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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDING MARCH 31, 2001
COMMISSION FILE NUMBER 000-22755
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COMPUTER MOTION, INC.
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(Exact name of registrant as specified on in its charter)
DELAWARE 77-0458805
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
130-B CREMONA DRIVE
GOLETA, CA 93117
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(Address of principal executive offices)
(805) 968-9600
(Registrant's telephone number, including area code)
Indicate by check /X/ whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of May 11, 2001 there were 10,535,468 shares of the Registrant's common stock
outstanding.
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COMPUTER MOTION, INC.
INDEX TO FORM 10-Q
QUARTER ENDED MARCH 31, 2001
INDEX PAGE
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PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Operations 3
Condensed Balance Sheets 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
PART II. - OTHER INFORMATION
Item 1. Litigation 13
Item 2. Changes in Securities and Use of Proceeds 14
Item 4. Submissions of Matters to Vote of the Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPUTER MOTION, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Amounts in thousands, except per share amounts)
Three Months Ended
March 31
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2001 2000
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Revenue $ 5,716 $ 1,368
Cost of revenue 2,440 689
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Gross profit 3,276 679
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Research and development expense 3,134 2,216
Selling, general & administrative expense 4,345 3,553
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Total operating expense 7,479 5,769
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Loss from operations (4,203) (5,090)
Other income (9) (76)
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Loss before income tax provision (4,194) (5,014)
Income tax provision 6 5
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Net loss (4,200) (5,019)
Dividend to preferred shareholders 2,633 --
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Net loss available to common shareholders $ (6,833) $ (5,019)
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Weighted average common shares outstanding
used to compute net loss per share - basic and
diluted 10,535 8,780
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Loss per share - basic and diluted $ (0.65) $ (0.57)
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See notes to condensed financial statements.
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COMPUTER MOTION, INC.
CONDENSED BALANCE SHEETS
(Amounts in thousands, except share and par value amounts)
March 31, December 31,
2001 2000
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Unaudited
ASSETS
Current assets:
Cash and cash equivalents $ 5,400 $ 1,551
Restricted cash (Note 4) 2,094 --
Accounts receivable 8,555 12,117
Inventories 5,592 4,681
Prepaid Expenses 643 440
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Total current assets 22,284 18,789
Property and equipment, net 4,204 4,232
Other assets 67 68
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Total assets $ 26,555 $ 23,089
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to shareholder $ -- $ 3,000
Accounts payable 4,454 4,431
Accrued expenses 3,252 3,486
Deferred revenue 2,801 2,185
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Total current liabilities 10,507 13,102
Deferred revenue 1,729 1,400
Other liabilities 66 75
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Total liabilities 12,302 14,577
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Mandatorily redeemable convertible series B preferred
stock $.001 par value authorized 5,000,000 shares,
outstanding, 1,024 shares in 2001, liquidation value
of $10,024 (Note 4) 10,055 --
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Shareholders' equity
Preferred stock, authorized 5,000,000 shares less
shares issued under mandatorily redeemable convertible
series B preferred stock listed above -- --
Common stock, $.001 par value, authorized 50,000,000 shares
outstanding - 10,525,468 and 10,542,902 shares 10 10
Additional paid-in capital 76,376 73,445
Deferred compensation expense (961) (605)
Accumulated deficit (71,118) (64,284)
Other comprehensive loss (109) (54)
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Total shareholders' equity 4,198 8,512
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Total liabilities & equity $ 26,555 $ 23,089
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See notes to condensed financial statements.
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COMPUTER MOTION, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
Three Months Ended
March 31
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2001 2000
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Cash flows from operating activities:
Net loss $ (4,200) $ (5,019)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 408 306
Provision for doubtful accounts and sales allowances -- 460
Amortization of deferred compensation 233 30
Other (8) (7)
Decrease/(increase) in:
Accounts receivable 3,562 2,658
Inventories (911) (959)
Prepaid expenses (203) (376)
Increase/(decrease) in:
Accounts payable 23 (1,307)
Accrued expenses (234) (492)
Deferred revenue 945 107
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Net cash used in operating activities (385) (4,599)
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Cash flows from investing activities:
Purchases of property and equipment (380) (966)
Decrease in marketable securities -- 3,224
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Net cash provided by (used in) investing activities (380) 2,258
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Cash flows from financing activities:
Net proceeds from preferred stock issuance 7,572 --
Proceeds from note payable to shareholder -- 3,000
Repayment of note payable to shareholder (3,000) --
Proceeds from common stock and warrant issuance 97 --
Proceeds from stock options -- 348
Comprehensive loss and other (55) 45
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Net cash provided by financing activities 4,614 3,393
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Increase in cash and cash equivalents 3,849 1,052
Cash and cash equivalents at beginning of period 1,551 4,297
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Cash and cash equivalents at end of period $ 5,400 $ 5,349
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See notes to condensed financial statements.
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COMPUTER MOTION, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
financial information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included.
The operating results of the interim periods presented are not
necessarily indicative of the results expected for the year ending December 31,
2001 or for any other interim period. The accompanying condensed financial
statements should be read in conjunction with the audited financial statements
and notes thereto for the year ended December 31, 2000 included in the Computer
Motion, Inc. ("the Company") Annual Report on Form 10-K for the year ended
December 31, 2000 as filed with the Securities and Exchange Commission (SEC).
NOTE 2. 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 shareholders by the
weighted average number of common shares outstanding for the period.
The net loss per share for the three months ended March 31, 2001 has
been adjusted to include the fair value of 557,931 additional warrants provided
to the shareholders of the Company's Series B Convertible Preferred Stock of
$1,536,000, a beneficial conversion feature of $1,066,000 and a dividend of
$31,000. The Company is required to recognize these items as a dividend in the
net loss computation for loss per share. This is a non-cash transaction
involving the charging of $2,602,000, to accumulated deficit and crediting
additional paid-in capital. The dividend feature of the Series B Convertible
Preferred Stock Agreement includes a dividend provision which resulted in a
$31,000 dividend for the three months ended March 31, 2001.
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NOTE 3. SHAREHOLDER RIGHTS
On June 14, 1999, the Board of Directors of the Company approved the
adoption of a Shareholder Rights Plan and declared a dividend distribution of
one right for each outstanding share of the Company's common stock to
shareholders of record on the close of business on June 28, 1999. Reference is
made to the Company's registration statement on Form 8-A filed with the SEC on
June 18, 1999.
NOTE 4. 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 557,931 shares of the Company's common stock, in a
private placement with several investors, ($3 million of which was used to repay
the note payable to Robert W. Duggan, the Company's Chairman and Chief Executive
Officer, and $2 million of which is currently held in escrow until the Company
receives shareholder approval of the shares to be issued in excess of 19.9% of
the Company's outstanding stock on the closing date of the private placement).
The preferred stock has a three-year maturity and is initially convertible into
shares of the Company's common stock at $5.77 per share. The initial conversion
price is subject to adjustment on the six month and nine month anniversaries of
the closing date of the private placement, whereupon the conversion price shall
be subject to reset to the average of the 10 lowest closing prices for the
Company's common stock as quoted on the NASDAQ National Market during the 20
consecutive dates immediately prior to each adjustment date if such average is
lower than the initial conversion price; provided, however, that the conversion
price shall not be reset below $2.72 per share. The investors shall receive a
preferred annual dividend payable in stock or cash, at the Company's option, at
a rate of 4.90%. In addition, the investors were granted five-year warrants to
purchase an aggregate of approximately 557,931 shares of the Company's common
stock at an exercise price of $8.12 per share.
NOTE 5. EQUITY-BASED LINE OF CREDIT
On March 30, 2001 the Company entered into the Equity Line Agreement
with Societe Generale, under which the Company may issue and sell, from time to
time, shares of its common stock for cash consideration up to an aggregate of
$12 million. Pursuant to the requirements of Equity Line Agreement, the Company
must file a registration statement on Form S-2 with the SEC in order to permit
Societe Generale to resell to the public any shares that it acquires pursuant to
the Equity Line Agreement. Commencing as of the effective date of this
registration statement and continuing for 24 months thereafter, the Company may
from time to time at its sole discretion, and subject to certain restrictions
set forth in the Equity Line Agreement, sell, or "draw down", shares of its
common stock to Societe Generale at an initial purchase price equal to 91% of
the daily volume weighted average of the price of the Company's common stock for
each day during the specified purchase period. A draw down can be made after
five trading days have elapsed from the date of the delivery of the last draw
down notice in amounts ranging from a minimum of $75,000 to a maximum of
$250,000, depending on the trading volume and the market price of the common
stock at the time of each draw down.
NOTE 6. 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 shareholders. 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 market are as follows:
For the Three Months
Ended March 31,
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2001 2000
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(Amounts in thousands)
ZEUS robotic and surgical systems $1,495 $ (48)
AESOP robotic and surgical systems 1,962 696
SOCRATES telementoring systems 55 --
HERMES voice control center 1,093 (113)
Development revenue 303 365
Recurring revenue 808 468
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$5,716 $ 1,368
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Export sales are made by the United States operations to the following
geographic locations:
For the Three Months
Ended March 31,
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2001 2000
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(Amounts in thousands)
Canada $ -- $ --
Europe and the Middle East 1,353 348
Asia 195 48
South America -- --
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$1,548 $396
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NOTE 7. LITIGATION
On May 10, 2000, the Company filed suit against Intuitive Surgical, Inc.
alleging that the Intuitive Surgical da Vinci surgical robot system infringes on
the Company's United States Patent Nos. 5,878,193; 5,524,180; 5,762,458;
6,001,108; 5,815,640; 5,907,664; 5,855,583. On June 1, 2000, the Company filed
an amended complaint alleging that Intuitive Surgical, Inc. has also infringed
the Company's recently issued United States Patent No. 6,063,095. On November 1,
2000, the Company filed another amended complaint further alleging that
Intuitive Surgical, Inc. is infringing on the Company's recently issued United
States Patent No. 6,102,850. The Company's complaint seeks damages for lost
profits, injunctive relief enjoining any future infringement of its patent
rights, treble damages and attorneys fees.
On June 30, 2000, Intuitive Surgical, Inc. served its Answer and
Counterclaim alleging non-infringement of each patent-in-suit, patent invalidity
and unenforceability. Other than a request for attorney's fees, Intuitive
Surgical, Inc. has not requested any damages. The Company has served discovery
requests seeking a statement of the facts that support Intuitive Surgical,
Inc.'s defenses. Intuitive Surgical, Inc. has provided partial responses to the
Company's discovery. The responses have been served under seal and the Company
is not privy too much of the information to Intuitive Surgical, Inc.'s
underlying intentions.
On or about December 7 and 8, 2000, the United States Patent Office
granted three of Intuitive Surgical, Inc.'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 February 13, 2001, the District Court issued an order staying the
infringement action for up to one year pending decision on preliminary motions
the parties intend to bring in the interferences.
On February 21, 2001, Brookhill-Wilk filed suit against the Company
alleging that the Company's ZEUS Platform infringes upon Brookhill-Wilks United
States Patent Nos. 5,217,005 and 5,368,015. Brookhill-Wilk's complaint seeks
damages, attorney's fees and increased damages alleging willful patent
infringement. The Company does not believe that its ZEUS Platform currently
infringes either patent. On March 21, 2001, the Company served its Answer and
Counterclaim alleging non-infringement of each patent-in-suit, patent invalidity
and unenforceability.
On March 30, 2001, Intuitive Surgical, Inc. 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 recently issued on March 13, 2001. The
complaint seeks damages, a preliminary injunction, a permanent injunction, costs
and attorneys fees. A preliminary review of the claims of this patent reveals
that each claim is limited to a surgical system employing voice recognition for
control of a surgical instrument. As this patent was only recently issued and as
the Company has not had prior notice of this patent or the claims of this
patent, the Company is currently evaluating the allegations of patent
infringement and the validity of the patent.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This report 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 herein under "Risk
Factors That May Affect Future Results" as well as those discussed in the "Risk
Factors That May Affect Future Results" section of the Company's Annual Report
on Form 10-K for the year ended December 31, 2000.
OVERVIEW
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, minimally invasive surgical 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 minimally invasive surgery, improve patient
outcomes, and create a safer, more efficient and cost effective OR.
The Company's AESOP(R) robotic endoscope positioning system is Food and
Drug Administration ("FDA") cleared. AESOP 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 and providing a more stable and
sustainable endoscopic image. The Company believes that AESOP is the world's
first FDA-cleared robot and first voice control interface for a surgical device.
Several hundred AESOP units have been sold worldwide, which the Company believes
have been used to perform tens of thousands of procedures.
The Company's HERMES(TM) 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. HERMES also provides standardized visual and
digitized voice feedback to a surgical team. The Company believes that the
enhanced control and feedback provided by HERMES has the potential to improve
safety, increase efficiency, shorten procedure times and reduce costs. Ten
510(k) submissions relating to HERMES have been cleared by the FDA and Stryker
Corporation's Endoscopy Division is currently marketing HERMES under an OEM
agreement with the Company.
The Company's ZEUS(TM) Robotic Surgical System is designed to
fundamentally improve a surgeon's ability to perform complex surgical procedures
and enable new, minimally invasive surgical procedures, including fully
endoscopic coronary artery bypass grafts ("E-CABG(TM)") on a beating heart,
which are currently very difficult or impossible to perform endoscopically. ZEUS
is comprised of 3 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 also
believes that new minimally invasive surgical procedures performed with ZEUS
will result in reduced patient pain and trauma, fewer complications, lessened
cosmetic concerns and shortened convalescent periods and will increase the
number of patients qualified for certain surgical procedures. In addition, the
Company believes that an increase in minimally invasive procedures will
ultimately result in lower overall healthcare costs to providers, payors and
patients. The Company has completed feasibility clinical trials for both
ZEUS-based tubal reanastomosis procedures and ZEUS-based cardiac procedures
under Investigational Device Exemptions (IDE) and is currently enrolling
patients. Based upon a series of meetings with FDA in May 2000, the Company has
submitted applications for IDE approval to commence multi-center pivotal
ZEUS-based laparoscopic and cardiac clinical trials in the United States. On
July 11, 2000, the Company was notified by the FDA that the ZEUS system would be
cleared for market under the 510(k) premarket notification process instead of
the longer premarket approval process. The FDA has also granted the Company
approval for commencement of pivotal randomized control trials for Coronary
Artery Bypass (CABG), Thorocoscopic surgery, and General Laparoscopic surgery.
The Company has initiated a feasibility clinical trial in which ZEUS is used in
mitral valve repair and replacement surgery and is currently enrolling patients.
The Company's SOCRATES(TM) Telementoring System 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 mentor
surgeon. The SOCRATES system enables the remote surgeon to help direct a
surgical procedure thereby augmenting the operative surgeon's prior training
experience.
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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.
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, the number, timing and significance of
product enhancements and new products by the Company and its competitors,
healthcare reimbursement policies, product quality issues and the cost and
outcome of current litigation.
RESULTS OF OPERATIONS
Three months ended March 31, 2001 compared to the three months ended March 31,
2000.
Revenue. Revenue increased $4,348,000 (318%) to $5,716,000 for the three
months ended March 31, 2001 from $1,368,000 for the same period in 2000. Revenue
increased on all of the Company's product lines over the prior year. ZEUS
revenue of $1,959,000 increased $1,633,000 (501%) over last year's first quarter
of $326,000. HERMES revenue of $1,387,000 increased $1,435,000 over last year's
first quarter of $48,000. AESOP revenue of $2,315,000 increased $1,225,000
(112%) over last year's first quarter of $1,090,000. SOCRATES revenue of $55,000
compared to no revenue for this product line for last year's first quarter.
Gross Profit. Gross profit increased $2,597,000 (383%) to $3,276,000 for
the three months ended March 31, 2001 from $679,000 for the same period in 2000.
Gross margin increased to 57% in the first quarter 2001 from 50% in the first
quarter 2000. Gross margin was favorably impacted by higher sales volume and
fixed costs charged to operations.
Research and Development. Research and development expense increased
$918,000 (41%) to $3,134,000 for the three months ended March 31, 2001 from
$2,216,000 for the same period in 2000, primarily as a result of the addition of
personnel, and increased development efforts for pre-clinical and clinical trial
activities related principally to ZEUS. The Company expects research and
development expenditures to remain flat over the remaining year as the increased
cost for clinical trials is offset by the Company's plan to reduce the operating
expenses of its business.
Selling, General and Administrative. Selling general and administrative
expense increased $792,000 (22%) to $4,345,000 for the three months ended March
2001 from $3,553,000 for the same period 2000. The increase was due mainly to
the addition of sales personnel and commissions as the Company expanded its
worldwide sales, service and training capability. Professional fees increased
substantially related to the patent infringement lawsuit the Company has filed
against a competitor and certain claims filed against the Company that are also
related to patent infringement. The Company expects selling, general and
administrative expense to decrease as a result of the Company's plan to reduce
the cost of operating and expanding the business.
Other Income. Other income decreased $67,000 (88%) to $9,000 for the
three months ended March 31, 2001, compared to other income of $76,000 for the
three months ended March 31, 2000. Other income for both periods was comprised
of interest income derived from funds held in interest bearing deposits.
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Income Taxes. Minimal provisions for state franchise taxes have been recorded on
the Company's pre-tax losses to date. As of December 31, 2000, the Company had
federal and state net operating loss (NOL) carryforwards of approximately of
$52,747,000 and $9,085,000, respectively which are available to offset future
carryforwards expire seven years after the year of loss. The Company has
provided a full valuation allowance on the deferred tax asset because of the
uncertainty regarding its realization.
Net Loss. The net loss for the first quarter 2001 was $4,200,000 ($ .40
per share, before dividend to preferred shareholder) compared to $5,019,000 ($
.57 per share) for the first quarter 2000 as increased gross profit derived from
increased revenue was more than offset by the sum of increased operating
expenses and reduced other income. Weighted average shares increased from
780,000 to 10,535,000 mainly as a result of the exercise of stock options,
issuance of shares of under the Company's employee stock purchase plan and
Company's private placement and warrant exercise.
FINANCIAL CONDITION
Since its inception, the Company's expenses have exceeded its revenues,
resulting in an accumulated deficit of $71,118,000 as of March 31, 2001. Other
than its initial public offering, the Company had primarily relied on proceeds
from issuance of preferred and common stock and bridge debt financing to fund
its operations.
At March 31, 2001, the Company's current ratio (current assets divided
by current liabilities) was 2.1 to 1 versus 1.4 to 1 at December 31, 2000,
reflecting the increase in cash and cash equivalents from the Series B
Convertible Preferred Stock private placement offset by the repayment of a
promissory note payable to Robert W. Duggan, the Company's Chairman and Chief
Executive Officer, and cash used in operating activities.
For the three months ended March 31, 2001, the Company's use of cash in
operating activities of $385,000 was primarily attributable to the net loss
offset by the decreases in accounts receivable.
Cash outflow from purchases of plant and equipment was $380,000 for the
three months ended March 31, 2001. The Company currently has no material
commitments for capital expenditures. For the three months ended March 31, 2001,
net cash provided by financing activities of $6,708,000 was primarily the result
of the Series B Convertible Preferred Stock issuance offset by the repayment of
the promissory note payable to Mr. Duggan.
The Company's operations to date have consumed substantial amounts of
cash, and the Company expects its capital and operating expenditures to continue
to exceed proceeds from ongoing sales at least through 2001. The Company's need
for additional financing will depend upon numerous factors, including, but not
limited to, the extent and duration of the Company's future operating losses,
the level and timing of future revenues and expenditures, the progress and scope
of clinical trials, the timing and costs required to receive both United States
and international governmental approvals or clearances, market acceptance of new
products, the results and scope of ongoing research and development projects,
the costs of training physicians to become proficient in the use of the
Company's products and procedures, the cost of developing appropriate sales and
marketing capabilities, and the cost and outcome of current litigation brought
by and brought against the Company. To the extent that existing resources are
insufficient to fund the Company's activities, the Company will seek to raise
additional funds through public or private financing. As part of this plan in
February 2001, the Company raised $10,024,000, ($3 million of which was used to
repay the promissory note payable to Mr. Duggan and $2 million of which is
currently held in escrow until the Company receives shareholder approval of the
shares to be issued in excess of 19.9% of the Company's outstanding stock on the
closing date of the private placement) in a private placement transaction (see
Note 4). On March 30, 2001, the Company secured an equity-based line of credit
from Societe Generale. Under the terms of this line of credit the Company may
draw down as much as $12,000,000 in exchange for registered shares of the
Company's common stock (see Note 5). The Company believes that its current cash
and cash equivalents, together with available borrowings under its equity line
of credit, will be sufficient to meet its anticipated cash requirements for
working capital and capital expenditures for at least twelve months. If the
Company requires further capital
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to grow its business, execute its operating plan or obtain FDA approvals at any
time in the future or any other reasons the Company may seek to sell additional
equity or debt securities, which may result in additional dilution to the
shareholders. There is no assurance that adequate funds would be available on
acceptable terms, if at all.
The Company's financial instruments include cash and short-term
investment grade debt securities. At March 31, 2001, 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 March 31, 2001.
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 the Company's control. The following
discussion summarizes some of these risks which could affect the Company's
actual future results, causing a difference materially from any forward-looking
statements made by the Company.
The Company has a limited operating history and has not yet made a
profit. Failure to raise additional capital or generate required working capital
could reduce the Company's ability to compete and could prevent the Company from
taking advantage of certain market opportunities. The Company's success depends
upon products, including the ZEUS product line, which have not achieved market
acceptance, nor received FDA regulatory clearance for certain procedures. If the
Company does not maintain necessary government regulator approvals it will not
be able to market and sell its products in the United States and/or foreign
countries. There are alternative treatments and procedures to using the
Company's products, and so the Company's customers may choose to purchase its
competitors' products or may not accept the Company's products. If surgeons
and/or medical 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 may be unable to generate sufficient sales to support its business. If
the Company is unable to protect its intellectual property contained in its
products from use by unauthorized third parties, its ability to compete in the
market will be harmed. The Company is involved in intellectual litigation with
Intuitive Surgical, Inc., IBM Corporation, and Brookhill-Wilk that may hurt its
competitive position, may be costly and may prevent the Company from selling
certain of its products. The Company could be subject to product liability
claims that could be expensive and harm the Company's business. The medical
device 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 its products. The Company needs to expand its sales and
distribution activities in order to market its products competitively. The
concentration of ownership among the Company's existing executive officers,
directors and principal shareholders may prevent new investors from influencing
significant corporate decisions. If the Company looses any key personnel or is
unable to attract and retain additional key personnel, its ability to compete
will be harmed. The Company depends on independent contract manufacturers for
principal components of its products who may encounter problems or delays that
could result in lost revenue. The Company relies on a continuous power supply to
conduct its business, and California's current energy crisis could disrupt our
operations and increase the Company's expenses. If the Company fails to control
and effectively manage its growth, its ability to compete will be harmed.
A more detailed discussion of factors that could affect the Company's
future results can be found in the "Risk Factors" section of the Company's
Annual Report on Form 10-K for the year ended December 31, 2000. The Company
strongly encourages you to review these risk factor disclosures.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's financial instruments include cash and short-term
investment grade debt securities. At March 31, 2001 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 a significant currency
exposure at March 31, 2001.
PART II. OTHER INFORMATION
ITEM 1. LITIGATION
On May 10, 2000, the Company filed suit against Intuitive Surgical, Inc.
alleging that the Intuitive Surgical da Vinci surgical robot system infringes on
the Company's United States Patent Nos. 5,878,193; 5,524,180; 5,762,458;
6,001,108; 5,815,640; 5,907,664; 5,855,583. On June 1, 2000, the Company filed
an amended complaint alleging that Intuitive Surgical, Inc. has also infringed
the Company's recently issued United States Patent No. 6,063,095. On November 1,
2000, the Company filed another amended complaint further alleging that
Intuitive Surgical, Inc. is infringing on the Company's recently issued United
States Patent No. 6,102,850. The Company's complaint seeks damages for lost
profits, injunctive relief enjoining any future infringement of its patent
rights, treble damages and attorneys fees.
On June 30, 2000, Intuitive Surgical, Inc. served its Answer and
Counterclaim alleging non-infringement of each patent-in-suit, patent invalidity
and unenforceability. Other than a request for attorney's fees, Intuitive
Surgical, Inc. has not requested any damages. The Company has served discovery
requests seeking a statement of the facts that support Intuitive Surgical,
Inc.'s defenses. Intuitive Surgical, Inc. has provided partial responses to the
Company's discovery. The responses have been served under seal and the Company
is not privy too much of the information to Intuitive Surgical, Inc.'s
underlying intentions.
On or about December 7 and 8, 2000, the United States Patent Office
granted three of Intuitive Surgical, Inc.'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 February 13, 2001, the District Court issued an order staying the
infringement action for up to one year pending decision on preliminary motions
the parties intend to bring in the interferences.
On February 21, 2001, Brookhill-Wilk filed suit against the Company
alleging that the Company's ZEUS Platform infringes upon Brookhill-Wilks United
States Patent Nos. 5,217,005 and 5,368,015. Brookhill-Wilk's complaint seeks
damages, attorney's fees and increased damages alleging willful patent
infringement. The Company does not believe that its ZEUS Platform currently
infringes either patent. On March 21, 2001, the Company served its Answer and
Counterclaim alleging non-infringement of each patent-in-suit, patent invalidity
and unenforceability.
On March 30, 2001, Intuitive Surgical, Inc. 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 recently issued on March 13, 2001. The
complaint seeks damages, a preliminary injunction, a permanent injunction, costs
and attorneys fees. A preliminary review of the claims of this patent reveals
that each claim is limited to a surgical system employing voice recognition for
control of a surgical instrument. As this patent was only recently issued and as
the Company has not had prior notice of this patent or the claims of this
patent, the Company is currently evaluating the allegations of patent
infringement and the validity of the patent.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Series B Convertible Preferred Stock Offering
On February 16, 2001, the Company, entered into a Securities Purchase
Agreement with Societe Generale, Catalpa Enterprises, Ltd., Baystar Capital,
L.P., Baystar International, Ltd., Robert W. Duggan, the Company's Chairman of
the Board of Directors and Chief Executive Officer, Mahkam Zanganeh, the
Company's Vice President European, Middle East and African Operations, and
Jeffrey O. Henley, a member of the Company's Board of Directors. Under the
Purchase Agreement, the Company sold a total of 1,024 shares of its Series B
Convertible Preferred Stock with certain conversion features discussed below and
warrants to purchase 557,931 shares of the Company's common stock, for total
consideration of $10,024,000. The Series B Convertible Preferred Stock has a
three-year maturity and is initially convertible into shares of the Company's
common stock at $5.77 per share. The initial conversion price is subject to
adjustment on the six month and nine month anniversaries of the closing date of
the private placement, whereupon the conversion price shall be subject to reset
to the average of the 10 lowest closing prices for the Company's common stock as
quoted on the NASDAQ National Market during the 20 consecutive dates immediately
prior to each adjustment date if such average is lower than the initial
conversion price; provided, however, that the conversion price shall not be
reset below $2.72 per share. The investors shall receive a preferred annual
dividend payable in stock or cash, at the Company's option, at a rate of 4.90%.
In addition, the investors were granted five-year warrants to purchase an
aggregate of approximately 557,931 shares of the Company's common stock at an
exercise price of $8.12 per share.
Under the rules of the NASDAQ National Market, the Company is required
to obtain shareholder approval for the sale, issuance or potential issuance of
the Company's common stock, or securities convertible into its common stock, if
the number of shares to be issued equals or exceeds 20% of its presently
outstanding stock and the purchase price is less than the greater of the book
value or market value of the stock. The Company anticipates the amount of common
stock issued upon the conversion of the Series B Convertible Preferred Stock and
the exercise of the warrants issued in connection with the sale and issuance of
the Series B Convertible Preferred Stock may exceed 20% of the number of shares
of the Company's common stock outstanding on the closing date of the Series B
Convertible Preferred Stock private placement. In addition, due to the reset
provisions contained in the Series B Convertible Preferred Stock, the final
conversion price of the Series B Convertible Preferred Stock may be reset to a
price below the market price on the closing date of the Series B Convertible
Preferred Stock private placement. Accordingly, the Company is asking its
shareholders to authorize the private placement at the regular shareholders
meeting to be held on May 31, 2001. If shareholder approval is not obtained, the
Company must redeem from the holders of the Series B Convertible Preferred Stock
half of the shares of Series B Convertible Preferred Stock originally sold at a
redemption price of 115% of the face value of such shares plus accrued
dividends. Failure to obtain the required shareholder approval, however, would
not effect the rights of the warrant holders to exercise their warrants for the
purchase of up to 557,931 shares of the Company's common stock.
Equity Line of Credit
On March 30, 2001 the Company entered into the Equity Line Agreement
with Societe Generale, under which the Company may issue and sell, from time to
time, shares of its common stock for cash consideration up to an aggregate of
$12 million. Pursuant to the requirements of the Equity Line Agreement, the
Company must file a registration statement on Form S-2 with SEC in order to
permit Societe Generale to resell to the public any shares that it acquires
pursuant to the Equity Line Agreement. Commencing as of the effective date of
this registration statement and continuing for 24 months thereafter, the Company
may from time to time at its sole discretion, and subject to certain
restrictions set forth in the Equity Line Agreement, sell, or draw down, shares
of its common stock Societe Generale at an initial purchase price equal to 91%
of the daily volume weighted average of the price of the Company's common stock
for each day during the specified purchase period. A draw down can be made after
five trading days have elapsed from the date of the delivery of the last draw
down notice in amounts ranging from a minimum of $75,000 to a maximum of
$250,000, depending on the trading volume and the market price of the common
stock at the time of each draw down. The maximum draw down amount may be
increased, and the discount to the daily volume weighted
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average price of the Company's common stock may be decreased, if the trading
volume of the common stock exceeds certain minimum thresholds prior to the
delivery of the draw down notice.
ITEM 4. SUBMISSIONS OF MATTERS TO VOTE OF SECURITY HOLDERS.
On March 9, 2001, the Company held a special meeting of its shareholders
with shareholders holding 8,942,612 shares of common stock (representing (89.1%)
of the total number of shares outstanding and entitled to vote) present in
person or by proxy at the meeting. Proxies for the meeting were solicited
pursuant to Regulation 14A of the Securities Exchange Act of 1934. At this
meeting, the Company sought approval on two proposals as follows:
First, the Company sought approval for a proposal to amend the
Certificate of Incorporation of Computer Motion, Inc. to increase the number of
authorized shares of the Company's common stock from 25,000,000 shares to
50,000,000 and to increase the authorized number of overall shares from
30,000,000 to 55,000,000. The proposal was approved with 8,297,882 affirmative
votes, 578,358 negative votes and 64,672 abstentions.
Second, the Company sought approval for a proposal to amend Computer
Motion, Inc.'s 1997 Stock Incentive Plan to increase the number of shares
available for issuance by an additional 2,000,000 shares of common stock and to
provide for an automatic annual increase of 750,000 shares on January 1st of
each year. The proposal was approved with 4,410,605 affirmative votes, 1,198,592
negative votes and 67,183 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4.1 -- Certificate of Designations Setting Forth the Preferences,
Rights, and Limitations of the Series B Convertible Preferred
Stock, filed on February 16, 2001. (1)
4.2 -- Registration Rights Agreement, dated as of February 16, 2001, by
and between Computer Motion, Inc., Societe Generale, Catalpa
Enterprises, Ltd., Jeffrey O. Henley, Robert W. Duggan, Mahkam
Zananeh, Baystar Capital, LP, and Baystar International, Ltd. (1)
4.3 -- Form of Warrant for the purchase of Common Stock of Computer
Motion, Inc. (1)
4.4 -- Registration Rights Agreement, dated March 30, 2001, by and
between Computer Motion, Inc. and Societe Generale.
10.1 -- Securities Purchase Agreement, dated February 16, 2001, by and
between Computer Motion, Inc., Societe Generale, Catalpa
Enterprises, Ltd., Jeffrey O. Henley, Robert W. Duggan, Mahkam
Zananeh, Baystar Capital, LP, and Baystar International, Ltd. (1)
10.2 -- Equity Financing Agreement, dated March 30, 2001, by and between
Computer Motion, Inc. and Societe Generale.
(1) Incorporate herein by reference to the same numbered exhibits to
the Company's current report on Form 8-K filed with the SEC on
March 26, 2001 (File No. 000-22755)
(b) Reports on Form 8-K. Report on Form 8-K dated March 14, 2001 was filed by
the Company with respect to a private placement of Series B Convertible
Preferred Stock, warrants issued in connection for the purchase of the
Company's common stock.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: May 15, 2001 COMPUTER MOTION, INC.
By: /s/ Gordon L. Rogers
-----------------------------------
GORDON L. ROGERS
Vice President, Chief Financial
Officer and Secretary
(Principal Financial and
Accounting officer)
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EXHIBIT INDEX
NUMBER DESCRIPTION
------ -----------
4.1 -- Certificate of Designations Setting Forth the Preferences,
Rights, and Limitations of the Series B Convertible Preferred
Stock, filed on February 16, 2001. (1)
4.2 -- Registration Rights Agreement, dated as of February 16, 2001, by
and between Computer Motion, Inc., Societe Generale, Catalpa
Enterprises, Ltd., Jeffrey O. Henley, Robert W. Duggan, Mahkam
Zananeh, Baystar Capital, LP, and Baystar International, Ltd. (1)
4.3 -- Form of Warrant for the purchase of Common Stock of Computer
Motion, Inc. (1)
4.4 -- Registration Rights Agreement, dated March 30, 2001, by and
between Computer Motion, Inc. and Societe Generale.
10.1 -- Securities Purchase Agreement, dated February 16, 2001, by and
between Computer Motion, Inc., Societe Generale, Catalpa
Enterprises, Ltd., Jeffrey O. Henley, Robert W. Duggan, Mahkam
Zananeh, Baystar Capital, LP, and Baystar International, Ltd. (1)
10.2 -- Equity Financing Agreement, dated March 30, 2001, by and between
Computer Motion, Inc. and Societe Generale.
----------
(1) Incorporate herein by reference to the same numbered exhibits to
the Company's current report on Form 8-K filed with the SEC on
March 26, 2001 (File No. 000-22755)