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AMENDMENT NO. 1
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDING SEPTEMBER 30, 2000
COMMISSION FILE NUMBER 000-22755
COMPUTER MOTION, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified on in its charter)
DELAWARE 77-0458805
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
130-B CREMONA DRIVE
GOLETA, CA 93117
--------------------------------------------------------------------------------
(Address of principal executive offices)
(805) 968-9600
(Registrant's telephone number, including area code)
Indicate by check [X] whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No
--- ---
As of November 27, 2000 there were 10,101,149 shares of the Registrant's common
stock outstanding.
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COMPUTER MOTION, INC.
INDEX TO FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2000
INDEX PAGE
----- ----
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Operations 3
Condensed Balance Sheets 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 11
PART II. - OTHER INFORMATION
Item 1. Litigation 11
Item 2. Changes in Securities and Use of Proceeds 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPUTER MOTION, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -------------------------
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 6,211 $ 5,358 $ 13,541 $ 14,009
Cost of revenue 2,545 2,143 5,616 5,836
------- ------- -------- --------
Gross profit 3,666 3,215 7,925 8,173
------- ------- -------- --------
Research & development expense 2,983 2,134 8,552 6,665
Selling, general & administrative expense 4,235 3,202 11,504 9,166
------- ------- -------- --------
Total operating expense 7,218 5,336 20,056 15,831
------- ------- -------- --------
Loss from operations (3,552) (2,121) (12,131) (7,658)
Other expense/(income) 39 (145) 76 (572)
------- ------- -------- --------
Loss before income taxes (3,591) (1,976) (12,207) (7,086)
Income tax provision 6 7 18 20
------- ------- -------- --------
Net loss (3,597) (1,983) (12,225) (7,106)
------- ------- -------- --------
Dividend to warrant holders 1,362 -- 1,362 --
------- ------- -------- --------
Net loss available to common shareholders $(4,959) $(1,983) $(13,587) $ (7,106)
======= ======= ======== ========
Weighted average common shares outstanding
used to compute net loss per share - basic
and diluted 9,509 8,540 9,022 8,449
======= ======= ======== ========
Net loss available to common shareholders
per share - basic and diluted $ (0.52) $ (0.23) $ (1.51) $ (0.84)
======= ======= ======== ========
</TABLE>
See notes to condensed financial statements.
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COMPUTER MOTION, INC.
CONDENSED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999(1)
------------- ------------
Unaudited
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,520 $ 4,297
Marketable securities -- 3,224
Accounts receivable 8,540 6,203
Inventories 4,767 5,009
Other current assets 453 332
-------- --------
Total current assets 18,280 19,065
Property and equipment, net 4,317 2,933
Other assets 85 1,363
-------- --------
Total assets $ 22,682 $ 23,361
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to shareholder $ 1,500 $ --
Accounts payable 2,705 3,235
Accrued expenses 3,720 2,917
Deferred revenue 1,464 317
-------- --------
Total current liabilities 9,389 6,469
Deferred revenue, net of current portion 1,293 970
Other liabilities 3 103
-------- --------
Total liabilities 10,685 7,542
-------- --------
Shareholders' equity
Preferred stock, authorized 5,000 shares,
issued and outstanding none -- --
Common stock, $.001 par value, authorized
25,000 shares outstanding - 10,095 and
8,745 shares 10 9
Additional paid-in capital 72,457 62,663
Deferred compensation (144) (247)
Accumulated deficit (60,160) (46,573)
Other comprehensive income/(loss) (166) (33)
-------- --------
Total shareholders' equity 11,997 15,819
-------- --------
Total liabilities & shareholders' equity $ 22,682 $ 23,361
======== ========
</TABLE>
-------------
(1) Derived from audited financial statements for the year ended
December 31, 1999.
See notes to condensed financial statements.
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COMPUTER MOTION, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(12,225) $ (7,106)
Adjustments to reconcile net loss to cash used
by operating activities:
Depreciation and amortization 1,003 672
Provision for doubtful accounts and
sales allowances 660 579
(Gain)/loss on sale of fixed assets -- 11
Amortization of deferred compensation 103 187
Other -- 34
Decrease/(increase) in:
Accounts receivable (1,736) (6,545)
Inventories 242 (304)
Other current assets (121) (219)
Increase/(decrease) in:
Accounts payable (530) 564
Deferred revenue 1,470 --
Accrued expenses 803 707
-------- --------
Net cash used in operating activities (10,331) (11,420)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (2,387) (1,144)
Net proceeds from short-term investments 3,224 9,802
-------- --------
Net cash provided by investing activities 837 8,658
-------- --------
Cash flows from financing activities:
Proceeds from common stock and warrant issuance 7,978 124
Proceeds from note payable to shareholder 1,500 --
Options exercised 455 1,053
Other (216) (16)
-------- --------
Net cash provided by financing activities 9,717 1,161
-------- --------
Increase (decrease) in cash and cash equivalents 223 (1,601)
Cash and cash equivalents at beginning of period 4,297 5,577
-------- --------
Cash and cash equivalents at end of period $ 4,520 $ 3,976
======== ========
</TABLE>
See notes to condensed financial statements.
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COMPUTER MOTION, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
financial information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included.
The operating results of the interim periods presented are not
necessarily indicative of the results expected for the year ending December 31,
2000 or for any other interim period. The accompanying condensed financial
statements should be read in conjunction with the audited financial statements
and notes thereto for the year ended December 31, 1999 included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999 as filed with
the Securities and Exchange Commission.
NOTE 2. NET LOSS PER SHARE
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings
Per Share," requires presentation of both basic and diluted net loss per share
in the financial statements. The Company's basic net loss per share is the same
as its diluted net loss per share because inclusion of outstanding stock options
and warrants in the calculation is antidilutive. Basic and diluted loss per
share is calculated by dividing net loss available to common shareholders by the
weighted average number of common shares outstanding for the period.
The net loss per share for the three months and nine months ended
September 30, 2000 have been adjusted to include the fair value of 361,530
additional warrants provided to certain warrant holders as an incentive to
exercise their existing warrants. The Company is required to show the Black
Scholes impact of this additional issuance as a dividend in the net loss
computation for loss per share. This is a non-cash transaction involving the
charging of $1,362,000, to accumulated deficit and crediting additional paid-in
capital. Had the Company not issued the additional warrants, net loss per share
on a pro forma basis would have been ($0.38) and ($1.36), respectively (See
Note 5 of notes to condensed financial statements). Pro forma data is as
follows:
<TABLE>
<CAPTION>
Period Ended September 30, 2000
-------------------------------
Three Months Nine Months
Unaudited Unaudited
------------ -----------
<S> <C> <C>
Unaudited pro forma per share data - basic and diluted:
Net loss available to common shareholders per share $(0.52) $(1.51)
Dividend to warrant holders per share (0.14) (0.15)
------ ------
Pro forma net loss per share $(0.38) $(1.36)
====== ======
</TABLE>
NOTE 3. SHAREHOLDER RIGHTS
On June 14, 1999, the Board of Directors of the Company approved the
adoption of a Shareholder Rights Plan and declared a dividend distribution of
one Right for each outstanding share of the Company's common stock to
shareholders of record on the close of business on June 28, 1999. Reference is
made to the Company's Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on June 18, 1999.
NOTE 4. CONVERTIBLE PROMISSORY NOTE AND PRIVATE PLACEMENT
On March 31, 2000, the Company issued a convertible promissory note to
the Company's Chief Executive Officer in the amount of $3,000,000. Interest on
the convertible note accrued at the prime rate. At the Annual Meeting held on
June 15, 2000, the stockholders approved the conversion of the note and accrued
interest outstanding to be converted into common stock. The conversion price per
share shall be derived from the price per share of the next private placement of
the Company's securities (the "Private Placement"). On June 29, 2000 the Company
completed a Private Placement for 594,891 shares of common stock at a price of
$7.67 totaling $4,562,000, which included the conversion of the $3,000,000
promissory note and accrued interest for a total of $3,048,000. On July 25, 2000
the Company's Chief Executive Officer loaned the Company $1,500,000 due on
demand with interest at the prime rate.
NOTE 5. WARRANTS
On August 31, 2000, the Company offered current warrant holders an
incentive to exercise their warrants. On all warrants exercised prior to
September 22, 2000 an additional five year warrant would be
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issued for 55% of the total warrants exercised. Warrants totaling 657,332
shares were exercised and new five year warrants totaling 361,533 shares were
issued at $9.178 per warrant. The exercise price per share for all shares of
common stock subject to the additional warrants is 110% of the average closing
price per share as reported on the Nasdaq National Market for the ten trading
days prior to August 31, 2000. The fair market value of the warrants at the
grant date was estimated using the Black-Scholes model of $1,362,000, which was
charged to accumulated deficit and credited to additional paid-in capital.
NOTE 6. SHIPMENTS TO DISTRIBUTOR
In June, 2000 the Company shipped four (4) ZEUS(TM) systems and related
equipment totaling approximately $2,668,000 to Kino Corporation in Japan under
its Distribution Agreement dated April 25, 2000. The Company recorded
approximately $2,408,000 in revenue from this transaction during the second
quarter. The product was shipped on irrevocable purchase orders and as of
September 30, 2000 approximately 75% has been paid.
In September, 2000 the Company shipped three (3) ZEUS systems and
related equipment totaling approximately $1,208,000 to two distributors. The
Company recorded approximately $896,000 in revenue from these transactions
during the quarter. The product was shipped on irrevocable purchase orders and
both distributors have been given ninety (90) day payment terms.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This report contains forward looking statements that involve risks and
uncertainties. The Company's actual results may differ materially due to factors
that include, but are not limited to, the risks discussed herein under "Risk
Factors That May Affect Future Results" as well as those discussed in the "Risk
Factors That May Affect Future Results" section of the Company's Annual Report
on Form 10-K for the year ended December 31, 1999.
OVERVIEW
Computer Motion, Inc. (the "Company") develops and markets proprietary
robotic and computerized surgical systems that are intended to enhance a
surgeon's performance and centralize and simplify a surgeon's control of the
operating room ("OR"). The Company believes that its products will provide
surgeons with the precision and dexterity necessary to perform complex,
minimally invasive surgical procedures, as well as enable surgeons to control
critical devices in the OR through simple verbal commands. The Company believes
that its products will broaden the scope and increase the effectiveness of
minimally invasive surgery, improve patient outcomes, and create a safer, more
efficient and cost effective OR.
The Company's AESOP(R) robotic endoscope positioning system is Food and
Drug Administration ("FDA") cleared. AESOP allows direct surgeon control of the
endoscope through simple verbal commands, eliminating the need for a member of a
surgical staff to manually control the camera and providing a more stable and
sustainable endoscopic image. The Company believes that AESOP is the world's
first FDA-cleared robot and first voice control interface for a surgical device.
Several hundred AESOP units have been sold worldwide, which the Company believes
have been used to perform tens of thousands of procedures.
The Company's HERMES(TM) Control Center is designed to enable a surgeon
to directly control multiple OR devices, including various laparoscopic,
arthroscopic and video devices, as well as the Company's robotic devices,
through simple verbal commands. HERMES also provides standardized visual and
digitized voice feedback to a surgical team. The Company believes that the
enhanced control and feedback provided by HERMES has the potential to improve
safety, increase efficiency, shorten procedure times and reduce costs. Ten
510(k) submissions relating to HERMES have been cleared by the FDA and Stryker
Corporation's Endoscopy Division is currently marketing HERMES under an OEM
agreement with the Company.
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The Company's ZEUS(TM) Robotic Surgical System is designed to
fundamentally improve a surgeon's ability to perform complex surgical procedures
and enable new, minimally invasive surgical procedures, including fully
endoscopic coronary artery bypass grafts ("E-CABG(TM)") on a beating heart,
which are currently very difficult or impossible to perform endoscopically. ZEUS
is comprised of three surgeon-controlled robotic arms, one of which positions
the endoscope and two of which manipulate surgical instruments. The Company
believes that ZEUS will improve a surgeon's dexterity and precision and enhance
visualization of, and access to, confined operative sites. The Company also
believes that new minimally invasive surgical procedures performed with ZEUS
will result in reduced patient pain and trauma, fewer complications, lessened
cosmetic concerns and shortened convalescent periods and will increase the
number of patients qualified for certain surgical procedures. In addition, the
Company believes that an increase in minimally invasive procedures will
ultimately result in lower overall healthcare costs to providers, payors and
patients. The Company has completed feasibility clinical trials for both
ZEUS-based tubal reanastomosis procedures and ZEUS-based cardiac procedures
under Investigational Device Exemptions ("IDE") and is currently enrolling
patients. Based upon a series of meetings with FDA in May 2000, the Company has
submitted applications for IDE approval to commence multi-center pivotal
ZEUS-based laparoscopic and cardiac clinical trials in the United States. On
July 11, 2000, the Company was notified by FDA that the ZEUS system would be
cleared for market under the 510(k) premarket notification process instead of
the longer premarket approval process. The FDA has granted the Company approval
for commencement of pivotal randomized control trials for Coronary Artery Bypass
(CABG), Thorocoscopic surgery, and General Laparoscopic surgery. The Company has
initiated a feasibility clinical trial in which ZEUS is used in mitral valve
repair and replacement surgery and is enrolling patients.
RESULTS OF OPERATIONS
Three months ended September 30, 2000 compared to the three months ended
September 30, 1999.
Revenue. Revenue increased $853,000 (16%) to $6,211,000 for the three
months ended September 30, 2000 from $5,358,000 for the same period in 1999. The
Company's ZEUS product line was principally responsible for the revenue
increase. ZEUS revenue of $3,488,000 for the quarter was up 40% from prior year
levels and resulted mainly from increased demand for the product. AESOP third
quarter revenue of $2,080,000 increased 1% over the previous year's third
quarter. HERMES revenue of $643,000 for the quarter was down (21%) from prior
year due to decrease systems shipped to the Company's OEM initial HERMES
alliance partner, Stryker Corporation.
Gross Profit. Gross profit increased $451,000 (14%) to $3,666,000 for
the three months ended September 30, 2000 from $3,215,000 for the same period in
1999. Gross margin decreased slightly as a percent of sales to 59% in the third
quarter 2000 from 60% in the third quarter 1999.
Research and Development. Research and development expense increased
$849,000 (40%) to $2,983,000 for the three months ended September 30, 2000 from
$2,134,000 for the same period in 1999, primarily as a result of the addition of
personnel, and increased development efforts for pre-clinical and clinical trial
activities related principally to ZEUS. Professional fees increased
substantially related to the patent infringement lawsuit the Company has filed
against a competitor. The Company expects research and development expenditures
to increase as it continues to develop its products and conduct clinical trials.
Selling, General and Administrative. Selling, general and administrative
expense increased $1,033,000 (32%) to $4,235,000 for the three months ended
September 30, 2000 from $3,202,000 for the same period in 1999. The increase was
due mainly to the addition of field support personnel as the Company expanded it
worldwide sales, service and training capability. The new hires caused increased
recruiting and relocation costs, and higher travel and business related
expenses. The Company expects selling, general and administrative expense to
increase in future periods as it continues to expand its revenue and its sales,
service and training capability.
Other Expense (Income). Other expense of $39,000 for the three months
ended September 30, 2000 compared to other income of $145,000 for the three
months ended September 30, 1999. Other expense for the
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current period was comprised of interest expense on the Note Payable and other
expenses. For the prior period other income was principally comprised of
interest income derived from proceeds of the Company's IPO that was completed
in August 1997.
Income Taxes. Minimal provisions for state franchise taxes have been
recorded on the Company's pre-tax losses to date. As of December 31, 1999, the
Company had federal and state net operating loss (NOL) carryforwards of
approximately $36,000,000 and $7,500,000, respectively which are available to
offset future federal and state taxable income. Federal carryforwards expire
twenty years after the year of loss and state carryforwards expire seven years
after the year of loss. The Company has provided a full valuation allowance on
the deferred tax asset because of the uncertainty regarding its realization.
Net Loss. The net loss for the third quarter 2000 was $3,597,000 ($.38
per share) compared to $1,983,000 ($.23 per share) for the third quarter 1999 as
increased gross profit derived from increased revenue was more than offset by
the sum of increased operating expenses and reduced other income. Weighted
average shares increased from 8,540,000 to 9,509,000 mainly as a result of the
exercise of stock options, issuance of shares under the Company's employee stock
purchase plan and the Company's Private Placement and warrant exercise. (See
Notes 4 and 5 of notes to condensed financial statements).
Nine months ended September 30, 2000 compared to the nine months ended
September 30, 1999.
Revenue. Revenue decreased $468,000 (3%) to $13,541,000 for the nine
months ended September 30, 2000 from $14,009,000 for the same period in 1999.
The decrease resulted principally from lower HERMES revenues which decreased
$1,854,000 (57%), along with decrease AESOP revenues of $171,000 (3%) while ZEUS
revenues increased $1,557,000 (29%).
Gross Profit. Gross profit decreased $248,000 (3%) to $7,925,000 for the
nine months ended September 30, 2000 from $8,173,000 for the same period in
1999. Gross margin increased as a percent of sales to 59% from 58% between the
two periods. Pressure on gross margin will continue until the Company receives
FDA clearance for ZEUS and is able to produce and sell at greater volume.
Research and Development. Research and development expense increased
$1,887,000 (28%) to $8,552,000 for the first nine months of 2000 from $6,665,000
for the first nine months of 1999, primarily as a result of additional
personnel, increased development efforts with respect to HERMES and ZEUS, and
pre-clinical and clinical activities associated with ZEUS, along with increased
professional fees associated with the patent infringement lawsuit the Company
has filed against a competitor.
Selling, General and Administrative. Selling, general and administrative
expense increased $2,338,000 (26%) to $11,504,000 for the first nine months as
compared to $9,166,000 for the first nine months of 1999. The increase was due
to the addition of sales and managerial personnel, related recruiting and
relocation costs, greater travel and business expenses.
Other Expense (Income). Other expense of $76,000 for the first nine
months of 2000 compared to other income of $572,000 for the first nine months of
1999. Other expense for the current period was comprised of interest expense on
the convertible promissory note (See Note 4 of notes to condensed financial
statements) issued March 31, 2000 and converted June 29, 2000 and note payable
offset by interest income in the first quarter of the year. Other income for the
first nine months of 1999 was mainly interest income derived from the proceeds
of the Company's IPO which was completed in August 1997.
Net Loss. The net loss for the first nine months of 2000 was $12,225,000
($1.36 per share) compared to $7,106,000 ($.84 per share) for the first nine
months of 1999 was due to increased operating expenses and reduced other income.
Weighted average shares outstanding increased from 8,449,000 to 9,022,000
mainly as a result of the exercise of stock options, issuance of shares under
the Company's employee stock purchase plan, the Company's Private Placement (See
Note 4 of notes to condensed financial statements) and warrant exercise (See
Notes 4 and 5 of notes to condensed financial statements).
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FINANCIAL CONDITION
Since its inception, the Company's expenses have exceeded its revenues,
resulting in an accumulated deficit of $60,160,000 as of September 30, 2000.
Until its initial public offering in August 1997, the Company had primarily
relied on proceeds from issuance of preferred and common stock and bridge debt
financing to fund its operations.
At September 30, 2000 the Company's current ratio (current assets
divided by current liabilities) was 1.9 to 1 versus 2.9 to 1 at December 31,
1999, reflecting the decrease in cash and marketable securities as the proceeds
from the initial public offering were used to support operations, offset by the
increase in cash of the $4,562,000 from the private placement and $3,402,000
from the warrant exercise.
For the nine months ended September 30, 2000, the Company's use of cash
in operating activities of $10,331,000 was primarily attributable to the net
loss adjusted for depreciation, amortization and provision for doubtful
accounts. Cash outflow from purchases of plant and equipment was $2,387,000 for
the nine months ended September 30, 2000. The Company currently has no material
commitments for capital expenditures but has procured additional leased space in
anticipation of continued business growth. For the nine months ended September
30, 2000, net cash provided by financing activities of $9,717,000 was
substantially attributable to the $4,562,000 private placement (See Note 4 of
notes to condensed financial statements), $1,500,000 note payable to
shareholder, warrants totaling $3,416,000 (See Note 5 of notes to condensed
financial statements) and the exercise of stock options totaling $455,000.
The Company's operations to date have consumed substantial amounts of
cash, and the Company expects its capital and operating expenditures to continue
to exceed proceeds from ongoing sales at least through 2000. 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. The Company plans to raise additional funds through
public or private equity financing and is also planning to obtain a bank line of
credit. There can be no assurance that additional financing, when required,
would be available on acceptable terms, if at all. The Company believes that it
will be able to raise the funds necessary to sustain operations through December
31, 2000. However, the Company may require substantial working capital to fund
our business and may need to raise additional capital. The Company cannot be
certain that additional funds will be available on satisfactory terms when
needed, if at all. If adequate funds are not available, the Company's business,
financial condition and results of operations could be adversely affected.
The various elements of our business and growth strategies, including
our introduction of new products, the expansion of our marketing distribution
activities and obtaining regulatory approval or market acceptance will require
additional capital. If we are unable to raise additional necessary capital in
the future, we may be required to significantly curtail our operations or obtain
funding through the relinquishment of significant technology or markets.
The Company's financial instruments include cash and short-term
investment grade debt securities. At September 30, 2000, 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
currency exposure at September 30, 2000.
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. The following
discussion summarizes some of these risks, which could affect
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our actual future results and could cause them to differ materially from any
forward-looking statements we have made.
Our growth and operating results could be impaired if we are unable to
meet our future capital requirements.
We have a limited operating history and have not yet made a profit. The
ZEUS product line is important to our future success and has not achieved U.S.
regulatory clearance, and none of our products have yet achieved significant
market acceptance. Government regulation of the medical device industry is
strict and regulatory approvals are generally lengthy, expensive and uncertain.
Third-party payors may be unwilling to reimburse hospitals for use of our
products. We have competition and there are alternative treatments and
procedures to using our products. Our products are subject to rapid
technological change and our success, in part, is based on our ability to obtain
patent protection for our products. Our patents are being, and may further be
challenged by others and others may assert that we are infringing their
proprietary rights. We cannot predict the outcome of such disputes and the
expenses of defending such actions may be substantial. We are dependent on sole
source suppliers for principal components of our products. Our anticipated
growth will place significant demands on our management and resources,
particularly in research and development, sales and marketing and manufacturing.
A more detailed discussion of factors that could affect our future results can
be found in the "Risk Factors That May Affect Future Results" section of the
Company's Annual Report on Form 10-K for the year ended December 31, 1999. We
strongly encourage you to review these risk factor disclosures and the Company's
Registration Statements on Form S-3 filed on May 19, 2000 and August 22, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include cash and short-term
investment grade debt securities. At September 30, 2000 the carrying values of
the Company's financial instruments approximated their fair values based on
current market prices and rates.
It is the Company's policy not to enter into derivative financial
instruments. The Company does not currently have material foreign currency
exposure as the majority of its international transactions are denominated in
U.S. currency. Accordingly, the Company does not have a significant currency
exposure at September 30, 2000.
PART II. OTHER INFORMATION
ITEM 1. LITIGATION
On May 10, 2000, the Company filed suit against Intuitive Surgical Inc.
alleging that Intuitive's da Vinci surgical robot system infringes on the
Company's United States Patent Nos. 5,878,193; 5,524,180; 5,762,458; 6,001,108;
5,815,640; 5,907,664; 5,855,583. On June 1, 2000 Computer Motion filed an
amended complaint alleging that Intuitive has also infringed the Company's
recently issued United States Patent No. 6,063,095. The Company's complaint
seeks damages for lost profits, injunctive relief enjoining any future
infringement of its patent rights, treble damages and attorneys fees.
On June 30, 2000, Intuitive served its Answer and Counterclaim alleging
non-infringement of each patent-in-suit, patent invalidity and unenforceability.
Other than request for attorney's fees, Intuitive has not requested any damages.
The Company has served discovery requests seeking a statement of the facts that
support Intuitive's defenses. Intuitive has provided partial responses to the
Company's discovery. The responses have been served under seal and the Company
is not privy to much of the information to Intuitive's underlying intentions.
The Company has initiated a motion to compel responses to its discovery
requests.
A pre-trial schedule has not been entered in the case. The Company
expects that the Court will set a status conference, during which the pre-trial
schedule is set, sometime before November 30, 2000. Intuitive
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has suggested that after an initial discovery phase the parties evaluate the
evidence and meet to discuss a possible settlement. The Company currently
intends to bring a motion for preliminary injunction and a motion for summary
judgment on the issues of invalidity and infringement.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Reference is made to the discussion of the use of proceeds of the
Company's initial public offering under the caption "Financial Condition" in
Management's Discussion and Analysis.
On March 31, 2000, the Company issued a convertible promissory note to
the Company's Chief Executive Officer in the amount of $3,000,000. Interest on
the convertible note accrued at the prime rate. At the Annual Meeting held on
June 15, 2000, the stockholders approved the conversion of the note and accrued
interest outstanding to be converted into common stock. The conversion price per
share shall be derived from the price per share of the next private placement of
the Company's securities (the "Private Placement"). On June 29, 2000 the Company
completed a Private Placement for 594,891 shares of common stock at a price of
$7.67 totaling approximately $4,562,000 which included the conversion of the
promissory note and accrued interest. The convertible promissory note was and
the shares of common or preferred stock to be issued upon the conversion of the
promissory note were issued in reliance upon the exemption provided by Section
4(2) of the Securities Act.
On August 31, 2000, the Company offered current warrant holders an
incentive to exercise their warrants. On all warrants exercised prior to
September 22, 2000 an additional five year warrant would be granted for 55% of
the total warrants exercised. Warrants totaling 657,332 shares of common stock
were exercised and new five year warrants totaling 361,533 shares were granted
at $9.178 per warrant. Daniel Dorian, a member of the Company's Board of
Directors, exercised four warrants for an aggregate of 58,690 shares of common
stock and received a new warrant to purchase 32,280 shares of common stock.
Yulun Wang, the Company's Chief Technical Officer, Executive Vice President and
member of the Company's Board of Directors, exercised a warrant for an aggregate
of 3,931 shares of common stock and received a new warrant to purchase 2,162
shares of common stock. Robert Duggan, the Company's Chief Executive Officer and
the Chairman of the Company's Board of Directors exercised eight warrants for an
aggregate of 271,617 shares of common stock and received a new warrant to
purchase 149,388 shares of common stock. The exercise price per share for all
shares of common stock subject to the additional warrants is 110% of the average
closing price per share as reported on the Nasdaq National Market for the ten
trading days prior to August 31, 2000. The fair market value of the warrants at
the grant date was estimated using the Black-Scholes model of $1,362,000 which
was charged to Accumulated deficit and credited to Additional paid-in capital.
The new warrants and the shares of common stock to be issued upon conversion of
the new warrants were and shall be issued in reliance upon the exemption
provided by Section 4(2) of the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 - Promissory Note between the Company and Robert W. Duggan, dated
July 25, 2000 (Previously filed)
10.2 - Form of Redeemable Warrant to Purchase common stock of Computer
Motion, Inc., dated September 22, 2000 (Previously filed)
27.1 - Financial data schedule
(b) No Reports on Form 8-K were filed during the quarter ended June 30, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: December 1, 2000 COMPUTER MOTION, INC.
By: /s/ GORDON L. ROGERS
---------------------------------
GORDON L. ROGERS
Vice President, Chief Financial
Officer and Secretary
(Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
EXHIBIT
INDEX DESCRIPTION
------- -----------
10.1 - Promissory Note between the Company and Robert W. Duggan, dated
July 25, 2000 (Previously filed)
10.2 - Form of Redeemable Warrant to Purchase common stock of Computer
Motion, Inc., dated September 22, 2000 (Previously filed)
27.1 - Financial data schedule
