<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
COMMISSION FILE NUMBER: 0-27600
OPTICAL SENSORS INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 41-1643592
(State of 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
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. [X] Yes [ ] No
AS OF NOVEMBER 10, 1998, THE REGISTRANT HAD 8,825,824 SHARES OF COMMON STOCK
OUTSTANDING.
<PAGE>
INDEX
OPTICAL SENSORS INCORPORATED
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets September 30, 1998 and December 31, 1997
Statements of Operations--Three months ended September 30, 1998 and 1997.
Nine months ended September 30, 1998 and 1997.
Statements of Cash Flows--Nine months ended September 30, 1998 and 1997.
Notes to Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
1
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Optical Sensors Incorporated
Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-----------------------------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $10,764,994 $17,101,130
Accounts receivable 211,285 27,100
Inventory 1,884,917 2,017,497
Prepaid expenses and other current assets 125,035 70,491
-----------------------------------
Total current assets 12,986,231 19,216,218
Property and equipment:
Leased equipment 989,772 679,892
Research and development equipment 733,742 594,542
Leasehold improvements 334,037 259,172
Furniture and equipment 145,473 109,214
Marketing equipment 1,004,840 986,483
Production equipment 454,275 259,363
-----------------------------------
3,662,139 2,888,666
Less accumulated depreciation (1,616,858) (974,887)
-----------------------------------
2,045,281 1,913,779
Other assets:
Patents 498,921 434,752
Other assets 23,975 60,785
-----------------------------------
522,896 495,537
Total assets $15,554,408 $21,625,534
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 268,232 $ 437,039
Employee compensation 638,636 404,513
Other liabilities and accrued expenses 8,630 2,154
Obligations under capital lease, current portion 229,292 152,756
-----------------------------------
Total current liabilities 1,144,790 996,462
Obligations under capital lease, less current portion 557,303 472,206
SHAREHOLDERS' EQUITY
Convertible 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 1998--8,821,436 and
1997--8,400,554 88,220 84,006
Additional paid-in capital 69,304,550 67,088,370
Deficit accumulated (55,443,303) (46,548,720)
Deferred compensation (97,152) (221,790)
Note receivable from officer - (245,000)
-------------------------------------
Total shareholders' equity 13,852,315 20,156,866
-------------------------------------
Total liabilities and shareholders' equity $ 15,554,408 $ 21,625,534
=====================================
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
2
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Optical Sensors Incorporated
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $ 319,505 $ 23,840 $ 798,698 $ 104,406
Cost of goods sold 827,156 928,901 2,296,076 1,850,523
-------------------------------------------------------
Gross margin (507,651) (905,061) (1,497,378) (1,746,117)
Operating expenses:
Research and development expenses 1,051,614 1,066,785 3,097,109 4,023,963
Selling, general and administrative expenses 1,704,799 1,342,886 4,808,471 4,166,085
Operating loss (3,264,064) (3,314,732) (9,402,958) (9,936,165)
Interest expense (24,405) (5,565) (70,906) (5,565)
Interest income 167,430 292,411 601,179 1,001,775
Other income (expense) (4,148) (7,519) (21,898) (43,501)
-------------------------------------------------------
Net loss $(3,125,187) $(3,035,405) $(8,894,583) $(8,983,456)
Net loss per common share:
Basic and diluted $(.35) $(.36) $(1.01) $(1.07)
Shares used in calculation of net loss per share 8,858,515 8,382,297 8,817,727 8,369,151
</TABLE>
See accompanying notes.
3
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Optical Sensors Incorporated
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
---------------------------------------
<S> <C> <C>
Operating activities
Net loss $(8,894,583) $ (8,983,456)
Adjustments to reconcile net loss to net cash used in
operating activities:
Writedown of inventories - 500,000
Depreciation and amortization 767,878 325,210
Deferred compensation amortization 124,638 244,486
Amortization of warrants in connection with debt and lease
financings 13,135 13,574
Changes in operating assets and liabilities:
Receivables (184,185) 41,502
Inventories 52,688 (1,326,953)
Prepaid expenses (54,544) (53,863)
Accounts payable and accrued expenses 71,791 (511,424)
---------------------------------------
Net cash used in operating activities (8,103,182) (9,750,924)
INVESTING ACTIVITIES
Purchases of property and equipment (780,539) (1,017,510)
Other (66,309) (101,295)
---------------------------------------
Net cash used in investing activities (846,848) (1,118,805)
FINANCING ACTIVITIES
Proceeds from note receivable-officer 245,000 -
Net proceeds from issuance of Common Stock 2,207,261 67,474
Proceeds (payments) on long-term debt and lease obligations 161,633 241,886
---------------------------------------
Net cash provided by financing activities 2,613,894 309,360
---------------------------------------
Increase (decrease) in cash and cash equivalents (6,336,136) (10,560,369)
Cash and cash equivalents at beginning of period 17,101,130 30,134,800
---------------------------------------
Cash and cash equivalents at end of period $10,764,994 $ 19,574,431
=======================================
</TABLE>
See accompanying notes.
4
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OPTICAL SENSORS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
Note A - Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended September
30, 1998 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998. For further information, refer to the
financial statements and footnotes thereto included in the Optical Sensors
Incorporated 1997 Annual Report to Shareholders incorporated by reference into
the Annual Report on Form 10-K for the year ended December 31, 1997.
NOTE B - NET LOSS PER SHARE
Basic and diluted net loss per common share is computed using the weighted
average number of common shares outstanding during the period. Options and
warrants were outstanding during the quarter ended September 30, 1998 and 1997,
but were not included in the computation of diluted net loss per common share
because the effect would be antidilutive. All earnings per share amounts for
all periods have been presented, and where necessary, restated to conform to the
Statement 128 requirements.
5
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 January 1998, the Company entered into an agreement with Instrumentation
Laboratory Company ("IL") for worldwide distribution of the Company's SensiCath
Sensors and OpticalCAM instrumentation. In April 1998, IL announced the U.S.
introduction of the GEM SensiCath and GEM OpticalCAM, new members of the IL GEM
family of hospital point-of-care diagnostic products.
In July, 1998 the Company entered into an agreement with the Institute for
Critical Care Medicine ("ICCM") providing the Company with the rights to
commercialize a new application of its sensor technology ("CapnoProbeTM") for
the non-invasive measurement of carbon dioxide in the tissue of ill or injured
patients to aid in the diagnosis and monitoring of shock. The CapnoProbe SLTM,
the first prodouct in the line that the Company plans to commercialize, is a
handheld, lightweight device with a probe that can be slipped under the tongue
like a thermometer. In less than 60 seconds, it noninvasively measures the
tissue CO2 of the mucous membrane in the mouth - a sensitive measure that can
indicate ealry clinical shock, even when traditional vital signs may still
appear realtively normal, as in compensated shock cases. The Company expects to
begin clinical evaluations of prototype products before the end of 1998.
In October, 1998 the Company implemented a strategic plan to focus its corporate
resources on the development and commercialization of the CapnoProbe product.
The plan resulted in reducing staff by approximately 20 percent through layoffs
and attrition and implementing other expense management measures. The
restructuring and expense management measures affected all areas of the Company.
The Company expects to begin receiving the full benefit of the restructuring in
the first
6
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quarter of 1999. The Company currently plans to direct all of the cost savings
to development of the CapnoProbe.
RESULTS OF OPERATIONS
Net sales in the third quarter of 1998 increased $295,665 or 1,240% from $23,840
in the third quarter in 1997 to $319,505 in the third quarter of 1998. Net
sales for the nine month period ended September 30, 1998 increased $694,292 or
665% from $104,406 for the nine month period ended September 30, 1997. Sales
for the three and nine month periods ended September 30, 1998 were insignificant
due to a product recall that the Company initiated in May 1997 because of an
interference problem with a certain portion of the critical care patient
population. In December 1997, the Company introduced an enhanced version of its
SensiCath Sensor that solved the interference problems, accounting for the
increase in sales in 1998. The Company does not believe that the product recall
will have a material impact on future results. Sales of SensiCath Sensors
accounted for approximately 17% of the total sales for the third quarter of 1998
while OpticalCAM instrumentation accounted for the balance. For the third
quarter of 1998, approximately 90% of Sensor sales and 98% of the OpticalCAM
instrumentation sales were made to the Company's distributor for resale to
customers with the remainder purchased for sales demonstration purposes.
Costs of products sold in the third quarter of 1998 decreased $101,745 or 11% to
$827,156 from $928,901 in the third quarter in 1997. Costs of products sold for
the nine months ended September 30, 1998 increased $445,553 or 24% to $2,296,076
from $1,850,523 for the nine months ended September 30, 1997. The decrease for
the quarter is due to a $500,000 write-down in the third quarter of 1997 of
OpticalCAM inventories to the lower of cost or market. After adjusting for this
write-down, the increase for the nine months ended September 30, 1998 is due
primarily to the increased sales levels. 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. Because
instrument sales are sold at amounts close to cost, gross margins in future
periods will be affected by the mix of sensor and instrumentation sales. The
Company expects an improving relationship between sales and cost of product sold
once sales volumes for sensors begin to increase. 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 costs for the third quarter of 1998 declined $15,171 or
1% to $1,051,614 from $1,066,785 in the third quarter of 1997. Research and
development costs for the nine months ended September 30, 1998 declined $926,854
or 23% to $3,097,109 from $4,023,963 for the nine months ended September 30,
1997. Research and development expenses in the nine month period ended
September 30, 1997 included approximately $417,000 for outside development of
the OpticalCAM and a $500,000 payment to Marquette Medical Systems, Inc. under a
previously disclosed technology purchase agreement. These expenses, which did
not recur in 1998, accounted for the majority of the decrease for the nine
months ended September 30, 1998. Overall, the Company expects research and
development expenses to increase by approximately $300,000 in the fourth
quarter due to development efforts related to the CapnoProbe. In addition, the
Company
7
<PAGE>
may become obligated to make a $500,000 payment to Marquette Medical Systems,
Inc. under a previously disclosed technology purchase agreement, assuming
Marquette sells a specified number of ABG Modules.
Selling, general and administrative expenses in the third quarter of 1998
increased $361,913 or 27% to $1,704,799 from $1,342,886 in the third quarter of
1997. Selling, general and administrative expenses for the nine months ended
September 30, 1998 increased $642,386 or 15% to $4,808,471 from $4,166,085 for
the nine months ended September 30, 1997. The increase for the three and nine
month periods are primarily due to a higher level of selling activity, compared
to 1997. The majority of selling activities continued to be directed towards
the market launch of the enhanced SensiCath. Additionally, selling expenses
increased as the Company has began market research related to the CapnoProbe
currently under development. The Company expects to operate through the balance
of 1998 with slightly higher selling, general and administrative expenses from
the current level due to market research activities related to the CapnoProbe.
Net interest income in the third quarter of 1998 decreased $124,981 to $167,430
from $292,411 in the third quarter of 1997. Net interest income for the nine
month period ended September 30, 1998 decreased $400,596 to $601,179 from
$1,001,775 for the nine month period ended 1997. The decrease in net interest
income in the three and nine month periods ending September 30, 1998 is due
primarily to declining cash balances of proceeds from the Company's initial
public offering, which was completed in the first quarter of 1996. The Company
expects interest income to continue to decline in future periods as it uses cash
for operations.
Since its inception, the Company has experienced significant operating losses.
The Company incurred a net loss of $3,125,187 for the quarter ended September
30, 1998, compared to a net loss of $3,035,405 for the quarter ended September
30, 1997. As of September 30, 1998, the Company had an accumulated deficit of
$55,443,301. The Company anticipates that its operating losses will continue for
the foreseeable future because it plans to expend substantial resources in
funding sales and marketing activities, commercial manufacturing, and research
and development. Except for historical information contained herein, the
disclosures in this report are forward looking statements. See "Certain
Important Factors".
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 second 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. 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 (which is equal to the closing market
price on the day before signing of the agreement). for a total price of
$2,206,015. The proceeds from the sales of stock has been used to fund costs of
producing
8
<PAGE>
products and operating expenses described above and capital expenditures
described below. The Company's Common Stock is quoted on the Nasdaq National
Market under the symbol "OPSI."
The Company's cash and cash equivalents were $10,764,994 and $17,101,130 at
September 30, 1998 and December 31, 1997, respectively. The Company incurred
cash expenditures for the nine months ended September 30, 1998 of $8,103,181 for
operations and $780,539 for capital expenditures. The capital equipment
expenditures were principally for the acquisition of manufacturing, research and
development and marketing promotional equipment. A substantial portion of the
inventory level at September 30, 1998 consisted of key components, OpticalCAM
monitors and ABG Modules for which the Company relies on sole suppliers.
As of September 30, 1998, the Company had no material commitments outstanding
for tooling and equipment. The Company has contracts for minimum purchase
quantities of OpticalCAM monitors and ABG Modules and other sole source
inventory items.
SensiCath(R) and OpticalCAM(TM) are trademarks of Optical Sensors Incorporated.
GEM(R) is a trademark of Instrumentation Laboratory Company.
YEAR 2000 SOFTWARE PERFORMANCE EXPOSURE
The Company has determined that the software embedded in the ABG Modules is Year
2000 compliant and that its major internal information technology systems are
Year 2000 compliant. The Company has numerous ancillary software programs which
are in the process of being evaluated and tested for Year 2000 compliance. The
Company expects to complete this process and to have taken any corrective
actions by mid 1999. Should any of these programs require replacement, the
Company anticipates that the total cost will not exceed $100,000. The Company
does not believe this amount nor any impact on ongoing information technology
projects will have any material affect on its ongoing 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
properly remediate their computer systems. For those vendors that have not yet
certified Year 2000 compliance and which are sole suppliers of critical product
components, the Company plans to have sufficient inventories on hand at the end
of 1999 to support its needs for at least six months. For the Company's
exclusive distributer, the Company has the ability to ship product directly to
the end customer and to invoice and collect receivables should it be necessary
to do so. The Company's Year 2000 initiative is being managed by an 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.
CERTAIN IMPORTANT FACTORS
9
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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 and the CapnoProbe
product. 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 these products. In order to use
these products, hospitals need to acquire the instrumentation, which may
require capital expenditure approvals by the hospital.
- - DEVELOPMENT AND COMMERCIALIZATION OF CAPNOPROBE. The Company's future success
will depend, in part, on successful development and commercialization of the
CapnoProbe product. Although this product is based on the Company's existing
technology, the Company is in the early stages of developing prototypes and
completing preliminary animal trials of the CapnoProbe product. Accordingly,
there can be no assurance that the Company will successfully develop a
commercial CapnoProbe product.
- - SALES BY INSTRUMENTATION LABORATORY. The Company's near term revenues will
depend almost exclusively on sales of the Company's products by IL. 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. 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 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.
- - 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.
PART II. OTHER INFORMATION
10
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is included herein:
(10.1) Patent License Agreement, dated July 20, 1998, between the Company
and the Institute of Critical Care Medicine. (Confidential
treatment has been requested with respect to designated portions
contained in this document. Such portions have been omitted and
filed separately with the Commission pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934, as amended.)
(27) Financial Data Schedule
(b) Reports on Form 8-K
None
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPTICAL SENSORS INCORPORATED
Date November 5, 1998 -----------------------------------
/s/ Paulita LaPlante
President
(Principal Executive Officer)
Date November 5, 1998 -----------------------------------
/s/ Wesley G. Peterson
Chief Financial Officer, Vice President
of Finance and Administration and
Secretary (Principal Financial and
Accounting Officer)
12
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[PORTIONS OF THIS EXHIBIT 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 EXHIBIT INTACT HAS BEEN FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
PATENT LICENSE AGREEMENT
THIS PATENT LICENSE AGREEMENT (this "Agreement") is made and entered
into as of July 20, 1998, by and between INSTITUTE OF CRITICAL CARE MEDICINE, a
California non-profit corporation ("Licensor"), with an address at 1695 North
Sunrise Way, Building #3, Palm Springs, California 92262 and OPTICAL SENSORS
INCORPORATED, a Delaware corporation ("Licensee"), with an address at 7615
Golden Triangle Drive, Suite A, Minneapolis, Minnesota 55344.
RECITALS:
A. Licensor is the owner of issued U.S. Patent No. 5,579,763 relating
to a method for measuring CO2 in the esophagus to assess perfusion failure, as
listed in Exhibit A attached hereto (the "Patent") and a filed U.S. patent
application relating to a method for measuring CO2 under the tongue to assess
perfusion failure and a filed continuation of such U.S. patent application, each
as listed in Exhibit A attached hereto (collectively, the "Patent
Applications").
B. Licensee desires to obtain from Licensor, and Licensor desires to
grant to Licensee, an exclusive, worldwide license under the Patent Rights (as
defined below), on the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual representations, warranties, covenants and agreements contained herein,
the parties hereto agree as follows:
1. Definitions.
(a) "Affiliate" as used in this Agreement with respect to a
person or entity means any corporation, company, partnership, joint
venture, entity and/or firm which controls, is controlled by or is
under common control with such person or entity.
(b) "Average Selling Price" as used in this Agreement means
with respect each Major Market (i) the aggregate Net Sales of
Esophageal Sensors or Sublingual Sensors, as the case may be, during a
particular period sold for use in each Major Market divided by (ii) the
aggregate number of Esophageal Sensors or Sublingual Sensors, as the
case may be, sold, net of returns, during the same period for use in
each Major Market. Average Selling Price shall be calculated separately
for each Major Market.
(c) "Esophageal Sensor" as used in this Agreement means
Licensee's disposable fiber optic sensor designed specifically to
measure CO2 in the esophagus to
<PAGE>
assess perfusion failure and that is covered by a validly issued U.S.
patent subject to the Patent Rights..
(d) "Gross Margin" as used in this Agreement means the
difference between Net Sales of Instruments and Licensee's direct cost
of manufacturing Instruments (i.e., direct material cost, direct labor
cost and manufacturing overhead) or having third parties manufacture
Instruments, as calculated in accordance with generally accepted
accounting principles consistently applied as utilized by Licensee in
its normal financial reporting. As of the date of this Agreement,
Licensee calculates gross margins for its other products in accordance
with the methodology described in Exhibit B.
(e) "Instruments" as used in this Agreement mean Licensee's
instrumentation designed specifically to be used in conjunction with a
Sensor.
(f) "Net Sales" as used in this Agreement means the amount
actually received by Licensee from the sale of Sensors or Instruments,
as the case may be, less the sum of the following deductions where
applicable: cash, trade or quantity discounts, sales, use, tariff,
import/export duties or other excise or similar taxes imposed upon
particular sales, transportation and related insurance charges and
allowances or credits to customers because of rejections or returns, as
calculated in accordance with consistently applied and generally
accepted accounting principles as utilized by Licensee in its normal
financial reporting.
(g) "Major Market" as used in this Agreement means each of the
following geographic territories: United States, Europe, Japan; and the
rest of the world.
(h) "Patent Rights" as used in this Agreement mean all right,
title and interest of Licensor and its Affiliates in (i) the Patent;
(ii) any patents that issue on the Patent Applications; (iii) any
patents issuing from any reissues, renewals, extensions, divisionals,
continuations and continuations-in-part of the Patent and Patent
Applications; (iv) any foreign patents corresponding to such patents;
and (v) any patents issuing on any and all improvements, modifications,
enhancements or new ideas developed or conceived by Licensor or its
Affiliates which relate to or may be useful in connection with the
Patent and the Patent Applications.
(i) "Sensors" as used in this Agreement mean Esophageal
Sensors and Sublingual Sensors.
(j) "Sublingual Sensor" as used in this Agreement means
Licensee's disposable fiber optic sensor designed specifically to
measure CO2 under the tongue to assess perfusion failure and that is
covered by a validly issued U.S. patent subject to the Patent Rights.
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<PAGE>
2. License.
(a) Grant. Licensor hereby grants to Licensee an exclusive,
worldwide, right and license, with the right to grant sublicenses, to
practice the Patent Rights and to make, have made, use, promote, market
and sell Sensors and Instruments in connection with practicing the
Patent Rights.
(b) Conversion to Non-Exclusive License. If Licensee elects
not to make Minimum Royalty Payments to Licensor after the fifth
anniversary date of this Agreement as permitted by Section 3(b), the
license granted in Section 2(a) may become, at the option of Licensor,
non-exclusive.
3. Royalties; Expenses.
(a) Percentage Royalty. Licensee shall pay to Licensor a
royalty on Net Sales of any Sensors sold by Licensee equal to: (i)
XXXXX% of Net Sales of Esophageal Sensors or Sublingual Sensors, as the
case may be, for calendar years in which Average Selling Price received
by Licensee was $XXXXX or more per unit; (ii) XXXXX% of Net Sales of
Esophageal Sensors or Sublingual Sensors, as the case may be, for
calendar years in which the Average Selling Price received by Licensee
was $XXXXX or more per unit, but less than $XXXXX per unit; and (iii)
XXXXX% of Net Sales of Esophageal Sensors or Sublingual Sensors, as the
case may be, for calendar years in which the Average Selling Price
received by Licensee was less than $XXXXX per unit. Royalties payable
with respect to Net Sales of Sensors shall be calculated separately for
each Major Market based on the Average Selling Price in each Major
Market. Licensee shall pay to Licensor a royalty on Net Sales of any
Instruments sold by Licensee equal to XXXXX% of the aggregate Gross
Margin with respect to Instruments that are sold or placed in the field
by Licensee. Royalties under this Section 3(a) shall be payable only
with respect to sales of Sublingual Sensors and related Instruments
only if a valid U.S. patent, as defined in the Patent Rights, has
issued covering the Sublingual Sensor prior to the date of sale.
[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) Minimum Royalty. Notwithstanding Section 3(a), Licensee
shall pay to Licensor, or its designee, a minimum royalty equal to
$XXXXX per calendar year ("Minimum Royalty Payment"), which shall be
paid in equal quarterly installments of $XXXXX within forty-five (45)
days of the end of each calendar quarter, beginning with the calendar
quarter ending September 30, 1998; provided that any royalties paid
pursuant to Section 3(a) with respect to Net Sales received or Gross
Margins earned by Licensee for any calendar year shall be applied as a
credit against the Minimum Royalty Payment for such year. Licensee may,
upon one (1) years' written notice to Licensor, elect to stop making
Minimum Royalty Payments; provided, however, that Licensee may not
deliver such notice prior to XXXXX. If Licensee makes such election
with an
3
<PAGE>
effective date that is prior to the fifth anniversary date of this
Agreement, Licensor shall have the right to terminate this Agreement.
If Licensee makes such election with an effective date that is after
the fifth anniversary date of this Agreement, Licensor shall have the
right to convert the license granted to Licensee to a non-exclusive
license pursuant to Section 2(b). [PORTIONS OF THIS SECTION HAVE BEEN
OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIALITY UNDER RULE 24b-2 OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. A COPY OF THIS
AGREEMENT WITH THIS SECTION INTACT HAS BEEN FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
(c) Sublicense Fees. If Licensee grants a sublicense to any
third party to practice the Patent Rights and the terms of such
sublicense would have the effect of reduced royalties being payable
under this Agreement with respect to products commercialized by such
sublicensee, then Licensee shall pay to Licensor XXXXX percent (XXXXX%)
of any license fees and XXXXX percent (XXXXX%) royalties received by
Licensee from such sublicensee; provided that amount of royalties
payable to Licensor shall not exceed the amount of royalties that would
have been payable under Section 3(a). Licensor acknowledges that,
notwithstanding the foregoing, Licensee may engage one or more third
parties to (i) manufacture all a portion of the Sensors or Instruments
to be sold by Licensee or (ii) distribute Sensors or Instruments sold
by Licensee to such third party; and that Licensee shall not be
required to pay Licensor any consideration for the granting of
sublicenses in connection therewith that would not constitute royalties
payable pursuant to Section 3(a). [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) Payments. All royalties payable to Licensor under this
Agreement shall be paid within forty-five (45) days of the end of each
calendar quarter to which such royalty payment relates. The Minimum
Royalty Payment, if any, shall be paid within forty-five (45) days of
the end of each calendar quarter. Each royalty payment shall be
accompanied by a written statement, in form reasonably satisfactory to
Licensor, showing (i) aggregate Net Sales received by Licensee during
such quarter in connection with the sale of Sensors; (ii) Gross Margin
earned by Licensee during such quarter in connection with the sale or
placement of Instruments; (iii) any sublicense fees received; and (iv)
the amount of royalty and sublicense fees, as the case may be, payable
to Licensor with respect to each of the foregoing, together with such
other information as Licensor may reasonably request. Licensee shall
submit such quarterly statements beginning with the first royalty
payment made pursuant to Section 3(a) sublicensee fee payment made
pursuant to Section 3(c), whichever is earlier.
(e) Books and Records. Licensee agrees to keep complete and
accurate books of account and records covering all transactions
relating to this Agreement. Licensee shall deliver to Licensor, within
ninety (90) days of the end of Licensee's fiscal year, a report of
Licensee's independent auditors, in substantially the form of Exhibit
C,
4
<PAGE>
regarding the statements delivered by Licensee pursuant to Section
3(d). Licensor, at its expense, shall have the right to have an
independent accounting firm, mutually agreeable to both parties, one
time in each calendar year on reasonable notice to audit Licensee's
books of account and records that relate to the subject matter and
terms of this Agreement. All such books of account and records shall be
kept available for at least two (2) years after the termination of this
Agreement. Licensor shall not have any right to audit any other books
of account or records of Licensee.
4. Licensee's Development Milestones.
(a) Milestones. Licensee agrees to use commercially reasonable
efforts to complete the following development milestones within the
respective time periods:
(1) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX.
(2) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX.
(3) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX.
(4) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX.
(5) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX.
[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) Extension of Milestones. If Licensee determines that it
will be unable to complete any of the development milestones set forth
in Section 4(a) within the corresponding time period, Licensee shall so
notify Licensor at least thirty (30) days prior to the previously
scheduled date for completing such milestone specifying a new date by
which Licensee anticipates completing such milestone. Licensee may not
extend any date for completing a milestone by more than thirty (30)
days at any one time, but Licensee may subsequently extend any date for
completing a milestone for any number of additional thirty-day periods
by delivery of a subsequent notice at least thirty (30) days
5
<PAGE>
prior to the previously scheduled date for completing such milestone.
Upon delivery of any such notice, the date for completing such
milestone shall be automatically extended to the date specified in
Licensee's notice unless the failure to complete such milestone was due
to Licensee's failure to use commercially reasonable efforts to
complete such milestone by the previously scheduled completion date. If
Licensee's failure to complete such milestone by the previously
scheduled completion date was due to Licensee's failure to use
commercially reasonable efforts to complete such milestone by such
date, Licensor shall have the right to terminate this Agreement. If the
parties disagree as to whether or not Licensee used commercially
reasonable efforts to complete such milestone by such date, the dispute
shall be resolved in accordance with the mediation and arbitration
procedures set forth in Section 13(d).
5. Commercialization Responsibilities.
(a) Consulting Agreement. Licensor and Licensee shall, within
thirty (30) days of the date of this Agreement, negotiate in good faith
the terms and conditions of a consulting agreement, mutually agreeable
to both parties, pursuant to which Licensor will provide services
related to tissue perfusion research on a fee for service basis.
(b) Regulatory Approvals. Licensee will be responsible for
obtaining, at its own expense, such regulatory clearances or approvals
from the FDA and any comparable foreign regulatory authorities, whose
function and purpose include regulating the design, manufacture,
quality and/or sale of medical devices, as Licensee in its sole
discretion deems necessary or appropriate for marketing Sensors and
Instruments.
(c) Distribution Channels. Licensee will be responsible for
establishing the distribution channels for the sale and distribution of
Sensors and Instruments. Licensee will use commercially reasonable
efforts to cause Sublingual Sensors and related Instruments to be
marketed and distributed on a worldwide basis.
6. Licensee's Representations and Warranties. Licensee hereby
represents and warrants to Licensor that as of the date hereof:
(a) Licensee is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware, and this
Agreement has been duly authorized by all necessary corporate action.
(b) This Agreement is the legal, valid and binding obligation
of Licensee, enforceable against Licensee in accordance with its terms.
(c) Neither the execution and delivery of this Agreement nor
the compliance with the terms and conditions hereof will conflict with,
result in a breach or violation by Licensee of or constitute a default
under any of the terms, conditions or provisions of any contract,
agreement or other instrument to which Licensee is or may be bound or
affected.
6
<PAGE>
(d) Licensee is under no obligation or subject to any
judicial, administrative or other proceeding which would limit
licensee's ability to fully perform its obligations hereunder.
7. Licensor's Representations and Warranties. Licensor hereby
represents and warrants to Licensee that as of the date hereof:
(a) Licensee is a non-profit corporation duly organized,
validly existing and in good standing under the laws of the State of
California, and this Agreement has been duly authorized by all
necessary corporate action.
(b) This Agreement is the legal, valid and binding obligation
of Licensor, enforceable against Licensor in accordance with its terms.
(c) Neither the execution and delivery of this Agreement nor
the compliance with the terms and conditions hereof will conflict with,
result in a breach or violation by Licensor of or constitute a default
under any of the terms, conditions or provisions of any contract,
agreement or other instrument to which Licensor is or may be bound or
affected.
(d) Licensor is the sole and exclusive owner of the Patent
Rights, free and clear of any license, security interests, known
claims, encumbrances or known charges of any kind, and has full right,
power and authority to enter into this Agreement and to grant to
Licensee the rights to be granted hereunder. No other party has any
rights of first refusal with respect to the licenses granted herein or
any other rights to obtain a license from Licensor to practice the
Patent Rights.
(e) Licensor is not under any obligations inconsistent with
the provisions of this Agreement.
(f) To the best of Licensor's knowledge, (i) the Patent Rights
are valid and enforceable, including inventorship, and (ii) the rights
granted under this Agreement do not infringe any patent, copyright,
trademark, license, trade secret or other intellectual property right
of any third party. Licensor is not aware of any information which
could render any of the claims of any of the Patent Rights invalid or
unenforceable.
(g) There is no legal, administrative, arbitration, or other
proceeding, suit, claim or action of any nature, judgment, decree,
decision, injunction, writ or order pending or, to the knowledge of
Licensor, threatened or contemplated by or against or involving
Licensor or its shareholders directors or officers (but only in their
capacity as such), pertaining to the Patent Rights or this Agreement,
whether at law or in equity, before or by any person, entity
governmental or quasi-governmental, administrative or regulatory agency
or any court.
(h) If any of the representations or warranties by Licensor in
this Section 7 are or become inaccurate or breached, Licensee, in
addition to its other rights under this Agreement, shall be entitled to
(i) a refund of all or a portion of the royalties paid by
7
<PAGE>
Licensee under this Agreement and (ii) a reduction in such amounts
payable thereafter by Licensee under this Agreement, such refund and
reduction to be in such an amount or amounts as will compensate
Licensee for its damages incurred by reason of the inaccuracy or breach
and compensate Licensee for the loss of value in rights granted to
Licensee under this Agreement as compared with the value of such rights
in the absence of such inaccuracy or breach.
8. Term and Termination.
(a) Term. The term of this Agreement shall commence on the
date hereof and shall remain in force, unless terminated earlier in
accordance with Section 8(b), until XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXX. [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) Termination. Notwithstanding the provisions of Section
8(a), this Agreement may be terminated in accordance with the following
provisions:
(1) Upon mutual agreement of the parties.
(2) Either party may terminate this Agreement at any
time by giving notice in writing to the other party, which
notice shall be effective upon dispatch, should the other
party file a petition for a liquidation in bankruptcy, be
declared bankrupt, make an assignment for the benefit of
creditors, go into liquidation or receivership, or otherwise
lose legal control of its business.
(3) Either party may terminate this Agreement by
giving notice in writing to the other party in the event the
other party is in material breach of this Agreement and shall
have failed to cure such breach within ninety (90) days of
receipt of written notice thereof from the first party, unless
such breach cannot reasonably be cured within ninety (90)
days, in which case the breaching party shall have undertaken
good faith efforts to cure such breach within ninety (90)
days.
(4) Licensee may terminate this Agreement immediately
if any U.S. Patent Rights are held to be invalid or
unenforceable by a court of competent jurisdiction.
(5) Licensee may terminate this Agreement if no valid
U.S. patent issues covering a method for measuring CO2 under
the tongue to assess perfusion failure that are substantially
the same as the claims in the Patent Applications as
originally filed with the U.S. Patent and Trademark Office
within XXXXX (XXXXX) years of the date of this Agreement.
8
<PAGE>
(6) Licensee may terminate this Agreement pursuant to
Section 10(c).
(7) Licensor may terminate this Agreement if Licensee
fails to make a Minimum Royalty Payment that is payable with
respect to the period beginning on the date of this Agreement
and ending on the XXXXX (XXXXX) anniversary date of this
Agreement within thirty (30) days of notice from Licensor of
such failure, in which event Licensor shall be entitled to
receive from Licensee any Minimum Royalty Payment that would
have been payable on or before XXXXX.
(8) Licensor may terminate this Agreement if Licensee
has not commenced commercial introduction of a Sensor and
related Instrument within XXXXX (XXXXX) years of the date of
this Agreement.
[PORTIONS OF THIS SECTION HAVE BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIALITY UNDER RULE 24b-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. A COPY OF THIS AGREEMENT
WITH THIS SECTION INTACT HAS BEEN FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
(c) Rights and Obligation on Termination. In the event of
termination of this Agreement for any reason, the parties shall have
the following rights and obligations:
(1) Licensee shall remain responsible for any payment
due to Licensor that has accrued prior to the effective date
of termination.
(2) The license granted to Licensee hereunder shall
immediately terminate and be of no further force and effect.
(3) Sections 10, 11(a), 11(b) and 12(a) shall survive
termination of this Agreement.
(4) Licensee, its Affiliates and sublicensees shall
be permitted to sell any inventory of Sensors and Instruments
on hand at the effective date of termination, provided that no
provision of this Agreement shall prevent Licensee, its
Affiliates or sublicensees from practicing the Patent Rights
or selling Sensors and Instruments after termination of this
Agreement if the relevant Patent Rights have expired.
9. Patent Prosecution and Maintenance.
(a) Existing Patents and Patent Applications. Licensee shall
pay when due all maintenance fees for the Patent in accordance with
applicable law and regulation. Licensee shall have the right, but not
the obligation, to prosecute the Patent Applications and any other
applications comprising the Patent Rights, at Licensee's expense. If
Licensee elects to prosecute any such patent application and a valid
patent issues thereon, then Licensee shall maintain, including payment
of any maintenance fees, any patents that issue on such patent
application that Licensee prosecuted. If Licensee fails to
9
<PAGE>
prosecute or maintain any such patent application, it will so notify
Licensor, and Licensor shall have the right, but not the obligation, to
prosecute and maintain any such patent application, at Licensor's
expense. Licensor shall provide Licensee with copies of all relevant
documentation on a confidential basis so that Licensee may undertake
such prosecution, and both parties shall keep the other informed and
apprised of the continuing prosecution and maintenance with respect to
such patent applications.
(b) Future Patents and Patent Applications. Licensee shall
have the right, but not the obligation, to prosecute and maintain any
foreign patent applications corresponding to the Patent or Patent
Applications, which have not been filed prior to the date of this
Agreement, at Licensee's expense. Licensee shall determine in its sole
and reasonable discretion whether any particular patent application
shall be filed or prosecuted or any patent shall be maintained pursuant
to this Section 9(b). Any such patent application shall be in the name
of Licensor and shall be deemed to be part of the Patent Rights under
this Agreement. Upon request from Licensor, Licensee will provide
Licensor with copies of patent applications prepared by Licensee prior
to filing and responses to patent office actions related to such
applications. Licensor shall cooperate fully with Licensee and execute
all necessary documentation to enable Licensee to file, prosecute and
maintain all such patent applications and patents issuing thereon. If
Licensee fails to file, prosecute or maintain any such patents or
patent applications, it will so notify Licensor, and Licensor shall
have the right, but not the obligation, file, prosecute and maintain
any such patents or patent application, at Licensor's expense.
10. Infringement.
(a) Action by Licensee. When information comes to the
attention of Licensor or Licensee to the effect that any of the Patent
Rights have been or are threatened to be infringed by a third party,
Licensee shall have the initial right, but not the obligation, at its
expense to take such action as Licensee may deem necessary to prosecute
or prevent such infringement, including the right to bring or defend
any suit, action or proceeding involving any such disclosure or
infringement. Licensee shall notify Licensor promptly of the receipt of
any such information and of the commencement of any such suit, action
or proceeding. If Licensee determines that it is necessary or desirable
for Licensor to join any such suit, action or proceeding, Licensor
shall execute all documents and perform such other acts as may be
reasonably required. In the event that Licensee brings a suit, Licensee
shall have the right to first reimburse itself out of any sums
recovered in such suit or in settlement thereof for all costs and
expenses, including reasonable attorneys' fees, necessarily involved in
the prosecution of such suit, and any funds that shall remain from said
recovery shall be distributed to Licensor and Licensee in proportion to
the loss incurred by each of Licensor and Licensee.
(b) Action by Licensor. If, within ninety (90) days after
receipt from Licensor of information described in Section 10(a) or
after giving notice to Licensor of such information, Licensee does not
notify Licensor that Licensee has commenced suit against any infringer,
Licensor shall have the right, but not the obligation, to bring suit
for such
10
<PAGE>
alleged infringement, and may join Licensee as party plaintiff, if
appropriate. Licensee shall execute all documents and take all other
actions, including giving testimony, which may reasonably be required
in connection with such suit, action or proceeding.
(c) Failure to Remove Competing Products. Notwithstanding the
parties' efforts pursuant to Section 10(a) and 10(b), if the parties
are unable to prevent a competitor from manufacturing, marketing or
selling products that are functionally equivalent to the Sensors and
the Instruments and such functionally equivalent products have
significantly affected the revenues or earnings that Licensee is able
to derive from the sale of Sensors and Instruments for a period of six
(6) months, Licensee shall have the right to renegotiate the royalties
payable under this Agreement by giving written notice thereof to
Licensor. If the parties agree to reduce royalty payments, Licensee
will pay to Licensor fifty percent (50%) of any amounts paid in
settlement or damages by such competitor to Licensee for claims brought
by Licensee against such competitor, after deducting Licensee's
attorneys' fees and disbursements, for bringing such claims, up to the
amount of the reduced royalties. If the parties are unable to agree on
new royalty rates within thirty (30) days after notice from Licensee of
its election to renegotiate the royalties payable under this Agreement,
Licensee shall have the right to terminate this Agreement immediately.
(d) Action Against Licensee. Licensor will cooperate with
Licensee in the defense of any suit, action or proceeding against
Licensee, or any Affiliate or sublicensee of Licensee, alleging the
infringement of a patent or other intellectual property right owned by
a third party by reason of the use of the Patent Rights in the
manufacture, use or sale of Sensors or Instruments. Licensee shall give
Licensor prompt notice of the commencement of any such suit, action or
proceeding or claim of infringement and shall furnish to Licensor a
copy of each communication relating to the alleged infringement.
Licensor hereby grants to Licensee the right to exclusive control of
the defense of any such suit, action or proceeding and the exclusive
right to compromise, litigate, settle or otherwise dispose of any such
suit, action or proceeding and shall provide all information and
assistance necessary to defend or settle any such suit, action or
proceeding. Licensee may join Licensor as a defendant, if necessary or
desirable, and Licensor shall execute all documents and take all other
actions, including giving testimony, which may reasonably be required
in connection with the defense of such suit, action or proceeding.
11. Indemnification and Insurance.
(a) Indemnification by Licensor. Licensor shall indemnify,
hold harmless, defend and protect Licensee and its Affiliates,
sublicensees, successors, assigns, employees, representatives and
agents from and against any and all claims, causes of action, costs,
expenses, losses, damages and liabilities (including, without
limitation, reasonable attorneys' fees) arising out of or resulting
from (i) the falsity of any representation or warranty made by Licensor
herein, (ii) any claim that any rights within Patent Rights were
granted by Licensor to any third party or (iii) any unlawful
misappropriation by Licensor of trade secrets or proprietary rights
belonging to any third
11
<PAGE>
party. Licensee shall have the right to offset and deduct any amount to
which it is entitled to indemnification hereunder against royalties or
other payments due under Section 3.
(b) Indemnification by Licensee. Licensee shall indemnify,
hold harmless, defend and protect Licensor and its Affiliates,
successors, assigns, employees, representatives and agents, from and
against any and all claims, causes of action, costs, expenses, losses,
damages and liabilities (including, without limitation, reasonable
attorneys' fees) arising out of or resulting from the falsity of any
representation or warranty made by Licensee herein.
(c) Insurance. To the extent that Licensee maintains product
liability insurance covering any loss, damage, expense or liability
incurred or suffered by third parties arising out of any use of Sensors
or Instruments, Licensee shall cause Licensor to be named as an
additional insured under such insurance policy. Licensee shall provide
such evidence of the effectiveness of such insurance to Licensor as may
be reasonably requested.
12. Confidentiality and Publication.
(a) Confidentiality. Each party agrees not to disclose to any
third party or use the other party's Confidential Information, as
defined in this Section 12, other than for purposes of this Agreement.
Upon termination of this Agreement, all Confidential Information shall
be returned to the disclosing party. "Confidential Information" means
any information which is disclosed in any tangible form and is clearly
labeled or marked as confidential, proprietary or its equivalent, or
information which is disclosed orally or visually, is designated
confidential, proprietary or its equivalent at the time of its
disclosure and is reduced to writing and clearly marked or labeled as
confidential, proprietary or its equivalent within thirty (30) days of
disclosure; provided that "Confidential Information shall not include
information that (i) was in the receiving party's possession or was
known to it prior to its receipt from the disclosing party; (ii) is or
becomes public knowledge without the fault of the receiving party;
(iii) is or becomes rightfully available on an unrestricted basis to
the receiving party from a source other than the disclosing party; (iv)
becomes available on an unrestricted basis to a third party from the
disclosing party or from someone acting under its control or (v) is
independently developed by the receiving party as demonstrated by its
written records.
(b) Scientific Publications and Presentations. Licensee
recognizes that Licensor is a public non-profit, research and
educational institution and, as such, conducts scientific research and
medical education. Licensor's mission is to perform research and to
educate medical scientists with the goal of improving current methods
of life-saving critical care. As such, Licensee further recognizes that
Licensor's primary method of achieving such progress is by timely
presentations, publications and other means of disseminating scientific
knowledge in the public interest. Licensor may publicly disseminate
such information except to the extent that such dissemination would
directly
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<PAGE>
compromise the commercialization of Sensors or Instruments by Licensee
or such dissemination discloses patentable or other information
proprietary to Licensee. The rights of presentation and publication of
scientific discoveries made during the term of this Agreement are
subject to Licensee's prior approval, which will not be unreasonably
withheld. Licensor will provide pre-publication documentation for
review and comment by Licensee. Such review will be completed within
ten (10) working days or extensions not to exceed an additional five
(5) working days at the request of Licensee.
13. Miscellaneous.
(a) Public Announcements. Each of the parties hereto agrees
that it will not, without the prior written consent of the other party,
make any public announcement of this Agreement or any of the terms and
conditions of this Agreement, except for such disclosure to the public
or to governmental agencies as its counsel shall deem necessary to
comply with applicable law, rule or regulation. Notwithstanding the
foregoing, either party may disclose publicly that Licensor has granted
Licensee an exclusive, worldwide license in the Patent Rights.
(b) Assignment. Neither party may assign or otherwise transfer
its rights and obligations under this Agreement without the prior
written consent of the other party, except to (i) an Affiliate,
provided that the original party to this Agreement remains obligated to
perform under this Agreement or (ii) any successor in interest of all
or substantially all of the business of such party, whether by merger,
operation of law, assignment, purchase or otherwise. Any prohibited
assignment shall be null and void. All terms and conditions of this
Agreement shall be binding on and inure to the benefit of the
successors and permitted assigns of the parties.
(c) Relationship. This Agreement shall not constitute either
party as the legal representative, partner, joint venturer or agent of
the other party hereto, nor shall either party have the right or
authority to assume, create, or incur any liability or any obligation
of any kind, express or implied, against or in the name of or on behalf
of the other party hereto.
(d) Mediation and Arbitration. If any dispute, controversy or
claim arises under this Agreement, the parties shall negotiate in good
faith to settle the matter. If the parties are unable to resolve the
matter within a reasonable time, the parties shall submit the matter to
mediation by a trained mediator approved by both parties, the cost of
which shall be shared equally by the parties. Any dispute, controversy
or claim arising under this Agreement not resolved through mediation
shall be finally settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association in
effect on the date of this Agreement by a single arbitrator appointed
in accordance with said Rules. The appointing authority shall be the
American Arbitration Association. The costs of any arbitration shall be
shared equally by the parties, unless the award of the arbitrator
provides otherwise. The arbitrator's award shall be non-
13
<PAGE>
appealable and enforceable in any court of competent jurisdiction. The
place of mediation or arbitration shall be Chicago, Illinois.
(e) Entire Agreement; Amendment. This Agreement constitutes
the entire agreement between the parties hereto relative to the subject
matter hereof, and supersedes any and all prior agreements, written or
oral, between the parties relating to such subject matter including,
but not limited to, the Joint Non-Disclosure Agreement, dated March 26,
1998, and the letter, dated July 2, 1998. No modifications or
amendments of any of the terms hereof shall be valid or binding unless
made in writing and signed by Licensor and Licensee.
(f) Waiver. No waiver of any breach of any provision of this
Agreement shall constitute a waiver of any prior, concurrent or
subsequent breach of the same or any other provision hereof, and no
waiver shall be effective unless made in writing.
(g) Notices. Notice permitted or required to be given under
this Agreement shall be deemed sufficient if given in writing by
facsimile, commercial air delivery service or by registered or
certified air mail, postage prepaid, return receipt requested,
addressed to the respective addresses of the parties set forth below or
at such other address as the respective parties may designate by like
notice from time to time. Notices so given shall be effective upon the
earlier of: (a) receipt by the party to which notice is given (which,
in the instance of a facsimile, shall be deemed to have occurred at the
time that the machine transmitting the facsimile verifies a successful
transmission of the facsimile); (b) on the fifth business day following
the date such notice was deposited in the mail; or (c) on the second
business day such notice was delivered to a commercial air delivery
service. Notices shall be given as follows:
If to Licensor: Institute of Critical Care Medicine
1695 North Sunrise Way, Building #3
Palm Springs, California 92262
Attn: Max Harry Weil, M.D., Ph.D.,
MACP, FACC, FCCP
Fax: (760) 323-6167
With a copy to: Thomas B. Pitcher
130 Menil Place
Palm Desert, California 92260
Fax: (760) 779-5942
If to Licensee: Optical Sensors Incorporated
7615 Golden Triangle Drive
Suite A
Minneapolis, Minnesota 55344
Attn: Chief Executive Officer
Fax: (612) 914-9441
14
<PAGE>
With a copy to: Oppenheimer Wolff & Donnelly LLP
Plaza VII Building, Suite 3400
45 South Seventh Street
Minneapolis, Minnesota 55402
Attn: Thomas A. Letscher
Fax: (612) 607-7100
(h) Severability. If any provision of this Agreement shall be
held invalid or unenforceable by any court of competent jurisdiction,
the remaining provisions of this Agreement shall remain in full force
and effect. Further, should any provision of this Agreement be deemed
unenforceable by virtue of its scope, such provision shall be deemed
limited to the extent necessary to render the same enforceable.
(i) Governing Law. This Agreement will be construed in
accordance with, and governed by, the laws of the State of Minnesota in
all respects, including, without limitation, interpretation,
performance, effect and remedies (without regard to the laws of
conflict of any jurisdiction).
(j) Headings. The headings of sections and subsections of this
Agreement have been inserted for the convenience of reference only and
shall in no way restrict or otherwise modify the terms of this
Agreement.
(k) Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, but
each of which together shall constitute one and the same document.
[Remainder of Page Intentionally Left Blank]
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this License
Agreement as of the date and year first above written.
OPTICAL SENSORS INCORPORATED
By /s/ Sam B. Humphries
-----------------------------------------
Sam B. Humphries
President and Chief Executive Officer
INSTITUTE OF CRITICAL CARE MEDICINE
By: /s/ Max Harry Weil
----------------------------------------
Title: President and Chief Executive Officer
-------------------------------------
16
<PAGE>
EXHIBIT A
PATENTS AND PATENT APPLICATIONS
U.S. Patent No. 5,579,763 entitled "Measurement of Systemic Perfusion"
U.S. Patent Application No. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
U.S. Patent Application No. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
[PORTIONS OF THIS EXHIBIT A 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 EXHIBIT A INTACT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.]
17
<PAGE>
EXHIBIT B
METHODOLOGY CURRENTLY USED FOR CALCULATING OF GROSS MARGIN
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX.
[PORTIONS OF THIS EXHIBIT B 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 EXHIBIT B INTACT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.]
18
<PAGE>
EXHIBIT C
FORM OF REPORT OF INDEPENDENT AUDITORS
We have audited, in accordance with generally accepted auditing standards, the
financial statements of Optical Sensors Incorporated for the year ended December
31, _______, and have issued our report thereon dated _____________. We also
have audited the accompanying schedule [IDENTIFICATION OF PRESENTATION OF
ELEMENTS] of Optical Sensors Incorporated as of December 31, ________, and for
the year then ended. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this schedule based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the schedule of [IDENTIFICATION OF PRESENTATION OF
ELEMENTS] is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the schedule of
[IDENTIFICATION OF PRESENTATION OF ELEMENTS]. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall schedule presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the schedule referred to above presents fairly, in all material
respects, the [IDENTIFICATION OF PRESENTATION OF ELEMENTS] of Optical Sensors
Incorporated at December 31, _________, and for the year then ended, in
conformity with generally accepted accounting principles.
/s/Ernst & Young LLP
Minneapolis, Minnesota
[Date]
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 512,690
<SECURITIES> 10,252,304
<RECEIVABLES> 211,285
<ALLOWANCES> 0
<INVENTORY> 1,884,917
<CURRENT-ASSETS> 12,986,231
<PP&E> 3,662,139
<DEPRECIATION> 1,616,858
<TOTAL-ASSETS> 15,554,408
<CURRENT-LIABILITIES> 1,144,790
<BONDS> 0
0
0
<COMMON> 88,220
<OTHER-SE> 13,764,097
<TOTAL-LIABILITY-AND-EQUITY> 15,554,408
<SALES> 798,698
<TOTAL-REVENUES> 798,698
<CGS> 2,296,076
<TOTAL-COSTS> 2,296,076
<OTHER-EXPENSES> 7,905,580
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70,906
<INCOME-PRETAX> (8,894,583)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,894,583)
<EPS-PRIMARY> (1.01)
<EPS-DILUTED> 0
</TABLE>
