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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-33016
PROSPECTUS
5,000,000 SHARES
[INTUITIVE LOGO]
COMMON STOCK
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This is our initial public offering of shares of common stock. We are offering
5,000,000 shares. No public market currently exists for our shares. Our common
stock has been approved for quotation on the Nasdaq National Market under the
symbol "ISRG."
INVESTING IN THE SHARES INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE 5.
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<CAPTION>
PER
SHARE TOTAL
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<S> <C> <C>
Public Offering Price....................................... $9.00 $45,000,000
Underwriting Discount....................................... $0.63 $ 3,150,000
Proceeds to Intuitive Surgical.............................. $8.37 $41,850,000
</TABLE>
We have granted the underwriters a 30-day option to purchase up to 750,000
additional shares of common stock on the same terms and conditions as set forth
above solely to cover over-allotments, if any.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Lehman Brothers expects to deliver the shares on or about June 16, 2000.
--------------------------------------------------------------------------------
LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
ROBERTSON STEPHENS
UBS WARBURG LLC
FIDELITY CAPITAL MARKETS
a division of National Financial
Services Corporation
JUNE 13, 2000
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[Description of Graphics]
Outside Front Cover
Captions
Headline: DA VINCI(TM) Surgical System
The future of surgery is now at your fingertips(TM)
A series of four photographs are shown on the right side and bottom of the page.
The first image shows two ENDOWRIST instruments suturing an organ. The second
image shows a surgeon's hands inside our Surgeon's console manipulating the
instrument controls to move the instruments shown in the first image. The
surgeon's hands are positioned and oriented relative to one another in the same
manner the instruments of the first image are relatively positioned and
oriented. The third image shows a surgeon holding an actual ENDOWRIST instrument
in front of his face. The fourth image is a graphic comparing the range of
motion of the human hand and wrist to that of an ENDOWRIST instrument.
Captions:
First and
Second Images: Orientation and movement of the surgeon's wrists, hands and
fingers are seamlessly translated to the instrument tips
Third Image: Enhanced precision and intuitive control are provided
through incisions the diameter of a pencil
Fourth Image: Full dexterity of the surgeon's wrists, hands and fingers are
replicated real-time at the operative field
Gatefold
Captions
Headline: DA VINCI(TM) Surgical System
Illustration: This illustration, centered on the page, shows various
operating room personnel performing a simulated surgery using
Intuitive Surgical's DA VINCI(TM) Surgical System.
Legend across bottom of the page
Orange dot 1 Surgeon Console
Blue dot 2 Patient Side Cart
Yellow dot 3 ENDOWRIST(TM) Instruments
Teal dot 4 INSITE(TM) High-Resolution 3-D Endoscope
Purple dot 5 INSITE(TM) Image Processing Equipment
Bottom line: The DA VINCI(TM) Surgical System in a simulated operating
environment
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Special Note Regarding Forward-Looking Statements........... 18
Use of Proceeds............................................. 19
Dividend Policy............................................. 19
Capitalization.............................................. 20
Dilution.................................................... 21
Selected Consolidated Financial Data........................ 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Business.................................................... 30
Management.................................................. 50
Related Party Transactions.................................. 60
Principal Stockholders...................................... 61
Description of Capital Stock................................ 63
Shares Eligible for Future Sale............................. 66
Underwriting................................................ 68
Legal Matters............................................... 71
Experts..................................................... 71
Where You Can Find More Information......................... 71
Index to Financial Statements............................... F-1
</TABLE>
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it is
unlawful. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
Until July 8, 2000 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealer's obligation to deliver a prospectus when acting as an
underwriter and with respect to unsold allotments or subscriptions.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the financial statements and the notes
to those statements, appearing elsewhere in this prospectus. Unless otherwise
indicated, information in this prospectus assumes that the underwriters do not
exercise their over-allotment option, assumes the conversion of all of our
preferred stock into common stock upon completion of this offering and assumes
the filing of our amended and restated certificate of incorporation immediately
following the closing of this offering.
INTUITIVE SURGICAL
We design and manufacture the da Vinci Surgical System, an advanced
surgical system that we believe represents a fundamentally new generation of
surgery. We believe this new generation of surgery, Intuitive surgery,
represents an advance similar in magnitude to the previous two generations of
surgery -- open surgery and minimally invasive surgery, or MIS. Our da Vinci
Surgical System seamlessly translates the surgeon's natural hand movements on
instrument controls at a console into corresponding micromovements of
instruments positioned inside the patient through small puncture incisions, or
ports. Our products provide the surgeon with the range of motion and fine tissue
control previously possible only with open surgery, while simultaneously
allowing the surgeon to work through small ports.
To date, surgeons have performed over 600 surgical procedures using our da
Vinci Surgical System. These procedures have been performed primarily in Europe.
Our products have not yet been approved by the U.S. Food and Drug
Administration, or FDA, for any surgical procedure. Although we cannot assure
you that the FDA will approve our products for use in any surgical procedure, we
expect the FDA to approve use of the da Vinci Surgical System in 2000 for
laparoscopic surgical procedures, which is surgery in the abdominal and pelvic
areas of the body using an endoscope. We believe that receiving this approval
would make us the only company to have received FDA approval for a third
generation surgical product.
Although open surgery is still the predominant form of surgery, the large
incisions required create significant trauma to the patient, often contributing
to long hospitalization and recovery times, high hospitalization costs, as well
as significant pain and suffering. Over the past several decades, physicians
have made progress in reducing surgery-related trauma by developing MIS
techniques. These techniques allow surgery to be performed through ports rather
than large incisions, resulting in shorter recovery times and reduced
hospitalization costs. MIS techniques have been widely adopted in certain
surgical procedures, such as gall bladder removal, but have not been widely
adopted for most complex surgical procedures. We believe surgeons have been slow
to adopt MIS for many surgical procedures because of the inherent drawbacks with
existing MIS tools and techniques, which include "backward" instrument
movements, restricted range of motion, magnified hand tremor, lack of precision,
difficulty in performing fine tissue manipulations, exaggerated instrument
movements and poor visualization.
Intuitive surgery overcomes many of the limitations of existing MIS surgery
by using 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 our da Vinci Surgical System, the
surgeon operates while seated comfortably at a console viewing a 3-D image of
the surgical field. The surgeon's fingers grasp the instrument controls below
the display with wrists naturally positioned relative to his or her eyes. Our
technology seamlessly translates the surgeon's
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movements into precise, real-time movements of our surgical instruments inside
the patient. The key advantages of Intuitive surgery over conventional MIS
techniques include the following:
- natural instrument movements that directly transform the surgeon's hand,
wrist and finger movements outside the patient's body into corresponding
instrument micromovements inside the body;
- a full range of motion for surgical instruments, previously available
only in open surgery;
- reduced hand tremor and finer instrument movements as a result of
computer enhancements of the surgeon's hand, wrist and finger movements;
- the look and feel of open surgery enabled by our 3-D InSite vision
system;
- ease of use enabling surgeons to learn to use our products with a limited
amount of training;
- the capability to perform complex surgical procedures; and
- broad applicability to multiple surgical procedures through a single
surgical platform.
Our products include our da Vinci Surgical System and a variety of "smart
disposable" EndoWrist instruments that incorporate our flexible "wrist" joint
technology. Our product revenues are generated primarily from the direct sale of
(1) the da Vinci Surgical System, consisting of a surgeon's console, a
patient-side cart that holds electromechanical arms, and our 3-D InSite vision
system and (2) our EndoWrist instruments, which include scissors, forceps,
scalpels and a variety of other tools. Our instruments are resterilizable and
the number of procedures or hours that each can perform is controlled by a
custom computer chip. Because we have designed our EndoWrist instruments to
expire after their recommended useful lives, we expect continuing sales of our
EndoWrist instruments to generate recurring revenues.
We have applied for trademark registration of, or claim trademark rights
in, the following: Intuitive, da Vinci, EndoWrist, InSite, the Intuitive
Surgical logo, Immersive and Navigator. Other trademarks and trade names
appearing in this prospectus are the property of their holders.
We were incorporated in Delaware in November 1995 as Intuitive Surgical
Devices, Inc. and changed our name to Intuitive Surgical, Inc. in January 1997.
Our executive offices are located at 1340 W. Middlefield Road, Mountain View,
California 94043, and our telephone number is (650) 237-7000. Our website is
located at http://www.intuitivesurgical.com. Information contained on our
website is not a part of this prospectus.
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THE OFFERING
Common Stock offered.................. 5,000,000 shares
Common Stock to be outstanding after
this offering......................... 34,477,297 shares
Use of Proceeds....................... For working capital and general
corporate purposes.
Nasdaq National Market Symbol......... "ISRG"
The number or shares of common stock to be outstanding after this offering
is based on the number of shares of common stock outstanding as of March 31,
2000, and excludes:
- 1,810,750 shares of common stock underlying options outstanding as of
March 31, 2000 at a weighted-average exercise price of $2.11 per share;
- 5,794,472 shares of common stock available for future grant under our
stock option plans, of which options to purchase 192,100 shares of common
stock were granted in April and May 2000 at an exercise price of $3.00
per share;
- 1,000,000 shares that we could issue under our employee stock purchase
plan;
- 11,000 shares of common stock underlying a warrant outstanding as of
March 31, 2000 at an exercise price of $5.00 per share; and
- 200,000 shares of common stock underlying a warrant issued in April 2000
at an exercise price of $3.00 per share.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables summarize our consolidated financial data. The pro
forma information contained in the consolidated statements of operations data
gives effect to the automatic conversion of our preferred stock into common
stock upon the completion of this offering. The as adjusted column of the
consolidated balance sheet data gives effect to the automatic conversion of our
preferred stock into common stock upon completion of this offering and reflects
the sale of 5,000,000 shares of our common stock in this offering at an initial
public offering price of $9.00 per share, after deducting underwriting discounts
and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- ------------------
1997 1998 1999 1999 2000
-------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Sales............................. $ -- $ -- $ 10,192 $ -- $ 2,933
Cost of sales..................... -- -- 9,273 -- 2,532
-------- -------- -------- ------- -------
Gross profit.................... -- -- 919 -- 401
Operating costs and expenses:
Research and development........ 14,282 23,208 11,130 3,963 2,631
Selling, general and
administrative............... 4,434 7,565 9,338 1,787 3,138
Technology license.............. 6,000 -- -- -- --
-------- -------- -------- ------- -------
Total operating costs and
expenses................... 24,716 30,773 20,468 5,750 5,769
-------- -------- -------- ------- -------
Loss from operations.............. (24,716) (30,773) (19,549) (5,750) (5,368)
Interest income (expense), net.... 1,114 1,330 1,134 189 336
-------- -------- -------- ------- -------
Net loss.......................... $(23,602) $(29,443) $(18,415) $(5,561) $(5,032)
======== ======== ======== ======= =======
Basic and diluted net loss per
share........................... $ (11.24) $ (8.14) $ (3.81) $ (1.27) $ (0.90)
======== ======== ======== ======= =======
Shares used in computing basic and
diluted net loss per share...... 2,100 3,619 4,837 4,369 5,574
======== ======== ======== ======= =======
Pro forma basic and diluted net
loss per share (unaudited)...... $ (0.79) $ (0.20)
======== =======
Shares used in computing pro forma
basic and diluted net loss per
share (unaudited)............... 23,331 25,309
======== =======
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
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ACTUAL AS ADJUSTED
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(UNAUDITED)
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CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 54,631 $ 95,456
Working capital............................................. 51,726 92,551
Total assets................................................ 65,081 105,906
Notes payable, less current portion......................... 2,471 2,471
Deferred compensation....................................... (3,058) (3,058)
Accumulated deficit......................................... (80,179) (80,179)
Total stockholders' equity.................................. 52,334 93,159
</TABLE>
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RISK FACTORS
An investment in our common stock is risky. You should carefully consider
the following risks, as well as the other information contained in this
prospectus. If any of the following risks actually occurs, our business could be
harmed. In that case, the trading price of our common stock could decline, and
you might lose all or part of your investment. The risks and uncertainties
described below are not the only ones facing us. Additional risks and
uncertainties not presently known to us, or that we currently see as immaterial,
may also harm our business. If any of these additional risks or uncertainties
occurs, the trading price of our common stock could decline, and you might lose
all or part of your investment.
RISKS RELATED TO INTUITIVE SURGICAL
OUR FUTURE OPERATING RESULTS MAY BE BELOW SECURITIES ANALYSTS' OR INVESTORS'
EXPECTATIONS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
Because of our limited operating history, we have limited insight into
trends that may emerge in our market and affect our business. The revenue and
income potential of our market are unproven, and we may be unable to generate
significant commercial revenues. In addition, our costs may be higher than we,
securities analysts or investors expect. If we fail to generate sufficient
revenues or our costs are higher than we expect, our results of operations will
suffer, which in turn could cause our stock price to decline. Further, future
revenue from sales of our products, if any, will be difficult to forecast
because the market for new surgical technologies is still evolving. Our results
of operations will depend upon numerous factors, including:
- the progress and results of clinical trials;
- actions relating to regulatory matters;
- the extent to which our products gain market acceptance;
- our timing and ability to develop our manufacturing and sales and
marketing capabilities;
- demand for our products;
- the progress of surgical training in the use of our products;
- our ability to develop, introduce and market new or enhanced versions of
our products on a timely basis;
- product quality problems;
- our ability to protect our proprietary rights;
- our ability to license additional intellectual property rights; and
- third-party payor reimbursement policies.
Our operating results in any particular period will not be a reliable indication
of our future performance. It is likely that in some future quarters, our
operating results will be below the expectations of securities analysts or
investors. If this occurs, the price of our common stock, and the value of your
investment, will likely decline.
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WE HAVE A LARGE ACCUMULATED DEFICIT, WE EXPECT FUTURE LOSSES, AND WE MAY NOT
ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred substantial losses since inception and we expect to incur
substantial additional operating losses for at least the next two years,
primarily as a result of expected increases in expenses for our manufacturing
and sales and marketing capabilities, research and development activities,
clinical trials and regulatory approval applications. The extent of our future
losses and the timing of profitability are highly uncertain, and we may never
achieve profitable operations. If the time required to generate significant
revenues and achieve profitability is longer than anticipated, we may not be
able to continue our operations. Our net loss for the year ended December 31,
1999 was $18.4 million and was $5.0 million for the three months ended March 31,
2000. As of March 31, 2000, we had an accumulated deficit of $80.2 million.
WE EXPERIENCE LONG AND VARIABLE SALES CYCLES, WHICH COULD HAVE A NEGATIVE IMPACT
ON OUR RESULTS OF OPERATIONS FOR ANY GIVEN QUARTER.
Our da Vinci Surgical System has a lengthy sales and purchase order cycle
because it is a major capital item and generally requires the approval of senior
management at purchasing institutions. We do not plan to maintain an inventory
of assembled da Vinci Surgical Systems, but rather plan to manufacture our
products only after receiving customer orders. These factors may contribute to
substantial fluctuations in our quarterly operating results, particularly during
the periods in which our sales volume is low. Because of these fluctuations, it
is likely that in some future quarters, our operating results could fall below
the expectations of securities analysts or investors. If that happens, the
market price of our stock would likely decrease. These fluctuations also mean
that you will not be able to rely upon our operating results in any particular
period as an indication of future performance.
BECAUSE A SMALL NUMBER OF CUSTOMERS HAVE AND ARE LIKELY TO CONTINUE TO ACCOUNT
FOR A SUBSTANTIAL PORTION OF OUR REVENUES, OUR REVENUES COULD DECLINE DUE TO THE
LOSS OR DELAY OF A SINGLE CUSTOMER ORDER.
A relatively small number of customers account for a significant portion of
our total revenues. In 1999 and in the first quarter of 2000, the majority of
our revenues came from the sales of da Vinci Surgical Systems, which are high
revenue dollar items. Due to the high dollar revenue per system sold, small
variations in system unit sales may cause revenue to vary significantly from
quarter to quarter. For the year ended December 31, 1999, two customers, AB
Medica SRL, located in Italy, and Marubeni America Corporation, located in New
York, each accounted for 16% of our total sales. AB Medica SRL and Marubeni
America Corporation are our Italian and Japanese distributors, respectively. For
the three months ended March 31, 2000, four customers, Henrico Doctors'
Hospital, located in Virginia, AB Medica SRL, Marubeni America Corporation and
Pitt County Memorial Hospital, located in North Carolina, accounted for 30%,
28%, 22% and 14% of total sales, respectively.
We expect that revenues from a limited number of new customers will account
for a large percentage of total revenues in future quarters. Our ability to
attract new customers will depend on a variety of factors, including the
capability, safety, efficacy, ease of use, price, quality and reliability of our
products and effective sales, support, training and service. The loss or delay
of individual orders could have a significant impact on revenues and operating
results. Our failure to add new customers that make significant purchases of our
products would reduce our future revenues.
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IF OUR PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, WE WILL NOT BE ABLE TO
GENERATE THE REVENUE NECESSARY TO SUPPORT OUR BUSINESS.
Our products represent a fundamentally new way of performing surgery.
Achieving physician, patient and third-party payor acceptance of Intuitive
surgery as a preferred method of performing surgery will be crucial to our
success. If our products fail to achieve market acceptance, hospitals will not
purchase our products and we will not be able to generate the revenue necessary
to support our business. We believe that physicians' and third-party payors'
acceptance of the benefits of procedures performed using our products will be
essential for acceptance of our products by patients. Physicians will not
recommend the use of our products unless we can demonstrate that they produce
results comparable or superior to existing surgical techniques. Even if we can
prove the effectiveness of our products through clinical trials, surgeons may
elect not to use our products for any number of other reasons. For example,
cardiologists may continue to recommend conventional open heart surgery simply
because such surgery is already so widely accepted. In addition, surgeons may be
slow to adopt our products because of the perceived liability risks arising from
the use of new products and the uncertainty of reimbursement from third-party
payors.
We expect that there will be a learning process involved for surgical teams
to become proficient in the use of our products. Broad use of our products will
require training of surgical teams. Market acceptance could be delayed by the
time required to complete this training. We may not be able to rapidly train
surgical teams in numbers sufficient to generate adequate demand for our
products. Although we are in the process of developing training programs for
surgical teams, we cannot be certain that our training programs will be cost
effective or sufficient to meet our customers' needs.
OUR PRODUCTS ARE SUBJECT TO A LENGTHY AND UNCERTAIN DOMESTIC REGULATORY PROCESS.
IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY DOMESTIC REGULATORY APPROVALS, WE
WILL NOT BE ABLE TO MARKET AND SELL OUR PRODUCTS IN THE UNITED STATES.
Our products are subject to extensive regulation in the United States by
the U.S. Food and Drug Administration, or FDA. The FDA regulates the research,
testing, manufacturing, safety, labeling, storage, recordkeeping, promotion,
distribution and production of medical devices in the United States. Our
products have not been approved by the FDA for any surgical procedure. If we
fail to obtain FDA approval for the use of our products, our business will be
harmed and we will not be able to market and sell our products in the United
States. In November 1999, we submitted a premarket approval, or PMA, application
requesting permission to market our da Vinci Surgical System and EndoWrist
instruments for laparoscopic surgical procedures, which the FDA accepted for
review in December 1999. In addition to the pending PMA application for
laparoscopic approval, we presently have a clinical study in progress covering
surgery in the chest called thoracoscopic surgery. A PMA application must be
supported by valid scientific evidence, which typically includes extensive
preclinical and clinical trials and other data, to demonstrate the safety and
effectiveness of the device. Data obtained from clinical trials are subject to
varying interpretations that could delay, limit or prevent us from obtaining FDA
approval. In May 2000, we received a letter from the FDA regarding a number of
issues which need to be resolved prior to obtaining a PMA approval. The primary
issue involves a request by the FDA for a reanalysis of the surgery times
related to our clinical trials. We cannot assure you that we will successfully
resolve these issues or obtain FDA approval for the use of our products in
laparoscopic or other surgical procedures on a timely basis or at all. Even if
our products are approved by the FDA, if we modify them, the FDA may require us
to obtain approval of the modified products before we are permitted to market
and sell them. We anticipate that the FDA will require a new PMA approval or PMA
supplement approval for additional types of surgical procedures for which we
propose to market our products. Any delay in receiving approval, failure to
receive approval or failure to comply with existing or future regulatory
requirements would harm our ability to market and sell our products. For
additional information concerning regulatory approval of our products, see
"Business -- Government Regulation."
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OUR PRODUCTS ARE SUBJECT TO VARIOUS INTERNATIONAL REGULATORY PROCESSES AND
APPROVAL REQUIREMENTS. IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY
INTERNATIONAL REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET AND SELL OUR
PRODUCTS IN FOREIGN COUNTRIES.
To be able to market and sell our products in other countries, we must
obtain regulatory approvals and comply with the regulations of those countries.
These regulations, including the requirements for approvals, and the time
required for regulatory review vary from country to country. Obtaining and
maintaining foreign regulatory approvals are expensive, and we cannot be certain
that we will receive regulatory approvals in any foreign country in which we
plan to market our products. If we fail to obtain regulatory approval in any
foreign country in which we plan to market our products, our ability to generate
revenue will be harmed.
The European Union requires that manufacturers of medical products obtain
the right to affix the CE mark to their products before selling them in member
countries of the European Union. 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
products, a manufacturer must obtain certification that its processes meet
certain European quality standards. In January 1999, we received permission to
affix the CE mark to our da Vinci Surgical System and EndoWrist instruments for
general surgical use. We received additional CE approvals for use of our da
Vinci Surgical System and EndoWrist instruments in cardiac surgery in September
1999 and February 2000.
If we modify existing products or develop new products in the future,
including new instruments, we will need to apply for permission to affix the CE
mark to such products. In addition, we will be subject to annual regulatory
audits in order to maintain the CE mark permissions we have already obtained. We
cannot be certain that we will be able to obtain permission to affix the CE mark
for new or modified products or that we will continue to meet the quality and
safety standards required to maintain the permissions we have already received.
If we are unable to maintain permission to affix the CE mark to our products, we
will no longer be able to sell our products in member countries of the European
Union.
IF INSTITUTIONS OR SURGEONS ARE UNABLE TO OBTAIN REIMBURSEMENT FROM THIRD-PARTY
PAYORS FOR PROCEDURES USING OUR PRODUCTS, OR IF REIMBURSEMENT IS INSUFFICIENT TO
COVER THE COSTS OF PURCHASING OUR PRODUCTS, WE MAY BE UNABLE TO GENERATE
SUFFICIENT SALES TO SUPPORT OUR BUSINESS.
At present, the da Vinci Surgical System is categorized as an "experimental
device" and thus does not qualify for Medicare reimbursement. In late 1999, the
FDA denied our formal request for reclassification of the da Vinci Surgical
System as an investigational, rather than an experimental, device. We believe
that unless the FDA approves our PMA application for a particular indication,
such as laparoscopic use, reimbursement through Medicare will be unavailable in
the United States for our products.
Domestic institutions will typically bill the services performed with our
products to various third-party payors, such as Medicare, Medicaid and other
government programs and private insurance plans. If hospitals do not obtain
sufficient reimbursement from third-party payors for procedures performed with
our products, or if government and private payors' policies do not permit
reimbursement for surgical procedures performed using our products, we may not
be able to generate the revenues necessary to support our business. In such
circumstances, we may have to apply to the American Medical Association for a
unique Current Procedural Terminology code covering computer-enhanced surgery.
If an application for a unique code is required, reimbursement for any use of
our products may be unavailable until an appropriate code is granted. The
application process, from filing until adoption of a new code, can take two or
more years.
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Our success in international markets also depends upon the eligibility of
our products for reimbursement through government-sponsored health care payment
systems and third-party payors. Reimbursement practices vary significantly by
country. Many international markets have government-managed healthcare systems
that control reimbursement for new products and procedures. Other foreign
markets have both private insurance systems and government-managed systems that
control reimbursement for new products and procedures. Market acceptance of our
products may depend on the availability and level of reimbursement in any
country within a particular time. In addition, health care cost containment
efforts similar to those we face in the United States are prevalent in many of
the other countries in which we intend to sell our products and these efforts
are expected to continue. For further information on third-party reimbursement
policies, see "Business -- Third-Party Reimbursement."
WE ARE INVOLVED IN INTELLECTUAL PROPERTY LITIGATION WITH COMPUTER MOTION THAT
MAY HURT OUR COMPETITIVE POSITION, MAY BE COSTLY TO US AND MAY PREVENT US FROM
SELLING OUR PRODUCTS.
On May 10, 2000, Computer Motion, Inc. filed a lawsuit in United States
District Court for the Central District of California (Case No. CV00-4988 CBM)
alleging that by making, using, selling or offering for sale our da Vinci
Surgical System, we are infringing United States Patent Numbers 5,524,180,
5,878,193, 5,762,458, 6,001,108, 5,815,640, 5,907,664 and 5,855,583 in willful
disregard of Computer Motion's patent rights. On June 1, 2000, Computer Motion
amended its lawsuit to allege that we also infringe U.S. Patent Number
6,063,095. These patents concern methods and devices for conducting various
aspects of robotic surgery. Beginning in May 1999, we requested that the U.S.
Patent and Trademark Office declare interferences between some of our
exclusively licensed patent applications and five of Computer Motion's U.S.
patents, each of which is included in Computer Motion's suit. An interference is
a proceeding within the U.S. Patent and Trademark Office to resolve questions
regarding who was the first to invent the subject matter of a patent and/or a
patent application.
If we lose Computer Motion's suit against us, it will hurt our competitive
position, may be costly to us and may prevent us from selling our products. In
addition, if we lose the patent suit, we will need to obtain from Computer
Motion a license to this technology if we are to continue to market our products
that have been found to infringe Computer Motion's patents. This license could
be expensive, or could require us to license to Computer Motion some of our
technology which would result in a partial loss of our competitive advantage in
the marketplace, each of which could seriously harm our business. We believe
that we have meritorious defenses in this action. However, litigation is
unpredictable and we may not prevail with any of these defenses. If Computer
Motion is successful in its suit against us and is unwilling to grant us a
license, we will be required to stop selling our products that are found to
infringe Computer Motion's patents unless we can redesign them so they do not
infringe Computer Motion's patents, which we may be unable to do. In addition,
if we lose the patent suit, we could be required to pay Computer Motion damages,
including treble damages, which could be substantial and harm our financial
position.
This litigation will be expensive to litigate, may be protracted and our
confidential information may be compromised. Whether or not we are successful in
this lawsuit, this litigation could consume substantial amounts of our financial
and managerial resources. At any time Computer Motion may file additional claims
against Intuitive Surgical, or we may file claims against Computer Motion, which
could increase the risk, expense and duration of the litigation. Further,
because of the substantial amount of discovery often involved in connection with
this type of litigation, there is a risk that some of our confidential
information could be compromised by disclosure. For more information on our
litigation with Computer Motion, see "Business -- Legal Proceedings."
9
<PAGE> 13
PUBLIC ANNOUNCEMENTS OF LITIGATION EVENTS WITH COMPUTER MOTION MAY HURT OUR
STOCK PRICE.
During the course of our lawsuit with Computer Motion, there may be public
announcements of the results of hearings, motions, and other interim proceedings
or developments in the litigation. If securities analysts or investors perceive
these results to be negative, it could have a substantial negative effect on the
trading price of our stock.
IF WE ARE UNABLE TO PROTECT THE INTELLECTUAL PROPERTY CONTAINED IN OUR PRODUCTS
FROM USE BY THIRD PARTIES, OUR ABILITY TO COMPETE IN THE MARKET WILL BE HARMED.
Our commercial success will depend in part on obtaining patent and other
intellectual property protection for the technologies contained in our products,
and on successfully defending our patents and other intellectual property
against third party challenges.
We will incur substantial costs in obtaining patents and, if necessary,
defending our proprietary rights. The patent positions of medical device
companies, including ours, can be highly uncertain and involve complex and
evolving legal and factual questions. We cannot assure you that we will obtain
the patent protection we seek, or that the protection we do obtain will be found
valid and enforceable if challenged. We also cannot assure you that we will be
able to develop additional patentable proprietary technologies. If we fail to
obtain adequate protection of our intellectual property, or if any protection we
obtain is reduced or eliminated, others could use our intellectual property
without compensating us, resulting in harm to our business. We may also
determine that it is in our best interests to voluntarily challenge a third
party's products or patents in litigation or administrative proceedings,
including patent interferences or reexaminations. Given the early priority dates
of some of our licensed patents, we believe one or more patent proceedings may
be in our best interests. In addition, the laws of certain foreign countries do
not protect intellectual property rights to the same extent as do the laws of
the United States.
OTHERS MAY ASSERT THAT OUR PRODUCTS INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS,
WHICH MAY CAUSE US TO ENGAGE IN COSTLY DISPUTES AND, IF WE ARE NOT SUCCESSFUL IN
DEFENDING OURSELVES, COULD ALSO CAUSE US TO PAY SUBSTANTIAL DAMAGES AND PROHIBIT
US FROM SELLING OUR PRODUCTS.
We are aware of both United States and foreign patents issued to third
parties that relate to computer-assisted surgery and minimally invasive surgery.
Some of these patents on their face appear broad enough to cover one or more
aspects of our present technology, and may cover aspects of our future
technology. We do not know whether any of these patents, if challenged, would be
held valid, enforceable and infringed. From time to time, we receive, and likely
will continue to receive, letters from third parties inviting us to license
their patents. We may be sued by, or become involved in an administrative
proceeding because of one or more of these third parties, regardless of the
merits or likely outcome of such suit or proceeding. We cannot assure you that a
court or administrative body would agree with any arguments or defenses we have
concerning invalidity, unenforceability or noninfringement of any third-party
patent. In addition to the issued patents of which we are aware, other parties
may have filed, and in the future are likely to file, patent applications
covering surgical products that are similar or identical to ours. We cannot
assure you that any patents issuing from applications filed by a third party
will not cover our products or will not have priority over our patent
applications.
The medical device industry has been characterized by extensive litigation
and administrative proceedings regarding patents and other intellectual property
rights, and companies have employed such actions to gain a competitive
advantage. If third parties assert infringement or other intellectual property
claims against us as Computer Motion has done, our technical and management
personnel will experience a significant diversion of time and effort and we will
incur large expenses defending ourselves. If third
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<PAGE> 14
parties in any patent action are successful, our patent portfolio may be
damaged, we may have to pay substantial damages, including treble damages, and
we may be required to stop selling our products or obtain a license which, if
available at all, may require us to pay substantial royalties. We cannot be
certain that we will have the financial resources or the substantive arguments
to defend our patents from infringement or claims of invalidity or
unenforceability, or to defend against allegations of infringement of
third-party patents. In addition, any public announcements related to litigation
or administrative proceedings initiated by us, or initiated or threatened
against us, could cause our stock price to decline.
THE RIGHTS AND MEASURES WE RELY ON TO PROTECT THE INTELLECTUAL PROPERTY
UNDERLYING OUR PRODUCTS MAY NOT BE ADEQUATE TO PREVENT THIRD PARTIES FROM USING
OUR TECHNOLOGY WHICH COULD HARM OUR ABILITY TO COMPETE IN THE MARKET.
In addition to patents, we typically rely on a combination of trade secret,
copyright and trademark laws, nondisclosure agreements and other contractual
provisions and technical security measures to protect our intellectual property
rights. Nevertheless, these measures may not be adequate to safeguard the
technology underlying our products. If they do not protect our rights
adequately, third parties could use our technology, and our ability to compete
in the market would be reduced. In addition, employees, consultants and others
who participate in developing our products may breach their agreements with us
regarding our intellectual property, and we may not have adequate remedies for
the breach. We also may not be able to effectively protect our intellectual
property rights in some foreign countries. For a variety of reasons, we may
decide not to file for patent, copyright or trademark protection outside the
United States. We also realize that our trade secrets may become known through
other means not currently foreseen by us. Notwithstanding our efforts to protect
our intellectual property, our competitors may independently develop similar or
alternative technologies or products that are equal or superior to our
technology and products without infringing any of our intellectual property
rights, or may design around our proprietary technologies. For further
information on our intellectual property and the difficulties in protecting it,
see "Business -- Intellectual Property."
OUR PRODUCTS RELY ON LICENSES FROM THIRD PARTIES, AND IF WE LOSE ACCESS TO THESE
TECHNOLOGIES, OUR REVENUES COULD DECLINE.
We rely on technology that we license from others, including technology
that is integral to our products. We have entered into license agreements with
SRI International, IBM, MIT and Heartport. Any of these agreements may be
terminated for breach, including the failure to make required payments under the
IBM license and the failure to commercialize our products under the SRI
International license. If any of these agreements is terminated, we may be
unable to reacquire the necessary license on satisfactory terms, or at all. The
loss or failure to maintain these licenses could prevent or delay further
development or commercialization of our products. See "Business -- Intellectual
Property" for further information on our license agreements.
BECAUSE OUR MARKETS ARE HIGHLY COMPETITIVE, CUSTOMERS MAY CHOOSE TO PURCHASE OUR
COMPETITORS' PRODUCTS OR MAY NOT ACCEPT INTUITIVE SURGERY, WHICH WOULD RESULT IN
REDUCED REVENUE AND LOSS OF MARKET SHARE.
Intuitive surgery is a new technology that must compete with established
minimally invasive surgery and open surgery. These procedures are widely
accepted in the medical community and in many cases have a long history of use.
We also face competition from several companies that are developing new
approaches and products for the minimally invasive surgery market. In addition,
we presently face increasing competition from companies who are developing
robotic and computer-assisted surgical systems. Our revenues may be reduced or
eliminated if our competitors develop and
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<PAGE> 15
market products that are more effective or less expensive than our products. If
we are unable to compete successfully, our revenues will suffer. We may not be
able to maintain or improve our competitive position against current or
potential competitors, especially those with greater resources.
In many cases, the medical conditions that can be treated using our
products can also be treated by pharmaceuticals or other medical devices and
procedures. Many of these alternative treatments are also widely accepted in the
medical community and have a long history of use. In addition, technological
advances could make such treatments more effective or less expensive than using
our products, which could render our products obsolete or unmarketable. We
cannot be certain that physicians will use our products to replace or supplement
established treatments or that our products will be competitive with current or
future technologies.
IF SOFTWARE DEFECTS ARE DISCOVERED IN OUR PRODUCTS, WE MAY INCUR ADDITIONAL
UNFORESEEN COSTS, HOSPITALS MAY NOT PURCHASE OUR PRODUCTS AND OUR REPUTATION MAY
SUFFER.
Our products incorporate sophisticated computer software. Complex software
frequently contains 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 our products are designed to be used to perform complex
surgical procedures, we expect that our customers will have an increased
sensitivity to software defects. We cannot assure you that our software will not
experience errors or performance problems in the future. If we experience
software errors or performance problems, any of the following could occur:
- delays in product shipments;
- loss of revenue;
- delay in market acceptance;
- diversion of our resources;
- damage to our reputation;
- increased service or warranty costs; or
- product liability claims.
WE HAVE LIMITED EXPERIENCE IN MANUFACTURING OUR PRODUCTS AND MAY ENCOUNTER
MANUFACTURING PROBLEMS OR DELAYS THAT COULD RESULT IN LOST REVENUE.
We have manufactured a limited number of our products for prototypes and
sales to customers. We may be unable to establish or maintain reliable,
high-volume manufacturing capacity. Even if this capacity can be established and
maintained, the cost of doing so may increase the cost of our products and
reduce our ability to compete. We may encounter difficulties in scaling up
production of our products, including:
- problems involving production yields;
- quality control and assurance;
- component supply shortages;
- shortages of qualified personnel; and
- compliance with state, federal and foreign regulations.
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<PAGE> 16
Manufacturing our products is a complex process. We plan to manufacture
products to fill purchase orders rather than to maintain inventories of our
assembled products. If demand for our products exceeds our manufacturing
capacity, we could develop a substantial backlog of customer orders. If we are
unable to establish and maintain larger-scale manufacturing capabilities, our
ability to generate revenues will be limited and our reputation in the
marketplace would be damaged.
IF OUR MANUFACTURING FACILITIES DO NOT CONTINUE TO MEET FEDERAL, STATE OR
EUROPEAN MANUFACTURING STANDARDS, WE MAY BE REQUIRED TO TEMPORARILY CEASE ALL OR
PART OF OUR MANUFACTURING OPERATIONS, WHICH WOULD RESULT IN PRODUCT DELIVERY
DELAYS AND LOST REVENUE.
Our manufacturing facilities are subject to periodic inspection by
regulatory authorities and our operations will continue to be regulated by the
FDA for compliance with Good Manufacturing Practice requirements. We are also
required to comply with the ISO 9000 series standards in order to produce
products for sale in Europe. If we fail to continue to comply with Good
Manufacturing Practice requirements or ISO 9000 series standards, we may be
required to cease all or part of our operations until we comply with these
regulations. We are currently in compliance with ISO 9000 series standards. In
March 2000, the FDA inspected our Mountain View facility and the Good
Manufacturing Practice issues raised during the inspection have been resolved.
Maintaining such compliance is difficult and costly. We cannot be certain that
our facilities will be found to comply with Good Manufacturing Practice
requirements or the ISO 9000 series standards in future audits by regulatory
authorities.
The state of California also requires that we maintain a license to
manufacture medical devices. Our facilities and manufacturing processes were
inspected in February 1998. In March 1998, we passed the inspection and received
a device manufacturing license from the California Department of Health
Services. We will be subject to periodic inspections by the California
Department of Health Services and if we are unable to maintain this license
following any future inspections, we will be unable to manufacture or ship any
products.
OUR RELIANCE ON SOLE AND SINGLE SOURCE SUPPLIERS COULD HARM OUR ABILITY TO MEET
DEMAND FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN BUDGET.
Some of the components necessary for the assembly of our products are
currently provided to us by sole source suppliers or single source suppliers. We
purchase components through purchase orders rather than long-term supply
agreements and generally do not maintain large volumes of inventory. The
disruption or termination of the supply of components could cause a significant
increase in the costs of these components, which could affect our profitability.
A disruption or termination in the supply of components could also result in our
inability to meet demand for our products, which could harm our ability to
generate revenues, lead to customer dissatisfaction and damage our reputation.
Furthermore, if we are required to change the manufacturer of a key component of
our products, we may be required to verify that the new manufacturer maintains
facilities and procedures that comply with quality standards and with all
applicable regulations and guidelines. The delays associated with the
verification of a new manufacturer could delay our ability to manufacture our
products in a timely manner or within budget.
THE USE OF OUR PRODUCTS COULD RESULT IN PRODUCT LIABILITY CLAIMS THAT COULD BE
EXPENSIVE, DIVERT MANAGEMENT'S ATTENTION AND HARM OUR BUSINESS.
Our business exposes us to significant risks of product liability claims.
The medical device industry has historically been litigious, and we face
financial exposure to product liability claims if the use of our products were
to cause injury or death. There is also the possibility that defects in the
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<PAGE> 17
design or manufacture of our products might necessitate a product recall.
Although we maintain product liability insurance, the coverage limits of these
policies may not be adequate to cover future claims. Particularly as sales of
our products increase, we may be unable to maintain product liability insurance
in the future at satisfactory rates or adequate amounts. A product liability
claim, regardless of its merit or eventual outcome, could result in significant
legal defense costs. A product liability claim or any product recalls could also
harm our reputation or result in a decline in revenues.
OUR GROWTH WILL PLACE A SIGNIFICANT STRAIN ON OUR MANAGEMENT SYSTEMS AND
RESOURCES AND, IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO MARKET, SELL AND
DEVELOP OUR PRODUCTS MAY BE HARMED.
In order to complete clinical trials, scale-up manufacturing, expand
marketing and distribution capabilities and develop future products, we must
expand our operations. We expect that future expansion will occur particularly
in the areas of sales and marketing, manufacturing and research and development.
This expansion will likely result in new and increased responsibilities for
management personnel and place significant strain upon our management, operating
and financial systems and resources. We plan to sell our products primarily
through direct sales, and we currently have a small sales organization. Our
products require a complex marketing and sales effort targeted at several levels
within a prospective customer's organization. We will need to expand our sales
team significantly over the next 12 months to achieve our sales growth goals. We
will face significant challenges and risks in building and managing our sales
team, including managing geographically dispersed sales efforts and adequately
training our sales people in the use and benefits of our products. To
accommodate our growth and compete effectively, we will be required to improve
our information systems, create additional procedures and controls and expand,
train, motivate and manage our work force. Our future success will depend in
part on the ability of current and future management personnel to operate
effectively, both independently and as a group. We cannot be certain that our
personnel, systems, procedures and controls will be adequate to support our
future operations.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, OUR ABILITY TO COMPETE WILL BE HARMED.
We are highly dependent on the principal members of our management and
scientific staff, in particular Lonnie M. Smith, our President and Chief
Executive Officer, Frederic H. Moll, M.D., our Vice President and Medical
Director and Robert G. Younge, our Vice President and Chief Technology Officer.
In order to pursue our product development, marketing and commercialization
plans, we will need to hire additional qualified personnel with expertise in
research and development, clinical testing, government regulation,
manufacturing, sales and marketing, and finance. Our product development plans
depend in part on our ability to attract and retain engineers with experience in
mechanics, software and optics. Attracting and retaining qualified personnel
will be critical to our success, and competition for qualified personnel is
intense, particularly in Silicon Valley. We may not be able to attract and
retain personnel on acceptable terms given the competition for such personnel
among technology and healthcare companies, and universities. The loss of any of
these persons or our inability to attract and retain qualified personnel could
harm our business and our ability to compete.
INTERNATIONAL SALES OF OUR PRODUCTS ACCOUNT FOR A SIGNIFICANT PORTION OF OUR
REVENUES, WHICH EXPOSES US TO RISKS INHERENT IN INTERNATIONAL OPERATIONS. OUR
GROWTH MAY BE LIMITED IF WE ARE UNABLE TO SUCCESSFULLY MANAGE OUR INTERNATIONAL
ACTIVITIES.
Our business currently depends in large part on our activities in Europe,
and a component of our growth strategy is to expand our presence into additional
foreign markets. Sales to markets outside of the United States accounted for
approximately 91% of our sales for the year ended December 31,
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<PAGE> 18
1999 and 56% for the three months ended March 31, 2000. We will be subject to a
number of challenges that specifically relate to our international business
activities. These challenges include:
- failure of local laws to provide the same degree of protection against
infringement of our intellectual property;
- protectionist laws and business practices that favor local competitors,
which could slow our growth in international markets;
- the risks associated with foreign currency exchange rate fluctuation;
- the expense of establishing facilities and operations in new foreign
markets; and
- building an organization capable of supporting geographically dispersed
operations.
Currently, a majority of our international sales are denominated in U.S.
dollars. As a result, an increase in the value of the U.S. dollar relative to
foreign currencies could make our products less competitive in international
markets. If we are unable to meet and overcome these challenges, our
international operations may not be successful, which would limit the growth of
our business.
FAILURE TO RAISE ADDITIONAL CAPITAL OR GENERATE THE SIGNIFICANT CAPITAL
NECESSARY TO EXPAND OUR OPERATIONS AND INVEST IN NEW PRODUCTS COULD REDUCE OUR
ABILITY TO COMPETE, RESULT IN LOWER REVENUES AND MAY PREVENT US FROM TAKING
ADVANTAGE OF MARKET OPPORTUNITIES.
We expect that our existing capital resources, revenue to be derived from
the sale of our products and the net proceeds from this offering will be
sufficient to meet our working capital and capital expenditure needs at least
through 2001. After that, we may need to raise additional funds and we cannot be
certain that we will be able to obtain additional financing on favorable terms,
or at all. If we need additional capital and cannot raise it on acceptable
terms, we may not be able to, among other things:
- develop or enhance our products and services;
- acquire technologies, products or businesses;
- expand operations in the United States or internationally;
- hire, train and retain employees; or
- respond to competitive pressures or unanticipated capital requirements.
Our failure to do any of these things could result in lower revenues and
could harm our business.
RISKS RELATED TO OUR OFFERING
THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR
FUTURE MAY CAUSE THE MARKET PRICE FOR OUR COMMON STOCK TO DECLINE.
Sales of a substantial number of shares of our common stock in the public
market following this offering could cause the market price of our common stock
to decline. The number of shares of common stock available for sale in the
public market is limited by restrictions under federal securities law and under
some agreements that our stockholders have entered into with the underwriters
and with us. Those lockup agreements restrict our stockholders from selling,
pledging or otherwise disposing of their shares for a period of 180 days after
the date of this prospectus without the prior written consent of Lehman Brothers
Inc. However, Lehman Brothers Inc. may, in its sole discretion, release all or
any portion of the common stock from the restrictions of the lockup agreements.
The following table indicates approximately when the 29,477,297 shares of our
common stock that are not being sold in the offering but which were outstanding
as of March 31, 2000 will be eligible for sale into the public market:
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<TABLE>
<CAPTION>
ELIGIBILITY OF RESTRICTED
SHARES FOR SALE
DAYS AFTER THE EFFECTIVE DATE IN PUBLIC MARKET COMMENT
----------------------------- ------------------------- ------------------------------
<S> <C> <C>
On Effectiveness....................... 0 Shares not locked-up and
saleable under Rule 144(k)
180 days............................... 25,638,929 Lock-up released; shares
saleable under Rules 144,
144(k) and 701
At various times after 180 days........ 3,838,368 Shares saleable under Rules
144, 144(k) and 701
</TABLE>
Additionally, of the 1,810,750 shares issuable upon exercise of options to
purchase our common stock outstanding as of March 31, 2000, approximately
863,346 shares will be vested and eligible for sale 180 days after the date of
this prospectus. For a further description of the eligibility of shares for sale
in to the public market following the offering, see "Shares Eligible for Future
Sale."
THE BOOK VALUE OF THE SHARES INVESTORS PURCHASE IN THIS OFFERING WILL BE
SUBSTANTIALLY LESS THAN THE PRICE THAT INVESTORS PAY FOR THE SHARES, AND IF A
LIQUIDATION WERE TO OCCUR, INVESTORS MIGHT RECEIVE SIGNIFICANTLY LESS THAN THE
PURCHASE PRICE THE INVESTORS PAID FOR THE SHARES.
The initial public offering price is substantially higher than the book
value per share of our common stock. Investors purchasing common stock in this
offering will, therefore, incur immediate dilution of $6.29 in net tangible book
value per share of common stock, based on an initial public offering price of
$9.00 per share. In addition, the number of shares available for issuance under
our stock option and employee stock purchase plans will automatically increase
without stockholder approval. Investors will incur additional dilution upon the
exercise of outstanding stock options and warrants. As a result of this
dilution, investors purchasing stock in this offering may receive significantly
less than the full purchase price that they paid for the shares purchased in
this offering in the event of a liquidation. See "Dilution" for a more detailed
discussion of the dilution new investors will incur in this offering.
OUR STOCK PRICE MAY BE VOLATILE BECAUSE OUR SHARES HAVE NOT BEEN PUBLICLY TRADED
BEFORE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
Prior to this offering, there has been no public market for our common
stock, and an active public market for our common stock may not develop or be
sustained after the offering. The initial public offering price was determined
by negotiations between the representatives of the underwriters and us and may
not be indicative of future market prices.
The market prices for securities of medical device companies in general
have been highly volatile and may continue to be highly volatile in the future.
The following factors, in addition to other risk factors described in this
section, may have a significant impact on the market price of our common stock:
- announcements of technological innovations or new commercial products by
our competitors or us;
- developments concerning proprietary rights, including patents by our
competitors or us;
- developments concerning our clinical trials;
- publicity regarding actual or potential medical results relating to
products under development by our competitors or us;
- regulatory developments in the United States and foreign countries;
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<PAGE> 20
- litigation or other disputes and associated public announcements;
- economic and other external factors or other disaster or crisis; or
- period-to-period fluctuations in financial results.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK
PRICE VOLATILITY.
In the past, securities class action litigation has often been brought
against a company following a decline in the market price of its securities.
This risk is especially acute for us because technology companies have
experienced greater than average stock price volatility in recent years and, as
a result, have been subject to, on average, a greater number of securities class
action claims than companies in other industries. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and divert management's attention and resources and could harm our
business.
WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS WHICH COULD DISCOURAGE OR PREVENT A
TAKEOVER, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult for
a third-party to acquire us, even if doing so would be beneficial to our
stockholders. These provisions include:
- establishing a classified board of directors that prevents a majority of
the board from being elected at one time;
- authorizing the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
- prohibiting cumulative voting in the election of directors, which would
otherwise allow less than a majority of stockholders to elect director
candidates;
- limitations on the ability of stockholders to call special meetings of
stockholders;
- prohibiting stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of stockholders; and
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law and the
terms of our stock option plans may discourage, delay or prevent a change in
control of Intuitive Surgical.
CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND
PRINCIPAL STOCKHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING SIGNIFICANT
CORPORATE DECISIONS.
Upon completion of this offering, our executive officers, directors and
principal stockholders will beneficially own, in the aggregate, approximately
58.1% of our outstanding common stock. These stockholders as a group will be
able to exercise control over all matters requiring stockholder approval,
including the election of directors, any merger, consolidation or sale of all or
substantially all of our assets and any other significant corporation
transactions. This could have the effect of delaying or preventing a change of
control of Intuitive Surgical and will make some transactions difficult or
impossible without the support of these stockholders. See "Principal
Stockholders" for details of our stock ownership.
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<PAGE> 21
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus are "forward-looking statements." These forward-looking statements
include, but are not limited to, statements about our plans, objectives,
expectations and intentions and other statements contained in the prospectus
that are not historical facts. When used in this prospectus, the words
"anticipates," "believes," "continue," "could," "estimates," "expects,"
"intends," "may," "plans," "potential," "predicts," "seeks," "should" or "will"
or the negative of these terms or other similar expressions are generally
intended to identify forward-looking statements. Because these forward-looking
statements involve risks and uncertainties, there are important factors that
could cause actual results to differ materially from those expressed or implied
by these forward-looking statements, including our plans, objectives,
expectations and intentions and other factors discussed under "Risk Factors."
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are not under any duty to update any
of the forward-looking statements after the date of this prospectus to conform
these statements to actual results, unless required by law.
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USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the 5,000,000
shares of our common stock will be approximately $40.8 million, approximately
$47.1 million if the underwriters' over-allotment option is exercised in full,
at an initial public offering price of $9.00 per share, after deducting
underwriting discounts and commissions and estimated offering expenses.
We intend to use the net proceeds of this offering primarily for additional
working capital and other general corporate purposes, including increased
expenditures for research and development, sales and marketing, and selling,
general and administrative. The amounts and timing of these expenditures will
vary depending on a number of factors, including the amount of cash generated by
our operations, competitive and technological developments and the rate of
growth, if any, of our business. We may also use a portion of the net proceeds
to acquire additional businesses, products and technologies, to lease additional
facilities, or to establish joint ventures that we believe will complement our
current or future business. However, we have no specific plans, agreements or
commitments to do so and are not currently engaged in any negotiations for any
business acquisition or joint venture.
The principal purposes of this offering are to increase our capitalization
and financial flexibility, increase our visibility in the marketplace and create
a public market for our common stock. As of the date of this prospectus, we
cannot specify with certainty all of the particular uses for the net proceeds of
this offering. Accordingly, we will retain broad discretion in the allocation of
the net proceeds of this offering. Pending the uses described above, we will
invest the net proceeds of this offering in short term interest bearing,
investment-grade securities. We cannot predict whether the proceeds will be
invested to yield a favorable return. We believe that our available cash,
together with the net proceeds of this offering and revenue to be derived from
the sale of our products, will be sufficient to meet our capital requirements at
least through 2001.
DIVIDEND POLICY
We have never declared or paid any cash dividends. We currently expect to
retain earnings for use in the operation and expansion of our business, and
therefore do not anticipate paying any cash dividends for at least the next four
years.
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<PAGE> 23
CAPITALIZATION
The following table sets forth our actual capitalization as of March 31,
2000. Our capitalization is also presented:
- on a pro forma basis to give effect to the automatic conversion of our
preferred stock into an aggregate of 22,776,283 shares of common stock,
which will occur upon the closing of this offering; and
- on a pro forma as adjusted basis to give effect to the automatic
conversion of our preferred stock into common stock upon closing of this
offering and to reflect our receipt of net proceeds from the sale of
5,000,000 shares of common stock in this offering at an initial public
offering price of $9.00 per share, after deducting underwriting discounts
and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Notes payable............................................... $ 2,471 $ 2,471 $ 2,471
Stockholders' equity:
Preferred Stock, $0.001 par value; 30,000,000 shares
authorized, actual and 5,000,000 shares authorized, pro
forma and pro forma as adjusted; 22,728,250 shares
issued and outstanding, actual; none issued and
outstanding, pro forma and pro forma as adjusted....... 23 -- --
Common Stock, $0.001 par value; 45,000,000 shares
authorized, actual; 200,000,000 shares authorized, pro
forma and pro forma as adjusted; 6,701,014 shares
issued and outstanding, actual; 29,477,297 shares
issued and outstanding, pro forma; 34,477,297 shares
issued and outstanding, pro forma as adjusted.......... 7 29 34
Additional paid-in capital.................................. 135,781 135,782 176,602
Deferred compensation....................................... (3,058) (3,058) (3,058)
Accumulated deficit......................................... (80,179) (80,179) (80,179)
Accumulated other comprehensive income...................... (240) (240) (240)
-------- -------- --------
Total stockholders' equity............................. 52,334 52,334 93,159
-------- -------- --------
Total capitalization................................... $ 54,805 $ 54,805 $ 95,630
======== ======== ========
</TABLE>
-------------------------
The number of shares of common stock to be outstanding after the offering
is based on the number of common shares outstanding as of March 31, 2000 and
excludes:
- 1,810,750 shares of common stock underlying options outstanding as of
March 31, 2000 at a weighted-average exercise price of $2.11 per share;
- 5,794,472 shares of common stock available for future grant under our
stock option plans, of which options to purchase 192,100 shares of common
stock were granted in April and May 2000 at an exercise price of $3.00
per share;
- 1,000,000 shares that we could issue under our employee stock purchase
plan;
- 11,000 shares of common stock underlying a warrant outstanding as of
March 31, 2000 at an exercise price of $5.00 per share; and
- 200,000 shares of common stock underlying a warrant issued in April 2000
at an exercise price of $3.00 per share.
See "Selected Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and related notes included in this prospectus.
20
<PAGE> 24
DILUTION
The pro forma net tangible book value of our common stock, on March 31,
2000, after giving effect to the conversion of all outstanding shares of
preferred stock upon the closing of the offering, was approximately $52.3
million, or approximately $1.78 per share. Pro forma net tangible book value per
share represents the amount of our total tangible assets less total liabilities
divided by the number of shares of common stock outstanding. Dilution in pro
forma net tangible book value per share represents the difference between the
amount per share paid by purchasers of shares of common stock in this offering
and the net tangible book value per share of our common stock immediately
afterwards. After giving effect to the sale of 5,000,000 shares of common stock
offered by this prospectus at an initial public offering price of $9.00 per
share, and after deducting underwriting discounts and commissions and estimated
offering expenses, our net tangible book value at March 31, 2000 would have been
approximately $93.2 million or $2.71 per share. This represents an immediate
decrease in net tangible book value of $6.29 per share to new investors
purchasing shares of common stock in this offering. The following table
illustrates this dilution:
<TABLE>
<S> <C> <C>
Initial public offering..................................... $9.00
Pro forma net tangible book value per share at March 31,
2000................................................... $1.78
Increase per share attributable to new investors.......... 0.93
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.71
-----
Dilution in net tangible book value per share to new
investors................................................. $6.29
=====
</TABLE>
If the underwriters' over-allotment option were exercised in full, the pro
forma net tangible book value per share after the offering would be $2.82 per
share, the increase in net tangible book value per share to existing
stockholders would be $1.05 per share and the dilution in net tangible book
value to new investors would be $6.18 per share.
The following table summarizes, on a pro forma basis, as of March 31, 2000,
the differences between the total consideration paid and the average price per
share paid by the existing stockholders and the new investors with respect to
the number of shares of common stock purchased from us based on an initial
public offering price of $9.00 per share. We have not deducted underwriting
discounts and commissions and estimated offering expenses in our calculations.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 29,477,297 85% $129,801,000 74% $4.40
New stockholders............ 5,000,000 15 45,000,000 26 9.00
---------- ------- ------------ -------
Total..................... 34,477,297 100% $174,801,000 100%
========== ======= ============ =======
</TABLE>
The foregoing discussion and tables do not assume the exercise of any stock
options or warrants outstanding at March 31, 2000. At March 31, 2000, there
were:
- 1,810,750 shares of common stock underlying options outstanding as of
March 31, 2000 at a weighted-average exercise price of $2.11 per share;
- 5,794,472 shares of common stock available for future grant under our
stock option plans, of which options to purchase 192,100 shares of common
stock were granted in April and May 2000 at an exercise price of $3.00
per share;
- 1,000,000 shares that we could issue under an employee stock purchase
plan; and
21
<PAGE> 25
- 11,000 shares of common stock underlying a warrant outstanding as of
March 31, 2000 at an exercise price of $5.00 per share.
In addition, in April 2000, a warrant to purchase 200,000 shares of common
stock was issued at an exercise price of $3.00 per share.
Assuming the exercise of all options and warrants outstanding at March 31,
2000, the pro forma net tangible book value at March 31, 2000 after the offering
would be $97.0 million, or $2.67 per share, which would represent an immediate
increase in the pro forma net tangible book value of $0.89 per share to existing
stockholders and an immediate dilution of $6.33 per share to new investors. See
"Capitalization" and "Management -- Employee Benefit Plans."
22
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL DATA
This section presents our historical consolidated financial data. You
should read carefully the consolidated financial statements included in this
prospectus, including the notes to the consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected data in this section are not intended to replace the
consolidated financial statements.
We derived the consolidated statement of operations data for the years
ended December 31, 1997, 1998 and 1999 and the consolidated balance sheet data
as of December 31, 1998 and 1999 from the consolidated financial statements
which have been audited by Ernst & Young LLP and included elsewhere in this
prospectus. The consolidated statements of operations data for the three months
ended March 31, 1999 and 2000, and the consolidated balance sheet data as of
March 31, 2000, have been derived from our unaudited consolidated financial
statements included elsewhere in this prospectus. We derived the consolidated
statement of operations data for the period from inception (November 9, 1995)
through December 31, 1996 and the consolidated balance sheet data as of December
31, 1996 and 1997 from the audited consolidated financial statements which have
been audited by Ernst & Young LLP but which are not included elsewhere in this
prospectus. In the opinion of management, the unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements and contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of our results of
operations for these periods and financial condition at that date. Historical
results are not necessarily indicative of future results. See notes to the
consolidated financial statements for an explanation of the method used to
determine the number of shares used in computing basic and diluted and pro forma
basic and diluted net loss per share.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(NOVEMBER 9, THREE MONTHS ENDED
1995) TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------------ -------------------
1996 1997 1998 1999 1999 2000
--------------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Sales......................... $ -- $ -- $ -- $ 10,192 $ -- $ 2,933
Cost of sales................. -- -- -- 9,273 -- 2,532
------- -------- -------- -------- -------- --------
Gross profit................ -- -- -- 919 -- 401
Operating costs and expenses:
Research and development.... 2,934 14,282 23,208 11,130 3,963 2,631
Selling, general and
administrative........... 951 4,434 7,565 9,338 1,787 3,138
Technology license.......... -- 6,000 -- -- -- --
------- -------- -------- -------- -------- --------
Total operating costs and
expenses............... 3,885 24,716 30,773 20,468 5,750 5,769
------- -------- -------- -------- -------- --------
Loss from operations.......... (3,885) (24,716) (30,773) (19,549) (5,750) (5,368)
Interest income (expense),
net......................... 198 1,114 1,330 1,134 189 336
------- -------- -------- -------- -------- --------
Net loss...................... $(3,687) $(23,602) $(29,443) $(18,415) $ (5,561) $ (5,032)
======= ======== ======== ======== ======== ========
Basic and diluted net loss per
share....................... $ (2.86) $ (11.24) $ (8.14) $ (3.81) $ (1.27) $ (0.90)
======= ======== ======== ======== ======== ========
Shares used in computing basic
and diluted net loss per
share....................... 1,287 2,100 3,619 4,837 4,369 5,574
======= ======== ======== ======== ======== ========
Pro forma basic and diluted
net loss per share
(unaudited)................. $ (0.79) $ (0.20)
======== ========
Shares used in computing pro
forma basic and diluted net
loss per share
(unaudited)................. 23,331 25,309
======== ========
</TABLE>
23
<PAGE> 27
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------------------------- MARCH 31,
1996 1997 1998 1999 2000
------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................ $ 1,494 $ 32,674 $ 23,220 $ 26,260 $ 54,631
Working capital.............................. 1,045 25,424 19,817 22,023 51,726
Total assets................................. 2,289 35,674 28,167 34,455 65,081
Notes payable, less current portion.......... -- 897 2,438 2,521 2,471
Deferred compensation........................ -- (1,831) (1,128) (943) (3,058)
Accumulated deficit.......................... (3,687) (27,289) (56,732) (75,147) (80,179)
Total stockholders' equity................... 1,770 27,331 20,596 22,211 52,334
</TABLE>
Our consolidated statement of operations data for the period from inception
(November 9, 1995) to December 31, 1995 and the consolidated balance sheet as of
December 31, 1995 are not presented separately as our operations during that
period were not material.
24
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS 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. Our 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.
We assume no obligation to update forward-looking statements or the risk
factors. The following discussion should be read in conjunction with our
consolidated financial statements and related notes included elsewhere in this
prospectus.
OVERVIEW
Since our inception in November 1995, we have engaged in the development
and commercialization of products that are designed to provide the flexibility
of open surgery while operating through ports. We believe that our technology
enables surgeons to perform better surgery while giving patients the benefits of
MIS surgery, including decreased trauma and postoperative pain, reduced surgical
complications, shorter hospital stays and lower total treatment costs. In 1999,
we introduced our da Vinci Surgical System and EndoWrist instruments.
We incurred net losses of $23.6 million in 1997, $29.4 million in 1998,
$18.4 million in 1999 and $5.0 million for the three months ended March 31,
2000. As of March 31, 2000, we had an accumulated deficit of $80.2 million. We
expect to expend substantial financial resources to expand marketing, direct
sales, training and customer support needed to support higher sales. In
addition, we anticipate our research and development expenses to increase as we
continue to develop new products and conduct clinical trials. If we receive FDA
approval, we will need to expend significant capital resources to expand our
manufacturing capabilities. This investment is likely to result in low gross
margins. Furthermore, we may encounter difficulties in scaling up production.
Problems may include low production yields, component supply shortages,
shortages of qualified personnel and failure to comply with federal, state and
international regulations.
We have obtained permission from the European Union to affix the CE Mark to
the da Vinci Surgical System and EndoWrist instruments for general surgical and
cardiac surgical use. In the second quarter of 1999, we recognized revenue for
the first time for the sale of our products. Sales to markets outside of the
United States represent 91% of our 1999 sales and 56% of our first quarter 2000
sales. In November 1999, we filed a PMA application with the FDA for
laparoscopic use of the da Vinci Surgical System and our EndoWrist instruments,
and this application is currently under FDA review. Substantial revenue growth
in the United States is dependent on FDA approval of our products.
Sales are generated through our direct sales force and through our
distributors. Revenue is generated from sales of our da Vinci Surgical System
and related accessories, our EndoWrist instruments and ongoing service provided
to our customers. System revenue is recognized upon installation for direct
sales and upon shipment for sales to our distributors. If substantial
contractual obligations exist after system installation, revenue is recognized
after our obligations are fulfilled. We recognize revenue for our EndoWrist
instruments and accessories upon shipment.
In 1999 and in the first quarter of 2000, the majority of our revenues came
from the sales of da Vinci Surgical Systems, which are high revenue dollar
items. A smaller percentage of our 1999 and first quarter of 2000 revenue came
from sales of EndoWrist instruments and accessories, which are lower revenue
dollar items. Although we expect the majority of our revenues to continue to
come from the sale of da Vinci Surgical Systems over the next few years, we
expect the percentage of revenue from our EndoWrist instruments to increase. Due
to the high dollar revenue per system sold,
25
<PAGE> 29
small variations in system unit sales may cause revenue to vary significantly
from quarter to quarter. During the useful life of each installed da Vinci
Surgical System, we expect to generate recurring revenue through sales of our
EndoWrist instruments and accessories. For the year ended December 31, 1999, two
customers, AB Medica SRL and Marubeni America Corporation, each accounted for
16% of our total sales. For the three months ended March 31, 2000, four
customers, Henrico Doctors' Hospital, AB Medica SRL, Marubeni America
Corporation and Pitt County Memorial Hospital, accounted for 30%, 28%, 22% and
14% of total sales, respectively.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and 2000
Sales. Sales were recorded for the first time in the second quarter of
1999. For the three months ended March 31, 2000, we recorded $2.9 million in
revenue for shipments of the da Vinci Surgical System, EndoWrist instruments and
accessories.
Cost of Sales. Cost of sales includes material, manufacturing labor,
overhead and warranty costs. No cost of sales exists for the three months ended
March 31, 1999. We reported cost of sales of $2.5 million, or 86% of sales, for
the three months ended March 31, 2000.
Gross Profit. No gross profit exists for the three months ended March 31,
1999. For the three months ended March 31, 2000, gross profit was $401,000, or
14% of sales.
Research and Development Expenses. Research and development expenses
include costs associated with the design, development, testing and enhancement
of our products. These enhancements represent significant improvements to our
products. Research and development expenses also include expenditures for
purchases of laboratory supplies and clinical trials. We expense research and
development costs as they are incurred. Research and development expenses
decreased from $4.0 million during the three months ended March 31, 1999 to $2.6
million during the comparable period in 2000. The decrease is primarily
attributable to a change in our treatment of manufacturing-related costs.
Starting in the second quarter of 1999, we transitioned from recording
manufacturing-related costs as research and development expense to cost of
sales. We expect research and development spending will increase in the future,
in absolute dollars, as we expand our product development efforts and seek
further regulatory approvals.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include personnel costs for sales, marketing and
administrative personnel, tradeshow expenses, legal expenses, regulatory fees
and general corporate expenses. Selling, general and administrative expenses
increased from $1.8 million during the three months ended March 31, 1999 to $3.1
million during the comparable period in 2000. The increase is primarily
attributable to $1.0 million in increased personnel costs and $291,000 in
marketing expenses. Selling, general and administrative expenses are expected to
increase in the future to support expanding business activities and the
additional administrative costs related to being a public company.
Interest Income (Expense), Net. Net interest income increased from $189,000
during the three months ended March 31, 1999 to $336,000 during the comparable
period in 2000. The increase resulted from increased interest income earned on
higher average cash balances, which was driven by the exercise of warrants to
purchase preferred stock in March 2000 yielding approximately $35.4 million in
gross proceeds.
Years Ended December 31, 1997, 1998 and 1999
Sales. Sales were recorded for the first time in 1999. For the year ended
December 31, 1999, we recorded $10.2 million in revenue for shipments of the da
Vinci Surgical System, EndoWrist instruments and accessories.
26
<PAGE> 30
Cost of Sales. No cost of sales exists for years 1997 and 1998. We reported
cost of sales of $9.3 million, or 91% of sales, for the year ended December 31,
1999.
Gross Profit. No gross profit exists for years 1997 and 1998. For the year
ended December 31, 1999, gross profit was $919,000, or 9% of sales.
Research and Development Expenses. Research and development expenses
increased from $14.3 million in 1997 to $23.2 million in 1998 and decreased to
$11.1 million in 1999. The increase in research and development expenses from
1997 to 1998 was primarily attributable to increases of $2.6 million in
prototype costs associated with development of the da Vinci Surgical System,
$2.4 million in clinical trial costs, and $3.1 million related to increased
personnel costs. The decrease in research and development expenses from 1998 to
1999 is primarily attributable to reductions of $5.4 million in prototype costs,
$2.3 million in clinical trial costs, and $619,000 in deferred compensation
expense. In addition, we transitioned from recording manufacturing-related costs
as research and development in 1998 to cost of sales in 1999. This resulted in a
decrease of $3.6 million in research and development costs from 1998 to 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $4.4 million in 1997 to $7.6 million in
1998 and to $9.3 million in 1999. The increase from 1997 to 1998 is primarily
attributable to $1.4 million in increased personnel costs and $468,000 in
marketing expenses. The increase from 1998 to 1999 is primarily due to increased
personnel costs.
Technology License. Technology license expense of $6.0 million was
recognized in 1997 in conjunction with technology obtained from IBM. The
arrangement with IBM specifically limits our application of the technology to
products used in surgery. Since none of our products had received regulatory
approval, and we had no alternative future use for the technology, this amount
was expensed when incurred.
Interest Income (Expense), Net. Net interest income remained relatively
constant at $1.1 million in 1997, $1.3 million in 1998 and $1.1 million in 1999.
The increase from 1997 to 1998 resulted from increased interest income earned on
higher average cash balances. The decrease from 1998 to 1999 resulted from lower
interest income earned on lower average cash balances, and higher interest
expense on additional debt.
Subsequent to March 31, 2000
In April 2000, we entered into an agreement with Heartport, Inc. to
exclusively license a number of Heartport's patents in exchange for cash of $3.0
million and a warrant to purchase 200,000 shares of common stock at an exercise
price of $3.00 per share. We anticipate that a charge of approximately $5.0
million will be capitalized as a result of this agreement, which will be
amortized over the estimated useful life of the patents.
DEFERRED COMPENSATION
We recorded deferred compensation as the difference between the exercise
price of options granted and the fair value of its common stock at the time of
grant for financial reporting purposes. Deferred compensation is amortized to
research and development expense, and selling, general and administrative
expense. Deferred compensation recorded through March 31, 2000 was $7.2 million
with accumulated amortization of $4.1 million. The remaining $3.1 million will
be amortized over the remaining vesting periods of the options, generally four
years from the date of grant. We anticipate that additional deferred
compensation totaling $1.5 million will be recorded for options granted in April
and May 2000. These amounts are being amortized over the respective vesting
periods of the individual stock options using a graded-vesting method. We expect
to record amortization expense for deferred compensation as follows: $2.5
million during 2000, $1.3 million during 2001, $600,000 during 2002 and $200,000
during 2003. The amount of deferred compensation expense to be recorded in
27
<PAGE> 31
future periods may decrease if unvested options for which deferred compensation
has been recorded are subsequently canceled.
NET OPERATING LOSS AND RESEARCH TAX CREDIT CARRY FORWARDS
As of December 31, 1999, net operating loss carryforwards were
approximately $44.8 million and $13.8 million for federal and state income tax
purposes, respectively. Federal and state research tax credit carryforwards were
approximately $2.0 million. The state and federal net operating loss
carryforwards will expire at various dates from 2003 through 2019 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 before utilization.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," or SFAS 133
which, as amended, is required to be adopted in years beginning after June 15,
2000. Because we do not use derivatives, management does not anticipate the
adoption of SFAS 133 will have a significant effect on the results of
operations, financial position or cash flows of Intuitive Surgical.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," or
SAB 101. SAB 101 summarizes some areas of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. We believe that our current revenue recognition principles comply
with SAB 101.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception we have financed our operations primarily through sales
of our preferred stock, yielding net proceeds of approximately $127.3 million,
and equipment financing arrangements yielding approximately $6.5 million. The
equipment arrangements provide financing at specified interest rates for periods
of up to 48 months, by which time the principal is repaid to the lessors. As
collateral for the equipment financing, we have granted the lessors a security
interest in equipment specified under each arrangement. As of March 31, 2000, we
had cash, cash equivalents and short-term investments of $54.6 million and
working capital of $51.7 million.
Net cash used in operating activities was approximately $14.9 million,
$31.1 million, $15.9 million and $5.8 million for the years ended December 31,
1997, 1998, 1999 and for the three months ended March 31, 2000, respectively.
For such periods, net cash used in operating activities resulted primarily from
net losses.
Net cash used in investing activities was approximately $18.4 million and
$10.3 million for the years ended December 31, 1997 and 1999, respectively. Net
cash provided by investing activities was approximately $954,000 and $5.8
million for the year ended December 31, 1998 and for the three months ended
March 31, 2000, respectively. Investing activities primarily consist of capital
expenditures and the purchase, sale and maturity of short-term investments.
Net cash provided by financing activities was approximately $48.9 million,
$23.3 million, $20.2 million and $34.9 million for the years ended December 31,
1997, 1998, 1999 and for the three months ended March 31, 2000, respectively.
The net cash provided by financing activities was primarily attributable to the
sale of preferred stock and proceeds from long-term borrowings.
In June 1999, October 1999 and March 2000, we entered into equipment
financing agreements with Heller Financial to finance equipment totaling $1.5
million, $0.5 million and $0.5 million, respectively. The term of these leases
is 36 months. The interest rate for these financing agreements
28
<PAGE> 32
is approximately 10%. The June 1999, October 1999 and March 2000 financing
agreements provide for monthly payments of approximately $48,000, $16,000 and
$16,000, respectively. We have granted Heller Financial a security interest in
all equipment covered under these agreements.
In addition, we have four prior equipment financing agreements with GE
Capital with an outstanding balance of $2.4 million and $2.2 million at December
31, 1999 and March 31, 2000, respectively. We are currently repaying these
amounts at interest rates ranging from approximately 9.0% to 13.8%. We have
granted to GE Capital a security interest in all equipment covered under these
agreements. In connection with these financing agreements, we 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.
As of March 31, 2000, we had capital equipment of $7.1 million less
accumulated depreciation of $4.0 million to support our clinical, research,
development, manufacturing and administrative activities. For the next twelve
months, we expect capital expenditures to increase modestly as we acquire
equipment and expand our facilities. Among these planned expenditures are
tooling costs for production and tenant improvements.
Our capital requirements depend on numerous factors, including market
acceptance of our products, the resources we devote to developing and supporting
our products and other factors. We expect to devote substantial capital
resources to continue our research and development efforts, to expand our
support and product development activities and for other general corporate
activities. We believe that our current cash balances, together with the net
proceeds of this offering and revenue to be derived from the sale of our
products, will be sufficient to fund our operations at least through 2001.
During or after this period, if cash generated by operations is insufficient to
satisfy our liquidity requirements, we may need to sell additional equity or
debt securities or obtain additional credit arrangements. Additional financing
may not be available on terms acceptable to us or at all. The sale of additional
equity or convertible debt securities may result in additional dilution to our
stockholders.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we invest in
may have market risk. This means that a change in prevailing interest rates may
cause the principal amount of the investment to fluctuate. For example, if we
hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the principal
amount of our investment will probably decline. To minimize this risk in the
future, we intend to maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, money market
funds and government and non-government debt securities. The average duration of
all of our investments as of December 31, 1999 and March 31, 2000 was less than
one year. Due to the short term nature of these investments, we believe we have
no material exposure to interest rate risk arising from our investments.
Therefore, no quantitative tabular disclosure is required.
29
<PAGE> 33
BUSINESS
OVERVIEW
We design and manufacture the da Vinci Surgical System, an advanced
surgical system that we believe represents a new generation of surgery -- the
third generation. We believe that this new generation of surgery, which we call
Intuitive surgery, is a revolutionary advance similar in scope to the previous
two generations of surgery -- open surgery and minimally invasive surgery, or
MIS. Our da Vinci System consists of a surgeon's console, a patient-side cart, a
high performance vision system and our proprietary instruments. By placing
computer-enhanced technology between the surgeon and patient, we believe that
our system enables surgeons to perform better surgery in a manner never before
experienced. The da Vinci Surgical System seamlessly translates the surgeon's
natural hand movements on instrument controls at a console into corresponding
micro-movements of instruments positioned inside the patient through small
puncture incisions, or ports. Our da Vinci Surgical System is the only
commercially available technology that can provide the surgeon with the
intuitive control, range of motion, fine tissue manipulation capability and 3-D
visualization characteristic of open surgery, while simultaneously allowing the
surgeon to work through the small ports of minimally invasive surgery.
In March 1997, surgeons using an early prototype of our technology
successfully performed Intuitive surgery on humans. Beginning in May 1998,
surgeons using our technology successfully performed what we believe were the
world's first computer-enhanced closed chest heart surgeries, including mitral
valve repair, dissection of an internal mammary artery and grafting of a
coronary artery. Since then, surgeons using our technology have successfully
completed hundreds of general surgery procedures of various types. In early
2000, surgeons using our technology successfully completed what we believe was
the world's first beating heart bypass procedure using only small ports. As of
May 31, 2000, we have sold 18 of our da Vinci Surgical Systems. This year, we
expect the FDA to approve use of the da Vinci Surgical System in laparoscopic
surgical procedures, which we believe would make us the only company to have
received FDA approval for a third generation surgical product. We cannot assure
investors as to when, or if, we will receive this approval. Laparoscopic surgery
is surgery in the abdominal and pelvic areas of the body using an endoscope. Our
U.S. customers are currently using our products in connection with clinical
trials and for training purposes.
The first generation of surgery, open surgery, remains the predominant form
of surgery and is still used in almost every area of the body. However, the
large incisions required for open surgery 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, the second generation of surgery, MIS surgery, has reduced
trauma to the patient by allowing some surgeries to be performed through small
ports rather than large incisions, resulting in shorter recovery times, fewer
complications and reduced hospitalization costs. MIS surgery has been widely
adopted for certain surgical procedures, but it has not been widely adopted for
complex procedures. We believe surgeons have been slow to adopt MIS surgery for
complex procedures because they generally find that fine tissue manipulations,
such as dissecting and suturing, using these techniques are more difficult to
learn and perform, and are less precise, than in open surgery.
Intuitive surgery overcomes many of the shortcomings of both open surgery
and MIS surgery. Surgeons operate while seated comfortably at a console viewing
a bright and sharp 3-D image of the surgical field. This immersive visualization
results in surgeons no longer feeling disconnected from the surgical field and
the instruments, as they do when using an endoscope in MIS surgery. While seated
at the console, the surgeon manipulates instrument controls in a natural manner,
just as he or she has been trained to do in open surgery. Our technology is
designed to provide surgeons with a range of motion in the surgical field
analogous to the motions of a human wrist, while filtering out the tremor
inherent in every surgeon's hand. In designing our products, we have focused on
making our technology as simple as possible to use. In our experience, based on
hundreds of procedures, surgeons
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can learn to manipulate our instruments with only a short amount of training and
can learn to perform Intuitive surgery with less training than is required for
MIS surgery.
Our products are designed to make a broad range of open surgical and MIS
procedures suitable for Intuitive surgery. The da Vinci Surgical System is
designed to allow surgeons to perform better surgery while providing patients
with the benefits of MIS surgery. We believe that these advantages will enable
us to drive a fundamental change in surgery.
BACKGROUND
We believe that there are three generations of surgical techniques: (1)
open surgery, which began its modern era in the 19th century, (2) MIS surgery,
which has developed over the past several decades and (3) Intuitive surgery,
which we have developed. Each generation of surgery has been enabled by the
development of an important technology or set of related technologies.
First Generation: Open Surgery
Modern open surgical technique developed in the second half of the 19th
century because of the combination of two medical breakthroughs: anesthesia and
sterile technique. Using open surgical techniques, a surgeon generally creates
an incision large enough to allow a direct view 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, forceps, 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. In most
cases, repairing damaged tissue is much less traumatic than creating the large
incisions necessary to expose that tissue. 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 considered the most precise and the easiest technique for
the surgeon to perform. Despite trauma and other drawbacks, open surgery remains
the predominant form of surgical technique.
Second Generation: Minimally Invasive Surgery
Minimally invasive surgical techniques have evolved over the past few
decades, beginning with the development of the endoscope. The objective of MIS
surgery is to substantially reduce trauma to the patient by replacing the large
six- to twelve-inch incision typically required for open surgery with three or
more small puncture incisions, or ports. These ports are each approximately ten
millimeters, or less than one-half inch, in diameter. The 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. MIS
surgery generally results in shorter hospitalization and recovery times, reduced
hospitalization costs and substantially less pain and suffering.
During an MIS procedure, the surgeon inserts an endoscope through a port.
An endoscope makes use of fiber optics or fine glass tubes that allow the
surgeon to view a surgical field through a small incision. The endoscope
transmits an image to a television monitor so the surgeon can see the surgical
site and indirectly observe the operation. The surgeon inserts a variety of
long, hand-held instruments through the ports and manipulates the handles of
these instruments outside the patient's body to perform the operation inside the
patient's body. The instruments typically have tips similar to the corresponding
instrument tips used in open surgery, such as forceps or scissors. These tips
are connected to 15- to 18-inch or 35- to 45-centimeter long tubes, which are
connected to the handles.
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Existing Limitations of Minimally Invasive Surgery. We believe that
surgeons generally find MIS surgical techniques more difficult to learn and
perform than open surgery for the following reasons:
- "Backward" Instrument Movements. Existing MIS instruments are essentially
long rigid levers that rotate around a fulcrum, or pivot point, located
at the port created in the body wall. As a result, the instrument tip
moves in the opposite direction from the surgeon's hand. For example, to
move the tip left, surgeons move the instrument handle to the right; to
move the tip up, surgeons move the instrument handle down. Surgeons must
relearn their hand-eye coordination to translate their hand movements in
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 provide
in open surgical procedures. For example, MIS instruments in widespread
use today do not have joints near their tips to replicate surgeons' hand
and wrist movements used in open surgery to perform manipulations such as
reaching behind tissue, suturing and fine dissection.
- Magnified Tremor and Exaggerated Instrument Movements. In open surgery,
instruments are held near their tips, allowing fine movements of
surgeons' hands to be directly translated into fine movements of the
instruments. In MIS surgery, the length of MIS instruments magnifies
surgeons' hand movements. As a result, the tremor inherent 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.
The difficulty of these movements is analogous to the lack of precision
one would experience in writing while holding the eraser end of a pencil.
- Poor Visualization. Since the video image from the endoscope is usually
displayed on a video monitor, surgeons typically must look up and away
from their hands, the patient and the instruments to see the surgical
field on 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 available give the surgeon only a
two-dimensional image. Although three-dimensional endoscopes exist, they
typically have diminished sharpness and lower brightness than
two-dimensional endoscopes, making fine detail more difficult for the
surgeon to see.
- Difficult to Learn. The combination of the inherent difficulties
mentioned above makes conventional MIS surgical techniques difficult to
learn. Although most surgeons are now trained in their residency programs
in basic laparoscopic skills, a significant amount of advanced training
is required for surgeons to become proficient in most MIS procedures. The
need for extensive training revolves around the difficulty of learning
certain laparoscopic skills such as suturing and precise dissection.
Without the assistance of computer-enhanced techniques, these types of
advanced laparoscopic skills take months of practice to learn and
perfect.
Slowing MIS Procedure Conversion Rates. Despite the limitations of existing
MIS techniques, a number of procedures are routinely performed using
laparoscopic procedures. For example, laparoscopic cholecystectomy, removal of
the gall bladder through ports, is learned by most surgeons after a moderate
amount of training, in part because of the anatomical location of the
gallbladder and the relatively gross tissue manipulations required.
Consequently, laparoscopic cholecystectomy grew from a newly-introduced
procedure to the "standard of care" in the United States over approximately
three years, beginning in the late 1980s. In 1997, approximately 85% of
cholecystectomies in the United States were performed using MIS techniques.
We believe that the adoption rate of laparoscopic cholecystectomy has not
been replicated for most subsequently introduced MIS procedures because such
procedures have been more difficult to
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learn and perform. In addition, as a result of these difficulties, many surgical
procedures commonly performed using open surgery have not been adapted to MIS
surgical techniques.
The chart below sets forth the percentage of selected procedures that were
performed worldwide in 1997 using MIS surgical techniques:
[CHART]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
% PERFORMED USING MIS SURGICAL TECHNIQUES
<TABLE>
<S> <C>
Cholecystectomy............................................. 65%(1)
Gynecology (except Hysterectomy)............................ 43%
Hysterectomy................................................ 20%
Hernia Repair............................................... 14%
Cardiac..................................................... 4%
</TABLE>
<TABLE>
<CAPTION>
NUMBER TOTAL
OF NUMBER
PROCEDURES OF
PERFORMED PROCEDURES
USING PERFORMED
MIS ----------
SURGICAL
TECHNIQUES
----------
<S> <C> <C>
Cholecystectomy............................................. 1,173,000 1,804,000
Gynecology (except Hysterectomy)............................ 1,098,000 2,540,000
Hysterectomy................................................ 234,000 1,170,000
Hernia Repair............................................... 198,000 1,430,000
Cardiac..................................................... 39,000 1,065,000
</TABLE>
---------------
(1) 85% in United States
Source: Medical Data International, Inc.
The Intuitive Surgical Solution: Third Generation Surgery
Our technology is designed to return to the surgeon the range of motion,
fine tissue control and 3-D vision characteristic of open surgery while
simultaneously allowing the surgeon to work through the ports used in MIS
surgery. All this is accomplished in an intuitive manner, in the same way that
the movements of a surgeon's hands in open surgery are entirely intuitive.
We believe that our technology overcomes many of the limitations of
existing MIS surgery in the following ways:
- Natural Instrument Movements. Our 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 Instruments Provide Natural Dexterity and Range of Motion. Our
technology is designed to provide surgeons with a range of motion in the
surgical field analogous to the motions of a human hand and wrist. Our
proprietary instruments, which we call EndoWrist instruments, incorporate
"wrist" joints that enable surgeons to reach behind tissues and suture
with precision, just as they can in open surgery. The surgeon controls
the joint's movements from the surgeon's console using natural hand and
wrist movements. EndoWrist joints are located near the tips of all of our
instruments.
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- More Precise Movements and Reduced Tremor. With our technology, the
surgeon can also use "motion scaling," a feature that translates, for
example, a three millimeter hand movement outside the patient's body into
a one millimeter instrument movement in the surgical field inside the
patient's body. Motion scaling is designed to allow greater precision
than is normally achievable in both open and MIS surgery. In addition,
our technology is designed to filter out the tremor inherent in every
surgeon's hands.
- Immersive 3-D Visualization. Our vision system, which we call the InSite
vision system, is designed to give surgeons the perception that their
hands are immersed in the surgical field even though they are outside the
patient's body. As a result, we believe that surgeons no longer feel
disconnected from the surgical field and the instruments, as they
currently do with MIS surgery. In addition, we believe that the InSite
system provides a much brighter and sharper image than any other 3-D
endoscope vision system. The InSite system also incorporates our
proprietary Navigator camera control technology that allows the surgeon
to easily change, move, zoom and rotate his or her field of vision. The
combination of these features offers what we believe is the most advanced
surgical vision system available today.
- Easy to Learn and Perform. In designing our products, we have focused on
making our technology as simple as possible to use, even though it is
inherently complex. We believe that tissue manipulations using our
products are as natural as hand movements in open surgery. In our
experience, based on feedback from surgeons who have performed hundreds
of procedures, surgeons can learn to manipulate our instruments with only
a short amount of training. Learning to perform surgical procedures using
the da Vinci System will vary depending on the complexity of the
procedure and the surgical team's experience with MIS surgery techniques.
- Multi-Specialty Surgical Platform. The da Vinci System is designed to
enable surgeons to perform surgery in virtually any part of the body. To
date, surgeons have used the da Vinci System to perform over 20 different
types of surgical procedures.
We believe that these advantages give the patient the benefits of less
traumatic MIS surgery while restoring to the surgeon the range of motion and
fine tissue control possible with open surgery, along with further enhancements
such as tremor reduction, motion scaling and superior visualization.
We believe that our technology has the potential to change surgical
procedures in three basic ways:
- Convert Open Procedures to Intuitive Surgery. We believe our technology
will make a number of surgical procedures that currently are performed
only with open surgical techniques suitable for Intuitive surgery.
- Facilitate Difficult MIS Operations. We believe surgical procedures that
today are performed only rarely using MIS techniques will be performed
routinely and with confidence using Intuitive surgery. Some procedures
have been adapted for port-based techniques but are extremely difficult
and are currently performed by a limited number of highly skilled
surgeons. We believe our da Vinci System will enable more surgeons at
more institutions to perform these procedures.
- Simplify Existing, High-Volume MIS Procedures. We believe surgical
procedures that today are performed routinely using MIS techniques will
be performed more quickly and safely with Intuitive surgery. For example,
over the past decade, approximately 85% of gall bladder removals
performed in the United States have been converted to MIS surgery. We
believe that the da Vinci System will make these procedures easier,
faster and more cost effective to perform.
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INTUITIVE SURGICAL'S PRODUCTS
Our principal products include the da Vinci Surgical System and a variety
of "smart disposable" EndoWrist instruments.
da Vinci Surgical System
Surgeon's Console. The da Vinci System allows the surgeon to operate while
comfortably seated at an ergonomic console viewing a 3-D image of the surgical
field. The surgeon's fingers grasp the instrument controls below the display
with wrists naturally positioned relative to his or her eyes. Using hardware,
software, algorithms, mechanics and optics, our technology is designed to
seamlessly translate the surgeon's hand movements into precise and corresponding
real-time microsurgical movements of the EndoWrist instruments inside the
patient.
Patient-Side Cart. The patient-side cart, which can be easily moved next to
the operating table, holds electromechanical arms that manipulate the
instruments inside the patient. Three arms attached to the cart can be easily
positioned as appropriate, and then locked into place. The first two arms, one
representing the left hand and one the right hand of the surgeon, hold our
EndoWrist instruments. The third arm positions the endoscope, allowing the
surgeon to easily change, move, zoom and rotate his or her field of vision.
3-D Vision System. The vision system includes our InSite high resolution
3-D endoscope with two separate vision channels linked to two high resolution,
progressively scanned color monitors. The vision system also incorporates our
InSite image processing equipment comprised of high performance video cameras,
specialized edge enhancement and noise reduction equipment. The resulting 3-D
image has high resolution and contrast and no flicker or cross-fading, which
occurs in single monitor systems, and minimizes eye fatigue. Our vision system
allows the surgeon to move his or her head in the viewer without affecting image
quality.
EndoWrist Instruments
We manufacture a variety of EndoWrist instruments, each of which
incorporates a wrist joint for natural dexterity, with tips customized for
various surgical procedures. These EndoWrist instruments are currently
approximately seven millimeters in diameter. The instruments mount onto the
electromechanical arms that represent the surgeon's left and right hands and
provide the mechanical capability necessary for performing complex tissue
manipulations through ports. At their tips, the various EndoWrist instruments
include forceps, scissors, electrocautery, scalpels and other surgical tools
that are readily familiar to the surgeon from open and MIS surgery. Generally, a
variety of EndoWrist instruments are selected and used interchangeably during
the surgery. Where instrument tips need to incorporate a disposable component,
for example, scalpel blades, we sell disposable inserts. We plan to continue to
add new types of EndoWrist instruments for additional types of surgical
procedures.
The EndoWrist instruments are "smart disposables" because they are
resterilizable and reusable for a defined number of procedures or hours of use.
A custom computer chip inside each instrument performs several functions that
help determine how the system and instruments work together. When an EndoWrist
instrument is attached to an arm of the patient-side cart, the chip performs an
"electronic handshake" that ensures the instrument was manufactured by us and
recognizes the type and function of the instrument and number of past uses or
hours. For example, the chip distinguishes between scissors and a scalpel and
controls the unique functions of different instruments as appropriate. In
addition, the chip will not allow the instrument to be used for more than the
prescribed number of procedures or hours so that its performance meets
specifications during each procedure. In addition, we can sell the instrument
for a fixed number of uses or hours and effectively price our EndoWrist
instruments on a per-procedure or per-hour basis.
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USING THE DA VINCI SURGICAL SYSTEM
During a procedure, the patient-side cart is positioned next to the
operating table with the electromechanical arms arranged to provide access to
the initial ports selected by the surgeon. Metal tubes attached to the arms are
inserted through the ports, and the EndoWrist instruments are introduced through
the tubes into the patient's body. The surgeon then performs the procedure while
sitting comfortably at the surgeon's console, manipulating the instrument
controls and viewing the operation through our InSite vision system. When a
surgeon needs to change an instrument, as is done many times during an
operation, the instrument is withdrawn from the surgical field using the
controls 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 and
replaces it with the new instrument, in a process designed to be rapid enough
not to disturb the natural flow of the procedure. As a result, the scrub nurse
plays a role similar to that played in open and MIS surgery. At the conclusion
of the operation, the metal tubes are removed from the patient's body and the
small incisions are sutured or stapled.
OUR STRATEGY
Our goal is to establish Intuitive surgery as the standard for complex
surgical procedures and many other procedures currently performed using either
open or MIS surgery. We intend to accomplish this objective both by pioneering
new types of endoscopic surgery and by making existing MIS procedures easier,
safer and more cost effective. Over time, our strategy is to broaden the number
of procedures performed using the da Vinci Surgical System and to educate
surgeons and hospitals as to the benefits of Intuitive surgery. Key elements of
this strategy include:
Focus on Key Institutions. Our marketing efforts are focused on large
multi-specialty care hospitals where a majority of complex surgical procedures
are performed. Following the initial placement at a given hospital, we intend to
expand the number of physicians who use the da Vinci Surgical System and work
with the hospitals and their surgeons to promote patient education as to the
benefits of Intuitive surgery. We believe that these efforts will result in
increased usage per system, leading to high volume sales of instruments and
sales of additional systems at each hospital. In addition, we believe such
efforts will benefit early-adopting hospitals by increasing their market share
in the procedures and specialties that benefit from Intuitive surgery. We expect
these efforts to increase demand for our products among competitive hospitals,
surgeons and referring physicians.
Focus on Leading Surgeons to Drive Rapid and Broad Adoption. We will place
significant emphasis on marketing the da Vinci Surgical System to leading
surgeons who are considered to be the "thought leaders" in their institutions
and fields. These surgeons typically perform complex surgical procedures that
are currently not adaptable to MIS techniques. For example, cardiac procedures,
of which over one million are currently performed annually worldwide, are among
the most difficult to perform using MIS techniques. This strategy puts surgeons
at the forefront of procedure development and provides them an opportunity to
maintain a competitive edge in their specialty. We believe that early adoption
of our products by surgical thought leaders will give many other surgeons the
confidence that the da Vinci Surgical System can be used for all types of
surgical procedures.
Develop Protocols for New Surgical Procedures. We intend to leverage our
relationships with key institutions and surgical thought leaders to develop
protocols for new surgical procedures. These protocols would include guidance on
patient screening, port placement, interaction of the surgical team and advice
on the sequence and selection of tools and maneuvers. We believe that
establishing protocols for a given procedure will facilitate the broader
adoption of Intuitive surgery for that procedure.
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Maintain Market Leadership. We intend to maintain our leadership advantage
by continuing to develop and enhance our technology and to communicate the
benefits of our da Vinci Surgical System to surgeons, hospitals and patients. We
will continue to improve our da Vinci Surgical System through software and
hardware enhancements and by developing new surgical instruments. We will also
continue to develop our surgical platform to facilitate and support future
surgical innovations.
CLINICAL CONTRIBUTIONS
We believe our technology is capable of enhancing or enabling a wide
variety of procedures in many surgical specialties. To date, surgeons using our
da Vinci Surgical System have performed over 200 general and vascular surgery
procedures, over ten gynecologic surgery procedures and over 400 cardiothoracic
surgery procedures. These applications, as well as potential applications for
orthopedic surgery, are described below.
General and Vascular Surgery
Aortic Aneurysms. A common vascular procedure is the repair of aortic
aneurysms, which are sacs formed by the dilation of the wall of the main artery
in the body. Aneurysms are caused primarily by atherosclerosis, which is
characterized by the deposition of fatty substances in large and medium-sized
arteries, such as the arteries that lead to the heart and brain. 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
heart/lung bypass machines. Thus, only a narrow window of time for completion is
available. Currently, some aneurysms are treated by intravascular stent-grafts.
These stent-grafts can be inserted through the main artery in the thigh, called
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. We believe that the capability of our technology to deliver to
the surgeon enhanced 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 above and below the blockage. This
procedure currently requires open surgery because of the need to suture the
grafts in place. We believe that with our technology, surgeons will be able to
perform the required suturing of arteries, called an anastomosis, through ports
and avoid the large incision currently required.
Cholecystectomy. Removal of the gallbladder, or cholecystectomy, is the
most common procedure performed by general surgeons. The procedure is used to
treat cholecystitis, which is an inflammation of the gall bladder. Although a
minimally invasive approach, called a laparoscopic cholecystectomy, 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 disease status the surgeon
discovers after the abdomen is entered. For example, acute cholecystitis can
result in inflammation and the abnormal union of tissues resulting from the
formation of new fibrous tissue in the inflammatory process. As a result, very
meticulous surgery to access gallbladder anatomy can be required. 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 its
difficulty. This usually results in a conversion to open technique or another
surgical or delicate gastrointestinal endoscopic procedure to extract the
stones.
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With our technology, we believe 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 that is performed to correct esophageal reflux. Esophageal reflux
disease is a digestive disorder that affects the muscle connecting the esophagus
with the stomach. As an elective procedure, Nissen fundoplication is currently
performed on only a small fraction of candidates who suffer from this condition
because the open surgical procedure is quite invasive. An MIS alternative
exists, but there are only a limited number of surgeons skilled in the
procedure. We believe that our technology will significantly improve the ease of
performing the Nissen procedure through ports. Specifically, our technology will
address the two most difficult steps in this procedure, which are made more
difficult by existing MIS techniques, esophageal dissection and suturing of the
fundus of the stomach. If adoption of our technology becomes widespread for
Nissen procedures, we believe that the number of surgeons able to perform a
Nissen procedure using port-based techniques will increase. Further, we expect
that the widespread availability of a port-based approach may significantly
expand the number of surgeries performed.
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 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,
we believe that our products will allow port-based colon resection to be
performed more widely.
Hernia Repair. An inguinal hernia is a condition in which tissue protrudes
through the wall of the pelvis. It is caused by a defect or weakness in the
lining covering the pelvic region. Repair of inguinal hernia is the second most
common procedure done in general surgery. 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 some of the structures and the
peritoneal sac, which often adheres to the pelvic anatomy, is very difficult for
surgeons to accomplish using MIS techniques. We believe that our technology will
encourage surgeons to convert hernia procedures to the port-based approach by
removing the training barrier that limits its adoption.
Gynecologic Surgery
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 that 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.
We believe that our 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 surgical removal of an ovary or
fallopian tube.
Hysterectomy. Removal of the uterus is one of the most commonly performed
surgeries in gynecology and 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, or tying, of blood vessels, ligaments and other pelvic
structures. Further, laparoscopic techniques used in this procedure increase the
risk of injury to the ureters, which are vital structures that provide the
conduit for urine between
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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. We believe that our 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 port-based 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 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 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. We believe our technology may
provide a better solution for suturing the bladder neck and would represent an
advance in the ease of performing incontinence surgery.
Orthopedic Surgery
Arthroscopy. 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 meniscus is a structure located in the knee joint that provides a surface
and cushion upon which the bones of the knee joint can move. We believe that our
technology and the capabilities of our EndoWrist instruments will increase the
ease with which complex arthroscopic procedures such as advanced knee and
shoulder arthroscopy can be performed.
Spinal Surgery. Disc removal and spinal fusion are common procedures
performed in open spinal surgery. MIS techniques where surgeons approach the
spine through the abdomen and use laparoscopic methods to expose the anterior
portion of the spine and lumbar disc space are just emerging. This procedure
requires both delicate and precise dissection and retraction of tissue, and
would benefit greatly from the enhanced capabilities offered by the da Vinci
Surgical System. We believe that our technology may make this procedure safer,
easier, more precise, and allow more surgeons to perform it with confidence.
Cardiothoracic Surgery
Internal Mammary Artery Dissection. In a coronary artery bypass graft
procedure used in cardiac surgery, a blocked coronary artery is bypassed with a
graft. When available, an artery from the chest called the internal mammary
artery is dissected from its natural position and grafted into place to perform
the bypass. Because the internal mammary artery is located on the underside of
the anterior surface of the chest, dissection of the vessel is challenging using
existing surgical instruments through the three- to five-inch incision currently
used in a coronary artery bypass graft procedure. Our products have multiple
joints that emulate the surgeon's shoulders and elbows, allowing exact
positioning of the instruments inside the patient's chest. In addition, the
EndoWrist joints permit the surgeon to reach behind the tissues for easier
dissection of the internal mammary artery. Thus, we believe that the internal
mammary artery can be dissected with greater ease and precision using our
technology.
Coronary Anastomosis. Coronary artery bypass graft surgery demands that the
surgeon delicately dissect and precisely suture very small structures, which are
less than two millimeters in diameter, under significant magnification. These
procedures are difficult when performed in open
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surgery. They are even more difficult when performed using an endoscopic or
limited incision approach, and extraordinarily difficult to perform when the
heart is beating. As a result, this procedure is typically done as open surgery
by stopping the heart and using a heart/lung bypass machine. Our technology is
designed to allow surgeons to perform scaled instrument movements that can be
even more precise than the movements used in open surgery, thus enabling precise
suturing of single and multiple coronary vessels on a stopped or beating heart.
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 valves and other structures inside the heart, and is key to
successful surgical outcomes with minimal complications. Motion scaling allows a
surgeon using our da Vinci Surgical System to maneuver instruments inside the
patient even more precisely than is possible in open surgery. Our system has
already enabled heart valve repairs to be performed through small ports in a
manner that could not have been accomplished with open surgery. Replacement of
valves currently requires a small incision, even if the majority of the
procedure is eventually performed through ports using our technology, because
the replacement valve itself is too large to be inserted into the chest through
a port. However, new valve designs that can be delivered through ports are being
developed, and the small incisions necessary today to deliver a replacement
valve to the heart may eventually not be required, allowing a surgeon using the
da Vinci Surgical System to replace a valve entirely using ports.
Thoracoscopy. A number of procedures performed in the thorax, or chest
cavity, can be accomplished by minimally invasive methods. These methods are
generally referred to as thoracoscopic procedures. They include various types of
lung resection, biopsy procedures, node dissections, nerve resections and
esophageal surgery. Conventional thoracoscopic tools have all the limitations of
conventional laparoscopic tools, such as "backward" movement and limited range
of motion. The capability of our technology to operate dexterously in the often
very small and restrictive space of the chest cavity is believed to offer
significant clinical value in the performance of advanced thoracoscopic
procedures.
MARKETING AND DISTRIBUTION
We market our products through a direct sales force in the United States
and most of Europe. We have also entered into agreements with distributors in
Italy and Japan. Our marketing and sales strategy in the United States and
Europe involves the use of a combination of area sales managers, technical sales
representatives and clinical training specialists. As of March 31, 2000, we had
21 employees in sales and marketing. We expect to significantly increase our
sales and marketing force as we expand our business.
The role of our technical sales representatives is to educate physicians
and surgeons on the advantages of Intuitive surgery and the clinical
applications that our technology makes possible. We also train our technical
sales representatives to educate hospital management on the potential benefits
of early adoption of our technology and the potential for increased local market
share that may result from Intuitive surgery. Once a hospital has installed a da
Vinci Surgical System, our sales force will help introduce the technology to
other surgical specialties within the hospital.
Clinical training specialists provide training and support to physicians
and other hospital staff and coordinate installation of our products. We employ
service technicians to provide non-clinical technical expertise, upgrades,
service and maintenance for our da Vinci Surgical Systems. We believe that this
combination of technical sales representatives, clinical training specialists
and service technicians provides an appropriate balance of professional selling
skills while maintaining an appropriate level of technical expertise in the
field.
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Our da Vinci Surgical System has a lengthy sales and purchase order cycle
because it is a major capital item and requires the approval of senior
management at purchasing institutions. Particularly during the period in which
our sales volume is low, this may contribute to fluctuations in our quarterly
operating results.
TECHNOLOGY
Using key technologies, we have designed the da Vinci Surgical System to
ensure intuitive control and fail-safe operation of the system. The system
updates arm and instrument positions over 1000 times per second, thereby
ensuring real-time connectivity between the surgeon's hand movements and the
movements of the instrument tips. A backup battery is included in the system
that can power the system for more than 20 minutes in case of power loss or
fluctuation. This 20-minute period is believed to be sufficient either to
reestablish the power supply or for the hospital back-up power system to become
effective.
Monitoring the operation of the system at all times is a network of
approximately 20 micro-controllers that checks for proper system performance.
System misuse or system fault can be detected and the system can be transitioned
to a safe state in micro-seconds. The system also includes a sensor that detects
the presence of the surgeon's head in the viewer. If the surgeon removes his or
her head from the viewer, the system automatically disengages and locks the
instruments in place to prevent their inadvertent movement.
The instrument controls at the surgeon's console have eight degrees of
freedom of motion that allow the surgeon to move each hand through a workspace
approximately one cubic foot in volume. These degrees of freedom allow the
surgeon to orient his or her hands without limitation. The instrument controls
are constructed with very low friction cables and gear transmissions to ensure
smooth operation. Furthermore, critical components are constructed of magnesium
and titanium to provide high mechanical stiffness and low inertia, ensuring a
light and responsive feel to the surgeon.
The electromechanical arms of the patient-side cart are gravitationally
counterbalanced to allow for smooth, easy and safe positioning of the
instruments in the patient. The arms have seven degrees of freedom, allowing for
control of position, orientation, translation and grip of the instrument, all
inside the body. Redundant sensors are designed to ensure fail-safe operation of
the instrument tips.
Unlike other 3-D systems, our InSite vision system relies on two entirely
separate vision channels. Two eyepieces are linked by a precisely designed
optical assembly to two high resolution, and high contrast medical grade
monitors, which have been specially designed to have a high visual update rate
that eliminates flicker and thus, reduces eye fatigue. Our stereo endoscope uses
two separate high resolution optical channels to improve image clarity. The
stereo images pass through video processing electronics that provide specialized
edge enhancement and noise reduction. A foot switch at the surgeon's console
operates a focus controller on the endoscope. The endoscope self-regulates the
temperature of its tip to eliminate fogging during procedures.
Our EndoWrist instruments use a wrist joint architecture driven by six tiny
but very high strength, flexible tungsten cables. Each tungsten cable is a
"metal rope" constructed from over 200 fibers that are each less than one
thousandth of an inch in diameter. These cables are similar in function to the
tendons of a human wrist and are used to drive fluid motions of the wrist joint.
The instruments each contain a custom memory chip that records and stores data
each time the instrument is placed on the system. The chip contains encrypted
security codes to protect against use of non-Intuitive Surgical instruments so
that only our instruments will work with the da Vinci Surgical System. The chip
identifies the type of tool being inserted so that different instrument types
can be controlled uniquely by the system. The chip also records usage of the
instrument and expires the instrument after its prescribed life.
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INTELLECTUAL PROPERTY
Since our inception in late 1995, we have encountered and solved a number
of technical hurdles. We have patented and continue to pursue patent and other
intellectual property protection for the technology that we have developed to
overcome such hurdles. In addition to developing our own patent portfolio, we
have spent significant resources in acquiring exclusive license rights to
necessary and desirable patents and other intellectual property from SRI
International and IBM, who were early leaders in applying robotics to surgery.
One of the strengths of our portfolio is that the licensed SRI International and
IBM patents have original filing dates as early as January 1992 and June 1991,
respectively. We have also exclusively licensed a patent application from MIT
concerning robotic surgery. In April 2000, we exclusively licensed an extensive
minimally invasive heart surgery patent portfolio from Heartport, Inc. in the
field of robotic surgery. These patents cover many different forms of minimally
invasive robotic surgery, including single- and multi-vessel coronary artery
bypass grafts, heart valve repair and replacement and beating heart
stabilization. As of April 30, 2000, we hold exclusive field-of-use licenses for
56 United States patents and 38 foreign patents, and own outright four U.S.
patents that expire in 2016. We also own or have licensed numerous pending
United States and foreign patent applications, two of which were recently
allowed. Our patents and patent applications relate to a number of important
aspects of our technology, including our surgeon's console, electromechanical
arms, vision system and our EndoWrist instruments. We intend to continue to file
additional patent applications to seek protection for other proprietary aspects
of our technology.
Our success will depend in part on our ability to obtain patent and
copyright protection for our products and processes, to preserve our trade
secrets, to operate without infringing or violating valid and enforceable
proprietary rights of third parties, and to prevent others from infringing our
proprietary rights. We intend to take action to protect our intellectual
property rights when we believe doing so is necessary and appropriate. In
addition, our strategy is to actively pursue patent protection in the United
States and in foreign jurisdictions for technology that we believe is
proprietary and that offers a potential competitive advantage, and to license
appropriate technologies when necessary or desirable. We cannot be certain that
we will be able to obtain adequate protection for our technology or licenses on
acceptable terms. Furthermore, if any protection we obtain is reduced or
eliminated, others could use our intellectual property without compensating us,
resulting in harm to our business. In addition, the laws of certain foreign
countries do not protect intellectual property rights to the same extent as do
the laws of the United States. See also "Risk Factors -- Others may assert that
our products infringe their intellectual property rights, which may cause us to
engage in costly disputes and, if we are not successful in defending ourselves,
could also cause us to pay substantial damages and prohibit us from selling our
products."
SRI International License Agreement
After receiving funding in 1990 from the U.S. Advanced Research Projects
Agency, SRI International conducted research to develop a "telesurgery" system
to allow surgeons to perform surgery on the battlefield from a remote location.
SRI International developed the precise electromechanics, force-feedback
systems, vision systems and surgical instruments needed to build and demonstrate
a prototype system that could accurately reproduce a surgeon's hand motions with
remote surgical instruments. In 1995, John G. Freund, M.D., one of our founders,
acquired an option to license SRI International's telesurgery technology, which
resulted in SRI International granting us a license.
Under the terms of our license agreement with SRI International, we have an
exclusive, worldwide, royalty-free license to use the SRI International
technology developed before September 12, 1997, including all patents and patent
applications resulting from such work, in the
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field of manipulating tissues and medical devices in animal and human medicine,
including surgery, laparoscopic surgery and microsurgery. We also have the right
of first negotiation with respect to any SRI International technology developed
in these areas before September 12, 1999 but after September 12, 1997.
Our license with SRI International will terminate upon the last expiration
of the patents licensed from SRI International or December 20, 2012, whichever
is later. Currently, the last patent expiration date is in 2016, although this
could change. SRI International may terminate the license in the event of a
material, uncured breach of our obligations. In the event SRI International
terminates the license, we cannot assure you that the necessary licenses could
be reacquired from SRI International on satisfactory terms, if at all.
IBM License Agreement
IBM conducted research on the application of computers and robotics to
surgery during the late 1980s and early 1990s. IBM performed some of this work
in conjunction with the Johns Hopkins Medical Center. Our license agreement with
IBM covers a number of technologies related to the application of computers and
robotics to surgery. Under the terms of this agreement, we have an exclusive,
worldwide, royalty-free license to a number of IBM patents and patent
applications in the field of surgery performed on animals and humans. We also
have a non-exclusive license from IBM to practice in the areas neurology,
ophthalmology, orthopedics and biopsies. Under the license, we are obligated to
make two future payments tied to revenue milestones. The IBM license agreement
will terminate upon the last expiration of the licensed patents. Currently, the
last patent expiration date is in 2016, although this could change. IBM may
terminate the license in the event that we fail to make the required payments.
In the event IBM terminates the license agreement, we cannot assure you that
necessary licenses could be reacquired from IBM on satisfactory terms, if at
all.
MIT License Agreement
After receiving funding from the U.S. Department of the Army, several
researchers at MIT conducted research on various aspects of robotic surgical
systems. As a result of that work, several patent applications were filed. Both
MIT and the Army waived their rights to one of these applications, which the
inventors ultimately assigned to Intuitive Surgical. MIT owns the other
application. Under the terms of our license agreement with MIT, we have an
exclusive, worldwide, royalty-free license to this patent application in the
field of medical devices. The MIT license will terminate upon the last
expiration of any patents issuing from the licensed patent application. MIT also
has the right to terminate the MIT license in the event of a material, uncured
breach of our obligations under the license. In the event MIT terminates the
license, we cannot assure you that we would be able to reacquire a license from
MIT on satisfactory terms, if at all.
RESEARCH AND DEVELOPMENT
Substantially all of our research and development activity is performed
internally. Our 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 used in
fabricating our products.
MANUFACTURING
We have a 13,000 square foot manufacturing facility in Mountain View,
California. We have used this facility and our manufacturing personnel to
produce the systems and instruments that have been sold to date and used in
clinical trials. The manufacture of our products is a complex operation
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involving a number of separate processes and components. In March 2000, the FDA
inspected our Mountain View facility and the Good Manufacturing Practice issues
raised during the inspection by the FDA have been resolved.
We purchase both custom and off-the-shelf components from a large number of
certified suppliers and subject them to stringent quality specifications. We
periodically conduct quality audits of suppliers and have established a supplier
certification program. Some of the components necessary for the assembly of our
products are currently provided to us by sole source suppliers or single source
suppliers. We purchase components through purchase orders rather than long-term
supply agreements and generally do not maintain large volumes of inventory. The
disruption or termination of the supply of components could cause a significant
increase in the costs of these components, which could affect our profitability.
A disruption or termination in the supply of components could also result in our
inability to meet demand for our products, which could harm our ability to
generate revenues, lead to customer dissatisfaction and damage our reputation.
COMPETITION
We consider our primary competition to be existing open or MIS surgical
techniques. Our success depends in part on convincing hospitals, surgeons and
patients to convert procedures to Intuitive surgery from open or existing MIS
surgery.
We also face competition from several companies that are developing new
approaches and products for the minimally invasive surgery market, 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., a division of Guidant Corporation,
C.R. Bard, Inc., Guidant Corporation, Heartport, Inc., Ethicon Endo-Surgery,
Inc., a division of Johnson & Johnson, Medtronic, Inc., and United States
Surgical Corporation, a division of Tyco International Ltd. If we are unable to
compete successfully with these companies our revenues will suffer.
In addition, a limited number of companies are using robots and computers
in surgery, including Brock Rogers Surgical, Inc., Computer Motion, Inc.,
Integrated Surgical Systems, Inc., Johns Hopkins University Engineering Research
Consortium, Maquet AG, MicroDexterity Systems, Inc. and Ross-Hime Designs, Inc.
Our revenues may be reduced or eliminated if our competitors develop and market
products that are more effective or less expensive than our products.
We believe that the primary competitive factors in the market we 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.
GOVERNMENT REGULATION
FDA's Premarket Clearance and Approval Requirements
Unless an exemption applies, each medical device that we wish to market in
the U.S. must first receive either "510(k) clearance" or "PMA approval" from the
U.S. Food and Drug Administration pursuant to the Federal Food, Drug, and
Cosmetic Act. The FDA's 510(k) clearance process usually takes from four to 12
months, but it can last longer. The process of obtaining PMA approval is much
more costly, lengthy and uncertain. It generally takes from one to three years
or even longer. We cannot be sure that 510(k) clearance or PMA approval will be
obtained in the future for any product we propose to market.
The FDA decides whether a device must undergo either the 510(k) clearance
or PMA approval process based upon statutory criteria. These criteria include
the level of risk that the agency perceives is associated with the device and a
determination whether the product is similar to devices that are
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already legally marketed. Devices deemed to pose relatively less risk are placed
in either class I or II, which requires the manufacturer to request 510(k)
clearance, unless an exemption applies. The manufacturer must demonstrate that
the proposed device is "substantially equivalent" in intended use, safety and
effectiveness to a legally marketed "predicate device" that is either in class
I, class II, or is a "preamendment" class III device, one that was in commercial
distribution before May 28, 1976, for which the FDA has not yet called for
submission of a PMA application. After a device receives 510(k) clearance, any
modification to the device that could significantly affect its safety or
effectiveness, or that would constitute a major change in its intended use,
requires a new 510(k) clearance or could require a PMA approval.
Devices deemed by the FDA to pose the greatest risk, such as
life-sustaining, life-supporting or implantable devices, or devices deemed not
substantially equivalent to a legally marketed predicate device, are placed in
class III. Such devices are required to undergo the PMA approval process in
which the manufacturer must prove the safety and effectiveness of the device to
the FDA's satisfaction.
A PMA application must provide extensive preclinical and clinical trial
data as well as information about the device and its components regarding, among
other things, device design, manufacturing and labeling. As part of the PMA
review, the FDA will inspect the manufacturer's facilities for compliance with
Good Manufacturing Practice requirements, which include elaborate testing,
control, documentation and other quality assurance procedures. During the FDA's
review, an FDA advisory committee, typically a panel of clinicians, likely will
be convened to review the application and recommend to the FDA whether, or upon
what conditions, the device should be approved. Although the FDA is not bound by
the advisory panel decision, the panel's recommendation is important to the
FDA's overall decision making process. If the FDA's evaluation of the PMA
application is favorable, the FDA typically issues an "approvable letter"
requiring the applicant's agreement to comply with specific conditions or to
supply specific additional data or information in order to secure final PMA
approval.
Once the approvable letter conditions are satisfied, the FDA will issue a
PMA order for the approved indications, which can be more limited than those
originally sought by the manufacturer. The PMA order can include post-approval
conditions that the FDA believes necessary to ensure the safety and
effectiveness of the device including, among other things, restrictions on
labeling, promotion, sale and distribution. Failure to comply with the
conditions of approval can result in an enforcement action, including withdrawal
of the approval. The PMA process can be expensive and lengthy, and no assurance
can be given that any PMA application will ever be approved for marketing. After
approval of a PMA, a new PMA or PMA supplement may be required in the event of
modifications to the device, its labeling or its manufacturing process.
A clinical trial may be required to support a 510(k) submission and
generally is required for a PMA application. Such trials generally require an
investigational device exemption application, or IDE, approved in advance by the
FDA for a specified number of patients and study sites, unless the product is
deemed an insignificant risk device eligible for more abbreviated IDE
requirements. The IDE must be supported by appropriate data, such as animal and
laboratory testing results. Clinical trials may begin if the FDA and the
appropriate institutional review boards at the clinical trial sites approve the
IDE. Trials must be conducted in conformance with FDA regulations and
institutional review board requirements. The sponsor or the FDA may suspend
these trials at any time if they are deemed to pose unacceptable health risks or
if the FDA finds deficiencies in the way they are being conducted. Data from
clinical trials are often subject to varying interpretations that could delay,
limit or prevent FDA approval.
Currently, our console, patient-side cart and all of our instruments have
not been approved by the FDA to be used in any particular surgical procedure. In
July 1997, we received 510(k) clearance
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from the FDA for the surgeon's console and patient cart to be used with only
rigid endoscopes, blunt dissectors, retractors and stabilizer instruments. In
November 1997, we withdrew a subsequent 510(k) submission covering additional
instruments necessary for performing most surgical procedures, including
scissors, scalpels, forceps/pickups, needle holders, clip appliers and
electrocautery, after the FDA indicated that substantial clinical data would be
required to support clearance.
In January 1999, we filed a 510(k) submission with clinical data, seeking
clearance for the da Vinci Surgical System and EndoWrist instruments for
laparoscopic surgical procedures. In May 1999, the FDA determined that our
products were not eligible for 510(k) clearance but would instead be required to
undergo the PMA approval process. On June 16, 1999, after review of the clinical
data on the use of our products in laparoscopic surgical procedures, the FDA's
General Surgery Advisory Panel recommended approval. In November 1999, we filed
a PMA application to commercialize our products for laparoscopic surgery which
was accepted for review by the FDA in December 1999. This PMA application is
currently subject to approval by the FDA. In March 2000, the FDA inspected our
Mountain View facility and the Good Manufacturing Practice issues raised during
the inspection have been resolved. In May 2000, we received a letter from the
FDA regarding a number of issues which need to be resolved prior to obtaining a
PMA approval. The primary issue involves a request by the FDA for a reanalysis
of the surgery times related to our clinical trials. We believe that we will
successfully resolve these issues. However, we cannot assure you that we will
successfully resolve these issues or obtain FDA approval for the use of our
products in laparoscopic or other surgical procedures on a timely basis or at
all. We anticipate that the FDA will require a new PMA approval or PMA
supplement approval for additional types of surgical procedures for which we
propose to market our products.
We presently have a thoracoscopic clinical study in progress. If completed,
this study may be the subject of a PMA application for permission to
commercialize our products for thoracoscopic procedures. In the next twelve
months, we anticipate submitting one or more investigational device exemption
applications requesting permission to conduct trials for mitral valve repair and
coronary artery bypass. We cannot assure you that the FDA will approve our
investigational device exemption applications or permit such trials to go
forward, or that such trials will produce clinical data adequate to support a
PMA application.
We are subject to inspection and market surveillance by the FDA to
determine compliance with regulatory requirements. If the FDA finds that we have
failed to comply, the agency can institute a wide variety of enforcement
actions, ranging from a public warning letter to more severe sanctions. The FDA
also has the authority to request repair, replacement or refund of the cost of
any medical device manufactured or distributed by us. Our failure to comply with
applicable requirements could lead to an enforcement action that may have an
adverse effect on our financial condition and results of operations.
California Regulation
The state of California requires that we obtain a license to manufacture
medical devices and subjects us to periodic inspection. Our facilities and
manufacturing processes were inspected in February 1998. We passed the
inspection and received our device manufacturing license from the Food and Drug
Branch of the California Department of Health Service in March 1998. The license
has remained in effect ever since.
Foreign Regulation
In order for us to market our products in other countries, we must obtain
regulatory approvals and comply with extensive safety and quality regulations in
other countries. These regulations, including the requirements for approvals or
clearance and the time required for regulatory review,
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vary from country to country. Failure to obtain regulatory approval in any
foreign country in which we plan to market our products may harm our ability to
generate revenue and harm our business.
Commercialization of medical devices in Europe is regulated by the European
Union. The European Union presently requires that all medical products bear the
CE mark, an international symbol of adherence to quality assurance standards and
demonstrated clinical effectiveness. Compliance with the Medical Device
Directive, as certified by a recognized European Competent Authority, permits
the manufacturer to affix the CE mark on its products. In January 1999,
following an audit of our quality system and Mountain View facility, we received
permission from the Danish Government, which was our European Competent
Authority, to affix the CE mark to our da Vinci Surgical System and EndoWrist
instruments for general surgical use, Class II-b. Additional CE approvals for
use of our da Vinci Surgical System and EndoWrist instruments in cardiac surgery
were received in September 1999 and February 2000, Class III.
If we modify existing products or develop new products in the future, we
will need to apply for permission to affix the CE mark to such products. In
addition, we will be subject to annual regulatory audits in order to maintain
the CE mark permissions we have already obtained. We cannot be certain that we
will be able to obtain permission to affix the CE mark for new or modified
products or that we will continue to meet the quality and safety standards
required to maintain the permissions we have already received. If we are unable
to maintain permission to affix the CE mark to our products, we will no longer
be able to sell our products in member countries of the European Union.
The Ministry of Health and Welfare regulates commercialization and
reimbursement of medical devices in Japan. We are currently in the process of
developing a clinical trial strategy for laparoscopic and cardiovascular use of
the da Vinci Surgical System and our EndoWrist instruments with our commercial
partner in Japan. However, we cannot assure you that we will succeed in
procuring the required approvals to market our products in Japan or elsewhere,
even if we develop a strategy and ultimately apply for these approvals.
THIRD-PARTY REIMBURSEMENT
In the United States and international markets where we intend to sell our
products, the government and health insurance companies together are responsible
for hospital and surgeon reimbursement for virtually all surgical procedures.
Governments and insurance companies generally reimburse hospitals and physicians
for surgery when the procedures are considered non-experimental and
non-cosmetic. In the United States, reimbursement for medical procedures under
the Medicare and Medicaid programs is governed by the Health Care Financing
Administration and, in the case of investigational devices, by the FDA.
Reimbursement, however, is only available if an appropriate Current Procedural
Terminology code exists for the procedure performed. If an appropriate Current
Procedural Terminology code does not exist, then an application requesting an
appropriate code can be made to the American Medical Association.
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 involved, the insurance plan involved, 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. This fixed amount is paid regardless of the
actual costs incurred by the hospital or physician in furnishing the care and is
unrelated to the specific devices used in that procedure. Thus, any
reimbursements that hospitals obtain for performing surgery with our products
will generally have to cover any additional costs that hospitals incur in
purchasing our products.
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At present, the da Vinci Surgical System is categorized as an "experimental
device" and thus does not qualify for Medicare reimbursement. In late 1999, the
FDA denied our formal request for reclassification of the da Vinci Surgical
System as an investigational, rather than an experimental, device. We presently
believe that unless and until the FDA approves our PMA application for a
particular indication, such as laparoscopic use, reimbursement through Medicare
will be unavailable in the United States for our products.
Domestic institutions will typically bill the services performed with our
products to various third-party payors, such as Medicare, Medicaid and other
government programs and private insurance plans. We believe that the procedures
we intend to target if and when we receive FDA approval are generally already
reimbursable by government agencies and insurance companies. Accordingly, we
believe 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 approved surgery using our products. If hospitals do
not obtain sufficient reimbursement from third-party payors for procedures
performed with our products, or if governmental and private payors' policies do
not permit reimbursement for surgical procedures performed using our products,
we may not be able to generate the revenues necessary to support our business.
In such circumstances, we may have to apply to the American Medical Association
for a unique Current Procedural Terminology code covering computer-enhanced
surgery. If an application for a unique code is required, reimbursement for any
use of our products may be unavailable until an appropriate code is granted. The
application process, from filing until adoption of a new code, can take two or
more years.
In countries outside the United States, reimbursement is obtained from
various sources, including governmental authorities, private health insurance
plans, and labor unions. In most foreign countries, private insurance systems
may also offer payments for some therapies. Although not as prevalent as in the
United States, health maintenance organizations are emerging in certain European
countries. To effectively conduct our business, we may need to seek
international reimbursement approvals, and we do not know if these required
approvals will be obtained in a timely manner or at all.
Any regulatory or legislative developments in domestic or foreign markets
that eliminate or reduce reimbursement rates for procedures performed with our
products could harm our ability to sell our products or cause downward pressure
on the prices of our products, either of which would affect our ability to
generate the revenues necessary to support our business.
EMPLOYEES
As of March 31, 2000, we had 116 employees, 33 of whom were engaged
directly in research and development, 43 in manufacturing and service and 40 in
marketing, sales, and administrative activities. None of our employees is
covered by a collective bargaining agreement, and we consider our relationship
with our employees to be good.
FACILITIES
We lease approximately 50,000 square feet in Mountain View, California. The
facility is leased through February 2002, and we have an option to extend the
lease for an additional three-year term. We believe that this facility will be
adequate to meet our needs through 2001.
LEGAL PROCEEDINGS
On May 10, 2000, Computer Motion, Inc. filed a lawsuit in United States
District Court for the Central District of California (Case No. CV00-4988 CBM)
alleging that by making, using, selling or offering for sale our da Vinci
Surgical System, we are infringing United States Patent Numbers 5,524,180,
5,878,193, 5,762,458, 6,001,108, 5,815,640, 5,907,664 and 5,855,583 in willful
disregard of
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Computer Motion's patent rights. These patents concern methods and devices for
conducting various aspects of robotic surgery.
On June 1, 2000, Computer Motion amended its lawsuit to allege that we also
infringe U.S. Patent Number 6,063,095. This patent concerns robotic surgical
systems with "filtered movement." Filtering can be used to reduce the effects of
hand tremor. We are aware of multiple publicly available references that
describe hand tremor filtering in telerobotic systems, including telerobotic
surgical systems, that predate Computer Motion's patent application for this
concept. We believe that Computer Motion did not cite these references to the
U.S. Patent and Trademark Office during the patent issuance process and
therefore, we believe that we have a meritorious defense with respect to this
claim for infringement.
The Computer Motion action seeks damages based upon the making, using,
selling and offering for sale of our products and processes, and seeks to enjoin
our continued activities relating to these products. This action subjects us to
potential liability for damages, including treble damages, and could require us
to cease making, using or selling the affected products, or to obtain a license
in order to continue to manufacture, use or sell the affected products. While we
believe we have meritorious defenses to this action, we cannot assure you that
we will prevail in this action, nor can we assure you that any license required
would be made available on commercially acceptable terms, if at all. Failure to
successfully defend ourselves against the Computer Motion action could harm our
business, financial condition and operating results. For further information on
the risks associated with this litigation see "Risk Factors -- We are involved
in intellectual property litigation with Computer Motion that may hurt our
competitive position, may be costly to us and may prevent us from selling our
products."
Beginning in May 1999, we requested that the U.S. Patent and Trademark
Office declare interferences between some of our exclusively licensed patent
applications and five of Computer Motion's U.S. patents. An interference is a
proceeding within the U.S. Patent and Trademark Office to resolve questions
regarding who was the first to invent the subject matter of a patent and/or a
patent application. All five of Computer Motion's patents were issued by the
U.S. Patent and Trademark Office without consideration of the
exclusively-licensed and earlier-filed patent applications on which we now rely
to request the interferences. All five of Computer Motion's patents subject to
our requests for interference are included in Computer Motion's May 2000 suit
for patent infringement.
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<PAGE> 53
MANAGEMENT
EXECUTIVE OFFICERS, SENIOR MANAGEMENT AND DIRECTORS
The following table presents information regarding our executive officers,
senior management and directors as of March 31, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS
Lonnie M. Smith.................... 55 President, Chief Executive Officer and Director
Susan K. Barnes.................... 46 Vice President, Finance, Chief Financial Officer
and Assistant Secretary
Frederic H. Moll, M.D.............. 48 Vice President, Medical Director and Director
Robert G. Younge................... 48 Vice President and Chief Technology Officer
SENIOR MANAGEMENT
Corinne Z. Augustine............... 42 Vice President, Manufacturing
Douglas M. Bruce................... 42 Vice President, Product Marketing
David Casal, Ph.D. ................ 45 Vice President, Clinical, Regulatory and Quality
Affairs
Gary S. Guthart, Ph.D. ............ 34 Vice President, Engineering
David M. Shaw...................... 33 Chief Patent Counsel
Thierry B. Thaure.................. 37 Vice President, Sales and Marketing
Alan C. Mendelson.................. 52 Secretary
DIRECTORS
Scott S. Halsted(1)................ 40 Director
Russell C. Hirsch, M.D., 37 Director
Ph.D.(2).........................
Richard J. Kramer(1)............... 57 Director
James A. Lawrence(1)............... 47 Director
Alan J. Levy, Ph.D.(2)............. 62 Director
</TABLE>
-------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Lonnie M. Smith has been our President and Chief Executive Officer since
May 1997 and has served as a member of our board of directors since December
1996. From 1977 until joining Intuitive Surgical, 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., from 1978 to 1982, and as
a 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 been our Vice President, Finance, Chief Financial
Officer and Assistant Secretary 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 BLUM Capital
Partners, L.P., formerly 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
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<PAGE> 54
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 Intuitive Surgical and has served
as Vice President, Medical Director and as a member of our board of directors
since our inception. In 1989, Dr. Moll co-founded Origin Medsystems, Inc., a
medical device company and served as Medical Director through 1995. Origin was
acquired by Eli Lilly & Company in 1992 and is now a wholly-owned subsidiary of
Tyco Health Care. 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 Intuitive Surgical and has served as
our Vice President and Chief Technology Officer since November 1999. From our
inception to November 1999, Mr. Younge served as our Vice President,
Engineering. Mr. Younge co-founded Acuson Corporation, a medical device company,
in 1979 and served as Vice President, Engineering and in various other
capacities until co-founding Intuitive Surgical. 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 a B.S.E.E.
and an M.S.E.E. from Stanford University.
Corinne Z. Augustine has been our Vice President, Manufacturing since
October 1999. Prior to joining Intuitive Surgical, from 1997 to October 1999,
Ms. Augustine served as a Vice President, Manufacturing with Acuson Corporation.
From 1994 to 1997, Ms. Augustine was a Director of Manufacturing with Acuson and
from 1991 to 1994, she held the position of a Manufacturing Project Manager at
Acuson. Ms. Augustine received a B.S.I.E. from the University of Florida and an
M.B.A. from Stanford University.
Douglas M. Bruce has been our Vice President, Product Marketing since
December 1997 and joined us as Director, Product Management in May 1997. Prior
to joining Intuitive Surgical, Mr. Bruce served as Vice President, Engineering
with Acuson Corporation from January 1997 to May 1997. Mr. Bruce served as
Acuson's Director of Engineering from August 1994 to December 1995 and held
Engineering Manager positions with Acuson from October 1987 to August 1994. Mr.
Bruce received a B.S. in Mechanical Engineering from the University of
California, Berkeley, and an M.S. in Mechanical Engineering from Santa Clara
University.
David Casal, Ph.D. has been our Vice President, Clinical, Regulatory, and
Quality Affairs since September 1999. From 1996 until joining Intuitive
Surgical, Mr. Casal was with Metra Biosystems, Inc., a medical technology
company, serving as Vice President of Clinical, Regulatory, and Quality Affairs.
From 1989 through 1996, Mr. Casal held many positions with Adeza Biomedical,
Inc., a biotechnology company, with the last being Vice President of Clinical
and Regulatory Affairs. Mr. Casal has also held positions with Hybritech, Inc.
and Progenex, Inc., medical technology companies. Mr. Casal received his B.A in
American History, M.S. in Physiology, and Ph.D. in Cardiovascular Epidemiology,
from the University of Minnesota, and was a National Institute of Health
Post-Doctoral Research Fellow in the School of Medicine at the University of
California, San Diego.
Gary S. Guthart, Ph.D. has been our Vice President, Engineering since
November 1999. He joined Intuitive Surgical in April 1996. From August 1992 to
April 1996, as Senior Research Engineer, Mr. Guthart was part of the core team
developing foundation technology for computer enhanced surgery at SRI
International. Mr. Guthart received a B.S. in Engineering from the
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<PAGE> 55
University of California, Berkeley and an M.S. and Ph.D. in Engineering Science
from the California Institute of Technology.
David M. Shaw has been our Chief Patent Counsel since April 1999. From
March 1998 to April 1999, Mr. Shaw was Director of Intellectual Property at
EndoVasix, Inc., a medical device company. From 1992 to 1994, he clerked on the
United States Court of Appeals for the Federal Circuit for the Honorable R.C.
Clevenger, III, and from 1994 to 1998 was an associate with the law firm of Fish
& Richardson P.C. Mr. Shaw received a B.S. in Chemical Engineering from North
Carolina State University and a J.D. from Duke University School of Law.
Thierry B. Thaure has been our Vice President, Sales and Marketing since
May 1997. From January 1993 to April 1997, Mr. Thaure served as Director of
International Sales and Marketing for Guidant Corporation's Minimally Invasive
System Group. From July 1990 to December 1992, Mr. Thaure held various positions
in Marketing and Business Development at Advanced Cardiovascular Systems, Inc.,
which at that time was a wholly-owned subsidiary of Eli Lilly Inc. He received a
B.S. in Biomedical Engineering and a B.A. in Chemistry from Duke University, and
an M.B.A. from the Kellogg Graduate School of Business at Northwestern
University.
Alan C. Mendelson has been our Secretary since our inception and has been a
senior partner of Latham & Watkins since May 2000. From 1973 to May 2000, Mr.
Mendelson was associated with Cooley Godward LLP, most recently as a senior
partner where he held various management positions within the firm. Mr.
Mendelson served as Managing Partner of Cooley Godward's Palo Alto office from
May 1990 to March 1995 and November 1996 to September 1997. He served as
Secretary and Acting General Counsel of Amgen, Inc. from April 1990 to April
1991 and as Acting General Counsel of Cadence Design Systems, Inc. from November
1995 to June 1996. Mr. Mendelson serves as the secretary of a number of private
and public companies and is a member of the board of directors of Aviron, Axys
Pharmaceuticals, Inc., Isis Pharmaceuticals, Inc. and US Search.com, Inc. Mr.
Mendelson received a A.B. in Political Science from the University of
California, Berkeley and a J.D. from Harvard Law School.
Scott S. Halsted has been a member of our board of directors since March
1997. Mr. Halsted joined Morgan Stanley in 1987, and has been a general partner
at Morgan Stanley Dean Witter Venture Partners since 1997. Mr. Halsted currently
serves as a director of several private healthcare companies. Mr. Halsted
received A.B. and B.E. degrees in Biomechanical Engineering from Dartmouth
College and an M.M. degree from Northwestern University.
Russell C. Hirsch, M.D., Ph.D. has been a member of our board of directors
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 on the
board of directors of Valentis, Inc., a biotechnology company. 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.
Richard J. Kramer has been a member of our board of directors since
February 2000. From 1989 to 1999, he served as the President and Chief Executive
Officer of Catholic Healthcare West, a multi-state health care provider. From
1982 to 1989, Mr. Kramer was Executive Vice President of Allina Health, an
integrated health care system. Mr. Kramer received a B.S. in Rehabilitation
Education from Pennsylvania State University, an M.S. in Rehabilitation
Counseling from Syracuse University and an M.S. in Hospital & Health Care
Administration from the University of Minnesota.
James A. Lawrence has been a member of our board of directors since March
2000. He has been Executive Vice President and Chief Financial Officer of
General Mills, Inc. since 1998. Mr. Lawrence has also held positions as
Executive Vice President and Chief Financial Officer for Northwest Airlines, and
President and Chief Executive Office of Pepsi-Cola Asia, Middle East, Africa. He
has also chaired and co-founded LEK Partnership, a corporate strategy and
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<PAGE> 56
merger/acquisition consulting firm headquartered in London, England. Mr.
Lawrence currently serves as a director of TransTechnology Corporation and
Avnet, Inc. Mr. Lawrence holds a B.A. in Economics from Yale University and an
M.B.A. from Harvard Business School.
Alan J. Levy, Ph.D. has been a member of our board of directors since
February 2000. He has been the President, Chief Executive Officer and member of
the board of directors of Vertis Neuroscience, Inc., a biotechnology company,
since 1999. From 1993 to 1998, Mr. Levy was the President, Chief Executive
Officer and a member of the board of directors of Heartstream, Inc., a medical
device company. From 1989 to 1993, Mr. Levy was the President, Chief Operating
Officer and a member of the board of directors of Heart Technology, Inc., a
medical device company. From 1966 to 1989, Mr. Levy held various positions at
Ethicon, a subsidiary of Johnson & Johnson Company, and was a member of the
board of directors of Ethicon from 1980 to 1989. Mr. Levy received a B.S. in
Chemistry from City College of New York, and a Ph.D. in Organic Chemistry from
Purdue University.
BOARD COMMITTEES
Audit committee. Our audit committee currently consists of Messrs. Halsted,
Kramer and Lawrence. The audit committee reviews our internal accounting
procedures and consults with and reviews the services provided by our
independent accountants.
Compensation committee. Our compensation committee currently consists of
Dr. Hirsch and Mr. Levy. The compensation committee administers our stock option
plans, reviews and approves the compensation and benefits of all our officers
and establishes and reviews general policies relating to compensation and
benefits of our employees.
DIRECTOR COMPENSATION
Directors currently receive no cash compensation from us for their services
as members of the board or for attendance at committee meetings. Directors may
be reimbursed for expenses in connection with attendance at board of directors
and committee meetings.
In consideration for attending our board and committee meetings, in
February 2000 we granted each of Messrs. Kramer and Levy, and in March 2000 we
granted Mr. Lawrence, options to purchase 20,000 shares of our common stock at
$3.00 per share. In April 2000, we authorized the granting of an option to
purchase 20,000 shares of our common stock to each of Mr. Halsted and Dr.
Hirsch, which are contingent upon, and will be effective concurrently with, the
signing of the underwriting agreement relating to this offering and which will
have an exercise price equal to the initial public offering price to the public.
These options vest in 48 equal monthly installments.
In March 2000, we adopted the 2000 Non-Employee Directors' Stock Option
Plan to provide for the automatic grant of options to purchase shares of common
stock to our non-employee directors who are not employees of Intuitive Surgical
or any affiliate of Intuitive Surgical. Any non-employee director elected after
the closing of this offering will receive an initial option to purchase 20,000
shares of common stock. Starting at the annual stockholder meeting in 2001, all
non-employee directors will receive an annual option to purchase 5,000 shares of
common stock. See "-- Employee Benefit Plans -- 2000 Non-Employee Directors'
Stock Option Plan" for a more detailed explanation of the terms of these stock
options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee.
Investment entities affiliated with Dr. Hirsch have purchased
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shares of our preferred stock. See "Related Party Transactions" for a detailed
explanation of these transactions.
BOARD COMPOSITION
We currently have seven directors. Upon the closing of this offering the
terms of office of the board of directors will be divided into three classes. As
a result, a portion of our board of directors will be elected each year. The
division of the three classes, the initial directors and their respective
election dates are as follows:
- the class I directors will be Messrs. Halsted and Levy and their term
will expire at the annual meeting of stockholders to be held in 2001;
- the class II directors will be Drs. Hirsch and Moll and Mr. Lawrence and
their term will expire at the annual meeting of stockholders to be held
in 2002; and
- the class III directors will be Messrs. Kramer and Smith and their term
will expire at the annual meeting of stockholders to be held in 2003.
At each annual meeting of stockholders after the initial classification,
the successors to directors whose terms will then expire will be elected to
serve from the time of election and qualification until the third annual meeting
following election. In addition, the authorized number of directors may be
changed only by resolution of the board of directors. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. This classification of the board of
directors may have the effect of delaying or preventing changes in control or
management of Intuitive Surgical.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation paid to our chief executive officer and other executive officers
for services during the year ended December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL NUMBER OF
COMPENSATION SECURITIES
----------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
--------------------------- -------- ----- ------------
<S> <C> <C> <C>
Lonnie M. Smith........................................ $300,000 -- --
President and Chief Executive Officer
Susan K. Barnes........................................ $191,643 -- 20,000
Vice President, Finance, Chief Financial Officer and
Assistant Secretary
Frederic H. Moll, M.D. ................................ $196,643 -- --
Vice President and Medical Director
Robert G. Younge....................................... $194,965 -- --
Vice President and Chief Technology Officer
</TABLE>
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OPTION GRANTS IN FISCAL YEAR 1999
The following table sets forth each grant of stock options during the
fiscal year ended December 31, 1999, to each of the individuals listed on the
previous table.
The exercise price of each option was equal to the fair value of our common
stock as valued by the board of directors on the date of grant. The exercise
price may be paid in cash, in shares of our common stock valued at fair value on
the exercise date or through a cashless exercise procedure involving a same-day
sale of the purchased shares.
The potential realizable value is calculated based on the ten-year term of
the option at the time of grant. Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange Commission
and does not represent our prediction of our stock price performance. The
potential realizable values at 5% and 10% appreciation are calculated by:
- multiplying the number of shares of common stock subject to a given
option by the initial public offering price of $9.00 per share;
- assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table until the
expiration of the options; and
- subtracting from that result the aggregate option exercise price.
The shares listed in the following table under "Number of Securities
Underlying Options Granted" are subject to vesting. Upon completion of six
months of service from the vesting start date, 12.5% of the option shares vest
and the balance vest in a series of equal monthly installments over the next 42
months of service. The option has a ten-year term, subject to earlier
termination if the optionee's service with us ceases. See "Employee Benefit
Plans" for a description of the material terms of this option.
Percentages shown under "Percent of Total Options Granted to Employees in
Fiscal Year 1999" are based on an aggregate of 628,550 options granted to
employees of Intuitive Surgical under our stock option plans during the fiscal
year ended December 31, 1999.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
----------------------------------------------------- STOCK PRICE
NUMBER OF PERCENT OF TOTAL APPRECIATION FOR
SECURITIES OPTIONS GRANTED TO OPTION TERM
UNDERLYING EMPLOYEES IN EXERCISE PRICE EXPIRATION ---------------------
NAME OPTIONS GRANTED FISCAL YEAR 1999 PER SHARE DATE 5% 10%
---- --------------- ------------------ -------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Lonnie M. Smith......... -- -- -- -- -- --
Susan K. Barnes......... 20,000 3.2% $3.00 08/05/09 $233,201 $406,874
Frederic H. Moll,
M.D................... -- -- -- -- -- --
Robert G. Younge........ -- -- -- -- -- --
</TABLE>
FISCAL YEAR-END OPTION VALUES
The following table sets forth the number and value of securities
underlying unexercised options that are held by each of the individuals listed
in the Summary Compensation Table as of December 31, 1999. No shares were
acquired on the exercise of stock options by these individuals during the year
ended December 31, 1999.
Amounts shown under the column "Value of Unexercised In-the-Money Options
at December 31, 1999" are based on the initial public offering price of $9.00,
without taking into account any taxes that may be payable in connection with the
transaction, multiplied by the number
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<PAGE> 59
of shares underlying the option, less the exercise price payable for these
shares. Our stock option plans allow for the early exercise of options granted
to employees. All options exercised early are subject to repurchase by us at the
original exercise price, upon the optionee's cessation of service prior to the
vesting of the shares.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Lonnie M. Smith..................... -- -- -- --
Susan K. Barnes..................... 20,000 0 $ 120,000 0
Frederic H. Moll, M.D. ............. -- -- -- --
Robert G. Younge.................... 300,000 0 $2,550,000 0
</TABLE>
EMPLOYMENT ARRANGEMENTS
In February 1997, we entered into an agreement with Lonnie M. Smith, our
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. Cause
as defined in the agreement includes conviction for any felony, participation in
a fraud or act of dishonesty against us, willful breach of our policies, or a
material breach by Mr. Smith of his employment agreement or of his proprietary
information and inventions agreement.
EMPLOYEE BENEFIT PLANS
2000 Equity Incentive Plan
We adopted the equity incentive plan in March 2000. The incentive plan is
an amendment and restatement of the equity incentive plan we adopted in 1996.
Share Reserve. We have reserved 10,000,000 shares for issuance under the
incentive plan. For 10 years starting with the year 2001, on the day after each
annual meeting of our stockholders, the number of shares in this reserve will
automatically increase by the greater of:
- 5% of the outstanding common stock on a fully-diluted basis, or
- the number of shares of common stock subject to awards granted under the
incentive plan during the previous twelve months.
No more than 20 million shares of the increase to the share reserve over
the 10-year period may be used for incentive stock options under the incentive
plan. If stock awards granted under the incentive plan expire or otherwise
terminate without being exercised, the shares not acquired pursuant to the stock
awards again become available for issuance under the incentive plan.
Effect of an Acquisition or Merger. If we dissolve or liquidate, then
outstanding stock awards will terminate immediately prior to the event. If we
sell, lease or dispose of all, or substantially all, of our assets, or are
acquired pursuant to a merger or consolidation, the surviving entity may either
assume or substitute all outstanding awards under the incentive plan. If it
declines to do so, then generally the vesting and exercisability of the stock
awards will accelerate.
Options Issued. As of March 31, 2000, we had issued 2,534,778 shares upon
the exercise of options under the incentive plan, 313,430 shares of which have
been repurchased and 488,115 shares of which are subject to repurchase; options
to purchase 1,810,750 shares were outstanding; and 5,494,472 shares, remained
available for future grant. As of March 31, 2000, the board has granted
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160,000 restricted stock awards under the incentive plan, no shares of which
have been repurchased. The incentive plan will terminate in 2010 unless the
board terminates it sooner.
2000 Non-Employee Directors' Stock Option Plan
We adopted the non-employee directors' stock option plan in March 2000.
Share Reserve. We have reserved 300,000 shares of our common stock for
issuance pursuant to the non-employee directors' stock option plan. On January 1
of each year for 10 years, starting with the year 2001, the number of shares in
the reserve will automatically increase by the greater of:
- 0.3% of the outstanding shares of common stock on a fully-diluted basis
or
- the number of shares subject to options granted under the plan during the
prior 12-month period.
Under the non-employee directors' stock option plan, each new non-employee
director who is subsequently elected or appointed for the first time after this
offering will automatically be granted an option to purchase 20,000 shares of
common stock. This is the non-employee director's initial grant.
On the day following each annual meeting of our stockholders, beginning in
the year 2001, each non-employee director who has been a non-employee director
for at least six months will be granted an option to purchase 5,000 shares of
common stock. This is the non-employee director's annual grant.
Options granted under the non-employee directors' stock option plan are
granted at 100% of the fair market value of the common stock on the date of
grant and may be exercised immediately. Options granted under the non-employee
directors' stock option plan have a ten-year term and vest as follows: initial
grants vest monthly at a rate of 1/36 of the shares each month for 36 months
after the date of the grant; annual grants vest as to 1/12 of the shares each
month for 12 months after the date of the grant. The non-employee directors'
stock option plan will terminate if and when terminated by the board of
directors.
Effect of an Acquisition or Merger. If we sell, lease or dispose of all, or
substantially all of our assets, or are acquired pursuant to a merger or
acquisition then all outstanding options under the non-employee directors' stock
option plan may be assumed by the surviving entity or the surviving entity may
substitute similar options for such outstanding options. If the surviving entity
determines not to assume such outstanding options or substitute similar options,
then generally the vesting of the options shall accelerate and options not
exercised prior to the transaction will be terminated. However, if an option is
assumed or replaced but the optionholder is not elected to the board of
directors of the acquiring or surviving corporation at the first meeting of the
board after the event, then the vesting of that option will accelerate by 18
months.
Options Issued. The directors' plan will not be effective until the date of
the initial public offering of our common stock. Therefore, we have not issued
any options under the directors' plan.
2000 Employee Stock Purchase Plan
We adopted the employee stock purchase plan in March 2000. The purchase
plan has no set termination date. It will terminate when all of the shares
reserved under it have been issued unless the board terminates it earlier.
Share Reserve. We have reserved 1,000,000 shares of our common stock
pursuant to purchase rights to be granted to eligible employees under the
purchase plan. For 10 years, beginning in 2001,
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on the day after each annual meeting of stockholders the number of shares in the
reserve will automatically be increased by the greater of:
- 0.5% of our outstanding shares of common stock on a fully-diluted basis,
or
- that number of shares issued under the plan during the prior 12-month
period.
The automatic share reserve increase in the aggregate may not exceed
10,000,000 shares over the 10-year period.
Eligibility. The purchase plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code.
The purchase plan provides a means by which employees may purchase our common
stock through payroll deductions. We implement this purchase plan by offerings
of purchase rights to eligible employees. Generally, all employees of Intuitive
Surgical and any United States affiliate may participate in the purchase plan,
excluding part-time and seasonal employees. However, no employee may participate
in the purchase plan if immediately after we grant the employee a purchase
right, the employee has voting power over 5% or more of our outstanding capital
stock. As of the date of this prospectus, no shares of common stock have been
purchased under the purchase plan.
Offerings. Under the purchase plan, the board may specify offerings of up
to 27 months. The first offering will begin on the effective date of this
initial public offering. Unless the board otherwise determines, our common stock
is purchased for accounts of participating employees at a price per share equal
to the lower of:
- 85% of the fair market value of a share on the first day of the offering,
or
- 85% of the fair market value of a share on the purchase date.
The board may provide that employees who become eligible to participate
after the offering period begins nevertheless may enroll in the offering. These
employees will purchase our stock at the lower of:
- 85% of the fair market value of a share on the day they began
participating in the purchase plan, or
- 85% of the fair market value of a share on the purchase date.
Under the current offering, employees may authorize payroll deductions of
up to 15% of their total compensation, including sales commissions and bonuses,
for the purchase of stock under the purchase plan and may end their
participation in the offering at any time up to 10 days before a purchase date.
Participation ends automatically on termination of employment with Intuitive
Surgical or its affiliate.
Other Provisions. The board may grant eligible employees purchase rights
under the purchase plan only if the purchase rights together with any other
purchase rights granted under other employee stock purchase plans established by
Intuitive Surgical or its affiliate, if any, do not permit the employee's rights
to purchase our stock to accrue at a rate that exceeds $25,000 of the fair
market value of our stock for each calendar year in which the purchase rights
are outstanding. The board also may limit the number of shares that an employee
may purchase on any purchase date.
Effect of an Acquisition or Merger. If we sell, lease or dispose of all, or
substantially all, of our assets, or are acquired pursuant to a merger or
acquisition then, the board may provide that the successor corporation will
assume or substitute outstanding purchase rights. Alternatively, the board may
shorten the offering and provide that shares will be purchased for participants
immediately before the transaction.
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<PAGE> 62
401(k) Plan
We maintain a 401(k) Plan for eligible employees. An employee participant
may contribute up to 15% of his or her total annual compensation to the 401(k)
Plan, up to a legal annual limit. The annual limit for calendar year 2000 is
$10,500. Each participant is fully vested in his or her deferred salary
contributions. Participant contributions are held and invested by the 401(k)
Plan's trustee. We may make discretionary contributions as a percentage of
participant contributions, subject to established limits. To date, we have made
no contributions to the 401(k) Plan on behalf of the participants. The 401(k)
Plan is intended to qualify under Section 401 of the Internal Revenue Code, so
that contributions by employees or by Intuitive Surgical to the 401(k) Plan, and
income earned on the 401(k) Plan contributions, are not taxable to employees
until withdrawn from the 401(k) Plan, and so that contributions by Intuitive
Surgical, if any, will be deductible when made.
Limitation of Liability and Indemnification
Our certificate of incorporation and bylaws provide for the indemnification
of our directors from personal liability to the fullest extent not prohibited by
Delaware law. Delaware law permits us to eliminate a director's personal
liability for monetary damages resulting from a breach of fiduciary duty, except
in circumstances involving wrongful acts, including:
- for any breach of the director's duty of loyalty to Intuitive Surgical or
our stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- for any acts under Section 174 of the Delaware General Corporation Law;
or
- for any transaction from which the director derives an improper personal
benefit.
Delaware law does not limit or eliminate our rights or any stockholder's
rights to seek non-monetary relief including an injunction or rescission, in the
event of a breach of a director's fiduciary duty. Delaware law does not alter a
director's liability under federal securities laws. In addition, we intend to
enter into separate indemnification agreements with our directors and officers
that provide each of them indemnification protection in the event our
certificate of incorporation and bylaws are subsequently amended. We believe
that these provisions and agreements will assist us in attracting and retaining
qualified individuals to serve as directors and officers.
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<PAGE> 63
RELATED PARTY TRANSACTIONS
The following executive officers, directors and holders of more than five
percent of our securities purchased securities in the amounts and as of the
dates shown below.
<TABLE>
<CAPTION>
SHARES OF CONVERTIBLE PREFERRED STOCK
-------------------------------------------------------------------------
COMMON STOCK SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F(1)
-------------- ------------ -------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Frederic H. Moll, M.D. ............ 1,050,000 150,000 -- -- -- -- --
Lonnie M. Smith.................... 700,000 -- -- -- -- -- --
Robert G. Younge................... 1,100,000 100,000 -- -- -- -- --
Russell C. Hirsch, M.D., Ph.D. .... -- -- -- -- -- 6,250 6,250
ENTITIES AFFILIATED WITH DIRECTORS
Mayfield Fund(2)................... 150,000 2,700,000 -- 960,000 355,400 125,000 125,000
Morgan Stanley Dean Witter Venture
Partners(3)...................... -- -- -- 1,500,000 -- 125,000 125,000
OTHER 5% STOCKHOLDERS
Sierra Ventures V, L.P. ........... -- 2,300,000 -- 600,000 125,000 125,000 --
Investor (Guernsey) Limited........ -- -- -- -- -- 1,250,000 1,250,000
PaTMarK Company, Inc. ............. -- -- -- 1,000,000 37,500 1,250,000 --
Allan G. Lozier.................... -- -- -- 1,200,000 116,000 312,500 312,500
Price per Share.................... $0.001 - $0.05 $1.00 $0.10 $5.00 $8.00 $8.00 $9.84
Date(s) of Purchase................ 11/95 - 1/97 12/95 - 1/96 1/96 1/97 - 3/97 11/97 7/98 - 5/99 3/00
</TABLE>
------------------------
(1) Based on an initial public offering price of $9.00 per share, each share of
Series F preferred stock will convert upon the closing of this offering into
approximately 1.0134 shares of common stock.
(2) Russell C. Hirsch, M.D., Ph.D., one of our directors, is a general partner
of Mayfield Fund.
(3) Scott S. Halsted, one of our directors, is a general partner of Morgan
Stanley Dean Witter Venture Partners.
We have entered into the following agreements with our executive officers,
directors, and holders of more than five percent of our voting securities.
Investor Rights Agreement. Intuitive Surgical and the preferred
stockholders described above have entered into an agreement pursuant to which
these and other preferred stockholders will have registration rights with
respect to their shares of common stock following this offering. Upon the
completion of this offering, all shares of our outstanding preferred stock will
be automatically converted into an equal number of shares of common stock. For
further information on these registration rights, see "Description of Capital
Stock -- Registration Rights of Stockholders."
Stock Options. We have granted Messrs. Kramer, Lawrence and Levy options to
purchase common stock in connection with their services as our directors. We
have authorized the granting of options to purchase common stock to Mr. Halsted
and Dr. Hirsch in connection with their services as our directors. See
"Management -- Director Compensation" for a description of these stock option
grants.
Executive Employment Agreement. We have entered into an employment
agreement with Lonnie M. Smith, our President and Chief Executive Officer. See
"Management -- Employment Arrangements" for a description of this agreement.
We believe that all of the transactions set forth above were made on terms
no less favorable to Intuitive Surgical than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
Intuitive Surgical and our officers, directors, principal stockholders and their
affiliates will be approved by a majority of the board of directors, including a
majority of the independent and disinterested directors, and will continue to be
on terms no less favorable to Intuitive Surgical than could be obtained from
unaffiliated third parties.
Indemnification Agreements. We intend to enter into indemnification
agreements with our directors and officers for the indemnification of and
advancement of expenses to these persons to the full extent permitted by law. We
also intend to execute such agreements with our future directors and officers.
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<PAGE> 64
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 31, 2000, and as adjusted to reflect
the sale of our common stock offered by this prospectus, by:
- each person, or group of affiliated persons, who is known by us to own
beneficially 5% or more of our common stock;
- each of the individuals listed on the "Summary Compensation Table" above;
- each of our directors; and
- all current directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of March 31, 2000 are deemed
outstanding. These shares, however, are not deemed outstanding for the purposes
of computing the percentage ownership of each other person.
Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, each stockholder named in the table has sole
voting and investment power with respect to the shares shown as beneficially
owned by them. Percentage of ownership is based on 29,477,297 shares of common
stock outstanding on March 31, 2000 and 34,477,297 shares of common stock
outstanding after completion of this offering. This table assumes no exercise of
the underwriters' over-allotment option. Unless otherwise indicated in the
footnotes, the address of each of the individuals and entities named below is:
c/o Intuitive Surgical, Inc., 1340 W. Middlefield Road, Mountain View, CA 94043.
<TABLE>
<CAPTION>
SHARES OF SHARES SUBJECT TO SHARES ISSUABLE PERCENT OF
COMMON A RIGHT OF PURSUANT TO OPTIONS OUTSTANDING SHARES
STOCK REPURCHASE EXERCISABLE WITHIN ----------------------
BENEFICIALLY WITHIN 60 DAYS OF 60 DAYS OF BEFORE THE AFTER THE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) MARCH 31, 2000(2) MARCH 31, 2000 OFFERING OFFERING
------------------------------------ ------------ ----------------- ------------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS
Entities affiliated with Mayfield
Fund(3)............................. 4,523,526 -- -- 15.3% 13.1%
Sierra Ventures V, L.P.(4)............ 3,150,000 -- -- 10.7 9.1
Investor (Guernsey) Limited(5)........ 2,516,713 -- -- 8.5 7.3
PatMarK Company, Inc.(6).............. 2,287,500 -- -- 7.8 6.6
Allan G. Lozier(7).................... 1,945,178 -- -- 6.6 5.6
Entities affiliated with Morgan
Stanley
Dean Witter Venture Partners(8)..... 1,751,700 -- -- 5.9 5.1
DIRECTORS AND EXECUTIVE OFFICERS
Russell C. Hirsch, M.D., Ph.D.(9)..... 4,536,108 -- -- 15.4 13.2
Scott S. Halsted(8)................... 1,751,700 -- -- 5.9 5.1
Frederic H. Moll, M.D. ............... 1,500,000 180,000 -- 5.1 4.4
Robert G. Younge(10).................. 1,298,000 110,000 300,000 4.4 3.7
Lonnie M. Smith(11)................... 1,000,000 296,667 -- 3.4 2.9
Susan K. Barnes....................... 225,000 50,000 25,000 * *
Richard J. Kramer..................... 20,000 -- 20,000 * *
James A. Lawrence..................... 20,000 -- 20,000 * *
Alan J. Levy, Ph.D. .................. 20,000 -- 20,000 * *
All directors and executive officers
as a group (9 persons).............. 10,370,808 636,667 385,000 34.7% 29.7%
</TABLE>
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<PAGE> 65
-------------------------
* Less than 1%
(1) Includes shares of common stock subject to a right of repurchase within 60
days of March 31, 2000 and shares issuable pursuant to options exercisable
within 60 days of March 31, 2000.
(2) The unvested portion of the shares of common stock is subject to a right of
repurchase, at the original option exercise price, in the event the holder
ceases to provide services to Intuitive Surgical. The option exercise
prices range from $0.001 to $0.50.
(3) Represents (a) 4,196,217 shares held by Mayfield VIII, (b) 220,853 shares
held by Mayfield Associates Fund II, and (c) 106,456 shares held by OR
Trust. Dr. Hirsch, a director of Intuitive Surgical, is a managing member
of the general partner of Mayfield VIII. Dr. Hirsch disclaims beneficial
ownership of shares held by such entities except to the extent of his
proportionate partnership interest therein. Mayfield Fund is located at
2800 Sand Hill Road, Suite 250, Menlo Park, California 94025.
(4) Sierra Ventures V, L.P. is located at 3000 Sand Hill Road, Building 4,
Suite 210, Menlo Park, California 94025.
(5) Investor (Guernsey) Limited is located at PO Box 626, National Westminster
House, Le Tuchot St. Peter Port, Guernsey Channel Islands, GY 1 4PW.
(6) PaTMarK is located at 700 State Route, 46 East, Batesville, IN 47006.
(7) Mr. Lozier's address is c/o Lozier Corporation, 6226 Pershing Drive, Omaha,
Nebraska 67810.
(8) Represents 1,598,224 shares held by Morgan Stanley Venture Partners III,
L.P. and 153,476 shares held by Morgan Stanley Venture Investors III, L.P.
Mr. Halsted, a director of Intuitive Surgical, 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. Morgan Stanley Dean Witter
Ventures Partners is located at 3000 Sand Hill Road, Building 4, Suite 210,
Menlo Park, California 94025.
(9) Includes (a) 4,196,217 shares held by Mayfield VIII, (b) 220,853 shares
held by Mayfield Associates Fund II, and (c) 106,456 shares held by OR
Trust. Dr. Hirsch, a director of Intuitive Surgical, is a managing member
of the general partner of Mayfield VIII. Dr. Hirsch disclaims beneficial
ownership of shares held by such entities except to the extent of his
proportionate partnership interest therein.
(10) 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. Mr. Younge disclaims beneficial ownership of the shares
held for the benefit of Ellen Sotos McCoy and Eric Roy Younge.
(11) Includes 200,000 shares held by McKRAM Investors, L.P. 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.
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<PAGE> 66
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will
consist of 200 million shares of common stock, $0.001 par value, and five
million shares of preferred stock, $0.001 par value.
COMMON STOCK
As of March 31, 2000, there were 29,477,297 shares of common stock
outstanding that were held of record by approximately 213 stockholders after
giving effect to the conversion of our preferred stock into common stock at a
one-to-one ratio, except for our Series F preferred stock. Based on an initial
public offering price of $9.00 per share, each share of Series F preferred stock
will convert upon the closing of this offering into approximately 1.0134 shares
of common stock. There will be 34,477,297 shares of common stock outstanding,
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options and warrants, after giving effect to the sale of the
shares of common stock offered by this prospectus.
The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of our stockholders. 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 ratably any dividends
out of assets legally available therefor as our board of directors may from time
to time determine. Upon liquidation, dissolution or winding up of Intuitive
Surgical, holders of our common stock are entitled to share ratably in 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 or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable.
PREFERRED STOCK
Our certificate of incorporation provides that our board of directors will
have the authority, without further action by the stockholders, to issue up to
five million shares of preferred stock in one or more series. The board will be
able to fix the rights, preferences, privileges and restrictions of the
preferred stock, 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 this series. The
issuance of preferred stock could adversely affect the voting power of holders
of common stock, and the likelihood that holders of preferred stock will receive
dividend payments and payments upon liquidation may have the effect of delaying,
deferring or preventing a change in control of Intuitive Surgical, which could
depress the market price of our common stock. We have no present plan to issue
any shares of preferred stock.
WARRANTS
As of March 31, 2000, a warrant to purchase 11,000 shares of common stock
was outstanding at an exercise price of $5.00 per share. This warrant expires on
April 15, 2003. In April 2000, we issued a warrant to purchase 200,000 shares of
common stock at an exercise price of $3.00 per share. This warrant expires in
May 2005.
REGISTRATION RIGHTS OF STOCKHOLDERS
Upon completion of this offering, the holders of 22,812,117 shares of our
common stock and a warrant to purchase 200,000 shares of our common stock, or
their transferees, will be entitled to rights to register these shares under the
Securities Act of 1933. If we propose to register any of our securities under
the Securities Act, either for our own account or for the account of other
security holders, the holders of these shares will be entitled to notice of the
registration and will be entitled to
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<PAGE> 67
include, at our expense, their shares of common stock. In addition, the holders
of these shares may require us, at our expense and on not more than two
occasions at any time beginning approximately six months from the date of the
closing of this offering, to file a registration statement under the Securities
Act with respect to their shares of common stock, and we will be required to use
our best efforts to effect the registration. Further, the holders may require us
at our expense to register their shares on Form S-3 when this form becomes
available. These rights shall terminate on the earlier of five years after the
effective date of this offering, or when a holder is able to sell all its shares
pursuant to Rule 144 under the Securities Act in any 90-day period.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND CHARTER PROVISIONS
We are subject to Section 203 of the Delaware General Corporation Law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder unless:
- prior to the 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;
- upon consummation of the transaction that resulted in the stockholder's
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 those shares owned by persons who
are directors and also officers, and 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
- on or subsequent to the 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:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
- subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; or
- 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 the entity or person.
Our bylaws provide that candidates for director may be nominated only by
the board of directors or by a stockholder who gives written notice to us no
later than 90 days prior nor earlier than 120 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 the board. The board
currently consists of seven members divided into three different classes. As a
result, only one class of directors will be elected at each annual meeting of
stockholders of Intuitive Surgical, with the other
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<PAGE> 68
classes continuing for the remainder of their respective terms. Between
stockholder meetings, the board may appoint new directors to fill vacancies or
newly created directorships.
Our certificate of incorporation requires that upon completion of the
offering, any action required or permitted to be taken by our stockholders must
be effected at a duly called annual or special meeting of stockholders and may
not be effected by a consent in writing. Our certificate of incorporation also
provides that the authorized number of directors may be changed only by
resolution of the board of directors. Delaware law and these charter provisions
may have the effect of deterring hostile takeovers or delaying changes in
control or our management, which could depress the market price of our common
stock.
SECTION 2115 OF THE CALIFORNIA CORPORATIONS CODE
We are currently subject to Section 2115 of the California Corporations
Code. Section 2115 provides that, regardless of a company's legal domicile,
provisions of California corporate law including those relating to shareholder
rights, election and removal of directors and distributions to shareholders will
apply to that company if the company meets the requirements of Section 2115. We
will not be subject to Section 2115 if:
- we are qualified for trading as a national market security on the Nasdaq
National Market, and we have at least 800 stockholders of record as of
the record date of our most recent annual meeting, or
- during any income year less than 50% of our outstanding voting securities
are held of record by persons having addresses in California.
Our certificate of incorporation includes a provision requiring cumulative
voting for directors whenever Section 2115 of the California Corporations Code
applies to us. Under cumulative voting, a minority stockholder holding a
sufficient percentage of a class of shares may be able to ensure the election of
one or more directors.
TRANSFER AGENT
The transfer agent and registrar for our common stock is American
Securities Transfer & Trust. Its phone number is (800) 962-4284.
NATIONAL MARKET LISTING
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "ISRG."
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<PAGE> 69
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market could adversely affect prevailing market prices. Furthermore, since no
shares will be available for sale shortly after this offering because of
contractual and legal restrictions on resale as described below, sales of
substantial amounts of our common stock in the public market after these
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
34,477,297 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options and warrants. Of
these shares, all of the shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
these shares are purchased by affiliates. The remaining 29,477,297 shares of
common stock held by existing stockholders are restricted securities. Restricted
securities 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.
<TABLE>
<CAPTION>
ELIGIBILITY OF RESTRICTED
SHARES FOR SALE
DAYS AFTER THE EFFECTIVE DATE IN PUBLIC MARKET COMMENT
----------------------------- -------------------------------- -------------------------
<S> <C> <C>
On Effectiveness..................... 0 Shares not locked-up and
saleable under Rule
144(k)
180 days............................. 25,638,929 Lock-up released; shares
saleable under Rules 144,
144(k) and 701
At various times after 180 days...... 3,838,368 Shares saleable under
Rules 144, 144(k) and 701
</TABLE>
Additionally, of the 1,810,750 shares issuable upon exercise of options to
purchase our common stock outstanding as of March 31, 2000, approximately
863,346 shares will be vested and eligible for sale 180 days after the date of
this prospectus.
Lock-Up Agreements. All of our officers, directors, stockholders and option
holders have agreed not to transfer or dispose of, directly or indirectly, any
shares of our common stock or any securities convertible into or exercisable or
exchangeable for shares of our common stock, for a period of 180 days after the
date the registration statement of which this prospectus is a part is declared
effective. Transfers or dispositions can be made sooner with the prior written
consent of Lehman Brothers Inc.
Rule 144. In general, under Rule 144 as currently in effect, beginning 90
days after the date the registration statement of which this prospectus is a
part is declared effective, a person or persons whose shares are aggregated, who
has beneficially owned restricted securities 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:
- 1% of the number of shares of our common stock then outstanding which
will equal approximately 344,773 shares immediately after this offering;
or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
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<PAGE> 70
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
Intuitive Surgical.
Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates 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 these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. No shares will
qualify as "144(k) shares" within 180 days after the date the registration
statement, of which this prospectus is a part, is declared effective.
Rule 701. In general, under Rule 701 of the Securities Act as currently in
effect, any of our employees, consultants or advisors, other than affiliates,
who purchases or receives shares from us in connection with a compensatory stock
purchase plan or option plan or other written agreement will be eligible to
resell their shares beginning 90 days after the effective date of the
registration statement of which this prospectus is a part, subject only to the
manner of sale provisions of Rule 144, and by affiliates under Rule 144 without
compliance with its holding period requirements.
Registration Rights. Upon completion of this offering, the holders of
22,812,117 shares of our common stock and a warrant to purchase 200,000 shares
of our common stock, or their transferees, will be entitled to rights with
respect to the registration of their shares under the Securities Act.
Registration of their shares under the Securities Act would result in the shares
becoming freely tradable without restriction under the Securities Act, except
for shares purchased by affiliates, immediately upon the effectiveness of this
registration.
Stock Options. Immediately after this offering, we intend to file a
registration statement under the Securities Act covering the shares of common
stock reserved for issuance under our 2000 Equity Incentive Plan, 2000
Non-Employee Directors' Stock Option Plan, and 2000 Employee Stock Purchase
Plan. The registration statement is expected to be filed and become effective as
soon as practicable after the closing of this offering. Accordingly, shares
registered under the 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 effective date of the registration statement of
which this prospectus is a part.
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UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each of the underwriters
named below, for whom Lehman Brothers Inc., Bear, Stearns & Co. Inc.,
FleetBoston Robertson Stephens Inc., UBS Warburg LLC and Fidelity Capital
Markets, a division of National Financial Services Corporation are acting as
representatives, has agreed to purchase from us the number of shares of common
stock shown opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ----------
<S> <C>
Lehman Brothers Inc. ....................................... 1,476,250
Bear, Stearns & Co. Inc. ................................... 1,272,500
FleetBoston Robertson Stephens Inc. ........................ 731,875
UBS Warburg LLC............................................. 731,875
Fidelity Capital Markets, a division of National Financial
Services.................................................. 75,000
Chase Securities Inc. ...................................... 75,000
Credit Suisse First Boston Corporation...................... 75,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 75,000
A.G. Edwards & Sons, Inc. .................................. 75,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 75,000
Prudential Securities Incorporated.......................... 75,000
Salomon Smith Barney Inc. .................................. 75,000
Dain Rauscher Incorporated.................................. 37,500
Fahnestock & Co. Inc. ...................................... 37,500
Gruntal & Co., L.L.C. ...................................... 37,500
Edward D. Jones & Co., L.P. ................................ 37,500
Raymond James & Associates, Inc. ........................... 37,500
----------
Total..................................................... 5,000,000
==========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement. It also provides that, if any of the
shares of common stock are purchased by the underwriters under the underwriting
agreement, then all of the shares of common stock that the underwriters have
agreed to purchase under the underwriting agreement must be purchased. The
conditions contained in the underwriting agreement include the requirement that:
- the representations and warranties made by us to the underwriters are
true;
- there is no material change in the financial markets; and
- we deliver to the underwriters customary closing documents.
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
shown on the cover page of this prospectus. The representatives have also
advised us that the underwriters propose to offer the shares of common stock to
dealers, who may include the underwriters, at the public offering price less a
selling concession not in excess of $0.35 per share. The underwriters may allow,
and the dealers may reallow, a concession not in excess of $0.10 per share to
brokers and dealers. After completion of the offering, the underwriters may
change the offering price and other selling terms.
We have granted the underwriters an option to purchase up to 750,000
additional shares of common stock, exercisable solely to cover over-allotments,
if any, at the public offering price less the underwriting discount shown on the
cover page of this prospectus. The underwriters may exercise this option at any
time until 30 days after the date of the underwriting agreement. If this option
is exercised, each underwriter will be committed, so long as the conditions of
the underwriting agreement are satisfied, to purchase a number of additional
shares of common stock proportionate to
68
<PAGE> 72
the underwriter's initial commitment as indicated in the table above and we will
be obligated, under the over-allotment option, to sell the shares of common
stock to the underwriters.
We have agreed that, without the prior consent of Lehman Brothers Inc., we
will not, directly or indirectly, offer, sell or otherwise dispose of any shares
of common stock or any securities that may be converted into or exchanged for
any shares of common stock for a period of 180 days from the date of this
prospectus. All of our executive officers, directors and substantially all of
our stockholders have agreed under lock-up agreements that, without the prior
written consent of Lehman Brothers Inc., they will not, directly or indirectly,
offer, sell or otherwise dispose of any shares of common stock or any securities
that may be converted into or exchanged for any shares of common stock for the
period ending 180 days from the date of this prospectus. See "Shares Eligible
for Future Sale."
Before this offering, there has been no public market for the shares of
common stock. The initial public offering price was negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives considered, among other things and in addition
to prevailing market conditions:
- our historical performance and capital structure;
- estimates of our business potential and earning prospects;
- an overall assessment of our management; and
- the consideration of the above factors in relation to market valuations
of companies in related businesses.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter of this offering and will be
facilitating electronic distribution through the Internet.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "ISRG."
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
the representations and warranties contained in the underwriting agreement. We
have also agreed to contribute to payments that the underwriters may be required
to make for these liabilities.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and passive market making in
accordance with Regulation M under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
- In passive market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to limitations,
make bids for or purchases of the common stock until the time, if any, at
which a stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it might
otherwise be in the absence of these
69
<PAGE> 73
transactions. The imposition of a penalty bid might have an effect on the price
of a security to the extent that it were to discourage resales of the security
by purchasers in an offering.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
such sale is made.
Purchasers of the shares of common stock offered by this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
of this prospectus.
The underwriters have informed us that they do not intend to confirm the
sales to discretionary accounts that exceed 5% of the total number of shares of
common stock offered by them.
At our request, the underwriters have reserved up to 8% of the shares of
common stock offered by this prospectus for sale to our officers, directors,
employees, consultants and their family members and to our business associates
at the initial public offering price set forth on the cover page of this
prospectus. Persons employed by us who purchase shares in this offering have
agreed with Lehman Brothers Inc. that they will not sell or otherwise transfer
any such shares for a period of 90 days following the date of this prospectus.
The consultants that may participate in this directed share program provide us
with a variety of services, including engineering, programming, finance and
administration, recruiting, production and sales and marketing services. The
number of shares available for sale to the general public will be reduced to the
extent these persons purchase the reserved shares.
70
<PAGE> 74
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Cooley Godward LLP, Palo Alto, California. As of the date of this
prospectus, partners and associates of Cooley Godward LLP own an aggregate of
approximately 43,086 shares of our common stock through an investment
partnership. The underwriters have been represented by Gibson, Dunn & Crutcher
LLP, Los Angeles, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements as of December 31, 1998 and 1999, and for each of the three
years ended December 31, 1999, as set forth in their report. We have included
our financial statements in this prospectus and elsewhere in this registration
statement in reliance on Ernst & Young LLP's report, given based on their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement, which term shall include any amendment to the registration statement,
on Form S-1 under the Securities Act of 1933 with respect to the shares of
common stock offered by our company. This prospectus, which constitutes a part
of the registration statement, does not contain all of the information set forth
in the Registration Statement, some items of which are contained in exhibits to
the registration statement as permitted by the rules and regulations of the
Commission. For further information with respect to Intuitive Surgical and the
common stock offered, reference is made to the registration statement, including
the exhibits, and the financial statements and notes filed as a part of the
registration statement. A copy of the registration statement, including the
exhibits and the financial statements and notes filed as a part of it, 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 the Securities and Exchange
Commission upon the payment of fees prescribed by it. The Securities and
Exchange Commission maintains a Web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
companies that file electronically with it.
71
<PAGE> 75
INTUITIVE SURGICAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statement of Stockholders' Equity.............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 76
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Intuitive Surgical, Inc.
We have audited the accompanying consolidated balance sheets of Intuitive
Surgical, Inc. as of December 31, 1998 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Intuitive
Surgical, Inc. as of December 31, 1998 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
Palo Alto, California ERNST & YOUNG LLP
March 8, 2000
F-2
<PAGE> 77
INTUITIVE SURGICAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
-------------------- MARCH 31, MARCH 31,
1998 1999 2000 2000
-------- -------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 10,169 $ 4,106 $ 39,046
Short-term investments.............................. 13,051 22,154 15,585
Accounts receivable................................. -- 2,044 2,780
Inventories......................................... 1,259 2,861 3,573
Prepaid expenses.................................... 471 581 1,018
-------- -------- --------
Total current assets.............................. 24,950 31,746 62,002
Property and equipment, net........................... 3,217 2,709 3,079
-------- -------- --------
$ 28,167 $ 34,455 $ 65,081
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 2,256 $ 2,722 $ 3,455
Accrued compensation and employee benefits.......... 562 1,325 897
Warranty provision.................................. -- 812 787
Accrued liabilities................................. 671 1,116 1,254
Deferred revenue.................................... 765 2,130 2,102
Current portion of notes payable.................... 879 1,618 1,781
-------- -------- --------
Total current liabilities......................... 5,133 9,723 10,276
Notes payable......................................... 2,438 2,521 2,471
Commitments
Stockholders' equity:
Preferred stock, 30,000,000 shares authorized,
$0.001 par value, issuable in series: 26,037,500
designated as convertible preferred stock,
16,656,000 and 19,134,375 shares issued and
outstanding at December 31, 1998 and 1999,
respectively, 22,728,250 shares issued and
outstanding at March 31, 2000 (aggregate
liquidation preference of $129,203 at March 31,
2000); 5,000,000 shares authorized, none issued
and outstanding pro forma......................... 17 19 23 $ --
Common stock, 45,000,000 shares authorized, $0.001
par value, 6,773,494 and 6,681,848 shares issued
and outstanding at December 31, 1998 and 1999;
6,701,014 shares issued and outstanding at March
31, 2000; 200,000,000 shares authorized,
29,477,297 issued and outstanding pro forma....... 7 7 7 29
Additional paid-in capital.......................... 78,386 98,508 135,781 135,782
Deferred compensation............................... (1,128) (943) (3,058) (3,058)
Accumulated deficit................................. (56,732) (75,147) (80,179) (80,179)
Accumulated other comprehensive income.............. 46 (233) (240) (240)
-------- -------- -------- --------
Total stockholders' equity........................ 20,596 22,211 52,334 $ 52,334
-------- -------- -------- ========
$ 28,167 $ 34,455 $ 65,081
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 78
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1997 1998 1999 1999 2000
--------- --------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales................................... $ -- $ -- $ 10,192 $ -- $ 2,933
Cost of sales........................... -- -- 9,273 -- 2,532
--------- --------- ---------- --------- ----------
Gross profit.......................... -- -- 919 -- 401
Operating costs and expenses:
Research and development.............. 14,282 23,208 11,130 3,963 2,631
Selling, general and administrative... 4,434 7,565 9,338 1,787 3,138
Technology license.................... 6,000 -- -- -- --
--------- --------- ---------- --------- ----------
Total operating costs and
expenses......................... 24,716 30,773 20,468 5,750 5,769
--------- --------- ---------- --------- ----------
Loss from operations.................... (24,716) (30,773) (19,549) (5,750) (5,368)
Interest income......................... 1,244 1,545 1,540 276 438
Interest expense........................ (130) (215) (406) (87) (102)
--------- --------- ---------- --------- ----------
Net loss................................ $ (23,602) $ (29,443) $ (18,415) $ (5,561) $ (5,032)
========= ========= ========== ========= ==========
Basic and diluted net loss per common
share................................. $ (11.24) $ (8.14) $ (3.81) $ (1.27) $ (0.90)
========= ========= ========== ========= ==========
Shares used in computing basic and
diluted net loss per common share..... 2,099,605 3,618,867 4,837,465 4,368,915 5,574,495
========= ========= ========== ========= ==========
Pro forma basic and diluted net loss per
common share (unaudited).............. $ (0.79) $ (0.20)
========== ==========
Shares used in computing pro forma basic
and diluted net loss per common share
(unaudited)........................... 23,330,892 25,309,185
========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 79
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ------------------ PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
---------- ------ --------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996....... 5,912,500 $ 6 3,833,000 $4 $ 5,447 $ -- $ (3,687)
Issuance of Series C convertible
preferred stock, net of issuance
costs of $51...................... 6,000,000 6 -- -- 29,943 -- --
Issuance of Series D convertible
preferred stock, net of issuance
costs of $75...................... 2,125,000 2 -- -- 16,923 -- --
Issuance of common stock............ -- -- 2,874,853 3 864 -- --
Repurchase of common stock.......... -- -- (113,333) -- (6) -- --
Deferred compensation............... -- -- -- -- 3,259 (3,259) --
Amortization of deferred
compensation...................... -- -- -- -- -- 1,428 --
Net loss............................ -- -- -- -- -- -- (23,602)
---------- --- --------- -- -------- ------- --------
Balances at December 31, 1997....... 14,037,500 14 6,594,520 7 56,430 (1,831) (27,289)
Issuance of Series E convertible
preferred stock, net of issuance
costs of $13...................... 2,618,500 3 -- -- 20,932 -- --
Issuance of common stock............ -- -- 255,060 -- 189 -- --
Repurchase of common stock.......... -- -- (76,086) -- (30) -- --
Deferred compensation............... -- -- -- -- 865 (865) --
Amortization of deferred
compensation...................... -- -- -- -- -- 1,568 --
Comprehensive loss:
Other comprehensive income
(loss) -- change in unrealized
gain (loss) on
available-for-sale securities... -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- (29,443)
Comprehensive loss.................. -- -- -- -- -- -- --
---------- --- --------- -- -------- ------- --------
Balances at December 31, 1998....... 16,656,000 17 6,773,494 7 78,386 (1,128) (56,732)
Issuance of Series E convertible
preferred stock, net of issuance
costs of $544..................... 2,478,375 2 -- -- 19,281 -- --
Issuance of common stock............ -- -- 79,365 -- 265 -- --
Repurchase of common stock.......... -- -- (171,011) -- (43) -- --
Deferred compensation............... -- -- -- -- 619 (619) --
Amortization of deferred
compensation...................... -- -- -- -- -- 804 --
Comprehensive loss:
Other comprehensive income
(loss) -- change in unrealized
gain (loss) on
available-for-sale securities... -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- (18,415)
Comprehensive loss.................. -- -- -- -- -- -- --
---------- --- --------- -- -------- ------- --------
Balances at December 31, 1999....... 19,134,375 19 6,681,848 7 98,508 (943) (75,147)
Issuance of Series F convertible
preferred stock, net of issuance
costs of $603 (unaudited)......... 3,593,875 4 -- -- 34,752 -- --
Issuance of common stock
(unaudited)....................... -- -- 25,500 -- 69 -- --
Repurchase of common stock
(unaudited)....................... -- -- (6,334) -- (9) -- --
Deferred compensation (unaudited)... -- -- -- -- 2,461 (2,461) --
Amortization of deferred
compensation (unaudited).......... -- -- -- -- -- 346 --
Comprehensive loss:
Other comprehensive income
(loss) -- change in unrealized
gain (loss) on
available-for-sale securities
(unaudited)..................... -- -- -- -- -- -- --
Net loss (unaudited).............. -- -- -- -- -- -- (5,032)
Comprehensive loss (unaudited)...... -- -- -- -- -- -- --
---------- --- --------- -- -------- ------- --------
Balances at March 31, 2000
(unaudited)....................... 22,728,250 $23 6,701,014 $7 $135,781 $(3,058) $(80,179)
========== === ========= == ======== ======= ========
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME EQUITY
------------- -------------
<S> <C> <C>
Balances at December 31, 1996....... $ -- $ 1,770
Issuance of Series C convertible
preferred stock, net of issuance
costs of $51...................... -- 29,949
Issuance of Series D convertible
preferred stock, net of issuance
costs of $75...................... -- 16,925
Issuance of common stock............ -- 867
Repurchase of common stock.......... -- (6)
Deferred compensation............... -- --
Amortization of deferred
compensation...................... -- 1,428
Net loss............................ -- (23,602)
----- --------
Balances at December 31, 1997....... -- 27,331
Issuance of Series E convertible
preferred stock, net of issuance
costs of $13...................... -- 20,935
Issuance of common stock............ -- 189
Repurchase of common stock.......... -- (30)
Deferred compensation............... -- --
Amortization of deferred
compensation...................... -- 1,568
Comprehensive loss:
Other comprehensive income
(loss) -- change in unrealized
gain (loss) on
available-for-sale securities... 46 46
Net loss.......................... -- (29,443)
--------
Comprehensive loss.................. -- (29,397)
----- --------
Balances at December 31, 1998....... 46 20,596
Issuance of Series E convertible
preferred stock, net of issuance
costs of $544..................... -- 19,283
Issuance of common stock............ -- 265
Repurchase of common stock.......... -- (43)
Deferred compensation............... -- --
Amortization of deferred
compensation...................... -- 804
Comprehensive loss:
Other comprehensive income
(loss) -- change in unrealized
gain (loss) on
available-for-sale securities... (279) (279)
Net loss.......................... -- (18,415)
--------
Comprehensive loss.................. -- (18,694)
----- --------
Balances at December 31, 1999....... (233) 22,211
Issuance of Series F convertible
preferred stock, net of issuance
costs of $603 (unaudited)......... -- 34,756
Issuance of common stock
(unaudited)....................... -- 69
Repurchase of common stock
(unaudited)....................... -- (9)
Deferred compensation (unaudited)... -- --
Amortization of deferred
compensation (unaudited).......... -- 346
Comprehensive loss:
Other comprehensive income
(loss) -- change in unrealized
gain (loss) on
available-for-sale securities
(unaudited)..................... (7) (7)
Net loss (unaudited).............. -- (5,032)
--------
Comprehensive loss (unaudited)...... -- (5,039)
----- --------
Balances at March 31, 2000
(unaudited)....................... $(240) $ 52,334
===== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 80
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- ------------------
1997 1998 1999 1999 2000
-------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss......................................... $(23,602) $(29,443) $(18,415) $(5,561) $(5,032)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation................................... 706 1,268 1,439 369 385
Amortization of deferred compensation.......... 1,428 1,568 804 242 346
Issuance of common stock for technology........ -- -- 150 -- --
Changes in operating assets and liabilities:
Accounts receivable............................ -- -- (2,044) -- (736)
Inventories.................................... -- (1,259) (1,602) (1,029) (712)
Prepaid expenses............................... (126) (275) (110) (101) (437)
Accounts payable............................... 1,339 445 466 450 733
Accrued compensation and employee benefits..... 235 327 763 (21) (428)
Warranty provision............................. -- -- 812 -- (25)
Accrued liabilities............................ 5,095 (4,471) 445 28 138
Deferred revenue............................... -- 765 1,365 410 (28)
-------- -------- -------- ------- -------
Net cash used in operating activities............ (14,925) (31,075) (15,927) (5,213) (5,796)
INVESTING ACTIVITIES
Capital expenditures............................. (2,785) (1,681) (931) (309) (755)
Purchases of short-term investments.............. (26,254) (47,811) (38,292) (1,006) --
Proceeds from sales and maturities of short-term
investments.................................... 10,614 50,446 28,910 3,021 6,562
-------- -------- -------- ------- -------
Net cash provided by (used in) investing
activities..................................... (18,425) 954 (10,313) 1,706 5,807
FINANCING ACTIVITIES
Net proceeds from issuance of convertible
preferred stock................................ 46,874 20,935 19,283 16,692 34,756
Proceeds from issuance of common stock........... 861 189 115 8 69
Repurchase of common stock....................... -- (30) (43) (26) (9)
Proceeds from notes payable...................... 1,359 2,644 2,000 -- 500
Repayment of notes payable....................... (204) (482) (1,178) (211) (387)
-------- -------- -------- ------- -------
Net cash provided by financing activities........ 48,890 23,256 20,177 16,463 34,929
-------- -------- -------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 15,540 (6,865) (6,063) 12,956 34,940
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD......................................... 1,494 17,034 10,169 10,169 4,106
-------- -------- -------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD....... $ 17,034 $ 10,169 $ 4,106 $23,125 $39,046
======== ======== ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.................................. $ 130 $ 190 $ 397 $ 117 $ 106
======== ======== ======== ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 81
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, manufacture and marketing of products designed to provide the
flexibility of open surgery while operating through ports. To date, the Company
has been engaged primarily in researching, developing, testing, commercializing
and pursuing regulatory clearances for its products. In 1999, the Company began
to manufacture, market and sell its products in Europe and the United States.
The Company expects to expend substantial additional funds and continue to incur
significant operating losses for at least the next two years 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.
Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
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
carrying value of cash and cash equivalents approximates market value at
December 31, 1998 and 1999 and March 31, 2000.
Short-Term Investments
All short-term investments are classified as available-for-sale and
therefore carried at fair value. The Company views its available-for-sale
portfolio as available for use in its current operations. Accordingly, the
Company has classified all investments as short-term, even though the stated
maturity date may be one year or more beyond the current balance sheet date.
Available-for-sale securities are stated at fair value based upon quoted market
prices of the securities. Unrealized gains and losses on such securities, when
material, are reported as a separate component of stockholders' equity. Realized
gains and losses, net, on available-for-sale securities are included in interest
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.
Concentrations of Risk
Financial instruments which subject the Company to potential credit risk
consist of its cash equivalents, short-term investments and accounts receivable.
The Company invests with high credit quality financial institutions. The Company
believes the financial risks associated with these financial instruments are
minimal. For the year ended December 31, 1999, two customers, A and B, each
accounted for 16% of total sales. For the three months ended March 31, 2000,
four customers, A, B, C and D, accounted for 28%, 22%, 14% and 30% of total
sales, respectively. The Company extends
F-7
<PAGE> 82
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reasonably short collection terms but does not require collateral. The Company
provides reserves for potential credit losses but has not experienced
significant losses to date.
The Company's da Vinci(TM) Surgical System and related instruments and
accessories have accounted for all of the Company's sales for the year ended
December 31, 1999 and the three months ended March 31, 2000. The Company
currently purchases key parts and components used to manufacture its products
from limited sources of supply.
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market value.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation.
Property and equipment are depreciated on a straight-line basis over the
estimated useful lives of the assets, generally three to five years. In
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," impairment losses on long-lived assets used in operations would be recorded
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.
Warranty Provision
The Company's standard policy is to warrant all shipped systems against
defects in design, materials and workmanship by replacing failed parts during
the first year of ownership. The warranty provision is reduced by the cost of
the replacement parts and labor over the warranty period. Estimated expenses for
warranty obligations are accrued as revenue is recognized and are included in
cost of sales.
Research and Development
Research and development costs, which include clinical and regulatory
costs, are expensed to operations as incurred in accordance with Statement of
Financial Accounting Standards No. 2, "Accounting for Research and Development
Costs."
Technology License
In 1997, the Company expensed $6.0 million in conjunction with technology
obtained from IBM. This arrangement with IBM specifically limits the Company's
application of the technology to products used in surgery. Since none of the
Company's products had received regulatory approval, and the Company had no
alternate future use for the technology, this amount was expensed when incurred.
F-8
<PAGE> 83
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
these estimates.
Stock-Based Compensation
The Company has 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, "Accounting for Stock Issued to Employees" and related
interpretations ("APB 25") in accounting for its stock option grants and rights
to purchase restricted stock 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 9)
Revenue Recognition
The Company recognizes system revenue upon installation for direct sales
and upon shipment for sales to our distributors. If substantial contractual
obligations exist after system installation, revenue is recognized after such
obligations are fulfilled. Distributors do not have price protection or return
rights. The Company recognizes revenue for instruments and accessories upon
shipment. Amounts are billed in accordance with the terms of the underlying
sales agreement. Amounts billed in excess of revenue recognized are included as
deferred revenue in the accompanying consolidated balance sheet.
Advertising
The Company expenses advertising costs as incurred. Advertising costs for
the years ended December 31, 1997, 1998 and 1999, and the three months ended
March 31, 2000 totaled $78,000, $155,000, $448,000 and $390,000, respectively.
Segment Disclosures
The company operates in one segment, the development and marketing of
products designed to provide the flexibility of open surgery while operating
through ports. For the year ended December 31, 1999, sales to Europe and the
U.S. accounted for 75% and 25% of total sales, respectively. For the three
months ended March 31, 2000, sales to Europe and the U.S. accounted for 34% and
66% of total sales, respectively. Sales in the U.S. included sales to the
Company's Japanese distributor's U.S. subsidiary, which represented 16% and 22%
of total sales for the year ended December 31, 1999 and the three months ended
March 31, 2000, respectively.
F-9
<PAGE> 84
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities ("SFAS 133")
which, as amended, is required to be adopted in years beginning after June 15,
2000. Because the Company does not use derivatives, management does not
anticipate that the adoption of SFAS 133 will have a significant effect on the
results of operations, financial position or cash flows of the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes some areas of the Staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company believes that its current revenue recognition principles comply with
SAB 101.
Unaudited Interim Financial Information
The financial information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 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, 2000 period are not
necessarily indicative of the results for the entire fiscal year or future
periods.
Unaudited Pro Forma Stockholders' Equity
In March 2000, 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 contemplated by the Company is consummated, all of the
preferred stock outstanding will automatically be converted into 22,776,283
shares of common stock. Unaudited pro forma stockholders' equity at March 31,
2000, as adjusted for the assumed conversion of preferred stock outstanding at
March 31, 2000, is set forth in the accompanying consolidated balance sheet.
2. NET LOSS PER SHARE
Basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the period
less shares subject to repurchase. Pro forma basic and diluted net loss per
share, as presented in the statements of operations, have been computed as
described above and also give effect to the conversion of the convertible
preferred stock (using the if-converted method) from the original date of
issuance. To date, the Company has not had any issuances of shares for nominal
consideration as that term is used in the Securities and Exchange Commission's
Staff Accounting Bulletin No. 98, "Earnings Per Share."
F-10
<PAGE> 85
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. NET LOSS PER SHARE (CONTINUED)
The following table presents the calculation of basic and diluted net loss
per share and pro forma basic and diluted net loss per share (in thousands,
except share and per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator used for basic and
diluted net loss per common
share.......................... $ (23,602) $ (29,443) $ (18,415) $ (5,561) $ (5,032)
=========== =========== =========== =========== ===========
Denominator used for basic and
diluted net loss per common
share:
Weighted-average shares
outstanding.................. 5,173,024 6,800,736 6,729,580 6,758,628 6,691,431
Weighted-average shares subject
to repurchase................ (3,073,419) (3,181,869) (1,892,115) (2,389,713) (1,116,936)
----------- ----------- ----------- ----------- -----------
2,099,605 3,618,867 4,837,465 4,368,915 5,574,495
=========== =========== =========== =========== ===========
Basic and diluted net loss per
common share................... $ (11.24) $ (8.14) $ (3.81) $ (1.27) $ (0.90)
=========== =========== =========== =========== ===========
Shares used in computing pro
forma basic and diluted net
loss per common share
(unaudited):
Shares used above.............. 4,837,465 5,574,495
Pro forma adjustment to reflect
weighted effect of the
assumed conversion of
preferred stock
(unaudited).................. 18,493,427 19,734,690
----------- -----------
23,330,892 25,309,185
=========== ===========
Pro forma basic and diluted net
loss per common share
(unaudited).................... $ (0.79) $ (0.20)
=========== ===========
Potentially dilutive securities
excluded from diluted net loss
per share computation because
they are anti-dilutive......... 18,561,334 20,263,030 26,940,981 24,374,656 25,599,898
=========== =========== =========== =========== ===========
</TABLE>
F-11
<PAGE> 86
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. AVAILABLE-FOR-SALE SECURITIES
The following summarizes available-for-sale securities included in cash and
cash equivalents and short-term investments as of the respective dates (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------------
AMORTIZED UNREALIZED FAIR
COST HOLDING LOSSES VALUE
--------- -------------- -------
<S> <C> <C> <C>
Time deposits........................................ $ 67 $ -- $ 67
U.S. corporate debt.................................. 14,687 (92) 14,595
Government debt...................................... 3,000 (141) 2,859
Other debt securities................................ 4,700 -- 4,700
------- ----- -------
$22,454 $(233) $22,221
======= ===== =======
Reported as:
Cash equivalents................................... $ 67 $ -- $ 67
Short-term investments............................. 22,387 (233) 22,154
------- ----- -------
$22,454 $(233) $22,221
======= ===== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------
AMORTIZED UNREALIZED FAIR
COST HOLDING GAINS VALUE
--------- ------------- -------
<S> <C> <C> <C>
Time deposits......................................... $ 50 $-- $ 50
U.S. corporate debt................................... 11,990 45 12,035
Government debt....................................... 6,600 1 6,601
Other debt securities................................. 1,285 -- 1,285
------- --- -------
$19,925 $46 $19,971
======= === =======
Reported as:
Cash equivalents.................................... $ 6,920 $-- $ 6,920
Short-term investments.............................. 13,005 46 13,051
------- --- -------
$19,925 $46 $19,971
======= === =======
</TABLE>
As of December 31, 1999, the average duration of securities in the
portfolio was less than one year.
Proceeds from the sale of available-for-sale securities were approximately
$2.0 million, $2.0 million, and $0.9 million for the years ended December 31,
1997, 1998 and 1999. Realized gross gains and losses from the sale of these
securities were not significant.
F-12
<PAGE> 87
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1998 1999 2000
------ ------ ---------
<S> <C> <C> <C>
Raw materials...................... $ 276 $1,147 $1,420
Work-in-process.................... 158 619 1,228
Finished goods..................... 825 1,095 925
------ ------ ------
$1,259 $2,861 $3,573
====== ====== ======
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Computer equipment.......................................... $ 1,697 $ 1,833
Laboratory/manufacturing equipment.......................... 1,134 1,426
Office furniture/equipment.................................. 704 816
Leasehold improvements...................................... 962 1,220
Software.................................................... 867 1,000
------- -------
5,364 6,295
Less accumulated depreciation............................... (2,147) (3,586)
------- -------
$ 3,217 $ 2,709
======= =======
</TABLE>
At December 31, 1999, the Company has granted to third parties interests in
specific property and equipment as part of equipment financing arrangements.
(See Note 8.)
6. EMPLOYEE BENEFIT PLAN
Effective May 1, 1996, the Company established a defined contribution
retirement plan (the "Plan") with 401(k) plan features. All U.S. employees who
are at least 21 years of age are eligible to participate. Contributions of up to
15% of compensation may be made by employees to the Plan through salary
withholdings. Employer contributions are made solely at the Company's
discretion. No employer contributions were made to the Plan for the years ended
December 31, 1997, 1998 and 1999.
7. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases office space in Mountain View, California. This facility
is leased through February 2002 and is accounted for as an operating lease. This
lease includes an option to extend the lease for an additional three-year term.
Rent expense was approximately $586,000, $825,000 and $882,000 for the years
ended December 31, 1997, 1998 and 1999, respectively.
F-13
<PAGE> 88
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum rental commitments under the operating leases as of December
31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000.................................................... $ 855
2001.................................................... 855
2002.................................................... 65
------
$1,775
======
</TABLE>
Rental income from a sublease was approximately $226,000 and $244,000 for
the years ended December 31, 1998 and 1999, respectively. There was no rental
income in 1997. This sublease expires in July 2000.
Contingencies
The arrangement entered into with IBM in December 1997 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 $1.0 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. Other
than described, no further payments are required under this arrangement.
The Company is subject to legal proceedings and claims that arise in the
normal course of its business. The Company cannot assure that it will prevail in
these matters nor can it assure that any remedy could be reached on commercially
available terms, if at all. Due to the inherent uncertainties of litigation, the
Company cannot accurately predict the ultimate outcome of these matters at this
time and, therefore, cannot estimate the range of possible loss.
F-14
<PAGE> 89
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. NOTES PAYABLE
Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------ -------
<S> <C> <C>
Note payable, due in monthly installments through April 1,
2001; interest rate at 13.8% at December 31, 1999........ $ 897 $ 602
Note payable, due in monthly installments through August 1,
2001; interest rate at 12.1% at December 31, 1999........ 504 355
Note payable, due in monthly installments through June 1,
2002; interest rate at 9.0% at December 31, 1999......... 958 739
Note payable, due in monthly installments through June 1,
2002; interest rate at 9.0% at December 31, 1999......... 958 739
Note payable, due in monthly installments through July 1,
2002; interest rate at 9.9% at December 31, 1999......... -- 1,240
Note payable, due in monthly installments through November
1, 2002; interest rate at 10.2% at December 31, 1999..... -- 464
------ -------
3,317 4,139
Less current portion....................................... (879) (1,618)
------ -------
$2,438 $ 2,521
====== =======
</TABLE>
Notes payable are collateralized by fixed assets specified under each
agreement. Assets collateralized under these agreements total $4.0 million and
$6.4 million at December 31, 1998 and 1999, respectively. Certain of the notes
payable by the Company contain covenants pertaining to profitability levels and
certain other financial ratios. As of December 31, 1999, the Company is in
compliance with all covenants. Principal maturities of notes payable at December
31, 1999 are as follows (in thousands): 2000 -- $1.6 million; 2001 -- $1.7
million; and 2002 -- $0.8 million. In March 2000, the Company issued a note
payable of $500,000 for additional equipment financing on substantially similar
terms.
The fair value of notes payable is estimated based on current interest
rates available to the Company for debt instruments with similar terms, degrees
of risk and remaining maturities. The carrying values of these obligations
approximate their respective fair values as of December 31, 1998 and 1999.
9. STOCKHOLDERS' EQUITY
At December 31, 1999, the Company was authorized to issue up to 30,000,000
shares of convertible preferred stock, issuable in series, with the rights and
preferences of each designated series to be determined by the Company's Board of
Directors. 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 75% of the then outstanding shares of convertible
preferred stock.
F-15
<PAGE> 90
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
Convertible Preferred Stock
Convertible preferred stock at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
SHARES
ISSUED AND PAR LIQUIDATION
DESIGNATED OUTSTANDING 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.............. 2,125,000 2,125,000 0.001 16,924,873 17,000,000
Series E convertible.............. 6,000,000 5,096,875 0.001 40,218,071 40,775,000
Series F convertible.............. 6,000,000 -- 0.001 -- --
---------- ---------- ----------- -----------
26,037,500 19,134,375 $92,522,980 $93,264,500
========== ========== =========== ===========
</TABLE>
During the three months ended March 31, 2000, the Company issued 3,593,875
shares of Series F convertible preferred stock, upon exercise of warrants at a
weighted-average exercise price of $9.84 per share, for net proceeds of $34.8
million. These shares are outstanding at March 31, 2000 and have an aggregate
liquidation preference of $35.9 million.
Each share of Series A, B, C, D, E and F 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. Based on an initial public offering price of $9.00 per
share, each share of Series F preferred stock will convert upon the closing of
the Company's initial public offering into approximately 1.0134 shares of common
stock.
The Series A, B, C, D, E and F 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 and if declared
by the Board of Directors out of legally available funds. No dividends have been
declared through March 31, 2000.
The Series A, B, C, D, E and F 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, D, E and F
stockholders, the available assets or property shall be distributed ratably
among the Series A, B, C, D, E and F stockholders.
The Series A, B, C, D, E and F convertible preferred stockholders have
voting rights equal to the shares of common stock issuable upon conversion.
F-16
<PAGE> 91
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
Common Stock
The Company has reserved the following shares of common stock for the
conversion of preferred stock, the exercise of warrants, and the issuance of
options and rights granted under the Company's stock option plan as of follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ----------
<S> <C> <C>
Convertible preferred stock........ 19,134,375 22,776,283
Warrants........................... 5,107,875 11,000
Stock option plan.................. 1,670,722 2,145,222
---------- ----------
25,912,972 24,932,505
========== ==========
</TABLE>
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. As of December 31, 1997, 1998 and 1999 and March 31, 2000, shares
subject to repurchase were 3,523,425, 2,559,530, 1,232,006 and 1,001,865,
respectively.
Warrants
In April 1997, in connection with one of the notes payable discussed in
Note 8, 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 fair value of the warrant was not material at the
issuance date.
In conjunction with the issuance of the Series E convertible preferred
stock, the Company issued to each purchaser a warrant to purchase shares of
Series F convertible preferred stock at a price initially equal to $8.00 per
preferred share. Warrants to purchase 5,096,875 shares of Series F convertible
preferred stock were issued. The exercise price shall increase on every
subsequent one-month anniversary of the issuance date by $0.1667 per month up to
a maximum exercise price of $10.00 per preferred share ($9.50 as of December 31,
1999). These warrants are exercisable through March 2000. During the three
months ended March 31, 2000, warrants to purchase 3,593,875 shares of Series F
convertible preferred stock were exercised at a weighted-average exercise price
of $9.84 per share for net proceeds of $34.8 million.
Stock Option Plans
In January 1996, the Board of Directors adopted, and the stockholders
approved, the 1996 Equity Incentive Plan (the "1996 Plan") under which
employees, consultants and directors may be granted Incentive Stock Options
("ISOs") and Nonstatutory Stock Options ("NSOs") to purchase shares of the
Company's common stock. The 1996 Plan permits ISOs to be granted at an exercise
price not less than the fair value on the date of grant and NSOs at an exercise
price not less than 85% of the fair value on the date of grant. Options granted
under the 1996 Plan generally expire 10 years from the date of grant and become
exercisable upon grant subject to repurchase rights in favor of the Company
until vested. Options generally vest 12.5% upon completion of 6 months service
and 1/48 per month thereafter; however, options may be granted with different
vesting terms as
F-17
<PAGE> 92
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
determined by the Board of Directors. A total of 4,340,000 shares of common
stock have been authorized for issuance pursuant to the 1996 Plan as of December
31, 1999. In March 2000, the Company reserved an additional 500,000 shares under
the 1996 Plan.
In March 2000, the Board of Directors adopted the 2000 Equity Incentive
Plan which takes effect upon the closing of the Company's initial public
offering. The Company has reserved an additional 5,160,000 shares under this
plan. This plan is an amendment and restatement of the 1996 Plan. Also in March
2000, the Board of Directors adopted the 2000 Non-Employee Directors' Stock
Option Plan and the 2000 Employee Stock Purchase Plan. The Company has reserved
300,000 and 1,000,000 shares for issuances under these plans, respectively.
These plans will also be effective upon the closing of the Company's initial
public offering.
Option activity under the 1996 Plan was as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Balance as of December 31, 1996..................... 398,000 $0.05
Granted........................................... 2,485,950 $0.56
Exercised......................................... (1,889,853) $0.39
Canceled.......................................... (4,688) $0.66
----------
Balance as of December 31, 1997..................... 989,409 $0.68
Granted........................................... 392,750 $2.33
Exercised......................................... (245,060) $0.65
Canceled.......................................... (100,599) $1.71
----------
Balance as of December 31, 1998..................... 1,036,500 $1.21
Granted........................................... 641,050 $3.00
Exercised......................................... (29,365) $2.21
Canceled.......................................... (181,460) $1.82
----------
Balance as of December 31, 1999..................... 1,466,725 $1.90
Granted........................................... 373,850 $3.00
Exercised......................................... (25,500) $2.71
Canceled.......................................... (4,325) $2.80
----------
Balance as of March 31, 2000........................ 1,810,750 $2.11
==========
</TABLE>
F-18
<PAGE> 93
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information concerning options outstanding
and vested as of the respective dates:
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------------------------------------------------------
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.............. 5,000 6.10 $0.05 -- $0.05
$0.50.............. 528,650 7.20 $0.50 346,435 $0.50
$1.50.............. 178,900 7.70 $1.50 109,952 $1.50
$3.00.............. 1,098,200 9.50 $3.00 140,106 $3.00
--------- -------
$0.05-$3.00........ 1,810,750 8.70 $2.11 596,493 $1.27
========= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------------------------------------
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.............. 5,000 6.30 $0.05 -- $0.05
$0.50.............. 528,650 7.40 $0.50 307,685 $0.50
$1.50.............. 184,475 7.90 $1.50 103,658 $1.50
$3.00.............. 748,600 9.50 $3.00 80,730 $3.00
--------- -------
$0.05-$3.00........ 1,466,725 8.50 $1.90 492,073 $1.12
========= =======
</TABLE>
Under the 1996 Plan, the Company may also grant rights to purchase
restricted stock. Terms and conditions of these rights are determined by the
Board of Directors. However, no right shall be granted at an exercise price
which is less than 85% of the fair value of the Company's common stock on the
date of grant. Exercise of these share purchase rights are made pursuant to
restricted stock purchase agreements containing provisions established by the
Board of Directors. These provisions give the Company the right to repurchase
the shares at the original purchase price of the stock. The right expires at a
rate determined by the Board of Directors, generally at a rate of 12.5% after 6
months and 1/48 per month thereafter. For the years ended December 31, 1997,
1998 and 1999 and for the three months ended March 31, 2000, the Company issued
2,585,950, 402,750, 691,050 and 373,850 shares under the 1996 Plan at a
weighted-average exercise price of $0.56, $2.33, $3.00 and $3.00, respectively.
For the years ended December 31, 1997, 1998 and 1999 and for the three months
ended March 31, 2000, the Company repurchased 113,333, 76,086, 117,677 and 6,334
shares under the 1996 Plan.
As of December 31, 1999 and March 31, 2000, 203,997 and 334,472 shares were
available for future grant under the 1996 Plan.
For the years ended December 31, 1997, 1998 and 1999 and for the three
months ended March 31, 2000, the Company recorded deferred stock compensation of
$3,259,000, $865,000, $619,000 and $2,461,000, respectively, representing the
difference between the exercise price and the fair value for accounting purposes
of the Company's common stock on the date such options were
F-19
<PAGE> 94
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
granted. For the years ended December 31, 1997, 1998 and 1999 and for the three
months ended March 31, 2000, the Company recorded amortization of deferred stock
compensation of $1.4 million, $1.6 million, $0.8 million and $0.3 million,
respectively. As of December 31, 1999 and March 31, 2000, the Company had $0.9
million and $3.1 million of remaining unamortized deferred compensation. Such
amount is included as a reduction of stockholders' equity and is being amortized
over the vesting period of the underlying options using a graded-vesting method.
Stock-Based Compensation
Pro forma information regarding net loss is required by SFAS No. 123, as if
the Company had accounted for its employee stock options under the fair value
method of SFAS No. 123. Option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable measure of the fair value of its employee stock
options.
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
weighted-average fair value of these options was $1.41, $2.53, $1.37 and $7.31
for the years ended December 31, 1997, 1998 and 1999 and for the three months
ended March 31, 2000, respectively. The fair value of these options was
estimated at the date of grant using the Black-Scholes option pricing model and
a graded-vesting approach using the following weighted-average assumptions for
1997, 1998 and 1999 and for the three months ended March 31, 2000, respectively:
risk-free interest rate of 6.5%, 5.5%, 5.9% and 5.9%, a weighted-average
expected option life of 2.16, 2.50, 2.50 and 2.50 years; no volatility and no
annual dividends. The Company's pro forma net loss was $23.7 million, $29.7
million, $18.7 million and $5.1 million for the years ended December 31, 1997,
1998 and 1999 and for the three months ended March 31, 2000, respectively. The
Company's pro forma net loss per share was $11.29, $8.21, $3.87 and $0.91 for
the years ended December 31, 1997, 1998 and 1999 and for the three months ended
March 31, 2000, respectively. Future pro forma results of operations may be
materially different from amounts reported as future years will include the
effects of additional stock option grants.
F-20
<PAGE> 95
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................. $13,500 $16,100
Research credits.................................. 1,600 2,000
Capitalized research and development.............. -- 1,600
Expenses not currently deductible................. 8,000 9,400
------- -------
Total..................................... 23,100 29,100
Valuation allowance................................. (23,100) (29,100)
------- -------
$ -- $ --
======= =======
</TABLE>
Realization of deferred tax assets is dependent upon future earnings the
timing and amount of which are uncertain. Accordingly, the net deferred tax
assets have been fully offset by a valuation allowance. The valuation allowance
increased by $9.8 million and $11.7 million during the years ended December 31,
1997 and 1998, respectively.
As of December 31, 1999, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $44.8 million, which expire in
the years 2010 through 2019. The Company also had net operating loss
carryforwards for state income tax purposes of approximately $13.8 million,
which expire in the years 2003 through 2004. The Company also had federal and
state research credit carryforwards of $2.0 million.
Utilization of the Company's net operating loss may be subject to
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss before
utilization.
11. OTHER EVENTS SUBSEQUENT TO THE AUDITOR'S REPORT (UNAUDITED)
In April 2000, the Company entered into an agreement with Heartport, Inc.
to exclusively license a number of Heartport's patents in exchange for cash of
$3.0 million and a warrant to purchase 200,000 shares of common stock at an
exercise price of $3.00 per share. In accordance with EITF 96-18, "Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services," the value of this warrant was
estimated using the Black-Scholes option pricing model with the following
assumptions: stock price on the date of grant of $9.90 per share, risk-free
interest rate of 6.5%, contractual life of 5 years, volatility of 0.75 and no
dividend yield. The Company anticipates that a charge of approximately $5.0
million will be capitalized as a result of this agreement which will be
amortized over the estimated useful life of the patents.
On May 10, 2000, Computer Motion, Inc. filed a lawsuit in United States
District Court for the Central District of California (Case No. CV00-4988 CBM)
alleging that by making, using, selling or
F-21
<PAGE> 96
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. OTHER EVENTS SUBSEQUENT TO THE AUDITOR'S REPORT (UNAUDITED) (CONTINUED)
offering for sale the Company's da Vinci Surgical System, the Company is
infringing United States Patent Numbers 5,524,180, 5,878,193, 5,762,458,
6,001,108, 5,815,640, 5,907,664 and 5,855,583 in willful disregard of Computer
Motion's patent rights. These patents concern methods and devices for conducting
various aspects of robotic surgery.
On June 1, 2000, Computer Motion amended its lawsuit to allege that the
Company also infringes U.S. Patent Number 6,063,095. This patent concerns
robotic surgical systems with "filtered movement." Filtering can be used to
reduce the effects of hand tremor. The Company is aware of multiple publicly
available references that describe hand tremor filtering in telerobotic systems,
including telerobotic surgical systems, that predate Computer Motion's patent
application for this concept. The Company believes that Computer Motion did not
cite these references to the U.S. Patent and Trademark Office during the patent
issuance process and therefore, the Company believes that it has a meritorious
defense with respect to this claim for infringement.
The Computer Motion action seeks damages based upon the making, using,
selling and offering for sale of the Company's products and processes, and seeks
to enjoin the Company's continued activities relating to these products. This
action subjects the Company to potential liability for damages, including treble
damages, and could require the Company to cease making, using or selling the
affected products, or to obtain a license in order to continue to manufacture,
use or sell the affected products. While the Company believes it has meritorious
defenses to this action, the Company cannot assure that it will prevail in this
action, nor can it assure that any license required would be made available on
commercially acceptable terms, if at all. Failure to successfully defend itself
against the Computer Motion action could harm the Company's business, financial
condition and operating results. Due to the inherent uncertainties of
litigation, the Company cannot accurately predict the ultimate outcome of this
matter at this time and, therefore, cannot estimate the range of possible loss.
Beginning in May 1999, the Company requested that the U.S. Patent and
Trademark Office declare interferences between some of the Company's exclusively
licensed patent applications and five of Computer Motion's U.S. patents. An
interference is a proceeding within the U.S. Patent and Trademark Office to
resolve questions regarding who was the first to invent the subject matter of a
patent and/or a patent application. All five of Computer Motion's patents were
issued by the U.S. Patent and Trademark Office without consideration of the
exclusively-licensed and earlier-filed patent applications on which the Company
now relies to request the interferences. All five of Computer Motion's patents
subject to the Company's requests for interference are included in Computer
Motion's May 2000 suit for patent infringement.
F-22
<PAGE> 97
5,000,000 SHARES
INTUITIVE LOGO
COMMON STOCK
-----------------------
PROSPECTUS
June 13, 2000
-----------------------
LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
ROBERTSON STEPHENS
UBS WARBURG LLC
FIDELITY CAPITAL MARKETS
a division of National Financial Services Corporation
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