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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
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)
DELAWARE 77-0416458
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(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification Number)
950 KIFER RD
SUNNYVALE, CA 94086
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(Address of Principal Executive Offices including Zip Code)
(408) 523-2100
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
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 period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ X ] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant on June 28, 2002, based upon the closing price of Common Stock on
such date as reported by Nasdaq, was approximately $289,351,649. Shares of
voting stock held by each officer and director have been excluded in that such
persons may be deemed to be affiliates. This assumption regarding affiliate
status is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant's common stock on
February 28, 2003 was 36,920,459.
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INTUITIVE SURGICAL, INC.
2002 ANNUAL REPORT ON FORM 10-K
INDEX
PART I. PAGE
Item 1. Business 4
Item 2. Properties 26
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 30
PART II.
Item 5. Market for the Registrant's Common Equity and Related 30
Stockholder Matters
Item 6. Selected Consolidated Financial Data 31
Item 7. Management's Discussion and Analysis of Financial Condition 32
and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 57
Item 8. Financial Statements and Supplementary Data 58
Item 9. Changes in and Disagreements with Accountants on Accounting 58
and Financial Disclosures
PART III.
Item 10. Directors and Executive Officers of the Registrant 59
Item 11. Executive Compensation 62
Item 12. Security Ownership of Certain Beneficial Owners and 66
Management
Item 13. Certain Relationships and Related Transactions 69
Item 14. Disclosure Controls and Procedures 69
PART IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 70
8-K
SIGNATURES 72
CERTIFICATIONS 73
EXHIBIT INDEX 104
PART I
ITEM 1: BUSINESS
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements based on our
current expectations about our company and our industry. You can identify these
forward-looking statements when you see us using words such as "expect,"
"anticipate," "estimate" and other similar expressions. These forward-looking
statements involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of the factors described in the "Factors Affecting Operating Results"
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this report. We undertake no obligation
to publicly update any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.
COMPANY BACKGROUND
Intuitive Surgical, Inc. was founded in 1995. We are a Delaware corporation with
our principal executive offices located at 950 Kifer Road, Sunnyvale, California
94086, our telephone number is (408) 523-2100 and our website address is
www.intuitivesurgical.com. 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.
We design, manufacture and market the da Vinci Surgical System, an advanced
surgical system that we believe represents a new generation of surgery -- the
third generation. We believe that this new generation of surgery, which we call
Intuitive surgery, is a revolutionary advance similar in scope to the previous
two generations of surgery -- open surgery and minimally invasive surgery, or
MIS. Our da Vinci Surgical System consists of a surgeon's console, a
patient-side cart, a high performance vision system and proprietary "wristed"
instruments. By placing computer-enhanced technology between the surgeon and
patient, we believe that our system enables surgeons to perform better surgery
in a manner never before experienced. The da Vinci Surgical System seamlessly
translates the surgeon's natural hand movements on instrument controls at a
console into corresponding micro-movements of instruments positioned inside the
patient through small puncture incisions, or ports. Our da Vinci Surgical System
provides 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
MIS.
In March 1997, surgeons using an early prototype of our technology successfully
performed Intuitive surgery on humans. Beginning in May 1998, surgeons using our
technology successfully performed what we believe were the world's first
computer-enhanced closed chest heart surgeries, including mitral valve repair,
dissection of an internal mammary artery and grafting of a coronary artery. In
early 2000, surgeons using our technology successfully completed what we believe
was the world's first beating heart bypass procedure using only small ports. The
da Vinci Surgical System can be used to control Intuitive Surgical endoscopic
instruments including, rigid endoscopes, blunt and sharp endoscopic dissectors,
scissors, scalpels, forceps/pickups, needle holders, endoscopic retractors,
stabilizers, electrocautery, and
accessories during a wide range of surgical procedures. In July 2000, we
received marketing clearance from the U.S. Food and Drug Administration, or FDA
for general surgery procedures. We received clearance for a non-cardiac
thoracoscopic surgery indication for the product in March 2001. Additionally, in
May 2001 we received clearance for use of our products in laparoscopic
prostatectomy procedures, and in November 2002 we received clearance for use of
our products in thoracoscopically-assisted cardiotomy procedures. As of December
31, 2002, we had sold 149 of our da Vinci Surgical Systems and surgeons using
our technology had successfully completed several thousand surgery procedures of
various types.
The first generation of surgery, open surgery, remains the predominant form of
surgery and is still used in almost every area of the body. However, the large
incisions required for open surgery create significant trauma to the patient,
resulting in long hospitalization and recovery times, increased hospitalization
costs, and significant pain and suffering. Over the past two decades, the second
generation of surgery, MIS, has reduced trauma to the patient by allowing some
surgeries to be performed through small ports rather than large incisions,
resulting in shorter recovery times, fewer complications and reduced
hospitalization costs. MIS has been widely adopted for certain surgical
procedures, but it has not been widely adopted for complex procedures. We
believe surgeons have been slow to adopt MIS for complex procedures because they
generally find that fine tissue manipulations, such as dissecting and suturing,
using these techniques are more difficult to learn and perform, and are less
precise, than in open surgery.
The da Vinci System enables surgeons to overcome many of the shortcomings of
both open surgery and MIS. Surgeons operate while seated comfortably at a
console viewing a bright and sharp 3-D image of the surgical field. This
immersive visualization results in surgeons no longer feeling disconnected from
the surgical field and the instruments, as they do when using an endoscope in
MIS. While seated at the console, the surgeon manipulates instrument controls in
a natural manner, just as he or she has been trained to do in open surgery. Our
technology is designed to provide surgeons with a range of motion in the
surgical field analogous to the motions of a human wrist, while filtering out
the tremor inherent in every surgeon's hand. In designing our products, we have
focused on making our technology as simple as possible to use. In our
experience, based on over a thousand procedures, surgeons can learn to
manipulate our instruments with only a short amount of training and can learn to
perform Intuitive surgery with less training than is required for MIS.
Our products are designed to make a broad range of open surgical and MIS
procedures suitable for Intuitive surgery. The da Vinci Surgical System is
designed to allow surgeons to perform better surgery while providing patients
with the benefits of MIS. We believe that these advantages will enable us to
drive a fundamental change in surgery.
THIRD GENERATION SURGERY: THE INTUITIVE SURGICAL SOLUTION
The da Vinci System is designed to provide the surgeon the range of motion, fine
tissue control and 3-D vision characteristic of open surgery while
simultaneously allowing the surgeon to work through the small ports used in MIS.
All this is accomplished in an intuitive manner, in the same way that the
movements of a surgeon's hands in open surgery are entirely intuitive.
We believe that our technology overcomes many of the limitations of existing MIS
in the following ways:
- Natural Instrument Movements. Our technology is designed to directly
transform the surgeon's natural hand movements outside the body into
corresponding micromovements inside the patient's body. For example,
a hand movement to the right outside the body causes the instrument
inside the patient to be moved to the right, eliminating the
backward nature of existing MIS.
- EndoWrist Instruments Provide Natural Dexterity and Range of Motion.
Our technology is designed to provide surgeons with a range of
motion in the surgical field analogous to the motions of a human
hand and wrist. Our proprietary instruments, which we call EndoWrist
instruments, incorporate "wrist" joints that enable surgeons to
reach behind tissues and suture with precision, just as they can in
open surgery. The surgeon controls the joint's movements from the
surgeon's console using natural hand and wrist movements. EndoWrist
joints are located near the tips of all of our instruments.
- More Precise Movements and Reduced Tremor. With our technology, the
surgeon can also use "motion scaling," a feature that translates,
for example, a three millimeter hand movement outside the patient's
body into a one millimeter instrument movement in the surgical field
inside the patient's body. Motion scaling is designed to allow
greater precision than is normally achievable in both open surgery
and MIS. In addition, our technology is designed to filter out the
tremor inherent in every surgeon's hands.
- Immersive 3-D Visualization. Our vision system, which we call the
InSite vision system, is designed to give surgeons the perception
that their hands are immersed in the surgical field even though they
are outside the patient's body. As a result, we believe that
surgeons no longer feel disconnected from the surgical field and the
instruments, as they currently do with MIS. In addition, we believe
that the InSite system provides a much brighter and sharper image
than any other 3-D endoscope vision system. The InSite system also
incorporates our proprietary Navigator camera control technology
that allows the surgeon to easily change, move, zoom and rotate his
or her field of vision. The combination of these features offers
what we believe is the most advanced surgical vision system
available today.
- Easy to Learn, Easy to Master. In designing our products, we have
focused on making our technology as simple as possible to use, even
though it is inherently complex. We believe that tissue
manipulations using our products are as natural as hand movements in
open surgery. In our experience, based on feedback from surgeons who
have performed hundreds of procedures, surgeons can learn to
manipulate our instruments with only a short amount of training.
Learning to perform surgical procedures using the da Vinci Surgical
System will vary depending on the complexity of the procedure and
the surgical team's experience with MIS techniques.
- Multi-Specialty Surgical Platform. The da Vinci Surgical System is
designed to enable surgeons to perform surgery in virtually any part
of the body. To date, surgeons have used the da Vinci Surgical
System to perform over 100 different types of surgical procedures.
We believe that these advantages give the patient the benefits of less traumatic
MIS while restoring to the surgeon the range of motion and fine tissue control
possible with open surgery,
along with further enhancements such as tremor reduction, motion scaling and
superior visualization.
We believe that our technology has the potential to change surgical procedures
in two basic ways:
- - Convert procedures which are currently performed through large
traditional incisions to Intuitive surgery.
- - Facilitate Difficult MIS Operations. We believe surgical procedures
that today are performed only rarely using MIS techniques will be
performed routinely and with confidence using Intuitive surgery. Some
procedures have been adapted for port-based techniques but are
extremely difficult and are currently performed by a limited number of
highly skilled surgeons. We believe our da Vinci Surgical System will
enable more surgeons at more institutions to perform these procedures.
AGREEMENT AND PLAN OF MERGER
On March 7, 2003, we entered into an Agreement and Plan of Merger with Computer
Motion, Inc. Pursuant to the merger agreement, a wholly owned subsidiary of our
company will merge with Computer Motion, with Computer Motion surviving the
merger and continuing as a wholly owned subsidiary of our company.
Upon completion of the merger, each share of Computer Motion common stock will
be converted into the right to receive a fraction of a share of our common
stock. The fraction of a share of our common stock to be issued with respect to
each share of Computer Motion common stock will be determined by a formula
described in the merger agreement. Based on the expected capitalization of
Intuitive Surgical and Computer Motion on an assumed closing date of June 20,
2003, we estimate that the exchange ratio will range from approximately 0.48 to
0.52 depending on the average Computer Motion common stock price during a
defined period prior to closing. Based on these assumptions and on Computer
Motion's common stock price as of the date of this Annual Report on Form 10-K,
we estimate that we will issue approximately 14.7 million shares of our common
stock in the merger and will reserve approximately 5.7 million additional shares
of our common stock for future issuance in connection with our assumption of
Computer Motion's outstanding options and warrants (including out-of-the-money
options and warrants). Further, we estimate that, upon completion of the merger,
our current stockholders will own approximately 72% of the then outstanding
shares of our common stock and former Computer Motion stockholders will own
approximately 28% of the then outstanding shares of our common stock. These
estimates are subject to change depending on such factors as the number of
fully-diluted shares we and Computer Motion have outstanding at closing,
Computer Motion's stock price, and whether outstanding options and warrants of
Computer Motion are exercised prior to closing.
Completion of the merger is subject to the approval of the stockholders of our
company and Computer Motion. Certain stockholders of Computer Motion and our
company have agreed to vote their respective shares in favor of the transaction.
In connection with the proposed merger, we have entered into a Loan and Security
Agreement with Computer Motion pursuant to which we have agreed to provide a
short-term secured bridge loan facility of up to $7.3 million. Computer Motion
may use the facility to pay off existing indebtedness and to fund operations
prior to completion of the merger. This facility terminates and all outstanding
amounts become due and payable 120 days following termination of the merger
agreement, subject to acceleration upon the
occurrence of specified events. Interest on the facility will accrue at a rate
of 8% per annum and will be payable on the maturity date.
Our company and Computer Motion have obtained an immediate stay through
August 31, 2003 of all proceedings in the pending litigation proceedings between
the companies. As part of the stays the courts have ceased all further activity
in the cases during the period of stays, and will not issue any opinions or
orders on issues already submitted for decision. The stays may be terminated
before, or extended beyond, August 31, 2003 under specified circumstances. In
the event the merger is completed, our company and Computer Motion will request
dismissal with prejudice of the pending litigations.
In reaching its decision to approve the merger agreement, the Intuitive Surgical
board of directors considered a variety of factors, including the following:
- Complementary Nature of Technologies. Our board of directors
believes there is a strategic fit between the technologies of our
company and Computer Motion, including the core competencies,
intellectual property rights and focus areas of the companies. Our
board of directors believes that the merger will permit all major
products and technologies currently provided by both companies to
survive to the benefit of the surgical community for the foreseeable
future. Our board of directors further believes that the merger will
permit the companies to focus the talent and energy of the combined
organization on developing and growing the application of robotics
to minimally invasive surgery, bringing significant benefits to
patients, surgeons and medical centers throughout the world. Our
board of directors believes that the combined company has the
opportunity to enhance its future prospects through the development
of products utilizing the technologies and expertise of Intuitive
Surgical and Computer Motion.
- Dismissal of Patent Litigation. Our board of directors weighed the
benefits of the dismissal of the pending patent litigations with
Computer Motion upon completion of the merger. Our board of
directors considered the diversion of management's attention and
significant expense associated with ongoing patent litigation. Our
board of directors also weighed the possibility that any the
litigation could result in Intuitive Surgical being found to
infringe the intellectual property rights of Computer Motion, which
could be ruled to be valid and enforceable and could result in
Intuitive Surgical being required to obtain a license from, and pay
damages and/or royalties to, Computer Motion or, in the event the
parties were unable to agree on the terms of a license to redesign
or withdraw from the market one or more of Intuitive Surgical's
products or product configurations.
- Synergies. Our board of directors evaluated the potential synergies
of a combination of Intuitive Surgical with Computer Motion,
including the complementary nature of the business of Intuitive
Surgical and Computer Motion and the opportunity for significant
cost savings. Our board of directors noted that, although no
assurances can be given that any particular level of synergies can
be achieved, our management anticipates annual pre-tax cost savings
of approximately $18 million commencing in late 2003 as a result of
the merger. A significant portion of the cost savings will result
from a substantial reduction in headcount. Our ability to achieve
these goals is subject to economic conditions, and therefore there
can be no assurance that these results will be achieved.
INTUITIVE SURGICAL'S PRODUCTS
Our principal products include the da Vinci Surgical System and a variety of
"smart disposable" EndoWrist instruments.
DA VINCI SURGICAL SYSTEM
Surgeon's Console. The da Vinci Surgical System allows the surgeon to operate
while comfortably seated at an ergonomic console viewing a 3-D image of the
surgical field. The surgeon's fingers grasp the instrument controls below the
display with wrists naturally positioned relative to his or her eyes. Using
hardware, software, algorithms, mechanics and optics, our technology is designed
to seamlessly translate the surgeon's hand movements into precise and
corresponding real-time microsurgical movements of the EndoWrist instruments
inside the patient.
Patient-Side Cart. The patient-side cart, which can be easily moved next to the
operating table, holds electromechanical arms that manipulate the instruments
inside the patient. Three arms attached to the cart can be easily positioned as
appropriate, and then locked into place. The first two arms, one representing
the left hand and one the right hand of the surgeon, hold our EndoWrist
instruments. The third arm positions the endoscope, allowing the surgeon to
easily change, move, zoom and rotate his or her field of vision.
3-D Vision System. The vision system includes our InSite high resolution 3-D
endoscope with two separate vision channels linked to two high resolution,
progressive scan color monitors. The vision system also incorporates our InSite
image processing equipment comprised of high performance video cameras,
specialized edge enhancement and noise reduction equipment. The resulting 3-D
image has high resolution and contrast and no flicker or cross-fading, which
occurs in single monitor systems, and minimizes eye fatigue. Our vision system
allows the surgeon to move his or her head in the viewer without affecting image
quality.
ENDOWRIST INSTRUMENTS
We manufacture a variety of EndoWrist instruments, each of which incorporates a
wrist joint for natural dexterity, with tips customized for various surgical
procedures. These EndoWrist instruments are currently approximately seven
millimeters in diameter. The instruments mount onto the electromechanical arms
that represent the surgeon's left and right hands and provide the mechanical
capability necessary for performing complex tissue manipulations through ports.
At their tips, the various EndoWrist instruments include forceps, scissors,
electrocautery, scalpels and other surgical tools that are readily familiar to
the surgeon from open surgery and MIS. Generally, a variety of EndoWrist
instruments are selected and used interchangeably during the surgery. Where
instrument tips need to incorporate a disposable component, for example, scalpel
blades, we sell disposable inserts. We plan to continue to add new types of
EndoWrist instruments for additional types of surgical procedures.
The EndoWrist instruments are "smart disposables" because they are
resterilizable and reusable for a defined number of procedures. A custom
computer chip inside each instrument performs several functions that help
determine how the system and instruments work together. When an EndoWrist
instrument is attached to an arm of the patient-side cart, the chip performs an
"electronic handshake" that ensures the instrument was manufactured by us and
recognizes the type and function of the instrument and number of past uses. For
example, the chip distinguishes between scissors and a scalpel and controls the
unique functions of different instruments as appropriate. In addition, the chip
will not allow the instrument to be used for more than the prescribed number of
procedures so that its performance meets specifications during each
procedure.
USING THE DA VINCI SURGICAL SYSTEM
During a procedure, the patient-side cart is positioned next to the operating
table with the electromechanical arms arranged to provide access to the initial
ports selected by the surgeon. Metal tubes attached to the arms are inserted
through the ports, and the EndoWrist instruments are introduced through the
tubes into the patient's body. The surgeon then performs the procedure while
sitting comfortably at the surgeon's console, manipulating the instrument
controls and viewing the operation through our InSite vision system. When a
surgeon needs to change an instrument, as is done many times during an
operation, the instrument is withdrawn from the surgical field using the
controls at the console, in similar fashion to the way a surgeon withdraws
instruments from the patient in MIS. A scrub nurse standing near the patient
removes the unwanted instrument from the electromechanical arm and replaces it
with the new instrument, in a process designed to be rapid enough not to disturb
the natural flow of the procedure. As a result, the scrub nurse plays a role
similar to that played in open surgery and MIS. At the conclusion of the
operation, the metal tubes are removed from the patient's body and the small
incisions are sutured or stapled.
OUR STRATEGY
Our goal is to establish Intuitive surgery as the standard for complex surgical
procedures and many other procedures currently performed using either open
surgery or MIS. We intend to accomplish this objective both by pioneering new
types of endoscopic surgery and by making existing MIS procedures easier, safer
and more cost effective. Over time, our strategy is to broaden the number of
procedures performed using the da Vinci Surgical System and to educate surgeons
and hospitals as to the benefits of Intuitive surgery. Key elements of this
strategy include:
Focus on Key Institutions. Our marketing efforts are focused on both academic
and community hospitals. Following the initial placement at a given hospital, we
endeavor to expand the number of physicians who use the da Vinci Surgical System
and work with the hospitals and their surgeons to promote patient education as
to the benefits of Intuitive surgery. We believe that these efforts will result
in increased usage per system, leading to high volume sales of instruments and
sales of additional systems at each hospital. In addition, we believe such
efforts will benefit early-adopting hospitals by increasing their market share
in the procedures and specialties that benefit from Intuitive surgery. We expect
these efforts to increase demand for our products among competitive hospitals,
surgeons and referring physicians.
Focus on Leading Surgeons to Drive Rapid and Broad Adoption. We place
significant emphasis on marketing the da Vinci Surgical System to leading
surgeons who are considered to be the "thought leaders" in their institutions
and fields. These surgeons typically perform complex surgical procedures that
are currently not adaptable to MIS techniques. For example, cardiac procedures,
of which over one million are currently performed annually worldwide, are among
the most difficult to perform using MIS techniques. This strategy puts surgeons
at the forefront of procedure development and provides them an opportunity to
maintain a competitive edge in their specialty. We believe that early adoption
of our products by surgical thought leaders will give many other surgeons the
confidence that the da Vinci Surgical System can be used for all types of
surgical procedures. In addition to working with academic-based thought leaders,
we
will work with busy community-based surgeons who are focused on differentiating
themselves within their community. We will help them expand their busy clinical
practice by offering their patients an increased number of MIS procedures.
Develop Protocols for New Surgical Procedures. We intend to leverage our
relationships with key institutions and surgical thought leaders to develop
protocols for new surgical procedures. These protocols would include guidance on
patient screening, port placement, interaction of the surgical team and advice
on the sequence and selection of tools and maneuvers. We believe that
establishing protocols for a given procedure will facilitate the broader
adoption of Intuitive surgery for that procedure.
Maintain Market Leadership. We intend to maintain our leadership advantage by
continuing to develop and enhance our technology and to communicate the benefits
of our da Vinci Surgical System to surgeons, hospitals and patients. We will
continue to improve our da Vinci Surgical System through software and hardware
enhancements and by developing new surgical instruments. We will also continue
to develop our surgical platform to facilitate and support future surgical
innovations.
CLINICAL APPLICATIONS
We believe our technology is capable of enhancing or enabling a wide variety of
procedures in many surgical specialties. To date, surgeons using our da Vinci
Surgical System have performed several thousand surgical procedures of various
types, including general, cardiothoracic, and urologic surgery. These surgical
applications which, are currently cleared by the FDA, are further described
below.
GENERAL SURGERY
Cholecystectomy. Removal of the gallbladder, or cholecystectomy, is the most
common procedure performed by general surgeons. The procedure is used to treat
cholecystitis, which is an inflammation of the gall bladder. Although a
minimally invasive approach, called a laparoscopic cholecystectomy, is now well
accepted for routine cases, there is great variability in the level of skill
required to accomplish the procedure. The skill level necessary to complete a
laparoscopic cholecystectomy is dependent on the disease status the surgeon
discovers after the abdomen is entered. For example, acute cholecystitis can
result in inflammation and the abnormal union of tissues resulting from the
formation of new fibrous tissue in the inflammatory process. As a result, very
meticulous surgery to access gallbladder anatomy can be required. Similarly,
during the operation, the surgeon may find a condition known as
choledocolithiasis, or stones in the common bile duct. The surgeon may choose to
incise or cut the common duct to extract stones that are caught between the
liver and intestine. Exploration of the common bile duct is an extremely
delicate procedure that requires micro-sutures to be placed in the common duct.
Most surgeons will not do this procedure laparoscopically because of its
difficulty. This usually results in a conversion to open technique or another
surgical or delicate gastrointestinal endoscopic procedure to extract the
stones. With our technology, we believe that the surgeon will have expanded
capability to deal with complicated cholecystectomies and can avoid subjecting
the patient to a second procedure.
Nissen Fundoplication. Nissen fundoplication is a general surgical procedure
that is performed to
correct esophageal reflux. Esophageal reflux disease is a digestive disorder
that affects the muscle connecting the esophagus with the stomach. As an
elective procedure, Nissen fundoplication is currently performed on only a small
fraction of candidates who suffer from this condition because the open surgical
procedure is quite invasive. An MIS alternative exists, but there are only a
limited number of surgeons skilled in the procedure. We believe that our
technology will significantly improve the ease of performing the Nissen
procedure through ports. Specifically, our technology will address the two most
difficult steps in this procedure, which are made more difficult by existing MIS
techniques, esophageal dissection and suturing of the fundus of the stomach. If
adoption of our technology becomes widespread for Nissen procedures, we believe
that the number of surgeons able to perform a Nissen procedure using port-based
techniques will increase. Further, we expect that the widespread availability of
a port-based approach may significantly expand the number of surgeries
performed.
CARDIOTHORACIC SURGERY
Internal Mammary Artery Dissection. In a coronary artery bypass graft procedure
used in cardiac surgery, a blocked coronary artery is bypassed with a graft.
When available, an artery from the chest called the internal mammary artery is
dissected from its natural position and grafted into place to perform the
bypass. Because the internal mammary artery is located on the underside of the
anterior surface of the chest, dissection of the vessel is challenging using
existing surgical instruments through the three- to five-inch incision currently
used in a coronary artery bypass graft procedure. The da Vinci instruments have
multiple joints that emulate the surgeon's shoulders and elbows, allowing exact
positioning of the instruments inside the patient's chest. In addition, the
EndoWrist joints permit the surgeon to reach behind the tissues for easier
dissection of the internal mammary artery. Thus, we believe that the internal
mammary artery can be dissected with greater ease and precision using our
technology.
Thoracoscopy. A number of procedures performed in the thorax, or chest cavity,
can be accomplished by minimally invasive methods. These methods are generally
referred to as thoracoscopic procedures. They include various types of lung
resection, biopsy procedures, node dissections, nerve resections and esophageal
surgery. Conventional thoracoscopic tools have all the limitations of
conventional laparoscopic tools, such as "backward" movement and limited range
of motion. We believe that the capability of our technology to operate
dexterously in the often very small and restrictive space of the chest cavity
will offer significant clinical value in the performance of advanced
thoracoscopic procedures.
Mitral Valve Repair/Replacement. Valve repair and replacement surgeries are
challenging even when using open surgical techniques. Significant exposure of
the surgical field is essential to the identification and precise manipulation
of valves and other structures inside the heart, and is key to successful
surgical outcomes with minimal complications. Motion scaling allows a surgeon
using our da Vinci Surgical System to maneuver instruments inside the patient
even more precisely than is possible in open surgery. Our system has already
enabled heart valve repairs to be performed through small ports in a manner that
could not have been accomplished with open surgery. Replacement of valves
currently requires a small incision, even if the majority of the procedure is
eventually performed through ports using our technology, because the replacement
valve itself is too large to be inserted into the chest through a port. However,
new valve designs that can be delivered through ports are being developed, and
the small incisions necessary today to deliver a replacement valve to the heart
may eventually not be required, allowing a surgeon
using the da Vinci Surgical System to replace a valve entirely using ports.
UROLOGIC SURGERY
Radical prostatectomy is the removal of the prostate gland in patients diagnosed
with clinically localized prostatic cancer. The current approach to removal of
the prostate is via an open surgical procedure or a laparoscopic approach. The
laparoscopic approach while not prevalent, is difficult and poses challenges to
even the skilled urologist. Patient demand for a minimally invasive approach to
the radical prostatectomy is increasing. The da Vinci Surgical system allows for
improved visualization of the gross anatomy (dorsal veins, endopelvic fascia,
bladder muscle, puboprostatic ligaments), microanatomy (bladder muscosa, nerve
bundles) and tissue planes which are critical for an anatomic dissection. Da
Vinci radical prostatectomy allows for good oncologic results, better
anastomoses, reduced operative blood loss, less postoperative pain, improved
cosmesis and potentially a better nerve-sparing technique. The technology has
enabled surgeons to convert from an open technique to a minimally invasive
technique with great ease.
ADDITIONAL CLINICAL APPLICATIONS
The da Vinci Surgical System has full regulatory clearance in Europe and has
been used for other applications which have not yet been cleared by the FDA. In
addition, we believe there are numerous additional applications that can be
addressed with the da Vinci Surgical System. Some of these applications include
totally endoscopic coronary artery bypass surgery, vascular surgery such as
aorto-femoral bypass and aortic aneurysm repair, gynecologic and orthopedic
surgery.
Totally Endoscopic Coronary Artery Bypass (TECAB). Coronary artery bypass graft
surgery demands that the surgeon delicately dissect and precisely suture very
small structures, which are less than two millimeters in diameter, under
significant magnification. These procedures are difficult when performed in open
surgery. They are even more difficult when performed using an endoscopic or
limited incision approach, and extraordinarily difficult to perform when the
heart is beating. As a result, this procedure is typically done as open surgery
by stopping the heart and using a heart/lung bypass machine. Our technology is
designed to allow surgeons to perform scaled instrument movements that can be
even more precise than the movements used in open surgery, thus enabling precise
suturing of single and multiple coronary vessels on a stopped or beating heart.
VASCULAR SURGERY
Aortic Aneurysms. A common vascular procedure is the repair of aortic aneurysms,
which are sacs formed by the dilation of the wall of the main artery in the
body. Aneurysms are caused primarily by atherosclerosis, which is characterized
by the deposition of fatty substances in large and medium-sized arteries, such
as the arteries that lead to the heart and brain. Surgical treatment involves
clamping the aorta and making long incisions at multiple sites to resect and
replace the aneurysm with a synthetic graft. Once the aorta is clamped, time is
of the essence, since procedures are typically done without heart/lung bypass
machines. Thus, only a narrow window of time for completion is available.
Currently, some aneurysms are treated by intravascular stent-grafts. These
stent-grafts can be inserted through the main artery in the thigh, called the
femoral artery, and do not require an incision. However, the necessity of
traversing the femoral artery to gain access to the aorta limits the usage of
this technique. We believe that the capability of our
technology to deliver to the surgeon enhanced dexterity and the ability to
suture grafts, alone or in conjunction with stent-grafts, will help convert this
procedure from open surgery to Intuitive surgery.
Aorto-Femoral Bypass. The lower portion of the abdominal aorta is often a
location of atherosclerosis. Atherosclerotic blockage of this portion of the
aorta restricts blood flow to the lower body. To treat this condition using open
surgery, a synthetic graft is attached above and below the blockage. This
procedure currently requires open surgery because of the need to suture the
grafts in place. We believe that with our technology, surgeons will be able to
perform the required suturing of arteries, called an anastomosis, through ports
and avoid the large incision currently required.
GYNECOLOGIC SURGERY
General Gynecology. Laparoscopy has been used for several decades in a large
number of diagnostic infertility procedures. Although there are a variety of
therapeutic infertility procedures that can currently be performed by some
gynecologists using existing MIS techniques, these procedures are relatively
difficult to perform using existing MIS tools because of the lack of tissue
control, inability to perform fine dissection, and limited suturing capability.
We believe that our technology will provide gynecologists with the ability to do
sophisticated procedures such as tubal re-anastomosis and dissection of ovarian
cysts, as well as common procedures such as surgical removal of an ovary or
fallopian tube.
Hysterectomy. Removal of the uterus is one of the most commonly performed
surgeries in gynecology and it can be done by using open surgery or MIS
techniques. Like colon resection, it demands a significant degree of tissue
manipulation in the dissection and ligation, or tying, of blood vessels,
ligaments and other pelvic structures. Further, laparoscopic techniques used in
this procedure increase the risk of injury to the ureters, which are vital
structures that provide the conduit for urine between the kidney and bladder. It
is often difficult to ensure the identification and prevention of injury to the
ureters and bladder with conventional MIS instruments because of the limited
angles at which these instruments can be positioned. We believe that our
products will increase the surgeon's dexterity in this procedure and, as a
result, will have a significant impact on safety, operating time, and rate of
adoption of port-based techniques in hysterectomy.
Bladder Neck Suspension. Bladder incontinence is a widespread condition
affecting middle aged women, which can be treated surgically with a procedure
known as bladder neck suspension. This procedure involves elevation of the
bladder neck by suspension with sutures, surgically recreating the normal angle
of the urethra and re-establishing bladder sphincter control. The procedure
works well in open surgery and is the "gold standard" for correction of bladder
incontinence. However, because of its long recovery time, most candidates are
discouraged from undergoing the procedure using open surgical technique.
Instead, they use adult diapers for their incontinence, which is an
embarrassment and inconvenience. Bladder neck suspension can currently be done
laparoscopically but is difficult to perform because of the need to suture at
awkward angles using existing MIS instruments. We believe our technology may
provide a better solution for suturing the bladder neck and would represent an
advance in the ease of performing incontinence surgery.
ORTHOPEDIC SURGERY
Spinal Surgery. Disc removal and spinal fusion are common procedures performed
in open spinal surgery. Disc replacement, via prosthetic discs, holds great
promise for hundreds of thousands of back pain sufferers. MIS techniques where
surgeons approach the spine through the abdomen and use laparoscopic methods to
expose the anterior portion of the spine and lumbar disc space are rapidly
emerging. This procedure requires both delicate and precise dissection and
retraction of tissue, and would benefit from the enhanced capabilities offered
by the da Vinci Surgical System. We believe that our technology may make this
procedure safer, easier, more precise, and allow more surgeons to perform it
with confidence.
MARKETING AND DISTRIBUTION
We market our products through a direct sales force in the United States and
most of Europe. We have also entered into agreements with distributors in Italy,
Canada, India, Singapore and Japan. Our marketing and sales strategy in the
United States and Europe involves the use of a combination of area sales
managers, technical sales representatives and clinical training specialists. As
of December 31, 2002, we had 94 employees in sales and marketing. We expect to
increase our sales and marketing force as we expand our business.
The role of our technical sales representatives is to educate physicians and
surgeons on the advantages of Intuitive surgery and the clinical applications
that our technology makes possible. We also train our technical sales
representatives to educate hospital management on the potential benefits of
early adoption of our technology and the potential for increased local market
share that may result from Intuitive surgery. Once a hospital has installed a da
Vinci Surgical System, our sales force helps introduce the technology to other
surgical specialties within the hospital.
Clinical training specialists provide training and support to physicians and
other hospital staff. We employ service technicians to install our da Vinci
Surgical Systems and to provide non-clinical technical expertise, service and
maintenance. We believe that this combination of technical sales
representatives, clinical training specialists and service technicians provides
an appropriate balance of professional selling skills while maintaining an
adequate level of technical expertise in the field.
Our da Vinci Surgical System has a lengthy sales and purchase order cycle
because it is a major capital item and normally requires the approval of senior
management at purchasing institutions. Particularly during periods in which our
sales volume is low, this may contribute to fluctuations in our quarterly
operating results.
TECHNOLOGY
Using key technologies, we have designed the da Vinci Surgical System to ensure
intuitive control and fail-safe operation of the system. The system updates arm
and instrument positions over 1,000 times per second, thereby ensuring real-time
connectivity between the surgeon's hand movements and the movements of the
instrument tips. A backup battery is included in the system that can power the
system for more than 20 minutes in case of power loss or fluctuation. We believe
this 20-minute period is sufficient either to reestablish the power supply or
for the hospital back-up power system to become effective.
Monitoring the operation of the system at all times is a network of
approximately 20 micro-controllers that checks for proper system performance.
System misuse or system fault can be
detected and the system can be transitioned to a safe state in micro-seconds.
The system also includes a sensor that detects the presence of the surgeon's
head in the viewer. If the surgeon removes his or her head from the viewer, the
system automatically disengages and locks the instruments in place to prevent
inadvertent movement.
The instrument controls at the surgeon's console have eight degrees of freedom
of motion that allow the surgeon to move each hand through a workspace
approximately one cubic foot in volume. These degrees of freedom allow the
surgeon to orient his or her hands without limitation. The instrument controls
are constructed with very low friction cables and gear transmissions to ensure
smooth operation. Furthermore, critical components are constructed of magnesium
and titanium to provide high mechanical stiffness and low inertia, ensuring a
light and responsive feel to the surgeon.
The electromechanical arms of the patient-side cart are gravitationally
counterbalanced to allow for smooth, easy and safe positioning of the
instruments in the patient. The arms have seven degrees of freedom, allowing for
control of position, orientation, translation and grip of the instrument, all
inside the body. Redundant sensors are designed to ensure fail-safe operation of
the instrument tips.
Unlike other 3-D systems, our InSite vision system relies on two entirely
separate vision channels. Two eyepieces are linked by a precisely designed
optical assembly to two high resolution, high contrast medical grade monitors,
which have been specially designed to have a refresh update rate that eliminates
flicker and reduces eye fatigue. Our stereo endoscope uses two separate
high-resolution optical channels to improve image clarity. The stereo images
pass through video processing electronics that provide specialized edge
enhancement and noise reduction. A foot switch at the surgeon's console operates
a focus controller on the endoscope. The endoscope self-regulates the
temperature of its tip to eliminate fogging during procedures.
Our EndoWrist instruments use a wrist joint architecture driven by tiny but very
high strength, flexible tungsten cables. Each tungsten cable is a "metal rope"
constructed from over 200 fibers that are each less than one thousandth of an
inch in diameter. These cables are similar in function to the tendons of a human
wrist and are used to drive fluid motions of the wrist joint. The instruments
each contain a custom memory chip that records and stores data each time the
instrument is placed on the system. The chip contains encrypted security codes
to protect against use of non-Intuitive Surgical instruments so that only our
instruments will work with the da Vinci Surgical System. The chip identifies the
type of tool being inserted so that different instrument types can be controlled
uniquely by the system. The chip also records usage of the instrument and
expires the instrument after its prescribed life.
INTELLECTUAL PROPERTY
Since our inception in late 1995, we have encountered and solved a number of
technical hurdles. We have patented and continue to pursue patent and other
intellectual property protection for the technology that we have developed to
overcome these hurdles. In addition to developing our own patent portfolio, we
have spent significant resources in acquiring exclusive license rights to
necessary and desirable patents and other intellectual property from SRI
International and IBM, which were early leaders in applying robotics to surgery.
One of the strengths of our portfolio is that the licensed SRI International and
IBM patents have original filing dates as early as January
1992 and June 1991, respectively. We have also exclusively licensed a patent
application from MIT concerning robotic surgery. In April 2000, we exclusively
licensed an extensive minimally invasive heart surgery patent portfolio from
Heartport, Inc. in the field of robotic surgery. These patents cover many
different forms of minimally invasive robotic surgery, including single- and
multi-vessel coronary artery bypass grafts, heart valve repair and replacement
and beating heart stabilization. In June 2001, we entered into a non-exclusive
patent license with Olympus Optical Co., Ltd. of Japan for several robotic
surgery patents. As of March 14, 2003, we hold exclusive field-of-use licenses
for over 80 United States patents and approximately 40 foreign patents, and own
outright 28 U.S. patents that expire no earlier than 2016. We also own or have
licensed numerous pending United States and foreign patent applications, several
of which were recently allowed. Our patents and patent applications relate to a
number of important aspects of our technology, including our surgeon's console,
electromechanical arms, vision system and our EndoWrist instruments. We intend
to continue to file additional patent applications to seek protection for other
proprietary aspects of our technology.
Our success will depend in part on our ability to obtain patent and copyright
protection for our products and processes, to preserve our trade secrets, to
operate without infringing or violating valid and enforceable proprietary rights
of third parties, and to prevent others from infringing our proprietary rights.
We intend to take action to protect our intellectual property rights when we
believe doing so is necessary and appropriate. In addition, our strategy is to
actively pursue patent protection in the United States and in foreign
jurisdictions for technology that we believe is proprietary and that offers a
potential competitive advantage, and to license appropriate technologies when
necessary or desirable. We cannot be certain that we will be able to obtain
adequate protection for our technology or licenses on acceptable terms.
Furthermore, if any protection we obtain is reduced or eliminated, others could
use our intellectual property without compensating us, resulting in harm to our
business. In addition, the laws of certain foreign countries do not protect
intellectual property rights to the same extent as do the laws of the United
States. See "Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Factors Affecting Operating Results." 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. In this regard, see "Item 3: Legal Proceedings" for a
description of pending cases and interferences before the U.S. Patent and
Trademark Office regarding our da Vinci Surgical System.
SRI INTERNATIONAL LICENSE AGREEMENT
After receiving funding in 1990 from the U.S. Advanced Research Projects Agency,
SRI International conducted research to develop a "telesurgery" system to allow
surgeons to perform surgery on the battlefield from a remote location. SRI
International developed the precise electromechanics, force-feedback systems,
vision systems and surgical instruments needed to build and demonstrate a
prototype system that could accurately reproduce a surgeon's hand motions with
remote surgical instruments. In 1995, John G. Freund, M.D., one of our founders,
acquired an option to license SRI International's telesurgery technology, which
resulted in SRI International granting us a license.
Under the terms of our license agreement with SRI International, we have an
exclusive, worldwide, royalty-free license to use the SRI International
technology developed before
September 12, 1997, including all patents and patent applications resulting from
that work, in the field of manipulating tissues and medical devices in animal
and human medicine, including surgery, laparoscopic surgery and microsurgery. We
also have the right of first negotiation with respect to any SRI International
technology developed in these areas before September 12, 1999 but after
September 12, 1997.
Our license with SRI International will terminate upon the last expiration of
the patents licensed from SRI International or December 20, 2012, whichever is
later. Currently, the last patent expiration date is in 2016, although this
could change. SRI International may terminate the license in the event of a
material, uncured breach of our obligations. In the event SRI International
terminates the license, we do not know whether the necessary licenses could be
reacquired from SRI International on satisfactory terms, if at all.
IBM LICENSE AGREEMENT
IBM conducted research on the application of computers and robotics to surgery
during the late 1980s and early 1990s. IBM performed some of this work in
conjunction with the Johns Hopkins Medical Center. Our license agreement with
IBM covers a number of technologies related to the application of computers and
robotics to surgery. Under the terms of this agreement, we have an exclusive,
worldwide, royalty-free license to a number of IBM patents and patent
applications in the field of surgery performed on animals and humans. We also
have a non-exclusive license from IBM to practice in the areas of neurology,
ophthalmology, orthopedics and biopsies. Under the license, we were obligated to
make two payments to IBM, which were tied to revenue milestones. The final
payment became payable in December 2001 and was paid in March 2002. The IBM
license agreement will terminate upon the last expiration of the licensed
patents. Currently, the last patent expiration date is in 2016, although this
could change. In the event IBM terminates the license agreement, we do not know
whether necessary licenses could be reacquired from IBM on satisfactory terms,
if at all.
In March 2001, consistent with the terms of our license agreement with IBM,
Intuitive and IBM jointly sued Computer Motion in the U.S. District Court for
the District of Delaware alleging infringement of U.S. Patent No. 6,201,984. See
"Item 3: Legal Proceedings" for a more detailed description of this litigation.
MIT LICENSE AGREEMENT
After receiving funding from the U.S. Department of the Army, several
researchers at MIT conducted research on various aspects of robotic surgical
systems. As a result of that work, several patent applications were filed. Both
MIT and the Army waived their rights to all but one of these applications, which
the inventors ultimately assigned to us. MIT owns the other application. Under
the terms of our license agreement with MIT, we have an exclusive, worldwide,
royalty-free license to this patent application in the field of medical devices.
The MIT license will terminate upon the last expiration of any patents issuing
from the licensed patent application. MIT also has the right to terminate the
MIT license in the event of a material, uncured breach of our obligations under
the license. In the event MIT terminates the license, we do not know whether we
would be able to reacquire a license from MIT on satisfactory terms, if at all.
HEARTPORT, INC. LICENSE AGREEMENT
Since its inception in the early 1990s, Heartport, Inc. has developed an
extensive patent portfolio covering systems and methods for performing many
different aspects of minimally invasive heart surgery, including single- and
multi-vessel coronary artery bypass grafts, heart valve repair and replacement,
and beating heart stabilization. In April 2000, we acquired an exclusive,
worldwide license in the field of robotic surgery to much of Heartport's
portfolio, including issued U.S. patents and pending U.S. and foreign
applications. The license is royalty-free unless we sell instruments for robotic
surgery procedures that are not operated by the robotic surgery system, in which
case we pay a small royalty.
Our license will terminate upon the last expiration of the patents licensed from
Heartport. Currently, the last patent expiration date is in 2015, although this
could change. Heartport may terminate the license in the event of a material,
uncured breach of our obligations. In the event Heartport terminates the
license, we do not know whether the necessary or desirable licenses could be
reacquired from Heartport on satisfactory terms, if at all.
In April 2001, Heartport became part of the Cardiovations Division of Ethicon,
Inc., a Johnson & Johnson Company. Intuitive's exclusive license survives
Johnson & Johnson's acquisition of Heartport. Ethicon, Inc. therefore is
Intuitive's licensor under the Heartport license.
RESEARCH AND DEVELOPMENT
Substantially all of our research and development activity is performed
internally. Our research and development team is divided into four groups:
software engineering, systems analysis, electrical engineering and mechanical
engineering. In addition, various members of the research and development team
support the design and development of the manufacturing processes used in
fabricating our products.
MANUFACTURING
Prior to February 2002, we leased a 13,000 square foot manufacturing facility in
Mountain View, California. We used this facility and our manufacturing personnel
to produce the systems and instruments that were sold and used in clinical
trials through December 2001. The manufacture of our products is a complex
operation involving a number of separate processes and components.
In February 2002, we moved our manufacturing facility to Sunnyvale, California.
We now lease approximately 18,000 square feet of manufacturing space.
We purchase both custom and off-the-shelf components from a large number of
certified suppliers and subject them to stringent quality specifications. We
periodically conduct quality audits of suppliers and have established a supplier
certification program. Some of the components necessary for the assembly of our
products are currently provided to us by sole source suppliers or single source
suppliers. We purchase components through purchase orders rather than long-term
supply agreements and generally do not maintain large volumes of inventory. The
disruption or termination of the supply of components could cause a significant
increase in the costs of these components, which could affect our operating
results. A disruption or termination in the supply of components could also
result in our inability to meet demand for
our products, which could harm our ability to generate revenues, lead to
customer dissatisfaction and damage our reputation.
COMPETITION
We consider our primary competition to be existing open or MIS surgical
techniques. Our success depends in part on convincing hospitals, surgeons and
patients to convert procedures to Intuitive surgery from open or existing MIS.
We also face competition from several companies that are developing new
approaches and products for the minimally invasive surgery market, however, as
many of these developments are aimed at MIS, it is our belief that the da Vinci
platform may actually prove complimentary to these new technologies.
In addition, a limited number of companies are using robots and computers in
surgery, including endoVia Medical, Inc., Computer Motion, Integrated Surgical
Systems, Inc., Johns Hopkins University Engineering Research Consortium, Maquet
AG, MicroDexterity Systems, Inc., Armstrong Healthcare Ltd., Sinters SA, and
Ross-Hime Designs, Inc. Our revenues may be reduced or eliminated if our
competitors develop and market products that are more effective or less
expensive than our products.
We believe that the primary competitive factors in the market we address are
capability, safety, efficacy, ease of use, price, quality, reliability, and
effective sales, support, training and service. The length of time required for
products to be developed and to receive regulatory and reimbursement approval is
also an important competitive factor.
GOVERNMENT REGULATION
UNITED STATES
Our products and operations are subject to extensive and rigorous regulation by
the 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 addition, the
FDA regulates the export of medical devices manufactured in the United States to
international markets.
Under the Federal Food, Drug, and Cosmetic Act, or FFDCA, medical devices are
classified into one of three classes -- Class I, Class II or Class III --
depending on the degree of risk associated with each medical device and the
extent of control needed to ensure safety and effectiveness. Our current
products are Class II medical devices.
Class I devices are those for which safety and effectiveness can be assured by
adherence to a set of guidelines, which include compliance with the applicable
portions of the FDA's Quality System Regulation, or QSR, facility registration
and product listing, reporting of adverse medical events, and appropriate,
truthful and non-misleading labeling, advertising, and promotional materials, or
General Controls. Some Class I devices also require premarket clearance by the
FDA through the 510(k) premarket notification process described below.
Class II devices are those which are subject to the General Controls and most
require premarket demonstration of adherence to certain performance standards or
other special controls, as specified by the FDA, and clearance by the FDA.
Premarket review and clearance by the FDA for these devices is accomplished
through the 510(k) premarket notification procedure. For most Class II devices,
the manufacturer must submit to the FDA a premarket notification submission,
demonstrating that the device is "substantially equivalent" to either:
(1) a device that was legally marketed prior to May 28, 1976, the date
upon which the Medical Device Amendments of 1976 were enacted, or
(2) to another commercially available, similar device which was
subsequently cleared through the 510(k) process.
If the FDA agrees that the device is substantially equivalent, it will grant
clearance to commercially market the device. By regulation, the FDA is required
to clear a 510(k) within 90 days of submission of the application. As a
practical matter, clearance often takes longer. The FDA may require further
information, including clinical data, to make a determination regarding
substantial equivalence. If the FDA determines that the device, or its intended
use, is not "substantially equivalent", the FDA will place the device, or the
particular use of the device, into Class III, and the device sponsor must then
fulfill much more rigorous premarketing requirements.
A Class III product is a product which has a new intended use or uses advanced
technology that is not substantially equivalent to a use or technology with
respect to a legally marketed device. The safety and effectiveness of Class III
devices cannot be assured solely by the General Controls and the other
requirements described above. These devices almost always require formal
clinical studies to demonstrate safety and effectiveness.
Approval of a premarket approval application, or PMA, from the FDA is required
before marketing of a Class III product can proceed. The PMA process is much
more demanding than the 510(k) premarket notification process. A PMA
application, which is intended to demonstrate that the device is safe and
effective, must be supported by extensive data, including data from preclinical
studies and human clinical trials and existing research material, and must
contain a full description of the device and its components, a full description
of the methods, facilities, and controls used for manufacturing, and proposed
labeling. Once the FDA determines that an application is sufficiently complete
to permit a substantive review, the FDA will accept the application for review.
The FDA, by statute and by regulation, has 180 days to review a filed PMA
application, although the review of an application frequently occurs over a
significantly longer period of time, sometimes up to several years. In approving
a PMA application or clearing a 510(k) application, the FDA may also require
some form of post-market surveillance, whereby the manufacturer follows certain
patient groups for a number of years and makes periodic reports to the FDA on
the clinical status of those patients when necessary to protect the public
health or to provide additional safety and effectiveness data for the device.
When FDA approval of a Class I, Class II or Class III device requires human
clinical trials, and if the device presents a "significant risk" (as defined by
the FDA) to human health, the device sponsor is required to file an
investigational device exemption, or IDE, application with the FDA and obtain
IDE approval prior to commencing the human clinical trial. If the device is
considered
a "non-significant" risk, IDE submission to the FDA is not required. Instead,
only approval from the Institutional Review Board overseeing the clinical trial
is required. Human clinical studies are generally required in connection with
approval of Class III devices and to a much lesser extent for Class I and II
devices.
Our manufacturing processes are required to comply with the FDA's Good
Manufacturing Practice, or GMP, requirements contained in its Quality System
Regulation, or QSR. The QSR covers, among other things, the methods and
documentation of the design, testing, production, processes, controls, quality
assurance, labeling, packaging, and shipping of a company's products. The QSR
also requires maintenance of a device master record, device history record, and
complaint files. A company's domestic facility, records, and manufacturing
processes are subject to periodic unscheduled inspections by the FDA.
In July 1997, we received 510(k) clearance from the FDA for the surgeon's
console and patient cart to be used with only rigid endoscopes, blunt
dissectors, retractors and stabilizer instruments. In November 1997, we withdrew
a subsequent 510(k) submission covering additional instruments necessary for
performing most surgical procedures, including scissors, scalpels,
forceps/pickups, needle holders, clip appliers and electrocautery, after the FDA
indicated that substantial clinical data would be required to support clearance.
In January 1999, we filed a 510(k) submission with clinical data, seeking
clearance for the da Vinci Surgical System and EndoWrist instruments for
laparoscopic surgical procedures. In May 1999, the FDA determined that our
products were not eligible for 510(k) clearance but would instead be required to
undergo the PMA approval process. On June 16, 1999, after review of the clinical
data on the use of our products in laparoscopic surgical procedures, the FDA's
General Surgery Advisory Panel recommended approval. In November 1999, we filed
a PMA application to commercialize our products for laparoscopic surgery, which
was accepted for review by the FDA in December 1999. In March 2000, the FDA
inspected our Mountain View facility and determined, after conducting an
extensive audit, that our facility and manufacturing practices were consistent
with Good Manufacturing Processes. In June 2000, the FDA determined that the PMA
approval process was inappropriate for the da Vinci Surgical System and
re-classified the device as Class II. The Premarket Approval Application
submitted in November 1999 was closed and the original 510(k) application
reactivated. In July 2000, we received a letter from the FDA informing us of
their decision to clear the da Vinci Surgical System for use in laparoscopic
surgery. The decision to reclassify the device to Class II also means that
future submissions for the da Vinci Surgical System may be reviewed under the
premarket notification process unless changes to the intended use significantly
change the safety and effectiveness of the device, in which case a PMA may be
required.
Subsequent to the July 2000 clearance of the da Vinci Surgical System, we have
obtained additional 510(k) clearances from the FDA to include non-cardiac
thoracoscopic surgical procedures (March 2001), laparoscopic radical
prostatectomy (May 2001). and thoracoscopically-assisted cardiotomy procedures
(November 2002). In January 2001, we submitted an investigational device
exemption application to the FDA requesting permission to conduct a multi-center
evaluation of the da Vinci Surgical System for totally endoscopic coronary
artery bypass grafting. In April 2001, we received a letter from the FDA
approving trials for totally endoscopic coronary artery bypass grafting. We have
commenced this clinical trial and, if completed, we expect to submit a 510(k) to
the FDA requesting permission to expand
the intended use for the da Vinci Surgical System to include totally endoscopic
coronary artery bypass grafting. While trials are in progress, we cannot assure
that such trials will produce clinical data adequate to support a 510(k)
application.
We are subject to inspection and market surveillance by the FDA to determine
compliance with regulatory requirements. If the FDA finds that we have failed to
comply, the agency can institute a wide variety of enforcement actions, ranging
from a public warning letter to more severe sanctions. The FDA also has the
authority to request repair, replacement or refund of the cost of any medical
device manufactured or distributed by us. Our failure to comply with applicable
requirements could lead to an enforcement action that may have an adverse effect
on our financial condition and results of operations.
CALIFORNIA REGULATION
The state of California requires that we obtain a license to manufacture medical
devices and subjects us to periodic inspection. Our facilities and manufacturing
processes were inspected in February 1998. We passed the inspection and received
our device manufacturing license from the Food and Drug Branch, or FDB, of the
California Department of Health Service in March 1998. In March 2002, our
facilities and manufacturing processes in our Sunnyvale facility were
re-inspected by the FDB and we have received an updated device manufacturing
license for our Sunnyvale facility.
FOREIGN REGULATION
In order for us to market our products in other countries, we must obtain
regulatory approvals and comply with extensive safety and quality regulations in
other countries. These regulations, including the requirements for approvals or
clearance and the time required for regulatory review, vary from country to
country. Failure to obtain regulatory approval in any foreign country in which
we plan to market our products may harm our ability to generate revenue and harm
our business.
Commercialization of medical devices in Europe is regulated by the European
Union. The European Union presently requires that all medical products bear the
CE mark, an international symbol of adherence to quality assurance standards and
demonstrated clinical effectiveness. Compliance with the Medical Device
Directive, as certified by a recognized European Notified Body, permits the
manufacturer to affix the CE mark on its products. In January 1999, following an
audit of our quality system and Mountain View facility, we received permission
from DGM, our Notified Body and agent of the Danish Government, to affix the CE
mark to our da Vinci Surgical System and EndoWrist instruments.
If we modify existing products or develop new products in the future, we may
need to apply for permission to affix the CE mark to such products. In addition,
we are subject to annual regulatory audits in order to maintain the CE mark
permissions already obtained. We do not know whether we will be able to obtain
permission to affix the CE mark for new or modified products or whether we will
continue to meet the quality and safety standards required to maintain the
permissions we have already received. If we are unable to maintain permission to
affix the CE mark to our products, we will no longer be able to sell our
products in member countries of the European Union.
The Ministry of Health and Welfare regulates commercialization and reimbursement
of medical devices in Japan. We have developed a clinical trial strategy for
laparoscopic surgical use of the da Vinci Surgical System and EndoWrist
instruments with our commercial partner in Japan. In May 2001, the proposed
clinical trial strategy was approved by the Ministry of Health and Welfare. We
commenced this clinical trial in June 2001 and, if completed, we expect to
submit appropriate documentation to the Ministry of Health and Welfare
requesting permission to commercialize the da Vinci Surgical System for conduct
of laparoscopic surgical procedures in Japan. We are currently in the process of
developing a cardiothoracic surgical clinical strategy with our commercial
partner to facilitate conduct of an evaluation ultimately permitting expansion
of the intended use for da Vinci Surgical System to include various
cardiothoracic surgical procedures. However, we do not know whether we will
succeed in procuring the required approvals to market our products in Japan or
elsewhere, even if we develop a strategy and ultimately apply for these
approvals.
THIRD-PARTY REIMBURSEMENT
In the United States and international markets where we intend to sell our
products, the government and health insurance companies together are responsible
for hospital and surgeon reimbursement for virtually all surgical procedures.
Governments and insurance companies generally reimburse hospitals and physicians
for surgery when the procedures are considered non-experimental and
non-cosmetic. In the United States, reimbursement for medical procedures under
the Medicare and Medicaid programs is administered by Centers for Medicare &
Medicaid Services. Generally, procedure codes are assigned by the American
Medical Association using the copyrighted Current Procedural Terminology codes,
which are in turn incorporated in the Medicare and Medicaid programs coding
system. Applications for new procedure codes may be submitted to the American
Medical Association.
Governments and insurance companies carefully review and increasingly challenge
the prices charged for medical products and services. Reimbursement rates from
private companies vary depending on the procedure performed, the third-party
involved, the insurance plan involved, and other factors. Medicare reimburses
hospitals a prospectively determined fixed amount for the costs associated with
an in-patient hospitalization based on the patient's discharge diagnosis, and
reimburses physicians a prospectively determined fixed amount based on the
procedure performed. This fixed amount is paid regardless of the actual costs
incurred by the hospital or physician in furnishing the care and is unrelated to
the specific devices used in that procedure. Thus, any reimbursements that
hospitals obtain for performing surgery with our products will generally have to
cover any additional costs that hospitals incur in purchasing our products.
Domestic institutions 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. Because the da Vinci Surgical System has
been cleared for commercial distribution in the United States by the FDA,
Medicare reimbursement is available for use of the device in laparoscopic and
thoracoscopic procedures and procedures conducted under an approved
investigational device exemption application. We believe that the additional
procedures we intend to target are generally already reimbursable by government
agencies and insurance companies. If hospitals do not obtain sufficient
reimbursement from third-party payors for procedures performed with our
products, or if governmental and private payors' policies do not permit
reimbursement for surgical procedures performed using our products, we may not
be able
to generate the revenues necessary to support our business. In such
circumstances, we may have to apply to the American Medical Association for a
unique Current Procedural Terminology code covering computer-enhanced surgery.
If an application for a unique code is required, reimbursement for any use of
our products may be unavailable until an appropriate code is granted. The
application process, from filing until adoption of a new code, can take two or
more years.
In countries outside the United States, reimbursement is obtained from various
sources, including governmental authorities, private health insurance plans, and
labor unions. In most foreign countries, private insurance systems may also
offer payments for some therapies. Additionally, health maintenance
organizations are emerging in certain European countries. To effectively conduct
our business, we may need to seek international reimbursement approvals, and we
do not know if these required approvals will be obtained in a timely manner or
at all.
Any regulatory or legislative developments in domestic or foreign markets that
eliminate or reduce reimbursement rates for procedures performed with our
products could harm our ability to sell our products or cause downward pressure
on the prices of our products, either of which would affect our ability to
generate the revenues necessary to support our business.
EMPLOYEES
As of December 31, 2002, we had 290 employees, 54 of whom were engaged directly
in research and development, 93 in manufacturing and service and 143 in
marketing, sales, and administrative activities. None of our employees are
covered by a collective bargaining agreement, and we consider our relationship
with our employees to be good.
RECENT DEVELOPMENTS
In November 2002, Frederic Moll, M.D. the Company's co-founder and Medical
Director, and a member of the Board of Directors, became the Chief Executive
Officer at a newly formed company called Hansen Medical. The Company does not
believe that Hansen Medical will directly compete with the Company. Hansen
Medical intends to develop and sell products that will use catheter-based
medical device technology for interventional procedures. The Board of Directors
and management of the Company have agreed with Dr. Moll that he will continue
with his responsibilities as Medical Director at a salary commensurate with his
time spent at the Company and that he will continue to serve as a member of the
Board of Directors. The Company may decide to license certain portions of its
technology to Hansen Medical as well as take an equity position in this new
venture. Initial funding for Hansen Medical has been provided by Prospect
Venture Partners. Dr. Russell C. Hirsch, a member of our board of directors,
serves as one of the managing partners for Prospect Venture Partners.
WEBSITE ACCESS TO REPORTS
We make our periodic and current reports available, free of charge, on our
website as soon as practicable after such material is electronically filed with
the Securities and Exchange Commission. Our website address is
www.intuitivesurgical.com and the reports are filed under "SEC Filings."
ITEM 2: PROPERTIES
Prior to February 2002, we leased approximately 50,000 square feet in Mountain
View, California. The lease expired in February 2002 and was not renewed.
Effective January 2002, we lease approximately 83,000 square feet in Sunnyvale,
California. Our lease agreement requires us to lease an additional 22,000 square
feet starting in January 2004. The facility is leased through April 2007, and we
have an option to extend the lease for an additional five-year term.
ITEM 3: LEGAL PROCEEDINGS
COMPUTER MOTION
We are involved in intellectual property litigation with Computer Motion as
described below. While the recently announced merger agreement has resulted in a
stay of all such litigation and other administrative legal proceedings between
Intuitive and Computer Motion, these proceedings may continue if the merger is
not completed for any reason. If the merger closes, then all litigation and
other disputes between Intuitive and Computer Motion will be dismissed with
prejudice or similarly finally terminated.
On May 10, 2000, Computer Motion 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, 5,762,458, 5,815,640,
5,855,583, 5,878,193, 5,907,664, and 6,001,108, 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. In late 2000,
Computer Motion alleged our infringement of a ninth patent, and added U.S.
Patent Number 6,102,850 to the litigation. Computer Motion subsequently added
U.S. Patent No. 6,244,809 to the litigation, alleging that we also infringe that
tenth patent. These ten patents concern various methods and devices for
conducting various aspects of robotic surgery. Of those ten patents, three are
no longer part of the suit. After Computer Motion lost all of its rights to its
5,855,583 and 5,878,193 patents as a result of our successful Patent Office
interference proceedings, Computer Motion voluntarily dismissed those patents
from suit. However, Computer Motion has sought to challenge the interference
proceedings by separate district court appeal. In addition, in November 2002,
the Court granted our motion for summary judgment of noninfringement of the
6,102,850 patent. In February 2003, the Court denied our motion for summary
judgment of noninfringement of the 6,244,809 patent and granted Computer
Motion's cross-motion for partial summary judgment of literal infringement of
one claim of that patent. We subsequently requested that the Court reconsider
that decision because of perceived flaws in the Court's approach to the issue of
infringement on summary judgment. Regardless of what happens on reconsideration,
we will continue to defend the 809 patent on invalidity, based on the earlier
robotic surgery work of SRI and others. We still have pending motions for
summary judgment of noninfringement on two more of Computer Motion's seven
remaining patents-in-suit, numbers 5,907,664 and 6,001,108. At the Court's
request, we will not file further motions for summary judgment until the
remaining pending motions are decided. In late January 2003, after close of fact
discovery, Computer Motion asserted between 26 and 35 new claims of its seven
remaining patents-in-suit and new theories of infringement. We have moved to
strike those new assertions as inappropriate at this late stage. Trial had been
calendared for April 29, 2003.
\
In connection with our proposed merger with Computer Motion, our company and
Computer Motion have obtained an immediate stay through August 31, 2003 of all
proceedings in the pending litigations between the companies. As part of the
stays, the courts have ceased all further activity in the cases during the
period of stays, and will not issue any opinions or orders on issues already
submitted for decision. In addition, the California court postponed the trial
date and was asked to reset trial for a date no earlier than November 30, 2003.
The stays may be terminated before, or extended beyond, August 31, 2003 under
specified circumstances. In the event the merger is completed, our company and
Computer Motion will request dismissal with prejudice of all pending
litigations.
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. In the event the stay is
lifted, this action will subject 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 each patent asserted in this action, in
the event that the stay is lifted, 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.
On March 7, 2003, Intuitive and Computer Motion announced their intent to merge
into a single surviving company. As part of their merger agreement, on March 10,
2003, both companies jointly requested that the California litigation be stayed
through August 31, 2003, and that a trial date be reserved no sooner than three
months after August 31, 2003, in case the merger cannot be completed. Currently,
there is no further activity in the California litigation while closing of the
merger is pursued.
On December 7 and 8, 2000, the PTO declared three interferences between a single
SRI patent application exclusively licensed to our company and three of Computer
Motion's patents, Numbers 5,855,583, 5,878,193 and 5,907,664. 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. The Patent Office entered final judgment
in each interference proceeding. In the interference involving the 5,878,193
patent, the PTO entered final judgment in our favor. Subject to review by or
appeal to a federal court, which could reverse or modify any or all of the
following, this judgment establishes that the disputed invention of, generally
speaking, image-based control of robotic surgical instruments is prior art to
all of Computer Motion's remaining patents, that we are entitled to patent that
invention, and that Computer Motion is no longer entitled to any of the three
claims of the 5,878,193 patent. In the interference involving the 5,855,583
patent, the PTO again entered final judgment in our favor. Subject to review by
or appeal to a federal court, which could reverse or modify any or all of the
following, this judgment establishes that the disputed invention of, generally
speaking, proportional movement of articulating robotic surgical instruments is
prior art to all of Computer Motion's remaining patents, that we are entitled to
patent that invention, and that Computer Motion is no longer entitled to any of
the 15 claims of
the 5,855,583 patent. In the interference involving the 5,907,664
patent, the PTO entered final judgment against us, deciding that our patent
claim is unpatentable for noncompliance with the "written description"
requirement of Title 35 of the U.S. Code. The PTO declined to decide our motion
challenging the validity of certain claims of the `664 patent, leaving that
issue in question. This 5,907,664 patent was the subject of our first motion for
summary judgment of noninfringement mentioned in the previous paragraph, which
motion still has not been decided. In July 2002, Computer Motion filed suit
against us in the U.S. District Court for the Central District of California to
challenge the PTO's two interference judgments in our favor. That suit has also
been stayed through August 31, 2003 as a result of the merger agreement between
Computer Motion and Intuitive.
In September 2000, we filed a Notice of Opposition in the European Patent
Office, or 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 our Notice of
Opposition, we cited numerous prior art references not cited to the EPO during
the '922 patent's original prosecution. An initial ruling in March 2002
indicated that the EPO was not then inclined to alter the `922 patent in any
way. However, during a hearing held in Germany on July 2, 2002, the EPO
sanctioned Computer Motion for its "abuse" of the opposition process. As a
result of Computer Motion's actions, the preliminary EPO decision is mooted,
both sides will now provide further written briefing and evidence on the
substantive issues, and another hearing is anticipated for sometime later in
2003. Intuitive and Computer Motion anticipate taking steps to seek a stay or
other similar relief from the EPO as a result of their recent merger agreement.
On March 30, 2001, Intuitive and International Business Machines Corporation
("IBM") jointly filed suit against Computer Motion 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,
Computer Motion willfully infringes U.S. Patent No. 6,201,984. The complaint
also impacted the HERMES product to the extent it interfaced with either the
AESOP or ZEUS. The `984 patent concerns various aspects of voice control of
surgical instruments issued to IBM in early March 2001 and is exclusively
licensed to us. The `984 patent predates by several years Computer Motion's
development of voice-controlled surgical robots. Trial was held in August 2002.
After evidence and argument was presented, the seven-member Delaware jury
returned a unanimous verdict in our favor, finding that Computer Motion had
failed to prove any claim of the `984 patent invalid and awarding us $4.4
million for damage caused by Computer Motion's sales of its infringing AESOP and
ZEUS products. In December 2002, the Court rejected Computer Motion's final
"prosecution laches" defense as inapplicable to the circumstances presented by
our patent. Subject to the stay, the suit is in the post-trial briefing phase.
Computer Motion has filed three motions seeking to set aside the jury's verdict,
to reduce the damages awarded, and for a new trial on one or more issues. We
have filed our request for a permanent injunction against further infringing
sales of Computer Motion's AESOP and ZEUS products. In February 2003, the Court
indicated that it would first address Computer Motion's post-trial requests
before deciding our request for a permanent injunction against Computer Motion.
All proceedings in this suit have also now been stayed through August 31, 2003
as a result of the merger agreement between Computer Motion and Intuitive.
BROOKHILL-WILK 1, LLC
On September 1, 2000, Brookhill-Wilk 1, LLC, or 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 infringement of the '015 patent against our company, leaving only
the '003 patent at issue in the suit. On November 8, 2001, the District Court
granted summary judgment of noninfringement of the `003 patent in our favor and
dismissed Wilk's complaint in its entirety. Wilk appealed the summary judgment
ruling to the U.S. Court of Appeals for the Federal Circuit. A decision on the
substantive issue on appeal is expected sometime in 2003. We believe the
appellate court will uphold the summary judgment of noninfringement. If we lose
the appeal, however, the case will return for further proceedings in the
District Court. We remain confident that we will prevail in Wilk's suit against
us and that we have multiple meritorious defenses to Wilk's assertion of its
`003 patent. However, litigation is unpredictable and we may not prevail with
any of our defenses or on appeal. If we ultimately lose Wilk's suit against us,
however, 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. 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.
OTHER LEGAL MATTERS
In September 2002, we discovered that one of our employees had purchased
approximately $900,000 in administrative supplies without the authorization or
knowledge of the company's management. This matter was investigated by law
enforcement authorities and company advisors. We have since terminated this
employee and have taken actions intended to insure that no similar incidents can
occur in the future, including by implementing additional controls relating to
our cash disbursement process. In addition, we are seeking to recover our loss.
We have filed a claim with our insurance carrier, from which we expect to
receive proceeds of approximately $500,000, and have filed suit against the
sellers of the administrative supplies in December 2002. Our complaint alleged
that each of the defendants has (i) violated various sections of the Racketeer
Influenced and Corrupt Organizations ("RICO") Act through their extortion,
coercion, intimidation, fraud, bribery and racketeering activity in connection
with the Unauthorized Purchase of Office Supplies, and (ii) committed unlawful
business acts and practices in violation of Cal. Bus. & Prof. Code Section 17200
et seq. Our suit seeks to recover actual and treble damages, costs and attorney
fees for the damage caused by each of defendants through their illegal conduct.
In January 2003, we amended our complaint to allege that each defendant further
unlawfully offered prizes and gifts in violation of Cal. Bus. & Prof. Code
Section 17537 and unlawfully failed to advertise limitations on the quantity of
its sales in violation of Cal. Bus. & Prof. Code Section 17500.5. The amended
complaint reiterates our claim to recover actual and treble damages, costs and
attorney fees. This suit is in its early stages and, as of March 21, 2003, none
of the defendants have yet answered either complaint.
We are subject to legal proceedings and claims that arise in the normal course
of our business. We do not know whether we will prevail in these matters nor can
we assure you that any remedy
could be reached on commercially viable terms, if at all. Due to the inherent
uncertainties of litigation, we cannot accurately predict the ultimate outcome
of these matters at this time and, therefore, cannot estimate the range of
possible loss.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fiscal
quarter ended December 31, 2002.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on The Nasdaq Stock Market under the symbol
"ISRG" since June 13, 2000. The following table sets forth the high and low
sales prices of our common stock for the periods indicated and are as reported
by Nasdaq.
QUARTER HIGH LOW
------ ------
Year Ended December 31, 2002:
First Quarter $10.15 $ 8.39
Second Quarter 10.90 7.92
Third Quarter 8.31 5.77
Fourth Quarter 8.13 6.08
Year Ended December 31, 2001:
First Quarter $ 9.13 $ 4.88
Second Quarter 14.78 3.00
Third Quarter 14.15 4.99
Fourth Quarter 10.75 6.01
As of December 31, 2002, there were approximately 253 stockholders of record of
our common stock, although we believe that there is a significantly larger
number of beneficial owners of our common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends. We currently expect to retain
earnings for use in the operation and expansion of our business, and therefore
do not anticipate paying any cash dividends for the next several years.
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with the Consolidated Financial Statements and the accompanying Notes to such
consolidated statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this report. The
selected data in this section is not intended to replace the consolidated
financial statements.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- --------- ---------
(In Thousands, Except Per Share Data)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Sales ............................... $ 72,022 $ 51,673 $ 26,624 $ 10,192 $ --
Cost of sales ....................... 34,584 28,218 18,031 9,273 --
-------- -------- -------- -------- --------
Gross profit ........................ 37,438 23,455 8,593 919 --
-------- -------- -------- -------- --------
Operating costs and expenses:
Selling, general and administrative 40,864 29,987 19,136 9,338 7,565
Research and development ........... 16,793 13,851 11,734 11,130 23,208
-------- -------- -------- -------- --------
Total operating costs
and expenses .................... 57,657 43,838 30,870 20,468 30,773
-------- -------- -------- -------- --------
Loss from operations ................ (20,219) (20,383) (22,277) (19,549) (30,773)
Interest income, net ................ 1,798 3,683 3,754 1,134 1,330
-------- -------- -------- -------- --------
Net loss ............................ $(18,421) $(16,700) $(18,523) $(18,415) $(29,443)
======== ======== ======== ======== ========
Basic and diluted net loss per share $ (0.51) $ (0.47) $ (0.78) $ (3.81) $ (8.14)
======== ======== ======== ======== ========
Shares used in computing basic and
diluted net loss per share ......... 36,458 35,815 23,796 4,837 3,619
======== ======== ======== ======== ========
DECEMBER 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(In Thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments ......................... $ 50,839 $ 66,661 $ 89,441 $ 26,260 $ 23,220
Working capital ...................... $ 52,562 $ 67,922 $ 83,836 $ 22,023 $ 19,817
Total assets ......................... $ 91,581 $ 100,361 $ 112,421 $ 34,455 $ 28,167
Notes payable, less current portion .. $ 1,838 $ 771 $ 1,861 $ 2,521 $ 2,438
Deferred compensation ................ $ (223) $ (886) $ (2,483) $ (943) $ (1,128)
Accumulated deficit .................. $(128,791) $(110,370) $ (93,670) $ (75,147) $ (56,732)
Total stockholders' equity ........... $ 63,680 $ 78,293 $ 90,730 $ 22,211 $ 20,596
The consolidated statements of operations data for the years ended December 31,
2002, 2001,
and 2000, and the consolidated balance sheet data at December 31, 2002 and 2001
are derived from our consolidated financial statements which have been audited
by Ernst & Young LLP and included elsewhere in this report. The consolidated
statement of operations data for the years ended December 31, 1999 and 1998 and
the consolidated balance sheet data at December 31, 2000, 1999, and 1998 are
derived from our audited consolidated financial statements that are not included
in this report. Historical results are not indicative of the results to be
expected in the future.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and our consolidated financial statements
and the related notes.
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.
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 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 Surgical System enables surgeons to perform better surgery
while giving patients the benefits of MIS, 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, or 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. In May 2001, we received market clearance
from the FDA to promote use of the da Vinci Surgical System for performance of
laparoscopic radical prostatectomy procedures. In
November 2002, we received clearance from the FDA for use of the da Vinci
Surgical System in thoracoscopically-assisted cardiotomy procedures. In January
2003, we began promoting atrial septal defect closure surgery under the November
2002 cardiotomy clearance.
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, we believe that the percentage of revenue from
our EndoWrist instruments and service will 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.
The percentage of revenue derived from recurring instrument, accessory, and
service revenue has grown from 12% in 2000 to 14% in 2001 and to 21% in 2002.
PROPOSED MERGER
On March 7, 2003, we entered into an Agreement and Plan of Merger with Computer
Motion, Inc. Pursuant to the merger agreement, a wholly owned subsidiary of our
company will merger with Computer Motion, with Computer Motion surviving the
merger and continuing as a wholly owned subsidiary of our company.
In connection with the proposed merger, we have entered into a Loan and Security
Agreement with Computer Motion pursuant to which we have agreed to provide a
short-term secured bridge loan facility of up to $7.3 million. Computer Motion
may use the facility to pay off existing indebtedness and to fund operations
prior to completion of the merger. This facility terminates and all outstanding
amounts become due, subject to acceleration upon the occurrence of specified
events. Interest on the facility will accrue at a rate of 8% per annum and will
be payable on the maturity date.
We expect that we and Computer Motion will hold our respective stockholders
meetings at which matters related to the merger will be submitted for approval
in June 2003.
Management anticipates that the combined companies will be able to achieve
annual pre-tax cost savings of approximately $18 million commencing in late
2003. A significant portion of those savings will result from a substantial
reduction in headcount. Intuitive Surgical's ability to achieve these goals is
subject to economic conditions and unanticipated changes in business conditions,
and therefore there can be no assurance that these results will be achieved.
RESULTS OF OPERATIONS
Sales. Sales for the year ended December 31, 2002 were $72.0 million, up 39%
from $51.7 million for the year ended December 31, 2001. The increase was
primarily the result of the sale of 60 systems during 2002, compared to 49
systems during 2001. Total system revenue for the year ended December 31, 2002
was $56.9 million, compared to $44.7 million in the year ended December 31,
2001. The average system selling price, or ASP, was $948,000 in 2002, compared
to $912,000 in 2001, reflecting the impact of a 2002 U.S. list price increase
and a higher concentration of sales in the higher ASP U.S. market. System unit
sales by region in 2002 were 50 in the U.S., 6 in Europe, and 4 in the rest of
the world, compared to 2001 system unit sales of 31 in the U.S., 16 in Europe,
and 2 in the rest of the world.
Also contributing to the revenue increase was continued growth in recurring
instrument, accessory, and service revenue. The 2002 recurring revenue increased
by $8.1 million, or 116%, to $15.1 million, compared to $7.0 million in 2001 as
cumulative placements of systems grew from 89 at December 31, 2001 to 149 at
December 31, 2002.
Sales for the year ended December 31, 2001 of $51.7 million were up 94% from
$26.6 million for the year ended December 31, 2000. The sales increase was
primarily due to an increase in the number of da Vinci Surgical Systems sold to
49 in 2001 from 28 in 2000.
Gross Profit. Gross profit for the year ended December 31, 2002 was $37.4
million, or 52% of sales, compared to $23.5 million, or 45% of sales, in 2001
and $8.6 million, or 32% of sales, in 2000. The year-to-year improvements in
gross profit resulted from higher system ASP increased manufacturing
efficiencies and improved contribution from customer service operations.
In addition, 2001 and 2000 gross profit were both negatively impacted by a $1.0
million non-routine royalty charge that became due to IBM when we exceeded $50.0
million in annual revenue in 2001 and $25.0 million in 2000. Excluding the
impact of this charge, 2001 gross profit would have been $24.5 million, or 47%
of sales, and 2000 gross profit would have been $9.6 million, or 36% of sales.
The 2001 royalty payment represented the final royalty obligation
under our agreement with IBM.
Research and Development Expenses. The 2002 research and development costs were
$16.8 million, up 21% from $13.9 million in 2001. The increase was primarily due
to headcount-related increases of $1.5 million, more clinical trial costs of
$900,000, higher prototype material and project costs of $400,000, and higher
facilities costs of $400,000, offset by lower deferred compensation amortization
of $600,000. The 2001 research and development expenses of $13.9 million were up
18% from $11.7 million in 2000. The increase was due to higher prototype
material and project costs of $1.4 million and headcount-related increases of
$1.0 million.
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 2002 were $40.9 million, up 36% from $30.0 million
for 2001. The year-over-year increase was due in large part to support increased
revenue and a larger installed base of da Vinci Surgical Systems. Specifically,
salaries and fringe benefits increased $5.6 million, travel and entertainment
increased $1.6 million, and customer training and lab costs increased $1.7
million. Selling, general and administrative expenses were also higher in 2002
due to increased legal expenses of $1.5 million, unauthorized purchases of
administrative supplies of $900,000, and facilities charges of $300,000, offset
by lower depreciation of $400,000 and deferred compensation expense of $300,000.
Selling, general and administrative expenses for 2001 of $30.0 million were
$10.9 million higher than the 2000 expenses of $19.1 million. This increase was
primarily due to headcount increases resulting from growing sales and marketing
activities as the da Vinci Surgical System received FDA clearance in 2000.
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 our
expanding business.
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 expenses and selling, general and
administrative expenses. For the years ended December 31, 2002, 2001 and 2000,
we recorded amortization of deferred stock compensation of $700,000, $1.6
million, and $2.6 million, respectively. For 2002, 2001 and 2000, non-cash
deferred compensation expense included in research and development expenses was
$400,000, $1.0 million, and $1.9 million, respectively. For 2002, 2001 and 2000
non-cash deferred compensation expense included in selling, general and
administrative expenses was $300,000, $600,000, and $700,000, respectively.
Deferred compensation recorded through December 31, 2002 was $8.9 million with
accumulated amortization of $8.7 million. The remaining $200,000 is scheduled to
be amortized during the first half of 2003.
Interest Income. Interest income was $2.0 million, $3.9 million, and $4.3
million for 2002, 2001, and 2000, respectively. The decreases resulted primarily
from decreasing cash and short-term investment balances over the period and
lower interest rates earned on cash and short-term investment balances in 2002.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering, we 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. Subsequently, our equipment financing arrangements yielded
approximately $4.0 million. 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 December 31, 2002, we had cash, cash equivalents and short-term
investments of $50.8 million, compared to $66.7 million at December 31, 2001 and
$89.4 million at December 31, 2000. Working capital at December 31, 2002 was
$52.6 million, compared to $67.9 million at December 31, 2001 and $83.8 million
at December 31, 2000. The decreases in cash and investments and working capital
were primarily attributable to cash used to fund operating losses and to acquire
fixed assets.
Net cash used in operating activities was $14.1 million for 2002, compared to
$18.5 million for 2001 and $12.8 for 2000. The decrease in cash used in
operations during 2002 compared to 2001 primarily reflects lower working capital
requirements in 2002, primarily caused by increased collection of accounts
receivable and higher accrued expense balances consisting mainly of accrued
legal costs and accrued compensation, offset by lower accrued royalties. The
increase in cash used in operations during 2001 compared to 2000 primarily
reflects higher working capital requirements in 2001, primarily caused by the
growth in our receivable balances due to increased sales over the prior period.
Net cash provided by investing activities was $18.2 million for 2002, compared
to net cash provided by investing activities of $5.6 million in 2001 and net
cash used by investing activities of $50.8 in 2000. In 2002 and 2001 cash
provided by investing activities resulted primarily from the net conversion of
short-term investments into cash to support operations. The cash used in
investing activities in 2000 related primarily to the purchase of short-term
investments with the net proceeds from our initial public offering.
Net cash provided by financing activities was $3.0 million for 2002, compared to
$800,000 for 2001 and $82.2 million for 2000. In 2002 cash provided by financing
activities resulted from proceeds from the issuance of common stock (resulting
mainly from the employee stock purchase plan and the exercise of stock options)
for $2.1 million and net long-term equipment financing proceeds of $1.0 million.
In 2001 cash provided by financing resulted from proceeds from the issuance of
common stock $2.3 million, offset by net long-term equipment financing
repayments of $1.5 million. Cash provided by investing activities in 2000
related primarily to our initial public offering in June, yielding net proceeds
of $46.8 million and proceeds from the issuance of preferred stock of $34.8
million.
On March 7, 2003, we entered an Agreement and Plan of Merger with Computer
Motion, Inc.
Under the terms of our merger agreement with Computer Motion, Computer Motion
will become a wholly owned subsidiary of our company. Computer Motion recorded
net losses of $21.2 million and $16.4 million for the years ended December 31,
2002 and 2001, respectively, and had a cash balance of $2.6 million as of
December 31, 2002. In recent periods, Computer Motion has not generated cash
from operations. Both we and Computer Motion expect to incur additional
operating losses into 2003, and both we and Computer Motion have substantial
cash needs. Among other things, total fees and costs of both companies
associated with the merger are currently projected to be approximately $4.0
million. Intuitive Surgical has agreed to fund up to $7.3 million of Computer
Motion's working capital needs through the effective time of the merger under
the Loan and Security Agreement. Assuming completion of the merger on or around
June 20, 2003, we project that the total combined cash and cash equivalents of
the two companies will be less than $35 million.
In addition to the effects of the merger, our capital requirements depend on
numerous factors, including market acceptance of our products, the resources we
devote to developing and supporting our products and other factors. We expect to
devote substantial capital resources to continue our research and development
efforts, to expand our customer support and product development activities and
for other general corporate activities. We believe that our current cash and
short-term investment balances, together with revenue to be derived from the
sale of our products, will be sufficient to meet our liquidity requirements at
least through 2003. During or after this period, if cash generated by operations
is insufficient to satisfy our liquidity requirements, we may need to sell
additional equity or debt securities or obtain additional credit arrangements.
Additional financing may not be available on terms acceptable to us or at all.
The sale of additional equity or convertible debt securities could result in
dilution to our stockholders.
Contractual Obligations and Commercial Commitments.
The following table summarizes all significant contractual payment obligations
by payment due date:
Payments by Period ($ Millions)
Contractual Obligation Total Under 1 Year 1-3 Years 3-5 Years Over 5 Years
- ---------------------- ----- ------------ --------- --------- ------------
Long-term debt $ 3.3 $1.5 $ 1.8 $ - $ -
Building lease 11.1 1.9 8.3 0.9 -
Total $14.4 $3.4 $10.1 $0.9 $ -
CRITICAL ACCOUNTING POLICIES
We believe the following represent our critical accounting policies:
Revenue Recognition. In certain cases, revenue from direct system sales is
generated from multiple element arrangements which require judgement in the
areas of customer acceptance, training, installation and collectibility. Revenue
is recognized as specific elements indicated in sales contracts are executed. If
an element is essential to the functionality of an arrangement, the entire
arrangement's revenue is deferred until that essential element is delivered. The
fair value of each undelivered element that is not essential to the
functionality of the system is deferred until performance or delivery occurs.
The fair value of an undelivered element is based upon an estimate made by
management. Amounts billed in excess of revenue recognized is recorded as
deferred revenue on the balance sheet.
Warranties. We provide for the estimated costs of product warranties at the time
revenue is
recognized. Our estimate of costs to service our warranty obligations is based
upon historical experience and expectation of future conditions. If warranty
claim activity and the costs associated with servicing those claims differ from
our estimates, revisions to the estimated warranty liability may be required.
Allowance for Doubtful Accounts. The allowance for doubtful accounts is based
upon management estimates. Factors underlying these estimates include analysis
of days outstanding, customer payment history and management judgement. The
allowance is adjusted regularly to reflect current data and activity.
Inventory Reserves. We write our inventory down for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions. If actual future demand or market conditions are less favorable than
those projected by management, additional inventory write-downs may be required.
Intangible Assets. We have intangible assets on our balance sheet related to the
acquisition of patents. The valuation and classification of these assets and the
assignment of useful amortization lives involves judgments and the use of
estimates. The evaluation of these intangibles for impairment under established
accounting guidelines is required on an ongoing basis. Changes in business
conditions could potentially require future adjustments to asset valuations.
Contingencies. We are subject to proceedings, lawsuits and other claims related
to our products, patents and other matters. We are required to assess the
likelihood of any adverse judgments or outcomes to these matters as well as
potential ranges of probable losses. A determination of the amount of reserves
required, if any, for these contingencies is made after careful analysis of each
individual issue. The required reserves may change in the future due to new
developments in each matter or changes in approach such as a change in
settlement strategy in dealing with these matters.
A complete description of all significant accounting policies is included in
Note 1 in the Notes to the consolidated financial statements, in Item 15 of this
report.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No.
141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets," effective for fiscal years beginning after December 15, 2001. SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, and that the use of the
pooling-of-interest method is no longer allowed. Under SFAS 142, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to an annual impairment test in accordance with the new
standards. Other intangible assets will continue to be amortized over their
respective useful lives. We adopted SFAS 141 and SFAS 142 as of January 1, 2002.
The adoption of SFAS 141 and SFAS 142 has not had a significant impact on our
financial position or results of operations. We will apply the provisions of
SFAS 141 and SFAS 142 to the acquisition of Computer Motion when the merger is
completed.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets," effective for fiscal years beginning after
December 15, 2001. SFAS No. 144 addresses financial accounting and reporting for
impairment or disposal of long-lived assets and supersedes SFAS 121. We adopted
SFAS 144 as of January 1, 2002, without a significant impact on our financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
146 requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. We will apply SFAS 146 prospectively to activities
initiated after December 31, 2002.
In June 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement
No. 123 ", effective for the fiscal years beginning after December 31, 2002.
SFAS 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of Statement 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. We continue to follow the
intrinsic value method prescribed by APB 25 in accounting for stock options,
recognizing no compensation expense for options granted at or above market
price. We adopted the provisions of SFAS 148 effective for the fiscal year ended
December 31, 2002 and have complied with the amended disclosure requirements.
In November 2002, the FASB issued Interpretation No. 45, or FIN 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 elaborates on the existing
disclosure requirements for most guarantees, including residual value guarantees
issued in conjunction with operating lease agreements. It also clarifies that at
the time a company issues a guarantee, the company must recognize an initial
liability for the fair value of the obligation it assumes under that guarantee
and must disclose that information in its interim and annual financial
statements. The initial recognition and measurement provisions apply on a
prospective basis to guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. Our adoption of FIN 45 did not
have a material impact on our results of operations and financial position.
In January 2003, the FASB issued Interpretation No. 46, or FIN 46,
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. A
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in
research and development or other activities on behalf of another company. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply to all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. We do not expect any significant impact on our
financial position or results of operations upon adoption of this pronouncement.
In October 2002, the Emerging Issues Task Force reached consensus on issue
00-21, or EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The
principles and application guidance of EITF 00-21 should be used to determine
(a) how the arrangement consideration should be measured, (b) whether the
arrangement should be divided into separate units of accounting, and (c) how the
arrangement consideration should be allocated among the separate units of
accounting. The guidance in this issue is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The Company has
not completed it's evaluation of the impact of the adoption of EITF 00-21 on its
results of operations or financial position.
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 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 is 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 completion of our pending merger with Computer Motion and
the successful integration of the two companies;
- 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 and defend
against third party challenges;
- 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 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. 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 will 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.
A relatively small number of customers account for a significant portion of our
total revenues. In 2000, 2001 and 2002, the majority of our revenues came from
the sales of da Vinci Surgical Systems, which are high revenue dollar items. Due
to the high dollar revenue per system sold, small variations in system unit
sales may cause revenue to vary significantly from quarter to quarter. For 2001
AB Medica SRL, our Italian distributor, accounted for 15% of total sales. No
customer accounted for more than 10% of sales during 2000 or 2002.
Due to the high average selling price of the da Vinci Surgical System, our
failure to add new customers that make significant purchases of our products
could reduce our future revenues. The loss or delay of individual orders could
have a significant impact on revenues and operating results.
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 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. We cannot be certain that our training programs will be cost effective
or sufficient to meet our customers' needs.
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. WHILE THE MERGER AGREEMENT HAS
RESULTED IN A STAY OF ALL PROCEEDINGS INVOLVING COMPUTER MOTION, THESE
PROCEEDINGS MAY CONTINUE IF THE MERGER IS NOT COMPLETED.
On May 10, 2000, Computer Motion filed a lawsuit in the 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, 5,762,458,
5,815,640, 5,855,583, 5,878,193, 5,907,664 and 6,001,108, 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. In late
2000, Computer Motion alleged our infringement of a ninth patent, and added U.S.
Patent Number 6,102,850 to the litigation. Computer Motion subsequently alleged
that we infringed U.S. Patent No. 6,244,809, which it added to the litigation in
May 2002. These ten patents concern various methods and devices for conducting
various aspects of robotic surgery. Of those ten patents, three are no longer
part of the suit. After Computer Motion lost all of its rights to its 5,855,583
and 5,878,193 patents as a result of our successful Patent Office interference
proceedings
Computer Motion voluntarily dismissed those patents from suit. However, Computer
Motion has sought to challenge the interference proceedings by separate district
court appeal. In addition, in November 2002, the Court granted our motion for
summary judgment of noninfringement of the 6,102,850 patent. In February 2003,
the Court denied our motion for summary judgment of noninfringement of the
6,244,809 patent and granted Computer Motion's cross-motion for partial summary
judgment of literal infringement of one claim of that patent. We subsequently
requested that the Court reconsider that decision because of perceived flaws in
the Court's approach to the issue of infringement on summary judgment.
Regardless of what happens on reconsideration, we will continue to defend the
809 patent on invalidity, based on the earlier robotic surgery work of SRI and
others. We still have pending motions for summary judgment of noninfringement on
two more of Computer Motion's seven remaining patents-in-suit, numbers 5,907,664
and 6,001,108 At the Court's request, we will not file further motions for
summary judgment until the remaining pending motions are decided. In late
January 2003, after close of fact discovery, Computer Motion asserted between 26
and 35 new claims of its seven remaining patents-in-suit and new theories of
infringement. We have moved to strike those new assertions as inappropriate at
this late stage. Trial had been calendared for April 29, 2003.
In connection with our proposed merger with Computer Motion, our company and
Computer Motion have agreed to request an immediate stay through August 31, 2003
of all proceedings in the pending litigations between the companies. As part of
the stays, the courts have ceased all further activity in the cases during the
period of stay, and will not issue any opinions or orders on issues already
submitted for decision. In addition, the California Court postponed the trial
date and was asked to reset the trial to a date no earlier than November 30,
2003. The stay may be terminated before, or extended beyond, August 31, 2003
under specified circumstances. In the event the merger is completed, our company
and Computer Motion will request dismissal with prejudice of all pending
litigations.
If the merger is not completed by August 31, 2003, the stays may be lifted and
the California case may proceed to trial. If the stays are lifted and we
ultimately 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, we may 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. If the stay is lifted and 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,
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, or 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 our company. On November 8, 2001, the
District Court granted summary judgment of noninfringement of the 003 patent in
our favor and dismissed Wilk's complaint in its entirety without prejudice. Wilk
appealed the summary judgment ruling to the U.S. Court of Appeals for the
Federal Circuit. A decision on the merits of the appeal is expected sometime in
2003. If we lose on appeal and ultimately also 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. 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. 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, we could be required to pay Wilk damages, including treble
damages, which could be substantial and harm our financial position.
On February 21, 2001, Wilk filed suit against Computer Motion alleging that its
ZEUS surgical system infringed upon Wilk's U.S. Patent Nos. 5,217,003 and
5,368,015. Wilk's complaint sought damages, attorneys' fees and increased
damages alleging willful patent infringement. On March 21, 2001, Computer Motion
served its answer and counterclaim alleging non-infringement of each
patent-in-suit, patent invalidity and unenforceability. On November 8, 2001, the
United States District Court for the Southern District of New York in the
co-pending Brookhill-Wilk v. Intuitive Surgical, Inc., Civil Action No.
00-CV-6599 (NRB), issued an order interpreting the claims of Wilk's U.S. Patent
No. 5,217,003 in a way that Computer Motion believed excluded current
applications of its ZEUS surgical system. In light of this decision, on November
13, 2001, Wilk and Computer Motion agreed to dismiss the case without prejudice
to refiling upon resolution of the appeal in Wilk's litigation against
Intuitive Surgical.
The foregoing proceedings would be expensive to litigate, may be
protracted and our confidential information may be compromised. Whether or not
we are successful in this lawsuit, these proceedings could consume substantial
amounts of our financial and managerial resources. At any time the other parties
may file additional claims against our company, or we may file claims against
them, which could increase the risk, expense and duration of the litigations.
For more information on these proceedings, see "Item 1: Business -- Legal
Proceedings."
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 do not know whether 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 do not know whether 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. 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, remote 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 with, one or more of these third parties. 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 our company. 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."
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 Corporation, MIT, Olympus Optical Co., Ltd., and Heartport,
Inc., now part of Johnson & Johnson. Any of these agreements may be terminated
for breach. 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."
PUBLIC ANNOUNCEMENTS OF LITIGATION EVENTS MAY CAUSE OUR STOCK PRICE TO DECLINE.
During the course of our administrative proceedings and/or lawsuits, 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.
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, or
"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 premarket approval application, 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 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 and clinical studies, 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 clearance or 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, or
"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, or "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 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."
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.
If we modify existing products or develop new products in the future, including
new instruments, we may 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.
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."
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 drugs 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 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 mechanical parts and computer software, either of which
can contain errors or failures, especially when first introduced. In addition,
new products or enhancements may contain undetected errors or performance
problems that, despite testing, are discovered only after commercial shipment.
Because our products are designed to be used to perform complex surgical
procedures, we expect that our customers will have an increased sensitivity to
such defects. We cannot assure you that our products will not experience errors
or performance problems in the future. If we experience flaws 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 sale 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. 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, or QSR. We are also required to comply with
International Organization for Standardization, or ISO quality system standards
in order to produce products for sale in Europe. If we fail to continue to
comply with Good Manufacturing Practice requirements or ISO 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 standards. The FDA
inspected our Mountain View and Sunnyvale facilities in March 2000 and December
2002, respectively. The Good Manufacturing Practice issues raised by the FDA
during the inspections either were satisfactorily resolved with the FDA, or we
believe can be resolved by us to the FDA's satisfaction, although we cannot
assure you that we will be able to do so. We continue to be subject to FDA
inspections at any time. 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 ISO standards in future inspections and
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. In
March 2002, our facilities and manufacturing processes in our Sunnyvale facility
were re-inspected by the Food and Drug Branch, or FDB, and we were issued an
updated device manufacturing license for our Sunnyvale facility. We are 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 in 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.
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. 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. 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 18%, 34% and 36% of our sales for 2002, 2001, and 2000,
respectively. We are 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.
RISK FACTORS ASSOCIATED WITH OUR PENDING MERGER WITH COMPUTER MOTION
THE ISSUANCE OF SHARES OF INTUITIVE SURGICAL COMMON STOCK TO COMPUTER MOTION
STOCKHOLDERS IN THE MERGER WILL SUBSTANTIALLY REDUCE THE PERCENTAGE INTERESTS OF
INTUITIVE SURGICAL STOCKHOLDERS.
Based on an estimated exchange ratio of approximately 0.52, we estimate that we
will issue approximately 14.7 million shares of our common stock in the merger
and upon completion of the merger, our current stockholders will own
approximately 72% of the then outstanding shares of our common stock and former
Computer Motion stockholders will own approximately 28% of the then outstanding
shares of our common stock.
In addition, based on the estimated exchange ratio of approximately 0.52, we
estimate that we will reserve approximately 5.7 million shares of Intuitive
Surgical common stock for future issuance in connection with Intuitive
Surgical's assumption of Computer Motion's outstanding options and warrants
(including out-of-the-money options and warrants), subject to proportional
reduction in the event that the proposed reverse stock split is approved by our
stockholders and implemented by our board of directors. The outstanding warrants
of Computer Motion have a range of exercise prices. Holders of these warrants
have the right to an adjustment in the exercise price of their warrants, and in
some cases in the number of shares issuable upon exercise, if the warrant issuer
sells shares in the future at prices below the exercise prices of the
warrants. These anti-dilution protections may continue to apply after the merger
and thus could result in additional dilution to stockholders of the combined
company as we make future offerings of capital stock.
The issuance of shares of Intuitive Surgical common stock to former Computer
Motion stockholders in or after the merger will cause a significant reduction in
the relative percentage interests of current Intuitive Surgical stockholders in
earnings, voting, liquidation value and book and market value. The issuance of
additional shares of Intuitive Surgical common stock in future transactions
could also reduce the percentage interests of former Computer Motion
stockholders and Intuitive Surgical stockholders in the combined company. This
dilution could reduce the market price of our common stock.
INTUITIVE SURGICAL AND COMPUTER MOTION EACH HAVE INCURRED SUBSTANTIAL LOSSES
SINCE INCEPTION, EXPECT TO INCUR FURTHER LOSSES, AND MAY NOT BE ABLE TO GENERATE
OR RAISE SUFFICIENT CASH TO FUND THEIR OPERATIONS, SEPARATE OR COMBINED.
We incurred a net loss of $18.4 million for 2002, and Computer Motion incurred a
net loss of $21.2 million for the same period. 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. In recent periods, Computer Motion has not generated cash from
operations. Both companies expect to incur additional operating losses into
2003, and both companies have substantial cash needs. Among other things, total
fees and costs of both companies associated with the merger are currently
projected to be approximately $4.0 million. We have agreed to fund up to $7.3
million of Computer Motion's working capital needs through the effective time of
the merger under the Loan and Security Agreement. Assuming completion of the
merger on or around June 20, 2003, we project that the total combined cash and
cash equivalents of the two companies will be less than $35 million. We expect
that the capital resources of the combined company, together with revenue
derived from product sales, will be sufficient to meet the combined company's
working capital needs at least through 2003. After that, we may need to raise
additional funds. We may not be able to obtain additional financing on favorable
terms, or at all. If we are unable to generate sufficient capital to fund our
operations and cannot raise it on acceptable terms, we may not be able to
further develop, enhance or expand the market for our products and services, and
the combined company could fail.
THE COMBINED COMPANY MAY NOT REALIZE ALL OF THE ANTICIPATED BENEFITS OF THE
MERGER.
The success of the merger will depend, in part, on the ability of the combined
company to realize the anticipated synergies, cost savings and growth
opportunities from integrating the business of Computer Motion with the business
of Intuitive Surgical. Our success in realizing these benefits and the timing of
this realization depend upon the successful, rapid integration of the operations
of Computer Motion with those of Intuitive Surgical. This integration will be a
complex, costly and time-consuming process, and may not succeed as planned. The
difficulties of combining the operations of the companies include, among other
things:
- coordinating and consolidating ongoing and future research and
development efforts;
- consolidating sales and marketing operations;
- retaining existing customers and attracting new customers;
- retaining strategic partners and attracting new strategic
partners;
- retaining key employees;
- consolidating corporate and administrative infrastructures;
- integrating and managing the technologies and products of the
two companies;
- identifying and eliminating redundant and underperforming
operations and assets;
- using capital assets efficiently to develop the business of
the combined company;
- minimizing the diversion of management's attention from
ongoing business concerns; and
- coordinating geographically separate organizations.
In addition, Computer Motion's products differ in substantial ways from our
products, and the companies rely on different distributors and sales channels to
sell their products. Both Computer Motion and Intuitive Surgical are parties to
existing distribution agreements that cannot be terminated prior to the end of
their terms.
We do not know whether the combined company will succeed in addressing these
risks or any other problems encountered in connection with the merger, or
whether the integration of Computer Motion with Intuitive Surgical will result
in the realization of the full benefits anticipated by us from the merger.
FAILURE TO COMPLETE THE MERGER COULD NEGATIVELY IMPACT INTUITIVE SURGICAL AND
ITS STOCKHOLDERS.
If the merger is not completed for any reason, Intuitive Surgical and Computer
Motion and their stockholders will be subject to a number of material risks,
including:
- the provision in the merger agreement that, under specified
circumstances, either Intuitive Surgical or Computer Motion
could be required to pay the other a termination fee and
expenses of up to an aggregate of $2.5 million;
- the litigations between the two companies may resume;
- Computer Motion would be required to repay to Intuitive
Surgical all amounts loaned under the bridge loan facility
within 120 days following termination of the merger agreement;
- Computer Motion likely would not have sufficient cash to repay
amounts loaned under the bridge loan, and Intuitive Surgical
would be at risk that such bridge loan amounts would not be
repaid unless Computer Motion were able to obtain alternative
financing;
- the market price of Intuitive Surgical common stock and
Computer Motion common stock may decline to the extent that
the current market price of such shares reflects a market
assumption that the merger will be completed;
- costs related to the merger, such as legal and accounting
fees, must be paid even if the merger is not completed;
- benefits that Intuitive Surgical and Computer Motion expect to
realize from the merger would not be realized; and
- the diversion of management attention from the day-to-day
businesses of the companies and the unavoidable disruption to
their employees and customers during the period before
completion of the merger may make it difficult for Intuitive
Surgical and Computer Motion to regain their financial and
market positions if the merger does not occur.
SALES BY INTUITIVE SURGICAL STOCKHOLDERS OR FORMER COMPUTER MOTION STOCKHOLDERS
COULD CAUSE INTUITIVE SURGICAL'S COMMON STOCK PRICE TO DECLINE.
The market price of Intuitive Surgical 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 the combined company 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 December 31, 2002, several entities
beneficially owned more than 5% of the outstanding shares of Intuitive
Surgical's common stock, including Bear Stearns Asset Management, Allan G.
Lozier, Investor Growth Capital, Ltd., Merrill Lynch & Co., and PaTMarK Company,
Inc. Assuming that the merger is completed, the former stockholders of Computer
Motion will own approximately 28% of the combined company, subject to the
assumptions and adjustments discussed elsewhere in this joint proxy
statement/prospectus. In addition, holders of warrants to purchase up to 5.5
million shares of Computer Motion common stock will receive Intuitive Surgical
warrants in exchange for their Computer Motion warrants in connection with the
merger. Such warrant holders will have the right to include their shares in
resale registration statements that we will be obligated to file on their
behalf.
CUSTOMER, SUPPLIER, AND EMPLOYEE UNCERTAINTY RELATED TO THE MERGER COULD HARM
THE COMBINED COMPANY.
Intuitive Surgical and Computer Motion customers and suppliers may, in response
to the announcement or completion of the merger, delay purchasing or supply
decisions or otherwise alter existing relationships with Intuitive Surgical or
Computer Motion. These decisions or other adverse changes in the business
relationships of Intuitive Surgical and Computer Motion with their respective
customers and suppliers could adversely affect the business of the combined
company. Similarly, current and prospective Computer Motion employees may
experience uncertainty about their future as employees of the combined company
until strategies with regard
to Computer Motion are announced or executed. This may adversely affect
Intuitive Surgical's or Computer Motion's ability to attract and retain, and may
affect the performance during the transition period of, key management, sales,
marketing and technical personnel.
THE CONVICTION OF ARTHUR ANDERSEN LLP ON OBSTRUCTION OF JUSTICE CHARGES MAY
ADVERSELY AFFECT ARTHUR ANDERSEN'S ABILITY TO SATISFY CLAIMS ARISING FROM THE
PROVISION OF AUDITING SERVICES TO COMPUTER MOTION AND MAY IMPEDE THE COMBINED
COMPANY'S ACCESS TO CAPITAL MARKETS AFTER THE MERGER.
Arthur Andersen LLP audited Computer Motion's financial statements for the years
ended December 31, 2001 and December 31, 2000. On March 14, 2002, an indictment
was unsealed charging Arthur Andersen with federal obstruction of justice
arising from the government's investigation of Enron Corp. On June 15, 2002,
Arthur Andersen was convicted of these charges. The impact of this conviction on
Arthur Andersen's financial condition may adversely affect the ability of Arthur
Andersen to satisfy any claims arising from its provision of auditing services
to Computer Motion.
Should Intuitive Surgical seek to access the public capital markets after
completion of the merger, SEC rules will require Intuitive Surgical to include
or incorporate by reference in any prospectus three years of audited financial
statements. The SEC's current rules would require Intuitive Surgical to present
audited financial statements for one or more fiscal years audited by
Arthur Andersen and use reasonable efforts to obtain its consent until the
audited financial statements for the fiscal year ending December 31, 2004 become
available. If prior to that time the SEC ceases accepting financial statements
audited by Arthur Andersen, it is possible that the available audited financial
statements for the years ended December 31, 2001 and December 31, 2000 audited
by Arthur Andersen might not satisfy the SEC's requirements. In that case,
Intuitive Surgical would be unable to access the public capital markets unless
an independent accounting firm were able to audit the financial statements
originally audited by Arthur Andersen. Any delay or inability to access the
public capital markets caused by these circumstances could have a material
adverse effect on the combined company's business, profitability and growth
prospects.
ITEM 7A: 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. We classify our cash equivalents and
marketable securities as "fixed-rate" if the rate of return on such instruments
remains fixed over their term. These "fixed-rate" investments include commercial
paper and government and non-government debt securities. We classify our cash
equivalents and marketable securities as "variable-rate" if the rate of return
on such investments varies based on the change in a predetermined index or set
of indices during their term. These "variable-rate" investments primarily
included money market accounts. The average duration of all of our investments
as of December 31, 2002 was approximately 1.4 years. At December 31, 2002,
approximately 36% of our investment portfolio was composed of investments with
original maturities of one year or less. The following table presents the
amounts of our cash, cash equivalents and short-term investments that may be
subject to interest rate risk and the weighted average interest rates by year of
maturity ($ in thousands):
AS OF DECEMBER 31, 2002
----------------------------
WEIGHTED AVERAGE FAIR
INTEREST RATE VALUE
------------- -----
Cash Equivalents
Variable rate ................... 1.51 % $ 8,600
Marketable securities
Fixed rate (mature in 2004) ..... 5.08 % $ 6,429
Fixed rate (mature in 2005) ..... 6.04 % $16,766
Fixed rate (mature in 2006) ..... 5.9 % $ 5,954
Fixed rate (mature in 2007) ..... 5.25 % $ 4,082
Fluctuations in interest rates would also impact interest expense on future
fixed rate notes payable for equipment financing contracts, should we elect to
finance future equipment purchases. The following table summarizes installment
notes outstanding as of December 31, 2002 and the associated interest rates by
year of maturity ($ in thousands):
Weighted
Final Outstanding Average
Installment December 31, 2002 Rate
----------- ----------------- ----
2003 $ 42 5.4%
2004 1,475 8.7%
2005 1,832 7.2%
--------
$ 3,349 7.8%
Less current portion 1,511
--------
Long-term portion $ 1,838
========
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Annual Financial Statements: See Part IV, Item 15(a)(1) of this Form 10-K.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Directors currently consists of seven members, divided into three
classes. The names of the directors and executive officers, their ages as of
February 28, 2003 and certain other information about them are set forth below:
DIRECTOR
NAME OF NOMINEE OR DIRECTOR AGE PRINCIPAL OCCUPATION SINCE
- --------------------------- --- -------------------- -----
Scott S. Halsted(1) 43 General Partner, Morgan Stanley Dean Witter Venture 1997
Partners
Russell C. Hirsch, M.D., Ph.D.(2) 40 Managing Partner, Prospect Venture Partners 1995
Richard J. Kramer(1) 60 President, R.J. Kramer Associates 2000
James A. Lawrence(1) 50 Executive Vice President and Chief Financial Officer of 2000
General Mills, Inc.
Alan J. Levy, Ph.D.(2) 65 President and Chief Executive Officer of Vertis 2000
Neuroscience, Inc.
Frederic H. Moll, M.D. 51 Vice President and Medical Director of the Company 1995
Lonnie M. Smith 58 President and Chief Executive Officer of the Company 1996
Susan K. Barnes 49 Senior Vice President, Chief Financial Officer and
Assistant Secretary
Gary S. Guthart, Ph.D. 37 Senior Vice President, Product Operations
Jerome J. McNamara 45 Senior Vice President, Worldwide Sales
(1) member of audit committee
(2) member of compensation committee
The principal occupations and positions for at least the past five years of the
directors and executive officers named above are as follows:
SCOTT S. HALSTED has been a member of our Board of Directors since March 1997.
Mr. Halsted joined Morgan Stanley in 1987, and has been a general partner at
Morgan Stanley Dean Witter Venture Partners since 1997. Mr. Halsted currently
serves as a director of several private healthcare companies. Mr. Halsted
received A.B. and B.E. degrees in Biomechanical Engineering from Dartmouth
College and an M.M. degree from Northwestern University.
RUSSELL C. HIRSCH, M.D., PH.D. has been a member of our Board of Directors since
December 1995. Dr. Hirsch has been a Managing Partner of Prospect Venture
Partners since 2001. Prior to joining Prospect Venture Partners, Dr. Hirsch was
a member of the Health Care Technology Group at Mayfield Fund, a venture capital
firm. He joined Mayfield Fund in 1992, served as a Venture Partner from 1993 to
1994 and a General Partner from 1995 to 2000. From 1984 to 1992, Dr. Hirsch
conducted research in the laboratories of Nobel Laureate Harold Varmus, M.D.,
and Don Ganem, M.D., at the University of California, San Francisco. Dr. Hirsch
received a B.S. in Chemistry from the University of Chicago and an M.D. and a
Ph.D. from the University of California, San Francisco.
RICHARD J. KRAMER has been a member of our Board of Directors since February
2000. Mr. Kramer is President of R.J. Kramer Associates, a healthcare consulting
firm he founded in January 2001. From 1989 to 1999, he served as the President
and Chief Executive Officer of Catholic Healthcare West, operating 48 hospitals
in the western United States. From 1982 to 1989, Mr. Kramer was Executive Vice
President of Allina Health, the largest integrated health care system in
Minnesota. Mr. Kramer received a B.S. in Rehabilitation Education from
Pennsylvania State University, an M.S. in Rehabilitation Counseling from
Syracuse University and an M.S. in Hospital & Health Care Administration from
the University of Minnesota.
JAMES A. LAWRENCE has been a member of our Board of Directors since March 2000.
He has been Executive Vice President and Chief Financial Officer of General
Mills, Inc. since 1998. Mr. Lawrence has also held positions as Executive Vice
President and Chief Financial Officer for Northwest Airlines, and President and
Chief Executive Officer of Pepsi-Cola Asia, Middle East, Africa. He has also
chaired and co-founded LEK Partnership, a corporate strategy and
merger/acquisition consulting firm headquartered in London, England. Mr.
Lawrence currently serves as a director of TransTechnology Corporation and
Avnet, Inc. Mr. Lawrence holds a B.A. in Economics from Yale University and an
M.B.A. from Harvard Business School.
ALAN J. LEVY, PH.D. has been a member of our Board of Directors since February
2000. Dr. Levy has been President, Chief Executive Officer and a member of the
board of directors of Vertis Neuroscience, Inc., a biotechnology company he
co-founded in 1999. From 1993 to 1998 Dr. Levy served as President and Chief
Executive Officer of Heartstream, Inc., a medical device company that was
acquired by Hewlett-Packard in 1998. Prior to joining Heartstream, he was
President of Heart Technology,Inc. a medical device company that was acquired by
Boston Scientific in 1995. Before joining Heart Technology, Dr. Levy was vice
president of research and new business development and a member of the board of
the Ethicon division of Johnson & Johnson. Dr. Levy received his B.S. in
chemistry from City University of New York and his Ph.D. in organic chemistry
from Purdue University.
FREDERIC H. MOLL, M.D. is a co-founder of Intuitive Surgical and has served as
Vice President, Medical Director and as a member of our Board of Directors since
our inception. In 1989, Dr. Moll co-founded Origin Medsystems, Inc., a medical
device company and served as Medical Director through 1995. Origin was acquired
by Eli Lilly & Company in 1992 and is now a wholly-owned subsidiary of Tyco
Health Care. In 1984, Dr. Moll founded Endotherapeutics, Inc., a medical device
company, which was acquired by United States Surgical Corporation in 1992. Dr.
Moll received a B.A. from the University of California, Berkeley, an M.S. in
Management from Stanford University's Sloan Program and an M.D. from the
University of Washington.
LONNIE M. SMITH has been our President and Chief Executive Officer since May
1997 and has served as a member of our Board of Directors since December 1996.
From 1977 until joining Intuitive Surgical, Mr. Smith was with Hillenbrand
Industries, Inc., a public holding company, serving as the Senior Executive Vice
President, a member of the Office of the President, and Director since 1982, as
Executive Vice President of American Tourister, Inc., from 1978 to 1982, and as
a Senior Vice President of Corporate Planning from 1977 to 1978. Mr. Smith has
also held positions with The Boston Consulting Group and IBM. Mr. Smith
currently serves as a director of Biosite Diagnostics, Inc. Mr. Smith received a
B.S.E.E. from Utah State University and an M.B.A. from Harvard Business School.
SUSAN K. BARNES, Senior Vice President has been our Chief Financial Officer and
Assistant Secretary since May 1997. From January 1995 to September 1996, Ms.
Barnes founded and served as Managing Director of the Private Equity Group of
Jefferies and Company, Inc., an investment bank. From January 1994 to January
1995, she founded and served as Managing General Partner of Westwind Capital
Partners, a private equity fund. From June 1991 to January 1994, Ms. Barnes
served as Chief Financial Officer and Managing Director of BLUM Capital
Partners, L.P., formerly Richard C. Blum & Associates, Inc., a merchant banking
firm. From September 1985 to June 1991, she served as Vice President and Chief
Financial Officer of NeXT Computer, Inc., a computer COMPANY. Prior to forming
NeXT with Steve Jobs, Ms. Barnes was Controller of the Macintosh Division at
Apple Computer. Ms. Barnes received a B.A. from Bryn Mawr College and an M.B.A.
from the Wharton School, University of Pennsylvania.
GARY S. GUTHART, PH.D., Senior Vice President, Product Operations, joined
Intuitive Surgical, Inc. in April 1996 and became Vice President, Engineering in
November 1999. Previously, Dr. Guthart was part of the core team developing
foundation technology for computer enhanced-surgery at SRI International
(formally Stanford Research Institute). While at SRI, he also developed
technologies for vibration and acoustic control of large-scale systems. Upon
receiving his doctorate degree from the California Institute of Technology, he
was honored with the Richard Bruce Chapman Memorial Award. In addition, Dr.
Guthart received a BS in Engineering from the University of California,
Berkeley, where he graduated magna cum laude and an MS and Ph.D. in Engineering
Science from the California Institute of Technology.
JEROME J. MCNAMARA, Senior Vice President, Worldwide Sales, joined Intuitive
Surgical in April 1999 from Valley Lab where he was Vice President of Marketing.
Prior to this, Mr. McNamara worked at United States Surgical Corporation for
nearly 17 years where he held positions in senior sales management, marketing,
and national accounts. Mr. McNamara graduated from the University of
Pennsylvania with a BA degree in Biology.
COMMITTEES OF THE BOARD OF DIRECTORS
In 2002, our Board of Directors held four meetings. Our Board of Directors has
two standing committees, the audit committee and the compensation committee.
The audit committee has responsibility for reviewing and making recommendations
regarding our employment of independent accountants, the annual audit of our
financial statements, and our internal controls, accounting practices and
policies. The members of the audit committee are Scott Halsted, Richard Kramer
and James Lawrence. In 2002, the audit committee met seven times and each member
of the audit committee attended 100% with the exception of Scott Halsted who
attended 71% of those meetings. The Board of Directors has determined that James
Lawrence is the audit committee financial expert as that term is defined by the
SEC.
The compensation committee has responsibility for determining the nature and
amount of compensation for our management and for administering our employee
benefit plans. The members of the compensation committee are Alan Levy and
Russell Hirsch. In 2002, the compensation committee met two
times and each member of the compensation committee attended 100% of those
meetings.
COMPLIANCE SECTION 16(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires that our executive officers and
directors, and persons who own more than ten percent of a registered class of
our equity securities, file reports of ownership and changes in ownership (Forms
3, 4 and 5) with the Securities and Exchange Commission. Executive officers,
directors and greater-than-ten-percent holders are required to furnish us with
copies of all of these forms which they file.
Based solely on our review of these reports or written representations from
certain reporting persons, we believe that during the fiscal year ended December
31, 2002, all filing requirements applicable to our officers, directors,
greater-than-ten-percent beneficial owners and other persons subject to Section
16(a) of the Exchange Act were met.
ITEM 11: EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the compensation
paid to our chief executive officer and other executive officers for services to
the Company in all capacities.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
------------------------------- SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS
--------------------------- ---- --------- --------- -------
Lonnie M. Smith.................................. 2002 $ 354,000 $ 22,500 125,000
President and 2001 350,000 - 150,000
Chief Executive Officer 2000 325,000 - -
---- --------- --------- -------
Susan K. Barnes.................................. 2002 $ 225,833 $ 15,000 100,000
Senior Vice President and 2001 220,000 37,989 100,000
Chief Financial Officer 2000 202,500 36,000 5,000
---- --------- --------- -------
Frederic H. Moll, M.D........................... 2002 $ 168,000 $ - 50,000
Vice President and 2001 210,000 - 85,000
Medical Director 2000 205,000 - -
---- --------- --------- -------
Jerome J. McNamara............................. 2002 $ 239,750 $ 136,000 75,000
Senior Vice President, Worldwide Sales 2001 190,000 96,661 60,000
2000 162,500 13,000 5,000
---- --------- --------- -------
Gary S. Guthart, Ph.D........................... 2002 $ 225,417 $ 15,000 75,000
Senior Vice President, Product Operations 2001 190,000 36,278 75,000
2000 170,000 18,500 10,000
DIRECTOR COMPENSATION
Directors currently receive no cash compensation from us for their services as
members of the board or for attendance at committee meetings. Directors may be
reimbursed for expenses in connection with attendance at board of directors and
committee meetings.
In March 2000, we adopted the 2000 Non-Employee Directors' Stock Option Plan to
provide for the automatic grant of options to purchase shares of common stock to
our non-employee directors who are not employees of Intuitive Surgical or any
affiliate of Intuitive Surgical. Any non-employee directors elected after the
closing of the initial public offering receive an initial option to purchase
20,000 shares of common stock. In connection with our annual stockholder meeting
in 2002, all non-employee directors received an option to purchase 5,000 shares
of common stock.
EMPLOYMENT AGREEMENTS
In February 1997, we entered into an agreement with Lonnie M. Smith, our
President and Chief Executive Officer, providing that, in the case of
involuntary termination other than for cause, his salary and benefits will
continue to be paid for a period of one year from the date of termination. Cause
is defined in the agreement to include conviction for any felony, participation
in a fraud or act of dishonesty against us, willful breach of our policies, or a
material breach by Mr. Smith of his employment agreement or of his proprietary
information and inventions agreement.
OPTION GRANTS IN FISCAL YEAR 2002
The following table sets forth each grant of stock options during the fiscal
year ended December 31, 2002, to each of the individuals listed on the previous
table. The exercise price of each option was equal to the fair value of our
common stock as valued by the board of directors on the date of grant. The
exercise price may be paid in cash or in shares of our common stock valued at
fair value on the exercise date.
The potential realizable value is calculated based on the ten-year term of the
option at the time of grant. Stock price appreciation of 5% and 10% is assumed
pursuant to rules promulgated by the Securities and Exchange Commission and does
not represent our prediction of our stock price performance. The potential
realizable values at 5% and 10% appreciation are calculated by:
- - Multiplying the number of shares of common stock subject to a given option
by the fair market value at the date of grant;
- - Assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table until the
expiration of the options; and
- - Subtracting from that result the aggregate option exercise price.
The shares listed in the following table under "Number of Securities Underlying
Options Granted" are subject to vesting. Upon completion of six months of
service from the vesting start date, 12.5% of the option shares vest and the
balance vest in a series of equal monthly installments over the next 42 months
of service. The option has a ten-year term, subject to earlier termination if
the optionee's service with us ceases.
Percentages shown under "Percentage of Total Options Granted to Employees in
Fiscal Year 2002" are based on an aggregate of 1,976,000 options granted to
employees of Intuitive Surgical under our stock option plans during the fiscal
year ended December 31, 2002.
INDIVIDUAL GRANTS
-----------------
PERCENTAGE
OF TOTAL
NUMBER OF OPTIONS POTENTIAL REALIZABLE VALUE AT
SECURITIES GRANTED TO EXERCISE ASSUMED ANNUAL RATES OF STOCK
UNDERLYING EMPLOYEES PRICE PRICE APPRECIATION FOR OPTION TERM
OPTIONS IN FISCAL PER EXPIRATION ----------------------------------
NAME GRANTED YEAR 2002 SHARE DATE 5% 10%
- ---- ------- --------- ----- ---- -- ---
Lonnie M. Smith ........ 125,000 6.3% $ 9.25 02/01/12 $ 821,330 $2,142,666
Susan K. Barnes ........ 75,000 3.8% 9.25 02/01/12 492,798 1,285,600
25,000 1.3% 9.25 03/14/12 164,266 428,533
Frederic H. Moll, M.D .. 50,000 2.5% 9.25 02/01/12 328,532 857,066
Jerome J. McNamara ..... 50,000 2.5% 9.25 02/01/12 328,532 857,066
25,000 1.3% 9.84 03/25/12 174,743 455,867
Gary S. Guthart, Ph.D .. 75,000 3.8% 9.25 02/01/12 492,798 1,285,600
FISCAL YEAR-END OPTION VALUES
The following table sets forth the number and value of securities underlying
unexercised options that are held by each of the individuals listed in the
Summary Compensation Table as of December 31, 2002. Amounts shown under the
column "Value of Unexercised In-The-Money Options at December 31, 2002" are
based on the fair market price of $6.16 on that date, without taking into
account any taxes that may be payable in connection with the transaction,
multiplied by the number of shares underlying the option, less the exercise
price payable for these shares. Our stock option plans allow for the early
exercise of options granted to employees. All options exercised early are
subject to repurchase by us at the original exercise price, upon the optionee's
cessation of service prior to the vesting of the shares.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT DECEMBER 31, 2002 DECEMBER 31, 2002
---------------------------- -----------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
Lonnie M. Smith ........ 97,914 177,086 $ -- $ --
Susan K. Barnes ........ 93,123 131,878 82,101 3,987
Frederic H. Moll, M.D .. 51,143 83,857 -- --
Jerome J. McNamara ..... 78,851 91,149 110,600 --
Gary S. Guthart, Ph.D .. 117,061 98,439 236,980 --
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 2002, the compensation committee consisted of Russell C. Hirsch,
M.D., Ph.D. and Alan J. Levy, Ph.D., neither of whom is a present or former
officer or employee of Intuitive Surgical, Inc. In addition, during 2002, none
of our officers had an "interlock" relationship, as that term is defined by the
SEC, to report.
STOCK PERFORMANCE GRAPH
The following graph compares our cumulative total stockholder return on the
common stock (no dividends have been paid thereon) with the cumulative total
return of (1) the Nasdaq Composite Index and (2) the S&P Healthcare Index, over
the indicated periods extending through the end of 2002.
The historical stock market performance of the common stock shown below is not
necessarily indicative of future stock performance.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG INTUITIVE
SURGICAL, NASDAQ COMPOSITE, AND S&P HEALTH CARE INDEX
[LINE GRAPH]
6/12/00 12/00 12/01 12/02
------- ----- ----- -----
Intuitive Surgical, Inc. 100 94 111 68
NASDAQ Composite 100 66 52 35
S&P Healthcare Index 100 122 106 85
The stock performance graph above shall not be deemed incorporated by reference
by any general statement incorporating by reference this proxy statement into
any filing under the Securities Act or under the Exchange Act, except to the
extent we specifically incorporate this information by reference, and shall not
otherwise be deemed filed under these acts.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the following table sets forth the ownership of our common
stock, as of February 28, 2003, by (i) each person who, to our knowledge,
beneficially owns more than 5% of the outstanding shares of our common stock;
(ii) each named executive officer; (iii) each of our directors; and (iv) all of
our directors and executive officers, as a group. As of February 28, 2003, we
had 36,920,459 shares of common stock outstanding.
NUMBER OF SHARES PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED (1) OWNERSHIP (1)
- ---------------------------------------- ---------------------- -------------
5% STOCKHOLDERS
Bear Stearns Asset Management, Inc. (2) 3,241,000 8.8%
383 Madison Avenue, 29th Floor
New York, NY 10179
Investor (Guernsey) Limited 2,529,545 6.9%
National Westminster House
Le Truchot, St. Peter Port
Guernsey, Channel Islands, GY1 4PW
PatMarK Company, Inc. 2,287,500 6.2%
Suite 530
300 Delaware Ave
Wilmington, DE 19801
Merrill Lynch & Co., Inc. (3) 1,952,786 5.3%
(on behalf of Merrill Lynch Investment Managers
("MLIM"))
World Financial Center, North Tower
New York, NY 10381
Allan G. Lozier 1,948,386 5.3%
6336 Pershing Dr.
Omaha, NE 68110
DIRECTORS AND CORPORATE OFFICERS
Frederic H. Moll, M.D. (4) 1,413,716 3.8%
Lonnie M. Smith (5) 1,123,961 3.0
Susan K. Barnes (6) 316,380 *
Gary Guthart, Ph.D (7) 164,421 *
Russell C. Hirsch, M.D., Ph.D (8) 108,738 *
Scott S. Halsted (9) 99,328 *
Jerome J. McNamara (10) 91,353 *
Alan J. Levy, Ph.D. (11) 30,869 *
James A. Lawrence (12) 30,000 *
Richard J. Kramer (13) 24,000 *
All Named Executive Officers and Directors as a group 3,402,766 9.2%
(10 persons)
* Represents less than 1% of the issued and outstanding shares
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock
subject to options and warrants which are currently exercisable, or will
become exercisable within 60 days of February 28, 2003, are deemed
outstanding for computing the percentage of the person or entity holding
such securities but are not outstanding for computing the percentage of
any other person or entity. Except as indicated by footnote, and subject
to the community property laws where applicable, to our knowledge the
persons named in the table above have sole voting and investment power
with respect to all shares of common stock shown as beneficially owned by
them. Unless otherwise indicated, the address for each person is our
address at 950 Kifer Road, Sunnyvale, California 94086.
(2) As of December 31, 2002, Bear Stearns Asset Management Inc. reported that
it beneficially owned 3,241,000 shares of the Company's common stock of
which it held the sole power to vote or direct the vote of all such
shares. The S&P Stars Portfolio has the right to receive and the power to
direct the receipt of dividends from and the proceeds for the sale of
greater than 5% of the common stock of Intuitive Surgical, Inc. The number
of shares beneficially owned is based solely on a joint Schedule 13G filed
with the Securities and Exchange Commission on January 27, 2003.
(3) As of December 31, 2002, Merrill Lynch & Co., Inc. on behalf of Merrill
Lynch Investment Managers ("MLIM") reported that it beneficially owned
1,952,786 shares of the Company's common stock of which it held shared
power to vote or direct the vote of all such shares. The number of shares
beneficially owned is based solely on a joint Schedule 13G filed with the
Securities and Exchange Commission on January 8, 2003.
(4) Includes 64,163 shares issuable pursuant to options exercisable within 60
days of February 28, 2003.
(5) Includes 123,961 shares issuable pursuant to options exercisable within 60
days of February 28, 2003.
(6) Includes 111,874 shares issuable pursuant to options exercisable within 60
days of February 28, 2003.
(7) Includes 131,124 shares issuable pursuant to options exercisable within 60
days of February 28, 2003.
(8) Includes 28,887 shares issuable pursuant to options exercisable within 60
days of February 28, 2003.
(9) Includes 54,701 shares held by Morgan Stanley Venture Partners III, L.P.,
5,252 shares held by Morgan Stanley Venture Investors III, L.P., and
28,887 shares issuable pursuant to options exercisable within 60 days of
February 28, 2003.
(10) Includes 91,353 shares issuable pursuant to options exercisable within 60
days of February 28, 2003.
(11) Includes 30,000 shares issuable pursuant to options exercisable within 60
days of February 28, 2003.
(12) Includes 10,000 shares issuable pursuant to options exercisable within 60
days of February 28, 2003.
(13) Includes 24,000 shares issuable pursuant to options exercisable within 60
days of February 28, 2003.
EQUITY COMPENSATION PLAN INFORMATION
The following table contains information as of December 31, 2002 for all of our
equity compensation plans, including our 2000 Equity Incentive Plan, our 2000
Employee Stock Purchase Plan, and our 2000 Non-Employee Directors' Stock Option
Plan. All of the equity compensation plans of the company have been approved by
security holders.
NUMBER OF
SECURITIES
REMAINING
AVAILABLE
FOR FUTURE
WARRANTS
NUMBER OF WEIGHTED ISSUANCE
SECURITIES TO -AVERAGE UNDER EQUITY
BE ISSUED UPON EXERCISE COMPENSATION
EXERCISE OF PRICE OF PLANS
OUTSTANDING OUTSTANDING (EXCLUDING
OPTIONS, OPTIONS, SECURITIES
WARRANTS WARRANTS REFLECTED
AND RIGHTS AND RIGHTS IN COLUMN (A))
PLAN CATEGORY (A) (B) (C)
- ------------- --- --- ---
Equity compensation plans approved by security holders 4,904,160(1) $ 7.24 7,109,891(2)
Equity compensation plans not approved by security holders -- $ -- --
Total 4,904,160 $ 7.24 7,109,891
(1) Includes (i) 4,814,160 shares of common stock issuable upon exercise of
options granted
under our 2000 Equity Incentive Plan, of which 2,194,494 shares were
exercisable as of December 31, 2002, and (ii) 90,000 shares of common
stock under our 2000 Non-Employee Directors' Stock Option Plan, of which
72,912 shares were exercisable as of December 31, 2002.
(2) Includes (i) 5,744,842 shares of common stock available for issuance under
our 2000 Equity Incentive Plan, (ii) 938,437shares of common stock
available for issuance under our 2000 Employee Stock Purchase Plan, and
(iii) 426,612 shares of common stock under our 2000 Non-Employee
Directors' Stock Option Plan.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
None.
ITEM 14: DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our management, including
the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective. There have been no significant changes in our internal controls or in
other factors that
could significantly affect the internal controls subsequent to the date we
completed our evaluation.
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on
Form 10-K
(1) Financial Statements -- See Index to Consolidated Financial
Statements on page F-1 of this Report on Form 10-K.
(2) The following financial statement schedule of Intuitive
Surgical, Inc. is filed as part of this Report and should be read in
conjunction with the financial statements of Intuitive Surgical:
- Schedule II: Valuation and Qualifying Accounts.
All other schedules have been omitted because they are not
applicable, not required under the instructions, or the information
requested is set forth in the consolidated financial statements or
related notes thereto.
(3) Exhibits
The exhibits filed as part of this report are listed under
"Exhibits" at subsection (C) of this Item 15.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended
December 31, 2002.
(c) Exhibits
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
2.1(3) Agreement and plan of merger by and among Intuitive Surgical, Inc.,
Iron Acquisition Corporation and Computer Motion, Inc., dated as of
March 7, 2003.
3.2(1) Amended and Restated Certificate of Incorporation of Registrant.(1)
3.3(1) Bylaws of Registrant.
4.2(1) Specimen Stock Certificate.
4.3(1) Warrant to Purchase Shares of Common Stock, dated April 26, 2000.
10.1(1) Form of Indemnity Agreement.
10.2(1) 2000 Equity Incentive Plan.
10.3(1) 2000 Non-Employee Directors' Stock Option Plan.
10.4(1) 2000 Employee Stock Purchase Plan.
10.5(1) Amended and Restated Investor Rights Agreement dated March 31, 1999.
10.6(1) Equipment Financing Agreement (No. 10809), dated April 2, 1997,
between the Registrant and Lease Management Services, Inc., and
related addendums.
10.7(1) Security Agreement, dated May 20, 1999, between the Registrant and
Heller Financial Leasing, Inc., and related amendments.
10.8(1) License Agreement, dated December 20, 1995, between the Registrant
and SRI International.
10.9(1) License Agreement, dated December 29, 1997, between the Registrant
and International Business Machines Corporation.
10.10(1) License Agreement, dated April 1, 1999, between the Registrant and
Massachusetts Institute of Technology.
10.11(1) Lease, dated September 9, 1996, between the Registrant and
Zappettini Investment Co.
10.12(1) Lease, dated February 5, 1997, between the Registrant and
Zappettini Investment Co.
10.13(1) Employment Agreement, dated February 28, 1997, between the
Registrant and Lonnie M. Smith.
10.14(2) Lease, dated July 16, 2001, between the Registrant and RNM
Technology Drive, L.P.
23.1(4) Consent of Ernst & Young LLP, Independent Auditors.
24.1(4) Power of Attorney (set forth on signature page).
99.1(4) Certification by Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of
2002.
99.2(4) Certification by Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of
2002.
- -------------
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (333-33016)
(2) Incorporated by reference to Exhibit 10.14 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2001
(3) Incorporated by reference to exhibits filed with the Registrant's current
report on Form 8-K dated March 7, 2003.
(4) Filed herewith
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.
(Registrant)
By: /s/ LONNIE M. SMITH
-----------------------------------
Lonnie M. Smith
President and Chief Executive Officer
March 27, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ LONNIE M. SMITH President, Chief Executive Officer and Director March 27, 2003
- ----------------------------------- (Principal Executive Officer)
Lonnie M. Smith
/s/ SUSAN K. BARNES Senior Vice President, Chief Financial Officer March 27, 2003
- ----------------------------------- and Assistant Secretary (Principal Financial and
Susan K. Barnes Accounting Officer)
/s/ SCOTT S. HALSTED Director March 27, 2003
- -----------------------------------
Scott S. Halsted
/s/ RUSSELL C. HIRSCH, M.D., PH.D. Director March 27, 2003
- -----------------------------------
Russell C. Hirsch, M.D., Ph.D.
/s/ RICHARD J. KRAMER Director March 27, 2003
- -----------------------------------
Richard J. Kramer
/s/ JAMES A. LAWRENCE Director March 27, 2003
- -----------------------------------
James A. Lawrence
/s/ ALAN J. LEVY, PH.D. Director March 27, 2003
- -----------------------------------
Alan J. Levy, Ph.D.
/s/ FREDERIC H. MOLL, M.D. Vice President, Medical Director and Director March 27, 2003
- -----------------------------------
Frederic H. Moll, M.D.
CERTIFICATIONS
I, Lonnie M. Smith, certify that:
1. I have reviewed this annual report on Form 10-K of Intuitive Surgical,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Lonnie M. Smith
Lonnie M. Smith
Chief Executive Officer
March 27, 2003
I, Susan K. Barnes, certify that:
1. I have reviewed this annual report on Form 10-K of Intuitive Surgical,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Susan K. Barnes
Susan K. Barnes
Chief Financial Officer
March 27, 2003
INTUITIVE SURGICAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets at December 31, 2002 and 2001 F-3
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 F-4
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 F-6
Notes to the Consolidated Financial Statements F-7
Schedule II -- Valuation and Qualifying Accounts S-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Intuitive Surgical, Inc.
We have audited the accompanying consolidated balance sheets of Intuitive
Surgical, Inc. as of December 31, 2002 and 2001, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2002. Our audits also included the
financial statement schedule listed in the index at Item 15(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Intuitive
Surgical, Inc. at December 31, 2002 and 2001, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects, the
information set forth therein.
/s/ Ernst & Young LLP
Palo Alto, California
January 31, 2003
INTUITIVE SURGICAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
------------
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 17,607 $ 10,487
Short-term investments ........................................ 33,232 56,174
Accounts receivable, net of allowance for doubtful
accounts of $806 and $446 at December 31, 2002
and 2001, respectively ...................................... 16,887 13,248
Inventory ..................................................... 8,738 6,182
Prepaid and other assets ...................................... 2,161 3,128
--------- ---------
Total current assets .................................... 78,625 89,219
Property and equipment, net ..................................... 10,388 7,834
Intangible and other assets ..................................... 2,568 3,308
--------- ---------
Total assets ............................................ $ 91,581 $ 100,361
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 9,282 $ 8,300
Accrued compensation and employee benefits .................... 4,666 2,537
Warranty accrual .............................................. 2,269 1,831
Accrued royalty expense ....................................... -- 1,000
Other accrued liabilities ..................................... 3,497 2,128
Deferred revenue .............................................. 4,838 3,870
Current portion of notes payable .............................. 1,511 1,631
--------- ---------
Total current liabilities ............................... 26,063 21,297
Long-term notes payable ......................................... 1,838 771
Commitments ..................................................... -- --
Stockholders' equity:
Common stock, 200,000,000 shares authorized, $0.001 par value,
36,715,026 and 36,223,640 shares issued and outstanding
as of December 31, 2002 and December 31, 2001, respectively .. 36 36
Additional paid-in capital ..................................... 191,020 188,962
Deferred compensation .......................................... (223) (886)
Accumulated deficit ............................................ (128,791) (110,370)
Accumulated other comprehensive income ......................... 1,638 551
--------- ---------
Total stockholders' equity ............................... 63,680 78,293
--------- ---------
Total liabilities and stockholders' equity ............... $ 91,581 $ 100,361
========= =========
See accompanying notes.
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
Sales ...................................... $ 72,022 $ 51,673 $ 26,624
Cost of sales .............................. 34,584 28,218 18,031
-------- -------- --------
Gross profit ........................... 37,438 23,455 8,593
Operating costs and expenses:
Selling, general and administrative ...... 40,864 29,987 19,136
Research and development ................. 16,793 13,851 11,734
-------- -------- --------
Total operating costs and expenses ..... 57,657 43,838 30,870
-------- -------- --------
Loss from operations ....................... (20,219) (20,383) (22,277)
Interest income ............................ 2,040 3,909 4,266
Interest expense ........................... (199) (268) (404)
Other income(expense) ...................... (43) 42 (108)
-------- -------- --------
Net loss ................................... $(18,421) $(16,700) $(18,523)
======== ======== ========
Basic and diluted net loss per common share $ (0.51) $ (0.47) $ (0.78)
======== ======== ========
Shares used in computing basic and
diluted net loss per common share ........ 36,458 35,815 23,796
======== ======== ========
See accompanying notes.
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
PREFERRED STOCK COMMON STOCK PAID-IN DEFERRED ACCUMULATED INCOME
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT (LOSS) TOTAL
------ ------ ------ ------ ------- ------------ ------- ------ -----
Balances at December 31, 1999 19,134,375 $ 19 6,681,848 $ 7 $ 98,508 $ (943) $ (75,147) $ (233) $ 22,211
----------- ------ ---------- ------ --------- ------- --------- ------- --------
Issuance of Series F
convertible preferred stock,
net of issuance costs
of $603 ..................... 3,678,798 4 -- -- 34,752 -- -- -- 34,756
Conversion of preferred stock
to common stock upon closing
of IPO ...................... (22,813,173) (23) 22,813,173 23 -- -- -- -- --
Issuance of common stock upon
closing of IPO, net of
issuance costs of $4,972 .... -- -- 5,750,000 6 46,778 -- -- -- 46,784
Issuance of common stock upon
exercise of options and
warrants .................... -- -- 467,770 -- 912 -- -- -- 912
Repurchase of common stock .... -- -- (36,969) -- (20) -- -- -- (20)
Fair market value of warrants
granted ..................... -- -- -- -- 1,720 -- -- -- 1,720
Deferred compensation ......... -- -- -- -- 4,063 (4,063) -- -- --
Amortization of deferred
compensation ................ -- -- -- -- -- 2,523 -- -- 2,523
Comprehensive loss:
Other comprehensive income
(loss) -- change in
unrealized gain (loss) on
available-for-sale securities -- -- -- -- -- -- -- 300 300
Change in unrealized gain
(loss) on foreign
exchange contracts ...... -- -- -- -- -- -- -- 67 67
Net loss ...................... -- -- -- -- -- -- (18,523) -- (18,523)
--------
Comprehensive loss ............ (18,156)
----------- ------ ---------- ------ --------- ------- --------- ------- --------
Balances at December 31, 2000 -- -- 35,675,822 36 186,713 (2,483) (93,670) 134 90,730
Issuance of common stock upon
exercise of options and
warrants .................... -- -- 569,989 -- 2,314 -- -- -- 2,314
Repurchase of common stock .... -- -- (22,171) -- (65) -- -- -- (65)
Amortization of deferred
compensation ................ -- -- -- -- -- 1,597 -- -- 1,597
Comprehensive loss:
Other comprehensive income
(loss) -- change in
unrealized gain (loss) on
available-for-sale
securities .................. -- -- -- -- -- -- -- 560 560
Change in unrealized gain
(loss) on foreign
exchange contracts ...... -- -- -- -- -- -- -- (67) (67)
Change in foreign currency
translation adjustments -- -- -- -- -- -- -- (76) (76)
Net loss ...................... -- -- -- -- -- -- (16,700) -- (16,700)
--------
Comprehensive loss ............ (16,283)
----------- ------ ---------- ------ --------- ------- --------- ------- --------
Balances at December 31, 2001 -- -- 36,223,640 36 188,962 (886) (110,370) 551 78,293
Issuance of common stock ...... -- -- 491,807 -- 2,060 -- -- -- 2,060
Repurchase of common stock .... -- -- (421) -- (2) -- -- -- (2)
Amortization of deferred
compensation ................ -- -- -- -- -- 663 -- -- 663
Comprehensive loss:
Other comprehensive income
(loss) -- change in
unrealized gain (loss) on
available-for-sale
securities .................. -- -- -- -- -- -- -- 996 996
Change in foreign currency
translation adjustments -- -- -- -- -- -- -- 91 91
Net loss ...................... -- -- -- -- -- -- (18,421) -- (18,421)
--------
Comprehensive loss ............ (17,334)
----------- ------ ---------- ------ --------- ------- --------- ------- --------
Balances at December 31, 2002 -- $ -- 36,715,026 $ 36 $ 191,020 $ (223) $(128,791) $ 1,638 $ 63,680
=========== ====== ========== ====== ========= ======= ========= ======= ========
See accompanying notes.
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
OPERATING ACTIVITIES:
Net loss ............................................... $(18,421) $(16,700) $(18,523)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation ......................................... 3,106 2,337 1,595
Gain(loss) on sales of fixed assets .................. 66 (11) --
Amortization of deferred compensation ................ 663 1,597 2,573
Amortization of intangible and other assets .......... 780 778 584
Changes in operating assets and liabilities:
Accounts receivable .................................. (3,639) (6,804) (4,400)
Prepaid and other assets ............................. 967 (1,423) (1,124)
Inventory ............................................ (2,556) (106) (3,215)
Accounts payable ..................................... 982 1,172 4,406
Accrued compensation and employee benefits ........... 2,129 (72) 1,284
Warranty accrual ..................................... 438 337 682
Other accrued liabilities ............................ 1,369 100 912
Accrued royalty expense .............................. (1,000) -- 1,000
Deferred revenue ..................................... 968 318 1,422
-------- -------- --------
Net cash used in operating activities .................. (14,148) (18,477) (12,804)
-------- -------- --------
INVESTING ACTIVITIES:
Acquisition of property and equipment .................. (5,788) (5,527) (3,555)
Disposition of property and equipment .................. 62 36 --
Acquisition of patents ................................. (40) -- (3,000)
Purchase of short-term investments ..................... (14,525) (59,910) (70,096)
Proceeds from sales of short-term investments .......... 21,216 35,990 6,900
Proceeds from maturities of short-term
investments .......................................... 17,247 35,023 18,933
-------- -------- --------
Net cash provided by (used in) investing
activities ........................................... 18,172 5,612 (50,818)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock, net ......... -- -- 34,756
Proceeds from issuance of common stock, net ............ 2,060 2,314 47,696
Repurchase of common stock ............................. (2) (65) (20)
Proceeds from notes payable ............................ 2,912 550 1,500
Repayment of notes payable ............................. (1,965) (2,028) (1,759)
-------- -------- --------
Net cash provided by financing activities .............. 3,005 771 82,173
-------- -------- --------
Effect of exchange rates on cash and cash equivalents .. 91 (76) --
Net increase (decrease) in cash and cash
equivalents .......................................... 7,120 (12,170) 18,551
Cash and cash equivalents, beginning of year ........... 10,487 22,657 4,106
-------- -------- --------
Cash and cash equivalents, end of year ................. $ 17,607 $ 10,487 $ 22,657
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid ........................................ $ 199 $ 268 $ 404
======== ======== ========
Issuance of warrants for license and services ........ $ -- $ -- $ 1,720
======== ======== ========
INTUITIVE SURGICAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Intuitive Surgical, Inc. (the "Company") designs, manufactures, and markets 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. The company began selling the da
Vinci Surgical System in 1999 and has placed 149 total systems worldwide as of
December 31, 2002.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity
from date of purchase of 90 days 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, 2002 and
2001.
SHORT-TERM INVESTMENTS
All short-term investments are classified as available-for-sale and therefore
carried at fair value. The Company views its available-for-sale portfolio as
available for use in its current operations. Accordingly, 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.
FOREIGN CURRENCY TRANSLATION
The functional currency of each foreign subsidiary is its local currency.
Foreign assets and liabilities are translated into U.S. dollars at year-end
exchange rates when appropriate, while components of the income statement are
translated using average exchange rates in effect throughout the year. Gains and
losses arising from foreign currency transactions are included in the
consolidated statement of operations. Translation adjustments of balance sheet
items are included as a component of stockholders' equity.
CONCENTRATIONS OF RISK
Financial instruments which subject the Company to potential risk consists of
its cash equivalents, short-term investments, accounts receivable, and foreign
exchange contracts. The counterparties to the agreements relating to the
Company's investment securities and foreign exchange contracts consist of
various major corporations and financial institutions of high credit standing.
The Company believes the financial risks associated with these financial
instruments are minimal. For the year ended December 31, 2002, no customer
accounted for more than 10% of total sales. For the year ended December 31,
2001, one customer accounted for 15% of total sales. For the year ended December
31, 2000, no customer accounted for more than 10% 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 years ended
December 31, 2002, 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.
INVENTORY
Inventory is stated at the lower of cost or market value. Cost is computed using
standard costs, which approximates actual cost on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation.
Property and equipment are depreciated on a straight-line basis over the
estimated useful lives of the assets as follows:
Useful Lives
Lab and manufacturing equipment 5 years
Other equipment 3 or 5 years
Leasehold improvements Lesser of useful life or term of lease
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 December 31, 2002 gross
intangible assets totaled $4.7 million and related accumulated amortization was
$2.1 million. At December 31, 2001, gross intangible assets totaled $4.7 million
and related accumulated amortization was $1.4 million.
IMPAIRMENT OF LONG-LIVED ASSETS
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets", effective for fiscal years beginning after
December 15, 2001. SFAS No. 144 addresses financial accounting and reporting for
impairment or disposal of long-lived assets and supersedes SFAS 121. The Company
adopted SFAS No. 144 as of January 1, 2002, without a significant impact on its
financial position or results of operations.
Reviews are performed when facts and circumstances exist which indicate that the
carrying amount of assets may not be recoverable or the useful life is shorter
than originally estimated. If indicators exist, the Company assesses the
recoverability of its assets by comparing the projected undiscounted net cash
flows associated with the related asset or group of assets over their remaining
lives against their respective carrying amounts. Impairment, if any, is based on
the excess of the carrying amount over the fair value of those assets.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for its software costs in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed." Software development costs
are included in research and development and are generally expensed as incurred.
The time periods involved and costs incurred between achieving technological
feasibility and the general availability of our software enhancements are
insignificant. Production and distribution costs are also minimal. Accordingly,
the Company has not capitalized any software development costs to date.
PRODUCT WARRANTY PROVISIONS
The Company's standard policy is to warrant all shipped systems against defects
in design, materials and workmanship by replacing failed parts during the first
year of ownership. The Company's estimate of costs to service the warranty
obligations is based on historical experience and current product performance
trends. These costs are included in cost of goods sold at the time revenue is
recognized. The warranty provision is reduced by material and labor costs used
for replacement activities over the warranty period. A review of the obligations
is performed regularly to determine the adequacy of the reserve. Based on the
outcome of this review, revisions to the estimated warranty liability are
recorded as appropriate.
The following table reconciles the changes to the product warranty liability for
the periods indicated (in thousands):
BALANCE AT BALANCE AT
BEGINNING WARRANTY WARRANTIES END OF
OF YEAR USAGE EXPENSED YEAR
------- ----- -------- ----
Year ended December 31, 2002 .......... $ 1,831 $ (1,631) $ 2,069 $ 2,269
OTHER FINANCIAL INSTRUMENTS
On a limited basis, the Company uses forward foreign exchange contracts that are
designated to reduce a portion of its exposure to foreign currency risk from
operational and balance sheet exposures resulting from changes in foreign
currency exchange rates. Such exposures result from sales denominated in foreign
currencies. The forward contracts, which have only nominal intrinsic value at
the time of purchase, are denominated in the same foreign currency in which the
sales are denominated. The gains and losses on these forward contracts as well
as the offsetting losses and gains on the hedged receivables are recognized
depending on whether the derivative instrument is designated and qualifies as
part of a hedging relationship and, if so, the nature of the hedging activity.
During the years ended December 31, 2002 and 2001, the Company did not designate
and qualify any forward contracts as part of a hedging relationship.
Accordingly, changes in the fair value of derivatives that do not qualify for
hedge treatment, as well as the ineffective portion of a particular hedge, are
recognized currently in earnings. All derivative instruments are recorded as
either current assets or accrued liabilities in the balance sheet at fair value.
The Company does not use derivative financial instruments for speculative
trading purposes, nor does it hold or issue leveraged derivative financial
instruments. At December 31, 2002, the Company had no outstanding derivative
instruments.
RESEARCH AND DEVELOPMENT
Research and development costs, which include clinical and regulatory costs, are
expensed to operations as incurred in accordance with Statement of Financial
Accounting Standards No. 2, "Accounting for Research and Development Costs."
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ materially from
these estimates.
STOCK-BASED COMPENSATION
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of FASB Statement No.123"("SFAS 148") as of December
31, 2002. In accordance with the provisions of SFAS 123 and 148, the Company
applies the intrinsic value method prescribed by APB Opinion 25 ("APB 25"),
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock option grants to employees and directors with an
exercise price equal to or in excess of the fair value of the shares at the date
of grant. The Company accounts for stock awards granted to non-employees in
accordance with SFAS 123 and related interpretations. Additional information
regarding stock-based compensation is included in Note 9, Stockholders' Equity.
The following table illustrates the effect on net income and earnings per share
if the company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
-------------------------------------
2002 2001 2000
-------- -------- --------
Net loss, as reported ............... $(18,421) $(16,700) $(18,523)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effect ............................. (1,578) $ (3,547) $ (277)
-------- -------- --------
Pro forma net loss .................. $(19,999) $(20,247) $(18,800)
======== ======== ========
Earnings per share:
Basic and diluted - as reported ..... $ (0.51) $ (0.47) $ (0.78)
Basic and diluted - pro forma ....... $ (0.55) $ (0.57) $ (0.79)
REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred or service has been rendered, the price is fixed
or determinable and collectibility is reasonably assured.
In certain cases, revenue from direct system sales is generated from multiple
element arrangements which require judgement in the areas of customer
acceptance, training, installation and collectibility. Revenue is recognized as
specific elements indicated in sales contracts are executed. If an element is
essential to the functionality of an arrangement, the entire arrangement's
revenue is deferred until that essential element is delivered. The fair value of
each undelivered element that is not essential to the functionality of the
system is deferred until performance or delivery occurs. The fair value of an
undelivered element is based upon an estimate made by management. Amounts billed
in excess of revenue recognized is recorded as deferred revenue on the balance
sheet. Costs associated with inconsequential or perfunctory elements in multiple
element arrangements are accrued for at the time of revenue recognition.
The Company's distributors do not have price protection rights. One of the
Company's distributors has a right of return under limited circumstances. Such
rights are accounted for under the provisions of SFAS No. 48. To date, the
Company has not had any system sales returns.
Revenue from sales of instruments and accessories is recognized upon shipment.
Revenue related to future commitments under service contracts is deferred and
recognized ratably over the service period. Costs incurred related to such
service contracts are expensed as incurred. Amounts billed in excess of revenue
recognized are included as deferred revenue in the accompanying consolidated
balance sheets.
The Company's da Vinci Surgical System contains a software component. The
Company believes that the software element in the Company's da Vinci Surgical
System is an incidental
part of the system. The software element within the Company's product is not
sold or marketed separately to customers and the software does not operate
independently of the surgical system. Furthermore, the software development
effort does not require a significant cost to the Company relative to the
overall development cost of the product. As such, the software the Company
provides is incidental to the surgical system as a whole and the software
revenue guidance provided in SOP 97-2 is not applicable to the Company's
revenues.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs for the years
ended December 31, 2002, 2001, and 2000, were $1.3 million, $1.5 million and
$1.1 million, respectively.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are incurred by the Company and are recorded as cost
of goods sold in the income statement.
SEGMENT DISCLOSURES
The Company operates in one segment, the development and marketing of products
designed to provide the flexibility of open surgery while operating through
ports. For the year ended December 31, 2002, U.S. and international sales
accounted for 83% and 17% of total sales, respectively. For the year ended
December 31, 2001, U.S. and international sales accounted for 69% and 31% of
total sales, respectively. For the year ended December 31, 2000, U.S. and
international sales accounted for 68% and 32% of total sales, respectively.
Sales in the U.S. included sales to the Company's Japanese distributor's U.S.
subsidiary, which represented 1%, 3%, and 4% of total sales for the years ended
December 31, 2002, 2001, and 2000, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances in order to
conform to the current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS 141, "Business
Combinations" and Statement of Financial Accounting Standards, or SFAS 142,
"Goodwill and Other Intangible Assets," effective for fiscal years beginning
after December 15, 2001. SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
and that the use of the pooling-of-interest method is no longer allowed. Under
SFAS 142 goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to an annual impairment test in
accordance with the new standards. Other intangible assets will continue to be
amortized over their respective useful lives. The Company adopted SFAS 141 and
SFAS 142 as of January 1, 2002. The adoption of SFAS 141 and SFAS 142 has not
had a significant impact on our financial position or results of operations. We
will apply the provisions of SFAS 141 and 142 to the acquisition of Computer
Motion when the merger is completed.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of
Long-Lived Assets", effective for fiscal years beginning after December 15,
2001. SFAS No. 144 addresses financial accounting and reporting for impairment
or disposal of long-lived assets and supersedes SFAS 121. The Company adopted
SFAS No. 144 as of January 1, 2002, without a significant impact on its
financial position or results of operations.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities," which addresses accounting for restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
146 requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. The Company will apply SFAS 146 prospectively to
activities initiated after December 31, 2002.
In June 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosure an amendment of FASB Statement No. 123
", effective for the fiscal years beginning after December 15, 2002. This
Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
SFAS 123 to require more prominent disclosure in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
continues to follow the intrinsic value method prescribed by APB 25 in
accounting for stock options, recognizing no compensation expense for options
granted at or above market price. The company expects to begin interim reporting
requirements for stock based compensation in 2003. The Company adopted the
provisions of SFAS 148 effective for the fiscal year ended December 31, 2002 and
has complied with the amended disclosure requirements.
In November 2002, the FASB issued Interpretation No. 45,or FIN 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 elaborates on the existing
disclosure requirements for most guarantees, including residual value guarantees
issued in conjunction with operating lease agreements. It also clarifies that at
the time a company issues a guarantee, the company must recognize an initial
liability for the fair value of the obligation it assumes under that guarantee
and must disclose that information in its interim and annual financial
statements. The initial recognition and measurement provisions apply on a
prospective basis to guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. Our adoption of FIN 45 did not
have a material impact on our results of operations and financial position.
In January 2003, the FASB issued Interpretation No. 46, or FIN 46,
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. A
variable interest entity is a corporation, partnership, trust, or any other
legal structures used for business
purposes that either (a) does not have equity investors with voting rights or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. A variable interest entity often holds
financial assets, including loans or receivables, real estate or other property.
A variable interest entity may be essentially passive or it may engage in
research and development or other activities on behalf of another company. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply to all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company does not expect that the adoption
of FIN 46 will have a significant impact on its financial position or results of
operations.
In October 2002, the Emerging Issues Task Force reached consensus on issue
00-21, or EITF 00-21, "Revenue Arrangements with Multiple Deliverables". The
principles and application guidance of EITF 00-21 should be used to determine
(a) how the arrangement consideration should be measured, (b) whether the
arrangement should be divided into separate units of accounting, and (c) how the
arrangement consideration should be allocated among the separate units of
accounting. The guidance in this issue is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The Company has
not completed it's evaluation of the impact of the adoption of EITF 00-21 on its
results of operations or financial position.
2. NET LOSS PER SHARE
The following table presents the computation of basic and diluted net loss per
share (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------------
2002 2001 2000
-------- -------- --------
Numerator used for basic and diluted
net loss per common share .......... $(18,421) $(16,700) $(18,523)
======== ======== ========
Denominator used for basic and diluted
net loss per common share:
Weighted-average shares outstanding 36,483 35,991 24,686
Less weighted-average shares subject
to repurchase ................... (25) (176) (890)
-------- -------- --------
Weighted-average shares used in
computing basic and diluted
net loss per common share ....... 36,458 35,815 23,796
======== ======== ========
Basic and diluted net loss per
common share$ ...................... (0.51) $ (0.47) (0.78)
======== ======== ========
Potentially dilutive securities
excluded from diluted net loss per
share computation because they
are anti-dilutive .................. 4,925 3,432 2,381
3. AVAILABLE-FOR-SALE SECURITIES
The following table summarizes available-for-sale securities included in cash
and cash equivalents and short-term investments as of the respective dates (in
thousands):
DECEMBER 31, 2002 DECEMBER 31, 2001
-------------------------------------------- -----------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED -------------------- FAIR AMORTIZED --------------------- FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
---- ----- ------ ----- ---- ----- ------ -----
U.S. corporate debt ... $ 20,534 $ 1,421 $ -- $ 21,955 $ 34,894 $ 562 $ (6) $ 35,450
U.S. government debt .. 11,075 202 -- 11,277 9,553 76 (5) 9,624
Municipal debt ........ 4,350 -- -- 4,350 5,500 -- -- 5,500
Commercial paper ...... 4,250 -- -- 4,250 -- -- -- --
Other debt securities . -- -- -- -- 5,600 -- -- 5,600
-------- -------- -------- -------- -------- -------- -------- --------
$ 40,209 $ 1,623 $ -- $ 41,832 $ 55,547 $ 638 $ (11) $ 56,174
======== ======== ======== ======== ======== ======== ======== ========
Reported as:
Cash equivalents ...... $ 8,600 $ -- $ -- $ 8,600 $ -- $ -- $ -- $ --
Short-term investments 31,609 1,623 -- 33,232 55,547 638 (11) 56,174
-------- -------- -------- -------- -------- -------- -------- --------
$ 40,209 $ 1,623 $ -- $ 41,832 $ 55,547 $ 638 $ (11) $ 56,174
======== ======== ======== ======== ======== ======== ======== ========
The Company views its available-for-sale portfolio as available for use in its
current operations. The following is a summary of the cost and estimated fair
value of available-for-sale securities at December 31, 2002, by maturity date:
2002
---------------------
AMORTIZED FAIR
COST VALUE
---- -----
Mature in less than 1 year ... $11,608 $11,612
Mature in one to five years .. 28,601 30,220
------- -------
Total .................... $40,209 $41,832
======= =======
Realized gains on available-for-sale securities were $39,000, $59,000, and
$112,000 for the years ended December 31, 2002, 2001, and 2000, respectively.
There were no realized losses on available-for-sale securities for the years
ended December 31, 2002, 2001, and 2000.
4. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31,
-------------------
2002 2001
------ ------
Raw materials .... $3,420 $3,577
Work-in-process .. 780 1,330
Finished goods ... 4,538 1,275
------ ------
Total ........ $8,738 $6,182
====== ======
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
DECEMBER 31,
------------------------
2002 2001
-------- --------
Computer equipment ........................... $ 3,745 $ 3,569
Laboratory and manufacturing equipment ....... 6,520 4,158
Office furniture and equipment ............... 1,265 1,046
Leasehold improvements ....................... 2,562 2,532
Software ..................................... 4,810 3,896
-------- --------
18,902 15,201
Less accumulated depreciation and amortization (8,514) (7,367)
-------- --------
Property and equipment, net .................. $ 10,388 $ 7,834
======== ========
6. EMPLOYEE BENEFIT PLAN
Effective May 1, 1996, the Company established a defined contribution retirement
plan (the "Plan"). All U.S. employees who are at least 21 years of age are
eligible to participate. Contributions of up to 15% of compensation may be made
by employees to the Plan through salary withholdings. Employer contributions are
made solely at the Company's discretion. No employer contributions were made to
the Plan for the years ended December 31, 2002, 2001, and 2000.
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
We leased office space in Mountain View, California. The lease expired in
February 2002 and was not renewed.
The Company entered into a lease arrangement for office space in Sunnyvale,
California effective January 2002. The Company is required to lease an
additional 22,000 square feet starting in January 2004. The lease expires
April 30, 2007. The lease includes a renewal option for one additional
five-year term.
Future minimum lease commitments under the Company's operating lease as of
December 31, 2002 are as follows and include an annual rent increase of 3%
(in thousands):
2003 .................... $ 1,881
2004 .................... 2,681
2005 .................... 2,761
2006 .................... 2,844
2007 .................... 976
Thereafter .............. --
-------
Total ................. $11,143
=======
Rent expense was approximately $2.5 million, $936,000, and $884,000 for the
years ended December 31, 2002, 2001, and 2000, respectively. Rental income from
a sublease was approximately $175,000 for the year ended December 31, 2000. This
sublease agreement expired in July 2000.
CONTINGENCIES
The Company entered into an arrangement with IBM in December 1997 which provides
for two payments of $1.0 million each upon the Company achieving revenue
milestones, as defined, of $25.0 million and $50.0 million, respectively. Each
$1.0 million payment is due and payable after the end of the fiscal year in
which the cumulative total of all sales of products and services in that year
meet the revenue milestone. The Company reached the $25.0 million revenue
milestone in 2000 and as of December 31, 2000 had accrued a $1.0 million royalty
obligation. The Company reached the $50.0 million revenue milestone in 2001 and
as of December 31, 2001 had accrued a $1.0 million royalty obligation. Other
than described, no further payments are due under the IBM arrangement. The
license agreement covers a number of technologies related to the application of
computers and robotics to surgery. Under the terms of this agreement, the
Company has an exclusive, worldwide, royalty-free license to a number of IBM
patents and patent applications in the field of surgery performed on animals and
humans. The Company also has a non-exclusive license from IBM to practice in the
areas of neurology, ophthalmology, orthopedics and biopsies.
On May 10, 2000, Computer Motion 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, 5,762,458, 5,815,640,
5,855,583, 5,878,193, 5,907,664 and 6,001,108 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. In late 2000,
Computer Motion alleged our infringement of a ninth patent, and added U.S.
Patent Number 6,102,850 to the litigation. Computer Motion subsequently added
U.S. Patent No. 6,244,809 to the litigation, alleging that we also infringe that
tenth patent. These ten patents concern various methods and devices for
conducting various aspects of robotic surgery. Of those ten patents, three are
no longer part of the suit. After Computer Motion lost all of its rights to its
5,855,583 and 5,878,193 patents as a result of the Company's successful Patent
Office interference proceedings (which Computer Motion has sought to challenge
by separate district court appeal), Computer Motion voluntarily dismissed those
patents from suit. In addition, in November 2002, the Court granted the
Company's motion for summary judgment of noninfringement of the 6,102,850
patent. In February 2003, the Court denied the Company's motion for summary
judgment of noninfringement of the 6,244,809 patent and granted Computer
Motion's cross-motion for partial summary judgment of literal infringement of
one claim of that patent. The Company subsequently requested that the Court
reconsider that decision because of perceived flaws in the Court's approach to
the issue of infringement on summary judgment. Regardless of what happens on
reconsideration, the Company will continue to defend the 809 patent on
invalidity, based on the earlier robotic surgery work of SRI and others. The
Company still has pending motions for summary judgment of noninfringement on two
more of Computer Motion's seven remaining patents-in-suit, numbers 5,907,664 and
6,001,108. At the Court's request, the
Company will not file further motions for summary judgment until the remaining
pending motions are decided. In late January 2003, after close of fact
discovery, Computer Motion asserted between 26 and 35 new claims of its seven
remaining patents-in-suit and new theories of infringement. The Company has
moved to strike those new assertions as inappropriate at this late stage. Trial
had been calendared for April 29, 2003.
The Computer Motion action seeks damages based upon the making, using, selling
and offering for sale of the Company's products and processes, and seeks to
enjoin our continued activities relating to these products. In the event the
stay is lifted, this action will subject the Company to potential liability for
damages, including treble damages, and could require the Company to cease
making, using or selling the affected products, or to obtain a license in order
to continue to manufacture, use or sell the affected products. While the Company
continues to believe it has multiple meritorious defenses to each patent
asserted in this action, in the event that the stay is lifted the Company cannot
assure you that it ultimately will prevail on any issue in the litigation or
that it will be able to successfully defend Computer Motion's charges, nor can
the Company 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.
On December 7 and 8, 2000, the U.S. Patent Office formally declared three
interference proceedings between a single SRI patent application licensed to the
Company and three of Computer Motion's patents: Nos. 5,855,583, 5,878,193, and
5,907,664. 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.
The Patent Office entered final judgment in each interference proceeding. In the
interference involving the 5,878,193 patent, the PTO entered final judgment in
the Company's favor. Subject to review by or appeal to a federal court, which
could reverse or modify any or all of the following, this judgment establishes
that the disputed invention of, generally speaking, image-based control of
robotic surgical instruments is prior art to all of Computer Motion's remaining
patents, that the Company is entitled to patent that invention for itself, and
that Computer Motion is no longer entitled to any of the three claims of the
5,878,193 patent. In the interference involving the 5,855,583 patent, the PTO
again entered final judgment in the Company's favor. Subject to review by or
appeal to a federal court, which could reverse or modify any or all of the
following, this judgment establishes that the disputed invention of, generally
speaking, proportional movement of articulating robotic surgical instruments is
prior art to all of Computer Motion's remaining patents, that Intuitive is
entitled to patent that invention for itself, and that Computer Motion is no
longer entitled to any of the 15 claims of the 5,855,583 patent. In the
interference involving the 5,907,664 patent, the PTO entered final judgment
against us, deciding that the Company's patent claim is unpatentable for
noncompliance with the "written description" requirement of Title 35 of the U.S.
Code. The PTO declined to decide our motion challenging the validity of certain
claims of the '664 patent, leaving that issue in question. This 5,907,664 patent
was the subject of our first motion for summary judgment of noninfringement
mentioned in the previous paragraph, which motion still has not been decided. In
July 2002, Computer Motion filed suit against us in the U.S. District Court for
the Central District of California to challenge the PTO's two interference
judgments in
our favor. That suit is pending.
In September 2000, the Company 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, the Company cited numerous prior art references not cited
to the EPO during the '922 patent's original prosecution. An initial ruling in
March 2002 indicated that the EPO was not then inclined to alter the `922 patent
in any way. However, during a hearing held in Germany on July 2, 2002, the EPO
sanctioned Computer Motion for its "abuse" of the opposition process. As a
result of Computer Motion's actions, the preliminary EPO decision is mooted,
both sides will now provide further written briefing and evidence on the
substantive issues, and another hearing is anticipated for sometime later in
2003.
On March 30, 2001, the Company and International Business Machines Corporation
("IBM") jointly filed suit against Computer Motion 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,
Computer Motion willfully infringes U.S. Patent No. 6,201,984. The complaint
also impacted the HERMES product to the extent it interfaced with either the
AESOP or ZEUS. The `984 patent, which concerns various aspects of voice control
of surgical instruments, issued to IBM in early March 2001 and is exclusively
licensed to the Company. The `984 patent predates by several years Computer
Motion's development of voice-controlled surgical robots. Trial was held in
August 2002. After evidence and argument was presented, the seven-member
Delaware jury returned a unanimous verdict in the Company's favor, finding that
Computer Motion had failed to prove any claim of the `984 patent invalid and
awarding us $4.4 million for damage caused by Computer Motion's sales of its
infringing AESOP and ZEUS products. In December 2002, the Court rejected
Computer Motion's final "prosecution laches" defense as inapplicable to the
circumstances presented by the Company's patent. The suit is in the post-trial
briefing phase. Computer Motion has filed three motions seeking to set aside the
jury's verdict, to reduce the damages awarded, and for a new trial on one or
more issues. Intuitive has filed its request for a permanent injunction against
further infringing sales of Computer Motion's AESOP and ZEUS products. In
February 2003, the Court indicated that it would first address Computer Motion's
post-trial requests before deciding the Company's request for a permanent
injunction against Computer Motion.
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, the Company is 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, leaving only the
'003 patent at issue in the suit. On November 8, 2001, the District Court
granted summary judgment of noninfringement of the `003 patent in the Company's
favor and dismissed Wilk's complaint in its entirety. Wilk appealed the summary
judgment ruling to the U.S. Court of Appeals for the Federal Circuit. A decision
on the substantive issue on appeal is expected sometime in the next year. The
Company believes the appellate court will uphold the summary judgment of
noninfringement. If the Company loses the
appeal, the case will return for further proceedings in the District Court. The
Company remains confident that it will prevail in Wilk's suit and that it has
multiple meritorious defenses to Wilk's assertion of its '003 patent. However,
litigation is unpredictable and we may not prevail with any of our defenses or
on appeal. If the Company ultimately loses Wilk's suit, however, it will hurt
our competitive position, may be costly to us and may prevent the Company from
selling its products. In addition, 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. 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, we could
be required to pay Wilk damages, including treble damages, which could be
substantial and harm our financial position.
In September 2002, the Company discovered that one of its employees had
purchased approximately $900,000 in administrative supplies without the
authorization or knowledge of the company's management. This matter was
investigated by law enforcement authorities and company advisors. The Company
has since terminated this employee and has taken actions intended to insure that
no similar incidents can occur in the future, including by implementing
additional controls relating to its cash disbursement process. In addition, the
Company seeking to recover the loss. The Company has filed a claim with its
insurance carrier and has filed suit against the sellers of the administrative
supplies in December 2002. The complaint alleged that each of the defendants
has (i) violated various sections of the Racketeer Influenced and Corrupt
Organizations ("RICO") Act through their extortion, coercion, intimidation,
fraud, bribery and racketeering activity in connection with the Unauthorized
Purchase of Office Supplies, and (ii) committed unlawful business acts and
practices in violation of Cal. Bus. & Prof. Code Section 17200 et seq. The
Company's suit seeks to recover actual and treble damages, costs and attorney
fees for the damage caused by each of defendants through their illegal conduct.
In January 2003, the company amended its complaint to allege that each defendant
further unlawfully offered prizes and gifts in violation of Cal. Bus. & Prof.
Code Section 17537 and unlawfully failed to advertise limitations on the
quantity of its sales in violation of Cal. Bus. & Prof. Code Section 17500.5.
The amended complaint reiterates the Company's claim to recover actual and
treble damages, costs and attorney fees. This suit is in its early stages and,
as of March 21, 2003, none of the defendants have yet answered either complaint.
The Company is subject to legal proceedings and claims that arise in the normal
course of its business. The Company cannot assure that we will prevail in these
matters nor can we assure that any remedy could be reached on commercially
viable terms, if at all. Due to the inherent uncertainties of litigation, the
Company cannot accurately predict the ultimate outcome of these matters at this
time and, therefore, cannot estimate the range of possible loss.
8. NOTES PAYABLE
Notes payable consists of the following (in thousands):
DECEMBER 31,
---------------------
2002 2001
------- -------
Note payable, due in monthly installments through June 1, 2002
Interest rate of 9.0% at December 31, 2002 ........................ $ -- $ 264
Note payable, due in monthly installments through June 1, 2002
Interest rate of 9.0% at December 31, 2002 ........................ -- 264
Note payable, due in monthly installments through June 1, 2002
Interest rate of 9.9% at December 31, 2002 ........................ -- 280
Note payable, due in monthly installments through October 1, 2002
Interest rate of 10.2% at December 31, 2002 ....................... -- 154
Note payable, due in monthly installments through April 1, 2003
Interest rate of LIBOR plus 3.75% which is 5.43% at
December 31, 2002 ................................................. 42 222
Note payable, due in monthly installments through January 1, 2004
Interest rate of 9.0% at December 31, 2002 ........................ 393 723
Note payable, due in monthly installments through August 1, 2004
Interest rate of 8.5% at December 31, 2002 ........................ 323 495
Note payable, due in monthly installments through April 1, 2005
Interest rate of 8.6% at December 31, 2002 ........................ 759 --
Note payable, due in monthly installments through September 1, 2005
Interest rate of 7.3% at December 31, 2002 ........................ 1,275 --
Note payable, due in monthly installments through November 30, 2005
Interest rate of 6.9% at December 31, 2002 ........................ 557 --
------- -------
3,349 2,402
Less current portion .............................................. (1,511) (1,631)
------- -------
$ 1,838 $ 771
======= =======
Notes payable are collateralized by fixed assets specified under each agreement.
Assets collateralized under these agreements total $4.7 million and $7.2 million
at December 31, 2002 and 2001, respectively. Certain of the notes payable
contain covenants pertaining to results of operations and certain other
financial ratios. As of December 31, 2002, the Company is in compliance with all
covenants. Principal maturities of notes payable at December 31, 2002 are as
follows: 2003 -- $1.51 million; 2004 -- $1.16 million; and 2005 -- $679,000. The
weighted average borrowing rate was 7.8% as of December 31, 2002 and 8.7% as of
December 31, 2001.
The fair value of notes payable is estimated based on current interest rates
available to the Company for debt instruments with similar terms, degrees of
risk and remaining maturities. The carrying values of these obligations
approximate their respective fair values as of December 31, 2002 and 2001.
9. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
During the first quarter of the year ended December 31, 2000, the Company issued
3,593,875 shares of Series F convertible preferred stock, upon exercise of
warrants at a weighted-average exercise price of $9.84 per share, for net
proceeds of $34.8 million.
Each share of Series A, B, C, D and E convertible preferred stock then
outstanding was converted automatically upon the closing of the Company's
initial public offering on a one-for-one basis into 19,134,375 shares of common
stock. Each share of Series F convertible preferred stock was converted on a
1.02363638 basis into 3,678,798 shares of common stock.
On June 13, 2000, as part of the initial public offering of the Company's common
stock, we issued 5,000,000 shares of its common stock at an offering price of
$9.00 per share. 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 $46.8
million.
COMMON STOCK
The Company has reserved the following shares of common stock for the exercise
of warrants and the issuance of options and rights granted under the Company's
stock option plans as follows:
DECEMBER 31,
--------------------------
2002 2001
---------- ----------
Warrants ......... 5,081 5,081
Stock option plans 12,014,051 10,230,024
---------- ----------
12,019,132 10,235,105
========== ==========
The Company has previously issued shares of common stock, which are subject to
the Company's right to repurchase at the original issuance price upon the
occurrence of certain
events as defined in the agreements relating to the sale of such stock. As of
December 31, 2002, 2001, and 2000 shares subject to repurchase were 15,875,
34,561 and 409,612, respectively.
WARRANTS
In April 1997, in connection with one of the notes payable discussed in Note 8,
the Company issued a warrant to purchase 11,000 shares of common stock at an
exercise price of $5.00 per share. In August 2000, this warrant was exercised
under a net exercise provision resulting in the issuance of 7,774 shares of
common stock.
In conjunction with the issuance of Series E convertible preferred stock, the
Company issued to each purchaser a warrant to purchase shares in Series F
convertible preferred stock at a price initially equal to $8.00 per preferred
share. Warrants to purchase 5,096,875 shares of Series F convertible preferred
stock were issued. The exercise price increased on every subsequent one-month
anniversary of the issuance date by $0.1667 per month up to a maximum exercise
price of $10.00 per preferred share. During the year ended December 31, 2000,
warrants to purchase 3,593,875 shares of Series F convertible preferred stock
were exercised at a weighted-average exercise price of $9.84 per share for net
proceeds of $34.8 million. The unexercised warrants expired in March 2000.
In June 2000, the Company issued a warrant to purchase 5,081 shares of common
stock at an exercise price of $9.00 per share to one company. The warrant, which
was fully vested and immediately exercisable, expires in June 2010. The value of
the warrant was estimated using the Black-Scholes option pricing model and was
determined to be immaterial.
In April 2000, the Company entered into an agreement with Heartport, Inc. to
exclusively license a number of Heartport's patents in exchange for cash of $3.0
million and a warrant to purchase 200,000 shares of common stock at an exercise
price of $3.00 per share. In accordance with EITF 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods or Services," the value of the warrant was
estimated using the Black-Scholes option pricing model with the following
assumptions: stock price on the date of grant of $9.90 per share, risk-free
interest rate of 6.5%, contractual life of 5 years, volatility of 0.75 and no
dividend yield, resulting in a value of $1.7 million. As a result of this
agreement, the Company capitalized approximately $4.7 million as intangible and
other assets, which will be amortized over the estimated useful life of the
patents which is approximately six years. The warrant, which was fully vested
and immediately exercisable was exercised by Heartport, Inc. in June 2001.
STOCK OPTION PLANS
In January 1996, the Board of Directors adopted, and the stockholders approved,
the 1996 Equity Incentive Plan (the "1996 Plan") under which employees,
consultants and directors may be granted Incentive Stock Options ("ISOs") and
Nonstatutory Stock Options ("NSOs") to purchase shares of the company's common
stock. The 1996 Plan permits ISOs to be granted at an exercise price not less
than the fair value on the date of grant and NSOs at an exercise price not less
than 85% of the fair value on the date of grant. Options granted under the 1996
Plan generally expire 10 years from the date of grant and become exercisable
upon grant subject to repurchase rights in favor of the Company until vested.
Options generally vest 12.5% upon completion of 6 months
service and 1/48 per month thereafter; however, options may be granted with
different vesting terms as determined by the Board of Directors. A total of
4,840,000 shares of common stock have been authorized for issuance pursuant to
the 1996 Plan as of December 31, 2002.
In March 2000, the Board of Directors adopted the 2000 Equity Incentive Plan,
which took effect upon the closing of the Company's initial public offering. The
Company has reserved an additional 5,160,000 shares under this plan. This plan
is an amendment and restatement of the 1996 Plan. Also in March 2000, the Board
of Directors adopted the 2000 Non-Employee Directors' Stock Option Plan and the
2000 Employee Stock Purchase Plan. The Company has reserved 300,000 and
1,000,000 shares for the issuances under these plans, respectively. These plans
were also effective upon the closing of the Company's initial public offering.
Each of these plans contains an evergreen provision whereas the authorized
shares are automatically increased concurrent with the Company's annual meeting
of shareholders. In May 2002, the Company reserved an additional 1,964,750
shares for the 2000 Equity Incentive Plan, 109,125 shares for the 2000
Non-Employee Directors' Stock Option Plan and 204,364 shares for the 2000
Employee Stock Purchase Plan. In May 2001, the Company reserved an additional
1,986,600 shares for the 2000 Equity Incentive Plan, 107,487 shares for the 2000
Non-Employee Directors' Stock Option Plan and 179,145 shares for the 2000
Employee Stock Purchase Plan.
Option activity under the 1996 and 2000 Plans was as follows:
2002 2001 2000
----------------------- ---------------------- -----------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED NUMBER OF WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
---------- --------- ---------- -------- --------- ----------
Outstanding at January 1 ..... 3,392,584 $5.85 1,766,756 $3.27 1,466,725 $1.90
Options granted ............. 2,001,000 9.03 2,146,251 7.55 823,600 4.94
Options exercised ........... (234,159) 2.64 (188,915) 2.19 (459,996) 1.98
Options canceled ............ (255,265) 8.55 (331,508) 5.06 (63,573) 2.69
--------- --------- ---------
Outstanding at December 31 ... 4,904,160 7.24 3,392,584 5.85 1,766,756 3.27
========= ========= =========
Exercisable at December 31 ... 2,267,406 $5.81 1,604,426 $3.65 1,517,923 $2.31
========= ========= =========
Additional information concerning options outstanding at December 31, 2002 is as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
- ----------------------- --------- ----------- --------- --------- --------
$ 0.50 - 0.50 ........ 180,500 4.40 $ 0.50 180,500 $ 0.50
1.50 - 1.50 ........ 62,500 4.70 1.50 62,500 1.50
3.00 - 4.47 ........ 709,842 6.20 3.02 699,981 3.01
5.15 - 7.61 ........ 1,658,587 8.10 7.09 721,982 7.12
7.74 - 11.17 ....... 2,201,999 8.90 9.16 556,102 9.16
13.56 - 16.13 ....... 90,732 7.90 14.03 46,341 14.09
--------- ---------
$ 0.50 - 16.13 ....... 4,904,160 8.00 $ 7.24 2,267,406 $ 5.81
========= =========
Under the 1996 and 2000 Plans, the Company may also grant rights to purchase
restricted stock. Terms and conditions of these rights are determined by the
Board of Directors. However, no right shall be granted at an exercise price
which is less than 85% of the fair value of the Company's common stock on the
date of grant. Exercise of these share purchase rights are made pursuant to
restricted stock purchase agreements containing provisions established by the
Board of Directors. These provisions give the Company the right to repurchase
the shares at the original purchase price of the stock. The right expires at a
rate determined by the Board of Directors, generally at a rate of 12.5% after 6
months and 1/48 per month thereafter. For the years ended December 31, 2002,
2001, and 2000, the Company repurchased 421, 22,171, and 36,969 shares under the
2000 Plan.
As of December 31, 2002, 2001, and 2000, 7,109,891, 6,837,440, and 5,263,970
shares were available for future grant under the 1996 and 2000 Plans.
For the years ended December 31, 2002, 2001, and 2000, the Company recorded
deferred stock compensation of zero, zero, and $4.1 million, respectively,
representing the difference between the exercise price and the fair value for
accounting purposes of the Company's common stock on the date such options were
granted. For the years ended December 31, 2002, 2001, and 2000, the Company
recorded amortization of deferred stock compensation of $663,000, $1.6 million,
and $2.5 million, respectively. As of December 31, 2002 and 2001, the Company
had $223,000 and $886,000 of remaining unamortized deferred compensation,
respectively. Such amount is included as a reduction of stockholders' equity and
is being amortized over the vesting period of the underlying options using the
graded-vesting method. Future amortization of deferred compensation at December
31, 2002 is $223,000. The deferred compensation will be fully amortized in the
first half of 2003.
STOCK-BASED COMPENSATION
Pro forma information regarding net loss is required by SFAS No. 123 as if the
Company had accounted for its employee stock options under the fair value method
of SFAS 123. Option valuation models require the input of highly subjective
assumptions. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable measure of the fair value of its
employee stock options.
The weighted-average estimated fair value of these options during fiscal 2002,
2001, and 2000 was $5.50, $3.40, and $1.07 per share, respectively. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option pricing model using the following weighted-average
assumptions:
YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
---- ---- ----
Expected life (in years) 4.0 6.3 4.0
Risk-free interest rate 3.9% 4.4% 5.9%
Volatility ............. 0.80 0.96 0.85
Dividend yield ......... -- -- --
The Company has elected to follow APB 25 in accounting for employee stock
options. Under APB 25, the Company recognizes no compensation expense in its
financial statements except in connection with the grant of restricted stock for
nominal consideration and unless the exercise price of employee stock options is
less than the market price of the underlying stock on the grant date.
10. INCOME TAXES
There is no provision for income taxes because the Company has incurred
operating losses.
Deferred income taxes reflect tax carryforwards and the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting and the amount used for income tax purposes. Significant
components of the Company's deferred tax assets are as follows (in thousands):
AS OF DECEMBER 31,
---------------------------
2002 2001
-------- --------
Net operating loss carryforward ................... $ 32,710 $ 25,800
Research credits .................................. 5,970 4,460
Expenses deductible in later years for tax purposes 12,770 12,120
Deferred revenue .................................. 1,940 1,520
-------- --------
Total deferred tax assets ......................... 53,390 43,900
Valuation allowance for deferred tax assets ....... (53,390) (43,900)
-------- --------
Net deferred tax assets ........................... $ -- $ --
======== ========
Realization of deferred tax assets is dependent upon future earnings; the timing
and amount of which are uncertain. Accordingly, the net deferred tax assets have
been fully offset by a valuation allowance. The valuation allowance increased by
$9.5 million and $7.8 million during the years ended December 31, 2002 and 2001,
respectively. As of December 31, 2002, the
Company had net operating loss carryforwards for federal tax purposes of
approximately $92.0 million which expire in the years 2011 through 2022 and
federal research and development tax credits of approximately $3.5 million which
expire in the years 2012 through 2022. . State loss carryforwards of
approximately $26.0 million begin expiring in 2005. Utilization of the Company's
net operating loss may be subject to a substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue Code and similar
state provisions. The annual limitation may result in the expiration of the net
operating loss before utilization.
11. OTHER COMPREHENSIVE INCOME (LOSS)
At December 31, the components of accumulated other comprehensive income, net of
related taxes, are comprised of the following (in thousands):
2002 2001
------ -----
Unrealized gain on available-for-sale securities $1,623 $ 627
Foreign currency translation adjustments ....... 15 (76)
------ -----
Accumulated other comprehensive income ......... $1,638 $ 551
====== =====
12. SELECTED QUARTERLY DATA (UNAUDITED)
2002
-----------------------------------------------------------------
Q1 Q2 Q3 Q4
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ................ $ 14,409 $ 19,387 $ 17,081 $ 21,145
Gross profit ............. 6,902 10,162 8,741 11,633
Operating expenses ....... 13,017 14,429 15,583 14,628
-------- -------- -------- --------
Operating loss ........... (6,115) (4,267) (6,842) (2,995)
Other income(expense) .... 498 527 378 395
-------- -------- -------- --------
Net loss ................. (5,617) (3,740) (6,464) (2,600)
Net loss per share ....... $ (0.15) $ (0.10) $ (0.18) $ (0.07)
Shares used in calculation
of net loss per share .. 36,308 36,383 36,499 36,641
2001
-----------------------------------------------------------------
Q1 Q2 Q3 Q4
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ................ $ 12,079 $ 12,720 $ 10,861 $ 16,013
Gross profit ............. 5,516 6,061 5,111 6,767
Operating expenses ....... 10,066 11,002 10,945 11,825
-------- -------- -------- --------
Operating loss ........... (4,550) (4,941) (5,834) (5,058)
Other income(expense) .... 1,143 697 1,036 807
-------- -------- -------- --------
Net loss ................. (3,407) (4,244) (4,798) (4,251)
Net loss per share ....... $ (0.10) $ (0.12) $ (0.13) $ (0.12)
Shares used in calculation
of net loss per share .. 35,401 35,655 36,056 36,147
13. SUBSEQUENT EVENTS (UNAUDITED)
On March 7, 2003, the Company entered into a merger agreement with Computer
Motion. Upon completion of the merger, each share of Computer Motion common
stock will be converted into the right to receive a fraction of a share of
Intuitive Surgical common stock. The fraction of a share of Intuitive Surgical
common stock to be issued with respect to each share of Computer Motion common
stock will be determined by a formula described in the merger agreement. Based
on the expected capitalization of Intuitive Surgical and Computer Motion on an
assumed closing date of June 20, 2003, the Company estimates that the exchange
ratio will range from approximately 0.48 to 0.52 depending on the average
Computer Motion common stock price during a defined period prior to closing.
Based on these assumptions and on Computer Motion's common stock price as of the
date of this Annual Report on Form 10-K, the Company estimates that it will
issue approximately 14.7 million shares of common stock in the merger and will
reserve approximately 5.7 million additional shares of common stock for future
issuance in connection with the assumption of Computer Motion's outstanding
options and warrants (including out-of-the-money options and warrants).
Further, the Company estimates that, upon completion of the merger, its current
stockholders will own approximately 72% of the then outstanding shares of its
common stock and former Computer Motion stockholders will own approximately 28%
of the then outstanding shares of its common stock. These estimates are subject
to change depending on such factors as the number of fully-diluted shares the
Company and Computer Motion have outstanding at closing, Computer Motion's stock
price, and whether outstanding options and warrants of Computer Motion are
exercised prior to closing.
The merger is subject to the approval of a majority of the shareholders of each
company and is intended to be a tax-free reorganization. In addition, the
Company may provide a bridge loan of up to $7.3 million to Computer Motion to
provide working capital for its operations through the closure period if
necessary.
Intuitive Surgical and Computer Motion can jointly agree to terminate the merger
agreement at any given time. Either company may also terminate the merger
agreement if the merger is not completed by August 31, 2003 and under other
circumstances described in the joint proxy
statement/prospectus to be filed in connection with the merger. The merger
agreement provides that, under specified circumstances, Intuitive Surgical or
Computer Motion may be required to pay a termination fee and expenses of the
other party in an aggregate amount of up to $2.5 million.
The recently announced merger agreement has resulted in a stay of all litigation
and other administrative legal proceedings between the Company and Computer
Motion. However, these proceedings may continue if the merger is not completed
for any reason. Additionally, both companies jointly requested that the
California litigation be stayed through August 31, 2003, and that a trial date
be reserved no sooner than three months after August 31, 2003, in case the
merger cannot be consummated. Currently, there is no further activity in the
California litigation while closing of the merger is pursued. If the merger
closes, then all litigation and other disputes between the Company and Computer
Motion will be dismissed with prejudice or similarly finally terminated.
SCHEDULE II
INTUITIVE SURGICAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE ADDITIONS
AT CHARGED TO BALANCE
BEGINNING COST AND AT END
OF YEAR EXPENSES DEDUCTIONS (1) OF YEAR
------- -------- -------------- -------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
AND RETURNS:
Year ended December 31, 2002 .. $446 360 -- $806
Year ended December 31, 2001 .. $192 254 -- $446
Year ended December 31, 2000 .. $ 55 137 -- $192
(1) Represents amounts written off or returned against the allowance or
reserves, or returned against earnings.
EXHIBIT INDEX
Exhibit Description
Number
2.1(3) Agreement and plan of merger by and among Intuitive Surgical, Inc.,
Iron Acquisition Corporation and Computer Motion, Inc., dated as of
March 7, 2003.
3.2(1) Amended and Restated Certificate of Incorporation of
Registrant.(1)
3.3(1) Bylaws of Registrant.
4.2(1) Specimen Stock Certificate.
4.3(1) Warrant to Purchase Shares of Common Stock, dated April 26, 2000.
10.1(1) Form of Indemnity Agreement.
10.2(1) 2000 Equity Incentive Plan.
10.3(1) 2000 Non-Employee Directors' Stock Option Plan.
10.4(1) 2000 Employee Stock Purchase Plan.
10.5(1) Amended and Restated Investor Rights Agreement dated March 31,
1999.
10.6(1) Equipment Financing Agreement (No. 10809), dated April 2,
1997, between the Registrant and Lease Management Services,
Inc., and related addendums.
10.7(1) Security Agreement, dated May 20, 1999, between the Registrant
and Heller Financial Leasing, Inc., and related amendments.
10.8(1) License Agreement, dated December 20, 1995, between the Registrant
and SRI International.
10.9(1) License Agreement, dated December 29, 1997, between the
Registrant and International Business Machines Corporation.
10.10(1) License Agreement, dated April 1, 1999, between the Registrant and
Massachusetts Institute of Technology.
10.11(1) Lease, dated September 9, 1996, between the Registrant and
Zappettini Investment Co.
10.12(1) Lease, dated February 5, 1997, between the Registrant and Zappettini
Investment Co.
10.13(1) Employment Agreement, dated February 28, 1997, between the
Registrant and Lonnie M. Smith.
10.14(2) Lease, dated July 16, 2001, between the Registrant and RNM
Technology Drive, L.P.
23.1(4) Consent of Ernst & Young LLP, Independent Auditors.
24.1(4) Power of Attorney (set forth on signature page).
99.1(4) Certification by Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of
2002.
99.2(4) Certification by Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of
2002.
- -----------
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (333-33016)
(2) Incorporated by reference to Exhibit 10.14 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2001
(3) Incorporated by reference to exhibits filed with the Registrant's current
report on Form 8-K dated March 7, 2003.
(4) Filed herewith