<PAGE>
As filed with the Securities and Exchange Commission on October 8, 1999
Registration No. 333-84089
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
under
The Securities Act of 1933
---------------
VASCULAR SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 3841 41-1859679
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
2495 Xenium Lane North
Minneapolis, Minnesota 55441
(612) 656-4300
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Howard C. Root
Vascular Solutions, Inc.
2495 Xenium Lane North
Minneapolis, Minnesota 55441
(612) 656-4300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Timothy S. Hearn, Esq. Dorsey & David J. Kaufman, Esq. Ernest W.
Whitney LLP 220 South Sixth Street Torain, Jr., Esq. Katten Muchin Zavis
Minneapolis, Minnesota 55402- 525 West Monroe Street, Suite 1600
1498(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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 OCTOBER 8, 1999
PROSPECTUS
2,675,000 Shares
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Per Share Total
- -----------------------------------------------------------------------------------
<S> <C> <C>
Public Offering Price........................................ $ $
Underwriting Discount........................................ $ $
Proceeds to Vascular Solutions, Inc. ........................ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 , 1999
<PAGE>
[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 sealing device in the United States, and we can make no assurance of
when, if ever, the Duett sealing device will be approved by the FDA.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
Because this is only a summary, it does not contain all of the information that
may be important to you. You should read the entire prospectus carefully. You
should consider the information under "Risk Factors" and in our financial
statements and the notes relating to these financial statements, together with
the information included elsewhere in this prospectus, before deciding to
invest in our common stock.
Our Business
We manufacture, market and sell the Vascular Solutions Duett sealing device,
which enables cardiologists and radiologists to rapidly seal the puncture site
following catheterization procedures such as angiography, angioplasty and
stenting. Our product combines a simple balloon catheter delivery mechanism
with a powerful, proprietary procoagulant, or blood clotting mixture. We
believe our product offers advantages over both manual compression and the
three existing FDA-approved devices used to seal the puncture site following
the catheterization procedure. We began selling our product in Europe in
February 1998. Over 7,500 deployments of our device have been performed
worldwide. On June 30, 1999, we filed our premarket approval, or PMA,
application with the FDA. We will not be able to commence commercial sales of
our Duett sealing device in the United States until we receive FDA approval of
our application, if ever.
We believe our product improves patient comfort and is more efficient than
manual compression. The Duett sealing device is an easy-to-use system which,
when compared to the three currently available FDA-approved sealing devices,
offers a better combination of a complete seal of the puncture site with
nothing left behind in the artery. Our product uses a balloon catheter, a
device already familiar to cardiologists and radiologists, which is inserted
through the introducer sheath that is already in the patient. The inflated
balloon serves as a temporary mechanical seal, preventing the flow of blood
from the artery. Our procoagulant, which is a proprietary mixture of thrombin,
collagen and diluent, is then delivered to the puncture site, stimulating rapid
clotting and creating a complete seal of both the arterial puncture and the
tissue tract from the artery to the skin surface. With our Duett sealing
device, nothing is left behind in the artery, so immediate reaccess of the
site, if necessary, is possible, and the potential for infection is minimized.
The primary factors underlying the market opportunity for vascular sealing
devices are that (1) there are a significant and growing number of
catheterization procedures being performed, and (2) the substantial majority of
the resulting puncture sites are still being sealed using manual compression.
In 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 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.
1
<PAGE>
For the six months ended June 30, 1999, we had net sales of $514,500 and a
net loss of $3.5 million. Because of our plans to invest heavily in sales and
marketing, hire additional employees and expand our commercialization, we
expect to incur significant net losses through at least December 31, 2000. Our
success will depend on the medical community's acceptance of our Duett sealing
device.
The Offering
Common stock offered.......... 2,675,000 shares
Common stock to be
outstanding after the
offering......................
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
<PAGE>
Summary Financial Data
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
---------------- ----------------
1997 1998 1998 1999
------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
----------------
As
Actual Adjusted
------- --------
(unaudited)
<S> <C> <C>
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
</TABLE>
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 2495 Xenium Lane, Minneapolis,
Minnesota 55441 and our telephone number is 612-656-4300.
Unless otherwise specifically stated, the information in this prospectus has
been adjusted to reflect the automatic conversion of all outstanding shares of
our preferred stock into shares of common stock, but does not take into account
the possible sale of additional shares of common stock to the underwriters
pursuant to the underwriters' right to purchase additional shares to cover
over-allotments.
3
<PAGE>
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.
4
<PAGE>
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 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.
On September 22, 1999, we received a letter from the Daig division of St.
Jude Medical, Inc. claiming that the manufacture, use, marketing and sale of
our Duett sealing device infringes upon certain United States patents licensed
by Daig. The letter referenced a prior letter dated August 18, 1998 from us to
the prior licensee of those patents in which we made a proposal intended to
avoid the anticipated litigation over those patents. The proposed license was
rejected. It is likely that litigation will be commenced in the near future
concerning this claim. Daig could initiate a lawsuit requesting an injunction
that, if issued, would prohibit us from selling our product. Furthermore, Daig
could allege monetary damages that, if awarded, would significantly harm our
business. It is not possible to predict the timing, substance or outcome of any
lawsuit that may arise from these allegations, including whether we will be
prohibited from selling our Duett sealing device in the United States or
internationally, or to estimate the amount or range of potential loss, if any.
The interventional cardiology industry is characterized by numerous patent
filings and frequent and substantial intellectual property litigation.
Companies in the interventional cardiology industry in general, and in vascular
sealing in particular, have employed intellectual property litigation in an
attempt to gain a competitive advantage. We are aware of many United States
patents issued to other companies in the vascular sealing field which describe
vascular sealing devices. Each of the three vascular sealing products with
which our Duett sealing device competes has been subject to infringement
litigation. It is likely that we will become the subject of additional
intellectual property claims in the future related to our Duett sealing device.
Intellectual property litigation in recent years has proven to be very complex,
and the outcome of such litigation is difficult to predict.
Our defense of the Datascope claim, the Daig claim and any other
intellectual property claims filed in the future, regardless of the merits of
the complaint, could divert the attention of our technical and management
personnel away from the development and marketing of the Duett sealing device
for significant periods of time. The costs incurred to defend the Datascope
claim, the Daig claim and other future claims could be substantial and
seriously harm us, even if we are ultimately successful.
We will not be successful if the vascular sealing device market does not adopt
our new sealing methodology
We have sold only a limited number of our Duett sealing devices to date. We
have not commercialized our product in the United States, which we believe
represents the largest market for vascular sealing devices, because we do not
yet have approval from the FDA to do so. Our success will depend on the medical
community's acceptance of our Duett sealing device. We cannot predict 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;
5
<PAGE>
. 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 indication of our future performance because they are likely to vary
significantly based on many factors, including:
. when, if ever, we receive FDA approval to sell our Duett sealing device;
. the timing of the introduction of our Duett sealing device into the
United States market;
. the effect of intellectual property disputes;
. the demand for and acceptance of our Duett sealing device;
. 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;
6
<PAGE>
. 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 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
7
<PAGE>
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, these
distributors. Sales through distributors are subject to several risks,
including the risk of financial instability of distributors and the risk that
distributors will not effectively promote our Duett sealing device. Loss or
termination of these distribution relationships could seriously harm our
international sales efforts and could result in our repurchasing unsold
inventory from former distributors by virtue of local laws applicable to
distribution relationships, provisions of distribution agreements or negotiated
settlements entered into with our distributors. Sales to our German and
Austrian distributors accounted for 65% and 16% of net sales for the year ended
December 31, 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.
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;
8
<PAGE>
. weaker intellectual property rights protection in some countries;
. potentially adverse tax consequences; and
. political and economic instability.
The occurrence of any of these events could seriously harm our future
international sales and our ability to successfully commercialize our Duett
sealing device or any future product in any international market.
We have limited manufacturing experience and may encounter difficulties in
expanding our manufacturing operations which could seriously harm our business
We have limited experience in manufacturing our Duett sealing device. We
currently manufacture the Duett sealing device in limited quantities for
international sales and clinical studies in the United States. We do not have
experience in manufacturing our Duett sealing device in substantial commercial
quantities. We believe our current facilities are adequate for the production
of our Duett sealing device for the next year, but future facility requirements
will depend on future sales of our product and when, if ever, we receive FDA
approval to sell our product in the United States. We may encounter unforeseen
difficulties in expanding our production of our Duett sealing device and new
products, including problems involving production yields, quality control and
assurance, component supply and shortages of qualified personnel, compliance
with FDA regulations and requirements regarding good manufacturing practices,
and the need for further regulatory approval of new manufacturing processes.
Difficulties encountered by us in expanding our manufacturing capabilities
could seriously harm our business.
Our business and results of operation may be seriously harmed by changes in
third-party reimbursement policies
We could be seriously harmed by changes in reimbursement policies of
governmental or private healthcare payors, particularly to the extent any
changes affect reimbursement for catheterization procedures in which our Duett
sealing device is used. Failure by physicians, hospitals and other users of our
Duett sealing device to obtain sufficient reimbursement from healthcare payors
for procedures in which our Duett sealing device is used or adverse changes in
governmental and private third-party payors' policies toward reimbursement for
such procedures would seriously harm our business.
In the United States, healthcare providers, including hospitals and clinics
that purchase medical devices such as our Duett sealing device, generally rely
on third-party payors, principally federal Medicare, state Medicaid and private
health insurance plans, to reimburse all or part of the cost of catheterization
procedures. We anticipate that in a prospective payment system, such as the
system 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.
9
<PAGE>
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 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
10
<PAGE>
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.
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.
11
<PAGE>
The price of our common stock could be highly volatile due to a number of
factors
An active trading market for our common stock may not develop or be
sustained after completion of this offering. The initial public offering price
of our common stock may not be indicative of the prices that will prevail in
the public market after the offering, and the market price of our common stock
could fall below the initial public offering price.
The trading price of our common stock may fluctuate widely as a result of a
number of factors, including:
. delays in obtaining regulatory approvals, specifically the approval by
the FDA of the PMA application for our Duett sealing device;
. market perception and customer acceptance of vascular sealing devices;
. increased competition;
. litigation concerning intellectual property rights;
. the loss of significant orders;
. general conditions in the medical device industry; and
. changes in earnings estimates by analysts.
In addition, the stock market for medical device companies has experienced
extreme price and volume fluctuations, which have often been unrelated to the
operating performance of the companies experiencing these fluctuations.
Future sales of our common stock in the public market could cause our stock
price to fall
If our shareholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. Upon completion of the offering, we will have 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, 165,000 shares will become freely tradeable as
of the date of this prospectus, an additional 247,250 shares will be freely
tradeable 75 days after the date of this prospectus and the remaining shares
will become freely tradeable at varying dates beginning 180 days after the date
of this prospectus upon the expiration of lock-up agreements between our
existing shareholders and the underwriters.
If holders of our common stock that have registration rights require us to
register a large number of their shares for sale into the public market, the
market price of our common stock and our ability to raise needed capital could
be significantly harmed
One hundred eighty days after the date of this prospectus, the holders of
3,777,777 shares of our common stock, which represent 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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
June 30, 1999
-------------------------------
Pro Pro Forma
Actual Forma As Adjusted
-------- -------- -----------
(in thousands)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
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
<PAGE>
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:
<TABLE>
<S> <C> <C>
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
======
</TABLE>
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:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
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%
========== ==== =========== ====
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Year ended Six Months
December 31, Ended June 30,
---------------- ----------------
1997 1998 1998 1999
------- ------- ------- -------
(in thousands, except per share
amounts)
<S> <C> <C> <C> <C>
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................................... 5,767 7,480
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1997 1998 1999
------ ------ --------
(in thousands)
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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 improvements in manufacturing efficiencies and increases in the
number of Duett
18
<PAGE>
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
<PAGE>
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
20
<PAGE>
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, 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. We currently have no commitments
for additional funding and so our ability to meet our long-term liquidity needs
is uncertain. If we raise additional funds through the issuance of equity
securities, our shareholders may experience significant dilution. Furthermore,
additional financing may not be available when needed or, if available,
financing may not be on terms favorable to us or our shareholders. If financing
is not available when required or is not available on acceptable terms, we may
be unable to develop or market our products or take advantage of business
opportunities or respond to competitive pressures.
Recent Accounting Pronouncements
In 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
21
<PAGE>
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 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.
22
<PAGE>
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.
23
<PAGE>
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 7,500 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 expected to grow by more than 5% each
year for the next three years as the incidence of cardiovascular disease
continues to increase.
24
<PAGE>
Each procedure using a catheter requires a puncture in an artery, usually
the femoral artery in the groin area, of the patient to gain access for the
catheter, which is deployed through an introducer sheath. Upon removal of the
catheter, the physician must seal this puncture in the artery and the tissue
tract that leads from the skin surface to the artery to stop bleeding. The
standard method for sealing the puncture site has been a manual process whereby
a healthcare professional applies direct pressure to the puncture site,
sometimes using a sand bag or a large C-clamp, for 20 minutes to an hour in
order to form a blood clot. The healthcare professional then monitors the
patient, who must remain immobile in order to prevent dislodging of the clot,
for an additional four to 48 hours.
Patients subjected to manual compression generally experience significant
pain and discomfort during compression of the puncture site and during the
period in which they are required to be immobile. Many patients report that
this pain is the most uncomfortable aspect of the catheterization procedure. In
addition, patients usually develop a substantial coagulated mass of blood, or
hemotoma, around the puncture site, limiting patient mobility for up to six
weeks following the procedure. Finally, the need for healthcare personnel to
provide compression and the use of hospital beds during the recovery period
results in substantial costs to the institution which, under virtually all
current healthcare payment systems, are not separately reimbursed.
In addition to this discomfort and cost, manual compression can result in
major complications at the puncture site. These major complications can include
a pseudo-aneurysm, or the continuation of blood flow from the artery into the
coagulated blood mass at the puncture site, collapse of the femoral artery or
femoral nerve damage from the extended compression. Additional procedures may
be required to correct these major complications.
The increasing use of medications to prevent blood clot formation during
interventional catheterization procedures has increased the difficulty in
sealing the puncture site using manual compression. During and following the
catheterization procedure, physicians are concerned with the formation of blood
clots in the coronary or peripheral arteries. To prevent clots from forming,
the physician typically administers heparin, an anticoagulant, during the
interventional catheterization procedure. More recently, drugs which prevent
blood clotting by inhibiting platelet aggregation, such as ReoPro(R), are also
being used in interventional catheterization procedures. Because these platelet
inhibitor drugs limit the ability of blood to clot, they also increase the
difficulty of sealing the puncture site using manual compression and the
natural clotting process following the catheterization procedure.
Until 1996, manual compression was used following virtually all
catheterization procedures. In late 1995, the first vascular sealing device
which did not rely on compression was introduced in the United States. Three
devices have received FDA approval and are currently being marketed around the
world.
. One device places a dry collagen plug in the tissue tract adjacent to
the puncture in the artery. The plug seals the tissue tract, however,
the clotting effect of collagen at the puncture in the artery is
limited, particularly if anticoagulants or platelet inhibitors are
present in the bloodstream. As a result, manual pressure may be required
for an additional period of time in order to achieve closure of the
puncture in the artery.
. The second device inserts a collagen plug into the tissue tract
connected by a suture to a biodegradable anchor which is inserted into
the artery. This device is held in place for approximately 20 minutes to
seal the puncture in the artery. The presence of the anchor prohibits
reaccess to the puncture site for up to 90 days. The reliance on
collagen as the
25
<PAGE>
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, as
compared to manual compression, the three primary end points we
submitted to the FDA with our PMA application:
. reduced time to the cessation of bleeding;
. reduced time to ambulation of the patient; and
. no statistically significant increase in major complications.
26
<PAGE>
The pursuit of FDA approval of our Duett sealing device for sale in the
United States is our top priority.
. 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 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 7,500
deployments of our Duett sealing device
27
<PAGE>
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
<TABLE>
<CAPTION>
Study Time Frame Patients Enrolled Number of Centers
----- ---------- ----------------- -----------------
<S> <C> <C> <C>
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
</TABLE>
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 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 both 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. Our Norwegian distributor is MicroMed A.S., and our
Italian distributor is N.G.C. Medical S.p.A.
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
28
<PAGE>
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
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.
29
<PAGE>
[Schematic drawing of Duett catheter in the artery labeling the items listed
below:]
Duett Catheter
Duett Procoagulant
The Duett catheter is then inserted through the introducer sheath and into
the femoral artery and the syringe containing the Duett procoagulant is
attached to the sidearm of the introducer sheath.
[Schematic drawing of Duett catheter inflated and creating a temporary seal;
labeling the item listed below:]
Inflated Duett Baloon Catheter
Using a syringe, the balloon is inflated and positioned against the inner
surface of the artery where the arterial pressure and gentle traction result in
the balloon acting as a temporary seal of the puncture.
30
<PAGE>
[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.
31
<PAGE>
[Schematic drawing of artery labeling the item listed below:]
Complete Seal of puncture Site
After removal of the Duett catheter from the artery, manual pressure is
maintained for a short time, usually two to five minutes, to assure the seal.
We recommend ambulation of patients generally one to two hours after diagnostic
catheterizations and two to four hours after interventional catheterization
procedures.
Research and Development
Our research and development staff is currently focused on improving our
Duett sealing device and reducing our cost of goods sold. We incurred expenses
of $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
32
<PAGE>
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. Although we have product liability insurance
coverage in an amount which we consider reasonable, it may not be adequate to
cover potential claims. Any product liability claims asserted against us could
result in costly litigation, reduced sales and significant liabilities and
divert the attention of our technical and management personnel away from the
development and marketing of the Duett sealing device for significant periods
of time.
Competition
We believe that competition in the vascular sealing market is intense and
will increase. We believe that the primary bases of competition in the vascular
sealing market are clinical efficacy, ease of use, patient comfort,
minimization of complications and cost-effectiveness. On these bases, we
believe that our product is well-positioned.
Because the substantial majority of vascular sealing is performed through
manual compression, this represents our primary competition. Manual compression
usually requires a healthcare professional to manually apply pressure to the
puncture site for 20 minutes to one hour following which the patient is
confined to bed rest for between four and 48 hours. Often manual compression
involves the use of mechanical devices, including C-clamps and sandbags, or
pneumatic devices. Manual compression is considered to be uncomfortable for the
patient.
Our Duett sealing device also competes with three vascular sealing devices,
none of which had over 40% of the vascular sealing device market in 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
33
<PAGE>
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
filed our PMA application with 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 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
34
<PAGE>
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.
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
35
<PAGE>
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 and
patent applications relating to the Duett sealing device to us on a worldwide,
perpetual, royalty-free basis. At the time of assignment, there existed one
United States patent issued that is directed to a balloon catheter sealing
device and method and which expires in May 2013, three United States patents
pending and an international patent application pending which designated
numerous foreign countries and regions.
Since commencing operations, we have continued the prosecution of the
pending United States patent applications and filed new patent applications. A
second United States patent has issued that is directed to a balloon catheter
and procoagulant sealing device and method and which expires in October 2015. A
third United States patent has also issued that contains method claims
concerning the use of a balloon catheter and flowable procoagulant and which
expires in October 2015. 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
36
<PAGE>
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 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 are defending 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.
On September 22, 1999, we received a letter from the Daig division of St.
Jude Medical, Inc. claiming that the manufacture, use, marketing and sale of
our Duett sealing device infringes upon certain United States patents licensed
by Daig. The letter referenced a prior letter dated August 18, 1998 from us to
the prior licensee of those patents in which we made a proposal intended to
avoid the anticipated litigation over those patents. The proposed license was
rejected. It is likely that litigation will be commenced in the near future
concerning this claim. Daig could initiate a lawsuit requesting an injunction
that, if issued, would prohibit us from selling our product. Furthermore, Daig
could allege monetary damages that, if awarded, would significantly harm our
business. We have previously consulted with our intellectual property counsel
regarding Daig's United States patents and do not believe that we infringe
them. We believe the allegations included in the letter are without merit, and
we intend to defend any lawsuit that may arise from these allegations
vigorously. It is not possible to predict the timing, substance or outcome of
any lawsuit that may arise from these allegations, including whether we will be
prohibited from selling our Duett sealing device in the United States or
internationally, or to estimate the amount or range of potential loss, if any.
It is likely that we will become the subject of additional intellectual
property claims in the future related to our Duett sealing device. Our defense
of the Datascope claim, the Daig claim and any other intellectual property
claims filed in the future, regardless of the merits of the complaint, could
divert the attention of our technical and management personnel away from the
development and marketing of the Duett sealing device for significant periods
of time. The costs incurred to defend the Datascope claim, the Daig claim and
other future claims could be substantial and adversely affect us, even if we
are ultimately successful. An adverse determination in the Datascope matter,
the Daig matter or in other litigation or interference proceedings in the
future could prohibit us from selling our product, subject us to significant
liabilities to third parties or require us to seek licenses from third parties.
We also rely on trade secret protection for certain aspects of our
technology. We typically require our employees, consultants and vendors for
major components to execute confidentiality 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.
37
<PAGE>
We also intend to register the trademarks and trade names through which we
conduct our business. To date, we have applied for registration in the United
States of the mark "Vascular Solutions Duett" and the Duett logo.
Facilities
Our principal offices are in approximately 24,000 square feet of leased
space in a suburb of Minneapolis, Minnesota. These facilities include
approximately 8,200 square feet used for manufacturing activities,
approximately 3,300 square feet used for research and laboratory activities,
with the remainder used for administrative offices. Our lease for these
facilities expires March 31, 2003 and includes both an option to renew for an
additional five-year term and an option to terminate after April 1, 2001. We
believe that these facilities will be adequate to meet our needs through at
least the end of 2000.
Employees
As of 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 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 are defending 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.
38
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table provides information concerning our executive officers
and directors:
<TABLE>
<CAPTION>
Name Age Position
---- --- -------------------------------------
<S> <C> <C>
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
</TABLE>
Howard Root has served as our Chief Executive Officer and a director since
he co-founded Vascular Solutions in February 1997. From April 1996 through
February 1997, Mr. Root was the Vice President of Gateway Alliance, LLC, a
provider of management services to start-up businesses. From 1990 to 1995, Mr.
Root was employed by ATS Medical, Inc., a mechanical heart valve company, most
recently as Vice President and General Counsel. Prior to joining ATS Medical,
Mr. Root practiced corporate law, specializing in representing emerging growth
companies, at the law firm of Dorsey & Whitney for over five years. Mr. Root
received his B.S. in Economics and J.D. degrees from the University of
Minnesota.
Gary Gershony, M.D., is the principal inventor of the Duett sealing device
and has served as our Medical Director as well as a director since he co-
founded Vascular Solutions in February 1997. Dr. Gershony also is in private
practice as an interventional cardiologist with John Muir Hospital in Walnut
Creek, California. From 1997 through March 1998, Dr. Gershony was associated
with Los Angeles Cardiology Associates. From 1993 through 1997, Dr. Gershony
was the Director of the Cardiac Catheterization Laboratories and Interventional
Cardiology at the University of California Davis Medical Center and an
Assistant Professor of Medicine (Cardiology) at the University of California
Davis School of Medicine. From 1989 to 1993, Dr. Gershony served as Clinical
Assistant Professor of Medicine at the University of Oklahoma College of
Medicine and Associate Director of Research Cardiology at Hillcrest Medical
Center. Dr. Gershony is a Fellow of the American College of Cardiology, the
American Heart Association, the Society for Cardiac Angiography and
Interventions and the American Society for Lasers in Medicine and Surgery. Dr.
Gershony received his M.D. degree from the University of Toronto and performed
his interventional cardiology fellowship at Emory University.
Michael Nagel has served as our Vice President of Sales & Marketing since
June 1997. Prior to joining us, Mr. Nagel was the Director of Sales & Marketing
at Quantech, Ltd., a developer of point of care medical diagnostic testing
products, where he worked since July 1996. From 1992 though July 1996, Mr.
Nagel was the mid-west division sales manager of B. Braun Cardiovascular, a
manufacturer of cardiovascular devices and catheters. From 1991 through 1992,
Mr. Nagel was the Director of Worldwide Sales for the Medical Products Division
of Angeion Corporation, a manufacturer of angioplasty accessories and pediatric
catheters. Prior to 1991, Mr. Nagel performed a variety of sales and marketing
functions with Abbott Labs Diagnostic Division for over five years. Mr. Nagel
received his B.A. and M.B.A. degrees from the University of St. Thomas.
39
<PAGE>
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.
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
40
<PAGE>
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.
41
<PAGE>
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
42
<PAGE>
any time by giving ten working days written notice to the other party. During
the term of the agreement and for one year after its termination, Dr. Gershony
is prohibited from working on a competitive vascular sealing device.
Executive Compensation
The following summary compensation table indicates the cash and non-cash
compensation earned by each our executive officers whose total compensation
exceeded $100,000 during the fiscal year ended December 31, 1998. All other
compensation consists of premiums we pay for health insurance benefits.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long Term
Compensation Compensation
-------------- ------------
Shares
Salary Bonus Underlying All Other
Name and Principal Position ($) ($) Options (#) Compensation ($)
- --------------------------- -------- ----- ------------ ----------------
<S> <C> <C> <C> <C>
Howard Root ....................... $115,000 $-- -- $1,510
Chief Executive Officer
Michael Nagel...................... 100,000 -- 10,000 5,078
Vice President, Sales & Marketing
</TABLE>
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
<TABLE>
<CAPTION>
Potential
Realizable
Value at
Assumed Annual
Rates of Stock
Price
Appreciation
Individual Grants for Option Term
----------------------------------------------- ---------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees Exercise Price Expiration
Name Granted in 1998 Per Share Date 5% 10%
- ---- ---------- ---------- -------------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Howard Root.... -- -- % $-- -- $ -- $ --
Michael Nagel.. 10,000 4.6 3.00 7/19/08 18,867 47,812
</TABLE>
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
43
<PAGE>
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
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
Shares December 31, 1998 at December 31, 1998
Acquired Value ------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Howard Root............. -- $-- 6,485 9,726 $11,349 $17,021
Michael Nagel........... -- -- 19,400 35,600 31,850 49,400
</TABLE>
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.
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
44
<PAGE>
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.
Dr. James Wilentz, who is an interventional cardiologist at the Beth Israel
Medical Center in New York City, New York.
45
<PAGE>
CERTAIN TRANSACTIONS
In December 1998, we issued 1,777,777 shares of Series B preferred stock at
$4.50 per share. Of this amount, Stephens Vascular Preferred, LLC, an affiliate
of Stephens Inc., purchased 1,221,466 shares. Mr. James Jacoby Jr., one of our
directors, is a Vice President of Stephens Inc. Affiliates of Olympic Venture
Partners, a 5% beneficial shareholder, purchased a total of 100,000 shares of
Series B preferred stock. Mr. Langeler, one of our directors, is a general
partner of Olympic Venture Partners and possesses voting control of the
entities noted above. TGI Fund II, LC, an affiliate of Tredegar Investments and
a 5% beneficial shareholder, purchased a total of 100,000 shares of Series B
preferred stock.
In connection with the Series B preferred stock purchase agreement, we
entered into a put and option agreement with Stephens Vascular Preferred, LLC.
Under this agreement, we have the right to sell to Stephens Vascular Preferred,
LLC, and Stephens Vascular Options, LLC has the right to purchase from us, up
to 600,000 shares of our common stock at $5.00 per share. On June 30, 1999 we
exercised our right under this agreement and issued 600,000 shares of common
stock to Stephens Vascular Preferred, LLC in exchange for $3,000,000. The right
of Stephens Vascular Options, LLC to purchase 600,000 shares of our common
stock at $5.00 per share 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
285,715 shares of our common stock at $7.00 per share. If our PMA application
is approved by the FDA, the exercise price increases to $8.00 per share and the
number of shares that Stephens Vascular Options, LLC has the right to purchase
decreases to 250,000. The option expires on December 31, 2000.
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:
<TABLE>
<CAPTION>
Common Stock
Issuable Upon
Conversion of
Preferred Stock
-------------------
Shareholder Series A Series B
----------- --------- ---------
<S> <C> <C>
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
</TABLE>
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.
46
<PAGE>
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.
<TABLE>
<CAPTION>
Percentage of Shares
Number of Beneficially Owned
Shares -------------------- Shares
Beneficially Before the After the Subject to
Owned Offering Offering Options
------------ ---------- --------- ----------
<S> <C> <C> <C> <C>
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
</TABLE>
- --------
* Less than 1%
(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.
47
<PAGE>
(2) Consists of 724,000 shares held by Olympic Venture Partners IV, L.P.;
988,190 shares held by Olympic Venture Partners III, L.P.; 48,863 shares
held by OVP III Entrepreneurs Fund, L.P. and 38,947 shares held by OVP IV
Entrepreneurs Fund, L.P. The address of all of these entities is 2420
Carillion Point, Kirkland, Washington 98033. Mr. Langeler is a general
partner of Olympic Venture Partners and possesses shared voting control of
the entities noted above. Mr. Langeler disclaims beneficial ownership of
these shares other than his interest in the funds.
(3) An affiliate of Tredegar Investments. The address is 6501 Columbia Center,
Seattle, WA 98104.
(4) Dr. Gershony's address is 2495 Xenium Lane North, Minneapolis, Minnesota
55441.
(5) Includes an aggregate of 18,000 shares registered in the name of Mr.
Nagels' three minor children's irrevocable trusts.
48
<PAGE>
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:
49
<PAGE>
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
285,715 shares of our common stock at $7.00 per share held by Stephens Vascular
Options, LLC. If our PMA application is approved by the FDA, the exercise price
of this option increases to $8.00 per share and the number of shares that
Stephens Vascular Options, LLC has the right to purchase decreases to 250,000.
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
50
<PAGE>
deprive our shareholders of opportunities to sell their shares of common stock
at prices higher than prevailing market prices.
Section 302A.671 of the Minnesota Business Corporation Act applies, with
exceptions, to any acquisition of our voting stock from a person other than
us, and other than in connection with certain mergers and exchanges to which
we are a party, that results in the beneficial ownership of 20% or 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.
51
<PAGE>
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:
. 165,000 shares will be available for immediate sale in the public market
on the date of this prospectus;
. 247,250 shares will be available for sale beginning 75 days after the
date of this prospectus; and
. 7,687,104 shares will be available for sale upon the expiration of
agreements between our shareholders and the underwriters at varying
dates beginning 180 days after the date of this prospectus.
In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person or persons whose shares are aggregated, including an
affiliate, who has beneficially owned restricted shares for at least one year,
is entitled to sell these shares. However, the number of these shares sold
within any three-month period may not exceed the greater of 1% of the then
outstanding shares of common stock, approximately 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.
52
<PAGE>
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.
53
<PAGE>
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.
<TABLE>
<CAPTION>
Number of Shares
Underwriter ----------------
<S> <C>
William Blair & Company, L.L.C.................................
Dain Rauscher Wessels..........................................
Stephens Inc...................................................
---------
Total........................................................ 2,675,000
=========
</TABLE>
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.
54
<PAGE>
The following table summarizes the compensation to be paid by us to the
underwriters:
<TABLE>
<CAPTION>
Total
-----------------------------
Without With
Per Share Over-Allotment Over-Allotment
--------- -------------- --------------
<S> <C> <C> <C>
Public offering price.................. $ $ $
Underwriting discount paid by us....... $ $ $
</TABLE>
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 7,674,073 shares of capital
stock or 94.7% 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
capitalization of other companies in our industry, estimates of our potential
and other factors that we and the representatives deem relevant.
55
<PAGE>
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.
The rules of the National Association of Securities Dealers, Inc. (the
"NASD") provide that an NASD member may not participate in a public offering of
an issuer's securities if more than 10% of the issuer's common stock is
beneficially owned by the member participating in the distribution of the
offering, unless a "qualified independent underwriter" has been engaged as
required by the rules of the NASD. Stephens, Inc., through its affiliates,
Stephens Vascular Preferred LLC and Stephens Vascular Options LLC, beneficially
owns 25.1% of our common stock. See "Principal Shareholders" and "Certain
Transactions."
In view of this ownership, this offering is being conducted in accordance
with rule 2720(d)(2) of the NASD conduct rules, and William Blair & Company
L.L.C. is acting as "qualified independent underwriter" within the meaning of
these rules. In connection with this offering, William Blair & Company L.L.C.
has participated in the preparation of the registration statement of which this
prospectus forms a part. It has exercised its usual standards of "due
diligence" during its participation and has recommended the maximum price at
which the common stock may be offered.
LEGAL MATTERS
Dorsey & Whitney LLP, Minneapolis, Minnesota, will pass upon the validity of
the issuance of shares of common stock offered by this prospectus for Vascular
Solutions. Certain legal matters will be passed on for the underwriters by
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
56
<PAGE>
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.
57
<PAGE>
VASCULAR SOLUTIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
</TABLE>
F-1
<PAGE>
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
<PAGE>
VASCULAR SOLUTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, Pro forma
------------------------ June 30, June 30,
1997 1998 1999 1999
----------- ----------- ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
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
=========== =========== ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
VASCULAR SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended June
Year Ended December 31, 30,
------------------------ ------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
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
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
VASCULAR SOLUTIONS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock Common Stock Additional
----------------- ----------------- ----------------- Paid-in Deferred Accumulated
Shares Amount Shares Amount Shares Amount Capital Compensation Deficit Total
--------- ------- --------- ------- --------- ------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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) -- -- 1,366
--------- ------- --------- ------- --------- ------- ----------- ---------- ------------ -----------
Balance at
December 31,
1996............. -- -- -- -- 1,366,250 13,663 (12,297) -- -- 1,366
Sale of common
stock at $1.50
per share in
January and
February 1997,
net of offering
costs........... -- -- -- -- 1,500,000 15,000 2,064,499 -- -- 2,079,499
Value of options
granted for
services........ -- -- -- -- -- -- 25,440 -- -- 25,440
Exercise of
stock options... -- -- -- -- 7,000 70 10,430 -- -- 10,500
Sale of Series A
preferred stock
at $2.50 per
share in
December 1997,
net of offering
costs........... 2,000,000 20,000 -- -- -- -- 4,940,954 -- -- 4,960,954
Sale of common
stock at $3.00
per share in
December 1997,
net of offering
costs........... -- -- -- -- 680,000 6,800 1,782,774 -- -- 1,789,574
Net loss........ -- -- -- -- -- -- -- -- (1,651,818) (1,651,818)
--------- ------- --------- ------- --------- ------- ----------- ---------- ------------ -----------
Balance at
December 31,
1997............. 2,000,000 20,000 -- -- 3,553,250 35,533 8,811,800 -- (1,651,818) 7,215,515
Sale of common
stock at $3.00
per share in
March and April
1998............ -- -- -- -- 126,667 1,266 378,734 -- -- 380,000
Exercise of
stock options... -- -- -- -- 19,700 197 32,353 -- -- 32,550
Value of options
granted for
services........ -- -- -- -- -- -- 78,400 -- -- 78,400
Sale of Series B
preferred stock
at $4.50 per
share in
December 1998,
net of offering
costs........... -- -- 1,777,777 17,778 -- -- 7,962,719 -- -- 7,980,497
Net loss........ -- -- -- -- -- -- -- -- (5,141,186) (5,141,186)
--------- ------- --------- ------- --------- ------- ----------- ---------- ------------ -----------
Balance at
December 31,
1998............. 2,000,000 20,000 1,777,777 17,778 3,699,617 36,996 17,264,006 -- (6,793,004) 10,545,776
Exercise of
stock options... -- -- -- -- 613,440 6,135 3,027,735 -- -- 3,033,870
Value of options
granted for
services........ -- -- -- -- -- -- 13,360 -- -- 13,360
Value of warrant
granted related
to supply
agreement....... -- -- -- -- -- -- 257,000 -- -- 257,000
Deferred
compensation
related to
option grants... -- -- -- -- -- -- 140,625 (140,625) -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- 13,070 -- 13,070
Net loss........ -- -- -- -- -- -- -- -- (3,532,971) (3,532,971)
========= ======= ========= ======= ========= ======= =========== ========== ============ ===========
Balance at June
30, 1999
(unaudited)...... 2,000,000 $20,000 1,777,777 $17,778 4,313,057 $43,131 $20,702,726 $ (127,555) $(10,325,975) $10,330,105
========= ======= ========= ======= ========= ======= =========== ========== ============ ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
VASCULAR SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June
Year Ended December 31, 30,
------------------------ ------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating activities
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
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- --------
<S> <C> <C>
Raw materials............................................... $59,710 $273,027
Finished goods.............................................. -- 45,784
------- --------
$59,710 $318,811
======= ========
</TABLE>
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:
<TABLE>
<S> <C>
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
</TABLE>
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
F-7
<PAGE>
VASCULAR SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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).
F-8
<PAGE>
VASCULAR SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
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:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
-------- ---------
<S> <C> <C>
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
======== =========
</TABLE>
F-9
<PAGE>
VASCULAR SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
Future minimum lease commitments under the existing operating lease as of
December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................................. $ 95,232
2000............................................................. 98,868
2001............................................................. 100,080
2002............................................................. 100,080
2003............................................................. 25,020
--------
$419,280
========
</TABLE>
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:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
--------- -----------
<S> <C> <C>
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................................. $ -- $ --
========= ===========
</TABLE>
F-10
<PAGE>
VASCULAR SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
1997 1998
----- -----
<S> <C> <C>
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...................................... -- % -- %
===== =====
</TABLE>
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
during the six months ended June 30, 1999. The amount was classified as
research and development expense because it related to product development
activities.
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.
F-11
<PAGE>
VASCULAR SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 600,000 shares of common stock at $5.00 or 500,000 shares at $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 285,715 shares of common stock at $7.00 or
250,000 shares at $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
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.
F-12
<PAGE>
VASCULAR SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Option activity is summarized as follows:
<TABLE>
<CAPTION>
Plan Options Outstanding
-----------------------------
Weighted
Average
Exercise
Shares Price
Available Non- Per
for Grant Incentive Qualified Share
--------- --------- --------- --------
<S> <C> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended December 31, Six Months
------------------------ Ended
1997 1998 June 30, 1999
----------- ----------- -------------
(unaudited)
<S> <C> <C> <C>
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)
</TABLE>
F-13
<PAGE>
VASCULAR SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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.
F-14
<PAGE>
VASCULAR SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Sales to significant customers as a percentage of total revenues are as
follows for the year ended December 31, 1998:
<TABLE>
<S> <C>
German distributor.................................................. 65.0%
Austrian distributor................................................ 15.8%
</TABLE>
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 Events (unaudited)
In July 1999, the Company was named as a defendant in a patent infringement
lawsuit brought by a competitor. The complaint requests a judgment that the
Company's device infringes and, following FDA approval will infringe, a United
States patent held by the competitor and asks for relief in the form of an
injunction that would prevent the Company from selling its product in the
United States as well as an award of attorney's fees, costs and disbursements.
The Company believes the claim is without merit and intends to defend the
lawsuit vigorously. On August 12, 1999, the Company filed its 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.
On September 22, 1999, the Company received a letter from the Daig division
of St. Jude Medical, Inc. claiming that the manufacture, use, marketing and
sale of our Duett sealing device infringes upon certain United States patents
licensed by Daig. The letter referenced a prior letter dated August 18, 1998
from the Company to the prior licensee of those patents in which the Company
made a proposal intended to avoid the anticipated litigation over those
patents. The proposed license was rejected. It is likely that litigation will
be commenced in the near future concerning this claim. Daig could initiate a
lawsuit requesting an injunction that, if issued, would prohibit the Company
from selling the Duett sealing device. Furthermore, Daig could allege monetary
damages that, if awarded, would significantly harm the Company's business. The
Company believes the allegations included in the letter are without merit, and
it intends to defend any lawsuit that may arise from these allegations
vigorously. It is not possible to predict the timing, substance or outcome of
any lawsuit that may arise from these allegations, including whether the
Company will be prohibited from selling the Duett sealing device in the United
States or internationally, or to estimate the amount or range of potential
loss, if any.
F-15
<PAGE>
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.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 4
Forward-Looking Statements............................................... 13
Trademarks............................................................... 13
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Financial Data.................................................. 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 24
Management............................................................... 39
Certain Transactions..................................................... 46
Principal Shareholders................................................... 47
Description of Capital Stock............................................. 49
Shares Eligible for Future Sale.......................................... 52
Underwriting............................................................. 54
Legal Matters............................................................ 56
Experts.................................................................. 56
Where You Can Find More Information...................................... 56
Index to Financial Statements............................................ F-1
</TABLE>
-----------------
Until , 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
Common Stock
-----------------
PROSPECTUS
, 1999
-----------------
William Blair & Company
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Stephens Inc.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
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.
<TABLE>
<S> <C>
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
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 302A.521 of the Minnesota Statutes provides that a corporation shall
indemnify any person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of such person against
judgments, penalties, fines (including, without limitation, excise taxes
assessed against such person with respect to any employee benefit plan),
settlements and reasonable expenses, including attorneys' fees and
disbursements, incurred by such person in connection with the proceeding, if,
with respect to the acts or omissions of such person complained of in the
proceeding, such person (1) has not been indemnified therefor by another
organization or employee benefit plan for the same judgments, penalties or
fines; (2) acted in good faith; (3) received no improper personal benefit and
Section 302A.255 (with respect to director conflicts of interest), if
applicable, has been satisfied; (4) in the case of a criminal proceeding, had
no reasonable cause to believe the conduct was unlawful; and (5) in the case of
acts or omissions in such person's official capacity for the corporation,
reasonably believed that the conduct was in the best interests of the
corporation, or in the case of acts or omissions in such person's official
capacity for other affiliated organizations, reasonably believed that the
conduct was not opposed to the best interests of the corporation. Section
302A.521 also requires payment by a corporation, upon written request, of
reasonable expenses in advance of final disposition of the proceeding in
certain instances. A decision as to required indemnification is made by a
disinterested majority of the Board of Directors present at a meeting at which
a disinterested quorum is present, or by a designated committee of the Board,
by special legal counsel, by the shareholders or by a court.
Provisions regarding indemnification of officers and directors of Vascular
Solutions to the extent permitted by Section 302A.521 are contained in Vascular
Solutions' bylaws.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Since December 20, 1996 (inception), the Company has issued and sold the
following securities that were not registered under the Securities Act:
1. On December 20, 1996, the Company sold 1,366,250 shares of common stock
at $.001 per share to the founders of the Company. The Company received
proceeds of $1,366 from the sale of common stock.
2. At various times during the period from December 20, 1996 through August
31, 1999, the Company has granted stock options to 85 individuals, including 69
employees, 9 consultants, 2 directors and 5 other individuals providing
services to the Company under its stock option plan covering an aggregate of
928,511 shares of the Company's common stock, at exercise prices ranging from
$1.50 to $5.00 per share. At various times during the period from July 1997
through August 31, 1999, a total of 48,660 shares of common stock were issued
by the Company upon the exercise of stock options under its stock option plan.
3. In January and February 1997, the Company sold 1,000,000 shares of common
stock at $1.50 per share, from which the Company received net proceeds of
approximately $1,329,000, to 56 individuals. In connection with this sale of
common stock, the Company granted warrants to the placement agent to purchase a
total of 100,000 shares of common stock at an exercise price of $1.50 per
share. The warrants expire in January and February 2007.
4. In February 1997, the Company sold 500,000 shares of common stock to two
entities affiliated with Olympic Venture Partners at $1.50 per share. Mr.
Gerard Langeler, a director of Vascular Solutions, is a general partner of
Olympic Venture Partners.
5. In December 1997, the Company sold 2,000,000 shares of Series A preferred
stock at $2.50 per share to entities affiliated with Tredegar Investments and
Olympic Venture Partners.
6. In December 1997, the Company sold 680,000 shares of common stock at
$3.00 per share, from which the Company received net proceeds of approximately
$1,790,000, to 59 individuals. In connection with this sale of common stock,
the Company granted warrants to the placement agent to purchase a total of
68,000 shares of common stock at an exercise price of $3.00 per share. The
warrants expire in December 2007.
7. Between March and April 1998, the Company sold a total of 126,667 shares
of common stock at $3.00 per share to a total of three individuals who are
unaffiliated with the Company.
8. In December 1998, the Company sold 1,777,777 shares of Series B preferred
stock at $4.50 per share to 18 entities and individuals, including 1,221,466
shares to an entity affiliated with Stephens Inc., 100,000 shares to an entity
affiliated with Tredegar Investments, and 100,000 shares to entities affiliated
with Olympic Venture Partners. In connection with the Series B preferred stock
purchase agreement, the Company entered into a put and option agreement with
Stephens Vascular Preferred, LLC and Stephens Vascular Options, LLC giving the
Company the right to sell to Stephens Vascular Preferred up to $3,000,000 of
common stock at $5.00 or $6.00 per share based on the Company attaining certain
milestones. On June 30, 1999, we exercised our right and issued 600,000 shares
of common stock to Stephens Vascular Preferred in exchange for $3,000,000. 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
II-2
<PAGE>
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. 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.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
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
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
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
</TABLE>
- --------
* Previously filed.
** Confidential information has been omitted from this exhibit and filed
separately with the Securities and Exchange Commission accompanied by a
confidential treatment request pursuant to Rule 406 under the Securities Act
of 1933, as amended.
(b) Financial Statement Schedules
Not applicable.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling
II-4
<PAGE>
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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 4 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Minneapolis, State of Minnesota, on October 8, 1999.
Vascular Solutions, Inc.
/s/ Howard Root
By: _________________________________
Howard Root
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to the Registration Statement on Form S-1 has been signed by the
following persons in the capacities indicated on October 8, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
/s/ Howard Root Chief Executive Officer
______________________________________ and Director (principal
Howard Root executive officer)
/s/ David Christofferson Chief Financial Officer
______________________________________ (principal financial
David Christofferson officer and principal
accounting officer)
* Director
______________________________________
Gary Gershony
* Director
______________________________________
Gerard Langeler
* Director
______________________________________
Gabriel Vegh
* Director
______________________________________
Daniel Sullivan
* Director
______________________________________
James Jacoby, Jr.
</TABLE>
/s/ Howard Root
*By: ____________________________
Howard Root
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
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
</TABLE>
- --------
* 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.
<PAGE>
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
October 8, 1999
