-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: [email protected]
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
ABr9mN8EYBZ16d26FUrhKS6DRwJ/lDnJvKxg2LkWdHT2r277Ggz/xvBd2qDlUe5S
r78zi6vTlS2/+lWba3uIVw==
<SEC-DOCUMENT>0000897101-03-000164.txt : 20030228
<SEC-HEADER>0000897101-03-000164.hdr.sgml : 20030228
<ACCEPTANCE-DATETIME>20030228081711
ACCESSION NUMBER: 0000897101-03-000164
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 20021231
FILED AS OF DATE: 20030228
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: VASCULAR SOLUTIONS INC
CENTRAL INDEX KEY: 0001030206
STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841]
IRS NUMBER: 411859679
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-27605
FILM NUMBER: 03584536
BUSINESS ADDRESS:
STREET 1: 2495 XENIUM LANE NORTH
CITY: MINNEAPOLIS
STATE: MN
ZIP: 55441
BUSINESS PHONE: 6125532970
MAIL ADDRESS:
STREET 1: 2495 XENIUM LANE NORTH
CITY: MINNEAPOLIS
STATE: MN
ZIP: 55441
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>vasc030918_10k.txt
<DESCRIPTION>VASCULAR SOLUTIONS, INC. FORM 10-K 12-31-02
<TEXT>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K (MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ________
Commission File Number: 0-27605
-------------------------------------
VASCULAR SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1859679
(State of Incorporation) (IRS Employer Identification No.)
6464 SYCAMORE COURT
MINNEAPOLIS, MINNESOTA 55369
(Address of Principal Executive Offices)
(763) 656-4300
(Registrant's telephone number, including are code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
-------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold on February 15, 2003 was $8,321,000.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of February 15, 2003, the number of shares outstanding of the registrant's
common stock was 12,850,239.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2003 Annual Meeting of
Shareholders to be held on April 15, 2003 are incorporated by reference in Part
III of this Annual Report on Form 10-K.
================================================================================
<PAGE>
PART I
ITEM 1. BUSINESS
OVERVIEW
We are a medical device company focused on bringing clinically advanced
solutions to interventional cardiologists and interventional radiologists
worldwide. Our current product line includes the Duett(TM) sealing device, the
D-Stat(TM) flowable hemostat and the Acolysis(R) therapeutic ultrasound system.
As a vertically-integrated medical device company, we generate ideas and create
new interventional medical devices, and then deliver these products directly to
the physician through our direct domestic sales force and international
distribution network.
Our principal product, the Duett sealing device, is designed to provide a
complete seal of the puncture site following catheterization procedures such as
angiography, angioplasty and stenting. Our Duett sealing device combines an
easy-to-use balloon catheter delivery mechanism with a biological procoagulant
mixture, which we believe offers advantages over both manual compression and
competitive vascular sealing devices. We began selling our Duett sealing device
in Europe in February 1998 and in the United States in June 2000. Over 150,000
Duett sealing devices have been sold and deployed worldwide, and we achieved
over $10 million in net sales of the Duett sealing device in its first year on
the United States market. In the fourth quarter of 2001 we introduced the
Diagnostic Duett version of the Duett sealing device, which utilizes a lower
dose of progcoagulant for the less-challenging diagnostic subset of
catheterization procedures. In mid-2002 we introduced the next generation "Pro"
line of the Duett sealing device for improved ease-of-use, and we are currently
working on future generations of the Duett product line.
The second product we have developed and commercialized is the D-Stat
flowable hemostat, which we began selling worldwide in February 2002. The D-Stat
utilizes the clinically proven procoagulant components of the Duett sealing
device to provide a powerful stop to active bleeding. The thick, yet flowable
procoagulant controls active bleeding by initiating the body's own clotting
mechanisms in the same manner as the Duett procoagulant. The D-Stat has clinical
use in a multitude of interventional procedures, and substantial extension
market opportunities in other medical practice areas.
During the second quarter of 2002 we acquired the Acolysis ultrasound
thrombolysis system. The Acolysis system uses ultrasound energy generated by the
controller that is delivered intravascularly by the disposable probe to lyse
blood clots and plaque. The Acolysis system is sold only in international
markets, where it has been sold principally for the treatment of peripheral
vascular disease. Upon completion of our acquisition and integration, we
commenced active international sales of the Acolysis probes through our existing
international distribution network in late 2002.
We are developing several additional products that leverage our existing
infrastructure to bring additional solutions to the interventional cardiologist
and radiologist. Additional interventional medical devices that we expect to
gain regulatory clearance and market launch in the second half of 2003 include
the D-Stat Dry hemostatic bandage, the D-Stat Radial hemostat band, the Pronto
extraction catheter and a minimally invasive varicose vein treatment device.
INTERVENTIONAL CARDIOLOGY AND INTERVENTIONAL RADIOLOGY 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. Peripheral vascular disease
affects over 8 million people
1
<PAGE>
worldwide. 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 9 million diagnostic and
interventional catheterization procedures worldwide in 2002. 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. The overall interventional medical device market in 2002
exceeded $5 billion worldwide.
Each procedure using a catheter requires a puncture in an artery, usually
the femoral artery in the groin area and sometimes the radial artery in the
wrist of the patient to gain access for the catheter. The catheter then is
deployed through an introducer sheath and into the vessel to be diagnosed or
treated. Upon completion of the procedure and 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 traditional 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.
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. In
addition to the Duett sealing device, four devices have received FDA approval
and are currently being marketed around the world. In aggregate, approximately
$320 million of the four FDA-approved devices were sold worldwide in 2002
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 more than $1 billion. Accordingly, the market opportunity for
vascular sealing devices is less than 20% penetrated.
THE VASCULAR SOLUTIONS DUETT SEALING DEVICE
We believe our Duett sealing device (1) offers a complete seal of the
puncture site with nothing left behind in the artery, (2) is an easy-to-use
system and (3) minimizes patient discomfort and permits early ambulation. 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 enables the use of
the Duett sealing device even in the presence of 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.
2
<PAGE>
We commenced sales of a new version of our Duett sealing device, the
Diagnostic Duett sealing device, for a subset of catheterization patients in the
fourth quarter of 2001. The Diagnostic Duett is tailored specifically for
treating diagnostic patients. Because the Duett sealing device is a
one-size-fits-all device, the procoagulant is dosed appropriately for the most
challenging catheterization patients. We developed the Diagnostic Duett with a
lower dose of procoagulant that is tailored specifically for the
less-challenging diagnostic patients where substantial blood-thinning drugs are
less frequently used. All other components of the Diagnostic Duett, including
the balloon catheter, are identical to the original Duett sealing device. This
results in the Diagnostic Duett having identical deployment steps, but being
less expensive and yet fully effective for the over 2.5 million diagnostic
procedures that occur each year in the United States.
In July 2002 we launched the next generation "Pro" line of the Duett
sealing device. The Pro line enhances the Duett catheter by improving its
robustness and simplifying the device deployment steps.
THE D-STAT FLOWABLE HEMOSTAT
Our second product, the D-Stat flowable hemostat, is a blood clotting gel
that can be delivered topically and into voids and open spaces to seal against
active bleeding. The D-Stat offers the advantage of being thick to maintain its
position, yet easily deliverable. The D-Stat consists of the same collagen,
thrombin and diluent components as the Duett sealing device, which has been
proven effective in controlling bleeding from aggressive arterial puncture
sites. After a simple reconstitution step, the D-Stat hemostat can be applied
directly to a wide variety of bleeding surfaces using one of the three included
applicator tips. Since the D-Stat is applied locally, no special catheter
delivery system is required. The D-Stat hemostat is shelf stable and can be
prepared up to three hours before use.
The D-Stat flowable hemostat can be used in a wide variety of
interventional procedures as an adjunct to hemostasis. Examples of these uses
include sealing the access site after the removal of catheters from A-V access
grafts, sealing very small punctures of the femoral artery, and sealing
following venous punctures. We believe that the D-Stat flowable hemostat is the
only hemostat available in the United States that combines the thick consistency
and extremely flowable delivery that is preferred by the interventional
physician in these opportunities.
We commenced sales of the D-Stat worldwide in the first quarter of 2002,
and by the end of the fourth quarter of 2002 we reached nearly $1 million in
annualized net sales of the D-Stat. We achieved this revenue with limited
approved clinical indications for the D-Stat, which initially has been limited
to topical bleeding and blood "oozing." We believe these indications are but a
small fraction of the total potential market for the D-Stat. We recently filed
for regulatory approval for a clinical study to confirm our next clinical use of
the D-Stat in the hemostasis of prepectoral pockets created in pacemaker and
defribrillator implantations. We estimate that the U.S. market opportunity for
this prepectoral pocket indication is greater than 100,000 procedures each year.
Following the prepectoral pockets study, we expect to perform clinical studies
on the use of D-Stat to seal following breast biopsy and liver biopsy
procedures, each of which we believe can match or exceed the prepectoral pocket
market opportunity for D-Stat.
THE ACOLYSIS ULTRASOUND THROMBOLYSIS SYSTEM
Our third product, the Acolysis ultrasound thrombolysis system, uses high
energy, low frequency ultrasound to lyse thrombus into subcapillary particles
without damaging vessel walls. The therapeutic principle of the Acolysis system
is to generate ultrasound thrombolysis by the selective disruption of the fibrin
matrix of the thrombus. Cavitation produces subcapillary-sized particles,
resulting in a debulking of the arterial lesion. Peripheral vascular disease,
the initial market opportunity, affects over 8 million people worldwide. We
believe
3
<PAGE>
the Acolysis System represents a breakthrough in both therapy and technology,
and initial clinical experience and one-year follow-up with the product has been
favorable.
Our international sales efforts on the Acolysis therapeutic ultrasound
product began in earnest during the fourth quarter of 2002. Our first indication
for this product is to open chronic total occlusions in peripheral arteries.
Currently, in Germany we have approximately 10 Acolysis controllers placed in
the field generating a mix of clinical evaluations and sales. We are in the
process of planning and structuring a clinical study to confirm the
effectiveness of the use of the Acolysis system to open chronic total
occlusions. We expect to commence a U.S. clinical study of the Acolysis product
in 2004.
BUSINESS STRATEGY
Our primary objective is to establish ourselves as a leading supplier of
clinically superior medical devices for substantial opportunites within
interventional medicine. Starting with our Duett sealing device in the large
vascular sealing device market, the key steps in achieving our primary objective
are the following:
o ESTABLISH OUR CLINICALLY-ORIENTED DIRECT SALES FORCE IN THE UNITED
STATES. During the third quarter of 2000 we commenced sales of our
Duett sealing device in the United States through a direct sales
force that includes clinical specialists who train interventional
cardiologists, radiologists and catheterization laboratory
administrators on the use of our products. We believe that effective
training is a key factor in promoting use of interventional medical
devices. We have created and will continue to work to improve an
in-the-field training and certification program for the use of our
products. As of December 31, 2002, our United States direct sales
force consisted of approximately 50 employees.
o CONTINUE TO PROMOTE THE DUETT SEALING DEVICE'S BENEFITS COMPARED TO
MANUAL COMPRESSION AND OTHER DEVICES. We believe that the primary
benefits of the Duett sealing device are improved patient outcomes
and provider efficiencies. We intend to continue 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.
o LEVERAGE FUTURE DEVICES THROUGH OUR DIRECT SALES FORCE TO OUR
EXISTING CUSTOMERS. We intend to leverage our direct sales force by
bringing additional products to the interventional physician. The
D-Stat is our first product that takes advantage of this strategy,
and the Acolysis product in international markets is the second
product in our pipeline. Our research and development team is
working on four additional substantial medical devices for the
interventional physician that we expect to launch through our
existing distribution network in the second half of 2003.
SALES, MARKETING AND DISTRIBUTION
In the third quarter of 2000 we commenced sales of our Duett sealing
device in the United States through our direct sales organization. As of
December 31, 2002, our direct sales force consisted of approximately 50
employees. 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 our focused direct
sales force. We also believe that our sales force will be able to sell our new
products to the same customer base.
As part of our sales force, we have hired clinical specialists to train
physicians and other healthcare personnel on the use of our products. We believe
that effective training is a key factor in encouraging physicians to use
interventional medical devices. We have created, and will continue to work to
improve an in-the-field
4
<PAGE>
training and certification program for the use of all of our products. We also
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
products. 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 products by publishing articles and making presentations at
physicians' meetings and conferences.
Our international 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. In Germany, we established a direct sales organization by creating
Vascular Solutions GmbH and began selling directly to customers in the German
market in the fourth quarter of 2000. Our products are currently marketed
through independent distributors in Norway, Italy, Austria, the United Kingdom,
Ireland, Denmark, Switzerland, Finland, Sweden, Greece, Belgium, Spain, the
Netherlands, South Africa, China and Portugal. 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 products to these distributors upon receipt of
purchase orders. Each of our independent distributors has the exclusive right to
sell our products 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 products from us at a
discount from list price and resell the device to hospitals and clinics. Sales
to international distributors are denominated in United States dollars. The
end-user price is determined by the distributor and varies from country to
country.
Substantially all of our revenues from inception until our FDA approval on
June 22, 2000 were derived from sales to international distributors, primarily
in Europe, none of which is affiliated with us. Sales in Europe constituted 11%,
10%, 33% and 93% of our net sales for the years ended December 31, 2002, 2001,
2000 and 1999.
NEW PRODUCT DEVELOPMENT
Our research and development staff is currently focused on developing new
products to sell to our existing customer base through our direct sales force
and on developing next generation versions of our Duett sealing device. We
incurred expenses of $3,227,538 in 2002, $4,123,883 in 2001 and $3,117,339 in
2000 for research and development activities. To further reduce our costs, our
research and development group continues to develop in-house capabilities to
manufacture some of the components currently produced by outside vendors.
We have developed four new products that we expect to launch in the second
half of 2003 through our existing distribution network to the interventional
cardiology and interventional radiology market:
o D-STAT DRY HEMOSTATIC BANDAGE. The D-Stat Dry bandage consists of a
freeze-dried pad of the D-Stat procoagulant which can be applied to
topical bleeding with a custom adhesive bandage. Initial potential
uses of the D-Stat Dry include sealing following arterial
interventional punctures and a variety of radiology procedures. We
believe that the D-Stat Dry bandage will be the most effective,
simple and cost-effective topical solution to hemostasis available
to the interventional physician.
o D-STAT RADIAL HEMOSTAT BAND. The D-Stat Radial hemostat band is a
customized compression device with the power of the D-Stat
procoagulant for sealing the arterial puncture following
catheterization procedures utilizing the radial artery in the wrist.
Currently, only compression devices are used to seal the puncture of
the radial artery, which is the source of arterial puncture in
approximately 5% of all
5
<PAGE>
catheterizations. We believe that the D-Stat Radial will lessen the
time to hemostasis, and thereby lower the risk of complications
resulting from compression of the radial artery following
catheterization procedures.
o PRONTO EXTRACTION CATHETER. We have licensed from Dr. Pedro Silva of
Milan, Italy a patented design of an extraction catheter for the
removal of soft thrombus from arteries. The Pronto catheter consists
of an extraction catheter with a proprietary atraumatic distal tip
and large extraction lumen that can be placed in arteries and easily
extract soft thrombus. A user-friendly syringe extraction system
allows for a single operator deployment with total preparation and
deployment time of less than one minute. Principal clinical uses of
the Pronto extraction catheter are expected to include the removal
of thrombus burden from acute myocardial infarction (heart attack)
cases.
o VARICOSE VEIN TREATMENT. During 2002 we internally generated a
product that addresses the substantial market for the treatment of
superficial venous reflux, otherwise known as varicose veins.
Varicose veins affect over one million people worldwide and, when
severe, are treated by the archaic practice of surgical vein
stripping. Recently, new interventional tools have been developed to
intravascularly treat and close superficial varicose veins as a
replacement for invasive vein stripping. We have developed a product
that furthers this shift to interventional treatments in a
clinically-efficient and cost-effective manner.
We are also working on next generation versions of the Duett sealing
device. We have developed and performed pre-clinical testing of the Mechanical
Duett, a concept that utilizes an immediate and complete mechanical seal of the
arterial puncture to obtain hemostasis. To develop the Mechanical Duett, we have
entered into a development and manufacturing agreement with Tepha, Inc. to
supply us with the bioresorbable component of the Mechanical Duett. Initial
international clinical studies of the Mechanical Duett are expected to occur in
the middle of 2003.
We expect our research and development activities to continue to expand to
include evaluation of new concepts and products for the interventional
cardiology and interventional 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
existing products.
MANUFACTURING
We manufacture our products in our facility in a suburb of Minneapolis,
Minnesota. The catheter manufacturing and packaging processes occur under a
controlled clean room environment. Our manufacturing facility and processes were
certified in July 1998 as compliant with the European Community's EN 46001
standards and were audited in September 1999 and June 2000 for compliance with
the FDA's quality systems regulations with no deficiencies noted. Upon
expiration of our existing lease, in March 2003 we will move to a new facility,
also located in a suburb of Minneapolis, Minnesota which will require
recertification by the FDA.
We purchase components from various suppliers and rely on single sources
for several parts of the Duett sealing device and D-Stat flowable hemostat. 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 King Pharmaceuticals, Inc., 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.
6
<PAGE>
The manufacture and sale of our products 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 our products for significant periods of time.
COMPETITION
Competition in the interventional medical device industry is intense and
dominated by very large and experienced companies such as Medtronic, Inc.,
Abbott Laboratories and Boston Scientific. We compete on the basis of our
clinically differentiated products and focused opportunities within this
interventional medical device market.
Our Duett sealing device competes with four vascular sealing devices and
manual compression. 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.
The four competitive vascular sealing devices are:
o The VasoSeal(R) 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.
o The Angio-Seal(R) 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.
o The Closer(TM) device, sold by Perclose, Inc., a subsidiary of
Abbott Laboratories, seals the puncture site through the use of a
mechanical device that enables a physician to perform a minimally
invasive replication of open surgery.
o The QuickSeal(TM)device, manufactured by SubQ, Inc. and distributed
by Boston Scientific, Inc., mechanically seals the puncture site
through use of a hydrated gelatin plug placed in the tissue tract
adjacent to the puncture in the artery.
We believe that several other companies are developing arterial closure
devices. The medical device industry is characterized by rapid and significant
technological change as well as the frequent emergence of new technologies.
There are likely to be research and development projects related to vascular
sealing devices of which we are currently unaware. A new technology or product
may emerge that results in a reduced need for vascular sealing devices or
results in a product that renders our product noncompetitive.
There are many companies that are selling or have developed hemostats
which compete generally with our D-Stat flowable hemostat. Virtually all of
these devices, however, are positioned as hemostats for the open surgical market
and are not designed specifically for use in interventional procedures. There
are likely to be new products, or modifications of existing products, that will
compete with our D-Stat flowable hemostat in the interventional segment of the
hemostat market, and these new products may render our product noncompetitive.
7
<PAGE>
Topical patches and pads, which have recently been introduced to the
market, are designed to treat bleeding at arterial puncture sites. Our D-Stat
Dry hemostatic bandage will compete in this market segment. These patches are
applied directly over the puncture site and held in place with adjunctive manual
compression for a period of 10-20 minutes. These patches include:
o The Syvek(TM)Patch, manufactured and marketed by Marine Polymer
Technologies, Inc.
o The Closur-P.A.D.(TM), manufactured by Scion Cardiovascular and
distributed by Medtronic, Inc.
o The Chito-Seal(TM), distributed by Abbott Vascular, Inc. a division
of Abbott Laboratories
The Acolysis therapeutic ultrasound system and the Pronto extraction
catheter compete, and are expected to compete, in the highly competitive market
segment for removal of thrombus and plaque from the arterial system. There are
many companies that are selling or have developed products in this segment,
including Possis Medical, Inc., Boston Scientific and Endicor. We believe that
several other companies are developing other technologies that will compete with
our Acolysis System, and these new technologies may render our product
noncompetitive.
REGULATORY REQUIREMENTS
UNITED STATES
Our products are regulated in the United States as medical devices by the
FDA under the Federal Food, Drug and Cosmetic, or FDC, Act. 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, and generally require
a premarket approval (PMA) application prior to their sale.
If a medical device manufacturer can establish that a device is
"substantially equivalent" to a legally marketed Class I or Class II device, or
to an unclassified device, or to a Class III device for which the FDA has not
called for PMAs, the manufacturer may seek clearance from the FDA to market the
device by filing a 510(k) premarket notification. The 510(k) notification may
need to be supported by appropriate data establishing the claim of substantial
equivalence to the satisfaction of the FDA. Following submission of the 510(k)
notification, the manufacturer may not place the device into commercial
distribution in the United States until an order is issued by the FDA.
Manufacturers must file an investigated device exemption (or 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.
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.
8
<PAGE>
Our Duett sealing device is classified as a Class III device and is
subject to the IDE requirements. In May 1997, the FDA determined that the review
of the Duett sealing device would be delegated to the Center for Devices and
Radiological Health area of the FDA, with a consulting review by the Center for
Biologic Evaluation and Research. During 1998 and 1999, we received approval of
our IDE application to start our feasibility clinical study, filed our IDE
Supplement to begin our multi-center clinical study, completed the SEAL
multi-center clinical study and filed our PMA application with the FDA. In
September 1999 our manufacturing facility was audited by the FDA, with no
deficiencies or non-compliances noted by the inspector. In December 1999, we
received the FDA's review letter of our PMA application, and we submitted an
amendment to our PMA to the FDA in January 2000. On June 22, 2000, we received
approval from the FDA of our PMA application to sell the Duett sealing device in
the United States.
Our D-Stat flowable hemostat also is regulated in the United States as a
medical device by the FDA and required clearance of our 510(k) application by
the FDA prior to being sold in the United States. Our D-Stat flowable hemostat
was the subject of a 510(k) application which was determined to be
"substantially equivalent" to a legally marketed predicate device by the FDA,
thereby allowing commercial marketing in the United States. In January 2002, our
510(k) application for the D-Stat flowable hemostat was cleared by the FDA, and
we commenced sales in the United States in February 2002.
We also are 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 are subject to inspection by the FDA on
an on-going basis. We are 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 our products also is 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, we received the CE mark approval for our D-Stat flowable hemostat in
October 2001 and we purchased the Acolysis system, which previously had obtained
the CE mark, in April 2002.
International sales of the Duett sealing device, D-Stat and the Acolysis
System 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 products are
currently marketed in Germany, Norway, Italy, Austria, the United Kingdom,
Ireland, Denmark, Switzerland, Finland, Sweden, Greece, Belgium, Spain, the
Netherlands, South Africa, China and Portugal. We have obtained regulatory
approvals where required. Through our Japanese distributor, we are pursuing the
regulatory approval of our Duett sealing device for commercial sale in Japan.
9
<PAGE>
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 Centers for Medicare and Medicaid Services, or CMS, (formerly
the Health Care Financing Administration, or HCFA) 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 incorporated into
the overall cost of the catheter procedure. We have performed analyses 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.
During 2000, CMS implemented a new Medicare prospective payment system for
hospital outpatient services. One aspect of the new system recognized new
technology items and services as discrete payment groups under the prospective
payment system. Under this system, hospitals receive separate payments for the
use of new medical devices that are recognized by CMS. The Duett sealing device
was issued a transitional pass through code by CMS in 2000. Effective January 1,
2003, CMS incorporated the payment for the Duett sealing device and all vascular
sealing devices into the overall payment for the diagnostic catheterization
procedure. The net effect is an overall increase in the 2003 hospital payment
for a diagnostic procedure, with no separate reimbursement for the sealing
device. Currently there is no separate reimbursement for our D-Stat flowable
hemostat.
Market acceptance of our products 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.
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 was 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 was issued that contains method claims concerning the
use of a balloon catheter and flowable procoagulant and which expires in October
2015. A fourth United States patent was issued concerning the procoagulant
mixture and which expires in October 2015. A fifth United States patent was
issued concerning a balloon catheter sealing device and which expires in May
2013. A sixth United States patent was issued concerning a balloon catheter and
procoagulant sealing device and which expires in October 2015. A seventh
10
<PAGE>
United States patent was issued concerning a balloon catheter sealing device and
which expires in October 2015. We currently have 5 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 vascular
sealing products currently on the U.S. market, including our Duett sealing
device, has been subject to infringement litigation. (See "Legal Proceedings" in
Item 3 of Part I of this Form 10-K) The interpretation of patents 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.
We may become the subject of additional intellectual property claims in
the future related to our Duett sealing device or other products. Our defense of
any 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 our products for
significant periods of time. The costs incurred to defend future claims could be
substantial and adversely affect us, even if we are ultimately successful.
We also rely on trade secret protection for certain aspects of our
technology. We typically require our employees, consultants and vendors for
major components to execute confidentiality agreements upon their commencing
services with us or before the disclosure of confidential information to them.
These agreements generally provide that all confidential information developed
or made known to the other party during the course of that party's relationship
with us is to be kept confidential and not disclosed to third parties, except in
special circumstances. The agreements with our employees also provide that all
inventions conceived or developed in the course of providing services to us
shall be our exclusive property.
We also 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 marks "Vascular Solutions Duett," "D-Stat," "Pronto" and the Duett stylized
logo. We acquired the registered trademark "Acolysis" in connection with our
acquisition of the Acolysis therapeutic ultrasound business in 2002.
EMPLOYEES
As of December 31, 2002, we had 127 full time employees. Of these
employees, 31 were in manufacturing activities, 62 were in sales and marketing
activities, 8 were in research and development activities, 15 were in
regulatory, quality assurance and clinical research activities and 11 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.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of February 15, 2003 are as
follows:
NAME AGE POSITION
Howard Root 42 Chief Executive Officer, Acting Chief Financial
Officer and Director
Michael Nagel 40 Vice President of Sales & Marketing and Secretary
Deborah Jensen 46 Vice President of Regulatory Affairs
James Quackenbush 44 Vice President of Manufacturing
11
<PAGE>
HOWARD ROOT has served as our Chief Executive Officer and a director since
he co-founded Vascular Solutions in February 1997. 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.
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 through 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.
DEBORAH JENSEN has served as our Vice President of Regulatory Affairs,
Clinical Affairs and Quality Systems since October 2000. Ms. Jensen served as
the Corporate Compliance Officer and Vice President of Regulatory Affairs,
Clinical Research and Quality Systems for Empi, Inc. from October 1995 to
October 2000. From May 1993 to October 1995, Ms. Jensen was employed as a
Regulatory Affairs Manager for Boston Scientific's Scimed division. Prior to May
1993, Ms. Jensen held regulatory affairs, clinical research and quality
assurance positions at Medtronic and Lifecore Biomedical. She received her B.S.
in Biology from Valparaiso University.
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.
There are no family relationships among any of our executive officers.
AVAILABLE INFORMATION
We make available free of charge on or through our internet website at
http://www.vascularsolutions.com our annual report on Form 10-K, quarterly
reports on Form 10Q, current reports on Form 8-K, and amendments to these
reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Exchange
Act as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the SEC.
12
<PAGE>
ITEM 2. PROPERTIES
Our offices are in approximately 29,000 square feet of leased space in a
suburb of Minneapolis, Minnesota. These facilities include approximately 12,800
square feet used for manufacturing activities, approximately 3,400 square feet
used for research and laboratory activities, with the remainder used for
administrative offices. Our lease for these facilities expires March 31, 2003.
We entered into a new lease effective April 1, 2003 for a 33,000-square-foot
office and manufacturing facility under an operating lease agreement that
expires in September 2008. Our new lease provides a lower effective net lease
payment per square foot than our existing lease, with reimbursement of our
expected moving expenses. Our new office also is located in a suburb of
Minneapolis, Minnesota. We believe that our new facility will be adequate to
meet our needs through at least the end of the lease period.
ITEM 3. LEGAL PROCEEDINGS
On July 23, 1999, we were named as the defendant in a patent infringement
lawsuit brought by Datascope Corp. in the United States District Court for the
District of Minnesota. The complaint requested a judgment that our Duett sealing
device infringes and, following FDA approval will infringe, a United States
patent held by Datascope and asks for relief in the form of an injunction that
would prevent us from selling our product in the United States as well as an
award of attorneys' fees, costs and disbursements. On August 12, 1999, we filed
our answer to this lawsuit and brought a counterclaim alleging unfair
competition and tortious interference. On August 20, 1999, we moved for summary
judgement to dismiss Datascope's claims. On March 15, 2000, the court granted
summary judgment dismissing all of Datascope's claims, subject to the right of
Datascope to recommence the litigation after our receipt of FDA approval of our
Duett sealing device. On July 12, 2000, after our receipt of FDA approval,
Datascope recommenced this litigation, alleging that the Duett sealing device
infringes a United States patent held by Datascope and requesting relief in the
form of an injunction that would prevent us from selling our product in the
United States, damages caused by our alleged infringement, and other costs,
disbursements and attorneys' fees. On November 26, 2002, we entered into an
agreement that settled all existing intellectual property litigation with
Datascope Corporation. Under the terms of the Settlement Agreement, Datascope
granted us a non-exclusive license to its Janzen patents as they apply to all
current versions of the Duett sealing sevice, and to certain permitted future
product improvements. Datascope also has released us from any claim of patent
infringement based on past or future sales of the Duett sealing device. In
exchange, we paid Datascope a single lump sum of $3,750,000 in the fourth
quarter of 2002.
On July 3, 2000, we were named as the defendant in a patent infringement
lawsuit brought by the Daig division of St. Jude Medical in the United States
District Court for the District of Minnesota. The complaint requested a judgment
that our Duett sealing device infringes a series of four patents known as the
Fowler patents held by St. Jude Medical and asks for relief in the form of an
injunction that would prevent us from selling our Duett sealing device in the
United States, damages caused by the manufacture and sale of our product, and
other costs, disbursements and attorneys' fees. On July 12, 2001, we entered
into an agreement that settled all existing intellectual property litigation
with St. Jude Medical. Under the terms of the settlement agreement, we agreed to
pay a royalty of 2.5% of net sales of our Duett sealing device to St. Jude
Medical, up to a maximum amount over the remaining life of the St. Jude Fowler
patents. In exchange, St. Jude Medical granted to us a non-exclusive license to
its Fowler patents and has released us from any claim of patent infringement
based on sales of our Duett sealing device. We granted a non-exclusive
cross-license to our Gershony patents to St. Jude Medical, subject to a similar
royalty payment if St. Jude Medical utilizes our Gershony patents in any future
device. Beginning on July 1, 2001, a royalty expense of 2.5% of net sales is
included in our cost of goods sold until the maximum royalty is attained.
13
<PAGE>
From time to time we are involved in legal proceedings arising in the
normal course of our business. As of the date of this report we are not a party
to any legal proceeding in which an adverse outcome would reasonably be expected
to have a material adverse effect on our results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On July 25, 2000, we sold 3,500,000 shares of our common stock, at an
initial public offering price of $12.00 per share, pursuant to a Registration
Statement on Form S-1 (Registration No. 333-84089), which was declared effective
by the Securities and Exchange Commission on July 19, 2000. Our net proceeds
from the offering were approximately $44.0 million. To date, we have spent
approximately $20.0 million of the net proceeds to hire, train and deploy a
direct sales force in the United States, $4.1 million to settle the St. Jude and
Datascope litigation, $1.6 million to purchase the Acolysis System and $4.5
million for general corporate purposes.
The Company's common stock began trading on the Nasdaq National Market
under the symbol "VASC" on July 20, 2000. The following table sets forth, for
the periods indicated, the range of high and low last sale prices for the common
stock as reported by the Nasdaq National Market.
High Low
------ -----
2001
First Quarter ........................... 10.000 5.750
Second Quarter .......................... 9.000 5.125
Third Quarter ........................... 9.640 1.770
Fourth Quarter .......................... 2.920 1.750
2002
First Quarter ........................... 3.700 2.480
Second Quarter .......................... 2.700 1.680
Third Quarter ........................... 1.780 .880
Fourth Quarter .......................... 1.200 .650
HOLDERS
As of December 31, 2002, the Company had 177 shareholders of record. Such
number of record holders does not reflect shareholders who beneficially own
common stock in nominee or street name.
DIVIDENDS
The Company has paid no cash dividends on its common stock, and it does
not intend to pay cash dividends on its common stock in the future.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7 below and the Consolidated Financial
Statements and the Notes thereto included in Item 8 below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net sales .......................... $ 12,101 $ 12,082 $ 6,193 $ 1,429 $ 494
Cost of sales ...................... 4,986 4,961 2,701 1,065 442
-------- -------- -------- -------- --------
Gross profit ..................... 7,115 7,121 3,492 364 52
Operating expenses:
Research and development ........... 3,227 4,124 3,117 3,068 2,348
Clinical and regulatory ............ 1,348 1,288 1,082 1,324 1,376
Sales and marketing ................ 11,964 12,772 6,700 2,301 1,075
General and administrative ......... 2,167 2,498 2,255 1,904 668
Legal settlement ................... 3,750 350 -- -- --
Amortization of purchased technology 145 -- -- -- --
-------- -------- -------- -------- --------
Total operating expenses ......... 22,601 21,032 13,154 8,597 5,467
-------- -------- -------- -------- --------
Operating loss ........................ (15,486) (13,911) (9,662) (8,233) (5,415)
Interest income ................. 507 1,661 1,453 371 274
-------- -------- -------- -------- --------
Net loss .............................. $(14,979) $(12,250) $ (8,209) $ (7,862) $ (5,141)
======== ======== ======== ======== ========
Net loss per common share -
Basic and diluted .................. $ (1.13) $ (.93) $ (.95) $ (1.95) $ (1.40)
Weighted average number of common
shares outstanding ................ 13,276 13,217 8,645 4,033 3,660
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and available-
for-sale securities ............. $ 16,750 $ 33,318 $ 44,098 $ 10,529 $ 9,897
Working capital ..................... 18,656 34,712 46,300 10,487 9,933
Total assets ........................ 22,280 37,593 49,661 12,295 11,007
Long-term debt ...................... -- -- -- -- --
Total shareholders' equity .......... 20,369 35,630 47,194 11,172 10,546
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, and the other financial
information included elsewhere in this Form 10-K Report. This Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains descriptions of the Company's expectations regarding future trends
affecting its business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The following discussion sets forth certain factors the Company believes
could cause actual results to differ materially from those contemplated by the
forward looking statements.
OVERVIEW
We are a medical device company focused on bringing solutions to
interventional cardiologists and interventional radiologists. Our product line
includes the Duett(TM) sealing device, the D-Stat(TM) flowable hemostat and the
Acolysis(R) therapeutic ultrasound system. As a vertically-integrated medical
device company, we generate ideas and create new interventional medical devices,
and then deliver those products directly to the physician through our direct
domestic sales force and international distribution network.
We commenced operations in February 1997, and during 1998 and 1999 we
received regulatory approvals to market our first product, the Duett sealing
device, in several international markets, principally in Europe. On June 22,
2000, we received approval from the FDA of our PMA application for the sale of
our Duett sealing device in the United States. As a result, during the third
quarter of 2000 we commenced sales of the Duett in the United States through our
direct sales force. We commenced sales of the Diagnostic Duett in the United
States in December 2001, and commenced sales of the D-Stat in the United States
in February 2002. In April 2002, we acquired the assets of the Acolysis system
from the secured creditors of Angiosonics, Inc. The Acolysis controller and
probes have been sold in international markets, principally in Europe and China,
for over two years. During the last quarter of 2002, we commenced active
international sales of the Acolysis product.
We have a limited history of operations and have experienced significant
operating losses since inception. As of December 31, 2002, we had an accumulated
deficit of $50.1 million.
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 profitability,
or if we achieve profitability it may not be sustained in future periods.
CRITICAL ACCOUNTING POLICIES:
The critical accounting policies of the Company are described in Note 1 to
the financial statements. We set forth below those material accounting policies
that we believe are the most critical to an investor's understanding of our
financial results and condition, and require complex management judgment.
INVENTORY
We state our inventory at the lower of cost or market. We record reserves
for inventory shrinkage and for potentially excess, obsolete and slow moving
inventory based upon historical experience and forecasted demand. Our reserve
requirements could be materially different if demand for our products decreased
because of
16
<PAGE>
competitive conditions or market acceptance, or if products become obsolete
because of advancements in the industry.
REVENUE RECOGNITION
We recognize revenue upon shipment of products to customers, net of
estimated returns. We analyze the rate of historical returns when evaluating the
adequacy of the allowance for sales returns, which is included with the
allowance for doubtful accounts on our balance sheet. If the historical data the
Company uses to calculate these estimates does not properly reflect future
returns, revenue could be overstated.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. This
allowance is regularly evaluated by us for adequacy by taking into consideration
factors such as past experience, credit quality of the customer base, age of the
receivable balances, both individually and in the aggregate, and current
economic conditions that may affect a customer's ability to pay. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
VALUATION OF LONG-LIVED ASSETS AND GOODWILL
In fiscal 2002, we adopted Statement of Financial Accounting Standards
(SFAS) 142, "Goodwill and Other Intangible Assets." Goodwill is tested for
impairment annually or more frequently if changes in circumstance or the
occurrence of events suggests an impairment exists. The test for impairment
requires us to make several estimates about fair value, most of which are based
on projected future cash flows.
We regularly review the carrying value of certain long-lived assets and
identifiable intangible assets with respect to any events or circumstances that
indicate an impairment or an adjustment to the amortization period is necessary.
If circumstances suggest the recorded amounts cannot be recovered, calculated
based upon estimated future undiscounted cash flows, the carrying values of
these assets are reduced to fair value.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Net sales increased modestly to $12,100,526 for the year ended December
31, 2002 from $12,082,379 for the year ended December 31, 2001. Approximately
89% of our net sales for the year ended December 31, 2002 were to customers in
the United States and 11% of the net sales were to customers in international
markets. Net sales in 2002 were negatively affected by the intense competitive
environment for our Duett sealing device in the United States market. Net sales
during 2002 benefited from the early sales of our D-Stat flowable hemostat,
which we launched in February 2002.
Gross profit as a percentage of net sales was unchanged at 59% for the
year ended December 31, 2002 and 2001. We added the Diagnostic Duett, D-Stat and
Acolysis products to our selling mix during 2002, which all have gross margins
greater than 60%. The introduction of the higher margin products in 2002 was
offset by a growth in the lower margin international sales. We expect gross
margins to slightly increase in 2003 as we again introduce new higher margin
products in 2003 and make slight gains in manufacturing efficiencies.
Research and development expenses decreased 22% to $3,227,538 for the year
ended December 31, 2002 from $4,123,883 for the year ended December 31, 2001.
The decrease was attributable to more focused
17
<PAGE>
development work on the product line extensions and new products during 2002.
Research and development expenses can fluctuate due to outside project spending.
We expect our research and development expenses to increase modestly during 2003
as we continue to pursue additional new products.
Clinical and regulatory expenses increased 5% to $1,347,694 for the year
ended December 31, 2002 from $1,288,301 for the year ended December 31, 2001.
Clinical and regulatory expenses fluctuate due to the timing of clinical and
marketing studies. We are expecting clinical expenses to increase in 2003 as we
move forward with additional indications for our existing D-Stat flowable
hemostat and international studies of our new products.
Sales and marketing expenses decreased 6% to $11,963,907 for the year
ended December 31, 2002 from $12,771,901 for the year ended December 31, 2001.
The reason for the decrease is better cost utilization. We have reviewed our
sales and marketing expenditures and focused our spending in the areas that
drive sales and provide an adequate financial return. As of December 31, 2002,
our direct sales force consisted of approximately 50 employees compared to
approximately 65 as of December 31, 2001. As a result, we expect our sales and
marketing expenses to again slightly decrease during 2003 as we continue to
review our sales and marketing expenditures.
General and administrative expenses decreased 13% to $2,166,883 for the
year ended December 31, 2002 from $2,498,435 for the year ended December 31,
2001. The decrease was the result of lower headcount in 2002 compared to 2001.
We currently anticipate that general and administrative expenses will decrease
in 2003 as we continue to benefit from lower headcount and the settlement of all
of our outstanding intellectual property litigation.
Legal settlement expenses were $3,750,000 for the year ended December 31,
2002 and $350,000 for the year ended December 31, 2001. We entered into an
agreement that settled all existing intellectual property litigation with
Datascope Corporation in 2002 (see "Legal Proceedings" in Item 3 of Part I of
this Form 10-K). As part of the settlement, Datascope released us from any claim
of patent infringement based on past or future sales of the Duett sealing
device. In exchange, we paid Datascope a single lump sum of $3,750,000 in the
fourth quarter of 2002. We entered into an agreement that settled all existing
intellectual property litigation with St. Jude Medical in 2001 (see "Legal
Proceedings" in Item 3 of Part I of this Form 10-K). As a result of the
settlement, we agree to pay St. Jude Medical a royalty of 2.5% of our Duett
sales up to a maximum amount over the remaining life of the St. Jude Medical
patents. We paid $350,000 to St. Jude Medical in 2001 representing the past
royalty on net sales of our Duett device since 1998 under the settlement
agreement.
Amortization of purchased technology was $145,000 for the year ended
December 31, 2002 and $0 for the year ended December 31, 2001. The amortization
was the result of our acquisition of the Acolysis assets from the secured
creditors of Angiosonics, Inc. We allocated $870,000 from the acquisition to
purchased technology and are amortizing the amount over four years.
Interest income decreased to $507,169 for the year ended December 31, 2002
from $1,660,757 for the year ended December 31, 2001 primarily as a result of a
reduced cash balance and lower interest rates.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net sales increased 95% to $12,082,379 for the year ended December 31,
2001 from $6,193,234 for the year ended December 31, 2000. The increase in net
sales was principally the result of a full year of United States sales of our
Duett sealing device in 2001, compared to six months of sales in 2000. As a
result, 90% of our net sales for the year ended December 31, 2001 were to
customers in the United States, while 10% of the net sales were to our customers
in international markets.
18
<PAGE>
Gross profit as a percentage of net sales increased to 59% for the year
ended December 31, 2001 from 56% for the year ended December 31, 2000. This
increase as a percentage of net sales resulted principally from the full year of
United States sales in 2001. In the third quarter of 2001 we settled our
intellectual property litigation with St. Jude Medical. As part of the
settlement agreement, we agreed to pay a royalty of 2.5% of our net sales of the
Duett sealing device to St. Jude Medical up to a maximum amount for the
remaining life of the patents. This 2.5% royalty was included in our costs of
goods sold beginning in the third quarter of 2001. During the fourth quarter of
2001 we commenced initial sales of our Diagnostic Duett version of the Duett
sealing device in the United States. The Diagnostic Duett has a substantially
lower costs of goods sold than the original Duett, which is offset by a lower
average selling price.
Research and development expenses increased 32% to $4,123,883 for the year
ended December 31, 2001 from $3,117,339 for the year ended December 31, 2000.
This increase was attributable to increased development work on the product line
extensions and new products during 2001.
Clinical and regulatory expenses increased 19% to $1,288,301 for the year
ended December 31, 2001 from $1,082,029 for the year ended December 31, 2000.
The increase was primarily the result of additional personnel and the
commencement of clinical studies for new products and new claims for our Duett
sealing device during 2001.
Sales and marketing expenses increased 91% to $12,771,901 for the year
ended December 31, 2001 from $6,699,722 for the year ended December 31, 2000.
This increase was due primarily to the full year of operations of our United
States direct sales force during 2001.
General and administrative expenses increased 11% to $2,498,435 for the
year ended December 31, 2001 from $2,255,160 for the year ended December 31,
2000. The primary reason for the increase was legal fees associated with the St.
Jude Medical and Datscope litigation increased during 2001 as compared with
2000.
Interest income increased to $1,660,757 for the year ended December 31,
2001 from $1,453,491 for the year ended December 31, 2000 primarily as a result
of a full year of interest on the cash proceeds received upon the closing of our
initial public offering in July 2000.
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, 2002, we had $46,100,000 of federal net operating loss
carryforwards available to offset future taxable income which begin to expire in
the year 2013. As of December 31, 2002, we also had federal and state research
and development tax credit carryforwards of approximately $1,206,000 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.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We have financed all of our operations since inception through the
issuance of equity securities and, to a lesser extent, sales of our products.
Through December 31, 2002, we have sold common stock and preferred stock
generating aggregate net proceeds of $70.2 million. At December 31, 2002, we had
$16.7 million in cash, cash equivalents and available-for-sale securities
on-hand.
During the year ended December 31, 2002, we used $14.3 million in
operating activities. The cash used in operating activities was primarily used
to fund our net loss for the period of $15.0 million, which was offset by
depreciation and amortization of $647,390. Included in the net loss of $15.0
million was the legal settlement of $3,750,000 to Datascope (see "Legal
Proceedings" in Item 3 of Part I of this Form 10-K). We generated proceeds of
$7,405,132 in investing activities, primarily from the net sales of investment
securities of $9,312,031, offset by the $1,550,203 in cash used in the
acquisition of Angiosonics' Acolysis System and net equipment purchases of
$356,696. We used $363,151 in financing activities during fiscal 2002, primarily
from the repurchase of our common stock for $547,722, offset by $184,571 we
received through the issuance of common stock.
In April 2002, we paid $1,550,203 in cash to the secured creditors of
Angiosonics, Inc. in connection with the acquisition of the Acolysis system,
related patents and technologies. This acquisition was funded through existing
cash balances.
In August 2002, the Board of Directors adopted a stock repurchase program
to acquire up to 1 million shares of our common stock in open market
transactions. The program does not obligate the company to acquire any specific
number of shares and may be discontinued at any time. Through December 31, 2002,
we have repurchased 608,900 shares under our stock repurchase program for
$547,722.
We do not have any significant cash commitments related to supply
agreements, nor do we have any significant commitments for capital expenditures.
We currently anticipate that we will continue to experience a negative
cash flow 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 mid-2004. We believe that current cash balances along with cash
generated from the future sales of products will be sufficient to meet our
operating and capital requirements for at least the next 24 months. Our
liquidity and capital requirements beyond the next 24 months will depend on
numerous factors, including the extent to which our current and future products
gain 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.
20
<PAGE>
RISK FACTORS
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.
WE WILL NOT BE SUCCESSFUL IF THE INTERVENTIONAL MEDICAL DEVICE COMMUNITY DOES
NOT ADOPT OUR PRODUCTS
During the third quarter of 2000 we commenced sales of our first product,
the Duett sealing device, in the United States, which we believe represents the
largest market for interventional medical devices. We have not become profitable
with the initial sales of our Duett sealing device, and we are in the process of
introducing additional interventional medical devices to grow our sales. Our
success will depend on the medical community's acceptance of our products. We
cannot predict how quickly, if at all, the medical community will accept our new
products, or, if accepted, the extent of their use. Our potential customers
must:
o believe that our products offer benefits compared to the
methodologies and/or devices that they are currently using;
o believe that our products are worth the price that they will be
asked to pay; and
o be willing to commit the time and resources required to change their
current methodology.
If we encounter difficulties in growing our sales of our new medical
devices in the United States, our business will be seriously harmed.
WE CURRENTLY RELY ON THE DUETT SEALING DEVICE AS OUR PRIMARY SOURCE OF REVENUE
Although we have sold the D-Stat flowable hemostat for approximately one
year and we recently commenced marketing of the Acoylsis System, we continue to
rely on sales of our principal product, the Duett sealing device, which is being
sold in a limited number of international markets and in the United States. Even
though we are in the process of developing additional products, preparation of
regulatory approval, implementation timing and market uncertainties will exist
with each new product. As a result, our success to a large degree is dependent
on the maintenance and growth of our Duett sealing device business. To date we
have not been able to grow our share of the vascular sealing device market over
5% with our Duett sealing device. If we are unable to maintain and modestly grow
our Duett sealing device market share, 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 primarily from costs relating to the development and commercialization of
our Duett sealing device. At December 31, 2002, we had an accumulated deficit of
$50.1 million. We expect to continue to significantly invest in our sales and
marketing, and research and development activities. Because of our plans to
introduce new products, hire additional employees and expand our
commercialization, we expect to incur significant net losses through at least
mid-2004. 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.
WE MAY FACE ADDITIONAL INTELLECTUAL PROPERTY CLAIMS IN THE FUTURE WHICH COULD
PREVENT US FROM MANUFACTURING AND SELLING OUR PRODUCTS OR RESULT IN OUR
INCURRING SUBSTANTIAL COSTS AND LIABILITIES
21
<PAGE>
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 currently marketed vascular sealing products has been
subject to infringement litigation. Although we have settled all of our previous
intellectual property litigation with respect to our Duett sealing device, it is
possible that additional claims relating to the Duett could be brought in the
future. In addition, it is possible that we could be subject to intellectual
property claims with respect to any of our new products. Intellectual property
litigation in recent years has proven to be very complex, and the outcome of
such litigation is difficult to predict.
An adverse determination in any intellectual property litigation or
interference proceedings could prohibit us from selling our products, 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.
Our defense of 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
our products for significant periods of time. The costs incurred to future
claims could be substantial and seriously harm us, even if our defense is
ultimately successful.
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 limited history of our sales and our 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:
o the level of sales of our Duett sealing device and new products in
the United States market;
o our ability to introduce new products and enhancements in a timely
manner;
o the demand for and acceptance of our products;
o the success of our competition and the introduction of alternative
products;
o our ability to command favorable pricing for our products;
o the growth of the market for our devices;
o the expansion and rate of success of our direct sales force in the
United States and our independent distributors internationally;
o actions relating to ongoing FDA compliance;
22
<PAGE>
o the effect of intellectual property disputes;
o the size and timing of orders from independent distributors or
customers;
o the attraction and retention of key personnel, particularly in sales
and marketing, regulatory, manufacturing and research and
development;
o unanticipated delays or an inability to control costs;
o general economic conditions as well as those specific to our
customers and markets; and
o seasonal fluctuations in revenue due to the elective nature of some
procedures.
OUR DIRECT SALES EFFORTS MAY NOT BE SUCCESSFUL BECAUSE WE HAVE A LIMITED
OPERATING HISTORY WITH A DIRECT SALES FORCE
Because we received regulatory approval to sell our Duett sealing device
in the United States during 2000, we have only a limited operating history with
a direct sales force. We believe that there is significant competition for
direct sales personnel and clinical specialists with the advanced sales skills
and technical knowledge we require. We may not be able to obtain, train and
retain sufficient numbers of 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 Abbott Laboratories (through its subsidiary
Perclose, Inc.), Datascope Corp. and St. Jude Medical, Inc., which sells a
product developed by Kensey Nash Corporation. These companies have:
o better name recognition;
o broader product lines;
o greater sales, marketing and distribution capabilities;
o significantly greater financial resources;
o larger research and development staffs and facilities; and
23
<PAGE>
o 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.
OUR INTERNATIONAL SALES ARE SUBJECT TO A NUMBER OF RISKS THAT COULD SERIOUSLY
HARM OUR ABILITY TO SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS IN ANY INTERNATIONAL
MARKET
Our international sales are subject to several risks, including:
o the ability of our independent distributors to sell our device;
o the impact of recessions in economies outside the United States;
o greater difficulty in collecting accounts receivable and longer
collection periods;
o unexpected changes in regulatory requirements, tariffs or other
trade barriers;
o weaker intellectual property rights protection in some countries;
o potentially adverse tax consequences; and
o 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 products
in any international market.
WE HAVE LIMITED MANUFACTURING EXPERIENCE AND MAY ENCOUNTER DIFFICULTIES IN OUR
MANUFACTURING OPERATIONS WHICH COULD SERIOUSLY HARM OUR BUSINESS
We have limited experience in manufacturing our products. We are currently
in the process of moving our facilities to a new location. We believe our new
facilities will be adequate for our projected production of our products for the
foreseeable future, but future facility requirements will depend largely on
future sales of our products in the United States. We may encounter unforeseen
difficulties in moving our production in the near future, expanding our
production of our 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 OPERATIONS MAY BE SERIOUSLY HARMED BY CHANGES IN
THIRD-PARTY REIMBURSEMENT POLICIES
24
<PAGE>
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 or D-Stat hemostat is used. Failure by physicians, hospitals and
other users of our products to obtain sufficient reimbursement from healthcare
payors for procedures in which our products are 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 or D-Stat
hemostat, 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 believe that in a prospective payment
system, such as the system currently used by Medicare, and in many managed care
systems used by private healthcare payors, the cost of our product 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 products 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 or our
D-Stat hemostat. 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
products in the markets in which these approvals are sought.
OUR PRODUCTS AND OUR MANUFACTURING ACTIVITIES ARE SUBJECT TO EXTENSIVE
GOVERNMENTAL REGULATION THAT COULD PREVENT US FROM SELLING OUR PRODUCTS IN THE
UNITED STATES OR INTRODUCING NEW AND IMPROVED PRODUCTS
Our products 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:
o obtain the approval of the FDA and international agencies before we
can market and sell our products;
o satisfy these agencies' content requirements for all of our
labeling, sales and promotional materials; and
o undergo rigorous inspections by these agencies.
Compliance with the regulations of these agencies may delay or prevent us
from introducing any new model of our existing products or other new 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. 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, the FDA may take actions which could seriously
harm our business. In addition, government regulation may be established that
could prevent, delay, modify or rescind regulatory clearance or approval of our
products.
THE LOSS OF, OR INTERRUPTION OF SUPPLY FROM, KEY VENDORS, INCLUDING SINGLE
SOURCE SUPPLIERS, COULD LIMIT OUR ABILITY TO MANUFACTURE OUR PRODUCTS
We purchase components used in our Duett sealing device and D-Stat
flowable hemostat from various suppliers and rely on single sources for the
collagen and thrombin components of our Duett sealing device
25
<PAGE>
procoagulant and our D-Stat flowable hemostat. There are currently no
FDA-approved alternative suppliers of thrombin and very few FDA-approved
alternative suppliers of collagen. Our current supply agreement with our
thrombin vendor extends through 2004, but there are no assurances that any
future agreement would be on similar terms. 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 our
D-Stat flowable hemostat and could therefore seriously harm our business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Notes thereto required pursuant
to this Item begin on page 35 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to the Sections under the headings
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" contained in the Proxy Statement for our Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days of the close of the year ended December 31, 2002.
See Item 1 of Part I hereof for information regarding our Executive
Officers.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Sections under the headings
"Director Compensation" and "Executive Compensation and Other Information"
contained in the Proxy Statement for our Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission within 120 days of the close
of the year ended December 31, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the Section under the heading
"Security Ownership of Certain Beneficial Owners and Management" and "Equity
Compensation Plan Information" contained in the Proxy Statement for our Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days of the close of the year ended December 31, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Acting Chief Financial Officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act) as
of a date (the "Evaluation Date") within 90 days prior to the filing date of
this report. Based upon that evaluation, the Chief Executive Officer and Acting
Chief Financial Officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures were effective in timely alerting them to the
material information relating to us (or our consolidated subsidiaries) required
to be included in our periodic SEC filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
27
<PAGE>
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report.
(1) The following financial statements are filed herewith in Item 8 in
Part II.
(i) Consolidated Balance Sheets
(ii) Consolidated Statements of Operations
(iii) Consolidated Statement of Changes in Shareholders' Equity
(iv) Consolidated Statements of Cash Flows
(v) Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts. Such schedule should be
read in conjunction with the consolidated financial statements. All other
supplemental schedules are omitted because of the absence of conditions under
which they are required.
(3) Exhibits
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Articles of Incorporation of Vascular
Solutions, Inc. (incorporated by reference to Exhibit 3.1 to
Vascular Solutions' Form 10-Q for the quarter ended September 30,
2000).
3.2 Bylaws of Vascular Solutions, Inc. (incorporated by reference to
Exhibit 3.2 of Vascular Solutions' Registration Statement on Form
S-1 (File No. 333-84089)).
4.1 Specimen of Common Stock certificate (incorporated by reference to
Exhibit 4.1 of Vascular Solutions' Registration Statement on Form
S-1 (File No. 333-84089)).
4.2 Form of warrant dated January 31 and February 14, 1997 issued to
representatives of Miller, Johnson & Kuehn, Incorporated
(incorporated by reference to Exhibit 4.2 of Vascular Solutions'
Registration Statement on Form S-1 (File No. 333-84089)).
4.3 Form of warrant dated December 29, 1997 issued to representatives of
Miller, Johnson & Kuehn, Incorporated (incorporated by reference to
Exhibit 4.3 of Vascular Solutions' Registration Statement on Form
S-1 (File No. 333-84089)).
4.4 Amended and Restated Investors' Rights Agreement dated December 9,
1998, by and between Vascular Solutions, Inc. and the purchasers of
Series A and Series B preferred stock (incorporated by reference to
Exhibit 4.4 of Vascular Solutions' Registration Statement on Form
S-1 (File No. 333-84089)).
4.5 Stock Purchase Warrant dated June 10, 1999 by and between Vascular
Solutions, Inc. and Jones Pharma, Incorporated (incorporated by
reference to Exhibit 4.7 of Vascular Solutions' Registration
Statement on Form S-1 (File No. 333-84089)).
10.1 Lease Agreement dated February 11, 1998 by and between Massachusetts
Mutual Life
28
<PAGE>
Insurance Company as Landlord and Vascular Solutions, Inc. as Tenant
(incorporated by reference to Exhibit 10.2 of Vascular Solutions'
Registration Statement on Form S-1 (File No. 333-84089)).
10.2 First Lease Amendment dated June 9, 1999 by and between Duke Realty
Limited Partnership as Landlord and Vascular Solutions, Inc. as
Tenant (incorporated by reference to Exhibit 10.3 of Vascular
Solutions' Registration Statement on Form S-1 (File No. 333-84089)).
10.3 Second Lease Amendment dated October 24, 1999 by and between Duke
Realty Limited Partnership as Landlord and Vascular Solutions, Inc.
as Tenant (incorporated by reference to Exhibit 10.3 to Vascular
Solutions' Form 10-K for the year ended December 31, 2000).
10.4 Third Lease Amendment dated August 23, 2000 by and between Duke
Realty Limited Partnership as Landlord and Vascular Solutions, Inc.
as Tenant (incorporated by reference to Exhibit 10.4 to Vascular
Solutions' Form 10-K for the year ended December 31, 2000).
10.5 Bill of Sale and Assignment dated January 31, 1997 by and between
Vascular Solutions, Inc. and Dr. Gary Gershony (incorporated by
reference to Exhibit 10.4 of Vascular Solutions' Registration
Statement on Form S-1 (File No. 333-84089)).
10.6 Mutual and General Release dated November 9, 1998 by and between
Vascular Solutions, Inc., Dr. Gary Gershony and B. Braun Medical,
Inc. (incorporated by reference to Exhibit 10.5 of Vascular
Solutions' Registration Statement on Form S-1 (File No. 333-84089)).
10.7 Purchase and Sale Agreement dated September 17, 1998 by and between
Vascular Solutions, Inc. and Davol Inc. (incorporated by reference
to Exhibit 10.8 of Vascular Solutions' Registration Statement on
Form S-1 (File No. 333-84089)).
10.8 Purchase Agreement dated June 10, 1999 by and between GenTrac, Inc.
and Vascular Solutions, Inc. (incorporated by reference to Exhibit
10.9 of Vascular Solutions' Registration Statement on Form S-1 (File
No. 333-84089)).
10.9* Form of Employment Agreement by and between Vascular Solutions, Inc.
and each of its executive officers (incorporated by reference to
Exhibit 10.11 of Vascular Solutions' Registration Statement on Form
S-1 (File No. 333-84089)).
10.10 Form of Distribution Agreement (incorporated by reference to Exhibit
10.12 of Vascular Solutions' Registration Statement on Form S-1
(File No. 333-84089)).
10.11* Vascular Solutions, Inc. Employee Stock Purchase Plan, as amended
(incorporated by reference to Exhibit 10.14 to Vascular Solutions'
Form 10-K for the year ended December 31, 2000).
10.12 Settlement Agreement dated July 12, 2001 by and between Vascular
Solutions and St. Jude Medical and Daig Corporation (incorporated by
reference to Exhibit 99.2 to Vascular Solutions' Form 8-K dated July
12, 2001).
10.13 Purchase Agreement dated April 30, 2002 by and between Vascular
Solutions and Angiosonics (incorporated by reference to Exhibit 99.2
to Vascular Solutions' Form 8-K dated April 30, 2002).
10.14* Stock Option and Stock Award Plan as Amended July 16, 2002
(incorporated by reference to Exhibit 10.1 of Vascular Solutions'
Form 10-Q for the quarter ended June 30, 2002).
10.15 Lease Agreement dated August 30, 2002 by and between First
Industrial, L.P. as Landlord and Vascular Solutions, Inc. as Tenant
(incorporated by reference to Exhibit 10.1 of Vascular Solutions'
Form 10-Q for the quarter ended September 30, 2002).
10.16 Settlement Agreement dated November 26, 2002 by and between Vascular
Solutions and Datascope (incorporated by reference to Exhibit 99.2
to Vascular Solutions' Form 8-K dated November 26, 2002).
10.17** License and Supply Agreement dated December 17, 2002 by and
between Vascular Solutions and Tepha, Inc.
21 List of Subsidiaries
29
<PAGE>
23.1 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included on signature page).
99.1 Certification of Chief Executive Officer and Acting Chief Financial
Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
- ------------------------
* Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K.
** Certain portions of this exhibit have been omitted pending a request for
confidential treatment from the SEC.
(b) Reports on Form 8-K:
We filed a Form 8-K on November 26, 2002 to report the settlement of patent
litigation with Datascope. There were no financial statements required to be
filed with the Form 8-K.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 28th day of
February, 2003.
VASCULAR SOLUTIONS, INC.
By: /s/ Howard Root
------------------------------------
Howard Root
Chief Executive Officer and Director
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Howard Root and James Hennen (with full
power to act alone), as his or her true and lawful attorneys-in-fact and agents,
with full powers of substitution and resubstitution, for him or her and in his
or her name, place and stead, in any and all capacities, to sign any and all
amendments to the Annual Report on Form 10-K of Vascular Solutions, Inc., and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on the 28th day of February 2003, by the following
persons in the capacities indicated.
Signature Title
--------- -----
/s/ Howard Root Chief Executive Officer, Acting Chief
- -------------------------- Financial Officer and Director
Howard Root (PRINCIPAL EXECUTIVE OFFICER &
PRINCIPAL FINANCIAL OFFICER)
/s/ James Hennen Controller/Director of Finance
- -------------------------- (PRINCIPAL ACCOUNTING OFFICER)
James Hennen
/s/ James Jacoby, Jr. Director
- --------------------------
James Jacoby, Jr.
/s/ Richard Nigon Director
- --------------------------
Richard Nigon
/s/ Michael Kopp Director
- --------------------------
Michael Kopp
/s/ Paul O'Connell Director
- --------------------------
Paul O'Connell
/s/ John Erb Director
- --------------------------
John Erb
/s/ Dr. Gary Dorfman Director
- --------------------------
Dr. Gary Dorfman
31
<PAGE>
CERTIFICATIONS
I, Howard Root, certify that:
1. I have reviewed this annual report on Form 10-K of Vascular Solutions,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(b) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
32
<PAGE>
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 28, 2003 By: /s/ Howard Root
-----------------------------
Howard Root
CHIEF EXECUTIVE OFFICER AND ACTING
CHIEF FINANCIAL OFFICER
(Principal executive officer and
principal financial officer)
33
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
<TABLE>
<CAPTION>
Additions
Charged
Balance at to Costs Balance at
Description Beginning and Less End of
of Year Expenses Deductions Year
-------- -------- -------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 2002:
Sales return allowance ........ $ 64,526 $174,642 $199,168 $ 40,000
Allowance for doubtful accounts 110,000 23,592 43,592 90,000
-------- -------- -------- --------
Total ....................... $174,526 $198,234 $242,760 $130,000
======== ======== ======== ========
YEAR ENDED DECEMBER 31, 2001:
Sales return allowance ........ -- 401,733 337,207 64,526
Allowance for doubtful accounts 80,000 35,304 5,304 110,000
-------- -------- -------- --------
Total ....................... $ 80,000 $437,037 342,511 $174,526
======== ======== ======== ========
YEAR ENDED DECEMBER 31, 2000:
Sales return allowance ........ -- -- -- --
Allowance for doubtful accounts -- 80,000 -- 80,000
-------- -------- -------- --------
Total ....................... $ -- $ 80,000 $ -- $ 80,000
======== ======== ======== ========
</TABLE>
34
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Vascular Solutions, Inc.
We have audited the consolidated balance sheets of Vascular Solutions, Inc. as
of December 31, 2002 and 2001, and the related statements of operations, changes
in shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Vascular
Solutions, Inc. at December 31, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States.
Ernst & Young LLP
Minneapolis, Minnesota
January 17, 2003
35
<PAGE>
37
Vascular Solutions, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
2002 2001
------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,835,059 $ 9,091,640
Available-for-sale securities 14,914,444 24,226,475
Accounts receivable, net of reserves of $130,000 and $174,526 in
2002 and 2001, respectively 1,357,946 1,285,011
Inventories 2,132,516 1,782,363
Prepaid expenses 326,773 289,888
------------------------------------
Total current assets 20,566,738 36,675,377
Property and equipment, net 795,885 917,579
Intangible assets, net 917,595 --
------------------------------------
Total assets $ 22,280,218 $ 37,592,956
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 771,078 $ 744,856
Accrued compensation 886,130 923,705
Accrued expenses 253,777 294,511
------------------------------------
Total current liabilities 1,910,985 1,963,072
Shareholders' equity:
Common stock, $0.01 par value:
Authorized shares - 40,000,000
Issued and outstanding shares - 12,880,839 - 2002;
13,327,002 - 2001 128,808 133,270
Additional paid-in capital 70,355,343 70,712,174
Other (21,278) (100,834)
Accumulated deficit (50,093,640) (35,114,726)
------------------------------------
Total shareholders' equity 20,369,233 35,629,884
------------------------------------
Total liabilities and shareholders' equity $ 22,280,218 $ 37,592,956
====================================
</TABLE>
SEE ACCOMPANYING NOTES.
36
<PAGE>
Vascular Solutions, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
2002 2001 2000
--------------------------------------------
<S> <C> <C> <C>
Net sales $ 12,100,526 $ 12,082,379 $ 6,193,234
Cost of goods sold 4,985,587 4,961,014 2,701,342
--------------------------------------------
Gross profit 7,114,939 7,121,365 3,491,892
Operating expenses:
Research and development 3,227,538 4,123,883 3,117,339
Clinical and regulatory 1,347,694 1,288,301 1,082,029
Sales and marketing 11,963,907 12,771,901 6,699,722
General and administrative 2,166,883 2,498,435 2,255,160
Legal settlement 3,750,000 350,000 --
Amortization of purchased technology 145,000 -- --
--------------------------------------------
Total operating expenses 22,601,022 21,032,520 13,154,250
--------------------------------------------
Operating loss (15,486,083) (13,911,155) (9,662,358)
Interest income 507,169 1,660,757 1,453,491
--------------------------------------------
Net loss $(14,978,914) $(12,250,398) $ (8,208,867)
============================================
Basic and diluted net loss per share $ (1.13) $ (0.93) $ (0.95)
============================================
Shares used in computing basic and diluted
net loss per share 13,276,147 13,216,773 8,645,152
============================================
</TABLE>
SEE ACCOMPANYING NOTES.
37
<PAGE>
Vascular Solutions, Inc.
Consolidated Statement of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 2,000,000 $ 20,000 1,777,777 $ 17,778 5,250,291 $ 52,503
Exercise of stock options -- -- -- -- 62,940 629
Sale of common stock with the initial
public offering at $12.00 per share
in July 2000, net of offering costs -- -- -- -- 4,025,000 40,250
Conversion of preferred stock in
connection with initial public
offering (2,000,000) (20,000) (1,777,777) (17,778) 3,777,777 37,778
Amortization of deferred compensation -- -- -- -- -- --
Deferred compensation related to
option grants -- -- -- -- -- --
Comprehensive loss:
Net loss -- -- -- -- -- --
Translation adjustment -- -- -- -- -- --
Total comprehensive loss
------------------------------------------------------------------------------------------
Balance at December 31, 2000 -- -- -- -- 13,116,008 131,160
Exercise of stock options -- -- -- -- 120,800 1,208
Issuance of common stock under the
Employee Stock Purchase Plan -- -- -- -- 90,194 902
Value of stock options granted for
services -- -- -- -- -- --
Deferred compensation related to
option grants -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Comprehensive loss:
Net loss -- -- -- -- -- --
Translation adjustment -- -- -- -- -- --
Total comprehensive loss
------------------------------------------------------------------------------------------
Balance at December 31, 2001 -- -- -- -- 13,327,002 133,270
Exercise of stock options -- -- -- -- 10,000 100
Issuance of common stock under the
Employee Stock Purchase Plan -- -- -- -- 152,737 1,528
Stock repurchase program -- -- -- -- (608,900) (6,090)
Deferred compensation related to
option grants -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Comprehensive loss:
Net loss -- -- -- -- -- --
Translation adjustment -- -- -- -- -- --
Total comprehensive loss
------------------------------------------------------------------------------------------
Balance at December 31, 2002 -- $ -- -- $ -- 12,880,839 $ 128,808
==========================================================================================
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL OTHER DEFICIT TOTAL
------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1999 $ 25,828,309 $ (90,931) $(14,655,461) $ 11,172,198
Exercise of stock options 169,765 -- -- 170,394
Sale of common stock with the initial
public offering at $12.00 per share
in July 2000, net of offering costs 43,932,416 -- -- 43,972,666
Conversion of preferred stock in
connection with initial public
offering -- --
Amortization of deferred compensation -- 72,561 -- 72,561
Deferred compensation related to
option grants 34,750 (34,750) -- --
Comprehensive loss:
Net loss -- -- (8,208,867) (8,208,867)
Translation adjustment -- 14,938 -- 14,938
-----------
Total comprehensive loss (8,193,929)
------------------------------------------------------------
Balance at December 31, 2000 69,965,240 (38,182) (22,864,328) 47,193,890
Exercise of stock options 304,096 -- -- 305,304
Issuance of common stock under the
Employee Stock Purchase Plan 308,660 -- -- 309,562
Value of stock options granted for
services 10,398 -- -- 10,398
Deferred compensation related to
option grants 123,780 (123,780) -- --
Amortization of deferred compensation -- 62,850 -- 62,850
Comprehensive loss:
Net loss -- -- (12,250,398) (12,250,398)
Translation adjustment -- (1,722) -- (1,722)
-----------
Total comprehensive loss (12,252,120)
------------------------------------------------------------
Balance at December 31, 2001 70,712,174 (100,834) (35,114,726) 35,629,884
Exercise of stock options 19,900 -- -- 20,000
Issuance of common stock under the
Employee Stock Purchase Plan 163,043 -- -- 164,571
Stock repurchase program (541,632) -- -- (547,722)
Deferred compensation related to
option grants 1,858 (1,858) -- --
Amortization of deferred compensation -- 74,668 -- 74,668
Comprehensive loss:
Net loss -- -- (14,978,914) (14,978,914)
Translation adjustment -- 6,746 -- 6,746
-----------
Total comprehensive loss (14,972,168)
------------------------------------------------------------
Balance at December 31, 2002 $ 70,355,343 $ (21,278) $(50,093,640) $ 20,369,233
============================================================
</TABLE>
SEE ACCOMPANYING NOTES.
38
<PAGE>
Vascular Solutions, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
2002 2001 2000
--------------------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $(14,978,914) $(12,250,398) $ (8,208,867)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 502,390 432,721 366,745
Amortization 145,000 -- --
Value of options granted for services -- 10,398 --
Deferred compensation expense 74,668 62,850 72,561
Changes in operating assets and liabilities:
Accounts receivable (72,935) 686,372 (1,592,304)
Inventories 113,455 684,082 (1,851,228)
Prepaid expenses (36,885) (58,637) (138,074)
Accounts payable 26,222 (22,191) 240,774
Accrued compensation and expenses (78,309) (481,583) 1,106,005
--------------------------------------------
Net cash used in operating activities (14,305,308) (10,936,386) (10,004,388)
INVESTING ACTIVITIES
Purchase of Acolysis assets (1,550,203) -- --
Purchase of property and equipment (356,696) (456,206) (575,887)
Purchase of securities (33,173,021) (25,300,530) (23,349,715)
Proceeds from sales of securities 42,485,052 24,423,770 --
--------------------------------------------
Net cash provided by (used in) investing activities 7,405,132 (1,332,966) (23,925,602)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 20,000 305,304 170,394
Net proceeds from sale of common stock 164,571 309,562 43,972,666
Repurchase of common stock (547,722) -- --
--------------------------------------------
Net cash (used in) provided by financing activities (363,151) 614,866 44,143,060
Effect of exchange rate changes on cash and cash
equivalents 6,746 (1,722) 5,587
--------------------------------------------
(Decrease) increase in cash and cash equivalents (7,256,581) (11,656,208) 10,218,657
Cash and cash equivalents at beginning of year 9,091,640 20,747,848 10,529,191
--------------------------------------------
Cash and cash equivalents at end of year $ 1,835,059 $ 9,091,640 $ 20,747,848
============================================
</TABLE>
SEE ACCOMPANYING NOTES.
39
<PAGE>
Vascular Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
1. DESCRIPTION OF BUSINESS
Vascular Solutions, Inc. (the Company) is a medical device company focused on
bringing solutions to interventional cardiologists and interventional
radiologists. The Company's product line includes the Duett(TM) sealing device,
the D-Stat(TM) flowable hemostat and the Acolysis(R) therapeutic ultrasound
system. As a vertically-intergrated medical device company, the Company
generates ideas and creates new interventional medical devices, and then
delivers those products directly to the physician through its direct domestic
sales force and international distribution network. The Duett sealing device is
designed to provide a complete seal of the puncture site following
catheterization procedures such as angiography, angioplasty and stenting. The
Diagnostic Duett is a version of the Duett sealing device that is tailored
specifically for treating diagnostic patients. The D-Stat flowable hemostat is a
thick, yet flowable blood clotting material that is used in a wide variety of
interventional medical procedures for the local control of bleeding. The
Acolysis intravascular therapeutic ultrasound system delivers ultrasound waves
to lyse blood clots and plaque in arteries. The Acolysis system is not available
for sale in the United States. The Company was incorporated in December 1996 and
began operations in February 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Vascular
Solutions, Inc. and its wholly owned subsidiary, Vascular Solutions GmbH, after
elimination of intercompany accounts and transactions.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
Foreign assets and liabilities are translated using the year-end exchange rates.
Results of operations are translated using the average exchange rates throughout
the year. Translation gains or losses are accumulated as a separate component of
shareholders' equity.
COMPREHENSIVE LOSS
The components of comprehensive loss are net loss and the effects of foreign
currency translation adjustments.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
40
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company classifies all highly liquid investments as cash equivalents. Cash
equivalents consist of cash and money market funds and are stated at cost, which
approximates market value.
AVAILABLE-FOR-SALE SECURITIES
The Company classifies investments as available-for-sale securities.
Available-for-sale securities consist of bank certificates of deposit, U.S.
Government obligations, commercial paper, and investment-grade corporate debt
with maturities of up to one year. These investments are stated at amortized
cost, which approximates market value.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and are comprised of the following at December 31:
2002 2001
------------------------------------
Raw materials $1,561,943 $1,294,507
Work-in-process 138,134 305,527
Finished goods 432,439 182,329
------------------------------------
$2,132,516 $1,782,363
====================================
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets as follows:
Manufacturing equipment 3 to 5 years
Office and computer equipment 3 years
Furniture and fixtures 2 to 5 years
Leasehold improvements Remaining term of the lease
Research and development equipment 3 to 5 years
IMPAIRMENT OF LONG-LIVED ASSETS
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. The amount of impairment loss recorded will be measured as the
amount by which the carrying value of the assets exceeds the fair value of the
assets.
41
<PAGE>
Vascular Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
In the United States and Germany, the Company sells its products directly to
hospitals and clinics. Revenue is recognized upon shipment of products to
customers, net of estimated returns.
In all other international markets, the Company sells its products to
international distributors which subsequently resell the products to hospitals
and clinics. The Company has agreements with each of its distributors which
provide that title and risk of loss pass to the distributor upon shipment of the
products to the distributor. The Company warrants that its products are free
from manufacturing defects at the time of shipment to the distributor. Revenue
is recognized upon shipment of products to distributors following the receipt
and acceptance of a distributor's purchase order. Allowances are provided for
estimated returns and warranty costs at the time of shipment. To date, warranty
costs have been insignificant.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to operations as incurred.
STOCK-BASED COMPENSATION
At December 31, 2002, the Company had a stock-based employee compensation plan,
which is described more fully in Note 9. The Company accounts for those plans
under the recognition and measurement principles of Accounting Principles Board
(APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations. No stock-based employee compensation cost is reflected in net
loss, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to stock-based employer
compensation.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
2002 2001 2000
-----------------------------------------------------------
<S> <C> <C> <C>
Net loss, as reported $(14,978,914) $(12,250,398) $ (8,208,867)
Deduct: Total stock-based employee compensation
expense determined under fair-value-based
method for all awards (2,340,094) (2,631,693) (2,152,860)
-----------------------------------------------------------
Pro forma net loss $(17,319,008) $(14,882,091) $(10,361,727)
===========================================================
Net loss per share:
Basic and diluted - as reported $(1.13) $(0.93) $(0.95)
===========================================================
Basic and diluted - pro forma $(1.30) $(1.13) $(1.20)
===========================================================
</TABLE>
42
<PAGE>
Vascular Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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. The fair value of the Company's stock options was
estimated assuming no expected dividends and the following weighted average
assumptions:
2002 2001 2000
-----------------------------------------------
Expected life (years) 6.50 7.00 7.50
Expected volatility 1.01 1.21 0.93
Risk-free interest rate 4.30% 4.88% 5.96%
The weighted average fair value of options granted with an exercise price equal
to the deemed stock price on the date of grant during 2002, 2001, and 2000 was
$1.58, $5.31, and $9.79, respectively.
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, investments, and
accounts receivable. The Company maintains its accounts for cash and cash
equivalents and investments principally at one major bank and two investment
firms 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.
43
<PAGE>
Vascular Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
With respect to accounts receivable, the Company performs credit evaluations of
its customers and does not require collateral. One customer accounted for 5% of
gross accounts receivable as of December 31, 2002 and two customers accounted
for 11% of gross accounts receivable as of December 31, 2001. There have been no
material losses on customer receivables.
NET LOSS PER SHARE
In accordance with SFAS No. 128, EARNINGS PER SHARE, basic net loss per share is
computed by dividing net loss by the weighted average common shares outstanding
during the periods presented. Diluted net loss per share is computed by dividing
net loss by the weighted average common and dilutive potential common shares
outstanding computed in accordance with the treasury stock method. For all
periods presented, diluted loss per share is the same as basic loss per share,
because the effect of outstanding options, warrants, and convertible preferred
stock is antidilutive.
RECLASSIFICATIONS
Certain prior year balances were reclassified to conform to the current year
presentation.
GOODWILL AND OTHER INTANGIBLE ASSETS
In fiscal 2002, the Company adopted SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS. Goodwill is tested for impairment annually or more frequently if changes
in circumstances or the occurrence of events suggest an impairment exists. The
test for impairment requires the Company to make several estimates about fair
value, most of which are based on projected future cash flows. The Company has
concluded that no impairment of goodwill exists as of December 31, 2002.
Other intangible assets consist of purchased technology. Purchased technology is
amortized using the straight-line method over its estimated useful life of four
years. The Company reviews intangible assets for impairment annually or as
changes in circumstances or the occurrence of events suggests the remaining
value is not recoverable.
3. ACQUISITION OF CERTAIN ASSETS OF ANGIOSONICS, INC.
On April 29, 2002, the Company purchased the Acolysis(R) intravascular
ultrasound assets and related patents and technologies from the secured
creditors of Angiosonics, Inc. in exchange for $1,500,000 in cash. The Company
allocated the purchase price of $1,500,000 and the related transaction fees
using the fair market value of the assets. The Company allocated $487,608 to
inventory and fixed assets, $870,000 to purchased technology, and $192,595 to
goodwill.
44
<PAGE>
Vascular Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
4. GOODWILL AND OTHER INTANGIBLE ASSETS
As discussed in Note 2, the Company adopted SFAS No. 142 in fiscal 2002, and
determined that the developed technology the Company acquired from Angiosonics,
Inc. in April 2002 would be amortized over its useful life of four years. The
Company also acquired goodwill determined to be an indefinite-lived intangible
asset. The Company expects the future annual amortization expense for its
acquired purchased development to be approximately $217,500 for each of the next
three fiscal years and approximately $72,500 in the fourth fiscal year.
Balances of acquired intangible assets as of December 31, 2002 were as follows:
ACCUMULATED
CARRYING AMOUNT AMORTIZATION NET
--------------------------------------------
Amortizing intangibles:
Purchased technology $ 870,000 $145,000 $725,000
Non-amortizing intangibles:
Goodwill 192,595 - 192,595
--------------------------------------------
$1,062,595 $145,000 $917,595
============================================
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
2002 2001
---------------------------------
Property and equipment:
Manufacturing equipment $1,017,283 $ 773,989
Office and computer equipment 817,143 734,146
Furniture and fixtures 242,694 221,347
Leasehold improvements 143,079 143,079
Research and development equipment 287,964 254,906
---------------------------------
2,508,163 2,127,467
Less accumulated depreciation (1,712,278) (1,209,888)
---------------------------------
Net property and equipment $ 795,885 $ 917,579
=================================
45
<PAGE>
Vascular Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
6. LEASES
The Company leases a 29,000 square-foot office and manufacturing facility under
an operating lease agreement, which expires in March 2003. The Company gave
written notice to the lessor in September 2002 of its intentions to terminate
the lease effective March 31, 2003. The Company signed a new lease in September
2002 to lease a 33,000 square-foot office and manufacturing facility under an
operating lease agreement, which expires in September 2008. Rent expense related
to the operating leases was approximately $303,100, $306,600, and $242,100 for
the years ended December 31, 2002, 2001, and 2000, respectively.
Future minimum lease commitments under these operating leases as of December 31,
2002 are as follows:
2003 $ 256,359
2004 342,225
2005 342,225
2006 356,497
2007 363,634
2008 272,725
-------------------
$1,933,665
===================
7. INCOME TAXES
At December 31, 2002, the Company had net operating loss carryforwards of
approximately $46,100,000 for federal income tax purposes that are available to
offset future taxable income and begin to expire in the year 2013. At December
31, 2002, the Company also had federal and Minnesota research and development
tax credit carryforwards of approximately $1,206,000 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 as of
December 31, 2002 and 2001 are as follows:
2002 2001
------------------------------------
Deferred tax assets:
Net operating loss carryforwards $18,452,000 $12,852,000
Tax credit carryforwards 1,206,000 1,317,000
Depreciation and amortization 129,000 156,000
Accrued compensation 88,000 245,000
Other allowances 94,000 44,000
Inventory reserve 104,000 34,000
------------------------------------
20,073,000 14,648,000
Less valuation allowances (20,073,000) (14,648,000)
------------------------------------
Net deferred taxes $ - $ -
====================================
46
<PAGE>
Vascular Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
7. INCOME TAXES (CONTINUED)
Reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
2002 2001 2000
-----------------------------------
Tax at statutory rate 34.0% 34.0% 34.0%
State income taxes 6.0 6.0 6.0
Impact of net operating loss carryforward (40.0) (40.0) (40.0)
-----------------------------------
Effective income tax rate -% -% -%
===================================
8. INITIAL PUBLIC OFFERING
On July 25, 2000, the Company completed the initial public offering of its
common stock. Upon the closing of the initial public offering, the Company
issued 3,500,000 shares of its common stock at an offering price of $12.00 per
share, and all of the Company's Series A and Series B preferred stock
automatically converted into 3,777,777 shares of common stock. On August 15,
2000, the underwriters exercised in full their overallotment option to purchase
an additional 525,000 shares of common stock at $12.00 per share. Cash proceeds
from the sale of the 4,025,000 shares of common stock, net of underwriters'
discount and offering expenses, totaled approximately $44 million. Upon closing
of the Company's initial public offering, the authorized capital stock of the
Company consisted of 40,000,000 shares of common stock, par value $0.01 per
share, with no shares of preferred stock outstanding or designated.
9. STOCK OPTIONS AND WARRANTS
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, 2002, the Company reserved 2,400,000 shares of common stock under
the Stock Option Plan. Under the Stock Option Plan, incentive stock options must
be granted at an exercise price not less than the fair market value of the
Company's common stock on the grant date. The exercise price of a nonqualified
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. Prior to the
initial public offering in July 2000, 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
47
<PAGE>
Vascular Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
stock-based awards. The incentive stock options generally become exercisable
over a four-year period and the nonqualified stock options generally become
exercisable over a two-year period. Unexercised options are canceled 90 days
after termination of employment and become available under the Stock Option
Plan.
In the third quarter of 2002, the Company offered to exchange for its current
employees, other than the Chief Executive Officer, any outstanding options to
purchase shares of the Company's common stock under the Stock Option Plan with
an exercise price of at least $3.00 per share for new options the Company will
grant under the plan. The new options will be granted on or about February 18,
2003, which is six months and two business days after the date the options were
exchanged. New options granted under the Stock Option Plan will have an exercise
price determined by the market price of the Company's stock on the date the new
options are granted. The number of shares to be granted to each participating
option holder will be equal to the number of shares subject to the eligible
options tendered by such option holder. A stock option holder must continue to
be employed by the Company through February 18, 2003 in order to be eligible to
receive the new options. As a result of this exchange of options shares, 467,070
options with an average price of $6.80 were canceled.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
AVAILABLE PLAN OPTIONS EXERCISE EXERCISE
FOR GRANT OUTSTANDING PRICE PRICE
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 374,729 933,611 $1.50-$ 6.00 $ 4.00
Granted (290,250) 290,250 6.00- 16.50 11.12
Exercised - (62,940) 1.50- 5.00 2.71
Canceled 90,150 (90,150) 1.50- 16.50 4.89
-----------------------------------
Balance at December 31, 2000 174,629 1,070,771 1.50- 16.50 5.85
Shares reserved 500,000 - - -
Granted (972,000) 972,000 2.51- 7.48 5.35
Exercised - (120,800) 1.50- 7.00 2.53
Canceled 347,160 (347,160) 1.50- 16.50 7.41
-----------------------------------
Balance at December 31, 2001 49,789 1,574,811 1.50- 16.50 5.45
Shares reserved 500,000 - - -
Granted (186,000) 186,000 0.81- 2.70 1.83
Exercised - (10,000) 2.00 2.00
Canceled 849,890 (849,890) 1.45- 16.50 6.25
-----------------------------------
Balance at December 31, 2002 1,213,679 900,921
===================================
</TABLE>
48
<PAGE>
Vascular Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 2002:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ---------------------------------
WEIGHTED
OUTSTANDING AVERAGE EXERCISABLE
AS OF REMAINING WEIGHTED AS OF WEIGHTED
RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 2002 LIFE EXERCISE PRICE 2002 EXERCISE PRICE
- ------------------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.81- $ 1.50 187,711 6.8 $ 1.31 121,811 $ 1.38
1.51- 3.25 340,070 8.1 2.55 163,955 2.58
3.26- 6.00 229,000 6.9 6.00 174,320 6.00
6.01- 7.00 51,440 4.6 6.69 48,030 6.71
7.01- 10.00 90,620 8.0 7.61 54,300 7.72
10.01- 12.00 1,000 7.3 12.00 640 12.00
12.01- 16.50 1,080 0.2 16.50 1,080 16.50
----------------- -----------------
900,921 7.3 3.94 564,136 4.26
================= =================
</TABLE>
For the year ended December 31, 2001, the Company recorded compensation expense
of $10,398 in connection with nonqualified stock options granted to outside
consultants.
DEFERRED COMPENSATION
In 2002, 2001, and 2000, the Company recorded a total of $160,388 of deferred
compensation in connection with certain nonqualified stock options granted to
medical advisory board members. The weighted average fair value of these options
was $3.21. Deferred compensation recorded is amortized ratably over the period
that the options vest and is adjusted for options which have been canceled.
Deferred compensation expense was $74,668, $62,850, and $72,561 for the years
ended December 31, 2002, 2001, and 2000, respectively.
WARRANTS
As of December 31, 2002, the Company had 268,000 warrants outstanding and
exercisable at a weighted average exercise price of $3.19 per share.
49
<PAGE>
Vascular Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
10. EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (the Purchase Plan) under which
700,000 shares of common stock have been reserved for issuance. Eligible
employees may contribute 1% to 10% of their compensation to purchase shares of
the Company's common stock at a discount of 15% of the market value at certain
plan-defined dates up to a maximum of 2,000 shares per purchasing period. The
Purchase Plan terminates in May 2010. In fiscal 2002, 2001, and 2000, 152,737
shares, 90,194 shares, and zero shares, respectively, were issued under the
Purchase Plan. At December 31, 2002, 457,069 shares were available for issuance
under the Purchase Plan.
11. STOCK REPURCHASE PROGRAM
In August 2002, the Board of Directors authorized a stock repurchase program to
acquire up to 1,000,000 shares of outstanding common stock in the open market,
block purchases, or private transactions. During fiscal 2002, the Company
repurchased and retired 608,900 shares of the Company's common stock for an
aggregate purchase price of $547,722. The remaining authorized amount for stock
repurchase is 391,100 shares.
12. EMPLOYEE RETIREMENT SAVINGS PLAN
The Company has an employee 401(k) retirement savings plan (the Plan). The 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 Plan beginning with the
first quarterly open enrollment date following start of employment. Through
December 31, 2001, the Plan allowed eligible employees to contribute up to 18%
of their annual compensation. Effective January 1, 2002, the employee
contribution limit was increased to 50% of their annual compensation, subject to
a maximum limit determined by the Internal Revenue Service, with the Company
contributing an amount equal to 25% of the first 5% contributed to the Plan. The
Company recorded an expense of $91,170, $112,084, and $52,357 for contributions
to the Plan for the years ended December 31, 2002, 2001, and 2000, respectively.
50
<PAGE>
Vascular Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
13. CONCENTRATIONS OF CREDIT AND OTHER RISKS
In the United States and Germany, the Company sells its products directly to
hospitals and clinics. In all other international markets, the Company sells its
products to distributors who, in turn, sell to medical clinics. 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.
No customers were more than 5% of net sales for the years ended December 31,
2002 and 2001. Three customers made up 22.4% of net sales for the year ended
December 31, 2000.
The Company performs ongoing credit evaluations of its customers but does not
require collateral. There have been no material losses on customer receivables.
Sales by geographic destination as a percentage of total net sales were as
follows for the years ended December 31:
2002 2001 2000
---------------------------------------------------
Domestic 89% 90% 67%
Foreign 11 10 33
14. 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.
15. COMMITMENTS AND CONTINGENCIES
Datascope
In July 1999, the Company was named as a defendant in a patent infringement
lawsuit brought by Datascope Corporation (Datascope), a competitor, in the
United States District Court of the District of Minnesota. The complaint
requested a judgment that the Company's 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 the Company from selling
its product in the United States as well as an award of attorney's fees, costs,
and disbursements. On August 12, 1999, the Company filed its answer to this
lawsuit and brought a counterclaim alleging unfair competition and tortious
interference against Datascope. On August 20, 1999, the Company moved for
summary judgment to dismiss Datascope's claims. On March 15, 2000, the court
granted summary judgment dismissing all of Datascope's claims, subject to the
right of Datascope to recommence the litigation after the Company's receipt of
FDA approval of the Duett sealing device. On July 12, 2000, after the Company
received FDA approval, Datascope recommenced this litigation, alleging that the
Duett sealing device infringes a
51
<PAGE>
Vascular Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
United States patent held by Datascope and requesting relief in the form of an
injunction that would prevent the Company from selling its product in the United
States, damages caused by the alleged infringement, and other costs,
disbursements, and attorneys' fees.
On November 26, 2002, the Company entered into an agreement that settled all
existing intellectual property litigation with Datascope Corporation. Under the
terms of the settlement agreement, Datascope has granted the Company a
nonexclusive license to its Janzen patents as they apply to all current versions
of the Duett sealing device, and to certain permitted future product
improvements. Datascope also has released the Company from any claim of patent
infringement based on past or future sales of the Duett sealing device. In
exchange, the Company paid Datascope a single lump sum of $3,750,000 in the
fourth quarter.
St. Jude
On July 3, 2000, the Company was named as the defendant in a patent infringement
lawsuit brought by the Daig division of St. Jude Medical, Inc. (St. Jude
Medical), a competitor, in the United States District Court of the District of
Minnesota. The complaint requests a judgment that the Company's Duett sealing
device infringes a series of four patents held by St. Jude Medical and asks for
relief in the form of an injunction that would prevent the Company from selling
its product in the United States, damages caused by the manufacture and sale of
the Company's product, and other costs, disbursements, and attorneys' fees.
On July 12, 2001, the Company entered into an agreement that settled all
existing intellectual property litigation with St. Jude Medical, Inc. Under the
terms of the settlement agreement, the Company agreed to pay a royalty of 2.5%
of net sales of the Company's Duett sealing device to St. Jude Medical, up to a
maximum amount over the remaining life of the St. Jude Medical Fowler patents.
In exchange, St. Jude Medical granted to the Company a nonexclusive license to
its Fowler patents and has released it from any claim of patent infringement
based on sales of the Duett sealing device. The Company granted a nonexclusive
cross-license to its Gershony patents to St. Jude Medical, subject to a similar
royalty payment if St. Jude Medical utilizes the Gershony patents in any future
device. Beginning on July 1, 2001, a royalty expense of 2.5% of net sales is
included in the Company's cost of goods sold until the maximum royalty is
attained.
52
<PAGE>
Vascular Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
16. QUARTERLY FINANCIAL DATA (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST THIRD
2002 QUARTER SECOND QUARTER QUARTER FOURTH QUARTER
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $2,803 $ 3,329 $ 3,041 $ 2,928
Gross profit 1,597 2,002 1,817 1,699
Operating loss (3,689) (2,871) (2,777) (6,149)
Net loss (3,551) (2,743) (2,634) (6,051)
Basic and diluted net loss
per share $ (0.27) $ (0.20) $ (0.20) $ (0.46)
2001
- -------------------------------------
Net sales $3,123 $ 3,540 $ 2,529 $ 2,890
Gross profit 1,906 2,154 1,444 1,617
Operating loss (2,988) (3,263) (3,891) (3,769)
Net loss (2,345) (2,824) (3,521) (3,560)
Basic and diluted net loss
per share $(0.18) $ (0.21) $ (0.27) $ (0.27)
</TABLE>
The results of the fourth quarter of 2002 include a $3,750,000 settlement of
litigation which the Company expensed in that period. (See Note 15.)
53
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.17
<SEQUENCE>3
<FILENAME>vasc030918_ex10-17.txt
<DESCRIPTION>SUPPLY AGREEMENT
<TEXT>
EXHIBIT 10.17
LICENSE AND SUPPLY AGREEMENT
This Agreement is made and entered into this 17th day of December, 2002
(the "Effective Date") by and between Tepha, Inc., a corporation duly organized
and existing under the laws of the State of Delaware and having its principal
office at 303 Third Street, Cambridge, Massachusetts 02142 (hereinafter referred
to as "Tepha"), and Vascular Solutions, Inc., a corporation duly organized and
existing under the laws of Minnesota and having its principal office at 2495
Xenium Lane North, Minneapolis, Minnesota 55441 (hereinafter referred to as
"Licensee").
WHEREAS, Tepha owns or is the licensee of the Patent Rights (as later
defined);
WHEREAS, Tepha wishes to grant, and Licensee wishes to receive, license
rights to the Patent Rights; and
WHEREAS, certain Polymer (as later defined) is manufactured by or for
Tepha that Licensee wishes to purchase under the terms of this Agreement.
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties hereto agree as follows:
1. DEFINITIONS.
1.1. "Patent Rights" means: (i) the United States and foreign patent
applications and patents set forth in Appendix A, (ii) any divisionals,
continuations and continuation-in-part applications which shall be
directed to subject matter specifically described in such patent
applications; (iii) the resulting United States and foreign patents;
(iv) any reissues, reexaminations or extensions of such patents; and
(v) all foreign counterparts of the above patent applications and
patents.
1.2. "Field" means medical devices for sealing of a percutaneous
puncture in a blood vessel or organ, but specifically excluding
pericardial and intracardiac (any construct in contact with the inner
compartment of the heart) patches and small and large diameter vascular
grafts to repair, replace or bypass compromised blood vessels.
1.3. "Net Sales" means Licensee's and its Affiliates' billings for the
use, sale, lease or other disposition of Licensed Products, otherwise
than to an Affiliate of the Licensee for resale, and the fair market
value of any noncash consideration, less:
(i) discounts allowed in amounts customary in the trade;
(ii) sales, tariff duties and/or use taxes directly
imposed and with reference to particular sales;
(iii) outbound transportation prepaid or allowed; and
Page 1 of 31
<PAGE>
(iv) invoices which become uncollectible after reasonable
means and time for collection (not to exceed *
of Net Sales in any Reporting Period); and
(v) amounts allowed or credited on returns of damaged
goods, expired goods, or recalls.
No deduction shall be made for commissions paid to individuals whether
they be with independent sales agencies or regularly employed by
Licensee and on its payroll, or for cost of collections. Licensed
Products shall be considered "sold" when invoiced. If a Licensed
Product shall otherwise be distributed or invoiced for a discounted
price substantially lower than customary in the trade or distributed at
no cost, to Affiliates of Licensee or otherwise, Net Sales shall be
based on the average amount billed for such Licensed Products during
the applicable Reporting Period (as later defined); provided, however,
Licensee may distribute a reasonable number of evaluation units on a
royalty-free basis, not to exceed * of Net Sales in any Reporting
Period.
1.4. "Polymer" means the poly-3-hydroxybutyrate-co-4-hydroxybutyrate
copolymer (PHA3444) manufactured by or for Tepha and offered for sale
by Tepha to its customers. All current Polymer compositions are listed
on Appendix C, which shall be updated from time to time by Tepha to
include all future improvements to and compositions of PHA3444
developed by Tepha.
1.5. "Licensed Product" means any device for sealing of a percutaneous
puncture in a blood vessel or organ in the Field:
(i) that is covered in whole or in part by an issued,
unexpired valid claim or a pending claim contained in
the Patent Rights in the country in which any such
product or part thereof is made, used, sold or
imported; and/or
(ii) that is manufactured by using a process or is
employed to practice a process which is covered in
whole or in part by an issued, unexpired valid claim
or a pending claim contained in the Patent Rights in
the country in which a process is used or in which
such product or part thereof is used, sold or
imported; and/or
(iii) that incorporates Polymer.
1.6. "Reporting Period" means a three (3) month period ending March 31,
June 30, September 30 or December 31 of each calendar year.
1.7. "Device Master File" means the device master file for Polymer
intended to be filed or filed by Tepha with the U.S. Food and Drug
Administration.
* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
Page 2 of 31
<PAGE>
1.8. "Affiliate" means any wholly owned subsidiary of Licensee or
Tepha, respectively.
1.9. "Specification" means the mutually agreed specifications for the
Polymer on the date of manufacture.
2. LICENSE GRANT
2.1 License. Subject to the terms and conditions of this Agreement,
Tepha hereby grants to Licensee the worldwide right and license,
without the right to sublicense, in the Field under the Patent Rights
to make, have made, use, lease, sell, offer for sale and import the
Licensed Products until the expiration of the last to expire of the
Patent Rights, unless this Agreement shall be sooner terminated
according to the terms hereof.
2.2 MIT Patent Rights. A subset of the Patent Rights are owned by the
Massachusetts Institute of Technology ("MIT"). Under the terms of its
sublicense to this subset of Patent Rights owned by MIT, Tepha has
agreed that any sublicenses granted by it shall provide that the
obligations to MIT of articles 2, 5, 7, 8, 9, 10, 12, 13, and 15 of the
license with MIT shall be binding upon Licensee as if it were a party
to that license agreement. Tepha further has agreed to attach copies of
these articles to sublicense agreements, and a copy is attached as
Appendix B. To the extent of any conflict between the terms of this
Agreement and Appendix B, as to the Patent Rights owned by MIT only,
the terms of Appendix B shall prevail.
2.3 No Future Grant or Use of Competing Rights. After the Effective
Date and during the term of this Agreement, Tepha shall not grant to
any third party, nor use in its own business, any right under the
Patent Rights in the Field to make, use, lease, sell, offer for sale,
or import a Licensed Product that incorporates Polymer. The parties
acknowledge that prior to the Effective Date Tepha has entered into one
other agreement granting rights to a third party under the Patent
Rights in the field of vascular closure devices for sealing the femoral
artery after catheter based procedures to make, have made, use, lease,
sell, offer for sale, and import Licensed Products that incorporate
Polymer and obligating Tepha to supply Polymer.
2.4 No Other Rights. Nothing in this Agreement shall be construed to
confer any rights upon Licensee by implication, estoppel or otherwise
beyond the express licenses granted by Tepha as to any technology or
patent rights of Tepha or any other entity other than the Patent
Rights.
2.5 Restriction. Licensee shall have no right to use, lease, sell,
offer for sale, import or otherwise dispose of Polymer as stand-alone
products, and may only use, lease, sell, offer for sale, import and
otherwise dispose of Polymer as incorporated into Licensed Products in
the Field. Licensee shall have no right to make or have made Polymer,
except as provided in Paragraph 3.8 hereof.
Page 3 of 31
<PAGE>
2.6 Improvements. Licensee shall promptly disclose to Tepha any
improvements, changes or modifications that Licensee may make to the
composition or processing of any Polymer ("Developments"). Licensee
hereby grants to Tepha a nonexclusive, royalty-free, worldwide,
irrevocable right and license outside the Field under Licensee's
intellectual property rights (including without limitation patent
rights) in Developments, with the right to grant sublicenses, to make,
have made, use, lease, sell and otherwise dispose of products, and to
practice processes and use, copy, modify and distribute information.
Tepha shall promptly disclose to Licensee any future improvements to
and compositions of PHA 3444 that Tepha may make, which shall
automatically be added to the definition of Polymer under this
Agreement under the financial terms set forth herein.
3. SUPPLY OF POLYMERS
3.1 Forecasts. Within thirty (30) days following the Effective Date,
Licensee shall provide Tepha with Licensee's initial forecasts by
Reporting Period of the quantity of each Polymer listed on Appendix C
that Licensee expects to purchase from Tepha during the first four
Reporting Periods. On or before the first day of each subsequent
Reporting Period, Licensee shall submit a revised forecast by Reporting
Period for each Polymer for the next consecutive four Reporting
Periods.
3.2 Supply. During the term of this Agreement, Tepha shall use
commercially reasonable efforts to supply to Licensee such quantities
of Polymer as may be reasonably requested by Licensee. However, if this
Agreement is Assigned by Licensee as may be permitted pursuant to
Paragraph 17.7, purchase orders by the assignee in any Reporting Period
in excess of one hundred and twenty percent (120%) of any of the volume
forecasts for that Reporting Period submitted pursuant to Paragraph 3.1
in any of the immediately preceding four (4) calendar quarters shall be
deemed not to be a "reasonable request" by Licensee. Tepha shall have
the right to contract with third parties to manufacture Polymer for
supply to Licensee, provided that Tepha shall remain liable to Licensee
for its obligations hereunder, and shall notify Licensee of the
identity of any such manufacturer. Tepha, or its sub-contractor, shall
manufacture the Polymer in accordance with all applicable Good
Manufacturing Practices ("GMP") of the U.S. Food & Drug Administration
(the "FDA"). Purchase orders for any Polymer in a Reporting Period in
excess of one hundred twenty percent (120%) of any of the volume
forecasts submitted pursuant to Paragraph 3.1 by Licensee in any of the
immediately preceding four (4) calendar quarters for such Reporting
Period which Tepha is not able to fill shall not be deemed a breach of
this Agreement. Tepha agrees to use commercially reasonable efforts to
accommodate purchase order revisions submitted in writing by Licensee.
Each purchase order must specify a delivery date not less than ninety
(90) days after the date of the purchase order.
3.3 Shipment. Tepha agrees to ship Polymer by the common carrier and
method of shipment designated by Licensee. Shipments will be F.O.B.,
Tepha or its designee's U.S. manufacturing facility, and will be
according to any reasonable shipping schedule specified by Licensee, to
the locations specified in Licensee's purchase orders. Legal title and
risk of loss shall pass to Licensee upon delivery to such common
carrier. Licensee shall pay all costs of shipping.
Page 4 of 31
<PAGE>
3.4 Inspection. Within thirty (30) days of receipt of any shipment,
Licensee shall inspect the shipment and notify Tepha of its rejection
of any Polymer within the shipment. Polymer may be rejected only to the
extent the quantity shipped exceeds the amount ordered in the relevant
purchase order, or if any Polymer fails to meet its Specification. If
Licensee does not notify Tepha of rejection within such thirty (30) day
period, it shall be deemed to have accepted the shipment of any Polymer
not so rejected. Rejected Polymer shall be returned to Tepha or
disposed of at the direction of Tepha, in either case at the expense of
Tepha, except as otherwise provided in Paragraph 16.3. Tepha shall have
thirty (30) days after receipt of a notice from Licensee rejecting any
Polymer to replace the defective Polymer.
3.5 Payment. Licensee shall pay Tepha the then current price of each
Polymer on the date of acceptance of each Purchase Order. The initial
price as of the Effective Date is set forth on Appendix C. Price
adjustments shall be computed annually according to the following
formula: On January 1, 2004 and each January 1 thereafter, Tepha may
increase the price of Polymer from the previous year by the 12-month
average percentage increase in total compensation for private industry
workers for the period ending December 31 as indicated on Table 3 of
the Employment Cost Index published by the Bureau of Labor Statistics
of the United States Department of Labor or, if the Employment Cost
Index should cease to be published, any comparable category in a
comparable index agreeable to both parties. If there is no increase in
such Employment Cost Index, the price of Polymer shall be the same as
the previous January 1. Tepha shall invoice Licensee for each shipment
of Polymer, and payment shall be due from Licensee within thirty (30)
days after the invoice date.
3.6 Adverse Events and Other Reporting. Licensee shall be responsible
for handling and shall promptly notify Tepha of any information that
might give rise to a recall or market withdrawal of any Licensed
Product incorporating the Polymer or which involves any complaint
relating to the Polymer material of a Licensed Product. To the extent
possible under the circumstances, Licensee will inform Tepha prior to
communicating with the FDA concerning any such recall, market
withdrawal or complaint. Tepha shall cooperate and supply on a
confidential basis any information or assistance reasonably required in
Licensee's interaction relating thereto with the Food and Drug
Administration and other governmental authorities, in the United States
or international markets, relating to the Polymer. Licensee shall keep
Tepha promptly informed on an ongoing basis and provide copies of all
correspondence, filings, and documentation to Tepha until resolution of
each such matter.
3.7 Device Master File; Regulatory Assistance. Upon execution of this
Agreement, Tepha will use diligent efforts to complete and file a
Device Master File with the FDA for the Polymer, and to maintain and
update the Device Master File for the remainder of this Agreement.
Tepha will own all right, title and interest in the Device Master File.
Licensee may reference the Device Master File for Polymer to support
Licensee's registration of any Licensed Product; provided, however,
Licensee will not have access to any information or data in the Device
Master File relating to the manufacturing process for the Polymer.
Tepha shall provide to Licensee as Confidential Information, the
information, test results and documentation relating to the Polymer
that is reasonably
Page 5 of 31
<PAGE>
necessary for Licensee's applications for registration of any Licensed
Product in international markets. Licensee will own all right, title
and interest in any regulatory filings (in the United States and
international markets) with respect to the Licensed Product (excluding
the Polymer and Master Device File). Tepha agrees to provide up to
twenty (20) hours of reasonable technical assistance to Licensee with
respect to Licensee's filings and responses to the FDA and
international regulatory agencies for no additional compensation.
Further technical assistance relating to such filings and responses
will be provided at Tepha's standard rates and terms.
3.8 Contingent Manufacturing Rights. If (i) Tepha becomes subject to a
bankruptcy petition under Chapter 7 of the U.S. Bankruptcy Code or (ii)
otherwise files for bankruptcy and ceases its manufacturing operations
for Polymer, or (iii) Tepha ceases to carry on its business operations
with respect to the Polymer, or (iv) Tepha is continually unable to
manufacture and supply any Polymer to Licensee during any consecutive
one hundred and eighty (180) day period, or (v) Licensee elects
pursuant to Paragraph 15.2 ,upon an uncured material breach by Tepha,
to exercise its rights under this Section 3.8, then at Licensee's
request, Tepha shall grant Licensee a nonexclusive right and license,
to manufacture the Polymer, or to have the Polymer manufactured by
direct contract between Licensee and any qualified Tepha third party
subcontractor for use in Licensed Products only, subject to the terms
and conditions of this Agreement. The right and license which may be
granted pursuant to this Paragraph shall continue until Tepha
reasonably demonstrates to Licensee that it is capable and willing to
resume the supply and delivery to Licensee of its requirements of the
Polymer under the terms and conditions of this Agreement, or if
Licensee has made an election under Section 3.8(v), until the material
breach has been cured by Tepha. The obligation of Licensee to make the
royalty payments pursuant to Section 4.3 shall continue notwithstanding
any grant to Licensee of the right and license to manufacture the
Polymer set forth in this Paragraph 3.8, provided that, at Licensee's
election, Licensee may pay directly to any third party that portion of
the royalty payments required to maintain the license rights from such
third party.
4. ROYALTIES
4.1 License Issue Fee. Licensee shall pay Tepha a License Issue Fee
of * which the parties acknowledge has been paid prior to the
Effective Date.
* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
Page 6 of 31
<PAGE>
4.2 Research and Development Payments. Licensee shall pay Tepha a total
sum of * to support Tepha's research and developments efforts and
completion of filing of the Device Master File for the Polymer with the
FDA, which said Research and Development payments shall be deemed
earned and due as follows: * which the parties acknowledge has
been paid prior to the Effective Date; and * earned and due at
the rate of * per month beginning January 1, 2003; and *
upon the completion of filing of the Device Master File with the FDA.
Such final * payment shall be subject to a reduction of *
for each month that the filing is delayed beyond December 31, 2003;
provided, however, such date shall be extended if the implantation
studies shall not be completed by November 30, 2003. Such extension
shall equal the additional period of time reasonably necessary for such
studies to be completed, plus one month.
4.3 Royalties. Until expiration of the last to expire patent within the
Patent Rights, Licensee shall pay Tepha a royalty (the "Royalty") as
follows: * of Net Sales of Licensed Products accrued during each
Reporting Period until aggregate Net Sales during the immediately
preceding four (4) Reporting Periods exceeds * and thereafter
* of Net Sales for the remainder of the term of this Agreement.
Each Royalty for a Reporting Period shall be paid within thirty (30)
days after the conclusion of the Reporting Period.
4.4 Minimum Royalties. A minimum royalty payment of * shall be
due and payable by Licensee to Tepha on January 1, 2006 and on
January 1 of each subsequent year during the term of this Agreement.
Royalties (as defined in Section 4.3) subsequently due on Net Sales of
Licensed Products, if any, for each such year shall be creditable
against the Minimum Royalty Payment paid for said year. Any minimum
royalty payment paid in excess of Royalties for any calendar year shall
not be creditable against Royalties due in future calendar years.
4.5 Payments in Full. All payments due hereunder shall be paid in full,
without deduction of taxes or other fees which may be imposed by any
government, except as otherwise provided in Paragraph 1.3(ii).
4.6 No Multiple Royalties. No multiple Royalties shall be payable under
Paragraph 4.3 because any Licensed Product, its manufacture, use,
lease, sale or importation are or shall be covered by more than one
patent application or patent licensed under this Agreement or because
any unit of Licensed Product for which a Royalty has been paid shall be
re-sold or re-distributed in Licensee's channel of trade.
* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
Page 7 of 31
<PAGE>
4.7 Payment. Royalty payments shall be paid in United States dollars in
Cambridge, Massachusetts, or at such other place as Tepha may
reasonably designate consistent with the laws and regulations
controlling in any foreign country. If any currency conversion shall be
required in connection with the payment of royalties hereunder, such
conversion shall be made by using the exchange rate published in the
Wall Street Journal on the last business day of the Reporting Period to
which such royalty payments relate.
5. RECORDS AND PAYMENTS
5.1 Records and Audit. Licensee shall keep true and accurate books of
account and records that are necessary for the purpose of showing the
amounts payable to Tepha hereunder and compliance with Paragraphs 6 and
16 of this Agreement. Said books of account and records shall be kept
at Licensee's principal place of business and shall be open at all
reasonable times for three (3) years following the end of the calendar
year to which they pertain, to the inspection of Tepha or its agents
for the purpose of verifying Licensee's royalty statements or
compliance in other respect with this Agreement. Tepha shall pay the
cost associated with any inspection; provided that should such
inspection lead to the discovery of a greater than Ten Percent (10%)
discrepancy in reporting to Tepha's detriment, Licensee agrees to pay
the cost of such inspection.
5.2 Reports and Payments. Within thirty (30) days after the end of each
Reporting Period, Licensee shall send to Tepha a report showing the Net
Sales of the Licensed Products, including calculation of deductions
permitted under Paragraph 1.3, for such Reporting Period and shall pay
the appropriate royalties to Tepha. These reports shall include at
least the following: (i) number and total billings of Licensed
Products, (ii) description of Licensed Products made using each Polymer
supplied by Tepha, (iii) deductions applicable as provided in Paragraph
1.3; and (iv) Royalties due under Paragraph 4.3. Licensee shall deliver
to Tepha true and accurate reports, giving a summary of the business
conducted by Licensee under this Agreement as shall be relevant to
diligence under Article 6.1 before the first commercial sale of a
Licensed Product, annually, on or before January 31 of each year.
5.3 Interest. The amounts due under Article 4 shall, if overdue, bear
interest until payment at a per annum rate Two Percent (2%) above the
prime rate in effect at Fleet Bank, or its successors, on the due date.
The payment of such interest shall not foreclose Tepha from exercising
any other rights it may have as a consequence of the lateness of any
payment.
Page 8 of 31
<PAGE>
6. DUE DILIGENCE
6.1 Diligent Efforts. Licensee shall use diligent efforts to bring
Licensed Products to market through a diligent program for exploitation
of the Patent Rights and shall continue diligent commercialization
efforts for the Licensed Products throughout the term of this
Agreement. Licensee shall use diligent efforts to meet the following
projected Net Sales of Licensed Products: 2006: * ; 2007: * ;
and 2008 and thereafter: * ; provided that failure to meet such
projections shall not be deemed to be a breach of this Agreement so
long as Licensee has nevertheless used diligent commercialization
efforts.
6.2 Development Plan. Within ninety (90) days following the execution
of this Agreement, Licensee shall provide Tepha with a development plan
which shall summarize the various phases and expected timing of the
material development of the Licensed Products.
6.3 Diligence Milestones. Licensee shall make a first commercial sale
of a Licensed Product in an international market on or before September
1, 2008, and shall make a first commercial sale of a Licensed Product
in the United States on or before September 1, 2010.
6.4 Notice of Human Clinical Trials; Governmental Approvals and
Marketing of Licensed Products. Licensee shall provide Tepha with
written notice prior to initiating the first human clinical trial of a
Licensed Product. Licensee shall be responsible for obtaining all
necessary governmental approvals for the development, production,
distribution, sale, use, export and import of all Licensed Products, at
Licensee's expense, including, without limitation, any clinical and
safety studies. Licensee shall have sole responsibility for the quality
control for any Licensed Product.
7. INFRINGEMENT
7.1 Notice. Licensee and Tepha shall each inform the other promptly in
writing of any alleged or threatened third party infringement of the
Patent Rights by a third party and of any available evidence thereof.
Licensee and Tepha shall each inform the other promptly in writing of
any allegations of infringement resulting from the use of the Polymer
in the Licensed Product.
7.2 Cooperation. In any infringement suit which Tepha may institute to
enforce the Patent Rights in the Field, or in a suit for patent
infringement which is brought by a third party against Tepha or
Licensee in connection with the Licensed Products, which either party
or both parties are required or elect to defend, the other party hereto
shall, at the request and expense of the party initiating or defending
such suit, cooperate in all reasonable respects and, to the extent
reasonably possible, have its employees testify when requested and make
available relevant records, papers, information, samples, specimens,
and the like.
* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
Page 9 of 31
<PAGE>
8. PRODUCT LIABILITY
8.1 Indemnity. Licensee shall at all times during the term of this
Agreement and thereafter indemnify, hold harmless and defend Tepha and
its licensors, and their directors, trustees, officers, employees and
affiliates against all claims and expenses, arising out of the death of
or injury to any person or persons or out of any damage to property and
against any other claim, proceeding, demand, expense and liability of
any kind whatsoever arising out of, resulting from or relating to the
production, manufacture, sale, use, lease, consumption or advertisement
of the Licensed Products, and manufacture of Polymer if Paragraph 3.8
shall ever become applicable, or arising from or relating to Licensee's
breach of any of its obligations hereunder; unless such claims and
expenses are the result of Tepha's (or its Affiliates or
sub-contractors) negligence or intentional misconduct. Prior to the
first use of a Licensed Product for humans, Licensee shall obtain and
carry in full force and effect commercial, general liability insurance,
including product liability insurance, which shall protect the
indemnities with respect to events covered by this Paragraph 8.1. Such
insurance shall list Tepha, Metabolix, Inc. and MIT as additional named
insureds thereunder, shall be endorsed to include product liability
coverage and shall require thirty (30) days written notice to be given
to Tepha prior to any cancellation or material change thereof. The
limits of such insurance shall not be less than One Million Dollars
($1,000,000) per occurrence with an aggregate of Three Million Dollars
($3,000,000) for personal injury including death; and One Million
Dollars ($1,000,000) per occurrence with an aggregate of Three Million
Dollars ($3,000,000) for property damage. Licensee shall provide Tepha
with Certificates of Insurance evidencing the same. Licensee shall
maintain such commercial general liability insurance during the period
that any Licensed Product is being used, distributed or sold and for
six (6) years thereafter.
9. WARRANTIES AND DISCLAIMER
9.1 Tepha warranty. Tepha represents and warrants to Licensee that
Tepha is either the owner of all rights, title and interest in and to
the Patent Rights, or has the right to grant the licenses set forth in
Article 2.
9.2 DISCLAIMER. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,
NEITHER PARTY, NOR THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND
AFFILIATES MAKE ANY REPRESENTATIONS OR EXTEND ANY WARRANTIES OF ANY
KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO
WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE,
VALIDITY OF PATENT RIGHTS CLAIMS, ISSUED OR PENDING, AND THE ABSENCE OF
LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE. NOTHING IN THIS
AGREEMENT SHALL BE CONSTRUED AS A REPRESENTATION MADE OR WARRANTY GIVEN
BY EITHER PARTY OR BY TEPHA's LICENSORS THAT THE PRACTICE OF THE
LICENSES GRANTED HEREUNDER SHALL NOT INFRINGE THE PATENT RIGHTS OR
OTHER INTELLECTUAL OR PROPRIETARY RIGHTS OF ANY THIRD PARTY.
Page 10 of 31
<PAGE>
10. LIMITATION OF LIABILITY
10.1 NO CONSEQUENTIAL DAMAGES. EXCEPT FOR BREACH BY EITHER PARTY OF
PARAGRAPH 14 (CONFIDENTIALITY), IN NO EVENT SHALL TEPHA, ITS LICENSORS
OR LICENSEE, OR THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND
AFFILIATES BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY
KIND INCURRED BY THE OTHER PARTY, INCLUDING ECONOMIC DAMAGE OR INJURY
TO PROPERTY AND LOST PROFITS, REGARDLESS OF WHETHER SUCH PARTY SHALL BE
ADVISED, SHALL HAVE OTHER REASON TO KNOW, OR IN FACT SHALL KNOW OF THE
POSSIBILITY OF THE FOREGOING.
11. EXPORT CONTROLS
11.1 Export Controls. Licensee acknowledges that it may be subject to
United States laws and regulations controlling the export of technical
data, computer software, laboratory prototypes and other commodities
(including the Arms Export Control Act, as amended and the United
States Department of Commerce Export Administration Regulations). The
transfer of such items may require a license from the cognizant agency
of the United States Government and/or written assurances by Licensee
that Licensee shall not export data or commodities to certain foreign
countries without prior approval of such agency. Tepha neither
represents that a license shall not be required nor that, if required,
it shall be issued.
12. NON-USE OF NAMES
12.1 Non-use of Names. Except as required by law or to accurately
describe this Agreement in connection with filings with the Securities
and Exchange Commission or in connection with raising funding, neither
party shall use the names or trademarks of the other or Tepha's
licensors, nor any adaptation thereof, nor the names of any of the
other party's, or Tepha's licensors', employees, in any advertising,
promotional or sales literature without prior written consent obtained
from such party, or said employee, in each case, such consent not to be
unreasonably withheld, except that Licensee may state that it is
licensed by Tepha, under one or more of the patents and/or applications
comprising the Patent Rights.
13. DISPUTE RESOLUTION
13.1 Except for the right of either party to apply to a court of
competent jurisdiction for a temporary restraining order, a preliminary
injunction or other equitable relief to preserve the status quo or to
prevent irreparable harm, and except for any dispute relating to patent
validity or infringement, any and all claims, disputes or controversies
arising under, out of or in connection with the Agreement, shall be
mediated in good faith. The party raising such dispute shall promptly
advise the other party of such claim, dispute or controversy in a
writing which describes in reasonable detail the nature of such
dispute. If the parties by their senior management representatives
shall be unable to resolve the dispute within thirty (30) days, then by
no later than forty (40) business days after the
Page 11 of 31
<PAGE>
recipient has received such notice of dispute, each party shall have
selected for itself a representative who shall have the authority to
bind such party, and shall additionally have advised the other party in
writing of the name and title of such representative. By no later than
sixty (60) business days after the date of such notice of dispute, such
representatives shall schedule a date for a mediation hearing with the
Cambridge Dispute Settlement Center or Endispute Inc. in Cambridge,
Massachusetts or another mutually agreeable mediator. The parties shall
enter into good faith mediation and shall share the costs equally. If
the representatives of the parties have not been able to resolve the
dispute within thirty (30) business days after such mediation hearing,
the parties shall have the right to pursue any other remedies legally
available to resolve such dispute in either the Courts of the
Commonwealth of Massachusetts, or in the United States District Court
for the District of Massachusetts, to whose jurisdiction for such
purposes Tepha and Licensee each hereby irrevocably consents and
submits.
13.2 Notwithstanding the foregoing, nothing in this Article shall be
construed to waive any rights or timely performance of any obligations
under this Agreement.
14. CONFIDENTIALITY
14.1 Confidential Information. Both Tepha and Licensee agree that all
confidential information disclosed to the other party, orally or in
writing, shall be deemed "Confidential Information" of the disclosing
party. In particular, "Confidential Information" shall be deemed to
include, but not be limited to, Developments, trade secrets,
information, ideas, inventions, materials, samples, processes,
procedures, methods, formulations, protocols, packaging designs and
materials, test data, future development plans, product launch dates,
technological know-how and engineering, manufacturing, regulatory,
marketing, servicing, sales, or financial matters relating to the
disclosing party and its business.
14.2 Nondisclosure and Nonuse. During the term and thereafter each
receiving party: (i) shall maintain all Confidential Information in
confidence; (ii) shall not disclose any Confidential Information to any
third party without prior written consent of the disclosing party
except that the receiving party may disclose in connection with
consultants, subcontractors or agents or raising funding and technical
development activities for purposes consistent with this Agreement
pursuant to a written non-disclosure agreement with said parties,
having terms of nondisclosure and nonuse at least as restrictive as
those set forth herein; and (iii) shall use such Confidential
Information only to the extent required to accomplish the purposes of
this Agreement. A receiving party may disclose Confidential Information
that is required to be disclosed pursuant to the law, by request of the
United States Food and Drug Administration ("FDA") or other government
authority or for medical or safety reasons, but only to the extent
required to be disclosed by the FDA or other government authority. Both
parties shall take precautions as each normally takes with its own
confidential and proprietary information to prevent disclosure to third
parties, but no less than reasonable precautions.
14.3 Exceptions. Both parties agree that, notwithstanding the above,
the obligations of confidentiality and nonuse shall not apply to:
Page 12 of 31
<PAGE>
14.3.1 Information that at the time of disclosure is, or
thereafter becomes, generally known to the public, through no
wrongful act or failure to act on the part of the receiving
party;
14.3.2 Information that was known by or in the possession of
the receiving party at the time of receiving such information
from the disclosing party, as evidenced by written records;
14.3.3 Information obtained by the receiving party from a
third party who is not breaching a commitment of
confidentiality to the disclosing party by revealing such
information to the receiving party, as evidenced by written
records;
14.3.4 Information that is developed independently by the
receiving party without use of confidential information of the
other party, as evidenced by written records.
14.4 Access. Both Parties shall make diligent efforts to ensure that
all employees, consultants, agents and subcontractors who may have
access to Confidential Information of the other party, and any other
third parties who might have access to Confidential Information, shall
sign nondisclosure agreements consistent with the terms set forth in
this Paragraph. No Confidential Information shall be disclosed to any
employees, subcontractors, agents, consultants or third parties who do
not have a need to receive such information for the purposes of this
Agreement.
15. TERMINATION
15.1 Termination by Tepha. If Licensee shall cease to carry on its
business or is in breach of Paragraph 17.7, this Agreement shall
terminate effective upon notice by Tepha.
15.2 Material Breach. Upon any material breach of this Agreement by
Tepha, Licensee shall have the right to give notice of default, stating
in reasonable detail the nature of the claimed breach. If Tepha shall
not have cured any such material breach within ninety (90) days from
notice, Licensee shall have the option to either: (i) terminate the
Agreement, effective on receipt of notice byTepha, or (ii) exercise its
rights under Section 3.8(v). Upon any material breach of this Agreement
by Licensee, Tepha shall have the right to give notice of default,
stating in reasonable detail the nature of the claimed breach. If
Licensee shall not have cured any such material breach within ninety
(90) days from notice, Tepha may terminate the Agreement, effective on
receipt of notice by Licensee.
15.3 Termination by Licensee. If Tepha shall cease to carry on its
business or is in breach of Paragraph 17.7, this Agreement shall
terminate effective upon notice by Licensee. Licensee shall have the
right to terminate this Agreement at any time on six (6) months' notice
to Tepha, and upon payment of all amounts due Tepha through the
effective date of termination.
15.4 Effects of Termination. Upon expiration or termination of this
Agreement for any reason: (i) nothing herein shall be construed to
release either party from any obligation
Page 13 of 31
<PAGE>
that matured prior to expiration or the effective date of termination;
(ii) Articles 1, 2.2, 2.6, 3.6, 3.8, 5, 8, 9.2, 10, 11, 12, 13, 14,
15.4 and 17 shall survive expiration or any termination; (iii) for a
period of six (6) months after the effective date of termination,
Licensee may sell Licensed Products in inventory, and complete Licensed
Products in the process of manufacture at the time of such termination
and sell the same, provided that Licensee shall pay the Running
Royalties thereon as required by Article 4 of this Agreement and shall
submit the reports required by Article 5 hereof on the sales of
Licensed Products; and (iv) each party shall immediately return all
Confidential Information to the disclosing party and shall cease and
refrain from any further use of such Confidential Information.
16. QUALITY SYSTEM OBLIGATIONS
16.1 Raw Materials. All raw materials for the Polymer will be defined
by engineering drawings or specifications of Tepha. Approved vendors
must be designated on the Specifications. Raw materials will be
supplied or specified by Tepha. During the term of this Agreement,
Tepha shall be responsible to maintain a working master cell bank for
the Polymer, with commercially appropriate redundancies and security.
Tepha will use standard operating procedures which define the sampling
methodology and the analytical methods used to assure that the raw
materials meet their respective specifications. Tepha will notify
Licensee in writing of any changes to the Specifications, sampling or
test methods of raw materials or any changes in approved vendors, and
shall obtain prior approval from Licensee prior to making any such
changes that require regulatory approval from the FDA or international
regulatory authorities with respect to a Licensed Product.
16.2 Packaging Materials. Licensee shall be responsible for and shall
provide to Tepha all copy content, artwork and mechanicals for all
printed materials associated with the Polymer to be shipped to
Licensee. This includes, but is not limited to, container labels,
container cartons, package inserts, and promotional material. Any
changes requested by Licensee or required for legal or regulatory
compliance shall be at the expense of Licensee. Licensee shall be
responsible for compliance with all Federal, State and Local laws and
regulations concerning packaging and labeling materials, and for
obtaining any necessary regulatory approvals of printed materials,
artwork and copy. Tepha shall obtain prior approval from Licensee
before revising any printed packaging components, primary container
components and all Licensee supplied packaging components used for the
shipment of the Polymer to Licensee.
16.3 Non-Conforming Polymer. Polymer not found to meet Specifications
will be considered non-conforming. Licensee shall determine the future
usability of non-conforming Polymer; provided that non-conforming
Polymer may not be used except as expressly permitted in the Device
Master File. If Licensee determines that the non-conforming Polymer is
usable, full payment for the non-conforming Polymer will be required.
If Licensee determines that the non-conforming Polymer is not usable,
the non-conforming Polymer may be rejected pursuant to Paragraph 3.4.
Actions taken to investigate the non-conformance and to justify the
release of the batch of Polymer must
Page 14 of 31
<PAGE>
be fully documented in compliance with all applicable Federal, State
and Local laws and regulations. Copies of all documentation associated
with non-conformance of Polymer used shall be maintained by Licensee
and provided to Tepha promptly on request.
16.4 Manufacturing Processes. The manufacturing process for the Polymer
shall be maintained by the Document Control / Quality Assurance group
within Tepha. Licensee will be notified of any changes to the
manufacturing process by Tepha, and Licensee will notify Tepha if any
such changes are unacceptable. Each batch or lot of Polymer produced
hereunder must be assigned a unique batch or lot number. Any deviation
from the specified manufacturing process must be documented in the
batch record. Tepha's system shall document the deviation, the
investigation that was undertaken and the conclusion drawn from that
investigation. The documentation associated with any deviation in the
manufacturing process shall become part of the batch record.
16.5 Manufacturing History Record/Device History Record/Batch Record.
Licensee must be provided with a copy of the top-level history record
(batch record for the Polymer) manufactured and supplied to Licensee
hereunder. Tepha agrees to maintain all records that support this
document (e.g., inspection/acceptance records for subassemblies and
components) for the duration of this Agreement, and for at least five
years following the termination of this Agreement.
16.6 Sampling, Testing and Release of Polymer. All in-process and
finished Polymer testing shall be conducted by Tepha using Tepha's
validated test methods. Tepha shall provide Licensee with a certificate
of analysis indicating each test parameter, test method, test result
and the corresponding acceptance criteria for each batch/lot of Polymer
manufactured, as well as a statement indicating that all associated
documentation has been reviewed and approved by the appropriate Tepha
quality control unit. Tepha shall release the Polymer to Licensee as
meeting the agreed and current Specifications for the Polymer.
16.7 Reserve Samples and Quality Review. Licensee is responsible for
obtaining and maintaining file samples of each lot of Polymer
manufactured and shipped to Licensee. Tepha will allow quality systems
audits to be performed, no more than once in any twelve-month period,
by approved representatives of Licensee at reasonable business hours
and with reasonable planning and advanced notice of at least five (5)
business days. Such audits shall be performed in accordance with the
FDA's Quality System Inspection Technique ("QSIT") and Tepha's then
current policy for visitors and no photographs may be taken or
documents reproduced. Any third party contracted by Tepha to provide
manufacturing or component supply under this Agreement shall also be
subject to audit in accordance with QSIT.
16.8 Storage, Validation and Environmental Monitoring. Process/product
and cleaning validation for the manufacture of the Polymer shall be
performed by Tepha in accordance with the Device Master File. Tepha
shall be responsible for conducting the validation studies and
maintaining validation reports. Where particulate and microbial levels
are required for the Polymer, then the facilities and raw materials
used during the manufacturing and packaging shall be subjected to a
monitoring program by Tepha to
Page 15 of 31
<PAGE>
assure that the Polymer will meet the required particulate and
microbial levels and shall maintain the records obtained from this
monitoring program. If no specifications are defined, then no
particular manufacturing environment requirements are necessary beyond
applicable Quality System Regulations of the FDA.
16.9 Distribution Records and Returns. Licensee shall maintain
distribution records which contain all of the appropriate information
as specified in 21 CFR, Section 820.160. Returned Licensed Product from
the distribution of the Licensed Product is the responsibility of
Licensee.
16.10 Customer Complaints. Licensee is responsible for investigating
and handling customer complaints and shall promptly notify Tepha of any
complaint relating to the Polymer material of a Licensed Product. To
the extent possible under the circumstances, Licensee will inform Tepha
prior to communicating with the FDA concerning any such complaint.
Tepha shall reasonably cooperate with Licensee's investigations,
including providing manufacturing-related records on a confidential
basis as they relate to the investigation. Licensee shall keep Tepha
promptly informed on an ongoing basis and provide copies of all
correspondence, filings, and documentation to Tepha until resolution of
each such matter.
16.11 Regulatory Compliance. Unless otherwise stated in this document,
Tepha is responsible for compliance to all Federal, State and Local
laws and regulations as they apply to Tepha's supply of Polymer to
Licensee hereunder.
17. GENERAL
17.1. Integrated Agreement. This Agreement (including its Appendices,
which are incorporated herein by reference) constitutes the complete
and exclusive statement of the agreement between the parties, and
supersedes all prior agreements, proposals, negotiations and
communications between the parties, both oral and written, regarding
the subject matter hereof. The terms of this Agreement shall have no
force or effect with respect to any claim based on the use by Licensee
of any intellectual property rights or proprietary rights of Tepha or
its licensors outside the scope of the licenses expressly granted
herein. The preprinted provisions of Licensee's purchase order shall
not apply, and the provisions set forth herein shall prevail.
17.2. Waiver or Amendment. No waiver, alteration or amendment of any of
the provisions of this Agreement shall be binding unless made in
writing and signed by each of the parties hereto.
17.3. Notices. All notices to be given under this Agreement shall be in
writing and shall be deemed duly given if sent by prepaid overnight
courier service to the addresses set forth immediately below (or to
such other addresses as the parties may designate by notice given in
accordance with this provision):
Page 16 of 31
<PAGE>
If to Tepha:
Tepha, Inc.
303 Third Street
Cambridge, MA 02142
Attn: Simon Williams, President
If to Licensee:
Vascular Solutions, Inc.
2495 Xenium Lane North
Minneapolis, MN 55441
Attn: Chief Executive Officer
All such notices, if properly addressed, shall be effective when
received.
17.4. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Massachusetts,
without regard to conflict of laws principles, and as necessary the
laws of the United States of America, except that questions affecting
the construction and effect of any patent shall be determined by the
law of the country in which the patent was granted. Each party agrees
that venue for any dispute arising under this Agreement shall be
Boston, Massachusetts, and waives any objection it has or may have in
the future with respect to such venue, except that the applicable
federal court or other tribunal shall have exclusive jurisdiction with
regard to the scope or validity of any Patent Rights.
17.5. Failure to Exercise Remedy. If either party fails to enforce any
term of this Agreement or fails to exercise any remedy, such failure to
enforce or exercise on that occasion shall not prevent enforcement or
exercise on any other occasion.
17.6. Remedies. The rights and remedies of the parties provided in this
Agreement shall not be exclusive and are in addition to any other
rights and remedies available at law or in equity.
17.7. Assignment. Except as expressly provided in this Agreement,
neither party shall directly or indirectly sell, transfer, assign or
delegate in whole or in part this Agreement, or any rights, duties,
obligations or liabilities under this Agreement (collectively "Assign"
for purposes of Paragraph 15.4 or 17.7), by operation of law or
otherwise, without the prior written consent of the other party.
Notwithstanding the foregoing sentence, both parties shall have the
right to Assign without consent of the other party all of its rights,
duties, obligations and liabilities under this Agreement to any
Affiliate or in connection with any sale, merger, consolidation,
recapitalization or reorganization involving in each case the sale of
substantially all of the capital stock of such party or all or
substantially all of the assets of such party to which this Agreement
relates. Subject to the foregoing, this Agreement shall inure to the
benefit of and be binding upon the permitted successors and permitted
assigns of Tepha and Licensee.
Page 17 of 31
<PAGE>
17.8. Independent Contractors. The parties agree that in the
performance of this Agreement they are and shall be independent
contractors. Nothing herein shall be construed to constitute either
party as the agent of the other party for any purpose whatsoever, and
neither party shall bind or attempt to bind the other party to any
contract or the performance of any obligation or represent to any third
party that it has any right to enter into any binding obligation on the
other party's behalf.
17.9. Severability. If any provision of this Agreement is held invalid
by any law, rule, order or regulation of any government or by the final
determination of any court of competent jurisdiction, such invalidity
shall not affect the enforceability of any other provisions. The
parties shall make a good faith effort to renegotiate and replace the
invalid provision with a valid and enforceable one, such that the
original intent of the parties shall be accomplished to the extent
permitted by law.
17.10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which when executed shall be deemed to be an
original but all of which taken together shall constitute one and the
same agreement.
17.11. Patent Marking. Licensee shall apply the patent marking notices
required by the law of any country where Licensed Products are made,
used or sold.
17.12. Rules of Construction. The parties agree that they have
participated equally in the formation of this Agreement and that the
language and terms of this Agreement shall not be presumptively
construed against either of them.
17.13. Affiliates. Each party shall be responsible to the other for all
obligations of its Affiliates in the same fashion and to the full
extent that each party is obligated to the other hereunder, including,
but not limited to, the payment of royalties due with respect to sales
made by Affiliates. A breach by an Affiliate of a party will be treated
as a breach by that party.
17.14. Force Majeure. Neither party shall be in default of its
obligations to the extent its performance is delayed or prevented by
causes beyond its control, including but not limited to acts of God,
earthquake, flood, embargo, riots, sabotage, utility or transmission
disruption, failure or delay of suppliers, fire or labor disturbances.
17.15. Nonsolicitation. During the Term of this Agreement and for a
period of six months thereafter, Licensee and Tepha agree not to,
directly, or indirectly, solicit or attempt to solicit for employment
any person employed by the other party.
Page 18 of 31
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement the
day and year set forth below.
Tepha, Inc. Vascular Solutions, Inc. ("Licensee")
By: /s/ Simon F. Williams By: /s/ Howard Root
Name: Simon F. Williams Name: Howard Root
Title: President Title: Chief Executive Officer
Date: 12/19/02 Date: 12/17/02
Page 19 of 31
<PAGE>
APPENDIX A
PATENT RIGHTS
1. US Patent No. 5,229,279 "Method for producing novel polyester
biopolymers" by Peoples and Sinskey, issued July 20, 1993.
2. US Patent No. 5,245,023 "Method for producing novel polyester
biopolymers" by Peoples and Sinskey, issued September 14, 1993.
3. US Patent No. 5,250,430 "Polyhydroxyalkanoate polymerase" by Peoples
and Sinskey, issued October 5, 1993.
4. US Patent No. 5,480,794 "Overproduction and purification of soluble PHA
synthase" by Peoples, Gerngross, and Sinskey, issued January 2, 1996.
5. US Patent No. 5,512,669 "Gene encoding bacterial acetoacetyl-CoA
reductase" by Peoples and Sinskey, issued April 30, 1996.
6. US Patent No. 5,534,432 "Polyhydroxybutyrate polymerase" by Peoples and
Sinskey, issued July 9, 1996.
7. US Patent No. 5,661,026 "Gene encoding bacterial beta-ketothiolase" by
Peoples and Sinskey, issued August 26, 1997.
8. US Patent No. 5,663,063 "Method for producing polyester biopolymers" by
Peoples and Sinskey, issued September 2, 1997.
9. US Patent No. 5,798,235 "Gene encoding acetoacetyl-CoA reductase" by
Peoples and Sinskey, issued August 25, 1998.
10. US Patent No. 5,811,272 "Method for controlling molecular weight of
polyhydroxyalkanoates" by Snell, Hogan, Sim, Sinskey and Rha, issued
September 22, 1998.
11. US Patent No. 6,228,934 "Methods and apparatus for the production of
amorphous polymer suspension" by Horowitz & Gerngross, issued May 8,
2001.
12. US Patent No. 6,245,537 "Removing endotoxin with an oxidizing agent
from polyhydroxyalkanoates produced by fermentation" by Williams,
Martin, Gerngross and Horowitz, issued June 12, 2001.
Page 20 of 31
<PAGE>
13. US Patent No. 6,316,262 "Biological systems for manufacture of
polyhydroxyalkanoate polymers containing 4-hydroxyacids" by Huisman,
Skraly, Martin and Peoples, issued November 13, 2001.
14. US Patent No. 6,323,010 "Polyhydroxyalkanoate biopolymer compositions"
by Skraly and Peoples, issued November 27, 2001.
15. US Patent No. 6,323,276 "Methods and apparatus for the production of
amorphous polymer suspensions" by Horowitz and Gerngross, issued
November 27, 2001.
16. US Patent No. 6,329,183 "Polyhydroxyalkanoate production from polyols"
by Skraly and Peoples, issued December 11, 2001.
17. EP Patent Application No. 0 870 837 A1 "Method for producing novel
polyester biopolymers" by Peoples and Sinskey, published October 14,
1998.
18. EP Patent No. 0 482 077 B1 "Method for producing novel polyester
biopolymers" by Peoples and Sinskey, published October 21, 1998.
19. WO 98/51812 "Polyhydroxyalkanoates for IN VIVO applications" by
Williams, Martin, Gerngross, and Horowitz, published November 19, 1998.
20. WO 99/32536 "Polyhydroxyalkanoate compositions having controlled
degradation rates" by Martin, Skraly, and Williams, published July 1,
1999.
21. WO 00/56376 "Medical devices and applications of polyhydroxyalkanoates"
by Williams, Martin, and Skraly, published September 28, 2000.
22. WO 00/51662 "Bioabsorbable, biocompatible polymers for tissue
engineering" by Williams, published September 8, 2000.
23. WO 01/19422 "Polyhydroxyalkanoate compositions for soft tissue repair,
augmentation, and viscosupplementation" by Williams and Martin,
published March 22, 2001.
24. JP 2-510584 Method for producing novel polyester biopolymers, Peoples
and Sinskey.
Page 21 of 31
<PAGE>
APPENDIX B
MIT LICENSE TERMS
ARTICLE 1 - DEFINITIONS
For the purposes of this Agreement, the following words and phrases
shall have the following meanings:
1.1 "LICENSEE" shall include a related company of METABOLIX, INC.
the voting stock of which is directly or indirectly at least
fifty percent (50%) owned and controlled by METABOLIX, INC.,
an organization which directly or indirectly controls more
than fifty percent (50%) of the voting stock of METABOLIX,
INC. and an organization the majority ownership of which is
directly or indirectly common to the ownership of METABOLIX,
INC.
1.2 "PATENT RIGHTS" shall mean all of the following M.I.T.
intellectual property:
1.2.a The United States and foreign patents and/or patent
applications and invention disclosures listed in
Appendix A;
1.2.b United States and foreign patents issued from the
applications and invention disclosures listed in
Appendix A and from divisionals and continuations of
these applications and invention disclosures;
1.2.c claims of United States and foreign
continuation-in-part applications and of the
resulting patents which are directed to subject
matter specifically described in the United States
and foreign applications and invention disclosures
listed in Appendix A;
1.2.d claims of all foreign patent applications and of the
resulting patents which are directed to subject
matter specifically described in the United States
patents and/or patent applications and invention
disclosures described in (a), (b), (c) or (d) above;
and
1.2.e any reissues of United States patents described in
(a), (b), (c) or (d) above.
1.3 A "LICENSED PRODUCT" shall mean any product or part thereof
which:
1.3.a is covered in whole or in part by an issued,
unexpired valid claim or a pending claim contained in
the PATENT RIGHTS in the country in which any such
product or part thereof is made, used or sold; or
1.3.b is manufactured by using a process or is employed to
practice a process which is covered in whole or in
part by an issued, unexpired valid claim or a pending
claim contained in the PATENT RIGHTS in the country
in which a LICENSED
Page 22 of 31
<PAGE>
PROCESS is used or in which such product or part
thereof is used or sold.
1.4 A "LICENSED PROCESS" shall mean any process which:
1.4.a is covered in whole or in part by an issued, expired
valid claim or a pending claim contained in the
PATENT RIGHTS in the country in which such process is
used or in which the LICENSED PRODUCT made thereby is
used or sold.
ARTICLE 2 - GRANT
2.1 M.I.T. hereby grants to LICENSEE the worldwide right and
license to make, have made, use, lease and sell the LICENSED
PRODUCTS and to practice the LICENSED PROCESSES to the end of
the term for which the PATENT RIGHTS are granted unless this
Agreement shall be sooner terminated according to the terms
hereof.
2.2 LICENSEE agrees that to the extent possible LICENSED PRODUCTS
leased or sold in the United States shall be manufactured
substantially in the United States and that in those cases
where domestic manufacture is impractical it will request
appropriate waivers from the Department of Commerce pursuant
to 37 C.F.R. Sec. 401.14(i).
2.3 In order to establish a period of exclusivity for LICENSEE,
M.I.T hereby agrees that it shall not grant any other license
to make, have made, use, lease and sell LICENSED PRODUCTS or
to utilize LICENSED PROCESSES during the term of this
agreement.
2.4 M.I.T. reserves the right to practice under the PATENT RIGHTS
for its own noncommercial research purposes.
2.5 M.I.T. further grants to LICENSEE a ninety (90) day first
option to negotiate for an exclusive license to new inventions
dominated by the claims of the PATENT RIGHTS as originally
licensed which arise from the laboratory of Prof. Anthony
Sinskey at M.I.T. within four (4) years of the Effective Date
of this Agreement. Such option shall be subject to any rights
granted in sponsorship agreements to sponsors of the research
from which any such invention arises.
2.6 LICENSEE shall have the right to enter into sublicensing
agreements for the rights, privileges and licenses granted
hereunder. In addition, LICENSEE may grant any sublicensee the
right to sublicense to third parties any or all of the rights,
privileges and licenses granted to such
Page 23 of 31
<PAGE>
sublicensee and such third party sublicenses may also include
the right to sublicense.
2.7 LICENSEE agrees that any sublicenses granted by it shall
provide that the obligations to M.I.T. of Articles 2, 5, 7, 8,
9, l0, 12, 13 and 15 of this Agreement shall be binding upon
the sublicensee as if it were a party to this Agreement.
LICENSEE further agrees to attach copies of these Articles to
sublicense agreements.
2.8 LICENSEE agrees to forward to M.I.T. a copy of any and all
sublicense agreements promptly upon execution by the parties.
2.9 The license granted hereunder shall not be construed to confer
any rights upon LICENSEE by implication, estoppel or otherwise
as to any technology not specifically set forth in Appendix A
hereof.
ARTICLE 5 - REPORTS AND RECORDS
5.1 LICENSEE shall keep full, true and accurate books of account
containing all particulars that maybe necessary for the
purpose of showing the amounts payable to M.I.T. hereunder.
Said books of account shall be kept at LICENSEE's principal
place of business or the principal place of business of the
appropriate division of LICENSEE to which this Agreement
relates. Said books and the supporting data shall be open at
all reasonable times for three (3) years following the end of
the calendar year to which they pertain, to the inspection of
M.I.T. or its agents for the purpose of verifying LICENSEE's
royalty statement or compliance in other respects with this
Agreement. Should such inspection lead to the discovery of a
greater than Ten Percent (10%) discrepancy in reporting,
LICENSEE agrees to pay the full cost of such inspection.
5.2 LICENSEE, within sixty (60) days after December 31 of each
year prior to the first commercial sale of a LICENSED PRODUCT
and sixty days after March 31, June 30, September 30 and
December 31, of each year after the first commercial sales of
a LICENSED PRODUCT, shall deliver to M.I.T. true and accurate
reports, giving such particulars of the business conducted by
LICENSEE during the preceding three-month period under this
Agreement as shall be pertinent to a royalty accounting
hereunder. These shall include at least the following: (a)
number of LICENSED PRODUCTS manufactured and sold by LICENSEE;
(b) total billings for LICENSED PRODUCTS manufactured and sold
by LICENSEE; (c) accounting for all LICENSED PROCESSES used or
sold by LICENSEE; (d) deductions applicable as provided in
Paragraph 1.5; (e) total royalties due; and (f) names and
addresses of all sublicensees of LICENSEE. LICENSEE shall
endeavor to obtain similar information from its
Page 24 of 31
<PAGE>
sublicensees and will provide such information which is
obtained to M.I.T.
5.3 With each such report submitted, LICENSEE shall pay to M.I.T.
the royalties due and payable under this Agreement. If no
royalties shall be due, LICENSEE shall so report.
5.4 On or before the ninetieth (90th) day following the close of
LICENSEE's fiscal year, LICENSEE shall provide M.I.T. with
LICENSEE's certified financial statements for the preceding
fiscal year including, at a minimum, a Balance Sheet and an
Operating Statement.
5.5 The royalty payments set forth in this Agreement and amounts
due under Article 6, shall if overdue, bear interest until
payment at a per annum rate Two Percent (2%) above the prime
rate in effect at the Chase Manhattan Bank (N.A.) on the due
date. The payment of such interest shall not foreclose M.I.T.
from exercising any other rights it may have as a consequence
of the lateness of any payment.
ARTICLE 7 - INFRINGEMENT
7.1 LICENSEE shall inform M.I.T. promptly in writing of any
alleged infringement of the PATENT RIGHTS by a third party and
of any available evidence thereof.
7.2 During the term of this Agreement, LICENSEE shall have the
right, but shall not be obligated, to prosecute at its own
expense any such infringements of the PATENT RIGHTS and, in
furtherance of such right, M.I.T. hereby agrees that LICENSEE
may join M.I.T. as a party plaintiff in any such suit, without
expense to M.I. T. The total cost of any such infringement
action commenced or defended solely by LICENSEE shall be borne
by LICENSEE. LICENSEE may, for such purposes, use the name of
M.I.T. as party plaintiff; provided, however, that such right
to bring an infringement action shall remain in effect only
for so long as the license granted herein remains exclusive.
No settlement, consent judgment or other voluntary final
disposition of the suit may be entered into without the
consent of M.I.T. which consent shall not unreasonably be
withheld. LICENSEE shall indemnify M.I.T. against any order
for costs that may be made against M.I.T. in proceedings
commenced and defended solely by LICENSEE.
7.3 In the event that LICENSEE shall undertake the enforcement
and/or defense of the PATENT RIGHTS by litigation, LICENSEE
may withhold up to Fifty Percent (50%) of the royalties
otherwise thereafter due M.I.T. hereunder and apply the same
toward reimbursement of up to half of
Page 25 of 31
<PAGE>
LICENSEE's expenses, including reasonable attorneys' fees, in
connection therewith. Any recovery of damages by LICENSEE for
any such suit shall be applied first in satisfaction of any
unreimbursed expenses and legal fees of LICENSEE relating to
the suit, and next toward reimbursement of M.I.T. for any
royalties past due or withheld and applied pursuant to this
Article VII. The balance remaining from any such recovery
attributable to damages for lost sales shall be divided
according to the royalty percentages set forth in Section 4.1;
any remaining balance shall be paid to LICENSEE.
7.4 If within six (6) months after having been notified of any
alleged infringement, LICENSEE shall have been unsuccessful in
persuading the alleged infringer to desist and shall not have
brought and shall not be diligently prosecuting an
infringement action, or if LICENSEE shall notify M.I.T. at any
time prior thereto of its intention not to bring suit against
any alleged infringer, then, and in those events only, M.I.T.
shall have the right, but shall not be obligated, to prosecute
at its own expense any infringement of the PATENT RIGHTS, and,
in furtherance of such right, LICENSEE hereby agrees that
M.I.T. may include LICENSEE as a party plaintiff in any such
suit, without expense to LICENSEE. The total cost of any such
infringement action commenced or defended solely by M.I.T.
shall be borne by M.I.T., and M.I.T. shall keep any recovery
or damages for past infringement derived therefrom.
7.5 In the event that a declaratory judgment action alleging
invalidity or noninfringement of any of the PATENT RIGHTS
shall be brought against LICENSEE, M.I.T., at its option,
shall have the right, within sixty (60) days after
commencement of such action, to join in the defense of the
action at its own expense.
7.6 In any infringement suit as either party may institute to
enforce the PATENT RIGHTS pursuant to this Agreement, the
other parry hereto shall, at the request and expense of the
party initiating such suit, cooperate in all respects and, to
the extent possible, have its employees testify when requested
and make available relevant records, papers, information,
samples, specimens and the like.
7.7 LICENSEE, during the period of this Agreement, shall have the
sole right in accordance with the terms and conditions herein
to sublicense any alleged infringer for future use of the
PATENT RIGHTS.
ARTICLE 8 - PRODUCT LIABILITY
8.1 LICENSEE shall at all times during the term of this Agreement
and thereafter, indemnify, defend and hold M.I.T., its
trustees, officers,
Page 26 of 31
<PAGE>
employees and affiliates, harmless against all claims and
expenses, including legal expenses and reasonable attorneys'
fees, arising out of the death of or injury to any person or
persons or out of any damage to property and against any other
claim, proceeding, demand, expense and liability of any kind
whatsoever resulting from the production, manufacture, sale,
use, lease, consumption or advertisement of the LICENSED
PRODUCT(s) and/or LICENSED PROCESS(es) or arising from any
obligation of LICENSEE hereunder.
8.2 Prior to the first use of a LICENSED PRODUCT on humans,
LICENSEE shall obtain and carry in full force and effect
liability insurance which shall protect LICENSEE and M.I.T. in
regard to events covered by Paragraph 8.1 above.
8.3 EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT,
M.I.T. MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF
ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED
TO WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, AND VALIDITY OF PATENT RIGHTS CLAIMS, ISSUED OR
PENDING. NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED AS A
REPRESENTATION MADE OR WARRANTY GIVEN BY M.I.T. THAT THE
PRACTICE BY LICENSEE OF THE LICENSE GRANTED HEREUNDER SHALL
NOT INFRINGE THE PATENT RIGHTS OF ANY THIRD PARTY.
ARTICLE 9 - EXPORT CONTROLS
It is understood that M.I.T. is subject to United States laws and
regulations controlling the export of technical data, computer software,
laboratory prototypes and other commodities (including the Arms Export Control
Act, as amended and the Export Administration Act of 1979), and that its
obligations hereunder are contingent on compliance with applicable United States
export laws and regulations. The transfer of certain technical data and
commodities may require a license from the cognizant agency of the United States
Government and/or written assurances by LICENSEE that LICENSEE shall not export
data or commodities to certain foreign countries without prior approval of such
agency. M.I.T. neither represents that a license shall not be required not that,
if required, it shall be issued.
ARTICLE 10 - NON-USE OF NAMES
Except as required by law, LICENSEE shall not use the names or
trademarks of the Massachusetts Institute of Technology, nor any adaptation
thereof, nor the names of
Page 27 of 31
<PAGE>
any of its employees, in any advertising, promotional or sales literature
without prior written consent obtained from M.I.T., or said employee, in each
case, except that LICENSEE may state that it is licensed by M.I.T. under one or
more of the patents and/or applications comprising the PATENT RIGHTS. LICENSEE
may, however, use the name of Oliver P. Peoples, Anthony J. Sinskey, and/or any
other employee of M.I.T. who is a consultant or member of an advisory board of
LICENSEE, with their permission, and provided, also, that their affiliation with
LICENSEE is identified.
ARTICLE 12 - DISPUTE RESOLUTION
12.1 Except for the right of either party to apply to a court of
competent jurisdiction for a temporary restraining order, a
preliminary injunction or other equitable relief to preserve
the status quo or prevent irreparable harm, any and all
claims, disputes or controversies arising under, out of or in
connection with the Agreement, including any dispute relating
to patent validity or infringement, which the parties shall be
unable to resolve within one hundred and twenty (120) days
shall be mediated in good faith. The party raising such
dispute shall promptly advise the other party of such claim,
dispute or controversy in a writing which describes in
reasonable detail the nature of such dispute. By not later
than ten (10) business days after the recipient has received
such notice of dispute, each party shall have selected for
itself a representative who shall have the authority to bind
such party, and shall additionally have advised the other
party in writing of the name and title of such representative.
By not later than twenty (20) business days after the date of
such notice of dispute, such representatives shall schedule a
date for a mediation hearing with the Cambridge Dispute
Settlement Center or Endispute Inc. in Cambridge,
Massachusetts. The parties shall enter into good faith
mediation and shall share the costs equally. If the
representatives of the parties have not been able to resolve
the dispute within thirty (30) business days after such
mediation hearing, the parties shall have the right to pursue
any other remedies legally available to resolve such dispute
in either the Courts of the Commonwealth of Massachusetts or
in the United States District Court for the District of
Massachusetts, to whose jurisdiction for such purposes M.I.T.
and LICENSEE each hereby irrevocably consents and submits.
12.2 Notwithstanding the foregoing, nothing in this Article shall
be construed to waive any rights or timely performance of any
obligations existing under this Agreement.
ARTICLE 13 - TERMINATION
13.1 If LICENSEE shall cease to carry on its business, this
Agreement shall terminate upon notice by M.I.T., except as
provided in Article 11.
Page 28 of 31
<PAGE>
13.2 Should LICENSEE fail to make any payment whatsoever due and
payable to M.I.T. hereunder, M.I.T. shall have the right to
terminate this Agreement effective on sixty (60) days' notice,
unless LICENSEE shall make all such payments to M.I.T. within
said sixty (60) day period. Upon the expiration of the sixty
(60) day period, if LICENSEE shall not have made all such
payments to M.I.T., the rights, privileges and license granted
hereunder shall automatically terminate.
13.3 Upon any material breach or default of this Agreement by
LICENSEE, other than those occurrences set out in Paragraphs
13.1 and 13.2 hereinabove, which shall always take precedence
in that order over any material breach or default referred to
in this Paragraph 13.3. M.I.T. shall have the right to
terminate this Agreement and the rights, privileges and
license granted hereunder effective on one hundred and twenty
(120) days' notice to LICENSEE. Such termination shall become
automatically effective unless LICENSEE shall have cured any
such material breach or default prior to the expiration of the
one hundred and twenty (120) day period.
13.4 LICENSEE shall have the right to terminate this Agreement at
any time on six (6) months' notice to M.I.T., and upon payment
of all amounts due M.I.T. through the effective date of the
termination.
13.5 Upon termination of this Agreement for any reason, nothing
herein shall be construed to release either party from any
obligation that matured prior to the effective date of such
termination. LICENSEE and any sublicensee thereof may,
however, after the effective date of such termination, sell
all LICENSED PRODUCTS, and complete LICENSED PRODUCTS in the
process of manufacture at the time of such termination and
sell the same, provided that LICENSEE shall pay to M.I.T. the
Running Royalties thereon as required by Article 4 of this
Agreement and shall submit the reports required by Article 5
hereof on the sales of LICENSED PRODUCTS.
13.6 Upon termination of this Agreement for any reason, any of
LICENSEE's direct sublicensees that are not then in default
shall have the right to seek a license from M.I.T. M.I.T.
agrees to negotiate such licenses in good faith under
reasonable terms and conditions. Notwithstanding the
foregoing, should Tepha, Inc. request a license, M.I.T. hereby
agrees to grant such a license under terms and conditions no
less favorable as a whole than those granted to Tepha, Inc. by
LICENSEE.
Page 29 of 31
<PAGE>
ARTICLE 15 - MISCELLANEOUS PROVISIONS
15.1 This Agreement shall be construed, governed, interpreted and
applied in accordance with the laws of the Commonwealth of
Massachusetts, U.S.A., except that questions affecting the
construction and effect of any patent shall be determined by
the law of the country in which the patent was granted.
15.2 The parties hereto acknowledge that this Agreement sets forth
the entire Agreement and understanding of the parties hereto
as to the subject matter hereof, and shall not be subject to
any change or modification except by the execution of a
written instrument subscribed to by the parties hereto.
15.3 The provisions of this Agreement are severable, and in the
event that any provisions of this Agreement shall be
determined to be invalid or unenforceable under any
controlling body of the law, such invalidity or
unenforceability shall not in any way affect the validity or
enforceability of the remaining provisions hereof.
15.4 The failure of either party to assert a right hereunder or to
insist upon compliance with any term or condition of this
Agreement shall not constitute a waiver of that right or
excuse a similar subsequent failure to perform any such term
or condition by the other party.
Page 30 of 31
<PAGE>
APPENDIX C
PRICE LIST
- -------------------------------------------------------- -----------------------
|
- -------------------------------------------------------- -----------------------
Poly-3-hydroxybutyrate-co-4-hydroxybutyrate (PHA3444) | $ *** *
- -------------------------------------------------------- -----------------------
*Current price, price adjustments to be determined in accordance with Paragraph
3.5. Each order must be for a minimum lot size of *** , except for research and
development runs during the initial two-year period after the Effective Date.
**Composition of co-monomers to be agreed between the parties.
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
Page 31 of 31
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>4
<FILENAME>vasc030918_ex21.txt
<DESCRIPTION>SUBSIDIARIES
<TEXT>
EXHIBIT 21
SUBSIDIARIES
Vascular Solutions, GmbH(Germany)
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>5
<FILENAME>vasc030918_ex23-1.txt
<DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS
<TEXT>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-54164) of our report dated January 17, 2003, with respect to the
consolidated financial statements of Vascular Solutions, Inc. included in the
Annual Report (Form 10-K) for the year ended December 31, 2002.
Our audits also included the financial statement schedule of Vascular Solutions,
Inc. listed in Item 15(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Ernst & Young LLP
Minneapolis, Minnesota
February 26, 2003
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>6
<FILENAME>vasc030918_ex99-1.txt
<DESCRIPTION>CERTIFICATION
<TEXT>
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SS.1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Vascular Solutions, Inc. (the "Company")
on Form 10-K for the period ended December 31, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Howard
Root, Chief Executive Officer and Acting Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
1. The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ Howard Root
------------------------------
Howard Root
Chief Executive Officer and
Acting Chief Financial Officer
February 28, 2003
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
