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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 000-30713
INTUITIVE SURGICAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 77-0416458
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
1340 WEST MIDDLEFIELD ROAD
MOUNTAIN VIEW, CALIFORNIA 94043-3061
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 237-7000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The Registrant had 35,679,209 shares of Common Stock, $0.001 par value per
share, outstanding as of August 7, 2000.
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INTUITIVE SURGICAL, INC.
TABLE OF CONTENTS TO FORM 10-Q
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated statements of operations for the three-month
and six-month periods ended June 30, 2000 and June 30,
1999........................................................ 1
Consolidated balance sheets as of June 30, 2000 and December
31, 1999.................................................... 2
Consolidated statements of cash flows for the six-month
periods ended June 30, 2000 and June 30, 1999............... 3
Notes to Consolidated Financial Statements.................. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results
of Operations............................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 20
Item 2. Changes in Securities and Use of Proceeds................... 20
Item 3. Defaults Upon Senior Securities............................. 21
Item 4. Submission of Matters to a Vote of Security Holders......... 21
Item 5. Other Information........................................... 21
Item 6. Exhibits and Reports on Form 8-K............................ 22
SIGNATURE................................................... 23
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales.............................................. $ 5,127 $ 3,635 $ 8,060 $ 3,635
Cost of sales...................................... 3,503 3,243 6,035 3,243
------- ------- -------- -------
Gross profit..................................... 1,624 392 2,025 392
Operating costs and expenses:
Research and development......................... 2,822 1,807 5,453 5,770
Selling, general and administrative.............. 3,976 2,228 7,114 4,015
------- ------- -------- -------
Total operating costs and expenses....... 6,798 4,035 12,567 9,785
Loss from operations............................... (5,174) (3,643) (10,542) (9,393)
Interest income.................................... 802 461 1,240 737
Interest expense................................... (118) (93) (220) (180)
------- ------- -------- -------
Interest income, net............................. 684 368 1,020 557
Net loss........................................... $(4,490) $(3,275) $ (9,522) $(8,836)
======= ======= ======== =======
Basic and diluted net loss per common share........ $ (0.23) $ (0.70) $ (0.75) $ (1.96)
======= ======= ======== =======
Shares used in computing net loss per common
share............................................ 19,808 4,649 12,691 4,509
</TABLE>
See accompanying notes to consolidated financial statements.
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INTUITIVE SURGICAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED) (SEE NOTE 1)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 40,484 $ 4,106
Short-term investments.................................... 46,856 22,154
Accounts receivable....................................... 5,285 2,044
Inventories............................................... 4,796 2,861
Prepaid expenses.......................................... 1,014 581
-------- --------
Total current assets.............................. 98,435 31,746
Property and equipment, net................................. 3,672 2,709
Other assets................................................ 4,465 --
-------- --------
Total assets...................................... $106,572 $ 34,455
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,825 $ 2,722
Accrued compensation and employee benefits................ 1,336 1,325
Warranty provision........................................ 1,115 812
Accrued liabilities....................................... 1,485 1,116
Deferred revenue.......................................... 2,744 2,130
Current portion of notes payable.......................... 1,746 1,618
-------- --------
Total current liabilities......................... 13,251 9,723
Notes payable............................................... 2,038 2,521
Stockholders' equity
Preferred stock, 5,000,000 shares authorized, $0.001 par
value, issuable in series: no shares and 19,134,375
shares issued and outstanding at June 30, 2000 and
December 31, 1999, respectively........................ -- 19
Common stock, 200,000,000 shares authorized, $0.001 par
value, 34,929,209 and 6,681,848 shares issued and
outstanding as of June 30, 2000 and December 31, 1999,
respectively........................................... 35 7
Additional paid-in capital................................ 180,171 98,508
Deferred compensation..................................... (3,964) (943)
Accumulated deficit....................................... (84,669) (75,147)
Accumulated other comprehensive income.................... (290) (233)
-------- --------
Total stockholders' equity........................ 91,283 22,211
-------- --------
Total liabilities and stockholders' equity........ $106,572 $ 34,455
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JUNE 30, JUNE 30,
2000 1999
-------- --------
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OPERATING ACTIVITIES
Net loss.................................................... $ (9,522) $ (8,836)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 749 696
Amortization of deferred compensation..................... 1,042 446
Amortization of other assets.............................. 205 --
Changes in operating assets and liabilities:
Accounts receivable....................................... (3,241) (1,937)
Inventories............................................... (1,935) (1,155)
Prepaid expenses.......................................... (433) 63
Accounts payable.......................................... 2,103 227
Accrued compensation and employee benefits................ 11 (95)
Warranty provision........................................ 303 400
Accrued liabilities....................................... 369 385
Deferred revenue.......................................... 614 (95)
-------- --------
Net cash used in operating activities....................... (9,735) (9,901)
INVESTING ACTIVITIES
Capital expenditures........................................ (1,712) (454)
Acquisition of patents...................................... (3,000) --
Purchase of short-term investments.......................... (34,771) (21,614)
Proceeds from sales and maturities of short-term
investments............................................... 10,012 5,027
-------- --------
Net cash used in investing activities....................... (29,471) (17,041)
FINANCING ACTIVITIES
Proceeds from issuance of convertible preferred stock....... 34,756 19,290
Proceeds from issuance of common stock...................... 41,192 8
Repurchase of common stock.................................. (9) (38)
Proceeds from notes payable................................. 500 1,500
Repayment of notes payable.................................. (855) (429)
-------- --------
Net cash provided by financing activities................... 75,584 20,331
Net increase (decrease) in cash and cash equivalents........ 36,378 (6,611)
Cash and cash equivalents at beginning of period............ 4,106 10,169
-------- --------
Cash and cash equivalents at end of period.................. $ 40,484 $ 3,558
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
In this report, "Intuitive Surgical," "we," "us," and "our" refer to
Intuitive Surgical, Inc.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
normal, recurring adjustments considered necessary for a fair presentation have
been included. The financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1999, included in
the Registration Statement on Form S-1 of Intuitive Surgical, Inc., as amended,
filed with the Securities and Exchange Commission. The results for the interim
period ended June 30, 2000 are not necessarily indicative of the results to be
expected for the full year ending December 31, 2000 or future operating periods.
NOTE 2. CASH AND CASH EQUIVALENTS
Intuitive Surgical 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, 1999 and June 30, 2000.
NOTE 3. SHORT-TERM INVESTMENTS
All short-term investments are classified as available-for-sale and
therefore carried at fair value. We view our available-for-sale portfolio as
available for use in its current operations. Accordingly, we have 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.
NOTE 4. INVENTORIES
Inventories consist of the following (in thousands):
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<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
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Raw materials.......................................... $1,883 $1,147
Work-in-process........................................ 1,114 619
Finished goods......................................... 1,799 1,095
------ ------
$4,796 $2,861
====== ======
</TABLE>
NOTE 5. OTHER ASSETS
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 our 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," we valued the warrant to be
approximately $1.7 million using the Black-Scholes option
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INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
pricing model. As a result of this agreement, we capitalized approximately $4.7
million as other assets, which will be amortized over the estimated useful life
of the patents.
NOTE 6. COMPREHENSIVE LOSS
The components of comprehensive loss consist of the following (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss.................................... $(4,490) $(3,275) $(9,522) $(8,836)
Other comprehensive income (loss):
Foreign currency translation
adjustments............................ (101) 14 (91) 19
Change in unrealized gain (loss) on
available-for-sale securities.......... (50) (137) (57) (181)
------- ------- ------- -------
Comprehensive loss.......................... $(4,641) $(3,398) $(9,670) $(8,998)
======= ======= ======= =======
</TABLE>
NOTE 7. NET LOSS PER SHARE
Statement of Financial Accounting Standard No. 128, "Earnings Per Share,"
requires presentation of both basic and diluted net loss per share in the
financial statements. Intuitive Surgical's basic net loss per share is the same
as its diluted net loss per share because inclusion of outstanding stock options
and warrants in the calculation is antidilutive. Net loss per share is
calculated using the weighted average number of common shares outstanding during
the period.
NOTE 8. REVENUE RECOGNITION
Intuitive Surgical recognizes system revenue upon installation for direct
sales and upon shipment for sales to its 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. We recognize revenue for instruments and accessories upon
shipment. Amounts are billed in accordance with the terms of the underlying
sales agreement, and amounts billed in excess of revenue recognized are included
as deferred revenue in the accompanying consolidated balance sheets.
NOTE 9. STOCKHOLDERS' EQUITY
On June 13, 2000, we commenced the initial public offering of our common
stock. Upon the closing of the initial public offering, we issued 5,000,000
shares of our common stock at an offering price of $9.00 per share and all of
Intuitive Surgical's convertible preferred stock automatically converted into
22,813,173 shares of common stock. On July 13, 2000, the underwriters exercised
in full their over-allotment option to purchase an additional 750,000 shares at
$9.00 per share. Cash proceeds from the sale of the 5,750,000 shares of common
stock, net of underwriters' discount and offering expenses, totaled
approximately $46.6 million.
In April 2000, we issued a warrant to purchase 200,000 shares of our common
stock in connection with a patent licensing agreement. (See Note 5.)
NOTE 10. 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 we do not use derivatives, management does not anticipate
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INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
that the adoption of SFAS 133 will have a significant effect on our results of
operations, financial position or cash flows.
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.
We believe that our current revenue recognition principles comply with SAB 101.
On March 31, 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," ("FIN 44") which provides
guidance on several implementation issues related to Accounting Principles Board
Opinion No. 25 ("APB 25"). The most significant topics discussed in FIN 44 are
the clarification of the definition of employee for purposes of applying Opinion
No. 25 and the accounting for stock options that have been repriced. FIN 44 is
effective for the most significant topics discussed beginning July 15, 2000. The
impact of the interpretation on Intuitive Surgical's financial position and
results of operations is not expected to be material.
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ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations as of June 30, 2000 and for the three and six-month
periods ended June 30, 2000 and June 30, 1999 should be read in conjunction with
the Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Intuitive Surgical's Registration Statement on Form S-1
for the year ended December 31, 1999.
Except for historical information, the discussion in this report contains
forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. The cautionary
statements made in this report should be read as applying to all related
forward-looking statements wherever they appear in this report. Our actual
results could differ materially from those discussed here. Factors that could
cause or contribute to these differences include those discussed in "-- Factors
Affecting Operating Results" below as well as those discussed elsewhere.
In this report, "Intuitive Surgical," "we," "us," and "our" refer to
Intuitive Surgical, Inc.
Intuitive(TM), da Vinci(TM) and EndoWrist(TM) are trademarks of Intuitive
Surgical, Inc.
OVERVIEW
We design and manufacture the da Vinci Surgical System, an advanced
surgical system that we believe represents a new generation of surgery. The da
Vinci System consists of a surgeon's console, a patient-side cart, a high
performance vision system and proprietary instruments. The da Vinci 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. We
believe that the 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 or MIS. By placing computer-enhanced
technology between the surgeon and the patient, we believe that the da Vinci
System 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 early 1999, we 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. Based on this approval, we recognized revenue
for the first time in the second quarter of 1999 for the sale of our products.
In July 2000, we received clearance from the U.S. Food and Drug Administration,
the FDA, to begin commercialization of our da Vinci Surgical System in the
United States for use in laparoscopic surgical procedures. In June and July
2000, we raised net proceeds of approximately $46.6 million through the initial
public offering of our common stock.
To date, the majority of our revenues have come from the sales of the da
Vinci Surgical System, which are high revenue dollar items. A smaller percentage
of revenues have come 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, the percentage of revenue from our EndoWrist instruments should continue
to increase. 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. During the useful life of each installed da Vinci Surgical System, we
expect to generate recurring revenue through sales of the EndoWrist instruments
and accessories.
RESULTS OF OPERATIONS
Sales. Sales for the three months ended June 30, 2000 were $5.1 million, up
41% from $3.6 million for the three months ended June 30, 1999. Sales for the
first half of 2000 were $8.1 million, up 122% from $3.6 million for the first
half of 1999. The increase in sales from the first half of 1999 to the first
half of 2000 was primarily due to an increase in the number of da Vinci Surgical
Systems sold. Sales in the first half of
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2000 were driven by the sale and installation of six and three da Vinci Surgical
Systems in the second and first quarters of 2000, respectively, compared with
four da Vinci Surgical Systems sold in the second quarter of 1999.
Gross Profit. Gross profit for the three months ended June 30, 2000 was
$1.6 million, or 32% of sales, compared with $392,000, or 11% of sales, during
the three months ended June 30, 1999. Gross profit for the first half of 2000
was $2.0 million, or 25% of sales, compared with $392,000, or 11% of sales, for
the first half of 1999. The improvement in gross profit for the three-month and
six-month periods ended June 30, 2000 compared to the same periods from the
prior year resulted from sales growth and increased manufacturing efficiencies.
Research and Development Expenses. Research and development expenses for
the three months ended June 30, 2000 were $2.8 million, up 56% from $1.8 million
for the three months ended June 30, 1999. Research and development expenses for
the first half of 2000 were $5.5 million, down 5% from $5.8 million for the
first half of 1999. The increase from the second quarter of 1999 to the second
quarter of 2000 was primarily attributable to additional headcount and increased
spending for product development efforts and regulatory approval processes.
Research and development costs decreased from the six-month period ended June
30, 1999 to the comparable period in 2000. This decrease is primarily
attributable to a change in our treatment of manufacturing-related costs.
Starting in the second quarter of 1999, as we recognized sales for the first
time, we transitioned from recording manufacturing-related costs as research and
development expense to cost of sales.
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 clinical trials and purchases of
laboratory supplies. Research and development costs are expensed as incurred. We
expect to continue to make substantial investments in research and development
and anticipate that research and development expenses will continue to increase
in the future.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended June 30, 2000 were $4.0
million, up 78% from $2.2 million for the three months ended June 30, 1999.
Selling, general and administrative expenses for the first half of 2000 were
$7.1 million, up 77% from $4.0 million for the first half of 1999. The increase
between the second quarter of 2000 and the second quarter of 1999 and between
the first half of 2000 and the first half of 1999 was primarily attributable to
an increase in headcount and increased marketing and training costs.
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 are expected to increase in the future to support
expanding business activities and the additional administrative costs related to
being a public company.
Deferred Compensation. We recorded deferred compensation as the difference
between the exercise price of options granted and the fair value of our common
stock at the time of grant for financial reporting purposes. Deferred
compensation is amortized to research and development expenses and selling,
general and administrative expenses. Deferred compensation recorded through June
30, 2000 was $8.8 million with accumulated amortization of $4.8 million. The
remaining $4.0 million will be amortized over the remaining vesting periods of
the options, generally four years from the date of grant, using a graded-vesting
method. The amount of deferred compensation expense to be recorded in future
periods may decrease if unvested options for which deferred compensation has
been recorded are subsequently canceled.
Interest Income (Expense), Net. Net interest income increased 86% to
$684,000 for the three months ended June 30, 2000 from $368,000 for the three
months ended June 30, 1999. Net interest income increased 83% to $1.0 million
for the first half of 2000 from $557,000 for the first half of 1999. The
increase between the second quarter of 2000 and 1999 and the first half of 2000
and 1999 resulted from increased interest income earned on higher average cash
balances, which was driven by the exercise of warrants to purchase preferred
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stock in March 2000, yielding approximately $34.8 million in net proceeds, and
our initial public offering in June 2000, which raised net proceeds of
approximately $40.3 million.
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 specific 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. In June and
July 2000, we sold and issued 5,750,000 shares of common stock in our initial
public offering, yielding net proceeds of approximately $46.6 million.
As of June 30, 2000, we had cash, cash equivalents and short-term
investments of $87.3 million. Working capital at June 30, 2000 was approximately
$85.2 million, compared to approximately $22.0 million at December 31, 1999. The
increase in working capital was primarily attributable to the exercise of
warrants to purchase preferred stock in March 2000, yielding approximately $34.8
million in net proceeds, and our initial public offering in June 2000, raising
net proceeds of approximately $40.3 million.
Net cash used in operating activities was $9.7 million for the six months
ended June 30, 2000, compared to $9.9 million for the six months ended June 30,
1999. Differences between the periods related to higher accounts payable and
accruals to support expanding business activities, which was offset by higher
inventory and accounts receivable levels to support increased sales activity.
Net cash used in investing activities was $29.5 million for the six months
ended June 30, 2000, compared to $17.0 million for the six months ended June 30,
1999. Differences between the periods related to the investment of the net
proceeds of $40.3 million from our initial public offering in June 2000 and the
net proceeds of $34.8 million from the exercise of warrants to purchase
preferred stock in March 2000.
Net cash provided by financing activities was $75.6 million for the six
months ended June 30, 2000, compared to $20.3 million for the six months ended
June 30, 1999. The primary difference between the first half of 2000 and the
first half of 1999 relates to our initial public offering in June 2000, yielding
net proceeds of $40.3 million, and the exercise of warrants to purchase
preferred stock in March 2000, yielding net proceeds of $34.8 million.
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 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.
FACTORS AFFECTING OPERATING RESULTS
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
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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.
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 $9.5 million for the six months ended June 30,
2000. As of June 30, 2000, we had an accumulated deficit of $84.7 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 half of 2000, the majority of our
revenues came from the sales of da Vinci Surgical Systems,
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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 six months ended June 30, 2000, seven customers, AB Medica
SRL, Association pour la Recherche en Chirurgie Cardiaque, located in Paris,
France, Beheer Medische Apparatuur Joseph Israels C.V., located in Utrecht,
Netherlands, Baylor University Medical Center, located in Texas, Brigham &
Women's Hospital, located in Massachusetts, Henrico Doctors' Hospital, located
in Virginia and the University of Nebraska Medical Center, located in Nebraska,
accounted for 11%, 11%, 11%, 11%, 11%, 11% and 10% 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.
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. 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 July 2000, we received clearance from the FDA for the commercialization
of our da Vinci Surgical System in the United States for use in laparoscopic
surgical procedures. In addition, the FDA determined through review of
Intuitive's PMA application that this and future submissions for Intuitive's
devices, including new clinical indications, could be more appropriately
reviewed through the Premarket Notification or 510(k) process and as such, the
FDA reclassified Intuitive's devices from Class III
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to Class II, thus requiring a premarket notification rather than a premarket
approval. In August 2000, we submitted a 510(k) application to the FDA
requesting clearance to expand the labeling of the da Vinci Surgical System and
EndoWrist instruments to include thoracoscopic procedures such as internal
mammary artery mobilization. A 510(k) 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
clearance. We cannot assure you that we will successfully obtain FDA clearance
for the use of our products in other surgical procedures on a timely basis or at
all. Even if our products are cleared by the FDA, if we modify them, the FDA may
require us to obtain clearance of the modified products before we are permitted
to market and sell them. We anticipate that the FDA will require a new 510(k)
clearance for additional types of surgical procedures for which we propose to
market our products. Any delay in receiving clearance, failure to receive
clearance 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," included in the Registration Statement on
Form S-1 of Intuitive Surgical, Inc., as amended, filed with the Securities and
Exchange Commission or SEC.
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.
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
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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.
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," included in the
Registration Statement on Form S-1 of Intuitive Surgical, Inc., as amended,
filed with the SEC.
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," included
in the Registration Statement on Form S-1 of Intuitive Surgical, Inc., as
amended, filed with the SEC.
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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 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
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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," included in the Registration Statement
on Form S-1 of Intuitive Surgical, Inc., as amended, filed with the SEC.
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," included in the Registration Statement on Form S-1 of Intuitive
Surgical, Inc., as amended, filed with the SEC, 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 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.
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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.
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
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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
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,
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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, 1999 and 45% for
the six months ended June 30, 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 and the revenue to be derived
from the sale of our products 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;
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- 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.
ITEM 3. 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 June 30, 2000 was less than one year. Due to the
short term nature of these investments, we believe that we have no material
exposure to interest rate risk arising from our investments. Therefore, no
quantitative tabular disclosure is required.
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<PAGE> 22
PART II. OTHER INFORMATION
ITEM 1. 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 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. 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. The litigation is still in the early stages of discovery.
While we continue to believe we have meritorious defenses to this action, we
cannot provide assurance that we will prevail in this action, nor can we provide
assurance 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 our business, financial condition and
operating results. Due to the inherent uncertainties of litigation, we 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, 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 request for interference are included in Computer Motion's May 2000 suit for
patent infringement.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
Since April 1, 2000, we have sold and issued the following unregistered
securities:
(1) From April 1, 2000 through June 30, 2000, we granted stock options
to purchase 232,150 shares of our common stock at an exercise price of
$3.00 per share, to employees pursuant to our 2000 Equity Incentive Plan.
(2) From April 1, 2000 through June 30, 2000, we issued 415,022 shares
of our common stock, at prices ranging from $0.05 to $3.00 per share, to
employees, consultants and directors pursuant to outstanding stock options
to purchase shares of our common stock.
(3) In April 2000, we issued a warrant to purchase 200,000 shares of
our common stock at an exercise price of $3.00 per share to Heartport,
Inc., in connection with a license agreement, with an aggregate value of
$600,000.
(4) In June 2000, we issued a warrant to purchase 5,081 shares of our
common stock, at an exercise price of $9.00 per share, to one company for
services rendered to Intuitive Surgical, with an aggregate value of
$45,729.
The sales and issuance of securities described in paragraphs (1) and (2)
above were deemed to be exempt from registration under the Securities Act by
virtue of Rule 701 promulgated thereunder in that they were offered and sold
either pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation, as provided by Rule 701. The sale and
issuance of securities described in
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<PAGE> 23
paragraph (3) and (4) above were deemed to be exempt from registration under the
Securities Act by virtue of Section 4(2).
USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES
Our initial public offering of common stock was effected through a
Registration Statement on Form S-1 (File No. 333-33016) that was declared
effective by the SEC on June 13, 2000, and pursuant to which we sold 5,750,000
shares of our common stock that had been registered.
Our initial public offering was completed after the shares of common stock
that were registered were sold. The managing underwriters in the offering were
Lehman Brothers Inc., Bear, Stearns & Co. Inc., FleetBoston Robertson Stephens
Inc. and UBS Warburg LLC. The aggregate offering price of the 5,750,000 shares
registered and sold was $51.8 million. Of this amount, $3.6 million was paid in
underwriting discounts and commissions, and an additional $1.1 million of
expenses was incurred through June 30, 2000. None of the expenses were paid,
directly or indirectly, to directors, officers or persons owning 10 percent or
more of our common stock, or to our affiliates. As of June 30, 2000, we had
applied the estimated aggregated net proceeds of $40.3 million from our initial
public offering as follows:
Temporary investments: $40.3 million
The foregoing amounts represent our best estimate of our use of proceeds
for the period indicated. No such payments were made to our directors or
officers or their associates, holders of 10% or more of any class of our equity
securities or to our affiliates, other than payments to officers for salaries in
the ordinary course of business.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In April 2000, we submitted an information statement to our stockholders in
connection with our initial public offering asking them to approve certain
matters. By action taken by written consent effective as of April 30, 2000, our
stockholders approved each of these matters, as set forth below. As of the
record date for taking such actions, we had outstanding 29,477,297 shares of our
common stock, calculated on an as-if-converted to common stock basis. We did not
receive written consents from each stockholder. Set forth below are each of the
matters voted upon and the results of the voting from the stockholders that
returned written consents to us:
A. Approval of the Amendment and Restatement of our Certificate of Incorporation
to be effective following our initial public offering:
Approved: 27,171,215 Disapproved: 0
B. Approval of the Amendment and Restatement of our Bylaws:
Approved: 27,171,215 Disapproved: 0
C. Approval of Adoption of our 2000 Non-Employee Directors' Stock Option Plan:
Approved: 27,171,215 Disapproved: 0
D. Approval of Adoption of our 2000 Employee Stock Purchase Plan:
Approved: 27,171,215 Disapproved: 0
E. Approval of Adoption of our 2000 Equity Incentive Plan:
Approved: 27,171,215 Disapproved: 0
ITEM 5. OTHER INFORMATION
None
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<PAGE> 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
Amended and Restated Certificate of Incorporation of
3.1(1) Intuitive Surgical.
3.2(2) Bylaws of Intuitive Surgical.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2(3) Specimen Stock Certificate.
Warrant to purchase shares of Common Stock, dated April 26,
4.3(3) 2000.
27.1 Financial Data Schedule.
</TABLE>
------------
(1) Previously filed as Exhibit 3.2 to our Registration Statement on Form S-1,
Registration No. 333-33016.
(2) Previously filed as Exhibit 3.3 to our Registration Statement on Form S-1,
Registration No. 333-33016.
(3) Previously filed as like-numbered Exhibit to our Registration Statement on
Form S-1, Registration No. 333-33016.
(b) We did not file a Current Report on Form 8-K during the three month
period ending June 30, 2000.
22
<PAGE> 25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTUITIVE SURGICAL, INC.
By: /s/ SUSAN K. BARNES
------------------------------------
Susan K. Barnes,
Vice President, Finance, Chief
Financial Officer
and Assistant Secretary
(Principal Financial and Accounting
Officer)
Date: August 14, 2000
23
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
Amended and Restated Certificate of Incorporation of
3.1(1) Intuitive Surgical.
3.2(2) Bylaws of Intuitive Surgical.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2(3) Specimen Stock Certificate.
Warrant to purchase shares of Common Stock, dated April 26,
4.3(3) 2000.
27.1 Financial Data Schedule.
</TABLE>
------------
(1) Previously filed as Exhibit 3.2 to our Registration Statement on Form S-1,
Registration No. 333-33016.
(2) Previously filed as Exhibit 3.3 to our Registration Statement on Form S-1,
Registration No. 333-33016.
(3) Previously filed as like-numbered Exhibit to our Registration Statement on
Form S-1, Registration No. 333-33016.
24
