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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDING MARCH 31, 2000
COMMISSION FILE NUMBER 000-22755
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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 May 12, 2000 there were 8,823,638 shares of the Registrant's common stock
outstanding.
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COMPUTER MOTION, INC.
INDEX TO FORM 10-Q
QUARTER ENDED MARCH 31, 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 10
PART II. - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 11
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPUTER MOTION, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenue $ 1,368 $ 3,952
Cost of revenue 689 1,714
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Gross profit 679 2,238
Research & development expense 2,216 2,234
Selling, general & administrative expense 3,553 2,973
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Loss from operations (5,090) (2,969)
Other expense/(income) (76) (239)
----------- -----------
Loss before income taxes (5,014) (2,730)
Income tax provision 5 6
----------- -----------
Net loss $ (5,019) $ (2,736)
=========== ===========
Weighted average common shares outstanding used
to compute net loss per share - basic and diluted 8,780,000 8,389,000
=========== ===========
Loss per share - basic and diluted $ (0.57) $ (0.33)
=========== ===========
</TABLE>
See notes to condensed financial statements.
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COMPUTER MOTION, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
Unaudited (1)
-------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,349 $ 4,297
Marketable securities -- 3,224
Accounts receivable 3,085 6,203
Inventories 5,968 5,009
Other current assets 532 332
-------- --------
Total current assets 14,934 19,065
Property and equipment, net 3,593 2,933
Other assets 1,539 1,363
-------- --------
Total assets $ 20,066 $ 23,361
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,928 $ 3,235
Accrued expenses 2,425 2,917
Deferred revenue 319 317
-------- --------
Total current liabilities 4,672 6,469
Convertible promissory note 3,000 --
Deferred revenue 1,075 970
Other liabilities 96 103
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Total liabilities 8,843 7,542
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Shareholders' equity
Preferred stock, authorized 5,000,000 shares -- --
Common stock, $.001 par value, authorized 25,000,000 shares
outstanding - 8,823,638 and 8,745,442 shares 9 9
Additional paid-in capital 63,011 62,663
Deferred compensation expense (217) (247)
Accumulated deficit (51,592) (46,573)
Accrued comprehensive gain/(loss) 12 (33)
-------- --------
Total shareholders' equity 11,223 15,819
-------- --------
Total liabilities & shareholders' equity $ 20,066 $ 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>
Three Months Ended
March 31
------------------------
2000 1999
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,019) $ (2,736)
Adjustments to reconcile net loss to cash used by operating activities:
Depreciation and amortization 306 204
Provision for doubtful accounts and sales allowances 460 51
Amortization of deferred compensation 30 63
Other (5) (16)
Decrease/(increase) in:
Accounts receivable 2,658 (1,036)
Inventories (959) 145
Prepaids & other current assets (200) (114)
Increase/(decrease) in:
Accounts payable (1,307) 259
Accrued expenses (492) 94
------- --------
Net cash used in operating activities (4,528) (3,086)
------- --------
Cash flows from investing activities:
Purchases of property and equipment (964) (347)
Net proceeds from short-term investments 3,224 8,009
------- --------
Net cash provided by investing activities 2,260 7,662
------- --------
Cash flows from financing activities:
Repayment of capital lease obligations (2) --
Proceeds from convertible promissory note 3,000 --
Options exercised 348 214
Other (26) --
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Net cash provided by financing activities 3,320 214
------- --------
Increase in cash and cash equivalents 1,052 4,790
Cash and cash equivalents at beginning of period 4,297 5,577
------- --------
Cash and cash equivalents at end of period $ 5,349 $ 10,367
======= ========
</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. Net loss per share is based on
the weighted average number of common shares outstanding.
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
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 accrues at the prime rate. The convertible note shall be due
and payable on demand upon the earlier of: (a) the first anniversary of the 2000
Annual Meeting to be held on June 15, 2000, if the stockholders decline to
approve the conversion of the note, or (b) at any time after March 29, 2002. All
of the principal and accrued interest outstanding shall automatically be
converted into common stock upon the approval of the conversion by the Company's
stockholders at the Company's 2000 Annual Meeting. 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"). In the event the Board of
Directors approves the issuance of preferred stock in the Private Placement, it
is anticipated that the terms of the convertible loan will be modified so that
it will convert into such series of preferred stock.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This report contains forward looking statements that involve risks and
uncertainties. The Company's actual results may differ materially due to factors
that include, but are not limited to, the risks discussed herein under "Risk
Factors That May Affect Future Results" as well as those discussed in the "Risk
Factors That May Affect Future Results" section of the Company's Annual Report
on Form 10-K for the year ended December 31, 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.
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,
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payors and patients. The Company has completed Phase I clinical trials for both
ZEUS-based laparoscopic procedures and ZEUS-based cardiac procedures under
Investigational Device Exemptions ("IDE"). Based on planned meetings with FDA,
the Company will submit applications for IDE approval to commence multi-center,
pivotal ZEUS-based laparoscopic and cardiac clinical trials in the United
States. The Company has initiated a Phase I clinical trial in which ZEUS is used
in mitral valve repair and replacement surgery.
The Company has sustained significant losses since inception and expects to
continue to incur significant losses due to research and development efforts,
costs associated with obtaining regulatory approvals and clearances, continued
sales and 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, clinician, hospital
and payor acceptance of the Company's products, the number, timing and
significance of product enhancements and new products by the Company and its
competitors, health care reimbursement policies and product performance and
quality issues.
RESULTS OF OPERATIONS
Three months ended March 31, 2000 compared to the three months ended March 31,
1999.
Revenue. Revenue decreased $2,584,000 (65%) to $1,368,000 for the three
months ended March 31, 2000 from $3,952,000 for the same period in 1999. The
Company's HERMES and ZEUS product lines were principally responsible for the
revenue decrease. HERMES revenue of ($48,000) resulted from a retroactive price
adjustment on units sold in previous periods along with no significant systems
shipped to the Company's OEM initial HERMES alliance partner, Stryker
Corporation. ZEUS revenue of $326,000 for the quarter was down (73%) from prior
year levels included only on-going contractual payments from hospitals where
ZEUS Robotic Surgical Systems have been previously installed under rental-based
research and clinical development arrangements. AESOP(R) first quarter revenue
of $1,089,000 decreased (32%) over the previous year's first quarter level
mainly as a result of lower unit sales.
Gross Profit. Gross profit decreased $1,559,000 (70%) to $679,000 for the
three months ended March 31, 2000 from $2,238,000 for the same period in 1999.
Gross margin decreased to 49.6 % in the first quarter 2000 from 56.6% in the
first quarter 1999. Gross margin was unfavorably impacted by lower sales volume
and fixed costs charged to operations.
Selling, General and Administrative. Selling, general and administrative
expense increased $580,000 (20%) to $3,553,000 for the three months ended March
31, 2000 from $2,973,000 for the same period in 1999. The increase was due
mainly to the addition of sales and support personnel; training, travel and
business related expenses in connection with the expansion in Europe. 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.
Research and Development. Research and development expense essentially
remained flat with a minimal decrease of $18,000 to $2,216,000 for the three
months ended March 31, 2000 from $2,234,000 for the same period in 1999, as
increased expenses for ZEUS pre-clinical and clinical trial activities were
largely offset by decreasing AESOP and HERMES related development expenses. The
Company does expect research and development expenditures to increase as it
continues to develop its products and conduct clinical trials, particularly for
the ZEUS product line.
8
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Other Income. Other income of $76,000 for the three months ended March 31,
2000 compared to other income of $239,000 for the three months ended March 31,
1999 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 five to seven
years after the year of loss. The Company has provided a full valuation
allowance on the deferred tax asset because of the uncertainty regarding its
realization.
Net Loss. The net loss for the first quarter 2000 was $5,019,000 ($.57 per
share) compared to $2,736,000 ($.33 per share) for the first quarter 1999 as
decreased gross profit derived from lower revenue along with the increase in
selling, general and administrative expense and reduced other income. Weighted
average shares increased from 8,389,000 in the first quarter 1999 to 8,780,000
in the first quarter 2000 mainly as a result of the exercise of stock options
and the issuance on shares under the Company's employee stock purchase plan.
FINANCIAL CONDITION
Since its inception, the Company's expenses have exceeded its revenues,
resulting in an accumulated deficit of $51,592,000 as of March 31, 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 March 31, 2000 the Company's current ratio (current assets divided by
current liabilities) was 3.2 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 from the proceeds of the $3,000,000 convertible loan.
For the three months ended March 31, 2000, the Company's use of cash in
operating activities of $4,528,000 was primarily attributable to the net loss.
Cash outflow from purchases of plant and equipment was $964,000 for the quarter
ended March 31, 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 quarter ended March 31, 2000, net cash
provided by financing activities of $3,320,000 was attributable to the
$3,000,000 convertible loan made to the Company by its Chief Executive Officer
and the exercise of stock options totaling $348,000.
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, we may require substantial working capital to fund our
business and may need to raise additional capital. We cannot be certain that
additional funds will be available on satisfactory terms when needed, if at all.
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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 March 31, 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 March 31, 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 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 may 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 and we strongly encourage you
to review the same.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include cash and short-term investment
grade debt securities. At March 31, 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 March 31, 2000.
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PART II. OTHER INFORMATION
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. All of the
principal and accrued interest outstanding shall automatically be converted into
common stock upon the approval of the conversion by the Company's stockholders
at the Company's 2000 Annual Meeting. 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"). In the event the Board of Directors
approves the issuance of preferred stock in the Private Placement, it is
anticipated that the terms of the convertible loan will be modified so that it
will convert into such series of preferred stock. The convertible promissory
note was and the shares of common or preferred stock to be issued upon the
conversion of the promissory note 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 - Bridge Financing Agreement between the Company and Robert W.
Duggan, dated March 31, 2000.
10.2 - Convertible Promissory Note issued by the Company to Robert
W. Duggan on March 31, 2000.
27.1 - Financial data schedule
b) No Reports on Form 8-K were filed during the quarter ended March 31,
2000.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: May 15, 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 10.1
BRIDGE FINANCING AGREEMENT
This Bridge Financing Agreement (the "Agreement") is entered into as of
March 31, 2000, among COMPUTER MOTION, INC., a Delaware corporation (the
"Company"), and Robert W. Duggan (the "Purchaser").
R E C I T A L S :
A. Purchaser desires to loan the sum of $3,000,000 to the Company and the
Company desires to borrow such amount pursuant to the terms and conditions set
forth herein.
B. The purpose of this Agreement is to set forth the terms and provisions
of this bridge financing.
NOW, THEREFORE, for good and valuable consideration, the parties agree as
follows:
1. Issuance of Note. Purchaser shall be issued a convertible promissory
note substantially in the form attached hereto as Exhibit A (the "Note"),
evidencing the amount loaned to the Company by Purchaser.
2. Automatic Conversion of the Note.
(a) All of the principal and accrued interest then outstanding under the
Note shall automatically be converted into Common Stock of the Company upon the
approval of the conversion by the Company's stockholders at the Company's next
annual meeting (the "2000 Annual Meeting"). The conversion price per share shall
be the same price as used in the close of the private round of financing
approved by the Company's Board of Directors on March 9, 2000 (the "Conversion
Price").
(b) The Company hereby agrees to take such actions as required to submit
the Note for approval by the Company's stockholders at the Company's 2000 Annual
Meeting.
(c) Should the stockholders of the Company decline to approve the
conversion of the note, the note would become due and payable on the first
anniversary of the 2000 Annual Meeting.
(d) Notwithstanding anything contained in the Note to the contrary, in
the event that prior to the payment of the Note or conversion of the Note
pursuant to this Section 2 hereof, whichever first occurs, if the Company
approves a Change in Control Transaction (as defined below), the Company shall
cause to be given to the Purchaser a written notice of such Change of Control
Transaction (a "Transaction Notice") as soon as practicable, but in no event
later than the tenth day immediately preceding the date on which the
stockholders of the Company are scheduled to vote on approval of the proposed
Change in Control Transaction. Such Transaction Notice shall describe the
principal economic terms of the proposed Change in Control Transaction and the
anticipated allocation of the consideration to be received in such Change of
Control Transaction (the "Transaction Consideration") among the holders of the
Company's capital stock. Purchaser, at Purchaser's option, may elect, by written
notice delivered to the Company not later than ten days after the mailing to the
Purchaser of the Transaction Notice by the Company, to convert all, but not less
than all, of the principal amount of the Note outstanding at the time of such
conversion, together with any accrued and unpaid interest thereon (the "Change
of Control Conversion Right") into a
<PAGE> 2
number of shares of Common Stock of the Company equal to the result obtained by
dividing the principal amount of the Note then outstanding and the accrued and
unpaid interest by the Conversion Price, in which event the Purchaser would be
entitled to receive the Transaction Consideration following consummation of such
Change of Control Transaction as if the Purchaser converted the then outstanding
principal amount of the Note immediately prior to the consummation of the Change
of Control Transaction in accordance with the formula described above. If the
Purchaser fails to make such election to convert the then outstanding principal
amount of the Note within such ten-day time period, the Change of Control
Conversion Right granted hereunder shall terminate automatically and be of not
further force or effect with respect to the Note.
As used herein, a "Change of Control Transaction" shall mean a sale of all
or substantially all of the assets of the Company, or a merger, consolidation or
reorganization of the Company with another corporation or other business entity
and, immediately following the consummation of any such transaction will not own
at least a majority of the outstanding voting stock of the acquiring corporation
(in the case of a sale of assets), or the surviving corporation (in a merger,
consolidation or reorganization), or a corporation that possesses a majority of
the voting power of such acquiring corporation or surviving corporation.
3. Representations and Warranties of the Company.
(a) Organization and Standing. The Company is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to own and operate
its properties and assets and to carry on its business as presently conducted.
(b) Capitalization. The authorized capital stock of the Company,
immediately prior to this offering, consists of 25,000,000 shares of Common
Stock, $.001 par value, 8,801,135 shares of which are issued and outstanding,
5,000,000 shares of Preferred Stock. No shares of Preferred Stock are issued and
outstanding. All issued and outstanding shares of the Company's capital stock
have been duly authorized and validly issued and are fully paid and
nonassessable. All of the outstanding shares of Common Stock, options and
warrants have been duly and validly issued in compliance with all applicable
federal and state securities laws.
(c) Validity of the Note and Common Stock. The Note and Common Stock,
when issued, sold and delivered in compliance with the provisions of this
Agreement will be validly issued, fully paid and nonassessable, and will be free
of any liens or encumbrances; provided, however, that the Note and Common Stock
may be subject to restrictions on transfer under state and/or federal securities
laws as set forth herein or as otherwise required by such laws at the time a
transfer is proposed.
4. Payments. The Note shall be due and payable upon demand, with interest,
if Conversion does not occur by the maturity date of the Note.
5. Purchaser's Representations; Acknowledgments Regarding Risk.
(a) Purchaser hereby represents and warrants to the Company as follows:
2
<PAGE> 3
(i) The Purchaser is acquiring the Note and the Common Stock
(collectively, the "Securities") for the Purchaser's own account and not as a
nominee or agent for any other person, and not with the view to, or for sale in
connection with, any distribution thereof.
(ii) The Purchaser is an "accredited investor" within the meaning of
SEC Rule 501(a) of Regulation D, as presently in effect.
(iii) The Purchaser has a preexisting personal or business
relationship with an officer, director or controlling person of the Company and,
by reason of the Purchaser's business or financial experience, has the capacity
to protect the Purchaser's own interests in connection with the purchase of the
Securities.
(iv) The Purchaser has adequate means of providing for current means
and possible personal contingencies, is able to bear the economic risk of this
investment, and is able to hold the Securities indefinitely.
(v) The Purchaser has the knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of this
investment in the Company.
(vi) The Purchaser has been provided with, and access to, all
information which the Purchaser has deemed material or relevant to the
Purchaser's decision to purchase the Securities, and all questions which the
Purchaser had with respect to the purchase of the Securities have been answered
by an officer or director of the Company.
(b) The Purchaser acknowledges and understands that:
(i) The Securities have not been registered under the Securities Act
of 1993, as amended (the "Act"), and that, accordingly, they will not be fully
transferable except as permitted under various exemptions containing such Act,
or upon satisfaction of the registration and prospectus delivery requirements of
the Act, and that there will be a legend printed upon the Securities so
indicating.
(ii) The Securities may not be sold, transferred, assigned, pledged,
hypothecated or otherwise disposed of unless the Purchaser first provides to the
Company and opinion of counsel to the effect that such sale, transfer,
assignment, pledge, hypothecation or other disposition will be exempt from the
registration and prospectus delivery requirements of the Act and the
registration or qualification requirements of any applicable state securities'
law.
6. Unsecured Obligations. Purchaser hereby agrees that the obligations of
the Company created by this Agreement and the Note shall remain unsecured.
7. Miscellaneous.
(a) Binding on Successors. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors,
assigns, administrators and transferees of the parties.
(b) Entire Agreement. This Agreement and the exhibits hereto, constitute
the entire agreement between the parties with respect to the subject matter
hereof and supersedes all prior
3
<PAGE> 4
and contemporaneous agreements, whether written or oral, and shall not be
modified except by a writing signed by the parties hereto.
(c) Governing Law. This Agreement and all actions arising out of or in
connection with this Agreement shall be governed by and construed in accordance
with the laws of the State of California, without regard to the conflicts of law
provisions of the State of California or of any other state.
(d) Headings. The headings in this Agreement are for convenience only
and shall not alter or otherwise affect the meaning hereof.
(e) No Waiver. No waiver of any of the provisions contained in this
Agreement shall be valid unless made in writing and executed by the waiving
party. It is expressly understood that in the event any party shall on any
occasion fail to perform any term of this Agreement and the other parties shall
not enforce that term, the failure to enforce on that occasion shall not prevent
enforcement of that or any other term hereof on any other occasion.
(f) Severability. If any section of this Agreement is held invalid by
any law, rule, order, regulation, or promulgation of any jurisdiction, such
invalidity shall not affect the enforceability of any other sections not held to
be invalid.
(g) Counterparts. This Agreement and any amendment thereof may be
executed in two or more counterparts, each of which shall be deemed an original
for all purposes.
(h) Notices. Any notice, approval, request, authorization, direction or
other communication under this Agreement or the Note shall be given in writing
and shall be deemed to have been delivered and given for all purposes (i) on the
delivery date if delivered personally to the party to whom the same is directed
or transmitted by facsimile with confirmation of receipt, (ii) one (1) business
day after deposit with a commercial overnight carrier, with written verification
of receipt, or (iii) five (5) business days after the mailing date, whether or
not actually received, if sent by U.S. mail, return receipt requested, postage
and charges prepaid, at the address of the party set forth on the signature page
of this Agreement (or at such other address as may be communicated to the
notifying party in writing).
4
<PAGE> 5
The Company and Purchaser have executed this Agreement as of this 29 day of
March, 2000.
"PURCHASER"
-----------------------------------------
Robert W. Duggan
3983 Cuervo Avenue
Santa Barbara, CA 93110
COMPUTER MOTION, INC.
-----------------------------------------
Gordon L. Rogers, Chief Financial Officer
5
<PAGE> 1
EXHIBIT 10.2
THIS NOTE AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.
COMPUTER MOTION, INC.
CONVERTIBLE PROMISSORY NOTE
$3,000,000 March 31, 2000
Goleta, California
FOR VALUE RECEIVED, Computer Motion, Inc., a Delaware corporation
("Company"), promises to pay to Robert Duggan (the "Holder"), the principal sum
of $3,000,000 or such lesser amount as shall then equal the outstanding
principal amount hereof, together with interest from the date of this Note on
the unpaid principal balance at a rate equal to Company's prime rate of
borrowing, defined as the latest published annualized rate for 90 day dealer
commercial paper appearing in the Wall Street Journal or any other regularly
published source selected by the Company) per annum (the "Prime Rate"). The
Prime Rate shall be determined on the last day of each calendar month for use in
calculating the interest which accrues for the succeeding calendar month. All
unpaid principal, together with the balance of unpaid and accrued interest and
other amounts payable hereunder, shall be due and payable on demand upon the
earlier of (i) the first anniversary of the 2000 Annual Meeting (as such term is
defined below in Section 3(a)) if the Company's stockholders decline to approve
the conversion of the Note as contemplated in Section 3(a) below, or (ii) at any
time after March 29, 2002 (the "Maturity Date"). This Note is issued pursuant to
the Bridge Financing Agreement of even date herewith (as amended, modified or
supplemented, the "Agreement") between Company and the Purchaser named therein.
The following is a statement of the rights of the Holder and the conditions
to which this Note is subject, and to which the Holder hereof, by the acceptance
of this Note, agrees:
1. Definitions. As used in this Note, the following capitalized terms have
the following meanings:
(a) "Obligations" shall mean all principal and accrued interest due
hereunder.
(b) "Common Stock" means the common stock of the Company.
<PAGE> 2
2. Prepayment. Company shall be entitled to prepay any portion of this Note
or all of the indebtedness owed hereunder without penalty. Any such prepayment
will be applied first to the payment of expenses due under this Note, second to
interest accrued on this Note and third, if the amount of prepayment exceeds the
amount of all such expenses and accrued interest, to the payment of principal of
this Note. Interest shall thereupon cease to accrue upon the principal so paid.
3. Conversion.
(a) Conversion into Common Stock. All of the principal and accrued
interest then outstanding on this Note shall automatically be converted into
Common Stock upon the approval of the conversion by the Company's stockholders
at the Company's next annual meeting (the "2000 Annual Meeting"). The conversion
shall be into that number of shares of Common Stock which fully converts this
Note, based on a conversion price (the "Conversion Price") equal to the price
per share used in the close of the private round of financing approved by the
Company's Board of Directors on March 9, 2000.
(b) Stock Dividend, Splits. If the Company shall (i) pay a dividend or
make a distribution in shares of capital stock (whether shares of Common Stock
or capital stock of any other class), (ii) effect a stock split or subdivide its
outstanding Common Stock, (iii) effect a reverse stock split or combine its
outstanding Common Stock into a smaller number of shares, or (iv) effect any
other reclassification or recapitalization, the Conversion Price in effect
immediately prior thereto shall be adjusted so that upon the subsequent
conversion of this Note the Holder shall be entitled to receive the number of
shares of capital stock of the Company which the Holder hereof would have owned
or have been entitled to receive after the happening of any of the events
described above had this Note been exercised immediately prior to the happening
of such event. An adjustment made pursuant to this Section 3(b) shall become
effective immediately after the record date for any event requiring such
adjustment or shall become effective immediately after the effective date of
such event if no record date is set.
(c) Notwithstanding anything contained in this Note to the contrary, in
the event that prior to the payment of this Note or conversion of this Note
pursuant to this Section 3 hereof, whichever first occurs, if the Company
approves a Change in Control Transaction (as defined below), the Company shall
cause to be given to the Purchaser a written notice of such Change of Control
Transaction (a "Transaction Notice") as soon as practicable, but in no event
later than the tenth day immediately preceding the date on which the
stockholders of the Company are scheduled to vote on approval of the proposed
Change in Control Transaction. Such Transaction Notice shall describe the
principal economic terms of the proposed Change in Control Transaction and the
anticipated allocation of the consideration to be received in such Change of
Control Transaction (the "Transaction Consideration") among the holders of the
Company's capital stock. Purchaser, at Purchaser's option, may elect, by written
notice delivered to the Company not later than ten days after the mailing to the
Purchaser of the Transaction Notice by the Company, to convert all, but not less
than all, of the principal amount of this Note outstanding at the time of such
conversion, together with any accrued and unpaid interest thereon (the "Change
of Control Conversion Right") into a number of shares of Common Stock of the
Company equal to the result obtained by dividing the principal amount of this
Note then outstanding and the accrued and unpaid interest by the Conversion
Price, in which event the Purchaser would be entitled receive the Transaction
Consideration following consummation of such Change of Control Transaction as if
the Purchaser converted the then outstanding principal amount of this Note
immediately prior to the consummation of the Change of Control Transaction in
accordance with the formula described above. If the Purchaser fails to
<PAGE> 3
make such election to convert the then outstanding principal amount of this Note
within such ten-day time period, the Change of Control Conversion Right granted
hereunder shall terminate automatically and be of not further force or effect
with respect to this Note. As used herein, a "Change of Control Transaction"
shall mean a sale of all or substantially all of the assets of the Company, or a
merger, consolidation or reorganization of the Company with another corporation
or other business entity and, immediately following the consummation of any such
transaction will not own at least a majority of the outstanding voting stock of
the acquiring corporation (in the case of a sale of assets), or the surviving
corporation (in a merger, consolidation or reorganization), or a corporation
that possesses a majority of the voting power of such acquiring corporation or
surviving corporation.
(d) Mechanics and Effect of Conversion. No fractional shares of Common
Stock shall be issued upon conversion of this Note. Upon the conversion of all
of the principal and accrued interest outstanding under this Note, in lieu of
Company issuing any fractional shares to the Holder, Company shall pay to the
Holder the amount of outstanding principal that is not so converted, such
payment to be in the form as provided below. Upon conversion of this Note
pursuant to this Section, the Holder shall surrender this Note, duly endorsed,
at the principal office of Company. At its expense, Company shall, as soon as
practicable thereafter, issue and deliver to such Holder at such principal
office a certificate or certificates for the number of shares of such Common
Stock to which the Holder shall be entitled upon such conversion, together with
any other securities and property to which the Holder is entitled upon such
conversion under the terms of this Note. Upon full conversion of this Note,
Company shall be forever released from all its obligations and liabilities under
this Note.
4. Registration Rights. Holder shall be entitled to the same registration
rights as granted in connection with the issuance of Common Stock to investors
in the private placement approved by the Company's Board of Directors on March
9, 2000.
5. Default. The Company will be deemed to be in default hereunder and the
unpaid principal balance of this Note, together with all accrued interest
thereon, will become immediately due and payable on any default under this Note
or the Agreement, including without limitation, any breach of the covenants and
undertakings of the Company thereunder.
6. Successors and Assigns. Subject to the restrictions on transfer
described in Section 7 below, the rights and obligations of Company and the
Holder of this Note shall be binding upon and benefit the successors, assigns,
heirs, administrators and transferees of the parties.
7. Waiver and Amendment. Any provision of this Note may be amended, waived
or modified upon the written consent of Company and the Holder.
8. Transfer of this Note or Securities Issuable on Conversion Hereof. This
Note may not be transferred in violation of any restrictive legend set forth
hereon. Each new Note issued upon transfer of this Note shall bear a legend as
to the applicable restrictions on transferability in order to ensure compliance
with the Securities Act of 1933, as amended (the "Act"), unless in the opinion
of counsel for Company such legend is not required in order to ensure compliance
with the Act. Company may issue stop transfer instructions to its transfer agent
in connection with such restrictions. Subject to the foregoing, transfers of
this Note shall be registered upon registration books maintained for such
purpose by or on behalf of Company as provided in the Agreement. Prior to
presentation of this Note for registration of transfer, Company shall treat the
registered holder hereof as the owner and holder of this Note for the purpose of
receiving all payments of principal and
<PAGE> 4
interest hereon and for all other purposes whatsoever, whether or not this Note
shall be overdue and Company shall not be affected by notice to the contrary.
9. Notices. Any notice, approval, request, authorization, direction or
other communication under this Note shall be given in writing and shall be
deemed to have been delivered and given for all purposes (i) on the delivery
date if delivered personally to the party to whom the same is directed or
transmitted by facsimile with confirmation of receipt, (ii) one (1) business day
after deposit with a commercial overnight carrier, with written verification of
receipt, or (iii) five (5) business days after the mailing date, whether or not
actually received, if sent by U.S. mail, return receipt requested, postage and
charges prepaid, at the address of the party set forth on the signature page of
the Agreement (or at such other address as may be communicated to the notifying
party in writing).
10. Payment. Payment shall be made in lawful tender of the United States.
11. Expenses. If action is instituted to collect this Note, Company
promises to pay all costs and expenses, including, without limitation,
reasonable attorneys' fees and costs, incurred in connection with such action.
12. Governing Law. This Note and all actions arising out of or in
connection with this Note shall be governed by and construed in accordance with
the laws of the State of California, without regard to the conflicts of law
provisions of the State of California or of any other state.
13. Miscellaneous.
(a) The Company hereby waives presentment, demand, protest, notice of
dishonor, diligence and all other notices, any release or discharge arising from
any extension of time, discharge of a prior party, release of any or all of any
security given from time to time for this Note, or other cause of release or
discharge other than actual payment in full hereof.
(b) The Holder shall not be deemed, by any act or omission, to have
waived any of its rights or remedies hereunder unless such waiver is in writing
and signed by the Holder and then only to the extent specifically set forth in
such writing. A waiver with reference to one event shall not be construed as
continuing or as a bar to or waiver of any right or remedy as to a subsequent
event. No delay or omission of the Holder to exercise any right, whether before
or after a default hereunder, shall impair any such right or shall be construed
to be a waiver of any right or default, and the acceptance at any time by the
Holder of any past-due amount shall not be deemed to be a waiver of the right to
require prompt payment when due of any other amounts then or thereafter due and
payable.
(c) Time is of the essence hereof. Upon any default hereunder, the
Holder may exercise all rights and remedies provided for herein and by law or
equity, including, but not limited to, the right to immediate payment in full of
this Note.
(d) The remedies of the Holder as provided herein, or any one or more of
them, or in law or in equity, shall be cumulative and concurrent, and may be
pursued singularly, successively or together at the Holder sole discretion, and
may be exercised as often as occasion therefor shall occur.
<PAGE> 5
(e) The Company and the Holder intend to contract in compliance with all
state and federal usury laws governing this Note. The Company and the Holder
agree that none of the terms of the Agreement or this Note shall be construed as
a contract for, or requirement to pay interest at a rate in excess of, the
maximum interest rate allowed by any applicable state or federal usury laws. If
the Holder receives sums which constitute interest that would otherwise increase
the effective interest rate on the Note to a rate in excess of that permitted by
any applicable law, then all such sums constituting interest in excess of the
maximum lawful rate shall, at Holder's option, either be credited to the payment
of principal or returned to the Company.
IN WITNESS WHEREOF, Company has caused this Note to be issued as of the
date first written above.
COMPUTER MOTION, INC., a Delaware corporation
By:
-----------------------------------------
Gordon Rogers,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND CONDENSED STATEMENTS OF OPERATIONS FOUND ON PAGES
THREE AND FOUR OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 5,349
<SECURITIES> 0
<RECEIVABLES> 4,763
<ALLOWANCES> 1,678
<INVENTORY> 5,968
<CURRENT-ASSETS> 14,934
<PP&E> 3,593
<DEPRECIATION> 2,929
<TOTAL-ASSETS> 20,066
<CURRENT-LIABILITIES> 4,672
<BONDS> 3,000
0
0
<COMMON> 9
<OTHER-SE> 11,214
<TOTAL-LIABILITY-AND-EQUITY> 20,066
<SALES> 1,368
<TOTAL-REVENUES> 1,368
<CGS> 689
<TOTAL-COSTS> 689
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 460
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (5,014)
<INCOME-TAX> 5
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,019)
<EPS-BASIC> (.57)
<EPS-DILUTED> (.57)
</TABLE>
