<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 9, 1996
REGISTRATION NO. 333-2774
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GENERAL SURGICAL INNOVATIONS, INC.
(Exact Name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 3841 97-3170244
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
3172A PORTER DRIVE
PALO ALTO, CA 94304
(415) 812-9730
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
RODERICK A. YOUNG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
GENERAL SURGICAL INNOVATIONS, INC.
3172A PORTER DRIVE
PALO ALTO, CA 94304
(415) 812-9730
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
Tae Hea Nahm Alan C. Mendelson
Mark B. Weeks Eric C. Jensen
Maribeth T. Younger COOLEY GODWARD CASTRO
Sanjay K. Khare HUDDLESON & TATUM
VENTURE LAW GROUP, 3000 Sand Hill Road
A Professional Corporation Bldg. 3, Suite 230
2800 Sand Hill Road Menlo Park, CA 94025
Menlo Park, CA 94025 (415) 843-5000
(415) 854-4488
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
AMOUNT TO BE OFFERING PRICE OFFERING PRICE REGISTRATION
TITLE OF SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) (2) FEE
<S> <C> <C> <C> <C>
Common Stock, $.001 par value per
share.................................. 575,000 $15.00 $8,625,000 $2,975
</TABLE>
(1) Includes 75,000 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
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<PAGE>
GENERAL SURGICAL INNOVATIONS, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN
PROSPECTUS OF PART I ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN FORM S-1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front and Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page of Prospectus; Underwriting
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Outside Front Cover Page and Inside Front Cover Page;
Underwriting
9. Description of Securities to be Registered........... Prospectus Summary; Capitalization; Description of
Capital Stock
10. Interests of Named Experts and Counsel............... Legal Matters; Experts
11. Information with Respect to the Registrant........... Outside Front and Inside Front Cover Pages;
Prospectus Summary; The Company; Risk Factors;
Dividend Policy; Capitalization; Dilution; Selected
Consolidated Financial Data; Management's Discussion
and Analysis of Financial Condition and Results of
Operations; Business; Management; Certain
Transactions; Principal Shareholders; Description of
Capital Stock; Shares Eligible for Future Sale;
Consolidated Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not Applicable
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
PROSPECTUS (Subject to Completion)
Dated May 9, 1996
3,000,000 Shares
[GENERAL SURGICAL INNOVATIONS LOGO]
Common Stock
----------------
All of the 3,000,000 shares of Common Stock, $0.001 par value per share (the
"Common Stock") offered hereby are being sold by General Surgical Innovations,
Inc. ("GSI" or the "Company").
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is estimated that the initial public offering price will be
between $13.00 and $15.00 per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
Common Stock has been approved for quotation on the Nasdaq National Market, upon
notice of issuance, under the symbol "GSII."
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions (1) Company (2)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Per Share........................ $ $ $
Total (3)........................ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be $800,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase an aggregate of up to 450,000
additional shares at the Price to Public less Underwriting Discounts and
Commissions to cover over-allotments, if any. If all such additional shares
are purchased, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
------------------------
The Common Stock is offered by the several Underwriters named herein when,
as and if received and accepted by them, subject to their right to reject orders
in whole or in part and subject to certain other conditions. It is expected that
delivery of certificates for the shares will be made at the offices of Cowen &
Company, New York, New York, on or about , 1996.
------------------------
COWEN & COMPANY UBS SECURITIES LLC
, 1996
<PAGE>
(LOGO)
Balloon Dissectors and Applications
A picture of the human body and diagrams of the
Company's balloon dissectors with arrows pointing to
parts of the body were the balloon dissectors would be
used.
Breast Augmentation/Reconstruction Brow Lift
Latissimus Dorsi Harvesting TRAM Flap Harvesting
Abdominoplasty Aortic Reconstruction
Anterior Spinal Fusion Hernia Repair
Bladder Neck Suspension Saphenous Vein Harvesting
Long Bone Plating Subfacial Endoscopic Perforator Surgery
The Company has introduced or is introducing for commercial sale balloon
dissectors for the hernia repair, subfascial endoscopic perforator surgery and
breast augmentation and reconstruction procedures set forth above. The other
balloon dissectors shown have been developed by the Company but are not sold
commercially
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.
------------------------
Spacemaker-Registered Trademark- and KnotMaker-TM- are trademarks of the
Company. This Prospectus also contains trademarks of other companies.
2
<PAGE>
(LOGO)
Spacemaker-Registered Trademark- Product Platforms
A picture of the Company's Spacemaker products and a
description of their features.
<TABLE>
<S> <C>
Spacemaker-Registered Trademark-
I Contains integral trocar to maintain space
Spacemaker-Registered Trademark-
II Allows visualization upon entry and inflation
Spacemaker-Registered Trademark-
Reposable Sold in multipack kits
Semi-reusable handle
Lower cost per procedure
Spacemaker World-TM- Sold in multipack kits
Limited visualization
Sold outside the United States
</TABLE>
The Spacemaker-Registered Trademark- I, Spacemaker-Registered Trademark- II and
Spacemaker-Registered Trademark- Reposable product platforms have received
510(k) clearance from the FDA for commercial sale in the United States. The
Spacemaker World-TM- product platform was designed for sale in international
markets and the Company has not applied for or received FDA clearance for the
sale of such product in the United States.
<PAGE>
(LOGO)
Spacemaker-Registered Trademark- Balloon Dissection Procedure
Spacemaker Balloon Dissector
A description of the balloon dissection procedure and
pictures of the procedure.
The Spacemaker balloon is introduced
through a small incision in the skin.
The balloon is filled with either air or saline
to dissect the tissue planes, creating a
working space.
The air/saline is removed.
The dissected space is insufflated creating
the bloodless working environment.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE
IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, "GSI" OR THE
"COMPANY" REFERS TO GENERAL SURGICAL INNOVATIONS, INC. AND ITS WHOLLY OWNED
SUBSIDIARY. THE DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" AND "BUSINESS" AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS PROSPECTUS.
THE COMPANY
General Surgical Innovations, Inc. ("GSI" or the "Company") develops,
manufactures and sells balloon dissection systems for minimally invasive surgery
("MIS"). Each of GSI's proprietary Spacemaker balloon dissection systems
consists of an access and deployment platform and a balloon dissector. By using
the Company's products, surgeons can access a surgical site in a minimally
invasive manner and can rapidly and relatively atraumatically create a working
space at the target surgical site where no space previously existed. The
Company's balloon dissection systems are currently offered in four access and
deployment platforms, along with 14 different balloon shapes and sizes, which
are specifically designed for various surgical techniques, procedure types and
market segments. The Company commenced commercial sales of its first product,
the Spacemaker I platform for hernia repair, in September 1993 and to date
almost all of the Company's revenues have been derived from sales of products
for this procedure, primarily pursuant to a distribution agreement with United
States Surgical Corporation ("USSC"). The Company currently sells products in
the United States and certain other countries, including the United Kingdom,
Germany and France, for selected applications, including hernia repair,
subfascial endoscopic perforator surgery and breast augmentation and
reconstruction. Over the next 18 months, the Company anticipates completing
marketing-related clinical evaluations of and launching products for several new
applications, including treatment of stress urinary incontinence, saphenous vein
harvesting and anterior spinal fusion.
Open surgery is an invasive procedure that generally requires large
incisions and significant tissue manipulation in order to provide the surgeon
with direct access to the intended surgical site. Much of the trauma suffered in
connection with open surgery is a result of gaining access to the surgical site
and is not caused by the surgical repair itself. In order to reduce the
complications associated with many open surgical procedures, surgical techniques
referred to as MIS have recently been developed. These techniques allow surgeons
to access the target surgical site through the body's natural openings (E.G.,
mouth, urethra or rectum) or by making small incisions to access body cavities
such as the abdominal cavity (the "peritoneum"). The benefits of MIS as compared
to open surgery generally include reduced patient trauma (including muscle,
nerve and other tissue damage), reduced blood loss, reduced post-operative
infection, reduced scarring at the site of the incision, shorter patient
recovery time, reduced procedure time and ultimately lower medical costs. As a
result of these benefits, MIS has been used increasingly for surgical procedures
within the peritoneum. For example, in 1995 approximately 93% of the estimated
857,000 cholecystectomies (gallbladder removal) performed in the United States
were performed using MIS, compared to none in 1988.
Despite the documented benefits of MIS, its adoption to date has been
limited to a select number of surgical procedures, and, in the aggregate,
represented only an estimated 15% of all surgical procedures performed in the
United States in 1995. The most widely adopted MIS procedure, laparoscopic
cholecystectomy, has been successfully adopted largely because of the proximity
of the target surgical site to the peritoneum, the only natural body cavity that
provides a working space when insufflated. Application of MIS techniques to
other surgical procedures and the ability to exploit the clinical benefits of
MIS have been limited by the lack of a natural body cavity proximate to the
surgical site and the inability of the surgeon to easily and atraumatically
access the surgical site or
3
<PAGE>
establish a surgical working space where no natural body cavity exists. MIS
conducted outside of a natural body cavity requires the surgeon to use blunt
dissection tools to tunnel through tissue to reach the surgical site, creating a
relatively bloody working space with poor visualization.
GSI's proprietary Spacemaker balloon dissection systems are designed to
address the limitations of blunt dissection MIS and enable the adoption of MIS
techniques for a variety of surgical procedures. The body has a large number of
naturally occuring tissue layers, including skin, muscle and fat. The Company's
balloon dissection systems allow the surgeon to exploit this physiology by
inflating the balloon to separate the natural tissue planes that exist between
these layers, thereby creating a working space at or near the target surgical
site. By utilizing any one of a range of balloons with pre-specified deployment
characteristics, the surgeon is able to accurately and predictably determine the
size, shape and proximity of the surgical working space relative to the target
surgical site. The Company believes that its technology can be deployed anywhere
in the body where a natural tissue plane exists.
The Company believes that its proprietary balloon dissection technology
provides the following benefits: (i) the ability to create a predictable working
space tailored for a specific procedure; (ii) the ability to rapidly dissect
tissue, thereby reducing procedure time; (iii) compatibility with existing MIS
techniques and instruments, facilitating the adoption of the Company's products
for a variety of surgical procedures; and (iv) ease of use, thereby minimizing
surgeon training requirements. In addition, the Company believes that its
products provide substantial clinical and cost benefits for the patient, surgeon
and payor, including reduced patient trauma, reduced blood loss, shorter patient
recovery time and reduced procedure time.
GSI believes that its current patent and regulatory status provide it with
competitive advantages in the balloon dissection market, and the Company plans
to capitalize on its proprietary position in establishing and maintaining market
leadership. To date, the Company has received 510(k) clearances from the FDA for
the use of its Spacemaker balloon dissection technology to perform dissection of
tissue planes during general, endoscopic, laparoscopic or cosmetic and
reconstructive surgery using a broad range of balloon sizes and shapes. The
Company believes that these FDA clearances allow the use of the Company's
balloon dissection technology for many surgical applications that the Company
may pursue, including those involving other balloon sizes and shapes. GSI
currently has 13 issued United States patents and two issued foreign patents,
and numerous additional United States and foreign patent applications covering
the Company's Spacemaker technology. In particular, the Company has received a
notice of allowance for one of its patent applications which contains claims
regarding the use of balloons to dissect tissue planes anywhere in the body. The
Company believes that the scope of these claims could provide a long-term
competitive advantage for many of its balloon dissection products.
The Company's objective is to become the leading provider of balloon
dissection systems and specialty surgical instruments for MIS procedures. The
Company's market penetration and adoption strategy is comprised of several key
elements. First, the Company seeks to develop and maintain relationships with
leading general surgeons and specialists in each of its target surgical fields,
including general surgery, obstetrics, gynecology, urology, cosmetic and
reconstructive surgery, orthopedic surgery and vascular surgery. Second, the
Company intends to develop relationships with leading medical device companies
that can support surgeon training in the use of the Company's products and
augment the Company's direct sales and marketing capabilities. The Company's
initial partnership in this area is the distribution of balloon dissection
systems for hernia repair through USSC. Third, the Company plans to capitalize
on its favorable regulatory and patent position to develop and rapidly introduce
additional products that broaden the surgical applications for its Spacemaker
technology. Finally, the Company will continue to develop surgical instruments
tailored for use in the working spaces created by the Company's balloon
dissection systems, with the goal of facilitating the adoption of the Company's
products for target procedures.
The Company's principal offices are located at 3172A Porter Drive, Palo
Alto, California 94304, and its telephone number is (415) 812-9730. The Company
was incorporated in California in April 1992.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 3,000,000 shares
Common Stock to be outstanding after the
offering (1)................................ 12,653,342 shares
Use of proceeds.............................. To fund sales and marketing activities,
research and development, marketing-related
clinical evaluations, capital expenditures,
expansion of manufacturing and other
facilities and other general corporate
purposes. See "Use of Proceeds."
Approved Nasdaq National Market symbol....... GSII
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
JUNE 30, MARCH 31,
------------------------------- ----------------------
1993 1994 1995 1996
--------- --------- --------- 1995 ---------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales...................................................... $ -- $ 789 $ 2,437 $ 1,805 $ 3,421
Cost of sales.............................................. -- 600 1,262 908 1,654
--------- --------- --------- ----------- ---------
Gross profit............................................. -- 189 1,175 897 1,767
Operating expenses:
Research and development................................. 750 496 975 735 864
Sales and marketing...................................... 42 1,532 2,859 1,965 2,578
General and administrative............................... 398 1,338 1,400 1,127 1,120
Write-off of acquired in-process research and
development............................................. 2,791
--------- --------- --------- ----------- ---------
Total operating expenses................................. 1,190 3,366 5,234 3,827 7,353
--------- --------- --------- ----------- ---------
Loss from operations....................................... (1,190) (3,177) (4,059) (2,930) (5,586)
Interest and other income (loss), net...................... 18 58 8 (6) 151
--------- --------- --------- ----------- ---------
Net loss................................................... $ (1,172) $ (3,119) $ (4,051) $ (2,936) $ (5,435)
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Pro forma net loss per share (2)........................... $ (0.16) $ (0.34) $ (0.40) $ (0.29) $ (0.53)
Shares used in computing pro forma net loss per share
(2)....................................................... 7,275 9,276 10,241 10,217 10,301
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------
ACTUAL AS ADJUSTED(1)(3)
--------- -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................................... $ 3,904 $ 42,164
Working capital.................................................................... 2,788 41,298
Total assets....................................................................... 6,708 44,968
Convertible redeemable preferred stock............................................. 15,547 --
Total shareholders' equity (deficit)............................................... (12,291) 41,766
</TABLE>
- ------------------------------
(1) Excludes (i) 1,133,266 shares of Common Stock issuable upon exercise of
outstanding stock options and (ii) 2,155,164 shares of Common Stock reserved
for issuance under the Company's equity incentive plans as of March 31,
1996. See "Management -- Stock Options" and "-- Equity Incentive Plans."
(2) Computed on the basis described in Note 14 of Notes to Consolidated
Financial Statements.
(3) Adjusted to give effect to the sale of 3,000,000 shares of Common Stock
offered by the Company at an assumed initial public offering price of $14.00
per share after deducting estimated Underwriting discounts and commissions
and estimated offering expenses payable by the Company. See "Use of
Proceeds" and "Capitalization."
------------------------------
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES (I)
NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) REFLECTS A
1.37-FOR-ONE SPLIT OF THE COMPANY'S CAPITAL STOCK TO BE APPROVED IN MARCH 1996,
(III) REFLECTS THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK OF
THE COMPANY INTO AN AGGREGATE OF 5,833,698 SHARES OF COMMON STOCK UPON THE
CLOSING OF THIS OFFERING AND (IV) ASSUMES THE CONVERSION OF TWO PROMISSORY NOTES
IN THE AGGREGATE PRINCIPAL AMOUNT OF $250,000 INTO 66,637 SHARES OF THE
COMPANY'S COMMON STOCK.
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS, INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN
EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE SHARES OF COMMON
STOCK OFFERED HEREBY.
LIMITED OPERATING HISTORY; ANTICIPATED FUTURE LOSSES
The Company was organized in April 1992 and began commercially shipping its
first Spacemaker products in September 1993. Accordingly, the Company has only a
limited operating history upon which an evaluation of the Company and its
prospects can be based. As of March 31, 1996, the Company had an accumulated
deficit of $13.8 million. The Company's operating losses for the fiscal years
ending June 30, 1993, 1994 and 1995 and for the nine months ended March 31, 1996
were $1.2 million, $3.1 million, $4.1 million and $5.4 million, respectively.
The Company expects to continue to incur significant operating losses on a
quarterly and annual basis. Since the introduction of its initial products, the
Company has yet to achieve profitability and may never do so in the future. Due
to the Company's limited operating history, there can be no assurance of sales
growth or profitability on a quarterly or annual basis in the future. The
Company intends to increase significantly its investments in research and
development, sales and marketing, marketing-related clinical evaluations and
related infrastructure. Due to the anticipated increases in the Company's
operating expenses, the Company's operating results will be adversely affected
if sales do not increase. The Company's prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in
their early stage of development, particularly companies in rapidly evolving
markets. To address these risks, the Company must respond to competitive
developments, continue to attract, retain and motivate qualified persons and
successfully commercialize products incorporating advanced technologies. There
can be no assurance that the Company will be successful in addressing such
risks. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business."
DEPENDENCE UPON BALLOON DISSECTION PRODUCTS; RISK OF TECHNOLOGICAL OBSOLESCENCE
All of the Company's sales since inception have been derived from sales of
its balloon dissection products, with a substantial portion derived from sales
for hernia repair procedures. Failure of the Company to develop successfully and
commercialize balloon dissection products for applications other than hernia
repair could have a material adverse effect on the Company's business, financial
condition and results of operations. The success of the Company's products
depends on the nature of the technological advances inherent in the product
designs, reductions in patient trauma or other benefits provided by such
products, results of marketing-related clinical evaluations, continued adoption
of MIS procedures by surgeons, market acceptance of the Company's products and
related procedures, reimbursement for the Company's products by health care
payors and the Company's receipt of regulatory approvals. There can be no
assurance that the Company's products will have the required technical
characteristics, that the Company's products will provide adequate patient
benefits, that marketing-related clinical evaluations results will be favorable,
that surgeons will continue to adopt MIS procedures, that recently introduced
products or future products of the Company or related procedures will gain
market acceptance, or that required regulatory approvals will be obtained. The
failure to achieve any of the foregoing could have a material adverse effect on
the Company's business, financial condition and results of operations. To the
extent demand for the Company's balloon dissection systems for hernia repair
declines and the Company's newly-introduced products are not commercially
accepted or its existing products are not developed for new procedures, there
could be a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
DEPENDENCE ON KEY DISTRIBUTOR
In March 1994, the Company entered into a distribution agreement with United
States Surgical Corporation ("USSC"), a large manufacturer and distributor of
medical devices. Pursuant to this
6
<PAGE>
agreement USSC has rights, which are co-exclusive with the rights of GSI, to
distribute the Spacemaker I product for hernia repair and, to the extent
permitted by the Company's initial 510(k) clearance for the Spacemaker I
product, other applications. USSC's distribution rights are limited to only
those products that are or could be covered by the Company's initial 510(k)
clearance. From time to time, the Company and USSC have had disagreements
regarding the extent of USSC's rights under the distribution agreement to
distribute new products developed by the Company after the date of such
agreement. In addition, under the distribution agreement, USSC is obligated to
purchase minimum quantities of the Company's products. USSC historically has
purchased substantially more product than is required under this agreement. In
fiscal 1994 and 1995 and the nine months ended March 31, 1996, sales to USSC,
which include sales to Autosuture, Inc., a subsidiary of USSC, represented
approximately 68%, 75% and 87%, respectively, of the Company's net sales. The
Company's sales to USSC have fluctuated significantly in the past, and the
Company anticipates that such sales could fluctuate in the future. For example,
purchases by USSC declined substantially in the quarter ended September 30,
1995, and then increased substantially in the subsequent quarter ended December
31, 1995. As a result, there can be no assurance that USSC will continue to
purchase the Company's products in amounts equal to past levels or that USSC
will purchase the minimum quantities required under the agreement. The
distribution agreement with USSC expires in March 1997, and there can be no
assurance that such agreement will be renewed on the same or similar terms. USSC
could also elect to sell competitive products, rather than those of the Company,
which could result in a decline of the Company's sales. A significant reduction
in orders from USSC or a failure to renew the agreement with USSC could have a
material adverse effect on the Company's business, financial condition and
results of operations. Although the Company intends to establish additional
distributorships in the United States for products in areas other than hernia
repair, there can be no assurance that such efforts will be successful. Failure
to diversify its distribution network in the United States could have a material
adverse effect on the Company's business, financial condition and results of
operations.
To date, substantially all of the Company's international sales for hernia
repair procedures have been made through Autosuture under the same terms and
conditions as the Company's agreement with USSC. Although the Company may in the
future seek to diversify its international distribution network, there can be no
assurance that such efforts will be successful. Failure to diversify its
international distribution network or failure to maintain or renew its
relationship with Autosuture could have a material adverse effect on the
Company's business, financial condition and results of operations.
LIMITED MARKETING AND DIRECT SALES EXPERIENCE
The Company has only limited experience marketing and selling its products
through its direct sales force, and has sold its products in commercial
quantities through its direct sales force only to the hernia market and, to a
lesser degree, to the cosmetic and reconstructive surgery market. Establishing
marketing and sales capability sufficient to support sales in commercial
quantities for the other markets targeted by the Company, including additional
hernia, vascular, urology, obstetrics, gynecology and orthopedic surgery
markets, will require significant resources, and there can be no assurance that
the Company will be able to recruit and retain additional qualified marketing
personnel, or direct sales personnel or that future sales efforts of the Company
will be successful. In markets where there is a large potential customer base,
the Company intends to establish partnership relationships with additional
distribution partners. The Company has no significant relationships other than
with USSC and there can be no assurance that the Company will be successful in
establishing such partnership relationships on commercially reasonable terms, if
at all. The failure to establish and maintain an effective distribution channel
for the Company's products, or establish and retain qualified and effective
sales personnel to support commercial sales of the Company's products, could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business -- Marketing,
Sales and Distribution."
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UNCERTAINTY OF MARKET ACCEPTANCE; NO ASSURANCE OF CLINICAL ADVANTAGE
The Company's success is substantially dependent upon the success of its
Spacemaker balloon dissection products. The Company believes that market
acceptance of the Company's products will depend on the Company's ability to
provide evidence to the medical community of the safety, efficacy and
cost-effectiveness of its products and the procedures in which these products
are intended to be used. Market acceptance is also dependent on the adoption of
laparoscopic techniques generally and the conversion of non-balloon dissection
techniques to balloon dissection techniques specifically. To date, the Company's
products have only been used to treat a limited number of patients and the
Company has limited long-term outcomes data. If the Company is not able to
demonstrate consistent clinical benefits resulting from the use of its products
(including reduced procedure time, reduced patient trauma and lower costs), the
Company's business, financial condition and results of operations could be
materially and adversely affected.
The Company further believes that the ability of health care providers to
obtain adequate reimbursement for procedures using the Company's Spacemaker
balloon dissector products and related instruments will be critical to market
acceptance of the Company's products. Although the Company believes that
procedures using its balloon dissection products currently may be reimbursed in
the United States under certain existing procedure codes, there can be no
assurance that such procedure codes will remain available or that reimbursement
under these codes will be adequate. The Company has limited experience in
obtaining third-party reimbursement, and the inability to obtain reimbursement
for some or all of its products could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Business
- -- Third-Party Reimbursement."
The Company introduced its balloon dissectors in late 1993 and to date there
has been relatively little education among surgeons about the benefits of
balloon dissection technology. Furthermore, because of the novelty of balloon
dissection procedures, many surgeons and surgeons' assistants have not developed
the requisite skills to perform balloon dissection procedures. To the extent
that laparoscopic techniques are adopted slowly, that balloon dissectors are
incorporated into laparoscopic techniques less often or that surgeons are
unwilling or unable to develop the skills necessary to utilize balloon
dissectors, the Company's business, financial condition and results of
operations could be materially adversely affected. See "Business -- Marketing,
Sales and Distribution."
FLUCTUATIONS IN QUARTERLY RESULTS
Results of the Company's operations may fluctuate significantly from quarter
to quarter and will depend on (i) new product introductions by the Company and
its competitors and the resulting product transitions, (ii) the rate of adoption
by surgeons of balloon dissection technology in markets targeted by the Company,
(iii) the sales efforts of the Company's distributors, (iv) the mix of sales
among distributors and the Company's direct sales force, (v) timing of patent
and regulatory approvals, (vi) timing of operating expenditures, (vii) the
Company's ability to manufacture its products efficiently, (viii) timing of
research and development expenses, including marketing-related clinical
evaluation expenditures, (ix) intellectual property litigation and (x) general
market conditions. The Company's sales in any period are highly dependent upon
the marketing efforts and success of USSC, which are not within the control of
the Company. The Company's sales to USSC have fluctuated significantly in the
past, and the Company anticipates that such sales could fluctuate in the future.
For example, purchases by USSC declined substantially in the quarter ended
September 30, 1995, and then increased substantially in the subsequent quarter
ended December 31, 1995. Accordingly, any decline in purchases by USSC could
result in a decline in sales and adversely affect the Company's operating
results. In addition, announcements or expected announcements by the Company,
its competitors or its distributors of new products, new technologies or pricing
changes could cause existing or potential customers of the Company to defer
purchases of the Company's existing products and could alter the mix of products
sold by the Company, which could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that future products or product enhancements will be successfully
introduced or that such introductions
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will not adversely affect the demand for existing products. As a result of these
and other factors, the Company's quarterly operating results have fluctuated in
the past, and the Company expects that such results may fluctuate in the future.
Due to such quarterly fluctuations in operating results, quarter-to-quarter
comparisons of the Company's operating results are not necessarily meaningful
and should not be relied upon as indicators of likely future performance or
annual operating results. In addition, the Company's limited operating history
makes accurate prediction of future operating results difficult or impossible to
make. There can be no assurance that in the future the Company will achieve
sales growth or become profitable on a quarterly or annual basis or that its
growth will be consistent with predictions by securities analysts and investors.
In such event, the price of the Company's Common Stock would likely be
materially and adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend on its ability to obtain patent protection
for its products and processes, to preserve its trade secrets and proprietary
technology and to operate without infringing upon the patents or proprietary
rights of third parties. As of March 31, 1996, the Company had 13 issued United
States patents and had applied for an additional 45 United States patents, six
of which had a notice of allowance or allowed claims. In addition, GSI had two
foreign patents issued, and nine additional foreign patent applications in
prosecution on such date. The Company has received a notice of allowance for one
of its United States patent applications that contains claims regarding the use
of balloons to dissect tissue planes anywhere in the body.
The validity and breadth of claims in medical technology patents involve
complex legal and factual questions and, therefore, may be highly uncertain. No
assurance can be given that any patents based on pending patent applications or
any future patent applications will be issued, that the scope of any patent
protection will exclude competitors or provide competitive advantages to the
Company, that any of the Company's patents or patents to which it has licensed
rights will be held valid if subsequently challenged or that others will not
claim rights in or ownership of the patents and other proprietary rights held or
licensed by the Company or that the Company's existing patents will cover the
Company's future products. Furthermore, there can be no assurance that others
have not developed or will not develop similar products, duplicate any of the
Company's products or design around any patents issued to or licensed by the
Company or that may be issued in the future to the Company. Since patent
applications in the United States are maintained in secrecy until patents issue,
the Company also cannot be certain that others did not first file applications
for inventions covered by the Company's pending patent applications, nor can the
Company be certain that it will not infringe any patents that may issue to
others on such applications.
One of the patent applications filed by the Company, which is directed to a
surgical method using balloon dissection technology, has been placed in
interference with a patent application filed by Origin Medsystems, Inc.
("Origin"), a competitor of the Company. The Company believes that the inventor
named in its patent application was the first to invent this subject matter, and
has asserted that the Origin patent application was filed after a disclosure
made by such inventor to employees of Origin. Origin takes a contrary position.
This interference is presently pending in the United States Patent and Trademark
Office ("USPTO") and, as permitted by the rules of the USPTO, has been referred
to an arbitrator for completion of the interference proceeding. A decision is
not expected in this interference proceeding until 1997. Failure of the Company
to prevail in such interference proceeding could have a material adverse effect
on the Company's business, financial condition and results of operations.
Patent interference or infringement involves complex legal and factual
issues and is highly uncertain, and there can be no assurance that any
conclusion reached by the Company regarding patent interference or infringement
will be consistent with the resolution of such issue by a court. In the event
the Company's products are found to infringe patents held by competitors, there
can be no assurance that the Company will be able to modify successfully its
products to avoid infringement, or
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that any modified products will be commercially successful. Failure in such
event to either develop a commercially successful alternative or obtain a
license to such patent on commercially reasonable terms could have a material
adverse effect on the Company's business, financial condition and results of
operations. In any event, there can be no assurance that the Company will not be
required to defend itself in court against allegations of infringement of
third-party patents. Patent litigation is expensive, requires extensive
management time, and could subject the Company to significant liabilities,
require disputed rights to be licensed from third parties or require the Company
to cease selling its products.
Legislation is pending in Congress that, if enacted in its present form,
would limit the ability of medical device manufacturers in the future to obtain
patents on surgical and medical procedures that are not performed by, or as a
part of, devices or compositions which are themselves patentable. While the
Company cannot predict whether the legislation will be enacted, or precisely
what limitations will result from the law if enacted, any limitation or
reduction in the patentability of medical and surgical methods and procedures
could have a material adverse effect on the Company's ability to protect its
proprietary methods and procedures. In addition, the patent laws of European and
certain other foreign countries generally do not allow for the issuance of
patents for methods of surgery on the human body. Accordingly, the ability of
the Company to gain patent protection for its methods of tissue dissection will
be significantly limited. As a result, there can be no assurance that the
Company will be able to develop a patent portfolio in Europe or that the scope
of any patent protection will provide competitive advantages to the Company. See
"Business -- Patents and Proprietary Rights."
ROYALTY PAYMENT OBLIGATIONS
The Company has acquired a significant number of patent rights from third
parties, including rights that apply to the Company's current balloon dissection
systems. The Company has historically paid and is obligated to pay in the future
to such third parties royalties equal to 4% of sales of such products, which
payments are expected to exceed minimum royalty payments due under agreements
with such parties. The Company also has acquired patent rights under
royalty-bearing agreements with respect to certain surgical instruments,
including the KnotMaker product and the balloon valve trocar currently under
development. The payment of such royalty amounts will have an adverse impact on
the Company's gross profit and other results of operations. There can be no
assurance that the Company will be able to continue to satisfy such royalty
payment obligations in the future, and a failure to do so could have a material
adverse effect on the Company's business, financial condition and results of
operations.
EARLY STAGE OF DEVELOPMENT AND COMMERCIALIZATION; NO ASSURANCE OF ABILITY TO
MANAGE GROWTH
The Company began commercial sales of its balloon dissection products in
September 1993 and, as a result, has limited experience in manufacturing,
marketing and selling its products commercially. The Company has recently
experienced rapid growth in its facilities and the number of its employees, the
number of products under development, the number and amount of products
manufactured and sold, and the geographic scope of its sales. In order to
support increased levels of sales in the future and to augment its long-term
competitive position, the Company anticipates that it will be required to make
significant additional expenditures in manufacturing, research and development,
sales and marketing, and administration. The Company's acquisition of Adjacent
Surgical, Inc. in February 1996 has resulted in additional demands on the
Company's limited management resources. The Company's inability to manage its
growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management --
Certain Transactions."
COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE
Competition in the market for medical devices used in tissue dissection
surgical procedures is intense and is expected to increase. The Company competes
primarily with other producers of MIS tissue dissection instruments. Origin, a
subsidiary of Guidant Corporation, and Ethicon Endo-Surgery, Inc., a subsidiary
of Johnson & Johnson Company, among others, currently compete against the
Company in the development, production and marketing of MIS tissue dissection
instruments and
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tissue dissection technology. To the extent that surgeons elect to use open
surgical procedures rather than MIS, the Company also competes with producers of
tissue dissection instruments used in open surgical procedures, such as blunt
dissectors or graspers. A number of companies currently compete against the
Company in the development, production and marketing of tissue dissection
instruments and technology for open surgical procedures. In addition, the
Company indirectly competes with producers of therapeutic drugs, when such drugs
are used as an alternative to surgery. Many of the Company's competitors have
substantially greater capital resources, name recognition, expertise in research
and development, manufacturing and marketing and obtaining regulatory approvals.
There can be no assurance that the Company's competitors will not succeed in
developing balloon dissectors or competing technologies that are more effective
than products marketed by the Company or that render the Company's technology
obsolete. Additionally, even if the Company's products provide performance
comparable to competing products or procedures, there can be no assurance that
the Company will be able to obtain necessary regulatory approvals or compete
against competitors in terms of price, manufacturing, marketing and sales.
Many of the alternative treatments for medical indications that can be
treated by balloon dissection products and laparoscopic surgery are widely
accepted in the medical community and have a long history of use. In addition,
technological advances with other therapies could make such other therapies more
effective or cost-effective than balloon dissectors and minimally invasive
surgery, and could render the Company's technology non-competitive or obsolete.
There can be no assurance that surgeons will use MIS to replace or supplement
established treatments or that MIS will remain competitive with current or
future treatments. The failure of surgeons to adopt MIS could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition to the Company's focus on the development of its balloon
dissection systems, the Company has also developed surgical instruments for use
in MIS. There can be no assurance that the Company's surgical instruments will
successfully compete with those manufactured by other producers of such surgical
instruments. The failure to achieve commercial market acceptance of such
surgical instruments could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Competition."
UNCERTAIN AVAILABILITY OF THIRD-PARTY REIMBURSEMENT
The Company's success will depend upon the ability of surgeons to obtain
satisfactory reimbursement from healthcare payors for the Company's products. In
the United States, hospitals, physicians and other healthcare providers that
purchase medical devices generally rely on third-party payors, such as private
health insurance plans, to reimburse all or part of the costs associated with
the treatment of patients. Reimbursement in the United States for the Company's
balloon dissection products is currently available from most third-party payors,
including most major private health care insurance plans and Medicaid, under
existing surgical procedure codes. The Company does not expect that third-party
reimbursement in the United States will be available for use of its other
products unless and until clearance or approval is received from the federal
Food and Drug Administration (the "FDA"). If FDA clearance or approval is
received, third-party reimbursement for these products will depend upon
decisions by individual health maintenance organizations, private insurers and
other payors. Many payors, including the federal Medicare program, pay a preset
amount for the surgical facility component of a surgical procedure. This amount
typically includes medical devices such as the Company's. Thus, the surgical
facility or surgeon may not recover the added cost of the Company's products. In
addition, managed care payors often limit coverage to surgical devices on a
preapproved list or obtained from an exclusive source. If the Company's products
are not on the list or are not available from the exclusive source, the facility
or surgeon will need to obtain an exception from the payor or the patient will
be required to pay for some or all of the cost of the Company's product. The
Company believes that procedures using its balloon dissection products currently
may be reimbursed in the United States under certain existing procedure codes.
However, there can be no assurance that such procedure codes will remain
available or that the reimbursement under these codes will be adequate. Given
the efforts to control and decrease health care costs in recent years, there can
be no
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<PAGE>
assurance that any reimbursement will be sufficient to permit the Company to
increase revenues or achieve or maintain profitability. The unavailability of
third-party or other adequate reimbursement could have a material adverse effect
on the Company's business, financial condition and results of operations.
Reimbursement systems in international markets vary significantly by
country, and by region within some countries, and reimbursement approvals must
be obtained on a country-by-country basis. Many international markets have
government-managed health care systems that govern reimbursement for new devices
and procedures. In most markets, there are private insurance systems as well as
government-managed systems. Large-scale market acceptance of the Company's
balloon dissection systems and other products will depend on the availability
and level of reimbursement in international markets targeted by the Company.
Currently, the Company has been informed by its international distributors that
the balloon dissectors have been approved for reimbursement in many of the
countries in which the Company markets its products. Obtaining reimbursement
approvals can require 12 to 18 months or longer. There can be no assurance that
the Company will obtain reimbursement in any country within a particular time,
for a particular amount, or at all. Failure to obtain such approvals could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Regardless of the type of reimbursement system, the Company believes that
surgeon advocacy of its products will be required to obtain reimbursement.
Availability of reimbursement will depend on the clinical efficacy of the
procedure and the utility and cost of the Company's products. There can be no
assurance that reimbursement for the Company's products will be available in the
United States or in international markets under either government or private
reimbursement systems, or that surgeons will support and advocate reimbursement
for use of the Company's systems for all applications intended by the Company.
Failure by surgeons, hospitals and other users of the Company's products to
obtain sufficient reimbursement from health care payors or adverse changes in
government and private third-party payors' policies toward reimbursement for
procedures employing the Company's products could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Third-Party Reimbursement."
GOVERNMENT REGULATION
The Company's Spacemaker balloon dissection systems and other products are
subject to extensive and rigorous regulation by the FDA and, to varying degrees,
by state and foreign regulatory agencies. Under the federal Food, Drug, and
Cosmetic Act, the FDA regulates the clinical testing, manufacture, labeling,
packaging, marketing, distribution and record keeping for medical devices, in
order to ensure that medical devices distributed in the United States are safe
and effective for their intended use. Prior to commercialization, a medical
device generally must receive FDA and foreign regulatory clearance or approval,
which can be an expensive, lengthy and uncertain process. The Company is also
subject to routine inspection by the FDA and state agencies, such as the
California Department of Health Services ("CDHS"), for compliance with Good
Manufacturing Practice requirements, Medical Device Reporting requirements and
other applicable regulations. Noncompliance with applicable requirements can
result in warning letters, import detentions, fines, civil penalties,
injunctions, suspensions or losses of regulatory approvals, recall or seizure of
products, operating restrictions, refusal of the government to approve product
export applications or allow the Company to enter into supply contracts, and
criminal prosecution. Delays in receipt of, or failure to obtain, regulatory
clearances and approvals, if obtained, or any failure to comply with regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations.
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 Spacemaker I platform, Spacemaker II platform, Spacemaker
Resposable platform, and KnotMaker product each have received 510(k) clearance
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for use during general, endoscopic, laparoscopic or cosmetic and reconstructive
surgery, either when tissue dissection is required or, with respect to the
KnotMaker product, when a surgical knot for suturing is required. The Company
has promoted these products for surgical applications (E.G., hernia repair,
subfascial endoscopic perforator surgery and breast augmentation and
reconstruction), and may in the future promote these products for the dissection
or knotmaking required for additional selected applications (E.G., treatment of
stress urinary incontinence, saphenous vein harvesting and a variety of
orthopedic procedures such as anterior spinal fusion). For any medical device
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 products which the
Company believes do not affect the safety or effectiveness of the device or
constitute a major change to the intended use and therefore do not require the
submission of new 510(k) notices. There can be no assurance, however, that the
FDA will agree with any of the Company's determinations not to submit a new
510(k) notice for any of these changes or will not require the Company to submit
a new 510(k) notice for any of the changes made to the product. If such
additional 510(k) clearances are required, there can be no assurance that the
Company will obtain them on a timely basis, if at all, and delays in receipt of
or failure to receive such approvals could have a material adverse effect on the
Company's business, financial condition and results of operations. If the FDA
requires the Company to submit a new 510(k) notice for any product modification,
the Company may be prohibited from marketing the modified product until the
510(k) notice is cleared by the FDA. The Company plans to file a 510(k)
submission for its specialized trocar with a balloon valve, which provides a
seal to maintain insufflation of the surgical space during MIS. There can be no
assurance that the FDA will grant 510(k) clearance for the Company's specialized
trocar on a timely basis, if at all.
Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary widely from country to country. The Company
currently relies on its international distributors for the receipt of premarket
approvals and compliance with clinical trial requirements in those countries
that require them, and it expects to continue to rely on distributors in those
countries where the Company continues to use distributors. In the event that the
Company's international distributors fail to obtain or maintain premarket
approvals or compliance in foreign countries where such approvals or compliance
are required, the Company may be required to cause the applicable distributor to
file revised governmental notifications, cease commercial sales of its products
in the applicable countries or otherwise act so as to stop any ongoing
noncompliance in such countries. Any enforcement action by regulatory
authorities with respect to past or any future regulatory noncompliance could
have a material adverse effect on the Company's business, financial condition
and results of operations.
In order to continue selling its products within the European Economic Area
following June 14, 1998, the Company will be required to achieve compliance with
the requirements of the Medical Devices Directive (the "MDD") and to affix CE
marking on its products to attest such compliance. Failure by the Company to
comply with CE marking requirements by June 1998 would mean that the Company
would be unable to sell its products in the European Economic Area unless and
until compliance was achieved, which could have a material adverse effect upon
the Company's business, financial condition and results of operations. See
"Business -- Government Regulation."
LIMITED MANUFACTURING EXPERIENCE; UNCERTAINTY REGARDING FUTURE FACILITIES
The Company has only limited experience in manufacturing its products in
commercial quantities. The Company intends to scale up its production of new
products and to increase its manufacturing capacity for existing and new
products. However, manufacturers often encounter difficulties in scaling up
production of new products, including problems involving production yields,
quality control and assurance, component supply and shortages of qualified
personnel. Difficulties experienced by the Company in manufacturing scale-up and
manufacturing difficulties could have a material adverse
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effect on its business, financial condition and results of operations. There can
be no assurance that the Company will be successful in scaling up or that it
will not experience manufacturing difficulties or product recalls in the future.
The Company occupies a single facility in Palo Alto, California that houses
its headquarters, administrative offices, research laboratories and
manufacturing facilities. This facility is subject to a lease that expires in
March 1997. While the Company believes that this space is adequate for its
immediate needs, GSI will need to obtain additional office, development and
manufacturing space to accommodate expected business growth during 1997. There
can be no assurance that the Company will be able to obtain such additional
facilities on commercially reasonable terms, or at all. If the Company is able
to lease such additional space, there can be no assurance that the Company will
be able to establish and certify adequate manufacturing capacity in a timely
manner, or at all, in such space. Failure to obtain additional space or
establish and certify adequate manufacturing capacity in a timely manner could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Manufacturing" and "-- Facilities."
DEPENDENCE ON SINGLE SOURCE SUPPLIERS; LACK OF CONTRACTUAL ARRANGEMENTS
The Company currently relies upon single source suppliers for several
components of its balloon dissection products, and in most cases there are no
formal supply contracts. There can be no assurance that the component materials
obtained from single source suppliers will continue to be available in adequate
quantities or, if required, that the Company will be able to locate alternative
sources of such component materials on a timely basis to market its products. In
addition, there can be no assurance that the single source suppliers will meet
the Company's future requirements for timely delivery of products of sufficient
quality and quantity. The failure to obtain sufficient quantities and qualities
of such component materials, or the loss of any of the Company's single source
suppliers, could cause a delay in GSI's ability to fulfill orders while it
identifies and certifies a replacement supplier, and could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Manufacturing."
FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE
AVAILABLE
The Company's capital requirements will depend on numerous factors,
including the progress of the Company's marketing-related clinical evaluations
and product development programs; the receipt of, and the time required to
obtain, regulatory clearances and approvals; the resources the Company devotes
to the development, manufacture and marketing of its products; the resources
required to hire and develop a direct sales force to supplement its independent
distributors and to expand manufacturing capacity; facilities requirements;
market acceptance and demand for its products; and other factors. The timing and
amount of such capital requirements cannot be accurately predicted.
Consequently, although the Company believes that the proceeds of this offering
will provide adequate funding for its capital requirements through calendar
1997, the Company may be required to raise additional funds through public or
private financings, collaborative relationships or other arrangements earlier
than expected. There can be no assurance that the Company will not require
additional funding or that such additional funding, if needed, will be available
on terms attractive to the Company, or at all. Any additional equity financings
may be dilutive to shareholders, and debt financing, if available, may involve
restrictive covenants. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
PRODUCT LIABILITY RISK AND PRODUCT RECALL; LIMITED INSURANCE COVERAGE
The Company's business exposes it to potential product liability risks or
product recalls that are inherent in the design, development, manufacture and
marketing of medical devices, in the event the use of the Company's products is
alleged to have caused adverse effects on a patient or such products are
believed to be defective. The Company's products are designed to be used in
certain procedures where there is a high risk of serious injury or death. Such
risks will exist even with respect to those products that have received, or may
in the future receive, regulatory clearance for commercial sale. As
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a result, there can be no assurance that the Company's product liability
insurance is adequate or that such insurance coverage will continue to be
available on commercially reasonable terms or at all. Particularly given the
lack of data regarding the long-term results of the use of balloon dissection
products, there can be no assurance the Company will avoid significant product
liability claims. Consequently, a product liability claim or other claim with
respect to uninsured or underinsured liabilities could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Product Liability and Insurance."
RISKS ASSOCIATED WITH INTERNATIONAL SALES
Sales outside of the United States accounted for approximately 2%, 3% and 2%
of the Company's sales in fiscal 1994, fiscal 1995 and the nine months ended
March 31, 1996, respectively, and the Company expects that international sales
will represent an increasing portion of revenue in the future. The Company
intends to continue to expand its sales outside of the United States and to
enter additional international markets, which will require significant
management attention and financial resources and subject the Company further to
the risks of selling internationally. These risks include unexpected changes in
regulatory requirements, tariffs and other barriers and restrictions, reduced
protection for intellectual property rights, and the burdens of complying with a
variety of foreign laws. In addition, because all of the Company's sales are
denominated in U.S. dollars, fluctuations in the U.S. dollar could increase the
price in local currencies of the Company's products in foreign markets and make
the Company's products relatively more expensive than competitors' products that
are denominated in local currencies. There can be no assurance that regulatory,
currency and other factors will not adversely impact the Company's operations in
the future or require the Company to modify its current business practices. See
"Business -- Marketing, Sales and Distribution."
DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL
The Company is dependent upon a limited number of key management and
technical personnel. The loss of the services of one or more of such key
employees could have a material adverse effect on the Company's business,
financial condition, and results of operations. In addition, the Company's
success will be dependent upon its ability to attract and retain additional
highly qualified sales, management, manufacturing and research and development
personnel. The Company faces intense competition in its recruiting activities
and there can be no assurance that the Company will be able to attract and/or
retain qualified personnel. See "Management."
CONTROL BY OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS
Following completion of this offering, directors, executive officers and
principal shareholders of the Company, will beneficially own approximately 35%
of the outstanding shares of the Company's Common Stock. Accordingly, these
persons, individually and as a group, may be able to effectively control the
Company and direct its affairs and business, including any determination with
respect to a change in control of the Company, future issuances of Common Stock
or other securities by the Company, declaration of dividends on the Common Stock
and the election of directors. See "Principal Shareholders."
BROAD MANAGEMENT DISCRETION IN ALLOCATION OF PROCEEDS
The Company expects to use approximately $17.3 million, or 45%, of the net
proceeds of this offering for working capital and general corporate purposes and
has not yet allocated such proceeds to any specific purpose. The Company's
management will, therefore, retain broad discretion as to the allocation of a
significant portion of the net proceeds of this offering, including but not
limited to allocating such proceeds to the funding of additional sales and
marketing, research and development, marketing-related clinical evaluations, and
other general corporate purposes. See "Use of Proceeds."
EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS; CHANGE OF CONTROL
Upon completion of this offering, the Board of Directors will have authority
to issue up to 2,000,000 shares of preferred stock and to fix the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the shareholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any 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
15
<PAGE>
purposes, may have the effect of delaying, deferring or preventing a change in
control of the Company, may discourage bids for the Common Stock at a premium
over the market price of the Common Stock and may adversely affect the market
price of and the voting and other rights of the holders of the Common Stock. The
Company's Board of Directors has also approved amendments to the Company's
Articles of Incorporation and Bylaws to provide (subject to shareholder
approval), among other things, the elimination of actions to be taken by the
Company's shareholders by written consent and certain procedures, including
advance notice procedures with regard to the nomination of candidates for
election as directors, other than by or at the direction of the Board of
Directors. The foregoing provisions could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, a majority of the outstanding voting stock of the
Company, and may make more difficult or discourage a takeover of the Company.
See "Description of Capital Stock."
From time to time, the Company has had discussions with third parties
regarding various strategic relationships, including the potential sale of the
Company, although the Company currently has no commitments with respect to any
such relationships. The Company may continue to have discussions regarding
potential strategic relationships in the future, however, there can be no
assurance that any such strategic relationship will occur.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of shares of Common Stock (including shares issued upon the exercise
of outstanding options) in the public market after this offering could adversely
affect the market price of the Common Stock. Such sales also might make it more
difficult for the Company to sell equity securities or equity-related securities
in the future at a time and price that the Company deems appropriate. Upon
completion of this offering, the Company will have approximately 12,653,342
shares of Common Stock outstanding. The 3,000,000 shares offered hereby will be
freely tradable without restriction. The remaining approximately 9,653,342
shares are restricted securities that may be sold only if registered under the
Securities Act or sold in accordance with an applicable exemption from
registration, such as Rule 144 promulgated under the Securities Act. None of
these shares will be available for sale upon the effective date of the
Registration Statement of which this Prospectus is a part (the "Effective
Date"). Beginning 180 days after the Effective Date upon the expiration of
agreements not to sell such shares (the "Lock-up Agreements"), approximately
7,498,171 shares and 428,538 shares subject to vested stock options will become
eligible for sale, subject to the provisions of Rule 144(k), Rule 144 or Rule
701 promulgated under the Securities Act. See "Shares Eligible for Future Sale."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common Stock
and there can be no assurance that an active public market for the Common Stock
will develop or be sustained after this offering. The initial public offering
price will be determined through negotiations between the Company and the
Underwriters. See "Underwriting." In addition, the securities markets have from
time to time experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. The market
prices of the common stock of many publicly held medical device companies have
in the past been, and can in the future be expected to be, especially volatile.
Announcements of technological innovations or new products by the Company or its
competitors, clinical marketing trial results, release of reports by securities
analysts, developments or disputes concerning patents or proprietary rights,
regulatory developments, changes in regulatory or medical reimbursement
policies, economic and other external factors, as well as period-to-period
fluctuations in the Company's financial results, may have a significant impact
on the market price of the Common Stock.
DILUTION; ABSENCE OF DIVIDENDS
Purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in net tangible book value per share. Such
investors will experience additional dilution upon the exercise of outstanding
options. The Company has never paid dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. See "Dilution"
and "Dividend Policy."
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby are estimated to be approximately $38,260,000
($44,119,000 if the Underwriters' over-allotment option is exercised in full),
at an assumed initial public offering price of $14.00 per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company.
The Company anticipates that it will use approximately $9 million of the net
proceeds of this offering to expand sales and marketing activities (which are
expected to include the development of direct sales capabilities in selected
markets to supplement the Company's independent distributors), approximately $6
million to fund the Company's research and development efforts, including
capital expenditures, approximately $3 million to fund marketing-related
clinical evaluations in support of regulatory approvals and marketing efforts
and approximately $3 million for expansion and development of manufacturing and
other facilities. The Company will use the remaining approximately $17.3 million
of the net proceeds for working capital and general corporate purposes. The
Company also may use a portion of the net proceeds to acquire businesses,
technologies or products complementary to the Company's business, although the
Company currently has no specific plans or commitments in this regard. The
amounts actually expended for each purpose may vary significantly depending upon
numerous factors, including the progress of the Company's marketing-related
clinical evaluations and actions related to regulatory matters, and the costs
and timing of expansion of marketing, sales and manufacturing activities. The
Company's management will have particularly broad discretion to allocate that
portion of the net proceeds of this offering estimated to be expended for
working capital and general corporate purposes. Pending such uses, the Company
intends to invest the net proceeds of this offering in interest-bearing,
investment grade securities. See "Risk Factors -- Broad Management Discretion in
Allocation of Proceeds."
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its capital stock
since inception and does not expect to pay any cash dividends in the foreseeable
future. The Company currently intends to retain any future earnings for use in
the operation of its business. In addition, the Company's current credit
arrangements prohibit the payment of cash dividends on the Company's capital
stock.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996 (i) on an actual basis and (ii) as adjusted to reflect the automatic
conversion of the outstanding shares of Preferred Stock of the Company into
Common Stock and the sale of 3,000,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $14.00 per share
(after deducting estimated underwriting discounts and commissions and offering
expenses payable by the Company). This table should be read in conjunction with
the Consolidated Financial Statements and related Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Notes payable........................................................................... $ 250 --
----------
Convertible redeemable preferred stock.................................................. 15,547 --
----------
Shareholders' equity (deficit):
Preferred stock, $.001 par value pro forma, 2,000,000 shares authorized, none issued
and outstanding...................................................................... -- --
Common Stock, $.001 par value, 10,000,000 shares authorized, 3,753,007 shares issued
and outstanding actual; pro forma 50,000,000 shares authorized, 12,653,342 shares
issued and outstanding as adjusted (1)............................................... 4 13
Additional paid-in capital............................................................ 2,142 56,190
Accumulated deficit................................................................... (13,787) (13,787)
Notes receivable from shareholders.................................................... (120) (120)
Deferred compensation................................................................. (530) (530)
---------- -----------
Total shareholders' equity (deficit)................................................ (12,291) 41,766
---------- -----------
Total capitalization.............................................................. $ 3,506 $ 41,766
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) Based on the number of shares outstanding as of March 31, 1996. Assumes no
exercise of the Underwriters' over-allotment option. Reflects a 1.37-for-one
split of the Company's capital stock approved in March 1996, the conversion
of all outstanding shares of convertible redeemable preferred stock of the
Company into an aggregate of 5,833,698 shares of Common Stock upon the
closing of this offering and assumes the conversion of notes payable into
66,637 shares of the Company's Common Stock. Excludes 1,133,266 shares of
Common Stock issuable upon exercise of stock options outstanding as of March
31, 1996 under the Company's stock option plans.
18
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1996,
was $3.2 million, or $0.33 per share. Pro forma net tangible book value per
share represents the amount of the Company's total tangible assets less total
liabilities, divided by the number of outstanding shares of Common Stock
outstanding after giving effect to the conversion of all outstanding shares of
Convertible Redeemable Preferred Stock, into Common Stock upon closing of this
offering. Net tangible book value dilution per share represents the difference
between the amount per share paid by purchases of shares of Common Stock in the
offering made hereby and the net tangible book value per share of Common Stock
immediately after the completion of this offering. After giving effect to the
sale by the Company of the 3,000,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $14.00 per share and after deduction of
estimated underwriting discounts and commissions and estimated offering expenses
payable by the Company, the Company's pro forma net tangible book value at March
31, 1996 would have been approximately $41,483,000, or $3.28 per share of Common
Stock. This represents an immediate increase in pro forma net tangible book
value of $2.95 per share to existing shareholders and an immediate dilution of
$10.72 per share to investors purchasing shares of Common Stock in this
offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $ 14.00
Pro forma net tangible book value per share at March 31, 1996..... $ 0.33
Increase per share attributable to new investors.................. 2.95
---------
Pro forma net tangible book value per share after this offering... 3.28
---------
Dilution to new investors........................................... $ 10.72
---------
---------
</TABLE>
The following table sets forth the number of shares of Common Stock
purchased from the Company, the total consideration paid and the average price
per share paid by existing shareholders and to be paid (at an assumed initial
public offering price of $14.00 per share) by purchasers of shares offered by
the Company hereby (before deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------------- --------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------------- ----------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders........................... 9,653,342 76.3% $ 15,151,022 26.5% $ 1.57
New shareholders................................ 3,000,000 23.7 42,000,000 73.5% 14.00
-------------- ----- -------------- -----
Total....................................... 12,653,342 100.0% $ 57,151,022 100.0%
-------------- ----- -------------- -----
-------------- ----- -------------- -----
</TABLE>
The foregoing calculations assume no exercise of outstanding options. As of
March 31, 1996, there were 1,133,266 shares of Common Stock reserved for
issuance upon exercise of outstanding options. To the extent such options are
exercised, there will be further dilution to investors in this offering. See
"Management -- Stock Options."
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company is
qualified by reference to and should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and
with the Company's consolidated financial statements and notes thereto included
elsewhere in this Prospectus. The consolidated statements of operations data for
each of the three years in the period ended June 30, 1995 and nine months ended
March 31, 1996 and the related consolidated balance sheet data as of June 30,
1993, 1994, 1995 and March 31, 1996, are derived from, or are qualified by
reference to, the audited consolidated financial statements included elsewhere
in this Prospectus. The unaudited consolidated financial statements have been
prepared by the Company on a basis consistent with the Company's audited
consolidated financial statements and in the opinion of management include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information. Results for the nine-month period ended
March 31, 1996 may not necessarily be indicative of results for the full year
ending June 30, 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
------------------------------- ----------------------
1993 1994 1995 1996
--------- --------- --------- ---------
1995
-----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Sales................................................... $ -- $ 789 $ 2,437 $ 1,805 $ 3,421
Cost of sales........................................... -- 600 1,262 908 1,654
--------- --------- --------- ----------- ---------
Gross profit.......................................... -- 189 1,175 897 1,767
Operating expenses:
Research and development.............................. 750 496 975 735 864
Sales and marketing................................... 42 1,532 2,859 1,965 2,578
General and administrative............................ 398 1,338 1,400 1,127 1,120
Write-off of acquired in-process research and
development.......................................... 2,791
--------- --------- --------- ----------- ---------
Total operating expenses............................ 1,190 3,366 5,234 3,827 7,353
--------- --------- --------- ----------- ---------
Loss from operations.................................... (1,190) (3,177) (4,059) (2,930) (5,586)
Interest and other income (expense), net................ 18 58 8 (6) 151
--------- --------- --------- ----------- ---------
Net loss................................................ $ (1,172) $ (3,119) $ (4,051) $ (2,936) $ (5,435)
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Pro forma net loss per share (2)........................ $ (0.40) $ (0.53)
Shares used in computing pro forma net loss
per share (2).......................................... 10,241 10,301
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
------------------------------- --------------
1993 1994 1995 1996
--------- --------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 336 $ 2,301 $ 4,541 $ 3,904
Working capital............................................. 169 2,516 4,457 2,788
Total assets................................................ 560 3,525 6,245 6,708
Convertible redeemable preferred stock...................... 1,462 6,841 13,225 15,547
Total shareholders' equity (deficit)........................ (1,161) (4,279) (8,316) (12,291)
</TABLE>
- ------------------------
(1) The Company did not conduct material operations from April 13, 1992, the
Company's inception date, through June 30, 1992. Operating expenses were not
material and approximated $10,000 for the period and, therefore, financial
data for this period is not presented.
(2) See Note 14 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used to compute pro forma net
loss per share.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
Since its inception in April 1992, GSI has been engaged in the development,
manufacturing and marketing of balloon dissection systems and related minimally
invasive surgical instruments. The Company began commercial sales of its balloon
dissection systems for hernia repair in September 1993. To date, the Company has
received from the FDA four 510(k) clearances for use of the Company's technology
to perform dissection of tissue planes anywhere in the body using a broad range
of balloon sizes and shapes. The Company currently sells products in the United
States and certain other countries, including the United Kingdom, Germany and
France, for selected applications, such as hernia repair, saphenous endoscopic
perforator surgery and breast augmentation and reconstruction surgery.
In March 1994, the Company entered into a distribution agreement with USSC
providing USSC with limited exclusive rights to distribute the Company's balloon
dissection systems in the hernia repair market in both the United States and
certain international countries, and USSC is obligated to purchase minimum
quantities of the Company's products. Substantially all of the Company's
revenues have been derived from sales to USSC, which include sales to
Autosuture, Inc., a subsidiary of USSC, with USSC representing approximately
68%, 75% and 87% of the Company's total net revenues for fiscal 1994 and 1995
and the nine months ended March 31, 1996, respectively. Sales outside of the
United States accounted for approximately 2%, 3% and 2% of the Company's sales
in fiscal 1994, fiscal 1995 and the nine months ended March 31, 1996,
respectively, and the Company expects that international sales will represent an
increasing portion of revenue in the future. The Company records all sales to
USSC as domestic sales; however, sales of the Company's products by USSC include
sales to European and other foreign countries, made through Autosuture. The
Company's sales to USSC have fluctuated significantly in the past, and the
Company anticipates that such sales could fluctuate in the future. In addition,
the distribution agreement with USSC expires in March 1997, and there can be no
assurance that such agreement will be renewed on the same or similar terms. A
significant reduction in orders from USSC or a failure to renew the agreement
with USSC could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Dependence
Upon Key Distributor; Limited Marketing and Direct Sales Experience."
Additional sales in the United States are currently made through a small
direct sales force. The Company currently sells its products in international
markets through a limited number of distributors who resell to surgeons and
hospitals. The Company plans to increase its direct sales force in the United
States and may seek to establish a direct sales force in one or more other
countries in the future. Any increase in the Company's direct sales force will
require significant expenditures and additional management resources. There can
be no assurance that any such direct sales force, if established, will be
successful.
To date, all of the sales to USCC and other distributors and almost all of
the sales by the Company's direct sales force have been for use in hernia repair
procedures. While the Company has developed balloon dissection systems for other
applications, sales of products for hernia repair are expected to provide a
majority of the Company's revenues at least through fiscal 1997. There can be no
assurance that the Company will be successful in generating sales of such
products for any other applications.
The Company has acquired a significant number of patent rights from third
parties, including rights that apply to the Company's current balloon dissection
systems. The Company has historically
21
<PAGE>
paid and is obligated to pay in the future to such third parties royalties equal
to 4% of sales of such products, which payments are expected to exceed certain
minimum royalty payments due under agreements with such parties. The Company has
also acquired patent rights under royalty-bearing agreements with respect to
certain surgical instruments, including the KnotMaker product and the balloon
valve trocar currently under development.
In February 1996, the Company acquired Adjacent Surgical, Inc., a company
engaged in the development of balloon dissection systems for use in vascular
applications. The transaction resulted in a one-time expense related to
in-process research and development of approximately $2.8 million, in the
quarter ending March 31, 1996. See "Management -- Certain Transactions." From
time to time, the Company has had discussions with third parties regarding
various strategic relationships, including the potential sale of the Company,
although the Company currently has no commitments with respect to any such
relationships. The Company may continue to have discussions regarding potential
strategic relationships in the future. However, there can be no assurance that
any such strategic relationship will occur.
The Company has a limited history of operations and has experienced
significant operating losses since inception. The Company expects such operating
losses to continue at least through calendar 1996. The increase in the Company's
sales to date has been due to demand for the Company's balloon dissector systems
principally for hernia repair. In order to support increased levels of sales in
the future and to augment its long-term competitive position, including the
development of balloon dissection systems for other applications, the Company
anticipates that it will be required to make significant additional expenditures
in manufacturing, research and development (including marketing related clinical
evaluations), sales and marketing and administration. In addition, the Company
anticipates higher administration expenses resulting from its obligations as a
public reporting company upon completion of this offering.
The Company anticipates that its results of operations may fluctuate for the
foreseeable future due to several factors, including purchases of the Company's
products by USSC, the status of the Company's relationship with USSC or other
partners, the mix of sales among the distributors and the Company's direct sales
force, timing of new product introductions or transitions to new products, the
margins recognized from products for various surgical procedures, the progress
of marketing-related clinical evaluations, the introduction of competitive
products (including pricing pressures), activities related to patents and patent
approvals (including litigation) and regulatory and third-party reimbursement
matters, the Company's ability to manufacture its products efficiently, and the
timing of research and development expenses (including marketing-related
clinical evaluations). In addition, the Company's results of operations could be
affected by the timing of orders from distributors, expansion of the Company's
distributor network, the ability of the Company's distributors to effectively
promote the Company's products and the ability of the Company to quickly and
cost effectively increase its direct domestic sales force. The Company's limited
operating history makes accurate prediction of future operating results
difficult or impossible. Although the Company has experienced sales growth in
recent periods, there can be no assurance that, in the future, the Company will
sustain sales growth or gain profitability on a quarterly or annual basis or
that its growth will be consistent with predictions made by securities analysts.
The Company currently manufactures and ships product shortly after the
receipt of orders, and anticipates that it will do so in the future.
Accordingly, the Company has not developed a significant backlog and does not
anticipate that it will develop a material backlog in the future.
22
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1996 AND 1995
SALES. Sales increased by 90% to $3.4 million in the first nine months of
fiscal 1996 from $1.8 million in the first nine months of fiscal 1995. This
increase was due primarily to the growth in unit sales of the Spacemaker I
platform to USSC for the hernia market and, to a lesser extent, from sales of
the Spacemaker II platform, which was introduced in October 1995.
COST OF SALES. Cost of sales increased by 82% to $1.7 million in the first
nine months of fiscal 1996 from $908,000 in the first nine months of fiscal
1995, and decreased as a percentage of sales to 48% in the 1996 period from 50%
in the 1995 period. This increase in absolute dollars was primarily a result of
the costs of additional manufacturing capacity and personnel necessary to
support increased sales volume, which was offset by leveraging certain fixed
overhead expenses across a higher base of sales. The cost of sales includes
royalties paid to certain patent inventors of 4% of certain net sales of the
Company's balloon dissection systems.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses, which
include expenditures for marketing-related clinical evaluations and regulatory
expenses, increased by 17% to $863,000 in the first nine months of fiscal 1996
from $735,000 in the first nine months of fiscal 1995 and decreased as a
percentage of sales to 25% in the 1996 period from 41% in the 1995 period. The
Company expects research and development expenses to increase in absolute
dollars as the Company pursues development of new products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 20% to $3.7 million in the first nine
months of fiscal 1996 from $3.1 million in the first nine months of fiscal 1995.
This increase was primarily due to the growth of a direct sales force in the
United States and the growth in marketing and other personnel associated with
the Company's higher levels of operations. The Company expects selling, general
and administrative expenses to continue to increase in absolute dollars as the
Company's level of sales and manufacturing operations increases and as the
Company increases its finance and administrative expenditures to meet its
obligations as a public reporting company.
NET LOSS. The Company had a net loss of $5.4 million in the nine months
ended March 31, 1996 compared to a net loss of $2.9 million in the nine months
ended March 31, 1995. This net loss reflected a one-time expense related to the
write-off of acquired research and development of $2.8 million, incurred in
connection with the Company's acquisition of Adjacent Surgical, Inc. in February
1996. See "-- Overview."
YEARS ENDED JUNE 30, 1995 AND 1994
SALES. Sales increased by 209% to $2.4 million in fiscal 1995 from $789,000
in fiscal 1994. This increase was due primarily to an increase in unit sales of
the Spacemaker I platform to USSC for the hernia market.
COST OF SALES. Cost of sales increased by 110% to $1.3 million in fiscal
1995 from $600,000 in fiscal 1994 and decreased as a percentage of sales to 52%
in the 1995 fiscal year from 76% in the 1994 fiscal year. This increase in
absolute dollars was primarily a result of the increased volume of products sold
and, to a lesser extent, the costs of additional manufacturing capacity and
personnel necessary to support increased sales volume. The increased volume of
products sold also resulted in the decrease in cost of sales as a percentage of
sales, as certain fixed overhead expenses were leveraged across a higher sales
base.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by 97% to $975,000 in fiscal 1995 from $496,000 in fiscal 1994 and
decreased as a percentage of sales to 40% in the 1995 fiscal year from 63% in
the 1994 fiscal year. The increase in absolute dollars was primarily
attributable to the addition of research and development personnel and related
use of supplies and
23
<PAGE>
inventory, and increased levels of spending associated with developing versions
of the Spacemaker platform primarily for the cosmetic and reconstructive surgery
market. The decrease as a percentage of sales was the result of higher sales in
fiscal 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 48% to $4.3 million in fiscal 1995 from
$2.9 million in fiscal 1994. This increase was primarily attributable to the
result of the establishment of a direct sales force in the United States, patent
and related litigation expenses, and additional costs of marketing and other
personnel necessary to support the higher level of operations.
NET LOSS. The Company had a net loss of $4.1 million in fiscal 1995
compared to $3.1 million in fiscal 1994.
YEARS ENDED JUNE 30, 1994 AND JUNE 30, 1993
SALES. Sales commenced in fiscal year 1994 with commercial sales starting
in September 1993. As a result, the Company had sales of $789,000 in fiscal
1994, primarily attributable to sales of the Spacemaker I platform to USSC for
hernia repair.
COST OF SALES. Cost of sales in fiscal year 1994 were $600,000. The
expenses were principally attributable to the commencement of manufacturing of
the Company's Spacemaker I platform.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased by
34% to $496,000 in fiscal 1994 from $750,000 in fiscal 1993. The decrease in
absolute dollars was primarily attributable to decreases in research and
development personnel and expenses associated with introduction of the Company's
Spacemaker I platform in September 1993.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $2.9 million in fiscal 1994 from $440,000
in fiscal 1993, primarily as the result of expenses associated with patent and
related litigation expenses and increased personnel and marketing costs.
NET LOSS. The Company had a net loss of $3.1 million in fiscal 1994
compared to $1.2 million in fiscal 1993.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited consolidated results of
operations for the four quarterly periods through March 31, 1996, as well as
such data expressed as a percentage of the Company's sales for the quarters
presented. This information has been derived from unaudited financial statements
that, in the opinion of management, reflect all adjustments (consisting only of
normally recurring adjustments) necessary to fairly present this information
when read in conjunction with the consolidated financial statements and notes
thereto incorporated by reference herein. The results of operations for any
quarter are not necessarily indicative of the results to be expected for any
future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1995 1995 1995 1996
--------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales..................................................... $ 632 $ 491 $ 1,217 $ 1,713
Cost of sales............................................. 354 334 586 734
--------- --------- --------- -----------
Gross profit............................................ 278 157 631 979
Operating expenses:
Research and development................................ 240 202 278 384
Sales and marketing..................................... 893 755 998 825
General and administrative.............................. 273 311 395 414
Write-off of acquired in-process research and
development............................................ 2,791
--------- --------- --------- -----------
Total operating expenses.............................. 1,406 1,268 1,671 4,414
--------- --------- --------- -----------
Loss from operations...................................... (1,128) (1,111) (1,040) (3,435)
Interest and other income (expense)....................... 13 63 25 63
--------- --------- --------- -----------
Net loss.................................................. $ (1,115) $ (1,048) $ (1,015) $ (3,372)
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1995 1995 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
AS A PERCENTAGE OF SALES:
Sales................................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales........................................ 56.0 68.0 48.2 42.8
----------- ----------- ----------- -----------
Gross profit....................................... 44.0 32.0 51.8 57.2
Operating expenses:
Research and development........................... 38.0 41.1 22.8 22.4
Sales and marketing................................ 141.3 153.8 82.0 48.2
General and administrative......................... 43.2 63.4 32.5 24.2
Write-off of acquired in-process research and
development....................................... 162.9
----------- ----------- ----------- -----------
Total operating expenses......................... 222.5 258.3 137.3 257.7
----------- ----------- ----------- -----------
Loss from operations................................. (178.5) (226.3) (85.5) (200.5)
Interest and other income (expense).................. 2.1 12.8 2.1 3.7
----------- ----------- ----------- -----------
Net loss............................................. (176.4)% (213.5)% (83.4)% (196.8)%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Results of the Company's operations may fluctuate significantly from quarter
to quarter and will depend on numerous factors, including (i) new product
introductions by the Company and its competitors and the resulting product
transitions, (ii) the rate of adoption by surgeons of balloon dissection
technology in markets targeted by the Company, (iii) the sales efforts of the
Company's distributors, (iv) the mix of sales among distributors and the
Company's direct sales force, (v) timing of patent and regulatory approvals,
(vi) timing of operating expenditures, (vii) the Company's ability to
manufacture its products efficiently, (viii) timing of research and development
expenses, including marketing-related clinical evaluation expenditures, (ix)
intellectual property litigation and (x) general market conditions. The
Company's sales in any period are highly dependent upon the marketing efforts
and success of USSC, which are not within the control of the Company. From time
to time, the Company and USSC have had disagreements regarding the extent of
USSC's right under the distribution agreement to distribute new products
developed by the Company after the date of such agreement. The Company's sales
to USSC have fluctuated significantly in the past, and the Company anticipates
that such sales could fluctuate in the future. For example, purchases by USSC
declined substantially in the quarter ended September 30, 1995, and then
increased substantially in the subsequent quarter ended December 31, 1995.
Accordingly, any decline in purchases by USSC could result in a decline of sales
and adversely affect the Company's operating results. In addition, announcements
or expected announcements by the Company, its competitors or its distributors of
new products, new technologies or pricing changes could cause existing or
potential customers of the Company to defer purchases of the Company's existing
products and could alter the mix of products sold by the Company, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that future products or
product enhancements will be successfully introduced or that such introductions
will not adversely affect the demand for existing products. As a result of these
and other factors, the Company's quarterly operating results have fluctuated in
the past, and the Company expects that such results may fluctuate in the future.
Due to such quarterly fluctuations in operating results, quarter-to-quarter
comparisons of the Company's operating results are not necessarily meaningful
and should not be relied upon as indicators of likely future performance or
annual operating results. In addition, the Company's limited operating history
makes accurate prediction of future operating results difficult or impossible to
make. There can be no assurance that in the future the Company will achieve
revenue growth or become profitable on a quarterly or annual basis or that its
growth will be consistent with predictions by securities analysts and investors.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's cash expenditures have significantly exceeded
its sales, resulting in an accumulated deficit of $13.8 million at March 31,
1996. The Company has funded its operations since inception primarily through
the private placement of equity securities, as well as through interest income,
equipment financing and secured loan arrangements. Through March 31, 1996, the
Company had raised approximately $15.2 million from the private placement of
equity securities.
As of March 31, 1996, the Company's principal sources of liquidity included
$3.9 million in cash and cash equivalents, an aggregate of $2.8 million in
working capital, and a credit facility of $1.5 million. The credit facility is
collateralized by substantially all of the Company's assets. Borrowings under
the line of credit bear interest at the bank's prime rate plus 1.0%. The Company
had borrowings of $500,000 under this agreement at March 31, 1996. The credit
facility expires on March 31, 1997. In addition, the Company has $300,000 and
$700,000 secured equipment loans, which bear interest at the bank's prime rate
plus 1.75% and 1.25%, respectively. At March 31, 1996, the Company owed
approximately $215,000 and $286,000, respectively, under such equipment loans.
Net cash used in operating activities was $3.8 million, $3.2 million and
$1.0 million during fiscal 1995, 1994 and 1993, respectively. This cash was used
primarily to fund increasing levels of the continued marketing of the Spacemaker
product line in the United States and internationally, general and
administrative expenses to support increased operations, research and
development of the Company's products, patent and related litigation expenses,
and development of a direct sales force.
The Company expects to incur substantial additional costs, including costs
related to increased sales and marketing activities, increased research and
development, expenditures in connection with seeking regulatory approvals and
conducting additional marketing-related clinical evaluations, capital equipment
and other costs associated with expansion of the Company's manufacturing
capabilities. While the Company believes that the proceeds from this offering,
together with existing funds and funds expected to be generated from operations,
will be sufficient to meet its projected working capital and other cash
requirements through calendar 1997, there can be no assurance that the Company
will not require additional financing within this time frame. The Company may
seek additional equity or debt financing to address its working capital needs or
to provide funding for capital expenditures. However, there can be no assurance
that events in the future will not require the Company to seek additional
capital sooner or, if so required, that such capital will be available on terms
acceptable to the Company.
INCOME TAXES
The Company has not generated any net income to date and therefore has not
paid any federal income taxes since its inception. The Company accounts for
income taxes under Statement of Financial Accounting Standards No. 109 ("FAS
109"). Realization of deferred tax assets is dependent on future earnings, if
any, the timing and amount of which are uncertain. Accordingly, valuation
allowances, in amounts equal to the net deferred tax assets as of June 30, 1995
and 1994 and March 31, 1996 have been established in each period to reflect
these uncertainties.
At March 31, 1996, the Company had federal and state net operating loss
carryforwards of $8.4 million and $3.7 million, respectively, that will expire
at various dates beginning in 1998 through 2010, if not utilized. Utilization of
net operating loss and tax credit carryforwards may be subject to a substantial
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986, as amended, and similar state provisions. The
annual limitation may result in the expiration of net operating loss and tax
credit carryforwards before full utilization.
26
<PAGE>
RECENT PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement No.
121 ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS
TO BE DISPOSED OF (SFAS No. 121) which requires the Company to review for
impairment long-lived assets and intangibles whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In certain situations, an impairment loss would be recognized. SFAS
121 will become effective for the Company's 1997 fiscal year. The Company has
studied the implications of the statement, and based on its initial evaluation,
does not expect it to have a material impact on the Company's financial
condition or results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS No. 123), which
establishes a fair value based method of accounting for stock-based compensation
plans and requires additional disclosures for those companies that elect not to
adopt the new method of accounting. While the Company studies the impact of the
pronouncement, it continues to account for employees' stock options under APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. SFAS No. 123 will be
effective for the Company's 1997 fiscal year.
27
<PAGE>
BUSINESS
OVERVIEW
General Surgical Innovations, Inc. ("GSI" or the "Company") develops,
manufactures and sells balloon dissection systems for minimally invasive surgery
("MIS"). Each of GSI's proprietary Spacemaker balloon dissection systems
consists of an access and deployment platform and a balloon dissector. By using
the Company's products, surgeons can access a surgical site in a minimally
invasive manner and can rapidly and relatively atraumatically create a working
space at the target surgical site where no space previously existed. The
Company's balloon dissection systems currently are offered in four access and
deployment platforms, along with 14 different balloon shapes and sizes, which
are specifically designed for various surgical techniques, procedure types and
market segments. The Company commenced commercial sales of its first product,
the Spacemaker I for hernia repair, in September 1993 and to date almost all of
the Company's revenues have been derived from sales of products for this
procedure, primarily pursuant to a distribution agreement with United States
Surgical Corporation ("USSC"). The Company currently sells products in the
United States and certain other countries, including the United Kingdom, Germany
and France, for selected applications, including hernia repair, subfascial
endoscopic perforator surgery ("SEPS") and breast augmentation and
reconstruction. Over the next 18 months, the Company anticipates completing
marketing-related clinical evaluations of and launching products for several new
applications, including treatment of stress urinary incontinence, saphenous vein
harvesting and anterior spinal fusion.
INDUSTRY BACKGROUND
Open surgery is an invasive procedure that generally requires large
incisions and significant tissue manipulation in order to provide the surgeon
with direct access to the intended surgical site. Much of the trauma suffered in
connection with open surgery is a result of gaining access to the surgical site
and is not caused by the surgical repair itself. For example, the surgeon often
must make large incisions through layers of muscle and tissue, which may cause
muscle or nerve damage, bleeding, scarring and other complications such as
infection, temporary or permanent debilitation and pain. As a result, many open
surgical procedures require extended operating times, expose the patient to the
risks of general anesthesia and involve lengthy hospitalization and patient
recovery times. In addition, because of the severe trauma often associated with
open surgical procedures, a significant population of patients, which includes
the elderly and weak, are not considered good candidates for these surgical
procedures, and are thus deprived of treatment.
In order to reduce the complications associated with open surgery, surgical
techniques referred to as MIS have been developed recently. These techniques
allow surgeons to access the surgical site through the body's natural openings
(E.G. mouth, urethra or rectum) or by making small incisions to access body
cavities such as the abdominal cavity (the "peritoneum"). The performance of MIS
generally involves five basic steps. First, a small incision (approximately 1-2
cm) is made for insertion of each trocar, a valved tube with a blunt or sharp
insertion device. Next, one or more trocars are inserted to gain access to the
surgical site and provide a port through which a surgeon can pass surgical
instruments. Third, the surgeon creates a working space through the use of
dissection tools or by insufflating a natural body cavity (such as the
peritoneum). Fourth, the surgeon utilizes a device such as an endoscope or
laparoscope to visualize the surgical field. Finally, the surgeon utilizes
specialized MIS instruments to perform the surgical procedure.
The benefits of MIS as compared to open surgery generally include reduced
patient trauma (including muscle, nerve and other tissue damage), reduced blood
loss, reduced post-operative infection, reduced scarring at the site of the
incision (which in turn reduces reintervention requirements), shorter patient
recovery time, shorter patient recovery time, reduced procedure time and
ultimately lower medical costs.
As a result of these benefits, MIS has been increasingly used for surgical
procedures. In particular, surgical techniques for gallbladder removal
("cholecystectomy") have experienced high conversion rates from open surgery to
minimally invasive laparoscopic surgery. By 1995, approximately 93% of
28
<PAGE>
the estimated 857,000 cholecystectomies performed in the United States were
performed laparoscopically compared to none in 1988. A number of retrospective
studies have reported that laparoscopic cholecystectomy causes less
postoperative pain, involves shorter periods of post-procedure hospitalization,
and allows a more rapid return to daily activities than the open surgical
procedure.
Despite the documented benefits of MIS, its adoption to date has been
limited to a select number of surgical procedures, and, in the aggregate,
represented only an estimated 15% of all surgical procedures performed in the
United States in 1995. The most widely adopted MIS procedure, laparoscopic
cholecystectomy, has been successfully adopted largely because of the proximity
of the target surgical site to the peritoneum, the only natural body cavity that
provides a working space when insufflated. Application of MIS techniques to
other surgical procedures and the ability to exploit the clinical benefits of
MIS have been limited by the lack of a natural body cavity proximate to the
surgical site and the inability of the surgeon to easily and atraumatically
access the surgical site or establish a surgical working space where no natural
body cavity exists. MIS conducted outside of a natural body cavity requires the
surgeon to use blunt dissection instruments to tunnel through tissue to reach
the target surgical site, creating a relatively bloody working space with poor
visualization.
As a result of these limitations, many common types of surgical repairs
cannot be effectively performed using blunt dissection MIS techniques, including
hernia repairs, and procedures performed on organs such as the bladder, kidney,
spine, aorta or other sites that do not lie within the abdominal cavity. For
example, there are currently no effective MIS techniques for many common types
of vascular surgery such as saphenous vein harvesting and the treatment of
venous stasis ulcers. These surgical procedures are performed on the leg, where
the target surgical site is not easily accessible through natural body openings
or natural body cavities. For other procedures, although MIS techniques exist
for the performance of the repair itself, gaining access to the target surgical
site is invasive thereby reducing many of the clinical benefits of MIS. For
example, currently utilized MIS for spinal fusion requires making small
incisions at the midline of the patient's abdomen, entering the peritoneum,
retracting bowel and other organs to one side, exiting the back of the
peritoneum and continuing down to the front of the spine.
The Company believes that a significant opportunity exists for technologies
and surgical instruments that can effectively address the limitations of MIS and
facilitate the adoption of MIS for a wider range of surgical procedures.
GSI SOLUTION
GSI's proprietary Spacemaker balloon dissection systems allow a surgeon to
rapidly and relatively atraumatically create a working space at a target
surgical site where no space previously existed. By creating a working space at
the target surgical site, the Company's technology eliminates the need for
surgeons to make large incisions or to cut through muscle, nerve and tissue
layers, thereby eliminating the trauma resulting from such incisions. GSI
believes that its proprietary line of balloon dissection products eliminates
many of the limitations of blunt dissection MIS and enables the application of
MIS technology to a broad range of additional surgical procedures.
The Company's balloon dissection systems create a predictable working space
for a surgical procedure by separating natural tissue layers in the body. The
body has a large number of naturally occuring tissue layers, including skin,
muscle and fat. The Company's balloon dissection systems allow the surgeon to
exploit this physiology by inflating the balloon to separate the natural tissue
planes that exist between these layers, thereby creating a working space at the
surgical site. By utilizing any one of a range of the Company's balloons with
pre-specified deployment characteristics, the surgeon is able to accurately and
predictably determine the size, shape and proximity of the surgical working
space created relative to the target surgical site.
The Company believes that its Spacemaker products can be deployed anywhere
in the body where a natural tissue plane exists. For example, by creating a
working space in the pre-peritoneal area (the space in front of the peritoneum),
the Company's technology enables the use of MIS for hernia repair
29
<PAGE>
and treatment of stress urinary incontinence. Similarly, by creating a working
space in the retroperitoneal area (the space behind the peritoneum), the
Company's technology enables the use of MIS for anterior spinal fusion, vascular
surgery and other pathologies accessible in this area. In addition, the ability
of the Company's line of Spacemaker products to create working spaces at
different tissue levels (including subcutaneous, subfascial, submuscular and
subglandular) enables the use of MIS for breast augmentation and reconstruction,
tissue flap harvesting for reconstruction, saphenous vein harvesting, subfascial
endoscopic perforator surgery, long-bone plating and a variety of other medical
procedures.
The Company believes that the principal advantages of its Spacemaker balloon
dissection products include:
PREDICTABLE WORKING SPACE. The Company's balloon dissection products
incorporate pre-shaped, nonelastomeric balloons made of polyurethane, which are
tailored for a specific procedure and which, when inflated, create a predictable
and consistent working space of a predetermined size, shape and volume. As a
result, dissection outcome or creation of the working space is not generally
dependent on surgeon technique.
RAPID TISSUE DISSECTION AND REDUCED PROCEDURE TIME. The Company believes
that the surgeon can utilize the Company's products to create the surgical
working space and access the target pathology, typically in a matter of minutes,
thereby reducing total procedure time, reducing trauma from the surgical
procedure itself and reducing overall procedure costs.
COMPATIBLE WITH EXISTING MIS TECHNIQUES AND INSTRUMENTS. The Company's
products provide direct, minimally invasive access to the site of surgical
repair. Once the surgeon has created the working space and can visualize the
surgical site, he or she can generally use conventional MIS tools and techniques
with which he or she is already familiar.
EASE OF USE. The Spacemaker balloon dissection systems are designed to be
easy for the surgeon to use, thereby minimizing surgeon training requirements.
The deployment apparatus, including the guide rod, blunt tip and balloon cover,
controls the placement and positioning of the balloon with minimal tissue
trauma, while the unique shape and size of the balloon minimizes the likelihood
of any additional manual dissection.
CLINICAL AND COST BENEFITS FOR THE PATIENT, SURGEON AND PAYOR. The Company
believes that its balloon dissection products offer both clinical benefits
(including reduced tissue trauma and limited need for general anesthesia) and
cost benefits (including lower procedure costs, reduced procedure time and
shorter hospital stays), as well as faster recovery times, as compared to open
surgery and alternative MIS procedures.
COMPANY STRATEGY
The Company's objective is to become the leading provider of balloon
dissection systems and specialty surgical instruments for MIS. The key elements
of the Company's strategy are as follows:
INCREASE MARKET ACCEPTANCE OF BALLOON DISSECTION TECHNIQUES. The Company
intends to increase market acceptance for its Spacemaker products primarily by
developing and maintaining relationships worldwide with leading general surgeons
and specialists in the surgical fields of obstetrics, gynecology, urology,
cosmetic and reconstructive surgery, orthopedic surgery and vascular surgery.
The Company intends to support these efforts through surgeon training programs
designed to increase surgeon familiarity with the advantages and applications of
the Company's products. In addition, the Company is conducting marketing-related
clinical evaluations to increase exposure of surgeons to the Company's products
and to demonstrate the effectiveness of MIS in a broad range of procedures when
used with the Company's Spacemaker balloon dissection systems. The Company
intends to use data collected from marketing-related clinical evaluations to
demonstrate the anticipated clinical and cost advantages of the Company's
products to patients, surgeons, hospital administrators and third-party health
care payors.
30
<PAGE>
CAPITALIZE ON EXISTING PROPRIETARY POSITION. GSI has established an
extensive patent portfolio, and plans to capitalize on its proprietary position
to establish and maintain a leadership position in the balloon dissection
market. Currently, GSI has 13 issued United States patents, two issued foreign
patents and numerous additional United States and foreign patent applications
covering GSI's Spacemaker technology, including tissue dissection with balloons.
In particular, the Company has received a notice of allowance for one of its
patent applications that contains claims regarding use of balloons to dissect
tissue planes during general, endoscopic, laparoscopic or cosmetic and
reconstructive surgery. The Company believes that the scope of these claims
could provide a long-term competitive advantage for many of the Company's
balloon dissection products.
DEVELOP AND RAPIDLY INTRODUCE NEW BALLOON DISSECTOR PRODUCTS. The Company
intends to develop and rapidly introduce additional balloon dissection products
and enhancements to its products that fall within the Company's existing 510(k)
clearances. GSI's Spacemaker balloon dissection systems (except for the
Spacemaker World system) have received FDA 510(k) clearance for tissue plane
dissection during general, endoscopic, laproscopic or cosmetic and
reconstructive surgery, using a broad range of balloon sizes and shapes.
Accordingly, the Company believes it is well positioned to offer a portfolio of
products for additional surgical procedures without significant additional
United States regulatory pre-market clearance compliance requirements. The
Company is developing balloon dissectors for a number of procedures for which
MIS is currently suboptimal or unavailable, including treatment of stress
urinary incontinence, saphenous vein harvesting, anterior spinal fusion and
long-bone plating for certain fractures.
DEVELOP NEW SURGICAL INSTRUMENTS FOR MIS. As part of its MIS product
strategy, the Company seeks to develop surgical instruments tailored for use in
the working spaces created by the Company's balloon dissection systems. To date,
the Company has developed several instruments to facilitate the application of
MIS to target surgical procedures, such as its KnotMaker product, which is
designed to assist the surgeon in suturing and knot tying applications during
stress urinary incontinence surgery and certain other procedures. The Company
will continue to develop specialized surgical instruments that facilitate the
broader adoption of MIS and balloon dissection products for surgical procedures.
MARKET PRODUCTS THROUGH COLLABORATIVE RELATIONSHIPS AND DIRECT SALES
FORCE. The Company intends to build relationships with medical device companies
both in the United States and internationally that can provide the Company
access to an established distribution network in GSI's targeted specialty
surgical markets. By pursuing a strategy of corporate partnering to leverage
established medical device distribution networks, the Company believes that it
will be able to capitalize on the existing surgeon training programs,
complementary products and established surgeon relationships of its corporate
partners. For example, the Company currently has a distribution agreement with
USSC, a large supplier of surgical instruments for laparoscopic procedures,
under which USSC purchases hernia repair products from the Company and sells
them individually or in combination with its own products. In addition, the
Company intends to expand its direct sales force in selected markets where it
believes such an approach will enhance its competitive position.
BALLOON DISSECTION SYSTEMS
GSI's proprietary Spacemaker balloon dissection systems consist of an access
and deployment platform and a balloon dissector. During a surgical procedure,
the balloon dissection system is inserted between the desired tissue layers
through a puncture-like opening with the balloon in an uninflated state. The
balloon is then filled with air or saline, which causes the balloon to dissect
the tissue planes
naturally. After completing the dissection, the balloon is deflated, the balloon
dissection system is removed from the body, and the newly dissected space is
insufflated with gas to create a surgical working space. The surgeon can then
utilize MIS instruments to access the surgical site and perform the surgical
repair in this new working space. By using the Company's balloon dissection
systems, the surgeon can avoid the large incisions and significant tissue
manipulation required for open surgery.
The Company's balloon dissectors incorporate several proprietary
technologies to increase the reliability, effectiveness and ease of use in
creating working spaces during MIS. Each balloon is
31
<PAGE>
composed of strong and reliable nonelastomeric polyurethane material and is
welded using a proprietary technique that allows the balloon to be inflated to a
predetermined size and predictable shape with minimal risk of rupture. Each of
the Company's balloons is designed to be deployed in a predictable manner that
maximizes effectiveness and accuracy in creating the surgical working space and
minimizes unnecessary tissue trauma because of the specific and predictable
manner in which the balloon unfurls. The Company has designed its dissection
balloons in a variety of shapes and sizes that are tailored for specific
procedures. For example, the Company's "Manta Ray" shaped balloon is designed
for use in hernia repair to maximize working space and visibility of the
surgical site while minimizing the disruption of other anatomy at the surgical
site.
The Company currently offers its balloon dissection systems in four distinct
access and deployment platforms, the Spacemaker I platform, the Spacemaker II
platform, the Spacemaker Resposable platform and the Spacemaker World platform,
along with 14 different balloon shapes and sizes, designed for various surgical
techniques, procedures types and market segments. Each balloon dissection system
contains three primary components: a guide rod and blunt tip to access the
surgical site; a single use, disposable balloon dissector (which includes a
tubing mechanism and valve apparatus to fill the balloon) to create a working
space at the surgical site; and a balloon cover to protect the balloon dissector
and maintain the balloon in its unfurled state prior to inflation. End-user
prices for the Company's balloon dissection systems range from $60 to $300 per
unit, depending upon the type of product platform purchased and the nature of
the product packaging.
The key attributes of the Company's four major product platforms are
described below:
SPACEMAKER I PLATFORM. The Spacemaker I platform is composed of a stainless
steel rod with a blunt tip which is used both as the guide rod for the balloon
and as the insertion rod for a pre-loaded integral trocar. This enables the
surgeon to quickly and accurately insert the trocar into the dissected space
once the balloon is removed. In addition, the balloon cover used with the
Spacemaker I platform is a strong sheath that maximizes its tunneling
capability.
SPACEMAKER II PLATFORM. The Spacemaker II platform is a blunt-tipped,
polymeric, hollow tube that is used both as a guide rod for insertion of the
balloon and as a scope cover for protection of a laparoscope. This platform is
designed to allow endoscopic visualization both during insertion and inflation
of the balloon. Visualization enables the surgeon to identify the appropriate
tissue plane for dissection, as well as identify anatomical features while
accessing the surgical site. The Spacemaker II platform includes an integral
polyurethane balloon cover, which releases automatically upon inflation of the
balloon thus simplifying the procedure for the surgeon.
SPACEMAKER RESPOSABLE PLATFORM. The Spacemaker Resposable platform consists
of a combined blunt-tipped polymeric guide rod and handle, used for insertion,
which can be resterilized and reused for multiple procedures. The one-piece
reusable handle and guide rod is designed to reduce the cost per surgical
procedure. The platform also includes a balloon cartridge, composed of a hollow
tube upon which the balloon is loaded and an integral cover over the balloon and
tubing to protect them during insertion. This enables the surgeon to easily load
cartridges onto the guide rod and handle prior to insertion.
SPACEMAKER WORLD PLATFORM. The Spacemaker World platform is a similar but
simplified version of the Spacemaker II platform design. As with the Spacemaker
II platform, the Spacemaker World platform allows for visualization during the
surgical procedure, but is composed of fewer component parts and is more limited
in its visualization capability. The Spacemaker World platform has been designed
for certain international markets with lower price/performance requirements. The
Company does not currently intend to sell the Spacemaker World platform system
in the United States.
APPLICATIONS OF BALLOON DISSECTION TECHNOLOGIES
The Company's initial market focus was the application of its Spacemaker
balloon dissection technology for hernia repair. More recently, the Company has
completed marketing-related clinical
32
<PAGE>
evaluations of, and has introduced products or is introducing products for SEPS
and breast augmentation and reconstruction procedures. The Company is currently
conducting additional marketing-related clinical evaluations for additional
surgical applications, including urological and gynecological applications (E.G.
stress urinary incontinence), other vascular applications (E.G. saphenous vein
harvesting and retroperitoneal aortic reconstruction) and orthopedic
applications (E.G. anterior spinal fusion). The Company believes that its
current FDA clearances provide coverage for many surgical applications that the
Company may pursue. The Company has commenced commercial sales of its products
in the United States and certain other countries, including the United Kingdom,
Germany and France, for selected applications including hernia repair, SEPS and
breast augmentation and reconstruction. The Company also is pursuing
marketing-related clinical evaluations for selected additional applications,
including the treatment of stress urinary incontinence, saphenous vein
harvesting and a variety of retroperitoneal procedures such as anterior spinal
fusion. To date, the Company has received 510(k) clearances from the FDA for the
use of its Spacemaker balloon dissection technology to perform dissection of
tissue planes during general, endoscopic, laparoscopic or cosmetic and
reconstructive surgery using a broad range of balloon sizes and shapes.
Following FDA clearance of one of the Company's products, the Company performs
marketing-related clinical evaluations to optimize the application of such
product to targeted surgical procedures.
33
<PAGE>
The following table identifies several markets currently targeted by the
Company, the surgical procedures addressed, the Company's balloon dissection
products available for these procedures and the estimated number of total MIS
and open surgical procedures performed in 1995.
<TABLE>
<CAPTION>
TARGETED MARKET PRODUCT ESTIMATED NUMBER OF
PROCEDURE PRODUCT GROUP LAUNCH TOTAL PROCEDURES
PERFORMED (2)
USA INTERNATIONAL
<S> <C> <C> <C> <C> <C>
General Surgery Extraperitoneal Spacemaker I Hernia 1993 600,000 750,000
hernia repair
Spacemaker II Hernia 1995
Spacemaker World 1996
Hernia
Vascular Subfascial Spacemaker I SEPS 1996 Not 100,000 (3)
endoscopic Available
perforator surgery (3)
(SEPS)
Saphenous vein Spacemaker I SVH 1997 (1) 300,000 300,000
harvesting (SVH)
Retroperitoneal Spacemaker I Aorta 1996 (1) 100,000 Not
aortic Available (4)
reconstruction;
abdominal aortic
aneurysms, aortic
bypass
Cosmetic and Breast augmentation Spacemaker Resposable 1996 90,000 95,000
Reconstructive and reconstruction BAAR 1995
(BAAR) Spacemaker I BAAR
Tissue flap Spacemaker I FH 1997 (1) 24,000 24,000
harvesting
Urology and Stress urinary Spacemaker II SUI 1996 (1) 110,000 110,000
Obstetrics and incontinence (SUI)
Gynecology
Orthopedic Anterior spinal Spacemaker I Spinal 1997 (1) 200,000 200,000
fusion
</TABLE>
(1) Estimated launch date. There can be no assurance that such new product will
be launched by such target launch date, if at all.
(2) "Procedures Performed" figures are 1995 estimates of total MIS and open
surgical procedures, and are based on information from Medical Data
International, National Center of Health Care Statistics, Society of Plastic
and Reconstructive Surgeons and Market Intelligence Research Co. and from
Surgical Instruments and MIS Equipment: Markets, Companies and Products,
November 1994 by M.D.I.S. Publications Limited. See "Risk Factors --
Uncertainty of Market Acceptance; No Assurance of Clinical Advantage."
(3) The Spacemaker I SEPS balloon dissection systems target the treatment of
venous stasis ulceration, which currently affects approximately 2.5 million
people in the United States. (Source: "Chronic Venous Insufficiency of the
Lower Limbs and its Socio-Economic Significance.") According to "A
Comparison of the Cost Effectiveness in Venous Ulcer Management Between
Current Methods in the Community and Treatment with a Multilayer Compression
Bandage System," more than 100,000 patients received treatment in the United
Kingdom alone.
(4) The Company believes that the estimated number of total procedures performed
internationally is at least as large as the number performed in the United
States.
HERNIA REPAIR
A hernia, a condition that commonly occurs in the groin, is a protrusion of
normal abdominal contents through a muscle defect, usually in the tissue layers
overlying the abdomen. The peritoneum and/or bowel often project into this
defect, causing pain and potential major complications. Hernias affect over
600,000 people in the United States and approximately 1.4 million people
worldwide each year.
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<PAGE>
The open surgical procedure for hernia repair is a herniorrhaphy, which
involves making a 10 to 15 cm open incision in the groin over the muscle defect
to be repaired. As in most invasive surgical procedures, recovery periods tend
to be long, typically extending between three and six weeks. Over the last few
years, in an effort to reduce post-operative pain and recovery times, several
laparoscopic techniques have been developed to repair hernias. Despite these
advances, MIS has not been optimized for hernia repair. For example, in certain
MIS hernia repair procedures, a surgeon must first make an incision in the
abdominal wall to gain access to the peritoneum. The surgeon then must make an
additional incision or window in the peritoneal wall that enables the surgeon to
exit the peritoneum to reach the surgical site and create the working space
required to conduct the surgical repair. While these newer laparoscopic
techniques may reduce pain and recovery time, they retain significant risks of
morbidity and post-procedural complications because they require entry into the
peritoneum and the use of general anesthesia.
The Company believes that its balloon dissection technology can
significantly improve the outcomes of laparoscopic hernia repair procedures.
Utilizing the Company's Spacemaker products, the surgeon deploys the balloon
through the umbilicus to create a large and relatively bloodless space at the
site of the hernia. As a result, the surgeon is able to more rapidly and easily
access the target surgical site and complete the hernia repair. In addition,
because the surgeon never enters the peritoneum, this procedure reduces the risk
of organ damage, adhesion formation and morbidity, and eliminates the
requirement for general anesthesia. In a study presented in March 1996, MIS
hernia repair procedures utilizing the Company's balloon dissectors resulted in
lower cost, fewer complications and faster recovery time as compared to open
surgical hernia repair procedures.
The Company believes that its Spacemaker products provide a platform for
increasing the conversion of hernia repair procedures from open to laparoscopic
procedures. According to Medical Data International, Inc., laparoscopic hernia
repair procedures represented approximately 160,000 or 25% of total hernia
repair procedures in 1995. The Company believes that approximately half of these
laparoscopic hernia repair procedures are now performed using balloon dissection
technology.
The Company commenced commercial sales of its hernia repair balloon
dissection products in the United States in late 1993 and in Europe in 1994 and
currently sells three versions: the Spacemaker I platform, which was introduced
in September 1993, the Spacemaker II platform, which was introduced in October
1995, and the Spacemaker World platform, which was introduced in March 1996. The
Company sells these products both in the United States and certain foreign
markets, including France, Germany and the United Kingdom, through its partner,
USSC. The Company also sells these products in the United States through its
direct sales force and within certain foreign markets through selected
distributors.
STRESS URINARY INCONTINENCE SURGERY
Stress urinary incontinence ("SUI") is the uncontrollable loss of urine due
to a displacement of the bladder. According to Frost & Sullivan, approximately
1.7 million women 30 years or older suffer from SUI on a daily basis and are
thus candidates for interventional treatment.
Depending on the severity of incontinence, there are a number of treatment
options for SUI, including collagen injections, drugs, biofeedback exercises and
absorbent pads. Over the last few decades, however, an open surgical procedure
involving suture suspension of the bladderneck has been the standard method for
correcting severe SUI. This method is invasive and can create significant
complications for the patient, including enterocele (a hernia within the vaginal
wall) and genital prolapse (a descending of the uterus due to a weakness of the
pelvic floor). Furthermore, after surgery patients may require up to six weeks
or more to resume their preoperative lifestyle. Because of the risk, expense and
complexity of suture suspension, this surgical procedure is often performed only
in conjunction with other open abdominal procedures such as hysterectomy. As a
result, many women who are identified as candidates for surgical SUI repair
never receive treatment.
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<PAGE>
Several MIS alternatives to open surgical procedures for the treatment of
SUI have recently been developed to suspend the bladderneck. These MIS
procedures have been increasingly accepted as stand-alone procedures and are
typically less expensive and less likely to cause adverse side effects. Although
long-term outcome studies are not available, early results indicate laparoscopic
outcomes are equivalent to open surgical procedures in successfully treating
incontinence. Unfortunately, as in hernia repair, these MIS procedures involve
accessing the surgical site by entering, traversing and then exiting the
peritoneal cavity. While these procedures offer improvements over open surgery
and afford the benefits of MIS, they still involve the morbidity risks and
difficulties associated with entering the peritoneum.
Utilizing the Company's balloon dissection system, the surgeon can suspend
the bladderneck laparoscopically without entering the peritoneum. As with GSI's
hernia repair products, GSI's Spacemaker dissection products can be deployed
through the umbilicus to provide direct access to the bladder and bladderneck.
The surgeon can then use conventional laparoscopic instruments to complete the
procedure. The Company believes that the entire SUI repair procedure can be
performed in less than one hour on an outpatient basis.
To date, SUI surgical procedures have been performed using the Company's
hernia repair balloon. The Company is currently conducting marketing-related
clinical evaluations on a new balloon shape designed specifically for SUI
repair, which the Company believes will allow a surgeon to optimize the working
space in which to perform the SUI repair procedure. GSI intends to launch
commercially the dissector balloon for SUI repair in late 1996 both domestically
and internationally.
BREAST AUGMENTATION AND RECONSTRUCTIVE SURGERY
In 1995, approximately 90,000 women worldwide had breast reconstructive
surgery due to partial or full mastectomies relating to breast cancer, and an
additional 110,000 had elective (aesthetic) breast augmentation surgery.
Traditional surgical methods for such procedures require making a three to five
cm incision in the skin, finding the required tissue plane, and then using a
combination of blunt and sharp dissection tools to create a pocket for the
implant. The procedure can cause substantial bleeding, can sever both sensory
nerves and perforating vessels and can leave the patient with substantial,
noticeable scars.
In contrast to traditional breast augmentation and reconstruction
procedures, the Company's Spacemaker products require only small incisions,
create a relatively bloodless pocket, do not sever sensory nerves or perforating
vessels and minimize scarring and loss of movement or sensation. In addition,
because the Spacemaker product allows the surgeon to introduce the balloon
dissector from a crease in the axilla (armpit), from the inframammary fold
(below the breast inside the mammary fold), in the periareolar (nipple) area or
in some cases from the umbilicus (navel), the surgeon can minimize the
appearance of any marks or scars. The Company believes that its Spacemaker
dissection products for breast augmentation and reconstruction procedures enable
the surgeon to create uniform, symmetrical pockets in less time and with much
less bleeding than is possible with traditional blunt or sharp dissection tools.
The Company has also developed a sizer, an instrument that can be used in
conjunction with its balloon dissection products, to enable the surgeon to
determine, prior to the placement of the implant, the fill volume that will
optimize the appearance of the implant. The Company believes the sizer will
reduce the overall cost for a procedure by eliminating the risk of having to
remove and destroy incorrectly sized implants, which cost approximately $650 -
$1,000 per set.
The Company's balloon dissection products for breast augmentation and
reconstruction were first introduced commercially in the United States in
January 1995. The Company currently sells the Spacemaker I platforms and the
Spacemaker Resposable platforms for use in this indication. The Company plans to
file a 510(k) notification with the FDA for its sizer products in April 1996 and
plans to introduce these products in the United States through its own direct
sales force upon receipt of such clearance. While the Company expects to receive
such clearance by the end of 1996, there can be no assurance as to the timing or
receipt of such clearance.
36
<PAGE>
OTHER COSMETIC AND RECONSTRUCTIVE SURGERY
In addition to the market opportunities for breast augmentation and
reconstruction, the Company has designed, developed and is clinically evaluating
applications of its balloon dissection technology for a number of cosmetic and
reconstructive surgery procedures, including tissue flap harvesting (24,000
procedures worldwide), face lifts (53,000 procedures worldwide), brow lifts
(21,000 procedures worldwide), and abdominolplasties (28,000 procedures
worldwide). The Company believes that its balloon dissection technology is
well-suited for such procedures. For example, a tissue flap harvest procedure
involves isolation and detachment of a discrete tissue segment for
transplantation to another part of the body, and may include a harvest of a
portion of the rectus muscle (or TRAM flap harvest) or a harvest of the
latissimus muscle (or latissimus dorsi flap harvest). Tissue flap harvesting
procedures are currently very tedious, requiring the severing of connecting
tissue with scissors or scalpel and taking three to four hours or longer to
complete.
The Company believes a surgeon utilizing the GSI balloon dissector can
complete tissue flap harvesting in less than half the time and can do so more
accurately with less blood loss. Studies involving the Spacemaker platform for
tissue flap harvest procedures have been conducted at both Duke University and
at the Manhattan Eye, Ear, Nose and Throat Institute. The initial results were
presented during the American Society of Plastic and Reconstruction Surgeons
meeting in Montreal, Canada in October 1995, with both groups demonstrating the
feasibility, cost effectiveness and time savings experienced during procedures
in which the Company's balloon dissection products were utilized for tissue flap
harvesting. The Company is currently conducting marketing-related clinical
evaluations for its tissue flap harvesting balloon dissection product, and
anticipates launching the product for commercial sale in 1997.
SUBFASCIAL ENDOSCOPIC PERFORATOR SURGERY
Chronic venous insufficiency, which results in insufficient blood flow from
the extremities, is a common and debilitating disease. A frequent manifestation
of venous insufficiency is venous stasis ulceration (chronic skin ulcers), which
currently affects approximately 2.5 million people in the United States.
The Company believes that current treatment options for venous stasis
ulceration and venous insuffiency are suboptimal. Compression stockings (elastic
stockings that put pressure on the leg to force blood flow), the most common
treatment, often temporarily heal the ulcers but do not treat the underlying
venous incompetence. Compression stockings as treatments are also ineffective
because patients often do not wear the stockings, the associated healing process
is slow and the recurrence rate for the ulcers is high. Treating the incompetent
vein through an open surgical procedure allows treatment of the underlying
condition, but requires an incision through the ulcer wound, which is composed
of diseased tissue and is often incapable of healing. Alternatively, a minimally
invasive procedure known as SEPS has recently been introduced in which the
surgeon accesses the incompetent vein from a site remote from the ulcer wound
using blunt dissection instruments. However, because access to the surgical site
using blunt dissection causes bleeding and significant tissue trauma, the
procedure is difficult and time consuming for the surgeon to perform because of
poor visualization.
The Company's Spacemaker balloon dissection products allow the surgeon to
perform SEPS to ligate incompetent veins endoscopically in a relatively
atraumatic, bloodless manner. By utilizing the Company's Spacemaker technology,
the surgeon is able to deploy an elongated balloon down the length of the
patient's leg to create an operating space for access to one or more incompetent
veins. Because the incisions needed for this procedure are very small
(approximately one cm) and are remote from the area of ulcerated skin, the
Company believes that wounds will heal more rapidly and that there will be fewer
complications compared to open surgery and non-balloon assisted SEPS procedures.
In addition, the bloodless working space created by the Company's balloon
provides the surgeon with improved visualization of the veins requiring
ligation, making the procedure easier and faster for the surgeon.
37
<PAGE>
The Company launched its initial product to treat venous stasis ulceration
and venous insufficiency in January 1996. To date, the Company's Spacemaker I
balloon dissection products have been used to treat more than 60 patients
suffering from venous stasis ulcers or venous insufficiency in 20 centers across
the United States, with results indicating successful outcomes. Additional
outcome studies are underway that are designed to demonstrate that balloon
assisted SEPS will produce faster healing rates, fewer complications and lower
recurrence rates as compared to compression stockings or open surgical ligation
or non-balloon assisted SEPS procedures. There can be no assurance that these
studies will in fact demonstrate these benefits.
SAPHENOUS VEIN HARVESTING
In recent years, advanced coronary artery disease has been increasingly
treated by coronary artery bypass graft (CABG) procedures, which involve
grafting a portion of a patient's vein, taken from a different part of the body,
around the blocked artery. More than 600,000 CABG procedures were performed
worldwide in 1995. Nearly 90% of these procedures utilized the patient's
saphenous vein as a bypass graft.
Traditional saphenous vein harvesting procedures often require a continuous
incision from the ankle to the upper thigh of a patient's leg. The saphenous
vein is then dissected and removed, and the wound is sutured closed. A study
involving over 1,000 patients indicates that the open surgical procedure for
saphenous vein harvesting results in wound healing impairment in approximately
24% of patients. The length and invasiveness of the leg incision also causes
significant postoperative patient pain and discomfort. Surgeons indicate that
after the CABG procedure, patients more frequently complain about the pain
caused by leg incisions than other aspects of the procedure.
By utilizing the Company's balloon dissection technology in the saphenous
vein harvest procedure, the surgeon can reduce the leg incision to three or four
one-centimeter incisions, and can minimize damage to the muscles and nerve
endings surrounding the saphenous vein. Early results from one market evaluation
of saphenous vein harvest procedures using the Company's balloon dissection
products involving five patients at a single center have indicated successful
outcomes from the procedure including less postoperative pain, faster healing
and less scarring than with traditional open procedures. The Company is
currently establishing marketing evaluation sites and an outcome protocol to
demonstrate further that the application of Spacemaker technology to saphenous
vein harvesting will minimize pain, reduce length of hospital stay, decrease
risk of morbidity and improve quality of life. There can be no assurance that
these evaluations will in fact demonstrate these benefits.
The Company currently is developing surgical instruments to facilitate the
saphenous vein harvesting procedure, including instruments to ligate the side
branches and instruments to perform additional harvesting of the saphenous vein.
The Company has not applied for FDA clearance for any of these surgical
instruments.
AORTIC RECONSTRUCTION
Disruptions of blood flow to the aorta can lead to major cardiovascular
complications and death. One form of disruption results from a weakening in the
aortic wall that causes a bulge or aneurysm to form, commonly referred to as an
abdominal aortic aneurysm ("AAA"). Because of the blood pressure in the aorta,
an AAA is particularly susceptible to rupture, usually resulting in death. The
National Center for Health Care Statistics estimates that approximately 1.5
million people in the United States have AAA's, with approximately 190,000 new
patients diagnosed with AAA each year and approximately 45,000 AAA's repaired
each year. A second, more gradual disruption of blood flow is caused by
occlusive disease, which results in a blockage of the aorta. Although less
dramatic, this form of aortic disease also requires a surgical solution, with
approximately 40,000 grafts being performed annually to bypass the blockage.
38
<PAGE>
Until recently, the only means of repair for AAA and occlusive disease was
open surgery. Open surgery is invasive, requires substantial incisions and long
recovery times, and can lead to complications such as blood loss and infection.
For example, the conventional treatment for aortic reconstruction is a
complicated open procedure requiring a significant incision in the patient's
abdomen, withdrawal of the patient's intestines to provide access to the aorta
and cross-clamping of the aorta to stop blood flow. This procedure typically
lasts two to four hours and is performed under general anesthesia. As a result
of its invasiveness, open surgical aortic reconstruction has high mortality and
complication rates.
The Company believes that its Spacemaker balloon dissection technology may
be used as a minimally invasive laparoscopic access device or as an aid to
surgeons in open procedures for creating rapid access to the aortic aneurysm or
occluded artery. The Company believes that its Spacemaker technology will allow
treatment that is rapid and atraumatic and will allow the surgeon to create a
relatively bloodless working space to access the aorta. The Company also
believes that its balloon dissection products may lower the cost of the
procedure. The Company is currently pursuing marketing-related clinical
evaluations to optimize the application of its Spacemaker technology for the
aortic reconstruction market.
ORTHOPEDIC SPINE SURGERY
The Company believes that its products can be used in several orthopedic
spinal procedures to both reduce the costs of the procedure and enhance patient
benefits. Foremost among these procedures is spinal fusion, which was performed
approximately 200,000 times in the United States in 1994. Spinal fusion is
usually performed to remove a ruptured vertebral disc that is causing
significant patient discomfort, and subsequently to promote fusion between the
then exposed and adjacent vertebrae. This fusion procedure can be promoted by
any of several prosthetic systems, by traditional bone prostheses, or by a
combination of the two.
Most traditional open spinal fusion procedures have approached the spine
from the back. Several newer procedures, some currently under clinical
investigation, approach the spine through the abdomen, which appears to yield
better results. The open abdominal approach is highly invasive, however, and has
led researchers to try to develop a minimally invasive, transperitoneal
laparoscopic approach. This approach still subjects the patient to the same
risks associated with the open abdominal approach.
The Company's balloon dissection products have been used in several cadaver
studies in which an extraperitoneal laparoscopic approach to the spine has been
successfully performed. In this procedure, the balloon is deployed in the
retroperitoneal area under the rib cage and is inflated in order to dissect the
peritoneum away from muscle layers in the back and side of the patient. By doing
so, the surgeon can create a large working space to access the spine without
entering the peritoneum. The Company believes the spinal fusion procedure is a
natural extension of the aortic reconstruction application for balloon
dissection technology because the required dissected space is essentially the
same. The Company intends to conduct additional marketing-related clinical
evaluations to optimize the design of the Company's Spacemaker balloon
dissection systems for the orthopedic spine surgery market.
ADDITIONAL PRODUCTS UNDER DEVELOPMENT
As part of its competitive strategy, GSI continually seeks to leverage its
core technology to develop balloon dissection systems for new surgical
procedures, as well as to develop new surgical instruments for MIS. The Company
has made a significant investment in developing its proprietary balloon
dissection technology and believes its research and development commitment in
this area is critical to its competitive position. Research and development
expenses for fiscal 1995, 1994 and 1993 were approximately $975,000, $496,000
and $750,000, respectively, and for the nine months ended March 31, 1996 were
approximately $864,000. As of March 31, 1996, the Company had 14 persons engaged
in research and development activities.
39
<PAGE>
BALLOON DISSECTION PRODUCTS. The Company is currently developing a
Spacemaker III product platform, designed as a one-piece instrument in which the
balloon and guide rod are connected as a single unit. The Company believes the
one-piece platform design will be easier to use than the two-piece Spacemaker
platforms, because of the reduced number of steps a surgeon must perform in
order to deploy the balloon and dissect the tissue at the target site. In
addition, the Company expects the Spacemaker III platform to be less expensive
to manufacture, resulting in reduced costs per procedure. The Company intends to
continue to develop additional balloon shapes and sizes that can be used in
conjunction with each of its Spacemaker product platforms. Additional surgical
applications currently being targeted by the Company include long-bone plating
for fractures and seural nerve harvests for reconstructive surgery.
SURGICAL AND RELATED INSTRUMENTS. The Company is also exploiting its
expertise in MIS to develop a range of instruments to maximize the surgeon's
ability to perform MIS once an operative working space is created by the
Company's balloon dissection products. For example, the Company has developed
the KnotMaker suturing instrument, which is designed to allow the surgeon to
maintain tension on the suture and deliver a pre-tied knot to the surgical site,
rather than requiring the surgeon to tie the knot remote from the surgical site.
The Company received 510(k) clearance for the KnotMaker suturing instrument in
October 1994, and is currently conducting marketing-related clinical evaluations
to optimize the design of the product for use in multiple applications. In
addition, the Company is developing a specialized trocar with a balloon valve
which provides a seal to maintain insufflation of the surgical space while
allowing the use of laparoscopic and conventional non-laparoscopic instruments
during MIS. For example, this specialized trocar would enable the use of
conventional arterial cross clamps, which are particularly important in aortic
reconstruction.
Product research and development will require substantial expenditures, and
there can be no assurance that the Company will be successful in identifying
products for which demand exists, in developing products that have the
characteristics necessary to treat target indications, or that any new product
introduced will receive regulatory approval or be commercially successful.
MARKETING, SALES AND DISTRIBUTION
The Company markets its products, both domestically and internationally, to
general surgeons, urologists, gynecologists, vascular surgeons, orthopedic
surgeons and cosmetic and reconstructive surgeons. Sales in the United States
and internationally in the hernia market are made primarily through an exclusive
relationship with USSC and through the Company's direct sales force. Sales of
devices for other applications are made in the United States through the
Company's direct sales force and internationally through the Company's network
of distributors.
MARKETING PROGRAMS. The Company's marketing strategy for its balloon
dissection products is designed to target surgeons who are leaders in their
respective surgical specialties, and to promote visibility of the Company's
products and awareness of the clinical efficacy and cost effectiveness of
surgical techniques that employ the Company's products. For direct product
sales, the Company has targeted those surgical procedure markets that are highly
concentrated, such as vascular surgery, plastic surgery and spinal repair. For
more dispersed markets, and markets where surgeons require substantial training
to use the Company's products, the Company has partnered or is seeking to
partner with independent distributors that have well-established distribution
networks across wide geographic areas as well as well-developed training
programs.
The Company has recently commenced a program to disseminate clinical and
technical information worldwide to educate surgeons about the benefits of the
Company's products and to encourage surgeons to perform procedures utilizing the
Company's products. In support of this program, the Company has produced and
distributed to surgeons Spacemaker dissector procedure demonstration videos and
educational videos for hernia repair, bladder neck suspension, cosmetic and
reconstructive surgery and vascular surgery. In addition, the Company has
developed relationships with several leading surgeons in each of the Company's
targeted major surgical specialty areas who provide input on clinical and
product development, as well as surgical procedures that are candidates for
GSI's
40
<PAGE>
products. The Company is also pursuing a public relations campaign to increase
patient awareness of the benefits of MIS and the improvements afforded by the
use of balloon dissectors in such surgical procedures. In addition, the Company
is actively sponsoring a number of marketing-related clinical evaluations
designed to optimize the product design and to demonstrate the utility and ease
of use of the Company's products.
SALES IN THE UNITED STATES. GSI maintains a direct sales organization in
the United States to market its products to general surgeons and specialists,
and to support its distributor's sales efforts. As of March 31, 1996, the
Company's sales force in the United States consisted of nine persons. The
Company's sales personnel are typically assigned to a particular surgical
market. GSI is currently selling Spacemaker products in the hernia repair
market, the breast augmentation and reconstructive surgery market, and the SEPS
market. For the hernia surgery market, sales and marketing is principally
conducted through a distribution agreement between the Company and USSC, a
leading supplier of surgical instruments for laparoscopic procedures. Under this
agreement, USSC has rights, co-exclusive with the rights of GSI, to distribute
the Spacemaker I product for hernia repair and, to the extent permitted by the
Company's initial 510(k) clearance for the Spacemaker I product, other
applications. USSC's distribution rights are limited to only those products that
are or could be covered by the Company's initial 510(k) clearance. From time to
time, the Company and USSC have had disagreements regarding the extent of USSC's
rights under the distribution agreement to distribute new products developed by
the Company after the date of such agreement. USSC purchases hernia repair
products from the Company and sells them individually or in combination with
USSC products. The GSI products sold by USSC carry the GSI name and logo. The
Company's sales to USSC have fluctuated significantly in the past, and the
Company anticipates that such sales could fluctuate in the future. For example,
purchases by USSC declined substantially in the quarter ended September 30,
1995, and then increased substantially in the subsequent quarter ended December
31, 1995. As a result, there can be no assurance that USSC will continue to
purchase the Company's products in amounts equal to past levels or that USSC
will purchase the minimum quantities required under the agreement. The
distribution agreement with USSC expires in March 1997, and there can be no
assurance that such agreement will be renewed on the same or similar terms. USSC
could also elect to sell competitive products, rather than those of the Company,
which could result in a decline of the Company's sales. A significant reduction
in orders from USSC or a failure to renew the agreement with USSC could have a
material adverse effect on the Company's business, financial condition and
results of operations. Although the Company intends to establish additional
distributorships in the United States for products in areas other than hernia
repair, there can be no assurance that such efforts will be successful. Failure
to diversify its distribution network in the United States could have a material
adverse effect on the Company's business, financial condition and results of
operations.
SALES INTERNATIONALLY. The Company's products are currently sold
internationally to general surgeons and specialists through USSC and independent
distributors in Europe, Asia, Latin America and the Middle East. The Company
generally operates under written agreements with its international distributors,
which typically grant distributors the right to sell the Company's products
within a defined territory and permit the distributors to sell other
non-competing medical products. In addition, the agreements typically include
minimum sales forecast requirements, minimum inventory forecast requirements,
participation in trade shows and marketing efforts on behalf of GSI, and
training and support service programs for end-users. The Company's distributors
typically purchase the Company's products at discounts that vary by product and
market.
Substantially all of the Company's revenues to date have been derived from
hernia repair products sold to USSC. Sales to USSC accounted for approximately
75% and 87% of the Company's total sales for the year ended June 30, 1995, and
for the nine months ended March 31, 1996, respectively. Sales outside of the
United States accounted for approximately 2%, 3% and 2% of the Company's sales
in fiscal 1994, fiscal 1995 and the nine months ended March 31, 1996,
respectively, and the Company expects that international sales will represent an
increasing portion of revenue in the future. The
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Company records all sales to USSC as domestic sales; however, sales of the
Company's products by USSC include sales to European and other countries
internationally, made through Autosuture, Inc., a subsidiary of USSC.
MANUFACTURING
The Company manufactures its products in a clean room facility in Palo Alto,
California. The Company has implemented quality control systems as part of its
manufacturing process, which are designed to enable the Company to achieve ISO
9001 certification for its products by the first half of 1997. The Company has
also been inspected by the California Department of Health Services ("CDHS"), on
behalf of the CDHS and the FDA, and is registered with the State of California
to manufacture its medical devices. The Company believes that it is in
compliance with all FDA requirements including FDA Good Manufacturing Practices
("GMP") for medical devices. There can be no assurance, however, that the
Company will attain ISO 9001 certification in 1997, or that the Company will
remain in compliance with GMP, and failure to do so in either case could have a
material adverse effect on the Company's business, operating results or
financial condition.
The Company occupies a single facility that houses its headquarters,
administrative offices, research laboratories and manufacturing facilities. This
facility is subject to a lease that expires in March 1997. While the Company
believes that this space is adequate for its immediate needs, GSI will need to
obtain additional office, development and manufacturing space to accommodate
expected business growth during 1996 and 1997. There can be no assurance that
the Company will be able to obtain such additional facilities on commercially
reasonable terms, or at all. If the Company is able to lease such additional
space, there can be no assurance that the Company will be able to establish and
certify adequate manufacturing capacity in a timely manner, or at all, in such
space. Failure to obtain additional space or establish and certify adequate
manufacturing capacity in a timely manner could have a material adverse effect
on the Company's business, financial condition or results of operations.
Raw materials used in the production of the Company's balloon dissector
products are purchased from various qualified vendors, subjected to stringent
quality specifications and assembled by the Company into the final balloon
dissectors. Quality audits of suppliers are conducted, and the Company has
adopted a vendor qualification program. The Company currently obtains certain
products from single source suppliers, including its supplier of product molds.
The Company believes that alternative suppliers are available for its raw
materials and other product components and plans to qualify additional suppliers
when sales volumes warrant. Although the Company intends to maintain sufficient
levels of inventory to avoid any material disruption resulting from the scale-up
of manufacturing, there can be no assurance that the Company will be able to
manufacture and supply sufficient products to meet potential demand. In
addition, there can be no assurance that the single source suppliers will meet
the Company's future requirements for timely delivery of products of sufficient
quality and quantity. The inability of GSI's single source suppliers to provide
it with adequate supplies of high quality products, or the loss of any of the
Company's single source suppliers, could cause a delay in GSI's ability to
fulfill orders while the Company identifies and certifies a replacement
supplier, and could have a material adverse effect upon the Company's business,
financial condition and results of operations. See "Risk Factors -- Limited
Manufacturing Experience; Uncertainty Regarding Future Facilities."
COMPETITION
Competition in the market for medical devices and tissue dissection products
is intense and is expected to increase. The Company competes primarily with
other producers of MIS tissue dissection products. Origin, a subsidiary of
Guidant Corporation, and Ethicon Endo-Surgery, Inc., a subsidiary of Johnson &
Johnson Company, among others, currently compete with the Company in the
development, production and marketing of MIS tissue dissection instruments and
tissue dissection technology. To the extent that surgeons elect to use open
surgical procedures rather than MIS, the Company also competes with producers of
tissue dissection products used in open surgical procedures, such as blunt
dissectors or graspers. A number of companies currently compete against the
Company in the
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development, production and marketing of tissue dissection products and
technology for open surgical procedures. In addition, the Company competes
indirectly with producers of therapeutic drugs, when such drugs are used as an
alternative to surgery. Many of the Company's competitors and potential
competitors have substantially greater name recognition and capital resources
than the Company and also have greater resources and expertise in the areas of
research and development, obtaining regulatory approvals, manufacturing and
marketing.
The Company believes that the primary competitive factors in the market for
tissue dissection products include safety, efficacy, ease of use, quality,
reliability and cost effectiveness. In addition, the length of time required for
products to be developed and to receive regulatory approval is an important
competitive factor. The Company believes that it competes favorably with respect
to these factors, although there can be no assurance that it will continue to do
so.
The market for tissue dissection products is characterized by rapid
technical innovation. Product development involves a high degree of risk and
there can be no assurance that the Company's competitors and potential
competitors will not succeed in developing and marketing technologies and
products that are more effective than those developed and marketed by the
Company or that would render the Company's technology and products obsolete or
noncompetitive. The medical applications for which the Company's MIS tissue
dissection products are used can also be addressed by other medical devices in
either MIS or open surgical procedures, many of which are widely accepted in the
medical community. There can be no assurance that a procedure using MIS balloon
dissection technology will be able to replace such established products and
procedures. Additionally, new surgical products or procedures could be developed
that replace or reduce the importance of current procedures that use the
Company's products.
PATENTS AND PROPRIETARY RIGHTS
The Company's policy is to seek to protect its proprietary position by,
among other methods, filing United States and foreign patent applications
related to its technology, inventions and improvements that are important to the
development of its business. The Company's patent strategy includes filing
procedure-specific method patents for the use of the Company's products in new
clinical applications. As of March 31, 1996 GSI had 13 United States patents
issued, and had applied for an additional 45 United States patents, six of which
had notice of allowance or allowed claims. In addition, GSI had two foreign
patents issued, and nine additional applications still in prosecution as of such
date. The Company has received a notice of allowance for one of its United
States patent applications which contains method claims regarding the use of
balloons to dissect tissue planes anywhere in the body. The validity and breadth
of claims in medical technology patents involve complex legal and factual
questions and, therefore, may be highly uncertain. No assurance can be given
that any patents based on pending patent applications or any future patent
applications will be issued, that the scope of any patent protection will
exclude competitors or provide competitive advantages to the Company, that any
of the Company's patents or patents to which it has licensed rights will be held
valid if subsequently challenged or that others will not claim rights in or
ownership of the patents and other proprietary rights held or licensed by the
Company or that the Company's existing patents will cover the Company's future
products. Furthermore, there can be no assurance that others have not developed
or will not develop similar products, duplicate any of the Company's products or
design around any patents issued to or licensed by the Company or that may be
issued in the future to the Company.
The Company has acquired a significant number of patent rights from third
parties, including rights which apply to the Company's current balloon
dissection systems. The Company has historically paid and is obligated to pay in
the future to such third parties royalties equal to 4% of sales of such
products, which payments are expected to exceed certain minimum royalty payments
due under agreements with such parties. The Company has also acquired patent
rights under royalty-bearing agreements with respect to certain surgical
instruments, including the KnotMaker suturing instrument and the balloon valve
trocar currently under development.
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One of the patent applications filed by the Company, which is directed to a
surgical method using balloon dissection technology, has been placed in
interference with a patent application filed by Origin, a competitor of the
Company. The Company believes that the inventor named in its patent application
was the first to invent this subject matter, and the Company has asserted that
the Origin patent application was filed after a disclosure made by such inventor
to employees of Origin. Origin takes a contary position. This interference is
presently pending in the United Stated Patent and Trademark Office ("USPTO")
and, as permitted by the rules of the USPTO, has been referred to an arbitrator
for completion of the interference proceeding. A decision is not expected in
this interference proceeding until 1997, and, while the Company believes that it
will be successful in this interference proceeding, there can be no assurance of
such success. Failure of the Company to prevail in such interference proceeding
could have a material adverse effect on the Company's business, financial
condition, or results of operations.
The patent position of medical device manufacturers, including GSI, is
uncertain and may involve complex legal and factual issues. Consequently, the
Company does not know whether any of its applications will result in the
issuance of any further patents, or whether issued patents will provide
significant proprietary protection or will not be challenged, circumvented or
invalidated. Since patent applications in the U.S. are maintained in secrecy
until patents issue, and since publications of discoveries in the scientific or
patent literature tend to lag behind actual discoveries by several months, GSI
cannot be certain that it was the first creator of inventions covered by pending
patent applications or issued patents, or that it was the first to file patent
applications for such inventions. Moreover, the Company is currently
participating in, and may in the future have to participate in, interference
proceedings declared by the USPTO to determine the priority of inventions, which
could result in substantial cost to the Company. There can be no assurance that
the Company's patent applications will result in further issued patents or that
such issued patents will offer protection against competitors with similar
technology.
Legislation is pending in Congress that, if enacted in its present form,
would limit the ability of medical device manufacturers in the future to obtain
patents on surgical and medical procedures that are not performed by, or as a
part of, devices or compositions which are themselves patentable. While the
Company cannot predict whether the legislation will be enacted, or precisely
what limitations will result from the law if enacted, any limitation or
reduction in the patentability of medical and surgical methods and procedures
could have a material adverse effect on the Company's ability to protect its
proprietary methods and procedures. In addition, the patent laws of European and
certain other foreign countries generally do not allow for the issuance of
patents for methods of surgery in the human body. Accordingly, the ability of
the Company to gain patent protection for its methods of tissue dissection will
be significantly limited. As a result, there can be no assurance that the
Company will be able to develop a patent portfolio in Europe or other foreign
jurisdictions or that the scope of any patent protection will provide
competitive advantages to the Company.
GSI also relies upon technical know-how and continuing technological
innovation to develop and maintain its competitive position. The Company
typically requires its employees, consultants and advisors to execute
appropriate confidentiality and assignment of inventions agreements in
connection with their employment, consulting or advisory relationship with the
Company. There can be no assurance, however, that these agreements will not be
breached or that GSI will have adequate remedies for any such breach.
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, or that GSI can
meaningfully protect its rights in unpatented proprietary technology.
GOVERNMENT REGULATION
UNITED STATES. The Company's Spacemaker balloon dissection systems and
other products are subject to extensive and rigorous regulation by the United
States Food and Drug Administration (the "FDA") and, to varying degrees, by
state and foreign regulatory agencies. Under the Federal Food,
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Drug, and Cosmetic Act, the FDA regulates the clinical testing, manufacture,
labeling, packaging, marketing, distribution and record keeping for medical
devices, in order to ensure that medical devices distributed in the United
States are safe and effective for their intended use. Prior to
commercialization, a medical device generally must receive prior FDA clearance
or approval, which can be an expensive, lengthy, and uncertain process.
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 assure their safety and effectiveness. Class
I devices are subject to general controls (E.G., labeling, premarket
notification and adherence to GMPs) and Class II devices are subject to general
and special controls (E.G., performance standards, postmarket surveillance,
patient registries, and FDA guidelines). Generally, Class III devices are those
which must receive premarket approval ("PMA") 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 into the market in the United States,
the manufacturer or distributor generally must obtain FDA marketing clearance
through either a 510(k) premarket notification or a PMA application. If a
medical device manufacturer or distributor can establish, among other things,
that a device is "substantially equivalent" in intended use and technological
characteristics to a Class I or Class II medical device or a Class III medical
device for which FDA has not called for PMAs, the manufacturer or distributor
may seek clearance from the FDA to market the device by filing a 510(k). The
510(k) must be supported by appropriate information establishing to the
satisfaction of the FDA the claim of substantial equivalence to a predicate
device. In recent years, the FDA has been requiring a more rigorous
demonstration of substantial equivalence, including more frequent requests for
clinical data in 510(k) submissions.
The FDA also has the authority to require clinical testing of certain
medical devices. If clinical testing of a device is required and if the device
presents a "significant risk," an Investigational Device Exemption ("IDE")
application must be approved prior to commencing clinical trials. The IDE
application must be supported by data, typically including the results of
laboratory and animal testing. If the IDE application is approved by the FDA and
one or more appropriate Institutional Review Boards ("IRBs"), clinical trials
may begin at a specific number of investigational sites with a maximum number of
patients, as approved by the agency. 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. Sponsors of clinical trials are permitted to sell those devices
distributed in the course of the study provided such compensation does not
exceed recovery of the costs of manufacture, research, development and handling.
The clinical trials must be conducted under the auspices of an IRB pursuant to
FDA regulations.
Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution unless and
until an order is issued by the FDA finding the product to be substantially
equivalent. It generally takes from four to 12 months from submission to obtain
510(k) premarket clearance, but may take longer. In response to a 510(k), the
FDA may declare that the device is substantially equivalent to another legally
marketed device and allow the proposed device to be marketed in the United
States. The FDA, however, may require further information, including clinical
data, to make a determination regarding substantial equivalence, or may
determine that the proposed device is not substantially equivalent and require a
PMA. Such a request for additional information or determination that the device
is not substantially equivalent would delay market introduction of the product.
There can be no assurance that the Company will obtain 510(k) premarket
clearance within the above time frames, if at all, for any of the devices for
which it may file a 510(k).
For any medical device 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
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the intended use of the device will require a new 510(k) submission. The Company
has made modifications to its products which the Company believes do not require
the submission of new 510(k) notices. There can be no assurance, however, that
the FDA will agree with any of the Company's determinations not to submit a new
510(k) notice for any of these changes or will not require the Company to submit
a new 510(k) notice for any of the changes made to the product. If the FDA
requires the Company to submit a new 510(k) notice for any product modification,
the Company may be prohibited from marketing the modified product until the
510(k) notice is cleared by the FDA. Such a prohibition could have a material
adverse effect on the Company's business, financial condition and results of
operations.
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent to a legally marketed device, the
manufacturer or distributor must seek premarket approval of the proposed device
through submission of a PMA. A PMA must be supported by extensive data,
including, laboratory, preclinical and clinical trial data to prove the safety
and effectiveness of the device as well as extensive manufacturing information.
Following receipt of a PMA, if the FDA determines that the application is
sufficiently complete to permit a substantive review, the FDA will "file" the
application. The PMA approval process can be lengthy, expensive and uncertain.
FDA review of a PMA generally takes approximately two years or more from the
date of filing to complete. If granted, the approval of the PMA may include
significant limitations on the indicated uses for which a product may be
marketed.
Labeling and promotional activities are subject to scrutiny by 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 Spacemaker I platform, Spacemaker II platform, Spacemaker Resposable
platform, and KnotMaker product each have received 510(k) clearance for use
during general, endoscopic, laparoscopic, or cosmetic and reconstructive
surgery, either when tissue dissection is required or, with respect to the
KnotMaker product, when a surgical knot for suturing is required. The Company
has promoted these products for performing the dissection required for selected
applications (E.G., hernia repair, SEPS and breast augmentation and
reconstruction), and may in the future promote these products for the dissection
or knotmaking required for additional selected applications (E.G., treatment of
stress urinary incontinence, saphenous vein harvesting and a variety of
retroperitoneal procedures such as spinal fusion). Although the Company believes
that these narrower applications are covered by the 510(k) clearance already
received for each of these products, there can be no assurance that the FDA will
not consider promotion of these products for performing the dissection or
knotmaking required for such narrower indications to be a major change to the
intended use of the device and require a new 510(k) submission. In addition,
since its receipt of 510(k) clearances for these products, the Company has made
product modifications, including developing new balloon shapes and sizes to
facilitate dissection for specific applications. Although the Company believes
that these product modifications are covered by the 510(k) clearances already
received, there can be no assurance that the FDA will agree with the Company's
determination or will not require a new 510(k) submission for some or all of the
new balloon shapes and sizes or other modifications. If such additional 510(k)
clearances are required, there can be no assurance that the Company will obtain
them on a timely basis, if at all, and delays in receipt of or failure to
receive such approvals could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company anticipates filing a 510(k) submission for its specialized
trocar with a balloon valve, which provides a seal to maintain insufflation of
the surgical space during MIS. There can be no assurance that the FDA will grant
510(k) clearance for the Company's specialized trocar on a timely basis, if at
all.
In addition, there can be no assurance that the Company will be able to
obtain future 510(k) clearances or PMA approvals, if required, to market its
products for the intended uses on a timely basis, if at all, and delays in
receipt of or failure to receive such approvals, the loss of previously received
approvals, or failure to comply with existing or future regulatory requirements
could have a
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material adverse effect on the Company's business, financial condition and
results of operations. The need for additional clearances or approvals could
cause the Company to utilize significant unanticipated resources and capital and
could prohibit or delay product introductions, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company is subject to pervasive and continuing regulation, including
routine inspection by the FDA and state agencies, such as the California
Department of Health Services ("CDHS"). Manufacturers of medical devices for
marketing in the United States are required to adhere to applicable regulations
setting forth detailed GMP requirements, which include testing, control and
documentation requirements. Manufacturers must also comply with Medical Device
Reporting ("MDR") requirements that a company report to 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.
Noncompliance with applicable requirements can result in warning letters, import
detentions, fines, civil penalties, injunctions, suspensions or losses of
regulatory approvals, recall or seizure of products, operating restrictions,
refusal of the government to approve product export applications or allow the
Company to enter into supply contracts, and criminal prosecution. Delays in
receipt of, or failure to obtain regulatory clearances and approvals, the
restriction, suspension or revocation of regulatory clearances and approvals, if
obtained, or any failure to comply with regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations. In July 1995, the Company's Palo Alto facility was
inspected by the CDHS, acting for itself and under contract with the FDA. The
Company received no material inspectional observations. The FDA has proposed
changes to the GMP regulations that will likely increase the cost of compliance
with GMP requirements. If finalized, the proposed GMP changes will cover device
design and servicing and will establish other new requirements. Changes in
existing requirements or adoption of new requirements could have a material
adverse effect on the Company's business, financial condition and results of
operation. There can be no assurance that the Company will not incur significant
costs to comply with laws and regulations in the future or that laws and
regulations will not have a material adverse effect upon the Company's business,
financial condition or results of operations.
The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, environmental protection,
and fire hazard control. 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 ability to do business.
Regulations regarding the development, manufacture and sale of the Company's
products are subject to change. The Company cannot predict what impact, if any,
such changes might have on its business, financial condition or results of
operations.
INTERNATIONAL. Sales of medical devices outside the United States are
subject to foreign regulatory requirements that vary widely from country to
country. The time required to obtain clearance required by foreign countries may
be longer or shorter than that required for FDA clearance or approval, and the
requirements may differ. The Company currently relies on its distributors for
the receipt of premarket approvals and compliance with clinical trial
requirements in those countries that require them, and the Company expects to
continue to rely on distributors in those countries where the Company continues
to use distributors. Many countries in which the Company intends to operate
either do not currently regulate medical devices or have minimal registration
requirements; however, these countries may develop more expensive regulations in
the future that could adversely affect the Company's ability to market its
products. Other countries, such as Japan, have requirements similar to those of
the United States. This disparity in the regulation of medical devices may
result in more rapid product clearance in certain countries than in others. The
products sold by the Company are subject to premarket approval as well as other
regulatory requirements in many countries.
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In order to continue selling its products within the European Economic Area
following June 14, 1998, the Company is required to achieve compliance with the
requirements of the Medical Devices Directive (the "MDD") and affix CE marking
on its products to attest such compliance. To achieve this, the Company's
products must meet the Essential Requirements as defined under the MDD relating
to safety and performance of its products and the Company must successfully
undergo verification of its regulatory compliance ("conformity assessment") by a
Notified Body selected by the Company. The nature of such assessment will depend
on the regulatory class of the Company's products. Under European law, the
Company's products are likely to be in Class IIA or lower. In the case of a
Class IIA product the Company can choose between two options. Under the first
option the Company must establish and maintain a complete quality system for
design and manufacture as described in Annex II of the MDD (this corresponds to
a quality system described in ISO 9001 and EN 46001 standards). The Notified
Body must audit this quality system and determine if it meets the requirements
of the MDD. The second option involves two stages. First, the Company would
declare that its products comply with the provisions of the MDD that apply to
them and prepare technical documentation to allow the conformity assessment of
the products. Next, the Company could choose to do one of the following: (i)
request the Notified Body to carry out batch testing of the finished products to
verify their conformity, (ii) set up a complete quality system for manufacture
subject to assessment by the Notified Body or (iii) set up a quality system for
the final testing of products subject to conformity assessment by the Notified
Body. Irrespective of the conformity assessment route chosen by the Company, the
Company must ensure that the products comply with the Essential Requirements of
the MDD. In order to comply with these requirements, the Company must, among
other things, carry out a risk analysis. The Company may have to present
clinical data to provide evidence of compliance with certain Essential
Requirements if evidence by other means is insufficient. The clinical data
presented by the Company must provide evidence that the products meet the
performance specifications claimed by the Company, provide sufficient evidence
of adequate assessment of unwanted side-effects and demonstrate that the
benefits to the patient outweigh the risks associated with the device. The
Company will be subject to continued supervision by the Notified Body and will
have to report any serious adverse incidents to the appropriate authorities. The
Company also will have to comply with additional national requirements that are
beyond the scope of the MDD. The Company believes that it will comply with the
CE marking requirements prior to June 14, 1998. Failure to do so would mean that
the Company would be unable to sell its products in the European Economic Area
unless and until compliance was achieved, which could have a material adverse
effect upon the Company's business, financial condition and results of
operations. There can be no assurance that the Company will be able to achieve
or maintain compliance required for CE marking or any or all of its products or
that it will be able to produce its products timely and profitably while
complying with the requirements of the MDD and other regulatory requirements.
THIRD-PARTY REIMBURSEMENT
In the United States, hospitals, physicians and other healthcare providers
that purchase medical devices generally rely on third-party payors, such as
private health insurance plans, to reimburse all or part of the costs associated
with the treatment of patients.
The Company's success will depend upon the ability of surgeons to obtain
satisfactory reimbursement from healthcare payors for the Company's products.
Reimbursement in the United States for the Company's balloon dissection products
is currently available from most third-party payors, including most major
private health care insurance plans and Medicaid, under existing surgical
procedure codes. The Company does not expect that third-party reimbursement in
the United States will be available for use of its other products unless and
until FDA clearance or approval is received. If FDA clearance or approval is
received, third-party reimbursement for these products will be dependent upon
decisions by individual health maintenance organizations, private insurers and
other payors. Many payors, including the federal Medicare program, pay a preset
amount for the surgical facility component of a surgical procedure. This amount
typically includes medical devices such as the Company's. Thus, the surgical
facility or surgeon may not recover the added cost of the Company's
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products. In addition, managed care payors often limit coverage to surgical
devices on a pre-approved list or obtained from an exclusive source. If the
Company's products are not on the list or are not available from the exclusive
source, the facility or surgeon will need to obtain an exception from the payor
or the patient will be required to pay for some or all of the cost of the
Company's product. The Company believes that procedures using its balloon
dissection products may be reimbursed in the United States under certain
existing procedure codes. However, there can be no assurance that such procedure
codes will remain available or that the reimbursement under these codes will be
adequate. Given the efforts to control and decrease health care costs in recent
years, there can be no assurance that any reimbursement will be sufficient to
permit the Company to achieve or maintain profitability.
Reimbursement systems in international markets vary significantly by
country, and by region within some countries, and reimbursement approvals must
be obtained on a country-by-country basis. Many international markets have
government managed health care systems that govern reimbursement for new devices
and procedures. In most markets, there are private insurance systems as well as
government-managed systems. Large-scale market acceptance of the Company's
balloon dissectors and other products will depend on the availability and level
of reimbursement in international markets targeted by the Company. Currently,
the Company has been informed by its international distributors that balloon
dissectors have been approved for reimbursement in many of the countries in
which the Company markets its products. Obtaining reimbursement approvals can
require 12 to 18 months or longer. There can be no assurance that the Company
will obtain reimbursement in any country within a particular time, for a
particular amount, or at all. Failure to obtain such approvals could have a
material adverse effect on the Company's sales, business, financial condition
and results of operations.
Regardless of the type of reimbursement system, the Company believes that
surgeon advocacy of its products will be required to obtain reimbursement.
Availability of reimbursement will depend on the clinical efficacy and cost of
the Company's balloon dissection systems. There can be no assurance that
reimbursement for the Company's products will be available in the United States
or in international markets under either government or private reimbursement
systems, or that surgeons will support and advocate reimbursement for use of the
Company's systems for all applications intended by the Company. Failure by
surgeons, hospitals and other users of the Company's products to obtain
sufficient reimbursement from health care payors or adverse changes in
government and private third-party payors' policies toward reimbursement for
procedures employing the Company's products would have a material adverse effect
on the Company's business, financial condition and results of operations.
PRODUCT LIABILITY AND INSURANCE
The Company's business involves an inherent risk of exposure to product
liability claims. Although the Company has not experienced any product liability
claims to date, there can be no assurance that the Company will be able to avoid
significant product liability claims and potential related adverse publicity.
The Company maintains product liability insurance with coverage limits of
$5,000,000 per occurrence and an annual aggregate maximum of $5,000,000, which
the Company believes is comparable to that maintained by other companies of
similar size serving similar markets. However, there can be no assurance that
product liability claims will not exceed such insurance coverage limits, which
could have a material adverse effect on the Company, or that such insurance will
continue to be available on commercially reasonable terms, or at all.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, rules, regulations
and policies governing the use, generation, manufacture, storage, air emission,
effluent discharge, handling and disposal of certain hazardous and potentially
hazardous substances used in connection with the Company's operations. Although
the Company believes that it has complied with these laws and regulations in all
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material respects and to date has not been required to take any action to
correct any noncompliance, there can be no assurance that the Company will not
be required to incur significant costs to comply with environmental regulations
in the future.
EMPLOYEES
As of March 31, 1996, GSI employed 59 individuals, 18 of whom were engaged
directly in research, development, regulatory and quality assurance affairs, 15
in manufacturing, 18 in marketing and sales and eight in finance and
administration. The Company also contracts with outside consultants. None of the
Company's employees is covered by a collective bargaining agreement. GSI
believes that it maintains good relations with its employees.
FACILITIES
The Company occupies a facility of approximately 19,500 square feet in Palo
Alto, California, which houses the Company's headquarters, administrative
offices, research laboratories and manufacturing facilities. The facility is
subject to a lease which expires on March 31, 1997. While the Company believes
that this space is adequate for its immediate needs, GSI will need to obtain
additional office, development and manufacturing space to accommodate expected
business growth during 1997. There can be no assurance that such additional
facilities will be available on commercially reasonable terms.
LEGAL PROCEEDINGS
From time to time the Company may be exposed to litigation arising out of
its products and operations. As of the date of this Prospectus, the Company is
not engaged in any legal proceedings that are expected, individually or in the
aggregate, to have a material adverse effect on the Company, except for a patent
interference proceeding. See "-- Patents and Proprietary Rights."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages as of
March 31, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- --- -------------------------------------------------------------------
<S> <C> <C>
Roderick A. Young 52 President, Chief Executive Officer and Director
James E. Jervis 60 Vice President of Research and Development
Gregory D. Casciaro 39 Vice President of Sales and Marketing
Stephen J. Bonelli 33 Chief Financial Officer, Vice President of Finance, and Treasurer
Thomas J. Fogarty, M.D. 62 Chairman of the Board of Directors
David W. Chonette (1) 60 Director
Paul Goeld (2) 44 Director
Mark A. Wan (1)(2) 30 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
RODERICK A. YOUNG joined GSI in August 1993, and serves as President and
Chief Executive Officer. From May 1993 until joining GSI, Mr. Young was
President and CEO of Focus Surgery, Inc., a medical device company that was spun
out of Diasonics, Inc. in October 1993. Prior to Focus Surgery, Mr. Young served
in various executive positions, including President, Chief Financial Officer and
Chief Operating Officer of Diasonics, Inc. a medical products manufacturer, from
May 1990 to May 1993. Mr. Young serves or has served on the Board of Directors
of Diasonics and Pacific Gateway Properties, Inc. and several privately held
companies. Mr. Young received a B.S. degree in Industrial Engineering from
Stanford University and an MBA from Harvard Business School.
JAMES E. JERVIS joined GSI in March 1994, and serves as Vice President of
Research and Development. Prior to joining GSI, Mr. Jervis had 30 years of
engineering design, development and operations experience at Raychem
Corporation. At Raychem, Mr. Jervis held various executive positions, including
Director of New Business Development, General Manager - Medical Products Group
and Operations Manager. Mr. Jervis holds 19 patents and is named as inventor in
over 50 other patents. Mr. Jervis received a BSME degree and an MBA from
Stanford University.
GREGORY D. CASCIARO joined GSI in February 1995, and serves as Vice
President of Sales and Marketing. Prior to joining GSI, Mr. Casciaro held
various positions at Devices for Vascular Intervention, Inc., a medical device
manufacturer, including Vice President of Sales, from June 1991 to February
1995. Previously, Mr. Casciaro held various sales positions at North American
Instrument Corporation, a medical device company, from March 1983 to May 1991.
Mr. Casciaro received a B.S. degree in Business Administration at Marquette
University.
STEPHEN J. BONELLI joined GSI in September 1994, and serves as Chief
Financial Officer, Vice President of Finance, and Treasurer. Prior to joining
GSI, Mr. Bonelli held financial management positions at Coactive Computing
Corporation, a computer networking company, from November 1993 to August 1994,
and Ready Systems Corporation, a software company, from May 1990 to October
1993. Previous to those positions, Mr. Bonelli held a management position with
Ernst & Young. Mr. Bonelli received a B.S. degree in Business Administration
from California Polytechnic State University, San Luis Obispo. Mr. Bonelli is a
Certified Public Accountant.
DR. THOMAS J. FOGARTY co-founded GSI in April 1992, and has been a director
of the Company since that time. Dr. Fogarty has an appointment at Stanford
University as a Professor of Surgery. He holds over 50 patents in surgical
instrumentation, including the Fogarty balloon catheter and the Fogarty
51
<PAGE>
vascular clamp. Dr. Fogarty has also been instrumental in founding a variety of
medical device companies over the past 30 years, including Cardiac Pathways,
Inc., CardioVascular Concepts, Perclose, Inc. and Ventritex. Dr. Fogarty is also
a founding general partner of Three Arch Partners, a venture capital investment
firm. Dr. Fogarty received his M.D. from the University of Cincinnati College of
Medicine.
DAVID W. CHONETTE has served as a director of the Company since July 1993.
Mr. Chonette is a general partner of Brentwood Associates, a venture capital
partnership. Mr. Chonette joined Brentwood in 1986, after 19 years with American
Hospital Supply Corporation (now Baxter International), a distributor of medical
products. During this period, Mr. Chonette served as president of the Edward
division, and as group vice president responsible for several medical device and
pharmaceutical divisions. Mr. Chonette also serves as a director of Biopsys
Medical, KeraVision, and several private health care companies. Mr. Chonette
received his B.S. in Mechanical Engineering from MIT, and M.S. in Engineering
from USC.
PAUL GOELD has served as a director of the Company since June 1995. Mr.
Goeld has served as President, Chief Executive Officer and Director of LocalMed,
Inc., a medical device company, since January 1994. From November 1992 to
December 1993, Mr. Goeld was President, Chief Executive Officer, and a Director
of Pilot Cardiovascular Systems, Inc., a manufacturer of medical devices. From
September 1991 to April 1992, Mr. Goeld was President of the Angioplasty
Division of Datascope Corporation, a manufacturer of medical devices. From 1986
to 1991, Mr. Goeld was President and Chief Executive Officer, of Camino
Laboratories, Inc., a manufacturer of diagnostic systems. Mr. Goeld received his
B.S in Chemistry from the University of Florida and M.B.A. from Pepperdine
University.
MARK A. WAN co-founded GSI in April 1992 and served as an officer from June
1992 to September 1993. Mr. Wan was also a founding general partner of Three
Arch Partners, a venture capital partnership, in October 1993 where he continues
to hold the position of general partner. Prior to founding Three Arch Partners,
from 1987 to September 1993, Mr. Wan served in various positions at Brentwood
Associates, most recently as a general partner. Mr. Wan also serves on the Board
of Directors of LocalMed, Inc., Perclose, and several other privately-held
health care companies. In addition, he has been involved in the formation and
operation of several privately held, venture-capital backed health care
companies. Mr. Wan received a B.S and B.A. from Yale University and an M.B.A.
from Stanford Graduate School of Business.
BOARD COMPOSITION
The Company's Bylaws authorize the Board to designate the number of
directors. The Company currently has five directors. All directors hold office
until the next annual meeting of shareholders or until their successors have
been elected and qualified. Officers serve at the discretion of the Board of
Directors. Each of the Company's officers and directors, other than non-employee
directors, devotes substantially full time to the affairs of the Company. The
Company's non-employee directors devote such time to the affairs of the Company
as is necessary to discharge their duties. There are no family relationships
between any of the directors, executive officers, or key employees of the
Company.
BOARD COMMITTEES
The Company's Board of Directors has established a Compensation Committee
(consisting of Messrs. Goeld and Wan), which establishes salaries, incentives
and other forms of compensation for Directors, executive officers and key
employees of the Company, and administers various incentive compensation and
benefit plans, and an Audit Committee (consisting of Messrs. Chonette and Wan),
which reviews the results and scope of the audit and other services provided by
the Company's independent accountants and reviews the Company's internal audit
controls.
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<PAGE>
DIRECTOR COMPENSATION
Directors do not currently receive any cash compensation from the Company
for their service as members of the Board of Directors, although they are
reimbursed for certain expenses in connection with attendance at Board and
Committee meetings. Non-employee directors of the Company are eligible to
receive options under the Directors' Plan. See "Management -- Stock and Other
Plans."
EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded or paid by the
Company during the fiscal year ended June 30, 1995 to (i) the Company's Chief
Executive Officer and (ii) the most highly paid of the Company's other executive
officers who earned in excess of $100,000 during the fiscal year (collectively,
the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION
- ---------------------------------------------------------------- ----------- --------- -------------
<S> <C> <C> <C>
Roderick A. Young .............................................. $ 160,000 $ 20,000 $ 0
President and Chief Executive Officer
James E. Jervis ................................................ 133,377 0 0
Vice President of Research and Development
</TABLE>
No options to purchase capital stock of the Company were granted during the
fiscal year ended June 30, 1995 to the Named Executive Officers. Subsequent to
June 30, 1995, the Company's executive officers were granted stock options or
stock purchase rights to an aggregate of 274,541 shares of Common Stock,
including 109,817 shares to Mr. Young and 27,454 shares to Mr. Jervis.
No named executive officer exercised a stock option during fiscal 1995.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended June 30, 1995, the following individuals served
on the Company's Compensation Committee: Dave Chonette and Mark A. Wan. Mr. Wan
served as an officer of the Company from June 1992 to September 1993. Mr.
Chonette has never served as an officer or employee of the Company.
STOCK AND OTHER PLANS
1992 STOCK OPTION PLAN. The Company's 1992 Stock Option Plan (the "Stock
Plan") was adopted by the Board of Directors in September 1992. A total of
1,715,895 shares of Common Stock has been reserved for issuance under the Stock
Plan. As of March 31, 1996, 64,719 shares had been issued upon the exercise of
stock options or stock purchase rights granted under the Stock Plan, 1,050,904
shares were subject to outstanding options and 600,273 shares remained available
for future grants. The Stock Plan provides for the grant to employees of the
Company (including officers and employee directors) of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and for the grant of nonstatutory stock options to
employees of and consultants to the Company. The Stock Plan also provides for
the issuance of shares of Common Stock directly to employees or consultants
pursuant to restricted stock purchase agreements, rather than pursuant to stock
options. The Stock Plan is administered by the Board of Directors or a committee
of the Board of Directors, which determines the terms of options and stock
purchase rights granted under the Stock Plan, including the number of shares to
be subject to each option and determines the exercise or purchase price of each
option or stock purchase right. In no event, however, may an individual employee
receive option grants for more than 200,000 shares under the Stock Plan in any
fiscal year. The exercise price of all incentive stock options granted under the
Stock Plan must be equal to at least the fair market value of the Common Stock
on the date of grant. The exercise price of all nonstatutory stock options
granted under the Stock Plan must be equal to at least 85% of the fair market
value of the Common Stock on the date of grant. With respect to any participant
who owns stock possessing more than 10% of the voting power of all classes of
stock of the
53
<PAGE>
Company, the exercise price of any stock option granted must equal at least 110%
of the fair market value on the grant date and the maximum term of the option
must not exceed five years. The term of all other options granted under the
Stock Plan may not exceed ten years.
In the event of certain changes in control of the Company, the Stock Plan
requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation; provided, however, that the
Administrator may, in lieu of such assumption or substitution, provide for the
optionee to have the right to exercise the option as to all of the stock subject
thereto, including shares which would not otherwise be exercisable, in which
case each option will be exercisable for 15 days from the date of notice of such
determination. Unless terminated sooner, the Stock Plan will terminate ten years
from its effective date. The Board has authority to amend or terminate the Stock
Plan, provided no such action would impair the rights of the holder of any
outstanding options without the written consent of such holder.
1996 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1996 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in
March 1996, and will be submitted to the shareholders for approval in April
1996. A total of 274,543 shares of Common Stock has been reserved for issuance
under the Purchase Plan. The Purchase Plan will be administered by the Board of
Directors, or a committee named by the Board of Directors. Employees (including
officers and employee directors) of the Company, or of any majority owned
subsidiary designated by the Board, are eligible to participate if they are
employed by the Company or any such subsidiary for at least 20 hours per week
and more than five months per year. The Purchase Plan, which is intended to
qualify under Section 423 of the Code, will be implemented by a series of
offering periods of twelve months duration, with new offering periods (other
than the first offering period) commencing on or about January 1 and July 1 of
each year. Each offering period will consist of two consecutive purchase periods
of six months duration, with the last day of such period being designated a
purchase date. The initial offering period will begin on the date of this
offering and will continue through December 31, 1996, with the first purchase
date occurring on June 30, 1996 and subsequent purchase dates to occur every six
months thereafter. The Purchase Plan permits eligible employees to purchase
Common Stock through payroll deductions, which may not exceed 10% of an
employee's compensation, at a price equal to the lower of 95% of the fair market
value of the Company's Common Stock at the beginning of the offering period or
the purchase date. If the fair market value of the Common Stock on a purchase
date is less than the fair market value at the beginning of the offering period,
a new twelve month offering period will automatically begin on the first
business day following the purchase date with a new fair market value. The
maximum number of shares purchasable by all participants on a purchase date may
not exceed 50,000 shares. Employees may end their participation in an offering
at any time during the offering period, and once during each offering period may
decrease the rate of payroll deductions. Participation in the Purchase Plan ends
automatically on termination of employment with the Company.
The Purchase Plan provides that in the event of a merger of the Company with
or into another corporation or a sale of substantially all of the Company's
assets, each right to purchase stock under the Purchase Plan will be assumed or
an equivalent right substituted by the successor corporation unless the Board of
Directors shortens the offering period so that employees' rights to purchase
stock under the Purchase Plan are exercised prior to the merger or sale of
assets. The Board of Directors has the power to amend or terminate the Purchase
Plan as long as such action does not adversely affect any outstanding rights to
purchase stock thereunder. If not terminated earlier, the Purchase Plan will
have a term of twenty years.
1995 DIRECTORS' STOCK OPTION PLAN. The Directors' Plan was adopted by the
Board of Directors in November 1995, and will be submitted to the shareholders
for approval in April 1996. A total of 164,726 shares of Common Stock have been
reserved for issuance under the Directors' Plan. The Directors' Plan provides
for the grant of nonstatutory stock options to non-employee directors of the
Company. The Directors' Plan is designed to work automatically without
administration; however, to the extent administration is necessary, it will be
performed by the Board of Directors. The exercise
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<PAGE>
price of all stock options granted under the Directors' Plan shall be equal to
the fair market value of a share of the Company's Common Stock on the date of
grant of the option. Options granted under the Directors' Plan have a term of
ten years.
In the event of a merger of the Company with or into another corporation or
a sale of substantially all of the Company's assets, each option will be assumed
or an equivalent option substituted by the successor corporation, unless the
successor corporation does not agree to the assumption or substitution, in which
case the optionee will have the right to exercise the option as to all of the
stock subject thereto, including shares which would not otherwise be
exercisable. The Board of Directors may amend or terminate the Directors' Plan;
provided, however, that no such action may adversely affect any outstanding
option, and the provisions regarding the grant of options under the plan may be
amended only once in any six-month period, other than to comport with changes in
the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or to
Code. If not terminated earlier, the Directors' Plan will have a term of ten
years.
401(K) PLAN. The Company's tax deferred savings plan (the "401(k) Plan") is
intended to qualify under Section 401 of the Internal Revenue Code, so that
contributions by employees or by the Company to the 401(k) Plan, and income
earned on contributions, are generally not taxable to employees until withdrawn
from the 401(k) Plan. The 401(k) Plan covers all employees of the Company.
Employees may elect to defer, in the form of contributions to the 401(k) Plan,
between 1% and 20% of their pre-tax compensation; however, the amount deferred
may not exceed the statutorily prescribed annual limit. The 401(k) Plan does not
permit matching contributions to be made to the 401(k) Plan by the Company on
behalf of employees. Contributions are allocated to each employee's individual
account, which is invested in selected mutual funds or a guaranteed income fund
according to the directions of the employee.
LIMITATIONS OF DIRECTORS' AND OFFICERS' LIABILITY
The Company's Articles of Incorporation provide that directors of the
Company shall not be personally liable to the Company or its shareholders for
monetary damages for breach of the directors' fiduciary duties except for
liability (i) for acts or omissions that involve intentional misconduct or a
knowing and culpable violation of law, (ii) for acts or omissions that a
director believes to be contrary to the best interest of the Company or its
shareholders or that involve the absence of good faith on the part of the
director, (iii) for any transaction from which a director derived an improper
personal benefit, (iv) for acts or omissions that show a reckless disregard for
the director's duty to the Company or its shareholders in circumstances in which
the director was aware, or should have been aware, in the ordinary course of
performing a director's duties, of a risk of a series a serious injury to the
Company or its shareholder, (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the Company or its shareholders, (vi) under Section 310 of the
California Corporations Code (the "California Code") concerning contracts or
transactions between the Company and a director or (vii) under Section 316 of
the California Code concerning directors' liability for improper dividends,
loans, and guarantees. The provision does not extend to acts or omissions of a
director in his capacity as an officer. Further, the provision will not affect
the availability of injunctions and other equitable remedies available to the
Company's shareholders for any violation of a director's fiduciary duty to the
Company or its shareholders.
The Company's Articles of Incorporation also include an authorization for
the Company to indemnify its agents (as defined in Section 317 of the California
Code), through bylaw provisions, by agreement or otherwise, to the fullest
extent permitted by law. Pursuant to this provision, the Company's Bylaws
provide for indemnification of the Company's directors, officers and employees.
In addition, the Company, at its discretion, may provide indemnification to
persons whom the Company is not obligated to indemnify. The Bylaws also allow
the Company to enter into indemnity agreements with individual directors,
officers, employees and other agents. These indemnity agreements have been
entered into with all directors and executive officers and provide the maximum
indemnification
55
<PAGE>
permitted by law. These agreements, together with the Company's Bylaws and
Articles of Incorporation, may require the Company, among other things, to
indemnify these directors or executive officers (other than liability resulting
from willful misconduct of a culpable nature), to advance expenses to them as
they are incurred, provided that they undertake to repay the amount advanced if
it is ultimately determined by a court that they are not entitled to
indemnification, and to obtain directors' and officers' insurance if available
on reasonable terms. Section 317 of the California Code and the Company's Bylaws
make provision for the indemnification of officers, directors and other
corporate agents in terms sufficiently broad to indemnify such persons, under
certain circumstances, for liabilities (including reimbursement of expense
incurred) arising under the Securities Act. At present, there is no pending
litigation or proceeding involving a director, officer or employee of the
Company regarding which indemnification is sought, nor is the Company aware of
any threatened litigation that may result in claims for indemnification.
The Company, with the approval of the Board of Directors, intends to obtain
directors' and officers' liability insurance.
56
<PAGE>
CERTAIN TRANSACTIONS
Since the inception of the Company in April 1992, the Company has issued, in
private placement transactions, shares of Preferred Stock as follows: an
aggregate of 1,710,167 shares of the Company's Series A Preferred Stock at a
price of $0.87 per share, from July 1992 to December 1992; an aggregate of
2,063,203 shares of the Company's Series B Preferred Stock at a price of $2.66
per share, from September 1993 to March 1995; an aggregate of 1,799,108 shares
of the Company's Series C Preferred Stock at a price of $3.75 per share from May
1995 to February 1996; and an aggregate of 261,220 shares of the Company's
Series D Preferred Stock at a price of $7.17 per share in March 1996. The
purchasers of the Series A, Series B and Series C Preferred Stock included,
among others, the following 5% shareholders, directors, and entities associated
with directors:
<TABLE>
<CAPTION>
SHARES OF SHARES OF SHARES OF
SERIES A SERIES B SERIES C
PREFERRED PREFERRED PREFERRED
NAME STOCK STOCK STOCK
- --------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Brentwood Associates V, L.P. ........................................ 571,965 658,151 26,654
Hancock Venture Partners, IV......................................... -- -- 799,640
Norwest Equity Partners IV........................................... -- 752,174 159,928
Schroder Venture International....................................... -- 93,021 533,066
Thomas J. Fogarty, M.D. ............................................. 594,845 188,042 66,637
Three Arch Partners.................................................. -- 93,021 81,014
</TABLE>
Upon the closing of this offering, each outstanding share of Preferred Stock
will be converted into one share of Common Stock.
On February 12, 1996, the Company acquired Adjacent Surgical, Inc.
("Adjacent"), which was primarily owned by Dr. Thomas J. Fogarty, for 254,027
shares of GSI Common Stock. In addition, in connection with the merger, GSI
agreed to assume certain obligations of Adjacent, which GSI subsequently
satisfied with aggregate payments of (i) 111,357 shares of GSI Series C
Preferred Stock, (ii) two convertible promissory notes, for an aggregate
principal amount of $250,000, convertible into shares of Series C Preferred
Stock and (iii) $144,470 in cash. The Adjacent acquisition has been accounted
for as a purchase. The Company, Adjacent and Dr. Fogarty also entered into an
Exclusive License Agreement under which the Company will pay royalties for
certain technology for vascular applications, to the extent the Company does not
already have proprietary rights to such technology. Three Arch Partners received
an aggregate of $250,000 in convertible promissory notes and 13,326 shares of
GSI Series C Preferred Stock in connection with the merger. Dr. Fogarty and Mr.
Wan, directors and co-founders of the Company, are general partners of Three
Arch Partners. In addition, Dr. Fogarty received an aggregate of 207,345 shares
of GSI Common Stock and 91,370 shares of GSI Series C Preferred Stock in
connection with the merger.
The Company has retained Fogarty Engineering, a sole proprietorship owned by
Dr. Fogarty, for certain product development efforts. The Company has paid
Fogarty Engineering $136,000 and $55,000 in fiscal year 1995 and 1994,
respectively.
The Company has loaned an aggregate of $120,000 to certain officers and
directors of the Company in connection with their purchase of Common Stock
pursuant to Common Stock Purchase Agreements.
All future transactions, including any loans from the Company to its
officers, directors, principal shareholders or affiliates, will be approved by a
majority of the Board of Directors, including a majority of the independent and
disinterested members of the Board of Directors or, if required by law, a
majority of disinterested shareholders, and will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of March 31, 1996, as
adjusted to reflect the sale by the Company of the shares offered hereby and
conversion of all outstanding shares of Preferred Stock into shares of Common
Stock upon completion of the offering, (i) by each person known to the Company
to own beneficially more than five percent of the outstanding shares of Common
Stock, (ii) by each director of the Company who beneficially owns shares of
Common Stock, (iii) by each of the Named Executive Officers, and (iv) by all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES PERCENT BENEFICIALLY
BENEFICIALLY OWNED
OWNED ------------------------
----------- BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER (1) OFFERING OFFERING
- ---------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Thomas J. Fogarty, M.D. (2)(6) ....................................... 2,083,633 21.6% 16.5%
3270 Alpine Road
Portola Valley, CA 94028
Brentwood Associates V, L.P. ......................................... 1,428,359 14.8 11.3
1920 Main Street, Suite 820
Irvine, CA 92714
Norwest Equity Partners, IV .......................................... 921,505 9.5 7.3
3000 Sand Hill Road
Building 3, Suite 245
Menlo Park, CA 94025
Hancock Venture Partners, IV ......................................... 799,640 8.3 6.3
One Financial Center, 44th Floor
Boston, MA 02111
Schroder Ventures ILS Fund Trust (3) ................................. 796,327 8.3 6.3
235 Montgomery Street
San Francisco, CA 94104
George Hermann ....................................................... 518,886 5.4 4.1
3270 Alpine Road
Portola Valley, CA 94028
Michelle Y. Monfort (4) .............................................. 519,085 5.4 4.1
c/o General Surgical Innovations, Inc.
3172A Porter Drive
Palo Alto, CA 94304
Kenneth H. Mollenauer (5) ............................................ 531,073 5.5 4.2
c/o General Surgical Innovations, Inc.
3172A Porter Drive
Palo Alto, CA 94304
Mark A. Wan (6)(7) ................................................... 594,253 6.2 4.7
c/o Three Arch Partners
2800 Sand Hill Road
Menlo Park, CA 94025
Roderick A. Young (8)................................................. 311,147 3.2 2.5
James E. Jervis (9)................................................... 98,377 1.0 *
Paul Goeld (10)....................................................... 5,289 * *
David W. Chonette (11)................................................ 1,428,359 14.8 11.3
All directors and executive officers as a group
(8 persons) (2)(6)(7)(8)(9)(10)(11)(12).............................. 4,402,961 45.4% 34.6%
</TABLE>
- ------------------------
*
Less than 1%
58
<PAGE>
(1)
Except as otherwise indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock.
(2)
Includes 188,042 shares held by the Thomas J. Fogarty Separate Property
Trust, 1,267,165 shares held by the Fogarty Family Revocable Trust and
285,982 shares held by Lincoln Trust Company FBO Thomas J. Fogarty IRA. Also
includes 91,370 shares held by Fogarty Engineering, a California corporation
of which Dr. Fogarty is a director. Because of his position with such
entity, Dr. Fogarty may be deemed to be a beneficial owner of such shares,
but expressly disclaims beneficial ownership of such shares.
(3)
Includes 182,604 shares held by Schroder Incorporated, 126,365 shares held
by Schroder Ventures Limited Partnership, 31,591 shares held by Schroder
Ventures U.S. Trust, 101,320 shares held by Schroder Ventures ILS Fund
Trust, 2,665 shares held by Schroder Ventures ILS Company Scheme; 287,817
shares held by Schroder Ventures International Life Sciences LPI and 63,965
shares held by Schroder Ventures International Life Sciences LP2.
(4)
Includes 1,572 shares issuable upon exercise of options exercisable within
60 days of March 31, 1996.
(5)
Includes 3,761 shares held by Kim Mollenauer, 2,820 shares held by Martha
Mollenauer and 2,860 shares held by Terry Mollenauer, all of whom are
members of Kenneth H. Mollenauer's immediate family. Mr. Mollenauer
expressly disclaims beneficial ownership of such shares.
(6)
Includes 33,871 shares held by Three Arch Associates, L.P. and 150,566
shares held by Three Arch Partners, L.P. Also includes 66,637 shares of
Common Stock issuable upon conversion of certain notes held by Three Arch
Partners, L.P. and Three Arch Associates, L.P. Thomas J. Fogarty and Mark A.
Wan are general partners of Three Arch Partners, L.P. and Three Arch
Associates, L.P. and may thereby deemed to be beneficial owners of such
shares. Dr. Fogarty and Mr. Wan both expressly disclaim beneficial ownership
of such shares.
(7) Excludes shares held by Brentwood Associates V, L.P. in which Mr. Wan has a
carried interest. Mr. Wan is a Special Limited Partner of entities
affiliated with Brentwood Associates and disclaims beneficial ownership of
all shares held by such entities, except to the extent of his carried
interest therein.
(8)
Includes 9,151 shares issuable upon exercise of options exercisable within
60 days of March 31, 1996.
(9)
Includes 2,287 shares issuable upon exercise of options exercisable within
60 days of March 31, 1996.
(10)
Includes 5,289 shares issuable upon exercise of options exercisable within
60 days of March 31, 1996.
(11)
Includes 1,428,356 shares held by Brentwood Associates V, L.P. Mr. Chonette
is a general partner of Brentwood Associates V, L.P. and may thereby be
deemed to be a beneficial owner of such shares. Mr. Chonette expressly
disclaims beneficial ownership of such shares.
(12)
Includes 18,585 shares issuable upon exericse of options exercisable within
60 days of March 31, 1996, held by officers who are not Named Executive
Officers.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Following the closing of the sale of the shares offered hereby, the
authorized capital stock of the Company will consist of 50,000,000 shares of
Common Stock, $0.001 par value, and 2,000,000 shares of Preferred Stock, $0.001
par value.
COMMON STOCK
As of March 31, 1996, there were 9,653,342 shares of Common Stock
outstanding that were held of record by approximately 82 shareholders, after
giving effect to the conversion of the Company's Series A, Series B, Series C
and Series D Preferred Stock into Common Stock. The holders of Common Stock are
entitled to one vote per share on all matters to be voted upon by the
shareholders. Subject to preferences that may be applicable to any outstanding
Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." In the
event of a liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably in all assets remaining after payment
of liabilities, subject to prior rights of Preferred Stock, if any, then
outstanding. The Common Stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
available to the Common Stock. All outstanding shares of Common Stock are fully
paid and non-assessable, and the shares of Common Stock to be issued upon
completion of this offering will be fully paid and nonassessable.
PREFERRED STOCK
Effective following the closing of this offering, the Company will be
authorized to issue 2,000,000 shares of undesignated Preferred Stock. The Board
of Directors will have the authority to issue the undesignated Preferred Stock
in one or more series and to determine the powers, preferences and rights and
the qualifications, limitations or restrictions granted to or imposed upon any
wholly unissued series of undesignated Preferred Stock including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption
prices, liquidation preferences, and to fix the number of shares constituting
any series and the designation of such series, without any further vote or
action by the shareholders. The issuance of Preferred Stock may have the effect
of delaying, deferring or preventing a change in control of the Company without
further action by the shareholders and may adversely affect the voting and other
rights of the holders of Common Stock. The issuance of Preferred Stock with
voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others. At
present, the Company has no plans to issue any shares of Preferred Stock.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
After this offering, the holders of 8,842,879 shares of Common Stock or
their transferees are entitled to certain rights with respect to the
registration of such shares under the Securities Act. These rights are provided
under the terms of an agreement between the Company and the holders of
Registrable Securities (as defined below). The Common Stock is issuable upon
conversion of the outstanding Preferred Stock (collectively the "Registrable
Securities"). Subject to certain limitations in the agreement, the holders of a
majority of the then outstanding Registrable Securities may require, on one
occasion after three months from the effective date of this Offering, that the
Company use its best efforts to register the Registrable Securities for public
resale. The Company may delay the filing by up to 90 days for business reasons
(but may not exercise this right of delay more than once in any 12-month
period). In addition if the Company registers any of its Common Stock either for
its own account or for the account of other security holders, the holders of
Registrable Securities are entitled to include their shares of Common Stock in
the registration. A holder's right to include shares in an underwritten
registration is subject to the ability of the underwriters to limit the number
of shares included in this Offering. The holders of at least 20% of the
Registrable Securities may also require the Company up to twice a year to
register all or a portion of their Registrable Securities on Form S-3 when use
of such form becomes available to the Company, provided, among other
limitations, that the proposed aggregate offering price of the Registrable
Securities, net of underwriting discounts and
60
<PAGE>
commissions, is at least $10,000,000. The Company can delay the registrations by
up to 90 days for business reasons (but not more than once in any 12-month
period). All registration expenses, including the fees and expenses of one
counsel for the selling stockholders but excluding discounts and commissions on
the selling stockholder shares, are borne by the Company.
EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
In March 1996, the Company's Board of Directors approved certain amendments
to the Company's Articles of Incorporation and Bylaws (the "Amendments") to
provide, among other things, that directors of the Company will be elected
without the application of cumulative voting. Such provision shall become
effective at the first meeting of shareholders following the annual meeting of
shareholders when the Company shall have had at least 800 shareholders. See "--
Common Stock."
The Amendments also provide that, after the closing of the offering
contemplated hereby, any action required or permitted to be taken by the
shareholders of the Company may be taken only at a duly called annual or special
meeting of the shareholders. The Bylaws also establish procedures, including
advance notice procedures with regard to the nomination, other than by or at the
direction of the Board of Directors, of candidates for election as directors.
The foregoing provisions could have the effect of making it more difficult
for a third party to effect a change in the control of the Board of Directors.
In addition, these provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, a majority of the outstanding voting stock of the Company, and may
make more difficult or discourage a takeover of the Company. From time to time,
the Company has had discussions with third parties regarding various strategic
relationships, including the potential sale of the Company although the Company
currently has no commitments in this regard. The Company may continue to have
discussions regarding potential strategic relationships in the future. However,
there can be no assurance that any such strategic relationship will occur.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock Transfer
Co. Its telephone number is (818) 502-1404.
61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect the prevailing market price from time to time.
Furthermore, because only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock in the public market after the restrictions lapse could adversely
affect the prevailing market price and the ability of the Company to raise
equity capital in the future.
Upon completion of this offering, the Company will have outstanding
12,653,342 shares of Common Stock, (assuming no exercise of the Underwriters'
over-allotment option or outstanding options under the Stock Plan or Directors'
Plan after March 31, 1996). Of these shares, the 3,000,000 shares sold in this
offering will be freely transferable without restriction or further registration
under the Securities Act unless purchased by "affiliates" of the Company as that
term is defined in Rule 144 of the Securities Act (an "Affiliate"), which shares
will be subject to the resale limitations of Rule 144 adopted under the
Securities Act. The remaining 9,653,342 shares outstanding upon completion of
this offering and held by existing shareholders will be "restricted securities"
as that term is defined under Rule 144 (the "Restricted Shares"). Restricted
Shares may be sold in the public market only if registered or if they qualify
for an exemption from registration under Rules 144, 144(k), 145 or 701
promulgated under the Securities Act, which rules are summarized below. As a
result of the contractual restrictions described below and the provisions of
Rules 144, 144(k) and 701, additional shares will be available for sale in the
public market as follows: (i) no shares will be available for immediate sale in
the public market on the Effective Date, (ii) 7,498,171 shares and 428,538
shares subject to options exercisable within 180 days of the Effective Date will
be eligible for sale upon expiration of the lock-up agreements 180 days after
the Effective Date, and (iii) 2,155,171 shares and 704,728 shares subject to
options will be eligible for sale upon expiration of their respective vesting
and two-year holding periods.
Upon completion of this offering, the holders of 8,842,879 shares of Common
Stock, or their transferees, will be entitled to certain rights with respect to
the registration of such shares under the Securities Act. See "Description of
Capital Stock -- Registration Rights." Registration of such shares under the
Securities Act would result in such shares (except for shares purchased by
Affiliates) immediately upon the effectiveness of such registration.
All directors and executive officers and certain other shareholders of the
Company, holding in the aggregate 9,653,342 of the shares of Common Stock
outstanding prior to this offering, have agreed with the Underwriters not to
sell or otherwise dispose of any shares of Common Stock for a period of 180 days
after the date of this Prospectus (the "Lockup Period") without the prior
written consent of Cowen & Company. See "Underwriting." The number of shares of
Common Stock available for sale in the public market is further limited by
restrictions under the Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least two years, including
persons who may be deemed "affiliates" of the Company, would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of one percent of the number of shares of Common Stock then outstanding
or the average weekly trading volume of the Common Stock as reported through the
Nasdaq National Market during the four calendar weeks preceding the filing of a
Form 144 with respect to such sale. Sales under Rule 144 are also subject to
certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. 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 for at least
three years the Restricted Shares proposed to be sold, would be entitled to sell
such shares under Rule 144(k) without regard to the volume limitation, manner of
sale provisions, public information requirements or notice requirements.
62
<PAGE>
Subject to certain limitations on the aggregate offering price of a
transaction and certain other conditions, Rule 701 permits resales of shares
issued prior to the date the issuer becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended, (the "Exchange
Act"), pursuant to certain compensatory benefit plans and contracts commencing
90 days after the issuer becomes subject to the reporting requirements of the
Exchange Act, in reliance upon Rule 144 but without compliance with certain
restrictions, including the holding period requirements, contained in Rule 144.
In addition, the Securities and Exchange Commission has indicated that Rule 701
will apply to typical stock options granted by an issuer before it becomes
subject to the reporting requirements of the Exchange Act, along with the shares
acquired upon exercise of such options (including exercises after the date of
this Prospectus). Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this Prospectus, may be sold by persons
other than Affiliates subject only to the manner of sale provisions of Rule 144
and by Affiliates under Rule 144 without compliance with its two-year minimum
holding period requirements.
The Company has agreed not to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock, or enter into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of the Common Stock, for a
period of 180 days after the date of this Prospectus, without the prior written
consent of Cowen & Company, subject to certain limited exceptions.
63
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Cowen & Company and UBS Securities LLC, have severally agreed to purchase
separately from the Company the following respective number 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 SHARES
NAME OF COMMON STOCK
- --------------------------------------------------------------------------- -----------------
<S> <C>
Cowen & Company............................................................
UBS Securities LLC.........................................................
-----------------
Total.................................................................... 3,000,000
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly 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 $ per share. The Underwriters may allow and such dealers may re-allow a
concession not in excess of $ per share to certain other dealers. The
Underwriters have informed the Company that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority. After the
initial public offering of the shares, the offering price and other selling
terms may from time to time be varied by the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus, to cover
over-allotments, if any. If the Underwriters exercise their over-allotment
option, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of shares
of Common Stock to be purchased by each of them shown in the foregoing table
bears to the total number of shares of Common Stock offered hereby. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of shares of Common Stock offered hereby.
The Company's directors, officers and certain other shareholders of the
Company, holding in the aggregate 9,648,195 the shares of Common Stock, have
agreed that they will not, without the prior written consent of Cowen & Company,
offer, sell or otherwise dispose of any shares of Common Stock (other than the
shares offered hereby), options, rights or warrants to acquire shares of Common
Stock, or securities exchangeable for or convertible into shares of Common Stock
owned by them during the 180-day period commencing on the effective date of the
Registration Statement. In addition, the Company has agreed that it will not,
without the prior written consent of Cowen & Company, offer, sell or otherwise
dispose of any shares of Common Stock, options, rights or warrants to acquire
shares of Common Stock, or securities exchangeable for or convertible into
shares of Common Stock during such 180-day period except in certain limited
circumstances.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
64
<PAGE>
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation among the Company and the Representatives. Among the factors
considered in determining the initial public offering price were prevailing
market and economic conditions, the revenues and earnings of the Company, market
valuations of other companies engaged in activities similar to the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, the Company's management and other
factors deemed relevant. The estimated initial public offering price range set
forth on the cover of this Prospectus is subject to change as a result of market
conditions and other factors.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Venture Law Group, A Professional Corporation, 2800 Sand Hill Road,
Menlo Park, California 94025. As of the date of this prospectus, certain members
of Venture Law Group beneficially own an aggregate of 28,733 shares of the
Company's Common Stock. Tae Hea Nahm, a director of Venture Law Group, is also
Secretary of the Company. Certain legal matters in connection with this offering
will be passed upon for the Underwriters by Cooley Godward Castro Huddleson &
Tatum, 3000 Sand Hill Road, Menlo Park, California 94025.
EXPERTS
The audited consolidated financial statements of the Company as of June 30,
1994 and 1995 and March 31, 1996 and for each of the three years in the period
ended June 30, 1995 and for the nine months ended March 31, 1996 included in
this Prospectus, and the related financial statement schedule included elsewhere
in the Registration Statement of which this Prospectus is a part, have been
included herein in reliance on the report of Coopers & Lybrand, L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The balance sheet as of December 31, 1995 and the statement of operations,
shareholders' equity and cash flows of Adjacent Surgical, Inc. for the period
from March 13, 1995 (date of inception) to December 31, 1995 have been included
herein in reliance on the report of Coopers & Lybrand, L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The statements in this Prospectus under the captions "Risk Factors --
Reliance on Patents and Proprietary Technology;" "Business -- Patents and
Proprietary Rights," and other references herein to intellectual property of the
Company have been reviewed and approved by Lyon & Lyon, patent counsel for the
Company, as experts on such matters, and are included herein in reliance upon
that review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement, of which this Prospectus constitutes a
part, under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus omits certain information contained in the
Registration Statement, and reference is made to the Registration Statement and
the exhibits and schedules thereto for further information with respect to the
Company and the Common Stock offered hereby. Statements contained herein
concerning the provisions of any documents are not necessarily complete, and in
each instance reference is made to the copy of such document filed as an exhibit
to the Registration Statement. Each such statement is qualified in its entirety
by such reference. The Registration Statement, including exhibits and schedules
filed therewith, may be inspected without charge at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048
and
65
<PAGE>
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials may be obtained from the Public Reference Section of
the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and its public reference facilities in New York, New York and
Chicago, Illinois, at prescribed rates.
The Company intends to furnish to its shareholders annual reports containing
audited financial statements examined by independent auditors and quarterly
reports containing interim unaudited financial information for the first three
quarters of each fiscal year.
66
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY FINANCIAL STATEMENTS
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Operations...................................................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit).................................................. F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
<CAPTION>
ADJACENT SURGICAL, INC. FINANCIAL STATEMENTS
<S> <C>
Report of Independent Accountants.......................................................................... F-17
Balance Sheet at December 31, 1995......................................................................... F-18
Statement of Operations for the period from March 13, 1995 (date of inception) to December 31, 1995........ F-19
Statement of Shareholders' Deficit for the period from March 13, 1995 (date of inception) to December 31,
1995...................................................................................................... F-20
Statement of Cash Flows for the period from March 13, 1995 (date of inception) to December 31, 1995........ F-21
Notes to Financial Statements.............................................................................. F-22
GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY PRO FORMA FINANCIAL STATEMENTS
Pro Forma Statement of Operations for the year ended June 30, 1995, (unaudited)............................ F-25
Pro Forma Statement of Operations for the nine months ended March 31, 1996, (unaudited).................... F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
General Surgical Innovations, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of General
Surgical Innovations, Inc. and Subsidiary as of June 30, 1994 and 1995, and
March 31, 1996, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for each of the three years in the
period ended June 30, 1995 and for the nine months ended March 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of General
Surgical Innovations, Inc. and Subsidiary as of June 30, 1994 and 1995 and March
31, 1996, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended June 30, 1995 and for the nine
months ended March 31, 1996, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
April 12, 1996
F-2
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------ MARCH 31,
1994 1995 1996
----------- ----------- ------------ PRO FORMA
(NOTE 14)
MARCH 31,
1996
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 2,301,066 $ 4,540,565 $ 3,904,393
Accounts receivable, net of allowance for doubtful
accounts of none and $17,000 at June 30, 1994 and 1995,
respectively, and $12,000 at March 31, 1996............ 627,277 256,023 601,032
Inventories............................................. 221,777 419,565 698,324
Prepaid expenses and other current assets............... 46,117 83,780 503,724
----------- ----------- ------------
Total current assets................................ 3,196,237 5,299,933 5,707,473
Fixed assets, net of depreciation and amortization........ 327,023 613,088 718,167
Intangible and other assets, net.......................... 2,022 331,780 282,180
----------- ----------- ------------
Total assets...................................... $ 3,525,282 $ 6,244,801 $ 6,707,820
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
LIABILITIES
<TABLE>
<S> <C> <C> <C> <C>
Current liabilities:
Bank line of credit..................................... $ 500,000
Accounts payable........................................ $ 258,546 $ 296,539 849,886
Accrued liabilities..................................... 273,222 327,474 1,004,171
Note payable............................................ 14,770 264,438 $ 14,438
Bank borrowings......................................... 85,714 167,446
Deferred revenue........................................ 133,333 133,333 133,333
----------- ----------- ------------ ------------
Total current liabilities........................... 679,871 843,060 2,919,274 2,669,274
Note payable, less current portion........................ 50,356
Bank borrowings, less current portion..................... 192,857 332,901
Deferred revenue, less current portion.................... 233,334 100,000
Other liabilities......................................... 200,000 200,000
----------- ----------- ------------ ------------
Total liabilities................................. 963,561 1,335,917 3,452,175 3,202,175
----------- ----------- ------------ ------------
Commitments (Note 9).
Convertible redeemable preferred stock, $.001 par value:
Authorized: 6,123,867 shares; issued and outstanding,
3,745,185 shares at June 30, 1994, 5,461,121 at June 30,
1995 and 5,833,698 at March 31, 1996 (Liquidation and
redemption value: $1,495,004, $5,486,001, $6,749,745 and
$1,874,406 for Series A, Series B, Series C and Series D
respectively)............................................ 6,840,839 13,224,795 15,547,028
----------- ----------- ------------
</TABLE>
SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C> <C> <C> <C>
Preferred stock, $.001 par value pro forma: Authorized:
2,000,000 shares; none issued and outstanding:
Common stock, $.001 par value:
Authorized: 10,000,000 shares (50,000,000 shares pro
forma); issued and outstanding: 3,255,153 shares at
June 30, 1994, 3,490,108 at June 30, 1995 and 3,753,007
at March 31, 1996 and 9,653,342 at March 31, 1996 pro
forma.................................................. 3,255 3,490 3,753 9,653
Additional paid-in capital................................ 89,964 152,885 2,142,307 17,933,435
Notes receivable from shareholders........................ (71,275) (120,058) (120,058) (120,058)
Deferred compensation..................................... (530,229) (530,229)
Accumulated deficit....................................... (4,301,062) (8,352,228) (13,787,156) (13,787,156)
----------- ----------- ------------ ------------
Total shareholders' equity (deficit)................ (4,279,118) (8,315,911) (12,291,383) $ 3,505,645
----------- ----------- ------------ ------------
------------
Total liabilities and shareholders' equity
(deficit)........................................ $ 3,525,282 $ 6,244,801 $ 6,707,820
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
---------------------------------------------- ------------------------------
1993 1994 1995 1996
-------------- -------------- -------------- 1995 --------------
--------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales.......................................... $ 788,729 $ 2,436,793 $ 1,804,991 $ 3,421,093
Cost of sales.................................. 599,672 1,262,046 908,258 1,654,207
-------------- -------------- -------------- --------------
Gross profit............................... 189,057 1,174,747 896,733 1,766,886
-------------- -------------- -------------- --------------
Operating expenses:
Research and development..................... $ 749,888 495,900 975,077 735,013 863,440
Sales and marketing.......................... 41,831 1,531,638 2,858,475 1,965,291 2,578,282
General and administrative................... 398,661 1,338,210 1,399,852 1,126,607 1,119,696
Write-off of acquired in-process research and
development................................. 2,791,491
-------------- -------------- -------------- -------------- --------------
Total operating expenses................... 1,190,380 3,365,748 5,233,404 3,826,911 7,352,909
-------------- -------------- -------------- -------------- --------------
Operating loss........................... (1,190,380) (3,176,691) (4,058,657) (2,930,178) (5,586,023)
Interest income................................ 21,810 64,016 50,849 17,199 99,767
Interest expense............................... (3,216) (7,214) (28,795) (12,504) (20,348)
Other income (expense)......................... 715 (14,563) (10,596) 71,676
-------------- -------------- -------------- -------------- --------------
Net loss............................... $ (1,171,786) $ (3,119,174) $ (4,051,166) $ (2,936,079) $ (5,434,928)
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Net loss per share............................. $ (0.20) $ (0.49) $ (0.62) $ (0.45) $ (0.83)
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Shares used in computing net loss per share.... 5,993,264 6,312,569 6,495,826 6,472,071 6,555,501
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Pro forma net loss per share................... $ (0.40) $ (0.53)
-------------- --------------
-------------- --------------
Shares used in computing pro forma net loss per
share (Note 14)............................... 10,241,011 10,300,687
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE THREE YEARS ENDED JUNE 30, 1995,
AND FOR THE NINE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE
---------------------- PAID-IN FROM DEFERRED ACCUMULATED
SHARES AMOUNT CAPITAL SHAREHOLDERS COMPENSATION DEFICIT
--------- ----------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1992....................... 2,299,299 $ 2,299 $ 14,451 $ (10,102)
Issuance of common stock to founders for
cash....................................... 514,769 515 3,235
Net loss.................................... (1,171,786)
--------- ----------- ----------- ------------
Balances, June 30, 1993....................... 2,814,068 2,814 17,686 (1,181,888)
Issuance of common stock for notes
receivable................................. 424,570 425 70,850 $ (71,275)
Exercise of stock options................... 16,515 16 1,428
Net loss.................................... (3,119,174)
--------- ----------- ----------- ------------ ------------
Balances, June 30, 1994....................... 3,255,153 3,255 89,964 (71,275) (4,301,062)
Issuance of common stock for cash........... 28,209 28 8,192
Issuance of common stock for notes
receivable................................. 216,488 217 62,866 (63,083)
Exercise of stock options................... 39,332 39 6,114
Repurchase of common stock in exchange for
note receivable............................ (49,074) (49) (14,251) 14,300
Net loss.................................... (4,051,166)
--------- ----------- ----------- ------------ ------------
Balances, June 30, 1995....................... 3,490,108 3,490 152,885 (120,058) (8,352,228)
Exercise of stock options................... 8,872 9 2,520
Issuance of common stock.................... 254,027 254 1,387,649
Deferred compensation related to grants of
stock options.............................. 599,253 $ (599,253)
Amortization of deferred compensation....... 69,024
Net loss.................................... (5,434,928)
--------- ----------- ----------- ------------ ------------- ------------
Balances, March 31, 1996...................... 3,753,007 $ 3,753 $ 2,142,307 $ (120,058) $ (530,229) $(13,787,156)
--------- ----------- ----------- ------------ ------------- ------------
--------- ----------- ----------- ------------ ------------- ------------
<CAPTION>
TOTAL
------------
<S> <C>
Balances, June 30, 1992....................... $ 6,648
Issuance of common stock to founders for
cash....................................... 3,750
Net loss.................................... (1,171,786)
------------
Balances, June 30, 1993....................... (1,161,388)
Issuance of common stock for notes
receivable................................. --
Exercise of stock options................... 1,444
Net loss.................................... (3,119,174)
------------
Balances, June 30, 1994....................... (4,279,118)
Issuance of common stock for cash........... 8,220
Issuance of common stock for notes
receivable................................. --
Exercise of stock options................... 6,153
Repurchase of common stock in exchange for
note receivable............................ --
Net loss.................................... (4,051,166)
------------
Balances, June 30, 1995....................... (8,315,911)
Exercise of stock options................... 2,529
Issuance of common stock.................... 1,387,903
Deferred compensation related to grants of
stock options..............................
Amortization of deferred compensation....... 69,024
Net loss.................................... (5,434,928)
------------
Balances, March 31, 1996...................... $(12,291,383)
------------
------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MARCH
YEAR ENDED JUNE 30, 31,
---------------------------------------------- --------------
1993 1994 1995
-------------- -------------- -------------- 1995
--------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................................... $ (1,171,786) $ (3,119,174) $ (4,051,166) $ (2,936,079)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of deferred compensation..........................
Depreciation and amortization.................................. 13,312 54,992 186,273 42,016
Write-off of acquired in-process research and development......
Changes in operating assets and liabilities:
Accounts receivable.......................................... (627,277) 371,254 219,888
Inventory.................................................... (221,777) (197,788) (127,878)
Prepaid expenses and other current assets.................... (27,280) (18,837) (37,663) (44,642)
Intangible and other assets.................................. (15,581) 13,559
Accounts payable............................................. 70,222 188,324 37,993 122,061
Accrued liabilities.......................................... 101,018 162,102 54,252 70,216
Deferred revenue............................................. 366,667 (133,334) (99,999)
-------------- -------------- -------------- --------------
Net cash used in operating activities...................... (1,030,095) (3,201,421) (3,770,179) (2,754,417)
-------------- -------------- -------------- --------------
Cash flows from investing activities:
Acquisition of fixed assets...................................... (112,521) (200,886) (513,037) (305,969)
Acquisition of patents........................................... (85,000) (85,000)
Disposal of fixed assets......................................... 8,696
Cash received on acquisition of Adjacent Surgical, Inc. (Note
3)..............................................................
-------------- -------------- -------------- --------------
Net cash used in investing activities........................ (112,521) (200,886) (589,341) (390,969)
-------------- -------------- -------------- --------------
Cash flows from financing activities:
Proceeds from issuance of Series A convertible redeemable
preferred stock................................................. 1,462,179
Proceeds from issuance of Series B convertible redeemable
preferred stock................................................. 5,378,660
Proceeds from issuance of Series C convertible redeemable
preferred stock................................................. 6,308,956 750,000
Proceeds from issuance of Series D convertible redeemable
preferred stock.................................................
Proceeds from issuance of common stock........................... 3,750 1,444 14,373 9,541
Principal payments on note payable............................... (4,073) (12,721) (2,881)
Proceeds from bank borrowings.................................... 300,000 300,000
Principal payments on bank borrowings............................ (21,429)
-------------- -------------- -------------- --------------
Net cash provided by financing activities.................. 1,461,856 5,367,383 6,599,019 1,059,541
-------------- -------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents............... 319,240 1,965,076 2,239,499 (2,085,845)
Cash and cash equivalents, beginning of year....................... 16,750 335,990 2,301,066 2,301,066
-------------- -------------- -------------- --------------
Cash and cash equivalents, end of period........................... $ 335,990 $ 2,301,066 $ 4,540,565 $ 215,221
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest....................................................... $ 3,216 $ 7,214 $ 21,503 $ 7,643
Taxes.......................................................... $ 1,600 $ 800 $ 800 $ 800
Noncash investing and financing activities:
Issuance of common stock for notes receivable................ $ 71,275 $ 63,083
Repurchase of common stock for note receivable............... $ 14,300
Issuance of preferred stock for technology patent............ $ 75,000 $ 75,000
Disposals of fixed assets through cancellation of note
payable..................................................... $ 62,245 $ 62,245
Additions to patents and other liabilities................... $ 200,000 $ 200,000
Fixed assets acquired through issuance of notes payable...... $ 81,920
<CAPTION>
1996
--------------
<S> <C>
Cash flows from operating activities:
Net loss......................................................... $ (5,434,928)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of deferred compensation.......................... 69,024
Depreciation and amortization.................................. 235,179
Write-off of acquired in-process research and development...... 2,791,491
Changes in operating assets and liabilities:
Accounts receivable.......................................... (345,009)
Inventory.................................................... (278,759)
Prepaid expenses and other current assets.................... (416,544)
Intangible and other assets..................................
Accounts payable............................................. 506,742
Accrued liabilities.......................................... 204,446
Deferred revenue............................................. (100,000)
--------------
Net cash used in operating activities...................... (2,768,358)
--------------
Cash flows from investing activities:
Acquisition of fixed assets...................................... (261,647)
Acquisition of patents...........................................
Disposal of fixed assets......................................... 39,170
Cash received on acquisition of Adjacent Surgical, Inc. (Note
3).............................................................. 21,132
--------------
Net cash used in investing activities........................ (201,345)
--------------
Cash flows from financing activities:
Proceeds from issuance of Series A convertible redeemable
preferred stock.................................................
Proceeds from issuance of Series B convertible redeemable
preferred stock.................................................
Proceeds from issuance of Series C convertible redeemable
preferred stock.................................................
Proceeds from issuance of Series D convertible redeemable
preferred stock................................................. 1,753,796
Proceeds from issuance of common stock........................... 2,529
Principal payments on note payable............................... (144,570)
Proceeds from bank borrowings.................................... 786,061
Principal payments on bank borrowings............................ (64,285)
--------------
Net cash provided by financing activities.................. 2,333,531
--------------
Net increase (decrease) in cash and cash equivalents............... (636,172)
Cash and cash equivalents, beginning of year....................... 4,540,565
--------------
Cash and cash equivalents, end of period........................... $ 3,904,393
--------------
--------------
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest....................................................... $ 24,307
Taxes.......................................................... $ 800
Noncash investing and financing activities:
Issuance of common stock for notes receivable................
Repurchase of common stock for note receivable...............
Issuance of preferred stock for technology patent............
Disposals of fixed assets through cancellation of note
payable.....................................................
Additions to patents and other liabilities...................
Fixed assets acquired through issuance of notes payable......
</TABLE>
- ------------------------
See Note 3 for other non-cash investing and financing activities.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. FORMATION AND BUSINESS OF THE COMPANY:
General Surgical Innovations, Inc. (the Company) was incorporated on April
13, 1992 to engage in the development, manufacturing and marketing of medical
device balloon dissectors which create new working spaces between natural tissue
planes in the human body. Prior to June 30, 1993, the Company was in the
development stage and devoted substantially all of its efforts to develop its
product, raise capital and recruit personnel.
In the course of its development activities, the Company has sustained
operating losses and expects such losses to continue through at least 1996. The
Company plans to continue to finance its operations with proceeds from the sale
of capital stock, such as the initial public offering contemplated by the
prospectus, of which these financial statements are a part, and revenues from
product sales. The Company's ability to continue as a going concern is dependent
upon successful execution of the planned financings and ultimately, upon
achieving profitable operations. If the offering contemplated herein is not
consummated, the Company will have to seek other sources of capital or adjust
its operating plans.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION (UNAUDITED):
The consolidated financial statements and related notes as of March 31, 1995
and for the nine months ended March 31, 1995 have been prepared on the same
basis as the audited financial statements and, in the opinion of management,
include all adjustments consisting of only normal recurring adjustments,
necessary for a fair presentation of the financial position and results
operations in accordance with generally accepted accounting principles. Results
for the interim period are not necessarily indicative of results to be expected
for the full fiscal year.
BASIS OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
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.
CASH AND CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES:
Investments with an original maturity of 90 days or less as of the date of
purchase are considered cash equivalents. The Company maintains its cash and
cash equivalents in accounts with one major financial institution.
The Company has classified its investments as "available-for-sale." Such
investments are recorded at fair value and unrealized gains and losses, if
material, are recorded as a separate component of equity until realized.
Interest income is recorded using an effective interest rate, with associated
premium or discount amortized to "investment income." The cost of securities
sold is based upon the specific identification method.
INVENTORIES:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
F-7
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FIXED ASSETS:
Fixed assets are stated at cost, net of accumulated depreciation and
amortization. Furniture, fixtures, equipment and tooling are depreciated on a
straight-line basis over their estimated useful lives of three to five years.
Leasehold improvements are amortized over the lesser of their estimated useful
lives or the term of the lease.
REVENUE RECOGNITION:
The Company recognizes product sales upon shipment of product and when title
passes to its customer.
RESEARCH AND DEVELOPMENT:
Research and development expenses are charged to operations as incurred.
CONCENTRATION OF CREDIT RISK:
The Company maintains its cash balances in demand accounts primarily with
one financial institution. For its accounts receivable, management of the
Company performs ongoing credit evaluations of its customers and maintains
allowances for doubtful accounts. At June 30, 1994 and 1995 and March 31, 1996,
one distributor accounted for approximately 71%, 45% and 86%, respectively, of
accounts receivable.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of the Company's financial instruments including cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair values due to their short maturities. Based on the borrowing
rates currently available to the Company for loans with similar terms, the
carrying values of the equipment loan and line of credit approximates fair
values.
INCOME TAXES: The Company accounts for income taxes under Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
which prescribes the use of the liability method whereby deferred tax asset or
liability account balances are calculated at the balance sheet date using
current tax laws and rates in effect.
RECENT PRONOUNCEMENTS:
In March 1995, the Financial Accounting Standards Board issued Statement No.
121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and For
Long-Lived Assets to be Disposed Of," which establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles and
goodwill relates to those assets which are held and used or disposed of. SFAS
121 will be effective for fiscal years beginning after December 15, 1995. The
Company does not anticipate that the adoption of SFAS 121 will have an adverse
material effect on the Company's results of operations.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which
establishes a fair value based method of accounting for stock-based compensation
plans and requires additional disclosures for those companies who elect not to
adopt the new method of accounting. While the Company studies the impact of the
pronouncement, it continues to account for employees stock options under APB
Opinion No. 25, "Accounting for Stock Issued to Employee." SFAS 123 will be
effective for fiscal years beginning after December 15, 1995.
NET LOSS PER SHARE:
The net loss per share, on a historical basis, is computed using the
weighted average number of shares of common stock outstanding after giving
retroactive effect to the 1.37-for-one stock split for all periods presented.
Common equivalent shares from stock options and preferred stock are excluded
F-8
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
from the computation as their effect is anti-dilutive, except that, pursuant to
the Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
and common equivalent shares issued at prices below the anticipated public
offering price during the 12 months immediately preceding the initial filing
date have been included in the calculation as if they were outstanding for all
periods presented (using the treasury stock method and the anticipated initial
public offering price).
3. ACQUISITION:
In February 1996, the Company acquired substantially all of the assets of
Adjacent Surgical, Inc., a development stage enterprise engaged in research and
development for vascular devices. Certain shareholders of Adjacent Surgical,
Inc., also serve as Directors and are also shareholders of the Company.
Consideration paid consisted of the issuance of 254,027 shares of the Company's
common stock and 111,357 shares of the Company's Series C convertible redeemable
preferred stock.
The acquisition was accounted for using the purchase method of accounting,
and accordingly, its operations have been included with those of the Company
since the date of acquisition. The fair market value of the assets acquired,
liabilities assumed and consideration paid is as follows:
<TABLE>
<S> <C>
Assets acquired:
Prepaid expenses............................................. $ 3,400
Fixed assets, net............................................ 68,076
In-process research and development.......................... 2,791,491
Liabilities assumed:
Accounts payable and other liabilities....................... (518,856)
Notes payable................................................ (408,903)
Consideration paid:
Issuance of Series C convertible redeemable preferred
stock....................................................... (568,437)
Issuance of common stock..................................... (1,387,903)
-----------
Cash received.............................................. $ 21,132
-----------
-----------
</TABLE>
Assuming the acquisition had occurred at both the beginning of the Company's
most recent fiscal year ended June 30, 1995 and the nine month period ended
March 31, 1996, pro forma net loss and pro forma net loss per share would have
been $4,345,588 and $0.67 per share and $6,379,452 and $0.97 per share,
respectively.
4. FIXED ASSETS:
Fixed assets comprise:
<TABLE>
<CAPTION>
JUNE 30,
------------------------ MARCH 31,
1994 1995 1996
----------- ----------- -------------
<S> <C> <C> <C>
Equipment............................................ $ 132,233 $ 356,935 $ 545,742
Furniture and fixtures............................... 50,813 193,958 226,476
Tooling.............................................. 65,312 239,178 303,074
Leasehold improvements............................... 146,969 7,616 13,372
----------- ----------- -------------
395,327 797,687 1,088,664
Less accumulated depreciation and amortization....... (68,304) (184,599) (370,497)
----------- ----------- -------------
$ 327,023 $ 613,088 $ 718,167
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
F-9
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVENTORIES:
Inventories comprise:
<TABLE>
<CAPTION>
JUNE 30,
------------------------ MARCH 31,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Raw materials.......................................... $ 90,627 $ 158,451 $ 452,913
Work in progress....................................... 43,006 81,622 110,001
Finished goods......................................... 88,144 179,492 135,410
----------- ----------- -----------
$ 221,777 $ 419,565 $ 698,324
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
6. INTANGIBLE AND OTHER ASSETS:
Intangible and other assets comprise:
<TABLE>
<CAPTION>
JUNE 30,
---------------------- MARCH 31,
1994 1995 1996
--------- ----------- -----------
<S> <C> <C> <C>
Patents.................................................. $ 360,000 $ 360,000
Other.................................................... $ 2,022 1,780 6,180
--------- ----------- -----------
2,022 361,780 366,180
Less accumulated amortization............................ (30,000) (84,000)
--------- ----------- -----------
$ 2,022 $ 331,780 $ 282,180
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
Patents are amortized on a straight line basis over their estimated useful lives
of five years.
7. NOTE PAYABLE:
In February 1996, the Company issued two notes payable to two shareholders
of Adjacent Surgical, Inc., who are also shareholders of the Company, and one
shareholder who is also a director of the Company, in connection with the
purchase of Adjacent Surgical, Inc. totaling $264,438. The notes are payable on
August 12, 1996 and accrue interest at 8% per annum. The notes and all accrued
interest can be paid in cash or converted to Series C Preferred Stock at the
rate of $3.75 per share. However, in the event the Company has a public offering
of its stock, the notes are automatically converted into Series C Preferred
Stock at the then in effect conversion rate.
The Company issued a five-year note payable to a finance company to finance
leasehold improvements during fiscal year 1993. The note bore an interest rate
of 12%, and was payable in monthly installments. During fiscal year 1995, this
note was cancelled in conjunction with the relocation of the Company to a new
facility. The note cancellation was given to the Company as a result of a new
financing agreement being executed with a finance company by the new occupant of
the Company's old facility. The amount outstanding at June 30, 1994 was $65,126,
and none at June 30, 1995 and March 31, 1996.
8. BANK BORROWINGS:
On March 25, 1996, the Company entered into a loan agreement with a
financial institution which provides for two equipment loans of $300,000 and
$700,000 with interest at the bank's prime rate plus 1.75% (10.00% at March 31,
1996) and 1.25% (9.50% at March 31, 1996), respectively. The note for $300,000
matures September 30, 1998 and the note for $700,000 matures on June 30, 2000.
F-10
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. BANK BORROWINGS: (CONTINUED)
The bank borrowings are collateralized by substantially all of the Company's
assets. In addition, the Company is required to maintain certain restrictive
financial covenants. Future minimum payments under the loans are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- -----------------------------------------------------------------------
<S> <C>
1996................................................................... $ 21,429
1997................................................................... 142,882
1998................................................................... 169,150
1999................................................................... 83,436
2000................................................................... 83,450
-----------
500,347
Less current portion................................................... (167,446)
-----------
$ 332,901
-----------
-----------
</TABLE>
Also on March 25, 1996, the Company entered into a line of credit agreement
with a bank for $1,500,000 with interest at the bank's prime rate plus 1.00%
(9.25% at March 31, 1996). The line of credit is due on March 24, 1997 and is
collateralized by substantially all of the Company's assets. The Company is
subject to certain financial covenants including minimum tangible net worth, and
a minimum quick ratio. Total amounts outstanding under the line of credit at
March 31, 1996 are $500,000 with $1,000,000 available for future use.
9. COMMITMENTS:
LEASE AGREEMENTS: The Company leases its facilities under a noncancelable
operating lease that expires on March 31, 1997. The Company is responsible for
certain taxes, maintenance costs and insurance under the lease. Future minimum
rental payments under the lease for fiscal year ending June 30,1997 is $409,983.
Rent expense for the years ended June 30, 1994 and 1995, and for the nine
months ended March 31, 1996 were $74,573, $333,869 and $340,075, respectively.
OTHER COMMITMENTS: In 1992, the Company entered into a royalty agreement to
obtain technology which provides for royalties of 4% of the sales price for
products which utilize this technology. Payments for the years ended June 30,
1994 and 1995, and for the nine months ended March 31, 1996 were $2,236 and
$79,666 and $88,313, respectively.
Also, in 1994 in conjunction with obtaining technology for issuance of
preferred stock, the Company entered into a royalty agreement which provides for
royalties subject to 4% of net sales through 2001. Minimum royalties under the
agreement are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- -----------------------------------------------------------------------
<S> <C>
1996 (three months)....................................................
1997...................................................................
1998...................................................................
1999................................................................... $ 50,000
2000................................................................... 150,000
-----------
$ 200,000
-----------
-----------
</TABLE>
F-11
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CONVERTIBLE REDEEMABLE PREFERRED STOCK:
Under the Company's Articles of Incorporation, the Company's preferred stock
is issuable in series and the Company's Board of Directors is authorized to
determine the rights, preferences and terms of each series.
During 1995, the Company amended its Articles of Incorporation to authorize
the issuance of 1,710,180 shares of Series A, 2,093,392 shares of Series B,
2,059,074 shares of Series C and 261,221 of Series D preferred stock. As of
March 31, 1996, the Company had issued and outstanding 1,710,167, 2,063,203,
1,799,108 and 261,220 shares of Series A, Series B, Series C and Series D
preferred stock, respectively.
Each share of preferred stock has voting rights equal to the number of
common shares into which it converts. Each share of preferred stock is
convertible into common stock, subject to antidilution provisions, at the option
of the holder at any time. Conversion is automatic upon the effective date of a
public offering of common stock for which the aggregate proceeds are not less
than $10,000,000. At March 31, 1996, 6,123,867 shares of the Company's common
stock have been reserved for conversion.
The holders of preferred stock are entitled at any time on or prior to the
effective date of a public offering, with the approval of at least 50% of the
then outstanding preferred stock to require the Company to redeem all shares of
Series A, Series B, Series C and Series D preferred stock then outstanding at a
redemption price of $0.87 per share, $2.66 per share, $3.75 per share and $7.17
per share, respectively. Preferred shareholders are also entitled to
registration rights as described in the respective "Preferred Stock Purchase
Agreement" and are entitled to dividends of $0.09, $0.27, $0.38 and $0.72 per
share per annum for holders of Series A, Series B, Series C and Series D,
respectively, which are noncumulative and in preference to any common stock
dividends, whenever funds are legally available and when declared by the Board
of Directors. As of March 31, 1996, no dividends have been declared.
Series D preferred shareholders have a liquidation preference over all other
shareholders equal to the original purchase price per share plus all declared
and unpaid dividends. Series C preferred shareholders have a liquidation
preference over Series A and B preferred shareholders equal to the original
purchase price per share plus all declared and unpaid dividends. Series B
preferred shareholders have a liquidation preference over Series A and common
shareholders equal to the original purchase price per share plus all declared
and unpaid dividends. Series A preferred shareholders have a liquidation
preference over common shareholders equal to the original purchase price per
share plus all declared and unpaid dividends. After payment of the liquidation
preference to the Series A, Series B, Series C and Series D preferred
shareholders, the remaining assets of the Company will be distributed ratably to
the common shareholders. If the funds available for distribution are not
adequate to cover the Series A, Series B, Series C or Series D preferred stock
liquidation preference, all funds available for distribution are to be
distributed ratably with first preference given to Series D preferred
shareholders.
F-12
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CONVERTIBLE REDEEMABLE PREFERRED STOCK: (CONTINUED)
Convertible redeemable preferred stock comprise:
<TABLE>
<CAPTION>
PREFERRED STOCK
----------------------------------------------
SERIES A SERIES B SERIES C SERIES D TOTAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balances, June 30, 1992.......................... $ -- $ -- $ -- $ -- $ --
Issuance of Series A convertible redeemable
preferred stock for cash, net of issuance
costs........................................... 1,462,179 1,462,179
---------- ---------- ---------- ---------- -----------
Balances, June 30, 1993.......................... 1,462,179 -- -- 1,462,179
Issuance of Series B convertible redeemable
preferred stock for cash, net of issuance
costs........................................... 5,378,660 5,378,660
---------- ---------- ---------- ---------- -----------
Balances, June 30, 1994.......................... 1,462,179 5,378,660 6,840,839
Issuance of Series B convertible redeemable
preferred stock for technology patent........... 75,000 75,000
Issuance of Series C convertible redeemable
preferred stock for cash, net of issuance
costs........................................... 6,308,956 6,308,956
---------- ---------- ---------- ---------- -----------
Balances, June 30, 1995.......................... 1,462,179 5,453,660 6,308,956 13,224,795
Issuance of Series C convertible redeemable
preferred stock for the acquisition of Adjacent
Surgical, Inc., net of issuance costs........... 568,429 568,429
Issuance of Series D convertible redeemable
preferred stock for cash, net of issuance
costs........................................... 1,753,804 1,753,804
---------- ---------- ---------- ---------- -----------
Balances, March 31, 1996......................... $1,462,179 $5,453,660 $6,877,385 $1,753,804 $15,547,028
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
</TABLE>
Liquidation and redemption values are $1,495,004, $5,486,001, $6,749,745 and
$1,874,406 for Series A, Series B, Series C and Series D redeemable convertible
preferred stock, respectively.
11. SHAREHOLDERS' EQUITY
COMMON STOCK SPLIT:
In March 1996, the Board of Directors approved a 1.37 to 1 stock split of
its common stock and preferred stock. All share and per share information in the
accompanying financial statements have been restated to give retroactive
recognition to the stock split for all periods presented.
COMMON STOCK:
The Company has issued through March 31, 1996 shares of its common stock to
the founders and key employees of the Company under stock purchase agreements.
Certain stock purchase agreements (the Agreements) contain provisions for the
repurchase of common stock by the Company in the event of termination of
employment, during the vesting period following the date of employment.
Generally, 25% of the shares of common stock purchased under the Agreements are
released from the Company's repurchase option at the end of twelve months from a
participant's hiring date with the remaining shares being released from
repurchase ratably over 36 months. At March 31, 1996, 221,530 shares are subject
to repurchase under the Agreements. Each share of common stock has the right to
one vote. The holders of common stock are also entitled to receive dividends
whenever funds are legally available and when declared by the Board of
Directors, subject to the prior rights of holder of all classes of stock at the
time outstanding having priority rights as to dividends.
In March 1996, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission permitting
the Company to sell shares of its common stock to the public and an amendment to
the Company's Articles of Incorporation, to be effective after the closing date
of the Company's initial public offering of its common stock, to increase the
authorized number of shares of common stock to 50,000,000 shares.
F-13
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS:
1992 Stock Option Plan
The Company has an Incentive Stock Option Plan (the Plan) under which an
aggregate of 1,715,895 shares of common stock were reserved for issuance.
Under the Plan, incentive options may be granted at prices not lower than
fair market value at the date of grant or 110% of the fair market value if the
optionee, immediately prior to the grant, owns stock representing 10% or more of
the voting power or value of all securities. Nonstatutory options may be granted
at prices not lower than 85% of fair market value at the date of grant as
determined by the Board of Directors. Options granted under the Plan are
exercisable and vest at such times and under such conditions as determined by
the Board. The options generally expire from five years to ten years from date
of grant.
1995 Directors' Stock Option Plan
In November 1995, the Company adopted the Directors' Stock Option Plan,
under which 164,726 shares of Common Stock have been reserved for issuance under
the Directors' Plan. The Directors' Plan will be submitted to the shareholders
for approval in April 1996. The Directors' Plan provides for the grant of
nonstatutory stock options to non-employee directors of the Company at an
initial option to purchase 27,454 shares of common stock, which vests monthly
over two years, and beginning the 1997 annual meeting, an additional annual
stock option grants to purchase 6,864 shares of common stock.
Information with respect to activity under the Plans is set forth below:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
SHARES ------------------------------------------
AVAILABLE OPTIONS NUMBER OF PRICE PER AGGREGATE
FOR GRANT EXERCISED SHARES SHARE PRICE
----------- --------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Shares reserved at adoption............... 617,722
Options granted.......................... (175,707) 175,707 $.09 $ 15,360
----------- ----------- -------------
Balances, June 30, 1993.................... 442,015 175,707 $.09 15,360
Options granted.......................... (240,225) 240,225 $.09-$.29 50,400
Options exercised........................ 16,515 (16,515) $.09 (1,444)
Options terminated....................... 69,279 (69,279) $.09-$.29 (8,856)
----------- --------- ----------- -------------
Balances, June 30, 1994.................... 271,069 16,515 330,138 $.09-$.29 55,460
Options granted.......................... (205,221) 205,221 $.29-$.55 67,850
Options exercised........................ 39,332 (39,332) $.09-$.29 (6,153)
Options terminated....................... 64,994 (64,994) $.09-$.29 (14,447)
----------- --------- ----------- -------------
Balances, June 30, 1995.................... 130,842 55,847 431,033 $.09-$.55 102,710
Increase in shares reserved.............. 1,262,899
Options granted.......................... (728,293) 728,293 $.55-$7.28 1,238,075
Options exercised........................ 8,872 (8,872) $.29 (2,592)
Options terminated....................... 17,188 (17,188) $.29 (5,008)
----------- --------- ----------- -------------
Balances, March 31, 1996................... 682,636 64,719 1,133,266 $.09-$7.28 $ 1,333,185
----------- --------- ----------- -------------
----------- --------- ----------- -------------
</TABLE>
At March 31, 1996, options to purchase 203,504 shares were exercisable.
EMPLOYEE STOCK PURCHASE PLAN:
In March 1996, the Board of Directors adopted the 1996 Employee Stock
Purchase Plan (the ESPP) and reserved 274,543 shares of common stock for
issuance. The purpose of the ESPP is to
F-14
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDERS' EQUITY (CONTINUED)
provide eligible employees of the Company with a means of acquiring common stock
of the Company through payroll deductions. The purchase price of such stock
under the ESPP cannot be less than 95% of the lower of the fair market value on
the specified purchase date or the beginning of the offering period. At March
31, 1996, no shares had been issued under the ESPP plan.
12. SIGNIFICANT CUSTOMERS:
One customer of the Company individually accounted for 68%, 75% and 87% of
revenues for the years ended June 30, 1994 and 1995, and the nine month period
ended March 31, 1996, respectively.
13. INCOME TAXES:
At March 31, 1996 the Company has federal and state net operating loss
carryforwards of $8,400,000 and $3,700,000, respectively, which expire in the
years 1998 - 2010.
The Tax Reform Act of 1986 substantially changed the rules relative to net
operating loss and tax credit carryforwards in the case of an "ownership change"
of a corporation. Due to a change in ownership, as defined, the future
utilization of the Company's net operating loss and credit carryforwards will be
subject to certain limitations.
Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets and liabilities, as adjusted for the adoption of
SFAS 109, are as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1994 1995 MARCH 31, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................................ $ 1,517,000 $ 2,900,000 $ 3,072,000
Capitalized start-up costs...................................... 2,000
Capitalized research expenses................................... 73,000 30,000 143,000
Research and development credit carryforward.................... 90,000 98,000 98,000
Accrued liabilities and other................................... 130,000 199,000
Valuation allowance............................................. (1,682,000) (3,158,000) (3,512,000)
-------------- -------------- --------------
$ -- $ -- $ --
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
In accordance with generally accepted accounting principles, a valuation
allowance must be established for a deferred tax asset if it is uncertain that a
tax benefit may be realized from the asset in the future. The Company has
established a valuation allowance to the extent of its deferred tax assets since
it is not certain that a benefit can be realized in the future due to the
Company's recurring operating losses.
14. PRO FORMA FINANCIAL STATEMENTS INFORMATION:
The pro forma statement of shareholders' equity as of March 31, 1996 is
presented on the face of the balance sheet to reflect the automatic conversion
of all the Company's outstanding preferred stock as of March 31, 1996 into an
aggregate of 5,833,698 shares of common stock and notes payable for $250,000
which are convertible into 66,637 shares of common stock in connection with the
acquisition of Adjacent Surgical (Note 7), and to reflect the creation of a par
value of $0.001 per share preferred stock of which 2,000,000 shares will be
authorized (upon the closing of the offering made thereby).
Pro forma net loss per share has been presented to depict what the net loss
per share would have been had the common shares issuable upon the conversion of
the outstanding preferred stock been outstanding during that period.
F-15
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. RELATED PARTY TRANSACTIONS:
The Company entered into certain product development arrangements with a
sole proprietorship which is owned by a director of the Company. The Company has
paid this sole proprietorship $136,000 and $55,000 in fiscal year 1995 and 1994,
respectively. (See Notes 3 and 7)
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Adjacent Surgical, Inc.:
We have audited the accompanying balance sheet of Adjacent Surgical, Inc. (a
company in the development stage) as of December 31, 1995 and the related
statements of operations, shareholders' deficit and cash flows for the period
from March 13, 1995 (date of inception) to December 31, 1995. The financial
statements are the responsibility of the management of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Adjacent Surgical, Inc. (a
company in the development stage) as of December 31, 1995 and the statements of
operations, shareholders' deficit and cash flows for the period from March 13,
1995 (date of inception) to December 31, 1995 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
May 6, 1996
F-17
<PAGE>
ADJACENT SURGICAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEET, DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 21,132
Prepaid expenses............................................................. 605
-----------
Total current assets....................................................... 21,737
Property and equipment, net.................................................... 63,410
-----------
Total assets............................................................... $ 85,147
-----------
-----------
LIABILITIES
Current liabilities:
Notes payable to related parties............................................. $ 250,000
Notes payable................................................................ 25,000
Accounts payable -- trade.................................................... 46,605
Accounts payable -- related parties.......................................... 821,961
Accrued liabilities.......................................................... 28,875
-----------
Total current liabilities.................................................. 1,172,441
-----------
SHAREHOLDERS' DEFICIT
Convertible preferred stock, $.001 par value;
Authorized: 1,740,000 shares
Issued and outstanding: none................................................. --
Common stock, $.001 par value
Authorized: 3,060,000 shares
Issued and outstanding: 2,700,000............................................ 2,700
Deficit accumulated during the development stage............................... (1,089,994)
-----------
Total shareholders' deficit.................................................. (1,087,294)
-----------
Total liabilities and shareholders' deficit................................ $ 85,147
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
ADJACENT SURGICAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM MARCH 31,
1995
(DATE OF
INCEPTION) TO
DECEMBER 31,
1995
--------------
<S> <C>
Costs and expenses:
Research and development........................................................................ $ 801,780
General and administrative...................................................................... 272,748
--------------
Operating loss................................................................................ (1,074,528)
Interest and other income (expense), net.......................................................... (15,466)
--------------
Net loss...................................................................................... $ (1,089,994)
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
ADJACENT SURGICAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF SHAREHOLDERS' DEFICIT
FOR THE PERIOD FROM MARCH 13, 1995
(DATE OF INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK DURING THE
---------------------- DEVELOPMENT
SHARES AMOUNT STAGE TOTAL
----------- --------- -------------- --------------
<S> <C> <C> <C> <C>
Issuance of common stock.................................. 2,700,000 $ 2,700 $ 2,700
Net loss.................................................. $ (1,089,994) (1,089,994)
----------- --------- -------------- --------------
Balance, December 31, 1995................................ 2,700,000 $ 2,700 $ (1,089,994) $ (1,087,294)
----------- --------- -------------- --------------
----------- --------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
ADJACENT SURGICAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM MARCH 31,
1995
(DATE OF
INCEPTION) TO
DECEMBER 31,
1995
--------------
<S> <C>
Cash flows from operating activities:
Net loss........................................................................................ $ (1,089,994)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation.................................................................................. 12,395
Change in operating liabilities:
Prepaid expenses............................................................................ (605)
Accounts payable -- trade................................................................... 46,605
Accounts payable -- related parties......................................................... 821,961
Accrued liabilities......................................................................... 28,875
--------------
Net cash used in operating activities..................................................... (180,763)
--------------
Cash flows from investing activities:
Purchases of property and equipment............................................................. (75,805)
--------------
Net cash used in investing activities..................................................... (75,805)
--------------
Cash flows from financing activities:
Proceeds from issuance of common stock.......................................................... 2,700
Proceeds from issuance of notes payable to related party........................................ 250,000
Proceeds from issuance of notes payable......................................................... 25,000
--------------
Net cash provided by financing activities................................................. 277,700
--------------
Net increase (decrease) in cash and cash equivalents.............................................. 21,132
Cash and cash equivalents, beginning of period.................................................... --
--------------
Cash and cash equivalents, end of period.......................................................... $ 21,132
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
ADJACENT SURGICAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY:
Adjacent Surgical, Inc. (the Company) designs and develops surgical products
for vascular devices. The Company was incorporated in March 1994 as Redwood
Interventional, Inc. and remained dormant until March 13, 1995 (date of
inception) when the name of the Company was changed to Adjacent Surgical, Inc.
The Company had no activity during 1994 and in 1995 until the commencement of
operations in April 1995. Since inception, the Company has devoted substantially
all of its efforts to develop its product, raise capital and recruit personnel.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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.
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 checking account.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and are depreciated on a
straight-line basis over their estimated useful lives of three to five years.
RESEARCH AND DEVELOPMENT:
Research and development costs are charged to operations as incurred.
CONCENTRATION OF CREDIT RISK:
The Company's cash and cash equivalents were maintained at one major
financial institution.
INCOME TAXES:
The company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which
prescribes the use of the liability method whereby deferred tax asset or
liability account balances are calculated at the balance sheet date using
current tax laws and rates in effect.
RECENT PRONOUNCEMENTS:
During March 1995, the Financial Accounting Standards Board issued
Statements No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," which required the Company
to review for impairment of long-lived assets, certain identifiable intangibles,
and goodwill related to those assets whenever events or changes in circumstances
indicate that the carrying amount of an asset might not be recoverable. In
certain situations, an impairment loss would be recognized. SFAS 121 will become
effective for fiscal years beginning after December 15, 1995, the Company does
not anticipate that the adoption of SFAS 121 will have an adverse material
effect on the Company's results of operations.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which
establishes a fair value based method of accounting for stock-based compensation
plans and requires additional disclosures for
F-22
<PAGE>
ADJACENT SURGICAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
those companies who elect not to adopt the new method of accounting. While the
Company studies the impact of the pronouncement, it continues to account for
employees stock options under APB Option No. 25, "Accounting for Stock Issued to
Employees." SFAS 123 will be effective for fiscal years beginning after December
15, 1995.
3. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1995 comprised:
<TABLE>
<S> <C>
Computer and office equipment............................ $ 55,990
Machinery and equipment.................................. 19,815
---------
75,805
Less accumulated depreciation............................ (12,395)
---------
$ 63,410
---------
---------
</TABLE>
4. NOTES PAYABLE:
In May 1995, the Company entered into three notes payables. The notes and
all accrued interest can be paid in cash or converted to Preferred Stock at the
per share purchase price of a future investment by Preferred Stock investors.
Two of the notes totaling $250,000 are payable 10 days after written demand for
payment has been made by the Payee. One of the notes for $25,000 is due and
payable on December 31, 1995 unless converted to Preferred Stock prior to the
maturity date.
5. STOCKHOLDERS' EQUITY:
COMMON STOCK:
The Company has issued shares of its common stock to founders of the Company
of which one founder was issued 539,000 share of common stock which are subject
to a right of repurchase by the Company. Shares of the common stock are released
from the Company's right of repurchase ratably over 24 months. At December 31,
1995, 269,500 shares were subject to repurchase.
6. RELATED PARTIES:
At December 31, 1995, notes payable totaling $250,000 were issued to
shareholders of the Company.
Included in accounts payable - related parties is a payable for $500,260
which represents expenses of the Company which were paid by a shareholder of the
Company. Interest of $8,455 related to this payable was recorded by the Company.
In October 1995, the Company signed a definitive agreement to be acquired by
General Surgical Innovations, Inc. (GSI), a related enterprise. For the period
from the signing of the agreement to December 31, 1995, expenses totaling
$321,701 were paid on behalf of the Company by General Surgical Innovations,
Inc. (GSI). The amount is included in accounts payable - related parties.
7. INCOME TAXES:
At December 31, 1995 the Company has approximately $1,090,000 in federal and
$1,090,000 in state net operating loss carryforwards to reduce future taxable
income. These carryforwards expire in the year 2010 for federal and 2000 for
state, if not utilized.
The Tax Reform Act of 1986 substantially changes the rules relative to net
operating loss and tax credit carryforwards in the case of an "ownership change"
of a corporation. Any ownership changes, as defined, may restrict utilization of
carryforwards.
F-23
<PAGE>
ADJACENT SURGICAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES: (CONTINUED)
Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets and liabilities at December 31, 1995 are as
follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 437,000
Research and development credit....................... 14,110
---------
451,100
Less valuation allowance................................ (451,100)
---------
Net deferred tax assets................................. $ --
---------
---------
</TABLE>
The Company has established a valuation allowance to the extent of its
deferred tax assets since it is not certain that a benefit can be realized in
the future.
8. SUBSEQUENT EVENTS.
In February 1996, substantially of all of the assets of the Company were
acquired by GSI in exchange for the issuance of GSI common stock, Series A
preferred stock and the assumption of outstanding liabilities. In connection
with the acquisition, GSI assumed outstanding liabilities which were payable to
related parties. In addition, a note payable of the Company totaling $25,000 was
converted into Series C convertible redeemable preferred stock of GSI.
F-24
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
PRO FORMA STATEMENT OF OPERATIONS (1)
FOR THE YEAR ENDED JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
GENERAL
SURGICAL ADJACENT
INNOVATIONS, SURGICAL, PRO FORMA
INC. INC. ADJUSTMENTS CONSOLIDATED
-------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Sales......................................... $ 2,436,793 $ 2,436,793
Cost of sales................................. 1,262,046 1,262,046
-------------- --------------
Gross profit................................ 1,174,747 1,174,747
Operating expenses............................ 5,233,404 $ 294,422 $ 2,791,491(2) 8,319,317
-------------- ------------ -------------- --------------
Operating loss.............................. (4,058,657) (294,422) (2,791,491) (7,144,570)
Interest and other income (expense), net...... 7,491 7,491
-------------- ------------ -------------- --------------
Net loss.................................... $ (4,051,166) $ (294,422) $ (2,791,491) $ (7,137,079)
-------------- ------------ -------------- --------------
-------------- ------------ -------------- --------------
Net loss per share............................ $ (0.62) $ (1.10)
-------------- --------------
-------------- --------------
Shares used in per share calculation.......... 6,495,826 6,495,826
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(1) On February 12, 1996, General Surgical Innovations, Inc. (GSI) acquired
Adjacent Surgical, Inc. (ASI), a private company based in Cupertino,
California for consideration paid of 254,027 shares of GSI Common Stock and
111,357 shares of GSI Series C Convertible Redeemable Preferred Stock and
the assumption of accounts payable and notes payable liabilities of
$927,759. The transaction was accounted for as a purchase. The pro forma
statement of operations for the year ended June 30, 1995 has been prepared
assuming that the transaction took place on March 13, 1995. The pro forma
information is not necessarily indicative of the financial position or
operating results that would have occurred had the acquisition been
consummated on those dates for which the acquisition is being given effect,
nor is it indicative of future operating results or financial position.
(2) Amount represents the inclusion of the write-off of acquired research and
development incurred in connection with the Company's acquisition of ASI as
if the transaction had occurred on March 13, 1995 (date of inception of
ASI).
F-25
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
PRO FORMA STATEMENT OF OPERATIONS (1)
FOR THE NINE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
GENERAL
SURGICAL ADJACENT
INNOVATIONS, SURGICAL, PRO FORMA
INC. INC. ADJUSTMENTS CONSOLIDATED
-------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Sales......................................... $ 3,421,093 $ 3,421,093
Cost of sales................................. 1,654,207 1,654,207
-------------- --------------
Gross profit................................ 1,766,886 1,766,886
Operating expenses............................ 7,352,909 $ 929,058 $ (2,791,491 (2) 5,490,476
-------------- ------------ -------------- --------------
Operating loss.............................. (5,586,023) (929,058) 2,791,491 (3,723,590)
Interest and other income (expense), net...... 151,095 (15,466) 135,629
-------------- ------------ -------------- --------------
Net (loss) income........................... $ (5,434,928) $ (944,524) $ 2,791,491 $ (3,587,961)
-------------- ------------ -------------- --------------
-------------- ------------ -------------- --------------
Net loss per share............................ $ (0.83) $ (0.55)
-------------- --------------
-------------- --------------
Shares used in per share calculation.......... 6,555,501 6,555,501
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(1) On February 12, 1996, General Surgical Innovations, Inc. (GSI) acquired
Adjacent Surgical, Inc. (ASI), a private company based in Cupertino,
California for consideration paid of 254,027 shares of GSI Common Stock and
111,357 shares of GSI Series C Convertible Redeemable Preferred Stock and
the assumption of accounts payable and notes payable liabilities of
$927,759. The transaction was accounted for as a purchase. The pro forma
statement of operations for the nine months ended March 31, 1996 has been
prepared assuming that the transaction took place on March 13, 1995. The pro
forma information is not necessarily indicative of the financial position or
operating results that would have occurred had the acquisition been
consummated on those dates for which the acquisition is being given effect,
nor is it indicative of future operating results or financial position.
(2) Amount represents the reversal of the write-off of acquired research and
development incurred in connection with the Company's acquisition of ASI as
if the transaction had occurred on March 13, 1995 (date of inception of
ASI).
F-26
<PAGE>
(LOGO)
Expanding the possibilites . . . GENERAL SURGERY
VASCULAR SURGERY
COSMETIC AND RECONSTRUCTIVE SURGERY
UROLOGIC SURGERY
GYNECOLOGICAL SURGERY
ORTHOPEDIC SURGERY
A picture of the Spacemaker product, a photograph of
vascular surgery, a photograph of reconstructive
surgery and a photograph of General Surgery.
GSI's Spacemaker balloon dissector system
allows the surgeon to rapidly and relatively
atraumatically create a large operating space
for performing minimally invasive surgery.
General Surgery
Pre-peritoneal space created by the Spacemakder balloon dissector
system for laparoscopic repair of a direct inguinal hernia. Photo
shows dissection of the direct hernia sac. Applications in general
surgery, urology, and gynecology include hernia repair and bladder
neck suspension for female stress urinary incontinence.
Vascular Surgery
Creation of an operating space within the leg for
a wide variety of vascular procedures. Photo
shows access to an incompetent perforating
vein for venous ulcer disease. Vascular
applications include treament of venous
stasis ulcers, saphenous vein harvest,
and peripheral arterial bypass,
including aortic bypass.
Cosmetic and Reconstructive Surgery
Subpectoral plane dissection by the Spacemaker balloon dissectors system
for breast augmentation. Photo shows space which has been created for
placement of a breast implant. Applications in the cosmetic and reconstructive
field include; breast augmentation and reconstruction, brow lift,
face lift, abdominoplasty, and tissue flap harvesting.
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
No dealer, sales representative or other person has been authorized to give
any information or to make any representations in connection with this offering
other than those contained in this Prospectus, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or by any Underwriter. This Prospectus does not constitute an
offer to sell, or a solicitation of an offer to buy any securities other than
the registered securities to which it relates or an offer to, or solicitation
of, any person in any jurisdiction where such an offer or solicitation would be
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances create any implication that there has been no
change in the affairs of the Company since the date hereof or 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
Use of Proceeds...................................... 17
Dividend Policy...................................... 17
Capitalization....................................... 18
Dilution............................................. 19
Selected Consolidated Financial Data................. 20
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 21
Business............................................. 28
Management........................................... 51
Certain Transactions................................. 57
Principal Shareholders............................... 58
Description of Capital Stock......................... 60
Shares Eligible for Future Sale...................... 62
Underwriting......................................... 64
Legal Matters........................................ 65
Experts.............................................. 65
Additional Information............................... 65
Index to Consolidated Financial Statements........... F-1
</TABLE>
------------------------
Until , 1996 (25 days after the commencement of the offering),
all dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to deliver
a Prospectus when acting as Underwriters and with respect to their unsold
allotments or subscriptions.
3,000,000 Shares
[LOGO]
Common Stock
-----------------
PROSPECTUS
------------------------
COWEN & COMPANY
UBS SECURITIES LLC
, 1996
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale of
Common Stock being registered. All amounts are estimates except the registration
fee, the NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
-----------
<S> <C>
Registration Fee................................................................. $ 15,863
NASD Filing Fee.................................................................. 5,145
Nasdaq National Market Listing Fee............................................... 49,125
Printing......................................................................... 100,000
Legal Fees and Expenses.......................................................... 300,000
Accounting Fees and Expenses..................................................... 225,000
Blue Sky Fees and Expenses....................................................... 15,000
Transfer Agent and Registrar Fees................................................ 5,000
Miscellaneous.................................................................... 84,867
-----------
Total........................................................................ $ 800,000
-----------
-----------
</TABLE>
- ------------------------
*To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 317 of the California Corporations Code authorizes a court to award,
or a corporation's Board of Directors to grant, indemnity to directors and
officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Act"). The
Company's Bylaws provide that the Company shall indemnify its directors and
officers to the fullest extent permitted by California law, including
circumstances in which indemnification is otherwise discretionary under
California law. The Company has entered into indemnification agreements with its
directors containing provisions which are in some respects broader than the
specific indemnification provisions contained in the California Corporations
Code. The indemnification agreements may require the Company, among other
things, to indemnify its directors against certain liabilities that may arise by
reason of their status or service as directors (other than liabilities arising
from willful misconduct of culpable nature), to advance their expenses incurred
as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' insurance if available on reasonable
terms. Article IV of the Registrant's Restated Articles of Incorporation
(Exhibit 3.1 hereto) provides for indemnification of its directors and officers
to the maximum extent permitted by the California Corporations Code. Article VI
of the Registrant's Bylaws (Exhibit 3.3 hereto) provides for indemnification of
its directors, officers, employees and other agents to the maximum extent
permitted by the California Corporations Code. In addition, the Registrant has
entered into Indemnification Agreements (Exhibit 10.1 hereto) with its directors
and officers. Reference is also made to Section of the Underwriting Agreement
contained in Exhibit 1.1 hereto, indemnifying officers and directors of the
Registrant against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
(a) Since its inception in April 1992, the Registrant issued and sold
(without payment of any selling commission to any person) the following
unregistered securities:
(1) From September 1992 through March 1996, the Registrant granted
options under the 1992 Stock Option Plan to purchase an aggregate of
1,266,467 shares of Common Stock at exercise prices ranging from $0.09 to
$7.28 per share to 78 employees and consultants.
II-1
<PAGE>
(2) From November 1993 through March 1996, the Registrant issued and
sold, pursuant to the exercise of options granted under the 1992 Stock
Option Plan, 63,367 shares of Common Stock to 9 employees and consultants
for an aggregate purchase price of $158,566.52.
(3) From July 1992 to December 1992, the Registrant issued and sold an
aggregate of 1,245,837 shares of Series A Preferred Stock to six accredited
investors as defined by Rule 501(a) of Regulation D promulgated under the
Act for an aggregate purchase price of $1,810,137.44.
(4) From September 1993 to March 1995, the Registrant issued and sold an
aggregate of 1,503,014 shares of Series B Preferred Stock to 19 accredited
investors as defined by Rule 501(a) of Regulation D promulgated under the
Act for an aggregate purchase price of $5,486,001.10.
(5) From May 1995 to February 1996, the Registrant issued and sold
1,310,630 shares of Series C Preferred Stock to 21 accredited investors as
defined by Rule 501(a) of Regulation D promulgated under the Act for an
aggregate purchase price of $6,749,744.50.
(6) On March 21, 1996, the Registrant issued and sold an aggregate of
261,220 shares of Series D Preferred Stock to six accredited investors as
defined by Rule 501(a) of Regulation D promulgated under the Act for an
aggregate purchase price of $1,874,215 in cash.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
Except for the matters described in Item 1, for which exemption from
registration was claimed under Section 2(3) of the Securities Act on the basis
that such transactions did not involve a "sale" of securities, the issuances of
the securities set forth in Item 15(a) were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such Act as
transactions by an issuer not involving any public offering. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends where affixed to the
securities issued in such transactions. All recipients had adequate access,
through their relationships with the Company, to information about the
Registrant. In addition, the issuances described in Item 2 were deemed to be
exempt from registration under the Securities Act in reliance upon Rule 701
promulgated under such Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement.
*3.1 Amended and Restated Articles of Incorporation of Registrant.
*3.2 Proposed Amended and Restated Articles of Incorporation of Registrant.
*3.3 Bylaws of Registrant.
*3.4 Form of Amended and Restated Bylaws of Registrant.
*4.1 Form of Common Stock Certificate.
*5.1 Opinion of Venture Law Group.
*10.1 Form of Indemnification Agreement.
*10.2 1992 Stock Option Plan and form of Option Agreement.
*10.3 1996 Employee Stock Purchase Plan and form of Subscription Agreement.
*10.4 1995 Directors' Option Plan and form of Option Agreement.
*10.5 Third Amended and Restated Registration Rights Agreement among the Registrant
and certain securityholders of the company, dated as of March 21, 1996.
*10.6 Commercial Security Agreement and Promissory Note dated as of December 15,
1994 between Silicon Valley Bank and the Registrant.
*10.7 Sublease dated July 13, 1994, Sublease Amendment dated November 4, 1995 and
Sublease Second Amendment dated March 15, 1996 between the Registrant and CV
Therapeutics, Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
*+10.8 Agreement and Plan of Reorganization dated as of October 1, 1995, by and
among the Registrant, General Surgical Acquisition Corporation and Adjacent
Surgical, Inc.
*10.9 Merger Agreement, dated February 12, 1996 between Adjacent Surgical, Inc.,
and General Surgical Acquisition Corporation.
*+10.10 Exclusive License Agreement dated as of February 12, 1996 by and among
Adjacent Surgical, Inc., Thomas J. Fogarty, Fogarty Engineering and the
Registrant.
*+10.11 Assignment Agreement dated as of March 9, 1995 between Apogee Medical
Products, Inc., and the Registrant.
*+10.12 Hernia Repair Device Agreement dated as of April 29, 1992 by and among Maciej
Kieturakis, Thomas J. Fogarty and the Registrant, as amended on April 18,
1995.
*+10.13 Distributorship Agreement dated as of March 9, 1994 between the Registrant
and United States Surgical Corporation, as amended on March 25, 1994 and
August 2, 1994.
*10.14 Professional Services Agreement dated June 16, 1992 between the Registrant
and Thomas J. Fogarty.
*10.15 Professional Services Agreement dated June 16, 1992 between the Registrant
and Mark Wan.
*10.16 Bill of Sale and Instrument of Assignment and Grantback License Agreement
dated June 16, 1992 between the Registrant and Thomas J. Fogarty.
*10.17 Bill of Sale and Instrument of Assignment dated June 16, 1992, between the
Registrant and Mark Wan.
*10.18 Loan Modification Agreement dated as of March 25, 1996, by and between the
Registrant and Silicon Valley Bank.
*11.1 Computation of Net Loss Per Share.
23.1 Consent of Independent Accountants (see page II-6).
*23.2 Consent of Counsel (included in Exhibit 5.1).
*23.3 Consent of Lyon and Lyon.
*24.1 Power of Attorney (see page II-5).
*27.1 Report of Independent Accountants on Schedules (see page II-7).
</TABLE>
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*Previously filed with the Commission.
+Confidential treatment requested.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and qualifying accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act, and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the
II-3
<PAGE>
securities being registered hereunder, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to the Registration Statement No. 333-2774
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Palo Alto, State of California, on May 8, 1996.
GENERAL SURGICAL INNOVATIONS, INC.
By: /s/ RODERICK A. YOUNG
-----------------------------------
Roderick A. Young
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 4 TO THE REGISTRATION STATEMENT NO. 333-2774 HAS BEEN SIGNED BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------------------------- ---------------
/s/ RODERICK A. YOUNG
------------------------------------ President, Chief Executive Officer and Director May 8, 1996
Roderick A. Young (Principal Executive Officer)
/s/ STEPHEN J. BONELLI Vice President of Finance and Chief Financial
------------------------------------ Officer (Principal Financial and Accounting May 8, 1996
Stephen J. Bonelli Officer)
*
------------------------------------ Chairman and Director May 8, 1996
Thomas J. Fogarty, M.D.
*
------------------------------------ Director May 8, 1996
Dave Chonette
*
------------------------------------ Director May 8, 1996
Paul Goeld
*
------------------------------------ Director May 8, 1996
Mark A. Wan
</TABLE>
*By: /s/ RODERICK A. YOUNG
-----------------------------------
Roderick A. Young
ATTORNEY-IN-FACT
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<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 4 (File No. 333-2774) of
our reports dated April 12, 1996 on our audits of the consolidated financial
statements and financial statement schedule of General Surgical Innovations,
Inc. and Subsidiary and of our report dated May 6, 1996, on our audit of the
financial statements of Adjacent Surgical, Inc. We also consent to the reference
to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
San Jose, California
May 8, 1996
II-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
In connection with our audits of the consolidated financial statements of
General Surgical Innovations, Inc. and Subsidiary as of June 30, 1994 and 1995
and March 31, 1996, and for each of the three years in the period ended June 30,
1995 and for the nine months ended March 31, 1996, which consolidated financial
statements are included in this Registration Statement, we have also audited the
financial statement schedule listed in Item 16(b) herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
April 12, 1996
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<PAGE>
SCHEDULE II
GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS, DEDUCTIONS BALANCE AT
BEGINNING COSTS AND AND WRITE- END OF
DESCRIPTION OF PERIOD EXPENSES OFFS PERIOD
- ----------------------------------------------------------------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Year ended June 30, 1993
Allowance for bad debt......................................... $ 0 $ 0 $ 0 $ 0
Reserve for obsolete inventory................................. 0 0 0 0
----------- --------- ---------- -----------
$ 0 $ 0 $ 0 $ 0
----------- --------- ---------- -----------
----------- --------- ---------- -----------
Year ended June 30, 1994
Allowance for bad debt......................................... $ 0 $ 0 $ 0 $ 0
Reserve for obsolete inventory................................. 0 0 0 0
----------- --------- ---------- -----------
$ 0 $ 0 $ 0 $ 0
----------- --------- ---------- -----------
----------- --------- ---------- -----------
Year ended June 30, 1995
Allowance for bad debt......................................... $ 0 $ 17,000 $ 0 $ 17,000
Reserve for obsolete inventory................................. 0 35,000 0 35,000
----------- --------- ---------- -----------
$ 0 $ 52,000 $ 0 $ 52,000
----------- --------- ---------- -----------
----------- --------- ---------- -----------
Nine months ended March 31,1996
Allowance for bad debt......................................... $ 17,000 $ 0 $ (5,000) $ 12,000
Reserve for obsolete inventory................................. 35,000 28,000 (18,000) 45,000
----------- --------- ---------- -----------
$ 52,000 $ 28,000 $ (23,000) $ 57,000
----------- --------- ---------- -----------
----------- --------- ---------- -----------
</TABLE>
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS PAGE
- --------- ---------
<C> <S> <C>
23.1 Consent of Independent Accountants (See page II-6)
</TABLE>
