<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission file number 0-21982
DIAMETRICS MEDICAL, INC.
Incorporated pursuant to the Laws of Minnesota
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Internal Revenue Service -- Employer Identification No. 41-1663185
2658 Patton Road, Roseville, Minnesota 55113
(612) 639-8035
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The total number of shares of the registrant's Common Stock, $.01 par value,
outstanding on October 30, 1998, was 23,378,217.
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DIAMETRICS MEDICAL, INC.
Page
----
Part I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Statements of Operations:
Three Months Ended September 30, 1998 and 1997.................3
Nine Months Ended September 30, 1998 and 1997..................3
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997..........................................4
Consolidated Statements of Cash Flows:
Nine Months Ended September 30, 1998 and 1997..................5
Notes to Consolidated Financial Statements.......................6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition........................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk......13
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings...............................................14
Item 2. Changes in Securities...........................................14
Item 3. Defaults Upon Senior Securities.................................14
Item 4. Submission of Matters to a Vote of Security Holders.............14
Item 5. Other Information...............................................14
Item 6. Exhibits and Reports on Form 8-K................................15
Signature................................................................16
2
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PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
DIAMETRICS MEDICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 3,102,430 $ 2,829,279 $ 8,571,181 $ 7,391,924
Cost of sales 2,946,478 3,018,947 8,159,236 8,668,467
------------ ------------ ------------ ------------
Gross profit (loss) 155,952 (189,668) 411,945 (1,276,543)
------------ ------------ ------------ ------------
Operating expenses:
Research and development 1,729,984 1,782,933 4,909,526 5,344,396
Sales and marketing 2,243,197 1,917,018 5,879,759 5,860,444
General and administrative 888,657 936,330 2,540,366 2,874,344
Restructuring and other charges -- 134,939 -- 298,143
------------ ------------ ------------ ------------
Total operating expenses 4,861,838 4,771,220 13,329,651 14,377,327
------------ ------------ ------------ ------------
Operating loss (4,705,886) (4,960,888) (12,917,706) (15,653,870)
Other expense, net (86,468) (192,379) (504,281) (525,444)
------------ ------------ ------------ ------------
Net loss $ (4,792,354) $ (5,153,267) $(13,421,987) $(16,179,314)
============ ============ ============ ============
Basic and diluted net loss per common share $ (0.21) $ (0.25) $ (0.62) $ (0.90)
============ ============ ============ ============
Weighted average number of
common shares outstanding 22,548,936 20,279,062 21,530,709 17,935,053
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
DIAMETRICS MEDICAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,170,486 $ 3,358,684
Marketable securities 6,558,430 8,401,642
Accounts receivable 5,058,444 3,768,528
Inventories 4,253,590 3,588,218
Prepaid expenses and other current assets 715,404 311,173
------------- -------------
Total current assets 20,756,354 19,428,245
------------- -------------
Property and equipment 20,135,486 18,060,127
Less accumulated depreciation and amortization (13,084,981) (10,674,155)
------------- -------------
7,050,505 7,385,972
------------- -------------
Other assets 1,861,013 2,217,089
------------- -------------
$ 29,667,872 $ 29,031,306
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,378,542 $ 2,261,822
Accrued expenses 2,412,897 3,687,597
Short-term borrowings and current portion of
long-term liabilities 513,733 969,950
------------- -------------
Total current liabilities 5,305,172 6,919,369
------------- -------------
Long-term liabilities:
Long-term liabilities, excluding current portion 8,245,073 8,537,742
Other liabilities, excluding current portion 432,317 431,145
------------- -------------
Total liabilities 13,982,562 15,888,256
------------- -------------
Shareholders' equity:
Common stock, $.01 par value: 35,000,000 authorized
23,378,217 and 20,889,945 shares issued and
outstanding 233,782 208,899
Additional paid-in capital 130,638,843 113,970,247
Cumulative translation adjustment (32,583) 19,584
Accumulated deficit (115,154,732) (101,055,680)
------------- -------------
Total shareholders' equity 15,685,310 13,143,050
------------- -------------
$ 29,667,872 $ 29,031,306
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
DIAMETRICS MEDICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(13,421,987) $(16,179,314)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,500,615 3,077,761
Other 6,952 (89,526)
Change in operating assets and liabilities:
Accounts Receivable, net (1,290,537) (505,123)
Inventories (811,666) 643,382
Prepaid expenses and other current assets (305,473) 75,214
Accounts payable and accrued expenses (1,078,761) (98,810)
------------ ------------
Net cash used in operating activities (14,400,857) (13,076,416)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (1,846,619) (2,466,031)
Purchases of marketable securities (6,501,680) (22,899,465)
Proceeds from maturities of marketable securities 8,401,642 12,400,000
Other 5,735 164,080
------------ ------------
Net cash provided by (used in) investing activities 59,078 (12,801,416)
------------ ------------
Cash flows from financing activities:
Principal payments on borrowings (1,232,488) (87,312)
Proceeds from short-term borrowings 990,000 --
Proceeds from long-term borrowings -- 1,058,626
Net proceeds from the issuance of preferred stock -- 11,900,000
Net proceeds from the issuance of common stock 16,684,029 13,053,739
Principal payments under capital lease obligations (506,398) (812,203)
------------ ------------
Net cash provided by financing activities 15,935,143 25,112,850
------------ ------------
Effect of subsidiary's year-end change on cash and cash equivalents (664,819) --
Effect of exchange rate changes on cash and cash equivalents (116,743) 14,749
------------ ------------
Net increase (decrease) in cash and cash equivalents 811,802 (750,233)
Cash and cash equivalents at beginning of period 3,358,684 2,451,993
------------ ------------
Cash and cash equivalents at end of period $ 4,170,486 $ 1,701,760
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,296,369 $ 298,734
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
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DIAMETRICS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
(1) UNAUDITED FINANCIAL STATEMENTS
The interim consolidated financial statements of Diametrics Medical, Inc.
(the "Company") are unaudited and have been prepared by the Company in
accordance with generally accepted accounting principles for interim
financial information, pursuant to the rules and regulations of the
Securities and Exchange Commission. Pursuant to such rules and regulations,
certain financial information and footnote disclosures normally included in
the financial statements have been condensed or omitted. However, in the
opinion of management, the financial statements include all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation
of the interim periods presented. Operating results for these interim
periods are not necessarily indicative of results to be expected for the
entire year, due to seasonal, operating and other factors.
These statements should be read in conjunction with the financial
statements and related notes which are incorporated by reference in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
(2) RECLASSIFICATIONS
Certain 1997 amounts in the Consolidated Balance Sheets have been
reclassified from prior reported balances to conform to the 1998
presentation.
(3) INVENTORIES
Inventories are summarized as follows:
September 30, December 31,
1998 1997
---------- ----------
Raw materials $1,089,374 $ 957,049
Work-in-process 783,864 442,527
Finished goods 2,380,352 2,188,642
---------- ----------
$4,253,590 $3,588,218
========== ==========
(4) NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure
About Segments of an Enterprise and Related Information". SFAS 131 is
effective for the fiscal year ending December 31, 1998 and establishes
standards for disclosure about products, geography and major customers. The
Company expects that implementation of this standard will not have a
material effect on its financial statement disclosures.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits". SFAS 132 is effective for the
fiscal year ending December 31, 1998, and standardizes the disclosure
requirements for pensions and other postretirement benefits. The Company
expects that implementation of this standard will not have a material
effect on its financial statement disclosures.
6
<PAGE>
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in
the balance sheet as either an asset or liability measured at its fair
value. SFAS 133 is effective for fiscal years beginning after June 15,
1999. The Company expects that implementation of this standard will not
have a material effect on its financial statement disclosure.
(5) COMPREHENSIVE LOSS
As of January 1, 1998, the Company adopted SFAS 130, "Reporting
Comprehensive Income". SFAS 130 establishes new rules for the reporting and
display of comprehensive income (loss) and its components; however, the
adoption of the Statement had no impact on the Company's net loss or
shareholders' equity. For the Company, SFAS 130 requires changes in the
shareholders' equity account (cumulative translation adjustment) to be
included as a component of comprehensive loss.
The following table sets forth the computation of comprehensive loss:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss $(4,792,354) $(5,153,267) $(13,421,987) $(16,179,314)
Change in cumulative
translation adjustment (58,443) (30,678) (52,167) (118,524)
----------- ----------- ------------ ------------
Comprehensive loss $(4,850,797) $(5,183,945) $(13,474,154) $(16,297,838)
=========== =========== ============ ============
Basic and diluted
comprehensive loss
per common share $ (0.22) $ (0.26) $ (0.63) $ (0.91)
=========== =========== ============ ============
</TABLE>
(6) CHANGE IN YEAR END OF SUBSIDIARY
Effective January 1, 1998, the Company changed the year-end of its
wholly-owned subsidiary, Diametrics Medical, Ltd. (DML) to December 31 from
November 30 to produce a consistent reporting period for the consolidated
entity. As a result of this change in year-end, DML's net results of
operations for the month of December 1997 were closed to beginning
accumulated deficit on the balance sheet as of January 1, 1998. The impact
of this change was an increase in the beginning accumulated deficit of
approximately $677,000.
(7) SHAREHOLDERS' EQUITY
On August 4, 1998, the Company completed the sale in a private placement of
2,142,858 shares of Common Stock at a price of $7.00 per share, resulting
in proceeds to the Company of $15,000,006. The purchasers also received
five-year warrants to purchase 714,286 shares of Common Stock at $8.40 per
share, providing additional future funding potential of $6,000,000. The
warrants are exercisable immediately and are callable after a twelve month
waiting period if the Common Stock closing price exceeds certain levels for
twenty consecutive trading days.
7
<PAGE>
In addition, the Company issued Convertible Senior Secured Fixed Rate Notes
to an investor group, with proceeds aggregating $7,300,000. The notes are
due in five years, require quarterly interest payments at a rate of 7% per
annum, and are convertible into the Company's Common Stock at $8.40 per
share. Proceeds of the notes were paid by the investor group directly to
another debtor of the Company to retire existing debt.
The Company expects to use the net proceeds from the private placement of
equity securities for product development, sales and marketing and other
general corporate purposes.
(8) SUBSEQUENT EVENT
On October 1, 1998, the Company entered into an exclusive Distribution
Agreement with Johnson & Johnson Professional, Inc. for worldwide market
development and distribution of the Company's Neurotrend(TM) Monitoring
System.
In addition, Johnson & Johnson Development Corporation has committed to
purchase up to $5,000,000 of the Company's Common Stock at the Company's
option over the twelve month period ending September 30, 1999 at the then
current market value, not to exceed $7.00 per share.
(9) RELATED PARTY TRANSACTIONS
Effective March 31, 1998, the Company secured a $1,000,000 receivable
backed credit line with DVI Business Credit Corporation. DVI Business
Credit Corporation is a business unit of DVI, Inc., which shares a common
director with the Company. The loan agreement requires the Company's
accounts receivable collections to be applied to reduce the loan balance,
including advances, interest and fees. All advances under the line of
credit bear interest on the unpaid principal amount at a fluctuating rate
equal to the Prime Rate plus three percent. Interest is payable monthly in
arrears. The loan agreement requires the monthly payment of an annualized
unutilized loan fee equal to one half of one percent (.5%) of the
difference between the committed available loan amount and the average
outstanding loan balance. The Company has no outstanding balance drawn on
the line of credit as of September 30, 1998.
Beginning November 26, 1996, the Company entered into three note agreements
totaling $1,557,933 with DVI, Inc. The loan agreements require principal
and interest payments in monthly installments at varying amounts through
September 2002, at annual interest rates ranging from 10.1% to 10.95%.
Maturity dates of the notes range from December 1, 2001 to September 25,
2002, and all notes are secured by equipment.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Statements regarding the Company's expectations about new and existing
products, future financial performance, Year 2000 concerns and other
forward looking statements are subject to various risks and uncertainties,
including, without limitation, demand and acceptance of new and existing
products, technological advances and product obsolescence, competitive
factors and the availability of capital to finance growth. These and other
risks are discussed in greater detail in Exhibit 99 filed with this Form
10-Q for the quarter ended September 30, 1998. When used in this Form 10-Q,
and in future filings by the Company with the Securities and Exchange
Commission, in the Company's press releases, presentations to securities
analysts or investors, in oral statements made by or with the approval of
an executive officer of the Company, the words or phrases "believes,"
"may," "will," "expects," "should," "continue," "anticipates," "intends,"
"will likely result," "estimates," "projects," or similar expressions and
variations thereof are intended to identify such forward-looking
statements.
8
<PAGE>
SUMMARY
Diametrics Medical, Inc. (the "Company"), which began operations in 1990,
is engaged in the development, manufacturing and marketing of critical care
blood and tissue analysis systems, which provide immediate or continuous
diagnostic results at the point of patient care.
Since its commencement of operations in 1990, the Company has transitioned
from a development stage company to a full-scale development, manufacturing
and sales organization. As of September 30, 1998, the primary funding for
the operations of the Company has been approximately $130 million raised
through public and private sales of its equity securities and issuance of
convertible promissory notes.
The Company has two product lines. The first are Point of Care blood
testing products (IRMA SL, IDMS, Capillary Collection Device and the
AVOXimeter 4000) based on electrochemical and optical technology, and the
second are Continuous Monitoring products (Paratrend 7, Neurotrend, Neocath
1000 and Neotrend) based primarily on fiberoptic technology.
RESULTS OF OPERATIONS
SALES - Sales of the Company's products were $3,102,430 and $8,571,181 for
the three and nine months ended September 30, 1998, compared to $2,829,279
and $7,391,924 for the same periods in the prior year, increases of 10% and
16%, respectively. The increase for the three and nine months ended
September 30, 1998 over the prior year reflects a 6% and 17% increase in
sales of instruments, respectively, and a 15% increase in disposable
cartridge and sensor sales in both periods.
International sales accounted for 74% and 62% of total sales for the three
and nine months ended September 30, 1998, compared to international sales
of 67% and 62% for the same periods in 1997.
Point of Care testing products represented 72% and 64% of sales for the
three and nine months ended September 30, 1998, compared to 67% and 57% of
sales for the comparable periods in 1997. Continuous Monitoring products
made up the remainder of sales.
Point of Care testing products revenue was comprised of 67% ($1,492,337)
and 61% ($3,304,161) of instrument related revenue and 33% ($730,800) and
39% ($2,157,056) of disposable cartridge related revenue for the three and
nine months ended September 30, 1998, respectively. Continuous monitoring
products revenue was comprised of 34% ($300,074) and 38% ($1,185,897) of
instrument related revenue and 66% ($579,219) and 62% ($1,924,068) of
disposable sensor revenue for the three and nine months ended September 30,
1998, respectively.
The Company's revenues are affected principally by the number of
instruments, both monitors and IRMA analyzers, placed with customers and
the rate at which disposable sensors and cartridges are used in connection
with these products. As of September 30, 1998, the Company has sold over
2,800 instruments. Disposable sensor and cartridge units sold for the three
and nine months ended September 30, 1998 increased 34% and 36%,
respectively, over the same periods in 1997. As the Company grows, it is
expected that the Company's growing customer base will increase its rate of
usage of disposable products, with the result that overall disposable
product sales will exceed that of instrument sales.
The Company's revenue in the fourth quarter and full year 1998 is targeted
to exceed that of the same periods in 1997 as a result of further planned
expansion of the blood and tissue analysis product lines and continued
market penetration of existing products.
9
<PAGE>
COST OF SALES. Cost of sales totaled $2,946,478 and $8,159,236, or 95% of
revenue for the three and nine months ended September 30, 1998, compared to
$3,018,947 and $8,668,467, or 107% and 117% of revenue for the same periods
in the prior year, respectively. The significant period-to-period
improvement in the Company's cost of sales as a percentage of revenue
reflects increased cartridge volumes and the impact of cost controls and
manufacturing process changes. These improvements resulted in the
achievement in the third quarter of 1998 of the Company's fourth
consecutive positive quarterly gross margin. The Company is targeting a
positive gross margin for the full year 1998, as a result of new product
introductions and continued reductions in unit product costs, stemming from
increased sales volumes and further expected improvements in manufacturing
yields.
OPERATING EXPENSES. Research and development expenditures were $1,729,984
and $4,909,526 for the three and nine months ended September 30, 1998,
compared to $1,782,933 and $5,344,396 for the same periods in the prior
year. The decline in expenses is primarily impacted by reductions in
headcount of 15%, largely in the Company's U.S. operations, and cost and
process improvements implemented during 1997.
Sales and marketing expenses totaled $2,243,197 and $5,879,759 for the
three and nine months ended September 30, 1998, compared to $1,917,018 and
$5,860,444 for the same periods in 1997. The increase between quarterly
periods is primarily due to the timing of significant expenditures for
advertising and promotion and increases in costs to inservice the Company's
products with new customers.
General and administrative expenses totaled $888,657 and $2,540,366 for the
three and nine months ended September 30, 1998, compared to $936,330 and
$2,874,344 for the same periods in 1997. The period-to-period decreases
reflect the impact of 12% and 26% reductions in headcount for the three and
nine months ended September 30, 1998, respectively, primarily in the
Company's U.S. operations, and cost improvements implemented during 1997.
Total 1998 operating expenses are expected to be below 1997 levels.
OTHER EXPENSE. Net other expense was $86,468 and $504,281 for the three and
nine months ended September 30, 1998, compared to $192,379 and $525,444 for
the same periods in the prior year, a decrease of $105,911 and $21,163,
respectively. The Company realized interest income of $119,420 and $301,233
for the three and nine months ended September 30, 1998, compared to
$204,814 and $463,449 for the same periods in the prior year. The
period-to-period decrease reflects the impact of lower average cash
balances, primarily due to the timing of the Company's private equity
placements in 1997 and 1998. Private equity placements in 1997 occurred in
January and June with proceeds of approximately $20,000,000, while the 1998
private equity placement occurred in August, with proceeds of approximately
$15,000,000.
Interest expense totaled $202,988 and $640,819 for the three and nine
months ended September 30, 1998, compared to $268,889 and $798,524 for the
same periods in 1997. The period-to-period decrease primarily reflects the
reduction in the amount of higher interest bearing capital lease debt
relative to total debt outstanding.
NET LOSS. The net loss for the three and nine months ended September 30,
1998 was $4,792,354 and $13,421,987, compared to $5,153,267 and $16,179,314
for the same periods in 1997. Compared to the three and nine months ended
September 30, 1997, the net loss decreased 7% and 17%, respectively, for
the same periods in 1998. This decrease reflects the revenue growth
previously discussed, coupled with the impact of headcount reductions
implemented during 1997 and increased production volumes. The Company is
targeting continued improvement in net loss in future quarters.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had working capital of $15,451,182, a
decrease of $1,013,788 from the working capital reported at September 30,
1997. The decrease primarily reflects the impact of the amount and timing
of proceeds from the private equity placements in January and June 1997 and
August 1998, and net cash used in operating activities for the nine months
ended September 30, 1998, partially offset by proceeds from the issuance of
Common Stock from warrant and option exercises.
Net cash used in operating activities totaled $14,400,857 for the nine
months ended September 30, 1998, compared to $13,076,416 for the same
period in 1997. This was the result of net losses of $13,421,987 and
$16,179,314 for these same periods in 1998 and 1997, respectively, adjusted
by changes in key operating assets and liabilities, primarily accounts
receivable, inventories and accounts payable and accrued expenses.
Net accounts receivable increased $1,290,537 for the nine months ended
September 30, 1998, compared to $505,123 for the same period in 1997. The
larger increase in the current period is primarily due to increased sales
in the first nine months of 1998 compared to the same period in the prior
year and the timing of sales and related customer payments.
Inventories increased $811,666 and decreased $643,382 for the nine months
ended September 30, 1998 and 1997, respectively. The increase in the
current period is due to increased inventory levels needed to begin
internal assembly of the Company's IRMA SL instruments and to meet an
expected increase in sales demand. The prior period decrease was due
primarily to an improvement in inventory turnover during the period,
stemming from improved inventory management.
Accounts payable and accrued expenses decreased $1,078,761 and $98,810 for
the nine months ended September 30, 1998 and 1997, respectively. The
current period decrease is primarily due to reductions in product upgrade
accruals as upgrades are completed, combined with timing of payments to
vendors and employees. The decrease in the prior period was primarily due
to timing of vendor and payroll-related payments.
Net cash provided by investing activities totaled $59,078 for the nine
months ended September 30, 1998 compared to net cash used in investing
activities of $12,801,416 for the nine months ended September 30, 1997.
This change is primarily due to the amounts and timing of private equity
placements, which reduced the amount of cash available for the purchase of
marketable securities in 1998.
At September 30, 1998, the Company had property and equipment of
$20,135,486, up from $17,676,137 at September 30, 1997, less accumulated
depreciation of $13,084,981 and $9,912,360 at September 30, 1998 and 1997,
respectively. The $713,272 net decrease in the cost of property and
equipment is primarily the result of continued depreciation of the assets,
offset by approximately $2,340,000 of capital additions, consisting
primarily of investments in development and production equipment and
instruments for internal use in R&D and sales. Approximately $3,000,000 of
the Company's property and equipment were financed through capital lease
obligations at September 30, 1998. In 1998, the Company expects total
capital expenditures and new lease commitments to approximate $2,700,000
for the year, primarily reflecting investments to support new product
development and production.
Net cash provided by financing activities totaled $15,935,143 and
$25,112,850 for the nine months ended September 30, 1998 and 1997,
respectively. The decrease is primarily due to the amount and timing of
private equity placements in January and June of 1997 and August of 1998.
At September 30, 1998, the Company had U.S. net operating loss and research
and development tax credit carryforwards for income tax purposes of
approximately $100,000,000 and $900,000, respectively. Pursuant to the Tax
Reform Act of 1986, use of the Company's net operating loss
11
<PAGE>
carryforwards may be limited if a cumulative "change in ownership" of more
than 50% occurs within any three year period. In connection with prior
sales by the Company of its securities in public and private offerings, the
Company has experienced a "change in ownership." As a result, the
utilization of the Company's net operating loss and certain credit
carryforwards incurred prior to these changes are subject to annual
limitations.
The Company's foreign subsidiary also has net operating loss carryforwards
of approximately $44,000,000 which can be carried forward indefinitely.
As reflected in the accompanying consolidated financial statements, the
Company has incurred net losses of $4,792,354 and $13,421,987,
respectively, for the three and nine months ended September 30, 1998. In
addition, the Company has incurred net losses and has had negative cash
flows from operating activities since inception. In August 1998, the
Company completed a private equity placement which generated net cash
proceeds to the Company of $15,000,006. Also, as part of an exclusive
Distribution Agreement initiated on October 1, 1998, the Company entered
into a $5,000,000 Put Option and Stock Purchase Agreement with Johnson &
Johnson Development Corporation who has committed to purchase up to
$5,000,000 of the Company's Common Stock at the Company's option over the
twelve month period ending September 30, 1999. The Company believes
currently available funds and cash generated from projected operating
revenues, supplemented by employee stock plans, warrant exercises, asset
based credit and corporate alliances, will meet the Company's working
capital needs through 1999. If the amount or timing of funding from these
sources or cash requirements vary materially from those currently planned,
the Company could require additional capital. The Company's long-term
capital requirements will depend upon numerous factors, including the rate
of market acceptance of the Company's products and the level of resources
devoted to expanding the sales and marketing organization, manufacturing
capabilities and research and development activities. While there can be no
assurance that adequate funds will be available when needed or on
acceptable terms, management believes that the Company will be able to
raise adequate funding if needed.
Effective March 31, 1998, the Company secured a $1,000,000 receivable
backed credit line. The loan agreement requires the Company's accounts
receivable collections to be applied to reduce the loan balance, including
advances, interest and fees. The Company has no outstanding balance drawn
on the line of credit as of September 30, 1998.
YEAR 2000 COMPLIANCE
The Company is addressing the issues associated with computing difficulties
that may affect existing computer systems as a result of programming code
malfunction in distinguishing 21st century dates from 20th century dates
(the "Year 2000" issue). The Year 2000 issue is a pervasive problem
affecting many information technology systems and embedded technologies in
all industries. The Company has identified teams of internal staff to
review its products; its internal financial, manufacturing and other
process control systems; and its interface with major customers and
suppliers in order to assess and remediate Year 2000 concerns.
The Company's information technology (IT) systems consist of computer
hardware systems and software supplied by third parties. IT systems in the
Company's U.S. operation are Year 2000 compliant. The Company has
identified necessary software and hardware upgrades to achieve compliance
for IT systems in its UK operations, with completion scheduled for mid
1999, allowing adequate time for testing and training.
The Company's assessment of internal systems includes a review of
non-information technology (non IT) systems (systems that contain embedded
technology in manufacturing or process control equipment containing
microprocessors or other similar circuitry). This assessment includes a
review of the Company's internal manufacturing equipment and facilities
(including building maintenance, security, electrical, lighting, fire
protection, telephone, heating and cooling systems). Based upon this
review, the Company believes that its manufacturing processes and equipment
company wide are Year 2000 compliant. Internal process control equipment
affecting the
12
<PAGE>
Company's U.S. facility has been determined to be Year 2000 compliant.
Control equipment affecting the Company's UK facility is currently under
review, with necessary modifications, if any, scheduled for completion by
June 1999.
The Company has assessed Year 2000 compliance of its products offered for
sale to customers, and believes that all are currently compliant. Contacts
are being made with the Company's customers regarding test procedures they
can apply to verify compliance of the Company's products.
The Company has identified third parties with which it has material
relationships, including suppliers of components for its products and
providers of critical utility services. The majority of the raw materials
and purchased components used to manufacture the Company's products are
readily available. Most of the raw materials are or may be obtained from
more than one source. A small number of these materials, however, are
unique in their nature, and are therefore single sourced. The Company has
contacted all major U.S. third party suppliers and has received
representations that if not currently compliant, each has plans in place to
ensure that products purchased by the Company from such suppliers will
function properly in the Year 2000 and that such suppliers' internal
systems will be Year 2000 compliant no later than June 1999. The Company is
in the process of contacting all major international suppliers to assess
their status of compliance, and expects to complete that process by March
31, 1999. The Company is also currently evaluating alternative supplier
sources in cases where it is single sourced. These actions are intended to
help mitigate the possible external impact of the Year 2000 problem. Even
assuming that all material third parties confirm that they are or expect to
be Year 2000 compliant by December 31, 1999, it is not possible to state
with certainty that such parties will be so compliant. It is impossible to
fully assess the potential consequences in the event service interruptions
from component suppliers occur or in the event that there are disruptions
in such infrastructure areas as utilities, communications, transportation,
banking and government.
The total estimated incremental cost required to address the Company's Year
2000 compliance is approximately $150,000, including the cost of software
and hardware upgrades. The Company expects the majority of this cost to be
incurred in 1999. The actual cost, however, could exceed this estimate.
These costs are not expected to have a material effect on the Company's
financial position, results of operations or cash flows.
Based upon its assessments to date, the Company believes it will not
experience any material disruption in its operations as a result of Year
2000 problems in its products, in its internal financial, manufacturing and
other process control systems, or in its interface with major customers and
suppliers. However, if major suppliers, including those providing component
parts, electricity, communications and transportation services, experience
difficulties resulting in disruption of critical supplies or services to
the Company, a shutdown of the Company's operations could occur for the
duration of the disruption. As previously noted, the Company is working on
minimizing the component supply risk by evaluating alternative suppliers in
cases where it is single-sourced, with completion of this evaluation
expected by June 1999. The Company has not yet developed a contingency plan
to provide for continuity of normal business operations in the event the
other described problem scenarios arise, but it will assess the need to
develop such a plan based upon the outcome of compliance areas currently
under review, and the results of remaining survey feedback from its major
suppliers. Assuming no major disruption in service from critical third
party providers, the Company believes that it will be able to manage the
Year 2000 transition without any material effect on the Company's results
of operations or financial position. There can be no assurance, however,
that unexpected difficulties will not arise and, if so, that the Company
will be able to timely develop and implement a contingency plan.
INTRODUCTION OF THE EURO
The countries of the European Union are expected to adopt a single currency
known as the "Euro". The Euro will come into existence on January 1, 1999,
and is intended to become the lead currency for Europe, with national
currencies expressed as a denomination of the Euro. During the three-and-a-
half year transition period following its introduction, countries will be
allowed to transact business both in the Euro and in their own currencies.
On July 1, 2002, the Euro will be the sole official currency in European
Union countries.
The Company is in the process of addressing the issues raised by the
introduction of the Euro. The Company does not presently expect that the
introduction and use of the Euro will result in any material increase in
costs to the Company. While the Company will continue to evaluate the
impact of the Euro introduction over time, based upon currently available
information, management does not believe that the introduction of the Euro
currency will have a material adverse impact on the Company's financial
condition or overall trends in results of operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Not Applicable.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On August 4, 1998, the Company completed the sale in a private placement of
2,142,858 shares of Common Stock at a price of $7.00 per share, resulting
in proceeds to the Company of $15,000,006. The purchasers also received
five-year warrants to purchase 714,286 shares of Common Stock at $8.40 per
share, providing additional future funding potential of approximately
$6,000,000. The warrants are exercisable immediately and are callable after
a twelve month waiting period if the Common Stock closing price exceeds
certain levels for twenty consecutive trading days. Proceeds from the sale
of shares of Common Stock will be used for product development, sales and
marketing and other general corporate purposes.
In addition, the Company issued Convertible Senior Secured Fixed Rate Notes
to an investor group, with proceeds aggregating $7,300,000. The notes are
due in five years, require quarterly interest payments at a rate of 7% per
annum, and are convertible into the Company's Common Stock at $8.40 per
share. Proceeds of the notes were used to retire other debt of the Company.
The Company also issued 15,360 shares of the Company's Common Stock in July
1998, to certain parties involved in the private equity placement, as part
of a financial advisory relationship. The shares of Common Stock and the
notes were sold pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On October 1, 1998, the Company entered into an exclusive Distribution
Agreement with Johnson & Johnson Professional, Inc. for worldwide market
development and distribution of the Company's Neurotrend(TM) Monitoring
System.
In addition, Johnson & Johnson Development Corporation has committed to
purchase up to $5,000,000 of the Company's Common Stock at the Company's
option during the twelve month period ending September 30, 1999, at the
then current market value, not to exceed $7.00 per share.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
<TABLE>
<CAPTION>
Exhibit Method
No. Description of Filing
------- ----------- ---------
<S> <C> <C>
10.1* Distribution Agreement, dated October 1, 1998, between
the Company and Johnson & Johnson Professional, Inc. Filed herewith
10.2 Put Option and Stock Purchase Agreement, dated October 1,
1998, between the Company and Johnson & Johnson Development
Corporation Filed herewith
10.3 Severance Pay Agreement (in the event of Change of Control)
dated July 31, 1998, between the Company and David T. Giddings Filed herewith
10.4 Form of Severance Pay Agreement (in the event of Change of
Control) dated July 31, 1998, between the Company and its
executive officers Filed herewith
10.5 Form of Severance Pay Agreement (in the event of Termination
Without Cause) dated July 31, 1998, between the Company and
its executive officers Filed herewith
27 Financial Data Schedule Filed herewith
99 Cautionary Factors Under the Private Securities Litigation
Reform Act Filed herewith
</TABLE>
* Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as
amended, confidential portions of Exhibit 10.1 have been deleted and
filed separately with the Securities and Exchange Commission pursuant
to a request for confidential treatment.
b. Reports on Form 8-K.
None
15
<PAGE>
DIAMETRICS MEDICAL, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIAMETRICS MEDICAL, INC.
By: /s/ Laurence L. Betterley
-----------------------------
Laurence L. Betterley
Senior Vice President
and Chief Financial Officer
(and Duly Authorized Officer)
Dated: November 16, 1998
16
<PAGE>
DIAMETRICS MEDICAL, INC.
EXHIBIT INDEX
Exhibit
No. Description
- - - ------- -----------
10.1* Distribution Agreement, dated October 1, 1998, between the Company and
Johnson & Johnson Professional, Inc.
10.2 Put Option and Stock Purchase Agreement, dated October 1, 1998, between
the Company and Johnson & Johnson Development Corporation
10.3 Severance Pay Agreement (in the event of Change of Control) dated
July 31, 1998, between the Company and David T. Giddings
10.4 Form of Severance Pay Agreement (in the event of Change of Control) dated
July 31, 1998, between the Company and its executive officers
10.5 Form of Severance Pay Agreement (in the event of Termination Without
Cause) dated July 31, 1998, between the Company and its executive
officers
27 Financial Data Schedule
99 Cautionary Factors Under the Private Securities Litigation Reform Act
* Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended,
confidential portions of Exhibit 10.1 have been deleted and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment.
<PAGE>
Exhibit 10.1
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT, dated as of October 1, 1998, by and between
DIAMETRICS MEDICAL INCORPORATED, a Minnesota corporation ("Diametrics"), and
Johnson & Johnson Professional, Inc., a New Jersey corporation ("JJPI").
WHEREAS, JJPI markets instruments and accessories for the diagnosis and
treatment of conditions affecting the central nervous system; and
WHEREAS, Diametrics manufactures and distributes diagnostic probes and
related hardware and accessories used for monitoring certain components of
tissue, blood and other bodily fluids; and
WHEREAS, the parties desire that JJPI distribute Diametrics's Products
(as defined below) under the Diametrics Trademarks (as defined below) pursuant
to the terms of this Agreement;
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements hereinafter set forth, the parties hereto agree as follows:
ARTICLE ONE
DEFINITIONS
As used throughout this Agreement, each of the following terms shall
have the respective meaning set forth below:
"Affiliate" of a party shall mean any entity or person that directly or
indirectly controls, is controlled by or is under common control with such
party. For purposes of this definition, "control" shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of an entity, whether through the ownership of voting
securities, by contract or otherwise.
"Calendar Quarter" shall mean the calendar quarter customarily used by
JJPI for internal accounting purposes consisting of approximately three months
in which each of the first two months consists of four weeks and the third month
consists of five weeks.
"Diametrics Patents" shall mean (i) all of the Patents, (ii) all other
patents and
<PAGE>
applications for patents that cover the manufacture, use, importation or sale of
any Product, in which Diametrics (or any Affiliate of Diametrics) has any
rights, any foreign counterparts thereof, as well as all continuations,
continuations-in-part, divisions and renewals thereof, all patents which may be
granted thereon, and all reissues, reexaminations and extensions.
"Diametrics Trademarks" shall mean (i) the Trademark and (ii) all other
trademarks, applications for trademarks, copyrights, applications for
copyrights, slogans, tradedress, artwork, names and other intellectual property
that appear on or are otherwise used in connection with any Product, or any
packaging therefor in which Diametrics (or any Affiliate of Diametrics) has any
rights.
"Field" shall mean the measurement of physiological parameters anywhere
within the central nervous system (i.e. the cranial cavity or the spinal
column).
"Improvement" shall mean any adaptation, change, redesign, improvement,
modification or development to any Product, the Specifications therefor, the Raw
Materials or the method or process of manufacture or production of any Product.
"Know-How" shall mean all know-how relating to the development,
manufacture, sale or use of any Product, including, without limitation,
processes, techniques, methods, products, apparatuses, biological materials and
other materials and compositions which are reasonably related thereto.
"Manufacturing Costs" shall mean the direct labor, direct overhead and
Raw Materials costs incurred in the manufacture of Product.
"Net Sales" means the gross revenues received from the sale of Products
to independent third parties during the applicable period less (i) discounts and
rebates, (ii) credits or allowances granted upon claims or returns, (iii)
freight charges paid for delivery and (iv) taxes and other governmental charges
levied on or measured by the invoiced amount.
"Patents" shall mean the U.S. Patents set forth on Schedule D, along
with any foreign counterparts thereof, as well as all continuations,
continuations-in-part, divisions and renewals thereof, all patents which may be
granted thereon, and all reissues, reexaminations, extensions, patents of
addition, and any subsequent improvement patents or applications, such
improvement patents and applications being those the practice of which falls
within the claims any
-2-
<PAGE>
of said patents.
"Products" shall mean the fiber optic continuous probe for monitoring
tissue, blood and other bodily fluid monitoring and components therefor, as
described on Schedule A, along with any Improvements thereto (all for use in the
Field).
"Raw Materials" shall mean the materials, components, and packaging
required to manufacture and to package any Product in accordance with the
Specifications.
"Specifications" shall mean the specifications for the design,
composition, product safety assurance, manufacture, packaging, and/or quality
control of any Product, as set forth on Schedule A attached hereto and made a
part hereof, as the same may hereafter be modified by mutual agreement of the
parties in writing.
"Trademark" shall mean the "Neurotrend" trademark (Federal Trademark
Registration No. 75/323,109, applied for on July 11, 1997 (not yet issued)).
ARTICLE TWO
SUPPLY OF PRODUCT
2.01 Distribution Rights. (a) Subject to the terms and conditions of
this Agreement, Diametrics hereby appoints JJPI, and JJPI hereby accepts
appointment, as Diametrics's exclusive worldwide distributor of the Products in
the Field (including for the sale of Sensors and other accessories to customers
using the Satellite System, Calibrator Patient Data Module or Senior Monitor
System as of the date hereof); provided Diametrics may continue to service its
existing (as of the date hereof) customers and sell Products until such time as
JJPI notifies Diametrics to cease such activities on a country-by country basis.
Diametrics understands and agrees that JJPI may utilize its Affiliates to act as
distributor hereunder in certain geographic areas, provided that JJPI shall at
all times remain responsible for performance of all of its obligations under
this Agreement. Within six months following execution of this Agreement, and at
least once every 12 months thereafter, representatives of JJPI and Diametrics
will meet to discuss the progress being made on the development, manufacture and
marketing of Products hereunder, including the development
-3-
<PAGE>
plans for Improvements and new products in the Field, if any, and the
development plans, milestones and funding related thereto.
(b)The parties acknowledge that Diametrics manufactures and markets
blood monitoring probes and related components for use outside the Field, and
that it is in their mutual interests to ensure that such other products are not
used in the Field. Diametrics shall be responsible for maintaining
differentiation and incompatibility between the Product and such other blood
monitoring probes to inhibit the use of such other probes in the Field. Such
differentiation and incompatibility may include variations in the connectors to
monitor, the probe introducer system, packaging and labeling of the sensors and
application specific software. The parties agree to meet within 30 days
following the execution of this Agreement to agree on a plan to develop such
differentiation and incompatibility. The parties acknowledge that to date, the
Product and such other probes are differentiated with respect to probe shape and
size and computer software only, and that there can be no guarantee that such
additional differentiation or incompatibility will be developed. In the event
Diametrics does not develop this additional differentiation or incompatibility
by (***), JJPI may, as its sole and exclusive remedy for such failure, terminate
this Agreement upon written notice to Diametrics, which notice must be given, if
at all, on or before (***). In the event Diametrics becomes aware that any of
its customers or users of blood monitor probes intended for use outside the
Field are using such probes in the Field, Diametrics shall take all such
reasonable actions as may be permitted by law to prevent or discourage such
continued use in the Field.
(c) JJPI shall be responsible for developing devices for tunneling,
anchoring and access that may be used in connection with the use of the
Products, which development may include adaptation of existing products. Such
devices shall be marketed by JJPI, and JJPI shall be responsible for obtaining
and maintaining the required governmental approvals therefor. JJPI shall be the
exclusive owner of any and all intellectual property, and shall be solely
responsible for procuring and maintaining any proprietary rights therein. The
parties acknowledge that there can be no assurance such devices will be
developed or marketable. In the event JJPI does not develop
- - - --------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
-4-
<PAGE>
and commence marketing of one of each such devices on or before (***),
Diametrics may, as its sole and exclusive remedy for JJPI's failure to develop
such devices, terminate this Agreement upon written notice to JJPI, which notice
must be given, if at all, on or before (***). JJPI's obligation to develop a
particular type of device pursuant to this Section 2.01(c ) shall terminate in
the event JJPI elects to market such a device using Diametrics' design (either
by manufacturing such device under license from Diametrics or purchasing the
device from Diametrics).
(d) The parties acknowledge that Diametrics is currently developing its
own anchoring and access devices for the Products. Unless the parties agree in
writing to develop such components jointly pursuant to Section 2.09, such
devices shall not be included as Products hereunder, but shall be deemed to be
new products in the Field for the purposes of Section 2.10.
2.02 Supply of Product. During the term of this Agreement, Diametrics
shall supply JJPI (and its Affiliates) with all of those quantities of Product
as ordered by JJPI (and its Affiliates) pursuant to this Agreement. Each such
Product shall be packaged by Diametrics in accordance with the Specifications.
2.03 Prices. (a) The price (the "Price") for each Product component
(other than sample units) shipped by Diametrics during the term of this
Agreement shall be as set forth on Schedule B hereto. In addition, during the
term of this Agreement, Diametrics shall supply JJPI with sample Products as
reasonably requested by JJPI. Such sample Products shall be fully functional and
shall be sold at the price set forth in Schedule B. The Prices set forth above
include all costs of packaging in accordance with the Specifications and are
F.O.B. Diametrics's factory in High Wycombe, England (Diametrics shall be
responsible for loading Product onto the applicable carrier, and JJPI bears risk
of loss and costs of delivery thereafter).
(b) The prices set forth on Schedule B shall remain in effect for at
least 12 months following the first commercial sale of the Products by JJPI.
Thereafter the prices may be adjusted on a component-by-component basis
effective on each anniversary of such first commercial sale to reflect (***)% of
the actual increases, if any, in Diametrics' Manufacturing Costs since the most
recent
- - - --------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
-5-
<PAGE>
price increase; provided that in no event shall any price adjustment for a
particular component be greater than the percentage change in the U.S. Medical
Care component of the Consumer Price Index-All Urban Consumers (Current Series)
as provided in Series Catalog CUUR0000SAM published by the U.S. Department Of
Labor, Bureau of Labor Statistics (or if such index is not available, such
similar index as the parties shall mutually agree) since the most recent price
increase.
(c) Diametrics shall notify JJPI of any decreases in its Manufacturing
Cost of the components of the Product excluding the Multiparameter sensor. If at
any time there is at least a (***)% reduction in Diametrics Manufacturing Costs
of any of such components since the most recent price decrease (or since
commercialization of the Product in the case of the first price decrease)
Diametrics shall reduce the price of such component to JJPI prospectively by an
amount equal to (***)% of such cost decrease. Diametrics hereby agrees that it
shall use its good faith efforts to minimize its Manufacturing Costs of
producing the Products to the extent it may do so without compromising the
quality of the Products or compliance with terms of this Agreement.
2.04 Forecasts. On or before December 31, 1998, JJPI shall provide to
Diametrics a non-binding (except for the first quarter) forecast of its expected
orders of Products (including samples) broken down on a component-by-component
basis, for the following four calendar quarters (it being agreed such forecast
shall not include the United States market until Diametrics has obtained 510K
approval for the Product). JJPI shall provide an updated forecast at least 30
days before the beginning of the next Calendar Quarter which shall also cover
the following four quarters. JJPI shall be obligated to order the quantity
forecasted for the first quarter of each updated forecasted, and in no event
shall JJPI be obligated to purchase or have any liability in respect of the
quantities of Product set forth in second, third or fourth quarters of any such
forecast.
2.05 Orders. JJPI shall place any binding orders for Product by written
or electronic purchase order (or by any other means agreed to by the parties) to
Diametrics. Such purchase orders shall set forth the desired date of delivery
with respect to the Products ordered and shall be placed at least thirty (30)
days prior to such desired date of delivery. To the extent of any conflict or
- - - --------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
-6-
<PAGE>
inconsistency between this Agreement and any purchase order, purchase order
release, confirmation, acceptance or any similar document, the terms of this
Agreement shall govern. For any calendar quarter, Diametrics shall be deemed to
have accepted, and shall be obligated to supply up to (***)% of the quantity
forecasted for first quarter of each updated forecasted provided pursuant to
Section 2.04. Orders in excess of such (***)% shall be subject to acceptance by
Diametrics; provided that Diametrics will accept such excess orders to the
extent it has the manufacturing capacity to supply them.
2.06 Delivery. All charges for final packaging and transport packaging
are included in the Price. All shipments must be accompanied by a packing slip
which describes the articles, states the purchase order number and shows the
shipment's destination. Diametrics agrees to promptly forward the original bill
of lading or other shipping receipt for each shipment in accordance with JJPI's
instructions. Diametrics further agrees to promptly render correct and complete
invoices to JJPI, and to accept payment by check or, at JJPI's discretion, cash
or electronic transfer of funds. All invoices submitted by Diametrics shall be
payable net within thirty (30) days after the date of such invoices. The date of
invoice with respect to any Product shall not be earlier than the date of
shipment of such Product.
2.07 Shipment. Diametrics shall ship Product, at JJPI's cost to the
extent set forth in Section 2.03, to any location chosen by JJPI utilizing
carriers approved by JJPI. The risk of loss with respect to all Product shall
remain with Diametrics until the same is loaded on to the carrier specified by
JJPI. Diametrics will package all Products in accordance with the packaging
requirements included in the Specifications.
2.08 Initial Order; Minimum Purchase Requirements. (a) On or before
(***), JJPI shall issue a Purchase Order for at least $(***) of Product to be
delivered on or before (***). In addition if, by (***) Diametrics has (A)
obtained all regulatory approvals and clearances required to manufacture and
market the Products in the United States and (B) completed to the satisfaction
of JJPI the Supplier Qualification Activities set forth in Exhibit B, JJPI
- - - --------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
-7-
<PAGE>
will issue a Purchase Order for an additional $(***) of Product for delivery
within 30 days following the date of the Purchase Order. If Diametrics has not
satisfied the conditions in (A) and (B) of the preceding sentence by (***), JJPI
shall pay to Diametrics prior to (***), $(***) as a prepayment against future
purchases of Product. Such prepayment shall be creditable at the rate of 100%
against such future purchases.
(b) (***) during 1999. In the year 2000 JJPI shall purchase from
Diametrics at least $(***) of Products (including Product used for Clinical
Studies) as long as Diametrics has satisfied the Supplier Qualification
Activities set forth in Exhibit B by (***). JJPI shall notify Diametrics of
those Supplier Qualification Activities which are not satisfactory by (***). If
Diametrics has not satisfied the Supplier Qualification Activities by (***),
JJPI shall have the right, as its sole and exclusive remedy for Diametrics'
failure to timely satisfy such qualifications, to terminate this Agreement by
written notice to Diametrics, which notice must be given, if at all, by (***);
provided that the (***) and (***) deadlines set forth in this sentence shall be
delayed by one day for each day JJPI delays notifying Diametrics of
unsatisfactory Supplier Qualification Activities after (***). For each year
commencing 2001, JJPI shall purchase from Diametrics at least the following
percent of the previous year's actual purchases of Products (excluding Product
used for clinical studies):
Year % of previous year's actual purchases
---- -------------------------------------
2001 (***)%
2002 (***)%
2003 (***)%
2004 (***)%
2005 (***)%
(c) The minimum purchase obligations shall be appropriately reduced to
the extent (i) Diametrics is for any reason unable or unwilling to supply
Product in accordance with the terms of this Agreement, (ii) any Product is
recalled or withdrawn from the market for reasons of product
- - - --------
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
-8-
<PAGE>
safety, efficacy or quality, or (iii) a third party infringes any of the
Patents and such infringement is deemed the cause for such minimums not to be
met. Such minimum obligations shall be reduced to zero during the pendency of a
claim that the manufacture, importation use or sale of the Product infringes
the intellectual property rights of a third party, and will be appropriately
adjusted prospectively upon final resolution of such claim.
(d) If JJPI does not actually purchase sufficient quantities of volume
to fulfill its obligations under this Section 2.08, JJPI may, at its option,
nevertheless be deemed to have fulfilled such obligations by paying Diametrics
an amount equal the (***)% of the difference between (A) the amount JJPI would
have paid to Diametrics had it fulfilled its purchase obligations and (B) the
amount JJPI has paid (or will pay) for Product actually purchased during the
applicable period. Such payment, if made, shall be due within 30 days following
the end of the applicable year in which JJPI did not fulfill its purchase
obligation.
(e) If JJPI does not fulfill any of its purchase obligations (or pay
the applicable shortfall amount) under this Section 2.08, Diametrics shall have
the right, as its sole and exclusive remedy, to (A) convert JJPI's distribution
rights hereunder to become non-exclusive or (B) terminate this Agreement, upon
written notice to JJPI, which notice must be given, if at all, within 90 days
following the end of the year in which JJPI did not fulfill its purchase
obligation.
2.09 Research and Development. Diametrics shall, at its own expense
conduct ongoing research and development for Product Improvements and new
products in the Field. JJPI acknowledges that there can be no assurance any
Product Improvements or new products will be developed, and the lack thereof
shall not constitute a breach of this Agreement by Diametrics. Areas for
Improvements include, without limitation, system accuracy, stability, mechanical
integrity and strength, data display, calibrations processes and sensor extended
shelf-life. If JJPI requests Diametrics to pursue a particular research and
development project, such project shall be subject to the mutual agreement of
the parties with respect to the scope, methodology and costs thereof.
2.10 New Products. If Diametrics develops or acquires rights to any new
product for use
- - - --------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
-9-
<PAGE>
in the Field, Diametrics shall offer JJPI the right to commercialize such new
product (a "Proposed Transaction") (which Proposed Transaction may be in the
form of a license, distributorship, supply arrangement, co-marketing arrangement
or otherwise) in accordance with the right of refusal described herein.
Diametrics shall not consummate or agree to consummate a Proposed Transaction
with any party, or in any way dispose of or encumber any rights with respect to
such new product, without first giving prompt notice thereof to JJPI in writing
(the "Notice") (i) specifying the pricing, terms, conditions and other material
provisions of such Proposed Transaction and (ii) providing a copy of a written
agreement in principal or letter of intent, if any, setting forth the terms of
such Proposed Transaction. In the event that JJPI elects to consummate a
Proposed Transaction upon the same pricing, terms, conditions and other material
provisions as specified in the Notice, JJPI shall have 30 days following receipt
of the Notice to so notify Diametrics and the parties shall use their best
efforts to facilitate the consummation of such a Proposed Transaction within 90
days following the receipt of such reply notification from JJPI. In the event
that JJPI does not elect to enter into the Proposed Transaction within the above
mentioned 30-day notice period, Diametrics may enter into an agreement with
respect to the Proposed Transaction on terms that are, in the aggregate, not
less favorable to Diametrics than the terms specified by Diametrics in the
Notice or contained in the last subsequent proposal by Diametrics to JJPI, if
any; provided, however, that if (x) Diametrics and the third party are unable to
consummate the Proposed Transaction within the (***) days following the later of
(i) the date of the Notice, or (ii) if JJPI elects to consummate the Proposed
Transaction but the parties are unable to agree on definitive terms, the day on
which such discussions terminate (either notice from JJPI or expiration of the
90 day period referred above), or (y) the pricing, terms, conditions and other
material provisions of the Proposed Transaction are modified to be less
favorable to Diametrics than were specified in the Notice or contained in the
last subsequent proposal by Diametrics, if any, to JJPI, then Diametrics shall
be required (each time such situation arises), pursuant to this Section 2.10, to
give a new Notice to JJPI and comply with the right of first refusal set forth
herein for an additional 30-day period following the receipt of such new Notice.
The
- - - --------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
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provisions of this Section 2.10 shall not apply if JJPI is in breach of any of
its material obligations hereunder or if JJPI has satisfied the minimum purchase
obligations set forth in Section 2.08 for the calendar year preceding the date
of the applicable Notice only by paying the shortfall amount pursuant to Section
2.08(d). The provisions of this Section 2.10 shall survive the termination or
expiration of this Agreement with respect to any Proposed Transaction for which
the initial Notice was given during the term hereof (including any extensions or
renewals hereof).
2.11 Marketing Plan. The Marketing Plan set forth in Schedule C
represents JJPI's anticipated marketing and clinical program for the Products
and JJPI undertakes to achieve all elements of such plan. The parties
acknowledge however that there can be no assurance that each component of such
plan will be achieved in a timely manner, if at all. If JJPI does not fulfill
all elements of the Marketing Plan for a particular year, JJPI may nevertheless
be deemed to have fully achieved the Marketing Plan for such year by (i)
demonstrating that it has spent at least the applicable amount on marketing and
clinical activities for the Products during such year as set forth below or (ii)
by paying to Diametrics the amount by which JJPI has underspent the applicable
commitment (in which event Diametrics shall apply such funds to internal
manufacturing improvements for the Products, further development of the Products
or its own marketing activities for the Products).
Year Expenditures
---- ------------
1998 $(***)
1999 $(***)
2000 $(***)
For purposes of this Section 2.11, marketing and clinical expenditures shall
include, without limitation, the following with respect to Products and related
tunneling, anchoring and access devices: planning, patient monitoring, data
analysis, reporting and Product purchases for clinical evaluations; training for
customers, users (surgeons), and JJPI or Diametrics personnel or sales
representatives; conventions, seminars, meetings, or presentations; advertising;
promotions;
- - - --------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
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<PAGE>
mailings; user evaluations and direct in-service representative activities (and,
in 1998, development of tunneling, anchoring and access devices). If JJPI has
not fulfilled all elements of the Marketing Plan for a particular year and has
not fulfilled either (i) or (ii) of the immediately preceding sentence, then
Diametrics may, as its sole and exclusive remedy, terminate this Agreement on
written notice to JJPI which notice must be given, if at all, within 90 days
following the end of the applicable year. Upon request from Diametrics, JJPI
will provide reasonable evidence of its marketing and clinical expenditures, not
later than 30 days following the end of the applicable year.
ARTICLE THREE
ADDITIONAL OBLIGATIONS OF THE PARTIES
3.01 Sales of Product. All business decisions relating to the sale,
price, marketing and promotion of any Product supplied under this Agreement,
shall be within the sole discretion of JJPI. Diametrics further agrees that (i)
payment by JJPI to Diametrics of the Prices set forth in Section 2.03 hereof for
purchased Product, (ii) satisfying the minimum order requirements, or paying the
shortfall amount, in accordance with Section 2.08, and (iii) compliance with the
Marketing Plan, or expenditure of the minimum marketing and clinical
expenditures, in accordance with Section 2.11, shall constitute complete
satisfaction of any duty, whether express or implied, which could be imposed
upon JJPI to commercially exploit its rights under this Agreement and are
accepted by Diametrics in lieu of any best efforts obligations on the part of
JJPI, and the remedies for the failure to fulfill any such obligations shall be
limited, as applicable, to loss of exclusivity, termination or the payment of
the Price for purchased Product as expressly set forth herein.
3.02 Package Labeling. Diametrics shall be responsible for the text and
regulatory compliance of all package labels and Product inserts used in
connection with the Products; provided JJPI shall have the opportunity to review
and comment on all such documents prior to their implementation (JJPI approval
thereof is not required). JJPI shall develop all other labeling for the
Products, including without limitation, all sales and promotional literature,
subject to compliance with approved Product claims; provided that Diametrics
shall have the opportunity to review and
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<PAGE>
comment on such labeling prior to their implementation (Diametrics approval
thereof is not required). Diametrics agrees that all labels and labeling shall
prominently identify JJPI (or its Codman Affiliate) as the distributor of the
Products to the extent permitted by law (except for Products subject to JJPI's
initial order under Section 2.08(a)). All labels and labeling shall also
prominently identify Diametrics as the manufacturer of the Products to the
extent permitted by law. In addition, all Products shall be printed, embossed or
engraved to prominently identify JJPI (or its Codman Affiliate) to the extent
permitted by law (except for Products subject to JJPI's initial order under
Section 2.08.(a)). For purposes of this Agreement the terms "label" and
"labeling" shall have the meanings set forth in Sections 201(k) and 201(m)
respectively of the U.S. Federal Food, Drug and Cosmetics Act.
3.03 Trademarks. JJPI shall distribute the Products purchased by it
hereunder under the Diametrics Trademarks. JJPI acknowledges that Diametrics is
the exclusive owner of and has all rights to the Diametrics Trademarks, subject
to JJPI's rights under Section 9.01.
3.04 Provision of Information by Diametrics. Diametrics shall, at the
request of JJPI, provide JJPI with the following information relating to the
Products and to the extent reasonably available to Diametrics, at no cost to
JJPI: (i) data, descriptions, processes, photographs and statements of claims
for safety, efficacy or performance;
(ii) the Device Master Record and Device History Record, as defined
in 21 Code of Federal Regulations, Part 820, for the Products
and components thereof;
(iii) copies of all U.S. and foreign regulatory submissions,
including the 510(k) submissions, for the Products;
(iv) any labeling, inserts, sales literature or customer
instruction prepared by Diametrics relating to the Products
for JJPI review (it being understood and agreed that no such
review shall relieve Diametrics of responsibility for the
accuracy of such materials);
(v) claim support for any claims, indications, or other
representations included in any labeling, inserts, sales
literature or customer instruction prepared by Diametrics
relating to the Products (it being understood and agreed that
in the
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<PAGE>
event JJPI reasonably disagrees with any such claims,
indications, or other representations, Diametrics shall modify
the same in a manner agreeable to both parties subject to
applicable regulatory requirements); and
(vi) review of all training materials and sales and promotional
literature developed by JJPI relating to the Products (it
being understood and agreed that no such review shall relieve
JJPI of responsibility for the accuracy of such materials).
3.05 Changes. In no event shall any significant change to any Product
(or any change to the Specifications) be implemented or made without the prior
written approval of JJPI. If the parties agree on any such change, they shall
modify the Specifications to reflect the same. Diametrics further agrees that no
significant changes to the method or process of manufacture or production of any
Product or the Raw Materials shall be made without prior written notification to
and approval of JJPI. As used in this Section 3.05, the term "significant
change" shall mean any change that (i) results in a change to the Specifications
(ii) affects Product performance, labeling, physical appearance or
configuration, software (other than debugging or other error correction which
does not otherwise affect on the performance of the software) , packaging, or
sterilization processes, (iii) affects Product safety, reliability or integrity
or (iv) requires a submission to or approval from a governmental body. In the
event of any significant change, JJPI shall have the responsibility to establish
an appropriate qualification protocol, if required by JJPI, and JJPI and
Diametrics shall determine an appropriate inventory level for the pre-change
Product in order to cover on-going requirements during the qualification
process.
3.06 Insurance. Diametrics agrees to procure and maintain in full force
and effect during the term of this Agreement valid and collectible insurance
policies in connection with its activities as contemplated hereby which policies
shall provide coverage in an amount not less than $10 million per occurrence.
Such policy shall name JJPI as an insured or an additional insured. Upon JJPI's
request, Diametrics shall provide to JJPI certificate of coverage or other
written evidence reasonably satisfactory to JJPI of such insurance coverage.
Such insurance policy shall provide that in the event such insurance coverage
should be materially adversely changed or terminated for any reason, the insurer
thereunder will give Diametrics and JJPI ten (10) days' prior notice. The
existence of such
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<PAGE>
coverage shall in no way limit Diametrics's liability or obligations hereunder.
3.07 Training. JJPI shall develop and implement training programs for
its sales representatives and customers with respect to the operation and
maintenance of the Products. Diametrics shall be responsible for the technical
accuracy of all training materials and shall assist JJPI in preparing the
technical aspects of such training programs. Diametrics shall actively
participate in training JJPI trainers, who will in turn train JJPI sales
representatives and customers.
3.08 Governmental Registrations. JJPI shall apply, in its name, for all
governmental registrations required for JJPI to market Products as a distributor
in those countries where JJPI desires to market Product, unless the applicable
laws of a particular country require that such registrations be obtained by and
in the name of the manufacturer of the applicable product, in which event
Diametrics shall apply for such approvals. Diametrics shall reasonably cooperate
with JJPI in its efforts to obtain such approvals. Upon termination or
expiration of this Agreement for any reason, JJPI shall transfer to Diametrics,
to the extent permitted by applicable law, those registrations obtained by JJPI.
Diametrics agrees that JJPI shall have access to all of Diametrics regulatory
submissions and technical files for the Products to the extent necessary to
exercise its rights or fulfill its obligations hereunder.
ARTICLE FOUR
QUALITY/DEFECTIVE PRODUCT/INSPECTIONS/TESTING
4.01 Inspections. JJPI shall have the right, upon reasonable notice to
Diametrics and during regular business hours, to inspect and audit the
facilities being used by Diametrics (or any third party) for production and
storage of Product to assure compliance by Diametrics (and its suppliers) with
(i) all applicable statutes, laws and regulations, including, without
limitation, Quality System Regulations ("QSRs") enforced by the United States
Food and Drug Administration (the "FDA"), (ii) JJPI Quality Assurance
Requirements attached as Exhibit A hereto, (iii) Johnson & Johnson Corporate
Quality Assurance Requirements attached as Exhibit B hereto, and (iv) the terms
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<PAGE>
and provisions of this Agreement. Diametrics shall within fourteen days remedy
or cause the remedy of any deficiencies which may be noted in any such audit or,
if any such deficiencies can not reasonably be remedied within such fourteen day
period, present to JJPI a written plan to remedy such deficiencies as soon as
possible; and the failure by Diametrics to remedy or cause the remedy of any
such deficiencies within such fourteen day period or to present such a plan
within such fourteen day period and then use its best efforts to remedy or cause
the remedy of such deficiencies in accordance with such written plan, as the
case may be, shall be deemed a material breach of this Agreement. Diametrics
acknowledges that the provisions of this Section 4.01 granting JJPI certain
audit rights shall in no way relieve Diametrics of any of its obligations under
this Agreement, nor shall such provisions require JJPI to conduct any such
audits.
4.02 Acceptance; Disposition of Defective Product. JJPI shall have no
obligation to pay for any Product that is subject to such a claim of
non-compliance or defect; provided JJPI shall pay for Product within 30 days of
receipt unless such Product has been rejected within such 30 day period.
Diametrics shall replace at its own cost and expense, including reimbursement of
freight and disposition costs incurred by JJPI, Product that fails to comply
with the Specifications or other warranties made in Article Five, which
replacement shall constitute JJPI's sole and exclusive remedy therefor (but in
no way limiting Diametrics's indemnity obligations under Section 6.01). JJPI
shall notify Diametrics of the existence and nature of any non-compliance or
defect which comes to its attention and shall return such defective Product to
Diametrics. Diametrics shall have a reasonable opportunity, not to exceed ten
(10) days from receipt of such Product, to inspect such defective Product and
provide JJPI an explanation of the defect and proposed course of action (ie.
repair (including the nature of the repair) or replacement of the Product). The
acceptance (or non-rejection) of any Products shall in no way limits JJPI's
rights under Diametrics Product warranty or for indemnification hereunder;
provided however that Diametrics shall replace defective Product (i) under this
Section 4.02 if found to be defective within 60 days following receipt thereof
by JJPI and (ii) under Section 5.01 if found to be defective after such 60 day
period.
4.03 Independent Testing. If, after Diametrics's inspections of any
Product, the parties disagree as to whether such Product conforms to the
Specifications or whether the Product has such a defect, either party may
deliver the item to an independent third-party laboratory, mutually and
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<PAGE>
reasonably acceptable to both parties, for analytical testing to confirm such
item's conformance to the Specifications or the presence or absence of defects.
All costs associated with such third-party testing shall be at JJPI's expense
unless the tested item is deemed by such third-party to be defective or not in
compliance with the Specifications, in which case all such costs, including
reimbursement of freight and disposition costs, shall be promptly paid by
Diametrics. No inspection or testing of or payment for Product by JJPI or any
third-party agent of JJPI shall constitute acceptance by JJPI thereof, nor shall
any such inspection or testing be in lieu or substitution of any obligation of
Diametrics for testing, inspection and quality control as provided in the
Specifications or under applicable local, state, or federal laws, rules,
regulations, standards, codes or statutes.
4.04 Corrective Action. In the event any governmental agency having
jurisdiction shall request or order, or if JJPI shall determine to undertake,
any corrective action with respect to any Product, including any recall,
corrective action or market action, and the cause or basis of such recall or
action is attributable to a breach by Diametrics of any of its warranties,
guarantees, representations, obligations or covenants contained herein, then
Diametrics shall actively cooperate with JJPI in executing such corrective
action relating to Product quality and performance, and Diametrics shall
reimburse JJPI for the reasonable out of pocket costs of such action, including
the cost of replacing any Product which is so recalled, whether or not any such
specific unit of Product shall be established to be in breach of any warranty by
Diametrics hereunder.
4.05 Notice of Audit or Inquiry. Each party agrees to promptly notify
the other of any FDA audit, or any audit by any other regulatory body, of its
facilities used for the manufacture, storage or distribution of Products, or any
request for information from the FDA, or other regulatory body, related to the
manufacture of Products, as soon as practicable after it received notice of such
audit or request.
4.06 Complaint Handling. JJPI shall be responsible for interacting with
customers regarding complaints and other product performance issues. Diametrics
shall be responsible for all product performance complaint issues and will
maintain MDR and other product performance tracking systems. JJPI shall
reasonably cooperate with Diametrics in connection with its obligations under
this Section 4.06 and provide to Diametrics, on a timely basis to permit
Diametrics to fulfill its regulatory obligations, the necessary reports relating
to complaints and product performance
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issues relating to the Products. Upon reasonable request by Diametrics, JJPI
shall make such reports (on behalf of Diametrics, if appropriate) directly to
the appropriate regulatory authorities. In addition, JJPI shall maintain a
tracking system for the Products, and shall provide such information to
Diametrics upon reasonable request. Diametrics shall have the right to review
and audit JJPI's complaint handling and product tracking systems for the
Products, upon reasonable request during normal business hours. JJPI and
Diametrics shall each be responsible for bearing their own costs associated with
all complaint analyses and evaluations. Diametrics shall be responsible for
bearing the cost of product replacement attributable to the failure of Product
to comply with the requirements set forth in this Agreement. Diametrics shall,
within 30 days following receipt of a returned Product, provide JJPI a written
report of the results of the analysis and corrective actions taken with respect
to such Product complaint.
4.07. Warranty Service. Diametrics agrees to perform repair,
maintenance, modification and other services (including warranty repairs) on a
timely basis on Products purchased by JJPI, its Affiliates, or its customers.
All requests for service from customers shall be directed to JJPI, who will
arrange for the customer to ship the applicable Product directly to Diametrics.
Diametrics will repair and return product in accordance with JJPI instructions.
In the case of out-of-warranty service, Diametrics will bill JJPI, who in turn
will bill the customer. The rates for out-of-warranty service shall be agreed
upon from time-to-time by JJPI and Diametrics. Diametrics agrees to maintain an
inventory for spare and replacement parts for each Product sold under this
Agreement if and when production ceases for a period of at least three (3) years
following the delivery date of the particular Product.
ARTICLE FIVE
REPRESENTATIONS AND WARRANTIES
5.01 (a) Diametrics warrants to JJPI that the Products will meet the
Specifications and will be free from material defects in material, workmanship
and design for a period of eighteen (18)
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months from the date of shipment from Diametrics or twelve (12) months from the
date of installation at the end user location, whichever is less, PROVIDED THAT:
1. The Product has been installed, stored, used and maintained in
strict compliance with the safety procedures, Operating
Instructions and storage and handling requirements provided
with the Product.
2. Diametrics or an authorized Diametrics representative is
notified, and the Product taken out of service, as soon as a
defect appears.
3. The Product has not been subject to (i) neglect, misuse or
operation contrary to the Operating Instructions provided with
the Product or (ii) improper storage or handling contrary to
the storage and handling requirements provided with the
Product.
4. No repairs have been attempted or parts replaced by anyone not
authorized by Diametrics to perform such repair, and that the
Product serial number, date stamp or other identification
marks have not been removed or defaced.
Diametrics's liability under this warranty is limited to the supply of
replacement parts or Product, or labor and parts repair at an authorized
Diametrics facility, to a value not exceeding the original Diametrics invoice
price of the Product.
The warranty does not include:
i) Packaging, freight and insurance to and from authorized
Diametrics repair facility.
ii) Products not provided by Diametrics or damage to the
Diametrics Product that is caused by any such products.
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iii) Fuses
No rechargeable batteries
Cables
Lamps and Bulbs
Disposables or consumables
(b) Diametrics represents and warrants that it complies and shall
comply with applicable statutes, laws, ordinances, rules and regulations
relating to the manufacture, assembly and supply of the Product, including,
without limitation, those enforced by the FDA (including compliance with QSRs)
and International Standards Organization (ISO) Rules 9,000 et seq. Diametrics
represents and warrants that it has obtained ISO 9001 certification and has
submitted to the FDA an application for 510K clearance for the Product and that
the applications for such certification and clearance contain (or prior to
certification or clearance will contain) complete and accurate information and
that the information contained therein was obtained in good faith in compliance
with all applicable statutes, laws, ordinances, rules and regulations.
(c) Diametrics warrants and represents that (a) the current Product is
fully Year 2000 Compliant (as defined below), or it will be able to demonstrate
Year 2000 compliance in a full production version of the Product, with
accompanying documentation, no later than the specified delivery date if such
date is on or before (***); (b) Diametrics's information systems and other
business systems for estimates, performance schedules, orders, confirmations,
manufacture and delivery, invoicing and crediting of payments will accept and
properly process input for dates before, on or after January 1, 2000 no later
than (***); and (c) Year 2000 Compliant products and/or services will be
provided to JJPI under this Agreement in a timely and efficient manner without
interruption and/or disruption at no additional fee or charge of any kind
(including any installation,
- - - --------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
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freight, or other costs or fees) to JJPI. On or before (***) Diametrics shall
provide to JJPI a written plan as to how it will achieve Year 2000 Compliance as
required hereby. The term "Year 2000 Compliant" shall mean (a) the Product
performs in a consistent manner and functions without interruptions regardless
of the date in time on which the Product is delivered, used and/or further
distributed, whether before, on or after January 1, 2000 and whether or not the
dates are affected by leap years; (b) the Product, if computerized, accepts,
calculates, compares, sorts, extracts, sequences and otherwise processes date
inputs and date values, and returns and displays date values and performs, in a
consistent manner regardless of the dates used, whether before, on or after
January 1, 2000; (c) the Product, if computerized, accepts and responds to
two-digit year -date input in a manner that resolves any ambiguities as to the
century in a defined, predetermined and appropriate manner; (d) the Product, if
computerized, stores and displays date information in ways that are unambiguous
as to the determination of the century; (e) the Product will be delivered and
the services will be scheduled and performed in a timely manner without
interruptions caused by the date in time on which the Product is ordered or is
actually delivered or the services are scheduled or actually performed under
normal procedures in the ordinary course, whether before, on or after January 1,
2000; (f) Diametrics is now planning and taking action to implement and will
continue to implement, in a commercially reasonable manner, any and all measures
to continue to perform this Agreement according to its terms and otherwise to
meet the needs of its supplier-customer trading relationship with JJPI,
including without limitation those required for due performance and continued
performance without impairment due to interruption and/or disruption of
estimates, performance schedules, orders, confirmations, manufacture and
delivery of conforming products and/or services in a timely and efficient manner
to fulfill JJPI's requirements and to enable JJPI to deal with its own business
and its clients' needs and contract requirements, as well as to invoice JJPI and
credit its payments in a timely and accurate manner; and (g) Diametrics will
promptly provide to JJPI, in response to JJPI's periodic requests for updates,
information concerning Diametrics's Year 2000 compliance program to the extent
it affects performance of this Agreement itself according to
- - - --------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
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the terms hereof or affects the performance of the products and/or services
which are the subject matter of this Agreement and might impair its
supplier-customer relationship with JJPI. JJPI may cancel, refuse to order
and/or take delivery, reject and/or return non-complying goods and/or services
and receive a full refund or credit against invoices, as applicable. In no event
shall delays and failures caused by failures of Diametrics, its products or
services to be fully Year 2000 Compliant constitute a force majeure event or
excuse Diametrics from timely performance of its obligations.
5.02 Execution and Performance of Agreement. Diametrics and JJPI each
represents and warrants to the other that it has full right, power and authority
to enter into and perform its obligations under this Agreement. Diametrics and
JJPI each further represents and warrants to the other that the performance of
its obligations under this Agreement will not result in a violation or breach
of, and will not conflict with or constitute a default under any agreement,
contract, commitment or obligation to which such party or any of its Affiliates
is a party or by which it is bound and that it has not granted and will not
grant during the term of this Agreement or any renewal thereof, any conflicting
rights, license, consent or privilege with respect to the rights granted herein.
5.03 Intellectual Property. Diametrics represents and warrants to JJPI
that Diametrics owns all of the rights, title and interest in and to the
Diametrics Patents, Diametrics Trademarks, Know-How and all other intellectual
property that appear on or are otherwise used in connection with the Products;
no academic institution, member of an academic institution, corporation or other
entity, or any local, state or federal government holds any property rights
through it in any Product; Diametrics is able to consummate this Agreement in
the capacity of a free agent; the manufacture, use and sale of the Products in
accordance with the terms of this Agreement does not and will not infringe any
third party's rights under any patent; the use of the Diametrics Trademarks by
JJPI hereunder does not and will not infringe the rights of any third party; and
Diametrics is presently aware of no infringement by any third party of any
Diametrics Patent or any Diametrics Trademark.
5.04 (a) DIAMETRICS MAKES NO WARRANTY OTHER THAN THOSE EXPRESSLY MADE
HEREIN, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY WARRANTY OF
MERCHANTABILITY OR OF FITNESS FOR ANY PARTICULAR PURPOSE.
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(b) THE ABOVE WARRANTY SHALL SUPERSEDE THE DISCLAIMER OF WARRANTIES
STATEMENT WHICH IS INCLUDED IN THE OPERATING INSTRUCTIONS, OR ANY OTHER
DOCUMENTATION PROVIDED WITH THE PRODUCT, TO THE EXTENT THE PROVISIONS OR SUCH
DISCLAIMER OF WARRANTIES ARE INCONSISTENT WITH THIS WARRANTY.
(c) NOTHING CONTAINED IN THE ARTICLE 5 SHALL IN ANY WAY LIMIT
DIAMETRICS INDEMNITY OBLIGATIONS UNDER SECTION 6.01.
ARTICLE SIX
INDEMNIFICATION
6.01 Indemnification by Diametrics. Diametrics shall indemnify and hold
harmless JJPI and its Affiliates and their respective officers, directors and
employees from and against any and all damages, liabilities, claims, costs,
charges, judgments and expenses (including interest, penalties and reasonable
attorneys' fees) (collectively "Damages") incurred by such party that arise out
of or result from any third party claim (i) alleging any breach by Diametrics of
any of its representations, warranties, guarantees, covenants or obligations
contained herein, or (ii) otherwise arising out of the use of the Products
except to the extent attributable to (A) claims made by JJPI that are beyond the
scope of claims that have been approved by Diametrics or (B) defective or
malfunctioning tunneling, anchoring, access or other devices manufactured by
JJPI.
6.02 Indemnification by JJPI. JJPI shall indemnify and hold harmless
Diametrics and its Affiliates and their respective officers, directors and
employees from and against any and all Damages incurred by such party that arise
out of or result from any third party claim (i) alleging any breach by JJPI of
any of its representations, warranties, guarantees, covenants or obligations
contained herein or (ii) arising out of the use of the Products to the extent
attributable to (A) claims
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made by JJPI that are beyond the scope of claims that have been approved by
Diametrics or (B) defective or malfunctioning tunneling, anchoring, access or
other devices manufactured by JJPI.
6.03 Claims. Each indemnified party agrees to give the indemnifying
party prompt written notice of any matter upon which such indemnified party
intends to base a claim for indemnification (an "Indemnity Claim") under this
Article Six. The indemnified party shall have the right to participate with the
indemnifying party in the indemnifying party's defense, settlement or other
disposition of any Indemnity Claim, subject to the ultimate control of the
indemnifying party. With respect to any Indemnity Claim relating solely to the
payment of money damages and which could not result in the indemnified party's
becoming subject to injunctive or other equitable relief or otherwise adversely
affect the business of the indemnified party in any manner, and as to which the
indemnifying party shall have acknowledged in writing the obligation to
indemnify the indemnified party hereunder, the indemnifying party shall have the
sole right to defend, settle or otherwise dispose of such Indemnity Claim, on
such terms as the indemnifying party, in its sole discretion, shall deem
appropriate, provided that the indemnifying party shall provide reasonable
evidence of its ability to pay any damages claimed and with respect to any such
settlement shall have obtained the written release of the indemnified party from
the Indemnity Claim. The indemnifying party shall obtain the written consent of
the indemnified party prior to ceasing to defend, settling or otherwise
disposing of any Indemnity Claim if as a result thereof the indemnified party
would become subject to injunctive or other equitable relief or the business of
the indemnified party would be adversely affected in any manner.
ARTICLE SEVEN
FAILURE TO SUPPLY; FORCE MAJEURE
7.01 Failure to Supply. Notwithstanding the provisions of Section 7.02,
in the event that Diametrics shall be unable or unwilling or has failed for any
reason (including as a result of the commencement of a case by or against
Diametrics under Title 11 (as defined in Section 9.02)) to supply to JJPI any
Products in compliance with the desired delivery date specified in the purchase
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orders submitted by JJPI in accordance with Section 2.05 hereof (to the extent
such quantities were included within the relevant forecasts submitted in
accordance with Section 2.04 hereof) (a "Failure to Supply"), then, upon ninety
(90) days written notice from JJPI (if Diametrics has failed to cure the breach
during such ninety (90) day period, which cure may include the use of a third
party manufacturer of Products that has satisfied the JJPI's Supplier
Qualification Activities), JJPI may use, sell, make and have made the Products
and use the Diametrics Trademarks in connection therewith pursuant to the
license granted in Section 9.01 until such time as Diametrics demonstrates to
JJPI's reasonable satisfaction its ability to fully resume its supply
obligations hereunder (such time period, a "License Period"); provided that JJPI
shall have no obligation to purchase Products from Diametrics, and the License
Period shall continue, until the earlier of (i) any contractual obligations that
JJPI has assumed in connection with producing the same or obtaining such
substitute source of supply shall have terminated, and (ii) 180 days following
the date on which Diametrics demonstrates to JJPI's reasonable satisfaction its
ability to fully resume its supply obligations hereunder. In the event of such
Failure to Supply, Diametrics shall make available to JJPI or its designee
access to all Know-How and any other technical and proprietary materials,
information and techniques necessary or helpful for JJPI to procure required raw
materials or produce or arrange an alternative supplier of Product, and to
provide advice and consultation in connection therewith. Diametrics shall not
sell any Product to any third party during a License Period. JJPI shall pay to
Diametrics a royalty equal to (***)% of Net Sales of Product manufactured by or
for JJPI under this Article 7 which, but for the license granted in Article 9 of
this Agreement, would infringe a valid claim of a Diametrics Patent, and a
royalty equal to (***)% of Net Sales of Product manufactured by or for JJPI
under this Article 7 which do not infringe a valid claim of a Diametrics Patent.
The provisions of this Section 7.01 shall constitute JJPI's sole and exclusive
remedy for a Failure to Supply except to the extent such Failure to Supply is
attributable to an intentional or willful act, omission or decision by
Diametrics.
- - - --------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
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7.02 Force Majeure Events. If either party is prevented from performing
any of its obligations hereunder due to any cause which is beyond the
non-performing party's reasonable control, including fire, explosion, flood, or
other acts of God; acts, regulations, or laws of any government; war or civil
commotion; strike, lock-out or labor disturbances; or failure of public
utilities or common carriers (a "Force Majeure Event"), such non-performing
party shall not be liable for breach of this Agreement with respect to such
non-performance to the extent such non-performance is due to a Force Majeure
Event. Such non-performance will be excused for three months or as long as such
event shall be continuing (whichever period is shorter), provided that the
non-performing party gives immediate written notice to the other party of the
Force Majeure Event. Such non-performing party shall exercise all reasonable
efforts to eliminate the Force Majeure Event and to resume performance of its
affected obligations as soon as practicable.
ARTICLE EIGHT
CONFIDENTIALITY
8.01 Confidential Information. As used herein, "Confidential
Information" shall mean all confidential or proprietary information that is
reduced to writing, marked as confidential and given to one party by the other
party relating to such other party or any of its Affiliates, including
information regarding any of the products of such other party or any of its
Affiliates, information regarding its advertising, distribution, marketing or
strategic plans or information regarding its costs, productivity or
technological advances. Neither party shall, during the term of this Agreement
and for a period of five years (seven years with respect to Know-How and other
technical and proprietary materials, information and techniques which may be
provided to JJPI pursuant to Section 7.01 or 9.01) following the termination or
expiration of this Agreement for any reason, use or disclose to third parties
any Confidential Information of the other (except to the extent reasonably
necessary to exercise its rights or comply with its obligations under this
Agreement) and each party shall insure that its employees, officers and agents
shall not use or disclose to third parties any Confidential Information of the
other (except to the extent reasonably necessary to exercise its rights or
comply with its obligations under this
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Agreement); provided, however, that JJPI may disclose Confidential Information
of Diametrics to JJPI's Affiliates and consultants if such persons are informed
of the confidential nature of such information and are under an obligation to
keep such information confidential. Confidential Information shall not include
information that (i) was already known to the receiving party at the time of its
receipt thereof, as evidenced by its written records, (ii) is disclosed to the
receiving party after its receipt thereof by a third party who has a right to
make such disclosure without violating any obligation of confidentiality, (iii)
is or becomes part of the public domain through no fault of the receiving party
or (iv) is required to be disclosed to comply with applicable laws or
regulations or an order of a court or regulatory body having competent
jurisdiction. Nothing contained herein shall prevent JJPI from marketing and, if
applicable pursuant to Sections 7.01 and 9.01, manufacturing or having
manufactured the Products and JJPI shall be permitted to disclose such
Confidential Information as is reasonably necessary in connection with such
activities.
ARTICLE NINE
LICENSE RIGHTS
9.01 License. Diametrics hereby grants to JJPI an exclusive worldwide
license, with the right to grant sub-licenses to its Affiliates, under the
Diametrics Patents and Know how in the Field, to use, sell, make and have made
the Products, and to use the Diametrics Trademarks in connection therewith;
provided, however, that the license granted hereunder shall be effective only
during License Periods (as defined in Section 7.01) and JJPI shall not exercise
its rights under this License other than during such License Periods. If JJPI
does exercise its rights under this license, JJPI shall pay to Diametrics the
royalties provided for in Section 7.01. The parties agree that under the license
in the Diametrics Trademarks granted herein, in order to protect the goodwill in
the Diametrics Trademarks, JJPI shall submit to Diametrics, for its written
approval, specimens of labels, advertising, and other materials bearing the
Diametrics Trademarks. Diametrics shall communicate its approval or disapproval
of JJPI's use of the Diametrics Trademarks within five (5) days following
receipt of such specimens. Failure of Diametrics to respond within such five (5)
day period shall
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constitute approval of such use. Diametrics's approval of JJPI's use of the
Diametrics Trademarks shall not be unreasonably withheld.
9.02 Rights Upon Insolvency. All rights and licenses to Diametrics
Patents, Diametrics Trademarks and Know-How granted under this Agreement by
Diametrics to JJPI are, for all purposes of Section 365(n) of Title 11 of the
U.S. Code ("Title 11"), licenses of rights to intellectual property as defined
in Title 11. Diametrics agrees during the term of this Agreement to create and
maintain current copies or, if not amenable to copying, detailed descriptions or
other appropriate embodiments, of all such Diametrics Patents, Diametrics
Trademarks and Know-How. If a case is commenced by or against Diametrics under
Title 11, then, unless and until this Agreement is rejected as provided in Title
11, Diametrics (in any capacity, including debtor-in-possession) and its
successors and assigns (including, without limitation, a Title 11 trustee) shall
either perform all of the obligations provided in this Agreement to be performed
by Diametrics or provide to JJPI all such intellectual property reasonable
required to make or have made, use and sell Products in the Field (including all
embodiments thereof) held by Diametrics and such successors and assigns, as JJPI
may elect in a written request, immediately upon such request. If a Title 11
case is commenced by or against Diametrics, this Agreement is rejected as
provided in Title 11 and JJPI elects to retain its rights hereunder as provided
in Title 11, then Diametrics (in any capacity, including debtor-inpossession)
and its successors and assigns (including, without limitation, a Title 11
trustee) shall provide to JJPI all such intellectual property (including all
embodiments thereof) held by Diametrics and such successors and assigns
immediately upon JJPI's written request therefor. All rights, powers and
remedies of JJPI, as a licensee hereunder, provided herein are in addition to
and not in substitution for any and all other rights, powers and remedies now or
hereafter existing at law or in equity (including, without limitation, Title 11)
in the event of the commencement of a Title 11 case by or against Diametrics.
JJPI, in addition to the rights, powers and remedies expressly provided herein,
shall be entitled to exercise all other such rights and powers and resort to all
other such remedies as may now or hereafter exist at law or in equity (including
Title 11) in such event.
9.03 Prosecution of Patents. Diametrics agrees to, at its expense,
prosecute, or cause to be prosecuted to allowance or rejection, and reasonably
maintain, in the United States and such other countries selected by mutual
agreement of Diametrics and JJPI, the patents and patent applications
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included in the Diametrics Patents. Diametrics shall issue as a patent each such
application prosecuted to allowance. Diametrics shall pay all government fees
required to keep in force patents and applications therefor included in the
Diametrics Patents and shall submit evidence to JJPI, upon request, that said
government fees have been timely paid.
9.04 Registration of Trademarks. Diametrics shall be responsible for
the registration and maintenance of all applications required to protect, in the
United States and such other countries selected by mutual agreement of
Diametrics and JJPI, all trademarks included in the Diametrics Trademarks.
Diametrics shall pay all government fees required to keep in force trademarks
and applications therefor included in the Diametrics Trademarks and shall submit
evidence to JJPI, upon request, that said government fees have been timely paid.
In the event that Diametrics decides not to register in a country elected by
JJPI, not to pay a government fee due on, or otherwise to abandon a trademark or
application therefor within the Diametrics Trademarks, Diametrics shall send
JJPI written notice of said decision at least ninety (90) days in advance of the
action or payment due date. JJPI shall thereupon have the option, but not the
obligation, to register or pay the government fees, in which event the affected
trademark or application shall be promptly assigned to JJPI.
9.05 Third-Party Infringement. In the event there is infringement by a
third party of any Diametrics Patent or Diametrics Trademark and JJPI becomes
aware of such infringement, JJPI shall give Diametrics written notice to that
effect, including with such written notice evidence establishing a prima facie
case of infringement by such third party. Diametrics shall bear all expenses of
any suit brought by it based upon such infringement and shall retain all damages
or other monies awarded or received in settlement of such suit. If, after the
expiration of ninety (90) days from the date of such notice, Diametrics has not
obtained a discontinuance of such infringement or brought suit against the third
party infringer, then JJPI shall have the right, but not the obligation, to
bring suit against such infringer. Diametrics will cooperate with JJPI in any
such suit for infringement brought by JJPI against a third party, and shall have
the right to consult with JJPI and to participate in and be represented by
independent counsel in such litigation at its own expense. JJPI shall bear all
expenses of such suit, and shall retain any damages or other monies awarded or
received in consequence of such litigation.
9.06 Escrow. Diametrics shall, within 60 days following execution of
this Agreement, place
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with an escrow agent mutually acceptable to Diametrics and JJPI, a description
of Diametrics's process for the manufacture of the Products in sufficiently
clear and detailed terms that it can be readily followed and carried out by a
trained scientist or engineer to make the Products in the manner Diametrics
considers most efficient. Furthermore, should Diametrics alter, modify or change
its process for manufacturing the Products, Diametrics shall amend the
description in escrow to include such alteration, modification or change. The
description held in escrow pursuant to this Section 9.06, shall be available to
JJPI or its designee only during License Periods. JJPI shall negotiate and pay
the fees of the escrow agent.
9.07 Ownership of Developments.
(a) All inventions made, conceived or acquired by Diametrics, and the
intellectual property related thereto, shall be the exclusive property of
Diametrics. Diametrics will pay all expenses relating to the securing and
maintaining of appropriate intellectual property protection with respect to such
inventions.
(b) All inventions made, conceived or acquired by JJPI, and the
intellectual property related thereto, will be the exclusive property of JJPI
and that JJPI will pay all expenses relating to the securing and maintaining of
appropriate intellectual property protection with respect to such inventions.
(c) In the event that personnel of Diametrics and JJPI jointly
participate in an invention, such invention, and the intellectual property
related thereto shall be owned jointly by the parties. The parties shall jointly
own and share in the expenses of obtaining intellectual property protection of
the invention. The parties shall agree on a single attorney to prepare and
prosecute such intellectual property on behalf of both parties. For any
intellectual property protection in any country that one of the parties refuses
to share in such costs, that party shall assign all right, title and interest in
such invention to the other party retaining only a paid up, non-exclusive
license to make (or have made), use and sell products using or incorporating
such invention, without the right to grant sublicenses (except to affiliates).
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ARTICLE TEN
TERM AND TERMINATION
10.01 Initial Term. The initial term of this Agreement (the "Initial
Term") shall commence on the date hereof and continue until the sixth
anniversary of the date hereof, unless sooner terminated as expressly provided
under the terms of this Agreement.
10.02 Renewal. JJPI shall have the right to extend this Agreement for
an additional two year term at the end of the Initial Term by giving Diametrics
at least 60 days prior written notice of such election; provided such extension
right is subject to the condition that JJPI has fulfilled its minimum purchase
obligations pursuant the Section 2.8 (but not if JJPI has satisfied such
obligations during the last year of the Initial Term only by paying the
shortfall amount pursuant to Section 2.08(d)). JJPI's election to extend this
Agreement shall be binding on Diametrics.
10.03 Termination for Breach. If either Diametrics, on the one hand, or
JJPI, on the other hand, shall materially breach any covenant, agreement or
obligation under this Agreement, then the other party may give notice to
terminate this Agreement by giving such party notice of such breach. The party
receiving such notice shall have ninety (90) days from the date of receipt
thereof to cure such breach. If such breach is not cured within such ninety (90)
day period, then the non-breaching party shall have the right to terminate this
Agreement effective as of the end of such period. In the event such breach is
cured during such period, such notice shall be of no force or effect and this
Agreement shall not be terminated.
10.04 Termination for Insolvency. Either party may terminate this
Agreement upon notice if the other party makes an assignment for the benefit of
creditors, is the subject of proceedings in voluntary or involuntary bankruptcy
instituted on behalf of or against such party, or has a receiver or trustee
appointed for all or substantially all of its property; provided that in the
case of an involuntary bankruptcy proceeding, such right to terminate shall only
become effective if the other party consents to the involuntary bankruptcy or
such proceeding is not dismissed within sixty
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(60) days after the filing thereof.
10.05 Termination for Patent Infringement. JJPI may terminate this
Agreement upon ninety (90) days written notice if a court of competent
jurisdiction determines the manufacture, use, importation or sale of a Product
infringes the patents rights of a third party.
10.06 Effect of Termination. Notwithstanding the termination of this
Agreement for any reason, each party hereto shall be entitled to recover any and
all damages (other than consequential damages) that such party shall have
sustained by reason of the breach by the other party hereto of any of the terms
of this Agreement. Termination of this Agreement for any reason shall be without
prejudice to Diametrics's right to receive all payments accrued and unpaid on
the effective date of termination and shall not release either party hereto from
any liability which at such time has already accrued or which thereafter accrues
from a breach or default prior to such expiration or termination, nor affect in
any way the survival of any other right, duty or obligation of either party
hereto which is expressly stated elsewhere in this Agreement to survive such
termination.
10.07 Survival of Certain Provisions. The provisions of this Agreement
set forth in Sections 10.06 and 8.01 and Articles Six and Eleven, and any
remedies for the breach thereof, shall survive the termination of this Agreement
under the terms hereof.
ARTICLE ELEVEN
MISCELLANEOUS
11.01 Arbitration a. Any dispute, claim or controversy arising from or
related in any way to this agreement or the interpretation, application, breach,
termination or validity thereof, including any claim of inducement of this
agreement by fraud or otherwise, will be submitted for resolution to final and
binding arbitration pursuant to the commercial arbitration rules then pertaining
of the Center for Public Resources ("CPR"), except where those rules conflict
with these provisions, in which case these provisions control. The arbitration
will be held in New York City, New York.
b. The panel shall consist of three arbitrators chosen from the CPR
Panels of Distinguished
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Neutrals each of whom is a lawyer specializing in business litigation with at
least 15 years experience with a law firm of over 25 lawyers or was a judge of a
court of general jurisdiction. In the event the aggregate damages sought by the
claimant are stated to be less than $5 million, and the aggregate damages sought
by the counterclaimant are stated to be less than $5 million, and neither side
seeks equitable relief, then a single arbitrator shall be chosen, having the
same qualifications and experience specified above.
c. The parties agree to cooperate (1) to obtain selection of the
arbitrator(s) within 30 days of initiation of the arbitration, (2) to meet with
the arbitrator(s) within 30 days of selection and (3) to agree at that meeting
or before upon procedures for discovery and as to the conduct of the hearing
which will result in the hearing being concluded within no more than 9 months
after selection of the arbitrator(s) and in the award being rendered within 60
days of the conclusion of the hearings, or of any post-hearing briefing, which
briefing will be completed by both sides with 20 days after the conclusion of
the hearings. In the event no such agreement is reached, the CPR will select
arbitrator(s), allowing appropriate strikes for reasons of conflict or other
cause and three peremptory challenges for each side. The arbitrator(s) shall set
a date for the hearing, commit to the rendering of the award within 60 days of
the conclusion of the evidence at the hearing, or of any post-hearing briefing
(which briefing will be completed by both sides in no more than 20 days after
the conclusion of the hearings), and provide for discovery according to these
time limits, giving recognition to the understanding of the parties hereto that
they contemplate reasonable discovery, including document demands and
depositions, but that such discovery be limited so that the time limits
specified herein may be met without undue difficulty. In no event will the
arbitrator(s) allow either side to obtain more than a total of 40 hours of
deposition testimony from all witnesses, including both fact and expert
witnesses. In the event multiple hearing days are required, they will be
scheduled consecutively to the greatest extent possible.
d. The arbitrator(s) shall render their award following the substantive
law of New Jersey. The arbitrator(s) shall render an opinion setting forth
findings of fact and conclusions of law with the reasons therefor stated. A
transcript of the evidence adduced at the hearing shall be made and shall, upon
request, be made available to either party.
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e. To the extent possible, the arbitration hearings and award will be
maintained in confidence.
f. The United States District Court for New Jersey may enter judgment
upon any award. In the event the panel's award exceeds $5 million in monetary
damages or includes or consists of equitable relief, then the court shall
vacate, modify or correct any award where the arbitrators' findings of fact are
clearly erroneous, and/or where the arbitrators' conclusions of law are
erroneous; in other words, it will undertake the same review as if it were a
federal appellate court reviewing a district court's findings of fact and
conclusions of law rendered after a bench trial. An award for less than $5
million in damages and not including equitable relief may be vacated, modified
or corrected only upon the grounds specified in the Federal Arbitration Act. The
parties consent to the jurisdiction of the above-specified Court for the
enforcement of these provisions, the entry of judgment on any award, and the
vacatur, modification and correction of any award as above specified. In the
event such Court lacks jurisdiction, then any court having jurisdiction of this
matter may enter judgment upon any award and provide the same relief, and
undertake the same review, as specified herein.
g. Each party has the right before or during the arbitration to seek
and obtain from the appropriate court provisional remedies such as attachment,
preliminary injunction, replevin, etc. to avoid irreparable harm, maintain the
status quo, or preserve the subject matter of the arbitration.
h. EACH PARTY HERETO WAIVES ITS RIGHT TO TRIAL OF ANY ISSUE BY JURY.
i. EACH PARTY HERETO WAIVES ANY CLAIM TO PUNITIVE OR EXEMPLARY DAMAGES
FROM THE OTHER.
j. EACH PARTY HERETO WAIVES ANY CLAIM OF CONSEQUENTIAL DAMAGES FROM THE
OTHER EXCEPT WITH RESPECT TO ANY BREACH OF SECTION 8.01; IT BEING AGREED THAT A
PARTY MUST PROVE THE EXISTANCE
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OF, AND ITS ENTITLEMENT TO, CONSEQUENTIAL DAMAGES WITH RESPECT TO A BREACH OF
SECTION 8.01 IN ACCORDANCE WITH APPLICABLE LAW.
11.02 Publicity. Except as provided in Section 3.02, neither party
hereto shall originate any publicity, news release, or other announcement,
written or oral, whether to the public press, the trade, JJPI's or Diametrics's
customers or otherwise, relating to this Agreement, or to performance hereunder
or the existence of an arrangement between the parties without the prior written
approval of the other party hereto. Diametrics shall not use the name of JJPI or
any of its Affiliates for advertising or promotional purposes without the prior
written consent of JJPI.
11.03 Headings. The Article and Section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning and interpretation of this Agreement.
11.04 Notices. All notices and other communications hereunder shall be
in writing. All notices hereunder of an Indemnity Claim, a Force Majeure Event,
default or breach hereunder, or, if applicable, termination of the term hereof,
or any other notice of any event or development material to this Agreement taken
as a whole, shall be delivered personally, or sent by national overnight
delivery service or postage pre-paid registered or certified U.S. mail, and
shall be deemed given when delivered, if by personal delivery or overnight
delivery service, or three business days after deposit in the mail, if sent by
U.S. mail, and shall be addressed as follows:
If to Diametrics: Diametrics Medical Incorporated
2658 Patton Road
St. Paul, MN 55113
Fax: (612) 638 1078
Attention: Vice President, Commercial Business
with a copy to: Dorsey & Whitney LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, MN 55402
Attention: Ken Cutler, Esq.
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If to JJPI: Johnson & Johnson Professional, Inc.
325 Paramount Drive
Raynham, MA 02767-0350
Attention: Vice President, New Business Development
with a copy to: Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
Attention: Office of General Counsel
or to such other place as either party may designate by written notice to the
other in accordance with the terms hereof.
11.05 Failure to Exercise. The failure of either party to enforce at
any time for any period any provision hereof shall not be construed to be a
waiver of such provision or of the right of such party thereafter to enforce
each such provision.
11.06 Assignment. This Agreement, or any of the rights and obligations
created herein, shall not be assigned or transferred, in whole or in part, by
either party hereto without the prior written consent of the other party;
provided, however, that either party shall have the right to assign any or all
of its rights or obligations under this Agreement to any Affiliate, or a
successor to that part of its business to which this Agreement relates, without
such prior written consent; provided that any such assignee of Diametrics shall
have all rights to the Diametrics Patents, Diametrics Trademarks and Know-How.
Any attempted assignment or transfer of such rights or obligations without such
consent, except as provided herein, shall be void. Subject to the foregoing
sentence, this Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns.
11.07 Severability. In the event that any one or more of the provisions
(or any part thereof) contained in this Agreement or in any other instrument
referred to herein, shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, then to the maximum extent permitted by law, such
invalidity, illegality or unenforceability shall not affect any other provision
of this Agreement or any other such instrument. Any term or provision of this
Agreement which is invalid, illegal or unenforceable in any jurisdiction shall,
to the extent the economic benefits conferred by this Agreement to both parties
remain substantially unimpaired, not affect the validity, legality or
enforceability of any of the terms or provisions of this Agreement in any other
jurisdiction.
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11.08 Relationship of the Parties. The relationship of JJPI and
Diametrics established by this Agreement is that of independent contractors, and
nothing contained herein shall be construed to (i) give either party any right
or authority to create or assume any obligation of any kind on behalf of the
other or (ii) constitute the parties as partners, joint venturers, co-owners or
otherwise as participants in a joint or common undertaking.
11.09 Competing Products. Diametrics recognizes and acknowledges that
JJPI (and its Affiliates) has been, and will continue to be, actively involved
in the design, development and marketing of instruments and accessories for the
treatment of neurological, spinal and orthopedic disorders. Diametrics
understands and agrees that JJPI (and its Affiliates) does or may design,
develop, market, sell and distribute products which compete directly with the
Product, and may continue to market, sell and distribute these and other
competing products throughout the term of this Agreement. Notwithstanding the
foregoing, JJPI shall not, during the term of this Agreement, design, develop or
market, itself or through any Affiliates or third parties, an invasive probe for
monitoring (***) in the central nervous system (i.e. the cranial cavity and
spinal column) other than the Product; it being agreed by Diametrics that
nothing contained in the Section 11.09 shall restrict an Affiliate of JJPI from
engaging in any of such activities independently of JJPI.
11.10 Entire Agreement. It is the desire and intent of the parties to
provide certainty as to their future rights and remedies against each other by
defining the extent of their undertakings herein. This Agreement constitutes and
sets forth the entire agreement and understanding between the parties with
respect to the subject matter hereof and is intended to define the full extent
of the legally enforceable undertakings of the parties hereto, and no promise,
agreement or representation, written or oral, which is not set forth explicitly
in this Agreement is intended by either party to be legally binding. Each party
acknowledges that in deciding to enter into this Agreement and to consummate the
transactions contemplated hereby it has not relied upon any statements, promises
or representations, written or oral, express or implied, other than those
explicitly set forth in this Agreement. This Agreement supersedes all previous
understandings, agreements and representations
- - - --------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
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between the parties, written or oral, with respect to the subject matter hereof.
11.11 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.12 Expenses. Each party shall pay all of its own fees and expenses
(including all legal, accounting and other advisory fees) incurred in connection
with the negotiation and execution of this Agreement and the arrangements
contemplated hereby.
11.13 Modifications and Amendments. This Agreement shall not be
modified or otherwise amended except pursuant to an instrument in writing
executed and delivered by each of the parties hereto.
11.14 Construction. The parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties and no presumption or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship of any of
the provisions of this Agreement.
11.15 Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New Jersey, without giving effect
to the choice of laws provisions thereof.
11.16 Incorporation of Exhibits and Schedules. The Exhibits and
Schedules identified in this Agreement are incorporated herein by reference and
made a part hereof.
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IN WITNESS WHEREOF, the parties hereto intending legally to be
bound hereby, have each caused this Agreement to be duly executed as of the date
first above written.
DIAMTERICS MEDICAL INCORPORATED
By: /s/David T. Giddings
-----------------------------------
Name: David T. Giddings
-----------------------------------
Title: Chief Executive Officer
-----------------------------------
JOHNSON & JOHNSON PROFESSIONAL, INC.
By: /s/David M. Hable
-----------------------------------
Name: David M. Hable
-----------------------------------
Title: Vice President, Sales and Marketing
-----------------------------------
-39-
<PAGE>
SCHEDULE A
Product Specification:
NEUROTREND(R)
(***)
- - - --------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
SCHEDULE B
PRODUCT TRANSFER PRICING
(***)
- - - --------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
SCHEDULE C
Product Launch, Clinical, & Marketing Plan
(***)
- - - --------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
SCHEDULE D
Patent Portfolio for Neurotrend
(***)
- - - --------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
EXHIBIT A
Johnson & Johnson Professional, Inc.
Quality Assurance Procedures for Product Evaluation
(***)
- - - --------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
EXHIBIT B
Product and Supplier Qualification Activities
(***)
- - - --------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
Exhibit 10.2
PUT OPTION AND
STOCK PURCHASE AGREEMENT
This Agreement (this "Agreement") is made this 1st day of October 1998
(the "Effective Date"), by and among Diametrics Medical, Inc., a Minnesota
corporation, with its principal place of business at 2658 Patton Road,
Roseville, Minnesota 55113 (the "Company"), and Johnson & Johnson Development
Corporation, a New Jersey corporation, with its principal place of business at
One Johnson & Johnson Plaza, New Brunswick, New Jersey 08933 (the "Purchaser").
BACKGROUND
A. The Company and Johnson & Johnson Professional Inc., a New Jersey
corporation ("JJPI"), have entered into a Distribution Agreement of even date
herewith (the "Distribution Agreement").
B. In connection with the Distribution Agreement, the Company desires
to sell shares of its common stock, par value $.01 (the "Common Stock"), and the
Purchaser desires to purchase the same, each on the terms and subject to the
conditions set forth herein.
C. The Company and the Purchaser desire to make certain
representations, warranties, covenants and agreements in connection with, and
establish various conditions precedent to, the sale and purchase of shares of
the Company's Common Stock.
NOW, THEREFORE, in consideration of the mutual covenants contained in
this Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Purchaser
hereby agree as follows:
Section 1. Authorization and Issuance of the Securities. Subject to the
terms and conditions of this Agreement, the Company has, or before the Initial
Closing (as defined in Section 3.1 below) will have, authorized the issuance and
delivery to the Purchaser of the Put Shares (as defined in Section 2.3 below).
Section 2. Put Right of the Company.
2.1 Put Right. The Company shall have, and is hereby granted, the right
and option to sell to the Purchaser, and to require the Purchaser to purchase,
the Put Shares upon and subject to the terms and conditions hereinafter set
forth (the said right and option to sell the Put Shares being hereinafter called
the "Put"). The Company may exercise the Put at any time during the period of
one year from the opening of business on October 1, 1998, to the close of
business on September 30, 1999 (the "Put Period"), by giving the Purchaser
notice of its election to sell the Put Shares, or a part thereof, as hereinafter
provided. During the Put Period, the Put may be exercised in whole at any time
or in part from time to time; provided, however, no partial exercise shall be
for Put Shares valued in the aggregate less than $1,000,000, and the Company
shall be entitled to exercise the Put no more than twice during the Put Period.
<PAGE>
2.2 Put Notification Date; Put Date. The Company shall provide written
notice to the Purchaser of its election or partial election to exercise the Put,
which notice shall specify (a) the date of notice of exercise of the Put (the
"Put Notification Date"), (b) the dollar amount of the equity investment
required to be made by Purchaser, (c) the Put Price Per Share (as defined in
Section 2.4 below), (d) the number of Put Shares to be purchased, (e) the date
on which the Purchaser shall purchase the Put Shares from the Company (the "Put
Date") and (f) a written statement of the calculation of the Put Price Per
Share. Such written notice shall be given by the Company within two (2) business
days after the Put Notification Date. The Put Date shall be no sooner than the
third business day nor later than the seventh business day after the Purchaser
receives such notice.
2.3 Put Shares. With respect to each exercise of the Put, the "Put
Shares" shall be defined as that number of shares of Common Stock of the Company
as determined by dividing the dollar amount of the equity investment to be made
by the Purchaser by the Put Price Per Share; provided, however, that the
aggregate equity investment that the Purchaser shall be required to make
pursuant to this Agreement shall not exceed $5,000,000, with the number of Put
Shares determined in accordance with the applicable Put Price Per Share. For
example, if the Company partially exercises the Put and sells Put Shares to the
Purchaser valued at $2,000,000 based on the applicable Put Price Per Share, the
Company may, prior to the expiration of the Put Period, exercise the Put one
more time and sell Put Shares to the Purchaser valued at up to $3,000,000 (or
any lesser amount if greater than $1,000,000) based on the then applicable Put
Price Per Share.
2.4 Put Price Per Share. The "Put Price Per Share" shall be defined as
the lesser of (a) the arithmetic average of the closing sales prices of the
Common Stock of the Company as reported by The Nasdaq National Market for the
twenty (20) consecutive days on which the Common Stock is traded prior to and
including the Put Notification Date, or (b) $7.00. The Put Price Per Share shall
be appropriately adjusted to reflect any stock dividend, stock split,
recapitalization or similar corporate action.
2.5 Sale of the Put Shares. Subject to the terms and conditions hereof,
upon exercise by the Company of the Put, the Company hereby agrees to issue and
sell to the Purchaser, and the Purchaser hereby agrees to purchase from the
Company, the Put Shares for an aggregate purchase price not to exceed
$5,000,000.
Section 3. Closing and Delivery.
3.1 Initial Closing. Subject to the satisfaction or waiver of the
conditions to Initial Closing set forth in Sections 8 and 9 hereof, the initial
closing of this Agreement (the "Initial Closing") shall be held on October 1,
1998 at the offices of Dorsey & Whitney LLP, 220 South Sixth Street,
Minneapolis, Minnesota 55402, or on such other date and place as may be agreed
to by the Company and the Purchaser. The date upon which the Initial Closing
occurs is herein referred to as the "Initial Closing Date."
2
<PAGE>
3.2 Put Closing. Each closing of the purchase and sale of the Put
Shares pursuant to this Agreement (each, a "Put Closing") shall be held on the
Put Date at the offices of Dorsey & Whitney LLP, 220 South Sixth Street,
Minneapolis, Minnesota 55402, or on such other date and place as may be agreed
to by the Company and the Purchaser. The date upon which each Put Closing occurs
is herein referred to as the "Put Closing Date".
3.3 Delivery of the Shares. At each Put Closing, the Company shall
deliver to the Purchaser an executed stock certificate registered in the name of
the Purchaser, or in such nominee name(s) as designated by the Purchaser,
representing the Put Shares purchased by the Purchaser. Also at each Put
Closing, the Purchaser shall pay to the Company the aggregate purchase price for
the Put Shares by certified check or wire transfer.
Section 4. Representations and Warranties of the Company. Except as set
forth on the Schedule of Exceptions attached hereto as Exhibit A, the Company
hereby represents and warrants as of the date hereof to the Purchaser as
follows:
4.1 Organization and Standing. Each of the Company and its Subsidiary
(as hereinafter defined in this Section 4.1) has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its organization, has full corporate power and authority to own
or lease its properties and conduct its business as presently conducted, and is
duly qualified as a foreign corporation and is in good standing in all
jurisdictions in which the character of the property owned or leased or the
nature of the business transacted by it makes qualification necessary (except
where the failure to be so qualified would not have a material adverse effect on
the business, properties, financial condition or results or operations of the
Company or its Subsidiary). Other than Diametrics Medical, Ltd., formerly known
as Biomedical Sensors, Ltd., (the "Subsidiary"), the Company has no subsidiaries
or equity interest in any other entity.
4.2 Corporate Power; Authorization. The Company has all requisite
corporate power, and will have taken all requisite corporate action, to execute
and deliver this Agreement, to sell and issue the Put Shares and to carry out
and perform all of its obligations hereunder. This Agreement constitutes the
legal, valid and binding obligation of the Company, enforceable in accordance
with its terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting the
enforcement of creditors' rights generally, (ii) as limited by equitable
principles generally, and (iii) as rights to indemnity or contributions
hereunder may be limited by federal or state securities laws or principles of
public policy. The execution and delivery of this Agreement, the performance of
this Agreement and the compliance with the provisions hereof do not, and the
issuance, sale and delivery of the Put Shares by the Company will not, conflict
with, or result in a breach or violation of the terms, conditions or provisions
of, or constitute a default under, or result in the creation or imposition of
any lien pursuant to the terms of, the Articles of Incorporation or Bylaws of
the Company or any statute, law, rule or regulation applicable to the Company or
its Subsidiary, or any state or federal order, judgment or decree applicable to
the Company or its Subsidiary, or any indenture,
3
<PAGE>
mortgage, lease or other agreement or instrument to which the Company or its
Subsidiary or any of the properties of such person is subject, except such as
would not have a material adverse effect on the business, properties, financial
condition or results of operations of the Company or its Subsidiary.
4.3 Issuance and Delivery of the Put Shares. The Put Shares, when
issued and paid for in compliance with the provisions of this Agreement, will be
validly issued, fully paid and nonassessable and issued in compliance with all
applicable federal and state securities laws. Further, the Put Shares, when
issued and paid for in compliance with the provisions of this Agreement, will
not be subject to preemptive, co-sale, right of first refusal or any other
similar rights of the shareholders of the Company or any liens or encumbrances.
Issuance of the Put Shares does not and will not constitute a default under or
give rise to a right of termination, cancellation, restriction or acceleration
of any right or obligation of the Company or its Subsidiary or a loss of any
benefit to which the Company or its Subsidiary is entitled under any provision
of any agreement, contract or other instrument binding upon or applicable to the
Company or its Subsidiary or any of the properties, assets, licenses,
franchises, permits or other similar authorizations of either of them.
4.4 SEC Documents; Financial Statements. Each of the Company and its
Subsidiary has filed in a timely manner all documents that such person was
required to file with the Securities and Exchange Commission ("SEC") under
Sections 13, 14(a) and 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") during the 36 months preceding the date of this Agreement.
As of their respective filing dates (or, if amended, when amended), all
documents filed by the Company or its Subsidiary with the SEC, whether under the
Exchange Act or under the Securities Act of 1933, as amended (the "Securities
Act"), during such 36-month period (the "SEC Documents") complied in all
material respects with the requirements of the Exchange Act or the Securities
Act, as the case may be. The Company satisfies the requirements for the use of
Form S-3 under the Securities Act, to register the offers and sales of the Put
Shares contemplated by the Shelf Registration Statement (as defined in Section
10). None of the SEC Documents as of their respective dates contained any untrue
statement of material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading. The consolidated
financial statements of the Company and its Subsidiary included in the SEC
Documents (the "Financial Statements") comply as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto. The Financial Statements have
been prepared in accordance with generally accepted accounting principles
consistently applied and fairly present the consolidated financial position of
the Company and its Subsidiary at the dates thereof and the results of their
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal, recurring adjustments (unless otherwise
disclosed in the SEC Documents) and the absence of footnotes). There is no
material liability or commitment of the Company or its Subsidiary which is not
reflected in the most recent Financial Statements except commitments made since
the date of such Financial Statements in the ordinary course of
4
<PAGE>
business. There have not been any changes in the assets, liabilities, financial
condition or operations of the Company or its Subsidiary from those reflected in
the most recent Financial Statements, except changes in the ordinary course of
business that have not had and are not reasonably expected to have a material
adverse effect on the business, properties, financial condition or results of
operations of the Company or its Subsidiary.
4.5 Intellectual Property. (a) Each of the Company and its Subsidiary
has sufficient title and ownership of all material patents, patent rights,
inventions, trademarks, service marks, copyrights, trade secrets, proprietary
rights, processes and know-how (collectively, "Intellectual Property") owned or
used by it or that are necessary for the conduct of its business as presently
conducted and believes it can obtain, on commercially reasonable terms, any
additional rights necessary for its business as proposed to be conducted, and
the Intellectual Property does not, and will not, conflict with or constitute an
infringement of the rights of others;
(b) There are no outstanding options, licenses (whether to or from the
Company) or agreements of any kind relating to the Intellectual Property
described in paragraph (a) of this Section 4.5 or granting rights to any other
person to manufacture, license, produce, assemble, market or sell products or
services derived or derivable from the Intellectual Property of the Company or
its Subsidiary, nor is the Company or its Subsidiary bound by or a party to any
options, licenses or agreements of any kind with respect to the Intellectual
Property of any other person or entity;
(c) Neither the Company nor its Subsidiary has received any
communications alleging that such person or any of its employees has violated or
infringed or, by conducting its business as proposed, would violate or infringe,
any of the Intellectual Property of any other person or entity;
(d) Neither the Company nor its Subsidiary is aware that any of its
employees is obligated under any contract (including licenses, covenants, or
commitments of any nature) or other agreement, or subject to any judgment,
decree, or order of any court or administrative agency, that would interfere
with the use of such employee's best efforts to promote the interests of the
Company or its Subsidiary with respect to the Intellectual Property of the
Company or its Subsidiary or otherwise or that would conflict with the business
of the Company or its Subsidiary as proposed to be conducted; and
(e) Neither the execution nor delivery of this Agreement, nor the
carrying on of the business of the Company or its Subsidiary by the employees of
such person, nor the conduct of the business of the Company or its Subsidiary as
proposed, will, to the Company's knowledge, conflict with or result in a breach
of the terms, conditions, or provisions of, or constitute a default under, any
contract, covenant, or instrument under which any of such employees is now
obligated. The Company does not believe it is or will be necessary to utilize
any inventions of any of the employees of the Company or its Subsidiary (or
people such person currently intends to hire) made prior to their employment by
such person.
5
<PAGE>
4.6 Properties. The Company and its Subsidiary have good and valid
title to all of the properties and assets reflected as owned by the Company or
its Subsidiary in the Financial Statements, free and clear of all material
liens, mortgages (statutory or otherwise), security interests, pledges, claims
or encumbrances except those, if any, disclosed in the Financial Statements. The
Company and its Subsidiary hold their leased properties under valid and binding
leases, with such exceptions as are not materially significant in relation to
the business of the Company or its Subsidiary. The Company and its Subsidiary
own or lease all of such properties as are necessary to their operations as now
conducted.
4.7 Capitalization. The authorized capital stock of the Company
consists of 35,000,000 shares of Common Stock and 5,000,000 shares of preferred
stock. There are 23,366,258 shares of Common Stock and no shares of Preferred
Stock outstanding as of the date of this Agreement, and, excluding the exercise
of vested options and warrants outstanding at the discretion of the holder
thereof and shares purchased through the Company's existing employee stock
purchase plan, immediately prior to the Initial Closing, 23,366,258 shares of
Common Stock and no shares of Preferred Stock will be outstanding. The
certificates evidencing the Put Shares will be in due and proper legal form and
will be duly authorized for issuance by the Company. All of the issued and
outstanding securities of the Company have been duly authorized and validly
issued, are fully paid and nonassessable, have been issued in compliance with
federal, state and other applicable laws and were issued without violation of
any preemptive, co-sale or other right. Except as otherwise disclosed in the SEC
Documents and in the Financial Statements, there is no outstanding option,
warrant, agreement or other right calling for the issuance or redemption of, and
there is no commitment, plan or arrangement to issue or redeem, any securities
of the Company. The Company does not have any binding agreement with respect to
the acquisition or purchase of the securities of or owned by any person or
entity or the acquisition of the business, assets or liabilities of any person
or entity, and the Company does not have any agreement or understanding with
respect to the disposition or sale of its business, or any of its material
assets or property.
4.8 Litigation. There is no pending or, to the Company's knowledge,
threatened, action, suit or other proceeding to which the Company or its
Subsidiary is a party or to which the property or assets of the Company or its
Subsidiary is subject which might result in a material adverse effect on the
business, properties, financial condition or results of operations of the
Company or its Subsidiary.
4.9 No Defaults. Neither the Company nor its Subsidiary is in violation
or default of any provisions of its Articles of Incorporation or Bylaws, or any
organizational documents, or in breach with respect to any provision of any
agreement, judgment, decree, order, mortgage, deed of trust, lease franchise,
license, indenture, permit or other instrument to which it is a party or by
which it or any of its properties are bound which violation, default or breach
would have a material adverse effect on the business, properties, financial
condition or results of operations of the Company or its Subsidiary, and there
does not exist any state of facts which constitutes an
6
<PAGE>
event of default on the part of the Company or its Subsidiary as defined in such
documents or which, with notice or lapse of time or both, would constitute such
an event of default.
4.10 Material Agreements. Each of the Company and its Subsidiary is a
party to all agreements that are necessary for the conduct of the business of
such person as presently conducted and all such agreements are currently in
effect. Neither the Company nor its Subsidiary is in breach of any provision of
any such agreement where such breach would have a material adverse effect on the
business, properties, financial condition or results of operations of the
Company or its Subsidiary.
4.11 Governmental Consents; Compliance with Law. No consent, approval,
order or authorization of, or registration, qualification, designation,
declaration or filing with, any federal, state, or local governmental authority
on the part of the Company is required in connection with the consummation of
the transactions contemplated by this Agreement except for (i) the filing of a
Shelf Registration Statement and all amendments thereto with the SEC as
contemplated by Section 10.1 of this Agreement, (ii) any filings required by
state securities laws and (iii) if required, the filing of a notification and
report form under the United States Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"). Each of the Company and its Subsidiary is
conducting business in compliance in all material respects with all applicable
laws, rules and regulations of the jurisdictions in which it is conducting
business, including but not limited to, all applicable local, state and federal
environmental laws and regulations.
4.12 Insurance. Each of the Company and its Subsidiary maintains
insurance of the types and in the amounts generally deemed adequate for its
business covering all risks customarily insured against, all of which insurance
is in full force and effect.
4.13 Investment Company. The Company is not an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
4.14 Taxes. Each of the Company and its Subsidiary has filed all
necessary federal, state, local, and foreign income and franchise tax returns
and has paid or accrued all taxes shown as due thereon except for such taxes as
are being contested in good faith, and the Company has no knowledge of any tax
deficiency which has been or might be asserted or threatened against the Company
or its Subsidiary which would have a material adverse effect on the business,
properties, financial condition or results of operations of the Company or its
Subsidiary.
4.15 Listing. The Company's Common Stock is traded on The Nasdaq
National Market.
4.16 Broker's Fee. Other than Lehman Brothers and Bay City Capital, the
Company represents that there are no brokers or finders entitled to compensation
by the Company or its Subsidiary in connection with any of the transactions
referred to or contemplated hereby, and
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<PAGE>
shall indemnify the Purchaser for any such fees for which the Company or its
Subsidiary is responsible.
4.17 Disclosure. No representation or warranty of the Company contained
in this Agreement or in the Schedule of Exceptions or in any bring-down
certificate required to be delivered to the Purchaser at the Initial Closing,
contains or will contain any untrue statement of a material fact or omit to
state a material fact required to make the statements herein or therein not
misleading.
Section 5. Representations and Warranties of the Purchaser. The
Purchaser hereby represents and warrants as of the date hereof to the Company as
follows:
5.1 Investment Purposes. (a) The Purchaser acknowledges that the Put
Shares are being issued in reliance upon the exception from the registration
requirements of the Securities Act provided by Section 4(2) thereof and as such
the Put Shares will be "restricted securities" within the meaning of Rule 144.
(b) The Purchaser will be acquiring the Put Shares pursuant to this
Agreement in the ordinary course of its business and for its own account for
investment only and with no present intention of distributing any of such Put
Shares or any arrangement or understanding with any other persons regarding the
distribution of such Put Shares except in each case as conforms with all
applicable requirements of the Securities Act, applicable blue sky laws and all
rules and regulations promulgated thereunder.
(c) The Purchaser will not, directly or indirectly, offer, sell,
pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase
or otherwise acquire or take a pledge of) any of the securities purchased
hereunder except in compliance with the Securities Act, applicable blue sky
laws, and the rules and regulations promulgated thereunder.
(d) The Purchaser has, in connection with its decision to acquire the
Put Shares, relied with respect to the Company and its affairs solely upon the
SEC Documents and the other information delivered to such Purchaser by the
Company as described in Sections 4.4 above and the representations and
warranties of the Company contained herein.
(e) The Purchaser is an "accredited investor" within the meaning of
Rule 501 of Regulation D promulgated under the Securities Act.
(f) The Purchaser has full right, power, authority and capacity to
enter into this Agreement and to consummate the transactions contemplated hereby
and has taken all necessary action to authorize the execution, delivery and
performance of this Agreement. Upon the execution and delivery of this Agreement
by the Purchaser, this Agreement shall constitute a valid and binding obligation
of the Purchaser, enforceable in accordance with its terms, except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws
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relating to or affecting the enforcement of creditors' rights generally, (ii) as
limited by equitable principles generally, including any specific performance,
and (iii) as to those provisions of Section 10.3 relating to indemnity or
contribution.
5.2 No Advice. The Purchaser understands that nothing in this Agreement
or any other materials presented to the Purchaser in connection with the
acquisition of the Put Shares constitutes legal, tax or investment advice to the
Purchaser. The Purchaser has consulted such legal, tax and investment advisors
as it, in its sole discretion, has deemed necessary or appropriate in connection
with its purchase of the Put Shares.
5.3 Restriction on Transfer. The Purchaser understands that: (a) other
than to a person directly or indirectly controlling, controlled by, or in common
control with, the Purchaser (any such person, an "Affiliate"), the Put Shares
will not be transferable in the absence of a registration under the Securities
Act or an exemption therefrom or in the absence of compliance with any term of
this Agreement; (b) the Company may provide stop transfer instructions to its
transfer agent with respect to the Put Shares in order to enforce the
restrictions contained in this Section 5.3 and to confirm that the Purchaser has
complied with its obligations contained in Section 10.2 hereof; and (c) each
certificate representing Put Shares shall be in the name of the Purchaser and
shall bear substantially the following legends (in addition to any legends
required under applicable securities laws):
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS
OF ANY STATE OR OTHER JURISDICTION, AND MAY ONLY BE SOLD, PLEDGED,
TRANSFERRED OR OTHERWISE DISPOSED OF BY PURCHASER IF SUBSEQUENTLY
REGISTERED UNDER THE SECURITIES ACT AND REGISTERED OR QUALIFIED UNDER
ANY APPLICABLE STATE OR OTHER SECURITIES LAWS, UNLESS THE COMPANY
DETERMINES THAT EXEMPTION FROM SUCH REGISTRATION REQUIREMENT IS
AVAILABLE."
The legend contained in this Section 5.3 shall be removed from a stock
certificate immediately upon receipt by the Company's transfer agent of a
certificate substantially in the form of Appendix I attached hereto.
Notwithstanding the foregoing, such Put Shares must be held in certificated form
until such Put Shares have been sold in accordance with the provisions of
Appendix I attached hereto.
5.4 Broker's Fee. The Purchaser represents that there are no brokers or
finders entitled to compensation by the Purchaser in connection with any of the
transactions referred to herein or contemplated hereby, and shall indemnify the
Company for any such fees for which the Purchaser is responsible.
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<PAGE>
Section 6. Covenants of the Parties.
6.1 Maintenance of Listing. During the Put Period and for so long as
the Company is obligated to keep in effect the Shelf Registration Statement
provided under Section 10 hereof, the Company will use its reasonable best
efforts to maintain its listing on The Nasdaq National Market or a national
securities exchange, as defined in the Exchange Act.
6.2 Filings. The parties shall consult and fully cooperate with and
provide assistance to each other in preparing and filing as soon as practicable
all consents, approvals and authorizations necessary or advisable to be made or
obtained from any third party or governmental agency in order to consummate the
transactions contemplated hereby.
6.3 Waiver of Right of Investment. Within thirty (30) days following
the Initial Closing or prior to the first Put Closing, whichever occurs first,
the Purchaser shall have received a certificate from a duly authorized officer
of the Company certifying that "Purchasers" (as defined in the Preferred Stock
Purchase Agreement dated January 30, 1997, between the Company and the
"Purchasers" listed on Schedule A thereto) representing 95% of the Preferred
Shares purchased under that Preferred Stock Purchase Agreement have waived such
"Purchasers'" rights to invest under Section 7.5 thereof, with respect to the
transactions contemplated by this Agreement (including without limitation the
issuance of the Put Shares).
6.4 Publicity. Neither party hereto shall originate any publicity, news
release, or other announcement, written or oral, whether to the public press,
the trade, JJPI's or Diametrics's customers or otherwise, relating to this
Agreement, or to performance hereunder or the existence of an arrangement
between the parties without the prior written approval of the other party
hereto, except as may be required by law or the requirements of the National
Association of Securities Dealers, in which case the party proposing to issue
such press release or make such public statement shall use reasonable efforts to
consult in good faith with the other party before issuing any such press release
or making any such public statement.. In no event shall the Company attribute
any statement to JJDC or any of its Affiliates in any public statement without
the prior written consent of JJDC. The Company shall not use the name of JJPI or
any of its Affiliates for advertising or promotional purposes without the prior
written consent of JJPI.
Section 7. Survival of Representations, Warranties and Agreements;
Indemnification.
7.1 Survival. Notwithstanding any investigation made by any party to
this Agreement, all covenants, agreements, representations and warranties made
by the Company and the Purchaser herein and in the certificates for the
securities delivered pursuant hereto shall survive the execution of this
Agreement, the delivery to the Purchaser of the certificates representing the
Put Shares and the payment thereof, until the first anniversary of the Initial
Closing Date, except for the representations set forth in Section 4.3 and 4.7,
which shall survive indefinitely, and the representations as to taxes set forth
in Section 4.14, which shall survive for
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the period expiring ninety (90) days after the expiration of the period during
which a claim by the applicable taxing authority for a deficiency or other tax
adjustment would not be barred by the statute of limitations applicable to such
taxes (any such period an "Indemnity Period").
7.2 Purchaser's Right to Indemnification. Subject to the provisions of
this Section 7, the Company hereby agrees to indemnify and hold harmless the
Purchaser and its employees, agents, directors, officers, equity holders,
successors, predecessors, assigns and affiliates (collectively, the "Purchaser
Indemnified Parties") from and against (i) any and all losses, obligations,
liabilities, damages, claims, deficiencies, costs and expenses (including, but
not limited to, the amount of any settlement entered into pursuant hereto and
all reasonable legal and other expenses incurred in connection with the
investigation, prosecution or defense of the matter but excluding consequential
damages) (collectively, "Claims"), which may be asserted against or sustained or
incurred by the Purchaser Indemnified Parties in connection with, arising out
of, or relating to (A) any breach or alleged breach of any of the
representations, warranties, agreements and covenants made by the Company herein
or in any certificate or other document delivered to any Purchaser Indemnified
Party by or on behalf of the Company in connection with this Agreement; or (B)
any false, incorrect or misleading representation or warranty made by or on
behalf of the Company herein or in any certificate or other document delivered
to any Purchaser Indemnified Party by or on behalf of the Company in connection
with this Agreement; and (ii) any and all costs and expenses (including, but not
limited to, reasonable legal expenses) incurred by any Purchaser Indemnified
Party in connection with the enforcement of its rights under this Agreement. No
claim for indemnification pursuant to this Section 7 may be commenced after the
relevant Indemnity Period; provided, however, that claims made within such
Indemnity Period shall survive to the extent of the Claim covered thereby until
such Claim is finally determined and, if applicable, paid. The parties to this
Agreement acknowledge that such indemnification provisions apply only with
respect to the Put Shares and the shares of Common Stock issued or issuable as
dividends on, or other distributions with respect to the Put Shares; and any
other security issued or issuable in exchange for, or in replacement of, the Put
Shares.
7.3 Procedure for Claims.
(a) Promptly, but in any event within 10 days after obtaining
knowledge of any claim or demand which may give rise to, or could reasonably
give rise to, a claim for indemnification hereunder (an "Indemnification
Claim"), the Purchaser shall give written notice to the Company of such
Indemnification Claim ("Notice of Claim"). A Notice of Claim shall be given with
respect to all Indemnification Claims; provided, however, that the failure to
give a timely Notice of Claim to the Company shall not relieve the Company from
any liability that it may have to the Purchaser Indemnified Parties hereunder to
the extent that the Company is not prejudiced by such failure. The Notice of
Claim shall set forth the amount (or a reasonable estimate) of the loss, damage
or expense suffered, or which may be suffered, by the Purchaser Indemnified
Party as a result of such Indemnification Claim and the aggregate amount of all
Indemnification Claims to date and a brief description of the facts giving rise
to such
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Indemnification Claim. The Purchaser shall furnish to the Company such
information (in reasonable detail) as the Purchaser may have with respect to
such Indemnification Claim (including copies of any summons, complaint or other
pleading which may have been served on it and any written claim, demand,
invoice, billing or other document evidencing or asserting the same).
(b) If the claim or demand set forth in the Notice of Claim is
a claim or demand asserted by a third party (a "Third Party Claim"), the Company
shall have fifteen days (or such shorter period (but not less than ten days) if
any answer or other response or filing with respect to the pleadings served by
the third party is required prior to the fifteenth day) after the date of
receipt by the Company of the Notice of Claim (the "Notice Date") to notify the
Purchaser in writing of the election by the Company to defend the Third Party
Claim on behalf of the Purchaser Indemnified Parties.
(c) If the Company elects to defend a Third Party Claim on
behalf of the Purchaser Indemnified Parties, the Purchaser shall make available
to the Company and its agents and representatives all records and other
materials in the Purchaser's possession which are reasonably required in the
defense of the Third Party Claim and the Company shall pay any expenses payable
in connection with the defense of the Third Party Claim as they are incurred
(whether incurred by the Purchaser or the Company).
(d) If the Company has assumed control of the defense, the
Company may contest or settle the Third Party Claim on such terms as the Company
may choose, provided, however, that the Company will not have the right, without
the prior written consent of the Purchaser, to settle any such claim if such
settlement (i) arises from or is part of any criminal action, suit or proceeding
(ii) contains a stipulation to, confession of judgment with respect to, or
admission or acknowledgment of, any liability or wrongdoing on the part of any
Purchaser Indemnified Party, (iii) relates to any foreign federal, state or
local tax matters, (iv) provides for injunctive relief, or other relief other
than damages, which is binding on any Purchaser Indemnified Party, (v) does not
fully release all Purchaser Indemnified Parties with respect to the relevant
Third Party Claim or (vi) has any res judicata or collateral estoppel effect
that could be adverse to any Purchaser Indemnified Party.
(e) If the Company elects to defend a Third Party Claim, the
Purchaser Indemnified Parties shall have the right to participate in the defense
of the Third Party Claim, at the Purchaser Indemnified Parties' expense (and
without the right to indemnification for such expense under this Agreement);
provided, however, that the reasonable fees and expenses of counsel retained by
the Purchaser Indemnified Parties shall be at the expense of the Company if (A)
the use of the counsel chosen by the Company to represent the Purchaser
Indemnified Parties would present such counsel with a conflict of interest; (B)
the parties to such proceeding include both Purchaser Indemnified Parties and
the Company and there may be legal defenses available to Purchaser Indemnified
Parties which are different from or additional to those available to the
Company; (C) within ten days after being advised by the Company of the identity
of counsel to
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be retained to represent the Purchaser Indemnified Parties, the Purchaser
Indemnified Party affected by such claim shall have objected to the retention of
such counsel for valid reasons (which shall be stated in a written notice to the
Company), and the Company shall not have retained different counsel reasonably
satisfactory to such Purchaser Indemnified Party; or (iv) the Company shall
authorize the Purchaser Indemnified Parties to retain separate counsel at the
expense of the Company.
(f) If the Company elects to defend a Third Party Claim, and
does not defend a Third Party Claim in good faith, the Purchaser Indemnified
Parties shall have the right, in addition to any other right or remedy it may
have hereunder, at the sole and exclusive expense of the Company, to defend such
Third Party Claim; provided, however, that such expenses shall be payable by the
Company only if and when such Third Party Claim becomes payable.
(g) The Purchaser shall cooperate with the Company in the
defense of Third Party Claims. Subject to the foregoing, (i) the Purchaser
Indemnified Parties shall not have any obligation to participate in the defense
of or to defend any Third Party Claim and (ii) the Purchaser Indemnified
Parties' defense of or participation in the defense of any Third Party Claim
shall not in any way diminish or lessen the right to indemnification as provided
in this Section 7.
Section 8. Conditions to Company's Obligations at the Initial Closing.
The Company's obligation to complete the transactions contemplated by this
Agreement shall be subject to the satisfaction of the following conditions at
the Initial Closing to the extent not waived by the Company:
8.1 Consents and Approvals. Any consents, waivers, clearances,
approvals and authorizations of regulatory or governmental bodies (including,
without limitation, the expiration or termination of the waiting period under
the HSR Act) and other persons that are necessary in connection with the
consummation of the transactions contemplated by this Agreement shall have been
obtained.
8.2 Representations and Warranties Correct. The representations and
warranties made by the Purchaser in Section 5 hereof shall be true and correct
in all material respects when made, and shall be true and correct in all
material respects on the Initial Closing Date.
Section 9. Conditions to the Purchaser's Obligations at the Initial
Closing. The Purchaser's obligation to complete the transactions contemplated by
this Agreement shall be subject to the satisfaction of the following conditions
at the Initial Closing to the extent not waived by the Purchaser:
9.1 Consents and Approvals. Any consents, waivers, clearances,
approvals and authorizations of regulatory or governmental bodies (including,
without limitation, the expiration or termination of the waiting period under
the HSR Act) and other persons that are necessary in
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connection with the consummation of the transactions contemplated by this
Agreement shall have been obtained.
9.2 Representations and Warranties Correct. The representations and
warranties made by the Company in Section 4 shall be true and correct in all
material respects (except with respect to representations and warranties that
are qualified as to materiality or material adverse effect, which
representations and warranties shall be true and correct in all respects) when
made and as of the Initial Closing Date, and the Purchaser shall have received a
certificate signed by the chief executive officer of the Company, or such other
officers of the Company as agreed upon by the parties hereto, that each of such
representations and warranties is true and correct in all material respects
(except with respect to representations and warranties that are qualified as to
materiality or material adverse effect, which representations and warranties
shall be true and correct in all respects) on and as of the Initial Closing Date
with the same effect as though such representations and warranties had been made
or given on and as of the Initial Closing Date, and that such party has
performed and complied with all of its obligations under this Agreement which
are to be performed or complied with on or prior to the Initial Closing Date.
9.3 Certificate as to Absence of Material Adverse Effect. The Purchaser
shall have received a certificate signed by a duly authorized officer of the
Company certifying that, since the date of the Company's most recent filing with
the SEC, there have not been any changes in the assets, liabilities, financial
condition or operations of the Company or its Subsidiary, except changes in the
ordinary course of business that have not had and are not expected to have a
material adverse effect on the business, properties, financial condition or
results of operations of the Company or its Subsidiary.
9.4 Legal Opinion. The Purchaser shall have received from Dorsey &
Whitney LLP, counsel to the Company, an opinion letter addressed to the
Purchaser, dated as of the Initial Closing Date, covering the matters set forth
in Exhibit B hereto, subject to customary assumptions and qualifications.
9.5 Closing Papers. The Purchaser shall have received the following,
addressed to Purchaser and in form and substance reasonably satisfactory to
Purchaser:
(a) certified copies of the resolutions adopted by the Board of
Directors of the Company authorizing the execution, delivery and performance of
this Agreement, the issuance of the Put Shares and each of the other agreements,
instruments and transactions contemplated hereby;
(b) certified copies of the certificate of incorporation and Bylaws of
the Company as in effect on the Initial Closing Date; and
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(c) a certificate of the Secretary of the Company dated the Initial
Closing Date, as to the incumbency and signatures of the officers executing this
Agreement and all instruments executed pursuant hereto.
Section 10. Conditions to the Purchaser's Obligations at each Put
Closing. The Purchaser's obligations to complete the transaction contemplated by
this Agreement at each Put Closing shall be subject to the satisfaction of the
following conditions:
10.1 Certificate regarding Representations and Warranties. The
Purchaser shall have received a certificate signed by the chief executive
officer of the Company, or such other officers of the Company as agreed upon by
the parties hereto, certifying that each of the representations and warranties
set forth in the form of officer certificate attached hereto as Exhibit C is
true and correct in all material respects (except with respect to
representations and warranties that are qualified as to materiality or material
adverse effect, which representations and warranties shall be true and correct
in all respects) on and as of the applicable Put Closing Date, and that the
Company has performed and complied with all of its obligations under this
Agreement which are to be performed and complied with on or prior to the
applicable Put Closing Date.
10.2 Certificate as to Absence of Material Adverse Effect. The
Purchaser shall have received a certificate signed by a duly authorized officer
of the Company certifying that, except as otherwise set forth in documents filed
with the SEC, or in other publicly available documents, since the date of the
Company's most recent filing with the SEC, there have not been any changes in
the assets, liabilities, financial condition or operations of the Company or its
Subsidiary, except changes in the ordinary course of business that have not had
and are not expected to have a material adverse effect on the business,
properties, financial condition.
10.3 Distribution Agreement. The Distribution Agreement (as amended
through the date of the applicable Put Closing, if applicable) shall continue to
be in full force and effect as of the applicable Put Closing Date, unless such
Distribution Agreement has been terminated as a result of a breach of such
Distribution Agreement by JJPI.
Section 11. Registration of the Put Shares; Compliance with the
Securities Act.
11.1 Registration Procedures and Expenses. (a) Upon written demand of
the Purchaser received by the Company prior to one year following the final Put
Closing Date, the Company shall prepare and file with the SEC within sixty (60)
days following the receipt of such written demand, and thereafter shall use its
reasonable best efforts to cause to be declared effective, a shelf registration
statement on an appropriate form under the Securities Act relating to the offer
and sale of the Put Shares (the "Registrable Securities") by the Purchaser, in
accordance with the methods of distribution set forth in such shelf registration
statement, through The Nasdaq National Market or the facilities of any national
securities exchange on which the Company's Common Stock is then traded, or in
privately-negotiated transactions (a "Shelf
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Registration Statement"). All shares of Common Stock acquired by the Purchaser
pursuant to Section 2 shall be included in such Shelf Registration Statement,
and the Company shall only be required to file up to two Shelf Registration
Statements with respect to the Put Shares.
(b) The Company shall use its reasonable best efforts (including,
without limitation, the preparation and filing with the SEC of amendments and
supplements to the Shelf Registration Statement and a prospectus to be used in
connection therewith) to keep the Shelf Registration Statement continuously
effective and not misleading until the earlier of (i) such time as all of the
Registrable Securities have become eligible for sale under Rule 144 under the
Securities Act or (ii) when all the Registrable Securities covered by the Shelf
Registration Statement have been sold pursuant thereto. The Company shall be
deemed not to have used its reasonable best efforts to keep the Shelf
Registration Statement effective during the requisite period if it takes any
action that would result in the holders of the Registrable Securities covered
thereby not being able to offer and sell such Registrable Securities during that
period, unless such action is required by applicable law. Notwithstanding the
foregoing, following the effectiveness of the Shelf Registration Statement, the
Company may, at any time, suspend the effectiveness of the Shelf Registration
Statement for up to no longer than seventy-five (75) days, as appropriate (a
"Suspension Period"), by giving notice to the Purchaser, if (i) the Company
shall have determined that the Company may be required to disclose any material
corporate development or (ii) the Company shall be involved in an underwritten
public offering of its securities. The Company will use its best efforts to
minimize the length of any Suspension Period. Notwithstanding the foregoing, no
more than two Suspension Periods may occur in any twelve (12) month period. The
Purchaser agrees that, upon receipt of any notice from the Company of a
Suspension Period, it will not sell (subject to the limitations on the Company
set forth above) any Registrable Securities pursuant to the Shelf Registration
Statement until (i) the Purchaser is advised in writing by the Company that the
use of the applicable prospectus may be resumed, (ii) the Purchaser has received
copies of any additional or supplemental or amended prospectus, if applicable,
and (iii) the Purchaser has received copies of any additional or supplemental
filings which are incorporated or deemed to be incorporated by reference in such
prospectus.
(c) In order to facilitate the public sale or other disposition of all
or any of the Registrable Securities by the Purchaser, the Company shall furnish
to the Purchaser with respect to the Registrable Securities registered under the
Shelf Registration Statement such number of copies of prospectuses, prospectus
supplements and preliminary prospectuses as the Purchaser reasonably requests in
conformity with the requirements of the Securities Act.
(d) The Company shall file any documents required of the Company for
normal blue sky clearance in states specified in writing by the Purchaser;
provided, however, that the Company shall not be required to qualify to do
business or consent to service of process in any jurisdiction in which it is not
now so qualified or has not so consented.
(e) Other than fees and expenses, if any, of counsel or other advisers
to the Purchaser, which fees and expenses shall be borne by them, the Company
shall bear all expenses
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(exclusive of any brokerage fees, underwriting discounts and commissions) in
connection with the procedures in paragraphs (a) through (d) of this Section
11.1.
11.2 Transfer of Securities After Shelf Registration. The Purchaser
agrees that it will not effect any disposition of the Registrable Securities
that would constitute a sale within the meaning of the Securities Act, except:
(a) pursuant to the Shelf Registration Statement, in which case the
Purchaser shall submit the certificates evidencing the Registrable Securities to
the Company's transfer agent, accompanied by a separate "Purchaser's
Certificate" (A) in the form of Appendix I attached hereto, (B) executed by an
officer of, or other authorized person designated by, the Purchaser, and (C) to
the effect that (1) the Registrable Securities have been sold in accordance with
the Shelf Registration Statement and (2) the requirement of delivering a current
prospectus has been satisfied; or
(b) in a transaction exempt from registration under the Securities Act.
11.3 Indemnification in Connection with Registration. As used in this
Section 11.3 the following terms shall have the following respective meanings:
(a) "Selling Shareholder" shall mean the Purchaser and any transferee
who is entitled to resell Registrable Securities pursuant to the Shelf
Registration Statement, including any underwriter involved in such resale, and
each person, if any, who controls such Selling Shareholder within the meaning of
Section 15 of the Securities Act, and each officer and each director of such
Selling Shareholder;
(b) "Shelf Registration Statement" shall include any final prospectus,
exhibit, supplement or amendment included in or relating to the Shelf
Registration Statement referred to in Section 10.1; and
(c) "Untrue Statement" shall include any untrue statement or alleged
untrue statement, or any omission or alleged omission to state in the Shelf
Registration Statement a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
The Company agrees to indemnify and hold harmless each Selling
Shareholder from and against any losses, claims, damages or liabilities to which
such Selling Shareholder may become subject (under the Securities Act or
otherwise) insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of, or are based upon, any Untrue
Statement on or after the effective date of the Shelf Registration Statement, or
on or after the date of any prospectus or prospectus supplement or the date of
any sale by any purchaser thereunder, or arise out of any failure by the Company
to fulfill any undertaking included in the Shelf Registration Statement and the
Company will reimburse such Selling
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Shareholder for any reasonable legal or other expenses reasonably incurred in
investigating, defending or preparing to defend any such action, proceeding or
claim; provided, however, that the Company shall not be liable to such Selling
Shareholder in any such case to the extent that such loss, claim, damage or
liability arises out of, or is based upon, an Untrue Statement made in such
Shelf Registration Statement in reliance upon and in conformity with written
information furnished to the Company by or on behalf of such Selling Shareholder
specifically for use in preparation of the Shelf Registration Statement, or the
failure of such Selling Shareholder to comply with the covenants and agreements
contained in Section 11.1 or 11.2 hereof respecting sale of the Registrable
Securities or any statement or omission in any prospectus that is corrected in
any subsequent prospectus that was delivered to the Selling Shareholder prior to
the pertinent sale or sales by the Selling Shareholder.
The Purchaser agrees to indemnify and hold harmless the Company (and
each person, if any, who controls the Company within the meaning of Section 15
of the Securities Act, each officer of the Company who signs the Shelf
Registration Statement and each director of the Company) from and against any
losses, claims, damages or liabilities to which the Company (or any the officer,
director or controlling person) may become subject (under the Securities Act or
otherwise), insofar as such losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) arise out of, or are based upon, the failure
by the Purchaser to comply with the covenants and agreements contained in
Section 11.1 or 11.2 hereof respecting sale of the Registrable Securities, or
any Untrue Statement contained in the Shelf Registration Statement on or after
the effective date thereof, or in any prospectus supplement as of its issue date
or date of any sale by the Purchaser thereunder, if such Untrue Statement was
made in reliance upon and in conformity with written information furnished by or
on behalf of the Purchaser specifically for use in preparation of the Shelf
Registration Statement, and the Purchaser will reimburse the Company (or such
officer, director or controlling person), as the case may be, for any legal or
other expenses reasonably incurred in investigating, defending or preparing to
defend any such action, proceeding or claim; provided that in no event shall any
indemnity by the Purchaser under this Section 11.3 exceed the gross proceeds
received by the Purchaser from the sale of Registrable Securities covered by
such Shelf Registration Statement.
Promptly after receipt by any indemnified person of a notice of a claim
or the beginning of any action in respect of which indemnity is to be sought
against an indemnifying person pursuant to this Section 11.3, such indemnified
person shall notify the indemnifying person in writing of such claim or of the
commencement of such action, and, subject to the provisions hereinafter stated,
in case any such action shall be brought against an indemnified person and such
indemnifying person shall have been notified thereof, such indemnifying person
shall be entitled to participate therein, and, to the extent it shall wish, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified person. After notice from the indemnifying person to such
indemnified person of its election to assume the defense thereof, such
indemnifying person shall not be liable to such indemnified person for any legal
expenses subsequently incurred by such indemnified person in connection with the
defense thereof; provided, however, that if there exists or shall exist a
conflict of interest that would make it
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inappropriate, in the opinion of counsel to the indemnified person, for the same
counsel to represent both the indemnified person and such indemnifying person or
any affiliate or associate thereof, the indemnified person shall be entitled to
retain its own counsel at the expense of such indemnifying person; provided,
however, that no indemnifying person shall be responsible for the fees and
expenses of more than one separate counsel for all indemnified parties.
11.4 Termination of Conditions and Obligations. The conditions
precedent imposed by Section 5 or this Section 11 upon the transferability of
the Registrable Securities shall cease and terminate as to any particular number
of the Registrable Securities when such Registrable Securities shall have been
sold or otherwise disposed of in accordance with the intended method of
disposition set forth in the Shelf Registration Statement covering such
Registrable Securities or at such time as an opinion of counsel satisfactory to
the Company shall have been rendered to the effect that such conditions are not
necessary in order to comply with the Securities Act.
11.5 Information Available. So long as the Purchaser continues to own
any of the Registrable Securities and the Shelf Registration Statement is
effective covering the resale of Registrable Securities owned by such person,
the Company will make available to each such person:
(a) as soon as practicable after available (but in the case of the
Company's Annual Report to Shareholders, within one hundred twenty (120) days
after the end of each fiscal year of the Company), one copy of (i) its Annual
Report to Shareholders (which Annual Report shall contain financial statements
audited in accordance with generally accepted auditing standards certified by a
national firm of certified public accountants); (ii) its Annual Report on Form
10-K (excluding exhibits); (iii) its quarterly reports on Form 10-Q (excluding
exhibits); (iv) its Proxy Statement; and (v) its current reports on Form 8-K, if
any (excluding exhibits);
(b) upon the request of any such person, all exhibits excluded by the
parentheticals to subparagraphs (a)(ii),(iii) and (v) of this Section 11.5, in
the form generally available to the public; and
(c) upon the reasonable request of any such person, an adequate number
of copies of the prospectuses and supplements to supply to any other party
requiring such prospectuses.
11.6 Changes in Information. The Purchaser agrees to promptly notify
the Company of any changes in the information set forth in the Shelf
Registration Statement regarding such person or such person's plan of
distribution set forth in such Shelf Registration Statement.
Section 12. Notices.
All notices, requests, consents and other communications hereunder
shall be in writing, shall be sent by confirmed facsimile or mailed by
first-class registered or certified airmail, or
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nationally recognized overnight express courier, postage prepaid, and shall be
deemed given when so sent in the case of facsimile transmission, or when so
received in the case of mail or courier, and addressed as follows:
(a) if to the Company, to:
Diametrics Medical, Inc.
2658 Patton Road
Roseville, Minnesota 55113
Attention: David T. Giddings, Chairman, CEO and President
Phone: (612) 639-8035
Fax: (612) 638-1197
with a copy to:
Dorsey & Whitney LLP
220 South 6th Street
Minneapolis, Minnesota 55402
Attention: Kenneth Cutler, Esq.
Phone: (612) 340-2740
Fax: (612) 340-8738
(b) if to the Purchaser, to:
Johnson & Johnson Development Corporation
One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933
Attention: Tom Gorrie
Phone: (732) 524-6730
Fax: (732) 524-5310
with a copy to:
Johnson & Johnson, Inc.
Office of General Counsel
One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933
Attention: General Counsel
Phone: (732) 524-0400
Fax: (732) 524-2788
Any change of an address set forth in this Section 12 may be accomplished by
means of a notice sent in accordance with the terms of this Section 12.
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Section 13. Miscellaneous.
13.1 Waivers and Amendments. Neither this Agreement nor any provision
hereof may be changed, waived, discharged, terminated, modified or amended
except upon the written consent of the Company and the Purchaser.
13.2 Sections; Headings; Dollar Amounts. Unless otherwise specified,
all references in this Agreement to "Sections" shall be to Sections of this
Agreement. The headings of the various sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed to be part of
this Agreement. All currency referred to herein shall be in U.S.
dollars.
13.3 Severability. In case any provision contained in this Agreement
should be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall
not in any way be affected or impaired thereby.
13.4 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Minnesota as applied to contracts
entered into and performed entirely in Minnesota by Minnesota residents, without
regard to conflicts of law principles.
13.5 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which, when
taken together, shall constitute but one instrument, and shall become effective
when one or more counterparts have been signed by each party hereto and
delivered to the other parties. Delivery of an executed counterpart by facsimile
shall be the same as delivery of an original counterpart.
13.6 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
13.7 Entire Agreement. This Agreement and other documents delivered
pursuant hereto, including the exhibits, constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof.
13.8 Payment of Fees and Expenses. Each of the Company and the
Purchaser shall bear its own expenses and legal fees incurred on its behalf with
respect to this Agreement and the transactions contemplated hereby. If any
action at law or in equity is necessary to enforce or interpret the terms of
this Agreement, the prevailing party shall be entitled to reasonable attorney's
fees, costs and necessary disbursements in addition to any other relief to which
such party may be entitled.
* * * * *
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In Witness Whereof, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the day and year first
above written.
DIAMETRICS MEDICAL, INC.
By: /s/ David T. Giddings
-------------------------
Name: David T. Giddings
Title: Chairman, President & CEO
JOHNSON & JOHNSON DEVELOPMENT
CORPORATION
By: /s/ Thomas M. Gorrie
-------------------------
Name: Thomas M. Gorrie
Title: Vice President
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APPENDIX I
DIAMETRICS MEDICAL, INC.
PURCHASER'S CERTIFICATE OF RESALE OF THE SHARES
(i) The undersigned, an officer of, or other person duly authorized by
- - - -------------------------------------------------------------------------------
[fill in official name of individual or institution]
hereby certifies that he/she [said institution] is the Purchaser of the Shares
evidenced by the attached stock certificate(s) and as such, sold such Shares on
__________________ in accordance with shelf registration statement number
- - - --------------------------------------------------------------------------------
[fill in the number of or otherwise identify shelf registration statement]
and the requirement of delivering a current prospectus and current annual,
quarterly and current reports (Forms 10-K, 10-Q and 8-K) by the Company has been
complied with in connection with such sale.
Print or Type:
Name of Purchaser:
--------------------------------
Name of Individual representing Purchaser:
--------------------------------
Title of Individual representing Purchaser:
--------------------------------
Signature by:
Individual representing Purchaser:
--------------------------------
23
<PAGE>
EXHIBIT A
[Schedule of Exceptions]
24
<PAGE>
EXHIBIT B
[Form of Legal Opinion]
25
<PAGE>
EXHIBIT C
[Form of Officer Certificate]
26
<PAGE>
Exhibit 10.3
SEVERANCE PAY AGREEMENT
(CHANGE OF CONTROL)
THIS AGREEMENT is made as of the 31st day of July 1998,
between Diametrics Medical, Inc., a Minnesota corporation (the "Company") and
David T. Giddings ("Employee").
WITNESSETH THAT:
WHEREAS, it is the purpose of this Agreement to specify the
financial arrangements that the Company will provide to Employee upon Employee's
separation from employment with the Company or one of its subsidiaries under the
circumstances described herein; and
WHEREAS, this Agreement is adopted in the belief that it is in
the best interests of the Company and its shareholders to provide stable
conditions of employment for Employee, thereby minimizing personnel turnover and
enhancing the Company's and its subsidiaries' ability to recruit highly
qualified people.
NOW, THEREFORE, to assure the Company that it will have the
continued dedication of Employee notwithstanding the possibility, threat or
occurrence of a bid to take over control of the Company, and to induce Employee
to remain in the employ of the Company or the subsidiary of the Company with
which Employee is employed (the "Subsidiary"), and for other good and valuable
consideration, the Company and Employee agree as follows:
1. Term of Agreement.
This Agreement shall be for a three-year term commencing on
the date hereof and shall be automatically renewed for an additional three-year
term thereafter unless canceled in writing by either party hereto at least 60
days prior to expiration of the initial or any renewal term; provided that this
Agreement shall continue for at least two years after a Change of Control that
occurs during the term of this Agreement.
2. Termination of Employment.
(i) If a Change in Control (as defined in Section 3(i) hereof)
occurs during the term of this Agreement and any of the events described in (a)
or (b) below shall occur within two years after such Change of Control, then
Employee shall be entitled to receive the cash payment provided in Section 4
hereof:
(a) the Company or the Subsidiary, as the case may
be, shall have exercised its right to terminate Employee
without Cause (as defined in Section 3(iii) hereof); or
-1-
<PAGE>
(b) Employee shall have voluntarily exercised
Employee's option to terminate Employee's employment for Good
Reason (as defined in Section 3(ii) hereof). Notice of
election of this option must identify Employee and set forth
in reasonable detail the facts and circumstances claimed to
constitute Good Reason.
(ii) From and after the date of a Change in Control, the
Company or the Subsidiary, as the case may be, shall have the right to terminate
Employee from employment at any time during the term of this Agreement for Cause
by written notice to Employee, specifying the particulars of the conduct of
Employee forming the basis for such termination, and Employee shall not be
entitled to any payment pursuant to Section 4 for termination for Cause.
(iii) From and after the date of a Change in Control during
the term of this Agreement, Employee shall not be removed from employment with
the Company or the Subsidiary, as the case may be, except as provided in Section
2(i) or (ii) hereof or as a result of Employee's Disability (as defined in
Section 3(iv) hereof) or Employee's death. Employee's rights upon termination of
employment prior to a Change in Control or after the expiration of the term of
this Agreement shall be governed by the Severance Pay Agreement (Termination
Without Cause) applicable to Employee in effect at the time of termination.
Any notice given by Employee pursuant to this Section 2 shall
be effective on the date it is given by Employee.
3. Definitions
(i) A "Change in Control" shall mean the occurrence of any of
the following events as a result of a transaction or series of transactions:
(a) a change in control of the Company of a nature required
to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended ("Exchange Act"), whether or not the Company is
then subject to such reporting requirement;
(b) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner"
(as defined in Rule 13d-3 promulgated under the Exchange Act),
directly or indirectly, of securities of the Company representing
20% or more of the combined voting power of the Company's then
outstanding securities;
(c) individuals who at the date hereof constitute the Board
of Directors of the Company cease to constitute a majority
thereof, provided that such change is the direct or indirect
result of a proxy fight and contested election for positions on
the Board; or
-2-
<PAGE>
(d) the Board of Directors of the Company determines, in its
sole and absolute discretion, that there has been a change in
control of the Company.
(ii) "Good Reason" shall mean the occurrence of any of the
following events:
(a) the assignment to Employee of employment
responsibilities which are not of comparable responsibility and
status as the employment responsibilities held by Employee
immediately prior to a Change in Control;
(b) a reduction by the Company or by the Subsidiary, as the
case may be, in Employee's compensation (including targeted bonus
compensation) as in effect immediately prior to a Change in
Control;
(c) the Company's or the Subsidiary's requiring Employee to
be based anywhere other than within fifty (50) miles of
Employee's office location immediately prior to a Change in
Control, except for requirements of temporary travel on the
Company's business to an extent substantially consistent with
Employee's business travel obligations immediately prior to a
Change in Control;
(d) except to the extent otherwise required by applicable
law, the failure by the Company or the Subsidiary to continue in
effect any benefit or compensation plan, stock ownership plan,
stock purchase plan, bonus plan, life insurance plan,
health-and-accident plan or disability plan in which Employee is
participating immediately prior to a Change in Control (or plans
providing Employee with substantially similar benefits), the
taking of any action by the Company or the Subsidiary which would
adversely affect Employee's participation in, or materially
reduce Employee's benefits under, any of such plans or deprive
Employee of any material fringe benefit enjoyed by Employee
immediately prior to such Change in Control, or the failure by
the Company or the Subsidiary to provide Employee with the number
of paid vacation days to which Employee is entitled immediately
prior to such Change in Control in accordance with the Company's
or such Subsidiary's vacation policy as then in effect; or
(e) the failure by the Company to obtain, as specified in
Section 6(i) hereof, an assumption of the obligations of the
Company to perform this Agreement by any successor to the
Company.
Notwithstanding the foregoing, none of the forgoing events shall be considered
"Good Reason" if it occurs in connection with the Employee's death or
disability.
-3-
<PAGE>
(iii) "Cause" shall mean termination by the Company or the
Subsidiary, as the case may be, of Employee's employment based upon (a) the
willful and continued failure by Employee substantially to perform Employee's
duties and obligations (other than any such failure resulting from Employee's
incapacity due to physical or mental illness) or (b) the willful engaging by
Employee in misconduct which is materially injurious to the Company or any of
its subsidiaries, monetarily or otherwise. For purposes of this paragraph, no
act, or failure to act, on Employee's part shall be considered "willful" unless
done, or omitted to be done, by Employee in bad faith and without reasonable
belief that Employee's action or omission was in the best interests of the
Company and its subsidiaries.
(iv) "Disability" shall mean any physical or mental condition
which would qualify Employee for a disability benefit under the long-term
disability plan of the Company or the Subsidiary.
4. Benefits Upon Termination Under Section 2(i)
Upon the termination of the employment of Employee pursuant to
Section 2(i) hereof, Employee shall be entitled to receive the benefits
specified in this Section 4. The amounts due to Employee under subparagraphs (a)
and (b) of this Section 4 shall be paid to Employee not later than one business
day prior to the date that the termination of Employee's employment becomes
effective.
(a) The Company shall pay to Employee (i) the full base salary
earned and other compensation (other than any bonus referred to in clause (ii)
below) by Employee and unpaid through the date that the termination of
Employee's employment becomes effective, at the rate in effect at the time
written notice of termination (voluntary or involuntary) was given, (ii) any
amount earned by Employee as a bonus with respect to the fiscal year of the
Company preceding the termination of his employment if such bonus has not
theretofore been paid to Employee, (iii) an amount equal to a pro rata portion,
based on number of days elapsed, of the bonus Employee would have earned for the
year in which termination is effective, assuming for such purposes that the
Company achieves targeted performance, and (iii) an amount representing vacation
pay earned or accrued by Employee but not taken.
(b) In lieu of any further base salary payments to Employee
for periods subsequent to the date that the termination of Employee's employment
becomes effective, the Company shall pay as severance pay to Employee a lump-sum
cash amount equal to three (3) times Employee's full base salary in effect
immediately prior to termination or occurrence of an event creating "Good
Reason", plus the targeted bonus Employee would have earned for the year in
which termination is effective, assuming for such purposes that the company and
Employee achieve targeted performance.
-4-
<PAGE>
(c) In the event that Employee becomes entitled to payments
under Section 4(b) hereof, the Company shall cause its independent auditors
promptly to review, at the Company's sole expense, the applicability of Section
4999 of the Code to such payments. If such auditors shall determine that any
payment or distribution of any type by the Company to Employee or for Employee's
benefit, whether paid or payable or distributed or distributable pursuant to the
terms of this Agreement or otherwise (the "Total Payments"), would be subject to
the excise tax imposed by Section 4999 of the Code, or any interest or penalties
with respect to such excise tax (such excise tax, together with any such
interest and penalties, are collectively referred to as the "Excise Tax"), then
Employee shall be entitled to receive an additional cash payment (a "Gross-Up
Payment") within 30 days of such determination equal to an amount such that
after payment by Employee of all taxes (including any interest or penalties
imposed with respect to such taxes), including any Excise Tax, imposed upon the
Gross-Up Payment, Employee would retain an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Total Payments. For purposes of the foregoing
determination, Employee's tax rate shall be deemed to be the highest statutory
marginal state and Federal tax rate (on a combined basis) (including Employee's
share of FICA and Medicare taxes) then in effect. If no determination by the
Company's auditors is made prior to the time a tax return reflecting the Total
Payments is required to be filed by Employee, Employee will be entitled to
receive a Gross-Up Payment calculated on the basis of the Total Payments
reported by Employee in such tax return, within 30 days of the filing of such
tax return. In all events, if any tax authority determines that a greater Excise
Tax should be imposed upon the Total Payments than is determined by the
Company's independent auditors or reflected in Employee's tax return pursuant to
this Section 4(c), Employee shall be entitled to receive the full Gross-Up
Payment calculated on the basis of the amount of Excise Tax determined to be
payable by such tax authority from the Company within 30 days of such
determination.
(d) The Company shall also pay to Employee all legal fees and
expenses incurred by Employee in seeking to obtain or enforce any right or
benefit provided to Employee by this Agreement, including any and all expenses
of arbitration in accordance with Section 12 below.
Employee shall not be required to mitigate the amount of any payment provided
for in this Section 4 by seeking other employment or otherwise. The amount of
any payment or benefit provided in this Section 4 shall not be reduced by any
compensation earned by Employee as a result of any employment by another
employer.
5. Successors; Binding Agreement; Assignment.
(i) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise), to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to Employee, to expressly assume and agree to
perform this Agreement
-5-
<PAGE>
in the same manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. Failure of the Company to
obtain such agreement prior to the effectiveness of any such succession shall be
a breach of this Agreement and shall entitle Employee to compensation from the
Company in the same amount and on the same terms as Employee would be entitled
hereunder if Employee terminated his employment after a Change in Control for
Good Reason, except that for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the Termination
Date. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which executes and delivers the agreement provided for in this Section
5(i) or which otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law.
(ii) This Agreement is personal to Employee and Employee may
not assign or transfer any part of Employee's rights or duties hereunder, or any
compensation due to Employee hereunder, to any other person. Notwithstanding the
foregoing, this Agreement shall inure to the benefit of and be enforceable by
Employee's personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
6. Modification; Waiver. No provisions of this Agreement may
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in a writing signed by Employee and such officer as may be
specifically designated by the Board of Directors of the Company. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision shall be deemed a waiver of similar
or dissimilar provisions or conditions at the same or at any prior or subsequent
time.
8. Notice. All notices, requests, demands and all other
communications required or permitted by either party to the other party by this
Agreement (including, without limitation, any notice of termination of
employment) shall be in writing and shall be deemed to have been duly given when
delivered personally or mailed by regular, certified or registered mail, return
receipt requested, at the address of the other party, as follows:
If to the Company, to:
Diametrics Medical, Inc.
2658 Patton Road
Roseville, MN 55113
If to Employee, to:
-6-
<PAGE>
Either party hereto may change its address for purposes of this Section 8 by
giving fifteen (15) days' prior notice to the other party hereto.
9. Severability. If any term or provision of this Agreement or
the application hereof to any person or circumstances shall to any extent be
invalid or unenforceable, the remainder of this Agreement or the application of
such term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable shall not be affected thereby, and each term
and provision of this Agreement shall be valid and enforceable to the fullest
extent permitted by law.
10. Headings. The headings in this Agreement are inserted for
convenience or reference only and shall not be a part of or control or affect
the meaning of this Agreement.
11. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12. Governing Law/Arbitration. This Agreement has been
executed and delivered in the State of Minnesota and shall in all respects be
governed by, and construed and enforced in accordance with, the laws of the
State of Minnesota, including all matters of construction, validity and
performance. Notwithstanding the foregoing, any dispute as to the occurrence of
a "Change of Control," or as to "Cause" or "Good Reason," shall be settled by
final and binding arbitration by a sole arbitrator in accordance with the Center
for Public Resources Rules for Non-Administered Arbitration of Business Disputes
in effect as of the date of this Agreement. The arbitration shall be governed by
the United States Arbitration Act, 9 U.S.C. ss. 1-16, and judgment upon the
award rendered by the arbitrator may be entered by any court having jurisdiction
thereof. The place of arbitration shall be Minneapolis, Minnesota. The
arbitrator is empowered to award damages in excess of compensatory damages.
13. Entire Agreement. This Agreement supersedes any and all
other oral or written agreements or policies made relating to the subject matter
hereof; provided that, this Agreement shall not supersede or limit in any way
Employee's rights under any benefit plan, program or arrangements in accordance
with their terms.
-7-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed in its name by a duly authorized officer, and Employee has hereunto
set Employee's hand, all as of the date first written above.
Diametrics Medical, Inc.
By /s/ Mark B. Knudson
---------------------------------
Its Director
-------------------------------
Employee
/s/ David T. Giddings
-----------------------------------
-8-
<PAGE>
Exhibit 10.4
SEVERANCE PAY AGREEMENT
(CHANGE OF CONTROL)
THIS AGREEMENT is made as of the 31st day of July 1998,
between Diametrics Medical, Inc., a Minnesota corporation (the "Company") and
___________________ ("Employee").
WITNESSETH THAT:
WHEREAS, it is the purpose of this Agreement to specify the
financial arrangements that the Company will provide to Employee upon Employee's
separation from employment with the Company or one of its subsidiaries under the
circumstances described herein; and
WHEREAS, this Agreement is adopted in the belief that it is in
the best interests of the Company and its shareholders to provide stable
conditions of employment for Employee, thereby minimizing personnel turnover and
enhancing the Company's and its subsidiaries' ability to recruit highly
qualified people.
NOW, THEREFORE, to assure the Company that it will have the
continued dedication of Employee notwithstanding the possibility, threat or
occurrence of a bid to take over control of the Company, and to induce Employee
to remain in the employ of the Company or the subsidiary of the Company with
which Employee is employed (the "Subsidiary"), and for other good and valuable
consideration, the Company and Employee agree as follows:
1. Term of Agreement.
This Agreement shall be for a three-year term commencing on
the date hereof and shall be automatically renewed for an additional three-year
term thereafter unless canceled in writing by either party hereto at least 60
days prior to expiration of the initial or any renewal term; provided that this
Agreement shall continue for at least two years after a Change of Control that
occurs during the term of this Agreement.
2. Termination of Employment.
(i) If a Change in Control (as defined in Section 3(i) hereof)
occurs during the term of this Agreement and any of the events described in (a)
or (b) below shall occur within two years after such Change of Control, then
Employee shall be entitled to receive the cash payment provided in Section 4
hereof:
(a) the Company or the Subsidiary, as the case may be, shall
have exercised its right to terminate Employee without Cause (as
defined in Section 3(iii) hereof); or
-1-
<PAGE>
(b) Employee shall have voluntarily exercised Employee's
option to terminate Employee's employment for Good Reason (as
defined in Section 3(ii) hereof). Notice of election of this
option must identify Employee and set forth in reasonable detail
the facts and circumstances claimed to constitute Good Reason.
(ii) From and after the date of a Change in Control, the
Company or the Subsidiary, as the case may be, shall have the right to terminate
Employee from employment at any time during the term of this Agreement for Cause
by written notice to Employee, specifying the particulars of the conduct of
Employee forming the basis for such termination, and Employee shall not be
entitled to any payment pursuant to Section 4 for termination for Cause.
(iii) From and after the date of a Change in Control during
the term of this Agreement, Employee shall not be removed from employment with
the Company or the Subsidiary, as the case may be, except as provided in Section
2(i) or (ii) hereof or as a result of Employee's Disability (as defined in
Section 3(iv) hereof) or Employee's death. Employee's rights upon termination of
employment prior to a Change in Control or after the expiration of the term of
this Agreement shall be governed by the Severance Pay Agreement (Termination
Without Cause) applicable to Employee in effect at the time of termination.
Any notice given by Employee pursuant to this Section 2 shall
be effective on the date it is given by Employee.
3. Definitions
(i) A "Change in Control" shall mean the occurrence of any of
the following events as a result of a transaction or series of transactions:
(a) a change in control of the Company of a nature required
to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended ("Exchange Act"), whether or not the Company is
then subject to such reporting requirement;
(b) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner"
(as defined in Rule 13d-3 promulgated under the Exchange Act),
directly or indirectly, of securities of the Company representing
20% or more of the combined voting power of the Company's then
outstanding securities;
(c) individuals who at the date hereof constitute the Board
of Directors of the Company cease to constitute a majority
thereof, provided that such change is the direct or indirect
result of a proxy fight and contested election for positions on
the Board; or
-2-
<PAGE>
(d) the Board of Directors of the Company determines, in its
sole and absolute discretion, that there has been a change in
control of the Company.
(ii) "Good Reason" shall mean the occurrence of any of the
following events:
(a) the assignment to Employee of employment
responsibilities which are not of comparable responsibility and
status as the employment responsibilities held by Employee
immediately prior to a Change in Control;
(b) a reduction by the Company or by the Subsidiary, as the
case may be, in Employee's compensation (including targeted bonus
compensation) as in effect immediately prior to a Change in
Control;
(c) the Company's or the Subsidiary's requiring Employee to
be based anywhere other than within fifty (50) miles of
Employee's office location immediately prior to a Change in
Control, except for requirements of temporary travel on the
Company's business to an extent substantially consistent with
Employee's business travel obligations immediately prior to a
Change in Control;
(d) except to the extent otherwise required by applicable
law, the failure by the Company or the Subsidiary to continue in
effect any benefit or compensation plan, stock ownership plan,
stock purchase plan, bonus plan, life insurance plan,
health-and-accident plan or disability plan in which Employee is
participating immediately prior to a Change in Control (or plans
providing Employee with substantially similar benefits), the
taking of any action by the Company or the Subsidiary which would
adversely affect Employee's participation in, or materially
reduce Employee's benefits under, any of such plans or deprive
Employee of any material fringe benefit enjoyed by Employee
immediately prior to such Change in Control, or the failure by
the Company or the Subsidiary to provide Employee with the number
of paid vacation days to which Employee is entitled immediately
prior to such Change in Control in accordance with the Company's
or such Subsidiary's vacation policy as then in effect; or
(e) the failure by the Company to obtain, as specified in
Section 6(i) hereof, an assumption of the obligations of the
Company to perform this Agreement by any successor to the
Company.
Notwithstanding the foregoing, none of the forgoing events shall be considered
"Good Reason" if it occurs in connection with the Employee's death or
disability.
-3-
<PAGE>
(iii) "Cause" shall mean termination by the Company or the
Subsidiary, as the case may be, of Employee's employment based upon (a) the
willful and continued failure by Employee substantially to perform Employee's
duties and obligations (other than any such failure resulting from Employee's
incapacity due to physical or mental illness) or (b) the willful engaging by
Employee in misconduct which is materially injurious to the Company or any of
its subsidiaries, monetarily or otherwise. For purposes of this paragraph, no
act, or failure to act, on Employee's part shall be considered "willful" unless
done, or omitted to be done, by Employee in bad faith and without reasonable
belief that Employee's action or omission was in the best interests of the
Company and its subsidiaries.
(iv) "Disability" shall mean any physical or mental condition
which would qualify Employee for a disability benefit under the long-term
disability plan of the Company or the Subsidiary.
4. Benefits Upon Termination Under Section 2(i)
Upon the termination of the employment of Employee pursuant to
Section 2(i) hereof, Employee shall be entitled to receive the benefits
specified in this Section 4. The amounts due to Employee under subparagraphs (a)
and (b) of this Section 4 shall be paid to Employee not later than one business
day prior to the date that the termination of Employee's employment becomes
effective.
(a) The Company shall pay to Employee (i) the full base salary
earned and other compensation (other than any bonus referred to in clause (ii)
below) by Employee and unpaid through the date that the termination of
Employee's employment becomes effective, at the rate in effect at the time
written notice of termination (voluntary or involuntary) was given, (ii) any
amount earned by Employee as a bonus with respect to the fiscal year of the
Company preceding the termination of his employment if such bonus has not
theretofore been paid to Employee, (iii) an amount equal to a pro rata portion,
based on number of days elapsed, of the bonus Employee would have earned for the
year in which termination is effective, assuming for such purposes that the
Company achieves targeted performance, and (iii) an amount representing vacation
pay earned or accrued by Employee but not taken.
(b) In lieu of any further base salary payments to Employee
for periods subsequent to the date that the termination of Employee's employment
becomes effective, the Company shall pay as severance pay to Employee a lump-sum
cash amount equal to two (2) times Employee's full base salary in effect
immediately prior to termination or occurrence of an event creating "Good
Reason" plus the targeted bonus Employee would have earned for the year in which
termination is effective, assuming for such purposes that the company and
employee achieve targeted performance.
-4-
<PAGE>
(c) In the event that Employee becomes entitled to payments
under Section 4(b) hereof, the Company shall cause its independent auditors
promptly to review, at the Company's sole expense, the applicability of Section
4999 of the Code to such payments. If such auditors shall determine that any
payment or distribution of any type by the Company to Employee or for Employee's
benefit, whether paid or payable or distributed or distributable pursuant to the
terms of this Agreement or otherwise (the "Total Payments"), would be subject to
the excise tax imposed by Section 4999 of the Code, or any interest or penalties
with respect to such excise tax (such excise tax, together with any such
interest and penalties, are collectively referred to as the "Excise Tax"), then
Employee shall be entitled to receive an additional cash payment (a "Gross-Up
Payment") within 30 days of such determination equal to an amount such that
after payment by Employee of all taxes (including any interest or penalties
imposed with respect to such taxes), including any Excise Tax, imposed upon the
Gross-Up Payment, Employee would retain an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Total Payments. For purposes of the foregoing
determination, Employee's tax rate shall be deemed to be the highest statutory
marginal state and Federal tax rate (on a combined basis) (including Employee's
share of FICA and Medicare taxes) then in effect. If no determination by the
Company's auditors is made prior to the time a tax return reflecting the Total
Payments is required to be filed by Employee, Employee will be entitled to
receive a Gross-Up Payment calculated on the basis of the Total Payments
reported by Employee in such tax return, within 30 days of the filing of such
tax return. In all events, if any tax authority determines that a greater Excise
Tax should be imposed upon the Total Payments than is determined by the
Company's independent auditors or reflected in Employee's tax return pursuant to
this Section 4(c), Employee shall be entitled to receive the full Gross-Up
Payment calculated on the basis of the amount of Excise Tax determined to be
payable by such tax authority from the Company within 30 days of such
determination.
(d) The Company shall also pay to Employee all legal fees and
expenses incurred by Employee in seeking to obtain or enforce any right or
benefit provided to Employee by this Agreement, including any and all expenses
of arbitration in accordance with Section 12 below.
Employee shall not be required to mitigate the amount of any payment provided
for in this Section 4 by seeking other employment or otherwise. The amount of
any payment or benefit provided in this Section 4 shall not be reduced by any
compensation earned by Employee as a result of any employment by another
employer.
5. Successors; Binding Agreement; Assignment.
(i) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise), to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to Employee, to expressly assume and agree to
perform this Agreement
-5-
<PAGE>
in the same manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. Failure of the Company to
obtain such agreement prior to the effectiveness of any such succession shall be
a breach of this Agreement and shall entitle Employee to compensation from the
Company in the same amount and on the same terms as Employee would be entitled
hereunder if Employee terminated his employment after a Change in Control for
Good Reason, except that for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the Termination
Date. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which executes and delivers the agreement provided for in this Section
5(i) or which otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law.
(ii) This Agreement is personal to Employee and Employee may
not assign or transfer any part of Employee's rights or duties hereunder, or any
compensation due to Employee hereunder, to any other person. Notwithstanding the
foregoing, this Agreement shall inure to the benefit of and be enforceable by
Employee's personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
6. Modification; Waiver. No provisions of this Agreement may
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in a writing signed by Employee and such officer as may be
specifically designated by the Board of Directors of the Company. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision shall be deemed a waiver of similar
or dissimilar provisions or conditions at the same or at any prior or subsequent
time.
8. Notice. All notices, requests, demands and all other
communications required or permitted by either party to the other party by this
Agreement (including, without limitation, any notice of termination of
employment) shall be in writing and shall be deemed to have been duly given when
delivered personally or mailed by regular, certified or registered mail, return
receipt requested, at the address of the other party, as follows:
If to the Company, to:
Diametrics Medical, Inc.
2658 Patton Road
Roseville, MN 55113
If to Employee, to:
-6-
<PAGE>
Either party hereto may change its address for purposes of this Section 8 by
giving fifteen (15) days' prior notice to the other party hereto.
9. Severability. If any term or provision of this Agreement or
the application hereof to any person or circumstances shall to any extent be
invalid or unenforceable, the remainder of this Agreement or the application of
such term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable shall not be affected thereby, and each term
and provision of this Agreement shall be valid and enforceable to the fullest
extent permitted by law.
10. Headings. The headings in this Agreement are inserted for
convenience or reference only and shall not be a part of or control or affect
the meaning of this Agreement.
11. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12. Governing Law/Arbitration. This Agreement has been
executed and delivered in the State of Minnesota and shall in all respects be
governed by, and construed and enforced in accordance with, the laws of the
State of Minnesota, including all matters of construction, validity and
performance. Notwithstanding the foregoing, any dispute as to the occurrence of
a "Change of Control," or as to "Cause" or "Good Reason," shall be settled by
final and binding arbitration by a sole arbitrator in accordance with the Center
for Public Resources Rules for Non-Administered Arbitration of Business Disputes
in effect as of the date of this Agreement. The arbitration shall be governed by
the United States Arbitration Act, 9 U.S.C. ss. 1-16, and judgment upon the
award rendered by the arbitrator may be entered by any court having jurisdiction
thereof. The place of arbitration shall be Minneapolis, Minnesota. The
arbitrator is empowered to award damages in excess of compensatory damages.
13. Entire Agreement. This Agreement supersedes any and all
other oral or written agreements or policies made relating to the subject matter
hereof; provided that, this Agreement shall not supersede or limit in any way
Employee's rights under any benefit plan, program or arrangements in accordance
with their terms.
-7-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in its
name by a duly authorized officer, and Employee has hereunto set Employee's
hand, all as of the date first written above.
Diametrics Medical, Inc.
By
--------------------------------
Its
-----------------------------
Employee
-8-
<PAGE>
Exhibit 10.5
SEVERANCE PAY AGREEMENT
(TERMINATION WITHOUT CAUSE)
THIS AGREEMENT is made as of the 31st day of July 1998,
between Diametrics Medical, Inc., a Minnesota corporation (the "Company") and
___________________ ("Employee").
WITNESSETH THAT:
WHEREAS, it is the purpose of this Agreement to specify the
financial arrangements that the Company will provide to Employee upon Employee's
separation from employment with the Company or one of its subsidiaries under the
circumstances described herein; and
WHEREAS, this Agreement is adopted in the belief that it is in
the best interests of the Company and its shareholders to provide stable
conditions of employment for Employee, thereby minimizing personnel turnover and
enhancing the Company's and its subsidiaries' ability to recruit highly
qualified people.
NOW, THEREFORE, to assure the Company that it will have the
continued dedication of Employee notwithstanding the possibility, threat or
occurrence of a bid to take over control of the Company, and to induce Employee
to remain in the employ of the Company or the subsidiary of the Company with
which Employee is employed (the "Subsidiary"), and for other good and valuable
consideration, the Company and Employee agree as follows:
1. Term of Agreement.
This Agreement shall be for a three-year term commencing on
the date hereof and shall be automatically renewed for an additional three-year
term thereafter unless canceled in writing by either party hereto at least 60
days prior to expiration of the initial or any renewal term.
2. Termination of Employment.
(i) The Company or the Subsidiary, as the case may be, shall
at all times have the right to terminate Employee from employment at any time
during the term of this Agreement with or without Cause by written notice to
Employee. If the termination is for Cause, the notice shall specify the
particulars of the conduct of Employee forming the basis for such termination,
and Employee shall not be entitled to any payment pursuant to Section 4 for
termination for Cause.
(ii) Employee's rights upon termination of employment after
the expiration of the term of this Agreement shall be governed by the standard
-1-
<PAGE>
employment termination policy applicable to Employee in effect at the time of
termination.
3. Definitions
"Cause" shall mean termination by the Company or the
Subsidiary, as the case may be, of Employee's employment based upon (a) the
willful and continued failure by Employee substantially to perform Employee's
duties and obligations (other than any such failure resulting from Employee's
incapacity due to physical or mental illness) or (b) the willful engaging by
Employee in misconduct which is materially injurious to the Company or any of
its subsidiaries, monetarily or otherwise. For purposes of this paragraph, no
act, or failure to act, on Employee's part shall be considered "willful" unless
done, or omitted to be done, by Employee in bad faith and without reasonable
belief that his action or omission was in the best interests of the Company and
its subsidiaries.
4. Benefits Upon Termination Under Section 2(i)
Upon the termination of the employment of Employee pursuant to
Section 2(i) hereof without Cause, Employee shall be entitled to receive the
benefits specified in this Section 4.
(a) The Company shall pay to Employee not later than one
business day prior to the date that the termination of Employee's employment
becomes effective.(i) the full base salary earned and other compensation (other
than any bonus referred to in clause (ii) below) by Employee and unpaid through
the date that such termination becomes effective, at the rate in effect at the
time written notice of termination was given, (ii) any amount earned by Employee
as a bonus with respect to the fiscal year of the Company preceding the
termination of Employee's employment if such bonus has not theretofore been paid
to Employee, (iii) an amount equal to a pro rata portion, based on number of
days elapsed, of the bonus Employee would have earned for the year in which
termination is effective, assuming for such purposes that the Company achieves
targeted performance, and (iii) an amount representing vacation pay earned or
accrued by Employee but not taken.
(b) The Company shall pay as severance pay to Employee, (i)
for a period of twelve (12) months following the effective date of such
termination, on the same terms in effect on such date and in accordance with the
Company's then applicable payroll policies, Employee's full base salary then in
effect plus a pro rata portion of the targeted bonus Employee would have earned
for the year in which termination is effective, assuming for such purposes that
the company and employee achieve targeted performance, or, at the option of the
Employee, (ii) a lump-sum payment, paid no later than one business day prior to
the date that the termination of Employee's employment becomes effective, of all
amounts payable under 4b(i) above.
-2-
<PAGE>
Employee shall not be required to mitigate the amount of any payment provided
for in this Section 4 by seeking other employment or otherwise. The amount of
any payment or benefit provided in this Section 4 shall not be reduced by any
compensation earned by Employee as a result of any employment by another
employer.
5. Successors; Binding Agreement; Assignment.
(i) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise), to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to Employee, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle
Employee to compensation from the Company in the same amount and on the same
terms as Employee would be entitled hereunder if Employee's employment were
terminated without Cause. As used in this Agreement, "Company" shall mean the
Company as hereinbefore defined and any successor to its business and/or assets
as aforesaid which executes and delivers the agreement provided for in this
Section 5(i) or which otherwise becomes bound by all the terms and provisions of
this Agreement by operation of law.
(ii) This Agreement is personal to Employee and Employee may
not assign or transfer any part of Employee's rights or duties hereunder, or any
compensation due to Employee hereunder, to any other person. Notwithstanding the
foregoing, this Agreement shall inure to the benefit of and be enforceable by
Employee's personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
6. Modification; Waiver. No provisions of this Agreement may
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in a writing signed by Employee and such officer as may be
specifically designated by the Board of Directors of the Company. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision shall be deemed a waiver of similar
or dissimilar provisions or conditions at the same or at any prior or subsequent
time.
8. Notice. All notices, requests, demands and all other
communications required or permitted by either party to the other party by this
Agreement (including, without limitation, any notice of termination of
employment) shall be in writing and shall be deemed to have been duly given when
delivered personally or mailed by regular, certified or registered mail, return
receipt requested, at the address of the other party, as follows:
-3-
<PAGE>
If to the Company, to:
Diametrics Medical, Inc.
2658 Patton Road
Roseville, MN 55113
If to Employee, to:
Either party hereto may change its address for purposes of this Section 8 by
giving fifteen (15) days' prior notice to the other party hereto.
9. Severability. If any term or provision of this Agreement or
the application hereof to any person or circumstances shall to any extent be
invalid or unenforceable, the remainder of this Agreement or the application of
such term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable shall not be affected thereby, and each term
and provision of this Agreement shall be valid and enforceable to the fullest
extent permitted by law.
10. Headings. The headings in this Agreement are inserted for
convenience or reference only and shall not be a part of or control or affect
the meaning of this Agreement.
11. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12. Governing Law/Arbitration. This Agreement has been
executed and delivered in the State of Minnesota and shall in all respects be
governed by, and construed and enforced in accordance with, the laws of the
State of Minnesota, including all matters of construction, validity and
performance. Notwithstanding the foregoing, any dispute as to "Cause" shall be
settled by final and binding arbitration by a sole arbitrator in accordance with
rules of the Center for Public Resources Rules for Non-Administered Arbitration
of Business Disputes in effect as of the date of this Agreement. The arbitration
shall be governed by the United States Arbitration Act, 9 U.S.C. ss. 1-16, and
judgment upon the award rendered by the arbitrator may be entered by any court
having jurisdiction thereof. The place of arbitration shall be Minneapolis,
Minnesota.
13. Entire Agreement. This Agreement supersedes any and all
other oral or written agreements or policies made relating to the subject matter
hereof; provided that, this Agreement shall not supersede or limit in any way
Employee's rights under any benefit plan, program or arrangements in accordance
with their terms.
-4-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed in its name by a duly authorized officer, and Employee has hereunto
set his hand, all as of the date first written above.
Diametrics Medical, Inc.
By
---------------------------------
Its
------------------------------
Employee
-5-
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,170,486
<SECURITIES> 6,558,430
<RECEIVABLES> 5,319,173
<ALLOWANCES> 260,729
<INVENTORY> 4,253,590
<CURRENT-ASSETS> 20,756,354
<PP&E> 20,135,486
<DEPRECIATION> (13,084,981)
<TOTAL-ASSETS> 29,667,872
<CURRENT-LIABILITIES> 5,305,172
<BONDS> 8,245,073
0
0
<COMMON> 233,782
<OTHER-SE> 15,451,528
<TOTAL-LIABILITY-AND-EQUITY> 29,667,872
<SALES> 8,571,181
<TOTAL-REVENUES> 8,571,181
<CGS> 8,159,236
<TOTAL-COSTS> 13,329,651
<OTHER-EXPENSES> 504,281
<LOSS-PROVISION> 118,058
<INTEREST-EXPENSE> 640,819
<INCOME-PRETAX> (13,421,987)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,421,987)
<DISCONTINUED> 0
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<PAGE>
Exhibit 99
CAUTIONARY STATEMENT
The statements contained in this Form 10-Q include forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "PSLRA"). When used in this Form 10-Q in filings by the Company with
the Securities and Exchange Commission, in the Company's press releases,
presentations to securities analysts or investors, and in oral statements made
by or with the approval of an executive officer of the Company, the words or
phrases "expects," "believes," "anticipates," "intends," "will likely result,"
"estimates," "projects," or similar expressions and variations thereof are
intended to identify such forward-looking statements. Any of these
forward-looking statements involve risks and uncertainties that may have a
material adverse effect on the business, results of operations, financial
condition or prospects, financial or other, of the Company and may cause the
Company's actual results to differ materially from the results discussed in the
forward-looking statements.
The following discussion contains cautionary statements regarding the
Company's business and results of operations that investors and others should
consider. This discussion is intended to take advantage of the "safe harbor"
provisions of the PSLRA.
EARLY STAGE OF COMMERCIALIZATION; LIMITED RELEVANT OPERATING HISTORY
The Company was founded in 1990 and until 1995 was engaged primarily in
the research, development and testing of, and the development of manufacturing
capabilities for, the IRMA(R) (Immediate Response Mobile Analysis) System and
the Paratrend(R) 7. Marketing efforts began for both products during 1994. The
Company has limited operating history upon which an evaluation of its prospects
can be made. Such prospects must be considered in light of the risks, expenses
and difficulties frequently encountered in establishing a new business in the
evolving, heavilyregulated medical device industry, which is characterized by an
increasing number of entrants, intense competition and a high failure rate.
ABSENCE OF PROFITABILITY; ANTICIPATED FUTURE LOSSES
The Company has only recently begun to generate revenues and has
incurred net operating losses since its inception. Net losses for the years
ended December 31, 1997, 1996 and 1995 were approximately $21,037,000,
$23,575,000 and $23,046,000, respectively. The Company had an accumulated
deficit of approximately $115,155,000 at September 30, 1998. The Company expects
to incur substantial net operating losses at least through 1999. There is no
assurance that the Company will ever generate substantial revenues or achieve
profitability.
NEW TECHNOLOGY; UNCERTAIN MARKET ACCEPTANCE
The Company's success is dependent upon acceptance of its products by
the medical community as reliable, accurate and cost-effective. Because the
products are point of care blood testing and monitoring devices, they represent
a new practice in the analysis of blood analytes. Critical or stat blood testing
is currently performed primarily by central and stat laboratories of hospitals
or by independent commercial laboratories, rather than at the point of care.
Although professional awareness of point of care blood testing is increasing,
most acute care hospitals have already installed costly benchtop blood testing
instruments for use in their central and stat laboratories and may be reluctant
to change standard operating procedures for performing blood analysis or incur
additional capital expenditures for new blood analysis equipment. In addition,
the limited number of analytes that can be analyzed on the products may cause
certain hospitals not to consider them. The Company is unable to predict how
quickly, if at all, the products will be accepted by members of the medical
community or, if accepted, what the utilization of disposable cartridges and
sensors may be. Therefore, the Company is unable to provide any assurance as to
sales volume of the products or the related disposable cartridges and sensors.
<PAGE>
FUTURE ADDITIONAL CAPITAL REQUIREMENTS
The Company expects that its existing capital resources, future
proceeds of up to $5 million at the Company's option from a put option and stock
purchase agreement with Johnson & Johnson Development Corporation, and its $1
million receivable based credit line, supplemented with warrant and stock option
exercises, capital equipment financing of approximately $1 million per year, and
funding from additional potential corporate alliances, should enable the Company
to maintain its current and planned operations through 1999. Nonetheless, the
Company's capital requirements depend on numerous factors, including the rate of
market acceptance of the Company's products, the level of resources devoted to
expanding the Company's marketing organization and manufacturing capabilities,
the Company's research and development activities, the availability of financing
for capital acquisitions and other factors. The timing and amount of such
capital requirements cannot accurately be predicted. If capital requirements
vary materially from those currently planned, the Company will require
additional capital. The Company has no commitments for any additional financing,
and no assurance exists that any such commitments can be obtained on favorable
terms, if at all. Any additional equity financings may be dilutive to
shareholders, and debt financing, if available, may involve restrictive
covenants. The Company is also pursuing additional corporate strategic
alliances. Such alliances may require the Company to relinquish rights to
certain of its technologies, products or marketing territories.
HIGHLY COMPETITIVE MARKETS; RISK OF TECHNOLOGICAL OBSOLESCENCE
The medical technology industry is characterized by rapidly evolving
technology and intense competition. The Company is aware of one other
commercially available hand-held point of care blood analysis system, which is
manufactured and marketed by i-STAT Corporation. The Company expects that
manufacturers of central and stat laboratory testing equipment will also compete
to maintain their revenues and market share. Many of the companies in the
medical technology industry and manufacturers of central and stat laboratory
equipment have substantially greater capital resources, research and development
staffs and facilities than the Company. Such entities have developed, may be
developing or could in the future attempt to develop additional products
competitive with the Company's. Many of these companies also have substantially
greater experience than the Company in research and development, obtaining
regulatory approvals, manufacturing, and sales and marketing, and may therefore
represent significant competition. There can be no assurance that the Company's
competitors will not succeed in developing or marketing technologies and
products that are more effective or less expensive than those developed or
marketed by the Company or that would render the Company's technology and
products obsolete or noncompetitive. Although the Company believes that its
products may offer certain technological advantages over its competitors'
currently-marketed products, earlier entrants in the market in a therapeutic
area often obtain and maintain significant market share relative to later
entrants. The Company's product pricing is competitive with other point of care
suppliers and is, in general, slightly higher than prices of existing high
volume central and near patient labs operating near capacity, which lack the
convenience and turnaround time of point of care testing. In the future, the
Company may experience competitive pricing pressures that may adversely affect
unit prices and sales levels.
LIMITED MANUFACTURING EXPERIENCE
The Company must manufacture its products in compliance with regulatory
requirements, in sufficient quantities and on a timely basis, while maintaining
product quality and acceptable manufacturing costs. The products consist of two
principal components: portable, microprocessor-based instruments and disposable
sensors. The Company has limited experience producing in large commercial
quantities. Although the Company believes that, based on its manufacturing
experience to date, it will be able to achieve and maintain product accuracy and
reliability when producing in the quantities required for profitable operations,
on a timely basis and at an acceptable cost, there can be no assurance that it
will be able to do so. Also, product design changes, equipment failures,
manufacturing process changes and employee turnover may disrupt existing
operations and impact sales. The instruments are manufactured for the Company by
outside vendors, and there can be no assurance that such vendors will be able to
provide the Company with a sufficient quantity to meet the Company's needs.
<PAGE>
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend in part on its ability to obtain
patent protection for products and processes, to preserve its trade secrets and
to operate without infringing the proprietary rights of third parties. The
validity and breadth of claims covered in medical technology patents involves
complex legal and factual questions and, therefore, may be highly uncertain. No
assurance can be given that any patents under pending patent applications or any
future patent applications will be issued, that the scope of any patent
protection will exclude competitors or provide competitive advantages to the
Company, that any of the Company's patents will be held valid if subsequently
challenged or that others will not claim rights in or ownership to the patents
and other proprietary rights held by the Company. Furthermore, there can be no
assurance that others have not developed or will not develop similar products,
duplicate any of the Company's products or, if patents are issued to the
Company, design around such patents. In addition, whether or not the Company's
patents are issued, others may hold or receive patents which contain claims
having a scope that covers products developed by the Company. The Company also
relies upon unpatented trade secrets to protect its proprietary technology, and
no assurance can be given that others will not independently develop or
otherwise acquire substantially equivalent techniques or otherwise gain access
to the Company's proprietary technology or disclose such technology or that the
Company can ultimately protect meaningful rights to such unpatented proprietary
technology.
RISK OF PATENT LITIGATION
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. Litigation, which
could result in substantial cost to and diversion of effort by the Company, may
be necessary to enforce patents issued to the Company, to protect trade secrets
or know-how owned by the Company, to defend the Company against claimed
infringement of the rights of others or to determine the ownership, scope or
validity of the proprietary rights of the Company and others. An adverse
determination in any such litigation could subject the Company to significant
liabilities to third parties, could require the Company to seek licenses from
third parties and could prevent the Company from manufacturing, selling or using
its products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company is not
currently a party to any patent litigation.
DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL
The success of the Company and of its business strategy is dependent in
large part on the ability of the Company to attract and retain key management
and operating personnel (i.e. Company officers; manufacturing, research and
development, sales, marketing and administrative management; scientists and
engineers; and sales professionals). Such individuals are in high demand and are
often subject to competing offers. In addition, the Company will have an ongoing
need to expand its management personnel and support staff. The loss of the
services of one or more members of the management group or the inability to hire
additional personnel as needed may have an adverse effect on the Company. The
Company maintains employment agreements with senior management and life
insurance coverage on its Chief Executive Officer.
UNCERTAINTY OF GOVERNMENT HEALTH CARE POLICY AND FUTURE REIMBURSEMENT
The willingness of hospitals to purchase the Company's products may
depend on the extent to which hospitals limit capital expenditures due to cost
reimbursement regulations, including regulations promulgated by the Health Care
Financing Administration, and general uncertainty relating to government health
care policy. In addition, sales volumes and prices of the Company's products in
certain markets will be dependent in part on the level of availability of
reimbursement to hospitals for blood analysis from third-party payors, such as
government and private insurance plans, health maintenance organizations and
preferred provider organizations. There can be no assurance that current
reimbursement amounts, if any, will not be decreased in the future, and that any
such decrease will not reduce the demand for or the price of the Company's
products. Any health care reform measures adopted by the federal government
could adversely affect the price of medical devices in the United States or the
amount of reimbursement available, and consequently could be adverse to the
Company. No prediction can be made as to the outcome of any reform initiatives
or their impact on the Company.
<PAGE>
GOVERNMENT REGULATION AND NEW PRODUCT DEVELOPMENT
Human diagnostic products are subject, prior to clearance for
marketing, to rigorous pre-clinical and clinical testing mandated by the United
States Food and Drug Administration (the "FDA") and comparable agencies in other
countries and, to a lesser extent, by state regulatory authorities. The Company
has obtained pre-market notification clearances under Section 510(k) ("Section
501(k)") of the Food, Drug and Cosmetic Act (the "FDC Act") to market the IRMA
SL System to test blood gases, electrolytes (i.e., inorganic compounds including
sodium, potassium, chloride, and ionized calcium), blood urea nitrogen ("BUN")
and hematocrit (i.e., ratio of red blood cells) in whole blood in hospital
laboratories and at the point of care and the Paratrend 7 and Paratrend 7+ to
monitor blood gases and temperature. In early 1998 additional pre-market
notifications were obtained for the addition of glucose testing capability to
the IRMA SL System, and Neotrend for blood gas monitoring of critically ill
neonates. A 510(k) clearance is subject to continual review and later discovery
of previously unknown problems may result in restrictions on the product's
marketing or withdrawal of the product from the market. The Company's long-term
business strategy includes development of cartridges and sensors for performing
additional blood and tissue chemistry tests, and any such additional tests will
be subject to the same regulatory process. No assurance can be given that the
Company will be able to develop such additional products or uses on a timely
basis, if at all, or that the necessary clearances for such products and uses
will be obtained by the Company on a timely basis or at all, or that the Company
will not be subjected to a more extensive prefiling testing and FDA approval
process. The Company also plans to market its products in several foreign
markets. Requirements vary widely from country to country, ranging from simple
product registrations to detailed submissions such as those required by the FDA.
Manufacturing facilities are also subject to FDA inspection on a periodic basis
and the Company and its contract manufacturers must demonstrate compliance with
current Good Manufacturing Practices promulgated by the FDA. The Company will be
required to expend time, resources and effort in the areas of production and
quality control to ensure full technical compliance. If violations of the
applicable regulations are noted during FDA inspections of the Company's
manufacturing facilities or the manufacturing facilities of its contract
manufacturers, the continued marketing of the Company's products may be
adversely affected.
EFFECT OF CLINICAL LABORATORY IMPROVEMENT ACT OF 1988
The Company's products are affected by the Clinical Laboratory
Improvement Amendment of 1988 ("CLIA") which has been implemented by the FDA.
This law is intended to assure the quality and reliability of all medical
testing in the United States regardless of where tests are performed. The
regulations require laboratories performing blood chemistry tests to meet
specified standards in the areas of personnel qualification, administration,
participation in proficiency testing, patient test management, quality control,
quality assurance and inspections. The regulations have established three levels
of regulatory control based on test complexity - "waived," "moderate complexity"
and "high complexity." Although the tests performed by the products have been
categorized as moderate complexity tests, there can be no assurance that they
will continue to be so categorized. Personnel standards for high complexity
tests are more rigorous than those for moderate complexity tests, requiring that
testing personnel have more education and experience than personnel conducting
moderate complexity tests. Any recategorization of the tests performed by the
Company's products as high complexity tests could affect the Company's ability
to successfully market them. As a result of the CLIA requirements, hospitals may
be discouraged from expanding point of care analysis and previously unregulated
testing markets, including physician office laboratories and small volume test
sites, and may be dissuaded from initiating, continuing or expanding patient
testing. There can be no assurance that the CLIA regulations or future
administrative interpretations of CLIA or various state regulations requiring
licensed technicians to operate point of care devices will not have a material
adverse effect on the Company.
PRODUCT LIABILITY RISK; NO ASSURANCE INSURANCE IS ADEQUATE
The Company faces an inherent business risk of exposure to product
liability claims in the event that the use of its products is alleged to have
resulted in adverse effects to a patient. Although the Company has not
experienced any product liability claims to date, any such claims could have an
adverse impact on the Company. The Company maintains a general insurance policy
which includes coverage for product liability claims. The policy is limited to a
maximum of $1,000,000 per product liability claim and an annual aggregate policy
limit of $2,000,000. The Company also carries umbrella liability insurance which
provides coverage up to $10,000,000. There can be no assurance that liability
claims will not exceed the coverage limits of such policies or that such
insurance will continue to be available on commercially
<PAGE>
reasonable terms or at all. Consequently, a product liability claim or other
claim with respect to uninsured liabilities or in excess of insured liabilities
could have a material adverse effect on the Company.
DEPENDENCE ON CONTRACT MANUFACTURERS AND SUPPLIERS
The Company's instruments, both monitors and IRMA analyzers, are
manufactured for the Company by single vendors, generally from off-the-shelf
components. A few components are supplied by a single source and manufactured to
the Company's specifications. Although the Company believes that it could find
alternative vendors, any interruption in supply could have a material adverse
effect on the Company. Although the Company believes that alternative sources
for key components are available, any interruption in supply of these components
could have a material adverse effect on the Company's ability to manufacture its
products.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
A significant portion of the Company's sales are international. Doing
business outside of the United States is subject to various risks. Changes in
overseas economic and political conditions, currency exchange rate fluctuations,
foreign tax laws or tariffs or other trade regulations could have a material
adverse effect on the Company's ability to market its products internationally
and therefore on its business, financial condition and results of operations.
The Company's business is also expected to subject it and its representatives,
agents and distributors to laws and regulations of the foreign jurisdictions in
which they operate or the Company's products are sold. The Company may depend on
foreign distributors and agents for compliance and adherence to foreign laws and
regulations. The regulation of medical devices in a number of such
jurisdictions, particularly in the European Union, continues to develop and
there can be no assurance that new laws or regulations will not have an adverse
effect on the Company's business, financial condition and results of operations.
In addition, the laws of certain foreign countries do not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States. The Company has no control over most of these risks and may be unable to
anticipate changes in international economic and political conditions and,
therefore, may be unable to alter its business practices in time to avoid the
adverse effect of any such changes.
The Company markets a majority of its products through distributors in
international markets, subject to receipt of required foreign regulatory
approvals. There can be no assurance that international distributors for the
Company's products will devote adequate resources to selling its products.
CONTROL BY EXISTING SHAREHOLDERS
As of September 30, 1998, directors, executive officers and principal
shareholders of the Company, and certain of their affiliates, owned beneficially
approximately 43% of the Company's outstanding Common Stock, assuming all vested
stock options, stock purchase warrants and convertible debt held by this group
are exercised or converted in accordance with the terms thereof. Accordingly,
these shareholders, individually and as a group, may be able to influence the
outcome of shareholder votes, including votes concerning the election of
directors, adopting or amending provisions in the Company's Articles of
Incorporation and Bylaws and approving certain mergers or other similar
transactions, such as sales of substantially all of the Company's assets. Such
control by existing shareholders could have the effect of delaying, deferring or
preventing a change in control of the Company.
POSSIBLE VOLATILITY OF STOCK PRICE IN THE PUBLIC MARKET
The securities markets have from time to time experienced significant
price and volume fluctuations that may be unrelated to the operating performance
of particular companies. The market prices of the common stock of many publicly
traded medical device companies have in the past been, and can in the future be
expected to be, especially volatile. Announcements of technological innovations
or new products by the Company or its competitors, developments or disputes
concerning patents or proprietary rights, regulatory developments and economic
and other external factors, as well as period-to-period fluctuations in the
Company's financial results, may have a significant impact on the market price
of the Common Stock. Sales of Common Stock in the public market could adversely
affect prevailing market prices.
<PAGE>
POSSIBLE ISSUANCES OF PREFERRED STOCK; ANTI-TAKEOVER EFFECT OF MINNESOTA LAW
The Board of Directors has authority to issue up to 5,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the shareholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of preferred stock could
have the effect of delaying, deferring or preventing a change in control of the
Company. In addition, certain provisions of Minnesota law applicable to the
Company could have the effect of discouraging certain attempts to acquire the
Company which could deprive the Company's shareholders of opportunities to sell
their shares of Common Stock at prices higher than prevailing market prices.
NO DIVIDENDS
The Company has never paid or declared a dividend on its capital stock
and does not anticipate doing so for the foreseeable future.
YEAR 2000 COMPLIANCE
The Company is addressing the issues associated with computing
difficulties that may affect existing computer systems as a result of
programming code malfunction in distinguishing 21st century dates from 20th
century dates (the "Year 2000" issue). The Company has identified teams to
review its products; its internal financial, manufacturing and other process
control systems; and its interface with major customers and suppliers in order
to assess and remediate Year 2000 issues.
Based upon its assessments to date, the Company believes it will not
experience any material disruption in its operations as a result of Year 2000
problems. However, if major suppliers, including those providing component
parts, electricity, communications and transportation services, experience
difficulties resulting in disruption of critical supplies or services to the
Company, a shutdown of the Company's operations could occur for the duration of
the disruption. The Company is working on minimizing component supply risk by
evaluating alternative suppliers in cases where it is single-sourced, with
completion of this evaluation expected by June 1999. The Company has not yet
developed a contingency plan to provide for continuity of normal business
operations in the event the other described problem scenarios arise, but it will
assess the need to develop such a plan based upon the outcome of compliance
areas currently under review, and the results of remaining survey feedback from
its major suppliers. Assuming no major disruption in service from critical third
party providers, the Company believes that it will be able to manage the Year
2000 transition without any material effect on the Company's results of
operations or financial position.
