<PAGE>
Filed pursuant to Rule 424(b)(4)
Registration No. 333-3368
1,900,000 Shares
[LOGO]
INNOVASIVE DEVICES, INC.
Common Stock
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All of the shares of Common Stock offered hereby are being sold by
Innovasive Devices, Inc. ("Innovasive Devices" or the "Company"). Prior to
this offering, there has been no public market for the Common Stock of the
Company. See "Underwriting" for the factors considered in determining the
initial offering price. The Common Stock has been approved for quotation on
the Nasdaq National Market under the symbol IDEA.
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 HEREOF.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share............................... $12.50 $0.88 $11.62
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Total(3)................................ $23,750,000 $1,662,500 $22,087,500
</TABLE>
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(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses of the offering estimated at $600,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 285,000 additional shares of Common Stock solely to cover over-
allotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares at the Price to Public shown
above. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$27,312,500, $1,911,875 and $25,400,625, respectively. See "Underwriting."
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The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It
is expected that delivery of the shares of Common Stock will be made at the
offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
June 11, 1996.
Alex. Brown & Sons Piper Jaffray Inc.
INCORPORATED
THE DATE OF THIS PROSPECTUS IS JUNE 6, 1996.
<PAGE>
A variety of tissue fixation [Drawing of human figure with blue dots
devices have been developed by on areas of the body for which the
the Company to perform repairs Company has developed devices.]
to the knee, shoulder, elbow,*
wrist and ankle.
ROC suture fasteners are [Drawing of ROC suture fastener embedded
inserted below the in bone and attached to tissue lying on
surface of the bone and top of bone.]
use attached sutures to
hold soft tissue to the
bone.
The ROC XS suture fastener [Drawing of ROC XS suture fastener
creates a 360 degree "umbrella" embedded in bone and attached to tissue
effect which is designed to lying on top of bone.]
provide additional holding
strength in soft bone structures.
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* The Company has not yet applied for regulatory clearance of an application
of the Company's products in the elbow, and there can be no assurance that
the Company will receive such clearance.
----------------
ROC(R), Innovasive(R) Devices, ID(TM) and IDeal(TM) are trademarks of the
Company. This Prospectus also includes tradenames, trademarks and registered
trademarks of companies other than the Company.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus.
THE COMPANY
Innovasive Devices designs, develops, manufactures and markets proprietary
tissue repair systems which facilitate the repair of soft tissue injuries. The
Company's tissue repair systems are designed to be used in either open surgical
or minimally invasive arthroscopic procedures. Performing tissue repairs
arthroscopically offers several benefits, including reduced patient trauma and
shorter rehabilitation times, resulting in an expedited return to full physical
activity. The Company's initial products consist of the ROC (Radial Osteo
Compression) family of suture fasteners and related arthroscopic instruments
and are marketed for use in the sports medicine/arthroscopy segment of the
orthopedic market. The Company's suture fastener, a bone anchor with an
attached suture, is deployed into bone and used to secure soft tissue, such as
ligaments and tendons, to the bone. Since the commercial release of the ROC
suture fastener in 1994, the Company estimates that more than 4,000 surgeries,
using over 12,000 of the Company's suture fasteners, have been performed.
Innovasive Devices has received 510(k) clearance or has been exempted by the
United States Food and Drug Administration ("FDA") from the 510(k) clearance
process on all products that it currently markets.
The Company competes in the $185 million soft tissue repair segment of the
$475 million United States sports medicine/arthroscopic surgery market. The
preceding market data was derived from industry estimates published in 1992 and
1993. Based on an April 1994 report, the Company believes that the soft tissue
to bone repair segment of the market in which it competes has had an average
annual growth rate of 35% over the past five years, which is substantially less
than the reported growth experienced in prior years. This growth is being
driven primarily by the increasing incidence of soft tissue repairs due to
greater participation in physical activity, an aging population and the
introduction of less invasive arthroscopic procedures. The Company markets its
products and related instruments principally to sports medicine surgeons and
orthopedic specialists who treat and repair soft tissues, within and around
joints, which have been damaged by traumatic injury or degenerative disease.
There are approximately 7,400 surgeons in the United States who consider sports
medicine/arthroscopy to be their primary practice. These specialists performed
an estimated 1.8 million diagnostic and therapeutic arthroscopic procedures in
1993, based on 1.64 million actual procedures reported in 1992. The Company
estimates that approximately 875,000 arthroscopic procedures could have
involved soft tissue repair if the appropriate arthroscopic repair devices and
technologies had been available, and that its current products could have been
used in approximately 280,000 open and arthroscopic procedures annually.
The Company's products are based on unique and proprietary technologies which
afford them many advantages when compared to the most widely-used metal bone
anchors. The unique radial osteo compression method of attachment has allowed
the Company to develop a family of suture fasteners which are efficacious in a
broad variety of bone densities and sizes. The ROC design allows for placement
of suture fasteners in close proximity for precise positioning, which enhances
tissue to bone reattachment. ROC suture fasteners require as little as 6mm
(approximately 1/4 inch) of depth, as compared to a minimum of 8mm
(approximately 1/3 inch) for most competitive bone anchors, making them well-
suited for small joint tissue repair. ROC suture fasteners are not forced,
hammered or screwed into the bone and therefore are particularly suitable for
placement in smaller, more fragile bones. ROC suture fasteners are polymer-
based and can be removed and replaced with another ROC suture fastener in the
event a revision or a second surgery is required. Based on its existing
designs, the Company is developing and currently testing next generation suture
fasteners using bioabsorbable composites, which degrade and absorb into
surrounding tissue, and collagen-based biomaterial composites, which remodel
into surrounding tissue. In addition, the Company is pursuing opportunities to
apply its core technologies outside of orthopedics in areas such as
uro/gynecology, maxillo-facial trauma repair and plastic surgery.
3
<PAGE>
The Company's strategy for establishing and maintaining leadership in the
minimally invasive soft tissue fixation market consists of the following key
elements: (i) focus on the arthroscopic soft tissue repair market; (ii)
continue to develop a clinically focused sales organization and leverage
clinical relationships; (iii) establish strategic partnerships for development
and commercialization of products; and (iv) establish a position of
technological leadership and protect its proprietary technologies.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk due to the
Company's history of losses; the probability of substantial additional future
losses; the uncertainty of future results; the seasonality of its sales; the
potential volatility of its stock price; the uncertainty of market acceptance
of the Company's products; the Company's limited product line; the rapid
technological change in its markets; its reliance on patents and proprietary
technology; the uncertainty of additional financing to meet its future capital
needs; regulatory risks; its limited manufacturing experience; its reliance on
sole or limited sources of supply; its reliance on international distributors;
product liability risks; its dependence on Collagen Corporation; risks of
intense competition; price pressures resulting from the consolidation of the
health care industry; possible limitations on third party reimbursement; risks
that it will be unable to manage growth; risks associated with its facility
change; its dependence on key personnel; the non-existence of a prior public
market for its common stock; the potential adverse impact on its stock price
due to shares eligible for future sale; the potential adverse impact on its
stock price upon release of locked-up shares; the potential adverse impact of
anti-takeover provisions in its charter; the possible issuance of its preferred
stock; its concentration of ownership; the management discretion to apply the
proceeds of this offering; its lack of dividends and dilution resulting from
this offering. For a discussion of these risks, see "Risk Factors" beginning on
page 6.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby............. 1,900,000 shares
Common Stock to be outstanding after the
offering (1)........................... 7,259,741 shares
Use of proceeds......................... To fund research and development,
sales and marketing, manufacturing,
possible acquisitions, working capital
and general corporate purposes.
Nasdaq National Market symbol........... IDEA
</TABLE>
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(1) Based on the number of shares of Common Stock outstanding on March 31,
1996. Excludes 679,537 shares of Common Stock issuable upon exercise of
stock options outstanding as of March 31, 1996, at a weighted average
exercise price of $3.30 per share, of which options to purchase 203,467
shares were then exercisable. See "Capitalization" and "Management--Stock
Plans."
----------------
Except as otherwise specified, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. See "Underwriting." Unless
otherwise specified, all information in this Prospectus assumes: (i) the filing
of amendments to the Company's Second Restated Articles of Organization prior
to the effectiveness of this offering effecting a 1-for-2.25 reverse stock
split of the Company's Common Stock and creating a class of undesignated
Preferred Stock; and (ii) the conversion of all outstanding shares of Preferred
Stock into Common Stock upon the closing of this offering. See "Description of
Capital Stock."
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- ---------------
1993 1994 1995 1995 1996
-------- -------- -------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales...................... $ 126 $ 244 $ 1,234 $ 166 $ 802
Cost of sales.................. 263 465 1,000 187 338
-------- -------- -------- ------ -------
Gross profit (loss)............ (137) (221) 234 (21) 464
Selling, general and
administrative expenses....... 914 1,533 2,435 493 1,091
Research and development
expenses...................... 922 1,172 1,597 331 582
-------- -------- -------- ------ -------
Loss from operations........... (1,973) (2,926) (3,798) (845) (1,209)
Interest income (expense), net. (238) 34 64 19 62
-------- -------- -------- ------ -------
Net loss....................... $ (2,211) $ (2,892) $ (3,734) $ (826) $(1,147)
======== ======== ======== ====== =======
Unaudited pro forma net loss
per share (1)................. $ (0.76) $(0.17) $ (0.21)
Shares used in computing
unaudited pro forma net loss
per share (1)................. 4,939 4,820 5,457
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED(2)
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(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Current assets......................................... $ 5,861 $27,348
Working capital........................................ 4,629 26,117
Total assets........................................... 6,487 27,975
Accumulated deficit.................................... (13,087) (13,087)
Total stockholders' equity (deficit)................... (9,645) 26,743
</TABLE>
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(1) Unaudited pro forma net loss per share is determined by dividing the net
loss attributable to common stockholders by the weighted average number of
Common Stock and Common Stock equivalents outstanding during the period,
assuming the conversion of all outstanding shares of Preferred Stock into
3,543,819 shares of Common Stock upon the closing of this offering. See
Note 6 of Notes to Financial Statements.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin 83,
Common Stock equivalents issued at prices below the offering price per share
during the twelve months preceding the anticipated public offering of the
Company's Common Stock have been included in the unaudited pro forma net
loss per share calculation using the treasury stock method and the initial
public offering price of $12.50 per share of Common Stock, as if outstanding
since the beginning of each period presented.
(2) Reflects the conversion of all outstanding shares of Preferred Stock into
3,543,819 shares of Common Stock upon the closing of this offering. See
Note 6 of Notes to Financial Statements. Also gives effect to the sale of
1,900,000 shares of Common Stock offered by the Company hereby at the
initial public offering price of $12.50 per share, after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses payable by the Company, and the anticipated application of the net
proceeds therefrom. See "Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
The following factors should be considered carefully in evaluating an
investment in the shares of Common Stock offered by this Prospectus.
History of Losses; Probability of Substantial Additional Future Losses;
Uncertainty of Future Results; Seasonality of Sales. The Company has incurred
substantial operating losses since its inception and, as of March 31, 1996,
had an accumulated deficit of approximately $13.1 million. These losses have
resulted principally from expenses associated with research and development
efforts, expenses associated with obtaining FDA clearance and the
establishment of the Company's sales and marketing organization. The Company
expects to generate substantial additional losses for at least the next
several years as it continues to expend substantial resources in research and
product development, funding of clinical trials in support of obtaining
necessary regulatory clearances or approvals and expanding its manufacturing
capabilities and marketing and sales activities. Results of operations may
fluctuate significantly from quarter to quarter due to the timing of such
expenditures, absence of a backlog of orders, timing of the receipt of orders,
promotional discounts of the Company's products, timing of regulatory actions,
introduction of new products by competitors of the Company, pricing of
competitive products and the cost and effect of promotional and marketing
programs. In addition, the Company anticipates some seasonality due to the
fact that generally fewer surgical procedures are performed during the third
quarter. This seasonal pattern may cause fluctuations in the Company's results
of operations. It is difficult to predict the impact that this seasonality
will have on the Company's results of operations because of its limited
operating history. The Company's revenue and profitability will be critically
dependent on expanding applications for its current product lines both within
arthroscopy and in other clinical specialties. In addition, the Company's
profitability could be adversely affected if it is required to sell its
products at reduced prices. There can be no assurance that significant
revenues or profitability will ever be achieved. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Potential Volatility of Stock Price. The stock market has from time to time
experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. In addition, the market price of the shares of Common Stock is likely
to be highly volatile. Factors such as fluctuations in the Company's operating
results, announcements of technological innovations or new products by the
Company or its competitors, FDA and international regulatory actions, actions
with respect to reimbursement matters, developments with respect to patents or
proprietary rights, mergers or acquisitions involving competitors, public
concern as to the safety of products developed by the Company or others,
changes in health care policy in the United States and internationally,
changes in stock market analyst recommendations regarding the Company, other
medical device companies or the medical device industry generally and general
market conditions may have a significant effect on the market price of the
Common Stock.
Uncertainty of Market Acceptance. The Company's future prospects depend
significantly on increasing penetration of existing markets, acceptance of the
Company's products in new markets, and the development of new products for its
existing and future markets. There can be no assurance that any of the
Company's existing or future products will gain market acceptance among
physicians, patients or healthcare payors, even if reimbursement and necessary
regulatory approvals are obtained. To date, the Company's marketing efforts
have been directed solely to the sports medicine segment of the orthopedic
market for tissue-to-bone fixation applications. The Company has no experience
in establishing marketing or distribution channels in other clinical areas.
With respect to its current products, the Company was not the first to market
devices for the attachment of soft tissue to bone and therefore, to succeed
must both take market share away from its existing competitors and create new
demand for its products. The size of the market for the Company's products
will depend in part on the Company's ability to persuade physicians that its
products offer clinical and other advantages over existing means of attaching
soft tissue structures to tissue or bone and that its fixation devices could
be used for a wider variety of clinical
6
<PAGE>
applications, such as repair of tears in the meniscus cartilage of the knee,
or repair of ligament or tendon damage in the fingers or toes. In addition,
the Company will need to demonstrate that its products are cost-effective and
convenient to use and that the techniques for their use are relatively
straightforward and simple. There can be no assurance that the market for the
Company's products will continue to grow or that they will be accepted for
orthopedic procedures not currently using fixation devices and in markets
outside of the sports medicine segment of the orthopedic market. See
"Business--Product Development."
Limited Product Line. A substantial portion of the Company's sales to date
have derived from the Company's ROC tissue fixation products for use in open
shoulder repair applications and related instruments. As of the date of this
Prospectus, the use of the ROC 3.5mm and 2.8mm fasteners have been cleared by
the FDA for applications involving the shoulder, knee and ankle, and the
Company's ROC XS fastener has been cleared by the FDA for applications
involving soft bone. The Company, however, has relatively little clinical
experience with joints other than the shoulder. In addition, while the
Company's future prospects depend in part on the use of its products in
arthroscopic and laparascopic procedures, most of the clinical experience
involving the Company's products has been in open surgery procedures. For the
fiscal years ended December 31, 1994 and 1995, the ROC fastener and related
instruments accounted for approximately 66.7% and 92.7%, respectively, of the
Company's sales. The Company expects that most of its revenue in the
foreseeable future will continue to be derived from sales of its ROC products.
Failure of the ROC products to maintain and gain market acceptance would have
a material adverse affect on the Company's business, financial condition and
results of operations. See "Business--Current Products and Applications" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Rapid Technological Change and New Product Innovation. The medical device
market is subject to rapid technological change and new product introductions
and enhancements. The Company's ability to remain competitive in this market
will depend in significant part on its ability to develop and introduce new
products and enhancements on a timely and cost effective basis. The ability of
the Company to develop new and enhanced tissue fixation devices depends on a
number of factors, including product selection, timely and efficient
completion of product design, development of new materials and manufacturing
processes, timely regulatory approval, implementation of manufacturing and
assembly processes and effective sales and marketing, and there is no
assurance that the Company will be successful in developing such products. If
the Company experiences quality or reliability problems with new products,
reductions in orders, higher manufacturing costs and additional warranty
expenses may result. Because new product development commitments must be made
well in advance of sales, new product decisions must anticipate both future
demand and the availability of technology to satisfy that demand. In the
meantime, competitors may achieve technological advances which provide a
competitive advantage over the Company's products. In addition, advances or
developments in other fixation technologies, including those relating to
bioabsorbable or biomaterial composites, could render the Company's products
obsolete or less desirable. The Company's experience to date has been limited
to the sports medicine segment of the orthopedic market. The Company
anticipates that its future success will be dependent on expanding
applications for its suture fastener product line within orthopedics and in
other clinical specialties, including maxillo-facial trauma, endoscopic
plastic surgery and uro-gynecology, and developing and marketing new products
for tissue-to-tissue, tissue-to-bone and bone-to-bone fixation, including
bioabsorbable and biomaterial versions of its products. There can be no
assurance that the Company will successfully develop and introduce new
products and enhancements or that such products will achieve market
acceptance. See "Business--Competition" and "Business--Product Development."
Reliance on Patents and Proprietary Technology. The Company relies on
proprietary technology which it seeks to protect primarily through patents,
trade secrets and proprietary know-how. The Company currently holds four
patents and has 40 United States and foreign patent applications pending which
cover certain aspects of its technology. With respect to the patent
applications, however, the breadth of the claims that will be covered by the
issued patents cannot be known until they are issued.
7
<PAGE>
Moreover, the degree of protection against competing devices afforded by the
Company's patents is subject to uncertainties. There can be no assurance that
others will not be successful in challenging, invalidating or circumventing
the Company's patents or that the Company's patents and intellectual property
rights will confer a competitive advantage on the Company. In addition, there
can be no assurance that the Company will be able to obtain patents on future
products, or that the Company's products will not infringe the patents and
proprietary rights of third parties. The medical device industry has been
characterized by extensive litigation involving patents and other intellectual
property rights, and certain companies in the medical device industry have
employed intellectual property litigation to gain a competitive advantage. The
Company has received a notice alleging that instruments based on one of its
patents may infringe the patent of a third party. The only products currently
manufactured by the Company using the Company's patent are its knot pusher and
laparascopic scissors. The Company may not be able to successfully defend
against a claimed infringement and there can be no assurance that the Company
will not become subject to other patent infringement claims or litigation or
interference proceedings. Litigation may be necessary to enforce patents
issued to the Company or to protect its trade secrets and other intellectual
property rights. Any litigation or interference proceedings will result in
substantial expense to the Company and a significant diversion of effort by
its employees, and, if adversely determined to the Company, could result in
significant liabilities to third parties and limitations on the manufacture,
distribution or sale of the Company's products or on the use of certain
technologies in the Company's products. See "Business--Patents and Proprietary
Technology."
Future Capital Needs; Uncertainty of Additional Funding. There can be no
assurance that additional equity or debt financing will not be required prior
to the time, if ever, the Company achieves and sustains profitability. The
Company may require additional financing to fund its operations. The Company's
future capital requirements will depend on many factors, including the
progress of the Company's research and development, the scope and results of
preclinical studies and clinical trials, the cost, timing and outcome of
regulatory reviews, the rate of technological advances, the market acceptance
of the Company's products, administrative and legal expenses, competitive
products, and manufacturing and marketing arrangements. Any additional equity
financing may result in dilution to the Company's stockholders. There can be
no assurance that funds will be available on favorable terms, if at all. If
adequate funds are not available, the Company may be required to cut back or
discontinue one or more of its product development programs, or obtain funds
through strategic alliances that may require the Company to relinquish rights
to certain of its technologies or products.
Regulatory Risks. Clinical testing, manufacture and sale of the Company's
products, including the ROC suture fasteners, the IDeal suture grasper and the
IDeal knot pusher, are subject to regulation by the FDA and corresponding
state and foreign regulatory agencies. Among other things, manufacturers of
medical devices for marketing in the United States are required to adhere to
applicable regulations setting forth detailed Good Manufacturing Practices
("GMP") requirements, which include testing, control and documentation
requirements, and Medical Device Reporting ("MDR") requirements that a firm
report to the FDA any incident in which its product may have caused or
contributed to a death or serious injury, or in which its product
malfunctioned and, if the malfunction were to recur, it would be likely to
cause or contribute to a death or serious injury. The FDA has proposed changes
to the GMP regulations which are likely to increase the cost of GMP
requirements. Changes in existing requirements or adoption of new requirements
could have a material adverse effect on the Company's business, financial
condition or results of operations. Labeling and promotional activities are
also subject to scrutiny by the FDA and, in certain circumstances, by the
Federal Trade Commission. Current FDA enforcement policy prohibits the
marketing of approved medical devices for unapproved uses. Noncompliance with
applicable requirements can result in, among other things, fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or
premarket approval for devices, withdrawal of marketing approvals and criminal
prosecution. The FDA
8
<PAGE>
also has the authority to request repair, replacement or refund of the cost of
any device manufactured or distributed by the Company.
Before a new device can be introduced in the market, the Company must
generally obtain FDA clearance or approval through either the 510(k) clearance
process or the costlier, lengthier and less certain PMA approval process. To
date, all of the Company's products have received 510(k) clearance or have
been exempted by the FDA from the 510(k) clearance process. There can be no
assurance that the FDA will not determine that future products, including the
bioabsorbable and biomaterial suture fasteners now in development, must adhere
to the more costly, lengthy and uncertain PMA approval process. To the
Company's knowledge, collagen-based medical devices currently being marketed
have required PMA approval. There can be no assurance that the Company will
obtain FDA clearance or approval for future products on a timely basis, if at
all, or that the FDA will not impose limitations on the intended use of such
products as a condition of clearance or approval. Any delay in receipt of,
failure to obtain or limitations on clearance or approval could have a
material adverse effect on the Company's business, financial condition or
results of operations.
For any of the Company's devices that are cleared through the 510(k)
process, modifications or enhancements that could significantly affect the
safety or effectiveness of the device or that constitute a major change to the
intended use of the device will require a new 510(k) submission. The Company
has made modifications to its devices which the Company believes do not
require the submission of new 510(k) notices. There can be no assurance,
however, that the FDA would agree with any of the Company's determinations not
to submit a new 510(k) notice for any of these changes or would not require
the Company to submit a new 510(k) notice for any of the changes made to the
device. If the FDA requires the Company to submit a new 510(k) notice for any
device modification, the Company may be prohibited from marketing the modified
device until the 510(k) notice is cleared by the FDA.
The Company has obtained regulatory approval to permit sales of its products
in Japan. The Company has not obtained regulatory approval in any other
foreign country to date. Starting in mid-1998, the Company will be required to
obtain ISO 9001 certification and receive "CE" market certification, an
international symbol of quality and compliance with applicable European
medical device directives, in order for it to sell its products in Europe.
There can be no assurance that the Company will be able to obtain the proper
certification. If the Company obtains regulatory approval to sell its products
in foreign countries, it would rely on independent distributors to comply with
certain of the foreign regulatory requirements. The inability or failure of
the Company's independent distributors to comply with applicable regulatory
requirements could materially and adversely affect the Company's business,
financial condition or results of operations.
The Company is subject to numerous federal, state and local laws relating to
such matters as safe working conditions and environmental protection. There
can be no assurance that the Company will not be required to incur significant
costs to comply with such laws and regulations in the future or that such laws
or regulations will not have a material adverse effect on the Company's
business, financial condition or results of operations. See "Business--
Government Regulation."
Limited Manufacturing Experience. The Company has been manufacturing and
assembling its ROC suture fastener products since 1994, but has yet to
manufacture the volumes necessary for the Company to achieve profitability.
There can be no assurance that reliable, high-volume manufacturing can be
achieved at a commercially reasonable cost. The Company intends to expand its
manufacturing capabilities to include bioabsorbable products and biomaterials,
and if the Company encounters difficulties in scaling up production of new
products, including problems involving production yields, quality control and
assurance, component supply and shortages of qualified personnel, such
problems could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Business--Manufacturing and
Quality Control."
Reliance on Sole or Limited Sources of Supply. The Company's handles and
suture fasteners are manufactured from molded polymers. The Company owns only
one set of molds for each of its products which require a molding
manufacturing process. In the event that the molds are damaged, approximately
9
<PAGE>
12 to 16 weeks would be required for the manufacture of new molds. Should the
Company's manufacturing process be disrupted, there can be no assurance that
the Company would be able to meet its commitments to customers. The failure of
the Company to meet its commitments could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Manufacturing and Quality Control."
In addition, certain suppliers may terminate sales of certain materials to
companies that manufacture medical devices in an attempt to limit their
potential product liability exposure. If the polymers which are used to
manufacture the Company's ROC suture fasteners became unavailable, the Company
would be required to identify a new polymer material for the suture fasteners
and certify the quality and suitability of the new material. In addition, a
new 510(k) clearance would have to be obtained to market products manufactured
from the new materials. This process could take a substantial period of time
and there is no assurance that the Company would be able to identify, certify
or obtain clearance for the new polymer-based fasteners. The Company is
attempting to develop new tissue fixation devices from bioabsorbable materials
and biomaterials, particularly collagen. The Company believes that there are
only a few sources of bioabsorbable materials with the ability and expertise
to manufacture bioabsorbable materials for the Company's products. The Company
believes that even fewer sources of supply for collagen materials currently
exist. While the Company is currently working with two companies on
development efforts relating to bioabsorbable polymers, the Company has no
long-term contractual or exclusive arrangements with them. The Company has
entered into a research and development and a manufacturing and supply
agreement with Collagen Corporation in connection with a program to develop
tissue fixation devices from collagen, but there are provisions in those
agreements that would enable either party to terminate the arrangements in
certain circumstances. If the Company were unable to obtain sources of
bioabsorbable materials or biomaterials to produce the next generation of its
products, the Company's future prospects and opportunities would be
substantially reduced, resulting in a material adverse effect on its business,
financial condition and results of operations. See "Business--Manufacturing
and Quality Control" and "Business--Relationship with Collagen Corporation."
Reliance on International Distributors. The Company has no sales employees
outside the United States. Accordingly, the Company depends entirely on
outside independent sales representatives and distributors for its
international sales. None of the Company's foreign representatives are subject
to any long-term commitments to the Company, and all of them represent a
number of manufacturers and sell a broad range of products in addition to
those offered by the Company. The revenues that such representatives are
likely to receive from the promotion and sale of other products may be
substantially greater than the compensation they may receive from the sale of
the Company's products, and it may be difficult for the Company to provide
incentives to such representatives in order to cause them to devote
substantial attention to marketing and selling the Company's products.
International sales accounted for 15.2% of the Company's revenues in 1995. The
Company expects international sales to comprise a significant percentage of
its sales in the foreseeable future. The failure of the Company's foreign
independent representatives to generate substantial sales for the Company
could have a material adverse effect on the Company's business, financial
condition and results of operations. The loss of such sales representatives or
distributors or the inability of the Company to develop and maintain an
alternative foreign distribution network could have a material adverse impact
on the Company's international sales. The Company will depend in part on its
international sales representatives to obtain needed regulatory approval for
the sale of the Company's products in overseas markets. The failure of its
international sales representatives to obtain or maintain the necessary
approvals could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Sales and
Marketing."
Certain risks are inherent in international operations, including changes in
demand resulting in fluctuations in exchange rates, the risk of government
financed or subsidized competition, changes in trade policies and tariff
regulations. Although the Company's international sales are denominated in
10
<PAGE>
U.S. dollars, fluctuations in foreign currencies can impact the prices quoted
by the Company to prospective customers and thereby affect the Company's
ability to obtain orders from foreign customers.
Product Liability Risk. The development, manufacture and sale of medical
devices entail significant risks of product liability claims. There can be no
assurance that the amount of the Company's insurance coverage will be adequate
to protect it from product liability claims, that the Company will be able to
obtain adequate coverage at competitive rates in the future, or that the
Company's product liability experience in the future will enable it to obtain
insurance coverage in the future. Product liability insurance is expensive,
and may not be available on acceptable terms, if at all, in the future. A
successful product liability suit not covered by such insurance would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Product Liability and Insurance."
Influence of Collagen Corporation. An important part of the Company's long-
term strategy is to develop and sell products manufactured from collagen.
After the offering, Collagen Corporation will hold approximately 11.6% of the
Company's Common Stock. Collagen Corporation is entitled to designate one
member of the Company's Board of Directors so long as it holds at least five
percent of the Company's Common Stock on a fully-diluted basis, and a
representative of Collagen Corporation currently serves on the Board of
Directors of the Company. In addition, the Company and Collagen Corporation
are parties to a research and development agreement, a manufacturing and
supply agreement and a distribution agreement with respect to tissue fixation
devices manufactured from collagen-based materials using Collagen
Corporation's proprietary technology. Pursuant to those agreements, certain of
the Company's products under development will be based upon patents and
intellectual property owned by Collagen Corporation. Accordingly, Collagen
Corporation may be able to exercise influence over the business and financial
affairs of the Company. If Collagen Corporation's licensed technology is
invalidated or challenged, the Company's ability to sell products based on
such technology could be severely limited. In the event that the Company
materially breaches any of the terms of its agreements with Collagen
Corporation, Collagen Corporation could terminate the Company's license to
develop, manufacture and sell products using Collagen Corporation's
technology, which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Relationship with Collagen Corporation."
Risks of Intense Competition. The medical device industry is highly
competitive and characterized by innovation and rapid technological change.
Among the Company's principal competitors are Mitek Surgical Products, Inc., a
division of Johnson & Johnson; the Zimmer and Linvatec divisions of Bristol-
Myers Squibb Company; Dyonics, Inc., a subsidiary of Smith & Nephew, Inc.;
Arthrotek Inc., a division of Biomet, Inc.; and U.S. Surgical Inc. Each of
these competitors has significantly greater financial, manufacturing,
marketing, distribution and technical resources than the Company and a greater
share of the tissue fixation market than the Company. In addition, a number of
smaller companies are entering or have entered the tissue fixation market.
Dyonics, Inc. has already released to the market a number of bioabsorbable
products. Many of the Company's competitors have large existing sales
organizations devoted to a wide variety of orthopedic products. These
companies are well capitalized and may be able to withstand price pressures
and deep discounting over extended periods of time better than the Company.
The Company has a small number of sales representatives focused on tissue
fixation devices in the sports medicine market with relatively little
experience selling the Company's products. There can be no assurance that the
Company's competitors will not succeed in developing technologies and products
that are more effective or less costly than any which have been developed or
may be developed by the Company or that would render the Company's products
obsolete or not competitive. See "Business--Competition."
Price Pressure Resulting From Consolidation of Health Care Industry. The
health care industry is undergoing rapid change and consolidation as health
care systems merge to effect cost savings and operating efficiencies. In
addition, a number of large, national buying consortiums have formed to engage
in group purchasing of medical supplies and services in an effort at cost
containment for member hospital
11
<PAGE>
systems and health care providers. These consolidated systems and large
purchasing organizations are likely to apply pressure to manufacturers and
distributors of medical devices to reduce the purchase prices of their goods.
Manufacturers such as the Company may be forced to lower prices in response to
those pressures in order for their products to be approved for purchase by
those organizations, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Possible Limitations on Third-Party Reimbursement. The Company's products
are generally purchased directly by hospitals and other health care providers,
which in turn bill third-party payors such as Medicare, Medicaid and private
insurance companies. Many of these payors are attempting to control health
care costs by authorizing fewer surgical procedures and by limiting
reimbursement for procedures to fixed amounts. The Company's strategy includes
the expansion of its market by encouraging physicians to use its tissue
fixation devices for procedures that are not routinely performed, or if
performed, are performed without the use of tissue fasteners. Failure by
physicians, hospitals and other users of the Company's products to obtain
sufficient reimbursement from third-party payors for procedures in which the
Company's products are used, or adverse changes in government and private
third-party payors' policies toward reimbursement for such procedures, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Risks that the Company will be Unable to Manage Growth. The Company has
experienced growth in production and its employee base which has placed, and
will continue to place, a significant strain on the Company's management,
financial and operating resources. In addition, the Company could, in the
future, reduce its reliance on contract manufacturers and perform more of its
manufacturing operations internally. The Company's growth strategy will
require increased personnel throughout the Company, expanded operational and
financial systems and implementation of new control procedures. There can be
no assurance that the Company will be able to attract qualified personnel or
successfully manage expanded operations. As the Company expands, it may from
time to time experience constraints that will adversely affect its ability to
satisfy customer demand in a timely fashion. There can be no assurance that
the Company will anticipate all of the changing demands that expansion may
place on the Company's operational, management and financial systems and
controls or that the Company will be able to continue to improve such systems
and controls. While the Company has not yet completed any acquisitions, it may
do so in the future. There is no assurance that the Company will be able to
successfully integrate new product lines and entities into its present
operations. If the Company's management is not able to manage growth
effectively, the Company's business, financial condition and results of
operations could be materially and adversely affected.
Risks Associated with Facility Change. At the end of March 1996, the Company
moved its headquarters and manufacturing operations to a new location in
Marlborough, Massachusetts. The Company will continue to occupy a portion of
the premises it previously occupied in Hopkinton, Massachusetts, including the
"clean room" in which it performs certain manufacturing operations on its
products until the "clean room" in its new premises is certified to be in
compliance with relevant regulations. The Company is currently transitioning
its manufacturing operations to the Marlborough facility. If the Company were
to experience a disruption in its manufacturing operations as a result of the
move, the Company might not be able to fulfill its commitments to ship
products during the period of disruption. Such a disruption could have an
adverse effect on the Company's relationships with its distributors and
customers and could have a material adverse effect on its business, financial
condition and results of operations. See "Business--Facilities."
Dependence on Key Personnel. The Company is dependent upon a number of key
management and technical personnel. The loss of the services of one or more of
such employees could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's success will also
depend on its ability to attract and retain additional highly qualified
management and technical personnel. The Company faces intense competition for
qualified personnel, many of whom are often subject to competing employment
offers. There can be no assurance that the Company will be
12
<PAGE>
able to attract and retain such personnel. Furthermore, the Company relies on
the services of several medical and scientific consultants, all of whom are
employed on a full-time basis by hospitals or academic or research
institutions. Such consultants are therefore not available to devote their
full time or attention to the Company's affairs. See "Business--Employees" and
"Management."
No Prior Public Market for Common Stock. Prior to this offering, there has
been no public market for the Company's Common Stock, and there can be no
assurance that a regular trading market will develop and continue after this
offering or that the market price of the Common Stock will not decline below
the initial public offering price. The initial public offering price has been
determined through negotiations between the Company and the representatives of
the Underwriters and may not be indicative of the market price of the Common
Stock following this offering.
Potential Adverse Impact on Price of Stock due to Shares Eligible for Future
Sale. A substantial number of the shares of Common Stock outstanding prior to
this offering and issuable upon the exercise of outstanding options will be
eligible for sale in the public market following the effectiveness of the
Registration Statement of which this Prospectus is a part (the "Effective
Date"), and such sales could have an adverse effect on the price of the
Company's Common Stock. See "Shares Eligible for Future Sale."
Potential Adverse Impact on Price of Stock upon Release of Locked-up
Shares. Holders of 5,327,591 shares of Common Stock of the Company and options
to purchase 538,220 shares of Common Stock have agreed that they will not,
without the prior written consent of the Underwriters, sell or otherwise
dispose of any shares of Common Stock or options to acquire shares of Common
Stock during the 180-day period following the Effective Date. The
Representatives have the sole discretion to release these shares from the
lock-up. If these shares are released from the lock-up prior to the expiration
of such 180-day period, sale of such shares could have an adverse effect on
the price of the Company's Common Stock. See "Shares Eligible for Future Sale"
and "Underwriting."
Potential Adverse Effects of Anti-Takeover Provisions; Possible Issuance of
Preferred Stock. The Company's Third Restated Articles of Organization and
Restated By-Laws will contain provisions that may make it more difficult for a
third party to acquire, or discourage acquisition bids for, the Company.
Moreover, upon completion of this offering, the Company will be subject to the
anti-takeover provisions of the Massachusetts General Laws which prohibit,
subject to certain exceptions, a holder of 5% or more of the outstanding
voting stock of the Company from engaging in certain transactions with the
Company, including a merger or stock or asset sale. These provisions could
limit the price that certain investors might be willing to pay in the future
for shares of the Company's Common Stock. In addition, shares of the Company's
Preferred Stock may be issued in the future without further stockholder
approval and upon such terms and conditions, and having such rights,
privileges and preferences, as the Board of Directors may determine. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of any holders of Preferred Stock that may be issued
in the future. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire, or discouraging a third party from acquiring, a majority of the
outstanding voting stock of the Company. See "Description of Capital Stock."
Concentration of Ownership. Upon completion of this offering, the Company's
executive officers and directors, and their affiliates, will beneficially own
approximately 42.5% of the Company's outstanding Common Stock (assuming no
exercise of the Underwriters' over-allotment option). This concentration of
ownership and voting control may have the effect of delaying or preventing a
change in control of the Company, or causing a change in control of the
Company which may not be favored by the Company's other stockholders. There
can be no assurance that these individuals' ability to prevent or cause a
change in control of the Company will not have a material adverse effect on
the market price of the Common Stock. See "Principal Stockholders."
13
<PAGE>
Management Discretion in Applying Proceeds of the Offering. The Company
currently has no specific plan for approximately $11.1 million, or 51.6%, of
the anticipated net proceeds of the offering. As a consequence, the Company's
management will have the discretion to allocate a large percentage of the
proceeds of the offering to uses which the stockholders may not deem
desirable, and there can be no assurance that the proceeds can or will be
invested to yield a return commensurate with the risk of the investment. See
"Use of Proceeds."
Lack of Dividends; Dilution. The Company has never declared or paid cash
dividends on its capital stock and does not anticipate paying any cash
dividends in the foreseeable future. See "Dividend Policy." In addition,
purchasers of shares of Common Stock offered hereby will suffer an immediate
and substantial dilution in the net tangible book value per share of the
Common Stock from the initial public offering price and will incur additional
dilution upon the exercise of outstanding stock options. See "Dilution" and
"Capitalization."
14
<PAGE>
THE COMPANY
A predecessor of the Company, Nicholson Associates, Inc., was organized in
June 1990. The Company was founded as a Massachusetts corporation in September
1991 under the name MinVasive Devices, Inc. ("MinVasive Devices"). In May
1992, MinVasive Devices merged with Nicholson Associates, Inc. Immediately
following the merger, the Company's name was changed to Innovasive Devices,
Inc.
The Company's executive offices are located at 734 Forest Street,
Marlborough, Massachusetts 01752-3032, and its telephone number is (508) 460-
8229.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,900,000 shares of
Common Stock offered hereby by the Company are estimated to be $21.5 million
($24.8 million if the Underwriters' over-allotment option is exercised in
full), after deducting the underwriting discounts and commissions and
estimated expenses of the offering.
The Company anticipates using the net proceeds from this offering to fund
its research and development efforts (approximately $3.3 million), to support
its marketing and sales efforts (approximately $5.7 million), to increase
manufacturing capacity (approximately $1.4 million) and for working capital
and for general corporate purposes (approximately $11.1 million). In addition,
the Company may use a portion of the net proceeds for license or acquisition
of new products or technologies from others, however, the Company has no
specific plans or commitments in this regard. The amount and timing of the
Company's expenditures may vary depending upon numerous factors, including
market acceptance of the ROC suture fastener product line and future products,
the timing of regulatory actions on the Company's future products and results
of clinical trials. Pending such uses, the Company intends to invest the net
proceeds from this offering in short-term, investment-grade, interest-bearing
securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company currently intends to retain all future earnings, if any,
to finance the development and growth of the Company's business.
15
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1996 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the
Company, after giving effect to the conversion of all outstanding shares of
Preferred Stock into 3,543,819 shares of Common Stock, and (iii) the pro forma
capitalization of the Company as adjusted to reflect the receipt of net
proceeds from the sale of 1,900,000 shares of Common Stock pursuant to this
offering:
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------------
ACTUAL PRO FORMA AS ADJUSTED(1)
------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Mandatorily redeemable convertible preferred
stock $14,901 $ -- $ --
Stockholders' equity:
Preferred Stock: $.01 par value, 1,000,000
shares authorized; no shares issued and
outstanding............................... -- -- --
Common Stock: $.0001 par value,
15,000,000 shares authorized; 1,820,366
shares issued, 1,815,922 shares
outstanding;
5,364,185 shares issued, 5,359,741 shares
outstanding pro forma; 7,259,741 shares
issued and outstanding, as adjusted (1)... -- 1 1
Additional paid-in capital................. 3,467 18,367 39,829
Accumulated deficit........................ (13,087) (13,087) (13,087)
Less--cost of 4,444 shares of Common Stock
held in treasury, no shares held in
treasury as adjusted (2)............... (25) (25) --
------- ------- -------
Total stockholders' equity (deficit)..... (9,645) 5,256 26,743
------- ------- -------
Total capitalization................... $ 5,256 $ 5,256 $26,743
======= ======= =======
</TABLE>
- --------
(1) Excludes 679,537 shares of Common Stock issuable pursuant to the exercise
of stock options outstanding as of March 31, 1996 at a weighted average
exercise price of $3.30 per share, of which options to purchase 203,467
shares were then exercisable. Also excludes (i) 8,888 shares available for
issuance under the 1992 Plan as of March 31, 1996 and (ii) 400,000 shares
available for issuance under the Omnibus Plan, the Director Plan and the
Stock Purchase Plan (as hereinafter defined). See "Management--Stock
Plans."
(2) 4,444 shares of Common Stock held in treasury will be issued as part of
the 1,900,000 shares of Common Stock offered by the Company hereby.
16
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock as of March 31,
1996 was $5,255,529 or approximately $0.98 per share. Net tangible book value
per share represents the amount of the Company's stockholders' equity, less
intangible assets, divided by 5,359,741 shares of Common Stock outstanding
after giving effect to the conversion of all outstanding shares of Preferred
Stock into 3,543,819 shares of Common Stock upon completion of this offering.
Net tangible book value dilution per share represents the difference between
the amount per share paid by purchasers of shares of Common Stock in the
offering made hereby and the pro forma net tangible book value per share of
Common Stock immediately after completion of the offering. After giving effect
to the sale of 1,900,000 shares of Common Stock in this offering at the
initial public offering price of $12.50 per share and the application of the
estimated net proceeds therefrom, the pro forma net tangible book value of the
Company as of March 31, 1996 would have been $26,743,029 or $3.68 per share.
This represents an immediate increase in net tangible book value of $2.70 per
share to existing stockholders and an immediate dilution in net tangible book
value of $8.82 per share to purchasers of Common Stock in this offering, as
illustrated in the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per share......................... $12.50
Net tangible book value per share at March 31, 1996........... $0.98
Increase per share attributable to new investors.............. 2.70
-----
Pro forma net tangible book value per share after the offering.. 3.68
------
Net tangible book value dilution per share to new investors..... $ 8.82
======
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 1996
(after giving effect to the conversion of all outstanding shares of Preferred
Stock into 3,543,819 shares of Common Stock upon completion of this offering),
the difference between the existing stockholders and the purchasers of shares
in this offering with respect to the number of shares purchased from the
Company, the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 5,359,741 73.8% $18,417,839 43.7% $ 3.44
New investors............... 1,900,000 26.2 23,750,000 56.3 12.50
--------- ------ ----------- ------
Total..................... 7,259,741 100.0% $42,167,839 100.0%
========= ====== =========== ======
</TABLE>
The foregoing tables assume no exercise of the Underwriters' over-allotment
option. As of March 31, 1996, there were options outstanding to purchase
679,537 shares of Common Stock under the Company's 1992 Plan with a weighted
average exercise price of $3.30 per share, of which options to purchase
203,467 shares were then exercisable. In addition, on April 2, 1996 the
Company's Board of Directors adopted, and on April 23, 1996 the stockholders
approved, the Omnibus Plan, the Director Plan, and the Stock Purchase Plan;
and 250,000 shares, 100,000 shares and 50,000 shares, respectively, have been
reserved for issuance thereunder. The issuance of shares under these plans is
not reflected in the preceding tables. The exercise of all options outstanding
as of March 31, 1996 would result in additional dilution of $.03 per share. To
the extent any options granted in the future are exercised, there will be
further dilution to the new investors. See "Management--Stock Plans."
17
<PAGE>
SELECTED FINANCIAL DATA
The following data, insofar as it relates to the period from inception (June
12, 1990) through December 31, 1991 and for each of the years 1992 through
1995, has been derived from annual financial statements, including the balance
sheet at December 31, 1994 and 1995 and the related statements of operations
and cash flows for the three years ended December 31, 1995, and notes thereto
appearing elsewhere herein. The selected data presented below at March 31,
1996 and for the three months ended March 31, 1995 and 1996 have been derived
from, and are qualified by reference to, the Company's unaudited financial
statements also appearing herein and which, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the unaudited interim
period. The data should be read in conjunction with the Financial Statements
and the Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 12, YEARS ENDED THREE MONTHS
1990) THROUGH DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, ---------------------------------- -----------------
1991(5)(6) 1992(5) 1993 1994 1995 1995 1996
------------- ------- ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net sales (1)........... $ 75 $ 344 $ 126 $ 244 $ 1,234 $ 166 $ 802
Cost of sales........... 263 465 1,000 187 338
----- ------- ------- ------- ------- ------- --------
Gross profit (loss)..... 75 344 (137) (221) 234 (21) 464
Selling, general and
administrative
expenses............... 180 580 914 1,533 2,435 493 1,091
Research and development
expenses (2)........... 148 2,589 922 1,172 1,597 331 582
----- ------- ------- ------- ------- ------- --------
Loss from operations.... (253) (2,825) (1,973) (2,926) (3,798) (845) (1,209)
Interest income
(expense), net......... (8) 1 (238) 34 64 19 62
----- ------- ------- ------- ------- ------- --------
Net loss................ $(261) $(2,824) $(2,211) $(2,892) $(3,734) $ (826) $ (1,147)
===== ======= ======= ======= ======= ======= ========
Pro forma net loss per
share (3).............. $ (0.76) $ (0.17) $ (0.21)
Shares used in computing
pro forma net loss per
share (3).............. 4,939 4,820 5,457
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1996
------------------------------------------ -----------------------
1991(5) 1992(5) 1993 1994 1995 ACTUAL AS ADJUSTED(4)
------- ------- ------- ------- ------- ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 473 $ 408 $ 294 $ 2,051 $ 5,052 $ 4,969 $26,456
Working capital......... 413 (409) (3,835) 1,628 4,857 4,629 26,117
Total assets............ 549 639 869 3,099 6,399 6,487 27,975
Long-term note payable,
less current portion... 650 906 -- -- -- -- --
Mandatorily redeemable
convertible preferred
stock.................. -- -- -- 6,993 13,970 14,901 --
Stockholders' equity
(deficit).............. $(170) $(1,189) $(3,426) $(4,759) $(8,501) $(9,645) $26,743
</TABLE>
- --------
(1) Sales amounts for the period from inception (June 12, 1990) through
December 31, 1991 and for the year ended December 31, 1992 represent
amounts received pursuant to a collaborative research and development
arrangement.
(2) Includes a charge of $1,728,651 in connection with a termination of a
development agreement in 1992 and research and development costs payable
to a related party of $264,708 in 1995 and $199,938 for the three months
ended March 31, 1996.
(3) See Note 1 of Notes to Financial Statements.
(4) Reflects the conversion of all outstanding shares of Preferred Stock into
3,543,819 shares of Common Stock upon the closing of this offering. See
Note 6 of Notes to Financial Statements. Also gives effect to the sale of
1,900,000 shares of Common Stock offered by the Company hereby at the
initial public offering price of $12.50 per share, after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses payable by the Company, and the anticipated application of the
net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
(5) The financial data for the period from inception in June 1990 through
December 31, 1991 and for the year ended December 31, 1992 include the
accounts of, MinVasive Devices, Inc. and Nicholson Associates, Inc. (the
predecessor companies of the Company) on a historical basis. All
intercompany transactions and balances have been eliminated.
(6) The Company's financial data are not presented separately for 1991, as the
Company's operations from inception in June 1990 through December 31, 1990
were immaterial.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of the financial condition and results of operation
of the Company should be read in conjunction with the Company's Financial
Statements and Notes thereto, and the other financial information included
elsewhere in this Prospectus.
OVERVIEW
Since its inception in June 1990, the Company has been engaged in the
development, manufacture and marketing of proprietary devices and
instrumentation which facilitate the reattachment of soft tissue structures,
such as ligaments and tendons, to bones and other tissues. The Company has a
limited history of operations and has experienced significant operating
losses, resulting primarily from the substantial level of expenses associated
with research and development efforts, expenses associated with obtaining FDA
clearance and the establishment of the Company's sales and marketing
organization. The Company will continue to make these investments and as a
result, expects its operating losses to continue for at least the next two
years. As of March 31, 1996, the Company had an accumulated deficit of
approximately $13.1 million.
The Company's sales are principally derived from the sale of its family of
ROC tissue fasteners and related surgical instruments. The Company commenced
commercial shipments of its first ROC suture fastener during the second
quarter of 1994 and expanded its product offering during 1995 to include the
IDeal Arthroscopic Suture Fastener System. For the three-month period ended
March 31, 1996, and for the year ended December 31, 1995, sales of the
Company's ROC suture fasteners and related surgical instruments represented
97.5% and 92.7% of net sales, respectively. The Company expects its expanding
line of ROC suture fasteners and related instruments will continue to
represent a significant portion of its future sales.
The Company sells its products within the United States to hospitals through
a direct sales force and independent sales agents and internationally through
a limited number of distributors. For the three months ended March 31, 1996
and the year ended December 31, 1995, international sales accounted for 26.8%
and 15.2% of net sales, respectively.
The Company was taxed under Subchapter S provisions of the Internal Revenue
Code of 1986, as amended, through December 31, 1993, but chose to revoke its
Subchapter S election as of January 1, 1994. As of December 31, 1995, the
Company had U.S. federal operating loss carryforwards of approximately
$6.1 million and tax credit carryforwards of approximately $85,000. Ownership
changes, as defined in the Internal Revenue Code, including those resulting
from the issuance of Common Stock in connection with this offering, may limit
the amount of net operating loss and tax credit carryforwards that can be
utilized to offset future taxable income or tax liability.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 and 1995
Net sales increased to $802,000 for the three months ended March 31, 1996
from $166,000 for the three months ended March 31, 1995. Sales of ROC suture
fasteners and related surgical instruments increased to $782,000 for the three
months ended March 31, 1996 from $135,000 for the three months ended March 31,
1995. The introduction of additional ROC suture fasteners and the expansion of
a direct sales effort contributed to the increase in domestic sales, which
increased to $574,000 from $157,000 in the prior year. International sales,
which are denominated in U.S. dollars, increased to $228,000 for the three
months ended March 31, 1996 from $9,000 for the three months ended March 31,
1995 due primarily to the addition of international distributors. The $228,000
of international sales for the three months ended March 31, 1996 were derived
from Europe (78.5%), Japan (8.3%) and Africa (13.2%). For the three months
ended December 31, 1995, international sales were approximately $82,000. The
$82,000 of international sales for the three months ended December 31, 1995
were derived from Europe (90.2%) and Africa (9.8%).
19
<PAGE>
Gross profit increased to $464,000 for the three months ended March 31, 1996
from a loss of $21,000 for the three months ended March 31, 1995. As a
percentage of net sales, gross profit increased to 57.9% for the three months
ended March 31, 1996 from (12.8)% for the three months ended March 31, 1995.
The increase in gross profit was primarily the result of increased net sales
of ROC suture fasteners and improved manufacturing efficiencies.
Selling, general and administrative expenses increased to $1.1 million for
the three months ended March 31, 1996 from $493,000 for the three months ended
March 31, 1995. This increase was primarily attributable to the growth of a
direct sales force in the United States and increased selling commission on
higher sales volume. In addition, the Company recorded a charge of $128,000 in
the first quarter of 1996 associated with a facility under lease through May
1997, which it vacated in March 1996.
Research and development expenses increased to $582,000 for the three months
ended March 31, 1996 from $331,000 for the three months ended March 31, 1995.
This increase was primarily the result of the Company's collaborative
development effort with Collagen Corporation.
Net interest income increased to $62,000 for the three months ended March
31, 1996 from $19,000 for the three months ended March 31, 1995, due primarily
to higher average cash balances during the first quarter of 1996.
Net loss increased to $1.1 million for the three months ended March 31, 1996
from $826,000 for the three months ended March 31, 1995.
Years Ended December 31, 1995 and 1994
Net sales increased to $1.2 million for the year ended December 31, 1995
from $244,000 for the year ended December 31, 1994. Sales of ROC suture
fasteners and related surgical instruments increased to $1.1 million for the
year ended December 31, 1995 from $163,000 for the year ended December 31,
1994. Sales of these products represented 92.7% and 66.7% of net sales in 1995
and 1994, respectively. The remaining sales for each year were derived from
the sale of laparoscopic scissors to a marketing partner.
Gross profit increased to $234,000 for the year ended December 31, 1995 from
a loss of $220,000 for the year ended December 31, 1994. As a percentage of
net sales, gross profit was 19.0% and (90.2)% in 1995 and 1994, respectively.
The improvement in gross profit was primarily due to the higher sales volume
of the ROC suture fasteners and related instruments.
Selling, general and administrative expenses increased to $2.4 million for
the year ended December 31, 1995 from $1.5 million for the year ended December
31, 1994. This increase was primarily attributable to the establishment of a
direct sales effort in the United States and increased sales commission on the
higher sales volume.
Research and development expenses increased to $1.6 million for the year
ended December 31, 1995 from $1.2 million for the year ended December 31,
1994. This increase was primarily a result of the Company's collaborative
development effort with Collagen Corporation and an increase in personnel
related expenses.
Net interest income increased to $64,000 for the year ended December 31,
1995 from $34,000 for the year ended December 31, 1994. Interest income
decreased to $84,000 for the year ended December 31, 1995 from $125,000 for
the year ended December 31, 1994 due to lower average cash balances. However,
lower interest income was offset by a reduction in interest expense to $20,000
for the year ended December 31, 1995 from $91,000 for the year ended December
31, 1994. Interest expense related to notes payable which were converted into
the Company's Common Stock.
Net loss increased to $3.7 million for the year ended December 31, 1995 from
$2.9 million for the year ended December 31, 1994.
20
<PAGE>
Years Ended December 31, 1994 and 1993
Sales increased to $244,000 for the year ended December 31, 1994 from
$126,000 for the year ended December 31, 1993. The first ROC suture fastener
and related surgical instruments were introduced during 1994. The sales of
these products were $163,000 and accounted for 66.7% of net sales. Sales of
the laparoscopic scissors decreased to $81,000 for the year ended December 31,
1994 from $126,000 for the year ended December 31, 1993.
Cost of sales increased to $465,000 for the year ended December 31, 1994
from $263,000 for the year ended December 31, 1993 as the Company expanded its
manufacturing capabilities and generated higher sales volume.
Selling, general and administrative expenses increased to $1.5 million for
the year ended December 31, 1994 from $914,000 for the year ended December 31,
1993, primarily as a result of the addition of sales and marketing management
personnel and increased promotional literature, advertising and trade show
expenses.
Research and development expenses increased to $1.2 million for the year
ended December 31, 1994 from $922,000 for the year ended December 31, 1993.
The higher level of expense was primarily due to increases in salary related
costs, supplies and services associated with the continued development of the
family of ROC suture fasteners and related surgical instruments.
Net interest income of $34,000 was earned for the year ended December 31,
1994 as compared to the $238,000 of net interest expense incurred for the year
ended December 31, 1993. The interest expense was attributable to notes
payable which subsequently were converted into the Company's stock and a term
note resulting from the termination of a development agreement previously
entered into by the Company with a third party.
Net loss increased to $2.9 million for the year ended December 31, 1994 from
$2.2 million for the year ended December 31, 1993.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected operating results for each quarter
of 1995 and the first quarter of 1996. This unaudited information has been
prepared on the same basis as the audited financial information, and includes
all adjustments (consisting only of normal, recurring adjustments) necessary
to present this information fairly. This financial information should be read
in conjunction with the Company's Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. The Company's historical operating
results shown below are not necessarily indicative of future results.
<TABLE>
<CAPTION>
1995 QUARTER ENDED THREE MONTHS
------------------------------------------- ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31, 1996
-------- ------- ------------ ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 166 $ 296 $ 303 $ 469 $ 802
Gross profit............ (21) 79 13 163 464
% of net sales........ (12.8)% 26.7 % 4.3 % 34.8 % 57.9 %
Total operating
expenses............... 824 960 965 1,283 1,673
Net loss................ $(826) $(876) $(961) $(1,071) $(1,147)
</TABLE>
The Company anticipates some seasonality due to fewer surgical procedures
performed during the third quarter versus other quarters. This seasonal
pattern may impact the Company's results of operations as it does other
surgical products manufacturers. It is difficult for the Company to predict
the impact that this seasonality will have on the results of operations
because of its limited operating history.
21
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-
Based Compensation." The Company has elected to adopt SFAS No. 123 in 1996
through disclosure only.
Effective January 1, 1995, the Company adopted SFAS No. 121, "Accounting For
The Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." The adoption of SFAS No. 121 in 1995 had no impact on the Company's
financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Innovasive Devices has financed its operations primarily from the private
sale of equity securities, from which it has raised $18.5 million since
inception. As a result of the operating losses incurred by the Company since
inception, the accumulated deficit was approximately $13.1 million at March
31, 1996.
As of March 31, 1996, the Company had cash and cash equivalents of $5.0
million as compared to a balance of $5.1 million on December 31, 1995. Cash
used in the Company's operations for the three months ended March 31, 1996
increased to $935,000 from $768,000 for the same period in the prior year. The
changes in cash used in operations were due primarily to the impact of
increased sales offset by higher expenses associated with the collaborative
development effort with Collagen Corporation and the expansion of the
Company's direct sales efforts.
Innovasive Devices believes that the net proceeds from this offering plus
the Company's existing capital resources, together with the interest income
thereon will be sufficient to fund its operations through at least 1997. The
Company may attempt to establish a bank credit facility and equipment lease
line to finance a portion of its working capital requirements and capital
expenditures, however, the Company does not have any commitments or
understandings pertaining to these credit facilities at this time. The
Company's future liquidity and capital requirements will depend upon the
progress of the research and development programs, including a $1.2 million
minimum commitment in connection with its collaborative arrangement with
Collagen Corporation, regulatory matters and the expansion of manufacturing
capabilities to satisfy increasing volume requirements. In addition, the
Company's capital requirements will depend on, among other factors, the timely
establishment of effective sales channels in the United States and
internationally and the extent to which the Company's products gain market
acceptance. Therefore, the Company cannot provide any assurances that it will
not require additional financing during this timeframe. If additional
financing is necessary, the Company would seek to raise these funds through
bank facilities or debt or equity offerings. There can be no assurance that
such funds would be available on terms acceptable to the Company.
BACKLOG
The Company fills orders for its products promptly. Accordingly, backlog is
not a significant factor in its business.
22
<PAGE>
BUSINESS
Innovasive Devices designs, develops, manufactures and markets proprietary
tissue repair systems which facilitate the repair of soft tissue injuries. The
Company's tissue repair systems are designed to be used in either open
surgical or minimally invasive arthroscopic procedures. Performing tissue
repairs arthroscopically offers several benefits, including reduced patient
trauma and shorter rehabilitation times, resulting in an expedited return to
full physical activity. The Company's initial products consist of the ROC
(Radial Osteo Compression) family of suture fasteners and related arthroscopic
instruments and are marketed for use in the sports medicine/arthroscopy
segment of the orthopedic market. The Company's suture fastener, a bone anchor
with an attached suture, is deployed into bone and used to secure soft tissue,
such as ligaments and tendons, to the bone. Since the commercial release of
the ROC suture fastener in 1994, the Company estimates that more than 4,000
surgeries, using over 12,000 of the Company's suture fasteners, have been
performed. Innovasive Devices has received 510(k) clearance or has been
exempted by the FDA from the 510(k) clearance process on all products that it
currently markets.
The Company competes in the $185 million soft tissue repair segment of the
$475 million United States sports medicine/arthroscopic surgery market. The
preceding market data was derived from industry estimates published in 1992
and 1993. Based on an April 1994 report, the Company believes that the soft
tissue to bone repair segment of the market in which it competes has had an
average annual growth rate of 35% over the past five years, which is
substantially less than the reported growth experienced in prior years. This
growth is being driven primarily by the increasing incidence of soft tissue
repairs due to greater participation in physical activity, an aging population
and the introduction of less invasive arthroscopic procedures. The Company
markets its products and related instruments principally to sports medicine
surgeons and orthopedic specialists who treat and repair soft tissues, within
and around joints, which have been damaged by traumatic injury or degenerative
disease. There are approximately 7,400 surgeons in the United States who
consider sports medicine/arthroscopy to be their primary practice. These
specialists performed an estimated 1.8 million diagnostic and therapeutic
arthroscopic procedures in 1993, based on 1.64 million actual procedures
reported in 1992. The Company estimates that approximately 875,000
arthroscopic procedures could have involved soft tissue repair if the
appropriate arthroscopic repair devices and technologies had been available,
and that its current products could have been used in approximately 280,000
open and arthroscopic procedures annually.
The Company's products are based on unique and proprietary technologies
which afford them many advantages when compared to the most widely-used metal
bone anchors. The unique radial osteo compression method of attachment has
allowed the Company to develop a family of suture fasteners which are
efficacious in a broad variety of bone densities and sizes. The ROC design
allows for placement of suture fasteners in close proximity for precise
positioning, which enhances tissue to bone reattachment. ROC suture fasteners
require as little as 6mm (approximately 1/4 inch) of depth, as compared to a
minimum of 8mm (approximately 1/3 inch) for most competitive bone anchors,
making them well-suited for small joint tissue repair. ROC suture fasteners
are not forced, hammered or screwed into the bone and therefore are
particularly suitable for placement in smaller, more fragile bones. ROC suture
fasteners are polymer-based and can be removed and replaced with another ROC
suture fastener in the event a revision or a second surgery is required. Based
on its existing designs, the Company is developing and currently testing next
generation suture fasteners using bioabsorbable composites, which degrade and
absorb into surrounding tissue, and collagen-based biomaterial composites,
which remodel into surrounding tissue. In addition, the Company is pursuing
opportunities to apply its core technologies outside of orthopedics in areas
such as uro/gynecology, maxillo-facial trauma repair and plastic surgery.
The Company's strategy for establishing and maintaining leadership in the
minimally invasive soft tissue fixation market consists of the following key
elements: (i) focus on the arthroscopic soft tissue repair market; (ii)
continue to develop a clinically focused sales organization and leverage
clinical relationships; (iii) establish strategic partnerships for development
and commercialization of products; and (iv) maintain technological leadership
and protect its proprietary technologies.
23
<PAGE>
BACKGROUND
Joint Structures and Common Injuries
A human joint is formed at the junction of two or more bones and is
structured in a way to permit stable movement of the bones. The stability of
the joint is maintained by an array of soft tissue structures, such as
ligaments and tendons, which are attached to the bone and surrounding tissue.
When ligaments or tendons are detached from the bone or tear as a result of
trauma, physical activity, or degenerative disease, a tissue-to-bone repair
may be necessary to restore functional stability to the joint. Alternatively,
surgeons may propose lengthy immobilization of the joint in the hope that
suitable healing will be effected. When the injury to the joint involves a
tear or rupture of the soft tissue, repair can often be achieved by suturing
the tissue or completely replacing the tissue structure with tissue grafts.
Tissue fixation devices have been developed to perform repairs to the knee,
shoulder, elbow, wrist and ankle. As a result of the size, density and number
of bones in these joints, a wide variety of tissue fixation devices are
required.
Markets
The Company currently competes in the $185 million soft tissue repair
segment of the $475 million domestic sports medicine/arthroscopic surgery
market. The Company believes that the soft tissue repair market has grown by
an average of approximately 35% per year over the past five years while the
overall arthroscopic surgery market has averaged approximately 15% growth over
the same period. Growth in the tissue repair segment is being driven primarily
by the increasing incidence of joint injuries due to greater emphasis on
physical activity, an aging population and the introduction of arthroscopic
procedures. The arthroscopic approach to joint surgery, when compared to open
surgery, is attractive to many patients and surgeons because it is minimally
invasive and results in reduced trauma, shorter rehabilitation times and
expedited return to full physical activity.
There are approximately 7,400 surgeons in the United States who consider
sports medicine/arthroscopy to be their primary practice. In the United
States, sports medicine surgeons and orthopedic specialists performed an
estimated 1.8 million diagnostic and therapeutic arthroscopic procedures in
1993. Of these 1.8 million procedures, approximately 1.3 million related to
the knee, 300,000 to the shoulder and 170,000 to the small joints in the
elbow, ankle, hand and wrist. The Company estimates that approximately 875,000
of these procedures could have involved soft tissue repair if the appropriate
arthroscopic repair devices and technologies had been available.
SURGICAL JOINT REPAIR: THE CURRENT PRACTICE
Open Surgery
Severe joint injuries have historically been treated using open surgery
involving hospital admittance, large incisions, associated trauma and lengthy
rehabilitation. Traditional methods of joint stabilization involving
reattachment of soft tissues to bone are complex, highly invasive, time-
consuming and technically challenging. The traditional method to repair
shoulder instability, the Bankart procedure, requires the surgeon to create
curved holes in bone through which sutures are threaded and used to attach the
ligament. The technical complexity of the Bankart procedure and potential
complications such as fracture of, or suture cuts through, the bones in the
shoulder have limited the number of surgeons willing to perform it.
Complications associated with the Bankart procedure are also experienced in
treating other orthopedic injuries such as those of the knee, foot, hand,
ankle and elbow.
Historically, soft tissue has been reattached to bone using metal surgical
screws or staples. These devices are placed through the tissue to secure it
directly to the bone. Metal screws and staples generally require large
incisions, are difficult to implant and protrude above the surface of the
bone, creating potential damage to healthy tissue. If a revision or corrective
surgery is required, it is difficult to remove the previously attached devices
without additional tissue damage. As a result, the device is often left in
place, which leads to less than optimal placement of the revision devices.
24
<PAGE>
To address the limitations of metal surgical screws and staples, the bone
anchor was introduced in 1989. A bone anchor is deployed in the bone and
becomes secured below the outer surface of the bone. This device has an
attached suture used to secure soft tissue structures to the bone. A bone
anchor is delivered in a fashion allowing for a smaller incision than
traditional metal screws and staples. The bone anchor has rapidly become the
device of choice for soft tissue-to-bone repairs in open surgery because of
its relatively small profile and diameter, ease of insertion and position
below the surface of the bone.
Arthroscopy
To attempt to minimize the trauma and complications associated with surgery,
surgeons have developed arthroscopic techniques for the repair of orthopedic
joint injuries. When using arthroscopic techniques, the surgeon makes a small
incision through which he passes a fiberoptic illuminated imaging tube, called
an arthroscope, through which he can see the injury. Through another small
incision, the surgeon typically inserts another tube, called a cannula,
through which he passes surgical instruments and suture to make the necessary
repairs.
The introduction of minimally invasive arthroscopic techniques has led to
an increase in the number of patients who elect to undergo joint repair
surgery in order to avoid the uncertain outcome of immobilization therapy or
the trauma of open surgery. However, conventional arthroscopic surgical
techniques, when applied to tissue reattachment, have generally been unable to
mimic proven techniques employed in open surgery. Accordingly, with the
exception of certain procedures of the knee, much of the joint reconstruction
performed today is performed in an open surgery format.
Limitations of Conventional Bone Anchors
Bone anchors may be used for both open surgery and arthroscopic procedures.
The vast majority of bone anchors used today employ permanently implanted
metal barbs or self-tapping screw threads to provide sufficient holding
strength. As a result, these metallic bone anchors are difficult to remove if
a correction or revision is required during the initial surgery or second
surgery. Moreover, even if they are removable, metal devices may leave a hole
in the bone that can be filled only with a revision device that is larger than
the available bone space. If removal is not possible, the existence of the
first implanted device makes it difficult to deploy revision bone anchors or
sequential devices in close proximity to the first device, therefore
precluding surgeons from achieving precise attachment of the tissue to
locations on the bone which are critical for tissue reattachment. Most bone
anchors on the market do not have integrated one-piece delivery systems, and,
if delivered incorrectly, the pieces comprising the bone anchor can separate
prematurely and lodge in the surrounding tissue, making it difficult to find
and remove from the joint. Metal bone anchors currently on the market require
bone holes which may be too deep to properly deploy within small bones, and
potential protrusion of metallic devices through the bone and into tissues
surrounding small bones is a serious post-operative concern.
Limitations of Arthroscopic Soft Tissue-to-Bone Repair
Although bone anchors can be deployed through minimally invasive
arthroscopic techniques, there has not been widespread acceptance of this
approach by surgeons. Under the limited visual field provided by the
arthroscope, barbed and threaded bone anchors can be misplaced and may attach
to soft tissue structures instead of bone, leading to improper fixation and
potential migration of the metallic device into the joint itself. Placing bone
anchors at the site of attachment is only one aspect of the reattachment
surgery. After sutures have been attached to the bone using bone anchors, the
sutures must be threaded through the detached tissue and then secured to the
bone with the proper placement of tight knots through tubes or cannula.
Current limitations on arthroscopic suturing and knot-tying techniques have
limited the number of surgeons willing to perform the surgery
arthroscopically. Clinical studies involving arthroscopic shoulder repair
indicate a higher rate of recurrent instability when compared to results from
open surgery.
25
<PAGE>
INNOVASIVE DEVICES' SOLUTION
Innovasive Devices' current products are designed to address the limitations
of conventional methods of tissue-to-bone repair. The Company's IDeal
Arthroscopic Tissue Repair System includes suture fasteners, a suture grasper
and a knot pusher. Innovasive Devices ROC suture fasteners are polymer-based
devices with an integrated delivery system designed to be easily revised and
to be placed in close proximity to each other. The Company's suture grasper
and knot pusher enable surgeons to mimic open surgery techniques and achieve
comparable clinical results in an arthroscopic environment.
ROC suture fasteners are inserted below the surface of the bone and use
attached sutures in order to hold soft tissue against bone during the eight to
twelve week healing period. Over time, the sutures degrade and are metabolized
by the body while the healed tissue and bone permanently cover the suture
fastener. The ROC suture fastener is comprised of a rigid drive pin and a
flexible polyethylene outer sleeve. When deployed, the sleeve, which is forced
open by the drive pin, radially expands and displaces the soft porous bone
beneath the hard cortical surface to create a compression fit within the bone.
The following diagram illustrates how a ROC suture fastener is deployed into
the bone.
[Drawing of ROC [Drawing of ROC [Drawing of [Drawing of
suture fastener suture fastener fastener fully fastener
placed in top of halfway into drill embedded in drill embedded in
drill hole in bone, hole, with delivery hole, with bone, with
with delivery system attached and delivery system sutures free
system attached and and suture extended detached from to be tied.]
suture extended from fastener.] fastener.]
from fastener.]
[DIAGRAM 1]
Pre- During deployment: Deployment Top down view
deployment: Drive rod complete: of ROC after
ROC placed in pushes inner Fastener placement.
drill hole to pin down, deployed Note attached
confirm resulting in below the suture which
placement. expansion of bone surface can be used
ROC and and separated to tie down
compression from the tissue.
of bone. delivery
system.
The unique radial osteo compression method of attachment has allowed the
Company to develop a family of ROC suture fasteners with a high holding
strength-to-profile ratio making them more efficacious in a broad variety of
bone types and sizes. All ROC suture fasteners can be removed and revised with
another ROC suture fastener if a second surgery or revision is required.
Because the ROC suture fasteners are not metal devices, a new bone hole can be
drilled directly into an initially deployed ROC suture fastener and a new
revision device can be deployed on top of or near the initial site. The ROC
design allows for placement of suture fasteners in close proximity for precise
positioning, which enhances tissue-to-bone reattachment. Because ROC suture
fasteners exhibit compression fixation across the entire surface area of the
device, existing designs can be used in bone holes as shallow as 6mm
(approximately 1/4 inch) in depth, as compared to a minimum of 8mm
(approximately 1/3 inch) for most competitive products, making them ideal for
small joint tissue repair. The ROC suture fastener is placed into pre-drilled
holes and is secured in place by the expansion of the outer sleeve by an inner
drive pin deployed by a rod contained in the delivery system. Accordingly, the
ROC suture fastener does not need to be forced, hammered or screwed into the
bone and is therefore more suitable for placement in smaller, more fragile
bones. The Company is developing suture fasteners based on its proprietary ROC
design using new bioabsorbable and biomaterial composites which will dissolve
or remodel into surrounding tissue after the reattached tissue has firmly
healed.
26
<PAGE>
The ROC XS (for "eXtra Strength"), which was designed to provide additional
holding strength in soft bone structures, is a three part hard plastic device
which creates a 360 degree "umbrella" effect within the porous bone. The ROC
XS was initially developed for rotator cuff repairs in the shoulder, which
often involve the fixation of tissue to softer bone, particularly in older
patients. The following diagram illustrates how the ROC XS is implanted.
[Drawing of ROC XS [Drawing of ROC XS [Drawing of ROC XS
suture fastener placed fully embedded in embedded in drill hole,
in top of drill hole drill hole, with with suture attached to
in bone.] suture free to tie tissue lying on top
down tissue.] of bone.]
[DIAGRAM 2]
ROC XS prior to The fully expanded ROC Completion of repair
placement: Hole has XS. with the ROC XS,
been created with awl showing tissue
or drill. attached with suture.
The Company has also developed a device, called a suture grasper, which
allows for arthroscopic suturing without needles and a device, called a knot
pusher, which facilitates the arthroscopic tying of surgical knots. The
Company believes that its suture fasteners, suture grasper and knot pusher
provide an integrated system that reproduces open surgery techniques in an
arthroscopic format.
27
<PAGE>
STRATEGY
The Company's business strategy for establishing and maintaining leadership
in the minimally invasive soft tissue fixation market consists of the
following key elements:
Focus on Arthroscopic Soft Tissue Repair Market
The Company will continue to develop minimally invasive, cost-effective
solutions for soft-tissue repair. The Company believes there are significant
advantages to arthroscopic techniques, including: reduced patient trauma,
shorter rehabilitation times and expedited return to full physical activity.
Despite these advantages, conventional arthroscopic treatments available to
perform soft tissue repair are unable to mimic the results of open surgery. As
a result, the Company believes a major opportunity exists for innovative
products which improve upon the clinical results associated with conventional
athroscopic surgery.
Continue to Develop a Clinically Focused Sales Organization and Leverage
Clinical Relationships
Most joint repair surgeries are performed by the approximately 7,400
surgeons who consider sports medicine or arthroscopy to be their primary
practice. The Company believes that this relatively small number of physicians
affords it a unique opportunity to develop a cost-effective, clinically
focused sales effort. The Company has established and will continue to expand
its sales force to market and distribute its products in the United States. In
conjunction with its clinically focused sales force, the Company intends to
utilize the strong relationships it has established with its Clinical Advisory
Group and Medical Advisory Board to accelerate market acceptance and increase
the market share of its products.
Establish Strategic Partnerships
The Company will pursue strategic corporate partnerships with other medical
device manufacturers and marketers focused on new product development,
commercializing applications of its technology outside of arthroscopy and
sports medicine and licensing and/or distributing third parties' sports
medicine products. The Company has established a strategic relationship with
Collagen Corporation which includes a Research and Development Agreement, a
Manufacturing and Supply Agreement and a Distribution Agreement. The Research
and Development Agreement provides that the companies will jointly develop
suture fasteners made from collagen-based materials. Beyond arthroscopy and
sports medicine, the Company intends to apply for FDA clearance to market
products in the fields of uro/gynecology, maxillo-facial trauma repair and
endoscopic plastic surgery. The Company expects that in these markets it will
seek a marketing partner to assist the Company in achieving rapid market
acceptance and penetration.
Establish a Position of Technological Leadership and Protect Its Proprietary
Technologies
The Company's strategy is to be a technological leader in the minimally
invasive soft tissue repair market. The Company believes that its ROC
technology and proprietary instruments provide significant performance
advantages over alternative bone anchors. Innovasive Devices intends to
establish a position of technological leadership through an aggressive
research and development program. Specifically, the Company is designing and
testing its next generation of ROC suture fastener products using
bioabsorbable and biomaterial composites. The Company aggressively seeks to
protect its proprietary technological positions through a combination of trade
secret laws and other contractual provisions and measures, and by a regular
process of filing patent applications throughout the world. The Company has
been granted United States and foreign patents covering ROC technology and
associated instruments and has submitted several United States and foreign
patent applications regarding various instruments, delivery systems and
methods.
28
<PAGE>
CURRENT PRODUCTS AND APPLICATIONS
The Company currently markets a family of suture fastener products cleared
by the FDA for clinical applications for the shoulder, knee, elbow, wrist,
hand and ankle. In addition, the Company markets a family of arthroscopic
instruments, including the IDeal Suture Grasper and the IDeal Knot Pusher. All
of the Company's current products have received 510(k) clearance or have been
exempted by the FDA from the 510(k) clearance process. The following chart
sets forth the product release date, current applications and features and
benefits of the Company's current products:
<TABLE>
<CAPTION>
INITIAL CURRENT
PRODUCT RELEASE DATE APPLICATIONS FEATURES AND BENEFITS
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
2.8mm ROC March 1995 shoulder, knee, . primary fastener for hard bone
Suture Fastener foot and ankle . all polymer design
. revisable
. available for open and
arthroscopic repair
- -----------------------------------------------------------------------------------------
3.5mm ROC May 1994 shoulder, knee, . primary fastener for soft bone
Suture Fastener foot and ankle . revision fastener for 2.8mm ROC
. all polymer design
. revisable
. available for open and
arthroscopic repair
- -----------------------------------------------------------------------------------------
1.9mm ROC April 1996 shoulder, hand . primary fastener for small bones
Suture Fastener and wrist . all polymer design
. revisable
. 5mm fastener length
- -----------------------------------------------------------------------------------------
2.3mm ROC May 1996 shoulder, hand . revision fastener for 1.9mm ROC
Suture Fastener and wrist . all polymer design
. revisable
. 5mm fastener length
- -----------------------------------------------------------------------------------------
3.5mm ROC XS May 1996 shoulder . added holding strength for soft bone
Suture Fastener . revision fastener for 3.5mm ROC
. all polymer design
- -----------------------------------------------------------------------------------------
IDeal Suture January 1995 open and . 15, 30, 45 and 60 degree angles
Grasper arthroscopic . arthroscopically sutures tissue
tissue suturing without needle
- -----------------------------------------------------------------------------------------
IDeal Knot September 1994 open and . delivers all types of knots
Pusher arthroscopic . tip spreads to tighten knots
knot tying
</TABLE>
The Company markets its fasteners and instruments as part of its complete
IDeal Arthroscopic Tissue Repair System, but each of the components may be
purchased separately. The Company also offers customized, reusable drill
guides, drills, ROC handles and awls as part of its standard instrument set
used to deploy the ROC family of suture fasteners. The Company markets this
instrument set in a standard tray which is universal to all the ROC suture
fasteners. The universal tray allows the hospital to standardize its soft
tissue fixation using a single cost effective instrument set.
29
<PAGE>
PRODUCT DEVELOPMENT
Innovasive Devices has a variety of new products in various stages of
development designed to address a number of clinical needs. The Company does
not currently have FDA clearance to market any of these products.
NEXT GENERATION SUTURE FASTENERS
Bioabsorbable ROC Suture Fasteners. Innovasive Devices has been developing
bioabsorbable suture fasteners employing the ROC design. Suitable
bioabsorbable materials have been identified, fasteners have been manufactured
and pre-clinical testing is under way. The goal is to develop a suture
fastener with the mechanical properties of the current ROC fastener in a
format that will degrade and absorb into surrounding tissue after the damaged
tissue has securely reattached to the bone.
Collagen Biomaterial Tissue Repair Systems. The Company has a collaborative
agreement with Collagen Corporation to develop tissue repair systems utilizing
the biomaterial collagen. Products are being designed to degrade into by-
products which will reincorporate, or remodel, into surrounding tissues, such
as cartilage or bone. The initial project, a collagen suture fastener, is in
Phase I pre-clinical testing.
Arthroscopic ROC XS and Mini ROC XS. The Company recognizes the clinical
need for soft bone tissue attachment in small bones and conditions where
arthroscopic delivery is preferable. The ROC XS product line is being expanded
to address these clinical needs.
MENISCAL AND CARTILAGE REPAIR
The meniscus is a pad of spongy cartilage tissue which acts as a shock
absorber between the two major bones which form the knee. The surfaces of the
bones are covered by articular cartilage that also cushion the joint. Tears of
the meniscus and damage to the articular cartilage are two common orthopedic
injuries. Conventional techniques for meniscal and cartilage repair may be
rather tedious, time-consuming and accompanied by risks of complications.
Meniscal Repair. Tears of the meniscus are currently treated primarily by
arthroscopic menisectomy, the removal of torn tissue. Partial menisectomies
can be performed in a matter of minutes with limited risks of complications
and often result in short-term functional improvements of the knee due to the
removal of attached and detached tissue fragments. However, menisectomies may
lead to greater knee instability and accelerate the onset of degenerative knee
disease. An alternative treatment for tears of the meniscus is meniscal suture
repair, which involves the repeated passing of long needles and suture through
the tight confines of the knee joint to reapproximate the torn tissue.
The Company believes that there were approximately 500,000 partial
menisectomies and 200,000 meniscal suture repairs performed in 1993.
Innovasive Devices intends to expand its product offering to knee applications
with the development of an arthroscopic system designed to repair the torn
meniscus. This product is currently in pre-clinical testing and is designed to
replace current suturing techniques.
Cartilage Repair. Conventional techniques to treat articular cartilage
damage include the removal of loose cartilage tissue or treating the bony
surface to cause the formation of a coating scar tissue. The Company believes
that approximately 225,000 articular cartilage treatments were performed in
1993. Innovasive Devices is currently developing instrument sets designed to
enable surgeons to repair articular cartilage defects of the knee using an
arthroscopic approach.
NON-ARTHROSCOPY/SPORTS MEDICINE APPLICATIONS
Innovasive Devices believes that a significant market opportunity is
available for its existing products and core proprietary technologies outside
of the arthroscopy/sports medicine market. The Company
30
<PAGE>
intends to seek FDA clearance for its devices for several non-
arthroscopy/sports medicine applications, including those set forth below. No
assurance can be given as to when or whether the Company will receive such
clearances.
Uro/Gynecology. Female urinary incontinence can result when the bladder sags
from its original position and alters the architecture of the urinary
retention structures within the urinary tract. Pain and reproductive problems
can occur when the uterus sags from its normal position and impinges upon
adjacent tissue structures. The Company believes that its suture fasteners can
be delivered in an open or minimally invasive laparascopic approach to attach
and elevate the sagging bladder neck or uterus to the pubic bone.
Reconstructive and Endoscopic Plastic Surgery. Reconstructive plastic
surgery typically requires the reattachment of bone and tissue to surrounding
bone. Occasionally, tissue must be removed and replaced for aesthetic
considerations. The Company believes its proprietary fixation technology can
be developed to provide a means to reattach bone and tissue structures using
conventional or biomaterial fracture fixation plates. The Company also
believes that suture fasteners using its proprietary ROC technology in a
minimally invasive endoscopic procedure can be developed to attach sagging
tissue structures which cause facial wrinkles. If products are developed for
endoscopic plastic surgery using Collagen Corporation's proprietary
technology, Collagen Corporation would have the right to distribute such
products under its distribution agreement with the Company. See "Business--
Relationship with Collagen Corporation."
RESEARCH AND DEVELOPMENT
The Company's objective is to continue to develop innovative products for
the sports medicine/arthroscopy market and to maximize the potential of its
core proprietary technology in non-orthopedic markets. The Company's research
and development department currently consists of five engineers with
substantial design experience in the field of arthroscopy. During the fiscal
years ended December 31, 1993, 1994 and 1995 and for the three-month period
ended March 31, 1996, the Company incurred expenses of $922,000, $1.2 million,
$1.6 million and $582,000, respectively, in connection with its research and
development efforts, and anticipates a substantial and increasing commitment
to ongoing programs.
The Company's research and development department is continually engaged in
assessing new tissue repair device technologies and techniques which are
applicable to the Company's business strategy. The research and development
engineers spend a significant amount of time with surgeon advisors and members
of the Company's Medical Advisory Board in evaluating new product ideas. The
Company has collaborative arrangements with university-based research centers
for pre-clinical design testing. In the future, the Company's research and
development efforts may include the identification of new technologies
developed by others and the acquisition or licensing of new technologies and
product lines and extensions.
SALES AND MARKETING
The Company's sales and marketing strategy is to focus its efforts on
arthroscopic/sports medicine surgeons through a combination of direct sales
calls, clinical workshops and presentations at medical meetings and
symposiums. Innovasive Devices' products are marketed domestically to
approximately 7,400 arthroscopic surgeons and sports medicine specialists. The
Company's clinical sales agents and marketing personnel meet with surgeons to
conduct product demonstrations, attend surgical procedures and provide
training. Sales and marketing personnel also attend numerous domestic and
foreign medical conventions each year where they exhibit and demonstrate the
Company's products.
The Company markets its products to surgeons in the United States through a
network of ten clinical employee sales representatives, 53 independent sales
agents and two regional sales managers. In addition to its field sales force,
as of March 31, 1996 the Company employed a staff of five corporate marketing,
31
<PAGE>
sales and customer service support staff employees. This staff, which includes
the Company's worldwide Director of Sales, manages clinical training
workshops, sales management, print and video promotion, sales data analysis,
convention management and international marketing. The Company ships to and
invoices its hospital customers directly.
The Company markets its products internationally through established
distributors of orthopedic medical devices. The Company's products are sold
directly to stocking distributors who sell the products to hospitals and
clinics. For the three months ended March 31, 1996, international sales
accounted for 28.4% of net sales.
Innovasive Devices also works with a Clinical Advisory Group ("CAG") of ten
surgeons located across the United States. The members of the CAG are opinion
leaders in the field of arthroscopy and sports medicine and are affiliated
with professional athletic teams, collegiate athletic departments and major
orthopedic hospitals. The Company relies on the CAG to conduct workshops at
which new surgeons train on the use of the Company's products, evaluate
products clinically prior to their general market release, present the
Company's products at conferences, assist in creating training videos and
advise the Company on new surgical and product techniques.
MANUFACTURING AND QUALITY CONTROL
The manufacture of the Company's devices and instruments consists of
inspection, assembly, testing and packaging of components that have been
molded, machined or manufactured to the Company's specifications by outside
contractors. The Company maintains a high level of quality control and
inspects each lot of components to ensure that they comply with the Company's
exacting specifications. The Company abides by the FDA's Good Manufacturing
Practices and the requirements of foreign regulatory agencies. Samples of
sterilized products are sent to a certified laboratory to validate that
sterilization procedures have been adequately performed. After this
validation, the products are shipped to customers.
Most purchased components are available from more than one vendor. For
certain of these components, there are relatively few alternative sources of
supply and establishment of additional or replacement suppliers for such
components cannot be accomplished quickly. Many components are injection
molded using Company owned molds. Many polymer components have only one mold
and replacement of the molds can take 12 to 16 weeks. Any bioabsorbable
materials used in future products will likely be available from a single
source. Any supply interruption from single source vendors could have a
material adverse effect on the Company's ability to supply products.
There is a risk that certain suppliers may terminate sales of certain
materials to companies that manufacture medical devices in an attempt to limit
their potential product liability exposure. If the polymers which are used to
manufacture the Company's ROC suture fasteners become unavailable, the Company
would be required to identify a new polymer material for the suture fasteners
and certify the quality and suitability of the new material. In addition, a
new 510(k) clearance would have to be obtained to market products manufactured
from the new materials. This process could take a substantial period of time
and there is no assurance that the Company would be able to identify, certify
or obtain clearance for the new polymer based fasteners.
RELATIONSHIP WITH COLLAGEN CORPORATION
The Company is a party to a Research and Development Agreement, a
Manufacturing and Supply Agreement and a Distribution Agreement with Collagen
Corporation, a leading developer of implantable bovine collagen. Pursuant to
these agreements, the Company and Collagen Corporation have cross-licensed
their respective technologies relating to collagen materials and medical
devices. After the offering, Collagen Corporation will be the holder of
approximately 11.6% of the Company's Common Stock. Pursuant to an agreement
among the Company and certain of its stockholders, Collagen
32
<PAGE>
Corporation has the right to designate one member of the Company's Board of
Directors so long as it holds at least five percent of the Company's
outstanding Common Stock on a fully-diluted basis. Howard D. Palefsky, the
Chief Executive Officer of Collagen Corporation, currently serves as Collagen
Corporation's designee on the Company's Board of Directors.
Under the Research and Development Agreement, the Company and Collagen
Corporation have agreed to undertake the joint development of suture fasteners
made from collagen-based materials, to be funded by the Company up to certain
amounts as specified in an agreed project plan. The Research and Development
Agreement contemplates subsequent development of collagen-based tissue
fixation devices if the parties can agree on a project plan and budget for
their development. Any technology jointly developed pursuant to a project plan
is to be owned jointly by the parties. Until October 17, 2000, the parties
have agreed to work exclusively together with respect to the development of
products covered by the agreement. With respect to products for which a
project plan has been approved by the parties prior to October 17, 2000 and
for which there is funding through completion of development, Collagen
Corporation and the Company have agreed not to commence the development of
competing products until after the second anniversary of the first commercial
sale of such products.
The Manufacturing and Supply Agreement provides that Collagen Corporation
will be the exclusive supplier to the Company for products manufactured from
collagen and developed under the Research and Development Agreement. If
Collagen Corporation is unable to supply such products, the Company is
entitled to develop a second source of supply. The Manufacturing and Supply
Agreement remains in effect with respect to a product until either the
Distribution Agreement between Collagen Corporation and the Company relating
to such product terminates or expires or until the Manufacturing Agreement is
terminated by reason of default or as the result of the bankruptcy or
insolvency of a contracting party.
The Distribution Agreement provides that Collagen Corporation will have
exclusive distribution rights to the Company's 3.5mm, 2.8mm and 1.9mm ROC
suture fasteners and collagen-based products developed under the Research and
Development Agreement which are labelled for facial plastic surgery or
dermatology applications. Under the agreement, the Company will have exclusive
distribution rights to collagen-based products developed under the Research
and Development Agreement which are labelled for orthopedic applications. Each
party must sell a minimum number of units of products in its exclusive field
to maintain exclusivity; otherwise, the other party gains co-exclusive rights
to market and distribute products in that field. Under the agreement, a
distributing party will purchase products from a manufacturing party at
various discounts from the actual average selling price of the products, and
Collagen Corporation is required to pay royalties to the Company with respect
to Collagen Corporation's net sales of products for which development was
funded by the Company pursuant to the Research and Development Agreement.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company believes that a key element of its competitive advantage depends
on its ability to develop and maintain proprietary aspects of its technology.
To this end, the Company files patent applications to protect technology,
inventions and improvements that it believes are significant to the growth of
its business. The Company has four issued patents and 40 U.S. and foreign
patent applications pending. Of its issued patents, the Company owns one
United States patent and one foreign patent that relate directly to its radial
osteo compression (ROC) technology. The other two U.S. patents are directed to
surgical tools and methods. There are four pending patent applications in the
United States and 12 foreign applications pending that all relate to the core
fastening technology. An additional 11 patent applications claiming various
surgical tools, systems and methods have been filed in the United States,
while 13 such applications have been filed abroad.
The Company has received a notice alleging that instruments based on one of
its patents may infringe the patent of a third party. The only products
currently manufactured by the Company using the Company's patent are its knot
pusher and laparascopic scissors. Based on advice of its patent counsel, the
33
<PAGE>
Company does not believe that its knot pusher or laparascopic scissors
infringe the cited third party patent and intends to vigorously defend its
position. However, the Company may not be able to successfully defend against
an infringement claim and there can be no assurance that the Company will not
become subject to other patent infringement claims or litigation or
interference proceedings. Moreover, there can be no assurance that current and
potential competitors and other third parties have not filed or in the future
will not file applications for, or have not received or in the future will not
receive, patents and will not obtain additional proprietary rights relating to
materials or processes used or proposed to be used by the Company.
Accordingly, there can be no assurance that the Company's products have not,
do not or will not infringe any patents or other proprietary rights of third
parties.
The Company typically requires its employees, consultants and advisors to
execute appropriate confidentiality agreements in connection with their
employment, consulting or advisory relationships with the Company. The Company
also typically requires its employees, consultants and certain advisors to
agree to disclose and assign to the Company all inventions conceived of on
Company time, using Company property or which relate to the Company's
business. There can be no assurance, however, that the foregoing agreements
will effectively prevent disclosure of the Company's confidential information
or provide meaningful protection for the Company's confidential information if
there is unauthorized use or disclosure. Furthermore, no assurance can be
given that competitors will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the
Company's proprietary technology.
COMPETITION
The Company faces strong competition in the marketplace from metal bone
anchors sold by large corporations with orthopedic divisions. Mitek Surgical
Products, Inc. ("Mitek"), a division of Johnson & Johnson, the Zimmer and
Linvatec divisions of Bristol-Meyers Squibb Company, Dyonics, Inc.
("Dyonics"), a subsidiary of Smith & Nephew, Inc., and Arthrotek Inc., a
division of Biomet, Inc., all compete in the Company's market with metal
suture anchors. Dyonics currently sells an all plastic design as well as a
bioabsorbable suture fastener. These competitors have significantly greater
financial, manufacturing, marketing, distribution and technical resources than
the Company. Mitek, which sells a metal barbed anchor, currently has the
largest share of the suture fastener market. The Company also faces
competition from smaller companies developing new metallic anchor systems,
including Arthrex Inc., Li Medical, Inc. and Orthopaedic Biosystems Ltd., Inc.
The Company believes that its products compete favorably against its
competitors based on a number of factors, including the Company's proprietary
radial osteo compression design which permits adequate holding strength in
both large and small bones and can be modeled from plastic, bioabsorbable
polymers and biomaterials; the revisability of the Company's fasteners; the
availability of a proprietary arthroscopic delivery system for its products;
and the small profile of the Company's products when inserted into bone, which
permits its fasteners to be deployed in the small bones of the wrist, hand,
ankle and foot. However, there can be no assurance that the Company's
competitors will not succeed in developing products and technologies that are
more effective or less costly than those that have been or may be developed by
the Company.
GOVERNMENT REGULATION
Clinical testing, manufacture and sale of the Company's products, including
the ROC suture fasteners, the IDeal suture graspers and IDeal knot pusher are
subject to regulation by the FDA and corresponding state and foreign
regulatory agencies. Pursuant to the Federal Food, Drug, and Cosmetic Act, and
the regulations promulgated thereunder, the FDA regulates the clinical
testing, manufacture, labeling, distribution and promotion of medical devices.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, failure of the government to grant pre-
market clearance or pre-market approval
34
<PAGE>
for devices, withdrawal of marketing approvals and criminal prosecution. The
FDA also has the authority to request repair, replacement or refund of the
cost of any device manufactured or distributed by the Company.
In the United States, medical devices are classified into one of three
classes (i.e., Class I, II, or III) on the basis of the controls deemed
necessary by the FDA to reasonably ensure their safety and effectiveness.
Class I devices are subject to general controls (e.g., labeling, pre-market
notification and adherence to GMPs) and Class II devices are subject to
general and special controls (e.g., performance standards, post-market
surveillance, patient registries and FDA guidelines). Generally, Class III
devices are those which must receive pre-market approval by the FDA to ensure
their safety and effectiveness (e.g., life-sustaining, life-supporting and
implantable devices, or new devices which have been found not to be
substantially equivalent to legally marketed devices).
Before a new device can be introduced in the market, the Company must
generally obtain FDA clearance or approval through either clearance of a
510(k) notification or approval of a PMA. A 510(k) clearance will be granted
if the submitted information establishes that the proposed device is
"substantially equivalent" to a legally marketed Class I or Class II medical
device or a Class III medical device for which the FDA has not called for
PMAs. The FDA recently has been requiring more rigorous demonstration of
substantial equivalence than in the past, including in some cases requiring
submission of clinical trial data. The FDA may determine that the proposed
device is not substantially equivalent to a predicate device or that
additional information is needed before a substantial equivalence
determination can be made. It generally takes from four to 12 months from
submission to obtain 510(k) premarket clearance, but the process may take
longer. The FDA may determine that a proposed device is not substantially
equivalent to a legally marketed device or that additional information is
needed before a substantial equivalence determination can be made. A "not
substantially equivalent" determination or a request for additional
information could prevent or delay the market introduction of new products
that fall into this category and could have a material adverse effect on the
Company's business, financial condition or results of operations. For any of
the Company's devices that are cleared through the 510(k) process,
modifications or enhancements that could significantly affect the safety or
effectiveness of the device or that constitute a major change to the intended
use of the device will require a new 510(k) submission.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a
Class III device for which the FDA has called for PMAs. A PMA application must
be supported by valid scientific evidence which typically includes extensive
information (including relevant bench tests, laboratory and animal studies and
clinical trial data) to demonstrate the safety and effectiveness of the
device. The PMA application also must contain a complete description of the
device and its components; a detailed description of the methods, facilities
and controls used to manufacture the device; and the proposed labeling,
advertising literature and training materials (if any). The PMA process can be
expensive, uncertain and lengthy. A number of devices for which FDA approval
has been sought by other companies have never been approved for marketing.
Modifications to a device that is the subject of an approved PMA, its
labeling, or manufacturing process may require approval by the FDA or PMA
supplements or new PMAs.
If human clinical trials of a device are required and the device presents a
"significant risk," the sponsor of the trial (usually the manufacturer or the
distributor of the device) will have to file an IDE application prior to
commencing human clinical trials. The IDE application must be supported by
data, typically including the results of animal and laboratory testing. If the
IDE application is approved by the FDA and one or more appropriate
Institutional Review Boards ("IRBs"), human clinical trials may begin at a
specific number of investigational sites with a specific number of patients,
as approved by the FDA. If the device presents a "nonsignificant risk" to the
patient, a sponsor may begin the clinical trial after obtaining approval for
the study by one or more appropriate IRBs without the need for FDA approval.
35
<PAGE>
Sponsors of clinical trials are permitted to sell investigational devices
distributed in the course of the study provided that compensation does not
exceed recovery of the costs of manufacture, research, development and
handling. An IDE supplement must be submitted to and approved by the FDA
before a sponsor or investigator may make a change to the investigational plan
that may affect its scientific soundness or the rights, safety or welfare of
human subjects.
To date, all of the Company's products have received 510(k) clearance or
have been exempted by the FDA from the 510(k) clearance process. The Company
has made modifications to its devices which the Company believes do not
require the submission of new 510(k) notices. There can be no assurance,
however, that the FDA would agree with any of the Company's determinations not
to submit a new 510(k) notice for any of these changes or would not require
the Company to submit a new 510(k) notice for any of the changes made to the
device. If the FDA requires the Company to submit a new 510(k) notice for any
device modification, the Company may be prohibited from marketing the modified
device until the 510(k) notice is cleared by the FDA. There can be no
assurance that any proposed modification will be cleared on a timely basis, if
at all.
The Company anticipates that its bioabsorbable suture fasteners under
development will be considered a Class II device subject to the 510(k)
clearance process. The need for clinical studies to support a 510(k)
submission for this device has not yet been determined, but there can be no
assurance that the FDA will not require such studies. With respect to the
biomaterial suture fasteners currently under development, although the Company
has had an initial discussion with the FDA, there has been no determination
whether 510(k) clearance or PMA approval will be required. To the Company's
knowledge, collagen-based medical devices currently being marketed have
required PMA approval. The Company anticipates that the FDA will require
clinical trial data for its biomaterial suture fastener, regardless of which
regulatory path the FDA ultimately requires. There can be no assurance the FDA
will not determine that the Company's future products, including the
bioabsorbable and biomaterial suture fasteners now in development, must adhere
to the more costly, lengthy, and uncertain PMA approval process. There also
can be no assurance that the Company will obtain FDA clearance or approval for
such future products on a timely basis, if at all, or that the FDA will not
impose limitations on the intended use of such products as a condition of
clearance or approval. Any delay in receipt of, failure to obtain, or
limitations on clearance or approval could have a material adverse effect on
the Company's business, financial condition or results of operation.
Any devices manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA and certain state agencies. Manufacturers of medical devices for
marketing in the United States are required to adhere to applicable
regulations setting forth detailed Good Manufacturing Practices ("GMP")
requirements, which include testing, control and documentation requirements.
Manufacturers must also comply with Medical Devices Reporting ("MDR")
requirements that a firm report to the FDA any incident in which its product
may have caused or contributed to a death or serious injury, or in which its
product malfunctioned and, if the malfunction were to recur, it would be
likely to cause or contribute to a death or serious injury. Labeling and
promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. Current FDA enforcement policy
prohibits the marketing of approved medical devices for unapproved uses.
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with GMP requirements, MDR requirements, and other
applicable regulations. The FDA has proposed changes to the GMP regulations
which will likely increase the cost of compliance with GMP requirements.
Changes in existing requirements or adoption of new requirements could have a
material adverse effect on the Company's business, financial condition or
results of operation.
The Company is also subject to regulation in each of the foreign countries
in which it sells its products in the areas of product standards, packaging
requirements, labeling requirements, import
36
<PAGE>
restrictions, tariff regulations, duties and tax requirements. Many of the
regulations applicable to the Company's products in these countries are
similar to those of the FDA. The national health organization of some
countries require the Company's products to be qualified before they can be
marketed in those countries. The Company relies on its international
distributors to comply with these requirements. To date, the Company has not
experienced significant difficulty in complying with these regulations.
The Company is in the process of implementing policies and procedures which
are intended to allow the Company to receive ISO 9001 certification. ISO 9001
standards for quality systems in manufacturing have been developed to ensure
that companies know, on a worldwide basis, the standards of quality to which
they will be held. The European Union has promulgated rules which require that
medical products receive the CE mark by mid-1998. The CE mark is an
international symbol of quality and compliance with applicable European
medical device directives. Failure to receive CE mark certification will
prohibit the Company from selling its products in Europe. There can be no
assurance that the Company will be successful in meeting the certification
requirements. ISO 9001 certification is one of the CE mark certification
requirements.
The Company is subject to numerous federal, state and local laws relating to
such matters as safe working conditions and environmental protection. There
can be no assurance that the Company will not be required to incur significant
costs to comply with such laws and regulations in the future or that such laws
or regulations will not have a material adverse effect upon the Company's
business, financial condition or results of operations.
PRODUCT LIABILITY AND INSURANCE
Medical device companies are subject to an inherent risk of product
liability and other liability claims in the event that the use of their
products results in personal injury. The Company maintains liability insurance
coverage in the amounts deemed appropriate by management based upon the nature
and risks of its business in general and its actual experience to date. There
can be no assurance that a future claim will not exceed insurance coverage or
that such coverage will continue to be available. In addition, any substantial
increase in the cost of such insurance could have a material adverse effect on
the Company's business, financial condition and results of operations.
EMPLOYEES
As of March 31, 1996, Innovasive Devices employed 40 individuals, 13 of whom
were engaged in research and development and regulatory and quality assurance,
six in manufacturing and 21 in marketing, sales and administrative positions.
The Company also contracts with outside consultants. None of the Company's
employees is covered by a collective bargaining agreement. The Company
believes that it maintains good relations with its employees.
FACILITIES
The Company is in the process of transitioning its operations from its
facility in Hopkinton, Massachusetts to Marlborough, Massachusetts. The
Company will continue to occupy the portion of its premises in Hopkinton which
contain its "clean room," where certain manufacturing operations take place,
until its new "clean room" facility is validated by the FDA. With the
exception of the manufacturing space described above, the Company has vacated
its 18,000 square-foot facility located in Hopkinton, 6,000 square feet of
which is subject to a lease terminating in June 1997. The Marlborough facility
contains approximately 28,000 square feet, which is divided equally between
offices, manufacturing and expansion space. The facility is leased through May
2002. The Company has options to renew the lease for a total of six additional
years and has a right of first offer on additional space in the building. The
Company believes this facility is adequate to meet its anticipated real estate
requirements for the foreseeable future.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard D. Randall................. 44 President, Chief Executive Officer and
Director
James E. Nicholson................. 57 Chief Technical Officer and Director
James V. Barrile................... 41 Executive Vice President of Finance,
Chief Financial Officer and Treasurer
Eric L. Bannon..................... 37 Vice President of Regulatory Affairs and
Quality Assurance
Rickey D. Hart..................... 32 Vice President of Advanced Projects
John T. Rice....................... 43 Vice President of Research and
Development
Philip H. Heitlinger............... 36 Director of Sales
Royce C. Kahler, Jr................ 49 Director of Operations
Karen L. Mattocks.................. 39 Director of Marketing
Joseph A. Ciffolillo (1)........... 57 Director
Thomas C. McConnell (2)............ 42 Director
Robert R. Momsen (1)............... 49 Director
Howard D. Palefsky (2)............. 49 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Mr. Randall has been President, Chief Executive Officer and a director of
the Company since February 1994. He currently serves as a director of Target
Therapeutics, Inc. ("Target"), a developer of neurovascular devices. He was
employed by Target from June 1989 to January 1994, during which time he served
as President, Chief Executive Officer and Chairman. Mr. Randall currently
serves as Chairman of the Board of Directors of Conceptus, Inc. ("Conceptus"),
a developer of minimally invasive devices for reproductive medical
applications. He was also acting President and acting Chief Executive Officer
of Conceptus from December 1992 to July 1993. Mr. Randall is also a director
of Neuro Navigational Corporation, a minimally invasive neurosurgery company.
Mr. Nicholson, a co-founder of the Company, has been a director of the
Company since the Company's inception in September 1991. He has also served as
Chief Technical Officer since February 1994 and President and Chief Executive
Officer from inception to February 1994. He was founder and President of
Nicholson Associates, Inc. ("Nicholson Associates"), a surgical device company
which was formed in June 1990 and merged into the Company in May 1992. Mr.
Nicholson was also a co-founder of Mitek Surgical Products, Inc., a bone
anchor manufacturer, and served as its President from 1985 to 1990.
Mr. Barrile, a co-founder of the Company, currently serves as Executive Vice
President of Finance, Chief Financial Officer and Treasurer. He has been Chief
Financial Officer and Treasurer of the Company since the Company's inception
in September 1991. He was formerly Vice President of Finance from the
Company's inception to April 1996. Mr. Barrile was also Treasurer of Nicholson
Associates from September 1991 until its merger into the Company. From 1978 to
1991, he was employed by Nova Biomedical Corporation, a medical laboratory
instrumentation manufacturer, most recently serving as Treasurer and Director
of Finance.
38
<PAGE>
Mr. Bannon currently serves as Vice President of Regulatory Affairs and
Quality Assurance, having served as Director of Quality Assurance and
Regulatory Affairs from August 1992 to April 1996. From May 1989 to August
1992, he was manager of quality assurance at Dyonics, Inc., an arthroscopic
surgical instrumentation company which is a subsidiary of Smith & Nephew, Inc.
Mr. Hart, a co-founder of the Company, currently serves as Vice President of
Advanced Projects, having been an engineer in research and development at the
Company from the Company's inception in September 1991 to April 1996. Mr. Hart
was formerly with Nicholson Associates from its inception in June 1990.
Mr. Rice currently serves as Vice President of Research and Development,
having served as Director of Research and Development from May 1992 to April
1996. From July 1989 to May 1992, he was an engineering manager at Mitek
Surgical Products, Inc.
Mr. Heitlinger has been Director of Sales at the Company since February
1994. From December 1992 to January 1994, he was regional sales manager for
American Surgical Technologies Corporation, a three-dimensional endoscopy
company. From September 1992 to December 1992, Mr. Heitlinger was a sales
representative for Endomedix Corporation, a disposable laparoscopic products
company, and from January 1992 to July 1992 he was regional sales manager for
Birtcher Medical Systems, Inc., an electrosurgery company. Mr. Heitlinger was
between jobs in August 1992. From June 1983 to January 1992, he held various
positions within the Linvatec division of Bristol-Myers Squibb Company,
including those of sales representative, director of marketing and product
manager.
Mr. Kahler has been Director of Operations at the Company since May 1994.
From May 1989 to May 1994, he was Director of Operations at the Interventional
Vascular division of Medtronic Inc., a cardiovascular device company.
Ms. Mattocks has been Director of Marketing at the Company since March 1993.
From March 1987 to March 1993, Ms. Mattocks was a marketing manager at
Dyonics, Inc.
Mr. Ciffolillo has been a director of the Company since February 1994. Now
retired, from 1987 to March 1995, he was Chief Operating Officer of Boston
Scientific Corporation ("Boston Scientific"), a manufacturer and marketer of
minimally invasive medical devices. From March 1995 until his retirement in
April 1996, he was Executive Vice President--Office of the Chairman, for
Boston Scientific Venture Group, the venture capital division of Boston
Scientific. He is also a director of CompDent Corporation, a dental health
maintenance organization.
Mr. McConnell has been a director of the Company since February 1995. He
joined New Enterprise Associates, a venture capital firm, in 1985 and has been
a general partner since 1989. He is also a director of Conceptus, Inc., Pyxis
Corporation, a maker of narcotic medication distribution systems, Penederm
Incorporated, a maker of topical drug delivery systems, and Sequana
Therapeutics, Inc., a maker of diagnostics for gene identification.
Mr. Momsen has been a director of the Company since February 1994. He joined
InterWest Partners, a venture capital firm, in 1981 and has been a general
partner since 1982. He is also a director of ArthroCare Corporation, a
manufacturer of arthroscopic surgical equipment, Ventritex, Inc., a
manufacturer of implantable cardiac defibrillators, and COR Therapeutics,
Inc., a developer of cardiovascular pharmaceuticals.
Mr. Palefsky has been a director of the Company since September 1995. He has
been Chief Executive Officer of Collagen Corporation since 1978. He is also a
director of Target Therapeutics, Inc. and Calgene, Inc., an agricultural
biotechnology company.
Each director currently holds office until the next annual meeting of
stockholders and until that director's successor has been elected and
qualified. Upon the effectiveness of this offering, however, the Company's
Board of Directors will be divided into three classes: Messrs. McConnell and
Momsen will serve
39
<PAGE>
in the class whose term expires in 1997; Messrs. Ciffolillo and Nicholson will
serve in the class whose term expires in 1998; and Messrs. Palefsky and
Randall will serve in the class whose term expires in 1999. Upon expiration of
the term of a class of directors, directors within such class will be elected
for a three-year term at the annual meeting of stockholders in the year in
which such term expires. Collagen Corporation is entitled to one
representative on the Board of Directors so long as it holds at least five
percent of the Common Stock of the Company on a fully-diluted basis. Mr.
Palefsky, Collagen Corporation's Chief Executive Officer, is its current
representative.
Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until the next annual meeting of the Board of
Directors and until their successors have been duly elected and qualified.
There are no family relationships among any of the executive officers or
directors of the Company.
BOARD COMMITTEES
The Company's Board of Directors has a Compensation Committee and an Audit
Committee. The Compensation Committee is responsible for recommending
compensation and benefits for the executive officers of the Company to the
Board of Directors and for administering the Company's stock plans. The
members of the Compensation Committee are Messrs. Ciffolillo and Momsen. The
Audit Committee is responsible for nominating the Company's independent
accountants for approval by the Board of Directors, reviewing the scope,
results and costs of the audit with the Company's independent accountants and
reviewing the financial statements and audit practices of the Company. The
members of the Audit Committee are Messrs. McConnell and Palefsky.
MEDICAL ADVISORY BOARD
The Company has established a Medical Advisory Board consisting of six
distinguished surgeons in the fields of orthopedics and sports medicine. The
Medical Advisory Board, which meets approximately twice a year with senior
management and research and development personnel, makes recommendations to
the Company with respect to the proposed development of new products and
technologies. The members of the Medical Advisory Board are parties to
consulting agreements with the Company and receive options as compensation for
their services. The members of the Medical Advisory Board are as follows:
David Altchek, M.D., is Assistant Attending Surgeon for Sports Medicine and
Shoulder Service at the Hospital for Special Surgery in New York City. He is
also Assistant Professor of Clinical Surgery at Cornell University Medical
College. Dr. Altchek is Team Physician for the New York Mets professional
baseball team and North American Medical Director for the Association of
Tennis Professionals.
James R. Andrews, M.D., is one of the founding members of the Alabama Sports
Medicine and Orthopaedic Center and the American Sports Medicine Institute in
Birmingham, Alabama, located at the HEALTHSOUTH Medical Center. He is National
Medical Director of HEALTHSOUTH Corporation, the largest rehabilitation
company in the United States. He is also Clinical Professor of Orthopedic
Surgery at the University of Virginia School of Medicine and the University of
Kentucky Medical Center. Dr. Andrews serves as Co-Medical Director for
Intercollegiate Sports at Auburn University and as an orthopedic consultant
for the University of Kentucky football team and the Toronto Blue Jays
professional baseball team. He currently serves on the Sports Medicine
Committee of the United States Olympic Committee.
Ralph Gambardella, M.D., is Attending Surgeon for Sports Medicine at the
Kerlan Jobe Clinic of Centinela Hospital in Inglewood, California. He is also
a Clinical Associate Professor at the University of Southern California
Department of Orthopedics. Dr. Gambardella is orthopedic consultant for the
Los
40
<PAGE>
Angeles Dodgers professional baseball team and the athletic departments at the
University of Southern California and Loyola Marymount University.
Lawrence J. Lemak, M.D., is one of the founding members of the Alabama
Sports Medicine and Orthopaedic Center, located at the HEALTHSOUTH Medical
Center in Birmingham, Alabama. He is President of the Medical Staff and
Executive Committee of the HEALTHSOUTH Medical Center. He is also Professor of
Orthopaedic Surgery at the University of Alabama at Birmingham and Clinical
Professor of Orthopaedic Surgery at the University of Virginia. Dr. Lemak is
Team Physician for Auburn University, Medical Director for the World Football
League and Major League Soccer, and Co-Medical Director for the LPGA.
Felix M. Savoie, III, M.D., is a partner of Mississippi Sports Medicine
Orthopaedic Center in Jackson, Mississippi. He is also Clinical Associate
Professor of Orthopaedic Surgery at the University of Mississippi Medical
Center. Dr. Savoie is a member of the editorial board of The Journal of
Arthroscopy.
John W. Uribe, M.D., is Associate Professor of Orthopedics and
Rehabilitation at University of Miami, Jackson Memorial Medical Center. Dr.
Uribe is also Orthopedic Consultant for the Miami Dolphins professional
football team and the Florida Marlins professional baseball team. Dr. Uribe
has published several papers and is an editor of The American Journal of
Sports Medicine.
CLINICAL ADVISORY GROUP
The Clinical Advisory Group ("CAG") consists of ten surgeons located across
the United States. The Company relies on the CAG to conduct workshops at which
new surgeons train on the use of the Company's products, clinically evaluate
products prior to their general market release, present the Company's products
at conferences, assist in making training videos and advise the Company on new
surgical and product techniques. Members of the CAG receive options as
compensation for their services.
DIRECTOR COMPENSATION
The Company reimburses non-employee directors for expenses incurred in
attending Board meetings. In addition, non-employee directors of the Company
will receive stock options under the 1996 Non-Employee Director Stock Option
Plan. See "Management--Stock Plans." The non-employee directors of the Company
are Messrs. Ciffolillo, McConnell, Momsen and Palefsky.
41
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid for services rendered to the Company in all capacities during the fiscal
year ended December 31, 1995 by (i) the Company's Chief Executive Officer and
(ii) the two most highly compensated other executive officers who received
annual compensation in excess of $100,000 (collectively, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION(2)
------------------------------ ---------------
AWARDS
---------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION(3)
------------------ -------- ----- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Richard D. Randall...... $150,000 -- -- -- $244
Chief Executive Officer
James E. Nicholson...... 130,000 -- -- -- --
Chief Technical Officer
James V. Barrile........ 110,000 -- -- -- 209
Executive Vice
President
</TABLE>
- --------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted in those instances where the aggregate amount of such
perquisites and other personal benefits constituted less than the lesser
of $50,000 or 10% of the total of annual salary and bonuses for the Named
Executive Officer for 1995.
(2) The Company did not make any restricted stock awards, grant any stock
appreciation rights ("SARs") or make any long-term incentive plan payouts
during 1995.
(3) Represents premiums paid by the Company for term life insurance
benefitting the respective estates of Messrs. Randall and Barrile.
OPTION GRANTS
There were no grants of stock options or SARs to the Named Executive
Officers during 1995.
YEAR-END OPTION TABLE
The following table sets forth certain information concerning the number and
value of unexercised stock options held by each of the Named Executive
Officers as of December 31, 1995:
FISCAL YEAR-END OPTION VALUES (1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)(2)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard D. Randall.......... 50,889 193,556 $550,110 $2,092,340
James E. Nicholson.......... -- -- -- --
James V. Barrile............ -- -- -- --
</TABLE>
- --------
(1) No SARs have been granted to date and no stock options were granted to or
exercised by the Named Executive Officers during 1995.
(2) There was no public trading market for the Common Stock as of December 31,
1995. Accordingly, as permitted by the rules of the Securities and
Exchange Commission, these values have been calculated on the basis of the
initial public offering price of $12.50 per share.
42
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1995, the Company had a Compensation Committee comprised of Messrs.
Ciffolillo and Momsen and a former outside Board member. The current members
of the Compensation Committee are Messrs. Ciffolillo and Momsen.
STOCK PLANS
1996 Omnibus Stock Plan. The Company's 1996 Omnibus Stock Plan (the "Omnibus
Plan") was adopted by the Board of Directors on April 2, 1996 and approved by
the stockholders on April 23, 1996. The Omnibus Plan provides for the issuance
of a maximum of 250,000 shares of Common Stock, plus such additional number of
shares that become available due to the forfeiture of options granted under
the 1992 Stock Option Plan, pursuant to the grant of incentive stock options
to employees and nonqualified stock options or restricted stock to employees,
consultants, directors and officers of the Company. To date, no options or
shares have been granted under the Omnibus Plan.
The Omnibus Plan is administered by the Compensation Committee of the Board
of Directors. Subject to the provisions of the Omnibus Plan, the Compensation
Committee has the authority to select the optionees or restricted stock
recipients and determine the terms of the options or restricted stock granted,
including: (i) the number of shares; (ii) the option exercise terms; (iii) the
exercise or purchase price (which in the case of an incentive stock option
cannot be less than the market price of the Common Stock as of the date of
grant); (iv) the type and duration of transfer or other restrictions; and (v)
the time and form of payment for restricted stock and upon exercise of
options. Generally, an option is not transferable by the optionholder except
by will or by the laws of descent and distribution. No incentive stock option
may be exercised more than 90 days following termination of employment unless
the termination is due to death or disability, in which case the option is
exercisable for a maximum of one year after such termination.
1996 Non-Employee Director Stock Option Plan. The 1996 Non-Employee Director
Stock Option Plan (the "Director Plan") was adopted by the Board of Directors
on April 2, 1996 and approved by the stockholders on April 23, 1996. The
Director Plan provides for the grant of options for the purchase of up to
100,000 shares of Common Stock of the Company. To date, no options have been
granted under the Director Plan.
On the date of the first Board meeting after the effectiveness of this
offering, each non-employee director then serving will receive an option to
purchase 10,000 shares of Common Stock, which will vest over a four-year
period at the rate of 25% per year so long as the optionee remains a director.
In addition, each new director who is not an employee of the Company will
receive upon his initial election to the Board of Directors an option to
purchase 10,000 shares of Common Stock, which will vest over a period of four
years at the rate of 25% per year provided that the optionee remains a
director of the Company. At each annual meeting thereafter, each director then
serving will receive 2,500 shares of Common Stock, which will vest over a
four-year period at the rate of 25% per year if the optionee remains a
director. The exercise price per share for all options granted under the
Director Plan will be equal to the market price of the Common Stock as of the
date of grant. Options may not be assigned or transferred except by will or by
the laws of descent and distribution and are exercisable, only to the extent
vested, within 180 days after the optionee ceases to serve as a director of
the Company (except that if a director dies or becomes disabled while he or
she is serving as a director of the Company, the option is exercisable until
the earlier of the scheduled expiration date of the option or one year from
the death or disability).
1996 Employee Stock Purchase Plan. The 1996 Employee Stock Purchase Plan
(the "Stock Purchase Plan") was adopted by the Board of Directors on April 2,
1996 and approved by the stockholders on April 23, 1996. An aggregate of
50,000 shares of Common Stock is reserved for issuance pursuant to this plan.
The Stock Purchase Plan is administered by the Compensation Committee of the
Board of Directors. All employees of the Company whose customary employment is
in excess of 20 hours per week and more than five months per year, other than
those employees who own 5% or more of the Common Stock of the
43
<PAGE>
Company, are eligible to participate in the Stock Purchase Plan. The Stock
Purchase Plan will be implemented by one or more offerings of such duration as
the Compensation Committee may determine, provided that no offering period may
be longer than 27 months. An eligible employee participating in an offering
will be able to purchase Common Stock at a price equal to the lesser of: (i)
85% of its fair market value on the date the right was granted; or (ii) 85% of
its fair market value on the date the right was exercised. Payment for Common
Stock purchased under the plan will be through regular payroll deduction or
lump sum cash payment, or both, as determined by the Compensation Committee.
The maximum value of Common Stock an employee may purchase during an offering
period is 10% of the employee's base compensation during such period,
calculated on the basis of the employee's compensation rate on the date the
employee elects to participate in that offering. To date, there have been no
offerings under the Stock Purchase Plan and no shares of Common Stock have
been issued thereunder.
1992 Stock Option Plan. The Company's 1992 Stock Option Plan (the "1992
Plan") was approved by the directors and stockholders of the Company on May
12, 1992. The 1992 Plan provides for the issuance of a maximum of 692,869
shares of Common Stock pursuant to the grant of incentive stock options to key
employees and non-qualified stock options to key employees, directors and
consultants of the Company. As of March 31, 1996, options for 679,537 shares
were outstanding under the 1992 Plan, at exercise prices ranging from $1.69 to
$6.75 per share and at a weighted average option price of $3.30 per share, and
options granted thereunder for 4,444 shares of Common Stock had been
exercised.
The 1992 Plan is administered by the Board of Directors of the Company.
Subject to the provisions of the 1992 Plan, the Board of Directors has the
authority to select the optionees and determine the terms of options granted
thereunder, including the term of the option, the option price, the manner of
payment, including any vesting provisions applicable to option grants. All
incentive stock options granted under the 1992 Plan are required to be granted
at fair market value. Options granted under the 1992 Plan are not transferable
by the optionholder except by will or under the laws of descent and
distribution, and during the lifetime of an optionholder, must be exercised
only by the optionholder. Generally, options granted under the 1992 Plan must
be exercised no more than three months less one day after the termination of
employment of the optionholder, except that in the case of death or
disability, options may be exercised for up to one year after termination. The
Board of Directors may require an optionholder to forfeit unexercised options
if the Board of Directors determines that an optionholder has engaged in
certain behavior detrimental to the interests of the Company. The Company does
not intend to issue any additional options under the 1992 Plan, but options
under the 1992 Plan that are forfeited will become available for grant under
the Omnibus Plan.
401(k) Plan. In October 1994, the Company adopted a retirement savings and
investment plan (the "401(k) Plan") covering all employees that have been
employed by the Company for three months or more. Pursuant to the 401(k) Plan,
employees may elect to reduce their current compensation by up to the
statutorily prescribed annual limit ($9,240 in 1994 and 1995) and to have the
amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan
permits, but does not require, additional matching contributions by the
Company on behalf of all participants in the 401(k) Plan. The Company has not
made any contributions to the 401(k) Plan. The 401(k) Plan is intended to
qualify under Section 401(k) of the Code, so that contributions to the 401(k)
Plan by employees or by the Company, and the investment earnings thereon, are
not taxable to employees until withdrawn from the 401(k) Plan, and so that
contributions by the Company, if any, will be deductible by the Company when
made.
44
<PAGE>
CERTAIN TRANSACTIONS
Nicholson Associates, Inc., a predecessor to the Company, was founded in
June 1990 by James E. Nicholson, a director and officer of the Company. Mr.
Nicholson originally acquired 1,000 shares of the Common Stock of Nicholson
Associates, Inc. for $660 in the aggregate, which subsequent to payment of a
stock dividend declared in October 1991 was increased to 6,600 shares. Mr.
Barrile, the Executive Vice President and Chief Financial Officer of the
Company, joined Nicholson Associates, Inc. in October 1991 and thereupon
acquired 2,000 shares of its Common Stock for $19,380. The number of shares
and dollar amounts set forth in this paragraph, unlike those set forth in the
subsequent paragraphs, have not been adjusted to reflect the reverse stock
split to be effected by the Company immediately prior to the Effective Date.
The Company was formed in September 1991 by Messrs. Nicholson and Barrile.
They were also joined by Rickey D. Hart, the Vice President of Advanced
Projects of the Company. At inception, Mr. Nicholson purchased 2,267 shares of
the Company's Common Stock for $510, and Mr. Hart purchased 667 shares of the
Company's Common Stock for $150, plus the assignment by Messrs. Nicholson and
Hart to the Company of all of their right, title and interest in certain
laparoscopic inventions and patent rights. The value of the rights of Messrs.
Nicholson and Hart which were assigned to the Company were estimated to equal
$39,015 and $11,475, respectively. In addition, in October 1991, Mr. Barrile
purchased 889 shares of the Company's Common Stock for $19,380.
In May 1992, Nicholson Associates, Inc. was merged with and into the
Company. Immediately after the merger, Messrs. Nicholson, Barrile and Hart
held 5,200 shares, 1,778 shares and 667 shares of Common Stock of the Company,
respectively, which subsequent to a stock split and stock dividend thereafter,
was increased to holdings of 520,000 shares, 177,800 shares and 66,700 shares
of Common Stock of the Company, respectively. Also in May 1992, the Company
granted an additional option to Mr. Hart for 53,333 shares at an exercise
price of $5.625 per share. In March 1994, Mr. Hart's option was repriced at
$1.69 per share. In May 1992, the Company also effected a private placement of
232,000 shares of its Common Stock for $5.625 per share, which included the
sale to Mr. Nicholson of 88,889 shares of the Company's Common Stock for an
aggregate purchase price of $500,000. Mr. Nicholson subsequently acquired an
additional 96,516 shares of Common Stock for an aggregate purchase price of
$217,161 in March 1994.
S. Richard Penni purchased 87,111 shares of the Company's Common Stock in
May 1992 for an aggregate purchase price of $350,000. He acquired an
additional 26,667 shares of Common Stock in May 1992 for an aggregate purchase
price of $150,000 and in March 1994 purchased 299,351 shares of Common Stock
for an aggregate purchase price of $673,539. Mr. Penni was also a purchaser of
72,483 shares of Series A Preferred Stock in February 1994 for $269,092.
Entities affiliated with InterWest Partners purchased 542,222 shares of
Series A Preferred Stock in February 1994 for an aggregate purchase price of
$2,012,998. InterWest Partners subsequently purchased 133,504 shares of Series
B Preferred Stock in October 1995 for an aggregate purchase price of $642,824.
New Enterprise Associates VI, Limited Partnership purchased 538,720 shares
of Series A Preferred Stock in February 1994 for an aggregate purchase price
of $2,000,000 and subsequently purchased 132,642 shares of Series B Preferred
Stock in October 1995 for an aggregate purchase price of $638,672.
Entities associated with Delphi Ventures II, L.P. purchased 471,380 shares
of Series A Preferred Stock in February 1994 for an aggregate purchase price
of $1,750,000 and purchased 116,062 shares of Series B Preferred Stock in
October 1995 for an aggregate purchase price of $558,840.
Six C's Investment Corporation, which is controlled by Joseph A. Ciffolillo,
a director of the Company, purchased 53,872 shares of Series A Preferred Stock
in February 1994 for an aggregate purchase price of $200,000.
45
<PAGE>
Collagen Corporation, which is party to a Research and Development
Agreement, a Manufacturing and Supply Agreement and a Distribution Agreement
with the Company (collectively, the "Collagen Agreements"), purchased 13,199
shares of Series A Preferred Stock in November 1995 for an aggregate purchase
price of $63,552 and 830,737 shares of Series B Preferred Stock from the
Company in October 1995 for an aggregate purchase price of $4,000,000. At
March 31, 1996, the Company had expended approximately $465,000 pursuant to
the Collagen Agreements. Collagen Corporation has the right to designate one
member of the Company's Board of Directors so long as it holds at least five
percent of the Company's outstanding Common Stock on a fully-diluted basis.
Mr. Palefsky, Collagen Corporation's Chief Executive Officer, currently serves
as Collagen Corporation's designee on the Company's Board of Directors.
Richard D. Randall, the President and Chief Executive Officer of the
Company, purchased 10,384 shares of the Company's Series B Preferred Stock for
an aggregate purchase price of $50,001 in January 1996.
The Company has recently adopted a policy whereby all future transactions
between the Company and its officers, directors, principal stockholders and
their affiliates will be on terms no less favorable to the Company than could
be obtained from unrelated third parties and will be approved by a majority of
the disinterested members of the Company's Board of Directors. No such
transactions are currently being considered.
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock as of March 31,
1996, by: (i) each stockholder who is known by the Company to own beneficially
more than 5% of the Common Stock; (ii) each Named Executive Officer of the
Company; (iii) each director of the Company; and (iv) all executive officers
and directors of the Company as a group. Unless otherwise indicated below, to
the knowledge of the Company, all persons listed below have sole voting and
investment power with respect to their shares of Common Stock, except to the
extent authority is shared by spouses under applicable law:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING OFFERING (1)
----------------------- -----------------------------
5% STOCKHOLDERS NUMBER PERCENT NUMBER PERCENT
- --------------- ------------ ---------- --------------- -------------
<S> <C> <C> <C> <C>
Collagen Corporation....... 843,936 15.7% 843,936 11.6%
2500 Faber Place, Palo
Alto, CA 94303
Entities affiliated with
InterWest Partners (2).... 675,727 12.6 675,727 9.3
3000 Sand Hill Road,
Building 3, Suite 255
Menlo Park, CA 94025
New Enterprise Associates
VI, Limited Partnership... 671,363 12.5 671,363 9.2
2490 Sand Hill Road, Menlo
Park, CA 94025
Delphi Ventures II,
L.P. (3).................. 587,443 11.0 587,443 8.1
3000 Sand Hill Road,
Building 1, Suite 135
Menlo Park, CA 94025
S. Richard Penni........... 485,612 9.1 485,612 6.7
100 Hancock Street, N.
Quincy, MA 02171
EXECUTIVE OFFICERS AND
DIRECTORS
- ----------------------
Richard D. Randall (4)..... 153,051 2.8 153,051 2.1
James E. Nicholson......... 444,351 8.3 444,351 6.1
James V. Barrile........... 177,778 3.3 177,778 2.4
Joseph A. Ciffolillo (5)... 62,760 1.2 62,760 *
Thomas C. McConnell (6).... 671,363 12.5 671,363 9.2
Robert R. Momsen (7)....... 675,727 12.6 675,727 9.3
Howard D. Palefsky (8)..... 843,936 15.7 843,936 11.6
All executive officers and
directors as a group
(13 persons) (9).......... 3,189,257 56.9 3,189,257 42.5
</TABLE>
- --------
* Less than 1.0% of the outstanding Common Stock.
(1) Assumes no exercise of the Underwriters' over-allotment option.
(2) Consists of 671,363 shares held by InterWest Partners V, L.P. ("IWP") and
4,364 shares held by InterWest Investors V ("IWI").
(3) Consists of 584,452 shares held by Delphi Ventures II, L.P. and 2,991
shares held by Delphi Investments II, L.P.
(4) Includes 142,667 shares which Mr. Randall may acquire within 60 days of
March 31, 1996 by exercise of options.
(5) Consists of 53,872 shares held by an investment company of which Mr.
Ciffolillo is the president and 8,888 shares which Mr. Ciffolillo may
acquire within 60 days of March 31, 1996 by exercise of options. Mr.
Ciffolillo may be deemed to share voting and investment power with respect
to the shares held by the investment company. He disclaims beneficial
ownership of such shares except to the extent of his proportionate
interest therein.
(6) Consists of 671,363 shares held by New Enterprise Associates VI, Limited
Partnership with respect to which Mr. McConnell may be deemed to share
voting and investment power by virtue of his status as a general partner
of NEA Partners VI, Limited Partnership, the general partner of New
Enterprises Associates VI, Limited Partnership. Mr. McConnell disclaims
beneficial ownership of the shares held by such entities except to the
extent of his proportionate partnership interest therein.
(7) Consists of 671,363 shares held by IWP and 4,364 shares held by IWI. Mr.
Momsen is a general partner of InterWest Management Partners V, L.P., the
general partner of IWP, and a general partner of IWI and accordingly may
be deemed to share voting and investment power with respect to these
shares. Mr. Momsen disclaims beneficial ownership of the shares held by
such entities except to the extent of his proportionate partnership
interest therein.
(8) Consists of shares held by Collagen Corporation. Mr. Palefsky is President
and Chief Executive Officer of Collagen Corporation and, accordingly may
be deemed to share voting and investment power with respect to such
shares. Mr. Palefsky disclaims beneficial ownership of these shares.
(9) Includes 2,244,898 shares beneficially owned by entities affiliated with
Messrs. Ciffolillo, McConnell, Momsen and Palefsky, for which they
disclaim beneficial ownership except to the extent of their proportionate
interest therein. Also includes 244,886 shares which the executive
officers and directors may acquire within 60 days of March 31, 1996 by
exercise of options.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Effective upon the filing of the Third Restated Articles of Organization
upon the closing of this offering, the authorized capital stock of the Company
will consist of 15,000,000 shares of Common Stock, $.0001 par value per share,
and 1,000,000 shares of Preferred Stock, $.01 par value per share (the
"Preferred Stock"), which may be issued in one or more series.
COMMON STOCK
As of March 31, 1996, there were 5,359,741 shares of Common Stock
outstanding and held of record by 65 stockholders. Based upon the number of
shares outstanding as of that date and giving effect to the issuance of the
1,900,000 shares of Common Stock offered by the Company hereby, assuming no
exercise of outstanding stock options and warrants, there will be 7,259,741
shares of Common Stock outstanding upon the closing of this offering.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights
of outstanding Preferred Stock. Upon the liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to receive ratably
the net assets of the Company available after the payment of all debts and
other liabilities and subject to the prior rights of any outstanding Preferred
Stock. Holders of the Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock are,
and the shares offered by the Company in this offering will be, when issued
and paid for, fully paid and nonassessable. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of Preferred
Stock which the Company may designate and issue in the future. Upon the
closing of this offering, there will be no shares of Preferred Stock
outstanding.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 1,000,000 shares of Preferred Stock in one of more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of the Company. The Company has no present plans to issue
any shares of Preferred Stock. See "Risk Factors--Potential Adverse Effects of
Anti-Takeover Provisions; Possible Issuance of Preferred Stock."
MASSACHUSETTS LAW AND CERTAIN PROVISIONS OF THE COMPANY'S RESTATED ARTICLES OF
ORGANIZATION AND RESTATED BY-LAWS; ANTI-TAKEOVER EFFECTS
Following this offering, the Company expects that it will have more than 200
stockholders, thus making it subject to Chapter 110F of the Massachusetts
General Laws, an anti-takeover law. In general, this statute prohibits a
publicly held Massachusetts corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
after the date of the transaction in which the person becomes an interested
stockholder, unless (i) the interested stockholder obtains the approval of the
Board of Directors prior to becoming an interested stockholder, (ii) the
interested
48
<PAGE>
stockholder acquires 90% of the outstanding voting stock of the corporation
(excluding shares held by certain affiliates of the corporation) at the time
it becomes an interested stockholder, or (iii) the business combination is
approved by both the Board of Directors and the holders of two-thirds of the
outstanding voting stock of the corporation (excluding shares held by the
interested stockholder). An "interested stockholder" is a person who, together
with affiliates and associates, owns (or at any time within the prior three
years did own) 5% or more of the outstanding voting stock of the Company. A
"business combination" includes a merger, a stock or asset sale, and certain
other transactions resulting in a financial benefit to the interested
stockholder.
Massachusetts General Laws Chapter 156B, Section 50A generally requires that
publicly held Massachusetts corporations have a classified board of directors
consisting of three classes as nearly equal in size as possible, unless the
corporation elects to opt out of the statute's coverage. The Company's Amended
and Restated By-Laws (the "Restated By-Laws") contain provisions which give
effect to Section 50A. See "Management--Executive Officers and Directors."
The Restated By-Laws include a provision excluding the Company from the
applicability of Massachusetts General Laws Chapter 110D, entitled "Regulation
of Control Share Acquisitions." In general, this statute provides that any
stockholder of a corporation subject to this statute who acquires 20% or more
of the outstanding voting stock of a corporation may not vote such stock
unless the stockholders of the corporation so authorize. The Board of
Directors may amend the Company's Restated By-Laws at any time to subject the
Company to this statute prospectively.
The Restated By-Laws also require that a stockholder seeking to have any
business conducted at a meeting of stockholders give notice to the Company at
least 20 days prior to the scheduled meeting. The notice from the stockholder
must describe the proposed business to be brought before the meeting and
include information about the stockholder making the proposal, any beneficial
owner on whose behalf the proposal is made and any other stockholder known to
be supporting the proposal. The Restated By-Laws require the Company to call a
special stockholders meeting at the request of stockholders holding at least
40% of the voting power of the Company.
The Second Restated Articles provide that the directors and officers of the
Company shall be indemnified by the Company to the fullest extent authorized
by Massachusetts law, as it now exists or may in the future be amended,
against all expenses and liabilities reasonably incurred in connection with
service for or on behalf of the Company. In addition, the Second Restated
Articles provide that the directors of the Company will not be personally
liable for monetary damages to the Company for breaches of their fiduciary
duty as directors, unless they violated their duty of loyalty to the Company
or its stockholders, acted in bad faith, knowingly or intentionally violated
the law, authorized illegal dividends or redemptions or derived an improper
personal benefit from their action as directors.
The Third Restated Articles will provide that the sale, lease or exchange of
all or substantially all of the Company's property and assets, or the merger
or consolidation of the Company into or with any other corporation may be
authorized by the approval of the holders of a majority of the shares of each
class of stock entitled to vote thereon, rather than by two-thirds as
otherwise provided by statute, provided that the transactions have been
authorized by a majority of the members of the Board of Directors then in
office and the requirements of any other applicable provisions of the Third
Restated Articles have been met.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Boston EquiServe
Limited Partnership, Boston, Massachusetts.
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, the Company will have an aggregate of
7,259,741 shares of Common Stock outstanding, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options to
purchase Common Stock. Of these shares, the 1,900,000 shares sold in this
offering are freely tradable without restriction or further registration under
the Securities Act of 1933, as amended (the "Securities Act"), except that any
shares held by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act ("Rule 144"), may generally only be sold in
compliance with the limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining 5,359,741 shares of Common Stock (the "Restricted Shares")
held by existing stockholders were sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act and are
thus treated as "restricted" securities under Rule 144. As of the Effective
Date, approximately 220,433 of the Restricted Shares are eligible for sale in
the public market in reliance on Rule 144(k) under the Securities Act; all of
these shares, however, are subject to the lock-up arrangements described below
(the "Lock-up Arrangements"). Beginning 90 days after the Effective Date,
approximately 3,408,939 additional Restricted Shares will become eligible for
sale in the public market, pursuant to Rule 144 and Rule 701 under the
Securities Act; 3,404,495 of these shares, however, are subject to the Lock-up
Arrangements. Beginning 180 days after the Effective Date, upon the expiration
of the Lock-up Arrangements, approximately 3,624,928 shares in the aggregate
will become eligible for sale in the public market, subject to the provisions
of Rule 144 and Rule 701. In addition, holders of approximately 3,543,819
shares of Common Stock have the right, as described below, to require the
Company in certain circumstances to register such shares for sale under the
Securities Act. The Securities and Exchange Commission (the "Commission") has
proposed an amendment to Rule 144 which would reduce the holding period from
two years to one year for shares subject to Rule 144 to become eligible for
sale in the public market. If this proposal were adopted, an additional
1,441,052 shares would become eligible for sale to the public 180 days after
the Effective Date.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned shares for at least two years is entitled to sell, within any three-
month period commencing 90 days after the Effective Date, a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
Common Stock (approximately 72,597 shares immediately after this offering) or
(ii) the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the date on which notice of such sale is filed,
subject to certain restrictions. In addition, a person who is not deemed to
have been an affiliate of the Company at any time during the 90 days preceding
a sale and who has beneficially owned the shares proposed to be sold for at
least three years would be entitled to sell such shares under Rule 144(k)
without regard to the requirements described above. To the extent that shares
were acquired from an affiliate of the Company, such stockholder's holding
period for the purpose of effecting a sale under Rule 144 commences on the
date of transfer from the affiliate.
Any employee, officer or director of or consultant to the Company who
purchased shares pursuant to a written compensatory plan or contract is
entitled to rely on the resale provisions of Rule 701 under the Securities
Act, which permits non-affiliates to sell their Rule 701 shares without having
to comply with Rule 144's holding period restrictions, in each case commencing
90 days after the Effective Date.
OPTIONS
As of March 31, 1996, options to purchase a total of 679,537 shares of
Common Stock were outstanding, of which options to purchase 203,467 shares
were then exercisable; 538,220 shares issuable pursuant to stock options are
subject to the Lock-up Arrangements.
50
<PAGE>
Approximately 90 days after the Effective Date, the Company intends to file
a Form S-8 registration statement under the Securities Act to register all
shares of Common Stock previously issued or issuable under the 1992 Plan, the
Omnibus Plan, the Director Plan and the Stock Purchase Plan (collectively, the
"Stock Plans"). See "Management--Stock Plans." Such registration statement is
expected to become effective immediately upon filing, and shares covered by
that registration statement will thereupon be eligible for sale in the public
markets, subject to Rule 144 limitations applicable to affiliates and to the
Lock-up Arrangements, if applicable.
Prior to this offering, there has not been any public market for the Common
Stock of the Company. Further sales of substantial amounts of Common Stock in
the open market may adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through the sale of
its equity securities.
LOCK-UP ARRANGEMENTS
All directors, officers and certain other stockholders, who hold in the
aggregate 5,327,591 shares of Common Stock and options to purchase 538,220
shares of Common Stock, have agreed that they will not, without the prior
written consent of the Representatives, sell or otherwise dispose of any
shares of Common Stock or options to acquire shares of Common Stock during the
180-day period following the Effective Date. The Representatives have no
present intention of releasing any shares from the Lock-up Arrangements.
REGISTRATION RIGHTS
Commencing six months after completion of this offering, holders of
3,543,819 shares (the "Registrable Shares") of Common Stock are entitled to
certain rights with respect to the registration of their shares under the
Securities Act. Subject to certain limitations, the holders of 40% of the
Registrable Shares will be entitled, on not more than three occasions, to
require the Company, at the Company's expense, to register their Registrable
Shares (a "demand registration"). If the Company proposes to register any of
its securities, either for its own account or for the account of other
stockholders, the Company is required, with certain exceptions, to include in
such registration all of the Registrable Shares and 1,584,104 additional
shares held by certain stockholders, if requested to be included by such
holders (a "piggyback registration"). The holders do not have the right to
include their Registrable Shares in this offering. In addition to the demand
and piggy-back registrations, holders of the Registrable Shares may, subject
to certain restrictions, require the Company to file an unlimited number of
registration statements on Form S-3 under the Securities Act once the Company
becomes eligible to use Form S-3.
51
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated and Piper Jaffray Inc., have severally agreed
to purchase from the Company the following respective numbers of shares of
Common Stock at the initial public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated...................................... 510,000
Piper Jaffray Inc. .................................................. 510,000
Bear Stearns & Co. Inc. ............................................. 60,000
Dillon, Read & Co. Inc. ............................................. 60,000
Hambrecht & Quist LLC................................................ 60,000
Montgomery Securities................................................ 60,000
Robertson, Stephens & Company LLC.................................... 60,000
UBS Securities LLC................................................... 60,000
Cowen & Company...................................................... 40,000
Dain Bosworth Incorporated........................................... 40,000
Fahnestock & Co., Inc. .............................................. 40,000
Furman Selz LLC...................................................... 40,000
Hampshire Securities Corporation..................................... 40,000
John G. Kinnard and Company, Incorporated............................ 40,000
Parker/Hunter Incorporated........................................... 40,000
Punk, Ziegel & Knoell, L.P. ......................................... 40,000
Rodman & Renshaw Inc. ............................................... 40,000
Tucker Anthony Incorporated.......................................... 40,000
Vector Securities International, Inc. ............................... 40,000
Volpe, Welty & Company............................................... 40,000
Wessels, Arnold & Henderson, L.L.C. ................................. 40,000
---------
Total.............................................................. 1,900,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares
are purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $.52 per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $.10 per share to certain other
dealers. After the initial public offering, the offering price and other
selling terms may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 285,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the above table bears to 1,900,000, and the Company
will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of Common Stock
52
<PAGE>
offered hereby. If purchased, the Underwriters will offer such additional
shares on the same terms as those on which the 1,900,000 shares are being
offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
The Company has agreed not to offer, sell or otherwise dispose of any shares
of Common Stock for a period of 180 days after the Effective Date is a part
without the prior written consent of the Representatives, except for the
shares of Common Stock offered hereby and except that the Company may issue
securities pursuant to the Company's stock option plans and upon the exercise
of outstanding options. The Company's officers, directors and certain other
stockholders, who upon the closing of this offering will hold in the aggregate
5,327,591 shares of Common Stock and options to purchase 538,220 shares of
Common Stock, have agreed that they will not, without the prior written
consent of Alex. Brown & Sons Incorporated, offer to sell, sell or otherwise
dispose of shares of Common Stock or any securities convertible or
exchangeable therefor for a period of 180 days after the Effective Date. The
Representatives have no present intention of releasing any shares from the
Lock-up Arrangements. See "Shares Eligible for Future Sale."
As of the date of this Prospectus, entities affiliated with Piper Jaffray
Inc. beneficially owned 167,840 shares of Common Stock of the Company, 33,160
shares of which were purchased on October 17, 1995 for an aggregate purchase
price of $159,688.
As of the date of this Prospectus, Brown Technology Associates Limited
Partnership ("BTA") owned 27,186 shares of Common Stock of the Company, 5,637
shares of which were purchased on January 31, 1996 for an aggregate purchase
price of $27,142. Through their investment in BTA, certain employees of Alex.
Brown & Sons Incorporated have a beneficial ownership interest in 1,000 of the
5,637 shares purchased by BTA in January 1996.
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the
right to reject any order for the purchase of shares in whole or in part.
Prior to this offering, there was no public market for the Common Stock.
Consequently, the initial public offering price for the Common Stock has been
determined by negotiation between the Company and the Representatives of the
Underwriters. The material factors considered in such negotiations were
prevailing market and economic conditions, revenues and earnings of the
Company, estimates of the business potential and prospects of the Company, the
present state of the Company's business operations, an assessment of the
Company's management and consideration of the above factors in relation to
market valuation of companies in related businesses.
LEGAL MATTERS
The validity of the shares of Common Stock offered by this Prospectus will
be passed upon for the Company by Choate, Hall & Stewart, Boston,
Massachusetts. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts.
53
<PAGE>
EXPERTS
The financial statements as of December 31, 1994 and 1995 and for each of
the three years in the period ended December 31, 1995 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
The statements in this Prospectus under the captions "Risk Factors--Reliance
on Patents and Proprietary Technology" and "Business--Patents and Proprietary
Technology" have been reviewed and approved by Pandiscio & Pandiscio, P.C.,
patent counsel for the Company, as experts in such matters in relation to the
Company's laparoscopic scissors, knot pusher and suture grasper, and by
Choate, Hall & Stewart, patent counsel for the Company, as experts in such
matters in relation to the Company's tissue fixation products, and are
included herein in reliance upon such review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (including all amendments thereto, the "Registration Statement") under the
Securities Act with respect to the shares of Common Stock offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus
omits certain information contained in the Registration Statement. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to the Registration Statement and to the exhibits and
schedules filed therewith. Although statements contained in this Prospectus as
to the contents of any agreement or other document filed as an exhibit to the
Registration Statement set forth all material elements of such documents, such
statements are not necessarily complete. Reference is made to the copy of such
agreement filed as an exhibit to the Registration Statement, each such
statement, although setting forth all material elements of such documents,
being qualified by such reference. The Registration Statement, including the
exhibits and schedules thereto, may be inspected at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, DC 20549, and at certain of its Regional
Offices located at 7 World Trade Center, 13th Floor, New York, NY 10048 and
500 West Madison Street, Chicago, IL 60661. Copies of all or any part thereof
may be obtained at prescribed rates by mail from the Public Reference Section
of the Commission at 450 Fifth Street, Washington, DC 20549 upon payment of
the prescribed fees.
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent accountants and
will make available copies of quarterly reports for the first three quarters
of each fiscal year containing unaudited financial statements.
54
<PAGE>
INNOVASIVE DEVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................................ F-2
Balance Sheet at December 31, 1994 and 1995, and March 31, 1996
(unaudited)............................................................. F-3
Statement of Operations for the three years ended December 31, 1995 and
for the three months ended March 31, 1995 and 1996 (unaudited).......... F-4
Statement of Stockholders' Equity (Deficit) for the three years ended
December 31, 1995 and for the three months ended March 31, 1996
(unaudited)............................................................. F-5
Statement of Cash Flows for the three years ended December 31, 1995 and
for the three months ended March 31, 1995 and 1996 (unaudited).......... F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Innovasive Devices, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Innovasive
Devices, Inc. at December 31, 1994 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
May 7, 1996
F-2
<PAGE>
INNOVASIVE DEVICES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------------- MARCH 31, MARCH 31,
1994 1995 1996 1996
----------- ------------ ----------- -----------
(NOTE 6)
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............ $ 2,051,413 $ 5,052,074 $ 4,968,640 $ 4,968,640
Accounts receivable, net
of allowance for
doubtful accounts of
$7,777 and $50,009 at
December 31, 1994 and
1995, respectively, and
$53,509 at March 31,
1996................... 70,637 283,250 370,669 370,669
Inventories............. 337,990 404,602 508,835 508,835
Prepaid expenses........ 33,388 47,622 12,798 12,798
----------- ------------ ----------- -----------
Total current assets.. 2,493,428 5,787,548 5,860,942 5,860,942
Fixed assets, net......... 592,659 599,076 607,878 607,878
Other assets, net......... 13,269 12,294 18,454 18,454
----------- ------------ ----------- -----------
$ 3,099,356 $ 6,398,918 $ 6,487,274 $ 6,487,274
=========== ============ =========== ===========
LIABILITIES, REDEEMABLE
PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable........ $ 254,236 $ 459,084 $ 393,119 $ 393,119
Accounts payable to
related party.......... -- 264,708 351,644 351,644
Accrued expenses........ 123,591 206,461 486,688 486,688
Note payable............ 464,286 -- -- --
Accrued interest........ 23,214 -- -- --
----------- ------------ ----------- -----------
Total current
liabilities.......... 865,327 930,253 1,231,451 1,231,451
----------- ------------ ----------- -----------
Mandatorily redeemable
convertible preferred
stock.................... 6,993,051 13,970,031 14,900,584 --
----------- ------------ ----------- -----------
Stockholders' equity
(deficit):
Preferred stock, $.01
par value; 1,000,000
shares authorized; no
shares issued and
outstanding............ -- -- -- --
Common stock, $.0001 par
value;
shares authorized:
15,000,000;
shares issued:
1,815,922 at
December 31, 1994 and
1995, 1,820,366 at
March 31, 1996;
shares outstanding:
1,811,478 at December
31, 1994 and 1995,
1,815,922 at March 31,
1996; 5,359,741 shares
outstanding pro forma.. 182 182 182 536
Additional paid-in
capital................ 3,459,212 3,459,212 3,466,712 18,366,942
Accumulated deficit..... (8,193,416) (11,935,760) (13,086,655) (13,086,655)
----------- ------------ ----------- -----------
(4,734,022) (8,476,366) (9,619,761) 5,280,823
Less--cost of 4,444
shares of common stock
held in treasury....... (25,000) (25,000) (25,000) (25,000)
----------- ------------ ----------- -----------
Total stockholders'
equity (deficit)..... (4,759,022) (8,501,366) (9,644,761) 5,255,823
Commitments (Note 11).....
----------- ------------ ----------- -----------
$ 3,099,356 $ 6,398,918 $ 6,487,274 $ 6,487,274
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
INNOVASIVE DEVICES, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 126,065 $ 244,366 $ 1,233,984 $ 166,102 $ 802,370
Cost of sales........... 262,628 464,832 999,914 187,287 337,964
----------- ----------- ----------- --------- -----------
Gross profit (loss)... (136,563) (220,466) 234,070 (21,185) 464,406
----------- ----------- ----------- --------- -----------
Selling, general and
administrative
expenses............... 914,393 1,533,362 2,434,848 492,528 1,090,776
Research and
development............ 922,356 1,172,305 1,332,373 330,642 382,469
Research and
development--related
party.................. -- -- 264,708 -- 199,938
----------- ----------- ----------- --------- -----------
Loss from operations.. (1,973,312) (2,926,133) (3,797,859) (844,355) (1,208,777)
Interest income......... 3,075 125,277 84,109 18,600 62,546
Interest expense........ (241,147) (90,987) (20,384) -- (631)
----------- ----------- ----------- --------- -----------
Net loss.............. $(2,211,384) $(2,891,843) $(3,734,134) $(825,755) $(1,146,862)
=========== =========== =========== ========= ===========
Unaudited pro forma net
loss per share assuming
conversion of
convertible preferred
stock (Note 6):
Net loss per share.... $ (0.76) $ (0.17) $ (0.21)
=========== ========= ===========
Shares used in
computing net loss
per share............ 4,939,403 4,819,540 5,456,708
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
INNOVASIVE DEVICES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A SERIES B
MANDATORILY MANDATORILY
REDEEMABLE REDEEMABLE STOCKHOLDERS' DEFICIT
CONVERTIBLE CONVERTIBLE -----------------------------------------------------------------
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------------- --------------------- ----------------
ADDITIONAL TOTAL
NUMBER NUMBER NUMBER PAR PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES VALUE CAPITAL DEFICIT STOCK DEFICIT
---------- ---------- ---------- ---------- ---------- ----- ---------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1992........... -- $ -- -- $ -- 1,120,890 $112 $1,895,458 $ (3,084,969) $ -- $(1,189,399)
Repurchase of
common stock
held in
treasury....... (25,000) (25,000)
Net loss........ (2,211,384) (2,211,384)
---------- ---------- ---------- ---------- ---------- ---- ---------- ------------ -------- -----------
Balance at
December 31,
1993........... -- -- -- -- 1,120,890 112 1,895,458 (5,296,353) (25,000) (3,425,783)
Issuance of
Series A
mandatorily
redeemable
convertible
preferred
stock, net of
issuance costs
of $41,727
(Note 6)....... 3,656,364 5,991,273
Issuance of
Series A
mandatorily
redeemable
convertible
preferred stock
upon conversion
of convertible
notes payable
(Note 6)....... 603,973 996,558
Issuance of
common stock
upon conversion
of convertible
notes payable
(Note 6)....... 695,032 70 1,563,754 1,563,824
Accretion of
Series A
mandatorily
redeemable
convertible
preferred stock
to redemption
value related
to stock
issuance costs. 5,220 (5,220) (5,220)
Net loss........ (2,891,843) (2,891,843)
---------- ---------- ---------- ---------- ---------- ---- ---------- ------------ -------- -----------
Balance at
December 31,
1994........... 4,260,337 6,993,051 -- -- 1,815,922 182 3,459,212 (8,193,416) (25,000) (4,759,022)
Issuance of
Series B
mandatorily
redeemable
convertible
preferred
stock, net of
issuance costs
of $31,234
(Note 6)....... 3,271,030 6,968,770
Accretion of
Series A and
Series B
mandatorily
redeemable
convertible
preferred stock
to redemption
value related
to stock
issuance costs. 6,960 1,250 (8,210) (8,210)
Net loss........ (3,734,134) (3,734,134)
---------- ---------- ---------- ---------- ---------- ---- ---------- ------------ -------- -----------
Balance at
December 31,
1995........... 4,260,337 7,000,011 3,271,030 6,970,020 1,815,922 182 3,459,212 (11,935,760) (25,000) (8,501,366)
Issuance of
Series B
mandatorily
redeemable
convertible
preferred
stock, net of
issuance costs
of $19,863
(Note 6)
(unaudited).... 442,235 926,520
Accretion of
Series A and
Series B
mandatorily
redeemable
convertible
preferred stock
to redemption
value related
to stock
issuance costs
(unaudited).... 1,740 2,293 (4,033) (4,033)
Issuance of
common stock
under stock
option plan
(unaudited).... 4,444 7,500 7,500
Net loss
(unaudited) (1,146,862) (1,146,862)
---------- ---------- ---------- ---------- ---------- ---- ---------- ------------ -------- -----------
Balance at March
31, 1996
(unaudited).... 4,260,337 $7,001,751 3,713,265 $7,898,833 1,820,366 $182 $3,466,712 $(13,086,655) $(25,000) $(9,644,761)
========== ========== ========== ========== ========== ==== ========== ============ ======== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
INNOVASIVE DEVICES, INC.
STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities
Net loss............... $(2,211,384) $(2,891,843) $(3,734,134) $ (825,755) $(1,146,862)
Adjustments to
reconcile net loss to
net cash provided by
(used for) operating
activities:
Depreciation and
amortization.......... 64,926 137,313 202,078 50,374 74,024
Changes in assets and
liabilities:
Accounts receivable... (46,654) (23,983) (212,613) (95,005) (87,419)
Inventories........... (104,273) (233,717) (66,612) (59,908) (104,233)
Prepaid expenses...... 89,495 (18,285) (14,234) 9,261 34,824
Other assets.......... (7,394) (4,850) 975 3,831 (6,160)
Accounts payable...... 261,407 (71,618) 204,848 112,396 (65,965)
Accounts payable to
related party........ -- -- 264,708 -- 86,936
Accrued expenses...... (1,524) 89,999 82,870 60,240 280,227
Accrued interest...... 154,714 (24,618) (23,214) (23,214) --
----------- ----------- ----------- ---------- -----------
Net cash used for
operating activities... (1,800,687) (3,041,602) (3,295,328) (767,780) (934,628)
----------- ----------- ----------- ---------- -----------
Cash flows from
investing activities
Purchases of fixed
assets................ (341,065) (329,043) (208,495) (65,745) (82,826)
----------- ----------- ----------- ---------- -----------
Cash flows from
financing activities
Proceeds from issuance
of preferred stock,
net of issuance costs. -- 5,991,273 5,968,770 -- 926,520
Principal payments on
note payable.......... (401,067) (863,298) (464,286) (464,286) --
Proceeds from issuance
of convertible notes
payable............... 2,453,500 -- 1,000,000 -- --
Proceeds from issuance
of common stock....... -- -- -- -- 7,500
Repurchase of common
stock held in
treasury.............. (25,000) -- -- -- --
----------- ----------- ----------- ---------- -----------
Net cash provided by
(used for) financing
activities............. 2,027,433 5,127,975 6,504,484 (464,286) 934,020
----------- ----------- ----------- ---------- -----------
Net increase (decrease)
in cash and cash
equivalents............ (114,319) 1,757,330 3,000,661 (1,297,811) (83,434)
Cash and cash
equivalents at
beginning of period.... 408,402 294,083 2,051,413 2,051,413 5,052,074
----------- ----------- ----------- ---------- -----------
Cash and cash
equivalents at end of
period................. $ 294,083 $ 2,051,413 $ 5,052,074 $ 753,602 $ 4,968,640
=========== =========== =========== ========== ===========
Supplemental disclosure
of cash flow
information
Cash paid for interest. $ 88,335 $ 111,702 $ 43,598 $ 23,214 $ 631
=========== =========== =========== ========== ===========
</TABLE>
Supplemental disclosure of non-cash financing activities:
In connection with the issuance of Series A preferred stock in 1994, holders
of convertible notes payable totalling $2,453,500 plus accrued interest of
$106,882 accepted 603,973 shares of Series A preferred stock and 695,032
shares of common stock as consideration for full payment of these obligations.
In connection with the issuance of Series B preferred stock in 1995, holders
of convertible notes payable totalling $1,000,000 accepted 467,290 shares of
Series B preferred stock as consideration for full payment of these
obligations.
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
INNOVASIVE DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is engaged in the research, development, manufacture and
distribution of medical devices focussed on less invasive, arthroscopic
surgical repair, and restoration of traumatized or diseased tissue. The
Company's products are sold to customers in the healthcare industry primarily
in the U.S.
Revenue Recognition, Accounts Receivable and Concentration of Credit Risk
Revenue is recognized upon shipment of product. Ongoing credit evaluations
of customers' financial condition are performed and collateral is not
required. Concentration of credit risk with respect to accounts receivable is
limited due to the number of customers comprising the Company's customer base.
The Company maintains reserves for potential credit losses and such losses, in
the aggregate, have not exceeded management's expectations.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Cash and cash
equivalents include funds on deposit in a money market account and funds on
deposit in other deposit accounts.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under the provisions of SFAS No.
115, the Company has classified its investments as "available-for-sale" and
any associated unrealized gains or losses, if material, are recorded as a
separate component of equity until realized. Investments at December 31, 1995
are recorded at cost plus accrued interest, which approximates market.
Inventories
Inventories are stated at the lower of cost or market, with cost being
determined using the first-in, first-out method.
Fixed Assets
Fixed assets are recorded at cost and depreciated using the straight-line
method over their estimated useful lives. Repair and maintenance costs are
expensed as incurred.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 is an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
company's financial statements or tax returns. Deferred tax expense (benefit),
represents the change in the net deferred tax asset or liability balance. In
estimating future tax consequences, SFAS No. 109 generally considers all
expected future events other than enactments of changes in the tax law or
rates.
Unaudited Pro Forma Net Loss Per Share
Pro forma net loss per share is determined by dividing the net loss
attributable to common stockholders by the weighted average number of common
stock and common stock equivalents outstanding during the period, assuming the
conversion of all convertible preferred stock which will
F-7
<PAGE>
INNOVASIVE DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
occur upon the closing of a qualified public offering of the Company's common
stock as described in Note 6.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin 83,
common stock equivalents, although anti-dilutive, issued at prices below the
offering price per share during the twelve months preceding the anticipated
public offering of the Company's common stock have been included in the
calculation of unaudited pro forma net loss per share using the treasury stock
method as if outstanding since the beginning of each period presented.
Historical net loss per share has not been presented as the mandatorily
redeemable Series A convertible preferred stock would have been omitted from
the weighted average shares outstanding as it is anti-dilutive and was issued
more than twelve months prior to the anticipated public offering.
Interim Financial Data (Unaudited)
The interim financial data for the three months ended March 31, 1995 and
1996, included in the accompanying financial statements are unaudited;
however, in the opinion of the Company, the interim financial data include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results for the interim periods. The interim financial
data are not necessarily indicative of the results of operations for a full
fiscal year.
New Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." The Company has elected to
adopt SFAS No. 123 in 1996 through disclosure only.
Effective January 1, 1995, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." The adoption of SFAS No. 121 in 1995 had no impact on the Company's
financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
-------- --------
<S> <C> <C>
Raw materials.............................................. $198,370 $156,795
Work-in-process............................................ 63,052 68,333
Finished goods............................................. 76,568 179,474
-------- --------
$337,990 $404,602
======== ========
</TABLE>
F-8
<PAGE>
INNOVASIVE DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
USEFUL LIFE
IN YEARS 1994 1995
----------- -------- ----------
<S> <C> <C> <C>
Furniture and fixtures...................... 3-7 $216,564 $ 255,289
Machinery and equipment..................... 5 202,731 210,952
Leasehold improvements...................... 3 67,833 73,460
Tooling..................................... 3-5 335,934 491,279
-------- ----------
823,062 1,030,980
Less--Accumulated depreciation and amortiza-
tion....................................... 230,403 431,904
-------- ----------
$592,659 $ 599,076
======== ==========
</TABLE>
4. BORROWINGS
Note Payable
In connection with the termination of a development agreement in December
1992, the Company executed a note payable for $1,950,000, payable in semi-
annual payments of $487,500, beginning June 30, 1993. As no stated interest
rate exists on the note payable, interest was imputed at 10% per annum. The
Company recorded a charge of $1,728,651 to research and development expense in
1992, representing the present value of the total consideration due. The
Company made the final payment related to this liability in February 1995.
5. INCOME TAXES
The provision (benefit) for income taxes was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax benefit
Federal......................................... $ (956,075) $(1,204,346)
State........................................... (299,722) (397,121)
----------- -----------
Total deferred.................................... (1,255,797) (1,601,467)
Tax asset valuation allowance..................... 1,255,797 1,601,467
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
Prior to 1993, the Company elected to be taxed under Subchapter S provisions
of the Internal Revenue Code. No provision has been made for federal or state
income taxes in 1993 as the Company itself did not pay such income taxes. The
shareholders, however, were required to report their respective shares of the
Company's loss in their individual income tax returns and were liable for any
related tax thereon. Effective January 1, 1994, the Company revoked its
election to be taxed under Subchapter S provisions of the Internal Revenue
Code.
Deferred income taxes reflect the tax impact of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and such amounts as measured by tax laws and regulations.
F-9
<PAGE>
INNOVASIVE DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Under SFAS 109, the benefit associated with future deductible temporary
differences is recognized if it is more likely than not that a benefit will be
realized. Based on historical evidence, the Company has recorded a valuation
allowance that offsets all net deferred tax assets. Upon adoption of SFAS 109
on January 1, 1994, a full valuation allowance was established for the net
deferred tax asset of $199,076. Principal components of the deferred tax
assets and liabilities included on the balance sheet at December 31, 1994 and
1995 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $ 1,124,210 $ 2,499,077
Inventory........................................ 233,992 329,419
Research and development tax credit.............. 97,271 149,080
Fixed assets..................................... -- 31,964
Other items...................................... 3,202 46,800
----------- -----------
Gross deferred tax assets.......................... 1,458,675 3,056,340
Deferred tax asset valuation allowance............. (1,454,873) (3,056,340)
----------- -----------
Net deferred tax assets............................ 3,802 --
Deferred tax liability:
Fixed assets..................................... 3,802 --
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
A reconciliation between the amount of reported tax benefit and the amount
computed using the U.S. Federal Statutory rate of 35% for 1994 and 1995
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Tax at statutory rate............................. $(1,012,145) $(1,306,947)
State tax, net of federal benefit................. (206,167) (272,798)
Research and development credit................... (64,847) (19,842)
Other............................................. 27,362 (1,880)
----------- -----------
(1,255,797) (1,601,467)
Increase in valuation allowance................... 1,255,797 1,601,467
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The Company has U.S. Federal operating loss carryforwards of approximately
$6,070,000 and tax credit carryforwards of approximately $85,000. The
operating loss and tax credit carryforwards expire in the years 2009 through
2010.
Ownership changes, as defined in the Internal Revenue Code, including those
resulting from the issuance of common stock in connection with the Company's
planned initial public offering, may limit the amount of net operating loss
and tax credit carryforwards that can be utilized to offset future taxable
income or tax liability. The amount of the annual limitation is determined in
accordance with Section 382 of the Internal Revenue Code.
F-10
<PAGE>
INNOVASIVE DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Mandatorily redeemable convertible preferred stock consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1994 1995 1996
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Redeemable preferred stock:
Series A mandatorily redeemable con-
vertible preferred stock, $1.65 per
share liquidating preference and re-
demption value; $.01 par value;
4,260,337 issued and outstanding at
December 31, 1994 and 1995 and March
31, 1996; shares authorized:
4,325,000 at December 31, 1994,
4,260,337 at December 31, 1995 and
March 31, 1996, net of issuance
costs............................... $6,993,051 $ 7,000,011 $ 7,001,751
Series B mandatorily redeemable con-
vertible preferred stock, $2.14 per
share liquidating preference and re-
demption value; $.01 par value;
3,738,318 shares authorized; shares
issued and outstanding: 3,271,030
and 3,713,265 shares at December 31,
1995 and March 31, 1996, respective-
ly, net of issuance costs, none at
December 31, 1994................... -- 6,970,020 7,898,833
---------- ----------- -----------
Total redeemable preferred stock....... $6,993,051 $13,970,031 $14,900,584
========== =========== ===========
</TABLE>
In February and March 1994, the Company issued 4,260,337 shares of Series A
mandatorily redeemable convertible preferred stock ("Series A Preferred
Stock") and 695,032 shares of common stock. Upon issuance of the preferred
stock and the common stock, the Company received net proceeds of $5,991,273
and converted notes payable in the amount of $2,453,500, plus accrued interest
of $106,882.
In October 1995, the Company issued 3,271,030 shares of Series B mandatorily
redeemable convertible preferred stock ("Series B Preferred Stock"). Upon
issuance the Company received net proceeds of $5,968,772 and converted notes
payable in the amount of $1,000,000 which was received August 1995 in the form
of a bridge loan.
Holders of Series A and Series B Preferred Stock are entitled to the
following rights and privileges.
Conversion
Series A and Series B Preferred Stock is convertible into common stock at a
conversion ratio of 2.25 shares of preferred stock for each share of common
stock, at anytime at the option of the holder, subject to certain anti-
dilution adjustments. All outstanding shares of preferred stock automatically
convert into common stock upon the closing of an initial public offering of
the Company's common stock that results in both certain specified minimum
gross proceeds to the Company and a minimum per share offering price.
Voting Rights
Preferred stockholders are entitled to one vote for each share of common
stock into which the preferred stock is convertible. An affirmative vote
representing not less than 66% of the outstanding
F-11
<PAGE>
INNOVASIVE DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
preferred stock is required in the event of certain transactions or actions by
the Company, as defined in the Articles of Incorporation.
Dividends
Preferred stockholders are entitled to receive dividends at a rate of $0.132
and $0.1712 for Series A and Series B, respectively, per share per annum,
adjusted to reflect stock splits, stock dividends and recapitalizations. Such
dividends are payable only when, as, and if declared by the Board of Directors
and are noncumulative. No dividends on the Series A or Series B Preferred
Stock have ever been declared by the Board of Directors.
Liquidation Rights
In the event of dissolution, liquidation or winding up of the Company,
preferred stockholders have liquidation preference and are entitled to $1.65
and $2.14 for Series A and Series B, respectively, per share plus any declared
but unpaid dividends.
Redemption
At the option of each individual preferred stockholder, the Company shall
redeem up to one-third of the outstanding Series A and Series B preferred
stock on December 31, 1999, 2000 and 2001, respectively, at a redemption price
equal to $1.65 and $2.14 for Series A and Series B, respectively, per share
plus any declared, but unpaid dividends.
1996 Series B Preferred Stock Issuance
In January 1996, the Company issued an additional 442,235 shares of Series B
Preferred Stock, resulting in gross proceeds to the Company of $946,383.
Unaudited Pro Forma Balance Sheet
Upon the closing date of the Company's initial public offering, all of the
outstanding shares of Series A and Series B Preferred Stock will automatically
convert into 3,543,819 shares of common stock, exclusive of fractional shares.
Such conversion has been reflected in the unaudited pro forma balance sheet as
of March 31, 1996.
7. STOCKHOLDERS' EQUITY
Stock Restrictions and Antidilution Provision
Common stockholders have granted, first to other stockholders, then to the
Company, the right of first refusal on the sale of common stock held. In the
event of a security offering, as defined in the Stockholders Agreement,
stockholders have the right to purchase such numbers of shares of the issued
security or other securities which would permit the stockholder to maintain a
constant pro-rata share of common stock outstanding, on a fully diluted basis.
The above conditions terminate upon the occurrence of certain events,
including an initial public offering as defined in the Stockholders'
Agreement.
Treasury Stock
Common stock held in treasury represents the Company's repurchase of common
stock at cost.
Reverse Common Stock Split
A 1-for-2.25 reverse stock split of the Company's common stock became
effective on May 7, 1996. All shares of common stock, options and per share
amounts included in the accompanying financial statements have been adjusted
to give retroactive effect to the reverse stock split for all years presented.
F-12
<PAGE>
INNOVASIVE DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Newly Authorized Preferred Stock
On April 2, 1996, the Company's Board of Directors, with the approval of the
stockholders on April 23, 1996, authorized 1,000,000 shares of $0.01 par value
preferred stock. Preferred stock may be issued at the discretion of the Board
of Directors of the Company (without stockholder approval) with such
designations, rights and preferences as the Board of Directors may determine
from time to time. The preferred stock may have dividend, liquidation,
redemption, conversion, voting or other rights which may be more expansive
than the rights of the holders of the common stock.
8. STOCK PLAN
During 1992, the Board of Directors adopted the 1992 Stock Option Plan (the
"Plan"). Under the Plan, directors, officers, employees and certain other
individuals may be awarded shares of common stock or granted options and
rights to purchase up to 692,869 shares of common stock of the Company.
Options granted may be either incentive stock options or non-qualified
options.
Incentive stock options may be granted to any officer or employee at an
exercise price per share of not less than the fair market value per common
share as determined by the Board of Directors on the date of such grant (not
less than 110% of such value in the case of holders of 10% or more of the
total combined voting power of all classes of the Company's stock). Non-
qualified options may be granted to any employee, officer, director or
consultant at an exercise price per share to be specified by the Board of
Directors on the date of grant. Options granted under the Plan are exercisable
over periods determined by the Board of Directors, not to exceed ten years
from the date of grant. Generally, options granted under the Plan must be
exercised no more than three months less one day after the termination of
employment of the option holder, except that in the case of death or
disability, options may be exercised for up to one year after termination.
Shares acquired through the exercise of options are subject to certain
transfer restrictions. In the event of termination of employment for cause
within five years from the date of grant, the Company has the right to
repurchase any shares acquired from the exercise of options at the option
price. In the event of termination of employment without cause or in the case
of voluntary terminations, the Company has the right, which terminates upon
the closing of the Company's initial public offering, to repurchase any shares
acquired from the exercise of options at fair market value. The repurchase
right can be assigned to another party.
F-13
<PAGE>
INNOVASIVE DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE
SHARES PER SHARE
--------- ----------
<S> <C> <C>
Outstanding at December 31, 1993....................... 97,331 $ 5.63
Granted.............................................. 425,643 1.69-5.63
Canceled............................................. (89,333) 1.69-5.63
Exercised............................................ -- --
-------
Outstanding at December 31, 1994....................... 433,641 1.69-5.63
Granted.............................................. 49,548 1.69
Canceled............................................. (4,311) 1.69
Exercised............................................ -- --
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Outstanding at December 31, 1995....................... 478,878 1.69-5.63
Granted (unaudited).................................. 208,214 6.75
Canceled (unaudited)................................. (3,111) 1.69
Exercised (unaudited)................................ (4,444) 1.69
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Outstanding at March 31, 1996 (unaudited).............. 679,537 $1.69-6.75
=======
</TABLE>
At December 31, 1995, options for 141,889 shares were exercisable and
options to purchase 213,991 shares of common stock were available for future
grant under the Plan. The Company has reserved 692,869 shares of common stock
for issuance under the 1992 Stock Option Plan.
1996 Stock Plans
On April 2, 1996, the Board of Directors, with the approval of the
stockholders on April 23, 1996, adopted the 1996 Omnibus Stock Plan (the
"Omnibus Plan"), the 1996 Non-Employee Director Stock Option Plan (the
"Director Plan") and the 1996 Employee Stock Purchase Plan (the "Stock
Purchase Plan"). All plans are administrated by the Compensation Committee of
the Board of Directors. Generally, all options granted under the plans are not
transferable. To date, no options have been granted under any of the plans.
Under the terms of the Omnibus Plan, employees, directors and certain other
individuals may be awarded incentive stock options, nonqualified stock options
or restricted stock. The Omnibus Plan provides for the issuance of a maximum
of 250,000 shares of Common Stock, plus such additional number of shares that
become available due to the forfeiture of options granted under the 1992 Stock
Option Plan. Incentive stock options must be granted at an exercise price
equal to the fair market value of the stock on the date of grant and vest over
a period not to exceed 10 years. Generally, incentive stock options expire 90
days following the termination of employment.
The Director Plan provides for the grant of options for the purchase of up
to 100,000 shares of Common Stock of the Company. Under the terms of the
Director Plan, each non-employee director will receive an option to purchase
2,500 shares of common stock at each annual meeting of stockholders. In
addition, each new non-employee director will receive upon his or her initial
election an option to purchase 10,000 shares of Common Stock. All options
granted under the plan will be at an exercise price equal to the fair market
value of the stock on the date of grant and will vest evenly over a four year
period. Generally, vested options terminate 180 days after the optionee ceases
to serve as a director of the Company.
F-14
<PAGE>
INNOVASIVE DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
An aggregate of 50,000 shares of Common Stock is reserved for issuance
pursuant to the Stock Purchase Plan. Employees whose customary employment is
in excess of 20 hours per week and five months per year and who own less than
5% of stock in the Company will be eligible to participate in the plan.
Employees participating in the plan will have the opportunity to purchase
common stock at a price equal to the lesser of 85% of the fair market value on
the date the right was granted or 85% of the fair market value on the date the
right was exercised.
9. RETIREMENT SAVINGS PLAN
The Company provides an employee retirement savings plan under Section
401(k) of the Internal Revenue Code (the "Plan") which covers substantially
all employees. Under the terms of the Plan, employees may contribute a
percentage of their salary, up to the greater of 15% or the statutory limit,
which is then invested in one or more of several mutual funds selected by the
employee. The Company may make contributions to the Plan at their discretion;
no contributions have been made since inception of the Plan.
10. SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION
For 1994 and 1995, approximately 27% and 13% of total sales, respectively,
were attributable to one customer. For 1993, approximately 13%, 10% and 10% of
total sales, respectively, were attributable to three customers. No other
customer accounted for greater than 10% of total sales for 1993, 1994 and
1995.
Export sales were 22% (all to Europe) and 15% (13% to Europe and 2% to
other) of total sales for 1993 and 1995, respectively. The Company's export
sales for 1994 accounted for less than 10% of total sales.
11. COMMITMENTS
Related Party Transaction
In October 1995, the Company entered into Research & Development,
Distribution and Supply agreements (the "Agreements") with an investor of the
Series B Preferred Stock (the "Collaborator"). Pursuant to the Agreements, the
Company will fund up to $1,653,000 of research and development efforts
performed by the Collaborator to develop certain products. In consideration
for the funding provided, the Company will receive certain rights to market,
sell and distribute certain products, subject to satisfying certain minimum
sales requirements, resulting from such research and development efforts. The
Agreements are cancelable upon the earlier of two years from the effective
date of the Agreements or the expenditure of $1,200,000 on the initial
research project. Total research and development expense incurred under the
Agreements was $264,708 for 1995.
F-15
<PAGE>
INNOVASIVE DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Facility Lease
The Company leases office and production facilities under two noncancellable
operating leases, which expire on March 31, 1996 and June 1, 1997,
respectively. In March 1996, the Company entered into a non-cancelable
operating lease which expires on May 31, 2002 ("new facility lease") for
office and production facilities to replace the current facilities. As of
December 31, 1995, the future minimum lease commitments under all the
noncancellable leases, including the new facility lease, are approximately as
follows:
<TABLE>
<S> <C>
1996.............................................................. $ 138,000
1997.............................................................. 163,000
1998.............................................................. 182,000
1999.............................................................. 209,000
2000.............................................................. 215,000
Thereafter........................................................ 304,000
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$1,211,000
==========
</TABLE>
Total rent expense was approximately $65,000, $92,000 and $110,000 for 1993,
1994 and 1995, respectively.
F-16
<PAGE>
ROC suture fastener [Picture of ROC suture fastener with disposable
with disposable cartridge and delivery handle, along with
cartridge, delivery separate drill guide.]
handle and drill
guide.
ROC in short format [Picture of ROC suture fasteners in both short
(used in open surgery) and long formats.]
and long format (used
in arthroscopic
surgery).
ROC suture fastener [Picture of ROC suture fastener attached to
cartridge, pre- and delivery cartridge and detached from the
post-deployment. cartridge.]
Three models of suture [Picture of three models of suture graspers with
graspers with varying tips at varying angles.]
tip geometry.
The needle end of [Close-up of end of suture grasper, showing hole
suture grasper is in the end of the instrument.]
designed to pass
through tissue.
A snare extended from [Picture of snare extended from the end of the
the end of the suture suture grasper attached to loop of suture.]
grasper to capture the
suture and pull it
back through the
tissue.
Knot pusher [Picture of knot pusher attached to loop of
arthroscopically suture.]
advances and tightens
the knot to the top of
the tissue.
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
The Company............................................................... 15
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Financial Data................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 23
Management................................................................ 38
Certain Transactions...................................................... 45
Principal Stockholders.................................................... 47
Description of Capital Stock.............................................. 48
Shares Eligible for Future Sale........................................... 50
Underwriting.............................................................. 52
Legal Matters............................................................. 53
Experts................................................................... 54
Additional Information.................................................... 54
Index to Financial Statements............................................. F-1
</TABLE>
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UNTIL JULY 1, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT-
ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUB-
SCRIPTIONS.
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1,900,000 Shares
[logo]
INNOVASIVE DEVICES, INC.
Common Stock
-------------
PROSPECTUS
-------------
Alex. Brown & Sons
INCORPORATED
Piper Jaffray Inc.
June 6, 1996
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