<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, 1999
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 3, 1999, the Registrant had 8,901,304 shares of Common Stock
outstanding.
<PAGE>
Index
OPTICAL SENSORS INCORPORATED
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheets - September 30, 1999 and December 31, 1998
Statements of Operations - Three and Nine Month Periods ended September
30, 1999 and September 30, 1998
Statements of Cash Flows - Nine Month Periods ended September 30, 1999
and September 30, 1998
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,
1999 1998
----------------------------------------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,396,482 $ 8,079,871
Accounts receivable 35,160 162,858
Inventory 1,669,940 1,846,294
Prepaid expenses and other current assets 62,410 99,610
----------------------------------------
Total current assets 4,163,992 10,188,633
Property and equipment:
Leased Equipment 1,073,438 1,017,953
Research and development equipment 742,971 740,444
Leasehold improvements 351,079 339,614
Furniture and equipment 161,048 148,621
Marketing equipment 1,004,840 1,004,840
Production equipment 478,913 460,118
----------------------------------------
3,812,289 3,711,590
Less accumulated depreciation (2,616,062) (1,866,074)
----------------------------------------
1,196,227 1,845,516
Other assets:
Patents 528,291 513,547
Other assets 16,278 16,833
----------------------------------------
544,569 530,380
----------------------------------------
Total assets $ 5,904,788 $12,564,529
========================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 123,141 $ 353,563
Employee compensation 165,892 441,917
Other liabilities and accrued expenses 75,392 29,714
Obligations under capital lease, current portion 274,670 260,319
----------------------------------------
Total current liabilities 639,095 1,085,513
Obligations under capital lease, less current portion 333,062 494,909
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 1999--8,880,304 and
1998--8,829,401 88,803 88,294
Additional paid-in capital 69,367,739 69,317,467
Accumulated deficit (64,523,911) (58,366,050)
Deferred compensation 0 (55,604)
----------------------------------------
Total shareholders' equity 4,932,631 10,984,107
----------------------------------------
Total liabilities and shareholders' equity $ 5,904,788 $ 12,564,529
==========================================
</TABLE>
Note: The balance sheet at December 31, 1998 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
1999 1998 1999 1998
-------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 28,889 $ 319,505 $ 90,456 $ 798,698
Cost of goods sold 298,042 827,156 1,351,707 2,296,076
-------------------------------------------------------
Gross margin (269,153) (507,651) (1,261,251) (1,497,378)
Operating expenses:
Research and development expenses 800,843 1,051,614 2,610,786 3,097,109
Selling, general and administrative expenses 482,567 1,704,799 2,382,507 4,808,471
-------------------------------------------------------
Operating loss (1,552,563) (3,264,064) (6,254,544) (9,402,958)
Interest expense (20,037) (24,405) (65,803) (70,906)
Interest income 38,189 167,430 161,536 601,179
Other income (expense) 1,068 (4,148) 950 (21,898)
-------------------------------------------------------
19,220 138,877 96,683 508,375
-------------------------------------------------------
Net loss $(1,533,343) $(3,125,187) $(6,157,861) $(8,894,583)
=======================================================
Net loss per common share:
Basic and diluted $(.17) $(.35) $(.70) $(1.01)
=======================================================
Shares used in calculation of net loss per share 8,869,177 8,858,515 8,852,496 8,817,727
=======================================================
</TABLE>
See accompanying notes.
3
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Optical Sensors Incorporated
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1999 1998
---------------------------------------
<S> <C> <C>
Operating activities
Net loss $(6,157,861) $(8,894,583)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 875,032 767,878
Deferred compensation amortization 55,604 124,640
Amortization of warrants in connection with debt and lease
financings 3,989 13,135
Changes in operating assets and liabilities:
Receivables 127,698 (184,185)
Inventories 96,250 52,688
Prepaid expenses and other assets (21,929) (120,853)
Accounts payable and accrued expenses (460,769) 71,790
---------------------------------------
Net cash (used in) operating activities (5,481,986) (8,169,490)
Investing activities
Purchases of property and equipment (45,214) (470,659)
---------------------------------------
Net cash (used in) investing activities (45,214) (470,659)
Financing activities
Proceeds from note receivable-officer 0 245,000
Net proceeds from issuance of Common Stock 46,792 2,207,261
(Payments) on long-term debt and lease obligations (202,981) (148,247)
---------------------------------------
Net cash (used in) provided by financing activities (156,189) 2,304,014
---------------------------------------
(Decrease) in cash and cash equivalents (5,683,389) (6,336,135)
Cash and cash equivalents at beginning of period 8,079,871 17,101,130
---------------------------------------
Cash and cash equivalents at end of period $ 2,396,482 $10,764,994
=======================================
</TABLE>
See accompanying notes.
4
<PAGE>
Optical Sensors Incorporated
Notes to Financial Statements
(Unaudited)
September 30, 1999
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, 1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999. For further information, refer to the
financial statements and footnotes thereto included in the Optical Sensors
Incorporated Annual Report on Form 10-K for the year ended December 31, 1998.
Certain reclassifications of 1998 amounts have been made to conform with the
1999 presentation.
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 quarters ended September 30, 1999 and 1998,
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
Since October 1998, Optical Sensors Incorporated (the "Company"), has been
focussing its resources on development and commercialization of the CapnoProbe,
which is a handheld device with a carbon dioxide ("CO2") probe that is slipped
under the tongue like a thermometer. It non-invasively measures the tissue CO2
of the mucous membrane in the mouth - a sensitive measure that may indicate
early clinical shock, even when traditional vital signs may still appear
relatively normal. Generalized inadequacy of tissue perfusion is the hallmark
of clinical shock. Diagnosis of inadequate tissue perfusion may be difficult in
its early stages when the signs and symptoms are masked by the body's natural
compensatory mechanisms that preserve blood supply to vital organs by reducing
blood flow to other organs. If treatment is delayed to the point that the
body's compensatory systems can no longer maintain adequate circulation and
vital tissue perfusion, the consequences can be disastrous for the patient. To
date, there has been no rapid, low-cost, noninvasive method to objectively
determine when a patient has inadequate tissue perfusion and may be in early
shock.
In December 1998, the Company filed a 510(k) application for FDA clearance of
the CapnoProbe as a Class II medical device. Prototype versions of the
CapnoProbe system are currently being evaluated at clinical sites in the United
States. The Company has completed set up of one manufacturing pod for manual
assembly of the prototype probes and finished preliminary plans for automated
probe assembly. The Company currently estimates that the CapnoProbe product
will be available for commercialization in the first half of 2000.
Prior to January 1999, the Company had also been actively marketing its
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,
carbon dioxide and acid-base in a sample of blood taken from a patient's artery.
Because of the Company's need to conserve resources, in January 1999, the
Company significantly reduced its workforce, suspended direct sales activities
and product cost reduction programs for the SensiCath System and reduced
associated expenses. The Company recognized approximately $300,000 in employee
severance costs for the first quarter of 1999 related to the workforce
reduction. Accrued severance costs, consisting of payments to employees and
related employer payroll taxes, were paid in the second quarter of 1999. The
Company also exercised its right to convert Instrumentation Laboratory Company
("IL") to a non-exclusive distributor of the SensiCath System in January 1999,
and is currently pursuing termination of the IL distribution agreement through
an arbitration proceeding filed by the Company. Since January 1999, IL has not
placed any material orders for the SensiCath, and the only sales of the
SensiCath have been to existing customers who have continued to order SensiCath
sensors. The Company does not expect meaningful sales of the SensiCath System in
the future. The Company currently has approximately 30 employees.
6
<PAGE>
In January 1999, the Company also announced that it had engaged Volpe Brown
Whelan & Company, LLC, to serve as financial advisor to the Company. The
Company is working with Volpe Brown Whelan to explore strategic alternatives.
Currently, the Company is actively pursuing a strategic transaction, including
the possible sale of the Company or a distribution agreement for the CapnoProbe
product. In August 1999, the Company adopted several severance pay plans
covering its employees. The plans provide for severance payments upon
employment termination within a twelve month period subsequent to a change of
control.
Results of Operations
Net sales in the third quarter of 1999 decreased $290,616 or 91% to $28,889 from
$319,505 in the third quarter in 1998. Net sales for the nine month period
ended September 30, 1999 decreased $708,242 or 89% to $90,456 from $798,698 for
the nine month period ended September 30, 1998. The decrease in sales is the
result of OSI's suspension of direct sales and support activities of the
SensiCath System in January 1999. Net sales for the quarter consisted of
development fees and sales of SensiCath sensors to existing customers, less
OpticalCAM product returns. No new customer sales were made nor were any
OpticalCAM instruments sold during the nine month period ended September 30,
1999. The Company does not expect meaningful sales of the SensiCath System in
the future.
Costs of products sold in the third quarter of 1999 decreased $529,114 or 64% to
$298,042 from $827,156 in the third quarter in 1998. Costs of products sold for
the nine months ended September 30, 1999 decreased $944,369 or 41% to $1,351,707
from $2,296,076 for the nine months ended September 30, 1998. The decreased
cost of products sold for the third quarter and the nine month period was
directly related to the suspension of SensiCath production in January of 1999.
Remaining fixed overhead costs and costs of personnel that remain in support of
CapnoProbe activities and maintenance of SensiCath technologies are expected to
continue at the third quarter level for the foreseeable future.
Research and development costs for the third quarter of 1999 decreased $250,771
or 24% to $800,843 from $1,054,614 in the third quarter of 1998. Research and
development costs for the nine months ended September 30, 1999 decreased
$486,323 or 16% to $2,610,786 from $3,097,109. The decrease for the third
quarter and nine month periods ended September 30, 1999 is due primarily to a
reduction in research and development staffing of approximately 25% in the first
quarter of 1999. Research and development efforts during the quarter were
directed towards product development and regulatory activities for the
CapnoProbe product. Research and development expenses are expected to remain at
approximately the same levels for the next several quarters as CapnoProbe
development efforts are completed. Under the July 1998 license agreement with
ICCM, the Company expects to pay $300,000 in minimum royalties in 1999. The
minimum royalty payments will be recorded as research and development expenses
because no CapnoProbe sales are anticipated in 1999. The Company is obligated
to pay ICCM a customary
7
<PAGE>
royalty equal to a percentage of sales, which varies depending on the selling
price to the customer of the CapnoProbe. However, the Company does not currently
expect to have any commercial sales of the CapnoProbe in 1999.
Selling, general and administrative expenses in the third quarter of 1999
decreased $1,222,232 or 72% to $482,567 from $1,704,799 in the third quarter of
1998. Selling, general and administrative expenses for the nine months ended
September 30, 1999 decreased $2,425,964 or 50% to $2,382,507 from $4,808,471 for
the nine months ended September 30, 1998. Substantially all sales and marketing
activities related to the SensiCath product line were suspended during the first
quarter of 1999, accounting for the decreases from comparable periods in the
prior year. The Company expects selling, general and administrative expenses to
remain at the third quarter levels for the balance of 1999, not including
expenses which might result from its activities in securing a corporate merger,
distribution partner or sale of a portion or all of the Company. Selling,
general and administrative expenses consist primarily of the cost of CapnoProbe
marketing clinical activities, ongoing administrative activities and costs of
maintaining the Company's public status.
Net interest income in the third quarter of 1999 decreased $124,873 to $18,152
from $143,025 in the third quarter of 1998. Net interest income for the nine
month period ended September 30, 1999 decreased $434,540 to $95,733 from
$530,273 for the nine month period ended September 30, 1998. The decrease in net
interest income in the third quarter of 1999 is due to declining cash balances.
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 $1,533,343 for the quarter ended September
30, 1999, compared to a net loss of $3,125,187 for the quarter ended September
30, 1998. As of September 30, 1999, the Company had an accumulated deficit of
$64,523,911. The Company anticipates that its operating losses will continue for
the foreseeable future. Except for historical information contained herein, the
disclosures in this report are forward looking statements. See "Certain
Important Factors".
8
<PAGE>
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. 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 date before signing of the agreement) for a total price of
$2,206,015. The proceeds from the sales of stock have been used to fund costs
of producing products and for the 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 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.
The Company's cash and cash equivalents were $2,396,482 and $8,079,871 at
September 30, 1999 and December 31, 1998, respectively. The decrease in the
Company's cash balance is due to the operating losses described above. The
Company incurred cash expenditures for the nine months ended September 30, 1999
of $5,481,986 for operations and $45,214 for capital expenditures.
All of the inventory at September 30, 1999 consisted of SensiCath components,
OpticalCAM monitors and ABG Modules for which the Company currently has no
customers from which significant sales are being generated. Also, a significant
portion of the Company's fixed assets are related to SensiCath production and
sales. The Company has previously announced that it has embarked on an effort
to sell the SensiCath product line and/or the Company. The Company is working
towards recovery of the value of these assets through such a sale and believes
that the recorded values will be realizable.
9
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The Company has contracts to purchase minimum quantities of instrumentation and
other sole source inventory items with an outstanding aggregate commitment of
approximately $900,000 in 1999 and 2000. The Company also has a potential
$500,000 obligation payable to Marquette Medical Systems, Inc. under a
previously disclosed technology purchase agreement. The Company is currently
negotiating nullification of these obligations. The Company is obligated to pay
ICCM $300,000 annually under the previously described royalty agreement. As of
September 30, 1999, the Company had no material commitments outstanding for
tooling and equipment. The Company is currently in discussion with its equipment
lessor regarding prepayment of certain lease obligations.
The Company believes that sufficient liquidity is available to satisfy its
operating needs through 1999. However, the Company anticipates that additional
funding will be necessary to continue operations past 1999. No assurances can
be made that the Company would be able to secure such funding.
SensiCath(R) and OpticalCAM(TM) are trademarks of Optical Sensors Incorporated.
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 ancillary software programs which may not
be Year 2000 compliant. The Company is in the process of replacing those
programs. The cost of replacement is not expected to exceed $5,000. 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 held discussions with and received assurances from its suppliers and
financial institutions 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 has assessed the extent to which
its operations are vulnerable should those organizations fail to properly
remediate their computer systems. The Company believes, based in part on its
current state of operations, that it has no significant Year 2000 exposure in
this regard The Company's Year 2000 initiative is being managed by an internal
staff. 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. The cost of the Year 2000 initiatives is not expected to be
material to the Company's results of operations or financial position.
10
<PAGE>
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:
- - Development and Commercialization of CapnoProbe. The Company's future success
will depend, in part, on successful development and commercialization of the
CapnoProbe product. The Company is in the later stages of developing and
testing prototypes and is currently engaged human clinical trials of the
CapnoProbe product. The Company has set up one manufacturing pod for manual
assembly of the prototype probes and finished preliminary plans for automated
probe assembly. The Company currently projects that the product will be
available for commercialization in the first half of 2000. The Company has
not yet established commercial manufacturing for the CapnoProbe. Accordingly,
there can be no assurance that the Company will successfully develop a
commercial CapnoProbe product.
- - Completion of Corporate Alliance or Business Combination. In January 1999,
the Company announced that it had engaged Volpe Brown Whelan & Company, LLC,
to serve as financial advisor to the Company. The Company is working with
Volpe Brown Whelan to explore strategic alternatives, including joint
ventures, corporate strategic alliances, sale of the business or product
lines, or other business combinations. The Company's future success will
depend on its ability to complete such a strategic transaction, and there can
be no assurance that the Company will be able to complete such a transaction
or complete a transaction with terms favorable to the Company.
- - Nasdaq Listing Requirements. The Company's Common Stock is currently quoted
on the Nasdaq National Market under the symbol "OPSI." In order to be listed
on the Nasdaq National Market, the Company must maintain total net tangible
assets of at least $4.0 million. As of September 30, 1999, the Company had
total net tangible assets of approximately $4.9 million. In addition, the
closing bid price for the Company's Common Stock cannot be less than $1.00
per share for thirty consecutive days. If, in the future, the Company had
less than $4.0 million in total net tangible assets but more than $2.0
million in total net tangible assets, the Company's Common Stock would be
eligible for quotation on the Nasdaq Small Cap Market, provided that the
$1.00 minimum bid price requirement was met. If the Common Stock were not
eligible for either the Nasdaq National Market or the Nasdaq Small Cap Market
it would likely be quoted in the "over-the-counter" market and eligible to
trade on the OTC bulletin board. If the Company's Common Stock traded on the
OTC bulletin board, trading, if any, would be subject to the "penny stock"
rules under the Securities Exchange Act of 1934 as amended, and the public
trading market for the Company's Common Stock could be adversely affected.
- - Competition. Competition among medical device companies 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
11
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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
Item 1. Legal Proceedings.
In April 1999, the Company initiated an arbitration proceeding against
Instrumentation Laboratory Company ("IL") by filing a demand for arbitration
with the American Arbitration Association. The Company is seeking a declaration
that it has no further limitations or obligations with respect to IL under the
Private Label Reseller Agreement, dated January 7,1998 between the Company and
IL. In addition, the Company is seeking monetary damages based on various legal
theories, including breach of the Agreement by IL for failing to adequately
promote and sell the Company's SensiCath System as required under the Agreement.
IL has filed a counterclaim also seeking damages from the Company. The
arbitration proceeding is pending.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is included herein:
(10.1) Optical Sensors Incorporated Executive Severance Pay Plan
(27.1) Financial Data Schedule
(b) Reports on Form 8-K
None
12
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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 12, 1999 /s/ Paulita M. LaPlante
-------------------------------------
Paulita M. LaPlante
President and Chief Executive Officer
(Principal Executive Officer)
Date November 12, 1999 /s/ Wesley G. Peterson
---------------------------------------
Wesley G. Peterson
Chief Financial Officer, Vice President of
Finance and Administration and Secretary
(Principal Financial and Accounting Officer)
13
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Exhibit 10.1
OPTICAL SENSORS INCORPORATED
EXECUTIVE SEVERANCE PAY PLAN
As Adopted Effective August 16, 1999
1
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OPTICAL SENSORS INCORPORATED
EXECUTIVE SEVERANCE PAY PLAN
Table of Contents
-----------------
OPTICAL SENSORS INCORPORATED
EXECUTIVE SEVERANCE PAY PLAN
Page
----
ARTICLE 1. Introduction.....................................................1
1.1. Plan Name...........................................................1
1.2. Plan Type...........................................................1
1.3. Plan Purpose........................................................1
ARTICLE 2. Definitions, Construction and Interpretations....................1
2.1. Administrator.......................................................1
2.2. Affiliate...........................................................1
2.3. Base Pay............................................................2
2.4. Board...............................................................2
2.5. Cause...............................................................2
2.6. Change in Control...................................................3
2.7. Code................................................................4
2.8. Company.............................................................5
2.9. Effective Date......................................................5
2.10. Eligible Employee..................................................5
2.11. ERISA..............................................................5
2.12. Exchange Act.......................................................5
2.13. Governing Law......................................................5
2.14. Headings...........................................................5
2.15. Number and Gender..................................................6
2.16. Officers...........................................................6
2.17. Person.............................................................6
2.18. Plan...............................................................6
2.19. Qualifying Termination.............................................6
2.20. Release............................................................7
2.21. Successor..........................................................8
2.22. Termination Date...................................................8
2.23. Trust..............................................................8
2.24. Trustee............................................................8
ARTICLE 3. Eligibility for Benefits.........................................8
3.1. Eligibility Requirements............................................8
3.2. Other Special Benefits..............................................9
ARTICLE 4. Benefits.........................................................9
4.1. Compensation and Benefits Through Termination Date..................9
4.2. Cash Payment........................................................9
4.3. Limitation on Benefits..............................................9
4.4. Gross-Up Payments..................................................10
ARTICLE 5. Source of Payments; Nature of Interest..........................10
5.1. Establishment of Trust.............................................10
i
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Table of Contents
-----------------
(continued)
Page
----
5.2. Source of Payments.................................................10
5.3. Status of Plan.....................................................11
5.4. Non-assignability of Benefits......................................11
ARTICLE 6. Administration..................................................11
6.1. Plan Administration................................................11
6.2. Plan Rules.........................................................11
6.3. Administrator's Discretion.........................................11
6.4. Specialist's Assistance............................................12
6.5. Indemnification....................................................12
6.6. Benefit Claims.....................................................12
6.7. Disputes...........................................................13
ARTICLE 7. Miscellaneous...................................................13
7.1. Amendment and Termination..........................................13
7.2. No Set-off.........................................................14
7.3. Taxes..............................................................14
7.4. Other Benefits.....................................................14
7.5. No Employment Rights Created.......................................14
7.6. Successors.........................................................14
7.7. Validity...........................................................15
7.8. No Mitigation......................................................15
7.9. Effect of Plan Benefits on Other Severance Plans...................15
7.10. Waiver............................................................15
ii
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OPTICAL SENSORS INCORPORATED
EXECUTIVE SEVERANCE PAY PLAN
ARTICLE 1.
INTRODUCTION
1.1. Plan Name.
The name of the Plan is the "Optical Sensors Incorporated Executive
Severance Pay Plan."
1.2. Plan Type.
The Plan is an unfunded plan maintained by the Company primarily for
the purpose of providing benefits for the Company's employees. The Plan is also
intended to be unfunded for tax purposes. The Plan will be construed in a manner
that gives effect to such intent.
1.3. Plan Purpose.
The purpose of the Plan is to provide Eligible Employees who experience
a Qualifying Termination with temporary financial support during their
transition to new employment.
ARTICLE 2.
DEFINITIONS, CONSTRUCTION AND INTERPRETATIONS
The definitions and rules of construction and interpretation set forth
in this Article 2 apply in construing the Plan unless the context otherwise
indicates.
2.1. Administrator.
The "Administrator" of the Plan is the Company or the person to whom
administrative responsibilities are delegated pursuant to Section 6.1, as the
context requires.
2.2. Affiliate.
An "Affiliate" is:
(a) any corporation at least a majority of whose outstanding
securities ordinarily having the right to vote at elections of
directors is owned directly or indirectly by the Company; or
(b) any other form of business entity in which the Company, by
virtue of a direct or indirect ownership interest, has the
right to elect a majority of the members of such entity's
governing body.
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2.3. Base Pay.
The "Base Pay" of an Eligible Employee is his or her monthly base
salary from the Company at the rate in effect immediately prior to the Change in
Control or his or her Termination Date, whichever is greater, disregarding any
decrease which constitutes grounds for a Qualifying Termination by the Eligible
Employee pursuant to Section 2.18(a)(ii). Base Pay includes only regular cash
salary and is determined before any reduction or deduction of any kind.
2.4. Board.
The "Board" is the board of directors of the Company. When the Plan
provides for an action to be taken by the Board, the action may be taken by any
committee or individual authorized to take such action pursuant to a proper
delegation by the board of directors of the Company. On and after the date of a
Change in Control, any duty of the Board in connection with the Plan is
nondelegable and any attempt by the Board to delegate any such duty is
ineffective.
2.5. Cause.
(a) Subject to Subsection (b), "Cause" with respect to a
particular Eligible Employee is any of the following:
(i) the Eligible Employee's gross misconduct which is
materially and demonstrably injurious to the Company;
(ii) the Eligible Employee's willful and continued failure
to perform substantially his or her duties with the
Company (other than a failure resulting from the
Eligible Employee's incapacity due to bodily injury
or physical or mental illness) after a demand for
substantial performance is delivered to the Eligible
Employee by the Chief Executive Officer of the
Company (or the Board if the Eligible Employee in
question is the Chief Executive Officer of the
Company) which specifically identifies the manner in
which the Chief Executive Officer or the Board, as
the case may be, believes that the Eligible Employee
has not substantially performed his or her duties and
provides for a reasonable period of time within which
the Eligible Employee may take corrective measures;
or
(iii) the Eligible Employee's conviction (including a plea
of nolo contendere) of willfully engaging in illegal
conduct constituting a felony or gross misdemeanor
under federal or state law (or comparable illegal
conduct under the laws of any foreign jurisdiction)
which is materially and demonstrably injurious to the
Company or which impairs the Eligible Employee's
ability to perform substantially his or her duties
with the Company.
(b) An act or failure to act will be considered "gross" or
"willful" for this
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purpose only if done, or omitted to be done, by the Eligible
Employee in bad faith and without reasonable belief that it
was in, or not opposed to, the best interests of the Company.
Any act, or failure to act, based upon authority given
pursuant to a resolution duly adopted by the board of
directors or governing body of any Company (or a committee
thereof) or based upon the advice of counsel for the Company
will be conclusively presumed to be done, or omitted to be
done, by the Eligible Employee in good faith and in the best
interests of the Company.
2.6. Change in Control.
(a) A "Change in Control" is the occurrence of any of the
following on or after Effective Date:
(i) the sale, lease, exchange or other transfer, directly
or indirectly, of all or substantially all of the
assets of the Company, in one transaction or in a
series of related transactions, to any Person;
(ii) the approval by the shareholders of the Company of
any plan or proposal for the liquidation or
dissolution of the Company;
(iii) any Person is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of (a) 20 percent or more,
but not more than 50 percent, of the combined voting
power of the Company's outstanding securities
ordinarily having the right to vote at elections of
directors, unless the transaction resulting in such
ownership has been approved in advance by the
"continuity directors," as defined at Subsection (b),
or (b) more than 50 percent of the combined voting
power of the Company's outstanding securities
ordinarily having the right to vote at elections of
directors (regardless of any approval by the
continuity directors);
(iv) a merger or consolidation to which the Company is a
party if the shareholders of the Company immediately
prior to the effective date of such merger or
consolidation have, solely on account of ownership of
securities of the Company at such time, "beneficial
ownership" (as defined in Rule 13d-3 under the
Exchange Act) immediately following the effective
date of such merger or consolidation of securities of
the surviving company representing (a) 50 percent or
more, but not more than 80 percent, of the combined
voting power of the surviving corporation's then
outstanding securities ordinarily having the right to
vote at elections of directors, unless such merger or
consolidation has been approved in advance by the
continuity directors, or (b) less than 50 percent of
the combined voting power of the surviving
corporation's then outstanding securities ordinarily
having the
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right to vote at elections of directors (regardless
of any approval by the continuity directors);
(v) the continuity directors cease for any reason to
constitute at least a majority the Board; or
(vi) a change in control of a nature that is determined by
outside legal counsel to the Company, in a written
opinion specifically referencing this provision of
the Plan, to be required to be reported (assuming
such event has not been "previously reported")
pursuant to section 13 or 15(d) of the Exchange Act,
whether or not the Company is then subject to such
reporting requirement, as of the effective date of
such change in control.
The sale, lease, exchange or other transfer, directly
or indirectly, of the assets comprising the Company's
CapnoProbe Product Line, in one transaction or in a series of
related transactions, to any Person shall constituted a Change
in Control under Subsection (a)(i).
(b) For purposes of this section: "continuity director" means any
individual who is a member of the Board on Effective Date,
while he or she is a member of the Board, and any individual
who subsequently becomes a member of the Board whose election
or nomination for election by the Company's shareholders was
approved by a vote of at least a majority of the directors who
are continuity directors (either by a specific vote or by
approval of the proxy statement of the Company in which such
individual is named as a nominee for director without
objection to such nomination). For example, if a majority of
the six individuals constituting the Board on the Effective
Date, approved a proxy statement in which two different
individuals were nominated to replace two of the individuals
who were members of the Board on Effective Date, upon their
election by the Company's shareholders, the two newly elected
directors would join the four remaining directors who were
members of the Board on Effective Date as continuity
directors. Similarly if a majority of those six directors
approved a proxy statement in which three different
individuals were nominated to replace three other directors
who were members of the Board on Effective Date, upon their
election by the Company's shareholders, the three newly
elected directors would also become, along with the three
other directors, continuity directors. Individuals
subsequently joining the Board could become continuity
directors under the principles reflected in this example.
2.7. Code.
The "Code" is the Internal Revenue Code of 1986, as amended. Any
reference to a specific provision of the Code includes a reference to such
provision as it may be amended from time to time and to any successor provision.
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2.8. Company.
The "Company" is Optical Sensors Incorporated or any Successor.
2.9. Effective Date.
The "Effective Date" of this Plan is August 16, 1999.
2.10. Eligible Employee.
An "Eligible Employee" is an individual who (a) is an employee of the
Company on the Effective Date, (b) has a salary grade level of 21 or higher on
the Effective Date, (c) is not eligible to receive benefits under any other
severance pay plan of the Company, either because such employee was not covered
under such plan or such employee waived his or her rights to receive benefits
under such plan, and (d) is not a party to a separate written agreement with the
Company which by its express terms specifically provides that the employee is
not eligible to participate in the Plan. In addition, the Board may, on a
case-by-case basis, provide that an employee who is hired after the Effective
Date may become an Eligible Employee. Any such decision by the Board with
respect to a particular employee applies only to that employee and does not in
any way require the Board to provide that any other employee will become an
Eligible Employee.
2.11. ERISA.
"ERISA" is the Employee Retirement Income Security Act of 1974, as
amended. Any reference to a specific provision of ERISA includes a reference to
such provision as it may be amended from time to time and to any successor
provision.
2.12. Exchange Act.
The "Exchange Act" is the Securities Exchange Act of 1934, as amended.
Any reference to a specific provision of the Exchange Act or to any rule or
regulation thereunder includes a reference to such provision as it may be
amended from time to time and to any successor provision.
2.13. Governing Law.
To the extent that state law is not preempted by provisions of ERISA or
any other laws of the United States, all questions pertaining to the
construction, validity, effect and enforcement of this Plan will be determined
in accordance with the internal, substantive laws of the State of Minnesota,
without regard to the conflict of laws principles of the State of Minnesota or
of any other jurisdiction.
2.14. Headings.
The headings of articles and sections are included solely for
convenience. If there is a conflict between a heading and the text of the Plan,
the text will control.
5
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2.15. Number and Gender.
Whenever appropriate, the singular number may be read as the plural,
the plural may be read as the singular and a reference to one gender may be read
as a reference to the other.
2.16. Officers.
Any reference in this Plan to a particular officer of the Company also
refers to the functional equivalent of such officer if the title or
responsibilities of that office change.
2.17. Person.
A "Person" includes any individual, corporation, partnership, group,
association or other "person," as such term is used in section 14(d) of the
Exchange Act, other than the Company, any Affiliate or any benefit plan
sponsored by the Company or an Affiliate.
2.18. Plan.
The "Plan" is the Optical Sensors Incorporated Executive Severance Pay
Plan, as amended from time to time.
2.19. Qualifying Termination.
(a) Subject to Subsection (b), a "Qualifying Termination" with
respect to an Eligible Employee is a complete termination of
his or her employment relationship with the Company and all
Affiliates on or after the Effective Date:
(i) by the Company, whether before or after the
occurrence of a Change in Control, for any reason
other than Cause, death or disability; or
(ii) by the Eligible Employee, within the period beginning
on the date of a Change in Control and ending on the
last day of the twelfth (12th) month that begins
after the month in which the Change in Control occurs
or prior to a Change in Control if the circumstance
described in this Subsection (a)(ii) was either a
condition of the Change in Control or at the request
or insistence of a Person related to the Change in
Control, due to:
(1) a change in the Eligible Employee's
title(s), status, position(s), authority,
duties or responsibilities as in effect at
any time during the 90-day period ending on
the date of the Change in Control which, in
the Eligible Employee's reasonable judgment,
is material and adverse, other than such a
change caused by an insubstantial and
inadvertent action that is remedied by the
Company promptly after the Chief Executive
Officer of the Company (or the Board if
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the Eligible Employee in question is the
Chief Executive Officer of the Company)
becomes aware of the change;
(2) a reduction by the Company in the Eligible
Employee's Base Pay, or an adverse change in
the form or timing of the payment thereof,
as in effect immediately prior to the Change
in Control or as thereafter increased;
(3) the failure by the Company to cover the
Eligible Employee under welfare benefit
plans that, in the aggregate, provide
substantially similar benefits to the
Eligible Employee and/or his or her family
and dependents at a substantially similar
total cost to the Eligible Employee (e.g.,
premiums, deductibles, co-pays, out of
pocket maximums, required contributions,
taxes and the like) relative to the benefits
and total costs under the welfare benefit
plans in which the Eligible Employee (and/or
his or her family or dependents) is
participating at any time during the 90-day
period immediately preceding the Change in
Control;
(4) the Company's requiring the Eligible
Employee to be based more than 30 miles from
where his or her office is located
immediately prior to the Change in Control,
except for required travel on the Company's
business; or
(5) the failure of the Company to obtain from
any Successor the assent to this Plan
contemplated by Section 7.6;
(6) the Eligible Employee's termination of
employment with the Company for any reason
other than death during the month of August
2000.
(b) An Eligible Employee will not be considered to have
experienced a Qualifying Termination pursuant to Subsection
(a)(ii) if:
(i) the Eligible Employee dies, resigns, retires or
otherwise voluntarily terminates employment under any
circumstance not described in Subsection (a)(ii);
(ii) in connection with a Change in Control, the Eligible
Employee becomes an employee of the acquirer or an
entity that controls, is controlled by or is under
common control with the acquirer; provided, however,
that if the Eligible Employee's employment is
subsequently terminated under any circumstance
described in Subsection (a) such subsequent
termination will be a Qualifying Termination.
2.20. Release.
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A "Release" is a written instrument, in form prescribed by the Company
and signed by the Eligible Employee, under which the Eligible Employee releases
the Company, each Affiliate and their respective predecessors and successors,
and the directors, officers, employees and agents of each of them, from any and
all claims the Eligible Employee may have against any of them by reason of his
or her employment or the termination of such employment. The Release will waive
all claims the Eligible Employee may have under the Age Discrimination in
Employment Act, the Older Workers Benefit Protection Act, the Americans with
Disabilities Act, the Employee Retirement Income Security Act of 1974, and such
other statutes and rules of law as the Company may deem advisable.
2.21. Successor.
A "Successor" is any Person that succeeds to, or has the practical
ability to control (either immediately or solely with the passage of time), the
Company's business directly, by merger, consolidation or other form of business
combination, or indirectly, by purchase of the Company's outstanding securities
ordinarily having the right to vote at the election of directors, all or
substantially all of its assets or otherwise.
2.22. Termination Date.
The "Termination Date" of an Eligible Employee is his or her last day
of employment in connection with a Qualifying Termination, without regard to any
payments or benefits provided pursuant to the Plan.
2.23. Trust.
The "Trust" is the trust or trusts, if any, established by the Company
pursuant to Section 5.1.
2.24. Trustee.
The "Trustee" is the one or more banks or trust companies that at the
relevant time has or have been appointed by the Company to act as trustee of the
Trust.
ARTICLE 3.
ELIGIBILITY FOR BENEFITS
3.1. Eligibility Requirements.
An Eligible Employee is entitled to the benefits provided in Article 4
upon his or her Qualifying Termination; provided, however, that if the
Qualifying Termination occurs prior to a Change in Control, the Eligible
Employee will be entitled to such benefits only if he or she signs and delivers
to the Company a Release and does not rescind the Release within any applicable
rescission period. If a Qualifying Termination occurs on or after a Change in
Control, the Eligible Employee will be entitled to the benefits provided in
Article 4 and will not be required to execute a Release. In addition, the
Company may, on a case-by-case basis, elect not to require a Release in
connection with a Qualifying Termination that occurs prior to a Change in
Control.
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Any such election by the Company with respect to a particular Eligible Employee
applies only to that Eligible Employee and does not in any way limit the
Company's right to require any other Eligible Employee to provide the Release.
3.2. Other Special Benefits.
The Company may (a) provide severance benefits to any Eligible Employee
who is not otherwise entitled to such benefits and (b) provide severance
benefits in excess of the amount provided by the Plan to any Eligible Employee
who is entitled to benefits under the Plan. In either case, the amount and type
of such benefits must be set forth in a written instrument signed on behalf of
the Company by its Chief Executive Officer (or a member of the Compensation
Committee of the Board if the Eligible Employee in question is the Company's
Chief Executive Officer) but will be deemed to be provided pursuant to the Plan.
Any special benefit provided to an Eligible Employee pursuant to this Section
3.2 applies only to that Eligible Employee and does not in any way obligate the
Company to provide any special benefit to any other Eligible Employee.
ARTICLE 4.
BENEFITS
4.1. Compensation and Benefits Through Termination Date.
An Eligible Employee who has a Qualifying Termination will continue to
receive his or her compensation and continue to participate in Company benefit
plans, programs and arrangements in accordance with their terms through his or
her Termination Date. As of the Termination Date, the Eligible Employee will
cease to earn any additional compensation and cease to participate in Company
benefit plans, programs and arrangements except as otherwise provided by the
terms of such plans, programs and arrangements with respect to former employees.
4.2. Cash Payment.
(a) Subject to Section 4.3 and 7.3, an Eligible Employee who has a
Qualifying Termination and who satisfies the eligibility
requirements described in Section 3.1 will receive a cash
payment in an amount equal to the Eligible Employee's Base
Pay, multiplied by twelve (12).
(b) The amount determined under Subsection (a) will be paid in a
single lump sum within five (5) business days after the
expiration of any rescission period arising under applicable
law or Plan rule in connection with the Eligible Employee's
Release.
4.3. Limitation on Benefits.
The amount of benefits to which an Eligible Employee would otherwise be
entitled under the Plan with respect to a Qualifying Termination that occurs
prior to a Change in Control will be reduced by the full amount of any payments
made to satisfy an actual or potential claim of the
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Eligible Employee under the Worker Adjustment and Retraining Notification Act,
29 U.S.C. ss. 2101 et seq. ("WARN"), or a law of any state determined by the
Administrator to be similar to WARN. The Administrator will determine how the
reduction will be made.
4.4. Gross-Up Payments.
Following a Change in Control, the Company will cause its independent
auditors promptly to review, at the Company's sole expense, the applicability of
Code section 4999 to any payment or distribution of any type by the Company to
or for the benefit of an Eligible Employee, whether paid or payable or
distributed or distributable pursuant to the terms of the Plan or otherwise (the
"Total Payments"). If the auditor determines that the Total Payments result in
an excise tax imposed by Code section 4999 or any comparable state or local law,
or any interest or penalties with respect to such excise tax (such excise tax,
together with any such interest and penalties, are collectively referred to as
the "Excise Tax"), the Company will make an additional cash payment (a "Gross-Up
Payment") to the Eligible Employee within ten days after such determination
equal to an amount such that after payment by the Eligible Employee of all taxes
(including any interest or penalties imposed with respect to such taxes),
including any Excise Tax, imposed upon the Gross-Up Payment, the Eligible
Employee would retain an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Total Payments. For purposes of the foregoing determination, an
Eligible Employee's tax rate will be deemed to be the highest statutory marginal
state and federal tax rate (on a combined basis) then in effect. If no
determination by the Company's auditors is made prior to the time a tax return
reflecting the Total Payments is required to be filed by the Eligible Employee,
he or she will be entitled to receive from the Company a Gross-Up Payment
calculated on the basis of the Excise Tax he or she reported in such tax return,
within ten days after the later of the date on which he or she files such tax
return or the date on which he or she provides a copy thereof to the Company. In
all events, if any tax authority determines that a greater Excise Tax should be
imposed upon the Total Payments than is determined by the Company's independent
auditors or reflected in the Eligible Employee's tax return pursuant to this
Section 4.5, the Eligible Employee is entitled to receive from the Company the
full Gross-Up Payment calculated on the basis of the amount of Excise Tax
determined to be payable by such tax authority within ten days after he or she
notifies the Company of such determination.
ARTICLE 5.
SOURCE OF PAYMENTS; NATURE OF INTEREST
5.1. Establishment of Trust.
The Company may establish a Trust. The Trust must (a) be a grantor
trust with respect to which the Company is treated as grantor for purposes of
Code Section 677, (b) not cause the Plan to be funded for purposes of Title I of
ERISA and (c) provide that Trust assets will, upon the insolvency of the
Company, be used to satisfy claims of the Company's general creditors. The
Company may from time to time transfer to the Trust cash, marketable securities
or other property acceptable to the Trustee.
5.2. Source of Payments.
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The Trustee will make payments from the Trust in satisfaction of the
Company's obligations under the Plan in accordance with the terms of the Trust.
The Company is responsible for paying any benefits that are not paid from the
Trust.
5.3. Status of Plan.
Nothing contained in the Plan or Trust is to be construed as providing
for assets to be held for the benefit of any Eligible Employee, the Eligible
Employee's only interest under the Plan being the right to receive the benefits
as provided in the Plan. The Trust is established only for the convenience of
the Company and no Eligible Employee has any interest in the assets of the
Trust. To the extent an Eligible Employee acquires a right to receive benefits
under the Plan, such right is no greater than the right of any unsecured general
creditor of the Company.
5.4. Non-assignability of Benefits.
The benefits payable under the Plan and the right to receive future
benefits under the Plan may not be anticipated, alienated, sold, transferred,
assigned, pledged, encumbered or subjected to any charge or legal process.
ARTICLE 6.
ADMINISTRATION
6.1. Plan Administration.
The Board has the power and authority to construe, interpret and
administer the Plan. Prior to the date of a Change in Control, the Board may
delegate such power and authority to any committee or individual but such
delegation will automatically cease to be effective on the date of a Change in
Control. Any such delegation to an officer or employee of the Company will
automatically terminate when he or she ceases to be an officer or employee of
the Company. Prior to (but not after) the date of a Change in Control, the power
and authority of the Board and any individual or committee to whom such power
and authority is in whole or in part delegated is discretionary as to all
matters.
6.2. Plan Rules.
The Administrator has the discretionary power and authority to make
such rules as the Administrator determines to be consistent with the terms, and
necessary or advisable in connection with the administration, of the Plan and to
modify or rescind any such rules.
6.3. Administrator's Discretion.
The Administrator has the discretionary power and authority to make all
determinations necessary for administration of the Plan, except those
determinations that the Plan requires others to make, and to construe,
interpret, apply and enforce the provisions of the Plan and Plan rules whenever
necessary to carry out its intent and purpose and to facilitate its
administration, including, without limitation, the discretionary power and
authority to remedy ambiguities, inconsistencies, omissions and erroneous
benefit calculations. In the exercise of its discretionary
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power and authority, the Administrator will treat all persons determined by the
Administrator to be similarly situated in a uniform manner. All acts and
decisions of the Administrator made in good faith are binding on all interested
persons.
6.4. Specialist's Assistance.
The Administrator may retain such actuarial, accounting, legal,
clerical and other services as may reasonably be required in the administration
of the Plan, and may pay reasonable compensation for such services. All costs of
administering the Plan will be paid by the Company.
6.5. Indemnification.
The Company will indemnify and hold harmless, to the extent permitted
by law, each director, officer and employee of the Company against any and all
liabilities, losses, costs and expenses (including legal fees) of every kind and
nature that may be imposed on, incurred by or asserted against such person at
any time by reason of such person's services in connection with the Plan, but
only if such person did not act dishonestly or in bad faith or in willful
violation of the law or regulation under which such liability, loss, cost or
expense arises. The Company has the right, but not the obligation, to select
counsel and control the defense and settlement of any action for which a person
may be entitled to indemnification under this provision.
6.6. Benefit Claims.
An individual whose employment relationship with the Company has
terminated and who has not been awarded benefits under the Plan or who objects
to the amount of the benefits so awarded may, within 90 days after his or her
employment has terminated, file a written request for benefits with the Board.
The Board will review such request and will notify the claimant of its decision
within 60 days after such request is filed. If the Board denies the claim for
benefits, the notice of the denial will contain
(a) the specific reason for the denial,
(b) a specific reference to the provision of the Plan on which
denial is based,
(c) a description of any additional information or material
necessary for the person to perfect his or her claim (and an
explanation of why such information is material or necessary),
and
(d) an explanation of the Plan's claim review procedure.
If the Board determines that a claimant is not eligible for benefits,
or if the claimant believes that he or she is entitled to greater or
different benefits, the claimant may file a petition for review with
the Board within 60 days after the claimant receives the notice issued
by the Board. Within 60 days after the Board receives the petition, the
Board will give the claimant (and his or her counsel, if any) an
opportunity to present his or her position to the Board orally or in
writing, and the claimant (or his or her counsel) will have the right
to review the pertinent documents. Within 60 days after the hearing (or
the
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date of receipt of the petition if the claimant presents his or her
position in writing) the Board will notify the claimant of its decision
in writing, stating the decision and the specific provisions of the
Plan on which the decision is based. A claimant must exhaust the
procedure described in this Section 6.6 with respect to any claim
relating to a Qualifying Termination that occurred prior to a Change in
Control before pursuing the claim in any other proceeding.
6.7. Disputes.
(a) If an Eligible Employee so elects, any dispute, controversy or
claim arising under or in connection with this Plan will be
settled exclusively by binding arbitration in Minneapolis,
Minnesota in accordance with the Employee Benefit Plan Claims
Arbitration Rules of the American Arbitration Association,
incorporated by referenced herein. Judgment may be entered on
the arbitrator's award in any court having jurisdiction;
provided, that an Eligible Employee may seek specific
performance of his or her right to receive benefits until the
Termination Date during the pendency of any dispute or
controversy arising under or in connection with the Plan. If
any dispute, controversy or claim for damages relating to a
Qualifying Termination that occurs on or after a Change in
Control is settled by arbitration, the Company will pay, or if
elected by the Eligible Employee, reimburse, all fees, costs
and expenses incurred by an Eligible Employee related to such
arbitration unless the arbitrator determines that the Eligible
Employee's claim was frivolous or advanced by the Eligible
Employee in bad faith.
(b) If an Eligible Employee does not elect arbitration, he or she
may pursue all available legal remedies. The Company will pay,
or if elected by the Eligible Employee, reimburse each
Eligible Employee for, all fees, costs and expenses incurred
by such Eligible Employee in connection with any actual,
threatened or contemplated litigation relating to a Qualifying
Termination that occurs on or after a Change in Control,
whether or not initiated by the Eligible Employee, if the
Eligible Employee is successful in recovering any benefit
under this Plan as a result of such action.
(c) The Company will not assert in any dispute or controversy with
any Eligible Employee arising under or in connection with this
Plan on or after a Change in Control the Eligible Employee's
failure to exhaust administrative remedies.
ARTICLE 7.
MISCELLANEOUS
7.1. Amendment and Termination.
(a) Prior to the date of a Change in Control, the Board may amend
the Plan
13
<PAGE>
from time to time in such respects as the Board may deem
advisable; provided, that the effective date of any amendment
that adversely affects an Eligible Employee may not be less
than one year after the date on which the amendment is
approved by the Board and, if a Change in Control occurs prior
to the date on which the amendment would otherwise be
effective, the amendment automatically will be null and void.
On and after the date of a Change in Control, the Plan may be
amended with respect to an Eligible Employee only if he or she
consents to the amendment in a written instrument signed by
the Eligible Employee.
(b) The Board may terminate the Plan at any time; provided, first,
that prior to the date of a Change in Control, the effective
date of the termination may not be less than one year after
the date on which the termination is approved by the Board;
and, second, that the Plan cannot be terminated, and no
termination will become effective, within the period beginning
on the date of a Change in Control and ending on the last day
of the twelfth month that begins after the month in which the
Change in Control occurs.
(c) Any amendment or termination of the Plan must be set forth in
a written instrument approved by the Board and signed by at
least two officers of the Company.
7.2. No Set-off.
The Company has no right to set-off benefits owed under this Plan
against amounts owed or claimed to be owed by an Eligible Employee to the
Company under this Plan or otherwise.
7.3. Taxes.
All benefits to be provided to each Eligible Employee in connection
with this Plan will be subject to required withholding of federal, state and
local income, excise and employment-related taxes.
7.4. Other Benefits.
No amounts paid pursuant to the Plan constitute salary or compensation
for the purpose of computing benefits under any other benefit plan, practice,
policy or procedure of the Company unless otherwise expressly provided
thereunder.
7.5. No Employment Rights Created.
Neither the establishment of or participation in the Plan gives any
employee a right to continued employment or limits the right of the Company to
discharge, transfer, demote or modify the terms and conditions of employment or
otherwise deal with any employee without regard to the effect such action might
have on him or her with respect to the Plan.
7.6. Successors.
14
<PAGE>
The Company will require any Successor to expressly assume and agree to
perform the obligations of this Plan in the same manner and to the same extent
that the Company would be required to perform if no such succession had taken
place. Failure of the Company to obtain such assumption and agreement at least
three business days prior to the time a Person becomes a Successor (or where the
Company does not have at least three business days' advance notice that a Person
may become a Successor, within one business day after having notice that such
Person may become or has become a Successor) will constitute Good Reason for
termination of an Eligible Employee's employment. A Successor has no rights,
authority or power with respect to the Plan prior to a Change in Control.
7.7. Validity.
The invalidity or unenforceability of any provision of the Plan does
not affect the validity or enforceability of any other provision of the Plan,
which will remain in full force and effect.
7.8. No Mitigation.
No Eligible Employee will be required to mitigate the amount of any
benefits the Company becomes obligated to provide in connection with this Plan
by seeking other employment or otherwise and the benefits to be provided in
connection with this Plan may not be reduced, offset or subject to recovery by
the Company by any benefits an Eligible Employee may receive from other sources.
7.9. Effect of Plan Benefits on Other Severance Plans.
An Eligible Employee who receives any payment under the terms of this
Plan will not be eligible to receive benefits under any other severance pay plan
sponsored or maintained by the Company.
7.10. Waiver.
No waiver by the Company of any breach of any obligation of an Eligible
Employee arising under or in connection with the Plan or of any condition or
requirement which may be imposed on an Eligible Employee under or in connection
with the Plan constitutes a waiver of similar or dissimilar obligations,
conditions or requirements at the same time or at any prior or subsequent time
with respect to the Eligible Employee or any other Eligible Employee.
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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0
0
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