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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K ANNUAL REPORT
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NO. 000-22755
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COMPUTER MOTION, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0458805
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
130-B CREMONA DRIVE
GOLETA, CA 93117
(Address of principal executive offices)
(805) 968-9600
(Registrant's telephone number, including area code)
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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
(Title of Class)
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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; 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, or will not be contained, to the
best of the Registrant's knowledge, in definitive proxy information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark if the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes[ ] No[X].
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of Common Stock on June 28, 2002,
as reported by Nasdaq, was approximately $10,675,000. Shares of voting stock
held by each officer and director and by each person who owns 5% or more of the
outstanding voting stock 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 shares outstanding of the Registrant's Common Stock, $.001
par value, as of March 14, 2003 was 17,921,882 shares.
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results
could differ materially from those projected in the forward-looking statements
as a result of a number of important factors. For a discussion of important
factors that could affect the Company's results, please refer to "Risk Factors
that May Affect Future Results" below.
COMPANY OVERVIEW
Computer Motion, Inc. ("Computer Motion" or the "Company") is committed to
developing, manufacturing and marketing proprietary robotic and computerized
surgical systems that are intended to enhance a surgeon's performance and
centralize and simplify the surgeon's control of the operating room ("OR").
The Company believes that its products have the potential to revolutionize
surgery and the OR by providing surgeons with the precision and dexterity
necessary to perform complex, minimally invasive surgical procedures, and by
enabling surgeons to control critical devices in the OR through simple verbal
commands. Computer Motion believes that its products have the potential to
broaden the scope and increase the effectiveness of minimally invasive surgery
("MIS"), improve patient outcomes and create a safer, more efficient and cost
effective OR.
Traditionally, the majority of all surgeries have been open, requiring
large incisions measuring up to 18 inches to access the operative site. Although
this approach can be highly effective, it often results in significant trauma,
pain and complications, as well as significant costs related to lengthy
postoperative convalescent periods for the patient. In an effort to minimize
these negative factors, MIS techniques and related technologies have been
developed. MIS has proven to be as effective as traditional open surgery while
offering patients substantially reduced pain and trauma, shortened convalescent
periods and decreased overall patient care costs. While these benefits are
significant, the minimally invasive approach presents challenges to surgeons,
including the intricate reconstruction of patient tissue by suturing, delicate
manipulation of small anatomical features and constrained access to, and limited
visualization of, the operative site.
Computer Motion's vision is to bring the power of computers and robotics to
the OR to facilitate a surgeon's ability to perform complex surgical procedures
and enable new, minimally invasive microsurgical procedures that are currently
very difficult or impossible to perform. The Company works with leading
practitioners in multiple surgical disciplines to develop new MIS procedures
using the Company's products to provide better visualization and improved
dexterity for the surgeon.
The Company has developed four major products and a suite of supporting
supplies, accessories and services. The four major products are the AESOP(R)
Endoscope Postioner, a surgical robot capable of positioning an endoscope in
response to a surgeon's commands; the ZEUS(R) Surgical System, a robotic
platform designed to improve a surgeon's ability to perform complex surgical
procedures and enable new, minimally invasive microsurgical procedures that are
currently impossible or very difficult to perform; the HERMES(R) Control Center,
a voice activated OR control system designed to enable a surgeon to directly
control multiple OR devices, including the Company's AESOP system, through
simple verbal commands; and the SOCRATES(TM) Telementoring System, an
interactive telecollaborative system allowing a surgeon to mentor and
collaborate with another surgeon during an operation. SOCRATES also allows a
remote surgeon to participate in a surgery by remotely controlling AESOP, our
endoscope-positioning robot.
ROBOTIC SYSTEMS
The Company's line of computer and robotic systems enhance a surgeon's
ability to perform complex, minimally invasive surgeries. The Company has
developed the EVOLVE surgical continuum to support a gradient learning curve for
surgeons to safely and economically develop the skills required to transition
from open to endoscopic surgery. All four of the Company's robotic products are
integral to the EVOLVE process.
AESOP PLATFORM
The Computer Motion AESOP system is a surgical robot which approximates the
form and function of a human arm and allows control of the endoscope (a
specially designed optical tube which, when connected to a medical video camera
and light source, is passed into the body to allow the surgeon to view the
operative site on a video monitor) using simple verbal commands. This eliminates
the need for a member of a surgical staff to manually control the camera and
provides a more stable endoscopic image and more precise positioning of the
endoscope. The Company estimates that over 175,000 MIS procedures have been
successfully assisted by more than 800 AESOP systems in more than 600 hospitals
and surgery centers around the world.
The AESOP platform is the world's first Food and Drug Administration
("FDA") cleared surgical robot and incorporates the world's first FDA-cleared
voice control interface for use in the OR. The AESOP system was introduced in
the fourth quarter of 1994. AESOP 2000 with voice control was introduced in the
fourth quarter of 1996. The AESOP 3000 platform, introduced in December 1997, is
the world's first FDA-cleared surgical robot capable of assisting in advanced
minimally invasive cardiothoracic procedures. The AESOP 3000 robotic arm
features added flexibility and functionality over its predecessor, adding the
range of motion necessary for endoscopic viewing in the thoracic (chest) cavity.
AESOP is cleared for use by the FDA in general surgery, ear nose throat,, cardio
thorasic, urologic, vascular, bariatric, and gynecological procedures. The AESOP
HR platform allows for control of AESOP through the HERMES Control Center. AESOP
HR enables the operative surgeon to view the status of the AESOP device, save
memory positions, and view the AESOP menu structure on a surgical monitor. The
AESOP HR platform also allows the surgeon to adjust AESOP's speed to an optimal
setting based on the constraints of the procedure.
The introduction of the Alpha(TM) Virtual Port in June 2000 enabled the
application of AESOP in open procedures, which is especially useful when used in
conjunction with the EVOLVE education continuum. The Alpha Virtual Port provides
a free-space pivot point for the use of AESOP in sternotomy accessed cardiac
procedures as well as open abdominal procedures. The application of the Alpha
Virtual Port in conjunction with AESOP is the first step in the EVOLVE program's
step-wise transition from open to closed procedures. The Alpha Virtual Port
allows the operative surgeon in-training to gain experience with the technology
prior to advancing to a closed MIS procedure approach.
Computer Motion has leveraged the core technologies underlying the AESOP
platform to develop the ZEUS Surgical System, the HERMES Control Center, and the
SOCRATES Telementoring System.
ZEUS PLATFORM
The Computer Motion ZEUS Surgical System is designed to fundamentally
improve a surgeon's ability to perform complex, MIS procedures and to enable
new, minimally invasive microsurgical procedures that are currently very
difficult or impossible to perform with conventional surgical methods. The
Company believes that these new MIS procedures will result in reduced patient
pain and trauma, fewer complications, lessened cosmetic concerns, shortened
convalescent periods and will increase the number of patients qualified for
certain surgical procedures. As a result, the Company believes that an increase
in minimally invasive procedures will produce lower overall healthcare costs to
patients, hospitals and healthcare payors.
The ZEUS platform is comprised of three surgeon-controlled robotic arms,
one of which positions an endoscope while the other two hold disposable and
reusable surgical instruments. Each arm is individually mounted on the operating
room table using the standard table rails. Because the arms are attached to the
table, the table can be adjusted during a surgical procedure without removing
the instruments. The surgeon sits near the operating room table at an open,
comfortable, and portable console. The open design of the console provides the
surgeon with an unobstructed view of the patient and allows clear communication
with the operating room staff. At the console, the surgeon controls the
instrument handles and views the operative site on a 3D video monitor or a boom
mounted 3D binocular display. ZEUS senses the surgeon's hand movements through
the new MicroWrist surgeon interface. It then scales the surgeon's hand
movements into precise, tremor-free micro movements at the operative site.
The Company received the first in a series of FDA 510(k) clearances for
ZEUS in October 2001. This 510(k) clearance allowed ZEUS to be used with blunt
dissectors, retractors, atraumatic graspers and stabilizers during laparoscopic
and thorascopic surgery. In September 2002, the company received an FDA 510(k)
clearance for the marketing of ZEUS in general laparoscopic surgery. There are
over 3.3 million general procedures performed annually in the United States.
This clearance allows clinical use of the ZEUS system for a broad set of general
surgery applications such as laparoscopic cholecystectomy and laparoscopic
nissen fundoplication. The Company is also seeking additional FDA clearances for
thoracic surgery, laparoscopic radical prostatectomy and cardiac procedures,
with clinical trials ongoing.
The Company believes that the ZEUS platform will provide clinicians with
the following significant benefits:
IMPROVED PRECISION. The ZEUS platform incorporates technology that is
designed to enable a surgeon to scale his or her movements, allowing
manipulation of instruments on a microsurgical scale while utilizing normal hand
and arm movements. For instance, in microsurgical procedures which involve
extremely small anatomical structures and which utilize sutures ranging from 20
to 40 microns (1/3 to 2/3 the width of a human hair), if a surgeon selects a
scaling ratio of 4 to 1, each one inch movement by the surgeon would result in a
1/4 inch movement by the robotic surgical instruments. Various useful scaling
ratios can be selected by the surgeon intra-operatively.
IMPROVED DEXTERITY. The ZEUS platform is designed to enhance a surgeon's
performance by enabling robotic manipulation of surgical instruments, as opposed
to hand-held instruments, which are very difficult to manipulate manually when
performing challenging minimally invasive surgery. For instance, a surgeon can
activate and deactivate the instrument handles to further extend his or her
range of motion to complete a particular movement, such as suturing, without
having to physically contort his or her arms. In addition, in order to gain
anatomical access to certain regions of the body in a minimally invasive manner,
the robotic instruments can be placed in positions that would be extremely
difficult for a surgeon to manipulate manually using conventional MIS techniques
due to the distance between the instruments and their relative positions to each
other.
ELIMINATION OF INVOLUNTARY HAND TREMOR. The ZEUS platform is designed to
hold the surgical instruments and the endoscope in a steady manner, eliminating
a surgeon's incidental and unintended hand motions and tremors, which are
intensified when holding surgical instruments for, extended periods of time.
ENHANCED VISUALIZATION. The ZEUS platform incorporates a robotic arm, which
controls the endoscope to produce a steady, magnified video image displayed
directly in front of the surgeon, which facilitates performance of MIS
procedures. ZEUS also provides a state of the art stereo 3D endoscope system
attached to the robotic arm.
IMPROVED MINIMALLY INVASIVE ANATOMICAL ACCESS. The ZEUS platform is
designed to provide a surgeon with access to confined areas in the body and
critical anatomical structures that are currently only accessible by means of
highly invasive, open surgical procedures or multiple less invasive incisions.
In the case of cardiac surgery, these less invasive approaches can require
multiple 3 to 5 inch incisions and often involve the removal of rib cartilage,
rib spreading and nerve trauma. In contrast, the ZEUS system is designed to
provide a surgeon with complete access to the heart through several 3 to 5
millimeter ports.
MINIMIZED SURGEON FATIGUE. The ZEUS platform allows a surgeon to operate
the surgical instrument handles in a comfortable, ergonomic position, including
sitting down and positioning his or her forearms on armrests. The Company
believes this enhanced ergonomic design can extend the professional lives of
surgeons and increase the efficiency and effectiveness of demanding and lengthy
microsurgical procedures.
The ZEUS system is designed as an open platform system. This allows
products from other corporations to integrate into the system. The Company has
entered into alliances with these outside companies to develop complementary
products to the ZEUS system, and to often offer their products as components of
the ZEUS
system. Included in these are: (i) visualization systems from Karl Storz, GMBH,
Vista Medical Technologies, Inc., and Smith and Nephew Endoscopy; (ii)
instrumentation from Scanlan International, Inc. and Karl Storz, GMBH, (iii)
sutures from W.L. Gore & Associates and (iv) other specialty instruments from
various medical device companies.
HERMES PLATFORM
The modernization of the OR has resulted in numerous medical devices that
aid a surgeon, but also increase the complexity and costs of the OR. In many
instances, these devices are manually controlled and monitored by someone other
than a surgeon in response to a surgeon's spoken commands and request for
status. The HERMES Control Center is designed to enable a surgeon to directly
control multiple OR devices, including the Company's AESOP system, through
simple verbal commands. The HERMES Control Center provides standardized visual
and digitized voice feedback to a surgical team. The Company believes that the
enhanced control and feedback provided by the HERMES Control Center improves
safety, increases efficiency, shortens procedure times and reduces cost.
HERMES is a centralized control system that networks multiple
HERMES-Ready(TM) medical devices and provides the surgeon and OR staff with
direct control using simple verbal commands or an interactive touch screen
pendant. The HERMES system provides both visual graphic feedback and digitized
audio feedback to the surgical team. The visual feedback is displayed directly
on the endoscopic video monitor and the digitized audio feedback provides
valuable device-specific status information. The 28+ FDA-cleared devices
controlled by the HERMES system include: endoscopic cameras, overhead cameras,
light sources, insufflators, arthroscopic shavers, arthroscopic pumps, VCRs,
printers, digital image capture device, OR lights, surgical tables,
electrosurgical units, and the Company's telephone, port expander, AESOP and
ZEUS systems. The HERMES-Ready interfaces for these cleared devices were created
in collaboration between the Company and various HERMES alliance partners, such
as Stryker Endoscopy, Smith and Nephew Endoscopy, Berchtold, Steris, Skytron,
ValleyLab (TYCO), and ConMed. There is additional HERMES interface projects
currently under development with these same HERMES alliance partners for an
additional ten devices. These models are expected to release for commercial sale
during the year 2003.
To leverage its proprietary voice recognition technology in the
arthroscopic and laparoscopic markets, the Company has partnered with Stryker
Endoscopy, a division of Stryker Corporation, to market and distribute the
HERMES system and various associated HERMES-Ready device interfaces. Stryker is
a leading manufacturer of endoscopic medical equipment. Stryker purchases the
HERMES system as an original equipment manufacturer ("OEM") and markets the
HERMES system as an integrated component with several of its laparoscopic and
arthroscopic products.
The Company has also entered into two additional HERMES alliance agreements
with Smith & Nephew Endoscopy and Karl Storz Endoscopy America. Both Smith &
Nephew and Karl Storz are leading manufacturers of endoscopic medical equipment.
These agreements define collaboration between the Company and these two medical
device companies to create HERMES-Ready interfaces for 40 additional medical
device models. This engineering development work is currently underway, and the
Company expects to make additional 510(k) submissions to the FDA in 2003 to
allow some of these devices to be released for sale by Smith & Nephew and Karl
Storz during 2003. Smith & Nephew will market a HERMES system as a component of
their integrated digital OR offering. Karl Storz will distribute a HERMES
related product that allows device integration with their integrated OR1
offering.
The Company intends to partner with other medical device manufacturers to
expand the number and type of devices to be integrated with HERMES, including
cautery/cutting devices, various imaging systems, devices for the cardiac
catheter laboratory, and other equipment for varying clinical environments.
SOCRATES PLATFORM
The SOCRATES Telementoring System is the latest generation technology
platform currently under development by the Company. SOCRATES enables remote
access to HERMES networked devices via proprietary software and standard
teleconferencing components. The SOCRATES system allows an operative surgeon to
virtually, cost-effectively, and on an as-needed basis, communicate with a
remote surgeon. SOCRATES enables the remote surgeon to help direct a surgical
procedure thereby augmenting the operative surgeon's prior training experience.
The SOCRATES system enhances the utility of the HERMES Control Center with
the AESOP-HR system by providing shared-remote control capability of the
endoscope. The SOCRATES system provides the remote surgeon with an interface to
the AESOP-HR system, enabling the remote surgeon to share control of the
endoscope with the operative surgeon. AESOP's precision and stability ensure the
remote surgeon's views are tremor-free and accurately positioned. It is common
for surgeons to remotely collaborate; however, without the SOCRATES system, a
remote surgeon is typically only able to view video of a procedure and provide
feedback through video overlay and verbal commands. The SOCRATES system enhances
this collaboration by making it more interactive by allowing remote physical
control of the endoscope in the operating room.
In October 2001, the Company received FDA clearance for the Socrates
Telementoring System for use as a point-to-point communication system, under the
newly created FDA device category called "Telemedicine devices."
MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations are required to comply with the
FDA's Quality System Regulation ("QSR"), which addresses the design, controls,
methods, facilities and quality assurance used in manufacturing, packing,
storing and installing medical devices. In addition, certain international
markets have quality assurance and manufacturing requirements. Specifically, the
Company is subject to the compliance requirements of ISO 9001, EN46001, the
Medical Device Directive and Conformity Europeane ("CE") mark directives which
impose certain procedural and documentation requirements with respect to device
design, development, manufacturing and quality assurance activities. The Company
has obtained such certification and is subject to audit on an annual basis for
compliance. The Company assembles all four of its product lines (AESOP, ZEUS,
HERMES and SOCRATES) in its 7,200 square foot manufacturing facility in Goleta,
California. Certain accessories and components are produced by qualified third
party vendors. The manufacturing and assembly of the Company's products is a
complex and lengthy process involving a significant number of parts, assemblies
and procedures.
The Company purchases both custom made and stock components from a large
number of qualified suppliers and subjects them to stringent incoming quality
inspections. As part of the Company's supplier qualification process, the
Company periodically conducts quality audits of its suppliers. The Company
relies on independent manufacturers, some of which are single source suppliers
for the manufacture of the principal components of its products. Shortages of
raw materials, production capacity constraints or delays on the part of the
Company's suppliers could negatively affect the Company's ability to ship
products and derive revenue. In some instances, the Company relies on companies
that are sole suppliers of key components of its products. If one of these sole
suppliers goes out of business, the Company could face significant production
delays until an alternate supplier is found, or until the product could be
redesigned and revalidated to accommodate a new supplier's replacement
component.
COMPETITION
There are four levels of competition for the Company's products;
pharmaceutical therapy, traditional methods of surgery, new approaches to MIS,
and direct competition in robotic surgery. All four of the Company's major
systems face different levels of competition in each of these areas.
Traditional methods of surgery have been in effect for over one hundred
years. These methods often involve large incisions in the patient's body and
long recovery times. The challenge for the Company is to
convince surgeons and administrators to convert to a minimally invasive approach
to surgery through robotics. This requires the surgeons and hospitals to expend
significant amounts of time and money in installation of the equipment and
training on new procedures. The Company also needs to convince potential
patients of the safety and benefits of surgery using the Company's products.
Many medical conditions that can be treated by the Company's products can also
be treated with pharmaceuticals or other medical devices and procedures. Many of
these alternative treatments are widely accepted in the medical community and
have a long history of use.
The field of MIS is growing rapidly. Several companies have developed new
minimally invasive technologies and techniques, which are alternatives to the
techniques and products the Company offers. Many of these companies are well
established in the medical industry including Boston Scientific Corporation,
C.R. Bard, Inc., Edwards Life Sciences, Guidant Corporation, Heartport, Inc.,
St. Jude and Ethicon Endo-Surgery, Inc., divisions of Johnson & Johnson, Inc.,
Medtronic Inc., and United States Surgical Corporation, a division of Tyco
International Ltd. These companies offer non-robotic surgical tools and
techniques involving hand held instruments and manually controlled visualization
or catheter based therapies such as stenting (mechanical devices which hold a
blocked or occluded blood vessel open) and Percuaneous Transluminal Coronary
Angioplasty (often referred to as PTCA, which is the introduction of a small
balloon into a vessel to force open the blocked or occluded vessel).
Direct competition with the Company's products is relatively limited. The
Company's AESOP product is fairly unique with only a single competitor,
Armstrong Healthcare Ltd. Besides this single competitor, there is no direct
competition other than a person physically holding an endoscope or the use of a
static arm fixed positioner.
There are a limited number of companies that have developed computer
assisted and robotic surgical systems that compete to varying degrees with the
Company's ZEUS system. These include EndoVia Medical, Inc. (formerly Brock
Rogers Surgical, Inc.) and Intuitive Surgical, Inc. Several other companies
produce computer assisted and robotic surgical devices that do not directly
compete with the potential surgical procedures for ZEUS. These include
Integrated Surgical Systems, Inc., Johns Hopkins University Engineering Research
Consortium, Maquet AG, MicroDexterity Systems, Inc, Ross-Hime Designs, Inc and
Stereotaxis, Inc.
The Company's SOCRATES system is unique in its ability to remotely control
a robotic arm. There are numerous video conferencing products and companies
which could provide remote audio and video feeds from the OR, as well as
telestration capabilities.
MARKETING
The Company's products are sold throughout the world. Orders are shipped as
they are received and, therefore, no material backlog has existed to date. For
the year ended December 31, 2002, no single customer accounted for more than 10%
of revenue. As of December 31, 2002, two customers each accounted for 14% of
accounts receivable and two other customers accounted for 11% and 10% of
accounts receivable, respectively. For the year ended December 31, 2001, the
Company had one distributor, SIC System SRL of Italy, which accounted for
approximately 6% of the revenue for the year and 17% of the accounts receivable
balance. For the year ended December 31, 2000, the Company had one distributor,
Kino Corporation of Japan, which accounted for approximately 21% of the revenue
for the year and 18% of accounts receivable and a second customer, Endoscopic
Technologies, Inc., that accounted for approximately 10% of the revenue for the
year and 15% of accounts receivable.
Should the Company cease to use current distributors to distribute products
throughout the world, it would have to identify new distributors to service
these markets. While this may cause a delay in revenues in the short term, in
the long term, the Company believes that it would be possible to secure new
distributors.
In the United States, the Company sells directly to hospitals through an
employee based sales organization. In Western Europe, the Company also has an
employee based sales organization, which is principally focused on sales in
France and Germany. The Company has co-marketed the ZEUS product line with
SIC System, SRL in Italy and Medtronic, Inc. in Europe, the Middle East and
Africa. The Company's agreement with Medtronic expired on December 31, 2001.
Throughout the rest of the world, the Company uses independent distributor
organizations including Kino Corporation and the Ethicon Endo-Surgery Division
of Johnson & Johnson, Inc. Under the Company's OEM agreement with Stryker
Corporation, Stryker may distribute the Company's HERMES product for control of
various Stryker endoscopic devices on a worldwide basis.
In November 2001, the Company entered into a HERMES alliance agreement with
Smith and Nephew Endoscopy, and, in February 2002, with Karl Storz Endoscopy
America. Both Smith & Nephew and Karl Storz are leading manufacturers of
endoscopic medical equipment. These agreements define a collaboration between
the Company and each of these two medical device companies to create
HERMES-Ready interfaces for 40 additional medical device models.
RESEARCH AND DEVELOPMENT
The Company's research and development function is focused on the
development of new procedures, new medical products and improvements to existing
products. In addition, research and development expense reflects the Company's
efforts to obtain additional FDA approval of certain products and processes and
to maintain the highest quality standards of existing products. The Company's
research and development expenses were $10,903,000 (45% of revenue), $12,034,000
(47% of revenue), and $11,564,000 (53% of revenue) for the years ended December
2002, 2001 and 2000, respectively.
GOVERNMENT REGULATION
The medical devices manufactured and marketed by the Company are subject to
regulation by the FDA and, in most instances, by state and foreign governmental
authorities. Under the Federal Food, Drug and Cosmetic Act, and regulations
thereunder, manufacturers of medical devices must comply with certain policies
and procedures that regulate the composition, labeling, testing, manufacturing,
packaging and distribution of medical devices. In July 2000, the FDA notified
the Company that robotic surgical systems would be reviewed and cleared for
market under the 510(k) premarket notification pathway that is currently applied
to most medical devices, including the Company's AESOP, HERMES, SOCRATES and
ZEUS products. The Company currently has 15 premarket notifications completed as
listed on the FDA web-site (www.accessdata.fda.gov). ZEUS follows the 510(k)
approval process, however, clearance for some indications for use required
clinical studies. Some future indications may also require clinical studies.
The Company is currently enrolling patients in the following controlled
clinical trials:
o Coronary Artery Bypass Grafting: The Company is now enrolling patients in a
FDA-approved multi-center, non-randomized, controlled trial for coronary
artery bypass grafting. This study, which will eventually involve several
ZEUS sites, is a pivotal study required for FDA market clearance. The
Company anticipates continuing this study throughout 2003.
o Internal Mammary Artery Harvesting: The Company received FDA approval to
conduct a clinical trial at six sites using the ZEUS system to harvest the
left internal mammary artery, a procedure that is part of a standard
coronary artery bypass grafting surgery. The Company initiated this study
in February 2001, completed the study in September 2002, and submitted a
510(k) application for non-intracardiac thoracoscopic clearance in November
2002. The Company received some minor questions from FDA relative to the
submission, which were answered and submitted back to the Agency. The
Company believes that it will receive FDA clearance of the 510(k)
submission in the second quarter of 2003.
o General Laparoscopic: The Company has been very active in clinical research
in the area of general laparoscopic surgery. The FDA has granted the
Company IDE approval for a study on laparoscopic cholecystectomy (a
procedure to remove the gall bladder) and laparoscopic nissen
fundoplication (a procedure to correct acid reflux disease) . The Company
sponsored randomized, controlled trials in the
United States and Mexico for both of these procedures. The Company
submitted a 510(k) application in April 2002 and received FDA clearance in
September 2002.
In addition to these trials, the Company is currently conducting
feasibility studies in Mitral valve replacement and repair.
The FDA may require testing and surveillance programs to monitor the effect
of approved products, which have been commercialized, and it has the power to
prevent or limit further marketing of a product based on the results of these
post-marketing programs. The FDA also conducts inspections to determine
compliance with both good manufacturing practice regulations and medical device
reporting regulations. If the FDA were to conclude that the Company was not in
compliance with applicable laws or regulations, it could institute proceedings
to detain or seize products, issue a recall, impose operating restrictions,
assess civil penalties against employees and recommend criminal prosecution.
Furthermore, the FDA could proceed to ban, or request recall, repair,
replacement or refund of the cost of, any device manufactured or distributed.
The FDA also regulates record keeping for medical devices and reviews
hospital and manufacturers' required reports of adverse experiences to identify
potential problems with FDA-cleared devices. Aggressive regulatory action may be
taken due to adverse experience reports. FDA device tracking and post-market
surveillance requirements are expected to increase future regulatory compliance
costs.
Diagnostic-related groups ("DRG") reimbursement schedules regulate the
amount the United States government, through the Health Care Financing
Administration ("HCFA"), will reimburse hospitals and doctors for the inpatient
care of persons covered by Medicare. While the Company is unaware of specific
domestic price resistance as a result of DRG reimbursement policies, changes in
current DRG reimbursement levels could have an adverse effect on its domestic
pricing flexibility.
The Company's business outside the United States is subject to medical
device laws in individual foreign countries. These laws range from extensive
device approval requirements in some countries to requests for data or
certifications in other countries. Generally, regulatory requirements are
increasing in these countries. In addition, government funding of medical
procedures is limited and in certain instances being reduced. In the European
Economic Union ("EEU"), the regulatory systems have been harmonized and approval
to market in EEU countries can be obtained through a single agency. The
Company's AESOP, HERMES and ZEUS products, are approved for CE-marking, enabling
marketing of these devices throughout the EEU countries. In addition, these
products are also approved in Canada, Middle East (Egypt, Saudi Arabia, and
Israel), Korea, Taiwan, Singapore, Japan (clinical studies), and Mexico. AESOP
is also approved in Australia.
PATENTS, LICENSES AND PROPRIETARY RIGHTS
Protection of the Company's intellectual property is important to the
Company's business. The Company maintains a policy of seeking device and method
patents on its inventions, obtaining copyrights on copyrightable materials and
entering into proprietary information agreements with its employees and
consultants with respect to technology, which it considers important to its
business. The Company also files for trademark registration and service mark
registration on those marks, which may be used, in marketing efforts with
respect to the products developed, sold and distributed by the Company. The
Company also relies upon trade secrets, unpatented know-how and continuing
technological innovation to develop and maintain its competitive position.
The Company currently holds 24 issued United States patents, 7 foreign
patents and has 75 domestic and foreign patent applications pending disclosing
concepts related to medical devices and methods, medical robotics and speech
recognition applications. The Company has filed corresponding international
patent applications on certain of its key United States patents.
There can be no assurance that patents will issue from any of the pending
applications, or that issued patents will be of sufficient scope to provide
meaningful protection of the Company's technology. In addition, there can be no
assurance that any patents issued to the Company will not be challenged,
invalidated or
circumvented, or that the rights granted thereunder will provide proprietary
protection or commercial advantage to the Company. Notwithstanding the scope of
the patent protection available to the Company, a competitor could develop other
devices or methods for enabling MIS procedures that do not require the use of
robotics or speech recognition tools, aspects of which are patented or pending
patents.
The Company is involved in substantial litigation regarding patents and
other intellectual property rights (See Note 12). Litigation, which could
ultimately result in substantial cost to and diversion of effort by the Company,
has been necessary and may continue to be necessary to enforce patents issued or
licensed to the Company, to protect trade secrets or know-how owned by the
Company, or to defend the Company against claimed infringement of the rights of
others and to determine the scope and validity of the proprietary rights of
others. Adverse determinations in such litigation could subject the Company to
significant liabilities to third parties, could require the Company to seek
licenses from third parties and could prevent the Company from manufacturing,
selling or using some or all of its products, any of which could have a material
adverse affect on the Company's business, financial condition or results of
operations.
The Company believes that it has been vigilant in reviewing the patents of
others with regard to the Company's products. However, from time to time, the
Company has been and may continue to be subject to claims of, and legal actions
alleging, infringement by the Company of the patent rights of others. For
further discussion of the Company's current or threatened litigation see the
description below in the section entitled "Litigation" Part I, Item 1.
PRODUCT LIABILITY AND INSURANCE
Historically, the medical device industry has been subject to product
liability claims. Such claims could be asserted against the Company in the
future for events not known to management at this time. Management has adopted
risk management practices, including procurement of product liability insurance
coverage, which management believes are prudent.
EMPLOYEES
As of December 31, 2002, the Company had 184 full-time employees including
79 employees in sales and marketing, 53 employees in research and development,
28 employees in production and 24 employees in administration. It has never
experienced a work stoppage as a result of labor disputes and none of its
employees are represented by a labor organization.
INDUSTRY SEGMENT AND INTERNATIONAL OPERATIONS
The medical device industry is the single industry segment in which the
Company operates. The Company's export revenues were $6,360,000 (26% of
revenue), $10,273,000 (40% of revenue) and $9,290,000 (43% of revenue) in 2002,
2001 and 2000, respectively.
As the Company's foreign business expands, it will be subject to such
special risks as exchange controls, currency devaluation, dividend restrictions,
the imposition or increase of import or export duties and surtaxes, and
international credit or financial problems. Since its international operations
will require the Company to hold assets in foreign countries denominated in
local currencies, some assets will be dependent for their U.S. dollar valuation
on the values of several foreign currencies in relation to the U.S. dollar.
RECENT DEVELOPMENTS
On March 7, 2003, the Company entered into an Agreement and Plan of Merger
with Intuitive Surgical, Inc. At the effective time of the merger, Intuitive
Merger Corporation, formerly Iron Acquisition
corporation, a newly formed subsidiary of Intuitive Surgical, Inc., will be
merged with and into Computer Motion, Inc., with Computer Motion, Inc. surviving
the merger and continuing as a wholly owned subsidiary of Intuitive Surgical,
Inc. 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
capitalization of Intuitive Surgical and Computer Motion and the market price of
Computer Motion common stock as of the date of this report and assuming that the
merger is completed on June 20, 2003, we estimate that the exchange ratio will
be approximately 0.52. The exchange ratio will be adjusted proportionately in
the event that the proposed reverse split of Intuitive Surgical's common stock
is approved by Intuitive Surgical's stockholders and implemented by Intuitive
Surgical's board of directors.
The final exchange ratio will be calculated based on the total number of fully
diluted shares outstanding for Intuitive Surgical and Computer Motion
immediately prior to the effective time of the merger. The number of Computer
Motion's fully diluted shares will vary based on the number of shares of
Computer Motion common stock into which Computer Motion's Series D convertible
preferred stock will be convertible and the number of shares of Computer Motion
common stock which may be issued to pay accrued dividends on the Series D
convertible preferred stock upon conversion. All shares of Computer Motion
Series D convertible preferred stock will convert into shares of Computer Motion
common stock immediately prior to the effective time of the merger. Under the
terms of the Series D convertible preferred stock, in the event that the average
of the closing bid prices of Computer Motion's common stock for the 20
consecutive trading days ending 15 days prior to the Computer Motion special
meeting is below $1.86 per share, the conversion ratio for Computer Motion's
Series D convertible preferred stock could increase. As a result, the exchange
ratio in the merger may decrease and, therefore, Computer Motion common
stockholders would receive a lesser number of Intuitive Surgical shares, and
Computer Motion preferred stockholders would receive a greater number of
Intuitive Surgical shares, in the merger. Stockholders may visit Intuitive
Surgical's website, www.intuitivesurgical.com, or Computer Motion's website,
www.computermotion.com, for announcements regarding the exchange ratio.
Computer Motion stockholders will receive cash in lieu of any fractional shares
of Intuitive Surgical common stock.
In connection with the proposed merger, Computer Motion and Intuitive
Surgical have entered into a Loan and Security Agreement, under which Intuitive
Surgical has agreed to provide a short-term secured bridge loan facility of up
to $7.3 million. The loan will terminate and all outstanding amounts will become
due and payable 120 days following termination of the merger agreement (the
"Maturity Date"). Interest on the loan will accrue at a rate of 8% per annum and
will be payable on the Maturity Date.
Additionally, pursuant to the merger agreement, Computer Motion and
Intuitive Surgical filed stipulations on March 10, 2003 to immediately stay all
pending litigation proceedings between them until August 31, 2003, subject to
the stay being lifted if the merger agreement is terminated, or subject to the
cases being dismissed upon consummation of the transaction contemplated by the
merger agreement.
On March 6, 2003, the Company entered into a Stock Exchange Agreement (the
"Exchange Agreement") with all of the holders of outstanding shares of Series
C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock
pursuant to which such holders agreed to exchange their Series C-1 Convertible
Preferred Stock and Series C-2 Convertible Preferred Stock for a like number of
shares of the Series D-1 Convertible Preferred Stock and Series D-2 Convertible
Preferred Stock. The shares of the Series D Convertible Preferred Stock will
convert into shares of common stock immediately prior to the consummation of the
merger described above. Pursuant to the terms of the Exchange Agreement, in the
event the Company does not consummate the merger by September 30, 2003, the
Company will file its Certificate of Designations Setting Forth the Preferences,
Rights and Limitations of the Series E Convertible Preferred Stock with the
Secretary of State of Delaware, and, holders of outstanding shares of Series D-1
Convertible Preferred Stock and Series D-2 Convertible Preferred Stock will have
the right to exchange such Series D Convertible Preferred Stock for a like
number of Series E Convertible Preferred Stock. As an inducement to the holders
of shares of Series C Convertible Preferred Stock to enter into the Exchange
Agreement, the Company has agreed to lower the exercise price of all outstanding
Series C-1 warrants and Series C-2 warrants (described more particularly below)
to $1.50 per share, provided that such holders exercise such warrants prior to
10 days following the mailing of a proxy statement relating to the Company's
meeting of stockholders to approve the merger.
On February 13, 2003, the Company entered into a Loan and Security
Agreement with Agility Capital, LLC, for a short-term secured bridge loan in the
aggregate principal amount of $2,300,000. The proceeds of the bridge loan were
used to provide funds for the issuance of a letter of credit to support the
issuance of a bond as required by the District Court of Delaware in response to
litigation currently pending. The bridge loan is evidenced by a Secured
Promissory Note that bears interest at a rate of 9% per annum, is secured by all
of the Company's assets and is payable in full on November 12, 2003. In
connection with the bridge loan, the Company issued to Agility Capital a warrant
to purchase up to an aggregate of 500,000 shares of common stock at a purchase
price of $0.97 per share. The Company is in the process of registering the
resale of the shares on its registration statement of Form S-3 with the
Securities and Exchange Commission.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond its control. A number of these risks
are highlighted below. These risks could affect its actual future results and
could cause them to differ materially from any forward-looking statements the
Company has made.
THE COMPANY HAS A HISTORY OF LOSSES, AND EXPECTS TO INCUR LOSSES IN THE FUTURE
SO IT MAY NEVER ACHIEVE PROFITABILITY.
From the Company's formation, it has incurred significant losses. For the
three years ended December 31, 2002, 2001, and 2000 the Company has incurred net
losses of $21,151,000, $16,413,000 and $16,349,000, respectively. In addition,
the Company has incurred net losses from operations since inception and as of
December 31, 2002 has an accumulated deficit of $116,674,000. The Company
expects to incur additional losses as it continues spending for research and
development efforts, clinical trials, manufacturing capacity and sales force
expansion. As a result, the Company will need to generate significant revenues
to achieve and maintain profitability. The Company cannot assure its
stockholders that it will ever achieve significant commercial revenues,
particularly from sales of its ZEUS product line, which is still under
development and awaiting additional FDA clearances for certain significant
applications and procedures, or that the Company will become profitable. It is
possible that the Company may encounter substantial delays or incur unexpected
expenses related to the clinical trials, market introduction and acceptance of
the ZEUS platform, or any future products. If the time required to generate
significant revenues and achieve profitability is longer than anticipated, the
Company may not be able to continue its operations.
SINCE THE COMPANY'S OPERATING EXPENDITURES CURRENTLY EXCEED ITS REVENUES, ANY
FAILURE TO RAISE ADDITIONAL CAPITAL OR GENERATE REQUIRED WORKING CAPITAL COULD
REDUCE THE COMPANY'S ABILITY TO COMPETE AND PREVENT IT FROM TAKING ADVANTAGE OF
MARKET OPPORTUNITIES.
The Company's operations to date have consumed substantial amounts of cash,
and it expects its capital and operating expenditures will exceed revenues for
at least the next year. The Company believes it will require substantial working
capital to fund its operations for the current year and beyond. Management is in
the process of pursuing financial arrangements to support operations through and
after December 31, 2003. Management believes funding may be obtained from the
following sources: current cash balances, the proceeds from the exercise of
warrants, the issuance of additional debt or equity securities, funding from
strategic partners and/or sale of assets. The Company cannot assure its
stockholders that additional capital will be available on terms favorable to it,
or at all. The various elements of the Company's business and growth strategies,
including its introduction of new products, the expansion of its marketing and
distribution activities, and obtaining regulatory approval or market acceptance
will require additional capital. If adequate funds are not available or are not
available on acceptable terms, the Company's ability to fund those business
activities essential to its ability to operate profitably, including further
research and development, clinical trials, and sales and marketing activities,
would be significantly limited.
FAILURE TO COMPLETE THE MERGER WITH INTUITIVE SURGICAL COULD HAVE AN ADVERSE
IMPACT ON THE COMPANY AND ITS STOCK PRICE
Since entering into the merger agreement on March 7, 2003, the Company has
made planning and operations decisions on the basis that the merger will be
completed. These planning and operations decisions may have been different had
the Company not entered into the merger agreement. For example, if the Company
had not entered into the merger agreement, it may have pursued a debt or equity
financing transaction in order to assure access to sufficient working capital as
an independent company, rather than rely on the availability of Intuitive
Surgical's cash assuming the merger will be completed. Moreover, the merger
agreement contains restrictions on the Company's incurrence of debt and issuance
of equity securities while the merger is pending. If the merger is not
completed, not only will the Company not have the benefit of Intuitive
Surgical's cash or have obtained other financing, but the Company also will have
incurred a significant amount of non-operating expenses associated with the
merger that it otherwise would not have incurred. Consequently, if the merger is
not completed, the Company's financial condition likely will be worse than it
would have been had it never entered into the merger agreement.
If the Company and Intuitive Surgical fail to complete the merger, the
Company will face the difficulties of competing with limited cash resources and
will need to attempt to raise additional debt or equity capital. Such financing
may be available only on terms materially adverse to the Company, and may not be
available at all.
Additionally, if the merger is not completed, the Company's stock would no
longer be influenced by the exchange ratio established by the merger agreement,
which could negatively impact the Company's current market valuation and stock
price.
THE COMPANY HAS NOT OBTAINED THE CONSENT OF ARTHUR ANDERSEN LLP TO BE NAMED IN
THIS FORM 10-K AS HAVING AUDITED THE COMPANY'S FINANCIAL STATEMENTS. THIS WILL
LIMIT YOUR ABILITY TO ASSERT CLAIMS AGAINST ARTHUR ANDERSEN LLP.
After reasonable efforts, the Company has been unable to obtain the consent of
Arthur Andersen LLP to the incorporation into the registration statement of
their report with respect to the consolidated financial statements of the
Company for the years ended December 31, 2001 and December 31, 2000 which appear
in its Annual Report on Form 10-K for the year ended December 31, 2002. Under
these circumstances, Rule 437(a) under the Securities Act of 1933 permits the
registration statement to be filed without a written consent from Arthur
Andersen. The absence of such consent may limit your recovery on certain claims.
In particular, and without limitation, you will not be able to assert claims
against Arthur Andersen under Section 11 of the Securities Act of 1933 for any
untrue statement of a material fact contained in the consolidated financial
statements of the Company for the years ended December 31, 2001 and December
31, 2000 or any omission to state a material fact required to be stated therein
which appear in the Company's Annual Report on Form 10-K for the year ended
December 31 ,2002.
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 THE COMPANY AND MAY IMPEDE THE COMPANY'S
ACCESS TO CAPITAL MARKETS.
Arthur Andersen LLP audited the Company's financial statements included in
this form 10-K for the years ended December 31, 2001 and 2000. On March 14,
2002, an indictment was unsealed charging Arthur Andersen LLP with federal
obstruction of justice arising from the government's investigation of Enron
Corp. On June 15, 2002, Arthur Andersen LLP was convicted of these charges. The
impact of this conviction on Arthur Andersen LLP's financial condition may
adversely affect the ability of Arthur Andersen LLP to satisfy any claims
arising from its provision of auditing services to the Company.
Should the Company seek to access the public capital markets, SEC rules
will require the Company to include or incorporate by reference in any
prospectus three years of audited financial statements. The SEC's current rules
would require the Company to present audited financial statements for one or
more fiscal years audited by Arthur Andersen LLP 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 LLP, it is possible
that the available audited financial statements for the years ended December 31,
2001 and 2000 audited by Arthur Andersen LLP might not satisfy the SEC's
requirements. In that case, the Company would be unable to access the public
capital markets unless an independent accounting firm, is able to audit the
financial statements originally audited by Arthur Andersen LLP. 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.
IF THE COMPANY'S PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, THE COMPANY WILL NOT
BE ABLE TO GENERATE THE REVENUE NECESSARY TO SUPPORT ITS BUSINESS.
The Company anticipates that ZEUS will comprise a substantial majority of
its sales in the future and its future success therefore depends on the
successful development, commercialization and market acceptance of this product.
Even if the Company is successful in obtaining the necessary regulatory
clearances or approvals for ZEUS, its successful commercialization will depend
upon the Company's ability to demonstrate the clinical safety and effectiveness,
ease-of-use, reliability and cost-effectiveness of this product in a clinical
setting. The Company cannot assure its investors that the FDA will allow it to
conduct further clinical trials or that ZEUS will prove to be safe and effective
in clinical trials under United States or international regulatory requirements.
It is also possible that the Company may encounter problems in clinical testing
that cause a delay in or prohibits commercialization of ZEUS. Moreover, the
clinical trials may identify significant technical or other obstacles to
overcome prior to the commercial deployment of ZEUS, resulting in significant
additional product development expense and delays. Even if the safety and
effectiveness of procedures using ZEUS are established, surgeons may elect not
to recommend the use of the product for any number of reasons. Broad use of the
Company's products will require significant surgeon training and practice, and
the time and expense required to complete such training and practice could
adversely affect market acceptance. Successful commercialization of the
Company's products will also require that the Company satisfactorily address the
needs of various decision makers in the hospitals that constitute the target
market for its products and to address potential resistance to change in
existing surgical methods. If the Company is unable to gain market acceptance of
its products, the Company will not be able to sell enough of its products to be
profitable, and the Company may be required to obtain additional funding to
develop and bring to market alternative products.
IF THE COMPANY DOES NOT OBTAIN AND MAINTAIN NECESSARY DOMESTIC REGULATORY
APPROVALS, THE COMPANY WILL NOT BE ABLE TO MARKET AND SELL ITS PRODUCTS IN THE
UNITED STATES.
The Company's products in the United States are regulated as medical
devices by the FDA. The FDA strictly prohibits the marketing of FDA-cleared or
approved medical devices for unapproved uses. Failure to receive or delays in
receipt of FDA clearances or approvals, including any resulting need for
additional clinical trials or data as a prerequisite to approval or clearance,
or any FDA conditions that limit the Company's ability to market its products
for particular uses or indications, could impair the Company's ability to
effectively develop a market for its products and impair its ability to operate
profitably in the future.
The Company's operations are subject to the FDA's Quality System Regulation
(a federal regulation governing medical devices) and ISO-9001 (a global standard
for quality systems) and similar regulations in other countries, including
EN-46001 Standards (the European standard for quality systems), regarding the
design, manufacture, testing, labeling, record keeping and storage of devices.
Ongoing compliance with FDA's Quality System Regulation requirements and other
applicable regulatory requirements will be monitored through periodic inspection
by federal and state agencies, including the FDA, and comparable agencies in
other countries. The Company's manufacturing processes are subject to stringent
federal, state and local regulations governing the use, generation, manufacture,
storage, handling and disposal of certain materials and wastes. Failure to
comply with applicable regulatory requirements can result in, among other
things, suspensions or withdrawals of approvals, product seizures, injunctions,
recalls of products, operating restrictions, and civil fines and criminal
prosecution. Delays or failure to receive approvals or clearances for the
Company's current submissions, or loss of previously received approvals or
clearances, would materially adversely affect the marketing and sales of its
products and impair its ability to operate profitably in the future.
THE COMPANY'S PRODUCTS ARE SUBJECT TO VARIOUS INTERNATIONAL REGULATORY PROCESSES
AND APPROVAL REQUIREMENTS. IF THE COMPANY DOES NOT MAINTAIN THE NECESSARY
INTERNATIONAL REGULATORY APPROVALS, THE COMPANY WILL NOT BE ABLE TO MARKET AND
SELL ITS PRODUCTS IN FOREIGN COUNTRIES.
To be able to market and sell the Company's products in other countries, it
must obtain regulatory approvals and comply with the regulations of those
countries. For instance, 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. The Company has obtained
the CE mark for all of its products, which means that these products may
currently be sold in all of the member countries of the European Union.
If the Company modifies existing products or develops new products in the
future, including new instruments, the Company will need to apply for permission
to affix the CE mark to such products. In addition, the Company will be subject
to annual regulatory audits in order to maintain the CE mark permissions it has
already obtained. If the Company is unable to maintain permission to affix the
CE mark to its products, the Company will no longer be able to sell its products
in member countries of the European Union.
INTERNATIONAL SALES OF THE COMPANY'S PRODUCTS ACCOUNT FOR A SIGNIFICANT PORTION
OF ITS REVENUES AND THE COMPANY'S GROWTH MAY BE LIMITED IF THE COMPANY IS UNABLE
TO SUCCESSFULLY MANAGE THESE INTERNATIONAL ACTIVITIES.
The Company's business currently depends in large part on its sales
activities in Europe and Asia, and the Company intends to expand its presence
into additional foreign markets. Sales to markets outside of the United States
accounted for approximately 26% of the Company's sales for the year ended
December 31, 2002. The Company is subject to a number of challenges that relate
to its international business activities. These challenges include:
o the risks associated with foreign currency exchange rate fluctuation;
o failure of local laws to provide the same degree of protection against
infringement of the Company's intellectual property;
o certain laws and business practices that could favor local competitors,
which could slow the Company's growth in international markets;
o building an organization capable of supporting geographically dispersed
operations; and
o the expense of establishing facilities and operations in new foreign
markets.
Currently, the majority of the Company's 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 the Company's products less
competitive in international markets. If the Company is unable to meet and
overcome these challenges, its international operations may not be successful,
which would limit the growth of the Company's business.
THE COMPANY MAY NEVER SELL ENOUGH PRODUCTS TO BE PROFITABLE BECAUSE THE
COMPANY'S CUSTOMERS MAY CHOOSE TO PURCHASE ITS COMPETITORS' PRODUCTS OR MAY NOT
ACCEPT THE COMPANY'S PRODUCTS.
The Minimally Invasive Surgery ("MIS") market has been, and will likely
continue to be, highly competitive. Many competitors in this market have
significantly greater financial resources and experience than the Company. In
addition, some of our competitors, including Intuitive Surgical, have been, and
may continue to be able to market their products sooner than the Company if they
are able to achieve regulatory approval before the Company. Many medical
conditions that can be treated using the Company's products can also be treated
by pharmaceuticals or other medical devices and procedures. Many of these
alternative treatments are widely accepted in the medical community and have a
long history of use. In addition, technological advances with other procedures
could make such therapies more effective or less expensive than using the
Company's products
and could render the Company's products obsolete or unmarketable. As a result,
the Company cannot be certain that physicians will use the Company's products to
replace or supplement established treatments or that its products will be
competitive with current or future technologies.
IF SURGEONS OR INSTITUTIONS ARE UNABLE TO OBTAIN REIMBURSEMENT FROM THIRD-PARTY
PAYORS FOR PROCEDURES USING THE COMPANY'S PRODUCTS, OR IF REIMBURSEMENT IS
INSUFFICIENT TO COVER THE COSTS OF PURCHASING THE COMPANY'S PRODUCTS, THE
COMPANY BE UNABLE TO GENERATE SUFFICIENT SALES TO SUPPORT ITS BUSINESS.
In the United States, the Company's products are primarily acquired by
medical institutions that bill various third-party payors, such as Medicare,
Medicaid and other government programs, and private insurance plans for the
healthcare services they provide their patients. Third-party payors are
increasingly scrutinizing whether to cover new products and, if so, the level of
reimbursement. There can be no assurance that third-party reimbursement and
coverage for the Company's products will be available or adequate, that current
reimbursement amounts will not be decreased in the future, or that future
legislation, regulation or reimbursement policies of third-party payors will not
otherwise affect the demand for the Company's products or the Company's ability
to sell its products on a profitable basis, particularly if the Company's
products are more expensive than competing surgical or other procedures. If
third-party payor coverage or reimbursement is not available or inadequate,
purchasers of the Company's products would lose their ability to pay for the
Company's products, and the Company's ability to make future sales and collect
on outstanding accounts would be significantly impaired, which would limit the
Company's ability to operate profitably
IF THE COMPANY IS UNABLE TO PROTECT THE INTELLECTUAL PROPERTY CONTAINED IN ITS
PRODUCTS FROM USE BY THIRD PARTIES, THE COMPANY'S ABILITY TO COMPETE IN THE
MARKET WILL BE HARMED.
The Company's success depends, in part, on its ability to obtain and
maintain patent protection for its products by filing United States and foreign
patent applications related to its technology, inventions and improvements.
However, there can be no assurance that third parties will not seek to assert
that the Company's devices and systems infringe their patents or seek to expand
their patent claims to cover aspects of the Company's technology. As a result,
there can be no assurance that the Company will not become subject to future
patent infringement claims or litigation in a court of law, interference
proceedings, or opposition to a patent granted in a foreign jurisdiction. The
defense and prosecution of such intellectual property claims are costly,
time-consuming, divert the attention of management and technical personnel and
could result in substantial cost and uncertainty regarding the Company's future
viability. Future litigation or regulatory proceedings, which could result in
substantial cost and uncertainty, may also be necessary to enforce the Company's
patent or other intellectual property rights or to determine the scope and
validity of other parties' proprietary rights. Any public announcements related
to such litigation or regulatory proceedings initiated by the Company, or
initiated or threatened against the Company by its competitors, could adversely
affect the price of the Company's stock.
The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position, and the Company typically requires its employees, consultants and
advisors to execute confidentiality and assignment of inventions agreements in
connection with their employment, consulting or advisory relationships. There
can be no assurance, however, that these agreements will not be breached or that
the Company will have adequate remedies for any breach. Failure to protect the
Company's intellectual property would limit its ability to produce and/or market
its products in the future and would likely adversely affect the Company's
revenues generated by the sale of such products.
THE COMPANY IS INVOLVED IN INTELLECTUAL PROPERTY LITIGATION WITH INTUITIVE
SURGICAL AND BROOKHILL-WILK THAT MAY HURT THE COMPANY'S COMPETITIVE POSITION,
MAY BE COSTLY TO THE COMPANY AND MAY PREVENT THE COMPANY FROM SELLING ITS
PRODUCTS.
On May 10, 2000, the Company filed a lawsuit in United States District
Court alleging that Intuitive Surgical's da Vinci surgical robot system
infringes on its United States Patent Nos. 5,524,180, 5,878,193, 5,762,458,
6,001,108, 5,815,640, 5,907,664, 5,855,583 and 6,063,095. Subsequently, Computer
Motion's complaint was amended to add allegations that Intuitive's da Vinci
surgical robot infringed two additional Computer Motion patents United States
Patent Nos. 6,244,809 and 6,102,850. These patents concern methods and devices
for conducting various aspects of robotic surgery. Intuitive has served an
Answer and Counterclaim alleging non-infringement of each patent-in-suit, patent
invalidity and unenforceability. Discovery is still underway. The parties have
filed cross motions for summary judgment on the issue of patent infringement
relating to the '108, '664, '809, and '850 patents. The Court recently granted
Intuitive's motion for summary judgment of non-infringement relating to the '850
patent. The Court also recently granted our motion for summary judgment relating
to the '809 patent. The Court has not ruled on any of the remaining motions at
this time. Pursuant to the merger agreement with Intuitive, Computer Motion and
Intuitive filed on March 10, 2003, stipulations to stay this litigation until
August 31, 2003, subject to the stay being lifted if the merger agreement is
terminated, or subject to this case being dismissed upon consummation of the
transactions contemplated by the merger agreement.
On or about December 7 and 8, 2000, the United States Patent and Trademark
Office (USPTO) granted three of Intuitive's petitions for a declaration of an
interference relating to the Company's 5,878,193, 5,907,664, and 5,855,583
patents. On March 30, 2002, the three judge panel of the Board of Patent
Interferences issued decision orders on the parties' preliminary motions. The
Board granted the Company's motion on Interference No. 104,643 and issued an
order for Intuitive to show cause why judgment should not be entered against
Intuitive on this interference. The Board denied the Company's motion on the
Interference No. 104,644 and entered judgment against the Company. The Board
denied the Company's motions on the Interference No. 104,645, deferred decision
on two of Intuitive's motions, and granted-in-part, denied-in-part and
deferred-in-part on one of Intuitive's motions. The Board's decision on
Interference No. 104,645 invalidated some of the parties' claims, affirmed some
of Intuitive's claims and provided for further proceedings related to two of our
claims and is therefore not final. On July 25, 2002, Computer Motion filed a
civil action seeking review of the two adverse decisions in the United States
District Court for the District of California. Pursuant to the merger agreement
with Intuitive, Computer Motion and Intuitive filed on March 10, 2003,
stipulations to stay this litigation until August 31, 2003, subject to the stay
being lifted if the merger agreement is terminated, or subject to this case
being dismissed upon consummation of the transactions contemplated by the merger
agreement.
On February 21, 2001, Brookhill-Wilk filed suit against the Company
alleging that its ZEUS surgical system infringed upon Brookhill-Wilk's United
States Patent Nos. 5,217,003 and 5,368,015. Brookhill-Wilk's complaint seeks
damages, attorneys' fees and increased damages alleging willful patent
infringement. On March 21, 2001, the Company 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 Brookhill-Wilk's Patent No. 5,217,003 in a way that the Company
believes excludes current applications of the Company's ZEUS surgical system. In
light of this decision, on November 13, 2001, the parties to Brookhill Wilk v.
Computer Motion, Inc. agreed to dismiss the case without prejudice. On March 25,
2002, Judge Alvin K. Hellerstein dismissed the case without prejudice.
On March 30, 2001, Intuitive and IBM Corporation filed suit alleging that
the Company's AESOP, ZEUS and HERMES products infringe United States Patent No.
6,201,984, which was issued on March 13, 2001. The complaint seeks damages, a
preliminary injunction, a permanent injunction, and costs and attorneys' fees.
The claims are directed to a surgical system employing voice recognition for
control of a surgical instrument. Each of the asserted claims are limited to a
surgical system employing voice recognition for control of a surgical robot and
literally read on the Company's current AESOP product and the Company's ZEUS and
HERMES products to the extent they are used with AESOP. A jury trial has been
held on the issues of patent invalidity due to lack
of enablement and failure to disclose the best mode in addition to damages. The
Company's defense of unenforceability due to prosecution laches was tried before
the District Court Judge. The jury returned a verdict finding IBM's United
States Patent No. 6,201,984 valid, and finding Intuitive was damaged in an
amount of $4.4 million. At December 31, 2002, the Company recorded a $4.4
million litigation provision for this related jury verdict that was recorded
within the litigation provision within the accompanying consolidated statements
of operations. In addition, the litigation provision included in the
accompanying consolidated statements of operations includes legal expenses
incurred during the three years ended December 31, 2002. Prior to the jury's
verdict, the court ruled that the Company had not "willfully" infringed the
patent. On December 10, 2002, the Court rendered an adverse decision on our
prosecution laches defense and on December 11, 2002, issued a judgment in
Intuitive's and IBM's favor based upon the earlier jury verdict and the Court's
December 10, 2002 ruling. The case has entered the post-trial phase during which
we will be seeking judicial review of the jury's verdict and the Court's
December 10, 2002 ruling. Pursuant to the merger agreement with Intuitive,
Computer Motion and Intuitive filed on March 10, 2003, stipulations to stay this
litigation until August 31, 2003, subject to the stay being lifted if the merger
agreement is terminated, or subject to this case being dismissed upon
consummation of the transactions contemplated by the merger agreement.
The Company believes that all of its major product lines could be affected
by this litigation. The patents subject to this litigation are an integral part
of the technology incorporated in the Company's AESOP, ZEUS and HERMES product
lines which together accounted for approximately 76% of its revenues for the
year ended December 31, 2002. If the stay is lifted and the Company loses the
counterclaim on the patent suit brought by Intuitive or the patent infringement
claims by Intuitive or IBM or if the decision in Brookhill-Wilk v. Intuitive
Surgical, Inc. is reversed, the Company may be prevented from selling its
products as currently configured without first obtaining a license to the
disputed technology from the successful party or modifying the product.
Obtaining a license could be expensive, or could require that the Company
license to the successful party some of its own proprietary technology, either
of which result could seriously harm the Company's business. In the event that a
successful party is unwilling to grant the Company a license, the Company will
be required to stop selling its products that are found to infringe the
successful party's patents unless the Company can redesign them so they do not
infringe these patents, which the Company may be unable to do. Whether or not
the Company is successful in these lawsuits in the event that the stay is
lifted, the litigation could consume substantial amounts of the Company's
financial and managerial resources. Further, because of the substantial amount
of discovery often involved in connection with this type of litigation, there is
a risk that some of the Company's confidential information could be compromised
by disclosure during the discovery process.
BECAUSE THE COMPANY'S INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND NEW
PRODUCT DEVELOPMENT, THE COMPANY'S FUTURE SUCCESS WILL DEPEND UPON ITS ABILITY
TO EXPAND THE APPLICATIONS OF THE COMPANY'S PRODUCTS.
The Company's success will depend to a significant extent upon its ability
to enhance and expand the utility of its products so that they gain market
acceptance. Failure to develop or introduce new products or product enhancements
on a timely basis that achieve market acceptance could have a material adverse
effect on the Company's business, financial condition and results of operations.
In the past, some of the Company's competitors have been able to develop
desirable product features (such as articulation of certain instruments and
three dimensional visualization of their products) earlier than the Company has.
The Company's inability to rapidly develop these features may have led to lower
sales of some of the Company's products. In addition, technological advances
with other therapies could make such therapies less expensive or more effective
than using the Company's products and could render its technology obsolete or
unmarketable. There can be no assurance that physicians will use the Company's
products to replace or supplement established treatments or that the Company's
products will be competitive with current or future technologies.
THE COMPANY MAY NOT BE ABLE TO EXPAND ITS MARKETING DISTRIBUTION ACTIVITIES IN
ORDER TO MARKET ITS PRODUCTS COMPETITIVELY.
The Company anticipates significantly increasing the number of sales
personnel to more fully cover its
target markets, particularly as the Company expands its product offerings. It is
possible the Company will be unable to compete effectively in attracting,
motivating and retaining qualified sales personnel. Additionally, the Company
currently intends to market and sell its products outside the United States and
Europe, principally through distributors. In order to accomplish this, the
Company will be required to expand its distributor network. The Company may not
be able to identify suitable distributors or negotiate acceptable distribution
agreements and any such distribution agreements may not result in significant
sales. If the Company is unable to identify, attract, motivate and retain
qualified sales personnel, suitable distributors or negotiate acceptable
distribution agreements, the Company may not be successful in expanding the
market for its products outside of the United States and Europe.
CONCENTRATION OF OWNERSHIP AMONG THE COMPANY'S EXISTING EXECUTIVE OFFICERS,
DIRECTORS AND PRINCIPAL STOCKHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING
SIGNIFICANT CORPORATE DECISIONS.
The Company's current directors and executive officers beneficially own
approximately 24.84% of its outstanding common stock. These stockholders, acting
together, have the ability to significantly influence the election of the
Company's directors and the outcomes of other stockholder actions and, as a
result, direct the operation of its business, including delaying or preventing a
proposed acquisition of the Company.
IF THE COMPANY LOSES ITS KEY PERSONNEL OR IS UNABLE TO ATTRACT AND RETAIN
ADDITIONAL PERSONNEL, THE COMPANY'S ABILITY TO COMPETE WILL BE HARMED.
The Company's future business and operating results depend in significant
part on its key management, scientific, technical and sales personnel, many of
whom would be difficult to replace, and future success will depend partially
upon the Company's ability to retain these persons and recruit additional
qualified management, technical, marketing, sales, regulatory, clinical and
manufacturing personnel. Competition for such personnel is intense and the
Company may have difficulty attracting or retaining such personnel. In addition,
the Company does not have employment agreements with the majority of its key
personnel and also does not maintain life insurance on any of its employees that
may make it more difficult to retain its key personnel in the future.
THE COMPANY'S FUTURE OPERATING RESULTS MAY FALL BELOW SECURITIES ANALYSTS' OR
INVESTORS' EXPECTATIONS, WHICH COULD CAUSE THE COMPANY'S STOCK PRICE TO DECLINE
AND DIMINISH THE VALUE OF ITS INVESTORS' HOLDINGS.
The Company's results of operations may vary significantly from quarter to
quarter depending upon numerous factors, including but not limited to, the
following:
o delays associated with the FDA and other regulatory clearance and approval
processes;
o healthcare reimbursement policies;
o timing and results of clinical trials;
o demand for its products;
o changes in pricing policies by the Company or its competitors;
o the number, timing and significance of its competitors' product
enhancements and new products;
o product quality issues; and
o component availability and supplier delivery performance.
In addition, the Company's operating results in any particular period may
not be a reliable indication of its future performance. It is likely that in
some future quarters, the Company's operating results will be below the
expectations of securities analysts or investors. If this occurs, the price of
the Company's common stock, and the value of its investors' holdings, will
likely decline.
THE COMPANY MAY INCUR SUBSTANTIAL COSTS DEFENDING SECURITIES CLASS ACTION
LITIGATION DUE TO ITS STOCK PRICE VOLATILITY.
The market price of the Company's common stock is likely to be volatile and
may be affected by a number of factors, including but not limited to, the
following:
o actual or anticipated decisions by the FDA with respect to approvals or
clearances of its competitors' products;
o actual or anticipated fluctuations in its operating results;
o announcements of technological innovations;
o new commercial products announced or introduced by the Company or its
competitors;
o changes in third party reimbursement policies;
o developments concerning the Company's or its competitors' proprietary
rights;
o conditions and trends in the medical device industry;
o governmental regulation;
o changes in financial estimates by securities analysts; and
o general stock market conditions.
Securities class action litigation has often been brought against companies
when the market price of their securities declines. The Company could be
especially prone to such risk because technology companies have experienced
greater than average stock price volatility in recent years. If the Company were
subject to securities litigation, the Company would incur substantial costs and
divert management's attention defending any such claims.
THE COMPANY'S RELIANCE ON SOLE OR SINGLE SOURCE SUPPLIERS COULD HARM ITS ABILITY
TO MEET DEMAND FOR THE COMPANY'S PRODUCTS IN A TIMELY MANNER OR WITHIN ITS
PROJECTED BUDGET.
The Company relies on independent contract manufacturers, some of which are
single source suppliers, for the manufacture of the principal components of its
products. In some instances, the Company relies on companies that are sole
suppliers of key components of its products. If one of these sole suppliers goes
out of business, the Company could face significant production delays until an
alternate supplier is found, or until the product could be redesigned and
revalidated to accommodate a new supplier's replacement component. In addition,
the Company generally submits purchase orders based upon its suppliers' current
price lists. Since the Company generally does not have written contracts for
future purchase orders with its suppliers, these suppliers may increase the cost
of the parts the Company purchases in the future.
The Company's manufacturing experience to date has been focused primarily
on assembling components produced by third-party manufacturers. In scaling up
manufacturing of new products, the Company may encounter difficulties involving
quality control and assurance, component availability, adequacy of control
policies and procedures, lack of qualified personnel and compliance with the
FDA's Quality System Regulations requirements. The Company may elect to
internally manufacture components currently provided by third parties or to
implement new production processes. The Company cannot assure its stockholders
that manufacturing yields or costs will not be adversely affected by a
transition to in-house production or to new production processes if such efforts
are undertaken. If necessary, this expansion will require the commitment of
capital resources for facilities, tooling and equipment and for leasehold
improvements. Further, the Company's delay or inability to expand its
manufacturing capacity or to obtain the commitment of such resources could
result in its inability to meet demand for its products, which could harm the
Company's ability to generate revenues, lead to customer dissatisfaction and
damage its reputation.
THE USE OF THE COMPANY'S PRODUCTS COULD RESULT IN PRODUCT LIABILITY CLAIMS THAT
COULD BE EXPENSIVE AND HARM ITS' BUSINESS.
As a medical device manufacturer, the Company faces an inherent business
risk of financial exposure to product liability claims in the event that the use
of its products results in personal injury or death. The Company also faces the
possibility that defects in the design or manufacture of its products might
necessitate a product recall. It is possible that the Company will experience
losses due to product liability claims or recalls in the future. The Company
currently maintains product liability insurance with coverage limits of
$5,000,000, but future claims may exceed these coverage limits. The Company may
also require increased product liability coverage as additional potential
products are successfully commercialized. Such insurance is expensive, difficult
to obtain and may not be available in the future on acceptable terms, or at all.
While the Company has not had any material product liability claims to date, its
defense of any future product liability claim, regardless of its merit or
eventual outcome, would divert management's attention and could result in
significant legal costs. In addition, a product liability claim or any product
recalls could also harm its reputation or result in a decline in revenues.
THE COMPANY'S CONTINUED GROWTH WILL SIGNIFICANTLY STRAIN ITS RESOURCES AND, IF
THE COMPANY FAILS TO MANAGE THIS GROWTH, ITS ABILITY TO MARKET, SELL AND DEVELOP
ITS PRODUCTS MAY BE HARMED.
The Company's growth will continue to place significant demands on its
management and resources. In order to compete effectively against current and
future competitors, prepare products for clinical trials and develop future
products, the Company believes it must continue to expand its operations,
particularly in the areas of research and development and sales and marketing.
It is likely that the Company will be required to implement additional operating
and financial controls, hire and train additional personnel, install additional
reporting and management information systems and expand its physical operations.
The Company's future success will depend, in part, on its ability to manage
future growth and the Company cannot assure its investors that it will be
successful in doing so.
FUTURE SALES OF THE COMPANY'S COMMON STOCK COULD DEPRESS THE MARKET PRICE OF ITS
COMMON STOCK.
Future sales of the Company's common stock could depress the market price
of its common stock. On March 12, 2003, the Company filed a registration
statement on Form S-3 covering the resale of 500,000 shares of its common stock
issuable upon exercise of a warrant. This registration statement has not been
declared effective. On December 13, 2002, the Company filed a registration
statement on Form S-3 (File No. 333-101830) covering the resale of up to an
aggregate of 16,931,365 shares of its common stock issuable upon conversion of
the Company's Series C Convertible Preferred Stock, as payment of dividends on
the Series C Convertible Preferred Stock, as a conversion premium on the Series
C Convertible Preferred Stock and upon exercise of certain warrants. This
registration statement was declared effective on December 23. 2002. On February
28, 2002 the Company filed a registration statement on Form S-3 (File No.
333-83552) covering the resale of 5,075,771 shares of its common stock by
certain selling stockholders. In addition, on or prior to February 13, 2002, the
Company issued 2,911,039 shares of common stock upon conversion of all the
shares of
its Series B Convertible Preferred Stock. The Company filed a registration
statement on Form S-3 (File No. 333-58962) covering the shares of common stock
issued to holders upon the conversion of the Series B Convertible Preferred
Stock and issuable upon exercise of certain warrants issued to the former holder
of its Series B Convertible Preferred Stock. The Securities Exchange Commission
declared this registration statement effective on September 24, 2001. In the
future, the Company may issue additional options, warrants or other derivative
securities convertible into its common stock. The public sale of the Company's
common stock by the selling stockholders who control large blocks of its common
stock could depress the market price of its common stock.
FAILURE TO SATISFY NASDAQ NATIONAL MARKET LISTING REQUIREMENTS MAY RESULT IN THE
COMPANY'S STOCK BEING DELISTED FROM THE NASDAQ NATIONAL MARKET AND BEING SUBJECT
TO RESTRICTIONS ON "PENNY STOCK".
The Company's common stock is currently listed on the Nasdaq National
Market under the symbol "RBOT." For continued inclusion on the Nasdaq National
Market, the Company must maintain, among other requirements, $10.0 million in
stockholders' equity, a minimum bid price of $1.00 per share, and a market value
of its public float of at least $5.0 million. On December 31, 2002, the
Company's stockholders' equity was $5.7 million, leaving the company
non-compliant with the new minimum stockholders' equity standard on the Nasdaq
National Market. In the event that the Company fails to maintain the minimum
stockholders' equity standard or other listing standards on a continuous basis,
the Company's common stock may be removed from listing on the Nasdaq National
Market. If the Company's common stock is delisted from the Nasdaq National
Market, and the Company is not able to list the shares on the Nasdaq Small Cap
Market or another exchange, trading of its common stock, if any, would be
conducted in the over-the-counter market in the so-called "pink sheets" or, if
available, the NASDAQ's "Electronic Bulletin Board." As a result, stockholders
could find it more difficult to dispose of, or to obtain accurate quotations as
to the value of the Company's common stock, and the trading price per share
could decline.
If the Company's shares are not listed on any exchange or on the Nasdaq
National Market, they are also subject to the regulations regarding trading in
"penny stocks," which are those securities trading for less than $5.00 per
share. The following is a list of the restrictions on the sale of penny stocks:
o Prior to the sale of penny stock by a broker-dealer to a new
purchaser, the broker-dealer must determine whether the purchaser is
suitable to invest in penny stocks. To make that determination, a
broker-dealer must obtain, from a prospective investor, information
regarding the purchaser's financial condition and investment
experience and objectives. Subsequently, the broker-dealer must
deliver to the purchaser a written statement setting forth the basis
of the suitability finding. A broker-dealer must obtain from the
purchaser a written agreement to purchase the securities. This
agreement must be obtained for every purchase until the purchaser
becomes an "established customer."
o The Exchange Act requires that prior to effecting any transaction in
any penny stock, a broker-dealer must provide the purchaser with a
"risk disclosure document" that contains, among other things, a
description of the penny stock market and how it functions and the
risks associated with such investment. These disclosure rules are
applicable to both purchases and sales by investors.
A dealer that sells penny stock must send to the purchaser, within ten days
after the end of each calendar month, a written account statement including
prescribed information relating to the security. As a result of a failure to
maintain the trading of the Company's stock on the Nasdaq National Market and
the rules regarding penny stock transactions, the investors' ability to sell to
a third party may be limited. The Company makes no guarantee that its current
market makers will continue to make a market in its securities, or that any
market for its securities will continue.
AVAILABLE INFORMATION
The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available
free of charge on the Company's web site at www.computermotion.com.
ITEM 2. PROPERTIES
The Company leases approximately 45,000 square feet of office and
manufacturing space in an office park in Goleta, California, approximately 1,100
square feet of office space in Shanghai, China, approximately 850 square feet of
office space in Beijing, China and approximately 1,300 square feet of office
space in Strasbourg, France. As of December 31, 2002, the Company had the
following aggregate minimum lease payments for certain facilities: 2003-
$1,032,000, 2004- $1,013,000, 2005-$766,000, 2006-$751,000 and thereafter
$273,000.
ITEM 3. LEGAL PROCEEDINGS
On May 10, 2000, the Company filed a lawsuit in United States District
Court alleging that Intuitive Surgical's da Vinci surgical robot system
infringes on its United States Patent Nos. 5,524,180, 5,878,193, 5,762,458,
6,001,108, 5,815,640, 5,907,664, 5,855,583 and 6,063,095. Subsequently, Computer
Motion's complaint was amended to add allegations that Intuitive's da Vinci
surgical robot infringed two additional Computer Motion patents United States
Patent Nos. 6,244,809 and 6,102,850. These patents concern methods and devices
for conducting various aspects of robotic surgery. Intuitive has served an
Answer and Counterclaim alleging non-infringement of each patent-in-suit, patent
invalidity and unenforceability. Discovery is still underway. The parties have
filed cross motions for summary judgment on the issue of patent infringement
relating to the '108, '664, '809, and '850 patents. The Court recently granted
Intuitive's motion for summary judgment of non-infringement relating to the '850
patent. The Court also recently granted our motion for summary judgment relating
to the '809 patent. The Court has not ruled on any of the remaining motions at
this time. Pursuant to the merger agreement with Intuitive, Computer Motion and
Intuitive filed on March 10, 2003, stipulations to stay this litigation until
August 31, 2003, subject to the stay being lifted if the merger agreement is
terminated, or subject to this case being dismissed upon consummation of the
transactions contemplated by the merger agreement.
On or about December 7 and 8, 2000, the United States Patent and Trademark
Office (USPTO) granted three of Intuitive's petitions for a declaration of an
interference relating to the Company's 5,878,193, 5,907,664, and 5,855,583
patents. On March 30, 2002, the three judge panel of the Board of Patent
Interferences issued decision orders on the parties' preliminary motions. The
Board granted the Company's motion on Interference No. 104,643 and issued an
order for Intuitive to show cause why judgment should not be entered against
Intuitive on this interference. The Board denied the Company's motion on the
Interference No. 104,644 and entered judgment against the Company. The Board
denied the Company's motions on the Interference No. 104,645, deferred decision
on two of Intuitive's motions, and granted-in-part, denied-in-part and
deferred-in-part on one of Intuitive's motions. The Board's decision on
Interference No. 104,645 invalidated some of the parties' claims, affirmed some
of Intuitive's claims and provided for further proceedings related to two of our
claims and is therefore not final. On July 25, 2002, Computer Motion filed a
civil action seeking review of the two adverse decisions in the United States
District Court for the District of California.
Pursuant to the merger agreement with Intuitive, Computer Motion and
Intuitive filed on March 10, 2003, stipulations to stay this litigation until
August 31, 2003, subject to the stay being lifted if the merger agreement is
terminated, or subject to this case being dismissed upon consummation of the
transactions contemplated by the merger agreement.
On February 21, 2001, Brookhill-Wilk filed suit against the Company
alleging that its ZEUS surgical system infringed upon Brookhill-Wilk's United
States Patent Nos. 5,217,003 and 5,368,015. Brookhill-Wilk's complaint seeks
damages, attorneys' fees and increased damages alleging willful patent
infringement. On March 21, 2001, the Company 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 Brookhill-Wilk's Patent No. 5,217,003
in a way that the Company believes excludes current applications of the
Company's ZEUS surgical system. In light of this decision, on November 13, 2001,
the parties to Brookhill Wilk v. Computer Motion, Inc. agreed to dismiss the
case without prejudice. On March 25, 2002, Judge Alvin K. Hellerstein dismissed
the case without prejudice.
On March 30, 2001, Intuitive and IBM Corporation filed suit alleging that
the Company's AESOP, ZEUS and HERMES products infringe United States Patent No.
6,201,984, which was issued on March 13, 2001. The complaint seeks damages, a
preliminary injunction, a permanent injunction, and costs and attorneys' fees.
The claims are directed to a surgical system employing voice recognition for
control of a surgical instrument. Each of the asserted claims are limited to a
surgical system employing voice recognition for control of a surgical robot and
literally read on the Company's current AESOP product and the Company's ZEUS and
HERMES products to the extent they are used with AESOP. A jury trial has been
held on the issues of patent invalidity due to lack of enablement and failure to
disclose the best mode in addition to damages. The Company's defense of
unenforceability due to prosecution laches was tried before the District Court
Judge. The jury returned a verdict finding IBM's United States Patent No.
6,201,984 valid, and finding Intuitive was damaged in an amount of $4.4 million.
Prior to the jury's verdict, the court ruled that the Company had not
"willfully" infringed the patent. On December 10, 2002, the Court rendered an
adverse decision on our prosecution laches defense and on December 11, 2002,
issued a judgment in Intuitive's and IBM's favor based upon the earlier jury
verdict and the Court's December 10, 2002 ruling. The case has entered the
post-trial phase during which we will be seeking judicial review of the jury's
verdict and the Court's December 10, 2002 ruling. Pursuant to the merger
agreement with Intuitive, Computer Motion and Intuitive filed on March 10, 2003,
stipulations to stay this litigation until August 31, 2003, subject to the stay
being lifted if the merger agreement is terminated, or subject to this case
being dismissed upon consummation of the transactions contemplated by the merger
agreement.
The Company believes that all of its major product lines could be affected
by this litigation. The patents subject to this litigation are an integral part
of the technology incorporated in the Company's AESOP, ZEUS and HERMES product
lines which together accounted for approximately 76% of its revenues for the
year ended December 31, 2002. If the Company loses the counterclaim on the
patent suit brought by Intuitive or the patent infringement claims by Intuitive
or IBM or if the decision in Brookhill-Wilk v. Intuitive Surgical, Inc. is
reversed, the Company may be prevented from selling its products as currently
configured without first obtaining a license to the disputed technology from the
successful party or modifying the product. Obtaining a license could be
expensive, or could require that the Company license to the successful party
some of its own proprietary technology, either of which result could seriously
harm the Company's business. In the event that a successful party is unwilling
to grant the Company a license, the Company will be required to stop selling its
products that are found to infringe the successful party's patents unless the
Company can redesign them so they do not infringe these patents, which the
Company may be unable to do. Whether or not the Company is successful in these
lawsuits, the litigation could consume substantial amounts of the Company's
financial and managerial resources. Further, because of the substantial amount
of discovery often involved in connection with this type of litigation, there is
a risk that some of the Company's confidential information could be compromised
by disclosure during the discovery process.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the quarter ended December 31, 2002.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the NASDAQ National Market under
the symbol "RBOT." The high and low sale prices for the Company's common stock
during 2002 and 2001 are set forth below:
High Low
------- -------
Year Ended December 31, 2002
Fourth Quarter $ 1.72 $ 0.70
Third Quarter $ 2.40 $ 0.53
Second Quarter $ 4.10 $ 0.67
First Quarter $ 6.25 $ 3.65
High Low
------- -------
Fourth Quarter $ 4.61 $ 3.06
Third Quarter $ 4.80 $ 3.02
Second Quarter $ 5.65 $ 2.88
First Quarter $ 6.50 $ 3.66
The stock market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. Like the stock prices of other medical device companies,
the market price of the Company's common stock has been and will be, subject to
significant volatility. Factors such as reports on the clinical efficacy and
safety of the Company's products, government approval status, fluctuations in
the Company's operating results, announcements of technological innovations or
new products by the Company or its competitors, changes in estimates of the
Company's performance by securities analysts, failure to meet securities
analysts' expectations and developments with respect to patents or proprietary
rights, may have a significant effect on the market price of the common stock.
In addition, the price of the Company's common stock could be affected by stock
price volatility in the medical device industry or the capital markets in
general without regard to the Company's operating performance.
The Company currently intends to retain future earnings to fund the
development and growth of its business and, therefore, does not anticipate
paying cash dividends within the foreseeable future. Any future payment of
dividends will be determined by the Company's Board of Directors and will depend
on the Company's financial condition, results of operations and other factors
deemed relevant by its Board of Directors at the time. As of March 14, 2003,
there were approximately 7,500 stockholders of record.
On October 31, 2002, the Company entered into a Series C Convertible
Preferred Stock Purchase Agreement with certain institutional and accredited
investors, including Robert W. Duggan, the Company's Chairman and Chief
Executive Officer. Under the terms of the Series C Stock Purchase Agreement, the
Company sold a total of 7,370 shares of the Company's Series C Convertible
Preferred Stock, including 6,299 shares of Series C-1 Convertible Preferred
Stock and 1,071 shares of Series C-2 Convertible Preferred Stock, and Series C-1
warrants to purchase an aggregate of 1,473,745 shares of common stock at an
initial exercise price of $1.80 per share and Series C-2 warrants to purchase an
aggregate of 1,473,475 shares of common stock at an initial exercise price of
$2.20 per share and warrants to purchase an aggregate of 290,306 shares of
common stock at an exercise price of $.001 per share for aggregate consideration
of $10,316,200. The $10,316,200 is exclusive of the $1,999,200 Robert W. Duggan
investment made in January and March 2003. As part of the $10,316,200 aggregate
consideration, the Company received $1,499,000 in cash for the purchase of
1,071,000 shares of Series C-2 Convertible Preferred Stock for which the shares
were not issued as of December 31, 2002. These shares were issued in January
2002 and at December 31, 2002, have been shown as a stock subscription within
the accompanying consolidated statements of stockholders' equity. At December
31, 2002 the fair value of the warrants issued, exclusive of Mr. Duggan's
investment, was $2,507,000. In addition, the fair value of the beneficial
conversion feature at December 31, 2002 was determined to be $3,244,000. At
December 31, 2002, the accrued dividends payable were $179,000. On March 6,
2003, all holders of Series C convertible preferred stock agreed to exchange
their shares for newly issued shares of Series D convertible preferred stock.
The terms of the Series D convertible preferred stock eliminate certain
provisions that were contained in the terms of the Series C convertible
preferred stock that could have restricted the ability of the Company to enter
into the merger agreement with Intuitive Surgical.
In February 2002, the Company raised net proceeds of approximately
$10,528,000 through the sale of 2,828,865 shares of common stock and the
issuance of approximately 1,697,319 warrants to purchase common stock at $5.00
per share, with certain institutional and accredited investors, including Robert
W. Duggan, the Company's Chief Executive Officer and Chairman. The fair market
value of these warrants was determined to be $3,590,000 under the Black-Scholes
valuation model and was recognized as a direct cost of raising capital. In
February $1,395,000 in accounts payable from certain vendors was exchanged for
328,689 shares of common stock. The proceeds from the sale of the Company's
common stock were used to retire approximately $2,359,000 (including the note
payable to Mr. Duggan) in debt and the remainder of the proceeds were used to
fund working capital needs.
On March 30, 2001, the Company entered into an Equity Line Financing
Agreement with Societe Generale, under which the Company was entitled to issue
and sell, from time to time, shares of the Company's common stock to Societe
Generale. In connection with the Equity Line Financing Agreement, the Company
filed a Registration Statement on Form S-2 (File No. 333-65952) covering the
shares of the Company's common stock to be issued upon delivery of draw down
notices. The parties terminated the Equity Line Financing Agreement on February
12, 2002. Prior to termination of the equity line, the Company raised $508,000
by issuing 111,615 shares to Societe Generale. The Company used these proceeds
to fund working capital needs for clinical trials, research and development, and
sales and marketing programs and for other general operating requirements.
On February 16, 2001, the Company entered into a Securities Purchase
Agreement with certain institutional and accredited investors. Under the terms
of the Securities Purchase Agreement, the Company sold a total of 10,024 shares
of the Company's Series B Convertible Preferred Stock and warrants to purchase
557,932 shares of the Company's common stock, for the total consideration of
$10,024,000. In connection with this transaction, the Company filed Registration
Statements on Form S-3 and Form S-2 (File Nos. 333-58962 and 333-65952
respectively) covering the shares of the Company's common stock, which were
issued upon conversion of the shares of Series B Convertible Preferred Stock and
will be issued upon exercise of the warrants. The Company used the proceeds from
the sale of its Series B Convertible Preferred Stock to retire approximately $3
million in debt and the remainder will be used to fund working capital needs due
to investments in clinical trials, research and development, and sales and
marketing programs and for other general operating requirements.
PART II
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from consolidated
financial statements of Computer Motion, Inc. The consolidated financial
statements for the year ended December 31, 2002 have been audited by Ernst &
Young LLP, independent auditors. Ernst & Young LLP's report on the consolidated
financial statements for the year ended December 31, 2002, which appears
elsewhere herein, includes an explanatory paragraph which describes an
uncertainty about Computer Motion, Inc.'s ability to continue as a going
concern. The consolidated financial statements for the four years ended December
31, 2001 have been audited by other independent auditors. The data should be
read in conjunction with the consolidated financial statements, related notes,
and other financial information included herein.
Years Ending December 31,
(in thousands except per share data)
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Revenue $ 24,111 $ 25,531 $ 21,732 $ 18,058 $ 10,586
Net loss $(21,151) $(16,413) $(16,349) $(13,375) $(11,545)
Net loss per share $ (1.93) $ (1.98) $ (1.90) $ (1.57) $ (1.45)
Weighted average common shares
outstanding 16,665 10,276 9,309 8,503 7,959
Total assets $ 21,850 $21,186 $23,089 $23,361 $30,444
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially due to factors
that include, but are not limited to, the risks discussed in Item 1 above under
the heading "Risk Factors."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company develops and markets proprietary robotic and computerized
surgical systems that are intended to enhance a surgeon's performance and
centralize and simplify a surgeon's control of the operating room ("OR"). The
Company believes that its products will provide surgeons with the precision and
dexterity necessary to perform complex, MIS procedures, as well as enable
surgeons to control critical devices in the OR through simple verbal commands.
The Company believes that its products will broaden the scope and increase the
effectiveness of MIS, improve patient outcomes, and create a safer, more
efficient and cost effective OR. On March 7, 2003, the Company entered into a
merger agreement with Intuitive Surgical, Inc., pursuant to which the Company
will become a wholly owned subsidiary of Intuitive Surgical upon completion of
the merger, which is subject to stockholder approval and other closing
conditions.
The Company's AESOP Robotic Endoscope Positioning System allows direct
surgeon control of the endoscope through simple verbal commands, eliminating the
need for a member of a surgical staff to manually control the camera, while
providing a more stable and sustainable endoscopic image.
The Company's ZEUS Robotic Surgical System is comprised of three
surgeon-controlled robotic arms, one of which positions the endoscope and two of
which manipulate surgical instruments. The Company believes that ZEUS will
improve a surgeon's dexterity and precision and enhance visualization of, and
access to, confined operative sites.
The Company's HERMES Control Center is designed to enable a surgeon to
directly control multiple OR devices, including various laparoscopic,
arthroscopic and video devices, as well as the Company's robotic devices,
through simple verbal commands.
The Company's SOCRATES Telementoring System enables remote access to HERMES
networked devices via proprietary software and standard teleconferencing
components.
Recurring revenue represents sales to ongoing customer for supplies,
disposable drapes, instruments, accessories, services and extended warranty
arrangements.
Development revenue comes from the following three sources: (i), fees paid
for the use of prototype product to perform limited, experimental procedures on
animals, including minimally invasive coronary artery bypass grafts, anastomosis
of the small bowel, and procedures involving the bile duct, urethral and iliac
artery; (ii) fees paid in conjunction with the delivery of a tele-surgical
system including technical and clinical support provided by the Company, in
order to perform experimental surgeries in a laboratory setting, as well as
possible clinical cases; and (iii) fees paid in conjunction with assisting other
medical companies to prepare their private label medical devices to be
compatible with the HERMES operating room control system.
The Company applies the provisions of Staff Accounting Bulleting No. 101
(SAB 101) when recognizing revenue. SAB 101 states that revenue generally is
realized or realizable and earned when all of the following criteria are met: a)
persuasive evidence of an arrangement exists, b) delivery has occurred or the
services have been rendered, c) the seller's price to the buyer is fixed or
determinable, and d) collectibility is reasonably assured.
The Company recognizes revenue from the sale of products to end-users,
including supplies and accessories, once shipment has occurred and all of the
conditions of SAB 101 (items (a): through (d): as
identified above) have been met (the Company's general terms are FOB shipping
point; in those few cases where the customers terms are FOB their plant, revenue
is not recognized until the Company receives a signed delivery and acceptance
certificate). Revenue is recognized from the performance of services as the
services are performed.
The Company recognizes revenue from the sale of products to distributors,
including supplies and accessories, once shipment has occurred, (as the
Company's general terms are FOB shipping point), and all of the conditions of
SAB 101 have been met. The Company's distributors do not have rights of return
or cancellation. Revenue from distributors, which do not meet all of the
requirements of SAB 101, are deferred and recognized upon the sale of the
product to the end user.
Revenues from product sales to financing institutions are not recognized by
the Company until a purchase order is received, the product has been shipped and
the funding by the financing institution has been approved.
The Company defers revenue from the sale of extended warranties, product
upgrades and other contractual items and recognizes them over the life of the
contract or upon shipment to the customer, as applicable.
Shipments of products to be used for demonstration purposes or prototype
products used in development programs are included in the property and equipment
balance in the accompanying consolidated balance sheets.
The Company has sustained significant losses since inception and expects to
continue to incur losses due to research and development efforts, costs
associated with obtaining regulatory approvals and clearances, continued
marketing expenditures to increase sales and other costs associated with the
Company's anticipated growth. Furthermore, the Company anticipates that its
operating results may fluctuate significantly from quarter to quarter in the
future, depending on a number of factors, many of which are outside the
Company's control. These factors include timing and results of clinical trials,
delays associated with FDA and other clearance processes, changes in pricing
policy by the Company or its competitors, changes in the financial condition of
its customers, the number, timing and significance of product enhancements and
new products by the Company and its competitors, health care reimbursement
policies and product quality issues.
Critical Accounting Policies
Accounting policies are integral to understanding this MD&A. The
consolidated financial statements of the Company are prepared in conformity with
accounting principles generally accepted in the United States, which requires
the use of estimates, judgments, and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the periods presented. The
Company's accounting policies are described in Note 2 to the consolidated
financial statements. Critical accounting estimates are described in this
section. An accounting estimate is considered critical if: the estimate requires
management to make assumptions about matters that were highly uncertain at the
time the estimate was made; different estimates reasonably could have been used;
or if changes in the estimate that would have a material impact on the
Corporation's financial condition or results of operations are reasonably likely
to occur from period to period. Management believes that the accounting
estimates employed are appropriate and resulting balances are reasonable;
however, actual results could differ from the original estimates, requiring
adjustments to these balances in future periods. The Company has discussed the
development, selection and disclosures of these critical accounting estimates
with the Audit Committee of the Company's Board of Directors, and the Audit
Committee has reviewed the Company's disclosures relating to these estimates.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
Revenue Recognition
The Company recognizes product revenue, net of discounts, returns, and
rebates in accordance with Statement of Financial Accounting Standards ("SFAS")
48, "Revenue Recognition When the Right of Return Exists", and Staff Accounting
Bulletin (SAB) No.101. As required by these standards, revenue is recorded when
persuasive evidence of a sales arrangement exists, delivery has occurred, the
buyer's price is fixed or determinable, contractual obligations have been
satisfied, and collectibility is reasonably assured. These requirements are met,
and sales and related cost of sales are recognized primarily upon the shipment
of products, or in the case of consignment inventories, upon the notification of
usage by the customer. The Company records at the time of sale an allowance for
estimated returns, based on historical experience, recent gross sales levels and
any notification of pending returns. Should the actual returns differ from those
estimated by the Company, additional adjustments to revenue and cost of sales
may be required.
Accounts Receivable
The Company markets its products to a diverse customer base, principally
throughout the United States, Canada and Western Europe. The Company grants
credit terms in the normal course of business to its customers, primarily
hospitals, doctors and distributors. The Company performs ongoing credit
evaluations of its customers and adjusts credit limits based upon payment
history and the customer's current credit worthiness, as determined through
review of their current credit information. The Company continuously monitors
collections and payments from customers and maintains allowances for doubtful
accounts for estimated losses resulting from the inability of some of its
customers to make required payments. Estimated losses are based on historical
experience and any specifically identified customer collection issues. If the
financial condition of the Company's customers, or the economy as whole, were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. These adjustments would be included in
selling, general and administrative expenses.
Inventories
The Company values its inventory at the lower of cost, based on the
first-in first-out ("FIFO") cost method, or the current estimated market value
of the inventory. The Company writes down its inventory 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
differ from those projected by management, additional inventory valuation
adjustments may be required. These adjustments would be included in cost of
goods sold.
Warranties and Related Reserves
The Company provides an accrual for the estimated cost of product
warranties and product liability claims at the time revenue is recognized. Such
accruals are based on estimates, which are based on relevant factors such as
historical experience, the warranty period, estimated costs, levels of insurance
and insurance retentions, identified product quality issues, if any, and, to a
limited extent, information developed by the insurance company using actuarial
techniques. These accruals are analyzed periodically for adequacy. While the
Company engages in extensive product quality programs and processes, including
actively monitoring and evaluating the quality of its component suppliers, the
warranty obligation is affected by reported rates of product problems and costs
incurred in correcting product problems. Should actual reported problem rates or
the resulting costs differ from the Company's estimates, adjustments to the
estimated warranty liability may be required. These adjustments would be
included in selling, general and administrative expenses.
RESULTS OF OPERATIONS
For the year ended December 31, 2002 compared to the year ended December
31, 2001
Revenue > Revenue decreased $1,420,000, or 6%, to $24,111,000 in 2002 from
$25,531,000 in 2001. ZEUS revenues decreased $2,099,000, or 23%, due to a
decrease in the number of units shipped which the Company believes was due, in
part, to FDA approval coming later in the year than anticipated. AESOP revenues
decreased $1,875,000, or 23%, due to fewer units shipped. HERMES revenue
increased $628,000, or 15%, due primarily to increased demand from the Company's
new OEM partner, Smith and Nephew. SOCRATES revenue increased $330,000, or 40%,
over it's initial year as it continued to gain market acceptance. Development
revenue decreased $765,000 due to the expiration of prior years' development
agreements. Grant revenue increased $406,000, or 923%, as a result of a 3-year
NIST grant the Company received in the fourth quarter of 2001. Recurring
revenues increased $1,955,000, or 85%, as the installed base of robotic systems
increased leading to more demand for parts, accessories, supplies and service.
Revenues outside of the United States decreased $3,913,000, or 38%. Sales
to Asia and Europe and the Middle East decreased by $695,000 and $4,916,000,
respectively. This was partially offset by an increase in sales to Canada and
South America of $1,698,000.
Gross profit > Gross profit decreased $693,000, or 5%, to $14,251,000 in
2002 from $14,944,000 in 2001. Gross margin remained constant at 59% from year
to year. The decrease in gross profit was a direct result of lower revenues.
Selling, general and administrative > Selling, general and administrative
expenses decreased $139,000, or 1%, to $17,895,000 in 2002 from $18,034,000 in
2001. The decrease was attributable to a smaller sales force early in 2002,
which was not reorganized until later in the year.
Research and development > Research and development expenses decreased
$1,131,000, or 9%, to $10,903,000 in 2002 from $12,034,000 in 2001. The decrease
was due primarily to the increased spending of $2,380,000 for the acceleration
of clinical trials in the last six months of 2001. This expense increase more
than offsets the transfer of the clinical development specialists from research
and development expense to a selling expense in the second quarter of 2001, as
well as, decreased spending over prior years for initial patent filings and
professional fees.
Other income / (expense) > Other expense was $53,000 in 2002 compared to
$21,000 in 2001. In 2002, other expense included interest income on short-term
deposits of $62,000, interest expense of $63,000 from debt used to finance
ongoing operations, along with $30,000 of foreign currency transactions loss and
$22,000 of miscellaneous other expenses.
Income taxes > Minimal provisions for state income taxes have been recorded
on the Company's pre-tax losses to date. At December 31, 2002, the Company had
federal and state net operating loss carryforwards of approximately $78,718,000
and $14,074,000 respectively, which are available to offset future federal and
state taxable income. Federal carryforwards expire between fifteen and twenty
years after the year of loss and state carryforwards expire between five and ten
years after the year of loss. The Company has provided a full valuation
allowance on the deferred income tax asset because of the uncertainty regarding
its realization.
Revenue (quarterly analysis) > Revenue and units shipped by quarter for the
year ended December 31, 2002 is shown in the attached table:
Revenue by product line for the three months ended
- -------------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
Dec. 31, 2002 Sep. 30, 2002 Jun. 30, 2002 Mar. 31, 2002 Dec. 31, 2001
------------- ------------- ------------- ------------- -------------
ZEUS surgical systems $3,159 $ 601 $ 983 $2,384 $3,741
AESOP surgical systems 2,175 1,455 1,860 932 2,560
SOCRATES telementoring systems 338 96 408 320 384
HERMES (systems, development, and supplies) 1,681 1,230 685 1,111 1,163
Grant revenue 128 132 101 88 -
Development revenue - - 184
Recurring revenue 1,341 1,020 1,027 856 622
------ ------ ------ ------ ------
$8,822 $4,534 $5,064 $5,691 $8,654
Units sold by product line for the three months ended
- -----------------------------------------------------------------------------------------------------------------------------
Dec. 31, 2002 Sep. 30, 2002 Jun. 30, 2002 Mar. 31, 2002 Dec. 31, 2001
------------- ------------- ------------- ------------- -------------
ZEUS surgical systems 4 1 1 4 5
ZEUS surgical systems upgrades 3 2 3 3 3
AESOP surgical systems 31 22 26 14 38
SOCRATES telementoring systems 4 1 5 4 4
The Company does not believe that there are material seasonal trends. Since
the first quarter of 1998, the Company has had quarter over quarter increases in
revenues in all but five quarters. The Company is penetrating only a small
fraction of the total potential market for its products. Although many medical
conditions that can be treated using the Company's products can also be treated
by pharmaceuticals and other medical devices, the Company does not believe that
it encounters direct competition for its AESOP, HERMES or SOCRATES products. The
Company believes that it has only one direct competitor for its ZEUS product.
Because its AESOP, HERMES, SOCRATES and ZEUS products are comprised of
relatively new technologies, and because the current customer profiles are made
up of early adopters that share the Company's pioneering vision for these new
technologies, the Company does not believe that there is any statistical
significance to its quarterly increase or decrease variations in business
levels. The challenges the Company faces in its attempt to increase market share
today involve market acceptance and adoption of these new technologies. The
Company believes that statistical significance in any increases or decreases
will not occur until its products receive larger mass-market acceptance and
adoption. In addition, the Company believes that the sales cycles for capital
medical equipment is approximately three to six months, especially for
innovative technology like the Company's AESOP, HERMES, SOCRATES and ZEUS
products. Thus, sales in the fourth quarter originate in the third quarter, and
sales in the first quarter originate in the fourth quarter of the prior year.
The Company also believes that prospecting for new sales tends to fall off in
the fourth quarter since its sales focus is on closing sales for the current
calendar year and because there are fewer working days available due to the
holiday season.
The analysis of the Company's quarterly revenue changes is as follows:
Revenue for the quarter ended March 31, 2002 compared to the quarter ended
December 31, 2001.
Revenue decreased $2,963,000, or 34%, to $5,691,000 for the quarter ended
March 31, 2002 from $8,654,000 for the quarter ended December 31, 2001. ZEUS
revenue of $2,384,000 for the quarter decreased $1,357,000 over the prior
quarter due to fewer units being shipped. AESOP revenue of $932,000 for the
quarter decreased $1,628,000 from the prior quarter due to fewer units being
shipped. HERMES revenue of $1,111,000 for the quarter decreased $52,000 from the
prior quarter due to decreased demand from the Company's HERMES alliance
partner, Stryker Corporation. For the quarter ended March 31, 2002, the Company
received approximately $88,000 of grant revenue from the 3-year NIST grant
received late in 2001. Recurring revenue of $856,000 for the quarter increased
$234,000 from the prior quarter as the Company's installed base of robotic
systems continues to expand.
Revenue for the quarter ended June 30, 2002 compared to the quarter ended
March 31, 2002.
Revenue decreased $627,000, or 11%, to $5,064,000 for the quarter ended
June 30, 2002 from $5,691,000 for the quarter ended March 31, 2002. Revenues
increased in all of the Company's product lines, except for ZEUS and HERMES.
ZEUS revenue of $983,000 for the quarter decreased $1,401,000 from prior quarter
as a result of fewer systems shipped. AESOP revenue of $1,860,000 for the
quarter increased $928,000, or 100%, from the prior quarter as a result of a
greater number of systems shipped. HERMES revenue of $685,000 for the quarter
decreased $426,000, or 38%, from prior quarter due to decreased demand from the
Company's HERMES alliance partner, Stryker Corporation. SOCRATES revenue of
$408,000 increased $88,000, or 28% for the quarter as the product continued to
gain market acceptance. Recurring revenue of $1,027,000 increased $171,000, or
20% for the quarter as the Company's installed base of robotic systems increased
leading to greater demand for parts, accessories, supplies and service. Grant
revenue of $101,000 remained relatively constant from the prior quarter.
Revenue for the quarter ended September 30, 2002 compared to the quarter
ended June 30, 2002.
Revenue decreased $530,000, or 10%, to $4,534,000 for the quarter ended
September 30, 2002 from $5,064,000 for the quarter ended June 30, 2002. ZEUS
revenue of $601,000 for the quarter decreased
$382,000, or 39%, from the prior quarter as a result of a lower average selling
price based on the same number of systems as well as fewer upgrades being
shipped. AESOP revenue of $1,455,000 for the quarter decreased $405,000, or 22%,
from the prior quarter primarily due to a decrease in the number of units
shipped as well as a lower average selling price. HERMES revenue of $1,230,000
for the quarter increased $545,000, or 80%, over the prior quarter as one of the
Company's HERMES alliance partners, Smith and Nephew, received their first
production shipment of controllers. During the third quarter, Grant revenue of
$132,000 and recurring revenue of $1,020,000 remained relatively constant from
the prior quarter.
Revenue for the quarter ended December 31, 2002 compared to the quarter
ended September 30, 2002.
Revenue increased $4,288,000, or 95%, to $8,822,000 for the quarter ended
December 31, 2002 from $4,534,000 for the quarter ended September 30, 2002.
Revenue for all of the Company's product lines increased from the prior quarter,
with the exception of Grant revenue, which remained relatively constant. ZEUS
revenue of $3,159,000 for the quarter increased $2,558,000, or 426%, from the
prior quarter due to increased demand resulting from the Company's FDA approval.
AESOP revenue of $2,175,000 for the quarter increased $720,000, or 49%, from the
prior quarter as increased demand resulted in 31 units shipped. HERMES revenue
of $1,681,000 for the quarter increased $451,000, or 37%, from prior quarter due
to an increase in demand from the Company's HERMES alliance partners. SOCRATES
revenue of $338,000 for the quarter increased $242,000, or 252% from the prior
quarter due to increased demand resulting in four systems shipped. Recurring
revenues of $1,341,000 for the quarter increased $321,000, or 31%, from the
prior quarter, as the installed base of robotic systems increased leading to
more demand for parts, accessories, supplies and service.
For the year ended December 31, 2001 compared to the year ended December
31, 2000
Revenue increased $3,799,000, or 17%, to $25,531,000 in 2001 from
$21,732,000 in 2000. Except for the ZEUS product line and development fees,
revenue increased on all of the other Company's product lines over the prior
year. ZEUS revenues decreased $2,156,000, or 19%, due to U.S. regulatory factors
and the transition from MicroJoint to MicroWrist. AESOP revenues increased
$2,699,000, or 48%, due to increased demand worldwide. HERMES revenue increased
$1,083,000, or 73%, due primarily to increased demand from the Company's OEM
partner, Stryker Corporation. SOCRATES revenue was $832,000 for its initial
year. Development revenues decreased $201,000, or 20%, due to the expiration of
prior years' development agreements. Recurring revenues increased $1,542,000, or
68%, as the installed base of robotic systems increased leading to more demand
for parts, accessories, supplies and service.
Gross profit > Gross profit increased $1,789,000, or 14%, to $14,944,000 in
2001 from $13,155,000 in 2000. Gross margin decreased to 59% in 2001 from 61% in
2000. The decrease in gross margin was primarily due to a shift in product mix
with lower gross margins.
Selling, general and administrative expenses increased $716,000, or 4%, to
$18,034,000 in 2001 from $17,318,000 in 2000. The increase was due mainly to the
addition of sales personnel and commission payments as the Company expanded its
worldwide sales, service and training capability, and includes the transfer of
the clinical development specialists from research and development expense.
Professional fees increased related to the Company's patent infringement
litigation.
Research and development expenses increased $470,000, or 4%, to $12,034,000
in 2001 from $11,564,000 in 2000. The increase was due mainly to increased
spending of $2,380,000 for the acceleration of clinical trials in the last six
months of 2001. This expense increase more than offsets the transfer of the
clinical development specialists from research and development expense to a
selling expense in the second quarter of 2001, as well as, decreased spending
over prior years for initial patent filings and professional fees.
Other expense decreased to $21,000 in 2001 from $118,000 in 2000. In 2001,
other expense included interest income on short-term deposits of $91,000,
interest expense of $114,000 from debt used to finance ongoing operations, along
with minor amounts on foreign currency transactions gains and other expense.
FINANCIAL CONDITION
Since its inception, the Company's expenses have exceeded its revenues,
resulting in an accumulated deficit of $116,674,000 as of December 31, 2002.
Since its initial public offering, the Company has primarily relied on proceeds
from issuance of preferred and common stock and bridge debt financing to fund
its operations. At December 31, 2002, the Company's current ratio (current
assets divided by current liabilities) was 1.125 to 1 versus 1.048 to 1 at
December 31, 2001, reflecting an increase in current assets of $502,000 and a
decrease in current liabilities of $621,000.
For the year ended December 31, 2002, the Company's use of cash in
operating activities of $18,459,000 was primarily attributable to the net loss,
increase in inventories, decreases in accounts payable and deferred revenue,
which was offset by a decrease in accounts receivable and an increase in accrued
expenses. The Company's products are generally shipped FOB shipping point, with
terms from 30 to 90 days for domestic sales and 60 to 180 days for foreign sales
based on an acceptable credit determination.
A significant amount of the Company's revenues come from sales to foreign
customers (26% in fiscal year 2002). In addition, total revenues in the last
four months of 2002 were $11,621,000, or 48% of annual revenues, compared to
total revenues of $12,490,000, or 52% of annual revenues, in the first eight
months of 2002. Furthermore, 26% of the revenues occurred within the last four
weeks of the year. As a result of these facts, accounts receivable of $6,786,000
represents 58% of the last four months revenues at December 31, 2002.
Due to the significant percentage of revenues recognized in the last four
months of the year ended December 31, 2002 and the 60 to 180 day payment terms,
foreign customers accounts receivable at December 31, 2002 comprised
approximately 14% of revenue for the year ended December 31, 2002. The existing
pattern of substantial receivable balances will remain for an indeterminate time
due to the following factors: (i) a substantial portion of the revenues
recognized are shipped in the last month of each quarter and (ii) terms with
foreign customers are expected to remain at 60 to 180 days.
Cash outflow from purchases of plant and equipment was $948,000 in 2002.
The Company currently has no material commitments for capital expenditures. For
the year ended December 31, 2002, net cash provided by financing activities of
$21,044,000 was primarily the result of equity offerings during the course of
the year.
The Company's operations to date have consumed substantial amounts of cash,
and the Company expects its capital and operating expenditures may exceed
revenues for at least the next year. The Company raised additional funds through
the following transactions.
On March 7, 2003, the Company entered into an Agreement and Plan of Merger
with Intuitive Surgical, Inc. At the effective time of the merger, Intuitive
Merger Corporation, Inc., formerly Iron Acquisition corporation, a newly formed
subsidiary of Intuitive Surgical, Inc., will be merged with and into Computer
Motion, Inc., with Computer Motion, Inc. surviving the merger and continuing as
a wholly owned subsidiary of Intuitive Surgical, Inc. As a result of the merger,
Computer Motion common stockholders will be entitled to receive approximately
..52 shares of Intuitive Surgical common stock for each share of Computer Motion
common stock that they own, subject to downward adjustment in the event that the
average of the closing bid prices of Computer Motion common stock for the 20
consecutive trading days ending 15 days prior to the Computer Motion special
meeting to approve the merger is below $1.86 per share. Computer Motion
preferred stockholders will be entitled to receive approximately .52 shares of
Intuitive Surgical common stock for each share of Computer Motion common stock
into which the shares of Computer Motion preferred stock that they own would
have been convertible, subject to upward adjustment in the event that the
average of the closing bid prices of Computer Motion common stock for the 20
consecutive trading days ending 15 days prior to the Computer Motion special
meeting to approve the merger is below $1.86 per share.
In connection with the proposed merger, Computer Motion and Intuitive
Surgical have entered into a Loan and Security Agreement, under which Intuitive
Surgical has agreed to provide a short-term secured bridge loan facility of up
to $7.3 million. The loan will terminate and all outstanding amounts will become
due and
payable 120 days following termination of the merger agreement (the "Maturity
Date"). Interest on the loan will accrue at a rate of 8% per annum and will be
payable on the Maturity Date.
Additionally, pursuant to the merger agreement, Computer Motion and
Intuitive Surgical filed stipulations on March 10, 2003 to immediately stay all
pending litigation proceedings between them until August 31, 2003, subject to
the stay being lifted if the merger agreement is terminated, or subject to the
cases being dismissed upon consummation of the transaction contemplated by the
merger agreement.
On February 13, 2003, the Company entered into a Loan and Security
Agreement with Agility Capital, LLC, for a short-term secured bridge loan in the
aggregate principal amount of $2,300,000. The proceeds of the bridge loan were
used to provide funds for the issuance of a letter of credit to support the
issuance of a bond as required by the District Court of Delaware in response to
litigation currently pending. The bridge loan is evidenced by a Secured
Promissory Note that bears interest at a rate of 9% per annum, is secured by all
of the Company's assets and is payable in full on November 12, 2003. In
connection with the bridge loan, the Company issued to Agility Capital a warrant
to purchase up to an aggregate of 500,000 shares of common stock at a purchase
price of $0.97 per share. The Company is in the process of registering the
resale of the shares on its registration statement of Form S-3 with the
Securities and Exchange Commission.
On October 31, 2002, the Company entered into a Series C Convertible
Preferred Stock Purchase Agreement with certain institutional and accredited
investors, including Robert W. Duggan, the Company's Chairman and Chief
Executive Officer. Under the terms of the Series C Stock Purchase Agreement, the
Company sold a total of 7,370 shares of the Company's Series C Convertible
Preferred Stock, including 6,299 shares of Series C-1 Convertible Preferred
Stock and 1,071 shares of Series C-2 Convertible Preferred Stock, and Series C-1
warrants to purchase an aggregate of 1,473,745 shares of common stock at an
initial exercise price of $1.80 per share and Series C-2 warrants to purchase an
aggregate of 1,473,475 shares of common stock at an initial exercise price of
$2.20 per share and warrants to purchase an aggregate of 290,306 shares of
common stock at an exercise price of $.001 per share for aggregate consideration
of $10,316,200. The $10,316,000 is exclusive of the $1,999,200 Robert W. Duggan
investment made in January 2003. As part of the $10,316,200 aggregate
consideration, the Company received $1,499,000 in cash for the purchase of
1,071,000 shares of Series C-2 Convertible Preferred Stock for which the shares
were not issued as of December 31, 2002. These shares were issued in January
2002 and at December 31, 2002, have been shown as a stock subscription within
the accompanying consolidated statements of stockholders' equity. At December
31, 2002 the fair value of the warrants issued, exclusive of Mr. Duggan's
investment, was $2,507,000. In addition, the fair value of the beneficial
conversion feature at December 31, 2002 was determined to be $3,244,000. At
December 31, 2002, the accrued dividends payable were $179,000. On March 6,
2003, all holders of Series C convertible preferred stock agreed to exchange
their shares for newly issued shares of Series D convertible preferred stock.
The terms of the Series D convertible preferred stock eliminates certain
provisions that were contained in the terms of the Series C convertible
preferred stock that could have restricted the ability of the Company to enter
into the merger agreement with Intuitive Surgical.
In February 2002, the holders of its Series B Preferred Stock converted all
of their remaining shares into common stock of the Company. Approximately
2,520,000 common shares were issued in connection with the conversion. In
February 2002, the Company also terminated its equity line agreement with
Societe Generale. In connection with the termination of the equity line
agreement, the Company paid a $135,000 settlement fee to Societe Generale.
In January 2002, the Company entered into a secured, revolving line of
credit with Bay View Funding. This line of credit provided for borrowings up to
$2,000,000 based on eligible domestic trade receivables at a factoring fee of 2%
plus a financing fee of prime rate plus 3%, secured by all the assets of the
Company. The six-month term of this revolving line of credit expired in July
2002 and was not renewed. In February 2002, the Company raised net proceeds of
approximately $10,528,000 through the sale of 2,828,865 shares of common stock
and the issuance of approximately 1,697,319 warrants to purchase common stock at
$5.00 per share, with certain institutional and accredited investors, including
Robert W. Duggan, the Company's Chief Executive
Officer and Chairman. The fair market value of these warrants was determined to
be $3,590,000 under the Black-Scholes valuation model and was recognized as a
direct cost of raising capital. In February $1,395,000 in accounts payable from
certain vendors was exchanged for 328,689 shares of common stock. The proceeds
from the sale of the Company's common stock were used to retire approximately
$2,359,000 (including the note payable to Mr. Duggan) in debt and the remainder
of the proceeds were used to fund working capital needs.
The Company believes that while it will be unable to fund its operations
for the next twelve months with its current cash, cash equivalents and proceeds
available under the working capital Line of Credit with Intuitive Surgical dated
March 6, 2003; management believes that it will be able to obtain additional
funding including proceeds available from the exercise of the Company's Series C
Warrants which will enable the Company to continue its operations through
December 31, 2003. The Company cannot assure that additional capital will be
available on terms favorable to it, or at all. The various elements of the
Company's business and growth strategies, including its introduction of new
products, the expansion of its marketing and distribution activities and its
efforts to obtain regulatory approval or market acceptance, will require
additional capital. If adequate funds are not available or are not available on
acceptable terms, the Company's ability to fund those business activities
essential to its ability to operate profitably, including further research and
development, clinical trials, and sales and marketing activities, would be
significantly limited.
The Company's financial instruments include cash and short-term investment
grade debt securities. At December 31, 2002, the carrying values of the
Company's financial instruments approximated their fair values based on current
market prices and rates. It is the Company's policy not to enter into
derivative financial instruments. The Company does not currently have material
foreign currency exposure as the majority of its international transactions are
denominated in U.S. currency. Accordingly, the Company does not have significant
overall currency exposure at December 31, 2002.
The Company leases approximately 45,000 square feet of office and
manufacturing space in an office park in Goleta, California, approximately 1,100
square feet of office space in Shanghai, China, approximately 850 square feet of
office space in Beijing, China and approximately 1,300 square feet of office
space in Strasbourg, France. As of December 31, 2002, the Company had the
following aggregate minimum lease payments for certain facilities: 2003-
$1,032,000, 2004- $1,013,000, 2005- $766,000, 2006- $751,000 and thereafter
$273,000.
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 marketable securities, which consist of bank
certificates of deposit, commercial paper, and corporate bonds, all of which by
policy must mature within 360 days. 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.
Trade accounts receivable and certain marketable securities are financial
instruments, which may subject the Company to concentration of credit risk.
Although the Company does not anticipate collection problems with its
receivables, payment is contingent to a certain extent upon the economic
condition of the hospitals, which purchase the Company's products. The credit
risk associated with receivables is limited due to the dispersion of the
receivables over a number of customers in a number of geographic areas. The
Company monitors credit worthiness of its customers to which it grants credit
terms in the normal course of business. Marketable securities are placed with
high credit qualified financial institutions and Company policy limits the
credit exposure to any one financial instrument; therefore, credit loss is
reduced. At December 31, 2002, the Company had $2,505,000 cash in excess of
Federal Deposit Insurance Corporation (FDIC) insurance coverage.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and Supplementary Data required by this Item 8 are
set forth at the pages indicated at Item 15 (a)(2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 7, 2002, the Board of Directors of Computer Motion, Inc. (the
"Company") determined, upon the recommendation of its audit committee, to
appoint Ernst & Young LLP as the Company's independent auditors, replacing
Arthur Andersen LLP. The Company dismissed Arthur Andersen LLP on the same date.
This determination followed the Company's decision to seek proposals from
independent public accountants to audit the financial statements of the Company.
The audit reports of Arthur Andersen LLP on the consolidated financial
statements of the Company as of and for the years of the Company ended December
31, 2001 and 2000 did not contain any adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope or accounting
principles.
During the two most recent years of the Company ended December 31, 2001 and
the subsequent interim period to the date hereof, there were no disagreements
between the Company and Arthur Andersen LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to Arthur Andersen LLP's
satisfaction, would have caused Arthur Andersen LLP to make reference to the
subject matter of the disagreement in connection with its reports.
None of the reportable events described under Item 304(a)(1)(v) of
Regulation S-K occurred within the two most recent fiscal years of the Company
ended December 31, 2001 and the subsequent interim period to the date hereof.
During the two most recent fiscal years of the Company ended December 31,
2001 and the subsequent interim period to the date hereof, the Company did not
consult with Ernst & Young LLP regarding any of the matters or events set forth
in Item 304(a)(2)(i) and (ii) of Regulation S-K.
The Company provided Arthur Andersen LLP a copy of the foregoing
disclosures. Attached as Exhibit 16 is a copy of Arthur Andersen's letter dated
June 7, 2002 stating that it has found no basis for disagreement with such
statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Daniel R. Doiron, Ph.D., 52, was a founder and director of Miravent Medical
Technologies, Inc. (formerly PDT, Inc.), a pharmaceutical company specializing
in photodynamic therapy for certain cancers and other diseases, where he served
in various capacities, including Vice President of Technology and Chief
Scientist and President of its subsidiary, PDT Systems, Inc., from 1989 to 1997.
Dr. Doiron holds B.S. and M.S. degrees in Nuclear Engineering and a Ph.D. in
Chemical Engineering from the University of California at Santa Barbara.
Robert W. Duggan, 58, has been Chief Executive Officer since October 1997,
and Chairman of the Board of Directors since 1990. Mr. Duggan has been a private
venture investor for more than 25 years, and has participated as a director of,
investor in and advisor to numerous small and large businesses in the medical
equipment, computer local and wide area network, PC hardware and software
distribution, digital encryption, consumer retail goods and outdoor media
communications industries. He has also assisted in corporate planning, capital
formation and management for his various investments. He is a member of the
University of California, Santa Barbara Foundation Board of Trustees. Mr. Duggan
is Chairman of MAG International ("MAG"). MAG was established by Robert W.
Duggan and Associates in 1992 and its the largest independent outdoor
advertising company in the combined Republic of Slovenia, Croatia, Srpska,
Serbia. MAG controls over 8,500 display faces.
Jeffrey O. Henley, 58, is currently an Executive Vice President and the
Chief Financial Officer of Oracle Corporation. Prior to joining Oracle in 1991,
Mr. Henley served as Executive Vice President and Chief Financial Officer at
Pacific Holding Company, Los Angeles, and Executive Vice President and Chief
Financial Officer at Saga Corp., a multi-billion dollar food service company. He
also served as Director of Finance at Memorex Corp. in its large storage
division and as Controller of International Operations at Fairchild Camera and
Instruments. Mr. Henley holds a bachelor's degree in economics from the
University of California at Santa Barbara and an MBA in finance from UCLA.
Eric H. Halvorson, 53, joined the Company in July 2002 as a member of the
Board of Directors. Mr. Halvorson is currently a Visiting Professor of Business
Law and Accounting at Pepperdine University, Malibu, California where he
instructs classes in the Legal and Regulatory Environment of Business and
Financial Accounting. Mr. Halvorson also has an extensive background in
business. He was the Executive Vice President and Chief Operating Officer at
Salem Communications Corp (NASDAQ:SALM) from 1995-2000. He directed Salem's 1999
$150 million initial public equity offering and its $150 million public debt
offering in 1997. Prior to becoming the Chief Operating Officer of Salem
Communications, he was Vice President and General Counsel for ten years. From
1976 until 1985, he was a partner at Godfrey and Kahn, a Milwaukee, Wisconsin
based law firm. At Godfrey and Kahn, Mr. Halvorson specialized in corporate,
banking and securities law with a particular emphasis in mergers and
acquisitions. Mr. Halvorson is a Certified Public Accountant and holds a
Bachelor of Science degree in Accounting from Bob Jones University and a Juris
Doctor degree from Duke University School of Law. Mr. Halvorson is currently a
director of Salem Communications Corp. and Media Arts Group, Inc. At Computer
Motion, he serves on the Audit and Compensation Committees of the Board of
Directors.
Joseph M. DeVivo, 36, joined the Company in August 2002 as President and
Chief Operating Officer. Mr. DeVivo was also granted a seat on the Company's
Board of Directors. His responsibilities include worldwide sales and marketing.
Mr. DeVivo has extensive experience in the healthcare industry, most recently
serving as Vice President and General Manager of a $350 million annual revenue
division of TYCO International's Healthcare Business, U.S. Surgical/Davis and
Geck Sutures. As Vice President and General Manager, Mr. DeVivo was responsible
for all aspects of the division including sales, marketing, research and
development, and finance. Additionally, over his nine years with U.S. Surgical,
Mr. DeVivo held senior positions in sales and marketing and supervised numerous
successful product launches. Mr. DeVivo received a Bachelors of Science Degree
in Marketing and Management from the E. Claiborne Robins School of Business,
University of Richmond, Richmond, Virginia.
EXECUTIVE OFFICERS
William J. Meloche, 59, joined the Company as Executive Vice President of
Sales and Marketing in July of 2000 and is currently serving as Executive Vice
President. Mr. Meloche was formerly president and CEO of Meloche Communications
International, a communications agency he started in 1975 focused on strategic
marketing to global markets. Meloche Communications grew from inception up to
the sale of the company to a group of investors in 1994 to annual revenues in
excess of $50,000,000. Previous clients include American Express, Air Canada,
Timex and Toyota Corporation. From 1994 until the time of his employment with
the Company, Mr. Meloche acted as an independent consultant and advisor to
companies in the areas of building business to business relationships and
changes in the management processes. He is a respected communications innovator
and the architect of the Customer Care Process, as practiced by several leading
service corporations.
David A. Stuart, 46, joined the Company as Vice President of Operations in
June 1996. In December 2002, he became the Vice President of Product Marketing,
Business Development, and the General Surgery business unit. From 1992 to 1996,
Mr. Stuart served as Director of Materials at Quantum Corporation, a disk drive
manufacturer. Previously, he was Director of Materials and Manager of
Manufacturing Finance for LTX Corporation, a manufacturer of semi-conductor test
equipment. Mr. Stuart currently serves as a board member of the American
Management Association Executive Council for Strategic Supply Chain Management.
Eugene W. Teal, 58, joined the Company as the Executive Vice President,
Finance and Administration in January 2002. In his current role as Executive
Vice President he is helping implement strategies to ensure
sustainable competitive advantage in the Company's markets. From 2000 to 2001
Mr. Teal served as a Business Consulting Director at Oracle Corporation. Prior
to joining Oracle, from 1981 to 1990 Mr. Teal served as a Senior Vice President
responsible for numerous profit centers and was a member of the Board of
Directors at Alexander & Alexander, Inc., a wholly owned subsidiary of Alexander
& Alexander Services. Between 1990 and 2000 Mr. Teal held various consulting and
college teaching positions, including the University of La Verne. Mr. Teal was
also a consultant for McKinsey & Company, where he solved strategic problems of
concern to CEOs and boards of directors. Mr. Teal holds a Bachelor's degree in
Economics from the University of California at Santa Barbara and an MBA in
Finance from UCLA.
Stephen Pedroff, 46, joined the Company as Vice President, Corporate
Relations in September 2001. Prior to joining the Company, from 2000 to 2001 Mr.
Pedroff served as Director of Business Development at Salus Media, Inc., a
developer of online health and wellness products for the medical and insurance
industries. From 1998 to 2000 Mr. Pedroff served as Vice President of Business
Development at Digital Media International, a maker of location based
entertainment products. From 1996 until 1998 Mr. Pedroff served as an Executive
Producer for America Online. Prior to joining America Online, from 1988 to 1996
Mr. Pedroff owned and ran a public relations and marketing firm, where he
created successful communications campaigns for clients including MCI, General
Motors, McGhan Medical, and Fujitsu. Mr. Pedroff has also engaged in business
development work with companies including Mattel, Disney Imagineering, Cendant
Software, and Segasoft.
Darrin Uecker, 37, was appointed the Company's Chief Technical Officer in
August 2002. Previously, Mr. Uecker served as the Company's Chief Operating
Officer and Vice President of Engineering. While Vice President of Engineering,
Mr. Uecker led the research and development teams for the Company's core product
platforms: AESOP, HERMES and ZEUS. Most recently, he was responsible for the
creation of Zeus with MicroWrist. In his current positions Mr. Uecker has
overall responsibility for the Company's Engineering, Production and
Clinical/Regulatory/Quality Affairs departments. Mr. Uecker joined the Company
in 1993 and has served as Staff Software Engineer, Manager and Vice President of
Engineering. Mr. Uecker holds 11 patents and has written numerous publications
in the areas of computer vision, man-machine interface design, and medical
robotic systems and has more than a dozen patents pending. Mr. Uecker received
both his B.S. and M.S. degrees in Electrical and Computer Engineering from the
University of California at Santa Barbara.
David Munjal, 62, joined the Company in October 2001 as Vice President of
Clinical Affairs, Regulatory Affairs, and Quality Assurance. Prior to joining
the Company, from 1997 to 2001, Dr. Munjal served as Director of Clinical
Research & Regulatory Affairs at BioEnterics Corporation (BEC), an Inamed
Company where he was responsible for the Company's worldwide clinical and
regulatory affairs, managed and completed clinical trials for a number of
devices projects, and made regulatory submissions for FDA approval and
international regulatory agencies. Prior to joining BEC, Dr. Munjal worked for
nine years as Corporate Director of Clinical Research/Clinical Affairs for
Meadox Medical/Boston Scientific Corporation. Previously, Dr. Munjal served in
various positions at Organon, Inc., Abbott Laboratories, and Integra Life
Sciences. Dr. Munjal received his Ph.D. in Biochemistry/Immunology from the
State University of New York at Buffalo and did advanced post-doctoral training
and teaching at Harvard University, University of Kentucky, and Ohio State
University.
Larry Redfern, 57, was appointed the Company's Chief Accounting Officer in
December 2002. Previously, Mr. Redfern served as the Company's Controller since
joining the Company in April 2000. Prior to joining Computer Motion, Mr. Redfern
was Treasurer for Applied Magnetics Corporation in Santa Barbara, California.
Mr. Redfern joined the company in 1976, as General Accounting Manager. Applied
Magnetics Corporation at one time was the leading independent manufacturer of
magnetic recording heads for the computer industry reaching their highest annual
sales of just under $500 million for 1997. Mr. Redfern was an Audit Manager with
Laventhol and Horwath, CPA's prior to entering private industry. Mr. Redfern
holds a bachelor's degree in business from California State University at
Northridge and an MBA in business from the University of Hawaii. In addition,
Mr. Redfern holds CPA licenses in the states of California and Hawaii.
Charles J. Vivian, 52, joined Computer Motion as Executive Vice President
of Sales for the Americas in September of 2002. Mr. Vivian has more than
twenty-five years of sales experience in the healthcare industry, most recently
as the Vice President, Sales for U.S. Surgical, a division of TYCO
International's Healthcare Business. At U.S. Surgical, he managed a sales
organization of 432 representatives, managers, and specialists. During his
sixteen years at U.S. Surgical, Mr. Vivian held senior positions in sales and
distribution development and has consistently been recognized as a top performer
in the U.S. Surgical organization. He began his career at American Hospital
Supply as a sales representative. He was also a top performer in computer system
sales before joining U.S. Surgical.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than ten percent of a registered class of the Company's
equity securities, to file reports of ownership of, and transactions in, the
Company's securities with the Securities and Exchange Commission and The Nasdaq
Stock Market. Such directors, executive officers and 10% stockholders are also
required to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely upon its review of the copies of Forms 3, 4 and 5 and
amendments thereto, the Company believes that all filing requirements under
Section 16(a) of the Exchange Act applicable to its directors, officers and any
persons holding ten percent or more of the Company's common stock were made with
respect to the Company's fiscal year ended December 31, 2002.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows the cash compensation and certain other
compensation paid or accrued by the Company to its Chief Executive Officer
("CEO") and each of the four other most highly compensated executive officers of
the Company other than the CEO (collectively the "Named Executive Officers")
during fiscal years 2002, 2001 and 2000 in all capacities in which they served.
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------
ANNUAL COMPENSATION SECURITIES
NAME AND -------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- -----------------------------------------------------------------------------------------
Robert Duggan 2002 $159,537 -- 80,000 --
Chairman 2001 $167,680 $16,400 25,000 --
Chief Executive Officer 2000 $164,000 $ 3,280 40,400 --
Joseph DeVivo(1) 2002 $ 75,474 $80,000 400,000 --
President 2001 -- -- -- --
Chief Operating Officer 2000 -- -- -- --
Eugene Teal(2) 2002 $143,527 $40,000 170,000 --
Executive Vice President 2001 -- -- -- --
2000 -- -- -- --
David A. Stuart 2002 $157,537 -- 20,000 --
Vice President Operations 2001 $163,590 $14,808 15,000 --
2000 $147,000 $10,050 20,520 --
Darrin Uecker(3) 2002 $180,080 $16,000 250,000 --
Chief Technical Officer 2001 $145,609 $ 8,613 110,000 --
2000 -- -- 90,000 --
William Meloche 2002 $164,422 -- 10,000 --
Executive Vice President 2001 $165,000 -- 20,000 $ 30,792
2000 $ 80,752 -- 150,000
- -----------------------------------------------------------------------------------------
(1) Mr. DeVivo joined the Company in August 2002 at an annual salary of
$220,000.
(2) Mr. Teal joined the Company in January 2002 at an annual salary of
$160,000.
(3) Mr. Uecker became the Chief Technical Officer in August of 2002.
OPTION GRANTS
The following table sets forth certain information concerning grants of
stock options to each of the Company's Named Executive Officers during the
fiscal year ending December 31, 2002. In addition, in accordance with the rules
and regulations of the Securities and Exchange Commission, the following table
sets forth the hypothetical gains or "option spreads" that would exist for the
options. Such gains are based on assumed rates of annual compound stock
appreciation of 5% and 10% from the date on which the options were granted over
the full term of the options. The rates do not represent the Company's estimate
or projection of future common stock prices and no assurance can be given that
the rates of annual compound stock appreciation assumed for the purposes of the
following table will be achieved.
OPTION GRANTS IN LAST FISCAL YEAR
- ----------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
NUMBER % OF TOTAL VALUE AT ASSUMED
OF SECURITIES OPTIONS ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO PRICE FOR OPTION TERM(3)
OPTIONS EMPLOYEES EXERCISE EXPIRATION -------------------------
NAME GRANTED(1) 2002 PRICE/SHARE(2) DATE 5% 10%
- ----------------------------------------------------------------------------------------------------------------------------
Robert W. Duggan 80,000 2.8% $0.65 7/5/12 $ 36,938 $ 96,362
Eugene Teal 30,000 1.1% $0.65 7/5/12 $ 13,852 $ 36,136
David A. Stuart 20,000 0.7% $0.65 7/5/12 $ 9,234 $ 24,091
Joseph DeVivo 300,000 10.6% $0.80 7/8/12 $170,481 $444,748
Joseph DeVivo 100,000 3.5% $0.86 12/30/12 $ 61,089 $159,368
Darrin Uecker 50,000 1.8% $1.65 5/24/12 $ 58,603 $152,882
Darrin Uecker 100,000 3.5% $0.65 7/5/12 $ 46,172 $120,453
Darrin Uecker 100,000 3.5% $0.86 12/30/12 $ 61,089 $159,368
William Meloche 10,000 0.4% $0.65 7/5/12 $ 4,617 $ 12,045
- ----------------------------------------------------------------------------------------------------------------------------
(1) Stock options vest at 25% per year for four years and expire 10 years from
the issue date.
(2) The exercise price per share was equal to the fair market value of the
common stock on the date of grant.
(3) The potential realizable value is calculated assuming that the fair market
value of the Company's common stock on the date of grant appreciates at the
indicated annual rate compounded annually for the entire term of the stock
option (ten years) and that the stock option is exercised and sold on the
last day of its term for the appreciated stock price. The 5% and 10%
assumed annual rates of stock price appreciation are mandated by the rules
of the Securities and Exchange Commission. Actual gain, if any, on stock
option exercises is dependent on the future performance of the common
stock.
OPTION EXERCISES
The following table sets forth information concerning the exercise of stock
options during the last fiscal year and unexercised stock options held as of the
end of the fiscal year for the Named Executive Officers. In addition, the table
includes the number of shares covered by both exercisable and unexercisable
stock options as of December 31, 2002. Also reported are the values for "in the
money" options, which represent the positive spread between the exercise prices
of any such existing stock options and the fiscal year end price of the
Company's common stock.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR-END OPTION VALUES
- -------------------------------------------------------------------------------------------------------------------------
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ON VALUE OPTIONS AT FISCAL AT FISCAL
NAME EXERCISE REALIZED YEAR-END YEAR END (1) (2)
- -------------------------------------------------------------------------------------------------------------------------
NON- NON-
EXERCISABLE EXERCISABLE EXERCISABLE EXERCISABLE
- -------------------------------------------------------------------------------------------------------------------------
Robert W. Duggan -- -- 93,654 117,719 -- $30,400
Joseph DeVivo -- -- 75,000 325,000 $17,250 $68,750
David A. Stuart -- -- 140,933 42,760 -- $ 7,600
Eugene Teal -- -- 65,334 104,666 -- $11,400
Darrin Uecker -- -- 77,500 372,500 -- $55,000
William Meloche -- -- 85,000 95,000 -- $ 3,800
- -------------------------------------------------------------------------------------------------------------------------
(1) Represents market value of underlying securities at date of exercise less
option exercise price.
(2) Values were calculated using a price of $1.03 per share, the closing sale
price of the Company's common stock as reported by the NASDAQ on December
31, 2002 minus the option exercise price.
EMPLOYMENT AGREEMENTS.
In January 2002, Computer Motion entered into a letter agreement with
Eugene W. Teal, Executive Vice President, which provides for an annual base
salary of $160,000 and a target bonus percentage of 50% of annual base salary.
Mr. Teal's bonus was guaranteed for the first year of his employment, which
began on January 23, 2002. The letter agreement also guarantees payment of Mr.
Teal's base salary for a two-year period. In addition, the letter agreement
provides that in the event Computer Motion is acquired or experiences a change
in control, Mr. Teal is guaranteed payment of his base salary through January
22, 2005.
In June 2002, Computer Motion entered into a letter agreement with Joseph
M. DeVivo, President and Chief Operating Officer, which provides for an annual
base salary of $220,000 and a bonus of up to 90% of annual base salary. The
letter agreement guarantees payment of Mr. DeVivo's base salary and a 90% bonus
for a one-year period. In addition, in the event Mr. DeVivo terminates his
employment for any reason following 90 days after Computer Motion is acquired or
experiences a change in control, or if Computer Motion terminates Mr. DeVivo for
any reason other than for cause after one year of service, Mr. DeVivo is
guaranteed payment of his base salary for a one-year period thereafter.
INDEMNIFICATION AGREEMENTS.
The Company indemnifies its directors and officers against certain costs
that could be incurred if they were made, or threatened to be made, a party to a
legal proceeding because of their official status as a director of officer. The
indemnification agreements, together with the Company's bylaws, provide for
indemnification to the fullest extent permitted by Delaware law.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information as of December 31, 2002 concerning
compensation plans under which the Company's equity securities are authorized
for issuance:
- -------------------------------------------------------------------------------------------------------------------------
Number of securities
Number of securities to be Weighted-average remaining available under
issued upon exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
PLAN CATEGORY warrants and rights warrants and rights reflected in column (a))
- -------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
Equity compenstion plans
approved by security holders 5,535,588 $3.68 80,618
Equity compensation plans
not approved by security holders 0 0 0
Total 5,535,588 $3.68 80,618
- -------------------------------------------------------------------------------------------------------------------------
The following table presents information provided to the Company as to
beneficial ownership of the Company's common stock as of March 1, 2003 (i) by
each person (or group of affiliated persons) who is known by the Company to own
beneficially more than five percent of the Company's common stock; (ii) by each
of the Company's directors, including the Company's Chief Executive Officer;
(iii) by each of the Named Executive Officers; and (iv) by all directors and
executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or exercisable within 60 days of March 1, 2003 are
deemed outstanding. Such shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of each other person. To the
Company's knowledge, except as otherwise indicated and except for the effect of
community property laws, as applicable, the persons listed below have sole
voting and investment power with respect to all shares shown as beneficially
owned by them.
- ----------------------------------------------------------------------------------------------------------
COMMON STOCK PERCENT OF
BENEFICIAL OWNERS BENEFICIALLY OWNED OUTSTANDING SHARES
Directors and Executive Officers
Joseph DeVivo(2) 215,853 1.10%
Daniel Doiron(3) 146,166 *
Robert W. Duggan(1) 4,448,477 20.96%
Eric Halvorson 8,918 *
Jeffrey Henley(3) 196,033 1.01%
William Meloche(3) 86,200 *
David Stuart(3) 148,757 *
Eugene Teal(3) 65,334 *
Darrin Uecker(3) 91,200 *
---------
Directors and Executive Officers as a Group 5,460,858 24.84%
11 persons
* less than 1%
- ----------------------------------------------------------------------------------------------------------
(1) Includes 492,546 shares and 3,565 warrants owned by Mr. Duggan's spouse of
which he disclaims beneficial ownership and 100,154 stock options and
676,272 warrants which may be exercised within 60 days from March 1, 2003.
(2) Includes 75,000 stock options and 40,000 warrants that may be exercised
within 60 days from March 1, 2003.
(3) Includes 146,833, 91,200, 86,200, 73,213, 65,334 and 37,830 stock options
and warrants which may be exercised by Mr. Stuart, Mr. Uecker, Mr. Meloche,
Mr. Doiron, Mr. Teal, and Mr. Henley, respectively within 60 days from
March 1, 2003.
BOARD COMPENSATION
Directors do not receive any cash compensation for their service as members
of the Board of Directors, but are reimbursed for expenses in connection with
attendance at Board of Directors and Board Committee meetings. Non-employee
Directors are eligible to receive discretionary stock option grants under the
Company's stock plans. Each non-employee Director received a grant of 25,000
stock options during the year ended December 31, 2002.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
During the year ended December 31, 2002, the Compensation Committee of the
Company's Board of Directors established the levels of compensation for the
Company's executive officers. The Compensation Committee consisted of Dr. Doiron
(Chairman), Mr. Halvorson and Mr. Henley. None of these individuals has served
as an officer or employee of the Company.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors (the "Committee") was
responsible for administering the compensation program for the Company's
executive officers, including the named executive officers, in 2002. The
Committee is composed exclusively of independent, non-employee directors who are
not eligible to participate in any aspect of the executive compensation program,
except for the possible receipt of stock options under the Company's stock
plans.
Compensation Philosophy> The Company's continued growth, new product
development, regulatory clearance and market introduction activities, together
with worldwide healthcare reform and competitive pressures, present significant
challenges to the Company's management. The Committee believes that, if the
Company is to continue its growth, bring new products to market, achieve
significant revenues and become profitable, its executive compensation program
must have the flexibility to attract and retain high quality employees.
Furthermore, the executive compensation program must provide incentives, which
will reward key managers for aggressively pursuing the actions necessary to
improve the Company's performance and enhance long-term stockholder value. The
Company's executive compensation program is based upon a pay-for-performance
philosophy. There are three components to the Company's executive compensation
program: base salary, a cash incentive bonus opportunity and long-term stock
based incentives. The Company is committed to a strong link between its business
and strategic goals and its compensation program. The financial goals for
certain elements of the compensation program are reviewed and approved by the
Board of Directors in conjunction with its approval of the Company's strategic
and operating plans.
Base Salary> An executive's base salary is determined by an assessment of
his sustained performance, advancement potential, experience, responsibility,
scope and complexity of the position, current salary in relation to the range
designated for the job and salary levels for comparable positions at peer group
companies. Additionally, the Board sets base salaries for executive officers
based on the executive's contribution to the Company's success through
operational improvements and strategic initiatives. Factors considered in
determining base salary are not assigned pre-determined relative weights.
Bonus Program> Payments under the Company's management bonus program are
based on the Company's achievement of performance goals as approved by the
Compensation Committee and the executive's achievement of individual objectives
as approved by the Chief Executive Officer. Company performance goals for 2002
were related to targeted levels of revenue, profitability and gross margin based
on the Company's 2002 operating plan that was approved by the Board of
Directors. It is anticipated that performance goals for 2003 will also relate to
these categories. The management bonus program provides for a normal bonus of up
to a maximum of 90% of base pay, with an over-achievement bonus of up to an
additional maximum of 25% of base pay.
Equity Based Compensation> The Company's overall equity based compensation
philosophy is that equity based incentives should be directly related to the
creation of stockholder value, thus providing a strong link between management
and stockholders. The Company believes that stock based incentives are very
consistent with the entrepreneurial spirit the Company seeks in its executive
team. In support of this philosophy, the Company has awarded to its executive
officers stock options and to a limited extent, restricted stock.
Stock Option Grants> Stock options encourage and reward executive officers
for creating stockholder value as measured by stock price appreciation. Stock
options are granted at an exercise price equal to the fair market value of the
stock on the date of grant and therefore, only have value if the price of the
Company's stock appreciates in value from the price of the stock on the date
options are granted. The executive officers and
stockholders benefit equally from such stock price appreciation. The Company
utilizes stock options, in lieu of higher, industry standard base salaries and
bonuses, as a means to attract, retain and motivate talented executives upon
whose performance the Company is dependent. Stock options are generally granted
annually and are consistent with the Company's objective to provide (i) a
long-term equity interest in the Company, and (ii) an opportunity for a greater
financial reward if long-term performance is sustained. To encourage a long-term
perspective, stock options cannot be exercised immediately. Generally, stock
options become exercisable over a four-year period. All stock options granted to
executive officers are approved by the Compensation Committee. Individual grants
are dependent on the executive officer's experience, position and level of
responsibility within the Company, an evaluation of the officer's performance
and an assessment of the executive officer's ability to positively impact the
Company's future business plans. No pre-assigned relative weight is ascribed to
any of these factors.
Compensation of Chief Executive Officer Robert W. Duggan, the Company's
Chairman of the Board, assumed the responsibility of Chief Executive Officer in
October 1997. Mr. Duggan's annual salary for 2002 was $159,537. He has an annual
normal bonus of up to a maximum of 50% of base pay, with an annual
over-achievement bonus opportunity of up to an additional maximum of 25% of base
pay based on over-achievement of stated objectives. For the year ended December
31, 2002, the Company's overall performance was below targeted levels and
therefore, Mr. Duggan did not receive a bonus. Mr. Duggan's salary and bonus
opportunity were considered to be very reasonable in comparison to similar
salaries and bonus structures for medical device company chief executive
officers. The Compensation Committee will consider future salary and bonus
adjustments and stock option grants for the chief executive officer based on the
Company's operating performance, as well as the compensation packages of
similarly positioned medical device company Chief Executive Officers. The
Committee believes that its Chief Executive Officer should have an equity
interest in the Company.
Fiscal Year 2002 Compensation Under Section 162(m) of the Internal Revenue
Code of 1986, as amended, compensation paid or accrued with respect to an
employee of a public corporation is limited to no more than $1 million per year.
It is not expected that the compensation to be paid to the Company's executive
officers will exceed the $1 million limit per employee. The Company's stock
option plans are structured such that any compensation deemed paid to an
executive officer when he exercises an outstanding stock option under the plan
will qualify as performance-based compensation that will not be subject to the
$1 million limitation.
SUBMITTED BY THE COMPENSATION COMMITTEE
/s/ Eric Halvorson /s/ Daniel R. Doiron /s/ Jeffrey O. Henley
- ----------------------- ------------------------- -------------------------
Eric Halvorson Daniel R. Doiron Jeffrey O. Henley
STOCK PERFORMANCE
The Securities and Exchange Commission requires that the Company include in
this proxy statement a line-graph presentation comparing cumulative five-year
stockholder returns on an indexed basis with the Standard and Poor's ("S&P") 500
Stock Index and either a nationally recognized industry standard or an index of
peer companies selected by the Company. The Company uses the S&P Medical
Products and Supplies Index as its peer group index. The table below compares
the cumulative total return as of the Company's last fiscal year assuming $100
was invested as of August 11, 1997, the date of the Company's initial public
offering, in the common stock of the Company, the S&P Medical Products and
Supplies Index and the S&P 500 Stock Index, assuming the reinvestment of all
dividends. The Indexes are weighted based on market capitalization at the time
of each reported data point.
INDEX 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02
- ----- -------- -------- -------- -------- --------
Computer Motion $ 89.29 $ 78.57 $ 33.07 $ 28.21 $ 7.36
S&P 500 $133.62 $161.83 $147.42 $130.05 $93.90
S&P 500 Healthcare Equipment and Supplies Index $138.81 $131.20 $188.06 $177.55 $63.96
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 9, 2002 the Company issued a $1,000,000 promissory note to
Robert W. Duggan, the Company's Chairman of the Board and Chief Executive
Officer, in exchange for funds loaned to the Company. On January 27, 2003 the
Company received stockholder approval to convert Mr. Duggan's note into shares
of the Company's Series C Convertible Preferred Stock, which were issued on
January 29, 2003.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief Executive
Officer and Chief Accounting Officer are responsible for establishing and
maintaining "disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) for the Company. Our Chief
Executive Officer and Chief Accounting Officer, after evaluating the
effectiveness of our disclosure controls and procedures as of a date within 90
days before the filing date of this Annual Report on Form 10-K, have concluded
that our disclosure controls and procedures are effective.
(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect those
controls subsequent to the date of the evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
See Index to Financial Statements and Schedule on page F-1.
(2) FINANCIAL STATEMENT SCHEDULE
See Index to Financial Statements and Schedule on page F-1.
(3) EXHIBITS.
Exhibit
No. Description
- -------- ---------------------------------------------------------------------------------------------------
3.1 Second Amended and Restated Certificate of Incorporation.*
3.2 Bylaws of the Company.*
4.1 Certificate of Designations Setting Forth the Preferences, Rights, and Limitations of the Series B
Convertible Preferred Stock, filed on February 16, 2001.+
4.2 Registration Rights Agreement, dated as of February 16, 2001, by and between the Company, Societe
Generale, Catalpa Enterprises, Ltd., Jeffrey O. Henley, Robert W. Duggan, Mahkam Zananeh, Baystar
Capital, LP, and Baystar International, Ltd.+
4.3 Form of Warrant for the purchase of Common Stock of The Company, Inc.+
4.4 Registration Rights Agreement, dated as of March 30, 2001, by and between the Company and Societe
Generale.++
4.5 Registration Rights Agreement, dated as of February 13, 2002, among the Company and the Purchasers
listed on Exhibit A thereto.++++
4.6 Certificate of Designations Setting Forth the Preferences, Rights and Limitations of the Series C
Convertible Preferred Stock, filed on October 31, 2002.(1)
4.7 Form of Registration Rights Agreement, dated as of October 31, 2002, by and among the Company and
the investors signatory thereto.(1)
4.8 Form of Series C-1 Warrant for the purchase of the Company's common stock.(1)
4.9 Form of Series C-2 Warrant for the purchase of the Company's common stock.(1)
4.10 Form of Agreement (regarding the Series C Convertible Preferred Stock), dated December 11, 2002,
by and among the Company and the investors signatory thereto.(2)
4.11 Form of Secured Promissory Note (included as Exhibit C to Exhibit 10.28 below).(3)
4.12 Form of Warrant for the purchase of the Company's common stock.(3)
10.1 Computer Motion, Inc. Tandem Stock Option Plan.*
10.2 Development and Supply Agreement between the Stryker Endoscopy Division of Stryker Corporation and
the Company dated August 21, 1996.*(4)
10.3 Registration Agreement between the Company and certain stockholders.*
10.4 Sales Agreement between the Company and Medtronic, Inc. dated May 28, 1997.*(4)
10.5 Form of Warrant to Purchase Common Stock issued in connection with Bridge Financing Agreements.*
10.6 Purchaser Representation and Subscription Agreement relating to the Company's Series E Preferred
Stock and Warrant to Purchase Common Stock.*
10.7 Form of Redeemable Warrant to Purchase Common Stock of the Company issued in conjunction with the
Company's Series E Preferred Stock.*
10.8 Business Agreement between the Company and Bulova Technologies, L.L.C. dated February 18, 1997.*(4)
10.9 Lease between the Company and University Business Center Associates dated March 1, 1994 and
amendment thereto dated October 19, 1996.*
10.10 Form of Indemnification Agreement for Officers and Directors of the Company.*
10.12 Computer Motion, Inc. Employee Stock Purchase Plan, as amended through September 30, 1997.**
Exhibit
No. Description
- -------- ---------------------------------------------------------------------------------------------------
10.13 Leases between the Company and University Business Center Associates dated September 19, 1997.**
10.14 Computer Motion, Inc. 1997 Stock Incentive Plan*
10.15 Stock Purchase Agreement between the Company and the Investors listed on Schedule A thereto, dated
June 29, 2000.***
10.16 Promissory Note between the Company and Robert W. Duggan, dated July 25, 2000.***
10.17 Form of Redeemable Warrant to Purchase common stock of the Company.***
10.18 Promissory Note between the Company and Robert W. Duggan, dated December 12, 2000.****
10.19 Securities Purchase Agreement, dated February 16, 2001, by and between the Company, Societe
Generale, Catalpa Enterprises, Ltd., Jeffrey O. Henley, Robert W. Duggan, Mahkam Zananeh, Baystar
Capital, LP, and Baystar International, Ltd.+
10.20 Equity Line Financing Agreement, dated as of March 30, 2001, by and between the Company and Societe
Generale.++
10.21 Amended and Restated Equity Line Financing Agreement, dated as of September 30, 2001, by and
between and Societe Generale.+++
10.22 Stock Purchase Agreement, dated January 30, 2002, by and between the Company and
Steven L. Gruba.++++
10.23 Stock Purchase Agreement, dated January 22, 2002, by and between the Company and Stradling Yocca
Carlson & Rauth, P.C.++++
10.24 Securities Purchase Agreement, dated February 13, 2002, among the Company and the Purchasers listed
on Exhibit A thereto.++++
10.25 Stock Purchase Agreement, dated February 19, 2002, by and between the Company and
Corlund Electronics, Inc.++++
10.26 Form of Series C Convertible Preferred Stock Purchase Agreement, dated October 31, 2002, by and
among the Company and the investors' signatory thereto.
10.27 Form of Amendment No. 1 to Series C Convertible Preferred Stock Purchase Agreement, dated December
11, 2002, by and among the Company and the investors signatory thereto.(2)
10.28 Form of Loan and Security Agreement, dated February 13, 2003, between the Company and Agility
Capital, LLC.(3)
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
- --------------
* Incorporated by reference to the Company's Form S-1 (File No. 333-29505)
declared effective August 11, 1997.
** Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
*** Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 2001.
**** Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2000.
+ Incorporated herein by reference to the Company's Current Report on Form
8-K filed with the Commission on March 26, 2001.
++ Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the period ended March 31, 2001.
+++ Incorporated herein by reference to the Company's Pre-Effective Amendment
No. 2 to Form S-2 (File No. 333-65952) declared effective on September 24,
2001.
++++ Incorporated herein by reference to the Company's Registration Statement
on Form S-3 (File No. 333-83552) filed with the Commission on February 28,
2002.
+++++ Incorporated herein by reference to the Company's Registration Statement
on Form S-3 (File No. 333-101830) filed with the Commission on December
23, 2002.
(1) Incorporated herein by reference to the Company's Current Report on Form
8-K filed with the Commission on November 4, 2002.
(2) Incorporated herein by reference to the Company's Current Report on Form
8-K filed with the Commission on December 12, 2002.
(3) Incorporated herein by reference to the Company's Current Report on Form
8-K filed with the Commission on February 13, 2003.
(4) Registrant has sought confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit
with the Commission.
(b) REPORTS ON FORM 8-K
The Company filed Current Reports on Form 8-K on November 4, 2002 and
December 12, 2002. Since December 31, 2002 the Company has filed Current
Reports on Form 8-K on February 7, 2003, February 24, 2003 and March 11,
2003.
(c) EXHIBITS
See Item 15 (a)(3) of this Report.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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.
COMPUTER MOTION, INC.
March 28, 2003 /s/ Robert W. Duggan
- -------------- ---------------------------------------------------
Date Robert W. Duggan
Chairman and Chief Executive Officer
(Principal Executive Officer)
March 28, 2003 /s/ Larry Redfern
- -------------- ---------------------------------------------------
Date Larry Redfern
Controller, Chief Accounting Officer and Secretary
(Principal Financial and Accounting Officer)
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 date indicated.
/s/ Daniel R. Doiron Director March 28, 2003
- -------------------------------------------- --------------
Daniel R. Doiron
/s/ Robert W. Duggan Director March 28, 2003
- -------------------------------------------- --------------
Robert W. Duggan
/s/ Eric Halvorson Director March 28, 2003
- -------------------------------------------- --------------
Eric Halvorson
/s/ Jeffery O. Henley Director March 28, 2003
- -------------------------------------------- --------------
Jeffrey O. Henley
/s/ Joseph M. DeVivo Director March 28, 2003
- -------------------------------------------- --------------
Joseph M. DeVivo
CERTIFICATIONS
I, Robert W. Duggan, Chairman and Chief Executive Officer of Computer Motion,
Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Computer Motion, 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 or 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
Rules 13a-14 and 15d-14 of the Exchange Act) 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
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.
Dated: March 28, 2002 COMPUTER MOTION, INC.
By: /s/ Robert W. Duggan
Robert W. Duggan
Chairman of the Board of Directors
and Chief Executive Officer
I, Larry Redfern, Chief Accounting Officer of Computer Motion, Inc., certify
that:
1. I have reviewed this annual report on Form 10-K of Computer Motion, 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 or 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
Rules 13a-14 and 15d-14 of the Exchange Act) 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
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.
Dated: March 28, 2002 COMPUTER MOTION, INC.
By: /s/ Larry Redfern
Larry Redfern
Controller and Chief Accounting Officer
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors of
Computer Motion, Inc.:
We have audited the accompanying consolidated balance sheet of Computer
Motion, Inc. as of December 31, 2002, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended. Our
audit for the year ended December 31, 2002 also included the financial statement
schedule listed in the index at Item 15 (a)(2). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The consolidated
financial statements of Computer Motion, Inc. for the years ended December 31,
2001 and 2000, were audited by other auditors who ceased operations. Those
auditors expressed an unqualified opinion on those statements in their report
dated February 25, 2002.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the 2002 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Computer Motion, Inc. as of December 31, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule for the year ended December
31, 2002 in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that Computer Motion, Inc. will continue as a going concern. As more
fully described in Note 1, the Company has incurred recurring operating losses
and has an accumulated deficit of $116,674,000 at December 31, 2002. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The consolidated financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from
the outcome of this uncertainty.
/s/ Ernst & Young, LLP
- -----------------------
Ernst & Young, LLP
Los Angeles, California
March 7, 2003
This is a copy of the audit report previously issued by Arthur Andersen LLP
in connection with Computer Motion, Inc.'s filing on Form 10-K for the year
ended December 31, 2001. This audit report has not been reissued by Arthur
Andersen LLP in connection with this filing on Form 10-K. See Exhibit 23.2 for
further discussion. The balance sheet as of December 31, 2000, referred to in
this report has not been included in the accompanying financial statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Computer Motion Inc.:
We have audited the accompanying consolidated balance sheets of Computer Motion,
Inc. and Subsidiary (a Delaware corporation) as of December 31, 2001 and 2000,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Computer Motion,
Inc. as of December 31, 2001 and 2000, and the results of their operations and
their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
Los Angeles, California
February 25, 2002
COMPUTER MOTION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
Years Ended December 31,
------------------------------------------------
2002 2001 2000
-------- -------- --------
Revenue $ 24,111 $ 25,531 $ 21,732
Cost of revenue 9,860 10,587 8,577
-------- -------- --------
Gross profit 14,251 14,944 13,155
-------- -------- --------
Research & development expense 10,903 12,034 11,564
Selling, general & administrative expense 17,895 18,034 17,318
Litigation provision 6,521 1,248 480
-------- -------- --------
Total operating expenses 35,319 31,316 29,362
-------- -------- --------
Loss from operations (21,068) (16,372) (16,207)
Interest income 62 91 140
Interest expense (63) (114) (189)
Foreign currency translation gain/(loss) (30) 25 (44)
Other income/(expense) (22) (23) (25)
-------- -------- --------
Total other income/(expense) (53) (21) (118)
-------- -------- --------
Loss before income tax provision (21,121) (16,393) (16,325)
Income tax provision 30 20 24
-------- -------- --------
Net loss (21,151) (16,413) (16,349)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment 142 (192) (21)
-------- -------- --------
Comprehensive loss (21,009) (16,605) (16,370)
Dividend to Series B preferred shareholders 4,978 3,897 -
Dividend to Series C preferred shareholders 5,951 - -
Dividend to warrant holders - - 1,362
-------- -------- --------
Net loss available to common shareholders $(32,080) $(20,310) $(17,711)
======== ======== ========
Weighted average common shares outstanding used to
compute net loss per share - basic and diluted 16,665 10,276 9,309
======== ======== ========
Net loss per share - basic and diluted $ (1.93) $ (1.98) $ (1.90)
======== ======== ========
See accompanying notes to consolidated financial statements
COMPUTER MOTION, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value)
December 31,
-------------------------
2002 2001
--------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 2,606 $ 987
Restricted cash 98 80
Accounts receivable, net of allowance for doubtful accounts and returns of $781
in 2002 and $1,184 in 2001 6,786 8,594
Inventories 5,866 5,853
Other current assets 1,471 811
--------- --------
Total current assets 16,827 16,325
Property and equipment:
Furniture and fixtures 1,896 2,020
Computer equipment 3,050 2,889
Machinery and equipment (including demo equipment) 7,419 5,381
Accumulated depreciation (7,398) (5,492)
--------- --------
Property and equipment, net 4,967 4,798
Other assets 56 63
--------- --------
Total assets $ 21,850 $ 21,186
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to shareholder $ 1,000 $ 900
Accounts payable 3,541 6,497
Accrued expenses 7,953 4,551
Deferred revenue 2,461 3,628
--------- --------
Total current liabilities 14,955 15,576
Deferred revenue 1,226 1,711
Other liabilities 18 37
--------- --------
Total liabilities 16,199 17,324
--------- --------
Commitments and contingencies (Note 12)
Stockholders' equity:
Series C convertible preferred stock, $.001 par value authorized 10,750 shares,
outstanding at 12/31/02 - 6,299 shares; at 12/31/01 - 0
liquidation preference of $14,106 including accrued and unpaid dividends $ 9,017 $ -
Series B convertible preferred stock, $.001 par value, authorized 12,000
shares, outstanding at 12/31/02 - 0; 12/31/01 - 8.5 shares - 8,674
Common stock, $.001 par value, authorized - 50,000 shares;
Outstanding at 12/31/02 - 17,627 shares; at 12/31/01 - 11,439 shares 18 11
Stock subscription 1,499 -
Additional paid-in capital 112,157 80,343
Deferred compensation (262) (326)
Accumulated deficit (116,674) (84,594)
Other comprehensive loss (104) (246)
--------- --------
Total stockholders' equity 5,651 3,862
--------- --------
Total liabilities & stockholders' equity $ 21,850 $ 21,186
========= ========
See accompanying notes to consolidated financial statements
COMPUTER MOTION INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Series C Series B
Convertible Convertible Stock
Preferred Preferred Common Subscription Additional
Stock Stock Stock Capital Paid-In
----------- ----------- ------ ------------ ----------
Balance December 31, 1999 $ - $ - $ 9 $ - $ 62,663
Common stock issued - - - - 4,923
Exercise of options - - - - 376
Exercise of warrants - - 1 - 3,416
Deferred compensation associated with
stock options to non-employees - - - - 605
Amortization of deferred compensation - - - - 100
Dividend to warrant holders - - - - 1,362
Other - - - - -
Other comprehensive loss - - - - -
Net loss - - - - -
------ ------- --- ------ --------
Balance December 31, 2000 $ - $ - $10 $ - $ 73,445
Preferred stock issued, net - 10,024 - - 2,030
Dividend to Preferred Stockholders - 202 - - -
Conversion of Preferred stock
to Common Stock - (1,552) - - 1,552
Series B Convertible Preferred stock
beneficial conversion feature - - - - 1,092
Common stock issued - - 1 - 2,005
Exercise of options - - - - 52
Deferred compensation associated with
stock options to non-employees - - - - 149
Amortization of deferred compensation - - - -
Reversal of deferred compensation
relating to options cancelled) - - - - (173)
Stock purchase plan - - - - 191
Other comprehensive loss - - - - -
Net loss - - - - -
------ ------- --- ------ --------
Balance December 31, 2001 $ - $ 8,674 $11 $ - $ 80,343
Preferred stock issued, net 8,817 - - 1,499 (941)
Proceeds from private placement - - 4 - 10,524
Dividend to Series B Preferred
Stockholders - 1,193 - - -
Dividend to Series C Preferred
Stockholders 200 - - - -
Conversion of Preferred stock
to Common Stock - (9,867) 3 - 9,864
Write off of Intrinsic Value at Series B
Preferred conversion to Common and
warrant price change - - - - 3,785
Series C Convertible Preferred stock
beneficial conversion feature - - - - 3,244
Fair Value of Warrants to
Series C Preferred Stockholders - - - - 2,507
Common stock issued for services - - - - 1,395
Common stock issued through
Equity Line - - - - 508
Exercise of options - - - - 282
Unexercised MBO Options issued - - - - 416
Fair Value of options to
non-employees - - - - 121
Amortization of deferred compensation - - - - -
Stock purchase plan - - - - 109
Other comprehensive loss - - - - -
Net loss - - - - -
------ ------- --- ------ --------
Balance December 31, 2002 $9,017 $ - $18 $1,499 $112,157
Other Total
Deferred Accumulated Comprehensive Stockholders'
Compensation Deficit Loss Equity (Deficit)
------------ ----------- ------------- ----------------
Balance December 31, 1999 $ (247) $ (46,573) $ (33) $ 15,819
Common stock issued - - - 4,923
Exercise of options - - - 376
Exercise of warrants - - - 3,417
Deferred compensation associated with
stock options to non-employees (605) - - -
Amortization of deferred compensation 247 - - 347
Dividend to warrant holders (1,362) - -
Other - - - -
Other comprehensive loss - - (21) (21)
Net loss - (16,349) - (16,349)
------- --------- ----- --------
Balance December 31, 2000 $ (605) $ (64,284) $ (54) $ 8,512
Preferred stock issued, net - (2,603) - 9,451
Dividend to Preferred Stockholders - (202) - -
Conversion of Preferred stock
to Common Stock - - -
Series B Convertible Preferred stock
beneficial conversion feature - (1,092) - -
Common stock issued - - - 2,006
Exercise of options - - - 52
Deferred compensation associated with
stock options to non-employees (149) - - -
Amortization of deferred compensation 255 - - 255
Reversal of deferred compensation
relating to options cancelled 173 - - -
Stock purchase plan - - - 191
Other comprehensive loss - - (192) (192)
Net loss - (16,413) - (16,413)
------- --------- ----- --------
Balance December 31, 2001 $ (326) $ (84,594) $(246) $ 3,862
Preferred stock issued, net - - - 9,375
Proceeds from private placement - - - 10,528
Dividend to Series B Preferred
Stockholders - (1,193) - -
Dividend to Series C Preferred
Stockholders - (200) - -
Conversion of Preferred stock
to Common Stock - - - -
Write off of Intrinsic Value at Series B
Preferred conversion to Common and
warrant price change - (3,785) - -
Series C Convertible Preferred stock
beneficial conversion feature - (3,244) - -
Fair Value of Warrants to
Series C Preferred Stockholders - (2,507) - -
Common stock issued for services - - - 1,395
Common stock issued through
Equity Line - - - 508
Exercise of options - - - 282
Unexercised MBO Options issued - - - 416
Fair Value of options to
non-employees (121) - - -
Amortization of deferred compensation 185 - - 185
Stock purchase plan - - - 109
Other comprehensive loss - - 142 142
Net loss - (21,151) - (21,151)
------- --------- ----- --------
Balance December 31, 2002 $ (262) $(116,674) $(104) $ 5,651
Preferred Preferred
Stock Stock Common Shares
--------- --------- --------------------------------
2002 2001 2002 2001 2000
--------- --------- ------ ------ -----
Beginning balance 8.5 - 11,439 10,151 8,745
Issued 6.3 10.0 3,269 807 646
Stock subscription 1.1 - - - -
Conversion of Preferred stock to Common Stock (8.5) (1.5) 2,520 402 -
Exercise of options - - 159 24 87
Exercise of warrants - - 145 - 659
Stock purchase plan - - 95 55 14
---- ---- ------ ------ ------
Ending balance 7.4 8.5 17,627 11,439 10,151
See accompanying notes to consolidated financial statements
COMPUTER MOTION INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Cash Flows from Operating Activities:
Net Loss $(21,151) $(16,413) $(16,349)
Adjustments to reconcile net loss to net cash used
in operating actives:
Depreciation and Amortization 2,041 1,714 1,397
Provision for Doubtful Accounts 284 250 931
Loss on Disposal of fixed assets - - 73
Unexercised MBO Options 416 - -
Common stock and options issued for services 1,395 - 471
Amortization of Deferred Compensation 185 255 247
Decrease (Increase) in:
Accounts receivable 1,524 3,273 (5,630)
Inventories (1,268) (1,118) 328
Other current assets (660) (372) (108)
Other assets - - 74
Increase (Decrease) in:
Accounts payable (2,956) 2,066 1,196
Accrued expenses 3,402 1,065 569
Other liabilities (19) (38) (28)
Deferred revenue (1,652) 1,754 2,298
-------- -------- --------
Net cash used in operating activities (18,459) (7,564) (14,531)
Cash flows from Investing Activities:
Purchase of property and equipment (948) (2,328) (2,763)
Decrease in marketable securities - - 3,224
-------- -------- --------
Net cash provided by (used in) investing activities (948) (2,328) 461
Cash Flows from Financing Activities:
Repayment of note payable to stockholder (900) (1,500) -
Proceeds from note payable to stockholder 1,000 900 3,000
Proceeds from preferred stock issuance, net of issuance costs 9,375 7,951 -
Proceeds from common stock - private placement 10,528 - -
Proceeds from common stock - Societe Generale 508 - -
Proceeds from common stock and warrants exercised,
including ESPP, net of repurchases 109 2,197 7,969
Proceeds from exercise of stock options 282 52 376
Comprehensive loss and other 142 (192) (21)
-------- -------- --------
Net cash provided by financing activities 21,044 9,408 11,324
Net increase (decrease) in cash, cash equivalents and restricted cash 1,637 (484) (2,746)
Cash, cash equivalents and restricted cash at beginning of period 1,067 1,551 4,297
-------- -------- --------
Cash, cash equivalents and restricted cash at end of period $ 2,704 $ 1,067 $ 1,551
======== ======== ========
See accompanying notes to consolidated financial statements
COMPUTER MOTION INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
Years Ended December 31,
--------------------------------
2002 2001 2000
------ ------ ------
Supplemental cash flow disclosure
Cash paid for:
Interest $ 59 $ 37 $ 189
Income taxes 28 11 23
Non-cash investing and financing activities
Dividend to warrant holders - - 1,362
Fair Value of warrants issued in connection with the Series B Convertible
Preferred Stock - 1,536 -
Fair Value of warrants issued in connection with the Series C Convertible
Preferred Stock 2,507 - -
Cumulative dividend on the Series B Convertible Preferred Stock 1,193 203 -
Cumulative dividend on the Series C Convertible Preferred Stock 200 - -
Fair value of additional shares issued due to reset provision of
Series B - 1,092 -
Conversion of Series B to Common Stock 9,867 - -
Write off of Intrinsic Value at conversion of Series B Preferred
to Common 3,785 - -
Beneficial Conversion feature of the Series B Convertible Preferred Stock - 1,066 -
Beneficial Conversion feature of the Series C Convertible Preferred Stock 3,244 - -
Deferred compensation associated with stock options to non-employees 121 149 605
See accompanying notes to consolidated financial statements
COMPUTER MOTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE 1: LIQUIDITY AND GOING CONCERN
Computer Motion, Inc. (the "Company") has incurred losses since inception.
For the years ended December 31, 2002, 2001 and 2000, the Company has incurred
losses of $21,151,000, $16,413,000 and $16,349,000, respectively. In addition,
for the years ended December 31, 2002, 2001 and 2000, the Company has used cash
in operations of $18,459,000, $7,564,000 and $14,531,000, respectively. The
combination of these factors raises substantial doubt about the Company's
ability to continue as a going concern.
Management's plans in regard to these items include the following:
o Obtain cash proceeds under the working capital line of credit
agreement with Intuitive Surgical, Inc. (see Note 16)
o Obtain cash proceeds from the exercise of the Series C Preferred
Stock warrants
On March 7, 2003, the Company entered into an Agreement and Plan of Merger with
Intuitive Surgical, Inc. At the effective time of the merger, Intuitive Merger
Corporation, Inc., formerly known as Iron Acquisition corporation, a newly
formed subsidiary of Intuitive Surgical, Inc., will be merged with and into
Computer Motion, Inc., with Computer Motion, Inc. surviving the merger and
continuing as a wholly owned subsidiary of Intuitive Surgical, Inc. 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
capitalization of Intuitive Surgical and Computer Motion and the market price of
Computer Motion common stock as of the date of this report and assuming that the
merger is completed on June 20, 2003, we estimate that the exchange ratio will
be approximately 0.52. The exchange ratio will be adjusted proportionately in
the event that the proposed reverse split of Intuitive Surgical's common stock
is approved by Intuitive Surgical's stockholders and implemented by Intuitive
Surgical's board of directors.
In connection with the proposed merger, Computer Motion and Intuitive
Surgical have entered into a Loan and Security Agreement, under which Intuitive
Surgical has agreed to provide a short-term secured bridge loan facility of up
to $7.3 million. The loan will terminate and all outstanding amounts will become
due and payable 120 days following termination of the merger agreement (the
"Maturity Date"). Interest on the loan will accrue at a rate of 8% per annum and
will be payable on the Maturity Date.
Additionally, pursuant to the merger agreement, Computer Motion and
Intuitive Surgical filed stipulations on March 10, 2003 to immediately stay all
pending litigation proceedings between them until August 31, 2003, subject to
the stay being lifted if the merger agreement is terminated, or subject to the
cases being dismissed upon consummation of the transaction contemplated by the
merger agreement.
There are no assurances that the proposed merger will close or that
adequate funds will be available to the Company on acceptable terms, if at all.
If the Company is unable to raise additional required capital in the future, it
may be required to significantly curtail its operations or obtain funding
through the relinquishment of significant technology. The failure of the Company
to successfully achieve one or all of the above items will have a material
impact on the Company's financial position and results of operations. The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
Nature of operations > The Company develops and markets proprietary robotic
and computerized surgical systems that enhance a surgeon's performance and
centralize and simplify a surgeon's control of the operating room. The Company's
primary efforts are directed toward developing and commercializing medical
robots and intelligent interface modalities, which will enable new minimally
invasive surgical procedures and enhance the surgical team's overall
productivity.
Consolidation > The consolidated financial statements include the accounts
of the Company and its wholly owned French subsidiary, Computer Motion, S.A.
Intercompany transactions and balances have been eliminated in consolidation.
Reclassifications > Certain reclassifications of previously reported
amounts have been reclassified to conform to the current year presentation.
Use of estimates > 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 financial statements and accompanying notes.
Revenue recognition > The Company applies the provisions of Staff
Accounting Bulleting No. 101 (SAB 101) when recognizing revenue. SAB 101 states
that revenue generally is realized or realizable and earned when all of the
following criteria are met: a) persuasive evidence of an arrangement exists, b)
delivery has occurred or the services have been rendered, c) the seller's price
to the buyer is fixed or determinable, and d) collectibility is reasonably
assured.
The Company recognizes revenue from the sale of products to end-users,
including supplies and accessories, once shipment has occurred, as the Company's
general terms are FOB shipping point. In those few cases where the customer
terms are FOB destination, revenue is not recognized until the Company receives
a signed delivery and acceptance certificate, and all of the conditions of SAB
101 as identified above have been met. Revenue is recognized from the
performance of services as the services are performed.
The Company recognizes revenue from the sale of products to distributors,
including supplies and accessories, once shipment has occurred, and all of the
conditions of SAB 101 have been met. The Company's distributors do not have
rights of return or cancellation. Revenue from distributors, which does not meet
all of the requirements of SAB 101, is deferred and recognized upon the sale of
the product to the end user.
Revenues from product sales to financing institutions are not recognized by
the Company until a purchase order is received, the product has been shipped and
the funding by the financing institution has been approved. The Company
recognized revenues from sales to third party financing institutions of
$933,000, $2,179,000 and $1,379,000 for the years ended December 31, 2002, 2001
and 2000, respectively.
The Company defers revenue from the sale of extended warranties, product
upgrades and other contractual items and recognizes them over the life of the
contract, when the service is performed or upon shipment to the customer, as
applicable. The value allocated to elements in a multiple element arrangement is
based on objective evidence of relative fair value of each element.
Shipments of products to be used for demonstration purposes or prototype
products used in development programs are reflected as consigned inventory and
are included in the property and equipment balance in the accompanying
consolidated balance sheets.
The Company records revenue net of commissions paid to agents in accordance
with Emerging Issues Task Force (EITF) No. 99-19, "Reporting Revenue Gross as a
Principal versus Net as an Agent."
The Company believes that Statement of Position 97-2, "Software Revenue
Recognition" (SOP 97-2), is not applicable to the sale of the Company's products
in accordance with the guidance in paragraphs 2 and 4 of SOP 97-2. The software
sold is considered by the Company to be incidental to the products sold and is
not a significant focus of the marketing efforts of the Company nor is the
software sold separately. In addition, post contract customer support is not
sold by the Company in conjunction with the software. As such, the Company does
not separately account for the sale of the software.
Foreign currency translation > The assets and liabilities of Computer
Motion, S.A. are translated into U.S. dollars at exchange rates in effect on
reporting dates, while capital accounts are translated at historical rates.
Income statement items are translated at average exchange rates in effect during
the financial statement period. The cumulative effect of translation is recorded
as a separate component of stockholders' equity.
Net loss per share > Statement of Financial Accounting Standard ("SFAS")
No. 128, "Earnings Per Share," requires presentation of both basic and diluted
net loss per share in the financial statements. The Company's basic net loss per
share is the same as its diluted net loss per share because inclusion of
outstanding stock options and warrants in the calculation is antidilutive. Basic
and diluted loss per share is calculated by dividing net loss available to
common stockholders by the weighted average number of common shares outstanding
for the period.
Loss per share information is summarized as follows:
Years Ended December 31,
Amounts in thousands, except per share amounts
---------------------------------------------------------------------------
2002 2001 2000
----------------------- --------------------- ----------------------
Amount Per share Amount Per share Amount Per share
-------- --------- -------- --------- -------- ---------
Loss per share data - basic and diluted:
Net Loss and net loss per share $(21,151) $(1.27) $(16,413) $(1.60) $(16,349) $(1.76)
Fair Value of warrants issued in connection
with the Series B Convertible Preferred Stock - - (1,536) (0.15) - -
Cumulative 4.9% dividend on the Series B
Convertible Preferred Stock (1,193) (0.07) (202) (0.02) - -
Fair value of additional shares issued
due to a reset provision of the Series B
Convertible Preferred Stock - - (1,092) (0.11) - -
Beneficial Conversion feature of the Series B
Convertible Preferred Stock - - (1,067) (0.10) - -
Write off of Intrinsic Value at conversion
of Series B Convertible Preferred Stock (3,785) (0.23) - - - -
Fair Value of warrants issued in connection
with the Series C Convertible Preferred Stock (2,507) (0.15) - - - -
Cumulative dividend on the Series C
Convertible Preferred Stock (200) (0.01) - - - -
Beneficial Conversion feature of the Series C
Convertible Preferred Stock (3,244) (0.20) - - - -
Fair Value of warrants issued in connection
with the Private Placement of Common Stock - - - - (1,362) (0.14)
-------- ------ -------- ------ -------- ------
Net loss available to common shareholders
and net loss per share $(32,080) $(1.93) $(20,310) $(1.98) $(17,711) $(1.90)
======== ====== ======== ====== ======== ======
Cash equivalents > Cash equivalents consisting of liquid investments with
maturity of three months or less when purchased and are stated at cost, which
approximates market.
Property and equipment > Property and equipment are stated at cost and are
depreciated using the straight-line method based on useful lives of seven years
for furniture and fixtures and three to seven years for machinery and equipment
and three years for computer equipment. Included in the property and equipment
section of the consolidated balance sheet is demo equipment of $5,413,000 and
$3,457,000 as of December 31, 2002 and 2001 respectively. Demo equipment is used
to enhance the marketing efforts of the Company and is depreciated over three
years. The Company evaluates its' long term assets including property and
equipment for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may be impaired.
Software development costs > The Company internally produces and develops
software related to its hardware products. Costs to develop this software are
accounted for in accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold Leased, or Otherwise Marketed", which requires the
Company to capitalize software development costs when "technological
feasibility" of the product has been established and future revenues assure
recovery of the capitalized amounts. Because of the relatively short time period
between "technological feasibility" and product release, the Company has not
capitalized any software development costs as of December 31, 2002 or December
31, 2001.
Stock-based compensation > SFAS No. 123, "Accounting for Stock-based
Compensation" encourages, but does not require, companies to record compensation
cost for stock-based employee compensation plans at fair value. The Company has
chosen to continue to account for stock-based compensation using the
intrinsic-value method prescribed in Accounting Principles board Opinion No. 25,
"Accounting for Stock Issued to Employees.
The Company accounts for option and warrant grants to non-employees using
the guidance of SFAS 123 and EITF No. 96-18 whereby the fair value of option and
warrant grants are determined using the Black Scholes valuation model at the
earlier of the date which the non-employees' performance is completed or a
performance commitment is reached.
Research and development > Research and development expenses are charged to
operations as incurred and totaled $10,903,000, $12,034,000 and $11,564,000 for
the years ended December 31, 2002, 2001 and 2000 respectively.
Income taxes > The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes". Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using the enacted
tax rate in effect for the years in which the differences are expected to
reverse.
The Tax Reform Act of 1986 contains provisions that may limit the net
operating loss carryforwards available to be used in any given year in the event
of significant changes in ownership interests. The Company does not believe that
ownership changes to date have had an impact on its ability to utilize these
carryforwards. There can be no assurance that ownership changes, including the
potential merger as discussed in Note 16, will not significantly limit the
Company's ability to use existing or future net operating loss or tax credit
carryforwards.
Inventories > Inventories, which include materials, labor and overhead, are
stated at the lower of cost or market. The Company uses the first-in, first-out
(FIFO) method to value inventories. The components of inventories are as
follows:
December 31, December 31,
2002 2001
------------ ------------
Raw materials $3,531,000 $3,200,000
Work in process 900,000 470,000
Finished goods 1,435,000 2,183,000
------------ ------------
Total inventories $5,866,000 $5,853,000
============ ============
Patents, trademarks and other intangibles > Patents, trademarks and other
intangibles are carried at cost less accumulated amortization that is calculated
on the straight-line basis over the estimated useful lives of the assets.
Other comprehensive loss > The Company accounts for other comprehensive
loss in accordance with SFAS No. 130, "Reporting Comprehensive Income". SFAS 130
requires certain financial statement components, such as net unrealized holding
gains or losses and cumulative translation adjustments, to be included in other
comprehensive income (loss).
Segment reporting > The Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information"(see Note 15). SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements.
Shipping and handling costs > Shipping and handling costs totaling
$113,000, $71,000 and $72,000 for the years ended December 31, 2002, 2001 and
2000, respectively were billed to customers. These billings have been recognized
as revenue. The associated costs have been recognized as a component of cost of
revenues in the accompanying consolidated statements of operations.
Fair value of financial instruments > The carrying value for cash and cash
equivalents, accounts receivable, note payable to stockholder and accounts
payable approximates fair value because of the short maturity of these
instruments.
Recent accounting pronouncements > In December 2002, the Financial
Accounting Standards Board (FASB) issued SFAS No. 148. Statement 148 amends FASB
Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition to Statement 123's fair value method of
accounting for stock-based employee compensation. Statement 148 also amends the
disclosure provisions of Statement 123 and APB Opinion No. 28, Interim Financial
Reporting, to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. While the Statement does not amend
Statement 123 to require companies to account for employee stock options using
the fair value method, the disclosure provisions of Statement 148 are applicable
to all companies with stock-based employee compensation, regardless of whether
they account for that compensation using the fair value method of Statement 123
or the intrinsic value method of Opinion 25. The Company adopted the disclosure
requirements of SFAS No. 148 in fiscal 2002. The Company did not adopt the fair
value method of accounting for stock-based compensation and as such the adoption
of SFAS No. 148 did not have a material impact on the Company's results of
operations or its financial position.
NOTE 3: STOCK PURCHASE AND OPTION PLANS
Employee stock purchase plan > The Company's employee stock purchase
savings plan allows participating employees to purchase, through payroll
deductions, shares of common stock at 85% of the fair market value at specified
dates. Under the terms of the plan, 400,000 shares of common stock have been
reserved for purchase by plan participants. Employees purchased 95,033, 54,679,
and 14,227 shares in fiscal 2002, 2001, and 2000 respectively. At December 31,
2002, there were 171,407 shares available for purchase under the plan.
Stock options > Under the terms of the Company's stock option plans,
6,746,017 shares of common stock have been reserved for issuance to directors,
officers and employees and to others with relationships with the Company. Stock
options are generally exercisable over periods up to 10 years from date of grant
and may be "incentive stock options" or "non-qualified stock options." Options
generally vest evenly over four years. At December 31, 2002, there were a
maximum of 80,618 shares available for grant and 5,535,588 options outstanding
of which 2,188,897 shares were exercisable at a weighted average exercise price
of $5.55 per share. The weighted average contractual life of options outstanding
December 31, 2002 was 8.3 years. The weighted average fair value of options
granted for the years ended December 31, 2002, 2001, and 2000 were $1.24, $2.63,
and $4.70 respectively. Stock option activity was as follows:
Options Weighted Average
----------- ----------------
Outstanding Exercise Price
----------- ----------------
Balance at December 31, 1999 1,695,210 $8.54
Granted 1,391,580 $7.82
Canceled (245,256) $9.96
Exercised (87,031) $4.32
--------- -----
Balance at December 31, 2000 2,754,503 $8.12
Granted 1,523,056 $4.22
Canceled (846,037) $8.73
Exercised (24,412) $0.01
--------- -----
Balance at December 31, 2001 3,407,110 $6.31
Granted 3,020,699 $1.08
Canceled (732,222) $6.00
Exercised (159,999) $0.15
--------- -----
Balance at December 31, 2002 5,535,588 $3.68
The following table summarizes information concerning outstanding and
exercisable stock options at December 31, 2002:
Options Outstanding Options Exercisable
---------------------------- -------------------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Number Contractual Price Number Price
Range of Exercise Prices Outstanding Life per Share Exercisable per Share
- ------------------------ ----------- ----------- --------- ----------- ---------
- 1.50 2,454,612 9.61 $ 0.77 426,112 $ 0.40
1.50 2.25 161,912 9.28 1.77 3,112 1.54
2.25 3.38 149,419 8.74 3.25 40,303 3.23
3.38 5.06 1,554,909 7.28 4.38 825,690 4.47
5.06 7.59 184,450 8.38 5.79 144,276 5.82
7.59 11.39 968,711 6.55 9.28 694,410 9.47
11.39 17.09 61,575 5.59 13.48 54,994 13.59
--------- ---- ------ --------- ------
5,535,588 8.30 $ 3.68 2,188,897 $ 5.55
--------- ---- ------ --------- ------
When stock options are exercised, the par value is credited to common stock
and the excess of the proceeds over the par value is credited to additional
paid-in capital. When non-qualified options are exercised, or when incentive
stock options are exercised and sold within a one-year period, the Company
realizes income tax benefits based on the difference between the fair value of
the stock on the date of exercise and the stock option exercise price. These tax
benefits do not affect the income tax provision, but rather are credited
directly to additional paid-in capital.
Non-employee Option Grants
Pursuant to the terms of the plans, in 1999 the Company issued 77,500
options to non-employees. The fair market value of the stock options on the
grant date was calculated to be $285,000 under the Black-Scholes valuation
model. In May 2001, all 77,500 options were cancelled. Compensation expense of
$0, $42,000 and $71,000 was recognized for the years ended December 31, 2002,
2001 and 2000, respectively for options granted to non-employees in 1999.
In 2000, the Company issued 92,000 options to non-employees. The fair
market value of the stock options on the grant date was calculated to be
$320,000 under the Black-Scholes valuation model. Compensation expense of
$75,701, $103,000 and $33,000 was recognized in 2002, 2001 and 2000,
respectively for options granted to non-employees in 2000.
In 2001, the Company issued 49,000 options to non-employees. The fair
market value of the stock options on the grant date was calculated to be
$149,000 under the Black-Scholes valuation model. Compensation expense of
$41,000 and $25,000 was recognized in 2002 and 2001, respectively for options
granted to non-employees in 2001.
In 2002, the Company issued 191,000 options to non-employees. The fair
market value of the stock options on the grant date was calculated to be
$121,000 under the Black-Scholes valuation model. Compensation expense of
$51,000 was recognized in 2002 for options granted to non-employees in 2002.
In accordance with EITF No. 96-18, and SFAS No. 123, compensation expense
related to non-employee option grants is recognized over the related vesting
period as this method approximates the recognition of compensation expense over
the service period.
Employee Option Grants
In 1996 and 1997, the Company issued common stock warrants and granted
stock options to employees and directors at prices less than the estimated fair
market value of the common stock. The difference between the issuance or grant
price and the estimated fair market value at the date of issuance or grant is
reflected as compensation expense. Compensation expense of $17,000, $86,000 and
$143,000 was recognized in 2002, 2001, and 2000 respectively. In accordance with
APB No. 25, compensation expense related to employee option grants is recognized
over the related vesting period. At December 31, 2002, there was no deferred
(unamortized) compensation expense relating to stock options granted to
employees.
The Company maintains a management by objectives program under which
non-executive employees may receive up to 10% of their base salary as a bonus if
certain objectives are met. During 2002, the Company suspended cash payments for
bonuses earned under this plan and issued options to purchase common stock at an
exercise price of $.00. The number of shares issued to each employee is
determined by the amount of their bonus divided by the fair market value of the
Company's common stock on the date of grant. The Company recognized $416,000 in
compensation expense for the full fair market value of options granted during
2002 at an exercise price of $0.
Under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company
has elected to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related accounting interpretations.
Accordingly, no compensation expense has been recognized related to the granting
of stock options, except as noted above. If compensation expense related to
stock options was determined based upon their grant date fair value consistent
with the methodology prescribed under SFAS No. 123 the Company's net loss and
net loss per share would have been increased by $4,828,000 ($.29 per share),
$4,839,000 ($.47 per share) and $3,757,000 ($.40 per share) for the years ended
December 31, 2002, 2001 and 2000, respectively. The fair market value of the
warrants and stock options at the grant date was estimated using the
Black-Scholes valuation model with the following weighted average assumptions:
2002 2001 2000
------ ----- -----
Expected life (years) 7.0 7.0 7.0
Interest rate 3.8% 4.9% 5.8%
Volatility 185.0% 77.0% 63.0%
Dividend yield 0.0% 0.0% 0.0%
NOTE 4: LINE OF CREDIT
In January 2002, the Company entered into a secured, revolving line of
credit with Bay View Funding. This line of credit provided for borrowings up to
$2,000,000 based on eligible domestic trade receivables at a factoring fee of 2%
plus a financing fee of prime rate plus 3%, secured by all the assets of the
Company. The six month term of this revolving line of credit expired in July
2002 and was not renewed
NOTE 5: COMMON STOCK
On March 30, 2001, the Company entered into an Equity Line Financing
Agreement with Societe Generale, under which the Company was entitled to issue
and sell, from time to time, shares of its common stock for cash consideration
up to an aggregate of $12 million. In February 2002, the Company terminated the
Equity Line Financing Agreement. In connection with this termination, the
Company paid a one-time settlement fee of $135,000 to Societe Generale. Prior to
terminating the Equity Line Financing Agreement, the Company raised
approximately $508,000 in fiscal 2002 by issuing 111,615 shares of its common
stock to Societe Generale.
In February 2002, the Company raised net proceeds of approximately
$10,528,000 through the sale of 2,828,865 shares of common stock and the
issuance of approximately 1,697,319 warrants to purchase common stock at $5.00
per share, with certain institutional and accredited investors, including Robert
W. Duggan, the Company's Chief Executive Officer and Chairman. The fair market
value of these warrants was determined to be $3,590,000 under the Black-Scholes
valuation model and was recognized as a direct cost of raising capital. In
February $1,395,000 in accounts payable from certain vendors was exchanged for
328,689 shares of common stock. The proceeds from the sale of the Company's
common stock were used to retire approximately $2,359,000 (including the note
payable to Mr. Duggan) in debt and the remainder of the proceeds were used to
fund working capital needs.
NOTE 6: COMMON STOCK WARRANTS
The Company has issued warrants to purchase common shares, which are
exercisable over periods of up to 7 years from the date of issuance. At December
31, 2002, all outstanding warrants were exercisable. Warrant information is as
follows:
Shares Weighted Avg
Under Exercise
Warrant Price
--------- ------------
Balance at December 31, 1999 1,308,894 $5.48
Granted 361,533 $9.17
Exercised (659,482) $5.18
--------- -----
Balance at December 31, 2000 1,010,945 $6.08
Granted 557,932 $8.12
--------- -----
Balance at December 31, 2001 1,568,877 $6.81
Granted 4,935,115 $2.46
Exercised (145,153) $0.00
--------- -----
Balance at December 31, 2002 6,358,839 $3.92
========= =====
In 2000, the Company issued 361,533 warrants to current warrant holders as
an incentive to exercise their original warrants. The fair market value of the
warrants on the grant date was calculated to be $1,362,000 under the
Black-Scholes valuation model and was recognized as a dividend to warrant
holders.
In 2001, the Company issued 557,932 warrants to the Company's Series B
Convertible Preferred Stock. The fair market value of these warrants were
determined to be $1,536,000 under the Black-Scholes valuation model and was
recognized as a dividend to Series B Preferred Stockholders.
In 2002, the Company issued 3,237,796 warrants to the Company's Series C
Convertible Preferred Stock. The fair market value of these warrants were
determined to be $2,507,592 under the Black-Scholes valuation model and was
recognized as a dividend to Series C Preferred Stockholders. In addition
1,697,319 warrants were issued in connection with the February 2002 common stock
private placement. The fair market value of these warrants were determined to be
$3,590,000 under the Black-Scholes valuation model and was recognized as a
direct cost of raising capital (See Note 5).
NOTE 7: SERIES B CONVERTIBLE PREFERRED STOCK
On February 16, 2001, the Company, sold and issued 10,024 shares of its
Series B Convertible Preferred Stock at a purchase price of $1,000 per share for
an aggregate amount of $10,024,000 and concurrently therewith issued warrants
for the purchase of up to 557,932 shares of the Company's Common Stock, in a
private placement with several investors. $3 million of the proceeds were used
to repay the note payable to Robert W. Duggan, the Company's Chairman and Chief
Executive Officer. The Preferred Stock had a three (3) year maturity and was
initially convertible into shares of the Company's common stock at $5.77 per
share. The initial conversion price was subject to adjustment on the six (6)
month and nine (9) month anniversaries of the closing date of the private
placement, whereupon the conversion price reset to the average of the ten (10)
lowest closing prices for the Company's Common Stock as quoted on the National
Association of Stock Dealers Automated Quotation ("NASDAQ") National Market
during the twenty (20) consecutive dates immediately prior to each adjustment
date if such average is lower than the initial conversion price. Thus, on August
16, 2001, the conversion price was adjusted to $3.863 per share and on November
16, 2001 to $3.906 per share. The conversion price was subsequently lowered to
$3.881 per share (due to certain anti-dilution adjustments), which allows the
preferred stockholders an additional 845,372 common shares under the agreement.
The investors entitled to receive a preferred annual dividend payable in stock
at a rate of 4.90%. In addition, the investors were granted five (5) year
warrants to purchase an aggregate of approximately 557,932 shares of the
Company's common stock at an exercise price of $8.12 per share. The fair value
of the warrants was determined to be
$1,536,000 using the Black-Scholes valuation model (see Note 6).
Pursuant to the Registration Rights Agreement entered into by the Company
in connection with its private placement of the Series B Convertible Preferred
Stock, the Company agreed to use its best efforts to effect the registration of
the shares of common stock issuable upon conversion of the Series B Convertible
Preferred Stock and the exercise of the warrants (the "Resale Shares") by May
17, 2001 (the "Effectiveness Deadline") or be subject to penalties of 2% of the
initial purchase price of the Series B Shares for each month delay. The Company
filed a registration statement on Form S-3 (File No. 333-58962), which was
subject to a lengthy review by the Securities and Exchange Commission (the
"SEC"). Due to this extended review process, the registration statement for the
Resale Shares was not declared effective until September 24, 2001. Since
effectiveness of the registration statement exceeded the Effectiveness Deadline
by four months and seven days, the investors were entitled to receive a penalty
payment of 8.47% of the face amount of the Series B Shares purchased by each
investor. The fair value of the penalty shares issued in satisfaction of the
penalty payment was $849,000 has been recorded as a direct cost of the Series B
Convertible Preferred Stock offering.
In February 2002 the holders of its Series B Convertible Preferred Stock
entered into agreements with the Company whereby they agreed to convert all of
their remaining shares into common stock, which included a receiving the present
value of the future dividends in stock. Approximately 2,520,000 common shares
were issued in connection with the conversion of the Series B Preferred Stock.
These agreements also included the reduction of the Warrant price from $8.12 to
$5.00 per share. The present value the dividends, write off of the unamortized
reset provision and warrant price change was determined to be $4,978,000 and
was recognized as a dividend in the first quarter of fiscal 2002.
NOTE 8: SERIES C CONVERTIBLE PREFERRED STOCK
On October 31, 2002, the Company entered into a Series C Convertible
Preferred Stock Purchase Agreement with certain institutional and accredited
investors, including Robert W. Duggan, the Company's Chairman and Chief
Executive Officer. Under the terms of the Series C Stock Purchase Agreement, the
Company sold a total of 7,370 shares of the Company's Series C Convertible
Preferred Stock, including 6,299 shares of Series C-1 Convertible Preferred
Stock and 1,071 shares of Series C-2 Convertible Preferred Stock, and Series C-1
warrants to purchase an aggregate of 1,473,745 shares of common stock at an
initial exercise price of $1.80 per share and Series C-2 warrants to purchase an
aggregate of 1,473,745 shares of common stock at an initial exercise price of
$2.20 per share and warrants to purchase an aggregate of 290,306 shares of
common stock at an exercise price of $.001 per share for aggregate consideration
$10,316,200, less direct financing costs of $941,000. The $10,316,000 is
exclusive of the $1,999,200 Robert W. Duggan investment made in January and
March 2003 (See Note 16). As part of the $10,316,200 aggregate consideration,
the Company received $1,499,000 in cash for the purchase of 1,071,000 shares of
Series C-2 Convertible Preferred Stock for which the shares were not issued as
of December 31, 2002. These shares were issued in January 2002 and at
December 31, 2002, have been shown as a stock subscription within the
accompanying consolidated statements of stockholders' equity. At
December 31, 2002 the fair value of the warrants issued, exclusive of
Mr. Duggan's investment, was $2,507,000. In addition, the fair value of the
beneficial conversion feature at December 31, 2002 was determined to be
$3,244,000. At December 31, 2002, the accrued dividends payable were $179,000.
The Series C Convertible Preferred Stock is convertible into shares of the
Company's common stock, at the holder's election, at an initial conversion
price of $1.40 per share. Dividends on Series C-1 Convertible Preferred Stock
may be paid, at the Company's election, in shares of common stock or cash and
dividends on Series C-2 Convertible Preferred Stock may be paid only in cash.
On March 6, all shares of Series C Convertible Preferred Stock have been
converted into shares of Series D Convertible Preferred Stock.
As set forth in the purchase agreement signed in connection with the Series
C Financing, Mr. Duggan (or his affiliates or designees) agreed to purchase an
aggregate amount of Series C stock totaling $1,999,200, $999,600 of which was
paid by the conversion of an outstanding promissory note from the Company to Mr.
Duggan. Following the receipt of shareholder approval on January 27, 2003, Mr.
Duggan and his designees purchased an additional $999,600 of Series C
Convertible Preferred Stock.
In accordance with the Certificate of Designations and the Side Agreement,
the shares of Series C Convertible Preferred Stock bear a cumulative dividend at
a rate of 12% per annum until January 31, 2003, and 8% per annum thereafter. In
the event shares of Series C Convertible Preferred Stock are not converted or
redeemed in accordance with the Certificate of Designations by October 31, 2004,
the cumulative dividend rate will be adjusted upward to 12% per annum
thereafter. Dividends on the Series C-1 Convertible Preferred Stock may be paid
by the Company, at its option, through the issuance of shares of Common Stock or
in cash, and dividends on the Series C-2 Convertible Preferred Stock may only be
paid in cash.
In accordance with the Certificate of Designations, in the event the
Company proposes to enter into a Change of Control Transaction (as defined
below) and if not previously converted, the holders of Series C Shares may elect
to convert such Series C Shares into a number of common shares equal to 135% of
the amount into which such Series C Shares would otherwise be convertible.
A "Change of Control Transaction" means, (i) the sale, conveyance or
disposition of all or substantially all of the assets of the Company, (ii) a
consolidation or merger of the Company with or into any other "Person" (as
defined in the Exchange Act) (whether or not the Company is the surviving
Person, but other than a consolidation or merger in which the surviving
corporation (x) is listed on the NASDAQ National Market, the New York Stock
Exchange or the American Stock Exchange and (y) the value of the consideration
to be paid to the stockholders of the Company is at least $1.40 per share of
Common Stock (as adjusted for stock dividends, stock splits or
recapitalizations)), or (iii) any Person or any "group" (as such term is used in
Section 13(d) of the Exchange Act), becomes the beneficial owner or is deemed to
beneficially own (as described in Rule 13d-3 under the Exchange Act without
regard to the 60-day exercise period) in excess of 50% of the Company's voting
power of the capital stock of the Company normally entitled to vote in the
election of directors of the Company (other than (A) any Person or any such
group that held such voting power as of the Initial Issuance Date or (B) any
group that holds such voting power subsequent to the Initial Issuance Date,
provided that the Persons that constitute such group include the Person or a
majority of the members of, and at least 50% of the voting power held by, a
group referenced in the foregoing clause (A)).
On March 6, 2003, the Company entered into a Stock Exchange Agreement (the
"Exchange Agreement") with all of the holders of outstanding shares of Series
C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock
pursuant to which such holders agreed to exchange their Series C-1 Convertible
Preferred Stock and Series C-2 Convertible Preferred Stock for a like number of
shares of the Series D-1 Convertible Preferred Stock and Series D-2 Convertible
Preferred Stock. The shares of the Series D Convertible Preferred Stock will
convert into shares of common stock immediately prior to the consummation of the
merger described above. Pursuant to the terms of the Exchange Agreement, in the
event the Company does not consummate the merger by September 30, 2003, the
Company will file its Certificate of Designations Setting Forth the Preferences,
Rights and Limitations of the Series E Convertible Preferred Stock with the
Secretary of State of Delaware, and, thereupon outstanding shares of Series D-1
Convertible Preferred Stock and Series D-2 Convertible Preferred Stock will be
exchanged for share of a like number of Series E-1 Convertible Preferred Stock
and Series E-2 Convertible Preferred Stock. As an inducement to the holders of
shares of Series C Convertible Preferred Stock to enter into the Exchange
Agreement, the Company has agreed to lower the exercise price of all outstanding
Series C-1 warrants and Series C-2 warrants (described more particularly below)
to $1.50 per share, provided that such holders exercise such warrants prior to
10 days following the mailing of a proxy statement relating to the Company's
meeting of stockholders to approve the merger.
NOTE 9: INCOME TAX PROVISION
Income tax for all years presented consists of the minimum state income and
franchise taxes. Net deferred income tax assets at December 31, 2002, 2001 and
2000 consisted of the following:
2002 2001 2000
------------ ------------ ------------
Allowance for doubtful accounts $ 311,000 $ 507,000 $ 1,038,000
Accrued liabilities 2,507,000 955,000 685,000
Depreciation and amortization 658,000 708,000 477,000
Net operating loss carryforwards 28,008,000 22,877,000 17,991,000
Tax credits 3,727,000 3,790,000 2,677,000
Capitalized research and development costs 3,700,000 3,122,000 2,343,000
Other 355,000 377,000 263,000
------------ ------------ ------------
Total deferred income tax asset 39,266,000 32,336,000 25,474,000
Valuation reserve (39,266,000) (32,336,000) (25,474,000)
------------ ------------ ------------
Net deferred income tax asset $ - $ - $ -
============ ============ ============
The income tax provision reconciles to the amount computed by applying the
federal statutory rate to loss before income taxes as follows:
2002 2001 2000
----------- ----------- -----------
Expected federal benefit $(7,191,000) $(5,580,000) $(5,559,000)
State income taxes, net of federal income tax effect 30,000 20,000 24,000
Tax benefits not recognized 7,191,000 5,580,000 5,559,000
----------- ----------- -----------
Income tax provision $ 30,000 $ 20,000 $ 24,000
=========== =========== ===========
At December 31, 2002, the Company had federal and state net operating loss
(NOL) carryforwards of approximately $78,718,000 and $14,074,000 respectively,
and research and development tax credit carryforwards of approximately
$4,854,000. The federal tax credit and NOL carryforwards expire between 15 and
20 years from the year of loss and are restricted if significant changes in
ownership occur. The state NOL carryforwards expire between 5 and 10 years from
the year of loss. The Tax Reform Act of 1986 contains provisions that may limit
the net operating loss carryforwards available to be used in any given year in
the event of significant changes in ownership interests. The Company does not
believe that ownership changes to date have had an impact on its ability to
utilize these carryforwards. There can be no assurance that ownership changes,
including the potential merger as discussed in Note 16, will not significantly
limit the Company's ability to use existing or future net operating loss or tax
credit carryforwards.
Realization of deferred tax assets is dependent on generating sufficient
taxable income during the periods in which the temporary differences will
reverse. Because the Company is uncertain when it may realize the benefit of its
tax assets, the Company has placed a valuation allowance against the total
amount of the deferred tax assets.
NOTE 10: FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET RISK
Financial instruments > Marketable securities consist of bank certificates
of deposit, commercial paper and corporate bonds, all of which by policy must
mature within 360 days. Under SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," all marketable securities are classified as held
to maturity and are carried at amortized cost which closely approximates fair
market value. Interest income earned totaled $62,000, $91,000 and $140,000 for
the years ended December 31, 2002, 2001 and 2000, respectively.
The Company's investment portfolios consist of money market accounts of
$2,606,000 and $987,000 at December 31, 2002 and 2001, respectively. At December
31, 2002 and 2001, cash of $98,000 and $80,000, respectively was restricted and
pledged as collateral for various letters of credit.
Concentration of risk > Trade accounts receivable and certain marketable
securities are financial instruments, which may subject the Company to
concentration of credit risk. Although the Company does not anticipate
collection problems with its receivables, payment is contingent to a certain
extent upon the economic condition of the hospitals, which purchase the
Company's products. The credit risk associated with receivables is limited due
to the dispersion of the receivables over a number of customers in a number of
geographic areas. The Company monitors credit worthiness of its customers to
which it grants credit terms in the normal course of business. Marketable
securities are placed with high credit qualified financial institutions and
Company policy limits the credit exposure to any one financial instrument;
therefore, credit loss is reduced. At December 31, 2002, the Company had
$2,505,000 cash in excess of Federal Deposit Insurance Corporation (FDIC)
insurance coverage.
For the year ended December 31, 2002, no single customer accounted for more
than 10% of revenue. As of December 31, 2002, the Company had two customers that
each accounted for approximately 14% of accounts receivable, and two other
customers that accounted for 11% and 10% of accounts receivable. For the year
ended and as of December 31, 2001, the Company had one customer that accounted
for approximately 13% of revenue for the year and two other customers that
accounted for approximately 17% and 15% of accounts receivable. For the year
ended and as of December 31, 2000, the Company had one customer that accounted
for approximately 21% of the revenue for the year and 18% of accounts receivable
and a second customer that accounted for approximately 10% of the revenue for
the year and 15% of accounts receivable.
A sub-assembly of the robotic arms, which are a major component of the
Company's AESOP and ZEUS products, is purchased from a single supplier. The
Company believes that other suppliers would be available for the sub-assembly,
if necessary (see Note 12).
NOTE 11: NOTE PAYABLE TO STOCKHOLDER
During the year ended December 31, 2002, the Company received a bridge loan
advance in the aggregate amount of $1,000,000 from Robert W. Duggan, the
Company's Chairman and Chief Executive Officer. Interest accrues at 12% per
annum on this loan. Upon stockholder approval, in January 2003, $999,600 of the
note was converted into shares of the Company's Series C Convertible preferred
stock (See Note 16).
NOTE 12: COMMITMENTS AND CONTINGENCIES
Leases > Rent expense for the years ended December 31, 2002, 2001 and 2000
was $1,076,000, $1,043,000 and $891,000, respectively. As of December 31, 2002,
the Company had the following minimum lease payments for certain facilities and
equipment under operating leases: 2003-$1,032,000; 2004-$1,013,000;
2005-$766,000; 2006-$751,000 and thereafter $273,000.
Contingencies > The Company is involved in various claims arising in the
normal course of business. Management is of the opinion that the ultimate
resolution of all such matters will not have a material effect on the
accompanying financial position or operating results.
On May 10, 2000, the Company filed a lawsuit in United States District
Court alleging that Intuitive Surgical's da Vinci surgical robot system
infringes on its United States Patent Nos. 5,524,180, 5,878,193, 5,762,458,
6,001,108, 5,815,640, 5,907,664, 5,855,583 and 6,063,095. Subsequently, Computer
Motion's complaint was amended to add allegations that Intuitive's da Vinci
surgical robot infringed two additional Computer Motion patents, United States
Patent Nos. 6,244,809 and 6,102,850. These patents concern methods and devices
for conducting various aspects of robotic surgery. Intuitive has served an
Answer and Counterclaim
alleging non-infringement of each patent-in-suit, patent invalidity and
unenforceability. Discovery is still underway. The parties have filed cross
motions for summary judgment on the issue of patent infringement relating to the
'108, '664, '809, and '850. The Court recently granted Intuitive's motion for
summary judgment of non-infringement relating to the '850 patent. The Court also
recently granted our motion for summary judgment relating to the '809 patent.
The Court has not ruled on any of the remaining motions at this time. Pursuant
to the merger agreement with Intuitive, Computer Motion and Intuitive filed on
March 10, 2003, stipulations to stay this litigation until August 31, 2003,
subject to the stay being lifted if the merger agreement is terminated, or
subject to this case being dismissed upon consummation of the transactions
contemplated by the merger agreement.
On or about December 7 and 8, 2000, the United States Patent and Trademark
Office (USPTO) granted three of Intuitive's petitions for a declaration of an
interference relating to the Company's 5,878,193, 5,907,664, and 5,855,583
patents. On March 30, 2002, the three judge panel of the Board of Patent
Interferences issued decision orders on the parties' preliminary motions. The
Board granted the Company's motion on Interference No. 104,643 and issued an
order for Intuitive to show cause why judgment should not be entered against
Intuitive on this interference. The Board denied the Company's motion on the
Interference No. 104,644 and entered judgment against the Company. The Board
denied the Company's motions on the Interference No. 104,645, deferred decision
on two of Intuitive's motions, and granted-in-part, denied-in-part and
deferred-in-part on one of Intuitive's motions. The Board's decision on
Interference No. 104,645 invalidated some of the parties' claims, affirmed some
of Intuitive's claims and provided for further proceedings related to two of our
claims and is therefore not final. On July 25, 2002, Computer Motion filed a
civil action seeking review of the two adverse decisions in the United States
District Court for the District of California. Pursuant to the merger agreement
with Intuitive, Computer Motion and Intuitive filed on March 10, 2003,
stipulations to stay this litigation until August 31, 2003, subject to the stay
being lifted if the merger agreement is terminated, or subject to this case
being dismissed upon consummation of the transactions contemplated by the merger
agreement.
On February 21, 2001, Brookhill-Wilk filed suit against the Company
alleging that its ZEUS surgical system infringed upon Brookhill-Wilk's United
States Patent Nos. 5,217,003 and 5,368,015. Brookhill-Wilk's complaint sought
damages, attorneys' fees and increased damages alleging willful patent
infringement. On March 21, 2001, the Company 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 Brookhill-Wilk's Patent No. 5,217,003 in a way that the Company
believed excluded current applications of its ZEUS surgical system. In light of
this decision, on November 13, 2001, the parties to Brookhill-Wilk v. Computer
Motion, Inc. agreed to dismiss the case without prejudice.
On March 30, 2001, Intuitive and IBM Corporation filed suit alleging that
the Company's AESOP, ZEUS and HERMES products infringe United States Patent No.
6,201,984, which was issued on March 13, 2001. The complaint seeks damages, a
permanent injunction, and costs and attorneys fees. Each of the asserted claims
is limited to a surgical system employing voice recognition for control of a
surgical instrument and literally read on Computer Motion's current AESOP
product and Computer Motion's ZEUS and HERMES products to the extent they are
used with AESOP. A jury trial has been held on the issues of patent invalidity
due to lack of enablement and failure to disclose the best mode in addition to
damages. The Company's defense of unenforceability due to prosecution laches was
tried before the District Court Judge. The jury returned a verdict finding IBM's
United States Patent No. 6,201,984 valid, and finding Intuitive was damaged in
an amount of $4.4 million. At December 31, 2002, the Company recorded a $4.4
million litigation provision for this related jury verdict that was recorded
within the litigation provision within the accompanying consolidated statements
of operations. In addition, the litigation provision included in the
accompanying consolidated statements of operations includes legal expenses
incurred during the three years ended December 31, 2002. Prior to the jury's
verdict, the court ruled that the Company had not "willfully" infringed the
patent. On December 10, 2002, the Court rendered an adverse decision on our
prosecution laches defense and on December 11, 2002, issued a judgment in
Intuitive's and IBM's favor based upon the earlier jury verdict and the Court's
December 10, 2002 ruling. The case has entered
the post-trial phase during which we will be seeking judicial review of the
jury's verdict and the Court's December 10, 2002 ruling. Pursuant to the merger
agreement with Intuitive, Computer Motion and Intuitive filed on March 10, 2003,
stipulations to stay this litigation until August 31, 2003, subject to the stay
being lifted if the merger agreement is terminated, or subject to this case
being dismissed upon consummation of the transactions contemplated by the merger
agreement.
The Company believes that all of its major product lines could be affected
by this litigation. The patents subject to this litigation are an integral part
of the technology incorporated in the Company's AESOP, ZEUS and HERMES product
lines which together accounted for approximately 76% of its revenues for the
year ended December 31, 2002. If the Company loses the counterclaim on the
patent suit brought by Intuitive or the patent infringement claims by Intuitive
or IBM or if the decision in Brookhill-Wilk v. Intuitive Surgical, Inc. is
reversed, the Company may be prevented from selling its products as currently
configured without first obtaining a license to the disputed technology from the
successful party or modifying the product. Obtaining a license could be
expensive, or could require that the Company license to the successful party
some of its own proprietary technology, either of which result could seriously
harm the Company's business. In the event that a successful party is unwilling
to grant the Company a license, the Company will be required to stop selling its
products that are found to infringe the successful party's patents unless the
Company can redesign them so they do not infringe these patents, which the
Company may be unable to do. Whether or not the Company is successful in these
lawsuits, the litigation could consume substantial amounts of the Company's
financial and managerial resources. Further, because of the substantial amount
of discovery often involved in connection with this type of litigation, there is
a risk that some of the Company's confidential information could be compromised
by disclosure during the discovery process.
Purchase commitments > The Company has purchase agreements with various
suppliers with purchase commitments totaling $4,551,565 at December 31, 2002.
NOTE 13: FINANCING ARRANGEMENTS
The Company can, if leasing arrangements are requested by the customer,
introduce a third party financing institution to facilitate the transaction.
Once the financing institution and the customer agree upon the financing terms,
the Company sells the product to the financing institution without recourse.
Revenues from product sales to financing institutions are not recognized by the
Company until a purchase order is received, the product has been shipped and the
funding by the financing institutions has been approved. The Company recognized
revenues from sales to third party institutions of $933,000, $2,179,000 and
$1,379,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
NOTE 14: PROFIT SHARING PLAN
The Company's defined contribution profit sharing plan (the "Plan")
includes features under Section 401(k) of the Internal Revenue code. All
employees are eligible to participate in the Plan after meeting certain minimum
service requirements. Employees may make discretionary contributions to the Plan
subject to Internal Revenue Service limitations. Employer contributions to the
Plan were $62,000, $66,000 and $69,000 for the years ending December 31, 2002,
2001 and 2000, respectively.
NOTE 15: SEGMENTS OF BUSINESS
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS 131 establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision-making group, in making decisions
how to allocate resources and assess performance. The Company's chief
decision-making group, as defined under SFAS 131 is the Executive Staff. To
date, the Executive Staff has
viewed the Company's operations as principally one market: proprietary robotic
and computerized surgical systems for the medical device industry. Sales by
product lines within this segment are as follows:
For the Years Ended December 31,
-----------------------------------------------
2002 2001 2000
------- ------- -------
ZEUS robotic and surgical systems $ 7,127 $ 9,226 $11,382
AESOP robotic and surgical systems 6,420 8,295 5,596
HERMES voice control center 4,706 4,078 2,140
Socrates telementoring systems 1,162 832 -
Grant Revenue 450 44 -
Development revenue 765 929
Recurring revenue 4,246 2,291 1,685
------- ------- -------
$24,111 $25,531 $21,732
Export sales are made by the United States operations to the following
geographic locations:
For the Years Ended December 31,
-----------------------------------------------
2002 2001 2000
------ ------- ------
Canada $1,734 $ 385 $ 260
Europe and the Middle East 2,240 7,156 3,986
Asia 1,927 2,622 4,802
South America 459 110 242
------ ------- ------
$6,360 $10,217 $9,290
26% 40% 43%
The relative impact of foreign currency fluctuations on export sales is not
significant as product-pricing and cash payments are generally based on the
U.S. dollar.
NOTE 16: SUBSEQUENT EVENTS
On January 27, 2003 the Company received stockholder approval to convert
$999,600 of the outstanding promissory note from the Company to Robert W.
Duggan, the Company's Chairman and Chief Executive Officer, into shares of the
Company's Series C Convertible Preferred Stock. On January 29, 2003 the Company
issued 714 shares of Series C Convertible Preferred Stock in exchange for the
note. In addition, the stockholders approved the purchase of an additional
$999,200 of Series C Convertible Preferred Stock by Mr. Duggan, or his
designees, which was received in March 2003.
On February 13, 2003, the Company entered into a Loan and Security
Agreement with Agility Capital, LLC, for a short-term bridge loan in the
aggregate principal amount of $2,300,000. In connection with the bridge loan,
the Company issued a warrant to purchase up to an aggregate of 500,000 shares of
the Company's common stock at an exercise price of $.97 per share.
On March 7, 2003, the Company entered into an Agreement and Plan of Merger
with Intuitive Surgical, Inc. At the effective time of the merger, Intuitive
Merger Corporation, Inc., formerly known as Iron Acquisition corporation, a
newly formed subsidiary of Intuitive Surgical, Inc., will be merged with and
into Computer Motion, Inc., with Computer Motion, Inc. surviving the merger and
continuing as a wholly owned subsidiary of
Intuitive Surgical. 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 capitalization of Intuitive Surgical and Computer Motion and the
market price of Computer Motion common stock as of the date of this report and
assuming that the merger is completed on June 20, 2003, we estimate that the
exchange ratio will be approximately 0.52. The exchange ratio will be adjusted
proportionately in the event that the proposed reverse split of Intuitive
Surgical's common stock is approved by Intuitive Surgical's stockholders and
implemented by Intuitive Surgical's board of directors.
The final exchange ratio will be calculated based on the total number of fully
diluted shares outstanding for Intuitive Surgical and Computer Motion
immediately prior to the effective time of the merger. The number of Computer
Motion's fully diluted shares will vary based on the number of shares of
Computer Motion common stock into which Computer Motion's Series D convertible
preferred stock will be convertible and the number of shares of Computer Motion
common stock which may be issued to pay accrued dividends on the Series D
convertible preferred stock upon conversion. All shares of Computer Motion
Series D convertible preferred stock will convert into shares of Computer Motion
common stock immediately prior to the effective time of the merger. Under the
terms of the Series D convertible preferred stock, in the event that the average
of the closing bid prices of Computer Motion's common stock for the 20
consecutive trading days ending 15 days prior to the Computer Motion special
meeting is below $1.86 per share, the conversion ratio for Computer Motion's
Series D convertible preferred stock could increase. As a result, the exchange
ratio in the merger may decrease and, therefore, Computer Motion common
stockholders would receive a lesser number of Intuitive Surgical shares, and
Computer Motion preferred stockholders would receive a greater number of
Intuitive Surgical shares, in the merger. After , 2003, stockholders may
visit Intuitive Surgical's website, www.intuitivesurgical.com, or Computer
Motion's website, www.computermotion.com, for announcements regarding the
exchange ratio. Computer Motion stockholders will receive cash in lieu of any
fractional shares of Intuitive Surgical common stock.
In connection with the proposed merger, Computer Motion and Intuitive
Surgical have entered into a Loan and Security Agreement, under which Intuitive
Surgical has agreed to provide a short-term secured bridge loan of up to $7.3
million. The loan will terminate and all outstanding amounts will become due and
payable 120 days following termination of the merger agreement (the "Maturity
Date"). Interest on the loan will accrue at a rate of 8% per annum and will be
payable on the Maturity Date.
Additionally, pursuant to the merger agreement, Computer Motion and
Intuitive Surgical filed stipulations on March 10, 2003 to immediately stay all
pending litigation proceedings between them until August 31, 2003, subject to
the stay being lifted if the merger agreement is terminated, or subject to the
cases being dismissed upon consummation of the transaction contemplated by the
merger agreement.
On March 6, 2003, the Company entered into a Stock Exchange Agreement (the
"Exchange Agreement") with all of the holders of outstanding shares of Series
C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock
pursuant to which such holders agreed to exchange their Series C-1 Convertible
Preferred Stock and Series C-2 Convertible Preferred Stock for a like number of
shares of the Series D-1 Convertible Preferred Stock and Series D-2 Convertible
Preferred Stock. The shares of the Series D Convertible Preferred Stock will
convert into shares of common stock immediately prior to the consummation of the
merger described above. Pursuant to the terms of the Exchange Agreement, in the
event the Company does not consummate the merger by September 30, 2003, the
Company will file its Certificate of Designations Setting Forth the Preferences,
Rights and Limitations of the Series E Convertible Preferred Stock with the
Secretary of State of Delaware, and, thereupon outstanding shares of Series D-1
Convertible Preferred Stock and Series D-2 Convertible Preferred Stock will be
exchanged for share of a like number of Series E-1 Convertible Preferred Stock
and Series E-2 Convertible Preferred Stock. As an inducement to the holders of
shares of Series C Convertible Preferred Stock to enter into the Exchange
Agreement, the Company has agreed to lower the exercise price of all outstanding
Series C-1 warrants and Series C-2 warrants (described more particularly below)
to $1.50 per share, provided that such holders exercise such warrants prior to
10 days following the mailing of a proxy statement relating to the Company's
meeting of stockholders to approve the merger.
NOTE 17: QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly data for the year's ended December 31, 2002, 2001 and 2000,
respectively was as follows:
First Quarter Second Quarter Third Quarter Fourth Quarter(A)
- ------------------------------------------------------------------------------------------------------------------------
Year ending December 31, 2002
Revenue $ 5,691,000 $ 5,064,000 $ 4,534,000 $ 8,822,000
Gross profit $ 3,046,000 $ 2,847,000 $ 2,537,000 $ 5,821,000
Net loss $(4,458,000) $(4,934,000) $(5,526,000) $(6,233,000)
Loss per share $ (0.65) $ (0.29) (0.32) (0.70)
- ------------------------------------------------------------------------------------------------------------------------
Year ending December 31, 2001
Revenue $ 5,716,000 $ 4,003,000 $ 7,158,000 $ 8,654,000
Gross profit $ 3,276,000 $ 2,121,000 $ 4,219,000 $ 5,328,000
Net loss $(4,200,000) $(5,300,000) $(2,937,000) $(3,976,000)
Loss per share $ (0.65) $ (0.53) $ (0.31) $ (0.43)
- ------------------------------------------------------------------------------------------------------------------------
Year ending December 31, 2000
Revenue $ 1,368,000 $ 5,962,000 $ 6,211,000 $ 8,191,000
Gross profit $ 679,000 $ 3,580,000 $ 3,666,000 $ 5,230,000
Net loss $(5,019,000) $(3,609,000) $(3,597,000) $(4,124,000)
Loss per share $ (0.57) $ (0.41) $ (0.52) $ (0.41)
- ------------------------------------------------------------------------------------------------------------------------
(A) In the fourth quarter 2002 the Company recorded a $4,400,000 litigation
provision for the Intuitive suit (see Note 12), along with actual
litigation expenses of $599,000.
COMPUTER MOTION, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance At Balance At
Beginning End Of
Allowance for Doubtful Accounts Of Period Additions(1) Deductions Period
- ------------------------------- ---------- ------------ ---------- ----------
Year ended December 31, 2002 $ 807,000 $284,000 $930,000 $ 161,000
Year ended December 31, 2001 $1,374,000 $250,000 $817,000 $ 807,000
Year ended December 31, 2000 $1,203,000 $931,000 $760,000 $1,374,000
Balance At Balance At
Beginning End Of
Allowance for Sales Returns Of Period Additions(2) Deductions Period
- --------------------------- ---------- ------------ ---------- ----------
Year ended December 31, 2002 $ 377,000 $ 306,000 $ 63,000 $ 620,000
Year ended December 31, 2001 $1,048,000 $ 169,000 $840,000 $ 377,000
Year ended December 31, 2000 $ 25,000 $1,033,000 $ 10,000 $1,048,000
(1) This is charged to bad debt expense
(2) This is recorded as a reduction to revenue
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
16 Letter of Arthur Andersen LLP
21.1 Subsidiaries of Computer Motion, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Notice Regarding Consent of Arthur Andersen LLP
99.1 Certification of Robert W. Duggan, the Company's Chairman and Chief
Executive Officer, pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
99.2 Certification of Larry Redfern, the Company's Chief Accounting Officer, pursuant to
Section 906 of the Sarbanes Oxley Act of 2002.