-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KW81ropRZWAI0EHnmiNYIdJZ7dOAAKDaK687vqwnCjh2T2rmRNCCTS2cId18Aa2X serjy3853U8+/EJsEYQxEg== 0001045969-00-000262.txt : 20000412 0001045969-00-000262.hdr.sgml : 20000412 ACCESSION NUMBER: 0001045969-00-000262 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20000411 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VASCULAR SOLUTIONS INC CENTRAL INDEX KEY: 0001030206 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 411859679 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-84089 FILM NUMBER: 598136 BUSINESS ADDRESS: STREET 1: 2495 XENIUM LANE NORTH CITY: MINNEAPOLIS STATE: MN ZIP: 55441 BUSINESS PHONE: 6125532970 MAIL ADDRESS: STREET 1: 2495 XENIUM LANE NORTH CITY: MINNEAPOLIS STATE: MN ZIP: 55441 S-1/A 1 AMENDMENT NO. 5 TO FORM S-1 As filed with the Securities and Exchange Commission on April 11, 2000 Registration No. 333-84089 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- AMENDMENT NO. 5 TO FORM S-1 REGISTRATION STATEMENT under The Securities Act of 1933 --------------- VASCULAR SOLUTIONS, INC. (Exact name of registrant as specified in its charter) Minnesota 3841 41-1859679 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification Number) incorporation or Classification Code organization) Number) 2495 Xenium Lane North Minneapolis, Minnesota 55441 (763) 656-4300 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Howard C. Root Vascular Solutions, Inc. 2495 Xenium Lane North Minneapolis, Minnesota 55441 (763) 656-4300 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------- Copy to: Timothy S. Hearn, Esq. Dorsey & Whitney LLP 220 South Sixth Street Minneapolis, Minnesota 55402-1498 (612) 340-2600 --------------- 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, check the following box and list the Securities Act registration statement 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 statement number of the earliest effective registration statement for the same offering:[ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest 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:[ ] --------------- 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 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and it is not soliciting an offer to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED APRIL 11, 2000 PROSPECTUS 2,675,000 Shares [Vascular Solutions Logo] Common Stock $ per share We are selling 2,675,000 shares of our common stock. We have granted the underwriters a 30-day option to purchase up to an additional 401,250 shares to cover over-allotments, if any. This is the initial public offering of our common stock. We currently expect the initial public offering price to be between $11.00 and $13.00 per share. We have applied to have our common stock included for quotation on the Nasdaq National Market under the symbol "VASC." -------- Investing in our common stock involves risks. For more information, see "Risk Factors" commencing on page 4. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or determined that this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. --------
Per Share Total --------- ----- Initial Public Offering Price $ $ Underwriting Discount $ $ Proceeds to Vascular Solutions, Inc. (before expenses) $ $
The underwriters expect to deliver the shares to purchasers on or about , 2000. -------- , 2000 [Duett sealing device logo] 1. Completely seals the puncture site--both the arterial puncture and the tissue tract between the skin surface and the artery. 2. Works effectively to cause clotting, even in patients receiving powerful anti-clotting medications. 3. Leaves nothing behind that could cause infection or interfere with accessing the puncture site again, if that becomes necessary. 4. Enables rapid deployment with easy-to-use, one-size-fits-all device which uses the existing introducer sheath. 5. Minimizes the amount of manual compression and immobile bed rest, therefore improving patient comfort and increasing provider efficiency. [Drawing of a human lying down, with a puncture in the groin and showing arteries running to the heart. Expanded insert shows the Duett sealing device being deployed.] A premarket approval application for the Vascular Solutions Duett(TM) sealing device has been filed with the United States Food and Drug Administration. We have not received approval from the FDA for the sale of the Duett sealing device in the United States, and we can make no assurance of when, if ever, the Duett sealing device will be approved by the FDA. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information provided by this prospectus is accurate as of any date other than the date on the front of this prospectus. ---------------- TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 2 Risk Factors............................................................. 5 Forward-Looking Statements............................................... 15 Trademarks............................................................... 15 Use of Proceeds.......................................................... 16 Dividend Policy.......................................................... 16 Capitalization........................................................... 17 Dilution................................................................. 18 Selected Financial Data.................................................. 19 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 20 Business................................................................. 25 Management............................................................... 40 Certain Transactions..................................................... 47 Principal Shareholders................................................... 48 Description of Capital Stock............................................. 50 Shares Eligible for Future Sale.......................................... 53 Underwriting............................................................. 55 Legal Matters............................................................ 57 Experts.................................................................. 57 Where You Can Find More Information...................................... 57 Index to Financial Statements............................................ F-1
Until , 2000, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 1 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. You should read the entire prospectus carefully. You should consider the information under "Risk Factors" and in our financial statements and the notes relating to these financial statements, together with the information included elsewhere in this prospectus, before deciding to invest in our common stock. Our Business We manufacture, market and sell the Vascular Solutions Duett sealing device, which enables cardiologists and radiologists to rapidly seal the puncture site following catheterization procedures such as angiography, angioplasty and stenting. Our product combines a simple balloon catheter delivery mechanism with a powerful, proprietary procoagulant, or blood clotting mixture. We believe our product offers advantages over both manual compression and the three existing FDA-approved devices used to seal the puncture site following the catheterization procedure. We began selling our product in Europe in February 1998. On June 30, 1999, we filed our premarket approval, or PMA, application with the FDA. If we receive approval of our application we will commence selling our Duett sealing device in the United States. Over 15,000 deployments of our device have been performed worldwide. We believe our product improves patient comfort and is more efficient than the current standard of manual compression. The Duett sealing device is an easy-to-use system which, when compared to the three currently available FDA- approved sealing devices, offers a better combination of a complete seal of the puncture site with nothing left behind in the artery. Our product uses a balloon catheter, a device already familiar to cardiologists and radiologists, which is inserted through the introducer sheath that is already in the patient. The inflated balloon serves as a temporary mechanical seal, preventing the flow of blood from the artery. Our procoagulant, which is a proprietary mixture of thrombin, collagen and diluent, is then delivered to the puncture site, stimulating rapid clotting and creating a complete seal of both the arterial puncture and the tissue tract from the artery to the skin surface. With our Duett sealing device, nothing is left behind in the artery, so immediate reaccess of the site, if necessary, is possible, and the potential for infection is minimized. The primary factors underlying the market opportunity for vascular sealing devices are that (1) there are a significant and growing number of catheterization procedures being performed, and (2) the substantial majority of the resulting puncture sites are still being sealed using manual compression. In 1999, over seven million catheterization procedures were performed. This number is expected to grow by more than 5% each year for the next three years principally due to the increasing incidence of cardiovascular disease. Vascular sealing devices were introduced in the United States in late 1995 and have been adopted by physicians, as evidenced by the $160 million of these devices that were sold worldwide in 1999. Nonetheless, over 85% of the arterial punctures created in 1999 still were sealed using manual compression. 2 During 1999, we had net sales of $1,429,094 and a net loss of $7.9 million. Because of our plans to invest heavily in sales and marketing, hire additional employees and expand our commercialization, we expect to incur significant net losses through at least December 31, 2000. Our success will depend on the medical community's acceptance of our Duett sealing device. The Offering Common stock offered.......... 2,675,000 shares Common stock to be outstanding after the offering...................... 11,717,868 shares. This number is based on shares outstanding on March 31, 2000. It excludes 946,751 shares of common stock issuable upon exercise of options outstanding under our stock option plan and 268,000 shares of common stock issuable upon exercise of other outstanding stock option and warrant agreements. Use of proceeds............... We intend to use the net proceeds of this offering to hire, train and deploy a direct United States sales force, for working capital and for general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol................ VASC 3 Summary Financial Data (in thousands, except per share amounts)
Three Months Ended March 31 Year Ended December 31, , ------------------------- --------------- 1997 1998 1999 1999 2000 ------- ------- ------- ------- ------ (unaudited) Statement of Operations Data: Net sales........................ $ -- $ 494 $ 1,429 $ 207 $ 643 Gross profit..................... -- 52 364 21 294 Total operating expenses......... 1,724 5,467 8,597 1,838 2,347 Operating loss................... (1,724) (5,415) (8,233) (1,817) (2,053) Net loss......................... (1,652) (5,141) (7,862) (1,714) (1,931) Basic and diluted net loss per share........................... $ (.62) $ (1.40) $ (1.95) $ (.46) $ (.37) Shares used in basic and diluted net loss per share.............. 2,668 3,660 4,033 3,700 5,255 Pro forma basic and diluted net loss per share.................. $ (1.01) $ (.21) Shares used in pro forma net loss per share....................... 7,810 9,032
March 31, 2000 ---------------- As Actual Adjusted ------- -------- (unaudited) Balance Sheet Data: Cash and cash equivalents.................................... $ 8,065 $37,568 Working capital.............................................. 8,519 38,022 Total assets................................................. 10,380 39,883 Long-term debt............................................... -- -- Total shareholders' equity................................... 9,281 38,784
For information regarding the determination of the number of shares used in computing pro forma basic and diluted net loss per share amounts, see note 2 of notes to the financial statements. The balance sheet data as of March 31, 2000 as adjusted, reflects our receipt and application of the estimated net proceeds from the sale of 2,675,000 shares of common stock offered at an assumed initial public offering price of $12.00 per share, after deducting the underwriting discount and estimated offering expenses that we will pay. ---------------- We were incorporated in Minnesota in December 1996 and commenced operations in February 1997. Our facility is located at 2495 Xenium Lane, Minneapolis, Minnesota 55441 and our telephone number is 763-656-4300. Unless otherwise specifically stated, the information in this prospectus has been adjusted to reflect the automatic conversion of all outstanding shares of our preferred stock into shares of common stock, but does not take into account the possible sale of additional shares of common stock to the underwriters pursuant to the underwriters' right to purchase additional shares to cover over-allotments. 4 RISK FACTORS You should carefully consider the risks described below before deciding to purchase our common stock. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks occur, our business, financial condition or results of operations could be seriously harmed. In such case, the trading price of our common stock could decline, and you could lose all or part of your investment. We will not be successful if we do not receive approval from the FDA to sell our Duett sealing device in the United States Before we are able to sell our Duett sealing device in the United States, we must receive approval from the FDA of our PMA application. We filed our PMA application with the FDA on June 30, 1999 and amended our PMA application on January 18, 2000. Prior to granting approval, the FDA may require additional clarification of information provided in the submission, more information or further clinical studies. We are unable to estimate when, if ever, we will receive approval and be able to commence sales of the Duett sealing device in the United States. The PMA application approval process can be expensive, uncertain and lengthy. A number of devices for which premarket approval has been sought have never been approved for marketing. If granted, the approval of our PMA application may include significant limitations on the indicated uses for which our product may be marketed. Should we experience delays or be unable to receive approval from the FDA, our business will be seriously harmed. Because we only began product development in February 1997, we have a limited operating history upon which to evaluate our potential for future success We began product development in February 1997 and began to generate international sales in February 1998. Accordingly, we have only three years of operating history upon which you can evaluate our business and prospects. You must consider the risks and uncertainties frequently encountered by early stage, single-product medical device companies like ours in a new and evolving market, such as vascular sealing devices. If we are unsuccessful in addressing these risks and uncertainties, our business will be seriously harmed. We have been named as the defendant in a patent infringement lawsuit and may face additional intellectual property infringement claims in the future which could prevent us from manufacturing and selling our product or result in our incurring substantial costs and liabilities An adverse determination in any intellectual property litigation or interference proceedings could prohibit us from selling our product, subject us to significant liabilities to third parties or require us to seek licenses from third parties. The costs associated with these license arrangements may be substantial and could include ongoing royalties. Furthermore, the necessary licenses may not be available to us on satisfactory terms, if at all. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling our product. 5 On July 23, 1999, we were named as the defendant in a patent infringement lawsuit brought by Datascope Corp. in the United States District Court for the District of Minnesota. The complaint requested a judgment that our Duett sealing device infringes and, following FDA approval, will infringe a United States patent held by Datascope and asks for relief in the form of an injunction that would prevent us from selling our product in the United States as well as an award of attorneys' fees, costs and disbursements. On March 15, 2000, the court granted summary judgment dismissing all of Datascope's claims, subject to the right of Datascope to recommence the litigation if and when we receive FDA approval of our Duett sealing device. It is not possible at this time to predict the outcome of the lawsuit if it is recommenced, including whether we would be prohibited from selling our Duett sealing device in the United States, or to estimate the amount or range of potential loss, if any. On September 22, 1999, we received a letter from the Daig division of St. Jude Medical, Inc. claiming that the manufacture, use, marketing and sale of our Duett sealing device infringes upon certain United States patents licensed by Daig. The letter referenced a prior letter dated August 18, 1998 from us to the prior licensee of those patents in which we made a proposal intended to avoid the anticipated litigation over those patents. The proposed license was rejected. It is likely that litigation will be commenced in the near future concerning this claim. Daig could initiate a lawsuit requesting an injunction that, if issued, would prohibit us from selling our product. Furthermore, Daig could allege monetary damages that, if awarded, would significantly harm our business. It is not possible to predict the timing, substance or outcome of any lawsuit that may arise from these allegations, including whether we will be prohibited from selling our Duett sealing device in the United States or internationally, or to estimate the amount or range of potential loss, if any. The interventional cardiology industry is characterized by numerous patent filings and frequent and substantial intellectual property litigation. Companies in the interventional cardiology industry in general, and in vascular sealing in particular, have employed intellectual property litigation in an attempt to gain a competitive advantage. We are aware of many United States patents issued to other companies in the vascular sealing field which describe vascular sealing devices. Each of the three vascular sealing products with which our Duett sealing device competes has been subject to infringement litigation. It is likely that we will become the subject of additional intellectual property claims in the future related to our Duett sealing device. Intellectual property litigation in recent years has proven to be very complex, and the outcome of such litigation is difficult to predict. Our defense of the Datascope claim, the Daig claim and any other intellectual property claims filed in the future, regardless of the merits of the complaint, could divert the attention of our technical and management personnel away from the development and marketing of the Duett sealing device for significant periods of time. The costs incurred to defend the Datascope claim, the Daig claim and other future claims could be substantial and seriously harm us, even if we are ultimately successful. We will not be successful if the vascular sealing device market does not adopt our new sealing methodology We have sold only a limited number of our Duett sealing devices to date. We have not commercialized our product in the United States, which we believe represents the largest market for vascular sealing devices, because we do not yet have approval from the FDA to do so. Our success will depend on the medical community's acceptance of our Duett sealing device. We cannot predict 6 how quickly, if at all, the medical community will accept our Duett sealing device, or, if accepted, the extent of its use. Our potential customers must: . believe that our device offers benefits compared to the methodologies and/or devices that they are currently using to seal vascular punctures; . believe that our device is worth the price that they will be asked to pay; and . be willing to commit the time and resources required to change their current methodology. If we encounter difficulties introducing our Duett sealing device into the United States market or expanding our presence in markets outside the United States, our business will be seriously harmed. We currently rely on the Duett sealing device as our sole source of revenue We have developed only one product which is being sold only in a limited number of countries in the foreign market. Even if we were to develop additional products, FDA approval would be required in order to sell them in the United States. Preparation of the requisite materials to seek FDA approval and the approval process itself require a substantial amount of time and money. Therefore, we do not expect to be in a position to sell additional products in the foreseeable future. As a result, our success is solely dependent on the success of our Duett sealing device. If our Duett sealing device is not successful, our business will be seriously harmed. We have incurred losses and we may not be profitable in the future Since we commenced operations in February 1997, we have incurred net losses from costs relating to the development and commercialization of our Duett sealing device. At March 31, 2000, we had an accumulated deficit of $16.6 million. We expect to continue to significantly increase our sales and marketing, research and development and general and administrative expenses. In particular, we intend to hire, train and deploy a direct sales force to sell our Duett sealing device in the United States. Because of our plans to invest heavily in sales and marketing, hire additional employees and expand our commercialization, we expect to incur significant net losses through at least December 31, 2000. Our business strategies may not be successful and we may not be profitable in any future period. If we do become profitable, we cannot be certain that we can sustain or increase profitability on a quarterly or annual basis. Our future operating results are difficult to predict and may vary significantly from quarter to quarter which may adversely affect the price of our common stock The relatively recent international introduction of our Duett sealing device and history of losses make prediction of future operating results difficult. You should not rely on our past revenue growth as any indication of future growth rates or operating results. The price of our common stock will likely fall in the event that our operating results do not meet the expectations of analysts and investors. Comparisons of our quarterly operating results are an unreliable indication of our future performance because they are likely to vary significantly based on many factors, including: . when, if ever, we receive FDA approval to sell our Duett sealing device; . the timing of the introduction of our Duett sealing device into the United States market; . the effect of intellectual property disputes; . the demand for and acceptance of our Duett sealing device; 7 . the success of our competition and the introduction of alternative means for vascular sealing; . our ability to command favorable pricing for our Duett sealing device; . the growth of the market for vascular sealing devices; . the expansion and rate of success of our direct sales force in the United States and our independent distributors internationally; . actions relating to ongoing FDA compliance; . the size and timing of orders from independent distributors or customers; . the attraction and retention of key personnel, particularly in sales and marketing, regulatory, manufacturing and research and development; . unanticipated delays or an inability to control costs with respect to our Duett sealing device; . our ability to introduce new products and enhancements in a timely manner; . general economic conditions as well as those specific to our customers and markets; and . seasonal fluctuations in revenue due to the elective nature of some procedures. Our direct sales efforts may not be successful because we have no operating history with a direct sales force Because we have not yet received regulatory approval to sell our Duett sealing device in the United States, we have not hired a direct sales force and have no operating history with a direct sales force. We need to hire a direct sales force, including clinical specialists to perform physician training, to commercialize our Duett sealing device in the United States. We currently anticipate spending approximately $18.5 million during the period from April 1, 2000 through December 31, 2001 to hire, train and deploy our direct sales force. We believe that our new salespeople and clinical specialists will require approximately three months from their hiring date to become productive selling and training physicians to use our Duett sealing device. Furthermore, we believe that there is significant competition for direct sales personnel and clinical specialists with the advanced sales skills and technical knowledge we need. We may not be able to obtain, train and retain direct sales personnel and the future sales efforts of our direct sales force may not be successful. We may face product liability claims that could result in costly litigation and significant liabilities The manufacture and sale of medical products entail significant risk of product liability claims. The medical device industry in general has been subject to significant medical malpractice litigation. Any product liability claims, with or without merit, could result in costly litigation, reduced sales, cause us to incur significant liabilities and divert our management's time, attention and resources. Because of our limited operating history and lack of experience with these claims, we cannot be sure that our product liability insurance coverage is adequate or that it will continue to be available to us on acceptable terms, if at all. 8 The market for vascular sealing devices is highly competitive and will likely become more competitive, and our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements that may render our Duett sealing device obsolete The existing market for vascular sealing devices is intensely competitive. We expect competition to increase further as additional companies begin to enter this market and/or modify their existing products to compete directly with ours. Our primary competitors are Perclose, Inc., which is a subsidiary of Abbott Laboratories, Datascope Corp. and St. Jude Medical, Inc., which sells a product developed by Kensey Nash Corporation. These companies have: . FDA approval of their products; . better name recognition; . broader product lines; . greater sales, marketing and distribution capabilities; . significantly greater financial resources; . larger research and development staffs and facilities; and . existing relationships with some of our potential customers. We may not be able to effectively compete with these companies. In addition, broad product lines may allow our competitors to negotiate exclusive, long-term supply contracts and offer comprehensive pricing for their products. Broader product lines may also provide our competitors with a significant advantage in marketing competing products to group purchasing organizations and other managed care organizations that are increasingly seeking to reduce costs through centralized purchasing. Greater financial resources and product development capabilities may allow our competitors to respond more quickly to new or emerging technologies and changes in customer requirements that may render our Duett sealing device obsolete. We currently depend solely on the marketing and sales efforts of a limited number of independent distributors Our Duett sealing device is sold internationally through independent distributors in Germany, Austria, Switzerland, Norway, Denmark, Finland, Sweden, Belgium, Spain, Greece, the Netherlands, the United Kingdom, Taiwan, Italy and Hong Kong. Our international sales are largely dependent on the marketing efforts of, and sales by, these distributors. Sales through distributors are subject to several risks, including the risk of financial instability of distributors and the risk that distributors will not effectively promote our Duett sealing device. Loss or termination of these distribution relationships could seriously harm our international sales efforts and could result in our repurchasing unsold inventory from former distributors by virtue of local laws applicable to distribution relationships, provisions of distribution agreements or negotiated settlements entered into with our distributors. Sales to our German, Norwegian and Italian distributors accounted for 29%, 20% and 12% of net sales for the year ended December 31, 1999. 9 Our international sales are subject to a number of risks that could seriously harm our ability to successfully commercialize our Duett sealing device in any international market Substantially all of our sales to date have been outside the United States, and we anticipate that this will continue until our Duett sealing device is approved, if ever, for sale in the United States. Our international sales also are subject to several risks, including: . the impact of recessions in economies outside the United States; . greater difficulty in collecting accounts receivable and longer collection periods; . unexpected changes in regulatory requirements, tariffs or other trade barriers; . weaker intellectual property rights protection in some countries; . potentially adverse tax consequences; and . political and economic instability. The occurrence of any of these events could seriously harm our future international sales and our ability to successfully commercialize our Duett sealing device or any future product in any international market. We have limited manufacturing experience and may encounter difficulties in expanding our manufacturing operations which could seriously harm our business We have limited experience in manufacturing our Duett sealing device. We currently manufacture the Duett sealing device in limited quantities for international sales and clinical studies in the United States. We do not have experience in manufacturing our Duett sealing device in substantial commercial quantities. We believe our current facilities are adequate for the production of our Duett sealing device for the next year, but future facility requirements will depend on future sales of our product and when, if ever, we receive FDA approval to sell our product in the United States. We may encounter unforeseen difficulties in expanding our production of our Duett sealing device and new products, including problems involving production yields, quality control and assurance, component supply and shortages of qualified personnel, compliance with FDA regulations and requirements regarding good manufacturing practices, and the need for further regulatory approval of new manufacturing processes. Difficulties encountered by us in expanding our manufacturing capabilities could seriously harm our business. Our business and results of operation may be seriously harmed by changes in third-party reimbursement policies We could be seriously harmed by changes in reimbursement policies of governmental or private healthcare payors, particularly to the extent any changes affect reimbursement for catheterization procedures in which our Duett sealing device is used. Failure by physicians, hospitals and other users of our Duett sealing device to obtain sufficient reimbursement from healthcare payors for procedures in which our Duett sealing device is used or adverse changes in governmental and private third-party payors' policies toward reimbursement for such procedures would seriously harm our business. In the United States, healthcare providers, including hospitals and clinics that purchase medical devices such as our Duett sealing device, generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to reimburse all or part of the cost of catheterization procedures. We anticipate that in a prospective payment system, such as the system 10 used by Medicare, and in many managed care systems used by private healthcare payors, the cost of the Duett sealing device will be incorporated into the overall cost of the procedure and that there will be no separate, additional reimbursement for our product. In international markets, acceptance of our Duett sealing device is dependent in part upon the availability of reimbursement within prevailing healthcare payment systems. However, we are unaware of any hospitals that receive specific, cost-based, direct reimbursement for the use of our Duett sealing device. Reimbursement and healthcare payment systems in international markets vary significantly by country. Our failure to receive international reimbursement approvals could have a negative impact on market acceptance of our Duett sealing device in the markets in which these approvals are sought. Our Duett sealing device and our manufacturing activities are subject to extensive governmental regulation that could delay or prevent us from introducing our Duett sealing device in the United States or introducing new and improved products Our Duett sealing device and our manufacturing activities are subject to extensive regulation by a number of governmental agencies, including the FDA and comparable international agencies. We are required to: . obtain the approval of the FDA and international agencies before we can market and sell our Duett sealing device; . satisfy these agencies' content requirements for all of our labeling, sales and promotional materials; and . undergo rigorous inspections by these agencies. Compliance with the regulations of these agencies may delay or prevent us from introducing our Duett sealing device in the United States or introducing any new or improved products. Furthermore, we may be subject to sanctions, including temporary or permanent suspension of operations, product recalls and marketing restrictions if we fail to comply with the laws and regulations pertaining to our business. We are also required to demonstrate compliance with the FDA's quality system regulations before we can receive FDA approval of our Duett sealing device. The FDA enforces its quality system regulations through pre-approval and periodic post-approval inspections. These regulations relate to product testing, vendor qualification, design control and quality assurance, as well as the maintenance of records and documentation. If we are unable to conform to these regulations, we will be required to locate alternative manufacturers that do conform. Identifying and qualifying alternative manufacturers may be a long and difficult process and could seriously harm our business. The FDA and international regulatory agencies may also limit the indications for which our Duett sealing device is approved. Even if we receive approval of our Duett sealing device, these regulatory agencies may restrict or withdraw approval if additional information becomes available to support this action. 11 The loss of, or interruption of supply from, key vendors, including single source suppliers, could limit our ability to manufacture our Duett sealing device We purchase components used in our Duett sealing device from various suppliers and rely on single sources for the collagen and thrombin components of our Duett sealing device procoagulant. There are currently no FDA-approved alternative suppliers of thrombin and very few FDA-approved alternative suppliers of collagen. Because it requires FDA approval, establishing additional or replacement suppliers for thrombin would require a lead-time of at least two years and would involve significant additional costs. Any supply interruption from key vendors or failure by us to engage alternative vendors may limit our ability to manufacture our Duett sealing device and could therefore seriously harm our business. Our failure to expand our management systems and controls to support anticipated growth could seriously harm our business Our operations are growing rapidly and we expect this expansion to continue as we execute our business strategy. Our total number of employees grew from 48 on April 1, 1999 to 71 on April 1, 2000. We anticipate further increases in the number of our employees. Sustaining our growth has placed significant demands on management and our administrative, operational, personnel and financial resources. Accordingly, our future operating results will depend on the ability of our officers and other key employees to continue to implement and improve our operational, client support and financial control systems, and effectively expand, train and manage our employee base. We may not be able to manage our growth successfully and inability to sustain or manage our growth could seriously harm our business. We may be required to delay, reduce or eliminate some or all of our research and development activities or sales and marketing efforts if we fail to obtain additional funding that may be required to satisfy our future capital expenditure needs We plan to continue to spend substantial funds to expand our sales and marketing activities, our research and development activities and our inventory requirements. Our future liquidity and capital requirements will depend upon numerous factors, including actions relating to regulatory matters, the costs and timing of expansion of sales and marketing, manufacturing and research and development activities, the extent to which our Duett sealing device gains market acceptance and competitive developments. Any additional required financing may not be available on satisfactory terms, if at all. If we are unable to obtain financing, we may be required to delay, reduce or eliminate some or all of our research and development activities or sales and marketing efforts. Concentration of ownership of our company may give some shareholders substantial influence and may prevent or delay a change in control of our company We anticipate that our executive officers and directors, together with their affiliates, will, in the aggregate, own approximately 5,611,969 shares, or 47.9%, of our outstanding common stock following the completion of this offering. These shareholders may be able to exercise substantial influence over all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change in control of our company. 12 Our articles of incorporation and Minnesota law may discourage an acquisition of our company Provisions of our articles of incorporation and Minnesota law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders. Management could spend or invest the proceeds of this offering in ways with which the shareholders may not agree, including the possible pursuit of other market opportunities Our management can spend or invest the proceeds from this offering in ways with which the shareholders may not agree. The investment of these proceeds may not yield a favorable return. Furthermore, because the market for vascular sealing devices is new and emerging, we may in the future discover new opportunities that are more attractive. As a result, we may commit resources to these alternative market opportunities. This action may require us to limit or abandon our current focus on developing, manufacturing and marketing our Duett sealing device. If we change our product focus we may face risks that may be different from the risks associated with the vascular sealing device market. The price of our common stock could be highly volatile due to a number of factors An active trading market for our common stock may not develop or be sustained after completion of this offering. The initial public offering price of our common stock may not be indicative of the prices that will prevail in the public market after the offering, and the market price of our common stock could fall below the initial public offering price. The trading price of our common stock may fluctuate widely as a result of a number of factors, including: . delays in obtaining regulatory approvals, specifically the approval by the FDA of the PMA application for our Duett sealing device; . market perception and customer acceptance of vascular sealing devices; . increased competition; . litigation concerning intellectual property rights; . the loss of significant orders; . general conditions in the medical device industry; and . changes in earnings estimates by analysts. In addition, the stock market for medical device companies has experienced extreme price and volume fluctuations, which have often been unrelated to the operating performance of the companies experiencing these fluctuations. Future sales of our common stock in the public market could cause our stock price to fall If our shareholders sell substantial amounts of our common stock in the public market following this offering, the market price of our common stock could fall. Upon completion of the offering, we will have 11,717,868 outstanding shares of common stock, assuming no exercise of outstanding options or warrants after March 31, 2000. Other than the shares sold in this offering which will be freely tradeable, 165,000 shares will become freely tradeable as of the date of this prospectus, an 13 additional 247,250 shares will be freely tradeable 75 days after the date of this prospectus and the remaining shares will become freely tradeable at varying dates beginning 180 days after the date of this prospectus upon the expiration of lock-up agreements between our existing shareholders and the underwriters. If holders of our common stock that have registration rights require us to register a large number of their shares for sale into the public market, the market price of our common stock and our ability to raise needed capital could be significantly harmed One hundred eighty days after the date of this prospectus, the holders of 3,777,777 shares of our common stock, which represent 32% of our outstanding common stock after this offering, and the holders of warrants to purchase 168,000 shares of our common stock will be entitled to have the resale of their shares registered under the Securities Act of 1933. If these holders cause a large number of shares to be registered and sold in the public market, such sales could seriously harm the market price for our common stock. In addition, if we include in a company-initiated registration shares held by these holders pursuant to the exercise of their registration rights, such sales may have a negative impact on our ability to raise needed capital. 14 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about us and our industry. When used in this prospectus, the words "expects," "anticipates," "estimates" and "intends" and similar expressions are intended to identify forward-looking statements. These statements include, but are not limited to, statements under the captions "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and elsewhere in this prospectus concerning, among other things: . our future operating results; . the comparative clinical performance of the Duett sealing device; . the ability to obtain regulatory and reimbursement approvals for the Duett sealing device; . our ability to compete against existing and future competition; . litigation or other unplanned future events; . the future market for vascular sealing devices; . our future capital expenditures and cash resources, and . the use of the net proceeds from this offering. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. The cautionary statements made in this prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this prospectus. We assume no obligation to update such forward-looking statements publicly for any reason, or to update the reasons actual results could differ materially from those anticipated in such forward-looking statements, even if new information becomes available in the future. TRADEMARKS We have filed a trademark registration application for Vascular Solutions Duett(TM). All other trademarks, service marks or trade names referred to in this prospectus are the property of their respective owners. 15 USE OF PROCEEDS We estimate the net proceeds to us from the sale of the 2,675,000 shares of our common stock offered pursuant to this offering to be approximately $29.5 million, or approximately $34.0 million if the underwriters' over-allotment option is exercised in full, based on an assumed initial public offering price of $12.00 per share less the underwriting discount and estimated offering expenses we expect to pay. We intend to use the net proceeds from this offering primarily for operating expenses, including increased sales and marketing expenses associated with the anticipated commercial launch of our Duett sealing device in the United States. We currently anticipate spending approximately $18.5 million during the period from April 1, 2000 through December 31, 2001 to hire, train and deploy a direct sales force in the United States. Any remaining proceeds will be used for working capital and other general corporate purposes. The amounts that we actually spend for each of these purposes will vary significantly depending on a number of factors, including the amount of cash we generate from operations and the progress of our regulatory and sales and marketing efforts. As a result, we will retain broad discretion in the allocation of the net proceeds from this offering. Pending these uses, we intend to invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock and do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings to fund the development and growth of our business. 16 CAPITALIZATION The following table sets forth: . our actual capitalization as of March 31, 2000; . our capitalization on a pro forma basis to give effect to the automatic conversion of all shares of preferred stock into an aggregate of 3,777,777 shares of common stock upon the closing of this offering; and . our capitalization on a pro forma basis as adjusted to give effect to our receipt of the estimated net proceeds from the sale of 2,675,000 shares of our common stock offered by this prospectus at an assumed initial public offering price of $12.00 per share less the underwriting discount and estimated offering expenses we expect to pay. You should read this information in conjunction with our financial statements and the related notes that appear elsewhere in this prospectus.
March 31, 2000 ----------------------------- Pro Pro Forma Actual Forma As Adjusted ------- ------- ----------- (in thousands) Long-term debt................................... $ -- $ -- $ -- Shareholders' equity: Series A preferred stock, $.01 par value, 2,000,000 shares authorized, 2,000,000 shares outstanding, actual; no shares outstanding, pro forma and pro forma as adjusted........... 20 -- -- Series B preferred stock, $.01 par value, 1,777,777 shares authorized, 1,777,777 shares outstanding, actual; no shares outstanding, pro forma and pro forma as adjusted........... 18 -- -- Common stock, $.01 par value, 36,222,223 shares authorized, 5,285,091 shares outstanding, actual; 40,000,000 shares authorized, 9,042,868 shares outstanding, pro forma; 40,000,000 shares authorized; shares outstanding, pro forma as adjusted................................... 53 91 118 Additional paid-in capital..................... 25,850 25,850 55,326 Deferred compensation.......................... (73) (73) (73) Accumulated deficit............................ (16,587) (16,587) (16,587) ------- ------- ------- Total shareholders' equity................... 9,281 9,281 38,784 ------- ------- ------- Total capitalization....................... $ 9,281 $ 9,281 $38,784 ======= ======= =======
The number of shares of common stock issued and outstanding, pro forma, as adjusted, is based on shares outstanding on March 31, 2000. It excludes 946,751 shares of common stock issuable upon exercise of options outstanding under our stock option plan and 268,000 shares of common stock issuable upon exercise of other outstanding stock option and warrant agreements, each as of March 31, 2000. 17 DILUTION If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma, adjusted net tangible book value per share of common stock immediately after completion of this offering. Our pro forma, net tangible book value as of March 31, 2000, after giving effect to the conversion of our outstanding preferred stock into common stock in connection with this offering, was $9,281,589 or $1.03 per share of common stock. Net tangible book value per share as of a specified date is equal to total tangible assets less total liabilities, divided by the number of outstanding shares of common stock at such date. After giving effect to our sale of the 2,675,000 shares of common stock offered hereby at an assumed initial public offering price of $12.00 per share and after deducting the underwriting discount and estimated offering expenses we expect to pay, our pro forma, adjusted net tangible book value as of March 31, 2000 would have been $38,784,589 or $3.31 per share of common stock. This represents an immediate increase in pro forma, adjusted net tangible book value to existing shareholders of $2.28 per share and an immediate dilution to new investors of $8.69 per share. The following table illustrates the per share dilution: Assumed initial public offering price per share.................. $12.00 Pro forma, net tangible book value per share at March 31, 2000.......................................................... $1.03 Increase attributable to this offering......................... 2.28 ----- Pro forma, adjusted net tangible book value per share after this offering........................................................ 3.31 ------ Net tangible book value dilution per share to investors in this offering........................................................ $ 8.69 ======
The following table summarizes, on a pro forma basis as of March 31, 2000, after giving effect to the conversion of all outstanding shares of our preferred stock into shares of our common stock in connection with this offering, the difference between the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing shareholders and new investors in this offering at an assumed initial public offering price of $12.00 per share:
Shares Purchased Total Consideration ------------------ ------------------- Average Price Number Percent Amount Percent Per Share ---------- ------- ----------- ------- ------------- Existing shareholders...... 9,042,868 77.2% $25,416,665 44.2% $ 2.81 New investors.............. 2,675,000 22.8 32,100,000 55.8 12.00 ---------- ---- ----------- ---- Total.................... 11,717,868 100% $57,516,665 100% ========== ==== =========== ====
This discussion and table assumes no exercise of options outstanding under our stock option plan or other outstanding options or warrants to purchase shares of our common stock. On March 31, 2000, there were options outstanding to purchase 946,751 shares of common stock under our stock option plan and 268,000 shares of common stock issuable upon exercise of outstanding stock option and warrant agreements. To the extent that any of these options or warrants are exercised, there will be further dilution to new investors. 18 SELECTED FINANCIAL DATA The selected statement of operations data shown below for the years ended December 31, 1997, 1998 and 1999 and the balance sheet data as of December 31, 1997, 1998 and 1999 are derived from our financial statements, which have been audited by Ernst & Young LLP, independent auditors. The selected financial data for the three months ended March 31, 1999 and 2000 and as of March 31, 2000 has been derived from our unaudited financial statements which, in the opinion of management, include all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the financial information shown in these statements. The results for the three months ended March 31, 1999 and 2000 are not necessarily indicative of the results to be expected for the full year or for any future period. When you read this selected financial data, it is important that you also read the historical financial statements and related notes included in this prospectus, as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations." Historical results are not necessarily indicative of future results.
Three Months Year Ended December 31, Ended March 31, ------------------------- ---------------- 1997 1998 1999 1999 2000 ------- ------- ------- ------- ------- (in thousands, except per share amounts) Statement of Operations Data: Net sales....................... $ -- $ 494 $1,429 $ 207 $ 643 Cost of goods sold.............. -- 442 1,065 186 349 ------- ------- ------- ------- ------- Gross profit.................... -- 52 364 21 294 Operating expenses: Research and development...... 766 2,348 3,068 713 692 Clinical and regulatory....... 259 1,376 1,324 580 190 Sales and marketing........... 273 1,075 2,301 350 901 General and administrative.... 426 668 1,904 195 564 ------- ------- ------- ------- ------- Total operating expenses........ 1,724 5,467 8,597 1,838 2,347 ------- ------- ------- ------- ------- Operating loss.................. (1,724) (5,415) (8,233) (1,817) (2,053) Interest income................. 72 274 371 103 122 ------- ------- ------- ------- ------- Net loss........................ $(1,652) $(5,141) $(7,862) $(1,714) $(1,931) ======= ======= ======= ======= ======= Basic and diluted net loss per share.......................... $ (.62) $ (1.40) $(1.95) $ (.46) $ (.37) Shares used in basic and diluted net loss per share............. 2,668 3,660 4,033 3,700 5,255 Pro forma basic and diluted net loss per share................. $(1.01) $ (.21) Shares used in pro forma net loss per share................. 7,810 9,032
December 31, --------------------- March 31, 1997 1998 1999 2000 ------ ------ ------- --------- (in thousands) Balance Sheet Data: Cash and cash equivalents..................... $7,299 $9,897 $10,529 $8,065 Working capital............................... 7,031 9,933 10,487 8,519 Total assets.................................. 7,559 11,007 12,295 10,380 Long-term debt................................ -- -- -- -- Total shareholders' equity.................... 7,216 10,546 11,172 9,281
For information regarding the determination of the number of shares used in computing pro forma basic and diluted net loss per share amounts, see note 2 of notes to the financial statements. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations should be read in conjunction with the financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from those anticipated in these forward- looking statements as a result of various factors, including, but not limited to, those described under "Risk Factors" and elsewhere in this prospectus. Overview Since we commenced operations in February 1997, we have been engaged in the design, development, clinical testing and, more recently, the manufacture and sale in international markets of the Vascular Solutions Duett sealing device. Our Duett sealing device is designed to seal the puncture site following catheterization procedures such as angiography, angioplasty and stenting. We have received regulatory approvals to market the Duett sealing device in several international markets, principally in Europe. We have a limited history of operations and have experienced significant operating losses since inception. As of March 31, 2000, we had an accumulated deficit of $16.6 million. We commenced international sales in February 1998. To date, we have generated substantially all of our revenue from sales to international distributors who resell the device to hospitals. We anticipate that substantially all of our revenues will be derived from sales to our independent international distributors until we receive approval to market our Duett sealing device in the United States, if ever. Upon FDA approval, we plan to sell our product in the United States with a direct sales force. Although we have experienced revenue growth in recent periods, this growth may not be sustainable and, therefore, these recent periods should not be considered indicative of future performance. We may never achieve significant revenues or profitability, or if we achieve significant revenues they may not be sustained in future periods. Results of Operations Three months ended March 31, 2000 compared to three months ended March 31, 1999 Net sales increased 210% to $642,545 for the three months ended March 31, 2000 from $207,000 for the three months ended March 31, 1999. This increase in net sales was the result of increased shipments of the Duett sealing device to our distributors for sale in Europe. Sales to our German, Norwegian, Italian and Austrian distributors accounted for approximately 26%, 26%, 18% and 10% of net sales for the three months ended March 31, 2000. Cost of goods sold as a percentage of net sales decreased to 54% for the three months ended March 31, 2000 from 90% for the three months ended March 31, 1999. This decrease as a percentage of net sales resulted from the conversion to the Duett Model 2000 for international sales in the fourth quarter of 1999 and improved manufacturing processes. The Duett Model 2000 incorporates slight modifications to the procoagulant components and different vendors for certain components, resulting in lower cost of goods compared to the original Duett Model 1000. We expect cost of goods sold as a percentage of net sales to continue to decline as our manufacturing volume increases and we improve our manufacturing processes. 20 Research and development expenses decreased 3% to $691,723 for the three months ended March 31, 2000 from $713,271 for the three months ended March 31, 1999. This slight decrease was attributable to the increased absorption of additional capacity by manufacturing and the transition of the Duett Model 2000 to production. We expect our research and development expenses to increase through the remainder of 2000 as we hire additional development personnel, continue work on product improvements and explore new product opportunities. Clinical and regulatory expenses decreased 67% to $189,904 for the three months ended March 31, 2000 from $579,596 for the three months ended March 31, 1999. These expenses consist of payments to clinics for participation in clinical studies, company personnel related to clinical study administration and payments to regulatory agencies as part of the product approval process. The decrease was primarily the result of the completion of our 695-patient multi-center clinical study in 1999. During the three months ended March 31, 1999, payments related to this clinical study totaled $346,000. We expect our clinical and regulatory expenses to continue to decrease during the remainder of 2000 compared to 1999 as additional clinical studies are expected to be smaller in scope than the multi-center clinical study. Sales and marketing expenses increased 157% to $901,315 for the three months ended March 31, 2000 from $350,065 for the three months ended March 31, 1999. This increase was due primarily to additional personnel and travel for the international distribution of our Duett sealing device. We currently anticipate spending $18.5 million during the period from April 1, 2000 through December 31, 2001 to hire, train and deploy a direct sales force in the United States. These increases will be principally related to hiring additional sales and marketing personnel, expanding marketing efforts and training new physicians. General and administrative expenses increased 189% to $563,572 for the three months ended March 31, 2000 from $195,077 for the three months ended March 31, 1999. This increase was primarily attributable to a $235,900 increase in legal expenses and $124,900 increase in personnel costs. We anticipate that general and administrative expenses will increase for the foreseeable future as we continue to add personnel and infrastructure. Interest income increased to $121,699 for the three months ended March 31, 2000 from $102,874 for the three months ended March 31, 1999 primarily as a result of higher cash balances resulting from the exercise of an option and warrant by an existing investor in the fourth quarter of 1999. Year ended December 31, 1999 compared to year ended December 31, 1998 Net sales increased 189% to $1,429,094 for the year ended December 31, 1999 from $494,150 for the year ended December 31, 1998. This increase in net sales was the result of increased shipments of our Duett sealing device to our existing independent international distributors and shipments to new independent international distributors covering other territories. International sales of our Duett sealing device commenced in February 1998. Sales to our German, Norwegian and Italian distributors accounted for approximately 29%, 20% and 12% of net sales for the year ended December 31, 1999. Cost of goods sold consists primarily of direct material component costs, personnel expenses and manufacturing equipment and overhead related to the production of our Duett sealing device. Cost of goods sold as a percentage of net sales decreased to 74% for the year ended December 31, 1999 from 90% for the year ended December 31, 1998. This decrease as a percentage of net sales resulted from improvements in manufacturing efficiencies and increases in the number of Duett sealing devices manufactured. 21 Research and development expenses increased 31% to $3,067,897 for the year ended December 31, 1999 from $2,348,281 in the year ended December 31, 1998. This increase was attributable to a $301,100 increase for additional personnel required for the continued development of the Duett sealing device, $240,000 of materials associated with the development of our next generation sealing device and $45,900 in prototyping costs. Clinical and regulatory expenses decreased 4% to $1,323,972 for the year ended December 31, 1999 from $1,375,595 for the year ended December 31, 1998. The decrease was primarily the result of costs associated with the 695-patient multi-center clinical study of our Duett sealing device which commenced in August 1998 and was completed in March 1999. In addition to the payments to the clinical centers for patient enrollment and data collection, we contracted with a third party to perform data analysis and computation for the study. We also contracted with a third party to perform a cost outcomes study of the patient data from this multi-center study. Sales and marketing expenses increased 114% to $2,301,603 for the year ended December 31, 1999 from $1,075,250 for the year ended December 31, 1998. This increase was due primarily to a $611,500 increase in personnel costs and $277,800 associated with travel, marketing and physician training for the international distribution of the Duett sealing device. General and administrative expenses increased 185% to $1,903,946 for the year ended December 31, 1999 from $667,522 in the year ended December 31, 1998. This increase was primarily the result of $453,500 in initial public offering costs that were expensed in the fourth quarter of 1999 due to the delay of the offering and $422,500 in legal expenses in 1999 associated with intellectual property claims. Interest income increased to $371,066 for the year ended December 31, 1999 from $273,877 for the year ended December 31, 1998 primarily as a result of higher cash balances resulting from our private equity financing completed in the fourth quarter of 1998. Year ended December 31, 1998 compared to the year ended December 31, 1997 Net sales of $494,150 in 1998 were the result of shipments to international distributors, with 65% of the sales attributable to our German distributor and 16% of the sales attributable to our Austrian distributor. We commenced international sales in February 1998 and, accordingly, had no revenues in 1997. Cost of goods sold were $442,565, or 90%, of net sales, in 1998. These costs reflected the commencement of manufacturing and assembly operations as well as manufacturing, engineering and support functions. Research and development expenses increased 206% to $2,348,281 in 1998 from $766,176 in 1997. This increase was attributable to a $577,000 increase associated with the hiring of additional personnel required to develop our Duett sealing device, a $146,000 increase in legal costs related to patent applications and approximately $425,000 of materials associated with the development of our Duett sealing device. Clinical and regulatory expenses increased 430% to $1,375,595 in 1998 from $259,503 in 1997. The increase was primarily the result of costs associated with our clinical studies that commenced in January 1998. 22 Sales and marketing expenses increased 294% to $1,075,250 in 1998 from $273,089 in 1997. The increase was due primarily to the international commercial launch of our Duett sealing device in February 1998, resulting in increases in costs associated with travel, marketing and physician training. General and administrative expenses increased 57% to $667,522 in 1998 from $425,596 in 1997. The increase was primarily the result of additional administrative personnel and facilities costs. Interest income increased to $273,877 in 1998 from $72,546 in 1997 primarily as a result of higher cash balances resulting from our December 1997 private equity financings. Income Taxes We have not generated any pre-tax income to date and therefore have not paid any federal income taxes since inception in December 1996. No provision or benefit for federal and state income taxes has been recorded for net operating losses incurred in any period since our inception. As of December 31, 1999, we had $12,643,000 of federal net operating loss carryforwards available to offset future taxable income which begin to expire in the year 2013. As of December 31, 1999, we also had federal and state research and development tax credit carryforwards of $332,500 which begin to expire in the year 2013. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances, including significant changes in ownership interests. Future use of our existing net operating loss carryforwards may be restricted due to changes in ownership or from future tax legislation. We have established a valuation allowance against the entire amount of our deferred tax asset because we have not been able to conclude that it is more likely than not that we will be able to realize the deferred tax asset, due primarily to our history of operating losses. Liquidity and Capital Resources We have financed all of our operations since inception through the issuance of equity securities. Through March 31, 2000, we have sold common stock and preferred stock generating aggregate net proceeds of $25.4 million. At March 31, 2000, we had $8.1 million in cash and cash equivalents on-hand. During the three-month periods ended March 31, 1999 and 2000, we used $2.0 million and $2.5 million of cash and cash equivalents and for the years ended December 31, 1998 and 1999, we used $5.8 million and $7.5 million of cash and cash equivalents. The increase in cash used in operations is due primarily to higher expenses associated with increased research and development activities, clinical study costs, initiation of sales and marketing activities in international markets, increased general and administrative expenses to support increased operations and purchases of inventory to support international sales. We do not have any significant cash commitments related to supply agreements, nor do we have any commitments for capital expenditures. We currently anticipate that we will continue to experience significant growth in our expenses for the foreseeable future and our expenses will be a material use of our cash resources. We anticipate that our operating losses will continue through at least December 31, 2000, because we plan to spend substantial amounts hiring and training a direct United States sales force, funding sales 23 and marketing activities and creating and expanding research and development initiatives. We believe that current cash balances along with cash generated from the future sales of products and the proceeds of this offering will be sufficient to meet our operating and capital requirements for at least the next 12 months. Our liquidity and capital requirements beyond the next 12 months will depend on numerous factors, including progress on the FDA approval process of our PMA application, the extent to which our Duett sealing device gains market acceptance and competitive developments. If cash generated from operations is insufficient to satisfy our cash needs, we may be required to raise additional funds. We currently have no commitments for additional funding and so our ability to meet our long-term liquidity needs is uncertain. If we raise additional funds through the issuance of equity securities, our shareholders may experience significant dilution. Furthermore, additional financing may not be available when needed or, if available, financing may not be on terms favorable to us or our shareholders. If financing is not available when required or is not available on acceptable terms, we may be unable to develop or market our products or take advantage of business opportunities or respond to competitive pressures. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities." This statement changes the previous accounting definition of derivative which focused on freestanding contracts, including, for example, options and forwards, and futures and swaps, expanding it to include embedded derivatives and many commodity contracts. Under the statement, every derivative is recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair valued be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS 133 is effective for fiscal years beginning after June 15, 1999. We do not anticipate that the adoption of SFAS 133 will have a material impact on our financial position or results of operations. We do not currently hold derivative instruments or engage in hedging activities. 24 BUSINESS Overview We manufacture, market and sell the Vascular Solutions Duett sealing device, which enables cardiologists and radiologists to rapidly seal the entire puncture site following catheterization procedures such as angiography, angioplasty and stenting. A catheterization procedure involves the insertion of a catheter through a patient's skin and into an artery to perform minimally invasive medical procedures. Our product combines a simple balloon catheter delivery mechanism with a proprietary, biological procoagulant mixture, which we believe offers advantages over both manual compression and the existing FDA-approved vascular sealing devices. We began selling our product in Europe in February 1998. On June 30, 1999 we filed our PMA application with the FDA. If we receive approval of our application we will commence selling our Duett sealing device in the United States. Over 15,000 deployments of our device have been performed worldwide. While the vascular sealing device market has developed quickly, it represents less than 15% of the $1 billion potential annual market, based on the current number of catheterization procedures performed. We believe that we are well-positioned to capture a substantial share of the vascular sealing device market opportunity as our Duett sealing device offers the following benefits: . complete closure of the entire puncture site, consisting of the arterial puncture and the tissue tract--the tissue between the skin surface and the artery; . compatibility with anti-clotting medications, such as ReoPro(R), which are increasingly used in therapeutic catheterization procedures, through the use of thrombin in our biological procoagulant; . nothing is left behind in the artery to cause an infection or to interfere with accessing the site again, if that becomes necessary; . rapid deployment of an easy-to-use, one-size-fits-all device through the existing introducer sheath; and . improved patient comfort and increased provider efficiencies by minimizing the amount of manual compression and the period of immobile bed rest. Industry Background Over 60 million Americans have one or more types of cardiovascular disease--diseases of the heart and blood vessels. Cardiovascular disease is the number one cause of death in the United States and is replacing infectious disease as the world's pre-eminent health risk. Advances in medicine have enabled physicians to perform an increasing number of diagnostic and therapeutic treatments of cardiovascular disease using minimally invasive methods, such as catheters placed inside the arteries, instead of highly invasive open surgery. Cardiologists and radiologists use diagnostic procedures, such as angiography, to confirm, and interventional procedures, such as angioplasty and stenting, to treat, diseases of the coronary and peripheral arteries. Based on industry statistics, we estimate that cardiologists and radiologists performed over seven million diagnostic and interventional catheterization procedures worldwide in 1999. The number of catheterization procedures performed is expected to grow by more than 5% each year for the next three years as the incidence of cardiovascular disease continues to increase. 25 Each procedure using a catheter requires a puncture in an artery, usually the femoral artery in the groin area, of the patient to gain access for the catheter, which is deployed through an introducer sheath. Upon removal of the catheter, the physician must seal this puncture in the artery and the tissue tract that leads from the skin surface to the artery to stop bleeding. The standard method for sealing the puncture site has been a manual process whereby a healthcare professional applies direct pressure to the puncture site, sometimes using a sand bag or a large C-clamp, for 20 minutes to an hour in order to form a blood clot. The healthcare professional then monitors the patient, who must remain immobile in order to prevent dislodging of the clot, for an additional four to 48 hours. Patients subjected to manual compression generally experience significant pain and discomfort during compression of the puncture site and during the period in which they are required to be immobile. Many patients report that this pain is the most uncomfortable aspect of the catheterization procedure. In addition, patients usually develop a substantial coagulated mass of blood, or hemotoma, around the puncture site, limiting patient mobility for up to six weeks following the procedure. Finally, the need for healthcare personnel to provide compression and the use of hospital beds during the recovery period results in substantial costs to the institution which, under virtually all current healthcare payment systems, are not separately reimbursed. In addition to this discomfort and cost, manual compression can result in major complications at the puncture site. These major complications can include a pseudo-aneurysm, or the continuation of blood flow from the artery into the coagulated blood mass at the puncture site, collapse of the femoral artery or femoral nerve damage from the extended compression. Additional procedures may be required to correct these major complications. The increasing use of medications to prevent blood clot formation during interventional catheterization procedures has increased the difficulty in sealing the puncture site using manual compression. During and following the catheterization procedure, physicians are concerned with the formation of blood clots in the coronary or peripheral arteries. To prevent clots from forming, the physician typically administers heparin, an anticoagulant, during the interventional catheterization procedure. More recently, drugs which prevent blood clotting by inhibiting platelet aggregation, such as ReoPro(R), are also being used in interventional catheterization procedures. Because these platelet inhibitor drugs limit the ability of blood to clot, they also increase the difficulty of sealing the puncture site using manual compression and the natural clotting process following the catheterization procedure. Until 1996, manual compression was used following virtually all catheterization procedures. In late 1995, the first vascular sealing device which did not rely on compression was introduced in the United States. Three devices have received FDA approval and are currently being marketed around the world. . One device places a dry collagen plug in the tissue tract adjacent to the puncture in the artery. The plug seals the tissue tract, however, the clotting effect of collagen at the puncture in the artery is limited, particularly if anticoagulants or platelet inhibitors are present in the bloodstream. As a result, manual pressure may be required for an additional period of time in order to achieve closure of the puncture in the artery. . The second device inserts a collagen plug into the tissue tract connected by a suture to a biodegradable anchor which is inserted into the artery. This device is held in place for approximately 20 minutes to seal the puncture in the artery. The presence of the anchor prohibits reaccess to the puncture site for up to 90 days. The reliance on collagen as the 26 clotting agent limits the effectiveness of this device in patients being treated with anticoagulants or platelet inhibitors. . The third device is a mechanical device that enables a physician to perform a minimally invasive replication of open surgery. This device employs remotely controlled needles to suture the puncture in the artery but leaves the tissue tract unsealed. The non-absorbable suture permanently remains at the arterial puncture. This device is more complicated to learn and use than the collagen-based devices. In aggregate, $160 million of these three FDA-approved devices were sold worldwide in 1999 compared to less than $20 million in 1996. Based on the number of catheterization procedures performed annually by cardiologists and radiologists, industry sources report that the total market opportunity for vascular sealing devices is approximately $1 billion. Accordingly, the market opportunity for vascular sealing devices is less than 15% penetrated. The Vascular Solutions Duett Sealing Device We believe our product addresses the current demand for a sealing device that (1) improves patient comfort and is more efficient than manual compression, and (2) compared to currently available FDA-approved sealing devices, offers a better combination of a complete seal of the puncture site with nothing left behind in the artery in an easy-to-use system. Our product uses a balloon catheter, a device already familiar to cardiologists and radiologists, which is inserted through the introducer sheath that is already in the patient. The inflated balloon serves as a temporary mechanical seal, preventing the flow of blood from the artery. Our biological procoagulant, which is a proprietary mixture of collagen, thrombin and diluent, is then delivered to the puncture site, stimulating rapid clotting and creating a complete seal of both the arterial puncture and the tissue tract from the artery to the skin surface. The blood-clotting speed and strength of thrombin enable the use of the Duett sealing device even in the presence of the powerful anti-clotting medications, such as ReoPro(R), increasingly used in interventional catheterization procedures. With our Duett sealing device, nothing is left behind in the artery, so immediate reaccess of the site, if necessary, is possible, and the potential for infection is minimized. Business Strategy Our primary objective is to establish our Duett sealing device as the leading product in the rapidly growing vascular sealing device market. The key steps in achieving this objective are the following: . Obtain FDA Approval for Sale of the Duett Sealing Device in the United States. On June 30, 1999, we filed our PMA application with the FDA for approval to sell our Duett sealing device in the United States. Included in this application were the results of our 695-patient multi-center clinical study in which our Duett sealing device demonstrated, as compared to manual compression, the three primary end points we submitted to the FDA with our PMA application: . reduced time to the cessation of bleeding; . reduced time to ambulation of the patient; and . no statistically significant increase in major complications. The pursuit of FDA approval of our Duett sealing device for sale in the United States is our top priority. 27 . Promote the Duett Sealing Device's Clinical Benefits. We believe that the primary clinical benefits of the Duett sealing device are improved patient outcomes and provider efficiencies. We intend to use our existing and growing body of clinical results to initiate use of our Duett sealing device by physicians currently using manual compression and to convert physicians from other vascular sealing devices to our product. We plan on building market awareness of our Duett sealing device through a wide range of programs, materials and events, including conference and trade show appearances and the dissemination of sales literature and promotional materials. . Capitalize on the Large and Growing Vascular Sealing Market. While the market for vascular sealing devices has developed quickly, it represents less than 15% of the $1 billion potential annual market, based on the current number of catheterization procedures performed. The primary factors underlying the market opportunity for vascular sealing devices are the significant and growing number of catheterization procedures being performed and the substantial majority of the resulting puncture sites still being sealed through manual compression. The growth in catheterization procedures by cardiologists and radiologists reflects an increasing incidence of cardiovascular disease and the growing number of catheterization laboratories worldwide. In 1999, over seven million catheterization procedures were performed. This number is expected to increase by more than 5% each year for the next three years. Although the market for vascular sealing devices has grown rapidly, over 85% of the arterial punctures in 1999 were sealed using manual compression. We believe that our device offers benefits that position it well to capture a significant share of the market for vascular sealing devices. . Hire, Train and Deploy a Direct Sales Force in the United States. Upon FDA approval of our PMA application, we intend to sell our Duett sealing device in the United States through a direct sales force that will include clinical specialists who will train interventional cardiologists, radiologists and catheterization laboratory administrators on the use of our product. We believe that effective training is a key factor in promoting use of our Duett sealing device. We have created and will continue to work to improve an in-the-field training and certification program for the use of our Duett sealing device. We anticipate that our initial direct sales force will be substantially in place prior to our receiving FDA approval of our PMA application. We currently anticipate spending approximately $18.5 million during the period from April 1, 2000 through December 31, 2001 to hire, train and deploy our direct sales force. . Develop Duett Sealing Product Line Extensions and Explore New Product Opportunities. In addition to developing next generation versions of our Duett sealing device, we are evaluating enhancements that will allow our product to be used in interventional procedures that result in larger, greater than nine French or three millimeters in diameter, arterial punctures. Furthermore, we intend to leverage our knowledge and experience in the vascular sealing market into other interventional cardiology and radiology products. Clinical Results To date, over 15,000 deployments of our Duett sealing device have been performed worldwide. A total of 27 scientific publications and presentations have been made on our Duett sealing device at interventional cardiology and radiology meetings, reporting the results of over 2,500 deployments. Six separate clinical studies of our Duett sealing device have been performed to date, each of which produced very favorable clinical results. 28 Duett Sealing Device Clinical Studies
Study Time Frame Patients Enrolled Number of Centers ----- ---------- ----------------- ----------------- European Feasibility July 1997 24 1 European Multi-Center October 1997-- January 1998 48 2 U.S. Feasibility January 1998--March 1998 43 2 European Registry June 1998--January 1999 1,587 25 SEAL Multi- Center August 1998--March 1999 695 15 Continued Access Registry July 1999--March 2000 457 5
The Simple and Effective Arterial cLosure ("SEAL") clinical study was a randomized, controlled study to support our PMA application with the FDA. As part of this study, we contracted with The Cardiovascular Data Analysis Center of the Beth Israel Medical Group to perform data analysis and computation and Emory University to perform a cost outcomes study of the patient data. In the SEAL study, the Duett sealing device demonstrated the three primary endpoints we submitted to the FDA with our PMA application. Sales, Marketing and Distribution Our initial sales and marketing strategy has been to sell to interventional cardiologists and radiologists through established independent distributors in major international markets, subject to required regulatory approvals. Our Duett sealing device is currently marketed through independent distributors in Germany, Austria, Switzerland, Norway, Denmark, Finland, Sweden, Belgium, Spain, Greece, the Netherlands, the United Kingdom, Taiwan, Italy and Hong Kong. We intend to add independent distributors in other countries as our sales and marketing efforts are expanded. Under multi-year written distribution agreements with each of our independent distributors, we ship our Duett sealing device to these distributors upon receipt of purchase orders. Each of our independent distributors has the exclusive right to sell our Duett sealing device within a defined territory. These distributors also market other medical products, although they have agreed not to sell other vascular sealing devices. Our independent distributors purchase our Duett sealing device from us at a discount from list price and resell the device to hospitals and clinics. Sales to international distributors are denominated in United States dollars. The end-user price is determined by the distributor and varies from country to country. Substantially all of our revenues through March 31, 2000 were derived from sales to international distributors, primarily in Europe, none of which is affiliated with us. Sales in Europe constituted 90% and 97% of our net sales for the year ended December 31, 1999 and the three months ended March 31, 2000. Sales to Cardiologic G.m.b.H., our German distributor, accounted for 29% of our net sales for the year ended December 31, 1999. Sales to MicroMed A.S., our Norwegian distributor, accounted for 20% of net sales and sales to N.G.C. Medical S.p.A., our Italian distributor, accounted for 12% for the same period. Sales to our German, Norwegian, Italian and Austrian distributors accounted for approximately 26%, 26%, 18% and 10% of net sales for the three months ended March 31, 2000. Our Austrian distributor is EuroMed. As of March 31, 2000, our sales and marketing staff consisted of 24 people. Upon receiving FDA approval of our PMA application, we plan to market our Duett sealing device in the United States through a direct sales organization. We believe that the majority of interventional catheterization procedures in the United States are performed in high volume catheterization laboratories, and that these institutions can be served by a focused direct sales force. While we intend to initially focus on these high volume laboratories, we believe that our Duett sealing device's ease 29 of use and relatively short training time will also make our product attractive to lower volume laboratories. As part of our sales force, we intend to hire clinical specialists to train physicians and other healthcare personnel on the use of the Duett sealing device. We believe that effective training is a key factor in encouraging physicians to use our Duett sealing device. We have created, and will continue to work to improve an in-the-field training and certification program for the use of our Duett sealing device. We will seek to develop and maintain close working relationships with our customers to continue to receive input concerning our product development plans. We are focused on building market awareness and acceptance of our Duett sealing device. Our marketing organization provides a wide range of programs, materials and events that support our sales force. These include product training, conference and trade show appearances and sales literature and promotional materials. Members of our medical advisory board also aid in marketing our Duett sealing device by publishing articles and making presentations at physicians' meetings and conferences. Product Technology The components of our proprietary Duett sealing device consist of a very thin balloon catheter and a procoagulant mixture. The balloon catheter consists of a balloon made of polyethylene connected to a wire, covered by a sleeve. The procoagulant is a proprietary mixture of collagen, thrombin and a diluent. Both collagen and thrombin have been approved for use as blood clotting agents in the human body by the FDA for over ten years. The mixture of thrombin, a very rapid blood clotting agent, and collagen, which allows the procoagulant to assume a gel-like viscosity, provides a highly effective clotting agent when delivered directly to the puncture site. The diluent is a liquid used to create the desired viscosity and neutralize the pH of the mixture. The procoagulant is mixed before use and the Duett sealing device is deployed in the following steps: [Schematic drawing of introducer sheath in artery labeling the items listed below:] Artery Arterial Puncture Tissue Tract Introducer Sheath The Duett catheter can be deployed through any commonly used introducer sheath from five French to nine French in diameter. Therefore, the sheath that is already in the femoral artery is left in place and no replacement of the sheath is required. 30 [Schematic drawing of Duett catheter in the artery labeling the items listed below:] Duett Catheter Duett Procoagulant The Duett catheter is then inserted through the introducer sheath and into the femoral artery and the syringe containing the Duett procoagulant is attached to the sidearm of the introducer sheath. [Schematic drawing of Duett catheter inflated and creating a temporary seal; labeling the item listed below:] Inflated Duett Baloon Catheter Using a syringe, the balloon is inflated and positioned against the inner surface of the artery where the arterial pressure and gentle traction result in the balloon acting as a temporary seal of the puncture. 31 [Schematic drawing of Duett procoagulant being delivered labeling the item listed below:] Procoagulant Delivery Next, the procoagulant is delivered directly to the top of the arterial puncture and the tissue tract through the sidearm of the introducer sheath. The procoagulant stimulates rapid clotting through the powerful action of thrombin and collagen. The introducer sheath is removed from the body as the procoagulant agent is being delivered. [Schematic drawing of Duett catheter being deflated labeling the item listed below:] Duett Catheter Sleeve Immediately after the delivery of the procoagulant to the tissue tract, the balloon is deflated and covered by the sleeve. The slippery nature of the sleeve as well as its low profile (approximately one millimeter in diameter) allows for removal of the balloon catheter from the artery without disruption of the procoagulant. 32 [Schematic drawing of artery labeling the item listed below:] Complete Seal of puncture Site After removal of the Duett catheter from the artery, manual pressure is maintained for a short time, usually two to five minutes, to assure the seal. We recommend ambulation of patients generally one to two hours after diagnostic catheterizations and two to four hours after interventional catheterization procedures. Research and Development Our research and development staff is currently focused on improving our Duett sealing device and reducing our cost of goods sold. We incurred expenses of $2,348,281 in 1998 and $3,067,897 in 1999 for research and development activities. To further reduce our costs, our research and development group is in the process of developing some of the component manufacturing steps currently performed by outside vendors. We intend to research and develop new sealants in the future for use in our Duett sealing device as well as to apply our core closure technology to other catheterization procedures, including cardio-pulmonary support procedures, treatment of abdominal aortic aneurysms and treatment of pseudo-aneurysms. The large size of the punctures in these procedures makes closure of the puncture site very difficult using conventional compression methods. We believe that modifications of our delivery system will allow our sealing technology to be useful in larger, greater than nine French, punctures of the femoral artery as well as in cases of abnormalities such as pseudo-aneurysms. We expect our research and development activities to expand to include evaluation of new concepts and products beyond vascular sealing in the interventional cardiology and radiology field. We believe that there are many potential new interventional products that would fit within the development, clinical, manufacturing and distribution network we have created for our Duett sealing device. Manufacturing We manufacture our Duett sealing device in our facility in a suburb of Minneapolis, Minnesota. The catheter manufacturing and packaging processes occur under a controlled clean room environment. Our manufacturing facility and processes were certified in July 1998 as compliant with the European Community's ISO 9001 standards and was audited in September 1999 for compliance with the FDA's good manufacturing practices with no deficiencies noted. We purchase components from various suppliers and rely on single sources for several parts of the Duett sealing device. In September 1998, we entered into a ten year, sole-source, supply 33 agreement with our collagen supplier, Davol Inc., that provides for a fixed price based on volume purchases which is adjusted annually for increases in the Department of Labor's employer's cost index. In June 1999, we entered into a five year, sole-source, supply agreement with our thrombin supplier, GenTrac, Inc., a subsidiary of Jones Pharma, Incorporated, that provides for a fixed price with a price adjustment formula based on increased costs and wholesale price increases. To date, we have not experienced any significant adverse effects resulting from shortages of components. The manufacture and sale of our Duett sealing device entail significant risk of product liability claims. Although we have product liability insurance coverage in an amount which we consider reasonable, it may not be adequate to cover potential claims. Any product liability claims asserted against us could result in costly litigation, reduced sales and significant liabilities and divert the attention of our technical and management personnel away from the development and marketing of the Duett sealing device for significant periods of time. Competition We believe that competition in the vascular sealing market is intense and will increase. We believe that the primary bases of competition in the vascular sealing market are clinical efficacy, ease of use, patient comfort, minimization of complications and cost-effectiveness. On these bases, we believe that our product is well-positioned. Because the substantial majority of vascular sealing is performed through manual compression, this represents our primary competition. Manual compression usually requires a healthcare professional to manually apply pressure to the puncture site for 20 minutes to one hour following which the patient is confined to bed rest for between four and 48 hours. Often manual compression involves the use of mechanical devices, including C-clamps and sandbags, or pneumatic devices. Manual compression is considered to be uncomfortable for the patient. Our Duett sealing device also competes with three vascular sealing devices, none of which had over 40% of the vascular sealing device market in 1999. These three competitive devices are: . The VasoSeal device, manufactured and marketed by Datascope Corp., seals the tissue tract by placing a dry collagen plug in the tissue tract adjacent to the puncture in the artery. . The Angio-Seal device, sold by the Daig division of St. Jude Medical, Inc. and developed by Kensey Nash Corporation, seals the puncture site through the use of a collagen plug on the outside of the artery connected by a suture to a biodegradable anchor which is inserted into the artery. . The third device, developed and marketed under the ProStar(TM), TechStar(TM) and Closer(TM) names by Perclose, Inc., a subsidiary of Abbott Laboratories, seals the puncture site through the use of a mechanical device that enables a physician to perform a minimally invasive replication of open surgery. We believe that several other companies are developing arterial closure devices, however, we are unaware of any new sealing device or company that has entered U.S. clinical studies. The medical device industry is characterized by rapid and significant technological change as well as the frequent emergence of new technologies. There are likely to be research and development projects related to vascular sealing devices of which we are currently unaware. A new technology or product may emerge that results in a reduced need for vascular sealing devices or results in a product that renders our product noncompetitive. 34 Regulatory Requirements United States Our Duett sealing device is regulated in the United States as a medical device by the FDA under the FDC Act, and requires premarket approval by the FDA prior to being sold. In May 1997, the FDA determined that the review of the Duett sealing device would be delegated to the Center for Devices and Radiological Health area of the FDA, with a consulting review by the Center for Biologic Evaluation and Research. During 1998 and 1999, we received approval of our investigational device exemption, or IDE, application to start our feasibility clinical study, filed our IDE Supplement to begin our multi-center clinical study, completed the SEAL multi-center clinical study and filed our PMA application with the FDA. In September 1999 our manufacturing facility was audited by the FDA, with no deficiencies or non-compliances noted by the inspector. In December 1999, we received the FDA's review letter of our PMA application, and we submitted an amendment to our PMA to the FDA on January 18, 2000. The FDA has stated that a panel review of our PMA application will not be necessary. The FDA classifies medical devices into one of three classes based upon controls the FDA considers necessary to reasonably ensure their safety and effectiveness. Class I devices are subject to general controls such as labeling, premarket notification and adherence to good manufacturing practices. Class II devices are subject to the same general controls and also are subject to special controls such as performance standards, postmarket surveillance, patient registries and FDA guidelines, and may also require clinical testing prior to approval. Class III devices are subject to the highest level of controls because they are used in life-sustaining or life-supporting implantable devices. Class III devices require rigorous clinical testing prior to their approval. Our Duett sealing device is classified as a Class III device. Manufacturers must file an IDE application if human clinical studies of a device are required and if the device presents what the FDA considers to be a significant risk. The IDE application must be supported by data, typically including the results of animal and mechanical testing of the device. If the IDE application is approved by the FDA, human clinical studies may begin at a specific number of investigational sites with a maximum number of patients, as approved by the FDA. The clinical studies must be conducted under the review of an independent institutional board at the hospital performing the clinical study. Our Duett sealing device is subject to the IDE requirements. We received approval of our IDE application and performed our feasibility clinical study at two United States centers in January to March 1998. Based on the results of this feasibility clinical study, we received approval and performed our 695 patient multi-center SEAL clinical study from August 1998 through March 1999. Generally, upon completion of these human clinical studies, a manufacturer seeks approval of a Class III medical device from the FDA by submitting a PMA application. A PMA application must be supported by extensive data, including the results of the clinical studies, as well as literature to establish the safety and effectiveness of the device. The FDA has allowed us to submit our PMA application in segments prior to completion of our clinical studies. Upon completion of the follow up and data analysis of the SEAL clinical study, we submitted the final two segments of our PMA application to the FDA on June 30, 1999. Under the FDC Act, the FDA has 180 days to review a 35 PMA application, although the review of such an application more often occurs over a longer time period and may require additional information. In December 1999, we received the FDA's review letter of our PMA application, and we submitted an amendment to our PMA to the FDA on January 17, 2000. The PMA application approval process can be expensive, uncertain and lengthy. A number of devices for which premarket approval has been sought have never been approved for marketing and sale. If granted, the approval of our PMA application may include significant limitations on the indicated uses for which our product may be marketed. We also will be subject to FDA regulations concerning manufacturing processes and reporting obligations. These regulations require that manufacturing steps be performed according to FDA standards and in accordance with documentation, control and testing standards. We also will be subject to inspection by the FDA on an on-going basis. We will be required to provide information to the FDA on adverse incidents as well as maintain a documentation and record keeping system in accordance with FDA guidelines. The advertising of the Duett sealing device also will be subject to both FDA and Federal Trade Commission jurisdiction. If the FDA believes that we are not in compliance with any aspect of the law, it can institute proceedings to detain or seize products, issue a recall, stop future violations and assess civil and criminal penalties against us, our officers and our employees. International The European Union has adopted rules which require that medical products receive the right to affix the CE mark, an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. As part of the CE compliance, manufacturers are required to comply with the ISO 9000 series of standards for quality operations. We received the CE mark approval for our Duett sealing device and ISO 9001 certification in July 1998. International sales of the Duett sealing device are subject to the regulatory requirements of each country in which we sell our product. These requirements vary from country to country but generally are much less stringent than those in the United States. Our Duett sealing device is currently marketed in Germany, Austria, Switzerland, Norway, Denmark, Finland, Sweden, Belgium, Spain, Greece, the Netherlands, the United Kingdom, Taiwan, Italy and Hong Kong. We have obtained regulatory approvals where required. Through our Japanese distributor, we are pursuing the regulatory approval for commercial sale in Japan. Third Party Reimbursement In the United States, healthcare providers that purchase medical devices, such as vascular sealing devices, generally rely on third-party payors, principally the Health Care Financing Administration and private health insurance plans, to reimburse all or part of the cost of therapeutic and diagnostic catheterization procedures. We believe that in the current United States reimbursement system, the cost of vascular sealing devices is and will be incorporated into the overall cost of the catheter procedure. We do not anticipate that a separate, additional reimbursement for the Duett sealing device will be required. As a result, we are working to establish the cost benefit of the Duett sealing device, relying on shortened hospital stays and decreased use of healthcare professionals, to justify the increased cost of using our Duett sealing device in the United States. As part of our 695-patient, 15-center SEAL clinical study, we retained the Emory Cost Outcomes Research Center to perform an analysis of the 36 costs and benefits of the use of the Duett sealing device in a randomized, controlled comparison to manual compression. While the results of this study are not complete, we believe that we will be able to demonstrate that the use of our Duett sealing device can result in cost savings in healthcare personnel and hospital resources. Before entering the United States market, we intend to further document the cost benefit of our Duett sealing device. Market acceptance of the Duett sealing device in international markets is dependent in part upon the availability of reimbursement from healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country. The main types of healthcare payment systems in international markets are government sponsored healthcare and private insurance. Countries with government sponsored healthcare, such as the United Kingdom, have a centralized, nationalized healthcare system. New devices are brought into the system through negotiations between departments at individual hospitals at the time of budgeting. In most foreign countries, there are also private insurance systems that may offer payments for alternative therapies. We have pursued reimbursement for our Duett sealing device internationally through our independent distributors. We have initially focused on the markets of Germany, Austria, Switzerland, Norway, Denmark, Finland, Sweden, Belgium, Spain, Greece, the Netherlands, the United Kingdom, Taiwan, Italy and Hong Kong. While the healthcare financing issues in these countries are substantial, we have been able to sell the Duett sealing device to private clinics or nationalized hospitals in each of these countries. Patents and Intellectual Property We file patent applications to protect technology, inventions and improvements that are significant to the development of our business, and use trade secrets and trademarks to protect other areas of our business. Prior to the formation of our company, Dr. Gary Gershony filed a number of patent applications in the United States and other countries directed to proprietary technology used in our Duett sealing device. Upon the commencement of our operations in February 1997, Dr. Gershony assigned all patents and patent applications relating to the Duett sealing device to us on a worldwide, perpetual, royalty-free basis. At the time of assignment, there existed one United States patent issued that is directed to a balloon catheter sealing device and method and which expires in May 2013, three United States patents pending and an international patent application pending which designated numerous foreign countries and regions. Since commencing operations, we have continued the prosecution of the pending United States patent applications and filed new patent applications. A second United States patent has issued that is directed to a balloon catheter and procoagulant sealing device and method and which expires in October 2015. A third United States patent has also issued that contains method claims concerning the use of a balloon catheter and flowable procoagulant and which expires in October 2015. A fourth United States patent has issued concerning the procoagulant mixture and which expires in October 2015. A fifth United States patent has issued concerning a balloon catheter sealing device and which expires in May 2013. Finally, a sixth United States patent has issued concerning a balloon catheter and procoagulant sealing device and which expires in October 2015. We currently have six additional United States patents pending concerning aspects of our Duett sealing device and other interventional products. We also have pursued international patent applications, which designate the key developed nations with substantive patent protection systems. 37 The interventional cardiology market in general, and the vascular sealing device field in particular, is characterized by numerous patent filings and frequent and substantial intellectual property litigation. Each of the three vascular sealing products with which our Duett sealing device competes has been subject to infringement litigation. We are aware of many United States patents issued to other companies in the vascular sealing field which describe vascular sealing devices. After consultation with our intellectual property counsel, we believe that our Duett sealing device does not infringe any of these existing United States issued patents. The interpretation of patents, however, involves complex and evolving legal and factual questions. Intellectual property litigation in recent years has proven to be complex and expensive, and the outcome of such litigation is difficult to predict. On July 23, 1999, we were named as the defendant in a patent infringement lawsuit brought by Datascope Corp. in the United States District Court for the District of Minnesota. The complaint requested a judgment that our Duett sealing device infringes and, following FDA approval will infringe, a United States patent held by Datascope and asks for relief in the form of an injunction that would prevent us from selling our product in the United States as well as an award of attorneys' fees, costs and disbursements. On March 15, 2000, the court granted summary judgment dismissing all of Datascope's claims, subject to the right of Datascope to recommence the litigation if and when we receive FDA approval of our Duett sealing device. It is not possible at this time to predict the outcome of the lawsuit if it is recommenced, including whether we will be prohibited from selling our Duett sealing device in the United States, or to estimate the amount or range of potential loss, if any. On September 22, 1999, we received a letter from the Daig division of St. Jude Medical, Inc. claiming that the manufacture, use, marketing and sale of our Duett sealing device infringes upon certain United States patents licensed by Daig. The letter referenced a prior letter dated August 18, 1998 from us to the prior licensee of those patents in which we made a proposal intended to avoid the anticipated litigation over those patents. The proposed license was rejected. It is likely that litigation will be commenced in the near future concerning this claim. Daig could initiate a lawsuit requesting an injunction that, if issued, would prohibit us from selling our product. Furthermore, Daig could allege monetary damages that, if awarded, would significantly harm our business. We have previously consulted with our intellectual property counsel regarding Daig's United States patents and do not believe that we infringe them. We believe the allegations included in the letter are without merit, and we intend to defend any lawsuit that may arise from these allegations vigorously. It is not possible to predict the timing, substance or outcome of any lawsuit that may arise from these allegations, including whether we will be prohibited from selling our Duett sealing device in the United States or internationally, or to estimate the amount or range of potential loss, if any. It is likely that we will become the subject of additional intellectual property claims in the future related to our Duett sealing device. Our defense of the Datascope claim, the Daig claim and any other intellectual property claims filed in the future, regardless of the merits of the complaint, could divert the attention of our technical and management personnel away from the development and marketing of the Duett sealing device for significant periods of time. The costs incurred to defend the Datascope claim, the Daig claim and other future claims could be substantial and adversely affect us, even if we are ultimately successful. An adverse determination in the Datascope matter, the Daig matter or in other litigation or interference proceedings in the future could prohibit us from selling our product, subject us to significant liabilities to third parties or require us to seek licenses from third parties. We also rely on trade secret protection for certain aspects of our technology. We typically require our employees, consultants and vendors for major components to execute confidentiality 38 agreements upon their commencing services with us or before the disclosure of confidential information to them. These agreements generally provide that all confidential information developed or made known to the other party during the course of that party's relationship with us is to be kept confidential and not disclosed to third parties, except in special circumstances. The agreements with our employees also provide that all inventions conceived or developed in the course of providing services to us shall be our exclusive property. We also intend to register the trademarks and trade names through which we conduct our business. To date, we have applied for registration in the United States of the mark "Vascular Solutions Duett" and the Duett logo. Facilities Our principal offices are in approximately 24,000 square feet of leased space in a suburb of Minneapolis, Minnesota. These facilities include approximately 8,200 square feet used for manufacturing activities, approximately 3,300 square feet used for research and laboratory activities, with the remainder used for administrative offices. Our lease for these facilities expires March 31, 2003 and includes both an option to renew for an additional five-year term and an option to terminate after April 1, 2001. We believe that these facilities will be adequate to meet our needs through at least the end of 2000. Employees As of March 31, 2000, we had 71 full time employees. Of these employees, 24 were in manufacturing activities, 24 were in sales and marketing activities, eight were in research and development activities, seven were in regulatory, quality assurance and clinical research activities and eight were in general and administrative functions. We have never had a work stoppage and none of our employees are covered by collective bargaining agreements. We believe our employee relations are good. Legal Proceedings On July 23, 1999, we were named as the defendant in a patent infringement lawsuit brought by Datascope Corp. in the United States District Court for the District of Minnesota. The complaint requested a judgment that our Duett sealing device infringes and, following FDA approval will infringe, a United States patent held by Datascope and asks for relief in the form of an injunction that would prevent us from selling our product in the United States as well as an award of attorneys' fees, costs and disbursements. On August 12, 1999, we filed our answer to this lawsuit and brought a counterclaim alleging unfair competition and tortious interference. On August 20, 1999, we moved for summary judgement to dismiss Datascope's claims. On March 15, 2000, the court granted summary judgment dismissing all of Datascope's claims, subject to the right of Datascope to recommence the litigation if and when we receive FDA approval of our Duett sealing device. It is not possible at this time to predict the outcome of the lawsuit if it is recommenced, including whether we will be prohibited from selling our Duett sealing device in the United States, or to estimate the amount or range of potential loss, if any. Other than the Datascope claim, there are no legal proceedings pending against us. 39 MANAGEMENT Executive Officers and Directors The following table provides information concerning our executive officers and directors:
Name Age Position ---- --- ---------------------------------------- Howard Root.................. 39 Chief Executive Officer and Director Gary Gershony, M.D. ......... 43 Medical Director and Director Michael Nagel................ 38 Vice President of Sales & Marketing Charmaine Sutton............. 40 Vice President of Regulatory Affairs James Quackenbush............ 41 Vice President of Manufacturing Will Sutton.................. 36 Vice President of Research & Development Jerry Johnson................ 34 Chief Financial Officer and Secretary Richard Buchholz............. 32 Treasurer Gerard Langeler.............. 48 Director Steven Brandt................ 45 Director James Jacoby, Jr. ........... 37 Director
Howard Root has served as our Chief Executive Officer and a director since he co-founded Vascular Solutions in February 1997. From April 1996 through February 1997, Mr. Root was the Vice President of Gateway Alliance, LLC, a provider of management services to start-up businesses. From 1990 to 1995, Mr. Root was employed by ATS Medical, Inc., a mechanical heart valve company, most recently as Vice President and General Counsel. Prior to joining ATS Medical, Mr. Root practiced corporate law, specializing in representing emerging growth companies, at the law firm of Dorsey & Whitney for over five years. Mr. Root received his B.S. in Economics and J.D. degrees from the University of Minnesota. Gary Gershony, M.D., is the principal inventor of the Duett sealing device and has served as our Medical Director as well as a director since he co- founded Vascular Solutions in February 1997. Dr. Gershony also is in private practice as an interventional cardiologist with John Muir Hospital in Walnut Creek, California. From 1997 through March 1998, Dr. Gershony was associated with Los Angeles Cardiology Associates. From 1993 through 1997, Dr. Gershony was the Director of the Cardiac Catheterization Laboratories and Interventional Cardiology at the University of California Davis Medical Center and an Assistant Professor of Medicine (Cardiology) at the University of California Davis School of Medicine. From 1989 to 1993, Dr. Gershony served as Clinical Assistant Professor of Medicine at the University of Oklahoma College of Medicine and Associate Director of Research Cardiology at Hillcrest Medical Center. Dr. Gershony is a Fellow of the American College of Cardiology, the American Heart Association, the Society for Cardiac Angiography and Interventions and the American Society for Lasers in Medicine and Surgery. Dr. Gershony received his M.D. degree from the University of Toronto and performed his interventional cardiology fellowship at Emory University. Michael Nagel has served as our Vice President of Sales & Marketing since June 1997. Prior to joining us, Mr. Nagel was the Director of Sales & Marketing at Quantech, Ltd., a developer of point of care medical diagnostic testing products, where he worked since July 1996. From 1992 though July 1996, Mr. Nagel was the mid-west division sales manager of B. Braun Cardiovascular, a manufacturer of cardiovascular devices and catheters. From 1991 through 1992, Mr. Nagel was the Director of Worldwide Sales for the Medical Products Division of Angeion Corporation, a manufacturer of angioplasty accessories and pediatric catheters. Prior to 1991, Mr. Nagel performed a 40 variety of sales and marketing functions with Abbott Labs Diagnostic Division for over five years. Mr. Nagel received his B.A. and M.B.A. degrees from the University of St. Thomas. Charmaine Sutton joined us as manager of regulatory compliance in February 1997, became director of regulatory affairs and quality assurance in January 1998 and was named our Vice President of Regulatory Affairs in June 1998. Ms. Sutton has performed regulatory compliance, quality system development and clinical study design for medical companies on a contract basis since 1992. From 1990 to 1992, Ms. Sutton was manager of regulatory, clinical and quality assurance with AngeLase, Inc., a subsidiary of Angeion Corporation. Previously, Ms. Sutton was a physicist with the Lawrence Livermore National Laboratory. Ms. Sutton received a B.S. in Applied Physics/Quantum Optics from the University of California Davis. James Quackenbush has served as our Vice President of Manufacturing since March 1999. Prior to joining us, Mr. Quackenbush served as Vice President of Manufacturing and Operations with Optical Sensors, Inc., a diagnostic medical device company, where he worked since October 1992. From March 1989 through October 1992, Mr. Quackenbush served as operations manager with Schneider USA's stent division. Prior to this time, he was an advanced project engineer with the 3M Medical Products Division. Mr. Quackenbush received a B.S. in Industrial Engineering from Iowa State University. Will Sutton joined us as our Vice President of Research & Development in December 1999. From 1997 through 1999, Mr. Sutton was Director of Research & Development for Urologix, Inc., a urology medical device company. From 1994 through 1997, Mr. Sutton was a manager of research and development with C.R. Bard, Inc., a medical device company. Mr. Sutton was a development engineer with Abbott Laboratories, Inc., from 1987 through 1994. Mr. Sutton received his M.S. and B.S. degrees in Mechanical Engineering from Stanford University. Jerry Johnson joined us as our Chief Financial Officer and Secretary in November 1999. Prior to joining us, Mr. Johnson was Executive Vice President of Commerce Financial Group, Inc., a specialty finance and banking organization since February 1999. From 1993 to 1999, Mr. Johnson was with John G. Kinnard & Company, Inc., an investment bank, most recently as Managing Director of the Healthcare Group. Mr. Johnson received a B.S. and M.B.A. in Finance from the University of Minnesota and a J.D. degree from the University of Southern California. Richard Buchholz has served as our Controller since December 1997 and as our Treasurer since December 1999. Prior to joining us, Mr. Buchholz was with Ernst & Young LLP for over five years, most recently as manager on the audit staff. Mr. Buchholz received his B.B.A. degree in Accounting from the University of Wisconsin--Eau Claire and is a Certified Public Accountant. Gerard Langeler has been a member of our board of directors since February 1997. Mr. Langeler has been a General Partner of Olympic Venture Partners, an operating venture capital company, since 1992. Prior to joining Olympic Venture Partners, Mr. Langeler was an officer and co-founder of Mentor Graphics, a manufacturer of software for computer-aided design of electronics. Mr. Langeler also is a director of Preview Systems, Inc. and 800.com, Inc. Steven Brandt was elected to the Board of Directors in January 2000. Mr. Brandt was the Chief Executive Officer of XRT Corporation, an interventional cardiology medical device company, from 1997 to February 2000, when it was acquired by Medtronic, Inc. From 1995 to 1997 Mr. Brandt was Vice President of Marketing for XRT Corporation. From 1992 through 1995, Mr. Brandt held marketing positions with Schneider, a cardiology medical device company, most recently as Director 41 of Marketing. Previously, Mr. Brandt was Director of Marketing for the angioplasty business unit of Medtronic, Inc. and previously held sales and marketing positions with the USCI and Bard Critical Care divisions of C.R. Bard, Inc. James Jacoby, Jr. joined our board of directors in February 1999. Mr. Jacoby has been Vice President, Corporate Finance Department of Stephens Inc., an Arkansas-based investment banking firm, since 1994. From 1990 through 1994, Mr. Jacoby was Vice President, Mergers and Acquisitions Department of Chemical Banking Corporation in New York and London. There are no family relationships among any of our directors or executive officers. All directors hold office until the next annual meeting of our shareholders and until their successors have been elected and qualified or until their earlier resignation or removal. Executive officers are appointed to serve at the discretion of our board of directors. Mr. Langeler and Mr. Jacoby have been elected to our board of directors pursuant to the terms of an amended and restated voting agreement dated December 9, 1998 among Vascular Solutions and certain of our shareholders, including affiliates of Olympic Venture Partners and Stephens Inc. This voting agreement will terminate upon the closing of this offering. Board Committees Our board of directors has established a compensation committee and an audit committee. The compensation committee consists of Messrs. Langeler and Jacoby and Dr. Gershony. The compensation committee's responsibilities include establishing salaries, incentives, and other forms of compensation for our directors and officers; administering our incentive compensation and benefits plans; and recommending policies relating to such incentive compensation and benefits plans. The audit committee consists of Messrs. Langeler, Brandt and Jacoby. The audit committee's responsibilities include facilitating our relationship with independent auditors; reviewing and assessing the performance of our accounting and finance personnel; communicating to the board the results of work performed by and issues raised by our independent auditors and legal counsel; and evaluating our management of assets and reviewing policies relating to asset management. Director Compensation We do not currently pay any compensation to directors for serving in that capacity, but we reimburse directors for out-of-pocket expenses incurred in attending board meetings. Each unaffiliated director receives an option to purchase 10,000 shares of our common stock with an exercise price equal to fair market value on the date of his or her election to our board and the date of each re-election thereafter. Compensation Committee Interlocks and Insider Participation Messrs. Langeler and Jacoby and Dr. Gershony currently serve on the compensation committee. None of these individuals has at any time been an officer or employee of Vascular Solutions. Prior to formation of the compensation committee, all decisions regarding executive compensation were made by the full board of directors. No interlocking relationship exists between the board of directors or the compensation committee and the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. 42 We have sold shares of common stock, Series A and Series B preferred stock to entities affiliated with Olympic Venture Partners and shares of common stock and Series B preferred stock to entities affiliated with Stephens Inc. Mr. Langeler, one of our directors and a member of our compensation committee, is a general partner of Olympic Venture Partners and has voting control of the affiliated entities. Mr. Jacoby, one of our directors and a member of our audit committee, is a Vice President of Stephens Inc. Indemnification Matters and Limitation of Liability Minnesota law and our bylaws provide that we will, subject to limitations, indemnify any person made or threatened to be made a party to a proceeding by reason of that person's former or present official capacity with us. We will indemnify such person against judgments, penalties, fines, settlements and reasonable expenses, and, subject to limitations, we will pay or reimburse reasonable expenses before the final disposition of the proceeding. As permitted by Minnesota law, our articles of incorporation provide that our directors will not be personally liable to us or our shareholders for monetary damages for a breach of fiduciary duty as a director, subject to the following exceptions: . any breach of the director's duty of loyalty to us or our shareholders; . acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; . liability for illegal distributions under section 302A.559 of the Minnesota Business Corporation Act or for civil liabilities for state securities law violations under section 80A.23 of the Minnesota statutes; or . any transaction from which the director derived an improper personal benefit. In his role as one of our directors, Mr. Jacoby may be entitled to indemnification by Stephens Inc. Presently, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for indemnification. Employment and Consulting Agreements We have entered into employment agreements with each of our executive officers. The employment agreements provide for employment "at will" which may be terminated by either party for any reason upon ten working days' prior written notice. The base salary and any discretionary bonus for each of the executive officers is determined by the compensation committee of our board of directors. During the term of his or her employment agreement and for a period of one year after its termination, each executive officer is prohibited from competing with us in the vascular sealing device field. Upon the commencement of our operations in February 1997, we entered into a consulting agreement with Dr. Gershony to serve as our Medical Director. In June 1999, the agreement was revised. Under the revised agreement, Dr. Gershony receives $8,333 on a monthly basis for his services to us in clinical research, product development and medical review. The relationship under the agreement is on an "at will" basis. Either party may terminate the relationship for any reason at 43 any time by giving ten working days written notice to the other party. During the term of the agreement and for one year after its termination, Dr. Gershony is prohibited from working on a competitive vascular sealing device. Executive Compensation The following summary compensation table indicates the cash and non-cash compensation earned by each our executive officers whose total compensation exceeded $100,000 during the fiscal year ended December 31, 1999. All other compensation consists of premiums we pay for health insurance benefits and matching contributions to the 401(k) plan. Summary Compensation Table
Annual Long Term Compensation Compensation --------------------- ------------ Shares Salary Bonus Underlying All Other Name and Principal Position Year ($) ($) Options (#) Compensation ($) - --------------------------- ---- -------- ------- ------------ ---------------- Howard Root ............... 1999 $140,000 $28,000 200,000 $2,046 Chief Executive Officer 1998 115,000 -- -- 1,510 Michael Nagel.............. 1999 130,000 25,000 60,000 7,697 Vice President of Sales & Marketing 1998 100,000 -- 10,000 5,078 Charmaine Sutton........... 1999 110,000 20,000 20,000 250 Vice President of Regulatory James Quackenbush.......... 1999 88,000 20,000 40,000 3,760 Vice President of Manufacturing
The following table provides information concerning the stock option grants we made to each of the above named executive officers during the year ended December 31, 1999. Options to purchase an aggregate of 573,000 shares of our common stock were granted to our employees during the year ended December 31, 1999. All stock options were granted with an exercise price equal to the fair market value of our common stock as determined by our board of directors on the grant date and vest in equal monthly installments over a four-year period beginning on the grant date. The 5% and 10% assumed annual rates of compounded stock price appreciation are required by the rules of the Securities and Exchange Commission and do not represent our estimates or projections of our future stock prices. Stock Options Granted in 1999
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term ----------------------------------------------- ------------------- Number of % of Total Securities Options Underlying Granted to Options Employees Exercise Price Expiration Name Granted in 1999 Per Share Date 5% 10% - ---- ---------- ---------- -------------- ---------- -------- ---------- Howard Root............. 200,000 34.9% $6.00 12/21/09 $754,674 $1,912,491 Michael Nagel........... 25,000 4.4 3.25 4/14/09 51,098 129,492 35,000 6.1 6.00 12/21/09 132,068 334,686 Charmaine Sutton........ 10,000 1.7 3.25 4/14/09 20,439 51,797 10,000 1.7 6.00 12/21/09 37,734 95,625 James Quackenbush....... 27,500 4.8 3.25 2/25/09 56,207 142,441 2,500 .4 3.25 4/14/09 5,110 12,949 10,000 1.7 6.00 12/21/09 37,734 95,625
44 The following table sets forth information concerning stock option exercises during 1999 by the named executive officers and the number and value of unexercised options held by them. There was no public trading market for our common stock as of December 31, 1999. Accordingly, the value of unexercised options has been calculated by subtracting the exercise price from the fair market value of the underlying securities on December 31, 1999 as determined by our board of directors, which was determined to be $6.00 per share. Aggregate Option Exercises in 1999 and Year-End Option Values
Number of Securities Underlying Unexercised Value of Unexercised Options at In-the-Money Options Shares December 31, 1999 at December 31, 1999 Acquired Value ------------------------- ------------------------- Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- -------- ----------- ------------- ----------- ------------- Howard Root............. -- $-- 10,375 205,836 $ 46,688 $ 26,262 Michael Nagel........... -- -- 32,600 82,400 141,000 160,250 Charmaine Sutton........ -- -- 21,400 38,600 90,000 102,500 James Quackenbush....... -- -- 6,600 33,400 18,150 64,350
Benefit Plans Stock Option and Stock Award Plan Our stock option and stock award plan was approved by our board of directors and shareholders and provides for the granting of the following to employees and non-employees of Vascular Solutions: . stock options, including incentive stock options and non-qualified stock options; . stock appreciation rights; and . restricted stock. We have reserved 1,400,000 shares of common stock for issuance under the stock option and stock award plan. The plan is administered by the compensation committee of the board of directors. The committee has the discretion to select the optionees and grantees and to establish the terms and conditions of each stock option and award, subject to the provisions of the plan. The exercise price for an incentive stock option granted under the plan must not be less than the fair market value of our common stock on the date the option is granted. The exercise price of a non-qualified option granted under the plan must not be less than 50% of the fair market value of our common stock on the date the option is granted. The term of each incentive stock option is determined by the committee but may not exceed ten years from the date the option is granted. Options may be exercised by tendering cash, by tendering shares of our common stock already owned by the optionee or, in the discretion of the committee, by the issuance of a promissory note. The plan may be amended or discontinued by our board of directors at any time. In connection with any option granted under the plan, the committee may grant a stock appreciation right. A stock appreciation right is a right to receive, in lieu of the exercise of an option, the difference between the fair market value of the common stock subject to the option and the exercise price of the option. A stock appreciation right may be exercised as an alternative, but not in addition to, the exercise of the option. A stock appreciation right may be paid in cash or shares of 45 our common stock, in the discretion of the committee. The committee has not granted any stock appreciation rights. The stock option and stock award plan also permits the award of restricted stock to employees or non-employees who perform valuable services for us. Restricted stock awards are a grant to an individual of a fixed number of shares of our common stock which vest over a specific period of time. The committee has the authority to determine the amount of any award and the conditions and timing of the vesting of the shares. No restricted stock awards have been made. As of March 31, 2000, options to purchase an aggregate of 946,751 shares of common stock, at an average exercise price of $4.24 per share, were outstanding under the stock option and stock award plan and a total of 346,789 shares were available for future option grants. 401(k) Plan We have established a tax-qualified employee savings and retirement plan (the "401(k) Plan") for all of our employees who satisfy eligibility requirements, including requirements relating to age and length of service. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to the lower of 18% or the statutorily prescribed limit and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan permits us to make additional discretionary matching contributions. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code so that contributions by employees or by us to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that our contributions, if any, will be deductible by us when made. Beginning April 1, 1999, we began matching 25% of the employee's contribution up to 5% of current compensation. Medical Advisory Board We have assembled a medical advisory board consisting of practicing interventional cardiologists to assist in the review of the Duett sealing device, formulation of appropriate clinical studies and future product developments. In addition to our Medical Director, Dr. Gary Gershony, our medical advisory board is comprised of: Dr. Donald Baim, who is Professor of Medicine at Harvard Medical School and Chief of the Interventional Cardiology Section of Beth Israel Deaconess Medical Center in Boston, Massachusetts. Dr. Stephen Ellis, who is the Director of the Sones Cardiac Catheterization Laboratory at The Cleveland Clinic Foundation in Cleveland, Ohio. Dr. Martin Leon, who is the Chief Executive Officer of the Cardiology Research Foundation at Lenox Hill Hospital in New York, New York. Dr. Michael Mooney, who is the Director of Interventional Cardiology at the Minneapolis Heart Institute in Minneapolis, Minnesota. Prof. Dr. Sigmund Silber, who is an interventional cardiologist at Muller Hospital in Munich, Germany and performed the first clinical study of the Duett sealing device. Dr. Arne Tofte, who is an interventional radiologist with The National Hospital of the University of Oslo in Norway. Dr. James Wilentz, who is an interventional cardiologist at the Beth Israel Medical Center in New York City, New York. 46 CERTAIN TRANSACTIONS In December 1998, we issued 1,777,777 shares of Series B preferred stock at $4.50 per share. Of this amount, Stephens Vascular Preferred, LLC, an affiliate of Stephens Inc., purchased 1,221,466 shares. Mr. James Jacoby Jr., one of our directors, is a Vice President of Stephens Inc. Affiliates of Olympic Venture Partners, a 5% beneficial shareholder, purchased a total of 100,000 shares of Series B preferred stock. Mr. Langeler, one of our directors, is a general partner of Olympic Venture Partners and possesses voting control of the entities noted above. TGI Fund II, LC, an affiliate of Tredegar Investments and a 5% beneficial shareholder, purchased a total of 100,000 shares of Series B preferred stock. In connection with the Series B preferred stock purchase agreement, we entered into a put and option agreement with Stephens Vascular Preferred, LLC. Under this agreement, we have the right to sell to Stephens Vascular Preferred, LLC, and Stephens Vascular Options, LLC has the right to purchase from us, up to 600,000 shares of our common stock at $5.00 per share. On June 30, 1999 we exercised our right under this agreement and issued 600,000 shares of common stock to Stephens Vascular Preferred, LLC in exchange for $3,000,000. On December 28, 1999, Stephens Vascular Options, LLC exercised its right under this agreement and purchased 600,000 shares of common stock in exchange for $3,000,000. Also in connection with the Series B preferred stock purchase agreement, we granted Stephens Vascular Options, LLC the option to purchase from us up to 285,714 shares of our common stock at $7.00 per share. On December 28, 1999, Stephens Vascular Options, LLC exercised its right under this agreement and purchased 285,714 shares of common stock in exchange for $2,000,000. All shares of our preferred stock will convert into shares of common stock upon the closing of our initial public offering. Some of these shares were sold or issued to 5% shareholders and entities affiliated with directors. We sold these shares pursuant to preferred stock purchase agreements on substantially similar terms as were sold to nonaffiliated purchasers. We believe that the shares issued in these transactions were sold at the then fair market value of the shares and that the terms of these transactions were no less favorable than we could have obtained from unaffiliated third parties. The following table summarizes the Series A and Series B preferred stock purchased by 5% shareholders and entities affiliated with our directors and their affiliates:
Common Stock Issuable Upon Conversion of Preferred Stock ------------------- Shareholder Series A Series B ----------- --------- --------- Entities affiliated with Olympic Venture Partners........ 1,200,000 100,000 Stephens Vascular Preferred, LLC......................... -- 1,221,466 TGI Fund II, LC.......................................... 800,000 100,000
The shares issued to entities affiliated with Olympic Venture Partners consists of 724,000 shares purchased by Olympic Venture Partner IV, L.P.; 512,000 shares purchased by Olympic Venture Partners III, L.P.; 25,053 shares purchased by OVP III Entrepreneurs Fund, L.P. and 38,947 shares purchased by OVP IV Entrepreneurs Fund, L.P. 47 PRINCIPAL SHAREHOLDERS The following table provides information concerning beneficial ownership of our common stock as of March 31, 2000 for: . each person or group that we know owns more than 5% of our outstanding common stock; . each of our named executive officers; . each of our directors; and . all of our directors and executive officers as a group. The following table lists the applicable percentage of beneficial ownership based on 9,042,868 shares of common stock outstanding as of March 31, 2000, as adjusted to reflect the conversion of the outstanding shares of preferred stock upon completion of this offering. The table also lists the applicable percentage of beneficial ownership based on 11,717,868 shares of common stock outstanding upon completion of this offering, assuming no exercise of the underwriters' overallotment option. Beneficial ownership is determined in accordance with rules of the Securities and Exchange Commission, and generally includes voting power and/or investment power with respect to the securities held. The fourth column shows separately shares of common stock subject to options currently exercisable or exercisable within 60 days after March 31, 2000 by the directors and named executive officers individually and all directors and executive officers as a group. These shares are included in the first column of the table below. Shares of common stock which may be acquired by exercise of stock options are deemed outstanding for purposes of computing the percentage beneficially owned by the persons holding such options but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person. Except as otherwise noted, the persons or entities named have sole voting and investment power with respect to all shares shown as beneficially owned by them.
Percentage of Shares Number of Beneficially Owned Shares -------------------- Shares Beneficially Before the After the Subject to Owned Offering Offering Options ------------ ---------- --------- ---------- Entities affiliated with Stephens Inc. (1)........................ 2,717,180 30.0% 23.2% 10,000 James Jacoby, Jr. (1).......... 2,717,180 30.0 23.2 10,000 Entities affiliated with Olympic Venture Partners (2)............ 1,800,000 19.9 15.4 -- Gerard Langeler (2)............ 1,810,000 20.0 15.4 10,000 TGI Fund II, LC (3).............. 900,000 10.0 7.7 -- Gary Gershony, M.D. (4).......... 767,000 8.5 6.5 10,000 Howard Root...................... 313,035 3.4 2.7 33,246 Michael Nagel (5)................ 113,100 1.2 1.0 45,100 Charmaine Sutton................. 26,200 * * 26,200 James Quackenbush................ 10,050 * * 10,050 Steven Brandt.................... 2,000 * * 2,000 All directors and executive officers as a group (10 persons)........................ 5,758,565 62.7% 48.5% 146,596
- -------- * Less than 1% (1) 1,821,466 of the shares are held by Stephens Vascular Preferred, LLC, 885,714 of the shares are held by Stephens Vascular Options, LLC and all of the options are held by Stephens Investment Partners III LLC. The address is 111 Center Street, Suite 2500, Little Rock, AR 72201. 48 Mr. Jacoby is Vice President of Stephens Inc. Mr. Jacoby disclaims beneficial ownership of these shares. (2) Consists of 724,000 shares held by Olympic Venture Partners IV, L.P.; 988,190 shares held by Olympic Venture Partners III, L.P.; 48,863 shares held by OVP III Entrepreneurs Fund, L.P. and 38,947 shares held by OVP IV Entrepreneurs Fund, L.P. The address of all of these entities is 2420 Carillion Point, Kirkland, Washington 98033. Mr. Langeler is a general partner of Olympic Venture Partners and possesses shared voting control of the entities noted above. Mr. Langeler disclaims beneficial ownership of these shares other than his interest in the funds. (3) An affiliate of Tredegar Investments. The address is 6501 Columbia Center, Seattle, WA 98104. (4) Dr. Gershony's address is 2495 Xenium Lane North, Minneapolis, Minnesota 55441. (5) Includes an aggregate of 18,000 shares registered in the name of Mr. Nagels' three minor children's irrevocable trusts. 49 DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of 40,000,000 shares of capital stock, par value $.01 per share. Unless otherwise designated by our board of directors, all issued shares are deemed common stock with equal rights and preferences. Common Stock As of March 31, 2000, there were 5,265,091 shares of common stock outstanding, held by 168 shareholders of record. Holders of our common stock do not have cumulative voting rights and are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders, including the election of directors. Holders of our common stock are entitled to receive ratably such dividends, if any, as may be declared by the board of directors out of funds legally available therefor, subject to the prior rights of any preferred stock then outstanding. See "Dividend Policy." Upon a liquidation, dissolution or winding up of Vascular Solutions, the holders of our common stock will be entitled to share ratably in the net assets legally available for distribution to shareholders after the payment of all debts and other liabilities of Vascular Solutions, subject to the prior rights of any preferred stock then outstanding. Holders of our common stock have no preemptive or conversion rights or other subscription rights and there are no redemption or sinking funds provisions applicable to the common stock. All outstanding shares of common stock are, and the common stock outstanding upon completion of this offering will be, fully paid and nonassessable. Preferred Stock Upon the closing of this offering, all of our outstanding shares of preferred stock will convert into 3,777,777 shares of common stock. These shares of preferred stock will no longer be authorized, issued or outstanding after completion of this offering. Our board of directors has the authority, without further action by the shareholders, to issue from time to time shares of preferred stock in one or more series and to fix the number of shares, designations and preferences, powers and relative, participating, optional or other special rights and the qualifications or restrictions thereof. The preferences, powers, rights and restrictions of different series of preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and purchase funds and other matters. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to holders of common stock or adversely affect the rights and powers, including voting rights, of the holders of common stock. It may have the effect of delaying, deferring or preventing a change in control of Vascular Solutions. We currently do not plan to issue any shares of preferred stock. Registration Rights After this offering, the holders of 3,777,777 shares of common stock will be entitled to rights with respect to the registration of these shares under the Securities Act as follows: 50 Demand Registration Rights: At any time after six months from the date of this prospectus, the holders of at least 51% of these shares of common stock can request that we register all or a portion of their shares. Upon such a request, we must, subject to restrictions and limitations, use our best efforts to cause a registration statement covering the number of shares of common stock that are subject to the request to become effective. The holders may only require us to file two registration statements in response to their demand registration rights. Piggyback Registration Rights: The holders of these shares can request that we register their shares anytime we are filing a registration statement to register securities for our own account. These registration opportunities are unlimited but the number of shares that can be registered may be cut back in limited situations by the underwriters. S-3 Registration Rights: The holders of over 20% of these shares can request that we register their shares if we are eligible to file a registration statement on Form S-3. The holders may only require us to file one registration statement on Form S-3 per twelve-month period. In addition, the holders of warrants to purchase 168,000 shares of common stock are entitled to rights with respect to the registration of the shares underlying their warrants under the Securities Act. At any time after the closing of our initial public offering, the holders of at least 51% of these warrants can request that we register the shares of common stock underlying these warrants. In addition, the holders of these warrants can request that we register the shares underlying these warrants anytime we are filing a registration statement to register securities for our own account. The registration rights of the warrant holders are subject to restrictions and limitations. All of these registration rights terminate when the shares may be sold under Rule 144(k) under the Securities Act. Warrants and Stock Options We currently have outstanding warrants to purchase 268,000 shares of common stock. Of this amount, warrants to purchase 100,000 shares of common stock have an exercise price of $1.50 per share and expire in January and February 2007, warrants to purchase 68,000 shares of common stock have an exercise price of $3.00 per share and expire in December 2007, and warrants to purchase 100,000 shares of common stock have an exercise price of $5.00 per share and expire in June 2004. Provisions of our Articles and State Law Provisions with Potential Antitakeover Effects The existence of authorized but unissued preferred stock, described above, and certain provisions of Minnesota law, described below, could have an anti- takeover effect. These provisions are intended to provide management with flexibility, to enhance the likelihood of continuity and stability in the composition of our board of directors and the policies of our board and to discourage an unsolicited takeover of Vascular Solutions, if our board of directors determines that such a takeover is not in the best interests of Vascular Solutions and our shareholders. However, these provisions could have the effect of discouraging attempts to acquire Vascular Solutions, which could deprive our shareholders of opportunities to sell their shares of common stock at prices higher than prevailing market prices. Section 302A.671 of the Minnesota Business Corporation Act applies, with exceptions, to any acquisition of our voting stock from a person other than us, and other than in connection with certain mergers and exchanges to which we are a party, that results in the beneficial ownership of 20% or 51 more of the voting stock then outstanding. Section 302A.671 requires approval of any such acquisitions by a majority vote of our shareholders before its consummation. In general, shares acquired in the absence of such approval are denied voting rights and are redeemable at their then fair market value by us within 30 days after the acquiring person has failed to give a timely information statement to us or the date the shareholders voted not to grant voting rights to the acquiring person's shares. Section 302A.673 of the Minnesota Business Corporation Act generally prohibits any business combination by us, or by any of our subsidiaries, with any shareholder that purchases ten percent or more of our voting shares within four years following that interested shareholder's share acquisition date. The business combination may be permitted if it is approved by a committee of all of the disinterested members of our board of directors before the interested shareholder's share acquisition date. Listing We have applied for quotation of our common stock on the Nasdaq National Market under the symbol "VASC." Transfer Agent and Registrar The transfer agent and registrar for our common stock will be Norwest Bank Minnesota, N.A. 52 SHARES ELIGIBLE FOR FUTURE SALE Upon the closing of this offering, we will have 11,717,868 shares of common stock outstanding, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options or warrants to purchase common stock after March 31, 2000. Of these shares, the 2,675,000 shares of common stock being sold in this offering will be freely tradeable without restriction or further registration under the Securities Act, except for shares held by our "affiliates," as such term is defined in Rule 144 under the Securities Act. These shares may generally only be sold in compliance with the limitations of Rule 144 described below. The remaining 9,042,868 shares were issued and sold by us in private transactions, are restricted securities and may be sold in the public market only if registered under the Securities Act or if exempt from registration under Rules 144, 144(k) or 701 under the Securities Act, which rules are summarized below. Subject to the agreements between our shareholders and the underwriters, described below, and the provisions of Rules 144, 144(k) and 701, additional shares will be available for sale in the public market, subject in the case of shares held by affiliates to compliance with volume restrictions, as follows: . 165,000 shares will be available for immediate sale in the public market on the date of this prospectus; . 247,250 shares will be available for sale beginning 75 days after the date of this prospectus; and . 8,630,618 shares will be available for sale upon the expiration of agreements between our shareholders and the underwriters at varying dates beginning 180 days after the date of this prospectus. In general, under Rule 144, beginning 90 days after the date of this prospectus, a person or persons whose shares are aggregated, including an affiliate, who has beneficially owned restricted shares for at least one year, is entitled to sell these shares. However, the number of these shares sold within any three-month period may not exceed the greater of 1% of the then outstanding shares of common stock, approximately 117,000 shares immediately after this offering, or the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the date of such sale. Sales under Rule 144 also are subject to requirements pertaining to the manner and notice of such sales and the availability of current public information concerning Vascular Solutions. Under Rule 144(k), a person who is not deemed to have been an affiliate of Vascular Solutions at any time during the 90 days before a sale and who has beneficially owned the shares proposed to be sold for at least two years would be entitled to sell these shares without regard to the requirements described above. To the extent that shares were acquired from an affiliate of Vascular Solutions, the transferee's holding period for the purpose of effecting a sale under Rule 144(k) commences on the date of transfer from the affiliate. Rule 701 provides that, beginning 90 days after the date of this prospectus, persons other than affiliates may sell shares of common stock acquired from us in connection with written compensatory benefit plans, such as our stock option and stock award plan, subject only to the manner of sale provisions of Rule 144. Beginning 90 days after the date of this prospectus, affiliates may sell these shares of common stock subject to all provisions of Rule 144 except the one-year minimum holding period. 53 Approximately six months after the date of this prospectus, we intend to file a registration statement on Form S-8 under the Securities Act to register all shares of common stock issuable under our stock option and stock award plan. See "Management--Benefit Plans." This Form S-8 registration statement is expected to become effective immediately upon filing and shares covered by that registration statement will then be eligible for sale in the public markets, subject to the Rule 144 limitations applicable to affiliates. Prior to this offering there has been no public market for our common stock, and no predictions can be made regarding the effect, if any, that sales of shares in the open market or the availability of shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of substantial amounts of our common stock in the public market could adversely affect the prevailing market price. All of our directors and executive officers and substantially all of our shareholders have agreed that they will not, without the prior written consent of to sell or otherwise dispose of any shares of common stock or options to acquire shares of common stock during the 180-day period following the closing of this offering. See "Underwriting." After the closing of this offering, the holders of 3,777,777 shares of our common stock will be entitled to rights with respect to the registration of such shares under the Securities Act. See "Description of Capital Stock-- Registration Rights." Registration of these shares under the Securities Act would result in these shares becoming freely tradeable without restriction under the Securities Act, except for shares purchased by affiliates, immediately upon the effectiveness of registration. 54 UNDERWRITING Subject to the terms and conditions stated in the underwriting agreement dated the date of this prospectus, each underwriter named below has severally agreed to purchase, and we have agreed to sell to each underwriter the number of shares of common stock set forth opposite the name of each underwriter:
Number Name of Shares ---- --------- Total......................................................... 2,675,000
The underwriting agreement provides that the obligations of the several underwriters to purchase the shares of common stock included in this offering are subject to approval of purchase by underwriters' counsel and to other conditions. The underwriters are obligated to purchase all the shares of common stock, other than those covered by the over-allotment option described below, if they purchase any of the shares of common stock. The underwriters, for whom , and are acting as representatives, propose to offer some of the shares of common stock directly to the public at the public offering price set forth on the cover page of this prospectus and some of the shares of common stock to certain dealers at the public offering price less a concession not in excess of $ per share. The underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share on sales to other dealers. If all of the shares are not sold at the initial offering price, the representatives may change the public offering price and the other selling terms. The representatives have advised us that the underwriters do not intend to confirm any sales to any accounts over which they exercise discretionary authority. We have granted the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to 401,250 additional shares of common stock to cover over-allotments, if any. The underwriters may exercise this option solely for the purpose of covering overallotments, if any, in connection with this offering. To the extent this option is exercised, each underwriter will be obligated, subject to the conditions stated above, to purchase a number of additional shares approximately proportionate to such underwriter's initial purchase commitment. At our request, the underwriters have reserved up to five percent of the common stock offered by this prospectus for sale to our employees and their friends and family members and to our business associates at the initial public offering price set forth on the cover page of this prospectus. This directed share program will be administered by . These persons must commit to purchase no later than the close of business on the day following the date of this prospectus. The number of shares available for sale to the general public will be reduced to the extent these persons purchase the reserved shares. We, our officers, directors and our existing shareholders, who own an aggregate of 8,630,618 shares of our common stock prior to this offering, have agreed that, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of dispose of or hedge any shares of common stock or any securities convertible into or exchangeable 55 for shares of our common stock, except that we may issue shares upon the exercise of options granted prior to the date of this prospectus, and may grant additional options under our share option plan. in its sole discretion may release any of the securities subject to these lock-up agreements at any time without notice. Prior to this offering, there has been no public market for our shares of common stock. Consequently, the initial public offering price for the shares was determined by negotiations between us and the representatives. Among the factors considered in determining the initial public offering price were our record of operations, our current financial condition, our future prospects, our markets, the economic conditions in and future prospects for the industry in which we compete, our management and currently prevailing general conditions in the equity securities markets, including current market valuations of publicly traded companies considered comparable to us. We cannot assure you, however, that the prices at which the shares will sell in the public market after this offering will not be lower than the price at which they are sold by the underwriters or that an active trading market in the shares will develop and continue after this offering. The following table shows the underwriting discount and commissions to be paid to the underwriters by us in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares.
Paid by Us ----------------- No Full Exercise Exercise -------- -------- Per Share............................................... $ $ Total...................................................
In connection with this offering, on behalf of the underwriters, may purchase and sell shares of common stock in the open market. These transactions may include over-allotment, syndicate covering transactions and stabilizing transactions. Over-allotment involves syndicate sales of shares in excess of the number of shares to be purchased by the underwriters in the offering, which creates a syndicate short position. Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. Stabilizing transactions consist of bids or purchases of common stock made for the purpose of preventing or retarding a decline in the market price of the common stock while the offering is in progress. The underwriters also may impose a penalty bid. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when in covering syndicate short positions or making stabilizing purchases, repurchases shares of common stock originally sold by that syndicate member. Any of these activities may cause the price of the ordinary shares to be higher than the price that otherwise would exist in the open market in the absence of such transactions. These transactions may be effected on the Nasdaq National Market or in the over-the-counter market, or otherwise and, if commenced, may be discontinued at any time. We estimate that our total expenses for this offering, excluding the underwriting discount, will be $350,000. We have agreed to indemnify the underwriters against liabilities to which they become subject, including liabilities that may arise under the Securities Act of 1933, the Securities Exchange Act of 56 1934, or other federal or state statutory law or regulation, at common law or otherwise, or to contribute to payments the underwriters may be required to make in respect of any of those liabilities. The rules of the National Association of Securities Dealers, Inc. (the "NASD") provide that an NASD member may not participate in a public offering of an issuer's securities if more than 10% of the issuer's common stock is beneficially owned by the member participating in the distribution of the offering, unless a "qualified independent underwriter" has been engaged as required by the rules of the NASD. Stephens, Inc., through its affiliates, Stephens Vascular Preferred LLC, Stephens Vascular Options LLC and Stephens Investment Partners III LLC, beneficially owns 30% of our common stock. See "Principal Shareholders" and "Certain Transactions." In view of this ownership, this offering is being conducted in accordance with rule 2720(d)(2) of the NASD conduct rules, and is acting as "qualified independent underwriter" within the meaning of these rules. In connection with this offering, has participated in the preparation of the registration statement of which this prospectus forms a part. It has exercised its usual standards of "due diligence" during its participation and has recommended the maximum price at which the common stock may be offered. LEGAL MATTERS Dorsey & Whitney LLP, Minneapolis, Minnesota, will pass upon the validity of the issuance of shares of common stock offered by this prospectus for Vascular Solutions. Certain legal matters will be passed on for the underwriters by . EXPERTS Ernst & Young LLP, independent auditors, have audited our financial statements as of December 31, 1998 and 1999 and for each of the years in the three year period ended December 31, 1999, as set forth in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. The matters of law discussed under the headings "Risk Factors--We have been named as the defendant in a patent infringement lawsuit and may face additional intellectual property infringement claims in the future which could prevent us from manufacturing and selling our product or result in our incurring substantial costs and liabilities" and "Business--Patents and Intellectual Property" have been reviewed by Patterson & Keough PA, and have been included herein in reliance upon the authority of such firm as an expert in such matters. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 with respect to the common stock offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules which are part of the registration statement. For further information on Vascular Solutions and our common stock, you should review the registration 57 statement and exhibits and schedules thereto. You may read and copy any document we file at the Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for further information on the public reference room. Our filings are also available to the public from the Commission's web site at http://www.sec.gov. Upon completion of this offering, we will be required to file periodic reports, proxy statements and other information with the Commission. These periodic reports, proxy statements and other information will be available for inspection and copying at the Commission's public reference rooms and the web site of the Commission referred to above. 58 VASCULAR SOLUTIONS, INC. INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Independent Auditors............................................. F-2 Balance Sheets............................................................. F-3 Statements of Operations................................................... F-4 Statement of Changes in Shareholders' Equity............................... F-5 Statements of Cash Flows................................................... F-6 Notes to Financial Statements.............................................. F-7
F-1 Report of Independent Auditors Board of Directors and Shareholders Vascular Solutions, Inc. We have audited the balance sheets of Vascular Solutions, Inc. as of December 31, 1998 and 1999, and the related statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. 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 Vascular Solutions, Inc. at December 31, 1998 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP Minneapolis, Minnesota January 12, 2000 F-2 VASCULAR SOLUTIONS, INC. BALANCE SHEETS
December 31, Pro forma ------------------------- March 31, March 31, 1998 1999 2000 2000 ----------- ------------ ----------- ----------- (unaudited) (unaudited) Assets Current assets: Cash and cash equivalents............ $ 9,897,053 $ 10,529,191 $ 8,064,673 $ 8,064,673 Accounts receivable..... 125,000 374,978 602,069 602,069 Inventories............. 318,811 612,569 854,302 854,302 Prepaid expenses........ 53,174 93,177 95,923 95,923 ----------- ------------ ----------- ----------- Total current assets.. 10,394,038 11,609,915 9,616,967 9,616,967 Property and equipment, net...................... 612,577 684,952 762,725 762,725 ----------- ------------ ----------- ----------- Total assets.......... $11,006,615 $ 12,294,867 $10,379,692 $10,379,692 =========== ============ =========== =========== Liabilities and Shareholders' Equity Current liabilities: Accounts payable........ $ 273,816 $ 1,019,715 $ 909,116 $ 909,116 Accrued clinical trial costs.................. 140,705 -- -- -- Accrued expenses........ 46,318 102,954 188,987 188,987 ----------- ------------ ----------- ----------- Total current liabilities.......... 460,839 1,122,669 1,098,103 1,098,103 Commitments and contingencies Shareholders' equity: Series A preferred stock, $.01 par value; 2,000,000 shares authorized; 2,000,000 shares issued and outstanding............ 20,000 20,000 20,000 -- Series B preferred stock, $.01 par value; 1,777,777 shares authorized; 1,777,777 shares issued and outstanding............ 17,778 17,778 17,778 -- Common stock, $.01 par value; 16,222,223, 16,222,223 and 36,222,223 shares authorized in 1998, 1999 and 2000, respectively, 40,000,000 pro forma shares authorized; 3,699,617, 5,250,291 and 5,265,091 shares issued and outstanding in 1998, 1999 and 2000, respectively, 9,042,868 pro forma shares issued and outstanding........ 36,996 52,503 52,651 90,429 Additional paid-in capital.................. 17,264,006 25,828,309 25,850,361 25,850,361 Deferred compensation..... -- (90,931) (72,619) (72,619) Accumulated deficit....... (6,793,004) (14,655,461) (16,586,582) (16,586,582) ----------- ------------ ----------- ----------- Total shareholders' equity................. 10,545,776 11,172,198 9,281,589 9,281,589 ----------- ------------ ----------- ----------- Total liabilities and shareholders' equity............... $11,006,615 $ 12,294,867 $10,379,692 $10,379,692 =========== ============ =========== ===========
See accompanying notes. F-3 VASCULAR SOLUTIONS, INC. STATEMENTS OF OPERATIONS
Three Months Ended Year Ended December 31, March 31, ------------------------------------- ------------------------ 1997 1998 1999 1999 2000 ----------- ----------- ----------- ----------- ----------- (unaudited) Net sales............... $ -- $ 494,150 $ 1,429,094 $ 207,000 $ 642,545 Cost of goods sold...... -- 442,565 1,065,199 185,944 348,851 ----------- ----------- ----------- ----------- ----------- Gross profit............ -- 51,585 363,895 21,056 293,694 Operating expenses: Research and development.......... 766,176 2,348,281 3,067,897 713,271 691,723 Clinical and regulatory........... 259,503 1,375,595 1,323,972 579,596 189,904 Sales and marketing... 273,089 1,075,250 2,301,603 350,065 901,315 General and administrative....... 425,596 667,522 1,903,946 195,077 563,572 ----------- ----------- ----------- ----------- ----------- Total operating expenses........... 1,724,364 5,466,648 8,597,418 1,838,009 2,346,514 ----------- ----------- ----------- ----------- ----------- Operating loss...... (1,724,364) (5,415,063) (8,233,523) (1,816,953) (2,052,820) Interest income......... 72,546 273,877 371,066 102,874 121,699 ----------- ----------- ----------- ----------- ----------- Net loss............ $(1,651,818) $(5,141,186) $(7,862,457) $(1,714,079) $(1,931,121) =========== =========== =========== =========== =========== Basic and diluted net loss per share......... $ (.62) $ (1.40) $ (1.95) $ (.46) $ (.37) =========== =========== =========== =========== =========== Shares used in computing basic and diluted net loss per share......... 2,667,612 3,660,136 4,032,616 3,699,705 5,254,603 =========== =========== =========== =========== =========== Pro forma net loss per share: Basic and diluted net loss per share....... $ (1.01) $ (.21) =========== =========== Shares used in computing basic and diluted net loss per share................ 7,810,393 9,032,380 =========== ===========
See accompanying notes. F-4 VASCULAR SOLUTIONS, INC. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Series A Series B Preferred Stock Preferred Stock Common Stock Additional ----------------- ----------------- ----------------- Paid-in Deferred Accumulated Shares Amount Shares Amount Shares Amount Capital Compensation Deficit Total --------- ------- --------- ------- --------- ------- ----------- ------------ ------------- ---------- Balance at December 31, 1996............. -- $ -- -- $ -- 1,366,250 $13,663 $ (12,297) $ -- $ -- $ 1,366 Sale of common stock at $1.50 per share in January and February 1997, net of offering costs........... -- -- -- -- 1,500,000 15,000 2,064,499 -- -- 2,079,499 Value of options granted for services........ -- -- -- -- -- -- 25,440 -- -- 25,440 Exercise of stock options... -- -- -- -- 7,000 70 10,430 -- -- 10,500 Sale of Series A preferred stock at $2.50 per share in December 1997, net of offering costs........... 2,000,000 20,000 -- -- -- -- 4,940,954 -- -- 4,960,954 Sale of common stock at $3.00 per share in December 1997, net of offering costs........... -- -- -- -- 680,000 6,800 1,782,774 -- -- 1,789,574 Net loss........ -- -- -- -- -- -- -- -- (1,651,818) (1,651,818) --------- ------- --------- ------- --------- ------- ----------- --------- ------------- ---------- Balance at December 31, 1997............. 2,000,000 20,000 -- -- 3,553,250 35,533 8,811,800 -- (1,651,818) 7,215,515 Sale of common stock at $3.00 per share in March and April 1998............ -- -- -- -- 126,667 1,266 378,734 -- -- 380,000 Exercise of stock options... -- -- -- -- 19,700 197 32,353 -- -- 32,550 Value of options granted for services........ -- -- -- -- -- -- 78,400 -- -- 78,400 Sale of Series B preferred stock at $4.50 per share in December 1998, net of offering costs........... -- -- 1,777,777 17,778 -- -- 7,962,719 -- -- 7,980,497 Net loss........ -- -- -- -- -- -- -- -- (5,141,186) (5,141,186) --------- ------- --------- ------- --------- ------- ----------- --------- ------------- ---------- Balance at December 31, 1998............. 2,000,000 20,000 1,777,777 17,778 3,699,617 36,996 17,264,006 -- (6,793,004) 10,545,776 Exercise of stock options... -- -- -- -- 1,550,674 15,507 8,144,018 -- -- 8,159,525 Value of options granted for services........ -- -- -- -- -- -- 22,660 -- -- 22,660 Value of warrant granted related to supply agreement....... -- -- -- -- -- -- 257,000 -- -- 257,000 Deferred compensation related to option grants... -- -- -- -- -- -- 140,625 (140,625) -- -- Amortization of deferred compensation.... -- -- -- -- -- -- -- 49,694 -- 49,694 Net loss........ -- -- -- -- -- -- -- -- (7,862,457) (7,862,457) --------- ------- --------- ------- --------- ------- ----------- --------- ------------- ---------- Balance at December 31, 1999............. 2,000,000 20,000 1,777,777 17,778 5,250,291 52,503 25,828,309 (90,931) (14,655,461) 11,172,198 Exercise of stock options... -- -- -- -- 14,800 148 22,052 -- -- 22,200 Amortization of deferred compensation.... -- -- -- -- -- -- -- 18,312 -- 18,312 Net loss........ -- -- -- -- -- -- -- -- (1,931,121) (1,931,121) --------- ------- --------- ------- --------- ------- ----------- --------- ------------- ---------- Balance at March 31, 2000 (unaudited)...... 2,000,000 $20,000 1,777,777 $17,778 5,265,091 $52,651 $25,850,361 $ (72,619) $ (16,586,582) $9,281,589 ========= ======= ========= ======= ========= ======= =========== ========= ============= ==========
See accompanying notes. F-5 VASCULAR SOLUTIONS, INC. STATEMENTS OF CASH FLOWS
Three Months Ended Year Ended December 31, March 31, ------------------------------------- ------------------------ 1997 1998 1999 1999 2000 ----------- ----------- ----------- ----------- ----------- (unaudited) Operating activities Net loss............... $(1,651,818) $(5,141,186) $(7,862,457) $(1,714,079) $(1,931,121) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation......... 12,832 154,272 243,318 53,678 80,724 Value of options granted for services............ 25,440 78,400 22,660 10,020 -- Value of warrant granted related to supply agreement.... -- -- 257,000 -- -- Deferred compensation expense............. -- -- 49,694 -- 18,312 Changes in operating assets and liabilities: Accounts receivable......... -- (125,000) (249,978) (67,000) (227,091) Inventories......... (59,710) (259,101) (293,758) (114,577) (241,733) Prepaid expenses.... (15,110) (38,064) (40,003) (40,318) (2,746) Accounts payable.... 327,583 (53,767) 745,899 (32,647) (110,599) Accrued clinical trial costs........ -- 140,705 (140,705) -- -- Accrued expenses.... 15,778 30,540 56,636 (37,319) 86,033 ----------- ----------- ----------- ----------- ----------- Net cash used in operating activities........ (1,345,005) (5,213,201) (7,211,694) (1,942,242) (2,328,221) Investing activities Purchase of property and equipment......... (197,758) (581,923) (315,693) (62,338) (158,497) ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities........ (197,758) (581,923) (315,693) (62,338) (158,497) Financing activities Net proceeds from sale of common stock........ 3,869,073 380,000 -- -- -- Net proceeds from exercise of stock options................ 10,500 32,550 8,159,525 2,520 22,200 Net proceeds from sale of preferred stock..... 4,960,954 7,980,497 -- -- -- ----------- ----------- ----------- ----------- ----------- Net cash provided by financing activities........ 8,840,527 8,393,047 8,159,525 2,520 22,200 ----------- ----------- ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents....... 7,297,764 2,597,923 632,138 (2,002,060) (2,464,518) Cash and cash equivalents at beginning of period.... 1,366 7,299,130 9,897,053 9,897,053 10,529,191 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period................. $ 7,299,130 $ 9,897,053 $10,529,191 $ 7,894,993 $ 8,064,673 =========== =========== =========== =========== ===========
See accompanying notes. F-6 VASCULAR SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS 1. Description of Business Vascular Solutions, Inc. (the "Company") manufactures, markets and sells the Vascular Solutions Duett sealing device, which enables cardiologists and radiologists to rapidly seal the puncture site following catheterization procedures such as angiography, angioplasty and stenting. The Company was incorporated in December 1996 and began operations in February 1997. 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments with a remaining maturity of three months or less to be cash equivalents. Cash equivalents consist of money market funds and are carried at cost which approximates market. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market and are comprised of the following at:
December 31, ----------------- 1998 1999 -------- -------- Raw materials.............................................. $273,027 $451,955 Work-in process............................................ -- 103,285 Finished goods............................................. 45,784 57,329 -------- -------- $318,811 $612,569 ======== ========
Property and Equipment Property and equipment are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets as follows: Manufacturing equipment....................... 3 to 5 years Office and computer equipment................. 3 years Furniture and fixtures........................ 2 to 5 years Leasehold improvements........................ Remaining term of the lease Research and development equipment............ 3 to 5 years
Impairment of Long-Lived Assets The Company will record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. The amount of impairment loss recorded will be measured as the amount by which the carrying value of the assets exceeds the fair value of the assets. F-7 VASCULAR SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Pro Forma Shareholders' Equity Upon the closing of the Company's planned initial public offering, all outstanding shares of Series A and B preferred stock will automatically convert into 3,777,777 shares of common stock. The pro forma effects of these transactions are unaudited and have been reflected in the accompanying pro forma balance sheet at March 31, 2000. Revenue Recognition Revenue is recognized at the time the product is shipped. Research and Development Costs All research and development costs are charged to operations as incurred. Stock-Based Compensation The Company follows Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and related interpretations in accounting for its stock options. Under APB 25, when the exercise price of stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Income Taxes Income taxes are accounted for under the liability method. Deferred income taxes are provided for temporary differences between the financial reporting and the tax bases of assets and liabilities. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivables. The Company maintains its accounts for cash and cash equivalents principally at one major bank in the United States. The Company has a formal written investment policy that restricts the placement of investments to issuers evaluated as creditworthy. The Company has not experienced any losses on its deposits of its cash and cash equivalents. With respect to accounts receivable, the Company performs credit evaluations of its customers and does not require collateral. Four customers accounted for 100% of total accounts receivable as of December 31, 1998. Two customers accounted for 51% of total accounts receivable as of December 31, 1999. Three customers accounted for 69% of total accounts receivable as of March 31, 2000 (unaudited). Net Loss Per Share Under Financial Accounting Standards Board Statement No. 128, Earnings per Share, basic earnings per share is based on the weighted average shares of common stock outstanding during the period. Diluted earnings per share includes any dilutive effects of options, warrants and convertible securities. Diluted loss per share as presented is the same as basic loss per share as the effect of outstanding options, warrants and convertible securities is antidilutive. F-8 VASCULAR SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Pro Forma Net Loss Per Share Pro forma net loss per share for the year ended December 31, 1999 and the three months ended March 31, 2000 is computed using the weighted average number of common shares outstanding, including the pro forma effects of the automatic conversion of the Company's Series A and B preferred stock into shares of the Company's common stock as if such conversion occurred on January 1, 1999, or at the date of original issuance, if later. The resulting pro forma adjustment includes an increase in the weighted average shares used to compute basic and diluted net loss per share of approximately 3,777,777 shares for the year ended December 31, 1999 and for the three months ended March 31, 2000. The pro forma effects of these transactions are unaudited. Interim Financial Statements The interim financial statements for the three months ended March 31, 1999 and 2000, are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles. In the opinion of the Company's management, the unaudited interim financial statements contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation. The results of operations for the interim periods are not necessarily indicative of the results of the entire year. Reclassifications Certain prior years' balances were reclassified to conform to the current year presentation. 3. Property and Equipment Property and equipment consisted of the following:
December 31, --------------------- 1998 1999 --------- ---------- Property and equipment: Manufacturing equipment............................. $ 393,565 $ 520,167 Office and computer equipment....................... 175,584 335,449 Furniture and fixtures.............................. 85,623 98,022 Leasehold improvements.............................. 67,234 84,143 Research and development equipment.................. 57,675 57,593 --------- ---------- 779,681 1,095,374 Less accumulated depreciation......................... (167,104) (410,422) --------- ---------- Net property and equipment............................ $ 612,577 $ 684,952 ========= ==========
4. Leases The Company leases a 24,000 square foot office and manufacturing facility under an operating lease agreement, which expires in March 2003. The Company may terminate the lease agreement at any time after March 2001 with a six-month written notice to the lessor. Prior to February 1998, the Company leased a 5,500 square foot facility under a noncancelable operating lease which expired in December 1998. The Company was required to make rental payments on its previous facility until December 1998. The Company subleased this facility to another entity from June 1998 through F-9 VASCULAR SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 1998. Rent expense related to the operating leases was approximately $36,600, $152,300 and $167,900 for the years ended December 31, 1997, 1998 and 1999, respectively. Rent expense for the year ended December 31, 1998 has been reduced by approximately $32,000 for rental income received under the sublease of the previous facility. Future minimum lease commitments under the existing operating lease as of December 31, 1999 are as follows: 2000............................................................. $148,000 2001............................................................. 150,900 2002............................................................. 151,700 2003............................................................. 37,900 -------- $488,500 ========
5. Income Taxes At December 31, 1999, the Company had net operating loss carryforwards of $12,643,000 for federal income tax purposes that are available to offset future taxable income and begin to expire in the year 2013. At December 31, 1999, the Company also had federal and Minnesota research and development tax credit carryforwards of $332,500 which begin to expire in the year 2013. No benefit has been recorded for such carryforwards, and utilization in future years may be limited under Sections 382 and 383 of the Internal Revenue Code if significant ownership changes have occurred. The components of the Company's deferred tax assets and liabilities are as follows:
December 31, ------------------------ 1998 1999 ----------- ----------- Deferred tax assets: Net operating loss carryforwards................. $ 2,245,800 $ 5,057,200 Tax credit carryforwards......................... 306,300 332,500 Depreciation and amortization.................... 328,700 382,000 Accrued compensation............................. 52,800 180,000 ----------- ----------- 2,933,600 5,951,700 Less valuation allowances........................ (2,933,600) (5,951,700) ----------- ----------- Net deferred taxes............................... $ -- $ -- =========== ===========
Reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows:
1997 1998 1999 ----- ----- ----- Tax at statutory rate................................... 34.0% 34.0% 34.0% State income taxes...................................... 6.0 6.0 6.0 Impact of net operating loss carryforward............... (40.0) (40.0) (40.0) ----- ----- ----- Effective income tax rate............................... -- % -- % -- % ===== ===== =====
F-10 VASCULAR SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 6. Capital Stock In January and February 1997, the Company issued 1,500,000 shares of common stock at $1.50 per share, from which the Company received net proceeds of $2,079,499. In connection with the sale of common stock, the Company granted warrants to the placement agent to purchase a total of 100,000 shares of common stock at an exercise price of $1.50 per share. The warrants expire in January and February 2007. In December 1997, the Company issued 2,000,000 shares of Series A preferred stock at $2.50 per share, from which the Company received net proceeds of $4,960,954. The Series A preferred stock has certain voting and registration rights, has preference over common stock upon liquidation and automatically converts to common stock upon the closing of an initial public offering. The holders of Series A preferred stock are also entitled to receive dividends prior and in preference to the common stock at the rate of $.20 per share per annum when, as and if declared by the Board of Directors. Such dividends shall not be cumulative. In December 1997, the Company issued 680,000 shares of common stock at $3.00 per share, from which the Company received net proceeds of $1,789,574. In connection with the sale of common stock, the Company granted warrants to the placement agent to purchase a total of 68,000 shares of common stock at an exercise price of $3.00 per share. The warrants expire in December 2007. In December 1998, the Company issued 1,777,777 shares of Series B preferred stock at $4.50 per share, from which the Company received net proceeds of $7,980,497. The Series B preferred stock has certain voting and registration rights, and has preference over common stock upon liquidation. The holders of Series B preferred stock are also entitled to receive dividends prior and in preference to the Series A preferred stock and the common stock at the rate of $.36 per share per annum when, as and if declared by the Board of Directors. Such dividends shall be cumulative. In connection with the Series B preferred stock Purchase Agreement, the Company entered into a Put and Option Agreement (the "Agreement") with one of the Series B investors (the "Investor"). The Agreement provided the Company with the right to sell, and the Investor the obligation to purchase, up to $3,000,000 of common stock at $5.00 or $6.00 per share based on the Company attaining certain milestones. The Company exercised its right and sold 600,000 shares of common stock to the Investor at $5.00 per share on June 30, 1999. In addition, the Agreement provided the Investor with the right to buy, and the Company the obligation to sell, up to $3,000,000 common stock at $5.00 or $6.00 per share based on the Company attaining certain milestones. The Investor exercised its right and purchased 600,000 shares of common stock from the Company at $5.00 per share on December 28, 1999. Furthermore, the Agreement provided an affiliate of the Investor with the right to buy, and the Company with the obligation to sell, up to $2,000,000 of common stock at $7.00 or $8.00 per share based on the Company attaining certain milestones. The affiliate of the Investor exercised its right and purchased 285,714 shares of common stock from the Company at $7.00 per share on December 28, 1999. F-11 VASCULAR SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) On June 10, 1999, the Company issued a warrant to purchase 100,000 shares of common stock at $5.00 per share to a supplier in connection with entering into a five year supply agreement. The warrant is exercisable at any time and expires on June 10, 2004. Using the Black-Scholes valuation model, the Company determined a fair value of $257,000 for the warrant and expensed this amount during the year ended December 31, 1999. The amount was classified as research and development expense because it related to product development activities. On December 31, 1999, the Company had 168,000 warrants outstanding at a weighted average exercise price of $2.11 per share. 7. Stock Options Stock Option Plan The Company has a stock option and stock award plan (the "Stock Option Plan") which provides for the granting of incentive stock options to employees and nonqualified stock options to employees, directors and consultants. As of December 31, 1999, the Company reserved 1,400,000 shares of common stock under the Stock Option Plan. Under the Stock Option Plan, incentive stock options must be granted at an exercise price not less than the fair market value of the Company's common stock on the grant date. The exercise price of a non-qualified option granted under the Stock Option Plan must not be less than 50% of the fair market value of the Company's common stock on the grant date. The Board of Directors determined the fair value of the common shares underlying options by assessing the business progress of the Company as well as the market conditions for medical device companies and other external factors. The options expire on the date determined by the Board of Directors but may not extend more than ten years from the grant date. The Stock Option Plan also permits the granting of stock appreciation rights; restricted stock and other stock based awards. The incentive stock options generally become exercisable over a four-year period and the non-qualified stock options generally become exercisable over a two- year period. Unexercised options are canceled upon termination of employment and become available under the Plan. F-12 VASCULAR SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Option activity is summarized as follows:
Plan Options Outstanding ----------------------------------------- Weighted Average Exercise Shares Price Available Non- Price Per Per for Grant Incentive Qualified Share Share --------- --------- --------- ----------- -------- Balance at December 31, 1996................... -- -- -- $ -- $ -- Shares reserved........ 500,000 -- -- -- -- Granted................ (456,011) 371,211 84,800 1.50- 2.00 1.71 Exercised.............. -- (7,000) -- 1.50 1.50 Canceled............... 47,600 (47,600) -- 1.50 1.50 -------- -------- ------- Balance at December 31, 1997................... 91,589 316,611 84,800 1.50- 2.00 1.74 Shares reserved........ 400,000 -- -- -- -- Granted................ (259,500) 217,000 42,500 3.00- 3.25 3.01 Exercised.............. -- (19,700) -- 1.50- 2.00 1.65 Canceled............... 108,080 (108,080) -- 1.50- 3.00 1.84 -------- -------- ------- Balance at December 31, 1998................... 340,169 405,831 127,300 1.50- 3.25 2.34 Shares reserved........ 500,000 -- -- -- -- Granted................ (587,000) 573,000 14,000 3.25- 6.00 5.08 Exercised.............. -- (61,960) (3,000) 2.00- 3.25 2.46 Canceled............... 121,560 (121,560) -- 2.00- 3.25 2.75 -------- -------- ------- Balance at December 31, 1999................... 374,729 795,311 138,300 $1.50-$6.00 $4.00 ======== ======== =======
The following table summarizes information about stock options outstanding at December 31, 1999:
Options Outstanding Options Exercisable ----------------------------------- ----------------------------- Weighted Average Weighted Number Remaining Average Number Weighted Range of Outstanding Contractual Exercise Exercisable as Average Exercise Prices as of 12/31/99 Life Price of 12/31/99 Exercise Price --------------- -------------- ----------- -------- -------------- -------------- $1.50- $2.00 206,931 7.44 years $1.65 140,775 $1.62 $3.00- $3.25 328,180 8.92 years $3.14 85,440 $3.04 $5.00- $6.00 398,500 9.91 years $5.94 12,480 $5.04 ------- ------- $1.50- $6.00 933,611 9.01 years $4.00 238,695 $2.31 ======= =======
Stock-Based Compensation The Company accounts for stock options under APB 25, under which no compensation cost has been recognized. Had compensation cost for these options been determined consistent with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the net loss F-13 VASCULAR SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) and net loss per common share would have been increased to the following pro forma amounts for the years ended December 31, 1997 and 1998 and 1999:
Year Ended December 31, ------------------------------------- 1997 1998 1999 ----------- ----------- ----------- Net loss: As reported........................ $(1,651,818) $(5,141,186) $(7,862,457) Pro forma.......................... (1,696,141) (5,306,547) (8,169,981) Basic and diluted net loss per share: As reported........................ $ (.62) $ (1.40) $ (1.95) Pro forma.......................... (.64) (1.45) (2.03)
For purposes of calculating the above required disclosure, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The fair value of the Company's stock options was estimated assuming no expected dividends and the following weighted average assumptions:
1997 1998 1999 ---- ---- ---- Expected life (years).................................... 7.0 7.0 7.0 Expected volatility...................................... .70 .62 .67 Risk-free interest rate.................................. 5.02% 4.78% 4.90%
The weighted average fair value of options granted with an exercise price equal to the deemed stock price on the date of grant during 1997, 1998 and 1999 was $1.21, $1.97 and $3.82 per share. For the years ended December 31, 1997, 1998 and 1999, the Company recorded compensation expense of $25,440, $78,400 and $22,660 in connection with non- qualified stock options granted to board of directors' members, medical advisory board members and outside consultants. Deferred Compensation During 1999, the Company recorded $140,625 of deferred compensation for certain stock options granted for the excess of the deemed value for accounting purposes of common stock issuable upon exercise of such options over the aggregate exercise price of such options. The weighted average fair value of these options was $2.74. Deferred compensation recorded is amortized ratably over the period that the options vest and is adjusted for options which have been canceled. Deferred compensation expense was $49,694 for the year ended December 31, 1999. 8. Employee Retirement Savings Plan In February 1998, the Company implemented an employee retirement savings plan (the "401(k) Plan") which qualifies under Section 401(k) of the Internal Revenue Code. The 401(k) Plan provides eligible employees with an opportunity to make tax-deferred contributions into a long-term investment and savings program. All employees over the age of 21 are eligible to participate in the 401(k) Plan beginning with the first quarterly open enrollment date following start of employment. The 401(k) Plan allows eligible employees to contribute up to 18% of their annual compensation with the Company contributing an amount equal to 25% of the first 5% contributed to the 401(k) F-14 VASCULAR SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Plan. No employer contributions were made for the year ended December 31, 1998. The Company recorded an expense of $21,573 for contributions to the 401(k) Plan for the year ended December 31, 1999. 9. Concentrations of Credit and Other Risks The Company operates in a single industry segment and sells its product to distributors who, in turn, sell to medical clinics. The Company sells its product in foreign countries through independent distributors denominated in United States dollars. Loss, termination or ineffectiveness of distributors to effectively promote the Company's product could have a material adverse effect on the Company's financial condition and results of operations. Sales to significant customers as a percentage of total revenues are as follows for the years ended December 31, 1998 and 1999:
1998 1999 ---- ---- German distributor............................................ 65.0% 28.8% Norwegian distributor......................................... 9.1% 19.7% Italian distributor........................................... 4.0% 11.8% Austrian distributor.......................................... 15.8% 5.8%
The Company performs ongoing credit evaluations of its customers but does not require collateral. There have been no material losses on customer receivables. 10. Dependence on Key Suppliers The Company purchases certain key components from single source suppliers. Any significant component delay or interruption could require the Company to qualify new sources of supply, if available, and could have a material adverse effect on the Company's financial condition and results of operations. 11. Commitments and Contingencies In July 1999, the Company was named as a defendant in a patent infringement lawsuit brought by a competitor. The complaint requested a judgment that the Company's device infringes and, following FDA approval will infringe, a United States patent held by the competitor and asks for relief in the form of an injunction that would prevent the Company from selling its product in the United States as well as an award of attorney's fees, costs and disbursements. On August 12, 1999, the Company filed its answer to this lawsuit and brought a counterclaim alleging unfair competition and tortious interference against Datascope. On August 20, 1999, the Company moved for summary judgment to dismiss Datascope's claims. On March 15, 2000, the court granted summary judgment dismissing all of Datascope's claims, subject to the right of Datascope to recommence the litigation if and when we receive FDA approval of our Duett sealing device. It is currently not possible to predict the outcome of the lawsuit if it is recommenced or to estimate the amount or range of potential loss, if any. On September 22, 1999, the Company received a letter from the Daig division of St. Jude Medical, Inc. claiming that the manufacture, use, marketing and sale of our Duett sealing device F-15 VASCULAR SOLUTIONS, INC. NOTES TO THE FINANCIAL STATEMENTS--(Continued) infringes upon certain United States patents licensed by Daig. The letter referenced a prior letter dated August 18, 1998 from the Company to the prior licensee of those patents in which the Company made a proposal intended to avoid the anticipated litigation over those patents. The proposed license was rejected. It is likely that litigation will be commenced in the near future concerning this claim. Daig could initiate a lawsuit requesting an injunction that, if issued, would prohibit the Company from selling the Duett sealing device. Furthermore, Daig could allege monetary damages that, if awarded, would significantly harm the Company's business. The Company believes the allegations included in the letter are without merit, and it intends to defend any lawsuit that may arise from these allegations vigorously. It is not possible to predict the timing, substance or outcome of any lawsuit that may arise from these allegations, including whether the Company will be prohibited from selling the Duett sealing device in the United States or internationally, or to estimate the amount or range of potential loss, if any. F-16 INSIDE BACK COVER [Duett sealing device logo] Duett catheter: A one-size-fits-all balloon catheter that creates a temporary seal. [Picture of Duett catheter] Duett procoagulant: A flowable mixture of thrombin, collagen and diluent that creates a complete seal of the puncture and tissue tract. [Picture of collagen syringe, thrombin vial, diluent vial and empty syringe] Vascular Solutions Duett sealing device. The dual-approach sealing device that seals the puncture left by arterial catheterizations. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2,675,000 Shares [Vascular Solutions Logo] Common Stock -------- PROSPECTUS , 2000 -------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution Except as set forth below, the following fees and expenses will be paid by Vascular Solutions, Inc. (the "Company") in connection with the issuance and distribution of the securities registered hereby and do not include underwriting commissions and discounts. All such expenses, except for the SEC registration, NASD filing and Nasdaq listing fees, are estimated. SEC registration fee............................................... $ 11,120 NASD filing fee.................................................... $ 4,500 Nasdaq National Market listing fee................................. $ 78,875 Legal fees and expenses............................................ $125,000 Accounting fees and expenses....................................... $ 65,000 Transfer Agent's and Registrar's fees.............................. $ 3,500 Printing and engraving expenses.................................... $ 43,000 Miscellaneous...................................................... $ 19,005 -------- Total............................................................ $350,000 ========
Item 14. Indemnification of Directors and Officers Section 302A.521 of the Minnesota Statutes provides that a corporation shall indemnify any person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of such person against judgments, penalties, fines (including, without limitation, excise taxes assessed against such person with respect to any employee benefit plan), settlements and reasonable expenses, including attorneys' fees and disbursements, incurred by such person in connection with the proceeding, if, with respect to the acts or omissions of such person complained of in the proceeding, such person (1) has not been indemnified therefor by another organization or employee benefit plan for the same judgments, penalties or fines; (2) acted in good faith; (3) received no improper personal benefit and Section 302A.255 (with respect to director conflicts of interest), if applicable, has been satisfied; (4) in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; and (5) in the case of acts or omissions in such person's official capacity for the corporation, reasonably believed that the conduct was in the best interests of the corporation, or in the case of acts or omissions in such person's official capacity for other affiliated organizations, reasonably believed that the conduct was not opposed to the best interests of the corporation. Section 302A.521 also requires payment by a corporation, upon written request, of reasonable expenses in advance of final disposition of the proceeding in certain instances. A decision as to required indemnification is made by a disinterested majority of the Board of Directors present at a meeting at which a disinterested quorum is present, or by a designated committee of the Board, by special legal counsel, by the shareholders or by a court. Provisions regarding indemnification of officers and directors of Vascular Solutions to the extent permitted by Section 302A.521 are contained in Vascular Solutions' bylaws. II-1 Item 15. Recent Sales of Unregistered Securities Since December 20, 1996 (inception), the Company has issued and sold the following securities that were not registered under the Securities Act: 1. On December 20, 1996, the Company sold 1,366,250 shares of common stock at $.001 per share to the founders of the Company. The Company received proceeds of $1,366 from the sale of common stock. 2. At various times during the period from December 20, 1996 through August 31, 1999, the Company has granted stock options to 85 individuals, including 69 employees, 9 consultants, 2 directors and 5 other individuals providing services to the Company under its stock option plan covering an aggregate of 928,511 shares of the Company's common stock, at exercise prices ranging from $1.50 to $5.00 per share. At various times during the period from July 1997 through August 31, 1999, a total of 48,660 shares of common stock were issued by the Company upon the exercise of stock options under its stock option plan. 3. In January and February 1997, the Company sold 1,000,000 shares of common stock at $1.50 per share, from which the Company received net proceeds of approximately $1,329,000, to 56 individuals. In connection with this sale of common stock, the Company granted warrants to the placement agent to purchase a total of 100,000 shares of common stock at an exercise price of $1.50 per share. The warrants expire in January and February 2007. 4. In February 1997, the Company sold 500,000 shares of common stock to two entities affiliated with Olympic Venture Partners at $1.50 per share. Mr. Gerard Langeler, a director of Vascular Solutions, is a general partner of Olympic Venture Partners. 5. In December 1997, the Company sold 2,000,000 shares of Series A preferred stock at $2.50 per share to entities affiliated with Tredegar Investments and Olympic Venture Partners. 6. In December 1997, the Company sold 680,000 shares of common stock at $3.00 per share, from which the Company received net proceeds of approximately $1,790,000, to 59 individuals. In connection with this sale of common stock, the Company granted warrants to the placement agent to purchase a total of 68,000 shares of common stock at an exercise price of $3.00 per share. The warrants expire in December 2007. 7. Between March and April 1998, the Company sold a total of 126,667 shares of common stock at $3.00 per share to a total of three individuals who are unaffiliated with the Company. 8. In December 1998, the Company sold 1,777,777 shares of Series B preferred stock at $4.50 per share to 18 entities and individuals, including 1,221,466 shares to an entity affiliated with Stephens Inc., 100,000 shares to an entity affiliated with Tredegar Investments, and 100,000 shares to entities affiliated with Olympic Venture Partners. In connection with the Series B preferred stock purchase agreement, the Company entered into a put and option agreement with Stephens Vascular Preferred, LLC and Stephens Vascular Options, LLC giving the Company the right to sell to Stephens Vascular Preferred up to $3,000,000 of common stock at $5.00 or $6.00 per share based on the Company attaining certain milestones. On June 30, 1999, we exercised our right and issued 600,000 shares of common stock to Stephens Vascular Preferred in exchange for $3,000,000. On December 28, 1999, Stephens Vascular Options exercised its right and purchased from the Company II-2 $3,000,000 of common stock at $5.00 per share. In addition, the put and option agreement provided Stephens Vascular Options the right to purchase up to $2,000,000 of common stock at $7.00 per share. This option was exercised in full by Stephens Vascular Options on December 28, 1999. 9. In June 1999, the Company issued a warrant to purchase 100,000 shares of common stock at $5.00 per share to Jones Pharma, Incorporated, who is a supplier of thrombin for the Company's Duett sealing device. The sale and issuance of securities described above were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act or Regulation D promulgated thereunder as transactions by an issuer not involving a public offering, where the purchasers represented their intention to acquire securities for investment purposes only and not with a view to or for sale in connection with any distribution thereof, and received or had access to adequate information about Vascular Solutions, or Rule 701 promulgated thereunder in that they were offered and sold either pursuant to written compensatory benefit plans or pursuant to a written contract relating to compensation. Item 16. Exhibits and Financial Statement Schedules (a) Exhibits
Number Description ------ ----------- 1.1* Form of Underwriting Agreement 3.1* Articles of Incorporation of the Company 3.2* Bylaws of the Company, as currently in effect 3.3 Amendment to the Company's Articles of Incorporation 4.1* Specimen of Common Stock certificate 4.2* Form of warrant dated January 31 and February 14, 1997 issued to representatives of Miller, Johnson & Kuehn, Incorporated 4.3* Form of warrant dated December 29, 1997 issued to representatives of Miller, Johnson & Kuehn, Incorporated 4.4* Amended and Restated Investors' Rights Agreement dated December 9, 1998, by and between the Company and the purchasers of Series A and Series B preferred stock 4.5* Amended and Restated Right of First Refusal and Co-Sale Agreement dated December 9, 1998 4.6* Put & Option Agreement dated December 9, 1998 by and among the Company, Stephens Vascular Preferred, LLC and Stephens Vascular Options, LLC 4.7* Stock Purchase Warrant dated June 10, 1999 by and between the Company and Jones Pharma, Incorporated 5.1* Opinion of Dorsey & Whitney LLP 10.1 Vascular Solutions, Inc. Amended Stock Option and Stock Award Plan 10.2* Lease Agreement dated February 11, 1998 by and between Massachusetts Mutual Life Insurance Company as Landlord and the Company as Tenant. 10.3* First Lease Amendment dated June 9, 1999 by and between Duke Realty Limited Partnership as Landlord and the Company as Tenant 10.4* Bill of Sale and Assignment dated January 31, 1997 by and between the Company and Dr. Gary Gershony 10.5* Mutual and General Release dated November 9, 1998 by and between the Company, Dr. Gary Gershony and B. Braun Medical, Inc.
II-3
Number Description ------ ----------- 10.6* Clinical Trial Services Agreement dated July 1, 1998 by and between the Company and The Cardiovascular Data Analysis Center of the Beth Israel Medical Group 10.7* Economics Substudy Contract dated September 1998 by and between the Company and Emory University 10.8* Purchase and Sale Agreement dated September 17, 1998 by and between the Company and Davol Inc.** 10.9* Purchase Agreement dated June 10, 1999 by and between GenTrac, Inc. and the Company** 10.10* Consulting Agreement dated June 10, 1999, between the Company and Gary Gershony, M.D. 10.11* Form of Employment Agreement by and between the Company and each of its executive officers 10.12* Form of Distribution Agreement 23.1 Consent of Ernst & Young LLP 23.2* Consent of Dorsey & Whitney LLP (included in Exhibit No. 5.1 to the Registration Statement) 23.3* Consent of Patterson & Keough PA 24.1* Powers of Attorney 27.1* Financial Data Schedule
- -------- * Previously filed. ** Confidential information has been omitted from this exhibit and filed separately with the Securities and Exchange Commission accompanied by a confidential treatment request pursuant to Rule 406 under the Securities Act of 1933, as amended. (b) Financial Statement Schedules Not applicable. 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 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, 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 securities being registered, 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. II-4 The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, 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 Securities 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 Securities Act of 1933, 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. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 5 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis, State of Minnesota, on April 10, 2000. Vascular Solutions, Inc. /s/ Howard Root By: _________________________________ Howard Root Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 5 to the Registration Statement on Form S-1 has been signed by the following persons in the capacities indicated on April 10, 2000.
Signature Title --------- ----- /s/ Howard Root Chief Executive Officer ______________________________________ and Director (principal Howard Root executive officer) /s/ Jerry Johnson Chief Financial Officer ______________________________________ (principal financial Jerry Johnson officer and principal accounting officer) * Director ______________________________________ Gary Gershony * Director ______________________________________ Gerard Langeler Director ______________________________________ Stephen Brandt * Director ______________________________________ James Jacoby, Jr.
/s/ Howard Root *By: ____________________________ Howard Root Attorney-in-Fact II-6 EXHIBIT INDEX
Number Description ------ ----------- 1.1* Form of Underwriting Agreement 3.1* Articles of Incorporation of the Company 3.2* Bylaws of the Company, as currently in effect 3.3 Amendment to the Company's Articles of Incorporation 4.1* Specimen of Common Stock certificate 4.2* Form of warrant dated January 31 and February 14, 1997 issued to representatives of Miller, Johnson & Kuehn, Incorporated 4.3* Form of warrant dated December 29, 1997 issued to representatives of Miller, Johnson & Kuehn, Incorporated 4.4* Amended and Restated Investors' Rights Agreement dated December 9, 1998, by and between the Company and the purchasers of Series A and Series B preferred stock 4.5* Amended and Restated Right of First Refusal and Co-Sale Agreement dated December 9, 1998 4.6* Put & Option Agreement dated December 9, 1998 by and among the Company, Stephens Vascular Preferred, LLC and Stephens, Vascular Options, LLC 4.7* Stock Purchase Warrant dated June 10, 1999 by and between the Company and Jones Pharma, Incorporated 5.1* Opinion of Dorsey & Whitney LLP 10.1 Vascular Solutions, Inc. Amended Stock Option and Stock Award Plan 10.2* Lease Agreement dated February 11, 1998 by and between Massachusetts Mutual Life Insurance Company as Landlord and the Company as Tenant 10.3* First Lease Amendment dated June 9, 1999 by and between Duke Realty Limited Partnership as Landlord and the Company as Tenant 10.4* Bill of Sale and Assignment dated January 31, 1997 by and between the Company and Dr. Gary Gershony 10.5* Mutual and General Release dated November 9, 1998 by and between the Company, Dr. Gary Gershony and B. Braun Medical, Inc. 10.6* Clinical Trial Services Agreement dated July 1, 1998 by and between the Company and The Cardiovascular Data Analysis Center of the Beth Israel Medical Group 10.7* Economics Substudy Contract dated September 1998 by and between the Company and Emory University 10.8* Purchase and Sale Agreement dated September 17, 1998 by and between the Company and Davol Inc.** 10.9* Purchase Agreement dated June 10, 1999 by and between GenTrac, Inc. and the Company** 10.10* Consulting Agreement dated June 10, 1999, between the Company and Gary Gershony, M. D. 10.11* Form of Employment Agreement by and between the Company and each of its executive officers 10.12* Form of Distribution Agreement 23.1 Consent of Ernst & Young LLP 23.2* Consent of Dorsey & Whitney LLP (included in Exhibit 5.1 to the Registration Statement) 23.3* Consent of Patterson & Keough PA 24.1* Power of Attorney 27.1* Financial Data Schedule
- -------- * Previously filed. ** Confidential information has been omitted from this exhibit and filed separately with the Securities and Exchange Commission accompanied by a confidential treatment request pursuant to Rule 406 under the Securities Act of 1933, as amended. EX-3.3 2 AMENDMENT TO ARTICLES OF INCORPORATION Exhibit 3.3 AMENDMENT TO ARTICLES OF INCORPORATION OF VASCULAR SOLUTIONS, INC. 1. The name of the corporation is Vascular Solutions, Inc. 2. The following is the full text of the Amended Article III of the Articles of Incorporation of Vascular Solutions, Inc.: "Article 3. Authorized Shares The aggregate number of authorized shares of capital stock of the corporation is 40,000,000 shares of $.01 par value per share. The shares shall be divisible into classes and series, have the designations, voting rights, and other rights and preferences, and be subject to the restrictions, that the board of directors may from time to time establish, fix, and determine, consistent with these articles of incorporation. Unless otherwise designated by the board of directors, all issued shares shall be deemed common stock with equal rights and preferences." 3. The foregoing amendment was adopted by the Board of Directors on January 24, 2000 and by Meeting of the Shareholders on February 24, 2000. 4. The foregoing amendment was adopted according to Chapter 302A of the Minnesota Business Corporation Act. IN WITNESS WHEREOF, the undersigned, Chief Executive Officer of Vascular Solutions, Inc., being duly authorized on behalf of such corporation, has executed this certificate this 7th day of April, 2000. VASCULAR SOLUTIONS, INC. By /s/ Howard C. Root --------------------------------------- Howard C. Root Chief Executive Officer EX-10.1 3 STOCK OPTION & STOCK AWARD PLAN Exhibit 10.1 VASCULAR SOLUTIONS, INC. STOCK OPTION AND STOCK AWARD PLAN (As Amended February 23, 2000) 1. Purpose of Plan This Plan shall be known as the "Vascular Solutions, Inc. Stock Option and Stock Award Plan" and is hereinafter referred to as the "Plan". The Plan shall provide for the issuance of shares of common stock, par value $.01 (the "Common Stock"), of Vascular Solutions, Inc. (the "Corporation"). The purpose of the Plan is to aid in maintaining and developing a mutually beneficial relationship with employees and non-employees of the Corporation who perform valuable services for or on behalf of the Corporation, to offer such persons additional incentives to put forth maximum efforts for the success of the business, and to afford them an opportunity to acquire a proprietary interest in the Corporation. It is intended that this purpose be effected through the granting of stock options, the awarding of Common Stock subject to restrictions (the "Restricted Shares") and the awarding of stock appreciation rights to such persons as hereinafter provided. Options granted under the Plan may be either incentive stock options ("Incentive Stock Options") within the meaning of the Internal Revenue Code of 1986, as amended (the "Code"), or options which do not qualify as Incentive Stock Options. 2. Stock Subject to the Plan Subject to the provisions of Section 10 hereof, the stock to be subject to options and which may be awarded as Restricted shares under the Plan shall be shares of the Corporation's authorized Common Stock. Such shares may be either authorized but unissued shares or issued shares which have been reacquired by the Corporation. Subject to the adjustment as provided in Section 10 hereof, the maximum number of shares on which options may be exercised or which may be awarded as Restricted Shares under this Plan shall be 1,400,000, plus an automatic annual increase on the first day of each of the Corporation's fiscal years beginning in 2001 and ending in 2006 equal to the lesser of (i) 500,000 shares, (ii) five percent (5%) of the common-equivalent shares outstanding on the last day of the immediately preceding fiscal year, or (iii) such lesser number of shares as determined by the Board of Directors or the Stock Option Committee. Notwithstanding the foregoing, the number of shares available for granting Incentive Stock Options under the Plan shall not exceed 2,600,000 shares, subject to adjustment as provided in the Plan and Section 422 or 424 of the Code or any successor provisions. Any shares subject to an option under the Plan which, for any reason, expires or is terminated unexercised, shall be available for options or awards thereafter granted during the term of the Plan. If any award of Restricted Shares is forfeited in accordance with the terms and conditions of such award, the Restricted Shares so forfeited shall also become available for further grants or awards under the Plan. 1 3. Administration of Plan (a) The Plan shall be administered by the Board of Directors of the Corporation. The Board of Directors may authorize, at any time, the formation of a Stock Option Committee (the "Committee"), consisting of two or more members who shall be appointed from time to time by the Board of Directors. The Stock Option Committee will, if formed, have authority to exercise the powers conferred on the Board of Directors under the Plan, other than the power under Section 11 herein to terminate or amend the Plan or to accelerate the exercisability of any option or lift the restrictions on any Restricted Shares granted or awarded under the Plan. (b) The Board of Directors shall have plenary authority in its discretion, subject to the express provisions of this Plan, to: (i) determine the purchase price of the Common Stock covered by each option and the terms of exercise of each such option, (ii) determine the persons to whom and the time or times at which options (a person receiving an option is hereinafter referred to as an "Optionee") or awards of Restricted Shares (a person receiving an award of Restricted Shares is hereinafter referred to as a "Grantee") shall be granted or made and the number of shares to be subject to each such option or award (iii) determine the period during which Restricted Shares shall remain subject to restrictions and the nature and type of restrictions that may be imposed on Restricted Shares (iv) interpret the Plan, (v) prescribe, amend and rescind rules and regulations relating to the Plan, (vi) determine the terms and provisions (and amendments thereof) of each option and Restricted Share agreement under this Plan (which agreements need not be identical), including the designation of those options intended to be Incentive Stock Options, (vii) the form of payment to be made upon the exercise of an SAR (as hereinafter defined) as provided in Section 16, which payment may be either cash, common stock of the Corporation or a combination thereof, and (viii) make all other determinations necessary or advisable for the administration of the Plan. (c) The Committee shall select one of its members as its Chairman and shall hold its meetings at such times and places as it may determine. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by not less than a majority of its members. Any decision or determination reduced to writing and signed by a majority of the members of the Committee shall be fully effective as if it had been made by a majority vote at a meeting duly called and held. (d) The granting of an option or an award pursuant to the Plan shall be effective only if a written agreement shall have been duly executed and delivered by and on behalf of the Corporation and the Optionee or Grantee to whom such right is granted. 4. Eligibility (a) Incentive Stock Options (as determined pursuant to Section 14 herein) may be granted only to employees of the Corporation and its subsidiary corporations. Options which do not qualify as Incentive Stock Options and awards of Restricted Shares may be granted or made to both 2 employees and to individuals or other entities (including but not limited to consultants) who perform services for the Corporation but who are not employed by the Corporation, when granting an option or award to such person would be of benefit to the Corporation. (b) Notwithstanding any other provision in the Plan, if at the time an option is otherwise to be granted pursuant to the Plan the Optionee owns directly or indirectly (within the meaning of Section 425(d) of the Code (as hereinafter defined) Common Stock of the Corporation possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation or its parent or subsidiary corporations, if any, (within the meaning of Section 422(b)(6) of the Code) then any Incentive Stock Option to be granted to such Optionee pursuant to the Plan shall satisfy the requirements of Section 422A(c)(6) of the Code, and the option price shall not be less than 110% of the fair market value of the Common Stock of the Corporation, determined as described in Section 5, and such option by its terms shall not be exercisable after the expiration of five (5) years from the date such option is granted. 5. Price The option price for all Incentive Stock Options granted under the Plan shall be determined by the Board of Directors but shall not be less than 100% of the fair market value of the Common Stock at the date of granting of such option, as determined in good faith by such Board. The option price for options granted under the Plan that do not qualify as Incentive Stock Options shall also be determined by the Board of Directors but shall not be less than 50% of the fair market value of the Common Stock at the date of granting of the option. The option price shall be payable at the time written notice of exercise is given to the Corporation. An Optionee shall be entitled to pay the exercise price in cash, by tendering to the Corporation shares of Common Stock, previously owned by the Optionee, having a fair market value on the date of exercise equal to the option price, or, with the consent of the Board of Directors, by the issuance of a promissory note to the Corporation. The fair market value of such shares shall be (i) the closing price of the Common Stock as reported for composite transactions if the Common Stock is then traded on a national securities exchange, (ii) the last sales price if the Common Stock is then traded on the NASDAQ National Market System, or (iii) the average of the closing representative bid and asked prices as reported on NASDAQ if the Common Stock is then traded on NASDAQ. If the Common Stock is not so traded, the Board of Directors shall determine in good faith the fair market value. 6. Term Each option and each Restricted Share award and all rights and obligations thereunder shall (subject to the provisions of Section 8) expire on the date determined by the Board of Directors and specified in the option agreement or agreement relating to the award of the Restricted Shares. The Board of Directors shall be under no duty to provide terms of like duration for options or awards granted under the Plan; provided, however, that the term of any Incentive Stock Option shall not extend more than ten (10) years from the date of granting of the option. 3 7. Exercise of Options and Awards (a) The Board of Directors shall have full and complete authority (subject to the provisions of Section 8) to determine, at the time of granting or making, whether an option or Restricted Share award will be exercisable in full at any time or from time to time during the term of the option or award, or to provide for the exercise or receipt thereof in such installments and at such times during the term of the option or award as Board may determine. Notwithstanding any provision of the Plan or the terms of any option granted or award of Restricted Shares made under the Plan, no option granted or Restricted Share awarded under the Plan may be exercised until at least six months from the date of grant or award. (b) Notwithstanding any provision of the Plan or the terms of any option granted or award of Restricted Shares made under the Plan, the exercise of any option or the transferring of any shares of Common Stock on the books and records of the Corporation pursuant to a Restricted Share award may be made contingent upon receipt from the Optionee or Grantee (or other person rightfully exercising the option or receiving certificates for the shares granted pursuant to a Restricted Share award) of a representation that, at the time of such exercise or receipt, it is their then intention to acquire the shares so received thereunder for investment and not with a view to distribution thereof. Certificates for shares issued or transferred pursuant to the exercise of any option or the granting of any Restricted Share award may be restricted as to further transfers upon advice of legal counsel that such restriction is appropriate to comply with applicable securities laws. (c) Notwithstanding any provision of the Plan or the terms of any option granted or award of Restricted Shares made under the Plan, the Company shall not be required to issue any shares of Common Stock, deliver any certificates for shares of Common Stock or transfer on its books and records any shares of Common Stock if such issuance, delivery or transfer would, in the judgment of the Board of Directors, constitute a violation of any state or Federal law, or of the rules and regulations of any governmental regulatory body or any securities exchange. (d) An Optionee electing to exercise an option shall give written notice to the Corporation of such election and of the number of shares subject to such exercise. The full purchase price of such shares shall be tendered, in accordance with the provisions of Section 5, with such notice of exercise. Until such person has been issued a certificate or certificates for the shares subject to such exercise, he shall possess no rights as a stockholder with respect to such shares. (e) Nothing in the Plan or in any agreement thereunder shall confer on any employee any right to continue in the employ of the Corporation or any of its subsidiaries or affect, in any way, the right of the Corporation or any of its subsidiaries to terminate his or her employment at any time. 8. Effect of Termination of Employment or Death Unless otherwise stated in the option agreement, the following provisions shall govern the treatment of an option upon termination of employment: 4 (a) In the event that the optionee shall cease to be employed by the Corporation or its subsidiaries, if any, for any reason other than such holder's gross and willful misconduct or death or disability, such optionee shall have the right to exercise the option at any time within three months after such termination of employment to the extent of the full number of shares such holder was entitled to purchase under the option on the date of termination, subject to the condition that no option shall be exercisable after the expiration of the term of the option. (b) In the event that an optionee shall cease to be employed by the Corporation or its subsidiaries, if any, by reason of such holder's gross and willful misconduct during the course of employment, including but not limited to wrongful appropriation of funds of the Corporation or the commission of a gross misdemeanor or felony, the option shall be terminated as of the date of the misconduct. (c) If the optionee shall die while in the employ of the Corporation or any subsidiary, if any, or within three (3) months after termination of employment for any reason other than gross and willful misconduct, or become disabled (within the meaning of Section 105(d)(4) of the Code) while in the employ of the Corporation or a subsidiary, if any, and such optionee shall not have fully exercised the option, such option may be exercised at any time within twelve months after such holder's death or such disability by the personal representatives, administrators, or, if applicable, guardian, of the optionee or by any person or persons to whom the option is transferred by will or the applicable laws of descent and distribution to the extent of the full number of shares such holder was entitled to purchase under the option on the date of death, disability or termination of employment, if earlier, and subject to the condition that no option shall be exercisable after the expiration of the term of the option. 9. Nontransferability of Options No option granted under the Plan shall be transferable by an Optionee, otherwise than by will or the laws of descent or distribution or pursuant to a qualified domestic relations order as defined by the Code. 10. Dilution or Other Adjustments If the number of outstanding shares of the Common Stock of the Corporation shall, at any time, be increased or decreased as a result of a subdivision or consolidation of shares, stock dividend, stock split, spin-off or other distribution of assets to shareholders, recapitalization, merger, consolidation or other corporate reorganization in which the Corporation is the surviving corporation, the number and kind of shares subject to the Plan and to any option, SAR or Restricted Share award previously granted or made, as well as the option price or amount payable upon the exercise of any previously granted option or SAR, shall be appropriately adjusted in order to prevent the dilution or enlargement of rights of holders of outstanding options, SARs or Restricted Share awards. Any fractional shares resulting from any such adjustment shall be eliminated. 5 11. Amendment or Discontinuance of Plan The Board of Directors may amend or discontinue the Plan at any time; however, no amendment of the Plan shall, without shareholder approval, amend the Plan in a way which would cause the Plan to no longer comply with Rule 16b-3 under the Securities Exchange Act of 1934 or any successor rule or other regulatory requirements. Except as provided in Section 10, the Board of Directors shall not alter or impair any option, SAR or Restricted Share award thereto granted or made under the Plan without the consent of the holder of the option, SAR or award; provided, however, that the Board of Directors may accelerate the exercisability of options (and any related SARs) or lift any restrictions imposed on Restricted Shares at any time during the term of such options or awards without the consent of the holder thereof. 12. Time of Granting Nothing contained in the Plan or in any resolution adopted or to be adopted by the Board of Directors or by the shareholders of the Corporation, and no action taken by the Board of Directors (other than the execution and delivery of an option or the making of an Award Agreement (as hereinafter defined)), shall constitute the granting of an option or the making of a Restricted Share award hereunder. The granting of an option or the making of a Restricted Share award pursuant to the Plan shall take place only when a written option or Award Agreement shall have been duly executed and delivered by or on behalf of the Corporation to the Optionee or Grantee to whom such option or award is granted or made. 13. Termination of Plan Unless the Plan shall have been discontinued as provided in Section 12 hereof, the Plan shall terminate on December 22, 2006. No option or Restricted Share award may be granted or made after such termination, but termination of the Plan shall not, without the consent of the Optionee or Grantee, alter or impair any rights or obligations under any option, SAR or Restricted Share award theretofore granted or made. 14. Determination of Incentive Stock Option The Board shall determine, upon the granting of each option, whether such option shall be an Incentive Stock Option or an option that does not qualify as an Incentive Stock Option. 15. Restricted Share Awards Each award of Restricted Shares under the Plan shall be evidenced by an instrument (an "Award Agreement"). Each Award Agreement shall be subject to the terms and conditions of the Plan but may contain additional terms and conditions (which terms and conditions may vary from Grantee to Grantee) that are not inconsistent with the Plan as the Board of Directors may deem necessary and desirable. Each Award Agreement shall comply with the following terms and conditions: 6 (a) The Board of Directors shall determine the number of Restricted Shares to be awarded to a Grantee. (b) At the time of the award of Restricted Shares, a certificate representing the appropriate number of shares of Common Stock awarded to a Grantee shall be registered in the name of such Grantee but shall be held by the Corporation or any custodian appointed by the Corporation for the account of the Grantee subject to the terms and conditions of the Plan. The Grantee shall have all rights of a stockholder as to such shares of Common Stock, including the right to receive dividends and the right to vote such Common Stock, subject to the following restrictions: (i) the Grantee shall not be entitled to delivery of the stock certificate until the expiration of the Restricted Period (as hereinafter defined); (ii) the Restricted Shares may not be sold, transferred, assigned, pledged, or otherwise encumbered or disposed of during the Restricted Period; and (iii) all or a specified portion of the Restricted Shares shall be forfeited and all rights of the Grantee to any forfeited Restricted Shares shall terminate without further obligation on the part of the Corporation unless the Grantee remains in the continuous employment of the Corporation for the period in relation to which all or such portion of the Restricted Shares were granted ( the "Restricted Period"). No Restricted Shares shall have a Restricted Period of less than six (6) months from the date of award. The Board of Directors shall have the power to determine which portion of an award of Restricted Shares shall be forfeited in the event of a Grantee's failure to remain in the continuous employment of the Corporation during the Restricted Period relating to such award. In addition, the Board of Directors may specify additional restrictions or events which must occur during the Restricted Period or the Restricted Shares, or a portion thereof, shall be forfeited as stated in the award thereof. Any shares of Common Stock received as a result of a stock distribution to holders of Restricted Shares shall be subject to the same restrictions as such Restricted Shares. (c) At the end of each applicable Restricted Period or at such earlier time as otherwise provided by the Board of Directors, all restrictions contained in an Award Agreement and in the Plan shall lapse as to such portion of the Restricted Shares granted in relation to such Restricted Period, and a stock certificate for the appropriate number of shares of Common Stock, free of restrictions, shall be delivered to the Grantee or the Grantee's beneficiary or estate, as the case may be. (d) There shall be no limitation on the number of shares of Common Stock which a Grantee may be awarded except that no Grantee may be awarded shares of Common Stock in excess of the number of shares remaining available for option grants and awards of Restricted Shares under the Plan. 16. Alternative Stock Appreciation Rights (a) Grant. At the time of grant of an option under the Plan (or at any time thereafter as to options which are not Incentive Stock Options), the Board of Directors, in its discretion, may grant to the holder of such option an alternative Stock Appreciation Right ("SAR") for all or any 7 part of the number of shares covered by the holder's option. Any such SAR may be exercised as an alternative, but not in addition to, an option granted hereunder, and any exercise of an SAR shall reduce an option by the same number of shares as to which the SAR is exercised. An SAR granted to an Optionee shall provide that such SAR, if exercised, must be exercised within the time period specified therein. Such specified time period may be less than (but may not be greater than) the time period during which the corresponding option may be exercised. An SAR may be exercised only when the corresponding option is eligible to be exercised. The failure of the holder of an SAR to exercise such SAR within the time period specified shall not reduce such holder's option rights. If an SAR is granted for a number of shares less than the total number of shares covered by the corresponding option, the Board of Directors may later (as to options which are not Incentive Stock Options) grant to the Optionee an additional SAR covering additional shares; provided, however, that the aggregate amount of all SARs held by any Optionee shall at no time exceed the total number of shares covered by such Optionee's unexercised options. (b) Exercise. The holder of any option which by its terms is exercisable who also holds an SAR may, in lieu of exercising their option, elect to exercise their SAR, subject, however, to the limitation on time of exercise hereinafter set forth. Such SAR shall be exercised by the delivery to the Corporation of a written notice which shall state that the Optionee elects to exercise their SAR as to the number of shares specified in the notice and which shall further state what portion, if any, of the SAR exercise amount (hereinafter defined) the holder thereof requests be paid in cash and what portion, if any, such holder requests be paid in Common Stock of the Corporation. The Board of Directors shall promptly cause to be paid to such holder the SAR exercise amount either in cash, in Common Stock of the Corporation, or any combination of cash and stock as the Board of Directors may determine. Such determination may be either in accordance with the request made by the holder of the SAR or in the sole and absolute discretion of the Board of Directors. The SAR exercise amount is the excess of the fair market value of one share of the Corporation's Common Stock on the date of exercise over the per share option price for the option in respect of which the SAR was granted multiplied by the number of shares as to which the SAR is exercised. For the purposes hereof, the fair market value of the Corporation's shares shall be determined as provided in Section 5 herein. An SAR may be exercised only when the SAR exercise amount is positive. (c) Limitation on Date of Exercise. A cash settlement of an SAR by an officer or director of the Corporation may only be accomplished in compliance with Rule 16b-3(e) of the Securities Exchange Act of 1934 as presently in effect or as subsequently modified by amendment. (d) Other Provisions of Plan Applicable. All provisions of this Plan applicable to options granted hereunder shall apply with equal effect to an SAR. No SAR shall be transferable otherwise than by will or the laws of descent and distribution and an SAR may be exercised during the lifetime of the holder thereof, only by such holder. 17. Tax Indemnification Payments The Board shall have the authority, at the time of the grant of an option or the 8 making of a Restricted Share award under the Plan or at any time thereafter, to approve tax indemnification payments to designated Optionees and Grantees to be paid upon their exercise of stock options which do not qualify as incentive stock options or recognition of a taxable gain by reason of their receipt of an award of Restricted Shares, as the case may be. The amount of any such payments shall not exceed the amount of tax generally payable by an Optionee or Grantee by reason of such exercise or recognition, and shall not, in any case, exceed sixty percent of the amount imputed as taxable income to a particular Optionee or Grantee by reason of either of the above-described events. The Board of Directors shall have full authority, in its discretion, to determine the amount of any such payment, the terms and conditions affecting the exercise, vesting and payment of any payment, and whether any payment shall be payable in cash or other property. 18. Income Tax Withholding In order to assist an Optionee or Grantee in paying federal and state income taxes required to be withheld upon the exercise of an option or receipt of a Restricted Share award granted or made hereunder, the Board of Directors, in its discretion and subject to such additional terms and conditions as it may adopt, may permit the Grantee or Optionee to elect to satisfy such income tax withholding obligation by delivering previously owned shares or by having the Corporation withhold a portion of the shares otherwise to be delivered upon exercise of such option or award with a fair market value, determined in accordance with the provisions of Section 5 hereof, in an amount up to the Optionee's maximum marginal tax rate. Any such election by an officer or director of the Corporation must comply with the provisions of Rule 16b-3 under the Securities Exchange Act of 1934 or any successor rule. 19. Automatic Outside Director Stock Option Grants (a) Procedure for Grants. All grants of options under this Section 19 shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions: (i) No person shall have any discretion to select which Outside Directors shall be granted options or to determine the number of shares to be covered by options granted to Outside Directors. As used herein, "Outside Director" means a member of the Corporation's Board of Directors who is not an employee of the Corporation. (ii) Any person who first becomes an Outside Director after January 24, 2000, shall be automatically granted an option to purchase 10,000 shares on the date on which such person first becomes an Outside Director, whether through election by the shareholders of the Corporation or appointment by the Board of Directors to fill a vacancy. (iii) Beginning with the 2000 Annual Meeting of Shareholders, each Outside Director shall be automatically granted an option to purchase 10,000 shares on the date of each Annual Meeting of the Corporation's shareholders immediately following which such Outside Director is serving on the Board of Directors, provided that, on such date, he or she shall have served on the Board of Directors for at least six (6) months prior to the date of such Annual Meeting. 9 (iv) Notwithstanding the provisions of subsections (ii) and (iii) hereof, in the event that a grant would cause the number of shares subject to outstanding options plus the number of shares previously purchased upon exercise of options to exceed the total number of shares available under the Plan in accordance with Section 2, then each such automatic grant shall be for that number of shares determined by dividing the total number of shares remaining available for grant by the number of Outside Directors receiving an option on the automatic grant date. Any further grants shall then be deferred until such time, if any, as additional shares become available for grant under the Plan through action of the shareholders to increase the number of shares which may be issued under the Plan or through cancellation or expiration of options previously granted hereunder. (b) Terms. The terms of each option granted under this Section 19 shall be as follows: (i) each option shall have a ten-year term and shall be exercisable only while the Outside Director remains a director of the Corporation, subject to the same extension provided to employees for death and disability under Section 8 (c) of the Plan; (ii) the exercise price per share shall be 100% of the fair market value per share on the date of grant of each option, determined in accordance with Section 5 of the Plan; (iii) each option shall be fully vested and exercisable on the date of grant. 20. Award Limitations Under the Plan. No person eligible to receive an award under the Plan may be granted any award or awards under the Plan, the value of which awards is based solely on an increase in the value of the shares after the date of grant of such awards, for more than 500,000 shares (subject to adjustment as provided for in Section 10), in the aggregate in any calendar year. The foregoing annual limitation specifically includes the grant of any awards representing "qualified performance-based compensation" within the meaning of Section 162(m) of the Code. 10 EX-23.1 4 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1 Consent of Independent Auditors We consent to the reference to our firm under the captions "Selected Financial Data" and "Experts" and to the use of our report dated January 12, 2000 in Amendment No. 5 to the Registration Statement (Form S-1 No. 333-84089) and related Prospectus of Vascular Solutions, Inc. for the registration of 3,076,250 shares of common stock. /s/ Ernst & Young LLP Minneapolis, Minnesota April 10, 2000 -----END PRIVACY-ENHANCED MESSAGE-----