Menlo Park, California 94025
(650) 321-2400
-------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
-------------------
If any of the Securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED , 1998
SHARES
[INTUITIVE LOGO]
COMMON STOCK
-----------------
ALL OF THE SHARES OF COMMON STOCK ARE BEING SOLD BY INTUITIVE SURGICAL,
INC. (THE "COMPANY"). PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC
MARKET FOR THE COMMON STOCK OF THE COMPANY. FOLLOWING THIS OFFERING THE
DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS OF THE
COMPANY AND THEIR AFFILIATES WILL BENEFICIALLY OWN APPROXIMATELY
% OF THE OUTSTANDING SHARES OF COMMON STOCK. IT IS
CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE
PER SHARE WILL BE BETWEEN $ AND $ . SEE
"UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS
TO BE CONSIDERED IN DETERMINING THE INITIAL
PUBLIC OFFERING PRICE.
------------------------
APPLICATION HAS BEEN MADE TO LIST THE COMMON STOCK FOR QUOTATION
ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "ISRG."
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
PRICE $ A SHARE
-------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
--------------------- ----------------------- -----------------------
<S> <C> <C> <C>
PER SHARE.............................. $ $ $
TOTAL(3)............................... $ $ $
</TABLE>
- ------------
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $ .
(3) THE COMPANY HAS GRANTED TO THE UNDERWRITERS AN OPTION, EXERCISABLE
WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF
ADDITIONAL SHARES AT THE PRICE TO PUBLIC LESS UNDERWRITING
DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS, IF
ANY. IF THE UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE TOTAL PRICE TO
PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO COMPANY
WILL BE $ , $ AND $ , RESPECTIVELY. SEE "UNDERWRITERS."
------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY GUNDERSON DETTMER STOUGH VILLENEUVE FRANKLIN & HACHIGIAN, LLP, COUNSEL FOR
THE UNDERWRITERS. IT IS EXPECTED THAT DELIVERY OF THE SHARES WILL BE MADE ON OR
ABOUT , 1998 AT THE OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW
YORK, N.Y., AGAINST PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE FUNDS.
-------------------
MORGAN STANLEY DEAN WITTER
BEAR, STEARNS & CO. INC.
BT ALEX. BROWN
, 1998
<PAGE>
GENERATIONS OF SURGERY
<TABLE>
<S> <C>
OPEN SURGERY [Photo of
SIMPLE & open
COMPLEX surgical
PROCEDURES instruments]
- NATURAL
MOTIONS
- EXTENDED
RANGE OF
MOTION
- HANDS
INSIDE
PATIENT
- PRECISE
TISSUE
MANIPULATION
- LARGE
INCISION
[Photo of MINIMALLY
minimally INVASIVE
invasive SURGERY
surgical SIMPLE
instruments] PROCEDURES
- BACKWARD
MOTIONS
- REDUCED
RANGE OF
MOTION
- HANDS
OUTSIDE
PATIENT
- IMPRECISE
TISSUE
MANIPULATION
- SMALL
INCISION
[Photo
INTUITIVE-TM- of
SURGERY Intuitive's
SIMPLE & surgeon
COMPLEX console]
PROCEDURES
- NATURAL
MOTIONS
- EXTENDED
RANGE OF
MOTION
- MECHANICAL
WRISTS
INSIDE
PATIENT
- PRECISE
TISSUE
MANIPULATION
- SMALL
INCISION
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
<PAGE>
INTUITIVE THIRD GENERATION SURGERY
<TABLE>
<S> <C>
[Photo of Intuitive's products in the Company's preclinical procedure room] With INTUITIVE surgery, surgeons
operate while seated at a console
and viewing a 3-D image of the
surgical field. Their hands rest
below the display holding
instrument handles that resemble
the handles of open surgical
instruments. Natural hand
movements made at the console are
translated into precise
microsurgical movements using
instruments that are
approximately seven millimeters
in diameter and which incorporate
real-time natural wrist
movements. Intuitive's products
are designed to allow surgeons,
for the first time, to be able to
perform surgical procedures
through small incisions using the
natural movements and precision
of open surgery.
[Photo of Company's instrument]
/ /
ACTUAL SIZE
INTUITIVE'S PRODUCTS IN THE COMPANY'S PRECLINICAL PROCEDURE ROOM
The Company's products are investigational and, except as set forth in this Prospectus, have not [INTUITIVE LOGO]
been approved by the FDA for sale in the United States. There can be no assurance that such
approval will ever be obtained. In addition, the Company's products have not been approved by
international regulatory agencies for sale in international markets. See "Risk Factors--Need for
Federal and State Regulatory Clearance or Approval," and "--Lack of International Regulatory
Clearance or Approval."
</TABLE>
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREBY SHALL UNDER ANY
CIRCUMSTANCE IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
-------------------
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 4
Risk Factors................................... 7
Use of Proceeds................................ 20
Dividend Policy................................ 20
Capitalization................................. 21
Dilution....................................... 22
Selected Financial Data........................ 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 24
Business....................................... 28
<CAPTION>
PAGE
---------
<S> <C>
Management..................................... 53
Certain Transactions........................... 62
Principal Stockholders......................... 63
Description of Capital Stock................... 65
Shares Eligible for Future Sale................ 69
Underwriters................................... 71
Legal Matters.................................. 73
Experts........................................ 73
Additional Information......................... 73
Index to Financial Statements.................. F-1
</TABLE>
-------------------
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by an independent certified public
accounting firm and quarterly reports for the first three quarters of each year
containing unaudited financial information.
-------------------
INTUITIVE, ENDOWRIST, IMMERSIVE and the Company's logo are trademarks of the
Company. This Prospectus also includes trademarks of companies other than the
Company.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT
OTHERWISE REQUIRES, THE TERMS "INTUITIVE" AND THE "COMPANY" REFER TO INTUITIVE
SURGICAL, INC., A DELAWARE CORPORATION. EXCEPT AS OTHERWISE NOTED HEREIN,
INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION, (II) GIVES EFFECT TO THE CONVERSION OF ALL OUTSTANDING
SHARES OF PREFERRED STOCK OF THE COMPANY INTO SHARES OF COMMON STOCK OF
THE COMPANY, WHICH WILL OCCUR UPON THE CLOSING OF THIS OFFERING, (III) GIVES
EFFECT TO THE FILING, ON DATE OF THE CLOSING OF THIS OFFERING, OF AN AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION, AUTHORIZING 10,000,000 SHARES OF
UNDESIGNATED PREFERRED STOCK AND 50,000,000 SHARES OF COMMON STOCK, AND (IV)
DOES NOT GIVE EFFECT TO A FOR REVERSE STOCK SPLIT TO BE EFFECTED PRIOR TO
THE CLOSING OF THIS OFFERING.
THE COMPANY
Intuitive designs and manufactures proprietary products which it believes
represent a fundamentally new generation of technology for surgery. This new
generation of surgery, INTUITIVE surgery, is believed by the Company to
represent an advance similar in scope to the previous two generations of
surgery--open surgery and minimally invasive ("MIS") surgery. The Company's
technology seamlessly translates the surgeon's natural hand movements on
instrument handles at a console into corresponding micro-movements of
instruments positioned inside the patient through small puncture incisions, or
"ports." Intuitive believes that its technology provides the surgeon with the
range of motion and fine tissue control possible with open surgery, while
simultaneously allowing the surgeon to work through the ports of MIS surgery.
Although open surgery is still commonly performed and is used in almost
every area of the body, the large incisions required create significant trauma
to the patient, resulting in long hospitalization and recovery times, high
hospitalization costs, as well as significant pain and suffering. Over the past
several decades, MIS surgery has reduced trauma to the patient by allowing
surgery through ports rather than large incisions, resulting in shorter recovery
times and reduced hospitalization costs. MIS surgery has been widely adopted in
certain surgical procedures, but it has not been widely adopted for complex
procedures. The Company believes this slow adoption for complex procedures has
occurred because surgeons generally find MIS operative techniques more difficult
to learn and perform and less precise than open surgery for fine tissue
manipulations such as dissecting and suturing. Factors that make MIS techniques
more difficult or less precise include backward instrument movements, restricted
range of motion, magnified hand tremors, exaggerated instrument movements and
poor visualization.
INTUITIVE surgery overcomes many of the limitations of existing MIS surgery
by utilizing a broad technology platform consisting of computer hardware,
software, algorithms, mechanics and optics to perform fine tissue manipulation
through ports in many parts of the body. Using Intuitive's technology, surgeons
perform surgical procedures while seated comfortably at a console viewing a 3-D
image of the surgical field. The surgeon's hands grasp the instrument handles
below the display in their normal orientation with respect to the surgeon's
eyes, and the Company's technology seamlessly translates these movements into
precise real-time microsurgical movements of electromechanical arms and
instruments inside the patient. The Company's technology is also designed to
give surgeons the perception that their hands are inside the patient, directly
holding instruments--even though their hands are outside--and to give surgeons
the perception that the surgical field is being directly visualized instead of
being viewed through an endoscope.
4
<PAGE>
An important advantage of the Company's technology is that surgeons can
learn to manipulate Intuitive's instruments with only a few minutes of training,
allowing surgeons to focus on the clinical procedure. When performing procedures
that the surgeon has previously performed only with open surgical techniques,
the Company believes that the surgeon will have to learn where to place ports
and how to approach the operation but will generally not have to relearn how to
perform basic tissue manipulations. The Company believes that tissue
manipulations using its products can be as natural to the surgeon as hand
movements in open surgery. As a result, the Company believes its products will
make a broad range of open surgical procedures suitable for INTUITIVE surgery,
with significantly less patient trauma and post-operative pain and shorter
recovery times.
The Company's strategy is to focus initially on the cardiac surgery market
because (i) there are a large number of procedures concentrated in a small
number of hospitals that can be targeted by a focused sales force and field
organization, (ii) while approaches to these procedures have been developed that
are somewhat less invasive than open surgery, they are difficult and only
account for a small minority of cardiac surgery procedures being performed and
(iii) no existing technology is able to accomplish a full cardiac procedure
through ports. The Company believes that its technology can help surgeons
accomplish cardiac surgery procedures more easily, more accurately and with less
trauma to the patient than existing approaches. Cardiac surgery procedures are
among the most precise and demanding in all of surgery. As such, the Company
believes that if its technology is adopted for cardiac surgery, surgeons will
gain confidence that Intuitive's technology also can be used for less demanding
procedures in general and other surgery.
The Company plans to derive its revenues from the direct sale of two types
of interlinked proprietary products (i) a surgeon's console and a patient-side
cart which holds the electromechanical arms and (ii) a range of "resposable"
instruments such as scissors, forceps and electrocautery. The resposable
instruments are resterilizable and the number of procedures that each instrument
can perform is controlled by a proprietary electronic interlock. This feature
will allow the Company to limit the number of uses of each instrument to less
than its tested usage so that the instrument's performance meets specifications
during each procedure. By defining the number of uses for each instrument, the
Company can effectively price its resposable instruments on a per-procedure
basis.
Intuitive believes that it is the leading company in third generation
surgery. In March 1997, surgeons using Intuitive's technology successfully
performed what the Company believes to be the first third generation surgery on
humans. In May 1998, surgeons using Intuitive's technology successfully
performed the first mitral valve repair, the first dissection of an internal
mammary artery and the first coronary anastomosis ever performed with third
generation surgical technology. Intuitive believes that its development efforts
represent the largest effort devoted to third generation surgery of any company
in the world today. Intuitive owns or has licensed 38 issued and 8 allowed
patents, including patents from SRI International and IBM, companies which in
the late 1980s were early pioneers in the research of third generation surgery.
The Company was incorporated in Delaware in November 1995 as Intuitive
Surgical Devices, Inc. and changed its name to Intuitive Surgical, Inc. in
January 1997. The Company's executive offices are located at 1340 W. Middlefield
Road, Mountain View, California 94043, and its telephone number is (650)
237-7000.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.................................... shares
Common Stock to be outstanding after this offering...... shares(1)
Use of Proceeds......................................... For research and development, clinical trials,
manufacturing scale-up, expansion of sales and marketing
activities, partial payment of a license fee to IBM,
working capital and general corporate purposes.
Proposed Nasdaq National Market Symbol.................. ISRG
</TABLE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION PERIOD FROM
(NOVEMBER 9, THREE MONTHS INCEPTION
1995) TO YEAR ENDED ENDED MARCH 31, (NOVEMBER 9,
DECEMBER 31, DECEMBER 31, -------------------- 1995) TO MARCH
1996(2) 1997 1997 1998 31, 1998
------------- ------------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Operating costs and expenses:
Research and development....................... $ 2,934 $ 14,282 $ 1,793 $ 6,764 $ 23,980
General and administrative..................... 951 4,434 686 1,627 7,012
Technology license............................. -- 6,000 -- -- 6,000
------------- ------------- --------- --------- ---------------
Total operating costs and expenses........... 3,885 24,716 2,479 8,391 36,992
------------- ------------- --------- --------- ---------------
Loss from operations............................. (3,885) (24,716) (2,479) (8,391) (36,992)
Interest income, net............................. 198 1,114 70 376 1,688
------------- ------------- --------- --------- ---------------
Net loss......................................... $ (3,687) $ (23,602) $ (2,409) $ (8,015) $ (35,304)
------------- ------------- --------- --------- ---------------
------------- ------------- --------- --------- ---------------
Historical net loss per share:
Basic and diluted net loss per share........... $ (2.86) $ (11.24) $ (1.45) $ (2.53)
------------- ------------- --------- ---------
------------- ------------- --------- ---------
Shares used in computing basic and diluted net
loss per share............................... 1,287 2,100 1,662 3,169
------------- ------------- --------- ---------
------------- ------------- --------- ---------
Pro forma net loss per share:
Pro forma basic and diluted net loss per
share........................................ $ (1.85) $ (0.47)
------------- ---------
------------- ---------
Shares used in computing pro forma basic and
diluted net loss per share................... 12,730 17,207
------------- ---------
------------- ---------
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-------------------------
ACTUAL AS ADJUSTED(3)
--------- --------------
<S> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........................................ $ 26,303
Working capital.......................................................................... 17,792
Total assets............................................................................. 30,107
Capital lease obligations, noncurrent.................................................... 1,297
Deficit accumulated during the development stage......................................... (35,304) (35,304)
Total stockholders' equity............................................................... 19,982
</TABLE>
- ------------
(1) Based on the number of shares outstanding on March 31, 1998. Excludes (i)
977,250 shares of Common Stock issuable upon exercise of options
outstanding, at a weighted average exercise price of $0.99 per share, (ii)
an aggregate of 785,138 shares available for future grants or purchases
pursuant to the Company's 1996 Equity Incentive Plan, and (iii) 11,000
shares issuable upon exercise of a warrant outstanding, at an exercise price
of $5.00 per share. In April 1998, an additional 4,700,000 shares were
reserved for future grants or purchases pursuant to the Company's 1998
Equity Incentive Plan, 1998 Employee Stock Purchase Plan and 1998
Non-Employee Directors' Stock Option Plan. See "Capitalization," and
"Management--Employee Benefit Plans."
(2) The Company's statement of operations data for the period from inception
(November 9, 1995) to December 31, 1995 is not presented separately as the
Company's operations during that period were not material. See Note 1 of
Notes to Financial Statements.
(3) As adjusted to give effect to the sale in this offering of shares
of Common Stock by the Company and the application of the net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. THE FOLLOWING FACTORS, IN ADDITION TO THE OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS, SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE
COMPANY AND ITS BUSINESS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED
HEREBY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. FOR THIS PURPOSE,
ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACTS MAY
BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE FOREGOING, THE
WORDS "BELIEVES," "ANTICIPATES," "PLANS," "INTENDS" AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THERE ARE A NUMBER OF IMPORTANT
FACTORS THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE,
WITHOUT LIMITATION, THOSE SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS.
EARLY STAGE OF CLINICAL TESTING; NO ASSURANCE OF SAFETY, EFFICACY OR
COMMERCIALIZATION
The Company was founded in November 1995. To date, the Company has engaged
primarily in researching, developing, testing and pursuing regulatory clearances
for its initial product candidate which consists of a surgeon's console and
patient-side cart and certain resposable instruments. The Company will not be
able to sell its products in the United States unless it obtains clearance or
approval from the United States Food and Drug Administration (the "FDA").
Although the Company has received clearance from the FDA for the surgeon's
console and patient-side cart (including all of the components, software,
algorithms and optics contained therein) and certain blunt resposable
instruments (all of which use the Company's ENDOWRIST technology) it has not
received clearance or approval for certain other resposable instruments
necessary for performing most surgical procedures, including scissors, scalpels,
forceps/ pickups, needle holders, clip appliers and electrocautery (the "Pending
Instruments"). Regulatory clearance or approval of the Pending Instruments is
necessary for the Company to commercialize its products. The FDA has determined
that the Company must submit substantial clinical data from a randomized and
concurrently controlled clinical trial comparing the use of the Pending
Instruments in certain thoracoscopic (in the chest) and laparoscopic (in the
abdomen or pelvis) surgical procedures to conventional MIS instruments before
the FDA will consider the clearance or approval of such instruments.
In order to obtain the required clinical data, the Company intends to begin
a clinical trial using the Pending Instruments, together with the surgeon's
console and patient-side cart and certain other resposable instruments, in July
1998. However, this clinical trial could be delayed. Even if the clinical trial
commences on schedule, the Company cannot be certain when it will be completed
or that the results of the clinical trial will be favorable or support further
product development. If the results of the clinical trial do not indicate that
the Company's products are safe and effective, regulatory approval could be
delayed or denied. In particular, such results may require the Company to modify
or abandon its products. Even if the results of the clinical trial indicate that
the Company's products are safe and effective, the clinical trial may identify
significant technical or other obstacles that the Company would need to
overcome. These obstacles could significantly delay or prevent any product
launch, which could have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, because the
surgeon's console and patient-side cart and resposable instruments together
represent the Company's sole product candidate, the Company could be required to
cease operations if it is not successfully commercialized. See
"Business--Intuitive's Products," "--Clinical Trials and Experience," and
"--Government Regulation."
DEVELOPMENT STAGE COMPANY; HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES;
NO PRODUCT REVENUE TO DATE
As of March 31, 1998, the Company had an accumulated deficit of $35.3
million. The Company recognized net losses of $3.7 million, $23.6 million, and
$8.0 million for the years ended December 31, 1996 and 1997 and the quarter
ended March 31, 1998, respectively. The Company has not generated any revenue
from product sales. The Company's future profitability depends, in part, on the
Company's ability
7
<PAGE>
to obtain clearance or approval from the FDA to market the Pending Instruments
in the United States, its ability to obtain regulatory approval to market its
products internationally and its ability to successfully manufacture and market
its products. The Company had 23, 86 and 100 employees as of December 31, 1996
and December 31, 1997 and March 31, 1998, respectively. The Company expects to
expend substantial additional funds, increase personnel and continue to incur
significant operating losses for the foreseeable future as it continues to fund
clinical trials in support of regulatory approvals, expands research and
development activities, establishes commercial-scale manufacturing capabilities
and expands sales and marketing activities. Even if the Company is able to
successfully commercialize its products, the Company cannot be certain that it
will achieve significant revenues from either domestic or international sales.
Failure to achieve significant revenues from product sales would have a material
adverse effect on the Company's business, financial condition and results of
operations, and may require the Company to cease operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
UNCERTAINTY OF MARKET ACCEPTANCE; TRAINING REQUIREMENTS
The Company's products represent a fundamentally new way of performing
surgery. The Company's ability to successfully commercialize its products will
depend, in part, on achieving physician and patient acceptance of INTUITIVE
surgery as a preferred method of performing surgery and for a broader array of
surgical procedures. There can be no assurance that the Company's products will
gain any significant degree of market acceptance by physicians, patients and
third-party payors even if necessary regulatory approvals are obtained. The
Company believes that physicians' and third-party payors' acceptance of the
benefits of procedures performed using the Company's products will be essential
for acceptance of the Company's products by patients. Physicians will not
recommend that procedures be performed using the Company's products unless the
Company is able to demonstrate similar efficacy and/or reduced trauma as
compared to existing surgical techniques. Even if the Company establishes the
clinical efficacy of procedures using its products, surgeons may elect not to
use the Company's products for any number of other reasons. For example, most
patients with cardiovascular disease first consult with a cardiologist who may
refer the patient to a cardiac surgeon for conventional open-heart surgery
because such surgery has become widely accepted.
The Company expects that there will be a significant learning process
involved for surgical teams to become proficient in the use of the Company's
products in performing surgeries, such as cardiac surgery, which to date have
been mostly performed with open surgical techniques. Broad use of the system
will require training of surgical teams in performing minimally invasive
procedures, and market acceptance could be delayed by the time required to
complete this training. The Company cannot be certain that it will be able to
rapidly train surgical teams in numbers sufficient to generate adequate demand
for the Company's products. In addition, the Company has not developed a formal
training program to date. If the Company's products fail to achieve market
acceptance, the Company may not achieve revenues from product sales necessary to
support the Company's business. See "Business--Intuitive's Products" and "--
Clinical Trials and Experience."
NEED FOR FEDERAL AND STATE REGULATORY CLEARANCE OR APPROVAL
The design, manufacturing, labeling, distribution and marketing of the
Company's products are subject to extensive government regulation in the United
States. As a result, the process of obtaining required regulatory approvals is
lengthy, expensive and uncertain. In order for Intuitive to market its products
in the United States, it must obtain clearance or approval from the FDA. Before
a new device can be introduced into the United States market, the FDA requires
that a manufacturer obtain marketing clearance either through a premarket
notification process under Section 510(k) of the Federal Food, Drug and Cosmetic
Act (the "FDC Act") or a PMA application under Section 515 of the FDC Act. In
order to obtain clearance through a premarket notification under Section 510(k)
of the FDC Act ("510(k)"), the
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Company must provide information sufficient to support a claim of substantial
equivalence to a legally marketed predicate device. The PMA application process
is substantially more extensive than the 510(k) notification process. Based upon
industry and FDA publications, the Company believes that it generally takes from
four to twelve months from the date of submission to obtain a 510(k) clearance,
but it may take longer. In June 1997, the Company submitted a 510(k)
notification for the surgeon's console and patient-side cart and certain blunt
resposable instruments, and in July 1997, the 510(k) notification was cleared by
the FDA. A subsequent 510(k) notification submission covering the Pending
Instruments was withdrawn by the Company in November 1997 after the FDA
indicated that substantial clinical data would be required to support a
determination of substantial equivalence. In March 1998, the Company received
conditional approval of an Investigational Device Exemption ("IDE") permitting
the Company to conduct a clinical trial using the Pending Instruments, together
with the surgeon's console and patient-side cart and certain other resposable
instruments, in certain thoracoscopic and laparoscopic surgical procedures. The
IDE approval is conditioned upon the Company's correction of certain
deficiencies within 45 days from the date of approval. In May 1998, the Company
submitted a response to the FDA in order to correct such deficiencies. Although
the Company believes it has corrected such deficiencies, there can be no
assurance that the Company will comply with the conditions of approval to the
FDA's satisfaction or that the agency will not revoke its approval of the
clinical trial. Such action could delay or prevent the Company from obtaining
the clinical data necessary to seek clearance or approval of the Pending
Instruments. The Company intends to submit the data obtained from the clinical
trial as part of a new 510(k) notification. The Company cannot be certain when
it will complete the clinical trial or file such 510(k) notification with the
FDA for the Pending Instruments. In addition, there can be no assurance whether
the results obtained from the clinical trial will support a finding of
substantial equivalence to a predicate device. It is possible that the FDA could
require the Company to submit a more extensive PMA application instead of a
510(k) notification for the Pending Instruments. If 510(k) clearance is granted,
the Company believes based upon discussions with the FDA that the clearance will
permit distribution and promotion of the Pending Instruments for broad use in
endoscopic surgery. There can be no assurance, however, that the FDA will not
require additional 510(k) clearances to be obtained before the Pending
Instruments could be distributed or promoted for use in other specific surgical
procedures other than those being studied in the clinical trial.
If the Company is unable to utilize the 510(k) process, the Company will
incur additional costs and delays while it seeks FDA approval of a PMA
application to use the Pending Instruments for endoscopic indications. A PMA
application may be submitted to the FDA only after clinical trials and the
required patient follow-up for a particular system or its instruments are
successfully completed. Upon acceptance of a PMA application for filing, the FDA
commences a review process that, based upon industry and FDA publications, the
Company believes generally takes one to three years from the date on which the
PMA application is accepted for filing. However, the review process may take
significantly longer.
The FDA may not act favorably or quickly on any of the Company's
submissions. As a result, the Company may encounter significant difficulties and
incur additional costs. For example, the FDA may request additional data or
require that the Company conduct further clinical trials, which would cause the
Company to incur substantial costs and delays. In addition, the FDA may impose
strict labeling requirements, onerous surgical training requirements or other
requirements as a condition of product approval. These restrictions could limit
the Company's ability to market its products. Furthermore, the Company cannot be
certain that it will ever receive FDA clearance or approval of the Pending
Instruments. If the Company is unable to obtain FDA clearance or approval of the
Pending Instruments, it will not be able to market and sell its products for
surgical procedures in the United States. Because the surgeon's console and
patient-side cart and resposable instruments, including the Pending Instruments,
together represent the Company's sole product candidate, the Company could be
required to cease operations if regulatory approvals of the Pending Instruments,
which are necessary for commercialization of the Company's products, are not
obtained.
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If the Company receives FDA approval or clearance of the Pending
Instruments, the Company will continue to be regulated by the FDA with regard
to, among other things, the reporting of adverse events and ongoing compliance
with FDA Quality System Regulations ("QSR"), which includes elaborate testing,
control, documentation and other quality assurance procedures. The Company's
manufacturing facilities must be registered with the FDA and will be subject to
periodic inspections. The Company's facilities have not yet been inspected by
the FDA. Labeling and promotional activities are subject to scrutiny by the FDA
and, in certain circumstances, by the Federal Trade Commission. Current FDA
enforcement policy prohibits the marketing of approved medical devices for
unapproved ("off label") uses.
For any devices that are cleared through the 510(k) process, modifications
or enhancements that could significantly affect safety or effectiveness, or
constitute a major change in the intended use of the device, will require new
510(k) submissions. The Company has made modifications to the surgeon's console
and patient-side cart and blunt instruments that the Company believes do not
require new 510(k) submissions. There can be no assurance, however, that the FDA
would agree with the Company's determination not to submit a new 510(k) notice
for any of these changes. If the FDA requires the Company to submit a new 510(k)
for any device modification, the Company may be prohibited from marketing the
modified device until the 510(k) submission is cleared by the FDA.
In addition to federal regulations, the State of California also requires
that the Company obtain a license to manufacture medical devices. The Company's
facilities and manufacturing processes were inspected in February 1998. The
Company passed the inspection and received a device manufacturing license from
the Food and Drug Branch of the California Department of Health Services
("CDHS") in March 1998. The Company will be subject to periodic inspections by
the CDHS. If the Company were unable to maintain this license following any
future inspections, it would be unable to manufacture or ship any product which
would have a material adverse effect on the Company's business, financial
condition and results of operations and may require the Company to cease
operations. See "Business--Government Regulation."
LACK OF INTERNATIONAL REGULATORY CLEARANCE OR APPROVAL
In order for the Company to market its products in Europe and in certain
other foreign jurisdictions, the Company and its distributors and agents must
obtain required regulatory approvals and clearances and otherwise comply with
extensive regulations regarding safety and quality. These regulations, including
the requirements for approvals or clearance and the time required for regulatory
review, vary from country to country. The Company cannot be certain that it will
obtain regulatory approvals in other countries. The Company may also incur
significant costs in attempting to obtain or in maintaining foreign regulatory
approvals. If the Company experiences delays in receipt of approvals to market
its products outside of the United States, or if the Company fails to receive
these approvals, sales of such products may be materially adversely affected.
Beginning in mid-1998, the European Union will require that medical products
receive the right to affix the CE mark. The CE mark is an international symbol
of adherence to quality assurance standards and compliance with applicable
European medical device directives. In order to obtain the right to affix the CE
mark to the Company's products, the Company will need to obtain certification
that the Company's processes meet European quality standards. These standards
include certification that the Company's design and manufacturing facility
complies with ISO 9000 series standards. If the Company does not receive the
right to affix the CE mark, it will be prohibited from selling its products in
member countries of the European Union. The Company cannot be certain that it
will be successful in meeting European quality standards or other certification
requirements. See "Business--Government Regulation."
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NEED FOR ADDITIONAL CAPITAL
The Company expects to expend substantial additional funds and continue to
incur significant operating losses for the foreseeable future as its continues
to fund clinical trials in support of regulatory approvals, expands research and
development activities, establishes commercial-scale manufacturing capabilities
and expands sales and marketing activities. If unanticipated difficulties arise
in any of these activities, the Company's cash requirements could increase
substantially. The Company's future liquidity and capital requirements will
depend upon numerous factors, including the extent of the Company's future
operating losses, the level and timing of future revenues and expenditures, the
progress of its product development efforts, the progress and scope of clinical
trials, actions relating to regulatory matters, the costs and timing of
expansion of product development, manufacturing and sales and marketing
activities, the extent to which the Company's products gain market acceptance,
the price of the Company's products and competitive developments. The Company
believes that the proceeds from this offering, together with interest income and
current cash, will be sufficient to meet its operating and capital requirements
at least for the next 12 months. The Company's forecast of the period of time
through which its financial resources will be adequate to support its operations
is a forward-looking statement that involves risks and uncertainties, and actual
results could vary. The Company may raise additional funds through public or
private financing or other arrangements. The Company cannot be certain that any
additional funding will be available when needed or at all. Even if such
financing is available, the terms may not be attractive. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may involve restrictive covenants. If the Company is unable to
raise capital when needed, it may have to reduce operations in order to conserve
cash or cease operations entirely. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
FLUCTUATIONS IN OPERATING RESULTS
The Company's results of operations will depend upon numerous factors,
including the following: the progress and results of clinical trials, actions
relating to regulatory matters, the extent to which the Company's products gain
market acceptance, the timing and ability of the Company to develop its
manufacturing and sales and marketing capabilities, demand for the Company's
products, the progress of surgical training in the use of the Company's
products, the ability of the Company to develop, introduce and market new or
enhanced versions of the Company's products on a timely basis, any product
quality problems and changes in third-party payor reimbursement policies. In
addition, sales by the Company of its surgeon's console and patient-side cart
could require lengthy sales and purchase order cycles because these products are
relatively expensive and require multiple levels of purchase authorizations. As
a result, the Company's quarterly or yearly results of operations may fluctuate
substantially and will be difficult to forecast. In addition, future revenue
from sales of the Company's products, if any, will be difficult to forecast
because the market for new surgical technologies is still evolving. As a result,
the Company's operating results in any particular period should not be relied
upon as an indication of future performance. In addition, it is possible that in
some future quarter the Company's operating results will be below the
expectations of public market analysts. If this occurs, the price of the
Company's Common Stock will likely decline. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
UNCERTAINTY RELATED TO THIRD-PARTY REIMBURSEMENT
A combination of the government and/or health insurance companies is
responsible for hospital and surgeon reimbursement for virtually all surgical
procedures except for cosmetic surgery in both the United States and elsewhere.
Governments and insurance companies generally reimburse hospitals and physicians
for surgery when the procedures are considered non-experimental and
non-cosmetic. The Company believes that the cardiac procedures that will
constitute its initial focus, as well as the majority of non-cardiac procedures
it may eventually target, are generally already reimbursable by governments and
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insurance companies. Accordingly, the Company believes hospitals and surgeons in
the United States will generally not be required to obtain new billing
authorizations or codes in order to be compensated for performing surgery using
the Company's products once such products have obtained FDA clearance or
approval, but there can be no assurance that this will be the case.
Governments and insurance companies carefully review and increasingly
challenge the prices charged for medical products and services. Reimbursement
rates from private companies vary depending on the procedure performed, the
third-party payor, the insurance plan and other factors. Medicare reimburses
hospitals a prospectively determined fixed amount for the costs associated with
an in-patient hospitalization based on the patient's discharge diagnosis, and
reimburses physicians a prospectively determined fixed amount based on the
procedure performed, regardless of the actual costs incurred by the hospital or
physician in furnishing the care and unrelated to the specific devices used in
that procedure. Thus, the reimbursements that hospitals obtain for performing
surgery with Intuitive's products will generally have to cover any additional
costs that hospitals incur in purchasing the Company's products.
In addition, the Company must obtain reimbursement approvals in certain
foreign countries. There can be no assurance that any such approvals will be
obtained in a timely manner or at all. Failure to obtain such approvals could
have a material adverse effect on market acceptance or sales of the Company's
products in the international markets in which approvals are required.
The Company believes that the overall escalating cost of medical products
and services has led to and will continue to lead to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by the Company. There can be no
assurance that third-party reimbursement and coverage will be available or
adequate either in United States or foreign markets, that current reimbursement
amounts will not be decreased in the future or that future legislation,
regulation, or reimbursement policies of third-party payors will not otherwise
adversely affect the demand for the Company's products or its ability to sell
its products on a profitable basis, particularly if the Company's products are
more expensive than other cardiac surgery products. Moreover, the Company is
unable to predict whether additional legislation or regulation relating to the
healthcare industry or third-party reimbursement will be enacted in the future,
or the effect of such legislation or regulation on the sale of the Company's
products. If third-party payor coverage or reimbursement is unavailable or
inadequate, the Company's business, financial condition, and results of
operations could be materially adversely affected. See "Business--Third-Party
Reimbursement."
SIGNIFICANT COMPETITION; RAPID TECHNOLOGICAL CHANGE
INTUITIVE surgery is a new technology that must compete with more
established procedures such as existing MIS surgery and open surgery. These
established procedures are widely accepted in the medical community and in many
cases have a long history of use. In addition, the Company expects that the
market for third generation surgery will be intensely competitive. Several
companies are developing new approaches and new products for the minimally
invasive treatment of heart disease and other conditions. Many of these
companies have an established presence in the field of MIS surgery, including
Boston Scientific Corporation, CardioThoracic Systems, Inc., C.R. Bard, Inc.,
Guidant Corporation, Heartport, Inc., Ethicon Endo-Surgery, Inc., a division of
Johnson & Johnson, Medtronic, Inc. and United States Surgical Corporation. Many
of these companies have substantially greater financial and other resources than
the Company. In particular, these companies frequently have larger research and
development staffs and more experience and capabilities in conducting research
and development activities, testing products in clinical trials, obtaining
regulatory approvals, and manufacturing, marketing and selling products. In
addition, a limited number of companies are using robots in surgery, including
Computer Motion, Inc., Integrated Surgical Systems, Inc., Brock Rogers Surgical,
Inc. and MicroDexterity Systems, Inc., which may develop products which directly
compete with the Company's products. Also, technological advances in cardiac or
other surgical procedures or the development of innovative drugs could make
other therapies more effective or lower in cost than the Company's products. The
Company
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cannot be certain that it will be able to complete development of its products
or develop new instruments for any additional surgical procedures, that are more
effective and cost-effective than established treatments or new approaches and
products developed by current or future competitors. The Company could be unable
to achieve adequate sales of the Company's products if it is unable to
demonstrate the efficacy and cost advantages of such products over products or
procedures of the Company's competitors or over existing MIS or open surgical
procedures. In addition, the timing of market introduction of its products
affects the Company's ability to compete effectively. As a result, the Company's
ability to complete product development and clinical trials, obtain regulatory
approvals and commercially introduce its initial products are important factors
in competing successfully. Even if its initial products were to gain market
acceptance and generate product revenue, the Company's ability to achieve or
sustain profitability could be adversely affected if it fails to develop new
technologies and products before competitors. See "Business--Competition."
RISK OF SOFTWARE DEFECTS
The Company's products incorporate sophisticated computer software which has
been entirely developed by the Company and some of which is still under
development by the Company. Software as complex as that incorporated into the
Company's products frequently contain errors or failures, especially when first
introduced. In addition, new products or enhancements may contain undetected
errors or performance problems that, despite testing, are discovered only after
commercial shipment. Because the Company's products are designed to be used to
perform complex surgical procedures, the Company expects that its customers will
have an increased sensitivity to software defects than the market for software
products generally. There can be no assurance that errors or performance
problems will not arise in the future, causing delays in product shipments, loss
of revenue, delay in market acceptance, diversion of Company resources, damage
to the Company's reputation or increased service or warranty costs, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON PATENTS, LICENSES AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain patent
protection and appropriate licenses from third parties for its products and
processes and its ability to preserve its trade secrets, trademarks and
copyrights, to operate without infringing or violating the proprietary rights of
others and to prevent others from infringing the proprietary rights of the
Company. The patent positions of medical device companies, including those of
the Company, are uncertain and involve complex and evolving legal and factual
questions. The coverage sought in a patent application can either be denied or
significantly reduced before or after the patent is issued. Consequently, the
Company cannot be certain that the scope of any of the Company's patents will
exclude competitors, provide competitive advantages or prevent others from
circumventing the Company's technology. Many of the Company's competitors have
substantial resources and have made substantial investments in competing
technologies. Such competitors may have applied for or may apply for and obtain
patents that will prevent, limit or interfere with the Company's ability to
make, use or sell the Company's products either in the United States or in
international markets. The Company cannot be certain that any of its patents
will be held valid if challenged by third parties or that others will not claim
rights in the Company's patents and other proprietary rights.
In view of the time delay in patent approval and secrecy afforded patent
applications, the Company does not know and is not able to determine if there
are patent applications belonging to others which have priority over
applications belonging to the Company. Moreover, portions or all of the
Company's patent applications could be rejected and there could be a material
adverse effect on the Company's business and future prospects if patents or
prior art exist that were not uncovered through database searches or there are
patent applications that have priority over any of the Company's patent
applications.
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Other companies, institutions or individuals may have filed applications
for, may have been issued patents or may obtain additional patents and
proprietary rights relating to products or processes similar in function or
effect to those of the Company or products that treat conditions that may be
treated by the Company's potential products. At this time, the Company cannot
predict whether or not these patents, patent applications and proprietary rights
will lead to the development of products competitive with the Company's
potential products. If such competitive products are developed and successfully
commercialized, they could materially adversely affect the Company's ability to
commercialize its potential products. If the United States Patent and Trademark
Office (the "PTO") should determine that any issued or pending patents claim the
same subject matter as any of the Company's pending patent applications and that
the subject matter of such issued or pending patents was invented first, the
Company could be prevented from obtaining patent protection or the scope of such
protection could be narrowed.
The laws of certain foreign countries do not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States. The Company attempts to protect the software included in its systems
under trade secret and copyright laws, but these laws provide only limited
protection. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy or obtain information that the Company
regards as proprietary. In addition to patents, trademarks and copyrights, the
Company relies on trade secrets and proprietary know-how to compete. The Company
attempts to protect its trade secrets and proprietary know-how, in part, through
confidentiality and proprietary information agreements with all of the Company's
employees and consultants, however such agreements may be breached. The Company
cannot be certain that it will have adequate remedies for any breach, or that
its secrets will not otherwise become known to, or independently developed by,
competitors.
The Company also relies on technology that it licenses from others,
including technology that is integrated into its products. The Company has
entered into a license agreement with SRI International ("SRI"), dated December
20, 1995 (the "SRI License"), pursuant to which the Company obtained an
exclusive, worldwide, royalty-free license to use certain telesurgery technology
for animal and human surgery. Under the terms of the SRI License, the Company is
required to use commercially reasonable and diligent efforts to conduct research
and development and clinical trials and to market products for use in surgery
once such products are approved for marketing by the FDA. If the Company fails
to commercialize its products by September 12, 2002, SRI has the option of
converting the exclusive license to a non-exclusive license. The SRI License
terminates upon the later of the last to expire of the patents licensed from SRI
or December 20, 2012. The license may also be terminated by SRI in the event of
an uncured breach of the Company's obligations. In the event of such termination
there can be no assurance that necessary licenses could be reacquired from SRI
on satisfactory terms or at all. The termination of the SRI License would
prevent or delay further development or commercialization efforts of the
Company's products which would have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, in
December 1997, the Company entered into a license with IBM (the "IBM License")
pursuant to which the Company was granted an exclusive, worldwide, royalty-free
license to use certain IBM patents covering technology related to the
application of computers and robotics to surgery. Excluded from the licensed
field were neurology, ophthalmology, orthopedics and biopsies, but the Company
obtained a nonexclusive license in these fields. Under the terms of the license,
the Company is obligated to pay certain amounts upon achievements of certain
milestones, including $5.0 million within 10 days of the closing of this
offering. The license agreement also provides for payments of $1.0 million each
upon the Company reaching revenue milestones, as defined, of $25.0 million and
$50.0 million. The IBM License will terminate upon the expiration of the last to
expire of the licensed patents. In addition, the IBM License may also be
terminated if the Company fails to make the required payments and such failure
is not cured within 90 days of written notice. In the event of such termination,
there can be no assurance that necessary licenses could be reacquired from IBM
on satisfactory terms or at all. The loss or failure to maintain these licenses
could prevent or delay further development or commercialization efforts of the
Company's products which would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Intellectual Property."
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The Company may be required to obtain licenses to patents or proprietary
rights of others. As the medical device industry expands and more patents are
issued, the risk increases that the Company's potential products may give rise
to claims that they infringe the patents of others. No assurance can be given
that any licenses required under any such patents or proprietary rights would be
made available on terms acceptable to the Company. If the Company does not
obtain such licenses, it could encounter delays in product market introductions
while it attempts to design around such patents, or could find that the
development, manufacture or sale of products requiring such licenses could be
foreclosed. Litigation may be necessary to defend against or assert claims of
infringement, to enforce patents issued to the Company, to protect trade secrets
or know-how owned by the Company, or to determine the scope and validity of the
proprietary rights of others, and could result in substantial costs to and
diversion of effort by, and may have a material adverse impact on, the Company.
In addition, there can be no assurance that these efforts by the Company will be
successful.
RISKS OF THIRD-PARTY CLAIMS OF INFRINGEMENT
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. The Company could become subject to patent infringement
claims or litigation in a court of law, interference proceedings declared by the
PTO to determine the priority of inventions or an opposition to a patent grant
in a foreign jurisdiction. As the medical device industry expands and more
patents are filed and issued, the risk increases that the Company's products may
give rise to a declaration of interference by the PTO or claims of patent
infringement by other companies, individuals and institutions. Such entities and
individuals could bring legal proceedings against the Company seeking damages or
seeking to enjoin the Company from testing, manufacturing or marketing its
products. Patent litigation is costly, and even if the Company prevails, the
cost of such litigation could adversely affect the Company's business. In
addition, such proceedings may result in a significant diversion of effort for
the Company's technical and management personnel. If other parties in any action
are successful, the Company could be required to cease the infringing activity
or obtain a license. Although patent and intellectual property disputes in the
medical device area have often been settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial and
could include ongoing royalties. In addition, it is uncertain whether any
required license would be available to the Company on acceptable terms, or at
all. See "Business--Intellectual Property-- Patents."
LIMITED MANUFACTURING EXPERIENCE; SCALE-UP RISK
The Company has manufactured prototypes of its products for further product
development and clinical trials only in limited quantities. The Company has no
experience manufacturing products in the volumes that will be necessary to
achieve significant commercial sales. The Company cannot be certain that it will
be able to establish or maintain reliable, high-volume manufacturing capacity.
Even if such capacity can be established and maintained, the Company cannot be
certain that the cost will be commercially reasonable. If the Company receives
FDA clearance or approval for the Pending Instruments, the Company will need to
expend significant capital resources and develop manufacturing expertise to
establish large-scale manufacturing capabilities. Manufacturers often encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance, component supply
shortages, shortages of qualified personnel, compliance with FDA regulations and
the need for further FDA approval of new manufacturing processes. In addition,
the manufacturing of the Company's products is a complex process with many
component parts. In the event demand for the Company's products exceeds
manufacturing capacity, the Company could develop a substantial backlog of
customer orders. If the Company is unable to establish and maintain large-scale
manufacturing capabilities, sales of the Company's products could be
substantially diminished, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
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In addition, the Company's manufacturing facilities are subject to periodic
inspection by regulatory authorities, and the Company's operations will continue
to be regulated by the FDA with respect to QSR compliance. The Company will be
required to comply with QSR requirements in order to produce products for sale
in the United States and with the ISO 9000 series standards in order to produce
products for sale in Europe. If the Company fails to comply with QSR or ISO 9000
series standards, it may be required to cease all or part of its operations for
some period of time until it can demonstrate that appropriate steps have been
taken to comply with such regulations. The Company cannot be certain that its
facilities will comply with QSR or the ISO 9000 series standards in future
audits by regulatory authorities. The State of California also requires that the
Company obtain a license to manufacture medical devices. The Company's
facilities and manufacturing processes were inspected in February 1998. The
Company passed the inspection and received a device manufacturing license from
the CDHS in March 1998. The Company will be subject to periodic inspections by
the CDHS. If the Company were unable to maintain this license following any
future inspections, it would be unable to manufacture or ship any products which
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Manufacturing" and
"--Government Regulation."
DEPENDENCE ON KEY SUPPLIERS
The Company purchases certain key components, including motors, endoscopes,
monitors, and certain integrated circuit components, from single source
suppliers. For certain of these components, there are relatively few alternative
sources of supply. The Company may not be able to establish quickly additional
or replacement suppliers for many of the numerous components used in the
Company's products. In addition, establishing a replacement supplier could
involve significant additional costs. If the Company's current suppliers become
unable or unwilling to supply components when needed and the Company is unable
to obtain alternative suppliers, the Company might be unable to manufacture and
market its products, which would have a material adverse effect on its business,
financial condition and results of operations. See "Business--Manufacturing."
LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE
The Company has no experience marketing and selling its products. If the
Company receives required regulatory clearance or approval, the Company intends
to market its products initially through a direct sales force in the United
States and Europe. Substantial efforts and significant management and financial
resources are required to establish marketing and sales capabilities sufficient
to support sales in commercial quantities. The Company cannot be certain that it
will be able to build such a marketing staff or sales force, that this strategy
will be cost-effective or that such sales and marketing efforts will be
successful. Failure to successfully market its products or any future products
could reduce the Company's revenues and may result in additional losses. See
"Business--Marketing and Distribution."
EXPANSION OF OPERATIONS; MANAGEMENT OF GROWTH
In order to complete clinical trials, scale-up manufacturing, marketing and
distribution capabilities and develop future products, the Company will be
required to expand its operations. The Company expects that future expansion
will occur particularly in the areas of research and development, manufacturing
and sales and marketing. Such expansion will likely result in new and increased
responsibilities for management personnel and place significant strain upon the
Company's management, operating and financial systems and resources. To
accommodate any such growth and compete effectively, the Company will be
required to improve information systems, procedures and controls and expand,
train, motivate and manage the Company's work force. The Company's future
success will depend in part on the ability of current and future management
personnel to operate effectively, both independently and as a group. The Company
cannot be certain that its personnel, systems, procedures and controls will be
adequate to support the Company's future operations. If the Company fails to
implement and improve its operational, financial and
16
<PAGE>
management systems or to expand, train, motivate or manage employees, the
Company's business could be adversely affected. See "--Dependence Upon Key
Personnel," "Business--Employees" and "Management."
RISK OF PRODUCT LIABILITY
The Company's business exposes it to significant risks of product liability
claims. The medical device industry has historically been litigious, and the
Company faces financial exposure to product liability claims in the event that
the use of the Company's products results in personal injury or death. There is
also the possibility that defects in the design or manufacture of the Company's
products might necessitate a product recall. The Company cannot be certain
whether product liability claims will be asserted against it. The Company
currently maintains product liability insurance. The Company cannot be certain
that the coverage limits of such insurance will be adequate or that it will be
able to maintain such insurance on acceptable terms. A product liability claim,
regardless of its merit or eventual outcome, could result in significant legal
defense costs. Such costs would have the effect of increasing the Company's
expenses and could have a material adverse effect on its business, financial
condition and results of operations. See "Business--Product Liability and
Insurance."
DEPENDENCE UPON KEY PERSONNEL
Because of the scientific nature of the Company's business, the Company is
highly dependent upon its ability to attract and retain certain key scientific,
technical, clinical, regulatory and managerial personnel. Competition for such
personnel is intense. In addition, the Company's success is also dependent on
its ability to hire qualified marketing and sales personnel. The loss of key
personnel or the inability to hire and retain qualified personnel could
adversely affect the Company's product development efforts. In February 1997,
the Company entered into an agreement with Lonnie M. Smith, the Company's
President and Chief Executive Officer, providing that, in the case of
involuntary termination other than for cause, his salary and benefits will
continue to be paid for a period of one year from the date of termination. See
"Management."
USE OF HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS
The Company's operations produce waste products and involve the controlled
use of hazardous materials and chemicals, including assorted flammable liquids,
oxygen, acetone and acetylene. The Company is subject to federal, state and
local laws and regulations governing the use, manufacture, storage, handling and
disposal of such materials and waste products. Although the Company believes
that its safety procedures for handling and disposing of such materials and
wastes comply with the standards prescribed by such laws and regulations, the
risk of contamination or injury from these materials cannot be eliminated
completely. In such event, the Company can be held liable for any damages that
result and any such liability could exceed the resources of the Company. There
can be no assurance that the Company will not be required to incur significant
costs to comply with environmental laws and regulations in the future, or that
the Company's business, financial condition or results of operations will not be
materially adversely affected by current or future environmental laws or
regulations.
ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of the Company's charter documents which will be
effective on the closing of this offering may make it more difficult for a
third-party to acquire control of the Company. These provisions may also limit
the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock. These provisions include the existence of
a classified Board of Directors (assuming the Company is not subject to Section
2115 of the California Corporations Code), the inability of stockholders to act
by written consent without a meeting, limits on the ability to remove directors
and certain procedures required for director nominations and stockholder
proposals. In addition, certain provisions of Delaware law may also delay or
make more difficult a merger, tender offer or proxy contest
17
<PAGE>
involving the Company. One such provision of the Delaware law prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years unless certain conditions are
met. In addition, the Company's Board of Directors is authorized to issue up to
10,000,000 shares of Preferred Stock without stockholder approval on such terms
as the Board determines. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock could therefore make it more difficult for a third-party to acquire a
majority of the Company's outstanding voting stock. In addition, the Preferred
Stock may have other rights senior to the Common Stock. As a result, the
issuance of the Preferred Stock could decrease the market value of the Common
Stock. See "Description of Capital Stock--Preferred Stock" and "--Delaware
Anti-Takeover Law and Certain Charter Provisions."
SIGNIFICANT INFLUENCE BY EXISTING STOCKHOLDERS
Following this offering, the Company's founders, directors and executive
officers and entities affiliated with them will beneficially own approximately
% of the Company's outstanding Common Stock ( % if the Underwriters'
over-allotment option is exercised). These stockholders, if acting together,
would be able to significantly influence all matters requiring approval by the
Company's stockholders, including the election of directors and the approval of
mergers or other business combination transactions. Such control could have the
effect of delaying or preventing a change in control. See "Principal
Stockholders."
NO PRIOR PUBLIC TRADING MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK
PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock. The initial public offering price will be determined through
negotiations between the Company and the representatives of the Underwriters.
The initial public offering price bears no relationship to earnings, asset
values, book value or any other recognized criteria of value. In addition,
prospective investors who purchase in this offering may not be able to sell the
shares of Common Stock at or above the initial public offering price.
Furthermore, the Company does not know the extent to which investor interest in
the Company will lead to the development of a trading market, or how liquid that
market might be.
The market price of the Company's Common Stock is likely to be highly
volatile. Certain factors may significantly affect the market price of the
Company's Common Stock, including actual or anticipated fluctuations in the
Company's operating results, regulatory developments, developments with respect
to clinical trials, announcements of technological innovations, new product
introductions by the Company or its competitors, developments with respect to
patents or proprietary rights, conditions and trends in the medical device and
other technology industries, changes in financial estimates by securities
analysts, changes in management or key personnel, general market conditions and
other factors. In addition, the stock market has from time to time experienced
significant price and volume fluctuations that have particularly affected the
market prices for the common stocks of early stage companies. These types of
broad market fluctuations may adversely affect the market price of the Company's
Common Stock. In the past, following periods of volatility in the market price
of a company's securities, securities class action litigation has often been
initiated against that company. Such litigation could result in substantial
costs and a diversion of management's attention and resources and could
materially adversely affect the Company's revenues and earnings. Any adverse
determination in such litigation could also subject the Company to significant
liabilities.
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECTS ON FUTURE MARKET PRICE
Sales of substantial amounts of Common Stock in the public market following
this offering could adversely affect the market price of the Common Stock. The
number of shares of Common Stock available for sale in the public market is
limited by restrictions under the Securities Act of 1933, as amended (the
"Securities Act"). In addition, all holders of outstanding shares of Common
Stock have agreed not to sell
18
<PAGE>
or otherwise dispose of any of their shares for a period of 180 days after the
date of this Prospectus. Morgan Stanley & Co. Incorporated may at its sole
discretion and at any time without notice release all or any portion of these
securities subject to such lock-up agreements. In addition to the
shares of Common Stock to be sold in this offering, there will be 20,874,779
shares of Common Stock outstanding as of the date of this Prospectus (assuming
no exercise of the Underwriters' over-allotment option). All of these shares are
"restricted" shares under the Securities Act. As a result of the lock-up
agreements described above and the provisions of Rules 144(k), 144 and 701, the
restricted shares will be available for sale in the public market as follows:
(i) no shares will be eligible for immediate sale on the date of this Prospectus
and (ii) approximately 18,447,659 shares (excludes approximately 2,693,361
shares subject to repurchase by the Company and includes approximately 255,241
shares subject to outstanding vested options and 11,000 shares subject to an
outstanding warrant) will be eligible for sale 180 days after the date of this
Prospectus upon expiration of lock-up agreements.
In addition, the Company intends to file a registration statement on Form
S-8 with respect to the shares of Common Stock issuable upon exercise of options
under the Company's option plans. The Company's option plans together authorize
the issuance of options to purchase 9,040,000 shares of Common Stock. As of
March 31, 1998, there were options to purchase 3,554,862 shares of Common Stock
that have been issued under such option plans. Upon filing of the Form S-8
registration statement, the holders of such options may, subject to vesting
requirements, exercise and sell their shares immediately without restriction,
except for affiliates who are subject to certain volume limitations and manner
of sale requirements under Rule 144. Upon completion of this offering, the
holders of approximately 14,037,500 shares of Common Stock will be entitled to
certain rights with respect to registration of such shares under the Securities
Act. If such holders cause a large number of securities to be registered and
sold in the public market after the lock-up agreements expire, such sales could
cause the market price for the Common Stock to decline. See "Description of
Capital Stock--Registration Rights," "Shares Eligible for Future Sale" and
"Underwriters."
IMMEDIATE AND SUBSTANTIAL DILUTION IN NET TANGIBLE BOOK VALUE; ABSENCE OF
DIVIDENDS
Purchasers participating in this offering will experience immediate and
substantial dilution in the net tangible book value of the Common Stock from the
assumed initial public offering price of $ a share. Additional dilution is
likely to occur upon the exercise of any options and warrants that the Company
has granted. The Company has never paid dividends and does not expect to pay
dividends in the foreseeable future. See "Dilution" and "Dividend Policy."
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Common
Stock offered hereby are estimated to be $ million ($ million if the
Underwriters' over-allotment option is exercised in full), at an assumed initial
public offering price of $ per share after deducting underwriters' discounts
and commissions and estimated offering expenses payable by the Company.
The Company anticipates using approximately $ million of the net proceeds
from this offering for research and development of its products, including
clinical trials and approximately $ million for manufacturing scale-up,
including the purchase of production equipment and tooling, and hiring and
training of manufacturing personnel. Manufacturing scale-up also includes
implementation of processes and procedures to maintain compliance with federal
QSR requirements. Approximately $ million of the net proceeds will be used
for expansion of marketing and sales capabilities, including hiring and training
field sales representatives and field clinical specialists who will provide
training in the hospitals that purchase the Company's products. Finally, $5.0
million will be used as a partial payment of license fees due under an exclusive
license with IBM. The balance of the net proceeds will be used for working
capital and general corporate purposes. The amounts and timing of the
expenditures for these purposes may vary significantly depending on numerous
factors, such as the progress of the Company's research and development efforts,
including the progress and scope of clinical trials, actions related to
regulatory matters, technological advances, determinations as to commercial
potential and the status of competitive products. In addition, the Company's
research and development expenditures will vary as projects are added, extended
or terminated. The Company may also use a portion of such net proceeds to
acquire or invest in businesses, products and technologies that are
complementary to those of the Company, although no such acquisitions are planned
or being negotiated as of the date of this Prospectus, and no portion of the net
proceeds has been allocated for any specific acquisition.
The Company believes that its available cash, cash equivalents, short-term
investments, together with the net proceeds of this offering and the interest
thereon, will be sufficient to meet its capital requirements at least for the
next 12 months. Pending application of the net proceeds as described above, the
Company intends to invest the net proceeds in short-term, interest-bearing,
investment-grade securities.
DIVIDEND POLICY
While the Company is not subject to any contractual restrictions on the
payment of dividends, the Company has never paid cash dividends on its Common
Stock. The Company presently intends to retain earnings for use in the operation
and expansion of its business, and therefore does not anticipate paying any cash
dividends in the foreseeable future.
20
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998, (i) on an actual basis and (ii) as adjusted to give effect to the sale
of shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $ per share (after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company), the conversion of all outstanding Preferred Stock into Common Stock
and the authorization of 10,000,000 shares of undesignated Preferred Stock and
50,000,000 shares of Common Stock upon the closing of this offering.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Capital lease obligations, noncurrent............................ $ 1,297 $ 1,297
Stockholders' equity:
Convertible Preferred Stock, $0.001 par value; 15,000,000
shares authorized, 14,037,500 shares issued and outstanding,
actual; 10,000,000 shares authorized, none issued and
outstanding, as adjusted..................................... 14 --
Common Stock, $0.001 par value; 35,000,000 shares authorized,
6,837,279 shares issued and outstanding, actual; 75,000,000
shares authorized, shares issued and outstanding, as
adjusted (1)................................................. 7
Additional paid-in capital..................................... 57,450
Deferred compensation.......................................... (2,185) (2,185)
Deficit accumulated during the development stage............... (35,304) (35,304)
--------- -----------
Total stockholders' equity................................... 19,982
--------- -----------
Total capitalization....................................... $ 21,279 $
--------- -----------
--------- -----------
</TABLE>
- ---------
(1) Based on the number of shares outstanding on March 31, 1998. Excludes (i)
977,250 shares of Common Stock issuable upon exercise of options outstanding
at a weighted average exercise price of $0.99 per share, (ii) an aggregate
of 785,138 shares available for future grants or purchases pursuant to the
Company's 1996 Equity Incentive Plan and (iii) 11,000 shares issuable upon
exercise of a warrant outstanding at an exercise price of $5.00 per share.
In April 1998, an additional 4,700,000 shares were reserved for future
grants or purchases pursuant to the Company's 1998 Equity Incentive Plan,
1998 Employee Stock Purchase Plan and 1998 Non-Employee Directors' Stock
Option Plan.
21
<PAGE>
DILUTION
The pro forma net tangible book value of the Company, as of March 31, 1998
was $20.0 million or $0.96 per share of Common Stock. Pro forma net tangible
book value per share represents the amount of total tangible assets less total
liabilities divided by the number of shares of Common Stock outstanding at that
date. After giving effect to the sale by the Company of the shares of
Common Stock being offered hereby at an assumed initial public offering price of
$ per share and after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company, the Company's pro forma net
tangible book value as of March 31, 1998, would have been $ or $ per
share. This represents an immediate increase in pro forma net tangible book
value of $ per share to existing stockholders and an immediate dilution of
$ per share to new public investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $
---------
Pro forma net tangible book value per share at March 31,
1998........................................................ $ 0.96
Increase per share attributable to new public investors.......
---------
Pro forma net tangible book value per share after offering......
---------
Dilution per share to new public investors...................... $
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
existing stockholders and by the new public investors purchasing shares in this
offering (at an assumed initial public offering price of $ per share and
before deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CASH CONSIDERATION
----------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......................... 20,874,779% $ 53,531,000% $
New public investors........................... $
------------ --------- ------------- ---------
Total...................................... 100.0% $ 100.0%
------------ --------- ------------- ---------
------------ --------- ------------- ---------
</TABLE>
The foregoing computations assume no exercise of stock options or warrants
after March 31, 1998. As of March 31, 1998, there were outstanding (i) options
to purchase 977,250 shares of Common Stock, at a weighted average exercise price
of $0.99 per share and (ii) a warrant to purchase 11,000 shares of Common Stock
at an exercise price of $5.00 per share. In addition, as of March 31, 1998,
there were an aggregate of 785,138 shares available for future grants or
purchases pursuant to the Company's 1996 Equity Incentive Plan. In April 1998,
an additional 4,700,000 shares were reserved for future grants or purchases
pursuant to the Company's 1998 Equity Incentive Plan, 1998 Employee Stock
Purchase Plan and 1998 Non-Employee Directors' Stock Option Plan. To the extent
that any shares available for issuance upon exercise of outstanding options or
the warrant or reserved for issuance under the Company's stock plans are issued,
there will be further dilution to new public investors.
22
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's Financial Statements and the Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The statements of operations data for the
period from inception (November 9, 1995) through December 31, 1996 and the year
ended December 31, 1997 and the balance sheet data as of December 31, 1996 and
1997 are derived from financial statements of the Company that have been audited
by Ernst & Young LLP, independent auditors, and are included elsewhere in this
Prospectus. The statements of operations data for the three months ended March
31, 1997 and 1998 and the period from inception (November 9, 1995) to March 31,
1998 are derived from unaudited financial statements included elsewhere in this
Prospectus. The unaudited financial statements have been prepared on the same
basis as the audited financial statements and, in the opinion of management,
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the Company's operating results and
financial position for such periods. The Company's operating results are not
necessarily indicative of the results to be expected for any other interim
period or any future year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(NOVEMBER 9, THREE MONTHS ENDED (NOVEMBER 9,
1995) TO YEAR ENDED MARCH 31, 1995) TO
DECEMBER 31, DECEMBER 31, -------------------- MARCH 31,
1996(1) 1997 1997 1998 1998
------------- ------------ --------- --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Operating costs and expenses:
Research and development........................ $ 2,934 $ 14,282 $ 1,793 $ 6,764 $ 23,980
General and administrative...................... 951 4,434 686 1,627 7,012
Technology license.............................. -- 6,000 -- -- 6,000
------------- ------------ --------- --------- ------------
Total operating costs and expenses............ 3,885 24,716 2,479 8,391 36,992
------------- ------------ --------- --------- ------------
Loss from operations.............................. (3,885) (24,716) (2,479) (8,391) (36,992)
Interest income, net.............................. 198 1,114 70 376 1,688
------------- ------------ --------- --------- ------------
Net loss.......................................... $ (3,687) $ (23,602) $ (2,409) $ (8,015) $ (35,304)
------------- ------------ --------- --------- ------------
------------- ------------ --------- --------- ------------
Historical net loss per share:
Basic and diluted net loss per share............ $ (2.86) $ (11.24) $ (1.45) $ (2.53)
------------- ------------ --------- ---------
------------- ------------ --------- ---------
Shares used in computing basic and diluted net
loss per share................................ 1,287 2,100 1,662 3,169
------------- ------------ --------- ---------
------------- ------------ --------- ---------
Pro forma net loss per share:
Pro forma basic and diluted net loss per share.. $ (1.85) $ (0.47)
------------ ---------
------------ ---------
Shares used in computing pro forma basic and
diluated net loss per share................... 12,730 17,207
------------ ---------
------------ ---------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------- AS OF MARCH
1996 1997 31, 1998
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments................................ $ 1,494 $ 32,674 $ 26,303
Working capital.................................................................. 1,045 25,424 17,792
Total assets..................................................................... 2,289 35,674 30,107
Capital lease obligations, noncurrent............................................ -- 897 1,297
Deficit accumulated during the development stage................................. (3,687) (27,289) (35,304)
Total stockholders' equity....................................................... 1,770 27,331 19,982
</TABLE>
- ----------
(1) The Company's statement of operations data for the period from inception
(November 9, 1995) to December 31, 1995 is not presented separately as the
Company's operations during that period were not material. See Note 1 of
Notes to Financial Statements.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN
THIS PROSPECTUS. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE FORWARD-LOOKING
STATEMENTS OR SUCH RISK FACTORS. THE FOLLOWING DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Since its inception in November 1995, the Company has been engaged in the
development of products that are designed to provide the flexibility of open
surgery while operating through ports. The Company believes that MIS surgery
decreases patient trauma and postoperative pain and reduces surgical
complications, length of hospital stay and total treatment costs. The Company is
a development-stage company, has generated no revenue from product sales and has
experienced significant operating losses. As of March 31, 1998, the Company had
an accumulated deficit of $35.3 million. To date, the Company has engaged
primarily in researching, developing, testing and pursuing regulatory clearances
for its products. The Company had 23, 86 and 100 employees as of December 31,
1996 and December 31, 1997 and March 31, 1998, respectively. The Company expects
to expend substantial additional funds, increase personnel and continue to incur
significant operating losses for the foreseeable future as it continues to fund
clinical trials in support of regulatory approvals, expands research and
development activities, establishes commercial-scale manufacturing capabilities
and expands sales and marketing activities.
To date, the Company has obtained clearance from the FDA to market its
surgeon's console, patient-side cart and certain blunt resposable instruments.
The Company has not obtained clearance or approval from the FDA to market
certain other resposable instruments necessary for performing most surgical
procedures, including scissors, scalpels, forceps/pickups, needle holders, clip
appliers and electrocautery. The Company has submitted an application to the FDA
for clearance or approval of such instruments; however, substantial clinical
data is required before the FDA will consider giving such clearance or approval.
The Company will not generate any significant revenue in the United States until
such time, if ever, as these instruments obtain FDA clearance or approval. In
addition, the Company will not generate any significant revenue from
international sales until the Company receives comparable international
regulatory approvals. Even if the Company obtains such United States or foreign
clearance or approval, there can be no assurance that the Company will be
capable of manufacturing its products in commercial quantities at acceptable
costs or that its products will be successfully commercialized or will achieve
market acceptance. See "Risk Factors--Uncertainty of Market Acceptance; Training
Requirements," "--Need for Federal and State Regulatory Clearance or Approval,"
"--Lack of International Regulatory Clearance or Approval" and
"Business--Government Regulation."
The Company expects that its research and development expenses will increase
substantially as the Company continues developing its products and conducts
clinical trials. In addition, the Company does not have any experience in
manufacturing any products in commercial quantities and has no experience in
marketing or selling such products. If the Company receives FDA clearance or
approval, it will need to expend significant capital resources and develop
manufacturing expertise to establish large-scale manufacturing capabilities.
This investment is likely to result in low margins, if any, in its initial
manufacturing phase. Furthermore, manufacturers often encounter difficulties in
scaling up production of new products, including problems involving production
yields, quality control and assurance, component supply shortages, shortages of
qualified personnel, compliance with FDA regulations and the need for further
FDA approval of new manufacturing processes. In addition, if FDA clearances or
approvals are received, the Company intends to market its products primarily
through a direct sales force in the United
24
<PAGE>
States and internationally. Establishing a marketing and direct sales capability
sufficient to support sales in commercial quantities will require substantial
efforts and require significant management and financial resources which is
likely to result in a substantial increase in general and administrative
expenses over historical amounts. See "Risk Factors--Limited Manufacturing
Experience; Scale-Up Risk," "--Limited Sales, Marketing and Distribution
Experience," "Business--Marketing and Distribution" and "-- Manufacturing."
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 1997
RESEARCH AND DEVELOPMENT. Research and development expenses include costs
associated with product research, prototype development, clinical trials,
purchase of laboratory supplies, pursuing regulatory approvals and compensation
and other overhead costs associated with regulatory, clinical and engineering
personnel. In addition, manufacturing startup costs are included in research and
development during the development stage of the Company. Research and
development expenses increased 277% to $6.8 million for the three months ended
March 31, 1998 from $1.8 million for the three months ended March 31, 1997. This
increase was primarily attributable to increased costs associated with the
hiring of additional engineering, regulatory and clinical personnel and
increased prototype development and production costs. The Company believes that
research and development expenditures will increase in the future as the Company
invests in further developing its products, expands clinical research activities
and increases its research and development efforts related to new products and
technologies.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
payroll and personnel expenses for sales, marketing, senior management and
administrative personnel, legal and professional fees for patent and other
matters and marketing materials. General and administrative expenses increased
137% to $1.6 million for the three months ended March 31, 1998 from $686,000 for
the three months ended March 31, 1997. The increase was primarily attributable
to the costs related to expansion of administrative, finance, information
systems, sales and marketing functions and increased legal and professional fees
related to the filing and registration of the Company's patents. General and
administrative expenses are expected to increase in the future to support the
Company's expanding business activities and the additional costs expected to be
incurred as a publicly-traded company.
DEFERRED COMPENSATION. The Company recorded deferred compensation
representing the difference between the exercise price of options granted and
the deemed fair market value of its Common Stock at the time of grant for
financial reporting purposes. Deferred compensation of approximately $4.1
million was recorded through March 31, 1998, of which approximately $1.9 million
has been amortized to research and development expense and general and
administrative expense and $2.2 million will be amortized over the remaining
vesting periods of the options, generally four years from the date of grant.
INTEREST INCOME, NET. Net interest income increased 437% to $376,000 for
the three months ended March 31, 1998 from $70,000 for the three months ended
March 31, 1997. The increase resulted from increased interest income earned on
higher average cash, cash equivalent and short-term investment balances as a
result of sales of equity securities of the Company, partially offset by
interest expense in connection with increased equipment lease financing.
NET LOSS. The Company recognized net loss of $8.0 million and $2.4 million,
an increase of 233%, for the three months ended March 31, 1998 and 1997,
respectively.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE PERIOD FROM INCEPTION (NOVEMBER
9, 1995) TO DECEMBER 31, 1996
RESEARCH AND DEVELOPMENT. Research and development expenses increased 387%
to $14.3 million in 1997 from $2.9 million in 1996. The increase in research and
development expenses was primarily
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attributable to increased payroll and personnel expenses for additional
regulatory, clinical and engineering personnel for the design, development and
testing of the Company's products, increased purchases of laboratory supplies,
increased equipment and leasehold improvement depreciation, increased facilities
expenses associated with the Company's move to its present facility and
increased costs related to the manufacture of prototype systems to be placed at
clinical sites in the United States and Europe.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
366% to $4.4 million in 1997 from $1.0 million in 1996. The increase in general
and administrative expenses was primarily attributable to increased personnel
costs as the Company established and expanded the finance, information systems,
sales and marketing, and human resource functions, increased costs associated
with facilities and related services supporting expanding operations and
increased legal and professional fees in connection with the filing and
registration of the Company's patents.
TECHNOLOGY LICENSE. Technology license expense of $6.0 million was
recognized in 1997 in conjunction with the execution of the IBM License in
December 1997. In conjunction with the execution of the IBM License, a payment
of $1.0 million was made in December 1997. The IBM License also provides that
the Company pay an additional $5.0 million within 10 days after the closing of
the first underwritten public offering of the securities of the Company but in
any event not later than September 1, 1998, which date may be extended until
October 1, 1998, upon a showing of good cause by the Company. See Note 6 of
Notes to Financial Statements.
INTEREST INCOME, NET. Net interest income increased 463% to $1.1 million in
1997 from $198,000 in 1996. The increase resulted from increased interest income
earned on higher average cash, cash equivalent and short-term investment
balances, partially offset by increased interest expense in connection with
increased equipment lease financing.
NET LOSS. The Company recognized net losses of $23.6 million and $3.7
million, an increase of 540%, in 1997 and 1996, respectively.
NET OPERATING LOSS AND RESEARCH TAX CREDIT CARRYFORWARDS. As of December
31, 1997, the Company's reported net operating loss carryforwards were
approximately $13.1 million and $12.5 million for federal and state income tax
purposes, respectively. The Company's federal and state research tax credit
carryforwards were approximately $900,000. The state and federal net operating
loss carryforwards will expire at various dates from 2004 through 2012 if not
utilized. The utilization of such carryforwards may be subject to a substantial
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code of 1986, as amended, and similar state provisions. The annual
limitation may result in the expiration of net operating losses before
utilization.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
sales of Preferred Stock yielding net proceeds of approximately $52.3 million,
and equipment lease financing arrangements yielding approximately $2.0 million.
The equipment lease arrangements provide financing to the Company at specified
interest rates for periods of up to 48 months, by which time the principal is
repaid to the lessor. To add equipment to the lease line, the Company provides
invoices and descriptions of capital equipment purchases to the lessor who, in
turn, provides financing for the equipment at the invoice cost. The Company has
granted the lessor a security interest in all equipment leased under this
arrangement. As of March 31, 1998, the Company had cash, cash equivalents and
short-term investments of $26.3 million and working capital of $17.8 million.
Net cash used in operating activities was approximately $3.1 million, $14.9
million and $6.1 million in 1996 and 1997 and the three months ended March 31,
1998, respectively. For such periods, net cash used in operating activities
resulted primarily from net losses.
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Net cash used in investing activities was approximately $898,000, $18.4
million and $4.0 million in 1996 and 1997 and the three months ended March 31,
1998, respectively. The net cash used in investing activities was attributable
to capital expenditures and the purchase of short-term investments.
Net cash provided by financing activities was approximately $5.5 million,
$48.9 million and $700,000 in 1996 and 1997 and the three months ended March 31,
1998, respectively. The net cash provided by financing activities was primarily
attributable to the sale of Preferred Stock and proceeds from the Company's
equipment lease financing arrangement.
As of March 31, 1998, the Company had capital equipment of $4.6 million less
accumulated depreciation of $1.1 million to support its clinical, research,
development, manufacturing and administrative activities. The Company has
financed approximately $2.0 million from capital lease obligations through March
31, 1998. For the next twelve months, the Company expects capital expenditures
to increase substantially as it acquires equipment to support the planned
expansion of manufacturing capabilities. Among these planned expenditures are
tooling costs for production and an enterprise-wide resource planning system.
The Company's future liquidity and capital requirements will increase,
depending upon numerous factors, including the extent of the Company's future
operating losses, the level and timing of future revenues and expenditures, the
progress of its product development efforts, the progress and scope of clinical
trials, actions relating to regulatory matters, the costs and timing of
expansion of product development, manufacturing and sales and marketing
activities, the extent to which its products gain market acceptance, the price
of the Company's products and competitive developments. Although the Company
believes that the proceeds from this offering together with interest income and
current cash balances will be sufficient to meet the Company's operating and
capital requirements for at least the next 12 months, there can be no assurance
that the Company will not require additional financing sooner. The Company's
forecast of the period of time through which its financial resources will be
adequate to support its operations is a forward-looking statement that involves
risks and uncertainties, and actual results could vary. The Company's belief is
based on its current operating plan, which could change in the future and
require additional funding sooner than anticipated. Even if the Company has
sufficient cash for its current operating plan, it may seek to raise additional
capital because of favorable market conditions or other strategic factors. In
addition to the increasing operating expense, if the Company meets its current
revenue plan, working capital requirements will also increase substantially for
the foreseeable future. The Company may be required to raise additional funds
through public or private financing or other arrangements. There can be no
assurance that such additional funding, if needed, will be available on terms
attractive to the Company, or at all. Furthermore, any additional equity
financing may be dilutive to stockholders, and debt financing, if available, may
involve restrictive covenants. The failure of the Company to raise capital when
needed could have a material adverse effect on the Company's business, financial
position and results of operations. See "Risk Factors--Need for Additional
Capital."
YEAR 2000 COMPLIANCE
The widespread use of computer programs that rely on two-digit date programs
to perform computations and decision-making functions may cause computer systems
to malfunction in the year 2000 and lead to significant business delays and
disruptions. Intuitive has addressed the issue of year 2000 compliance in both
its internal information systems and its products. Based upon its design and
testing to date, the Company believes that it is fully year 2000 compliant. The
Company has made inquiries regarding the year 2000 issue of its significant
suppliers. Based upon such inquiries and a review of the Company's systems, the
Company does not believe year 2000 issues will have a material adverse impact
upon its business. However, there can be no assurance that this will be the
case.
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BUSINESS
INTRODUCTION
Intuitive designs and manufactures proprietary products which it believes
represent a fundamentally new generation of technology for surgery. This new
generation of surgery, INTUITIVE surgery, is believed by the Company to
represent an advance similar in scope to the previous two generations of
surgery--open surgery and minimally invasive ("MIS") surgery. The Company's
technology seamlessly translates the surgeon's natural hand movements on
instrument handles at a console into corresponding micro-movements of
instruments positioned inside the patient through small puncture incisions, or
"ports." Intuitive believes that its technology provides the surgeon with the
range of motion and fine tissue control possible with open surgery, while
simultaneously allowing the surgeon to work through the ports of MIS surgery.
Although open surgery is still commonly performed and is used in almost
every area of the body, the large incisions required create significant trauma
to the patient, resulting in long hospitalization and recovery times, high
hospitalization costs, as well as significant pain and suffering. Over the past
several decades, MIS surgery has reduced trauma to the patient by allowing
surgery through ports rather than large incisions, resulting in shorter recovery
times and reduced hospitalization costs. MIS surgery has been widely adopted in
certain surgical procedures, but it has not been widely adopted for complex
procedures. The Company believes this slow adoption for complex procedures has
occurred because surgeons generally find MIS operative techniques more difficult
to learn and perform and less precise than open surgery for fine tissue
manipulations such as dissecting and suturing. Factors that make MIS techniques
more difficult or less precise include backward instrument movements, restricted
range of motion, magnified hand tremors, exaggerated instrument movements and
poor visualization.
INTUITIVE surgery overcomes many of the limitations of existing MIS surgery
by utilizing a broad technology platform consisting of computer hardware,
software, algorithms, mechanics and optics to perform fine tissue manipulation
through ports in many parts of the body. Using Intuitive's technology, surgeons
perform surgical procedures while seated comfortably at a console viewing a 3-D
image of the surgical field. The surgeon's hands grasp the instrument handles
below the display in their normal orientation with respect to the surgeon's
eyes, and the Company's technology seamlessly translates these movements into
precise real-time microsurgical movements of electromechanical arms and
instruments inside the patient. The Company's technology is also designed to
give surgeons the perception that their hands are inside the patient, directly
holding instruments--even though their hands are outside--and to give surgeons
the perception that the surgical field is being directly visualized instead of
being viewed through an endoscope.
An important advantage of the Company's technology is that surgeons can
learn to manipulate Intuitive's instruments with only a few minutes of training,
allowing surgeons to focus on the clinical procedure. When performing procedures
that the surgeon has previously performed only with open surgical techniques,
the Company believes that the surgeon will have to learn where to place ports
and how to approach the operation but will generally not have to relearn how to
perform basic tissue manipulations. The Company believes that tissue
manipulations using its products can be as natural to the surgeon as hand
movements in open surgery. As a result, the Company believes its products will
make a broad range of open surgical procedures suitable for INTUITIVE surgery,
with significantly less patient trauma and post-operative pain and shorter
recovery times.
The Company's strategy is to focus initially on the cardiac surgery market
because (i) there are a large number of procedures concentrated in a small
number of hospitals that can be targeted by a focused sales force and field
organization, (ii) while approaches to these procedures have been developed that
are somewhat less invasive than open surgery, they are difficult and only
account for a small minority of cardiac surgery procedures being performed and
(iii) no existing technology is able to accomplish a full cardiac procedure
through ports. The Company believes that its technology can help surgeons
accomplish
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cardiac surgery procedures more easily, more accurately and with less trauma to
the patient than existing approaches. Cardiac surgery procedures are among the
most precise and demanding in all of surgery. As such, the Company believes that
if its technology is adopted for cardiac surgery, surgeons will gain confidence
that Intuitive's technology also can be used for less demanding procedures in
general and other surgery.
The Company plans to derive its revenues from the direct sale of two types
of interlinked proprietary products (i) a surgeon's console and a patient-side
cart which holds the electromechanical arms and (ii) a range of "resposable"
instruments such as scissors, forceps and electrocautery. The resposable
instruments are resterilizable and the number of procedures that each instrument
can perform is controlled by a proprietary electronic interlock. This feature
will allow the Company to limit the number of uses of each instrument to less
than its tested usage so that the instrument's performance meets specifications
during each procedure. By defining the number of uses for each instrument, the
Company can effectively price its resposable instruments on a per-procedure
basis.
Intuitive believes that it is the leading company in third generation
surgery. In March 1997, surgeons using Intuitive's technology successfully
performed what the Company believes to be the first third generation surgery on
humans. In May 1998, surgeons using Intuitive's technology successfully
performed the first mitral valve repair, the first dissection of an internal
mammary artery and the first coronary anastomosis ever performed with third
generation surgical technology. Intuitive believes that its development efforts
represent the largest effort devoted to third generation surgery of any company
in the world today. Intuitive owns or has licensed 38 issued and 8 allowed
patents, including patents from SRI International and IBM, companies which in
the late 1980s were early pioneers in the research of third generation surgery.
BACKGROUND
The Company believes that there are three fundamental generations of
surgical techniques (1) open surgery, which began its modern era in the 19th
century, (2) minimally invasive surgery, also known as MIS surgery, which has
developed over the past several decades, and (3) INTUITIVE surgery, which the
Company is in the process of developing. Each generation of surgery has been
enabled by the development of an important technology or set of related
technologies.
FIRST GENERATION: OPEN SURGERY
While surgery in one form or another has been practiced since the beginning
of recorded history, modern open surgical technique was enabled in the second
half of the 19th century because of the fusion of two breakthrough technological
developments: anesthesia, developed beginning in the 1840s, and sterile
technique, developed in the 1870s.
Using open surgical techniques, a surgeon generally creates an incision in
the body large enough to allow both direct visualization of the operating field
and the insertion of at least two human hands to manipulate the patient's
tissues. Many different types of hand-held instruments such as the scalpel,
needle driver, retractor and clamp have been developed to enable the surgeon to
manipulate tissue precisely in almost every area of the body, and to accomplish
complicated movements such as suturing.
The large incisions generally used in open surgery create very significant
trauma to the patient, resulting in long hospitalization and recovery times,
high hospitalization costs, as well as significant pain and suffering. However,
because the human hand has an extremely wide range of motion and can grip open
surgical instruments near their tips to allow very precise and natural tissue
manipulations, open surgical technique is generally the most precise and the
easiest technique for the surgeon to perform. Despite the trauma and other
drawbacks of open surgery, a significant number of the surgical procedures in
the United States are open surgical procedures.
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SECOND GENERATION: MINIMALLY INVASIVE SURGERY
Minimally invasive surgical techniques have evolved over the past several
decades. The objective of MIS surgery is to substantially reduce trauma to the
patient by making small puncture incisions, or "ports," generally resulting in
shorter hospitalization and recovery times, reduced hospitalization costs and
substantially less pain and suffering.
While a number of new technologies have enabled the growth of MIS surgical
procedures, the most fundamental have been (i) the development of endoscopes for
viewing a surgical field through a small incision and (ii) the development of
long, hand-held instruments that can manipulate tissues through ports.
The long hand-held instruments generally used in MIS surgery are inserted
into the patient through ports, which are approximately ten millimeters in
diameter. These ports are created in the abdominal wall, chest wall, or other
areas of the body in locations designed to provide access to the organs on which
the surgeon intends to operate. Thus, the six to twelve inch incision (15 to 30
centimeters) typically required for open surgery is replaced with three or more
ports, each of approximately ten millimeters in diameter. Through the ports,
surgeons insert an endoscope through which they visualize the operation via a
television monitor. They also insert a variety of instruments through these
ports which surgeons use to perform the operation and manipulate tissue.
The instruments used for MIS surgery typically have a tip which is similar
to the corresponding tip of an instrument used in open surgery, such as a
forceps or scissors. The tip is connected to a 15 to 18 inch tube (35 to 45
centimeters), which is connected to a handle. To perform the procedure, the
surgeon inserts the instrument through the port and manipulates the handle from
the outside of the patient's body.
EXISTING LIMITATIONS OF MINIMALLY INVASIVE SURGERY. The Company believes
that surgeons generally find MIS surgical techniques more difficult to learn and
perform than open surgery for reasons that include the following:
"BACKWARD" INSTRUMENT MOVEMENTS. Existing MIS instruments are essentially
long rigid levers which rotate around a fulcrum located at the port created in
the body wall. As a result, the "working end" of the instrument moves in the
opposite direction from the hand of the surgeon. For example, to move the
working end left, surgeons move the instrument handle to the right; to move the
working end up, surgeons move the instrument handle down. Surgeons must relearn
their hand-eye coordination to translate this backward environment into the
required instrument movements.
RESTRICTED MOTIONS. Existing MIS instruments provide surgeons less
flexibility, dexterity and range of motion than their own hands which are used
in an open surgical procedure. For example, MIS instruments in widespread use
today have no joints near their tips to provide the MIS-equivalents of the
real-time wrist motions used throughout open surgery to perform manipulations
such as reaching behind tissue and suturing. As a result, surgeons performing
MIS surgery with existing technology find it difficult to perform certain
necessary tissue manipulations through ports, such as fine dissection or
suturing.
MAGNIFIED TREMORS AND EXAGGERATED INSTRUMENT MOVEMENTS. In open surgery,
the instruments are held near their tips, allowing fine movements of the
surgeon's hands to be directly translated into fine movements of the
instruments. However, the lever arm of the 15 to 18 inch instruments (35 to 45
centimeters) used in MIS procedures magnifies the surgeon's hand movements
making fine tissue manipulation substantially more difficult. As a result, the
inherent tremor in a surgeon's hands is magnified, and the exaggerated motor
movements caused by MIS instruments make fine tissue manipulation more difficult
for the surgeon.
POOR VISUALIZATION. The video image from the endoscope is usually displayed
on a video monitor. The surgeon typically must look up and away from the patient
and the plane of the instruments to view the monitor. This can give the MIS
surgeon a feeling of being disconnected from the surgical field and the
instruments. In addition, most endoscopes currently being used give the surgeon
a two-dimensional image.
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Although three-dimensional endoscopes exist, they typically have less resolution
and lower brightness than two-dimensional endoscopes, making it more difficult
for the surgeon to visualize fine structures.
For these reasons, as well as others, using existing MIS techniques and
associated hand-held MIS instruments is generally less precise and more
difficult for the surgeon than using open surgical techniques. This can be
illustrated by the current status of surgical techniques used to perform
coronary artery bypass graft procedures ("CABG").
In a CABG procedure, a blocked coronary artery is bypassed with a graft.
When available, an artery from the chest called the internal mammary artery
("IMA") is dissected from its natural position and grafted into place to perform
the bypass. When the IMA is not available, a saphenous vein from the leg is used
instead. The suturing of the graft to the coronary artery requires extremely
precise tissue manipulations, culminating in an "anastomosis"--the suturing of
the graft to the coronary artery to create near-perfect blood flow through the
graft and past the blockage in the coronary artery.
In the past several years, a number of companies have devoted considerable
resources to developing devices that help convert open CABG procedures with
approximately twelve inch incisions (30 centimeters) into procedures with three
to five inch incisions (seven to twelve centimeters) ("Modified CABG"). Some of
these devices facilitate procedures where the heart is stopped through a
catheter-accessed heart-lung bypass system, while others facilitate procedures
where the heart is allowed to remain beating. Although these companies have made
significant progress with Modified CABG both technically and in the marketplace,
clinicians today generally perform a small portion or none of these procedures
using ports. Generally, the port-based instruments available today lack the
dexterity required to perform complex surgery of this nature. Instead, surgeons
performing these new types of cardiac procedures generally make a three to five
inch incision (seven to twelve centimeters) between the ribs. They then
generally spread the incision and ribs with a device known as a retractor. Under
direct visualization through this retracted incision, surgeons can perform
anastomoses to bypass blocked arteries using modified versions of the
instruments used in open CABG surgery.
Because Modified CABG creates a substantial incision during part of the
procedure, it does not offer the patient the full benefits of an operation
completed through ports. Furthermore, these substantial incisions do not give
the surgeon as much access to certain tissues as is available in open CABG
surgery. This restricted access and other factors can make Modified CABG
relatively longer and more difficult to perform with precision than open CABG
surgery. In addition, the anastomoses between the grafts and the coronary
arteries are often more difficult to perform with Modified CABG than in open
surgery. This difficulty can cause concern among some surgeons because a
successful CABG procedure generally depends on the quality and precision of the
anastomoses.
Although some CABG procedures have been converted from open surgery to
Modified CABG and although similar changes have been made to other cardiac
procedures (collectively, "Modified Cardiac Surgery"), the conversion rate has
been slower than originally forecast. The Company believes that two important
factors account for the relatively slow conversion rate (i) surgeons generally
find that the existing MIS approaches are more difficult to learn and perform
than open cardiac surgery and (ii) patient demand for and benefits from Modified
Cardiac Surgery are not as substantial as they would be for fully ported cardiac
surgeries. A significant portion of the difficulty surgeons have in performing
Modified Cardiac Surgery derives from the need to perform fine tissue
manipulations such as dissection and anatomosis in the restricted space that the
three to five inch incisions (seven to twelve centimeters) provide. Using the
Company's technology, these necessary steps to perform a CABG procedure, may be
performed through ports.
MIS PROCEDURE CONVERSION RATES. Despite the limitations of existing MIS
techniques, a number of procedures are routinely performed as MIS procedures.
For example, laparoscopic cholecystectomy (removal of the gallbladder through
ports) could be learned by most surgeons after a moderate amount of retraining,
in part because of the anatomical location of the gallbladder and the relatively
gross tissue manipulations required. In the late 1980s and early 1990s,
laparoscopic cholecystectomy grew from a
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newly-introduced procedure to the "standard of care" in the United States over
approximately three years. Last year only 15% of cholecystectomies were
performed using open surgical techniques in the United States. The Company
believes that the limitations of MIS techniques did not prevent the rapid
conversion to laparoscopic cholecystectomy because large numbers of surgeons
could learn to perform the relatively simple tissue manipulations with
confidence. The conversion to laparoscopic cholecystectomy was rapid because of
reduced hospital stays, surgeon acceptance and patient preference.
The Company believes that the adoption rate of laparoscopic cholecystectomy
has not been replicated with subsequently introduced MIS procedures, despite
substantial patient benefits, because those new MIS procedures have been more
difficult to learn or perform. As a result of these difficulties, some complex
surgical procedures which are commonly performed using open surgery have not
been adapted to MIS techniques. Other complex surgical procedures, such as
hernia repair or Nissen fundoplication, have been performed by certain surgeons
using MIS techniques. However, the Company believes that these MIS procedures
are not being performed as often, or by as many surgeons, as they could be if
these complex procedures were easier to perform through ports. Surgeons began
performing Modified Cardiac Surgery approximately two years ago, and while such
procedures have established that Modified Cardiac Surgery is possible, more than
95% of cardiac surgery procedures are still performed using open surgery
techniques.
The chart below sets forth the percentage of selected procedures that were
still performed worldwide in 1997 using open surgical techniques:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
% PERFORMED USING OPEN SURGICAL TECHNIQUES
<S> <C> <C> <C> <C> <C>
Cardiac 96%
Hernia Repair 86%
Hysterectomy 80%
Gynecology (except Hysterectomy) 57%
Cholecystectomy 35%(1)
Cholecystectomy Gynecology Hysterectomy Hernia Repair Cardiac
(except Hysterectomy)
Number of Procedures Performed
Using Open Surgical Techniques: 631,000 1,442,000 936,000 1,232,000 1,026,000
Total Number of Procedures Performed: 1,804,000 2,540,000 1,170,000 1,430,000 1,065,000
(1) 15% in United States.
Source: Medical Data International, Inc.
</TABLE>
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THIRD GENERATION: INTUITIVE SURGERY
Intuitive's technology is designed to return to the surgeon the range of
motion and fine tissue control possible with open surgery, while simultaneously
allowing the surgeon to work through the ports used in MIS surgery. The Company
believes that such fine tissue manipulations are fundamental to many complex
surgical procedures which today are generally performed using open surgery.
Intuitive believes its products will make a broad range of open surgical
procedures newly suitable for minimally invasive approaches, and will increase
the surgeon's confidence and ease of use when performing procedures that have
already been adapted for MIS or Modified Cardiac Surgery. In addition, the
Company's technology may also allow surgeons to perform certain aspects of
surgical procedures with greater precision than is possible with open surgery.
The Company believes that its technology has the potential to change
surgical procedures in three basic ways:
NEW OPERATIONS WILL BE PIONEERED. A number of surgical procedures that
currently cannot be performed using MIS or modified surgical techniques will be
made suitable for conversion to techniques that use ports.
TODAY'S DIFFICULT MIS OPERATIONS WILL BECOME EASIER AND ROUTINE. Surgical
procedures that today are performed only rarely using MIS or modified surgical
techniques, by certain surgeons, will be performed routinely and with confidence
through ports using Intuitive's technology.
EXISTING HIGH-VOLUME MIS PROCEDURES WILL BECOME EASIER. Surgical procedures
that today are performed routinely using MIS techniques will be performed more
quickly and safely with Intuitive's technology.
In designing its products, the Company has focused on making the complexity
of its technology as transparent as possible to the user. The Company's
technology is designed to allow surgeons to perform procedures while seated at a
console, viewing a 3-D image of the surgical field through a high resolution
endoscope and display. The surgeon's hands grasp instrument handles below the
display in their normal orientation with respect to the surgeon's eyes.
Electromechanical arms mounted on a patient-side cart hold the Company's
resposable instruments that perform tissue manipulations, including cutting,
suturing, dissecting and holding tissue. The technology allows the surgeon's
natural hand movements on the instrument handles at the console to be translated
into corresponding micro-movements of the instruments positioned inside the
patient by the electromechanical arms. Further, the technology is designed to
give surgeons the visual perception that their hands are inside the patient,
directly holding the instruments-- even though they are outside--and gives the
perception that the surgical field is being directly visualized instead of being
viewed through an endoscope.
Using sophisticated computer hardware and software, proprietary know-how and
highly specialized microsurgical instruments, Intuitive has designed a broad
technology platform which it believes will allow fine tissue manipulation
through ports across many types of surgeries in many parts of the body, thus
overcoming many of the limitations of current MIS surgery. Most surgery requires
fine tissue manipulations, including blunt or sharp dissection, placement of
clips, staples, electrocautery and suturing. The Company believes that tissue
manipulations using Intuitive's products are as natural as hand movements in
open surgery. In the Company's experience, based on surgeon feedback in
pre-clinical studies and clinical trials, surgeons can learn to manipulate
Intuitive's instruments with only minutes of training, allowing them to focus on
the clinical procedure itself instead of on relearning how to manipulate tissue
using existing MIS instruments. When surgeons use Intuitive's technology to
perform procedures with which they are already familiar from using MIS or
modified surgical techniques, the Company believes that only a modest amount of
training will be required because the surgeon already knows where to place ports
and how to approach the tissue manipulations required for that procedure. When
performing INTUITIVE surgery that the surgeon has previously performed only with
open surgical techniques, the Company believes that the surgeon will have to
spend a relatively larger amount of time learning where
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to place ports and how to approach the tissue manipulations required, but will
not have to relearn how to perform basic tissue manipulations.
Intuitive believes that its technology can overcome many of the limitations
of existing MIS surgery, for the following reasons:
NATURAL INSTRUMENT MOVEMENTS. Intuitive's technology is designed to
directly transform the surgeon's natural hand movements outside the body into
corresponding micromovements inside the patient's body. For example, a hand
movement to the RIGHT outside the body causes the instrument inside the patient
to be moved to the RIGHT, eliminating the backward nature of existing MIS
surgery.
ENDOWRIST-TM- FLEXIBILITY. Intuitive's ENDOWRIST technology is designed to
provide surgeons with an instrument with a range of motion analogous to the
human wrist. These ENDOWRISTS are located near the tips of the instruments
inside the patient's body and the surgeon controls them in real-time with
natural wrist movements on the instrument handles outside the patient's body.
This capability is designed to allow surgeons, for example, to reach behind
tissues or suture with precision.
REDUCED TREMORS AND FINER MOTOR MOVEMENTS. Intuitive's technology is
designed to directly translate the surgeon's hand movements into a 1:1
correspondence INSIDE the body, unlike in existing MIS surgery, where the lever
arms of the 15 to 18 inch instruments (35 to 45 centimeters) can magnify the
surgeon's hand movements. With Intuitive's technology the surgeon can also use
"motion scaling," a feature which translates, for example, a four millimeter
hand movement OUTSIDE the patient's body into a one millimeter instrument
movement INSIDE the patient's body. Motion scaling is designed to allow greater
precision than is normally achievable in open surgery because of this
translation of a surgeon's hand movements at the console into finer movements of
the instruments inside the patient. In addition, Intuitive's technology is
designed to reduce or filter out the inherent tremor in a surgeon's hands.
IMMERSIVE-TM- 3-D VISUALIZATION. Intuitive's technology is designed to give
surgeons the perception that their hands and eyes are immersed in the surgical
field even though they are outside the body. As a result, the Company believes
that surgeons will no longer feel disconnected from the surgical field and the
instruments, as they currently do with MIS surgery. IMMERSIVE technology also
includes a 3-D endoscopic visualization system that has substantially higher
contrast and resolution than conventional 3-D endoscopic visualization systems.
The Company believes that these advantages, when integrated together in
Intuitive's products, give the patient the advantages of MIS surgery while
restoring to the surgeon the range of motion and fine tissue control possible
with open surgery.
INTUITIVE'S PRODUCTS
The Company plans to derive its revenues from the sale of two types of
interlinked proprietary products (i) a surgeon's console and a patient-side cart
and (ii) a range of "resposable" instruments.
SURGEON'S CONSOLE AND PATIENT-SIDE CART
The surgeon's console consists of a 3-D display that uses high resolution 14
inch monitors, and instrument handles through which the surgeon controls the
procedure. Using Intuitive's technology, a surgeon performs surgical procedures
while seated at the console, viewing a 3-D image of the surgical field. The
surgeon's hands grasp the instrument handles below the display, in their normal
orientation with respect to the surgeon's eyes. Using hardware, software,
algorithms, mechanics and optics contained in the console (as well as in other
components of the system), the technology is designed to seamlessly translate
the surgeon's hand movements to precise real-time microsurgical movements of the
electromechanical arms of the patient-side cart and the resposable instruments
inside the patient. The patient-side cart, which can be moved next to the
operating table, holds electromechanical arms that manipulate instruments inside
the patient. Three arms attached to the cart can be easily positioned, as
appropriate for each part of the surgery, and then locked into place. The first
two arms (one representing the left hand and one the right hand) hold the
Company's resposable instruments containing ENDOWRIST technology, which transmit
precise movements to the instrument tips. The third arm positions the endoscope.
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RESPOSABLE INSTRUMENTS
The Company plans to manufacture a variety of resposable instruments, each
customized for a different range of tissue manipulations used in different
surgical procedures. These resposable instruments are currently approximately
seven millimeters in diameter. The resposable instruments provide the mechanical
capability necessary for performing complex tissue manipulations through a port,
and mount onto the electromechanical arms that represent the left and right
hands. The resposable instruments incorporate ENDOWRIST technology. At their
tips, the various resposable instruments include forceps,
scissors, electrocautery, blunt dissectors, and other end effectors that the
Company believes will be readily familiar to the surgeon from open and MIS
surgery. Generally, a variety of resposable instruments will be selected and
used interchangeably during the surgery. Where the instrument tip needs to
incorporate a disposable component (for example, an absorbent swab), a
disposable insert will be provided by the Company.
The resposable instruments are resterilizable and reusable for a defined
number of procedures. A proprietary electronic interlock performs several
functions that help determine how the system and instruments work together. When
a resposable instrument is attached to an arm of the patient-side cart, the
interlock performs an electronic handshake which ensures that the instrument was
manufactured by the Company and recognizes the type and function of the
instrument and number of past uses. For example, the interlock recognizes which
instrument is a scissors and which is a blunt dissector and controls the unique
functions of different instruments as appropriate. In addition, the interlock
will not allow the instrument to be used for more than the prescribed number of
procedures. This feature will help the Company keep the number of uses of the
instrument lower than tested usage life of the resposable so that its
performance is up to specifications during each procedure. In addition, the
Company can sell the instrument for a fixed number of uses and effectively price
its resposable instruments on a per-procedure basis.
During a procedure, the patient-side cart is positioned next to the
operating table with the arms arranged to provide access to the initial ports
selected by the surgeon. The surgeon performs the procedure while sitting at the
surgeon's console, manipulating the instrument handles. When a surgeon needs to
change instruments, as is done many times during an operation, the instrument is
withdrawn using the handles at the console, in similar fashion to the way a
surgeon withdraws instruments from the patient in MIS surgery. A scrub nurse
standing near the patient removes the unwanted instrument from the
electromechanical arm attached to the patient-side cart and replaces it with the
new instrument, in a process designed to be rapid enough to not disturb the
natural flow of the procedure. As a result, the scrub nurse will play a similar
role to that played in open and MIS surgery. Different types of operations will
require different sets of resposable instruments, and the Company expects to add
new types of resposable instruments in the future to tailor its technology to
additional types of surgical procedures.
INTUITIVE'S STRATEGY
Intuitive believes that it is the leading company in third generation
surgery. In March 1997, surgeons used an early prototype employing Intuitive's
technology to successfully perform what the Company believes to be the first
third generation surgery on humans. In May 1998, surgeons using Intuitive's
technology successfully performed the first mitral valve repair, the first
dissection of an internal mammary artery and the first coronary anastomosis ever
performed with third generation surgical technology. Intuitive believes that its
development efforts represent the largest effort devoted to third generation
surgery of any company in the world today. Intuitive owns or has licensed 38
issued and 8 allowed patents, including patents from SRI International and IBM,
companies which in the late 1980s were early pioneers in the research of third
generation surgery. The Company's goal is to establish its technology as the
preferred means for performing complex surgery through ports and to become the
leader in delivering products and solutions for third generation surgery to
surgeons, hospitals and patients.
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Intuitive's goal is to maintain its leadership advantage by continuing to
develop and enhance its technology and deliver it to surgeons, hospitals and
patients. The Company intends to accomplish this by (i) focusing initially on
the cardiac surgery market, (ii) concentrating efforts on the institutions that
perform the greatest number of cardiac surgical procedures and (iii) expanding
later to non-cardiac surgical markets.
FOCUS FIRST ON CARDIAC SURGERY. Intuitive will focus initially on the
cardiac surgery market. The Company selected this market for a number of
reasons. There are over one million cardiac procedures performed in the world
annually, and a few types of procedures, such as CABG and cardiac valve repair,
account for the majority of procedures performed by cardiac surgeons. These
procedures are routinely performed in high volumes using open surgical
techniques. However, these open procedures cause considerable pain, morbidity
and long patient recovery times. Although Modified Cardiac Surgery has been
developed to address some of the drawbacks of open cardiac surgery, such
procedures currently account for a small minority of cardiac surgery procedures
being performed, and no existing technology is able to accomplish a full cardiac
procedure through ports. Further, the Company believes that its technology can
help surgeons accomplish these procedures more easily, more accurately and with
less trauma to the patient than Modified Cardiac Surgery. As a result, the
Company believes its technology can help accelerate the conversion of open
cardiac surgery procedures to INTUITIVE surgery. In addition, approximately 200
hospitals are responsible for 45% of cardiac surgery procedures performed in the
United States, and 500 hospitals are responsible for 75%. As a result, Intuitive
believes it can address the United States cardiac surgery market with a small,
focused sales force and field organization. Finally, the tissue manipulations
required for cardiac procedures are among the most precise and demanding in all
of surgery. As a result, Intuitive believes that if it can establish its
products in cardiac surgery, many surgeons will have confidence that the
Company's technology can subsequently be used for less demanding procedures in
general surgery and other areas.
Intuitive has already established relationships with a number of leading
cardiac surgeons through appointments to the Company's Scientific Advisory Board
and Clinical Advisory Board and through consulting arrangements where such
surgeons act as clinical investigators. These relationships with cardiac
surgeons have also resulted in the Company establishing informal relationships
with leading hospitals. The Company plans to complete the clinical development
of its initial products for cardiac surgery at sites selected from these and
other hospitals. Following receipt of required regulatory approvals, the Company
plans to begin manufacturing its products and targeting their initial sale to a
limited number of hospitals that perform a high volume of cardiac surgery.
FOCUS ON KEY INSTITUTIONS. The Company believes that it is more valuable to
have a smaller number of hospitals using its products routinely for certain
types of cardiac procedures than it is to have a larger number of hospitals
using its products on a sporadic basis. The Company plans to focus intensely on
working with its early-adopting hospitals until such hospitals and their
surgeons are comfortable in performing a substantial portion of their cardiac
procedures using the Company's products. Using public relations and other
techniques, the Company intends to assist hospitals in educating patients and
referring physicians as to the potential benefits of performing INTUITIVE
surgery. Through such efforts, the Company believes early-adopting hospitals
will benefit by increasing their market share of cardiac surgery procedures. In
addition, the Company expects these efforts to drive interest in INTUITIVE
surgery among competitive hospitals and physicians.
Many of these targeted United States hospitals have more than one surgical
suite devoted exclusively to cardiac surgery, and the largest 200 hospitals in
the United States have an average of over three such suites. The Company
believes that by concentrating on these large hospitals, it can leverage use of
its products in the first cardiac surgical suite at a given hospital into use in
additional suites of that hospital, thereby increasing the efficiency of its
field organization.
EXPAND TO NON-CARDIAC MARKETS. The 500 United States hospitals performing
the largest number of cardiac procedures also perform a large number of
non-cardiac surgical procedures, many of which are complex. The Company believes
this relationship also exists in Europe. Although the Company plans to
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focus on the United States and European cardiac surgery market for the
foreseeable future, it plans to eventually broaden its focus to non-cardiac
surgery using its platform technology. Most non-cardiac procedures are performed
in operating suites that do not perform cardiac surgery. The Company believes
that its initial efforts in marketing its products for non-cardiac procedures
will be focused on the large institutions where it has already sold its products
for cardiac surgery, further leveraging its institutional relationships and
field organization. As appropriate, the Company intends to develop relationships
with leading physicians and hospitals in non-cardiac surgical areas in order to
complete clinical development for a critical mass of procedures for each
surgical specialty that it targets.
CLINICAL CONTRIBUTIONS
CARDIAC SURGERY
The Company's initial focus will be in cardiac surgery. The Company's
technology is designed to perform through ports the fine tissue manipulations
required for cardiac surgery with the precision required to complete the
procedure. The Company believes that cardiac surgeons using its technology will
be able to accomplish these manipulations more easily and precisely than can be
accomplished with existing instruments for Modified Cardiac Surgery, and will
also eventually be able to accomplish many of these procedures through ports. In
addition, the Company believes motion scaling, ENDOWRIST technology and superior
visualization may make it possible for certain tissue manipulations to be
accomplished with even greater precision than is possible in open surgery. Some
of the contributions that Intuitive believes it can make to cardiac surgery are
as follows:
IMA DISSECTION. In a CABG procedure, a blocked coronary artery is bypassed
with a graft. When available, an artery from the chest called the internal
mammary artery ("IMA") is dissected from its natural position and grafted into
place to perform the bypass. Because the IMA is located on the underside of the
anterior surface of the thorax, dissection of the vessel is challenging using
existing surgical instruments through the three to five inch incision currently
used in Modified CABG. The Company's products have multiple joints that emulate
the surgeon's shoulders and elbows, allowing exact positioning of the
instruments inside the patient's thorax. In addition, the ENDOWRIST technology
permits the surgeon to reach behind the tissues for easier dissection of the
IMA. Thus, the Company believes that the IMA can be dissected with greater ease
and precision using Intuitive's technology. In addition, the Company believes
that its technology can be used to dissect the IMA using ports.
MULTI-VESSEL CORONARY ANASTOMOSIS. CABG surgery and Modified CABG demand
that the surgeon delicately dissect and precisely suture very small structures
(less than two millimeters) under significant magnification. These procedures
are difficult when performed in open surgery; they are even more difficult when
performed using an endoscopic or limited incision approach. Intuitive's
technology is designed to allow surgeons to perform scaled instrument movements
that may be even more precise than the movements used in open surgery, including
precise suturing of multiple coronary vessels, while viewing the surgical field
through a 3-D monitor. The combination of precision, superior visualization, use
of ports and maneuverability is designed to capture many of the advantages of
both open CABG and Modified CABG.
MITRAL AND AORTIC VALVE REPAIR/REPLACEMENT. Valve repair and replacement
surgeries are challenging even when using open surgical techniques. Significant
exposure of the surgical field is essential to the identification and precise
manipulation of valvular and intracardiac structures, and is key to successful
surgical outcomes with minimal complications. The limitations inherent in
modified cardiac valve surgery are similar to those in Modified CABG surgery
because the restricted surgical field made possible by the three to five inch
incisions make visualization and repetition of precise surgical movements
challenging. Replacement of valves will always require a small incision, even if
the majority of the procedure is eventually performed through ports using the
Company's technology because the replacement valve itself is too large to be
inserted into the chest through a port. The Company believes that its technology
will help cardiac surgeons perform valve replacement and repair procedures in
confined spaces with greater ease and precision than is possible with existing
modified approaches to these procedures. In addition, the motion scaling
capability of the Company's technology may make it possible for surgeons to
perform
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certain extremely fine tissue manipulations that are important in valve repair
surgery with greater precision than is possible even with open surgery,
expanding the ability of cardiac surgeons to repair some valves instead of
replace them.
NON-CARDIAC CLINICAL APPLICATIONS
Although the Company intends to focus its efforts on the cardiac surgery
market for the foreseeable future, the Company believes its technology will
enhance or enable a number of other procedures in a variety of surgical
specialties outside of cardiac surgery. Some of these applications include the
following:
AORTIC ANEURYSMS. A common vascular procedure is the repair of aortic
aneurysms--sacs formed by the dilation of the wall of an artery caused primarily
by atherosclerosis. Surgical treatment involves clamping the aorta and making
long incisions at multiple sites to resect and replace the aneurysm with a
synthetic graft. Once the aorta is clamped, time is of the essence, since
procedures are typically done without cardiopulmonary bypass, allowing a narrow
window of time for completion. Currently, some aneurysms are treated by
intravascular stent-grafts. These stent-grafts can be inserted through the
femoral artery, and do not require an incision. However, the necessity of
traversing the femoral artery to gain access to the aorta limits the usage of
this technique. The Company believes that the ability of its technology to
deliver dexterity and the ability to suture grafts, alone or in conjunction with
stent-grafts, will help convert this procedure from open surgery to INTUITIVE
surgery.
AORTO-FEMORAL BYPASS. The lower portion of the abdominal aorta is often a
location of atherosclerosis. Atherosclerotic blockage of this portion of the
aorta restricts blood flow to the lower body. To treat this condition using open
surgery, a synthetic graft is attached to the vasculature above and below the
blockage. This procedure currently requires open surgery because of the need to
suture the grafts in place. The Company believes that with its technology, the
surgeon will be able to perform the required anastomosis through ports and avoid
the large incision currently required.
CHOLECYSTECTOMY. Removal of the gallbladder or cholecystectomy is the most
common procedure performed by the general surgeon. Although a laparoscopic
approach is now well accepted for routine cases, there is great variability in
the level of skill required to accomplish the procedure. The skill level
necessary to complete a laparoscopic cholecystectomy is dependent on the
pathology or disease status the surgeon discovers after the abdomen is entered.
For example, acute cholecystitis can result in inflammation and adhesion
formation that can require very meticulous surgery to access gallbladder
anatomy. Similarly, during the operation the surgeon may find a condition known
as choledocolithiasis, or stones in the common bile duct. The surgeon may choose
to incise or cut the common duct to extract stones that are caught between the
liver and intestine. Exploration of the common bile duct is an extremely
delicate procedure that requires micro-sutures to be placed in the common duct.
Most surgeons will not do this procedure laparoscopically because of the
difficulty of the procedure. This usually results in a conversion to open
technique or another surgical or delicate gastrointestinal endoscopic procedure
to extract the stones. With its technology, the Company believes that the
surgeon will have expanded capability to deal with complicated cholecystectomies
and can avoid subjecting the patient to a second procedure.
NISSEN FUNDOPLICATION. Nissen fundoplication is a general surgical
procedure which is performed to correct esophageal reflux. As an elective
procedure, it is currently performed on only a small fraction of candidates who
suffer from reflux esophagitis because the open surgical procedure is quite
invasive. An MIS alternative exists, but there are only a limited number of
surgeons who are skilled in the procedure. The Company believes that its
technology will significantly improve the ease of performing the Nissen
procedure through ports. Specifically, Intuitive's technology will address the
two most difficult steps in this procedure, which are made more difficult by
existing MIS techniques (i) esophageal dissection and (ii) suturing of the
fundus of the stomach. If adoption of Intuitive's technology becomes widespread
for Nissen procedures, the Company believes that the number of surgeons able to
do a Nissen procedure using port-based techniques might be expanded. Further,
the Company expects that the widespread availability of a port-based approach
may significantly expand the number of surgeries performed.
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COLON RESECTION. Removal of the colon or large bowel is a common general
surgical procedure done for both benign and malignant disease. Colon resection
is accomplished in a variety of ways by removing all or part of the colon. These
procedures are complicated and involve resecting a portion of diseased tissue
and then re-anastomosing the two ends of the colon to re-establish continuity of
intestinal flow. When using existing MIS techniques, the challenge is to have
enough manipulating capability to perform fine dissection of the colon from its
peritoneal attachment and then to be able to sew or staple the ends of the bowel
to accomplish the re-anastomosis. The MIS procedure is currently performed by
only a small fraction of general surgeons. By making dissection significantly
more precise, the Company believes that its products will allow port-based colon
resection to be performed more widely.
HERNIA REPAIR. Repair of inguinal hernia is the second most common
procedure done in general surgery. A hernia is caused by a defect or weakness in
the inguinal fascia in the pelvic region. There are a variety of hernia
procedures available that use both open and MIS techniques. However, the lack of
precise dissection capability inhibits adoption of the MIS procedures.
Specifically, the delicate dissection of the spermatic cord structures and the
peritoneal sac, which is often adherent to the inguinal anatomy, is very
difficult for surgeons to accomplish using MIS techniques. The Company believes
that its technology will encourage surgeons to convert hernia procedures to the
port-based approach by removing the training barrier that limits adoption.
GENERAL GYNECOLOGY. Laparoscopy has been used for several decades in a
large number of diagnostic infertility procedures. Although there are a variety
of therapeutic infertility procedures which can currently be performed by some
gynecologists using existing MIS techniques, these procedures are relatively
difficult to perform using existing MIS tools because of the lack of tissue
control, inability to perform fine dissection, and limited suturing capability.
The Company believes that its technology will provide gynecologists with the
ability to do sophisticated procedures such as tubal re-anastomosis and
dissection of ovarian cysts, as well as common procedures such as oophorectomy
and salpingectomy.
HYSTERECTOMY. This is one of the most commonly performed surgeries in
gynecology and involves removal of the uterus. It can be done by using open or
MIS techniques. Like colon resection, it demands a significant degree of tissue
manipulation in the dissection and ligation of blood vessels, ligaments and
other pelvic structures. Further, laparoscopic techniques used in this procedure
increase the risk of injury to the ureters, vital structures that provide the
conduit for urine between the kidney and bladder. It is often difficult to
ensure the identification and prevention of injury to the ureters and bladder
with conventional MIS instruments because of the limited angles at which these
instruments can be positioned. The Company believes that its products will
increase the surgeon's dexterity in this procedure and, as a result, will have a
significant impact on safety, operating time, and rate of adoption of MIS
techniques in hysterectomy.
BLADDER NECK SUSPENSION. Bladder incontinence is a widespread condition
affecting middle aged women, which can be treated surgically with a procedure
known as bladder neck suspension. This procedure involves the elevation of the
bladder neck by suspension with sutures, surgically recreating the normal angle
of the urethra and re-establishing bladder sphincter control. The procedure
works well in open surgery and is the "gold standard" for correction of bladder
incontinence. However, because of its long recovery time, most women who would
be candidates are discouraged from undergoing the procedure using open surgical
technique. Instead, they use adult diapers for their incontinence which is an
embarrassment and inconvenience. Bladder neck suspension can currently be done
laparoscopically but is difficult to perform because of the need to suture at
awkward angles using existing MIS instruments. The Company believes that its
technology may provide a better solution for suturing the bladder neck and would
represent an advance in the ease of performing incontinence surgery.
ORTHOPEDICS. Many knee surgeries are accomplished by an MIS technique
called arthroscopy. This technique is well accepted in the surgical community.
However, many of the more sophisticated maneuvers in arthroscopy, such as
suturing torn meniscal tissue, are very difficult with existing MIS instruments.
The Company believes that its technology and the capabilities of its instruments
with ENDOWRIST flexibility will increase the ease with which complex arthroscopy
can be performed. Further, the emerging techniques of MIS
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spine surgery, which involves completion of the very common procedure of disc
removal and spinal fusion, requires an approach to the spine through the
abdomen, involving very advanced laparoscopic technique. The Company believes
that its technology may make this procedure safer, easier and more precise.
CLINICAL TRIALS AND EXPERIENCE
The Company has conducted extensive laboratory testing of various prototypes
since early 1996. This testing has been directed at establishing the clinical
requirements for Intuitive's products and verifying that the final products will
meet those requirements. Clinical experience has also been important in
developing protocols and procedures for using its technology in the operating
room.
In March 1997, clinical investigators in Belgium performed five human
surgeries using an early prototype employing Intuitive's technology. All five
procedures were completed after minimal training of the physicians and operating
room staff. Two of these procedures were laparoscopic cholecystecomies, and a
third was a lysis of adhesions. The purpose of these three procedures, all of
which were performed successfully through ports, was to establish that third
generation surgery could be used to perform procedures previously converted to
MIS techniques with equal or better results. The procedures were completed
successfully, and they demonstrated the prototype's ability to perform
successfully in an endoscopic environment. In two additional procedures, a
vascular surgeon performed an anastomosis between a small artery and a small
vein in the arm, using open surgical incisions. The goal of these two successful
anastomoses was to demonstrate that third generation surgery was capable of
performing precise anastomoses in small blood vessels only slightly larger in
size than the coronary vessels on which anastomosis are performed in CABG
procedures. Patency (blood flow) of the anastomoses was deemed by the surgeon to
be equal to or better than similar anastomoses he performs using open surgical
techniques. All five procedures were performed without complication, and all
patients recovered at the same rates as for conventional laparoscopic or open
surgery, respectively.
In addition, the goals for these five procedures included gathering clinical
experience to help finalize specifications for the Company's initial products.
The Company used this experience to further develop its current prototypes. One
of the current prototypes is being tested in animal surgery and on cadavers. In
1998, the Company expects to begin human clinical testing in certain cardiac and
other surgical procedures in Europe. The Company intends to use the results of
these tests to finalize the current design of its products. In addition, the
Company has received approval from the FDA for an IDE to conduct a clinical
trial using the surgeon's console, patient-side cart and certain resposable
instruments necessary for performing most surgical procedures, including
scissors, scalpels, forceps/pickups, needle holders, clip appliers and
electrocautery (the "Pending Instruments"), in certain laparoscopic and
thoracoscopic surgical procedures. The Company intends to use the data from this
trial in order to seek clearance or approval from the FDA for the Pending
Instruments. There can be no assurance that this clinical trial will be
completed in a timely manner or that the results will support FDA clearance or
approval. Even if the results of the clinical trial demonstrate the safety and
efficacy of the Pending Instruments, FDA clearance or approval could be delayed
or prevented for other reasons. See "Risk Factors--Early Stage of Clinical
Testing; No Assurance of Safety, Efficacy or Commercialization," "--Need for
Federal and State Regulatory Clearance or Approval" and "Business--Government
Regulation."
MARKETING AND DISTRIBUTION
The Company plans to derive its revenues from the direct sale of two types
of interlinked proprietary products (i) a surgeon's console and patient-side
cart and (ii) a range of resposable instruments. The resposable instruments are
resterilizable and reusable for a defined number of uses. An electronic chip
with a proprietary interlock monitors the number of surgical procedures that
each resposable instrument performs. The interlock will not allow the instrument
to be used more than the prescribed number of uses. This will help the Company
keep the number of uses of the instrument lower than the tested usage of the
resposable so that its performance meets specifications during each procedure.
In addition, because of this controlled reusability, the Company can effectively
charge for resposable instruments on a per procedure basis.
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The Company initially intends to market its products through a direct sales
force in the United States and Europe. Based on industry data, the Company
believes that the largest 200 cardiac centers account for approximately 45% of
the cardiac procedures performed in the United States. These 200 cardiac centers
and their surgeons have been identified by the Company as potential prospects
and will be the object of concentrated sales efforts when, and if, the Pending
Instruments receive regulatory approvals. The Company believes that the
concentrated nature of the cardiac market in the United States will allow it to
address this market with a small, targeted sales force.
The Company's marketing and sales strategy in the United States and Europe
will involve the use of a combination of sales representatives and field
clinical specialists. The role of sales representatives will be to educate
physicians and surgeons on the advantages of INTUITIVE surgery and the clinical
applications that the Company's technology makes possible. The Company also
plans to train its sales representatives to educate hospital management on the
potential benefits of early adoption of Intuitive's technology and the potential
for increased local market share that may result. The Company intends to
establish surgical reference sites which will allow surgeons to visit hospitals
where the Company's products are being used. A field clinical specialist who the
Company expects to be a licensed nurse will provide training and support to
physicians and other hospital staff and will coordinate installation of the
Company's products. Intuitive will employ service technicians to provide
non-clinical technical expertise, upgrades, service and maintenance for its
surgeon's consoles and patient-side carts. The Company believes that this
combination of sales representatives, field clinical specialists and service
technicians will provide an appropriate balance of professional selling skills
while maintaining an appropriate level of technical expertise in the field.
An important element of the Company's marketing strategy to date has been to
develop relationships with prominent academic surgeons who have a history of
research and publications in peer-reviewed journals concerning cardiac surgery
techniques. The Company's strategy is to leverage these relationships with
leading cardiac surgeons to gain market acceptance of its products. The Company
intends to continue to build these relationships through clinical investigator
meetings and participation in symposia and meetings to discuss clinical issues
and treatments.
The Company has no experience marketing and selling its products. If the
Company receives required regulatory clearance or approval, the Company intends
to initially market its products through a direct sales force in the United
States and Europe. Substantial efforts and significant management and financial
resources are required to establish marketing and sales capabilities sufficient
to support sales in commercial quantities. The Company cannot be certain that it
will be able to build such a marketing staff or sales force, that this strategy
will be cost-effective or that such sales and marketing efforts will be
successful. Failure to successfully market its products or any future products
could reduce the Company's revenues and may result in additional losses. See
"Risk Factors--Limited Sales, Marketing and Distribution Experience."
INTELLECTUAL PROPERTY
Since the inception of the Company in late 1995, Intuitive has encountered
and solved a number of technical hurdles, and has attempted to patent or
otherwise protect the technology that it developed to overcome such hurdles. In
addition to developing its own patent portfolio, Intuitive has spent significant
resources in acquiring license rights to necessary patents and intellectual
property from SRI and IBM, who were early leaders in performing research on
using robotics in surgery. The Company owns exclusive field-of-use licenses for
15 issued United States patents and 23 issued foreign patents. In addition, the
Company owns or has licensed numerous pending United States patent applications,
of which 8 have been allowed by the United States Patent and Trademark Office,
and has filed numerous corresponding foreign patent applications that are
currently pending in Europe, Japan and Canada. The Company's patents and patent
applications relate to a number of important aspects of the Company's
technology, including the technology related to the Company's surgeon's console,
surgical manipulators, and articulated surgical instruments. The Company intends
to file additional patent applications to seek protection for other proprietary
aspects of its technology in the future.
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SRI INTERNATIONAL AGREEMENT
An option to acquire a license covering the original technology for the
Company's system was acquired by John G. Freund, M.D., a founder and director of
the Company, from SRI in 1995, and transferred to the Company in connection with
its formation and initial venture financing. SRI conducted research after
receiving funding in 1990 from the U. S. Advanced Research Projects Agency to
develop "telesurgery" to allow surgeons to perform surgery on the battlefield
from a remote location. A multidisciplinary SRI team developed the precise
electromechanics, force-feedback systems, vision systems and surgical
instruments needed to build and demonstrate a prototype system that could
faithfully reproduce the surgeon's hand motions with remote surgical
instruments.
Under the terms of the SRI License Agreement dated December 20, 1995 (the
"SRI License"), the Company was granted an exclusive, worldwide, royalty-free
license to use the SRI technology developed prior to September 12, 1997 related
to the manipulation of human tissues and medical devices for animal and human
surgery, including but not limited to surgery, laparoscopic surgery and
microsurgery (the "Field"). The Company also has the right of first negotiation
with respect to SRI technology in the Field developed after September 12, 1997
but before September 12, 1999. As consideration for the SRI License, the Company
issued to SRI and certain designated employees of SRI a total of 585,000 shares
of the Company's Common Stock. The Company also paid SRI for patent prosecution
costs of $116,000 for filing and maintenance of patent applications, which were
incurred before the execution of the SRI License and is responsible for all
subsequent patent prosecution costs relating to the SRI License. In addition,
under the terms of the SRI License, the Company granted SRI a non-exclusive
royalty-free license to the Company's technology developed prior to September
12, 1997 for use outside the Field and non-commercial research inside the Field.
Under the terms of the SRI License, the Company is required to use
commercially reasonable and diligent efforts to conduct research and development
and clinical trials and to market products for use in surgery when they are
approved for marketing by the FDA. If the Company fails to commercialize its
products by September 12, 2002, SRI has the option of converting the exclusive
license to a non-exclusive license. The SRI License will terminate upon the last
expiration of the patents licensed from SRI or December 20, 2012, whichever is
later. Currently, the last patent expiration date is June 5, 2016, although this
could change due to subsequently issued patents. The SRI License may also be
terminated by SRI in the event of a material uncured breach of the Company's
obligations under the SRI License. In the event of such termination, there can
be no assurance that necessary licenses could be reacquired by the Company from
SRI on satisfactory terms, if at all. Adverse determinations in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
the Company from manufacturing and selling its products, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
IBM AGREEMENT
IBM conducted research in the application of computers and robotics to
surgery during the late 1980s and early 1990s. As part of this project, a
Laparoscopic Assistant Robot System (LARS) was designed and developed at IBM in
conjunction with the Johns Hopkins Medical Center. IBM's system used an image-
guided surgical robot to work as a third hand to assist a human surgeon in a
variety of common laparoscopic surgical tasks. The system was built around a
specially designed seven-axis remote-center surgical robot and featured a
Cartesian motion controller, image-processing capabilities, telerobotic and
semi-autonomous control modalities, and a variety of man-machine interfaces for
easy and natural control of system functions. The initial focus was on
applications of the system to camera navigation and tissue biopsies within the
context of laparoscopic surgical procedures.
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In December 1997, the Company entered into a license with IBM covering
certain technology related to the application of computers and robotics to
surgery (the "IBM License"). Under the IBM License, the Company was granted an
exclusive, worldwide, royalty-free license to certain IBM patents in the field
of surgery. Excluded from the field were neurology, ophthalmology, orthopedics
and biopsies, but the Company has also been granted a non-exclusive license to
practice in these fields. The IBM License is also subject to a number of
pre-existing license agreements of IBM. As consideration for the IBM License,
the Company paid IBM a non-refundable license fee and is obligated to pay
additional amounts upon achievement of certain milestones, including $5.0
million within ten days of the closing of this offering.
The IBM License will terminate upon the last expiration of the licensed
patents. Currently, the last patent expiration date is December 9, 2014,
although this could change due to subsequently issued patents. However, the
license may also be terminated by IBM in the event that the Company fails to
make the required payments and such failure is not cured within a 90 days of
written notice of the failure. In the event of such termination, there can be no
assurance that necessary licenses could be reacquired by the Company from IBM on
satisfactory terms, if at all. Adverse determinations in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
the Company from manufacturing and selling its products, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
PATENTS
The Company's success will depend in part on its ability to obtain patent
and copyright protection for its products and processes, to preserve its trade
secrets, to operate without infringing or violating the proprietary rights of
third parties, and to prevent others from infringing on the proprietary rights
of the Company. The Company's strategy is to actively pursue patent protection
in the United States and in foreign jurisdictions for technology that it
believes to be proprietary and that offers a potential competitive advantage.
The Company owns or has licensed patents covering fundamental aspects of its
technology.
The patent positions of medical device companies, including those of the
Company, are uncertain and involve complex and evolving legal and factual
questions. The coverage sought in a patent application either can be denied or
significantly reduced before or after the patent is issued. Consequently, there
can be no assurance that any patents, patents issuing from pending patent
applications or from any future patent application will be issued, that the
scope of any patent protection will exclude competitors or provide competitive
advantages to the Company, that any of the Company's patents will be held valid
if subsequently challenged or that others will not claim rights in or ownership
of the patents and other proprietary rights held by the Company. Since patent
applications are secret until patents are issued in the United States or
corresponding applications are published in international countries if at all,
and since publication of discoveries in the scientific or patent literature
often lags behind actual discoveries, the Company cannot be certain that it was
the first to make the inventions covered by each of its pending patent
applications or that it was the first to file patent applications for such
inventions. In addition, there can be no assurance that competitors, many of
which have substantial resources and have made substantial investments in
competing technologies, have not applied for and will not seek to apply for and
obtain patents that will prevent, limit or interfere with the Company's ability
to make, use or sell its products either in the United States or in
international markets. Further, the laws of certain foreign countries do not
protect the Company's intellectual property rights to the same extent as do the
laws of the United States. Litigation or regulatory proceedings, which could
result in substantial cost and uncertainty to the Company, may also be necessary
to enforce patent or other intellectual property rights of the Company or to
determine the scope and validity of other parties' proprietary rights. There can
be no assurance that the Company will have the financial resources to defend its
patents from infringement or claims of invalidity or to defend itself from
alleged infringement of third-party patents.
In addition to patents, the Company relies on trade secrets and proprietary
know-how to compete, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. These agreements
generally provide that all confidential information developed or made
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known to individuals by the Company during the course of the relationship with
the Company is to be kept confidential and not disclosed to third parties,
except in specific circumstances. The agreements also generally provide that all
inventions conceived by the individual in the course of rendering service to the
Company and properly assigned to the Company shall be the exclusive property of
the Company. There can be no assurance that proprietary information or
confidentiality agreements with employees, consultants and others will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known to or independently
developed by competitors. In addition, confidentiality agreements with
consultants and others may conflict with, or be subject to, the rights of third
parties with whom such individuals have employment or consulting relationships.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not
become subject to patent infringement claims or litigation in a court of law, or
interference proceedings declared by the PTO to determine the priority of
inventions or an opposition to a patent grant in a foreign jurisdiction. The
defense and prosecution of intellectual property suits, PTO interference or
opposition proceedings and related legal and administrative proceedings are both
costly and time-consuming. Any litigation, opposition or interference
proceedings will result in substantial expense to the Company and significant
diversion of effort by the Company's technical and management personnel. An
adverse determination in litigation or interference proceedings to which the
Company may become a party could subject the Company to significant liabilities
to third parties, require disputed rights to be licensed from third parties or
require the Company to cease using such technology. Although patent and
intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include payment of ongoing royalties.
Furthermore, there can be no assurance that necessary licenses from others would
be available to the Company on satisfactory terms, if at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling its
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is aware of certain patents owned or licensed by others and
relating to telesurgery and MIS surgery. Certain enhancements of the Company's
technology are still in the design and preclinical testing phase. Depending on
the ultimate design specifications and results of preclinical testing of these
enhancements, the Company may need to obtain licenses to third-party patents.
There can be no assurance that the Company would be able to obtain a license to
such third-party's patents or that a court would find that such third-party's
patents are either not infringed by the Company's enhanced products or are
invalid. Further, there can be no assurance that owners or licensees of these
patents will not attempt to enforce their patent rights against the Company in a
patent infringement suit or other legal proceeding, regardless of the likely
outcome of such suit or proceeding.
RESEARCH AND DEVELOPMENT
As of March 31, 1998, substantially all of the Company's research and
development activity is performed internally by the Company's team of 51
scientists, engineers and technicians, in consultation with the Company's
Scientific Advisory Board and outside consultants. The Company's research and
development team is divided into four groups: software engineering, systems
analysis, electrical engineering and mechanical engineering. In addition,
various members of the research and development team support the design and
development of the manufacturing processes to be used in fabricating its
products.
The Company's current research and development goals include the completion
of necessary clinical trials, optimizing the functionality of its products and
refining the design of its products in anticipation of commercial distribution.
Research and development expenses for the period from inception (November 9,
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1995) to December 31, 1996, the year ended December 31, 1997 and the three
months ended March 31, 1998 were $2.9 million, $14.3 million and $6.8 million,
respectively. The Company intends to continue to make significant investments in
research and development for the foreseeable future.
MANUFACTURING
The Company has a 9,000 square feet manufacturing facility in Mountain View,
California. The facility includes a cleanroom equipped for the assembly of
resposable instruments. The Company has used its facility and its manufacturing
personnel to complete the prototypes and resposable instruments that will be
used in clinical trials. The manufacture of the Company's products is a complex
operation involving a number of separate processes and components. The Company
purchases both custom and off-the-shelf components from a large number of
suppliers. Each product is assembled and individually tested by the Company in
accordance with FDA requirements.
The Company has no experience manufacturing its products in the volumes that
will be necessary for the Company to achieve significant commercial sales, and
there can be no assurance that reliable, high-volume manufacturing capacity can
be established or maintained at commercially reasonable costs. If the Company
receives FDA clearance or approval for its products, it will need to expend
significant capital resources and develop manufacturing expertise to establish
large-scale manufacturing capabilities. Manufacturers often encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance, component supply
shortages, shortages of qualified personnel, compliance with FDA regulations,
and the need for further FDA approval of new manufacturing processes. In
addition, in the event demand for the Company's products exceeds manufacturing
capacity, the Company could develop a substantial backlog of customer orders. If
the Company is unable to establish and maintain large-scale manufacturing
capabilities, sales of the Company's products could be substantially diminished,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, the Company's manufacturing facilities are subject to periodic
inspection by regulatory authorities, and the Company's operations will continue
to be regulated by the FDA with respect to Quality System Regulations ("QSR")
compliance. The Company will be required to comply with QSR requirements in
order to produce products for sale in the United States and with ISO 9001
standards in order to produce products for sale in Europe. If the Company fails
to comply with QSR or ISO 9001 standards, it may be required to cease all or
part of its operations for some period of time until it can demonstrate that
appropriate steps have been taken to comply with such regulations. The Company
cannot be certain that its facilities will comply with QSR or ISO 9001 standards
in future audits by regulatory authorities. The State of California also
requires that the Company obtain a license to manufacture medical devices. The
Company received a device manufacturing license from the California Department
of Health Services ("CDHS") in March 1998, but the Company will continue be
subject to periodic inspections by the CDHS. If the Company were unable to
maintain this license following any future inspections, it would be unable to
manufacture or ship any products, which would have a material adverse effect on
the Company's business, financial condition and results of operations.
Components and raw materials are purchased from various qualified suppliers
and subjected to stringent quality specifications. The Company conducts quality
audits of suppliers and is establishing a vendor certification program. A number
of the components such as motors, endoscopes, monitors, and certain integrated
circuit components are provided by sole source suppliers. For certain of these
components, there are relatively few alternative sources of supply, and
establishing additional or replacement vendors for such components cannot be
accomplished quickly. The Company plans to qualify additional suppliers if and
when future production volumes increase. Because of the long lead time required
for some components that are currently available from a single source, a
vendor's inability to supply such components in a timely manner could impede the
Company's ability to manufacture and market its products and therefore could
have a material adverse effect on its business, financial condition
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and results of operations. See "Risk Factors--Limited Manufacturing Experience;
Scale-Up Risk" and "--Dependence on Key Suppliers."
COMPETITION
At present, the Company considers its primary competition to be existing
open or MIS surgical procedures. For the Company to be successful it must
convince hospitals, surgeons and patients to convert procedures from open or
existing MIS surgery to INTUITIVE surgery. In addition, several companies are
developing new approaches and new products for MIS and, in particular, minimally
invasive cardiac surgery. Many of these companies have an established presence
in the field of MIS, including Boston Scientific Corporation, CardioThoracic
Systems, Inc., C.R. Bard, Inc., Guidant Corporation, Heartport, Inc., Ethicon
Endo-Surgery, Inc., a division of Johnson & Johnson, Medtronic, Inc. and United
States Surgical Corporation. In addition, a limited number of companies are
using robots in surgery, including Computer Motion, Inc., Integrated Surgical
Systems, Inc., Brock Rogers Surgical, Inc. and MicroDexterity Systems, Inc.,
which may develop products which directly compete with the Company's products.
The Company believes that the primary competitive factors in the market it
plans to address are capability, safety, efficacy, ease of use, price, quality,
reliability and effective sales, support, training and service. The length of
time required for products to be developed and to receive regulatory and
reimbursement approval is also an important competitive factor. The medical
device industry is characterized by rapid and significant technological change.
Accordingly, the Company's success will depend in part on its ability to respond
quickly to medical and technological changes through the development and
introduction of new products.
However, many of the Company's potential competitors have substantially
greater financial and other resources than the Company, including larger
research and development staffs and more experience and capabilities in
conducting research and development activities, testing products in clinical
trials, obtaining regulatory approvals, and manufacturing, marketing and
distributing products. There can be no assurance that the Company will succeed
in developing and marketing technologies and products that are more clinically
efficacious and cost-effective than the more established treatments or the new
approaches and products developed and marketed by its competitors. Furthermore,
there can be no assurance that the Company will succeed in developing new
technologies and products that are available prior to competitors' products. The
failure of the Company to demonstrate the efficacy and cost advantages of its
products over those of its competitors or the failure to develop new
technologies and products before its competitors could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Risk Factors--Significant Competition; Rapid Technological Change."
GOVERNMENT REGULATION
UNITED STATES
Clinical testing, manufacture and sale of the Company's products are subject
to regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign regulatory agencies. Pursuant to the FDC Act,
the FDA regulates the clinical testing, manufacture, labeling, distribution and
promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing approvals, a recommendation by the FDA that the Company
not be permitted to enter into government contracts and criminal prosecution.
The FDA also has the authority to request repair, replacement or refund of the
cost of any device manufactured or distributed by the Company.
In the United States, medical devices are classified into one of three
classes, Class I, II or III, on the basis of the controls deemed by the FDA to
be necessary to reasonably ensure their safety and effectiveness. Class I
devices are subject to general controls such as labeling, premarket notification
and
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adherence to QSR. Class II devices are subject to general controls and to
special controls (such as performance standards, postmarket surveillance,
patient registries, and FDA guidelines). Generally, Class III devices are those
that must receive premarket approval by the FDA to assure their safety and
effectiveness. Class III devices generally are life-sustaining, life-supporting
and implantable devices, or new devices which have not been found substantially
equivalent to legally marketed Class I and Class II devices.
Before a new device can be introduced into the market, the manufacturer must
generally obtain marketing clearance through a premarket notification under
Section 510(k) of the FDC Act ("510(k)") or an approval of a premarket approval
application ("PMA application") under Section 515 of the FDC Act. A 510(k)
clearance typically will be granted if the submitted information establishes
that the proposed device is "substantially equivalent" to a predicate Class I or
II medical device or to a Class III medical device for which the FDA has not
called for PMAs. If a company cannot establish that a proposed device is
substantially equivalent to a legally marketed predicate device, the company
must seek premarket approval of the proposed device from the FDA through the
submission of a PMA application. Commercial distribution of a medical device for
which a 510(k) clearance or PMA is required cannot begin until clearance or
approval is received from the FDA.
In a 510(k) notification, a company must provide information to support a
claim of substantial equivalence, which may include laboratory test results or
the results of clinical trials of the device in humans. The FDA recently has
been requiring a more rigorous demonstration of substantial equivalence than in
the past and is more likely to require the submission of clinical trial data.
Based upon industry and FDA publications, the Company believes that it generally
takes from four to twelve months from the date of submission to obtain a 510(k)
clearance, but it may take longer. Commercial distribution of a medical device
for which a 510(k) clearance is required can only begin after the FDA issues an
order finding the device to be "substantially equivalent" to a predicate device.
The FDA may determine that a proposed device is not substantially equivalent to
a predicate device, or that additional information is needed before a
substantial equivalence determination can be made. A "not substantially
equivalent" determination, or a request for additional information, could delay
the market introduction of new products that fall into this category.
For any devices that are cleared through the 510(k) process, modifications
or enhancements that could significantly affect safety or effectiveness, or
constitute a major change in the intended use of the device, will require new
510(k) submissions. There can be no assurance that the FDA will not require the
submission of a new 510(k) notification for any of the modifications. If the FDA
were to take such action, marketing the modified device could be delayed until a
new 510(k) notification was cleared by the FDA.
If a company cannot establish that a proposed device is substantially
equivalent to a predicate device, the company must seek premarket approval of
the proposed device from the FDA through a PMA application. A PMA application
must be supported by valid scientific evidence that typically includes extensive
data, including preclinical and clinical data, to demonstrate the safety and
efficacy of the device. If clinical trials of a device are required and the
device presents a "significant risk," the sponsor of the trial (usually the
manufacturer or the distributor of the device) is required to file an IDE
application with the FDA prior to commencing clinical trials. The IDE
application must be supported by data, typically including the results of animal
and laboratory testing. If the IDE application is approved by the FDA and one or
more appropriate institutional review boards ("IRBs"), clinical trials may begin
at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. An IDE supplement must be submitted to, and be
approved by, the FDA before a sponsor or an investigator may make a change to
the investigational plan that may affect its scientific soundness or the rights,
safety or welfare of human subjects.
A PMA application must contain the results of clinical trials, the results
of all relevant bench tests, laboratory and animal studies, a complete
description of the device and its components, and a detailed description of the
methods, facilities and controls used to manufacture the device. In addition,
the submission must include the proposed labeling, advertising literature and
training methods (if required). Upon receipt of a PMA application, the FDA makes
a threshold determination as to whether the
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application is sufficiently complete to permit a substantive review. If the FDA
determines that the PMA application is sufficiently complete to permit a
substantive review, the FDA will accept the application for filing. Once the
submission is accepted, the FDA begins an in-depth review of the PMA
application. Based upon industry and FDA publications, the Company believes that
an FDA review of a PMA application generally takes one to three years. The
review time is often significantly extended by the FDA asking for more
information or clarification of information already provided in the submission.
If the FDA's evaluation of the PMA application is favorable, the FDA may
issue either an approval letter or request additional information in the form of
an "approvable" letter which usually contains a number of conditions that must
be met in order to secure final approval of the PMA application. When and if
those conditions have been fulfilled to the satisfaction of the FDA, the agency
will issue a final approval letter, authorizing commercial marketing of the
device for certain indications. If the FDA evaluation of the PMA application is
not favorable, the FDA will deny approval of the PMA or issue a "not approvable"
letter. The FDA may also determine that additional clinical trials are
necessary, in which case approval may be delayed for an indeterminate period of
time while additional clinical trials are conducted and submitted as an
amendment to the PMA application. The PMA process can be expensive, uncertain
and lengthy, and a number of devices for which FDA approval has been sought by
other companies have never been approved for marketing.
In July 1997, the Company received 510(k) clearance from the FDA for the
surgeon's console and patient-side cart for use with rigid endoscopes, blunt
dissectors, retractors and stabilizer instruments. A subsequent 510(k)
submission covering additional resposable instruments necessary for performing
most surgical procedures, including scissors, scalpels, forceps / pickups,
needle holders, clip appliers and electrocautery (the "Pending Instruments"),
was withdrawn in November 1997 after the FDA indicated that clinical data would
be required to support a determination of substantial equivalence for these
additional surgical tools. In March 1998, the Company received approval of an
IDE for a clinical trial to study the use of the surgeon's console and
patient-side cart and certain of the resposable instruments, including the
Pending Instruments, in various thoracoscopic and laparoscopic surgical
procedures. The IDE approval is conditioned upon the Company's correction of
certain deficiencies within 45 days from the date of approval. In May 1998, the
Company submitted a response to the FDA in order to correct such deficiencies.
Although the Company believes it has corrected such deficiencies, there can be
no assurance that the Company will comply with the conditions of approval to the
FDA's satisfaction or that the agency will not revoke its approval of the
clinical trial. Such action could delay or prevent the Company from obtaining
the clinical data necessary to seek clearance or approval of the Pending
Instruments. Upon completion of the clinical trial, the Company intends to
submit the data obtained from the trial as part of a new 510(k) notification.
There can be no assurance as to when the clinical trial will be completed, if
ever, or whether the results obtained will support a finding of substantial
equivalence to a legally marketed predicate device. Accordingly, there can be no
assurance that the FDA will not require the Company to submit a PMA application
for the Pending Instruments. If 510(k) clearance is granted, the Company
believes based upon discussions with the FDA that the clearance will permit
distribution and promotion of the Pending Instruments for broad use in
endoscopic surgery. There can be no assurance, however, that the FDA will not
require additional 510(k) clearances to be obtained before the Pending
Instruments could be distributed or promoted for use in other specific surgical
procedures other than those being studied in the clinical trial. In addition,
there can be no assurance that the Company will be able to obtain necessary
regulatory approvals or clearances on a timely basis or at all. Any delay in
receipt of approval or clearance or failure to receive such approval or
clearance or failure to comply with existing or future regulatory requirements
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Subsequent to receipt of FDA approval or clearance, the Company will
continue to be regulated by the FDA with regard to, among other things, the
reporting of adverse events related to its products and ongoing QSR compliance,
which includes elaborate testing, control, documentation and other quality
assurance procedures. The Company's manufacturing facility must be registered
with the FDA and will be subject to
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periodic inspections. The Company's facilities have not yet been inspected by
the FDA. Labeling and promotional activities are subject to scrutiny by FDA and,
in certain circumstances, by the Federal Trade Commission. Current FDA
enforcement policy prohibits the marketing of approved medical devices for
unapproved ("off label") uses. See "Risk Factors--Need for Federal and State
Regulatory Clearance or Approval."
CALIFORNIA
The State of California requires that the Company obtain a license to
manufacture medical devices. The Company's facilities and manufacturing
processes were inspected in February 1998. The Company passed the inspection and
received a device manufacturing license from the Food and Drug Branch of the
CDHS in March 1998. The Company will be subject to periodic inspections by the
CDHS. If the Company were unable to maintain this license following any future
inspections, it would be unable to manufacture or ship any product, which
inability would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors--Need for
Federal and State Regulatory Clearance or Approval."
INTERNATIONAL
In order for the Company to market its products in Europe and certain other
foreign jurisdictions, the Company must obtain required regulatory approvals and
clearances and otherwise comply with extensive regulations regarding safety and
manufacturing processes and quality. These regulations, including the
requirements for approvals or clearance to market and the time required for
regulatory review, vary from country to country. There can be no assurance that
the Company will obtain regulatory approvals in such countries or that it will
not be required to incur significant costs in obtaining or maintaining its
foreign regulatory approvals. Delays in receipt of approvals to market the
Company's products, failure to receive these approvals or future loss of
previously received approvals could have a material adverse effect on the
Company's business, financial condition and results of operations.
The time required to obtain approval for sale in foreign countries may be
longer or shorter than that required for FDA approval, and the requirements may
differ. In addition, there may be foreign regulatory barriers other than
premarket approval, and the FDA must approve exports of devices that require a
PMA but are not yet approved domestically. The current rules provide that, in
order to obtain FDA export approval, the Company must provide the FDA with data
and information to demonstrate that the device (i) is not contrary to public
health and safety and (ii) has the approval of the country to which it is
intended for export. So that the FDA can determine that export of a device is
not contrary to public health and safety, the Company is required to submit
basic data regarding the safety of the device unless the device is the subject
of an FDA-approved IDE and it will be marketed or used for clinical trials in
the importing country for the same intended use, or at least two IRBs in the
United States have determined that the device is a nonsignificant risk device
and the device will be marketed or used for clinical trials in the importing
country for the same intended use. The Company also must submit a letter to the
FDA from the foreign country approving importation of the device.
The Company is in the process of obtaining approvals for initiating clinical
trials in Germany, France and Belgium. Beginning in mid-1998, the EU requires
that medical products receive the right to affix the CE mark, an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. The Company has implemented
policies and procedures intended to allow the Company to receive ISO 9001
certification, one of the CE mark certification prerequisites for its
manufacturing facility in Mountain View, California. While the Company intends
to satisfy the requisite policies and procedures that will permit it to receive
the CE mark certification, there can be no assurance that the Company will be
successful in meeting the European certification requirements and failure to
receive the right to affix the CE mark will prohibit the Company from selling
its products in member countries of the European Union. See "Risk Factors--Lack
of International Regulatory Clearance or Approval."
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THIRD-PARTY REIMBURSEMENT
A combination of the government and health insurance companies is
responsible for hospital and surgeon reimbursement for virtually all surgical
procedures except for cosmetic surgery, in both the United States and elsewhere.
Governments and insurance companies generally reimburse hospitals and physicians
for surgery when the procedures are considered non-experimental and
non-cosmetic. The Company believes that the cardiac procedures that will be the
subject of its initial focus, as well as the majority of non-cardiac procedures
it may eventually target, are generally already reimbursable by governments and
insurance companies. Accordingly, the Company believes hospitals and surgeons in
the United States will generally not be required to obtain new billing
authorizations or codes in order to be compensated for performing surgery using
the Company's products once such products have obtained FDA approval, but there
can be no assurance that this is the case.
Governments and insurance companies carefully review and increasingly
challenge the prices charged for medical products and services. Reimbursement
rates from private companies vary depending on the procedure performed, the
third-party payor, the insurance plan and other factors. Medicare reimburses
hospitals a prospectively determined fixed amount for the costs associated with
an in-patient hospitalization based on the patient's discharge diagnosis, and
reimburses physicians a prospectively determined fixed amount based on the
procedure performed, regardless of the actual costs incurred by the hospital or
physician in furnishing the care and unrelated to the specific devices used in
that procedure. Thus, the reimbursements that hospitals obtain for performing
surgery with Intuitive's products will generally have to cover any additional
costs that hospitals incur in purchasing the Company's products.
In countries outside the United States, reimbursement is obtained from a
variety of sources, including governmental authorities, private health insurance
plans, and labor unions. In most foreign countries, there are also private
insurance systems that may offer payments for some therapies. Although not as
prevalent as in the United States, health maintenance organizations are emerging
in certain European countries. The Company may need to seek international
reimbursement approvals, although there can be no assurance that any such
approvals will be obtained in a timely manner or at all. Failure to receive
international reimbursement approvals could have an adverse effect on market
acceptance of the Company's products in the international markets in which such
approvals are sought.
The Company believes that the overall escalating cost of medical products
and services has led to and will continue to lead to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by the Company. There can be no
assurance that third-party reimbursement and coverage will be available or
adequate either in United States or foreign markets, that current reimbursement
amounts will not be decreased in the future or that future legislation,
regulation, or reimbursement policies of third-party payors will not otherwise
adversely affect the demand for the Company's products or its ability to sell
its products on a profitable basis, particularly if the Company's systems are
more expensive than other cardiac surgery products. Moreover, the Company is
unable to predict whether additional legislation or regulation relating to the
healthcare industry or third-party reimbursement will be enacted in the future,
or the effect of such legislation or regulation on the sale of the Company's
products. If third-party payor coverage or reimbursement is unavailable or
inadequate, the Company's business, financial condition, and results of
operations could be materially adversely affected. See "Risk
Factors--Uncertainty Related to Third-Party Reimbursement."
PRODUCT LIABILITY AND INSURANCE
The development, manufacture and sale of medical products entail significant
risk of product liability claims and product failure claims. The Company has
conducted only limited clinical trials and does not yet have, and will not have
for a number of years, sufficient clinical data to allow the Company to measure
the risk of such claims with respect to its products. The Company faces an
inherent business risk of financial exposure to product liability claims in the
event that the use of its products results in personal injury or
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death. The Company also faces the possibility that defects in the design or
manufacture of its products might necessitate a product recall. There can be no
assurance that the Company will not experience losses due to product liability
claims or recalls in the future. The Company currently maintains product
liability insurance, and there can be no assurance that the coverage limits of
the Company's insurance policies will be adequate. Any claims against the
Company, regardless of their merit or eventual outcome, could have a material
adverse effect upon the Company's business, financial condition and results of
operations. See "Risk Factors--Risk of Product Liability."
EMPLOYEES
As of March 31, 1998, the Company had 100 employees, 54 of whom were engaged
directly in research, development, regulatory and clinical activities, 23 in
manufacturing and quality assurance and 23 in marketing, sales, and
administrative activities. No employee of the Company is covered by collective
bargaining agreements, and the Company believes that its relationship with its
employees is good.
FACILITIES
The Company leases approximately 50,000 square feet in Mountain View,
California, approximately 16,000 square feet of which is subleased to a
third-party until November 1998. The facility is leased through February 2002,
at which time the Company has an option to extend the lease for an additional
three-year term. The Company believes that this facility will be adequate to
meet its needs through 1998.
INVESTIGATORS AND COLLABORATORS
An important part of the Company's strategy is to build upon relationships
with institutions and surgeons in order to gain acceptance of its products in
the marketplace. The Company has assembled a group of prominent medical
investigators and collaborators to consult with the Company's engineers and
clinical research staff and to advise the Company on the design and development
of its products and on other scientific and medical matters in the areas of the
Company's business. The Company has formed a Scientific Advisory Board to assist
it in the development of cardiac procedures. The Company has granted options to
purchase an aggregate of 30,000 shares of the Company's Common Stock to certain
Scientific Advisory Board members in 1997. The Scientific Advisory Board
includes the following cardiac surgeons:
ALAIN CARPENTIER, M.D., PH.D. is the Professor of Cardiac Surgery,
University of Paris and Chief, Department of Cardiovascular and Thoracic
Surgery, Hospital Broussais, Paris, France.
W. RANDOLPH CHITWOOD, M.D. is the Chairman, Department of Surgery and Chief
of Cardiothoracic Surgery, East Carolina University School of Medicine,
Greenville, North Carolina. Dr. Chitwood received a B.S. from Hampden-Sydney
College and an M.D. from the University of Virginia.
LAWRENCE H. COHN, M.D. is a Professor of Surgery, Harvard Medical School and
Chief of Division of Cardiac Surgery, Brigham & Women's Hospital, Boston,
Massachusetts. Dr. Cohn received a B.A. from the University of California at
Berkeley, an M.D. from Stanford University and an M.A. from the Harvard
University School of Medicine.
PAUL J. CORSO, M.D. is the Director, Section of Cardiac Surgery, Washington
Heart at Washington Hospital Center, Washington, D.C. Dr. Corso received both a
B.A. and an M.D. from The George Washington University.
DELOS M. COSGROVE, M.D. is the Chairman, Thoracic and Cardiovascular
Surgery, The Cleveland Clinic Foundation, Cleveland, Ohio. Dr. Cosgrove received
an undergraduate degree from Williams College and an M.D. from the University of
Virginia School of Medicine.
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<PAGE>
ALBERT STARR, M.D. is the Director of Heart Institute at St. Vincent's
Hospital and Medical Center located in Portland, Oregon. He received a B.A. from
Columbia College and an M.D. from Columbia's College of Physicians and Surgeons.
The Company has also formed a Clinical Advisory Board to assist it in the
development of its products and clinical protocols. The Company has granted
options to purchase an aggregate of 70,000 shares of the Company's Common Stock
to certain Clinical Advisory Board members in 1997. The Clinical Advisory Board
includes the following cardiac and general surgeons:
GUY BERNARD CADIERE, M.D., PH.D. is a full Professor of Surgery at both St.
Pierre University Hospital, Brussels, Belgium and University Paul Sabatier of
Toulouse, France.
JACQUES HIMPENS, M.D. is an attending surgeon at Sint Blasius Hospital,
Dendermonde, Belgium, and at St. Pierre University Hospital, Brussels, Belgium.
He received an M.D. from University Hospital of Leuven, Belgium.
BARRY N. GARDINER, M.D. is a general surgeon in private practice in Oakland,
California. He is also Associate Clinical Professor, Department of Surgery, the
University of California Davis Medical Center. He received a B.A. from the
University of Utah and an M.D. from the University of Pennsylvania.
MARK M. SUZUKI, M.D. is a cardiovascular surgeon in private practice in
Pittsburgh, Pennsylvania. He received a B.S. from the University of California
Davis and an M.D. from The George Washington University.
WILLIAM P. SWEEZER, M.D. is a cardiovascular surgeon in private practice in
Concord, California. He attended Michigan State University for his pre-med
curriculum and received an M.D. from Meharry Medical College.
CHRISTOPHER ZARINS, M.D. is a professor in the Department of Surgery at
Stanford University Medical Center. Dr. Zarins is also Chief of Vascular Surgery
at Stanford University Medial Center. He received a B.A. from Lehigh University
and an M.D. from the Johns Hopkins School of Medicine.
Each of the Company's investigators and collaborators has entered into a
confidentiality and non-disclosure agreement with the Company. These
investigators and collaborators are generally employed by employers other than
the Company and may have commitments to or consulting advisory contracts with
other entities that may limit their availability to the Company. Although
generally each investigator and collaborator agrees not to perform services for
another person or entity which would create a conflict of interest with the
individual's services for the Company, there can be no assurance that such
conflict will not arise.
52
<PAGE>
MANAGEMENT
OFFICERS AND DIRECTORS
The officers and directors of the Company, and their ages and positions as
of March 31, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ ----------- ----------------------------------------------------------
<S> <C> <C>
Lonnie M. Smith................................. 53 President, Chief Executive Officer and Director
Susan K. Barnes................................. 44 Vice President, Finance, Chief Financial Officer and
Assistant Secretary
Frederic H. Moll, M.D........................... 46 Vice President, Medical Director and Director
Robert G. Younge................................ 46 Vice President, Engineering
Thierry B. Thaure............................... 35 Vice President, Sales and Marketing
Michael A. Daniel............................... 46 Vice President, Regulatory, Clinical Affairs and Quality
Marc N. Hoffman................................. 41 Vice President, Manufacturing and Services
Douglas M. Bruce................................ 40 Vice President, Program Management
K. Iain McAusland............................... 32 Chief Patent Counsel
Alan C. Mendelson............................... 50 Secretary
John G. Freund, M.D.(1)......................... 44 Director
Scott S. Halsted (1)............................ 38 Director
Russell C. Hirsch, M.D., Ph.D.(2)............... 35 Director
Petri T. Vainio, M.D., Ph.D.(2)................. 38 Director
</TABLE>
- ---------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
LONNIE M. SMITH has served as President and Chief Executive Officer of the
Company since May 1997 and has served as a director of the Company since
December 1996. From 1977 until joining the Company, Mr. Smith was with
Hillenbrand Industries, Inc., a public holding company, serving as the Senior
Executive Vice President, a member of the Office of the President, and director
since 1982, as Executive Vice President of American Tourister, Inc. (a wholly
owned subsidiary) from 1978 to 1982, and as Senior Vice President of Corporate
Planning from 1977 to 1978. Mr. Smith has also held positions with The Boston
Consulting Group and IBM. Mr. Smith currently serves as a director of Biosite
Diagnostics, Inc. Mr. Smith received a B.S.E.E. from Utah State University and
an M.B.A. from Harvard Business School.
SUSAN K. BARNES has served as Vice President, Finance, Chief Financial
Officer and Assistant Secretary of the Company since May 1997. From January 1995
to September 1996, Ms. Barnes founded and served as Managing Director of the
Private Equity Group of Jefferies and Company, Inc., an investment bank. From
January 1994 to January 1995, she founded and served as Managing General Partner
of Westwind Capital Partners, a private equity fund. From June 1991 to January
1994, Ms. Barnes served as Chief Financial Officer and Managing Director of
Richard C. Blum & Associates, Inc., a merchant banking firm. From September 1985
to June 1991, she served as Vice President and Chief Financial Officer of NeXT
Computer, Inc., a computer company. Ms. Barnes received a B.A. from Bryn Mawr
College and an M.B.A. from the Wharton School, University of Pennsylvania.
FREDERIC H. MOLL, M.D. is a co-founder of the Company and has served as Vice
President, Medical Director and a director since inception. In 1989, Dr. Moll
co-founded Origin Medsystems, Inc., a medical
53
<PAGE>
device company ("Origin") and served as Medical Director through 1995. Origin
was acquired by Eli Lilly & Company in 1992 and is now a wholly owned subsidiary
of Guidant Corporation, a medical device company. In 1984, Dr. Moll founded
Endotherapeutics, Inc., a medical device company, which was acquired by United
States Surgical Corporation in 1992. Dr. Moll received a B.A. from the
University of California, Berkeley, an M.S. in Management from Stanford
University's Sloan Program and an M.D. from the University of Washington.
ROBERT G. YOUNGE is a co-founder of the Company and has served as Vice
President, Engineering since inception. Mr. Younge co-founded Acuson
Corporation, a medical device company ("Acuson"), in 1981 and served as Vice
President, Engineering and in various capacities until founding the Company.
From 1994 to December 1995, Mr. Younge managed the Product Engineering Group at
Acuson which introduced the Aspen System in 1996. In 1991, he founded Acuson's
Transducer Division and served as its General Manager until 1994. The Transducer
Division introduced Acuson's first flexible endoscopic transducer. Mr. Younge
received both a B.S.E.E. and an M.S.E.E. from Stanford University.
THIERRY B. THAURE has served as Vice President, Sales and Marketing of the
Company since May 1997. From January 1994 to April 1997, Mr. Thaure served as
Director of International Sales and Marketing for Guidant Corporation's
Minimally Invasive System Group, and from January 1993 to January 1994, he
served as Manager, International Sales and Marketing of Guidant Corporation.
From July 1990 to December 1992, Mr. Thaure held various positions in Marketing
and Business Development at Advanced Cardiovascular Systems, Inc., a wholly
owned subsidiary of Guidant Corporation. Mr. Thaure received a B.S. from Duke
University and an M.M. from Northwestern University.
MICHAEL A. DANIEL has served as Vice President, Regulatory, Clinical Affairs
and Quality of the Company since February 1997. From June 1995 to February 1997,
Mr. Daniel served as Vice President, Product Assurance of FemRx, Inc., a medical
device company. From April 1993 to June 1995, he served as Manager, Product
Assurance and Regulatory Affairs of SmithKline Beckman Instruments, Inc., a
medical device company. From June 1988 to April 1993, Mr. Daniel served as
Director, Quality Assurance and Director NIH Product Development Programs of
Novacor, a division of Baxter Healthcare Corporation. Mr. Daniel received a B.S.
from Michigan State University, an M.S. from Illinois Institute of Technology
and an M.B.A. from the University of California, Berkeley.
MARC N. HOFFMAN has served as Vice President, Manufacturing and Services of
the Company since January 1998. From August 1995 to December 1997, Mr. Hoffman
served as Vice President, Operations, Engines, of AlliedSignal Aerospace, a
manufacturer of aircraft engines and a division of AlliedSignal, Inc.
("AlliedSignal"), and from August 1994 to July 1995, he served as Vice
President, Manufacturing, Aerospace Sector, of AlliedSignal. From January 1993
to July 1994, Mr. Hoffman served as a Senior Management Consultant of TBM
Consulting Group, a consulting firm, and from February 1981 to December 1992, he
served as Plant Manager, Components Manufacturing Company, of General Electric
Company. Mr. Hoffman received a B.S. from Cornell University.
DOUGLAS M. BRUCE has served as Vice President, Program Management of the
Company since December 1997 and as a Program Manager from May 1997 to December
1997. From February 1997 to May 1997, Mr. Bruce served as Vice President,
Engineering of Acuson and from December 1995 to January 1997, he served as its
Director of Engineering. From August 1994 to December 1995, Mr. Bruce served as
a Program Manager of Acuson and from October 1987 to August 1994, he served as
Mechanical Engineering Manager. Mr. Bruce received a B.S. from the University of
California, Berkeley and an M.S. from the University of Santa Clara.
K. IAIN MCAUSLAND has served as Chief Patent Counsel of the Company since
June 1996. From September 1991 to June 1996, Mr. McAusland was an associate at
Fish & Neave. Mr. McAusland received a B.A. from Pembroke College at Cambridge
University and a J.D. from Boston College Law School.
54
<PAGE>
ALAN C. MENDELSON has served as Secretary of the Company since inception. He
has been a partner of Cooley Godward LLP, counsel to the Company, since 1980 and
served as Managing Partner of its Palo Alto office from 1990 to 1995 and from
November 1996 to September 1997. Mr. Mendelson also served as Secretary and
Acting General Counsel of Amgen, Inc., a biopharmaceutical company, from 1990 to
1991, and served as Acting General Counsel of Cadence Design Systems, Inc., an
electronic design automation software company, from November 1995 to June 1996.
Mr. Mendelson currently serves as a director of Acuson, CoCensys, Inc. and Isis
Pharmaceuticals, Inc. Mr. Mendelson received a B.A. from the University of
California, Berkeley and a J.D. from the Harvard Law School.
JOHN G. FREUND, M.D. is a co-founder of the Company and has served as a
director since inception. At the time of inception, he also served briefly as
the Company's Chief Executive Officer. Dr. Freund has served as Managing
Director of the General Partner of Skyline Venture Partners, L.P., a venture
capital firm, since October 1997. He served as Managing Director in the
Alternative Assets Group of Chancellor Capital Management, Inc. (later
Chancellor LGT Asset Management, Inc.), from August 1995 to September 1997. From
July 1988 through December 1994, Dr. Freund was employed at Acuson, where he was
Vice President, Corporate Development and later Executive Vice President.
Previously, he was a partner in Morgan Stanley Venture Partners, a venture
capital firm, and also co-founded the healthcare group in the corporate finance
department of Morgan Stanley & Co. Incorporated. Dr. Freund currently serves as
a director of LJL BioSystems, Inc. and several private companies. Dr. Freund
received a B.A. from Harvard College, an M.D. from the Harvard Medical School
and an M.B.A. from Harvard Business School where he was a Baker Scholar.
SCOTT S. HALSTED has served as a director of the Company since March 1997.
Mr. Halsted joined Morgan Stanley Venture Partners, a venture capital firm, in
1987, and has been a general partner since 1997. Mr. Halsted currently serves as
a director of several private healthcare companies. Mr. Halsted received an A.B.
and B.E. degrees in Biomechanical Engineering from Dartmouth College and an M.M.
from Northwestern University.
RUSSELL C. HIRSCH, M.D., PH.D., has served as a director of the Company
since December 1995. He joined Mayfield Fund, a venture capital firm, in 1992,
and has been a managing member of several venture capital funds affiliated with
Mayfield Fund since 1995. From 1984 to 1992, Dr. Hirsch conducted research in
the laboratories of Nobel Laureate Harold Varmus, M.D., and Don Ganem, M.D., at
the University of California, San Francisco. Dr. Hirsch currently serves as a
director of Megabios Corp. Dr. Hirsch received a B.S. in Chemistry from the
University of Chicago and an M.D. and a Ph.D. from the University of California,
San Francisco.
PETRI T. VAINIO, M.D., PH.D. has served as a director of the Company since
December 1995. He joined Sierra Ventures, a venture capital firm, in 1988, and
has been a general partner of Sierra Ventures since 1990. Dr. Vainio currently
serves as a director of Heartport, Inc. and Symphonix Devices, Inc. Dr. Vainio
received an M.D. and a Ph.D. from the University of Helsinki, Finland, and an
M.B.A. from Stanford University.
The Company's Bylaws currently authorize one or more directors, the number
of directors to be determined from time to time by resolution of the Board of
Directors. The Company's Board of Directors is currently comprised of six
directors. Directors are elected by the stockholders at each annual meeting of
stockholders to serve until the next annual meeting of stockholders or until
their successors are duly elected and qualified. Executive officers are elected
by, and serve at the discretion of, the Board. The Company's Amended and
Restated Certificate of Incorporation and Amended and Restated Bylaws, both of
which will become effective on the closing of this offering, provide that as
soon as the Company is no longer subject to Section 2115 of the California
Corporations Code ("Section 2115"), the Board of Directors will be divided into
three classes, Class I, Class II and Class III, with each class serving
staggered three-year terms. The Class I directors, initially Mr. Halsted and Dr.
Vainio, will stand for re-election or election at the 1999 annual meeting of
stockholders. The Class II directors, initially Drs. Hirsch and
55
<PAGE>
Freund, will stand for re-election or election at the 2000 annual meeting of
stockholders and the Class III directors, initially Dr. Moll and Mr. Smith, will
stand for re-election or election at the 2001 annual meeting of stockholders.
Until the Company is no longer subject to Section 2115, the directors will each
be elected each year to serve one year terms. In addition, stockholders may, in
certain circumstances, be entitled to cumulate votes with respect to the
election of directors. See "Description of Capital Stock."
BOARD COMMITTEES
The Company's Compensation Committee was formed in February 1997, to review
and approve the compensation and benefits for the Company's key executive
officers, administer the Company's stock purchase and stock option plans and
make recommendations to the Board regarding such matters. The Compensation
Committee is currently composed of Drs. Hirsch and Vainio. The Audit Committee
was formed in February 1997, to review the internal accounting procedures of the
Company and to consult with and review the services provided by the Company's
independent auditors. The Audit Committee is currently composed of Dr. Freund
and Mr. Halsted.
DIRECTOR COMPENSATION
Directors currently receive no cash compensation from the Company for their
services as members of the Board of Directors. They are reimbursed for certain
expenses in connection with attendance at Board and Committee meetings.
All of the Company's non-employee directors are entitled to receive
non-discretionary stock option grants under the Company's 1998 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan"). Options granted under the
Directors' Plan are intended by the Company not to qualify as incentive stock
options under the Code. Each option granted pursuant to the Directors' Plan has
an exercise price equal to the fair market value of the Common Stock on the date
of grant. The Directors' Plan provides for the grant of an option to purchase
25,000 shares for each non-employee director who joins the Board following the
initial public offering (the "Initial Grant"). The Initial Grant vests with
respect to 1/8(th) of the option shares on the six-month anniversary of the date
of grant and the remaining option shares vest in equal monthly installments over
the following 42 months. In addition to the Initial Grant, the Directors' Plan
provides for the grant of an option to purchase 2,500 shares (which amount shall
be prorated for non-employee directors who do not continuously serve as a
non-employee director of the Company for the 12 months prior to such grant)
immediately following each annual meeting of stockholders, beginning with a
grant in calendar year 1999 (the "Annual Grant"). The Annual Grant vests in 36
equal monthly installments over a 3-year period measured from the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
From the Company's inception through February 1997, the Board of Directors
made all determinations with respect to executive officer compensation. Since
March 1997, the Compensation Committee has made all determinations relating to
executive officer compensation.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation awarded to, earned by, or paid for services rendered to the Company
in all capacities by the Company's Chief
56
<PAGE>
Executive Officer and each of the Company's executive officers who earned more
than $100,000 during the year ended December 31, 1997 (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION(1) -----------
---------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) COMPENSATION($) OPTIONS(#)
- -------------------------------------------- --------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Lonnie M. Smith............................. 1997 $ 212,500 $ 62,532(2) 300,000
President and Chief Executive Officer
Susan K. Barnes............................. 1997 105,705 -- 200,000
Vice President, Finance, Chief Financial
Officer and Assistant Secretary
Frederic H. Moll, M.D....................... 1997 170,000 -- 300,000
Vice President and Medical Director
Robert G. Younge............................ 1997 160,025 -- 300,000
Vice President, Engineering
</TABLE>
- ---------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), other annual compensation in the form of perquisites and
other personal benefits has been omitted where the aggregate amount of such
perquisites and other personal benefits constitutes less than the lesser of
$50,000 or 10% of the total annual salary and bonus for the Named Executive
Officer for the year.
(2) Includes reimbursement of expenses incurred in connection with relocating to
California as follows: $32,607 in direct reimbursement and $29,925 in tax
gross-up.
OPTION GRANTS IN 1997
The following table sets forth certain information regarding stock options
granted to each of the Named Executive Officers during the year ended December
31, 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
INDIVIDUAL GRANTS(1)
------------------------------ AT ASSUMED ANNUAL RATES OF
NUMBER OF PERCENTAGE OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(4)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------------
NAME GRANTED(#) FISCAL YEAR(2) ($/SH)(3) DATE 5%($) 10%($)
- ---------------------------- ----------- ----------------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lonnie M. Smith............. 300,000 11.6% $ 0.50 05/08/07
Susan K. Barnes............. 200,000 7.7 0.50 05/18/07
Frederic H. Moll, M.D....... 300,000 11.6 0.50 05/08/07
Robert G. Younge............ 300,000 11.6 0.50 05/08/07
</TABLE>
- ---------
(1) Options granted under the Company's 1996 Equity Incentive Plan. These
options are immediately exercisable. They vest as to 1/8(th) of the option
shares on the six-month anniversary of the date of grant and the remaining
option shares vest in equal monthly installments over the following 42
months. These options have a term of ten years. Upon certain changes of
control of the Company, this vesting schedule will accelerate as to 100% of
any shares that are then unvested. See "--Employee Benefit Plans" for a
description of the material terms of these options.
57
<PAGE>
(2) Based on an aggregate of 2,585,950 options granted to employees, consultants
and directors of the Company in 1997, including the Named Executive
Officers.
(3) The exercise price is equal to 100% of the fair market value of the Common
Stock on the date of grant, as determined by the Board of Directors.
(4) The potential realizable value is calculated based on the term of the option
at the time of grant (ten years). Stock price appreciation of five percent
and ten percent is assumed pursuant to rules promulgated by the Commission
and does not represent the Company's prediction of its stock price
performance. The potential realizable value at 5% and 10% appreciation is
calculated by assuming that the assumed initial public offering price
($ per share) appreciates at the indicated rate for the entire term
of the option and that the option is exercised at the exercise price and
sold on the last day of its term at the appreciated price.
AGGREGATE OPTION EXERCISES IN 1997 AND YEAR-END OPTION VALUES
The following table sets forth information regarding the exercise of stock
options by the Named Executive Officers during 1997 and stock options held as of
December 31, 1997, by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES ACQUIRED AT DECEMBER 31, 1997(#) AT DECEMBER 31, 1997($)(3)
ON VALUE -------------------------- --------------------------
NAME EXERCISE(#)(1) REALIZED($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ---------------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lonnie M. Smith......... 300,000 $ -- -- -- --
Susan K. Barnes......... 200,000 -- -- -- --
Frederic H. Moll,
M.D................... 300,000 -- -- -- --
Robert G. Younge........ -- -- 300,000 -- $ --
</TABLE>
- ---------
(1) Certain shares acquired on exercise are subject to repurchase by the Company
at the original exercise price paid per share upon the optionee's cessation
of service prior to vesting in such shares. The repurchase right lapses and
the optionee vests in the shares issued upon exercise of the options as to
1/8(th) of the shares on the six-month anniversary of the date of grant and
the remaining shares vest in equal monthly installments over the following
42 months.
(2) Value realized is based on the assumed initial offering price of the
Company's Common Stock ($ per share), less the exercise price,
without taking into account any taxes that may be payable in connection with
the transaction, multiplied by the number of shares underlying the option.
(3) Based on the assumed initial offering price of the Company's Common Stock
($ per share), less the exercise price, without taking into account
any taxes that may be payable in connection with the transaction, multiplied
by the number of shares underlying the option.
EMPLOYEE BENEFIT PLANS
1998 EQUITY INCENTIVE PLAN. In January 1996, the Board adopted, and the
stockholders approved, the 1996 Equity Incentive Plan. In April 1998, the Board
adopted, subject to stockholder approval to be obtained prior to the closing of
this offering, the 1998 Equity Incentive Plan (the "Incentive Plan") as an
amendment and restatement of the Company's 1996 Equity Incentive Plan. The
Company has reserved a total of 7,340,000 shares for issuance under the
Incentive Plan; provided that such amount shall be increased on January 1 of
each year, beginning with January 1, 1999, by an amount equal to 3% of the total
outstanding shares of Common Stock (calculated on a fully diluted, fully
converted basis) measured as of
58
<PAGE>
the immediately preceding December 31. The Incentive Plan provides for grants of
incentive stock options that qualify under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), to employees (including officers and
employee directors) of the Company or any affiliate and nonstatutory stock
options, restricted stock purchase awards, stock bonuses and stock appreciation
rights to employees (including officers and employee directors), directors of
and consultants to the Company or any affiliate. The number of shares granted
pursuant to stock bonuses shall at no time exceed 10% of the then current share
reserve. The Incentive Plan shall be administered by the Board or a committee
appointed by the Board (references herein to the Board shall include any such
committee). It is intended that the Incentive Plan will be administered by the
Compensation Committee currently consisting of Drs. Hirsch and Vainio, both of
whom are "non-employee directors" under applicable securities laws and "outside
directors," as defined under the Code. The Board has the authority to determine
which recipients and what types of awards are to be granted, including the
exercise price, number of shares subject to the award and the exercisability
thereof.
The term of a stock option granted under the Incentive Plan generally may
not exceed ten years. The exercise price of options granted under the Incentive
Plan is determined by the Board, but, in the case of an incentive stock option,
cannot be less than 100% of the fair market value of the Common Stock on the
date of grant. Options granted under the Incentive Plan vest at the rate
specified in the option agreement. Except as expressly provided by the terms of
a nonstatutory stock option agreement, no option may be transferred by the
optionee other than by will or the laws of descent or distribution or, in
certain limited instances, pursuant to a qualified domestic relations order,
provided that an optionee may designate a beneficiary who may exercise the
option following the optionee's death. An optionee whose relationship with the
Company or any related corporation ceases for any reason (other than by death or
permanent and total disability) may exercise vested options in the three-month
period following such cessation (unless such options terminate or expire sooner
by their terms) or in such longer period as may be determined by the Board and
set forth in the option agreement. Vested options may be exercised for up to
twelve months after an optionee's relationship with the Company or its affiliate
ceases due to disability and for up to eighteen months after such relationship
with the Company or its affiliate ceases due to death.
No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant and the term of the option
does not exceed five (5) years from the date of grant. In addition, the
aggregate fair market value, determined at the time of grant, of the shares of
Common Stock with respect to which incentive stock options are exercisable for
the first time by an optionee during any calendar year (under the Incentive Plan
and all other stock plans of the Company and its affiliates) may not exceed
$100,000. The options, or portions thereof, which exceed this limit are treated
as nonstatutory options.
When the Company becomes subject to Section 162(m) of the Code (which denies
a deduction to publicly held corporations for certain compensation paid to
specific employees in a taxable year to the extent that the compensation exceeds
$1.0 million, no person may be granted options under the Incentive Plan covering
more than 1,000,000 shares of Common Stock in any calendar year.
Shares subject to stock awards which have lapsed or terminated, without
having been exercised in full, and any shares repurchased by the Company
pursuant to a repurchase option provided under the Incentive Plan may again
become available for the grant of awards under the Incentive Plan. Shares
subject to stock appreciation rights exercised in accordance with the Incentive
Plan may not again become available for the grant of awards under the Incentive
Plan. In the event of a decline in the value of the Company's Common Stock, the
Board of Directors has the authority to offer optionees the opportunity to
replace outstanding options with new options for the same or a different number
of shares. Both the original and the new option will count towards the
per-person, calendar year limitation set forth above.
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Restricted stock purchase awards granted under the Incentive Plan may be
granted pursuant to a repurchase option in favor of the Company. The Company's
repurchase right lapses and the optionee vests in the shares awarded in
accordance with a vesting schedule determined by the Board. The purchase price
of such awards will be at least 85% of the fair market value of the Common Stock
on the date of grant. Stock bonuses may be awarded in consideration for past
services without a purchase payment and may be subject to vesting in which case
it is a restricted stock bonus. Rights under a stock bonus or restricted stock
bonus agreement may not be transferred other than by will, the laws of descent
and distribution or a qualified domestic relations order while the stock awarded
pursuant to such an agreement remains subject to the agreement, provided that an
optionee may designate a beneficiary who may exercise the option following
optionee's death. Stock appreciation rights authorized for issuance under the
Incentive Plan may be tandem stock appreciation rights, concurrent stock
appreciation rights or independent stock appreciation rights.
Upon certain changes in control of the Company, all outstanding stock awards
under the Incentive Plan shall either be assumed or substituted by the surviving
entity. If the surviving entity determines not to assume or substitute such
awards, then with respect to persons whose service with the Company or an
affiliate has not terminated prior to such change in control, the time during
which such awards may be exercised shall be accelerated and the awards
terminated if not exercised prior to such change in control and any Company
repurchase option or reacquisition right with respect to such person shall
lapse. Further, certain stock award agreements may provide that, with respect to
persons whose service with the Company or an affiliate has not terminated prior
to a change in control, if upon or within 24 months following a change in
control certain triggering events occur, then such person's stock awards will
automatically become fully vested and exercisable and any Company repurchase
option or reacquisition right with respect to such person's stock awards shall
lapse.
As of April 15, 1998, 2,477,695 shares had been issued upon the exercise of
options granted under the Incentive Plan and options to purchase 1,059,100
shares were outstanding with 3,703,205 shares reserved for future grants or
purchases under the Incentive Plan. In addition, the Company has also granted
stock awards to purchase 100,000 shares of Common Stock to consultants pursuant
to the Incentive Plan. The Incentive Plan will terminate in April 2008, unless
terminated sooner by the Board. See Notes 4 and 7 of Notes to Financial
Statements.
1998 EMPLOYEE STOCK PURCHASE PLAN. In April 1998, the Board adopted,
subject to stockholder approval to be obtained prior to the closing of this
offering, the 1998 Employee Stock Purchase Plan (the "Purchase Plan") covering
an aggregate of 1,500,000 shares of Common Stock. The Purchase Plan is intended
to qualify as an employee stock purchase plan within the meaning of Section 423
of the Code. Under the Purchase Plan, the Board may authorize participation by
eligible employees, including officers, in periodic offerings following the
adoption of the Purchase Plan. The offering period for any offering will be no
more than 27 months.
Employees are eligible to participate if they are employed by the Company,
or an affiliate of the Company designated by the Board, for at least 20 hours
per week and are employed by the Company, or an affiliate of the Company
designated by the Board, for at least five months per calendar year. Employees
who participate in an offering can have up to 10% of their earnings withheld
pursuant to the Purchase Plan. The amount withheld will then be used to purchase
shares of the Common Stock on specified dates determined by the Board. The price
of Common Stock purchased under the Purchase Plan will be equal to 85% of the
lower of the fair market value of the Common Stock on the commencement date of
each offering period or on the specified purchase date. Employees may end their
participation in the offering at any time during the offering period.
Participation ends automatically on termination of employment with the Company.
In the event of certain changes of control of the Company, the Board has
discretion to provide that each right to purchase Common Stock will be assumed
or an equivalent right substituted by the successor
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corporation, or the Board may shorten the offering period and provide for all
sums collected by payroll deductions to be applied to purchase Common Stock
immediately prior to the change in control. The Purchase Plan will terminate at
the Board's discretion. The Board has the authority to amend or terminate the
Purchase Plan, subject to the limitation that no such action may adversely
affect any outstanding rights to purchase Common Stock. See Note 7 of Notes to
Financial Statements.
1998 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN. In April 1998, the Board
adopted, subject to stockholder approval to be obtained prior to the closing of
this offering, the 1998 Non-Employee Directors' Stock Option Plan (the
"Directors' Plan") to provide for the automatic grant of options to purchase
shares of Common Stock to non-employee directors of the Company. The Directors'
Plan is administered by the Board, unless the Board delegates administration to
a committee comprised of members of the Board.
The aggregate number of shares of Common Stock that may be issued pursuant
to options granted under the Directors' Plan is 200,000. Pursuant to the terms
of the Directors' Plan, each director of the Company who is not an employee of
the Company (a "Non-Employee Director") and who is first elected or appointed to
be a Non-Employee Director after the closing of this offering shall
automatically be granted an option to purchase 25,000 shares of Common Stock
upon the date of such election or appointment (an "Initial Grant"). In addition,
each Non-Employee Director who continues to serve as a Non-Employee Director of
the Company will automatically be granted an option to purchase 2,500 shares of
Common Stock immediately following the annual meeting of stockholders of the
Company (an "Annual Grant"), which amount shall be pro-rated for any
Non-Employee Director who has not continuously served as a director for the 12
month period prior to the date of such annual meeting of stockholders. Each
Initial Grant shall vest as to 1/8(th) of the option shares on the six-month
anniversary of the date of grant and the remaining option shares shall vest in
equal monthly installments over the following 42 months. Each Annual Grant shall
vest in 36 equal monthly installments over a 3-year period measured from the
grant date.
In the event of certain changes of control of the Company and the occurrence
of a triggering event within 24 months of such change of control of the Company,
then such Non-Employee Director's options will automatically become fully vested
and exercisable.
No option granted under the Directors' Plan may be exercised after the
expiration of ten years from the date it was granted. The exercise price of
options under the Directors' Plan will equal the fair market value of the Common
Stock on the date of grant. The Directors' Plan will terminate in April 2008,
unless earlier terminated by the Board. See Note 7 of Notes to Financial
Statements.
As of April 15, 1998, no options to purchase Common Stock have been granted
pursuant to the Directors' Plan.
EXECUTIVE OFFICER AND EMPLOYMENT ARRANGEMENTS
In February 1997, the Company entered into an agreement with Mr. Smith
providing that, in the case of involuntary termination other than for cause, his
salary and benefits will continue to be paid for a period of one year from the
date of termination. Cause as defined in the agreement includes conviction for
any felony, willful breach of the Company's policies, and a material breach by
Mr. Smith of his employment agreement or of his proprietary information and
inventions agreement.
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CERTAIN TRANSACTIONS
Since November 1995, the Company has sold the following shares of Common
Stock and Preferred Stock in private placement transactions: in November 1995
and December 1995, 3,385,000 shares of Common Stock at a price of $0.001 per
share; in December 1995 and January 1996, 5,442,500 shares of Series A Preferred
Stock at a price of $1.00 per share; in January 1996, 470,000 shares of Series B
Preferred Stock at a price of $0.10 per share; in December 1996 and January
1997, 910,000 shares of Common Stock at a price of $0.05 per share; in January
1997 and March 1997, 6,000,000 shares of Series C Preferred Stock at a price of
$5.00 per share and in November 1997, 2,125,000 shares of Series D Preferred
Stock at a price of $8.00 per share. The Company also issued a warrant to
purchase 11,000 shares of Common Stock at an exercise price of $5.00 per share
in April 1997.
The purchasers of Common Stock and Preferred Stock described above included,
among others, the following officers, directors and holders of more than five
percent of the Company's voting securities:
<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK
COMMON ---------------------------------------------
STOCK SERIES A SERIES B SERIES C SERIES D
-------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
John G. Freund, M.D............................. 500,000 50,000 -- -- --
Frederic H. Moll, M.D........................... 1,050,000 150,000 -- -- --
Lonnie M. Smith................................. 700,000 -- -- -- --
Robert G. Younge................................ 1,100,000 100,000 -- -- --
ENTITIES AFFILIATED WITH DIRECTORS
Mayfield Fund................................... 150,000 2,700,000 -- 960,000 355,400
Sierra Ventures................................. -- 2,300,000 -- 600,000 125,000
Morgan Stanley Venture Partners................. -- -- -- 1,500,000 --
OTHER 5% STOCKHOLDERS
Allan G. Lozier................................. -- -- -- 1,200,000 116,000
</TABLE>
INVESTOR RIGHTS AGREEMENT. The Company, the holders of Preferred Stock, and
Drs. Freund and Moll and Mr. Younge (the "Founders") have entered into an
Amended and Restated Investor Rights Agreement, dated November 14, 1997 (the
"Investor Rights Agreement"), pursuant to which the holders of all Preferred
Stock have certain registration rights with respect to their shares of Common
Stock following the closing of this offering. See "Description of Capital
Stock--Registration Rights."
STOCKHOLDERS AGREEMENT. The Company, the Founders, Mr. Smith, and entities
affiliated with Mayfield Fund, Sierra Ventures and Morgan Stanley Venture
Partners have entered into a Stockholders Agreement dated December 20, 1995, as
amended March 27, 1997 (the "Stockholders Agreement"). The Stockholders
Agreement provides all shares of voting capital stock of the Company registered
in the parties' respective names or beneficially owned by them shall be voted at
the election of directors so that one director shall be the Company's Chief
Executive Officer, two directors shall be nominees designated by the Founders,
two directors shall be nominees designated by Mayfield Fund, one director shall
be a nominee designated by Sierra Ventures and one director shall be a nominee
designated by Morgan Stanley Venture Partners. The Stockholders Agreement
terminates upon the closing of this offering.
The Company intends to enter into indemnification agreements with its
directors and officers for the indemnification of and advancement of expenses to
such persons to the full extent permitted by law. The Company also intends to
execute such agreements with its future directors and officers.
See also "Management--Executive Officer and Employment Arrangements."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 31, 1998 held by
(i) each person known to the Company to be the beneficial owner of more than 5%
of its outstanding shares of Common Stock, (ii) each director of the Company,
(iii) each of the Named Executive Officers of the Company, and (iv) all
directors and executive officers of the Company as a group. Except as otherwise
noted below, the address of each person listed below is c/o the Company, 1340 W.
Middlefield Road, Mountain View, California 94043.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
SHARES -------------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- ---------------------------------------------------------------------------- ------------ ----------- ------------
<S> <C> <C> <C>
Entities affiliated with Mayfield Fund (2) ................................. 4,165,400 20.0%
2800 Sand Hill Road
Menlo Park, California 94025
Entity affiliated with Sierra Ventures (3) ................................. 3,025,000 14.5%
3000 Sand Hill Road
Building 4, Suite 210
Menlo Park, California 94025
Entities affiliated with Morgan Stanley Venture Partners (4) ............... 1,500,000 7.2%
3000 Sand Hill Road
Building 4, Suite 250
Menlo Park, California 94025
Frederic H. Moll, M.D. (5).................................................. 1,500,000 7.2%
Allan G. Lozier ............................................................ 1,316,000 6.3%
c/o Lozier Corporation
6226 Pershing Drive
Omaha, Nebraska 67810
Robert G. Younge (6)........................................................ 1,298,000 6.1%
Russell C. Hirsch, M.D., Ph.D. (2).......................................... 4,165,400 20.0%
Petri T. Vainio, M.D., Ph.D. (3)............................................ 3,025,000 14.5%
Scott S. Halsted (4)........................................................ 1,500,000 7.2%
Lonnie M. Smith (7)......................................................... 1,000,000 4.8%
John G. Freund, M.D. (8).................................................... 550,000 2.6%
Susan K. Barnes (9)......................................................... 200,000 1.0%
All directors and executive officers as a group
(8 persons) (10)............................................................ 13,238,400 62.5%
</TABLE>
- ---------
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Beneficial ownership also includes shares of stock subject to
options and warrants currently exercisable or convertible, or exercisable or
convertible within 60 days of March 31, 1998. Percentage of beneficial
ownership is based on 20,874,779 shares of Common Stock outstanding as of
March 31, 1998, and shares of Common Stock outstanding after the
closing of this offering assuming the Underwriters' over-allotment option is
not exercised. Unless otherwise indicated below, to the knowledge of the
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<PAGE>
Company, all persons listed below have sole voting and investment power with
respect to their shares of Common Stock, except to the extent authority is
shared by spouses under applicable law.
(2) Represents 3,957,130 shares held by Mayfield VIII and 208,270 shares held by
Mayfield Associates Fund II. Dr. Hirsch, a director of the Company, is a
managing member of the general partner of Mayfield VIII and a general
partner of Mayfield Associates Fund II. Dr. Hirsch disclaims beneficial
ownership of shares held by such entities except to the extent of his
proportionate partnership interest therein.
(3) Represents 3,025,000 shares held by Sierra Ventures V, L.P. Dr. Vainio, a
director of the Company, is a general partner of the general partner of such
entity. Dr. Vainio disclaims beneficial ownership of shares held by such
entity except to the extent of his proportionate partnership interest
therein.
(4) Represents 1,368,600 shares held by Morgan Stanley Venture Partners III,
L.P. and 131,400 shares held by Morgan Stanley Venture Investors III, L.P.
Mr. Halsted, a director of the Company, is a general partner of the general
partner of such entities. Mr. Halsted disclaims beneficial ownership of
shares held by such entities except to the extent of his proportionate
partnership interest therein.
(5) Includes 645,000 shares subject to a right of repurchase by the Company 60
days from March 31, 1998.
(6) Includes 30,000 shares held by Diane Lauren Sotos, Trustee of the Younge
Irrevocable Trust fbo Ellen Sotos McCoy dated June 25, 1996 and 3,000 shares
held by Arthur G. Closson, Custodian fbo Eric Roy Younge, under the CUTMA,
to age 21. Also includes 440,000 shares subject to a right of repurchase by
the Company 60 days from March 31, 1998 and 300,000 shares Mr. Younge has
the right to acquire pursuant to options exercisable within 60 days of March
31, 1998. Mr. Younge disclaims beneficial ownership of the shares held for
the benefit of Ellen Sotos McCoy and Eric Roy Younge.
(7) Includes 200,000 shares held by McKRAM Investors, L.P. ("McKRAM"). Also
includes 702,667 shares subject to a right of repurchase by the Company 60
days from March 31, 1998. Mr. Smith, a partner of McKRAM, disclaims
beneficial ownership of shares held by such entity except to the extent of
his proportionate partnership interest therein.
(8) Represents (i) 450,000 shares held by the Freund/Sexton Living Trust dated
February 8, 1991, (ii) 75,000 shares held by the Freund/Sexton 1997
Children's Trust dated January 20, 1997 ("Children's Trust") and (iii)
25,000 shares held by the Sexton/Freund 1984 Family Trust ("Family Trust").
Dr. Freund does not have sole voting and investment power with respect to
the shares held by the Children's Trust. Dr. Freund disclaims beneficial
ownership of shares in the Children's Trust and Family Trust.
(9) Includes 150,000 shares subject to a right of repurchase by the Company 60
days from March 31, 1998.
(10) Includes 8,690,400 shares held by entities affiliated with certain
directors of the Company. Also includes 1,937,667 shares subject to a right
of repurchase by the Company 60 days from March 31, 1998 and 300,000 shares
subject to options exercisable within 60 days of March 31, 1998.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
On the closing of this offering, the authorized capital stock of the Company
will consist of 50,000,000 shares of Common Stock, par value $0.001, and
10,000,000 shares of Preferred Stock, par value $0.001.
The Company may be subject to Section 2115 of the California Corporations
Code. Section 2115 provides that, regardless of a company's legal domicile,
certain provisions of California corporate law will apply to that company if the
company meets certain requirements relating to its property, payroll and sales
in California and if more than one-half of its outstanding voting securities are
held of record by persons having addresses in California. Among other things,
Section 2115 may limit the ability of the Company to elect a classified Board of
Directors. The Company will not be subject to Section 2115 (i) at such time as
the Company is qualified for trading as a national market security on the Nasdaq
National Market and has 800 stockholders as of the record date of its most
recent annual meeting of stockholders or (ii) at the end of any income year
during which a certificate shall have been filed showing that less than one-half
of its outstanding voting securities are held of record by persons having
addresses in California or that one of the other tests of Section 2115 is not
met.
COMMON STOCK
Upon the closing of this offering, based on the number of shares outstanding
on March 31, 1998, there will be shares of Common Stock outstanding (plus
up to 11,000 shares that may be issued upon the exercise of an outstanding
warrant). The holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. Until the
Company is no longer subject to Section 2115, the holders of Common Stock are
entitled to cumulative voting rights with respect to the election of directors.
At such time or times as the Company is no longer subject to Section 2115, the
holders of Common Stock will not be entitled to cumulate voting rights with
respect to the election of directors, and as a consequence, minority
stockholders will not be able to elect directors on the basis of their votes
alone.
Subject to preferences that may be applicable to any Preferred Stock
outstanding at the time, the holders of outstanding shares of Common Stock are
entitled to receive dividends out of assets legally available therefor at such
time and in such amounts as the Board of Directors may from time to time
determine. See "Dividend Policy." Upon liquidation, dissolution or winding up of
the Company, holders of Common Stock are entitled to all assets remaining after
payment of liabilities and the liquidation preference of any then outstanding
shares of Preferred Stock. Holders of Common Stock have no preemptive rights and
no right to convert their Common Stock into any other securities. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are, and all shares of Common Stock to be
outstanding upon closing of this offering will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, each outstanding share of Preferred Stock
will be converted into of a share of Common Stock. Pursuant to the Company's
Amended and Restated Certificate of Incorporation, to be effective upon the
closing of this offering, the Board of Directors has the authority, without
further action by the stockholders, to issue up to 10,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of such series, without any further vote or action by the stockholders. The
issuance of Preferred Stock could adversely affect the voting power of holders
of Common Stock and the likelihood that such holders will receive dividend
payments and payments upon liquidation may have the effect of delaying,
deferring or preventing a change in control of
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<PAGE>
the Company, which could have a depressive effect on the market price of the
Company's Common Stock. The Company has no present plan to issue any shares of
Preferred Stock.
WARRANT
In April 1997, the Company issued a warrant to purchase 11,000 shares of its
Common Stock at an exercise price of $5.00 per share, exercisable at any time
through April 15, 2003, in connection with an equipment lease.
REGISTRATION RIGHTS
Upon the closing of this offering, the holders (or their permitted
transferees) ("Holders") of 14,037,500 shares of Common Stock are entitled to
certain rights with respect to the registration of such shares under the
Securities Act. If the Company proposes to register any of its securities under
the Securities Act, either for its own account or for the account of other
security holders, the Holders are entitled to notice of the registration and are
entitled to include, at the Company's expense, such shares therein. In addition,
certain of the Holders may require the Company at its expense on not more than
two occasions at any time beginning approximately six months from the date of
this Prospectus to file a Registration Statement under the Securities Act, with
respect to their shares of Common Stock, and the Company is required to use its
best efforts to effect the registration, subject to certain conditions and
limitations. Further, the Holders may require the Company at its expense to
register their shares on Form S-3 when such form becomes available to the
Company, subject to certain conditions and limitations.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder,
(ii) upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding, for purposes of determining the number of
shares outstanding, those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer or (iii) on or subsequent to
such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least two-thirds of the outstanding
voting stock that is not owned by the interested stockholder.
Section 203 defines business combination to include (i) any merger or
consolidation involving the corporation and the interested stockholder, (ii) any
sale, transfer, pledge or other disposition involving the interested stockholder
of 10% or more of the assets of the corporation, (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder or
(iv) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or through
the corporation. In general, Section 203 defines an interested stockholder as
any entity or person beneficially owning 15% or more of the outstanding voting
stock of the corporation and any entity or person affiliated with or controlling
or controlled by such entity or person. See "Risk Factors--Anti-Takeover Effect
of Delaware Law and Certain Charter and Bylaw Provisions."
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<PAGE>
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") and Amended and Restated Bylaws (the "Bylaws"),
both of which will become effective upon the closing of this offering, provide
that at such time or times that the Company is no longer subject to Section
2115, the Company will have a classified Board of Directors. Accordingly, at
that time, each director will serve for a three-year term, with approximately
one-third of the directors to be elected annually. Candidates for director may
be nominated only by the Board of Directors or by a stockholder who gives
written notice to the Company no later than 60 days prior nor earlier than 90
days prior to the first anniversary of the last annual meeting of stockholders.
The Board may consist of one or more members to be determined from time to time
by resolution of the Board. The Board currently consists of six members. Between
stockholder meetings, the Board may appoint new directors to fill vacancies or
newly created directorships. The Certificate of Incorporation and Bylaws provide
that at such time as the Company is no longer subject to Section 2115,
cumulative voting at stockholder meetings for the election of directors will not
be allowed. As a result, stockholders controlling more than 50% of the
outstanding Common Stock will be able to elect the entire Board of Directors,
while stockholders controlling 49% of the outstanding Common Stock may not be
able to elect any directors. The Certificate of Incorporation and Bylaws also
provide that during such time as the Company is subject to Section 2115, a
director may be removed with or without cause by the affirmative vote of the
holders of at least a majority of the then outstanding shares of voting stock.
At such time that the Company is no longer subject to Section 2115, the
Certificate of Incorporation and Bylaws provide that a director may be removed
from office for cause by the affirmative vote of a majority of the combined
voting power of the then outstanding shares of stock entitled to vote generally
in the election of directors.
The Company's Certificate of Incorporation and Bylaws require that upon the
closing of this offering, any action required or permitted to be taken by
stockholders of the Company must be effected at a duly called annual or special
meeting of stockholders and may not be effected by a consent in writing. The
Company's Certificate of Incorporation also provides that the authorized number
of directors may be changed only by resolution of the Board of Directors. See
"Management--Officers and Directors." Delaware Law and these charter provisions
may have the effect of deterring hostile takeovers or delaying changes in
control or management of the Company, which could have a depressive effect on
the market price of the Company's Common Stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation and Bylaws contain certain
provisions permitted under Delaware Law relating to the liability of directors.
These provisions eliminate a director's personal liability for monetary damages
resulting from a breach of fiduciary duty, except in certain circumstances
involving certain wrongful acts, such as (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derives an improper personal
benefit. These provisions do not limit or eliminate the rights of the Company or
any stockholder to seek non-monetary relief, such as an injunction or
rescission, in the event of a breach of director's fiduciary duty. These
provisions will not alter a director's liability under federal securities laws.
The Company's Certificate of Incorporation and Bylaws also contain provisions
indemnifying the directors and officers of the Company to the fullest extent
permitted by Delaware General Corporation Law. The Company believes that these
provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors and officers.
The Company intends to enter into indemnification agreements with its
directors and officers for the indemnification of and advancement of expenses to
such persons to the full extent permitted by law. The Company also intends to
execute such agreements with its future directors and officers. In addition, the
Company intends to obtain directors and officers insurance to be effective
concurrently with this offering.
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TRANSFER AGENT
The transfer agent and registrar for the Common Stock of the Company is
BankBoston, N.A. (the "Transfer Agent"). The telephone number of the Transfer
Agent is (781) 575-2000.
LISTING
The Company has applied to have the Common Stock quoted on the Nasdaq
National Market under the symbol "ISRG."
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices from time to time.
Furthermore, since no shares will be available for sale shortly after this
offering because of certain contractual and legal restrictions on resale (as
described below), sales of substantial amounts of Common Stock of the Company in
the public market after these restrictions lapse could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.
Upon the closing of this offering, the Company will have outstanding an
aggregate of shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options and a
warrant. Of these shares, the shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
unless such shares are purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act (the "Affiliates"). The remaining
20,874,779 shares of Common Stock held by existing stockholders are "restricted
securities" as that term is defined in Rule 144 under the Securities Act
("Restricted Shares"). Restricted Shares may be sold in the public market only
if registered or if they qualify for an exemption from registration described
below under Rules 144, 144(k) or 701 promulgated under the Securities Act, which
rules are summarized below. As a result of such contractual restrictions and the
provisions of Rules 144, 144(k) and 701, the Restricted Shares will be available
for sale in the public market as follows: (i) no shares will be eligible for
immediate sale on the date of this Prospectus and (ii) approximately 18,447,659
shares (excludes approximately 2,693,361 shares subject to repurchase by the
Company and includes approximately 255,241 shares subject to outstanding vested
options and 11,000 shares subject to an outstanding warrant) will be eligible
for sale upon expiration of the lock-up agreements 180 days after the date of
this Prospectus. All officers, directors, stockholders and option holders of the
Company have agreed not to offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly (or enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of), any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for shares of Common Stock, for a period of 180 days
after the date of this Prospectus, without the prior written consent of Morgan
Stanley & Co. Incorporated. Morgan Stanley & Co. Incorporated may in its sole
discretion choose to release a certain number of these shares from such
restrictions prior to the expiration of such 180 day period.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: (i) 1% of the number of shares of Common Stock then outstanding
(which will equal approximately shares immediately after this offering);
or (ii) the average weekly trading volume of the Common Stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a notice
on Form 144 with respect to such sale. Sales under Rule 144 are also subject to
certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an Affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of any
prior owner except an Affiliate), is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144; therefore, unless otherwise restricted, shares
will qualify as "144(k) shares" on the date of this Prospectus and may be sold
immediately upon the completion of this offering.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, employees, directors, officers, consultants or
advisors may rely on Rule 701 with respect to the resale of
69
<PAGE>
securities originally purchased from the Company prior to the date the issuer
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), pursuant to written compensatory benefit
plans or written contracts relating to the compensation of such persons. In
addition, the Commission has indicated that Rule 701 will apply to typical stock
options granted by an issuer before it becomes subject to the reporting
requirements of the Exchange Act, along with the shares acquired upon exercise
of such options (including exercises after the date of this Prospectus).
Securities issued in reliance on Rule 701 are restricted securities and, subject
to the contractual restrictions described above, beginning 90 days after the
date of this Prospectus, may be sold by persons other than Affiliates subject
only to the manner of sale provisions of Rule 144, and by Affiliates under Rule
144 without compliance with its holding period requirements.
Upon the closing of this offering, the holders of approximately 14,037,500
shares of Common Stock, or their transferees, will be entitled to certain rights
with respect to the registration of such shares under the Securities Act. See
"Description of Capital Stock--Registration Rights." Registration of such shares
under the Securities Act would result in such shares becoming freely tradable
without restriction under the Securities Act (except for share purchases by
affiliates) immediately upon the effectiveness of such registration.
The Company intends to file registration statements under the Securities Act
covering 9,040,000 shares of Common Stock reserved for issuance under the
Incentive Plan, the Purchase Plan and the Directors' Plan. See
"Management--Employee Benefit Plans." Such registration statements are expected
to be filed and become effective as soon as practicable after the effective date
of this offering. Accordingly, shares registered under such registration
statements will, subject to Rule 144 volume limitations applicable to
Affiliates, be available for sale in the open market, beginning 180 days after
the date of the Prospectus, unless such shares are subject to vesting
restrictions with the Company.
70
<PAGE>
UNDERWRITERS
Under the terms of and subject to the conditions contained in an
Underwriting Agreement dated the date of this Prospectus hereof (the
"Underwriting Agreement"), the Underwriters named below (the "Underwriters"),
for whom Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc. and BT
Alex. Brown Incorporated are serving as Representatives (the "Representatives"),
have severally agreed to purchase, and the Company has agreed to sell to the
Underwriters severally, the respective number of shares of Common Stock set
forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Morgan Stanley & Co. Incorporated................................................
Bear, Stearns & Co. Inc..........................................................
BT Alex. Brown Incorporated......................................................
----------
Total..........................................................................
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all of the shares of Common Stock offered hereby (other than the
shares covered by the over-allotment option described below) if any such shares
are taken.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the initial public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the initial public offering
price. Any Underwriter may allow, and such dealers may reallow, a concession not
in excess of $ a share to other Underwriters or to certain dealers. After
the initial offering of the shares of Common Stock, the offering price and other
selling terms may from time to time be varied by the Underwriters.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of
additional shares of Common Stock at the initial public offering price
set forth on the cover page hereof, less underwriting discounts and commissions.
The Underwriters may exercise such option to purchase solely for the purpose of
covering over-allotments, if any, incurred in the sale of the shares of Common
Stock offered hereby. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares of Common Stock as the number set
forth next to such Underwriter's name in the preceding table bears to the total
number of shares of Common Stock offered hereby to the Underwriters.
The Representatives have informed the Company that they will not make sales
of the Common Stock offered hereby to accounts over which they exercise
discretionary authority without prior specific written approval of the customer.
71
<PAGE>
In March 1997, Morgan Stanley Venture Partners III, L.P. and Morgan Stanley
Venture Investors III, L.P., entities affiliated with Morgan Stanley & Co.
Incorporated, purchased an aggregate of 1,500,000 shares of the Company's
Preferred Stock at a purchase price of $5.00 per share, for an aggregate of
$7,500,000. Such shares will convert into 1,500,000 shares of Common Stock upon
the closing of this offering.
See "Shares Eligible for Future Sale" for a description of certain
arrangements by which all officers, directors, stockholders and option holders
of the Company have agreed not to sell or otherwise dispose of Common Stock or
convertible securities of the Company for up to 180 days after the date of this
Prospectus without the prior consent of Morgan Stanley & Co. Incorporated. The
Company has agreed in the Underwriting Agreement that it will not, directly or
indirectly, without the prior written consent of Morgan Stanley & Co.
Incorporated, offer, pledge, sell, lend, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock, for a period of 180 days after the date of this Prospectus,
except under certain circumstances.
In order to facilitate the offering of Common Stock, the Underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price of
the Common Stock. Specifically, the Underwriters may over-allot in connection
with the offering, creating a short position in the Common Stock for their own
account. In addition, to cover the over-allotments or to stabilize the price of
the Common Stock, the Underwriters may bid for, and purchase, shares of Common
Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an Underwriter or a dealer for distributing the
Common Stock in the offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
The Underwriters have reserved for sale, at the initial public offering
price, up to an aggregate of five percent of the Common Stock offered hereby for
employees and directors of the Company and certain others, including vendors,
physicians and consultants who have expressed an interest in purchasing such
shares of Common Stock in the offering. The number of shares available for sale
to the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
Underwriters to the general public on the same basis as other shares offered
hereby.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the Common Stock
or any other securities of the Company. The initial public offering price for
the Common Stock will be determined by negotiations between the Company and the
Representatives. Among the factors that will be considered in determining the
initial public offering price are the future prospects of the Company and its
industry in general; sales, earnings and certain other financial and operating
information of the Company in recent periods; and certain ratios, price-sales
ratios, market prices of securities and certain financial and operating
information of companies engaged in activities similar to those of the Company.
72
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward LLP, Palo Alto, California. GC&H
Investments, an investment partnership comprised primarily of certain partners
and associates of Cooley Godward LLP, beneficially owns 30,000 shares of the
Company's Preferred Stock which shares will convert into shares of the
Company's Common Stock upon the closing of this offering. Certain legal matters
will be passed upon for the Underwriters by Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, Menlo Park, California.
EXPERTS
The financial statements of the Company as of December 31, 1996, and 1997
and for the period from inception (November 9, 1995) to December 31, 1996 and
for the year ended December 31, 1997 appearing in this Prospectus and
Registration Statement have been included herein and in the Registration
Statement in reliance upon the reports of Ernst & Young LLP, independent
certified accountants appearing elsewhere herein, and upon authority of said
firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement on Form S-1 under the Securities Act with respect to the
shares of Common Stock offered. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedule filed therewith. Certain items are omitted in accordance with the rules
and regulations of the Commission. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedule filed therewith. Statements
contained in this Prospectus as to the contents of any contract or any other
document referred to are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement, and the
exhibits and schedule filed therewith, may be inspected without charge at the
public reference facilities maintained by the Commission in Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and the Commission's regional offices
located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New
York 10048, and copies of all or any part of the Registration Statement may be
obtained from such offices upon the payment of the fees prescribed by the
Commission. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
site is http://www.sec.gov. The Registration Statement, including all exhibits
thereto and amendments thereof, has been filed with the Commission through the
Electronic Data Gathering, Analysis and Retrieval system (EDGAR).
73
<PAGE>
INTUITIVE SURGICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Balance Sheets........................................................................ F-3
Statements of Operations.............................................................. F-4
Statement of Stockholders' Equity..................................................... F-5
Statements of Cash Flows.............................................................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Intuitive Surgical, Inc.
We have audited the accompanying balance sheets of Intuitive Surgical, Inc.
(a development stage company) as of December 31, 1996 and 1997, and the related
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 1997, the period from inception (November 9, 1995) to December 31,
1996, and the period from inception (November 9, 1995) to December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Intuitive Surgical, Inc. (a
development stage company) at December 31, 1996 and 1997, and the results of its
operations and its cash flows for the year ended December 31, 1997, the period
from inception (November 9, 1995) to December 31, 1996, and the period from
inception (November 9, 1995) to December 31, 1997, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
February 6, 1998,
except for Note 7, as to which the date is
April 21, 1998
F-2
<PAGE>
INTUITIVE SURGICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
-------------------- MARCH 31, MARCH 31,
1996 1997 1998 1998
--------- --------- ----------- -----------
(UNAUDITED) (NOTE 7)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 1,494 $ 17,034 $ 7,625
Short-term investments........................... -- 15,640 18,678
Prepaid expenses................................. 70 196 317
--------- --------- -----------
Total current assets............................... 1,564 32,870 26,620
Property and equipment, net........................ 725 2,804 3,487
--------- --------- -----------
$ 2,289 $ 35,674 $ 30,107
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 472 $ 1,811 $ 2,857
Accrued liabilities.............................. 47 377 568
Accrued license fee.............................. -- 5,000 5,000
Current portion of capital lease obligations..... -- 258 403
--------- --------- -----------
Total current liabilities.......................... 519 7,446 8,828
Capital lease obligations, noncurrent.............. -- 897 1,297
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, 15,000,000 shares
authorized, $0.001 par value, issuable in
series: 14,412,500 designated, 14,037,500
shares issued and outstanding, aggregate
liquidation preference of $52,489,500 at March
31, 1998; none pro forma....................... 6 14 14 $ --
Common stock, 35,000,000 shares authorized,
$0.001 par value, 3,833,000, 6,594,520 and
6,837,279 shares issued and outstanding at
December 31, 1996, December 31, 1997, and March
31, 1998, respectively, and 20,874,779 pro
forma.......................................... 4 7 7 21
Additional paid-in capital....................... 5,447 56,430 57,450 57,450
Deferred compensation............................ -- (1,831) (2,185) (2,185)
Deficit accumulated during the development
stage.......................................... (3,687) (27,289) (35,304) (35,304)
--------- --------- ----------- -----------
Total stockholders' equity......................... 1,770 27,331 19,982 $ 19,982
--------- --------- ----------- -----------
-----------
$ 2,289 $ 35,674 $ 30,107
--------- --------- -----------
--------- --------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
INTUITIVE SURGICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM PERIOD FROM
INCEPTION INCEPTION INCEPTION
(NOVEMBER 9, (NOVEMBER 9, THREE MONTHS (NOVEMBER 9,
1995) TO YEAR ENDED 1995) TO ENDED MARCH 31, 1995) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, -------------------- MARCH 31,
1996 1997 1997 1997 1998 1998
------------ ------------ ------------ --------- --------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating costs and expenses:
Research and development.............. $ 2,934 $ 14,282 $ 17,216 $ 1,793 $ 6,764 $ 23,980
General and administrative............ 951 4,434 5,385 686 1,627 7,012
Technology license.................... -- 6,000 6,000 -- -- 6,000
------------ ------------ ------------ --------- --------- ------------
Total operating costs and expenses...... 3,885 24,716 28,601 2,479 8,391 36,992
------------ ------------ ------------ --------- --------- ------------
Loss from operations.................... (3,885) (24,716) (28,601) (2,479) (8,391) (36,992)
Interest income......................... 198 1,244 1,442 70 423 1,865
Interest expense........................ -- (130) (130) -- (47) (177)
------------ ------------ ------------ --------- --------- ------------
Net loss................................ $ (3,687) $ (23,602) $ (27,289) $ (2,409) $ (8,015) $ (35,304)
------------ ------------ ------------ --------- --------- ------------
------------ ------------ ------------ --------- --------- ------------
Historical net loss per share:
Basic and diluted net loss per
share............................... $ (2.86) $ (11.24) $ (1.45) $ (2.53)
------------ ------------ --------- ---------
------------ ------------ --------- ---------
Shares used in computing basic and
diluted net loss per share.......... 1,287 2,100 1,662 3,169
------------ ------------ --------- ---------
------------ ------------ --------- ---------
Pro forma net loss per share:
Pro forma basic and diluted net loss
per share........................... $ (1.85) $ (0.47)
------------ ---------
------------ ---------
Shares used in computing pro forma
basic and diluted net loss per
share............................... 12,730 17,207
------------ ---------
------------ ---------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
INTUITIVE SURGICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM INCEPTION (NOVEMBER 9, 1995) TO MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK ADDITIONAL
------------------------ ----------------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
----------- ----------- ---------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to founders at
$0.001 per share in December 1995 for
technology license, cash and services.... -- -- 3,385,000 $ 4 $ -- $ --
Issuance of Series A stock to investors at
$1.00 per share in December 1995 for
cash, net of issuance costs of $53....... 5,442,500 5 -- -- 5,384 --
Issuance of Series B stock to investors at
$0.10 per share in January 1996 for cash,
net of issuance costs of $5.............. 470,000 1 -- -- 41 --
Issuance of common stock to employees and
consultants at $0.05 per share for cash
and services............................. -- -- 448,000 -- 22 --
Net loss from Inception (November 9, 1995)
to December 31, 1996..................... -- -- -- -- -- --
----------- ----- ---------- ----- ----------- -------
Balances at December 31, 1996.............. 5,912,500 6 3,833,000 4 5,447 --
Issuance of Series C stock to investors at
$5.00 per share in January 1997 and March
1997 for cash, net of issuance costs of
$51...................................... 6,000,000 6 -- -- 29,943 --
Issuance of Series D stock to investors at
$8.00 per share in November 1997 for
cash, net of issuance costs of $75....... 2,125,000 2 -- -- 16,923 --
Issuance of common stock to employees and
consultants at $0.05-$1.50 per share for
cash and services........................ -- -- 2,874,853 3 864 --
Repurchase of common stock from employees
at $0.05 per share....................... -- -- (113,333) -- (6) --
Deferred compensation resulting from grant
of options............................... -- -- -- -- 3,259 (3,259)
Amortization of deferred compensation...... -- -- -- -- -- 1,428
Net loss................................... -- -- -- -- -- --
----------- ----- ---------- ----- ----------- -------
Balances at December 31, 1997.............. 14,037,500 14 6,594,520 7 56,430 (1,831)
Issuance of common stock to employees and
consultants at $0.05-$3.00 per share for
cash (unaudited)......................... -- -- 242,759 -- 155 --
Deferred compensation resulting from grant
of options (unaudited)................... -- -- -- -- 865 (865)
Amortization of deferred compensation
(unaudited).............................. -- -- -- -- -- 511
Net loss (unaudited)....................... -- -- -- -- -- --
----------- ----- ---------- ----- ----------- -------
Balances at March 31, 1998 (unaudited)..... 14,037,500 $ 14 6,837,279 $ 7 $ 57,450 $ (2,185)
----------- ----- ---------- ----- ----------- -------
----------- ----- ---------- ----- ----------- -------
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE TOTAL
DEVELOPMENT STOCKHOLDERS'
STAGE EQUITY
-------------- -------------
<S> <C> <C>
Issuance of common stock to founders at
$0.001 per share in December 1995 for
technology license, cash and services.... $ -- $ 4
Issuance of Series A stock to investors at
$1.00 per share in December 1995 for
cash, net of issuance costs of $53....... -- 5,389
Issuance of Series B stock to investors at
$0.10 per share in January 1996 for cash,
net of issuance costs of $5.............. -- 42
Issuance of common stock to employees and
consultants at $0.05 per share for cash
and services............................. -- 22
Net loss from Inception (November 9, 1995)
to December 31, 1996..................... (3,687) (3,687)
-------------- -------------
Balances at December 31, 1996.............. (3,687) 1,770
Issuance of Series C stock to investors at
$5.00 per share in January 1997 and March
1997 for cash, net of issuance costs of
$51...................................... -- 29,949
Issuance of Series D stock to investors at
$8.00 per share in November 1997 for
cash, net of issuance costs of $75....... -- 16,925
Issuance of common stock to employees and
consultants at $0.05-$1.50 per share for
cash and services........................ -- 867
Repurchase of common stock from employees
at $0.05 per share....................... -- (6)
Deferred compensation resulting from grant
of options............................... -- --
Amortization of deferred compensation...... -- 1,428
Net loss................................... (23,602) (23,602)
-------------- -------------
Balances at December 31, 1997.............. (27,289) 27,331
Issuance of common stock to employees and
consultants at $0.05-$3.00 per share for
cash (unaudited)......................... -- 155
Deferred compensation resulting from grant
of options (unaudited)................... -- --
Amortization of deferred compensation
(unaudited).............................. -- 511
Net loss (unaudited)....................... (8,015) (8,015)
-------------- -------------
Balances at March 31, 1998 (unaudited)..... $ (35,304) $ 19,982
-------------- -------------
-------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
INTUITIVE SURGICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM PERIOD FROM
INCEPTION INCEPTION INCEPTION
(NOVEMBER 9, (NOVEMBER 9, THREE MONTHS ENDED (NOVEMBER 9,
1995) TO YEAR ENDED 1995) TO MARCH 31 1995) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, -------------------- MARCH 31,
1996 1997 1997 1997 1998 1998
------------ ------------ ------------ --------- --------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................ $ (3,687) $ (23,602) $ (27,289) $ (2,409) $ (8,015) $ (35,304)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization....... 173 706 879 133 265 1,144
Amortization of deferred
compensation...................... -- 1,428 1,428 67 511 1,939
Changes in operating assets and
liabilities:
Prepaid expenses.................. (70) (126) (196) (86) (121) (317)
Accounts payable.................. 472 1,339 1,811 (208) 1,046 2,857
Accrued liabilities............... 47 330 377 60 191 568
Accrued license fee............... -- 5,000 5,000 -- -- 5,000
------------ ------------ ------------ --------- --------- ------------
Net cash used in operating activities... (3,065) (14,925) (17,990) (2,443) (6,123) (24,113)
INVESTING ACTIVITIES
Capital expenditures.................... (898) (2,785) (3,683) (1,190) (948) (4,631)
Purchase of short-term investments,
net................................... -- (15,640) (15,640) -- (3,038) (18,678)
------------ ------------ ------------ --------- --------- ------------
Net cash used in investing activities... (898) (18,425) (19,323) (1,190) (3,986) (23,309)
FINANCING ACTIVITIES
Proceeds from issuance of preferred
stock, net............................ 5,431 46,874 52,305 29,949 -- 52,305
Proceeds from issuance of common
stock................................. 26 861 887 105 155 1,042
Proceeds from long-term borrowings...... -- 1,359 1,359 -- 644 2,003
Repayment of long-term borrowings....... -- (204) (204) -- (99) (303)
------------ ------------ ------------ --------- --------- ------------
Net cash provided by financing
activities............................ 5,457 48,890 54,347 30,054 700 55,047
------------ ------------ ------------ --------- --------- ------------
Net increase (decrease) in cash and cash
equivalents........................... 1,494 15,540 17,034 26,421 (9,409) 7,625
Cash and cash equivalents at beginning
of period............................. -- 1,494 -- 1,494 17,034 --
------------ ------------ ------------ --------- --------- ------------
Cash and cash equivalents at end of
period................................ $ 1,494 $ 17,034 $ 17,034 $ 27,915 $ 7,625 $ 7,625
------------ ------------ ------------ --------- --------- ------------
------------ ------------ ------------ --------- --------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
INTUITIVE SURGICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Intuitive Surgical, Inc., formerly Intuitive Surgical Devices, Inc. (the
"Company") was incorporated in Delaware on November 9, 1995 and is engaged in
the development of products designed to provide the flexibility of open surgery
while operating through ports. The Company is a development stage company, has
generated no revenue from product sales and has experienced significant
operating losses. As of March 31, 1998, the Company had an accumulated deficit
of $35.3 million. To date, the Company has engaged primarily in researching,
developing, testing and pursuing regulatory clearances for its products. The
Company expects to expend substantial additional funds and continue to incur
significant operating losses for the foreseeable future as it continues to fund
clinical trials in support of regulatory approvals, expands research and
development activities, establishes commercial-scale manufacturing capabilities
and expands sales and marketing activities.
Although the Company was incorporated on November 9, 1995, it did not
commence operating activities until early 1996. During the period ended December
31, 1995, the Company incurred minor amounts of legal and pre-operating costs,
which are immaterial in total.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity from date of purchase of three months or less to be cash equivalents
for the purpose of balance sheet and statement of cash flows presentation. The
Company's excess cash is invested in a Government Portfolio Class A
Institutional Money Market Fund, which is classified as a cash equivalent. The
carrying value of cash and cash equivalents approximates market value at
December 31, 1996 and 1997 and March 31, 1998.
SHORT-TERM INVESTMENTS
All short-term investments are classified as available-for-sale and
therefore carried at fair value. The Company's short-term investments primarily
consist of commercial paper with maturity dates greater than three months and
less than one year from date of purchase. Unrealized gains and losses on such
securities, when material, are reported as a separate component of stockholders'
equity. Realized gains and losses on available-for-sale securities are included
in investment income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets as follows: computer
equipment--three years; lab and manufacturing equipment--five years; office
furniture and equipment--five years; leasehold improvements--the shorter of the
remaining term of the related lease or five years; and software--the shorter of
the life of the license or three years. Equipment under capital lease is
amortized over the related lease term.
F-7
<PAGE>
INTUITIVE SURGICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development costs, which include clinical and regulatory costs,
are expensed to operations as incurred.
SOFTWARE DEVELOPMENT COSTS
Product development costs include costs related to software components that
are expensed as incurred until both technological feasibility has been
established for the software and all research and development activities for the
other components of the product have been completed. After technological
feasibility has been established for the software and all research and
development activities for the other components of the product have been
completed, any additional software costs are capitalized in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Cost of
Computer Software To Be Sold, Leased or Otherwise Marketed." The Company
believes that both technological feasibility of the software and completion of
research and development activities for the other components have not been
reached, and accordingly, no software costs have been capitalized to date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results could differ from these estimates.
INTERIM FINANCIAL INFORMATION
The financial information at March 31, 1998 and for the three months ended
March 31, 1997 and 1998 is unaudited but includes all adjustments (consisting of
normal recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position at such date and the operating results
and cash flows for those periods. Results of the March 31, 1998 period are not
necessarily indicative of the results for the entire year.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously required fully diluted
earnings per share. Stock options, warrants and common stock subject to a right
of repurchase have been excluded from the computation as their effect is
antidilutive.
Pro forma net loss per share for 1997 and the three months ended March 31,
1998 has been computed to give effect to the automatic conversion of convertible
preferred stock into 14,037,500 shares of common stock upon completion of the
Company's initial public offering (using the as-if-converted method) from the
original date of issuance.
F-8
<PAGE>
INTUITIVE SURGICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A reconciliation of shares used in the calculation of basic and diluted and
pro forma net loss per share follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------------- ----------------------------
1996 1997 1997 1998
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss............................................ $ (3,687,000) $ (23,602,000) $ (2,409,000) $ (8,015,000)
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Basic and Diluted:
Weighted average shares of common stock
outstanding..................................... 1,286,912 2,099,605 1,662,272 3,169,328
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Basic and diluted net loss per share................ $ (2.86) $ (11.24) $ (1.45) $ (2.53)
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Pro forma:
Shares used in computing basic and diluted net
loss per share.................................. 2,099,605 3,169,328
Adjusted to reflect the effect of the assumed
conversion of preferred stock................... 10,629,966 14,037,500
-------------- -------------
Weighted average shares used in computing pro
forma net loss per share........................ 12,729,571 17,206,828
-------------- -------------
-------------- -------------
Pro forma basic and diluted net loss per share...... $ (1.85) $ (0.47)
-------------- -------------
-------------- -------------
</TABLE>
Had the Company been in a net income position, diluted earnings per share
would have included additional shares relating to outstanding options, warrants,
and common stock subject to a right of repurchase determined using the treasury
stock method. Options, warrants, and common stock subject to a right of
repurchase amounted to 2,615,768 and 4,523,834 at December 31, 1996 and 1997,
respectively, and 3,748,033 and 4,447,576 at March 31, 1997 and 1998,
respectively.
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
If the initial public offering is consummated, all of the convertible
preferred stock outstanding as of the closing date will automatically be
converted into 14,037,500 shares of common stock, based on the shares of
convertible preferred stock outstanding as of March 31, 1998. Pro forma
stockholders' equity at March 31, 1998, as adjusted for the conversion of
preferred stock is disclosed on the balance sheet.
STOCK COMPENSATION
Effective for the fiscal year ended December 31, 1996, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). In accordance with
the provisions of SFAS No. 123, the Company applies APB Opinion 25 ("APB 25"),
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock option grants to employees and directors with an
exercise price equal to or in excess of the fair value of the shares at the date
of grant. The Company accounts for stock awards granted to non-employees in
accordance with SFAS No. 123 and related interpretations. (See Note 4,
Stockholders' Equity.)
F-9
<PAGE>
INTUITIVE SURGICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," effective January 1, 1996. The Company continually reviews
long-lived assets to assess recoverability based upon undiscounted cash flow
analysis. Impairments, if any, are recognized in operating results in the period
in which a permanent diminution in value is determined.
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), and Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS No.
131"). The Company is required to adopt these Statements in fiscal 1998. SFAS
No. 130 establishes new standards for reporting and displaying comprehensive
income and its components. SFAS No. 131 requires disclosure of certain
information regarding operating segments, products and services, geographic
areas of operation and major customers. Adoption of these Statements is expected
to have no impact on the Company's financial position, results of operations or
cash flows.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Computer equipment.............................................. $ 348 $ 1,300 $ 1,572
Lab/manufacturing equipment..................................... 167 643 810
Office furniture/equipment...................................... 76 542 655
Leasehold improvements.......................................... -- 476 834
Software........................................................ 307 722 760
--------- --------- -----------
898 3,683 4,631
Less accumulated depreciation and amortization.................. (173) (879) (1,144)
--------- --------- -----------
Property and equipment, net..................................... $ 725 $ 2,804 $ 3,487
--------- --------- -----------
--------- --------- -----------
</TABLE>
3. COMMITMENTS
OPERATING LEASES
Effective March 1997, the Company entered into two operating lease
arrangements for office space in Mountain View, California which expire February
28, 2002. Both of these leases include an option to renew the lease for one
additional three-year term.
Rent expense was approximately $179,000 for the three months ended March 31,
1998, $586,000 for the year ended December 31, 1997, $99,000 for the period from
inception to December 31, 1996 and $864,000 for the period from inception to
March 31, 1998.
F-10
<PAGE>
INTUITIVE SURGICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. COMMITMENTS (CONTINUED)
Future minimum rental commitments under the operating leases as of December
31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................ $ 825
1999................................................................ 855
2000................................................................ 855
2001................................................................ 855
2002................................................................ 65
---------
$ 3,455
---------
---------
</TABLE>
CAPITAL LEASES
In April 1997, the Company entered into a master lease agreement with a
third party for an equipment lease line against which the Company has drawn
approximately $1.4 million at December 31, 1997. The term of the lease is 48
months and provides for monthly payments of approximately $33,000 with a final
payment of approximately $204,000 in March 1999. The Company has granted to the
third party a security interest in all equipment leased under this agreement.
Assets capitalized under capital leases totaled approximately $1.4 million at
December 31, 1997, and are included in computer equipment, lab equipment, office
furniture and equipment and software. Accumulated amortization for assets
capitalized under capital leases totaled approximately $577,000 at December 31,
1997. Amortization of leased assets is included in depreciation expense. Future
minimum lease payments under capital lease obligations at December 31, 1997 are
as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................ $ 401
1999................................................................ 401
2000................................................................ 401
2001................................................................ 271
---------
Total minimum lease payments........................................ 1,474
Less amount representing interest................................... (319)
---------
Present value of net minimum lease payments......................... 1,155
Less current portion................................................ (258)
---------
Long-term portion................................................... $ 897
---------
---------
</TABLE>
In February 1998, the Company entered into an additional lease agreement
with a third party for an equipment lease line totaling approximately $644,000.
The term of the lease is 42 months and provides for monthly payments of
approximately $17,000 with a final payment of approximately $97,000. The Company
has granted to the third party a security interest in all equipment leased under
this agreement. Assets capitalized under this lease agreement include computer
equipment, lab equipment, office furniture and equipment and software.
F-11
<PAGE>
INTUITIVE SURGICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY
At December 31, 1997, the Company was authorized to issue up to 15,000,000
shares of preferred stock, issuable in series, with the rights and preferences
of each designated series to be determined by the Company's board of directors.
At December 31, 1997, 5,442,500 shares have been designated as Series A
preferred stock, 470,000 shares as Series B preferred stock, 6,000,000 shares as
Series C preferred stock and 2,500,000 shares as Series D preferred stock. The
outstanding shares of convertible preferred stock automatically convert into
common stock upon the closing of an underwritten public offering of common stock
under the Securities Act of 1933 in which the Company receives at least $10.0
million in gross proceeds and the price per share is at least $10.00 as adjusted
for stock splits, recapitalization and the like, or at the election of the
holders of at least two-thirds of the then outstanding shares of Series A, B, C
and D preferred stock.
PREFERRED STOCK
Preferred stock at December 31, 1997 and March 31, 1998 is as follows:
<TABLE>
<CAPTION>
SHARES
ISSUED AND LIQUIDATION
DESIGNATED OUTSTANDING PAR VALUE NET PROCEEDS PREFERENCE
---------- ------------ --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Series A convertible................ 5,442,500 5,442,500 $ 0.001 $ 5,389,499 $ 5,442,500
Series B convertible................ 470,000 470,000 0.001 41,750 47,000
Series C convertible................ 6,000,000 6,000,000 0.001 29,948,787 30,000,000
Series D convertible................ 2,500,000 2,125,000 0.001 16,924,873 17,000,000
------------ ------------- -------------
14,037,500 $ 52,304,909 $ 52,489,500
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
Each share of Series A, B, C and D convertible preferred stock is
convertible, at the option of the holder, into common stock on a one-for-one
basis, subject to certain adjustments for dilution, if any, resulting from
future stock issuances.
Series A, B, C and D convertible preferred stockholders are entitled to
noncumulative dividends, before and in preference to any dividends paid on
common stock, at the rate of 8% of the original issuance price per annum on each
outstanding share of preferred stock as adjusted for stock splits,
recapitalization and the like. Dividends will be paid only when declared by the
board of directors out of legally available funds. No dividends have been
declared as of March 31, 1997.
The Series A, B, C and D convertible preferred stockholders are entitled to
receive, upon liquidation, dissolution or winding up of the Company, an amount
per share equal to the original issuance price, plus all declared but unpaid
dividends. Thereafter, the remaining assets and funds, if any, shall be
distributed pro rata among the common stockholders. If the assets or property
were not sufficient to allow full payment to the Series A, B, C and D
stockholders, the available assets or property shall be distributed ratably
among the Series A, B, C and D stockholders.
The Series A, B, C and D convertible preferred stockholders have voting
rights equal to the shares of common stock issuable upon conversion.
F-12
<PAGE>
INTUITIVE SURGICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
The Company has previously issued shares of common stock which are subject
to the Company's right to repurchase at the original issuance price upon the
occurrence of certain events, as defined in the agreements relating to the sale
of such stock. At December 31, 1996 and 1997, approximately 2,217,768 and
3,523,425 shares, respectively, were subject to repurchase.
Subject to the preferences of preferred stock, the holders of common stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for
payment. In the event of the liquidation, dissolution, or winding up of the
Company, holders of common stock are entitled to receive, after payment of the
full liquidation price on the preferred stock, the balance of any remaining
assets of the Company.
WARRANT TO PURCHASE COMMON STOCK
In April 1997, in connection with the capital lease agreement discussed in
Note 3, the Company issued a warrant to purchase 11,000 shares of common stock
at an exercise price of $5.00. The warrant, which is currently exercisable,
expires in April 2003. The Company has reserved 11,000 common shares for the
exercise of this warrant. The fair value of the warrant is not material.
1996 EQUITY INCENTIVE PLAN
In January 1996, the board of directors adopted, and the stockholders
approved, the 1996 Equity Incentive Plan (the "1996 Plan") for issuance of
common stock to employees, consultants and directors. Incentive stock options
granted under the 1996 Plan are at prices not less than the fair value on the
date of grant while nonstatutory options granted under the 1996 Plan are at
prices not less than 85% of the fair value on the date of grant. Options granted
under the 1996 Plan expire 10 years from the date of grant. Options generally
become exercisable upon grant subject to repurchase rights in favor of the
Company until vested. Options generally vest ratably over a period of four years
from the date of grant; however, options may be granted with different vesting
terms from time to time. A total of 4,340,000 shares of common stock have been
authorized for issuance pursuant to the 1996 Plan.
F-13
<PAGE>
INTUITIVE SURGICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
Stock activity under the 1996 Equity Incentive Plan was as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED-
AVAILABLE OPTIONS AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
----------- ----------- ---------------
<S> <C> <C> <C>
Authorized....................................... 1,500,000 -- --
Granted.......................................... (743,000) 743,000 $ 0.05
Exercised........................................ -- (345,000) $ 0.05
----------- -----------
Balance as of December 31, 1996.................... 757,000 398,000 $ 0.05
Authorized....................................... 2,840,000 --
Granted.......................................... (2,585,950) 2,585,950 $ 0.56
Exercised........................................ -- (1,989,853) $ 0.39
Canceled......................................... 4,688 (4,688) $ 0.66
----------- -----------
Balance as of December 31, 1997.................... 1,015,738 989,409 $ 0.68
Authorized....................................... -- -- --
Granted.......................................... (239,600) 239,600 $ 1.90
Exercised........................................ -- (242,759) $ 0.64
Canceled......................................... 9,000 (9,000) $ 0.50
----------- -----------
Balance as of March 31, 1998....................... 785,138 977,250 $ 0.99
----------- -----------
----------- -----------
</TABLE>
Since the Company's inception through December 31, 1997, options to purchase
a total of 3,328,950 shares were granted at prices ranging from $0.05 to $1.50
per share. Deferred compensation of approximately $3.3 million was recorded for
these option grants based on the deemed fair value of common stock (ranging from
$0.35 to $5.00 per share). In the first quarter of 1998, the Company granted
options to purchase 239,600 shares of common stock at prices ranging from $1.50
to $3.00 per share for which deferred compensation of approximately $865,000 was
recorded based on the deemed fair value of common stock (ranging from $5.00 to
$7.00 per share).
The following table summarizes information concerning outstanding and vested
options at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS OUTSTANDING AND VESTED
------------------------------------------------- ------------------------------
WEIGHTED-AVERAGE NUMBER
EXERCISE NUMBER REMAINING WEIGHTED-AVERAGE OUTSTANDING WEIGHTED-AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE AND VESTED EXERCISE PRICE
- ----------- ----------- ----------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$ 0.05 92,000 8.70 $ 0.05 7,017 $ 0.05
$ 0.50 675,709 9.40 $ 0.50 61,082 $ 0.50
$ 1.50 221,700 9.80 $ 1.50 1,665 $ 1.50
----------- -----------
989,409 69,764
----------- -----------
----------- -----------
</TABLE>
F-14
<PAGE>
INTUITIVE SURGICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information concerning outstanding and vested
options at March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS OUTSTANDING AND VESTED
------------------------------------------------- ------------------------------
WEIGHTED-AVERAGE NUMBER
EXERCISE NUMBER REMAINING WEIGHTED-AVERAGE OUTSTANDING WEIGHTED-AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE AND VESTED EXERCISE PRICE
- ----------- ----------- ----------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$ 0.05 35,000 8.30 $ 0.05 -- $ 0.05
$ 0.50 536,150 9.20 $ 0.50 76,697 $ 0.50
$ 1.50 345,600 9.70 $ 1.50 15,137 $ 1.50
$ 3.00 60,500 10.00 $ 3.00 -- $ 3.00
----------- -----------
977,250 91,834
----------- -----------
----------- -----------
</TABLE>
STOCK-BASED COMPENSATION
During 1996, the Company adopted SFAS No. 123. In accordance with SFAS No.
123, the Company follows APB 25 in accounting for option grants to employees
under the 1996 Plan, and, accordingly, does not recognize compensation expense
for options granted to employees at fair value. However, as noted earlier in
this footnote, the Company has recorded deferred compensation expense based on
the deemed fair value of common stock which is higher than the originally
determined fair value.
Pro forma information regarding net loss is required by SFAS No. 123, which
also requires that the information be determined as if the Company has accounted
for its employee stock options under the fair value method of SFAS No. 123. For
purposes of the pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net loss was $23.7 million and $3.8 million in 1997 and 1996,
respectively. The minimum value method was applied using the following
weighted-average assumptions: risk-free interest rate of 6.5%, a weighted
average expected option life of 2.16 years; and no annual dividends. Future pro
forma results of operations may be materially different from actual amounts
reported.
5. INCOME TAXES
No provision for income taxes has been made due to operating losses with no
current tax benefit.
F-15
<PAGE>
INTUITIVE SURGICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. INCOME TAXES (CONTINUED)
Deferred income taxes reflect tax carryforwards and the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting and the amount used for income tax purposes. Significant
components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------
1996 1997
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforward................................ $ 35,000 $ 5,200,000
Research credits............................................... 150,000 900,000
Expenses capitalized for tax purposes.......................... 1,400,000 5,300,000
------------- --------------
Total deferred tax assets...................................... 1,585,000 11,400,000
Valuation allowance for deferred tax assets.................... (1,585,000) (11,400,000)
------------- --------------
Total.......................................................... $ -- $ --
------------- --------------
------------- --------------
</TABLE>
The state and federal net operating loss and credit carryforwards (above)
will expire at various dates from 2004 through 2012, if not utilized. The
utilization of such carryforwards may be subject to a substantial annual
limitation due to the "change in ownership" provisions of the Internal Revenue
Code of 1986 and similar state provisions. The annual limitation may result in
the expiration of net operating losses and credits before utilization.
6. TECHNOLOGY LICENSE AGREEMENT
In December 1997, the Company executed a license agreement with IBM. In
conjunction with the execution of the license agreement, a payment of $1.0
million was made in December 1997. The license agreement also provides that the
Company pay a sum of $5.0 million within 10 days after the closing of the first
underwritten public offering registered under the Securities Act of 1933, as
amended, but in any event not later than September 1, 1998, which date may be
extended until October 1, 1998, upon a showing of good cause by the Company.
Since the Company's product that incorporates the licensed technology is still
in the research and development phase and the Company has no alternative future
use for this technology, the Company recorded $6.0 million to operating costs
and expenses related to this license agreement during 1997. The license
agreement also provides for payments of $1.0 million each upon the Company
reaching revenue milestones, as defined, of $25.0 million and $50.0 million.
Each $1.0 million payment is due and payable after the end of the fiscal year in
which the cumulative total of all sales of products and services in that year
meet the revenue milestone. Both payments may become due in the same year. The
$1 million payments will be expensed ratably over the revenue period they
pertain to beginning in the period that it becomes evident that the revenue
milestones will be met. No further payments are required under the license
agreement. The license agreement expires upon the expiration of the last patent
covered under the agreement. The license agreement may not be terminated by the
licensor without cause.
F-16
<PAGE>
INTUITIVE SURGICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
7. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
In April 1998, the board of directors authorized management of the Company
to file a registration statement with the Securities and Exchange Commission
permitting the Company to sell shares of its common stock to the public. If the
initial public offering is closed under the terms presently anticipated, all of
the preferred stock outstanding will automatically convert into 14,037,500
shares of common stock. Unaudited pro forma stockholders' equity, as adjusted
for the assumed conversion of the preferred stock, is set forth on the balance
sheet.
1998 EQUITY INCENTIVE PLAN
In April 1998, the Company's Board of Directors adopted, subject to
stockholder approval, the 1998 Equity Incentive Plan (the "Incentive Plan") as
an amendment and restatement of the Company's 1996 Equity Incentive Plan. The
key provisions of the Incentive Plan are generally consistent with that of the
1996 Equity Incentive Plan. In connection with the amendment and restatement, an
additional 3,000,000 shares were authorized for issuance under the Incentive
Plan.
1998 EMPLOYEE STOCK PURCHASE PLAN
In April 1998, the Company's Board of Directors adopted, subject to
stockholder approval, the 1998 Employee Stock Purchase Plan (the "Purchase
Plan") covering an aggregate of 1,500,000 shares of the Company's common stock.
Under the Purchase Plan, the Board of Directors may authorize participation by
eligible employees, including officers, in periodic offerings which can be no
more than 27 months. Eligible employees can have up to 10% of their earnings
withheld in order to purchase shares of common stock at 85% of the lower of the
fair market value of the common stock on the commencement date of each offering
period or on the specified purchase date.
1998 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In April 1998, the Company's Board of Directors adopted, subject to
stockholder approval, the 1998 Non-Employee Directors' Stock Option Plan (the
"Directors' Plan") to provide for the automatic grant of options to purchase
shares of Common Stock to non-employee directors of the Company. The aggregate
number of shares of Common Stock that can be issued under the Directors' Plan is
200,000. Stock options granted under the Directors' Plan are at prices not less
than the fair value on the date of grant and expire 10 years from the date of
grant. Options generally ratably vest over a period of three or four years from
the date of grant.
F-17
<PAGE>
CARDIAC SURGERY
<TABLE>
<S> <C>
OPEN CABG SURGERY: FULL STERNOTOMY
- - LARGE INCISION (30 CM LONG) - [Photo of open CABG surgery]
- - EXTENDED RANGE OF MOTION
MODIFIED CABG SURGERY:
MINI-THORACOTOMY
[Photo of modified CABG surgery] - SMALLER INCISION (7 TO 12 CM
LONG)
- REDUCED RANGE OF MOTION
INTUITIVE CABG SURGERY: FULLY ENDOSCOPIC
- - SMALL INCISIONS (1 CM LONG) [Photo of Intuitive CABG Surgery
- - EXTENDED RANGE OF MOTION performed on a cadaver]
</TABLE>
The Company's products are investigational and, except as set forth in this
Prospectus, have not been approved by the FDA for sale in the United States.
There can be no assurance that such approval will ever be obtained. In addition,
the Company's products have not been approved by international regulatory
agencies for sale in international markets. See "Risk Factors--Need for Federal
and State Regulatory Clearance or Approval," and "--Lack of International
Regulatory Clearance or Approval."
<PAGE>
[INTUITIVE LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts are estimates except for
the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee........................................................ $ 14,750
Nasdaq National Market listing fee......................................
NASD filing fee......................................................... 5,500
Blue sky qualification fees and expenses................................ 15,000
Printing and engraving expenses......................................... 125,000
Legal fees and expenses................................................. 350,000
Accounting fees and expenses............................................ 125,000
Transfer agent and registrar fees.......................................
Directors' and Officers' Insurance...................................... 150,000
Miscellaneous...........................................................
---------
Total................................................................. $
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act"). The Registrant's Bylaws also
provide that the Registrant will indemnify its directors and executive officers
and may indemnify its other officers, employees and agents to the fullest extent
permitted by Delaware law. The Company intends to enter into indemnification
agreements with its directors and officers for the indemnification of and
advancement of expenses to such persons to the full extent permitted by law. The
Company also intends to execute such agreements with its future directors and
officers.
The Company's Certificate of Incorporation provides for the elimination of
liability for monetary damages for breach of the directors' fiduciary duty of
care to the Registrant and its stockholders. These provisions do not eliminate
the directors' duty of care and, in appropriate circumstances, equitable
remedies such an injunctive or other forms of non-monetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to the
Registrant, for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for any transaction from which the
director derived an improper personal benefit, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement, will provide for indemnification by the Underwriters and their
controlling persons, on the one hand, and of the Registrant and its controlling
persons on the other hand, for certain liabilities arising under the Securities
Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since inception, the Company has sold and issued the following unregistered
securities:
(1) From November 1995 through the date hereof, the Registrant has
granted stock options to purchase 3,584,400 shares of the Common Stock to
employees, consultants and directors pursuant to its 1998 Equity Incentive
Plan (the "Plan"). Of these options, 15,387 have been canceled without being
exercised, 2,477,913 have been exercised and 1,091,100 remain outstanding.
From November
II-1
<PAGE>
1995 through the date hereof, the Registrant has also granted stock awards
to purchase 110,000 shares of Common Stock to consultants pursuant to the
Incentive Plan.
(2) In November 1995 and December 1995, the Registrant issued an
aggregate of 3,385,000 shares of Common Stock to 14 purchasers at $0.001 per
share, for an aggregate purchase price of $3,385.
(3) In December 1995 and January 1996, the Registrant issued an
aggregate of 5,442,500 shares of Series A Preferred Stock to 13 purchasers
at $1.00 per share, for an aggregate purchase price of $5,442,500. Shares of
Series A Preferred Stock are convertible into shares of Common Stock at the
rate of one share of Common Stock for each share of Series A Preferred Stock
owned.
(4) In January 1996, the Registrant issued an aggregate of 470,000
shares of Series B Preferred Stock to one purchaser at $0.10 per share, for
an aggregate purchase price of $47,000. Shares of Series B Preferred Stock
are convertible into shares of Common Stock at the rate of one share of
Common Stock for each share of Series B Preferred Stock owned.
(5) In May 1996, the Registrant issued 50,000 shares of Common Stock to
one purchaser at $0.05 per share, for a purchase price of $2,500.
(6) In June 1996, the Registrant issued 3,000 shares of Common Stock for
services rendered.
(7) In December 1996 and January 1997, the Registrant issued an
aggregate of 910,000 shares of Common Stock to four purchasers at $0.05 per
share, for an aggregate purchase price of $45,500.
(8) In January 1997 and March 1997, the Registrant issued an aggregate
of 6,000,000 shares of Series C Preferred Stock to 21 purchasers at a
purchase price of $5.00 per share, for an aggregate purchase price of
$30,000,000. Shares of Series C Preferred Stock are convertible into shares
of Common Stock at the rate of one share of Common Stock for each share of
Series C Preferred Stock owned.
(9) In April 1997, the Registrant issued a warrant to purchase 11,000
shares of the Common Stock of the Registrant to Lease Management Services,
Inc., for an exercise price of $5.00 per share, issuable upon exercise of
the warrant.
(10) In November 1997, the Registrant issued an aggregate of 2,125,000
shares of Series D Preferred Stock to 23 purchasers at a purchase price of
$8.00 per share for an aggregate purchase price of $17,000,000. Shares of
Series D Preferred Stock are convertible into shares of Common Stock at the
rate of one share of Common Stock for each share of Series D Preferred Stock
owned.
(11) In November 1997, the Registrant issued 25,000 shares of Common
Stock for services rendered in connection with the Series D Preferred Stock
financing.
(12) In April 1998, the Registrant issued 10,000 shares of Common Stock
to one purchaser at $3.00 per share, for a purchase price of $30,000.
The sales and issuances of securities described in paragraph (1) above were
deemed to be exempt from registration under the Securities Act by virtue of Rule
701 of the Securities Act in that they were offered and sold either pursuant to
a written compensatory benefit plan or pursuant to a written contract relating
to compensation, as provided by Rule 701. The sales and issuances of securities
described in paragraphs (2) through (12) above were deemed to be exempt from
registration under the Securities Act by virtue of Rule 4(2), Regulation D or
Regulation S promulgated thereunder. With respect to the grant of options
described in paragraph (1), an exemption from registration was unnecessary in
that none of the transactions involved a "sale" of securities as such term is
used in Section 2(3) of the Act.
Appropriate legends are affixed to the stock certificates issued in the
aforementioned transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities. All recipients either received adequate
information about the Registrant or had access, through employment or other
relationships, to such information.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following is a list of exhibits filed as a part of this
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1+ Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Registrant.
3.2* Certificate of Amendment of Restated Certificate of Incorporation of the Registrant.
3.3 Form of Amended and Restated Certificate of Incorporation of the Registrant to be effective upon the
closing of the offering.
3.4 Bylaws of the Registrant.
3.5 Form of Amended and Restated Bylaws of the Registrant to be effective upon the closing of the offering.
4.1 Reference is made to Exhibits 3.1 through 3.5.
4.2+ Specimen Stock Certificate.
5.1* Opinion of Cooley Godward LLP.
10.1 Form of Indemnity Agreement.
10.2 1998 Equity Incentive Plan.
10.3 Form of Stock Option Grant Notice.
10.4 Form of Stock Option Agreement.
10.5 1998 Non-Employee Directors' Stock Option Plan.
10.6 Form of Nonstatutory Stock Option.
10.7 1998 Employee Stock Purchase Plan.
10.8 Amended and Restated Investor Rights Agreement dated November 14, 1997.
10.9 Equipment Financing Agreement (No. 10809), dated April 2, 1997, between the Registrant and Lease
Management Services, Inc., and related addendums.
10.10 Warrant, dated April 15, 1997, to purchase Common Stock of the Registrant issued to Lease Management
Services, Inc.
10.11+ License Agreement, dated December 20, 1995, between the Registrant and SRI International.
10.12* License Agreement, dated December 29, 1997, between the Registrant and International Business Machines
Corporation.
10.13 Lease, dated September 9, 1996, between the Registrant and Zappettini Investment Co.
10.14 Lease, dated February 5, 1997, between the Registrant and Zappettini Investment Co.
10.15 Employment Agreement, dated February 28, 1997, between the Registrant and Lonnie M. Smith.
23.1+ Consent of Ernst & Young LLP.
23.2* Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1 Power of Attorney. See Signature Page.
27.1 Financial Data Schedule.
</TABLE>
- ---------
+ Filed herewith.
* To be filed by amendment.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 14 or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will governed by the final adjudication of such issue.
The undersigned Registrant undertakes that: (1) for purposes of determining
any liability under the Securities Act, the information omitted from the form of
prospectus filed as part of the registration statement in reliance upon Rule
430A and contained in the form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of the registration statement as of the time it was declared effective, and
(2) for the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant has duly caused this amendment to the Registration Statement on Form
S-1 to be signed on its behalf by the undersigned, in the City of Mountain View,
County of Santa Clara, State of California, on the 2nd day of June, 1998.
INTUITIVE SURGICAL, INC.
By: /s/ LONNIE M. SMITH
-----------------------------------
Lonnie M. Smith
President, Chief Executive Officer
and Director
(PRINCIPAL EXECUTIVE OFFICER)
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
AMENDMENT TO THE REGISTRATION STATEMENT WAS SIGNED BELOW BY THE FOLLOWING PERSON
IN THE CAPACITIES AND ON THE DATES STATED.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
President, Chief Executive June 2, 1998
/s/ LONNIE M. SMITH Officer and Director
- ------------------------------ (PRINCIPAL EXECUTIVE
Lonnie M. Smith OFFICER)
/s/ SUSAN K. BARNES* Vice President, Finance, June 2, 1998
- ------------------------------ Chief Financial Officer
Susan K. Barnes and Assistant Secretary
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
/s/ JOHN G. FREUND* June 2, 1998
- ------------------------------ Director
John G. Freund, M.D.
/s/ SCOTT S. HALSTED* June 2, 1998
- ------------------------------ Director
Scott S. Halsted
/s/ RUSSELL C. HIRSCH* June 2, 1998
- ------------------------------ Director
Russell C. Hirsch, M.D., Ph.D.
/s/ FREDERIC H. MOLL* June 2, 1998
- ------------------------------ Director
Frederic H. Moll, M.D.
/s/ PETRI T. VAINIO* June 2, 1998
- ------------------------------ Director
Petri T. Vainio, M.D., Ph.D
* By:
/s/ LONNIE M. SMITH
- ------------------------------
Lonnie M. Smith
Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1+ Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Registrant.
3.2* Certificate of Amendment of Restated Certificate of Incorporation of the Registrant.
3.3 Form of Amended and Restated Certificate of Incorporation of the Registrant to be effective upon the
closing of the offering.
3.4 Bylaws of the Registrant.
3.5 Form of Amended and Restated Bylaws of the Registrant to be effective upon the closing of the offering.
4.1 Reference is made to Exhibits 3.1 through 3.5.
4.2+ Specimen Stock Certificate.
5.1* Opinion of Cooley Godward LLP.
10.1 Form of Indemnity Agreement.
10.2 1998 Equity Incentive Plan.
10.3 Form of Stock Option Grant Notice.
10.4 Form of Stock Option Agreement.
10.5 1998 Non-Employee Directors' Stock Option Plan.
10.6 Form of Nonstatutory Stock Option.
10.7 1998 Employee Stock Purchase Plan.
10.8 Amended and Restated Investor Rights Agreement dated November 14, 1997.
10.9 Equipment Financing Agreement (No. 10809), dated April 2, 1997, between the Registrant and Lease
Management Services, Inc., and related addendums.
10.10 Warrant, dated April 15, 1997, to purchase Common Stock of the Registrant issued to Lease Management
Services, Inc.
10.11+ License Agreement, dated December 20, 1995, between the Registrant and SRI International.
10.12* License Agreement, dated December 29, 1997, between the Registrant and International Business Machines
Corporation.
10.13 Lease, dated September 9, 1996, between the Registrant and Zappettini Investment Co.
10.14 Lease, dated February 5, 1997, between the Registrant and Zappettini Investment Co.
10.15 Employment Agreement, dated February 28, 1997, between the Registrant and Lonnie M. Smith.
23.1+ Consent of Ernst & Young LLP.
23.2* Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1 Power of Attorney. See Signature Page.
27.1 Financial Data Schedules.
</TABLE>
- ---------
+ Filed herewith
* To be filed by amendment.
<PAGE>
Exhibit 1.1
[_________] Shares
INTUITIVE SURGICAL, INC.
COMMON STOCK (PAR VALUE $0.001 PER SHARE)
UNDERWRITING AGREEMENT
_____, 1998
<PAGE>
_____, 1998
Morgan Stanley & Co. Incorporated
Bear, Stearns & Co. Inc.
BT Alex. Brown Incorporated
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Ladies and Gentlemen:
Intuitive Surgical, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to the several Underwriters named in Schedule I
hereto (the "Underwriters"), an aggregate of [________] shares of the Common
Stock (par value $0.001 per share) of the Company (the "Firm Shares"). The
Company also proposes to sell to the several Underwriters not more than an
additional [________] shares of its Common Stock (par value $0.001 per share)
(the "Additional Shares"), if and to the extent that you, as Managers of the
offering, shall have determined to exercise, on behalf of the Underwriters, the
right to purchase such shares of Common Stock granted to the Underwriters in
Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter
collectively referred to as the "Shares." The shares of Common Stock (par value
$0.001 per share) of the Company to be outstanding after giving effect to the
sales contemplated hereby are hereinafter referred to as the "Common Stock."
The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement, including a prospectus, relating to
the Shares. The registration statement as amended at the time it becomes
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement;" the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "Prospectus."
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "Rule 462 Registration Statement"), then any reference herein to the
term "Registration Statement" shall be deemed to include such Rule 462
Registration Statement.
As part of the offering contemplated by this Agreement, Morgan
Stanley & Co. Incorporated ("Morgan Stanley") has agreed to reserve out of the
Shares set forth opposite its name on Schedule I to this Agreement, up to
[________] shares, for sale to the Company's employees, officers, and directors
and other parties associated with the Company (collectively, "Participants"), as
set forth in the Prospectus under the heading "Underwriting" (the "Directed
Share Program"). The Shares to be sold by Morgan Stanley pursuant to the
Directed Share Program (the "Directed Shares") will be sold by Morgan Stanley
pursuant to this Agreement at the public offering price. Any Directed Shares
not orally confirmed for purchase by any Participants by the end of the first
business day after the date on which this Agreement is executed will be offered
to the public by Morgan Stanley as set forth in the Prospectus.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or, to the
Company's knowledge, threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement and the
Prospectus comply and, as amended or supplemented, if applicable, will
comply in all material respects with the Securities Act and the applicable
rules and regulations of the Commission thereunder, and (iii) the
Prospectus does not contain and, as supplemented,
1
<PAGE>
if applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in this
Section l(b) do not apply to statements or omissions in the Registration
Statement or the Prospectus based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter
through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not have a
material adverse effect on the Company.
(d) The Company does not own any equity or capital interests in
any corporation, partnership, joint venture, association or other entity.
(e) This Agreement has been duly authorized, executed and
delivered by the Company.
(f) The authorized capital stock of the Company conforms as to
legal matters in all material respects to the description thereof
contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the issuance
of the Shares to be sold by the Company have been duly authorized and are
validly issued, fully paid and non-assessable. Except as set forth in the
Prospectus and other than options to purchase [________] shares of the
Company's Common Stock granted to employees pursuant to the Company's 1998
Equity Incentive Plan (the "1998 Incentive Plan"), the Company's 1998
Employee Stock Purchase Plan (the "1998 Purchase Plan"), the Company's
1998 Non-Employee Directors' Stock Option Plan (the "1998 Directors'
Plan") and a warrant to purchase 11,000 shares, all as described in the
Prospectus, the Company has no outstanding options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such
options, rights, convertible securities or obligations. All outstanding
shares of capital stock and options and other rights to acquire capital
stock have been issued in compliance with the registration and
qualification provisions of all applicable securities laws (or applicable
exemptions thereof) and were not issued in violation of any preemptive
rights, rights of first refusal and other similar rights.
(h) The Shares have been duly authorized, and when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene any provision of the Company's Amended and Restated
Certificate of Incorporation, as amended, or bylaws of the Company or any
agreement or other instrument binding upon the Company that is material to
the Company or any judgment, order or decree of any governmental body,
agency or court having jurisdiction over the Company, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or governmental agency is required for the performance
by the Company of its obligations under this Agreement, except such as may
be required by the National Association of Securities Dealers ("NASD") or
the securities or Blue Sky laws of the various states or international
jurisdictions in connection with the offer and sale of the Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company from that set forth in the Prospectus.
(k) There are no legal or governmental proceedings pending or, to
the Company's knowledge, threatened to which the Company is a party or to
which any of the properties of the Company
2
<PAGE>
is subject that are required to be described in the Registration Statement
or the Prospectus and are not so described or any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or documents required to be filed
as exhibits to the Registration Statement that are not described or filed
as required.
(l) Each preliminary prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto, or
filed pursuant to Rule 424 or Rule 462 under the Securities Act, complied
when so filed in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder.
(m) The Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" or an
entity "controlled" by an "investment company" as such terms are defined
in the Investment Company Act of 1940, as amended.
(n) There is no owner of any securities of the Company who has any
right, not effectively satisfied or waived, to require registration of any
shares of capital stock of the Company in connection with the filing of
the Registration Statement or the sale of the Shares thereunder. There
are no contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Securities Act with respect to any
securities of the Company or to require the Company to include such
securities with the Shares registered pursuant to the Registration
Statement, except in each case as described in the Prospectus.
(o) The Company (i) is in compliance with any and all applicable
foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("Environmental
Laws"), (ii) has received all permits, licenses or other approvals
required of them under applicable Environmental Laws to conduct its
respective business and (iii) is in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required
permits, licenses or other approvals or failure to comply with the terms
and conditions of such permits, licenses or approvals would not, singly or
in the aggregate, have a material adverse effect on the Company.
(p) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval, any
related constraints on operating activities and any potential liabilities
to third parties) which would, singly or in the aggregate, have a material
adverse effect on the Company.
(q) The Company has complied with all provisions of
Section 517.075, Florida Statutes relating to doing business with the
Government of Cuba or with any person or affiliate located in Cuba.
(r) The Company has notified each holder of a currently
outstanding option issued under the 1998 Incentive Plan, 1998 Purchase
Plan, or the 1998 Directors' Plan and each person who has acquired shares
of Common Stock pursuant to the exercise of any option granted under the
1998 Incentive Plan, 1998 Purchase Plan, or the 1998 Directors' Plan, that
none of such options or shares may be sold or otherwise transferred or
disposed of for a period of 180 days after the date of the initial public
offering of the Shares and that the Company has the right to impose
stop-transfer instructions with the Company's transfer agent in order to
enforce the foregoing lock-up provision.
(s) As of the date the Registration Statement became effective,
the Common Stock was authorized for quotation on The Nasdaq National
Market upon official notice of issuance.
(t) The financial statements, including the notes thereto,
included in the Registration Statement and the Prospectus fairly present,
in all material respects, the financial position of the Company as of the
dates indicated and the results of its operations for the periods
specified; said financial statements
3
<PAGE>
have been prepared in conformity with generally accepted accounting
principles applied on a consistent basis.
(u) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (1) the Company
has not incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction not in the ordinary
course of business; (2) the Company has not purchased any of its
outstanding capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock other than
ordinary and customary dividends; and (3) there has not been any material
change in the capital stock, short-term debt or long-term debt of the
Company, except for options or warrants to purchase common stock which
have been exercised on or after [May 31, 1998], in each case as described
or contemplated in the Prospectus.
(v) The Company does not own any real property. The Company has
good and marketable title in fee simple to all personal property owned by
it which is material to the business of the Company, in each case free and
clear of all liens, encumbrances and defects except such as are described
in the Prospectus or such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company; and any real property and buildings held
under lease by the Company are held by it under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company, in each case except as described in the
Prospectus.
(w) The Company owns or possess, or can acquire on reasonable
terms, all material patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks and trade names currently employed
by them in connection with the business now operated by it, and the
Company has not received any notice of infringement of or conflict with
asserted rights of others with respect to any of the foregoing and there
are no legal or governmental proceedings other than patent applications
pending relating to patent rights of the Company to which the Company is a
party, which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse affect on the
Company. The U.S. patents assigned to the Company are held by the
Company, and, except as set forth in the Registration Statement and
Prospectus, no other entity or individual has any right or claim in any of
the applications, or any patent to be issued therefrom, by virtue of any
contract, license or other agreement entered into between such entity or
individual and the Company.
(x) No material labor dispute with the employees of the Company
exists, except as described in the Prospectus, or, to the knowledge of the
Company, is imminent.
(y) The Company is insured by the insurers of recognized financial
responsibility against such losses and risks and in such amounts as are
prudent and customary in the businesses in which they are engaged; the
Company has not been refused any insurance coverage sought or applied for;
and, except as described in the Prospectus, the Company has no reason to
believe that it will not be able to renew its existing insurance coverage
as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost
that would not have a material adverse effect on the Company.
(z) The Company possesses all consents, approvals, orders,
certificates, authorizations and permits issued by, and has made all
declarations and filings with all appropriate federal, state or foreign
regulatory authorities necessary to conduct its business as currently
being conducted or as proposed in the Registration Statement to be
conducted, except where the failure to possess such consents, approvals,
orders, certificates, authorizations and permits or to make all
declarations and filings would not have a material adverse effect on the
Company, and to own, lease, license, and use their properties in the
manner described in the Prospectus, and the Company has not received any
notice of proceedings relating to the revocation or modification of any
such consent, approval, order, certificate, authorization or permit which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have a material adverse change in the condition,
financial, or otherwise, or in the earnings, business or operations
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of the Company, except as described the Prospectus
(aa) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (1) transactions are
executed in accordance with management's general or specific
authorizations; (2) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (3) access to
assets is permitted only in accordance with management's general or
specific authorization; and (4) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(bb) (i) The Registration Statement, the Prospectus and any
preliminary prospectus comply, and any further amendments or supplements
thereto will comply, with any applicable laws or regulations of foreign
jurisdictions in which the Prospectus or any preliminary prospectus, as
supplemented, if applicable, are distributed in connection with the
Directed Share Program, and (ii) no authorization, approval, consent,
license, order, registration or qualification of or with any government,
governmental instrumentality or court, other than such as have been
obtained, is necessary under the securities laws and regulations of
foreign jurisdictions in which the Directed Shares are offered outside the
United States.
(cc) The Company has not offered, or caused the Underwriters to
offer, Shares to any person pursuant to the Directed Share Program with
the specific intent to unlawfully influence (i) a customer or supplier of
the Company to alter the customer's or supplier's level or type of
business with the Company, or (ii) a trade journalist or publication to
write or publish favorable information about the Company or its products.
2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees to
sell to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective number of Firm Shares set forth in Schedule I hereto
opposite its name at $____ a share (the "Purchase Price").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to [________]
Additional Shares at the Purchase Price. If you, on behalf of the Underwriters,
elect to exercise such option, you shall so notify the Company in writing not
later than 30 days after the date of this Agreement, which notice shall specify
the number of Additional Shares to be purchased by the Underwriters and the date
on which such shares are to be purchased. Such date may be the same as the
Closing Date (as defined below) but not earlier than the Closing Date nor later
than ten business days after the date of such notice. Additional Shares may be
purchased as provided in Section 4 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule I hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
The Company hereby agrees that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, it will not, during the period
ending 180 days after the date of the Prospectus, (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to
(A) the Shares to be sold hereunder (B) the grant of options pursuant to the
1998 Incentive Plan or the 1998 Directors Plan (C) the sale of stock pursuant to
the 1998 Purchase Plan (D) the grant of any option or warrant pursuant to an
equipment lease or accounts receivable finance transaction (E) the issuance by
the Company of shares of Common Stock upon the exercise of an option or warrant
or the conversion of a security outstanding on
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the date hereof of which the Underwriters have been advised in writing or (F)
the sale by the Company of securities for an aggregate consideration not to
exceed $__________, in connection with an investment by one or more strategic
partners, provided that the holders of such securities are subject to a
lock-up for six (6) months following the sale with substantially the same
terms as set forth in the Lock-Up Agreements (as defined in Section 5(h)
herein).
3. TERMS OF PUBLIC OFFERING. The Company is advised by you that
the Underwriters propose to make a public offering of their respective portions
of the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
[$_____] a share (the "Public Offering Price") and to certain dealers selected
by you at a price that represents a concession not in excess of [$____] a share
under the Public Offering Price, and that any Underwriter may allow, and such
dealers may reallow, a concession, not in excess of [$____] a share, to any
Underwriter or to certain other dealers.
4. PAYMENT AND DELIVERY. Payment for the Firm Shares shall be
made to the Company in federal or immediately available funds in New York City
against delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on [_________, 1998] or at such
other time on the same or such other date, not later than [________, 1998], as
shall be designated in writing by you. The time and date of such payment are
hereinafter referred to as the "Closing Date."
Payment for any Additional Shares shall be made in federal or
immediately available funds in New York City against delivery of such Additional
Shares for the respective accounts of the several Underwriters at 10:00 a.m.,
New York City time, on the date specified in Section 2 or at such other time on
the same or such other date, not later than [________, 1998], as shall be
designated in writing by you. The time and date of such payment are hereinafter
referred to as the "Option Closing Date."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. CONDITIONS TO THE UNDERWRITER'S OBLIGATIONS. The obligations
of the Company to sell the Shares to the Underwriters and the several
obligations of the Underwriters to purchase and pay for the Shares on the
Closing Date are subject to the condition that the Registration Statement shall
have become effective not later than [5:30 p.m.] (New York time) on the date
hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading
or of any review for a possible change that does not indicate the
direction of the possible change, in the rating accorded any of the
Company's securities by any "nationally recognized statistical
rating organization," as such term is defined for purposes of Rule
436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or operations
of the Company, from that set forth in the Registration Statement at
the time it was declared effective (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement) that,
in your judgment, is material and adverse and that makes it, in your
judgment, impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
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(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company on behalf of the Company, to the effect set forth in
clause (a) above and to the effect that the representations and warranties
of the Company contained in this Agreement are true and correct as of the
Closing Date and that the Company has complied with all of the agreements
and satisfied all of the conditions on its part to be performed or
satisfied hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely upon
his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Cooley Godward LLP, outside counsel for the Company, dated the
Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power authority
to own its property and to conduct its business as described in the
Prospectus and is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in
which the conduct of its business or its ownership or leasing of
property requires such qualification, except where the failure to be
so qualified or be in good standing would not have a material
adverse effect on the Company;
(ii) the authorized, issued and outstanding capital stock of
the Company conforms as to legal matters to the description thereof
contained in the Prospectus under the caption "Description of
Capital Stock";
(iii) the shares of Common Stock outstanding prior to the
issuance of the Shares to be sold by the Company have been duly
authorized and are validly issued, fully paid, and non-assessable;
(iv) the Shares have been duly authorized and, when issued
and delivered in accordance with the terms of this Agreement, will
be validly issued, fully paid and non-assessable, and the issuance
of such Shares will not be subject to any preemptive or similar
rights contained in the Company's Certificate of Incorporation or
bylaws or to such counsel's knowledge, under any agreement to which
the Company is a party;
(v) this Agreement has been duly authorized, executed and
delivered by the Company;
(vi) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable law or the Amended
and Restated Certificate of Incorporation, as amended, or bylaws of
the Company or any agreement or other instrument binding upon the
Company that is filed as an exhibit to the Registration Statement,
or, to the best of such counsel's knowledge, any judgment, order or
decree of any governmental body, agency or court having jurisdiction
over the Company, and no consent, approval, authorization or order
of, or qualification with, any governmental body or governmental
agency is required for the performance by the Company of its
obligations under this Agreement, except such as may be required by
the NASD and securities or Blue Sky laws of the various states or
international jurisdiction in connection with the offer and sale of
the Shares;
(vii) the statements (A) in the Prospectus under the captions
"Management--Officers and Directors (except with respect to the
seventh and eighth sentences of the last paragraph thereof),
"Management--Employee Benefit Plans," "Management--Executive Officer
and Employment Arrangements," "Certain Transactions," "Description
of Capital Stock," "Shares Eligible for Future Sale," and
"Business--Intellectual Property--SRI INTERNATIONAL AGREEMENT"
(except with respect to the first paragraph) and "--IBM AGREEMENT
(except with respect to the first paragraph) and (B) in the
Registration Statement in Items 14 and 15, in each case insofar
as such statements constitute summaries of the legal matters,
documents or
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proceedings referred to therein, fairly present the information
called for with respect to such legal matters, documents and
proceedings and fairly summarize the matters referred to therein to
the extent required by the Act and the Rules;
(viii) to such counsel's knowledge, there are no legal or
governmental proceedings pending or overtly threatened to which the
Company is a party or to which any of the properties of the Company
is subject that are required by the Securities Act or the rules and
regulations thereunder (the "Act and Rules") to be described in the
Registration Statement or the Prospectus or any statutes,
regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or
contracts or other documents required to be filed as exhibits to the
Registration Statement, that are not described or filed as required
by the Act or the Rules;
(ix) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the net
proceeds therefrom as described in the Prospectus, will not be an
"investment company" as such terms are defined in the Investment
Company Act of 1940, as amended; and
(x) the Registration Statement and Prospectus (except for
the Regulatory Portion and Intellectual Property Portion (as defined
below) and the financial statements and schedules and other
financial and statistical data included therein as to which such
counsel need not express any opinion) comply as to form in all
material respects with the Securities Act and the applicable rules
and regulations of the Commission thereunder.
(xi) In addition, such counsel shall state that during the
course of the preparation of the Registration Statement, they have
participated in conferences with the Representatives and with
officers and other representatives of the Company, its counsel and
its independent public accountants at which the contents of the
Registration Statement and Prospectus and any supplements or
amendments thereto, and related matters were discussed. Such
counsel shall further state that although they have not
independently verified and are not passing upon the accuracy,
completeness or fairness of the statements made in the Registration
Statement and Prospectus and any supplements or amendments thereto
(other than as specified above in paragraphs (ii) and (vii)),
nothing has come to their attention that has caused them to believe
that the Registration Statement, as of the time it became effective,
contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make
the statements therein not misleading, or that the Prospectus, as of
its date or the date hereof, contained or contains an untrue
statement of a material fact or omitted or omits to state a material
fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except
that such counsel shall express no comment with respect to the
financial statements and schedules, related notes, other financial
data and statistical data derived therefrom included in the
Registration Statement and Prospectus or derived therefrom.
(d) The Underwriters shall have received on the Closing Date an
opinion of Hogan & Hartsen LLP, outside regulatory counsel for the
Company, dated the Closing Date, to the effect that the statements under
the captions "Risk Factors--Need for Federal and State Regulatory
Clearance or Approval," "Risk Factors--Limited Manufacturing Experience;
Scale-Up Risk, "Business--Clinical Trials and Experience," and
"Business--Government Regulation" (together the "Regulatory Portion"), (i)
insofar as such statements purport to summarize applicable provisions of
the Federal Food, Drug, and Cosmetic Act and the regulations promulgated
thereunder, are accurate summaries in all material respects of the
provisions purported to be summarized under such captions in the
Prospectus and Registration Statement, and (ii) insofar as such statements
relate to FDA regulatory matters, such counsel has no reason to believe
that the information contained in the Regulatory Portion of the
Registration Statement and Prospectus at the time each became effective,
contains any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are
made, not misleading.
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(e) The Underwriters shall have received on the Closing Date an
opinion of Townsend, Townsend & Crew LLP, outside intellectual property
counsel for the Company, dated the Closing Date, to the effect that (i)
such counsel is familiar with the technology used by the Company in its
business and the manner of its use, (ii) such counsel has read the
statements contained in the Registration Statement and Prospectus under
the captions "Risk Factors--Dependence on Patents and Proprietary and
Licensed Technology," "Risk Factors--Risks of Third-Party Claims of
Infringement," "and "Business--Intellectual Property--Patents" (together
the "Intellectual Property Portion"), (iii) the Intellectual Property
Portion contains accurate descriptions of the Company's patent
applications, issued and allowed patents, and, to the best of counsel's
knowledge, patents licensed to the Company, and fairly summarizes the
legal matters, documents and proceedings relating thereto, (iv) such
counsel is not aware of any valid United States or foreign patent that is
or would be infringed by the activities of the Company in the manufacture,
use or sale of any presently proposed product, as described in the
Prospectus, (v) such counsel has reviewed the Company's patent
applications filed in the U.S. and outside the U.S. (the "Applications"),
and the Applications have been properly prepared and filed on behalf of
the Company, and are being diligently pursued by the Company; the
inventions described in the Applications are assigned or licensed to the
Company to our knowledge, except for patents where the Company has
obtained a field of use license, no other entity or individual has any
right or claim in any of the inventions, Applications, or any patent to be
issued therefrom, and in such counsel's opinion based on presently
available information each of the Applications discloses patentable
subject matter, (vi) such counsel not aware of any pending or threatened
judicial or governmental proceedings relating to patents or proprietary
information to which the Company is a party or of which an property of the
Company is subject and such counsel is not aware of any pending or
threatened action, suit or claim by others that the Company is infringing
or otherwise violating any patent rights of others, nor is such counsel
aware of any rights of third parties to any of the Company's inventions
described in the Applications, issued, approved or licensed patents which
could reasonably be expected to materially affect the ability of the
Company to conduct its business as described in the Prospectus, including
the commercialization of the "surgeon's console," the "patient-side cart"
and the "resposable instruments" (each as described in the Prospectus) and
other products currently under development, and (vii) such counsel has no
reason to believe that the information contained in the Intellectual
Property Portion of the Registration Statement and the Prospectus at the
time each became effective, contained any untrue statement of a material
fact or omitted to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading].
(f) The Underwriters shall have received on the Closing Date an
opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
counsel for the Underwriters, dated the Closing Date, covering the matters
referred to in subparagraphs (c)(iv), (c)(v), (c)(vii) (but only as to the
statements in the Prospectus under "Description of Capital Stock" and
"Underwriters") and Section 5(c)(x)(i) above.
With respect to Section 5(c)(x)(i) above, Cooley Godward LLP and
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, may state
that their opinion and belief are based upon their participation in the
preparation of the Registration Statement and Prospectus and any
amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification,
except as specified.
The opinions of Cooley Godward LLP, Hogan & Hartsen LLP, and
Townsend, Townsend & Crew LLP described in paragraphs (c), (d) and (e)
above shall be rendered to the Underwriters at the request of the Company
and shall so state therein.
(g) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the Closing
Date, as the case may be, in form and substance satisfactory to the
Underwriters, from Ernst & Young LLP, independent certified public
accountants, containing statements and information of the type ordinarily
included in accountants' "comfort letters" to underwriters with respect to
the financial statements and certain financial information contained in
the
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Registration Statement and the Prospectus; PROVIDED that the letter
delivered on the Closing Date shall use a "cut-off date" not earlier than
the date hereof.
(h) The lock-up agreements (the "Lock-Up Agreements"), each
substantially in the form attached as EXHIBIT A hereto, between you and
certain stockholders, officers and directors of the Company relating to
sales and certain other dispositions of shares of Common Stock or certain
other securities, delivered to you on or before the date hereof, shall be
in full force and effect on the Closing Date.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of the Additional
Shares and other matters related to the Additional Shares.
6. COVENANTS OF THE COMPANY. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, three (3) signed copies of
the Registration Statement (including exhibits thereto) and for delivery
to each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City, without
charge, prior to 10:00 a.m. local time on the second business day
following the date of this Agreement and during the period mentioned in
paragraph (c) below, as many copies of the Prospectus and any supplements
thereto or to the Registration Statement as you may reasonably request.
(b) Before amending the Registration Statement or supplementing
the Prospectus, to furnish to you a copy of each such proposed amendment
or supplement and not to file any such proposed amendment or supplement to
which you reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares in the opinion of counsel for the Underwriters the
Prospectus is required by law to be delivered in connection with sales by
an Underwriter or dealer, any event shall occur or condition exist as a
result of which it is necessary to supplement the Prospectus in order to
make the statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to supplement the
Prospectus to comply with applicable law, forthwith to prepare, file with
the Commission and furnish, at its own expense, to the Underwriters and to
the dealers (whose names and addresses you will furnish to the Company) to
which Shares may have been sold by you on behalf of the Underwriters and
to any other dealers upon request, either such supplements to the
Prospectus so that the statements in the Prospectus as so supplemented
will not, in the light of the circumstances when the Prospectus is
delivered to a purchaser, be misleading or so that the Prospectus, as
supplemented, will comply with law.
(d) To the extent necessary to comply with applicable law, to
endeavor to qualify the Shares for offer and sale under the securities or
Blue Sky laws of such jurisdictions as you shall reasonably request.
(e) To make generally available to the Company's security holders
and to you as soon as practicable an earnings statement of the Company
that satisfies Section 11(a) of the Securities Act and the rules and
regulations of the Commission thereunder.
(f) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be
paid all expenses incident to the performance of its obligations under
this Agreement, including: (i) the fees, disbursements and expenses of the
Company's counsel and the Company's accountants in connection with the
registration and delivery of the Shares under the Securities Act and all
other fees or expenses in connection with the preparation and filing of
the Registration Statement, any preliminary prospectus, the Prospectus and
amendments and supplements to
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any of the foregoing, including all printing costs associated therewith,
and the mailing and delivering of copies thereof to the Underwriters and
dealers, in the quantities hereinabove specified, (ii) all costs and
expenses related to the transfer and delivery of the Shares to the
Underwriters, including any transfer or other taxes payable thereon,
(iii) the cost of printing or producing any Blue Sky memorandum in
connection with the offer and sale of the Shares under state securities
laws, including filing fees and the reasonable fees and disbursements of
counsel for the Underwriters in connection with the Blue Sky memorandum,
(iv) all filing fees and reasonable disbursements of counsel to the
Underwriters incurred in connection with the review and qualification of
the offering of the Shares by the National Association of Securities
Dealers, Inc., (v) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating
to the Common Stock and all costs and expenses incident to listing the
Shares on the Nasdaq National Market, (vi) the cost of printing
certificates representing the Shares, (vii) the costs and charges of any
transfer agent, registrar or depositary, (viii) the costs and expenses of
the Company associated with the production of road show slides and
graphics, fees and expenses of any consultants engaged in connection with
the road show presentations with the prior approval of the Company, travel
and lodging expenses of officers of the Company and any such consultants,
and the Company's pro rata cost of any aircraft chartered in connection
with the road show, (ix) all other costs and expenses incident to the
performance of the obligations of the Company hereunder for which
provision is not otherwise made in this Section, and (x) all fees and
disbursements of counsel incurred by the Underwriters in connection with
the Directed Share Program and stamp duties, similar taxes or duties or
other taxes, if any, incurred by the Underwriters in connection with the
Directed Share Program. It is understood, however, that except as provided
in this Section, Section 7 entitled "Indemnity and Contribution," and the
last paragraph of Section 9 below, the Underwriters will pay all of their
costs and expenses, including fees and disbursements of their counsel,
stock transfer taxes payable on resale of any of the Shares by them, and
any advertising expenses connected with any offers they may make.
(g) To not release any shares of Common Stock from any
restrictions imposed upon such shares by the Lock-Up Agreements without
the prior written consent of Morgan Stanley.
(h) That in connection with the Directed Share Program, the
Company will ensure that the Directed Shares will be restricted to the
extent required by the NASD or the NASD rules from sale, transfer,
assignment, pledge or hypothecation for a period of three months following
the date of the effectiveness of the Registration Statement. Morgan
Stanley will notify the Company as to which Participants will need to be
so restricted. The Company will direct the transfer agent to place
stop-transfer restrictions upon such securities for such period of time.
(i) To comply with all applicable securities and other applicable
laws, rules and regulations in each foreign jurisdiction in which the
Directed Shares are offered in connection with the Directed Share Program.
7. INDEMNITY AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of either Section 15 of the Securities Act or Section 20 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from
and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably
incurred in connection with defending or investigating any such action or
claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto) or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading; provided, however, that the
Company will not be liable in any such case to the extent that such
losses, claims, damages or liabilities are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to the Company in
writing by such Underwriter through you expressly for use therein; and
provided further that the foregoing indemnity agreement with respect to
any preliminary prospectus shall not inure to the benefit of any
Underwriter or any person controlling such Underwriter,
11
<PAGE>
from whom the person asserting any such losses, claims, damages or
liabilities purchased Shares, if a copy of the Prospectus (as then
supplemented if the Company shall have furnished any amendment or
supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been delivered,
at or prior to the written confirmation of the sale of the Shares to such
person, and if the Prospectus (as so amended or supplemented) would have
cured the defect giving rise to such loss, claim, damage or liability,
unless such failure is the result of non-compliance by the Company with
Section 6(a) hereof.
(b) The Company agrees to indemnify and hold harmless Morgan
Stanley and each person, if any, who controls Morgan Stanley within the
meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act ("Morgan Stanley Entities"), from and against any and all
losses, claims, damages and liabilities (including, without limitation,
any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) (i) caused by any
untrue statement or alleged untrue statement of a material fact contained
in the prospectus wrapper material attached to the Prospectus or any
preliminary prospectus prepared by or with the consent of the Company for
distribution in foreign jurisdictions in connection with the Directed
Share Program, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statement therein, when considered in conjunction with the Prospectus
or any applicable preliminary prospectus and in light of the circumstances
in which they were made, not misleading; (ii) caused by the failure of any
Participant to pay for and accept delivery of the shares which,
immediately following the effectiveness of the Registration Statement,
were subject to a properly confirmed agreement to purchase; or
(iii) related to, arising out of, or in connection with the Directed Share
Program, provided that, the Company shall not be responsible under this
subparagraph (iii) for any losses, claim, damages or liabilities (or
expenses relating thereto) that are finally judicially determined to have
resulted from the bad faith or gross negligence of Morgan Stanley
Entities.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless, the Company, its directors and officers who
sign the Registration Statement, and each person, if any, who controls the
Company within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act from and against any and all losses,
claims, damages and liabilities (including, without limitation, any legal
or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, any preliminary prospectus or the
Prospectus (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), or caused by any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, but
only with reference to information relating to such Underwriter furnished
to the Company in writing by or on behalf of such Underwriter through you
expressly for use in the Registration Statement, any preliminary
prospectus, the Prospectus or any amendments or supplements thereto.
(d) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity may be sought pursuant to paragraph (a), (b) or (c) of
this Section 7, such person (the "indemnified party") shall promptly
notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing and the indemnifying party, upon request
of the indemnified party, shall retain counsel reasonably satisfactory to
the indemnified party to represent the indemnified party and any others
the indemnifying party may reasonably designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the
right to retain its own counsel, but the fees and expenses of such counsel
shall be at the expense of such indemnified party unless (i) the
indemnifying party and the indemnified party shall have mutually agreed to
the retention of such counsel or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the indemnifying
party and the indemnified party and representation of both parties by the
same counsel would be inappropriate due to actual or potential differing
interests between them. It is understood that the indemnifying party shall
not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one
separate firm (in addition to any local counsel) for (i) all Underwriters
and all persons, if any, who control any Underwriter
12
<PAGE>
within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, and (ii) the Company, its directors, its
officers who sign the Registration Statement and each person, if any, who
controls the Company within the meaning of either such Section, and that
all such fees and expenses shall be reimbursed as they are incurred. In
the case of any such separate firm for the Underwriters and such control
persons of the Underwriters, such firm shall be designated in writing by
Morgan Stanley. In the case of any such separate firm for the Company,
and such directors, officers and control persons of the Company, such firm
shall be designated in writing by the Company. The indemnifying party
shall not be liable for any settlement of any proceeding effected without
its written consent, but if settled with such consent or if there be a
final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by
reason of such settlement or judgment. Notwithstanding the foregoing
sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and
expenses of counsel as contemplated by the second and third sentences of
this paragraph, the indemnifying party agrees that it shall be liable for
any settlement of any proceeding effected without its written consent if
(i) such settlement is entered into more than 60 days after receipt by
such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in
accordance with such request prior to the date of such settlement. No
indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been
a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter
of such proceeding. Notwithstanding anything contained herein to the
contrary, if indemnity may be sought pursuant to Section 7(b) hereof in
respect of such action or proceeding, then in addition to such separate
firm for the indemnified parties, the indemnifying party shall be liable
for the reasonable fees and expenses of not more than one separate firm
(in addition to any local counsel) for Morgan Stanley for the defense of
any losses, claims, damages and liabilities arising out of the Directed
Share Program, and all persons, if any, who control Morgan Stanley within
the meaning of either Section 15 of the Act or Section 20 of the Exchange
Act provided that (i) the indemnifying party and Morgan Stanley shall have
mutually agreed to the retention of such counsel or (ii) the
representation of the indemnified parties and Morgan Stanley by the same
counsel would be inappropriate due to actual or potential differing
interests between them.
(e) To the extent the indemnification provided for in
paragraph (a), (b) or (c) of this Section 7 is unavailable to an
indemnified party or insufficient in respect of any losses, claims,
damages or liabilities referred to therein, then each indemnifying party
under such paragraph, in lieu of indemnifying such indemnified party
thereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the indemnifying party or parties on the one
hand and the indemnified party or parties on the other hand from the
offering of the Shares or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the indemnifying party or
parties on the one hand and of the indemnified party or parties on the
other hand in connection with the statements or omissions that resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Company
on the one hand and the Underwriters on the other hand in connection with
the offering of the Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Shares (before
deducting expenses) received by the Company and the total underwriting
discounts and commissions received by the Underwriters, in each case as
set forth in the table on the cover of the Prospectus, bear to the
aggregate Public Offering Price of the Shares. The relative fault of the
Company and the Underwriters shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates
to information supplied by the Company or by the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are
several in proportion to the respective number of Shares they have
purchased hereunder, and not joint.
13
<PAGE>
(f) The Company and the Underwriters agree that it would not be
just or equitable if contribution pursuant to this Section 7 were
determined by PRO RATA allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation that
does not take account of the equitable considerations referred to in
paragraph (e) of this Section 7. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be
deemed to include, subject to the limitations set forth above, any legal
or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages that
such Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation.
The remedies provided for in this Section 7 are not exclusive and shall
not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
(g) The indemnity and contribution provisions contained in this
Section 7 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any termination of this Agreement,
(ii) any investigation made by or on behalf of any Underwriter or any
person controlling any Underwriter, or the Company, its officers or
directors or any person controlling the Company and (iii) acceptance of
and payment for any of the Shares.
8. TERMINATION. This Agreement shall be subject to termination
by notice given by you to the Company, if (a) after the execution and delivery
of this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses (a)(i) through (iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
9. EFFECTIVENESS: DEFAULTING UNDERWRITERS. This Agreement shall
become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
that it has or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I bears to the
aggregate number of Firm Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; PROVIDED that in no event shall the
number of Shares that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Section 9 by an amount in excess of
one-ninth of such number of Shares without the written consent of such
Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares
with respect to which such default occurs is more than one-tenth of the
aggregate number of Firm Shares to be purchased, and arrangements satisfactory
to you and the Company for the purchase of such Firm Shares are not made within
36 hours after such default, this Agreement shall terminate without liability on
the part of any non-defaulting Underwriter or the Company. In any such case
either you or the Company shall have the right to postpone the Closing Date, but
in no event for longer than seven days, in order that the required changes, if
any, in the Registration Statement and in the
14
<PAGE>
Prospectus or in any other documents or arrangements may be effected. If, on
the Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase
Additional Shares or (ii) purchase not less than the number of Additional Shares
that such non-defaulting Underwriters would have been obligated to purchase in
the absence of such default. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions placed upon it in this
Agreement, or if for any reason the Company shall be unable to perform its
obligations under this Agreement that are within its control, the Company will
reimburse the Underwriters or such Underwriters as have so terminated this
Agreement with respect to themselves, severally, for all out-of-pocket expenses
(including the fees and disbursements of their counsel) reasonably incurred by
such Underwriters in connection with this Agreement or the offering contemplated
hereunder.
10. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
11. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
12. HEADINGS. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.
15
<PAGE>
Very truly yours,
INTUITIVE SURGICAL, INC.
By:
-----------------------------------
Name: Lonnie M. Smith
Title: President and Chief
Executive Officer
Accepted as of the date hereof:
MORGAN STANLEY & CO. INCORPORATED
BEAR, STEARNS & CO. INC.
BT ALEX. BROWN INCORPORATED
Acting severally on behalf of themselves
and the several Underwriters
named in Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By:
-----------------------------------------
Name:
Title:
<PAGE>
SCHEDULE I
Number of
Firm Shares
UNDERWRITER TO BE PURCHASED
Morgan Stanley & Co. Incorporated
Bear, Stearns & Co. Inc.
BT Alex. Brown Incorporated
Total:
<PAGE>
Exhibit 4.2
COMMON STOCK
THIS CERTIFICATE IS TRANSFERABLE
IN BOSTON, MA OR NEW YORK, NY
INTUITIVE SURGICAL
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK
SEE REVERSE FOR STATEMENTS RELATIVE
TO RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS, IF ANY
CUSIP 46120E 10 7
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE, OF
INTUITIVE SURGICAL, INC.
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered
by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/ ALAN C. MENDELSON
SECRETARY
INTUITIVE SURGICAL, INC.
CORPORATE
SEAL
1995
DELAWARE
/s/ LONNIE M. SMITH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
BANKBOSTON, N.A.
TRANSFER AGENT AND REGISTRAR
BY /s/ [ILLEGIBLE]
AUTHORIZED SIGNATURE
<PAGE>
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights as established, from time to time, by the
Certificate of Incorporation of the Corporation and by any certificate of
determination, the number of shares constituting each class and series, and
the designations thereof, may be obtained by the holder hereof upon request
and without charge from the Secretary of the Corporation at the principal
office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
UT TEN -- as joint tenants with right of survivorship and not as tenants in
common
COM PROP -- as community property
UNIF GIFT MIN ACT -- Custodian
------ -----
(Cust) (Minor)
under Uniform Gifts to Minors
Act
-------------------
(State)
UNIF TRF MIN ACT --
------- Custodian (until age )
(Cust) ----
under Uniform Transfers
----------
to Minors Act
---------
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------
- -------------------------
- -----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Shares
- ----------------------------------------------------------------------
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- --------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
-------------------------------
X
--------------------------------------
X
--------------------------------------
NOTICE. THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH THE NAME(S)
AS WRITTEN UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
---------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN AND ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM, PURSUANT TO
S.E.C. RULE 17d-15.
<PAGE>
EXHIBIT 10.11
LICENSE AGREEMENT
THIS LICENSE AGREEMENT dated as of December 20, 1995 (the "Agreement"),
is entered into between SRI INTERNATIONAL, a California nonprofit public
benefit corporation ("SRI"), having a place of business located at 333
Ravenswood Avenue, Menlo Park, California 94025-3493, and INTUITIVE SURGICAL
DEVICES, INC., a Delaware corporation ("ISD"), having a place of business
located at Five Palo Alto Square, 3000 El Camino Real, Palo Alto, California
94306-2155.
W I T N E S S E T H :
WHEREAS, SRI owns or has rights in certain patent rights and know-how
regarding Telepresence Surgical Technology (defined below), as described in
the SRI disclosures listed in Exhibit A hereto.
WHEREAS, SRI and John G. Freund, M.D. ("Dr. Freund"), entered into an
Option Agreement dated September 12, 1995 (the "Option Agreement"), pursuant
to which SRI granted to Dr. Freund an option to obtain a certain license
under SRI's rights in such patent rights and know-how.
WHEREAS, by exercising the option granted under the Option Agreement,
Dr. Freund desires that SRI convey to ISD a license under SRI's rights in
such patent rights and know-how to develop, make use and sell products for
use in performing surgery on humans and animals, on the terms and subject to
the conditions of the Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants herein contained, the parties hereby agree as follows:
ARTICLE 1
DEFINITIONS
For purposes of the Agreement, the terms defined in this article shall
have the respective meanings set forth below:
1.1 "AFFILIATE" shall mean, with respect to any Person, any other
Person which directly or indirectly controls, is controlled by, or is under
common control with, such Person. A Person shall be regarded as in control of
another Person if it owns, or directly or indirectly controls, at least
fifty percent (50%) of
<PAGE>
the voting stock or other ownership interest of the other Person, or if it
directly or indirectly possesses the power to direct or cause the direction
of the management and policies of the other Person by any means whatsoever.
1.2 "FIELD" shall mean the manipulation of tissues and medical devices
for animal and human medicine (including but not limited to surgery,
laparoscopic surgery and microsurgery).
1.3 "ISD KNOW-HOW" shall mean all inventions, discoveries, processes,
methods, compositions, formulae, procedures, protocols, techniques, results
of experimentation and testing, information and data, which have not been
published and otherwise are not generally known, which are necessary or
useful to the development, manufacture, use or sale of products utilizing or
incorporating the Telepresence Surgical Technology, or otherwise relate to or
arise from the Telepresence Surgical Technology, and which are first
conceived or reduced to practice solely or jointly by employees or other
Persons on behalf of ISD prior to September 12, 1997; all to the extent and
only to the extent that ISD has the right to grant licenses, immunities or
other rights thereunder.
1.4 "ISD PATENT RIGHTS" shall mean (a) all patent applications,
heretofore or hereafter filed or having legal force in any country which
claim a discovery or invention which is (i) necessary or useful to the
development, manufacture, use or sale of products utilizing or incorporating
the Telepresence Surgical Technology or (ii) otherwise relates to or arises
from the Telepresence Surgical Technology, and which is first conceived or
reduced to practice solely or jointly by employees or other Persons on behalf
of ISD prior to September 12, 1997, (b) all valid and enforceable patents
that have issued or in the future issue from the patent applications
described in clause (a) above, including utility, model and design patents
and certificates of invention, and (c) all divisionals, continuations,
continuations-in-part, reissues, renewals, extensions, registrations,
confirmations, re-examinations or additions to any such patent applications
and patents; all to the extent and only to the extent that ISD has the right
to grant licenses, immunities or other rights thereunder.
1.5 "MILESTONE" shall mean the good faith filing by ISD, its Affiliate
or sublicensee of a Pre-Market Approval application or 510K application with
the Food and Drug Administration in the United States (or the equivalent
application with the governing health authority of any country in Europe),
supported by the information that in ISD's best judgment would give the
greatest likelihood of approval by the FDA (or the governing health authority
of the applicable country in Europe).
1.6 "PERSON" shall mean an individual, corporation, partnership, trust,
business trust, association, joint stock company, joint venture, pool,
syndicate, sole proprietorship,
-2-
<PAGE>
unincorporated organization, governmental authority or any other form of
entity not specifically listed herein.
1.7 "PRODUCT" shall mean any product for use in the Field which if
made, used or sold would infringe one or more valid claims of the SRI Patent
Rights if in an issued patent but for the license granted by the Agreement,
or which otherwise uses, incorporates or was conceived, developed or reduced
to practice using the SRI Patent Rights or SRI Know-How.
1.8 "SRI FUTURE TECHNOLOGY RIGHTS" shall mean all intellectual property
rights of SRI in all inventions, discoveries, processes, methods,
compositions, formulae, procedures, protocols, techniques, results of
experimentation and testing, information and data regarding Telepresence
Surgical Technology, which are first conceived or reduced to practice solely
or jointly by employees or other Persons on behalf of SRI on or after
September 12, 1997 and prior to September 12, 1999; all to the extent and
only to the extent that SRI has the right to grant licenses, immunities or
other rights thereunder.
1.9 "SRI KNOW-HOW" shall mean all inventions, discoveries, processes,
methods, compositions, formulae, procedures, protocols, techniques, results
of experimentation and testing, information and data, which have not been
published and otherwise are not generally known, regarding Telepresence
Surgical Technology in which SRI has an ownership or other interest as of the
date of the Agreement or which are first conceived or reduced to practice
solely or jointly by employees or other Persons on behalf of SRI prior to
September 12, 1997; all to the extent and only to the extent that SRI has the
right to grant licenses or other rights thereunder.
1.10 "SRI PATENT RIGHTS" shall mean (a) all patent applications,
heretofore or hereafter filed or having legal force in any country, regarding
Telepresence Surgical Technology, which claim a discovery or invention in
which SRI has an ownership or other interest as of the date of the Agreement
or which is first conceived or reduced to practice solely or jointly by
employees or other Persons on behalf of SRI prior to September 12, 1997, (b)
all valid and enforceable patents that have issued or in the future issue
from the patent applications described in clause (a) above, including
utility, model and design patents and certificates of invention, and (c) all
divisionals, continuations, continuations-in-part, reissues, renewals,
extensions or additions to any such patent applications and patents; all to
the extent and only to the extent that SRI has the right to grant licenses,
immunities or other rights thereunder. A list of the SRI Patent Rights as of
the date of the Agreement is attached hereto as Exhibit B.
1.11 "STOCK PURCHASE AGREEMENT" shall mean the Stock Purchase Agreement
dated the date hereof, among ISD, SRI and the other signatories thereto.
-3-
<PAGE>
1.12 "TELEPRESENCE SURGICAL TECHNOLOGY" shall mean hardware, firmware
and software technology pertaining to the manipulation of tissues or medical
devices for human and animal medicine (including but not limited to surgery,
laparoscopic surgery and microsurgery) as described or contemplated in
Exhibits A and B to the Agreement and developed by SRI's Medical Technology
Laboratory or any successor SRI organization having the development of
medical hardware, firmware and software technology as its primary mission.
1.13 "THIRD PARTY" shall mean any Person other than SRI, ISD and their
respective Affiliates.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
Each party hereby represents and warrants to the other party as follows:
2.1 CORPORATE EXISTENCE AND POWER. Such party (a) is a corporation duly
organized, validly existing and in good standing under the laws of the state
in which it is incorporated; (b) has the corporate power and authority and
the legal right to own and operate its property and assets, to enter into the
Agreement and to perform its obligations hereunder, and to carry on its
business as it is now being conducted and (c) is in compliance with all
requirements of applicable law, except to the extent that any noncompliance
would not have a material adverse effect on the properties, business,
financial or other condition of it and would not materially adversely affect
its ability to perform its obligations under the Agreement.
2.2 AUTHORIZATION AND ENFORCEMENT OF OBLIGATIONS. Such party has taken
all necessary corporate action on its part to authorize the execution and
delivery of the Agreement and the performance of its obligations hereunder.
The Agreement has been duly executed and delivered on behalf of such
party, and constitutes a legal, valid, binding obligation, enforceable
against such party in accordance with its terms.
2.3 NO CONSENTS. All necessary consents, approvals and authorizations of
all governmental authorities and other Persons required to be obtained by
such party in connection with the Agreement have been obtained.
2.4 NO CONFLICT. The execution and delivery of the Agreement and the
performance of such party's obligations hereunder (a) do not conflict with or
violate any requirement of applicable laws or regulations, and (b) do not
conflict with, or constitute a default under, any contractual obligation of
it.
-4-
<PAGE>
2.5 SRI REPRESENTATIONS AND WARRANTIES. SRI hereby represents and
warrants to ISD that:
2.5.1 Except as otherwise specifically disclosed under the
Agreement, it has not granted any right to any Third Party under the SRI
Patent Rights or and SRI Technology.
2.5.2 It owns or controls under valid licenses with right of
sublicense all of the rights, title and interest in and to the patents and
patent applications set forth on Exhibit B attached hereto and the SRI
Know-How, except as otherwise provided herein.
2.5.3 It has disclosed to ISD all SRI invention disclosures
regarding the Telepresence Surgical Technology as of the date of the
Agreement.
ARTICLE 3
LICENSE GRANTS
3.1 LICENSE GRANT TO ISD. Subject to the provisions of Section 5.3
below, SRI hereby grants to ISD an exclusive, worldwide, royalty-free license
(including the right to grant sublicenses) under the SRI Patent Rights and
SRI Know-How (a) to conduct research and development with respect to Products
for use in the Field, and (b) to make, have made, use, market, distribute,
import, offer for sale and sell Products for use in the Field. Upon execution
of the Agreement and frequently thereafter until September 12, 1998, at
mutually convenient times, SRI shall disclose and make available to ISD all
information available to SRI, including without limitation SRI invention
disclosures and SRI Know-How, as is reasonably necessary for ISD's employees
and consultants to understand and practice the SRI Patent Rights and SRI
Know-How in the Field, as such information becomes available to SRI. ISD
shall have the right, during normal business hours upon reasonable notice,
to review and make copies of those portions of SRI employees' laboratory
notebooks containing such information as is reasonably necessary for ISD's
employees and consultants to understand and practice the SRI Patent Rights
and SRI Know-How in the Field.
3.2 SUBLICENSES. Each sublicense by ISD under the Agreement shall be
consistent with the terms and conditions of the license granted to ISD by SRI
and nothing in such sublicense shall eliminate or reduce ISD's obligations to
SRI under the Agreement. Each sublicense by SRI under the Agreement shall be
consistent with the terms and conditions of the license granted to SRI by ISD
and nothing in such sublicense shall eliminate or reduce SRI's obligations to
ISD under the Agreement.
3.3 RESERVATION OF CERTAIN RIGHTS. Notwithstanding the foregoing, the
license granted to ISD by the Agreement is subject
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to the reservation of (a) the right of SRI to practice processes and methods,
and to make, use and sell products, which are covered by the SRI Patent
Rights or which are disclosed in or otherwise pertain to SRI Know-How, (i)
for all commercial and research purposes outside the Field and (ii) for SRI's
internal and collaborative non-commercial research purposes (including United
States Government sponsored research) in the Field; (b) certain rights held
by or in favor of the United States Government by applicable law or
regulation; and (c) the non-exclusive, worldwide, royalty-free right to use
the SRI Patent Rights and SRI Know-How for medical training and simulations,
so long as products created pursuant to such right are not used to perform
medical procedures. To the extent required by applicable United States laws
or regulations, if at all, ISD, its Affiliates and sublicensees shall
manufacture the Products in the United States or its territories.
3.4 DISCLAIMER OF WARRANTIES. NOTHING IN THE AGREEMENT SHALL BE
CONSTRUED AS A REPRESENTATION MADE OR WARRANTY GIVEN BY SRI THAT ANY PATENT
WILL ISSUE BASED UPON ANY PENDING PATENT APPLICATION INCLUDED IN THE SRI
PATENT RIGHTS, THAT ANY PATENT INCLUDED IN THE SRI PATENT RIGHTS WHICH ISSUES
WILL BE VALID, OR THAT THE USE OF ANY SRI PATENT RIGHTS OR SRI KNOW-HOW WILL
NOT INFRINGE THE PATENT OR PROPRIETARY RIGHTS OF ANY OTHER PERSON. EXCEPT AS
OTHERWISE SET FORTH IN SECTION 2.5 ABOVE, SRI MAKES NO REPRESENTATIONS OR
WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE SRI PATENT RIGHTS OR SRI
KNOW-HOW, INCLUDING WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
3.5 LICENSE GRANT TO SRI. ISD hereby grants to SRI a non-exclusive,
worldwide, royalty-free license (including the right to grant sublicenses) to
practice methods and processes, and to make, use and sell products, which are
covered by the ISD Patent Rights or which are disclosed in or otherwise
pertain to ISD Know-How (a) for all commercial and research purposes outside
the Field and (b) for SRI's internal and collaborative non-commercial
research purposes (including United States Government sponsored research) in
the Field. At least quarterly prior to September 12, 1998, at mutually
convenient times, ISD shall disclose and make available to SRI information
available to ISD regarding the use of the ISD Patent Rights and ISD Know-How
outside the Field, as such information becomes available to ISD.
3.6 TECHNICAL ASSISTANCE. Prior to September 12, 1997, upon reasonable
notice and during normal business hours, SRI (a) shall provide such technical
assistance regarding the SRI Patent Rights and SRI Know-How as ISD reasonably
requests to conduct its activities contemplated by the Agreement, and (b)
shall make available to ISD such technical personnel of SRI as reasonably
necessary to provide the foregoing technical assistance. Except for services
reasonably required for the technology transfer as set forth in Section 3.1
above, ISD shall reimburse SRI for its standard research or consulting costs
for any such technical
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assistance, determined in accordance with SRI's normal business practice
applied on a consistent basis, together with all reasonable out-of-pocket
travel and other expenses incurred by SRI in providing such technical
assistance. At the request of ISD, SRI shall provide ISD with estimates of
the anticipated costs of any requested technical assistance prior to
undertaking such technical assistance.
3.7 ACCESS. During the term of the Agreement prior to September 12,
1997, subject to the limitations of this Section 3.7, ISD shall have the
right to visit SRI's facilities to inspect and use SRI Telepresence Surgical
Technology demonstration or prototype equipment. ISD's access to SRI
facilities and use of equipment shall be subject to the following conditions:
(a) ISD shall provide reasonable prior notice;
(b) ISD's use of SRI facilities and equipment shall be during
normal business hours at times mutually convenient to SRI and ISD, which do
not conflict with SRI's normal business activities;
(c) ISD shall repair or replace any SRI equipment damaged by ISD;
and
(d) ISD's access to SRI facilities shall be subject to the
execution by ISD of an agreement with standard SRI terms and conditions
regarding access to SRI facilities by contractors and other non-employee
Third Parties.
3.8 RIGHT OF FIRST NEGOTIATION. SRI shall not sell, assign, license or
otherwise transfer the SRI Future Technology Rights for use in the Field to
any Third Party unless SRI first (a) gives to ISD written notice of SRI's
desire to do so, (b) provides ISD with information available to SRI regarding
the use of the SRI Future Technology Rights in the Field, sufficient to
permit ISD to evaluate and understand such SRI Future Technology Rights,
subject to the confidentiality provisions of Article 6 below, solely to
evaluate its interest in negotiating a license under such rights, and (c)
offers to ISD the opportunity to negotiate with SRI to obtain a license under
the SRI Future Technology Rights for use in the Field. IF ISD fails to give
written notice to SRI of its desire to negotiate a license under such rights
within 60 days after receipt of the written notice from SRI under clause (a)
above, or if the parties are unable after good faith negotiations to reach a
mutually acceptable agreement, thereafter SRI shall have the right in its
sole discretion to sell, assign, license or otherwise transfer the SRI Future
Technology Rights for use in the Field to any one or more Third Parties.
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ARTICLE 4
CONSIDERATION TO SRI
4.1 ISSUANCE OF ISD SHARES. In consideration for the license granted
to ISD hereunder, concurrent with the execution of the Agreement, ISD shall
issue to SRI or SRI's designees five hundred eighty five thousand (585,000)
shares of ISD Common Stock on the terms and subject to the conditions of the
Stock Purchase Agreement.
4.2 REIMBURSEMENT OF CERTAIN SRI COSTS. Within five (5) business days
following the execution of the Agreement, ISD shall reimburse SRI for (a) all
reasonable, direct, out-of-pocket costs (not to exceed $116,000 in the
aggregate) incurred by SRI on or before the date of the Option Agreement in
connection with the preparation, filing, prosecution and maintenance of the
patent applications and patents included in the SRI Patent Rights; (b) all
reasonable, direct, out-of-pocket costs incurred by SRI after the date of the
Option Agreement and on or before the date of the Agreement in connection
with the preparation, filing, prosecution and maintenance of the patent
applications and patents included in the SRI Patent Rights, which are
approved by ISD or Dr. Freund prior to being incurred; and (c) all
reasonable, outside counsel attorneys' fees and costs (not to exceed $10,000
in the aggregate) incurred by SRI in connection with the negotiation,
drafting and execution of the Option Agreement, the Agreement and the Stock
Purchase Agreement; PROVIDED, HOWEVER, that no fees or costs resulting from
work performed by SRI in-house counsel shall be reimbursed under this Section
4.2.
4.3 PAYMENT METHOD. All payments by ISD to SRI under the Agreement
shall be paid in United States dollars by bank wire transfer in immediately
available funds to such account as SRI shall designate before such payment is
due.
ARTICLE 5
DILIGENCE OBLIGATIONS
5.1 RESEARCH AND DEVELOPMENT EFFORTS. ISD shall use its commercially
reasonable and diligent efforts (a) to conduct such research, development and
preclinical and human clinical trials as necessary or desirable (in ISD's
reasonable discretion) to obtain regulatory approvals to manufacture and
market Products for use in the Field, and (b) to commence marketing and
market each such Product for use in the Field in such countries as ISD
determines are commercially desirable. ISD's obligation to commence marketing
a Product in a country shall not commence until all regulatory approvals
necessary to market such Product in such country have been obtained by ISD.
ISD, at its sole expense and in its sole discretion, shall fund the costs of
all research, development, preclinical and clinical trials, regulatory
approval
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activities and commercialization of the Products, and SRI shall have no
obligation to fund any such activities.
5.2 REPORTS. Within ninety (90) days following the end of each
calendar year during the term of the Agreement, ISD shall prepare and deliver
to SRI a summary written report which shall summarize the status of the
research, development and testing of Products, and the status of obtaining
the necessary approvals to market Products.
5.3 FAILURE TO MEET THE MILESTONE. If ISD fails to achieve the
Milestone on or before September 12, 2002, then at SRI's election in its sole
discretion, (a) the license granted by SRI to ISD shall become non-exclusive,
and (b) the right to file and prosecute patent applications, to maintain and
enforce any resulting patents, included within the SRI Patent Rights under
Article 7 below shall revert to SRI, without any further action by ISD.
ARTICLE 6
CONFIDENTIALITY
6.1 CONFIDENTIAL INFORMATION. During the term of the Agreement, and
for a period of five (5) years following the expiration or earlier
termination hereof, each party shall exercise reasonable care to maintain in
confidence all information of the other party (including samples) disclosed
by the other party and identified as, or acknowledged to be, confidential
(the "Confidential Information"), and shall not use, disclose or grant the
use of the Confidential Information except on a need-to-know basis to those
directors, officers, employees, agents, permitted sublicensees and permitted
assignees, to the extent such disclosure is reasonably necessary in
connection with such party's activities as expressly authorized by the
Agreement. To the extent that disclosure is authorized by the Agreement,
prior to disclosure, each party hereto shall obtain the written agreement of
any such Person, who is not otherwise bound by fiduciary obligations to such
party, to hold in confidence and not make use of the Confidential Information
for any purpose other than those permitted by the Agreement. Each party shall
notify the other promptly upon discovery of any unauthorized use or disclosure
of the other party's Confidential Information.
6.2 PERMITTED DISCLOSURES. The nonuse and nondisclosure obligations
contained in this article shall not apply to the extent that (a) any
receiving party (the "Recipient") is required (i) to disclose information by
law, order or regulation of a governmental agency or a court of competent
jurisdiction, or (ii) to disclose information to any governmental agency for
purposes of obtaining approval to test or market a product, provided in
either case that the Recipient shall provide written notice thereof to the
other party and sufficient opportunity to object, time
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permitting, to any such disclosure or to request confidential treatment
thereof; or (b) the Recipient can demonstrate that (i) the information was
public knowledge at the time of such disclosure by the Recipient, or
thereafter became public knowledge, other than as a result of acts
attributable to the Recipient in violation hereof; (ii) the information was
rightfully known by the Recipient (as shown by its written records) prior to
the date of disclosure to the Recipient by the other party hereunder; (iii)
the information was disclosed to the Recipient on an unrestricted basis from
a Third Party not under a duty of confidentiality to the other party; or (iv)
the information was independently developed by employees or agents of the
Recipient without access to the Confidential Information of the other party.
6.3 PUBLICATION. ISD acknowledges SRI's interest in publishing the
results of its research to obtain recognition within the scientific community
and to advance the state of scientific knowledge. SRI and ISD each recognize
their mutual interest in obtaining valid patent protection and protecting
their respective business interests. Consequently, if SRI, its employees or
consultants desire to make a publication (including any oral disclosure made
without obligation of confidentiality) relating to any discovery or invention
regarding the technology which is the subject of the Agreement (except (a)
such technology as described in Section 3.8 above which is not licensed to
ISD, and (b) such technology as is conceived or invented by ISD), SRI shall
give ISD a copy of the proposed written publication at least 30 days prior to
submission for publication, or an outline of such oral disclosure at least 30
days prior to presentation. ISD shall have the right to request a reasonable
delay in publication or presentation, not to exceed 90 days, in order to
protect patentable information. If ISD requests such a delay, SRI shall delay
submission or presentation of the publication for a period of 90 days to
enable ISD to file the applicable patent applications protecting each
parties' rights in such discoveries or inventions to be filed in accordance
with Article 7 below. Upon the expiration of 30 days in the case of proposed
written publications, or 30 days in the case of proposed oral presentations,
from delivery to ISD, SRI shall be free to proceed with the written
publication or presentation, respectively, unless ISD has requested the delay
described above.
6.4 TERMS OF THE AGREEMENT. Except as otherwise provided in this
article or as otherwise required by applicable law, regulation or order of a
governmental agency or court of competent jurisdiction, neither party shall
disclose any terms or conditions of the Agreement to any Third Party without
the prior consent of the other party; PROVIDED, HOWEVER, that ISD may, at its
election, disclose terms or conditions of the Agreement to an investor in ISD
or a bona fide potential investor in ISD, without the prior consent of SRI.
6.5 NO USE OF NAME. Except as otherwise required by applicable law,
regulation or order of a governmental agency or
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court of competent jurisdiction, neither party shall use the name of the
other party or the other party's directors, officers or employees in any
advertising, news release or other publication, without the prior express
written consent of the other party; PROVIDED, HOWEVER, that ISD may, at its
election, identify SRI as the licensor of the Telepresence Surgical
Technology (whether under that name or under some other designation) and/or
of certain technology on which the Products are in part based.
6.6 DESCRIPTION OF TELEPRESENCE SURGICAL TECHNOLOGY. Notwithstanding
the provisions of Section 6.1, ISD may, at its election and in its sold
discretion, disclose a description of the Telepresence Surgical Technology
(whether under that name or some other designation) in financing documents,
in marketing literature and in such other publications as ISD reasonably
deems necessary to meet ISD's diligence obligations under Article 5 above;
PROVIDED, HOWEVER, that ISD may not disclose SRI Know-How without the prior
express written consent of SRI.
ARTICLE 7
INVENTIONS AND PATENTS
7.1 OWNERSHIP OF INVENTIONS. The entire right and title in all
inventions, discoveries, processes, methods, compositions, formulae,
techniques, information and data regarding Telepresence Surgical Technology,
whether or not patentable (collectively, the "Inventions"), and any patent
applications or patents based thereon, conceived in the performance of the
parties' activities during the term of the Agreement (a) by employees or
other Persons acting solely on behalf of SRI, shall be owned solely by SRI
("SRI Inventions"), (b) by employees or other Persons acting solely on behalf
of ISD shall be owned solely by ISD ("ISD Inventions"), and (c) jointly by
employees or other Persons acting on behalf of SRI and by employees or other
Persons acting on behalf of ISD, shall be owned jointly by SRI and ISD (the
"Joint Inventions"). SRI and ISD each hereby represents that all employees
and other Persons acting on its behalf in performing its obligations under
the Agreement shall be obligated to assign to it, or as it shall direct, all
Inventions conceived by such employees or other Persons.
7.2 SRI PATENT RIGHTS.
7.2.1 FILING, PROSECUTION, AND MAINTENANCE. ISD shall file and
prosecute patent applications included in the SRI Patent Rights in the United
States, Japan, the European Patent Office (designating the United Kingdom,
France, Germany and Italy) and such other countries as ISD may select in its
sole discretion, and shall maintain any resulting patents. At ISD's election
in its sole discretion, such foreign filing may be initiated through the
Patent Cooperation Treaty designating such countries. In so doing, ISD shall
endeavor to obtain the strongest commercially
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desirable patent protection (under the circumstances) regarding the
Telepresence Surgical Technology with respect to the Products and shall
consider in good faith the interests of SRI. ISD (a) shall supply SRI with a
copy of each such patent application as filed, together with notice of its
filing date and serial number; (b) shall consult with SRI regarding the
prosecution and maintenance of the SRI Patent Rights, and shall implement
reasonable requests of SRI with respect thereto; (c) shall provide SRI with
copies of all filings, submissions, correspondence, office actions and
responses thereto with the applicable patent authorities regarding the SRI
Patent Rights; and (d) shall inform SRI promptly of the allowance and
issuance of each patent included in the SRI Patent Rights, together with the
date and patent number thereof, and shall provide SRI with a copy of such
patent as issued. SRI shall cooperate with ISD, execute all lawful papers and
instruments and make all rightful oaths and declarations and and instruments
and make all rightful oaths and declarations as may be necessary in the
preparation, prosecution and maintenance of all such patents and patent
applications, ISD shall reimburse SRI for its standard costs for any such
assistance, determined in accordance with SRI's normal business practice
applied on a consistent basis, together with all reasonable out-of-pocket
travel and other expenses incurred by SRI in providing such assistance;
PROVIDED, HOWEVER, that ISD shall not be obligated to reimburse SRI for any
consultation with SRI which ISD is obligated to undertake pursuant to this
Article 7. At the request of ISD, SRI shall provide ISD with estimates of the
anticipated costs of any requested assistance prior to undertaking such
assistance.
7.2.2 FUTURE PATENT COSTS. Except as otherwise set forth in this
section, ISD shall pay all costs incurred after the date of the Agreement in
connection with the preparation, filing, prosecution and maintenance of the
patent applications and patents included in the SRI Patent Rights. If, during
the term of the Agreement, SRI grants a license to any one or more Third
Parties under the SRI Patent Rights for use outside the Field, SRI shall pay
or cause each such Third party to reimburse ISD for such Third Party's PRO
RATA share of the actual out-of-pocket costs paid by ISD (or reimbursed by
ISD to SRI) in connection with the preparation, filing, prosecution and
maintenance of the patent applications and patents included in the SRI Patent
Rights; PROVIDED, HOWEVER, that SRI shall have no obligation to reimburse ISD
for any such Third Party's share of such out-of-pocket costs paid through the
effective date of the license agreement with such Third Party in excess of
the total consideration received by SRI from such Third Party for the license
agreement with such Third Party. Patent costs incurred after the date(s) of
such Third Party license agreement(s) shall be shared on a PRO RATA basis by
ISD and each such Third Party; PROVIDED, HOWEVER, that ISD may, at is
election, seek reimbursement directly from each such Third Party, and SRI
shall cause each such Third Party to make reimbursement directly to ISD, for
such Third Party's PRO RATA share of those patent costs incurred after the
date of such Third Party license agreement. Notwithstanding anything to the
contrary in this Section 7.2, if ISD desires to abandon or materially
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narrow any claim of the SRI Patent Rights which has application outside the
Field, then SRI shall have the right, in its sole discretion and at its sole
expense, to assume control of the prosecution, maintenance and enforcement of
such claim, provided that the respective rights of each party under the
Agreement with respect to such claim shall not otherwise be affected solely
by virtue of ISD abandoning and SRI assuming control thereof.
7.2.3 ENFORCEMENT. Each party promptly shall notify the other
party of any infringement known to such party of the SRI Patent Rights and
shall provide the other party with the available evidence, if any, of such
infringement. ISD, at its sole expense, shall have the right (but not the
obligation) to determine the appropriate course of action to enforce the SRI
Patent Rights in the Field or otherwise abate the infringement thereof in the
Field, to take (or refrain from taking) appropriate action to enforce the SRI
Patent Rights in the Field, to control any litigation or other enforcement
action in the Field and to enter into, or permit, the settlement of any such
litigation or other enforcement action with respect to the SRI Patent Rights
in the Field, and shall consider, in good faith, the interests of SRI in so
doing. If, within one hundred twenty (120) days of receipt of notice from
SRI, ISD does not abate the infringement in the Field or file suit to enforce
the SRI Patent Rights against at least one infringing party in the Field, SRI
shall have the right to take whatever action it deems appropriate to enforce
the SRI Patent Rights in the Field. The party controlling any such
enforcement action shall not settle the action or otherwise consent to an
adverse judgment in such action that adversely affects the rights or
interests of the non-controlling party or imposes additional obligations on
the non-controlling party, without the prior written consent of the
non-controlling party. All monies recovered upon the final judgment or
settlement of any such suit by ISD to enforce the SRI Patent Rights in the
Field shall be retained by ISD. All monies recovered upon the final judgment
or settlement of any such suit by SRI to enforce the SRI Patent Rights in the
Field shall be retained by SRI. Notwithstanding the foregoing, SRI and ISD
shall fully cooperate with each other in the planning and execution of any
action to enforce the SRI Patent Rights in the Field.
7.3 ISD PATENT RIGHTS.
7.3.1 FILING, PROSECUTION, AND MAINTENANCE. ISD, at its sole
expense, shall have the right to file and prosecute patent applications
included in the ISD Patent Rights in the United States, Japan, the European
Patent Office (designating the United Kingdom, France, Germany and Italy) and
such other countries as ISD may select in its sole discretion, and to
maintain any resulting patents. At ISD's election in its sole discretion,
such foreign filing may be initiated through the Patent Cooperation Treaty
designating such countries. ISD shall provide SRI with copies of each such
patent application as filed,
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together with notice of its filing date and serial number, and copies of all
office actions and responses thereto.
7.3.2 ENFORCEMENT. ISD, at its sole expense, shall have the
right (but not the obligation) to determine the appropriate course of action
to enforce the ISD Patent Rights or otherwise abate the infringement thereof,
to take (or refrain from taking) appropriate action to enforce the ISD Patent
Rights, to control any litigation or other enforcement action and to enter
into, or permit, the settlement of any such litigation or other enforcement
action with respect to the ISD Patent Rights, and shall consider, in good
faith, the interests of SRI in so doing. All monies recovered upon the final
judgment or settlement of any such suit to enforce the ISD Patent Rights
shall be retained by ISD.
7.4 PATENT MARKINGS. With respect to each Product which would infringe
a valid claim of an issued patent of the SRI Patent Rights but for the license
granted to ISD hereunder, ISD, its Affiliates and sublicensees shall mark
each such Product sold or otherwise disposed of by any of them with the
appropriate marking, giving notice to the public that such Product is
patented, by fixing thereon either the word "patent" or the abbreviation
"pat", together the number of such issued patent of the SRI Patent Rights.
ARTICLE 8
TERM AND TERMINATION
8.1 EXPIRATION. Subject to the provisions of this article, the
Agreement shall expire on the later of (a) the expiration of the last to
expire of the SRI Patent Rights, or (b) the date seventeen (17) years after
the date of the Agreement.
8.2 TERMINATION BY SRI. SRI may terminate the Agreement, in its sole
discretion, upon thirty (30) days prior written notice to ISD, (a) if ISD
fails to timely reimburse SRI for the costs described in Section 4.2 above,
and if ISD has not cured such breach within thirty (30) days after written
notice thereof by SRI; or (b) except as otherwise provided in the article
below regarding force majeure, upon or after the material breach of its
obligations under the Stock Purchase Agreement or under Section 6.1, 6.2,
6.3, 6.4, 7.2, 7.3, 9.1, 9.2 or 9.3 of the Agreement, if ISD has not cured
such breach within ninety (90) days after written notice thereof by SRI.
8.3 TERMINATION BY ISD. Except as otherwise provided in the article
below regarding force majeure, if SRI materially breaches its obligations
under Section 3.1, 3.6 or 3.7 of the Agreement, and SRI has not cured such
breach within sixty (60) days after written notice thereof by ISD, then (a)
ISD may terminate the Agreement upon thirty (30) days prior written notice to
SRI, and
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for the periods(s) specified in Section 2(a) of the Stock Purchase Agreement,
repurchase that portion of the shares of ISD Common Stock issued to SRI
specified in Section 2(a) of the Stock Purchase Agreement at the price and on
the terms and conditions set forth in the Stock Purchase Agreement, and (b)
SRI shall grant to ISD an exclusive, worldwide, royalty-free license with the
right to sublicense, under the SRI Patent Rights and SRI Know-How, to make,
have made, use, market, distribute, import, offer for sale and sell Products
for use in the Field.
8.4 CONVERSION TO NONEXCLUSIVE BY SRI. SRI may convert the license
granted by SRI to ISD to a nonexclusive license, in its sole discretion, upon
thirty (30) days prior written notice to ISD, (a) upon or after the material
breach of ISD's obligations under Section 5.1 of the Agreement, if ISD has
not cured such breach within sixty (60) days after written notice thereof by
SRI; or (b) if ISD voluntarily commences any action or seeks any relief
regarding its liquidation, reorganization, dissolution or similar act or
under any bankruptcy, insolvency or similar law; or (c) if a proceeding is
commenced or an order, judgment or decree is entered seeking the liquidation,
reorganization, dissolution or similar act or any other relief under any
bankruptcy, insolvency or similar law against ISD, without its consent, which
continues undismissed or unstayed for a period of sixty (60) days; PROVIDED,
HOWEVER, that SRI shall not have the right to terminate the Agreement solely
by reason of the occurrence of any one or more of the events described in
this Section 8.4.
8.5 FAILURE TO ISSUE ISD SHARES. In the event that ISD fails to duly
authorize, validly issue and deliver to SRI or its designees the shares
referenced in Section 4.2 above concurrent with the execution of the
Agreement, the Agreement automatically shall terminate without further action
by SRI.
8.6 EFFECT OF EXPIRATION OR TERMINATION. Expiration or termination of
the Agreement shall not relieve the parties of any obligation accruing prior
to such expiration or termination, and the provisions of Articles 6 and 9
shall survive the expiration or termination of the Agreement. Upon expiration
of the Agreement under Section 8.1 above, ISD shall have an exclusive,
worldwide, royalty-free license under the SRI Know-How in the Field, and SRI
shall have a non-exclusive, worldwide, royalty-free license under the ISD
Patent Rights and ISD Know-How for use outside the Field.
8.7 ISD DATA. Notwithstanding anything to the contrary in the
Agreement, (a) if the Agreement is terminated pursuant to the provisions of
Section 8.2 above, upon SRI's request not more than ninety (90) days after
such termination, within thirty (30) days after such request, ISD shall
provide provide SRI with copies of all regulatory submissions and approvals,
if any, regarding actual or potential Products, (b) SRI shall have the right
of reference to all data and information in such regulatory submissions, and
(c) ISD shall execute all such documents and instruments reasonably necessary
to enable SRI to reference all such data, information
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and submissions. ISD makes no representations and warranties whatsoever,
express or implied, regarding such data, information and submissions, and any
such use and reference of such data, information and submissions shall be at
SRI's own risk.
ARTICLE 9
INDEMNIFICATION AND INSURANCE
9.1 INDEMNIFICATION. ISD shall indemnify, defend and hold harmless SRI,
its directors, officers, employees and agents from all losses, liabilities,
damages and expenses (including reasonable attorneys' fees and costs) that
they may suffer as a result of any claims, demands, actions or other
proceedings made or instituted by any Third Party or Affiliate against any of
them and arising out of or relating to (a) any use by ISD, its Affiliate or
sublicensee of any SRI Patent Rights or SRI Know-How, including any claim of
patent infringement, or (b) any personal injury to or death of any person or
damage to any property in connection with any act or omission (without regard
to culpable conduct) by or on behalf of ISD, its Affiliate or sublicensee in
the performance of its activities contemplated by the Agreement (including
without limitation the manufacture, use and sale of Products), other than
those certain losses, liabilities, damages and expenses arising solely out of
the gross negligence or willful misconduct of SRI. Notwithstanding the
foregoing, ISD shall have no obligation to indemnify, defend or hold harmless
SRI from any losses, liabilities, damages and expenses (including reasonable
attorneys' fees and costs) that it may suffer as a result of any claims,
demands, actions or other proceedings made or instituted by any current or
former employee, consultant, licensee or optionee of SRI.
9.2 INDEMNIFICATION PROCEDURE. SRI promptly shall notify ISD of any
loss, liability, damage or expense, or any claim, demand, action or other
proceeding with respect to which SRI intends to claim such indemnification.
ISD's indemnity obligations under this article shall not apply to amounts
paid in any settlement if effected without the consent of ISD, which consent
shall not be unreasonably withheld or delayed. ISD shall not settle or
consent to an adverse judgment in any such claim, demand, action or other
proceeding that adversely affects the rights or interests of SRI, its
employees or agents or imposes additional obligations on SRI, its employees
or agents, without the prior express written consent of SRI. SRI, its
employees and agents, shall cooperate fully with ISD and its legal
representatives in the investigation of any action, claim or liability
covered by this indemnification.
9.3 INSURANCE. Concurrent with the commencement of the first human
clinical trial of any Product, ISD shall procure and maintain such liability
insurance, including contractual and product liability insurance, against
claims for bodily injury,
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including death, or property damage arising from its activities contemplated
by the Agreement, in amounts not less than $2,000,000 per occurrence and
$5,000,000 in the aggregate. ISD shall maintain such insurance for so long
thereafter as it continues to conduct its activities contemplated by the
Agreement; PROVIDED, HOWEVER, that in the event such insurance becomes
unavailable to ISD or in the event of extreme market conditions or other
unforeseen events, the parties agree to discuss such changed circumstances
and appropriate mechanisms to address them. Upon request, ISD shall provide
SRI with certificates of insurance evidencing ISD's compliance with the
insurance requirements of this section. SRI assumes no liability and
disclaims any responsibility for the product specifications, clinical trials,
manufacture, use, marketing, sale or other disposition, application, or
delivery of any and all Products. No warranties made by ISD in connection
with Product shall expressly or implicitly obligate SRI in any manner
whatsoever.
9.4 LIMITED LIABILITY. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE
OTHER PARTY FOR ANY SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES ARISING OUT
OF OR RELATED TO THE AGREEMENT OR WITH RESPECT TO ANY CLAIM, DEMAND, ACTION
OR OTHER PROCEEDING RELATING TO THE AGREEMENT HOWEVER CAUSED, AND ON ANY
THEORY OF LIABILITY (INCLUDING NEGLIGENCE) AND WHETHER OR NOT SUCH PARTY HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN NO EVENT SHALL SRI'S
LIABILITY OWING TO ISD WITH RESPECT TO ANY CLAIM, DEMAND, ACTION OR OTHER
PROCEEDING RELATING TO THE AGREEMENT EXCEED THE VALUE OF THE CONSIDERATION
ACTUALLY RECEIVED BY SRI UNDER THE AGREEMENT OR THE STOCK PURCHASE AGREEMENT.
ARTICLE 10
FORCE MAJEURE
Neither party shall be held liable or responsible to the other party nor
be deemed to have defaulted under or breached the Agreement for failure or
delay in fulfilling or performing any term of the Agreement to the extent,
and for so long as, such failure or delay is caused by or results from causes
beyond the reasonable control of the affected party including but not limited
to fires, earthquakes, floods, embargoes, wars, acts of war (whether war is
declared or not), insurrections, riots, civil commotions, strikes, lockouts
or other labor disturbances, acts of God or acts, omissions or delays in
acting by any governmental authority or other party.
ARTICLE 11
ARBITRATION
Any controversy or claim arising out of or relating to the Agreement, or
the breach thereof, or any failure to agree where
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agreement of the parties is necessary pursuant hereto, including the
determination of the scope of this agreement to arbitrate, shall be resolved
by the following procedures:
11.1 ATTEMPT TO RESOLVE DISPUTE. The parties shall use all reasonable
efforts to amicably resolve the dispute through direct discussions. The
senior management of each party commits itself to respond promptly to any
such dispute. Either party may send written notice to the other party
identifying the matter in dispute and invoking the procedures of this
article. Within ten (10) days after such written notice is received, unless a
delay is agreed to by both parties or the parties agree to confer by
telephone, one or more principals of each party shall meet in Menlo Park,
California to attempt to amicably resolve the dispute by written agreement.
If said dispute cannot be settled through direct discussions within twenty
(20) days after such written notice is received, the parties agree to first
endeavor to settle the dispute in an amicable manner by mediation in San
Francisco and administered by the American Arbitration Association ("AAA"),
417 Montgomery Street, San Francisco, California 94104-1113, pursuant to the
Commercial Mediation Rules of AAA at the time of submission prior to
resorting to binding arbitration.
11.2 APPLICATION TO BINDING ARBITRATION. If after sixty (60) days from
the first written notice of dispute, the parties fail to resolve the dispute
by written agreement or mediation, either party may submit the dispute to
final and binding arbitration administered by the AAA, pursuant to the
Commercial Arbitration Rules of the AAA at the time of submission. California
Arbitration Law shall govern. The arbitration shall be held in Menlo Park,
California before a single neutral, independent, and impartial arbitrator
(the "Arbitrator"). The language of the arbitration shall be English,
provided however that an interpreter may be provided for any witness that
desires an interpreter; the costs of such interpretation shall be borne by
the party requesting the interpreter, subject to being awarded by the
Arbitrator as a cost of arbitration.
11.3 BINDING ARBITRATION PROCEDURE. Unless the parties have agreed upon
the selection of the Arbitrator before then, the AAA shall appoint the
Arbitrator as soon as practicable, but in any event within thirty (30) days
after the submission to AAA for binding arbitration. The arbitration hearings
shall commence within forty-five (45) days after the selection of the
Arbitrator. Unless the Arbitrator otherwise directs, each party shall be
limited to two pre-hearing depositions each lasting no longer than 6 hours.
The parties shall exchange documents to be used at the hearing no later than
ten (10) days prior to the hearing date. Unless the Arbitrator otherwise
directs, each party shall have no longer than ten (10) hours to present its
position, the entire proceedings before the Arbitrator shall be on no more
than three (3) hearing days within a two week period. At the close of
evidence, each side shall submit a proposed award to the Arbitrator, one of
which shall be selected by the Arbitrator. The
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award shall be made no more than thirty (30) days following the close of the
proceeding. Under no circumstance should any time limit on the arbitration
hearings be applied so as to render any award subject to vacation under
California Code of Civil Procedure Section 1286.2. Accordingly, the
Arbitrator shall have authority to alter any time period believed necessary
to avoid vacatur under Section 1286.2. The Arbitrator's award shall be a
final and binding determination of the dispute and shall be fully enforceable
as an arbitration award by the California courts in accordance with the
California Arbitration Law. The prevailing party shall be entitled to recover
its reasonable attorneys' fees and expenses, including arbitration
administration fees, incurred in connection with such proceeding. Except as
otherwise required by applicable law, regulation or order of a governmental
agency or court of competent jurisdiction, neither party nor the Arbitrator
may disclose the existence, content, or results of any arbitration hereunder
without the prior written consent of both parties.
11.4 FEDERAL CLAIM. Any controversy or claim arising out of or
relating to the provisions of Article 7 of the Agreement for which the United
States District Court or other federal court would have subject matter
jurisdiction in the absence of the arbitration provisions set forth in this
Article 11 shall be exempt from such arbitration provisions and the United
States District Court for the Northern District of California shall have
exclusive jurisdiction over such controversy or claim.
ARTICLE 12
MISCELLANEOUS
12.1 NOTICES. Any consent, notice or report required or permitted to
be given or made under the Agreement by one party to the other party shall be
in writing, delivered personally or by facsimile (and promptly confirmed by
personal delivery, U.S. first class mail, courier or nationally-recognized
delivery service), U.S. first class mail postage prepaid, courier or
nationally-recognized delivery service, and addressed to the other party at
its address indicated below, or to such other address as the addressee shall
have last furnished in writing to the addressor. Except as otherwise provided
in the Agreement, such consent, notice or report shall be effective upon
receipt by the addressee.
If to SRI, for
technical matters: SRI International
333 Ravenswood Avenue
Menlo Park, California 94025-3493
Attention: Ajit Shah
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If to SRI, for
all other matters: SRI International
333 Ravenswood Avenue
Menlo Park, California 94025-3493
Attention: Technology Licensing
If to ISD, for
technical matters: Intuitive Surgical Devices, Inc.
c/o Cooley Godward Castro Huddleson & Tatum
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306-2155
Attention: John G. Freund, M.D.
If to ISD, for
all other matters: Intuitive Surgical Devices, Inc.
c/o Cooley Godward Castro Huddleson & Tatum
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306-2155
Attention: John G. Freund, M.D.
12.2 SOLICITATION OF SRI EMPLOYEES. ISD acknowledges that, during the
term of the Agreement, ISD will have access to SRI's business and employees,
including certain valuable proprietary information of SRI. ISD recognizes
that misuse of such proprietary information, including interference with the
employment relationship between SRI and its employees, would cause
substantial loss and irreparable harm to SRI. Therefore, as part of the
consideration for the Agreement, ISD shall not, prior to the expiration of
twelve (12) months after the effective date of the Agreement, either directly
or indirectly, by any means or device whatsoever, solicit any more than two
of SRI's scientific or laboratory personnel involved with or working on any
project relating to Telepresence Surgical Technology or otherwise induce or
attempt to induce such personnel to terminate their employment with SRI.
12.3 GOVERNING LAW. The Agreement, including the decision to arbitrate
and any decision by an arbitrator pursuant to Article 11, shall be governed
by and construed in accordance with the laws of the State of California,
without regard to the conflicts of law principles thereof (except to the
extent United States law preempts California law), and shall not be governed
by the United Nations Convention on Contracts for the International Sale of
Goods.
12.4 U.S. EXPORT LAWS AND REGULATIONS. Each party hereby acknowledges
that the rights and obligations of the Agreement are subject to the laws and
regulations of the United States relating to the export of products and
technical information. Without
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limitation, each party shall comply with all such laws and regulations.
12.5 NO OTHER RIGHTS. The Agreement shall not be construed to grant
any license or other rights to ISD in any patent rights, know-how or other
technology of SRI, except as expressly provided in the Agreement.
12.6 ASSIGNMENT. ISD shall not assign its rights or obligations under
the Agreement, in whole or in part, by operation of law or otherwise, wihtout
the prior written consent of SRI, which consent shall not be unreasonably
withheld; PROVIDED, HOWEVER, that ISD may, without such consent, assign the
Agreement and its rights and obligations hereunder in connection with the
transfer or sale of all or substantially all of its business or divisions or
subdivisions related to Telepresence Surgical Technology, or in the event of
its merger, consolidation, change in control, spin-off, recapitalization or
similar transaction. Any permitted assignee shall assume all obligations of
its assignor under the Agreement. Any purported assignment in violation of
this section shall be null and void.
12.7 WAIVERS AND AMENDMENTS. No change, modification, extension,
termination or waiver of the Agreement, or any of ythe provisions herein
contained, sahll be valid unless made in writing and signed by duly
authorized representatives of the parties hereto.
12.8 ENTIRE AGREEMENT. The Agreement embodies the entire
understanding between the parties and supersedes any prior understanding and
agreements between and among them respecting the subject matter hereof. There
are no representations, agreements, arrangements or understandings, oral or
written, between the parties hereto relating to the subject matter of the
Agreement which are not fully expressed herein. The Agreement supersedes the
Option Agreement, and upon execution of the Agreement by the parties, the
Option Agreement is hereby terminated.
12.9 SEVERABILITY. Any of the provisions of the Agreement which are
determined to bei nvalid or unenforceable in any jurisdiction shall be
ineffective to the extent of such invalidity or unenforceability in such
jurisdiction, without rendering invalid or unenforceable the remaining
provisions hereof and without affeting the validity or enforceability of any
of the terms of the Agreement in any other jurisdiction.
12.10 WAIVER. The waiver by either party hereto of any right
hereunder or the fialure to perform or of a breach by the other party shall
not be deemed a waiver of any other right hereunder or of any other breach or
failure by said other party whether of a similar nature or otherwise.
12.11 COUNTERPARTS. The Agreement may be executed in two or more
counterparts, each of which shall be deemd an original, but
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all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed the Agreement as of the
date first set forth above.
SRI INTERNATIONAL INTUITIVE SURGICAL DEVICES, INC.
By: /s/ Harold E. Kruth By: /s/ John G. Freund
--------------------------- ----------------------------
Title: SR VP & G C Title:
----------------------- -------------------------
Agreed to, for purposes of the
third sentence of Section 12.8
only, as of this December 19, 1995
/s/ John G. Freund
- -----------------------------------
John G. Freund, M.D.
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EXHIBIT "A"
SRI International Invention Disclosures
#3026
Teleoperator System and Method with Telepresence
Green (corresponds to #48)
P #3079
Steerable and Stereoscopic Laparoscope
Green
P #3278
Remote Center Positioner
Jenses (corresponds to #29)
P #3308
Articulated Surgical Grasper
Hill
P #3311
Telepresence Surgery Demo System
Hill, Green, Jensen, Gorfa, Shah
P #3318
Sterilizable Inner Manipulator
Hill
P #3319
Method for Telemanipulation with Telepresence
Green (corresponds to #33)
P #3336
Articulated Manipulator
Green, Hill, Jensen
P #3421
Method and Apparatus for Axial and Rotational Positioning Shaft with
Application to Laparoscopic Medical Instruments
Green
P #3435
Combined Remote-Center Positioner and Abdominal Wall Lift Device
Green
P #3441
Manipulator with Twist-Lock Tool Insertion
Jensen, Hill (corresponds to #42)
P #3457
Quick-Change Surgical Instrument
Hill (corresponds to #44)
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EXHIBIT "B"
SRI International Patent Rights
#48
Basic teleoperator system for providing operator tactile feedback and control
and a real or virtual image of the workspace (filed January 21, 1992).
(SN: 07/8231932) (also filed in Europe, Japan and Canada)
#48-1
Divisional of -48, directed to tactile sensors and broader claim language re
the basic telepresence concept (filed August 21, 1995). (SN: 08/S17,052)
#29
Remote center positioner (RCP) - four bar linkage that constrains movement of
an endoscopic instrument about a remote point (i.e., a percutaneous penetration
in the patient) (filed May 14, 1993). (SN: 08/062,404) (also filed in Europe
and Japan)
#29-4
Divisional of RCP application-directed to method claims (filed July 20, 1995).
(SN:08/504,301)
#29-5
Divisional of RCP application-directed to flexible drive element (filed
July 20, 1995). (SN: 08/504,620)
#29-6
Divisional of RCP application-directed to channel shaped linkage (filed
July 20, 1995). (SN: 08/504,619)
#33
System and method for transforming view able real-time image into perspective
image simulating the view of an operator at the remote workspace (filed
May 5, 1994). (SN: 08/239,086)
#33-1
Directed to the dynamic calibration system (filed April 20, 1995). (SN:
06/239,086)
#42, -44
Surgical instrument manipulator - receives signals from servomechanism and
manipulates instrument, provides at least four degrees of freedom and quick
attachment and release of different surgical instruments (filed June 7,
1995). (42: 08/485,597, 44: 08/487,020)
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EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated February 6,
1998 (except for Note 7, as to which the date is April 21, 1998) in Amendment
No. 1 to the Registration Statement (Form S-1) and related Prospectus of
Intuitive Surgical, Inc. for the registration of shares of its common stock.
ERNST & YOUNG LLP
Palo Alto, California
June 1, 1998
