edX - TXT1x Data
-----BEGIN PRIVACY-ENHANCED MESSAGE-----1Proc-Type: 2001,MIC-CLEAR2Originator-Name: [email protected]3Originator-Key-Asymmetric:4MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen5TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB6MIC-Info: RSA-MD5,RSA,7J/eMVgL4b8AWoR7G81TR+R7tMJf0csOJ1xRMRAi7lj9Ky6t+r/uEkZOneAcjVB5k8xr1BIgj/GhaLJiwtsn5Lpw==910<SEC-DOCUMENT>0000897101-02-000150.txt : 2002041511<SEC-HEADER>0000897101-02-000150.hdr.sgml : 2002041512ACCESSION NUMBER: 0000897101-02-00015013CONFORMED SUBMISSION TYPE: 10-K40514PUBLIC DOCUMENT COUNT: 215CONFORMED PERIOD OF REPORT: 2001123116FILED AS OF DATE: 200203071718FILER:1920COMPANY DATA:21COMPANY CONFORMED NAME: VASCULAR SOLUTIONS INC22CENTRAL INDEX KEY: 000103020623STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841]24IRS NUMBER: 41185967925STATE OF INCORPORATION: DE26FISCAL YEAR END: 12312728FILING VALUES:29FORM TYPE: 10-K40530SEC ACT: 1934 Act31SEC FILE NUMBER: 000-2760532FILM NUMBER: 025694993334BUSINESS ADDRESS:35STREET 1: 2495 XENIUM LANE NORTH36CITY: MINNEAPOLIS37STATE: MN38ZIP: 5544139BUSINESS PHONE: 61255329704041MAIL ADDRESS:42STREET 1: 2495 XENIUM LANE NORTH43CITY: MINNEAPOLIS44STATE: MN45ZIP: 5544146</SEC-HEADER>47<DOCUMENT>48<TYPE>10-K40549<SEQUENCE>150<FILENAME>vascular021172_10k405.txt51<DESCRIPTION>VASCULAR SOLUTIONS, INC. FORM 10-K52<TEXT>53================================================================================5455UNITED STATES56SECURITIES AND EXCHANGE COMMISSION57WASHINGTON, D.C. 205495859FORM 10-K60(MARK ONE)6162[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES63EXCHANGE ACT OF 19346465FOR THE FISCAL YEAR ENDED DECEMBER 31, 20016667OR6869[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES70EXCHANGE ACT OF 19347172FOR THE TRANSITION PERIOD FROM _______ TO ________7374Commission File Number: 0-2760575-----------------7677VASCULAR SOLUTIONS, INC.78(Exact name of registrant as specified in its charter)7980MINNESOTA 41-185967981(State of Incorporation) (IRS Employer Identification No.)82832495 XENIUM LANE NORTH84MINNEAPOLIS, MINNESOTA 5544185(Address of Principal Executive Offices)8687(763) 656-430088(Registrant's telephone number, including are code)8990Securities registered pursuant to Section 12(b) of the Act: None91Securities registered pursuant to Section 12(g) of the Act:92Common Stock, par value $.01 per share93-----------------94Indicate by check mark whether the registrant (1) has filed all reports required95to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during96the preceding 12 months (or for such shorter period that the registrant was97required to file such reports), and (2) has been subject to such filing98requirements for the past 90 days. Yes [X] No [ ]99100Indicate by check mark if disclosure of delinquent filers pursuant to Item 405101of Regulation S-K is not contained herein, and will not be contained, to the102best of registrant's knowledge, in definitive proxy or information statements103incorporated by reference in Part III of this Form 10-K or any amendment to this104Form 10-K. [X]105106The aggregate market value of voting stock held by non-affiliates based upon the107closing Nasdaq sale price on February 15, 2002 was $25,052,000.108109As of February 15, 2002, the number of shares outstanding of the registrant's110common stock was 13,337,002.111112113DOCUMENTS INCORPORATED BY REFERENCE114115Portions of the Registrant's Proxy Statement for its 2002 Annual Meeting of116Shareholders to be held on April 16, 2002 are incorporated by reference in Part117III of this Annual Report on Form 10-K.118119================================================================================120<PAGE>121122123PART I124125ITEM 1. BUSINESS126127OVERVIEW128129We are an interventional medical device company with a focus on designing,130manufacturing and marketing devices that allow interventional cardiologists and131radiologists to seal percutaneous access sites from blood loss. Our principal132product, the Vascular Solutions Duett(TM) sealing device, enables cardiologists133and radiologists to rapidly seal the entire puncture site following134catheterization procedures such as angiography, angioplasty and stenting. Our135second product, the D-Stat(TM) flowable hemostat, enables interventional136physicians to seal less-challenging access sites following the removal of137sheaths and tubes used in a variety of procedures, such as hemodialysis,138electrophysiology and radial arterial access procedures. We are developing139several additional products that leverage our existing technology to bring140additional sealing solutions to the interventional cardiologist and radiologist.141142Our Duett sealing device combines an easy-to-use balloon catheter delivery143mechanism with a biological procoagulant mixture, which we believe offers144advantages over both manual compression and the three other FDA-approved145vascular sealing devices. We began selling our Duett product in Europe in146February 1998. On June 22, 2000, we received approval from the U.S. Food and147Drug Administration, or FDA, of our premarket approval, or PMA, application for148the sale of the Duett sealing device in the United States and commenced selling149our Duett sealing device in the United States. Over 100,000 Duett sealing150devices have been sold and deployed worldwide. While the vascular sealing device151market has developed quickly, it represents less than 20% of the more than $1152billion potential annual market, based on the current number of catheterization153procedures performed.154155Our D-Stat flowable hemostat consists of the procoagulant components of156the Duett sealing device packaged separately as a thick, yet flowable, blood157clotting material that can be delivered locally to bleeding sites. We began158selling our D-Stat flowable hemostat in the United States in the first quarter159of 2002.160161VASCULAR SEALING INDUSTRY BACKGROUND162163Over 60 million Americans have one or more types of cardiovascular164disease--diseases of the heart and blood vessels. Cardiovascular disease is the165number one cause of death in the United States and is replacing infectious166disease as the world's pre-eminent health risk. Advances in medicine have167enabled physicians to perform an increasing number of diagnostic and therapeutic168treatments of cardiovascular disease using minimally invasive methods, such as169catheters placed inside the arteries, instead of highly invasive open surgery.170Cardiologists and radiologists use diagnostic procedures, such as angiography,171to confirm, and interventional procedures, such as angioplasty and stenting, to172treat, diseases of the coronary and peripheral arteries. Based on industry173statistics, we estimate that cardiologists and radiologists performed over 8174million diagnostic and interventional catheterization procedures worldwide in1752001. The number of catheterization procedures performed is expected to grow by176more than 5% each year for the next three years as the incidence of177cardiovascular disease continues to increase.178179Each procedure using a catheter requires a puncture in an artery, usually180the femoral artery in the groin area, of the patient to gain access for the181catheter, which is deployed through an introducer sheath. Upon removal of the182catheter, the physician must seal this puncture in the artery and the tissue183tract that leads from the skin surface to the artery to stop bleeding. The184traditional method for sealing the puncture site has been a manual process185whereby a healthcare professional applies direct pressure to the puncture site,186sometimes using a sand bag or a large C-clamp, for 20 minutes to an hour in187order to form a blood clot. The healthcare professional then monitors1881891901191<PAGE>192193194the patient, who must remain immobile in order to prevent dislodging of the195clot, for an additional four to 48 hours.196197Patients subjected to manual compression generally experience significant198pain and discomfort during compression of the puncture site and during the199period in which they are required to be immobile. Many patients report that this200pain is the most uncomfortable aspect of the catheterization procedure. In201addition, patients usually develop a substantial coagulated mass of blood, or202hemotoma, around the puncture site, limiting patient mobility for up to six203weeks following the procedure. Finally, the need for healthcare personnel to204provide compression and the use of hospital beds during the recovery period205results in substantial costs to the institution which, under virtually all206current healthcare payment systems, are not separately reimbursed.207208In addition to this discomfort and cost, manual compression can result in209major complications at the puncture site. These major complications can include210a pseudo-aneurysm, or the continuation of blood flow from the artery into the211coagulated blood mass at the puncture site, collapse of the femoral artery or212femoral nerve damage from the extended compression. Additional procedures may be213required to correct these major complications.214215The increasing use of medications to prevent blood clot formation during216interventional catheterization procedures has increased the difficulty in217sealing the puncture site using manual compression. During and following the218catheterization procedure, physicians are concerned with the formation of blood219clots in the coronary or peripheral arteries. To prevent clots from forming, the220physician typically administers heparin, an anticoagulant, during the221interventional catheterization procedure. More recently, drugs which prevent222blood clotting by inhibiting platelet aggregation, such as ReoPro(R), are also223being used in interventional catheterization procedures. Because these platelet224inhibitor drugs limit the ability of blood to clot, they also increase the225difficulty of sealing the puncture site using manual compression and the natural226clotting process following the catheterization procedure.227228Until 1996, manual compression was used following virtually all229catheterization procedures. In late 1995, the first vascular sealing device230which did not rely on compression was introduced in the United States. In231addition to the Duett sealing device, three devices have received FDA approval232and are currently being marketed around the world.233234In aggregate, approximately $280 million of the four FDA-approved devices235were sold worldwide in 2001 compared to less than $20 million in 1996. Based on236the number of catheterization procedures performed annually by cardiologists and237radiologists, industry sources report that the total market opportunity for238vascular sealing devices is more than $1 billion. Accordingly, the market239opportunity for vascular sealing devices is less than 20% penetrated.240241THE VASCULAR SOLUTIONS DUETT SEALING DEVICE242243We believe our Duett sealing device (1) offers a complete seal of the244puncture site with nothing left behind in the artery, (2) is an easy-to-use245system and (3) minimizes patient discomfort and permits early ambulation. Our246product uses a balloon catheter, a device already familiar to cardiologists and247radiologists, which is inserted through the introducer sheath that is already in248the patient. The inflated balloon serves as a temporary mechanical seal,249preventing the flow of blood from the artery. Our biological procoagulant, which250is a proprietary mixture of collagen, thrombin and diluent, is then delivered to251the puncture site, stimulating rapid clotting and creating a complete seal of252both the arterial puncture and the tissue tract from the artery to the skin253surface. The blood-clotting speed and strength of thrombin enables the use of254the Duett sealing device even in the presence of powerful anti-clotting255medications, such as ReoPro(R), increasingly used in interventional256catheterization procedures. With our Duett sealing device, nothing is left257behind in the artery, so immediate reaccess of the site, if necessary, is258possible, and the potential for infection is minimized.2592602612262<PAGE>263264265We recently commenced sales of a new version of our Duett sealing device,266the Diagnostic Duett(TM) sealing device, for a subset of catheterization267patients. The Diagnostic Duett is tailored specifically for treating diagnostic268patients. Because the Duett sealing device is a one-size-fits-all device, the269procoagulant is dosed appropriately for the most challenging catheterization270patients. We developed the Diagnostic Duett with a lower dose of procoagulant271that is tailored specifically for the less-challenging diagnostic patients where272substantial blood-thinning drugs are less frequently used. All other components273of the Diagnostic Duett, including the balloon catheter, are identical to the274original Duett sealing device. This results in the Diagnostic Duett having275identical deployment steps, but being less expensive and yet fully effective for276the over 2.5 million diagnostic procedures that occur each year in the United277States. We commenced sales of the Diagnostic Duett version of the Duett sealing278device in the United States in December 2001.279280THE D-STAT FLOWABLE HEMOSTAT281282Our second product, the D-Stat flowable hemostat, consists of the Duett283procoagulant components without the catheter and is sold as a hemostat which is284thick, yet easily deliverable. The D-Stat consists of the same collagen,285thrombin and diluent components as the Duett sealing device, which has been286proven effective in controlling bleeding from aggressive arterial puncture287sites. After a simple reconstitution step, the D-Stat hemostat can be applied288directly to a wide variety of bleeding surfaces using one of the three included289applicator tips. Since the D-Stat is applied locally, no special catheter290delivery system is required. The D-Stat hemostat is shelf stable and can be291prepared up to three hours before use. We commenced sales of the D-Stat hemostat292through our direct sales force in the United States in the first quarter of2932002.294295The D-Stat flowable hemostat can be used in a wide variety of296interventional procedures as an adjunct to hemostasis. Examples of these uses297include sealing the access site after the removal of catheters used in kidney298dialysis, sealing very small punctures of the femoral artery, and sealing299punctures of the radial artery in the arm. We believe that the D-Stat flowable300hemostat is the only hemostat available in the United States that combines the301thick consistency and extremely flowable delivery that is preferred by the302interventional physician.303304BUSINESS STRATEGY305306Our primary objective is to establish ourselves as a leading supplier of307sealing devices for a variety of procedures performed by interventional308physicians, starting with our Duett sealing device in the large vascular sealing309device market. The key steps in achieving our primary objective are the310following:311312o DEVELOP OUR CLINICALLY-ORIENTED DIRECT SALES FORCE IN THE UNITED313STATES. During the third quarter of 2000 we commenced sales of our314Duett sealing device in the United States through a direct sales315force that includes clinical specialists who train interventional316cardiologists, radiologists and catheterization laboratory317administrators on the use of our product. We believe that effective318training is a key factor in promoting use of our Duett sealing319device. We have created and will continue to work to improve an320in-the-field training and certification program for the use of our321Duett sealing device. As of December 31, 2001, our United States322direct sales force consisted of approximately 65 employees which we323expect to grow to approximately 75 employees by the end of 2002.324325o PROMOTE THE DUETT SEALING DEVICE'S BENEFITS COMPARED TO MANUAL326COMPRESSION AND OTHER DEVICES. We believe that the primary benefits327of the Duett sealing device are improved patient outcomes and328provider efficiencies. We intend to continue to use our existing and329growing body of clinical results to initiate use of our Duett330sealing device by physicians currently using manual compression and331to convert physicians from other vascular sealing devices to our332product.333334o CAPITALIZE ON THE LARGE AND GROWING VASCULAR SEALING MARKET. While335the market for vascular sealing devices has developed quickly, it336represents less than 20% of the more than $1 billion potential337annual3383393403341<PAGE>342343344market, based on the current number of catheterization procedures345performed. The primary factors underlying the market opportunity for346vascular sealing devices are the significant and growing number of347catheterization procedures being performed and the substantial348majority of the resulting puncture sites still being sealed through349manual compression. The growth in catheterization procedures by350cardiologists and radiologists reflects an increasing incidence of351cardiovascular disease and the growing number of catheterization352laboratories worldwide. In 2001, over 8 million catheterization353procedures were performed. This number is expected to increase by354more than 5% each year for the next three years. Although the market355for vascular sealing devices has grown rapidly, over 80% of the356arterial punctures in 2001 were sealed using manual compression. We357believe that our device offers benefits that position it well to358capture a significant share of the market for vascular sealing359devices.360361o LEVERAGE OUR D-STAT AND FUTURE DEVICES THROUGH OUR DIRECT SALES362FORCE TO OUR EXISTING CUSTOMERS. Starting with the D-Stat flowable363hemostat, we intend to leverage our direct sales force by bringing364additional products to the interventional physician. We commenced365sales of the D-Stat in the first quarter of 2002. We are performing366clinical studies in international markets of a new biopsy tract367sealing device that is intended to seal the needle tract created by368a biopsy of the liver. Our research and development team is working369on several additional devices that generally utilize our sealing370technology to create new products for the interventional physician.371372SALES, MARKETING AND DISTRIBUTION373374In the third quarter of 2000 we commenced sales of our Duett sealing375device in the United States through our direct sales organization. As of376December 31, 2001, our direct sales force consisted of approximately 65377employees, which we expect to grow to approximately 75 employees by the end of3782002. We believe that the majority of interventional catheterization procedures379in the United States are performed in high volume catheterization laboratories,380and that these institutions can be served by our focused direct sales force. We381also believe that our sales force will be able to sell additional products to382the same customer base, starting with the D-Stat flowable hemostat in 2002.383384As part of our sales force, we have hired clinical specialists to train385physicians and other healthcare personnel on the use of the Duett sealing386device. We believe that effective training is a key factor in encouraging387physicians to use our Duett sealing device. We have created, and will continue388to work to improve an in-the-field training and certification program for the389use of our Duett sealing device. We will seek to develop and maintain close390working relationships with our customers to continue to receive input concerning391our product development plans.392393We are focused on building market awareness and acceptance of our Duett394sealing device and D-Stat flowable hemostat. Our marketing organization provides395a wide range of programs, materials and events that support our sales force.396These include product training, conference and trade show appearances and sales397literature and promotional materials. Members of our medical advisory board also398aid in marketing our Duett sealing device by publishing articles and making399presentations at physicians' meetings and conferences.400401Our international sales and marketing strategy has been to sell to402interventional cardiologists and radiologists through established independent403distributors in major international markets, subject to required regulatory404approvals. In Germany, we established a direct sales organization by creating405Vascular Solutions GmbH and began selling directly to customers in the German406market in the fourth quarter of 2000. Our Duett sealing device is currently407marketed through independent distributors in Norway, Italy, Austria, the United408Kingdom, Ireland, Denmark, Switzerland, Finland, Sweden, Greece, Belgium, Spain,409the Netherlands and Portugal. We intend to add independent distributors in other410countries as our sales and marketing efforts are expanded. Under multi-year411written distribution agreements with each of our independent distributors, we412ship our Duett sealing device to these distributors upon receipt of purchase413orders. Each of our independent distributors has the exclusive right to sell our414Duett sealing device within a defined territory. These distributors also market415other medical products,4164174184419<PAGE>420421422although they have agreed not to sell other vascular sealing devices. Our423independent distributors purchase our Duett sealing device from us at a discount424from list price and resell the device to hospitals and clinics. Sales to425international distributors are denominated in United States dollars. The426end-user price is determined by the distributor and varies from country to427country.428429Substantially all of our revenues from inception until our FDA approval on430June 22, 2000 were derived from sales to international distributors, primarily431in Europe, none of which is affiliated with us. Sales in Europe constituted 10%,43233% and 93% of our net sales for the years ended December 31, 2001, 2000 and4331999.434435DUETT SEALING DEVICE TECHNOLOGY AND DEPLOYMENT436437The components of our proprietary Duett sealing device consist of a very438thin balloon catheter and a procoagulant mixture. The balloon catheter consists439of a balloon made of polyethylene connected to a wire, covered by a sleeve. The440procoagulant is a proprietary mixture of collagen, thrombin and a diluent. Both441collagen and thrombin have been approved for use as blood clotting agents in the442human body by the FDA for over ten years. The mixture of thrombin, a very rapid443blood clotting agent, and collagen, which allows the procoagulant to assume a444gel-like viscosity, provides a highly effective clotting agent when delivered445directly to the puncture site. The diluent is a liquid used to create the446desired viscosity and neutralize the pH of the mixture. The procoagulant is447mixed before use.448449The Duett catheter can be deployed through any commonly used introducer450sheath from five French to nine French in diameter. Therefore, the sheath that451is already in the femoral artery is left in place and no replacement of the452sheath is required. The Duett catheter is then inserted through the introducer453sheath and into the femoral artery and the syringe containing the Duett454procoagulant is attached to the sidearm of the introducer sheath. Using a455syringe, the balloon is inflated and positioned against the inner surface of the456artery where the arterial pressure and gentle traction result in the balloon457acting as a temporary seal of the puncture.458459Next, the procoagulant is delivered directly to the top of the arterial460puncture and the tissue tract through the sidearm of the introducer sheath. The461procoagulant stimulates rapid clotting through the powerful action of thrombin462and collagen. The introducer sheath is removed from the body as the procoagulant463agent is being delivered.464465Immediately after the delivery of the procoagulant to the tissue tract,466the balloon is deflated and covered by the sleeve. The slippery nature of the467sleeve as well as its low profile (approximately one millimeter in diameter)468allows for removal of the balloon catheter from the artery without disruption of469the procoagulant.470471After removal of the Duett catheter from the artery, manual pressure is472maintained for a short time, usually two to five minutes, to assure the seal. We473recommend ambulation of patients generally one to two hours after diagnostic474catheterizations and two to four hours after interventional catheterization475procedures.476477RESEARCH AND DEVELOPMENT478479Our research and development staff is currently focused on improving our480Duett sealing device and developing new products to sell to our existing481customer base through our direct sales force. We incurred expenses of $4,287,726482in 2001, $3,265,536 in 2000 and $3,067,897 in 1999 for research and development483activities. To further reduce our costs, our research and development group484continues to develop in-house capabilities to manufacture some of the components485currently produced by outside vendors.486487We are currently developing several new products and product line488extensions to the Duett sealing device. Our next product line extension is a489biopsy tract sealing device, a device intended to be used to seal the needle490tract left following a solid organ biopsy procedure. During biopsies of organs,491such as the liver, a substantial4924934945495<PAGE>496497498amount of blood can be lost upon the removal of the needle. Utilizing our D-Stat499flowable hemostat and a proprietary delivery device, we believe that we will be500able to seal the needle tract against significant blood loss. Our second product501line extension is the Duett pseudo-aneurysm closure, which also uses the Duett502procoagulant components and a simple delivery system to close pseudo-aneurysms.503A pseudo-aneurysm is a complication which occurs in approximately 1-3% of504patients following a catheterization procedure and often requires a surgical505procedure to repair. The use of the Duett procoagulant components to close506pseudo-aneurysms was demonstrated in a European clinical evaluation during 2001.507Our research and development team also is in the process of developing and508collaborating on next generation sealants for use in our Duett sealing device.509510We expect our research and development activities to expand to include511evaluation of new concepts and products beyond vascular sealing in the512interventional cardiology and radiology field. We believe that there are many513potential new interventional products that would fit within the development,514clinical, manufacturing and distribution network we have created for our Duett515sealing device.516517MANUFACTURING518519We manufacture our Duett sealing device and D-Stat flowable hemostat in520our facility in a suburb of Minneapolis, Minnesota. The catheter manufacturing521and packaging processes occur under a controlled clean room environment. Our522manufacturing facility and processes were certified in July 1998 as compliant523with the European Community's ISO 9001 standards and were audited in September5241999 for compliance with the FDA's good manufacturing practices with no525deficiencies noted.526527We purchase components from various suppliers and rely on single sources528for several parts of the Duett sealing device and D-Stat flowable hemostat. In529September 1998, we entered into a ten year, sole-source, supply agreement with530our collagen supplier, Davol Inc., that provides for a fixed price based on531volume purchases which is adjusted annually for increases in the Department of532Labor's employer's cost index. In June 1999, we entered into a five year,533sole-source, supply agreement with our thrombin supplier, GenTrac, Inc., a534subsidiary of King Pharmaceuticals, Inc., that provides for a fixed price with a535price adjustment formula based on increased costs and wholesale price increases.536To date, we have not experienced any significant adverse effects resulting from537shortages of components.538539The manufacture and sale of our products entail significant risk of540product liability claims. Although we have product liability insurance coverage541in an amount which we consider reasonable, it may not be adequate to cover542potential claims. Any product liability claims asserted against us could result543in costly litigation, reduced sales and significant liabilities and divert the544attention of our technical and management personnel away from the development545and marketing of the Duett sealing device for significant periods of time.546547COMPETITION548549Competition in the vascular sealing market is intense, and we believe that550it will increase. We believe that the primary bases of competition in the551vascular sealing market are clinical efficacy, ease of use, patient comfort,552minimization of complications and cost-effectiveness. On these bases, we believe553that our product is well-positioned.554555Because the substantial majority of vascular sealing is performed through556manual compression, this represents our primary competition. Manual compression557usually requires a healthcare professional to manually apply pressure to the558puncture site for 20 minutes to one hour following which the patient is confined559to bed rest for between four and 48 hours. Often manual compression involves the560use of mechanical devices, including C-clamps and sandbags, or pneumatic561devices. Manual compression is considered to be uncomfortable for the patient.5625635646565<PAGE>566567568Our Duett sealing device also competes with three vascular sealing569devices. These three competitive devices are:570571o The VasoSeal(R) device, manufactured and marketed by Datascope572Corp., seals the tissue tract by placing a dry collagen plug in the573tissue tract adjacent to the puncture in the artery.574575o The Angio-Seal(R) device, sold by the Daig division of St. Jude576Medical, Inc. and developed by Kensey Nash Corporation, seals the577puncture site through the use of a collagen plug on the outside of578the artery connected by a suture to a biodegradable anchor which is579inserted into the artery.580581o The Closer(TM) device, sold by Perclose, Inc., a subsidiary of582Abbott Laboratories, seals the puncture site through the use of a583mechanical device that enables a physician to perform a minimally584invasive replication of open surgery.585586We believe that several other companies are developing arterial closure587devices. The medical device industry is characterized by rapid and significant588technological change as well as the frequent emergence of new technologies.589There are likely to be research and development projects related to vascular590sealing devices of which we are currently unaware. A new technology or product591may emerge that results in a reduced need for vascular sealing devices or592results in a product that renders our product noncompetitive.593594There are many companies that are selling or have developed hemostats595which compete generally with our D-Stat flowable hemostat. Virtually all of596these devices, however, are positioned as hemostats for the open surgical market597and are not designed specifically for use in interventional procedures. There598are likely to be new products, or modifications of existing products, that will599compete with our D-Stat flowable hemostat in the interventional segment of the600hemostat market, and these new products may render our product noncompetitive.601602REGULATORY REQUIREMENTS603604UNITED STATES605606Our Duett sealing device is regulated in the United States as a medical607device by the FDA under the federal Food, Drug and Cosmetic, or FDC, Act, and608required premarket approval by the FDA prior to being sold. In May 1997, the FDA609determined that the review of the Duett sealing device would be delegated to the610Center for Devices and Radiological Health area of the FDA, with a consulting611review by the Center for Biologic Evaluation and Research. During 1998 and 1999,612we received approval of our investigational device exemption, or IDE,613application to start our feasibility clinical study, filed our IDE Supplement to614begin our multi-center clinical study, completed the SEAL multi-center clinical615study and filed our PMA application with the FDA. In September 1999 our616manufacturing facility was audited by the FDA, with no deficiencies or617non-compliances noted by the inspector. In December 1999, we received the FDA's618review letter of our PMA application, and we submitted an amendment to our PMA619to the FDA in January 2000. On June 22, 2000, we received approval from the FDA620of our PMA application to sell the Duett sealing device in the United States.621622Our D-Stat flowable hemostat is also regulated in the United States as a623medical device by the FDA under the FDC Act, and required clearance of our624510(k) application by the FDA prior to being sold in the United States. In625January 2002, our 510(k) application for the D-Stat flowable hemostat was626cleared by the FDA, and we commenced sales in the United States in February6272002.628629The FDA classifies medical devices into one of three classes based upon630controls the FDA considers necessary to reasonably ensure their safety and631effectiveness. Class I devices are subject to general controls such as labeling,632premarket notification and adherence to good manufacturing practices. Class II633devices are subject to the same general controls and also are subject to special634controls such as performance standards, postmarket6356366377638<PAGE>639640641surveillance, patient registries and FDA guidelines, and may also require642clinical testing prior to approval. Class III devices are subject to the highest643level of controls because they are used in life-sustaining or life-supporting644implantable devices. Class III devices require rigorous clinical testing prior645to their approval. Our Duett sealing device is classified as a Class III device.646647Manufacturers must file an IDE application if human clinical studies of a648device are required and if the device presents what the FDA considers to be a649significant risk. The IDE application must be supported by data, typically650including the results of animal and mechanical testing of the device. If the IDE651application is approved by the FDA, human clinical studies may begin at a652specific number of investigational sites with a maximum number of patients, as653approved by the FDA. The clinical studies must be conducted under the review of654an independent institutional board at the hospital performing the clinical655study. Our Duett sealing device is subject to the IDE requirements. We received656approval of our IDE application for the Duett sealing device and performed our657feasibility clinical study at two United States centers in January to March6581998. Based on the results of this feasibility clinical study, we received659approval and performed our 695 patient multi-center SEAL clinical study from660August 1998 through March 1999.661662Generally, upon completion of these human clinical studies, a manufacturer663seeks approval of a Class III medical device from the FDA by submitting a PMA664application. A PMA application must be supported by extensive data, including665the results of the clinical studies, as well as literature to establish the666safety and effectiveness of the device. The FDA allowed us to submit our PMA667application in segments prior to completion of our clinical studies. Upon668completion of the follow-up and data analysis of the SEAL clinical study, we669submitted the final two segments of our PMA application to the FDA in June 1999.670Under the FDC Act, the FDA has 180 days to review a PMA application, although671the review of such an application more often occurs over a longer time period672and may require additional information. In December 1999, we received the FDA's673review letter of our PMA application, and we submitted an amendment to our PMA674to the FDA in January 2000. On June 22, 2000, we received approval from the FDA675of our PMA application for the sale of the Duett sealing device in the United676States. Our PMA approval was conditioned on our agreeing to perform a post677approval study of the immunogenic response to the Duett procoagulant and a post678approval animal study of the 30 day resorption of the Duett procoagulant, both679of which we are conducting. The FDA or international regulatory agencies could680restrict or withdraw their approval of our Duett sealing device if one of the681post approval studies produces adverse results that would support such an682action.683684If a medical device manufacturer can establish that a device is685"substantially equivalent" to a legally marketed Class I or Class II device, or686to an unclassified device, or to a Class III device for which the FDA has not687called for PMAs, the manufacturer may seek clearance from the FDA to market the688device by filing a 510(k) premarket notification. The 510(k) notification may689need to be supported by appropriate data establishing the claim of substantial690equivalence to the satisfaction of the FDA. Following submission of the 510(k)691notification, the manufacturer may not place the device into commercial692distribution in the United States until an order is issued by the FDA. Our693D-Stat flowable hemostat was the subject of a 510(k) application which was694determined to be "substantially equivalent" to a legally marketed predicate695device by the FDA, thereby allowing commercial marketing in the United States.696697We also are subject to FDA regulations concerning manufacturing processes698and reporting obligations. These regulations require that manufacturing steps be699performed according to FDA standards and in accordance with documentation,700control and testing standards. We also are subject to inspection by the FDA on701an on-going basis. We are required to provide information to the FDA on adverse702incidents as well as maintain a documentation and record keeping system in703accordance with FDA guidelines. The advertising of our products also is subject704to both FDA and Federal Trade Commission jurisdiction. If the FDA believes that705we are not in compliance with any aspect of the law, it can institute706proceedings to detain or seize products, issue a recall, stop future violations707and assess civil and criminal penalties against us, our officers and our708employees.7097107118712<PAGE>713714715INTERNATIONAL716717The European Union has adopted rules which require that medical products718receive the right to affix the CE mark, an international symbol of adherence to719quality assurance standards and compliance with applicable European medical720device directives. As part of the CE compliance, manufacturers are required to721comply with the ISO 9000 series of standards for quality operations. We received722the CE mark approval for our Duett sealing device and ISO 9001 certification in723July 1998, and we received the CE mark approval for our D-Stat flowable hemostat724in October 2001.725726International sales of the Duett sealing device are subject to the727regulatory requirements of each country in which we sell our product. These728requirements vary from country to country but generally are much less stringent729than those in the United States. Our Duett sealing device is currently marketed730in Germany, Norway, Italy, Austria, the United Kingdom, Ireland, Denmark,731Switzerland, Finland, Sweden, Greece, Belgium, Spain, the Netherlands and732Portugal. We have obtained regulatory approvals where required. Through our733Japanese distributor, we are pursuing the regulatory approval for commercial734sale in Japan.735736THIRD PARTY REIMBURSEMENT737738In the United States, healthcare providers that purchase medical devices,739such as vascular sealing devices, generally rely on third-party payors,740principally the Centers for Medicare and Medicaid Services, or CMS, (formerly741the Health Care Financing Administration, or HCFA) and private health insurance742plans, to reimburse all or part of the cost of therapeutic and diagnostic743catheterization procedures. We believe that in the current United States744reimbursement system, the cost of vascular sealing devices is incorporated into745the overall cost of the catheter procedure. We are working to establish the cost746benefit of the Duett sealing device, relying on shortened hospital stays and747decreased use of healthcare professionals, to justify the increased cost of748using our Duett sealing device in the United States.749750During 2000, CMS implemented a new Medicare prospective payment system for751hospital outpatient services. One aspect of the new system involves the752recognition of new technology items and services as discrete payment groups753under the prospective payment system. Under this new system, hospitals receive754separate payments for the use of new medical devices that are recognized by CMS.755The Duett sealing device has been issued a transitional pass through code by CMS756and is currently eligible for device reimbursement under the Medicare757prospective payment system for hospital outpatient services. CMS is proposing758changes to the prospective payment system that could be adopted in 2002.759760Market acceptance of our products in international markets is dependent in761part upon the availability of reimbursement from healthcare payment systems.762Reimbursement and healthcare payment systems in international markets vary763significantly by country. The main types of healthcare payment systems in764international markets are government sponsored healthcare and private insurance.765Countries with government sponsored healthcare, such as the United Kingdom, have766a centralized, nationalized healthcare system. New devices are brought into the767system through negotiations between departments at individual hospitals at the768time of budgeting. In most foreign countries, there are also private insurance769systems that may offer payments for alternative therapies.770771PATENTS AND INTELLECTUAL PROPERTY772773We file patent applications to protect technology, inventions and774improvements that are significant to the development of our business, and use775trade secrets and trademarks to protect other areas of our business. Prior to776the formation of our company, Dr. Gary Gershony filed a number of patent777applications in the United States and other countries directed to proprietary778technology used in our Duett sealing device. Upon the commencement of our779operations in February 1997, Dr. Gershony assigned all patents and patent780applications7817827839784<PAGE>785786787relating to the Duett sealing device to us on a worldwide, perpetual,788royalty-free basis. At the time of assignment, there existed one United States789patent issued that is directed to a balloon catheter sealing device and method790and which expires in May 2013, three United States patents pending and an791international patent application pending which designated numerous foreign792countries and regions.793794Since commencing operations, we have continued the prosecution of the795pending United States patent applications and filed new patent applications. A796second United States patent has issued that is directed to a balloon catheter797and procoagulant sealing device and method and which expires in October 2015. A798third United States patent has also issued that contains method claims799concerning the use of a balloon catheter and flowable procoagulant and which800expires in October 2015. A fourth United States patent has issued concerning the801procoagulant mixture and which expires in October 2015. A fifth United States802patent has issued concerning a balloon catheter sealing device and which expires803in May 2013. A sixth United States patent has issued concerning a balloon804catheter and procoagulant sealing device and which expires in October 2015. A805seventh United States patent has issued concerning a balloon catheter sealing806device and which expires in October 2015. We currently have five additional807United States patents pending concerning aspects of our Duett sealing device and808other interventional products. We also have pursued international patent809applications, which designate the key developed nations with substantive patent810protection systems.811812The interventional cardiology market in general, and the vascular sealing813device field in particular, is characterized by numerous patent filings and814frequent and substantial intellectual property litigation. Each of the three815vascular sealing products with which our Duett sealing device competes has been816subject to infringement litigation. We are aware of many United States patents817issued to other companies in the vascular sealing field which describe vascular818sealing devices. After consultation with our intellectual property counsel, we819believe that our Duett sealing device does not infringe any of these existing820United States issued patents. The interpretation of patents, however, involves821complex and evolving legal and factual questions. Intellectual property822litigation in recent years has proven to be complex and expensive, and the823outcome of such litigation is difficult to predict.824825On July 23, 1999, we were named as the defendant in a patent infringement826lawsuit brought by Datascope Corp. in the United States District Court for the827District of Minnesota. The complaint requested a judgment that our Duett sealing828device infringes and, following FDA approval will infringe, a United States829patent held by Datascope and asks for relief in the form of an injunction that830would prevent us from selling our product in the United States as well as an831award of attorneys' fees, costs and disbursements. On March 15, 2000, the court832granted summary judgment dismissing all of Datascope's claims, subject to the833right of Datascope to recommence the litigation after our receipt of FDA834approval of our Duett sealing device. On July 12, 2000, after our receipt of FDA835approval, Datascope recommenced this litigation, alleging that the Duett sealing836device infringes a United States patent held by Datascope and requesting relief837in the form of an injunction that would prevent us from selling our product in838the United States, damages caused by our alleged infringement, and other costs,839disbursements and attorneys' fees. We believe the allegations included in the840complaint are without merit, have filed our answer to the complaint, and we841intend to defend this litigation vigorously. It is not possible to predict the842timing or outcome of the Datascope litigation, including whether we will be843prohibited from selling our Duett sealing device in the United States or844internationally, or to estimate the amount or range of potential loss, if any.845846On July 3, 2000, we were named as the defendant in a patent infringement847lawsuit brought by the Daig division of St. Jude Medical in the United States848District Court for the District of Minnesota. The complaint requested a judgment849that our Duett sealing device infringes a series of four patents known as the850Fowler patents held by St. Jude Medical and asked for relief in the form of an851injunction that would prevent us from selling our Duett sealing device in the852United States, damages caused by the manufacture and sale of our product, and853other costs, disbursements and attorneys' fees. On July 12, 2001, we entered854into an agreement that settled all existing intellectual property litigation855with St. Jude Medical. Under the terms of the settlement agreement, we agreed to856pay a royalty of 2.5% of net sales of our Duett sealing device to St. Jude857Medical, up to a maximum amount over the remaining life of the St. Jude Fowler858patents. In exchange, St. Jude Medical granted to us a non-exclusive85986086110862<PAGE>863864865license to its Fowler patents and has released us from any claim of patent866infringement based on sales of our Duett sealing device. We granted a867non-exclusive cross-license to our Gershony patents to St. Jude Medical, subject868to a similar royalty payment if St. Jude Medical utilizes our Gershony patents869in any future device. Beginning on July 1, 2001, a royalty expense of 2.5% of870net sales is included in our cost of goods sold until the maximum royalty is871attained.872873We may become the subject of additional intellectual property claims in874the future related to our Duett sealing device. Our defense of the Datascope875claim and any other intellectual property claims filed in the future, regardless876of the merits of the complaint, could divert the attention of our technical and877management personnel away from the development and marketing of the Duett878sealing device for significant periods of time. The costs incurred to defend the879Datascope claim and other future claims could be substantial and adversely880affect us, even if we are ultimately successful. An adverse determination in the881Datascope matter or in other litigation or interference proceedings in the882future could prohibit us from selling our product, subject us to significant883liabilities to third parties or require us to seek licenses from third parties.884885We also rely on trade secret protection for certain aspects of our886technology. We typically require our employees, consultants and vendors for887major components to execute confidentiality agreements upon their commencing888services with us or before the disclosure of confidential information to them.889These agreements generally provide that all confidential information developed890or made known to the other party during the course of that party's relationship891with us is to be kept confidential and not disclosed to third parties, except in892special circumstances. The agreements with our employees also provide that all893inventions conceived or developed in the course of providing services to us894shall be our exclusive property.895896We also intend to register the trademarks and trade names through which we897conduct our business. To date, we have applied for registration in the United898States of the mark "Vascular Solutions Duett," "D-Stat" and the Duett logo.899900EMPLOYEES901902As of December 31, 2001, we had 140 full time employees. Of these903employees, 31 were in manufacturing activities, 78 were in sales and marketing904activities, 9 were in research and development activities, 12 were in905regulatory, quality assurance and clinical research activities and 10 were in906general and administrative functions. We have never had a work stoppage and none907of our employees are covered by collective bargaining agreements. We believe our908employee relations are good.909910EXECUTIVE OFFICERS OF THE REGISTRANT911912The executive officers of the Company as of February 15, 2002 are as913follows:914915NAME AGE POSITION916- ---- --- --------917Howard Root 41 Chief Executive Officer and Director918Michael Nagel 39 Vice President of Sales & Marketing and Secretary919Deborah Jensen 45 Vice President of Regulatory Affairs920James Quackenbush 43 Vice President of Manufacturing921William Sutton 38 Vice President of Research & Development922James Butala 46 Chief Financial Officer and Treasurer92392492511926<PAGE>927928929HOWARD ROOT has served as our Chief Executive Officer and a director since930he co-founded Vascular Solutions in February 1997. From April 1996 through931February 1997, Mr. Root was the Vice President of Gateway Alliance, LLC, a932provider of management services to start-up businesses. From 1990 to 1995, Mr.933Root was employed by ATS Medical, Inc., a mechanical heart valve company, most934recently as Vice President and General Counsel. Prior to joining ATS Medical,935Mr. Root practiced corporate law, specializing in representing emerging growth936companies, at the law firm of Dorsey & Whitney for over five years. Mr. Root937received his B.S. in Economics and J.D. degrees from the University of938Minnesota.939940MICHAEL NAGEL has served as our Vice President of Sales & Marketing since941June 1997. Prior to joining us, Mr. Nagel was the Director of Sales & Marketing942at Quantech, Ltd., a developer of point of care medical diagnostic testing943products, where he worked since July 1996. From 1992 through July 1996, Mr.944Nagel was the mid-west division sales manager of B. Braun Cardiovascular, a945manufacturer of cardiovascular devices and catheters. From 1991 through 1992,946Mr. Nagel was the Director of Worldwide Sales for the Medical Products Division947of Angeion Corporation, a manufacturer of angioplasty accessories and pediatric948catheters. Prior to 1991, Mr. Nagel performed a variety of sales and marketing949functions with Abbott Labs Diagnostic Division for over five years. Mr. Nagel950received his B.A. and M.B.A. degrees from the University of St. Thomas.951952DEBORAH JENSEN has served as our Vice President of Regulatory Affairs,953Clinical Affairs and Quality Systems since October 2000. Ms. Jensen served as954the Corporate Compliance Officer and Vice President of Regulatory Affairs,955Clinical Research and Quality Systems for Empi, Inc. from October 1995 to956October 2000. From May 1993 to October 1995, Ms. Jensen was employed as a957Regulatory Affairs Manager for Boston Scientific's Scimed division. Prior to May9581993, Ms. Jensen held regulatory affairs, clinical research and quality959assurance positions at Medtronic and Lifecore Biomedical. She received her B.S.960in Biology from Valparaiso University.961962JAMES QUACKENBUSH has served as our Vice President of Manufacturing since963March 1999. Prior to joining us, Mr. Quackenbush served as Vice President of964Manufacturing and Operations with Optical Sensors, Inc., a diagnostic medical965device company, where he worked since October 1992. From March 1989 through966October 1992, Mr. Quackenbush served as operations manager with Schneider USA's967stent division. Prior to this time, he was an advanced project engineer with the9683M Medical Products Division. Mr. Quackenbush received a B.S. in Industrial969Engineering from Iowa State University.970971WILLIAM SUTTON has served as our Vice President of Research & Development972since December 1999. From 1997 through 1999, Mr. Sutton was Director of Research973& Development for Urologix, Inc., a urology medical device company. From 1994974through 1997, Mr. Sutton was a manager of research and development with C.R.975Bard, Inc., a medical device company. Mr. Sutton was a development engineer with976Abbott Laboratories, Inc., from 1987 through 1994. Mr. Sutton received his M.S.977and B.S. degrees in Mechanical Engineering from Stanford University.978979JAMES BUTALA joined us as our Chief Financial Officer and Treasurer in980January 2002. Prior to joining Vascular Solutions, Mr. Butala was the Chief981Financial Officer of CIVISnet Corporation, a software and E-commerce company.982From 1989 to 1999, Mr. Butala was the Chief Financial Officer for Lucht Inc., a983manufacturer of digital and optical photographic equipment. Mr. Butala received984his B.S. degree in Accounting from the University of St. Thomas and is a985Certified Public Accountant.986987There are no family relationships among any of our executive officers.98898999012991<PAGE>992993994ITEM 2. PROPERTIES995996Our principal offices are in approximately 29,000 square feet of leased997space in a suburb of Minneapolis, Minnesota. These facilities include998approximately 12,800 square feet used for manufacturing activities,999approximately 3,400 square feet used for research and laboratory activities,1000with the remainder used for administrative offices. Our lease for these1001facilities expires March 31, 2003 and includes both an option to renew for an1002additional five-year term and options to terminate at six-month intervals. We1003believe that these facilities will be adequate to meet our needs through at1004least the end of 2002.10051006ITEM 3. LEGAL PROCEEDINGS10071008On July 23, 1999, we were named as the defendant in a patent infringement1009lawsuit brought by Datascope Corp. in the United States District Court for the1010District of Minnesota. The complaint requested a judgment that our Duett sealing1011device infringes and, following FDA approval will infringe, a United States1012patent held by Datascope and asks for relief in the form of an injunction that1013would prevent us from selling our product in the United States as well as an1014award of attorneys' fees, costs and disbursements. On August 12, 1999, we filed1015our answer to this lawsuit and brought a counterclaim alleging unfair1016competition and tortious interference. On August 20, 1999, we moved for summary1017judgement to dismiss Datascope's claims. On March 15, 2000, the court granted1018summary judgment dismissing all of Datascope's claims, subject to the right of1019Datascope to recommence the litigation after our receipt of FDA approval of our1020Duett sealing device. On July 12, 2000, after our receipt of FDA approval,1021Datascope recommenced this litigation, alleging that the Duett sealing device1022infringes a United States patent held by Datascope and requesting relief in the1023form of an injunction that would prevent us from selling our product in the1024United States, damages caused by our alleged infringement, and other costs,1025disbursements and attorneys' fees. We believe the allegations included in the1026complaint are without merit, have filed our answer to the complaint, and intend1027to defend this litigation vigorously. It is not possible to predict the timing1028or outcome of the Datascope litigation, including whether we will be prohibited1029from selling our Duett sealing device in the United States or internationally,1030or to estimate the amount or range of potential loss, if any.10311032On July 3, 2000, we were named as the defendant in a patent infringement1033lawsuit brought by the Daig division of St. Jude Medical in the United States1034District Court for the District of Minnesota. The complaint requested a judgment1035that our Duett sealing device infringes a series of four patents known as the1036Fowler patents held by St. Jude Medical and asks for relief in the form of an1037injunction that would prevent us from selling our Duett sealing device in the1038United States, damages caused by the manufacture and sale of our product, and1039other costs, disbursements and attorneys' fees.10401041On July 12, 2001, we entered into an agreement that settled all existing1042intellectual property litigation with St. Jude Medical. Under the terms of the1043settlement agreement, we agreed to pay a royalty of 2.5% of net sales of our1044Duett sealing device to St. Jude Medical, up to a maximum amount over the1045remaining life of the St. Jude Fowler patents. In exchange, St. Jude Medical1046granted to us a non-exclusive license to its Fowler patents and has released us1047from any claim of patent infringement based on sales of our Duett sealing1048device. We granted a non-exclusive cross-license to our Gershony patents to St.1049Jude Medical, subject to a similar royalty payment if St. Jude Medical utilizes1050our Gershony patents in any future device. Beginning on July 1, 2001, a royalty1051expense of 2.5% of net sales is included in our cost of goods sold until the1052maximum royalty is attained.10531054Other than the Datascope claim, there are no legal proceedings pending1055against us.10561057ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS10581059No matters were submitted to a vote of security holders during the fourth1060quarter ended December 31, 2001.106110621063131064<PAGE>106510661067PART II10681069ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS10701071The Company's common stock began trading on the Nasdaq National Market1072under the symbol "VASC" on July 20, 2000. On July 25, 2000, the Company1073completed the initial public offering of its common stock. Upon the closing of1074the initial public offering, the Company issued 3,500,000 shares of its common1075stock at an offering price of $12.00 per share and all of the Company's Series A1076and Series B preferred stock automatically converted into 3,777,777 shares of1077common stock. On August 15, 2000, the underwriters exercised in full their1078over-allotment option to purchase an additional 525,000 shares of common stock1079at $12.00 per share. Cash proceeds from the sale of the 4,025,000 shares of1080common stock, net of underwriters' discount and offering expenses, totaled1081approximately $44.0 million.10821083On July 25, 2000, we sold 3,500,000 shares of our common stock, at an1084initial public offering price of $12.00 per share, pursuant to a Registration1085Statement on Form S-1 (Registration No. 333-84089), which was declared effective1086by the Securities and Exchange Commission on July 19, 2000. The managing1087underwriters of our initial public offering were Salomon Smith Barney Inc.,1088Stephens Inc. and William Blair & Company, L.L.C. On August 15, 2000, the1089underwriters exercised in full their over-allotment option to purchase an1090additional 525,000 shares of common stock at $12.00 per share. Our net proceeds1091from the offering were approximately $44.0 million. To date, we have spent1092approximately $17.1 million of the net proceeds to hire, train and deploy a1093direct sales force in the United States, and $2.7 million for general corporate1094purposes.10951096The following table sets forth, for the periods indicated, the range of1097high and low last sale prices for the common stock as reported by the Nasdaq1098National Market.10991100High Low1101-------- -------1102110320001104Third Quarter ............. $19.375 $13.8751105Fourth Quarter ............ 23.6875 7.3751106110720011108First Quarter ............. 10.000 5.7501109Second Quarter ............ 9.000 5.1251110Third Quarter ............. 9.640 1.7701111Fourth Quarter ............ 2.920 1.75011121113HOLDERS11141115As of December 31, 2001, the Company had 140 shareholders of record. Such1116number of record holders does not reflect shareholders who beneficially own1117common stock in nominee or street name.11181119DIVIDENDS11201121The Company has paid no cash dividends on its common stock, and it does1122not intend to pay cash dividends on its common stock in the future.112311241125141126<PAGE>112711281129ITEM 6. SELECTED FINANCIAL DATA11301131The selected consolidated financial data below should be read in1132conjunction with "Management's Discussion and Analysis of Financial Condition1133and Results of Operations" in Item 7 below and the Consolidated Financial1134Statements and the Notes thereto included in Item 8 below.11351136<TABLE>1137<CAPTION>1138YEAR ENDED DECEMBER 31,1139------------------------------------------------------------------11402001 2000 1999 1998 19971141---------- ---------- ---------- ---------- ----------1142(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)1143<S> <C> <C> <C> <C> <C>1144Statements of Operations Data:1145Net sales .......................... $ 12,082 $ 6,193 $ 1,429 $ 494 $ --1146Cost of sales ...................... 4,961 2,701 1,065 443 --1147---------- ---------- ---------- ---------- ----------1148Gross profit ..................... 7,121 3,492 364 51 --1149Operating expenses:1150Research and development ........... 4,288 3,265 3,068 2,348 7661151Clinical and regulatory ............ 1,288 1,082 1,324 1,376 2591152Sales and marketing ................ 12,772 6,700 2,301 1,075 2731153General and administrative ......... 2,684 2,107 1,904 667 4261154---------- ---------- ---------- ---------- ----------1155Total operating expenses ......... 21,032 13,154 8,597 5,466 1,7241156---------- ---------- ---------- ---------- ----------11571158Operating loss ........................ (13,911) (9,662) (8,233) (5,415) (1,724)1159Interest income .................. 1,661 1,453 371 274 721160---------- ---------- ---------- ---------- ----------1161Net loss .............................. $ (12,250) $ (8,209) $ (7,862) $ (5,141) $ (1,652)1162========== ========== ========== ========== ==========1163Net loss per common share -1164Basic and diluted .................. $ (.93) $ (.95) $ (1.95) $ (1.40) $ (.62)1165Weighted average number of common1166shares outstanding ................. 13,217 8,645 4,033 3,660 2,66811671168<CAPTION>1169AS OF DECEMBER 31,1170------------------------------------------------------------------11712001 2000 1999 1998 19971172---------- ---------- ---------- ---------- ----------1173(IN THOUSANDS)1174<S> <C> <C> <C> <C> <C>1175Balance Sheet Data:1176Cash and cash equivalents .......... $ 33,318 $ 44,098 $ 10,529 $ 9,897 $ 7,2991177Working capital .................... 34,712 46,300 10,487 9,933 7,0311178Total assets ....................... 37,593 49,661 12,295 11,007 7,5591179Long-term debt ..................... 0 0 0 0 01180Total shareholders' equity ......... 35,630 47,194 11,172 10,546 7,2161181</TABLE>118211831184151185<PAGE>118611871188ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND1189RESULTS OF OPERATIONS11901191The following discussion of the financial condition and results of1192operations of the Company should be read in conjunction with the Company's1193Consolidated Financial Statements and Notes thereto, and the other financial1194information included elsewhere in this Form 10-K Report. This Management's1195Discussion and Analysis of Financial Condition and Results of Operations1196contains descriptions of the Company's expectations regarding future trends1197affecting its business. These forward-looking statements and other1198forward-looking statements made elsewhere in this document are made in reliance1199upon safe harbor provisions of the Private Securities Litigation Reform Act of12001995. The following discussion sets forth certain factors the Company believes1201could cause actual results to differ materially from those contemplated by the1202forward looking statements.12031204OVERVIEW12051206Since we commenced operations in February 1997, we have been engaged in1207the design, development, clinical testing, manufacture and sale of the Vascular1208Solutions Duett sealing device. Our Duett sealing device is designed to seal the1209entire puncture site following catheterization procedures such as angiography,1210angioplasty and stenting. During 1998 and 1999 we received regulatory approvals1211to market the Duett sealing device in several international markets, principally1212in Europe. On June 22, 2000, we received approval from the FDA of our PMA1213application for the sale of our Duett sealing device in the United States. As a1214result, during the third quarter of 2000 we commenced sales of our product in1215the United States with a direct sales force. Virtually all of our sales through1216December 31, 2001 consisted of sales of our Duett sealing device.12171218We have a limited history of operations and have experienced significant1219operating losses since inception. As of December 31, 2001, we had an accumulated1220deficit of $35.1 million.12211222Although we have experienced revenue growth in recent periods, this growth1223may not be sustainable and, therefore, these recent periods should not be1224considered indicative of future performance. We may never achieve profitability,1225or if we achieve profitability it may not be sustained in future periods.12261227RESULTS OF OPERATIONS12281229YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 200012301231Net sales increased 95% to $12,082,379 for the year ended December 31,12322001 from $6,193,234 for the year ended December 31, 2000. The increase in net1233sales was principally the result of a full year of United States sales of our1234Duett sealing device in 2001, compared to six months of sales in 2000. As a1235result, 90% of our net sales for the year ended December 31, 2001 were to1236customers in the United States, while 10% of the net sales were to our customers1237in international markets.12381239Gross profit as a percentage of net sales increased to 59% for the year1240ended December 31, 2001 from 56% for the year ended December 31, 2000. This1241increase as a percentage of net sales resulted principally from the full year of1242United States sales in 2001. In the third quarter of 2001 we settled our1243intellectual property litigation with St. Jude Medical. As part of the1244settlement agreement, we agreed to pay a royalty of 2.5% of our net sales of the1245Duett sealing device to St. Jude Medical up to a maximum amount for the1246remaining life of the patents. This 2.5% royalty was included in our costs of1247goods sold beginning in the third quarter of 2001. During the fourth quarter of12482001 we commenced initial sales of our Diagnostic Duett version of the Duett1249sealing device in the United States. The Diagnostic Duett has a substantially1250lower costs of goods sold than the original Duett, which is offset by a lower1251average selling price. We believe that our gross profit will continue to1252increase slightly toward 60% during 2002.125312541255161256<PAGE>125712581259Research and development expenses increased 31% to $4,287,726 for the year1260ended December 31, 2001 from $3,265,536 for the year ended December 31, 2000.1261This increase was attributable to increased development work on the product line1262extensions and new products during 2001. We expect our research and development1263expenses to continue to increase slightly during 2002 as we pursue additional1264new products.12651266Clinical and regulatory expenses increased 19% to $1,288,301 for the year1267ended December 31, 2001 from $1,082,029 for the year ended December 31, 2000.1268The increase was primarily the result of additional personnel and the1269commencement of clinical studies for new products and new claims for our Duett1270sealing device during 2001. We expect clinical and regulatory expenses to1271increase modestly during 2002 as we pursue additional clinical studies of our1272Duett sealing device and new products.12731274Sales and marketing expenses increased 91% to $12,771,901 for the year1275ended December 31, 2001 from $6,699,722 for the year ended December 31, 2000.1276This increase was due primarily to the full year of operations of our United1277States direct sales force during 2001. As of December 31, 2001, our direct sales1278force consisted of approximately 65 employees, which we expect to grow to1279approximately 75 employees by the end of 2002. As a result, we expect our sales1280and marketing expenses to continue to increase during 2002.12811282General and administrative expenses increased 27% to $2,684,592 for the1283year ended December 31, 2001 from $2,106,963 for the year ended December 31,12842000. This increase was primarily attributable to an expense of $350,000 upon1285the settlement of the litigation with St. Jude Medical in the third quarter of12862001 relating to the royalty on net sales of our Duett sealing device since 19981287(see "Legal Proceedings" in Item 3 of Part I of this Form 10-K). In addition,1288legal fees associated with the St. Jude Medical and Datscope litigation1289increased during 2001 as compared with 2000. We currently anticipate that1290general and administrative expenses will increase by modest amounts for the1291foreseeable future as we continue to incur litigation expenses related to the1292existing Datascope litigation.12931294Interest income increased to $1,660,757 for the year ended December 31,12952001 from $1,453,491 for the year ended December 31, 2000 primarily as a result1296of a full year of interest on the cash proceeds received upon the closing of our1297initial public offering in July 2000.12981299YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 199913001301Net sales increased 333% to $6,193,234 for the year ended December 31,13022000 from $1,429,094 for the year ended December 31, 1999. The increase in net1303sales was principally the result of United States approval of our Duett sealing1304device on June 22, 2000 and the commencement of our formal United States market1305launch in July 2000. As a result, 67% of net sales for the year ended December130631, 2000 were to customers in the United States while 33% of the net sales were1307to our customers in international markets. In September 2000, we began the1308process of transitioning from utilizing an independent distributor in Germany to1309organizing Vascular Solutions GmbH as a wholly owned subsidiary for direct sales1310in Germany. In October 2000, we commenced direct shipments through Vascular1311Solutions GmbH to customers in Germany.13121313Gross profit as a percentage of net sales increased to 56% for the year1314ended December 31, 2000 from 25% for the year ended December 31, 1999. This1315increase as a percentage of net sales resulted from the initiation of United1316States sales of the Duett sealing device, a decrease in cost of goods sold due1317to the conversion to a new model of the Duett for international sales in the1318fourth quarter of 1999, increased volume and improved manufacturing processes.13191320Research and development expenses increased 6% to $3,265,536 for the year1321ended December 31, 2000 from $3,067,897 for the year ended December 31, 1999.1322This increase was attributable to hiring additional development personnel,1323continued work on product improvements and exploring new product opportunities.132413251326171327<PAGE>132813291330Clinical and regulatory expenses decreased 18% to $1,082,029 for the year1331ended December 31, 2000 from $1,323,972 for the year ended December 31, 1999.1332The decrease was primarily the result of costs associated with the patient1333enrollment portion of the 695-patient multi-center clinical study of our Duett1334sealing device which commenced in August 1998 and was completed in March 1999.1335In addition to the payments to the clinical centers for patient enrollment and1336data collection, we contracted with a third party to perform data analysis and1337computation for the study in 1999.13381339Sales and marketing expenses increased 191% to $6,699,722 for the year1340ended December 31, 2000 from $2,301,603 for the year ended December 31, 1999.1341This increase was due primarily to $2,815,000 in increased personnel costs with1342hiring, training and deploying a direct United States sales force and $997,0001343associated with travel, marketing and physician training for the domestic and1344international distribution of our Duett sealing device.13451346General and administrative expenses increased 11% to $2,106,963 for the1347year ended December 31, 2000 from $1,903,946 for the year ended December 31,13481999. This increase was primarily attributable to a $385,000 increase in legal1349fees associated with litigation items and a $425,000 increase in personnel costs1350to support increased operations. These increases in 2000 were offset by a1351$257,000 expense in connection with a warrant granted to a supplier in the1352second quarter of 1999 and $453,500 in initial public offering costs that were1353expensed in the fourth quarter of 1999 due to the delay of our initial public1354offering.13551356Interest income increased to $1,453,491 for the year ended December 31,13572000 from $371,066 for the year ended December 31, 1999 primarily as a result of1358higher cash balances from the cash proceeds received upon the closing of our1359initial public offering in July 2000.13601361INCOME TAXES13621363We have not generated any pre-tax income to date and therefore have not1364paid any federal income taxes since inception in December 1996. No provision or1365benefit for federal and state income taxes has been recorded for net operating1366losses incurred in any period since our inception.13671368As of December 31, 2001, we had $32,600,000 of federal net operating loss1369carryforwards available to offset future taxable income which begin to expire in1370the year 2013. As of December 31, 2001, we also had federal and state research1371and development tax credit carryforwards of $1,317,000 which begin to expire in1372the year 2013. Under the Tax Reform Act of 1986, the amounts of and benefits1373from net operating loss carryforwards may be impaired or limited in certain1374circumstances, including significant changes in ownership interests. Future use1375of our existing net operating loss carryforwards may be restricted due to1376changes in ownership or from future tax legislation.13771378We have established a valuation allowance against the entire amount of our1379deferred tax asset because we have not been able to conclude that it is more1380likely than not that we will be able to realize the deferred tax asset, due1381primarily to our history of operating losses.13821383LIQUIDITY AND CAPITAL RESOURCES13841385We have financed all of our operations since inception through the1386issuance of equity securities. Through December 31, 2001, we have sold common1387stock and preferred stock generating aggregate net proceeds of $70.1 million. At1388December 31, 2001, we had $33.3 million in cash and cash equivalents on-hand.1389During the year ended December 31, 2001, we used $10.9 million of cash and cash1390equivalents in operating activities. The cash used in operating activities was1391primarily used to fund our net loss for the period of $12.2 million, which was1392partially offset by decreases in accounts receivable and inventories due to1393improved controls. During the year ended December 31, 2000, we used $10.01394million of cash and cash equivalents in operating activities. The cash139513961397181398<PAGE>139914001401used in operating activities was primarily used to fund our net loss for the1402period of $8.2 million and increases in accounts receivable and inventories to1403support our increased operations and a decrease in accounts payable as a result1404of the timing of certain vendor payments. For the year ended December 31, 1999,1405we used $7.2 million of cash in operating activities. This was primarily used to1406fund our net loss for the period of $7.9 million and increases in accounts1407receivable and inventories. Cash used in operating activities was partially1408offset by an increase of $746,000 in accounts payable. Our other use of cash in1409each of these periods was investing activities to acquire manufacturing and1410office equipment. Our equipment acquisitions totaled $456,000 during the year1411ended December 31, 2001, $576,000 during the year ended December 31, 2000, and1412$316,000 for the year ended December 31, 1999.14131414We do not have any significant cash commitments related to supply1415agreements, nor do we have any commitments for capital expenditures.14161417We currently anticipate that we will continue to experience a negative1418cash flow for the foreseeable future and our expenses will be a material use of1419our cash resources. We anticipate that our operating losses will continue1420through at least December 31, 2002. We believe that current cash balances along1421with cash generated from the future sales of products will be sufficient to meet1422our operating and capital requirements for at least the next 36 months. Our1423liquidity and capital requirements beyond the next 36 months will depend on1424numerous factors, including the extent to which our Duett sealing device gains1425market acceptance and competitive developments.14261427If cash generated from operations is insufficient to satisfy our cash1428needs, we may be required to raise additional funds. We currently have no1429commitments for additional funding and so our ability to meet our long-term1430liquidity needs is uncertain. If we raise additional funds through the issuance1431of equity securities, our shareholders may experience significant dilution.1432Furthermore, additional financing may not be available when needed or, if1433available, financing may not be on terms favorable to us or our shareholders. If1434financing is not available when required or is not available on acceptable1435terms, we may be unable to develop or market our products or take advantage of1436business opportunities or respond to competitive pressures.143714381439191440<PAGE>144114421443RISK FACTORS14441445THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING1446OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR1447THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF1448ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS1449OF OPERATIONS COULD BE SERIOUSLY HARMED.145014511452WE WILL NOT BE SUCCESSFUL IF THE VASCULAR SEALING DEVICE MARKET DOES NOT ADOPT1453OUR NEW SEALING METHODOLOGY14541455During the third quarter of 2000 we commenced sales of our product in the1456United States, which we believe represents the largest market for vascular1457sealing devices. Our success will depend on the medical community's acceptance1458of our Duett sealing device. We cannot predict how quickly, if at all, the1459medical community will accept our Duett sealing device, or, if accepted, the1460extent of its use. Our potential customers must:14611462o believe that our device offers benefits compared to the methodologies1463and/or devices that they are currently using to seal vascular1464punctures;14651466o believe that our device is worth the price that they will be asked to1467pay; and14681469o be willing to commit the time and resources required to change their1470current methodology.14711472If we encounter difficulties in growing our sales of our Duett sealing1473device in the United States, our business will be seriously harmed.147414751476WE CURRENTLY RELY ON THE DUETT SEALING DEVICE AS OUR PRIMARY SOURCE OF REVENUE14771478Although we have recently commenced marketing of the D-Stat flowable1479hemostat, we continue to rely on sales of our principal product, the Duett1480sealing device, which is being sold in a limited number of international markets1481and in the United States. Even if we were to develop additional products, FDA1482approval would be required in order to sell them in the United States.1483Preparation of the requisite materials to seek FDA approval and the approval1484process itself require a substantial amount of time and money. As a result, our1485success is dependent on the success of our Duett sealing device. If our Duett1486sealing device is not successful, our business will be seriously harmed.148714881489WE HAVE INCURRED LOSSES AND WE MAY NOT BE PROFITABLE IN THE FUTURE14901491Since we commenced operations in February 1997, we have incurred net1492losses from costs relating to the development and commercialization of our Duett1493sealing device. At December 31, 2001, we had an accumulated deficit of $35.11494million. We expect to continue to significantly invest in our sales and1495marketing, and research and development activities. Because of our plans to1496invest heavily in sales and marketing, hire additional employees and expand our1497commercialization, we expect to incur significant net losses through at least1498December 31, 2002. Our business strategies may not be successful and we may not1499be profitable in any future period. If we do become profitable, we cannot be1500certain that we can sustain or increase profitability on a quarterly or annual1501basis.150215031504WE HAVE BEEN NAMED AS THE DEFENDANT IN A PATENT INFRINGEMENT LAWSUIT AND MAY1505FACE ADDITIONAL INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS IN THE FUTURE WHICH1506COULD PREVENT US FROM MANUFACTURING AND SELLING OUR PRODUCT OR RESULT IN OUR1507INCURRING SUBSTANTIAL COSTS AND LIABILITIES150815091510201511<PAGE>151215131514An adverse determination in any intellectual property litigation or1515interference proceedings could prohibit us from selling our product, subject us1516to significant liabilities to third parties or require us to seek licenses from1517third parties. The costs associated with these license arrangements may be1518substantial and could include ongoing royalties. Furthermore, the necessary1519licenses may not be available to us on satisfactory terms, if at all. Adverse1520determinations in a judicial or administrative proceeding or failure to obtain1521necessary licenses could prevent us from manufacturing and selling our product.15221523On July 23, 1999, we were named as the defendant in a patent infringement1524lawsuit brought by Datascope Corp. in the United States District Court for the1525District of Minnesota. The complaint requested a judgment that our Duett sealing1526device infringes and, following FDA approval, will infringe a United States1527patent held by Datascope and asks for relief in the form of an injunction that1528would prevent us from selling our product in the United States as well as an1529award of attorneys' fees, costs and disbursements. On March 15, 2000, the court1530granted summary judgment dismissing all of Datascope's claims, subject to the1531right of Datascope to recommence the litigation after our receipt of FDA1532approval of our Duett sealing device. On July 12, 2000, after our receipt of FDA1533approval, Datascope recommenced this litigation, alleging that the Duett sealing1534device infringes a United States patent held by Datascope and requesting relief1535in the form of an injunction that would prevent us from selling our product in1536the United States, damages caused by our alleged infringement, and other costs,1537disbursements and attorneys' fees. It is not possible to predict the timing or1538outcome of this lawsuit, including whether we will be prohibited from selling1539our Duett sealing device in the United States or internationally, or to estimate1540the amount or range of potential loss, if any.15411542The interventional cardiology industry is characterized by numerous patent1543filings and frequent and substantial intellectual property litigation. Companies1544in the interventional cardiology industry in general, and in vascular sealing in1545particular, have employed intellectual property litigation in an attempt to gain1546a competitive advantage. We are aware of many United States patents issued to1547other companies in the vascular sealing field which describe vascular sealing1548devices. Each of the three vascular sealing products with which our Duett1549sealing device competes has been subject to infringement litigation. It is1550likely that we will become the subject of additional intellectual property1551claims in the future related to our Duett sealing device. Intellectual property1552litigation in recent years has proven to be very complex, and the outcome of1553such litigation is difficult to predict.15541555Our defense of the Datascope lawsuit and any other intellectual property1556claims filed in the future, regardless of the merits of the complaint, could1557divert the attention of our technical and management personnel away from the1558development and marketing of the Duett sealing device for significant periods of1559time. The costs incurred to defend the Datascope lawsuit and other future claims1560could be substantial and seriously harm us, even if our defense is ultimately1561successful.156215631564OUR FUTURE OPERATING RESULTS ARE DIFFICULT TO PREDICT AND MAY VARY SIGNIFICANTLY1565FROM QUARTER TO QUARTER, WHICH MAY ADVERSELY AFFECT THE PRICE OF OUR COMMON1566STOCK15671568The limited history of United States sales of our Duett sealing device and1569our history of losses make prediction of future operating results difficult. You1570should not rely on our past revenue growth as any indication of future growth1571rates or operating results. The price of our common stock will likely fall in1572the event that our operating results do not meet the expectations of analysts1573and investors. Comparisons of our quarterly operating results are an unreliable1574indication of our future performance because they are likely to vary1575significantly based on many factors, including:15761577o the level of sales of our Duett sealing device in the United States1578market;15791580o the effect of intellectual property disputes;158115821583211584<PAGE>158515861587o the demand for and acceptance of our Duett sealing device;15881589o the success of our competition and the introduction of alternative1590means for vascular sealing;15911592o our ability to command favorable pricing for our Duett sealing1593device;15941595o the growth of the market for vascular sealing devices;15961597o the expansion and rate of success of our direct sales force in the1598United States and our independent distributors internationally;15991600o actions relating to ongoing FDA compliance;16011602o the size and timing of orders from independent distributors or1603customers;16041605o the attraction and retention of key personnel, particularly in sales1606and marketing, regulatory, manufacturing and research and1607development;16081609o unanticipated delays or an inability to control costs with respect1610to our Duett sealing device;16111612o our ability to introduce new products and enhancements in a timely1613manner;16141615o general economic conditions as well as those specific to our1616customers and markets; and16171618o seasonal fluctuations in revenue due to the elective nature of some1619procedures.162016211622OUR DIRECT SALES EFFORTS MAY NOT BE SUCCESSFUL BECAUSE WE HAVE A LIMITED1623OPERATING HISTORY WITH A DIRECT SALES FORCE16241625Because we received regulatory approval to sell our Duett sealing device1626in the United States during 2000, we have only a limited operating history with1627a direct sales force. We believe that there is significant competition for1628direct sales personnel and clinical specialists with the advanced sales skills1629and technical knowledge we require. We may not be able to obtain, train and1630retain sufficient numbers of direct sales personnel and the future sales efforts1631of our direct sales force may not be successful.163216331634WE MAY FACE PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN COSTLY LITIGATION AND1635SIGNIFICANT LIABILITIES16361637The manufacture and sale of medical products entail significant risk of1638product liability claims. The medical device industry in general has been1639subject to significant medical malpractice litigation. Any product liability1640claims, with or without merit, could result in costly litigation, reduced sales,1641cause us to incur significant liabilities and divert our management's time,1642attention and resources. Because of our limited operating history and lack of1643experience with these claims, we cannot be sure that our product liability1644insurance coverage is adequate or that it will continue to be available to us on1645acceptable terms, if at all.164616471648THE MARKET FOR VASCULAR SEALING DEVICES IS HIGHLY COMPETITIVE AND WILL LIKELY1649BECOME MORE COMPETITIVE, AND OUR COMPETITORS MAY BE ABLE TO RESPOND MORE QUICKLY1650TO NEW OR EMERGING TECHNOLOGIES AND CHANGES IN CUSTOMER REQUIREMENTS THAT MAY1651RENDER OUR DUETT SEALING DEVICE OBSOLETE165216531654221655<PAGE>165616571658The existing market for vascular sealing devices is intensely competitive.1659We expect competition to increase further as additional companies begin to enter1660this market and/or modify their existing products to compete directly with ours.1661Our primary competitors are Abbott Laboratories (through its subsidiary1662Perclose, Inc.), Datascope Corp. and St. Jude Medical, Inc., which sells a1663product developed by Kensey Nash Corporation. These companies have:16641665o better name recognition;16661667o broader product lines;16681669o greater sales, marketing and distribution capabilities;16701671o significantly greater financial resources;16721673o larger research and development staffs and facilities; and16741675o existing relationships with some of our potential customers.16761677We may not be able to effectively compete with these companies. In1678addition, broad product lines may allow our competitors to negotiate exclusive,1679long-term supply contracts and offer comprehensive pricing for their products.1680Broader product lines may also provide our competitors with a significant1681advantage in marketing competing products to group purchasing organizations and1682other managed care organizations that are increasingly seeking to reduce costs1683through centralized purchasing. Greater financial resources and product1684development capabilities may allow our competitors to respond more quickly to1685new or emerging technologies and changes in customer requirements that may1686render our Duett sealing device obsolete.168716881689OUR INTERNATIONAL SALES ARE SUBJECT TO A NUMBER OF RISKS THAT COULD SERIOUSLY1690HARM OUR ABILITY TO SUCCESSFULLY COMMERCIALIZE OUR DUETT SEALING DEVICE IN ANY1691INTERNATIONAL MARKET16921693Our international sales are subject to several risks, including:16941695o the ability of our independent distributors to sell our device;16961697o the impact of recessions in economies outside the United States;16981699o greater difficulty in collecting accounts receivable and longer1700collection periods;17011702o unexpected changes in regulatory requirements, tariffs or other1703trade barriers;17041705o weaker intellectual property rights protection in some countries;17061707o potentially adverse tax consequences; and17081709o political and economic instability.17101711The occurrence of any of these events could seriously harm our future1712international sales and our ability to successfully commercialize our Duett1713sealing device or any future product in any international market.171417151716231717<PAGE>171817191720WE HAVE LIMITED MANUFACTURING EXPERIENCE AND MAY ENCOUNTER DIFFICULTIES IN OUR1721MANUFACTURING OPERATIONS WHICH COULD SERIOUSLY HARM OUR BUSINESS17221723We have limited experience in manufacturing our Duett sealing device. We1724believe our current facilities are adequate for our projected production of our1725Duett sealing device for the next year, but future facility requirements will1726depend largely on future sales of our product in the United States. We may1727encounter unforeseen difficulties in expanding our production of our Duett1728sealing device and new products, including problems involving production yields,1729quality control and assurance, component supply and shortages of qualified1730personnel, compliance with FDA regulations and requirements regarding good1731manufacturing practices, and the need for further regulatory approval of new1732manufacturing processes. Difficulties encountered by us in expanding our1733manufacturing capabilities could seriously harm our business.173417351736OUR BUSINESS AND RESULTS OF OPERATIONS MAY BE SERIOUSLY HARMED BY CHANGES IN1737THIRD-PARTY REIMBURSEMENT POLICIES17381739We could be seriously harmed by changes in reimbursement policies of1740governmental or private healthcare payors, particularly to the extent any1741changes affect reimbursement for catheterization procedures in which our Duett1742sealing device or D-Stat hemostat is used. Failure by physicians, hospitals and1743other users of our products to obtain sufficient reimbursement from healthcare1744payors for procedures in which our products are used or adverse changes in1745governmental and private third-party payors' policies toward reimbursement for1746such procedures would seriously harm our business.17471748In the United States, healthcare providers, including hospitals and1749clinics that purchase medical devices such as our Duett sealing device or D-Stat1750hemostat, generally rely on third-party payors, principally federal Medicare,1751state Medicaid and private health insurance plans, to reimburse all or part of1752the cost of catheterization procedures. We believe that in a prospective payment1753system, such as the system currently used by Medicare, and in many managed care1754systems used by private healthcare payors, the cost of our product will be1755incorporated into the overall cost of the procedure and that there will be no1756separate, additional reimbursement for our product.17571758In international markets, acceptance of our products is dependent in part1759upon the availability of reimbursement within prevailing healthcare payment1760systems. However, we are unaware of any hospitals that receive specific,1761cost-based, direct reimbursement for the use of our Duett sealing device or our1762D-Stat hemostat. Reimbursement and healthcare payment systems in international1763markets vary significantly by country. Our failure to receive international1764reimbursement approvals could have a negative impact on market acceptance of our1765products in the markets in which these approvals are sought.176617671768OUR PRODUCTS AND OUR MANUFACTURING ACTIVITIES ARE SUBJECT TO EXTENSIVE1769GOVERNMENTAL REGULATION THAT COULD PREVENT US FROM SELLING OUR PRODUCTS IN THE1770UNITED STATES OR INTRODUCING NEW AND IMPROVED PRODUCTS17711772Our products and our manufacturing activities are subject to extensive1773regulation by a number of governmental agencies, including the FDA and1774comparable international agencies. We are required to:17751776o obtain the approval of the FDA and international agencies before we1777can market and sell our products;17781779o satisfy these agencies' content requirements for all of our labeling,1780sales and promotional materials; and17811782o undergo rigorous inspections by these agencies.178317841785241786<PAGE>178717881789Compliance with the regulations of these agencies may delay or prevent us1790from introducing any new model of our existing products or other new products.1791Furthermore, we may be subject to sanctions, including temporary or permanent1792suspension of operations, product recalls and marketing restrictions if we fail1793to comply with the laws and regulations pertaining to our business.17941795We are also required to demonstrate compliance with the FDA's quality1796system regulations. The FDA enforces its quality system regulations through1797pre-approval and periodic post-approval inspections. These regulations relate to1798product testing, vendor qualification, design control and quality assurance, as1799well as the maintenance of records and documentation. If we are unable to1800conform to these regulations, the FDA may take actions which could seriously1801harm our business.18021803We are currently conducting two post approval studies of our Duett sealing1804device as required by the FDA. It is likely that we will conduct further studies1805on the use of our Duett sealing device for the foreseeable future. The FDA and1806international regulatory agencies may restrict or withdraw their approval of our1807Duett sealing device if additional information becomes available to support this1808action through these studies or otherwise.180918101811THE LOSS OF, OR INTERRUPTION OF SUPPLY FROM, KEY VENDORS, INCLUDING SINGLE1812SOURCE SUPPLIERS, COULD LIMIT OUR ABILITY TO MANUFACTURE OUR PRODUCTS18131814We purchase components used in our Duett sealing device and D-Stat1815flowable hemostat from various suppliers and rely on single sources for the1816collagen and thrombin components of our Duett sealing device procoagulant and1817our D-Stat flowable hemostat. There are currently no FDA-approved alternative1818suppliers of thrombin and very few FDA-approved alternative suppliers of1819collagen. Because it requires FDA approval, establishing additional or1820replacement suppliers for thrombin would require a lead-time of at least two1821years and would involve significant additional costs. Any supply interruption1822from key vendors or failure by us to engage alternative vendors may limit our1823ability to manufacture our Duett sealing device and our D-Stat flowable hemostat1824and could therefore seriously harm our business.182518261827ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK18281829Financial instruments that potentially subject us to concentrations of1830credit risk consist primarily of cash and cash equivalents and accounts1831receivables. We maintain our accounts for cash and cash equivalents principally1832at one major bank and two investment firms in the United States. We have a1833formal written investment policy that restricts the placement of investments to1834issuers evaluated as creditworthy. We have not experienced any losses on our1835deposits of our cash and cash equivalents.18361837With respect to accounts receivable, we perform credit evaluations of our1838customers and do not require collateral. There have been no material losses on1839customer receivables.18401841In the United States and Germany, we sell our products directly to1842hospitals and clinics. Revenue is recognized upon shipment of products to1843customers.18441845In international markets outside of Germany, we sell our products to1846independent distributors who, in turn, sell to medical clinics. Loss,1847termination or ineffectiveness of distributors to effectively promote our1848product would have a material adverse effect on our financial condition and1849results of operations.185018511852251853<PAGE>185418551856ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA18571858The Consolidated Financial Statements and Notes thereto required pursuant to1859this Item begin on page 31 of this Annual Report on Form 10-K.186018611862ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND1863FINANCIAL DISCLOSURE18641865None.186618671868261869<PAGE>187018711872PART III187318741875ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT18761877Incorporated herein by reference to the Sections under the headings1878"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting1879Compliance" contained in the Proxy Statement for our Annual Meeting of1880Shareholders to be filed with the Securities and Exchange Commission within 1201881days of the close of the year ended December 31, 2001.18821883See Item 1 of Part I hereof for information regarding our Executive1884Officers.188518861887ITEM 11. EXECUTIVE COMPENSATION18881889Incorporated herein by reference to the Sections under the headings1890"Director Compensation" and "Executive Compensation and Other Information"1891contained in the Proxy Statement for our Annual Meeting of Shareholders to be1892filed with the Securities and Exchange Commission within 120 days of the close1893of the year ended December 31, 2001.189418951896ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT18971898Incorporated herein by reference to the Section under the heading1899"Security Ownership of Certain Beneficial Owners and Management" contained in1900the Proxy Statement for our Annual Meeting of Shareholders to be filed with the1901Securities and Exchange Commission within 120 days of the close of the year1902ended December 31, 2001.190319041905ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS19061907None.190819091910271911<PAGE>191219131914PART IV191519161917ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K19181919(a) Documents filed as part of this Report.19201921(1) The following financial statements are filed herewith in Item 8 in1922Part II.19231924(i) Consolidated Balance Sheets19251926(ii) Consolidated Statements of Operations19271928(iii) Consolidated Statement of Changes in Shareholders' Equity19291930(iv) Consolidated Statements of Cash Flows19311932(v) Notes to Consolidated Financial Statements19331934(2) Financial Statement Schedules19351936Schedule II - Valuation and Qualifying Accounts. Such schedule1937should be read in conjunction with the consolidated financial statements. All1938other supplemental schedules are omitted because of the absence of conditions1939under which they are required.19401941(3) Exhibits19421943Exhibit1944Number Description1945------ -----------19463.1 Amended and Restated Articles of Incorporation of Vascular1947Solutions, Inc. (incorporated by reference to Exhibit 3.1 to1948Vascular Solutions' Form 10-Q for the quarter ended September194930, 2000).19503.2 Bylaws of Vascular Solutions, Inc. (incorporated by reference1951to Exhibit 3.2 of Vascular Solutions' Registration Statement1952on Form S-1 (File No. 333-84089)).19534.1 Specimen of Common Stock certificate (incorporated by1954reference to Exhibit 4.1 of Vascular Solutions' Registration1955Statement on Form S-1 (File No. 333-84089)).19564.2 Form of warrant dated January 31 and February 14, 1997 issued1957to representatives of Miller, Johnson & Kuehn, Incorporated1958(incorporated by reference to Exhibit 4.2 of Vascular1959Solutions' Registration Statement on Form S-1 (File No.1960333-84089)).19614.3 Form of warrant dated December 29, 1997 issued to1962representatives of Miller, Johnson & Kuehn, Incorporated1963(incorporated by reference to Exhibit 4.3 of Vascular1964Solutions' Registration Statement on Form S-1 (File No.1965333-84089)).19664.4 Amended and Restated Investors' Rights Agreement dated1967December 9, 1998, by and between Vascular Solutions, Inc. and1968the purchasers of Series A and Series B preferred stock1969(incorporated by reference to Exhibit 4.4 of Vascular1970Solutions' Registration Statement on Form S-1 (File No.1971333-84089)).19724.5 Stock Purchase Warrant dated June 10, 1999 by and between1973Vascular Solutions, Inc. and Jones Pharma, Incorporated1974(incorporated by reference to Exhibit 4.7 of Vascular1975Solutions' Registration Statement on Form S-1 (File No.1976333-84089)).197710.1 Lease Agreement dated February 11, 1998 by and between1978Massachusetts Mutual Life Insurance Company as Landlord and1979Vascular Solutions, Inc. as Tenant (incorporated by reference1980to Exhibit 10.2 of Vascular Solutions' Registration Statement1981on Form S-1 (File No. 333-84089)).198219831984281985<PAGE>19861987198810.2 First Lease Amendment dated June 9, 1999 by and between Duke1989Realty Limited Partnership as Landlord and Vascular Solutions,1990Inc. as Tenant (incorporated by reference to Exhibit 10.3 of1991Vascular Solutions' Registration Statement on Form S-1 (File1992No. 333-84089)).199310.3 Second Lease Amendment dated October 24, 1999 by and between1994Duke Realty Limited Partnership as Landlord and Vascular1995Solutions, Inc. as Tenant (incorporated by reference to1996Exhibit 10.3 to Vascular Solutions' Form 10-K for the year1997ended December 31, 2000).199810.4 Third Lease Amendment dated August 23, 2000 by and between1999Duke Realty Limited Partnership as Landlord and Vascular2000Solutions, Inc. as Tenant (incorporated by reference to2001Exhibit 10.4 to Vascular Solutions' Form 10-K for the year2002ended December 31, 2000).200310.5 Bill of Sale and Assignment dated January 31, 1997 by and2004between Vascular Solutions, Inc. and Dr. Gary Gershony2005(incorporated by reference to Exhibit 10.4 of Vascular2006Solutions' Registration Statement on Form S-1 (File No.2007333-84089)).200810.6 Mutual and General Release dated November 9, 1998 by and2009between Vascular Solutions, Inc., Dr. Gary Gershony and B.2010Braun Medical, Inc. (incorporated by reference to Exhibit 10.52011of Vascular Solutions' Registration Statement on Form S-12012(File No. 333-84089)).201310.7 Purchase and Sale Agreement dated September 17, 1998 by and2014between Vascular Solutions, Inc. and Davol Inc. (incorporated2015by reference to Exhibit 10.8 of Vascular Solutions'2016Registration Statement on Form S-1 (File No. 333-84089)).201710.8 Purchase Agreement dated June 10, 1999 by and between GenTrac,2018Inc. and Vascular Solutions, Inc. (incorporated by reference2019to Exhibit 10.9 of Vascular Solutions' Registration Statement2020on Form S-1 (File No. 333-84089)).202110.9* Form of Employment Agreement by and between Vascular2022Solutions, Inc. and each of its executive officers2023(incorporated by reference to Exhibit 10.11 of Vascular2024Solutions' Registration Statement on Form S-1 (File No.2025333-84089)).202610.10 Form of Distribution Agreement (incorporated by reference to2027Exhibit 10.12 of Vascular Solutions' Registration Statement on2028Form S-1 (File No. 333-84089)).202910.11* Vascular Solutions, Inc. Stock Option and Stock Award Plan, as2030amended (incorporated by reference to Exhibit 10.13 of2031Vascular Solutions' Form 10-Q for the quarter ended March 31,20322001).203310.12* Vascular Solutions, Inc. Employee Stock Purchase Plan, as2034amended (incorporated by reference to Exhibit 10.14 to2035Vascular Solutions' Form 10-K for the year ended December 31,20362000).203710.13 Settlement Agreement dated July 12, 2001 by and between2038Vascular Solutions and St. Jude Medical and Daig Corporation2039(incorporated by reference to Exhibit 99.2 to Vascular2040Solutions' Form 8-K dated July 12, 2001).204123.1 Consent of Ernst & Young LLP.204224.1 Power of Attorney (included on signature page).20432044- ------------------------2045* Management contract or compensatory plan or arrangement required to be filed2046as an Exhibit to this Form 10-K.20472048(b) Registrant filed no Report on Form 8-K during its fourth quarter ended2049December 31, 2001.20502051(c) See Item 14(a)(3) above.20522053(d) See Item 14(a)(2) above.205420552056292057<PAGE>205820592060SIGNATURES20612062Pursuant to the requirements of Section 13 or 15(d) of the Securities2063Exchange Act of 1934, the registrant has duly caused this report to be signed on2064its behalf by the undersigned, thereunto duly authorized, on the 1st day of2065March, 2002.206620672068VASCULAR SOLUTIONS, INC.20692070By: /s/ Howard Root2071------------------------------------2072Howard Root2073Chief Executive Officer and Director20742075KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature2076appears below constitutes and appoints Howard Root and James Butala (with full2077power to act alone), as his or her true and lawful attorneys-in-fact and agents,2078with full powers of substitution and resubstitution, for him or her and in his2079or her name, place and stead, in any and all capacities, to sign any and all2080amendments to the Annual Report on Form 10-K of Vascular Solutions, Inc., and to2081file the same, with all exhibits thereto, and other documents in connection2082therewith, with the Securities and Exchange Commission, granting unto said2083attorneys-in-fact and agents full power and authority to do and perform each and2084every act and thing requisite or necessary to be done in and about the premises,2085as fully to all intents and purposes as he or she might or could do in person,2086hereby ratifying and confirming all that said attorneys-in-fact and agents, or2087their substitute or substitutes, lawfully do or cause to be done by virtue2088hereof.20892090Pursuant to the requirements of the Securities Exchange Act of 1934,2091this report has been signed on the 1st day of March 2002, by the following2092persons in the capacities indicated.20932094Signature Title2095--------- -----20962097/s/ Howard Root Chief Executive Officer and Director2098- ----------------------------------- (PRINCIPAL EXECUTIVE OFFICER)2099Howard Root21002101/s/ James Butala Chief Financial Officer2102- ----------------------------------- (PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL2103James Butala ACCOUNTING OFFICER)21042105Director2106- -----------------------------------2107Paul O'Connell21082109/s/ Gerard Langeler Director2110- -----------------------------------2111Gerard Langeler21122113/s/ James Jacoby, Jr. Director2114- -----------------------------------2115James Jacoby, Jr.21162117/s/ Richard Nigon Director2118- -----------------------------------2119Richard Nigon21202121/s/ Michael Kopp Director2122- -----------------------------------2123Michael Kopp212421252126302127<PAGE>212821292130SCHEDULE II2131VALUATION AND QUALIFYING ACCOUNTS2132YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999213321342135<TABLE>2136<CAPTION>2137Additions2138Charged2139Balance at to Costs Balance at2140Beginning and Less End of2141Description of Year Expenses Deductions Year2142---------- ---------- ---------- ----------2143<S> <C> <C> <C> <C>2144YEAR ENDED DECEMBER 31, 2001:2145Sales return allowance ................ $ -- $ 401,733 $ 337,207 $ 64,5262146Allowance for doubtful accounts ....... 80,000 35,304 5,304 110,0002147---------- ---------- ---------- ----------2148Total ............................... $ 80,000 $ 437,037 $ 342,511 $ 174,5262149========== ========== ========== ==========21502151YEAR ENDED DECEMBER 31, 2000:2152Sales return allowance ................ -- -- -- --2153Allowance for doubtful accounts ....... -- 80,000 -- 80,0002154---------- ---------- ---------- ----------2155Total ............................... $ -- $ 80,000 -- $ 80,0002156========== ========== ========== ==========21572158YEAR ENDED DECEMBER 31, 1999:2159Sales return allowance ................ -- -- -- --2160Allowance for doubtful accounts ....... -- -- -- --2161---------- ---------- ---------- ----------2162Total ............................... $ -- $ -- $ -- $ --2163========== ========== ========== ==========2164</TABLE>216521662167312168<PAGE>216921702171REPORT OF INDEPENDENT AUDITORS21722173The Board of Directors and Shareholders2174Vascular Solutions, Inc.21752176We have audited the consolidated balance sheets of Vascular Solutions, Inc. as2177of December 31, 2001 and 2000, and the related statements of operations, changes2178in shareholders' equity and cash flows for each of the three years in the period2179ended December 31, 2001. These financial statements are the responsibility of2180the Company's management. Our responsibility is to express an opinion on these2181financial statements based on our audits.21822183We conducted our audits in accordance with auditing standards generally accepted2184in the United States. Those standards require that we plan and perform the audit2185to obtain reasonable assurance about whether the financial statements are free2186of material misstatement. An audit includes examining, on a test basis, evidence2187supporting the amounts and disclosures in the financial statements. An audit2188also includes assessing the accounting principles used and significant estimates2189made by management, as well as evaluating the overall financial statement2190presentation. We believe that our audits provide a reasonable basis for our2191opinion.21922193In our opinion, the financial statements referred to above present fairly, in2194all material respects, the financial position of Vascular Solutions, Inc. at2195December 31, 2001 and 2000, and the results of its operations and its cash flows2196for each of the three years in the period ended December 31, 2001 in conformity2197with accounting principles generally accepted in the United States.21982199/s/ Ernst & Young LLP22002201Minneapolis, Minnesota2202January 11, 2002220322042205322206<PAGE>220722082209VASCULAR SOLUTIONS, INC.22102211CONSOLIDATED BALANCE SHEETS22122213<TABLE>2214<CAPTION>2215DECEMBER 3122162001 20002217-----------------------------2218<S> <C> <C>2219ASSETS2220Current assets:2221Cash and cash equivalents $ 33,318,115 $ 44,097,5632222Accounts receivable, net of reserves of $174,526 and $80,0002223in 2001 and 2000, respectively 1,285,011 1,971,3832224Inventories 1,782,363 2,466,4452225Prepaid expenses 289,888 231,2512226-----------------------------2227Total current assets 36,675,377 48,766,64222282229Property and equipment, net 917,579 894,0942230-----------------------------2231Total assets $ 37,592,956 $ 49,660,7362232=============================22332234LIABILITIES AND SHAREHOLDERS' EQUITY2235Current liabilities:2236Accounts payable $ 876,891 $ 933,0592237Accrued compensation 923,705 1,344,9952238Accrued expenses 162,476 188,7922239-----------------------------2240Total current liabilities 1,963,072 2,466,84622412242Commitments and contingencies22432244Shareholders' equity:2245Common stock, $.01 par value:2246Authorized shares - 40,000,0002247Issued and outstanding shares - 13,327,002--2001;224813,116,008--2000 133,270 131,1602249Additional paid-in capital 70,712,174 69,965,2402250Other (100,834) (38,182)2251Accumulated deficit (35,114,726) (22,864,328)2252-----------------------------2253Total shareholders' equity 35,629,884 47,193,8902254-----------------------------2255Total liabilities and shareholders' equity $ 37,592,956 $ 49,660,7362256=============================2257</TABLE>22582259SEE ACCOMPANYING NOTES.226022612262332263<PAGE>226422652266VASCULAR SOLUTIONS, INC.22672268CONSOLIDATED STATEMENTS OF OPERATIONS22692270<TABLE>2271<CAPTION>2272YEAR ENDED DECEMBER 3122732001 2000 19992274----------------------------------------------2275<S> <C> <C> <C>2276Net sales $ 12,082,379 $ 6,193,234 $ 1,429,0942277Cost of goods sold 4,961,014 2,701,342 1,065,1992278----------------------------------------------2279Gross profit 7,121,365 3,491,892 363,89522802281Operating expenses:2282Research and development 4,287,726 3,265,536 3,067,8972283Clinical and regulatory 1,288,301 1,082,029 1,323,9722284Sales and marketing 12,771,901 6,699,722 2,301,6032285General and administrative 2,684,592 2,106,963 1,903,9462286----------------------------------------------2287Total operating expenses 21,032,520 13,154,250 8,597,4182288----------------------------------------------22892290Operating loss (13,911,155) (9,662,358) (8,233,523)2291Interest income 1,660,757 1,453,491 371,0662292----------------------------------------------22932294Net loss $(12,250,398) $ (8,208,867) $ (7,862,457)2295==============================================22962297Basic and diluted net loss per share $ (.93) $ (.95) $ (1.95)2298==============================================22992300Shares used in computing basic and diluted net2301loss per share 13,216,773 8,645,152 4,032,6162302==============================================2303</TABLE>23042305SEE ACCOMPANYING NOTES.230623072308342309<PAGE>23102311VASCULAR SOLUTIONS, INC.23122313CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY2314<TABLE>2315<CAPTION>2316SERIES A SERIES B2317PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL2318-------------------------------------------------------------------- PAID-IN2319SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL2320-----------------------------------------------------------------------------------2321<S> <C> <C> <C> <C> <C> <C> <C>2322Balance at December 31, 1998 2,000,000 $20,000 1,777,777 $17,778 3,699,617 $ 36,996 $17,264,0062323Exercise of stock options - - - - 1,550,674 15,507 8,144,0182324Value of options granted for services - - - - - - 22,6602325Value of warrant granted related to2326supply agreement - - - - - - 257,0002327Deferred compensation related to2328option grants - - - - - - 140,6252329Amortization of deferred compensation - - - - - - -2330Net loss - - - - - - -2331-----------------------------------------------------------------------------------2332Balance at December 31, 1999 2,000,000 20,000 1,777,777 17,778 5,250,291 52,503 25,828,3092333Exercise of stock options - - - - 62,940 629 169,7652334Sale of common stock with the initial2335public offering at $12.00 per share2336in July 2000, net of offering costs - - - - 4,025,000 40,250 43,932,4162337Conversion of preferred stock in2338connection with initial public (2,000,000) (20,000) (1,777,777) (17,778) 3,777,777 37,778 -2339offering2340Amortization of deferred compensation - - - - - - -2341Deferred compensation related to2342option grants - - - - - - 34,7502343Comprehensive loss:2344Net loss - - - - - - -2345Translation adjustment - - - - - - -23462347Total comprehensive loss2348-----------------------------------------------------------------------------------2349Balance at December 31, 2000 - - - - 13,116,008 131,160 69,965,2402350Exercise of stock options - - - - 120,800 1,208 304,0962351Issuance of common stock under the2352Employee Stock Purchase Plan - - - - 90,194 902 308,6602353Value of stock options granted for - - - - - - 10,3982354services2355Deferred compensation related to2356option grants - - - - - - 123,7802357Amortization of deferred compensation - - - - - - -2358Comprehensive loss:2359Net loss - - - - - - -2360Translation adjustment - - - - - - -23612362Total comprehensive loss2363-----------------------------------------------------------------------------------2364Balance at December 31, 2001 - $ - - $ - 13,327,002 $133,270 $70,712,1742365===================================================================================2366</TABLE>23672368[WIDE TABLE CONTINUED FROM ABOVE]23692370<TABLE>2371<CAPTION>2372ACCUMULATED2373OTHER DEFICIT TOTAL2374-----------------------------------------2375<S> <C> <C> <C>2376Balance at December 31, 1998 $ - $ (6,793,004) $10,545,7762377Exercise of stock options - - 8,159,5252378Value of options granted for services - - 22,6602379Value of warrant granted related to2380supply agreement - - 257,0002381Deferred compensation related to2382option grants (140,625) - -2383Amortization of deferred compensation 49,694 - 49,6942384Net loss - (7,862,457) (7,862,457)2385-----------------------------------------2386Balance at December 31, 1999 (90,931) (14,655,461) 11,172,1982387Exercise of stock options - - 170,3942388Sale of common stock with the initial2389public offering at $12.00 per share2390in July 2000, net of offering costs - - 43,972,6662391Conversion of preferred stock in2392connection with initial public - - -2393offering2394Amortization of deferred compensation 72,561 - 72,5612395Deferred compensation related to2396option grants (34,750) - -2397Comprehensive loss:2398Net loss - (8,208,867) (8,208,867)2399Translation adjustment 14,938 - 14,9382400-------------2401Total comprehensive loss (8,193,929)2402-----------------------------------------2403Balance at December 31, 2000 (38,182) (22,864,328) 47,193,8902404Exercise of stock options - - 305,3042405Issuance of common stock under the2406Employee Stock Purchase Plan - - 309,5622407Value of stock options granted for - - 10,3982408services2409Deferred compensation related to2410option grants (123,780) - -2411Amortization of deferred compensation 62,850 - 62,8502412Comprehensive loss:2413Net loss - (12,250,398) (12,250,398)2414Translation adjustment (1,722) - (1,722)2415-------------2416Total comprehensive loss (12,252,120)2417-----------------------------------------2418Balance at December 31, 2001 $(100,834) $ (35,114,726) $35,629,8842419=========================================2420</TABLE>24212422SEE ACCOMPANYING NOTES.24232424352425<PAGE>242624272428VASCULAR SOLUTIONS, INC.24292430CONSOLIDATED STATEMENTS OF CASH FLOWS24312432<TABLE>2433<CAPTION>2434YEAR ENDED DECEMBER 3124352001 2000 19992436----------------------------------------------2437<S> <C> <C> <C>2438OPERATING ACTIVITIES2439Net loss $(12,250,398) $ (8,208,867) $ (7,862,457)2440Adjustments to reconcile net loss to net cash used in2441operating activities:2442Depreciation 432,721 366,745 243,3182443Value of options granted for services 10,398 -- 22,6602444Value of warrant granted related to supply agreement -- -- 257,0002445Deferred compensation expense 62,850 72,561 49,6942446Changes in operating assets and liabilities:2447Accounts receivable 686,372 (1,592,304) (249,978)2448Inventories 684,082 (1,851,228) (293,758)2449Prepaid expenses (58,637) (138,074) (40,003)2450Accounts payable (56,168) (84,509) 745,8992451Accrued compensation and expenses (447,606) 1,431,288 (84,069)2452----------------------------------------------2453Net cash used in operating activities (10,936,386) (10,004,388) (7,211,694)24542455INVESTING ACTIVITIES2456Purchase of property and equipment (456,206) (575,887) (315,693)2457----------------------------------------------2458Net cash used in investing activities (456,206) (575,887) (315,693)24592460FINANCING ACTIVITIES2461Proceeds from exercise of stock options 305,304 170,394 8,159,5252462Net proceeds from sale of common stock 309,562 43,972,666 --2463Net proceeds from sale of preferred stock -- -- --2464----------------------------------------------2465Net cash provided by financing activities 614,866 44,143,060 8,159,52524662467Effect of exchange rate changes on cash and cash equivalents (1,722) 5,587 --2468----------------------------------------------2469(Decrease) increase in cash and cash equivalents (10,779,448) 33,568,372 632,1382470Cash and cash equivalents at beginning of year 44,097,563 10,529,191 9,897,0532471----------------------------------------------2472Cash and cash equivalents at end of year $ 33,318,115 $ 44,097,563 $ 10,529,1912473==============================================2474</TABLE>24752476SEE ACCOMPANYING NOTES.247724782479362480<PAGE>248124822483VASCULAR SOLUTIONS, INC.24842485NOTES TO CONSOLIDATED FINANCIAL STATEMENTS24862487DECEMBER 31, 20012488248924901. DESCRIPTION OF BUSINESS24912492Vascular Solutions, Inc. (the Company) manufactures, markets and sells the2493Vascular Solutions Duett(TM) sealing device, which enables cardiologists and2494radiologists to rapidly seal the puncture site following catheterization2495procedures such as angiography, angioplasty and stenting. The Company was2496incorporated in December 1996 and began operations in February 1997.249724982. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES24992500BASIS OF CONSOLIDATION25012502The consolidated financial statements include the accounts of Vascular2503Solutions, Inc. and its wholly owned subsidiary, Vascular Solutions GmbH, after2504elimination of intercompany accounts and transactions.25052506FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS25072508Foreign assets and liabilities are translated using the year-end exchange rates.2509Results of operations are translated using the average exchange rates throughout2510the year. Translation gains or losses are accumulated as a separate component of2511shareholders' equity.25122513COMPREHENSIVE LOSS25142515The components of comprehensive loss are net loss and the effects of foreign2516currency translation adjustments.25172518USE OF ESTIMATES25192520The preparation of financial statements in conformity with accounting principles2521generally accepted in the United States requires management to make estimates2522and assumptions that affect the amounts reported in the financial statements and2523accompanying notes. Actual results could differ from those estimates.25242525CASH AND CASH EQUIVALENTS25262527The Company considers all highly liquid investments with a remaining maturity of2528three months or less to be cash equivalents. Cash equivalents consist of money2529market funds and are carried at cost which approximates market.253025312532372533<PAGE>253425352536VASCULAR SOLUTIONS, INC.25372538NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)2539254025412. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)25422543INVENTORIES25442545Inventories are stated at the lower of cost (first-in, first-out method) or2546market and are comprised of the following at December 31:254725482001 20002549-----------------------------25502551Raw materials $1,294,507 $1,746,2792552Work in process 305,527 371,1762553Finished goods 182,329 348,9902554-----------------------------2555$1,782,363 $2,466,4452556=============================25572558PROPERTY AND EQUIPMENT25592560Property and equipment are stated at cost. Depreciation is provided on a2561straight-line basis over the estimated useful lives of the assets as follows:25622563Manufacturing equipment 3 to 5 years2564Office and computer equipment 3 years2565Furniture and fixtures 2 to 5 years2566Leasehold improvements Remaining term of the lease2567Research and development equipment 3 to 5 years25682569IMPAIRMENT OF LONG-LIVED ASSETS25702571The Company will record impairment losses on long-lived assets used in2572operations when indicators of impairment are present and the undiscounted cash2573flows estimated to be generated by those assets are less than the assets'2574carrying amount. The amount of impairment loss recorded will be measured as the2575amount by which the carrying value of the assets exceeds the fair value of the2576assets.25772578REVENUE RECOGNITION25792580In the United States and Germany, the Company sells its products directly to2581hospitals and clinics. Revenue is recognized upon shipment of products to2582customers.258325842585382586<PAGE>258725882589VASCULAR SOLUTIONS, INC.25902591NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)2592259325942. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)25952596In all other international markets, the Company sells its products to2597international distributors which subsequently resell the products to hospitals2598and clinics. The Company has agreements with each of its distributors which2599provide that title and risk of loss pass to the distributor upon shipment of the2600products to the distributor. The Company warrants that its products are free2601from manufacturing defects at the time of shipment to the distributor. Revenue2602is recognized upon shipment of products to distributors following the receipt2603and acceptance of a distributor's purchase order. Allowances are provided for2604estimated warranty costs at the time of shipment. To date, warranty costs have2605been insignificant.26062607RESEARCH AND DEVELOPMENT COSTS26082609All research and development costs are charged to operations as incurred.26102611STOCK-BASED COMPENSATION26122613The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING FOR2614STOCK ISSUED TO EMPLOYEES (APB 25), and related interpretations in accounting2615for its stock options. Under APB 25, when the exercise price of stock options2616equals, or exceeds, the market price of the underlying stock on the date of2617grant, no compensation expense is recognized.26182619The Company determines the fair value of stock options granted to non-employees2620for services using the Black-Scholes valuation method. The fair value of the2621stock options granted is expensed over the time period the services are2622rendered.26232624INCOME TAXES26252626Income taxes are accounted for under the liability method. Deferred income taxes2627are provided for temporary differences between the financial reporting and the2628tax bases of assets and liabilities.26292630CONCENTRATIONS OF CREDIT RISK26312632Financial instruments that potentially subject the Company to concentrations of2633credit risk consist primarily of cash and cash equivalents and accounts2634receivable. The Company maintains its accounts for cash and cash equivalents2635principally at one major bank and two investment firms in the United States. The2636Company has a formal written investment policy that restricts the placement of2637investments to issuers evaluated as creditworthy. The Company has not2638experienced any losses on its deposits of its cash and cash equivalents.263926402641392642<PAGE>264326442645VASCULAR SOLUTIONS, INC.26462647NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)2648264926502. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)26512652With respect to accounts receivable, the Company performs credit evaluations of2653its customers and does not require collateral. Two customers accounted for 11%2654and 23% of gross accounts receivable as of December 31, 2001 and 2000. There2655have been no material losses on customer receivables.26562657NET LOSS PER SHARE26582659In accordance with Statement of Financial Accounting Standards No. 128, EARNINGS2660PER SHARE, (SFAS 128), basic net loss per share is computed by dividing net loss2661by the weighted average common shares outstanding during the periods presented.2662Diluted net loss per share is computed by dividing net loss by the weighted2663average common and dilutive potential common shares outstanding computed in2664accordance with the treasury stock method. For all periods presented, diluted2665loss per share is the same as basic loss per share, because the effect of2666outstanding options, warrants and convertible preferred stock is antidilutive.26672668RECLASSIFICATIONS26692670Certain prior year balances were reclassified to conform to the current year2671presentation.267226733. PROPERTY AND EQUIPMENT26742675Property and equipment consists of the following at December 31:267626772001 20002678------------------------------26792680Property and equipment:2681Manufacturing equipment $ 773,989 $ 713,0542682Office and computer equipment 734,146 555,8282683Furniture and fixtures 221,347 216,9832684Leasehold improvements 143,079 105,8692685Research and development equipment 254,906 79,5272686------------------------------26872,127,467 1,671,2612688Less accumulated depreciation (1,209,888) (777,167)2689------------------------------2690Net property and equipment $ 917,579 $ 894,0942691==============================269226932694402695<PAGE>269626972698VASCULAR SOLUTIONS, INC.26992700NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)2701270227034. LEASES27042705The Company leases a 29,000-square-foot office and manufacturing facility under2706an operating lease agreement, which expires in March 2003. The Company may2707terminate the lease agreement at six-month intervals after December 2001 with a2708six-month written notice to the lessor. Rent expense related to the operating2709leases was approximately $306,600, $242,100 and $167,900 for the years ended2710December 31, 2001, 2000 and 1999.27112712Future minimum lease commitments under the existing operating lease as of2713December 31, 2001 are as follows:271427152002 $315,00627162003 75,7522717----------2718$390,7582719==========272027215. INCOME TAXES27222723At December 31, 2001, the Company had net operating loss carryforwards of2724approximately $32,600,000 for federal income tax purposes that are available to2725offset future taxable income and begin to expire in the year 2013. At December272631, 2001, the Company also had federal and Minnesota research and development2727tax credit carryforwards of approximately $1,317,000 which begin to expire in2728the year 2013. No benefit has been recorded for such carryforwards, and2729utilization in future years may be limited under Sections 382 and 383 of the2730Internal Revenue Code if significant ownership changes have occurred.273127322733412734<PAGE>273527362737VASCULAR SOLUTIONS, INC.27382739NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)2740274127425. INCOME TAXES (CONTINUED)27432744The components of the Company's deferred tax assets and liabilities as of2745December 31, 2001 and 2000 are as follows:274627472001 20002748-------------------------------2749Deferred tax assets:2750Net operating loss carryforwards $ 12,852,000 $ 8,154,0002751Tax credit carryforwards 1,317,000 1,084,0002752Depreciation and amortization 156,000 198,0002753Accrued compensation 245,000 209,0002754Other allowances 78,000 88,0002755-------------------------------275614,648,000 9,733,0002757Less valuation allowances (14,648,000) (9,733,000)2758-------------------------------2759Net deferred taxes $ -- $ --2760===============================276127622763Reconciliation of the statutory federal income tax rate to the Company's2764effective tax rate is as follows:276527662001 2000 19992767-----------------------------27682769Tax at statutory rate 34.0% 34.0% 34.0%2770State income taxes 6.0 6.0 6.02771Impact of net operating loss carryforward (40.0) (40.0) (40.0)2772-----------------------------2773Effective income tax rate --% --% --%2774=============================277527766. INITIAL PUBLIC OFFERING27772778On July 25, 2000, the Company completed the initial public offering of its2779common stock. Upon the closing of the initial public offering, the Company2780issued 3,500,000 shares of its common stock at an offering price of $12.00 per2781share and all of the Company's Series A and Series B preferred stock2782automatically converted into 3,777,777 shares of common stock. On August 15,27832000, the underwriters exercised in full their over-allotment option to purchase2784an additional 525,000 shares of common stock at $12.00 per share. Cash proceeds2785from the sale of the 4,025,000 shares of common stock, net of underwriters'2786discount and offering expenses, totaled approximately $44 million. Upon closing2787of the Company's initial public offering, the authorized capital stock of the2788Company consisted of 40,000,000 shares of common stock, par value $.01 per2789share, with no shares of preferred stock outstanding or designated.279027912792422793<PAGE>279427952796VASCULAR SOLUTIONS, INC.27972798NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)2799280028017. CAPITAL STOCK28022803In connection with the sale of Series B preferred stock, the Company entered2804into a Put and Option Agreement (the Agreement) with one of the Series B2805investors (the Investor). The Agreement provided the Company with the right to2806sell, and the Investor the obligation to purchase, up to $3,000,000 of common2807stock at $5.00 or $6.00 per share based on the Company attaining certain2808milestones. The Company exercised its right and sold 600,000 shares of common2809stock to the Investor at $5.00 per share on June 30, 1999. In addition, the2810Agreement provided the Investor with the right to buy, and the Company the2811obligation to sell, up to $3,000,000 of common stock at $5.00 or $6.00 per share2812based on the Company attaining certain milestones. The Investor exercised its2813right and purchased 600,000 shares of common stock from the Company at $5.00 per2814share on December 28, 1999.28152816Furthermore, the Agreement provided an affiliate of the Investor with the right2817to buy, and the Company with the obligation to sell, up to $2,000,000 of common2818stock at $7.00 or $8.00 per share based on the Company attaining certain2819milestones. The affiliate of the Investor exercised its right and purchased2820285,714 shares of common stock from the Company at $7.00 per share on December282128, 1999.28222823On June 10, 1999, the Company issued a warrant to purchase 100,000 shares of2824common stock at $5.00 per share to a supplier in connection with entering into a2825five-year supply agreement. The warrant is exercisable at any time and expires2826on June 10, 2004. Using the Black-Scholes valuation model, the Company2827determined a fair value of $257,000 for the warrant and expensed this amount2828during the year ended December 31, 1999. The amount was classified as research2829and development expense because it related to product development activities.28302831As of December 31, 2001, the Company had 268,000 warrants outstanding at a2832weighted average exercise price of $3.19 per share.283328348. STOCK OPTIONS28352836STOCK OPTION PLAN28372838The Company has a stock option and stock award plan (the Stock Option Plan)2839which provides for the granting of incentive stock options to employees and2840nonqualified stock options to employees, directors and consultants. As of2841December 31, 2001, the Company reserved 1,900,000 shares of common stock under2842the Stock Option Plan. Under the Stock Option Plan, incentive stock options must2843be granted at an exercise price not less than the fair market value of the2844Company's common stock on the grant date. The exercise price of a non-qualified2845option granted under the Stock Option Plan must not be less than 50% of the fair2846market value of the Company's common stock on the grant date. Prior to the2847initial public offering in July 2000, the Board of Directors determined the fair2848value of the common shares underlying options by assessing the business progress2849of the Company as well as the market conditions for medical285028512852432853<PAGE>285428552856VASCULAR SOLUTIONS, INC.28572858NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)2859286028618. STOCK OPTIONS (CONTINUED)28622863device companies and other external factors. The options expire on the date2864determined by the Board of Directors but may not extend more than ten years from2865the grant date. The Stock Option Plan also permits the granting of stock2866appreciation rights, restricted stock and other stock-based awards. The2867incentive stock options generally become exercisable over a four-year period and2868the non-qualified stock options generally become exercisable over a two-year2869period. Unexercised options are canceled upon termination of employment and2870become available under the Stock Option Plan.28712872Option activity is summarized as follows:28732874<TABLE>2875<CAPTION>2876WEIGHTED2877SHARES AVERAGE2878AVAILABLE PLAN OPTIONS EXERCISE EXERCISE2879FOR GRANT OUTSTANDING PRICE PRICE2880-----------------------------------------------------------2881<S> <C> <C> <C> <C> <C>2882Balance at December 31, 1998 340,169 533,131 $ 1.50 - $ 3.25 $ 2.342883Shares reserved 500,000 -- -- --2884Granted (587,000) 587,000 3.25 - 6.00 5.082885Exercised -- (64,960) 2.00 - 3.25 2.462886Canceled 121,560 (121,560) 2.00 - 3.25 2.752887----------------------------2888Balance at December 31, 1999 374,729 933,611 1.50 - 6.00 4.002889Granted (290,250) 290,250 6.00 - 6.50 11.122890Exercised -- (62,940) 1.50 - 5.00 2.712891Canceled 90,150 (90,150) 1.50 - 16.50 4.892892----------------------------2893Balance at December 31, 2000 174,629 1,070,771 1.50 - 16.50 5.852894Shares reserved 500,000 -- -- --2895Granted (972,000) 972,000 2.51 - 7.48 5.352896Exercised -- (120,800) 1.50 - 7.00 2.532897Canceled 347,160 (347,160) 1.50 - 16.50 7.412898----------------------------2899Balance at December 31, 2001 49,789 1,574,8112900============================2901</TABLE>290229032904442905<PAGE>290629072908VASCULAR SOLUTIONS, INC.29092910NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)2911291229138. STOCK OPTIONS (CONTINUED)29142915The following table summarizes information about stock options outstanding at2916December 31, 2001:29172918<TABLE>2919<CAPTION>2920OPTIONS OUTSTANDING OPTIONS EXERCISABLE2921--------------------------------------------- -------------------------------2922WEIGHTED2923OUTSTANDING AVERAGE EXERCISABLE2924AS OF REMAINING WEIGHTED AS OF WEIGHTED2925RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE2926EXERCISE PRICES 2001 LIFE EXERCISE PRICE 2001 EXERCISE PRICE2927- ---------------------------------------------------------------------- -------------------------------2928<S> <C> <C> <C> <C> <C>2929$ 0.00 - $ 1.65 101,211 5.4 $ 1.50 101,211 $ 1.5029301.66 - 3.30 523,810 8.4 2.71 157,810 2.9629314.96 - 6.60 526,620 8.4 6.20 172,000 6.0929326.61 - 8.25 291,860 8.7 7.28 85,150 7.1929339.91 - 11.55 19,480 7.9 10.00 11,650 10.00293411.56 - 13.20 92,880 8.2 12.00 37,700 12.00293514.86 - 16.50 18,950 8.5 16.50 6,370 16.502936------------- ------------29371,574,811 8.2 5.45 571,891 5.162938============= ============2939</TABLE>29402941STOCK-BASED COMPENSATION29422943The Company accounts for stock options under APB 25, under which no compensation2944cost has been recognized. Had compensation cost for these options been2945determined consistent with Statement of Financial Accounting Standards No. 123,2946ACCOUNTING FOR STOCK-BASED COMPENSATION (FASB 123), the net loss and net loss2947per common share would have been increased to the following pro forma amounts2948for the years ended December 31, 2001, 2000 and 1999:29492950<TABLE>2951<CAPTION>29522001 2000 19992953-------------------------------------------2954<S> <C> <C> <C>2955Net loss:2956As reported $(12,250,398) $ (8,208,867) $(7,862,457)2957Pro forma (14,882,091) (10,361,727) (8,169,981)29582959Basic and diluted net loss per share:2960As reported $ (.93) $ (.95) $(1.95)2961Pro forma (1.21) (1.20) (2.03)2962</TABLE>29632964For purposes of calculating the above required disclosure, the fair value of2965each option grant is estimated on the date of grant using the Black-Scholes2966option pricing model.296729682969452970<PAGE>297129722973VASCULAR SOLUTIONS, INC.29742975NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)2976297729788. STOCK OPTIONS (CONTINUED)29792980The fair value of the Company's stock options was estimated assuming no expected2981dividends and the following weighted average assumptions:298229832001 2000 19992984------------------------------------29852986Expected life (years) 7.0 7.5 7.02987Expected volatility 1.21 .93 .672988Risk-free interest rate 2.76% 5.96% 4.90%29892990The weighted average fair value of options granted with an exercise price equal2991to the deemed stock price on the date of grant during 2001, 2000 and 1999 was2992$5.31, $9.79 and $3.82.29932994For the years ended December 31, 2001, 2000 and 1999, the Company recorded2995compensation expense of $10,398, zero and $22,660 in connection with2996non-qualified stock options granted to Board of Directors members, medical2997advisory board members and outside consultants, respectively.29982999DEFERRED COMPENSATION30003001In 2001, 2000 and 1999, the Company recorded a total of $299,155 of deferred3002compensation for certain stock options granted for the excess of the deemed3003value for accounting purposes of the common stock issuable upon exercise of such3004options over the aggregate exercise price of such options. The weighted average3005fair value of these options was $2.93. Deferred compensation recorded is3006amortized ratably over the period that the options vest and is adjusted for3007options which have been canceled. Deferred compensation expense was $62,850,3008$72,561 and $49,694 for the years ended December 31, 2001, 2000 and 1999,3009respectively.301030119. EMPLOYEE RETIREMENT SAVINGS PLAN30123013The Company has an employee 401(k) retirement savings plan (the Plan). The Plan3014provides eligible employees with an opportunity to make tax-deferred3015contributions into a long-term investment and savings program. All employees3016over the age of 21 are eligible to participate in the Plan beginning with the3017first quarterly open enrollment date following start of employment. The Plan3018allows eligible employees to contribute up to 18% of their annual compensation,3019subject to a maximum limit determined by the Internal Revenue Service, with the3020Company contributing an amount equal to 25% of the first 5% contributed to the3021Plan. The Company recorded an expense of $112,084, $52,357 and $21,573 for3022contributions to the Plan for the years ended December 31, 2001, 2000 and 1999.302330243025463026<PAGE>302730283029VASCULAR SOLUTIONS, INC.30303031NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)30323033303410. CONCENTRATIONS OF CREDIT AND OTHER RISKS30353036In the United States and Germany, the Company sells its products directly to3037hospitals and clinics. In all other international markets, the Company sells its3038products to distributors who, in turn, sell to medical clinics. Loss,3039termination or ineffectiveness of distributors to effectively promote the3040Company's product could have a material adverse effect on the Company's3041financial condition and results of operations.30423043Sales to significant customers as a percentage of total revenues are as follows3044for the years ended December 31, 2001, 2000 and 1999:304530462001 2000 19993047------------------------------------30483049Customer A 2.6% 10.7% 19.7%3050Customer B 2.3 6.3 28.83051Customer C 2.0 5.4 11.83052Customer D 1.8 2.2 5.830533054The Company performs ongoing credit evaluations of its customers but does not3055require collateral. There have been no material losses on customer receivables.30563057Sales by geographic destination as a percentage of total net sales were as3058follows for the years ended December 31:305930602001 2000 19993061------------------------------------30623063Domestic 90% 67% 7%3064Foreign 10 33 933065306611. DEPENDENCE ON KEY SUPPLIERS30673068The Company purchases certain key components from single source suppliers. Any3069significant component delay or interruption could require the Company to qualify3070new sources of supply, if available, and could have a material adverse effect on3071the Company's financial condition and results of operations.307230733074473075<PAGE>307630773078VASCULAR SOLUTIONS, INC.30793080NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)30813082308312. COMMITMENTS AND CONTINGENCIES30843085In July 1999, the Company was named as a defendant in a patent infringement3086lawsuit brought by Datascope Corporation, a competitor, in the United States3087District Court of the District of Minnesota. The complaint requested a judgment3088that the Company's device infringes and, following FDA approval will infringe, a3089United States patent held by Datascope and asks for relief in the form of an3090injunction that would prevent the Company from selling its product in the United3091States as well as an award of attorney's fees, costs and disbursements. On3092August 12, 1999, the Company filed its answer to this lawsuit and brought a3093counterclaim alleging unfair competition and tortious interference against3094Datascope. On August 20, 1999, the Company moved for summary judgment to dismiss3095Datascope's claims. On March 15, 2000, the court granted summary judgment3096dismissing all of Datascope's claims, subject to the right of Datascope to3097recommence the litigation after the Company's receipt of FDA approval of the3098Duett sealing device. On July 12, 2000, after the Company received FDA approval,3099Datascope recommenced this litigation, alleging that the Duett sealing device3100infringes a United States patent held by Datascope and requesting relief in the3101form of an injunction that would prevent the Company from selling its product in3102the United States, damages caused by the alleged infringement, and other costs,3103disbursements and attorneys' fees. The Company believes the allegations included3104in the complaint are without merit, has filed its answer to the complaint and3105intends to defend the lawsuit vigorously. It is not possible to predict the3106timing or outcome of the Datascope litigation, including whether the Company3107will be prohibited from selling the Duett sealing device in the United States or3108internationally, or to estimate the amount or range of potential loss, if any.31093110On July 3, 2000, the Company was named as the defendant in a patent infringement3111lawsuit brought by the Daig division of St. Jude Medical, Inc., a competitor, in3112the United States District Court of the District of Minnesota. The complaint3113requests a judgment that the Company's Duett sealing device infringes a series3114of four patents held by St. Jude Medical and asks for relief in the form of an3115injunction that would prevent the Company from selling its product in the United3116States, damages caused by the manufacture and sale of the Company's product, and3117other costs, disbursements and attorneys' fees.31183119On July 12, 2001, the Company entered into an agreement that settled all3120existing intellectual property litigation with St. Jude Medical, Inc. Under the3121terms of the settlement agreement, the Company agreed to pay a royalty of 2.5%3122of net sales of our Duett sealing device to St. Jude Medical, up to a maximum3123amount over the remaining life of the St. Jude Medical Fowler patents. In3124exchange, St. Jude Medical granted to the Company a non-exclusive license to its3125Fowler patents and has released it from any claim of patent infringement based3126on sales of the Duett sealing device. The Company granted a non-exclusive3127cross-license to its Gershony patents to St. Jude Medical, subject to a similar3128royalty payment if St. Jude Medical utilizes the Gershony patents in any future3129device. Beginning on July 1, 2001, a royalty expense of 2.5% of net sales is3130included in the Company's cost of goods sold until the maximum royalty is3131attained.313231333134483135<PAGE>313631373138VASCULAR SOLUTIONS, INC.31393140NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)31413142314313. QUARTERLY FINANCIAL DATA (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)31443145<TABLE>3146<CAPTION>3147FIRST SECOND THIRD FOURTH31482001 QUARTER QUARTER QUARTER QUARTER3149- -------------------------------------------------------------------------------------------3150<S> <C> <C> <C> <C>3151Net sales $ 3,123 $ 3,540 $ 2,529 $ 2,8903152Operating loss (2,988) (3,263) (3,891) (3,769)3153Net loss (2,345) (2,824) (3,521) (3,560)3154Basic and diluted net loss3155per share $ (.18) $ (.21) $ (.27) $ (.27)31563157315820003159- -------------------------------31603161Net sales $ 643 $ 708 $ 2,037 $ 2,8053162Operating loss (2,052) (2,912) (2,630) (2,068)3163Net loss (1,931) (2,819) (2,100) (1,359)3164Basic and diluted net loss3165per share $ (.37) $ (.53) $ (.19) $ (.10)3166</TABLE>3167316831694931703171</TEXT>3172</DOCUMENT>3173<DOCUMENT>3174<TYPE>EX-23.13175<SEQUENCE>33176<FILENAME>vascular021172_ex23-1.txt3177<DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS3178<TEXT>3179EXHIBIT 23.1318031813182Consent of Independent Auditors318331843185We consent to the incorporation by reference in the Registration Statement (Form3186S-8 No. 333-54164) of our report dated January 11, 2002, with respect to the3187consolidated financial statements of Vascular Solutions, Inc. included in the3188Annual Report (Form 10-K) for the year ended December 31, 2001.31893190Our audits also included the financial statement schedule of Vascular Solutions,3191Inc. listed in Item 14(a). This schedule is the responsibility of the Company's3192management. Our responsibility is to express an opinion based on our audits. In3193our opinion, the financial statement schedule referred to above, when considered3194in relation to the basic financial statements taken as a whole, presents fairly3195in all material respects the information set forth therein.31963197/s/ Ernst & Young LLP31983199Minneapolis, Minnesota3200March 4, 200232013202</TEXT>3203</DOCUMENT>3204</SEC-DOCUMENT>3205-----END PRIVACY-ENHANCED MESSAGE-----320632073208