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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, 1997
[ ] 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. [x]
As of March 13, 1998, 8,848,764 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 $40,731,856.
DOCUMENTS INCORPORATED BY REFERENCE
Parts 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 Stockholders for the year ended December 31, 1997
(the "1997 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 1998 Annual
Meeting to be held May 7, 1998 (the "1998 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-connected, 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
("O2"), carbon dioxide ("CO2") and acid-base ("pH") in a sample of blood taken
from a patient's artery. These tests, which are among the most frequently
ordered and most urgently needed tests for critically ill and unstable patients,
are the foremost indicators of the body's ability to absorb and use oxygen.
Results of ABG tests provide a basis for medical treatment and intervention and
are required to accurately regulate the patient's respiratory support system.
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 (the "ABG Module") that is part of the Company's OpticalCAM
instrumentation ("OpticalCAM"). The SensiCath System is able to either stand
alone or interface with various monitoring platforms, including monitoring
systems produced and installed by Marquette Medical Systems, Inc., SpaceLabs
Medical, Inc., and the Hewlett-Packard Company. These three producers account
for approximately 80% of the installed base of critical care monitoring
instrumentation 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 parameters at the point-of-care.
In May of 1997, the Company voluntarily initiated an action to recover
all customer inventory of SensiCath Sensors due to a limited number of
performance variations in pH readings on certain patient applications. These
performance variations were caused by an interfering agent, called bilirubin,
which is elevated in patients that have underdeveloped or failing livers. At the
same time, the Company notified the FDA of its action to recover all customer
inventory of sensors. In July 1997, the FDA notified the Company that the
voluntary action was classified as a product recall. The Company complied with
all requirements of the FDA recall action and retrieved all Sensors from
customers. In December 1997, the Company completed a number of enhancements to
the SensiCath Sensors including enhancements to the pH sensors that reduced
potential interference from bilirubin to clinically acceptable levels.
In the fourth quarter of 1997 and early 1998, the Company achieved a
number of important strategic milestones. These milestones include enhancements
to the system that improve sensor performance and ease of use and expand its
application in the patient-connected segment of the point-of-care blood gas
monitoring market; and implementing aggressive marketing programs for the
OpticalCAM instrumentation. The Company began commercial distribution of the
enhanced sensor in December 1997. In January 1998, the Company entered into a
seven-year strategic partnership with Instrumentation Laboratory Company ("IL")
for worldwide distribution of the Company's SensiCath Sensors and OpticalCAM
instrumentation. IL will market and distribute the Company's products throughout
the world under the names GEM SensiCath and GEM OpticalCAM, as part of the IL
GEM family of hospital point-of-care diagnostic products. In January 1998, IL
also made an equity investment in the Company of approximately $2.2 million.
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In January 1998, the Company entered into a seven-year strategic
partnership with Instrumentation Laboratory Company ("IL") for worldwide
distribution of the Company's SensiCath Sensors and OpticalCAM instrumentation.
IL will market and distribute the Company's products throughout the world under
the names GEM SensiCath and GEM OpticalCAM, as part of the IL GEM family of
hospital point-of-care diagnostic products. In January 1998, IL also made an
equity investment in the Company of approximately $2.2 million.
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 ABG monitoring equipment 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-connected 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 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 its approved 144-hour period of use, while traditional ABG
analyzers require calibration prior to each test.
- - COST-EFFECTIVE. The SensiCath 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
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provider is not exposed to potentially infectious blood samples or blood
contaminated materials during testing.
SENSICATH SYSTEM
The SensiCath System is able to interface with various monitoring
platforms, including monitoring systems produced and installed by Marquette
Medical Systems, Inc., SpaceLabs Medical, Inc., and the Hewlett-Packard Company.
These three producers account for approximately 80% of the installed base of
critical care monitoring instrumentation in the United States. In addition, the
OpticalCam provides stand-alone instrumentation capability for the SensiCath
System, operating independently of any other monitoring equipment. The SensiCath
Sensor contains three optical fibers with fluorescent chemistries for sensing
O2, CO2 and pH. The disposable, single-patient sensor has been designed to
provide accurate ABG data for the 144-hour approved period of use. The ABG
Module is the source and receptor of optical signals, provides signal processing
and communicates with other components in the monitoring system.
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. 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 are 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 O2 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 CO2 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., O2, CO2 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
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the sensor dyes provide fully ratioed capability which maintains calibration for
the entire 144-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 144-hour period of use of the SensiCath System. No external
gas tanks with O2 and CO2 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 principal distribution channel for its products is
through IL, the Company's worldwide distribution partner. In January 1998, the
Company entered into a seven-year strategic partnership with IL for worldwide
distribution of the Company's SensiCath Sensors and OpticalCAM instrumentation.
IL will market and distribute the Company's products throughout the world under
the names GEM SensiCath and GEM OpticalCAM, as part of IL's established GEM line
of critical care products. The Company will supply IL with SensiCath Sensors, on
an exclusive basis, through 2004 and on a non-exclusive basis through 2007. The
Company will also supply IL with OpticalCAM Instruments, on a semi-exclusive
basis, through 2004. The Company retains the right to sell OpticalCAM
Instruments to manufacturers of physiological monitoring, ventilator and
anesthesia delivery systems. IL is required to purchase sufficient quantities of
products from the Company that will result in preestablished annual minimum
revenues to the Company. These quotas increase each year during the first five
years of the relationship. If IL fails to meet the quota requirements, the
Company has the right to convert IL's exclusive right to a non-exclusive right.
In addition, the Company has the right to convert IL's exclusive right to a
non-exclusive right if there is a change in control of the Company. If the
Company exercises this right, IL will have the right to terminate the
relationship. In January 1998, IL also purchased 441,203 shares of Common Stock
from the Company, which represented 4.99% of the Company's outstanding Common
Stock following completion of the transaction, for approximately $2.2 million.
The Company also maintains a sales and marketing staff whose primary
role is to develop joint marketing programs with IL, provide support for
customer evaluation of the SensiCath System, provide training, support and
technical assistance for IL's sales force and provide technical assistance and
support for customers. The Company's sales and marketing staff will continue to
identify and establish key customer sites, call on customers and develop
relationships with manufacturers of critical care patient bedside monitoring
systems. The Company plans to continue to directly market the OpticalCAM to
manufacturers of critical care patient bedside monitoring systems, although
their customers will purchase sensors directly from IL.
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.
During 1997, the Company's research and development staff completed a number of
significant improvements to the SensiCath System, including modifications to the
pH sensor to reduce potential interference from bilirubin in the blood to
clinically acceptable levels, software upgrades to streamline the process of
generating, storing and retrieving
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measurement data, and hardware and software upgrades that reduce set-up and
calibration time for the system. The Company's principal research and
development activities currently consist of design and development of new
sensors to measure additional blood analytes and further product enhancements,
including planned cost reduction programs. There can be no assurance that the
Company will be able to successfully develop new products or achieve planned
cost reductions on a timely basis or at all. The Company's research and
development expenses for the fiscal years ended December 31, 1997, 1996 and 1995
were $4,975,037, $5,632,458 and $5,955,344, 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 FDA conducted a scheduled good manufacturing practices
("GMP") inspection of the Company's manufacturing facility in November 1997, and
the Company has passed the inspection. The Company has also received ISO 9001
certification for its manufacturing facility. 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 ABG
Module is currently manufactured solely by Marquette Medical Systems, Inc. While
the Company has entered into an OEM agreement with Marquette for the ABG Module,
any delay or disruption in the supply of ABG 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 VIA Medical, Inc. 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.
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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. 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) and OpticalCAM(TM) are trademarks of the Company. GEM(R) is a
trademark of Instrumentation Laboratory Company.
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
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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 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 SensiCath
System and the OpticalCAM monitor from the FDA. The Company 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 submitted safety and effectiveness information to the
FDA for the SensiCath System by August 1997. 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
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restrictions, tariff regulations, duties and tax requirements. Many of the
regulations applicable to the 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 was
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 is 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
effect on the Company.
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EMPLOYEES
As of December 31, 1997, the Company employed 75 persons full-time and
8 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 OpticalCAM instrumentation, which may
require capital expenditure approvals by the hospital.
- - SALES BY INSTRUMENTATION LABORATORY. The Company's future revenues will
depend almost exclusively on sales of the Company's products by IL. In
January 1998, the Company entered into a seven-year strategic partnership
with IL for worldwide distribution of the Company's SensiCath Sensors and
OpticalCAM instrumentation. IL will market and distribute the Company's
products throughout the world under the names GEM SensiCath and GEM
OpticalCAM. The Company will supply IL with SensiCath Sensors, on an
exclusive basis, through 2004 and on a non-exclusive basis through 2007.
The Company will also supply IL with OpticalCAM Instruments, on a
semi-exclusive basis, through 2004. The Company retains the right to sell
OpticalCAM Instruments to manufacturers of physiological monitoring,
ventilator and anesthesia delivery systems. Although IL is required to
purchase sufficient quantities of products from the Company that will
result in pre-established annual minimum revenues to the Company in order
to maintain exclusivity, there can be no assurance that IL will achieve
sufficient sales for the Company to substantially increase revenues or
achieve profitability.
- - MANUFACTURING AND SUPPLY. The Company's future plans include planned
enhancements to the SensiCath Sensor that will reduce the Company's
manufacturing costs. In addition, the Company does not yet have experience
in manufacturing sensors in volumes that will be necessary to achieve
significant revenues. A failure to implement the planned cost reduction
programs in a timely manner or to successfully scale-up manufacturing of
sensors could have a material adverse effect on the Company. Currently, the
Company has only one supplier for the ABG 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.
- - 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.
9
<PAGE>
- - REGULATORY APPROVALS. The Company's ability to market its current products
and any products that it may develop in the future requires clearances or
approvals from the FDA and other governmental agencies, including, in some
instances, foreign and state agencies. The process for maintaining and
obtaining necessary regulatory clearances and approvals can be expensive
and time consuming. There can be no assurance that the Company will be able
to maintain or obtain necessary regulatory approvals and clearances in the
future.
ITEM 2. PROPERTIES.
The Company's facilities are located at 7615 Golden Triangle Drive,
Minneapolis, Minnesota, and consist of approximately 23,364 square feet. The
Company leases these facilities pursuant to a lease that expires on November 30,
1999. The lease provides for rent of approximately $20,800 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 13, 1998, are as follows:
NAME AGE TITLE
- ------------------- --- --------------------------------------------
Sam B. Humphries 55 President and Chief Executive Officer
Paulita M. LaPlante 40 Vice President of Worldwide Sales,
Marketing and Business Development
Byron (Buzz) Moran 55 Vice President of Research and Development and
Operations
Wesley G. Peterson 50 Chief Financial Officer, Vice President
of Finance and Administration and Secretary
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
10
<PAGE>
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.
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 "Common Stock Information" on page
25 of the Company's 1997 Annual Report is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The financial information under the caption "Selected Financial Data"
on page 23 of the Company's 1997 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" on pages 6 to 9 of the Company's 1997 Annual Report is incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not Applicable.
11
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and Independent Auditors' Report
thereon on pages 10 to 23 of the Company's 1997 Annual Report are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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 1998 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 1998 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
1998 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 1998 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 1998 Proxy Statement is incorporated herein by reference.
12
<PAGE>
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 1997 Annual
Report:
FINANCIAL STATEMENTS: PAGE:
Report of Independent Auditors........................... 23
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 and for the period from
May 23, 1989 (inception) to December 31, 1997............ 10
Balance Sheets as of December 31, 1997 and 1996.......... 11
Statement of Shareholders' Equity for the period
May 23, 1989 (inception) to December 31, 1997............ 12-13
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 and for the period
from May 23, 1989 (inception) to December 31, 1997....... 14
Notes to Financial Statements............................ 15-22
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 13, 1998, 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.
13
<PAGE>
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.
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. Employee Stock Purchase Plan.
(B) REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K during the
quarter ended December 31, 1997.
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 25, 1998 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 25, 1998 by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
NAME TITLE
/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
Wesley G. Peterson Secretary (principal financial and
accounting officer)
/S/ RICHARD B. EGEN Director
- -------------------------------
Richard B. Egen
/S/ PROMOD HAQUE, PH.D. Director
- -------------------------------
Promod Haque, Ph.D.
/S/ RICHARD J. MEELIA Director
- -------------------------------
Richard J. Meelia
/S/ DEMETRE M. NICOLOFF, M.D. Director
- -------------------------------
Demetre M. Nicoloff, M.D.
/S/ GARY A. PETERSON Director
- -------------------------------
Gary A. Peterson
15
<PAGE>
OPTICAL SENSORS INCORPORATED
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ITEM NO. ITEM METHOD OF FILING
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Incorporated by reference to Exhibit 3.3
Company. contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
3.2 Certificate of Designation, Preferences and Incorporated by reference to Exhibit 3.2
Rights of Series A Junior Preferred Stock. contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1996 (File
No. 0-27600).
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 with the Incorporated by reference to Exhibit 4.4
Convertible Bridge Loan Agreement dated November contained in the Company's Registration
22, 1991 Statement on Form S-1 (File No. 33-99904).
4.3 Form of Warrant issued in connection with the Incorporated by reference to Exhibit 4.5
On-Call Bridge Loan Agreement dated December 6, contained in the Company's Registration
1991 Statement on Form S-1 (File No. 33-99904).
4.4 Form of Warrant issued in connection with the Incorporated by reference to Exhibit 4.6
Convertible Bridge Loan Agreement dated May 4, contained in the Company's Registration
1993 Statement on Form S-1 (File No. 33-99904).
4.5 Form of Warrant issued in connection with the Incorporated by reference to Exhibit 4.7
Bridge Loan Agreement dated June 1, 1995 contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
4.6 Warrant dated November 6, 1992 issued to Incorporated by reference to Exhibit 4.8
Comdisco, Inc. contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
4.7 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).
4.8 Rights Agreement dated as of December 3, 1996 Incorporated by reference to Exhibit 4.1
between the Company and Norwest Bank Minnesota, contained in the Company's Current Report on
N.A. Form 8-K dated December 3, 1996 (File No.
0-27600).
10.1 Lease dated October 7, 1991 between Registrant Incorporated by reference to Exhibit 10.1
and First Industrial L.P. (successor to MIG contained in the Company's Registration
Kappa III Companies) Statement on Form S-1 (File No. 33-99904).
10.2 Equipment Lease dated November 6, 1992, as Incorporated by reference to Exhibit 10.2
amended, between the Company and Comdisco, Inc. contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
10.3 Letter Agreement dated October 1, 1995 between Incorporated by reference to Exhibit 10.3
the Company and Marquette Electronics, Inc. contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
10.4 Employment Agreement dated October 1, 1991 Incorporated by reference to Exhibit 10.4
between the Company and Sam B. Humphries contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
10.5 Non-Competition Agreement, dated April 28, 1992 Incorporated by reference to Exhibit 10.6
between the Company and Sam B. Humphries contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
10.6 Registration Rights Agreement, dated April 28, Incorporated by reference to Exhibit 10.9
1992, as amended contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
10.7 1989 Omnibus Stock Option Plan, as amended Incorporated by reference to Exhibit 10.11
contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
10.8 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).
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
10.9 Non-Statutory Stock Option Agreement dated Incorporated by reference to Exhibit 10.13
August 2, 1995 between the Company and Sam B. contained in the Company's Registration
Humphries Statement on Form S-1 (File No. 33-99904).
10.10 Non-Recourse Promissory Note dated September 1, Incorporated by reference to Exhibit 10.14
1995 between the Company and Sam B. Humphries contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
10.11 Pledge Agreement dated September 1, 1995 between Incorporated by reference to Exhibit 10.15
the Company and Sam B. Humphries contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
10.12 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).
10.13 Form of Non-Statutory Stock Option Agreement for Incorporated by reference to Exhibit 10.21
Nonemployees pursuant to 1993 Stock Option Plan contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
10.14 Form of Non-Statutory Stock Option Agreement for Incorporated by reference to Exhibit 10.18
Nonemployee Directors pursuant to 1993 Stock contained in the Company's Registration
Option Plan Statement on Form S-1 (File No. 33-99904).
10.15 Form of Incentive Stock Option Agreement for Incorporated by reference to Exhibit 10.19
Employees pursuant to contained in the Company's Registration
1993 Stock Option Plan Statement on Form S-1 (File No. 33-99904).
10.16 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).
10.17 First Amendment to Lease Agreement dated April Incorporated by reference to Exhibit 10.21
26, 1996 between First Industrial Financing contained in the Company's Annual Report on Form
Partnership, L.P. and the Company. 10-K for the year ended December 31, 1996 (File
No. 0-27600).
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
10.18 Supply Agreement dated August 22, 1996 between Incorporated by reference to Exhibit 10.22
the Company and Marquette Electronics, Inc. (1) ontained in the Company's Annual Report on Form
10-K for the year ended December 31, 1996 (File
No. 0-27600).
10.19 Manufacturing Supply Agreement dated September Incorporated by reference to Exhibit 10.23
10, 1996 between the Company and SpecTran contained in the Company's Annual Report on Form
Specialty Optics Company. (1) 10-K for the year ended December 31, 1996 (File
No. 0-27600).
10.20 Purchase Order dated February 21, 1997 between Incorporated by reference to Exhibit 10.24
the Company and SeaMED Corporation. (1) contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1996 (File
No. 0-27600).
10.21 Second Amendment to Lease Agreement, dated Filed herewith electronically.
April 14, 1997, between First Industrial
Financing Partnership, L.P. and the Company.
10.22 Master Equipment Lease dated June 15, 1997 Filed herewith electronically.
between Phoenix Leasing Incorporated and the
Company
10.23 Amendment No. 1 to Master Equipment Lease dated Filed herewith electronically.
August 15, 1997 between Phoenix Leasing
Incorporated and the Company
10.24 Private Label Reseller Agreement dated as of Incorporated by reference to Exhibit 10.1
January 7, 1998 between the Company and contained in the Company's Current Report on
Instrumentation Laboratory Company. (1) Form 8-K, dated January 7, 1998 (File No.
0-27600).
10.25 Stock Purchase Agreement dated as of January 7, Incorporated by reference to Exhibit 10.2
1998 between the Company and Grupo CH Werfen, contained in the Company's Current Report on
S.A. Form 8-K, dated January 7, 1998 (File No.
0-27600).
10.26 OEM Agreement dated February 5, 1998 between the Filed herewith electronically.
Company and Marquette Medical Systems, Inc. (2)
13.1 Excerpts from the Company's 1997 Annual Report Filed herewith electronically.
to Shareholders incorporated by reference herein.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
23.1 Independent Auditors' Consent Filed herewith electronically.
27.1 Financial Data Schedule Filed herewith electronically.
</TABLE>
- ---------------------
(1) Confidential treatment has been granted by the Commission 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.
(2) 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.
<PAGE>
EXHIBIT 10.21
SECOND AMENDMENT TO LEASE AGREEMENT
TO THE LEASE dated October 7, 1991, by and between MIG III-Kappa Corporation and
now assigned to First Industrial, L.P. (a Delaware Limited Partnership) as
Landlord, and Optical Sensors Incorporated (a Delaware corporation and successor
to Optical Senor for Medicine, Inc.) as Tenant.
THIS AMENDMENT TO LEASE, entered into and made as of April 14, 1997, by and
between First Industrial, 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 and amended by First Amendment dated April 26, 1996 (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. Effective April 21, 1997, Tenant shall occupy an additional 4,925 square
feet of space (totaling 23,264 square feet; 2,181 square feet office,
14,083 square feet warehouse) located at 7615 Golden Triangle Drive, Suite
L, as attached on Exhibit A.
2. Monthly Base Rent as set forth in Section 1.4 of the Lease shall be as
follows:
April 21, 1997 - November 30, 1999 $14,130 per month
3. Right of First Refusal: During the initial term of this Lease and the
option periods thereafter, Tenant shall have the Right of First Refusal on
the space located at 7615 Golden Triangle Drive, Suite N, as attached on
Exhibit B. During said period, Landlord shall provide to Tenant a copy of
any bonafide offer received from any third party to lease any portion of
the space. Tenant shall thereafter have the option to lease the space which
is the subject of said bonafide offer, which option shall be exercisable at
any time within five (5) business days after receipt of the copy of said
bonafide offer, on the same terms and conditions as set forth therein. In
the event that Tenant fails to exercise its option to lease such space,
Landlord may lease such space to a third party at any time during the next
following sixty (60) day period on terms not more favorable to the Tenant
thereof as were set forth in the bonafide offer provided to Tenant. The
Right of First Refusal of Tenant under this paragraph is conditioned upon
the Lease being in full force and effect without default thereunder on the
date the Tenant exercises its right hereunder.
4. Except as hereinafter 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: FIRST INDUSTRIAL L.P., TENANT: OPTICAL SENSORS
a Delaware Limited Partnership INCORPORATED, 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>
EXHIBIT 10.22
MASTER EQUIPMENT LEASE NO. 053-0070
Under this Master Equipment Lease No. 053-0070 (the "Lease"), dated as of June
15, 1997, PHOENIX LEASING INCORPORATED, a California corporation ("Lessor"),
hereby leases to OPTICAL SENSORS INCORPORATED, a Delaware corporation
("Lessee"), and Lessee hereby leases from Lessor, the equipment and certain
custom use equipment, installation and delivery costs, purchase tax, toolings
software and items generally considered fungible or expendable ("Soft Costs")
(herein together called "Equipment") which is described on the schedule attached
hereto or any subsequently-executed schedule entered into by Lessor and Lessee
and which incorporates this Lease by reference. Any such schedules shall
hereinafter individually be referred to as a "Schedule" and collectively be
referred to as the "Schedules." Lessor hereby leases the Equipment to Lessee
upon the following terms and conditions:
1. TERM OF AGREEMENT. The term of this Lease begins on the date set forth
above and shall continue thereafter and be in effect so long as and at any time
any Schedule entered into pursuant to this Lease is in effect. The Base Term and
rent payable with respect to each leased item of Equipment shall be as set forth
in and as stated in the respective Schedule(s). The terms of each Schedule
hereto are subject to all conditions and provisions of this Lease as it may at
any time be amended. Each Schedule shall constitute a separate and independent
lease and contractual obligation of Lessee and shall incorporate the terms and
conditions of this Lease and any additional provisions contained in such
Schedule. In the event of a conflict between the terms and conditions of this
Lease and any additional provisions of such Schedule, the additional provisions
of such Schedule shall prevail with respect to such Schedule only.
2. NON-CANCELLABLE LEASE. This Lease and any Schedule cannot be cancelled
or terminated except as expressly provided herein. This Lease (including all
Schedules to this Lease) constitutes a net lease and Lessee agrees that its
obligations to pay all rent and other sums payable hereunder (and under any
Schedule) and the rights of Lessor and assignee in and to such rent and other
sums, are absolute and unconditional and are not subject to any abatement,
reduction, setoff, defense, counterclaim or recoupment due or alleged to be due
to, or by reason of, any past, present or future claims which Lessee may have
against Lessor, any assignee, the manufacturer or seller of the Equipment, or
against any person for any reason whatsoever.
3. LESSOR COMMITMENT. So long as no Event of Default or event which with
the giving of notice or passage of time, or both, could become an Event of
Default has occurred or is continuing, Lessor agrees to lease to Lessee the
groups of Equipment described on each Schedule, subject to the following
conditions: (a) that in no event shall Lessor be obligated to lease Equipment to
Lessee hereunder where the aggregate purchase price of all Equipment leased to
Lessee hereunder would exceed $2,000,000 ("Commitment") of which amount Lessor
may purchase Soft Costs Equipment for lease to Lessee having an aggregate
purchase price not exceeding an amount equal to 25% of the utilized Commitment;
(b) the amount of Equipment purchased by Lessor at any one time shall be at
least equal to $20,000 except for a final advance which may be less than
$20,000; (c) Lessor shall not be obligated to purchase Equipment hereunder after
June 30, 1998; (d) all Lease documentation required by Lessor has been executed
by Lessee or provided by Lessee no later than June 15, 1997; (e) the equipment
described on the Schedule is acceptable to Lessor and may include equipment
manufactured by Lessee provided Lessee certifies such equipment will only be
utilized as laboratory equipment; (f) with respect to each funding Lessee has
provided to Lessor each of the closing documents and other items described in
1
<PAGE>
Exhibit A hereto (which documents shall be in form and substance acceptable to
Lessor) and which list may be modified for each subsequent funding; (g) there is
no material adverse change in Lessee's condition, financial or otherwise, as
determined by Lessor, and Lessee so certifies, from (yy) the date of the most
recent financial statements delivered by Lessee to Lessor prior to execution of
this Lease, to (zz) the date of the proposed lease of the Equipment; (h) Lessee
is performing substantially according to its business plan referred to as
"Quarterly Plan (Optical Sensors Incorporated, 1997 Operating Budget, Draft
2/6/97 Statement of Operations, Balance Sheets and Statements of Projected Cash
Flows dated 1/31/97)" as may be amended from time to time in form and substance
reasonably acceptable to Lessor ("Business Plan"); (i) Lessor or its agent has
inspected and placed identification labels on the Equipment; (j) Lessee shall
offer to Lessor, on an exclusive basis, all lease transactions for equipment
contemplated by Lessee other than motor vehicles until expiration of all
Schedules; however if Lessor declines to finance any such transaction or Lessee
and Lessor cannot agree upon terms, then Lessee shall be free to seek such
financing from any other third party; and (k) Lessor has received in form and
substance reasonably acceptable to Lessor: (i) Lessee's interim financial
statements signed by a financial officer of Lessee; and (ii) evidence of
Lessee's $30,000,000 cash position as of December 31, 1996.
4. NO WARRANTIES BY LESSOR. (a) Lessee has selected both (i) the Equipment
and (ii) the suppliers (herein called "Vendor") from whom Lessor is to purchase
the Equipment. LESSOR MAKES NO WARRANTY EXPRESS OR IMPLIED AS TO ANY MATTER
WHATSOEVER, INCLUDING THE CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY OR ITS
FITNESS FOR ANY PARTICULAR PURPOSE, ITS COMPLIANCE WITH ANY APPLICABLE
GOVERNMENTAL REQUIREMENTS AND ITS NON-INFRINGEMENT OF ANY PATENTS OR OTHER
RIGHTS, AND AS TO LESSOR, LESSEE LEASES THE EQUIPMENT "AS IS" AND WITH ALL
FAULTS. (b) If the Equipment is not properly installed, does not operate as
represented or warranted by Vendor or is unsatisfactory for any reason, Lessee
shall make any claim on account thereof solely against Vendor and shall,
nevertheless, pay Lessor all rent payable under this Lease, Lessee hereby
waiving any such claims as against Lessor. Lessor hereby agrees to assign to
Lessee solely for the purpose of making and prosecuting any said claim, to the
extent assignable, all of the rights which Lessor has against Vendor for breach
of warranty or other representation respecting the Equipment. Lessor shall have
no responsibility for delay or failure to fill the order. (c) Lessee understands
and agrees that neither the Vendor nor any salesman or other agent of the Vendor
is an agent of Lessor. No salesman or agent of Vendor is authorized to waive or
alter any term or condition of this Lease, and no representations as to the
Equipment or any other matter by the Vendor shall in any way affect Lessee's
duty to pay the rent and perform its other obligations as set forth in this
Lease. (d) Lessee hereby requests Lessor to purchase Equipment from Vendor and
to lease Equipment to Lessee on the terms and conditions of the Lease set forth
herein. (e) Lessee hereby authorizes Lessor to insert in this Lease and each
Schedule hereto the serial numbers and other identification data of the
Equipment when determined by Lessor.
5. LESSEE'S REPRESENTATIONS AND WARRANTIES. Lessee represents and warrants
that (a) it is in good standing under the laws of the state of its formation,
and duly qualified to do business, and will remain duly qualified during the
term of this Lease, in each state where the Equipment will be located, as
specified on each Schedule hereto, except where the failure to be so qualified
would not have a material adverse effect on Lessee; (b) it has full authority to
execute and deliver this Lease and perform the terms hereof, and this Lease has
been duly authorized and constitutes valid and binding obligations of Lessee
enforceable in accordance with its terms; (c) this Lease will not contravene any
law, regulation or judgment affecting Lessee or result in any breach of any
agreement or
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other instrument binding on Lessee; (d) no consent of Lessee's shareholders,
members or managers or partners, as applicable, or holder of any indebtedness,
or filing with, or approval of, any governmental agency or commission, is a
condition to the performance of the terms hereof; (e) there is no action or
proceeding pending or, to Lessee's knowledge, threatened against Lessee before
any court or administrative agency which would have a materially adverse effect
on the business, financial condition or operations of Lessee; (f) no deed of
trust, mortgage or third party interest arising through Lessee will attach to
the Equipment or the Lease; (g) the Equipment will remain at all times under
applicable law, removable personal property, free and clear of any lien or
encumbrance in favor of Lessee or any other person, notwithstanding the manner
in which the Equipment may be attached to any real property; (h) all credit,
financial and any other information submitted to Lessor herewith or any other
time is true and correct in all material respects at the time submitted to
Lessor; and (i) Lessee has provided, or will provide if requested, Lessee's tax
identification number.
6. EQUIPMENT ORDERING. Lessee shall be responsible for all packing,
rigging, transportation and installation charges for the Equipment and Lessor
may separately invoice Lessee for such charges. Lessee has selected the
Equipment itself and shall arrange for delivery of Equipment so that it can be
accepted in accordance with Section 7 hereof. Lessee hereby agrees to indemnify
and hold Lessor harmless from any claims, liabilities, costs and expenses,
including reasonable attorneys' fees, incurred by Lessor arising out of any
purchase orders or assignments executed by Lessor with respect to any Equipment
or services relating thereto.
7. LESSEE ACCEPTANCE. Lessee shall return to Lessor the signed and dated
Acceptance Notice attached to each Schedule hereto (a) acknowledging the
Equipment has been received, installed and is ready for use and (b) accepting it
as satisfactory in all respects for the purposes of this Lease. Lessor is
authorized to fill in the Rent Start Date on each Schedule in accordance with
the foregoing.
8. LOCATION; INSPECTION; LABELS. The Equipment shall be delivered to and
shall not be removed from the Equipment "Location" shown on each Schedule
without Lessor's prior written consent, which Location shall in all events be
within the United States. Lessor shall have the right to inspect the Equipment
at any reasonable time and on reasonable notice. Lessee shall be responsible for
all labor, material and freight charges incurred in connection with any removal
or relocation of such Equipment which is requested by the Lessee and consented
to by Lessor, as well as for any charges due to the installation or moving of
the Equipment. The rental payments shall continue during any period in which the
Equipment is in transit during a relocation. Lessor or its agent shall mark and
label the Equipment, which labels shall state the Equipment is owned by Lessor,
and Lessee shall keep such labels on the Equipment as labeled by Lessor or its
agent.
9. EQUIPMENT MAINTENANCE. (a) GENERAL. Lessee will locate or base each item
of Equipment where designated in an Acceptance Notice and will reasonably permit
Lessor to inspect such item of Equipment and its maintenance records at any
reasonable time and on reasonable notice. Lessee will at its sole expense comply
with all applicable laws, rules and regulations with respect to the use,
maintenance, repair, condition, storage and operation of each item of Equipment.
Except as required herein, Lessee will not make any addition or improvement to
any item of Equipment that is not readily removable without causing material
damage to any item or impairing its original value or utility. Any addition or
improvement that is so required or cannot be so removed will immediately become
the property of Lessor. (b) SERVICE AND REPAIR. Lessee will, at its sole
expense, maintain and service, and
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repair any damage to, each item of Equipment in a manner consistent with prudent
industry practice and Lessee's own practice so that such item of Equipment is at
all times (i) in the same condition as when delivered to Lessee, except for
ordinary wear and tear, (ii) in good operating order for the function intended
by its manufacturer's warranties and recommendations.
10. LOSS OR DAMAGE. Lessee assumes the entire risk of loss to the Equipment
through use, operation or otherwise. Lessee hereby indemnifies and holds
harmless Lessor from and against all claims, loss of rental payments, costs,
damages, and expenses relating to or resulting from any loss, damage or
destruction of the Equipment, any such occurrence being hereinafter called a
"Casualty Occurrence." Within ninety (90) days after such Casualty Occurrence,
Lessee shall (a) repair the Equipment, returning it to good operating condition,
or (b) replace the Equipment with identical equipment in good condition and
repair, the title to which shall vest in Lessor and which thereafter shall be
subject to the terms of this Lease; or (c) pay to Lessor (i) any unpaid accrued
amounts relating to such Equipment due Lessor under this Lease up to the date of
the Casualty Occurrence, and (ii) a sum equal to the Casualty Value as set forth
in the Casualty Value table attached to each Schedule hereto for such Equipment.
Upon the making of such payment, the term of this Lease as to each unit of
Equipment with respect to which the Casualty Value was paid shall terminate.
11. GENERAL INDEMNITY. Lessee will protect, indemnify and save harmless
Lessor from and against all liabilities, obligations, claims, damages,
penalties, causes of action, costs and expenses, including consequential or
special damages of any kind, imposed upon or incurred by or asserted against
Lessor or any assignee of Lessor by Lessee or any third party by reason of the
occurrence or existence (or alleged occurrence or existence) of any act or event
relating to or caused by the Equipment, other than arising from the intentional
or grossly negligent acts of Lessor or any failure on the part of Lessee to
perform or comply with any of the terms of this Lease. In the event that any
action, suit or proceeding is brought against Lessor by reason of any such
occurrence, Lessee, upon request of Lessor, will at Lessee's expense resist and
defend such action, suit or proceeding or cause the same to be resisted and
defended by counsel designated and approved by Lessor. Lessor shall tender and
otherwise make available to Lessee control of the defense and resolution of such
claim, whether by way of settlement or otherwise. Lessee's obligations under
this Section 11 shall survive the expiration of this Lease with respect to acts
or events occurring or alleged to have occurred prior to the return of the
Equipment to Lessor at the end of the Lease term.
12. INSURANCE. Lessee at its expense shall keep the Equipment insured for
the entire term and any extensions of this Lease against all risks of physical
loss for at least the replacement value of such Equipment and shall provide for
a loss payable endorsement to Lessor and/or any assignee of Lessor. Lessee shall
maintain commercial general liability insurance with respect to loss or damage
for personal injury, death or property damage in an amount not less than
$2,000,000 in the aggregate, naming Lessor and/or Lessor's assignee as
additional insured. Such insurance shall contain insurer's agreement to give
thirty (30) days written notice to Lessor before cancellation or material change
of any policy of insurance. Lessee will provide Lessor and any assignee of
Lessor with a certificate of insurance from the insurer evidencing Lessor's or
such assignee's interest in the policy of insurance. Such insurance shall cover
any Casualty Occurrence to any unit of Equipment. Notwithstanding anything in
Section 10 or this Section 12 to the contrary, this Lease and Lessee's
obligations hereunder and under each Schedule shall remain in full force and
effect with respect to any unit of Equipment which is not subject to a Casualty
Occurrence. If Lessee fails to provide or maintain insurance as required herein,
Lessor shall have the right, but shall not be obligated to obtain such
insurance. In that
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event, Lessee shall pay to Lessor the reasonable cost thereof.
13. TAXES. Lessee agrees to report the Equipment as equipment leased from
Lessor and not as equipment owned by Lessee on Lessee's personal property tax
return. Promptly upon receipt of an invoice from Lessor, Lessee agrees to
reimburse Lessor for (or pay directly if instructed by Lessor), and agrees to
indemnify and hold Lessor harmless from, all fees (including, but not limited
to, license, documentation, recording and registration fees), and all sales,
use, gross receipts, personal property, occupational, value added or other
taxes, levies, imposts, duties, assessments, charges, or withholdings of any
nature whatsoever, together with any penalties, fines, additions to tax, or
interest thereon (all of the foregoing being hereafter referred to as
"Impositions") except same as may be attributable to Lessor's income, arising at
any time prior to or during the term of this Lease, or upon termination or early
termination of this Lease and levied or imposed upon Lessor directly or
otherwise by any Federal, state or local government in the United States or by
any foreign country or foreign or international taxing authority upon or with
respect to (a) the Equipment, (b) the exportation, importation, registration,
purchase, ownership, delivery, leasing, possession, use, operation, storage,
maintenance, repair, return, sale, transfer of title, or other disposition
thereof, (c) the rentals, receipts, or earnings arising from the Equipment, or
any disposition of the rights to such rentals, receipts, or earnings, (d) any
payment pursuant to this Lease, and (e) this Lease or the transaction or any
part thereof. Lessee's obligations under this Section 13 shall survive the
expiration of this Lease with respect to acts or events occurring or alleged to
have occurred prior to the return of the Equipment to Lessor at the end of the
Lease term. Lessee shall have the right, at its expense, to contest in good
faith and by appropriate proceeding, the proprietary of, and other issues
relating to, any Imposition for which Lessee has or may have financial
responsibility under this Section 13, provided that Lessee shall take any action
necessary to prevent the confiscation of or lien attaching against the
Equipment.
14. PAYMENT BY LESSOR. If Lessee shall fail to make any payment or perform
any act required hereunder, then Lessor may, but shall not be required to, after
such notice to Lessee as is reasonable under the circumstances, make such
payment or perform such act with the same effect as if made or performed by
Lessee. Lessee will upon demand reimburse Lessor for all sums paid and all costs
and expenses incurred in connection with the performance of any such act.
15. SURRENDER OF EQUIPMENT. If required by the terms of this Lease or any
Schedule, Lessee will forthwith surrender the Equipment to Lessor delivered in
as good order and condition as originally delivered, reasonable wear and tear
excepted. Lessor may, at its sole option, arrange for removal and transportation
of the Equipment, provided that Lessee's obligations under Sections 10, 11 and
12 shall not be released. Lessee shall bear all expenses of delivering (which
include, but are not limited to, the de-installation, insurance, packaging and
transportation of) the Equipment to Lessor's location or other location within
the United States as Lessor may request. Notwithstanding Lessee's surrender
and/or delivery of the Equipment and/or Lessor's removal of the Equipment, all
obligations of Lessee under this Lease, including rental payments, shall remain
in full force and effect until Lessee delivers the Equipment to Lessor.
16. ASSIGNMENT. WITHOUT LESSOR'S PRIOR WRITTEN CONSENT, SUCH CONSENT NOT TO
BE UNREASONABLY WITHHELD, LESSEE SHALL NOT (A) ASSIGN, TRANSFER, PLEDGE,
HYPOTHECATE OR OTHERWISE DISPOSE OF THIS LEASE, EQUIPMENT, OR ANY INTEREST
THEREIN, OR (B) SUBLET OR LEND EQUIPMENT OR PERMIT IT TO BE USED BY ANYONE OTHER
THAN LESSEE OR LESSEE'S EMPLOYEES.
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LESSOR MAY ASSIGN THIS LEASE OR GRANT A SECURITY INTEREST IN ANY OR ALL
EQUIPMENT, OR BOTH, IN WHOLE OR IN PART TO ONE OR MORE ASSIGNEES OR SECURED
PARTIES WITHOUT NOTICE TO LESSEE. No assignment under the Lease will relieve
Lessor of any obligations it has under the Lease. If Lessee is given notice of
such assignment it agrees to acknowledge receipt thereof in writing and Lessee
shall execute such additional documentation as Lessor's assignee shall
reasonably require. Each such assignee and/or secured party shall have all of
the rights, but none of the obligations, of Lessor under this Lease, unless such
assignee or secured party expressly agrees to assume such obligations in
writing. Lessee shall not assert against any assignee and/or secured party any
defense, counterclaim or offset that Lessee may have against Lessor.
Notwithstanding any such assignment, and providing no Event of Default has
occurred and is continuing, Lessor, or its assignees, secured parties, or their
agents or assigns, shall not interfere with Lessee's right to quietly enjoy use
of Equipment subject to the terms and conditions of this Lease. Subject to the
foregoing, this Lease inures to the benefit of and is binding upon the
successors and assignees of the parties hereto. Lessee acknowledges that any
such assignment by Lessor will not materially change Lessee's duties or
obligations under the Lease or increase any burden of risk on Lessee.
17. DEFAULT. (a) EVENT OF DEFAULT. Any of the following events or
conditions shall constitute an "Event of Default" hereunder: (i) Lessee's
failure to pay any monies due to Lessor hereunder or under any Schedule beyond
the tenth (10th) day after the same is due; (ii) Lessee's failure to comply with
its obligations under Section 12 or Section 16; (iii) Lessee's failure to comply
with or perform any term, covenant, condition, warranty or representation of
this Lease or any Schedule hereto or under any other agreement between Lessee
and Lessor or under any lease of real property covering the location of
Equipment if such failure to comply or perform is not cured by Lessee within
thirty (30) days of receipt of notice thereof; (iv) seizure of the Equipment
under legal process; (v) the filing by or against Lessee of a petition for
reorganization or liquidation under the Bankruptcy Code or any amendment thereto
or under any other insolvency law providing for the relief of debtors; or (vi)
the voluntary or involuntary making of an assignment of a substantial portion of
its assets by Lessee, or any guarantor ("Guarantor") under any guaranty executed
in connection with this Lease ("Guaranty"), for the benefit of its creditors,
the appointment of a receiver or trustee for Lessee or any Guarantor for any of
Lessee's or Guarantor's assets, the institution by or against Lessee or any
Guarantor of any formal or informal proceeding for dissolution, liquidation,
settlement of claims against or winding up of the affairs of Lessee or any
Guarantor, PROVIDED that in the case of all such involuntary proceedings, same
are not dismissed within sixty (60) days after commencement; or (vii) the making
by Lessee or any Guarantor of a transfer of all or a material portion of
Lessee's or Guarantor's assets or inventory not in the ordinary course of
business.
(b) REMEDIES. If any Event of Default shall have occurred:
(i) Lessor may proceed by appropriate court action or actions either
at law or in equity to enforce performance by Lessee, of the applicable
covenants of this Lease, or to recover damages therefor; or
(ii) Lessee will, without demand, on the next rent payment date
following the Event of Default, pay to Lessor as liquidated damages which
the parties agree are fair and reasonable under the circumstances existing
at the time this Lease is entered into, and not as a penalty, an amount
equal to the Casualty Value of the Equipment set forth in the Casualty
Value Table attached to such Equipment's Schedule together with any rent or
other amounts past due and owing by Lessee hereunder (but not any
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future rent); and
(iii) Lessor may, without notice to or demand upon Lessee;
(A) Take possession of the Equipment and lease or sell the same
or any portion thereof, for such period, amount, and to such entity as
Lessor shall elect. The proceeds of such lease or sale will be applied
by Lessor (1) first, to pay all costs and expenses, including
reasonable legal fees and disbursements, incurred by Lessor as a
result of the default and the exercise of its remedies with respect
thereto, (2) second, to pay Lessor an amount equal to any unpaid rent
or other amounts past due and payable (but not any future rent) plus
the Casualty Value, to the extent not previously paid by Lessee, and
(3) third, to reimburse Lessee for the Casualty Value to the extent
previously paid. Any surplus remaining thereafter will be retained by
Lessor.
(B) Take possession of the Equipment and hold and keep idle the
same or any portion thereof.
Lessee agrees to pay all reasonable internal and out-of-pocket
costs of Lessor related to the exercise of its remedies, including
direct costs of its in-house counsel and out-of-pocket legal fees and
expenses. At Lessor's request, Lessee shall assemble the Equipment and
make it available to Lessor at such location as Lessor may designate.
Lessee waives any right it may have to redeem the Equipment.
Repossession of any or all Equipment shall not terminate this
Lease or any Schedule unless Lessor notifies Lessee in writing.
None of the above remedies is intended to be exclusive, but each
is cumulative and in addition to any other remedy available to Lessor,
and all may be enforced separately or concurrently.
18. LATE PAYMENTS. Lessee shall pay to Lessor an amount equal to 10% per
month of all amounts owed Lessor by Lessee which are not paid within ten (10)
days of when due, but in no event shall Lessee pay more than an amount greater
than the highest rate permitted by applicable law. If such funds have not been
received by Lessor at Lessor's place of business or by Lessor's designated agent
within ten (10) days of the date such funds are due under this Lease, Lessor
shall bill Lessee for such charges. Lessee acknowledges that invoices for
rentals due hereunder are sent by Lessor for Lessee's convenience only. Lessee's
non-receipt of an invoice will not relieve Lessee of its obligation to make rent
payments hereunder.
19. LESSOR'S EXPENSE. Lessee shall pay Lessor all reasonable costs and
expenses including reasonable attorney's fees and the fees of the collection
agencies, incurred by Lessor (a) in enforcing any of the terms, conditions or
provisions hereof including, but not limited to, all reasonable out-of-pocket
costs of Lessor related to the exercise of its remedies, including reasonable
out-of-pocket legal fees and expenses, and (b) in connection with any bankruptcy
or post-judgment proceeding, whether or not suit is filed and, including,
without limitation, those incurred in each and every action, suit or proceeding,
including any and all appeals and petitions therefrom and all fees and costs
incurred by Lessor.
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20. OWNERSHIP; PERSONAL PROPERTY. The Equipment shall be and remain
personal property of Lessor, and Lessee shall have no right, title or interest
therein or thereto except as expressly set forth in this Lease, notwithstanding
the manner in which it may be attached or affixed to real property, and upon
termination or expiration of the Lease term, Lessee shall have the duty and
Lessor shall have the right to remove the Equipment from the premises where the
same be located whether or not affixed or attached to the real property or any
building, at the cost and expense of Lessee.
21. ALTERATIONS; ATTACHMENTS. No alterations or attachments shall be made
to the Equipment without Lessor's prior written consent, which shall not be
given for changes that will affect the reliability and utility of the Equipment
or which cannot be removed without damage to the Equipment, or which in any way
affect the value of the Equipment for purposes of resale or re-lease. All
attachments and improvements to the Equipment shall be deemed to be "Equipment"
for purposes of the Lease, and all right, title and interest therein shall
immediately vest in Lessor.
22. FINANCING STATEMENT. Lessee will execute financing statements pursuant
to the Uniform Commercial Code. Lessee authorizes Lessor to file financing
statements signed only by Lessor (where such authorization is permitted by law)
at all places where Lessor deems necessary.
23. MISCELLANEOUS. (a) Lessee shall provide Lessor with such corporate
resolutions, financial statements and other documents as Lessor shall reasonably
request from time to time. (b) Lessee represents that the Equipment is being
leased hereunder for business purposes. (c) Time is of the essence with respect
to this Lease. (d) Lessee shall keep its books and records in accordance with
generally accepted accounting principles and practices consistently applied and
shall deliver to Lessor its annual audited financial statements, unaudited
monthly financial statements to include any financial information given to
Lessee's Board of Directors, and signed by an officer of Lessee and such other
unaudited financial statements as may be reasonably requested by Lessor. (e)
Lessee will notify Lessor at least 30 days prior to changing its name, principal
place of business or chief executive office.
24. NOTICES. All notices hereunder shall be in writing, by registered mail,
or reliable messenger or delivery service and shall be directed, as the case may
be, to Lessor at 2401 Kerner Boulevard, San Rafael, California 94901, Attention:
Asset Management and to Lessee at 7615 Golden Triangle Drive, Suite A,
Minneapolis, Minnesota 55344, Attention: Chief Financial Officer.
25. ENTIRE AGREEMENT. Lessee acknowledges that Lessee has read this Lease,
understands it and agrees to be bound by its terms, and further agrees that the
Lease and each Schedule constitute the entire agreement between Lessor and
Lessee with respect to the subject matter hereof and supersedes all previous
agreements, promises, or representations. The terms and conditions hereof shall
prevail notwithstanding any variance with the terms of any purchase order
submitted by the Lessee with respect to any Equipment covered hereby.
26. AMENDMENT. This Lease may not be changed, altered or modified except by
an instrument in writing signed by an officer of the Lessor and the Lessee.
27. WAIVER. Any failure of Lessor to require strict performance by Lessee
or any waiver by Lessor of any provision herein shall not be construed as a
consent or waiver of any other breach of the same or any other provision.
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28. SEVERABILITY. If any provision of this Lease is held invalid, such
invalidity shall not affect any other provisions hereof.
29. JURISDICTION AND WAIVER OF JURY TRIAL. This Lease shall be governed by
and construed under the laws of the State of California without giving effect to
conflicts of law principles. It is agreed that exclusive jurisdiction and venue
for any legal action between the parties arising out of this Lease shall be in
the Superior Court for Marin County, California, or, in cases where Federal
diversity jurisdiction is available, in the United States District Court for the
Northern District of California.
30. NATURE OF TRANSACTION. Lessor makes no representation whatsoever,
express or implied, concerning the legal character of the transaction evidenced
hereby, for tax or any other purpose.
31. SECURITY INTEREST. (a) One executed copy of the Lease will be marked
"Original" and all other counterparts will be duplicates. To the extent, if any,
that this Lease constitutes chattel paper (as such term is defined in the
Uniform Commercial Code as in effect in any applicable jurisdiction) no security
interest in the lease may be created in any documents other than the "Original."
(b) There shall be only one original of each Schedule and it shall be marked
"Original," and all other counterparts will be duplicates. To the extent, if
any, that any Schedule(s) to this Lease constitutes chattel paper (or as such
term is defined in the Uniform Commercial Code as in effect in any applicable
jurisdiction) no security interest in any Schedule(s) may be created in any
documents other than the "Original."
32. SUSPENSION OF OBLIGATIONS. The obligations of Lessor hereunder will be
suspended to the extent that it is hindered or prevented from complying
therewith because of labor disturbances, including but not limited to strikes
and lockouts, acts of God, fires, storms, accidents, failure of the manufacturer
to deliver any item of Equipment, governmental regulations or interference, or
any cause whatsoever not within the sole and exclusive control of Lessor.
33. SOFTWARE. For the term of this Lease, and so long as no Event of
Default has occurred and is continuing, Lessor hereby assigns to Lessee all of
Lessor's rights under any License Agreement executed by Lessor in connection
with the Equipment (except for any right of Lessor to be reimbursed for the
License Fee). Lessee agrees to be bound by the provisions of any such License
Agreement and to perform all obligations of Lessor (except Lessor's payment
obligations) thereunder. Lessee acknowledges that all of Lessee's obligations
under the Lease with respect to the Equipment will apply equally to the
software, including but not limited to Lessee's obligation to pay rent to
Lessor.
34. COMMITMENT FEE. Lessee has paid to Lessor a commitment fee ("Fee") of
$20,000. The Fee shall be applied by Lessor first to reimburse Lessor for all
out-of-pocket UCC search costs, inspections and appraisal fees incurred by
Lessor, and then proportionally to the first month's rent for each Schedule
hereunder in the proportion that the purchase price of the Equipment leased
pursuant to the Schedule bears to Lessor's entire commitment. However, the
portion of the Fee which is not applied to rental shall be non-refundable except
if Lessor defaults in its obligations pursuant to Section 3.
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35. FINANCE LEASE. The parties agree that this lease is a "Finance Lease"
as defined by section 10-103(a)(7) of the California Commercial Code
(Cal.Com.C.). Lessee acknowledges either (a) that Lessee has reviewed and
approved any written Supply Contract (as defined by Cal.Com.C. Section
10-103(a)(25)) covering Equipment purchased from the "Supplier" (as defined by
Cal.Com.C. Section 10-103(a)(24)) thereof for lease to Lessee or (b) that Lessor
has informed or advised Lessee, in writing, either previously or by this Lease
of the following: (i) the identity of the Supplier; (ii) that the Lessee may
have rights under the Supply Contract; and (iii) that the Lessee may contact the
Supplier for a description of any such rights Lessee may have under the Supply
Contract. Lessee hereby waives any rights and remedies Lessee may have under
Cal.Com.C. Sections 10-508 through 522.
36. END OF LEASE POSITION. (a) GENERAL. At the expiration of the Base
Term of the first Schedule to the Lease, Lessee shall choose a final
purchase or extension option ("End of Lease Position") as specified in the
Schedule, and that choice shall be an election of Lessee's End of Lease Position
for all, but not less than all, of the Equipment under all Schedules to the
Lease.
Any Equipment Purchase election shall be a purchase of the Equipment, AS-IS,
WHERE-IS. Upon Lessor's receipt of the purchase price, Lessor shall issue to
Lessee an equipment bill of sale, transferring valid title to the Equipment,
free and clear of all liens and encumbrances arising through Lessor, to the
Lessee without any representation or warranty whatsoever, except as to Lessor's
title in the Equipment. Lessee shall be responsible for all applicable taxes in
connection with any Equipment purchase.
Fair market or rental value shall be determined for the Equipment under all
Schedules prior to the Base Term's expiration.
Until Lessee fulfills an End of Lease Position option or requirement, all
Lessee's Lease obligations, including payment of the Monthly Rental Amount,
shall continue in full force and effect, on a month-to-month basis.
(b) END OF LEASE POSITION REQUIREMENTS. Provided no Event of Default has
occurred and is continuing and notwithstanding anything to the contrary in the
Lease, Lessee shall elect one of the following alternatives at the Schedule's
Base Term expiration. Lessee shall make its election by giving Lessor at least
90 days' prior written notice thereof prior to such expiration.
(i) Requirements for Standard Equipment ALTERNATIVE NO. 1 FOR STANDARD
EQUIPMENT:
Purchase the Equipment for the Equipment's fair market value, in no
event less than 10% nor more than 15% of the Equipment's original purchase
price. Fair market value shall be determined by Lessor in its reasonable
discretion.
ALTERNATIVE NO. 2 FOR STANDARD EQUIPMENT:
Extend the Schedule's Base Term for an additional 12 months ("Extended
Term") for a monthly rate of 1.3% of the Equipment's original purchase
price.
At the expiration of the Extended Term, Lessee shall purchase the
Equipment for $1.
In the event Lessee does not provide 90 days' prior written notice, Lessee
shall be deemed to have elected Alternative No. 1 above.
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(ii) Requirements for Soft Cost Equipment: Purchase the Equipment for 15%
of the Equipment's original purchase price.
37. FURTHER ASSURANCES. Lessee shall at its expense take such action and
execute and deliver all acts and instruments and other documents as Lessor may
at any time reasonably request to protect, assure or enforce its interests and
rights hereunder.
38. POWER OF ATTORNEY. Lessee hereby irrevocably appoints Lessor as
Lessee's attorney-in-fact, with full authority in the place and stead of Lessee
and in the name of Lessee, from time to time in Lessor's discretion, to take any
action and to execute any instrument which Lessor may deem necessary or
advisable to accomplish the purposes of the Lease and any documents and
instruments contained therein or thereby to the extent permitted by law.
39. ADJUST-A-LEASE OPTION. (a) GENERAL: After the first 12 months of the
term of any Schedule, Lessee shall have the option to remove such Schedule's
Equipment ("Removed Equipment") and finance new Equipment ("New Equipment")
under a new Schedule ("New Schedule"). (b) NEW SCHEDULE AMOUNT: The amount of
the New Schedule shall be an amount equal to the purchase price for the New
Equipment plus a prepayment figure for the Removed Equipment. The prepayment
figure shall be the original amount of the original Schedule ("Old Schedule")
less: (i) any trade-in value or resale proceeds received by Lessor for the
Removed Equipment and (ii) a credit for Schedule payments already made (the
total Old Schedule payments attributable to the removed Equipment multiplied by
the "Allowance Factor" indicated in the table below). In no event shall the
Schedule amount of the New Schedule be less than original amount of the Old
Schedule.
REMOVAL DATE ALLOWANCE FACTOR
After 12 Months of Old Schedule 55%
After 24 Months of Old Schedule 60%
After 36 Months of Old Schedule 65%
(c) OLD SCHEDULE: If any Equipment remains on the Old Schedule, the monthly
payment amount for the Old Schedule will be reduced in proportion to the Removed
Equipment's value. (d) OPTION PRECONDITIONS: Lessee's right to exercise this
Adjust-A-Lease Option ("Option") is conditioned upon the following: (i) no Event
of Default under the Lease has theretofore occurred or is continuing; (ii) the
New Equipment and prepayment of the Removed Equipment are financed by Lessor
under a New Schedule, subject to Lessor's current lease rates and documentation
acceptable to Lessor; (iii) Lessor is satisfied with Lessee's creditworthiness;
(iv) the New Equipment is acceptable to Lessor; and (v) Lessee has given Lessor
at least 90 days' prior written notice of its desire to exercise the Option.
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IN WITNESS WHEREOF, the parties hereto have executed this Lease.
PHOENIX LEASING INCORPORATED OPTICAL SENSORS INCORPORATED
By: /S/ NORM NELSON By: /S/ SAM B. HUMPHRIES
------------------------------- --------------------------------
Title: SENIOR VICE PRESIDENT Title: PRESIDENT AND CHIEF EXECUTIVE OFFICER
--------------------------- --------------------------------------
HEADQUARTERS LOCATION:
7615 Golden Triangle Drive, Suite A
Minneapolis, MN 55344
County of Hennepin
EXHIBITS AND SCHEDULES:
Exhibit A - Closing Memorandum
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AMENDMENT NO. 1 TO MASTER EQUIPMENT LEASE AGREEMENT NO. 053-0070
THIS AMENDMENT NO. 1 TO MASTER EQUIPMENT LEASE AGREEMENT NO. 053-0070
("Amendment") is dated as of August 15, 1997, by and between OPTICAL SENSORS
INCORPORATED ("Lessee") and PHOENIX LEASING INCORPORATED ("Lessor").
RECITALS
WHEREAS, Lessee and Lessor entered into that certain Master Equipment Lease
Agreement No. 053-0070, dated as of June 15, 1997 (the "Lease");
WHEREAS Lessee has requested that the Lease be amended as set forth below;
WHEREAS, Lessor is willing to amend the Lease on the terms set forth herein and
Lessee is willing to agree to such terms;
NOW, THEREFORE, IT IS AGREED THAT:
1. A new Section 40 is added to the Lease to read as follows:
40. SPECIFIC TERMS - SOFT COST EQUIPMENT. Lessee and Lessor agree that if;
upon the expiration of the Commitment Period, the amount funded allocable to
Soft Cost Equipment exceeds 25 percent (25%) of the Commitment utilized as of
such expiration date, then, at Lessor's option, Lessee shall pay to Lessor an
amount equal to such excess ("Excess Payment"). Lessee agrees to pay the Excess
Payment to Lessor within thirty (30) days of Lessor's invoice. The Excess
Payment shall be applied in prorata shares to each Schedule as advance payments
under each such Schedule of: (i) first, Lessee's end of lease requirement (which
for purposes of this Excess Payment shall be assumed to be the final payment
election) and (ii) next, Lessee's last monthly payment obligations.
2. REPRESENTATIONS AND WARRANTIES: Lessee hereby reconfirms as of the date
hereof, its representations and warranties set forth in Section 5 of the Lease.
3. CONTINUED VALIDITY OF LEASE. Except as amended by this Amendment, the Lease
shall continue in full force and effect as originally constituted and is
ratified and affirmed by the parties hereto. Such Amendment shall not amend or
otherwise affect any of the Schedules executed and delivered by Lessee prior to
the date hereof.
4. AUTHORIZATION. Each party represents to the other that the individual
executing this Amendment on its behalf is the duly appointed signatory of such
party to this Amendment and that such individual is authorized to execute this
Amendment by or on behalf of such party and to take all action required by the
terms of this Amendment.
5. WHEN AMENDMENT IS EFFECTIVE. This Amendment shall be binding and deemed
effective when executed by Lessee and accepted and executed by Lessor. Upon such
effectiveness this Amendment shall be deemed to have amended the Lease as
provided herein.
<PAGE>
6. CAPTIONS. Section headings and numbers have been set forth herein for
convenience only. Unless the contrary is compelled by the context, everything
contained in each section applies equally to this entire Amendment.
7. NO NOVATION. This Amendment is not intended to be, and shall not be construed
to create, a novation or accord and satisfaction, and, except as otherwise
provided herein, the Lease shall remain in full force and effect.
8. SEVERABILITY. Each provision of this Amendment shall be severable from every
other provision of this Amendment for the purpose of determining the legal
enforceability of any specific provision.
9. ENTIRE AGREEMENT. The Lease as amended by this Amendment constitutes the
entire agreement between Lessee and Lessor with respect to the subject matter
hereof and supersedes all prior and contemporaneous negotiations,
communications, discussions and agreements concerning such subject matter.
Lessee acknowledges and agrees that Lessor has not made any representation,
warranty or covenant in connection with this Amendment.
10. CONFLICTS. In the event of any conflict between the terms of this Amendment
and terms of the Master Equipment Lease No. 053-0070, the terms of this
Amendment shall prevail.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first set forth above.
LESSOR: LESSEE:
PHOENIX LEASING INCORPORATED OPTICAL SENSORS INCORPORATED
By: /S/ JOAN WINTER By: /S/ WES PETERSON
----------------------------- ------------------------------
Title: CONTRACTING ADMINISTRATOR Title: CHIEF FINANCIAL OFFICER
--------------------------- ----------------------------
<PAGE>
OEM AGREEMENT
THIS AGREEMENT, effective this 5th day of February, 1998, by and
between MARQUETTE MEDICAL SYSTEMS, INC., a Wisconsin corporation, having a place
of business at 8200 West Tower Avenue, Milwaukee, Wisconsin 53223 (hereinafter
called "Seller") and OPTICAL SENSORS INCORPORATED, a Delaware corporation, with
principal offices located at 7615 Golden Triangle Drive, Suite A, Minneapolis,
Minnesota 55344 (hereinafter called "Buyer").
W I T N E S S E T H:
WHEREAS, Seller currently manufactures and markets directly to end
users and through the Buyer an optical blood gas module known as OnlineABG (the
"Module").
WHEREAS, Seller and Buyer desire to enter into this Agreement to
supersede and replace the Supply Agreement dated August 22, 1996 between Seller
and Buyer (the "Supply Agreement").
.
WHEREAS, Buyer markets a stand-alone medical monitor and desires to
purchase Modules from Seller pursuant to this Agreement to incorporate the
Module into Buyer's monitor.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, and for other good and valuable consideration, the
receipt of which is hereby mutually acknowledged, the parties hereto agree as
follows:
1. DEFINITIONS
A. The term "Accessory Items" shall mean service/repair parts or
accessories for use in connection with Modules.
B. The term "Affiliate" shall mean any person, firm or entity
controlling, controlled by or under common control with, a party
to this Agreement.
C. The term "Agreement" shall mean this OEM Agreement.
D. The term "Contract Products" shall mean Modules and Accessory
Items currently manufactured, assembled or sold by Seller. The
Accessory Items being manufactured, assembled, or sold by Seller
as of the date of this Agreement are listed in Schedule C hereto.
E. The term "Contract Year" shall mean each sequential twelve (12)
month period during the term of this Agreement with the first such
period commencing on the effective date.
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F. The term "Monitor" shall mean all medical monitors manufactured or
assembled by or on behalf of Buyer during the term of this
Agreement into which Buyer incorporates or includes as an add-on
Modules or Accessory Items. The Monitor being manufactured or
assembled by or on behalf of Buyer, or as to which manufacture or
assembly is contemplated by Buyer, as of the date of this
Agreement is listed in Schedule B hereto.
G. The term "Specifications" shall mean the specifications for the
Module set forth in Schedule A hereto, as may be amended from time
to time upon mutual agreement of the parties.
2. SUPPLY OF CONTRACT PRODUCTS
A. Seller shall manufacture the Modules in accordance with the
Specifications. Seller shall sell to Buyer such quantities of
Contract Products as Buyer orders pursuant to Section 4.B.
Contract Products purchased by Buyer from Seller hereunder shall
be used by Buyer solely in the design, manufacture or assembly of
Monitors or for the replacement of Contract Products so used.
B. Notwithstanding the above, nothing herein shall grant Buyer any
right with respect to any of Seller's trademarks, except as they
may appear on Contract Products.
3. PRICES
A. The unit price for each Module shall be $_________. The Buyer may
elect to purchase Accessory Items from the Seller and the unit
prices for Accessory Items shall be the prices set forth in
Schedule C, plus any sales, use, excise or similar taxes. The
Buyer may elect to purchase Accessory Items directly from original
manufacturers and if the Buyer elects to do so, the Seller shall
supply a letter of authorization to the original manufacturers.
[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.]
B. Prices, billing, and payment hereunder shall be in U.S. Dollars.
4. PURCHASES
A. Commencing on the date of this Agreement and on the first day of
every calendar quarter thereafter while this Agreement is in
effect, Buyer shall deliver to Seller a forecast covering its
estimated requirements for Modules
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for the next twelve (12) calendar months. Such forecast shall constitute
a non-binding good faith of estimate of Buyer's anticipated purchases
for those months.
B. Buyer will, from time to time, submit written purchase orders for
Modules to Seller specifying a shipment date, which shipment date
shall in no event be less than 90 days from the date of delivery
of such purchase order. Buyer shall also submit purchase orders
for Accessory Items it purchases pursuant to this Agreement. Each
purchase order, without any acceptance by Seller, shall give rise
to a contract for the purchase of 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.
C. Buyer agrees to purchase and take delivery from Seller during each
Contract Year, a minimum of _____ (___) Modules. In the event that
Buyer, as of the end of any Contract Year, shall not have ordered
_____ (___) Modules, Seller may immediately invoice Buyer for the
delivery of the remaining modules, provided that Seller actually
deliver such Modules to 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.]
D. Title and risk of loss or damage to Contract Products shall pass
to Buyer upon delivery at Seller's plant to either Buyer or a
common carrier. Shipping costs and insurance are the sole
obligation of Buyer. Seller will make all arrangements for
shipments of Contract Products in accordance with Buyer's shipping
instructions. Buyer shall insure each shipment of Contract
Products with a reputable insurer for the full invoice value of
such shipment.
5. PAYMENT
Seller will invoice Buyer upon shipment of Contract Products. All
purchases hereunder shall be for cash, with the amount thereof due and
payable within thirty (30) days after delivery of Contract Products.
Interest at a rate of one and one-half (1 1/2%) percent per month shall
be applied to alL accounts delinquent by more than thirty (30) days.
6. CONTRACT ACCESSORY AND SERVICE ITEMS
Seller shall supply Accessory Items to Buyer for the entire duration of
this Agreement and for a period of three (3) years following the last
Module shipment. During each year of said three (3) year period, the
prices for Accessory Items shall be subject to negotiation by the
parties hereto annually.
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7. WARRANTY
A. Seller warrants that each Module purchased under this Agreement
will conform to the Specifications (or any revised specifications
agreed to by the Buyer) and is free from any defect in design,
workmanship, and materials.
B. Buyer shall inspect the Contract Products within thirty (30) days of
receipt to determine whether the Contract Products conform to the
Purchase Order and whether the Modules function in accordance with the
Specifications. Buyer's inspection for determining whether the Modules
function in accordance with the Specifications shall be approved in
advance by Seller, which approval shall not be unreasonably withheld or
delayed. Buyer's failure to notify Seller, in writing, within 30 days of
delivery by the Seller of the Contract Products to Buyer shall
constitute an irrevocable acceptance of such Contract Products and a
waiver of any claim for breach of any warranty with respect to such
Contract Products. Any Contract Product not passing this inspection may,
at Buyer's option, be returned to Seller for repair or replacement
within 60 days following delivery of the Contract Product to the Buyer,
provided that Buyer has filed notice with the Seller as provided above.
C. Seller's sole obligation under warranty shall be to repair or
replace, without charge, Contract Products or parts of Modules to
Buyer. Seller shall pay shipping costs in both directions for
warranty related activities.
D. For any Module not covered by Seller's warranty, Buyer will have
right either to service the Module directly, or to ask Seller to
provide Buyer with quotation for contract service. Seller's
warranty shall not apply to any Modules that are serviced by
Buyer.
E. THE FOREGOING WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES,
EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. EXCEPT AS OTHERWISE
SPECIFICALLY PROVIDED IN THIS AGREEMENT, SELLER'S LIABILITY ON ANY
CLAIM, WHETHER IN CONTRACT OR OTHERWISE, FOR ANY LOSS OR DAMAGE ARISING
OUT OF, CONNECTED WITH, OR RESULTING FROM THE MANUFACTURE, SALES,
DELIVERY, RESALE, REPAIR, REPLACEMENT OR USE OF ANY CONTRACT PRODUCT OR
ANY PART THEREOF SHALL IN NO CASE EXCEED THE PRICE PAID BY BUYER FOR
SAID CONTRACT PRODUCT WHICH GIVES RISE TO THE CLAIM. IN NO EVENT SHALL
SELLER BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL OR SPECIAL DAMAGES TO
BUYER EXCEPT WHEN AND TO THE EXTENT THAT SUCH DAMAGES ARE DIRECTLY
CAUSED BY A DEFECT IN CONTRACT PRODUCTS PURCHASED PURSUANT TO
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THIS AGREEMENT AND RESULT IN BODILY INJURY TO ANY PERSON.
8. INTELLECTUAL PROPERTY
Seller acknowledges that all intellectual property rights relating to the
Contract Products are the sole and exclusive property of Buyer, subject only
the limited license granted by Buyer to Seller pursuant the letter
agreement, dated September 7, 1995, between Buyer and Seller.
9. PRODUCT LIABILITY INDEMNITY
A. Seller will indemnify, protect, and save Buyer harmless from all claims,
demands, suits, or actions for damages to property (excluding losses of
income due to down time of equipment) or person which may be sustained
by any third party, including Buyer's personnel which may be asserted
against Buyer and which are caused or are alleged to be caused by any
defect in design, workmanship or materials of any of the Contract
Products purchased or used under this Agreement. The foregoing covenant
of indemnity shall survive the expiration or termination of this
Agreement, but Seller shall not be responsible for any loss or damage
caused by negligence acts or omission of Buyer or Buyer's personnel nor
shall the covenant be enforceable in the event that such loss or damage
is caused by Buyer's modification to either the hardware or the software
constituting the subject Contract Product. Seller shall have no
liability or responsibility of any kind to Buyer or Buyer personnel
under this Paragraph 9 for any claims, demands, suits, or actions,
unless Seller shall be notified in writing of any such claim, demand,
suit, or action promptly upon Buyer's learning of the event and shall
have had an adequate opportunity to defend, unless such failure to so
notify does not prejudice Seller. The obligations of the parties set
forth in this Paragraph 9 shall continue notwithstanding the termination
or expiration of this Agreement.
B. Buyer will indemnify, protect, and save Seller harmless from all claims,
demands, suits, or actions, for damages to property or person which may
be sustained by any third party, including Seller personnel, arising
from any deficiency in the design or deficiency in the manufacture of
products by Buyer, incorporating or including as an add-on, Contract
Products with the exception of claims, demands, suits, or actions
covered by Paragraphs 8 and 9A above. The foregoing indemnity shall
survive the expiration or termination of this Agreement, but Buyer shall
not be responsible for any loss or damage caused by negligent acts or
omissions of Seller or Seller personnel. Buyer shall have no liability
or responsibility of any kind to Seller, or Seller personnel, under this
Paragraph 8 for any claims, demands, suits, or actions, unless Buyer
shall be notified in writing of any such claim, demand, suit, or
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<PAGE>
action promptly upon Seller's learning of the event, and shall have had
an adequate opportunity to defend, unless such failure to so notify does
not prejudice Buyer. The obligations of the parties set forth in this
Paragraph 9 shall continue notwithstanding the termination or expiration
of this Agreement.
C. Each party hereto shall maintain, at its own expense, with an insurance
company reasonably acceptable to the other party hereto, Bodily Injury
and Property Damage Liability Insurance with limits of at least
$1,000,000 for injuries to one (1) person and $3,000,000 for injuries to
two (2) or more persons, in any one accident, and $300,000 for property
damage in any one accident. Each party has furnished to the other a
certificate or certificates of insurance duly executed by an authorized
representative of the insurance company or companies evidencing the
maintenance of the insurance coverage provided for by this Paragraph and
containing a provision to the effect that in the event any insurance
covered by such certificates is canceled or modified, before the
expiration of such insurance coverage, the insurer will give the other
party hereto ten (10) days prior written notice thereof.
D. Each party agrees to promptly notify the other if a suit or other
legal action is commenced against it or its customers which, if brought
against the other party hereto, would entitle such other party to be
indemnified hereunder by the notifying party, provided that such other
party shall not disclose information concerning such suit or action to
any third party, except to the extent necessary for such other party to
fulfill other obligations it may have under law or by court or
administrative order.
10. PRODUCT ALTERATIONS
A. Seller acknowledges and agrees that Buyer intends to modify the software
incorporated into the Modules, and Buyer may make other modifications to
the Contract Products. Buyer will notify Seller in writing within ten
(10) business days of the part number, description and serial number of
all modified modules and Contract Products. Neither Seller nor Buyer
shall make any modifications to the Specifications to which Seller is
required to manufacture Modules without the other part's prior written
consent. Should any such agreed upon modification to the Specifications
result in increased costs to or expenditures by Seller or result in
either an increase or decrease in Seller's cost of production of the
Contract Products, then the parties shall negotiate in good faith
appropriate adjustments to the pricing of the Contract Products to
reflect such cost changes or expenditures.
B. Seller acknowledges that Buyer intends to modify certain Modules
currently owned and in possession of Buyer. Buyer will notify Seller in
writing of the part number, description, and serial number of all such
Modules being modified. Buyer agrees that Seller's one-year warranty
obligation with respect
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to such Modules shall expire effective upon notice from Buyer to Seller
of such modification.
11. FORCE MAJEURE
Neither Seller nor Buyer shall be liable for any delay in, or failure of,
performance hereunder due to act of God or similar casualty beyond its
control. When only a part of Seller's or Buyer's capacity to perform is
excused under this Paragraph, Seller or Buyer must fairly allocate
production and deliveries among various customers or suppliers then under
contract for similar goods during the period when Buyer or Seller is
partially unable to perform, subject to any contractual obligations of
Seller to any third party. The allocation must be effected in a commercially
fair and equitable manner.
12. REGULATORY MATTERS AND RECALLS
A. Seller warrants that the Modules will be manufactured in compliance with
all applicable federal, state and local laws and regulations including,
but not limited to, the Food, Drug and Cosmetic Act, as amended, and
U.S. Food and Drug Administration (the "FDA") Good Manufacturing
Practice for Medical Devices regulations ("GMP"). Seller represents and
warrants to Buyer that Seller's manufacturing facility is certified "DIN
EN ISO 9001/EN46001/MDD" and that Seller has all approvals and consents
required to mark Modules with the "CE" mark. Seller further covenants
with Buyer that Seller will maintain such certification during the term
of this Agreement. Seller will notify Buyer of any audits of Seller's
manufacturing facility to be conducted by TUV Product Services or any
other notified body for such certification, provide Buyer with a written
copy of the results of such audit, to the extent that such audit relates
directly to the manufacture of Modules, and Seller's proposed corrective
response to such audit, if any required.
B. In the event of a governmental regulatory ruling, of standards
promulgated and issued by the government or any product deficiency
affecting patient safety or efficacy that requires the recall or field
modification of the Modules, Seller agrees to "swap" with Buyer or fix
(at Seller's option) all defective Contract Products or parts of
Modules, for acceptable Contract Products or parts of Modules at charges
mutually agreed upon after negotiations in good faith. Except as ordered
by a governmental agency, no recall or field modification action shall
be initiated without the mutual agreement of the parties hereto unless
the initiating party is prepared to solely bear the costs thereof. Each
party shall notify the other in writing if either becomes aware of any
recall or field modification action and both parties shall cooperate in
reaching a consistent response. Neither party shall withhold any
information from the other or from any regulatory agency involving
patient safety or efficacy required by any recall or field modification
action.
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C. Both parties shall be responsible for maintaining records and
meeting all government laws and regulations as they may pertain to
Contract Products or products incorporating or including as an add-on
Contract Products sold by each party including, but not limited to, U.S.
export and re-export control laws and neither party assumes any risk
arising out of the other party's failure to comply with such laws or
regulations with respect to products sold by such other party. Component
and product serial number/lot number assigned and records shall be
maintained and supplied to either party for purposes of product or
component tracing, recall or field modifications or compliance with
government laws and regulations.
D. Each party will forward to the other copies of customer complaints
and medical device reports ("MDR") relating to events required to
reported by the FDA in accordance with 21 CFR Part 803 relating to the
manufacture and operation of the Module, and each party will cooperate
fully with the other party in investigating and resolving such
complaints, including any necessary testing and analysis of the Module.
E. Seller will at its sole cost and expense, timely register with the FDA
as a Contract Medical Device Manufacturer, or cause to be timely
registered with the FDA, in accordance with 21 CFR Part 807, each
establishment which Seller or a subcontractor of Seller intends to
manufacture and/or repair the Module.
F. Seller will provide Buyer with copies of any FDA Form 483 observations,
follow-up warning letters and/or close-out reports for those portions of
GMP compliance inspection reports relating specifically to the
manufacture of Modules for any facility where Modules are manufactured.
G. Either party may, upon not less than seven (7) days prior written notice
to the other, inspect other's manufacturing facilities for compliance
with quality and regulatory requirements no more than once every three
months.
H. Buyer shall be solely responsible for, and shall indemnify and hold
Seller harmless from and against any and all claims, demands, suits or
actions which may be asserted against Seller arising out of fraudulent
or substantially inaccurate promotional activities, labeling or
materials relating to the sale or promotion of Monitors.
13. TERM AND TERMINATION
A. This Agreement shall become effective as of the date first above written
and, unless previously terminated, shall continue in effect until the
end of the second Contract Year.
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B. Prior to the end of the second Contract Year, either party may terminate
this Agreement as follows:
1. 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 taken reasonable steps to commence to cure
such material breach within such thirty (30) day period; or
2. By giving written notice if the other party attempts to assign this
Agreement, except incident to a sale of its business, without prior
written consent of the other party; or
3. 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.
C. At the end of the second Contract Year, this Agreement shall renew
automatically provided that either party may terminate this Agreement
upon ninety (90) days prior written notice, with or without cause, at
any time after the end of the second Contract Year.
14. OBLIGATIONS UPON TERMINATION
Upon termination by either party, each party shall be obliged to pay all
amounts then owing and, unless Seller has terminated by reason of a material
breach by Buyer, Seller shall fill all purchase orders previously accepted.
Anything herein to the contrary notwithstanding, the parties obligations
under Sections 8, 9, 12, 15 and 16 shall survive such termination.
15. LABELING
Modules will be labeled by Seller as "Manufactured for Optical Sensors
Incorporated by Marquette Medical Systems", with an appropriate traceable
serial number. This label will be in accordance with appropriate FDA and MDD
regulations and the Specifications. Buyer may add its own Module labels,
identifying the Module as Buyer's product. Buyer shall not remove, alter or
conceal Seller's traceable serial number.
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16. CONFIDENTIALITY
Each party acknowledges and agrees that all the information provided by the
other party that is marked as proprietary or confidential or which from its
nature or the context in which it is given should reasonably be understood
to be confidential shall be deemed "Confidential Information" for purposes
of this Agreement. Without limiting the foregoing, the parties acknowledge
that the Specifications constitute "Confidential Information." 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
16 shall survive termination of this Agreement.
17. CUSTOMER'S STATUS
During the term hereof, the relationship of Seller to Buyer is that of an
independent contractor. Nothing herein contained shall be deemed to
authorize or empower either Seller or the Buyer, its agents, or employees,
to act as agent for Seller or the Buyer, or conduct business in the name, or
for the account of, Seller or the Buyer or any of their Affiliates or
otherwise bind it to them in any manner. Amendments hereto shall be made
only in writing referencing this Agreements and executed by both parties.
18. NON-WAIVER
The failure of Buyer and Seller to enforce at any time or for any period of
time any of the provisions of this Agreement shall not constitute a waiver
of such provisions.
19. SEVERABILITY
If any provision of this Agreement should be held unenforceable or illegal,
it shall be deemed severable from the other provisions which shall remain
valid and enforceable.
20. COMPLETE UNDERSTANDING
This Agreement is the complete and exclusive statement of the understandings
between the parties concerning Seller's supply of Modules to the Buyer,
superseding all proposals, oral or written, and all negotiations,
conversations and discussions with respect to the supply relationship,
including, but not limited to the Supply Agreement.
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21. 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.
22. GOVERNING LAW; COUNTERPARTS
This Agreement shall be governed by the laws of the State of Wisconsin. This
Agreement may be executed in any number of counterparts, each of which shall
be an original but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by their
duly authorized officials as of the day and year first above written.
MARQUETTE MEDICAL SYSTEMS, INC.
By: /S/ GERALD WOODARD
----------------------------------------
Its: SENIOR VICE PRESIDENT MONITORING GROUP
---------------------------------------
OPTICAL SENSORS INCORPORATED
By: /S/ PAULITA LAPLANTE
----------------------------------------
Its: VICE PRESIDENT BUSINESS DEVELOPMENT
---------------------------------------
11
<PAGE>
SCHEDULE A
MODULE SPECIFICATIONS
[THIS SCHEDULE HAS 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.]
12
<PAGE>
SCHEDULE B
BUYER MONITOR
[THIS SCHEDULE HAS 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.]
13
<PAGE>
SCHEDULE C
ACCESSORY ITEMS AND PRICES
[THIS SCHEDULE HAS 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.]
14
<PAGE>
EXHIBIT 13.1
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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:
QUARTER ENDED HIGH LOW
- -------------------------------------------------
March 31, 1997 $ 11.500 $ 7.500
June 30, 1997 8.750 4.500
September 30, 1997 7.375 4.500
December 31, 1997 8.000 4.500
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
The foregoing prices reflect inter-dealer prices, without dealer markup,
mark-down or commissions, and may not represent actual transactions.
As of March 13, 1998, the company had 268 shareholders of record of its
common stock and an estimated 3,500 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 1997, the Company sold a total of 14,647 shares of common stock
pursuant to the exercise of warrants with an exercise price ranging from $3.15
to $9.00 per share, under Section 4(2) of the Securities Act of 1933.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Net sales $ 141 163 $ -- $ -- $ --
Operating expenses 10,472 9,734 8,249 6,463 5,586
Loss from operations (12,527) (10,940) (8,249) (6,463) (5,586)
Interest income, net 1,193 1,555 118 183 149
Net loss $ (11,333) $ (9,385) $(8,131) $ (6,280) $ (5,437)
Net loss per common share
Basic and diluted $ (1.35) $ (1.30) $ (19.27) $ (21.88) $ (18.72)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents $ 17,101 $ 30,135 $ 5,395 $ 2,851 $ 9,105
Working capital 18,220 30,039 5,242 2,363 8,734
Total assets 21,626 32,369 6,367 3,582 9,741
Long-term debt 472 -- -- -- 89
Total shareholders' equity 20,157 31,050 5,778 2,987 9,182
</TABLE>
<PAGE>
Item 7. 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-connected, 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 ("O2"), carbon dioxide
("CO2") and acid-base ("pH") in a sample of blood taken from a patient's artery.
These tests, which are among the most frequently ordered and most urgently
needed tests for critically ill and unstable patients, are the foremost
indicators of the body's ability to absorb and use oxygen. Results of ABG tests
provide a basis for medical treatment and intervention and are required to
accurately regulate the patient's respiratory support system. 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
(the "ABG Module") that is part of the Company's OpticalCAM instrumentation
("OpticalCAM"). The SensiCath System is able to either stand alone or interface
with various monitoring platforms, including monitoring systems produced and
installed by Marquette Medical Systems, Inc., SpaceLabs Medical, Inc., and the
Hewlett-Packard Company. These three producers account for approximately 80% of
the installed base of critical care monitoring instrumentation in the United
States.
In May of 1997, the Company voluntarily initiated an action to recover all
customer inventory of SensiCath Sensors due to a limited number of performance
variations in pH readings on certain patient applications. These performance
variations were caused by an interfering agent, called bilirubin, which is
elevated in patients that have underdeveloped or failing livers. At the same
time, the Company notified the FDA of its action to recover all customer
inventory of sensors. In July 1997, the FDA notified the Company that the
voluntary action was classified as a product recall. The Company complied with
all requirements of the FDA recall action and retrieved all Sensors from
customers. In December 1997, the Company completed a number of enhancements to
the SensiCath Sensor including enhancements to the pH sensor that reduced
potential interference from bilirubin to clinically acceptable levels.
In the fourth quarter of 1997 and early 1998, the Company achieved a number of
important strategic milestones. These milestones include enhancements to the
system that improve sensor performance and ease of use and expand its
application in the patient-connected segment of the point-of-care blood gas
monitoring market; and implementing aggressive marketing programs for the
OpticalCAM instrumentation. The Company began commercial distribution of the
enhanced sensor in December 1997.
In January 1998, the Company entered into an agreement with Instrumentation
Laboratory Company ("IL") for worldwide distribution of the Company's SensiCath
Sensors and OpticalCAM
<PAGE>
instrumentation. IL will market and distribute the Company's products
throughout the world under the names GEM SensiCath and GEM OpticalCAM. The
Company has agreed to supply IL with SensiCath Sensors, on an exclusive basis,
through 2004 and on a non-exclusive basis through 2007. The Company has also
agreed to supply IL with OpticalCAM Instruments, on a semi-exclusive basis,
through 2004. The Company retains the right to sell OpticalCAM Instruments to
manufacturers of physiological monitoring, ventilator and anesthesia delivery
systems. In January 1998, IL also purchased 441,203 shares of Common Stock
from the Company, which represented 4.99% of the Company's outstanding Common
Stock following completion of the transaction, at a price of $5.00 per share for
a total price of $2,206,015.
RESULT OF OPERATIONS
Fiscal Years Ended December 31, 1997 and 1996
Net sales were $140,936 and $163,068 for 1997 and 1996, respectively. Sales in
1997 were adversely affected by the Company's action in May of 1997 to
voluntarily recall its product as described above. The Company completed a
number of significant product enhancements in the second half of 1997 and began
commercial distribution of the enhanced sensor in December 1997. In 1997,
approximately 64% of net sales were from the sale of SensiCath Sensors, and
approximately 36% of net sales were from the placement of OpticalCAM
instrumentation. Sales in 1996 were primarily from sensors purchased by
customers and third parties for evaluation purposes. The Company did not have
any instrument sales in 1996.
Costs of products sold were $2,195,714 and $1,369,221 in 1997 and 1996,
respectively, an increase of $826,493. A total of $446,000 of the increase for
1997 represents a write-down of OpticalCAM inventories to estimated market
value. The amount of the write-down reflects the difference between the
Company's estimated net realizable value based on the future selling price to
its customers of the OpticalCAM System and the cost of inventories on hand or on
order at the end of 1997. The major component of cost of products sold for 1997
and the primary reason for the increase from 1996 to 1997, excluding the
inventory write-down, is manufacturing infrastructure costs necessary for
anticipated future sales levels, which was established to its current level in
the latter part of 1996. Under the agreement between the Company and IL, the
Company has agreed to sell OpticalCAM instrumentation to IL at the lower of the
Company's direct cost of manufacturing or previously scheduled amounts.
Accordingly, the Company does not expect to generate any gross margin from the
sale of OpticalCAM instrumentation in future periods. The Company has reduced
the cost of manufacturing the OpticalCAM instrumentation to the anticipated
approximate selling price and initiated programs to reduce the cost of
manufacturing sensors. The Company expects an improving relationship between
sales and cost of product sold for sensors once sales volumes for sensors begin
to increase. Gross margins in future periods will also be affected by the mix of
sensor sales and instrumentation sales in future periods. The Company believes
it has the capacity to increase production levels to approximately 50,000
sensors per year without materially increasing manufacturing infrastructure
costs.
Research and development expenses were $4,975,037 and $5,632,458 in 1997 and
1996, respectively, a decrease of $657,421, or 12% in 1997. The Company
completed development of
<PAGE>
the OpticalCAM in late 1996, which was a significant component of research and
development expense in 1996 that did not recur in 1997, and the Company spent
less on clinical research activities during 1997 as the SensiCath System reached
development maturity. These two factors accounted for the majority of the
decrease in research and development expenses. Research and development
expenses also included payments under an agreement with Marquette Medical
Systems, Inc. entered into in September 1995 pursuant to which the Company
acquired ownership of the technology used in the SensiCath System. Payments to
Marquette were $500,000 and $553,250 in 1997 and 1996, respectively. The
Company is obligated to make a final payment of $500,000 if Marquette sells
certain minimum quantities of ABG Modules. The Company currently expects to
make this final payment to Marquette in 1998. The Company anticipates that 1998
research and development expenses will remain at levels comparable to that
experienced in 1997 due to planned development of new sensors to measure
additional blood analytes and further product enhancements, including planned
cost reduction programs.
Selling, general and administrative expenses were $5,496,772 and $4,102,147 in
1997 and 1996, respectively, an increase of $1,394,625, or 34%, in 1997. The
increase is attributable primarily to organizational expansion of sales and
marketing and product positioning activities beginning the latter half of 1996.
During late 1996, the Company completed the initial hiring of its sales and
marketing staff to support product positioning and initial product launch
activities. Salaries and benefits for the expanded sales and marketing staff
and travel expenses related to their activities and depreciation for OpticalCAM
demonstration units accounted for a significant portion of the increase in
selling, general and administrative expenses in 1997. The Company's
administrative expenses decreased slightly in 1997 from the prior year. The
Company expects selling, general and administrative expenses to increase only
moderately in 1998 because the Company does not plan to increase its sales and
marketing staff.
Net interest income decreased $308,824 to $1,246,662 in 1997 from $1,555,486 in
1996, due to declining cash reserves resulting from negative cash flows.
The Company incurred a net loss of $11,333,358 in 1997 compared to a net loss of
$9,385,272 in 1996. Since inception, the Company has incurred a cumulative net
loss of $46,548,720. The increase in net loss in 1997 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, 1996 and 1995
The Company had no sales in 1995 as the Company received regulatory clearance to
market the SensiCath System in January 1996. Net sales for 1996 were $163,068.
In 1996, approximately 62% of sales were to Marquette for demonstration purposes
and for clinical marketing studies, approximately 18% of sales were to
international distributors for demonstration purposes, and approximately 20% of
sales were commercial sales to customers.
Costs of products sold in 1996 were primarily related to the establishment of
commercial manufacturing operations and manufacturing of sensors for marketing
studies and other testing purposes. Costs of products sold were $1,369,221 in
1996. In 1995, comparable costs of
<PAGE>
$981,151 were recorded as research and development expenses because the Company
had no sales in that period. The increase in 1996 from comparable costs in 1995
resulted from increased activities to scale up manufacturing to meet anticipated
future sales demand.
Research and development expenses were $5,632,458 and $5,995,344 (including
$981,151 related to manufacturing costs described above) in 1996 and 1995,
respectively. Research and development expenses included payments under the
1995 technology acquisition agreement with Marquette of $553,250 and $759,750 in
1996 and 1995, respectively. Research and development expenses (excluding
payments to Marquette and 1995 manufacturing costs included in research and
development expenses) increased $864,765, or 21%, in 1996 from 1995. This
increase is primarily attributable to development expenses incurred for the
Company's OpticalCAM monitor.
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 their activities accounted for a significant portion
of the increase in 1996. The Company's administrative expenses also increased
primarily due to the Company's higher level of activity associated with initial
commercialization of the Company's products and additional costs associated with
being a public company.
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. The increase in net loss in 1996 was primarily due to the
increase in operating expenses described above.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations primarily through the sale of
equity securities. From inception through December 31, 1995, the Company raised
net proceeds of $30,400,000 from private equity financings and stock option
exercises. 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."
In January 1998, the Company sold 441,203 shares of Common Stock to IL, which
represented 4.99% of the Company's outstanding Common Stock following completion
of the transaction, at a price of $5.00 per share for a total price of
$2,206,015. The Company granted IL and its affiliates certain pre-emptive rights
to participate in future sales of equity securities by the Company, and
<PAGE>
certain demand and incidental registration rights under a registration rights
agreement previously entered into by the Company and shareholders that purchased
shares of stock in private transactions prior to the Company's initial public
offering in February 1996. IL is prohibited from selling or otherwise
transferring its shares of Common Stock for a period of one year, except to an
affiliate or pursuant to the exercise of its registration rights. IL and its
affiliates are also subject to certain standstill provisions for a period of
five years that prohibit them from (a) acquiring more than 5.0% of the Company's
outstanding Common Stock, (b) entering into a voting agreement with respect to
the shares IL purchased from the Company, (c) participating in any proxy
solicitation or becoming a participant in an election contest, or (d) joining a
group for the purpose of acquiring, holding, voting or disposing of shares of
Common Stock.
The Company's cash and cash equivalents were $17,101,130 and $30,134,800 at
December 31, 1997 and December 31, 1996, respectively. The decrease in the
Company's cash balance is due to the operating losses described above. The
Company incurred cash expenditures of $11,949,325 for operations and $1,127,097
for capital expenditures in 1997. In addition, the Company acquired equipment
and tooling under capital leases for a total of $679,892 in 1997. The capital
equipment expenditures were principally for the acquisition of OpticalCAM
instrumentation for demonstration and promotional purposes, tooling and
equipment for commercial production of the Company's products and for research
and development purposes. As of December 31, 1997, the Company had no material
commitments outstanding for tooling and equipment.
As of December 31, 1997, the Company had commitments outstanding for
approximately $557,000 to purchase inventory components for its OpticalCAM
instrumentation. The Company increased its inventory levels during 1997 to
support future product sales. A substantial portion of the inventory level at
December 31, 1997 consisted of key components and ABG Modules and OpticalCAM
monitors for which the Company relies on sole suppliers.
The Company believes that sufficient liquidity is available to satisfy its
working capital through 1998 and into early 1999.
YEAR 2000 SOFTWARE PERFORMANCE EXPOSURE
The Company has determined that the software embedded in the AMB modules is Year
2000 compliant and that its internal computer information systems are either
Year 2000 compliant or will be modified to be Year 2000 compliant in 1998
without any significant interruption to the Company's operations. The Company
has initiated discussions with its significant suppliers, large customers and
financial institutions to ensure that those parties have appropriate plans to
remediate Year 2000 issues where their systems interface with the Company's
systems or otherwise impact its operations. The Company is assessing the extent
to which its operations are vulnerable should those organizations fail to
remediate properly their computer systems. The Company's Year 2000 initiative is
being managed by internal staff and is scheduled to be completed in early 1999.
While the Company believes its planning efforts are adequate to address its Year
2000 concerns, there can be no assurance that the systems of other companies
which may impact the Company's operations will be converted on a timely basis
and will not have a material effect on the Company. The cost of the Year 2000
initiatives is not expected to be material to the Company's results of
operations or financial position.
<PAGE>
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 statement 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 OpticalCAM instrumentation, which may require
capital expenditure approvals by the hospital.
- - SALES BY INSTRUMENTATION LABORATORY. The Company's future revenues will
depend almost exclusively on sales of the Company's products by IL. In
January 1998, the Company entered into a seven-year strategic partnership
with IL for worldwide distribution of the Company's SensiCath Sensors and
OpticalCAM instrumentation. IL will market and distribute the Company's
products throughout the world under the names GEM SensiCath and GEM
OpticalCAM. The Company will supply IL with SensiCath Sensors, on an
exclusive basis, through 2004 and on a non-exclusive basis through 2007. The
Company will also supply IL with OpticalCAM Instruments, on a semi-exclusive
basis, through 2004. The Company retains the right to sell OpticalCAM
Instruments to manufacturers of physiological monitoring, ventilator and
anesthesia delivery systems. Although IL is required to purchase sufficient
quantities of products from the Company that will result in pre-established
annual minimum revenues to the Company in order to maintain exclusivity,
there can be no assurance that IL will achieve sufficient sales for the
Company to substantially increase revenues or achieve profitability.
- - MANUFACTURING AND SUPPLY. The Company's future plans include planned
enhancements to the SensiCath Sensor that will reduce the Company's
manufacturing costs. Although the Company has established and validated
manufacturing processes, equipment and infrastructure to manufacture sensors
in volumes that will be necessary to achieve significant revenues, the
Company has limited experience in producing sensors at these volumes. A
failure to implement the planned cost reduction programs in a timely manner
or to successfully scale-up manufacturing of sensors could have a material
adverse effect on the Company. Currently, the Company has only one supplier
for the ABG 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.
- - 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.
<PAGE>
- - REGULATORY APPROVALS. The Company's ability to market its current products
and any products that it may develop in the future requires clearances or
approvals from the FDA and other governmental agencies, including, in some
instances, foreign and state agencies. The process for maintaining and
obtaining necessary regulatory clearances and approvals can be expensive and
time consuming. There can be no assurance that the Company will be able to
maintain or obtain necessary regulatory approvals and clearances in the
future.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Financial Statements
Years ended December 31, 1997 and 1996
CONTENTS
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
<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, 1997 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, 1997 and the period from May 23,
1989 (inception) to December 31, 1997. 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, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 and the period from May 23, 1989 (inception) to December 31,
1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
February 12, 1998
1
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $17,101,130 $30,134,800
Accounts receivable 27,100 91,040
Inventories 2,017,497 931,917
Prepaid expenses and other current assets 70,491 200,731
-------------------------------
Total current assets 19,216,218 31,358,488
Property and equipment:
Leased equipment 679,892 -
Research and development equipment 594,542 292,488
Leasehold improvements 259,172 199,211
Furniture and equipment 109,214 77,895
Marketing equipment 986,483 344,448
Production equipment 259,363 167,635
-------------------------------
2,888,666 1,081,677
Less accumulated depreciation (974,887) (488,043)
-------------------------------
1,913,779 593,634
Other assets:
Patents 434,752 328,630
Other assets 60,785 88,445
-------------------------------
495,537 417,075
-------------------------------
Total assets $21,625,534 $32,369,197
===============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 437,039 $ 740,804
Employee compensation 404,513 577,228
Other liabilities and accrued expenses 2,154 1,541
Obligations under capital lease,
current portion 152,756 -
-------------------------------
Total current liabilities 996,462 1,319,573
Obligations under capital lease,
less current portion 472,206 -
Shareholders' equity:
Preferred Stock, par value $.01 per share
Authorized shares--5,000,000
Common Stock, par value $.01 per share:
Authorized shares--30,000,000
Issued and outstanding shares 1997--
8,400,554; 1996--8,341,497 84,006 83,415
Additional paid-in capital 67,088,370 66,974,345
Deficit accumulated during
the development stage (46,548,720) (35,215,362)
Deferred compensation (221,790) (547,774)
Note receivable from officer (245,000) (245,000)
-------------------------------
Total shareholders' equity 20,156,866 31,049,624
-------------------------------
Total liabilities and
shareholders' equity $21,625,534 $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
YEAR ENDED DECEMBER 31 (INCEPTION) TO
---------------------------------------------------- DECEMBER 31,
1997 1996 1995 1997
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 140,936 $ 163,068 $ - $ 304,004
Cost of goods sold (2,195,714) (1,369,221) - (3,564,935)
---------------------------------------------------------------------------
Gross margin (2,054,778) (1,206,153) - (3,260,931)
Operating expenses:
Research and development 4,975,037 5,632,458 5,955,344 29,997,903
Selling, general and
administrative 5,496,772 4,102,147 2,293,435 16,517,731
---------------------------------------------------------------------------
Total operating expenses 10,471,809 9,734,605 8,248,779 46,515,634
---------------------------------------------------------------------------
Operating loss (12,526,587) (10,940,758) (8,248,779) (49,776,565)
Interest expense (21,143) - (19,333) (162,528)
Interest income 1,267,805 1,555,486 137,095 3,443,806
Other expense (53,433) - - (53,433)
-----------------------------------------------------------------------------
1,193,229 1,555,486 117,762 3,227,845
----------------------------------------------------------------------------
Net loss and deficit accumulated
during development stage $ (11,333,358) $(9,385,272) $(8,131,017) $(46,548,720)
===============================================================================
Net loss per common share:
Basic and diluted $ (1.35) $ (1.30) $ (19.27) $ (11.44)
Shares used in calculation of
net loss per share:
Basic and diluted 8,375,000 7,222,000 421,900 4,069,000
</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, 1997
<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 in April, conversion price
of $4.50 per share
Payments received on stock subscription
Issuance of Common Stock in July at $9.00
per share
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
COMMON STOCK ADDITIONAL DURING THE COMMON PREFERRED
-------------------- PAID-IN DEVELOPMENT STOCK STOCK DEFERRED
SHARES AMOUNT CAPITAL STAGE SUBSCRIPTION SUBSCRIPTION COMPENSATION TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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>
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 in April
for $12.60 per share 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
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
COMMON STOCK ADDITIONAL DURING THE COMMON PREFERRED
-------------------- PAID-IN DEVELOPMENT STOCK STOCK DEFERRED
SHARES AMOUNT CAPITAL STAGE SUBSCRIPTION SUBSCRIPTION COMPENSATION TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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>
Valuation 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 310,645 3,107
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
COMMON STOCK ADDITIONAL OFFICER DURING THE COMMON PREFERRED
-------------------- PAID-IN RECEIVABLE DEVELOPMENT STOCK STOCK DEFERRED
SHARES AMOUNT CAPITAL FOR STOCK STAGE SUBSCRIPTION SUBSCRIPTION COMPENSATION TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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 public
offering (113,223) $(1,133)(656,577) $(6,566) (1,416,008) $(14,159) (2,210,828) $(22,109) (370,338) $(3,703)
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 - - - - - - - - - -
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, 1997 - $ - - $ - - $ - - $ - - $ -
===================================================================================================
</TABLE>
See accompanying notes.
10
<PAGE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL OFFICER DURING THE COMMON PREFERRED
- --------------------- PAID-IN RECEIVABLE DEVELOPMENT STOCK STOCK DEFERRED
SHARES AMOUNT CAPITAL FOR STOCK STAGE SUBSCRIPTION SUBSCRIPTION COMPENSATION TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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
59,057 591 97,093 97,684
16,932 16,932
325,984 325,984
(11,333,358) (11,333,358)
- --------------------------------------------------------------------------------------------------------------------------------
8,400,554 $84,006 $67,088,370 $(245,000) $(46,548,720) $ - $ - $(221,790) $20,156,866
================================================================================================================================
</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,
1997 1996 1995 1997
------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(11,333,358) $(9,385,272) $(8,131,017) $(46,548,720)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 510,537 124,452 104,800 1,145,441
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
Deferred compensation amortization 325,984 623,452 1,008,467 1,957,903
License fee financed with long-term debt - - - 193,700
Issuance of Common Stock for services - - - 37,091
Writedown of inventory 445,706 - - 445,706
Issuance of Common Stock in lieu of interest
payments on notes payable - - - 35,412
Amortization of warrants in connection with debt
and lease financing 16,933 18,099 19,464 81,030
Issuance of options in connection with consulting
services - - 6,150 55,690
Changes in operating assets and liabilities:
Receivables 63,940 (91,040) - (27,100)
Inventories (1,531,286) (931,917) - (2,463,203)
Prepaid expenses and other assets 28,086 132,602 (414,391) (589,308)
Accounts payable and accrued expenses (475,867) 730,259 82,572 843,706
------------------------------------------------------------------
Net cash used in operating activities (11,949,325) (8,779,365) (7,188,754) (44,552,336)
INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,806,989) (496,084) (66,999) (3,511,518)
Proceeds from disposal of equipment - - - 46,947
------------------------------------------------------------------
Net cash used in investing activities (1,806,989) (496,084) (66,999) (3,464,571)
FINANCING ACTIVITIES
Proceeds from sale leaseback - - - 283,030
Net proceeds from issuance of Common Stock 97,684 34,015,528 46,346 35,142,360
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 and lease obligations 624,960 - (1,142,415) (771,934)
Reimbursement to founder and shareholder - - - (3,500)
------------------------------------------------------------------
Net cash provided by financing activities 722,644 34,015,528 9,799,379 65,118,037
------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (13,033,670) 24,740,079 2,543,626 17,101,130
Cash and cash equivalents at beginning of period 30,134,800 5,394,721 2,851,095 -
------------------------------------------------------------------
Cash and cash equivalents at end of period $17,101,130 $30,134,800 $ 5,394,721 $17,101,130
==================================================================
</TABLE>
See accompanying notes.
12
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
1. BUSINESS ACTIVITY
Optical Sensors Incorporated 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 equivalents consist primarily of commercial paper and municipal bonds. The
market value of investments is based on quoted market prices which approximates
cost.
INVENTORIES
Inventories are recorded at the lower of cost or market (FIFO basis).
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.
Equipment under capital leases is depreciated over the lease term.
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.
13
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
The Company has adopted the disclosure only provisions of the Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("Statement 123"). Accordingly, the Company has made pro forma disclosures of
what net loss and net loss per share would have been had the provisions of
Statement 123 been applied to the Company's stock options.
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.
14
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, Earnings Per Share. Statement 128 replaced the previously
reported primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants, and convertible securities.
All earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to the Statement 128 requirements.
3. 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.
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.
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.
SHAREHOLDER RIGHTS PLAN
In December 1996, the Company's Board of Directors adopted a Shareholder Rights
Plan by declaring a dividend of one preferred share purchase right (the "Right")
for each outstanding share of Common Stock. Under certain circumstances, a Right
may be exercised to purchase one one-thousandth of a share of Series A Junior
Preferred Stock for $90. The rights become exercisable if a person or group
acquires 15 percent or more of the Company's outstanding Common Stock, subject
to certain exceptions. If a person
15
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
3. COMMON STOCK (CONTINUED)
or group acquires 15 percent or more of the Company's outstanding Common Stock,
subject to certain exceptions, each right will entitle its holder to buy Common
Stock of the Company having a market value of twice the exercise price of the
Right. The Rights expire in December 2006 and may be redeemed by the Company for
$.001 per Right at any time before, or, in certain circumstances, within 10 days
(subject to extension) following the announcement that a person has acquired 15
percent or more of the Company's outstanding Common Stock. Until a Right is
exercised, the holder of a Right, as such, has no rights as a shareholder of the
Company.
In connection with the adoption of the Shareholder Rights Plan, the Company
authorized 250,000 shares of Series A Junior Preferred Stock (the "Preferred
Stock"). Subject to the rights of holders of any Senior Securities, if any,
holders of the Preferred Stock are entitled to quarterly dividends, when, as and
if declared by the Board of Directors, in the amount of one thousand times the
aggregate per share amount of dividends paid to Common Stock shareholders. Each
Preferred Stock share is entitled to one thousand votes on all matters submitted
to a vote of the shareholders of the Company. The Preferred Stock has
liquidation preference over the Company's Common Stock. The liquidation rate on
the Preferred Stock is the greater of (a) $1,000 per share plus accrued
dividends, whether or not earned or declared, or (b) an amount equal to one
thousand times the amount distributed to the Common Stock shareholders.
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.
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. 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 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 warrants were exercised in
1997. See Note 5 for cancellation of related bridge loans.
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. 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.
Upon completion of the Company's initial public offering of Common Stock in
February 1996, all shares of outstanding Convertible Preferred Stock were
converted into 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.
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
17
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
5. NOTES PAYABLE (CONTINUED)
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.
6. LEASES
OPERATING 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.
18
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
6. LEASES (CONTINUED)
Total rent expense under operating leases was $869,764, $921,000 and $765,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
Future minimum lease payments under noncancelable operating leases with initial
or remaining terms of one year or more as of December 31, 1997 are as follows:
Year ending December 31:
1998 $ 613,194
1999 502,361
2000 48,404
2001 8,329
-----------
$1,172,288
===========
CAPITAL LEASES
In June 1997, the Company entered into an equipment lease agreement. Under the
lease agreement, the Company is allowed to lease up to $2,000,000 of equipment
between June 15, 1997 and June 30, 1998. Assets leased under the agreement at
December 31, 1997 were approximately $680,000 with a related obligation of
$624,962 at December 31, 1997. The terms of each lease schedule under the lease
are 42 months with payments due the first of each month.
Future payments under capital leases are as follows:
1998 $227,302
1999 227,302
2000 259,839
2001 71,460
Thereafter -
----------------
785,903
Less amount representing payment of interest (160,941)
----------------
624,962
Less current portion (152,756)
----------------
Long-term capital lease obligations $472,206
================
19
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
7. INCOME TAXES
At December 31, 1997, the Company has cumulative net operating loss
carryforwards for tax purposes of approximately $42,920,000 plus research and
development tax credit carryforwards of approximately $1,000,000. These
carryforwards are available to offset future taxable income through 2012.
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.
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:
DECEMBER 31
1997 1996
----------------------------------
Deferred tax assets:
Net operating loss carryforwards $15,900,000 $11,900,000
Tax credit carryforwards 1,000,000 1,000,000
Deferred compensation on stock options 724,000 604,000
Vacation accrual 86,000 71,000
Book over tax depreciation 239,000 98,000
----------------------------------
Total deferred tax assets 17,949,000 13,673,000
Deferred tax liabilities:
Other 33,000 -
----------------------------------
Total deferred tax liabilities 33,000 -
----------------------------------
Net deferred tax assets 17,916,000 13,673,000
Valuation allowance (17,916,000) (13,673,000)
----------------------------------
$ - $ -
==================================
20
<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:
OPTIONS WEIGHTED
SHARES OUTSTANDING AVERAGE
--------------- EXERCISE
AVAILABLE TOTAL PRICE PER
FOR GRANT SHARES SHARE
----------------------------------------
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) 8.84
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
Granted--incentive stock options (148,205) 148,205 5.22
Options canceled 24,986 (24,986) 5.71
Options exercised - (40,032) 1.28
-----------------------------
Balance at December 31, 1997 69,945 817,195 $3.50
=============================
The weighted average fair value of options granted is summarized as follows:
1997 1996 1995
------------------------------
Stock price equals exercise price $3.02 $5.26 $4.03
Stock price is greater than exercise price - 5.41 2.70
21
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
The exercise price of options outstanding at December 31, 1997 ranged from $.90
to $13.00 per share, as summarized in the following table:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
RANGE OF SHARES OUTSTANDING AT REMAINING CONTRACTUAL SHARES EXERCISE PRICE
EXERCISE PRICE DECEMBER 31, 1997 LIFE EXERCISABLE PER SHARE
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ .90 to 4.50 487,762 7.50 years 265,865 $ 1.18
4.51 to 9.00 272,683 7.71 years 59,991 6.03
9.01 to 13.00 56,750 7.92 years 23,790 11.35
--------------------------------------------------------------
Total 817,195 7.74 years 349,646 $ 3.50
==============================================================
</TABLE>
The number of shares exercisable at December 31, 1996 and 1995 was 239,784 and
197,897, respectively, at a weighted average exercisable price per share of
$3.06 and $1.90, respectively.
Pro forma information regarding net loss and net 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 Black-Scholes
option pricing model with the following weighted-average assumptions:
1997 1996 1995
------------------------------------------
Expected stock price volatility 75% 78% 78%
Risk-free interest rate 6.5% 5.5% 6.3%
Expected life of options 7 years 7 years 7 years
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 estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
22
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
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:
1997 1996 1995
------------------------------------------
Pro forma net loss $11,714,634 $9,451,264 $8,131,017
Pro forma net loss per common share:
Basic and diluted $1.40 $1.31 $2.70
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, 1997, the Company has total exercisable warrants outstanding to
purchase shares of its Common Stock as follows: 36,262 shares at $9.00 per
share, 26,871 shares at $12.60 per share, 71,471 shares at $3.15 per share.
These warrants expire at various dates in 1998 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, the Company recognized in August 1995, $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 $325,984, $623,452 and $1,008,467 for the years ended December 31,
1997, 1996 and 1995, respectively.
The remaining unamortized deferred compensation is expected to be charged to
operations as follows:
1998 $166,186
1999 55,605
-------------------
$221,791
===================
23
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
9. TECHNOLOGY AGREEMENTS
In August 1991, the Company entered into an agreement to purchase certain
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 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.
In September 1995, the Company entered into an agreement with Marquette Medical
Systems, Inc. to acquire exclusive ownership of certain technology that had been
jointly developed by the Company and Marquette. 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, 1997, the Company has a remaining obligation of $500,000
under this agreement which will become payable if Marquette meets the product
sales requirements.
10. PURCHASE COMMITMENTS
The Company has entered into purchase commitments with two companies for the
purchase of Arterial Blood Gas Modules and OpticalCAM instruments. Under the
terms of the agreements, the Company has agreed to purchase, under a specified
pricing structure, a fixed number of units in 1998. As of December 31, 1997, the
Company is committed to purchase $556,815 of inventory during 1998.
24
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
11. 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
of $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. The compensation expense associated with this transaction is part
of the amounts disclosed in Note 8.
12. 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
25
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
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 1997, 1996 or 1995.
13. EMPLOYEE STOCK PURCHASE PLAN
In December 1996, the Company adopted an Employee Stock Purchase Plan. Eligible
employees can authorize payroll withholdings in each pay period to be designated
for stock purchase. Payroll deductions cannot exceed 10% of total compensation
and no more than 1,500 shares may be purchased by any one employee in one
offering period. There are four three-month offering periods in each year, in
which employees may purchase shares of Common Stock at the end of each
three-month offering period at a price equal to 85% of the market price on the
first or last day of the offering period, whichever is lower. Shares issued
under the plan at December 31, 1997 were 8,711.
14. SUBSEQUENT EVENT
In January 1998, the Company entered into an agreement with Instrumentation
Laboratory Company (IL) for worldwide distribution of the Company's SensiCath
Sensors and OpticalCAM Instruments. IL will market and distribute the Company's
products throughout the world under the names GEM SensiCath and GEM OpticalCAM.
The Company has agreed to supply IL with SensiCath Sensors, on an exclusive
basis, through 2004 and on a non-exclusive basis through 2007. The Company has
also agreed to supply IL with OpticalCAM Instruments, on a semi-exclusive basis,
through 2004. The Company retains the right to sell OpticalCAM Instruments to
manufacturers of physiological monitoring, ventilator and anesthesia delivery
systems. IL is required to purchase sufficient quantities of products from the
Company under the agreement that will result in preestablished annual minimum
revenues to the Company. These quotas increase each year during the first five
years of the agreement. If IL fails to meet the quota requirements, the Company
has the right to convert IL's exclusive right to a non-exclusive right. If there
is a change in control of the Company, the Company will have the right to
convert the agreement into a non-exclusive distributorship agreement. If the
Company exercises this right, IL will have the right to terminate the agreement.
26
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
14. SUBSEQUENT EVENT (CONTINUED)
In January 1998, the Company also sold 441,203 shares of Common Stock to IL,
which represented 4.99% of the Company's outstanding Common Stock following
completion of the transaction, at a price of $5.00 per share for a total price
of $2,206,015. The Company granted IL and its affiliates certain pre-emptive
rights to participate in future sales of equity securities by the Company, and
certain demand and incidental registration rights under a registration rights
agreement previously entered into by the Company and shareholders that purchased
shares of stock in private transactions prior to the Company's initial public
offering in February 1996. IL is prohibited from selling or otherwise
transferring its shares of Common Stock for a period of one year, except to an
affiliate or pursuant to the exercise of its registration rights. IL and its
affiliates are also subject to certain standstill provisions for a period of
five years that prohibit them from (a) acquiring more than 5.0% of the Company's
outstanding Common Stock, (b) entering into a voting agreement with respect to
the shares IL purchased from the Company, (c) participating in any proxy
solicitation or becoming a participant in an election contest, or (d) joining a
group for the purpose of acquiring, holding, voting or disposing of shares of
Common Stock.
27
<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 12, 1998, included
in the 1997 Annual Report to Shareholders of Optical Sensors Incorporated.
We also 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 12, 1998, with respect to the financial statements of Optical
Sensors Incorporated, incorporated by reference in this Annual Report (Form
10-K) for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 432,917
<SECURITIES> 16,668,213
<RECEIVABLES> 27,100
<ALLOWANCES> 0
<INVENTORY> 2,017,498
<CURRENT-ASSETS> 19,216,218
<PP&E> 2,888,666
<DEPRECIATION> 974,887
<TOTAL-ASSETS> 21,625,534
<CURRENT-LIABILITIES> 996,462
<BONDS> 0
84,006
0
<COMMON> 0
<OTHER-SE> 20,072,860
<TOTAL-LIABILITY-AND-EQUITY> 21,625,534
<SALES> 140,936
<TOTAL-REVENUES> 140,936
<CGS> 2,195,714
<TOTAL-COSTS> 2,195,714
<OTHER-EXPENSES> 10,471,809
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,143
<INCOME-PRETAX> (11,333,358)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,333,358)
<EPS-PRIMARY> (1.35)
<EPS-DILUTED> 0
</TABLE>
