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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark one)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________ to __________________.
Commission File No. 0-27600
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OPTICAL SENSORS INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 41-164359
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7615 Golden Triangle Drive
Suite A
Minneapolis, Minnesota 55344-3733
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (612) 944-5857
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Preferred Share Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [x] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 12, 1997, 8,349,279 shares of Common Stock of the
Registrant were outstanding, and the aggregate market value of the Common Stock
of the Registrant as of that date (based upon the last reported sale price of
the Common Stock at that date as reported by the Nasdaq National Market System),
excluding outstanding shares beneficially owned by directors and executive
officers, was $62,403,112.50
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and IV of this Annual Report on Form 10-K incorporate by
reference information (to the extent specific pages are referred to herein) from
the Registrant's Annual Report to Shareholders for the year ended December 31,
1996 (the "1996 Annual Report"). Part III of this Annual Report on Form 10-K
incorporates by reference information (to the extent specific sections are
referred to herein) from the Registrant's Proxy Statement for its 1997 Annual
Meeting to be held May 13, 1997 (the "1997 Proxy Statement").
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PART I
This Form 10-K contains certain forward-looking statements. For this
purpose, any statements contained in this Form 10-K that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"estimate" or "continue" or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, and actual results may differ materially depending on a
variety of factors, including those set forth in the section below entitled
"Certain Important Factors."
Item 1. BUSINESS.
General
Optical Sensors Incorporated (the "Company") has developed the
SensiCath system, a patient-attached, on-demand arterial blood gas ("ABG")
monitoring system, which provides precise and accurate ABG results within 60
seconds without exposure to potentially infectious blood or depleting the
patients blood supply (the "SensiCath System"). ABG tests measure oxygen
("O\2\"), carbon dioxide ("CO\2\") and acid-base ("pH") in a sample of blood
taken from a patient's artery. The Company believes that the SensiCath System is
the first ABG analyzer to be integrated into both an arterial pressure
monitoring line and a critical care patient monitoring system. The SensiCath
System utilizes a disposable, fiberoptic sensor device (the "SensiCath Sensor")
connected to a small modular instrument that can be configured to integrate with
bedside monitoring systems or to serve as a stand-alone monitor. The SensiCath
System is currently available in two configurations. The first configuration of
the SensiCath System combines the SensiCath Sensor with a module (the "OnlineABG
Module") that plugs into bedside monitors manufactured by Marquette Medical
Systems, Inc. ("Marquette"). The second configuration of the SensiCath System
consists of the SensiCath Sensor, the OnlineABG Module and a stand-alone monitor
(the "OpticalCAM/TM/") that can be used as a stand-alone monitoring device or
can interface with bedside monitors manufactured by other manufacturers of
patient monitoring equipment. The Company plans to market the OpticalCAM monitor
to all hospitals regardless of the type of patient monitoring system used by the
hospital. Currently, the OpticalCAM is able to interface with patient monitoring
systems manufactured by the Hewlett-Packard Company and SpaceLabs Medical, Inc.
The two configurations of the SensiCath System give the Company access to over
80% of the monitored critical care beds in the United States. The Company's
strategy is to become the leader in the design, development and
commercialization of sensors and integrated monitoring systems for the
measurement of ABG values and other critical blood analytes at the point-of-care
and thereby establish a new standard of care for critically ill patients.
The Company completed product development of the initial
configuration of the SensiCath System in June 1995 and received 510(k) clearance
to market the SensiCath System from the FDA in January 1996. In April 1996,
Marquette completed development of the OnlineABG Module. Both companies began
marketing the SensiCath System in May 1996. However, full-scale commercial
launch of the SensiCath System was delayed throughout 1996 while Marquette
completed scale-up of commercial production of the OnlineABG Module and an
upgrade to its software package for its Solar patient monitoring systems
necessary to accommodate several new Marquette products and performance
features, including the OnlineABG Module and the SensiCath System. During this
period, the Company implemented a marketing program involving the purchase by
the Company of OnlineABG Modules and the short-term rental of portable Solar
monitors, which the Company has been providing to customers under various
marketing and rental programs. Marquette released the upgrade to its software
package and commenced commercialization of the upgrade in January 1997. The
Company completed development of the OpticalCAM monitor in September 1996 and
received 510(k) clearance to market the OpticalCAM monitor from the FDA in
January 1997.
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In order to increase market awareness and customer demand for the
SensiCath System, the Company initiated and completed a number of sales and
marketing objectives during 1996. The Company completed the initial hiring of
its sales and marketing staff, identified a distribution partner for European
markets and continued its clinical marketing study program. A number of papers
have been published in medical peer review journals and several abstracts have
been presented at medical conferences regarding the SensiCath System. The
Company has established reference sites for the SensiCath System at key
hospitals and medical centers in the U.S. and Europe. With Marquette's
completion of its Solar software and the introduction of the OpticalCAM monitor,
the Company positioned itself to increase sales and marketing activities in the
first quarter of 1997. In addition, the Company has made initial sales of the
SensiCath System in Europe to its distribution partner and plans to increase
European marketing efforts in the first quarter of 1997.
During 1996, the Company also completed a number of research and
development activities. The Company confirmed through extended clinical
laboratory testing that the SensiCath sensor can be used for 144 hours without
any compromise in performance. The extension from 72 hours to 144 hours of use
will enable customers to realize additional cost savings for their high acuity
patients and potentially expand its use to less acute patients. In May 1996, the
Company submitted a 510(k) application to the FDA covering the 144-hour
SensiCath sensor, which is currently under review. The 144-hour sensor is
currently available for commercial sale outside of the United States. In June
1996, the Centers for Disease Control and Prevention notified the Company that
the SensiCath System is not subject to regulation under the Clinical Laboratory
Improvements Act of 1988, and the Company completed acquisition of ownership of
all of the technology in the SensiCath System, pursuant to a previously
disclosed agreement with Marquette. In September 1996, the Company completed
development of the OpticalCAM monitor. The Company plans to phase in a
miniaturized sensor in 1997 and has begun development programs to provide
analysis of other critical blood analytes.
In the first quarter of 1996, the Company completed an initial public
offering of its Common Stock, raising net proceeds of approximately $33,916,000.
The Company was incorporated in Minnesota in May 1989 and
reincorporated in Delaware in January 1996. The Company's executive offices are
located at 7615 Golden Triangle Drive, Suite A, Minneapolis, Minnesota 55344,
and its telephone number is (612) 944-5857.
The SensiCath Solution
By integrating an ABG module as part of an existing bedside monitor
and an ABG sensor as part of an existing arterial line, the Company believes
that the SensiCath System presents the first patient-attached ABG system which
addresses the needs of the critically ill, unstable patient population. The
SensiCath System has the following benefits:
. Fast and Easy to Use. The SensiCath System provides ABG results within 60
seconds. Once installed in the arterial line, the health care provider
need only push a button on the monitor and draw the blood over the sensors
to obtain ABG readings and automatically record and transmit all results.
Testing with the SensiCath System can be conducted by one health care
professional, while testing with traditional ABG analyzers requires
several hospital personnel.
. Clinically Superior. The SensiCath System provides accurate and precise
ABG results on demand that are comparable to results generated by
traditional ABG analyzers. By integrating ABG data with other critical
care parameters on a bedside monitor, the SensiCath System provides a
valuable management tool for a patient experiencing rapid changes in
cardiopulmonary status. By eliminating
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the requirement for any blood removal, the risk of human error in
removing, handling and analyzing the blood sample is significantly
reduced. The SensiCath System has also been designed with a quality
assurance routine that is easily integrated into standard hospital
practices. Furthermore, the SensiCath System only needs to be calibrated
once during the period of use approved for the sensor (currently 72 hours
in the U.S. and 144 hours outside of the U.S.), while traditional ABG
analyzers require calibration prior to each test.
. Cost-Effective. The 72-hour SensiCath Sensor can be used to take up to
100 ABG tests, and the 144-hour sensor can be used to take up to 200 ABG
tests. The SensiCath System provides cost-effective ABG testing for
patients requiring a large number of ABG tests because, unlike other ABG
technologies, the SensiCath System does not have a direct per test cost.
All test results are immediately captured as part of the patient's
paperless record, which is an increasingly important benefit in the
current environment for managing health care costs. The Company has priced
the SensiCath Sensor to allow hospitals to reduce the cost of ABG testing
for critically ill, unstable patients requiring frequent testing during
their hospital stay.
. Eliminates Blood Exposure and Loss. The SensiCath Sensor is placed in an
arterial line creating a closed-loop system. As a result, no blood is
removed from the patient during ABG testing, and the health care
provider's exposure to blood is eliminated. Elimination of blood loss is
significant for all patients, and is extremely important for neonatal
patients who can require blood transfusions as a direct result of frequent
ABG analysis using traditional technology. The closed-loop system also
significantly reduces the risk of infection to both the health care
provider and the patient by removing the need to open the arterial line,
attach a syringe and remove blood. The health care provider is not exposed
to potentially infectious blood samples or blood contaminated materials
during testing.
SensiCath System
The first configuration of the SensiCath System consists of a
SensiCath Sensor and the OnlineABG Module. The second configuration of the
SensiCath System consist of the SensiCath Sensor, the OnlineABG Module and the
OpticalCAM monitor. The SensiCath Sensor contains three optical fibers with
fluorescent chemistries for sensing O\2\, CO\2\ and pH. The disposable,
single-patient sensor has been designed to provide accurate ABG data for the
approved period of use (currently 72 hours in the U.S. and 144 hours outside of
the U.S.). The OnlineABG Module, which plugs into Marquette's bedside monitoring
system, is the source and receptor of optical signals, provides signal
processing and communicates with other components in the monitoring system.
Many of the clinical benefits of the SensiCath System result from
what the Company describes as the Paracorporeal Advantage. This means that the
fiberoptic sensors are located outside the patient's artery (paracorporeal) as a
part of an existing arterial pressure monitoring line which is secured to the
patient's forearm. The integration of the SensiCath Sensor with an existing
arterial line and a bedside monitoring system enables the health care provider
to provide integrated bedside management of rapid changes in the patient's
cardiopulmonary status. The closed-loop system of the SensiCath Sensor and the
arterial line eliminates blood loss and blood exposure resulting from
traditional ABG analysis.
The SensiCath Sensor is attached to the standard arterial line
already in place on critically ill patients. A standard line includes an
arterial cannula, pressure monitoring tubing and pressure transducer. The
arterial line is constantly filled with saline or other physiologic solution as
part of its function as a pressure monitor. The SensiCath Sensor is added to the
arterial line in a flow-through configuration which does not disrupt the
arterial pressure waveform or interfere with fluid delivery.
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Unlike electrochemical ABG analyzers, the SensiCath System needs to be
calibrated only once at the outset of its use. The calibration procedure takes
approximately five minutes and requires only two small pouches of initialization
fluid which will be included with the SensiCath Sensor.
The SensiCath System is then ready to provide ABG measurements. To
take an ABG measurement, the health care provider pushes a button on the bedside
monitor and draws blood past the sensor. A tone from the monitor signals the
health care provider to return the blood to the patient and flush the line. The
ABG results then appear on the monitor screen within 60 seconds. The
time-consuming and complicated process of removing, handling and analyzing a
blood sample, all of which can contribute to delayed and inaccurate results, is
unnecessary with the SensiCath System.
The SensiCath Sensor contains three fiberoptic chemical sensors
enclosed in a sterile, disposable device. The O\2\ and pH sensors consist of
fluorescent dyes immobilized within unique polymer matrices, which are directly
bonded onto the distal region of a polymer clad glass fiber. The CO\2\ sensor
consists of a dissolved fluorescent dye within an ultra-miniaturized
mechanically encapsulated housing, also bonded onto the distal region of a glass
fiber. These captive dyes react with the analyte of interest (i.e., O\2\, CO\2\
and pH) to influence optical signals within the fiberoptics. The SensiCath
Sensor also contains a temperature control device which enables the sensors to
provide accurate measurements at varying blood temperatures.
The Company's optical platform, by means of a proprietary ratiometric
methodology, provides light source and light detection using solid-state,
miniature components. The optics in combination with the sensor dyes provide
fully ratioed capability which maintains calibration for the entire 72-hour
period.
The initialization fluids are liquid stable solutions, administered
once to the SensiCath System to enable a two point calibration. This calibration
is stable for the 72-hour period of use of the SensiCath System. No external gas
tanks with O\2\ and CO\2\ are required because the fluids are calibrated at the
time of manufacture, unlike traditional ABG analyzers which require calibration
prior to each test.
Sales and Marketing
The Company's sales and marketing staff consists of sales, marketing
and clinical support personnel. The Company's sales, clinical and marketing
activities have been designed to support customer evaluation of the SensiCath
System as it integrates/interfaces with critical care patient bedside monitoring
systems. During 1996, the Company completed the initial hiring of its sales and
marketing staff, identified a distribution partner for European markets and
continued its clinical marketing study program. The Company plans to sell the
SensiCath System primarily through its direct sales force in the United States
and through distributors outside of the United States. The Company believes that
its team marketing and focused selling strategies eliminate the need to
establish a large sales force to support U.S. sales. The Company regularly
exhibits its products at major U.S. and European medical conferences. In
addition, a number of papers have been published in medical peer review journals
and several abstracts have been presented at medical conferences regarding the
SensiCath System. The Company plans to continue to support publications and
abstract presentations. The Company has established reference sites for the
SensiCath System at key hospitals and medical centers in the U.S. and Europe.
Research and Development
The Company's research and development staff is dedicated to the
research, design and development of the technology used in the SensiCath System.
The Company's principal research and development activities currently consist of
design and development of additional sensors to measure
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other blood analytes and additional configurations of the SensiCath System.
There can be no assurance that the Company will be able to successfully develop
new products on a timely basis or at all. The Company's research and development
expenses for the fiscal years ended December 31, 1994, 1995 and 1996 were
$4,774,487, $5,955,344 and $5,632,458, respectively. The Company anticipates
that it will continue to spend significant amounts on research and development
activities for the foreseeable future.
Manufacturing and Supply
The Company manufactures the SensiCath Sensor at its facility in
Minneapolis, Minnesota, which includes approximately 4,000 square feet of
manufacturing space. The Company's manufacturing facility has passed an FDA good
manufacturing practices ("GMP") inspection. In December 1996, the Company
received ISO 9001 certification, indicating compliance with the requirements of
this world-wide quality standard. The SensiCath Sensors are manufactured in a
unique, reproducible process. The finished device is packaged and sterilized
prior to being shipped. The Company has entered into an agreement with a third
party in Europe which packages sterilized sensors manufactured by the Company
and non-proprietary components for sale of the SensiCath System in Europe.
The Company purchases components from various suppliers and relies on
single sources for the OpticalCAM monitor, as well as a few key components. To
date, the Company has qualified only single sources for certain purchased
components of the Company's unique optical platform. While the Company believes
that alternate suppliers are available and can be approved in accordance with
the Company's vendor qualification procedures, identifying and qualifying such
vendors could cause a delay in production of the Company's products. Any such
delay could have a material adverse effect on the Company. In addition, the
OnlineABG Module is currently manufactured solely by Marquette. While the
Company has entered into a supply agreement with Marquette for the OnlineABG
Module, any delay or disruption in the supply of OnlineABG Modules could have a
material adverse effect on the Company.
Competition
Competition in the medical device industry in general and the ABG
analyzer market in particular is intense and expected to increase. The Company
believes that the principal competitive factors for ABG analyzers and monitors
are accuracy, rapid results, cost-effectiveness, integration with bedside
monitors, reduction of blood loss and exposure, and price. The Company believes
that it competes favorably with respect to all of these factors. Several other
point-of-care or near-patient blood gas testing manufacturers have commercially
available products including AVL Scientific Corp., i-STAT Corporation,
Diametrics Medical, Inc., SenDx Medical Inc. and Instrumentation Laboratory. In
addition, some manufacturers of laboratory equipment are marketing "mobile"
versions of traditional blood gas testing equipment. The Company also expects
that manufacturers of central and satellite laboratory testing equipment will
compete to maintain their revenues and market share. Most of the Company's
competitors have significantly greater financial, technical, research,
marketing, sales, distribution and other resources than the Company. 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. Furthermore, there
can be no assurance that the emergence of new products, technologies or
procedures will not reduce the need for ABG analysis.
Patents and Proprietary Rights
The Company seeks to protect technology, inventions and improvements
that it considers important through the use of patents and trade secrets. The
Company owns or has rights to several U.S.
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patents and has filed a number of patent applications in the United States,
Japan and key European countries. There can be no assurance, however, that the
Company's patents will provide competitive advantages for the Company's
products, or that such rights will not be challenged or circumvented by
competitors. In addition, there can be no assurance that any pending patent
applications will issue. Claims made under patent applications may be denied or
significantly narrowed and the issued patents, if any, may not provide
significant commercial protection to the Company. The Company could incur
substantial costs in proceedings before the U.S. Patent and Trademark Office,
including interference proceedings. These proceedings could result in adverse
decisions as to the priority of the Company's inventions.
While the Company does not believe that any of its products infringe
any valid claims of patents or other proprietary rights held by third parties,
there can be no assurance that the Company does not infringe any patents or
other proprietary rights held by third parties. If an infringement claim were
made, the costs incurred to defend the claim could be substantial and adversely
affect the Company, even if the Company were ultimately successful in defending
the claim. If the Company's products were found to infringe any proprietary
right of a third party, the Company could be required to pay significant damages
or license fees to the third party or cease production. Litigation may also be
necessary to enforce patent rights held by the Company, or to protect trade
secrets or techniques owned by the Company. Any such claims or litigation could
result in substantial costs and diversion of effort by management of the
Company.
The Company also relies on trade secrets and other unpatented
proprietary technology. There can be no assurance that the Company can
meaningfully protect its rights in such unpatented proprietary technology or
that others will not independently develop substantially equivalent proprietary
products or processes or otherwise gain access to the Company's proprietary
technology. The Company seeks to protect its trade secrets and proprietary
know-how, in part, with confidentiality agreements with employees and
consultants. There can be no assurance that the agreements will not be breached,
that the Company will have adequate remedies for any breach or that the
Company's trade secrets will not otherwise become known to or independently
developed by competitors.
SensiCath/(R)/, OpticalCAM/TM/ and SensiCath the Paracorporeal Advantage/TM/ are
trademarks of the Company. OnlineABG/TM/, Solar/TM/ and Tramscope/(R)/ are
trademarks of Marquette Medical Systems, Inc.
Government Regulation
The Company's products, development activities and manufacturing
processes are subject to regulation by numerous governmental authorities,
principally the United States Food and Drug Administration ("FDA") and
corresponding foreign agencies. In the United States, the FDA administers the
Federal Food, Drug and Cosmetics Act and amendments thereto, including the Safe
Medical Devices Act of 1990. The Company is subject to the standards and
procedures respecting manufacture and marketing of medical devices contained in
the Federal Food, Drug and Cosmetics Act and the regulations promulgated
thereunder and is subject to inspection by the FDA for compliance with such
standards and procedures. Noncompliance with applicable requirements can result
in, among other things, fines, injunctions, civil penalties, recall or seizure
of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing approvals and criminal prosecution.
In the United States, medical devices are classified into one of
three classes (class I, II or III), on the basis of the controls deemed
necessary by the FDA to reasonably assure their safety and effectiveness. Under
FDA regulations, class I devices are subject to general controls (e.g.,
labeling, premarket notification
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and adherence to good manufacturing practices) and class II devices are subject
to general and special controls (e.g., performance standards, postmarket
surveillance, patient registries and FDA guidelines ). In general, class III
devices (e.g., life-sustaining, life-supporting and implantable devices, or new
devices which have not been found substantially equivalent to a legally marketed
device), in addition to being subject to general and special controls, must
receive premarket approval ("PMA") by the FDA to ensure their safety and
effectiveness.
Before a new or significantly modified device can be introduced into the
market, the manufacturer must generally obtain marketing clearance through a
510(k) notification or approval of a PMA application. A 510(k) clearance will be
granted if the proposed device is "substantially equivalent" to a predicate
device (i.e., a legally marketed class I or class II medical device, or a class
III medical device for which the FDA has not called for the submission of a PMA
application). Commercial distribution of a device for which a 510(k)
notification is required can begin only after the FDA issues a written
determination that the device is "substantially equivalent" to a predicate
device. The process of obtaining a 510(k) clearance typically can take several
months to a year or longer. A PMA application must be filed if a proposed device
is not substantially equivalent to a legally marketed class I or class II
device, or if it is a class III device for which the FDA has called for a PMA
application. Certain class III devices that were on the market before May 28,
1976 ("preamendments class III devices"), and devices that are substantially
equivalent to them, can be brought to market through the 510(k) process until
the FDA calls for the submission of PMA applications for preamendments class III
devices. The process of obtaining a PMA can be expensive, uncertain and lengthy,
frequently requiring anywhere from one to several years from the date the PMA is
submitted to the FDA, if approval is obtained at all.
The Company has received 510(k) clearance to market the 72-hour
SensiCath System and the OpticalCAM monitor from the FDA. The Company submitted
a 510(k) notification regarding the 144-hour SensiCath Sensor in May 1997, which
is currently under review. The Company also anticipates submitting 510(k)
notifications for other configurations of the SensiCath System and other
products that the Company may develop in the future. There can be no assurance
that these future 510(k) submissions will be cleared by the FDA on a timely
basis, if at all.
The Company's 510(k) notice claimed that the SensiCath System is
substantially equivalent to certain preamendments class III devices for which
the FDA has published a final regulation placing the devices in class III.
Pursuant to the FDA's August 14, 1995 order requiring manufacturers of
preamendments class III devices to submit safety and effectiveness information
to the FDA, the Company may be required to submit safety and effectiveness
information to the FDA for the SensiCath System by August 1997. The Company
plans to submit appropriate data to the FDA prior to August 1997. Failure on the
part of the Company to submit the required safety and effectiveness information
could subject the Company to FDA enforcement action and may result in the
SensiCath System being deemed misbranded as a preamendments class III device,
thereby requiring a PMA application. In addition, if the FDA publishes a final
regulation calling for PMA applications for the SensiCath predicate devices
based on information submitted by the Company and other manufacturers, the
Company may be required to submit a PMA application within 90 days after the FDA
calls for PMA applications. Although the FDA order requiring submission of
safety and effectiveness information characterized the predicate devices as
having a high potential for down-classification, there can be no assurance that
the devices will be down-classified or that the Company will not be required to
submit a PMA application for the SensiCath System.
The Company is also subject to regulation in each of the foreign
countries in which it sells its products with regard to product standards,
packaging requirements, labeling requirements, import restrictions, tariff
regulations, duties and tax requirements. Many of the regulations applicable to
the
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Company's products in such countries are similar to those of the FDA. The
national health or social security organizations of certain of such countries
require the Company's products to be qualified before they can be marketed in
those countries. Delays in receipt of, or a failure to receive such approvals or
clearances, or the loss of any previously received approvals or clearances,
could have a material adverse effect on the Company. To date, the Company has
not experienced significant difficulty in complying with these regulations. In
February 1997, the Company received the European Medical Devices Directorate
("MDD") approval to place the "CE" mark on its products. The CE mark enables the
Company's products to be marketed, sold and used throughout the European Union,
subject to limited "safeguard" powers of member states.
The Company is subject to periodic inspections by the FDA, which is
charged with auditing the Company's compliance with good manufacturing practices
("GMP") established by the FDA and other applicable government standards. The
Company is also subject to inspections by the MDD and other European regulatory
agencies. Strict regulatory action may be initiated in response to audit
deficiencies or to product performance problems. The Company believes that its
manufacturing and quality control procedures are in compliance with the
requirements of the FDA and MDD regulations. The Company's manufacturing
facilities and processes are also subject to periodic inspection and review by
its Notified Body in conjunction with the Company's ISO 9001 certification.
Failure to maintain GMP and ISO 9001 certifications could have a material
adverse effect on the Company.
Some of the currently available methods for performing ABG analysis
are subject to the Clinical Laboratory Improvements Act of 1988 ("CLIA"), which
is intended to ensure the quality and reliability of all medical testing in the
United States, regardless of testing site. In June 1996, the Company as notified
by the Centers for Disease Control and Prevention ("CDC") that the SensiCath
System was not subject to regulation under CLIA. Under CLIA, testing sites are
required to comply with certain requirements regarding personnel qualification,
administration, participation in proficiency testing, patient test management,
quality control, quality assurance and inspections based on the level of
"complexity" associated with the test, and each manufacturer of a test analyzer
must obtain a classification of the tests its product performs from the FDA and
CDC. There can be no assurance that future CDC regulations will not apply to the
SensiCath System.
Third Party Reimbursement
Hospitals that purchase and physicians who use medical devices such
as the Company's products generally rely upon third party payors such as
Medicare, Medicaid, private health insurers and others to pay for some or all of
the costs associated with the product. Medicare is the largest single
third-party payor for services involving the use of the Company's products which
are used primarily for hospital inpatients who are receiving critical care
services.
The patient population that the Company has initially targeted for
the SensiCath System requires numerous ABG tests as part of their critical care
stay. Using the average cost of traditional ABG tests and comparing it to the
costs associated with the SensiCath System, the Company believes that it will be
able to demonstrate the cost-effectiveness of the SensiCath System. However,
there can be no assurance that the use of the SensiCath System will be
considered cost-effective by certain hospitals and physicians in relation to the
level of reimbursement typically received for ABG tests or for any reimbursement
that might be received for each SensiCath Sensor. Furthermore, the level of
reimbursement for ABG testing could decrease in the future. Failure by hospitals
and other users of the Company's products to obtain sufficient reimbursement
from third party payors and/or changes in governmental and private third party
payors' policies toward coverage for ABG tests could have a materially adverse
affect on the Company.
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Employees
As of December 31, 1996, the Company employed 67 persons full-time and 5
persons on a contract or part-time basis. No employees are covered by collective
bargaining agreements, and the Company considers its relationship with its
employees to be good.
Certain Important Factors
In addition to the factors identified above, there are several important
factors that could cause the Company's actual results to differ materially from
those anticipated by the Company or which are reflected in any forward-looking
statements of the Company. These factors, and their impact on the success of the
Company's operations and its ability to achieve its goals, include the
following:
. Market Acceptance of the SensiCath System. The Company's future revenues
will depend on market acceptance of the SensiCath System. The Company will
need to demonstrate to health care professionals, hospital administrators
and third-party payors the accuracy, reliability, ease of use, safety and
cost effectiveness of the SensiCath System. In order to use the SensiCath
System, hospitals need to acquire the OnlineABG Module, and, if they do not
have a Marquette patient bedside monitoring system the OpticalCAM monitor,
both of which may require capital expenditure approvals by the hospital.
. Timely Installation of the SensiCath System. The Company's ability to
increase sales in the near-term will depend on timely installation and in-
service training for the OnlineABG Module, which is provided by Marquette.
The Company does not have control over the scheduling of this installation
and in-service training for the OnlineABG Module.
. Sales to Installed Base. The Company's plans for increasing sales in 1997
is based, in part, on its ability to sell the SensiCath System to
Marquette's installed base of Tramscope and Solar patient monitoring
systems. In order to interface with the SensiCath System, Tramscope systems
need either hardware or software upgrades or both, and previously installed
Solar systems need a software upgrade. These upgrades require an additional
investment by hospitals with Tramscope systems and hospitals with Solar
systems that are not under warranty. Hospitals may be reluctant to absorb
the costs associated with the purchase of an OnlineABG Module and upgrades
needed to interface the Solar and Tramscope system with the SensiCath
System.
. Competition. Competition among companies attempting to provide ABG and
other critical blood analyte analysis at the point-of-care is intense and
increasing. 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 the Company's products or that would
render the Company's products obsolete or non-competitive.
. Future Regulatory Approvals. The Company's ability to market new
configurations of or improvements to the SensiCath System and any products
it may develop in the future will require clearances or approvals from the
FDA and in some instances foreign governmental agencies. The process for
obtaining necessary regulatory clearances and approvals can be expensive
and time consuming. There can be no assurance that the Company will be able
to obtain necessary regulatory approvals and clearances in the future on a
timely basis, or at all.
9
<PAGE>
. Sole Sources of Supply. Currently, the Company has only one supplier for
the OnlineABG Module, the OpticalCAM Monitor and certain other key
components. Any disruption or delay in the supply of key components or
instrumentation could have a material adverse effect on the Company.
Item 2. PROPERTIES.
The Company's facilities are located at 7615 Golden Triangle Drive,
Suite A, Minneapolis, Minnesota, and consist of approximately 18,300 square
feet. The Company leases these facilities pursuant to a lease that expires on
November 30, 1999. The lease provides for rent of approximately $17,000 per
month, including base rent and a pro rata share of operating expenses and real
estate taxes. The Company expects that these facilities will be sufficient for
its operations for the foreseeable future.
Item 3. LEGAL PROCEEDINGS.
There are no material pending or threatened legal, governmental,
administrative or other proceedings to which the Company is a party or of which
any of its property is subject.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
Item 4a. EXECUTIVE OFFICERS OF THE COMPANY.
The executive officers of the Company, their ages and the offices
held, as of March 15, 1997, are as follows:
<TABLE>
<CAPTION>
Name Age Title
- -------------------------------------------- ------------ -----------------------------------------------------------------
<S> <C> <C>
Sam B. Humphries 54 President and Chief Executive Officer
Paulita M. LaPlante 39 Vice President of Worldwide Sales, Marketing and Business
Development
Byron (Buzz) Moran 54 Vice President of Research and Development and Operations
Wesley G. Peterson 49 Chief Financial Officer, Vice President of Finance and
Administration and Secretary
</TABLE>
Information regarding the business experience of the executive officers
of the Company is set forth below.
Sam B. Humphries has been the President, Chief Executive Officer and a
Director of the Company since October 1991. From January 1988 to October 1991,
he served as President and Chief Executive Officer of American Medical Systems
("AMS"), a medical device manufacturer which is a subsidiary of Pfizer, Inc. Mr.
Humphries also served as a member of the Board of Directors of the Hospital
Products Group at Pfizer, Inc. Mr. Humphries is a Director of Universal Hospital
Services, Inc.
10
<PAGE>
Paulita M. LaPlante has been the Company's Vice President of Worldwide
Sales, Marketing and Business Development since June 1994 and was Director of
Marketing and Business Development from April 1992 to June 1994. She also served
as the Company's interim Vice President of Research and Development from January
1994 to September 1994. From 1986 to April 1992, Ms. LaPlante held a variety of
positions with AMS, including Manager for Prostate Products, Manager of New
Business Development and Manager of Worldwide Technical Training.
Byron (Buzz) Moran has been the Company's Vice President of Research and
Development and Operations since September 1994. From January 1985 to August
1994, Mr. Moran held several management positions, including Vice President and
General Manager and Vice President of Research and Development, for Spectramed
Incorporated, a medical device manufacturer which is a subsidiary of British
Oxygen Corporation.
Wesley G. Peterson has been the Company's Chief Financial Officer since
January 1992, Vice President of Finance and Administration since June 1994 and
Secretary since July 1992. He was also Director of Finance and Administration
from January 1992 to June 1994. From December 1986 to December 1991, Mr.
Peterson was the Vice President of Finance and Administration for CIMA Labs,
Inc., a manufacturer and distributor of pharmaceuticals based in Minneapolis,
Minnesota.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The information under the caption "Market for Company's Common Stock
and Related Stockholder Matters" on page 20 of the Company's 1996 Annual Report
is incorporated herein by reference.
Item 6. SELECTED FINANCIAL DATA.
The financial information under the caption "Selected Financial Data" on
page 19 of the Company's 1996 Annual Report is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The information under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 6 to 7 of
the Company's 1996 Annual Report is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and Independent Auditors' Report
thereon on pages 8 to 19 of the Company's 1996 Annual Report are incorporated
herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
11
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Directors, Executive Officers, Promoters and Control Persons
The information under the captions "Election of Directors -- Information
About Nominees" and "Election of Directors -- Other Information About Nominees"
in the Company's 1997 Proxy Statement is incorporated herein by reference. The
information concerning executive officers of the Company is included in this
Report under Item 4a, "Executive Officers of the Company."
(b) Section 16(a) Beneficial Ownership Reporting Compliance
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's 1997 Proxy Statement is incorporated
herein by reference.
Item 11. EXECUTIVE COMPENSATION.
The information under the captions "Election of Directors -- Director
Compensation" and "Executive Compensation and Other Benefits" in the Company's
1997 Proxy Statement is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information under the caption "Principal Shareholders and Beneficial
Ownership of Management" in the Company's 1997 Proxy Statement is incorporated
herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the caption "Certain Transactions" in the
Company's 1997 Proxy Statement is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The following Financial Statements of the Company are incorporated
herein by reference from the pages indicated in the Company's 1996
Annual Report:
Financial Statements: Page:
--------------------- -----
Independent Auditors' Report............................. 19
12
<PAGE>
Balance Sheets as of December 31, 1996 and 1995.......... 9
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 and for the period from
May 23, 1989 (inception) to December 31, 1996............ 8
Statement of Shareholders' Equity for the period
May 23, 1989 (inception) to December 31, 1996............ 10
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 and for the period
from May 23, 1989 (inception) to December 31, 1996....... 12
Notes to Financial Statements............................ 13
2. Financial Statement Schedules.
All schedules are omitted as the required information is
inapplicable or the information is presented in the financial
statements or related notes thereto.
3. Exhibits
The exhibits to this Report are listed in the Exhibit Index on
pages 16 to 20 below.
A copy of the exhibits referred to above will be furnished at a
reasonable cost to any person who was a stockholder of the Company as of
March 20, 1997, upon receipt from any such person of a written request
for any such exhibit. Such request should be sent to: Optical Sensors
Incorporated, 7615 Golden Triangle Drive, Suite A, Minneapolis,
Minnesota 55344; Attn: Stockholder Information.
The following is a list of each management contract or
compensatory plan or arrangement required to be filed as an exhibit
to this Annual Report on Form 10-K pursuant to Item 13(a):
A. Employment Agreement dated October 1, 1991 between the Company
and Sam B. Humphries.
B. 1989 Omnibus Stock Option Plan, as amended.
C. 1991 Stock Option Plan, as amended.
D. Non-Statutory Stock Option Agreement dated August 2, 1995
between the Company and Sam B. Humphries.
E. Non-Recourse Promissory Note dated September 1, 1995 between
the Company and Sam B. Humphries.
F. 1993 Stock Option Plan, as amended.
G. Form of Non-Statutory Stock Option Agreement for Nonemployees
pursuant to 1993 Stock Option Plan.
13
<PAGE>
H. Form of Non-Statutory Stock Option Agreement for Nonemployee
Directors pursuant to 1993 Stock Option Plan
I. Form of Incentive Stock Option Agreement for Employees pursuant
to 1993 Stock Option Plan.
J. Warrant dated April 28, 1992 to purchase 4,548 shares issued to
Gary A. Peterson.
(b) Reports on Form 8-K
On December 4, 1996, the Company filed a Current Report on Form 8-K
reporting the adoption of the Rights Plan, dated as of December 3, 1996 between
the Company and Norwest Bank Minnesota, N.A.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OPTICAL SENSORS INCORPORATED
Dated: March 27, 1997 By: /s/ Sam B. Humphries
----------------------------------------------
Sam B. Humphries
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on March 27, 1997 by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title
- ---- -----
<S> <C>
/s/ Sam B. Humphries President, Chief Executive Officer and Director
- ------------------------------ (principal executive officer)
Sam B. Humphries
/s/ Wesley G. Peterson Chief Financial Officer, Vice President of Finance and
- ------------------------------ Administration and Secretary (principal financial and
Wesley G. Peterson accounting officer)
/s/ Promod Haque, Ph.D. Director
- ------------------------------
Promod Haque, Ph.D.
/s/ Peter H. McNerney Director
- ------------------------------
Peter H. McNerney
/s/ John M. Nehra Director
- ------------------------------
John M. Nehra
/s/ Demetre M. Nicoloff, M.D. Director
- ------------------------------
Demetre M. Nicoloff, M.D.
/s/ Gary A. Peterson Director
- ------------------------------
Gary A. Peterson
</TABLE>
15
<PAGE>
OPTICAL SENSORS INCORPORATED
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Item No. Item Method of Filing
- -------- ---- ----------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of Incorporated by reference to Exhibit 3.3
the Company. contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
3.2 Certificate of Designation, Preferences Filed herewith electronically.
and Rights of Series A Junior Preferred
Stock.
3.3 Bylaws of the Company. Incorporated by reference to Exhibit 3.5
contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
4.1 Specimen Common Stock Certificate Incorporated by reference to Exhibit 4.1
contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
4.2 Form of Warrant issued in connection Incorporated by reference to Exhibit 4.3
with the sale of Convertible Preferred contained in the Company's Registration
Stock, Series B Statement on Form S-1 (File No. 33-99904).
4.3 Form of Warrant issued in connection Incorporated by reference to Exhibit 4.4
with the Convertible Bridge Loan contained in the Company's Registration
Agreement dated November 22, 1991 Statement on Form S-1 (File No. 33-99904).
4.4 Form of Warrant issued in connection Incorporated by reference to Exhibit 4.5
with the On-Call Bridge Loan contained in the Company's Registration
Agreement dated December 6, 1991 Statement on Form S-1 (File No. 33-99904).
4.5 Form of Warrant issued in connection Incorporated by reference to Exhibit 4.6
with the Convertible Bridge Loan contained in the Company's Registration
Agreement dated May 4, 1993 Statement on Form S-1 (File No. 33-99904).
4.6 Form of Warrant issued in connection Incorporated by reference to Exhibit 4.7
with the Bridge Loan Agreement dated contained in the Company's Registration
June 1, 1995 Statement on Form S-1 (File No. 33-99904).
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C>
4.7 Warrant dated November 6, 1992 issued Incorporated by reference to Exhibit 4.8
to Comdisco, Inc. contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
4.8 Warrant Dated August 31, 1995 issued to Incorporated by reference to Exhibit 4.9
Comdisco, Inc. contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
4.9 Warrant dated September 3, 1993 issued Incorporated by reference to Exhibit 4.10
to Alex. Brown & Sons Incorporated contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
4.10 Warrant dated April 28, 1992 to purchase Incorporated by reference to Exhibit 4.11
40,938 shares issued to Edson Spencer, Jr. contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
4.11 Warrant dated April 28, 1992 to purchase Incorporated by reference to Exhibit 4.14
40,938 shares issued to Gary A. Peterson contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
4.12 Rights Agreement dated as of Incorporated by reference to Exhibit 4.1
December 3, 1996 between the Company contained in the Company's Current
and Norwest Bank Minnesota, N.A. Report on Form 8-K filed December 3,
1996 (File No. 0-27600).
10.1 Lease dated October 7, 1991 between Incorporated by reference to Exhibit 10.1
Registrant and First Industrial L.P. contained in the Company's Registration
(successor to MIG Kappa III Companies) Statement on Form S-1 (File No. 33-99904).
10.2 Equipment Lease dated November 6, Incorporated by reference to Exhibit 10.2
1992, as amended, between the Company contained in the Company's Registration
and Comdisco, Inc. Statement on Form S-1 (File No. 33-99904).
10.3 Letter Agreement dated October 1, 1995 Incorporated by reference to Exhibit 10.3
between the Company and Marquette contained in the Company's Registration
Electronics, Inc. Statement on Form S-1 (File No. 33-99904).
</TABLE>
17
<PAGE>
<TABLE>
<S> <C> <C>
10.4 Employment Agreement dated October Incorporated by reference to Exhibit 10.4
1, 1991 between the Company and contained in the Company's Registration
Sam B. Humphries Statement on Form S-1 (File No. 33-99904).
10.5 Non-Competition Agreement, dated Incorporated by reference to Exhibit 10.6
April 28, 1992 between the Company contained in the Company's Registration
and Sam B. Humphries Statement on Form S-1 (File No. 33-99904).
10.6 Series D Convertible Preferred Stock Incorporated by reference to Exhibit 10.7
Purchase Agreement dated July 25, 1995 contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
10.7 Series E Convertible Preferred Stock Incorporated by reference to Exhibit 10.8
Purchase Agreement dated contained in the Company's Registration
November 14, 1995 Statement on Form S-1 (File No. 33-99904).
10.8 Registration Rights Agreement, dated Incorporated by reference to Exhibit 10.9
April 28, 1992, as amended contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
10.9 Bridge Loan Agreement, dated June 1, Incorporated by reference to Exhibit
1995 10.10 contained in the Company's
Registration Statement on Form S-1
(File No. 33-99904).
10.10 1989 Omnibus Stock Option Plan, as Incorporated by reference to Exhibit
amended 10.11 contained in the Company's
Registration Statement on Form S-1
(File No. 33-99904).
10.11 1991 Stock Option Plan, as amended Incorporated by reference to Exhibit
10.12 contained in the Company's
Registration Statement on Form S-1
(File No. 33-99904).
10.12 Non-Statutory Stock Option Agreement Incorporated by reference to Exhibit
dated August 2, 1995 between the 10.13 contained in the Company's
Company and Sam B. Humphries Registration Statement on Form S-1
(File No. 33-99904).
10.13 Non-Recourse Promissory Note dated Incorporated by reference to Exhibit
September 1, 1995 between the 10.14 contained in the Company's
Company and Sam B. Humphries Registration Statement on Form S-1
(File No. 33-99904).
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C>
10.14 Pledge Agreement dated September 1, Incorporated by reference to Exhibit
1995 between the Company and Sam B. 10.15 contained in the Company's
Humphries Registration Statement on Form S-1
(File No. 33-99904).
10.15 1993 Stock Option Plan, as amended Incorporated by reference to Exhibit
10.21 contained in the Company's
Registration Statement on Form S-1
(File No. 33-99904).
10.16 Form of Non-Statutory Stock Option Incorporated by reference to Exhibit
Agreement for Nonemployees pursuant 10.21 contained in the Company's
to 1993 Stock Option Plan Registration Statement on Form S-1
(File No. 33-99904).
10.17 Form of Non-Statutory Stock Option Incorporated by reference to Exhibit
Agreement for Nonemployee Directors 10.18 contained in the Company's
pursuant to 1993 Stock Option Plan Registration Statement on Form S-1
(File No. 33-99904).
10.18 Form of Incentive Stock Option Incorporated by reference to Exhibit
Agreement for Employees pursuant to 10.19 contained in the Company's
1993 Stock Option Plan Registration Statement on Form S-1
(File No. 33-99904).
10.19 Manufacturing Supply Agreement dated Incorporated by reference to Exhibit
October 26, 1994 between the Company 10.20 contained in the Company's
and SpecTran Specialty Optics Company Registration Statement on Form S-1
(File No. 33-99904).
10.20 Employee Stock Purchase Plan Incorporated by reference to Exhibit 99.1
contained in the Company's Registration
Statement on Form S-8 (File No. 333-17493).
10.21 First Amendment to Lease Agreement Filed herewith electronically.
dated April 26, 1996 between First
Industrial Financing Partnership, L.P.
and the Company.
10.22 Supply Agreement dated August 22, Filed herewith electronically.
1996 between the Company and
Marquette Electronics, Inc. (1)
10.23 Manufacturing Supply Agreement dated Filed herewith electronically.
September 10, 1996 between the
Company and SpecTran Specialty Optics
Company. (1).
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C>
10.24 Purchase Order dated February 21, 1997 Filed herewith electronically.
between the Company and SeaMED
Corporation. (1)
11.1 Statement regarding computation of per Filed herewith electronically.
share loss
13.1 Excerpts from the Company's 1996 Filed herewith electronically.
Annual Report to Shareholders
incorporated by reference herein.
23.1 Independent Auditors' Consent Filed herewith electronically.
27.1 Financial Data Schedule Filed herewith electronically.
</TABLE>
- ---------------------
(1) Confidential treatment has been requested with respect to designated
portions contained within document. Such portions have been omitted and filed
separately with the Commission pursuant to Rule 24b-2 of the Securities and
Exchange Act of 1934, as amended.
20
<PAGE>
EXHIBIT 3.2
FORM
of
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
of
SERIES A JUNIOR PREFERRED STOCK
of
OPTICAL SENSORS INCORPORATED
Pursuant to Section 151 of the
Delaware General Corporation Law of the State of Delaware
__________________
We, Sam B. Humphries, Chief Executive Officer, and Wesley G. Peterson,
Chief Financial Officer, of Optical Sensors Incorporated, a corporation
organized and existing under the General Corporation Law of the State of
Delaware (the "Corporation"), in accordance with the provisions thereof, DO
HEREBY CERTIFY:
That pursuant to the authority vested in the Board of Directors by the
Certificate of Incorporation of the Corporation, the said Board of Directors on
December 3, 1996, adopted the following resolution creating a series of two
hundred fifty thousand (250,000) shares of Preferred Stock designated as Series
A Junior Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of Directors
of this Corporation in accordance with the provisions of its Certificate of
Incorporation, a series of Preferred Stock of the Corporation be and it hereby
is created, and that the designation and amount thereof and the voting powers,
preferences and relative, participation, optional and other special rights of
the shares of such series, and the qualifications, limitation or restrictions
thereof are as follows:
Section 1. Designation and Amount. The shares of such series shall be
----------------------
designated as Series A Junior Preferred Stock, par value $.01 per share (the
"Series A Junior Preferred Share(s)"), and the number of shares constituting
such series shall be two hundred fifty thousand (250,000).
<PAGE>
Section 2. Dividends and Distributions.
---------------------------
(a) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to Series A
Junior Preferred Shares with respect to dividends, the holders of Series A
Junior Preferred Shares shall be entitled to receive, when, as and if declared
by the Board of Directors out of funds legally available for the purpose,
quarterly dividends payable in cash on the first day of January, March, July and
October in each year (each such date being referred to herein as a "Quarterly
Dividend Payment Date," commencing on the first Quarterly Dividend Payment Date
after the first issuance of a share or fraction of a Series A Junior Preferred
Share, in an amount per share (rounded to the nearest cent) equal to (subject to
the provision for adjustment hereinafter set forth), 1,000 times the aggregate
per share amount of all cash dividends, and 1,000 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other distributions other
than a dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise), declared
on the Common Stock, par value $.01 per share, of the Corporation (the "Common
Stock") since the immediately preceding Quarterly Dividend Payment Date, or,
with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a Series A Junior Preferred Share. In the
event the Corporation shall at any time after December 3, 1996 (the "Rights
Declaration Date") (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount to which holders of Series A Junior Preferred Shares were entitled
immediately prior to such event under the preceding sentence shall be adjusted
by multiplying such amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution on the
Series A Junior Preferred Shares as provided in paragraph (a) above immediately
after it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock).
(c) Dividends shall begin to accrue and be cumulative on outstanding
Series A Junior Preferred Shares from the Quarterly Dividend Payment Date next
preceding the date of issue of such Series A Junior Preferred Shares, unless the
date of issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of Series A Junior Preferred Shares entitled to receive
a quarterly dividend and before such Quarterly Dividend Payment Date, in either
of which events such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the Series A Junior Preferred Shares in an amount
less than the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a record date for
the determination of holders of Series A Junior Preferred Shares entitled to
receive payment of a dividend or distribution declared thereon, which record
date shall be no more than 30 days prior to the date fixed for the payment
thereof.
Section 3. Voting Rights. In addition to any other voting rights required
-------------
by law, the holders of Series A Junior Preferred Shares shall have the following
voting rights:
(a) Subject to the provision for adjustment hereinafter set forth, each
Series A Junior Preferred Share shall entitle the holder thereof to 1,000 votes
on all matters submitted to a vote of the stockholders of
2
<PAGE>
the Corporation. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii)
combine the outstanding shares of Common Stock into a smaller number of shares,
then in each such case the number of votes per share to which holders of Series
A Junior Preferred Shares were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) If, on the date used to determine stockholders of record for any
meeting of stockholders for the election of directors, a default in dividends on
the Series A Junior Preferred Shares shall exist, the number of directors
constituting the Board of Directors of the Corporation shall be increased by
two, and the holders of the Series A Junior Preferred Shares shall have the
right at such meeting, voting together as a single class, to elect two directors
of the Corporation to fill such newly created directorships. Each director
elected by the holders of Series A Junior Preferred Shares (herein called a
"Series A Preferred Director") shall continue to serve as such director for the
full term for which he shall have been elected, notwithstanding that prior to
the end of such term a default in dividends shall cease to exist. Any Series A
Preferred Director may be removed by, and shall not be removed except by, the
vote of the holders of record of the outstanding Series A Junior Preferred
Shares, voting together as a single class, at a meeting of the stockholders, or
of the holders of Series A Junior Preferred Shares called for such purpose.
Thereafter, so long as a default in dividends on the Series A Preferred Shares
shall exist (i) any vacancy in the office of a Series A Preferred Director may
be filled (except as provided in the following clause (ii)) by an instrument in
writing signed by the remaining Series A Preferred Director and filed with the
Corporation and (ii) in the case of the removal of any Series A Preferred
Director, the vacancy may be filled by the vote of the holders of the
outstanding Series A Junior Preferred Shares, voting together as a class, at the
same meeting at which such removal shall be voted. Each director appointed as
aforesaid by the remaining Series A Preferred Director shall be deemed, for all
purposes hereof, to be a Series A Preferred Director. Whenever the term of
office of the Series A Preferred Directors shall end and no default in dividends
on the Series A Junior Preferred Shares shall exist, the number of directors
constituting the Board of Directors of the Corporation shall be reduced by two.
For the purposes of this Section 3(b), a "default in dividends" on the Series A
Junior Preferred Shares shall be deemed to have occurred whenever there shall be
an arrearage in the payment of any dividends to which the holders of the Series
A Junior Preferred Shares are entitled to receive, whether or not any such
dividends have been declared by the Board of Directors, for six consecutive
quarters, and, having so occurred, such default shall be deemed to exist
thereafter until, but only until, all accrued dividends on all shares of Series
A Junior Preferred Shares then outstanding shall have been paid through the last
Quarterly Dividend Payment Date.
At any time when such right to elect directors separately as a
class shall have so vested, the Corporation may, and upon the written request of
the holders of record of not less than 20% of the then outstanding total number
of the Series A Junior Preferred Shares shall, call a special meeting of holders
of such Series A Junior Preferred Shares for the election of directors. In the
case of such a written request, such special meeting shall be held within 90
days after the delivery of such request, and, in either case, at the place and
upon the notice provided by law and in the Bylaws of the Corporation; provided
that the Corporation shall not be required to call such a special meeting if
such request is received less than 120 days before the date fixed for the next
ensuing annual or special meeting of stockholders of the Corporation. After the
number of directors of the Corporation shall have been increased by two as
hereinabove provided, the number as so increased may thereafter be further
increased or decreased in such manner as may be permitted by the Certificate of
Incorporation or By-laws, provided that no such action
3
<PAGE>
shall impair the right of the holders of Series A Junior Preferred Shares to
elect and to be represented by two directors as herein provided.
(c) Except as otherwise provided herein, in the Certificate of
Incorporation of the Corporation or by law, the holders of Series A Junior
Preferred Shares and the holders of Common Stock (and the holders of shares of
any other series or class entitled to vote thereon) shall vote together as one
class on all matters submitted to a vote of stockholders of the Corporation.
Section 4. Certain Restrictions.
--------------------
(a) Whenever any dividends or other distributions payable on the Series
A Junior Preferred shares as provided in Section 2 are in arrears, thereafter
and until all accrued and unpaid dividends and distributions, whether or not
declared, on Series A Junior Preferred Shares outstanding shall have been paid
in full, the Corporation shall not:
(i) declare or pay dividends on, make any other distributions on,
or redeem or purchase or otherwise acquire for consideration any share
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Preferred Shares;
(ii) declare or pay dividends on or make any other distributions on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior Preferred
Shares, except dividends paid ratably on the Series A Junior Preferred
Shares and all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of all such
shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior Preferred
Shares, provided that the Corporation may at any time redeem, purchase or
otherwise acquire shares of any such parity stock in exchange for shares of
any stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Junior Preferred
Shares; or
(iv) purchase or otherwise acquire for consideration any Series A
Junior Preferred Shares, except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of Directors) to all
holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative
rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among
the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (a) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any Series A Junior Preferred Shares
-----------------
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued Preferred
Stock and may be reissued as part of a new series of Preferred Stock to be
created by resolution or resolutions of the Board of Directors.
4
<PAGE>
Section 6. Liquidation, Dissolution or Winding Up. In the event of any
--------------------------------------
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, the holders of Series A Junior Preferred Shares shall be entitled
to receive the greater of (a) $1,000.00 per share, plus accrued dividends to the
date of distribution, whether or not earned or declared, or (b) an amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
1,000 times the aggregate amount to be distributed per share to holders of
Common Stock. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii)
combine the outstanding shares of Common Stock into a smaller number of shares,
then in each such case the amount to which holders of Series A Junior Preferred
Shares were entitled immediately prior to such event pursuant to clause (b) of
the preceding sentence shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
Section 7. Consolidation, Merger, Etc. In case the Corporation shall
--------------------------
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the Series A
Junior Preferred Shares shall at the same time be similarly exchanged or changed
in an amount per share (subject to the provision for adjustment hereinafter set
forth) equal to 1,000 times the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is changed or exchanged. In the event the
Corporation shall at any time after the Rights Declaration Date (i) declare any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding shares of Common Stock, or (iii) combine the outstanding shares of
Common Stock into a smaller number of shares, then in each such case the amount
set forth in the preceding sentence with respect to the exchange or change of
Series A Junior Preferred Shares shall be adjusted by multiplying such amount by
a fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
Section 8. No Redemption. The Series A Junior Preferred Shares shall not
-------------
be redeemable.
Section 9. Ranking. The Series A Junior Preferred Stock shall rank junior
-------
to all other series of the Corporation's Preferred Stock as to the payment of
dividends and the distribution of assets, unless the terms of any such series
shall provide otherwise.
Section 10. Fractional Shares. Series A Junior Preferred Shares may be
-----------------
issued in fractions of a share which shall entitle the holder, in proportion to
such holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series A Junior Preferred Shares.
Section 11. Amendment. The Certificate of Incorporation of the
---------
Corporation shall not be further amended in any manner which would materially
alter or change the powers, preferences or special rights of the Series A Junior
Preferred Shares so as to affect them adversely without the affirmative vote of
the holders of a majority or more of the outstanding Series A Junior Preferred
Shares, voting separately as a class.
5
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed and subscribed this
Certificate and do affirm the foregoing as true under penalties of perjury this
3rd day of December, 1996.
/s/ Sam B. Humphries
-------------------------
Sam B. Humphries
Chief Executive Officer
ATTEST:
/s/ Wesley G. Peterson
- ----------------------------
Wesley G. Peterson
Chief Financial Officer
6
<PAGE>
EXHIBIT 10.21
FIRST AMENDMENT TO LEASE AGREEMENT
TO THE LEASE dated October 7, 1991, by and between MIG III-Kappa Corporation and
now assigned to First Industrial Financing Partnership, L.P. (a Delaware Limited
Partnership) as Landlord, and Optical Sensors Incorporated (a Delaware
corporation and successor to Optical Sensors for Medicine, Inc.) as Tenant.
THIS AMENDMENT TO LEASE, entered into and made as of April 26, 1996, by and
between First Industrial Financing Partnership, L.P., as Landlord and Optical
Sensors Incorporated, as Tenant.
WITNESSETH:
WHEREAS, Landlord and Tenant have heretofore entered into a certain Lease dated
October 7, 1991 (the "Lease") covering that certain space at 7615 Golden
Triangle Drive, Suite A, Eden Prairie, MN 55344 (the "Premises"), upon terms and
conditions described in said Lease; and
WHEREAS, Landlord and Tenant desire to amend said Lease as described below:
1. The term of the Lease as set forth in Section 1.3 thereof shall be extended
through November 30, 1999.
2. Monthly Base Rent as set forth in Section 1.4 of the Lease shall be as
follows:
December 1, 1996 - November 30, 1999 $11,888.00 per month
3. Landlord will, at Landlord's sole cost and expense, provide the improvements
to the Premises described on Exhibit A attached hereto.
4. Landlord acknowledges that Tenant uses the chemicals set forth on Exhibit B
hereto in connection with its business and that such chemicals may constitute
"Hazardous Substances" as defined in Section 14.8 of the Lease. Landlord
agrees that Tenant's use of such chemicals will not constitute a breach of or
default under the Lease as long as Tenant complies with all federal, state
and local laws and regulations applicable to the use of such chemicals.
5. Except as hereinabove set forth, all terms, provisions and covenants of the
Lease shall remain unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the
date and year first above written.
LANDLORD: TENANT:
FIRST INDUSTRIAL PARTNERSHIP, L.P., OPTICAL SENSORS INCORPORATED,
a Delaware Limited Partnership a Delaware corporation
By: First Industrial Finance Corporation,
a Maryland corporation, its general
partner
By: /s/ Duane Lund By: /s/ Sam B. Humphries
------------------------------- -------------------------------
Its: Senior Regional Director Its: President and CEO
------------------------------ ------------------------------
<PAGE>
EXHBIT 10.22
SUPPLY AGREEMENT
This Agreement, made and entered into at Milwaukee, Wisconsin this 22nd day of
August, 1996, by and between Marquette Electronics, Inc., a Wisconsin
corporation, whose principal offices are located at 8200 West Tower Avenue,
Milwaukee, Wisconsin 53223 ("Marquette") and Optical Sensors Incorporated, a
Delaware corporation ("OSI") whose principal offices are located at 7615 Golden
Triangle, Suite A, Minneapolis, Minnesota 55344;
WITNESSETH:
WHEREAS, Marquette and OSI were parties to a certain Cross Development and
Cross Supply Agreement dated July 8, 1992 which agreement was amended on October
31, 1994 and terminated by letter agreement dated September 7, 1995 (the
original agreement and October 31, 1994 amendment hereinafter collectively
referred to as the "Cross Development Agreement" and the letter agreement dated
September 7, 1995 being referred to as the "September Letter") pursuant to which
the parties contributed to the joint development of a blood chemistry sensor and
analysis system;
WHEREAS, pursuant to the terms of the September Letter, Marquette
transferred to OSI its technology so developed under the terms and conditions
therein set forth, reserving onto itself certain rights with respect to the
"Purchased Technology" and the "Marquette Product" as defined in the Cross
Development Agreement;
WHEREAS, Marquette, under its reserved rights, will shortly commence the
manufacture of the Arterial Blood Gas Module (the "ABG Module") for use in
Marquette's monitoring systems by use of the Purchased Technology and OSI has
requested that Marquette manufacture the ABG Module and sell the ABG Module to
OSI upon the terms hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants herein contained
the parties agree as follows:
1. Manufacture. Marquette shall manufacture in accordance with the
-----------
specifications for the ABG Module set forth in Exhibit A (the "ABG Module
Specifications") and sell to OSI such quantities of the ABG Module as OSI orders
pursuant to Section 5 of this Agreement.
2. Design Changes. Marquette may modify the specifications from time to
--------------
time upon not less than 60 days prior written notice to OSI.
3. Price. The purchase price payable by OSI to Marquette for each ABG
-----
Module shall be the sum of $________ per module, plus sales, use, excise or
similar taxes, that may be payable with respect to each transaction. Marquette
shall have the right, as of each anniversary date of this Agreement, to change
the unit price of the ABG Module by delivering written notice of such change to
OSI not less than thirty days prior to the end of the Contract Year. For
purposes of this Agreement, a Contract Year shall be the period ending on the
first anniversary of the execution of this Agreement and each 365 day period to
the next anniversary date. [Portions of this section have been omitted pursuant
to a request for confidentiality under Rule 24b-2 of
<PAGE>
the Securities Exchange Act of 1934, as amended. A copy of this Agreement with
this section intact has been filed separately with the Securities and Exchange
Commission.]
4. Forecasts. OSI will furnish Marquette with a rolling twelve month
---------
forecast, the first of which shall be delivered to Marquette coincident with the
execution of this Agreement and thereafter succeeding forecasts shall be
delivered to Marquette as of the first day of the third full calendar month
succeeding the date of this Agreement and as of the first day of each third
month thereafter, each such forecast to be delivered within fifteen (15) days
prior to the first day of the first month of the calendar quarter. The first
three months of such forecast shall constitute a firm order by OSI to purchase
the number of ABG Modules covered by each such forecast. The last nine months
of each forecast shall constitute a non-binding good faith estimate of expected
orders for the ABG Module covered by the forecast. Marquette will use
reasonable efforts to ship ABG Modules ordered pursuant to the forecasts
provided that OSI's purchasing history substantially conforms to the forecast.
5. Purchase Order. OSI will submit purchase orders for ABG Modules
--------------
ordered pursuant to its forecast at the time that each forecast is updated.
Such purchase order shall cover the portion of the forecast that has become a
firm order under Section 4 of this Agreement. Provided that OSI is not in
default hereunder with respect to its payment obligations or otherwise, each
purchase order delivered to Marquette during the term of this Agreement, without
necessity for acceptance by Marquette, shall give rise to a contract for the
purchase of ABG Modules under the terms set forth in this Agreement to the
exclusion of any additional or contrary terms set forth in any purchase order,
acceptance, invoice or other document.
6. Delivery and Shipment. All deliveries of ABG Modules shall be F.O.B.
---------------------
shipping point. All risk of loss or damage to ABG Modules shall pass to OSI
upon delivery to a common carrier at the shipping point. Marquette will make
all arrangements for shipment of ABG Modules in accordance with OSI's shipping
instructions. OSI shall insure each shipment of ABG Modules with a reputable
insurer for the full invoice value of such shipment. Marquette reserves all
rights with respect to delivered ABG Modules permitted by applicable law,
including, without limitation, the right of reclusion, repossession, resale and
stoppage in transit until the full amount due from OSI in respect of such
delivered ABG Modules has been paid. Title to the ABG Modules shall pass to OSI
upon payment in full.
7. Invoices and Payment. Marquette will invoice OSI upon shipment of ABG
--------------------
Modules. All invoices shall be due and payable in full within thirty (30) days
from the date of invoice. Interest at the rate of 1.5% per month, or such
lesser rate as is the maximum rate of interest permitted by law, shall be
charged on all overdue accounts. Any duties, taxes of other governmental
charges imposed by any governmental entity upon the importation, sale, purchase,
resale, shipment or possession of the ABG Modules shall be borne by OSI.
Nothing contained in this Agreement or any other agreement or understanding
between the parties shall prevent OSI from freely and unilaterally setting
resale prices for the ABG Modules.
8. Inspection. OSI shall inspect the ABG Modules and notify Marquette
----------
within thirty days of receipt of any ABG Modules that do not conform to the ABG
Module Specifications or the purchase order covering the ABG Modules. Failure
to notify Marquette in writing within
2
<PAGE>
thirty (30) days of receipt of a ABG Module of any such nonconformance will
constitute conclusive acceptance of such ABG Module by OSI. The parties shall
consult with respect to the appropriate solution to the asserted nonconformance
including, but not limited to, reinspection and rework to be performed by OSI or
Marquette at Marquette's expense, or sale of such ABG Module under appropriate
conditions for use of such ABG Modules for demonstration or testing purposes, in
each case with appropriate adjustments to the purchase price to be paid by OSI.
If no such arrangements are agreed to by the parties and if such ABG Module is
determined to be nonconforming, Marquette shall credit OSI with the purchase
price of such ABG Modules.
9. Warranties. Marquette warrants to OSI that the ABG Module will be
----------
manufactured in accordance with the ABG Module Specifications and will be free
from defects in material and workmanship for a period of one year from the date
of shipment. Marquette will repair or replace, at its option and cost, any
defective ABG Module. Marquette warrants that the ABG Modules will be
manufactured in compliance with all applicable federal, state and local laws and
regulations pertaining to the manufacture of medical devices including, but not
limited to, the Food, Drug and Cosmetic Act, as amended, and U.S. Food and Drug
Administration (the "FDA") and Good Manufacturing Practice for Medical Devices
regulations ("GMP").
10. Limitation of Liability. The warranties set forth in Section 9 are
-----------------------
intended solely or the benefit of OSI. All claims hereunder shall be made by
OSI and may not be made by OSI's customers. THE WARRANTIES SET FORTH IN SECTION
9 ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WHICH ARE HEREBY
DISCLAIMED AND EXCLUDED BY MARQUETTE, INCLUDING WITHOUT LIMITATION ANY WARRANTY
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. Marquette will not be
liable for any loss or damage caused by delay in furnishing ABG Modules under
this Agreement. The sole and exclusive remedies for breach of any and all
warranties with respect to the ABG Modules shall be limited to the remedies
provided in Section 9. IN NO EVENT WILL MARQUETTE'S LIABILITY OF ANY KIND
INCLUDE ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL LOSSES OF DAMAGES,
EVEN IF MARQUETTE HAD BEEN ADVISED OF THE POSSIBILITY OF SUCH POTENTIAL LOSS OR
DAMAGES.
11. Labeling and Trademarks. Marquette shall mark the ABG Module with the
-----------------------
name "Optical Sensors" or such other name as OSI requests in accordance with
OSI's instructions. OSI grants Marquette a nonexclusive, nontransferable,
royalty-free license to use OSI's trademarks to the extent necessary to mark the
ABG Module in accordance with OSI's instructions. Marquette shall not acquire
any right, title or interest in OSI's trademark, and Marquette shall cease using
OSI's trademark upon termination of this Agreement.
12. Regulatory Matters.
------------------
(a) Complaints. Each party will forward to the other copies of customer
----------
complaints and medical device reports ("MDR") relating to events
required to be reported by the FDA in accordance with 21 CFR Part 803
relating to the manufacture and operation of the ABG Module, and each
party will cooperate fully with the other
3
<PAGE>
party in investigating and resolving such complaints, including any
necessary testing and analysis of the ABG Module.
(b) Registration. Marquette has registered or will timely register with
------------
the FDA as a Contract Medical Device manufacture, or cause to be
timely registered with the FDA, in accordance with 21 CFR Part 807,
each establishment which Marquette or a subcontractor of Marquette
intends to manufacture and/or repair the ABG Module.
(c) FDA Inspection Reports. Marquette will provide OSI with copies of any
----------------------
FDA Form 483 observations, follow-up earning letters and/or close-out
reports for those portions of GMP compliance inspection reports
resulting specifically to the manufacture of ABG Modules for any
facility where ABG Modules are manufactured.
13. Recalls. The parties agree to establish a procedure which will enable
-------
each ABG Module purchased by OSI under this Agreement to be located in the event
of a recall, OSI agreeing to maintain records of the serial number and revision
levels for each ABG Module sold to a customer. Each party agrees to promptly
notify the other party of any event that may lead to a ABG Module recall or
which may be required to be reported under the Medical Device Reporting
regulations of the FDA. OSI will bear all expenses of any ABG Module recall
mandated by the FDA or other administrative authority having like functions in
countries other than the United States.
14. Confidentiality. Each party acknowledges and agrees that all the
---------------
information provided by the other party that is marked as proprietary or
confidential or which by its nature or the context in which it is given should
reasonable by understood to be confidential shall be deemed "Confidential
Information" for purposes of this Agreement. Each party agrees not to use any
Confidential Information for any purpose other than as permitted or required for
performance by it under this Agreement and not to disclose or provide any
Confidential Information to any third party and to take all necessary measures
to prevent any such disclosure by its employees, agents, contractors or
consultants. Upon request or termination of this Agreement, each party will
return all such Confidential Information of the other party to the other party.
Each party's obligations under this Section 14 shall survive termination of this
Agreement.
15. Indemnification. Marquette agrees to indemnify and hold harmless OSI
---------------
and its affiliates, officers, directors, shareholders, employees and agents,
from and against all costs, claims, losses, damages, liability and expenses
(including, without limitations, reasonable attorney's fees) incurred on account
of any injury to persons or property arising out of (i) any failure by Marquette
to manufacture an ABG Module in accordance with the ABG Module Specifications or
(ii) other manufacturing defects, unless in any such case such costs, claims,
losses, damages, liability or expenses result in the negligence or willful
misconduct of OSI.
OSI agrees to indemnify and hold harmless Marquette and its
affiliates, officers, directors, shareholders, employees and agents from and
against all costs, claims, losses, damages, liability and expenses (including
without limitation, reasonable attorneys fees) incurred on account of any
4
<PAGE>
injury to person or property arising out of the design or absence of warning
labels appended to the ABG Module, unless in each case such costs, claims,
losses, damages, liability or expenses result in the negligence or willful
misconduct of Marquette.
<TABLE>
<C> <S>
16. Insurance Requirements. Each party will carry product liability
----------------------
insurance covering any loss, damage, expense or liability incurred or suffered
by any party other than OSI or Marquette arising out of any use of a Product.
Such policy or policies shall (a) have aggregate limits of liability of not less
than $5,000,000 with respect to any incident or occurrence and of not less than
$20,000,000 in aggregate; (b) name both OSI and Marquette as insured parties;
(c) provide for a deductible or retained amount of not more than $500,000; and
(d) provide that such policy may not be canceled except upon not less than 30
days' written notice to both Marquette and OSI. Each party shall provide such
evidence of the effectiveness of such insurance to the other party as may be
reasonably requested.
17. Intellectual Property Rights. Marquette acknowledges that all
----------------------------
intellectual property rights relating to the ABG Module are the sole and
exclusive property of OSI, subject only to the rights reserved by Marquette
pursuant to the September Letter.
18. Term and Termination. This Agreement shall take effect as of the
--------------------
date hereof and shall continue in force for a period of two years and shall
automatically renew for additional one-year periods from the end of each
Contract Year unless terminated by either party upon not less than 60 days'
written notice prior to the end of such Contract Year. Notwithstanding the
foregoing, either party may terminate this Agreement:
</TABLE>
(a) by giving written notice to the other party in the event the other
party is in material breach of this Agreement and shall have
failed either to cure such material breach within thirty (30) days
of receipt of written notice thereto or, if cure is not possible
within thirty (30) days, to have taken reasonable steps to
commence to cure such material breach within such thirty (30) day
period; or
(b) at any time by giving written notice to the other party, which
notice shall be effective upon dispatch, should the other party
file a bankruptcy petition or have a bankruptcy petition filed
against it which is not discharged within thirty (30) days, be
declared bankrupt, become insolvent, make an assignment for the
benefit of creditors or go into liquidation or receivership.
19. Rights and Obligations Upon Termination. In the event of the
---------------------------------------
termination of this Agreement for any reason, OSI will remain responsible for
payment of all ABG Modules for which it has issued purchase orders and delivery
has been made prior to the effective date of termination and for the first three
months of the most recently submitted rolling forecast.
20. Miscellaneous. This Agreement shall be governed by, interpreted
-------------
and construed in accordance with the laws of Wisconsin without giving effect to
the principles of conflicts of laws. Neither party shall assign its rights or
delegate its duties under this Agreement without the prior written consent of
the other party; provided that either party may assign any or all of its rights
and obligations under this Agreement to any successor in interest of all or
substantially all of the
5
<PAGE>
business of such party my merger, operation of law, assignment, purchase or
otherwise or to any of its affiliates. All terms and conditions of this
Agreement shall be binding on and inure to the benefit of the successors and
permitted assigns of the parties. This Agreement does not make either party the
employee, agent or legal representative of the other for any purpose whatsoever.
Neither party is granted any right or authority to assume or to create any
obligation or responsibility, express or implied, on behalf or in the name of
the other party. In fulfilling its obligations pursuant to this Agreement, each
party shall be acting as an independent contractor. This Agreement, including
the exhibits hereto, all of which are attached to and incorporate into this
Agreement, constitutes the entire agreement of the parties with respect to he
subject matter of this Agreement, and supersedes all previous proposals,
negotiations, conversations or discussions, oral or written, between the parties
related to this Agreement. Any controversy or claim arising out of or relating
to this -Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the Rules of the American Arbitration Association, and judgment
upon the reward rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof.
The parties have executed this Agreement on the day and year first
above written.
MARQUETTE ELECTRONICS, INC.
By: /s/ Fred Robertson
----------------------------
OPTICAL SENSORS INCORPORATED
By: /s/ Sam B. Humphries
----------------------------
6
<PAGE>
Exhibit A
[The material in Exhibit A has been omitted, in its entirety, pursuant to a
request for confidentiality under Rule 24b-2 of the Securities Exchange Act of
1934, as amended. A copy of this Agreement with this Exhibit intact has been
filed separately with the Securities and Exchange Commission.]
A-1
<PAGE>
EXHIBIT 10.23
MANUFACTURING SUPPLY AGREEMENT
THIS AGREEMENT is entered into effective as of September 10, 1996, between
Optical Sensors Incorporated, a Delaware corporation, with its principal place
of business at 7615 Golden Triangle Drive, Technology Park Five, Eden Prairie,
Minnesota 55344 ("OSI") and SpecTran Specialty Optics Company, a Delaware
corporation, with its principal place of business at 150 Fisher Drive, P.O. Box
1260 Avon, Connecticut 06001 ("SSOC").
RECITALS
A. The parties have previously entered into a Manufacturing Supply Agreement,
dated October 26, 1994 (the "Prior Agreement"), relating to the supply of a
Hybrid Interconnect System which is used with the current version of OSI's
arterial blood gas measuring device.
B. OSI is developing a new arterial blood gas measuring device in a manner that
will not require the of use the Hybrid Interconnect System (as defined in
the Prior Agreement) with future versions of OSI's device.
C. The parties desire to enter into this Agreement for the manufacture and
supply of a fiber optic cable that will be used with OSI's new arterial
blood gas measuring device.
In consideration of the mutual covenants set forth below, the parties mutually
agree as follows:
ARTICLE
1.
DEFINITIONS
The following words, terms and phrases, where capitalized, shall have the
meanings assigned to them in this Article 1, unless the context requires
otherwise.
1.1. Annual Forecast. "Annual Forecast" shall mean OSI's annual forecast of the
---------------
quantity of Products that OSI anticipates ordering each year during the
term of this Agreement.
1.2. Confidential Information. "Confidential Information" shall have the
------------------------
definition given such term in Section 7.1.
1.3. Leadtime. "Leadtime" shall mean the minimum time in which SSOC shall be
--------
required to deliver the Product ordered by OSI following SSOC's receipt of
a purchase order from OSI, which shall be eight (8) weeks.
1.4. Product. "Product" shall mean the new patient cable assembly for OSI's
-------
arterial blood gas measuring system, which is described in the system
specifications set forth in Exhibit A and consisting of the components set
forth in Exhibit B.
1.5. Specifications. "Specifications" shall mean the latest revision levels for
--------------
the component parts of the Product, as set forth on Exhibit B, and the
system specifications for the
<PAGE>
Product, as set forth in Exhibit A, which may be amended from time to time
upon the mutual agreement of the parties.
ARTICLE
2.
MANUFACTURE OF THE PRODUCT
2.1. Agreement to Manufacture and Purchase. SSOC shall manufacture and sell to
-------------------------------------
OSI, and OSI shall purchase from SSOC, such quantities of the Product for
which OSI may issue purchase orders under this Agreement; provided,
however, that OSI shall purchase a minimum of ____________ (_____) units of
the Product during the term of this Agreement, as set forth in Section 6.1.
OSI may authorize third parties to purchase the Product directly from SSOC,
and such purchases shall be counted as if made by OSI for purposes of
determining whether or not OSI has purchased the ______ unit minimum
quantity. In no event will OSI be obligated to purchase more than ______
units of the Product (including units purchased by third parties) under
this Agreement. Subject to the foregoing minimum purchase requirement, OSI
shall not be restricted from purchasing the Product from other third party
suppliers. SSOC shall manufacture the Product in accordance with the
Specifications, as may be modified from time to time upon mutual agreement
of the parties. OSI will supply to SSOC or provide for direct supply to
SSOC, at no cost to SSOC, those components of the Product identified on
Exhibit B as being supplied by OSI in sufficient quantities and leadtime to
enable SSOC to manufacture and deliver the Product in accordance with the
forecast described in Section 3.3. SSOC will procure the components of the
Product that are so indicated on Exhibit B. [Portions of this section have
been omitted pursuant to a request for confidentiality under Rule 24b-2 of
the Securities Exchange Act of 1934, as amended. A copy of this Agreement
with this section intact has been filed separately with the Securities and
Exchange Commission.]
2.2. Engineering and Development. SSOC will perform all design and development
---------------------------
work necessary to manufacture the Product in accordance with the
Specifications. SSOC will deliver to OSI copies of documentation as
follows: the Specifications, toleranced and dimensioned mechanical
drawings of the Product and its subcomponents, test procedures, performance
of the Product against the test criteria, and bill of materials including
supplier and supplier part numbers. OSI shall be the exclusive owner of
all such documentation; provided, however, that SSOC shall be permitted to
retain one (1) copy of such documentation and to use such documentation for
fiber optic cables used in non-medical applications (i.e., applications not
involving the diagnosis or treatment of conditions in humans). The parties
acknowledge and agree that SSOC owns the crimp and cleave technology
developed under the Prior Agreement and certain manufacturing assembly
processes for the assembly of fiber optic cables which will be used in
connection with the Product and which shall remain the exclusive property
of SSOC. SSOC acknowledges that OSI does not desire to receive, be given
access to or view any aspect of SSOC's proprietary manufacturing process,
and SSOC agrees not to disclose in any manner any
2
<PAGE>
aspect of such proprietary manufacturing process to OSI. Notwithstanding
any other provision of this Agreement, if SSOC makes any such disclosure to
OSI without declaring in advance (and confirming in writing within 30 days
thereafter) that the information relating to such manufacturing process
being disclosed is Confidential Information (as defined in Section 7.1),
OSI shall not be prohibited from using or disclosing to third parties such
manufacturing process.
2.3. Engineering Changes. OSI may from time to time direct that modifications
-------------------
be made to the design of the Product. SSOC will use commercially reasonable
efforts to make such modifications as soon as practicable upon receipt of
such written notice from OSI. SSOC will not make any changes in the design
of the Product or any material changes in the tooling or manufacturing
processes related to the production of the Product, without the prior
written consent of OSI, which will not be unreasonably withheld.
2.4. Equipment and Tooling. The parties acknowledge that certain equipment and
---------------------
tooling used by SSOC for the manufacture of the Hybrid Interconnect System
under the Prior Agreement and the manufacture of the Product is owned by
OSI, which is listed on Exhibit C, and SSOC will deliver such equipment and
tooling to OSI upon termination or expiration of the Prior Agreement, at
OSI's expense.
2.5. Inspection Rights. During the term of this Agreement, OSI shall have the
-----------------
right to witness and inspect at SSOC's facility, under the supervision of
SSOC personnel, during normal business hours and one week after written
notice from OSI to SSOC requesting an inspection (unless SSOC otherwise
permits an earlier inspection), the manufacture and production of the
Product for the purpose of verifying compliance with the Specifications and
applicable law; provided, however, that SSOC shall have the right, in its
sole discretion, to determine the regions of the facility that may be
inspected so long as the ability of OSI to adequately verify compliance
with the Specifications and applicable law is not materially impaired.
ARTICLE
3.
ORDERS FOR PRODUCT
3.1. Purchase Orders. OSI shall submit purchase orders for the Product to SSOC
---------------
by written notice. All purchase orders shall cover a minimum of fifty (50)
units of the Product.
3.2. Acceptance of Orders. All purchase orders are subject to approval and
--------------------
acceptance by SSOC at its offices in Avon, Connecticut by written notice to
OSI; provided, however, that the failure of SSOC to respond in writing to a
purchase order within ten (10) business days of receipt thereof shall
result in such purchase order being deemed approved and accepted by SSOC.
Each purchase order, upon acceptance by SSOC, shall give rise to a contract
for the purchase of Product under the terms set forth in this Agreement to
the exclusion of any additional or contrary terms set forth in SSOC's
confirmation of
3
<PAGE>
acceptance, invoice or other document not signed by an authorized employee
of OSI. Any terms of the purchase order that are contrary or in addition to
the terms of this Agreement shall be ineffective.
3.3. Rolling and Annual Forecasts. Beginning on the effective date of this
----------------------------
Agreement, OSI shall furnish to SSOC within ten (10) business days of each
month a written rolling twelve (12) month forecast of its expected orders
of the Product. The first three (3) months of each forecast shall
constitute a firm order to purchase the Product specified. The last nine
(9) months of each forecast shall constitute a non-binding good faith
estimate of expected orders for the Product.
3.4. Delivery Schedule. SSOC shall not deliver the Product later or
-----------------
substantially earlier than the dates indicated on each purchase order,
provided, that such requested delivery dates shall not be earlier than the
Leadtime; provided, however, that if the actual purchase order
substantially exceeds OSI's forecast, SSOC shall be granted a reasonable
extension of the delivery date sufficient to fulfill such excess order.
3.5. Delivery and Shipment. All deliveries of the Product hereunder shall be
---------------------
F.O.B. shipping point (in good condition and packaged for shipment in
accordance with SSOC's standard practices). Title and all risk of loss or
damage to the Product shall pass to OSI upon delivery to a common carrier
at the shipping point. SSOC shall make all arrangements for shipments of
the Product in accordance with OSI's shipping instructions. Unless
otherwise agreed in writing, SSOC shall prepay all freight costs for each
shipment, and such costs shall be listed separately in SSOC's commercial
invoice and reimbursed to SSOC by OSI in accordance with Section 4.3 below.
ARTICLE
4.
PRICES AND PAYMENT
4.1. Prices. The price to be paid by OSI for the first _____________ (_____)
------
units of the Product purchased pursuant to this Agreement shall be $______
per unit. The parties will negotiate in good faith the price to be paid by
OSI for any additional units of the Product purchased pursuant to this
Agreement. [Portions of this section have been omitted pursuant to a
request for confidentiality under Rule 24b-2 of the Securities Exchange Act
of 1934, as amended. A copy of this Agreement with this section intact has
been filed separately with the Securities and Exchange Commission.]
4.2. Non-Recurring Engineering Charges. OSI shall pay SSOC a total of $96,650
---------------------------------
in engineering charges for the development of the Product contemplated by
Section 2.2, payable as follows: $10,000 paid prior to the execution of
this Agreement (receipt of which is acknowledged by SSOC); $20,000 upon
delivery to and acceptance by OSI of a prototype of the cable portion of
the Product; $20,000 upon delivery to OSI of a valid test report showing
that the cable portion of the Product meets the Specifications; $20,000
upon delivery to and acceptance by OSI of a prototype of the Product;
$20,000 upon
4
<PAGE>
delivery to OSI of a valid test report showing that the entire Product
meets the Specifications; and $6,650 upon delivery to and acceptance by OSI
of ten (10) final assemblies of the Product that meet Specifications.
4.3. Engineering Changes. The price set forth in Section 4.1 is based on a
-------------------
Product manufactured and assembled according to the Specifications, as
amended from time to time in accordance with this Agreement. In the event
that OSI requests an engineering change pursuant to Section 2.3 above (i)
OSI shall reimburse SSOC for the reasonable expenses, including labor,
incurred by SSOC in effecting the engineering change, and (ii) the parties
shall mutually agree on an increase or decrease in the unit price for the
Product as a result of such change. In addition, in the event of a Product
engineering change, OSI shall be obligated to purchase from SSOC the amount
of OSI's three (3) month firm order outstanding, as of the date of written
notice of such change, pursuant to Section 3.3 above for such Product as is
made obsolete by the engineering change (which shall be delivered in
accordance with Section 3.4 above) and raw materials or supplies not
incorporated into final the Product subject to noncancellable order by SSOC
with its vendors (or if is cancellable OSI will reimburse SSOC for any
cancellation or related charges); provided that OSI's obligation to
purchase raw materials or supplies shall be limited to quantities necessary
to produce Products for a six month period based on OSI's most recent
forecast at the time SSOC purchases such raw materials or supplies;
provided further that OSI's obligation to purchase the three (3) month firm
order or raw material and supplies shall be reduced (or eliminated) in the
event and to the extent that OSI provides SSOC advance written notice of an
engineering change.
4.4. Invoices and Payment. SSOC shall invoice OSI upon shipment of Products
--------------------
hereunder for the amount payable by OSI for such items and for freight
prepaid by SSOC and reimbursable by OSI. All such invoices shall be due
and payable in full within thirty (30) days from the date of invoice. All
payments shall be made in U.S. dollars. Interest at the rate of 1.5% per
month, or such lesser rate as is the maximum rate of interest permitted by
law, shall be charged on all overdue accounts. In the case of a payment
default, OSI shall reimburse SSOC for all reasonable costs of collection,
including, without limitation, reasonable attorneys' fees and other
litigation and settlement costs.
ARTICLE
5.
ACCEPTANCE/REJECTION OF PRODUCT AND WARRANTY
5.1. Acceptance/Rejection of Product. OSI shall have the right to reject any
-------------------------------
Product that does not conform to Specifications and the terms of this
Agreement. Within thirty (30) days of receiving a nonconforming shipment of
the Product at its facility in Eden Prairie, Minnesota, OSI shall provide
SSOC a written notice of rejection. OSI shall state its reasons for
rejecting the Product in such notice. Any Product not rejected by OSI
pursuant to this Section 5.1 shall be deemed accepted. A sample of a
rejected Product lot shall be returned by OSI to SSOC as soon as possible
following delivery of a rejection
5
<PAGE>
notice. SSOC agrees to analyze the rejected Product within two weeks after
receipt thereof, and the parties shall use their best efforts to mutually
agree upon an acceptable disposition of the rejected item. Upon agreement
between the parties as to the disposition of the rejected item, SSOC shall
as soon as practicable deliver additional or substitute Product without
charge to OSI at the shipping address specified by OSI in the initial
purchase order or as otherwise agreed by the parties.
5.2. Warranty. SSOC warrants that the Products shall conform to the
--------
Specifications, as the same may be amended from time to time. THIS WARRANTY
IS EXCLUSIVE AND SSOC MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR
FITNESS FOR ANY PARTICULAR PURPOSE. SSOC warranties made in connection with
any sale shall not be effective if SSOC has determined, in its sole and
reasonable discretion, that OSI has misused the Product. OSI assumes all
risk and liability resulting from use of the Product whether used
singularly or in combination with other products. SSOC's sole and exclusive
liability and OSI's exclusive remedy with respect to Product found to be
defective or non-conforming shall be the replacement of such Product
without charge or refund of the purchase price, in SSOC's sole discretion,
upon the disposition of such Product in accordance with SSOC instructions.
SSOC SHALL NOT BE LIABLE FOR ANY INCIDENTAL, CONSEQUENTIAL, SPECIAL,
INDIRECT OR LIQUIDATED DAMAGES (INCLUDING, BUT NOT LIMITED TO, DAMAGES FOR
LOST PROFITS OR INJURY TO PERSON OR PROPERTY). OSI assumes all
responsibility and liability for injury or damages resulting from its
handling, possession, use or sale of the Product and agrees to indemnify
and hold harmless SSOC from and against any and all claims, losses,
liabilities and expenses (including reasonable attorneys' fees and other
litigation or settlement costs) arising out of such handling, possession,
use or sale.
ARTICLE
6.
TERM AND TERMINATION
6.1. Term. This Agreement shall take effect as of the date first written above
----
and shall continue in force for a term of two (2) years from the date that
OSI receives ten (10) final assemblies of the Product that meet
Specifications, unless earlier terminated pursuant to Section 6.2.
6.2. Termination. Notwithstanding the provisions of Section 6.1 above, this
-----------
Agreement may be terminated in accordance with the following provisions:
(a) either party may terminate this Agreement by giving written notice to
the other party in the event the other party is in material breach of
this Agreement and shall have failed either to cure such material
breach within thirty (30) days of receipt of written notice thereof
or, if cure is not possible within thirty (30) days, to have
6
<PAGE>
taken reasonable steps to commence to cure such material breach within
such thirty (30) day period; or
(b) either party may terminate this Agreement, at any time by giving
written notice to the other party, which notice shall be effective
upon dispatch, should the other party file a petition of any type as
to its bankruptcy or have a bankruptcy petition filed against it which
is not discharged within thirty (30) days, be declared bankrupt,
become insolvent, make an assignment for the benefit of creditors, go
into liquidation or receivership, or otherwise lose legal control of
its business; or
(c) OSI may terminate this Agreement immediately upon written notice to
SSOC if it fails to deliver three line items in any purchase order
within sixty (60) days of the date SSOC acknowledges such order
pursuant to Section 3.2, in accordance with the Leadtime specified in
Sections 1.3 and 3.4; provided that OSI has given SSOC thirty (30)
days' prior written notice that such order is at least thirty (30)
days past due; and provided further that OSI has fully complied with
Section 3.3.
6.3. Rights and Obligations Upon Termination. In the event of the termination
---------------------------------------
of this Agreement for any reason, the parties shall have the following
rights and obligations:
(a) OSI shall remain responsible for payment of all units of the Product
for which it has issued purchase orders and delivery has been made
prior to the effective date of termination and for the first three
months of the most recently submitted rolling forecast (which shall be
delivered in accordance with Section 3.4 above); and
(b) Each party agrees to cease using the Confidential Information
disclosed to it by the other party for any purpose and return to the
other party all documentation relating to the Confidential Information
within sixty (60) days after termination and to destroy all other
copies of such documentation, or to make such disposition thereof as
instructed by the other party; and
(c) Each party's obligations under Article 7 shall survive termination of
this Agreement for a period of three years after termination.
ARTICLE
7.
CONFIDENTIALITY
7.1. Confidential Information. Except as set forth in Section 2.2,
------------------------
"Confidential Information" means any information which is disclosed by
either party in any tangible form and is clearly labeled or marked as
confidential, proprietary or its equivalent, or information which is
disclosed orally or visually, is designated confidential, proprietary or
its equivalent at the time of its disclosure and is reduced to writing and
clearly marked or labeled as confidential, proprietary or its equivalent
within thirty (30) days of disclosure.
7
<PAGE>
7.2. Non-Disclosure. Neither party, nor its employees, will disclose any
--------------
Confidential Information to any third party or use Confidential Information
of the other party except as is necessary to perform its obligations under
this Agreement. The party receiving Confidential Information will make the
Confidential Information available only to its employees who have a need
for such access. The obligations of each party regarding disclosure and use
of Confidential Information shall be deemed to be satisfied by a party if
such party exercises the same degree of care used to restrict disclosure
and use of its own proprietary information. Each party represents and
warrants to the other party that it has established and follows reasonable
and customary procedures prevent unauthorized use and disclosure of its own
proprietary information. All proprietary and copyright notices in the
original must be affixed to copies or partial copies.
7.3. Exceptions. The receiving party shall not be obligated to maintain any
----------
information in confidence or refrain from use, if:
(a) The information was in the receiving party's possession or was known
to it prior to its receipt from the disclosing party;
(b) The information is or becomes public knowledge without the fault of
the receiving party;
(c) The information is or becomes rightfully available on an unrestricted
basis to the receiving party from a source other than the disclosing
party;
(d) The information becomes available on an unrestricted basis to a third
party from the disclosing party or from someone acting under its
control; or
(e) The information is required to be disclosed by court or government
order.
7.4. No Transfer of Ownership. No license or transfer of ownership in any
------------------------
Confidential Information is granted or conveyed, directly or indirectly,
under any patent, trade secret, copyright, mask work right, or other
intellectual property right now held by, or which may be obtained by any
party as a result of the disclosure of any Confidential Information.
ARTICLE
8.
MISCELLANEOUS
8.1. Governing Law. This Agreement shall be governed by, interpreted and
-------------
construed in accordance with the laws of Connecticut without giving effect
to the principles of conflicts of laws.
8.2. Assignment. Neither party shall have the right to assign or otherwise
----------
transfer its rights and obligations under this Agreement without the prior
written consent of the other party; provided that either party may assign
any or all of its rights and obligations under this
8
<PAGE>
Agreement to any successor in interest of all or substantially all of the
business of such party by merger, operation of law, assignment, purchase or
otherwise or to any of its affiliates. Any prohibited assignment shall be
null and void. All terms and conditions of this Agreement shall be binding
on and inure to the benefit of the successors and permitted assigns of the
parties.
8.3. Relationship. This Agreement does not make either party the employee,
------------
agent or legal representative of the other for any purpose whatsoever.
Neither party is granted any right or authority to assume or to create any
obligation or responsibility, express or implied, on behalf of or in the
name of the other party. In fulfilling its obligations pursuant to this
Agreement, each party shall be acting as an independent contractor.
8.4. Written Notice. Notice permitted or required to be given under this
--------------
Agreement shall be deemed sufficient if given in writing by facsimile,
courier or by registered or certified mail, postage prepaid, return receipt
requested, addressed to the respective addresses of the parties set forth
below or at such other address as the respective parties may designate by
like notice from time to time. Notices so given shall be effective upon (a)
receipt by the party to which notice is given (which, in the instance of a
facsimile, shall be deemed to have occurred at the time that the machine
transmitting the facsimile verifies a successful transmission of the
facsimile), or (b) on the fifth business day following the date such notice
was posted, whichever occurs first. Notices shall be given as follows:
If to SSOC to: SpecTran Specialty Optics Company
150 Fisher Drive
P.O. Box 1260
Avon, Connecticut 06001
Attn: Bill Beck
Fax: 203-674-8818
With a copy to: Hackmyer & Nordlicht
645 Fifth Avenue
New York, New York 10022
Attn: Ira S. Nordlicht, Esq.
Fax: 212-421-6500
If to OSI to: Optical Sensors Incorporated
7615 Golden Triangle Drive
Technology Park Five
Eden Prairie, Minnesota 55344
Attn: Sam B. Humphries
Fax: 612-944-6022
With a copy to: Oppenheimer Wolff & Donnelly
3400 Plaza VII
45 South Seventh Street
Minneapolis, Minnesota 55402
9
<PAGE>
Attn: Thomas A. Letscher
Fax: 612-344-9376
8.5. Entire Agreement. This Agreement, including Exhibits A through C, all of
----------------
which are attached to and incorporated into this Agreement, constitutes
the entire agreement of the parties with respect to the subject matter of
this Agreement, and supersedes all previous proposals, negotiations,
conversations or discussions, oral or written, between the parties related
to this Agreement. Each party acknowledges that it has not been induced to
enter into this Agreement by any representations or statements, oral or
written, not expressly contained in this Agreement. The Prior Agreement
shall remain in effect in accordance with its terms until it expires or is
terminated in accordance with its terms by either of the parties.
8.6. Amendment. This Agreement shall not be deemed or construed to be
---------
modified, amended, rescinded, cancelled or waived, in whole or in part,
other than by written amendment signed by the parties to this Agreement.
8.7. Waiver. No party shall be deemed to have waived the right to take any
------
action or assert any claim under this Agreement by failing to take the
action or assert the claim, even though the circumstances giving rise to
the action or claim have been continuing or repeating.
8.8. Severability. In the event that any of the terms of this Agreement are in
------------
conflict with any rule of law or statutory provision or otherwise
unenforceable under the laws or regulations of any government or its
subdivision, the terms shall be deemed to be stricken from this Agreement.
The invalidity or unenforceability of these terms shall not invalidate any
of the other terms of this Agreement. This Agreement shall continue in
force unless the invalidity or unenforceability of any of the provisions
of this Agreement substantially violates, comprises an integral part of or
is otherwise inseparable from the remainder of this Agreement.
8.9. Counterparts. This Agreement may be executed in two or more counterparts,
------------
each of which shall be deemed to be an original.
8.10. Arbitration. Any controversy or claim arising out of or relating to this
-----------
Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the Rules of the American Arbitration Association, and
judgment upon the award rendered by the arbitrator(s) may be entered in
any court having jurisdiction thereof.
8.11. Force Majeure. The failure of either party to perform any obligation
-------------
under this Agreement, except for the obligation to pay amounts due and
owing, shall not subject the party so failing to any liability to the
other if such failure shall be caused or occasioned by act of God or the
public enemy, governmental action, fire, explosion, flood, drought, war,
riot, sabotage, embargo, interruption or delay in transportation, shortage
of fuel, energy or utilities, or by any other event or circumstance of a
similar nature beyond the reasonable control of the party so failing
("Force Majeure"); provided, however, that the party whose performance is
affected shall be relieved of any liability hereunder only to the extent
and
10
<PAGE>
only for so long as its performance is prevented by the event of Force
Majeure. During the period the performance of one of the parties of its
obligations under this Agreement has been suspended by reason of an event
of Force Majeure, the other party may likewise suspend performance of all
or part of its obligations, except for the obligation to pay amounts due
and owing, to the extent commercially reasonable. If an event of Force
Majeure prevents performance hereunder by either party for more than
ninety (90) consecutive days, the party whose performance is not prevented
by such event may terminate this Agreement on written notice to the other
without any liability hereunder, except the obligation to make payments
due to such date.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
on the date first written above.
OPTICAL SENSORS INCORPORATED SPECTRAN SPECIALTY OPTICS
COMPANY
By /s/ Sam B. Humphries By /s/ William Beck
--------------------------------- -------------------------------
Its President and CEO Its President 9/19/96
-------------------------------- ------------------------------
11
<PAGE>
EXHIBIT A - SYSTEM SPECIFICATIONS
[The material in Exhibit A has been omitted, in its entirety, pursuant to a
request for confidentiality under Rule 24b-2 of the Securities Exchange Act of
1934, as amended. A copy of this Agreement with this Exhibit intact has been
filed separately with the Securities and Exchange Commission.]
12
<PAGE>
EXHIBIT B - LIST OF COMPONENTS THAT ARE NOT PART OF THE NEW PRODUCT
[The material in Exhibit B has been omitted, in its entirety, pursuant to a
request for confidentiality under Rule 24b-2 of the Securities Exchange Act of
1934, as amended. A copy of this Agreement with this Exhibit intact has been
filed separately with the Securities and Exchange Commission.]
13
<PAGE>
EXHIBIT C - NEW PRODUCT BOM
[The material in Exhibit C has been omitted, in its entirety, pursuant to a
request for confidentiality under Rule 24b-2 of the Securities Exchange Act of
1934, as amended. A copy of this Agreement with this Exhibit intact has been
filed separately with the Securities and Exchange Commission.]
14
<PAGE>
EXHIBIT D - EXISTING TOOLING LIST
[The material in Exhibit D has been omitted, in its entirety, pursuant to a
request for confidentiality under Rule 24b-2 of the Securities Exchange Act of
1934, as amended. A copy of this Agreement with this Exhibit intact has been
filed separately with the Securities and Exchange Commission.]
15
<PAGE>
EXHIBIT 10.24
OPTICAL SENSORS INCORPORATED
PURCHASE ORDER
Date: 2/21/97
SeaMED Corporation
14500 N.E. 87th Street
Redmond, Washington 98052
Ladies/Gentlemen:
This Purchase Order, upon acceptance by SeaMED Corporation ("Contractor"),
constitutes the agreement of Optical Sensors Incorporated ("Buyer") to purchase
from and Contractor, and Contractor to manufacture and sell to Buyer, Buyer's
OpticalCam Arterial Blood Gas Monitor, Buyer's Part No. 01481 (the "Product").
Buyer's Standard Terms and Conditions of Purchase, which are attached hereto,
shall apply to this Purchase Order. The term Seller in the Standard Terms and
Conditions shall mean Contractor. If any terms of this Purchase Order are
inconsistent with the Standard Terms and Conditions, the terms of this Purchase
Order shall control.
Price
The per unit price to be paid by Buyer for the Product is set forth on Exhibit A
Buyer will pay for any additional cost due to unavailability of piece parts from
production tooling, at Contractor's cost (without any mark-up), pursuant to a
separate purchase order to be issued by Buyer. [Portions of this section have
been omitted pursuant to a request for confidentiality under Rule 24b-2 of the
Securities Exchange Act of 1934, as amended. A copy of this Agreement with this
section intact has been filed separately with the Securities and Exchange
Commission.]
Quantity, Delivery Dates and Forecast
This Purchase Order covers a total of _____ units of the Product. Buyer's
Forecast of its anticipated delivery dates for the Product during 1997 is
attached hereto as Exhibit B. The delivery dates set forth in the first four
(4) months of the Forecast are firm delivery dates. The delivery dates set
forth in the remainder of the Forecast represent Buyer's current estimate of its
requested delivery dates during 1997 and are not binding in any manner, except
that Buyer will take delivery of all units of the Product covered by this
Purchase Order within eighteen (18) months of the date of this Purchase Order.
Buyer will update the Forecast monthly, provided that Buyer will not be
obligated to purchase more than ____ units of the Product, even if the Forecast
calls for more than ____ units, unless Buyer issues a subsequent Purchase Order
covering such additional units. Contractor will use its best efforts to inform
Buyer of a need to authorize procurement of long lead time materials and
outplant services for forecasted purchases that are not covered by this Purchase
Order. Contractor will not order any such materials for forecasted
<PAGE>
quantities of Product that are not covered by this Purchase Order or any
subsequent Purchase Order without the prior written consent of Buyer. Buyer will
provide Contractor with an inventory deposit for all inventory procured and paid
for by Contractor that is held for a period in excess of sixty (60) days due to
slide in production forecast. [Portions of this section have been omitted
pursuant to a request for confidentiality under Rule 24b-2 of the Securities
Exchange Act of 1934, as amended. A copy of this Agreement with this section
intact has been filed separately with the Securities and Exchange Commission.]
Specifications
Contractor will manufacture the Product in accordance with Buyer's
specifications, number 01481 (the "Specifications"), a copy of which has been
previously provided to Contractor.
Warranty
Contractor warrants for fifteen (15) months from date of shipment to Buyer that
all Products shall be free from defects in material and workmanship, and shall
conform to applicable Specifications, drawings, samples and descriptions
referred to in this Purchase Order. Contractor warrants it has the right to
convey the Product and that the Product will be free of all liens and
encumbrances. These warranties shall survive any inspection, delivery, payment
and termination of this Purchase Order, and shall run to Buyer, its customers,
successors and assigns.
Contractor shall correct defects in Product at its facility. At Buyer's option,
Contractor shall complete an assessment of the returned Product within three
(3) days of receipt, and repair or replace all defective Product within fourteen
(14) days of receipt. If the defective Product is covered by the foregoing
warranty, Buyer will pay the cost of shipping the defective Product to
Contractor, and Contractor will pay the cost of shipping the repaired or
replaced Product to Buyer, except that if the defect is an "out-of-box" failure,
Contractor will pay the cost of shipping to and from Contractor.
Compliance
Contractor warrants that all Products will be produced, manufactured and
assembled in compliance with all applicable federal, state and local laws and
rules and regulations, including, but not limited to, the Food, Drug and
Cosmetic Act of 1938, as amended, and all regulations promulgated thereunder,
including without limitation, Good Manufacturing Practices ("GMP") for Medical
Devices (21 CFR Part 820).
Contractor represents and warrants to Buyer that Contractor's manufacturing
facility is certified "DIN EN ISO 9001/EN46001/MDD" and that Contractor has all
approvals and consents required to mark the Product with the "CE" mark.
Contractor further covenants with Buyer that Contractor will maintain such
certification during the term of this Purchase Order. Contractor will notify
Buyer of any audits of Contractor's manufacturing facility to be conducted by
TUV Product Services or any other notified body for such certification, provide
Buyer with a written
2
<PAGE>
copy of the results of such audit, to the extent that such audit relates
directly to the manufacture of the Product, and Contractor's proposed corrective
response to such audit, if any required.
Prior Letter Agreement
Buyer and Seller acknowledge and agree that Paragraphs 6(b), 6(c) and 7 of the
Letter Agreement, dated December 15, 1995, between Buyer and Seller shall apply
to the work performed under this Purchase Order and shall remain in effect so
long as Product is manufactured and delivered under this Purchase Order.
OPTICAL SENSORS INCORPORATED SEAMED CORPORATION
By /s/ Sam B. Humphries By /s/ Don Ried
---------------------------- -------------------------------------
Its President and CEO Its Senior Vice President - Operations
--------------------------- ------------------------------------
3
<PAGE>
OPTICAL SENSORS INCORPORATED
STANDARD TERMS AND CONDITIONS OF PURCHASE
1. Terms of Agreement. These Standard Terms and Conditions of Purchase shall be
------------------
a part of the Purchase Order issued by Optical Sensors Incorporated (the
"Buyer") to which these Standard Terms and Conditions of Purchase are
attached, and the Purchase Order is subject to the following terms and
conditions. No waiver, alteration, or modification of the terms and
conditions set forth herein shall be valid unless expressly agreed to in
writing by the Buyer. Any different, additional or conflicting terms or
conditions set forth in the Seller's invoice or any other document issued by
the Seller are expressly objected to by the Seller; the terms of the
Purchase Order shall exclusively govern the purchase and sale of the Product
covered by the Purchase Order (the "Product").
2. Delivery Terms. The Seller shall deliver the Products at the Buyer's
--------------
facility on the date set forth in the Purchase Order. The Products shall not
be delivered substantially before or after the delivery date without the
Buyer's prior approval. All deliveries of Products ordered by the Buyer
shall be F.O.B. the Seller's manufacturing facility, with all title and risk
of loss passing to the Buyer upon delivery of the Products at the F.O.B.
delivery point to the common carrier specified by the Buyer. Seller shall
package the Products in a manner that will prevent damage during shipping
and ship the Products in accordance with the Buyer's instructions. The Buyer
shall pay all insurance and freight costs directly to the carrier, or
reimburse the Seller for cost of such insurance and freight if paid by the
Seller, unless otherwise mutually agreed by the Buyer and the Seller. Each
shipment of Products shall include separate packing slips showing: (a)
Buyers' purchase order number; (b) the part number and revision level for
each Product shipped; (c) a description of the goods; (d) individual serial
numbers of the Product; and (e) the total quantity of Products shipped.
3. Specifications. The Seller will supply or manufacture the Product in
--------------
accordance with the specifications, if any, provided by the Buyer. The
Seller will not make any changes in such specifications or make any changes
in any components or processes used in manufacturing the Product previously
agreed to by the Buyer without the Buyer's prior consent.
4. Acceptance of Products. The Buyer shall inspect the Products upon delivery
----------------------
and shall within thirty (30) days thereof give written notice to the Seller
of any claim that any or all of the Products do not conform to the terms or
specifications of the Purchase Order, stating the particulars to support
such claim. If the Buyer shall fail to timely give the Seller such written
notice as provided hereunder, the Products shall be deemed to conform to the
terms of the Purchase Order and the Buyer shall be deemed to have accepted
the goods, subject to any warranty covering the Product, and shall pay for
the goods in accordance with the terms of the Purchase Order.
5. Invoices. Seller's invoices shall, at a minimum, include: (a) Buyer's
--------
purchase order number, against which the Products were shipped; (b) the date
of shipment; (c) the part number and revision level for each Product
shipped; (c) a description of the goods; (d) the total quantity of Products
shipped; and (e) the per unit price of the Products shipped.
6. Payment Terms. Down payment, if required, shall be due upon execution by the
-------------
Buyer of this Purchase Order and shall be returned to the Buyer if the
Purchase Order is not accepted. Payment, other than any down payment, shall
be made by the Buyer no later than thirty (30) days after receipt of invoice
from the Seller. The Buyer shall pay a late payment charge computed at the
rate of one and one-half percent (1-1/2%) per month on the unpaid amount for
each calendar month (or fraction thereof) that such payment is in default.
The Buyer shall pay any and all costs of collection including, without
limitation, reasonable attorney's fees, whether or not suit is instituted,
incurred by the Seller in the event collection of any delinquent balance is
required.
7. Cancellation and Returned Goods. The parties agree that an acceptance of the
-------------------------------
Products by the Buyer shall be deemed to have been made with knowledge of
any alleged defects that inspection during the period designated above would
have revealed. Following inspection and written notice by the Buyer as set
forth hereunder, if any of the goods shall prove defective due to faults in
manufacture or fail to meet the written specifications, the Seller shall
repair or replace, at its option, any non-conforming goods within the time
period specified in the Purchase Order, or if no such time period is
specified, within a reasonable time. If the Buyer cancels all or any portion
of an order, the Buyer shall pay cancellation charges which shall include
all direct costs (which the Seller cannot recover from its suppliers)
incurred by the Seller in obtaining raw materials and components in order to
fulfill the Purchase Order until the time of the Buyer's written request for
cancellation. The Buyer shall have no other liability to the Seller for
cancellation. Such cancellation charges shall not include lost profits or
incidental or consequential damages:
8. Taxes. The Buyer shall be responsible for and shall pay or reimburse the
-----
Seller for all taxes, duties, assessments and other governmental charges,
however designated, associated with the purchase of Products hereunder, the
payment of any amounts by the Buyer to the Seller, or taxes based on the
Products or their use which are or may be imposed under or by any federal,
state or local taxing authority; provided, however, that the Seller shall
not responsible for any taxes based upon Seller's income.
9. Confidential Information. The Seller acknowledges and agrees that any
------------------------
specifications and all related writings, drawings, artwork, computer
assisted designs and similar works shall be deemed "Confidential
Information." The Seller further acknowledges and agrees that any other
information which is disclosed by Buyer in any tangible form and is clearly
labeled or marked as confidential, proprietary or its equivalent, or
information which is disclosed orally or visually, is designated
confidential, proprietary or its equivalent at the time of its disclosure
and is reduced to writing and clearly marked or labeled as confidential,
proprietary or its equivalent within thirty (30) days of disclosure shall be
deemed "Confidential Information." All Confidential Information shall be the
exclusive property of Buyer, and Buyer retains all right, title and
interest, including copyright, relating to "Confidential Information." The
Seller agrees not to use any Confidential Information for any purpose other
than as permitted or required for performance by the Seller under the
Purchase Order and not to disclose or provide any Confidential Information
to any third party and to take all necessary measures to prevent any such
disclosure by its employees, agents, contractors or consultants. Upon
request of the Buyer or completion of the Purchase Order, the Seller shall
return all such Confidential Information to the Buyer. The return of
Confidential Information shall be complete in every respect, so as to permit
an experienced manufacturer to manufacture, assemble, maintain and service
the Product and shall include a full drawing package in reproducible form
and any revisions or updates, including but not limited but not limited to,
GSF Autocad files, fabrication drawings, approved supplier list, test
specifications, tooling specifications and drawings, manufacturing assembly
instructions, routings, quality assurance protocols, test equipment,
specifications and drawings and engineering change notice history, device
master files, and device history records.
10. Indemnification. The parties agree to indemnify and hold each other, their
---------------
affiliated entities, and their respective officers, directors, shareholders,
employees an agents, harmless from and against all claims, losses, damages,
liability, costs and expenses (including, without limitation, attorneys'
fees and legal costs and disbursements) arising out of or related to a
breach of the Purchase Order.
4
<PAGE>
11. Notices. Notices and communications under the Purchase Order shall be
-------
deemed given to either party at the address set forth on the Purchase Order:
(a) upon the expiration of five (5) business days after the date of deposit
in the U.S. mail if sent by registered mail, return receipt requested; or
(b) upon the next business day if sent by recognized overnight supplemental
delivery service; (c) the same business date if notice is delivered
personally or (d) upon electronic confirmation of transmission if sent by
facsimile.
12. Assignment. Seller may not assign or transfer the Purchase Order or any
----------
interest herein or any rights or duties hereunder without the prior written
consent of Buyer.
13. Governing Law. The Purchase Order shall be interpreted and construed in
-------------
accordance with the laws of the State of Minnesota.
14. Entire Agreement. This Purchase Order, including these Standard Terms and
----------------
Condition and all attachments and specifications, constitutes the complete
and final agreement between the parties and supersedes all prior
negotiations and agreements between the parties concerning its subject
matter.
5
<PAGE>
EXHIBIT A
[The material in Exhibit A has been omitted, in its entirety, pursuant to a
request for confidentiality under Rule 24b-2 of the Securities Exchange Act of
1934, as amended. A copy of this Agreement with this Exhibit intact has been
filed separately with the Securities and Exchange Commission.]
6
<PAGE>
EXHIBIT B
[The material in Exhibit B has been omitted, in its entirety, pursuant to a
request for confidentiality under Rule 24b-2 of the Securities Exchange Act of
1934, as amended. A copy of this Agreement with this Exhibit intact has been
filed separately with the Securities and Exchange Commission.]
7
<PAGE>
EXHIBIT 11.1
Optical Sensors Incorporated
Exhibit 11 - Statement Re: Computation of Per Share Loss
<TABLE>
<CAPTION>
Year Ended
Primary: 1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Weighted average shares outstanding 7,222,000 315,000 290,000
Stock options -
based on the treasury
stock method using the
initial public offering
price (1) --- 2,696,000 2,696,000
-------------------------------------------
Total 7,222,000 3,011,000 2,986,000
===========================================
Net loss $(9,385,272) $(8,131,017) $(6,279,414)
===========================================
Per share amount $ (1.30) $ (2.70) $ (2.10)
===========================================
Supplemental:
Weighted average shares outstanding 7,222,000 315,000 290,000
Stock options -
based on the treasury stock
method using the initial
public offering price (1) --- 2,696,000 2,696,000
Convertible preferred stock
- using the if-converted
method 596,000 3,138,000 2,186,000
-------------------------------------------
Total 7,818,000 6,149,000 5,172,000
===========================================
Net loss $(9,385,272) $(8,131,017) $(6,279,414)
===========================================
Per share amount $ (1.20) $ (1.32) $ (1.21)
===========================================
</TABLE>
(1) In accordance with SAB No. 83.
<PAGE>
Exhibit 13.1
COMMON STOCK INFORMATION
The common stock of Optical Sensors Incorporated has been traded on the Nasdaq
National Market, under the symbol OPSI, since the company's initial public
offering on February 14, 1996. The following table sets forth the high and low
closing prices for the company's common stock, as reported by the Nasdaq
National Market, for the periods indicated:
<TABLE>
<CAPTION>
Quarter ended High Low
- -------------------- -------- --------
<S> <C> <C>
March 31, 1996 $14.875 $10.375
June 30, 1996 14.250 10.250
September 30, 1996 10.750 5.250
December 31, 1996 9.250 7.750
</TABLE>
The foregoing prices reflect inter-dealer prices, without retail mark-up, mark-
down or commission. As of March 20, 1997, the company had approximately 315 of
record and an estimated 3,100 beneficial holders whose shares were registered in
the names of nominees.
Optical Sensors Incorporated has never paid any cash dividends on its common
stock, and does not anticipate paying any cash dividends on its common stock in
the foreseeable future. During 1996, the company sold a total of 18,566 shares
of common stock pursuant to the exercise of stock options with an exercise
price of $.90 per share, under Rule 701 of the Securities Act of 1933.
<PAGE>
SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
-----------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Net sales $ 163 $ -- $ -- $ -- $ --
Operating expenses 9,734 8,249 6,463 5,586 3,688
Loss from operations 10,940 8,249 6,463 5,586 3,688
Interest income (expense), net 1,555 118 183 149 35
Net loss 9,385 8,131 6,280 5,437 3,653
Net loss per common share $ 1.30 $ 2.70 $ 2.10 $ 1.82 $ 1.23
Years ended December 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
-----------------------------------------------------------------
(In thousands, except per share data)
BALANCE SHEET DATA
Cash and cash equivalents $ 30,135 $ 5,395 $ 2,851 $ 9,105 $ 2,284
Working capital 30,039 5,242 2,363 8,734 1,820
Total assets 32,369 6,367 3,582 9,741 2,962
Long-term debt -- -- -- 89 153
Total shareholders' equity 31,050 5,778 2,987 9,182 2,313
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS OVERVIEW
Optical Sensors Incorporated (the "Company") has developed the SensiCath system,
a patient-attached, on-demand arterial blood gas ("ABG") monitoring system,
which provides precise and accurate ABG results within 60 seconds without
exposure to potentially infectious blood or depleting the patient's blood supply
(the "SensiCath System"). ABG tests measure oxygen ("O\2\"), carbon dioxide
("CO\2\"), and acid-base ("pH") in a sample of blood taken from the patient's
artery. The Company believes that the SensiCath System is the first ABG analyzer
to be integrated into both an arterial pressure monitoring line and a critical
care patient monitoring system. The SensiCath System utilizes a disposable,
fiberoptic sensor device ("the SensiCath Sensor") connected to a small modular
instrument that can be configured to integrate with bedside monitoring systems
or to serve as a stand-alone monitor.
The SensiCath System is currently available in two configurations. The first
configuration of the SensiCath System combines the SensiCath Sensor with a
module (the "OnlineABG Module") that plugs into bedside monitors manufactured
by Marquette Medical Systems, Inc. ("Marquette"). The second configuration of
the SensiCath System consists of the SensiCath Sensor, the OnlineABG Module and
a stand-alone monitor ("the OpticalCAM") that can be used as a stand-alone
monitoring device or can interface with bedside monitors supplied by other
manufacturers of patient monitoring equipment. The Company plans to market the
OpticalCAM monitor to all hospitals regardless of the type of monitoring system
used by the hospital. Currently, the OpticalCAM is able to interface with
patient monitoring systems sold by the Hewlett-Packard Company and SpaceLabs
Medical, Inc. The two configurations of the SensiCath System give the Company
access to over 80 percent of the monitored critical care beds in the United
States. The Company's strategy is to become the leader in the design,
development and commercialization of sensors and integrated monitoring systems
for the measurement of ABG and other critical blood analytes at the point-of-
care and thereby establish a new standard of care for critically ill patients.
The Company completed product development of the initial configuration of the
SensiCath System in June 1995 and received 510(k) clearance to market the
SensiCath System from the FDA in January 1996. The Company completed development
of the OpticalCAM monitor in September 1996 and received 510(k) clearance to
market the OpticalCAM monitor from the FDA in January 1997.
RESULT OF OPERATIONS
Fiscal Years Ended December 31, 1996 and 1995
The Company had no sales in 1995. Net sales for 1996 were $163,068.
Approximately 52% of sales have been to Marquette for demonstration purposes and
for clinical marketing studies, approximately 18% of sales have been to
international distributors for demonstration purposes, and approximately 20% of
sales have been commercial sales to customers.
Costs of products sold to date have been primarily related to the establishment
of commercial manufacturing operations and manufacturing of sensors for clinical
studies and other testing purposes. Costs of products sold were $1,369,221 and
$981,151 in 1996 and 1995 respectively. In 1995, production costs were recorded
as research and development expenses because the Company had no sales in that
period. The increase in 1996 is the result of increased activities to scale-up
manufacturing to meet anticipated future sales demand.
Research and development expenses were $5,632,458 and $4,974,193 (excluding
$981,151 related to costs of products sold described above) in 1996 and 1995,
respectively. Research and development expenses included payments under an
agreement with Marquette entered into in September 1995 pursuant to which the
Company acquired ownership of the technology used in the SensiCath System.
Payments to Marquette were $553,250 and $759,750 in 1996 and 1995, respectively.
The Company is obligated to make two additional payments of $500,000 each
subject to Marquette selling certain minimum quantities of OnlineABG Modules.
The Company currently expects to make these payments to Marquette in 1997.
Research and development expenses (excluding payments to Marquette) increased
$864,765, or 21%, in 1996 from 1995. The increase in 1996 is primarily
attributable to development expenses incurred for the OpticalCAM. The Company
expects that research and development expenses will remain at comparable levels
during 1997 due to the anticipated payments to Marquette and planned development
of a further miniaturized sensor and new sensors to measure additional blood
analytes.
Selling, general and administrative expenses were $4,102,147 and $2,293,435 in
1996 and 1995, respectively. Selling, general and administrative expenses
included amortization of deferred compensation expenses (for options granted in
1995) of $623,452 and $1,008,467 in 1996 and 1995, respectively. Selling,
general and administrative expenses (after adjusting for compensation expenses
described above) increased $2,193,727, or 171%, in 1996 from the prior year.
During 1996, the Company completed the initial hiring of its sales and marketing
staff. Salaries and benefits for the expanded sales and marketing staff and
travel expenses related to sales and marketing activities accounted for a
significant portion of the 1996 increase in selling, general and administrative
expenses. Administrative expenses also increased primarily due to the higher
level of activity associated with initial commercialization of the Company's
products and additional costs associated with being a public company. The
<PAGE>
Company expects selling, general and administrative expenses to increase in 1997
in an amount similar to the 1996 increase. Substantially all of the anticipated
increase is for sales and marketing staff hired late in 1996 and incremental
marketing activities related to the relaunch of the SenisiCath System.
Net interest income increased $1,437,724 to $1,555,486 in 1996 from 1995. The
increase is due to interest earned on the proceeds from the Company's initial
public offering, which was completed in the first quarter of 1996.
The Company incurred a net loss of $9,385,272 in 1996 compared to a net loss of
$8,131,017 in 1995. Since inception, the Company has incurred a cumulative net
loss of $35,215,362. The increase in net loss in 1996 was primarily due to the
increase in operating expenses described above. The Company anticipates that
its operating losses will continue for the foreseeable future.
Fiscal Years Ended December 31, 1995 and 1994
The Company did not have any sales in 1995 or 1994.
Research and development expenses increased 25% to $5,955,344 in 1995 from
$4,774,487 in 1994. The increase was primarily due to payments of $750,000 made
to Marquette in 1995 under the agreement referred to above. The remainder of
the increase was due to additional development efforts, start-up costs for
establishing commercial manufacturing facilities, initial clinical marketing
studies of the SensiCath System and a write-off of prepaid license fees of
$135,000 related to the cancellation of license agreements.
Selling, general and administrative expenses increased 36% to approximately
$2,293,435 in 1995 from approximately $1,688,309 in 1994. The increase was due
to an increase in compensation expense of $1,008,000 related to stock options
granted from June through October 1995, offset in part by cost reduction
measures taken by the Company in the fourth quarter of 1994. These measures
were instituted because of a delay in product development that began in late
1994.
Net interest income decreased 36% to approximately $118,000 in 1995 from
approximately $183,000 in 1994. The decrease was due to a decline in short-term
investments caused by continued operating losses and capital equipment
purchases.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 1996, the Company completed an initial public offering
of 2,875,000 shares of Common Stock. The net proceeds to the Company from the
public offering were approximately $33,916,000. The Company's Common Stock is
quoted on the Nasdaq National Market under the symbol "OPSI."
The Company's cash and cash equivalents were $30,134,800 and $5,394,721 at
December 31, 1996 and December 31, 1995, respectively. The increase is due to
the proceeds from the public offering, offset by cash used in 1996. The Company
incurred cash expenditures of $8,779,365
<PAGE>
for operations (including lease payments of $725,150 under operating leases for
capital equipment) and $496,084 for capital expenditures in 1996. The capital
equipment expenditures and operating lease payments were principally for the
acquisition of tooling and equipment, primarily for commercial launch of the
Company's products and for research and development purposes. As of December 31,
1996, the Company had no material commitments outstanding for tooling and
equipment. Subsequent to year end, the Company entered into commitments of
approximately $225,000 to acquire tooling for production of the OpticalCAM
monitor.
As of December 31, 1996, the Company had commitments outstanding for
approximately $500,000 to purchase OpticalCAM monitors and OnlineABG Modules.
Subsequent to year end, the Company entered into additional commitments of
approximately $1,700,000 to purchase OpticalCAM monitors and OnlineABG Modules.
The Company increased its inventory levels during 1996 to support future product
sales. A substantial portion of the inventory level at December 31, 1996
consisted of key components and OnlineABG Modules for which the Company relies
on sole suppliers.
With the proceeds of the initial public offering, the Company believes that
sufficient liquidity is available to satisfy its working capital needs at least
through 1997.
CERTAIN IMPORTANT FACTORS
There are several important factors that could cause the Company's actual
results to differ materially from those anticipated by the Company or which are
reflected in any forward-looking statements of the Company. These factors, and
their impact on the success of the Company's operations and its ability to
achieve its goals, include the following:
. MARKET ACCEPTANACE OF THE SENSICATH SYSTEM. The Company's future revenues
will depend on market acceptance of the SensiCath System. The company will
need to demonstrate to health care professionals, hospital administrators and
third-party payors the accuracy, reliability, ease of use, safety and cost
effectiveness of the sensicath system. in order to use the SensiCath System,
hospitals need to acquire the OnlineABG Module, and if they do not have a
Marquette patient bedside monitoring system the OpticalCAM monitor, both of
which may require capital expenditure approvals by the hospital.
. TIMELY INSTALLATION OF THE SENSICATH SYSTEM. The Company's ability to
increase sales in the near-term will depend on timely installation and in-
service training of the onlineABG Module, which is provided by Marquette. the
company does not have control over the scheduling of this installation and
in-service training for the OnlineABG Module.
. SALES TO INSTALLED BASE. The Company's plan for increasing sales in 1997 is
based, in part, on its ability to sell the SensiCath System to Marquette's
installed base of Tramscope and Solar patient monitoring systems. in order to
interface with the SensiCath System, Tramscope systems need either hardware
or software upgrades or both, and previously installed solar systems need a
software upgrade. These upgrades require an additional investment by
hospitals with Tramscope systems and hospitals with Solar Systems that are
not under warranty. Hospitals may be reluctant to absorb the costs associated
with the
<PAGE>
purchase of an OnlineABG Module and upgrades needed to interface the
solar and tramscope system with the SensiCath System.
. COMPETITION. Competition among companies attempting to provide ABG and other
critical blood analyte analysis at the point-of-care is intense and
increasing. 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 the Company's products or that would render
the Company's products obsolete or non-competitive.
. FUTURE REGULATORY APPROVALS. The Company's ability to market new
configurations of or improvements to the SensiCath System and any products it
may develop in the future will require clearances or approvals from the FDA
and in some instances foreign governmental agencies. The process for
obtaining necessary regulatory clearances and approvals can be expensive and
time consuming. There can be no assurance that the Company will be able to
obtain necessary regulatory approvals and clearances in the future on a
timely basis, or at all.
. SOLE SOURCES OF SUPPLY. Currently, the Company has only one supplier for the
OnlineABG module, the OpticalCAM monitor and certain other key components.
Any disruption or delay in the supply of key components or instrumentation
could have a material adverse effect on the Company.
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Financial Statements
Years ended December 31, 1995 and 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................ 1
Audited Financial Statements
Balance Sheets........................................ 2
Statements of Operations.............................. 3
Statement of Shareholders' Equity..................... 4
Statements of Cash Flows.............................. 12
Notes to Financial Statements......................... 13
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors
Optical Sensors Incorporated
We have audited the accompanying balance sheets of Optical Sensors Incorporated
(a development stage company) as of December 31, 1995 and 1996, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1996 and the period from May 23,
1989 (inception) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Optical Sensors Incorporated (a
development stage company) at December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 and the period from May 23, 1989 (inception) to December 31,
1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 7, 1997
1
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1995 1996
-----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,394,721 $ 30,134,800
Accounts receivable - 91,040
Inventory - 931,917
Prepaid expenses and other current
assets 436,503 200,731
------------ ------------
Total current assets 5,831,224 31,358,488
Property and equipment:
Research and development equipment 375,124 292,488
Leasehold improvements 174,673 199,211
Furniture and equipment 35,796 77,895
Marketing equipment - 344,448
Production equipment - 167,635
------------ ------------
585,593 1,081,677
Less accumulated depreciation (373,237) (488,043)
------------ ------------
212,356 593,634
Other assets:
Patents 230,549 328,630
Other assets 93,002 88,445
------------ ------------
323,551 417,075
------------ ------------
Total assets $ 6,367,131 $ 32,369,197
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 116,609 $ 740,804
Employee compensation 468,952 577,228
Other liabilities and accrued expenses 3,753 1,541
------------ ------------
Total current liabilities 589,314 1,319,573
Commitments
SHAREHOLDERS' EQUITY
Preferred Stock, par value $.01 per
share
Authorized shares--5,000,000
Convertible Preferred Stock, Series A
through E, par value $.01 per share:
Issued and outstanding shares
1995--4,766,974; 1996--0 47,670 -
Common Stock, par value $.01 per share:
Authorized shares--30,000,000
Issued and outstanding shares
1995--610,443; 1996--8,341,497 6,105 83,415
Additional paid-in capital 32,970,358 66,974,345
Deficit accumulated during the
development stage (25,830,090) (35,215,362)
Deferred compensation (1,171,226) (547,774)
Note receivable from officer (245,000) (245,000)
------------ ------------
Total shareholders' equity 5,777,817 31,049,624
------------ ------------
Total liabilities and shareholders'
equity $ 6,367,131 $ 32,369,197
============ ============
</TABLE>
See accompanying notes.
2
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
CUMULATIVE
MAY 23, 1989
(INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31,
1994 1995 1996 1996
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ $ $ 163,068 $ 163,068
Cost of goods sold (1,369,221) (1,369,221)
-----------------------------------------------------------
Gross margin (1,206,153) (1,206,153)
Operating expenses:
Research and development 4,774,487 5,955,344 5,632,458 25,022,866
Selling, general and administrative 1,688,309 2,293,435 4,102,147 11,020,959
-----------------------------------------------------------
Operating loss (6,462,796) (8,248,779) (10,940,758) (37,249,978)
Interest expense 17,057 19,333 141,385
Interest income (200,439) (137,095) (1,555,486) (2,176,001)
-----------------------------------------------------------
(183,382) (117,762) (1,555,486) (2,034,616)
-----------------------------------------------------------
Net loss and deficit accumulated during
development stage $(6,279,414) $(8,131,017) $ (9,385,272) $(35,215,362)
===========================================================
Net loss per common share:
Primary $ (2.10) $ (2.70) $(1.30)
Supplemental $ (1.21) $ (1.32) $(1.20)
Shares used in calculation of net loss
per share:
Primary 2,986,000 3,011,000 7,222,000
Supplemental 5,172,000 6,149,000 7,818,000
</TABLE>
See accompanying notes.
3
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Statement of Shareholders' Equity
Period from May 23, 1989 (inception) to December 31, 1996
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
---------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Subscriptions for sale of Common Stock
at $.45 per share
Payments received on stock
subscriptions, net of placement costs
Issuance of Common Stock
Issuance of Common Stock for consulting
services
Net loss for period of May 23, 1989
(inception) to December 31, 1989 ---------------------------------------------------
Balance at December 31, 1989
Issuance of Common Stock, net of
offering costs of $121,502
Issuance of Common Stock for services
provided in the private placement
Issuance of Common Stock for consulting
services
Issuance of Common Stock upon debt
conversion
Payments received on stock subscription
Issuance of Common Stock
Net loss ---------------------------------------------------
Balance at December 31, 1990
Issuance of Series A Convertible
Preferred Stock net of offering costs
of $49,904 94,370 $944
Issuance of Common Stock for technology
Net loss ---------------------------------------------------
Balance at December 31, 1991 94,370 944
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED PREFERRED AND
COMMON STOCK ADDITIONAL DURING THE COMMON
- ----------------- PAID-IN DEVELOPMENT STOCK DEFERRED
SHARES AMOUNT CAPITAL STAGE SUBSCRIPTION COMPENSATION TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
127,037 $1,270 $ 57,022 $(58,292) $ -
(3,987) 55,792 51,805
9,560 96 13,205 (10,000) 3,301
350 4 1,256 1,260
$ (181,793) (181,793)
- -----------------------------------------------------------------------------------------
136,947 1,370 67,496 (181,793) (12,500) (125,427)
92,678 927 711,671 712,598
6,260 63 (63) -
640 6 5,751 5,757
26,088 261 117,135 117,396
12,500 12,500
16,667 167 149,833 150,000
(636,266) (636,266)
- -----------------------------------------------------------------------------------------
279,280 2,794 1,051,823 (818,059) 236,558
1,011,652 (10,635) 1,001,961
2,778 28 24,972 25,000
(1,511,013) (1,511,013)
- -----------------------------------------------------------------------------------------
282,058 2,822 2,088,447 (2,329,072) (10,635) (247,494)
</TABLE>
5
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Statement of Shareholders' Equity (continued)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Series B Convertible
Preferred Stock, net of offering costs
of $93,903 418,387 $4,184
Issuance of Series B Convertible
Preferred Stock upon debt cancellation 81,129 811
Issuance of Common Stock for consulting
services
Payment received on stock subscriptions
Net loss ------------------------------------------------------
Balance at December 31, 1992 94,370 $944 499,516 4,995
Issuance of Series C Convertible
Preferred Stock, net of offering costs
of $815,320 958,200 $ 9,582
Issuance of Series C Convertible
Preferred Stock upon debt cancellation 79,817 798
Issuance of Common Stock upon exercise
of warrants
Issuance of Common Stock
Net loss ------------------------------------------------------
Balance at December 31, 1993 94,370 944 499,516 4,995 1,038,017 10,380
Issuance of Common Stock upon exercise
of warrants and options
Value assigned to warrants issued in
connection with debt and lease
financings
Net loss ------------------------------------------------------
Balance at December 31, 1994 94,370 944 499,516 4,995 1,038,017 10,380
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED PREFERRED AND
COMMON STOCK ADDITIONAL DURING THE COMMON
- ----------------- PAID-IN DEVELOPMENT STOCK DEFERRED
SHARES AMOUNT CAPITAL STAGE SUBSCRIPTION COMPENSATION TOTAL
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 5,173,589 $ 5,177,773
1,021,416 1,022,227
317 $ 3 2,853 2,856
$10,635 10,635
$ (3,653,474) (3,653,474)
- ----------------------------------------------------------------------------------------
282,375 2,825 8,286,305 (5,982,546) $ -- 2,312,523
11,248,418 11,258,000
1,004,924 1,005,722
6,658 66 35,787 35,853
833 8 7,492 7,500
(5,437,113) (5,437,113)
- ----------------------------------------------------------------------------------------
289,866 2,899 20,582,926 (11,419,659) 9,182,485
778 7 7,493 7,500
76,051 76,051
(6,279,414) (6,279,414)
- ----------------------------------------------------------------------------------------
290,644 2,906 20,666,470 (17,699,073) 2,986,622
</TABLE>
7
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Statement of Shareholders' Equity (continued)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
-------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Value assigned to options issued in
connection with a consulting agreement
Issuance of Series D Convertible
Preferred Stock, net of offering costs
of $88,501 1,900,183 $19,002
Issuance of Series D Convertible
Preferred Stock upon debt cancellation
Issuance of Common Stock upon exercise
of options and warrants
Issuance of Convertible Preferred Stock
pursuant to antidilution provisions in
Series A through C 18,853 $ 189 157,061 $1,571 377,991 $ 3,779
Issuance of Series E Convertible
Preferred Stock, net of offering costs
of $33,660 370,338 $3,703
Value assigned to warrants in
connection with debt and lease
financing
Deferred compensation related to stock
options
Amortization of deferred compensation
Net loss -----------------------------------------------------------------------------------------
Balance at December 31, 1995 113,223 1,133 656,577 6,566 1,416,008 14,159 2,210,828 22,109 370,338 3,703
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED PREFERRED AND
COMMON STOCK ADDITIONAL OFFICER DURING THE COMMON
- ----------------- PAID-IN RECEIVABLE DEVELOPMENT STOCK DEFERRED
SHARES AMOUNT CAPITAL FOR STOCK STAGE SUBSCRIPTION COMPENSATION TOTAL
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 6,150 $ 6,150
5,877,647 5,896,649
975,689 978,796
319,799 3,199 288,147 $(245,000) 46,346
(5,539)
2,962,637 2,966,340
19,464 19,464
2,179,693 $(2,179,693)
1,008,467 1,008,467
$ (8,131,017) (8,131,017)
- ------------------------------------------------------------------------------------------------------
610,443 6,105 32,970,358 (245,000) (25,830,090) (1,171,226) 5,777,817
</TABLE>
9
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Statement of Shareholders' Equity (continued)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
---------------------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock
in conjunction with
public offering, net of
expenses of
$3,459,218
Conversion of Preferred
Stock in conjunction with (113,223) $(1,133) (656,577) $(6,566) (1,416,008) $(14,159) (2,210,828) $(22,109) (370,338) $(3,703)
public offering
Issuance of Common Stock
upon exercise of options
and warrants
Value assigned to warrants
in connection with debt
and lease financing
Amortization of deferred
compensation
Net loss --------------------------------------------------------------------------------------------------------
Balance at December 31, - $ - - $ - - $ - - $ - - $ -
1996
========================================================================================================
</TABLE>
See accompanying notes.
10
<PAGE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED PREFERRED AND
COMMON STOCK ADDITIONAL OFFICER DURING THE COMMON
- -------------------- PAID-IN RECEIVABLE DEVELOPMENT STOCK DEFERRED
SHARES AMOUNT CAPITAL FOR STOCK STAGE SUBSCRIPTION COMPENSATION TOTAL
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
2,875,000 $28,750 $33,887,032 $33,915,782
4,766,974 47,670 -
89,080 890 98,856 99,746
18,099 18,099
623,452 623,452
$ (9,385,272) (9,385,272)
- ---------------------------------------------------------------------------------------------------------
8,341,497 $83,415 $66,974,345 $(245,000) $(35,215,362) $ - $(547,774) $31,049,624
=========================================================================================================
</TABLE>
11
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
CUMULATIVE
MAY 23, 1989
(INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31,
1994 1995 1996 1996
----------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(6,279,414) $(8,131,017) $(9,385,272) $(35,215,362)
Adjustments to reconcile net loss to
net cash used in
operating activities:
Depreciation and amortization 110,453 104,800 124,452 634,904
Loss on write-off of research and
development equipment - - - 133,919
Loss on write-off of prepaid royalties - 135,201 - 135,201
Amortization of deferred loss on sale
leaseback 11,196 - - 11,196
Deferred compensation amortization - 1,008,467 623,452 1,631,919
License fee financed with long-term
debt - - - 193,700
Issuance of Common Stock for services - - - 37,091
Issuance of Common Stock in lieu of
interest payments on notes payable - - - 35,412
Amortization of warrants in connection
with debt and lease financing 26,534 19,464 18,099 64,097
Issuance of options in connection with
consulting services 49,540 6,150 - 55,690
Changes in operating assets and
liabilities:
Receivables - - (91,040) (91,040)
Inventories - - (931,917) (931,917)
Prepaid expenses and other assets (131,337) (414,391) 132,602 (617,394)
Accounts payable and accrued expenses 100,732 82,572 730,259 1,319,573
----------------------------------------------------------
Net cash used in operating activities (6,112,296) (7,188,754) (8,779,365) (32,603,011)
INVESTING ACTIVITIES
Purchases of property, plant and
equipment (85,637) (66,999) (496,084) (1,704,529)
Proceeds from disposal of equipment - - - 46,947
---------------------------------------------------------
Net cash used in investing activities (85,637) (66,999) (496,084) (1,657,582)
FINANCING ACTIVITIES
Proceeds from sale leaseback - - - 283,030
Net proceeds from issuance of Common
Stock 7,477 46,346 34,015,528 35,044,676
Net proceeds from issuance of Preferred
Stock - 9,841,785 - 27,290,155
Proceeds from notes payable - 1,053,663 - 3,177,926
Payments on long-term debt (63,806) (1,142,415) (1,396,894)
Reimbursement to founder and shareholder - - - (3,500)
Net cash provided by (used in) ----------------------------------------------------------
financing activities (56,329) 9,799,379 34,015,528 64,395,393
----------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (6,254,262) 2,543,626 24,740,079 30,134,800
Cash and cash equivalents at beginning
of period 9,105,357 2,851,095 5,394,721 -
Cash and cash equivalents at end of ----------------------------------------------------------
period $ 2,851,095 $ 5,394,721 $30,134,800 $ 30,134,800
==========================================================
</TABLE>
See accompanying notes.
12
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996
1. BUSINESS ACTIVITY
Optical Sensors Incorporated (the "Company") is a development stage company
engaged in developing, manufacturing and marketing fiberoptic chemical sensors
for blood gas monitoring for medically unstable patients in critical and
intensive care units. The Company was incorporated on May 23, 1989 and
reincorporated in Delaware on January 4, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Investments classified as
cash equivalent consist primarily of commercial paper and municipal bonds. The
market value of investments is based on quoted market prices which approximates
cost.
INVENTORIES
Inventories consist of ABG modules and raw materials which are recorded at the
lower of cost (FIFO basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over three to five years. Leasehold improvements are
amortized over the shorter of the term of the lease or life of the asset.
13
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PATENTS
Patents are stated at cost and are amortized upon issuance of a patent on a
straight-line basis over sixty months. The carrying value of patents will be
reviewed if the facts and circumstances suggest that it may be impaired. If this
review indicates that patent cost will not be recoverable, as determined based
on the undiscounted cash flows over the remaining amortization period, the
Company's carrying value of the patents will be reduced by the estimated
shortfall of cash flows.
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary differences between the financial
reporting and tax bases of assets and liabilities.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25"), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("Statement 123"). The Company adopted the disclosure only provisions of
Statement 123. Accordingly, the Company has made pro forma disclosures of what
net loss and loss per share would have been had the provisions of Statement 123
been applied to the Company's stock options.
14
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from the estimates.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company records losses on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding. Common equivalent shares from stock options and warrants are
excluded from the computation as their effect is antidilutive except that,
pursuant to the Securities and Exchange and Exchange Commission (SEC) Staff
Accounting Bulletins, common and common equivalent shares issued during the
period beginning twelve months prior to the filing of the Company's initial
public offering at prices substantially below the public offering price have
been included in the calculation as if they were outstanding for all periods
prior to the initial public offering presented (using the treasury stock method
and the public offering price for stock options, warrants and the if-converted
method for convertible preferred stock).
3. SALES OF COMMON STOCK
In 1989, the Company issued 4,930 shares of Common Stock in exchange for a
release from a covenant not to compete. The non-compete covenant related to the
founder's position of president with a former company.
15
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (Continued)
3. SALES OF COMMON STOCK (CONTINUED)
Also, in 1989 and 1990, the Company sold 93,789 shares of Common Stock in a
private placement for $844,100 less related costs of $121,502 plus 6,260 shares
of Common Stock issued at $9.00 per share for services provided in the private
placement. Additionally, in July 1990, the Company sold 16,667 shares of Common
Stock for $150,000 related to the same offering.
4. CONVERTIBLE PREFERRED STOCK
In February 1991, the Company created a new class of stock, Convertible
Preferred Stock, Series A. From March 1991 to November 1991, the Company sold
94,370 shares of this new class at $11.25 per share for a total consideration of
$1,062,500, less related offering costs of $49,904. Each share sold includes a
warrant to purchase one-fifth of a share of Common Stock at $11.25 per share.
The shares had a liquidation preference of $11.25 per share.
In April 1992, the Company created a new class of Preferred Stock, Convertible
Preferred Stock, Series B. From April 1992 to July 1992, the Company sold
418,387 shares of this new class at $12.60 per share for a total consideration
of $5,271,676 less related offering costs of $93,903. Each share sold includes a
warrant to purchase one-fourth of a share of Common Stock at $12.60 per share.
The shares had a liquidation preference of $12.60 per share. See Note 5 for
cancellation of related bridge loans.
In June 1993, the Company created a new class of Preferred Stock, Convertible
Preferred Stock, Series C. From June 1993 to September 1993, the Company sold
958,200 shares of this new class at $12.60 per share for a total consideration
of $12,073,752 less related offering costs of $815,320. In connection with the
sale thereof, the Company issued warrants to a placement agent to purchase
79,869 shares of Common Stock at $7.38 per share. The shares had liquidation
preference of $12.60 per share. See Note 5 for cancellation of related bridge
loans.
16
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (Continued)
4. CONVERTIBLE PREFERRED STOCK (CONTINUED)
In July 1995, the Company created a new class of Preferred Stock, Convertible
Preferred Stock, Series D. From July 1995 to September 1995, the Company sold
2,210,828 shares of this new class at $3.15 per share for a total consideration
of $6,963,946 less related offering costs of $88,501. The shares also had a
liquidation preference of $3.15 per share. See Note 5 for cancellation or
conversion of related bridge loans.
On November 28, 1995, the Company sold an aggregate of 370,338 shares of Series
E Preferred Stock to certain existing shareholders, pursuant to the Company's
Series E Convertible Preferred Stock Purchase Agreement, at a price of $8.10 per
share for a total consideration of $3,000,000 less related offering costs of
$33,660. These shares had a liquidation preference of $8.10 per share.
The Company completed an initial public offering of Common Stock in 1996 in
which it sold 2,875,000 shares of Common Stock, resulting in net proceeds of
$33,915,782.
At the time of the initial public offering, all shares of outstanding Preferred
Stock were converted into an aggregate of 4,766,974 shares of Common Stock.
5. NOTES PAYABLE
In 1989, the Company received working capital loans totaling $110,000. The notes
bore interest at an annual rate of 12%. In April 1990, notes totaling $85,000
plus the accrued interest of $4,396 were converted to Common Stock at a
conversion price of $4.50 per share. In November 1990, the remaining note
totaling $25,000 plus the accrued interest of $3,000 was converted to Common
Stock at a conversion price of $4.50 per share.
17
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (Continued)
5. NOTES PAYABLE (CONTINUED)
In 1991, the Company received working capital convertible bridge loans totaling
$220,000. One of the notes for $50,000 was from a company that is owned by a
Company Director. In 1992, the Company received an additional $780,000 of
working capital convertible bridge loans. The notes bore interest at an annual
rate of 2% over the First Bank National Association reference rate. Upon the
completion of the sale of Series B Convertible Preferred Stock on April 28,
1992, the convertible bridge loans of $1,000,000 plus the accrued interest of
$22,227 were automatically canceled as payment for 81,129 shares of Series B
Convertible Preferred Stock at a price of $12.60 per share. In consideration of
the purchase of the notes, the Company issued warrants to the investors to
purchase 24,076 shares of Common Stock at $9.00 per share.
In 1993, the Company received working capital convertible bridge loans totaling
$999,933. The notes bore interest at an annual rate of 8%. Upon completion of
the sale of Series C Convertible Preferred Stock, bridge loans of $999,933 plus
the accrued interest of $5,789 were automatically canceled as payment for 79,817
shares of Series C Convertible Preferred Stock at a price of $12.60 per share.
In consideration of the purchase of the notes, the Company issued warrants to
the investors to purchase 26,871 shares of Common Stock at $12.60 per share.
In 1995, the Company received working capital convertible bridge loans totaling
$967,887. The notes bore interest at an annual rate of 8%. Upon completion of
the sale of Series D Convertible Preferred Stock, bridge loans of $967,887, plus
the accrued interest of $10,909, were automatically canceled or converted into
310,645 shares of Series D Convertible Preferred Stock at a price of $3.15 per
share. In consideration of the purchase of the notes, the Company issued
warrants to the investors to purchase 61,429 shares of Common Stock at $3.15 per
share.
18
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (Continued)
6. LEASES
The Company leases its office and research and development facility under an
operating lease that expires on November 30, 1999. Operating expenses, including
maintenance, utilities, real estate taxes and insurance, are paid by the
Company. The Company also leases certain office equipment under operating
leases.
In November 1992, the Company entered into an operating lease for capital
equipment, which included a sale leaseback transaction. The Company recognized a
loss on the sale leaseback of approximately $39,000. The loss has been deferred
and was amortized over the term of the lease as an increase of rental expense.
Under the lease agreement, the Company is allowed to lease up to $1,000,000 of
equipment between November 5, 1992 and May 4, 1994. Assets leased under the
agreement at December 31, 1995 and 1996 were approximately $1,002,000. The term
of the lease is 42 months with payments due the first of each month. Rental
payments are based on the total amount of equipment leased each month.
In March 1994, the Company entered into two lease transactions. Under the lease
agreements, the Company was allowed to lease up to $1,350,000 and $150,000,
respectively, of equipment between April 1, 1994 and April 1, 1995. Assets
leased under the agreement at December 31, 1996 were approximately $462,000 and
$79,000, respectively. Terms of the lease are 42 and 33 months, respectively,
with payments due the first of each month. Rental payments are based on the
total amount of equipment leased each month.
In August 1995, the Company entered into an equipment lease agreement in which
$500,000 became available immediately to the Company and the remaining balance
of $475,000 became available after the Company received FDA marketing clearance
for its product. Assets leased under the agreement at December 31, 1996 were
approximately $799,267. The term of the lease is 42 months with payments due the
first of each month. Rent payments are based on the total amount of equipment
leased each month.
Total rent expense under operating leases was $585,000, $765,000 and $921,000
for the years ended December 31, 1994, 1995 and 1996, respectively.
19
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (Continued)
6. LEASES (CONTINUED)
Future minimum lease payments under noncancelable operating leases with initial
or remaining terms of one year or more as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 $ 660,000
1998 475,000
1999 372,000
2000 32,000
------------
$1,539,000
============
</TABLE>
7. INCOME TAXES
At December 31, 1996, the Company had cumulative net operating loss
carryforwards for tax purposes of approximately $32,300,000 plus research and
development tax credit carryforwards of approximately $1,000,000. These
carryforwards are available to offset future taxable income through 2011.
As a result of the sales of Preferred Stock and additional shares of Common
Stock, the Company has experienced a change in ownership under the net operating
loss limitation rules. The use of losses, incurred through the change in
ownership date, to offset future taxable income, will be limited during the
carryforward period. The credits will also be subject to limitations under these
same rules.
20
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (Continued)
7. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-----------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 11,900,000 $ 8,900,000
Tax credit carryforwards 1,000,000 800,000
Deferred compensation on stock options 604,000 373,000
Vacation accrual 71,000 69,000
Book over tax depreciation 98,000 69,000
Other 1,000
-----------------------------
Total deferred tax assets 13,673,000 10,212,000
Deferred tax liabilities:
Deferred loss on sale leaseback - 2,000
-----------------------------
Total deferred tax liabilities - 2,000
-----------------------------
Net deferred tax assets 13,673,000 10,210,000
Valuation allowance (13,673,000) (10,210,000)
-----------------------------
$ - $ -
=============================
</TABLE>
21
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (Continued)
8. STOCK OPTIONS AND WARRANTS
The Company has three stock option plans that include both incentive and non-
statutory stock options to be granted to directors, officers, employees and
consultants of the Company. Option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE
AVAILABLE OPTIONS PRICE PER
FOR GRANT OUTSTANDING SHARE
-------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1993 60,261 273,072 $9.05
Additional shares reserved for 51,556 9.00
issuance
Granted--incentive stock options (83,687) 83,687 9.00
Granted--non-statutory stock options (1,498) 1,498 9.00
Options canceled 15,650 (15,650) 9.00
-------------------------------------
Balance at December 31, 1994 42,282 342,607 9.04
Additional shares reserved 948,444
Granted--incentive stock options (698,666) 698,666 1.25
Granted--non-statutory stock options (289,240) 289,240 .94
Options canceled 305,854 (305,854) 8.83
Options exercised (319,861) .91
-------------------------------------
Balance at December 31, 1995 308,674 704,798 1.80
Granted--incentive stock options (151,650) 151,650 8.42
Options canceled 36,140 (36,140) 4.62
Options exercised (86,300) .94
-------------------------------------
Balance at December 31, 1996 193,164 734,008 $3.11
=====================================
</TABLE>
22
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (Continued)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
The weighted average fair value of options granted is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
--------------
<S> <C> <C>
Stock price = exercise price $5.22 $4.03
Stock price > exercise price 5.36 2.70
</TABLE>
The exercise price of options outstanding at December 31, 1996 ranged from $.90
to $13.00 per share, as summarized in the following table:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE NUMBER OF WEIGHTED
RANGE OF SHARES OUTSTANDING AT REMAINING SHARES AVERAGE EXERCISE
EXERCISE PRICE DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISABLE PRICE PER SHARE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ .90 to $ 5.00 538,619 8.54 years 155,015 $1.13
5.01 to 9.00 139,009 9.23 34,528 8.94
9.01 to 13.00 56,380 7.87 14,110 9.90
----------------------------------------------------------------------------------------
Total 734,008 8.62 years 203,653 $3.06
========================================================================================
</TABLE>
The number of shares exercisable at December 31, 1994 and 1995 was 154,240 and
197,887 respectively at a weighted average exercise price of $9.08 and $1.90 per
share, respectively.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using a minimum value
option pricing model with the following weighted-average assumptions for 1996
and 1995, respectively: risk-free interest rates ranging from 5.5% to 6.3%,
volatility factor of the expected market price of the Company's Common Stock of
.79 and a weighted-average expected life of the option of 7 years.
23
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (Continued)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value statement, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
<TABLE>
<CAPTION>
1995 1996
--------------------------
<S> <C> <C>
Pro forma net loss $ 8,131,017 $ 9,451,264
Pro forma net loss per common share $ 2.70 $ 1.31
</TABLE>
These pro forma amounts may not be indicative of future years' amounts since the
Statement provides for a phase-in of option values beginning with those granted
in 1995.
At December 31, 1996, the Company has total exercisable warrants outstanding to
purchase shares of its Common Stock as follows: 2,777 shares at $.90 per share,
71,706 shares at $3.15 per share, 79,869 shares at $7.38 per share, 36,298
shares at $9.00 per share, 9,095 shares at $11.25 per share and 151,730 shares
at $12.60 per share. These warrants expire at various dates in 1997 through
2001.
DEFERRED COMPENSATION
For options granted during the period June 17, 1995 through October 3, 1995 to
purchase a total of 971,640 shares of Common Stock at exercise prices ranging
from $.90 to $2.70 per share in August 1995, the Company recognized $2,179,693
as deferred compensation for the excess of the deemed value for accounting
purposes of the Common Stock issuable upon exercise of such options over the
aggregate exercise price of such options. The deferred compensation expense is
amortized ratably over the vesting period of the options. Deferred compensation
expense was $1,008,467 and $623,452 for the years ended December 31, 1995 and
1996, respectively.
24
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (Continued)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
The remaining unamortized deferred compensation is expected to be charged to
operations as follows:
<TABLE>
<S> <C>
1997 $325,984
1998 166,186
1999 55,604
----------
$547,774
==========
</TABLE>
9. LICENSE AGREEMENTS
In June 1991, the Company entered into a license agreement to license certain
fiberoptic chemical sensor technology from another licensor. In consideration
for the technology, the Company agreed to pay $88,000 upon execution of the
agreement and executed a promissory note in the amount of $352,000 payable in
four equal amounts annually. In June 1995, the final payment was made on the
promissory note. The Company does not intend to use the technology in the future
and, therefore, does not anticipate paying any royalties under the agreement.
In August 1991, the Company entered into an agreement to purchase additional
fiberoptic chemical sensor technology for $10,000. In addition, the Company
issued 2,778 shares of Common Stock to the licensor upon assignment of the
technology. The Company also issued a warrant to the licensor to purchase 2,777
shares of Common Stock which may be exercised if sales of product that are based
significantly on the technology acquired aggregate $1,000,000. In addition, the
Company has agreed to pay royalties on sales of industrial and environmental
products for which the technology purchased is a significant part. The royalties
shall be 5%, 4% and 3% on the first, second and third $10 million sales
increments and 2% on sales in excess of $40 million. For sales of such products
by any future licensees of the Company, the Company shall pay 25% of all
licensing fees received up to $500,000 and 10% thereafter. The Company has made
all payments for the technology. The Company does not intend to use the
technology in the future and, therefore, does not anticipate paying any
royalties under the agreement.
25
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (Continued)
9. LICENSE AGREEMENTS (CONTINUED)
In October of 1994, the Company entered into an agreement to have certain
mathematical models developed related to chemical sensor technology. In
consideration for the mathematical models, the Company has agreed to pay a fee
of $45,000, payable in four installments of $11,250 beginning October 1, 1994.
The Company has made all payments under the agreement. This agreement can be
canceled with a 90 day notice.
In September 1995, the Company entered into an agreement to acquire technology
and the exclusive worldwide right to transfer and exploit such technology. In
consideration for the technology, the Company has agreed to pay $2,000,000
payable as follows: $500,000 upon execution of the agreement, $500,000 upon
completion of the technology, $500,000 once the product has been sold and
installed in 20 hospitals and $500,000 once the product has been sold and
installed in an additional 50 hospitals. The Company also agreed to pay $50,000
per month for engineering and technical support from August 1, 1995 through
January 31, 1996. As of December 31, 1996, the Company has $1,000,000 remaining
under this agreement which directly relates to products sold.
26
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (Continued)
10. EMPLOYMENT AGREEMENT
The Company has an employment agreement ("agreement") with the President and
Chief Executive Officer of the Company. The agreement provides for a base salary
currently at $185,000 per year, which may be increased by the Board of Directors
and provides for an annual incentive bonus in an amount not less than 20% of the
base salary if the Company reaches milestones agreed to by the Board and the
President. The President also receives an automobile allowance of $500 per
month. The agreement requires the President to assign to the Company patents and
other proprietary rights related to the Company's business and to keep the
Company's proprietary information confidential. The President is also prohibited
from competing with the Company for a period of one year following termination
of employment with the Company. Additionally, the agreement provides for
severance pay equal to twelve months of base salary if the President is
terminated without cause.
In connection with the employment agreement, the Company granted the President
options to purchase 121,162 shares of Common Stock at a price of $9.00 per
share. In August of 1995, these options were canceled, and the Board of
Directors granted the President a non-statutory option to purchase 272,222
shares of Common stock at a price of $.90 per share.
In September 1995, the President exercised this option under the Company's 1991
Stock Option Plan to purchase 272,222 shares of Common Stock at a price of $.90
per share. The right to retain certain of the shares is subject to the
President's continued employment through August 2, 1999. As payment for the
shares, the President executed a $245,000 promissory note, payable in full on
August 1, 1998, at an interest rate of 5.91%. The note is secured by the shares
of Common Stock and proceeds of any dividend or other distribution attributable
to the shares.
27
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (Continued)
11. EMPLOYEE BENEFIT PLANS
In July 1992, the Company adopted a 401(k) savings plan. Employees employed on
July 1, 1992 were automatically eligible to participate and employees hired
after July 1, 1992 are eligible to participate after six months of service and
attaining the age of 21. Employees may contribute up to the maximum amount which
will not violate provisions of the Plan or cause the Plan to exceed the maximum
amount allowable as a deduction to the employer. The Company, at its discretion,
may make matching contributions equal to a percentage of the employee's
contribution. The Company did not contribute to the Plan in 1994, 1995 or 1996.
28
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Optical Sensors Incorporated of our report dated February 7, 1997, included
in the 1996 Annual Report to Shareholders of Optical Sensors Incorporated.
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-04373) pertaining to the Optical Sensors Incorporated 1989 Omnibus
Stock Option Plan and the Optical Sensors Incorporated 1993 Stock Option Plan
and, in the Registration Statement (Form S-8 No. 333-17493) pertaining to the
Optical Sensors Incorporated Employee Stock Purchase Plan, of our report dated
February 7, 1997, with respect to the financial statements of Optical Sensors
Incorporated, incorporated by reference in this Annual Report (Form 10-K) of
Optical Sensors Incorporated.
Minneapolis, Minnesota /s/ Ernst & Young LLP
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 617,003
<SECURITIES> 29,517,797
<RECEIVABLES> 91,040
<ALLOWANCES> 0
<INVENTORY> 931,917
<CURRENT-ASSETS> 31,158,488
<PP&E> 1,081,677
<DEPRECIATION> 488,043
<TOTAL-ASSETS> 32,369,197
<CURRENT-LIABILITIES> 1,319,573
<BONDS> 0
0
0
<COMMON> 83,415
<OTHER-SE> 30,966,209
<TOTAL-LIABILITY-AND-EQUITY> 32,369,197
<SALES> 163,068
<TOTAL-REVENUES> 163,068
<CGS> 1,369,221
<TOTAL-COSTS> 1,369,221
<OTHER-EXPENSES> 10,940,758
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,385,272)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,385,272)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,385,272)
<EPS-PRIMARY> (1.30)
<EPS-DILUTED> (1.20)
</TABLE>
