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,7ABr9mN8EYBZ16d26FUrhKS6DRwJ/lDnJvKxg2LkWdHT2r277Ggz/xvBd2qDlUe5S8r78zi6vTlS2/+lWba3uIVw==910<SEC-DOCUMENT>0000897101-03-000164.txt : 2003022811<SEC-HEADER>0000897101-03-000164.hdr.sgml : 2003022812<ACCEPTANCE-DATETIME>2003022808171113ACCESSION NUMBER: 0000897101-03-00016414CONFORMED SUBMISSION TYPE: 10-K15PUBLIC DOCUMENT COUNT: 516CONFORMED PERIOD OF REPORT: 2002123117FILED AS OF DATE: 200302281819FILER:2021COMPANY DATA:22COMPANY CONFORMED NAME: VASCULAR SOLUTIONS INC23CENTRAL INDEX KEY: 000103020624STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841]25IRS NUMBER: 41185967926STATE OF INCORPORATION: DE27FISCAL YEAR END: 12312829FILING VALUES:30FORM TYPE: 10-K31SEC ACT: 1934 Act32SEC FILE NUMBER: 000-2760533FILM NUMBER: 035845363435BUSINESS ADDRESS:36STREET 1: 2495 XENIUM LANE NORTH37CITY: MINNEAPOLIS38STATE: MN39ZIP: 5544140BUSINESS PHONE: 61255329704142MAIL ADDRESS:43STREET 1: 2495 XENIUM LANE NORTH44CITY: MINNEAPOLIS45STATE: MN46ZIP: 5544147</SEC-HEADER>48<DOCUMENT>49<TYPE>10-K50<SEQUENCE>151<FILENAME>vasc030918_10k.txt52<DESCRIPTION>VASCULAR SOLUTIONS, INC. FORM 10-K 12-31-0253<TEXT>54================================================================================5556UNITED STATES57SECURITIES AND EXCHANGE COMMISSION58WASHINGTON, D.C. 205495960FORM 10-K (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, 20026667OR6869[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES70EXCHANGE ACT OF 193471FOR THE TRANSITION PERIOD FROM _______ TO ________7273Commission File Number: 0-2760574-------------------------------------7576VASCULAR SOLUTIONS, INC.77(Exact name of registrant as specified in its charter)7879MINNESOTA 41-185967980(State of Incorporation) (IRS Employer Identification No.)81826464 SYCAMORE COURT83MINNEAPOLIS, MINNESOTA 5536984(Address of Principal Executive Offices)8586(763) 656-430087(Registrant's telephone number, including are code)8889Securities registered pursuant to Section 12(b) of the Act: NONE90Securities registered pursuant to Section 12(g) of the Act:91COMMON STOCK, PAR VALUE $.01 PER SHARE9293-------------------------------------9495Indicate by check mark whether the registrant (1) has filed all reports required96to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during97the preceding 12 months (or for such shorter period that the registrant was98required to file such reports), and (2) has been subject to such filing99requirements for the past 90 days. Yes [X] No [ ]100101Indicate by check mark if disclosure of delinquent filers pursuant to Item 405102of Regulation S-K is not contained herein, and will not be contained, to the103best of registrant's knowledge, in definitive proxy or information statements104incorporated by reference in Part III of this Form 10-K or any amendment to this105Form 10-K. [X]106107The aggregate market value of voting and non-voting common equity held by108non-affiliates computed by reference to the price at which the common equity was109last sold on February 15, 2003 was $8,321,000.110111Indicate by check mark whether the registrant is an accelerated filer (as112defined in Rule 12b-2 of the Act). Yes [ ] No [X]113114As of February 15, 2003, the number of shares outstanding of the registrant's115common stock was 12,850,239.116117DOCUMENTS INCORPORATED BY REFERENCE118119Portions of the Registrant's Proxy Statement for its 2003 Annual Meeting of120Shareholders to be held on April 15, 2003 are incorporated by reference in Part121III of this Annual Report on Form 10-K.122123================================================================================124<PAGE>125126127PART I128129ITEM 1. BUSINESS130131OVERVIEW132133We are a medical device company focused on bringing clinically advanced134solutions to interventional cardiologists and interventional radiologists135worldwide. Our current product line includes the Duett(TM) sealing device, the136D-Stat(TM) flowable hemostat and the Acolysis(R) therapeutic ultrasound system.137As a vertically-integrated medical device company, we generate ideas and create138new interventional medical devices, and then deliver these products directly to139the physician through our direct domestic sales force and international140distribution network.141142Our principal product, the Duett sealing device, is designed to provide a143complete seal of the puncture site following catheterization procedures such as144angiography, angioplasty and stenting. Our Duett sealing device combines an145easy-to-use balloon catheter delivery mechanism with a biological procoagulant146mixture, which we believe offers advantages over both manual compression and147competitive vascular sealing devices. We began selling our Duett sealing device148in Europe in February 1998 and in the United States in June 2000. Over 150,000149Duett sealing devices have been sold and deployed worldwide, and we achieved150over $10 million in net sales of the Duett sealing device in its first year on151the United States market. In the fourth quarter of 2001 we introduced the152Diagnostic Duett version of the Duett sealing device, which utilizes a lower153dose of progcoagulant for the less-challenging diagnostic subset of154catheterization procedures. In mid-2002 we introduced the next generation "Pro"155line of the Duett sealing device for improved ease-of-use, and we are currently156working on future generations of the Duett product line.157158The second product we have developed and commercialized is the D-Stat159flowable hemostat, which we began selling worldwide in February 2002. The D-Stat160utilizes the clinically proven procoagulant components of the Duett sealing161device to provide a powerful stop to active bleeding. The thick, yet flowable162procoagulant controls active bleeding by initiating the body's own clotting163mechanisms in the same manner as the Duett procoagulant. The D-Stat has clinical164use in a multitude of interventional procedures, and substantial extension165market opportunities in other medical practice areas.166167During the second quarter of 2002 we acquired the Acolysis ultrasound168thrombolysis system. The Acolysis system uses ultrasound energy generated by the169controller that is delivered intravascularly by the disposable probe to lyse170blood clots and plaque. The Acolysis system is sold only in international171markets, where it has been sold principally for the treatment of peripheral172vascular disease. Upon completion of our acquisition and integration, we173commenced active international sales of the Acolysis probes through our existing174international distribution network in late 2002.175176We are developing several additional products that leverage our existing177infrastructure to bring additional solutions to the interventional cardiologist178and radiologist. Additional interventional medical devices that we expect to179gain regulatory clearance and market launch in the second half of 2003 include180the D-Stat Dry hemostatic bandage, the D-Stat Radial hemostat band, the Pronto181extraction catheter and a minimally invasive varicose vein treatment device.182183INTERVENTIONAL CARDIOLOGY AND INTERVENTIONAL RADIOLOGY INDUSTRY BACKGROUND184185Over 60 million Americans have one or more types of cardiovascular186disease--diseases of the heart and blood vessels. Cardiovascular disease is the187number one cause of death in the United States and is replacing infectious188disease as the world's pre-eminent health risk. Peripheral vascular disease189affects over 8 million people1901911921193<PAGE>194195196worldwide. Advances in medicine have enabled physicians to perform an increasing197number of diagnostic and therapeutic treatments of cardiovascular disease using198minimally invasive methods, such as catheters placed inside the arteries,199instead of highly invasive open surgery. Cardiologists and radiologists use200diagnostic procedures, such as angiography, to confirm, and interventional201procedures, such as angioplasty and stenting, to treat, diseases of the coronary202and peripheral arteries. Based on industry statistics, we estimate that203cardiologists and radiologists performed over 9 million diagnostic and204interventional catheterization procedures worldwide in 2002. The number of205catheterization procedures performed is expected to grow by more than 5% each206year for the next three years as the incidence of cardiovascular disease207continues to increase. The overall interventional medical device market in 2002208exceeded $5 billion worldwide.209210Each procedure using a catheter requires a puncture in an artery, usually211the femoral artery in the groin area and sometimes the radial artery in the212wrist of the patient to gain access for the catheter. The catheter then is213deployed through an introducer sheath and into the vessel to be diagnosed or214treated. Upon completion of the procedure and removal of the catheter, the215physician must seal this puncture in the artery and the tissue tract that leads216from the skin surface to the artery to stop bleeding. The traditional method for217sealing the puncture site has been a manual process whereby a healthcare218professional applies direct pressure to the puncture site, sometimes using a219sand bag or a large C-clamp, for 20 minutes to an hour in order to form a blood220clot. The healthcare professional then monitors the patient, who must remain221immobile in order to prevent dislodging of the clot, for an additional four to22248 hours.223224Patients subjected to manual compression generally experience significant225pain and discomfort during compression of the puncture site and during the226period in which they are required to be immobile. Many patients report that this227pain is the most uncomfortable aspect of the catheterization procedure. In228addition, patients usually develop a substantial coagulated mass of blood, or229hemotoma, around the puncture site, limiting patient mobility for up to six230weeks following the procedure. Finally, the need for healthcare personnel to231provide compression and the use of hospital beds during the recovery period232results in substantial costs to the institution which, under virtually all233current healthcare payment systems, are not separately reimbursed.234235Until 1996, manual compression was used following virtually all236catheterization procedures. In late 1995, the first vascular sealing device237which did not rely on compression was introduced in the United States. In238addition to the Duett sealing device, four devices have received FDA approval239and are currently being marketed around the world. In aggregate, approximately240$320 million of the four FDA-approved devices were sold worldwide in 2002241compared to less than $20 million in 1996. Based on the number of242catheterization procedures performed annually by cardiologists and radiologists,243industry sources report that the total market opportunity for vascular sealing244devices is more than $1 billion. Accordingly, the market opportunity for245vascular sealing devices is less than 20% penetrated.246247THE VASCULAR SOLUTIONS DUETT SEALING DEVICE248249We believe our Duett sealing device (1) offers a complete seal of the250puncture site with nothing left behind in the artery, (2) is an easy-to-use251system and (3) minimizes patient discomfort and permits early ambulation. Our252product uses a balloon catheter, a device already familiar to cardiologists and253radiologists, which is inserted through the introducer sheath that is already in254the patient. The inflated balloon serves as a temporary mechanical seal,255preventing the flow of blood from the artery. Our biological procoagulant, which256is a proprietary mixture of collagen, thrombin and diluent, is then delivered to257the puncture site, stimulating rapid clotting and creating a complete seal of258both the arterial puncture and the tissue tract from the artery to the skin259surface. The blood-clotting speed and strength of thrombin enables the use of260the Duett sealing device even in the presence of powerful anti-clotting261medications, such as ReoPro(R), increasingly used in interventional262catheterization procedures. With our Duett sealing device, nothing is left263behind in the artery, so immediate reaccess of the site, if necessary, is264possible, and the potential for infection is minimized.2652662672268<PAGE>269270271We commenced sales of a new version of our Duett sealing device, the272Diagnostic Duett sealing device, for a subset of catheterization patients in the273fourth quarter of 2001. The Diagnostic Duett is tailored specifically for274treating diagnostic patients. Because the Duett sealing device is a275one-size-fits-all device, the procoagulant is dosed appropriately for the most276challenging catheterization patients. We developed the Diagnostic Duett with a277lower dose of procoagulant that is tailored specifically for the278less-challenging diagnostic patients where substantial blood-thinning drugs are279less frequently used. All other components of the Diagnostic Duett, including280the balloon catheter, are identical to the original Duett sealing device. This281results in the Diagnostic Duett having identical deployment steps, but being282less expensive and yet fully effective for the over 2.5 million diagnostic283procedures that occur each year in the United States.284285In July 2002 we launched the next generation "Pro" line of the Duett286sealing device. The Pro line enhances the Duett catheter by improving its287robustness and simplifying the device deployment steps.288289THE D-STAT FLOWABLE HEMOSTAT290291Our second product, the D-Stat flowable hemostat, is a blood clotting gel292that can be delivered topically and into voids and open spaces to seal against293active bleeding. The D-Stat offers the advantage of being thick to maintain its294position, yet easily deliverable. The D-Stat consists of the same collagen,295thrombin and diluent components as the Duett sealing device, which has been296proven effective in controlling bleeding from aggressive arterial puncture297sites. After a simple reconstitution step, the D-Stat hemostat can be applied298directly to a wide variety of bleeding surfaces using one of the three included299applicator tips. Since the D-Stat is applied locally, no special catheter300delivery system is required. The D-Stat hemostat is shelf stable and can be301prepared up to three hours before use.302303The D-Stat flowable hemostat can be used in a wide variety of304interventional procedures as an adjunct to hemostasis. Examples of these uses305include sealing the access site after the removal of catheters from A-V access306grafts, sealing very small punctures of the femoral artery, and sealing307following venous punctures. We believe that the D-Stat flowable hemostat is the308only hemostat available in the United States that combines the thick consistency309and extremely flowable delivery that is preferred by the interventional310physician in these opportunities.311312We commenced sales of the D-Stat worldwide in the first quarter of 2002,313and by the end of the fourth quarter of 2002 we reached nearly $1 million in314annualized net sales of the D-Stat. We achieved this revenue with limited315approved clinical indications for the D-Stat, which initially has been limited316to topical bleeding and blood "oozing." We believe these indications are but a317small fraction of the total potential market for the D-Stat. We recently filed318for regulatory approval for a clinical study to confirm our next clinical use of319the D-Stat in the hemostasis of prepectoral pockets created in pacemaker and320defribrillator implantations. We estimate that the U.S. market opportunity for321this prepectoral pocket indication is greater than 100,000 procedures each year.322Following the prepectoral pockets study, we expect to perform clinical studies323on the use of D-Stat to seal following breast biopsy and liver biopsy324procedures, each of which we believe can match or exceed the prepectoral pocket325market opportunity for D-Stat.326327THE ACOLYSIS ULTRASOUND THROMBOLYSIS SYSTEM328329Our third product, the Acolysis ultrasound thrombolysis system, uses high330energy, low frequency ultrasound to lyse thrombus into subcapillary particles331without damaging vessel walls. The therapeutic principle of the Acolysis system332is to generate ultrasound thrombolysis by the selective disruption of the fibrin333matrix of the thrombus. Cavitation produces subcapillary-sized particles,334resulting in a debulking of the arterial lesion. Peripheral vascular disease,335the initial market opportunity, affects over 8 million people worldwide. We336believe3373383393340<PAGE>341342343the Acolysis System represents a breakthrough in both therapy and technology,344and initial clinical experience and one-year follow-up with the product has been345favorable.346347Our international sales efforts on the Acolysis therapeutic ultrasound348product began in earnest during the fourth quarter of 2002. Our first indication349for this product is to open chronic total occlusions in peripheral arteries.350Currently, in Germany we have approximately 10 Acolysis controllers placed in351the field generating a mix of clinical evaluations and sales. We are in the352process of planning and structuring a clinical study to confirm the353effectiveness of the use of the Acolysis system to open chronic total354occlusions. We expect to commence a U.S. clinical study of the Acolysis product355in 2004.356357BUSINESS STRATEGY358359Our primary objective is to establish ourselves as a leading supplier of360clinically superior medical devices for substantial opportunites within361interventional medicine. Starting with our Duett sealing device in the large362vascular sealing device market, the key steps in achieving our primary objective363are the following:364365o ESTABLISH OUR CLINICALLY-ORIENTED DIRECT SALES FORCE IN THE UNITED366STATES. During the third quarter of 2000 we commenced sales of our367Duett sealing device in the United States through a direct sales368force that includes clinical specialists who train interventional369cardiologists, radiologists and catheterization laboratory370administrators on the use of our products. We believe that effective371training is a key factor in promoting use of interventional medical372devices. We have created and will continue to work to improve an373in-the-field training and certification program for the use of our374products. As of December 31, 2002, our United States direct sales375force consisted of approximately 50 employees.376377o CONTINUE TO PROMOTE THE DUETT SEALING DEVICE'S BENEFITS COMPARED TO378MANUAL COMPRESSION AND OTHER DEVICES. We believe that the primary379benefits of the Duett sealing device are improved patient outcomes380and provider efficiencies. We intend to continue to use our existing381and growing body of clinical results to initiate use of our Duett382sealing device by physicians currently using manual compression and383to convert physicians from other vascular sealing devices to our384product.385386o LEVERAGE FUTURE DEVICES THROUGH OUR DIRECT SALES FORCE TO OUR387EXISTING CUSTOMERS. We intend to leverage our direct sales force by388bringing additional products to the interventional physician. The389D-Stat is our first product that takes advantage of this strategy,390and the Acolysis product in international markets is the second391product in our pipeline. Our research and development team is392working on four additional substantial medical devices for the393interventional physician that we expect to launch through our394existing distribution network in the second half of 2003.395396SALES, MARKETING AND DISTRIBUTION397398In the third quarter of 2000 we commenced sales of our Duett sealing399device in the United States through our direct sales organization. As of400December 31, 2002, our direct sales force consisted of approximately 50401employees. We believe that the majority of interventional catheterization402procedures in the United States are performed in high volume catheterization403laboratories, and that these institutions can be served by our focused direct404sales force. We also believe that our sales force will be able to sell our new405products to the same customer base.406407As part of our sales force, we have hired clinical specialists to train408physicians and other healthcare personnel on the use of our products. We believe409that effective training is a key factor in encouraging physicians to use410interventional medical devices. We have created, and will continue to work to411improve an in-the-field4124134144415<PAGE>416417418training and certification program for the use of all of our products. We also419develop and maintain close working relationships with our customers to continue420to receive input concerning our product development plans.421422We are focused on building market awareness and acceptance of our423products. Our marketing organization provides a wide range of programs,424materials and events that support our sales force. These include product425training, conference and trade show appearances and sales literature and426promotional materials. Members of our medical advisory board also aid in427marketing our products by publishing articles and making presentations at428physicians' meetings and conferences.429430Our international sales and marketing strategy has been to sell to431interventional cardiologists and radiologists through established independent432distributors in major international markets, subject to required regulatory433approvals. In Germany, we established a direct sales organization by creating434Vascular Solutions GmbH and began selling directly to customers in the German435market in the fourth quarter of 2000. Our products are currently marketed436through independent distributors in Norway, Italy, Austria, the United Kingdom,437Ireland, Denmark, Switzerland, Finland, Sweden, Greece, Belgium, Spain, the438Netherlands, South Africa, China and Portugal. We intend to add independent439distributors in other countries as our sales and marketing efforts are expanded.440Under multi-year written distribution agreements with each of our independent441distributors, we ship our products to these distributors upon receipt of442purchase orders. Each of our independent distributors has the exclusive right to443sell our products within a defined territory. These distributors also market444other medical products, although they have agreed not to sell other vascular445sealing devices. Our independent distributors purchase our products from us at a446discount from list price and resell the device to hospitals and clinics. Sales447to international distributors are denominated in United States dollars. The448end-user price is determined by the distributor and varies from country to449country.450451Substantially all of our revenues from inception until our FDA approval on452June 22, 2000 were derived from sales to international distributors, primarily453in Europe, none of which is affiliated with us. Sales in Europe constituted 11%,45410%, 33% and 93% of our net sales for the years ended December 31, 2002, 2001,4552000 and 1999.456457NEW PRODUCT DEVELOPMENT458459Our research and development staff is currently focused on developing new460products to sell to our existing customer base through our direct sales force461and on developing next generation versions of our Duett sealing device. We462incurred expenses of $3,227,538 in 2002, $4,123,883 in 2001 and $3,117,339 in4632000 for research and development activities. To further reduce our costs, our464research and development group continues to develop in-house capabilities to465manufacture some of the components currently produced by outside vendors.466467We have developed four new products that we expect to launch in the second468half of 2003 through our existing distribution network to the interventional469cardiology and interventional radiology market:470471o D-STAT DRY HEMOSTATIC BANDAGE. The D-Stat Dry bandage consists of a472freeze-dried pad of the D-Stat procoagulant which can be applied to473topical bleeding with a custom adhesive bandage. Initial potential474uses of the D-Stat Dry include sealing following arterial475interventional punctures and a variety of radiology procedures. We476believe that the D-Stat Dry bandage will be the most effective,477simple and cost-effective topical solution to hemostasis available478to the interventional physician.479480o D-STAT RADIAL HEMOSTAT BAND. The D-Stat Radial hemostat band is a481customized compression device with the power of the D-Stat482procoagulant for sealing the arterial puncture following483catheterization procedures utilizing the radial artery in the wrist.484Currently, only compression devices are used to seal the puncture of485the radial artery, which is the source of arterial puncture in486approximately 5% of all4874884895490<PAGE>491492493catheterizations. We believe that the D-Stat Radial will lessen the494time to hemostasis, and thereby lower the risk of complications495resulting from compression of the radial artery following496catheterization procedures.497498o PRONTO EXTRACTION CATHETER. We have licensed from Dr. Pedro Silva of499Milan, Italy a patented design of an extraction catheter for the500removal of soft thrombus from arteries. The Pronto catheter consists501of an extraction catheter with a proprietary atraumatic distal tip502and large extraction lumen that can be placed in arteries and easily503extract soft thrombus. A user-friendly syringe extraction system504allows for a single operator deployment with total preparation and505deployment time of less than one minute. Principal clinical uses of506the Pronto extraction catheter are expected to include the removal507of thrombus burden from acute myocardial infarction (heart attack)508cases.509510o VARICOSE VEIN TREATMENT. During 2002 we internally generated a511product that addresses the substantial market for the treatment of512superficial venous reflux, otherwise known as varicose veins.513Varicose veins affect over one million people worldwide and, when514severe, are treated by the archaic practice of surgical vein515stripping. Recently, new interventional tools have been developed to516intravascularly treat and close superficial varicose veins as a517replacement for invasive vein stripping. We have developed a product518that furthers this shift to interventional treatments in a519clinically-efficient and cost-effective manner.520521We are also working on next generation versions of the Duett sealing522device. We have developed and performed pre-clinical testing of the Mechanical523Duett, a concept that utilizes an immediate and complete mechanical seal of the524arterial puncture to obtain hemostasis. To develop the Mechanical Duett, we have525entered into a development and manufacturing agreement with Tepha, Inc. to526supply us with the bioresorbable component of the Mechanical Duett. Initial527international clinical studies of the Mechanical Duett are expected to occur in528the middle of 2003.529530We expect our research and development activities to continue to expand to531include evaluation of new concepts and products for the interventional532cardiology and interventional radiology field. We believe that there are many533potential new interventional products that would fit within the development,534clinical, manufacturing and distribution network we have created for our535existing products.536537MANUFACTURING538539We manufacture our products in our facility in a suburb of Minneapolis,540Minnesota. The catheter manufacturing and packaging processes occur under a541controlled clean room environment. Our manufacturing facility and processes were542certified in July 1998 as compliant with the European Community's EN 46001543standards and were audited in September 1999 and June 2000 for compliance with544the FDA's quality systems regulations with no deficiencies noted. Upon545expiration of our existing lease, in March 2003 we will move to a new facility,546also located in a suburb of Minneapolis, Minnesota which will require547recertification by the FDA.548549We purchase components from various suppliers and rely on single sources550for several parts of the Duett sealing device and D-Stat flowable hemostat. In551September 1998, we entered into a ten year, sole-source, supply agreement with552our collagen supplier, Davol Inc., that provides for a fixed price based on553volume purchases which is adjusted annually for increases in the Department of554Labor's employer's cost index. In June 1999, we entered into a five year,555sole-source, supply agreement with our thrombin supplier, GenTrac, Inc., a556subsidiary of King Pharmaceuticals, Inc., that provides for a fixed price with a557price adjustment formula based on increased costs and wholesale price increases.558To date, we have not experienced any significant adverse effects resulting from559shortages of components.5605615626563<PAGE>564565566The manufacture and sale of our products entail significant risk of567product liability claims. Although we have product liability insurance coverage568in an amount which we consider reasonable, it may not be adequate to cover569potential claims. Any product liability claims asserted against us could result570in costly litigation, reduced sales and significant liabilities and divert the571attention of our technical and management personnel away from the development572and marketing of our products for significant periods of time.573574COMPETITION575576Competition in the interventional medical device industry is intense and577dominated by very large and experienced companies such as Medtronic, Inc.,578Abbott Laboratories and Boston Scientific. We compete on the basis of our579clinically differentiated products and focused opportunities within this580interventional medical device market.581582Our Duett sealing device competes with four vascular sealing devices and583manual compression. Because the substantial majority of vascular sealing is584performed through manual compression, this represents our primary competition.585Manual compression usually requires a healthcare professional to manually apply586pressure to the puncture site for 20 minutes to one hour following which the587patient is confined to bed rest for between four and 48 hours. Often manual588compression involves the use of mechanical devices, including C-clamps and589sandbags, or pneumatic devices. Manual compression is considered to be590uncomfortable for the patient.591592The four competitive vascular sealing devices are:593594o The VasoSeal(R) device, manufactured and marketed by Datascope595Corp., seals the tissue tract by placing a dry collagen plug in the596tissue tract adjacent to the puncture in the artery.597598o The Angio-Seal(R) device, sold by the Daig division of St. Jude599Medical, Inc. and developed by Kensey Nash Corporation, seals the600puncture site through the use of a collagen plug on the outside of601the artery connected by a suture to a biodegradable anchor which is602inserted into the artery.603604o The Closer(TM) device, sold by Perclose, Inc., a subsidiary of605Abbott Laboratories, seals the puncture site through the use of a606mechanical device that enables a physician to perform a minimally607invasive replication of open surgery.608609o The QuickSeal(TM)device, manufactured by SubQ, Inc. and distributed610by Boston Scientific, Inc., mechanically seals the puncture site611through use of a hydrated gelatin plug placed in the tissue tract612adjacent to the puncture in the artery.613614We believe that several other companies are developing arterial closure615devices. The medical device industry is characterized by rapid and significant616technological change as well as the frequent emergence of new technologies.617There are likely to be research and development projects related to vascular618sealing devices of which we are currently unaware. A new technology or product619may emerge that results in a reduced need for vascular sealing devices or620results in a product that renders our product noncompetitive.621622There are many companies that are selling or have developed hemostats623which compete generally with our D-Stat flowable hemostat. Virtually all of624these devices, however, are positioned as hemostats for the open surgical market625and are not designed specifically for use in interventional procedures. There626are likely to be new products, or modifications of existing products, that will627compete with our D-Stat flowable hemostat in the interventional segment of the628hemostat market, and these new products may render our product noncompetitive.6296306317632<PAGE>633634635Topical patches and pads, which have recently been introduced to the636market, are designed to treat bleeding at arterial puncture sites. Our D-Stat637Dry hemostatic bandage will compete in this market segment. These patches are638applied directly over the puncture site and held in place with adjunctive manual639compression for a period of 10-20 minutes. These patches include:640641o The Syvek(TM)Patch, manufactured and marketed by Marine Polymer642Technologies, Inc.643o The Closur-P.A.D.(TM), manufactured by Scion Cardiovascular and644distributed by Medtronic, Inc.645o The Chito-Seal(TM), distributed by Abbott Vascular, Inc. a division646of Abbott Laboratories647648The Acolysis therapeutic ultrasound system and the Pronto extraction649catheter compete, and are expected to compete, in the highly competitive market650segment for removal of thrombus and plaque from the arterial system. There are651many companies that are selling or have developed products in this segment,652including Possis Medical, Inc., Boston Scientific and Endicor. We believe that653several other companies are developing other technologies that will compete with654our Acolysis System, and these new technologies may render our product655noncompetitive.656657REGULATORY REQUIREMENTS658659UNITED STATES660661Our products are regulated in the United States as medical devices by the662FDA under the Federal Food, Drug and Cosmetic, or FDC, Act. The FDA classifies663medical devices into one of three classes based upon controls the FDA considers664necessary to reasonably ensure their safety and effectiveness. Class I devices665are subject to general controls such as labeling, premarket notification and666adherence to good manufacturing practices. Class II devices are subject to the667same general controls and also are subject to special controls such as668performance standards, postmarket surveillance, patient registries and FDA669guidelines, and may also require clinical testing prior to approval. Class III670devices are subject to the highest level of controls because they are used in671life-sustaining or life-supporting implantable devices. Class III devices672require rigorous clinical testing prior to their approval, and generally require673a premarket approval (PMA) application prior to their sale.674675If a medical device manufacturer can establish that a device is676"substantially equivalent" to a legally marketed Class I or Class II device, or677to an unclassified device, or to a Class III device for which the FDA has not678called for PMAs, the manufacturer may seek clearance from the FDA to market the679device by filing a 510(k) premarket notification. The 510(k) notification may680need to be supported by appropriate data establishing the claim of substantial681equivalence to the satisfaction of the FDA. Following submission of the 510(k)682notification, the manufacturer may not place the device into commercial683distribution in the United States until an order is issued by the FDA.684685Manufacturers must file an investigated device exemption (or IDE)686application if human clinical studies of a device are required and if the device687presents what the FDA considers to be a significant risk. The IDE application688must be supported by data, typically including the results of animal and689mechanical testing of the device. If the IDE application is approved by the FDA,690human clinical studies may begin at a specific number of investigational sites691with a maximum number of patients, as approved by the FDA. The clinical studies692must be conducted under the review of an independent institutional board at the693hospital performing the clinical study.694695Generally, upon completion of these human clinical studies, a manufacturer696seeks approval of a Class III medical device from the FDA by submitting a PMA697application. A PMA application must be supported by extensive data, including698the results of the clinical studies, as well as literature to establish the699safety and effectiveness of the device.7007017028703<PAGE>704705706Our Duett sealing device is classified as a Class III device and is707subject to the IDE requirements. In May 1997, the FDA determined that the review708of the Duett sealing device would be delegated to the Center for Devices and709Radiological Health area of the FDA, with a consulting review by the Center for710Biologic Evaluation and Research. During 1998 and 1999, we received approval of711our IDE application to start our feasibility clinical study, filed our IDE712Supplement to begin our multi-center clinical study, completed the SEAL713multi-center clinical study and filed our PMA application with the FDA. In714September 1999 our manufacturing facility was audited by the FDA, with no715deficiencies or non-compliances noted by the inspector. In December 1999, we716received the FDA's review letter of our PMA application, and we submitted an717amendment to our PMA to the FDA in January 2000. On June 22, 2000, we received718approval from the FDA of our PMA application to sell the Duett sealing device in719the United States.720721Our D-Stat flowable hemostat also is regulated in the United States as a722medical device by the FDA and required clearance of our 510(k) application by723the FDA prior to being sold in the United States. Our D-Stat flowable hemostat724was the subject of a 510(k) application which was determined to be725"substantially equivalent" to a legally marketed predicate device by the FDA,726thereby allowing commercial marketing in the United States. In January 2002, our727510(k) application for the D-Stat flowable hemostat was cleared by the FDA, and728we commenced sales in the United States in February 2002.729730We also are subject to FDA regulations concerning manufacturing processes731and reporting obligations. These regulations require that manufacturing steps be732performed according to FDA standards and in accordance with documentation,733control and testing standards. We also are subject to inspection by the FDA on734an on-going basis. We are required to provide information to the FDA on adverse735incidents as well as maintain a documentation and record keeping system in736accordance with FDA guidelines. The advertising of our products also is subject737to both FDA and Federal Trade Commission jurisdiction. If the FDA believes that738we are not in compliance with any aspect of the law, it can institute739proceedings to detain or seize products, issue a recall, stop future violations740and assess civil and criminal penalties against us, our officers and our741employees.742743INTERNATIONAL744745The European Union has adopted rules which require that medical products746receive the right to affix the CE mark, an international symbol of adherence to747quality assurance standards and compliance with applicable European medical748device directives. As part of the CE compliance, manufacturers are required to749comply with the ISO 9000 series of standards for quality operations. We received750the CE mark approval for our Duett sealing device and ISO 9001 certification in751July 1998, we received the CE mark approval for our D-Stat flowable hemostat in752October 2001 and we purchased the Acolysis system, which previously had obtained753the CE mark, in April 2002.754755International sales of the Duett sealing device, D-Stat and the Acolysis756System are subject to the regulatory requirements of each country in which we757sell our product. These requirements vary from country to country but generally758are much less stringent than those in the United States. Our products are759currently marketed in Germany, Norway, Italy, Austria, the United Kingdom,760Ireland, Denmark, Switzerland, Finland, Sweden, Greece, Belgium, Spain, the761Netherlands, South Africa, China and Portugal. We have obtained regulatory762approvals where required. Through our Japanese distributor, we are pursuing the763regulatory approval of our Duett sealing device for commercial sale in Japan.7647657669767<PAGE>768769770THIRD PARTY REIMBURSEMENT771772In the United States, healthcare providers that purchase medical devices,773such as vascular sealing devices, generally rely on third-party payors,774principally the Centers for Medicare and Medicaid Services, or CMS, (formerly775the Health Care Financing Administration, or HCFA) and private health insurance776plans, to reimburse all or part of the cost of therapeutic and diagnostic777catheterization procedures. We believe that in the current United States778reimbursement system, the cost of vascular sealing devices is incorporated into779the overall cost of the catheter procedure. We have performed analyses to780establish the cost benefit of the Duett sealing device, relying on shortened781hospital stays and decreased use of healthcare professionals, to justify the782increased cost of using our Duett sealing device in the United States.783784During 2000, CMS implemented a new Medicare prospective payment system for785hospital outpatient services. One aspect of the new system recognized new786technology items and services as discrete payment groups under the prospective787payment system. Under this system, hospitals receive separate payments for the788use of new medical devices that are recognized by CMS. The Duett sealing device789was issued a transitional pass through code by CMS in 2000. Effective January 1,7902003, CMS incorporated the payment for the Duett sealing device and all vascular791sealing devices into the overall payment for the diagnostic catheterization792procedure. The net effect is an overall increase in the 2003 hospital payment793for a diagnostic procedure, with no separate reimbursement for the sealing794device. Currently there is no separate reimbursement for our D-Stat flowable795hemostat.796797Market acceptance of our products in international markets is dependent in798part upon the availability of reimbursement from healthcare payment systems.799Reimbursement and healthcare payment systems in international markets vary800significantly by country. The main types of healthcare payment systems in801international markets are government sponsored healthcare and private insurance.802Countries with government sponsored healthcare, such as the United Kingdom, have803a centralized, nationalized healthcare system. New devices are brought into the804system through negotiations between departments at individual hospitals at the805time of budgeting. In most foreign countries, there are also private insurance806systems that may offer payments for alternative therapies.807808PATENTS AND INTELLECTUAL PROPERTY809810We file patent applications to protect technology, inventions and811improvements that are significant to the development of our business, and use812trade secrets and trademarks to protect other areas of our business. Prior to813the formation of our company, Dr. Gary Gershony filed a number of patent814applications in the United States and other countries directed to proprietary815technology used in our Duett sealing device. Upon the commencement of our816operations in February 1997, Dr. Gershony assigned all patents and patent817applications relating to the Duett sealing device to us on a worldwide,818perpetual, royalty-free basis. At the time of assignment, there existed one819United States patent issued that is directed to a balloon catheter sealing820device and method and which expires in May 2013, three United States patents821pending and an international patent application pending which designated822numerous foreign countries and regions.823824Since commencing operations, we have continued the prosecution of the825pending United States patent applications and filed new patent applications. A826second United States patent was issued that is directed to a balloon catheter827and procoagulant sealing device and method and which expires in October 2015. A828third United States patent was issued that contains method claims concerning the829use of a balloon catheter and flowable procoagulant and which expires in October8302015. A fourth United States patent was issued concerning the procoagulant831mixture and which expires in October 2015. A fifth United States patent was832issued concerning a balloon catheter sealing device and which expires in May8332013. A sixth United States patent was issued concerning a balloon catheter and834procoagulant sealing device and which expires in October 2015. A seventh83583683710838<PAGE>839840841United States patent was issued concerning a balloon catheter sealing device and842which expires in October 2015. We currently have 5 additional United States843patents pending concerning aspects of our Duett sealing device and other844interventional products. We also have pursued international patent applications,845which designate the key developed nations with substantive patent protection846systems.847848The interventional cardiology market in general, and the vascular sealing849device field in particular, is characterized by numerous patent filings and850frequent and substantial intellectual property litigation. Each of the vascular851sealing products currently on the U.S. market, including our Duett sealing852device, has been subject to infringement litigation. (See "Legal Proceedings" in853Item 3 of Part I of this Form 10-K) The interpretation of patents involves854complex and evolving legal and factual questions. Intellectual property855litigation in recent years has proven to be complex and expensive, and the856outcome of such litigation is difficult to predict.857858We may become the subject of additional intellectual property claims in859the future related to our Duett sealing device or other products. Our defense of860any intellectual property claims filed in the future, regardless of the merits861of the complaint, could divert the attention of our technical and management862personnel away from the development and marketing of our products for863significant periods of time. The costs incurred to defend future claims could be864substantial and adversely affect us, even if we are ultimately successful.865866We also rely on trade secret protection for certain aspects of our867technology. We typically require our employees, consultants and vendors for868major components to execute confidentiality agreements upon their commencing869services with us or before the disclosure of confidential information to them.870These agreements generally provide that all confidential information developed871or made known to the other party during the course of that party's relationship872with us is to be kept confidential and not disclosed to third parties, except in873special circumstances. The agreements with our employees also provide that all874inventions conceived or developed in the course of providing services to us875shall be our exclusive property.876877We also register the trademarks and trade names through which we conduct878our business. To date, we have applied for registration in the United States of879the marks "Vascular Solutions Duett," "D-Stat," "Pronto" and the Duett stylized880logo. We acquired the registered trademark "Acolysis" in connection with our881acquisition of the Acolysis therapeutic ultrasound business in 2002.882883EMPLOYEES884885As of December 31, 2002, we had 127 full time employees. Of these886employees, 31 were in manufacturing activities, 62 were in sales and marketing887activities, 8 were in research and development activities, 15 were in888regulatory, quality assurance and clinical research activities and 11 were in889general and administrative functions. We have never had a work stoppage and none890of our employees are covered by collective bargaining agreements. We believe our891employee relations are good.892893EXECUTIVE OFFICERS OF THE REGISTRANT894895The executive officers of the Company as of February 15, 2003 are as896follows:897898NAME AGE POSITION899Howard Root 42 Chief Executive Officer, Acting Chief Financial900Officer and Director901Michael Nagel 40 Vice President of Sales & Marketing and Secretary902Deborah Jensen 46 Vice President of Regulatory Affairs903James Quackenbush 44 Vice President of Manufacturing90490590611907<PAGE>908909910HOWARD ROOT has served as our Chief Executive Officer and a director since911he co-founded Vascular Solutions in February 1997. From 1990 to 1995, Mr. Root912was employed by ATS Medical, Inc., a mechanical heart valve company, most913recently as Vice President and General Counsel. Prior to joining ATS Medical,914Mr. Root practiced corporate law, specializing in representing emerging growth915companies, at the law firm of Dorsey & Whitney for over five years. Mr. Root916received his B.S. in Economics and J.D. degrees from the University of917Minnesota.918919MICHAEL NAGEL has served as our Vice President of Sales & Marketing since920June 1997. Prior to joining us, Mr. Nagel was the Director of Sales & Marketing921at Quantech, Ltd., a developer of point of care medical diagnostic testing922products, where he worked since July 1996. From 1992 through July 1996, Mr.923Nagel was the mid-west division sales manager of B. Braun Cardiovascular, a924manufacturer of cardiovascular devices and catheters. From 1991 through 1992,925Mr. Nagel was the Director of Worldwide Sales for the Medical Products Division926of Angeion Corporation, a manufacturer of angioplasty accessories and pediatric927catheters. Prior to 1991, Mr. Nagel performed a variety of sales and marketing928functions with Abbott Labs Diagnostic Division for over five years. Mr. Nagel929received his B.A. and M.B.A. degrees from the University of St. Thomas.930931DEBORAH JENSEN has served as our Vice President of Regulatory Affairs,932Clinical Affairs and Quality Systems since October 2000. Ms. Jensen served as933the Corporate Compliance Officer and Vice President of Regulatory Affairs,934Clinical Research and Quality Systems for Empi, Inc. from October 1995 to935October 2000. From May 1993 to October 1995, Ms. Jensen was employed as a936Regulatory Affairs Manager for Boston Scientific's Scimed division. Prior to May9371993, Ms. Jensen held regulatory affairs, clinical research and quality938assurance positions at Medtronic and Lifecore Biomedical. She received her B.S.939in Biology from Valparaiso University.940941JAMES QUACKENBUSH has served as our Vice President of Manufacturing since942March 1999. Prior to joining us, Mr. Quackenbush served as Vice President of943Manufacturing and Operations with Optical Sensors, Inc., a diagnostic medical944device company, where he worked since October 1992. From March 1989 through945October 1992, Mr. Quackenbush served as operations manager with Schneider USA's946stent division. Prior to this time, he was an advanced project engineer with the9473M Medical Products Division. Mr. Quackenbush received a B.S. in Industrial948Engineering from Iowa State University.949950There are no family relationships among any of our executive officers.951952AVAILABLE INFORMATION953954We make available free of charge on or through our internet website at955http://www.vascularsolutions.com our annual report on Form 10-K, quarterly956reports on Form 10Q, current reports on Form 8-K, and amendments to these957reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Exchange958Act as soon as reasonably practicable after we electronically file such material959with, or furnish it to, the SEC.96096196212963<PAGE>964965966ITEM 2. PROPERTIES967968Our offices are in approximately 29,000 square feet of leased space in a969suburb of Minneapolis, Minnesota. These facilities include approximately 12,800970square feet used for manufacturing activities, approximately 3,400 square feet971used for research and laboratory activities, with the remainder used for972administrative offices. Our lease for these facilities expires March 31, 2003.973We entered into a new lease effective April 1, 2003 for a 33,000-square-foot974office and manufacturing facility under an operating lease agreement that975expires in September 2008. Our new lease provides a lower effective net lease976payment per square foot than our existing lease, with reimbursement of our977expected moving expenses. Our new office also is located in a suburb of978Minneapolis, Minnesota. We believe that our new facility will be adequate to979meet our needs through at least the end of the lease period.980981ITEM 3. LEGAL PROCEEDINGS982983On July 23, 1999, we were named as the defendant in a patent infringement984lawsuit brought by Datascope Corp. in the United States District Court for the985District of Minnesota. The complaint requested a judgment that our Duett sealing986device infringes and, following FDA approval will infringe, a United States987patent held by Datascope and asks for relief in the form of an injunction that988would prevent us from selling our product in the United States as well as an989award of attorneys' fees, costs and disbursements. On August 12, 1999, we filed990our answer to this lawsuit and brought a counterclaim alleging unfair991competition and tortious interference. On August 20, 1999, we moved for summary992judgement to dismiss Datascope's claims. On March 15, 2000, the court granted993summary judgment dismissing all of Datascope's claims, subject to the right of994Datascope to recommence the litigation after our receipt of FDA approval of our995Duett sealing device. On July 12, 2000, after our receipt of FDA approval,996Datascope recommenced this litigation, alleging that the Duett sealing device997infringes a United States patent held by Datascope and requesting relief in the998form of an injunction that would prevent us from selling our product in the999United States, damages caused by our alleged infringement, and other costs,1000disbursements and attorneys' fees. On November 26, 2002, we entered into an1001agreement that settled all existing intellectual property litigation with1002Datascope Corporation. Under the terms of the Settlement Agreement, Datascope1003granted us a non-exclusive license to its Janzen patents as they apply to all1004current versions of the Duett sealing sevice, and to certain permitted future1005product improvements. Datascope also has released us from any claim of patent1006infringement based on past or future sales of the Duett sealing device. In1007exchange, we paid Datascope a single lump sum of $3,750,000 in the fourth1008quarter of 2002.10091010On July 3, 2000, we were named as the defendant in a patent infringement1011lawsuit brought by the Daig division of St. Jude Medical in the United States1012District Court for the District of Minnesota. The complaint requested a judgment1013that our Duett sealing device infringes a series of four patents known as the1014Fowler patents held by St. Jude Medical and asks for relief in the form of an1015injunction that would prevent us from selling our Duett sealing device in the1016United States, damages caused by the manufacture and sale of our product, and1017other costs, disbursements and attorneys' fees. On July 12, 2001, we entered1018into an agreement that settled all existing intellectual property litigation1019with St. Jude Medical. Under the terms of the settlement agreement, we agreed to1020pay a royalty of 2.5% of net sales of our Duett sealing device to St. Jude1021Medical, up to a maximum amount over the remaining life of the St. Jude Fowler1022patents. In exchange, St. Jude Medical granted to us a non-exclusive license to1023its Fowler patents and has released us from any claim of patent infringement1024based on sales of our Duett sealing device. We granted a non-exclusive1025cross-license to our Gershony patents to St. Jude Medical, subject to a similar1026royalty payment if St. Jude Medical utilizes our Gershony patents in any future1027device. Beginning on July 1, 2001, a royalty expense of 2.5% of net sales is1028included in our cost of goods sold until the maximum royalty is attained.102910301031131032<PAGE>103310341035From time to time we are involved in legal proceedings arising in the1036normal course of our business. As of the date of this report we are not a party1037to any legal proceeding in which an adverse outcome would reasonably be expected1038to have a material adverse effect on our results of operations or financial1039condition.10401041ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS10421043No matters were submitted to a vote of security holders during the fourth1044quarter ended December 31, 2002.104510461047PART II10481049ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS10501051On July 25, 2000, we sold 3,500,000 shares of our common stock, at an1052initial public offering price of $12.00 per share, pursuant to a Registration1053Statement on Form S-1 (Registration No. 333-84089), which was declared effective1054by the Securities and Exchange Commission on July 19, 2000. Our net proceeds1055from the offering were approximately $44.0 million. To date, we have spent1056approximately $20.0 million of the net proceeds to hire, train and deploy a1057direct sales force in the United States, $4.1 million to settle the St. Jude and1058Datascope litigation, $1.6 million to purchase the Acolysis System and $4.51059million for general corporate purposes.10601061The Company's common stock began trading on the Nasdaq National Market1062under the symbol "VASC" on July 20, 2000. The following table sets forth, for1063the periods indicated, the range of high and low last sale prices for the common1064stock as reported by the Nasdaq National Market.10651066High Low1067------ -----106820011069First Quarter ........................... 10.000 5.7501070Second Quarter .......................... 9.000 5.1251071Third Quarter ........................... 9.640 1.7701072Fourth Quarter .......................... 2.920 1.7501073107420021075First Quarter ........................... 3.700 2.4801076Second Quarter .......................... 2.700 1.6801077Third Quarter ........................... 1.780 .8801078Fourth Quarter .......................... 1.200 .65010791080HOLDERS10811082As of December 31, 2002, the Company had 177 shareholders of record. Such1083number of record holders does not reflect shareholders who beneficially own1084common stock in nominee or street name.10851086DIVIDENDS10871088The Company has paid no cash dividends on its common stock, and it does1089not intend to pay cash dividends on its common stock in the future.109010911092141093<PAGE>109410951096ITEM 6. SELECTED FINANCIAL DATA10971098The selected consolidated financial data below should be read in1099conjunction with "Management's Discussion and Analysis of Financial Condition1100and Results of Operations" in Item 7 below and the Consolidated Financial1101Statements and the Notes thereto included in Item 8 below.11021103<TABLE>1104<CAPTION>1105YEAR ENDED DECEMBER 31,1106------------------------------------------------------------11072002 2001 2000 1999 19981108-------- -------- -------- -------- --------1109(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)1110<S> <C> <C> <C> <C> <C>1111Statements of Operations Data:1112Net sales .......................... $ 12,101 $ 12,082 $ 6,193 $ 1,429 $ 4941113Cost of sales ...................... 4,986 4,961 2,701 1,065 4421114-------- -------- -------- -------- --------1115Gross profit ..................... 7,115 7,121 3,492 364 5211161117Operating expenses:1118Research and development ........... 3,227 4,124 3,117 3,068 2,3481119Clinical and regulatory ............ 1,348 1,288 1,082 1,324 1,3761120Sales and marketing ................ 11,964 12,772 6,700 2,301 1,0751121General and administrative ......... 2,167 2,498 2,255 1,904 6681122Legal settlement ................... 3,750 350 -- -- --1123Amortization of purchased technology 145 -- -- -- --1124-------- -------- -------- -------- --------1125Total operating expenses ......... 22,601 21,032 13,154 8,597 5,4671126-------- -------- -------- -------- --------11271128Operating loss ........................ (15,486) (13,911) (9,662) (8,233) (5,415)1129Interest income ................. 507 1,661 1,453 371 2741130-------- -------- -------- -------- --------1131Net loss .............................. $(14,979) $(12,250) $ (8,209) $ (7,862) $ (5,141)1132======== ======== ======== ======== ========1133Net loss per common share -1134Basic and diluted .................. $ (1.13) $ (.93) $ (.95) $ (1.95) $ (1.40)1135Weighted average number of common1136shares outstanding ................ 13,276 13,217 8,645 4,033 3,66011371138<CAPTION>11391140AS OF DECEMBER 31,1141------------------------------------------------------------11422002 2001 2000 1999 19981143-------- -------- -------- -------- --------1144(IN THOUSANDS)1145<S> <C> <C> <C> <C> <C>1146Balance Sheet Data:1147Cash, cash equivalents and available-1148for-sale securities ............. $ 16,750 $ 33,318 $ 44,098 $ 10,529 $ 9,8971149Working capital ..................... 18,656 34,712 46,300 10,487 9,9331150Total assets ........................ 22,280 37,593 49,661 12,295 11,0071151Long-term debt ...................... -- -- -- -- --1152Total shareholders' equity .......... 20,369 35,630 47,194 11,172 10,5461153</TABLE>115411551156151157<PAGE>115811591160ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS1161OF OPERATIONS11621163The following discussion of the financial condition and results of1164operations of the Company should be read in conjunction with the Company's1165Consolidated Financial Statements and Notes thereto, and the other financial1166information included elsewhere in this Form 10-K Report. This Management's1167Discussion and Analysis of Financial Condition and Results of Operations1168contains descriptions of the Company's expectations regarding future trends1169affecting its business. These forward-looking statements and other1170forward-looking statements made elsewhere in this document are made in reliance1171upon safe harbor provisions of the Private Securities Litigation Reform Act of11721995. The following discussion sets forth certain factors the Company believes1173could cause actual results to differ materially from those contemplated by the1174forward looking statements.11751176OVERVIEW11771178We are a medical device company focused on bringing solutions to1179interventional cardiologists and interventional radiologists. Our product line1180includes the Duett(TM) sealing device, the D-Stat(TM) flowable hemostat and the1181Acolysis(R) therapeutic ultrasound system. As a vertically-integrated medical1182device company, we generate ideas and create new interventional medical devices,1183and then deliver those products directly to the physician through our direct1184domestic sales force and international distribution network.11851186We commenced operations in February 1997, and during 1998 and 1999 we1187received regulatory approvals to market our first product, the Duett sealing1188device, in several international markets, principally in Europe. On June 22,11892000, we received approval from the FDA of our PMA application for the sale of1190our Duett sealing device in the United States. As a result, during the third1191quarter of 2000 we commenced sales of the Duett in the United States through our1192direct sales force. We commenced sales of the Diagnostic Duett in the United1193States in December 2001, and commenced sales of the D-Stat in the United States1194in February 2002. In April 2002, we acquired the assets of the Acolysis system1195from the secured creditors of Angiosonics, Inc. The Acolysis controller and1196probes have been sold in international markets, principally in Europe and China,1197for over two years. During the last quarter of 2002, we commenced active1198international sales of the Acolysis product.11991200We have a limited history of operations and have experienced significant1201operating losses since inception. As of December 31, 2002, we had an accumulated1202deficit of $50.1 million.12031204Although we have experienced revenue growth in recent periods, this growth1205may not be sustainable and, therefore, these recent periods should not be1206considered indicative of future performance. We may never achieve profitability,1207or if we achieve profitability it may not be sustained in future periods.12081209CRITICAL ACCOUNTING POLICIES:12101211The critical accounting policies of the Company are described in Note 1 to1212the financial statements. We set forth below those material accounting policies1213that we believe are the most critical to an investor's understanding of our1214financial results and condition, and require complex management judgment.12151216INVENTORY12171218We state our inventory at the lower of cost or market. We record reserves1219for inventory shrinkage and for potentially excess, obsolete and slow moving1220inventory based upon historical experience and forecasted demand. Our reserve1221requirements could be materially different if demand for our products decreased1222because of122312241225161226<PAGE>122712281229competitive conditions or market acceptance, or if products become obsolete1230because of advancements in the industry.12311232REVENUE RECOGNITION12331234We recognize revenue upon shipment of products to customers, net of1235estimated returns. We analyze the rate of historical returns when evaluating the1236adequacy of the allowance for sales returns, which is included with the1237allowance for doubtful accounts on our balance sheet. If the historical data the1238Company uses to calculate these estimates does not properly reflect future1239returns, revenue could be overstated.12401241ALLOWANCE FOR DOUBTFUL ACCOUNTS12421243We maintain allowances for doubtful accounts for estimated losses1244resulting from the inability of our customers to make required payments. This1245allowance is regularly evaluated by us for adequacy by taking into consideration1246factors such as past experience, credit quality of the customer base, age of the1247receivable balances, both individually and in the aggregate, and current1248economic conditions that may affect a customer's ability to pay. If the1249financial condition of our customers were to deteriorate, resulting in an1250impairment of their ability to make payments, additional allowances may be1251required.12521253VALUATION OF LONG-LIVED ASSETS AND GOODWILL12541255In fiscal 2002, we adopted Statement of Financial Accounting Standards1256(SFAS) 142, "Goodwill and Other Intangible Assets." Goodwill is tested for1257impairment annually or more frequently if changes in circumstance or the1258occurrence of events suggests an impairment exists. The test for impairment1259requires us to make several estimates about fair value, most of which are based1260on projected future cash flows.12611262We regularly review the carrying value of certain long-lived assets and1263identifiable intangible assets with respect to any events or circumstances that1264indicate an impairment or an adjustment to the amortization period is necessary.1265If circumstances suggest the recorded amounts cannot be recovered, calculated1266based upon estimated future undiscounted cash flows, the carrying values of1267these assets are reduced to fair value.12681269RESULTS OF OPERATIONS12701271YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 200112721273Net sales increased modestly to $12,100,526 for the year ended December127431, 2002 from $12,082,379 for the year ended December 31, 2001. Approximately127589% of our net sales for the year ended December 31, 2002 were to customers in1276the United States and 11% of the net sales were to customers in international1277markets. Net sales in 2002 were negatively affected by the intense competitive1278environment for our Duett sealing device in the United States market. Net sales1279during 2002 benefited from the early sales of our D-Stat flowable hemostat,1280which we launched in February 2002.12811282Gross profit as a percentage of net sales was unchanged at 59% for the1283year ended December 31, 2002 and 2001. We added the Diagnostic Duett, D-Stat and1284Acolysis products to our selling mix during 2002, which all have gross margins1285greater than 60%. The introduction of the higher margin products in 2002 was1286offset by a growth in the lower margin international sales. We expect gross1287margins to slightly increase in 2003 as we again introduce new higher margin1288products in 2003 and make slight gains in manufacturing efficiencies.12891290Research and development expenses decreased 22% to $3,227,538 for the year1291ended December 31, 2002 from $4,123,883 for the year ended December 31, 2001.1292The decrease was attributable to more focused129312941295171296<PAGE>129712981299development work on the product line extensions and new products during 2002.1300Research and development expenses can fluctuate due to outside project spending.1301We expect our research and development expenses to increase modestly during 20031302as we continue to pursue additional new products.13031304Clinical and regulatory expenses increased 5% to $1,347,694 for the year1305ended December 31, 2002 from $1,288,301 for the year ended December 31, 2001.1306Clinical and regulatory expenses fluctuate due to the timing of clinical and1307marketing studies. We are expecting clinical expenses to increase in 2003 as we1308move forward with additional indications for our existing D-Stat flowable1309hemostat and international studies of our new products.13101311Sales and marketing expenses decreased 6% to $11,963,907 for the year1312ended December 31, 2002 from $12,771,901 for the year ended December 31, 2001.1313The reason for the decrease is better cost utilization. We have reviewed our1314sales and marketing expenditures and focused our spending in the areas that1315drive sales and provide an adequate financial return. As of December 31, 2002,1316our direct sales force consisted of approximately 50 employees compared to1317approximately 65 as of December 31, 2001. As a result, we expect our sales and1318marketing expenses to again slightly decrease during 2003 as we continue to1319review our sales and marketing expenditures.13201321General and administrative expenses decreased 13% to $2,166,883 for the1322year ended December 31, 2002 from $2,498,435 for the year ended December 31,13232001. The decrease was the result of lower headcount in 2002 compared to 2001.1324We currently anticipate that general and administrative expenses will decrease1325in 2003 as we continue to benefit from lower headcount and the settlement of all1326of our outstanding intellectual property litigation.13271328Legal settlement expenses were $3,750,000 for the year ended December 31,13292002 and $350,000 for the year ended December 31, 2001. We entered into an1330agreement that settled all existing intellectual property litigation with1331Datascope Corporation in 2002 (see "Legal Proceedings" in Item 3 of Part I of1332this Form 10-K). As part of the settlement, Datascope released us from any claim1333of patent infringement based on past or future sales of the Duett sealing1334device. In exchange, we paid Datascope a single lump sum of $3,750,000 in the1335fourth quarter of 2002. We entered into an agreement that settled all existing1336intellectual property litigation with St. Jude Medical in 2001 (see "Legal1337Proceedings" in Item 3 of Part I of this Form 10-K). As a result of the1338settlement, we agree to pay St. Jude Medical a royalty of 2.5% of our Duett1339sales up to a maximum amount over the remaining life of the St. Jude Medical1340patents. We paid $350,000 to St. Jude Medical in 2001 representing the past1341royalty on net sales of our Duett device since 1998 under the settlement1342agreement.13431344Amortization of purchased technology was $145,000 for the year ended1345December 31, 2002 and $0 for the year ended December 31, 2001. The amortization1346was the result of our acquisition of the Acolysis assets from the secured1347creditors of Angiosonics, Inc. We allocated $870,000 from the acquisition to1348purchased technology and are amortizing the amount over four years.13491350Interest income decreased to $507,169 for the year ended December 31, 20021351from $1,660,757 for the year ended December 31, 2001 primarily as a result of a1352reduced cash balance and lower interest rates.13531354YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 200013551356Net sales increased 95% to $12,082,379 for the year ended December 31,13572001 from $6,193,234 for the year ended December 31, 2000. The increase in net1358sales was principally the result of a full year of United States sales of our1359Duett sealing device in 2001, compared to six months of sales in 2000. As a1360result, 90% of our net sales for the year ended December 31, 2001 were to1361customers in the United States, while 10% of the net sales were to our customers1362in international markets.136313641365181366<PAGE>136713681369Gross profit as a percentage of net sales increased to 59% for the year1370ended December 31, 2001 from 56% for the year ended December 31, 2000. This1371increase as a percentage of net sales resulted principally from the full year of1372United States sales in 2001. In the third quarter of 2001 we settled our1373intellectual property litigation with St. Jude Medical. As part of the1374settlement agreement, we agreed to pay a royalty of 2.5% of our net sales of the1375Duett sealing device to St. Jude Medical up to a maximum amount for the1376remaining life of the patents. This 2.5% royalty was included in our costs of1377goods sold beginning in the third quarter of 2001. During the fourth quarter of13782001 we commenced initial sales of our Diagnostic Duett version of the Duett1379sealing device in the United States. The Diagnostic Duett has a substantially1380lower costs of goods sold than the original Duett, which is offset by a lower1381average selling price.13821383Research and development expenses increased 32% to $4,123,883 for the year1384ended December 31, 2001 from $3,117,339 for the year ended December 31, 2000.1385This increase was attributable to increased development work on the product line1386extensions and new products during 2001.13871388Clinical and regulatory expenses increased 19% to $1,288,301 for the year1389ended December 31, 2001 from $1,082,029 for the year ended December 31, 2000.1390The increase was primarily the result of additional personnel and the1391commencement of clinical studies for new products and new claims for our Duett1392sealing device during 2001.13931394Sales and marketing expenses increased 91% to $12,771,901 for the year1395ended December 31, 2001 from $6,699,722 for the year ended December 31, 2000.1396This increase was due primarily to the full year of operations of our United1397States direct sales force during 2001.13981399General and administrative expenses increased 11% to $2,498,435 for the1400year ended December 31, 2001 from $2,255,160 for the year ended December 31,14012000. The primary reason for the increase was legal fees associated with the St.1402Jude Medical and Datscope litigation increased during 2001 as compared with14032000.14041405Interest income increased to $1,660,757 for the year ended December 31,14062001 from $1,453,491 for the year ended December 31, 2000 primarily as a result1407of a full year of interest on the cash proceeds received upon the closing of our1408initial public offering in July 2000.14091410INCOME TAXES14111412We have not generated any pre-tax income to date and therefore have not1413paid any federal income taxes since inception in December 1996. No provision or1414benefit for federal and state income taxes has been recorded for net operating1415losses incurred in any period since our inception.14161417As of December 31, 2002, we had $46,100,000 of federal net operating loss1418carryforwards available to offset future taxable income which begin to expire in1419the year 2013. As of December 31, 2002, we also had federal and state research1420and development tax credit carryforwards of approximately $1,206,000 which begin1421to expire in the year 2013. Under the Tax Reform Act of 1986, the amounts of and1422benefits from net operating loss carryforwards may be impaired or limited in1423certain circumstances, including significant changes in ownership interests.1424Future use of our existing net operating loss carryforwards may be restricted1425due to changes in ownership or from future tax legislation.14261427We have established a valuation allowance against the entire amount of our1428deferred tax asset because we have not been able to conclude that it is more1429likely than not that we will be able to realize the deferred tax asset, due1430primarily to our history of operating losses.143114321433191434<PAGE>143514361437LIQUIDITY AND CAPITAL RESOURCES14381439We have financed all of our operations since inception through the1440issuance of equity securities and, to a lesser extent, sales of our products.1441Through December 31, 2002, we have sold common stock and preferred stock1442generating aggregate net proceeds of $70.2 million. At December 31, 2002, we had1443$16.7 million in cash, cash equivalents and available-for-sale securities1444on-hand.14451446During the year ended December 31, 2002, we used $14.3 million in1447operating activities. The cash used in operating activities was primarily used1448to fund our net loss for the period of $15.0 million, which was offset by1449depreciation and amortization of $647,390. Included in the net loss of $15.01450million was the legal settlement of $3,750,000 to Datascope (see "Legal1451Proceedings" in Item 3 of Part I of this Form 10-K). We generated proceeds of1452$7,405,132 in investing activities, primarily from the net sales of investment1453securities of $9,312,031, offset by the $1,550,203 in cash used in the1454acquisition of Angiosonics' Acolysis System and net equipment purchases of1455$356,696. We used $363,151 in financing activities during fiscal 2002, primarily1456from the repurchase of our common stock for $547,722, offset by $184,571 we1457received through the issuance of common stock.14581459In April 2002, we paid $1,550,203 in cash to the secured creditors of1460Angiosonics, Inc. in connection with the acquisition of the Acolysis system,1461related patents and technologies. This acquisition was funded through existing1462cash balances.14631464In August 2002, the Board of Directors adopted a stock repurchase program1465to acquire up to 1 million shares of our common stock in open market1466transactions. The program does not obligate the company to acquire any specific1467number of shares and may be discontinued at any time. Through December 31, 2002,1468we have repurchased 608,900 shares under our stock repurchase program for1469$547,722.14701471We do not have any significant cash commitments related to supply1472agreements, nor do we have any significant commitments for capital expenditures.14731474We currently anticipate that we will continue to experience a negative1475cash flow for the foreseeable future and our expenses will be a material use of1476our cash resources. We anticipate that our operating losses will continue1477through at least mid-2004. We believe that current cash balances along with cash1478generated from the future sales of products will be sufficient to meet our1479operating and capital requirements for at least the next 24 months. Our1480liquidity and capital requirements beyond the next 24 months will depend on1481numerous factors, including the extent to which our current and future products1482gain market acceptance and competitive developments.14831484If cash generated from operations is insufficient to satisfy our cash1485needs, we may be required to raise additional funds. We currently have no1486commitments for additional funding and so our ability to meet our long-term1487liquidity needs is uncertain. If we raise additional funds through the issuance1488of equity securities, our shareholders may experience significant dilution.1489Furthermore, additional financing may not be available when needed or, if1490available, financing may not be on terms favorable to us or our shareholders. If1491financing is not available when required or is not available on acceptable1492terms, we may be unable to develop or market our products or take advantage of1493business opportunities or respond to competitive pressures.149414951496201497<PAGE>149814991500RISK FACTORS15011502THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING1503OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR1504THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF1505ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS1506OF OPERATIONS COULD BE SERIOUSLY HARMED.15071508WE WILL NOT BE SUCCESSFUL IF THE INTERVENTIONAL MEDICAL DEVICE COMMUNITY DOES1509NOT ADOPT OUR PRODUCTS15101511During the third quarter of 2000 we commenced sales of our first product,1512the Duett sealing device, in the United States, which we believe represents the1513largest market for interventional medical devices. We have not become profitable1514with the initial sales of our Duett sealing device, and we are in the process of1515introducing additional interventional medical devices to grow our sales. Our1516success will depend on the medical community's acceptance of our products. We1517cannot predict how quickly, if at all, the medical community will accept our new1518products, or, if accepted, the extent of their use. Our potential customers1519must:15201521o believe that our products offer benefits compared to the1522methodologies and/or devices that they are currently using;15231524o believe that our products are worth the price that they will be1525asked to pay; and15261527o be willing to commit the time and resources required to change their1528current methodology.15291530If we encounter difficulties in growing our sales of our new medical1531devices in the United States, our business will be seriously harmed.15321533WE CURRENTLY RELY ON THE DUETT SEALING DEVICE AS OUR PRIMARY SOURCE OF REVENUE15341535Although we have sold the D-Stat flowable hemostat for approximately one1536year and we recently commenced marketing of the Acoylsis System, we continue to1537rely on sales of our principal product, the Duett sealing device, which is being1538sold in a limited number of international markets and in the United States. Even1539though we are in the process of developing additional products, preparation of1540regulatory approval, implementation timing and market uncertainties will exist1541with each new product. As a result, our success to a large degree is dependent1542on the maintenance and growth of our Duett sealing device business. To date we1543have not been able to grow our share of the vascular sealing device market over15445% with our Duett sealing device. If we are unable to maintain and modestly grow1545our Duett sealing device market share, our business will be seriously harmed.15461547WE HAVE INCURRED LOSSES AND WE MAY NOT BE PROFITABLE IN THE FUTURE15481549Since we commenced operations in February 1997, we have incurred net1550losses primarily from costs relating to the development and commercialization of1551our Duett sealing device. At December 31, 2002, we had an accumulated deficit of1552$50.1 million. We expect to continue to significantly invest in our sales and1553marketing, and research and development activities. Because of our plans to1554introduce new products, hire additional employees and expand our1555commercialization, we expect to incur significant net losses through at least1556mid-2004. Our business strategies may not be successful and we may not be1557profitable in any future period. If we do become profitable, we cannot be1558certain that we can sustain or increase profitability on a quarterly or annual1559basis.15601561WE MAY FACE ADDITIONAL INTELLECTUAL PROPERTY CLAIMS IN THE FUTURE WHICH COULD1562PREVENT US FROM MANUFACTURING AND SELLING OUR PRODUCTS OR RESULT IN OUR1563INCURRING SUBSTANTIAL COSTS AND LIABILITIES156415651566211567<PAGE>156815691570The interventional cardiology industry is characterized by numerous patent1571filings and frequent and substantial intellectual property litigation. Companies1572in the interventional cardiology industry in general, and in vascular sealing in1573particular, have employed intellectual property litigation in an attempt to gain1574a competitive advantage. We are aware of many United States patents issued to1575other companies in the vascular sealing field which describe vascular sealing1576devices. Each of the currently marketed vascular sealing products has been1577subject to infringement litigation. Although we have settled all of our previous1578intellectual property litigation with respect to our Duett sealing device, it is1579possible that additional claims relating to the Duett could be brought in the1580future. In addition, it is possible that we could be subject to intellectual1581property claims with respect to any of our new products. Intellectual property1582litigation in recent years has proven to be very complex, and the outcome of1583such litigation is difficult to predict.15841585An adverse determination in any intellectual property litigation or1586interference proceedings could prohibit us from selling our products, subject us1587to significant liabilities to third parties or require us to seek licenses from1588third parties. The costs associated with these license arrangements may be1589substantial and could include ongoing royalties. Furthermore, the necessary1590licenses may not be available to us on satisfactory terms, if at all. Adverse1591determinations in a judicial or administrative proceeding or failure to obtain1592necessary licenses could prevent us from manufacturing and selling our product.15931594Our defense of intellectual property claims filed in the future,1595regardless of the merits of the complaint, could divert the attention of our1596technical and management personnel away from the development and marketing of1597our products for significant periods of time. The costs incurred to future1598claims could be substantial and seriously harm us, even if our defense is1599ultimately successful.16001601OUR FUTURE OPERATING RESULTS ARE DIFFICULT TO PREDICT AND MAY VARY SIGNIFICANTLY1602FROM QUARTER TO QUARTER, WHICH MAY ADVERSELY AFFECT THE PRICE OF OUR COMMON1603STOCK16041605The limited history of our sales and our history of losses make prediction1606of future operating results difficult. You should not rely on our past revenue1607growth as any indication of future growth rates or operating results. The price1608of our common stock will likely fall in the event that our operating results do1609not meet the expectations of analysts and investors. Comparisons of our1610quarterly operating results are an unreliable indication of our future1611performance because they are likely to vary significantly based on many factors,1612including:16131614o the level of sales of our Duett sealing device and new products in1615the United States market;16161617o our ability to introduce new products and enhancements in a timely1618manner;16191620o the demand for and acceptance of our products;16211622o the success of our competition and the introduction of alternative1623products;16241625o our ability to command favorable pricing for our products;16261627o the growth of the market for our devices;16281629o the expansion and rate of success of our direct sales force in the1630United States and our independent distributors internationally;16311632o actions relating to ongoing FDA compliance;163316341635221636<PAGE>163716381639o the effect of intellectual property disputes;16401641o the size and timing of orders from independent distributors or1642customers;16431644o the attraction and retention of key personnel, particularly in sales1645and marketing, regulatory, manufacturing and research and1646development;16471648o unanticipated delays or an inability to control costs;16491650o general economic conditions as well as those specific to our1651customers and markets; and16521653o seasonal fluctuations in revenue due to the elective nature of some1654procedures.16551656OUR DIRECT SALES EFFORTS MAY NOT BE SUCCESSFUL BECAUSE WE HAVE A LIMITED1657OPERATING HISTORY WITH A DIRECT SALES FORCE16581659Because we received regulatory approval to sell our Duett sealing device1660in the United States during 2000, we have only a limited operating history with1661a direct sales force. We believe that there is significant competition for1662direct sales personnel and clinical specialists with the advanced sales skills1663and technical knowledge we require. We may not be able to obtain, train and1664retain sufficient numbers of direct sales personnel and the future sales efforts1665of our direct sales force may not be successful.16661667WE MAY FACE PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN COSTLY LITIGATION AND1668SIGNIFICANT LIABILITIES16691670The manufacture and sale of medical products entail significant risk of1671product liability claims. The medical device industry in general has been1672subject to significant medical malpractice litigation. Any product liability1673claims, with or without merit, could result in costly litigation, reduced sales,1674cause us to incur significant liabilities and divert our management's time,1675attention and resources. Because of our limited operating history and lack of1676experience with these claims, we cannot be sure that our product liability1677insurance coverage is adequate or that it will continue to be available to us on1678acceptable terms, if at all.16791680THE MARKET FOR VASCULAR SEALING DEVICES IS HIGHLY COMPETITIVE AND WILL LIKELY1681BECOME MORE COMPETITIVE, AND OUR COMPETITORS MAY BE ABLE TO RESPOND MORE QUICKLY1682TO NEW OR EMERGING TECHNOLOGIES AND CHANGES IN CUSTOMER REQUIREMENTS THAT MAY1683RENDER OUR DUETT SEALING DEVICE OBSOLETE16841685The existing market for vascular sealing devices is intensely competitive.1686We expect competition to increase further as additional companies begin to enter1687this market and/or modify their existing products to compete directly with ours.1688Our primary competitors are Abbott Laboratories (through its subsidiary1689Perclose, Inc.), Datascope Corp. and St. Jude Medical, Inc., which sells a1690product developed by Kensey Nash Corporation. These companies have:16911692o better name recognition;16931694o broader product lines;16951696o greater sales, marketing and distribution capabilities;16971698o significantly greater financial resources;16991700o larger research and development staffs and facilities; and170117021703231704<PAGE>170517061707o existing relationships with some of our potential customers.17081709We may not be able to effectively compete with these companies. In1710addition, broad product lines may allow our competitors to negotiate exclusive,1711long-term supply contracts and offer comprehensive pricing for their products.1712Broader product lines may also provide our competitors with a significant1713advantage in marketing competing products to group purchasing organizations and1714other managed care organizations that are increasingly seeking to reduce costs1715through centralized purchasing. Greater financial resources and product1716development capabilities may allow our competitors to respond more quickly to1717new or emerging technologies and changes in customer requirements that may1718render our Duett sealing device obsolete.17191720OUR INTERNATIONAL SALES ARE SUBJECT TO A NUMBER OF RISKS THAT COULD SERIOUSLY1721HARM OUR ABILITY TO SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS IN ANY INTERNATIONAL1722MARKET17231724Our international sales are subject to several risks, including:17251726o the ability of our independent distributors to sell our device;17271728o the impact of recessions in economies outside the United States;17291730o greater difficulty in collecting accounts receivable and longer1731collection periods;17321733o unexpected changes in regulatory requirements, tariffs or other1734trade barriers;17351736o weaker intellectual property rights protection in some countries;17371738o potentially adverse tax consequences; and17391740o political and economic instability.17411742The occurrence of any of these events could seriously harm our future1743international sales and our ability to successfully commercialize our products1744in any international market.17451746WE HAVE LIMITED MANUFACTURING EXPERIENCE AND MAY ENCOUNTER DIFFICULTIES IN OUR1747MANUFACTURING OPERATIONS WHICH COULD SERIOUSLY HARM OUR BUSINESS17481749We have limited experience in manufacturing our products. We are currently1750in the process of moving our facilities to a new location. We believe our new1751facilities will be adequate for our projected production of our products for the1752foreseeable future, but future facility requirements will depend largely on1753future sales of our products in the United States. We may encounter unforeseen1754difficulties in moving our production in the near future, expanding our1755production of our new products, including problems involving production yields,1756quality control and assurance, component supply and shortages of qualified1757personnel, compliance with FDA regulations and requirements regarding good1758manufacturing practices, and the need for further regulatory approval of new1759manufacturing processes. Difficulties encountered by us in expanding our1760manufacturing capabilities could seriously harm our business.17611762OUR BUSINESS AND RESULTS OF OPERATIONS MAY BE SERIOUSLY HARMED BY CHANGES IN1763THIRD-PARTY REIMBURSEMENT POLICIES176417651766241767<PAGE>176817691770We could be seriously harmed by changes in reimbursement policies of1771governmental or private healthcare payors, particularly to the extent any1772changes affect reimbursement for catheterization procedures in which our Duett1773sealing device or D-Stat hemostat is used. Failure by physicians, hospitals and1774other users of our products to obtain sufficient reimbursement from healthcare1775payors for procedures in which our products are used or adverse changes in1776governmental and private third-party payors' policies toward reimbursement for1777such procedures would seriously harm our business.17781779In the United States, healthcare providers, including hospitals and1780clinics that purchase medical devices such as our Duett sealing device or D-Stat1781hemostat, generally rely on third-party payors, principally federal Medicare,1782state Medicaid and private health insurance plans, to reimburse all or part of1783the cost of catheterization procedures. We believe that in a prospective payment1784system, such as the system currently used by Medicare, and in many managed care1785systems used by private healthcare payors, the cost of our product will be1786incorporated into the overall cost of the procedure and that there will be no1787separate, additional reimbursement for our product.17881789In international markets, acceptance of our products is dependent in part1790upon the availability of reimbursement within prevailing healthcare payment1791systems. However, we are unaware of any hospitals that receive specific,1792cost-based, direct reimbursement for the use of our Duett sealing device or our1793D-Stat hemostat. Reimbursement and healthcare payment systems in international1794markets vary significantly by country. Our failure to receive international1795reimbursement approvals could have a negative impact on market acceptance of our1796products in the markets in which these approvals are sought.17971798OUR PRODUCTS AND OUR MANUFACTURING ACTIVITIES ARE SUBJECT TO EXTENSIVE1799GOVERNMENTAL REGULATION THAT COULD PREVENT US FROM SELLING OUR PRODUCTS IN THE1800UNITED STATES OR INTRODUCING NEW AND IMPROVED PRODUCTS18011802Our products and our manufacturing activities are subject to extensive1803regulation by a number of governmental agencies, including the FDA and1804comparable international agencies. We are required to:18051806o obtain the approval of the FDA and international agencies before we1807can market and sell our products;18081809o satisfy these agencies' content requirements for all of our1810labeling, sales and promotional materials; and18111812o undergo rigorous inspections by these agencies.18131814Compliance with the regulations of these agencies may delay or prevent us1815from introducing any new model of our existing products or other new products.1816Furthermore, we may be subject to sanctions, including temporary or permanent1817suspension of operations, product recalls and marketing restrictions if we fail1818to comply with the laws and regulations pertaining to our business.18191820We are also required to demonstrate compliance with the FDA's quality1821system regulations. The FDA enforces its quality system regulations through1822pre-approval and periodic post-approval inspections. These regulations relate to1823product testing, vendor qualification, design control and quality assurance, as1824well as the maintenance of records and documentation. If we are unable to1825conform to these regulations, the FDA may take actions which could seriously1826harm our business. In addition, government regulation may be established that1827could prevent, delay, modify or rescind regulatory clearance or approval of our1828products.18291830THE LOSS OF, OR INTERRUPTION OF SUPPLY FROM, KEY VENDORS, INCLUDING SINGLE1831SOURCE SUPPLIERS, COULD LIMIT OUR ABILITY TO MANUFACTURE OUR PRODUCTS18321833We purchase components used in our Duett sealing device and D-Stat1834flowable hemostat from various suppliers and rely on single sources for the1835collagen and thrombin components of our Duett sealing device183618371838251839<PAGE>184018411842procoagulant and our D-Stat flowable hemostat. There are currently no1843FDA-approved alternative suppliers of thrombin and very few FDA-approved1844alternative suppliers of collagen. Our current supply agreement with our1845thrombin vendor extends through 2004, but there are no assurances that any1846future agreement would be on similar terms. Because it requires FDA approval,1847establishing additional or replacement suppliers for thrombin would require a1848lead-time of at least two years and would involve significant additional costs.1849Any supply interruption from key vendors or failure by us to engage alternative1850vendors may limit our ability to manufacture our Duett sealing device and our1851D-Stat flowable hemostat and could therefore seriously harm our business.18521853ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK18541855Not applicable.18561857ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA18581859The Consolidated Financial Statements and Notes thereto required pursuant1860to this Item begin on page 35 of this Annual Report on Form 10-K.18611862ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND1863FINANCIAL DISCLOSURE18641865None.18661867186818691870261871<PAGE>187218731874PART III18751876ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT18771878Incorporated herein by reference to the Sections under the headings1879"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting1880Compliance" contained in the Proxy Statement for our Annual Meeting of1881Shareholders to be filed with the Securities and Exchange Commission within 1201882days of the close of the year ended December 31, 2002.18831884See Item 1 of Part I hereof for information regarding our Executive1885Officers.18861887ITEM 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, 2002.18941895ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT18961897Incorporated herein by reference to the Section under the heading1898"Security Ownership of Certain Beneficial Owners and Management" and "Equity1899Compensation Plan Information" contained in the Proxy Statement for our Annual1900Meeting of Shareholders to be filed with the Securities and Exchange Commission1901within 120 days of the close of the year ended December 31, 2002.19021903ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS19041905None.19061907ITEM 14. CONTROLS AND PROCEDURES19081909(a) Evaluation of disclosure controls and procedures.19101911Under the supervision and with the participation of our management,1912including our Chief Executive Officer and Acting Chief Financial Officer, we1913evaluated the effectiveness of the design and operation of our disclosure1914controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act) as1915of a date (the "Evaluation Date") within 90 days prior to the filing date of1916this report. Based upon that evaluation, the Chief Executive Officer and Acting1917Chief Financial Officer concluded that, as of the Evaluation Date, our1918disclosure controls and procedures were effective in timely alerting them to the1919material information relating to us (or our consolidated subsidiaries) required1920to be included in our periodic SEC filings.19211922(b) Changes in internal controls.19231924There were no significant changes made in our internal controls during the1925period covered by this report or, to our knowledge, in other factors that could1926significantly affect these controls subsequent to the date of their evaluation.192719281929271930<PAGE>193119321933PART IV193419351936ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K19371938(a) Documents filed as part of this Report.19391940(1) The following financial statements are filed herewith in Item 8 in1941Part II.19421943(i) Consolidated Balance Sheets19441945(ii) Consolidated Statements of Operations19461947(iii) Consolidated Statement of Changes in Shareholders' Equity19481949(iv) Consolidated Statements of Cash Flows19501951(v) Notes to Consolidated Financial Statements19521953(2) Financial Statement Schedules19541955Schedule II - Valuation and Qualifying Accounts. Such schedule should be1956read in conjunction with the consolidated financial statements. All other1957supplemental schedules are omitted because of the absence of conditions under1958which they are required.19591960(3) Exhibits19611962Exhibit1963Number Description1964------ -----------196519663.1 Amended and Restated Articles of Incorporation of Vascular1967Solutions, Inc. (incorporated by reference to Exhibit 3.1 to1968Vascular Solutions' Form 10-Q for the quarter ended September 30,19692000).197019713.2 Bylaws of Vascular Solutions, Inc. (incorporated by reference to1972Exhibit 3.2 of Vascular Solutions' Registration Statement on Form1973S-1 (File No. 333-84089)).197419754.1 Specimen of Common Stock certificate (incorporated by reference to1976Exhibit 4.1 of Vascular Solutions' Registration Statement on Form1977S-1 (File No. 333-84089)).197819794.2 Form of warrant dated January 31 and February 14, 1997 issued to1980representatives of Miller, Johnson & Kuehn, Incorporated1981(incorporated by reference to Exhibit 4.2 of Vascular Solutions'1982Registration Statement on Form S-1 (File No. 333-84089)).198319844.3 Form of warrant dated December 29, 1997 issued to representatives of1985Miller, Johnson & Kuehn, Incorporated (incorporated by reference to1986Exhibit 4.3 of Vascular Solutions' Registration Statement on Form1987S-1 (File No. 333-84089)).198819894.4 Amended and Restated Investors' Rights Agreement dated December 9,19901998, by and between Vascular Solutions, Inc. and the purchasers of1991Series A and Series B preferred stock (incorporated by reference to1992Exhibit 4.4 of Vascular Solutions' Registration Statement on Form1993S-1 (File No. 333-84089)).199419954.5 Stock Purchase Warrant dated June 10, 1999 by and between Vascular1996Solutions, Inc. and Jones Pharma, Incorporated (incorporated by1997reference to Exhibit 4.7 of Vascular Solutions' Registration1998Statement on Form S-1 (File No. 333-84089)).1999200010.1 Lease Agreement dated February 11, 1998 by and between Massachusetts2001Mutual Life200220032004282005<PAGE>200620072008Insurance Company as Landlord and Vascular Solutions, Inc. as Tenant2009(incorporated by reference to Exhibit 10.2 of Vascular Solutions'2010Registration Statement on Form S-1 (File No. 333-84089)).2011201210.2 First Lease Amendment dated June 9, 1999 by and between Duke Realty2013Limited Partnership as Landlord and Vascular Solutions, Inc. as2014Tenant (incorporated by reference to Exhibit 10.3 of Vascular2015Solutions' Registration Statement on Form S-1 (File No. 333-84089)).2016201710.3 Second Lease Amendment dated October 24, 1999 by and between Duke2018Realty Limited Partnership as Landlord and Vascular Solutions, Inc.2019as Tenant (incorporated by reference to Exhibit 10.3 to Vascular2020Solutions' Form 10-K for the year ended December 31, 2000).2021202210.4 Third Lease Amendment dated August 23, 2000 by and between Duke2023Realty Limited Partnership as Landlord and Vascular Solutions, Inc.2024as Tenant (incorporated by reference to Exhibit 10.4 to Vascular2025Solutions' Form 10-K for the year ended December 31, 2000).2026202710.5 Bill of Sale and Assignment dated January 31, 1997 by and between2028Vascular Solutions, Inc. and Dr. Gary Gershony (incorporated by2029reference to Exhibit 10.4 of Vascular Solutions' Registration2030Statement on Form S-1 (File No. 333-84089)).2031203210.6 Mutual and General Release dated November 9, 1998 by and between2033Vascular Solutions, Inc., Dr. Gary Gershony and B. Braun Medical,2034Inc. (incorporated by reference to Exhibit 10.5 of Vascular2035Solutions' Registration Statement on Form S-1 (File No. 333-84089)).2036203710.7 Purchase and Sale Agreement dated September 17, 1998 by and between2038Vascular Solutions, Inc. and Davol Inc. (incorporated by reference2039to Exhibit 10.8 of Vascular Solutions' Registration Statement on2040Form S-1 (File No. 333-84089)).2041204210.8 Purchase Agreement dated June 10, 1999 by and between GenTrac, Inc.2043and Vascular Solutions, Inc. (incorporated by reference to Exhibit204410.9 of Vascular Solutions' Registration Statement on Form S-1 (File2045No. 333-84089)).2046204710.9* Form of Employment Agreement by and between Vascular Solutions, Inc.2048and each of its executive officers (incorporated by reference to2049Exhibit 10.11 of Vascular Solutions' Registration Statement on Form2050S-1 (File No. 333-84089)).2051205210.10 Form of Distribution Agreement (incorporated by reference to Exhibit205310.12 of Vascular Solutions' Registration Statement on Form S-12054(File No. 333-84089)).2055205610.11* Vascular Solutions, Inc. Employee Stock Purchase Plan, as amended2057(incorporated by reference to Exhibit 10.14 to Vascular Solutions'2058Form 10-K for the year ended December 31, 2000).2059206010.12 Settlement Agreement dated July 12, 2001 by and between Vascular2061Solutions and St. Jude Medical and Daig Corporation (incorporated by2062reference to Exhibit 99.2 to Vascular Solutions' Form 8-K dated July206312, 2001).2064206510.13 Purchase Agreement dated April 30, 2002 by and between Vascular2066Solutions and Angiosonics (incorporated by reference to Exhibit 99.22067to Vascular Solutions' Form 8-K dated April 30, 2002).2068206910.14* Stock Option and Stock Award Plan as Amended July 16, 20022070(incorporated by reference to Exhibit 10.1 of Vascular Solutions'2071Form 10-Q for the quarter ended June 30, 2002).2072207310.15 Lease Agreement dated August 30, 2002 by and between First2074Industrial, L.P. as Landlord and Vascular Solutions, Inc. as Tenant2075(incorporated by reference to Exhibit 10.1 of Vascular Solutions'2076Form 10-Q for the quarter ended September 30, 2002).2077207810.16 Settlement Agreement dated November 26, 2002 by and between Vascular2079Solutions and Datascope (incorporated by reference to Exhibit 99.22080to Vascular Solutions' Form 8-K dated November 26, 2002).2081208210.17** License and Supply Agreement dated December 17, 2002 by and2083between Vascular Solutions and Tepha, Inc.2084208521 List of Subsidiaries208620872088292089<PAGE>20902091209223.1 Consent of Ernst & Young LLP.2093209424.1 Power of Attorney (included on signature page).2095209699.1 Certification of Chief Executive Officer and Acting Chief Financial2097Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.20982099- ------------------------2100* Management contract or compensatory plan or arrangement required to be filed2101as an Exhibit to this Form 10-K.2102** Certain portions of this exhibit have been omitted pending a request for2103confidential treatment from the SEC.21042105(b) Reports on Form 8-K:21062107We filed a Form 8-K on November 26, 2002 to report the settlement of patent2108litigation with Datascope. There were no financial statements required to be2109filed with the Form 8-K.21102111(c) See Item 14(a)(3) above.21122113(d) See Item 14(a)(2) above.2114211521162117211821192120302121<PAGE>212221232124SIGNATURES21252126Pursuant to the requirements of Section 13 or 15(d) of the Securities2127Exchange Act of 1934, the registrant has duly caused this report to be signed on2128its behalf by the undersigned, thereunto duly authorized, on the 28th day of2129February, 2003.21302131VASCULAR SOLUTIONS, INC.21322133By: /s/ Howard Root2134------------------------------------2135Howard Root2136Chief Executive Officer and Director21372138KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature2139appears below constitutes and appoints Howard Root and James Hennen (with full2140power to act alone), as his or her true and lawful attorneys-in-fact and agents,2141with full powers of substitution and resubstitution, for him or her and in his2142or her name, place and stead, in any and all capacities, to sign any and all2143amendments to the Annual Report on Form 10-K of Vascular Solutions, Inc., and to2144file the same, with all exhibits thereto, and other documents in connection2145therewith, with the Securities and Exchange Commission, granting unto said2146attorneys-in-fact and agents full power and authority to do and perform each and2147every act and thing requisite or necessary to be done in and about the premises,2148as fully to all intents and purposes as he or she might or could do in person,2149hereby ratifying and confirming all that said attorneys-in-fact and agents, or2150their substitute or substitutes, lawfully do or cause to be done by virtue2151hereof.21522153Pursuant to the requirements of the Securities Exchange Act of 1934,2154this report has been signed on the 28th day of February 2003, by the following2155persons in the capacities indicated.21562157Signature Title2158--------- -----21592160/s/ Howard Root Chief Executive Officer, Acting Chief2161- -------------------------- Financial Officer and Director2162Howard Root (PRINCIPAL EXECUTIVE OFFICER &2163PRINCIPAL FINANCIAL OFFICER)216421652166/s/ James Hennen Controller/Director of Finance2167- -------------------------- (PRINCIPAL ACCOUNTING OFFICER)2168James Hennen216921702171/s/ James Jacoby, Jr. Director2172- --------------------------2173James Jacoby, Jr.217421752176/s/ Richard Nigon Director2177- --------------------------2178Richard Nigon217921802181/s/ Michael Kopp Director2182- --------------------------2183Michael Kopp218421852186/s/ Paul O'Connell Director2187- --------------------------2188Paul O'Connell218921902191/s/ John Erb Director2192- --------------------------2193John Erb219421952196/s/ Dr. Gary Dorfman Director2197- --------------------------2198Dr. Gary Dorfman219922002201312202<PAGE>220322042205CERTIFICATIONS22062207I, Howard Root, certify that:220822091. I have reviewed this annual report on Form 10-K of Vascular Solutions,2210Inc.;221122122. Based on my knowledge, this annual report does not contain any untrue2213statement of a material fact or omit to state a material fact necessary to2214make the statements made, in light of the circumstances under which such2215statements were made, not misleading with respect to the period covered by2216this annual report;221722183. Based on my knowledge, the financial statements, and other financial2219information included in this annual report, fairly present in all material2220respects the financial condition, results of operations and cash flows of2221the registrant as of, and for, the periods presented in this annual report;222222234. The registrant's other certifying officers and I are responsible for2224establishing and maintaining disclosure controls and procedures (as defined2225in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:22262227(a) designed such disclosure controls and procedures to ensure that2228material information relating to the registrant, including its2229consolidated subsidiaries, is made known to us by others within those2230entities, particularly during the period in which this annual report2231is being prepared;22322233(b) evaluated the effectiveness of the registrant's disclosure controls2234and procedures as of a date within 90 days prior to the filing date of2235this annual report (the "Evaluation Date"); and22362237(b) presented in this annual report our conclusions about the2238effectiveness of the disclosure controls and procedures based on our2239evaluation as of the Evaluation Date;224022415. The registrant's other certifying officers and I have disclosed, based on2242our most recent evaluation, to the registrant's auditors and the audit2243committee of registrant's board of directors (or persons performing the2244equivalent function):22452246(a) all significant deficiencies in the design or operation of internal2247controls which could adversely affect the registrant's ability to2248record, process, summarize and report financial data and have2249identified for the registrant's auditors any material weaknesses in2250internal controls; and22512252(b) any fraud, whether or not material, that involves management or other2253employees who have a significant role in the registrant's internal2254controls; and225522562257322258<PAGE>2259226022616. The registrant's other certifying officers and I have indicated in2262this annual report whether or not there were significant changes in2263internal controls or in other factors that could significantly affect2264internal controls subsequent to the date of our most recent2265evaluation, including any corrective actions with regard to2266significant deficiencies and material weaknesses.22672268Date: February 28, 2003 By: /s/ Howard Root2269-----------------------------2270Howard Root2271CHIEF EXECUTIVE OFFICER AND ACTING2272CHIEF FINANCIAL OFFICER2273(Principal executive officer and2274principal financial officer)2275227622772278227922802281332282<PAGE>228322842285SCHEDULE II2286VALUATION AND QUALIFYING ACCOUNTS2287YEARS ENDED DECEMBER 31, 2002, 2001, AND 200022882289<TABLE>2290<CAPTION>2291Additions2292Charged2293Balance at to Costs Balance at2294Description Beginning and Less End of2295of Year Expenses Deductions Year2296-------- -------- -------- --------2297<S> <C> <C> <C> <C>2298YEAR ENDED DECEMBER 31, 2002:2299Sales return allowance ........ $ 64,526 $174,642 $199,168 $ 40,0002300Allowance for doubtful accounts 110,000 23,592 43,592 90,0002301-------- -------- -------- --------2302Total ....................... $174,526 $198,234 $242,760 $130,0002303======== ======== ======== ========23042305YEAR ENDED DECEMBER 31, 2001:2306Sales return allowance ........ -- 401,733 337,207 64,5262307Allowance for doubtful accounts 80,000 35,304 5,304 110,0002308-------- -------- -------- --------2309Total ....................... $ 80,000 $437,037 342,511 $174,5262310======== ======== ======== ========23112312YEAR ENDED DECEMBER 31, 2000:2313Sales return allowance ........ -- -- -- --2314Allowance for doubtful accounts -- 80,000 -- 80,0002315-------- -------- -------- --------2316Total ....................... $ -- $ 80,000 $ -- $ 80,0002317======== ======== ======== ========2318</TABLE>23192320232123222323342324<PAGE>2325232623272328232923302331233223332334Report of Independent Auditors23352336The Board of Directors and Shareholders2337Vascular Solutions, Inc.23382339We have audited the consolidated balance sheets of Vascular Solutions, Inc. as2340of December 31, 2002 and 2001, and the related statements of operations, changes2341in shareholders' equity, and cash flows for each of the three years in the2342period ended December 31, 2002. These financial statements are the2343responsibility of the Company's management. Our responsibility is to express an2344opinion on these financial statements based on our audits.23452346We conducted our audits in accordance with auditing standards generally accepted2347in the United States. Those standards require that we plan and perform the audit2348to obtain reasonable assurance about whether the financial statements are free2349of material misstatement. An audit includes examining, on a test basis, evidence2350supporting the amounts and disclosures in the financial statements. An audit2351also includes assessing the accounting principles used and significant estimates2352made by management, as well as evaluating the overall financial statement2353presentation. We believe that our audits provide a reasonable basis for our2354opinion.23552356In our opinion, the financial statements referred to above present fairly, in2357all material respects, the consolidated financial position of Vascular2358Solutions, Inc. at December 31, 2002 and 2001, and the consolidated results of2359its operations and its cash flows for each of the three years in the period2360ended December 31, 2002 in conformity with accounting principles generally2361accepted in the United States.23622363Ernst & Young LLP23642365Minneapolis, Minnesota2366January 17, 200323672368236923702371237223733523742375<PAGE>237623772378237923803723812382Vascular Solutions, Inc.23832384Consolidated Balance Sheets23852386<TABLE>2387<CAPTION>2388DECEMBER 3123892002 20012390------------------------------------2391<S> <C> <C>2392ASSETS2393Current assets:2394Cash and cash equivalents $ 1,835,059 $ 9,091,6402395Available-for-sale securities 14,914,444 24,226,4752396Accounts receivable, net of reserves of $130,000 and $174,526 in23972002 and 2001, respectively 1,357,946 1,285,0112398Inventories 2,132,516 1,782,3632399Prepaid expenses 326,773 289,8882400------------------------------------2401Total current assets 20,566,738 36,675,37724022403Property and equipment, net 795,885 917,5792404Intangible assets, net 917,595 --2405------------------------------------2406Total assets $ 22,280,218 $ 37,592,9562407====================================24082409LIABILITIES AND SHAREHOLDERS' EQUITY2410Current liabilities:2411Accounts payable $ 771,078 $ 744,8562412Accrued compensation 886,130 923,7052413Accrued expenses 253,777 294,5112414------------------------------------2415Total current liabilities 1,910,985 1,963,07224162417Shareholders' equity:2418Common stock, $0.01 par value:2419Authorized shares - 40,000,0002420Issued and outstanding shares - 12,880,839 - 2002;242113,327,002 - 2001 128,808 133,2702422Additional paid-in capital 70,355,343 70,712,1742423Other (21,278) (100,834)2424Accumulated deficit (50,093,640) (35,114,726)2425------------------------------------2426Total shareholders' equity 20,369,233 35,629,8842427------------------------------------2428Total liabilities and shareholders' equity $ 22,280,218 $ 37,592,9562429====================================2430</TABLE>2431243224332434SEE ACCOMPANYING NOTES.243524362437362438<PAGE>24392440244124422443Vascular Solutions, Inc.24442445Consolidated Statements of Operations24462447<TABLE>2448<CAPTION>2449YEAR ENDED DECEMBER 3124502002 2001 20002451--------------------------------------------2452<S> <C> <C> <C>2453Net sales $ 12,100,526 $ 12,082,379 $ 6,193,2342454Cost of goods sold 4,985,587 4,961,014 2,701,3422455--------------------------------------------2456Gross profit 7,114,939 7,121,365 3,491,89224572458Operating expenses:2459Research and development 3,227,538 4,123,883 3,117,3392460Clinical and regulatory 1,347,694 1,288,301 1,082,0292461Sales and marketing 11,963,907 12,771,901 6,699,7222462General and administrative 2,166,883 2,498,435 2,255,1602463Legal settlement 3,750,000 350,000 --2464Amortization of purchased technology 145,000 -- --2465--------------------------------------------2466Total operating expenses 22,601,022 21,032,520 13,154,2502467--------------------------------------------24682469Operating loss (15,486,083) (13,911,155) (9,662,358)2470Interest income 507,169 1,660,757 1,453,4912471--------------------------------------------24722473Net loss $(14,978,914) $(12,250,398) $ (8,208,867)2474============================================24752476Basic and diluted net loss per share $ (1.13) $ (0.93) $ (0.95)2477============================================24782479Shares used in computing basic and diluted2480net loss per share 13,276,147 13,216,773 8,645,1522481============================================2482</TABLE>24832484SEE ACCOMPANYING NOTES.24852486248724882489372490<PAGE>249124922493Vascular Solutions, Inc.24942495Consolidated Statement of Changes in Shareholders' Equity24962497<TABLE>2498<CAPTION>2499SERIES A SERIES B2500PREFERRED STOCK PREFERRED STOCK COMMON STOCK2501------------------------------------------------------------------------------------------2502SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT2503------------------------------------------------------------------------------------------2504<S> <C> <C> <C> <C> <C> <C>2505Balance at December 31, 1999 2,000,000 $ 20,000 1,777,777 $ 17,778 5,250,291 $ 52,5032506Exercise of stock options -- -- -- -- 62,940 6292507Sale of common stock with the initial2508public offering at $12.00 per share2509in July 2000, net of offering costs -- -- -- -- 4,025,000 40,2502510Conversion of preferred stock in2511connection with initial public2512offering (2,000,000) (20,000) (1,777,777) (17,778) 3,777,777 37,7782513Amortization of deferred compensation -- -- -- -- -- --2514Deferred compensation related to2515option grants -- -- -- -- -- --2516Comprehensive loss:2517Net loss -- -- -- -- -- --2518Translation adjustment -- -- -- -- -- --25192520Total comprehensive loss2521------------------------------------------------------------------------------------------2522Balance at December 31, 2000 -- -- -- -- 13,116,008 131,1602523Exercise of stock options -- -- -- -- 120,800 1,2082524Issuance of common stock under the2525Employee Stock Purchase Plan -- -- -- -- 90,194 9022526Value of stock options granted for2527services -- -- -- -- -- --2528Deferred compensation related to2529option grants -- -- -- -- -- --2530Amortization of deferred compensation -- -- -- -- -- --2531Comprehensive loss:2532Net loss -- -- -- -- -- --2533Translation adjustment -- -- -- -- -- --25342535Total comprehensive loss2536------------------------------------------------------------------------------------------2537Balance at December 31, 2001 -- -- -- -- 13,327,002 133,2702538Exercise of stock options -- -- -- -- 10,000 1002539Issuance of common stock under the2540Employee Stock Purchase Plan -- -- -- -- 152,737 1,5282541Stock repurchase program -- -- -- -- (608,900) (6,090)2542Deferred compensation related to2543option grants -- -- -- -- -- --2544Amortization of deferred compensation -- -- -- -- -- --2545Comprehensive loss:2546Net loss -- -- -- -- -- --2547Translation adjustment -- -- -- -- -- --25482549Total comprehensive loss2550------------------------------------------------------------------------------------------2551Balance at December 31, 2002 -- $ -- -- $ -- 12,880,839 $ 128,8082552==========================================================================================25532554</TABLE>255525562557[WIDE TABLE CONTINUED FROM ABOVE]255825592560<TABLE>2561<CAPTION>25622563ADDITIONAL2564PAID-IN ACCUMULATED2565CAPITAL OTHER DEFICIT TOTAL2566------------------------------------------------------------2567<S> <C> <C> <C> <C>2568Balance at December 31, 1999 $ 25,828,309 $ (90,931) $(14,655,461) $ 11,172,1982569Exercise of stock options 169,765 -- -- 170,3942570Sale of common stock with the initial2571public offering at $12.00 per share2572in July 2000, net of offering costs 43,932,416 -- -- 43,972,6662573Conversion of preferred stock in2574connection with initial public2575offering -- --2576Amortization of deferred compensation -- 72,561 -- 72,5612577Deferred compensation related to2578option grants 34,750 (34,750) -- --2579Comprehensive loss:2580Net loss -- -- (8,208,867) (8,208,867)2581Translation adjustment -- 14,938 -- 14,9382582-----------2583Total comprehensive loss (8,193,929)2584------------------------------------------------------------2585Balance at December 31, 2000 69,965,240 (38,182) (22,864,328) 47,193,8902586Exercise of stock options 304,096 -- -- 305,3042587Issuance of common stock under the2588Employee Stock Purchase Plan 308,660 -- -- 309,5622589Value of stock options granted for2590services 10,398 -- -- 10,3982591Deferred compensation related to2592option grants 123,780 (123,780) -- --2593Amortization of deferred compensation -- 62,850 -- 62,8502594Comprehensive loss:2595Net loss -- -- (12,250,398) (12,250,398)2596Translation adjustment -- (1,722) -- (1,722)2597-----------2598Total comprehensive loss (12,252,120)25992600------------------------------------------------------------2601Balance at December 31, 2001 70,712,174 (100,834) (35,114,726) 35,629,8842602Exercise of stock options 19,900 -- -- 20,0002603Issuance of common stock under the2604Employee Stock Purchase Plan 163,043 -- -- 164,5712605Stock repurchase program (541,632) -- -- (547,722)2606Deferred compensation related to2607option grants 1,858 (1,858) -- --2608Amortization of deferred compensation -- 74,668 -- 74,6682609Comprehensive loss:2610Net loss -- -- (14,978,914) (14,978,914)2611Translation adjustment -- 6,746 -- 6,7462612-----------2613Total comprehensive loss (14,972,168)2614------------------------------------------------------------2615Balance at December 31, 2002 $ 70,355,343 $ (21,278) $(50,093,640) $ 20,369,2332616============================================================2617</TABLE>26182619SEE ACCOMPANYING NOTES.2620262126222623382624<PAGE>262526262627Vascular Solutions, Inc.26282629Consolidated Statements of Cash Flows26302631<TABLE>2632<CAPTION>2633YEAR ENDED DECEMBER 3126342002 2001 20002635--------------------------------------------2636<S> <C> <C> <C>2637Operating activities2638Net loss $(14,978,914) $(12,250,398) $ (8,208,867)2639Adjustments to reconcile net loss to net cash used2640in operating activities:2641Depreciation 502,390 432,721 366,7452642Amortization 145,000 -- --2643Value of options granted for services -- 10,398 --2644Deferred compensation expense 74,668 62,850 72,5612645Changes in operating assets and liabilities:2646Accounts receivable (72,935) 686,372 (1,592,304)2647Inventories 113,455 684,082 (1,851,228)2648Prepaid expenses (36,885) (58,637) (138,074)2649Accounts payable 26,222 (22,191) 240,7742650Accrued compensation and expenses (78,309) (481,583) 1,106,0052651--------------------------------------------2652Net cash used in operating activities (14,305,308) (10,936,386) (10,004,388)26532654INVESTING ACTIVITIES2655Purchase of Acolysis assets (1,550,203) -- --2656Purchase of property and equipment (356,696) (456,206) (575,887)2657Purchase of securities (33,173,021) (25,300,530) (23,349,715)2658Proceeds from sales of securities 42,485,052 24,423,770 --2659--------------------------------------------2660Net cash provided by (used in) investing activities 7,405,132 (1,332,966) (23,925,602)26612662FINANCING ACTIVITIES2663Proceeds from exercise of stock options 20,000 305,304 170,3942664Net proceeds from sale of common stock 164,571 309,562 43,972,6662665Repurchase of common stock (547,722) -- --2666--------------------------------------------2667Net cash (used in) provided by financing activities (363,151) 614,866 44,143,06026682669Effect of exchange rate changes on cash and cash2670equivalents 6,746 (1,722) 5,5872671--------------------------------------------2672(Decrease) increase in cash and cash equivalents (7,256,581) (11,656,208) 10,218,6572673Cash and cash equivalents at beginning of year 9,091,640 20,747,848 10,529,1912674--------------------------------------------2675Cash and cash equivalents at end of year $ 1,835,059 $ 9,091,640 $ 20,747,8482676============================================26772678</TABLE>267926802681SEE ACCOMPANYING NOTES.2682268326842685392686<PAGE>26872688268926902691Vascular Solutions, Inc.26922693Notes to Consolidated Financial Statements26942695December 31, 2002269626971. DESCRIPTION OF BUSINESS26982699Vascular Solutions, Inc. (the Company) is a medical device company focused on2700bringing solutions to interventional cardiologists and interventional2701radiologists. The Company's product line includes the Duett(TM) sealing device,2702the D-Stat(TM) flowable hemostat and the Acolysis(R) therapeutic ultrasound2703system. As a vertically-intergrated medical device company, the Company2704generates ideas and creates new interventional medical devices, and then2705delivers those products directly to the physician through its direct domestic2706sales force and international distribution network. The Duett sealing device is2707designed to provide a complete seal of the puncture site following2708catheterization procedures such as angiography, angioplasty and stenting. The2709Diagnostic Duett is a version of the Duett sealing device that is tailored2710specifically for treating diagnostic patients. The D-Stat flowable hemostat is a2711thick, yet flowable blood clotting material that is used in a wide variety of2712interventional medical procedures for the local control of bleeding. The2713Acolysis intravascular therapeutic ultrasound system delivers ultrasound waves2714to lyse blood clots and plaque in arteries. The Acolysis system is not available2715for sale in the United States. The Company was incorporated in December 1996 and2716began operations in February 1997.271727182. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES27192720BASIS OF CONSOLIDATION27212722The consolidated financial statements include the accounts of Vascular2723Solutions, Inc. and its wholly owned subsidiary, Vascular Solutions GmbH, after2724elimination of intercompany accounts and transactions.27252726FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS27272728Foreign assets and liabilities are translated using the year-end exchange rates.2729Results of operations are translated using the average exchange rates throughout2730the year. Translation gains or losses are accumulated as a separate component of2731shareholders' equity.27322733COMPREHENSIVE LOSS27342735The components of comprehensive loss are net loss and the effects of foreign2736currency translation adjustments.27372738USE OF ESTIMATES27392740The preparation of financial statements in conformity with accounting principles2741generally accepted in the United States requires management to make estimates2742and assumptions that affect the amounts reported in the financial statements and2743accompanying notes. Actual results could differ from those estimates.27442745274627472748402749<PAGE>2750275127522. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)27532754CASH AND CASH EQUIVALENTS27552756The Company classifies all highly liquid investments as cash equivalents. Cash2757equivalents consist of cash and money market funds and are stated at cost, which2758approximates market value.27592760AVAILABLE-FOR-SALE SECURITIES27612762The Company classifies investments as available-for-sale securities.2763Available-for-sale securities consist of bank certificates of deposit, U.S.2764Government obligations, commercial paper, and investment-grade corporate debt2765with maturities of up to one year. These investments are stated at amortized2766cost, which approximates market value.27672768INVENTORIES27692770Inventories are stated at the lower of cost (first-in, first-out method) or2771market and are comprised of the following at December 31:277227732002 20012774------------------------------------27752776Raw materials $1,561,943 $1,294,5072777Work-in-process 138,134 305,5272778Finished goods 432,439 182,3292779------------------------------------2780$2,132,516 $1,782,3632781====================================27822783PROPERTY AND EQUIPMENT27842785Property and equipment are stated at cost. Depreciation is provided on a2786straight-line basis over the estimated useful lives of the assets as follows:27872788Manufacturing equipment 3 to 5 years2789Office and computer equipment 3 years2790Furniture and fixtures 2 to 5 years2791Leasehold improvements Remaining term of the lease2792Research and development equipment 3 to 5 years27932794IMPAIRMENT OF LONG-LIVED ASSETS27952796The Company will record impairment losses on long-lived assets used in2797operations when indicators of impairment are present and the undiscounted cash2798flows estimated to be generated by those assets are less than the assets'2799carrying amount. The amount of impairment loss recorded will be measured as the2800amount by which the carrying value of the assets exceeds the fair value of the2801assets.28022803280428052806412807<PAGE>28082809Vascular Solutions, Inc.28102811Notes to Consolidated Financial Statements28122813December 31, 20022814281528162. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)28172818REVENUE RECOGNITION28192820In the United States and Germany, the Company sells its products directly to2821hospitals and clinics. Revenue is recognized upon shipment of products to2822customers, net of estimated returns.28232824In all other international markets, the Company sells its products to2825international distributors which subsequently resell the products to hospitals2826and clinics. The Company has agreements with each of its distributors which2827provide that title and risk of loss pass to the distributor upon shipment of the2828products to the distributor. The Company warrants that its products are free2829from manufacturing defects at the time of shipment to the distributor. Revenue2830is recognized upon shipment of products to distributors following the receipt2831and acceptance of a distributor's purchase order. Allowances are provided for2832estimated returns and warranty costs at the time of shipment. To date, warranty2833costs have been insignificant.28342835RESEARCH AND DEVELOPMENT COSTS28362837All research and development costs are charged to operations as incurred.28382839STOCK-BASED COMPENSATION28402841At December 31, 2002, the Company had a stock-based employee compensation plan,2842which is described more fully in Note 9. The Company accounts for those plans2843under the recognition and measurement principles of Accounting Principles Board2844(APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related2845interpretations. No stock-based employee compensation cost is reflected in net2846loss, as all options granted under those plans had an exercise price equal to2847the market value of the underlying common stock on the date of grant. The2848following table illustrates the effect on net loss and loss per share if the2849Company had applied the fair value recognition provisions of Financial2850Accounting Standards Board (FASB) Statement of Financial Accounting Standards2851(SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to stock-based employer2852compensation.28532854<TABLE>2855<CAPTION>2856YEAR ENDED DECEMBER 3128572002 2001 20002858-----------------------------------------------------------28592860<S> <C> <C> <C>2861Net loss, as reported $(14,978,914) $(12,250,398) $ (8,208,867)2862Deduct: Total stock-based employee compensation2863expense determined under fair-value-based2864method for all awards (2,340,094) (2,631,693) (2,152,860)2865-----------------------------------------------------------2866Pro forma net loss $(17,319,008) $(14,882,091) $(10,361,727)2867===========================================================2868Net loss per share:2869Basic and diluted - as reported $(1.13) $(0.93) $(0.95)2870===========================================================2871Basic and diluted - pro forma $(1.30) $(1.13) $(1.20)2872===========================================================2873</TABLE>2874287528762877422878<PAGE>287928802881Vascular Solutions, Inc.28822883Notes to Consolidated Financial Statements28842885December 31, 20022886288728882. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)28892890For purposes of calculating the above-required disclosure, the fair value of2891each option grant is estimated on the date of grant using the Black-Scholes2892option-pricing model. The fair value of the Company's stock options was2893estimated assuming no expected dividends and the following weighted average2894assumptions:289528962002 2001 20002897-----------------------------------------------28982899Expected life (years) 6.50 7.00 7.502900Expected volatility 1.01 1.21 0.932901Risk-free interest rate 4.30% 4.88% 5.96%29022903The weighted average fair value of options granted with an exercise price equal2904to the deemed stock price on the date of grant during 2002, 2001, and 2000 was2905$1.58, $5.31, and $9.79, respectively.29062907INCOME TAXES29082909Income taxes are accounted for under the liability method. Deferred income taxes2910are provided for temporary differences between the financial reporting and the2911tax bases of assets and liabilities.29122913CONCENTRATIONS OF CREDIT RISK29142915Financial instruments that potentially subject the Company to concentrations of2916credit risk consist primarily of cash and cash equivalents, investments, and2917accounts receivable. The Company maintains its accounts for cash and cash2918equivalents and investments principally at one major bank and two investment2919firms in the United States. The Company has a formal written investment policy2920that restricts the placement of investments to issuers evaluated as2921creditworthy. The Company has not experienced any losses on its deposits of its2922cash and cash equivalents.29232924292529262927432928<PAGE>292929302931Vascular Solutions, Inc.29322933Notes to Consolidated Financial Statements29342935December 31, 20022936293729382. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)29392940With respect to accounts receivable, the Company performs credit evaluations of2941its customers and does not require collateral. One customer accounted for 5% of2942gross accounts receivable as of December 31, 2002 and two customers accounted2943for 11% of gross accounts receivable as of December 31, 2001. There have been no2944material losses on customer receivables.29452946NET LOSS PER SHARE29472948In accordance with SFAS No. 128, EARNINGS PER SHARE, basic net loss per share is2949computed by dividing net loss by the weighted average common shares outstanding2950during the periods presented. Diluted net loss per share is computed by dividing2951net loss by the weighted average common and dilutive potential common shares2952outstanding computed in accordance with the treasury stock method. For all2953periods presented, diluted loss per share is the same as basic loss per share,2954because the effect of outstanding options, warrants, and convertible preferred2955stock is antidilutive.29562957RECLASSIFICATIONS29582959Certain prior year balances were reclassified to conform to the current year2960presentation.29612962GOODWILL AND OTHER INTANGIBLE ASSETS29632964In fiscal 2002, the Company adopted SFAS No. 142, GOODWILL AND OTHER INTANGIBLE2965ASSETS. Goodwill is tested for impairment annually or more frequently if changes2966in circumstances or the occurrence of events suggest an impairment exists. The2967test for impairment requires the Company to make several estimates about fair2968value, most of which are based on projected future cash flows. The Company has2969concluded that no impairment of goodwill exists as of December 31, 2002.29702971Other intangible assets consist of purchased technology. Purchased technology is2972amortized using the straight-line method over its estimated useful life of four2973years. The Company reviews intangible assets for impairment annually or as2974changes in circumstances or the occurrence of events suggests the remaining2975value is not recoverable.297629773. ACQUISITION OF CERTAIN ASSETS OF ANGIOSONICS, INC.29782979On April 29, 2002, the Company purchased the Acolysis(R) intravascular2980ultrasound assets and related patents and technologies from the secured2981creditors of Angiosonics, Inc. in exchange for $1,500,000 in cash. The Company2982allocated the purchase price of $1,500,000 and the related transaction fees2983using the fair market value of the assets. The Company allocated $487,608 to2984inventory and fixed assets, $870,000 to purchased technology, and $192,595 to2985goodwill.29862987298829892990442991<PAGE>29922993Vascular Solutions, Inc.29942995Notes to Consolidated Financial Statements29962997December 31, 20022998299930004. GOODWILL AND OTHER INTANGIBLE ASSETS30013002As discussed in Note 2, the Company adopted SFAS No. 142 in fiscal 2002, and3003determined that the developed technology the Company acquired from Angiosonics,3004Inc. in April 2002 would be amortized over its useful life of four years. The3005Company also acquired goodwill determined to be an indefinite-lived intangible3006asset. The Company expects the future annual amortization expense for its3007acquired purchased development to be approximately $217,500 for each of the next3008three fiscal years and approximately $72,500 in the fourth fiscal year.30093010Balances of acquired intangible assets as of December 31, 2002 were as follows:30113012ACCUMULATED3013CARRYING AMOUNT AMORTIZATION NET3014--------------------------------------------3015Amortizing intangibles:3016Purchased technology $ 870,000 $145,000 $725,00030173018Non-amortizing intangibles:3019Goodwill 192,595 - 192,5953020--------------------------------------------3021$1,062,595 $145,000 $917,5953022============================================302330245. PROPERTY AND EQUIPMENT30253026Property and equipment consists of the following at December 31:302730282002 20013029---------------------------------3030Property and equipment:3031Manufacturing equipment $1,017,283 $ 773,9893032Office and computer equipment 817,143 734,1463033Furniture and fixtures 242,694 221,3473034Leasehold improvements 143,079 143,0793035Research and development equipment 287,964 254,9063036---------------------------------30372,508,163 2,127,4673038Less accumulated depreciation (1,712,278) (1,209,888)3039---------------------------------3040Net property and equipment $ 795,885 $ 917,5793041=================================30423043304430453046453047<PAGE>30483049Vascular Solutions, Inc.30503051Notes to Consolidated Financial Statements30523053December 31, 20023054305530566. LEASES30573058The Company leases a 29,000 square-foot office and manufacturing facility under3059an operating lease agreement, which expires in March 2003. The Company gave3060written notice to the lessor in September 2002 of its intentions to terminate3061the lease effective March 31, 2003. The Company signed a new lease in September30622002 to lease a 33,000 square-foot office and manufacturing facility under an3063operating lease agreement, which expires in September 2008. Rent expense related3064to the operating leases was approximately $303,100, $306,600, and $242,100 for3065the years ended December 31, 2002, 2001, and 2000, respectively.30663067Future minimum lease commitments under these operating leases as of December 31,30682002 are as follows:306930702003 $ 256,35930712004 342,22530722005 342,22530732006 356,49730742007 363,63430752008 272,7253076-------------------3077$1,933,6653078===================307930807. INCOME TAXES30813082At December 31, 2002, the Company had net operating loss carryforwards of3083approximately $46,100,000 for federal income tax purposes that are available to3084offset future taxable income and begin to expire in the year 2013. At December308531, 2002, the Company also had federal and Minnesota research and development3086tax credit carryforwards of approximately $1,206,000 which begin to expire in3087the year 2013. No benefit has been recorded for such carryforwards, and3088utilization in future years may be limited under Sections 382 and 383 of the3089Internal Revenue Code if significant ownership changes have occurred.30903091The components of the Company's deferred tax assets and liabilities as of3092December 31, 2002 and 2001 are as follows:309330942002 20013095------------------------------------3096Deferred tax assets:3097Net operating loss carryforwards $18,452,000 $12,852,0003098Tax credit carryforwards 1,206,000 1,317,0003099Depreciation and amortization 129,000 156,0003100Accrued compensation 88,000 245,0003101Other allowances 94,000 44,0003102Inventory reserve 104,000 34,0003103------------------------------------310420,073,000 14,648,0003105Less valuation allowances (20,073,000) (14,648,000)3106------------------------------------3107Net deferred taxes $ - $ -3108====================================3109311031113112463113<PAGE>31143115Vascular Solutions, Inc.31163117Notes to Consolidated Financial Statements31183119December 31, 20023120312131227. INCOME TAXES (CONTINUED)31233124Reconciliation of the statutory federal income tax rate to the Company's3125effective tax rate is as follows:312631272002 2001 20003128-----------------------------------31293130Tax at statutory rate 34.0% 34.0% 34.0%3131State income taxes 6.0 6.0 6.03132Impact of net operating loss carryforward (40.0) (40.0) (40.0)3133-----------------------------------3134Effective income tax rate -% -% -%3135===================================313631378. INITIAL PUBLIC OFFERING31383139On July 25, 2000, the Company completed the initial public offering of its3140common stock. Upon the closing of the initial public offering, the Company3141issued 3,500,000 shares of its common stock at an offering price of $12.00 per3142share, and all of the Company's Series A and Series B preferred stock3143automatically converted into 3,777,777 shares of common stock. On August 15,31442000, the underwriters exercised in full their overallotment option to purchase3145an additional 525,000 shares of common stock at $12.00 per share. Cash proceeds3146from the sale of the 4,025,000 shares of common stock, net of underwriters'3147discount and offering expenses, totaled approximately $44 million. Upon closing3148of the Company's initial public offering, the authorized capital stock of the3149Company consisted of 40,000,000 shares of common stock, par value $0.01 per3150share, with no shares of preferred stock outstanding or designated.315131529. STOCK OPTIONS AND WARRANTS31533154STOCK OPTION PLAN31553156The Company has a stock option and stock award plan (the Stock Option Plan)3157which provides for the granting of incentive stock options to employees and3158nonqualified stock options to employees, directors, and consultants. As of3159December 31, 2002, the Company reserved 2,400,000 shares of common stock under3160the Stock Option Plan. Under the Stock Option Plan, incentive stock options must3161be granted at an exercise price not less than the fair market value of the3162Company's common stock on the grant date. The exercise price of a nonqualified3163option granted under the Stock Option Plan must not be less than 50% of the fair3164market value of the Company's common stock on the grant date. Prior to the3165initial public offering in July 2000, the Board of Directors determined the fair3166value of the common shares underlying options by assessing the business progress3167of the Company as well as the market conditions for medical device companies and3168other external factors. The options expire on the date determined by the Board3169of Directors but may not extend more than ten years from the grant date. The3170Stock Option Plan also permits the granting of stock appreciation rights,3171restricted stock, and other317231733174473175<PAGE>31763177Vascular Solutions, Inc.31783179Notes to Consolidated Financial Statements31803181December 31, 20023182318331849. STOCK OPTIONS AND WARRANTS (CONTINUED)31853186stock-based awards. The incentive stock options generally become exercisable3187over a four-year period and the nonqualified stock options generally become3188exercisable over a two-year period. Unexercised options are canceled 90 days3189after termination of employment and become available under the Stock Option3190Plan.31913192In the third quarter of 2002, the Company offered to exchange for its current3193employees, other than the Chief Executive Officer, any outstanding options to3194purchase shares of the Company's common stock under the Stock Option Plan with3195an exercise price of at least $3.00 per share for new options the Company will3196grant under the plan. The new options will be granted on or about February 18,31972003, which is six months and two business days after the date the options were3198exchanged. New options granted under the Stock Option Plan will have an exercise3199price determined by the market price of the Company's stock on the date the new3200options are granted. The number of shares to be granted to each participating3201option holder will be equal to the number of shares subject to the eligible3202options tendered by such option holder. A stock option holder must continue to3203be employed by the Company through February 18, 2003 in order to be eligible to3204receive the new options. As a result of this exchange of options shares, 467,0703205options with an average price of $6.80 were canceled.32063207Option activity is summarized as follows:32083209<TABLE>3210<CAPTION>3211WEIGHTED3212SHARES AVERAGE3213AVAILABLE PLAN OPTIONS EXERCISE EXERCISE3214FOR GRANT OUTSTANDING PRICE PRICE3215----------------------------------------------------------------------3216<S> <C> <C> <C> <C> <C>3217Balance at December 31, 1999 374,729 933,611 $1.50-$ 6.00 $ 4.003218Granted (290,250) 290,250 6.00- 16.50 11.123219Exercised - (62,940) 1.50- 5.00 2.713220Canceled 90,150 (90,150) 1.50- 16.50 4.893221-----------------------------------3222Balance at December 31, 2000 174,629 1,070,771 1.50- 16.50 5.853223Shares reserved 500,000 - - -3224Granted (972,000) 972,000 2.51- 7.48 5.353225Exercised - (120,800) 1.50- 7.00 2.533226Canceled 347,160 (347,160) 1.50- 16.50 7.413227-----------------------------------3228Balance at December 31, 2001 49,789 1,574,811 1.50- 16.50 5.453229Shares reserved 500,000 - - -3230Granted (186,000) 186,000 0.81- 2.70 1.833231Exercised - (10,000) 2.00 2.003232Canceled 849,890 (849,890) 1.45- 16.50 6.253233-----------------------------------3234Balance at December 31, 2002 1,213,679 900,9213235===================================32363237</TABLE>3238323932403241483242<PAGE>32433244Vascular Solutions, Inc.32453246Notes to Consolidated Financial Statements32473248December 31, 20023249325032519. STOCK OPTIONS AND WARRANTS (CONTINUED)32523253The following table summarizes information about stock options outstanding at3254December 31, 2002:32553256<TABLE>3257<CAPTION>3258OPTIONS OUTSTANDING OPTIONS EXERCISABLE3259------------------------------------------------ ---------------------------------3260WEIGHTED3261OUTSTANDING AVERAGE EXERCISABLE3262AS OF REMAINING WEIGHTED AS OF WEIGHTED3263RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE3264EXERCISE PRICES 2002 LIFE EXERCISE PRICE 2002 EXERCISE PRICE3265- ------------------------------------------------------------------------- ---------------------------------32663267<S> <C> <C> <C> <C> <C> <C>3268$ 0.81- $ 1.50 187,711 6.8 $ 1.31 121,811 $ 1.3832691.51- 3.25 340,070 8.1 2.55 163,955 2.5832703.26- 6.00 229,000 6.9 6.00 174,320 6.0032716.01- 7.00 51,440 4.6 6.69 48,030 6.7132727.01- 10.00 90,620 8.0 7.61 54,300 7.72327310.01- 12.00 1,000 7.3 12.00 640 12.00327412.01- 16.50 1,080 0.2 16.50 1,080 16.503275----------------- -----------------3276900,921 7.3 3.94 564,136 4.263277================= =================3278</TABLE>32793280For the year ended December 31, 2001, the Company recorded compensation expense3281of $10,398 in connection with nonqualified stock options granted to outside3282consultants.32833284DEFERRED COMPENSATION32853286In 2002, 2001, and 2000, the Company recorded a total of $160,388 of deferred3287compensation in connection with certain nonqualified stock options granted to3288medical advisory board members. The weighted average fair value of these options3289was $3.21. Deferred compensation recorded is amortized ratably over the period3290that the options vest and is adjusted for options which have been canceled.3291Deferred compensation expense was $74,668, $62,850, and $72,561 for the years3292ended December 31, 2002, 2001, and 2000, respectively.32933294WARRANTS32953296As of December 31, 2002, the Company had 268,000 warrants outstanding and3297exercisable at a weighted average exercise price of $3.19 per share.32983299330033013302493303<PAGE>33043305Vascular Solutions, Inc.33063307Notes to Consolidated Financial Statements33083309December 31, 200233103311331210. EMPLOYEE STOCK PURCHASE PLAN33133314The Company has an Employee Stock Purchase Plan (the Purchase Plan) under which3315700,000 shares of common stock have been reserved for issuance. Eligible3316employees may contribute 1% to 10% of their compensation to purchase shares of3317the Company's common stock at a discount of 15% of the market value at certain3318plan-defined dates up to a maximum of 2,000 shares per purchasing period. The3319Purchase Plan terminates in May 2010. In fiscal 2002, 2001, and 2000, 152,7373320shares, 90,194 shares, and zero shares, respectively, were issued under the3321Purchase Plan. At December 31, 2002, 457,069 shares were available for issuance3322under the Purchase Plan.3323332411. STOCK REPURCHASE PROGRAM33253326In August 2002, the Board of Directors authorized a stock repurchase program to3327acquire up to 1,000,000 shares of outstanding common stock in the open market,3328block purchases, or private transactions. During fiscal 2002, the Company3329repurchased and retired 608,900 shares of the Company's common stock for an3330aggregate purchase price of $547,722. The remaining authorized amount for stock3331repurchase is 391,100 shares.3332333312. EMPLOYEE RETIREMENT SAVINGS PLAN33343335The Company has an employee 401(k) retirement savings plan (the Plan). The Plan3336provides eligible employees with an opportunity to make tax-deferred3337contributions into a long-term investment and savings program. All employees3338over the age of 21 are eligible to participate in the Plan beginning with the3339first quarterly open enrollment date following start of employment. Through3340December 31, 2001, the Plan allowed eligible employees to contribute up to 18%3341of their annual compensation. Effective January 1, 2002, the employee3342contribution limit was increased to 50% of their annual compensation, subject to3343a maximum limit determined by the Internal Revenue Service, with the Company3344contributing an amount equal to 25% of the first 5% contributed to the Plan. The3345Company recorded an expense of $91,170, $112,084, and $52,357 for contributions3346to the Plan for the years ended December 31, 2002, 2001, and 2000, respectively.33473348334933503351503352<PAGE>33533354Vascular Solutions, Inc.33553356Notes to Consolidated Financial Statements33573358December 31, 200233593360336113. CONCENTRATIONS OF CREDIT AND OTHER RISKS33623363In the United States and Germany, the Company sells its products directly to3364hospitals and clinics. In all other international markets, the Company sells its3365products to distributors who, in turn, sell to medical clinics. Loss,3366termination, or ineffectiveness of distributors to effectively promote the3367Company's product could have a material adverse effect on the Company's3368financial condition and results of operations.33693370No customers were more than 5% of net sales for the years ended December 31,33712002 and 2001. Three customers made up 22.4% of net sales for the year ended3372December 31, 2000.33733374The Company performs ongoing credit evaluations of its customers but does not3375require collateral. There have been no material losses on customer receivables.33763377Sales by geographic destination as a percentage of total net sales were as3378follows for the years ended December 31:337933802002 2001 20003381---------------------------------------------------33823383Domestic 89% 90% 67%3384Foreign 11 10 333385338614. DEPENDENCE ON KEY SUPPLIERS33873388The Company purchases certain key components from single-source suppliers. Any3389significant component delay or interruption could require the Company to qualify3390new sources of supply, if available, and could have a material adverse effect on3391the Company's financial condition and results of operations.3392339315. COMMITMENTS AND CONTINGENCIES33943395Datascope33963397In July 1999, the Company was named as a defendant in a patent infringement3398lawsuit brought by Datascope Corporation (Datascope), a competitor, in the3399United States District Court of the District of Minnesota. The complaint3400requested a judgment that the Company's device infringes and, following FDA3401approval, will infringe, a United States patent held by Datascope and asks for3402relief in the form of an injunction that would prevent the Company from selling3403its product in the United States as well as an award of attorney's fees, costs,3404and disbursements. On August 12, 1999, the Company filed its answer to this3405lawsuit and brought a counterclaim alleging unfair competition and tortious3406interference against Datascope. On August 20, 1999, the Company moved for3407summary judgment to dismiss Datascope's claims. On March 15, 2000, the court3408granted summary judgment dismissing all of Datascope's claims, subject to the3409right of Datascope to recommence the litigation after the Company's receipt of3410FDA approval of the Duett sealing device. On July 12, 2000, after the Company3411received FDA approval, Datascope recommenced this litigation, alleging that the3412Duett sealing device infringes a3413341434153416341734183419513420<PAGE>3421342234233424Vascular Solutions, Inc.34253426Notes to Consolidated Financial Statements34273428December 31, 2002342934303431343215. COMMITMENTS AND CONTINGENCIES (CONTINUED)34333434United States patent held by Datascope and requesting relief in the form of an3435injunction that would prevent the Company from selling its product in the United3436States, damages caused by the alleged infringement, and other costs,3437disbursements, and attorneys' fees.34383439On November 26, 2002, the Company entered into an agreement that settled all3440existing intellectual property litigation with Datascope Corporation. Under the3441terms of the settlement agreement, Datascope has granted the Company a3442nonexclusive license to its Janzen patents as they apply to all current versions3443of the Duett sealing device, and to certain permitted future product3444improvements. Datascope also has released the Company from any claim of patent3445infringement based on past or future sales of the Duett sealing device. In3446exchange, the Company paid Datascope a single lump sum of $3,750,000 in the3447fourth quarter.34483449St. Jude34503451On July 3, 2000, the Company was named as the defendant in a patent infringement3452lawsuit brought by the Daig division of St. Jude Medical, Inc. (St. Jude3453Medical), a competitor, in the United States District Court of the District of3454Minnesota. The complaint requests a judgment that the Company's Duett sealing3455device infringes a series of four patents held by St. Jude Medical and asks for3456relief in the form of an injunction that would prevent the Company from selling3457its product in the United States, damages caused by the manufacture and sale of3458the Company's product, and other costs, disbursements, and attorneys' fees.34593460On July 12, 2001, the Company entered into an agreement that settled all3461existing intellectual property litigation with St. Jude Medical, Inc. Under the3462terms of the settlement agreement, the Company agreed to pay a royalty of 2.5%3463of net sales of the Company's Duett sealing device to St. Jude Medical, up to a3464maximum amount over the remaining life of the St. Jude Medical Fowler patents.3465In exchange, St. Jude Medical granted to the Company a nonexclusive license to3466its Fowler patents and has released it from any claim of patent infringement3467based on sales of the Duett sealing device. The Company granted a nonexclusive3468cross-license to its Gershony patents to St. Jude Medical, subject to a similar3469royalty payment if St. Jude Medical utilizes the Gershony patents in any future3470device. Beginning on July 1, 2001, a royalty expense of 2.5% of net sales is3471included in the Company's cost of goods sold until the maximum royalty is3472attained.34733474347534763477523478<PAGE>347934803481Vascular Solutions, Inc.34823483Notes to Consolidated Financial Statements34843485December 31, 200234863487348816. QUARTERLY FINANCIAL DATA (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)348934903491<TABLE>3492<CAPTION>34933494FIRST THIRD34952002 QUARTER SECOND QUARTER QUARTER FOURTH QUARTER3496- -----------------------------------------------------------------------------------------------------------3497<S> <C> <C> <C> <C>3498Net sales $2,803 $ 3,329 $ 3,041 $ 2,9283499Gross profit 1,597 2,002 1,817 1,6993500Operating loss (3,689) (2,871) (2,777) (6,149)3501Net loss (3,551) (2,743) (2,634) (6,051)3502Basic and diluted net loss3503per share $ (0.27) $ (0.20) $ (0.20) $ (0.46)35043505350620013507- -------------------------------------35083509Net sales $3,123 $ 3,540 $ 2,529 $ 2,8903510Gross profit 1,906 2,154 1,444 1,6173511Operating loss (2,988) (3,263) (3,891) (3,769)3512Net loss (2,345) (2,824) (3,521) (3,560)3513Basic and diluted net loss3514per share $(0.18) $ (0.21) $ (0.27) $ (0.27)35153516</TABLE>351735183519The results of the fourth quarter of 2002 include a $3,750,000 settlement of3520litigation which the Company expensed in that period. (See Note 15.)3521352235233524352535265335273528</TEXT>3529</DOCUMENT>3530<DOCUMENT>3531<TYPE>EX-10.173532<SEQUENCE>33533<FILENAME>vasc030918_ex10-17.txt3534<DESCRIPTION>SUPPLY AGREEMENT3535<TEXT>3536EXHIBIT 10.17353735383539LICENSE AND SUPPLY AGREEMENT35403541This Agreement is made and entered into this 17th day of December, 20023542(the "Effective Date") by and between Tepha, Inc., a corporation duly organized3543and existing under the laws of the State of Delaware and having its principal3544office at 303 Third Street, Cambridge, Massachusetts 02142 (hereinafter referred3545to as "Tepha"), and Vascular Solutions, Inc., a corporation duly organized and3546existing under the laws of Minnesota and having its principal office at 24953547Xenium Lane North, Minneapolis, Minnesota 55441 (hereinafter referred to as3548"Licensee").35493550WHEREAS, Tepha owns or is the licensee of the Patent Rights (as later3551defined);35523553WHEREAS, Tepha wishes to grant, and Licensee wishes to receive, license3554rights to the Patent Rights; and35553556WHEREAS, certain Polymer (as later defined) is manufactured by or for3557Tepha that Licensee wishes to purchase under the terms of this Agreement.35583559NOW THEREFORE, in consideration of the premises and the mutual3560covenants contained herein, the parties hereto agree as follows:356135621. DEFINITIONS.356335641.1. "Patent Rights" means: (i) the United States and foreign patent3565applications and patents set forth in Appendix A, (ii) any divisionals,3566continuations and continuation-in-part applications which shall be3567directed to subject matter specifically described in such patent3568applications; (iii) the resulting United States and foreign patents;3569(iv) any reissues, reexaminations or extensions of such patents; and3570(v) all foreign counterparts of the above patent applications and3571patents.357235731.2. "Field" means medical devices for sealing of a percutaneous3574puncture in a blood vessel or organ, but specifically excluding3575pericardial and intracardiac (any construct in contact with the inner3576compartment of the heart) patches and small and large diameter vascular3577grafts to repair, replace or bypass compromised blood vessels.357835791.3. "Net Sales" means Licensee's and its Affiliates' billings for the3580use, sale, lease or other disposition of Licensed Products, otherwise3581than to an Affiliate of the Licensee for resale, and the fair market3582value of any noncash consideration, less:35833584(i) discounts allowed in amounts customary in the trade;3585(ii) sales, tariff duties and/or use taxes directly3586imposed and with reference to particular sales;3587(iii) outbound transportation prepaid or allowed; and358835893590Page 1 of 313591<PAGE>359235933594(iv) invoices which become uncollectible after reasonable3595means and time for collection (not to exceed *3596of Net Sales in any Reporting Period); and3597(v) amounts allowed or credited on returns of damaged3598goods, expired goods, or recalls.35993600No deduction shall be made for commissions paid to individuals whether3601they be with independent sales agencies or regularly employed by3602Licensee and on its payroll, or for cost of collections. Licensed3603Products shall be considered "sold" when invoiced. If a Licensed3604Product shall otherwise be distributed or invoiced for a discounted3605price substantially lower than customary in the trade or distributed at3606no cost, to Affiliates of Licensee or otherwise, Net Sales shall be3607based on the average amount billed for such Licensed Products during3608the applicable Reporting Period (as later defined); provided, however,3609Licensee may distribute a reasonable number of evaluation units on a3610royalty-free basis, not to exceed * of Net Sales in any Reporting3611Period.361236131.4. "Polymer" means the poly-3-hydroxybutyrate-co-4-hydroxybutyrate3614copolymer (PHA3444) manufactured by or for Tepha and offered for sale3615by Tepha to its customers. All current Polymer compositions are listed3616on Appendix C, which shall be updated from time to time by Tepha to3617include all future improvements to and compositions of PHA34443618developed by Tepha.361936201.5. "Licensed Product" means any device for sealing of a percutaneous3621puncture in a blood vessel or organ in the Field:36223623(i) that is covered in whole or in part by an issued,3624unexpired valid claim or a pending claim contained in3625the Patent Rights in the country in which any such3626product or part thereof is made, used, sold or3627imported; and/or3628(ii) that is manufactured by using a process or is3629employed to practice a process which is covered in3630whole or in part by an issued, unexpired valid claim3631or a pending claim contained in the Patent Rights in3632the country in which a process is used or in which3633such product or part thereof is used, sold or3634imported; and/or3635(iii) that incorporates Polymer.363636371.6. "Reporting Period" means a three (3) month period ending March 31,3638June 30, September 30 or December 31 of each calendar year.363936401.7. "Device Master File" means the device master file for Polymer3641intended to be filed or filed by Tepha with the U.S. Food and Drug3642Administration.364336443645* Denotes confidential information that has been omitted from the exhibit and3646filed separately, accompanied by a confidential treatment request, with the3647Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities3648Exchange Act of 1934.364936503651Page 2 of 313652<PAGE>3653365436551.8. "Affiliate" means any wholly owned subsidiary of Licensee or3656Tepha, respectively.365736581.9. "Specification" means the mutually agreed specifications for the3659Polymer on the date of manufacture.3660366136622. LICENSE GRANT366336642.1 License. Subject to the terms and conditions of this Agreement,3665Tepha hereby grants to Licensee the worldwide right and license,3666without the right to sublicense, in the Field under the Patent Rights3667to make, have made, use, lease, sell, offer for sale and import the3668Licensed Products until the expiration of the last to expire of the3669Patent Rights, unless this Agreement shall be sooner terminated3670according to the terms hereof.367136722.2 MIT Patent Rights. A subset of the Patent Rights are owned by the3673Massachusetts Institute of Technology ("MIT"). Under the terms of its3674sublicense to this subset of Patent Rights owned by MIT, Tepha has3675agreed that any sublicenses granted by it shall provide that the3676obligations to MIT of articles 2, 5, 7, 8, 9, 10, 12, 13, and 15 of the3677license with MIT shall be binding upon Licensee as if it were a party3678to that license agreement. Tepha further has agreed to attach copies of3679these articles to sublicense agreements, and a copy is attached as3680Appendix B. To the extent of any conflict between the terms of this3681Agreement and Appendix B, as to the Patent Rights owned by MIT only,3682the terms of Appendix B shall prevail.368336842.3 No Future Grant or Use of Competing Rights. After the Effective3685Date and during the term of this Agreement, Tepha shall not grant to3686any third party, nor use in its own business, any right under the3687Patent Rights in the Field to make, use, lease, sell, offer for sale,3688or import a Licensed Product that incorporates Polymer. The parties3689acknowledge that prior to the Effective Date Tepha has entered into one3690other agreement granting rights to a third party under the Patent3691Rights in the field of vascular closure devices for sealing the femoral3692artery after catheter based procedures to make, have made, use, lease,3693sell, offer for sale, and import Licensed Products that incorporate3694Polymer and obligating Tepha to supply Polymer.369536962.4 No Other Rights. Nothing in this Agreement shall be construed to3697confer any rights upon Licensee by implication, estoppel or otherwise3698beyond the express licenses granted by Tepha as to any technology or3699patent rights of Tepha or any other entity other than the Patent3700Rights.370137022.5 Restriction. Licensee shall have no right to use, lease, sell,3703offer for sale, import or otherwise dispose of Polymer as stand-alone3704products, and may only use, lease, sell, offer for sale, import and3705otherwise dispose of Polymer as incorporated into Licensed Products in3706the Field. Licensee shall have no right to make or have made Polymer,3707except as provided in Paragraph 3.8 hereof.370837093710Page 3 of 313711<PAGE>3712371337142.6 Improvements. Licensee shall promptly disclose to Tepha any3715improvements, changes or modifications that Licensee may make to the3716composition or processing of any Polymer ("Developments"). Licensee3717hereby grants to Tepha a nonexclusive, royalty-free, worldwide,3718irrevocable right and license outside the Field under Licensee's3719intellectual property rights (including without limitation patent3720rights) in Developments, with the right to grant sublicenses, to make,3721have made, use, lease, sell and otherwise dispose of products, and to3722practice processes and use, copy, modify and distribute information.3723Tepha shall promptly disclose to Licensee any future improvements to3724and compositions of PHA 3444 that Tepha may make, which shall3725automatically be added to the definition of Polymer under this3726Agreement under the financial terms set forth herein.372737283. SUPPLY OF POLYMERS372937303.1 Forecasts. Within thirty (30) days following the Effective Date,3731Licensee shall provide Tepha with Licensee's initial forecasts by3732Reporting Period of the quantity of each Polymer listed on Appendix C3733that Licensee expects to purchase from Tepha during the first four3734Reporting Periods. On or before the first day of each subsequent3735Reporting Period, Licensee shall submit a revised forecast by Reporting3736Period for each Polymer for the next consecutive four Reporting3737Periods.373837393.2 Supply. During the term of this Agreement, Tepha shall use3740commercially reasonable efforts to supply to Licensee such quantities3741of Polymer as may be reasonably requested by Licensee. However, if this3742Agreement is Assigned by Licensee as may be permitted pursuant to3743Paragraph 17.7, purchase orders by the assignee in any Reporting Period3744in excess of one hundred and twenty percent (120%) of any of the volume3745forecasts for that Reporting Period submitted pursuant to Paragraph 3.13746in any of the immediately preceding four (4) calendar quarters shall be3747deemed not to be a "reasonable request" by Licensee. Tepha shall have3748the right to contract with third parties to manufacture Polymer for3749supply to Licensee, provided that Tepha shall remain liable to Licensee3750for its obligations hereunder, and shall notify Licensee of the3751identity of any such manufacturer. Tepha, or its sub-contractor, shall3752manufacture the Polymer in accordance with all applicable Good3753Manufacturing Practices ("GMP") of the U.S. Food & Drug Administration3754(the "FDA"). Purchase orders for any Polymer in a Reporting Period in3755excess of one hundred twenty percent (120%) of any of the volume3756forecasts submitted pursuant to Paragraph 3.1 by Licensee in any of the3757immediately preceding four (4) calendar quarters for such Reporting3758Period which Tepha is not able to fill shall not be deemed a breach of3759this Agreement. Tepha agrees to use commercially reasonable efforts to3760accommodate purchase order revisions submitted in writing by Licensee.3761Each purchase order must specify a delivery date not less than ninety3762(90) days after the date of the purchase order.376337643.3 Shipment. Tepha agrees to ship Polymer by the common carrier and3765method of shipment designated by Licensee. Shipments will be F.O.B.,3766Tepha or its designee's U.S. manufacturing facility, and will be3767according to any reasonable shipping schedule specified by Licensee, to3768the locations specified in Licensee's purchase orders. Legal title and3769risk of loss shall pass to Licensee upon delivery to such common3770carrier. Licensee shall pay all costs of shipping.377137723773Page 4 of 313774<PAGE>3775377637773.4 Inspection. Within thirty (30) days of receipt of any shipment,3778Licensee shall inspect the shipment and notify Tepha of its rejection3779of any Polymer within the shipment. Polymer may be rejected only to the3780extent the quantity shipped exceeds the amount ordered in the relevant3781purchase order, or if any Polymer fails to meet its Specification. If3782Licensee does not notify Tepha of rejection within such thirty (30) day3783period, it shall be deemed to have accepted the shipment of any Polymer3784not so rejected. Rejected Polymer shall be returned to Tepha or3785disposed of at the direction of Tepha, in either case at the expense of3786Tepha, except as otherwise provided in Paragraph 16.3. Tepha shall have3787thirty (30) days after receipt of a notice from Licensee rejecting any3788Polymer to replace the defective Polymer.378937903.5 Payment. Licensee shall pay Tepha the then current price of each3791Polymer on the date of acceptance of each Purchase Order. The initial3792price as of the Effective Date is set forth on Appendix C. Price3793adjustments shall be computed annually according to the following3794formula: On January 1, 2004 and each January 1 thereafter, Tepha may3795increase the price of Polymer from the previous year by the 12-month3796average percentage increase in total compensation for private industry3797workers for the period ending December 31 as indicated on Table 3 of3798the Employment Cost Index published by the Bureau of Labor Statistics3799of the United States Department of Labor or, if the Employment Cost3800Index should cease to be published, any comparable category in a3801comparable index agreeable to both parties. If there is no increase in3802such Employment Cost Index, the price of Polymer shall be the same as3803the previous January 1. Tepha shall invoice Licensee for each shipment3804of Polymer, and payment shall be due from Licensee within thirty (30)3805days after the invoice date.380638073.6 Adverse Events and Other Reporting. Licensee shall be responsible3808for handling and shall promptly notify Tepha of any information that3809might give rise to a recall or market withdrawal of any Licensed3810Product incorporating the Polymer or which involves any complaint3811relating to the Polymer material of a Licensed Product. To the extent3812possible under the circumstances, Licensee will inform Tepha prior to3813communicating with the FDA concerning any such recall, market3814withdrawal or complaint. Tepha shall cooperate and supply on a3815confidential basis any information or assistance reasonably required in3816Licensee's interaction relating thereto with the Food and Drug3817Administration and other governmental authorities, in the United States3818or international markets, relating to the Polymer. Licensee shall keep3819Tepha promptly informed on an ongoing basis and provide copies of all3820correspondence, filings, and documentation to Tepha until resolution of3821each such matter.382238233.7 Device Master File; Regulatory Assistance. Upon execution of this3824Agreement, Tepha will use diligent efforts to complete and file a3825Device Master File with the FDA for the Polymer, and to maintain and3826update the Device Master File for the remainder of this Agreement.3827Tepha will own all right, title and interest in the Device Master File.3828Licensee may reference the Device Master File for Polymer to support3829Licensee's registration of any Licensed Product; provided, however,3830Licensee will not have access to any information or data in the Device3831Master File relating to the manufacturing process for the Polymer.3832Tepha shall provide to Licensee as Confidential Information, the3833information, test results and documentation relating to the Polymer3834that is reasonably383538363837Page 5 of 313838<PAGE>383938403841necessary for Licensee's applications for registration of any Licensed3842Product in international markets. Licensee will own all right, title3843and interest in any regulatory filings (in the United States and3844international markets) with respect to the Licensed Product (excluding3845the Polymer and Master Device File). Tepha agrees to provide up to3846twenty (20) hours of reasonable technical assistance to Licensee with3847respect to Licensee's filings and responses to the FDA and3848international regulatory agencies for no additional compensation.3849Further technical assistance relating to such filings and responses3850will be provided at Tepha's standard rates and terms.385138523.8 Contingent Manufacturing Rights. If (i) Tepha becomes subject to a3853bankruptcy petition under Chapter 7 of the U.S. Bankruptcy Code or (ii)3854otherwise files for bankruptcy and ceases its manufacturing operations3855for Polymer, or (iii) Tepha ceases to carry on its business operations3856with respect to the Polymer, or (iv) Tepha is continually unable to3857manufacture and supply any Polymer to Licensee during any consecutive3858one hundred and eighty (180) day period, or (v) Licensee elects3859pursuant to Paragraph 15.2 ,upon an uncured material breach by Tepha,3860to exercise its rights under this Section 3.8, then at Licensee's3861request, Tepha shall grant Licensee a nonexclusive right and license,3862to manufacture the Polymer, or to have the Polymer manufactured by3863direct contract between Licensee and any qualified Tepha third party3864subcontractor for use in Licensed Products only, subject to the terms3865and conditions of this Agreement. The right and license which may be3866granted pursuant to this Paragraph shall continue until Tepha3867reasonably demonstrates to Licensee that it is capable and willing to3868resume the supply and delivery to Licensee of its requirements of the3869Polymer under the terms and conditions of this Agreement, or if3870Licensee has made an election under Section 3.8(v), until the material3871breach has been cured by Tepha. The obligation of Licensee to make the3872royalty payments pursuant to Section 4.3 shall continue notwithstanding3873any grant to Licensee of the right and license to manufacture the3874Polymer set forth in this Paragraph 3.8, provided that, at Licensee's3875election, Licensee may pay directly to any third party that portion of3876the royalty payments required to maintain the license rights from such3877third party.387838794. ROYALTIES388038814.1 License Issue Fee. Licensee shall pay Tepha a License Issue Fee3882of * which the parties acknowledge has been paid prior to the3883Effective Date.388438853886* Denotes confidential information that has been omitted from the exhibit and3887filed separately, accompanied by a confidential treatment request, with the3888Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities3889Exchange Act of 1934.389038913892Page 6 of 313893<PAGE>3894389538964.2 Research and Development Payments. Licensee shall pay Tepha a total3897sum of * to support Tepha's research and developments efforts and3898completion of filing of the Device Master File for the Polymer with the3899FDA, which said Research and Development payments shall be deemed3900earned and due as follows: * which the parties acknowledge has3901been paid prior to the Effective Date; and * earned and due at3902the rate of * per month beginning January 1, 2003; and *3903upon the completion of filing of the Device Master File with the FDA.3904Such final * payment shall be subject to a reduction of *3905for each month that the filing is delayed beyond December 31, 2003;3906provided, however, such date shall be extended if the implantation3907studies shall not be completed by November 30, 2003. Such extension3908shall equal the additional period of time reasonably necessary for such3909studies to be completed, plus one month.391039114.3 Royalties. Until expiration of the last to expire patent within the3912Patent Rights, Licensee shall pay Tepha a royalty (the "Royalty") as3913follows: * of Net Sales of Licensed Products accrued during each3914Reporting Period until aggregate Net Sales during the immediately3915preceding four (4) Reporting Periods exceeds * and thereafter3916* of Net Sales for the remainder of the term of this Agreement.3917Each Royalty for a Reporting Period shall be paid within thirty (30)3918days after the conclusion of the Reporting Period.391939204.4 Minimum Royalties. A minimum royalty payment of * shall be3921due and payable by Licensee to Tepha on January 1, 2006 and on3922January 1 of each subsequent year during the term of this Agreement.3923Royalties (as defined in Section 4.3) subsequently due on Net Sales of3924Licensed Products, if any, for each such year shall be creditable3925against the Minimum Royalty Payment paid for said year. Any minimum3926royalty payment paid in excess of Royalties for any calendar year shall3927not be creditable against Royalties due in future calendar years.392839294.5 Payments in Full. All payments due hereunder shall be paid in full,3930without deduction of taxes or other fees which may be imposed by any3931government, except as otherwise provided in Paragraph 1.3(ii).393239334.6 No Multiple Royalties. No multiple Royalties shall be payable under3934Paragraph 4.3 because any Licensed Product, its manufacture, use,3935lease, sale or importation are or shall be covered by more than one3936patent application or patent licensed under this Agreement or because3937any unit of Licensed Product for which a Royalty has been paid shall be3938re-sold or re-distributed in Licensee's channel of trade.393939403941* Denotes confidential information that has been omitted from the exhibit and3942filed separately, accompanied by a confidential treatment request, with the3943Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities3944Exchange Act of 1934.394539463947Page 7 of 313948<PAGE>3949395039514.7 Payment. Royalty payments shall be paid in United States dollars in3952Cambridge, Massachusetts, or at such other place as Tepha may3953reasonably designate consistent with the laws and regulations3954controlling in any foreign country. If any currency conversion shall be3955required in connection with the payment of royalties hereunder, such3956conversion shall be made by using the exchange rate published in the3957Wall Street Journal on the last business day of the Reporting Period to3958which such royalty payments relate.395939605. RECORDS AND PAYMENTS396139625.1 Records and Audit. Licensee shall keep true and accurate books of3963account and records that are necessary for the purpose of showing the3964amounts payable to Tepha hereunder and compliance with Paragraphs 6 and396516 of this Agreement. Said books of account and records shall be kept3966at Licensee's principal place of business and shall be open at all3967reasonable times for three (3) years following the end of the calendar3968year to which they pertain, to the inspection of Tepha or its agents3969for the purpose of verifying Licensee's royalty statements or3970compliance in other respect with this Agreement. Tepha shall pay the3971cost associated with any inspection; provided that should such3972inspection lead to the discovery of a greater than Ten Percent (10%)3973discrepancy in reporting to Tepha's detriment, Licensee agrees to pay3974the cost of such inspection.397539765.2 Reports and Payments. Within thirty (30) days after the end of each3977Reporting Period, Licensee shall send to Tepha a report showing the Net3978Sales of the Licensed Products, including calculation of deductions3979permitted under Paragraph 1.3, for such Reporting Period and shall pay3980the appropriate royalties to Tepha. These reports shall include at3981least the following: (i) number and total billings of Licensed3982Products, (ii) description of Licensed Products made using each Polymer3983supplied by Tepha, (iii) deductions applicable as provided in Paragraph39841.3; and (iv) Royalties due under Paragraph 4.3. Licensee shall deliver3985to Tepha true and accurate reports, giving a summary of the business3986conducted by Licensee under this Agreement as shall be relevant to3987diligence under Article 6.1 before the first commercial sale of a3988Licensed Product, annually, on or before January 31 of each year.398939905.3 Interest. The amounts due under Article 4 shall, if overdue, bear3991interest until payment at a per annum rate Two Percent (2%) above the3992prime rate in effect at Fleet Bank, or its successors, on the due date.3993The payment of such interest shall not foreclose Tepha from exercising3994any other rights it may have as a consequence of the lateness of any3995payment.399639973998Page 8 of 313999<PAGE>4000400140026. DUE DILIGENCE400340046.1 Diligent Efforts. Licensee shall use diligent efforts to bring4005Licensed Products to market through a diligent program for exploitation4006of the Patent Rights and shall continue diligent commercialization4007efforts for the Licensed Products throughout the term of this4008Agreement. Licensee shall use diligent efforts to meet the following4009projected Net Sales of Licensed Products: 2006: * ; 2007: * ;4010and 2008 and thereafter: * ; provided that failure to meet such4011projections shall not be deemed to be a breach of this Agreement so4012long as Licensee has nevertheless used diligent commercialization4013efforts.401440156.2 Development Plan. Within ninety (90) days following the execution4016of this Agreement, Licensee shall provide Tepha with a development plan4017which shall summarize the various phases and expected timing of the4018material development of the Licensed Products.401940206.3 Diligence Milestones. Licensee shall make a first commercial sale4021of a Licensed Product in an international market on or before September40221, 2008, and shall make a first commercial sale of a Licensed Product4023in the United States on or before September 1, 2010.402440256.4 Notice of Human Clinical Trials; Governmental Approvals and4026Marketing of Licensed Products. Licensee shall provide Tepha with4027written notice prior to initiating the first human clinical trial of a4028Licensed Product. Licensee shall be responsible for obtaining all4029necessary governmental approvals for the development, production,4030distribution, sale, use, export and import of all Licensed Products, at4031Licensee's expense, including, without limitation, any clinical and4032safety studies. Licensee shall have sole responsibility for the quality4033control for any Licensed Product.403440357. INFRINGEMENT403640377.1 Notice. Licensee and Tepha shall each inform the other promptly in4038writing of any alleged or threatened third party infringement of the4039Patent Rights by a third party and of any available evidence thereof.4040Licensee and Tepha shall each inform the other promptly in writing of4041any allegations of infringement resulting from the use of the Polymer4042in the Licensed Product.404340447.2 Cooperation. In any infringement suit which Tepha may institute to4045enforce the Patent Rights in the Field, or in a suit for patent4046infringement which is brought by a third party against Tepha or4047Licensee in connection with the Licensed Products, which either party4048or both parties are required or elect to defend, the other party hereto4049shall, at the request and expense of the party initiating or defending4050such suit, cooperate in all reasonable respects and, to the extent4051reasonably possible, have its employees testify when requested and make4052available relevant records, papers, information, samples, specimens,4053and the like.405440554056* Denotes confidential information that has been omitted from the exhibit and4057filed separately, accompanied by a confidential treatment request, with the4058Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities4059Exchange Act of 1934.406040614062Page 9 of 314063<PAGE>4064406540668. PRODUCT LIABILITY406740688.1 Indemnity. Licensee shall at all times during the term of this4069Agreement and thereafter indemnify, hold harmless and defend Tepha and4070its licensors, and their directors, trustees, officers, employees and4071affiliates against all claims and expenses, arising out of the death of4072or injury to any person or persons or out of any damage to property and4073against any other claim, proceeding, demand, expense and liability of4074any kind whatsoever arising out of, resulting from or relating to the4075production, manufacture, sale, use, lease, consumption or advertisement4076of the Licensed Products, and manufacture of Polymer if Paragraph 3.84077shall ever become applicable, or arising from or relating to Licensee's4078breach of any of its obligations hereunder; unless such claims and4079expenses are the result of Tepha's (or its Affiliates or4080sub-contractors) negligence or intentional misconduct. Prior to the4081first use of a Licensed Product for humans, Licensee shall obtain and4082carry in full force and effect commercial, general liability insurance,4083including product liability insurance, which shall protect the4084indemnities with respect to events covered by this Paragraph 8.1. Such4085insurance shall list Tepha, Metabolix, Inc. and MIT as additional named4086insureds thereunder, shall be endorsed to include product liability4087coverage and shall require thirty (30) days written notice to be given4088to Tepha prior to any cancellation or material change thereof. The4089limits of such insurance shall not be less than One Million Dollars4090($1,000,000) per occurrence with an aggregate of Three Million Dollars4091($3,000,000) for personal injury including death; and One Million4092Dollars ($1,000,000) per occurrence with an aggregate of Three Million4093Dollars ($3,000,000) for property damage. Licensee shall provide Tepha4094with Certificates of Insurance evidencing the same. Licensee shall4095maintain such commercial general liability insurance during the period4096that any Licensed Product is being used, distributed or sold and for4097six (6) years thereafter.409840999. WARRANTIES AND DISCLAIMER410041019.1 Tepha warranty. Tepha represents and warrants to Licensee that4102Tepha is either the owner of all rights, title and interest in and to4103the Patent Rights, or has the right to grant the licenses set forth in4104Article 2.410541069.2 DISCLAIMER. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,4107NEITHER PARTY, NOR THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND4108AFFILIATES MAKE ANY REPRESENTATIONS OR EXTEND ANY WARRANTIES OF ANY4109KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO4110WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE,4111VALIDITY OF PATENT RIGHTS CLAIMS, ISSUED OR PENDING, AND THE ABSENCE OF4112LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE. NOTHING IN THIS4113AGREEMENT SHALL BE CONSTRUED AS A REPRESENTATION MADE OR WARRANTY GIVEN4114BY EITHER PARTY OR BY TEPHA's LICENSORS THAT THE PRACTICE OF THE4115LICENSES GRANTED HEREUNDER SHALL NOT INFRINGE THE PATENT RIGHTS OR4116OTHER INTELLECTUAL OR PROPRIETARY RIGHTS OF ANY THIRD PARTY.411741184119Page 10 of 314120<PAGE>41214122412310. LIMITATION OF LIABILITY4124412510.1 NO CONSEQUENTIAL DAMAGES. EXCEPT FOR BREACH BY EITHER PARTY OF4126PARAGRAPH 14 (CONFIDENTIALITY), IN NO EVENT SHALL TEPHA, ITS LICENSORS4127OR LICENSEE, OR THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND4128AFFILIATES BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY4129KIND INCURRED BY THE OTHER PARTY, INCLUDING ECONOMIC DAMAGE OR INJURY4130TO PROPERTY AND LOST PROFITS, REGARDLESS OF WHETHER SUCH PARTY SHALL BE4131ADVISED, SHALL HAVE OTHER REASON TO KNOW, OR IN FACT SHALL KNOW OF THE4132POSSIBILITY OF THE FOREGOING.4133413411. EXPORT CONTROLS4135413611.1 Export Controls. Licensee acknowledges that it may be subject to4137United States laws and regulations controlling the export of technical4138data, computer software, laboratory prototypes and other commodities4139(including the Arms Export Control Act, as amended and the United4140States Department of Commerce Export Administration Regulations). The4141transfer of such items may require a license from the cognizant agency4142of the United States Government and/or written assurances by Licensee4143that Licensee shall not export data or commodities to certain foreign4144countries without prior approval of such agency. Tepha neither4145represents that a license shall not be required nor that, if required,4146it shall be issued.4147414812. NON-USE OF NAMES4149415012.1 Non-use of Names. Except as required by law or to accurately4151describe this Agreement in connection with filings with the Securities4152and Exchange Commission or in connection with raising funding, neither4153party shall use the names or trademarks of the other or Tepha's4154licensors, nor any adaptation thereof, nor the names of any of the4155other party's, or Tepha's licensors', employees, in any advertising,4156promotional or sales literature without prior written consent obtained4157from such party, or said employee, in each case, such consent not to be4158unreasonably withheld, except that Licensee may state that it is4159licensed by Tepha, under one or more of the patents and/or applications4160comprising the Patent Rights.4161416213. DISPUTE RESOLUTION4163416413.1 Except for the right of either party to apply to a court of4165competent jurisdiction for a temporary restraining order, a preliminary4166injunction or other equitable relief to preserve the status quo or to4167prevent irreparable harm, and except for any dispute relating to patent4168validity or infringement, any and all claims, disputes or controversies4169arising under, out of or in connection with the Agreement, shall be4170mediated in good faith. The party raising such dispute shall promptly4171advise the other party of such claim, dispute or controversy in a4172writing which describes in reasonable detail the nature of such4173dispute. If the parties by their senior management representatives4174shall be unable to resolve the dispute within thirty (30) days, then by4175no later than forty (40) business days after the417641774178Page 11 of 314179<PAGE>418041814182recipient has received such notice of dispute, each party shall have4183selected for itself a representative who shall have the authority to4184bind such party, and shall additionally have advised the other party in4185writing of the name and title of such representative. By no later than4186sixty (60) business days after the date of such notice of dispute, such4187representatives shall schedule a date for a mediation hearing with the4188Cambridge Dispute Settlement Center or Endispute Inc. in Cambridge,4189Massachusetts or another mutually agreeable mediator. The parties shall4190enter into good faith mediation and shall share the costs equally. If4191the representatives of the parties have not been able to resolve the4192dispute within thirty (30) business days after such mediation hearing,4193the parties shall have the right to pursue any other remedies legally4194available to resolve such dispute in either the Courts of the4195Commonwealth of Massachusetts, or in the United States District Court4196for the District of Massachusetts, to whose jurisdiction for such4197purposes Tepha and Licensee each hereby irrevocably consents and4198submits.4199420013.2 Notwithstanding the foregoing, nothing in this Article shall be4201construed to waive any rights or timely performance of any obligations4202under this Agreement.4203420414. CONFIDENTIALITY4205420614.1 Confidential Information. Both Tepha and Licensee agree that all4207confidential information disclosed to the other party, orally or in4208writing, shall be deemed "Confidential Information" of the disclosing4209party. In particular, "Confidential Information" shall be deemed to4210include, but not be limited to, Developments, trade secrets,4211information, ideas, inventions, materials, samples, processes,4212procedures, methods, formulations, protocols, packaging designs and4213materials, test data, future development plans, product launch dates,4214technological know-how and engineering, manufacturing, regulatory,4215marketing, servicing, sales, or financial matters relating to the4216disclosing party and its business.4217421814.2 Nondisclosure and Nonuse. During the term and thereafter each4219receiving party: (i) shall maintain all Confidential Information in4220confidence; (ii) shall not disclose any Confidential Information to any4221third party without prior written consent of the disclosing party4222except that the receiving party may disclose in connection with4223consultants, subcontractors or agents or raising funding and technical4224development activities for purposes consistent with this Agreement4225pursuant to a written non-disclosure agreement with said parties,4226having terms of nondisclosure and nonuse at least as restrictive as4227those set forth herein; and (iii) shall use such Confidential4228Information only to the extent required to accomplish the purposes of4229this Agreement. A receiving party may disclose Confidential Information4230that is required to be disclosed pursuant to the law, by request of the4231United States Food and Drug Administration ("FDA") or other government4232authority or for medical or safety reasons, but only to the extent4233required to be disclosed by the FDA or other government authority. Both4234parties shall take precautions as each normally takes with its own4235confidential and proprietary information to prevent disclosure to third4236parties, but no less than reasonable precautions.4237423814.3 Exceptions. Both parties agree that, notwithstanding the above,4239the obligations of confidentiality and nonuse shall not apply to:424042414242Page 12 of 314243<PAGE>42444245424614.3.1 Information that at the time of disclosure is, or4247thereafter becomes, generally known to the public, through no4248wrongful act or failure to act on the part of the receiving4249party;4250425114.3.2 Information that was known by or in the possession of4252the receiving party at the time of receiving such information4253from the disclosing party, as evidenced by written records;4254425514.3.3 Information obtained by the receiving party from a4256third party who is not breaching a commitment of4257confidentiality to the disclosing party by revealing such4258information to the receiving party, as evidenced by written4259records;4260426114.3.4 Information that is developed independently by the4262receiving party without use of confidential information of the4263other party, as evidenced by written records.4264426514.4 Access. Both Parties shall make diligent efforts to ensure that4266all employees, consultants, agents and subcontractors who may have4267access to Confidential Information of the other party, and any other4268third parties who might have access to Confidential Information, shall4269sign nondisclosure agreements consistent with the terms set forth in4270this Paragraph. No Confidential Information shall be disclosed to any4271employees, subcontractors, agents, consultants or third parties who do4272not have a need to receive such information for the purposes of this4273Agreement.4274427515. TERMINATION4276427715.1 Termination by Tepha. If Licensee shall cease to carry on its4278business or is in breach of Paragraph 17.7, this Agreement shall4279terminate effective upon notice by Tepha.4280428115.2 Material Breach. Upon any material breach of this Agreement by4282Tepha, Licensee shall have the right to give notice of default, stating4283in reasonable detail the nature of the claimed breach. If Tepha shall4284not have cured any such material breach within ninety (90) days from4285notice, Licensee shall have the option to either: (i) terminate the4286Agreement, effective on receipt of notice byTepha, or (ii) exercise its4287rights under Section 3.8(v). Upon any material breach of this Agreement4288by Licensee, Tepha shall have the right to give notice of default,4289stating in reasonable detail the nature of the claimed breach. If4290Licensee shall not have cured any such material breach within ninety4291(90) days from notice, Tepha may terminate the Agreement, effective on4292receipt of notice by Licensee.4293429415.3 Termination by Licensee. If Tepha shall cease to carry on its4295business or is in breach of Paragraph 17.7, this Agreement shall4296terminate effective upon notice by Licensee. Licensee shall have the4297right to terminate this Agreement at any time on six (6) months' notice4298to Tepha, and upon payment of all amounts due Tepha through the4299effective date of termination.4300430115.4 Effects of Termination. Upon expiration or termination of this4302Agreement for any reason: (i) nothing herein shall be construed to4303release either party from any obligation430443054306Page 13 of 314307<PAGE>430843094310that matured prior to expiration or the effective date of termination;4311(ii) Articles 1, 2.2, 2.6, 3.6, 3.8, 5, 8, 9.2, 10, 11, 12, 13, 14,431215.4 and 17 shall survive expiration or any termination; (iii) for a4313period of six (6) months after the effective date of termination,4314Licensee may sell Licensed Products in inventory, and complete Licensed4315Products in the process of manufacture at the time of such termination4316and sell the same, provided that Licensee shall pay the Running4317Royalties thereon as required by Article 4 of this Agreement and shall4318submit the reports required by Article 5 hereof on the sales of4319Licensed Products; and (iv) each party shall immediately return all4320Confidential Information to the disclosing party and shall cease and4321refrain from any further use of such Confidential Information.4322432316. QUALITY SYSTEM OBLIGATIONS4324432516.1 Raw Materials. All raw materials for the Polymer will be defined4326by engineering drawings or specifications of Tepha. Approved vendors4327must be designated on the Specifications. Raw materials will be4328supplied or specified by Tepha. During the term of this Agreement,4329Tepha shall be responsible to maintain a working master cell bank for4330the Polymer, with commercially appropriate redundancies and security.4331Tepha will use standard operating procedures which define the sampling4332methodology and the analytical methods used to assure that the raw4333materials meet their respective specifications. Tepha will notify4334Licensee in writing of any changes to the Specifications, sampling or4335test methods of raw materials or any changes in approved vendors, and4336shall obtain prior approval from Licensee prior to making any such4337changes that require regulatory approval from the FDA or international4338regulatory authorities with respect to a Licensed Product.4339434016.2 Packaging Materials. Licensee shall be responsible for and shall4341provide to Tepha all copy content, artwork and mechanicals for all4342printed materials associated with the Polymer to be shipped to4343Licensee. This includes, but is not limited to, container labels,4344container cartons, package inserts, and promotional material. Any4345changes requested by Licensee or required for legal or regulatory4346compliance shall be at the expense of Licensee. Licensee shall be4347responsible for compliance with all Federal, State and Local laws and4348regulations concerning packaging and labeling materials, and for4349obtaining any necessary regulatory approvals of printed materials,4350artwork and copy. Tepha shall obtain prior approval from Licensee4351before revising any printed packaging components, primary container4352components and all Licensee supplied packaging components used for the4353shipment of the Polymer to Licensee.4354435516.3 Non-Conforming Polymer. Polymer not found to meet Specifications4356will be considered non-conforming. Licensee shall determine the future4357usability of non-conforming Polymer; provided that non-conforming4358Polymer may not be used except as expressly permitted in the Device4359Master File. If Licensee determines that the non-conforming Polymer is4360usable, full payment for the non-conforming Polymer will be required.4361If Licensee determines that the non-conforming Polymer is not usable,4362the non-conforming Polymer may be rejected pursuant to Paragraph 3.4.4363Actions taken to investigate the non-conformance and to justify the4364release of the batch of Polymer must436543664367Page 14 of 314368<PAGE>436943704371be fully documented in compliance with all applicable Federal, State4372and Local laws and regulations. Copies of all documentation associated4373with non-conformance of Polymer used shall be maintained by Licensee4374and provided to Tepha promptly on request.4375437616.4 Manufacturing Processes. The manufacturing process for the Polymer4377shall be maintained by the Document Control / Quality Assurance group4378within Tepha. Licensee will be notified of any changes to the4379manufacturing process by Tepha, and Licensee will notify Tepha if any4380such changes are unacceptable. Each batch or lot of Polymer produced4381hereunder must be assigned a unique batch or lot number. Any deviation4382from the specified manufacturing process must be documented in the4383batch record. Tepha's system shall document the deviation, the4384investigation that was undertaken and the conclusion drawn from that4385investigation. The documentation associated with any deviation in the4386manufacturing process shall become part of the batch record.4387438816.5 Manufacturing History Record/Device History Record/Batch Record.4389Licensee must be provided with a copy of the top-level history record4390(batch record for the Polymer) manufactured and supplied to Licensee4391hereunder. Tepha agrees to maintain all records that support this4392document (e.g., inspection/acceptance records for subassemblies and4393components) for the duration of this Agreement, and for at least five4394years following the termination of this Agreement.4395439616.6 Sampling, Testing and Release of Polymer. All in-process and4397finished Polymer testing shall be conducted by Tepha using Tepha's4398validated test methods. Tepha shall provide Licensee with a certificate4399of analysis indicating each test parameter, test method, test result4400and the corresponding acceptance criteria for each batch/lot of Polymer4401manufactured, as well as a statement indicating that all associated4402documentation has been reviewed and approved by the appropriate Tepha4403quality control unit. Tepha shall release the Polymer to Licensee as4404meeting the agreed and current Specifications for the Polymer.4405440616.7 Reserve Samples and Quality Review. Licensee is responsible for4407obtaining and maintaining file samples of each lot of Polymer4408manufactured and shipped to Licensee. Tepha will allow quality systems4409audits to be performed, no more than once in any twelve-month period,4410by approved representatives of Licensee at reasonable business hours4411and with reasonable planning and advanced notice of at least five (5)4412business days. Such audits shall be performed in accordance with the4413FDA's Quality System Inspection Technique ("QSIT") and Tepha's then4414current policy for visitors and no photographs may be taken or4415documents reproduced. Any third party contracted by Tepha to provide4416manufacturing or component supply under this Agreement shall also be4417subject to audit in accordance with QSIT.4418441916.8 Storage, Validation and Environmental Monitoring. Process/product4420and cleaning validation for the manufacture of the Polymer shall be4421performed by Tepha in accordance with the Device Master File. Tepha4422shall be responsible for conducting the validation studies and4423maintaining validation reports. Where particulate and microbial levels4424are required for the Polymer, then the facilities and raw materials4425used during the manufacturing and packaging shall be subjected to a4426monitoring program by Tepha to442744284429Page 15 of 314430<PAGE>443144324433assure that the Polymer will meet the required particulate and4434microbial levels and shall maintain the records obtained from this4435monitoring program. If no specifications are defined, then no4436particular manufacturing environment requirements are necessary beyond4437applicable Quality System Regulations of the FDA.4438443916.9 Distribution Records and Returns. Licensee shall maintain4440distribution records which contain all of the appropriate information4441as specified in 21 CFR, Section 820.160. Returned Licensed Product from4442the distribution of the Licensed Product is the responsibility of4443Licensee.4444444516.10 Customer Complaints. Licensee is responsible for investigating4446and handling customer complaints and shall promptly notify Tepha of any4447complaint relating to the Polymer material of a Licensed Product. To4448the extent possible under the circumstances, Licensee will inform Tepha4449prior to communicating with the FDA concerning any such complaint.4450Tepha shall reasonably cooperate with Licensee's investigations,4451including providing manufacturing-related records on a confidential4452basis as they relate to the investigation. Licensee shall keep Tepha4453promptly informed on an ongoing basis and provide copies of all4454correspondence, filings, and documentation to Tepha until resolution of4455each such matter.4456445716.11 Regulatory Compliance. Unless otherwise stated in this document,4458Tepha is responsible for compliance to all Federal, State and Local4459laws and regulations as they apply to Tepha's supply of Polymer to4460Licensee hereunder.4461446217. GENERAL4463446417.1. Integrated Agreement. This Agreement (including its Appendices,4465which are incorporated herein by reference) constitutes the complete4466and exclusive statement of the agreement between the parties, and4467supersedes all prior agreements, proposals, negotiations and4468communications between the parties, both oral and written, regarding4469the subject matter hereof. The terms of this Agreement shall have no4470force or effect with respect to any claim based on the use by Licensee4471of any intellectual property rights or proprietary rights of Tepha or4472its licensors outside the scope of the licenses expressly granted4473herein. The preprinted provisions of Licensee's purchase order shall4474not apply, and the provisions set forth herein shall prevail.4475447617.2. Waiver or Amendment. No waiver, alteration or amendment of any of4477the provisions of this Agreement shall be binding unless made in4478writing and signed by each of the parties hereto.4479448017.3. Notices. All notices to be given under this Agreement shall be in4481writing and shall be deemed duly given if sent by prepaid overnight4482courier service to the addresses set forth immediately below (or to4483such other addresses as the parties may designate by notice given in4484accordance with this provision):448544864487Page 16 of 314488<PAGE>448944904491If to Tepha:44924493Tepha, Inc.4494303 Third Street4495Cambridge, MA 021424496Attn: Simon Williams, President449744984499If to Licensee:45004501Vascular Solutions, Inc.45022495 Xenium Lane North4503Minneapolis, MN 554414504Attn: Chief Executive Officer45054506All such notices, if properly addressed, shall be effective when4507received.4508450917.4. Governing Law. This Agreement shall be governed by and construed4510in accordance with the laws of the Commonwealth of Massachusetts,4511without regard to conflict of laws principles, and as necessary the4512laws of the United States of America, except that questions affecting4513the construction and effect of any patent shall be determined by the4514law of the country in which the patent was granted. Each party agrees4515that venue for any dispute arising under this Agreement shall be4516Boston, Massachusetts, and waives any objection it has or may have in4517the future with respect to such venue, except that the applicable4518federal court or other tribunal shall have exclusive jurisdiction with4519regard to the scope or validity of any Patent Rights.4520452117.5. Failure to Exercise Remedy. If either party fails to enforce any4522term of this Agreement or fails to exercise any remedy, such failure to4523enforce or exercise on that occasion shall not prevent enforcement or4524exercise on any other occasion.4525452617.6. Remedies. The rights and remedies of the parties provided in this4527Agreement shall not be exclusive and are in addition to any other4528rights and remedies available at law or in equity.4529453017.7. Assignment. Except as expressly provided in this Agreement,4531neither party shall directly or indirectly sell, transfer, assign or4532delegate in whole or in part this Agreement, or any rights, duties,4533obligations or liabilities under this Agreement (collectively "Assign"4534for purposes of Paragraph 15.4 or 17.7), by operation of law or4535otherwise, without the prior written consent of the other party.4536Notwithstanding the foregoing sentence, both parties shall have the4537right to Assign without consent of the other party all of its rights,4538duties, obligations and liabilities under this Agreement to any4539Affiliate or in connection with any sale, merger, consolidation,4540recapitalization or reorganization involving in each case the sale of4541substantially all of the capital stock of such party or all or4542substantially all of the assets of such party to which this Agreement4543relates. Subject to the foregoing, this Agreement shall inure to the4544benefit of and be binding upon the permitted successors and permitted4545assigns of Tepha and Licensee.454645474548Page 17 of 314549<PAGE>45504551455217.8. Independent Contractors. The parties agree that in the4553performance of this Agreement they are and shall be independent4554contractors. Nothing herein shall be construed to constitute either4555party as the agent of the other party for any purpose whatsoever, and4556neither party shall bind or attempt to bind the other party to any4557contract or the performance of any obligation or represent to any third4558party that it has any right to enter into any binding obligation on the4559other party's behalf.4560456117.9. Severability. If any provision of this Agreement is held invalid4562by any law, rule, order or regulation of any government or by the final4563determination of any court of competent jurisdiction, such invalidity4564shall not affect the enforceability of any other provisions. The4565parties shall make a good faith effort to renegotiate and replace the4566invalid provision with a valid and enforceable one, such that the4567original intent of the parties shall be accomplished to the extent4568permitted by law.4569457017.10. Counterparts. This Agreement may be executed in one or more4571counterparts, each of which when executed shall be deemed to be an4572original but all of which taken together shall constitute one and the4573same agreement.4574457517.11. Patent Marking. Licensee shall apply the patent marking notices4576required by the law of any country where Licensed Products are made,4577used or sold.4578457917.12. Rules of Construction. The parties agree that they have4580participated equally in the formation of this Agreement and that the4581language and terms of this Agreement shall not be presumptively4582construed against either of them.4583458417.13. Affiliates. Each party shall be responsible to the other for all4585obligations of its Affiliates in the same fashion and to the full4586extent that each party is obligated to the other hereunder, including,4587but not limited to, the payment of royalties due with respect to sales4588made by Affiliates. A breach by an Affiliate of a party will be treated4589as a breach by that party.4590459117.14. Force Majeure. Neither party shall be in default of its4592obligations to the extent its performance is delayed or prevented by4593causes beyond its control, including but not limited to acts of God,4594earthquake, flood, embargo, riots, sabotage, utility or transmission4595disruption, failure or delay of suppliers, fire or labor disturbances.4596459717.15. Nonsolicitation. During the Term of this Agreement and for a4598period of six months thereafter, Licensee and Tepha agree not to,4599directly, or indirectly, solicit or attempt to solicit for employment4600any person employed by the other party.460146024603Page 18 of 314604<PAGE>460546064607IN WITNESS WHEREOF, the parties have duly executed this Agreement the4608day and year set forth below.46094610Tepha, Inc. Vascular Solutions, Inc. ("Licensee")46114612By: /s/ Simon F. Williams By: /s/ Howard Root4613Name: Simon F. Williams Name: Howard Root4614Title: President Title: Chief Executive Officer4615Date: 12/19/02 Date: 12/17/02461646174618461946204621462246234624Page 19 of 314625<PAGE>462646274628APPENDIX A46294630PATENT RIGHTS463146321. US Patent No. 5,229,279 "Method for producing novel polyester4633biopolymers" by Peoples and Sinskey, issued July 20, 1993.463446352. US Patent No. 5,245,023 "Method for producing novel polyester4636biopolymers" by Peoples and Sinskey, issued September 14, 1993.463746383. US Patent No. 5,250,430 "Polyhydroxyalkanoate polymerase" by Peoples4639and Sinskey, issued October 5, 1993.464046414. US Patent No. 5,480,794 "Overproduction and purification of soluble PHA4642synthase" by Peoples, Gerngross, and Sinskey, issued January 2, 1996.464346445. US Patent No. 5,512,669 "Gene encoding bacterial acetoacetyl-CoA4645reductase" by Peoples and Sinskey, issued April 30, 1996.464646476. US Patent No. 5,534,432 "Polyhydroxybutyrate polymerase" by Peoples and4648Sinskey, issued July 9, 1996.464946507. US Patent No. 5,661,026 "Gene encoding bacterial beta-ketothiolase" by4651Peoples and Sinskey, issued August 26, 1997.465246538. US Patent No. 5,663,063 "Method for producing polyester biopolymers" by4654Peoples and Sinskey, issued September 2, 1997.465546569. US Patent No. 5,798,235 "Gene encoding acetoacetyl-CoA reductase" by4657Peoples and Sinskey, issued August 25, 1998.4658465910. US Patent No. 5,811,272 "Method for controlling molecular weight of4660polyhydroxyalkanoates" by Snell, Hogan, Sim, Sinskey and Rha, issued4661September 22, 1998.4662466311. US Patent No. 6,228,934 "Methods and apparatus for the production of4664amorphous polymer suspension" by Horowitz & Gerngross, issued May 8,46652001.4666466712. US Patent No. 6,245,537 "Removing endotoxin with an oxidizing agent4668from polyhydroxyalkanoates produced by fermentation" by Williams,4669Martin, Gerngross and Horowitz, issued June 12, 2001.467046714672Page 20 of 314673<PAGE>46744675467613. US Patent No. 6,316,262 "Biological systems for manufacture of4677polyhydroxyalkanoate polymers containing 4-hydroxyacids" by Huisman,4678Skraly, Martin and Peoples, issued November 13, 2001.4679468014. US Patent No. 6,323,010 "Polyhydroxyalkanoate biopolymer compositions"4681by Skraly and Peoples, issued November 27, 2001.4682468315. US Patent No. 6,323,276 "Methods and apparatus for the production of4684amorphous polymer suspensions" by Horowitz and Gerngross, issued4685November 27, 2001.4686468716. US Patent No. 6,329,183 "Polyhydroxyalkanoate production from polyols"4688by Skraly and Peoples, issued December 11, 2001.4689469017. EP Patent Application No. 0 870 837 A1 "Method for producing novel4691polyester biopolymers" by Peoples and Sinskey, published October 14,46921998.4693469418. EP Patent No. 0 482 077 B1 "Method for producing novel polyester4695biopolymers" by Peoples and Sinskey, published October 21, 1998.4696469719. WO 98/51812 "Polyhydroxyalkanoates for IN VIVO applications" by4698Williams, Martin, Gerngross, and Horowitz, published November 19, 1998.4699470020. WO 99/32536 "Polyhydroxyalkanoate compositions having controlled4701degradation rates" by Martin, Skraly, and Williams, published July 1,47021999.4703470421. WO 00/56376 "Medical devices and applications of polyhydroxyalkanoates"4705by Williams, Martin, and Skraly, published September 28, 2000.4706470722. WO 00/51662 "Bioabsorbable, biocompatible polymers for tissue4708engineering" by Williams, published September 8, 2000.4709471023. WO 01/19422 "Polyhydroxyalkanoate compositions for soft tissue repair,4711augmentation, and viscosupplementation" by Williams and Martin,4712published March 22, 2001.4713471424. JP 2-510584 Method for producing novel polyester biopolymers, Peoples4715and Sinskey.471647174718Page 21 of 314719<PAGE>472047214722APPENDIX B47234724MIT LICENSE TERMS47254726ARTICLE 1 - DEFINITIONS47274728For the purposes of this Agreement, the following words and phrases4729shall have the following meanings:473047311.1 "LICENSEE" shall include a related company of METABOLIX, INC.4732the voting stock of which is directly or indirectly at least4733fifty percent (50%) owned and controlled by METABOLIX, INC.,4734an organization which directly or indirectly controls more4735than fifty percent (50%) of the voting stock of METABOLIX,4736INC. and an organization the majority ownership of which is4737directly or indirectly common to the ownership of METABOLIX,4738INC.473947401.2 "PATENT RIGHTS" shall mean all of the following M.I.T.4741intellectual property:474247431.2.a The United States and foreign patents and/or patent4744applications and invention disclosures listed in4745Appendix A;474647471.2.b United States and foreign patents issued from the4748applications and invention disclosures listed in4749Appendix A and from divisionals and continuations of4750these applications and invention disclosures;475147521.2.c claims of United States and foreign4753continuation-in-part applications and of the4754resulting patents which are directed to subject4755matter specifically described in the United States4756and foreign applications and invention disclosures4757listed in Appendix A;475847591.2.d claims of all foreign patent applications and of the4760resulting patents which are directed to subject4761matter specifically described in the United States4762patents and/or patent applications and invention4763disclosures described in (a), (b), (c) or (d) above;4764and476547661.2.e any reissues of United States patents described in4767(a), (b), (c) or (d) above.476847691.3 A "LICENSED PRODUCT" shall mean any product or part thereof4770which:477147721.3.a is covered in whole or in part by an issued,4773unexpired valid claim or a pending claim contained in4774the PATENT RIGHTS in the country in which any such4775product or part thereof is made, used or sold; or477647771.3.b is manufactured by using a process or is employed to4778practice a process which is covered in whole or in4779part by an issued, unexpired valid claim or a pending4780claim contained in the PATENT RIGHTS in the country4781in which a LICENSED478247834784Page 22 of 314785<PAGE>478647874788PROCESS is used or in which such product or part4789thereof is used or sold.479047911.4 A "LICENSED PROCESS" shall mean any process which:479247931.4.a is covered in whole or in part by an issued, expired4794valid claim or a pending claim contained in the4795PATENT RIGHTS in the country in which such process is4796used or in which the LICENSED PRODUCT made thereby is4797used or sold.479847994800ARTICLE 2 - GRANT480148022.1 M.I.T. hereby grants to LICENSEE the worldwide right and4803license to make, have made, use, lease and sell the LICENSED4804PRODUCTS and to practice the LICENSED PROCESSES to the end of4805the term for which the PATENT RIGHTS are granted unless this4806Agreement shall be sooner terminated according to the terms4807hereof.480848092.2 LICENSEE agrees that to the extent possible LICENSED PRODUCTS4810leased or sold in the United States shall be manufactured4811substantially in the United States and that in those cases4812where domestic manufacture is impractical it will request4813appropriate waivers from the Department of Commerce pursuant4814to 37 C.F.R. Sec. 401.14(i).481548162.3 In order to establish a period of exclusivity for LICENSEE,4817M.I.T hereby agrees that it shall not grant any other license4818to make, have made, use, lease and sell LICENSED PRODUCTS or4819to utilize LICENSED PROCESSES during the term of this4820agreement.482148222.4 M.I.T. reserves the right to practice under the PATENT RIGHTS4823for its own noncommercial research purposes.482448252.5 M.I.T. further grants to LICENSEE a ninety (90) day first4826option to negotiate for an exclusive license to new inventions4827dominated by the claims of the PATENT RIGHTS as originally4828licensed which arise from the laboratory of Prof. Anthony4829Sinskey at M.I.T. within four (4) years of the Effective Date4830of this Agreement. Such option shall be subject to any rights4831granted in sponsorship agreements to sponsors of the research4832from which any such invention arises.483348342.6 LICENSEE shall have the right to enter into sublicensing4835agreements for the rights, privileges and licenses granted4836hereunder. In addition, LICENSEE may grant any sublicensee the4837right to sublicense to third parties any or all of the rights,4838privileges and licenses granted to such483948404841Page 23 of 314842<PAGE>484348444845sublicensee and such third party sublicenses may also include4846the right to sublicense.484748482.7 LICENSEE agrees that any sublicenses granted by it shall4849provide that the obligations to M.I.T. of Articles 2, 5, 7, 8,48509, l0, 12, 13 and 15 of this Agreement shall be binding upon4851the sublicensee as if it were a party to this Agreement.4852LICENSEE further agrees to attach copies of these Articles to4853sublicense agreements.485448552.8 LICENSEE agrees to forward to M.I.T. a copy of any and all4856sublicense agreements promptly upon execution by the parties.485748582.9 The license granted hereunder shall not be construed to confer4859any rights upon LICENSEE by implication, estoppel or otherwise4860as to any technology not specifically set forth in Appendix A4861hereof.486248634864ARTICLE 5 - REPORTS AND RECORDS486548665.1 LICENSEE shall keep full, true and accurate books of account4867containing all particulars that maybe necessary for the4868purpose of showing the amounts payable to M.I.T. hereunder.4869Said books of account shall be kept at LICENSEE's principal4870place of business or the principal place of business of the4871appropriate division of LICENSEE to which this Agreement4872relates. Said books and the supporting data shall be open at4873all reasonable times for three (3) years following the end of4874the calendar year to which they pertain, to the inspection of4875M.I.T. or its agents for the purpose of verifying LICENSEE's4876royalty statement or compliance in other respects with this4877Agreement. Should such inspection lead to the discovery of a4878greater than Ten Percent (10%) discrepancy in reporting,4879LICENSEE agrees to pay the full cost of such inspection.488048815.2 LICENSEE, within sixty (60) days after December 31 of each4882year prior to the first commercial sale of a LICENSED PRODUCT4883and sixty days after March 31, June 30, September 30 and4884December 31, of each year after the first commercial sales of4885a LICENSED PRODUCT, shall deliver to M.I.T. true and accurate4886reports, giving such particulars of the business conducted by4887LICENSEE during the preceding three-month period under this4888Agreement as shall be pertinent to a royalty accounting4889hereunder. These shall include at least the following: (a)4890number of LICENSED PRODUCTS manufactured and sold by LICENSEE;4891(b) total billings for LICENSED PRODUCTS manufactured and sold4892by LICENSEE; (c) accounting for all LICENSED PROCESSES used or4893sold by LICENSEE; (d) deductions applicable as provided in4894Paragraph 1.5; (e) total royalties due; and (f) names and4895addresses of all sublicensees of LICENSEE. LICENSEE shall4896endeavor to obtain similar information from its489748984899Page 24 of 314900<PAGE>490149024903sublicensees and will provide such information which is4904obtained to M.I.T.490549065.3 With each such report submitted, LICENSEE shall pay to M.I.T.4907the royalties due and payable under this Agreement. If no4908royalties shall be due, LICENSEE shall so report.490949105.4 On or before the ninetieth (90th) day following the close of4911LICENSEE's fiscal year, LICENSEE shall provide M.I.T. with4912LICENSEE's certified financial statements for the preceding4913fiscal year including, at a minimum, a Balance Sheet and an4914Operating Statement.491549165.5 The royalty payments set forth in this Agreement and amounts4917due under Article 6, shall if overdue, bear interest until4918payment at a per annum rate Two Percent (2%) above the prime4919rate in effect at the Chase Manhattan Bank (N.A.) on the due4920date. The payment of such interest shall not foreclose M.I.T.4921from exercising any other rights it may have as a consequence4922of the lateness of any payment.492349244925ARTICLE 7 - INFRINGEMENT492649277.1 LICENSEE shall inform M.I.T. promptly in writing of any4928alleged infringement of the PATENT RIGHTS by a third party and4929of any available evidence thereof.493049317.2 During the term of this Agreement, LICENSEE shall have the4932right, but shall not be obligated, to prosecute at its own4933expense any such infringements of the PATENT RIGHTS and, in4934furtherance of such right, M.I.T. hereby agrees that LICENSEE4935may join M.I.T. as a party plaintiff in any such suit, without4936expense to M.I. T. The total cost of any such infringement4937action commenced or defended solely by LICENSEE shall be borne4938by LICENSEE. LICENSEE may, for such purposes, use the name of4939M.I.T. as party plaintiff; provided, however, that such right4940to bring an infringement action shall remain in effect only4941for so long as the license granted herein remains exclusive.4942No settlement, consent judgment or other voluntary final4943disposition of the suit may be entered into without the4944consent of M.I.T. which consent shall not unreasonably be4945withheld. LICENSEE shall indemnify M.I.T. against any order4946for costs that may be made against M.I.T. in proceedings4947commenced and defended solely by LICENSEE.494849497.3 In the event that LICENSEE shall undertake the enforcement4950and/or defense of the PATENT RIGHTS by litigation, LICENSEE4951may withhold up to Fifty Percent (50%) of the royalties4952otherwise thereafter due M.I.T. hereunder and apply the same4953toward reimbursement of up to half of495449554956Page 25 of 314957<PAGE>495849594960LICENSEE's expenses, including reasonable attorneys' fees, in4961connection therewith. Any recovery of damages by LICENSEE for4962any such suit shall be applied first in satisfaction of any4963unreimbursed expenses and legal fees of LICENSEE relating to4964the suit, and next toward reimbursement of M.I.T. for any4965royalties past due or withheld and applied pursuant to this4966Article VII. The balance remaining from any such recovery4967attributable to damages for lost sales shall be divided4968according to the royalty percentages set forth in Section 4.1;4969any remaining balance shall be paid to LICENSEE.497049717.4 If within six (6) months after having been notified of any4972alleged infringement, LICENSEE shall have been unsuccessful in4973persuading the alleged infringer to desist and shall not have4974brought and shall not be diligently prosecuting an4975infringement action, or if LICENSEE shall notify M.I.T. at any4976time prior thereto of its intention not to bring suit against4977any alleged infringer, then, and in those events only, M.I.T.4978shall have the right, but shall not be obligated, to prosecute4979at its own expense any infringement of the PATENT RIGHTS, and,4980in furtherance of such right, LICENSEE hereby agrees that4981M.I.T. may include LICENSEE as a party plaintiff in any such4982suit, without expense to LICENSEE. The total cost of any such4983infringement action commenced or defended solely by M.I.T.4984shall be borne by M.I.T., and M.I.T. shall keep any recovery4985or damages for past infringement derived therefrom.498649877.5 In the event that a declaratory judgment action alleging4988invalidity or noninfringement of any of the PATENT RIGHTS4989shall be brought against LICENSEE, M.I.T., at its option,4990shall have the right, within sixty (60) days after4991commencement of such action, to join in the defense of the4992action at its own expense.499349947.6 In any infringement suit as either party may institute to4995enforce the PATENT RIGHTS pursuant to this Agreement, the4996other parry hereto shall, at the request and expense of the4997party initiating such suit, cooperate in all respects and, to4998the extent possible, have its employees testify when requested4999and make available relevant records, papers, information,5000samples, specimens and the like.500150027.7 LICENSEE, during the period of this Agreement, shall have the5003sole right in accordance with the terms and conditions herein5004to sublicense any alleged infringer for future use of the5005PATENT RIGHTS.500650075008ARTICLE 8 - PRODUCT LIABILITY500950108.1 LICENSEE shall at all times during the term of this Agreement5011and thereafter, indemnify, defend and hold M.I.T., its5012trustees, officers,501350145015Page 26 of 315016<PAGE>501750185019employees and affiliates, harmless against all claims and5020expenses, including legal expenses and reasonable attorneys'5021fees, arising out of the death of or injury to any person or5022persons or out of any damage to property and against any other5023claim, proceeding, demand, expense and liability of any kind5024whatsoever resulting from the production, manufacture, sale,5025use, lease, consumption or advertisement of the LICENSED5026PRODUCT(s) and/or LICENSED PROCESS(es) or arising from any5027obligation of LICENSEE hereunder.502850298.2 Prior to the first use of a LICENSED PRODUCT on humans,5030LICENSEE shall obtain and carry in full force and effect5031liability insurance which shall protect LICENSEE and M.I.T. in5032regard to events covered by Paragraph 8.1 above.503350348.3 EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT,5035M.I.T. MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF5036ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED5037TO WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR5038PURPOSE, AND VALIDITY OF PATENT RIGHTS CLAIMS, ISSUED OR5039PENDING. NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED AS A5040REPRESENTATION MADE OR WARRANTY GIVEN BY M.I.T. THAT THE5041PRACTICE BY LICENSEE OF THE LICENSE GRANTED HEREUNDER SHALL5042NOT INFRINGE THE PATENT RIGHTS OF ANY THIRD PARTY.504350445045ARTICLE 9 - EXPORT CONTROLS50465047It is understood that M.I.T. is subject to United States laws and5048regulations controlling the export of technical data, computer software,5049laboratory prototypes and other commodities (including the Arms Export Control5050Act, as amended and the Export Administration Act of 1979), and that its5051obligations hereunder are contingent on compliance with applicable United States5052export laws and regulations. The transfer of certain technical data and5053commodities may require a license from the cognizant agency of the United States5054Government and/or written assurances by LICENSEE that LICENSEE shall not export5055data or commodities to certain foreign countries without prior approval of such5056agency. M.I.T. neither represents that a license shall not be required not that,5057if required, it shall be issued.505850595060ARTICLE 10 - NON-USE OF NAMES50615062Except as required by law, LICENSEE shall not use the names or5063trademarks of the Massachusetts Institute of Technology, nor any adaptation5064thereof, nor the names of506550665067Page 27 of 315068<PAGE>506950705071any of its employees, in any advertising, promotional or sales literature5072without prior written consent obtained from M.I.T., or said employee, in each5073case, except that LICENSEE may state that it is licensed by M.I.T. under one or5074more of the patents and/or applications comprising the PATENT RIGHTS. LICENSEE5075may, however, use the name of Oliver P. Peoples, Anthony J. Sinskey, and/or any5076other employee of M.I.T. who is a consultant or member of an advisory board of5077LICENSEE, with their permission, and provided, also, that their affiliation with5078LICENSEE is identified.507950805081ARTICLE 12 - DISPUTE RESOLUTION5082508312.1 Except for the right of either party to apply to a court of5084competent jurisdiction for a temporary restraining order, a5085preliminary injunction or other equitable relief to preserve5086the status quo or prevent irreparable harm, any and all5087claims, disputes or controversies arising under, out of or in5088connection with the Agreement, including any dispute relating5089to patent validity or infringement, which the parties shall be5090unable to resolve within one hundred and twenty (120) days5091shall be mediated in good faith. The party raising such5092dispute shall promptly advise the other party of such claim,5093dispute or controversy in a writing which describes in5094reasonable detail the nature of such dispute. By not later5095than ten (10) business days after the recipient has received5096such notice of dispute, each party shall have selected for5097itself a representative who shall have the authority to bind5098such party, and shall additionally have advised the other5099party in writing of the name and title of such representative.5100By not later than twenty (20) business days after the date of5101such notice of dispute, such representatives shall schedule a5102date for a mediation hearing with the Cambridge Dispute5103Settlement Center or Endispute Inc. in Cambridge,5104Massachusetts. The parties shall enter into good faith5105mediation and shall share the costs equally. If the5106representatives of the parties have not been able to resolve5107the dispute within thirty (30) business days after such5108mediation hearing, the parties shall have the right to pursue5109any other remedies legally available to resolve such dispute5110in either the Courts of the Commonwealth of Massachusetts or5111in the United States District Court for the District of5112Massachusetts, to whose jurisdiction for such purposes M.I.T.5113and LICENSEE each hereby irrevocably consents and submits.5114511512.2 Notwithstanding the foregoing, nothing in this Article shall5116be construed to waive any rights or timely performance of any5117obligations existing under this Agreement.511851195120ARTICLE 13 - TERMINATION5121512213.1 If LICENSEE shall cease to carry on its business, this5123Agreement shall terminate upon notice by M.I.T., except as5124provided in Article 11.512551265127Page 28 of 315128<PAGE>51295130513113.2 Should LICENSEE fail to make any payment whatsoever due and5132payable to M.I.T. hereunder, M.I.T. shall have the right to5133terminate this Agreement effective on sixty (60) days' notice,5134unless LICENSEE shall make all such payments to M.I.T. within5135said sixty (60) day period. Upon the expiration of the sixty5136(60) day period, if LICENSEE shall not have made all such5137payments to M.I.T., the rights, privileges and license granted5138hereunder shall automatically terminate.5139514013.3 Upon any material breach or default of this Agreement by5141LICENSEE, other than those occurrences set out in Paragraphs514213.1 and 13.2 hereinabove, which shall always take precedence5143in that order over any material breach or default referred to5144in this Paragraph 13.3. M.I.T. shall have the right to5145terminate this Agreement and the rights, privileges and5146license granted hereunder effective on one hundred and twenty5147(120) days' notice to LICENSEE. Such termination shall become5148automatically effective unless LICENSEE shall have cured any5149such material breach or default prior to the expiration of the5150one hundred and twenty (120) day period.5151515213.4 LICENSEE shall have the right to terminate this Agreement at5153any time on six (6) months' notice to M.I.T., and upon payment5154of all amounts due M.I.T. through the effective date of the5155termination.5156515713.5 Upon termination of this Agreement for any reason, nothing5158herein shall be construed to release either party from any5159obligation that matured prior to the effective date of such5160termination. LICENSEE and any sublicensee thereof may,5161however, after the effective date of such termination, sell5162all LICENSED PRODUCTS, and complete LICENSED PRODUCTS in the5163process of manufacture at the time of such termination and5164sell the same, provided that LICENSEE shall pay to M.I.T. the5165Running Royalties thereon as required by Article 4 of this5166Agreement and shall submit the reports required by Article 55167hereof on the sales of LICENSED PRODUCTS.5168516913.6 Upon termination of this Agreement for any reason, any of5170LICENSEE's direct sublicensees that are not then in default5171shall have the right to seek a license from M.I.T. M.I.T.5172agrees to negotiate such licenses in good faith under5173reasonable terms and conditions. Notwithstanding the5174foregoing, should Tepha, Inc. request a license, M.I.T. hereby5175agrees to grant such a license under terms and conditions no5176less favorable as a whole than those granted to Tepha, Inc. by5177LICENSEE.517851795180Page 29 of 315181<PAGE>518251835184ARTICLE 15 - MISCELLANEOUS PROVISIONS5185518615.1 This Agreement shall be construed, governed, interpreted and5187applied in accordance with the laws of the Commonwealth of5188Massachusetts, U.S.A., except that questions affecting the5189construction and effect of any patent shall be determined by5190the law of the country in which the patent was granted.5191519215.2 The parties hereto acknowledge that this Agreement sets forth5193the entire Agreement and understanding of the parties hereto5194as to the subject matter hereof, and shall not be subject to5195any change or modification except by the execution of a5196written instrument subscribed to by the parties hereto.5197519815.3 The provisions of this Agreement are severable, and in the5199event that any provisions of this Agreement shall be5200determined to be invalid or unenforceable under any5201controlling body of the law, such invalidity or5202unenforceability shall not in any way affect the validity or5203enforceability of the remaining provisions hereof.5204520515.4 The failure of either party to assert a right hereunder or to5206insist upon compliance with any term or condition of this5207Agreement shall not constitute a waiver of that right or5208excuse a similar subsequent failure to perform any such term5209or condition by the other party.521052115212521352145215521652175218Page 30 of 315219<PAGE>522052215222APPENDIX C52235224PRICE LIST52255226- -------------------------------------------------------- -----------------------5227|5228- -------------------------------------------------------- -----------------------5229Poly-3-hydroxybutyrate-co-4-hydroxybutyrate (PHA3444) | $ *** *5230- -------------------------------------------------------- -----------------------52315232*Current price, price adjustments to be determined in accordance with Paragraph52333.5. Each order must be for a minimum lot size of *** , except for research and5234development runs during the initial two-year period after the Effective Date.52355236**Composition of co-monomers to be agreed between the parties.52375238*** Denotes confidential information that has been omitted from the exhibit and5239filed separately, accompanied by a confidential treatment request, with the5240Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities5241Exchange Act of 1934.524252435244524552465247524852495250Page 31 of 3152515252</TEXT>5253</DOCUMENT>5254<DOCUMENT>5255<TYPE>EX-215256<SEQUENCE>45257<FILENAME>vasc030918_ex21.txt5258<DESCRIPTION>SUBSIDIARIES5259<TEXT>526052615262526352645265EXHIBIT 21526652675268SUBSIDIARIES526952705271Vascular Solutions, GmbH(Germany)5272527352745275</TEXT>5276</DOCUMENT>5277<DOCUMENT>5278<TYPE>EX-23.15279<SEQUENCE>55280<FILENAME>vasc030918_ex23-1.txt5281<DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS5282<TEXT>5283EXHIBIT 23.152845285528652875288Consent of Independent Auditors528952905291We consent to the incorporation by reference in the Registration Statement (Form5292S-8 No. 333-54164) of our report dated January 17, 2003, with respect to the5293consolidated financial statements of Vascular Solutions, Inc. included in the5294Annual Report (Form 10-K) for the year ended December 31, 2002.52955296Our audits also included the financial statement schedule of Vascular Solutions,5297Inc. listed in Item 15(a). This schedule is the responsibility of the Company's5298management. Our responsibility is to express an opinion based on our audits. In5299our opinion, the financial statement schedule referred to above, when considered5300in relation to the basic financial statements taken as a whole, presents fairly5301in all material respects the information set forth therein.530253035304Ernst & Young LLP53055306Minneapolis, Minnesota5307February 26, 200353085309</TEXT>5310</DOCUMENT>5311<DOCUMENT>5312<TYPE>EX-99.15313<SEQUENCE>65314<FILENAME>vasc030918_ex99-1.txt5315<DESCRIPTION>CERTIFICATION5316<TEXT>5317EXHIBIT 99.1531853195320CERTIFICATION PURSUANT TO532118 U.S.C. SS.1350,5322AS ADOPTED PURSUANT TO5323SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002532453255326In connection with the Annual Report of Vascular Solutions, Inc. (the "Company")5327on Form 10-K for the period ended December 31, 2002, as filed with the5328Securities and Exchange Commission on the date hereof (the "Report"), I, Howard5329Root, Chief Executive Officer and Acting Chief Financial Officer of the Company,5330certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of5331the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:533253331. The Report fully complies with the requirements of Section533413(a) or 15(d) of the Securities Exchange Act of 1934; and533553362. The information contained in the Report fairly presents, in5337all material respects, the financial condition and results of5338operations of the Company.533953405341/s/ Howard Root5342------------------------------5343Howard Root5344Chief Executive Officer and5345Acting Chief Financial Officer5346February 28, 200353475348</TEXT>5349</DOCUMENT>5350</SEC-DOCUMENT>5351-----END PRIVACY-ENHANCED MESSAGE-----535253535354