Back to GetFilings.com
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-K ANNUAL REPORT
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NO. 000-22755
----------------------------
COMPUTER MOTION, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0458805
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
130-B CREMONA DRIVE
GOLETA, CA 93117
(Address of principal executive offices)
(805) 968-9600
(Registrant's telephone number, including area code)
----------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
----------------
----------------------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months; and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, or will not be contained, to the
best of the Registrant's knowledge, in definitive proxy information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark if the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes[ ] No[X].
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of Common Stock on June 28, 2002,
as reported by Nasdaq, was approximately $10,675,000. Shares of voting stock
held by each officer and director and by each person who owns 5% or more of the
outstanding voting stock have been excluded in that such persons may be deemed
to be affiliates. This assumption regarding affiliate status is not necessarily
a conclusive determination for other purposes.
The number of shares outstanding of the Registrant's Common Stock, $.001
par value, as of March 14, 2003 was 17,921,882 shares.
================================================================================
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results
could differ materially from those projected in the forward-looking statements
as a result of a number of important factors. For a discussion of important
factors that could affect the Company's results, please refer to "Risk Factors
that May Affect Future Results" below.
COMPANY OVERVIEW
Computer Motion, Inc. ("Computer Motion" or the "Company") is committed to
developing, manufacturing and marketing proprietary robotic and computerized
surgical systems that are intended to enhance a surgeon's performance and
centralize and simplify the surgeon's control of the operating room ("OR").
The Company believes that its products have the potential to revolutionize
surgery and the OR by providing surgeons with the precision and dexterity
necessary to perform complex, minimally invasive surgical procedures, and by
enabling surgeons to control critical devices in the OR through simple verbal
commands. Computer Motion believes that its products have the potential to
broaden the scope and increase the effectiveness of minimally invasive surgery
("MIS"), improve patient outcomes and create a safer, more efficient and cost
effective OR.
Traditionally, the majority of all surgeries have been open, requiring
large incisions measuring up to 18 inches to access the operative site. Although
this approach can be highly effective, it often results in significant trauma,
pain and complications, as well as significant costs related to lengthy
postoperative convalescent periods for the patient. In an effort to minimize
these negative factors, MIS techniques and related technologies have been
developed. MIS has proven to be as effective as traditional open surgery while
offering patients substantially reduced pain and trauma, shortened convalescent
periods and decreased overall patient care costs. While these benefits are
significant, the minimally invasive approach presents challenges to surgeons,
including the intricate reconstruction of patient tissue by suturing, delicate
manipulation of small anatomical features and constrained access to, and limited
visualization of, the operative site.
Computer Motion's vision is to bring the power of computers and robotics to
the OR to facilitate a surgeon's ability to perform complex surgical procedures
and enable new, minimally invasive microsurgical procedures that are currently
very difficult or impossible to perform. The Company works with leading
practitioners in multiple surgical disciplines to develop new MIS procedures
using the Company's products to provide better visualization and improved
dexterity for the surgeon.
The Company has developed four major products and a suite of supporting
supplies, accessories and services. The four major products are the AESOP(R)
Endoscope Postioner, a surgical robot capable of positioning an endoscope in
response to a surgeon's commands; the ZEUS(R) Surgical System, a robotic
platform designed to improve a surgeon's ability to perform complex surgical
procedures and enable new, minimally invasive microsurgical procedures that are
currently impossible or very difficult to perform; the HERMES(R) Control Center,
a voice activated OR control system designed to enable a surgeon to directly
control multiple OR devices, including the Company's AESOP system, through
simple verbal commands; and the SOCRATES(TM) Telementoring System, an
interactive telecollaborative system allowing a surgeon to mentor and
collaborate with another surgeon during an operation. SOCRATES also allows a
remote surgeon to participate in a surgery by remotely controlling AESOP, our
endoscope-positioning robot.
ROBOTIC SYSTEMS
The Company's line of computer and robotic systems enhance a surgeon's
ability to perform complex, minimally invasive surgeries. The Company has
developed the EVOLVE surgical continuum to support a gradient learning curve for
surgeons to safely and economically develop the skills required to transition
from open to endoscopic surgery. All four of the Company's robotic products are
integral to the EVOLVE process.
AESOP PLATFORM
The Computer Motion AESOP system is a surgical robot which approximates the
form and function of a human arm and allows control of the endoscope (a
specially designed optical tube which, when connected to a medical video camera
and light source, is passed into the body to allow the surgeon to view the
operative site on a video monitor) using simple verbal commands. This eliminates
the need for a member of a surgical staff to manually control the camera and
provides a more stable endoscopic image and more precise positioning of the
endoscope. The Company estimates that over 175,000 MIS procedures have been
successfully assisted by more than 800 AESOP systems in more than 600 hospitals
and surgery centers around the world.
The AESOP platform is the world's first Food and Drug Administration
("FDA") cleared surgical robot and incorporates the world's first FDA-cleared
voice control interface for use in the OR. The AESOP system was introduced in
the fourth quarter of 1994. AESOP 2000 with voice control was introduced in the
fourth quarter of 1996. The AESOP 3000 platform, introduced in December 1997, is
the world's first FDA-cleared surgical robot capable of assisting in advanced
minimally invasive cardiothoracic procedures. The AESOP 3000 robotic arm
features added flexibility and functionality over its predecessor, adding the
range of motion necessary for endoscopic viewing in the thoracic (chest) cavity.
AESOP is cleared for use by the FDA in general surgery, ear nose throat,, cardio
thorasic, urologic, vascular, bariatric, and gynecological procedures. The AESOP
HR platform allows for control of AESOP through the HERMES Control Center. AESOP
HR enables the operative surgeon to view the status of the AESOP device, save
memory positions, and view the AESOP menu structure on a surgical monitor. The
AESOP HR platform also allows the surgeon to adjust AESOP's speed to an optimal
setting based on the constraints of the procedure.
The introduction of the Alpha(TM) Virtual Port in June 2000 enabled the
application of AESOP in open procedures, which is especially useful when used in
conjunction with the EVOLVE education continuum. The Alpha Virtual Port provides
a free-space pivot point for the use of AESOP in sternotomy accessed cardiac
procedures as well as open abdominal procedures. The application of the Alpha
Virtual Port in conjunction with AESOP is the first step in the EVOLVE program's
step-wise transition from open to closed procedures. The Alpha Virtual Port
allows the operative surgeon in-training to gain experience with the technology
prior to advancing to a closed MIS procedure approach.
Computer Motion has leveraged the core technologies underlying the AESOP
platform to develop the ZEUS Surgical System, the HERMES Control Center, and the
SOCRATES Telementoring System.
ZEUS PLATFORM
The Computer Motion ZEUS Surgical System is designed to fundamentally
improve a surgeon's ability to perform complex, MIS procedures and to enable
new, minimally invasive microsurgical procedures that are currently very
difficult or impossible to perform with conventional surgical methods. The
Company believes that these new MIS procedures will result in reduced patient
pain and trauma, fewer complications, lessened cosmetic concerns, shortened
convalescent periods and will increase the number of patients qualified for
certain surgical procedures. As a result, the Company believes that an increase
in minimally invasive procedures will produce lower overall healthcare costs to
patients, hospitals and healthcare payors.
The ZEUS platform is comprised of three surgeon-controlled robotic arms,
one of which positions an endoscope while the other two hold disposable and
reusable surgical instruments. Each arm is individually mounted on the operating
room table using the standard table rails. Because the arms are attached to the
table, the table can be adjusted during a surgical procedure without removing
the instruments. The surgeon sits near the operating room table at an open,
comfortable, and portable console. The open design of the console provides the
surgeon with an unobstructed view of the patient and allows clear communication
with the operating room staff. At the console, the surgeon controls the
instrument handles and views the operative site on a 3D video monitor or a boom
mounted 3D binocular display. ZEUS senses the surgeon's hand movements through
the new MicroWrist surgeon interface. It then scales the surgeon's hand
movements into precise, tremor-free micro movements at the operative site.
The Company received the first in a series of FDA 510(k) clearances for
ZEUS in October 2001. This 510(k) clearance allowed ZEUS to be used with blunt
dissectors, retractors, atraumatic graspers and stabilizers during laparoscopic
and thorascopic surgery. In September 2002, the company received an FDA 510(k)
clearance for the marketing of ZEUS in general laparoscopic surgery. There are
over 3.3 million general procedures performed annually in the United States.
This clearance allows clinical use of the ZEUS system for a broad set of general
surgery applications such as laparoscopic cholecystectomy and laparoscopic
nissen fundoplication. The Company is also seeking additional FDA clearances for
thoracic surgery, laparoscopic radical prostatectomy and cardiac procedures,
with clinical trials ongoing.
The Company believes that the ZEUS platform will provide clinicians with
the following significant benefits:
IMPROVED PRECISION. The ZEUS platform incorporates technology that is
designed to enable a surgeon to scale his or her movements, allowing
manipulation of instruments on a microsurgical scale while utilizing normal hand
and arm movements. For instance, in microsurgical procedures which involve
extremely small anatomical structures and which utilize sutures ranging from 20
to 40 microns (1/3 to 2/3 the width of a human hair), if a surgeon selects a
scaling ratio of 4 to 1, each one inch movement by the surgeon would result in a
1/4 inch movement by the robotic surgical instruments. Various useful scaling
ratios can be selected by the surgeon intra-operatively.
IMPROVED DEXTERITY. The ZEUS platform is designed to enhance a surgeon's
performance by enabling robotic manipulation of surgical instruments, as opposed
to hand-held instruments, which are very difficult to manipulate manually when
performing challenging minimally invasive surgery. For instance, a surgeon can
activate and deactivate the instrument handles to further extend his or her
range of motion to complete a particular movement, such as suturing, without
having to physically contort his or her arms. In addition, in order to gain
anatomical access to certain regions of the body in a minimally invasive manner,
the robotic instruments can be placed in positions that would be extremely
difficult for a surgeon to manipulate manually using conventional MIS techniques
due to the distance between the instruments and their relative positions to each
other.
ELIMINATION OF INVOLUNTARY HAND TREMOR. The ZEUS platform is designed to
hold the surgical instruments and the endoscope in a steady manner, eliminating
a surgeon's incidental and unintended hand motions and tremors, which are
intensified when holding surgical instruments for, extended periods of time.
ENHANCED VISUALIZATION. The ZEUS platform incorporates a robotic arm, which
controls the endoscope to produce a steady, magnified video image displayed
directly in front of the surgeon, which facilitates performance of MIS
procedures. ZEUS also provides a state of the art stereo 3D endoscope system
attached to the robotic arm.
IMPROVED MINIMALLY INVASIVE ANATOMICAL ACCESS. The ZEUS platform is
designed to provide a surgeon with access to confined areas in the body and
critical anatomical structures that are currently only accessible by means of
highly invasive, open surgical procedures or multiple less invasive incisions.
In the case of cardiac surgery, these less invasive approaches can require
multiple 3 to 5 inch incisions and often involve the removal of rib cartilage,
rib spreading and nerve trauma. In contrast, the ZEUS system is designed to
provide a surgeon with complete access to the heart through several 3 to 5
millimeter ports.
MINIMIZED SURGEON FATIGUE. The ZEUS platform allows a surgeon to operate
the surgical instrument handles in a comfortable, ergonomic position, including
sitting down and positioning his or her forearms on armrests. The Company
believes this enhanced ergonomic design can extend the professional lives of
surgeons and increase the efficiency and effectiveness of demanding and lengthy
microsurgical procedures.
The ZEUS system is designed as an open platform system. This allows
products from other corporations to integrate into the system. The Company has
entered into alliances with these outside companies to develop complementary
products to the ZEUS system, and to often offer their products as components of
the ZEUS
system. Included in these are: (i) visualization systems from Karl Storz, GMBH,
Vista Medical Technologies, Inc., and Smith and Nephew Endoscopy; (ii)
instrumentation from Scanlan International, Inc. and Karl Storz, GMBH, (iii)
sutures from W.L. Gore & Associates and (iv) other specialty instruments from
various medical device companies.
HERMES PLATFORM
The modernization of the OR has resulted in numerous medical devices that
aid a surgeon, but also increase the complexity and costs of the OR. In many
instances, these devices are manually controlled and monitored by someone other
than a surgeon in response to a surgeon's spoken commands and request for
status. The HERMES Control Center is designed to enable a surgeon to directly
control multiple OR devices, including the Company's AESOP system, through
simple verbal commands. The HERMES Control Center provides standardized visual
and digitized voice feedback to a surgical team. The Company believes that the
enhanced control and feedback provided by the HERMES Control Center improves
safety, increases efficiency, shortens procedure times and reduces cost.
HERMES is a centralized control system that networks multiple
HERMES-Ready(TM) medical devices and provides the surgeon and OR staff with
direct control using simple verbal commands or an interactive touch screen
pendant. The HERMES system provides both visual graphic feedback and digitized
audio feedback to the surgical team. The visual feedback is displayed directly
on the endoscopic video monitor and the digitized audio feedback provides
valuable device-specific status information. The 28+ FDA-cleared devices
controlled by the HERMES system include: endoscopic cameras, overhead cameras,
light sources, insufflators, arthroscopic shavers, arthroscopic pumps, VCRs,
printers, digital image capture device, OR lights, surgical tables,
electrosurgical units, and the Company's telephone, port expander, AESOP and
ZEUS systems. The HERMES-Ready interfaces for these cleared devices were created
in collaboration between the Company and various HERMES alliance partners, such
as Stryker Endoscopy, Smith and Nephew Endoscopy, Berchtold, Steris, Skytron,
ValleyLab (TYCO), and ConMed. There is additional HERMES interface projects
currently under development with these same HERMES alliance partners for an
additional ten devices. These models are expected to release for commercial sale
during the year 2003.
To leverage its proprietary voice recognition technology in the
arthroscopic and laparoscopic markets, the Company has partnered with Stryker
Endoscopy, a division of Stryker Corporation, to market and distribute the
HERMES system and various associated HERMES-Ready device interfaces. Stryker is
a leading manufacturer of endoscopic medical equipment. Stryker purchases the
HERMES system as an original equipment manufacturer ("OEM") and markets the
HERMES system as an integrated component with several of its laparoscopic and
arthroscopic products.
The Company has also entered into two additional HERMES alliance agreements
with Smith & Nephew Endoscopy and Karl Storz Endoscopy America. Both Smith &
Nephew and Karl Storz are leading manufacturers of endoscopic medical equipment.
These agreements define collaboration between the Company and these two medical
device companies to create HERMES-Ready interfaces for 40 additional medical
device models. This engineering development work is currently underway, and the
Company expects to make additional 510(k) submissions to the FDA in 2003 to
allow some of these devices to be released for sale by Smith & Nephew and Karl
Storz during 2003. Smith & Nephew will market a HERMES system as a component of
their integrated digital OR offering. Karl Storz will distribute a HERMES
related product that allows device integration with their integrated OR1
offering.
The Company intends to partner with other medical device manufacturers to
expand the number and type of devices to be integrated with HERMES, including
cautery/cutting devices, various imaging systems, devices for the cardiac
catheter laboratory, and other equipment for varying clinical environments.
SOCRATES PLATFORM
The SOCRATES Telementoring System is the latest generation technology
platform currently under development by the Company. SOCRATES enables remote
access to HERMES networked devices via proprietary software and standard
teleconferencing components. The SOCRATES system allows an operative surgeon to
virtually, cost-effectively, and on an as-needed basis, communicate with a
remote surgeon. SOCRATES enables the remote surgeon to help direct a surgical
procedure thereby augmenting the operative surgeon's prior training experience.
The SOCRATES system enhances the utility of the HERMES Control Center with
the AESOP-HR system by providing shared-remote control capability of the
endoscope. The SOCRATES system provides the remote surgeon with an interface to
the AESOP-HR system, enabling the remote surgeon to share control of the
endoscope with the operative surgeon. AESOP's precision and stability ensure the
remote surgeon's views are tremor-free and accurately positioned. It is common
for surgeons to remotely collaborate; however, without the SOCRATES system, a
remote surgeon is typically only able to view video of a procedure and provide
feedback through video overlay and verbal commands. The SOCRATES system enhances
this collaboration by making it more interactive by allowing remote physical
control of the endoscope in the operating room.
In October 2001, the Company received FDA clearance for the Socrates
Telementoring System for use as a point-to-point communication system, under the
newly created FDA device category called "Telemedicine devices."
MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations are required to comply with the
FDA's Quality System Regulation ("QSR"), which addresses the design, controls,
methods, facilities and quality assurance used in manufacturing, packing,
storing and installing medical devices. In addition, certain international
markets have quality assurance and manufacturing requirements. Specifically, the
Company is subject to the compliance requirements of ISO 9001, EN46001, the
Medical Device Directive and Conformity Europeane ("CE") mark directives which
impose certain procedural and documentation requirements with respect to device
design, development, manufacturing and quality assurance activities. The Company
has obtained such certification and is subject to audit on an annual basis for
compliance. The Company assembles all four of its product lines (AESOP, ZEUS,
HERMES and SOCRATES) in its 7,200 square foot manufacturing facility in Goleta,
California. Certain accessories and components are produced by qualified third
party vendors. The manufacturing and assembly of the Company's products is a
complex and lengthy process involving a significant number of parts, assemblies
and procedures.
The Company purchases both custom made and stock components from a large
number of qualified suppliers and subjects them to stringent incoming quality
inspections. As part of the Company's supplier qualification process, the
Company periodically conducts quality audits of its suppliers. The Company
relies on independent manufacturers, some of which are single source suppliers
for the manufacture of the principal components of its products. Shortages of
raw materials, production capacity constraints or delays on the part of the
Company's suppliers could negatively affect the Company's ability to ship
products and derive revenue. In some instances, the Company relies on companies
that are sole suppliers of key components of its products. If one of these sole
suppliers goes out of business, the Company could face significant production
delays until an alternate supplier is found, or until the product could be
redesigned and revalidated to accommodate a new supplier's replacement
component.
COMPETITION
There are four levels of competition for the Company's products;
pharmaceutical therapy, traditional methods of surgery, new approaches to MIS,
and direct competition in robotic surgery. All four of the Company's major
systems face different levels of competition in each of these areas.
Traditional methods of surgery have been in effect for over one hundred
years. These methods often involve large incisions in the patient's body and
long recovery times. The challenge for the Company is to
convince surgeons and administrators to convert to a minimally invasive approach
to surgery through robotics. This requires the surgeons and hospitals to expend
significant amounts of time and money in installation of the equipment and
training on new procedures. The Company also needs to convince potential
patients of the safety and benefits of surgery using the Company's products.
Many medical conditions that can be treated by the Company's products can also
be treated with pharmaceuticals or other medical devices and procedures. Many of
these alternative treatments are widely accepted in the medical community and
have a long history of use.
The field of MIS is growing rapidly. Several companies have developed new
minimally invasive technologies and techniques, which are alternatives to the
techniques and products the Company offers. Many of these companies are well
established in the medical industry including Boston Scientific Corporation,
C.R. Bard, Inc., Edwards Life Sciences, Guidant Corporation, Heartport, Inc.,
St. Jude and Ethicon Endo-Surgery, Inc., divisions of Johnson & Johnson, Inc.,
Medtronic Inc., and United States Surgical Corporation, a division of Tyco
International Ltd. These companies offer non-robotic surgical tools and
techniques involving hand held instruments and manually controlled visualization
or catheter based therapies such as stenting (mechanical devices which hold a
blocked or occluded blood vessel open) and Percuaneous Transluminal Coronary
Angioplasty (often referred to as PTCA, which is the introduction of a small
balloon into a vessel to force open the blocked or occluded vessel).
Direct competition with the Company's products is relatively limited. The
Company's AESOP product is fairly unique with only a single competitor,
Armstrong Healthcare Ltd. Besides this single competitor, there is no direct
competition other than a person physically holding an endoscope or the use of a
static arm fixed positioner.
There are a limited number of companies that have developed computer
assisted and robotic surgical systems that compete to varying degrees with the
Company's ZEUS system. These include EndoVia Medical, Inc. (formerly Brock
Rogers Surgical, Inc.) and Intuitive Surgical, Inc. Several other companies
produce computer assisted and robotic surgical devices that do not directly
compete with the potential surgical procedures for ZEUS. These include
Integrated Surgical Systems, Inc., Johns Hopkins University Engineering Research
Consortium, Maquet AG, MicroDexterity Systems, Inc, Ross-Hime Designs, Inc and
Stereotaxis, Inc.
The Company's SOCRATES system is unique in its ability to remotely control
a robotic arm. There are numerous video conferencing products and companies
which could provide remote audio and video feeds from the OR, as well as
telestration capabilities.
MARKETING
The Company's products are sold throughout the world. Orders are shipped as
they are received and, therefore, no material backlog has existed to date. For
the year ended December 31, 2002, no single customer accounted for more than 10%
of revenue. As of December 31, 2002, two customers each accounted for 14% of
accounts receivable and two other customers accounted for 11% and 10% of
accounts receivable, respectively. For the year ended December 31, 2001, the
Company had one distributor, SIC System SRL of Italy, which accounted for
approximately 6% of the revenue for the year and 17% of the accounts receivable
balance. For the year ended December 31, 2000, the Company had one distributor,
Kino Corporation of Japan, which accounted for approximately 21% of the revenue
for the year and 18% of accounts receivable and a second customer, Endoscopic
Technologies, Inc., that accounted for approximately 10% of the revenue for the
year and 15% of accounts receivable.
Should the Company cease to use current distributors to distribute products
throughout the world, it would have to identify new distributors to service
these markets. While this may cause a delay in revenues in the short term, in
the long term, the Company believes that it would be possible to secure new
distributors.
In the United States, the Company sells directly to hospitals through an
employee based sales organization. In Western Europe, the Company also has an
employee based sales organization, which is principally focused on sales in
France and Germany. The Company has co-marketed the ZEUS product line with
SIC System, SRL in Italy and Medtronic, Inc. in Europe, the Middle East and
Africa. The Company's agreement with Medtronic expired on December 31, 2001.
Throughout the rest of the world, the Company uses independent distributor
organizations including Kino Corporation and the Ethicon Endo-Surgery Division
of Johnson & Johnson, Inc. Under the Company's OEM agreement with Stryker
Corporation, Stryker may distribute the Company's HERMES product for control of
various Stryker endoscopic devices on a worldwide basis.
In November 2001, the Company entered into a HERMES alliance agreement with
Smith and Nephew Endoscopy, and, in February 2002, with Karl Storz Endoscopy
America. Both Smith & Nephew and Karl Storz are leading manufacturers of
endoscopic medical equipment. These agreements define a collaboration between
the Company and each of these two medical device companies to create
HERMES-Ready interfaces for 40 additional medical device models.
RESEARCH AND DEVELOPMENT
The Company's research and development function is focused on the
development of new procedures, new medical products and improvements to existing
products. In addition, research and development expense reflects the Company's
efforts to obtain additional FDA approval of certain products and processes and
to maintain the highest quality standards of existing products. The Company's
research and development expenses were $10,903,000 (45% of revenue), $12,034,000
(47% of revenue), and $11,564,000 (53% of revenue) for the years ended December
2002, 2001 and 2000, respectively.
GOVERNMENT REGULATION
The medical devices manufactured and marketed by the Company are subject to
regulation by the FDA and, in most instances, by state and foreign governmental
authorities. Under the Federal Food, Drug and Cosmetic Act, and regulations
thereunder, manufacturers of medical devices must comply with certain policies
and procedures that regulate the composition, labeling, testing, manufacturing,
packaging and distribution of medical devices. In July 2000, the FDA notified
the Company that robotic surgical systems would be reviewed and cleared for
market under the 510(k) premarket notification pathway that is currently applied
to most medical devices, including the Company's AESOP, HERMES, SOCRATES and
ZEUS products. The Company currently has 15 premarket notifications completed as
listed on the FDA web-site (www.accessdata.fda.gov). ZEUS follows the 510(k)
approval process, however, clearance for some indications for use required
clinical studies. Some future indications may also require clinical studies.
The Company is currently enrolling patients in the following controlled
clinical trials:
o Coronary Artery Bypass Grafting: The Company is now enrolling patients in a
FDA-approved multi-center, non-randomized, controlled trial for coronary
artery bypass grafting. This study, which will eventually involve several
ZEUS sites, is a pivotal study required for FDA market clearance. The
Company anticipates continuing this study throughout 2003.
o Internal Mammary Artery Harvesting: The Company received FDA approval to
conduct a clinical trial at six sites using the ZEUS system to harvest the
left internal mammary artery, a procedure that is part of a standard
coronary artery bypass grafting surgery. The Company initiated this study
in February 2001, completed the study in September 2002, and submitted a
510(k) application for non-intracardiac thoracoscopic clearance in November
2002. The Company received some minor questions from FDA relative to the
submission, which were answered and submitted back to the Agency. The
Company believes that it will receive FDA clearance of the 510(k)
submission in the second quarter of 2003.
o General Laparoscopic: The Company has been very active in clinical research
in the area of general laparoscopic surgery. The FDA has granted the
Company IDE approval for a study on laparoscopic cholecystectomy (a
procedure to remove the gall bladder) and laparoscopic nissen
fundoplication (a procedure to correct acid reflux disease) . The Company
sponsored randomized, controlled trials in the
United States and Mexico for both of these procedures. The Company
submitted a 510(k) application in April 2002 and received FDA clearance in
September 2002.
In addition to these trials, the Company is currently conducting
feasibility studies in Mitral valve replacement and repair.
The FDA may require testing and surveillance programs to monitor the effect
of approved products, which have been commercialized, and it has the power to
prevent or limit further marketing of a product based on the results of these
post-marketing programs. The FDA also conducts inspections to determine
compliance with both good manufacturing practice regulations and medical device
reporting regulations. If the FDA were to conclude that the Company was not in
compliance with applicable laws or regulations, it could institute proceedings
to detain or seize products, issue a recall, impose operating restrictions,
assess civil penalties against employees and recommend criminal prosecution.
Furthermore, the FDA could proceed to ban, or request recall, repair,
replacement or refund of the cost of, any device manufactured or distributed.
The FDA also regulates record keeping for medical devices and reviews
hospital and manufacturers' required reports of adverse experiences to identify
potential problems with FDA-cleared devices. Aggressive regulatory action may be
taken due to adverse experience reports. FDA device tracking and post-market
surveillance requirements are expected to increase future regulatory compliance
costs.
Diagnostic-related groups ("DRG") reimbursement schedules regulate the
amount the United States government, through the Health Care Financing
Administration ("HCFA"), will reimburse hospitals and doctors for the inpatient
care of persons covered by Medicare. While the Company is unaware of specific
domestic price resistance as a result of DRG reimbursement policies, changes in
current DRG reimbursement levels could have an adverse effect on its domestic
pricing flexibility.
The Company's business outside the United States is subject to medical
device laws in individual foreign countries. These laws range from extensive
device approval requirements in some countries to requests for data or
certifications in other countries. Generally, regulatory requirements are
increasing in these countries. In addition, government funding of medical
procedures is limited and in certain instances being reduced. In the European
Economic Union ("EEU"), the regulatory systems have been harmonized and approval
to market in EEU countries can be obtained through a single agency. The
Company's AESOP, HERMES and ZEUS products, are approved for CE-marking, enabling
marketing of these devices throughout the EEU countries. In addition, these
products are also approved in Canada, Middle East (Egypt, Saudi Arabia, and
Israel), Korea, Taiwan, Singapore, Japan (clinical studies), and Mexico. AESOP
is also approved in Australia.
PATENTS, LICENSES AND PROPRIETARY RIGHTS
Protection of the Company's intellectual property is important to the
Company's business. The Company maintains a policy of seeking device and method
patents on its inventions, obtaining copyrights on copyrightable materials and
entering into proprietary information agreements with its employees and
consultants with respect to technology, which it considers important to its
business. The Company also files for trademark registration and service mark
registration on those marks, which may be used, in marketing efforts with
respect to the products developed, sold and distributed by the Company. The
Company also relies upon trade secrets, unpatented know-how and continuing
technological innovation to develop and maintain its competitive position.
The Company currently holds 24 issued United States patents, 7 foreign
patents and has 75 domestic and foreign patent applications pending disclosing
concepts related to medical devices and methods, medical robotics and speech
recognition applications. The Company has filed corresponding international
patent applications on certain of its key United States patents.
There can be no assurance that patents will issue from any of the pending
applications, or that issued patents will be of sufficient scope to provide
meaningful protection of the Company's technology. In addition, there can be no
assurance that any patents issued to the Company will not be challenged,
invalidated or
circumvented, or that the rights granted thereunder will provide proprietary
protection or commercial advantage to the Company. Notwithstanding the scope of
the patent protection available to the Company, a competitor could develop other
devices or methods for enabling MIS procedures that do not require the use of
robotics or speech recognition tools, aspects of which are patented or pending
patents.
The Company is involved in substantial litigation regarding patents and
other intellectual property rights (See Note 12). Litigation, which could
ultimately result in substantial cost to and diversion of effort by the Company,
has been necessary and may continue to be necessary to enforce patents issued or
licensed to the Company, to protect trade secrets or know-how owned by the
Company, or to defend the Company against claimed infringement of the rights of
others and to determine the scope and validity of the proprietary rights of
others. Adverse determinations in such litigation could subject the Company to
significant liabilities to third parties, could require the Company to seek
licenses from third parties and could prevent the Company from manufacturing,
selling or using some or all of its products, any of which could have a material
adverse affect on the Company's business, financial condition or results of
operations.
The Company believes that it has been vigilant in reviewing the patents of
others with regard to the Company's products. However, from time to time, the
Company has been and may continue to be subject to claims of, and legal actions
alleging, infringement by the Company of the patent rights of others. For
further discussion of the Company's current or threatened litigation see the
description below in the section entitled "Litigation" Part I, Item 1.
PRODUCT LIABILITY AND INSURANCE
Historically, the medical device industry has been subject to product
liability claims. Such claims could be asserted against the Company in the
future for events not known to management at this time. Management has adopted
risk management practices, including procurement of product liability insurance
coverage, which management believes are prudent.
EMPLOYEES
As of December 31, 2002, the Company had 184 full-time employees including
79 employees in sales and marketing, 53 employees in research and development,
28 employees in production and 24 employees in administration. It has never
experienced a work stoppage as a result of labor disputes and none of its
employees are represented by a labor organization.
INDUSTRY SEGMENT AND INTERNATIONAL OPERATIONS
The medical device industry is the single industry segment in which the
Company operates. The Company's export revenues were $6,360,000 (26% of
revenue), $10,273,000 (40% of revenue) and $9,290,000 (43% of revenue) in 2002,
2001 and 2000, respectively.
As the Company's foreign business expands, it will be subject to such
special risks as exchange controls, currency devaluation, dividend restrictions,
the imposition or increase of import or export duties and surtaxes, and
international credit or financial problems. Since its international operations
will require the Company to hold assets in foreign countries denominated in
local currencies, some assets will be dependent for their U.S. dollar valuation
on the values of several foreign currencies in relation to the U.S. dollar.
RECENT DEVELOPMENTS
On March 7, 2003, the Company entered into an Agreement and Plan of Merger
with Intuitive Surgical, Inc. At the effective time of the merger, Intuitive
Merger Corporation, formerly Iron Acquisition
corporation, a newly formed subsidiary of Intuitive Surgical, Inc., will be
merged with and into Computer Motion, Inc., with Computer Motion, Inc. surviving
the merger and continuing as a wholly owned subsidiary of Intuitive Surgical,
Inc. Upon completion of the merger, each share of Computer Motion common stock
will be converted into the right to receive a fraction of a share of Intuitive
Surgical common stock. The fraction of a share of Intuitive Surgical common
stock to be issued with respect to each share of Computer Motion common stock
will be determined by a formula described in the merger agreement. Based on the
capitalization of Intuitive Surgical and Computer Motion and the market price of
Computer Motion common stock as of the date of this report and assuming that the
merger is completed on June 20, 2003, we estimate that the exchange ratio will
be approximately 0.52. The exchange ratio will be adjusted proportionately in
the event that the proposed reverse split of Intuitive Surgical's common stock
is approved by Intuitive Surgical's stockholders and implemented by Intuitive
Surgical's board of directors.
The final exchange ratio will be calculated based on the total number of fully
diluted shares outstanding for Intuitive Surgical and Computer Motion
immediately prior to the effective time of the merger. The number of Computer
Motion's fully diluted shares will vary based on the number of shares of
Computer Motion common stock into which Computer Motion's Series D convertible
preferred stock will be convertible and the number of shares of Computer Motion
common stock which may be issued to pay accrued dividends on the Series D
convertible preferred stock upon conversion. All shares of Computer Motion
Series D convertible preferred stock will convert into shares of Computer Motion
common stock immediately prior to the effective time of the merger. Under the
terms of the Series D convertible preferred stock, in the event that the average
of the closing bid prices of Computer Motion's common stock for the 20
consecutive trading days ending 15 days prior to the Computer Motion special
meeting is below $1.86 per share, the conversion ratio for Computer Motion's
Series D convertible preferred stock could increase. As a result, the exchange
ratio in the merger may decrease and, therefore, Computer Motion common
stockholders would receive a lesser number of Intuitive Surgical shares, and
Computer Motion preferred stockholders would receive a greater number of
Intuitive Surgical shares, in the merger. Stockholders may visit Intuitive
Surgical's website, www.intuitivesurgical.com, or Computer Motion's website,
www.computermotion.com, for announcements regarding the exchange ratio.
Computer Motion stockholders will receive cash in lieu of any fractional shares
of Intuitive Surgical common stock.
In connection with the proposed merger, Computer Motion and Intuitive
Surgical have entered into a Loan and Security Agreement, under which Intuitive
Surgical has agreed to provide a short-term secured bridge loan facility of up
to $7.3 million. The loan will terminate and all outstanding amounts will become
due and payable 120 days following termination of the merger agreement (the
"Maturity Date"). Interest on the loan will accrue at a rate of 8% per annum and
will be payable on the Maturity Date.
Additionally, pursuant to the merger agreement, Computer Motion and
Intuitive Surgical filed stipulations on March 10, 2003 to immediately stay all
pending litigation proceedings between them until August 31, 2003, subject to
the stay being lifted if the merger agreement is terminated, or subject to the
cases being dismissed upon consummation of the transaction contemplated by the
merger agreement.
On March 6, 2003, the Company entered into a Stock Exchange Agreement (the
"Exchange Agreement") with all of the holders of outstanding shares of Series
C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock
pursuant to which such holders agreed to exchange their Series C-1 Convertible
Preferred Stock and Series C-2 Convertible Preferred Stock for a like number of
shares of the Series D-1 Convertible Preferred Stock and Series D-2 Convertible
Preferred Stock. The shares of the Series D Convertible Preferred Stock will
convert into shares of common stock immediately prior to the consummation of the
merger described above. Pursuant to the terms of the Exchange Agreement, in the
event the Company does not consummate the merger by September 30, 2003, the
Company will file its Certificate of Designations Setting Forth the Preferences,
Rights and Limitations of the Series E Convertible Preferred Stock with the
Secretary of State of Delaware, and, holders of outstanding shares of Series D-1
Convertible Preferred Stock and Series D-2 Convertible Preferred Stock will have
the right to exchange such Series D Convertible Preferred Stock for a like
number of Series E Convertible Preferred Stock. As an inducement to the holders
of shares of Series C Convertible Preferred Stock to enter into the Exchange
Agreement, the Company has agreed to lower the exercise price of all outstanding
Series C-1 warrants and Series C-2 warrants (described more particularly below)
to $1.50 per share, provided that such holders exercise such warrants prior to
10 days following the mailing of a proxy statement relating to the Company's
meeting of stockholders to approve the merger.
On February 13, 2003, the Company entered into a Loan and Security
Agreement with Agility Capital, LLC, for a short-term secured bridge loan in the
aggregate principal amount of $2,300,000. The proceeds of the bridge loan were
used to provide funds for the issuance of a letter of credit to support the
issuance of a bond as required by the District Court of Delaware in response to
litigation currently pending. The bridge loan is evidenced by a Secured
Promissory Note that bears interest at a rate of 9% per annum, is secured by all
of the Company's assets and is payable in full on November 12, 2003. In
connection with the bridge loan, the Company issued to Agility Capital a warrant
to purchase up to an aggregate of 500,000 shares of common stock at a purchase
price of $0.97 per share. The Company is in the process of registering the
resale of the shares on its registration statement of Form S-3 with the
Securities and Exchange Commission.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond its control. A number of these risks
are highlighted below. These risks could affect its actual future results and
could cause them to differ materially from any forward-looking statements the
Company has made.
THE COMPANY HAS A HISTORY OF LOSSES, AND EXPECTS TO INCUR LOSSES IN THE FUTURE
SO IT MAY NEVER ACHIEVE PROFITABILITY.
From the Company's formation, it has incurred significant losses. For the
three years ended December 31, 2002, 2001, and 2000 the Company has incurred net
losses of $21,151,000, $16,413,000 and $16,349,000, respectively. In addition,
the Company has incurred net losses from operations since inception and as of
December 31, 2002 has an accumulated deficit of $116,674,000. The Company
expects to incur additional losses as it continues spending for research and
development efforts, clinical trials, manufacturing capacity and sales force
expansion. As a result, the Company will need to generate significant revenues
to achieve and maintain profitability. The Company cannot assure its
stockholders that it will ever achieve significant commercial revenues,
particularly from sales of its ZEUS product line, which is still under
development and awaiting additional FDA clearances for certain significant
applications and procedures, or that the Company will become profitable. It is
possible that the Company may encounter substantial delays or incur unexpected
expenses related to the clinical trials, market introduction and acceptance of
the ZEUS platform, or any future products. If the time required to generate
significant revenues and achieve profitability is longer than anticipated, the
Company may not be able to continue its operations.
SINCE THE COMPANY'S OPERATING EXPENDITURES CURRENTLY EXCEED ITS REVENUES, ANY
FAILURE TO RAISE ADDITIONAL CAPITAL OR GENERATE REQUIRED WORKING CAPITAL COULD
REDUCE THE COMPANY'S ABILITY TO COMPETE AND PREVENT IT FROM TAKING ADVANTAGE OF
MARKET OPPORTUNITIES.
The Company's operations to date have consumed substantial amounts of cash,
and it expects its capital and operating expenditures will exceed revenues for
at least the next year. The Company believes it will require substantial working
capital to fund its operations for the current year and beyond. Management is in
the process of pursuing financial arrangements to support operations through and
after December 31, 2003. Management believes funding may be obtained from the
following sources: current cash balances, the proceeds from the exercise of
warrants, the issuance of additional debt or equity securities, funding from
strategic partners and/or sale of assets. The Company cannot assure its
stockholders that additional capital will be available on terms favorable to it,
or at all. The various elements of the Company's business and growth strategies,
including its introduction of new products, the expansion of its marketing and
distribution activities, and obtaining regulatory approval or market acceptance
will require additional capital. If adequate funds are not available or are not
available on acceptable terms, the Company's ability to fund those business
activities essential to its ability to operate profitably, including further
research and development, clinical trials, and sales and marketing activities,
would be significantly limited.
FAILURE TO COMPLETE THE MERGER WITH INTUITIVE SURGICAL COULD HAVE AN ADVERSE
IMPACT ON THE COMPANY AND ITS STOCK PRICE
Since entering into the merger agreement on March 7, 2003, the Company has
made planning and operations decisions on the basis that the merger will be
completed. These planning and operations decisions may have been different had
the Company not entered into the merger agreement. For example, if the Company
had not entered into the merger agreement, it may have pursued a debt or equity
financing transaction in order to assure access to sufficient working capital as
an independent company, rather than rely on the availability of Intuitive
Surgical's cash assuming the merger will be completed. Moreover, the merger
agreement contains restrictions on the Company's incurrence of debt and issuance
of equity securities while the merger is pending. If the merger is not
completed, not only will the Company not have the benefit of Intuitive
Surgical's cash or have obtained other financing, but the Company also will have
incurred a significant amount of non-operating expenses associated with the
merger that it otherwise would not have incurred. Consequently, if the merger is
not completed, the Company's financial condition likely will be worse than it
would have been had it never entered into the merger agreement.
If the Company and Intuitive Surgical fail to complete the merger, the
Company will face the difficulties of competing with limited cash resources and
will need to attempt to raise additional debt or equity capital. Such financing
may be available only on terms materially adverse to the Company, and may not be
available at all.
Additionally, if the merger is not completed, the Company's stock would no
longer be influenced by the exchange ratio established by the merger agreement,
which could negatively impact the Company's current market valuation and stock
price.
THE COMPANY HAS NOT OBTAINED THE CONSENT OF ARTHUR ANDERSEN LLP TO BE NAMED IN
THIS FORM 10-K AS HAVING AUDITED THE COMPANY'S FINANCIAL STATEMENTS. THIS WILL
LIMIT YOUR ABILITY TO ASSERT CLAIMS AGAINST ARTHUR ANDERSEN LLP.
After reasonable efforts, the Company has been unable to obtain the consent of
Arthur Andersen LLP to the incorporation into the registration statement of
their report with respect to the consolidated financial statements of the
Company for the years ended December 31, 2001 and December 31, 2000 which appear
in its Annual Report on Form 10-K for the year ended December 31, 2002. Under
these circumstances, Rule 437(a) under the Securities Act of 1933 permits the
registration statement to be filed without a written consent from Arthur
Andersen. The absence of such consent may limit your recovery on certain claims.
In particular, and without limitation, you will not be able to assert claims
against Arthur Andersen under Section 11 of the Securities Act of 1933 for any
untrue statement of a material fact contained in the consolidated financial
statements of the Company for the years ended December 31, 2001 and December
31, 2000 or any omission to state a material fact required to be stated therein
which appear in the Company's Annual Report on Form 10-K for the year ended
December 31 ,2002.
THE CONVICTION OF ARTHUR ANDERSEN LLP ON OBSTRUCTION OF JUSTICE CHARGES MAY
ADVERSELY AFFECT ARTHUR ANDERSEN'S ABILITY TO SATISFY CLAIMS ARISING FROM THE
PROVISION OF AUDITING SERVICES TO THE COMPANY AND MAY IMPEDE THE COMPANY'S
ACCESS TO CAPITAL MARKETS.
Arthur Andersen LLP audited the Company's financial statements included in
this form 10-K for the years ended December 31, 2001 and 2000. On March 14,
2002, an indictment was unsealed charging Arthur Andersen LLP with federal
obstruction of justice arising from the government's investigation of Enron
Corp. On June 15, 2002, Arthur Andersen LLP was convicted of these charges. The
impact of this conviction on Arthur Andersen LLP's financial condition may
adversely affect the ability of Arthur Andersen LLP to satisfy any claims
arising from its provision of auditing services to the Company.
Should the Company seek to access the public capital markets, SEC rules
will require the Company to include or incorporate by reference in any
prospectus three years of audited financial statements. The SEC's current rules
would require the Company to present audited financial statements for one or
more fiscal years audited by Arthur Andersen LLP and use reasonable efforts to
obtain its consent until the audited financial statements for the fiscal year
ending December 31, 2004 become available. If prior to that time the SEC ceases
accepting financial statements audited by Arthur Andersen LLP, it is possible
that the available audited financial statements for the years ended December 31,
2001 and 2000 audited by Arthur Andersen LLP might not satisfy the SEC's
requirements. In that case, the Company would be unable to access the public
capital markets unless an independent accounting firm, is able to audit the
financial statements originally audited by Arthur Andersen LLP. Any delay or
inability to access the public capital markets caused by these circumstances
could have a material adverse effect on the combined company's business,
profitability and growth prospects.
IF THE COMPANY'S PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, THE COMPANY WILL NOT
BE ABLE TO GENERATE THE REVENUE NECESSARY TO SUPPORT ITS BUSINESS.
The Company anticipates that ZEUS will comprise a substantial majority of
its sales in the future and its future success therefore depends on the
successful development, commercialization and market acceptance of this product.
Even if the Company is successful in obtaining the necessary regulatory
clearances or approvals for ZEUS, its successful commercialization will depend
upon the Company's ability to demonstrate the clinical safety and effectiveness,
ease-of-use, reliability and cost-effectiveness of this product in a clinical
setting. The Company cannot assure its investors that the FDA will allow it to
conduct further clinical trials or that ZEUS will prove to be safe and effective
in clinical trials under United States or international regulatory requirements.
It is also possible that the Company may encounter problems in clinical testing
that cause a delay in or prohibits commercialization of ZEUS. Moreover, the
clinical trials may identify significant technical or other obstacles to
overcome prior to the commercial deployment of ZEUS, resulting in significant
additional product development expense and delays. Even if the safety and
effectiveness of procedures using ZEUS are established, surgeons may elect not
to recommend the use of the product for any number of reasons. Broad use of the
Company's products will require significant surgeon training and practice, and
the time and expense required to complete such training and practice could
adversely affect market acceptance. Successful commercialization of the
Company's products will also require that the Company satisfactorily address the
needs of various decision makers in the hospitals that constitute the target
market for its products and to address potential resistance to change in
existing surgical methods. If the Company is unable to gain market acceptance of
its products, the Company will not be able to sell enough of its products to be
profitable, and the Company may be required to obtain additional funding to
develop and bring to market alternative products.
IF THE COMPANY DOES NOT OBTAIN AND MAINTAIN NECESSARY DOMESTIC REGULATORY
APPROVALS, THE COMPANY WILL NOT BE ABLE TO MARKET AND SELL ITS PRODUCTS IN THE
UNITED STATES.
The Company's products in the United States are regulated as medical
devices by the FDA. The FDA strictly prohibits the marketing of FDA-cleared or
approved medical devices for unapproved uses. Failure to receive or delays in
receipt of FDA clearances or approvals, including any resulting need for
additional clinical trials or data as a prerequisite to approval or clearance,
or any FDA conditions that limit the Company's ability to market its products
for particular uses or indications, could impair the Company's ability to
effectively develop a market for its products and impair its ability to operate
profitably in the future.
The Company's operations are subject to the FDA's Quality System Regulation
(a federal regulation governing medical devices) and ISO-9001 (a global standard
for quality systems) and similar regulations in other countries, including
EN-46001 Standards (the European standard for quality systems), regarding the
design, manufacture, testing, labeling, record keeping and storage of devices.
Ongoing compliance with FDA's Quality System Regulation requirements and other
applicable regulatory requirements will be monitored through periodic inspection
by federal and state agencies, including the FDA, and comparable agencies in
other countries. The Company's manufacturing processes are subject to stringent
federal, state and local regulations governing the use, generation, manufacture,
storage, handling and disposal of certain materials and wastes. Failure to
comply with applicable regulatory requirements can result in, among other
things, suspensions or withdrawals of approvals, product seizures, injunctions,
recalls of products, operating restrictions, and civil fines and criminal
prosecution. Delays or failure to receive approvals or clearances for the
Company's current submissions, or loss of previously received approvals or
clearances, would materially adversely affect the marketing and sales of its
products and impair its ability to operate profitably in the future.
THE COMPANY'S PRODUCTS ARE SUBJECT TO VARIOUS INTERNATIONAL REGULATORY PROCESSES
AND APPROVAL REQUIREMENTS. IF THE COMPANY DOES NOT MAINTAIN THE NECESSARY
INTERNATIONAL REGULATORY APPROVALS, THE COMPANY WILL NOT BE ABLE TO MARKET AND
SELL ITS PRODUCTS IN FOREIGN COUNTRIES.
To be able to market and sell the Company's products in other countries, it
must obtain regulatory approvals and comply with the regulations of those
countries. For instance, the European Union requires that manufacturers of
medical products obtain the right to affix the CE mark to their products before
selling them in member countries of the European Union. The CE mark is an
international symbol of adherence to quality assurance standards and compliance
with applicable European medical device directives. In order to obtain the right
to affix the CE mark to products, a manufacturer must obtain certification that
its processes meet certain European quality standards. The Company has obtained
the CE mark for all of its products, which means that these products may
currently be sold in all of the member countries of the European Union.
If the Company modifies existing products or develops new products in the
future, including new instruments, the Company will need to apply for permission
to affix the CE mark to such products. In addition, the Company will be subject
to annual regulatory audits in order to maintain the CE mark permissions it has
already obtained. If the Company is unable to maintain permission to affix the
CE mark to its products, the Company will no longer be able to sell its products
in member countries of the European Union.
INTERNATIONAL SALES OF THE COMPANY'S PRODUCTS ACCOUNT FOR A SIGNIFICANT PORTION
OF ITS REVENUES AND THE COMPANY'S GROWTH MAY BE LIMITED IF THE COMPANY IS UNABLE
TO SUCCESSFULLY MANAGE THESE INTERNATIONAL ACTIVITIES.
The Company's business currently depends in large part on its sales
activities in Europe and Asia, and the Company intends to expand its presence
into additional foreign markets. Sales to markets outside of the United States
accounted for approximately 26% of the Company's sales for the year ended
December 31, 2002. The Company is subject to a number of challenges that relate
to its international business activities. These challenges include:
o the risks associated with foreign currency exchange rate fluctuation;
o failure of local laws to provide the same degree of protection against
infringement of the Company's intellectual property;
o certain laws and business practices that could favor local competitors,
which could slow the Company's growth in international markets;
o building an organization capable of supporting geographically dispersed
operations; and
o the expense of establishing facilities and operations in new foreign
markets.
Currently, the majority of the Company's international sales are
denominated in U.S. dollars. As a result, an increase in the value of the U.S.
dollar relative to foreign currencies could make the Company's products less
competitive in international markets. If the Company is unable to meet and
overcome these challenges, its international operations may not be successful,
which would limit the growth of the Company's business.
THE COMPANY MAY NEVER SELL ENOUGH PRODUCTS TO BE PROFITABLE BECAUSE THE
COMPANY'S CUSTOMERS MAY CHOOSE TO PURCHASE ITS COMPETITORS' PRODUCTS OR MAY NOT
ACCEPT THE COMPANY'S PRODUCTS.
The Minimally Invasive Surgery ("MIS") market has been, and will likely
continue to be, highly competitive. Many competitors in this market have
significantly greater financial resources and experience than the Company. In
addition, some of our competitors, including Intuitive Surgical, have been, and
may continue to be able to market their products sooner than the Company if they
are able to achieve regulatory approval before the Company. Many medical
conditions that can be treated using the Company's products can also be treated
by pharmaceuticals or other medical devices and procedures. Many of these
alternative treatments are widely accepted in the medical community and have a
long history of use. In addition, technological advances with other procedures
could make such therapies more effective or less expensive than using the
Company's products
and could render the Company's products obsolete or unmarketable. As a result,
the Company cannot be certain that physicians will use the Company's products to
replace or supplement established treatments or that its products will be
competitive with current or future technologies.
IF SURGEONS OR INSTITUTIONS ARE UNABLE TO OBTAIN REIMBURSEMENT FROM THIRD-PARTY
PAYORS FOR PROCEDURES USING THE COMPANY'S PRODUCTS, OR IF REIMBURSEMENT IS
INSUFFICIENT TO COVER THE COSTS OF PURCHASING THE COMPANY'S PRODUCTS, THE
COMPANY BE UNABLE TO GENERATE SUFFICIENT SALES TO SUPPORT ITS BUSINESS.
In the United States, the Company's products are primarily acquired by
medical institutions that bill various third-party payors, such as Medicare,
Medicaid and other government programs, and private insurance plans for the
healthcare services they provide their patients. Third-party payors are
increasingly scrutinizing whether to cover new products and, if so, the level of
reimbursement. There can be no assurance that third-party reimbursement and
coverage for the Company's products will be available or adequate, that current
reimbursement amounts will not be decreased in the future, or that future
legislation, regulation or reimbursement policies of third-party payors will not
otherwise affect the demand for the Company's products or the Company's ability
to sell its products on a profitable basis, particularly if the Company's
products are more expensive than competing surgical or other procedures. If
third-party payor coverage or reimbursement is not available or inadequate,
purchasers of the Company's products would lose their ability to pay for the
Company's products, and the Company's ability to make future sales and collect
on outstanding accounts would be significantly impaired, which would limit the
Company's ability to operate profitably
IF THE COMPANY IS UNABLE TO PROTECT THE INTELLECTUAL PROPERTY CONTAINED IN ITS
PRODUCTS FROM USE BY THIRD PARTIES, THE COMPANY'S ABILITY TO COMPETE IN THE
MARKET WILL BE HARMED.
The Company's success depends, in part, on its ability to obtain and
maintain patent protection for its products by filing United States and foreign
patent applications related to its technology, inventions and improvements.
However, there can be no assurance that third parties will not seek to assert
that the Company's devices and systems infringe their patents or seek to expand
their patent claims to cover aspects of the Company's technology. As a result,
there can be no assurance that the Company will not become subject to future
patent infringement claims or litigation in a court of law, interference
proceedings, or opposition to a patent granted in a foreign jurisdiction. The
defense and prosecution of such intellectual property claims are costly,
time-consuming, divert the attention of management and technical personnel and
could result in substantial cost and uncertainty regarding the Company's future
viability. Future litigation or regulatory proceedings, which could result in
substantial cost and uncertainty, may also be necessary to enforce the Company's
patent or other intellectual property rights or to determine the scope and
validity of other parties' proprietary rights. Any public announcements related
to such litigation or regulatory proceedings initiated by the Company, or
initiated or threatened against the Company by its competitors, could adversely
affect the price of the Company's stock.
The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position, and the Company typically requires its employees, consultants and
advisors to execute confidentiality and assignment of inventions agreements in
connection with their employment, consulting or advisory relationships. There
can be no assurance, however, that these agreements will not be breached or that
the Company will have adequate remedies for any breach. Failure to protect the
Company's intellectual property would limit its ability to produce and/or market
its products in the future and would likely adversely affect the Company's
revenues generated by the sale of such products.
THE COMPANY IS INVOLVED IN INTELLECTUAL PROPERTY LITIGATION WITH INTUITIVE
SURGICAL AND BROOKHILL-WILK THAT MAY HURT THE COMPANY'S COMPETITIVE POSITION,
MAY BE COSTLY TO THE COMPANY AND MAY PREVENT THE COMPANY FROM SELLING ITS
PRODUCTS.
On May 10, 2000, the Company filed a lawsuit in United States District
Court alleging that Intuitive Surgical's da Vinci surgical robot system
infringes on its United States Patent Nos. 5,524,180, 5,878,193, 5,762,458,
6,001,108, 5,815,640, 5,907,664, 5,855,583 and 6,063,095. Subsequently, Computer
Motion's complaint was amended to add allegations that Intuitive's da Vinci
surgical robot infringed two additional Computer Motion patents United States
Patent Nos. 6,244,809 and 6,102,850. These patents concern methods and devices
for conducting various aspects of robotic surgery. Intuitive has served an
Answer and Counterclaim alleging non-infringement of each patent-in-suit, patent
invalidity and unenforceability. Discovery is still underway. The parties have
filed cross motions for summary judgment on the issue of patent infringement
relating to the '108, '664, '809, and '850 patents. The Court recently granted
Intuitive's motion for summary judgment of non-infringement relating to the '850
patent. The Court also recently granted our motion for summary judgment relating
to the '809 patent. The Court has not ruled on any of the remaining motions at
this time. Pursuant to the merger agreement with Intuitive, Computer Motion and
Intuitive filed on March 10, 2003, stipulations to stay this litigation until
August 31, 2003, subject to the stay being lifted if the merger agreement is
terminated, or subject to this case being dismissed upon consummation of the
transactions contemplated by the merger agreement.
On or about December 7 and 8, 2000, the United States Patent and Trademark
Office (USPTO) granted three of Intuitive's petitions for a declaration of an
interference relating to the Company's 5,878,193, 5,907,664, and 5,855,583
patents. On March 30, 2002, the three judge panel of the Board of Patent
Interferences issued decision orders on the parties' preliminary motions. The
Board granted the Company's motion on Interference No. 104,643 and issued an
order for Intuitive to show cause why judgment should not be entered against
Intuitive on this interference. The Board denied the Company's motion on the
Interference No. 104,644 and entered judgment against the Company. The Board
denied the Company's motions on the Interference No. 104,645, deferred decision
on two of Intuitive's motions, and granted-in-part, denied-in-part and
deferred-in-part on one of Intuitive's motions. The Board's decision on
Interference No. 104,645 invalidated some of the parties' claims, affirmed some
of Intuitive's claims and provided for further proceedings related to two of our
claims and is therefore not final. On July 25, 2002, Computer Motion filed a
civil action seeking review of the two adverse decisions in the United States
District Court for the District of California. Pursuant to the merger agreement
with Intuitive, Computer Motion and Intuitive filed on March 10, 2003,
stipulations to stay this litigation until August 31, 2003, subject to the stay
being lifted if the merger agreement is terminated, or subject to this case
being dismissed upon consummation of the transactions contemplated by the merger
agreement.
On February 21, 2001, Brookhill-Wilk filed suit against the Company
alleging that its ZEUS surgical system infringed upon Brookhill-Wilk's United
States Patent Nos. 5,217,003 and 5,368,015. Brookhill-Wilk's complaint seeks
damages, attorneys' fees and increased damages alleging willful patent
infringement. On March 21, 2001, the Company served its Answer and Counterclaim
alleging non-infringement of each patent-in-suit, patent invalidity and
unenforceability. On November 8, 2001, the United States District Court for the
Southern District of New York in the co-pending Brookhill-Wilk v. Intuitive
Surgical, Inc., Civil Action No. 00-CV-6599 (NRB), issued an order interpreting
the claims of Brookhill-Wilk's Patent No. 5,217,003 in a way that the Company
believes excludes current applications of the Company's ZEUS surgical system. In
light of this decision, on November 13, 2001, the parties to Brookhill Wilk v.
Computer Motion, Inc. agreed to dismiss the case without prejudice. On March 25,
2002, Judge Alvin K. Hellerstein dismissed the case without prejudice.
On March 30, 2001, Intuitive and IBM Corporation filed suit alleging that
the Company's AESOP, ZEUS and HERMES products infringe United States Patent No.
6,201,984, which was issued on March 13, 2001. The complaint seeks damages, a
preliminary injunction, a permanent injunction, and costs and attorneys' fees.
The claims are directed to a surgical system employing voice recognition for
control of a surgical instrument. Each of the asserted claims are limited to a
surgical system employing voice recognition for control of a surgical robot and
literally read on the Company's current AESOP product and the Company's ZEUS and
HERMES products to the extent they are used with AESOP. A jury trial has been
held on the issues of patent invalidity due to lack
of enablement and failure to disclose the best mode in addition to damages. The
Company's defense of unenforceability due to prosecution laches was tried before
the District Court Judge. The jury returned a verdict finding IBM's United
States Patent No. 6,201,984 valid, and finding Intuitive was damaged in an
amount of $4.4 million. At December 31, 2002, the Company recorded a $4.4
million litigation provision for this related jury verdict that was recorded
within the litigation provision within the accompanying consolidated statements
of operations. In addition, the litigation provision included in the
accompanying consolidated statements of operations includes legal expenses
incurred during the three years ended December 31, 2002. Prior to the jury's
verdict, the court ruled that the Company had not "willfully" infringed the
patent. On December 10, 2002, the Court rendered an adverse decision on our
prosecution laches defense and on December 11, 2002, issued a judgment in
Intuitive's and IBM's favor based upon the earlier jury verdict and the Court's
December 10, 2002 ruling. The case has entered the post-trial phase during which
we will be seeking judicial review of the jury's verdict and the Court's
December 10, 2002 ruling. Pursuant to the merger agreement with Intuitive,
Computer Motion and Intuitive filed on March 10, 2003, stipulations to stay this
litigation until August 31, 2003, subject to the stay being lifted if the merger
agreement is terminated, or subject to this case being dismissed upon
consummation of the transactions contemplated by the merger agreement.
The Company believes that all of its major product lines could be affected
by this litigation. The patents subject to this litigation are an integral part
of the technology incorporated in the Company's AESOP, ZEUS and HERMES product
lines which together accounted for approximately 76% of its revenues for the
year ended December 31, 2002. If the stay is lifted and the Company loses the
counterclaim on the patent suit brought by Intuitive or the patent infringement
claims by Intuitive or IBM or if the decision in Brookhill-Wilk v. Intuitive
Surgical, Inc. is reversed, the Company may be prevented from selling its
products as currently configured without first obtaining a license to the
disputed technology from the successful party or modifying the product.
Obtaining a license could be expensive, or could require that the Company
license to the successful party some of its own proprietary technology, either
of which result could seriously harm the Company's business. In the event that a
successful party is unwilling to grant the Company a license, the Company will
be required to stop selling its products that are found to infringe the
successful party's patents unless the Company can redesign them so they do not
infringe these patents, which the Company may be unable to do. Whether or not
the Company is successful in these lawsuits in the event that the stay is
lifted, the litigation could consume substantial amounts of the Company's
financial and managerial resources. Further, because of the substantial amount
of discovery often involved in connection with this type of litigation, there is
a risk that some of the Company's confidential information could be compromised
by disclosure during the discovery process.
BECAUSE THE COMPANY'S INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND NEW
PRODUCT DEVELOPMENT, THE COMPANY'S FUTURE SUCCESS WILL DEPEND UPON ITS ABILITY
TO EXPAND THE APPLICATIONS OF THE COMPANY'S PRODUCTS.
The Company's success will depend to a significant extent upon its ability
to enhance and expand the utility of its products so that they gain market
acceptance. Failure to develop or introduce new products or product enhancements
on a timely basis that achieve market acceptance could have a material adverse
effect on the Company's business, financial condition and results of operations.
In the past, some of the Company's competitors have been able to develop
desirable product features (such as articulation of certain instruments and
three dimensional visualization of their products) earlier than the Company has.
The Company's inability to rapidly develop these features may have led to lower
sales of some of the Company's products. In addition, technological advances
with other therapies could make such therapies less expensive or more effective
than using the Company's products and could render its technology obsolete or
unmarketable. There can be no assurance that physicians will use the Company's
products to replace or supplement established treatments or that the Company's
products will be competitive with current or future technologies.
THE COMPANY MAY NOT BE ABLE TO EXPAND ITS MARKETING DISTRIBUTION ACTIVITIES IN
ORDER TO MARKET ITS PRODUCTS COMPETITIVELY.
The Company anticipates significantly increasing the number of sales
personnel to more fully cover its
target markets, particularly as the Company expands its product offerings. It is
possible the Company will be unable to compete effectively in attracting,
motivating and retaining qualified sales personnel. Additionally, the Company
currently intends to market and sell its products outside the United States and
Europe, principally through distributors. In order to accomplish this, the
Company will be required to expand its distributor network. The Company may not
be able to identify suitable distributors or negotiate acceptable distribution
agreements and any such distribution agreements may not result in significant
sales. If the Company is unable to identify, attract, motivate and retain
qualified sales personnel, suitable distributors or negotiate acceptable
distribution agreements, the Company may not be successful in expanding the
market for its products outside of the United States and Europe.
CONCENTRATION OF OWNERSHIP AMONG THE COMPANY'S EXISTING EXECUTIVE OFFICERS,
DIRECTORS AND PRINCIPAL STOCKHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING
SIGNIFICANT CORPORATE DECISIONS.
The Company's current directors and executive officers beneficially own
approximately 24.84% of its outstanding common stock. These stockholders, acting
together, have the ability to significantly influence the election of the
Company's directors and the outcomes of other stockholder actions and, as a
result, direct the operation of its business, including delaying or preventing a
proposed acquisition of the Company.
IF THE COMPANY LOSES ITS KEY PERSONNEL OR IS UNABLE TO ATTRACT AND RETAIN
ADDITIONAL PERSONNEL, THE COMPANY'S ABILITY TO COMPETE WILL BE HARMED.
The Company's future business and operating results depend in significant
part on its key management, scientific, technical and sales personnel, many of
whom would be difficult to replace, and future success will depend partially
upon the Company's ability to retain these persons and recruit additional
qualified management, technical, marketing, sales, regulatory, clinical and
manufacturing personnel. Competition for such personnel is intense and the
Company may have difficulty attracting or retaining such personnel. In addition,
the Company does not have employment agreements with the majority of its key
personnel and also does not maintain life insurance on any of its employees that
may make it more difficult to retain its key personnel in the future.
THE COMPANY'S FUTURE OPERATING RESULTS MAY FALL BELOW SECURITIES ANALYSTS' OR
INVESTORS' EXPECTATIONS, WHICH COULD CAUSE THE COMPANY'S STOCK PRICE TO DECLINE
AND DIMINISH THE VALUE OF ITS INVESTORS' HOLDINGS.
The Company's results of operations may vary significantly from quarter to
quarter depending upon numerous factors, including but not limited to, the
following:
o delays associated with the FDA and other regulatory clearance and approval
processes;
o healthcare reimbursement policies;
o timing and results of clinical trials;
o demand for its products;
o changes in pricing policies by the Company or its competitors;
o the number, timing and significance of its competitors' product
enhancements and new products;
o product quality issues; and
o component availability and supplier delivery performance.
In addition, the Company's operating results in any particular period may
not be a reliable indication of its future performance. It is likely that in
some future quarters, the Company's operating results will be below the
expectations of securities analysts or investors. If this occurs, the price of
the Company's common stock, and the value of its investors' holdings, will
likely decline.
THE COMPANY MAY INCUR SUBSTANTIAL COSTS DEFENDING SECURITIES CLASS ACTION
LITIGATION DUE TO ITS STOCK PRICE VOLATILITY.
The market price of the Company's common stock is likely to be volatile and
may be affected by a number of factors, including but not limited to, the
following:
o actual or anticipated decisions by the FDA with respect to approvals or
clearances of its competitors' products;
o actual or anticipated fluctuations in its operating results;
o announcements of technological innovations;
o new commercial products announced or introduced by the Company or its
competitors;
o changes in third party reimbursement policies;
o developments concerning the Company's or its competitors' proprietary
rights;
o conditions and trends in the medical device industry;
o governmental regulation;
o changes in financial estimates by securities analysts; and
o general stock market conditions.
Securities class action litigation has often been brought against companies
when the market price of their securities declines. The Company could be
especially prone to such risk because technology companies have experienced
greater than average stock price volatility in recent years. If the Company were
subject to securities litigation, the Company would incur substantial costs and
divert management's attention defending any such claims.
THE COMPANY'S RELIANCE ON SOLE OR SINGLE SOURCE SUPPLIERS COULD HARM ITS ABILITY
TO MEET DEMAND FOR THE COMPANY'S PRODUCTS IN A TIMELY MANNER OR WITHIN ITS
PROJECTED BUDGET.
The Company relies on independent contract manufacturers, some of which are
single source suppliers, for the manufacture of the principal components of its
products. In some instances, the Company relies on companies that are sole
suppliers of key components of its products. If one of these sole suppliers goes
out of business, the Company could face significant production delays until an
alternate supplier is found, or until the product could be redesigned and
revalidated to accommodate a new supplier's replacement component. In addition,
the Company generally submits purchase orders based upon its suppliers' current
price lists. Since the Company generally does not have written contracts for
future purchase orders with its suppliers, these suppliers may increase the cost
of the parts the Company purchases in the future.
The Company's manufacturing experience to date has been focused primarily
on assembling components produced by third-party manufacturers. In scaling up
manufacturing of new products, the Company may encounter difficulties involving
quality control and assurance, component availability, adequacy of control
policies and procedures, lack of qualified personnel and compliance with the
FDA's Quality System Regulations requirements. The Company may elect to
internally manufacture components currently provided by third parties or to
implement new production processes. The Company cannot assure its stockholders
that manufacturing yields or costs will not be adversely affected by a
transition to in-house production or to new production processes if such efforts
are undertaken. If necessary, this expansion will require the commitment of
capital resources for facilities, tooling and equipment and for leasehold
improvements. Further, the Company's delay or inability to expand its
manufacturing capacity or to obtain the commitment of such resources could
result in its inability to meet demand for its products, which could harm the
Company's ability to generate revenues, lead to customer dissatisfaction and
damage its reputation.
THE USE OF THE COMPANY'S PRODUCTS COULD RESULT IN PRODUCT LIABILITY CLAIMS THAT
COULD BE EXPENSIVE AND HARM ITS' BUSINESS.
As a medical device manufacturer, the Company faces an inherent business
risk of financial exposure to product liability claims in the event that the use
of its products results in personal injury or death. The Company also faces the
possibility that defects in the design or manufacture of its products might
necessitate a product recall. It is possible that the Company will experience
losses due to product liability claims or recalls in the future. The Company
currently maintains product liability insurance with coverage limits of
$5,000,000, but future claims may exceed these coverage limits. The Company may
also require increased product liability coverage as additional potential
products are successfully commercialized. Such insurance is expensive, difficult
to obtain and may not be available in the future on acceptable terms, or at all.
While the Company has not had any material product liability claims to date, its
defense of any future product liability claim, regardless of its merit or
eventual outcome, would divert management's attention and could result in
significant legal costs. In addition, a product liability claim or any product
recalls could also harm its reputation or result in a decline in revenues.
THE COMPANY'S CONTINUED GROWTH WILL SIGNIFICANTLY STRAIN ITS RESOURCES AND, IF
THE COMPANY FAILS TO MANAGE THIS GROWTH, ITS ABILITY TO MARKET, SELL AND DEVELOP
ITS PRODUCTS MAY BE HARMED.
The Company's growth will continue to place significant demands on its
management and resources. In order to compete effectively against current and
future competitors, prepare products for clinical trials and develop future
products, the Company believes it must continue to expand its operations,
particularly in the areas of research and development and sales and marketing.
It is likely that the Company will be required to implement additional operating
and financial controls, hire and train additional personnel, install additional
reporting and management information systems and expand its physical operations.
The Company's future success will depend, in part, on its ability to manage
future growth and the Company cannot assure its investors that it will be
successful in doing so.
FUTURE SALES OF THE COMPANY'S COMMON STOCK COULD DEPRESS THE MARKET PRICE OF ITS
COMMON STOCK.
Future sales of the Company's common stock could depress the market price
of its common stock. On March 12, 2003, the Company filed a registration
statement on Form S-3 covering the resale of 500,000 shares of its common stock
issuable upon exercise of a warrant. This registration statement has not been
declared effective. On December 13, 2002, the Company filed a registration
statement on Form S-3 (File No. 333-101830) covering the resale of up to an
aggregate of 16,931,365 shares of its common stock issuable upon conversion of
the Company's Series C Convertible Preferred Stock, as payment of dividends on
the Series C Convertible Preferred Stock, as a conversion premium on the Series
C Convertible Preferred Stock and upon exercise of certain warrants. This
registration statement was declared effective on December 23. 2002. On February
28, 2002 the Company filed a registration statement on Form S-3 (File No.
333-83552) covering the resale of 5,075,771 shares of its common stock by
certain selling stockholders. In addition, on or prior to February 13, 2002, the
Company issued 2,911,039 shares of common stock upon conversion of all the
shares of
its Series B Convertible Preferred Stock. The Company filed a registration
statement on Form S-3 (File No. 333-58962) covering the shares of common stock
issued to holders upon the conversion of the Series B Convertible Preferred
Stock and issuable upon exercise of certain warrants issued to the former holder
of its Series B Convertible Preferred Stock. The Securities Exchange Commission
declared this registration statement effective on September 24, 2001. In the
future, the Company may issue additional options, warrants or other derivative
securities convertible into its common stock. The public sale of the Company's
common stock by the selling stockholders who control large blocks of its common
stock could depress the market price of its common stock.
FAILURE TO SATISFY NASDAQ NATIONAL MARKET LISTING REQUIREMENTS MAY RESULT IN THE
COMPANY'S STOCK BEING DELISTED FROM THE NASDAQ NATIONAL MARKET AND BEING SUBJECT
TO RESTRICTIONS ON "PENNY STOCK".
The Company's common stock is currently listed on the Nasdaq National
Market under the symbol "RBOT." For continued inclusion on the Nasdaq National
Market, the Company must maintain, among other requirements, $10.0 million in
stockholders' equity, a minimum bid price of $1.00 per share, and a market value
of its public float of at least $5.0 million. On December 31, 2002, the
Company's stockholders' equity was $5.7 million, leaving the company
non-compliant with the new minimum stockholders' equity standard on the Nasdaq
National Market. In the event that the Company fails to maintain the minimum
stockholders' equity standard or other listing standards on a continuous basis,
the Company's common stock may be removed from listing on the Nasdaq National
Market. If the Company's common stock is delisted from the Nasdaq National
Market, and the Company is not able to list the shares on the Nasdaq Small Cap
Market or another exchange, trading of its common stock, if any, would be
conducted in the over-the-counter market in the so-called "pink sheets" or, if
available, the NASDAQ's "Electronic Bulletin Board." As a result, stockholders
could find it more difficult to dispose of, or to obtain accurate quotations as
to the value of the Company's common stock, and the trading price per share
could decline.
If the Company's shares are not listed on any exchange or on the Nasdaq
National Market, they are also subject to the regulations regarding trading in
"penny stocks," which are those securities trading for less than $5.00 per
share. The following is a list of the restrictions on the sale of penny stocks:
o Prior to the sale of penny stock by a broker-dealer to a new
purchaser, the broker-dealer must determine whether the purchaser is
suitable to invest in penny stocks. To make that determination, a
broker-dealer must obtain, from a prospective investor, information
regarding the purchaser's financial condition and investment
experience and objectives. Subsequently, the broker-dealer must
deliver to the purchaser a written statement setting forth the basis
of the suitability finding. A broker-dealer must obtain from the
purchaser a written agreement to purchase the securities. This
agreement must be obtained for every purchase until the purchaser
becomes an "established customer."
o The Exchange Act requires that prior to effecting any transaction in
any penny stock, a broker-dealer must provide the purchaser with a
"risk disclosure document" that contains, among other things, a
description of the penny stock market and how it functions and the
risks associated with such investment. These disclosure rules are
applicable to both purchases and sales by investors.
A dealer that sells penny stock must send to the purchaser, within ten days
after the end of each calendar month, a written account statement including
prescribed information relating to the security. As a result of a failure to
maintain the trading of the Company's stock on the Nasdaq National Market and
the rules regarding penny stock transactions, the investors' ability to sell to
a third party may be limited. The Company makes no guarantee that its current
market makers will continue to make a market in its securities, or that any
market for its securities will continue.
AVAILABLE INFORMATION
The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available
free of charge on the Company's web site at www.computermotion.com.
ITEM 2. PROPERTIES
The Company leases approximately 45,000 square feet of office and
manufacturing space in an office park in Goleta, California, approximately 1,100
square feet of office space in Shanghai, China, approximately 850 square feet of
office space in Beijing, China and approximately 1,300 square feet of office
space in Strasbourg, France. As of December 31, 2002, the Company had the
following aggregate minimum lease payments for certain facilities: 2003-
$1,032,000, 2004- $1,013,000, 2005-$766,000, 2006-$751,000 and thereafter
$273,000.
ITEM 3. LEGAL PROCEEDINGS
On May 10, 2000, the Company filed a lawsuit in United States District
Court alleging that Intuitive Surgical's da Vinci surgical robot system
infringes on its United States Patent Nos. 5,524,180, 5,878,193, 5,762,458,
6,001,108, 5,815,640, 5,907,664, 5,855,583 and 6,063,095. Subsequently, Computer
Motion's complaint was amended to add allegations that Intuitive's da Vinci
surgical robot infringed two additional Computer Motion patents United States
Patent Nos. 6,244,809 and 6,102,850. These patents concern methods and devices
for conducting various aspects of robotic surgery. Intuitive has served an
Answer and Counterclaim alleging non-infringement of each patent-in-suit, patent
invalidity and unenforceability. Discovery is still underway. The parties have
filed cross motions for summary judgment on the issue of patent infringement
relating to the '108, '664, '809, and '850 patents. The Court recently granted
Intuitive's motion for summary judgment of non-infringement relating to the '850
patent. The Court also recently granted our motion for summary judgment relating
to the '809 patent. The Court has not ruled on any of the remaining motions at
this time. Pursuant to the merger agreement with Intuitive, Computer Motion and
Intuitive filed on March 10, 2003, stipulations to stay this litigation until
August 31, 2003, subject to the stay being lifted if the merger agreement is
terminated, or subject to this case being dismissed upon consummation of the
transactions contemplated by the merger agreement.
On or about December 7 and 8, 2000, the United States Patent and Trademark
Office (USPTO) granted three of Intuitive's petitions for a declaration of an
interference relating to the Company's 5,878,193, 5,907,664, and 5,855,583
patents. On March 30, 2002, the three judge panel of the Board of Patent
Interferences issued decision orders on the parties' preliminary motions. The
Board granted the Company's motion on Interference No. 104,643 and issued an
order for Intuitive to show cause why judgment should not be entered against
Intuitive on this interference. The Board denied the Company's motion on the
Interference No. 104,644 and entered judgment against the Company. The Board
denied the Company's motions on the Interference No. 104,645, deferred decision
on two of Intuitive's motions, and granted-in-part, denied-in-part and
deferred-in-part on one of Intuitive's motions. The Board's decision on
Interference No. 104,645 invalidated some of the parties' claims, affirmed some
of Intuitive's claims and provided for further proceedings related to two of our
claims and is therefore not final. On July 25, 2002, Computer Motion filed a
civil action seeking review of the two adverse decisions in the United States
District Court for the District of California.
Pursuant to the merger agreement with Intuitive, Computer Motion and
Intuitive filed on March 10, 2003, stipulations to stay this litigation until
August 31, 2003, subject to the stay being lifted if the merger agreement is
terminated, or subject to this case being dismissed upon consummation of the
transactions contemplated by the merger agreement.
On February 21, 2001, Brookhill-Wilk filed suit against the Company
alleging that its ZEUS surgical system infringed upon Brookhill-Wilk's United
States Patent Nos. 5,217,003 and 5,368,015. Brookhill-Wilk's complaint seeks
damages, attorneys' fees and increased damages alleging willful patent
infringement. On March 21, 2001, the Company served its Answer and Counterclaim
alleging non-infringement of each patent-in-suit,
patent invalidity and unenforceability. On November 8, 2001, the United States
District Court for the Southern District of New York in the co-pending
Brookhill-Wilk v. Intuitive Surgical, Inc., Civil Action No. 00-CV-6599 (NRB),
issued an order interpreting the claims of Brookhill-Wilk's Patent No. 5,217,003
in a way that the Company believes excludes current applications of the
Company's ZEUS surgical system. In light of this decision, on November 13, 2001,
the parties to Brookhill Wilk v. Computer Motion, Inc. agreed to dismiss the
case without prejudice. On March 25, 2002, Judge Alvin K. Hellerstein dismissed
the case without prejudice.
On March 30, 2001, Intuitive and IBM Corporation filed suit alleging that
the Company's AESOP, ZEUS and HERMES products infringe United States Patent No.
6,201,984, which was issued on March 13, 2001. The complaint seeks damages, a
preliminary injunction, a permanent injunction, and costs and attorneys' fees.
The claims are directed to a surgical system employing voice recognition for
control of a surgical instrument. Each of the asserted claims are limited to a
surgical system employing voice recognition for control of a surgical robot and
literally read on the Company's current AESOP product and the Company's ZEUS and
HERMES products to the extent they are used with AESOP. A jury trial has been
held on the issues of patent invalidity due to lack of enablement and failure to
disclose the best mode in addition to damages. The Company's defense of
unenforceability due to prosecution laches was tried before the District Court
Judge. The jury returned a verdict finding IBM's United States Patent No.
6,201,984 valid, and finding Intuitive was damaged in an amount of $4.4 million.
Prior to the jury's verdict, the court ruled that the Company had not
"willfully" infringed the patent. On December 10, 2002, the Court rendered an
adverse decision on our prosecution laches defense and on December 11, 2002,
issued a judgment in Intuitive's and IBM's favor based upon the earlier jury
verdict and the Court's December 10, 2002 ruling. The case has entered the
post-trial phase during which we will be seeking judicial review of the jury's
verdict and the Court's December 10, 2002 ruling. Pursuant to the merger
agreement with Intuitive, Computer Motion and Intuitive filed on March 10, 2003,
stipulations to stay this litigation until August 31, 2003, subject to the stay
being lifted if the merger agreement is terminated, or subject to this case
being dismissed upon consummation of the transactions contemplated by the merger
agreement.
The Company believes that all of its major product lines could be affected
by this litigation. The patents subject to this litigation are an integral part
of the technology incorporated in the Company's AESOP, ZEUS and HERMES product
lines which together accounted for approximately 76% of its revenues for the
year ended December 31, 2002. If the Company loses the counterclaim on the
patent suit brought by Intuitive or the patent infringement claims by Intuitive
or IBM or if the decision in Brookhill-Wilk v. Intuitive Surgical, Inc. is
reversed, the Company may be prevented from selling its products as currently
configured without first obtaining a license to the disputed technology from the
successful party or modifying the product. Obtaining a license could be
expensive, or could require that the Company license to the successful party
some of its own proprietary technology, either of which result could seriously
harm the Company's business. In the event that a successful party is unwilling
to grant the Company a license, the Company will be required to stop selling its
products that are found to infringe the successful party's patents unless the
Company can redesign them so they do not infringe these patents, which the
Company may be unable to do. Whether or not the Company is successful in these
lawsuits, the litigation could consume substantial amounts of the Company's
financial and managerial resources. Further, because of the substantial amount
of discovery often involved in connection with this type of litigation, there is
a risk that some of the Company's confidential information could be compromised
by disclosure during the discovery process.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the quarter ended December 31, 2002.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the NASDAQ National Market under
the symbol "RBOT." The high and low sale prices for the Company's common stock
during 2002 and 2001 are set forth below:
High Low
------- -------
Year Ended December 31, 2002
Fourth Quarter $ 1.72 $ 0.70
Third Quarter $ 2.40 $ 0.53
Second Quarter $ 4.10 $ 0.67
First Quarter $ 6.25 $ 3.65
High Low
------- -------
Fourth Quarter $ 4.61 $ 3.06
Third Quarter $ 4.80 $ 3.02
Second Quarter $ 5.65 $ 2.88
First Quarter $ 6.50 $ 3.66
The stock market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. Like the stock prices of other medical device companies,
the market price of the Company's common stock has been and will be, subject to
significant volatility. Factors such as reports on the clinical efficacy and
safety of the Company's products, government approval status, fluctuations in
the Company's operating results, announcements of technological innovations or
new products by the Company or its competitors, changes in estimates of the
Company's performance by securities analysts, failure to meet securities
analysts' expectations and developments with respect to patents or proprietary
rights, may have a significant effect on the market price of the common stock.
In addition, the price of the Company's common stock could be affected by stock
price volatility in the medical device industry or the capital markets in
general without regard to the Company's operating performance.
The Company currently intends to retain future earnings to fund the
development and growth of its business and, therefore, does not anticipate
paying cash dividends within the foreseeable future. Any future payment of
dividends will be determined by the Company's Board of Directors and will depend
on the Company's financial condition, results of operations and other factors
deemed relevant by its Board of Directors at the time. As of March 14, 2003,
there were approximately 7,500 stockholders of record.
On October 31, 2002, the Company entered into a Series C Convertible
Preferred Stock Purchase Agreement with certain institutional and accredited
investors, including Robert W. Duggan, the Company's Chairman and Chief
Executive Officer. Under the terms of the Series C Stock Purchase Agreement, the
Company sold a total of 7,370 shares of the Company's Series C Convertible
Preferred Stock, including 6,299 shares of Series C-1 Convertible Preferred
Stock and 1,071 shares of Series C-2 Convertible Preferred Stock, and Series C-1
warrants to purchase an aggregate of 1,473,745 shares of common stock at an
initial exercise price of $1.80 per share and Series C-2 warrants to purchase an
aggregate of 1,473,475 shares of common stock at an initial exercise price of
$2.20 per share and warrants to purchase an aggregate of 290,306 shares of
common stock at an exercise price of $.001 per share for aggregate consideration
of $10,316,200. The $10,316,200 is exclusive of the $1,999,200 Robert W. Duggan
investment made in January and March 2003. As part of the $10,316,200 aggregate
consideration, the Company received $1,499,000 in cash for the purchase of
1,071,000 shares of Series C-2 Convertible Preferred Stock for which the shares
were not issued as of December 31, 2002. These shares were issued in January
2002 and at December 31, 2002, have been shown as a stock subscription within
the accompanying consolidated statements of stockholders' equity. At December
31, 2002 the fair value of the warrants issued, exclusive of Mr. Duggan's
investment, was $2,507,000. In addition, the fair value of the beneficial
conversion feature at December 31, 2002 was determined to be $3,244,000. At
December 31, 2002, the accrued dividends payable were $179,000. On March 6,
2003, all holders of Series C convertible preferred stock agreed to exchange
their shares for newly issued shares of Series D convertible preferred stock.
The terms of the Series D convertible preferred stock eliminate certain
provisions that were contained in the terms of the Series C convertible
preferred stock that could have restricted the ability of the Company to enter
into the merger agreement with Intuitive Surgical.
In February 2002, the Company raised net proceeds of approximately
$10,528,000 through the sale of 2,828,865 shares of common stock and the
issuance of approximately 1,697,319 warrants to purchase common stock at $5.00
per share, with certain institutional and accredited investors, including Robert
W. Duggan, the Company's Chief Executive Officer and Chairman. The fair market
value of these warrants was determined to be $3,590,000 under the Black-Scholes
valuation model and was recognized as a direct cost of raising capital. In
February $1,395,000 in accounts payable from certain vendors was exchanged for
328,689 shares of common stock. The proceeds from the sale of the Company's
common stock were used to retire approximately $2,359,000 (including the note
payable to Mr. Duggan) in debt and the remainder of the proceeds were used to
fund working capital needs.
On March 30, 2001, the Company entered into an Equity Line Financing
Agreement with Societe Generale, under which the Company was entitled to issue
and sell, from time to time, shares of the Company's common stock to Societe
Generale. In connection with the Equity Line Financing Agreement, the Company
filed a Registration Statement on Form S-2 (File No. 333-65952) covering the
shares of the Company's common stock to be issued upon delivery of draw down
notices. The parties terminated the Equity Line Financing Agreement on February
12, 2002. Prior to termination of the equity line, the Company raised $508,000
by issuing 111,615 shares to Societe Generale. The Company used these proceeds
to fund working capital needs for clinical trials, research and development, and
sales and marketing programs and for other general operating requirements.
On February 16, 2001, the Company entered into a Securities Purchase
Agreement with certain institutional and accredited investors. Under the terms
of the Securities Purchase Agreement, the Company sold a total of 10,024 shares
of the Company's Series B Convertible Preferred Stock and warrants to purchase
557,932 shares of the Company's common stock, for the total consideration of
$10,024,000. In connection with this transaction, the Company filed Registration
Statements on Form S-3 and Form S-2 (File Nos. 333-58962 and 333-65952
respectively) covering the shares of the Company's common stock, which were
issued upon conversion of the shares of Series B Convertible Preferred Stock and
will be issued upon exercise of the warrants. The Company used the proceeds from
the sale of its Series B Convertible Preferred Stock to retire approximately $3
million in debt and the remainder will be used to fund working capital needs due
to investments in clinical trials, research and development, and sales and
marketing programs and for other general operating requirements.
PART II
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from consolidated
financial statements of Computer Motion, Inc. The consolidated financial
statements for the year ended December 31, 2002 have been audited by Ernst &
Young LLP, independent auditors. Ernst & Young LLP's report on the consolidated
financial statements for the year ended December 31, 2002, which appears
elsewhere herein, includes an explanatory paragraph which describes an
uncertainty about Computer Motion, Inc.'s ability to continue as a going
concern. The consolidated financial statements for the four years ended December
31, 2001 have been audited by other independent auditors. The data should be
read in conjunction with the consolidated financial statements, related notes,
and other financial information included herein.
Years Ending December 31,
(in thousands except per share data)
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Revenue $ 24,111 $ 25,531 $ 21,732 $ 18,058 $ 10,586
Net loss $(21,151) $(16,413) $(16,349) $(13,375) $(11,545)
Net loss per share $ (1.93) $ (1.98) $ (1.90) $ (1.57) $ (1.45)
Weighted average common shares
outstanding 16,665 10,276 9,309 8,503 7,959
Total assets $ 21,850 $21,186 $23,089 $23,361 $30,444
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially due to factors
that include, but are not limited to, the risks discussed in Item 1 above under
the heading "Risk Factors."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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, MIS 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 MIS, improve patient outcomes, and create a safer, more
efficient and cost effective OR. On March 7, 2003, the Company entered into a
merger agreement with Intuitive Surgical, Inc., pursuant to which the Company
will become a wholly owned subsidiary of Intuitive Surgical upon completion of
the merger, which is subject to stockholder approval and other closing
conditions.
The Company's AESOP Robotic Endoscope Positioning System allows direct
surgeon control of the endoscope through simple verbal commands, eliminating the
need for a member of a surgical staff to manually control the camera, while
providing a more stable and sustainable endoscopic image.
The Company's ZEUS Robotic Surgical System is comprised of three
surgeon-controlled robotic arms, one of which positions the endoscope and two of
which manipulate surgical instruments. The Company believes that ZEUS will
improve a surgeon's dexterity and precision and enhance visualization of, and
access to, confined operative sites.
The Company's HERMES Control Center is designed to enable a surgeon to
directly control multiple OR devices, including various laparoscopic,
arthroscopic and video devices, as well as the Company's robotic devices,
through simple verbal commands.
The Company's SOCRATES Telementoring System enables remote access to HERMES
networked devices via proprietary software and standard teleconferencing
components.
Recurring revenue represents sales to ongoing customer for supplies,
disposable drapes, instruments, accessories, services and extended warranty
arrangements.
Development revenue comes from the following three sources: (i), fees paid
for the use of prototype product to perform limited, experimental procedures on
animals, including minimally invasive coronary artery bypass grafts, anastomosis
of the small bowel, and procedures involving the bile duct, urethral and iliac
artery; (ii) fees paid in conjunction with the delivery of a tele-surgical
system including technical and clinical support provided by the Company, in
order to perform experimental surgeries in a laboratory setting, as well as
possible clinical cases; and (iii) fees paid in conjunction with assisting other
medical companies to prepare their private label medical devices to be
compatible with the HERMES operating room control system.
The Company applies the provisions of Staff Accounting Bulleting No. 101
(SAB 101) when recognizing revenue. SAB 101 states that revenue generally is
realized or realizable and earned when all of the following criteria are met: a)
persuasive evidence of an arrangement exists, b) delivery has occurred or the
services have been rendered, c) the seller's price to the buyer is fixed or
determinable, and d) collectibility is reasonably assured.
The Company recognizes revenue from the sale of products to end-users,
including supplies and accessories, once shipment has occurred and all of the
conditions of SAB 101 (items (a): through (d): as
identified above) have been met (the Company's general terms are FOB shipping
point; in those few cases where the customers terms are FOB their plant, revenue
is not recognized until the Company receives a signed delivery and acceptance
certificate). Revenue is recognized from the performance of services as the
services are performed.
The Company recognizes revenue from the sale of products to distributors,
including supplies and accessories, once shipment has occurred, (as the
Company's general terms are FOB shipping point), and all of the conditions of
SAB 101 have been met. The Company's distributors do not have rights of return
or cancellation. Revenue from distributors, which do not meet all of the
requirements of SAB 101, are deferred and recognized upon the sale of the
product to the end user.
Revenues from product sales to financing institutions are not recognized by
the Company until a purchase order is received, the product has been shipped and
the funding by the financing institution has been approved.
The Company defers revenue from the sale of extended warranties, product
upgrades and other contractual items and recognizes them over the life of the
contract or upon shipment to the customer, as applicable.
Shipments of products to be used for demonstration purposes or prototype
products used in development programs are included in the property and equipme