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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 MARCH 31, 2001
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
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INTUITIVE SURGICAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 77-0416458
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1340 W. 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 35,789,067 shares of Common Stock, $0.001 par value per
share, outstanding as of April 17, 2001.
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INTUITIVE SURGICAL, INC.
TABLE OF CONTENTS TO FORM 10-Q
PAGE
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PART I. FINANCIAL INFORMATION
Item Financial Statements
1....
Consolidated balance sheets as of March 31, 2001 and
December 31, 2000......................................... 1
Consolidated statements of operations for the three-month
periods ended March 31, 2001 and March 31, 2000........... 2
Consolidated statements of cash flows for the three-month
periods ended March 31, 2001 and March 31, 2000........... 3
Notes to Consolidated Financial Statements.................. 4
Item Management's Discussion and Analysis of Financial Condition
2.... 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................... 21
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 BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED) (SEE NOTE 1)
Current assets:
Cash and cash equivalents................................. $ 13,670 $ 22,657
Short-term investments.................................... 63,246 66,784
Accounts receivable....................................... 10,266 6,444
Inventory, net............................................ 6,523 6,076
Prepaid expenses.......................................... 1,606 1,705
-------- --------
Total current assets.............................. 95,311 103,666
Property and equipment, net................................. 5,803 4,669
Intangible and other assets................................. 3,892 4,086
-------- --------
Total assets...................................... $105,006 $112,421
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,540 $ 7,128
Accrued compensation and employee benefits................ 1,452 2,609
Warranty accrual.......................................... 1,543 1,494
Accrued royalty expense................................... -- 1,000
Other accrued liabilities................................. 1,699 2,028
Deferred revenue.......................................... 2,340 3,552
Current portion of notes payable.......................... 2,072 2,019
-------- --------
Total current liabilities......................... 14,646 19,830
Long-term notes payable..................................... 1,473 1,861
Stockholders' equity
Preferred stock, 5,000,000 shares authorized, $0.001 par
value, issuable in series; no shares issued and
outstanding as of March 31, 2001 and December 31,
2000................................................... -- --
Common stock, 200,000,000 shares authorized, $0.001 par
value, 35,828,944 and 35,675,822 shares issued and
outstanding as of March 31, 2001 and December 31, 2000,
respectively........................................... 36 36
Additional paid-in capital................................ 187,407 186,713
Deferred compensation..................................... (1,866) (2,483)
Accumulated deficit....................................... (97,077) (93,670)
Accumulated other comprehensive income (loss)............. 387 134
-------- --------
Total Stockholders' equity........................ 88,887 90,730
-------- --------
Total liabilities and stockholders' equity........ $105,006 $112,421
======== ========
See accompanying notes to consolidated financial statements.
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INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
----------------------
MARCH 31, MARCH 31,
2001 2000
--------- ---------
Sales....................................................... $12,079 $ 2,933
Cost of sales............................................... 6,563 2,532
------- -------
Gross profit...................................... 5,516 401
Operating costs and expenses:
Research and development.................................. 3,231 2,631
Selling, general and administrative....................... 6,835 3,138
------- -------
Total operating costs and expenses................ 10,066 5,769
Loss from operations........................................ (4,550) (5,368)
Other income (expense)...................................... 1,143 336
------- -------
Net loss.................................................... $(3,407) $(5,032)
======= =======
Basic and diluted net loss per common share................. $ (0.10) $ (0.90)
======= =======
Shares used in computing net loss per common share.......... 35,401 5,574
See accompanying notes to consolidated financial statements.
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INTUITIVE SURGICAL
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
----------------------
MARCH 31, MARCH 31,
2001 2000
--------- ---------
OPERATING ACTIVITIES:
Net loss.................................................... $ (3,407) $(5,032)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 428 385
Amortization of deferred compensation..................... 617 346
Amortization of intangible and other assets............... 194 --
Changes in operating assets and liabilities:
Accounts receivable....................................... (3,822) (736)
Prepaid expenses.......................................... 99 (437)
Inventory................................................. (447) (712)
Accounts payable.......................................... (1,588) 733
Accrued compensation and employee benefits................ (1,157) (428)
Warranty accrual.......................................... 49 (25)
Other accrued liabilities................................. (329) 138
Accrued royalty expense................................... (1,000) --
Deferred revenue.......................................... (1,212) (28)
-------- -------
Net cash used in operating activities....................... (11,575) (5,796)
INVESTING ACTIVITIES:
Acquisition of property and equipment....................... (1,562) (755)
Purchase of short-term investments.......................... (10,434) --
Proceeds from sales of short-term investments............... 479 2,000
Proceeds from maturities of short-term investments.......... 13,746 4,562
-------- -------
Net cash provided by investing activities................... 2,229 5,807
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock................... -- 34,756
Proceeds from issuance of common stock...................... 755 69
Repurchase of common stock.................................. (61) (9)
Proceeds from notes payable................................. -- 500
Repayment of notes payable.................................. (335) (387)
-------- -------
Net cash provided by financing activities................... 359 34,929
-------- -------
Net increase (decrease) in cash and cash equivalents........ (8,987) 34,940
Cash and cash equivalents, beginning of period.............. 22,657 4,106
-------- -------
Cash and cash equivalents, end of period.................... 13,670 39,046
======== =======
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, 2000, included in
the Annual Report on Form 10-K of Intuitive Surgical, Inc, filed with the
Securities and Exchange Commission. The results for the interim period ended
March 31, 2001 are not necessarily indicative of the results to be expected for
the full year ending December 31, 2001 or future operating periods.
NOTE 2. CONCENTRATIONS OF RISK
For the three months ended March 31, 2001, two customers, A and B,
accounted for 21% and 14%, respectively, of total sales. For the three months
ended March 31, 2000, four customers A, B, C and D, accounted for 30%, 28%, 22%,
and 14%, respectively, of total sales. The Company extends 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 Surgical System, related instruments and accessories
and service have accounted for all of the Company's sales for the three months
ended March 31, 2001 and 2000. Purchases of key parts and components used to
manufacture our products are from limited supply sources. The inability of any
of these suppliers to fulfill our supply requirements may negatively impact
future operating results.
NOTE 3. 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 March
31, 2001 and December 31, 2000.
NOTE 4. 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 our current operations. Accordingly, all investments are
classified 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 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.
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INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5. INVENTORY, NET
Inventory, net consists of the following (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Raw materials........................................ $2,667 $2,650
Work-in-process...................................... 1,415 1,130
Finished goods....................................... 2,441 2,296
------ ------
$6,523 $6,076
====== ======
NOTE 6. INTANGIBLE AND OTHER ASSETS
Purchased intangible assets represent patents which are carried at cost
less accumulated amortization. Amortization is computed using the straight-line
method over the expected useful life of six years. At March 31, 2001 gross
intangible assets totaled $4.7 million and related accumulated amortization was
$779,000.
NOTE 7. COMPREHENSIVE LOSS
The components of comprehensive loss consist of the following (in
thousands):
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
------- -------
Net loss................................................. $(3,407) $(5,032)
Other comprehensive income (loss):
Change in unrealized gain on forward exchange
contracts........................................... (67) --
Change in unrealized gain (loss) on available-for-sale
securities.......................................... 320 (7)
------- -------
Comprehensive loss....................................... $(3,154) $(5,039)
======= =======
NOTE 8. NET LOSS PER SHARE
The following table presents the computation of basic and diluted net loss
per share (in thousands, except share and per share data):
THREE MONTHS ENDED
MARCH 31,
--------------------------
2001 2000
----------- -----------
Numerator used for basic and diluted net loss per
common share.................................... $ (3,407) $ (5,032)
Denominator used for basic and diluted net loss
per common share:
Weighted-average shares outstanding............. 35,743,685 6,691,431
Less weighted-average shares subject to
repurchase................................... (342,658) (1,116,936)
----------- -----------
Weighted-average shares used in computing basic
and diluted net loss per common share:....... 35,401,027 5,574,495
=========== ===========
Basic and diluted net loss per common share....... $ (0.10) $ (0.90)
=========== ===========
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INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 9. REVENUE RECOGNITION
Revenue from system sales 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 such
obligations are fulfilled. Our distributors do not have price protection rights.
Revenue from instruments and accessories is recognized upon shipment. Service
revenue is billed in advance and recognized over the service period. Amounts are
billed in accordance with the terms of the underlying sales agreement.
We apply the provisions of SAB 101 when recognizing revenue. SAB 101 states
that revenue generally is realized or realizable and earned when all of the
following criteria are met: a) persuasive evidence of an arrangement exists, b)
delivery has occurred or services have been rendered, c) the seller's price to
the buyer is fixed or determinable, and d) collectibility is reasonably assured.
Accordingly, amounts billed in excess of revenue recognized are included as
deferred revenue in the accompanying consolidated balance sheets.
NOTE 10. OTHER FINANCIAL INSTRUMENTS
We did not hold any forward exchange contracts at March 31, 2001. At
December 31, 2000, we had forward foreign exchange contracts of approximately 2
months duration, to exchange euro and Belgian Francs for U.S. dollars in the
total gross notional amount of $781,000. The net effect on settlement of these
contracts during the three months ended March 31, 2001 was not material to our
financial position or our results of operations and is included in other income
(expense) in the accompanying consolidated statements of operations.
NOTE 11. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). We adopted SFAS 133 effective
January 1, 2001. This statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. The adoption of SFAS 133, as
amended, has not had a significant impact on our financial position or results
of operations.
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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 March 31, 2001 and for the three-month periods ended
March 31, 2001 and March 31, 2000 should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Intuitive Surgical's Annual Report on Form 10-K for the
year ended December 31, 2000.
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)(R), da Vinci(TM), EndoWrist(TM), InSite(TM) and Navigator(TM)
are trademarks of Intuitive Surgical, Inc.
OVERVIEW
We design, manufacture, and market the da Vinci Surgical System, an
advanced surgical system that we believe represents a new generation of surgery.
The da Vinci Surgical System consists of a surgeon's console, a patient-side
cart, a high performance vision system and proprietary instruments. 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. 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 surgeons 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 Surgical 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 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 March 2001, we
received clearance from the FDA for use of our da Vinci Surgical System in
non-cardiac thoracoscopic surgical procedures.
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. A small percentage of revenue also comes from
ongoing service of installed da Vinci Surgical Systems. 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 and service 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 and ongoing service.
RESULTS OF OPERATIONS
Sales. Sales for the three months ended March 31, 2001 were $12.1 million,
up 312% from $2.9 million for the three months ended March 31, 2000. The sales
increase was primarily due to an increase in the number of da Vinci Surgical
Systems sold to 12 in the first quarter of 2001 from 3 in the first quarter of
2000.
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Gross Profit. Gross profit for the three months ended March 31, 2001 was
$5.5 million, or 46% of sales, compared with $0.4 million, or 14% of sales in
the same period last year. The improvement in gross profit resulted from sales
growth and increased manufacturing efficiencies.
Research and Development Expenses. Research and development expenses for
the three months ended March 31, 2001 were $3.2 million, up 23% from $2.6
million for the same period last year. The increase resulted primarily from
headcount additions to support product development and enhancements.
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 March 31, 2001 were $6.8
million, up 118% from $3.1 million in the same period last year. The increase
was due in large part to increases in headcount in the sales and marketing areas
to support increased revenue.
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.
Deferred Compensation. We record 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 expense and selling,
general and administrative expenses. Non-cash deferred compensation expense
included in research and development expenses was $0.4 million and $0.3 million
for the three months ended March 31, 2001 and 2000, respectively. Non-cash
deferred compensation expense included in selling, general and administrative
expenses was $0.2 million and $0.1 million for the three months ended March 31,
2001 and 2000, respectively. The remaining $1.9 million of deferred compensation
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.
Other Income (Expense). Other income (expense) for the three months ended
March 31, 2001 was $1.1 million, up 240% from $0.3 million in the same period
last year. The increase resulted from higher cash and short-term investment
balances, driven by 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 and July 2000, which raised net proceeds of
approximately $46.8 million.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering, operations were financed primarily
through sales of our preferred stock, yielding net proceeds of approximately
$127.3 million, and equipment financing arrangements yielding approximately $7.5
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 completed the initial public offering of 5,750,000 shares of our
common stock and realized net proceeds of approximately $46.8 million.
As of March 31, 2001, we had working capital of $80.7 million, compared to
$83.8 million as of December 31, 2000. The decrease in working capital during
the first quarter of 2001 approximated the net loss of $3.4 million.
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As of March 31, 2001, we had cash, cash equivalents and short-term
investments of $76.9 million, compared to $89.4 million as of December 31, 2000,
a decrease of $12.5 million. In addition to our net loss of $3.4 million, our
decrease in cash was primarily due to an increase in accounts receivable of $3.8
million. The increased accounts receivable balance reflects a return to a more
typical average days sales outstanding for our business of 76 days compared to
the 54 days at the end of the fourth quarter of 2000. Since our average selling
price is nearly $1.0 million per system, the timing of collection on only a few
systems can cause dramatic swings in our accounts receivable balances. Other
uses of cash include the payment of the $1.0 million IBM royalty accrued last
year, $1.6 million for fixed asset additions, and general working capital
requirements.
Net cash provided by financing activities was $359,000 for the three months
ended March 31, 2001, compared to $34.9 million provided during the same period
in 2000. The primary reason for the decreased cash provided by financing
activities in the first quarter of 2001 versus 2000 relates to proceeds received
from the issuance of preferred stock of $34.8 million during the first quarter
of last year.
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 and short-term investment balances,
together with revenue to be derived from the sale of our products, will be
sufficient to fund our operations at least through 2002. 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
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.
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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 this quarter was $3.4 million
compared to a net loss of $5.0 million for the same period last year. As of
March 31, 2001, we had an accumulated deficit of $97.1 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. For the three months ended March 31, 2001, AB Medica SRL,
our Italian distributor, accounted for 21% of total sales and Marubeni America
Corporation, our Japanese distributor, accounted for 14% of our total sales. For
the year ended December 31, 2000, none of our customers accounted for 10% or
more of total sales. 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.
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
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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 and operations 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 to ensure that medical products distributed domestically are safe
and effective for their intended uses. In order for us to market certain
products for use in the United States, we generally must first obtain clearance
from the FDA, pursuant to Section 510(k) of the Federal Food, Drug, and Cosmetic
Act ("FFDCA"). Clearance under Section 510(k) requires demonstration that a new
device is substantially equivalent to another legally marketed device. If we
modify our products after they receive FDA clearance, the FDA may require us to
submit a separate 510(k) or PMA for the modified product before we are permitted
to market the products in the U.S. In addition, if we develop products in the
future that are not considered to be substantially equivalent to a legally
marketed device, we will be required to obtain FDA approval by submitting a
premarket approval application ("PMA").
The FDA may not act favorably or quickly in its review of our 510(k) or PMA
submissions, or we may encounter significant difficulties and costs in our
efforts to obtain FDA clearance or approval, all of which could delay or
preclude sale of new products in the United States. Furthermore, the FDA may
request additional data, require us to conduct further testing, or compile more
data, including clinical data, in support of a 510(k) submission. The FDA may
also, instead of accepting a 510(k) submission, require us to submit a PMA,
which is typically a much more complex application than a 510(k). To support a
PMA, the FDA would likely require that we conduct one or more clinical studies
to demonstrate that the device is safe and effective, rather than substantially
equivalent to another legally marketed device. We may not be able to meet the
requirements to obtain 510(k) clearance or PMA approval, or the FDA may not
grant any necessary clearances or approvals. In addition, the FDA may place
significant limitations upon the intended use of our products as a condition to
a 510(k) clearance or PMA approval. Product applications can also be denied or
withdrawn due to failure to comply with regulatory requirements or the
occurrence of unforeseen problems following approval. Any delays or failure to
obtain FDA clearance or approvals of new products we develop, any limitations
imposed by the FDA on new product use or the costs of obtaining FDA clearance or
approvals could have a material adverse effect on our business, financial
condition and results of operations.
In order to conduct a clinical investigation involving human subjects for
the purpose of demonstrating the safety and effectiveness of a device, a company
must, among other things, apply for and obtain Institutional Review Board
("IRB") approval of the proposed investigation. In addition, if the clinical
study involves a "significant risk" (as defined by the FDA) to human health, the
sponsor of the investigation must also submit and obtain FDA approval of an
investigational device exemption ("IDE") application. We may not be able to
obtain FDA and/or IRB approval to undertake clinical trials in the U.S. for any
new devices we intend to market in the United States in the future. If we obtain
such approvals, we may not be able to comply with the
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IDE and other regulations governing clinical investigations or the data from any
such trials may not support clearance or approval of the investigational device.
Failure to obtain such approvals or to comply with such regulations could have a
material adverse effect on our business, financial condition and results of
operations. For additional information concerning regulatory approvals of our
products, see "Item 1: Business -- Government Regulation," included in the
Annual Report on Form 10-K of Intuitive Surgical, Inc., filed with the
Securities and Exchange Commission or SEC.
In March 2001, we received a warning letter from the FDA concerning our
marketing of the da Vinci Surgical System for cardiac and radical prostatectomy
procedures on our company web site. The warning letter indicated, among other
things, that we have no specific clearance for these procedures in the United
States, and therefore should not be promoting them. We have already taken
specific steps that we believe fully rectify the concerns expressed by the FDA.
In addition, prior to receiving the aforementioned warning letter, the FDA
informed us in February 2001 of its concern that radical prostatectomy was not
within the scope of procedures encompassed in the FDA's clearance of the da
Vinci Surgical System for laparoscopic surgical procedures which we received in
July 2000. This was an advisory, or guidance, letter. Although we disagree with
the agency's interpretation regarding the scope of the cleared intended use, we
have ceased marketing the product for this indication and have submitted a
510(k) application to the FDA seeking clearance for a radical prostatectomy
indication for the da Vinci Surgical System. We have received a 510(k) document
control number from the FDA and expect a response to this filing by
approximately the end of the second quarter.
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
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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.
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 "Item 1: Business -- Third-Party Reimbursement," included in the
Annual Report on Form 10-K of Intuitive Surgical, Inc., filed with the SEC.
WE ARE INVOLVED IN INTELLECTUAL PROPERTY LITIGATION WITH COMPUTER MOTION AND
BROOKHILL-WILK 1, LLC 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. On October 30, 2000, Computer Motion filed a motion seeking to add
U.S. Patent Number 6,102,850 to the litigation. These patents concern methods
and devices for conducting various aspects of robotic surgery. On December 7 and
8, 2000, the U.S. Patent and Trademark Office ("PTO") declared three
interferences between a single SRI patent application exclusively licensed to us
and three of Computer Motion's patents, Numbers 5,878,193, 5,907,664 and
5,855,583. In light of those declarations of interference, the District Court on
February 5, 2001 stayed -- put on hold -- all proceedings in the litigation for
one year while the PTO conducts the interference proceedings.
If the litigation proceeds after the PTO has resolved the interferences,
and 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.
On September 1, 2000, Brookhill-Wilk 1, LLC ("Wilk") filed a lawsuit in the
United States District Court for the Southern District of New York (Case No. 00
Civ. 6599 (NRB)) alleging that by making, using, selling or offering for sale
our da Vinci Surgical System, we are infringing U.S. Patent Nos. 5,217,003 and
5,368,015 in willful disregard of Wilk's patent rights. These patents concern
methods and devices for "remote" surgery. In March 2001, Wilk withdrew its
assertion of the '015 patent against Intuitive. If we lose Wilk's suit
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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 may need to obtain from Wilk a license to this technology if we are to
continue to market our products that have been found to infringe Wilk's patents.
This license could be expensive, which could seriously harm our business. We
believe that we have multiple meritorious defenses in this action. However,
litigation is unpredictable and we may not prevail with any of these defenses.
If Wilk is successful in its suit against us and is unwilling to grant us a
license, we may be required to stop selling our products that are found to
infringe Wilk's patents unless we can redesign them so they do not infringe
Wilk's patents, which we may be unable to do. In addition, if we lose the patent
suit, we could be required to pay Wilk damages, including treble damages, which
could be substantial and harm our financial position.
These claims will be expensive to litigate, may be protracted and our
confidential information may be compromised. Whether or not we are successful in
these lawsuits, this litigation could consume substantial amounts of our
financial and managerial resources. At any time Computer Motion or Wilk may file
additional claims against Intuitive Surgical, or we may file claims against
Computer Motion or Wilk, which could increase the risk, expense and duration of
the litigations. 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 "Item 1:
Business -- Legal Proceedings," included in the Annual Report on Form 10-K of
Intuitive Surgical, Inc., filed with the SEC.
PUBLIC ANNOUNCEMENTS OF LITIGATION EVENTS MAY HURT OUR STOCK PRICE.
During the course of our administrative proceedings and/or lawsuits with
Computer Motion and Brookhill-Wilk 1, LLC, 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
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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 and Brookhill-Wilk 1, LLC have 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 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 "Item 1: Business -- Intellectual Property," included in the Annual Report
on Form 10-K of Intuitive Surgical, Inc., 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 "Item 1:
Business -- Intellectual Property," included in the Annual Report on Form 10-K
of Intuitive Surgical, Inc., filed with the SEC.
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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.
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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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 contained in
the FDA's Quality System Regulations (QSR). 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 satisfactorily resolved with the FDA. 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
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
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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 32% of our sales for the year ended December 31, 2000, 52% for the
three months ended March 31, 2001 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;
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- 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 2002. 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.
SALES BY CURRENT STOCKHOLDERS COULD CAUSE OUR COMMON STOCK PRICE TO DECLINE.
The market price of our common stock could decline as a result of sales of
a large number of shares in the market. These sales may also make it more
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate to raise funds through future offerings of common
stock. As of March 31, 2001, several entities beneficially owned more than 5% of
the outstanding shares of our common stock, including Mayfield Fund, Investor
Guernsey Ltd. and PaTMarK Company, Inc. On May 8, 2001, Mayfield Fund
distributed 1,734,176 shares of Intuitive common stock to its members.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are not subject to any meaningful market risks related to currency,
commodity prices or similar matters. We are sensitive to short-term interest
rate fluctuations to the extent that such fluctuations impact the interest
income we receive on the investment of the remaining proceeds from our June 2000
initial public offering.
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 March 2001 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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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. On October 30, 2000, Computer Motion filed a motion seeking to add
U.S. Patent Number 6,102,850 to the litigation. Each of these nine patents
concerns methods and devices for conducting various aspects of robotic surgery.
Until February 2001, the litigation was proceeding in the early stages of
discovery, with no trial date set. In February 2001, in response to Intuitive's
request, the District Court stayed -- put on hold -- all proceedings in the
litigation because of the declaration by the U.S. Patent and Trademark Office
("PTO") of three interferences between a single SRI patent application
exclusively licensed to us and three of Computer Motion's patents (see next
paragraph). A status report is due to the Court in one year, or earlier if the
interferences are resolved before then. 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 continue to believe we have multiple
meritorious defenses to this action, we cannot assure you that we ultimately
will prevail on any issue in the litigation or that we will be able to
successfully defend Computer Motion's charges, nor can we provide assurance that
any license required would be made available on commercially acceptable terms,
if at all. Failure to successfully defend 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 and as recently as January 2001, we requested that
the PTO declare interferences between some of our exclusively licensed SRI
patent applications and six of Computer Motion's U.S. patents. An interference
is a proceeding within the U.S. Patent Office to resolve questions regarding the
patentability of inventions and who first invented subject matter claimed by two
or more patents or patent applications. On December 7 and 8, 2000, the PTO
formally declared three interference proceedings between a single SRI patent
application licensed to us and three of Computer Motion's patents: Nos.
5,878,193, 5,907,664 and 5,855,583. Several of our requests for other
interferences are still pending. Because the SRI patent application licensed to
Intuitive was filed in January 1992 and Computer Motion's three patents were
filed no earlier than August 1992 and as late as February 1996, SRI/Intuitive
will be the "Senior Party" in each interference. As "Junior Party," Computer
Motion will bear the burden of proving that it is entitled to keep its patents.
Each party filed its preliminary motions in the three interferences on March 7,
2001. A hearing on those motions is expected sometime in late summer or early
autumn of 2001, with decisions expected before year-end.
In September 2000, we filed a Notice of Opposition in the European Patent
Office ("EPO") challenging European Patent No. 653,922, which was issued to
Computer Motion in 1999 and is related to several of the patents now involved in
the U.S. litigation and the interference proceedings. An Opposition proceeding
allows the EPO to determine whether the challenged patent should be revoked in
its entirety, should be amended, or should remain unaltered. In its Notice of
Opposition, Intuitive cited numerous prior art references not cited to the EPO
during the '922 patent's original prosecution.
On March 30, 2001, Intuitive and International Business Machines
Corporation ("IBM") jointly filed suit against Computer Motion, Inc. ("CMI") in
the U.S. District Court for the District of Delaware. The complaint alleges that
by continuing to make, use, sell, and offer for sale its AESOP and ZEUS voice-
controlled products, CMI willfully infringes U.S. Patent No. 6,201,984. The '984
patent issued to IBM on March 13, 2001, and is exclusively licensed to us under
the terms of our 1997 License Agreement with IBM. The '984 patent concerns
various aspects of controlling movement of surgical instruments with voice
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commands and predates by several years CMI's development of voice-controlled
surgical robots. Because CMI's voice-controlled HERMES product interfaces with
the AESOP and ZEUS products, HERMES is also implicated in the patent
infringement complaint.
On September 1, 2000, Brookhill-Wilk 1, LLC ("Wilk") filed a lawsuit in the
United States District Court for the Southern District of New York (Case No. 00
Civ. 6599 (NRB)) alleging that by making, using, selling or offering for sale
our da Vinci Surgical System, we are infringing U.S. Patent Nos. 5,217,003 and
5,368,015 in willful disregard of Wilk's patent rights. These patents concern
methods and devices for "remote" surgery. In March 2001, Wilk withdrew its
assertion of the '015 patent against Intuitive. If we lose Wilk'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 may
need to obtain from Wilk a license to this technology if we are to continue to
market our products that have been found to infringe Wilk's patents. This
license could be expensive, which could seriously harm our business. We believe
that we have multiple meritorious defenses in this action. However, litigation
is unpredictable and we may not prevail with any of these defenses. If Wilk is
successful in its suit against us and is unwilling to grant us a license, we may
be required to stop selling our products that are found to infringe Wilk's
patents unless we can redesign them so they do not infringe Wilk's patents,
which we may be unable to do. In addition, if we lose the patent suit, we could
be required to pay Wilk damages, including treble damages, which could be
substantial and harm our financial position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 2001, we have sold and issued the following unregistered
securities:
(1) From January 1, 2001 through March 31, 2001, we granted stock
options to purchase 1,523,450 shares of our common stock, at prices ranging
from $5.38 to $8.44 per share, to employees pursuant to our 2000 Equity
Incentive Plan.
(2) From January 1, 2001 through March 31, 2001, we granted stock
options to purchase 40,000 shares of common stock, at $8.63 per share, to
directors pursuant to our 2000 Non-Employee Directors' Stock Option Plan.
(3) On January 31, 2001, we issued 102,629 shares at an exercise price
of $7.12 per share, to employees pursuant to our 2000 Employee Stock
Purchase Plan.
The sales and issuance of securities described in paragraphs (1), (2) and
(3) 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1(1) Amended and Restated Certificate of Incorporation of
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.
- ---------------
(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) Current Reports on Form 8-k. We did not file a Current Report on Form
8-K during the three month period ending March 31, 2001.
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SIGNATURES
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
Date: May 14, 2001
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1(1) Amended and Restated Certificate of Incorporation of
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.
- ---------------
(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.