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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, 1997
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)
--------------------------------
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]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $60.5 million at March 23, 1998 when the
closing sale price of such stock, as reported on the NASDAQ National Market was
$10.00 per share.
The number of shares outstanding of the Registrant's Common Stock, $.001
par value, as of March 23, 1998 was 7,916,316 shares.
Portions of the Annual Report to Shareholders for the year ended
December 31, 1997 are incorporated by reference in Parts II and IV. Portions of
the Proxy Statement dated March 26, 1998 are incorporated by reference in Part
III.
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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 and Section 21E
of the Securities Exchange Act of 1934. 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 and technologies under
development 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 and technologies under development 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 vast 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 convalescent periods for the patient. In an effort to minimize these
negative factors, minimally invasive surgical techniques and related
technologies have been developed. MIS is 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 operating room 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's
products and technologies are intended to provide better visualization and
improved dexterity for the surgeon, particularly for minimally invasive
techniques.
The Company currently markets the Automated Endoscopic System for
Optimal Positioning ("AESOP(R)"), a surgical robot capable of positioning an
endoscope in response to a surgeon's verbal commands. AESOP approximates the
form and function of a human arm and allows 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. Over 35,000 MIS procedures have been successfully assisted by
AESOP in over 350 hospitals and surgery centers around the world.
The Company's product development strategy is intended to leverage
AESOP's broad-based technology platform, and lead to a family of products that
improve the control of devices in the operating room and enable new minimally
invasive surgical procedures. To centralize and simplify control of the OR,
Computer Motion is developing the HERMES(TM) OR Control Center for the voice
control of medical devices in the operating room. To enable new minimally
invasive microsurgery procedures, such as
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endoscopic coronary artery bypass grafting ("E-CABG(TM)"), the Company is
developing the ZEUS(TM) Robotic Surgical System.
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 OR Control Center is designed to enable a surgeon to directly
control multiple OR devices, as well as the Company's robotic devices, through
simple verbal commands. HERMES provides standardized visual and digitized voice
feedback to a surgical team. The Company believes that the enhanced control and
feedback provided by HERMES can improve safety, increase efficiency, shorten
procedure times and reduce costs.
The ZEUS Robotic Surgical System is 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 Company believes that ZEUS will improve a surgeon's
dexterity and precision and enhance visualization of, and access to, confined
operative sites. The Company believes that new MIS procedures performed with
ZEUS can, like currently available MIS procedures, result in reduced pain and
trauma, fewer complications, lessened cosmetic concerns and shortened
convalescent periods and will increase the number of patients qualified for
certain surgical procedures.
AESOP PRODUCT LINE
Computer Motion's AESOP is a surgical robot capable of positioning an
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 operation on a video monitor) in response to a surgeon's verbal
commands. This allows the surgeon to have direct control over the endoscope in
minimally invasive surgical procedures.
The Company believes that AESOP is the world's first FDA-cleared
surgical robot and incorporates the world's first FDA-cleared voice control
interface for use in the operating room. AESOP was first introduced in the
fourth quarter 1994. Since then, over 35,000 minimally invasive surgical
procedures have been successfully assisted by AESOP in over 350 hospitals and
surgery centers around the world.
AESOP 2000 with voice control was introduced in the fourth quarter 1996.
AESOP 3000, introduced in December 1997, is the world's first FDA-cleared
surgical robot capable of assisting in new advanced minimally invasive
cardiothoracic procedures. The AESOP 3000 robotic arm features added flexibility
and functionality over its predecessor, providing the range of motion necessary
for endoscopic viewing in the thoracic (chest) cavity.
Computer Motion is leveraging the core technologies underlying AESOP to
develop the HERMES OR Control Center and the ZEUS Robotic Surgical System.
HERMES PRODUCT LINE
Computer Motion's HERMES OR Control Center is designed to serve as a
centralized and simplified interface for a surgeon to voice-control multiple
medical devices in the operating room. HERMES has the potential to increase the
effectiveness of a surgical team by enhancing the efficiency and safety of
surgical procedures, while reducing operating costs.
HERMES is comprised of a control unit which is networked with multiple
HERMES-compatible devices and is controlled by a surgeon using simple verbal
commands or an interactive touch screen pendant. The devices controlled by
HERMES currently include the endoscopic camera and light source,
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insufflator, arthroscopic shaver, VCR, video printer, video frame grabber and
Computer Motion's proprietary robotic devices. The HERMES system also provides
both visual and digitized voice feedback to the surgical team. The visual
feedback is displayed on the endoscopic video monitor and the digitized voice
feedback is device-specific. Both feedback features are customizable by a
surgeon in real time, allowing a surgeon to modify the amount and type of
feedback received.
To leverage its proprietary voice recognition technology in the
arthroscopic and laparoscopic markets, Computer Motion has partnered with
Stryker Corporation, a leading manufacturer of endoscopic equipment. Stryker
will purchase HERMES on an original equipment manufacturer ("OEM") basis and
will market HERMES as an integrated component of several of its laparoscopic and
arthroscopic products. Computer Motion is currently performing HERMES
functionality testing in human clinical procedures. Several 510(k) submissions
relating to HERMES are pending with the FDA. Human clinical evaluation of the
product began in January 1998. The Company expects to receive regulatory
clearance and to market HERMES through its OEM agreement with Stryker in 1998.
Computer Motion plans to partner with other leading medical device
manufacturers on an OEM basis to expand the number and type of devices to be
integrated with HERMES, including the OR table, OR lights, electrocautery
devices, various imaging systems and devices for the cardiac catheter laboratory
and other medical clinic environments.
ZEUS PRODUCT LINE
Computer Motion's ZEUS Robotic Surgical System under development is
designed to fundamentally improve a surgeon's ability to perform complex,
minimally invasive procedures and to enable new, minimally invasive
microsurgical procedures that are currently very difficult or impossible with
conventional surgical methods. The Company believes that these new minimally
invasive surgical procedures 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. Additionally, the Company believes that an increase in minimally
invasive procedures would result in lower overall healthcare costs to patients,
hospitals and healthcare payors.
ZEUS is comprised of three surgeon-controlled robotic arms, one of which
positions an endoscope while the other two hold disposable and reusable surgical
instruments. The ZEUS robotic arms can be directly attached to the surgical
table to maintain a constant orientation to the patient. A surgeon controls the
movement of the robotic arms by manipulating two corresponding robotic
instrument handles which are housed in a mobile console. These instrument
handles are similar to conventional surgical instrument handles. A surgeon's
precise manipulation of the instrument handles is communicated to a proprietary
computer controller which filters, scales and translates the movements to the
robotic surgical instruments. A surgeon can operate these instrument handles
from a comfortable, ergonomic position. The surgeon controls the robotic arm
which holds the endoscope through means of simple verbal commands spoken into a
headset microphone. A video display of the endoscopic image is placed directly
in front of the surgeon, and a second monitor is positioned next to the patient
for use by the other members of the surgical team.
Computer Motion has commenced limited experimental testing with ZEUS at
several medical centers and intends in the second half of 1998 to seek approval
from the Food and Drug Administration to market ZEUS. Computer Motion intends to
sell ZEUS on a direct basis in North America. Computer Motion and Medtronic,
Inc., a leading manufacturer of medical devices, have entered into an agreement
whereby Medtronic will co-market ZEUS, for cardiovascular applications, in North
America, and distribute ZEUS, for cardiac applications, in Europe, the Middle
East and Africa.
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The Company believes that ZEUS will provide clinicians with the following
significant benefits:
Improved Precision. ZEUS incorporates technology that is designed to enable a
surgeon to scale his/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.
Improved Dexterity. ZEUS 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 or impossible to manipulate manually when
performing challenging minimally invasive surgery. For instance, a surgeon can
activate and deactivate the instrument handles to further extend his/her range
of motion to complete a particular movement, such as suturing, without having to
physically contort his/her arms. In addition, in order to gain anatomical access
to certain regions of the body in a minimally invasive manner, the instruments
must be placed in positions that would be extremely difficult for a surgeon to
manipulate manually using conventional minimally invasive surgical techniques
due to the distance between the instruments and their relative positions to each
other.
Elimination of Involuntary Hand Tremor. ZEUS 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 Tactile Feedback. ZEUS is designed to provide a surgeon with
computerized, scalable feedback which enhances and amplifies the surgeon's sense
of touch while grasping delicate tissue as compared to traditional minimally
invasive surgical instruments.
Enhanced Visualization. ZEUS incorporates a robotic arm which controls the
endoscope to produce a steady, magnified video image which facilitates
performance of minimally invasive surgical procedures.
Improved Minimally Invasive Anatomical Access. ZEUS 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. In contrast, ZEUS is
designed to provide a surgeon with complete access to the heart through several
3-5 millimeter ports.
Minimized Surgeon Fatigue. ZEUS allows a surgeon to operate the surgical
instrument handles in a comfortable, ergonomic position, including sitting down
and positioning his/her forearms on armrests. The Company believes these
enhanced ergonomics can extend the professional lives of surgeons and increase
the efficiency and effectiveness of demanding and lengthy microsurgical
procedures.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations are required to comply with the
FDA's Quality System Regulations ("QSR"), which address 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 and 9002
certification 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 is in
the process of obtaining such certification and will be audited on a semiannual
basis for compliance. The Company has a limited history of operations that, to
date, have consisted primarily of manufacturing moderate quantities of its AESOP
products, and limited quantities of its HERMES and
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ZEUS products for clinical investigations. The Company does not have experience
manufacturing its products in the volumes that will be necessary to achieve
significant commercial sales. The Company may encounter difficulties in scaling
up production of its products, in procuring the necessary supply of materials,
components and contract services, or in hiring and training additional
manufacturing personnel to support domestic and international demand. If the
Company is unable to achieve commercial-scale production capability on a timely
basis with acceptable quality and manufacturing yield and costs, or to achieve
FDA and other governmental approvals, the ability of the Company to deliver
products on a timely basis could be impaired.
COMPETITION
While the Company believes that it is currently the only Company
marketing a surgical robot, it is aware that there are other companies working
on design and development of both endoscope holding robots and surgical robots,
as well as voice control of medical devices. Beyond direct competition, there is
significant indirect competition. 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.
MARKETING
The Company's products are sold throughout the world. Payment terms
worldwide are consistent with local practice. Orders are shipped as they are
received and, therefore, no material back orders exist. No distributor
organization or single customer accounted for more than 10% of 1997 net sales.
In the United States, the Company sells directly to hospitals through an
employee based sales organization. In Western Europe, the Company is beginning
to develop an employee based sales organization which will be principally
focused on sales of AESOP in France and Germany. The Company has an agreement
with Medtronic, Inc. whereby Medtronic will distribute the Company's ZEUS
product for cardiovascular applications on an exclusive basis in Europe, the
Middle East and Africa, and provide co-marketing assistance for ZEUS in North
America. Throughout the rest of the world the Company uses independent
distributor organizations including the Ethicon Endo-Surgery Division of Johnson
& Johnson, Inc. Under the Company's OEM agreement with Stryker Corporation,
Stryker will distribute the Company's HERMES product for control of various
Stryker endoscopic devices on a worldwide basis.
RESEARCH AND DEVELOPMENT
The Company is focused on the development of new products and
improvements to existing products. In addition, research and development expense
reflects the Company's efforts to obtain 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 $4,149,000 (62.8% of net
sales), $1,359,000 (33.5% of net sales) and $739,000 (32.5% of net sales) in
1997, 1996 and 1995, respectively.
GOVERNMENT REGULATION
The medical devices manufactured and marketed by the Company are
subject to regulation by the FDA and, in some 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. Medical
devices are subject to different levels of government approval requirements, the
most comprehensive of which require the completion of an FDA approved clinical
evaluation program and submission and approval of a pre-market approval ("PMA")
application before a device may be commercially marketed. The Company's ZEUS
product may be subject to a PMA.
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In addition, 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 ("HFCA"), will reimburse hospitals and doctors for the inpatient
care of persons covered by Medicare. Several legislative proposals have been
advanced which would restrict future funding increases for these programs. While
the Company has been unaware of significant domestic price resistance directly
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 the European Economic Union ("EEU"), the
regulatory systems have been harmonized and approval to market in EEU countries
can be obtained through one agency. In addition, government funding of medical
procedures is limited and in certain instances being reduced.
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, acquiring licenses for selected patents of third
parties, obtaining copyrights on copyrightable materials and entering into
invention and proprietary information agreements with its employees and
consultants with respect to technology which it considers important to its
business. Computer Motion 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. Computer Motion
also relies upon trade secrets, unpatented know-how and continuing technological
innovation to develop and maintain its competitive position.
The Company currently holds seven issued United States patents and has
patent applications pending disclosing concepts generally related to medical
devices and methods, medical robotics and speech recognition applications. More
particularly, the Company has issued patents protecting several key aspects of
its AESOP product line. The Company has patent applications pending disclosing
key aspects of its ZEUS Robotic Surgical System, as well as key aspects of its
HERMES OR Control Center. The Company has filed corresponding international
patent applications on certain of its key United States patent applications.
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There can be no assurance that patents will issue from any of the
remaining applications or, if patents are issued, that they 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
minimally invasive surgical procedures that do not require the use of robotics,
aspects of which are patented by the Company.
Additionally, there has been substantial litigation regarding patents
and other intellectual property rights in the medical device industry.
Litigation, which could result in substantial cost to and diversion of effort by
the Company, may 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 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 is not currently a party to any patent litigation or other litigation
regarding proprietary rights and is not aware of any challenge to its patents or
proprietary rights.
PRODUCTS LIABILITY AND INSURANCE
The medical device industry has historically been subject to significant
products 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 products liability insurance
coverage, which management believes are prudent.
EMPLOYEES
As of December 31, 1997, the Company had 94 full-time employees
including 33 employees in sales and marketing, 39 employees in research and
development, 10 employees in production and 12 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 net sales were $1,871,000 (28% of
revenue), $1,147,000 (28% of revenue) and $350,000 (15% of revenue) in 1997,
1996 and 1995, 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.
OTHER
The Company is not materially impacted by the effects of inflation and
does not expect to be materially impacted by changes required by the effect of
the year 2000.
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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 highlights some of these risks. These risks could affect the
Company's actual future results and could cause them to differ materially from
any forward-looking statements made by the Company.
ABSENCE OF PROFITABILITY. The Company has incurred significant losses from its
inception and expects to incur significant additional losses as it increases its
spending with respect to research and development efforts, clinical trials,
manufacturing and distribution. There can be no assurance that the Company will
ever achieve significant commercial revenues, particularly from sales of its
HERMES or ZEUS product lines, or that the Company will be profitable. There can
be no assurance that the Company will not encounter substantial delays or incur
unexpected expenses related to the introduction of HERMES and ZEUS, or future
products.
RELIANCE ON FUTURE PRODUCTS; UNCERTAINTY OF REGULATORY APPROVAL AND MARKET
ACCEPTANCE. The Company has been producing and selling its AESOP products since
1994, but the Company has not received regulatory clearance or approval to
market its other products. If regulatory clearance or approval for HERMES and
ZEUS is obtained, the Company anticipates that HERMES and ZEUS will comprise a
substantial majority of the Company's sales. Accordingly, the Company's future
success depends on the successful development, regulatory clearance or approval,
commercialization and market acceptance of these products. Even if the Company
is successful in obtaining the necessary regulatory clearances or approvals for
HERMES and ZEUS, their successful commercialization will depend upon the
Company's ability to demonstrate the clinical safety and efficacy, ease-of-use,
reliability and cost-effectiveness of such products in a clinical setting.
HERMES has only recently begun its initial human clinical applications and ZEUS
has not yet been operated in human clinical practice. In order to conduct
clinical trials with ZEUS, the Company must submit and obtain approval of an
Investigational Device Exemption ("IDE") application. There can be no assurance
that the FDA will allow the Company to conduct clinical trials or that ZEUS will
prove to be safe and effective in clinical trials under United States or
international regulatory requirements or that the Company will not encounter
problems in clinical testing that will cause a delay in or prohibit
commercialization of ZEUS. Moreover, the clinical trials may identify
significant technical or other obstacles to overcome prior to obtaining
necessary regulatory or reimbursement approvals, resulting in significant
additional product development expense and delays. Even if the safety and
efficacy of procedures using HERMES and ZEUS is established, surgeons may elect
not to recommend the use of these products for any number of reasons, including
inadequate levels of reimbursement. Broad use of the Company's products will
require training surgeons and the time and expense required to complete such
training could adversely affect market acceptance.
GOVERNMENT REGULATION. The Company's products in the United States are regulated
as medical devices by the FDA. The process of obtaining United States regulatory
approvals and clearances is lengthy, expensive and uncertain. Commercial
distribution of the Company's products in foreign countries is also subject to
varying government regulations which may delay or restrict marketing of the
Company's products in those countries. In addition, such regulatory authorities
may impose limitations on the use of the Company's products. After mid-1998, the
Company will be required to obtain the certifications necessary to enable the CE
mark to be affixed to the Company's products in order to sell its products in
member countries of the European Union. The Company is in the process of
obtaining such certification, but there can be no assurance it will be able to
do so for all its products in a timely manner. The Company's manufacturing
operations are subject to the FDA's QSR and similar regulations in other
countries regarding the manufacturing, testing, labeling, record keeping and
storage of devices and the failure to maintain compliance would have an adverse
effect on the Company and its operations.
INTENSE COMPETITION. The minimally invasive surgery market has been, and will
likely continue to be, highly competitive. Many competitors in this market have
significantly greater financial resources and
<PAGE> 10
experience than the Company. Many medical conditions that can be treated using
the Company's systems, particularly ZEUS, 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 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.
LIMITATIONS ON THIRD PARTY REIMBURSEMENT. In the United States, the Company's
products would be acquired primarily by medical institutions which then bill
various third-party payors, such as Medicare, Medicaid and other government
programs and private insurance plans for the health care services provided to
their patients. Government agencies, certain private insurers and certain other
payors generally reimburse hospitals for medical treatment at a fixed rate based
on the DRG established by the HCFA. The Company believes that the procedures
using AESOP are eligible and that future products will be eligible for
reimbursement under existing DRG reimbursement codes. However, Medicare and
other third-party payors are increasingly scrutinizing whether to cover new
products and the level of reimbursement. Even if a procedure is covered by DRG,
payors may deny reimbursement if they determine that the device used in the
treatment was unnecessary, inappropriate, not cost-effective, experimental or
used for a non-approved indication. Many international markets have government
managed health care systems that control reimbursement for new products and
procedures. In most markets, there are private insurance systems, as well as
governmental managed systems, that control reimbursement for new products and
procedures. Market acceptance of the Company's products will depend on the
availability and level of reimbursement in international markets targeted by the
Company. There can be no assurance that the Company will obtain reimbursement in
any country within a particular time, or at all.
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The success of the Company
will depend, in part, on its ability to obtain and maintain patent protection
for its products, to preserve its trade secrets, and to operate without
infringing the proprietary rights of others. The Company seeks to protect its
proprietary positions by filing United States and foreign patent applications
related to its technology, inventions and improvements that are important to the
development of its business. There can be no assurance that the Company's issued
patents or any patents that may be issued will not be challenged, invalidated or
circumvented in the future. Further, there can be no assurance that competitors,
many of which have substantially more resources than the Company and have made
substantial investments in competing technologies, will not seek to apply for
and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or
internationally. There can be no assurance that the Company will not become
subject to patent infringement claims or litigation.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT. The market for the
Company's products is characterized by rapidly changing technology and new
product introductions and enhancements. The Company's success will depend to a
significant extent upon its ability to enhance and expand the utility of AESOP
and its other products and to develop and introduce additional innovative
products that gain market acceptance. The Company maintains research and
development programs to continually improve and refine its product offerings and
those under development. There can be no assurance, however, that such efforts
will be successful or that the Company will be successful in selecting,
developing, manufacturing and marketing new products or enhancing its existing
products on a timely or cost-effective basis. Moreover, the Company may
encounter technical problems in connection with its product development efforts
that could delay introduction of new products or product enhancements.
CONTROL BY MANAGEMENT AND DEPENDENCE ON KEY PERSONNEL. The present directors and
executive officers of the Company and their affiliates, in the aggregate,
beneficially own approximately 30% of the
<PAGE> 11
Company's outstanding common stock. These shareholders, acting together, have
the ability to significantly influence the election of the Company's directors
and other shareholder actions and, as a result, direct the Company's affairs and
business, including delaying or preventing a change in control of the Company.
The Company's future business and operating results depend in significant part
on its key management, scientific and technical personnel, many of whom would be
difficult to replace, and its future success will depend partially upon its
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 there can be no assurance that
the Company will be successful in attracting or retaining such personnel.
FLUCTUATIONS IN OPERATING RESULTS; MARKET VOLATILITY. The Company's results of
operations may vary significantly from quarter to quarter depending upon
numerous factors, including the following: delays associated with the FDA and
other regulatory approval processes; health care reimbursement policies; timing
and results of clinical trials; demand for the Company's products; changes in
pricing policies by the Company or its competitors; the number, timing and
significance of product enhancements and new products by the Company and its
competitors; and product quality issues. The market price of the Company's
common stock is likely to be volatile and may be affected by actual or
anticipated decisions by the FDA with respect to approvals or clearances of the
Company's or competitors' products, actual or anticipated fluctuations in the
Company's operating results, announcements of technological innovations, new
commercial products announced or introduced by the Company or its competitors,
changes in third party reimbursement policies, developments concerning
proprietary rights, conditions and trends in the medical device industry,
governmental regulation, changes in financial estimates by securities analysts,
and general stock market conditions.
EXPANSION OF MARKETING ACTIVITIES AND LIMITED DISTRIBUTION. The Company
anticipates it will significantly increase the number of sales personnel to more
fully cover its target markets, particularly as additional products become
commercially available. There can be no assurance that the Company will be able
to compete effectively in attracting, motivating and retaining qualified sales
personnel. The Company currently intends to market and sell its products outside
the United States principally through distributors. In order to accomplish this,
the Company will be required to significantly expand its distributor network.
There can be no assurance that the Company will be able to identify suitable
distribution agreements on acceptable terms, if at all, or that such
distribution agreements will result in significant sales.
DEPENDENCE ON INDEPENDENT CONTRACT MANUFACTURERS; LIMITED MANUFACTURING
EXPERIENCE. The Company relies on independent contract manufacturers, some of
which are single source suppliers, for the manufacture of the principal
components of AESOP. Shortages of raw materials, production capacity constraints
or delays on the part of the Company's contract manufacturers could negatively
affect the Company's ability to ship products and derive revenue. The Company
does not have experience manufacturing its products in commercial quantities.
The Company's manufacturing experience to date has been focused primarily on
assembling components produced by third party manufacturers for its AESOP
product. The Company's manufacturing activities to date with respect to HERMES
and ZEUS have consisted primarily of manufacturing a limited number of
prototypes. In scaling up manufacturing of new products, the Company may
encounter difficulties involving quality control and assurance, component and
service availability, adequacy of control policies and procedures, lack of
qualified personnel and compliance with FDA QSR requirements. The Company may
elect to internally manufacture components currently provided by third parties
or to implement new production processes. There can be no assurance 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.
<PAGE> 12
RISK OF PRODUCT LIABILITY CLAIMS. 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 the Company's products
might necessitate a product recall. There can be no assurance that the Company
will not experience losses due to product liability claims or recall in the
future. The Company currently maintains product liability insurance with
coverage limits of $5,000,000. There can be no assurance that these coverage
limits will be adequate.
MANAGEMENT OF GROWTH. The Company's growth will continue to place significant
demands on the Company's 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 physical 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 management's ability to manage future growth
and there can be no assurance that these efforts will be successful.
ADVERSE IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE. The exercise of existing
stock options and warrants, totaling approximately 3,360,000 shares, of which
approximately 2,187,000 were exercisable at December 31, 1997, would have a
dilutive effect on the interests of current investors.
ITEM 2. PROPERTIES
The Company leases approximately 28,000 square feet of office and
manufacturing space in an office park in Goleta, California and a small sales
office in Strasbourg, France. The Company is currently looking to expand its
leased space in Goleta.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
Information on executive officers is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert W. Duggan 53 Chairman of the Board and Chief Executive Officer
Yulun Wang 37 Chief Technical Officer, Founder and Director
Stephen L. Wilson 45 Executive Vice President, Chief Financial Officer and
Secretary
Kermit R. (Kerry) Pope, Jr. 52 Executive Vice President of Sales and Marketing
John M. Greathouse 36 Vice President of Business Development
David A. Stuart 42 Vice President of Operations
</TABLE>
<PAGE> 13
ROBERT W. DUGGAN 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, as well as
the University's Engineering Steering Committee. Formerly, Mr. Duggan served as
a Board of Trustee for the Santa Barbara Museum of Art and the Santa Barbara
Symphony.
YULUN WANG, PH.D., has been Chief Technical Officer of the Company since
January 1996, and a Director since 1990, and has served in numerous other
capacities since he founded the Company in 1989.
STEPHEN L. WILSON joined the Company as Executive Vice President, Chief
Financial Officer and Secretary in June 1997. Prior to joining the Company, Mr.
Wilson had served as the Vice President of Finance and Chief Financial Officer
of St. Jude Medical Inc., a medical device manufacturer, since 1990.
KERRY R. POPE, JR. joined the Company in May 1997 as Executive Vice
President of Sales and Marketing. Prior to joining the Company, Mr. Pope served
as a Vice President of Baxter Healthcare's Vascular Systems Division since 1994.
Prior to that, Mr. Pope served in several sales related capacities at Vitaphore
Corporation, a manufacturer of collagen-based medical devices, since 1986.
JOHN M. GREATHOUSE joined the Company as Director of Finance in 1993 and
has served as the Company's Vice President of Business Development since
February 1997. Prior to joining the Company, Mr. Greathouse served as Manager of
Corporate Development with Mitchell Humphrey & Co., a developer of financial
software, from 1990 to 1993.
DAVID A. STUART joined the Company as Vice President of Operations in
June 1996. 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.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
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 1997 (from August 12, 1997, the date trading in the stock commenced) are
set forth below.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 High Low
---- ---
<S> <C> <C>
First Quarter............................................. N/A N/A
Second Quarter............................................ N/A N/A
Third Quarter (commencing August 12, 1997)................ $15.00 $13.38
Fourth Quarter............................................ $13.63 $7.88
</TABLE>
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,
<PAGE> 14
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 23, 1998,
there were approximately 2,000 stockholders of record.
The Company's Registration Statement on Form S-1 filed with the
Securities Exchange Commission (Registration No. 33-29505) for 2,875,000 shares
of its common stock was declared effective on August 11, 1997. Proceeds from the
offering, net of underwriting discounts and commissions and direct offering
expenses, were $36,740,000. During the quarter ended December 31, 1997, the
Company used $2,845,000 of these proceeds. The proceeds were principally used to
support the cash loss from operations of $2,019,000, increase working capital by
$487,000 and purchase property and equipment for $382,000. The remaining
proceeds of the offering have been invested in short-term investment grade debt
securities. Proceeds from the offering will continue to be used to fund the
Company's operating losses and capital requirements.
The following is a summary of transactions by the Company during 1997
involving sales of the Company's securities that were not registered under the
Securities Act:
During 1997, the Company issued 11,437 shares of its common stock to
five providers of services to the Company and 242,810 shares of its Series E
preferred stock together with an equal number of warrants to purchase its common
stock to 39 accredited investors. Subsequently, the number of shares of common
stock into which the Series E preferred stock is convertible was increased to
303,484 by an adjustment to the conversion ratio. The warrants to purchase
common stock underwent a similar adjustment and are now exercisable for 303,484
shares of common stock at an exercise price of $7.71 per share. The aggregate
consideration for the Series E preferred stock issued during 1997 totaled
$2,341,000.
In March 1997, Medtronic, Inc. invested $4,000,000 in the Company in the
form of a convertible loan bearing interest at a rate equal to prime plus 1%.
Such loan was converted into 363,743 shares of common stock on August 11, 1997.
In connection with the issuance of this convertible loan, Medtronic was granted
an option to purchase shares of the Company's common stock at a price equal to
the public offering price in the Company's initial public offering. On August
11, 1997, Medtronic exercised such option and purchased 76,805 shares of the
Company's common stock for $13.02 per share.
In June 1997, Stephen L. Wilson purchased 32,417 shares of common stock
for $4.57 per share pursuant to the terms of his employment agreement with the
Company.
Exemption from the registration requirement of the Act for the
transactions described above is claimed under Section 4(2) of the Act, among
others, on the basis that such transactions did not involve any public offering
and the purchasers were sophisticated with access to the kind of information
registration would provide. No underwriting fees or broker's commissions were
paid in connection with the foregoing transactions.
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data and is
qualified by reference to, and should be read in conjunction with, the Company's
consolidated financial statements and with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in the Company's 1997
Annual Report to Shareholders. The selected financial data is derived from
consolidated financial statements that have been audited by Arthur Andersen LLP,
independent auditors.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993(1)
------------ ------------ -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue $ 6,611,000 $ 4,057,000 $ 2,271,000 $ 607,000 $ 66,000
Net loss ($ 9,219,000) ($ 4,559,000) ($ 3,590,000) ($ 3,244,000) ($ 874,000)
Net loss per share basic
and diluted ($2.12) ($2.68) ($2.12) ($1.90) ($0.54)
Weighted average common
shares outstanding 4,343,000 1,701,000 1,691,000 1,706,000 1,629,000
Total assets
$ 37,313,000 $ 3,489,000 $ 2,017,000 $ 4,699,000 $ 595,000
Long-term liabilities $ -- $ 9,132,000 $ 605,000 $ 126,000 $ 2,000
----------------------------------------------------------------------------
</TABLE>
- ----------
(1) In 1993, the Company changed its fiscal year-end from March 31 to December
31. Therefore, 1993 includes only nine months of operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The information set forth under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" on pages 14 through
18 of the Company's 1997 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements of the Company and
Report of Independent Auditors set forth on pages 18 through 28 of the Company's
1997 Annual Report to Shareholders are incorporated herein by reference:
Consolidated Statements of Operations - Years ended December 31, 1997,
1996 and 1995 Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Shareholders' Equity (Deficit) - Years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended December 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
Report of Independent Auditors
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE> 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information set forth under the caption "Election of Directors" in the
Company's definitive proxy statement dated March 26, 1998, is incorporated
herein by reference. Information on executive officers is set forth in Part I,
Item 4A hereto.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation and
Other Information" in the Company's definitive proxy statement dated March 26,
1998, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" and "Election of Directors" in the
Company's definitive proxy statement dated March 26, 1998, is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Election of Directors" in
the Company's definitive proxy statement dated March 26, 1998, is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Report
(1) Financial Statements
The following Consolidated Financial Statements of the Company and
Report of Independent Auditors as set forth on pages 18 through 28 of
the Company's 1997 Annual Report to Shareholders are incorporated herein
by reference:
Consolidated Statements of Operations -Years ended December 31, 1997,
1996 and 1995
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Shareholders' Equity (Deficit) - Years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended December 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
Report of Independent Auditors
<PAGE> 17
(2) Financial Statement Schedule
The following financial statement schedule is filed as part of this
Report:
<TABLE>
<CAPTION>
SCHEDULE PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
<S> <C> <C>
II Valuation and Qualifying Accounts 20
- ---------------------------------------------------------------------------------------------
</TABLE>
The report of the Company's Independent Auditors with respect to the
above-listed financial statement schedule appears on page 19 of this Report.
All other financial statements and schedules not listed have been
omitted because the required information is included in the consolidated
financial statements or the notes thereto, or is not applicable.
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
--- -----------
<C> <S>
3.1 Second Amended and Restated Certificate of Incorporation.*
3.2 Bylaws of the Company.*
10.1 Computer Motion, Inc. Tandem Stock Option Plan..*
10.2 Computer Motion, Inc. 1997 Stock Incentive Plan.*
10.3 Development and Supply Agreement between the Stryker Endoscopy
Division of Stryker Corporation and the Company dated August 21,
1996.*(1)
10.4 Series D Convertible Preferred Stock and Warrant Purchase
Agreement dated as of August 24, 1994 between Chase Manhattan
Capital Corporation and the Company.*
10.5 Registration Agreement between the Company and certain
shareholders.*
10.6 Stockholders Agreement dated August 24, 1994 between Chase
Manhattan Capital Corporation, the Company and the Executives
designated therein.*
10.7 Sales Agreement between the Company and Medtronic, Inc. dated
May 28, 1997.* (1)
10.8 Secured Convertible Debenture of the Company to Medtronic, Inc.
dated March, 19, 1997.*
10.9 Form of Bridge Financing Agreements.*
10.10 Form of Warrant to Purchase Common Stock issued in connection
with Bridge Financing.*
10.11 Purchaser Representation and Subscription Agreement relating to
the Company's Series E Preferred Stock and Warrant to Purchase
Common Stock.*
10.12 Form of Redeemable Warrant to Purchase Common Stock of the
Company issued in conjunction with the Company's Series E
Preferred Stock.*
10.13 Business Agreement between the Company and Bulova Technologies,
L.L.C. dated February 18, 1997.*(1)
10.14 Lease between the Company and University Business Center
Associates dated March 1, 1994 and amendment thereto dated
October 19, 1996.*
10.15 Form of Indemnification Agreement for Officers and Directors of
the Company.*
10.16 Agreement relating to the Company's employment of Stephen L.
Wilson.*
</TABLE>
<PAGE> 18
<TABLE>
<C> <S>
10.17 Stock Purchase Agreement between the Company and Medtronic Asset
Management, Inc. dated as of August 11, 1997.
10.18 Computer Motion, Inc. Employee Stock Purchase Plan, as amended
through September 30, 1997.
10.19 Leases between the Company and University Business Center
Associates dated as of September, 1997.
13.1 Management's Discussion and Analysis of Financial Condition and
Results of Operations and Consolidated Financial Statements
from the 1997 Annual Report to Shareholders.
21.1 Subsidiaries of the Company..
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
</TABLE>
- ----------------------
* Incorporated by reference to the Company's Form S-1 Registration
Statement No. 333-29505 declared effective August 11, 1997.
(1) 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
None
(c) Exhibits
See Item 14(a)(2) of this Report.
<PAGE> 19
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 26, 1998 /s/ Robert W. Duggan
- ------------------------- -------------------------------------------------
Date Robert W. Duggan
Chairman and Chief Executive Officer
(Principal Executive Officer)
March 26, 1998 /s/ Stephen L. Wilson
- ------------------------- -------------------------------------------------
Date Stephen L. Wilson
Executive Vice President, Chief Financial 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.
<TABLE>
<S> <C> <C>
/s/ Daniel R. Doiron Director March 26, 1998
- --------------------------------
Daniel R. Doiron
/s/ Robert W. Duggan Director March 26, 1998
- --------------------------------
Robert W. Duggan
/s/ W. Peter Geis Director March 26, 1998
- --------------------------------
W. Peter Geis
/s/ M. Jacqueline Eastwood Director March 26, 1998
- --------------------------------
M. Jacqueline Eastwood
/s/ William D. Williams Director March 26, 1998
- --------------------------------
William D. Williams
/s/ Yulun Wang Director March 26, 1998
- --------------------------------
Yulun Wang
</TABLE>
<PAGE> 20
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Computer Motion, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Computer Motion, Inc.'s annual
report to shareholders incorporated by reference in this Form 10-K, and have
issued our report thereon dated February 5, 1998. Our audits were made for the
purpose of performing an opinion on those statements taken as a whole. The
schedule listed in the index above is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subject to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Woodland Hills, California
February 5, 1998
<PAGE> 21
COMPUTER MOTION, INC.
YEAR ENDED DECEMBER 31, 1997
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING BALANCE AT
DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
- ------------------------------ ------------ ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for doubtful
accounts $75,000 $28,000 $41,000 $62,000
Year ended December 31, 1996
Allowance for doubtful
accounts 5,000 118,000 48,000 75,000
Year ended December 31, 1995
Allowance for doubtful
accounts 5,000 - - 5,000
</TABLE>
<PAGE> 1
Exhibit 10.17
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT ("Agreement") is entered into as of the
11th day of August, 1997, by and between MEDTRONIC ASSET MANAGEMENT, INC. (a
wholly-owned subsidiary of MEDTRONIC, INC.) (the "Purchaser") and COMPUTER
MOTION, INC. a Delaware corporation (the "Company").
WHEREAS, the Company has undertaken an initial public offering (the
"Initial Public Offering") of its Common Stock, $.01 par value per share (the
"Common Stock"), for which it filed a registration statement on Form S-1 and
amendments thereto (File No. 333-29505, the "Registration Statement") with the
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "Securities Act") and which was declared effective on August 11,
1997; and
WHEREAS, concurrently with the closing of the Initial Public Offering,
the Company desire to issue and sell to Medtronic, and Medtronic desires to
purchase from the Company, upon the terms and subject to the conditions set
forth in this Agreement, Seventy-Six Thousand Eight Hundred and Five (76,805)
shares (the "Shares") of the Company's Common Stock.
In consideration of the mutual covenants and representations set forth
in this Agreement, the Company and Purchaser agree as follows:
1. Purchase. Purchaser, in exercise of its right under the Debenture
Purchase Agreement dated March 18, 1997, hereby irrevocably (subject to
completion of the Initial Public Offering) agrees to purchase, on the terms and
conditions described herein, Seventy-Six Thousand Eight Hundred and Five
(76,805) Shares. Purchaser acknowledges that its right to purchase the balance
of up to $10,000,000 of the Company's Common Stock is no longer exercisable. The
Shares are purchased as an Additional Minority Investment pursuant to the
Principal Terms attached as Exhibit C to Debenture Purchase Agreement.
2. Purchase Price. Purchaser shall pay to the Company $13.02 per share,
or a total of One Million Dollars ($1,000,000). Such purchase price shall be
paid immediately following the closing of the Company's initial public offering
on August 15, 1997 (the "Closing Date").
3. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Purchaser as follows:
(a) All corporate action on the part of the Company, its officers,
directors and shareholders necessary for the authorization, execution and
delivery of this Agreement, the performance of all obligations of the Company
hereunder and the authorization, issuance (or reservation for issuance) and
delivery of the Shares being issued hereunder has been taken or will be taken
prior to the Closing, and this Agreement constitutes a valid and legally binding
obligation of the Company, enforceable in accordance with its terms.
(b) The Shares which are being purchased by the Purchaser hereunder,
when issued, sold and delivered in accordance with the terms hereof for the
consideration expressed
<PAGE> 2
herein will be duly and validly issued, fully paid and nonassessable and, based
in part upon the representations of the Purchaser in this Agreement, will be
issued in compliance with all applicable federal and state securities laws.
(c) The execution and delivery by the Company of this Agreement, the
performance by the Company of its obligations hereunder, and the issuance, sale
and delivery of the Shares will not violate any provision of law, any order of
any court or other agency of government, the Certificate of Incorporation or the
By-laws of the Company, in each case as amended, or any provision of any
material indenture, agreement or other instrument to which the Company or any of
its properties or assets is bound, or conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under any such
material indenture, agreement or other instrument, or result in the creation or
imposition of any material lien upon any of the properties or assets of the
Company.
(d) The Registration Statement, as amended by Amendments No. 1, No. 2
and No. 3 thereto, including the preliminary prospectus delivered in connection
with the Initial Public Offering (the "Preliminary Prospectus"), copies of which
have heretofore been delivered to the Purchaser, has been prepared by the
Company in conformity with the requirements of the Securities Act and the rules
and regulations (the "Rules and Regulations") of the SEC under the Securities
Act, and has been filed with the SEC under the Securities Act; such amendment or
amendments to such Registration Statement, copies of which have heretofore been
delivered to the Purchaser, as may have been made prior to the date of this
Agreement have been so prepared and filed; and the Company has so prepared and
proposes so to file the final prospectus (the "Final Prospectus") in accordance
with Rule 424 promulgated under the Securities Act.
(e) The Commission has not issued any order preventing or suspending
the use of the Preliminary Prospectus. At the time of filing the Preliminary
Prospectus, such prospectus did not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading. The Registration Statement when it became
effective and Final Prospectus when filed with the SEC pursuant to Rule 424 of
the Rules and Regulations and at all times subsequent thereto up to the Closing
Date and any amendments or supplements thereto will contain as of their
respective dates all material statements and information which are required to
be included therein in accordance with the Securities Act and the Rules and
Regulations and will in all material respects conform to the requirements of the
Securities Act and the Rules and Regulations, and neither the Registration
Statement nor the Final Prospectus, nor any amendment or supplement thereto,
will include as of such dates any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading.
(f) Except as contemplated in the Registration Statement, subsequent
to the respective dates as of which information is given in the Registration
Statement, the Company has not incurred any direct or, to the best of the
Company's knowledge, contingent material liabilities or material obligations, or
entered into any material transactions or contracts, not in the ordinary course
of business, and there has not been any material increase or decrease in any
thereof or in any debt, except pursuant to the terms of the instruments
governing the same, or any material adverse change in the present or, the
Company's best knowledge, prospective, general affairs, business, management, or
financial condition of the Company.
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4. Investment Representation of Purchaser. Purchaser hereby represents
and agrees that:
(a) Purchaser understands that the Shares will be issued by the
Company without registration under the Securities Act of 1933 ("Securities Act")
and without qualification or registration under applicable state securities laws
("Blue Sky Laws") pursuant to exemptions from registration or qualification
contained in the Securities Act and in the Blue Sky Laws. Purchaser understands
that the Shares must be held indefinitely unless subsequently registered or
qualified under the Securities Act and under the Blue Sky Laws unless exemptions
from the registration or qualification requirements under the Securities Act and
under the Blue Sky Laws are available in connection with any proposed transfer
of the Shares by Purchaser.
(b) Purchaser agrees that none of the Shares, nor any interest in
the Shares, will be resold or otherwise transferred by Purchaser without
registration or qualification under the Securities Act and the Blue Sky Laws
unless Purchaser first demonstrates to the satisfaction of the Company that
specific exemptions from such registration or qualification requirements are
available with respect to the proposed transfer and provides the Company an
opinion of counsel satisfactory to the Company that the proposed transfer may be
made without violation of the Securities Act or the Blue Sky Laws and will not
affect the exemptions relied upon by the Company in connection with the original
issuance of the Shares.
(c) Without limiting the Company's representations in Section 3
above, Purchaser is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision regarding the merits and risks of investing
in the Shares. Purchaser has had ample opportunity to review information
regarding the Company and to ask questions of the Company and its
representatives and to seek independent investment, tax, and legal advice prior
to investing in the Shares. THE PURCHASER RECOGNIZES THAT THE SHARES ARE A
SPECULATIVE INVESTMENT INVOLVING A HIGH DEGREE OF RISK OF LOSS BY THE PURCHASER
AND THAT THE PURCHASER COULD LOSE THE ENTIRE AMOUNT OF THE PURCHASER'S
INVESTMENT. THE PURCHASER IS ABLE TO BEAR THE ECONOMIC RISK OF SAID INVESTMENT
AND AT THE PRESENT TIME COULD AFFORD A COMPLETE LOSS OF SAID INVESTMENT.
(d) Purchaser represents and warrants to the Company that Purchaser
is an "accredited investor" within the meaning of Rule 501 under the Securities
Act and that the Shares are being acquired for private investment for
Purchaser's own account and not with a view to or for sale in connection with
any distribution of the Shares to others.
(e) Purchaser acknowledges that the certificates representing the
Shares will bear the legends set forth herein:
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<PAGE> 4
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933; THEY HAVE BEEN
ACQUIRED BY THE HOLDER FOR INVESTMENT AND MAY NOT BE PLEDGED,
HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT
AS MAY BE AUTHORIZED UNDER THE SECURITIES ACT OF 1933, AND THE
RULES AND REGULATIONS PROMULGATED THEREUNDER.
(f) Purchaser understands that the Shares constitute "restricted
securities" for the purposes of Rule 144 promulgated under the Securities Act.
The Company agrees to use its best efforts to keep available adequate public
information regarding the Company to satisfy subsection (c) of such Rule 144.
5. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which,
taken together, shall constitute one and the same agreement.
6. Controlling Law. This Agreement shall be governed by, interpreted
under, and construed and enforced in accordance with the laws of the State of
California applicable to agreements made and to be performed wholly within the
State of California.
7. Severability. If any provision of this Agreement is declared void,
such provision shall be deemed severed from this Agreement, which shall
otherwise remain in full force and effect.
8. Survival of Representations, Warranties and Agreements. The
representations, warranties, covenants and agreements contained herein shall
survive the purchase of the Shares and remain in full force and effect. No
independent investigation of the Company by the Purchaser, its counsel, or any
of its agents or employees shall in any way limit or restrict the scope of the
representations and warranties made by the Company in this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the day and year first written above.
"THE COMPANY"
COMPUTER MOTION, INC.,
a Delaware corporation
By: _______________________________
Its: ______________________________
"PURCHASER"
MEDTRONIC ASSET MANAGEMENT, INC.
By: _______________________________
Its: ______________________________
5
<PAGE> 1
EXHIBIT 10.18
COMPUTER MOTION, INC.
EMPLOYEE STOCK PURCHASE PLAN
This EMPLOYEE STOCK PURCHASE PLAN (the "Plan") was adopted by COMPUTER
MOTION, INC., a California corporation, on May 23, 1997, approved by the
shareholders on July 3, 1997, and assumed by COMPUTER MOTION, INC., a Delaware
corporation (the "Company"), on August 5, 1997, and became effective as of
August 11, 1997 (the "Effective Date").
1.
PURPOSE OF THE PLAN
-------------------
1.1 Purpose. The Company has determined that it is in its best interest
to provide incentives to attract and retain employees and to increase employee
morale by providing a program through which employees of the Company, and of
such of the Company's subsidiaries as the Company's Board of Directors (the
"Board of Directors") may from time to time designate (each a "Designated
Subsidiary", and collectively, "Designated Subsidiaries"), may acquire a
proprietary interest in the Company through the purchase of shares of the common
stock of the Company ("Company Stock"). The Plan is hereby established by the
Company to permit employees to subscribe for and purchase directly from the
Company shares of the Company Stock at a discount from the market price, and to
pay the purchase price in installments by payroll deductions. The Plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code of 1986, as amended from time to time (the "Code").
The provisions of the Plan are to be construed in a matter consistent with the
requirements of Section 423 of the Code. The Plan is not intended to be an
employee benefit plan under the Employee Retirement Income Security Act of 1974,
and therefore is not required to comply with that Act.
2.
DEFINITIONS
-----------
2.1 Compensation. "Compensation" means the amount indicated on the Form
W-2, including any elective deferrals with respect to a plan of the Company
qualified under either Section 125 or Section 401(a) of the Code, issued to an
employee by the Company.
2.2 Eligible Employee. "Eligible Employee" means any person currently
employed by the Company or any of its Designated Subsidiaries, any portion of
whose income is subject to withholding of income tax or for whom Social Security
retirement contributions are made by the Company or any Designated Subsidiary
who is regularly scheduled for not less then 20 hours of work per week and who
has been so employed for not less than thirty (30) days.
2.3 Effective Date. "Effective Date" means the effective date of the
Company's first Registration Statement filed with the Securities and Exchange
Commission registering Company Stock.
<PAGE> 2
2.4 Entry Date. "Entry Date" means the date an Eligible Employee first
joins an Offering Period. The earliest Entry Date shall be the Effective Date.
2.5 5% Owner. "5% Owner" means an Employee who, immediately after the
grant of any rights under the Plan, would own Company Stock or hold outstanding
options to purchase Company Stock possessing 5% or more of the total combined
voting power of all classes of stock of the Company. For purposes of this
Section, the ownership attribution rules of Code Section 425(d) shall apply.
2.6 Participant. "Participant" means an employee who has satisfied the
definition of Eligible Employee and has become a participant in the Plan in
accordance with Section 3.2.
2.7 Plan Year. "Plan Year" means the twelve consecutive month period
ending on the last day of December.
2.8 Offering Period. "Offering Period" means the period beginning on the
Effective Date and ending on June 30, 1999, and thereafter each twenty-four (24)
month period beginning the date after the expiration of the previous Offering
Period.
2.9 Purchase Date. "Purchase Date" means the last trading day of each
Semi-Annual Period of Participation.
2.10 Semi-Annual Period of Participation means each semiannual period
for which the Participant actually participates in an Offering Period in effect
under the Plan. There shall be a maximum of four (4) semi-annual periods of
participation within each Offering Period. The first such semi-annual period
shall extend from the Effective Time through the last trading day in December
1997. Subsequent semi-annual periods shall be measured from the first trading
day of January to the last trading day of June each calendar year and from the
first trading day of July to the last trading day of December each calendar
year.
3.
ELIGIBILITY AND PARTICIPATION
-----------------------------
3.1 Eligibility. Each Eligible Employee may participate in the Plan in
accordance with the following provisions.
(a) An individual who is an Eligible Employee on the first day of
any Offering Period under the Plan shall be eligible to commence participation
in that Offering Period on such day. Such date shall become such individual's
Entry Date for the Offering Period, and on that date such individual shall be
granted his/her purchase right for the Offering Period. Should any such Eligible
Employee not enter the Offering Period on the start date, then he/she may not
subsequently join that particular Offering Period until the next Semi-Annual
Entry Date.
(b) An individual who first becomes an Eligible Employee after
the start date of any Offering Period under the Plan may enter that Offering
Period on any Semi-Annual Entry Date on which he/she is an Eligible Employee.
Such Semi-Annual Entry Date shall become such
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<PAGE> 3
individual's Entry Date for the Offering Period, and on that date such
individual shall be granted his/her purchase right for the Offering Period.
3.2 Participation. An Eligible Employee may become a Participant in the
Plan upon his completion and delivery to the Human Resources Department of the
Company of a stock purchase agreement provided by the Company (the "Stock
Purchase Agreement") authorizing payroll deductions. Payroll deductions for a
Participant shall commence on the Entry Date coincident with or next following
the filing of the Participant's Stock Purchase Agreement and shall remain in
effect until revoked by the Participant by the filing of a notice of withdrawal
from the Plan under Article 8 or by the filing of a new Stock Purchase Agreement
providing for a change in the Participant's payroll deduction rate under Section
5.2.
3.3 Special Rules. Under no circumstances shall
(a) A 5% Owner be granted a right to purchase Company Stock under
the Plan;
(b) A Participant be entitled to purchase Company Stock under the
Plan which, when aggregated with all other employee stock purchase plans of the
Company, exceed an amount equal to the Aggregate Maximum. "Aggregate Maximum"
means an amount equal to $25,000 worth of Company Stock (determined using the
fair market value of such Company Stock at each applicable Entry Date) during
each calendar year; or
(c) The number of shares of Company Stock purchasable by a
Participant on any Purchase Date exceed 2,593 shares, subject to periodic
adjustments under Section 10.4.
4.
OFFERING PERIODS
----------------
4.1 Offering Periods.
(a) Initially, each Offering Period shall have a duration of
twenty-four (24) months; provided, however that the Board or Committee (as
defined in Section 9.1 below) may designate the duration of future Offering
Periods prior to the start date of the Offering Period and in the absence of any
express determination otherwise, each Offering Period shall have a duration
equal to that of the Preceding Offering Period. Semi-Annual Period of
Participation shall begin the first trading day of July and January and shall
end on the next succeeding Semi-Annual Purchase Date. Notwithstanding the
foregoing, the initial Offering Period shall begin on the Effective Date and end
on the last trading day in June of 1999.
(b) The Participant shall be granted a separate purchase right
for each Offering Period in which he or she participates. The purchase right
shall be granted on the Entry Date on which such individual first joins the
Offering Period in effect under the Plan and shall be automatically exercised on
the last trading day of each December and June occurring within the Offering
Period.
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<PAGE> 4
(c) Except as otherwise provided in this Plan, the Participant's
acquisition of Common Stock under the Plan on any Semi-Annual Purchase Date
shall neither limit nor require the Participant's acquisition of Common Stock on
any subsequent Semi-Annual Purchase Date.
5.
PAYROLL DEDUCTIONS
------------------
5.1 Participant Election. Upon completion of the Stock Purchase
Agreement, each Participant shall designate the amount of payroll deductions to
be made from his or her paycheck to purchase Company Stock under the Plan. The
amount of payroll deductions shall be designated in whole percentages of
Compensation or in whole dollar amounts, not to exceed 10% of Compensation. The
amount so designated upon the Stock Purchase Agreement shall be effective as of
the next Entry Date and shall continue until terminated or altered in accordance
with Section 5.2 below.
5.2 Changes in Election. A Participant may terminate participation in
the Plan at any time prior to the close of an Offering Period as provided in
Article 8. A Participant may decrease or increase the rate of payroll deductions
one time during any Semi-Annual Period of Participation by completing and
delivering to the Human Resources Department of the Company a new Stock Purchase
Agreement setting forth the desired change. A Participant may also terminate
payroll deductions and have accumulated deductions for the Offering Period
applied to the purchase of Company Stock as of the next Purchase Date by
completing and delivering to the Human Resources Department a new Stock Purchase
Agreement setting forth the desired change. Any change under this Section shall
become effective on the next payroll period (to the extent practical under the
Company's payroll practices) following the delivery of the new Stock Purchase
Agreement.
5.3 Participant Accounts. The Company shall establish and maintain a
separate account ("Account") for each Participant. The amount of each
Participant's payroll deductions shall be credited to his Account. No interest
will be paid or allowed on amounts credited to a Participant's Account. All
payroll deductions received by the Company under the Plan are general corporate
assets of the Company and may be used by the Company for any corporate purpose.
The Company is not obligated to segregate such payroll deductions.
6.
GRANT OF PURCHASE RIGHTS
------------------------
6.1 Right to Purchase Shares. On each Entry Date, each Participant shall
be granted a right to purchase at the price determined under Section 6.2 that
number of whole shares of Company Stock that can be purchased or issued by the
Company based upon that price with the amounts held in his Account, subject to
the limits set forth in Section 3.3. In the event that there are amounts held in
a Participant's Account that are not used to purchase Company Stock, such
amounts shall remain in the Participant's Account and shall be eligible to
purchase Company Stock in any subsequent Semi-Annual Period of Participation.
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<PAGE> 5
6.2 Purchase Price. The purchase price for any Offering Period shall be
the lesser of:
(a) 85% of the Fair Market Value of Company Stock on the Entry
Date in that Offering Period; or
(b) 85% of the Fair Market Value of Company Stock on the Purchase
Date.
6.3 Fair Market Value. "Fair Market Value" means for the initial Entry
Date (which is the Effective Date), the price per share at which the Common
Stock is to be sold to the public in the initial public offering of the Common
Stock. For any subsequent date thereafter, "Fair Market Value" shall mean the
value of one share of Company Stock, determined as follows:
(a) If the Company Stock is then listed or admitted to trading on
the Nasdaq Stock Market or a stock exchange which reports closing sale prices,
the Fair Market Value shall be the closing sale price on the date of valuation
on the Nasdaq Stock Market or principal stock exchange on which the Company
Stock is then listed or admitted to trading, or, if no closing sale price is
quoted or no sale takes place on such day, then the Fair Market Value shall be
the closing sale price of the Company Stock on the Nasdaq Stock Market or such
exchange on the next preceding day on which a sale occurred.
(b) If the Company Stock is not then listed or admitted to
trading on the Nasdaq Stock Market or a stock exchange which reports closing
sale prices, the Fair Market Value shall be the average of the closing bid and
asked prices of the Company Stock in the over-the-counter market on the date of
valuation.
(c) If neither (a) nor (b) is applicable as of the date of
valuation, then the Fair Market Value shall be determined by the Board or
Committee (as defined in Section 9.1 below) in good faith using any reasonable
method of valuation, which determination shall be conclusive and binding on all
interested parties.
7.
PURCHASE OF STOCK
-----------------
7.1 Purchase of Company Stock. Absent an election by the Participant to
terminate and have his or her Account returned, on each Purchase Date, the Plan
shall purchase on behalf of each Participant the maximum number of whole shares
of Company Stock at the purchase price determined under Section 6.2 above as can
be purchased with the amounts held in each Participant's Account. In the event
that there are amounts held in a Participant's Account that are not used to
purchase Company Stock, all such amounts shall be held in the Participant's
Account and carried forward to the next Semi-Annual Period of Participation.
7.2 Delivery of Company Stock.
(a) Company Stock acquired under the Plan may either be issued
directly to Participants or may be issued to a contract administrator
("Administrator") engaged by the Company to administer the Plan under Article 9.
If the Company Stock is issued in the name of the Administrator,
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<PAGE> 6
all Company Stock so issued ("Plan Held Stock") shall be held in the name of the
Administrator for the benefit of the Plan. The Administrator shall maintain
accounts for the benefit of the Participants which shall reflect each
Participant's interest in the Plan Held Stock. Such accounts shall reflect the
number of shares of Company Stock that are being held by the Administrator for
the benefit of each Participant.
(b) Any Participant may elect to have the Company Stock purchased
under the Plan from his or her Account be issued directly to the Participant.
Any election under this paragraph shall be on the forms provided by the Company
and shall be issued in accordance with paragraph (c) below.
(c) In the event that Company Stock under the Plan is issued
directly to a Participant, the Company will deliver to each Participant a stock
certificate or certificates issued in his name for the number of shares of
Company Stock purchased as soon as practicable after the Purchase Date. Where
Company Stock is issued under this paragraph, only full shares of stock will be
issued to a Participant. The time of issuance and delivery of shares may be
postponed for such period as may be necessary to comply with the registration
requirements under the Securities Act of 1933, as amended, the listing
requirements of any securities exchange on which the Company Stock may then be
listed, or the requirements under other laws or regulations applicable to the
issuance or sale of such shares.
8.
WITHDRAWAL
----------
8.1 In Service Withdrawals. At any time prior to the Purchase Date of an
Offering Period, any Participant may withdraw the amounts held in his Account by
executing and delivering to the Human Resources Department for the Company
written notice of withdrawal on the form provided by the Company. In such a
case, the entire balance of the Participant's Account shall be paid to the
Participant, without interest, as soon as is practicable. Upon such
notification, the Participant shall cease to participate in the Plan for the
remainder of the Semi-Annual Period of Participation in which the notice is
given. Any Employee who has withdrawn under this Section may thereafter be
reinstated as a Participant for a subsequent Semi-Annual Period of Participation
by executing and delivering a new Stock Purchase Agreement to the Human
Resources Department of the Company.
8.2 Termination of Employment.
(a) In the event that a Participant's employment with the Company
terminates for any reason, the Participant shall cease to participate in the
Plan on the date of termination. As soon as is practical following the date of
termination, the entire balance of the Participant's Account shall be paid to
the Participant or his beneficiary, without interest.
(b) A Participant may file a written designation of a beneficiary
who is to receive any shares of Company Stock purchased under the Plan or any
cash from the Participant's Account in the event of his or her death subsequent
to a Purchase Date, but prior to delivery of such shares and cash. In addition,
a Participant may file a written designation of a beneficiary who is to receive
any cash from the Participant's Account under the Plan in the event of his death
prior to a Purchase Date under paragraph (a) above.
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<PAGE> 7
(c) Any beneficiary designation under paragraph (b) above may be
changed by the Participant at any time by written notice. In the event of the
death of a Participant, the Committee may rely upon the most recent beneficiary
designation it has on file as being the appropriate beneficiary. In the event of
the death of a Participant where no valid beneficiary designation exists or the
beneficiary has predeceased the Participant, the Committee shall deliver any
cash or shares of Company Stock to the executor or administrator of the estate
of the Participant, or if no such executor or administrator has been appointed
to the knowledge of the Committee, the Committee, in its sole discretion, may
deliver such shares of Company Stock or cash to the spouse or any one or more
dependents or relatives of the Participant, or if no spouse, dependent or
relative is known to the Committee, then to such other person as the Committee
may designate.
9.
PLAN ADMINISTRATION
-------------------
9.1 Plan Administration.
(a) Authority to control and manage the operation and
administration of the Plan shall be vested in the Board of Directors (the
"Board") for the Company, or a committee ("Committee") thereof. The Board or
Committee shall have all powers necessary to supervise the administration of the
Plan and control its operations.
(b) In addition to any powers and authority conferred on the
Board or Committee elsewhere in the Plan or by law, the Board or the Committee
shall have the following powers and authority:
(i) To designate agents to carry out responsibilities
relating to the Plan;
(ii) To administer, interpret, construe and apply this
Plan and to answer all questions which may arise or which may be raised under
this Plan by a Participant, his beneficiary or any other person whatsoever;
(iii) To establish rules and procedures from time to time
for the conduct of its business and for the administration and effectuation of
its responsibilities under the Plan; and
(iv) To perform or cause to be performed such further acts
as it may deem to be necessary, appropriate, or convenient for the operation of
the Plan.
(c) Any action taken in good faith by the Board or Committee in
the exercise of authority conferred upon it by this Plan shall be conclusive and
binding upon a Participant and his beneficiaries. All discretionary powers
conferred upon the Board shall be absolute.
9.2 Limitation on Liability. No employee of the Company nor member of
the Board or Committee shall be subject to any liability with respect to his
duties under the Plan unless the person acts fraudulently or in bad faith. To
the extent permitted by law, the Company shall indemnify each member of the
Board or Committee, and any other Employee of the Company with duties under the
Plan who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed
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<PAGE> 8
proceeding, whether civil, criminal, administrative, or investigative, by reason
of the person's conduct in the performance of his duties under the Plan.
10.
COMPANY STOCK
-------------
10.1 Limitations on Purchase of Shares. The maximum number of shares of
Company Stock that shall be made available for sale under the Plan shall be
129,668 shares, subject to adjustment under Section 10.4 below. The shares of
Company Stock to be sold to Participants under the Plan will be issued by the
Company. If the total number of shares of Company Stock that would otherwise be
issuable pursuant to rights granted pursuant to Section 6.1 of the Plan at the
Purchase Date exceeds the number of shares then available under the Plan, the
Company shall make a pro rata allocation of the shares remaining available in as
uniform and equitable manner as is practicable. In such event, the Company shall
give written notice of such reduction of the number of shares to each
participant affected thereby and any unused payroll deductions shall be returned
to such participant if necessary.
10.2 Company Stock. The Participant will have no interest or voting
right in shares to be purchased under Section 6.1 of the Plan until such shares
have been purchased.
10.3 Registration of Company Stock. Shares to be delivered to a
Participant under the Plan will be registered in the name of the Participant
unless designated otherwise by the Participant.
10.4 Changes in Capitalization of the Company. Subject to any required
action by the stockholders of the Company, the number of shares of Company Stock
covered by each right under the Plan which has not yet been exercised and the
number of shares of Company Stock which have been authorized for issuance under
the Plan but have not yet been placed under rights or which have been returned
to the Plan upon the cancellation of a right, as well as the Purchase Price per
share of Company Stock covered by each right under the Plan which has not yet
been exercised, shall be proportionately adjusted for any increase or decrease
in the number of issued shares of Company Stock resulting from a stock split,
stock dividend, spin-off, reorganization, recapitalization, merger,
consolidation, exchange of shares or the like. Such adjustment shall be made by
the Board of Directors for the Company, whose determination in that respect
shall be final, binding and conclusive. Except as expressly provided herein, no
issue by the Company of shares of stock of any class, or securities convertible
into shares of stock of any class, shall affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of shares of Company
Stock subject to any right granted hereunder.
10.5 Merger of Company. In the event that the Company at any time
proposes to merge into, consolidate with or enter into any other reorganization
pursuant to which the Company is not the surviving entity (including the sale of
substantially all of its assets or a "reverse" merger in which the Company is
the surviving entity), the Plan shall terminate, unless provision is made in
writing in connection with such transaction for the continuance of the Plan and
for the assumption of rights theretofore granted, or the substitution for such
rights of new rights covering the shares of a successor corporation, with
appropriate adjustments as to number and kind of shares and prices, in which
event the Plan and the rights theretofore granted or the new rights substituted
therefor, shall continue in the manner and under the terms so provided. If such
provision is not made in such transaction for the
8
<PAGE> 9
continuance of the Plan and the assumption of rights theretofore granted or the
substitution for such rights of new rights covering the shares of a successor
corporation, then the Board of Directors or its committee shall cause written
notice of the proposed transaction to be given to the persons holding rights not
less than 10 days prior to the anticipated effective date of the proposed
transaction, and, concurrent with the effective date of the proposed
transaction, such rights shall be exercised automatically in accordance with
Section 7.1 as if such effective date were a Purchase Date of the applicable
Offering Period unless a Participant withdraws from the Plan as provided in
Section 8.1.
11.
MISCELLANEOUS MATTERS
---------------------
11.1 Amendment and Termination. The Plan shall terminate June 30, 2007.
Since future conditions affecting the Company cannot be anticipated or foreseen,
the Company reserves the right to amend, modify, or terminate the Plan at any
time. Upon termination of the Plan, all benefits shall become payable
immediately. Notwithstanding the foregoing, no such amendment or termination
shall affect rights previously granted, nor may an amendment make any change in
any right previously granted which adversely affects the rights of any
Participant. In addition, no amendment may be made without prior approval of the
stockholders of the Company if such amendment would:
(a) Increase the number of shares of Company Stock that may be
issued under the Plan;
(b) Materially modify the requirements as to eligibility for
participation in the Plan; or
(c) Materially increase the benefits which accrue to Participants
under the Plan.
11.2 Stockholder Approval. Continuance of the Plan and the effectiveness
of any right granted hereunder shall be subject to approval by the stockholders
of the Company, within twelve months before or after the date the Plan is
adopted by the Board.
11.3 Benefits Not Alienable. Benefits under the Plan may not be assigned
or alienated, whether voluntarily or involuntarily. Any attempt at assignment,
transfer, pledge or other disposition shall be without effect, except that the
Company may treat such act as an election to withdraw funds in accordance with
Article 8.
11.4 No Enlargement of Employee Rights. This Plan is strictly a
voluntary undertaking on the part of the Company and shall not be deemed to
constitute a contract between the Company and any Employee or to be
consideration for, or an inducement to, or a condition of, the employment of any
Employee. Nothing contained in the Plan shall be deemed to give the right to any
Employee to be retained in the employ of the Company or to interfere with the
right of the Company to discharge any Employee at any time.
11.5 Governing Law. To the extent not preempted by Federal law, all
legal questions pertaining to the Plan shall be determined in accordance with
the laws of the state of incorporation of the Company.
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<PAGE> 10
11.6 Non-trading Days. When any act under the Plan is required to be
performed on a day that falls on a Saturday, Sunday or legal or stock market
holiday, that act shall be performed on the next succeeding day which is not a
Saturday, Sunday or holiday. Notwithstanding the above, Fair Market Value shall
be determined in accordance with Section 6.3.
11.7 Compliance With Securities Laws. Notwithstanding any provision of
the Plan, the Committee shall administer the Plan in such a way to ensure that
the Plan at all times complies with any requirements of Federal Securities Laws.
For example, affiliates may be required to make irrevocable elections in
accordance with the rules set forth under Section 16b-3 of the Securities
Exchange Act of 1934.
(AS AMENDED THROUGH SEPTEMBER 30, 1997)
10
<PAGE> 1
Exhibit 10.19
NET, NET, NET
LEASE
THIS LEASE dated September _____ , 1997 for reference purposes only is
made between the Lessor and the Lessee named below, effective on the later of
the dates set forth under their respective signatures.
BASIC LEASE PROVISIONS
----------------------
1. PREMISES: As depicted on Exhibit A.
PROJECT NAME: UNIVERSITY BUSINESS CENTER
BUILDING NAME: UNIVERSITY BUSINESS CENTER
PREMISES ADDRESS: 120 Cremona Drive
Santa Barbara, CA 93117
USE OF PREMISES: Offices, light assembly and testing
2. LEASED AREA: As depicted on Exhibit A.
SQUARE FEET: 10,225 square feet
3. LESSEE'S PERCENTAGES:
BUILDING: 17.24%
COMMON AREA: 4.48%
4. INITIAL MONTHLY RENT: $13,292.50 NNN ($1.30 per square foot per month)
During the initial six (6) months of the Lease
term, the Lessee shall not be obligated to pay the
above monthly rent provided, however, that Lessee
shall be obligated to pay Building Operating
Expenses and Common Area Expenses otherwise due
during that six (6) month period. Lessee shall
commence payment of the monthly rent on April 1,
1998.
RENTAL DEPOSIT: $13,292.50
RENT ADJUSTMENT: Rent to be increased Two Percent (2%) per annum
commencing on the first (1st) day of each calendar
year commencing with January 1, 1999.
5. TERM: Five (5) years.
6. COMMENCEMENT DATE: October 1, 1997; subject to Premises being timely
vacated by the existing lessee.
TERMINATION DATE: September 30, 2002
7. SECURITY DEPOSIT: $13,292.50
8. BROKER(S): Blair Hayes Commercial - Lessor
None - Lessee
<PAGE> 2
9. PARKING SPACES
PROVIDED: Thirty (30)
10. TENANT IMPROVEMENT
ALLOWANCE: As provided in Section 18 of this Lease.
11. CONDITIONS: The obligations of the parties under this Lease are
subject to (i) approval by the Lessor's Lender, and
(ii) cancellation of an existing lease with Sapiens
USA, Inc. as to the premises, by September 30, 1997.
12. Submissions of this instrument for examination or signature by the Lessee
does not constitute a reservation of or option for space and it is not
effective as a lease or otherwise until execution by both the Lessee and the
Lessor. This document will be deemed withdrawn by the Lessor if not executed
by the Lessee and delivered to the Lessor by September 19, 1997.
IN WITNESS WHEREOF, the parties hereto have executed this Lease,
consisting of the foregoing basic Lease Provisions, Articles 1 through 18 which
follow, and any attached Exhibits or Addendums, as of the date first above
written. LESSOR:
LESSOR:
Date: October 8, 1997 UNIVERSITY BUSINESS CENTER ASSOCIATES
A California General Partnership
By: EAST GROUP PROPERTIES, A MARYLAND
REAL ESTATE INVESTMENT TRUST
By: __________________________________
Name: /s/ Marshall Loeb
Title: Vice President
Date: October 9, 1997 By: JCB LIMITED,
A California Limited Partnership
By: /s/ Jeff Bermant
----------------------------------
Name: Jeff Bermant
Title: Owner
Address:
--------
5383 Hollister Avenue
Suite No. 150
Santa Barbara, CA 93111
LESSEE:
Date: September __, 1997 COMPUTER MOTION, INC.
By: /s/ Gene Wang
----------------------------------
Name: Gene Wang
Title: Chief Executive Officer
Address:
130 Cremona Drive
Santa Barbara, CA 93117
<PAGE> 3
EXHIBIT 10.19A
NET, NET, NET
LEASE
THIS LEASE dated September _____ , 1997 for reference purposes only is
made between the Lessor and the Lessee named below, effective on the later of
the dates set forth under their respective signatures.
BASIC LEASE PROVISIONS
1. PREMISES: As depicted on Exhibit A.
PROJECT NAME: UNIVERSITY BUSINESS CENTER
BUILDING NAME: UNIVERSITY BUSINESS CENTER
PREMISES ADDRESS: 120-B Cremona Drive
Santa Barbara, CA 93117
USE OF PREMISES: Offices, light assembly and testing
2. LEASED AREA: As depicted on Exhibit A.
SQUARE FEET: 8,545 square feet
3. LESSEE'S PERCENTAGES:
BUILDING: 14.89%
COMMON AREA: 3.68%
4. INITIAL MONTHLY RENT: $10,254.00 NNN ($1.20 per square foot per month)
During the initial six and one half (6 1/2) months
of the Lease term, the Lessee shall not be
obligated to pay the above monthly rent provided,
however, that Lessee shall be obligated to pay
Building Operating Expenses and Common Area
Expenses otherwise due during that six and on half
(6 1/2) month period. Lessee shall make a payment
of half the monthly rent on April 15, 1998, and
commence payment of the monthly rent on May 1,
1998.
RENTAL DEPOSIT: $10,254.00
RENT ADJUSTMENT: Rent to be increased Three Percent (3%) per annum
commencing on the first (1st) day of each calendar
year commencing with January 1, 1999.
5. TERM: Five (5) years.
6. COMMENCEMENT DATE: October 1, 1997; subject to Premises being timely
vacated by, and termination of the existing lease
with, BioTek Solutions, Inc., as to the Premises on
or before September 30, 1997.
TERMINATION DATE: September 30, 2002
7. SECURITY DEPOSIT: $10,254.00
<PAGE> 4
8. BROKER(S): None.
9. PARKING SPACES PROVIDED: Twenty-six (26)
10. TENANT IMPROVEMENT
ALLOWANCE: As provided in Section 18 of this Lease.
11. CONDITIONS: The obligations of the parties under this Lease are
subject to (i) approval by the Lessor's Lender, and
(ii) cancellation of an existing lease with BioTek
Solutions, Inc. as to the premises, by September
30, 1997.
12. Submissions of this instrument for examination or signature by the Lessee
does not constitute a reservation of or option for space and it is not
effective as a lease or otherwise until execution by both the Lessee and the
Lessor. This document will be deemed withdrawn by the Lessor if not executed
by the Lessee and delivered to the Lessor by September 29, 1997.
IN WITNESS WHEREOF, the parties hereto have executed this Lease,
consisting of the foregoing basic Lease Provisions, Articles 1 through 18 which
follow, and any attached Exhibits or Addendums, as of the date first above
written.
LESSOR:
Date: October 8, 1997 UNIVERSITY BUSINESS CENTER ASSOCIATES
A California General Partnership
By: EAST GROUP PROPERTIES, A MARYLAND
REAL ESTATE INVESTMENT TRUST
By: /s/ Marshall Loeb
----------------------------------
Name: Marshall Loeb
Title: Vice President
Date: October 9, 1997 By: JCB LIMITED,
A California Limited Partnership
By: /s/ Jeff Bermant
----------------------------------
Name: Jeff Bermant
Title: Owner
Address:
5383 Hollister Avenue
Suite No. 150
Santa Barbara, CA 93111
LESSEE:
Date: September __, 1997 COMPUTER MOTION, INC.
By: /s/ Gene Wang
----------------------------------
Name: Gene Wang
Title: Chief Executive Officer
Address:
130 Cremona Drive
Santa Barbara, CA 93117
<PAGE> 1
EXHIBIT 13.1
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 herein under "Risk
Factors," as well as those discussed in the "Risk Factors" section of the
Company's Annual Report on Form 10-K.
OVERVIEW
Computer Motion, Inc. (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 and technologies under
development 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 and technologies under development 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 current commercial product, AESOP(R), is a U.S. Food and Drug
Administration (FDA) cleared, robotic endoscope positioning system. 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, while providing a more stable and sustainable endoscopic image.
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
multivessel coronary artery bypass grafts (E-CABG(TM), which are currently
impossible or very difficult to perform. ZEUS 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 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 result in lower overall
healthcare costs to providers, payors and patients. The Company has commenced
pre-clinical testing in several medical centers and intends to seek clearance
from the FDA to market ZEUS in the United States in 1998.
The Company's HERMES(TM) OR 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 is also designed to provide 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.
The Company is currently performing HERMES functionality testing in human
clinical procedures. Several 510(k) submissions relating to HERMES are pending
with the FDA. The Company expects to receive regulatory clearance and to market
HERMES through its OEM agreement with Stryker Corporation in 1998.
The Company has sustained significant losses since inception and expects to
continue to incur significant losses due to
<PAGE> 2
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 pre-clinical and 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
and product quality issues.
RESULTS OF OPERATIONS
REVENUE. Revenue increased $2,554,000 (63%) to $6,611,000 in 1997 from
$4,057,000 in 1996. The increase resulted almost entirely from a $2,360,000, or
81%, increase in AESOP sales. AESOP robotic arm unit sales and average selling
prices increased by approximately 34% and 49%, respectively and were favorably
impacted by the commercial introductions of the AESOP 2000 in the fourth quarter
of 1996 and the AESOP 3000 in the fourth quarter of 1997. Development revenue
associated with pre-clinical ZEUS activities in 1997 totaled $1,008,000, a 35%
increase over the prior year. Development revenue associated with HERMES was
$220,000 in 1997, a 16% increase over the prior year.
Revenue increased 79% to $4,057,000 in 1996 from $2,271,000 in 1995.
Approximately 50% of this increase was due to the commercial introduction of the
AESOP 2000 in the fourth quarter of 1996. The Company also received additional
revenue in 1996 as a result of the sale of ZEUS prototypes which accounted for
approximately 35% of the increase.
GROSS PROFIT. Gross profit increased $2,318,000 (162%) to $3,748,000 in 1997
from $1,430,000 in 1996. Gross margin increased to 56.7% in 1997 as compared to
35.2% in 1996. The increase in gross margin was primarily due to significantly
increased AESOP average selling prices, as well as some efficiencies of scale
associated with increased unit production.
Gross profit increased to $1,430,000 in 1996 from $298,000 in 1995. Gross margin
increased to 35.2% in 1996 as compared to 13.1% in 1995. Increases in selling
price accounted for more than half of the increase in gross margin with
efficiencies of scale associated with increased production accounting for most
of the balance of the increase.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $3,646,000 (88%) to $7,790,000 in 1997 as compared to
$4,144,000 in 1996. Non-cash compensation charges related to the grant of stock,
warrants and stock options of $1,057,000 in 1997 accounted for a significant
portion of the increase. The balance of the increase was due to the addition of
sales and managerial personnel and related recruiting and relocation costs,
greater travel and business expenses, higher commissions based on the increased
sales, and the cost of several conferences, including the Company's own
international congress on computers and robotics.
Selling, general and administrative expenses increased 31% to $4,144,000 in 1996
as compared to $3,158,000 in 1995. The increase was due almost entirely to
additional salary and commission paid as the Company increased its personnel in
selling and administrative functions.
<PAGE> 3
RESEARCH AND DEVELOPMENT. Research and development expenses increased $2,790,000
(205%) to $4,149,000 in 1997 as compared to $1,359,000 in 1996, primarily as a
result of increased research and development efforts with respect to AESOP,
HERMES, and most particularly ZEUS, as well as for building additional R&D and
regulatory infrastructure.
Research and development expenses increased 84% to $1,359,000 in 1996 as
compared to $739,000 in 1995. During 1996, the Company incurred additional costs
for the development of voice control and more sophisticated user interfaces
related to the enhanced version of AESOP as well as research and development
efforts with respect to HERMES and ZEUS.
OTHER EXPENSE. Other expense was $1,015,000 in 1997 compared to other expense of
$485,000 in 1996. Other expense in 1997 included the amortization of $1,000,000
of financing costs attributable to the fixed conversion feature of a convertible
debenture and $442,000 of financing costs attributable to warrants issued with
bridge debt, and was net of $776,000 of interest income derived primarily from
investing the proceeds of the Company's initial public offering. Other expense
in 1996 included $189,000 of financing costs attributable to warrants issued
with bridge debt and $252,000 of interest expense, and was net of interest
income of $14,000 derived from interest earned on operating bank accounts.
INCOME TAXES. Minimal provisions for the state income taxes have been recorded
for the Company's pre-tax losses to date. At December 31, 1997, the Company had
federal and state net operating loss carryforwards of approximately $18,000,000
and $8,000,000, respectively which are available to offset future federal and
state taxable income. Federal carryforwards expire fifteen years after the year
of loss and state carryforwards expire from five to seven 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.
FINANCIAL CONDITION
Since its inception, the Company's expenses have exceeded its revenues,
resulting in an accumulated deficit of $21,653,000 as of December 31, 1997.
Until 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.
During the third quarter 1997, the Company filed an S-1 registration statement
with the Securities and Exchange Commission (Registration No. 333-29505) for
2,875,000 shares of its common stock. The registration statement was granted
effectiveness on August 11, 1997 and on August 15, 1997 the Company completed
its initial public offering (IPO) by selling 2,500,000 shares of its common
stock at $14.00 per share, less underwriting discounts and commissions of $.98
per share, to its underwriters, Montgomery Securities and Piper Jaffray, Inc.
The Company received net proceeds of $32,550,000 from this sale before deducting
offering expenses. Effective upon the closing of the IPO, all of the outstanding
shares of convertible preferred stock of the Company were converted into
2,344,387 shares of common stock and all accrued dividends payable thereon were
eliminated.
On September 16, 1997, the underwriters exercised their option to purchase an
additional 375,000 shares of common stock directly from the Company at a price
of $14.00 per share, less underwriting discounts and commissions of $.98 per
share. The Company received net proceeds of $4,883,000 from this sale before
deducting offering expenses.
In conjunction with completing the IPO, the Company incurred total direct
offering expenses of approximately $693,000. Total net proceeds to the Company
from the IPO and the exercise of
<PAGE> 4
the over-allotment option, after deducting underwriting discounts and
commissions and total direct offering expenses, were $36,740,000.
The Company used $3,250,000 of the net proceeds from the IPO to repay certain
outstanding indebtedness, and $490,000 to make capital purchases. Proceeds from
the IPO are also funding the Company's current operating losses. Proceeds
remaining from the IPO have been invested in short-term investment grade debt
securities.
At December 31, 1997, the Company's current ratio (current assets divided by
current liabilities) was 14.9 to 1 versus 0.7 to 1 at December 31, 1996,
reflecting the initial public offering proceeds.
For the year ended December 31, 1997, the Company had net cash used in operating
activities of $7,007,000 primarily attributable to the net loss partially offset
by several non-cash expenditures - depreciation and amortization, amortization
of financing costs attributable to the fixed conversion feature of a convertible
debenture and warrants issued with bridge debt, and amortization of deferred
compensation expense.
Cash outflow from purchases of plant and equipment was $816,000 in 1997. The
Company currently has no material commitments for capital expenditures, but is
seeking to procure additional leased space in anticipation of continued business
growth. For the year ended December 31, 1997, net cash provided by financing
activities of $40,124,000 was almost entirely attributable to the net proceeds
from the initial public offering of $36,740,000 and other common stock and
warrant issuances of $5,470,000, offset somewhat by $4,409,000 repayment of
debt.
The Company's operations to date have consumed substantial amounts of cash, and
the Company expects its capital requirements and operating expenditures to
continue to increase. The Company believes that the net proceeds of its initial
public offering should be adequate to fund its expected operating losses and
satisfy its capital requirements through at least 1999. 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, and the cost of developing marketing and
distribution capabilities. To the extent that existing resources are
insufficient to fund the Company's activities, the Company may seek to raise
additional funds through public or private financing. There can be no assurance
that additional financing, if required, would be available on acceptable terms,
if at all. If adequate funds are not available, the Company's business,
financial condition and results of operations would be materially adversely
affected.
RISK FACTORS
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 and could cause them to differ materially from any forward-looking
statements made by the Company.
The Company has a limited operating history and has not yet made a profit. The
HERMES and ZEUS product lines are important to the Company's future success and
neither product has achieved regulatory approval or market acceptance.
Government regulation
<PAGE> 5
of the medical device industry is strict and regulatory approvals are generally
lengthy, expensive and uncertain. There are alternative treatments and
procedures to using the Company's products. The Company's products are subject
to rapid technological change and the success of the Company, in part, is based
on its ability to obtain patent protection for its products. The Company is
dependent on sole source suppliers for principal components of its AESOP product
line. The Company's anticipated growth will place significant demands on the
Company's management and resources, particularly in research and development and
sales and marketing.
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, 1997.
REPORT OF INDEPENDENT AUDITORS
Board of Directors of Computer Motion, Inc.
We have audited the accompanying consolidated balance sheets of Computer Motion,
Inc. and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. 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 generally accepted auditing
standards. 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. and subsidiary as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Woodland Hills, California
February 5, 1998
<PAGE> 6
COMPUTER MOTION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,555,000 $ 433,000
Marketable securities 10,179,000 --
Accounts receivable, net of allowance for doubtful
accounts of $62,000 in 1997 and $75,000 in 1996 1,804,000 1,085,000
Inventories 992,000 645,000
Prepaid expenses 283,000 88,000
--------------------------------
Total current assets 35,813,000 2,251,000
- -----------------------------------------------------------------------------------------------------------------------
Property and equipment:
Furniture and fixtures 617,000 186,000
Computer equipment 741,000 401,000
Machinery and equipment 936,000 836,000
Accumulated depreciation (1,186,000) (814,000)
--------------------------------
Property and equipment, net 1,108,000 609,000
- -----------------------------------------------------------------------------------------------------------------------
Other assets 392,000 629,000
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 37,313,000 $ 3,489,000
=======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,218,000 $ 902,000
Accrued expenses 1,039,000 827,000
Capital lease obligations 141,000 136,000
Line of credit -- 186,000
Current portion of long-term debt -- 1,000,000
--------------------------------
Total current liabilities 2,398,000 3,051,000
- -----------------------------------------------------------------------------------------------------------------------
Long-term debt -- 3,250,000
Redeemable preferred stock at redemption value, 545,971 shares outstanding -- 5,882,000
- -----------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock-$.001 par value
Authorized-5,000,000 shares;
Outstanding - 1,474,545 shares in 1996 -- 3,716,000
Common stock- $.001 par value
Authorized-25,000,000 shares;
Outstanding-1997 - 7,670,589 shares; 1996 - 1,734,289 shares 8,000 2,000
Additional paid-in capital 58,341,000 537,000
Deferred compensation (1,781,000) (515,000)
Accumulated deficit (21,653,000) (12,434,000)
--------------------------------
Total shareholders' equity (deficit) 34,915,000 (8,694,000)
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 37,313,000 $ 3,489,000
=======================================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 7
COMPUTER MOTION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 6,611,000 $ 4,057,000 $ 2,271,000
Cost of revenue 2,863,000 2,627,000 1,973,000
-------------------------------------------------
Gross profit 3,748,000 1,430,000 298,000
- ---------------------------------------------------------------------------------------------------
Research and development expense 4,149,000 1,359,000 739,000
Selling, general and administrative expense 7,790,000 4,144,000 3,158,000
-------------------------------------------------
Loss from operations (8,191,000) (4,073,000) (3,599,000)
- ---------------------------------------------------------------------------------------------------
Other expense (income) 1,015,000 485,000 (10,000)
-------------------------------------------------
Loss before taxes (9,206,000) (4,558,000) (3,589,000)
- ---------------------------------------------------------------------------------------------------
Income tax provision 13,000 1,000 1,000
-------------------------------------------------
Net loss ($9,219,000) ($4,559,000) ($3,590,000)
===================================================================================================
Net loss per share - basic and diluted ($2.12) ($2.68) ($2.12)
===================================================================================================
Shares outstanding for per share purposes 4,343,000 1,701,000 1,691,000
===================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 8
COMPUTER MOTION, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED COMMON ADDITIONAL DEFERRED ACCUMULATED SHAREHOLDERS'
STOCK STOCK PAID-IN CAPITAL COMPENSATION DEFICIT EQUITY (DEFICIT)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance-12/31/94 $ 2,973,000 $ 2,000 $ 79,000 $ -- ($ 4,285,000) ($ 1,231,000)
- --------------------------------------------------------------------------------------------------------------------------------
Stock issued -- -- 274,000 -- -- 274,000
Exercise of options -- -- 17,000 -- -- 17,000
Stock repurchased or redeemed (43,000) -- (285,000) -- -- (328,000)
Redemption premium (324,000) (2,000) (85,000) -- -- (411,000)
Net loss -- -- -- -- (3,590,000) (3,590,000)
----------------------------------------------------------------------------------------
Balance-12/31/95 2,606,000 -- -- -- (7,875,000) (5,269,000)
- --------------------------------------------------------------------------------------------------------------------------------
Stock issued 785,000 -- 118,000 -- -- 903,000
Exercise of options -- -- 42,000 -- -- 42,000
Warrants issued -- -- 1,000 -- -- 1,000
Value of warrants issued in
connection with debt -- -- 631,000 -- -- 631,000
Deferred compensation -- -- 515,000 (515,000) -- --
Redemption premium 325,000 2,000 (770,000) -- -- (443,000)
Net loss -- -- -- -- (4,559,000) (4,559,000)
----------------------------------------------------------------------------------------
Balance-12/31/96 3,716,000 2,000 537,000 (515,000) (12,434,000) (8,694,000)
- --------------------------------------------------------------------------------------------------------------------------------
Common stock issued -- 1,000 1,216,000 -- -- 1,217,000
Stock issued on IPO -- 3,000 36,737,000 -- -- 36,740,000
Conversion of preferred to
common, net of issuances (3,716,000) 2,000 12,176,000 -- -- 8,462,000
Exercise of options -- -- 272,000 -- -- 272,000
Exercise of warrants, net of issuances -- -- 168,000 -- -- 168,000
Deferred compensation,
net of amortization -- -- 2,323,000 (1,266,000) -- 1,057,000
Conversion of debt to common -- -- 5,074,000 -- -- 5,074,000
Redemption premium -- -- (240,000) -- -- (240,000)
Stock purchase plan -- -- 78,000 -- -- 78,000
Net loss -- -- -- -- (9,219,000) (9,219,000)
----------------------------------------------------------------------------------------
Balance-12/31/97 $ -- $ 8,000 $ 58,341,000 ($ 1,781,000) ($21,653,000) $ 34,915,000
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
COMMON SHARES PREFERRED SHARES
---------------------------------------- -----------------------------------------
1995 1996 1997 1995 1996 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning Balance 1,706,452 1,695,173 1,734,289 1,403,487 1,393,114 1,474,545
- -------------------------------------------------------------------------------------------------------------------
Issued 59,899 25,890 125,734 -- 81,431 323,871
Exercise of options 7,832 13,226 187,653 -- -- --
Repurchased or redeemed (79,010) -- -- (10,373) -- --
Issued on IPO -- -- 2,875,000 -- -- --
Conversion of preferred -- -- 2,344,387 -- -- (1,798,416)
Exercise of warrants -- -- 31,051 -- -- --
Conversion of debt -- -- 363,743 -- -- --
Stock purchase plan -- -- 8,732 -- -- --
--------------------------------------------------------------------------------------
Ending Balance 1,695,173 1,734,289 7,670,589 1,393,114 1,474,545 --
===================================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 9
COMPUTER MOTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(9,219,000) $(4,559,000) $(3,590,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 379,000 346,000 331,000
Provision for doubtful accounts 28,000 70,000 --
Loss (gain) on sale of fixed assets 1,000 8,000 (2,000)
Common stock issued for services 66,000 23,000 --
Financing cost of warrants issued with long-term debt 442,000 189,000 --
Financing cost of fixed conversion feature of
convertible debenture 1,000,000 -- --
Compensation for stock options, warrants and
common stock issued below fair market value 1,057,000 -- 24,000
Working capital changes:
Accounts receivable (747,000) (818,000) (172,000)
Inventories (347,000) 149,000 (3,000)
Prepaid expenses (195,000) (32,000) 82,000
Accounts payable 316,000 678,000 (421,000)
Accrued expenses 212,000 459,000 144,000
----------------------------------------------------
Net cash used in operating activities (7,007,000) (3,487,000) (3,607,000)
- ----------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchases of property and equipment (816,000) (116,000) (347,000)
Proceeds from sale of property and equipment -- 14,000 2,000
Net proceeds from (purchases of) short-term investments (10,179,000) -- 2,875,000
----------------------------------------------------
Net cash provided by (used in) investing activities (10,995,000) (102,000) 2,530,000
- ----------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net proceeds from (repayment of) long-term debt (4,223,000) 3,057,000 943,000
Net proceeds from (repayment of) line of credit (186,000) 185,000 --
Repayment of capital lease obligations (79,000) (33,000) (12,000)
Proceeds from common stock and warrant issuance,
net of repurchases 5,470,000 1,000 238,000
Proceeds from IPO, net of expenses 36,740,000 -- --
Proceeds from (repurchase of) preferred stock 2,341,000 785,000 (43,000)
Proceeds from exercise of stock options 272,000 42,000 17,000
Other (211,000) (79,000) (14,000)
----------------------------------------------------
Net cash provided by financing activities 40,124,000 3,958,000 1,129,000
- ----------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 22,122,000 369,000 52,000
Cash and cash equivalents, beginning of period 433,000 64,000 12,000
----------------------------------------------------
Cash and cash equivalents, end of period $22,555,000 $ 433,000 $ 64,000
===============================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 10
COMPUTER MOTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATION. Computer Motion, Inc. 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 currently markets AESOP (R), the first surgical robot cleared by the
U.S. Food and Drug Administration. The Company's primary efforts are now
directed toward enhancing AESOP, developing and commercializing new medical
robots and intuitive interface modalities which will enable new minimally
invasive surgical procedures and enhance the surgical team's overall
productivity. The Company's objective is to become the leading provider of
robotic and computerized surgical systems. Like other companies at this stage of
development, the Company's future success is subject to numerous risks including
the uncertainty of design, development and manufacturing of new products,
regulatory approvals, developing markets, acceptance of products, reimbursement
for products, financing operations, managing growth and competition.
CONSOLIDATION. The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Computer Motion, S.A. Intercompany
transactions and balances have been eliminated in consolidation. Certain
reclassifications of previously reported amounts have been made to conform with
the current year presentation.
USE OF ESTIMATES. Preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION. The Company recognizes revenues as products are shipped and
as services are performed. The Company also recognizes revenues for prototype
products delivered and related services provided under contracts with healthcare
institutions to jointly research, develop and test the Company's new products.
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.
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. Basic net loss per share is the same as
diluted net loss per share since inclusion of the Company's outstanding stock
options and warrants in the calculation is antidilutive. Net loss per share is
based on the weighted average number of common shares outstanding. Under SFAS
No. 128, outstanding shares no longer include the dilutive effect of common
shares issued, or issuable pursuant to the exercise of warrants issued or
options granted, during the 12 months immediately preceding the Company's
initial public offering.
CASH EQUIVALENTS. Cash equivalents, consisting of liquid investments with a
maturity of three months or less when purchased, are stated at cost which
closely approximates market.
INVENTORIES. Inventories are stated at the lower of cost or market. Cost is
determined under the average cost method. Allowances are made for slow-moving,
obsolete, unsalable or unusable inventories.
PROPERTY AND EQUIPMENT. Property and equipment are stated at
cost and are depreciated using the straight-line method based
<PAGE> 11
on useful lives of seven years for leasehold improvements and three to seven
years for machinery and equipment. Accelerated depreciation is used by the
Company for tax accounting purposes only.
RESEARCH AND DEVELOPMENT. Research and development expense includes all
expenditures for general research into scientific phenomena, development of
useful ideas into merchantable products and continuing support and upgrading of
various products, as well as expenditures related to regulatory and clinical
activities. All such expense is charged to operations as incurred.
PATENTS. Patents, which are included in other assets, consist primarily of legal
fees and are stated at cost. Patents are amortized on a straight-line basis over
17 years.
NOTE 2 STOCK PURCHASE AND OPTION PLANS
STOCK PURCHASE. The Company's employee stock purchase savings plan, established
in 1997, 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, 129,668 shares of common stock have been reserved for
purchase by the plan participants. Employees purchased 8,732 shares in 1997. At
December 31, 1997, 120,936 shares were available for purchase under the plan.
STOCK OPTIONS. Under the terms of the Company's stock option plans, 2,593,361
shares of common stock have been reserved for issuance to directors, officers
and employees upon the exercise of stock options. Stock options are exercisable
over periods up to 10 years from date of grant and may be "incentive stock
options" or "non-qualified stock options" and may have stock appreciation rights
attached. At December 31, 1997, there were a maximum of 616,369 shares available
for grant and 1,733,475 options outstanding, of which 559,675 shares were
exercisable at a weighted price of $4.27 per share. The weighted average
contractual life of options outstanding at December 31, 1997 was 8.7 years.
Stock option activity was as follows:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE
OUTSTANDING PRICE PER SHARE
- ---------------------------------------------------
<S> <C> <C>
Balance at 12/31/94 475,855 $1.75
- ---------------------------------------------------
Granted 331,172 $4.49
Canceled (175,311) $3.51
Exercised (7,832) $2.12
-----------------------------
Balance at 12/31/95 623,884 $2.72
- ---------------------------------------------------
Granted 961,859 $4.57
Canceled (230,757) $2.95
Exercised (13,226) $3.20
-----------------------------
Balance at 12/31/96 1,341,760 $4.01
- ---------------------------------------------------
Granted 650,789 $8.44
Canceled (71,421) $4.57
Exercised (187,653) $1.45
-----------------------------
Balance at 12/31/97 1,733,475 $6.34
===================================================
</TABLE>
Pursuant to the terms of the Company's stock option plans, optionees can use
cash, previously owned shares or a combination of cash and previously owned
shares to reimburse the Company for the cost of the option and the related tax
liabilities. Shares are acquired from the optionee at the fair market value of
the stock on the transaction date.
In the opinion of management, all options have been granted at not less than
fair market value at dates of grant. When stock options are exercised, the par
value of the shares issued 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 stock options are exercised, or when incentive stock options are
exercised and sold
<PAGE> 12
within a one-year period, the Company realizes income tax benefits based on the
difference between the fair market 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.
The Company has issued certain common stock and warrants and granted certain
stock options at prices perceived by the Securities and Exchange Commission to
be 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 date
of issuance or grant is reflected as compensation expense. Compensation expense
of $432,000 relating to the issuance of common stock and warrants and $625,000
relating to the grant of stock options was recognized in 1997. At December 31,
1997, deferred (unamortized) compensation expense relating to stock options was
$1,781,000 and will be recognized as compensation expense over the vesting
period of the options which is generally five years.
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," encourages but does not require companies to record
compensation expense for stock-based compensation plans. The Company has elected
to account for stock-based compensation using the intrinsic value method
prescribed by 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 market value consistent with the
methodology prescribed under SFAS No. 123, the Company's net loss and basic loss
per share would have been increased by $718,000 ($.17 per share) and $239,000
($.14 per share) for 1997 and 1996, respectively. The fair market value of the
warrants and stock options at the grant date was estimated using the
Black-Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------
<S> <C> <C>
Expected life (years) 7 7
Interest rate 6.0% 7.5%
Volatility 10 0
Dividend yield 0 0
====================================================
</TABLE>
NOTE 3 COMMON STOCK WARRANTS
The Company has issued warrants to purchase common shares which are exercisable
over periods of up to seven years from date of issuance. At December 31, 1997,
1,626,910 warrants were exercisable. Warrant transactions were as follows:
<TABLE>
<CAPTION>
WARRANTS WEIGHTED AVERAGE
OUTSTANDING PRICE PER SHARE
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance at 12/31/94 -- --
- --------------------------------------------------------------------------------
Granted 163,792 $4.57
-------------------------------------
Balance at 12/31/95 163,792 $4.57
- --------------------------------------------------------------------------------
Granted 1,137,496 $5.27
-------------------------------------
Balance at 12/31/96 1,301,288 $5.18
- --------------------------------------------------------------------------------
Granted 356,673 $7.43
Exercised (31,051) $5.23
-------------------------------------
Balance at 12/31/97 1,626,910 $5.34
================================================================================
</TABLE>
NOTE 4 INCOME TAXES
Income taxes for the years ended December 31, 1997, 1996 and 1995
consisted of minimum state income taxes only. Net deferred income
tax assets at December 31, 1997 and 1996 consisted of the following:
<PAGE> 13
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Allowance for doubtful
accounts $ 25,000 $ 30,000
Accrued liabilities 67,000 198,000
Deferred rent 39,000 24,000
Depreciation and amortization 20,000 16,000
Uniform capitalization costs 60,000 80,000
Net operating loss
carryforwards 7,761,000 4,039,000
Tax credits 390,000 219,000
Other 7,000 11,000
------------------------------------------
Total deferred income
tax asset 8,369,000 4,617,000
------------------------------------------
Valuation reserve (8,369,000)
------------------------------------------
Net deferred income tax asset $ -- $ --
================================================================================
</TABLE>
The income tax provision reconciles to the amount computed by applying the
federal statutory rate of 35% to loss before taxes as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed
expected
federal tax
benefit ($3,222,000) ($1,595,000) ($1,256,000)
State income
taxes, net of
federal income
tax effect 13,000 1,000 1,000
Tax benefits not
recognized 3,222,000 1,595,000 1,256,000
-------------------------------------------------------
Income tax
provision $ 13,000 $ 1,000 $ 1,000
================================================================================
</TABLE>
At December 31, 1997, the Company had federal and state net operating loss (NOL)
carryforwards of approximately $18,000,000 and $8,000,000, respectively and
research and development tax credit carryforwards of approximately $400,000. The
federal NOL carryforwards expire after 15 years from the year of loss and are
restricted if significant changes in ownership occur. The state NOL
carryforwards expire in five to seven years from the year of loss.
Realization of deferred income tax assets is dependent on generating sufficient
taxable income during the periods in which the temporary differences will
reverse. The amount of the deferred income tax assets considered realizable
could be adjusted if estimates of future taxable income during the reversal
periods are revised.
NOTE 5 FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET RISK
LONG-TERM DEBT. There was no long-term debt at December 31, 1997. Long-term debt
at December 31, 1996 was as follows:
<TABLE>
<CAPTION>
1996
- --------------------------------------------------------------------------------
<S> <C>
Bridge financing debt bearing
interest at prime rate plus 1%,
repaid in August, 1997 $ 3,250,000
Note payable to corporation bearing
interest at 10%, due and repaid
in January, 1997 1,000,000
Less current portion (1,000,000)
----------
$ 3,250,000
================================================================================
</TABLE>
Warrants to purchase 1,064,645 shares of the Company's common stock were issued
in connection with the bridge financing debt. Under SFAS No. 123, the fair
market value of these warrants at the date of issuance totaling $631,000 was
recorded as additional paid-in capital and deferred financing cost. During 1997
and 1996, financing costs of $442,000 and $189,000, respectively were expensed.
At December 31, 1996, the Company had drawn $186,000 under a $250,000 line of
credit maintained with a bank at an interest rate of prime plus 1.5%. The
balance was repaid and the line canceled in June 1997. The maximum borrowing in
1996 under this line was approximately $226,000, the average borrowing was
approximately $103,000, and the weighted average interest rate was 9.75%.
FINANCIAL INSTRUMENTS. Marketable securities consisted of bank certificates of
deposit, corporate bonds, auction market preferred stock and commercial paper,
all of which by Company policy
<PAGE> 14
mature within 360 days. Marketable securities with maturities of 90 days or less
from date of purchase are shown as cash equivalents. Under Statement of
Financial Accounting Standard 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. No net realized gains or losses were recorded in any year.
The Company's investment portfolio at December 31, 1997 consisted of the
following:
<TABLE>
<CAPTION>
1997
- --------------------------------------------------------------------------------
<S> <C>
Certificates of deposit $ 8,049,000
Commercial paper 9,014,000
Auction market preferreds 4,265,000
Corporate bonds 8,156,000
Cash and cash equivalents 3,250,000
-----------
$32,734,000
================================================================================
</TABLE>
CONCENTRATION OF CREDIT RISK. Trade accounts receivable and certain marketable
securities are the 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 situation of the hospitals which purchase the Company's
products. The credit risk associated with receivables is limited due to
dispersion of the receivables over a number of customers in a number of
geographic areas. The Company monitors the 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 institution;
therefore, credit loss is unlikely.
NOTE 6 COMMITMENTS AND CONTINGENCIES
LEASES. Rent expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $364,000, $214,000 and $211,000, respectively. As of December 31,
1997, the Company had the following minimum lease payments for certain
facilities and equipment under operating leases: 1998-$670,000; 1999-$733,000;
2000-$721,000; 2001-$686,000; and 2002-$279,000.
LEGAL MATTERS. While there are no pending legal actions against the Company, the
Company may become party to various legal proceedings in the normal course of
business.
NOTE 7 FINANCING ARRANGEMENTS
The Company has an agreement with a third party finance company, whereby the
Company sells its leases, mainly without recourse. The Company recognized
approximately $1,331,000, $494,000 and $797,000 in revenues from leases sold in
1997, 1996 and 1995, respectively. At December 31, 1997 and 1996, approximately
$255,000 and $193,000, respectively had not been collected on leases sold with
recourse for which the Company is contingently liable.
NOTE 8 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 age and
service requirements. Employees may make discretionary contributions to the Plan
subject to Internal Revenue Code limitations. Employer contributions to the Plan
are discretionary. No employer contributions were made during 1997. For 1998,
the Company anticipates contributing 25% of the first four percent of an
employee's salary contribution to the Plan. Plan participants are fully vested
in their contributions to the Plan and employer contributions vest over two
years.
<PAGE> 15
NOTE 9 GEOGRAPHIC AREA
The Company operates in a single industry segment, the medical device industry.
Export sales from the United States were $1,871,000, $1,147,000 and $350,000 in
1997, 1996 and 1995, respectively.
NOTE 10 SHAREHOLDERS' EQUITY
The Company reincorporated in Delaware and effected a reverse stock split of its
existing common and preferred stock of 1 for 1.928 shares in August 1997. This
reincorporation and reverse stock split have been retroactively reflected in the
accompanying financial statements. All shares of convertible preferred stock
were converted to common stock upon the Company's initial public offering in
August 1997.
PREFERRED STOCK. At December 31, 1997, the Company had 5,000,000 shares of
undesignated preferred stock authorized and available for future issuance, none
of which had been issued. The Company's Board of Directors, at its sole
discretion, may determine, fix and alter dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any preferred
stock series, and may determine the designation, terms and conditions of the
issuance of any such stock.
COMMON STOCK. During the year ended December 31, 1997, stock
option and warrant exercises and issuances of common stock under
the Company's Employee Stock Purchase Plan increased the
number of common shares by 227,436. Effective May 1997, a
corporation which had invested $4,000,000 in the Company in the
form of a convertible note converted its note and all accrued interest
thereon into 363,743 shares of the Company's common stock.
Financing costs of $1,000,000 relating to the fixed conversion
feature of this note were expensed in 1997.
NOTE 11 VENDORS
The robotic arm which is the major component of the Company's AESOP product is
purchased from a sole supplier. The Company believes that other suppliers would
be available for the component if necessary.
NOTE 12 QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly data for 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended 12/31/97:
Revenue $ 1,373,000 $ 1,483,000 $ 1,685,000 $ 2,070,000
Gross profit $ 722,000 $ 759,000 $ 1,007,000 $ 1,260,000
Net loss $(1,530,000) $(3,380,000) $(2,185,000) $(2,124,000)
Loss per share $ (0.88) $ (1.76) $ (0.36) $ (0.28)
========================================================================================
Year Ended 12/31/96:
Revenue $ 676,000 $ 702,000 $ 1,134,000 $ 1,545,000
Gross profit $ 232,000 $ 245,000 $ 452,000 $ 501,000
Net loss $ (890,000) $ (950,000) $(1,104,000) $(1,615,000)
Loss per share $ (0.52) $ (0.56) $ (0.65) $ (0.95)
========================================================================================
</TABLE>
NOTE: The full year 1997 loss per share was lower than the sum of the reported
quarterly loss per share amounts due to changes in the number of outstanding
shares during 1997.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
The Company has one wholly-owned subsidiary, Computer Motion, S.A.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Computer Motion, Inc.:
As independent public accountants, we hereby consent to the incorporation of our
report dated February 5, 1998 incorporated by reference in this Form 10-K, into
the Company's previously filed Registration Statement File No. 333-29505. It
should be noted that we have not audited any financial statements of the Company
subsequent to December 31, 1997 or performed any audit procedure subsequent to
the date of our report.
/s/ Arthur Andersen
---------------------------------
ARTHUR ANDERSEN LLP
Woodland Hills, California
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 22,555,000
<SECURITIES> 10,179,000
<RECEIVABLES> 1,804,000
<ALLOWANCES> 62,000
<INVENTORY> 992,000
<CURRENT-ASSETS> 35,813,000
<PP&E> 2,294,000
<DEPRECIATION> 1,186,000
<TOTAL-ASSETS> 37,313,000
<CURRENT-LIABILITIES> 2,398,000
<BONDS> 0
0
0
<COMMON> 8,000
<OTHER-SE> 34,907,000
<TOTAL-LIABILITY-AND-EQUITY> 37,313,000
<SALES> 6,611,000
<TOTAL-REVENUES> 6,611,000
<CGS> 2,863,000
<TOTAL-COSTS> 2,863,000
<OTHER-EXPENSES> 1,015,000
<LOSS-PROVISION> 28,000
<INTEREST-EXPENSE> 332,000
<INCOME-PRETAX> (9,206,000)
<INCOME-TAX> 13,000
<INCOME-CONTINUING> (9,219,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,219,000)
<EPS-PRIMARY> (2.12)
<EPS-DILUTED> (2.12)
</TABLE>
