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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, 1998
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 $58.4 million at March 22, 1999 when the
closing sale price of such stock, as reported on the NASDAQ National Market was
$9.00 per share.
The number of shares outstanding of the Registrant's Common Stock, $.001
par value, as of March 22, 1999 was 8,404,479 shares.
Portions of the Annual Report to Shareholders for the year ended
December 31, 1998 are incorporated by reference in Parts II and IV. Portions of
the Proxy Statement dated March 26, 1999 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 have the potential to
revolutionize surgery and the OR by providing surgeons with the precision and
dexterity necessary to perform complex, minimally invasive surgical procedures,
and by enabling surgeons to control critical devices in the OR through simple
verbal commands. Computer Motion believes that its products have the potential
to broaden the scope and increase the effectiveness of minimally invasive
surgery ("MIS"), improve patient outcomes and create a safer, more efficient and
cost effective OR.
Traditionally, the 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 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. The Company estimates that over 60,000 MIS procedures have
been successfully assisted by AESOP in over 400 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) Control Center for the voice
control of medical devices in the operating room. To enable new minimally
invasive microsurgery procedures, such as endoscopic coronary artery bypass
grafting ("E-CABG(TM)"), the Company is developing the ZEUS(TM) Robotic Surgical
System.
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The modernization of the OR has resulted in numerous medical devices
that aid a surgeon, but also increase the complexity and costs of the OR. In
many instances, these devices are manually controlled and monitored by someone
other than a surgeon in response to a surgeon's spoken commands and request for
status. The HERMES Control Center is designed to enable a surgeon to directly
control multiple OR devices, including the Company's AESOP, 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 operative site on a video monitor) in response to a surgeon's verbal
commands. This allows the surgeon to have very direct control over the endoscope
in minimally invasive surgical procedures.
The Company believes that AESOP is the world's first Food and Drug
Administration ("FDA") cleared surgical robot and incorporates the world's first
FDA-cleared voice control interface for use in the operating room. AESOP was
first introduced in the fourth quarter 1994. Since then, the Company estimates
that over 60,000 minimally invasive surgical procedures have been successfully
assisted by AESOP in over 400 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 Control Center and the ZEUS Robotic Surgical System.
HERMES PRODUCT LINE
Computer Motion's HERMES 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 room costs.
HERMES is comprised of a control unit which can be 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 which are currently FDA-cleared include the
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endoscopic camera and light source, insufflator, arthroscopic shaver, VCR, video
printer, video frame grabber and Computer Motion's AESOP. The HERMES system
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. The Company expects to make additional 510(k) submissions
to the FDA in 1999 for HERMES control of Stryker's arthroscopic pump, Berchtold
Corporation's OR overhead cameras and lights, and STERIS Corporation's OR table
and overhead cameras and lights.
Computer Motion intends to partner with other leading medical device
manufacturers to expand the number and type of devices to be integrated with
HERMES, including 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 is designed to
fundamentally improve a surgeon's ability to perform complex, minimally invasive
surgical procedures and to enable new, minimally invasive microsurgical
procedures that are currently very difficult or impossible to perform with
conventional surgical methods. The Company believes that these new 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 are 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 Phase I clinical testing with ZEUS and
expects to file an Investigational Device Exemption with the FDA to gain
approval to begin a multi-center clinical evaluation of the product in 1999. The
Company intends to sell ZEUS on a direct basis in North America and co-market
ZEUS with Medtronic, Inc., a leading manufacturer of medical devices, in Europe,
the Middle East and Africa.
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.
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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 has
obtained such certification and is subject to audit on a semiannual basis for
compliance. The Company's manufacturing capability to date has been limited to
manufacturing moderate quantities of its AESOP product, and limited quantities
of its HERMES and ZEUS products. 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 yields 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.
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COMPETITION
The Company 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 backlog exists. No distributor organization
or single customer accounted for more than 10% of 1998 revenue except for
Stryker Corporation which accounted for $1,501,000 (14%) of 1998 revenue. In the
United States, the Company sells directly to hospitals through an employee based
sales organization. In Western Europe, the Company is developing an employee
based sales organization which will be principally focused on sales in France
and Germany. The Company intends to co-market the ZEUS product line with
Medtronic, Inc. in Europe, the Middle East and Africa. 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 may distribute the Company's HERMES
product for control of various Stryker endoscopic devices on a worldwide basis.
RESEARCH AND DEVELOPMENT
The Company's research and development function is focused on the
development of new medical 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 $7,905,000 (75% of revenue), $4,149,000 (63% of
revenue) and $1,359,000 (34% of revenue) in 1998, 1997 and 1996, respectively.
GOVERNMENT REGULATION
The medical devices manufactured and marketed by the Company are subject
to regulation by the FDA and, in most instances, by state and foreign
governmental authorities. Under the Federal Food, Drug and Cosmetic Act, and
regulations thereunder, manufacturers of medical devices must comply with
certain policies and procedures that regulate the composition, labeling,
testing, manufacturing, packaging and distribution of medical devices. 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.
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,
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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 recordkeeping for medical devices and reviews
hospital and manufacturers' required reports of adverse experiences to identify
potential problems with FDA-cleared devices. Aggressive regulatory action may be
taken due to adverse experience reports. FDA device tracking and post-market
surveillance requirements are expected to increase future regulatory compliance
costs.
Diagnostic-related groups ("DRG") reimbursement schedules regulate the
amount the United States government, through the Health Care Financing
Administration ("HCFA"), will reimburse hospitals and doctors for the inpatient
care of persons covered by Medicare. While the Company is unaware of specific
domestic price resistance as a result of DRG reimbursement policies, changes in
current DRG reimbursement levels could have an adverse effect on its domestic
pricing flexibility.
The Company's business outside the United States is subject to medical
device laws in individual foreign countries. These laws range from extensive
device approval requirements in some countries to requests for data or
certifications in other countries. Generally, regulatory requirements are
increasing in these countries. In addition, government funding of medical
procedures is limited and in certain instances being reduced. In the European
Economic Union ("EEU"), the regulatory systems have been harmonized and approval
to market in EEU countries can be obtained through one agency.
PATENTS, LICENSES AND PROPRIETARY RIGHTS
Protection of the Company's intellectual property is important to the
Company's business. The Company maintains a policy of seeking device and method
patents on its inventions, obtaining copyrights on copyrightable materials and
entering into proprietary information agreements with its employees and
consultants with respect to technology which it considers important to its
business. The Company also files for trademark registration and service mark
registration on those marks which may be used in marketing efforts with respect
to the products developed, sold and distributed by the Company. The Company also
relies upon trade secrets, unpatented know-how and continuing technological
innovation to develop and maintain its competitive position.
The Company currently holds 14 issued United States patents and has over
50 domestic and foreign patent applications pending disclosing concepts 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 and ZEUS product lines. The Company has
additional patent applications pending disclosing key aspects of its ZEUS
Robotic Surgical System, as well as key aspects of its HERMES Control Center.
The Company has filed corresponding international patent applications on certain
of its key United States patents.
There can be no assurance that patents will issue from any of the
pending applications, or that issued patents will be of sufficient scope to
provide meaningful protection of the Company's technology. In addition, there
can be no assurance that any patents issued to the Company will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide proprietary protection or commercial advantage to the Company.
Notwithstanding the scope of the patent protection available to the Company, a
competitor could develop other devices or methods for enabling minimally
invasive surgical procedures that do not require the use of robotics or speech
recognition, aspects of which are patented or pending patents.
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
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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 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 procurement of products liability insurance
coverage, which management believes are prudent.
EMPLOYEES
As of December 31, 1998, the Company had 146 full-time employees
including 53 employees in sales and marketing, 50 employees in research and
development, 28 employees in production and 15 employees in administration. It
has never experienced a work stoppage as a result of labor disputes and none of
its employees are represented by a labor organization.
INDUSTRY SEGMENT AND INTERNATIONAL OPERATIONS
The medical device industry is the single industry segment in which the
Company operates. The Company's export revenues were $1,225,000 (12% of
revenue), $1,871,000 (28% of revenue) and $1,147,000 (28% of revenue) in 1998,
1997 and 1996, 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.
YEAR 2000 COMPLIANCE
The Company has completed its assessment of the impact of Year 2000. The
Company's products have no Year 2000 issues. The Company will be required to
update or replace its internal business systems software so that its business
systems will continue to function properly. Completion of this activity is
expected by October 1999 at an estimated cost of $300,000. See "Risk Factors
that May Affect Future Results - Year 2000 Matters."
OTHER
The Company has not been materially impacted by the effects of inflation
or deflation during 1998.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Computer Motion operates in a rapidly changing environment that involves
a number of risks, some of which are beyond our control. A number of these risks
are highlighted below. These risks could affect our actual future results and
could cause them to differ materially from any forward-looking statements we
have made.
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WE HAVE NEVER OPERATED PROFITABLY. We have incurred significant losses from our
inception to date. Further, we expect to incur additional losses as we increase
spending for research and development efforts, clinical trials, manufacturing
capacity and sales force improvement. We can not assure you that we will ever
achieve significant commercial revenues, particularly from sales of our HERMES
or ZEUS product lines, both of which are still under development, or that we
will become profitable. It is possible that we may encounter substantial delays
or incur unexpected expenses related to the market introduction and acceptance
of HERMES and ZEUS, or any future products.
RELIANCE ON FUTURE PRODUCTS AND UNCERTAINTY OF REGULATORY APPROVAL AND MARKET
ACCEPTANCE. We anticipate that HERMES and ZEUS will comprise a substantial
majority of our sales in the future. Accordingly, our future success depends on
the successful development, regulatory clearance or approval, commercialization
and market acceptance of these products. Even if we are successful in obtaining
the necessary regulatory clearances or approvals for HERMES and ZEUS, their
successful commercialization will depend upon our ability to demonstrate the
clinical safety and efficacy, ease-of-use, reliability and cost-effectiveness of
these products in a clinical setting. HERMES has only recently begun to be
marketed and ZEUS has only recently begun to be used under a ten patient FDA
Phase I human clinical trial. In order to conduct a multi-center clinical trial
with ZEUS, we must submit and obtain approval from the FDA of an Investigational
Device Exemption ("IDE") application. We can not assure you that the FDA will
allow us to conduct clinical trials or that ZEUS will prove to be safe and
effective in clinical trials under United States or international regulatory
requirements. It is also possible that we may encounter problems in clinical
testing that 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 our products
will require significant surgeon training and practice, and the time and expense
required to complete such training and practice could adversely affect market
acceptance.
GOVERNMENT REGULATION. Our 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 our products in foreign countries is also subject to varying
government regulations which could delay or restrict marketing of our products
in those countries. In addition, such regulatory authorities may impose
limitations on the use of our products. We have obtained the CE mark for all of
our products which means these products can be sold in all the member countries
of the European Union. Our manufacturing operations are subject to the FDA's
Quality System Regulations and similar regulations in other countries regarding
the manufacturing, testing, labeling, recordkeeping and storage of devices and
the failure to maintain compliance would have an adverse effect on our
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 experience than us. Many medical
conditions that can be treated using our products, 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
our products and could render our products obsolete or unmarketable. We can not
be certain that physicians will use our products to replace or supplement
established treatments or that our products will be competitive with current or
future technologies.
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LIMITATIONS ON THIRD-PARTY REIMBURSEMENT. In the United States, our products
will 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 healthcare services they provide their patients.
Government agencies, certain private insurers and certain other payors generally
reimburse hospitals for medical treatment at a fixed rate based on schedules
established by the Health Care Finance Administration. We believe that the
procedures using our products will be eligible for reimbursement under existing
reimbursement schedules. 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 such schedules, 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
healthcare 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 our products may depend on the availability and level of
reimbursement in international markets we target. We can not be certain that we
will obtain reimbursement in any country within a particular time, or at all.
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY. Our success will depend, in
part, on our ability to obtain and maintain patent protection for our products,
to preserve our trade secrets, and to operate without infringing the proprietary
rights of others. We seek to protect our proprietary positions by filing United
States and foreign patent applications related to our technology, inventions and
improvements that are important to the development of our business. We cannot be
certain that our issued patents or any patents that may be issued will not be
challenged, invalidated or circumvented in the future. Further, it is possible
that our competitors, many of which have substantially more resources than us
and have made substantial investments in competing technologies, will apply for
and obtain patents that will prevent, limit or interfere with our ability to
make, use or sell our products either in the United States or internationally.
We can not assure you that we will not become subject to patent infringement
claims or litigation.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT. The market for our
products is characterized by rapidly changing technology and new product
introductions and enhancements. Our success will depend to a significant extent
upon our ability to enhance and expand the utility of our products so that they
gain market acceptance. We maintain research and development programs to
continually improve and refine our current product offerings and develop new
products. We can not assure you that we will be successful in identifying,
developing, manufacturing and marketing new products or enhancing our existing
products on a timely or cost-effective basis. Moreover, we may encounter
technical problems in connection with our product development efforts that could
delay the introduction of new products or product enhancements.
CONTROL BY MANAGEMENT. Our present directors and executive officers beneficially
own approximately 30% of the 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 operation of our business, including delaying or preventing a
proposed acquisition of the Company.
DEPENDENCE ON KEY PERSONNEL. Our future business and operating results depend in
significant part on our key management, scientific, technical and sales
personnel, many of whom would be difficult to replace, and future success will
depend partially upon our 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 we may
have difficulty in attracting or retaining such personnel.
10
<PAGE> 11
FLUCTUATIONS IN OPERATING RESULTS AND MARKET VOLATILITY. Our results of
operations may vary significantly from quarter to quarter depending upon
numerous factors, including the following: (i) delays associated with the FDA
and other regulatory clearance and approval processes; (ii) healthcare
reimbursement policies; (iii) timing and results of clinical trials; (iv) demand
for our products; (v) changes in pricing policies by us or our competitors; (vi)
the number, timing and significance of our competitors' product enhancements and
new products; and (vii) product quality issues.
The market price of our common stock is likely to be volatile and may be
affected by: (i) actual or anticipated decisions by the FDA with respect to
approvals or clearances of our or our competitors' products; (ii) actual or
anticipated fluctuations in our operating results; (iii) announcements of
technological innovations; (iv) new commercial products announced or introduced
by us or our competitors; (v) changes in third party reimbursement policies;
(vi) developments concerning our or our competitors' proprietary rights; (vii)
conditions and trends in the medical device industry; (viii) governmental
regulation; (ix) changes in financial estimates by securities analysts; and (x)
general stock market conditions.
EXPANSION OF MARKETING ACTIVITIES AND LIMITED DISTRIBUTION. We anticipate
significantly increasing the number of sales personnel to more fully cover our
target markets, particularly as we expand our product offerings. It is possible
we will be unable to compete effectively in attracting, motivating and retaining
qualified sales personnel. We currently intend to market and sell our products
outside the United States and Europe principally through distributors. In order
to accomplish this, we will be required to expand our distributor network. We
may not be able to identify suitable distributors or negotiate acceptable
distribution agreements. Any such distribution agreements may not result in
significant sales.
DEPENDENCE ON INDEPENDENT CONTRACT MANUFACTURERS AND LIMITED MANUFACTURING
EXPERIENCE. We rely 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 our contract manufacturers could negatively affect our ability to
ship products and derive revenue. We do not have experience manufacturing our
products in commercial quantities. Our manufacturing experience to date has been
focused primarily on assembling components produced by third party manufacturers
for AESOP. Our manufacturing activities to date with respect to HERMES and ZEUS
have consisted primarily of manufacturing a limited number of products. In
scaling up manufacturing of new products, we may encounter difficulties
involving quality control and assurance, component availability, adequacy of
control policies and procedures, lack of qualified personnel and compliance with
FDA's Quality System Regulations requirements. We may elect to internally
manufacture components currently provided by third parties or to implement new
production processes. We can not assure you 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.
YEAR 2000 MATTERS. Many existing information technology ("IT") systems, such as
computer systems and software products, were not designed to correctly process
dates after December 31, 1999. We have assessed the impact of such "Year 2000"
issues on our products and internal IT systems, as well as on our significant
suppliers. We have completed testing of our products and have not identified any
areas of non-compliance with respect to Year 2000 issues. We have also evaluated
our internal IT systems and have determined that our business system is not Year
2000 compliant. We have developed a plan to replace this system in a timely
fashion at a cost of approximately $300,000. We have also initiated discussions
with our significant suppliers regarding their plans to investigate, identify
and remedy their Year 2000 issues. While we anticipate cooperation in these
efforts from our significant suppliers, they are outside our control. If any of
our significant suppliers fail to appropriately address their Year 2000 issues,
such failure could have a material adverse effect on our business, financial
condition and results of operations. For example, if Year 2000 problems
experienced by any of our significant suppliers result in or contribute to
delays or interruptions of our delivery of products or services, such delays or
interruptions could have a material adverse effect on our business, financial
condition and results of operations. In addition, many of our customers depend,
in part, on third-party payors, both private and governmental, for much of their
revenues. Any inability of our customers to obtain payment from such payors
could impact their ability to pay for our products. Finally, we could be
materially adversely affected by a disruption in the economy generally resulting
from Year 2000 issues.
11
<PAGE> 12
Should we not be completely successful in mitigating internal and external Year
2000 risks, the result could be a system failure or miscalculation causing
disruption of our or our customers' or suppliers' operations, including among
other things, a temporary inability to process transactions, manufacture
products, send invoices, or engage in similar normal business activities. We
believe that under a worst case scenario, we could continue the majority of
normal business activities on a manual basis. As to our suppliers and customers,
we do not currently have a contingency plan with respect to potential Year 2000
failures of these parties. In the event that we can not obtain reasonable
assurances from current suppliers, particularly single source suppliers, we may
choose to qualify additional suppliers.
RISK OF PRODUCT LIABILITY CLAIMS. We face an inherent business risk of financial
exposure to product liability claims in the event that the use of our products
results in personal injury or death. We also face the possibility that defects
in the design or manufacture of our products might necessitate a product recall.
It is possible that we will experience losses due to product liability claims or
recalls in the future. We currently maintain product liability insurance with
coverage limits of $5,000,000, but future claims may exceed these coverage
limits.
MANAGEMENT OF GROWTH. Our growth will continue to place significant demands on
our management and resources. In order to compete effectively against current
and future competitors, prepare products for clinical trials and develop future
products, we believe we must continue to expand our operations, particularly in
the areas of research and development and sales and marketing. It is likely that
we will be required to implement additional operating and financial controls,
hire and train additional personnel, install additional reporting and management
information systems and expand our physical operations. Our future success will
depend, in part, on our ability to manage future growth and we can not assure
you that we will be successful.
ADVERSE DILUTIVE IMPACT OF OPTIONS AND WARRANTS. The exercise of existing stock
options and warrants, totaling 2,982,531 shares, of which 1,944,920 were
exercisable at December 31, 1998, would have a dilutive effect on the interests
of current investors and may have an adverse effect on the market price of our
common stock.
ITEM 2. PROPERTIES
The Company leases approximately 32,000 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 seeking 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.
12
<PAGE> 13
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 54 Chairman of the Board and Chief Executive Officer
Yulun Wang 38 Chief Technical Officer, Founder and Director
Stephen L. Wilson 46 Executive Vice President, Chief Financial Officer
and Secretary
John M. Greathouse 37 Vice President of Business Development
David A. Stuart 43 Vice President of Operations
</TABLE>
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.
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.
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.
13
<PAGE> 14
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 1998 and 1997 (from August 12, 1997, the date trading in the stock
commenced) are set forth below.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Year Ended December 31, 1998
----------------------------
Fourth Quarter.................................... $13.38 $7.50
Third Quarter..................................... $13.06 $6.25
Second Quarter.................................... $17.63 $9.88
First Quarter..................................... $13.00 $8.81
</TABLE>
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Year Ended December 31, 1997
----------------------------
Fourth Quarter.................................... $13.63 $7.88
Third Quarter (commencing August 12, 1997)........ $15.00 $13.38
Second Quarter.................................... N/A N/A
First Quarter..................................... N/A N/A
</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, 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 22, 1999,
there were approximately 3,500 shareholders of record.
The Company's Registration Statement on Form S-1 filed with the
Securities Exchange Commission (Registration No. 333-29505) 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 1998, the Company used $16,978,000 of these
proceeds. The proceeds were principally used to support the cash loss from
operations of $12,928,000, increase working capital by $2,450,000 and purchase
property and equipment for $1,784,000. 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.
14
<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 1998
Annual Report to Shareholders. The selected financial data is derived from
consolidated financial statements that have been audited by Arthur Andersen LLP,
independent public accountants.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenue $10,586,000 $6,611,000 $4,057,000 $2,271,000 $607,000
Net loss ($11,545,000) ($9,219,000) ($4,559,000) ($3,590,000) ($3,244,000)
Net loss per share ($1.45) ($2.12) ($2.68) ($2.12) ($1.90)
Weighted average common
shares outstanding 7,959,000 4,343,000 1,701,000 1,691,000 1,706,000
Total assets $30,444,000 $37,313,000 $3,489,000 $2,017,000 $4,699,000
Long-term liabilities $ -- $ -- $9,132,000 $605,000 $126,000
</TABLE>
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 Financial Condition and Results of Operations" on pages 19 through
21 of the Company's 1998 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include cash and short-term
investment grade debt securities. At December 31, 1998, the carrying values of
the Company's financial instruments approximated their fair values based on
current market prices and rates.
It is the Company's policy not to enter into derivative financial
instruments. The Company does not currently have material foreign currency
exposure as the majority of its international transactions are denominated in
U.S. currency. Accordingly, the Company does not have significant overall
currency exposure at December 31, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements of the Company and
Report of Independent Public Accountants set forth on pages 22 through 30 of the
Company's 1998 Annual Report to Shareholders are incorporated herein by
reference:
Consolidated Statements of Operations - Years ended December 31, 1998,
1997 and 1996
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Shareholders' Equity (Deficit) - Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
15
<PAGE> 16
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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, 1999, 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,
1999, 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, 1999, 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, 1999, 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 Public Accountants as set forth on pages 22
through 30 of the Company's 1998 Annual Report to Shareholders are
incorporated herein by reference:
Consolidated Statements of Operations -Years ended December 31,
1998, 1997 and 1996
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Shareholders' Equity (Deficit) - Years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
16
<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 21
- --------------------------------------------------------------------------------
</TABLE>
The report of the Company's independent public accountants with respect
to the above-listed financial statement schedule appears on page 20 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 Development and Supply Agreement between the Stryker Endoscopy
Division of Stryker Corporation and the Company dated August 21,
1996.*(1)
10.3 Registration Agreement between the Company and certain
shareholders.*
10.4 Sales Agreement between the Company and Medtronic, Inc.
dated May 28, 1997.*(1)
10.5 Form of Warrant to Purchase Common Stock issued in connection
with Bridge Financing Agreements.*
10.6 Purchaser Representation and Subscription Agreement
relating to the Company's Series E Preferred Stock and
Warrant to Purchase Common Stock.*
10.7 Form of Redeemable Warrant to Purchase Common Stock of the
Company issued in conjunction with the Company's Series E
Preferred Stock.*
10.8 Business Agreement between the Company and Bulova Technologies,
L.L.C. dated February 18, 1997.*(1)
10.9 Lease between the Company and University Business Center
Associates dated March 1, 1994 and amendment thereto dated
October 19, 1996.*
10.10 Form of Indemnification Agreement for Officers and Directors
of the Company.*
10.11 Agreement relating to the Company's employment of Stephen
L. Wilson.*
10.12 Computer Motion, Inc. Employee Stock Purchase Plan, as amended
through September 30, 1997.**
10.13 Leases between the Company and University Business Center
Associates dated September 19, 1997.**
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
Exhibit
No. Description
---------- --------------------------------------------------------
<C> <S>
10.14 Computer Motion, Inc. 1997 Stock Incentive Plan*
13.1 Management's Discussion and Analysis of Financial
Condition and Results of Operations and Consolidated
Financial Statements from the 1998 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.
** Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS
See Item 14(a)(3) of this Report.
18
<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, 1999 /s/ Robert W. Duggan
- -------------- -------------------------------------------
Date Robert W. Duggan
Chairman and Chief Executive Officer
(Principal Executive Officer)
March 26, 1999 /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, 1999
- --------------------------------
Daniel R. Doiron
/s/ Robert W. Duggan Director March 26, 1999
- --------------------------------
Robert W. Duggan
/s/ W. Peter Geis Director March 26, 1999
- --------------------------------
W. Peter Geis
/s/ M. Jacqueline Eastwood Director March 26, 1999
- --------------------------------
M. Jacqueline Eastwood
/s/ William D. Williams Director March 26, 1999
- --------------------------------
William D. Williams
/s/ Yulun Wang Director March 26, 1999
- --------------------------------
Yulun Wang
</TABLE>
19
<PAGE> 20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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 2, 1999. Our audits were made for the
purpose of expressing 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 2, 1999
20
<PAGE> 21
COMPUTER MOTION, INC.
YEAR ENDED DECEMBER 31, 1998
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, 1998
Allowance for doubtful accounts $62,000 $298,000 $106,000 $254,000
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
</TABLE>
21
<PAGE> 22
EXHIBIT INDEX
<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 Development and Supply Agreement between the Stryker Endoscopy
Division of Stryker Corporation and the Company dated August 21,
1996.*(1)
10.3 Registration Agreement between the Company and certain
shareholders.*
10.4 Sales Agreement between the Company and Medtronic, Inc.
dated May 28, 1997.*(1)
10.5 Form of Warrant to Purchase Common Stock issued in connection
with Bridge Financing Agreements.*
10.6 Purchaser Representation and Subscription Agreement
relating to the Company's Series E Preferred Stock and
Warrant to Purchase Common Stock.*
10.7 Form of Redeemable Warrant to Purchase Common Stock of the
Company issued in conjunction with the Company's Series E
Preferred Stock.*
10.8 Business Agreement between the Company and Bulova Technologies,
L.L.C. dated February 18, 1997.*(1)
10.9 Lease between the Company and University Business Center
Associates dated March 1, 1994 and amendment thereto dated
October 19, 1996.*
10.10 Form of Indemnification Agreement for Officers and Directors
of the Company.*
10.11 Agreement relating to the Company's employment of Stephen
L. Wilson.*
10.12 Computer Motion, Inc. Employee Stock Purchase Plan, as amended
through September 30, 1997.**
10.13 Leases between the Company and University Business Center
Associates dated September 19, 1997.**
10.14 Computer Motion, Inc. 1997 Stock Incentive Plan*
13.1 Management's Discussion and Analysis of Financial
Condition and Results of Operations and Consolidated
Financial Statements
from the 1998 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.
** Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
<PAGE> 1
EXHIBIT 13.1
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 will provide surgeons with
the precision and dexterity necessary to perform complex, minimally invasive
surgical procedures, as well as enable surgeons to control critical devices in
the OR through simple verbal commands. The Company believes that its products
will broaden the scope and increase the effectiveness of minimally invasive
surgery, improve patient outcomes, and create a safer, more efficient and cost
effective OR.
The Company's AESOP(R) robotic endoscope positioning system 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 comprised of three
surgeon-controlled robotic arms, one of which positions the endoscope and two of
which manipulate surgical instruments. The Company believes that ZEUS will
improve a surgeon's dexterity and precision and enhance visualization of, and
access to, confined operative sites.
The Company's HERMES(TM) Control Center is designed to enable a surgeon to
directly control multiple OR devices, including various laparoscopic,
arthroscopic and video devices, as well as the Company's robotic devices,
through simple verbal commands.
The Company has sustained significant losses since inception and expects to
continue to incur losses due to research and development efforts, costs
associated with obtaining regulatory approvals and clearances, continued
marketing expenditures to increase sales and other costs associated with the
Company's anticipated growth. Furthermore, the Company anticipates that its
operating results may fluctuate significantly from quarter to quarter in the
future, depending on a number of factors, many of which are outside the
Company's control. These factors include timing and results of clinical trials,
delays associated with FDA and other clearance processes, changes in pricing
policy by the Company or its competitors, the number, timing and significance of
product enhancements and new products by the Company and its competitors, health
care reimbursement policies and product quality issues.
RESULTS OF OPERATIONS
REVENUE - Revenue increased $3,975,000 (60%) to $10,586,000 in 1998 from
$6,611,000 in 1997. The increase resulted from a $2,486,000, or 46%, increase in
AESOP revenue and a $1,510,000, or 687%, increase in HERMES revenue. AESOP
robotic arm unit sales and average selling prices increased by 8% and 34%,
respectively and were favorably impacted by the commercial introduction of the
AESOP 3000 in the fourth quarter of 1997. HERMES revenue related mainly to
initial commercial sales to Stryker Corporation, the Company's distributor of
HERMES. Development revenue associated with pre-clinical ZEUS activities in 1998
totaled $986,000, a slight decrease from the prior year.
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 revenue. AESOP robotic arm unit sales and average selling prices
increased by 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.
GROSS PROFIT - Gross profit increased $2,346,000 (63%) to $6,094,000 in 1998
from $3,748,000 in 1997. Gross margin increased to 57.6% in 1998 as compared to
56.7% in 1997. The increase in gross margin was primarily due to significantly
increased AESOP average selling prices and
<PAGE> 2
some efficiencies of scale associated with increased unit production, offset in
part by costs associated with the ZEUS product line as older products in the
field were replaced with upgraded or new products. Pressure on gross margins
will continue until the Company receives FDA clearance for ZEUS and is able to
produce and sell at a greater volume.
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 efficiencies of scale associated with
increased unit production.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative
expenses increased $3,327,000 (43%) to $11,117,000 in 1998 as compared to
$7,790,000 in 1997. The increase was due mainly to the addition of sales and
marketing personnel and related recruiting and relocation costs, greater travel
and business expenses, and higher commissions based on the increased sales.
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.
RESEARCH AND DEVELOPMENT - Research and development expenses increased
$3,756,000 (91%) to $7,905,000 in 1998 as compared to $4,149,000 in 1997,
primarily as a result of additional personnel and increased research and
development efforts with respect to HERMES and ZEUS, as well as for building
additional research and development, new product introduction, regulatory and
clinical affairs infrastructure.
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 research and development
and regulatory infrastructure.
OTHER INCOME - Other income was $1,408,000 in 1998 compared to other expense of
$1,015,000 in 1997. Other income in 1998 was almost entirely interest income
derived from proceeds from the Company's initial public offering which was
completed in August 1997. 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 in connection 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 of $485,000 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 state income taxes have been recorded on
the Company's pre-tax losses to date. At December 31, 1998, the Company had
federal and state net operating loss carryforwards of approximately $28,000,000
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 five 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 $33,198,000 as of December 31, 1998.
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 and the Company completed its initial public offering ("IPO") in
August 1997 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.
In September 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
<PAGE> 3
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 $728,000. Total net proceeds to the Company from the IPO
and the exercise of the over-allotment option, after deducting underwriting
discounts and commissions and total direct offering expenses, were $36,705,000.
The Company has used $3,250,000 of the net proceeds from the IPO to repay
certain outstanding indebtedness, certain holders of which were officers,
directors and persons owning in excess of ten percent of the Company's common
stock, and $2,274,000 to make capital purchases from unrelated third parties.
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, 1998, the Company's current ratio (current assets divided by
current liabilities) was 7.8 to 1 versus 14.9 to 1 at December 31, 1997,
reflecting the initial public offering proceeds and the use thereof.
For the year ended December 31, 1998, the Company's use of cash in operating
activities of $12,500,000 was primarily attributable to the net loss and also to
increases in accounts receivable and inventory in support of the Company's
revenue growth.
Cash outflow from purchases of plant and equipment was $1,784,000 in 1998. 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, 1998, net cash provided by financing
activities of $2,863,000 was almost entirely attributable to the exercise of
stock options and warrants totaling $2,841,000.
The Company's operations to date have consumed substantial amounts of cash, and
the Company expects its capital 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, at a minimum, through 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 appropriate sales
and marketing 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.
The Company's financial instruments include cash and short-term investment grade
debt securities. At December 31, 1998, the carrying values of the Company's
financial instruments approximated their fair values based on current market
prices and rates. It is the Company's policy not to enter into derivative
financial instruments. The Company does not currently have material foreign
currency exposure as the majority of its international transactions are
denominated in U.S. currency. Accordingly, the Company does not have significant
overall currency exposure at December 31, 1998.
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 market acceptance. ZEUS has not achieved United
States regulatory clearance. Government regulation of the medical device
industry is strict and the regulatory clearance process is 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. 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 and ZEUS product
lines. 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, 1998.
<PAGE> 4
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenue $ 10,586,000 $ 6,611,000 $ 4,057,000
Cost of revenue 4,492,000 2,863,000 2,627,000
------------ ------------ ------------
Gross profit 6,094,000 3,748,000 1,430,000
------------ ------------ ------------
Research and development expense 7,905,000 4,149,000 1,359,000
Selling, general and administrative expense 11,117,000 7,790,000 4,144,000
------------ ------------ ------------
Loss from operations (12,928,000) (8,191,000) (4,073,000)
------------ ------------ ------------
Other expense (income) (1,408,000) 1,015,000 485,000
------------ ------------ ------------
Loss before taxes (11,520,000) (9,206,000) (4,558,000)
------------ ------------ ------------
Income tax provision 25,000 13,000 1,000
------------ ------------ ------------
Net loss $(11,545,000) $ (9,219,000) $ (4,559,000)
------------ ------------ ------------
Net loss per share - basic and diluted $ (1.45) $ (2.12) $ (2.68)
------------ ------------ ------------
Shares outstanding for per share purposes 7,959,000 4,343,000 1,701,000
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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. as of December 31, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
- ---------------------------------
ARTHUR ANDERSEN LLP
Woodland Hills, California
February 2, 1999
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 5,577,000 $ 22,555,000
Marketable securities 15,736,000 10,179,000
Accounts receivable, net of allowance for doubtful
accounts of $254,000 in 1998 and $62,000 in 1997 2,856,000 1,804,000
Inventories
Raw materials 1,588,000 688,000
Work in process 344,000 70,000
Finished goods 1,349,000 234,000
------------ ------------
Total inventories 3,281,000 992,000
Prepaid expenses 347,000 283,000
------------ ------------
Total current assets 27,797,000 35,813,000
------------ ------------
Property and equipment
Furniture and fixtures 950,000 617,000
Computer equipment 1,307,000 741,000
Machinery and equipment 1,807,000 936,000
Accumulated depreciation (1,689,000) (1,186,000)
------------ ------------
Property and equipment, net 2,375,000 1,108,000
------------ ------------
Other assets 272,000 392,000
------------ ------------
Total assets $ 30,444,000 $ 37,313,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,623,000 $ 1,218,000
Accrued expenses 1,951,000 1,180,000
------------ ------------
Total current liabilities 3,574,000 2,398,000
------------ ------------
Shareholders' equity
Common stock -- $.001 par value
Authorized -- 25,000,000 shares
Outstanding -- 1998 - 8,353,725 shares; 1997 - 7,670,589 shares 8,000 8,000
Additional paid-in capital 60,813,000 58,341,000
Deferred compensation (753,000) (1,781,000)
Accumulated deficit (33,198,000) (21,653,000)
------------ ------------
Total shareholders' equity 26,870,000 34,915,000
------------ ------------
Total liabilities and shareholders' equity $ 30,444,000 $ 37,313,000
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 6
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<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 December 31, 1995 $ 2,606,000 $ -- $ -- $ -- $( 7,875,000) $( 5,269,000)
----------- ------ ------------ ----------- ------------ ------------
Stock issued 785,000 -- 118,000 -- -- 903,000
Exercise of options -- -- 42,000 -- -- 42,000
Value of warrants issued in
connection with debt -- -- 632,000 -- -- 632,000
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 December 31, 1996 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 December 31, 1997 -- 8,000 58,341,000 (1,781,000) (21,653,000) 34,915,000
----------- ------ ------------ ----------- ------------ ------------
Common stock issued -- -- 46,000 -- -- 46,000
Exercise of options -- -- 1,094,000 -- -- 1,094,000
Exercise of warrants -- -- 1,471,000 -- -- 1,471,000
Amortization of deferred
compensation -- -- (400,000) 1,028,000 -- 628,000
Stock purchase plan -- -- 276,000 -- -- 276,000
IPO expenses and other -- -- (15,000) -- -- (15,000)
Net loss -- -- -- -- (11,545,000) (11,545,000)
----------- ------ ------------ ----------- ------------ ------------
Balance December 31, 1998 $ -- $8,000 $ 60,813,000 $( 753,000) $(33,198,000) $ 26,870,000
=========== ====== ============ =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
COMMON SHARES PREFERRED SHARES
--------------------------------------- -------------------------
1996 1997 1998 1996 1997
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Beginning balance 1,695,173 1,734,289 7,670,589 1,393,114 1,474,545
--------- --------- --------- --------- ----------
Issued 25,890 125,734 91,747 81,431 323,871
Issued on IPO -- 2,875,000 -- -- --
Exercise of options 13,226 187,653 254,780 -- --
Conversion of preferred -- 2,344,387 -- -- (1,798,416)
Exercise of warrants -- 31,051 309,827 -- --
Conversion of debt -- 363,743 -- -- --
Stock purchase plan -- 8,732 26,782 -- --
--------- --------- --------- --------- ----------
Ending balance 1,734,289 7,670,589 8,353,725 1,474,545 --
========= ========= ========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(11,545,000) $( 9,219,000) $(4,559,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 518,000 379,000 346,000
Provision for doubtful accounts 298,000 28,000 70,000
Loss on sale of fixed assets 5,000 1,000 8,000
Common stock issued for services 46,000 66,000 23,000
Financing cost of warrants issued with debt
and fixed conversion of convertible debenture -- 1,442,000 189,000
Compensation for stock options, warrants and
common stock issued below fair market value 628,000 1,057,000 --
Working capital changes:
Accounts receivable (1,350,000) (747,000) (818,000)
Inventories (2,289,000) (347,000) 149,000
Prepaid expenses (65,000) (195,000) (32,000)
Accounts payable 405,000 316,000 678,000
Accrued expenses 849,000 212,000 459,000
------------ ------------ -----------
Net cash used in operating activities (12,500,000) (7,007,000) (3,487,000)
------------ ------------ -----------
Cash Flows from Investing Activities:
Purchases of property and equipment (1,784,000) (816,000) (116,000)
Proceeds from sale of property and equipment -- -- 14,000
Purchases of short-term investments (5,557,000) (10,179,000) --
------------ ------------ -----------
Net cash used in investing activities (7,341,000) (10,995,000) (102,000)
------------ ------------ -----------
Cash Flows from Financing Activities:
Net proceeds from (repayment of) debt (78,000) (4,488,000) 3,209,000
Proceeds from common stock and warrant
issuance, net of repurchases 1,747,000 5,470,000 1,000
Proceeds from IPO, net of expenses (35,000) 36,740,000 --
Proceeds from preferred stock issuance -- 2,341,000 785,000
Proceeds from exercise of stock options 1,094,000 272,000 42,000
Other 135,000 (211,000) (79,000)
------------ ------------ -----------
Net cash provided by financing activities 2,863,000 40,124,000 3,958,000
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents (16,978,000) 22,122,000 369,000
Cash and cash equivalents, beginning of year 22,555,000 433,000 64,000
------------ ------------ -----------
Cash and cash equivalents, end of year $ 5,577,000 $ 22,555,000 $ 433,000
============ ============ ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 8
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's primary efforts are directed toward developing and commercializing
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 be the world's 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 clearances and approvals,
developing its markets, acceptance of its products, reimbursement for its
products, financing its operations, managing its 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 revenue as products are shipped and
as services are performed. The Company also recognizes revenue under contracts
with healthcare institutions to research, develop and test certain Company
products which have not yet received regulatory clearances.
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 - 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 during the financial
statement period.
CASH EQUIVALENTS - Cash equivalents, consisting of liquid investments with a
maturity of three months or less when purchased, are stated at cost which
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 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 seventeen years.
NOTE 2: STOCK PURCHASE AND OPTION PLANS
STOCK PURCHASE - The Company's employee stock purchase plan allows participating
employees to purchase, through payroll deductions, shares of the Company's
common stock at 85% of the fair market value at specified dates. Under the terms
of the plan, 129,668 shares of the Company's common stock have been reserved for
purchase by plan participants. Employees purchased 26,782 and 8,732 shares in
1998 and 1997, respectively. At December 31, 1998, 94,154 shares were available
for purchase under the plan.
STOCK OPTIONS - Under the terms of the Company's stock incentive plans,
2,593,361 shares of common stock have been reserved for issuance to
<PAGE> 9
directors, officers, employees and service providers upon the grant of
restricted stock or the exercise of stock options. Stock options are generally
exercisable over periods up to 10 years from date of grant and may be "incentive
stock options" or "non-qualified stock options." At December 31, 1998, there
were a maximum of 429,617 shares available for grant and 1,665,448 options
outstanding, of which 627,837 shares were exercisable at a weighted price of
$4.68 per share. The weighted average contractual life of options outstanding at
December 31, 1998 was 8.3 years. Stock option activity was as follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVG. PRICE
OUTSTANDING PER SHARE
----------- ----------
<S> <C> <C>
Balance - 12/31/95 623,884 $ 2.72
Granted 961,859 $ 4.57
Canceled (230,757) $ 2.95
Exercised (13,226) $ 3.20
--------- ------
Balance - 12/31/96 1,341,760 $ 4.01
--------- ------
Granted 650,789 $ 8.44
Canceled (71,421) $ 4.57
Exercised (187,653) $ 1.45
--------- ------
Balance - 12/31/97 1,733,475 $ 6.34
--------- ------
Granted 657,950 $10.61
Canceled (471,197) $ 9.12
Exercised (254,780) $ 4.30
--------- ------
Balance - 12/31/98 1,665,448 $ 7.10
========= ======
</TABLE>
Pursuant to the terms of the 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
acquired from the optionee are valued at fair market value 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 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 $650,000 and $1,057,000 was recognized in 1998 and 1997, respectively. At
December 31, 1998, deferred (unamortized) compensation expense relating to stock
options was $753,000 and will be recognized as compensation expense over the
balance of the vesting periods of the stock options.
Under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," the Company has elected to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related accounting interpretations. Accordingly, no compensation
expense has been recognized related to the granting of stock options, except as
noted above. If compensation expense related to stock options was determined
based upon their grant date fair 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 $1,295,000 ($.16 per share), $718,000 ($.17 per
share) and $239,000 ($.14 per share) for 1998, 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected life (years) 7.0 7.0 7.0
Interest rate 5.5% 6.0% 7.5%
Volatility 40% 10% 0%
Dividend yield 0% 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 7 years from date of issuance. At December 31, 1998,
1,317,083 warrants were exercisable. Warrant activity was as follows:
<PAGE> 10
<TABLE>
<CAPTION>
WEIGHTED
WARRANTS AVG. PRICE
OUTSTANDING PER SHARE
----------- ----------
<S> <C> <C>
Balance - 12/31/95 163,792 $ 4.57
---------- --------
Granted 1,137,496 $ 5.27
---------- --------
Balance - 12/31/96 1,301,288 $ 5.18
---------- --------
Granted 356,673 $ 7.43
Exercised (31,051) $ 5.23
---------- --------
Balance - 12/31/97 1,626,910 $ 5.34
---------- --------
Exercised (309,827) $ 4.75
---------- --------
Balance - 12/31/98 1,317,083 $ 5.48
========== ========
</TABLE>
NOTE 4: INCOME TAXES
Income taxes for all years presented consisted of minimum state income taxes
only. Net deferred income tax assets at December 31, 1998 and 1997 consisted of
the following:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Allowance for doubtful accounts $ 102,000 $ 25,000
Accrued liabilities 80,000 67,000
Deferred rent 53,000 39,000
Depreciation and amortization 74,000 20,000
Uniform capitalization costs 337,000 60,000
Net operating loss carryforwards 9,950,000 7,761,000
Tax credits 771,000 390,000
Other 52,000 7,000
------------ -----------
Total deferred income tax asset 11,419,000 8,369,000
Valuation reserve (11,419,000) (8,369,000)
------------ -----------
Net deferred income tax asset $ -- $ --
============ ===========
</TABLE>
The income tax provision reconciles to the amount computed by applying the
federal statutory rate to loss before taxes as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Expected federal benefit $(3,917,000) $(3,222,000) $(1,595,000)
State income taxes, net of federal income tax effect 25,000 13,000 1,000
Tax benefits not recognized 3,917,000 3,222,000 1,595,000
----------- ----------- -----------
Income tax provision $ 25,000 $ 13,000 $ 1,000
=========== =========== ===========
</TABLE>
At December 31, 1998, the Company had federal and state net operating loss (NOL)
carryforwards of approximately $28,000,000 and $8,000,000, respectively and
research and development tax credit carryforwards of approximately $771,000. The
federal tax credit and NOL carryforwards expire fifteen years from the year of
loss and are restricted if significant changes in Company ownership occur. The
state NOL carryforwards expire five years from the year of loss.
Realization of deferred tax assets is dependent on generating sufficient taxable
income during the periods in which the temporary differences will reverse. The
amount of the deferred 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
DEBT - Warrants to purchase 1,064,645 shares of Company common stock were issued
in 1996 in connection with bridge financing debt. Under SFAS No. 123, the fair
market value of these warrants at the date of issuance totaling $632,000 was
recorded as additional paid-in capital and deferred financing cost. During 1997
and 1996, financing costs of $1,442,000 and $189,000, respectively were
expensed.
FINANCIAL INSTRUMENTS - Marketable securities consisted of bank certificates of
deposit, commercial paper, auction market preferred stock and corporate bonds,
all of which by policy must mature within 360 days. Under Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," all marketable securities are classified as held to
maturity and are carried at amortized cost which closely approximates fair
market value. No net realized gains or losses were recorded in any year.
The Company's investment portfolio at December 31, 1998 and 1997 consisted of
the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Certificates of deposit $ 1,000,000 $ 7,998,000
Commercial paper 8,686,000 9,005,000
Auction market preferreds -- 4,250,000
Corporate bonds 9,068,000 8,032,000
Cash 2,350,000 3,245,000
Interest receivable 209,000 204,000
----------- -----------
Total $21,313,000 $32,734,000
=========== ===========
</TABLE>
<PAGE> 11
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 condition 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 instrument;
therefore, credit loss is reduced.
NOTE 6: COMMITMENTS AND CONTINGENCIES
LEASES - Rent expense for the years ended December 31, 1998, 1997 and 1996 was
$629,000, $364,000 and $214,000, respectively. As of December 31, 1998, the
Company had the following minimum lease payments for certain facilities and
equipment under operating leases: 1999-$688,000; 2000-$703,000; 2001-$690,000;
2002-$283,000; and nothing in 2003 and thereafter.
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 arrangements with several third party financial institutions,
whereby the Company sells its leases, mainly without recourse. The Company
recognized approximately $3,511,000, $1,331,000 and $494,000 in revenues from
leases sold in 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997,
approximately $256,000 and $255,000, 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 includes features under
Section 401(k) of the Internal Revenue Code. All employees are eligible to
participate in the plan after meeting certain minimum service requirements.
Employees may make discretionary contributions to the plan subject to Internal
Revenue Code limitations. Employer contributions to the plan were $56,000 in
1998 and zero in 1997. For 1999, the Company anticipates contributing 25% of the
first four percent of a participant's salary contribution to the plan. Plan
participants are fully vested in their contributions to the plan and employer
contributions vest over two years.
NOTE 9: GEOGRAPHIC AREA
The Company operates in a single industry segment, the medical device industry.
Export sales from the United States were $1,225,000, $1,871,000 and $1,147,000
in 1998, 1997 and 1996, 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 preferred stock were converted
to common stock upon the Company's initial public offering in August 1997.
PREFERRED STOCK - At December 31, 1998, 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 such series,
and may determine the designation, terms and conditions of the issuance of any
such shares.
COMMON STOCK - During the year ended December 31, 1998, 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 591,389. Effective May
1997, a corporation which had invested $4,000,000 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.
<PAGE> 12
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 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998:
Revenue $ 2,077,000 $ 2,274,000 $ 2,807,000 $ 3,428,000
Gross profit $ 1,184,000 $ 1,323,000 $ 1,589,000 $ 1,998,000
Net loss $(2,730,000) $(3,004,000) $(2,994,000) $(2,817,000)
Loss per share $ (0.35) $ (0.38) $ (0.37) $ (0.35)
----------- ----------- ----------- -----------
Year Ended December 31, 1997:
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)
=========== =========== =========== ===========
</TABLE>
Full year 1997 loss per share was lower than the sum of the reported 1997
quarterly loss per share amounts due to significant changes in the number of
outstanding shares.
<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 2, 1999 included in the Company's 1998 Annual Report to
Shareholders incorporated by reference in this Form 10-K into the Company's
previously filed Form S-8 Registration Statement No. 333-35939. It should be
noted that we have not audited any financial statements of the Company
subsequent to December 31, 1998 or performed any audit procedures subsequent
to the date of our report.
/s/ Arthur Andersen, LLP
Woodland Hills, California
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND CONDENSED STATEMENTS OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,577,000
<SECURITIES> 15,736,000
<RECEIVABLES> 3,110,000
<ALLOWANCES> 254,000
<INVENTORY> 3,281,000
<CURRENT-ASSETS> 27,797,000
<PP&E> 4,064,000
<DEPRECIATION> 1,689,000
<TOTAL-ASSETS> 30,444,000
<CURRENT-LIABILITIES> 3,574,000
<BONDS> 0
0
0
<COMMON> 8,000
<OTHER-SE> 26,862,000
<TOTAL-LIABILITY-AND-EQUITY> 30,444,000
<SALES> 10,586,000
<TOTAL-REVENUES> 10,586,000
<CGS> 4,492,000
<TOTAL-COSTS> 4,492,000
<OTHER-EXPENSES> 1,000
<LOSS-PROVISION> 298,000
<INTEREST-EXPENSE> 38,000
<INCOME-PRETAX> (11,520,000)
<INCOME-TAX> 25,000
<INCOME-CONTINUING> (11,545,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,545,000)
<EPS-PRIMARY> (1.45)
<EPS-DILUTED> (1.45)
</TABLE>
