-----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, DMudfryefTYIuyyzoQ0y8O/hgbYl+o1lbncLDS0hc//bL+Tx7Hwwc959kziacqnd 3Kg+IQc4cBXX5PVamnjibA== 0001045969-99-000662.txt : 19990906 0001045969-99-000662.hdr.sgml : 19990906 ACCESSION NUMBER: 0001045969-99-000662 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19990903 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: 99706506 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. 1 TO FORM S-1 As filed with the Securities and Exchange Commission on September 3, 1999 Registration No. 333-84089 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO.1 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 jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
2405 Xenium Lane North, Suite 200 Minneapolis, Minnesota 55441 (612) 553-2970 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Howard C. Root Vascular Solutions, Inc. 2405 Xenium Lane North, Suite 200 Minneapolis, Minnesota 55441 (612) 553-2970 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------- Copies to: Timothy S. Hearn, Esq. David J. Kaufman, Esq. Dorsey & Whitney LLP Ernest W. Torain, Jr., Esq. 220 South Sixth Street Katten Muchin Zavis Minneapolis, Minnesota 55402-1498 525 West Monroe Street, Suite 1600 (612) 340-2600 Chicago, Illinois 60661 (312) 902-5200 ------------------------ 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 SEPTEMBER 3, 1999 PROSPECTUS 2,675,000 Shares [LOGO OF VASCULAR SOLUTIONS] Common Stock Vascular Solutions, Inc. is offering 2,675,000 shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We expect the initial public offering price will be between $ 11.00 and $ 13.00 per share. We will list the common stock 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 - -------------------------------------------------------------------------------- Public Offering Price....................... $ $ Underwriting Discount....................... $ $ Proceeds to Vascular Solutions, Inc......... $ $ ================================================================================ The underwriters may also purchase up to an additional 401,250 shares at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. William Blair & Company Dain Rauscher Wessels a division of Dain Rauscher Incorporated Stephens Inc. The date of this prospectus is September , 1999 - Inside Front Cover - [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 sale of the Duett in the United States, and we can make no assurance of when, if ever, the Duett will be approved by the FDA. 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 existing FDA-approved devices used to seal the puncture site following the catheterization procedure. We began selling our product in Europe in February 1998. For the six months ended June 30, 1999, we had net sales of $514,500 and a net loss of $3.5 million. 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 6,000 deployments of our device have been performed worldwide. While the vascular sealing device market has developed quickly from less than $20 million in sales in 1996 to $110 million in 1998, it represents less than 15% of the $1 billion potential annual market, based on the current number of catheterization procedures performed. 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 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 therapeutic 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. 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 1998, 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. Prior to 1996, virtually all of the puncture sites created by catheterization procedures were sealed by a healthcare professional applying manual pressure. Vascular sealing devices were introduced in the United States in late 1995 and have rapidly been adopted by physicians, as evidenced by the $110 million of these devices that were sold worldwide in 1998. Nonetheless, over 85% of the arterial punctures created in 1998 still were sealed using manual compression. We believe that our device offers benefits that position it well to capture a significant share of the market opportunity for vascular sealing devices. -1- Since July 1997, five clinical studies of our Duett sealing device, reporting on over 2,000 deployments, have been performed. The most recent of these studies, completed in March 1999, was a randomized, controlled study to support our PMA application with the FDA. In this study, which involved 695 patients in 15 catheterization centers in the United States and Germany, our product demonstrated: . reduced time to the cessation of bleeding; . reduced time to ambulation of the patient; and . no statistically significant increase in major complications compared to manual compression. The Offering Common stock offered................................. 2,675,000 shares Common stock to be outstanding after the offering.... 10,774,354 shares. This number is based on shares outstanding on August 31, 1999. It excludes 668,011 shares of common stock issuable upon exercise of options outstanding under our stock option plan and 653,715 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 -2- Summary Financial Data (in thousands, except per share amounts)
Year Ended Six Months Ended December 31, June 30, ---------------------------------- -------------------------------- 1997 1998 1998 1999 ------------- ---------------- ------------ --------------- (unaudited) Statement of Operations Data: Net sales................................................ $ -- $ 494 $ 133 $ 514 Gross profit............................................. -- 52 7 72 Total operating expenses................................. 1,724 5,467 2,213 3,788 Operating loss........................................... (1,724) (5,415) (2,206) (3,716) Net loss................................................. (1,652) (5,141) (2,045) (3,533) Basic and diluted net loss per share..................... $ (.62) $ (1.40) $ (.57) $ (.95) Shares used in basic and diluted net loss per share...... 2,668 3,660 3,588 3,702 Pro forma basic and diluted net loss per share........... $ (.89) $ (.47) Shares used in pro forma net loss per share.............. 5,767 7,480
June 30, 1999 ----------------------------------- As Actual Adjusted ------------------ ------------- (unaudited) Balance Sheet Data: Cash and cash equivalents........................................................... $ 9,201 $ 38,704 Working capital..................................................................... 9,681 39,184 Total assets........................................................................ 10,674 40,177 Long-term debt...................................................................... -- -- Total shareholders' equity.......................................................... 10,330 39,833
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 June 30, 1999, 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 2405 Xenium Lane, Suite 200, Minneapolis, Minnesota 55441 and our telephone number is 612-553-2970. 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. -3- 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. Under the Federal Food, Drug and Cosmetic Act, or FDC Act, the FDA has 180 days to review a PMA application, although the review time is often significantly extended by the FDA. Prior to granting approval, the FDA may require clarification of information provided in the submission, more information or further clinical studies. Also, a review panel is often convened by the FDA to review and evaluate the application and recommend whether the device should be approved. 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. In addition, the FDA will inspect our manufacturing facility to ensure compliance with the FDA's requirements regarding good manufacturing practices prior to approval of our application. 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 less than 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. 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 requests a declaratory 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. It is not possible at this time to predict the outcome of the lawsuit, 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. 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. -4- Our defense of the Datascope 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 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 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 June 30, 1999, we had an accumulated deficit of $10.3 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 indiction of our future performance because they are likely to vary signigicantly based on many factors, including: -5- . 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; . 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 $12 million during the period from July 1, 1999 through December 31, 2000 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 -6- 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 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 has agreed to be acquired by 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, the Netherlands, the United Kingdom, Taiwan, Italy and Hong Kong. Our international sales are largely dependent on the marketing efforts of, and sales by, -7- 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. 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 All of our sales to date have been outside the United States, and we anticipate that substantially all of our revenue will be derived from international sales 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 -8- 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 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. 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 -9- 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 19 on June 30, 1998 to 51 on August 31, 1999. 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. -10- 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 4,730,255 shares, or 43.9%, 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. 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; -11- . 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 10,774,354 outstanding shares of common stock, assuming no exercise of outstanding options or warrants after August 31, 1999. Other than the shares sold in this offering which will be freely tradeable, 178,031 shares will become freely tradeable as of the date of this prospectus, an additional 259,650 shares will be freely tradeable 90 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 35.1% 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. -12- 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. -13- 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 $12 million during the period from July 1, 1999 through December 31, 2000 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. -14- CAPITALIZATION The following table sets forth: . our actual capitalization as of June 30, 1999; . our capitalization on a pro forma basis to give effect to the 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.
June 30, 1999 ------------------------------------------------------- (in thousands) Pro Forma Actual Pro Forma As Adjusted ------------ -------------- ------------- 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, 16,222,223 shares authorized, 4,313,057 shares outstanding, actual; 20,000,000 shares authorized, 8,090,834 shares outstanding, pro forma; 20,000,000 shares authorized; 10,765,834 shares outstanding, pro forma as adjusted............................... 43 81 108 Additional paid-in capital......................................... 20,703 20,703 50,179 Deferred compensation.............................................. (128) (128) (128) Accumulated deficit................................................ (10,326) (10,326) (10,326) ------------ ----------- ---------- Total shareholders' equity....................................... 10,330 10,330 39,833 ------------ ----------- ---------- Total capitalization........................................... $ 10,330 $ 10,330 $ 39,833 ============ =========== ==========
The number of shares of common stock issued and outstanding, pro forma, as adjusted, is based on shares outstanding on June 30, 1999. It excludes 676,531 shares of common stock issuable upon exercise of options outstanding under our stock option plan and 653,715 shares of common stock issuable upon exercise of other outstanding stock option and warrant agreements, each as of June 30, 1999. -15- 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 June 30, 1999, after giving effect to the conversion of our outstanding preferred stock into common stock in connection with this offering, was $10,330,105 or $1.28 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 June 30, 1999 would have been $39,833,105 or $3.70 per share of common stock. This represents an immediate increase in pro forma, adjusted net tangible book value to existing shareholders of $2.42 per share and an immediate dilution to new investors of $8.30 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 June 30, 1999............. $ 1.28 Increase attributable to this offering.................................... 2.42 ---------- Pro forma, adjusted net tangible book value per share after this offering..... 3.70 ------- Net tangible book value dilution per share to investors in this offering...... $ 8.30 =======
The following table summarizes, on a pro forma basis as of June 30, 1999, 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:
Average Shares Purchased Total Consideration Price ------------------------------ -------------------------------- Number Percent Amount Percent Per Share -------------- ------------ ---------------- ------------ ------------ Existing shareholders..... 8,090,834 75.2 % $20,268,810 38.7 % $2.51 New investors............. 2,675,000 24.8 32,100,000 61.3 $12.00 -------------- ------------ ---------------- ------------ ------------ Total 10,765,834 100% $52,368,810 100% ============== ============ ================ ============
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 June 30, 1999, there were options outstanding to purchase 676,531 shares of common stock under our stock option plan and 653,715 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. -16- SELECTED FINANCIAL DATA The selected statement of operations data shown below for the years ended December 31, 1997 and 1998 and the balance sheet data as of December 31, 1997 and 1998 are derived from our financial statements, which have been audited by Ernst & Young LLP, independent auditors. The selected financial data for the six months ended June 30, 1998 and 1999 and as of June 30, 1999 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 six months ended June 30, 1998 and 1999 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.
Year ended December 31, Six Months Ended June 30, ------------------------------------------ ------------------------------------------ 1997 1998 1998 1999 ------------------- ------------------- ------------------- ------------------- (in thousands, except per share amounts) Statement of Operations Data: Net sales......................... $ - $ 494 $ 133 $ 514 Cost of goods sold................ - 442 126 442 ------------------- ------------------- ------------------- ------------------- Gross profit...................... - 52 7 72 Operating expenses: Research and development......... 766 2,348 1,129 1,647 Clinical and regulatory.......... 259 1,376 414 882 Sales and marketing.............. 273 1,075 352 850 General and administrative....... 426 668 318 409 ------------------- ------------------- ------------------- ------------------- Total operating expenses.......... 1,724 5,467 2,213 3,788 ------------------- ------------------- ------------------- ------------------- Operating loss.................... (1,724) (5,415) (2,206) (3,716) Interest income................... 72 274 161 183 ------------------- ------------------- ------------------- ------------------- Net loss.......................... $ (1,652) $ (5,141) $ (2,045) $ (3,533) =================== =================== =================== =================== Basic and diluted net loss per share....................... $ (.62) $ (1.40) $ (.57) $ (.95) Shares used in basic and diluted net loss per share...... 2,668 3,660 3,588 3,702 Pro forma basic and diluted net loss per share.................. $ (.89) $ (.47) Shares used in pro forma net loss per share calculation........... 5,767 7,480
December 31, June 30, ----------------------------------------- 1997 1998 1999 ------------------- ------------------- ------------------- (in thousands) Balance Sheet Data: Cash and cash equivalents.......................... $7,299 $ 9,897 $ 9,201 Working capital.................................... 7,031 9,933 9,681 Total assets....................................... 7,559 11,007 10,674 Long-term debt..................................... - - - Total shareholders' equity......................... 7,216 10,546 10,330
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. -17- 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. On June 30, 1999, we filed our PMA application with the FDA for approval to sell our Duett sealing device in the United States. We have a limited history of operations and have experienced significant operating losses since inception. As of June 30, 1999, we had an accumulated deficit of $10.3 million. We commenced international sales in February 1998. To date, we have generated 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 Six months ended June 30, 1999 compared to six months ended June 30, 1998 Net sales increased 288% to $514,500 for the six months ended June 30, 1999 from $132,750 for the six months ended June 30, 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, Italian and Austrian distributors accounted for approximately 25%, 22%, 16% and 15% of net sales for the six months ended June 30, 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 86% for the six months ended June 30, 1999 from 95% for the six months ended June 30, 1998. This decrease as a percentage of net sales resulted from -18- improvements in manufacturing efficiencies and increases in the number of Duett sealing devices manufactured. 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. Research and development expenses increased 46% to $1,646,978 for the six months ended June 30, 1999 from $1,129,205 in the six months ended June 30, 1998. This increase was attributable to a $332,000 increase for additional personnel required for the continued development of the Duett sealing device, $125,000 of materials associated with the development of our next generation sealing device and $21,000 in prototyping costs. We expect our research and development expenses to continue to increase as we continue work on product improvements and explore new product opportunities. Clinical and regulatory expenses increased 113% to $882,303 for the six months ended June 30, 1999 from $413,478 for the six months ended June 30, 1998. 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. This increase was primarily the result of $263,000 in 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. We expect our clinical and regulatory expenses to decrease over the next year as additional clinical studies are expected to be smaller in scope than the completed 695-patient multi-center clinical study. Sales and marketing expenses increased 141% to $849,429 for the six months ended June 30, 1999 from $351,935 for the six months ended June 30, 1998. This increase was due primarily to a $266,000 increase in personnel costs and $132,000 associated with travel, marketing and physician training for the international distribution of the Duett sealing device. We currently anticipate spending $12 million during the period from July 1, 1999 through December 31, 2000 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 29% to $409,460 for the six months ended June 30, 1999 from $317,465 in the six months ended June 30, 1998. This increase was primarily the result of the costs associated with additional personnel and the expansion of our facilities. We anticipate that general and administrative expenses will increase for the foreseeable future as we continue to add administrative personnel and infrastructure. Interest income increased to $183,036 for the six months ended June 30, 1999 from $161,095 for the six months ended June 30, 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. -19- 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. 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, 1998, we had $5,615,000 of federal net operating loss carryforwards available to offset future taxable income which begin to expire in the year 2013. As of December 31, 1998, we also had federal and state research and development tax credit carryforwards of $306,300 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 June 30, 1999, we have sold common stock and preferred stock generating aggregate net proceeds of $20.3 million. At June 30, 1999, we had $9.2 million in cash and cash equivalents on-hand. During the six- month periods ended June 30, 1998 and 1999, we used $2.7 million and $3.7 million of cash and cash equivalents and for the years ended December 31, 1997 and 1998, we used $1.5 million and $5.8 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, -20- 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 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. 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 March 1998, the Accounting Standards Committee issued AICPA Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement provides guidance on accounting for the costs of computer software developed or obtained for internal use and identifies characteristics of internal use software as well as assists in determining when computer software is for internal use. SOP 98-1 is effective for fiscal years beginning after December 15, 1998, with earlier application permitted. We do not expect the adoption of this SOP to have a material impact on our financial statement. In March 1998, the Accounting Standards Committee issued AICPA Statement of Position 98-5, "Reporting on the Costs of Start-up Activities." This statement provides guidance on the financial reporting of start-up costs and organization costs. It requires that the cost of start-up activities and organization costs be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after December 15, 1998, with earlier application permitted. We do not expect the adoption of this SOP to have a material impact on our financial statements. 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. Year 2000 Many currently installed computer systems and software are coded to accept only two-digit entries in the date code fields. These date code fields will need to accept four-digit entries to distinguish whether "00" means 1900 or 2000. This problem could result in system failures or miscalculations causing disruptions of business operations, including, among other things, a temporary inability to process transactions, send invoices or engage in other similar business activities. As a result, many companies' computer systems and software will need to be upgraded or replaced in order to comply with Year 2000 requirements. The potential global impact of the Year 2000 problem is not known. If Year 2000 problems are not corrected in a timely manner, they could affect us. We have formed a project team to address internal Year 2000 issues. Our internal financial and other computer systems are being reviewed to assess and remediate Year 2000 problems. Our assessment of internal systems includes our information technology systems as well as other systems which include embedded technology in equipment containing microprocessors or other similar circuitry. Our Year 2000 compliance program includes the following phases: . identifying systems that need to be modified or replaced; . carrying out remediation work to modify existing systems or convert to new systems; and . conducting validation testing of systems and applications to ensure compliance. The amount and cost of remediation work required to address internal Year 2000 problems is not expected to be extensive. We have installed most of our operational systems and personal computers in the last 18 months. We believe that this equipment and software substantially addresses Year 2000 issues. However, we will be required to modify some of our existing hardware and software in order for our computer systems to function properly in the year 2000 and thereafter. We estimate that we will complete -21- our Year 2000 compliance program for all of our significant internal systems no later than October 31, 1999, at minimal costs. There can be no assurance that these estimates are correct or that actual costs will not be materially greater than anticipated. In addition, we are in the process of surveying our major suppliers and evaluating their plans to address potential Year 2000 issues. We anticipate that this evaluation will be completed by October 31, 1999. We will rely primarily on our suppliers' commitments to accomplish this task but have no contractual commitments from the suppliers regarding Year 2000 issues. Based on information we have received to date, we believe our major suppliers have compliance programs in place that will enable them to become substantially Year 2000 compliant in a timely manner. It is impossible to fully assess the potential consequences in the event interruptions from suppliers occur or in the event that there are disruptions in infrastructure areas such as utilities, communications, transportation, banking or government. Based on our assessments to date, we believe we will not experience any material disruptions as a result of Year 2000 problems in internal processes, information processing, and interfaces with major customers or with processing orders and billing. However, if our suppliers or other third-party providers, such as those providing electricity, water or telephone services, experience difficulties in providing products or services to us because of their Year 2000 problems, we believe the worst case scenario would be that our ability to timely ship products to our customers would be disrupted. This could result in the loss of current or potential customers which could seriously harm our business. In addition, if our information technology systems are not Year 2000 compliant, we would have to devote significant resources to correct such problems and we may be unable to process customer orders, which could lead to shipment delays. We have not yet developed a contingency plan to address these potential issues, but we will assess the need to develop such a plan based on the outcome of our Year 2000 review. Assuming no major disruption in service from suppliers or other third parties, we believe that we will be able to manage our total Year 2000 transition without any material effect on our results of operations or financial condition. -22- 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 6,000 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 1998. The number of catheterization procedures performed is -23- expected to grow by more than 5% each year for the next three years as the incidence of cardiovascular disease continues to increase. 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. -24- . 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 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, $110 million of these three FDA-approved devices were sold worldwide in 1998 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 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 compared to manual compression. The pursuit of FDA approval of our Duett sealing device for sale in the United States is our top priority. -25- . 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 1998, 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, 85% of the arterial punctures in 1998 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 $12 -26- million during the period from July 1, 1999 through December 31, 2000 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 and Regulatory Status On June 30, 1999, we filed our PMA application with the FDA for approval to sell our Duett sealing device in the United States. To date, over 6,000 deployments of our Duett sealing device have been performed worldwide. A total of 14 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. Five separate clinical studies of our Duett sealing device have been performed to date, each of which produced very favorable clinical results. 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 - --------------------------------------------------------------------------------------------------------------
The most recent clinical study of our Duett sealing device was our Simple and Effective Arterial cLosure ("SEAL") clinical study which was performed between August 1998 and March 1999. The SEAL 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, 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 -27- 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. All of our revenues through June 30, 1999 were derived from sales to international distributors, primarily in Europe, none of which is affiliated with us. Sales in Europe constituted 94% of our net sales for each of the year ended December 31, 1998 and the six months ended June 30, 1999. Sales to Cardiologic G.m.b.H., our German distributor, accounted for 65% of our net sales for the year ended December 31, 1998 and sales to Moderne Medizintechnik m.b.H, our Austrian distributor, accounted for 16% of net sales for the same period. Sales to our German, Norwegian, Italian and Austrian distributors accounted for approximately 25%, 22%, 16% and 15% of net sales for the six months ended June 30, 1999. As of August 31, 1999, our sales and marketing staff consisted of 13 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 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 -28- 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. [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. [Schmatic drawing of Duett catheter inflated and creating a temporary seal; labeling the item listed below:] Inflated Duett Balloon 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. [Schematic drawing of Duett procoagulant being delivered] 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. [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. -29- Research and Development Our research and development staff is currently focused on improving our Duett sealing device to include the use of a modified procoagulant designed for improved patient comfort and to reduce our cost of goods sold. We incurred expenses of $766,176 in 1997 and $2,348,281 in 1998 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 will be audited in September 1999 for compliance with the FDA's good manufacturing practices. 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 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. 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. -30- Our Duett sealing device also competes with three vascular sealing devices, none of which had over 40% of the vascular sealing device market in the three- month period ended June 30, 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) and TechStar(TM) names by Perclose, Inc., which has agreed to be acquired by 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. 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. In the past two years, we have submitted and 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 submitted our PMA application to the FDA. 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 -31- 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 PMA application, although the review of such an application more often occurs over a longer time period and may require additional information. 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. Also, a review panel is often convened by the FDA to review and evaluate the application and recommend whether the device should be approved. In addition, the FDA will inspect our manufacturing facility to ensure compliance with the FDA's requirements regarding good manufacturing practices prior to approval of our application. 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. 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. -32- 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, 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 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, the Netherlands, the United Kingdom, Taiwan and Italy. 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 -33- 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 been issued that contains method claims concerning the use of a balloon catheter and flowable procoagulant and which expires in October 2015. We currently have eight 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. 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 requests a declaratory 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. We believe this claim is without merit and intend to defend the lawsuit vigorously. It is not possible at this time to predict the outcome of the lawsuit, 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. 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 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 and other future claims could be substantial and adversely affect us, even if we are ultimately successful. An adverse determination in the Datascope 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 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. -34- Employees As of August 31, 1999, we had 51 full time employees. Of these employees, 18 were in manufacturing activities, 13 were in sales and marketing activities, five were in research and development activities, six were in regulatory, quality assurance and clinical research activities and nine 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 requests a declaratory 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. We believe this claim is without merit and intend to defend the lawsuit vigorously. 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. It is not possible at this time to predict the outcome of the lawsuit, 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. -35- MANAGEMENT Executive Officers and Directors The following table provides information concerning our executive officers and directors:
Name Age Position - ---- --- -------- Howard Root............... 38 Chief Executive Officer and Director Gary Gershony, M.D........ 43 Medical Director and Director Michael Nagel............. 37 Vice President of Sales & Marketing Charmaine Sutton.......... 39 Vice President of Regulatory Affairs James Quackenbush......... 40 Vice President of Manufacturing David Christofferson...... 62 Chief Financial Officer and Secretary Gabriel Vegh.............. 60 Director Gerard Langeler........... 48 Director Daniel Sullivan........... 44 Director James Jacoby, Jr.......... 36 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 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 variety of sales and marketing functions with -36- 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. David Christofferson joined us as Chief Financial Officer and Secretary in July 1999. Prior to joining Vascular Solutions, Mr. Christofferson was a financial consultant since April 1998. From 1991 through 1998, Mr. Christofferson was Vice President, Chief Financial Officer and Secretary for Angeion Corporation, a manufacturer of products that treat irregular heartbeats. From 1986 to December 1990, Mr. Christofferson was a branch manager for Excel Office Products, a company he founded in 1986, which was acquired by General Office Products in 1988. From 1987 through 1989 he served as Chairman and Chief Financial Officer of Medical Wellness Technologies, Inc., a distributor of pain control devices. Prior to 1986, Mr. Christofferson was employed by Medtronic, Inc., a medical device company, for over 13 years in various financial management positions. Mr. Christofferson received a B.S. in Finance from the University of Minnesota. Gabriel Vegh has been a member of our board of directors since May 1997. Mr. Vegh is the founder, Chief Operating Officer and a director of Cardima, Inc., an electrophysiology medical device company, where he has worked since 1993. From 1985 through 1993, Mr. Vegh was Vice President of Operations of Target Therapeutics, Inc., a manufacturer of therapeutic micro-catheters. From 1983 through 1984, Mr. Vegh was General Manager of Advanced Cardiovascular Systems, Inc., a manufacturer of angioplasty catheters. 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. -37- Daniel Sullivan has been a member of our board of directors since October 1998. Mr. Sullivan is the President and Chief Executive Officer of Vascular Science, Inc., a Minneapolis based development stage medical device company he founded in 1996 that is unaffiliated with Vascular Solutions. Prior to 1995, Mr. Sullivan was Vice President of Sales and Marketing at SCIMED Life Systems, Inc., an interventional cardiology company, where he also served as the General Manager of the company's Ancillary Division. Mr. Sullivan also is a director of Applied Biometrics, Inc. and several privately held companies. 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 Sullivan 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, Sullivan 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 the first board meeting held after his or her election to our board. Compensation Committee Interlocks and Insider Participation Messrs. Langeler and Sullivan 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. -38- We have sold shares of common stock, Series A and Series B preferred stock to entities affiliated with Olympic Venture Partners and shares of 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 1998, no bonuses were paid to any executive officer. 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 any time by giving ten -39- 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 $100,000 during the fiscal year ended December 31, 1998. All other compensation consists of premiums we pay for health insurance benefits. Summary Compensation Table
Annual Long Term Compensation Compensation ------------------------------- -------------- Shares Underlying All Other Name and Principal Position Salary ($) Bonus ($) Options (#) Compensation ($) - ---------------------------------------- -------------- ----------- -------------- ----------------------- Howard Root............................. $115,000 $ -- -- $1,510 Chief Executive Officer Michael Nagel........................... 100,000 -- 10,000 5,078 Vice President, Sales & Marketing
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, 1998. Options to purchase an aggregate of 217,000 shares of our common stock were granted to our employees during the year ended December 31, 1998. 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 1998
Potential Realizable Value at Assumed Annual Rates of Stock Price Indiviual Grants Appreciation for Option Term ----------------------------------------------------------------------------- -------------------------- % of Total Number of Securities Options Granted Exercise Underly Options to Employees in Price Per Expiration Name Granted 1998 Share Date 5% 10% - --------------------- -------------------- ---------------- ---------- ------------ ----------- ----------- Howard Root.......... -- -- % $ -- -- $ -- $ -- Michael Nagel........ 10,000 4.6 3.00 7/19/08 18,867 47,812
-40- The following table sets forth information concerning stock option exercises during 1998 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, 1998. 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, 1998 as determined by our board of directors, which was determined to be $3.25 per share. Aggregate Option Exercises in 1998 and Year-End Option Values
Number of Securities Underlying Value of Unexercised Unexercised Options In-the-Money Options at December 31, 1998 at December 31, 1998 -------------------------------- ----------------------------------- Shares Acquired on Value Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ------------- -------------- ----------- ------------- --------------- ---------------- ---------------- Howard Root.. -- $ -- 6,485 9,726 $11,349 $17,021 Michael Nagel -- -- 19,400 35,600 31,850 49,400
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 900,000 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 our common stock, in the discretion of the committee. The committee has not granted any stock appreciation rights. -41- 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 August 31, 1999, options to purchase an aggregate of 668,011 shares of common stock, at an average exercise price of $2.65 per share, were outstanding under the stock option and stock award plan and a total of 183,329 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. We did not make any matching contributions to the 401(k) Plan for the year ended December 31, 1998. 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 Director of Cardiovascular Research at the Washington Cardiology Center and Chief Executive Officer of the Cardiology Research Foundation in Washington, D.C. 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. -42- Dr. James Wilentz, who is an interventional cardiologist at the Beth Israel Medical Center in New York City, New York. 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 $3,000,000 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. The right of Stephens Vascular Options, LLC to purchase $3,000,000 of our common stock will terminate upon the effectiveness of this offering. 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 $2,000,000 of our common stock. The option expires on December 31, 2000. Prior to the expiration date, Stephens Vascular Options, LLC has the right to convert this option into shares of common stock under a conversion formula specified in the put and option agreement. 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. -43- PRINCIPAL SHAREHOLDERS The following table provides information concerning beneficial ownership of our common stock as of August 31, 1999 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 8,099,354 shares of common stock outstanding as of August 31, 1999, 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 10,774,354 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 August 31, 1999 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).......... 2,107,181 25.1% 19.1% 285,715 James Jacoby, Jr. (1)............................ 2,107,181 25.1 19.1 285,715 Entities affiliated with Olympic Venture Partners(2) 1,800,000 22.2 16.7 - Gerard Langeler (2).............................. 1,800,000 22.2 16.7 - TGI Fund II, LC (3)................................. 900,000 11.1 8.4 - Gary Gershony, M.D. (4)............................. 757,000 9.3 7.0 - Howard Root......................................... 293,516 3.6 2.7 9,727 Michael Nagel (5)................................... 98,400 1.2 * 30,400 Gabriel Vegh........................................ 10,000 * * 10,000 Daniel Sullivan..................................... 5,600 * * 5,600 All directors and executive officers as a group (10 persons)..................................... 5,109,297 60.3% 45.8% 379,042
_______________ *Less than 1% -44- (1) All of the shares are held by Stephens Vascular Preferred, LLC and all of the shares subject to options are held by Stephens Vascular Options, LLC. The address is 111 Center Street, Suite 2500, Little Rock, AR 72201. 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) Mr. Gershony's address is 2405 Xenium Lane North, Suite 200, Minneapolis, Minnesota 55441. (5) Includes an aggregate of 18,000 shares registered in the name of Mr. Nagels' three minor children's irrevocable trusts. -45- DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of 20,000,000 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 August 31, 1999, there were 4,321,577 shares of common stock outstanding, held by 126 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: -46- 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. In addition, we currently have outstanding an option to purchase up to $2,000,000 of our common stock held by Stephens Vascular Options, LLC. This option is exercisable at $7.00 per share at any time prior to our receipt of approval by the FDA of our PMA application for our Duett sealing device, and $8.00 at any time thereafter. This option expires on December 31, 2000. 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. -47- 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 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. -48- SHARES ELIGIBLE FOR FUTURE SALE Upon the closing of this offering, we will have 10,774,354 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 August 31, 1999. 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 8,099,354 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: . 178,031 shares will be available for immediate sale in the public market on the date of this prospectus; . 259,650 shares will be available for sale beginning 90 days after the date of this prospectus; and . 7,661,673 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 with in any three-month period may not exceed the greater of 1% of the then outstanding shares of common stock, approximately 108,000 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. -49- 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 William Blair & Company, L.L.C. 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. -50- UNDERWRITING We intend to offer our common stock through the several underwriters named below, for which William Blair & Company, L.L.C., Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, and Stephens Inc. are acting as representatives. Subject to the terms and conditions set forth in the underwriting agreement by and among us and the underwriters, the underwriters have agreed, severally and not jointly, to purchase from us, and we have agreed to sell each of the underwriters, the respective number of shares of common stock set forth opposite each underwriter's name in the table below.
Underwriter Number of Shares ----------------- William Blair & Company, L.L.C........................... Dain Rauscher Wessels.................................... Stephens Inc............................................. --------------- Total.................................................. ===============
This offering will be underwritten on a firm commitment basis. In the underwriting agreement, the underwriters have agreed, subject to the terms and conditions set forth in the agreement, to purchase the shares of common stock being sold at a price per share equal to the public offering price less the underwriting discounts specified on the cover page of this prospectus. According to the terms of the underwriting agreement, the underwriters will either purchase all of the shares or none of them. In the event of default by any underwriter, in certain circumstances the purchase commitments of the non- defaulting underwriters may be increased or the underwriting agreement may be terminated. The representatives have advised us that the underwriters will offer the shares of common stock to the public initially at the public offering price specified on the cover page of this prospectus. The underwriters may also offer the shares to certain dealers at the public offering price less a concession of up to $________ per share. The underwriters may allow, and these dealers may re-allow, a concession of up to $________ per share to certain other dealers. The underwriters will offer the shares subject to prior sale and subject to receipt and acceptance of the shares by the underwriters. The underwriters may reject any order to purchase shares in whole or in part. The underwriters expect that we will deliver the shares to the underwriters through the facilities of the Depository Trust Company in New York, New York, on or about ________, 1999. At that time, the underwriters will pay us for the shares in immediately available funds. After the commencement of the initial public offering, the representatives may change the public offering price and the other selling terms. The underwriters have the option to purchase up to an aggregate of 401,250 additional shares of common stock from us at the same price they are paying for the shares offered hereby. The underwriters may purchase additional shares only to cover over-allotments made in connection with this offering and only within 30 days after the date of this prospectus. If the underwriters decide to exercise this over-allotment option, each underwriter will be required to purchase additional shares in approximately the same proportion as set forth in the table above. The underwriters will offer any additional shares that they purchase on the terms described in the preceding paragraph. -51- The following table summarizes the compensation to be paid by us to the underwriters:
Total ------------------------------------------- Without With Per Share Over-Allotment Over-Allotment --------- -------------- -------------- Public offering price.................. $ $ $ Underwriting discount paid by us....... $ $ $
We estimate the expenses of this offering payable by us, excluding the underwriting discount, to be $350,000. We have agreed to indemnify the underwriters and their controlling persons against certain liabilities, including liabilities under the Securities Act. We and substantially all of our existing shareholders have agreed not to sell or transfer any shares of common stock, or to engage in certain hedging transactions with respect to the common stock, for a period of 180 days from the date of this prospectus without the consent of William Blair & Company, L.L.C., except in certain limited circumstances. Shareholders who have agreed to this lock-up arrangement hold an aggregate of 7,661,673 shares of capital stock or 94.6% of our capital stock outstanding as of August 31, 1999. For a more detailed discussion of shares available for sale following this offering, please refer to "Shares Eligible for Future Sale." In connection with this offering, the underwriters and other persons participating in this offering may engage in transactions which affect the market price of the common stock. These may include stabilizing and over- allotment transactions and purchases to cover syndicate short positions. Stabilizing transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock. Over-allotment involves selling more shares of common stock in this offering than are specified on the cover page of this prospectus, which results in a syndicate short position. The underwriters may cover this short position by purchasing common stock in the open market or by exercising all or part of their over-allotment option. In addition, the representatives may impose a penalty bid. This allows the representatives to reclaim the selling concession allowed to an underwriter or selling group member if common stock sold by such underwriter or selling group member in this offering is repurchased by the representatives in stabilizing or syndicate short covering transactions. These transactions, which may be effected on the Nasdaq National Market or otherwise, may stabilize, maintain or otherwise affect the market price of the common stock and could cause the price to be higher than it would be without these transactions. The underwriters and other participants in this offering are not required to engage in any of these activities and may discontinue any of these activities at any time without notice. Neither Vascular Solutions nor any of the underwriters makes any representation or prediction as to whether the underwriters will engage in such transactions or choose to discontinue any transactions engaged in or as to the direction or magnitude of any effect that these transactions may have on the price of the common stock. The representatives have advised us that the underwriters do not intend to confirm, without client authorization, sales to any account over which they exercise discretionary authority. Prior to this offering, there has been no public market for our common stock. Consequently, we and the representatives negotiated to determine the initial public offering price. The initial public offering price was based on current market conditions, our operating results in recent periods, the market -52- capitalization of other companies in our industry, estimates of our potential and other factors that we and the representatives deem relevant. The underwriters have reserved for sale, at the initial public offering price, up to 133,750 shares of common stock in this offering for our employees and certain other individuals. Purchases of the reserved shares would reduce the number of shares available for sale to the general public. The underwriters will offer any reserved shares which are not so purchased to the general public on the same terms as the other shares. 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 Katten Muchin Zavis, Chicago, Illinois. EXPERTS Ernst & Young LLP, independent auditors, have audited our financial statements as of December 31, 1997 and 1998 and for the years then ended, 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 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. -53- VASCULAR SOLUTIONS, INC. INDEX TO FINANCIAL STATEMENTS 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, 1997 and 1998, and the related statements of operations, changes in shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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, 1997 and 1998, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Minneapolis, Minnesota January 20, 1999 F-2 VASCULAR SOLUTIONS, INC. BALANCE SHEETS
Pro forma December 31, June 30, June 30, ----------------------------- 1997 1998 1999 1999 ------------- -------------- -------------- ------------ (unaudited) (unaudited) ASSETS Current assets: Cash and cash equivalents............................... $ 7,299,130 $ 9,897,053 $ 9,201,407 $ 9,201,407 Accounts receivable..................................... - 125,000 283,000 283,000 Inventories............................................. 59,710 318,811 475,546 475,546 Prepaid expenses........................................ 15,110 53,174 64,830 64,830 ------------- -------------- ------------- ------------ Total current assets............................ 7,373,950 10,394,038 10,024,783 10,024,783 Property and equipment, net................................ 184,926 612,577 649,386 649,386 ------------- -------------- ------------- ------------ Total assets.................................... $ 7,558,876 $11,006,615 $ 10,674,169 $ 10,674,169 ============= ============== ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable........................................ $ 327,583 $ 273,816 $ 264,833 $ 264,833 Accrued clinical trial costs............................ - 140,705 - - Accrued expenses........................................ 15,778 46,318 79,231 79,231 ------------- -------------- ------------- ------------ Total current liabilities....................... 343,361 460,839 344,064 344,064 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; 0, 1,777,777 and 1,777,777 shares issued and outstanding in 1997, 1998 and 1999, respectively............... - 17,778 17,778 - Common stock, $.01 par value; 18,000,000, 16,222,223 and 16,222,223 shares authorized in 1997, 1998 and 1999, respectively 20,000,000 pro forma shares authorized; 3,553,250, 3,699,617 and 4,313,057 shares issued and outstanding in 1997, 1998 and 1999, respectively, 8,090,834 pro forma shares issued and outstanding................................. 35,533 36,996 43,131 80,909 Additional paid-in capital................................. 8,811,800 17,264,006 20,702,726 20,702,726 Deferred compensation...................................... - - (127,555) (127,555) Accumulated deficit........................................ (1,651,818) (6,793,004) (10,325,975) (10,325,975) ------------- -------------- ------------- ------------ Total shareholders' equity.............................. 7,215,515 10,545,776 10,330,105 10,330,105 ------------- -------------- ------------- ------------ Total liabilities and shareholders' equity...... $ 7,558,876 $ 11,006,615 $ 10,674,169 $ 10,674,169 ============= ============== ============= ============
See accompanying notes. F-3 VASCULAR SOLUTIONS, INC. STATEMENTS OF OPERATIONS
Year Ended December 31, Six Months Ended June 30, ----------------------------------- -------------------------------- 1997 1998 1998 1999 ----------------- ---------------- --------------- --------------- (unaudited) Net sales .............................. $ - $ 494,150 $ 132,750 $ 514,500 Cost of goods sold ..................... - 442,565 126,335 442,337 ----------------- ---------------- --------------- --------------- Gross profit ........................... - 51,585 6,415 72,163 Operating expenses: Research and development............ 766,176 2,348,281 1,129,205 1,646,978 Clinical and regulatory............. 259,503 1,375,595 413,478 882,303 Sales and marketing................. 273,089 1,075,250 351,935 849,429 General and administrative.......... 425,596 667,522 317,465 409,460 ----------------- ---------------- --------------- --------------- Total operating expenses...... 1,724,364 5,466,648 2,212,083 3,788,170 ----------------- ---------------- --------------- --------------- Operating loss................ (1,724,364) (5,415,063) (2,205,668) (3,716,007) Interest income......................... 72,546 273,877 161,095 183,036 ----------------- ---------------- --------------- --------------- Net loss...................... $ (1,651,818) $ (5,141,186) $ (2,044,573) $ (3,532,971) ================= ================ =============== =============== Basic and diluted net loss per share.... $ (.62) $ (1.40) $ (.57) $ (.95) ================= ================ =============== =============== Shares used in computing basic and diluted net loss per share.......... 2,667,612 3,660,136 3,588,187 3,702,387 ================= ================ =============== =============== Pro forma net loss per share: Basic and diluted net loss per share............................ $ (.89) $ (.47) ================ =============== Shares used in computing basic and diluted net loss per share....... 5,767,290 7,480,164 ================ ===============
See accompanying notes. F-4 VASCULAR SOLUTIONS, INC. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Series A Series B Additional Preferred Stock Preferred Stock Common Stock Paid-in ---------------------- ---------------------- ---------------------- Shares Amount Shares Amount Shares Amount Capital ---------- -------- ---------- -------- ---------- --------- ------------ Balance at December 20, 1996 (inception).......................... - $ - - $ - - $ - $ - Original issuance of common stock at $.001 per share in December 1996..... - - - - 1,366,250 13,663 (12,297) ---------- -------- ---------- -------- ---------- ---------- ------------ Balance at December 31, 1996............ - - - - 1,366,250 13,663 (12,297) 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 Value of options granted for services............................. - - - - - - 25,440 Exercise of stock options............... - - - - 7,000 70 10,430 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 Sale of common stock at $3.00 per share in December 1997, net of offering costs................................ - - - - 680,000 6,800 1,782,774 Net loss................................ - - - - - - - ---------- -------- ---------- -------- ---------- ---------- ------------ Balance at December 31, 1997............ 2,000,000 20,000 - - 3,553,250 35,533 8,811,800 Sale of common stock at $3.00 per share in March and April 1998.............. - - - - 126,667 1,266 378,734 Exercise of stock options............... - - - - 19,700 197 32,353 Value of options granted for services............................. - - - - - - 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 Net loss................................ - - - - - - - ---------- -------- ---------- -------- ---------- ---------- ------------ Balance at December 31, 1998............ 2,000,000 20,000 1,777,777 17,778 3,699,617 36,996 17,264,006 Exercise of stock options............... - - - - 613,440 6,135 3,027,735 Value of options granted for services............................. - - - - - - 13,360 Value of warrant granted related to supply agreement.................. - - - - - - 257,000 Deferred compensation related to option grants..................... - - - - - - 140,625 Amortization of deferred compensation... - - - - - - - Net loss................................ - - - - - - - ========== ======== ========== ======== ========== ========= ============ Balance at June 30, 1999 (unaudited).... 2,000,000 $ 20,000 1,777,777 $ 17,778 4,313,057 $ 43,131 $ 20,702,726 ========== ======== ========== ======== ========== ========= ============ Deferred Accumulated Compensation Deficit Total -------------- ------------- ------------ Balance at December 20, 1996 (inception).......................... $ - $ - $ - Original issuance of common stock at $.001 per share in December 1996 .... - - 1,366 -------------- ------------- ------------ Balance at December 31, 1996............ - - 1,366 Sale of common stock at $1.50 per share in January and February 1997, net of offering costs....................... - - 2,079,499 Value of options granted for services............................. - - 25,440 Exercise of stock options............... - - 10,500 Sale of Series A preferred stock at $2.50 per share in December 1997, net of offering costs................ - - 4,960,954 Sale of common stock at $3.00 per share in December 1997, net of offering costs................................ - - 1,789,574 Net loss................................ - (1,651,818) (1,651,818) -------------- ------------- ------------ Balance at December 31, 1997............ - (1,651,818) 7,215,515 Sale of common stock at $3.00 per share in March and April 1998.............. - - 380,000 Exercise of stock options............... - - 32,550 Value of options granted for services............................. - - 78,400 Sale of Series B preferred stock at $4.50 per share in December 1998, net of offering costs................ - - 7,980,497 Net loss................................ - (5,141,186) (5,141,186) -------------- ------------- ------------ Balance at December 31, 1998............ - (6,793,004) 10,545,776 Exercise of stock options............... - - 3,033,870 Value of options granted for services............................. - - 13,360 Value of warrant granted related to supply agreement.................. - - 257,000 Deferred compensation related to option grants..................... (140,625) - - Amortization of deferred compensation... 13,070 - 13,070 Net loss................................ - (3,532,971) (3,532,971) ============== ============= ============ Balance at June 30, 1999 (unaudited).... $ (127,555) $ (10,325,975) $ 10,330,105 ============== ============= ============
See accompanying notes. F-5 VASCULAR SOLUTIONS, INC. STATEMENTS OF CASH FLOWS
Year Ended December 31, Six Months Ended June 30, ---------------------------------------- ---------------------------------------- 1997 1998 1998 1999 ------------------- ------------------ ------------------- ----------------- Operating activities (unaudited) Net loss...................................... $(1,651,818) $(5,141,186) $(2,044,573) $(3,532,971) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation................................ 12,832 154,272 55,747 113,471 Value of options granted for services....... 25,440 78,400 - 13,360 Value of warrant granted related to supply agreement........................ - - - 257,000 Deferred compensation expense............... - - - 13,070 Changes in operating assets and liabilities: Accounts receivable......................... - (125,000) (98,250) (158,000) Inventories................................. (59,710) (259,101) (86,463) (156,735) Prepaid expenses............................ (15,110) (38,064) (16,377) (11,656) Accounts payable............................ 327,583 (53,767) (4,904) (8,983) Accrued clinical trial costs................ - 140,705 - (140,705) Accrued expenses............................ 15,778 30,540 15,631 32,913 ----------- ----------- ----------- ----------- Net cash used in operating activities...... (1,345,005) (5,213,201) (2,179,189) (3,579,236) Investing activities Purchase of property and equipment............ (197,758) (581,923) (493,996) (150,280) ----------- ----------- ----------- ----------- Net cash used in investing activities...... (197,758) (581,923) (493,996) (150,280) Financing activities Net proceeds from sale of common stock........ 3,869,073 380,000 380,000 - Net proceeds from exercise of stock options... 10,500 32,550 22,550 3,033,870 Net proceeds from sale of preferred stock..... 4,960,954 7,980,497 - - ----------- ----------- ----------- ----------- Net cash provided by financing activities.. 8,840,527 8,393,047 402,550 3,033,870 ----------- ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents............................... 7,297,764 2,597,923 (2,270,635) (695,646) Cash and cash equivalents at beginning of period....................................... 1,366 7,299,130 7,299,130 9,897,053 ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period.... $ 7,299,130 $ 9,897,053 $ 5,028,495 $ 9,201,407 =========== =========== =========== ===========
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. Prior to 1998, the Company was considered to be a development stage company. 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, ---------------------------------- 1997 1998 ----------------- ------------- Raw materials................... $ 59,710 $ 273,027 Finished goods.................. - 45,784 ----------------- ------------- $ 59,710 $ 318,811 ================= =============
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 F-7 VASCULAR SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 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. 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 June 30, 1999. 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. Three customers accounted 64% of total accounts receivable as of June 30, 1999 (unaudited). The Company has not incurred credit losses to date, and therefore has not provided a reserve for potential losses. Revenues from two customers represented 81% of total net sales for the year ended December 31, 1998. Revenues from four customers represented 78% of total net sales for the six months ended June 30, 1999 (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. Pro Forma Net Loss Per Share Pro forma net loss per share for the year ended December 31, 1998 and the six months ended June 30, 1999 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, 1998, or at the date of original issuance, if later. The resulting pro forma adjustment F-8 VASCULAR SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) includes an increase in the weighted average shares used to compute basic and diluted net loss per share of approximately 2,107,154 shares for the year ended December 31, 1998 and 3,777,777 shares for the six months ended June 30, 1999. The pro forma effects of these transactions are unaudited. Interim Financial Statements The interim financial statements for the six months ended June 30, 1998 and 1999, 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, --------------------------------------- 1997 1998 ----------------- ----------------- Property and equipment: Manufacturing equipment................ $ 64,866 $ 393,565 Office and computer equipment.......... 78,892 175,584 Furniture and fixtures................. 47,878 85,623 Leasehold improvements................. - 67,234 Research and development equipment..... 6,122 57,675 ----------------- ----------------- 197,758 779,681 Less accumulated depreciation.......... (12,832) (167,104) ----------------- ----------------- Net property and equipment........... $ 184,926 $ 612,577 ================= =================
4. Leases In February 1998, the Company entered into an operating lease agreement for a 16,700 square foot office and manufacturing facility, which expires in March 2003. 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 December 1998. Rent expense related to the operating leases was approximately $36,600 and $152,300 for the years ended December 31, 1997 and 1998, 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. F-9 VASCULAR SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Future minimum lease commitments under the existing operating lease as of December 31, 1998 are as follows: 1999............................... $ 95,232 2000............................... 98,868 2001............................... 100,080 2002............................... 100,080 2003............................... 25,020 ----------- $ 419,280 ===========
5. Income Taxes At December 31, 1998, the Company had net operating loss carryforwards of $5,615,000 for federal income tax purposes that are available to offset future taxable income and begin to expire in the year 2013. At December 31, 1998, the Company also had federal and Minnesota research and development tax credit carryforwards of $306,300 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, ----------------------------------------- 1997 1998 ----------------- -------------------- Deferred tax assets: Net operating loss carryforwards....................... $ 571,500 $ 2,245,800 Tax credit carryforwards............................... - 306,300 Depreciation and amortization.......................... 71,400 328,700 Accrued compensation................................... 13,600 52,800 ----------------- -------------------- 656,500 2,933,600 Less valuation allowances.............................. (656,500) (2,933,600) ----------------- -------------------- Net deferred taxes.................................. $ - $ - ================= ====================
Reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows:
1997 1998 ----------------- -------------------- Tax at statutory rate.................................... 34.0% 34.0% State income taxes....................................... 6.0 6.0 Impact of net operating loss carryforward................ (40.0) (40.0) ----------------- -------------------- Effective income tax rate................................ --% --% ================= ====================
6. Common Stock and Warrants 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 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. On December 31, 1998, the Company had 168,000 warrants outstanding at a weighted average exercise price of $2.11 per share. 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 as research and development expense during the six months ended June 30, 1999. F-10 VASCULAR SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 7. Preferred Stock 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 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, 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 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 preferred stock investors (the "Investor"). The Company shall have the right to sell and the Investor agrees 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. On June 30, 1999, the Company exercised its right and sold to the Investor 600,000 shares of common stock at $5.00 per share. Also, the Investor shall have the right to buy and the Company agrees to sell, up to $3,000,000 of common stock at $5.00 or $6.00 per share based on the Company attaining certain milestones. The right of the Investor to purchase common stock under the Agreement expires upon the earlier of December 31, 2000 or the effective date of a registration statement for a public offering of securities of the Company as specified in the Agreement. Additionally, the Investor has the right to buy from the Company, and the Company agrees 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 Investor's right to give notice to the Company expires on December 31, 2000. As of December 31, 1998, the Company had reserved an aggregate of 1,985,715 shares of common stock for future issuance pursuant to the Agreement. 8. 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, 1998, the Company reserved 900,000 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 F-11 VASCULAR SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) stock appreciation rights; restricted stock and other stock based awards. The incentive stock options vest monthly over four years of continued employment and non-qualified stock options generally vest monthly over two years. Option activity is summarized as follows:
Plan Options Outstanding --------------------------------------------------- Shares Weighted Available Non- Average Exercise for Grant Incentive Qualified Price Per Share ------------- ------------ --------------- ---------------- Balance at December 31, 1996.... - - - $ - Shares reserved................ 500,000 - - - Granted........................ (456,011) 371,211 84,800 1.71 Exercised...................... - (7,000) - 1.50 Canceled....................... 47,600 (47,600) - 1.50 ------------- ------------ --------------- Balance at December 31, 1997.... 91,589 316,611 84,800 1.74 Shares reserved................ 400,000 - - - Granted........................ (259,500) 217,000 42,500 3.01 Exercised...................... - (19,700) - 1.65 Canceled....................... 108,080 (108,080) - 1.84 ------------- ------------ --------------- Balance at December 31, 1998.... 340,169 405,831 127,300 2.34 Granted....................... (213,000) 205,000 8,000 3.46 Exercised..................... - (10,440) (3,000) 2.52 Canceled...................... 56,160 (56,160) - 2.48 ------------- ------------ --------------- Balance at June 30, 1999 (unaudited).................. 183,329 544,231 132,300 $ 2.67 ============= ============ =============== Exercisable at December 31, 1997................. 39,594 29,000 $ 1.64 Exercisable at December 31, 1998................. 104,545 77,500 $ 2.03 Exercisable at June 30, 1999..................... 146,890 93,300 $ 2.25
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 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 the six months ended June 30, 1999:
Year Ended December 31, Six Months ------------------------------------------ Ended June 30, 1999 1997 1998 ------------------- ------------------ -------------- (unaudited) Net loss: As reported................................................. $ (1,651,818) $ (5,141,186) $ (3,532,971) Pro forma................................................... (1,696,141) (5,306,547) (3,633,585) Basic and diluted net loss per share: As reported................................................. $ (.62) $ (1.40) $ (.95) Pro forma................................................... (.64) (1.45) (.98)
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 with the following weighted average assumptions used for grants in 1997, 1998 and the six months ended June 30, 1999, respectively, risk- free interest rate of 5.02%, 4.78% and 5.36%, no expected dividend yield, expected life of seven years and expected volatility of .70, .62 and .67. The weighted average fair value of options granted during 1997, 1998 and the six months ended June 30, 1999 was $1.21, $1.97 and $2.24 per share, respectively. Options issued during 1997, 1998 and the six months ended June 30, 1999, which remain outstanding at December 31, 1997, 1998 and June 30, 1999, have a weighted average exercise price of $1.74, $2.34 and $2.67 per share, respectively, and a weighted average remaining contractual life of 9.0, 8.5 and 8.5 years, respectively. As of December 31, 1998, the range of options outstanding was 280,011 at $1.50 to $2.00 per share and 253,120 at $3.00 to $3.25 per share. As of June 30, 1999, the range of options outstanding was 248,811 shares at $1.50 to $2.00 per share, 402,720 shares at $3.00 to $3.25 per share and 25,000 shares at $5.00 per share. F-12 VASCULAR SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) For the years ended December 31, 1997 and 1998, the Company recorded compensation expense of $25,440 and $78,400 in connection with non-qualified stock options granted to board of directors members, medical advisory board members and outside consultants. 9. 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. Employer contributions are made solely at the Company's discretion. No employer contributions were made for the year ended December 31, 1998. 10. Acquisition of Technology and Patents In February 1997, the Company acquired all rights, title and interest in the Duett sealing device, including all issued and pending patents, in exchange for $150,000 paid to the inventor, who is a founder of the Company. In addition, the Company agreed to assume the obligation to pay $40,000 to an unaffiliated third party for certain prior development work related to the Duett sealing device. The acquisition resulted in the Company recording an expense of $190,000 during the year ended December 31, 1997 related to in-process research and development of the Duett sealing device. Beyond the foregoing, the Company incurred no additional payments or obligations related to the acquisition of the Duett sealing device. 11. 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 year ended December 31, 1998: German distributor.......................... 65.0% Austrian distributor........................ 15.8% The Company performs ongoing credit evaluations of its customers but does not require collateral. There have been no losses on customer receivables. 12. 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. 13. Subsequent Event (unaudited) In July 1999, the Company was named as a defendant in a patent infringement lawsuit brought by a competitor. The compliant requests a declaratory 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. The Company believes the claim is without merit and intends to defend the lawsuit vigorously. On August 12, 1999, the Company filed our answer to this lawsuit and brought a counterclaim alleging unfair competition and tortious interference. On August 20, 1999, the Company moved for summary judgment to dismiss Datascope's claims. It is currently not possible to predict the outcome of the lawsuit or to estimate the amount or range of potential loss, if any. F-13 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. - -------------------------------------------------------------------------------- You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that which is set forth in this prospectus. We are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of the prospectus or of any sale of common stock. ______________________ TABLE OF CONTENTS Page ---- Prospectus Summary............................. 1 Risks Factors.................................. 4 Forward-Looking Statements..................... 14 Trademarks..................................... 14 Use of Proceeds................................ 15 Dividend Policy................................ 15 Capitalization................................. 16 Dilution....................................... 17 Selected Financial Data........................ 18 Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 19 Business....................................... 25 Management..................................... 38 Certain Transactions........................... 45 Principal Shareholders......................... 46 Description of Capital Stock................... 48 Shares Eligible for Future Sale................ 51 Underwriting................................... 53 Legal Matters.................................. 55 Experts........................................ 55 Where You Can Find More Information.................................. 55 Index to Financial Statements.................. F-1 Until October ___, 1999 (25 days after the date of this prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 2,675,000 Shares [LOGO OF VASCULAR SOLUTIONS] Common Stock _______________ PROSPECTUS September _, 1999 _______________ William Blair & Company Dain Rauscher Wessels a division of Dain Rauscher Incorporated Stephens Inc. - -------------------------------------------------------------------------------- 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. 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 employees, consultants, directors and other individuals providing services to the II-1 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 various 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 various 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. The put and option agreement also gives Stephens Vascular Options the right to buy from the Company up to $3,000,000 of common stock at $5.00 or $6.00 per share based on the Company achieving certain milestones. Stephens Vascular Options' right expires upon the earlier of December 31, 2000 or the effective date of a registration statement for a public offering of the Company. In addition, under the put and option agreement, Stephens Vascular Options has the right to purchase up to $2,000,000 of common stock at $7.00 or $8.00 per share based on the Company attaining certain milestones. As an alternative to exercising the option, Stephens Vascular Options has the right to convert the option into shares of common stock representing the net value of the option. This option expires on December 31, 2000. 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. II-2 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, as currently in effect 3.2* Bylaws of the Company, as currently in effect 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. 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 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. II-3 (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. 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-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 1 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 September 3, 1999. VASCULAR SOLUTIONS, INC. By: /s/ Howard Root ----------------------------------- Howard Root Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement on Form S-1 has been signed by the following persons in the capacities indicated on September 3, 1999. Signature Title --------- ----- /s/ Howard Root Chief Executive Officer - ------------------------------- Howard Root and Director (principal executive officer) /s/ David Christofferson Chief Financial Officer - ------------------------------- David Christofferson (principal financial officer and principal accounting officer) * Director - ------------------------------- Gary Gershony * Director - ------------------------------- Gerard Langeler * Director - ------------------------------- Gabriel Vegh * Director - ------------------------------- Daniel Sullivan * Director - ------------------------------- James Jacoby, Jr. *By /s/ Howard Root ---------------------------- Howard Root Attorney-in-Fact II-5 EXHIBIT INDEX Number Description - ------ ----------- 1.1* Form of Underwriting Agreement 3.1* Articles of Incorporation of the Company, as currently in effect 3.2* Bylaws of the Company, as currently in effect 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. 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. II-6 EX-4.1 2 SPECIMEN OF COMMON STOCK CERTIFICATE EXHIBIT 4.1 NUMBER SHARES See reverse side for certain definitions CUSIP 92231M 10 9 [LOGO] INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA THIS CERTIFIES that is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, OF THE PAR VALUE OF $.01 PER SHARE, VASCULAR SOLUTIONS, INC. transferable on the books of the Corporation by the holder hereof in person or by attorney upon surrender of this certificate properly endorsed. This certificate is not valid unless countersigned by the Transfer Agent and Registrar. IN WITNESS WHEREOF the said Corporation has caused this certificate to be signed by the facsimile signatures of its duly authorized officers. Dated: /s/ David Christofferson /s/ Howard C. Root SECRETARY CHIEF EXECUTIVE OFFICER THE COMPANY IS AUTHORIZED TO ISSUE SHARES OF MORE THAN ONE CLASS OR SERIES. THE BOARD OF DIRECTORS OF THE COMPANY HAS THE AUTHORITY TO DETERMINE THE RELATIVE RIGHTS AND PREFERENCES OF EACH SUCH CLASS OR SERIES. THE COMPANY WILL FURNISH TO ANY SHAREHOLDER, UPON REQUEST MADE OF THE COMPANY AND WITHOUT CHARGE, A FULL STATEMENT OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS, AND RELATIVE RIGHTS OF THE SHARES OF ANY SUCH CLASS OR SERIES SO FAR AS THEY HAVE BEEN DETERMINED BY THE BOARD OF DIRECTORS. -------------------------- The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM --as tenants in common TEN ENT --as tenants by the entireties JT TEN --as joint tenants with right of survivorship and not as tenants in common UTMA GIFT MIN ACT--........Custodian........ (Cust) (Minor) under Uniform Transfer to Minors Act............ (State) Additional abbreviations may also be used though not in the above list. For value received ______________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - --------------------------------------- - --------------------------------------- -------------------------------------- - -------------------------------------------------------------------------------- PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ________________________________________________________________________ Shares of capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _______________________________________________________________________ Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated ---------------------------------------------- ---------------------------------------------- NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. SIGNATURE GUARANTEED EX-4.7 3 COMMON STOCK WARRANT Exhibit 4.7 THIS WARRANT (AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES STATUTE, OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE THEREUNDER AS EVIDENCED BY AN OPINION OF COUNSEL OR NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION, IN EITHER CASE IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY COMMON STOCK WARRANT To Purchase 100,000 Shares of Common Stock of Vascular Solutions, Inc. June 10, 1999 THIS CERTIFIES THAT, for value received, Jones Pharma Incorporated, a Delaware corporation, or its registered assigns (the "Holder"), is entitled to subscribe for and purchase from Vascular Solutions, Inc. (the Company) at any time after the date hereof to and including June 10, 2004, up to One Hundred Thousand (100,000) fully paid and nonassessable shares (the "Shares") of the Company's Common Stock, $.01 par value, at a price of $5.00 per Share (the "Warrant Price"), subject to the provisions and upon the terms and conditions hereinafter set forth. 1. Term; Transferability. The rights represented by this Warrant may be --------------------- exercised by the holder hereof, in whole or in part (but not as to a fractional share of Common Stock), at any time and from time to time, by written notice of exercise delivered to the Company and by the surrender of this Warrant at the principal office of the Company. This Warrant may be transferred by the Holder subject to the restrictions contained in Section 7 hereof. 2. Issuance of Shares. The rights evidenced by this Warrant shall be ------------------ deemed to be exercised as of the close of business on the date upon which this Warrant, together with notice of exercise and any applicable payment of any consideration due the Company, shall have been received by the Company. Certificates for Shares of stock acquired by the Holder upon exercise of this Warrant shall be delivered to or as directed by the Holder within a reasonable time, not exceeding ten (10) business days after the rights represented by this Warrant shall have been so exercised and unless this Warrant has expired, a new Warrant representing the number of shares, if any, with respect to which this Warrant shall not then have been exercised shall also be delivered to the holder hereof within such time. 3. Method of Exercise. ------------------ 3.1. Standard Method. The purchase right represented by this Warrant may --------------- be exercised by the Holder, in whole or in part and from time to time by the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A duly executed) at the principal office of the Company and by the payment to the Company, by certified or bank check or by wire transfer, of an amount equal to the then applicable Warrant Price per share multiplied by the number of Shares then being purchased. 3.2 Net Issue Exercise. ------------------ (a) In lieu of exercising this Warrant, the Holder may elect to receive Shares equal to the value of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with notice of such election in which event the Company shall issue to Holder a number of shares of the Company's Common Stock computed using the following formula: X= Y(A-B) ------ A Where X = the number of Shares to be issued to Holder. Y = the number of Shares purchasable under this Warrant, or if the entire Warrant is not being exercised on a net issue basis, the number of Shares the holder is electing to apply towards the net issue exercise right set forth in this Section 3.2. A = the fair market value of one Share. B = the Warrant Price (as adjusted to the date of such calculations). (b) For purposes of this Section, fair market value of one share of the Company's Common Stock shall be based on the average of the closing per share bid and asked prices of the Company's Common Stock quoted in the Over-The- Counter Market Summary or the closing price quoted on Nasdaq or any exchange on which the Common Stock is listed, whichever is applicable, as published in the Wall Street Journal for the ten trading days prior to the date of determination - ------------------- of fair market value. If the Common Stock is not traded Over-The-Counter or on Nasdaq or an exchange, the fair market value of the Company's Common Stock shall be the price per share which the Company could obtain from a willing buyer for shares sold by the Company from authorized but unissued shares, as such price shall be agreed by the Company and the Holder, and if they fail to agree within 15 days after the exercise of this Warrant, then at a price equal to the price used in the Company's most recent sale of Common Stock to an unaffiliated third party. 2 3.3 Automatic Exercise. If the Company has publicly traded Common Stock ------------------ as of the expiration date of this Warrant, this Warrant shall be deemed automatically exercised pursuant to Section 3.2 above (even if not surrendered) immediately prior to its expiration. 4. Covenants of Company. The Company covenants and agrees that all Shares -------------------- which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized and issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issue thereof. The Company further covenants and agrees that, during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant. 5. Anti-Dilution Adjustments. The number and kind of securities ------------------------- purchasable upon the exercise of the Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: (a) Recapitalization. If any capital reorganization or reclassification of ---------------- the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Stock of the Company shall be entitled to receive stock, securities or assets with respect to or in exchange for such Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the Holder hereof shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in this Warrant and in lieu of the shares of Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the holder of this Warrant to the end that the provisions hereof (including without limitation provisions for adjustments of the Warrant purchase price and of the number of shares purchasable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Company shall not effect any such consolidation, merger or sale unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger, or the corporation purchasing such assets, shall assume by operation of law or written instrument, the obligation to deliver to the Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase. Notice of such assumption shall be promptly mailed to the registered holder hereof at the last address of such holder appearing on the books of the Company. Notwithstanding any language to the contrary set forth in this paragraph 5(a), if an occurrence or event described herein shall take place in which the shareholders of the Company receive solely cash for their shares of Common Stock of the 3 Company, either pursuant to a merger or consolidation or in liquidation of the Company, the Holder shall be deemed to have elected to exercise this Warrant in accordance with paragraph 3.2 above as of the effective date of such event and the Company or its successor shall be obligated to pay to the Holder in cash the resulting value of this Warrant. (b) Stock Dividend or Split. In case the Company shall at any time ----------------------- hereafter subdivide or combine the outstanding shares of Common Stock or declare a dividend payable in Common Stock, the number of shares to which this Warrant relates and the Warrant Price shall each be adjusted. First the number of Shares to which this Warrant relates shall be redetermined by multiplying the number of Shares in effect immediately prior to the record date for such subdivision, combination or dividend payable in common stock by a factor equal to subdivision or combination (e.g. 2.0 in the case of a two-for-one split or 100% dividend or 1.10 in the case of a 10% stock dividend). The adjusted Warrant Price shall then be determined by dividing the redetermined number of Shares into the aggregate exercise price of all Shares purchasable by this Warrant as in effect immediately prior to such subdivision, combination or dividend. (c) No fractional shares of common stock shall result from any redetermination of the number of Shares to which this Warrant relates and any such fractional entitlement resulting from the foregoing formulae shall be increased to the next larger whole share. Any adjustment to the Warrant Price pursuant to the foregoing formulae shall be reduced to the nearest whole cent by eliminating any fraction of a cent. . (d) Upon any adjustment of the Warrant Price or number of Shares, then, and in each such case, the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the Holder of this Warrant at the address of such Holder as shown on the books of the Company, which notice shall state the Warrant Price resulting from such adjustment and the increase or decrease or other change, if any, in the number of Shares purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (e) If the Company shall, at any time while this Warrant is outstanding, declare or otherwise authorize any distribution in respect of its Common Stock other than a dividend payable in cash or in shares of such Common Stock, the Company shall give notice of such declaration or authorization to the Holder at least ten business days prior to the record date for determining holders of the Common Stock entitled to participate therein. In addition, in the event that any such distribution to shareholders consists of rights to purchase from the Company shares of the Common Stock at a discount from the fair market value thereof, the Company agrees to issue to the Holder similar rights covering a number of shares of the Company's Common Stock equal to the number of rights the Holder would have received had the Warrant been exercised in full in accordance with Section 3.1 as of the record date for such distribution. (f) If any event occurs as to which in the good faith determination of the Board of Directors of the Company the other provisions of this paragraph 5 are not strictly applicable or if strictly applicable would not fairly protect the purchase rights of the Holder of this Warrant or of common stock in accordance with the essential intent and principles of such provisions, then the 4 Board of Directors shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such purchase rights as aforesaid. 6. No Shareholder Rights. No Holder, as such, shall be entitled to vote --------------------- or receive dividends or be deemed the holder of Shares or any other securities of the Company which may at any time be issuable on the exercise thereof for any purpose, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. 7. Transfer of Warrant or Resale of Shares. In the event the Holder --------------------------------------- desires to transfer this Warrant, or any Shares issued upon the exercise hereof, the Holder shall provide the Company with a written notice describing the manner of such transfer and an opinion of counsel (reasonably acceptable to the Company) that the proposed transfer may be effected without registration or qualification (under any Federal or State law), whereupon such Holder shall be entitled to transfer this Warrant or to dispose of shares of Common Stock received upon the previous exercise hereof in accordance with the notice delivered by such holder to the Company; provided, that an appropriate legend -------- may be endorsed on this Warrant or the certificates for such shares respecting restrictions upon transfer thereof necessary or advisable in the opinion of counsel satisfactory to the Company to prevent further transfers which would be in violation of Section 5 of the Securities Act of 1933. Notwithstanding the foregoing, (i) for a period of 180 days following the commencement of the Company's initial public offering of securities (provided the initial public offering is declared effective by the Securities and Exchange Commission prior to December 31, 1999), without the prior written consent of the Company, the holder of this Warrant will not offer, sell, pledge, contract to sell or grant any option to purchase or otherwise dispose of or transfer this Warrant or any Shares, and (ii) the Company will issue certificates evidencing the Shares free of any restrictive legend at such time as the Holder is entitled to rely upon the provisions of clause (k) of Rule 144 under the Securities Act of 1933 (or any successor rule). 8. Financial Statements and Information. The Company shall deliver ------------------------------------ to the registered holder hereof (i) within 90 days after the end of the fiscal year of the Company, a consolidated balance sheet of the Company as of the end of such year and a consolidated statement of income, retained earnings and cash flows for such year, which year-end financial reports shall be in reasonable detail and certified by independent public accountants of nationally recognized standing selected by the Company and (ii) within 45 days after the end of each quarter other than the last quarter of the fiscal year, unaudited consolidated statements of income, retained earnings and cash flows for such quarter and a consolidated balance sheet as of the end of such quarter. If the Company has a class of securities registered under the Securities Exchange Act of 1934, the provisions of this Section 8 shall be satisfied by the delivery to the holder, within 90 days after the end of the Company's fiscal year, of a report on Form 10-K for such fiscal year, and with respect to the first three fiscal quarters in each fiscal year, within 45 days after the end of each such fiscal quarter, of a report on Form 10-Q for such fiscal quarter. 5 In addition, the Company shall deliver to the registered holder hereof any other information or data provided generally to the shareholders of the Company.. 9. Representations and Warranties. This Warrant is issued and delivered ------------------------------ on the basis of the following: 9.1 Authorization and Delivery. The Company represents that this Warrant -------------------------- has been duly authorized and executed by the Company and when delivered will be the valid and binding obligation of the Company enforceable in accordance with its terms; 9.2 No Inconsistency. The Company represents that the execution and ---------------- delivery of this Warrant are not, and the issuance of the Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company's Articles of Incorporation or Bylaws, do not and will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company, and do not and will not contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration with or the taking of any action in respect of or by, any Federal, state or local government authority or agency or other person. 9.3 Accredited Investor. The Holder represents (i) that it is as of ------------------- the date hereof, and will be as of the date of any exercise of this Warrant, an "accredited investor" as that term is defined and utilized in Regulation D under the Securities Act of 1933 and (ii) that it is not acquiring this Warrant with a view to the public distribution of the Warrant or the Shares. 10. Modification and Waiver. This Warrant and any provision hereof may be ----------------------- changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 11. Notices. Any notice, request or other document required or permitted ------- to be given or delivered to the holder hereof or the Company shall be delivered by facsimile where confirmation of receipt by the receiving party's receiver can be documented, or delivered by hand, or shall be sent by reputable overnight courier, certified or registered mail, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefore on the signature page of this Warrant. 12. Binding Effect on Successors. This Warrant shall be binding upon any ---------------------------- corporation succeeding the Company by merger or consolidation, and all of the obligations of the Company relating to the Shares issuable upon the exercise of this Warrant shall be as set forth in the Company's Articles of Incorporation and the Company's Bylaws (each as amended from time to time) and shall survive the exercise and termination of this Warrant and all of the covenants and agreements herein and in such other documents and instruments of the Company shall inure to the benefit of the successors and assigns of the holder hereof. The Company will, at the time of the exercise of this Warrant, in whole or in part, upon request of the holder hereof but at the Company's expense, acknowledge in writing its continuing obligation to the holder hereof in 6 respect of any rights to which the holder hereof shall continue to be entitled after such exercise in accordance with this Warrant; provided, that the failure -------- of the holder hereof to make any such request shall not affect the continuing obligation of the Company to the holder hereof in respect of such rights. 14. Lost Warrants or Stock Certificates. The Company covenants to the ----------------------------------- holder hereof that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant or any stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, or like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 15. Descriptive Headings. The descriptive headings of the several -------------------- paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 16. Governing Law. THIS WARRANT SHALL BE CONSTRUED AND ENFORCED IN ------------- ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF MINNESOTA. IN WITNESS WHEREOF, Vascular Solutions, Inc. and Jones Pharma Incorporated have caused this Warrant to be executed by its duly authorized officers and this Warrant to be dated as of June 10, 1999. VASCULAR SOLUTIONS, INC. By /s/ Howard C. Root ------------------------------- Howard C. Root Chief Executive Officer By /s/ Michael P. Nagel ------------------------------- Michael P. Nagel Secretary JONES PHARMA INCORPORATED By /s/ Dennis M. Jones, President ------------------------------------ 7 EXERCISE FORM (TO BE SIGNED ONLY UPON EXERCISE OF WARRANT) VASCULAR SOLUTIONS, INC. The undersigned, the holder of the within warrant, hereby irrevocably elects to exercise the purchase right represented by such warrant for, and to purchase hereunder ______________ shares of the Common Stock, $.01 par value, of Vascular Solutions, Inc. and herewith makes payment of $__________ therefor, and requests that the certificates for such shares be issued in the name of ______________________ and be delivered to _____________________________, whose address is _______________________________________________________________. Dated:____________________ ______________________________________________ (Signature must conform in all respects to the name of holder as specified on the face of the warrant) (Address) [Signature Guaranteed] (City - State - Zip) ASSIGNMENT FORM (TO BE SIGNED ONLY UPON TRANSFER OF WARRANT) For value received, the undersigned hereby sells, assigns and transfers unto _________________________ the right represented by the within warrant to purchase __________________ of the shares of the Common Stock, $.01 par value, of Vascular Solutions, Inc., to which the within warrant relates, and appoints ______________________ attorney to transfer said right on the books of Vascular Solutions, Inc., with full power of substitution in the premises. Dated:____________________ ______________________________________________ (Signature must conform in all respects to the name of holder as specified on the face of the warrant) (Address) [Signature Guaranteed] (City - State - Zip) In the presence of: EX-5.1 4 OPINION OF DORSEY & WHITNEY LLP EXHIBIT 5.1 [DORSEY & WHITNEY LETTERHEAD] Vascular Solutions, Inc. 2405 Xenium Lane North, Suite 200 Minneapolis, Minnesota 55441 Re: Vascular Solutions, Inc. Registration Statement on Form S-1 Ladies and Gentlemen: We have acted as counsel to Vascular Solutions, Inc., a Minnesota corporation (the "Company"), in connection with a Registration Statement on Form S-1 (the "Registration Statement") relating to the issuance and sale by the Company of up to 3,076,250 shares of common stock, $.01 par value per share (including 401,250 shares to be subject to the Underwriters' over-allotment option) (the "Common Stock"). The Common Stock will be issued pursuant to an Underwriting Agreement to be entered into among the Company and William Blair & Company, L.L.C., Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, and Stephens Inc., as representatives of the several underwriters named therein (the "Underwriters"). We have examined such documents and have reviewed such questions of law as we have considered necessary and appropriate for the purposes of our opinions set forth below. In rendering our opinions set forth below, we have assumed the authenticity of all documents submitted to us as originals, the genuineness of all signatures and the conformity to authentic originals of all documents submitted to us as copies. We have also assumed the legal capacity for all purposes relevant hereto of all natural persons and, with respect to all parties to agreements or instruments relevant hereto other than the Company, that such parties had the requisite power and authority (corporate or otherwise) to execute, deliver and perform such agreements or instruments, that such agreements or instruments have been duly authorized by all requisite action (corporate or otherwise), executed and delivered by such parties and that such agreements or instruments are the valid, binding and enforceable obligations of such parties. As to questions of fact material to our opinions, we have relied upon certificates of officers of the Company and of public officials. We have also assumed that the Common Stock will be sold for a price per share not less than the par value per share of the Common Stock, will be priced by the Pricing Committee established by the authorizing resolutions adopted by the Company's Board of Directors in accordance with such resolutions and will be issued and sold as described in the Registration Statement. Vascular Solutions, Inc. September 3, 1999 Page 2 Based on the foregoing, we are of the opinion that the shares of Common Stock to be sold by the Company pursuant to the Registration Statement have been duly authorized by all requisite corporate action and, upon issuance, delivery and payment therefor as described in the Registration Statement, will be validly issued, fully paid and nonassessable. Our opinions expressed above are limited to the laws of the State of Minnesota. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement, and to the reference to our firm under the caption "Legal Matters" in the Prospectus constituting part of the Registration Statement. Dated: September 3, 1999 Very truly yours, /s/ DORSEY & WHITNEY LLP TSH EX-10.9 5 PURCHASE AGREEMENT Exhibit 10.9 PURCHASE AGREEMENT THIS PURCHASE AGREEMENT ("Agreement") is entered into as of the 10th day of June, 1999 by and between GENTRAC, INC. ("Seller"), having its principal place of business at 2232 Evergreen Road, Middleton, WI 53562, and VASCULAR SOLUTIONS, INC. ("Buyer"), having a principal place of business at 2495 Xenium Lane, Minneapolis, MN 55441. RECITALS A. Seller is the manufacturer of a topical thrombin U.S.P. (bovine origin) product which it markets and sells under the trademark Thrombin-JMI (the "Trademark"). B. Buyer desires to purchase certain topical thrombin U.S.P. products from Seller and Seller is willing to sell said products to Buyer pursuant to the provisions set forth in this Agreement. NOW, THEREFORE, for good and valuable consideration, the parties agree as follows: 1. Purchase and Sale of Product. During the Term (as hereinafter defined) ---------------------------- of this Agreement, Seller agrees to sell and Buyer agrees to purchase, on the terms and conditions herein stated, Seller's topical thrombin U.S.P. product listed on Schedule 1 attached hereto (the "Product"). Buyer shall purchase the ---------- Product solely for inclusion and subsequent resale as part of its vascular sealing device known as Duett ("Buyer's Device"), and Buyer shall not sell the Product separately or in conjunction with another product or device or for any other use except with Seller's prior written consent. Buyer acknowledges that Buyer is not receiving any exclusive rights hereunder with respect to the Product and that Seller may sell, and will be selling, the Product to wholesale distributors and to other users of the Product. Nothing set forth in this Agreement shall in any way prevent or otherwise limit or restrict Seller's right to manufacture and sell Product to wholesale distributors or other users and resellers of the Product. 2. Product Specifications. The Product sold to Buyer hereunder shall meet ---------------------- the specifications listed on Schedule 1 attached hereto (the "Specifications") ---------- and shall be manufactured in accordance with applicable current Good Manufacturing Practices ("cGMP's") of the U.S. Food & Drug Administration (the "FDA") for the Product. Animal origin raw materials shall be sourced from USDA licensed facilities and a USDA certificate shall accompany all shipments of raw materials. If at any time during the Term of this Agreement, Seller finds it necessary or desirable to change the formulation, manufacturing processes or procedures or source of animal origin raw materials for use of the Product, or to effect any other change relating to the Product which could, to Seller's knowledge, reasonably require notification to, or approval of, the FDA or any international regulatory agency for the Buyer's Device, Seller shall not effect such change with respect to the Product until Seller notifies Buyer 1 of such change. 3. Purchase Price. (a) The initial price of the Product shall be as set -------------- forth in Schedule 2 attached hereto. Seller shall invoice Buyer on each shipment ---------- of Product, and payment shall be made in all cases net 30 days from the date of shipment. Any invoiced amounts not paid when due shall accrue a service charge of 1.5% per month or the maximum rate allowed by law, whichever is lower. The price of the Product does not include, and Buyer shall also pay for, all freight charges and any and all excise, sales, use or like taxes resulting from the sale of the Product to Buyer. (b) Seller shall have the right, at any and all times during the Term of this Agreement, to increase the price of the Product charged to Buyer (the "Buyer's Price") by the increase in Seller's manufacturing costs (raw materials, labor and overhead) associated with the manufacturing of the Product upon giving Buyer notice at least thirty (30) days prior to the effective date of the increase in the Buyer's Price. Furthermore, Seller shall also have the right to increase the Buyer's Price on an annual basis at the end of each 12 month period following September 1, 1999 (each 12 month period hereinafter referred to as a "Contract Year") by the same percentage increase(s) established by Seller during the immediately preceding 12 month period in the wholesale price of the Product charged to Seller's wholesale purchasers, less any increase(s) previously made by Seller to the Buyer's Price pursuant to the first sentence of this Section 3(b) during such 12 month period. Seller shall effect such annual increase in the Buyer's Price by giving written notice thereof to Buyer at any time prior to the Contract Year with respect to which the annual increase is to be effective. 4. Delivery, Shipping, Title. ------------------------- (a) Delivery. Time is of the essence with respect to delivery -------- of the Product hereunder. All purchases shall be FOB Seller's facility in Middleton, Wisconsin. If Seller fails to deliver the Product by the scheduled delivery date for reasons other than the fault of Buyer, Buyer reserves the right to cancel all or any portion of the purchase order. (b) Shipping. All shipments will be shipped by Seller freight -------- prepaid and Buyer will reimburse Seller for the actual costs of such shipping. All shipments will be made as directed by Seller by appropriate and reasonable method of transportation in keeping with the requirements of the Product and the particular delivery date. Packaging of shipments shall be in accordance with Seller's customary practices unless otherwise agreed to by Seller. No partial shipments (that is, in amounts less than that requested by Buyer in accordance with the provisions of Section 6 hereof) shall be made without Buyer's written consent. (c) Title. Seller shall retain title and bear the risk of loss ----- until such time as a shipment has been delivered to the carrier designated by Buyer or, if no such designation has occurred, Seller's designated carrier. Upon such delivery to the carrier, title and risk of loss shall pass to Buyer. 2 5. Quality Standards. Buyer shall have access to Seller's Quality ----------------- Assurance SOP's for the Product, with proprietary information subject to reasonable protection, and to all quality systems employed by Seller in connection with the manufacture and packaging of the Product. In addition, Seller shall provide the documentation necessary to allow Buyer to reference Seller's relevant Master File(s) in any submissions with the FDA and any international regulatory filings or approvals in connection with the approval of the Buyer's Device. Buyer shall provide Seller with a copy of any proposed filing or submission with the FDA or any international regulatory agency with respect to the Buyer's Device which includes Seller's proprietary information or other information from Seller's Master Files or Quality Assurance SOP's, and Buyer shall receive Seller's approval with respect to such filing or submission prior to filing or submitting the material to the FDA or international regulatory agency. All of Seller's proprietary information with respect to the Product shall be subject to reasonable protection and Buyer shall comply with Seller's rules and procedures with respect thereto. Seller shall, at no cost or expense to Seller, cooperate with Buyer's reasonable requests for information and assistance with respect to all FDA and international regulatory filings, audits and approvals associated with the Product being sold to Buyer hereunder, and Seller shall, at no cost or expense to Seller, reasonably cooperate with Buyer to address any cGMP deficiencies noted during any such FDA audit associated with the Product being sold to Buyer hereunder. Buyer agrees to handle, store and distribute the Product in a manner consistent with the conditions stated on the Product labeling and the conditions stated in Buyer's submission(s) to the FDA and/or foreign regulatory agencies. Nothing set forth herein shall require Seller to provide Buyer with any information pertaining to Seller's batch records of the Product or with any information pertaining to the proprietary processes utilized in manufacturing the Product, all such information being deemed trade secrets of Seller. Buyer and Seller shall execute and keep on file, a contract manufacturing agreement in the form of Schedule 3 ---------- attached hereto, or such other form as Seller may determine is required by the U. S. Center for Biologics Evaluation and Research ("CBER"). 6. Ordering Procedures. ------------------- (a) Purchase Orders. Sales of the Product will be made pursuant --------------- to purchase orders issued by Buyer and accepted by Seller, specifying quantities desired and delivery dates. The Buyer's Prices for the Product shall be those in effect at the time that the purchase order is received by Seller. Each purchase order must be based on full "batch sizes" as set forth in Schedule 4 attached ---------- hereto; however, multiple shipping dates may be requested for individual purchase orders. Purchase orders which are not based on full batch sizes will be deemed automatically rejected. Buyer shall be entitled to use its standard form of purchase order; provided, however, none of the terms or conditions of Buyer's purchase order shall be applicable except those specifying quantity ordered, delivery location(s), delivery schedule and invoice information, all of which must be in accordance with the provisions of this Agreement. In the event of any conflict between the terms of any purchase order and the terms of this Agreement, the terms of this Agreement shall control. (b) Order Forecasts. Upon the signing of this Agreement, and --------------- continuing on or before the 1st day of each month during the Term of this Agreement, Buyer will provide Seller 3 with a rolling forecast (the "Forecast") of its estimated requirements for Product for each of the next 24 calendar months during the Term of this Agreement. The initial Forecast shall be for the 24 month period commencing September 1, 1999. The Forecasts shall be provided by Buyer to Seller pursuant to the forecast form set forth in Schedule 5 attached hereto , unless otherwise ---------- agreed to in writing by Seller. Each such Forecast will be done in good faith but will not bind Buyer to the purchase of any specific amount of Product, except that (i) Buyer shall be required to purchase the Forecast amount for each of the first four (4) calendar months listed on the 24-month Forecast, and (ii) the quantity purchased shall be subject to the limitations set forth in paragraph (e) of this Section 6. There will be no variances in the amounts purchased by Buyer during the first four months from the applicable Forecast without the prior written consent of Seller. Upon receipt of each Forecast, Seller will review the Forecast and use reasonable efforts to notify Buyer whether Seller reasonably believes that it will be able to manufacture and sell to Buyer the quantities of Product shown on the Forecast, based upon Seller's capacity and its other orders for Product. In the event that Seller reasonably believes that it will be unable to manufacture and sell Product to Seller as per the Forecast, Seller will promptly notify Buyer of such and Buyer will revise its Forecast and corresponding purchase orders accordingly. (c) Amount and Delivery Dates. Buyer shall issue its purchase ------------------------- order(s) at the same time that it delivers its monthly Forecast to Seller, requesting delivery no sooner than sixty (60) days from the date of the receipt of the purchase order by Seller. Each purchase order shall be in accordance with the provisions and subject to the limitations of Section 6 of this Agreement. (d) Minimum Purchases. Buyer agrees to purchase a minimum ----------------- amount of Product each Contract Year as set forth in Schedule 6 attached hereto ---------- (the "Minimum Requirements"). In the event that Buyer fails to purchase the Minimum Requirements as herein set forth, Seller shall have the right, in addition to all other rights and remedies available at law or equity, to terminate this Agreement pursuant to Section 13 of this Agreement. (e) Limitations on Quantity of Product Ordered. Notwithstanding ------------------------------------------ anything in this Agreement to the contrary, in the event that Seller is not able (due to force majeure, lack of capacity, or otherwise) to manufacture sufficient Product to fill purchase orders from its wholesale distributors, Buyer and others, Seller shall have the right to first fill the purchase orders of its wholesale distributors and any Product remaining thereafter will be divided pro rata (based on average monthly purchases during the prior six month period) among Buyer and Seller's other customers based upon binding orders for Product that Seller has, at that time, received. Seller shall have no liability or obligation to Buyer in the event that Seller is unable to fill Buyer's purchase orders as requested by Buyer. 7. Inspection and Acceptance. Upon receipt by Buyer of a shipment of ------------------------- Product, Buyer shall have the right, at its sole cost and expense, to inspect each Product shipped (pursuant only to the tests and in accordance with the inspection parameters set forth in Schedule 7 attached hereto) in order to ---------- determine whether the Product complies with the Specifications. If Buyer's inspection indicates that the Product fails to comply with the Specifications, then Buyer shall 4 immediately provide Seller with notice ("Rejection Notice") of such together with a written explanation of the reason(s) for such failure. Upon receipt of the Rejection Notice, Seller shall have thirty (30) days to conduct its own inspection of the Product and if Seller's testing confirms that the Product fails to conform to the Specifications, then Buyer's sole remedy shall be for Seller, at Seller's sole discretion, to either deliver new Product to Buyer, or issue a credit or refund for the Buyer's Price of such rejected Product together with reimbursement of actual shipping costs to and from Buyer. Any such Product which Seller confirms does not comply with the Specifications shall be returned to Seller. If Seller's testing indicates that the Product does comply with the Specifications, then Buyer will accept and pay for the Product subject to its dispute resolution rights set forth in Section 15 of this Agreement. For purposes of this Agreement, Buyer shall be deemed to have accepted all Product shipped which is not affirmatively rejected by Buyer by means of a Rejection Notice to Seller within twenty (20) working days of receipt of such Product. 8. Covenants and Warranties. (a) Seller warrants that it has the right to ------------------------ sell the Product and that the Product, when sold by Seller, will be free and clear from all liens and encumbrances. Seller warrants that the Product will meet the agreed Specifications and will be free from defects in material and workmanship at the time of shipment from Seller's facility. Seller further warrants that the manufacture of the Product will be in conformity with cGMP's for biologicals, and that no Product delivered by Seller under this Agreement will be adulterated or misbranded within the meaning of the United States Food, Drug and Cosmetic Act. No substitution of Product may be made by Seller without the express prior written consent of Buyer. Seller's sole responsibility for its breach of any representation or warranty hereunder will be to replace the Product or issue a full credit or refund respecting any Product failing to meet this warranty, and Seller shall not be responsible for any special, exemplary, indirect, incidental or consequential damages arising from its breach of said warranty. THE FOREGOING SHALL BE THE SOLE AND EXCLUSIVE REMEDY WHETHER IN CONTRACT, TORT OR OTHERWISE. THERE ARE NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, EXCEPT AS SPECIFICALLY SET FORTH IN THIS SECTION 8. (b) During the Term of this Agreement, Buyer shall maintain product liability insurance covering the use of Buyer's Device in the minimum amount of + and with an insurance company reasonably acceptable to Seller. Seller shall be named as an additional insured on said insurance policies and Buyer shall provide Seller with a certificate of insurance evidencing such coverage. Buyer covenants and agrees (i) not to alter or manipulate the Product in any way, (ii) not to adulterate or misbrand the Product within the meaning of the United States Food, Drug and Cosmetic Act, and (iii) to comply with all foreign, Federal, state and local laws, statutes, rules, regulations and ordinances of any kind as the same may affect Buyer's use, storage, handling, distribution or sale of the Product. + Denotes confidential information that has been omitted and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as Amended. 5 9. Indemnification. --------------- (a) Buyer's Indemnification. Buyer acknowledges that Seller ----------------------- will have no control over the uses to which the Product will be devoted with Buyer's Device, or over the circumstances of the Product's use, storage, handling, distribution or application after shipment from Seller's facility. As such, Buyer will assume full responsibility with respect to the uses to which the Product will be devoted with Buyer's Device and with respect to the use, storage, handling, distribution or application of the Product after shipment from Seller's facility, and it is mutually agreed that Seller assumes no liabilities of any kind with respect to the use by Buyer or by any third party of the Product in or with the Buyer's Device or with respect to the use, storage, handling, distribution or application of the Product after shipment from Seller's facility. Buyer agrees to indemnify, defend and hold harmless Seller, its successors, assigns, directors, officers, agents and employees, from and against any and all claims, losses, damages, liabilities, fines, penalties, costs and expenses, including without limitation, court costs and reasonable attorneys' fees (collectively, "Losses"), resulting from or arising out of (i) claims that Buyer's Device infringes on the patents, trade secrets or other intellectual property rights of others, (ii) any governmental or other regulatory actions (including without limitation, notification requirements and recalls) which are required with respect to the sale of the Product by Buyer outside of the United States, (iii) any violation(s) by Buyer of this Agreement or Buyer's covenants hereunder, or (iv) the use of the Product with Buyer's Device, or the design, manufacture, marketing, sale or use by Buyer of any vascular sealing device incorporating the Product, unless such Losses are the direct result of the Product failing to meet the agreed Specifications set forth herein at the time of shipment from Seller's facility. (b) Seller's Indemnification. Seller agrees to indemnify, ------------------------ defend and hold harmless Buyer, its successors, assigns, directors, officers, agents and employees, from and against any and all Losses resulting from or arising out of (i) the failure of the Product to meet the agreed Specifications at the time of shipment from Seller's facility, or (ii) a valid claim that the Product as shipped to Buyer infringes the patent, trade secrets or other intellectual property of any third party. (c) Indemnification Procedures. Promptly after receipt by a -------------------------- party hereto of notice of any claim which could give rise to a right to indemnification pursuant to this Section 9, such party (the "Indemnified Party") shall give the other party (the "Indemnifying Party") written notice describing the claim in reasonable detail. The failure of an Indemnified Party to give notice in the manner provided herein shall not relieve the Indemnifying Party of its obligations under this Section, except to the extent that such failure to give notice materially prejudices the Indemnifying Party's ability to defend such claim. The Indemnifying Party shall have the right, at its option, to compromise or defend, at its own expense and by its own counsel, any such matter involving the asserted liability of the party seeking such indemnification. If the Indemnifying Party undertakes to compromise or defend any such asserted liability, it shall promptly (and in any event not more than ten (10) days after receipt of the Indemnified Party's original notice) 6 notify the Indemnified Party in writing of its intention to do so, and the Indemnified Party shall cooperate fully with the Indemnifying Party and its counsel in the compromise of or defense against any such asserted liability. All reasonable costs and expenses incurred in connection with such cooperation shall be borne by the Indemnifying Party. If the Indemnifying Party elects not to compromise or defend the asserted liability, fails to notify the Indemnified Party of its election to compromise or defend as herein provided, fails to admit its obligation to indemnify under this Agreement with respect to the claim, or if the claim could result in the Indemnified Party becoming subject to injunctive relief or relief other than the payment of money damages that could materially adversely affect the ongoing business of the Indemnified Party in any manner, the Indemnified Party shall have the right, at its option, to pay, compromise or defend, by its own counsel, such asserted liability. The Indemnifying Party shall have the right to compromise any claim with respect to which it takes responsibility provided that such settlement or compromise does not involve an admission of liability on behalf of the Indemnified Party, does not require the Indemnified Party to take any action or refrain from taking any action, and prior to any such settlement or compromise the Indemnifying Party gives the Indemnified Party at least fifteen (15) days prior notice of its intent to settle or compromise a claim and further affords the Indemnified Party an opportunity to provide input to the settlement or compromise. The Indemnified Party may not settle or compromise any claim over the objection of the Indemnifying Party; provided, however, that consent to settlement or compromise -------- ------- shall not be unreasonably withheld. In any event, the Indemnified Party and the Indemnifying Party may participate, at their own expense, in the defense of such asserted liability. If the Indemnifying Party chooses to defend any claim, the Indemnified Party shall make available to the Indemnifying Party, subject to such reasonable confidentiality provisions as the Indemnified Party may impose, any books, records or other documents within its control that are necessary or appropriate for such defense. Notwithstanding anything to the contrary in this Section 9(c), (i) the party conducting the defense of a claim shall (A) keep the other party informed on a reasonable and timely basis as to the status of the defense of such claim (but only to the extent such other party is not participating jointly in the defense of such claim), and (B) conduct the defense of such claim in a prudent manner, and (ii) the Indemnifying Party shall not cease to defend, settle or otherwise dispose of any claim without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld). (d) Survival. The provisions of Section 9 shall survive any -------- termination of this Agreement. Each Indemnified Party's rights under Section 9 shall not be deemed to have been waived or otherwise affected by such Indemnified Party's waiver of the breach of any representation, warranty, agreement or covenant contained in or made pursuant to this Agreement, unless such waiver expressly and in writing also waives any or all of the Indemnified Party's rights under Section 9. (e) Limitation of Liability. Notwithstanding anything in this ----------------------- Agreement to the contrary, but subject to the last sentence of this paragraph (e), (i) Seller shall not be responsible for any special, exemplary, indirect, incidental or consequential damages sustained or incurred by Buyer as a result of Seller's breach of any of the provisions of this Agreement, and (ii) Buyer shall not be responsible for any special, exemplary, indirect, incidental or consequential damages 7 sustained or incurred by Seller as a result of Buyer's breach of any of the provisions of this Agreement. The provisions of this paragraph (e) shall not in any way limit either party's indemnification obligations pursuant to paragraphs (a) or (b) of this Section 9 with respect to claims by third parties against either Buyer or Seller respectively for damages of any kind incurred by said third parties. 10. Term of Agreement. (a) The term of this Agreement ("Term") shall ----------------- commence on the date hereof and continue until terminated (i) as set forth in Section 13 of this Agreement, or (ii) by Buyer, effective any time after giving Seller at least 4 months prior written notice, or (iii) by Seller, effective any time after September 1, 2004, by giving Buyer at least 24 months prior written notice. (b) Termination of this Agreement for any reason shall not relieve the parties of any obligation accruing prior thereto and shall be without prejudice to the rights and remedies of either party with respect to any breach of the provisions of this Agreement. Without limiting the generality of the foregoing and except as otherwise provided herein, no termination of this Agreement, whether by lapse of time or otherwise, shall serve to terminate the obligations of the parties hereto under Sections 9, 11,14 or 15. (c) On the termination of this Agreement, Buyer shall return to Seller all information which it possesses or controls that belongs to Seller. In addition, Buyer shall be required to purchase from Seller, at Seller's cost therefor, any and all supplies and other components of Seller which are specific to the Product purchased or to be purchased by Buyer pursuant to this Agreement. 11. Confidentiality. Buyer covenants and agrees not to (i) divulge, --------------- disclose or disseminate any Confidential Information (as hereafter defined) of Seller or any information pertaining to this Agreement, or (ii) use any of Seller's Confidential Information except as contemplated by this Agreement. For purposes hereof, "Confidential Information" means any information disclosed by Seller or of which Buyer becomes aware (whether in writing or orally or by sensory detection) with respect to the manufacture or sale of the Product unless such information (x) was known to Buyer prior to disclosure thereof by Seller, (y) is or becomes generally available to the public through no fault of Buyer, or (z) is required to be disclosed by law or court order, provided that Seller is given at least 10 days notice prior to any disclosure required by law or pursuant to court order. Buyer and Seller have executed a separate confidentiality agreement governing the use of confidential information during the Term of this Agreement and thereafter. 12. Use of Trademark. Buyer shall have the right to utilize the Trademark ---------------- in its product descriptions, sales literature, labels, brochures, advertisements and other descriptions (collectively, the "Marketing Materials") of the Product, subject to Seller's prior written approval which shall not be unreasonably withheld. Prior to utilizing the Trademark, Buyer shall provide Seller with copies of all Marketing Materials for Seller's review and approval. Buyer shall not 8 use the name "GenTrac" or any variation thereof without Seller's prior written approval. 13. Termination. Either party may terminate this Agreement immediately and ----------- cancel any purchase orders hereunder if the other party (a) assigns this Agreement or any of its rights hereunder in violation of the terms of this Agreement and without the prior written consent of the other party, (b) makes an assignment for the benefit of creditors, or a receiver, trustee in bankruptcy or similar officer is appointed to take charge of all or part of its property, (c) is adjudged a bankrupt, (d) breaches any term of this Agreement (other than a payment term by Buyer) and such breach is not remedied within thirty (30) days after written notice thereof has been given to the breaching party, (e) fails to meet its obligation to pay for any Product shipped and invoiced within five business days of the receipt of notice by Buyer from Seller of non-payment (or within five business days of the due date for such payment without notice if the Seller has supplied notice of non-payment to Buyer on two prior occasions within the prior 12 month period), or (f) is unable to perform due to force majeure as set forth in Section 14 hereof. Any such termination shall not release Seller or Buyer from obligations arising under this Agreement prior to the effective date of termination. In addition, any such termination shall be subject to the provisions of paragraphs (b) and (c) of Section 10 of this Agreement. 14. Force Majeure. Neither party hereto shall be considered in default in ------------- performance of its obligations hereunder if performance of such obligations is prevented or delayed by reason of force majeure, including by way of example and not by way of limitation, acts of God, acts or omissions of government agencies or instrumentalities (including without limitation, CBER and the FDA), lack of building or equipment capacity, fire, flood, explosion, storm, strike, lockout or other labor disputes, riot, war, rebellion, accident, failure or delay of transportation, or by vendors or subcontractors, failure of suppliers or shortage of raw materials or labor, failure of equipment, or any other similar cause or causes beyond its reasonable control. Time of performance of either party's obligations hereunder shall be extended by the time period reasonably necessary to overcome the effects of such force majeure occurrences; provided, however, if either party is unable to perform its obligations under this Agreement due to reason of force majeure as herein set force for a period of 6 consecutive months, then either party may terminate this Agreement by giving notice to the other party within 30 days after the end of said 6 month period. 15. Dispute Resolution. ------------------ (a) Negotiation. The parties agree to consult and negotiate in ----------- good faith to try to resolve any dispute, controversy or claim that arises out of or relates to this Agreement. The parties agree that, except as provided in Section 15(b), neither party will initiate formal dispute resolution under this Agreement unless and until such party has provided written notice of the potential claim to the other party and the representatives of the parties shall have met in person to attempt to achieve such an amicable resolution of such situation; provided, however, that in no event shall a party be required to delay initiation of formal dispute resolution hereunder for more than a period of 30 days following such notice. 9 (b) Reservation for Litigation. Notwithstanding Sections 15(a) and -------------------------- 15(c), each party expressly reserves the right to seek judicial or equitable relief (including, without limitation, any injunction or other preliminary relief ) from a court of competent jurisdiction if the other party is or appears to be in violation of such other party's obligations under this Agreement, including without limitation, those pertaining to non-use and non-disclosure under the provisions of Section 11 hereof. Nothing in this Section 15(b) shall preclude a party from seeking such interim relief with respect to any disputes of claims arising under this Agreement as may be available under the AAA rules as provided in Section 15(c). (c) Arbitration. Subject to the reservation of the parties under ----------- Section 15(b), all disputes, claims or controversies arising out of or in connection with this Agreement shall be finally settled under then current commercial arbitration rules of the American Arbitration Association ("AAA"), as modified by Section 15(d) below. Judgment upon the award rendered by the arbitrators may be entered in any court of competent jurisdiction. The place of arbitration shall be St. Louis, Missouri. The arbitration shall be conducted by three neutral arbitrators selected by mutual agreement of the parties or, if that is not possible within 30 days of the initial demand for such arbitration, by the AAA. At least one arbitrator shall have knowledge or experience in the medical device industry and at least one arbitrator shall have knowledge or experience in the pharmaceutical or biological industry. (d) Special Rules. Notwithstanding any provision to the contrary in ------------- the AAA rules, the parties hereby stipulate that any arbitration hereunder shall be subject to the following special rules. (i) Each party shall have the right to request from the arbitrators, and the arbitrators shall order upon good cause shown, reasonable and limited pre-hearing discovery, including (1) exchange of witness lists, (2) depositions under oath of named witnesses, (3) written interrogatories, and (4) document requests; (ii) Upon conclusion of the pre-hearing discovery, the arbitrators shall promptly hold a hearing upon the evidence to be presented by the parties and shall promptly render a written opinion and award; (iii) The arbitrators may not award or assess punitive damages against either party; and (iv) Each party shall bear its own costs and expenses of the arbitration and one-half (1/2) of the fees and costs of the arbitrators, subject to the power of the arbitrators, in their sole discretion, to award all such reasonable costs, expenses and fees to the prevailing party. (e) Survival. The duty of the parties to arbitrate any dispute, -------- controversy or claim under this Section 15 shall survive the termination of this Agreements for any reason. 10 16. Entire Agreement. This Agreement and the Schedules attached hereto ---------------- set forth the entire and only agreement between Buyer and Seller concerning the subject matter hereof and supercedes all prior written or oral agreements. No provision of this Agreement can be modified or amended except by an explicit written amendment signed by both Buyer and Seller. 17. Assignment. Neither party will have the right to voluntarily or ---------- involuntarily assign this Agreement, in whole or in part, to any third party without the prior written consent of a duly authorized officer of the other party, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, (i) either party may freely assign this Agreement to any company controlling, controlled by or under common control with that party or succeeding to the entire business of the party, (ii) Seller may assign this Agreement incident to the sale or transfer of all or substantially all of its thrombin business or assets, and (iii) either party may freely assign this Agreement incident to the merger or reorganization of said party. This Agreement will be binding upon and inure to the benefit of the parties and their successors and permitted assigns. 18. General. ------- (a) Waivers. No waiver of any right or remedy hereunder will ------- be effective unless based upon a writing signed by the party against whom it is sought to be enforced. No delay on the part of either party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of either party of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder. (b) Notices. All notices or other communications required or ------- permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered by hand, or if mailed, three (3) days after mailing first class, postage prepaid, by registered or certified mail, return receipt requested, addressed to the attention of (i) the Chief Executive Officer of Buyer, or (ii) Mr. Brad Knoll of Seller (with a copy to Mr. Michael T. Bramblett at Jones Pharma Incorporated, 1945 Craig Road, St. Louis, MO 63146) at the respective addresses first written above, or to such other person(s) or address(es) as may be given by notice as herein set forth. (c) Relationship. The parties are independent contractors and ------------ shall not be deemed to have formed any partnership, joint venture or other relationship. Neither party shall make, or represent to any other person that it has the power or authority to make, any financial or other commitment on behalf of the other party. (d) Severability. If any provision of this Agreement is ------------ declared invalid or unenforceable by a court of competent jurisdiction, such provision will be severed from this Agreement and the remaining provisions will be unaffected thereby. The parties will promptly meet and negotiate a substitute provision meeting as closely as possible the intent of the invalid or unenforceable provision and, with reasonable precision, avoiding the defects of the original provision. 11 (e) Governing Law. This Agreement has been entered into under ------------- the laws of the State of Missouri and will be governed by and construed in accordance with those laws as they apply to contracts entered into and carried out solely within the State of Missouri. (f) Exclusiveness of Remedies. Subject to the terms of this ------------------------- Agreement, all rights accorded either of the parties hereunder shall be cumulative of all other rights so granted as well as any rights and remedies either of them may have at law or in equity. (g) Headings. The Section headings in this Agreement are for -------- convenience only and shall not affect the construction hereof. (h) Counterparts. This Agreement may be executed in any number ------------ of counterparts, each of which shall be deemed an original but all of which together shall constitute a single instrument. (i) Legal Fees. Subject to the provisions of Section 15(d) with ---------- respect to arbitration, the prevailing party in any legal action shall have the right, in addition to all other rights and remedies, to recover all legal fees and costs incurred in pursuing its rights and remedies hereunder. (j) No Third-Party Rights. No provision of this Agreement shall --------------------- be deemed or construed in any way to result in the creation of any right or obligation in any person or entity not a party to this Agreement. (k) Schedules. The Schedules are by this reference incorporated --------- in and made a part of this Agreement. [The remainder of this page intentionally left blank; signature page to follow.] 12 IN WITNESS WHEREOF, the parties hereto have caused their duly authorized representatives to execute this Agreement as of the day and year first written above. THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. VASCULAR SOLUTIONS, INC. GENTRAC, INC. By: /s/ Howard C. Root By: /s/ Dennis M. Jones -------------------------- ------------------- Name: Howard C. Root Name: Dennis M. Jones ----------------------- ------------------- Title: CEO Title: President ----------------------- ------------------- 13 Schedule 1 - Specifications Each Product to consist of one vial of Thrombin, Topical (Bovine Origin), U.S.P. (Thrombin - JMI), in either the 5,000 unit or 10,000 unit size, as specified in the purchase order, together with the package insert. The vials shall be packaged in bulk 25s for shipment to Buyer via common carrier. The Product shall conform to the specifications for Seller's commercially available thrombin under the following product codes:
---------------------------------------------------------------------- Product Description NDC Number ---------------------------------------------------------------------- Thrombin - JMI 52766-131-05 5,000 unit ---------------------------------------------------------------------- Thrombin - JMI 52766-132-05 10,000 unit ----------------------------------------------------------------------
Each lot shipped to Buyer shall be accompanied by a certificate of analysis certifying compliance with U.S. License #977 and Seller's accepted release criteria for the Product. Schedule 2 - Prices The initial price for the Product shall be as follows:
---------------------------------------------------------------------- Product Description NDC Number Price/Bulk 25s ---------------------------------------------------------------------- Thrombin - JMI 52766-131-05 + 5,000 unit ---------------------------------------------------------------------- Thrombin - JMI 52766-132-05 + 10,000 unit ----------------------------------------------------------------------
Price increases shall be determined according to the provisions set forth in Section 3 of this Agreement. + Denotes confidential information that has been omitted and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as Amended. Schedule 3 CONTRACT MANUFACTURING AGREEMENT This agreement is intended to define the responsibilities mutually agreed to by GenTrac, Inc., 2232 Evergreen Road, Middleton, WI 53562 ("GenTrac") and Vascular Solutions, Inc., 2495 Xenium Lane North, Minneapolis, MN 55441 ("Vascular Solutions"), regarding the manufacture of topical thrombin, Thrombin-JMI(R). 1. GenTrac agrees to manufacture Thrombin-JMI(R) in compliance with US License #977 and applicable cGMPs. 2. All distribution of Thrombin-JMI(R) will be performed by GenTrac, Middleton, WI, in compliance with agreements between Vascular Solutions and GenTrac. 3. GenTrac will notify Vascular Solutions in writing of important proposed changes made to the manufacturing process, facilities or source of animal origin raw materials which may have an impact on the final product purchased by Vascular Solutions. 4. GenTrac will allow GMP audits to be performed by approved representatives of Vascular Solutions. Specific information regarding the process for the harvesting, activation and purification of the thrombin are not included in the scope of the audit. 5. Inquires as to the specific details of manufacture or for technical information regarding Thrombin-JMI(R) shall be directed to Vice President of Quality Assurance or Senior Vice President of Scientific Affairs of GenTrac. 6. Vascular Solutions agrees to handle, store and distribute the Thrombin-JMI(R) in a manner consistent with the conditions stated on the product labeling and the conditions stated in Vascular Solution's submission(s) to the Food and Drug Administration and/or foreign regulatory agency. 7. This agreement was entered into on effective _______________, _____. Accepted: Accepted: Name:____________________________ Name:______________________________ Title:___________________________ Title:_____________________________ GenTrac, Inc. Vascular Solutions, Inc. 2232 Evergreen Road 2495 Xenium Lane North Middleton, WI 53562 Minneapolis, MN 55441 Schedule 4 - Product Batch Sizes
---------------------------------------------------------------------- Product Description NDC Number Batch Sizes* ---------------------------------------------------------------------- Thrombin - JMI 52766-131-05 + 5,000 unit ---------------------------------------------------------------------- Thrombin - JMI 52766-132-05 + 10,000 unit ----------------------------------------------------------------------
* Batch sizes may vary by 10% based on the yield of each batch. + Denotes confidential information that has been omitted and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as Amended. Schedule 5 - Forecasts Third Party Forecast For Finished Product Manufactured Forecast by ________________________ Date [__________________________] To: ____________________________ From: ____________________ Phone: ____________________________ Company: ____________________ FAX: ____________________________ Phone: ____________________ Address: ____________________________ ____________________________ ____________________________ Product Title: [___________] Item Code: [___________]
Current Calendar Forecaster PO Due Date/ Years and Next Quantity PO Qty PO# Comments by Month --------------------------- ----------------------------------------------- 1 June --------------------------- ----------------------------------------------- 2 July --------------------------- ----------------------------------------------- 3 Aug. --------------------------- ----------------------------------------------- 4 Sept. ----------------------------------------------------------------------------------------------- 5 Oct. ------------------------------------------------ 6 Nov. ------------------------------------------------ 7 Dec. ------------------------------------------------ 8 Jan. ------------------------------------------------ 9 Feb. ------------------------------------------------ 10 Mar. ------------------------------------------------ 11 Apr. ------------------------------------------------ 12 May ------------------------------------------------ 13 June ------------------------------------------------ 14 July ------------------------------------------------ 15 Aug. ------------------------------------------------ 16 Sept. ------------------------------------------------ 17 Oct. ------------------------------------------------ 18 Nov. ------------------------------------------------ 19 Dec. ------------------------------------------------ 20 Jan. ------------------------------------------------ 21 Feb. ------------------------------------------------ 22 Mar. ------------------------------------------------ 23 Apr. ------------------------------------------------
------------------------------------------------ 24 May ------------------------------------------------ Schedule 6 - Minimum Requirements
---------------------------------------------------------------------- Contract Year Minimum Requirements* ---------------------------------------------------------------------- Sept. 1, 1999 - August 31, 2000 + ---------------------------------------------------------------------- Sept. 1, 2000 - August 31, 2001 + ---------------------------------------------------------------------- Sept. 1, 2001 - August 31, 2002 + ---------------------------------------------------------------------- Sept. 1, 2002 - August 31, 2003 + ---------------------------------------------------------------------- Sept. 1, 2003 - August 31, 2004 + ----------------------------------------------------------------------
*Minimum Requirements increase by + per year after the fifth Contract Year if the Agreement is still in effect, unless otherwise provided by Seller. *Minimum Requirements apply to any mixture of Products, that is, the 5,000 unit or 10,000 unit size, provided that all orders are for full batch sizes for the applicable Product. *Orders may be shipped in partial amounts and are counted against the Minimum Requirements on the date of shipment. + Denotes confidential information that has been omitted and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as Amended. Schedule 7 - Tests and Inspection Parameters --------------------------------------------
- -------------------------------------------------------------------------------- Specification - -------------------------------------------------------------------------------- 5,000 Units 10,000 Units - -------------------------------------------------------------------------------- Thrombin Activity, U.S. Units/vial + + - -------------------------------------------------------------------------------- PH - reconstituted with isotonic saline + + - -------------------------------------------------------------------------------- Moisture + + - -------------------------------------------------------------------------------- Sterility + + - -------------------------------------------------------------------------------- General animal safety per 21 CFR 610.11 + + - -------------------------------------------------------------------------------- Osmolarity* + + - --------------------------------------------------------------------------------
*When reconstituted in + of Buyer's diluent, with such test to be performed and accepted by Buyer prior to Seller's shipment of the Product. All lots to include a Certificate of Analysis from Seller in the form attached hereto, including the statement "bovine plasma and lungs used to manufacture Thrombin-JMI(R) are taken from BSE-free animals of U.S. origin." + Denotes confidential information that has been omitted and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as Amended. "SAMPLE" CERTIFICATE OF ANALYSIS Thrombin, Topical (Bovine) USP THROMBIN-JMI(R) Lot: Date of Manufacture: Thrombin Activity, U.S. Units/vial + pH - reconstituted with isotonic saline + Moisture + Sterility + General Animal Safety per 21CFR610.11 + This lot was manufactured in compliance with cGMPs following the procedures and specifications approved in U.S. License #977. The bovine plasma and lungs used to manufacture Thrombin-JMI(R) are taken from BSE-free animals of U.S. origin. Bovine plasma and lungs used to manufacture this lot of Thrombin-JMI(R) are derived from inspected animals, which are fit for human consumption and meet all required USDA specifications. ___________________________________________ Quality Assurance GenTrac, Inc. The data contained in this certificate of analysis is representative of the batch at the time of manufacture. Certificates of Analysis are authorized to clients on a confidential basis. No reference to the data contained in the Certificate of Analysis may be made public without our written authorization. + Denotes confidential information that has been omitted and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. GenTrac, Inc. is a subsidiary of JONES PHARMA INCORPORATED, St. Louis, MO. Thrombin-JMI is a trademark of JONES PHARMA INCORPORATED. EX-23.1 6 CONSENT OF ERNST & YOUNG LLP 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 20, 1999 in 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 September 2, 1999 -----END PRIVACY-ENHANCED MESSAGE-----